You should read the selected consolidated financial data set forth below in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and the related notes included elsewhere in this filing. We derived the financial information for each of the years ended and as of December 31, 2002, 2001, 2000, 1999 and 1998 from our audited financial statements and the related notes included elsewhere in this filing. Between 1994 and 1999, we pursued an acquisition strategy with a goal of building a national organization capable of distributing a broad range of insurance and financial products and services. The majority of our over 90 acquisitions were completed prior to December 31, 1999. As a result of our acquisitions, the results in the years 1998 through 2000 are not directly comparable. There is no single acquisition that materially affects the comparability of the financial information presented.
EBITDA, which we define as Total Revenues less Compensation and Employee Benefits and Other Operating Expenses;
Net Loss From Continuing Operations. Net Loss From Continuing Operations increased $24.8 million to $34.7 million in 2001 from $9.9 million in 2000, primarily due to the items described under the heading “Integration Efforts and Other Charges,” below. This was partially offset by an increase in the Income Tax Benefit of $2.0 million. The Income Tax Benefit recorded in 2001 was reduced by the accrual of an $8.0 million tax valuation allowance against our net deferred tax assets recorded in 2001. In accordance with GAAP, a deferred tax asset valuation allowance must be established to the extent it is more likely than not that an entity will not fully realize the deferred tax asset in the near future. The effective tax rate from continuing operations in 2001 was (11.8)% compared to (21.3)% in 2000. The decrease in the effective tax rate and corresponding reduced benefit in 2001 resulted from the establishment of the valuation allowance in 2001 offset by a reduction in permanent differences relating to non-deductible goodwill and state income taxes.
Net Loss From Continuing Operations in the Corporate segment was $34.2 million, $51.5 million and $41.6 million in 2002, 2001 and 2000, respectively. The decrease in 2002 is primarily due to (i) a $6.3 million decrease in interest expense as a result of lower interest rates and a reduction in debt, (ii) a $4.1 million gain from the reduction in the book value of redeemable common stock warrants, and (iii) a $3.0 million gain from the
In the fourth quarter of 2001, we reorganized an administrative affinity group marketing operation, included as part of the insurance brokerage segment, after it lost its principal revenue source, commissions and fees generated from the sale of retiree military supplemental medical insurance. This source of revenue was negatively impacted by federal legislation that changed the retiree military medical insurance program. This operation was reorganized into three distinct units. Two of the three units were transferred to then existing operations. Operations at the third unit were terminated. This decision resulted in a write-off of receivables of $2.4 million and a write-off of other assets of $0.8 million for a total charge of $3.2 million in the fourth quarter of 2001.
The table below summarizes our indebtedness and lease commitments as of December 31, 2002:
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of U.S.I. Holdings Corporation and subsidiaries at December 31, 2002 and 2001, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States.
In August 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, and accounting and reporting provisions of APB Opinion No. 30, “Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions,” (APB No. 30) for a disposal of a segment of a business. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. The Company adopted SFAS No. 144 beginning January 1, 2002. As a result of the Company’s decision to discontinue USIA’s operations in January 2002, the accompanying prior year’s financial statements have been restated to separately reflect continuing and discontinued operations (see Note 16-Discontinued Operations).
The revolving credit facility is available on a revolving basis for loans denominated in U.S. dollars and for letters of credit. As of December 31, 2002, there was $56,075,000 outstanding under this facility. Additionally, the Company had $1,425,000 outstanding under letters of credit. Borrowings under the revolving credit facility and term loan bear interest rates based on LIBOR plus a maximum of 4.5%. Additionally, there is a quarterly commitment fee on the unused portion of the revolving credit facility of 0.75%. The revolving credit facility may be used for acquisition financing and general corporate purposes. The Existing Credit Facility contains provisions that prohibit the payment of dividends or other distributions to stockholders. The Existing Credit Facility also contains financial covenants that must be met with respect to interest and fixed charges coverage and limitations on consolidated debt and capital expenditures, and further limit the incurrence of certain secured indebtedness. The Company is currently in compliance with all debt covenants, as amended, governing its indebtedness.
On October 25, 2002, the Company completed its IPO of 9,000,000 common shares at a price of $10 per share. The $78,436,000 in net cash proceeds from the offering, after deducting the underwriting discount and offering expenses, was used to pay down the Company indebtedness under the credit facility (see Note 5-Long-Term Debt).
Compensation expense, or a reduction of compensation expense, for SARs was recorded based on the change in fair value of the Company’s Common Stock from grant date to each balance sheet date. Reference
Royal Indemnity Company Claim. In March 2000, the Company and Royal Indemnity Company, an affiliate of Royal & Sun Alliance Insurance Group plc (Royal), entered into a multi-year strategic Alliance Agreement (Agreement). In May 2001, Royal gave notice of its intent to terminate the Agreement and thereby avoided responsibility to fund additional annual incentive payments. In September 2001, Royal advised the Company in writing of its contention that the Company owed Royal $7,295,000 under the Agreement. At December 31, 2001, the Company had a $4,700,000 liability for the Royal claim. Royal also contended that the Company was obligated to contribute $1,500,000 toward an errors and omissions claim not directly related to the Agreement, but that arose from a coverage dispute with a mutual client. In April 2002, Royal and the Company agreed on terms to settle all matters related to the errors and omissions claim and the Agreement. Pursuant to the terms of the June 7, 2002 Settlement Agreement and Mutual Release, Royal will receive a $2,725,000 cash payment from the Company, with $250,000 of such payment being paid by the Company’s insurer. The $2,725,000 cash payment will be paid in installments whereby $250,000 from the Company’s insurer was paid upon the execution of the settlement agreement, $1,238,000 was paid by the Company in January 2003, and the remaining $1,237,000 will be paid by the Company in April 2003. In addition, solely in exchange for a release of liability on all claims, the Company issued to Royal 353,572 shares of preferred stock (which was converted into common stock upon the consummation of the Company’s initial public offering) at $7 per share (pre-split). The parties agreed to mutually exchange releases of liability.
The Company has granted nonqualified stock options to officers, employees and non-employee directors of the Company and its subsidiaries. The options are primarily granted at the fair value of the underlying shares at the date of grant. Options granted generally become fully exercisable at the end of four years of continued employment. Options expire ten years from the date of grant, or earlier in the event of termination of employment.