<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
for the quarter ended September 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)
-------------
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 October 29, 1999 was as follows:
CLASS A COMMON STOCK, $1.00 PAR VALUE: 25,930,533
CLASS B COMMON STOCK, $1.00 PAR VALUE: 24,823,371
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<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CRAWFORD & COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME - UNAUDITED
(In thousands, except per share data)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
----------------------------
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
------------- -------------
<S> <C> <C>
REVENUES $510,699 $501,277
COSTS AND EXPENSES:
Cost of services provided, less reimbursed expenses
of $27,083 in 1999 and $26,638 in 1998 373,624 370,362
Selling, general, and administrative expenses 87,055 78,110
Year 2000 expenses 3,600 5,231
Restructuring charges -- 14,873
-------- --------
TOTAL COSTS AND EXPENSES 464,279 468,576
-------- --------
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST 46,420 32,701
PROVISION FOR INCOME TAXES 17,825 12,561
-------- --------
INCOME BEFORE MINORITY INTEREST 28,595 20,140
MINORITY INTEREST IN LOSS OF JOINT VENTURE -- 1,177
-------- --------
NET INCOME $ 28,595 $ 21,317
======== ========
NET INCOME PER SHARE:
BASIC $ 0.57 $ 0.43
DILUTED $ 0.57 $ 0.42
======== ========
WEIGHTED-AVERAGE SHARES OUTSTANDING:
BASIC 50,257 50,142
DILUTED 50,436 50,777
======== ========
CASH DIVIDENDS PER SHARE:
CLASS A COMMON STOCK $ 0.39 $ 0.375
CLASS B COMMON STOCK $ 0.39 $ 0.375
======== ========
</TABLE>
(See accompanying notes to condensed consolidated financial statements)
2
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CRAWFORD & COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME - UNAUDITED
(In thousands, except per share data)
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
------------- -------------
<S> <C> <C>
REVENUES $168,251 $165,116
COSTS AND EXPENSES:
Cost of services provided, less reimbursed expenses
of $9,090 in 1999 and $8,048 in 1998 123,492 124,001
Selling, general, and administrative expenses 30,852 28,529
Year 2000 expenses 754 2,261
Restructuring charges -- 14,873
-------- --------
TOTAL COSTS AND EXPENSES 155,098 169,664
-------- --------
INCOME (LOSS) BEFORE INCOME TAXES AND MINORITY INTEREST 13,153 (4,548)
PROVISION (BENEFIT) FOR INCOME TAXES 5,060 (1,741)
-------- ---------
INCOME (LOSS) BEFORE MINORITY INTEREST 8,093 (2,807)
MINORITY INTEREST IN LOSS OF JOINT VENTURE -- 690
-------- --------
NET INCOME (LOSS) $ 8,093 $ (2,117)
======== ========
NET INCOME (LOSS) PER SHARE:
BASIC $ 0.16 $ (0.04)
DILUTED $ 0.16 $ (0.04)
======== ========
WEIGHTED-AVERAGE SHARES OUTSTANDING:
BASIC 50,361 51,162
DILUTED 50,548 51,162
======== ========
CASH DIVIDENDS PER SHARE:
CLASS A COMMON STOCK $ 0.13 $ 0.125
CLASS B COMMON STOCK $ 0.13 $ 0.125
======== ========
</TABLE>
(See accompanying notes to condensed consolidated financial statements)
3
<PAGE> 4
CRAWFORD & COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 25,690 $ 8,423
Accounts receivable, less allowance for doubtful
accounts of $20,159 in 1999 and $19,346 in 1998 131,321 134,094
Unbilled revenues, at estimated billable amounts 94,126 88,871
Prepaid expenses and other current assets 16,687 19,758
--------- ---------
TOTAL CURRENT ASSETS 267,824 251,146
--------- ---------
PROPERTY AND EQUIPMENT:
Property and equipment, at cost 161,311 154,073
Less accumulated depreciation and amortization (114,410) (111,130)
--------- ---------
NET PROPERTY AND EQUIPMENT 46,901 42,943
--------- ---------
OTHER ASSETS:
Intangible assets arising from acquisitions, net 80,668 64,092
Prepaid pension cost 51,481 55,377
Capitalized software costs, net 15,752 11,885
Other 8,797 7,826
--------- ---------
TOTAL OTHER ASSETS 156,698 139,180
--------- ---------
TOTAL ASSETS $ 471,423 $ 433,269
========= =========
</TABLE>
(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)
<TABLE>
<CAPTION>
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Short-term borrowings $ 41,732 $ 37,196
Accounts payable 26,145 21,971
Accrued compensation and related costs 24,097 24,219
Accrued restructuring charges 1,676 7,362
Other accrued liabilities 32,010 31,688
Deferred revenues 29,277 17,575
Current installments of long-term debt 701 563
-------- --------
TOTAL CURRENT LIABILITIES 155,638 140,574
-------- --------
NONCURRENT LIABILITIES:
Long-term debt, less current installments 16,121 1,854
Deferred income taxes 9,370 8,720
Deferred revenues 14,047 13,594
Postretirement medical benefit obligation 7,756 7,983
Self-insured risks 10,740 9,002
Other 11,852 11,491
-------- --------
TOTAL NONCURRENT LIABILITIES 69,886 52,644
-------- --------
SHAREHOLDERS' INVESTMENT:
Class A Common Stock, $1.00 par value; 50,000
shares authorized; 25,942 and 25,735 shares
issued in 1999 and 1998, respectively 25,942 25,735
Class B Common Stock, $1.00 par value; 50,000
shares authorized; 24,823 and 25,168 shares
issued in 1999 and 1998, respectively 24,823 25,168
Additional paid-in-capital 22,762 24,560
Retained earnings 181,903 172,958
Cumulative translation adjustment (9,531) (8,370)
-------- --------
TOTAL SHAREHOLDERS' INVESTMENT 245,899 240,051
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' INVESTMENT $471,423 $433,269
======== ========
</TABLE>
(See accompanying notes to condensed consolidated financial statements)
5
<PAGE> 6
CRAWFORD & COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
(In thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
------------------------------
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 28,595 $ 21,317
Reconciliation of net income to net cash
provided by operating activities:
Minority interest in loss of joint venture -- (1,177)
Depreciation and amortization 12,289 11,395
Deferred income taxes 650 (2,363)
Loss on sales of property and equipment 278 1,114
Changes in operating assets and liabilities, net
of effects of acquisitions:
Accounts receivable, net 4,968 (4,342)
Unbilled revenues (4,887) 57
Prepaid or accrued income taxes 2,815 (4,222)
Accounts payable and accrued liabilities 1,793 (7,419)
Accrued restructuring charges (7,169) 8,466
Deferred revenues 11,336 381
Prepaid expenses and other assets 8,237 (6,405)
-------- --------
Net cash provided by operating activities 58,905 16,802
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of property and equipment, net (15,166) (10,183)
Acquisitions of businesses, net of cash acquired (9,555) (15,827)
Capitalization of software costs (4,638) (8,864)
-------- --------
Net cash used in investing activities (29,359) (34,874)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (19,650) (18,757)
Repurchase of common stock (13,071) (18,035)
Proceeds from exercise of stock options 948 8,037
Increase in short-term borrowings 5,383 6,180
Increase (decrease) in long-term debt 14,208 (2,323)
-------- --------
Net cash used in financing activities (12,182) (24,898)
-------- --------
Effect of exchange rate changes on cash and cash equivalents (97) (1,420)
-------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 17,267 (44,390)
Cash and cash equivalents at beginning of period 8,423 55,380
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 25,690 $ 10,990
======== ========
</TABLE>
(See accompanying notes to condensed consolidated financial statements)
6
<PAGE> 7
CRAWFORD & COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. The unaudited condensed financial statements included herein have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Certain previously reported amounts have been reclassified to conform to the
current presentation. These condensed financial statements should be read in
conjunction with the financial statements and related notes contained in the
Company's annual report on Form 10-K for the fiscal year ended December 31,
1998.
2. The results of operations for the quarter and nine months ended September 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. On August 9, 1999, the Company acquired PRISM Network Inc. ("PRISM") by
issuing 919,945 shares of Crawford Class A Common Stock for a total purchase
price of approximately $9.9 million. The Company acquired assets with a fair
value of $11.6 million and assumed liabilities of approximately $1.7 million.
The transaction was accounted for by the purchase method of accounting. Goodwill
related to the initial purchase was $9.1 million.
5. During the quarter and nine months ended September 30, 1999, the Company
utilized $1.4 million and $7.2 million, respectively, of its restructuring
reserves for payments due to employee separations and lease terminations. As of
September 30, 1999, remaining restructuring reserves were $6.3 million, $4.6
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.
6. 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.
7
<PAGE> 8
CRAWFORD & COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Below is the calculation of basic and diluted net income per share for the
quarter and nine months ended September 30, 1999 and 1998:
<TABLE>
<CAPTION>
Quarter ended Nine Months ended
----------------------------- ------------------------------
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
------------- ------------- ------------- -------------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Net income (loss) available to common shareholders $ 8,093 $ (2,117) $28,595 $21,317
======= ======== ======= =======
Weighted-average shares outstanding - Basic 50,361 51,162 50,257 50,142
Dilutive effect of stock options 187 -- 179 635
------- -------- ------- -------
Weighted-average shares outstanding - Diluted 50,548 51,162 50,436 50,777
======= ======== ======= =======
Basic net income (loss) per share $ 0.16 $ (0.04) $ 0.57 $ 0.43
======= ======== ======= =======
Diluted net income (loss) per share $ 0.16 $ (0.04) $ 0.57 $ 0.42
======= ======== ======= =======
</TABLE>
Additional options to purchase 3,438,612 shares of Class A Common Stock at
$12.50 to $19.50 per share were outstanding at September 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.
7. Comprehensive income for the Company consists of net income and foreign
currency translation adjustments. Comprehensive income (loss) (in thousands)
totaled $8,516 and ($3,665) for the quarters ended September 30, 1999 and 1998,
respectively, and $27,434 and $21,602 for the nine-month periods ended September
30, 1999 and 1998, respectively.
8. The Company has two reportable segments, one which provides claims services
through branch offices located in the United States ("Domestic Operations") and
the other which provides similar services through branch or representative
offices located in 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.
8
<PAGE> 9
CRAWFORD & COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Financial information for the quarters and nine-month periods ended September
30, 1999 and 1998 covering the Company's reportable segments is presented below
(in thousands):
<TABLE>
<CAPTION>
Quarter ended Nine months ended
------------------------------ -----------------------------
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
REVENUES
Domestic $ 126,876 $ 124,632 $381,319 $ 381,193
International 41,375 40,484 129,380 120,084
--------- --------- -------- ---------
TOTAL REVENUES $ 168,251 $ 165,116 $510,699 $ 501,277
========= ========= ======== =========
PRETAX INCOME (LOSS) BEFORE YEAR 2000
EXPENSES, RESTRUCTURING CHARGES,
AND MINORITY INTEREST
Domestic $ 15,120 $ 14,103 $ 46,384 $ 56,100
International (1,213) (1,517) 3,636 (3,295)
--------- --------- -------- ---------
TOTAL PRETAX INCOME BEFORE YEAR 2000
EXPENSES, RESTRUCTURING CHARGES, AND
MINORITY INTEREST $ 13,907 $ 12,586 $ 50,020 $ 52,805
========= ========= ======== ==========
</TABLE>
9. 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.
9
<PAGE> 10
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 quarters and nine-month periods ended September 30, 1999 and 1998 are as
follows:
<TABLE>
<CAPTION>
Quarter ended Nine months ended
---------------------------- ------------------------------
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
------------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
(in thousands)
REVENUES:
Domestic $ 126,876 $ 124,632 $381,319 $ 381,193
International 41,375 40,484 129,380 120,084
--------- --------- -------- ---------
TOTAL $ 168,251 $ 165,116 $510,699 $ 501,277
--------- --------- -------- ---------
COMPENSATION & BENEFITS:
Domestic $ 77,959 $ 78,024 $234,676 $ 236,603
% of Revenues 61.4% 62.6% 61.5% 62.1%
International 27,421 26,041 82,534 76,963
% of Revenues 66.3% 64.3% 63.8% 64.1%
--------- --------- -------- ---------
TOTAL $ 105,380 $ 104,065 $317,210 $ 313,566
--------- --------- -------- ---------
% of Revenues 62.6% 63.0% 62.1% 62.6%
EXPENSES OTHER THAN COMPENSATION & BENEFITS:
Domestic $ 33,797 $ 32,505 $100,259 $ 88,490
% of Revenues 26.6% 26.1% 26.3% 23.2%
International 15,167 15,960 43,210 46,416
% of Revenues 36.7% 39.4% 33.4% 38.7%
--------- --------- -------- ---------
TOTAL $ 48,964 $ 48,465 143,469 $ 134,906
--------- --------- -------- ---------
% of Revenues 29.1% 29.4% 28.1% 26.9%
PRETAX INCOME (LOSS) BEFORE YEAR 2000 EXPENSES,
RESTRUCTURING CHARGES, AND MINORITY INTEREST:
Domestic $ 15,120 $ 14,103 $ 46,384 $ 56,100
% of Revenues 11.9% 11.3% 12.2% 14.7%
International (1,213) (1,517) 3,636 (3,295)
% of Revenues (2.9)% (3.7)% 2.8% (2.7)%
--------- --------- -------- ---------
TOTAL $ 13,907 $ 12,586 $ 50,020 $ 52,805
========= ========= ======== =========
% of Revenues 8.3% 7.6% 9.8% 10.5%
</TABLE>
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, restructuring charges, and
minority interest.
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<PAGE> 11
DOMESTIC OPERATIONS
REVENUES
Domestic revenues from insurance companies and self-insured entities totaled
$126.9 million for the quarter ended September 30, 1999, an increase of 1.8%
from the $124.6 million reported for the same period in 1998. Revenues for the
first nine months of 1999 increased, to $381.3 million from $381.2 million for
the same period in 1998. Domestic revenues from insurance companies decreased
10% to $71.7 million for the quarter ended September 30, 1999, and decreased 8%
to $218.2 million for the nine months ended September 30, 1999. Revenues from
self-insured entities increased 7% to $48.7 million in the third quarter of
1999, and increased 1% to $145.5 million in the nine months ended September 30,
1999. The GCG and PRISM acquisitions contributed $6.5 million and $17.6
million of revenue in the quarter and nine months ended September 30, 1999,
respectively.
Excluding the impact of the GCG and PRISM acquisitions, domestic unit volume,
measured principally by cases received, decreased 6.5% and 5.7% in the third
quarter and first nine 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 3.1% in the third quarter of 1999 and 1.1%
for the nine months ended September 30, 1999, compared to the same periods in
1998. The Company's acquisitions of GCG and PRISM increased domestic revenues by
5.2% and 4.6% in the third quarter and first nine 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 61.4% in the third quarter of 1999
as compared to 62.6% in the 1998 period, and to 61.5% in the nine months ended
September 30, 1999 from 62.1% in the 1998 comparable period.
Domestic salaries and wages decreased to $66.9 million for the third quarter of
1999 from $67.6 million for the third quarter of 1998 and decreased for the nine
months ended September 30, 1999, to $199.9 million from $202.9 million in the
comparable 1998 period. These declines are due to reductions in staff levels.
Payroll taxes and fringe benefits for domestic operations totaled $11.0 million
and $34.8 million in the third quarter and first nine months of 1999,
respectively, increasing 5.6% and 3.2% from 1998 costs of $10.4 million and
$33.7 million for the comparable periods. These increases are due to increased
pension expenses. Pension expense in 1998 was lower due to favorable investment
returns.
11
<PAGE> 12
EXPENSES OTHER THAN COMPENSATION AND FRINGE BENEFITS
Domestic expenses, other than compensation and related payroll taxes and fringe
benefits, approximated 26.6% and 26.3% of revenues for the quarter and nine
months ended September 30, 1999, respectively, up from 26.1% and 23.2% of
revenues for the same periods in 1998. These increases are due primarily to
higher professional fees (related primarily to outsourced functions in the
company's class action administration and medical bill auditing units), higher
self-insurance costs, and higher interest costs as a result of increased
borrowings and lower cash balances in 1999.
INTERNATIONAL OPERATIONS
REVENUES
Revenues from the Company's international operations totaled $129.4 million for
the first nine months of 1999, a 7.7% increase from $120.1 million in the first
nine months of 1998. This increase is due to the July 1998 acquisition of
Adjusters Canada Incorporated ("ACI"). Third quarter revenues increased from
$40.5 million in 1998 to $41.4 million in 1999, as reduced claims frequency was
more than offset by the impact of the ACI acquisition. Revenues in 1999 are net
of 1.0% and 1.6% declines for the quarter and nine months ended September 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 66.3% for the three months ended September 30,
1999 from 64.3% in the same period in 1998. For the nine-month period,
compensation and fringe benefits decreased as a percentage of revenues from
64.1% in 1998 to 63.8% in 1999.
Salaries and wages of international personnel increased in the quarter ended
September 30, 1999 to 57.3% of revenue from 55.7% for the comparable period in
1998 due to lower revenue per employee. Salaries and wages remained constant at
54.9% of revenues for the nine months ended September 30, 1999 and September 30,
1998. Payroll taxes and fringe benefits increased in the quarter ended September
30, 1999 to 9.0% of revenue from 8.6% for the comparable period in 1998. Payroll
taxes and fringe benefits decreased as a percent of revenues, to 8.9% for the
nine months ended September 30, 1999, from 9.2% for the same period in 1998.
EXPENSES OTHER THAN COMPENSATION AND FRINGE BENEFITS
Expenses other than compensation and related payroll taxes and fringe benefits
were 36.7% and 39.4% of international revenues for the third quarter of 1999 and
1998, respectively. Expenses other than compensation and related payroll taxes
and fringe benefits were 33.4% of international revenues for the first nine
months of 1999, compared to 38.7% 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,
and expense reduction measures put in place in 1999.
12
<PAGE> 13
RESTRUCTURING CHARGES
During the third quarter of 1998, the Company recorded charges totaling $14.9
million ($9.7 million after taxes or $0.19 per share) related to the
restructuring of its U.K. and Canadian operations and the realignment of senior
management after the resignation of its former chairman and chief executive
officer.
FINANCIAL CONDITION
At September 30, 1999, current assets exceeded current liabilities by
approximately $112.2 million, an increase of $1.6 million from the working
capital balance at December 31, 1998. Cash and cash equivalents at September 30,
1999 totaled $25.7 million, an increase of $17.3 million from the balance at the
end of 1998. Cash was generated primarily from operating activities and
long-term borrowings, while the principal uses of cash were acquisitions of
property and equipment, the acquisition of GCG, repurchases of common stock and
dividends paid to shareholders.
During the first nine months of 1999, the Company repurchased 795,000 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. As of September 30,
1999, 3,171,500 shares remain to be repurchased under share repurchase programs
authorized by the Company's Board of Directors.
The Company maintains credit lines with banks in order to meet seasonal working
capital requirements and other financing needs that may arise. Short-term
borrowings outstanding as of September 30, 1999 totaled $41.7 million, as
compared to $37.2 million at the end of 1998. In September 1999, the Company
obtained a five-year, $15 million term loan with fixed interest rate of 6.8%.
This new loan increased the Company's long-term debt to $16.1 million as of
September 30, 1999, compared to $1.9 million at December 31, 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 September 30, 1999 was $245.9 million, compared with
$240.1 million at December 31, 1998.
FACTORS THAT MAY AFFECT FUTURE RESULTS
YEAR 2000
Overview
The Year 2000 issue 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 issues might cause processing errors or computer
system failures. Based on the results of the initial analysis, the Company's
senior management
13
<PAGE> 14
identified the Year 2000 issue 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 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 issue 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 complete the system modifications 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 October 31, 1999, the Company has
completed the remediation of and placed into production all of its U.S.
mainframe and mid-range computer systems, internally developed PC-based software
systems, and non-IT systems. The Company is in the process of upgrading and
replacing certain personal computers and installing 2 purchased PC-based
software systems; these activities are expected to be completed prior to
year-end.
The Project team has completed the assessment of the Year 2000 readiness of
vendors, customers and other business partners ("Trading Partners"). 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 substantially complete.
14
<PAGE> 15
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 have reduced 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 resulting 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 its 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. The Company has completed its contingency plans with
respect to critical systems and contingency planning for possible Year 2000
disruptions affecting non-critical systems is ongoing and will continue through
the end of the year.
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 $11.7 million having been incurred through September 30, 1999. The
Company expects to incur approximately $1.4 million during the fourth quarter of
1999 and $0.4 million in 2000 in such costs.
15
<PAGE> 16
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 25% of total revenue for the nine months ended
September 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 September 30, 1999, approximately $12 million of internal and
external costs have been capitalized in connection with this development
project. The system, which is scheduled to be deployed in mid-2000, 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.
16
<PAGE> 17
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 September 30,
1999 and the related condensed consolidated statements of income for the three-
month and nine-month periods ended September 30, 1999 and 1998, and the
condensed statement of cash flows for the nine-month periods ended September 30,
1999 and 1998. 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
November 10, 1999
17
<PAGE> 18
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
15.1 Letter from Arthur Andersen LLP
27.1 Financial Data Schedule (For SEC use only)
(b) Reports on Form 8-K:
The Company did not file any reports on Form 8-K during the
period covered by this report.
18
<PAGE> 19
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: November 12, 1999 /s/ Archie Meyers, Jr.
------------------------------------
Archie Meyers, Jr.
Chairman of the Board and
Chief Executive Officer
Date: November 12, 1999 /s/ John F. Giblin
------------------------------------
John F. Giblin
Executive Vice President - Finance
(Principal Financial Officer)
Date: November 12, 1999 /s/ William L. Hudson
------------------------------------
William L. Hudson
Senior Vice President and Controller
(Principal Accounting Officer)
19
<PAGE> 20
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description Sequential Page No.
<S> <C> <C>
15.1 Letter from Arthur Andersen LLP 21
27.1 Financial Data Schedule (For SEC use only)
</TABLE>
20
<PAGE> 1
EXHIBIT 15.1
Stockholders and Board of Directors of
Crawford & Company:
Gentlemen:
We are aware that Crawford & Company has incorporated by reference in its
previously filed Registration Statement File Nos. 2-78989, 33-22595, 33-47536,
33-36116, 333-02051, 333-24425, 333-24427, 333-874465, and 333-874467, its Form
10-Q for the quarter ended September 30, 1999, which includes our report dated
November 10, 1999 covering the unaudited interim financial information contained
therein. Pursuant to Regulation C of the Securities Act of 1933 (the "Act"),
that report is not considered a part of the Registration Statement prepared or
certified by our firm or a report prepared or certified by our firm within the
meaning of Sections 7 and 11 of the Act.
/s/ Arthur Andersen LLP
Atlanta, Georgia
November 10, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CRAWFORD AND
COMPANY CONDENSED CONSOLIDATED STATEMENT OF INCOME FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND CRAWFORD AND COMPANY CONSOLIDATED BALANCE SHEET AT
SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 25,690
<SECURITIES> 0
<RECEIVABLES> 225,447
<ALLOWANCES> 20,159
<INVENTORY> 0
<CURRENT-ASSETS> 267,824
<PP&E> 161,311
<DEPRECIATION> 114,410
<TOTAL-ASSETS> 471,423
<CURRENT-LIABILITIES> 155,638
<BONDS> 16,121
0
0
<COMMON> 50,765
<OTHER-SE> 195,134
<TOTAL-LIABILITY-AND-EQUITY> 471,423
<SALES> 0
<TOTAL-REVENUES> 510,699
<CGS> 0
<TOTAL-COSTS> 373,624
<OTHER-EXPENSES> 90,655
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 46,420
<INCOME-TAX> 17,825
<INCOME-CONTINUING> 28,595
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 28,595
<EPS-BASIC> 0.57
<EPS-DILUTED> 0.57
</TABLE>
