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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
COMMISSION FILE NO. 000-24769
CLARK/BARDES, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 52-2103926
(State of Incorporation) (I.R.S. Employer Identification No.)
102 SOUTH WYNSTONE PARK DRIVE
NORTH BARRINGTON, ILLINOIS 60010
(Address of principal executive offices) (Zip code)
Registrant's telephone number: (847) 304-5800
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
As of May 1, 2003, the registrant had outstanding 18,318,032 shares of
common stock.
TABLE OF CONTENTS
PAGE
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.................................................4
Condensed Consolidated Balance Sheets at March 31, 2003
and December 31, 2002.............................................4
Condensed Consolidated Statements of Income for the three
months ended March 31, 2003 and 2002...............................5
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 2003 and 2002........................6
Notes to Condensed Consolidated Financial Statements....................8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................22
Item 3. Quantitative and Qualitative Disclosures About Market Risk...........39
Item 4. Controls and Procedures..............................................40
PART II. OTHER INFORMATION
Item 1. Legal Proceedings....................................................40
Item 2. Changes in Securities and Use of Proceeds............................41
Item 4. Submission of Matters to a Vote of Security Holders..................41
Item 6. Exhibits and Reports on Form 8-K.....................................42
SIGNATURES...................................................................43
EXHIBITS
Index to Exhibits.......................................................46
2
FORWARD-LOOKING STATEMENTS
This Form 10-Q and the documents incorporated by reference in this Form 10-Q may
contain forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. Such statements are identified by words such as
"anticipate," "believe," "estimate," "expect," "intend," "predict," "project,"
and similar expressions, as they relate to us or our management. When we make
forward-looking statements, we are basing them on our management's beliefs and
assumptions, using information currently available to us. These forward-looking
statements are subject to risks, uncertainties and assumptions, including but
not limited to, risks, uncertainties and assumptions related to the following:
o changes in tax legislation;
o federal and state regulations;
o general economic conditions;
o competitive factors and pricing pressures;
o our dependence on key consultants and services of key
personnel;
o our dependence on persistency of existing business;
o our ability to achieve our earnings projections;
o risks associated with acquisitions;
o significant intangible assets;
o our dependence on a select group of insurance companies; and
o our dependence on information processing systems and risk of
errors or omissions.
If one or more of these or other risks or uncertainties materialize, or if our
underlying assumptions prove to be incorrect, actual results may vary materially
from those anticipated. Any forward-looking statements you read in this Form
10-Q or the documents incorporated herein by reference reflect our current views
with respect to future events and are subject to these and other risks,
uncertainties and assumptions relating to our operations, results of operations,
growth strategy and liquidity. You should specifically consider the factors
identified in our Form 10-K for the year ended December 31, 2002, included under
the caption "Risk Factors," which could cause actual results to differ
materially from those indicated by the forward-looking statements. In light of
the foregoing risks and uncertainties, you should not unduly rely on such
forward-looking statements when deciding whether to buy, sell or hold any of our
securities. We disclaim any intent or obligation to update or alter any of the
forward-looking statements, whether in response to new information, unforeseen
events, changed circumstances or otherwise.
3
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
CLARK/BARDES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2003 AND DECEMBER 31, 2002
(UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
MARCH 31, DECEMBER 31,
2003 2002
---- ----
ASSETS
CURRENT ASSETS
Cash and cash equivalents $17,797 $14,524
Restricted cash 13,925 14,065
Accounts and notes receivable, net 53,590 64,262
Prepaid income taxes 1,262 3,253
Deferred income taxes 1,889 1,252
Other current assets 2,995 2,945
--------------- ----------------
TOTAL CURRENT ASSETS 91,458 100,301
--------------- ----------------
INTANGIBLE ASSETS - NET
Net present value of inforce revenue 474,598 479,561
Goodwill 118,265 117,803
Non-compete agreements 2,674 2,831
--------------- ----------------
TOTAL INTANGIBLE ASSETS - NET 595,537 600,195
--------------- ----------------
EQUIPMENT AND LEASEHOLD IMPROVEMENTS - NET 15,284 15,064
OTHER ASSETS 18,243 19,010
--------------- ----------------
TOTAL ASSETS $720,522 $734,570
=============== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 8,144 $ 11,065
Accrued liabilities 32,483 44,807
Deferred revenue 5,258 2,349
Recourse debt maturing within one year 13,970 11,154
Non-recourse debt maturing within one year 15,790 11,521
------------ ----------------
TOTAL CURRENT LIABILITIES 75,645 80,896
------------ ----------------
LONG TERM RECOURSE DEBT 95,062 101,905
LONG TERM NON-RECOURSE DEBT 283,671 293,479
DEFERRED INCOME TAXES 10,634 8,837
DEFERRED COMPENSATION 4,189 3,779
INTEREST RATE SWAP 621 -
OTHER NON-CURRENT LIABILITIES 2,823 4,552
STOCKHOLDERS' EQUITY
Preferred stock
Authorized - 1,000,000 shares; $0.01 par value, none issued - -
Common stock
Authorized - 40,000,000; $0.01 par value
Issued and outstanding - 18,313,032 at March 31, 2003 and 18,060,518
at December 31, 2002 184 181
Paid in capital 187,525 183,980
Retained earnings 60,540 56,961
Other comprehensive loss (372) -
------------ ----------------
TOTAL STOCKHOLDERS' EQUITY 247,877 241,122
------------ ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $720,522 $734,570
============ ================
See accompanying notes to these condensed consolidated financial statements.
4
CLARK/BARDES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
THREE MONTHS ENDED
MARCH 31,
---------
2003 2002
---- ----
(AS RESTATED)
(SEE NOTE 16)
-------------
REVENUE
First year commissions and related fees $27,611 $24,011
Renewal commissions and related fees 42,364 34,875
Consulting fees 13,381 5,798
Reimbursable expenses 1,282 1,350
--------------- ----------------
TOTAL REVENUE 84,638 66,034
--------------- ----------------
OPERATING EXPENSES
Commissions and fees 25,106 24,054
General and administrative 41,268 30,126
Reimbursable expenses 1,282 1,350
Amortization 5,178 1,831
--------------- ----------------
TOTAL OPERATING EXPENSE 72,834 57,361
--------------- ----------------
OPERATING INCOME 11,804 8,673
OTHER INCOME 87 69
INTEREST
Income 100 88
Expense (6,003) (382)
--------------- ----------------
(5,903) (294)
--------------- ----------------
INCOME BEFORE TAXES 5,988 8,448
INCOME TAXES (2,407) (3,497)
--------------- ----------------
INCOME, before cumulative effect of change in accounting
principle, net of tax 3,581 4,951
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE, NET OF
TAX - (523)
--------------- ----------------
NET INCOME $3,581 $4,428
=============== ================
Basic Earnings per Common Share, before cumulative effect of
change in accounting principle $0.20 $0.30
Cumulative effect of change in accounting principle - (0.03)
--------------- ----------------
Basic Earnings per Common Share $0.20 $0.27
=============== ================
Weighted average shares outstanding - Basic 18,115,152 16,595,880
--------------- ----------------
Diluted Earnings per Common Share, before cumulative effect
of change in accounting principle $0.19 $0.29
Cumulative effect of change in accounting principle - (0.03)
--------------- ----------------
Diluted Earnings per Common Share $0.19 $0.26
=============== ================
Weighted average shares outstanding - Diluted 18,598,968 17,156,050
=============== ================
See accompanying notes to these condensed consolidated financial statements.
5
CLARK/BARDES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
---------
2003 2002
---- ----
(AS RESTATED)
(SEE NOTE 16)
-------------
OPERATING ACTIVITIES
Net income $3,581 $4,428
Adjustments to reconcile net income to cash provided by operating
Activities:
Depreciation and amortization 6,482 2,735
Cumulative effect of change in accounting principle - 892
Stock compensation 345 -
Deferred income taxes 1,409 (179)
Loss on disposal of assets 277 -
Changes in operating assets and liabilities (excluding the effects of
acquisitions):
Accounts and notes receivable 10,672 10,573
Other current assets (93) (808)
Other assets 767 390
Accounts payable (2,921) (930)
Income taxes 2,155 (420)
Accrued liabilities (8,359) (13,534)
Deferred revenue 2,909 1,833
Non-current liabilities 388 -
Deferred compensation 410 446
------- -------
Cash provided by operating activities 18,022 5,426
------- -------
INVESTING ACTIVITIES
Purchases of businesses, including contingent payments on prior
acquisitions (3,552) (5,098)
Purchases of equipment (1,801) (791)
------- -------
Cash used in investing activities (5,353) (5,889)
------- -------
FINANCING ACTIVITIES
Proceeds from borrowings 8,500 5,000
Repayment of borrowings (18,066) (252)
Change in cash restricted for the repayment of non-recourse notes 140 -
Exercise of stock options 30 210
Settlement of interest rate swap - (2,043)
------- -------
Cash (used in) provided by financing activities (9,396) 2,915
------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS 3,273 2,452
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 14,524 10,207
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $17,797 $12,659
======= =======
See accompanying notes to these condensed consolidated financial statements.
6
CLARK/BARDES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
(DOLLARS IN THOUSANDS)
Supplemental Disclosure for Cash Paid/(Received) during the Period:
- -------------------------------------------------------------------
Interest paid $1,116 $ 221
Income taxes, net of refunds (1,157) 3,704
Supplemental Non-Cash Information:
- ----------------------------------
Fair value of common stock issued in connection with acquisition
contingent payouts $3,054 $5,289
====== ======
See accompanying notes to these condensed consolidated financial statements.
7
CLARK/BARDES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
MARCH 31, 2003
(Tables shown in thousands of dollars, except share and per share amounts)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - The condensed consolidated financial statements include
the accounts of Clark/Bardes, Inc. ("the Company") and its wholly owned
subsidiaries. Through the Company's six operating segments, Executive Benefits
Practice, Banking Practice, Healthcare Group, Human Capital Practice, Pearl
Meyer & Partners, and Federal Policy Group, the Company designs, markets and
administers compensation and benefit programs for companies supplementing and
securing employee benefits and provides executive compensation and related
consulting services to U.S. corporations, banks and healthcare organizations.
The Company assists its clients in using customized life insurance products to
finance their long-term benefit liabilities. In addition, the Company owns
Clark/Bardes Financial Services, Inc. ("CBFS"), a registered broker-dealer
through which it sells all its securities products and receives related
commissions. All significant intercompany amounts and transactions have been
eliminated in the accompanying condensed consolidated financial statements.
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States ("GAAP") for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by GAAP for complete
financial statements. In the Company's opinion, all adjustments, including
normally recurring accruals, considered necessary for a fair presentation have
been included. Operating results for the three months ended March 31, 2003 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2003 or any other period.
The balance sheet at December 31, 2002 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by GAAP for complete financial statements.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's annual report on Form 10-K for the
year ended December 31, 2002.
2. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2002, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 146, Accounting for Costs
Associated with Exit or Disposal Activities, which nullifies Emerging Issues
Task Force ("EITF") Issue No. 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring). SFAS No. 146 requires companies to recognize
costs associated with exit or disposal activities when they are incurred, rather
than at the date of commitment to an exit or disposal plan. The Company adopted
SFAS No. 146 as of January 1, 2003, as described in Note 4.
8
CLARK/BARDES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
UNAUDITED
In November 2002, the FASB issued FASB Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, an interpretation of FASB Statement Nos.
5, 57, and 107 and rescission of FASB Interpretation No. 34 ("FIN No. 45"). This
Interpretation elaborates on the existing disclosure requirements for most
guarantees, including loan guarantees such as standby letters of credit. It also
clarifies that at the time a company issues a guarantee, the company must
recognize an initial liability for the fair value, or market value, of the
obligations it assumes under that guarantee and must disclose that information
in its interim and annual financial statements. The initial recognition and
initial measurement provisions of FIN No. 45 are applicable on a prospective
basis to guarantees issued or modified after December 31, 2002. The disclosure
requirements of FIN No. 45 are effective for financial statements of interim or
annual periods ending after December 15, 2002. The Company does not anticipate
the adoption of this interpretation to have a material impact on its condensed
consolidated financial statements.
In 2003, the FASB issued FASB Interpretation No. 46, Consolidation of Variable
Interest Entities--an interpretation of ARB No. 51 ("FIN No. 46"). FIN No. 46
provides guidance on the identification of entities for which control is
achieved through means other than voting rights (variable interest entities or
"VIE") and how to determine when and which business enterprises should
consolidate the VIE. FIN No. 46 requires that both the primary beneficiary and
all other enterprises with a significant variable interest in a VIE make
additional disclosures. The Company does not anticipate the adoption of this
interpretation to have a material impact on its condensed consolidated financial
statements.
In accordance with EITF Issue No. 00-21, Revenue Arrangements with Multiple
Deliverables, a vendor should evaluate all deliverables in an arrangement to
determine whether they represent separate units of accounting. The evaluation
must be performed at the inception of the arrangement and as each item in the
arrangement is delivered. EITF 00-21 is effective for revenue arrangements
entered into in fiscal periods beginning after June 15, 2003. The Company does
not anticipate the adoption of the requirements of this consensus reached in
this issue to have a material impact on its condensed consolidated financial
statements.
3. ACQUISITIONS
Long, Miller & Associates, LLC. - On November 26, 2002, the Company acquired
Long, Miller & Associates, LLC ("LongMiller"). Based in Greensboro, North
Carolina, LongMiller specializes in bank-owned life insurance portfolio
services. The acquisition combined the two largest distributors of bank-owned
life insurance, as LongMiller was merged into the Company's existing Banking
Practice. The purchase price was $403.5 million, before acquisition costs of
approximately $736,000, consisting of a cash payment at closing of $346.1
million, $37.4 million of asset-backed notes, and 1,196,888 shares of the
Company's common stock valued at $20 million. The cash portion of the
acquisition was financed by borrowing $87.5 million from the Company's existing
debt facility, with the remainder through a capital markets transaction
involving the securitization of a majority of the inforce revenues of
LongMiller. The Company has preliminarily allocated $4.4 million to tangible
assets acquired with the remaining amount allocated to inforce revenue. The
inforce revenue is being amortized over 30 years. The results of LongMiller are
included beginning November 26, 2002.
The unaudited pro forma information below presents the Company's results as if
the acquisition of LongMiller had occurred on January 1, 2002.
THREE MONTHS
ENDED MARCH 31,
2002
--------------
Pro Forma
Revenue..................... $82,126
Net income.................. 5,235
Diluted earnings per share.. 0.29
9
CLARK/BARDES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
UNAUDITED
The allocation of purchase price is preliminary, pending completion of a
valuation by an independent valuation firm. Upon completion of such valuation,
the allocation of purchase price will be finalized in accordance with SFAS No.
141, Business Combinations.
4. RESTRUCTURING COSTS
During the first quarter of 2003, a determination was made to consolidate the
business support services of the Executive Benefits Practice in Dallas, Texas.
As a result, the Company intends to significantly reduce operations in the Los
Angeles, California and Bethesda, Maryland offices. The moves from Los Angeles
and Bethesda are expected to be substantially completed by July 31, 2004 and
September 30, 2004, respectively. There were 68 individuals who were notified of
the restructuring with some being offered relocation packages and others being
terminated with severance packages that include varying retention bonus
incentives. There were no terminations as of March 31, 2003. In accordance with
SFAS No. 146, the total expected cost of this restructuring is approximately
$1.6 million, of which approximately $89,000 will be recognized and expensed
monthly starting in March 2003. There were no cash payments made during the
quarter ended March 31, 2003.
5. CONTINGENT CONSIDERATION
As a result of the Company's acquisition program, the Company has approximately
$22.5 million of potential additional consideration issuable over the next three
years to the former owners of the Company's acquired entities, of which
approximately $5.0 million is accrued on the balance sheet at March 31, 2003. If
and when the acquired entities meet certain criteria stipulated in the purchase
agreements, these amounts are payable as additional consideration. A summary of
the amounts payable if the criteria are met is as follows for acquisitions that
were completed as of March 31, 2003 (dollar amounts in millions):
POTENTIAL AMOUNTS
PAYABLE IN CASH SHARES (1) SHARE VALUE
--------------------------------------
2004 $7.1 275,141 $4.1
2005 5.9 231,931 2.4
2006 2.4 53,930 0.6
--------------------------------------
$15.4 561,002 $7.1
======================================
(1) Number of shares determined based upon
the closing price of the Company's common
stock at March 31, 2003 of $11.96 per
share.
10
CLARK/BARDES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
UNAUDITED
6. ACCOUNTS RECEIVABLE
Major categories of accounts receivable are as follows:
AS OF AS OF
MARCH 31, 2003 DECEMBER 31, 2002
-------------- -----------------
Accounts receivable - trade.... $53,535 $64,181
Loans receivable............... 1,108 1,170
Accounts receivable allowance.. (1,053) (1,089)
------------------------------------
$53,590 $64,262
====================================
The roll-forward of the allowance for uncollectible accounts receivables is as
follows:
THREE MONTHS YEAR ENDED
ENDED MARCH 31, 2003 DECEMBER 31, 2002
-------------------- -----------------
Beginning balance................. ($1,089) ($822)
Write offs........................ 234 638
Expense........................... (198) (905)
---------------------------------------
Ending balance.................... ($1,053) ($1,089)
=======================================
As of March 31, 2003 and December 31, 2002, there were approximately $1.4
million and $1.6 million, respectively, of unbilled receivables included in
accounts receivable on the condensed consolidated balance sheets. These unbilled
amounts, the majority of which relate to in-process consulting projects, are
typically billed during the quarter immediately following the reporting period.
7. GOODWILL AND OTHER INTANGIBLE ASSETS
Changes in the carrying amount of goodwill for the three months ended March 31,
2003, by reporting units are as follows:
BALANCE ACQUIRED BALANCE
JANUARY 1, DURING IMPAIRMENT MARCH 31,
2003 THE PERIOD EARNOUTS/ETC. CHARGE 2003
-------------- ------------ --------------- -------------- ------------
Executive Benefits Practice $16,952 - - - $16,952
Banking Practice 40,488 - ($1,038) - 39,450
Healthcare Group 14,076 - - - 14,076
Management Science Associates 5,010 - - - 5,010
Human Capital Practice 15,193 - - - 15,193
Pearl Meyer & Partners 21,788 - - - 21,788
Federal Policy Group 4,266 - 1,500 - 5,766
Corporate 30 - - - 30
-------- --- ----- --- --------
TOTAL $117,803 - $462 - $118,265
======== === ===== === ========
11
CLARK/BARDES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
UNAUDITED
Information regarding the Company's other intangible assets are as
follows:
AS OF MARCH 31, 2003 AS OF DECEMBER 31, 2002
-------------------- -----------------------
GROSS ACCUMULATED GROSS ACCUMULATED
AMOUNT AMORTIZATION NET AMOUNT AMORTIZATION NET
------ ------------ --- ------ ------------ ---
Net present value
of inforce revenue $503,953 ($29,355) $474,598 $503,895 ($24,334) $479,561
Non-compete
agreements 4,472 (1,798) 2,674 4,472 (1,641) 2,831
-------- -------- -------- -------- -------- --------
Total $508,425 ($31,153) $477,272 $508,367 ($25,975) $482,392
======== ======== ======== ======== ======== ========
Amortization expense of other intangible assets was $5.2 million and $1.8
million for the three months ended March 31, 2003 and March 31, 2002,
respectively.
The Company estimates that its amortization for 2003 through 2007 for intangible
assets related to all acquisitions consummated through March 31, 2003 will be
approximately as follows:
Year Amount
---- ------
2003 $20,712
2004 17,059
2005 14,246
2006 13,773
2007 13,459
8. INTEREST RATE SWAPS
The Company has limited transactions that fall under the accounting rules of
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as
amended by SFAS No. 137 and SFAS No. 138. From time to time, the Company uses
financial instruments, including interest rate swap agreements, to manage
exposure to movements in interest rates. On January 7, 2003, the Company entered
into two interest rate swaps with a total notional value of $50 million to hedge
the $50 million of term debt. These swaps have been designated as cash flow
hedges. The fair value of these interest rate swap agreements, based upon bank
quotes, was a liability of approximately $621,000 at March 31, 2003. The
notional amount of the interest rate swap amortizes at the same rate of the term
debt. The terms of these interest rate swaps are as follows (fair value in
thousands):
Effective Notional amount Fixed rate to Variable rate Fair Value as of
Date Maturity date at March 31, 2003 be paid to be received March 31, 2003
---- ------------- ----------------- ------- -------------- --------------
January 7, 2003 December 31, 2007 $26.6 million 2.85% LIBOR $321
January 7, 2003 December 31, 2007 $20.9 million 2.92% LIBOR $300
12
CLARK/BARDES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
UNAUDITED
9. EARNINGS PER SHARE
The following table sets forth the computation of historical basic and diluted
earnings per common share:
THREE MONTHS ENDED
MARCH 31,
-----------------------
2003 2002
---- ----
(DOLLARS IN THOUSANDS)
NUMERATOR:
Income, before cumulative effect of change in accounting
principle, net of tax $3,581 $4,951
Cumulative effect of change in accounting principle, net of tax - (523)
------------------ ----------------
Net income for basic and diluted earnings per common share $3,581 $4,428
================== ================
DENOMINATOR:
Basic earnings per common share -
weighted average shares outstanding 18,115,152 16,595,880
Effect of dilutive securities:
Stock options 224,003 560,170
Contingent shares earned not issued 259,813 -
------------------ ----------------
Diluted earnings per share-weighted average
shares plus assumed conversions 18,598,968 17,156,050
================== ================
PER SHARE
Basic Earnings per Common Share, before cumulative effect of
change in accounting principle $0.20 $0.30
Cumulative effect of change in accounting principle - (0.03)
------------------ ----------------
Basic earnings per Common Share $0.20 $0.27
================== ================
Diluted Earnings per Common Share, before cumulative effect of
change in accounting principle $0.19 $0.29
Cumulative effect of change in accounting principle - (0.03)
------------------ ----------------
Diluted Earnings per Common Share $0.19 $0.26
================== ================
There are 864,664 and 6,800 of outstanding stock options which are not included
in the calculations as they are antidilutive for the three months ended March
31, 2003 and 2002, respectively. The range of exercise price for these options
was between $4.80 and $30.30 at March 31, 2003 and March 31, 2002.
10. EMPLOYEE COMPENSATION
SFAS No. 123, Accounting for Stock-Based Compensation, established accounting
and disclosure requirements using a fair value based method of accounting for
stock-based employee compensation plans. The Company has elected to remain on
the current method of accounting as described in Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees, for employees and
directors. However, the Company accounts for stock options granted to
non-employees under the provisions of SFAS No. 123.
The pro forma information regarding net income and earnings per share required
by SFAS No. 123 has
13
CLARK/BARDES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
UNAUDITED
been determined as if the Company accounted for its stock-based compensation
plans under the fair value method. The fair value of each option grant was
estimated at the date of grant using the Black-Scholes option pricing model with
the following weighted average assumptions used for grants in 2003 and 2002,
respectively:
MARCH 31,
---------
2003 2002
---- ----
Dividend yield........................................ None None
Volatility............................................ 64.8% 64.17%
Risk-free interest rates.............................. 5.2% 5.4%
Expected life (years)................................. 5 6
Had compensation cost for the Company's stock-based compensation plans been
determined in accordance with SFAS No. 123, as amended by SFAS No. 148,
Accounting for Stock-Based Compensation - Transition and Disclosure - An
Amendment of FASB Statement No. 123, its net income and earnings per share would
have been reduced to the pro forma amounts indicated below:
MARCH 31,
-------------------------
2003 2002
---- ----
NET INCOME
As reported...................................................... $3,581 $4,428
Add: stock-based employee compensation expense included in reported
net income, net of related tax effect............................ 206 -
Deduct: stock option compensation expense, net of tax............ (418) (533)
------ ------
Pro forma........................................................ $3,369 $3,895
====== ======
BASIC EARNINGS PER COMMON SHARE
As reported...................................................... $0.20 $0.27
Pro forma........................................................ $0.19 $0.23
DILUTED EARNINGS PER COMMON SHARE
As reported...................................................... $0.19 $0.26
Pro forma........................................................ $0.18 $0.23
11. OTHER COMPREHENSIVE INCOME
Under SFAS No. 130, Comprehensive Income, the Company reports changes in
stockholders' equity that result from either recognized transactions or other
economic events, excluding capital stock transactions, which affect
stockholders' equity. For the Company, the differences between net income and
comprehensive income were as follows:
THREE MONTHS ENDED
MARCH 31,
-----------------------------------
2003 2002
---- ----
Net income $3,581 $4,428
Change in fair value of interest rate swap, net of tax (371) -
------ ------
Comprehensive income $3,210 $4,428
====== ======
14
CLARK/BARDES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
UNAUDITED
12. SIGNIFICANT RISKS AND UNCERTAINTIES
Federal tax laws create certain advantages for the purchase of life insurance
products; therefore, the life insurance products underlying the benefit programs
marketed by the Company are vulnerable to adverse changes in laws and
interpretation. Any proposal or enactment of changes in federal tax laws that
would reduce or eliminate such advantages could result in the surrender of
existing policies. As a result of any such change, the Company could lose a
substantial amount of renewal revenue and its ability to write new business
could be impaired.
In July 2002, proposed Treasury regulations changed the manner in which split
dollar life insurance arrangements will be taxed in the future. The new tax
treatment is, in certain respects, less attractive than the historical tax
treatment of split dollar arrangements. Consequently, this initiative could
result in reduced revenue from split dollar arrangements.
Other types of potential changes to federal tax laws could also have a
significant adverse effect on the Company's revenues. On February 3, 2003, the
Bush Administration proposed to remove legislatively a 1978 moratorium on
Treasury Department regulatory guidance on the tax treatment of nonqualified
deferred compensation arrangements. On May 8, 2003, the Senate Finance Committee
approved a legislative proposal that would tax the deferrals of compensation by
top executives under certain "funded" deferred compensation arrangements,
including those involving rabbi trusts. If either of these legislative
proposals, or others affecting nonqualified deferred compensation were enacted,
future compensation deferrals under many arrangements the Company markets could
be significantly curtailed, with a resulting reduction in the Company's revenues
from these arrangements.
There have been several recent legislative proposals to change the federal tax
laws with respect to business-owned life insurance. For example, in 1998, 1999,
and 2000, the Clinton Administration proposed to deny interest deductions of
corporate taxpayers in proportion to the unborrowed cash values of life
insurance policies they held on the lives of their employees; however, this
proposal was not adopted by the Congress and has not been renewed by the Bush
Administration. More recently, in the aftermath of negative media coverage
regarding certain types of business-owned life insurance, Senator Jeff Bingaman
(D-NM) has proposed to tax the death benefits taxpayers receive from policies on
the lives of former employees. Significant segments of the life insurance
industry are engaged in an ongoing, intensive effort to oppose the Bingaman
proposal. While Senator Bingaman did not offer his proposal in 2002, and while
there has not been any significant demonstration of Congressional support for
the proposal, there can be no assurance that the proposal will not ultimately be
introduced and included in enacted legislation. Also, the Joint Committee on
Taxation staff has recently recommended repeal of the 1986 grandfather provision
permitting the deduction of interest on borrowings against certain policies
existing in 1986. If Congress were to adopt any of these proposals or other
legislation eliminating or limiting the tax-deferred appreciation of
business-owned life insurance policies, eliminating or limiting the tax-free
payment of death benefits on such policies, or otherwise adversely affecting the
tax treatment of the policies, these policies would be less attractive to
policyholders and a large number of such policies could be surrendered or
exchanged, which could have a material adverse effect on the Company's financial
condition and results of operations.
15
CLARK/BARDES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
UNAUDITED
In recent years, the Internal Revenue Service ("IRS") has undertaken a major
enforcement initiative to disallow the interest deductions on certain leveraged
business-owned life insurance programs sold during or prior to 1995. The IRS has
prevailed on the majority of cases it has litigated related to this initiative
and has recently made a temporary public settlement offer to address ongoing
cases. While the Company stopped selling leveraged business-owned life insurance
programs after 1995 and the Company does not expect any material adverse impact
on its revenue from this enforcement initiative, it is impossible to determine
the impact of this initiative on a client's decision to continue or surrender an
existing leveraged business-owned life insurance program.
On July 30, 2002, President Bush signed the Sarbanes-Oxley Act of 2002 into law.
This law generally prohibits any personal loans from certain SEC-regulated
companies to current directors or executive officers of such companies. While it
is not entirely clear, there is a possibility that company premium payments made
on or after July 30, 2002 on collateral-assignment split dollar policies, on
current directors or executive officers of those SEC-regulated companies, could
be covered by the loan prohibition. Without favorable clarification of this law,
revenue from collateral assignment split dollar arrangements could be reduced as
a result of this law.
The Company has certain split dollar policies with four of its officers. These
policies are expected to be terminated in 2003.
16
CLARK/BARDES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
UNAUDITED
13. SEGMENTS AND RELATED INFORMATION
The Company has six reportable segments:
o Executive Benefits Practice - markets, designs, implements,
administers and finances non-qualified benefit plans for
companies of all sizes, including Fortune 1000 companies and
other companies which can benefit from the Company's products
and services.
o Banking Practice - offers compensation consulting, executive
and director benefit programs and bank-owned life insurance to
the bank market.
o Healthcare Group - provides specialized compensation and
benefit services for large and medium sized not-for-profit
healthcare organizations.
o Human Capital Practice - provides compensation, benefits and
human resources consulting services and products to major
companies including technology and intellectual capital
companies.
o Pearl Meyer & Partners - specializes in executive compensation
and retention programs.
o Federal Policy Group - provides a variety of legislative and
regulatory strategic services.
As of January 1, 2003, we transferred the operations of Coates Kenney from
Executive Benefits Practice to Human Capital Practice. As a result, the March
31, 2002 segment information has been reclassified to reflect this transfer.
LongMiller, acquired on November 26, 2002, became part of the existing Banking
Practice.
Prior to May 16, 2002, the amounts reflected below for the Human Capital
Practice segment reflect the results of and information related to the Rewards
and Performance Group, which is now part of the Human Capital Practice.
On February 25, 2002, the Company acquired the Federal Policy Group of
PricewaterhouseCoopers LLP.
The six reportable segments operate as independent and autonomous business units
with a central corporate staff in North Barrington, Illinois responsible for
finance, strategic planning, and human resources. Each segment has its own
client base as well as its own marketing, administration, and management.
The Company evaluates performance and allocates resources based on operating
income before income taxes, interest, and corporate administrative expenses. The
accounting policies of the reporting segments are the same as those described in
the summary of significant accounting policies, as described in Note 1 "Nature
of Operations and Summary of Significant Accounting Policies" in the Company's
Annual Report on Form 10-K for the year ended December 31, 2002.
17
CLARK/BARDES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
UNAUDITED
THREE MONTHS ENDED
MARCH 31,
-----------------------------
2003 2002
-----------------------------
REVENUES FROM EXTERNAL CUSTOMERS
Executive Benefits Practice $27,279 $33,849
Banking Practice 32,446 13,880
Healthcare Group 9,912 10,354
Human Capital Practice 5,887 2,309
Pearl Meyer & Partners 3,474 3,020
Federal Policy Group 4,590 878
------------- ---------------
Total segments - reported 83,588 64,290
Corporate/CBFS 1,050 1,744
------------- ---------------
Total consolidated - reported $84,638 $66,034
============= ===============
OPERATING INCOME (LOSS)
Executive Benefits Practice $5,113 $6,937
Banking Practice 5,947 917
Healthcare Group 1,431 2,174
Human Capital Practice (549) 282
Pearl Meyer & Partners 464 250
Federal Policy Group 2,785 360
------------- ---------------
Total segments - reported 15,191 10,920
Corporate/CBFS (3,387) (2,247)
Other income 87 69
Interest - net (5,903) (294)
------------- ---------------
Income before taxes $5,988 $8,448
============= ===============
DEPRECIATION AND AMORTIZATION
Executive Benefits Practice $1,229 $1,167
Banking Practice 3,995 508
Healthcare Group 727 741
Human Capital Practice 75 45
Pearl Meyer & Partners 158 154
Federal Policy Group 100 29
------------- ---------------
Total segments - reported 6,284 2,644
Corporate/CBFS 198 91
------------- ---------------
Total consolidated - reported $6,482 $2,735
============= ===============
CAPITAL EXPENDITURES
Executive Benefits Practice $421 $254
Banking Practice 370 102
Healthcare Group 426 73
Human Capital Practice 116 75
Pearl Meyer & Partners 10 170
Federal Policy Group - 25
------------- ---------------
Total segments - reported 1,343 699
Corporate/CBFS 458 92
------------- ---------------
Total consolidated - reported $1,801 $791
============= ===============
18
CLARK/BARDES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
UNAUDITED
MARCH 31, 2003 DECEMBER 31, 2002
-------------- -----------------
IDENTIFIABLE ASSETS
Executive Benefits Practice $82,949 $83,617
Banking Practice 511,828 526,485
Healthcare Group 37,800 36,793
Human Capital Practice 30,763 28,426
Pearl Meyer & Partners 28,726 29,211
Federal Policy Group 9,511 7,413
--------------- ------------------
Total segments - reported 701,577 711,945
Deferred income taxes 1,889 1,252
Corporate/CBFS 17,056 21,373
--------------- ------------------
Total consolidated - reported $720,522 $734,570
=============== ==================
14. RELATED PARTY TRANSACTIONS
The Company leases 16,266 square feet of office space owned by W. Thomas
Wamberg, the Company's Chairman and Chief Executive Officer, for approximately
$400,000 annually, under a lease expiring on February 21, 2009.
Wamberg Financial Corporation, one of the Company's subsidiaries, leases hangar
space for the corporate aircraft from WTW Investment, an entity controlled by
Mr. Wamberg for an annual rent of approximately $45,000.
During the first quarter 2003, the Company paid Randy Pohlman, a member of its
Board of Directors, $40,000 as a referral fee. This amount was accrued in the
Company's financial statements as of December 31, 2002.
Robert Long became a member of the Company's Board of Directors, filling a
vacant seat, in January 2003 in connection with the LongMiller acquisition. He
received a substantial amount of the proceeds, including asset-backed notes,
from the November 2002 purchase of LongMiller.
On September 25, 2002, the Company entered into an Administrative Services
Agreement and Bonus Forfeiture Agreement with an affiliate of AUSA Holding,
Inc., one of its principal stockholders. During 2002, the Company received $2.5
million for services rendered prior to and through September 30, 2002 and
recognized a total of $3.2 million in 2002, pursuant to this agreement. Under
the terms of this agreement, the Company expects to continue to receive
approximately $2.5 million annually from the carrier for a period of 30 years
depending upon certain conditions. Of this annual amount, $2.0 million is
included in the cash flows securitizing the asset-backed notes issued to finance
the acquisition of LongMiller, and the Company will not have access to this cash
for general corporate purposes until the securitization notes are fully paid.
This revenue, net of amounts provided for chargebacks, is being recognized on a
monthly basis beginning in October 2002. The amounts received are subject to
chargeback (reimbursement of a portion of amounts received) if any policies
under this agreement are surrendered or if there is a section 1035 exchange. Any
chargeback amounts are deducted from the next scheduled payment. There is a
receivable of approximately $1.3 million included in the condensed consolidated
balance sheet as of March 31, 2003.
15. LITIGATION
From time to time, the Company is involved in various claims and lawsuits
incidental to its business, including claims and lawsuits alleging breaches of
contractual obligations under agreements with its consultants. The following is
a summary of the current material legal proceedings pending against the Company.
WILLIAM L. MACDONALD, SR. V. CLARK/BARDES CONSULTING, INC.
On April 10, 2003, William L. MacDonald, Sr., the former Chairman of the
Executive Benefits Practice, filed suit in Los Angeles, California Superior
Court alleging wrongful termination and seeking damages
19
CLARK/BARDES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
UNAUDITED
and a declaration that all of his non-competition and non-solicitation
provisions were unenforceable. On April 11, 2003, the Company filed proceedings
in the Circuit Court of Cook County, Illinois to enforce the non-competition and
non-solicitation covenants agreed to by Mr. MacDonald when the Company purchased
Mr. MacDonald's business, Compensation Resource Group, Inc., in September of
2000. In light of the California suit, the Illinois litigation was stayed
pending the outcome in California.
The Company responded to Mr. MacDonald's suit by requesting the California court
to transfer the matter to arbitration as provided for in several of the
contracts at issue, and to enter a temporary restraining order prohibiting Mr.
MacDonald from competing with the Company and contacting its clients, in aid of
and pending the outcome of the arbitration. On May 1, the court granted the
Company's motion and entered a temporary restraining order prohibiting Mr.
MacDonald from contacting certain clients of the Company. A hearing has been
scheduled for May 21, 2003 on the Company's request for a preliminary injunction
seeking to prevent Mr. MacDonald from contacting any of the Company's clients,
regardless of size. The court has taken the Company's Motion to Compel
Arbitration under advisement. The Company denies any wrongdoing and intends to
vigorously defend Mr. MacDonald's claims. The Company also intends to vigorously
pursue the enforcement of Mr. MacDonald's non-competition and non-solicitation
covenants.
CONSTELLATION ENERGY GROUP, INC. AND BALTIMORE GAS AND ELECTRIC COMPANY, ET AL.
V. CLARK/BARDES, INC. AND NEW YORK LIFE INSURANCE AND ANNUITY CORPORATION.
On July 25, 2000, Constellation Energy Group, Inc. ("Constellation") and related
entities filed a civil action against the Company in the U.S. District Court for
the District of Maryland. On September 14, 2001, Constellation amended its
complaint and added New York Life Insurance and Annuity Corporation as a
defendant. Constellation claims that the Company failed to take proper action in
connection with the administration of an employee benefit life insurance program
under which policies were issued by the defendant insurance company. On February
20, 2003, an agreement was reached for a complete settlement of this litigation.
While the settlement terms are confidential, the Company regards the outcome as
favorable and believes such terms did not have a material adverse impact on its
financial condition or results of operations.
16. RESTATED QUARTERLY RESULTS
Subsequent to the issuance of the Company's condensed consolidated financial
statements for the quarter ended March 31, 2002, the Company's management
determined that revenue recognized under its administrative service agreements
should have been recognized on the straight-line basis at the Executive Benefits
Practice. During the fourth quarter of 2002, the Company completed an analysis
of the services provided and timing thereof and determined that because of
changes in the timing of the services provided, revenue under these agreements
should have been recognized on the straight-line basis during 2002.
Historically, these fees were recognized 75% in the renewal month and 25%
ratably over the remainder of the annual service agreement. In addition, during
the fourth quarter of 2002, the Company restated its 2002 quarterly results to
reflect a timing difference whereby CBFS was under-recognizing revenue in the
period earned. This restatement for CBFS had no impact on prior years reports or
on 2002 results for the full year.
As a result, the condensed consolidated financial statements for the three
months ended March 31, 2002 have been restated from the amounts previously
reported to recognize administrative service fees on a straight-line basis. A
summary of the effects of the restatement is as follows:
20
CLARK/BARDES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
UNAUDITED
THREE MONTHS ENDED
MARCH 31,
---------
2002 2002
---- ----
(AS PREVIOUSLY
REPORTED)
REVENUE
First year commissions and related fees $24,551 $24,011
Renewal commissions and related fees 36,172 34,875
Consulting fees 5,031 5,798
Reimbursable expenses 1,350 1,350
---------------- -----------------
TOTAL REVENUE 67,104 66,034
---------------- -----------------
OPERATING EXPENSES
Commissions and fees 24,054 24,054
General and administrative 30,126 30,126
Reimbursable expenses 1,350 1,350
Amortization 1,831 1,831
---------------- -----------------
TOTAL OPERATING EXPENSE 57,361 57,361
---------------- -----------------
OPERATING INCOME 9,743 8,673
OTHER INCOME 69 69
INTEREST
Income 88 88
Expense (382) (382)
---------------- -----------------
(294) (294)
---------------- -----------------
INCOME BEFORE TAXES 9,518 8,448
INCOME TAXES (3,940) (3,497)
---------------- -----------------
INCOME, before cumulative effect of change in accounting
principle, net of tax 5,578 4,951
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE, NET OF
TAX (523) (523)
---------------- -----------------
NET INCOME $5,055 $4,428
================ =================
Basic Earnings per Common Share, before cumulative effect of
change in accounting principle $0.34 $0.30
Cumulative effect of change in accounting principle (0.03) (0.03)
---------------- -----------------
Basic Earnings per Common Share $0.31 $0.27
================ =================
Weighted average shares outstanding - Basic 16,595,880 16,595,880
================ =================
Diluted Earnings per Common Share, before cumulative effect
of change in accounting principle $0.33 $0.29
Cumulative effect of change in accounting principle (0.03) (0.03)
---------------- -----------------
Diluted Earnings per Common Share $0.30 $0.26
================ =================
Weighted average shares outstanding - Diluted 17,156,050 17,156,050
---------------- -----------------
21
17. SUBSEQUENT EVENTS
On January 28, 2003, the Board of Directors approved an amendment to the
Company's certificate of incorporation changing its name to Clark, Inc.,
approved the Clark, Inc. 2003 Stock Option Plan, and approved the Amended and
Restated Employee Stock Purchase Plan. These proposals were submitted to and
were approved by the stockholders at the April 29, 2003 Annual Stockholders
Meeting.
On April 24, 2003, the Company's operating entity, Clark/Bardes Consulting,
Inc., changed its name to Clark Consulting, Inc.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Tables shown in thousands of dollars, except share and per share
amounts)
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-Q.
As discussed in Note 16 in the notes to the condensed consolidated financial
statements, the Company has restated its financial statements for the three
months ended March 31, 2002. This management discussion and analysis gives
effect to this restatement.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires us to make estimates
and assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. The Securities and Exchange Commission ("SEC") has defined a
company's most critical accounting policies as those that are most important to
the portrayal of its financial condition and the results of operations, and
which require us to make difficult and subjective judgments, often as a result
of the need to make estimates of matters that are inherently uncertain. Based on
this definition, we have identified the following critical accounting policies
and judgments. Although we believe that our estimates and assumptions are
reasonable, they are based upon information available when they are made. Actual
results may differ significantly from these estimates under different
assumptions and conditions.
REVENUE SOURCES AND RECOGNITION
Our operating segments derive their revenue primarily from:
o commissions paid by the insurance companies issuing the
policies underlying our benefit programs;
o program design and administrative service fees paid by our
clients;
o executive compensation and benefit consulting fees; and
o fees for legislative liaison and related advisory services.
Our commission revenue is normally long term and recurring, is typically paid
annually and usually extends for a period of ten years or more after the sale.
Commissions paid by insurance companies vary by policy and by program and
represent a percentage of the premium or the cash surrender value of the
insurance policies underlying the program.
First Year Commission Revenue and Related Fees. First year commission
revenue and related fees are derived from two principal sources: (a)
the commission we earn when the client first purchases the policies,
which revenue is recognized at the time the application is
substantially completed, the client is contractually committed to
purchase the insurance policies and the
22
premiums are paid by the client, to the insurance company; and (b) fees
for the services related to the enrollment and initial administration
of the benefit programs and underlying policies.
Our first year commission revenue is frequently subject to
chargeback, which means that insurance companies retain the
right to recover commissions in the event policies prematurely
terminate. The chargeback schedules differ by product and
usually apply to first year commission only. A typical
chargeback schedule, based on a percentage of first year
commission and the year in which the termination occurs, is as
follows:
Year 1 100%
Years 2 and 3 50%
Year 4 25%
Years 5 and beyond 0%
While the commission revenue is subject to chargeback, our
experience has indicated that less than 1% of revenue
recognized has ever been refunded to insurance companies
pursuant to such chargeback provisions. Given the homogeneous
nature of such cases and historical information about
chargebacks, we believe we are able to accurately estimate the
revenue earned. We currently maintain a chargeback allowance,
which is monitored on a quarterly basis for adequacy.
Renewal Commission Revenue and Related Fees. Renewal commission revenue
is the commission we earn on the policies underlying the benefit
programs we have sold in prior years continuing inforce. 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.
Consulting fee revenue. Consulting fee revenue consists of fees of
Human Capital Practice, Pearl Meyer and Federal Policy Group for the
services we perform in advising our clients on their executive
compensation programs and related consulting services, retirement,
benefit, actuarial, pension savings plan design and management, people
strategy, compensation surveys, institutional registered investment
advisory services and fees from legislative and regulatory policy
matters. These fees are generally based on a rate per hour arrangement
and are earned when the service is rendered. Some of our consulting
clients pay a retainer at the beginning of a project. These revenues
are recognized ratably over the term of the engagement. Consulting
revenue generated by the Executive Benefits Practice, Banking Practice
and Healthcare Group are included as first year revenue line in the
accompanying condensed consolidated income statement.
Administrative service fee revenue. Administrative service fee revenue
consists of fees we charge our clients for the administration of their
benefit programs and are earned when services are rendered. These
revenues are included as renewal commissions and related fees revenue
in the accompanying condensed consolidated income statement.
During the fourth quarter of 2002, we completed an analysis of the
services provided and timing thereof under our administrative service
agreements at our Executive Benefits Practice. As a result of this
analysis, we determined that because of changes in the timing of the
services being provided, revenue under these agreements should have
been recognized on a straight-line basis during 2002. Historically,
these fees were recognized 75% in the renewal month and 25% ratably
over the remainder of the annual service agreement.
We record revenue on a gross basis when we are the primary obligor in the
arrangement or when we bear the credit risk in the arrangement. We record
revenue on a net basis when another party is the primary obligor in the
arrangement or when another party bears the credit risk.
In accordance with Emerging Issues Task Force ("EITF") Issue No. 01-14, Income
Statement Characterization of Reimbursements Received for "Out-of-Pocket"
Expenses Incurred, reimbursements received for out-of-pocket expenses incurred
are characterized as revenues and are shown as a separate
23
component of total revenue. Similarly, related reimbursable expenses are also
shown separately within operating expenses. EITF Issue No. 01-14 was effective
as of January 1, 2002.
Success fee arrangements. In our Human Capital Practice and Federal Policy
Group, we are involved in certain client engagements under which we receive a
success fee upon meeting certain objectives. We recognize revenue on these
engagements only when we have verifiable information that the objectives have
been met even if the services were performed in prior periods.
OTHER SIGNIFICANT ACCOUNTING POLICIES
INTANGIBLE ASSETS
We have intangible assets representing the excess of the costs of acquired
businesses over the fair values of the tangible net assets associated with an
acquisition. Intangible assets consist of the net present value of future cash
flows from policies inforce at the acquisition date, non-compete agreements
with the former owners, other identifiable intangibles and goodwill. Non-compete
agreements are amortized over the period of the agreements and other
identifiable intangibles are amortized over their useful lives.
The net present value of inforce revenue is typically amortized between 20 and
30 years (the expected average policy duration). The determination of the
amortization schedule involves making certain assumptions related to
persistency, expenses, and discount rates that are used in the calculation of
the carrying value of inforce revenue. If any of these assumptions change or
actual experience differs materially from the assumptions used, it could affect
the carrying value of the inforce revenue.
We are required to assess potential impairments of long-lived assets in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 144,
Accounting for Impairment of Long-Lived Assets, if events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable.
In assessing the recoverability of goodwill and the net present value of future
cash flows from policies inforce, we must make assumptions regarding estimated
future cash flows and other factors to determine the fair value of the
respective assets. If these estimates and related assumptions change in the
future, we may be required to record impairment charges not previously recorded.
As of January 1, 2002, amortization of goodwill ceased and is tested annually
for impairment or whenever changes in circumstances indicate impairment might
exist.
EMPLOYEE COMPENSATION
We account for stock-based compensation to employees using the intrinsic value
method prescribed in Accounting Principles Board ("APB") Opinion No. 25,
Accounting for Stock Issued to Employees. Under APB 25, compensation cost for
stock options is measured as the excess, if any, of the quoted market price of
our stock at the date of grant over the amount an employee must pay to acquire
the stock. Generally, common stock options issued to employees do not result in
compensation expense because the exercise price of the option equals the market
price of the underlying stock on the date of grant. However, compensation
expense may be incurred for options issued to employees if the options are
contingent upon meeting certain performance criteria.
SFAS No. 123, Accounting for Stock-Based Compensation, established accounting
and disclosure requirements using a fair value based method of accounting for
stock-based employee compensation plans. We have elected to remain on the
current method of accounting as described above for employees. However, we
account for stock options granted to non-employees under the provisions of SFAS
No. 123.
The pro forma information regarding net income and earnings per share required
by SFAS No. 123 has been determined as if we accounted for our stock based
compensation plans under the fair value method. The fair value of each option
grant was estimated at the date of grant using the Black-Scholes option pricing
model with the following weighted average assumptions used for grants in 2003
and 2002, respectively:
24
MARCH 31,
---------
2003 2002
---- ----
Dividend yield........................................ None None
Volatility............................................ 64.8% 64.17%
Risk-free interest rates.............................. 5.2% 5.4%
Expected life (years)................................. 5 6
Had compensation cost for our stock-based compensation plans been determined in
accordance with SFAS No. 123, as amended by SFAS No. 148, Accounting for
Stock-Based Compensation - Transition and Disclosure - An Amendment of FASB
Statement No. 123, our net income and earnings per share would have been reduced
to the pro forma amounts indicated below:
MARCH 31,
-------------------------
2003 2002
---- ----
NET INCOME
As reported...................................................... $3,581 $4,428
Add: stock-based employee compensation expense included in reported
net income, net of related tax effect......................... 206 -
Deduct: stock option compensation expense, net of tax............ (418) (533)
------ ------
Pro forma........................................................ $3,369 $3,895
====== ======
BASIC EARNINGS PER COMMON SHARE
As reported...................................................... $0.20 $0.27
Pro forma........................................................ $0.19 $0.23
DILUTED EARNINGS PER COMMON SHARE
As reported...................................................... $0.19 $0.26
Pro forma........................................................ $0.18 $0.23
25
OVERVIEW
Net income for the quarter ended March 31, 2003 was $3.6 million, or $0.19 per
diluted share, representing a 19.1% decrease from net income of $4.4 million, or
$0.26 per diluted share, in the comparable quarter of 2002.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31,
----------------------------
2003 2002 CHANGE
---- ---- ------
REVENUE
First year commissions and related fees $27,611 $24,011 15.0%
Renewal commissions and related fees 42,364 34,875 21.5%
Consulting fees 13,381 5,798 130.8%
Reimbursable expenses 1,282 1,350 (5.0%)
-----------------------------------------------
Total Revenue 84,638 66,034 28.2%
OPERATING EXPENSES
Commissions and fees 25,106 24,054 4.4%
% of revenue 29.7% 36.4%
General and administrative 41,268 30,126 37.0%
% of revenue 48.8% 45.6%
Reimbursable expenses 1,282 1,350 (5.0%)
% of revenue 1.5% 2.0%
Amortization 5,178 1,831 182.8%
-----------------------------------------------
Operating income 11,804 8,673 36.1%
% of revenue 13.9% 13.1%
Other income 87 69 26.1%
Interest income 100 88 13.6%
Interest expense (6,003) (382)
-----------------------------------------------
Income before taxes 5,988 8,448 (29.1%)
Income taxes (2,407) (3,497) 31.2%
-----------------------------------------------
Net income, before cumulative effect of change
in accounting, net of tax 3,581 4,951 (27.7%)
Cumulative effect of change in accounting
principle - (523)
-----------------------------------------------
Net Income $3,581 $4,428 (19.1%)
===============================================
PER COMMON SHARE - DILUTED
Earnings $0.19 $0.26
Weighted average shares 18,598,968 17,156,050
Quarter ended March 31, 2003 compared to quarter ended March 31, 2002
Revenue. Total revenues for the quarter ended March 31, 2003 were $84.6 million,
an increase of 28.2% from revenues of $66.0 million in first quarter 2002. The
Banking Practice, which increased total revenue by $18.6 million over the prior
period, benefited significantly from the November 2002 acquisition of Long,
Miller & Associates, LLC ("LongMiller"). Federal Policy Group results were
strong reflecting good overall demand for its services and including a $2.8
million success fee recorded and collected during the
26
first quarter 2003. However, the Executive Benefits Practice continued to
underperform, as predicted and compared to the three months ended March 31,
2002, due to the weak economic environment, which has slowed the benefit plan
implementation process with its corporate clients. Healthcare revenues were
lower than expected and as compared to the three months ended March 31, 2002.
This was primarily due to timing issues with the closing of some of its benefit
cases. These cases are expected to close during the second quarter of 2003.
Consulting fees as a percentage of total revenue increased to 15.8% in the first
quarter of 2003 compared to 8.8% in the first quarter of 2002. This increase is
primarily due to the formation and growth of our Human Capital Practice through
the addition of the Arthur Andersen ("Andersen") partners and employees in May
2002 and the acquisition of Federal Policy Group in February 2002.
Commissions and fee expense. Commission and fee expense for the three months
ended March 31, 2003 was $25.1 million or 29.7% of total revenue compared to
$24.1 million or 36.4% of total revenue in first quarter 2002. The percentage
paid in commission expense declined primarily due to an increasing number of
employee consultants who have a lower commission rate than independent
consultants and the increase in consulting fee revenue from the three months
ended March 31, 2002. With the acquisition of Federal Policy Group and the
formation of our Human Capital Practice, we continue to expand our fee-based
revenue, which should continue to favorably affect commission expense as a
percentage of revenue.
General and administrative expense. General and administrative expense for the
three months ended March 31, 2003 was $41.3 million or 48.8% of total revenue
compared to $30.1 million or 45.6% of total revenue for the three months ended
March 31, 2002. General and administrative expenses increased for the three
months ended March 31, 2003 from prior year as a result of the 2002
acquisitions, such as LongMiller and Federal Policy Group and the hiring of
Andersen Human Capital Practice partners and employees, included for the entire
quarter of 2003. General and administrative expense for the three months ended
March 31, 2003 included approximately $1.9 million in charges, primarily related
to severance costs and lease terminations in our Executive Benefits Practice and
our Healthcare Group. A non-cash expense of $345,000 was incurred in the first
quarter of 2003 related to stock compensation expense.
Amortization. Amortization expense for the quarter was $5.2 million compared to
$1.8 million in the prior year. We acquired approximately $400 million of
inforce revenue with our November 2002 acquisition of LongMiller, which
accounted for approximately $3.0 million of the amortization expense in the
first quarter of 2003.
Other income. In the first quarter of 2003 and 2002, we received approximately
$87,000 and $69,000, respectively, of rental income from several tenants.
Interest expense - net. Net interest expense for the three months ended March
31, 2003 was $5.9 million compared to $294,000 in 2002. With the November 2002
acquisition of LongMiller, we borrowed approximately $87.5 million on our line
of credit and issued $305 million of non-recourse asset-backed notes. This
acquisition-related debt significantly increased our net interest expense from
the three months ended March 31, 2003 compared to the three months ended March
31, 2002.
Income taxes. Income taxes for the three months ended March 31, 2003 were $2.4
million at an effective tax rate of 40.2% compared to $3.5 million at an
effective tax rate of 41.4% for the three months ended March 31, 2002.
The decrease in effective tax rate is a result of a lower blended state rate.
Net Income. Net income for the three months ended March 31, 2003 was $3.6
million, or $0.19 per diluted common share versus net income of $4.4 million or
$0.26 per diluted share for the same period last year.
27
The tables that follow present the operating results of our six major operating
segments for the three months ended March 31, 2003 and 2002.
EXECUTIVE BENEFITS PRACTICE
THREE MONTHS ENDED
MARCH 31,
---------
2003 2002
---- ----
REVENUE
First year commissions and related fees $8,415 $9,509
Renewal commissions and related fees 18,841 24,238
Reimbursable expenses 23 102
---------------------------------
TOTAL REVENUE $27,279 $33,849
OPERATING EXPENSES
Commissions and fees 12,045 17,778
% of revenue 44.2% 52.5%
General and administrative 9,092 8,095
% of revenue 33.3% 23.9%
Reimbursable expenses 23 102
Amortization 1,006 937
---------------------------------
OPERATING INCOME $5,113 $6,937
% of revenue 18.7% 20.5%
=================================
The Executive Benefits Practice continued to underperform, as predicted
and as compared to the three months ended March 31, 2002, due to the
weak economic environment, which has slowed the benefit plan
implementation process with its corporate clients. We may continue to
experience revenue declines in future periods due to a weak economy.
Commission expense as a percentage of total revenue declined from 52.5%
for the three months ended March 31, 2002 to 44.2% for the three months
ended March 31, 2003. The principal cause of this decline is the result
of more revenue generated by employee consultants who have a lower
commission rate than by independent consultants. General and
administrative expense was impacted by approximately $89,000 of
restructuring charges for the consolidation of the business support
services in Dallas, Texas and $711,000 of charges associated with other
severance agreements and lease terminations. These expenses were
accrued for in the accompanying condensed consolidated balance sheet as
of March 31, 2003.
28
BANKING PRACTICE
THREE MONTHS ENDED
MARCH 31,
---------
2003 2002
---- ----
REVENUE
First year commissions and related fees $12,649 $ 6,996
Renewal commissions and related fees 19,797 6,864
Reimbursable expenses - 20
------------------------------
TOTAL REVENUE $32,446 $13,880
OPERATING EXPENSES
Commissions and fees 11,755 5,450
% of revenue 36.2% 39.3%
General and administrative 11,129 7,120
% of revenue 34.3% 51.3%
Reimbursable expenses - 20
Amortization 3,615 373
------------------------------
OPERATING INCOME $5,947 $917
% of revenue 18.3% 6.6%
==============================
Total first year commission revenue increased 80.8% to $12.6 million
for the three months ended March 31, 2003 from $7.0 million for the
three months ended March 31, 2002. This increase reflects continued
strong demand in the banking market. Approximately $11.0 million of the
increase in renewal revenue is attributable to the securitized inforce
revenue stream from the acquisition of LongMiller. Commission expense
for the three months ended March 31, 2003 was $11.8 million, or 36.2%
of revenue, compared to $5.5 million or 39.3% of revenue in the same
period in 2002. Commission expense as a percentage of revenue decreased
as a result of a higher percentage of first year revenue produced by
employee consultants versus the prior year. In addition, a larger
percentage of total revenue is generated by renewal revenue which has a
lower commission expense. General and administrative expenses for the
three months ended March 31, 2003 were $11.1 million, or 34.3% of
revenue, compared to $7.1 million or 51.3% of revenue for the
comparable period in 2002, due to the increased headcount primarily
from acquisitions and to support internal growth.
29
HEALTHCARE GROUP
THREE MONTHS ENDED
MARCH 31,
---------
2003 2002
---- ----
REVENUE
First year commissions and related fees $6,035 $6,602
Renewal commissions and related fees 3,188 2,933
Reimbursable expenses 689 819
---------------------------------
TOTAL REVENUE $9,912 $10,354
OPERATING EXPENSES
Commissions and fees 1,306 826
% of revenue 13.2% 8.0%
General and administrative 6,065 6,083
% of revenue 61.2% 58.8%
Reimbursable expenses 689 819
Amortization 421 452
---------------------------------
OPERATING INCOME $1,431 $2,174
% of revenue 14.4% 21.0%
=================================
Healthcare Group revenues were lower than expected and as compared to
the three months ended March 31, 2002, which was primarily attributed
to timing issues with the closing of a couple of its benefit cases.
These cases are expected to close in the second quarter of 2003. For
the three months ended March 31, 2003, commission and general and
administrative expenses include approximately $435,000 and $335,000,
respectively, for costs associated with a severance agreement. These
expenses were accounted for in the accompanying condensed consolidated
balance sheet as of March 31, 2003.
30
HUMAN CAPITAL PRACTICE
THREE MONTHS ENDED
MARCH 31,
---------
2003 2002
---- ----
REVENUE
Consulting fees $5,794 $2,253
Reimbursable expenses 93 56
----------------------------------------
TOTAL REVENUE $5,887 $2,309
OPERATING EXPENSES
General and administrative 6,343 1,971
% of revenue 107.7% 85.4%
Reimbursable expenses 93 56
----------------------------------------
OPERATING INCOME $(549) $282
% of revenue (9.3%) 12.2%
========================================
In May 2002, the Human Capital Practice was formed by combining our existing
Rewards and Performance Group with the addition of 10 partners and 74 other
employees from the Arthur Andersen Human Capital Practice. The three months
ended March 31, 2003 includes $5.0 million of operating expenses related to this
additional growth. The Human Capital Practice results were improved from the
previous calendar quarter and benefited from approximately $500,000 of success
fees and improved billings. The Human Capital Practice results reflect
difficulties related to the start-up of a new consulting practice in the current
challenging economic climate.
The results for first quarter 2002 only include the operating results of our
Rewards and Performance Group.
PEARL MEYER AND PARTNERS
THREE MONTHS ENDED
MARCH 31,
---------
2003 2002
---- ----
REVENUE
Consulting fees $3,056 $2,667
Reimbursable expenses 418 353
----------------------------------------
TOTAL REVENUE $3,474 $3,020
OPERATING EXPENSES
General and administrative 2,592 2,417
% of revenue 74.6% 80.0%
Reimbursable expenses 418 353
----------------------------------------
OPERATING INCOME $464 $250
% of revenue 13.4% 8.3%
========================================
Total consulting revenue increased 15.0% to $3.5 million for the three months
ended March 31, 2003 compared to $3.0 million for the three months ended March
31, 2002. The practice experienced more sales activity as a result of
engagements in its areas of expertise of corporate governance and executive
compensation. General and administrative expense increased to $2.6 million for
the three months ended March 31, 2003 from $2.4 million for the three months
ended March 31, 2002, which includes severance costs of approximately $123,000.
31
FEDERAL POLICY GROUP
THREE MONTHS ENDED
MARCH 31,
---------
2003 2002
---- ----
REVENUE
Consulting fees $4,531 $878
Reimbursable expenses 59 -
----------------------------------------
TOTAL REVENUE $4,590 $878
OPERATING EXPENSES
General and administrative 1,650 491
% of revenue 35.9% 55.9%
Reimbursable expenses 59 -
Amortization 96 27
----------------------------------------
OPERATING INCOME $2,785 $360
% of revenue 60.7% 41.0%
========================================
For the three months ended March 31, 2003, Federal Policy Group had three months
of results compared to one month for the three months ended March 31, 2002.
Federal Policy Group was acquired on February 25, 2002. Federal Policy Group
experienced good overall demand for its services and benefited from a $2.8
million success fee recorded and collected during the first quarter of 2003.
32
Results Attributable to Acquisitions
As an active acquirer, our operating results are significantly influenced by the
contributions of our acquired businesses. By definition, we consider any
business not appearing in four full quarters of operating results as being from
acquisitions. After that, they become part of existing business. Immaterial
acquisitions are not included in the acquisition column. An analysis of our
operating results, separating acquisitions from existing businesses for the
periods indicated is as follows:
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 2003 MARCH 31, 2002
-------------- --------------
EXISTING ACQUISITIONS(1) COMBINED EXISTING ACQUISITIONS(2) COMBINED
-------- --------------- -------- -------- --------------- --------
Revenue
First year commissions and
consulting fees $36,461 $4,531 $40,992 $27,444 $2,365 $29,809
Renewal commissions and related
fees 30,903 11,461 42,364 34,875 - 34,875
Reimbursable expenses 1,223 59 1,282 1,294 56 1,350
-------------------------------------------------------------------------------------
Total Revenue 68,587 16,051 84,638 63,613 2,421 66,034
Operating Expenses
Commissions and fees 21,297 3,809 25,106 24,054 - 24,054
General and administrative 38,917 2,351 41,268 28,254 1,872 30,126
Reimbursable 1,223 59 1,282 1,294 56 1,350
-------------------------------------------------------------------------------------
Operating income before
amortization 7,150 9,832 16,982 10,011 493 10,504
Amortization of intangibles 2,027 3,151 5,178 1,804 27 1,831
-------------------------------------------------------------------------------------
Operating income $5,123 $6,681 $11,804 $8,207 $466 $8,673
=====================================================================================
(1) Includes the operations of Federal Policy Group, which was
acquired February 25, 2002, and LongMiller, which was acquired
November 26, 2002.
(2) Includes operations of Rewards & Performance, which was
acquired March 12, 2001, and the Federal Policy Group, which
was acquired February 25, 2002.
Caution should be used in analyzing and evaluating the foregoing. Acquisitions
have made, and are expected to make, a substantial contribution to our operating
performance and growth; however, the resources dedicated to our acquisition
program, if not used for acquisitions, would have been available to make an
impact on the performance of the existing business.
For the three months ended March 31, 2003, approximately 19.0% of gross revenue
and 56.6% of operating income came from acquisitions while 3.7% of gross revenue
and 5.4% of operating income were from acquisitions during the same period in
2002. The increase in 2003 is primarily attributed to our acquisition of
LongMiller. We do not attribute a great deal of significance to the above
statistics for the following reasons:
o an acquisition's contribution to operating performance in any given
period is considerably dependent on the timing of the transaction;
o an acquisition, by our definition for this purpose, is one that has
not yet appeared in four quarters' operating results. As the value
of these acquisitions add to our existing business base, the
relative contribution of any subsequent acquisition may diminish;
and
33
o acquisitions have made, and are expected to make, a substantial
contribution to our operating performance and growth; however, the
resources dedicated to our acquisition program would have been
available to make an impact on the performance of the existing
business.
LIQUIDITY AND CAPITAL RESOURCES
Selected Measures of Liquidity and Capital Resources
MARCH 31, DECEMBER 31,
2003 2002
------- -------
Cash and cash equivalents..................................... $17,797 $14,524
Working capital (1)........................................... $15,813 $19,405
Current ratio - to one........................................ 1.21 1.24
Stockholders' equity per common share (2)..................... $13.54 $13.35
Debt to total capitalization (3).............................. 62.2% 63.4%
___________
(1) Includes restricted cash and current portion of debt
associated with asset-backed notes
(2) Total stockholders' equity divided by actual shares
outstanding
(3) Current debt plus long term debt divided by current debt plus
long term debt plus stockholders' equity
As a financial company with historically strong operating cash flow, we believe
we have little need to retain substantial cash balances. We use the net cash
from operating activities to fund capital expenditures and small acquisitions
and pay down our credit facility. We expect that large future acquisitions will
be financed primarily through externally available funds. However, we can offer
no assurance that such funds will be available and, if so, on terms acceptable
to us.
Summarizing our cash flow, comparatively, for the year-to-date:
THREE MONTHS ENDED
MARCH 31,
------------------
2003 2002
---- ----
Cash flows from (used in):
Operating........................................................... $18,022 $5,426
Investing.......................................................... (5,353) (5,889)
Financing.......................................................... (9,396) 2,915
------ ------
Net increase in cash $3,273 $2,452
====== ======
Cash Flows from Operating Activities
Our cash flow from operating activities for the three months ended March 31,
2003, compared with the same three-month period in 2002, was as follows:
THREE MONTHS ENDED
MARCH 31,
---------------------------
2003 2002
---------- ---------
Net income plus non-cash expenses $12,094 $7,876
Changes in operating assets and liabilities 5,928 (2,450)
------- ------
Cash flow from operating activities $18,022 $5,426
======= ======
Estimated Future Gross Renewal Revenue
The following tables represent the estimated gross renewal revenue associated
with the business-owned life insurance policies owned by our clients as of
March 31, 2003. The projected gross revenues are not
34
adjusted for mortality, lapse or other factors that may impair realization, have
not been discounted to reflect their net present value, and do not reflect the
commission expense we must pay to consultants when we recognize the related
revenue. 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 realized in the future and we cannot assure you that commissions
under these policies will be received.
Non-securitized Gross Inforce Revenues. The following table represents the
estimated gross inforce revenue associated with business owned life insurance
policies owned by our clients as of March 31, 2003, not including estimated
securitized inforce revenues, which are set forth in a separate table.
EXECUTIVE BANKING HEALTHCARE
BENEFITS PRACTICE PRACTICE GROUP TOTAL
----------------- -------- ---------- -------
2004 $49,993 $36,186 $5,924 $92,103
2005 40,870 32,879 5,552 79,301
2006 35,120 33,475 5,253 73,848
2007 31,718 32,662 4,947 69,327
2008 28,409 33,958 4,398 66,765
2009 27,855 34,677 3,801 66,333
2010 27,695 35,651 3,206 66,552
2011 27,745 36,730 2,578 67,053
2012 27,585 37,635 1,738 66,958
2013 28,246 38,900 1,483 68,629
--------------------------------------------------------
Total $325,236 $352,753 $38,880 $716,869
========================================================
March 31, 2002 $292,279 $270,514 $38,250 $601,043
========================================================
At March 31, 2003, our ten-year gross inforce revenue projection amounted to
$716.9 million. This balance represents a 19.3% increase in our residual book of
business over the March 31, 2002 balance.
Ten-year inforce revenues net of commission expense are $512.1 million and
$406.7 million as of March 31, 2003 and March 31, 2002, respectively.
Securitized Gross In-force Revenues. The following table represents the
estimated gross inforce revenue associated with our securitized inforce
bank-owned life insurance policies as of March 31, 2003. These revenue streams
are restricted for the specific purpose of paying off our asset-backed notes
that were issued in connection with the acquisition of LongMiller in November
2002.
SECURITIZED
BANKING PRACTICE
--------------------
2004 $45,726
2005 44,571
2006 46,064
2007 48,363
2008 50,556
2009 52,762
2010 55,060
2011 56,897
2012 59,150
2013 62,112
--------------------
Total March 31, 2003 $521,261
====================
The ten-year inforce revenues net of commission expense are $407.3 million as
of March 31, 2003.
Human Capital Practice, Pearl Meyer and Partners, and Federal Policy Group
generate fee-based revenues and do not produce inforce revenues.
35
Cash Used in Investing Activities
Approximately $3.6 million of cash used in investing activities represented
earnout payments to prior owners of certain of our acquired businesses and
approximately $1.8 million was used for the purchase of equipment.
A substantial amount of the purchase price of our acquisitions is paid in cash.
This is primarily due to our desire to avoid diluting our existing stockholders.
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.
Cash Flows from Financing Activities
In order to finance the acquisition of LongMiller, we entered into a
securitization of a majority of the inforce revenues of LongMiller, raising
$305 million of gross proceeds. The securitization is broken into four
traunches, each rated by Standard & Poors. The traunches consist of the A-1 and
A-2 class totaling approximately $167 million and each rated "AAA", B-class
traunch of $108 million rated "A" and the C-class traunch of $30 million rated
"BBB". The weighted average interest cost over the 20-year life of the
asset-backed notes is approximately seven percent. The securitized net inforce
revenues, which are expected to be approximately $40.6 million in 2003, are used
to pay interest and principal to the bondholders. Assuming the securitized notes
are paid in accordance with the payment schedule, the securitization will
provide residual cash flow to us of approximately five percent of the
securitized inforce revenue in the initial years, and our total residual
interest would equal approximately 28 percent of the total present value of the
securitized inforce revenue over the expected life of the asset-backed notes.
Such residual interest could be substantially less if the notes do not amortize
as expected. The securitization is treated as debt, is included in the Banking
Practice segment, and is generally non-recourse to us.
As of March 31, 2003, we had restricted cash of approximately $13.9 million.
This cash is not available for general corporate purposes, but is solely used to
service the securitization indebtedness incurred to finance the acquisition of
LongMiller. A certain variable portion of the restricted cash is paid to us
after bondholders are paid.
In May 2002, we amended our December 28, 1999 Credit Agreement to increase the
amount available under the credit facility to $125.0 million, of which $103.2
million was outstanding at March 31, 2003. We converted $50 million of the
year-end amount under the revolving credit facility to term debt at December 31,
2002. The term debt is payable quarterly over five years under the term facility
agreement. We had $21.8 million available under our credit lines at March 31,
2003. The revolving portion of our credit facility is scheduled to terminate on
December 31, 2003, at which time any revolving debt would convert to term debt
payable in quarterly installments over five years. We are currently in
discussions with our lenders to extend and amend the terms of our credit
agreement. There is no assurance that our lenders will extend and/or amend the
terms of our credit agreement.
The restrictive covenants under the new loan agreement provide for the
maintenance of a minimum ratio of fixed charges, a maximum allowable leverage
ratio, a minimum amount of net worth (stockholders' equity), and a maximum ratio
of debt to capitalization. We were in compliance with all our restrictive
covenants as of March 31, 2003. Our restrictive covenants may limit our
borrowing ability under our credit line.
We believe that our cash flow from operating activities will continue to provide
sufficient funds to service our debt obligations. However, as our business
grows, our working capital and capital expenditure requirements will also
continue to increase. There can be no assurance that the net cash flow from
operations will be sufficient to meet our anticipated cash flow requirements or
that we will not require additional debt or equity financing in the future. We
may continue to issue stock to finance future acquisitions.
36
The following table provides information about our remaining debt obligations
for the years ended December 31. The table presents principal cash flows and
related interest rates by expected maturity dates totaling $408.5 million.
EXPECTED MATURITY DATE
----------------------
2008 AND
--------
2003 2004 2005 2006 2007 THEREAFTER TOTAL
---- ---- ---- ---- ---- ---------- -----
LIABILITIES
Long term debt
Note to former shareholder $876 $1,274 $1,407 $1,553 $691 - $5,801
Average interest rate 10.0% 10.0% 10.0% 10.0% 10.0% -
Term debt 7,500 10,000 10,000 10,000 10,000 - 47,500
Average interest rate (1) (2) 3.34% 3.34% 3.34% 3.34% 3.34%
Revolver (3) - 11,146 11,146 11,146 11,146 11,146 55,730
Average interest rate (4) - 3.47% 3.47% 3.47% 3.47% 3.47%
Asset-backed notes 5,982 13,183 11,831 12,188 12,367 243,911 299,462
Average interest rate (5) 6.2% 6.2% 6.2% 6.2% 6.2% 6.9%
(1) This rate is three-month LIBOR plus our spread of 225 basis points as
of March 31, 2003. Our spread may change depending on our financial
leverage.
(2) Term debt interest rate has been hedged with the interest rate swaps
discussed in Item 3 below.
(3) Assumes revolver amount at March 31, 2003 terms out per credit
agreement at year-end.
(4) The average interest rate of borrowings at prime and LIBOR at March 31,
2003.
(5) This rate is the average interest rate on the outstanding asset-backed
notes as of March 31, 2003.
The interest rate on the outstanding term debt and revolver is variable based on
current prime or LIBOR rates.
Below is a summary of our contractual cash obligations and other commitments and
contingencies:
2008 AND
2003 2004 2005 2006 2007 THEREAFTER TOTAL
---- ---- ---- ---- ---- ---------- -----
Debt................ $14,358 $35,603 $34,384 $34,887 $34,204 $255,057 $408,493
Operating leases.... 7,916 10,535 10,391 9,992 9,615 25,788 74,237
Contingent
consideration.... - 7,099 5,855 2,355 - - 15,309
------------------------------------------------------------------------------
Total.......... $22,274 $53,237 $50,630 $47,234 $43,819 $280,845 $498,039
==============================================================================
37
Intangible Assets and Renewal Revenue
Intangible assets arise as a direct result of our acquisition program and said
acquisitions have been an important contribution to our past and expected future
growth. In most of our acquisitions, we acquire very little in the way of
tangible assets, therefore a substantial portion of the purchase price is
typically allocated to intangible assets. Intangible assets, net of
amortization, arising from our purchased businesses consist of the following:
MARCH 31, DECEMBER 31,
2003 2002
--------- ------------
Present value of inforce revenue $474,598 $479,561
Goodwill 118,265 117,803
Non-compete agreements 2,674 2,831
-------- --------
$595,537 $600,195
======== ========
As a percentage of total assets 82.7% 81.7%
As of percentage of stockholders' equity 240.3% 248.9%
The present value of inforce revenue is the net discounted cash flow from the
book of business of those companies having future renewal revenue at the time we
acquired them. The amounts allocated to inforce revenue are determined using
the discounted cash flow of future commission adjusted for expected persistency,
mortality and associated costs. The balance of the excess purchase price over
the net tangible assets has been allocated to goodwill. The inforce revenue is
amortized over its period of duration, which is normally twenty to thirty years.
Many factors outside our control determine the persistency of our inforce
business and we cannot be sure that the value we allocated will ultimately be
realized.
Non-compete agreements are amortized over the period of the agreements.
Recent Accounting Pronouncements
In June 2002, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS ") No. 146, Accounting for Costs
Associated with Exit or Disposal Activities, which nullifies Emerging Issues
Task Force ("EITF") Issue No. 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring). SFAS No. 146 requires companies to recognize
costs associated with exit or disposal activities when they are incurred, rather
than at the date of commitment to an exit or disposal plan. The Company adopted
SFAS No. 146 as of January 1, 2003, as described in Note 4 of the footnotes.
38
In November 2002, the FASB issued FASB Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, an interpretation of FASB Statements No.
5, 57, and 107 and rescission of FASB Interpretation No. 34 ("FIN No. 45"). This
Interpretation elaborates on the existing disclosures requirements for most
guarantees, including loan guarantees such as standby letters of credit. It also
clarifies that at the time a company issues a guarantee, the company must
recognize an initial liability for the fair value, or market value, of the
obligations it assumes under that guarantee and must disclose that information
in its interim and annual financial statements. The initial recognition and
initial measurement provisions of FIN No. 45 are applicable on a prospective
basis to guarantees issued or modified after December 31, 2002. The disclosure
requirements of FIN No. 45 are effective for financial statements of interim or
annual periods ending after December 15, 2002. The Company does not anticipate
the adoption of this interpretation to have a material impact on its condensed
consolidated financial statements.
In 2003, the FASB issued FASB Interpretation No. 46, Consolidation of Variable
Interest Entities--an interpretation of ARB No. 51 ("FIN No. 46"). FIN No. 46
provides guidance on the identification of entities for which control is
achieved through means other than voting rights (variable interest entities or
"VIE") and how to determine when and which business enterprises should
consolidate the VIE. FIN No. 46 requires that both the primary beneficiary and
all other enterprises with a significant variable interest in a VIE make
additional disclosures. The Company does not anticipate the adoption of this
interpretation to have a material impact on its condensed consolidated financial
statements.
In accordance with EITF Issue No. 00-21, Revenue Arrangements with Multiple
Deliverables, a vendor should evaluate all deliverables in an arrangement to
determine whether they represent separate units of accounting. The evaluation
must be performed at the inception of the arrangement and as each item in the
arrangement is delivered. EITF 00-21 is effective for revenue arrangements
entered into in fiscal periods beginning after June 15, 2003. The Company does
not anticipate the adoption of the requirements of this consensus reached in
this issue to have a material impact on its condensed consolidated financial
statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At March 31, 2003, we had total outstanding indebtedness of $408.5 million, or
approximately 186.5% of total market capitalization. Of our outstanding debt,
$5.8 million was subject to fixed rates of 10.0% at March 31, 2003. Of our
outstanding debt, $47.5 million is term debt and is subject to a variable rate
based on LIBOR plus a spread (3.34% at March 31, 2003). Outstanding debt on our
credit revolver is $55.7 million, borrowed at prime and at a three month LIBOR
rate plus a spread (weighted average interest rate of 3.47% as of March 31,
2003).
On January 7, 2003, we entered into two interest rate swaps with a total
notional value of $50 million to hedge the $50 million of term debt. The
notional amount of the interest rate swaps amortizes at the same rate of the
term debt. The terms of these interest rate swaps are as follows (fair value in
thousands):
Effective Notional amount at Fixed rate Variable rate Fair Value as of
Date Maturity date March 31, 2003 to be paid to be received March 31, 2003
--------- ------------- ------------------ ---------- -------------- ----------------
January 7, 2003 December 31, 2007 $26.6 million 2.85% LIBOR $321
January 7, 2003 December 31, 2007 $20.9 million 2.92% LIBOR $300
In order to finance the acquisition of LongMiller, we entered into a
securitization of a majority of the inforce revenues of LongMiller, raising $305
million of gross proceeds. The securitization is broken into four traunches,
each rated by Standard & Poors. The traunches consist of the A-1 and A-2 class
totaling approximately $167 million and each rated "AAA", the B-class traunch of
$108 million rated "A" and the C-class traunch of $30 million rated "BBB". The
weighted average interest cost over the 20-year life of the asset-backed notes
is approximately seven percent. The securitized net inforce revenues, which are
approximately $40.6 million in 2003, are used to pay interest and principal to
the bondholders. Assuming the securitized notes amortize as expected, the
securitization will provide residual cash flow to us of approximately five
percent of
39
the securitized inforce revenue in the initial years, and our total
residual interest would equal approximately 28 percent of the total present
value of the securitized inforce revenue over the expected life of the
asset-backed notes. Such residual interest could be substantially less if the
notes do not amortize as expected. The securitization is treated as debt, is
included in the Banking Practice segment, and is non-recourse to us.
Interest rate risk - We have exposure to changing interest rates and, as
discussed in Note 8 to the financial statements, are engaged in hedging
activities to mitigate this risk. The interest rate swaps, which we have entered
into, are used to hedge our interest rate exposure on the $47.5 million of
variable rate term-debt outstanding at March 31, 2003. Interest on the $55.7
million credit revolver outstanding at March 31, 2003 bears interest at LIBOR
plus 225 basis points. At our current borrowing level, a 1% change in the
interest rate will have an effect of approximately $557,300 on our interest
expense on an annual basis.
ITEM 4. CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this report, we carried out an
evaluation, under the supervision and with the participation of management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Exchange Act Rule 13a-15. Based upon, and as of the date
of, that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures are effective in timely
alerting them to material information relating to our company (and its
consolidated subsidiaries) required to be included in the periodic reports we
are required to file and submit to the SEC under the Exchange Act.
The Chief Executive Officer and Chief Financial Officer concluded that there
have been no significant changes to our internal controls or in other factors
that could significantly affect these internal controls subsequent to the date
the internal controls were recently evaluated. There were no significant
deficiencies or material weaknesses identified in the evaluation and, therefore,
no corrective actions were taken.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we are involved in various claims and lawsuits incidental to
our business, including claims and lawsuits alleging breaches of contractual
obligations under agreements with our consultants. The following is a summary of
the current material legal proceedings pending against us.
WILLIAM L. MACDONALD, SR. V. CLARK/BARDES CONSULTING, INC.
On April 10, 2003, William L. MacDonald, Sr., the former Chairman of the
Executive Benefits Practice, filed suit in Los Angeles California Superior Court
alleging wrongful termination and seeking damages and a declaration that all of
his non-competition and non-solicitation provisions were unenforceable. On April
11, 2003, we filed proceedings in the Circuit Court of Cook County, Illinois to
enforce the non-competition and non-solicitation covenants agreed to by Mr.
MacDonald when we purchased Mr. MacDonald's business, Compensation Resource
Group, Inc., in September of 2000. In light of the California suit, the Illinois
litigation was stayed pending the outcome in California.
We responded to Mr. MacDonald's suit by requesting the California court to
transfer the matter to arbitration as provided for in several of the contracts
at issue, and to enter a temporary restraining order prohibiting Mr. MacDonald
from competing with us and contacting our clients, in aid of and pending the
outcome of the arbitration. On May 1, the Court granted our motion and entered a
temporary restraining order prohibiting Mr. MacDonald from contacting certain
clients. A hearing has been scheduled for May 21, 2003 on our request for a
preliminary injunction seeking to prevent Mr. MacDonald from contacting any of
our clients, regardless of size. The court has taken our Motion to Compel
Arbitration under advisement. We deny any wrongdoing and intend to vigorously
defend Mr. MacDonald's claims. We also intend to vigorously pursue the
enforcement of Mr. MacDonald's non-competition and non-solicitation covenants.
40
CONSTELLATION ENERGY GROUP, INC. AND BALTIMORE GAS AND ELECTRIC COMPANY, ET AL.
V. CLARK/BARDES, INC. AND NEW YORK LIFE INSURANCE AND ANNUITY CORPORATION.
On July 25, 2000, Constellation Energy Group, Inc. ("Constellation") and related
entities filed a civil action against us in the U.S. District Court for the
District of Maryland. On September 14, 2001, Constellation amended its complaint
and added New York Life Insurance and Annuity Corporation as a defendant.
Constellation claims that we failed to take proper action in connection with the
administration of an employee benefit life insurance program under which
policies were issued by the defendant insurance company. On February 20, 2003,
an agreement was reached for a complete settlement of this litigation. While the
settlement terms are confidential, we regard the outcome as favorable and
believe such terms did not have a material adverse impact on our financial
condition or results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On March 3, 2003, we issued 32,727 shares of our common stock to the previous
owners of Rich, Florin/Solutions, Inc. for attaining established financial
performance criteria as outlined in the purchase agreement, related to our
acquisition of Rich, Florin. The issue was exempt from registration under
Section 4(2) of the Securities Act of 1933. The total value of the shares issued
was approximately $450,000, based upon the average closing price of our common
stock for the ten days prior to the date of issuance.
On March 14, 2003, we issued the number of shares of our common stock set out
below to the previous owners of the following entities for attaining established
financial criteria as outlined in the purchase agreement related to our
acquisition of the respective entities:
ENTITY SHARES
- ------ ------
National Institute for Community Bank 96,113
Christensen & Associates 42,791
W.M. Sheehan 2,433
Federal Policy Group 26,546
Comiskey Kaufman 27,990
-------
195,873
=======
The issues were exempt from registration under Section 4(2) of the Securities
Act of 1933. The total value of the shares issued was approximately $2.4
million.
On March 26, 2003, we issued 16,644 shares of our common stock to the previous
owners of Coates Kenney for attaining established financial performance criteria
as outlined in the purchase agreement related to our acquisition of
Coates-Kenney. The issue was exempt from registration under Section 4(2) of the
Securities Act of 1993. The total value of the shares issued was approximately
$200,000, based upon the average closing price of our common stock for the ten
days prior to the date of issuance.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company's Annual Meeting of Stockholders was held on April 29, 2003.
(b) At the Annual Meeting, two uncontested nominees to the Board of Directors of
the Company were elected Class II directors for three-year terms expiring at the
2006 Annual Meeting. The votes for the director nominees were as follows:
Director Nominee For Withheld
---------------- --- --------
L. William Seidman 15,230,553 334,383
William Archer 14,185,199 1,379,737
41
In addition, Randolph A. Pohlman, W.T. Wamberg, George D. Dalton, Steven F.
Piaker and Robert E. Long, Jr. continue to serve as directors of the Company
after the Annual Meeting.
(c) The results of stockholder voting on Proposals 2 through 5 were as
follows:
Proposal 2 - A vote to ratify the appointment of Deloitte & Touche LLP
as independent public accountants for the year ending December 31,
2003.
For Against Abstain
--- ------- -------
15,354,999 209,499 438
Proposal 3 - A management proposal recommending that stockholders
approve an amendment to our Certificate of Incorporation changing our
name to Clark, Inc.
For Against Abstain
--- ------- -------
15,091,654 417,843 55,439
Proposal 4 - A management proposal recommending that stockholders
approve the Clark, Inc. 2003 Stock Option Plan.
For Against Abstain Broker non-votes
--- ------- ------- ----------------
9,277,593 4,212,384 738,588 1,338,391
Proposal 5 - A management proposal recommending that stockholders
approve the Amended and Restated Employee Stock Purchase Plan.
For Against Abstain Broker non-votes
--- ------- ------- ----------------
13,316,700 173,872 735,973 1,338,391
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The list of exhibits required by this Item 6(a) appears on the
Exhibit Index attached hereto.
(b) Reports on Form 8-K.
On January 29, 2003, we filed an 8-K related to the acquisition of
Long, Miller & Associates, LLC.
42
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CLARK/BARDES, INC.
Date May 15, 2003 /s/ W. T. Wamberg
------------ -------------------------------------
W.T. Wamberg
President and Chief Executive Officer
Date May 15, 2003 /s/ Thomas M. Pyra
------------ -------------------------------------
Thomas M. Pyra
Vice President and Chief Financial Officer
(Principal Financial Officer)
CERTIFICATIONS PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
- ------------------------------------------------------------------------
CERTIFICATION BY THE CHIEF EXECUTIVE OFFICER
- --------------------------------------------
I, W.T. Wamberg, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Clark/Bardes,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and we have:
a) Designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during
the period in which this quarterly report is being
prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior
to the filing date of this quarterly report (the
"Evaluation Date"); and
c) Presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation
Date.
43
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent functions):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b. any fraud, whether or not material, that involves
management or other employees who have a significant role
in the registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.
Date: May 15, 2003 /s/ W.T. Wamberg
------------ -------------------------------------
Title: President and Chief Executive Officer
-------------------------------------
CERTIFICATION BY THE CHIEF FINANCIAL OFFICER
- --------------------------------------------
I, Thomas M. Pyra, certify that:
1. I have reviewed this quarterly report on Form 10-Q of
Clark/Bardes, Inc.;
2. Based on my knowledge, this quarterly report does not
contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements
made, in light of the circumstances under which such
statements were made, not misleading with respect to the
period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
a. Designed such disclosure controls and procedures
to ensure that material information relating to
the registrant, including its consolidated
subsidiaries, is made known to us by others
within those entities, particularly during the
period in which this quarterly report is being
prepared;
b. Evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
44
c. Presented in this quarterly report our
conclusions about the effectiveness of the
disclosure controls and procedures based on our
evaluation as of the Evaluation Date.
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the
equivalent functions):
a. all significant deficiencies in the design or
operation of internal controls which could
adversely affect the registrant's ability to
record, process, summarize and report financial
data and have identified for the registrant's
auditors any material weaknesses in internal
controls; and
b. any fraud, whether or not material, that involves
management or other employees who have a
significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there
were significant changes in internal controls or in other
factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation,
including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: May 15, 2003 /s/ Thomas M. Pyra
-------------------------------------------
Title: Chief Financial Officer and Chief Operating
Officer
-------------------------------------------
45
EXHIBIT INDEX
3.1 Certificate of Incorporation of Clark/Bardes, Inc. (incorporated herein
by reference to Exhibit 3.1 of Clark/Bardes' Registration Statement on
Form S-1, File No. 333-56799, filed with the SEC on July 12, 1998).
3.2 Certificate of Amendment of Certificate of Incorporation of
Clark/Bardes, Inc. (incorporated herein by reference to Exhibit 3.3 to
Amendment No.1 to the Clark/Bardes' Registration Statement on Form S-1,
File No. 333-56799, filed with the SEC on July 27, 1998).
3.3 Certificate of Amendment of Certificate of Incorporation of
Clark/Bardes, Inc. (incorporated herein by reference to Exhibit 5 of
Clark/Bardes' Registration Statement on Form 8-A, File No. 001-31256,
filed with the SEC on February 28, 2002).
3.4 Bylaws of Clark/Bardes, Inc. (incorporated herein by reference to
Exhibit 3.2 of Clark/Bardes' Registration Statement on Form S-1, File
No. 333-56799, filed with the SEC on July 12, 1998).
3.5 Certificate of Designation (incorporated herein by reference to Exhibit
3.4 of Clark/ Bardes' Registration Statement on Form S-1, File No.
333-56799), filed with the SEC on July 12, 1998.
3.6 Certificate of Amendment of Certificate of Incorporation of
Clark/Bardes, Inc. (incorporated herein by reference to Exhibit 3.6 of
Clark/Bardes' Quarterly Report on Form 10-Q, File No. 001-31256, filed
with the SEC on August 14, 2002).
4.1 Specimen Certificate for shares of Common Stock, par value $.01 per
share, of Clark/ Bardes Holdings, Inc. (incorporated herein by
reference to Exhibit 4.1 of Clark/Bardes' Amendment No. 1 to the
Registration Statement on Form S-1, File No. 333-56799, filed with the
SEC on July 27, 1998).
4.2 Rights Agreement, dated as of July 10, 1998, by and between
Clark/Bardes Holdings, Inc. and The Bank of New York (incorporated
herein by reference to Exhibit 4.4 of Clark/Bardes' Quarterly Report on
Form 10-Q, File No. 000-24769, filed with the SEC on November 16,
1998).
99.1 Certification of Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.*
99.2 Certification of Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.*
_______________
* Filed herewith.
46