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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
for the quarter ended June 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from ____ to _____
COMMISSION FILE NUMBER 1-10356
CRAWFORD & COMPANY
(Exact name of Registrant as specified in its charter)
GEORGIA 58-0506554
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5620 GLENRIDGE DRIVE, N.E.
ATLANTA, GEORGIA 30342
(Address of principal executive offices) (Zip Code)
(404) 256-0830
(Registrant's telephone number, including area code)
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Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
The number of shares outstanding of each of the issuer's classes of common
stock, as of July 30, 1999 was as follows:
CLASS A COMMON STOCK, $1.00 PAR VALUE: 25,028,306
CLASS B COMMON STOCK, $1.00 PAR VALUE: 24,820,871
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CRAWFORD & COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME - UNAUDITED
(IN THOUSANDS, EXCEPT PER SHARE DATA)
SIX MONTHS ENDED
-----------------------------------
JUNE 30, JUNE 30,
1999 1998
-----------------------------------
REVENUES $342,448 $336,161
COSTS AND EXPENSES:
Cost of services provided, less reimbursed expenses
of $17,993 in 1999 and $18,590 in 1998 250,132 246,361
Selling, general, and administrative expenses 56,203 49,581
Year 2000 expenses 2,846 2,970
- ----------------------------------------------------------------------------------------------------------------
TOTAL COSTS AND EXPENSES 309,181 298,912
- ----------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST 33,267 37,249
PROVISION FOR INCOME TAXES 12,765 14,302
- ----------------------------------------------------------------------------------------------------------------
INCOME BEFORE MINORITY INTEREST 20,502 22,947
MINORITY INTEREST IN LOSS OF JOINT VENTURE - 487
- ----------------------------------------------------------------------------------------------------------------
NET INCOME $ 20,502 $ 23,434
================================================================================================================
NET INCOME PER SHARE:
BASIC $ 0.41 $ 0.47
DILUTED $ 0.41 $ 0.47
================================================================================================================
WEIGHTED-AVERAGE SHARES OUTSTANDING:
BASIC 50,205 49,617
DILUTED 50,297 50,319
================================================================================================================
CASH DIVIDENDS PER SHARE:
CLASS A COMMON STOCK $ 0.26 $ 0.25
CLASS B COMMON STOCK $ 0.26 $ 0.25
================================================================================================================
(See accompanying notes to condensed consolidated financial statements)
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CRAWFORD & COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME - UNAUDITED
(IN THOUSANDS, EXCEPT PER SHARE DATA)
QUARTER ENDED
-----------------------------------
JUNE 30, JUNE 30,
1999 1998
-----------------------------------
REVENUES $169,827 $170,028
COSTS AND EXPENSES:
Cost of services provided, less reimbursed expenses
of $10,125 in 1999 and $9,239 in 1998 122,543 122,579
Selling, general, and administrative expenses 29,256 26,778
Year 2000 expenses 1,057 1,942
- ----------------------------------------------------------------------------------------------------------------
TOTAL COSTS AND EXPENSES 152,856 151,299
- ----------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST 16,971 18,729
PROVISION FOR INCOME TAXES 6,507 7,189
- ----------------------------------------------------------------------------------------------------------------
INCOME BEFORE MINORITY INTEREST 10,464 11,540
MINORITY INTEREST IN LOSS OF JOINT VENTURE - 474
- ----------------------------------------------------------------------------------------------------------------
NET INCOME $ 10,464 $ 12,014
================================================================================================================
NET INCOME PER SHARE:
BASIC $ 0.21 $ 0.24
DILUTED $ 0.21 $ 0.24
================================================================================================================
WEIGHTED-AVERAGE SHARES OUTSTANDING:
BASIC 49,814 49,912
DILUTED 49,876 50,614
================================================================================================================
CASH DIVIDENDS PER SHARE:
CLASS A COMMON STOCK $ 0.13 $ 0.125
CLASS B COMMON STOCK $ 0.13 $ 0.125
================================================================================================================
(See accompanying notes to condensed consolidated financial statements)
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CRAWFORD & COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
JUNE 30, DECEMBER 31,
1999 1998
- -------------------------------------------------------------------------------------------------------------------------
ASSETS
- -------------------------------------------------------------------------------------------------------------------------
CURRENT ASSETS:
Cash and cash equivalents $ 8,529 $ 8,423
Accounts receivable, less allowance for doubtful
accounts of $19,232 in 1999 and $19,346 in 1998 135,862 134,094
Unbilled revenues, at estimated billable amounts 90,821 88,871
Prepaid expenses and other current assets 16,994 19,758
- -------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 252,206 251,146
- -------------------------------------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT:
Property and equipment, at cost 156,703 154,073
Less accumulated depreciation and amortization (113,502) (111,130)
- -------------------------------------------------------------------------------------------------------------------------
NET PROPERTY AND EQUIPMENT 43,201 42,943
- -------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS:
Intangible assets arising from acquisitions, net 72,086 64,092
Prepaid pension cost 52,890 55,377
Capitalized software costs 14,598 11,885
Other 9,348 7,826
- -------------------------------------------------------------------------------------------------------------------------
TOTAL OTHER ASSETS 148,922 139,180
- -------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 444,329 $ 433,269
=========================================================================================================================
(See accompanying notes to condensed consolidated financial statements)
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CRAWFORD & COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS - CONTINUED
(IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
JUNE 30, DECEMBER 31,
1999 1998
- -------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' INVESTMENT
- -------------------------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES:
Short-term borrowings $ 51,121 $ 37,196
Accounts payable 25,092 21,971
Accrued compensation and related costs 21,700 24,219
Accrued restructuring costs 2,581 7,362
Other accrued liabilities 35,433 31,688
Deferred revenues 21,474 17,575
Current installments of long-term debt 710 563
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 158,111 140,574
- -------------------------------------------------------------------------------------------------------------------------------
NONCURRENT LIABILITIES:
Long-term debt, less current installments 1,170 1,854
Deferred income taxes 8,720 8,720
Deferred revenues 13,860 13,594
Postretirement medical benefit obligation 8,014 7,983
Self-insured risks 10,294 9,002
Other 10,977 11,491
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL NONCURRENT LIABILITIES 53,035 52,644
- -------------------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' INVESTMENT:
Class A Common Stock, $1.00 par value; 50,000
shares authorized; 24,970 and 25,735
shares issued in 1999 and 1998, respectively 24,970 25,735
Class B Common Stock, $1.00 par value; 50,000
shares authorized; 24,821 and 25,168
shares issued in 1999 and 1998, respectively 24,821 25,168
Additional paid-in-capital 12,936 24,560
Retained earnings 180,410 172,958
Cumulative translation adjustment (9,954) (8,370)
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' INVESTMENT 233,183 240,051
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' INVESTMENT $444,329 $433,269
===============================================================================================================================
(See accompanying notes to condensed consolidated financial statements)
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CRAWFORD & COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
(IN THOUSANDS)
SIX MONTHS ENDED
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JUNE 30, JUNE 30,
1999 1998
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 20,502 $ 23,434
Reconciliation of net income to net cash
provided by operating activities:
Minority interest in loss of joint venture - (487)
Depreciation and amortization 8,267 7,566
Loss (gain) on sales of property and equipment 133 (614)
Changes in operating assets and liabilities, net of effects of
acquisitions:
Accounts receivable, net (1,010) (5,899)
Unbilled revenues (1,765) (950)
Prepaid or accrued income taxes 6,455 3,116
Accounts payable and accrued liabilities (1,383) 4,511
Accrued restructuring costs (5,772) (1,815)
Deferred revenues 3,346 1,486
Prepaid expenses and other assets 4,290 (13,584)
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 33,063 16,764
- ------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of property and equipment, net (8,090) (8,111)
Acquisition of business, net of cash acquired (10,048) -
Capitalization of software costs (3,202) (6,183)
- ------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (21,340) (14,294)
- ------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (13,049) (12,357)
Repurchase of common stock (12,845) (12,292)
Proceeds from exercise of stock options 112 6,938
Increase in short-term borrowings 15,156 2,787
Decrease in long-term debt (727) (188)
- ------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (11,353) (15,112)
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents (264) (887)
- ------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 106 (13,529)
Cash and cash equivalents at beginning of period 8,423 55,380
- ------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 8,529 $ 41,851
==================================================================================================================
(See accompanying notes to condensed consolidated financial statements)
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CRAWFORD & COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. The unaudited condensed financial statements included herein have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Certain previously reported amounts have been reclassified to conform to the
current presentation. These condensed financial statements should be read in
conjunction with the financial statements and related notes contained in the
Company's annual report on Form 10-K for the fiscal year ended December 31,
1998.
2. The results of operations for the quarter and six months ended June 30,
1999, are not necessarily indicative of the results to be expected during the
balance of the year ending December 31, 1999.
3. On January 6, 1999, the Company acquired The Garden City Group ("GCG")
for an initial purchase price of $7.6 million. The Company acquired assets with
a fair value of $11.1 million and assumed liabilities of approximately $3.5
million. This transaction was accounted for by the purchase method of
accounting. Goodwill related to the initial purchase was $5.4 million. In April
1999, the Company made additional payments to the former owners of GCG pursuant
to the purchase agreement. Such additional purchase price was approximately $3.2
million, which was recorded as additional goodwill in the second quarter. The
purchase price may be further increased based on future earnings of GCG.
4. During the quarter and six months ended June 30, 1999, the Company
utilized $2.1 million and $5.8 million, respectively, of its restructuring
reserves for payments due to employee separations and lease terminations. As of
June 30, 1999, remaining restructuring reserves were $7.7 million, $5.1 million
of which is included in other noncurrent liabilities. Management periodically
reviews the restructuring reserves and believes the remaining reserves are
adequate to complete its plan.
5. Basic earnings per share is computed based on the weighted-average
number of total common shares outstanding during the respective periods. Diluted
earnings 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.
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CRAWFORD & COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Below is the calculation of basic and diluted net income per share for the
quarter and six months ended June 30, 1999 and 1998:
Quarter ended Six Months ended
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June 30, June 30, June 30, June 30,
1999 1998 1999 1998
=========================================================================================================
(In thousands, except per share data)
Net income available to common shareholders $10,464 $12,014 $20,502 $23,434
======= ======= ======= =======
Weighted-average shares outstanding - Basic 49,814 49,912 50,205 49,617
Dilutive effect of stock options 62 702 92 702
------- ------- ------- -------
Weighted-average shares outstanding - Diluted 49,876 50,614 50,297 50,319
======= ======= ======= =======
Basic net income per share $ 0.21 $ 0.24 $ 0.41 $ 0.47
======= ======= ======= =======
Diluted net income per share $ 0.21 $ 0.24 $ 0.41 $ 0.47
======= ======= ======= =======
=========================================================================================================
Additional options to purchase 3,701,862 shares of Class A Common Stock at
$12.50 to $19.50 per share were outstanding at June 30, 1999 but were not
included in the computation of diluted net income per share because the options'
exercise price was greater than the average market price of the common shares;
to include them would have been antidilutive.
6. Comprehensive income for the Company consists of net income and foreign
currency translation adjustments. Comprehensive income (in thousands) totaled
$9,689 and $15,316 for the quarter ended June 30, 1999 and 1998, respectively,
and $18,918 and $25,267 for the six months ended June 30, 1999 and 1998,
respectively.
7. The Company has two reportable segments, one which provides claims
services through branch offices located in the United States ("Domestic
Operations") and the other which provides similar services through branch
offices located in 51 other countries ("International Operations"). Intersegment
sales are recorded at cost and are not material. The Company measures segment
profit based on income before taxes, nonrecurring charges, and minority
interest.
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CRAWFORD & COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Financial information for the quarter and six months ended June 30, 1999 and
1998 covering the Company's reportable segments is presented below (in
thousands):
Quarter ended Six months ended
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June 30, June 30, June 30, June 30,
1999 1998 1999 1998
===============================================================================================================
REVENUES
Domestic $126,148 $129,304 $254,443 $256,561
International 43,679 40,724 88,005 79,600
-------- --------- -------- ---------
TOTAL REVENUES $169,827 $170,028 $342,448 $336,161
PRETAX INCOME BEFORE YEAR 2000 EXPENSES
AND MINORITY INTEREST
Domestic $16,197 $ 22,488 $ 31,264 $ 41,996
International 1,831 (1,817) 4,849 (1,777)
-------- --------- -------- ---------
TOTAL PRETAX INCOME BEFORE YEAR 2000
EXPENSES AND MINORITY INTEREST $ 18,028 $ 20,671 $ 36,113 $ 40,219
===============================================================================================================
8. In 1998, the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivatives Instruments and Hedging Activities." SFAS 133
establishes accounting and reporting standards for derivative instruments. SFAS
133, which will be effective for the Company in 2001, requires that entities
recognize all derivatives as either assets or liabilities in the balance sheet
and measure those instruments at fair value. Except for borrowing in foreign
currencies, the Company does not presently engage in any hedging activities to
compensate for the effect of exchange rate fluctuations on the net assets or
operating results of its foreign subsidiaries. As a result, the new standard is
not expected to have a significant effect on the Company's consolidated results
of operations, financial position, or cash flows.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Operating results for the Company's domestic and international operations for
the quarter and six months ended June 30, 1999 and 1998 are as follows:
Quarter ended Six months ended
------------- ----------------
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
==========================================================================================================
(in thousands)
REVENUES:
Domestic $126,148 $129,304 $254,443 $256,561
International 43,679 40,724 88,005 79,600
-------- -------- -------- --------
TOTAL $169,827 $170,028 $342,448 $336,161
COMPENSATION & BENEFITS:
Domestic $ 75,896 $ 78,385 $156,720 $158,579
% of Revenues 60.2% 60.6% 61.6% 61.8%
International 28,006 25,654 55,111 50,921
% of Revenues 64.1% 63.0% 62.6% 64.0%
-------- -------- -------- --------
TOTAL $103,902 $104,039 $211,831 $209,500
% of Revenues 61.2% 61.2% 61.9% 62.3%
EXPENSES OTHER THAN COMPENSATION & BENEFITS:
Domestic $ 34,055 $ 28,431 $ 66,459 $ 55,986
% of Revenues 27.0% 22.0% 26.1% 21.8%
International 13,842 16,887 28,045 30,456
% of Revenues 31.7% 41.5% 31.9% 38.3%
-------- -------- -------- --------
TOTAL $ 47,897 $ 45,318 94,504 $ 86,442
% of Revenues 28.2% 26.7% 27.6% 25.7%
--------------------------------------------------------
PRETAX INCOME BEFORE YEAR 2000 EXPENSES AND
MINORITY INTEREST:
Domestic $ 16,197 $ 22,488 $ 31,264 $ 41,996
% of Revenues 12.8% 17.4% 12.3% 16.4%
International 1,831 (1,817) 4,849 (1,777)
% of Revenues 4.2% (4.5)% 5.5% (2.2)%
-------- -------- -------- --------
TOTAL $ 18,028 $ 20,671 $ 36,113 $ 40,219
% of Revenues 10.6% 12.2% 10.6% 12.0%
==========================================================================================================
The following discussion analyzes the Company's results reported by its two
reportable segments: domestic operations and international operations. Expense
amounts discussed are excluding Year 2000 expenses and minority interest.
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DOMESTIC OPERATIONS
REVENUES
Domestic revenues from insurance companies and self-insured entities totaled
$126.1 million for the quarter ended June 30, 1999, a decrease of 2.4% from the
$129.3 million reported for the same period in 1998. Revenues for the first six
months of 1999 totaled $254.4 million, a 0.9% decrease from 1998 revenues of
$256.6 million. Domestic revenues from insurance companies decreased 10.2% to
$69.4 million for the quarter ended June 30, 1999 and decreased 4.7% to $142.5
million for the six months ended June 30, 1999. The Garden City Group ("GCG")
acquisition contributed $6.3 million and $11.1 million of revenue in the quarter
and six months ended June 30, 1999, respectively. Revenues related to the
winding down of a major class action project declined from $2.5 million in the
second quarter of 1998 to $2.1 million in the second quarter of 1999 and
declined from $7.9 million in the first six months of 1998 to $3.9 million in
the first six months of 1999. Revenues from self-insured entities, excluding the
class action project, decreased 2.7% to $48.3 million in the second quarter of
1999 and decreased 2.2% to $96.9 million in the six months ended June 30, 1999.
Excluding the impact of the GCG acquisition, domestic unit volume, measured
principally by cases received, decreased 9.6% and 5.2% in the second quarter and
first six months of 1999, respectively, compared to the same periods in 1998.
Additionally, changes in the mix of services provided and in the rates charged
for those services had the combined effect of increasing revenues by
approximately 2.2% in the second quarter of 1999 and had no effect for the six
months ended June 30, 1999, compared to the same periods in 1998. The Company's
acquisition of GCG increased domestic revenues by 5.0% and 4.4% in the second
quarter and first six months of 1999, respectively.
COMPENSATION AND FRINGE BENEFITS
The Company's most significant expense is the compensation of its employees,
including related payroll taxes and fringe benefits. Domestic compensation
expense as a percent of revenues decreased to 60.2% in the second quarter of
1999 as compared to 60.6% in the 1998 period and from 61.8% in the six months
ended June 30, 1998 to 61.6% for the 1999 period.
Domestic salaries and wages decreased to $64.8 million and $132.9 million for
the quarter and six months ended June 30, 1999, respectively, from $68.4 million
and $135.3 in the comparable 1998 periods. This decline was due primarily to
reductions in staff levels. Payroll taxes and fringe benefits for domestic
operations totaled $11.1 million and $23.8 million in the second quarter and
first six months of 1999, respectively, increasing 10.8% and 2.2% from 1998
costs of $10.0 million and $23.3 million for the comparable periods. These
increases are due to increased pension expenses. Pension expense in 1998 was
lower due to favorable investment returns.
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EXPENSES OTHER THAN COMPENSATION AND FRINGE BENEFITS
Domestic expenses other than compensation and related payroll taxes and fringe
benefits approximated 27.0% and 26.1% of revenues for the quarter and six months
ended June 30, 1999, respectively, up from 22.0% and 21.8% of revenues for the
same periods in 1998. These increases are due primarily to higher professional
fees, higher self-insurance costs, and higher interest costs as a result of
increased borrowings in 1999.
INTERNATIONAL OPERATIONS
REVENUES
Revenues from the Company's international operations totaled $88.0 million for
the first six months of 1999, a 10.6% increase from $79.6 million in the first
six months of 1998. This increase is due to the July 1998 acquisition of
Adjusters Canada Incorporated ("ACI"). Second quarter revenues increased from
$40.7 million in 1998 to $43.7 million in 1999, as weak claims volume was more
than offset by the impact of the ACI acquisition. Revenues in 1999 are net of
2.8% and 2.5% declines for the quarter and six months ended June 30, 1999,
respectively, due to the negative effect of a strong U.S. dollar.
COMPENSATION AND FRINGE BENEFITS
As a percent of revenues, compensation expense, including related payroll taxes
and fringe benefits, increased to 64.1% for the three months ended June 30, 1999
from 63.0% in the same period in 1998. For the six-month period, compensation
and fringe benefits decreased as a percentage of revenues from 64.0% in 1998 to
62.6% in 1999.
Salaries and wages of international personnel increased in the quarter ended
June 30, 1999 to 55.3% of revenue from 53.4% for the comparable period in 1998
due to lower revenue per employee. Salaries and wages decreased from 54.6% of
revenues in the first half of 1998 to 53.8% for the first half of 1999. Payroll
taxes and fringe benefits decreased as a percent of revenues, to 8.8% in both
the quarter and six months ended June 30, 1999, from 9.6% and 9.4% for the same
periods in 1998.
EXPENSES OTHER THAN COMPENSATION AND FRINGE BENEFITS
Expenses other than compensation and related payroll taxes and fringe benefits
were 31.7% and 41.5% of international revenues for the second quarter of 1999
and 1998, respectively. Expenses other than compensation and related payroll
taxes and fringe benefits were 31.9% of international revenues for the first six
months of 1999, compared to 38.3% of revenues for the same period in 1998. These
expenses comprise a higher percentage of revenues than the Company's domestic
operations due primarily to amortization of intangible assets and higher
automobile, occupancy, and interest costs. The decline in these expenses is
primarily due to lower professional fees in 1999, as significant fees were
incurred in 1998 related to the restructuring of the Company's U.K. operations.
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FINANCIAL CONDITION
At June 30, 1999, current assets exceeded current liabilities by approximately
$94.1 million, a decrease of $16.5 million from the working capital balance at
December 31, 1998. Cash and cash equivalents at June 30, 1999 totaled $8.5
million, remaining level with the balance at the end of 1998. Cash was generated
primarily from operating activities and short-term borrowings, while the
principal uses of cash were for repurchases of common stock, the acquisition of
GCG and dividends paid to shareholders.
During 1997, the Company announced a share repurchase program to acquire up to
an aggregate of 3,000,000 shares of its Class A or Class B Common Stock through
open market purchases. During the first six months of 1999, the Company
repurchased 775,000 shares of its Class A Common Stock and 354,000 shares of its
Class B Common Stock at an average per share cost of $11.42 and $11.28,
respectively. In April 1999, the Board of Directors authorized a share
repurchase program to acquire an additional 3,000,000 shares of Class A or Class
B Common Stock through open market purchases. As of June 30, 1999, 3,191,500
shares remain to be repurchased under the share repurchase programs.
The Company maintains credit lines with banks in order to meet seasonal working
capital requirements and other financing needs that may arise. Short-term
borrowings outstanding as of June 30, 1999 totaled $51.1 million, as compared to
$37.2 million at the end of 1998. The Company believes that its current
financial resources, together with funds generated from operations and existing
and potential long-term borrowing capabilities, will be sufficient to maintain
its current operations.
The Company does not engage in any hedging activities to compensate for the
effect of exchange rate fluctuations on the operating results of its foreign
subsidiaries. Foreign currency denominated debt is maintained primarily to hedge
the currency exposure of the Company's net investment in foreign operations.
Shareholders' investment at June 30, 1999 was $233.2 million, compared with $240
million at December 31, 1998. The decline was due to share repurchases.
FACTORS THAT MAY AFFECT FUTURE RESULTS
YEAR 2000
Overview
The Year 2000 problem concerns the inability of some computer hardware, software
and embedded microprocessors to properly distinguish the year 2000 from the year
1900. Because of the Company's reliance on such computer technologies, this
could result in a system failure or a temporary inability to process claims, to
make claims payments, or to transact similar normal business activities. In
1997, the Company conducted an initial assessment of its information technology
to determine which Year 2000 problems might cause processing errors or computer
system failures. Based on the results of the initial analysis, the Company's
senior management identified the Year 2000 problem as a top corporate priority
and established a centralized team to provide companywide management of its Year
2000 project (the "Project"). During the initial stages of the Project, the
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Company engaged an independent consultant to evaluate its assessment and plans
and to report on its findings to the Company's Board of Directors.
The following discussion of the implications of the Year 2000 problem for the
Company contains numerous forward-looking statements based on inherently
uncertain information. The cost of the Project and the planned completion dates
are based on the Company's best estimates, which are derived from assumptions of
future events, including the continued availability of internal and external
resources, vendor software modifications and other factors. However, there can
be no guarantee that these estimates will be achieved. Further, although the
Company believes it will be able to make the necessary modifications in advance,
any failure to modify the systems could have a material adverse effect on the
Company.
Readiness
The Project contains five primary remediation phases: identification,
assessment, repair, testing, and contingency planning. The Company prioritized
each information technology ("IT") and non-IT system according to its
criticality to the Company's operations. As of July 31, 1999, the Company has
completed the remediation of and placed into production all of its U.S.
mainframe and mid-range computer systems, which represent approximately 90% of
the Company's lines of computer code. The remainder of the Company's U.S.
systems consists of personal computers, PC-based software systems, and non-IT
systems (primarily telephones). Except for one PC-based system representing
approximately 1% of the Company's lines of computer code (which the Company
expects to remediate by October 31, 1999), the Company has remediated and placed
into production all of its internally developed PC-based software systems.
Additionally, the Company is in the process of upgrading and replacing certain
personal computers and telephone systems and installing 3 purchased PC-based
software systems; these activities are expected to be completed by November 30,
1999.
The Project also includes the assessment of the Year 2000 readiness of vendors,
customers and other business partners ("Trading Partners"). This assessment is
substantially complete. Based on certifications and statements received from
Trading Partners, the Company believes that all Trading Partners identified as
critical (e.g. telecommunications providers) are Year 2000 ready. For Trading
Partners considered to be less critical, the Company has established a listing
of preferred vendors, which have certified their Year 2000 readiness.
The Company has determined that the Year 2000 efforts required in its
international operations are significantly less than those required in the U.S.,
primarily due to the use of newer systems and less automation internationally.
Remediation efforts in the international operations are progressing, and the
established deadlines for completion are similar to those discussed above for
domestic operations.
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Risks
Because of the range of possible issues and the large number of variables
involved (including the Year 2000 readiness of Trading Partners), it is
impossible to quantify the potential cost of problems should the Company's
remediation efforts or the efforts of its Trading Partners not be successful.
Such costs and any failure of such remediation efforts could result in loss of
business, damage to the Company's reputation, and legal liability. Accordingly,
any such costs or failures could have a material adverse effect on the Company.
The Company believes the most significant internal risk related to the Project
is its ability to effectively remediate its U.S. claims management systems. The
worst-case scenario, a complete failure of these systems, would require the
Company to shift temporarily to a manual-processing mode. Such a scenario could
significantly delay the processing, payment, and reporting of claims and, thus,
the Company's revenue from such services. If the Company were forced to operate
in such a mode for an extended length of time, the adverse impact on the
Company's financial position and results of operations would likely be material.
However, the Company believes that its remediation and contingency planning
efforts will reduce the risk of such an occurrence to a very low level.
The Company believes that the most likely risks of serious Year 2000 business
disruptions are external in nature, such as disruptions in telecommunications,
electric or transportation services and noncompliance of smaller Trading
Partners. The Company believes the most reasonably likely worst case scenario
would be a business disruption resulted from an extended and/or extensive
communications failure. The Company is dependent on voice and data
communications to receive, process, pay and report on claims. Based on the
Company's information regarding the readiness of its major communications
carriers and developing contingency plans, the Company expects that any such
disruption would likely be localized and of short duration, and would therefore
not be likely to have a material adverse effect on the Company.
Contingency Plans
The contingency planning portion of the Project attempts to identify,
investigate, and document potential failure points, internal and external, in
the Company's systems. Failure points are prioritized based on likelihood and
criticality. Contingency plans are then developed for each of the potential
failure points deemed likely and/or critical. Examples of the Company's Year
2000 contingency plans include alternative manual means for receiving and
processing claims in its branch network, and alternative power supplies and
communication lines. Contingency planning for possible Year 2000 disruptions is
ongoing and will continue through the end of the year. The Company expects to
have substantially completed contingency plans with respect to critical systems
by September 30, 1999.
Costs
The total cost associated with the Year 2000 project is not expected to be
material to the Company's financial position. The Company estimates the total
cost of its Year 2000 compliance efforts to be approximately $13.5 million, with
approximately $11 million having been incurred through June 30, 1999. The
Company expects to incur approximately $2 million for the remainder of 1999 and
$0.5 million in 2000 in such costs.
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EURO
On January 1, 1999, the euro was introduced as the official currency in eleven
European countries in which the Company operates. Companies and individuals in
those countries may now enter into transactions either in euros or in the local
currency. Management does not believe the introduction of the euro will
materially affect the Company's financial position or results of operations.
FOREIGN CURRENCY EXCHANGE
The Company's international operations expose the Company to foreign currency
exchange rate changes and could impact translations of foreign-denominated
assets and liabilities into U.S. dollars and future earnings and cash flows from
transactions denominated in different currencies. The Company's revenue from its
international operations was 26% of total revenue for the six months ended June
30, 1999. Except for borrowing in foreign currencies, the Company does not
presently engage in any hedging activities to compensate for the effect of
exchange rate fluctuations on the net assets or operating results of its foreign
subsidiaries.
NEW CLAIMS MANAGEMENT SYSTEM
During 1998, the Company began the development of a new claims management
system. As of June 30, 1999, approximately $11.9 million of internal and
external costs have been capitalized in connection with this development
project. The server-based system, which is scheduled to be completed by the end
of 1999, is designed to streamline and automate the claims intake, assignment,
management and reporting functions. The Company believes the system will
increase its competitive advantages, particularly in the self-insured corporate
market. However, if the system fails to function as planned, it could adversely
affect the Company's competitive position and revenues.
FORWARD LOOKING STATEMENTS
Certain information presented in Management's Discussion and Analysis of
Financial Condition and Results of Operations may include forward-looking
statements, the accuracy of which is subject to a number of risks and
assumptions. The Company's Form 10-K for the year ended December 31, 1998,
discusses such risks and assumptions and other key factors that could cause
actual results to differ materially from those expressed in such forward-looking
statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK
The information called for by this item is provided under Item 2 - Management's
Discussion and Analysis of Financial Condition and Results of Operations.
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
Crawford & Company:
We have reviewed the accompanying condensed consolidated balance sheets of
CRAWFORD & COMPANY (a Georgia corporation) AND SUBSIDIARIES as of June 30, 1999
and the related condensed consolidated statements of income for the three- and
six-month periods then ended. These financial statements are the responsibility
of the company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the financial statements referred to above for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Crawford & Company and subsidiaries
as of December 31, 1998 (not presented herein), and, in our report dated January
29, 1999, we expressed an unqualified opinion on that statement. In our opinion,
the information set forth in the accompanying condensed consolidated balance
sheet as of December 31, 1998, is fairly stated, in all material respects, in
relation to the consolidated balance sheet from which it has been derived.
/s/ Arthur Andersen LLP
Atlanta, Georgia
August 6, 1999
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PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On April 27, 1999, the Registrant held its Annual Meeting of
Shareholders. At the Annual Meeting, the Class B Shareholders,
the only class entitled to vote at the meeting, voted on (i) the
election of nine (9) directors for a one-year term; and (ii)
ratification of the selection of Arthur Andersen LLP as the
Registrant's auditor for the year ending December 31, 1999. The
results of that voting are as follows:
ELECTION OF DIRECTORS
For Withheld
--- --------
Forrest L. Minix 24,498,798 62,381
J. Hicks Lanier 24,503,111 58,068
Charles Flather 24,502,874 58,305
Linda K. Crawford 24,498,311 62,868
Jesse C. Crawford 24,503,311 57,868
Larry L. Prince 24,501,473 59,706
John A. Williams 24,501,473 59,706
E. Jenner Wood, III 24,501,761 59,418
Archie L. Meyers, Jr. 24,502,220 58,959
RATIFICATION OF APPOINTMENT OF AUDITORS
For Against Abstain
--- ------- -------
24,542,446 13,818 4,915
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
3.1 Restated By-laws of the Registrant, as amended
*10.1 Amended and Restated Supplemental Executive
Retirement Plan
*10.2 Crawford & Company UK Sharesave Scheme
15.1 Letter from Arthur Andersen LLP
27.1 Financial Data (For SEC use only)
* Management contract or compensatory plan required to
be filed as an Exhibit pursuant to Item 601 of
Regulation S-K.
(b) Reports on Form 8-K:
The Company did not file any reports on Form 8-K during the
period covered by this report.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CRAWFORD & COMPANY
(Registrant)
Date: August 13, 1999 /s/ Archie Meyers, Jr.
------------------------------------
Archie Meyers, Jr.
Chairman of the Board and
Chief Executive Officer
Date: August 13, 1999 /s/ John F. Giblin
------------------------------------
John F. Giblin
Executive Vice President - Finance
(Principal Financial Officer)
Date: August 13, 1999 /s/ William L. Hudson
------------------------------------
William L. Hudson
Senior Vice President and Controller
(Principal Accounting Officer)
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INDEX TO EXHIBITS
Exhibit No. Description Sequential Page No.
3.1 Restated By-laws of the Registrant, as amended 21
*10.1 Amended and Restated Supplemental Executive 30
Retirement Plan
*10.2 Crawford & Company UK Sharesave Scheme 35
15.1 Letter from Arthur Andersen LLP 46
27.1 Financial Data Schedule (For SEC use only) 47
* Management contract or compensatory plan required to be filed
as an Exhibit pursuant to Item 601 of Regulation S-K.
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