Compensation Resource Group-- Dallas, Texas...................................................$70,417 50,000 April 2009 Bethesda, Maryland.........................................21,179 8,519 July 2007 Phoenix, Arizona............................................3,427 2,056 March 2004 Los Angeles, California....................................55,970 37,313 June 2010 Cleveland, Ohio.............................................5,831 3,049 June 2002 Atlanta, Georgia............................................4,498 2,399 December 2002 Chicago, Illinois...........................................7,895 4,734 June 2004 Bedminster, New Jersey......................................6,063 3,000 September 2008 Berkeley, California.......................................16,997 5,483 April 2006 Walnut Creek, California...................................10,056 2,366 April 2006 Waltham, Massachusetts......................................6,507 2,440 November 2004
The following historical information should be read in conjunction with information included elsewhere herein, including the financial statements and notes thereto and “
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements, the notes thereto and other information appearing elsewhere in this Form 10-K.
During 2001, corporate general and adminstrative expense was $11.7 million. Total expenses for 2000 were $9.1 million. This increase over prior year can be attributed primarily to more expenses related to the start up of the reinsurance business and larger bonuses in 2001 as a result of our performance.
Net income. Net income of $16.0 million in 2001 represented a $4.6 million, or 39.9% increase over 2000. On a diluted per share basis, earnings of $1.18 were $0.13, or 12.4%, over 2000.
Gross profit. Gross profit for 2000 was $96.8 million, a 43.1% increase over $67.7 million for 1999. Gross profit margin for 2000 and 1999 was 65.6% and 56.0%, respectively, reflecting the reduction of commissions paid on business generated by The Wamberg Organization, our largest independent consultant which we acquired in September 1999.
During 2000, corporate general and administrative expense was $9.1 million, including $518,000 of reorganization expenses and $500,000 of legal expenses relating to acquisitions that were not consummated. Results also include the net loss of $603,000 from Insurance Alliance Group operations. Excluding this component, corporate general and administrative expense would have been $8.5 million for 2000. Total expenses for 1999, the year our corporate office was established in North Barrington, were $5.9 million.
Amortization. Amortization of intangibles increased $2.8 million or 63.3% over 1999. The entire amount is attributable to companies acquired in 2000 and the full year's effect of companies acquired in 1999.
Interest expense--net. Net interest expense was $4.7 million in 2000, a 45.8% increase from the $3.2 million net interest expense in 1999. This was due to a $21.8 million increase in our net borrowings in 2000.
Non-operating income. In the fourth quarter of 2000, we received $1.0 million of life insurance proceeds as a result of the death of one of our employees. This one time credit increased net income for 2000 by approximately $0.09 per share.
Our acquisition program continues to remain broadly focused on adding new markets or expanding those in which we already have a presence. We feel we furthered this objective in 2001 by acquiring Rich, Florin/Solutions, Inc. (f.d.b.a. Executive Alliance), a technical and middle management compensation consulting firm, during the first quarter; and Management Science Associates, Inc., a consultant to the healthcare industry, in the third quarter, along with three other acquisitions in 2001.
On March 12, 2001, we acquired the business along with certain assets and liabilities of Rich, Florin/Solutions, Inc. (f.d.b.a. Executive Alliance), a Boston, Massachusetts compensation consulting company. This acquisition created a new operating segment for the company - Rewards and Performance (previously known as Corporate Practice.) The net assets acquired were approximately $1.8 million. The purchase price was $20.8 million; before expenses, consisting of a cash payment at closing of $11.3 million and $9.5 million of contingent payments over the next four years based on the attainment of established financial performance criteria. When earned, the contingent payments will consist of 60% cash and 40% in our common stock. The transaction was funded from our existing line of credit. The initial goodwill of approximately $9.4 million was being amortized over twenty years. Goodwill amortization ceased on December 31, 2001 under new accounting rules.
On September 6, 2000, we acquired all the issued and outstanding capital stock of Compensation Resource Group ("CRG") for a total purchase price of $30.5 million consisting of the following: a cash payment to the CRG selling shareholders of $11.4 million, the issuance of 596,463 shares of our common stock, having an aggregate value of $6.1 million based on the closing price on September 5, 2000, and the repayment of approximately $13.0 million of CRG's long-term debt. Acquisition expenses were $735,000 and are not included in the purchase price above. The cash portion of the purchase price was borrowed under our acquisition and working capital credit facility. The acquisition of CRG has been accounted for as a purchase with $26.7 million of the purchase price allocated to the present value of in-force revenue and amortized over a period of thirty years and $11.6 million allocated to goodwill which will be amortized over twenty years. The goodwill allocation includes $7.1 million of net deferred tax liabilities arising from the portion of the purchase price that will not be deductible for federal income tax purposes. Goodwill amortization ceased on December 31, 2001 under new accounting rules.
Coincident with this acquisition, we entered into a bonus arrangement for certain key executives and employees of CRG. This arrangement will provide for the payment of bonuses of up to $20 million if certain stipulated financial objectives are achieved during the years ended December 31, 2003 to 2005. The division president has the opportunity to earn up to $3.5 million in bonuses through 2003 based on certain financial objectives as outlined in the employment agreement.
Year Ended December 31, ------------------------- ------------ ------------ 2000 1999 Pro Forma Revenue $181,787 $148,487 Net income 9,500 5,957 Diluted earnings per share 0.84 0.60
The acquisition has been accounted for as a purchase and goodwill of $23.5 million was being amortized over a twenty-year period. Goodwill amortization ceased on December 31, 2001 under new accounting rules.
The unaudited pro forma information below presents the results of Pearl Meyer & Partners and ourselves as if the acquisition had occurred on January 1, 1999.
Year Ended December 31, ------------------------- ------------ ------------ 2000 1999 Pro forma Revenue $154,557 $133,339 Net income 12,143 7,562 Diluted earnings per share 1.10 0.79
On March 7, 2002, our stock which was previously traded on the NASDAQ under the symbol of CLKB, began trading on the New York Stock Exchange under the symbol of CBC.
On February 25, 2002, we announced the purchase of the Federal Policy Group of PricewaterhouseCoopers based in Washington, D.C. Federal Policy Group is a consulting practice representing Fortune 500 companies, trade associations and other businesses before the government on legislative and regulatory policy matters. The purchase price was $11.0 million before expenses consisting of a cash payment at closing of $5.0 million and $6.0 million of contingent payments consisting of cash and stock over the next 4 years based upon attainments of established performance criteria.
Clark/Bardes Reinsurance Company, Ltd. (CBRCL), a wholly owned subsidiary of Clark/Bardes, Inc., was incorporated in the Cayman Islands with Limited Liability effective December 13, 2001. CBRCL was formed in order to increase and diversify our earnings stream by participating in the underwriting profits of the insurance business produced by its various operating segments. The Governor In Council granted approval on December 19, 2001 for the issue of an unrestricted Class “B” insurer’s license to CBRCL, subject to the receipt and approval by the Cayman Monetary Authority of certain outstanding requirements of the Law. As of December 31, 2001, CBRCL had not yet been capitalized nor had it begun its reinsurance operations. The insurance license for CBRCL has been issued and is effective as of February 1, 2002.
On November 21 and 30, 2001, we sold 3,693,750 shares of common stock at a price of $19 per share. The entire amount of the proceeds received of $66.0 million was used to repay bank debt.
Our commission revenue is usually long term and recurring, is typically paid annually and extend for a period of ten years or more after the sale. Commissions paid by insurance companies vary by policy and by program and usually represent a percentage of the premium or the cash surrender value of the insurance policies underlying our program.
We have intangible assets representing the excess of the costs of acquired businesses over the fair values of the tangible net assets associated with the acquisition. Intangible assets consist of the net present value of future cash flows from existing business at the acquisition date, non-compete agreements with the former owners and goodwill. The amortization periods for the non-compete agreements are 5 years and 10 years. The net present value of inforce revenue is amortized over 20 to 30 years (the expected average policy duration). There are certain assumptions related to persistency, expenses, and discount rates that are used in the calculation of inforce revenue. If any of these assumptions change, it could effect the carrying value of the inforce revenue. Under accounting rules, we periodically review and test the recoverability of these assets.
William Archer, a member of our Board of Directors since February 2001, is a senior policy advisor at Pricewaterhouse Coopers LLP. We previously engaged Pricewaterhouse Coopers LLP to perform various consulting related to the installation of our wide area network and a knowledge management system at one of our compensation consulting practices. During 2001, we paid approximately $726,000 to Pricewaterhouse Coopers LLP for these services.
The following table presents a summary of key revenue and expense statistics for the most recent eight calendar quarters. This information is not necessarily indicative of results for any full year or for any subsequent period.
Dec. Sept. June Mar. Dec. Sept. June Mar. 2001 2001 2001 2001 2000 2000 2000 2000 Revenue $77,264 $43,922 $43,468 $66,037 $57,457 $34,645 $24,364 $31,147 % of annual 33.5% 19.1% 18.8% 28.6% 38.9% 23.5% 16.5% 21.1%
The Healthcare Group acquired Partners First in March 2001 and Management Science Associates (“MSA”) in July 2001. MSA contributed $4.1 million and $1.2 million of revenue and operating income, respectively, to the consolidated results of the Healthcare Group in 2001. We anticipate the MSA acquisition will provide cross selling opportunities within the Healthcare Group and throughout the Company going forward into 2002.
Total revenue $19,915 $6,027 Commission expense -- -- ------------- ------------- ------------- ------------- Gross profit 19,915 6,027 % of revenue 100.0% 100.0% ------------- ------------- ------------- ------------- General and administrative 14,244 4,095 % of revenue 71.5% 67.9% Amortization of 1,570 626 intangibles ------------- ------------- ------------- ------------- Total 15,814 4,721 Operating income $4,101 $1,306 ============= ============= ============= ============= % of revenue 20.6% 21.7%
In 2001, approximately 3.8% of gross revenue and 8.4% of operating income were from acquisitions while 12.9% of gross revenue and 9.4% of operating income were from acquisitions in 2000. We do not attribute a great deal of significance to these statistics because an acquisition’s contribution to operating performance in any given period is considerably dependent on the timing of the transaction and whether it is considered an acquisition for definition purposes. In addition, the statistics only break-out acquisitions that are considered material to our financial results. Finally, the resources of our existing businesses that are dedicated to our acquisition program could have had an impact on the performance of the existing business had the acquisitions not been made.
Our working capital ratio at December 31, 2001 was 1.11 to 1 compared to the ratio of .95 to 1 at December 31, 2000. As an acquiring company, a significant amount of borrowing is done to finance our acquisitions. Because of this and the strong cash generated by operations, management has determined to dedicate all excess cash to help with the funding of future acquisitions, as a result, only cash for reasonably foreseeable needs and expenses is retained. The debt to total capitalization ratio significantly decreased from 2000 due to the pay off of the debt with the proceeds from our secondary offering. It should be noted that our loan agreements do not impose a working capital covenant or restriction because of the value of our renewal revenue that is used as collateral for our senior debt.
10 year inforce revenues net of commission expense are $416.7 million for the year ended December 31, 2001.
Because of the income tax structure of the companies we seek to acquire, a substantial amount of the purchase price is paid in cash. This is also due, in part, to our desire to avoid diluting our existing shareholders. We expect acquisitions to continue and be financed primarily from available credit lines and possible additional equity. However, we can offer no assurances such will be the case.
In December 2001, we amended our Amended and Restated Credit Agreement dated December 28, 1999 to increase the amount available under the revolving credit facility from $62.0 million to $103.2 million. There is no longer a term loan balance of this facility. We paid off the term portion under the old agreement in December 2001 with the proceeds from our November 2001 secondary offering. Any outstanding debt on December 31, 2002 will convert from the revolving credit facility to term debt and will amortize over 5 years under the term facility agreement.
The restrictive covenants under the loan agreement provide for the maintenance of a minimum ratio of fixed charges, a maximum allowable leverage ratio, a minimum amount of stockholders’ equity; and, a maximum ratio of debt to capitalization. We were in compliance with all restrictive covenants as of December 31, 2001.
We had $103.2 million available under our credit lines at December 31, 2001.
The following table provides information about our debt obligations. The table presents principal cash flows and related interest rates by expected maturity dates totaling $7.1 million.
Inflation has not had a material effect on our results of operations. Certain of our expenses, such as compensation, benefits and capital equipment costs, are subject to normal inflationary pressures. However, the majority of our service and administrative agreements with clients, which generate fee income, have a cost of living adjustment tied to the consumer price index. Management believes that future inflationary pressures will continue to be offset, because as inflation increases, investment returns will also increase, resulting in higher cash values and higher commission rates.
As a result of the pay off of the debt in November 2001 with the proceeds from the secondary offering, we were unable to continue our hedging program. We recorded $2.0 million as interest expense for the year ended December 31, 2001 related to these interest rate swaps.
Prior to January 1, 2001, we also used interest rate swap contracts for hedging purposes. The net amount paid or received and net amounts accrued through the end of the accounting period were included in interest expense.
In June, 2001 the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, Business Combinations and No. 142, Goodwill and Other Intangible Assets. Statement 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Statement 141 also includes guidance on the initial recognition and measurement of goodwill and other intangible assets arising from business combinations completed after June 30, 2001. Statement 142 prohibits the amortization of goodwill and intangible assets with indefinite useful lives. Statement 142 requires that these assets be reviewed for impairment at least annually. Intangible assets with finite lives will continue to be amortized over their estimated useful lives.
We will apply Statement 142 beginning the first quarter of 2002. Application of the nonamortization provision of Statement 142 is expected to result in an increase in pre tax income of $4.0 million with an after tax effect on EPS of $0.13 to $0.14 per share in 2002. We will test goodwill for impairment using the two-step process prescribed in Statement 142. The first step is a screen for potential impairment, while the second step measures the amount of the impairment, if any. We expect to perform the first of the required impairment tests of goodwill and indefinite lived intangible assets as of January 1, 2002 in the first quarter of 2002. Any impairment charge resulting from these transitional impairment tests will be reflected as the cumulative effect of a change in accounting principle in the first quarter of 2002. We have not determined what the effect of these tests will be on our earnings or financial position.
On January 1, 2002, we adopted Financial Accounting Standards Board Statement of Financial Accounting Standard No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. This statement supersedes SFAS No. 121. Most of the provisions of SFAS No. 121 have been retained; however SFAS No. 144 removes goodwill from its scope and it establishes a primary asset approach to determine the cash flow estimation period for a group of assets. We do not anticipate the adoption of this statement to have a material impact on our consolidated financial statements.
Year ended December 31, 2001 ------------------------------------ Actual Guidance Revenue First year $ 137,894 $ 133,906 Renewal and fees 92,797 84,621 ------------------------------------ ------------------------------------ Total 230,691 218,527 ------------------------------------ Gross profit 146,689 144,129 ------------------------------------ Earnings before interest, taxes and amortization (1) 45,437 44,709 ------------------------------------ Net income $ 16,012 $ 18,479 ==================================== Diluted shares outstanding 13,575,830 13,400,000 Diluted earnings per share (2) $ 1.18 $ 1.38 ====================================
(2) We sold substantially all the assets of Insurance Alliances Group in September 2001 and in 2001 wrote off approximately $2.1 million relating to the carrying value of the goodwill and inforce revenue intangible assets arising from this acquisition that was considered not recoverable. We recorded interest expense of approximately $2.0 million as a result of the interest rate swap settlements since we were unable to continue with our hedging program due to the pay off of the bank debt with the proceeds from our secondary offering.
Set forth below is the earnings guidance set forth by management for the 2002.
2002 Revenue 2002 EBITA Expected contribution by market 38% 31% Corporate Benefits Banking Practice 38% 63% Healthcare Compensation 13% 13% Compensation Consulting 11% 16% Corporate (23%)
that there will be no change in tax laws, regulations or enforcement policies of the Internal Revenue Service; that our recently completed acquisitions will be successful, and such statements do not give effect to any future acquisitions; that general economic conditions will not decline from current levels; and that our overall persistency rates will remain at levels consistent with historic levels.
The foregoing assumptions are inherently subject to significant business, economic, competitive, regulatory and other risks and uncertainties, many of which are beyond our control, and upon assumptions with respect to future business decisions that are subject to change. Forecasts are necessarily speculative in nature, and it can be expected that some or all of the assumptions underlying the forecasts will not materialize. We cannot assure you that the forecasts will be realized, and actual results may be materially higher or lower than the forecasts. Consequently, the inclusion of the forecasts in this 10-K should not be regarded as a representation by us or any other person that the forecasted results will be achieved. Because of such risks and uncertainities and the possibility that one or more of our assumptions may be incorrect, you should not rely on the above forward-looking statements in making any investment decision whether to buy, hold or sell any of our securities.
Our financial statements begin on page 40 of this Form 10-K.