The year 2000 produced three unusual and non-recurring events. In the third quarter, we sustained a $518,000 charge to integrate a new acquisition. Also, in the third quarter, we recovered approximately $500,000 of overpaid state income taxes thus giving us an unusually low effective tax rate for the year and a $.05 per share benefit. In the fourth quarter, we received $1.0 million of life insurance proceeds as the result of the death of a sales consultant. This one time credit increased net income for 2000 by $1.0 million or $.09 per share.
o Pearl Meyer & Partners, one of America's leading executive compensation consulting firms, during the second quarter; and,
2) We acquire little in the way of tangible assets, thus creating a substantial amount of intangible assets on our balance sheet.
The transaction was funded from CBH's existing line of credit. The initial goodwill of approximately $9.0 million will be amortized over twenty years.
On October 23, 2000, CBH acquired all of the outstanding stock of Forrest, Wagner & Associates, Inc. ("FWA") for a purchase price of $4.2 million, including expenses, of which $3.5 million was paid in cash at the closing. The balance of $750,000 is payable upon the achievement of certain financial criteria by December 31, 2004.
FWA is a Phoenix, Arizona based firm specializing in marketing and administering non-qualified executive benefit plans funded primarily by Company owned life insurance. FWA was affiliated with Compensation Resource Group, Inc.
The acquisition will be accounted for as a purchase with $2.7 million of the purchase price amortized based on the net present value of future renewal revenue over twenty years. The balance of the purchase price, when made, will be accounted for as goodwill and amortized over the remainder of the initial twenty-year period.
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, excluding acquisition expenses, consisting of:
o a cash payment to the CRG shareholder Sellers of $11.4 million;
o the issuance by CBH of 596,463 shares of its common stock, par value $0.1 per share (the "Common Stock"), having an aggregate value of $6.1 million based on the closing price of the Common Stock on September 5, 2000;
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 $11.4 million allocated to goodwill, which will be amortized over twenty years.
The unaudited financial information below presents the results of CBH and CRG as if the acquisition had occurred on January 1, 1999.
Twelve Months Ended December 31, 2000 1999 Pro forma Revenue................ $181,787 $148,487 Net income (loss)...... 9,500 5,957 Diluted earnings (loss) .84 .60 per share................
For the period prior to the acquisition, Pearl Meyer & Partners had revenue and net income as follows:
Years Ended Three Months December 31, Ended March 31, 1999 1998 2000 ------------------ ------------ (Audited) (Unaudited) Revenue.. $12,579 $11,230 $3,176 Net income 757 232 1,346
For income tax purposes, Pearl Meyer & Partners was an S corporation; consequently the net income was passed on to the shareholders.
Pearl Meyer is a New York City based consulting firm specializing in executive compensation and retention programs. The Pearl Meyer organization became our fourth operating division. Prior to the acquisition, there was no material relationship between CBH and Pearl Meyer.
The unaudited pro forma information below presents the results of us and Pearl Meyer & Partners as if the acquisition had occurred on January 1, 1999.
Twelve Months Ended December 31, 2000 1999 Pro forma Revenue................ $154,557 $133,339 Net income (loss)...... 12,143 7,562 Diluted earnings (loss) 1.10 .79 per share................
In addition to the purchase price paid at closing, an additional $650,000 will be paid upon the achievement of certain revenue and earnings objectives during the years ended June 30, 2001 through 2004. The payments will be made 23% in cash and 77% in our common stock based on values at time of issuance. The additional payments will be accounted for as goodwill and amortized over the remaining twenty-year period.
The purchase price for the business was $3.5 million consisting of $2.8 million cash and 49,143 shares of our common stock having a value of $713,000. The cash portion of the purchase price was borrowed under our line of credit. The acquisition will be accounted for as a purchase and the entire purchase price has been allocated to the net present value of renewal revenue from insurance in force at the time of the acquisition and will be amortized over a period of thirty years.
Effective January 1, 2000 we acquired the stock and business of Christiansen & Associates for 43,714 shares of common stock at a value of $694,000 and cash and expenses of $128,913. Christiansen is a former independent consulting organization that sold through our BCS division. The acquisition has been accounted for as a purchase and goodwill will be amortized over twenty years.
On February 1, 2000, we acquired the assets of The Watson Company for $328,000, cash and expenses, as an expansion of the Banking Practice division. The acquisition has been accounted for as a purchase and the goodwill amortized over twenty years.
On September 11, 2000, we sold 1,888,887 shares of our common stock in a registered private placement to a group of unaffiliated investors for $25.1 million, net of expenses. The funds were used to complete the CRG acquisition and retire debt. The shares have been registered for sale if any of the investors wish to do so.
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.
2001 Quarter Ending Full Year March 31 June 30 September 30 December 31 2001 ---------- ---------- ------------------------------ Revenue First Year........... $ 29,100 $ 24,200 $ 25,700 $ 38,500 $ 117,500 Renewal and Fees..... 28,000 18,100 17,900 24,300 88,300 ---------- ---------- --------- ---------- ---------- Total........ 57,100 42,300 43,600 62,800 205,800 ---------- ---------- --------- ---------- ---------- Gross profit.......... 37,200 28,400 29,600 42,700 137,900 ---------- ---------- --------- ---------- ---------- Earnings Before Interest, Taxes and Amortization.. 12,200 4,500 5,400 18,500 40,600 ---------- ---------- --------- ---------- ----------
Net Income............. $ 5,300 $ 600 $ 1,200 $ 9,500 $ 16,600 ========== ========== ========= ========== ========== Diluted Shares Outstanding............ 13,034,000 13,218,000 13,325,000 13,401,000 13,244,000 Diluted Earnings Per share.................. $ 0.41 $ 0.05 $ 0.09 $ 0.71 $ 1.25 Contributions by Division Revenue Corporate......... $ 22,300 $ 16,500 $ 17,000 $ 24,500 $ 80,300 Banking........... 24,500 18,100 18,700 27,000 88,300 HealthCare........ 6,300 4,700 4,800 6,900 22,700 Compensation 4,000 3,000 3,100 4,400 14,500 ---------- ---------- --------- ---------- ---------- Consulting............. Total........ $ 57,100 $ 42,300 $ 43,600 $ 62,800 $ 205,800 ========== ========== ========= ========== ==========
Earnings Before Interest, Taxes and Amortization Corporate......... $ 4,000 $ 1,500 $ 1,800 $ 6,100 $ 13,400 Banking........... 8,700 3,200 3,800 13,100 28,800 HealthCare........ 600 200 300 900 2,000 Compensation 1,700 600 800 2,600 5,700 Consulting............. Holding Company... (2,800) (1,000) (1,300) (4,200) (9,300) ---------- ---------- --------- ---------- ---------- $ 12,200 $ 4,500 $ 5,400 $ 18,500 $ 40,600 ========== ========== ========= ========== ==========
All of the data in this schedule, constitutes forward-looking statements. They are based on the beliefs of management and information currently available and they are not a guarantee of future performance. Actual results could differ materially from those shown in the forward-looking statement as a result of a number of factors, such as changes in tax legislation, dependence on key consultants, persistency of existing business, credit risk, acquisition risks, competitive factors and pricing pressure, dependence on certain insurance companies, changes in legal and regulatory requirements, general economic conditions and other factors discussed under the caption "Risk Factors".
o commissions paid by the insurance companies that underwrite the policies underlying the various benefit programs;
Our commission revenue is usually long term and recurring, is typically paid annually and extends 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.
o Renewal Commission Revenue. Renewal revenue is the commission we earned 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 $297 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.
o Other Revenue. Other revenue consists of several sources of revenue associated with our operations, including:
Net income (loss).......... $ 11,448 $ 8,831 $ (411) 29.6 nmf % of total revenue 7.8% 7.3% (0.5)% Per common share Basic Income before amortization and non-recurring items...$ 1.48 $ 1.26 $ (1.30) 17.4 nmf Amortization and non-recurring items.................... $ 0.41 $ 0.29 $ (1.22) 44.1 nmf Net income............... $ 1.07 $ 0.97 $ (0.08) 9.5 nmf Weighted average shares... 10,744,719 9,077,775 5,006,009 18.4 nmf Diluted Income before amortization and non-recurring items.. $ 1.46 $ 1.22 $ (1.30) 19.1 nmf Amortization and non-recurring items......................$ 0.41 $ 0.28 $ (1.22) 46.3 nmf Net income............... $ 1.05 $ 0.95 $ (0.08) 11.2 nmf Weighted average shares... 10,880,094 9,328,939 5,006,009 16.6 nmf
The following analyses depict the results of each of our operating divisions on a stand-alone basis. No allocation of corporate overhead or interest has been made.
Formerly our Clark/Bardes division the division now consists of the original core business as well as the Schoenke, Wiedemann & Johnson, Wamberg Organization, and Compensation Resource Group acquisitions. The Division 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 division, the bank owned life insurance business of this Division will be transferred to the Banking Practice Division, effective January 1, 2001 and the Clark/Bardes Consulting Compensation Resource Group Division will concentrate on non-qualified executive compensation plans.
Despite a disappointing year for first year revenue, down 5.6% or $1.9 million from 1999, this Division still managed to improve over 1999 by $2.2 million or 11.4% due primarily to a 20.4% increase in the gross profit ratio.
Year Ended December 31, Variances- Operating Results Inc. (Dec.) --------------------------- --------------- 2000 1999 1998 00/99 99/98 -------- -------- -------- -------- ------- Revenue First year......... $28,551 $21,614 $23,462 32.1% (7.9)% Renewal............ 11,621 9,170 5,896 26.7% 55.5% ------- ------- ------- ---- ---- Total...... 40,172 30,784 29,358 30.5% 4.9% Commission expense... 17,453 15,057 19,761 15.9% (23.8)% ------- ------- ------- ---- ----- Gross profit......... 22,719 15,727 9,597 44.5% 63.9% % of revenue 56.6% 51.1% 32.7% 10.7% 56.3% ------- ------- ------- ---- ---- Expenses General and administrative....... 15,293 11,192 4,650 36.6% 140.7% % of revenue 38.1% 36.4% 15.8% 4.7% 129.5% Amortization of intangibles.......... 1,232 914 909 34.8% 0.6% % of revenue 3.1% 3.0% 3.1% 3.3% (4.1)% ------- ------- ------- --- ---- Total...... 16,525 12,106 5,559 36.5% 117.8% Operating income..... $ 6,194 $ 3,621 $ 4,038 71.1% (10.3)% % of revenue 15.4% 11.8% 13.8% 31.1% (14.5)%
o gross profit increased 44.5% or $7.0 million, to more than offset a $4.4 million or 36.5% increase in operating expenses.
Year Ended December 31, Operating Results Variances- 2000 1999 Inc. (Dec.) Revenue First year......... $16,870 $12,516 34.8% Renewal............ 5,269 3,932 34.0% ------- ------- ---- Total...... 22,139 16,448 34.6% Commission expense... 2,811 1,893 48.5% ------- ------- ---- Gross profit......... 19,328 14,555 32.8% % of revenue 87.3% 88.5% (1.3)% ------- ------- ---- Expenses General and administrative....... 16,932 12,571 34.7% % of revenue 76.5% 76.4% 0.1% Amortization of intangibles.......... 1,795 1,361 31.9% % of revenue 8.1% 8.3% (2.0)% ------- ------- ---- Total...... 18,727 13,932 34.4% Operating income..... $ 601 $ 623 (3.5)% % of revenue 2.7% 3.8% (28.3)%
Although other divisions offer compensation consulting in connection with their benefit plan activities, the acquisition of Pearl Meyer & Partners in June 2000 represented our major initiative into this vital and logical extension of our business.
o an acquisition's contribution to operating performance in any given period is considerably dependent on the timing of the transaction;
o as stated, an acquisition, by our definition for this purpose, is one in which it has not yet appeared in four quarters' operating results. As the value of these additions adds to our existing business base, the relative contribution of any subsequent acquisition may diminish; and
In 1999, we established a corporate executive and administrative office in North Barrington, Illinois to house the offices of our Chief Executive Officer, our Chief Operating Officer and to provide direction and coordination for our financial, strategic planning and acquisition activities. This operation began in mid-year 1999 and total expenses for 1999 were $5.9 million. During 2000, the total cost of our Corporate Headquarters amounted to $9.1 million including $518,000 of reorganization expenses, and over $500,000 of expenses relating to acquisitions that were not consummated. Results also include the net loss of $617,000 from the Insurance Alliance Group acquisition, which we expect to eventually become our estate planning division. Excluding this component, Corporate overhead would have been $8.5 million for the year 2000.
Borrowing increased to support our acquisition program. During 2000, our cash outlays for acquisitions were $59.2 million and $3.5 million for new equipment. In addition, on March 12, 2001 we acquired all the assets and business of Rich, Florin/Solutions, Inc. for a cash payment of $11.3 million all of which was borrowed under our line of credit.
o The receipt of $500,000 of state tax refunds -- a direct reduction of our state income tax expense.
o The receipt of $1.0 million of non-taxable life insurance proceeds as a result of the death of one of our employees.
Our balance sheet currently reflects $86.0 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, 2000 1999 Change Cash flows from (used in): Operations........ $17,918 $12,552 $5,366 Investing......... (62,655) (40,282) (22,373) Financing......... 47,503 20,460 27,043
Our cash flow from operations for the twelve months ended December 31, 2000, improved significantly over that of the comparable twelve-month period in 1999. The components were:
Year Ended December 31, Increase/(Decrease) 2000 1999 in Cash flow -------- -------- ------------ Net income (loss) plus non-cash $19,860 $14,016 $5,844 expenses...................... Changes in operating assets and liabilities................. (1,942) (1,464) (478) ------ ------ ------ Cash flow from operating $17,918 $12,552 $5,366 activities....................
The following table represents the estimated gross renewal revenue associated with our inforce business owned life insurance policies as of December 31, 2000. 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.
Clark/ Bardes Consulting Compensation Banking HealthCare Resource Group Practice Group Total ------------------------------- ------- 2001........... $71,124 $11,251 $6,084 $ 88,459 2002........... 68,287 8,546 6,016 82,849 2003........... 60,917 5,085 5,944 71,946 2004........... 52,071 5,167 5,810 63,048 2005........... 50,226 5,206 5,436 60,868 2006........... 47,418 5,259 5,155 57,832 2007........... 44,389 5,318 4,901 54,608 2008........... 42,637 5,368 4,629 52,634 2009........... 42,744 5,406 4,141 52,291 2010........... 42,939 5,349 3,605 51,893 ------- ------- ------ -------- Total $522,752 $61,955 $51,721 $636,428 December 31, $322,450 $49,390 $65,406 $437,246 1999...........
On December 28, 1999, we expanded the credit facility negotiated in January 1999 to $100 million with the same group of bank lenders. The new credit facility provided for a revolving credit line and a term loan. The revolving credit portion terminates on December 31, 2002 and it converts to a term loan at the end of each year. The term loan is payable quarterly at the rate of 5% of the year-end balance and $1,250,000 per quarter so the term portion is repaid by December 31, 2004.
On August 23, 2000, we expanded the credit facility from $100 million to $114.3 million and added another bank to the group of lenders. The principal changes in the structure of the facility are the increase of the working capital limit from $5 million to $10 million and an expansion of the borrowing base. The credit facility contains restrictive covenants requiring mandatory prepayments under certain conditions, financial reporting and compliance certificates, maintenance of financial ratios, restrictions on guarantees and additional indebtedness, limitations on mergers and acquisitions, prohibition of cash dividends, limitation on investments, loans, and advances, and changes in control.
We were in compliance with all restrictive covenants as of December 31, 2000.
Depending upon adherence to the criteria in our loan agreements at the time of draw down, we had $57.8 million available under our credit lines at December 31, 2000.
We believe that our net cash flow from operations will continue to provide sufficient funds to service our debt obligations. We estimate renewal revenue in future periods, which is not reflected on our balance sheet, to represent approximately $367 million over the next five years. However, renewal revenue can be adversely affected by policy surrenders or exchanges, material contract changes, asset growth and case mortality rates.
As our business grows, our working capital and capital expenditures requirements will also continue to increase. There can be no assurance, that the net cash flows from operations will be sufficient to meet our anticipated requirements or that we will not require additional debt or equity financing within this time frame. We may continue to issue stock to finance future acquisitions.
o U.S. prime rate, published in the Wall Street Journal, which will float, as adjusted, for as long as this segment of borrowing is outstanding; or,
We do not enter into derivative or interest rate transactions for speculative purposes. Approximately 12.5% of our outstanding debt was subject to fixed rates with a weighted average of 10.0% at December 31, 2000. An additional 79.2% of our outstanding debt at December 31, 2000, was effectively locked at an interest rate of 6.5% plus a spread based on our leverage ratio, through an interest rate swap agreement for a notional amount of $44.8 million. We regularly review interest rate exposure on outstanding borrowings in an effort to minimize the risk of interest rate fluctuations.
In late 1999, we completed our remediation and testing of systems for year 2000 compliance. As a result of past planning and implementation efforts, we experienced no significant disruptions in mission critical information technology and non-information technology systems, and we believe those systems successfully responded to the year 2000 date change. We expensed approximately $400,000 during 1999 in connection with remediating our systems. We did not experience any material problems resulting from year 2000 issues, either with products, internal systems, or the products and services of third parties.
SAB No. 101 became effective in 2000. SAB 101 gives the SEC's guidance on the applicability of generally accepted accounting principles to revenue recognition on financial statements. We have been in compliance with SAB No. 101 and its adoption did not to have any impact on our net income or stockholders' equity.
As of January 1, 2001, CBH will adopt 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).
Many of the compensation and benefit programs we design and implement for our clients are funded by specifically designed life insurance products. The life insurance products underlying these compensation and benefit programs currently offer a number of tax advantages, such as:
Previous administrations have sought to reduce the income tax advantages of life insurance funded benefit plans. Although we believe such proposals do not have widespread support in Congress, we cannot predict the effect that any amendments will have on our future revenue.
While the federal government does not directly regulate the marketing of most insurance products, some products, such as variable life insurance, must be registered under the federal securities laws. As a result, our consultants selling these products must be registered representatives of a broker-dealer registered with the National Association of Securities Dealers. While we have not had any regulatory problems in the past related to these products, we cannot be sure that we or our consultants will not have regulatory problems in the future.
While we stopped selling leveraged COLI products since 1995 and we do not expect any adverse impact on our revenue, it is impossible to determine the impact of this enforcement initiated or a client's decision to continue or surrender an existing policy.
We also face competition from either from large, diversified financial services firms willing and able to expend the resources to gain market share or from large direct competitors that choose to pursue an acquisition or consolidation strategy similar to ours.
Before our acquisition of The Wamberg Organization, it was our largest independent consultant organization and accounted for approximately 17.5% of our total revenue in 1998 and 15.2% of our total revenue for the eight month period ended August 31, 1999. The offices operated by our three largest consultants collectively accounted for approximately 22.3% of our total revenue in 1999 and 10.8% of our total revenue for 2000. We enter agency agreements with our consultants in which they agree not to compete with us for a period of time and after their relationship with us terminates. From time to time, we or our consultants have terminated relationships. We cannot be sure if a consultant relationship will be terminated in the future. We cannot be sure that the non-competition provisions in the agreements will be honored or enforceable.
We derive a substantial portion of our revenue from business owned life insurance and other financial instruments that underlie our clients' compensation and benefit programs and are maintained year after year. Persistency is the extent to which the premium and commission on a given policy repeat year after year. High persistency rates are especially important to our Clark/Bardes Consulting -- Compensation Resource Group and Banking Practice divisions since we derive a substantial portion of our revenue from these two divisions in the form of renewal commissions and fees. If a business purchaser chooses to let a policy lapse, we will stop receiving any renewal commissions and fees. In the past, we have had high persistency rates, but we cannot assure you that we will continue to have them in the future.
o the present value of inforce revenue is the net discounted cash flow form the book of business of those companies having future renewal revenue at the time we acquired them; and
2000 1999 Present value of inforce $ 85,962 $59,284 revenue................. Goodwill................ 78,419 34,440 Non-competition 992 1,267 -------- ------- agreements.............. $165,373 $94,991 Total assets............ 75.2% 76.1% Stockholders' equity.... 146.9% 152.3%
We have adopted Statement of Financial Accounting Standard No. 121 "Accounting for Impairment of Long Lived Assets and Long Lived Assets To Be Disposed Of." On an annual basis, we review the components of our intangible assets and make appropriate adjustments if it becomes apparent that the undiscounted cash flow is less than its unamortized carrying amount. No growth rates are used in the projection of renewal revenue and, in the opinion of management, projections are consistent in all respects. If any component of the inforce revenue base should become unrealizable or accounting regulatory agencies impose shorter amortization periods, this could have a material adverse effect on our business, financial condition and operating results. We cannot assure you that a component of the inforce revenue base will not become unrealizable or that accounting regulatory bodies will not impose shorter amortization periods.
W.T. Wamberg, our Chairman and Chief Executive Officer, owns 18.5% of our outstanding common stock. As a result, Mr. Wamberg is able to exercise significant influence over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. This concentration of ownership may also have the effect of delaying, preventing or deterring a change in control of Clark/Bardes Holdings that may otherwise be beneficial to you.
Delaware law, as well as provisions of our certificate of incorporation and bylaws, could discourage unsolicited proposals to acquire us, even though such a proposal may be beneficial to you. These provisions include:
In our press release of February 28, 2001, announcing the operating results for the fourth quarter and full year of 2000, we published a quarterly, revenue, net revenue and earnings per share projection. This projection was based on our best and most informed estimate at the time of its preparation but we can offer no assurance that it will be achieved.
In addition, while our insurance carriers have acknowledged coverage in one of the cases, a loss of this case could damage our business reputation.