The Company leases its principal corporate office in Briarcliff Manor, New York, and its operating unit offices in various states. Information regarding lease commitments is set forth in Note 11 “Lease Commitments” in the Notes to Consolidated Financial Statements included in Part II, Item 8 of this report. The disclosure set forth in Note 11 “Lease Commitments” is incorporated herein by reference.
We monitor and manage to a number of different operating statistics, including, but not limited to, sales pipeline by producer, cross-selling within our 400 largest accounts, client retention rates, and revenue mix by operating company. All of these metrics are tracked and reported monthly and form the basis of our agenda, among other items, for our monthly operations meetings with each of our business unit executive management teams.
Quarterly fluctuations in revenues and EBITDA make our performance less predictable than our peers who have less seasonal and non-recurring revenues, which may negatively impact the value of our stock. We have implemented various strategies to reduce the impact of seasonal and non-recurring revenue, such as negotiating alternative commission schedules with insurance companies on products that have historically paid most commissions in the first policy year and diversification of our business model for enrollment business to drive more revenue in the first three quarters of the year. We continue to focus on strategies that will provide a more predictable revenue stream, however, we cannot predict if we will be successful in these efforts or if market or other changes will result in a similar or greater level of unpredictability. All revenues are recorded in accordance with GAAP.
A reconciliation of EBITDA to Net income (loss) in accordance with GAAP.
Revenues. Revenues increased $16.6 million, or 5.3%, to $328.2 million in 2002 from $311.6 million in 2001. In 2002, Organic Revenue Growth was 5.3%, primarily due to positive new business and increased premium rates on renewal commission, partially offset by lost business and non-recurring business from 2001. In addition, we generated increased revenues from the sales production of recently hired sales professionals. Offsetting the increase in revenues from new business production, increasing premium rates and additional sales production from recently hired sales professionals in 2002, was a $7.7 million reduction in revenues from eliminating low margin business, which contributed $1.1 million in 2002 versus $8.8 million in 2001.
EBITDA in the Insurance Brokerage segment increased $17.6 million or 25.8% to $86.0 million in 2003 from $68.4 million in 2002, and increased $24.4 million or 55.5% to $68.4 million in 2002 from $44.0 million in 2001. EBITDA Margin in the Insurance Brokerage segment was 28.5%, 24.9% and 17.0% in 2003, 2002 and 2001, respectively. The increase in EBITDA and EBITDA Margin in 2003 is attributable to (i) a decrease in Compensation and Employee Benefits Expenses as a percent of revenues, due to an improvement in performance in our operations and positive effects of our integration efforts, (ii) the positive impact of increased contingent commissions, (iii) the accretive impact of acquisitions, and (iv) the integration efforts and other charges in 2002. The increase in EBITDA and EBITDA Margin in 2002 compared to 2001 is attributable to (i) a decrease in Compensation and Employee Benefits Expenses as a percent of revenues, due to the positive effects of our integration efforts, (ii) improvement in performance in our operations and (iii) the decrease in integration efforts and other charges in 2002 compared to 2001.
In 2003, we recorded a charge of $0.4 million for severance costs related to the move of the corporate offices from San Francisco to New York.
Liquidity describes the ability of a company to generate sufficient cash flows to meet the cash requirements of its business operations, including working capital needs, capital expenditures, debt service, acquisitions and other commitments and contractual obligations. Prior to our initial public offering, we relied on our ability to generate cash flows from our financing activities, such as the issuance of debt and equity, to supplement our cash flows from operations which were insufficient to fund our business operations. Following our initial public offering, we substantially reduced our long-term debt, but still lacked sufficient cash flows from operations to fund our foreseeable debt payments. So, in 2003, we entered into a new credit facility, as further described below, and now consider our liquidity in terms of cash flows from operations and their sufficiency to fund our operating and investing activities.
Net cash (used in) provided by continuing investing activities totaled $(21.2) million, $5.6 million and $(14.9) million for the years ended December 31, 2003, 2002 and 2001, respectively, which principally reflects acquisition activities and capital expenditures. Included in the net cash provided by continuing investing activities for the year ended December 31, 2002 is $18.2 million in proceeds from the sale of USIA. Please read “Discontinued Operations” below. Cash expenditures for acquisitions amounted to $18.2 million, $5.7 million and $6.9 million for the years ended December 31, 2003, 2002 and 2001, respectively. We made no acquisitions in 2002 or 2001. The $5.7 million for the year ended December 31, 2002, reflects the payment of additional purchase price and retention-based acquisition payments. The $6.9 million for the year ended December 31, 2001, reflects the payment of additional purchase price on retention-based acquisitions, as well as the payment of the cash portion of an acquisition effective in 2000 but paid in the first quarter of 2001. Cash expenditures for property and equipment amounted to $8.1 million, $7.0 million and $8.5 million for the years ended December 31, 2003, 2002 and 2001, respectively. The net effect of investments in discontinued operations amounted to $0.2 million, $(8.9) million and $(14.8) million for the years ended December 31, 2003, 2002 and 2001, respectively.
On July 24, 2003, Standard & Poor’s raised the counterparty credit and bank loan rating on us to ‘BB-’ from ‘B+.’ On August 12, 2003 Moody’s Investors Service assigned a B1 rating to our new credit facility with a stable outlook.
Property and equipment are stated at cost, less accumulated depreciation. Upon sale or retirement, the cost and related accumulated depreciation are removed from the accounts and any gain or loss is reflected in income. Expenditures for maintenance and repairs are expensed as incurred. The Company periodically reviews long-lived assets for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be recoverable. Under those circumstances, if the fair value was less than the carrying amount of the asset, a loss would be recognized for the difference.
SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure”, an amendment of SFAS No. 123 “Accounting for Stock-Based Compensation” (collectively SFAS No. 148), establishes accounting and disclosure requirements using the fair value based method of accounting for employee stock-based compensation. SFAS No. 148 encourages, but does not require, companies to record compensation cost for stock-based compensation plans at fair value.
In November 2002, the FASB issued Financial Accounting Standards Board Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (FIN 45), which requires a guarantor to recognize a liability for the fair value of the obligation at the inception of the guarantee. FIN 45’s disclosure requirements were effective for all guarantees, regardless of initiation date, for financial statements of interim or annual periods ending after December 15, 2002, while the initial recognition and measurement provisions are applicable on a prospective basis to guarantees issued, renewed or modified after December 31, 2002. The Company reviewed its contractual
On October 25, 2002, the Company completed its IPO of 9,000,000 common shares at a price of $10.00 per share (see Note 5-Long-Term Debt).
Following an acquisition, the Company may maintain the existing savings plans of acquired entities for a short period of time. During 2003, 2002 and 2001, a number of such plans were maintained by the Company, all of which have been or will be merged into the Company’s 401(k) Plan.
There were 4,107,000 options available for future grant at December 31, 2003. The range of exercise prices of options outstanding at December 31, 2003 was $7.50 to $12.02.
At December 31, 2003, the Company had a net operating loss carry-forward of approximately $22,584,000 for federal tax purposes that will expire during the period 2011 through 2022. In addition, as a result of certain acquisitions, the Company had a preacquisition net operating loss carry-forward of approximately $1,261,000. To the extent not utilized earlier, the pre-acquisition net operating loss has expiration dates from 2011 through 2013.
Near North Insurance Litigation. In October 2002, a group of plaintiffs who are affiliated companies and competitors of the Company in the insurance brokerage and risk management business, filed a complaint in the Chancery Court of the Circuit Court of Cook County, Illinois, against the Company and two of its Illinois-based and one of its California-based officers and employees who previously worked for the plaintiff, various other third party individuals, and an insurance brokerage. Plaintiff’s complaint seeks from all defendants unspecified compensatory damages and punitive damages related to claims for among other things tortuous interference with clients, violation of state trade secrets laws, and civil conspiracy. The Company, its officers and employees asserted various defenses to this action, and the Company’s insurance carriers are involved in the defense of the litigation. In March 2003, the Company’s California-based officer was dismissed from the litigation. In November 2003, the Illinois court dismissed all of the claims asserted against the Company and its officers and employees for failing to meet Illinois pleading requirements, and the court gave plaintiffs an additional opportunity to attempt to meet those requirements.
The following table summarizes transactions related to the employee termination benefits, producer compensation restructuring costs and terminated office lease costs:
In January 2002, the Company determined that USIA was no longer core to the Company’s mission, vision, or strategy and in April 2002, sold USIA for $19,900,000 to CBCA Inc. (CBCA). The Company received and recorded cash proceeds of $18,200,000 with the remaining consideration of $1,700,000 in the form of an account receivable. Of the $18,200,000 in cash proceeds, $16,300,000 was used to reduce the Company’s term loan and $1,900,000 was used to pay selling costs. The receivable was due to the Company no later than May 16, 2003. In connection with the sale, the Company recorded a pre-tax loss of $7,219,000 in the second quarter of 2002. The Company also received a $13,000,000 contingent note receivable, which became due in June 2003. The note receivable was contingent upon certain post-closing revenue and other adjustments included in the purchase agreement. The $13,000,000 note receivable was not recorded by the Company.