Banking Practice-- Bloomington, Minnesota....................................$62,252 31,611 September 2005 North Barrington, Illinois.................................12,521 9,391 February 2009 Frisco, Texas..............................................11,054 6,034 February 2005 5 Regional Offices.........................................11,090 5,855 Various
Healthcare Group-- Minneapolis, Minnesota....................................$78,560 44,861 January 2003 St. Louis, Missouri.........................................7,394 3,400 December 2002 Independence, Missouri.....................................20,370 15,248 December 2002 Burnsville, Minnesota.......................................1,050 1,050 October 2003 Flemington, New Jersey........................................840 400 October 2002
Our net income for 2001 of $16.0 million and $1.18 per diluted common share was the best in our history representing a 39.9% increase over comparable net income of $11.4 million and a 12.4% improvement over diluted earnings per share of $1.05 for the year 2000. 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.
Revenue. For the year ended December 31, 2001, our total revenue was $230.7 million, an increase of 56.3% over $147.6 million for the year ended December 31, 2000. This increase was attributable primarily to a full year's results for Compensation Resource Group (full twelve months compared to four months in 2000) and Pearl Meyer (full twelve months compared to six months in 2000), and the addition of Rich Florin/Solutions Inc (f.d.b.a. Executive Alliance) in March 2001. In addition, we had strong sales results in the corporate and community banking markets in 2001.
General and administrative expense. General and administrative expense was $101.3 million or 43.9% of revenue in 2001 compared to $68.2 million or 46.2% of revenue in 2000. The increase can be primarily attributed to the full year results of Compensation Resource Group, Pearl Meyer and the 5 acquisitions completed in 2001. As a percentage of revenue, it has declined from 46.2% to 43.9% due to integration activities at the groups and spreading of fixed costs over a larger revenue base.
Amortization. Amortization was $11.6 million in 2001 or 62.0% higher than the $7.1 million in 2000. This is a result of a full year's amortization cost for Compensation Resource Group and Pearl Meyer. As a result of new accounting rules outlined in FAS 142 which are effective January 1, 2002, goodwill will no longer be amortized. Approximately $4.0 million of the amortization in 2001 related to goodwill.
Interest expense - net. Net interest expense excluding the interest expense for the settlement of an interest rate swap was $5.2 million in 2001 compared to $4.7 million in the prior year. We had additional borrowings of $20.0 million during the year to fund our acquisitions. Our longterm bank debt was paid off with the proceeds from our secondary offering in November 2001.
Income taxes. Income taxes in 2001 were $8.7 million which resulted in an effective tax rate of 35.3% compared with $5.8 million or an effective tax rate of 33.7% in 2000. We received a refund for prior year's taxes of approximately $1.7 million during the year which reduced our rate for the 2001 tax year. In 2000, we received a state tax refund of $500,000 and non-taxable life insurance proceeds of $1.0 million which lowered our effective tax rate in that year.
Revenue. For the year ended December 31, 2000, our total revenue was $147.6 million, an increase of 22.2% over $120.8 million for the year ended December 31, 1999. This increase in total revenue was attributable primarily to significant increases in first year commission revenue from business-owned life insurance and our acquisitions of Compensation Resource Group and Pearl Meyer in 2000. Revenue also benefited from the inclusion of the Healthcare Group for a full twelve months compared with nine months in 1999.
General and administrative expense. General and administrative expense was $68.2 million, an increase of $23.0 million, or 51.0%, over 1999. General and administrative expense increased due to the natural increase in expenses required to support increased revenue and operations, the inclusion of our Healthcare Group and other acquisitions for a full year and higher corporate general and administrative expense.
Income taxes. Income taxes in 2000 were $5.8 million which resulted in an effective tax rate of 33.7% compared with $6.1 million or an effective tax rate of 40.8% in 1999. Tax expense in 2000 was reduced by the receipt of $500,000 of state tax refunds--a direct reduction of our state income tax expense and the receipt of $1.0 million of non-taxable life insurance proceeds as a result of the death of one of our employees.
Net income. Net income of $11.4 million in 2000 represented a $2.6 million, or 29.6% increase over 1999. On a diluted per share basis, earnings of $1.05 were $0.10, or 10.5%, over 1999.
Up until now, our future renewal revenue stream has been the source of collateral for our acquisition line of credit. As we acquire more businesses that do not have this attribute, this may limit our future borrowing availability.
On August 31, 2001, we acquired the business and certain assets and assumed certain liabilities of Lyons Compensation and Benefits, LLC. This acquisition added several new clients and inforce revenues and strengthened the presence in the Northeast region of the United States for our CRG operating segment.
CRG is an executive compensation and benefits organization that provides the design, marketing and administration of non-qualified benefit plans. CRG is headquartered in Los Angeles, California and has affiliated offices in seven other cities. Prior to the acquisition, we had no material relationship with CRG.
The unaudited financial information below presents our results and CRG as if the acquisition had occurred on January 1, 1999.
On June 21, 2000, we acquired all of the capital stock of Pearl Meyer & Partners, Inc. for a total purchase price of $25.9 million, excluding expenses. The purchase price consisted of a cash payment of $21.9 million and the issuance of 250,000 shares of our common stock with a value of $4.0 million. Acquisition expenses were $720,000. The cash portion of the purchase price was borrowed under our line of credit. For income tax purposes, Pearl Meyer & Partners was an S corporation; consequently the net income was passed on to the shareholders and no taxes were paid by us.
On February 26, 2002, we announced the signing of a letter of intent to purchase Comiskey Kaufman, Inc. Comiskey Kaufman is a Houston, Texas based provider of executive benefits consulting for major companies in the Southwest, primarily in Texas. Consummation of the purchase is subject to the approval of both companies’ Boards of Directors, our lending banks and the satisfactory completion of financial and business due diligence.
Last year, we had reported that the Tax Court had found in favor of the Internal Revenue Service in their efforts to disallow an interest deduction by a company having purchased an executive benefit program funded by a life insurance product known as leveraged COLI. Since then, the IRS has continued to litigate the matter with other companies and has prevailed on three more cases. We have not offered leveraged COLI in our product offerings since 1995. Consequently, we do not expect any adverse effects on our future new business revenue stream. However, because of the varied facts and circumstances surrounding each case, it is impossible to determine the effects of any case on a client’s decision to continue or surrender any existing policy. Because of the number of other variables, including adverse tax implications resulting from a surrender of the insurance contracts, it is impossible to predict the ultimate effect, if any, this could have on our future renewal revenues.
In January 2001, the Treasury Department and the Internal Revenue Service served notice on taxpayers of their intent to consider taxing the equity increase in what are known as “equity split dollar” arrangements, to the individual beneficiary of the coverage. Heretofore, the individual did not sustain a tax liability until the policy was closed and the equity distributed. The implementation of this notice may have a negative impact on our ability to market new equity split dollar arrangements and could potentially affect existing split dollar arrangements.
Our operating units derive their revenue primarily from commissions paid by the insurance companies that underwrite the policies underlying the various benefit programs, program design and administrative service fees paid by clients, and executive compensation and benefit consulting fees.
First Year Revenue. First year revenue is derived from two principal sources; (a) the commission we earn when the client first purchases the policies underlying the program. It is the financial result of our sales efforts. First year revenue is recognized in the amount due or paid by the carrier at the time the application is substantially completed, the client is contractually committed to purchase the insurance policies and the initial premium payments are paid by the client to the insurance company; and (b) fees for the services we perform in advising our clients on their executive compensation programs. These fees are based on a rate per hour arrangement and are earned when the service is rendered and billed to the client. Renewal Commission Revenue. Renewal revenue is the commission we receive based on the premiums on the policies underlying the benefit programs we have sold in prior periods. Renewal revenue is recognized on the date that the renewal premium is due or paid to the insurance company depending on the type of policy. Renewal revenue in future periods, which is not recorded on our balance sheet, is estimated to be approximately $366.1 million over the next five years. However, renewal revenue can be affected by policy surrenders or exchanges, material contract changes, asset growth and case mortality rates. Over the last five years, we have experienced a persistency rate of approximately 95% of the inforce insurance underlying our programs. However, we can give no assurances that our persistency rate will remain at this level. We intend to do all we can to retain our clients, service their accounts and sustain our persistency. Other Revenue. Other revenue consists of several sources of revenue associated with our operations, including various consulting fees we may charge incident to the studies we perform in the development of a specific benefit program and fees we charge our clients for the administration of their benefit program. Both of these fees are recorded as revenue as they are earned in accordance with the governing agreement.
In connection with the acquisition of the Wamberg Organization in September 1999, the asset purchase agreement provided for additional payments to W.T. Wamberg, our chief executive officer and previous owner of the Wamberg Organization, upon attainment of certain stipulated annual financial objectives starting with the period ended December 31, 1999 through December 31, 2002. As of December 31, 2001, the financial objectives for those years have been met and a total cash payment of $8.3 million was made to W. T. Wamberg and recorded as additional purchase price. The Board of Directors has approved the distribution of The Wamberg Organization earnout payment prior to the date we are obligated to distribute the proceeds. The earnout target has been achieved and the payment will be made but discounted for the time value of money. $3.5 million was accrued for this payment in the consolidated financial statements at December 31, 2001.
We funded our deferred compensation plan at year-end with an insurance policy under which we recognized revenue of $560,000 as stated in our revenue recognition policy. The employment agreement with one of our division presidents was revised in December 2001 to change bonuses for key performance measures. No cash payments were made in December 2001, however $250,000 was accrued as the amount that has been earned to date under the new agreement.
During 2001, we paid William Seidman, a member of our Board of Directors, $75,000 for services in connection with the evaluation of a potential acquisition target.
Our Chairman and Chief Executive officer, Tom Wamberg and Richard Chapman, Executive Vice-President of Clark/Bardes, Inc. and President of the Banking Practice, have collectively invested $1 million in a company which George Dalton, a member of our Board of Directors is founder and majority shareholder.
Fox-Pitt Kelton, co-manager of our November 2001 secondary offering owns Conning Capital Partners. Steve Piaker, a member of our Board of Directors, is a partner with Conning Capital Partners.
% of revenue 18.5% 6.9% 6.5% 17.6% 22.8% 8.9% 3.7% 12.6% % of gross profit 30.3% 10.1% 9.3% 29.8% 35.0% 13.5% 5.5% 19.3%
Non-operating (expense) income (21) - (72) 191 1,001 - - - Interest expense -- net 3,224 1,206 1,447 1,291 1,587 1,407 847 851 (2) Income taxes 3,946 39 422 4,318 4,151 514 (113) 1,273 Net income $7,133 $1,765 $900 $6,214 $8,339 $1,159 $159 $1,791
(1) In the fourth quarter of 2001, we incurred an unusual operating expense of $2.1 million in connection with the writedown of assets acquired from Insurance Alliances Group.
(2) As we paid off the bank debt during the fourth quarter of 2001, we were unable to continue our hedging program and incurred $2.0 million of interest expense related to our interest rate swaps.
The following analyses depict the results of each of our operating segments on a stand-alone basis. No allocation of corporate overhead or interest has been made.
--------------------------------- Year Ended December 31, --------------------------------- 2001 2000 1999 Revenue First year $42,117 $21,376 $7,884 Renewal 51,674 25,766 24,537 ---------- ----------- ---------- ---------- ----------- ---------- Total 93,791 47,142 32,421 Commission expense 47,650 20,474 14,023 ---------- ----------- ---------- ---------- ----------- ---------- Gross profit 46,141 26,668 18,398 % of revenue 49.2% 56.6% 56.7% ---------- ----------- ---------- ---------- ----------- ---------- General and administrative 28,915 15,791 9,866 % of revenue 30.8% 33.5% 30.4% Amortization of 5,703 1,946 951 intangibles ---------- ----------- ---------- ---------- ----------- ---------- Total 34,618 17,737 10,817 Operating income $11,523 $8,931 $7,581 ========== =========== ========== ========== =========== ========== % of revenue 12.3% 18.9% 23.4%
Formerly our Clark/Bardes segment, the segment now consists of the original core business as well as the Schoenke, Wiedemann & Johnson, Wamberg Organization, and Compensation Resource Group acquisitions. The segment was reorganized with the acquisition of Compensation Resource Group and renamed Clark/Bardes Consulting - Compensation Resource Group.
In order to streamline the focus of the segment, the bank owned life insurance business of this segment was transferred to the Banking Practice, effective January 1, 2001 and the Clark/Bardes Consulting Compensation Resource Group segment will concentrate on non-qualified executive benefit plans.
Revenue was $93.8 million for 2001 compared to $47.1 million for 2000. This increase of $46.6 million is primarily attributed to a full year of results in 2001 for Compensation Resource Group (full twelve months in 2001 versus 4 months in 2000) and strong first quarter sales. Gross profit as a percentage of revenue declined from 56.6% in 2000 to 49.2% in 2001 due to more sales being generated by senior consultants who are generally paid a higher commission expense. General and administrative expenses increased 83.1% over 2000. This is primarily attributed to a full year of expenses in 2001 for Compensation Resource Group (full twelve months in 2001 versus 4 months in 2000.) Operating income as percentage of revenue declined from 18.9% in 2000 to 12.3% in 2001 as a result of the higher commission expense mentioned above and a full year of amortization expense.
Year Ended December 31, --------------------------------- 2001 2000 1999 Revenue First year $55,797 $38,835 $47,204 Renewal 35,964 32,783 24,687 ---------- ---------- ----------- ---------- ---------- ----------- Total 91,761 71,618 71,891 Commission expense 33,356 27,465 37,192 ---------- ---------- ----------- ---------- ---------- ----------- Gross profit 58,405 44,153 34,699 % of revenue 63.6% 61.7% 48.3% General and administrative 25,450 22,268 16,850 % of revenue 27.7% 31.1% 23.4% Amortization of 1,690 2,625 2,059 intangibles ---------- ---------- ----------- ---------- ---------- ----------- Total 27,140 24,893 18,909 Operating income $31,265 $19,260 $15,790 ========== ========== =========== ========== ========== =========== % of revenue 34.1% 26.9% 22.0%
The major component of the Banking Practice is Bank Compensation Strategies and the BOLI business previously included in the CRG segment. Revenue increased 28.1% between 2001 and 2000 primarily due to strong first year sales in the community banking sector. Improvements in the gross profit percentage from 61.7% in 2000 to 63.6% in 2001 relates to more sales being generated by employee consultants who have a lower commission structure and stronger performances by Christiansen and NICB. General and administrative expense as a percentage of revenue was 27.7% in 2001 and 31.1% in 2000. This has improved as a result of consolidation of the majority of the banking business in Minneapolis.
Although other segments offer compensation consulting in connection with their benefit plan activities, the June 2000 acquisition of Pearl Meyer & Partners represented our major initiative into this vital and logical extension of our business. In 2001, we acquired Rich Florin/Solutions, Inc. (f.d.b.a. Executive Alliance) which helped us expand our compensation consulting services. The performance of compensation consulting was negatively impacted by the events of September 11, 2001 during the later half of third quarter and the beginning of fourth quarter.
As an acquirer, our operating results are significantly influenced by the contributions of our acquired businesses. For reporting purposes, we consider the operating results from any business not appearing in four complete quarters as being from acquisitions. After that, they become part of existing business. Non-material acquisitions are not included in the acquisition column. An analysis of our operating results, separating acquisitions from existing business is as follows:
Year Ended Year Ended December 31, 2001 December 31, 2000 Existing Acquisitions Combined Existing Acquisitions Combined Revenue First year $128,477 $8,667 $137,144 $68,484 $14,816 $83,300 Renewal 93,547 - 93,547 60,135 4,178 64,313 ----------- ------------ ----------- ----------- ------------ ------------ ----------- ------------ ----------- ----------- ------------ ------------ Total 222,024 8,667 230,691 128,619 18,994 147,613 Commission expense 84,002 - 84,002 44,656 6,148 50,804 ----------- ------------ ----------- ----------- ------------ ------------ ----------- ------------ ----------- ----------- ------------ ------------ Gross profit 138,022 8,667 146,689 83,963 12,846 96,809 General and administrative Expense 95,659 5,593 101,252 59,594 9,113 68,707 Operating income before Amortization 42,363 3,074 45,437 24,369 3,733 28,102 Amortization of 11,167 393 11,560 5,373 1,765 7,138 intangibles IAG writeoff 2,070 - 2,070 - - - ----------- ------------ ----------- ----------- ------------ ------------ ----------- ------------ ----------- ----------- ------------ ------------ Operating income $29,126 $2,681 $31,807 $18,996 $1,968 $20,964 =========== ============ =========== =========== ============ ============
(1) total stockholders' equity divided by actual shares outstanding at year end excluding shares on option
(2) current debt plus long term debt divided by current debt plus long term debt plus stockholders' equity
Due to the nature of the commission structure on the insurance policies underlying our clients' benefit programs, we have an on going renewal revenue stream, estimated to be $624.1 million over the next ten years. Our balance sheet currently reflects $98.4 million of renewals, in the form of intangible assets attributed to the net present value of renewals from acquired companies purchased through acquisitions. Other than these intangibles, renewals are not reflected on our balance sheet.
Year Ended December 31, ------------------------------------- ------------ ------------ 2001 2000 1999 Cash flows from (used in): Operations $28,422 $17,918 $12,552 Investing (34,242) (62,655) (40,282) Financing 8,429 47,503 20,460
Year Ended December 31, 2001 2000 1999 Net income plus non-cash expenses $35,222 $19,860 $14,016 Changes in operating assets and liabilities (6,800) (1,942) (1,464) ----------- ----------- ---------- ----------- ----------- ---------- Cash flow from operating activities $28,422 $17,918 $12,552 =========== =========== ==========
The following table represents the estimated gross renewal revenue associated with our inforce business owned life insurance policies as of December 31, 2001. The projected gross revenue is not adjusted for mortality, lapse or other factors that may impair realization. We cannot assure you that commissions under these policies will be received. These projected gross revenues are based on the beliefs and assumptions of management and are not necessarily indicative of the revenue that may actually be achieved in the future.
Total December 31, $522,752 $61,955 $51,721 $636,428 ================ ========= ============ ==========
The bank owned life insurance product sold by the former Clark/Bardes segment which was included in CRG was transferred to the Banking Practice thus placing all of our bank owned life insurance business in one segment, commencing January, 2001.
Partners First $1.1 Rich/Florin Solutions 11.4 Management Sceience Associates 4.7 Lyons Compensation and Benefits 5.0 Coates Kenney 0.6 The Wamberg Organization earnout 6.7 ------- $29.5 ======= =======
In November 2001, we sold 3,693,750 shares in a secondary offering. The entire proceeds from the sale of approximately $66.0 million were used to repay all debt under our credit facility. We will have more flexibility with where our money can be directed because of the pay off of the debt.
As of January 1, 2001, we adopted Financial Accounting Standards Board Statement No. 133, Accounting for Derivative Instruments and Hedging Activities (Statement 133) which was issued in June 1998 together with its amendments Statements 137, Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133 and 138, Accounting for Derivative Instruments and Certain Hedging Activities (issued in June 1999 and June 2000, respectively are collectively referred to as Statement 133).
Because of our minimal use of derivatives, the adoption of the new Statement did not have a significant effect on our earnings or financial position. The Statement requires us to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative’s change in fair value will be immediately recognized in earnings.
Set forth below is a comparison of our actual results for the year ended December 31, 2001 compared to the guidance previously provided.
2002 Quarter Ending ------------------------------------------------------- ------------------------------------------------------- Full Year March 31 June 30 September 30 December 31 2002 First year revenue $38,140 $34,870 $36,670 $54,020 $163,700 Renewal and other 30,360 17,020 17,300 27,320 92,000 ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- Gross revenue 68,500 51,890 53,970 81,340 255,700 Gross profit 43,970 35,980 37,190 56,660 173,800 Earnings before interest, taxes and amortization (EBITA) 16,280 5,360 7,380 22,980 52,000 ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- Net income 8,675 2,225 3,450 13,330 27,650 ============= ============= ============= ============= ============= ============= ============= ============= ============= ============= Diluted shares outstanding 17,250 17,350 17,450 17,550 17,400 Diluted earnings per share 0.50 0.13 0.20 0.76 1.59 ============= ============= ============= ============= ============= ============= ============= ============= ============= =============
The above forward-looking statements are based on the good faith beliefs of management and the information currently available and are not an assurance of future performance. Such forward-looking statements are based on a number of assumptions by management, including, without limitation: