Back to GetFilings.com
- --------------------------------------------------------------------------------
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, 2005
COMMISSION FILE NO. 001-31256
CLARK, 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 March 31, 2005, the registrant had outstanding 18,401,092 shares
of common stock.
TABLE OF CONTENTS
PAGE
Forward-Looking Statements....................................................................... 3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)....................................................... 4
Condensed Consolidated Balance Sheets as of March 31, 2005
and December 31, 2004................................................................. 4
Condensed Consolidated Statements of Income for the Three
Months Ended March 31, 2005 and 2004................................................... 5
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2005 and 2004............................................ 6
Notes to Condensed Consolidated Financial Statements........................................ 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................................... 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk............................. 23
Item 4. Controls and Procedures................................................................ 23
PART II - OTHER INFORMATION
Item 1. Legal Proceedings...................................................................... 23
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds............................ 24
Item 3. Defaults Upon Senior Securities........................................................ 25
Item 4. Submission of Matters to a Vote of Security Holders.................................... 25
Item 5. Other Information...................................................................... 25
Item 6. Exhibits............................................................................... 25
SIGNATURES....................................................................................... 26
EXHIBITS
Index to Exhibits........................................................................... 27
2
FORWARD-LOOKING STATEMENTS
This Form 10-Q may contain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, 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. When we make forward-looking statements, we
are basing them on 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 laws;
o other federal and state laws and regulations;
o general economic conditions;
o competitive factors and pricing pressures;
o our dependence on key producers, 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;
o supplemental compensation arrangements with certain 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 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, 2004, included under the caption "Risk Factors," or in the
documents incorporated by reference in our Form 10-K, 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 I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------------------------------------------
CLARK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2005 AND DECEMBER 31, 2004
(UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
MARCH 31, DECEMBER 31,
2005 2004
----------------- ----------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 7,055 $ 23,199
Restricted cash 7,081 12,020
Accounts and notes receivable, net 32,608 44,388
Prepaid income taxes 2,278 1,479
Deferred tax assets 899 782
Other current assets 6,301 2,445
-------- --------
TOTAL CURRENT ASSETS 56,222 84,313
-------- --------
INTANGIBLE ASSETS, NET
Net present value of inforce revenue 436,163 439,644
Goodwill 139,637 138,768
Non-compete agreements 5,444 5,834
-------- --------
TOTAL INTANGIBLE ASSETS, NET 581,244 584,246
-------- --------
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, NET 11,836 12,140
CASH SURRENDER VALUE OF LIFE INSURANCE 9,190 8,111
OTHER ASSETS 12,185 12,483
-------- --------
TOTAL ASSETS $670,677 $701,293
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $3,310 $ 3,886
Accrued liabilities 31,535 54,145
Deferred revenue 5,335 2,268
Recourse debt maturing within one year 1,328 1,295
Non-recourse debt maturing within one year 3,366 13,632
-------- --------
TOTAL CURRENT LIABILITIES 44,874 75,226
TRUST PREFERRED DEBT 45,000 45,000
LONG-TERM RECOURSE DEBT 3,083 3,427
LONG-TERM NON-RECOURSE DEBT 259,453 261,195
DEFERRED TAX LIABILITIES 26,909 24,752
DEFERRED COMPENSATION 9,755 8,215
OTHER NON-CURRENT LIABILITIES 6,686 9,292
-------- --------
TOTAL LIABILITIES 395,760 427,107
-------- --------
STOCKHOLDERS' EQUITY
Preferred stock
Authorized - 1,000,000 shares; $.01 par value, none issued - -
Common stock
Authorized - 40,000,000 shares; $.01 par value, 18,995,263 shares at
March 31, 2005 and 18,921,903 shares at December 31, 2004 189 188
Paid-in capital 194,645 193,849
Retained earnings 87,812 87,803
Other comprehensive income (loss) 100 (135)
Deferred compensation 2,327 1,898
Treasury stock, at cost - 594,171 shares at March 31, 2005 and 549,171
shares at December 31, 2004 (10,156) (9,417)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 274,917 274,186
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $670,677 $701,293
======== ========
See accompanying notes to these condensed consolidated financial statements.
4
CLARK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
THREE MONTHS ENDED
MARCH 31,
--------------------------------
2005 2004
-------------- ----------------
REVENUE
First year commissions and related fees $18,977 $35,725
Renewal commissions and related fees 36,105 38,053
Consulting fees 10,243 9,419
Reimbursable expenses 1,623 1,454
------- -------
TOTAL REVENUE 66,948 84,651
------- -------
OPERATING EXPENSES
Commissions and fees 13,802 23,218
General and administrative 40,466 41,097
Reimbursable expenses 1,623 1,454
Amortization 3,844 4,542
------- -------
TOTAL OPERATING EXPENSES 59,735 70,311
------- -------
OPERATING INCOME 7,213 14,340
OTHER INCOME (EXPENSE), NET - (1,468)
INTEREST, NET
Income 164 57
Expense (5,552) (5,601)
------- -------
TOTAL INTEREST, NET (5,388) (5,544)
------- -------
Income before taxes 1,825 7,328
Income taxes ( 723) (2,913)
------- -------
NET INCOME $ 1,102 $ 4,415
======= =======
Basic Earnings per Common Share $ 0.06 $ 0.24
Weighted Average Shares Outstanding - Basic 18,315,144 18,493,430
Diluted Earnings per Common Share $ 0.06 $ 0.23
Weighted Average Shares Outstanding - Diluted 18,482,923 18,862,438
See accompanying notes to these condensed consolidated
financial statements.
5
CLARK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
---------------------------------
2005 2004
--------------- ---------------
NET CASH FROM OPERATING ACTIVITIES $ 695 $ 10,633
-------- --------
INVESTING ACTIVITIES
Purchases of businesses, net of cash acquired ( 8,843) ( 6,449)
Purchases of equipment ( 1,103) ( 694)
-------- --------
Cash used in investing activities ( 9,946) ( 7,143)
-------- --------
FINANCING ACTIVITIES
Proceeds from borrowings - 34,800
Repayment of borrowings (12,320) (42,425)
Cash restricted for the repayment of non-recourse notes 4,939 5,680
Exercise of stock options 673 528
Net activity related to employee stock purchase plan 125 -
Purchase of company stock (deferred comp plan) 429 -
Repurchase of company stock ( 739) -
-------- --------
Cash used in financing activities ( 6,893) ( 1,417)
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (16,144) 2,073
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 23,199 3,156
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 7,055 $ 5,229
======== ========
Supplemental Disclosure for Cash Paid during the Period:
Interest paid $ 5,434 $ 5,125
Income taxes, net of refunds ( 374) 126
Supplemental Non-Cash Information:
Fair value of common stock issued in connection with acquisition contingent
payouts $ 539 $ 1,005
See accompanying notes to these condensed consolidated
financial statements.
6
CLARK, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 2005
(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, Inc. ("the Company") and its wholly-owned subsidiaries.
Through the Company's five operating segments, Executive Benefits Practice,
Banking Practice, Healthcare Group, 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 Securities, Inc. ("CSI"), 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 of America ("GAAP") for interim financial information in
accordance 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, 2005, are not necessarily indicative of the results that may be
expected for the year ending December 31, 2005, or any other period.
The balance sheet at December 31, 2004 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, including a summary of significant accounting policies,
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, 2004.
Stock-Based Compensation - Statement of Financial Accounting Standard ("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 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 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 2005 and 2004, respectively:
MARCH 31,
------------------------------
2005 2004
------------ --------------
Dividend yield None None
Volatility 57.1% 61.8%
Risk-free interest rates 4.2% 5.2%
Expected life (years) 5 5
7
CLARK, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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, the Company's net income and earnings per
share would have been reduced to the pro forma amounts indicated below:
THREE MONTHS ENDED
MARCH 31,
------------------------
2005 2004
---------- ----------
NET INCOME
As reported $1,102 $4,415
Deduct: stock option compensation expense, net of tax (993) (750)
------ ------
Pro forma $ 109 $3,665
====== ======
BASIC EARNINGS PER COMMON SHARE
As reported $ 0.06 $ 0.24
Pro forma $ 0.01 $ 0.20
DILUTED EARNINGS PER COMMON SHARE
As reported $ 0.06 $ 0.23
Pro forma $ 0.01 $ 0.19
Certain 2004 amounts have been reclassified to conform to 2005 presentation due
to the merger of Human Capital Practice into Executive Benefits Practice, which
was effective January 1, 2005.
2. RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 123(R), Shared-Based
Payment, which supersedes Accounting Principle Board ("APB") Opinion No. 25,
Accounting for Stock Issued to Employees, and its related implementation
guidance. SFAS No. 123(R) requires companies to recognize in the income
statement the grant-date fair value of stock options and other equity-based
compensation issued to employees. The requirements of SFAS 123(R) are effective
as of the beginning of the first fiscal year beginning after June 15, 2005. The
Company will be required to adopt the provisions of SFAS 123(R) as of January 1,
2006. The Company is currently evaluating the impact to the financial statements
of adoption of this pronouncement.
3. HUMAN CAPITAL PRACTICE
Effective January 1, 2005, the Human Capital Practice was merged into Executive
Benefits Practice. In the fourth quarter of 2003, the Company reorganized its
executive compensation consulting practices and recorded a charge of $7.5
million in the fourth quarter of 2003 relating to the reorganization, of which
$3.1 million remains accrued on the condensed consolidated balance sheet as of
March 31, 2005. In the first quarter of 2005, the Company adjusted its estimate
of net future lease costs based upon sublease arrangements on terms more
favorable than its previous expectations. The adjustment of $60 thousand is
included in general and administrative expenses in the condensed consolidated
statement of income for the three months ended March 31, 2005.
The Company will continue to evaluate the remaining restructuring reserve as
plans are being executed. As a result, there may be additional charges or
reversals in future periods. A summary of the activity in the reserve account as
of March 31, 2005, is as follows:
8
CLARK, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
RESERVE BALANCE CASH RESERVE BALANCE
JANUARY 1, 2005 PAYMENTS ADJUSTMENTS MARCH 31, 2005
-------------------- --------------- ---------------- ------------------------
Employee termination costs $ 325 $ - $ - $ 325
Lease costs 2,946 ( 141) ( 60) 2,745
------ ----- ---- ------
Total $3,271 ($141) ($60) $3,070
====== ===== ==== ======
4. ACCOUNTS RECEIVABLE
Major categories of accounts receivable are as follows:
AS OF AS OF
MARCH 31, 2005 DECEMBER 31, 2004
--------------------------- ---------------------------
Accounts receivable - trade $34,061 $45,855
Accounts receivable allowance (1,453) (1,467)
------- -------
$32,608 $44,388
======= =======
A summary of the activity in the allowance for uncollectible accounts receivable
is as follows:
THREE MONTHS ENDED YEAR ENDED
MARCH 31, 2005 DECEMBER 31, 2004
--------------------------- ---------------------------
Beginning balance ($1,467) ($1,296)
Write offs 218 805
Expense ( 204) ( 976)
------- ---------
Ending balance ($1,453) ($1,467)
======= =========
As of March 31, 2005, and December 31, 2004, there were approximately $2.0
million and $2.6 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.
5. GOODWILL AND OTHER INTANGIBLE ASSETS
Changes in the carrying amount of goodwill for the three months ended March 31,
2005 by reporting units are as follows:
BALANCE BALANCE
JANUARY 1, 2005 EARNOUTS MARCH 31, 2005
----------------- ---------- ----------------
Executive Benefits Practice $ 21,855 ($120) $ 21,735
Banking Practice 52,050 1,019 53,069
Healthcare Group 14,076 - 14,076
Management Science Associates 5,010 - 5,010
Pearl Meyer & Partners 36,981 - 36,981
Federal Policy Group 8,766 - 8,766
Corporate 30 ( 30) -
-------- ----- --------
Total $138,768 $869 $139,637
======== ===== ========
9
CLARK, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Information regarding the Company's other intangible assets follows:
AS OF MARCH 31, 2005 AS OF DECEMBER 31, 2004
---------------------------------------- -----------------------------------------
GROSS ACCUMULATED GROSS ACCUMULATED
AMOUNT AMORTIZATION NET AMOUNT AMORTIZATION NET
------------- -------------- ----------- ------------ --------------- ------------
Inforce revenue $500,494 ($64,331) $436,163 $500,521 ($60,877) $439,644
Non-compete agreements 10,669 ( 5,225) 5,444 10,669 ( 4,835) 5,834
-------- -------- -------- -------- -------- --------
Total $511,163 ($69,556) $441,607 $511,190 ($65,712) $445,478
======== ======== ======== ======== ======== ========
Amortization expense of other intangible assets was $3.8 million and $4.5
million for the three months ended March 31, 2005, and March 31, 2004,
respectively.
The Company estimates that its annual amortization for 2005 through 2009 for
intangible assets related to all acquisitions consummated through March 31, 2005
will be approximately as follows:
YEAR AMOUNT
---- -------
2005 $15,373
2006 14,783
2007 14,395
2008 13,962
2009 13,114
6. CONTINGENT CONSIDERATION
As a result of the Company's acquisition program, it has $9.3 million of
contingent consideration potentially due to the former owners of its acquired
entities, including $4.2 million that has been earned and is accrued on the
condensed consolidated balance sheet as of March 31, 2005. If and when the
acquired entities meet certain performance criteria negotiated at the time of
the purchase, 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, 2005:
POTENTIAL AMOUNT PAYABLE IN CASH
- ---------------------------------------------------- -----------
2005 $3,603
2006 2,100
2007 3,602
------
$9,305
======
7. STATEMENT OF COMPREHENSIVE INCOME
Under SFAS No. 130, Comprehensive Income, the comprehensive income for the
Company consists of net income and changes in fair value of interest rate swaps,
net of tax. Shown below is the Company's comprehensive income:
THREE MONTHS ENDED
MARCH 31,
----------------------------
2005 2004
------------ ------------
Net income $1,102 $4,415
Change in fair value of interest rate swap, net of tax 235 (90)
------ ------
Comprehensive income $1,337 $4,325
====== ======
10
CLARK, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
8. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
common share:
THREE MONTHS ENDED
MARCH 31,
---------------------------------
2005 2004
--------------- ---------------
Numerator for basic and diluted earnings per common share $1,102 $4,415
========== ==========
DENOMINATOR:
Basic earnings per common share - weighted average shares outstanding 18,315,144 18,493,430
Effect of dilutive securities:
Stock options 141,777 274,921
Contingent shares earned not issued 26,002 94,087
---------- ----------
Diluted earnings per share - weighted average shares plus assumed conversions 18,482,923 18,862,438
========== ==========
Basic earnings per common share $ 0.06 $ 0.24
========== ==========
Diluted earnings per common share $ 0.06 $ 0.23
========== ==========
For the three months ended March 31, 2005 and 2004, there were approximately 860
thousand and 567 thousand, respectively, of outstanding stock options, which are
not included in the computation of diluted earnings per share because the
exercise prices of the options were greater than the average market prices of
the Company's common shares during the respective periods. The range of exercise
prices for these antidilutive stock options was between $15.51 and $25.28 at
March 31, 2005 and $18.13 to $30.30 at March 31, 2004.
9. INTEREST RATE SWAP
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 February 25, 2005, the Company
entered into an interest rate swap with a non-amortizing notional value of $10
million to hedge outstanding three-month LIBOR-based debt. This swap and
interest rate swaps entered into in 2004 and 2003 have been designated as cash
flow hedges. As such, the changes in the fair value of the interest rate swaps
are recorded in other comprehensive income ("OCI") for the effective portion of
the hedge, while the ineffective portion is recorded immediately in earnings.
Amounts are reclassified from OCI to earnings as the interest rate swaps effect
earnings. There have been no charges to earnings for ineffectiveness of interest
rate hedges for the three months ended March 31, 2005. The fair value of
interest rate swap agreements, based upon bank quotes, was an asset of
approximately $331 thousand at March 31, 2005. 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, 2005 TO BE PAID TO BE RECEIVED MARCH 31, 2005
- ----------------------- ------------------------ --------------------- -------------- ---------------- -------------------
February 25, 2005 December 31, 2009 $10.0 million 4.31% LIBOR $ 68
May 18, 2004 March 31, 2009 $ 7.0 million 4.44% LIBOR (1)
January 7, 2003 December 31, 2007 $15.4 million 2.85% LIBOR 264
----
Total $331
====
10. DIVIDENDS
On January 25, 2005, the Board of Directors authorized the Company to pay a
dividend of $0.06 per share (approximately $1.1 million) to all stockholders of
record as of March 1, 2005, which was paid on April 1, 2005.
On April 26, 2005, the Board of Directors authorized the Company to pay a
dividend of $0.06 per share to all stockholders of record as of June 1, 2005,
payable on July 1, 2005.
11
CLARK, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
11. SEGMENTS AND RELATED INFORMATION
The Company has five 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
provides compensation, benefit, and human resource consulting
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 Pearl Meyer & Partners - specializes in executive compensation
and retention programs.
o Federal Policy Group - provides a variety of legislative and
regulatory strategic services.
The segment information as of, and for the periods ended March 31, 2005 and
2004, for the Executive Benefits Practice segment reflects the results of, and
information related to, the Human Capital Practice, which was merged into the
Executive Benefits Practice effective January 1, 2005.
The five reportable segments operate as independent and autonomous business
units with a central corporate staff in North Barrington, Illinois responsible
for finance, strategic planning, human resources, and company-wide policies.
Each segment has its own client base as well as its own marketing,
administration, and management.
The Company has disclosed income from operations as the primary measure of
segment earnings (loss). This is the measure of profitability used by the
Company's chief operating decision-maker and the most consistent with the
presentation of profitability reported within the condensed consolidated
financial statements. The accounting policies of the business segment reports
are the same as those 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, 2004.
The Company evaluates performance and allocates resources based on operating
income before income taxes, interest, and corporate administrative expenses.
There are no inter-segment revenues or expenses.
Segment information for the three month periods ended March 31, 2005 and 2004,
is as follows:
12
CLARK, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
---------------------------------
2005 2004
---------------- ---------------
REVENUES FROM EXTERNAL CUSTOMERS
Executive Benefits Practice $ 18,103 $ 28,943
Banking Practice 26,398 33,785
Healthcare Group 10,180 9,994
Pearl Meyer & Partners 8,254 6,537
Federal Policy Group 2,900 3,454
-------- --------
Total segments - reported 65,835 82,713
Corporate/CSI 1,113 1,938
-------- --------
Total consolidated - reported $ 66,948 $ 84,651
======== ========
OPERATING INCOME (LOSS) AND INCOME BEFORE TAXES
Executive Benefits Practice $ 1,565 $ 7,385
Banking Practice 5,604 6,590
Healthcare Group 2,186 2,310
Pearl Meyer & Partners 937 531
Federal Policy Group 281 665
-------- --------
Total segments - reported 10,573 17,481
Corporate/CSI (3,360) (3,141)
Other income (expense) - (1,468)
Interest - net (5,388) (5,544)
-------- --------
Income before taxes $ 1,825 $ 7,328
======== ========
DEPRECIATION AND AMORTIZATION
Executive Benefits Practice $ 1,118 $ 1,131
Banking Practice 3,022 3,488
Healthcare Group 534 687
Pearl Meyer & Partners 126 188
Federal Policy Group 101 102
-------- --------
Total segments - reported 4,901 5,596
Corporate/CSI 337 336
-------- --------
Total consolidated - reported $ 5,238 $ 5,932
======== ========
CAPITAL EXPENDITURES
Executive Benefits Practice $ 495 $ 89
Banking Practice 235 236
Healthcare Group 352 142
Pearl Meyer & Partners 92 106
Federal Policy Group - -
-------- --------
Total segments - reported 1,174 573
Corporate/CSI ( 71) 121
-------- --------
Total consolidated - reported $ 1,103 $694
======== ========
MARCH 31, DECEMBER 31,
IDENTIFIABLE ASSETS 2005 2004
---------------- ---------------
Executive Benefits Practice $ 82,103 $ 80,040
Banking Practice 471,009 487,784
Healthcare Group 31,757 31,032
Pearl Meyer & Partners 49,381 48,355
Federal Policy Group 13,068 12,018
-------- --------
Total segments - reported 647,318 659,229
Deferred tax assets 899 782
Corporate/CSI 22,460 41,282
-------- --------
Total consolidated - reported $670,677 $701,293
======== ========
13
CLARK, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
12. LITIGATION AND CONTINGENCIES
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 employee consultants and
independent producers. The following is a summary of the current material legal
proceedings pending against the Company.
FRIEDA SHUSTER, ET AL. V. HYDER MIRZA, ET AL. INCLUDING CLARK/BARDES, INC.
On May 30, 2001, the Company was named a defendant in a lawsuit filed in the
District Court of LaSalle County, Texas, but heard in Dallas County, Texas,
alleging gross negligence in connection with the death of an employee when the
private aircraft in which he was traveling on company business crashed. On
February 12, 2004, settlement was reached with the lead plaintiff. On March 14,
2005, a jury returned a verdict in favor of the Company on all matters, and no
damages were awarded to the plaintiffs. The plaintiffs have the right to appeal
the verdict, however, the Company is confident that the outcome of any appeal
would not be adverse to the Company.
INDEPENDENT SALES PRODUCERS' DISPUTES
In March 2004, two of the Company's independent sales producers exercised their
termination rights under their agreement(s) with the Company. Included in the
Company's condensed consolidated balance sheets is a receivable of approximately
$1.4 million from these two producers and their employee related to certain
chargeback commissions to be repaid to the Company from the surrender of
policies in 2003. Upon termination, the producers have disputed the chargeback
and asserted other miscellaneous claims. The producers have filed a motion to
compel arbitration in U.S. District Court in Connecticut, which the Company has
opposed. Although, the Company has filed a claim with the NASD in order to
resolve the chargeback dispute in that forum, the Company has agreed to stay the
NASD proceeding until resolution of the motion to compel arbitration with the
U.S. District Court. While it is not possible to predict with certainty the
outcome of the disputes, the Company does not believe resolution will have a
material adverse effect on its financial position or results of operations.
BASSETT FURNITURE INDUSTRIES, INCORPORATED V. CLARK CONSULTING, INC. (F/K/A
CLARK/BARDES, INC.)
On November, 29, 2004, Bassett Furniture Industries, Incorporated ("Bassett")
filed a civil action against the Company in the United States District Court for
the Western District of Virginia, Danville Division, in which Bassett alleges,
among other things, fraud, professional negligence, breach of fiduciary duty and
breach of contract in connection with a broad-based corporate-owned life
insurance program purchased by Bassett in 1994. The relief sought by Bassett
includes compensatory damages in an unspecified amount in excess of $3 million,
pre-judgment and post-judgment interest, and attorneys' fees. The Company
believes it has meritorious defenses to Bassett's claims and intends to
vigorously defend the matter. On March 15, 2005, prior to filing its answer or
other pleading, the Company entered into a settlement agreement for $650
thousand, which resolved the matter, and the litigation has been dismissed.
14
*****
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 condensed consolidated
financial statements, the notes thereto, and other information appearing
elsewhere in this Form 10-Q.
OVERVIEW
We design, market, and administer compensation and benefit programs for
companies supplementing and securing employee benefits and provide executive
compensation and related consulting services to U.S. corporations, banks, and
healthcare organizations. We generally compete with regional firms while we
market our products and services nationwide. A majority of our revenues result
from commissions paid by insurance companies that underwrite the insurance
policies used to finance our clients' benefit programs. Most of our clients'
benefit programs are financed by business-owned life insurance and other
financial products. We pay commissions to employee and independent producers
based upon a percentage of our commission revenue. We work closely with clients
to design customized products that meet the specific organizational needs of the
client and with insurance companies to develop unique policy features and
competitive pricing.
A significant portion of our growth in the last ten years has been acquisition
related. Business-owned life insurance programs have tax advantages associated
with products that are attractive to our clients. Portions of our product
offerings are interest rate sensitive. Changes in tax and legislative laws can
have an affect on our business, as seen over the last several years with our
Executive Benefits Practice. We have been expanding our compensation consulting
practices to diversify our product offerings. The largest component of our
general and administrative expense is salary and other benefit related costs.
RECENT EVENTS
On April 20, 2005, the Internal Revenue Service completed its audit of our
Federal income tax returns for the years ended December 31, 2003 and 2002.
Virtually all of the settlement amount related to the timing of certain
deductions and there was no adjustment to 2005 income tax expense relating to
the settlement.
On March 9, 2005, we received a subpoena from the Office of the Attorney General
of the State of New York. The subpoena sought information related to our
business practices relating to the sale of retirement products, including
contingent commission agreements related to these sales. On March 19, 2005, we
provided all of the requested information to the Office of the Attorney General
of the State of New York. We intend to fully cooperate with any future
inquiries.
On January 25, 2005, our Board of Directors authorized us to pay a dividend of
$0.06 per share (approximately $1.1 million) to all stockholders of record as of
March 1, 2005, which was paid on April 1, 2005. On April 26, 2005, our Board of
Directors authorized us to pay a dividend of $0.06 per share to all stockholders
of record as of June 1, 2005, payable on July 1, 2005. We intend to pay a
similar dividend each quarter, assuming we have adequate capital availability,
that we continue to be permitted to pay dividends under our senior credit
facility, and that cash dividends continue to be in the best interests of our
stockholders and us. On January 25, 2005, the Board of Directors also authorized
us to expand our existing stock repurchase program to a total of $15 million of
our outstanding common stock, from the previously authorized level of $10
million.
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. 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.
15
REVENUE SOURCES AND RECOGNITION
Our operating segments derive their revenue primarily from:
o commissions paid by the insurance companies issuing the
policies underlying our client's benefit programs;
o program design and administrative service fees paid by our
clients;
o executive compensation and benefit related consulting fees;
and
o fees for legislative liaison and related advisory services.
Our commission revenue is normally recurring, is typically paid annually and
usually extends for a period of twenty years or more after the sale. Commissions
are paid by insurance companies and vary by policy and by program and typically
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 premiums are
paid (which is the effective date of the insurance policy), by the client, to
the insurance company or, in certain instances, when cash is received; 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 percent of first year commission, is
as follows:
Year 1 100%
Year 2 and 3 50%
Year 4 25%
Year 5 and beyond 0%
Given the homogenous 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. The chargeback allowance is calculated based on the average
percentage rate of the last two years of chargebacks multiplied by first year
revenue for the trailing twelve months.
Renewal Commission Revenue and Related Fees. Renewal revenue is recognized on
the date that the renewal premium is due or paid by the client to the insurance
company depending on whether a policy is considered fixed or variable. Fixed
renewal policies have predictable set premium amounts. Revenue on these policies
is recognized on the premium due date. Variable renewal policy premiums can be
based upon such items as value of underlying investments in the policy, cash
surrender value of the policy, or mutual fund values. In some cases, we are able
to obtain information directly from the carriers allowing us to reasonably and
reliably estimate the expected renewal premiums. Revenue is recognized based
upon these estimates at a policy's renewal date. For those policies where we are
unable to obtain information to reasonably estimate the expected renewal
premiums, revenue is not recognized until the confirmation has been received
from the insurance carrier that the client's premium payment has been received.
We are notified in advance if a client plans to surrender, so adjustments in
subsequent periods due to cancellations are infrequent and minor. Revenue
associated with policies to be surrendered is not recognized.
Consulting Fee Revenue. Consulting fee revenue consists of fees charged by Pearl
Meyer & Partners and Federal Policy Group for the services we perform in
advising our clients on their executive compensation programs and related
consulting services, retirement, benefit, people strategy, compensation surveys,
and fees from legislative and regulatory policy matters. These fees are
generally based on a rate per hour arrangement or a fixed monthly fee and are
earned when the service is rendered. Consulting revenue generated by the
Executive Benefits Practice, Banking Practice, and Healthcare Group are included
in the first year revenue line on our condensed consolidated statement of
income.
16
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 mainly included in
our renewal revenue line on our condensed consolidated statement of income.
Supplemental Compensation Agreements. A portion of our revenue is derived from
certain supplemental compensation arrangements with insurance carriers. These
arrangements generate additional revenue with respect to primarily existing and,
to a lesser extent, new blocks of business. Payments under such arrangements are
typically based on the cash value (or fair value) of our existing in-force
business with these carriers at specified dates of measurement and, to a much
lesser extent, based on the value of new business generated. We realized
approximately $3.2 million and $3.1 million in revenue under such arrangements
for the three months ended March 31, 2005, and 2004, respectively.
We record revenue on a gross basis when we:
o act as the principal in the transaction by helping clients
select the right product or service;
o take responsibility for the acceptability of the products and
services;
o provide services through employees and exclusive independent
producers;
o have latitude in establishing the price the customer will pay;
o have discretion in carrier selection with multiple carriers;
o have chargeback and credit risk; and/or
o are viewed by the client as the administrator of the program
once the product is sold.
We record revenue on a net basis when we provide a lead on a case (in the
capacity of a finder) and another company has control of the case and bears the
credit risk (i.e., working directly with a client to determine the product and
design of the plan).
INTANGIBLE ASSETS
Our intangible assets include the excess of the costs of acquired businesses
over the fair values of the tangible net assets associated with an acquisition.
Our 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 the Impairment of Long-Lived Assets, if events or changes in
circumstances indicate that the carrying amount of a long-lived asset may not be
recoverable. In assessing the recoverability of goodwill, in accordance with
SFAS No. 142, Goodwill and Other Intangible Assets, and the net present value of
future cash flows from policies inforce, we must make assumptions regarding
estimated future cash flows, mortality, lapse, 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.
INCOME TAXES
Significant judgement is required in determining the provision for income taxes
and related accruals, deferred tax assets and liabilities, and any valuation
allowance recorded against the deferred tax assets. In the ordinary course of
business, there are
17
transactions and calculations where the ultimate tax outcome is uncertain.
Additionally, our tax returns are subject to audit by federal and various state
authorities. Although we believe our estimates are reasonable, no assurance can
be given that the final tax outcome will not be materially different from that
which is reflected in our historical income tax provisions and accruals. In
assessing the realizability of deferred tax assets, we consider the likelihood
that some portion or all of the deferred tax assets may not be realized. The
ultimate realization of deferred tax assets is dependent upon the generation of
future taxable income during the periods in which the temporary differences
become deductible. We consider the scheduled reversal of deferred tax
liabilities, projected future taxable income, and tax planning strategies in
making this assessment.
RESTRUCTURING COSTS
We make provisions for restructuring costs in accordance with SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal Activities. To determine
the amounts expensed in any period, we estimate the amounts we will receive in
the future for subleasing office space that is no longer required for our
existing operations. Should these estimates not reflect actual results in future
periods, we adjust the provision through the income statement.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31,
-------------------------------------------
2005 2004 % CHANGE
----------- ------------ -------------
TOTAL REVENUE $66,948 $84,651 (20.9%)
OPERATING EXPENSE
Commissions and fees 13,802 23,218 (40.6%)
% of revenue 20.6% 27.4%
Other operating expenses 45,933 47,093 ( 2.5%)
% of revenue 68.6% 55.6%
------- ------- ------
OPERATING INCOME $ 7,213 $14,340 (49.7%)
======= ======= ======
Quarter ended March 31, 2005 compared to quarter ended March 31, 2004.
Revenue. Total revenue for the three months ended March 31, 2005, was $66.9
million, compared to revenue of $84.7 million in first quarter 2004. First year
revenue for the three months ended March 31, 2005, was $19.0 million compared to
$35.7 million for the three months ended March 31, 2004 accounting for the
majority of the shortfall. First year revenue in 2004 included $9.3 million for
a large case that closed during the quarter. Banking Practice first year revenue
was $7.7 million less for the three months ended March 31, 2005, when compared
to the three months ended March 31, 2004, due to a soft market for BOLI
products. Revenue for the three months ended March 31, 2005 and 2004, included
approximately $3.2 million and $3.1 million, respectively, related to
supplemental compensation arrangements. Renewal revenue for the three months
ended March 31, 2005, was $36.1 million compared to $38.1 million for the three
months ended March 31, 2004. The decrease in renewal revenue is primarily the
result of the timing of premium payments from certain clients and changes in
contract renewal commission rates that carriers pay on certain products as the
policies age at the Executive Benefits Practice.
Commissions and fees expense. Commissions and fees expense for the three months
ended March 31, 2005, was $13.8 million, or 20.6% of total revenue, compared to
$23.2 million or 27.4% of total revenue in first quarter 2004. The percentage
paid in commission expense declined due to the fact that the supplemental
compensation arrangement revenues and consulting revenues have no related
commission expense and are a higher percentage of revenue in 2005 than in 2004.
Also impacting commission percentage to revenue is the mix between first year
and renewal revenue and the mix between sales by employees versus sales by
independent producers. Renewal revenues generally have lower commissions than
first year revenues and employee sales generally have lower commissions than
sales by independent producers. Some of the commission savings from sales by
employees is spent in the form of increased operating expenses. Independent
producers cover their operating expenses out of their commissions.
General and administrative expenses. General and administrative expenses
declined slightly (1.5%) from $41.1 million for the three months ended March 31,
2004, to $40.5 million for the three months ended March 31, 2005. The decrease
in general and administrative expenses was attributable to lower headcounts at
Executive Benefits Practice and Banking Practice partially offset by a $650
thousand lawsuit settlement at the Executive Benefits Practice in 2005.
18
Amortization expense. Amortization expense decreased approximately $700 thousand
to $3.8 million for the three months ended March 31, 2005, from $4.5 million for
the three months ended March 31, 2004, based on the timing of scheduled
amortization of our acquired inforce revenue.
Other income (expense). Other income (expense) for the three months ended March
31, 2004, included a $1.5 million write-off of costs associated with a
prospective securitization financing that was abandoned in the first quarter of
2004.
Interest expense. Interest expense for the three months ended March 31, 2005 and
2004 was $5.6 million.
Income taxes. Income taxes for the three months ended March 31, 2004, were $2.9
million, or 39.8% of income before taxes, compared to $723 thousand, or 39.6% of
income before taxes for the three months ended March 31, 2005.
Net income. Net income for the quarter ended March 31, 2005, was $1.1 million,
or $0.06 per diluted share, representing a 75% decrease from net income of $4.4
million, or $0.23 per diluted share, in the comparable quarter of 2004.
The tables that follow present the operating results of our five segments for
the three months ended March 31, 2005 and 2004.
EXECUTIVE BENEFITS PRACTICE
THREE MONTHS ENDED
MARCH 31,
---------------------------
2005 2004
-------------- ------------
TOTAL REVENUE $18,103 $28,943
OPERATING EXPENSES
Commissions and fees 5,776 10,936
Other operating expenses 10,762 10,622
------- -------
OPERATING INCOME $ 1,565 $ 7,385
% of revenue 8.6% 25.5%
======= =======
As of January 1, 2005, we transferred the operations of Human Capital Practice
to Executive Benefits Practice. As a result, all periods presented have been
reclassified to reflect this transfer.
Total revenue for the three months ended March 31, 2005, was $18.1 million
compared to $28.9 million for the three months ended March 31, 2004. First year
revenue for the three months ended March 31, 2005, was $6.5 million compared to
$14.9 million for the three months ended March 31, 2004, in the Executive
Benefits Practice. First year 2004 revenue included $8.6 million for one large
case. Renewal revenue for the three months ended March 31, 2005, was $11.6
million compared to $14.1 million for the three months ended March 31, 2004. The
decrease in renewal revenue is primarily the result of the timing of premium
payments from certain clients and changes in contract renewal commission rates
that carriers pay on certain products as the policies age. Commission expense as
a percentage of total revenue declined to 31.9% for the three months ended March
31, 2005, from 37.8% for the three months ended March 31, 2004, due to the mix
of sales by employee consultants, who are paid on a lower commission grid, and
the mix between first year versus renewal revenue. General and administrative
expense for the three months ended March 31, 2005, was $100 thousand higher than
the three months ended March 31, 2004, due mainly to a $650 thousand lawsuit
settlement in 2005 offset by lower headcount (260 for 2005 and 285 for 2004).
General and administrative expense for the three months ended March 31, 2004
included a charge of $475 thousand related to the termination of two independent
producers' agreements with us.
19
BANKING PRACTICE
THREE MONTHS ENDED
MARCH 31,
---------------------------
2005 2004
-------------- ------------
TOTAL REVENUE $26,398 $33,785
OPERATING EXPENSES
Commissions and fees 6,796 11,575
Other operating expenses 13,998 15,620
------- -------
OPERATING INCOME $ 5,604 $ 6,590
% of revenue 21.2% 19.5%
======= =======
First year revenue decreased 54.7% to $6.4 million for the three months ended
March 31, 2005 from $14.0 million for the three months ended March 31, 2004.
First year revenue for the three months ended March 31, 2005 was impacted by a
soft market for BOLI products and the historically low long-term interest rate
environment. Total revenue for the three months ended March 31, 2005 and 2004,
included approximately $1.5 million and $1.6 million, respectively, related to
supplemental compensation arrangements. Renewal revenue for the three months
ended March 31, 2005 and March 31, 2004, was approximately $20 million.
Commission expense for the three months ended March 31, 2005, was $6.8 million,
or 25.7% of revenue, compared to $11.6 million, or 34.3% of revenue, for the
same period in 2004. The commission expense as a percentage of revenue continues
to decrease as a result of a higher percentage of first year revenue produced by
employee consultants versus independent producers and the mix between first year
revenues and renewal revenues. In addition, we do not pay commission expense on
the revenue associated with the supplemental compensation arrangements. General
and administrative expense for the three months ended March 31, 2005, was $11.4
million, or 43.1% of revenue, compared to $12.5 million or 37.1% of revenue, for
the comparable period in 2004. General and administrative expense decreased due
to lower headcount (289 in 2005 and 312 in 2004) and a shift in 2005 to smaller
regional marketing meetings instead of an annual national marketing meeting.
Amortization expense for the three months ended March 31, 2005 and 2004, was
$2.6 million and $3.1 million, respectively. The decrease is based on the timing
of scheduled amortization of our acquired inforce revenue.
HEALTHCARE GROUP
THREE MONTHS ENDED
MARCH 31,
---------------------------
2005 2004
-------------- ------------
TOTAL REVENUE $10,180 $9,994
OPERATING EXPENSES
Commissions and fees 1,230 707
Other operating expenses 6,764 6,977
------- ------
OPERATING INCOME $ 2,186 $2,310
% of revenue 21.5% 23.1%
======= ======
Healthcare Group revenues were slightly higher (1.9%) for the three months ended
March 31, 2005, compared to the prior year. First year commission revenue for
the three months ended March 31, 2005, was lower (8.5 %) than prior year due to
a lower number of new projects and lower add-on commissions as a result of a
lost client. Commission expense for the three months ended March 31, 2005, was
$1.2 million compared to $700 thousand for the three months ended March 31,
2004. Commission expense for the three months ended March 31, 2005, includes
approximately $100 thousand for costs associated with a severance agreement and
higher costs associated with the mix of revenues. General and administrative
expense for the three months ended March 31, 2005, was $6.5 million compared to
$6.6 million for the three months ended March 31, 2004.
20
PEARL MEYER & PARTNERS
THREE MONTHS ENDED
MARCH 31,
---------------------------
2005 2004
-------------- ------------
TOTAL REVENUE $8,254 $6,537
OPERATING EXPENSES 7,317 6,006
------ ------
OPERATING INCOME $ 937 $ 531
% of revenue 11.4% 8.1%
====== ======
Total consulting revenue increased 26.3% to $8.3 million for the three months
ended March 31, 2005, compared to $6.5 million for the three months ended March
31, 2004. The practice continues to experience more sales activity generated by
higher headcount (101 in 2005 and 85 in 2004) along with additional engagements
in its area of expertise of corporate governance and executive compensation.
General and administrative expense was $7.3 million for the three months ended
March 31, 2005, compared to $6.0 million for the three months ended March 31,
2004, reflecting additional expense from higher headcount.
FEDERAL POLICY GROUP
THREE MONTHS ENDED
MARCH 31,
---------------------------
2005 2004
-------------- ------------
TOTAL REVENUE $2,900 $3,454
OPERATING EXPENSES 2,619 2,789
------ ------
OPERATING INCOME $ 281 $ 665
% of revenue 9.7% 19.3%
====== ======
Revenue for the three months ended March 31, 2005 was $2.9 million compared to
$3.5 million for the three months ended March 31, 2004 due to a lower number of
clients in 2005. Several client projects concluded on December 31, 2004.
Operating expenses for the three months ended March 31, 2005 were $2.6 million
compared to $2.8 million for the three months ended March 31, 2004. Operating
expenses for the three months ended March 31, 2005, included $100 thousand of
client expenses, which was billed back to the client and included in revenue.
LIQUIDITY AND CAPITAL RESOURCES
Selected Measures of Liquidity and Capital Resources
MARCH 31, DECEMBER 31,
2005 2004
------------------ -----------------
Cash and cash equivalents $ 7,055 $23,199
Working capital (1) $11,348 $ 9,087
Current ratio - to one 1.25 1.12
Stockholders' equity per common share (2) $ 14.94 $ 14.92
Debt to total capitalization (3) 53.2% 54.2%
(1) Includes restricted cash and current portion of debt associated with
asset-backed non-recourse 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 company with historically strong operating cash flow, we believe we have
little need to maintain substantial cash balances. To the extent we have net
cash from operating activities, we use it to fund capital expenditures and
service existing debt. We expect large cash outlays such as future acquisitions
to be financed primarily through externally available funds. However, we can
offer no assurance such funds will be available and, if so, on terms acceptable
to us.
21
Below is a table summarizing our cash flow:
THREE MONTHS ENDED MARCH 31,
--------------------------------------
2005 2004
------------------ --------------
Cash flows from (used in):
Operating activities $ 695 $10,633
Investing activities (9,946) (7,143)
Financing activities (6,893) (1,417)
Cash Flows from Operating Activities
Our cash flows from operating activities were as follows:
THREE MONTHS ENDED MARCH 31,
---------------------------------
2005 2004
------------- --------------
Net income plus non-cash expenses $ 8,294 $12,932
Changes in operating assets and liabilities (7,599) (2,299)
------- -------
Cash flows from operating activities $ 695 $10,633
======= =======
Non-cash expenses include depreciation of equipment and leasehold improvements,
amortization of intangibles and deferred tax expense. The 2005 decrease in cash
relating to changes in operating assets and liabilities relates primarily to the
payment of accrued liabilities ($18.1 million) in the first quarter for bonuses
and earnout payments offset by collection of accounts receivables ($11.8
million).
Cash Used in Investing Activities
For the three months ended March 31, 2005, approximately $8.8 million of our
cash was used for contingent consideration payments to prior owners of
businesses we acquired and approximately $1.1 million of our cash was used for
the purchase of fixed assets.
A substantial portion of the purchase price used to fund acquisitions has
historically been paid in cash. This is primarily due to our desire to avoid
diluting our existing stockholders. We expect acquisitions to continue to 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
For the three months ended March 31, 2005, approximately $6.9 million of cash
was used for financing activities. We used $12.3 million for the repayment of
borrowings. As of March 31, 2005, we had restricted cash of approximately $7.1
million, a decrease of $4.9 million from December 31, 2004, which will be used
to pay down the asset-backed notes issued to finance the acquisition of
LongMiller. This cash is not available for general corporate purposes, but is
solely to service securitization indebtedness incurred to finance the
acquisition of LongMiller.
In November 2003, we amended and restated our December 28, 1999 Credit Agreement
revising the amount available under the credit facility to $80.0 million for a
three year period ending December 31, 2006. In December 2003, a new participant
bank was added to the facility increasing the facility amount to $90 million.
The credit facility amount was reduced dollar for dollar by $18 million of
repayments in 2003 and 2004 on the term portion of the facility. We had $72
million available under our credit line at March 31, 2005. Our assets are
pledged to the bank group as part of the credit facility except for cash flows
from commissions to be received upon the renewals of specified inforce policies
acquired in connection with the acquisition of LongMiller. In September 2004, we
amended our credit agreement to allow for potential stock repurchases and
dividend payments. The remaining provisions of the agreement remained
substantively the same.
22
The restrictive covenants under the credit 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 restrictive covenants as of
March 31, 2005.
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 issue stock to finance future acquisitions.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At March 31, 2005, we had total outstanding indebtedness of $312.2 million, or
approximately 109.8% of total market capitalization. Our outstanding debt
consists of the following:
OUTSTANDING AMOUNT AS OF WEIGHTED AVERAGE INTEREST RATE AS
TYPE OF DEBT MARCH 31, 2005 OF MARCH 31, 2005
------------ ------------------------ ---------------------------------
Non-recourse bonds $262.8 million Fixed - 6.5%
Note to prior owner 4.4 million Fixed - 10.0%
Trust preferred 45.0 million Variable - 6.8%
On February 25, 2005, we entered into an interest rate swap with a total
non-amortizing notional value of $10 million to hedge our LIBOR-based debt. The
notional amount of the interest rate swap entered into in January 2003 amortizes
at the rate of $1.4 million per quarter. The terms of the interest rate swaps
are as follows:
EFFECTIVE NOTIONAL AMOUNT FIXED RATE VARIABLE RATE FAIR VALUE AS OF
DATE MATURITY DATE AT MARCH 31, 2005 TO BE PAID TO BE RECEIVED MARCH 31, 2005
- -------------------- --------------------- ------------------- -------------- --------------- ---------------------
February 25, 2005 December 31, 2009 $10,000 4.31% LIBOR $ 68
May 18, 2004 March 31, 2009 $ 7,000 4.44% LIBOR (1)
January 7, 2003 December 31, 2007 $15,400 2.85% LIBOR 264
----
Total $331
====
We have exposure to changing interest rates and will engage in hedging
activities, from time to time, to mitigate this risk. The interest rate swaps we
have entered into are used to hedge our interest rate exposure on the LIBOR
based variable rate debt outstanding at March 31, 2005. Interest on the
remaining $12.6 million of unhedged debt at March 31, 2005, bears interest at
three-month LIBOR plus a weighted average of 400 basis points. At our current
borrowing level, a 1% change in the interest rate will have an effect of
approximately $126 thousand on interest expense on an annual basis.
ITEM 4. CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management, including
our chief executive officer and chief financial officer, we conducted an
evaluation of our disclosure controls and procedures, as such term is defined
under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as
amended (the Exchange Act). Based on this evaluation, our chief executive
officer and our chief financial officer concluded that our disclosure controls
and procedures were effective as of the end of the period covered by this
quarterly report.
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 employee consultants and independent
producers. The following is a summary of the current material legal proceedings
pending against us.
23
FRIEDA SHUSTER, ET AL. V. HYDER MIRZA, ET AL. INCLUDING CLARK/BARDES, INC.
On May 30, 2001, we were named a defendant in a lawsuit filed in the District
Court of LaSalle County, Texas, but heard in Dallas County, Texas, alleging
gross negligence in connection with the death of an employee when the private
aircraft in which he was traveling on company business crashed. On February 12,
2004, settlement was reached with the lead plaintiff. On March 14, 2005, a jury
returned a verdict in our favor on all matters, and no damages were awarded to
the plaintiffs. The plaintiffs have the right to appeal the verdict, however, we
are confident that the outcome of any appeal would not be adverse to us.
BASSETT FURNITURE INDUSTRIES, INCORPORATED V. CLARK CONSULTING, INC. (F/K/A
CLARK/BARDES, INC.)
On November, 29, 2004, Bassett Furniture Industries, Incorporated ("Bassett")
filed a civil action against us in the United States District Court for the
Western District of Virginia, Danville Division, in which Bassett alleges, among
other things, fraud, professional negligence, breach of fiduciary duty and
breach of contract in connection with a broad-based corporate owned life
insurance program purchased by Bassett in 1994. The relief sought by Bassett
includes compensatory damages in an unspecified amount in excess of $3 million,
pre-judgment and post-judgment interest, and attorneys' fees. We believe we have
meritorious defenses to Bassett's claims and we intend to vigorously defend the
matter. On March 15, 2005, prior to filing our answer or other pleading, we
entered into a settlement agreement for $650 thousand, which resolved the matter
and the litigation has been dismissed.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On March 15, 2005, 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 agreements related to our
acquisition of the respective entities:
ENTITY SHARES
- ------ ------
Comiskey Kaufman 20,476
Coates Kenney 11,148
------
31,624
======
The sale of the securities to the entities noted above were made in reliance
upon the Section 4(2) exemption from the registration provisions of the
Securities Act of 1933, as amended.
24
ISSUER PURCHASES OF EQUITY SECURITIES
The following table sets forth information in connection with purchases made by,
or on behalf of, us or any affiliated purchaser of ours, of shares of our common
stock during the quarterly period ended March 31, 2005.
(A) (B) (C) (D)
TOTAL AVERAGE TOTAL NUMBER OF SHARES MAXIMUM NUMBER (OR
NUMBER OF PRICE PURCHASED AS PART OF APPROXIMATE DOLLAR VALUE) OF
SHARES PAID PER PUBLICLY ANNOUNCED SHARES THAT MAY YET BE PURCHASED
PERIOD PURCHASED(1)(2) SHARE PLANS OR PROGRAMS UNDER THE PLANS OR PROGRAMS(2)
---------------- --------------- -------- ---------------------- --------------------------------
January 1, 2005
through
January 31, 2005 - - -
February 1, 2005
through
February 28, 2005 35,000 $16.25 35,000 $7.21 million
March 1, 2005
through
March 31, 2005 10,000 $16.96 10,000 $7.04 million
------ ------ ------
TOTAL 45,000 $16.42 45,000
====== ====== ======
(1) In January 2003, our Board of Directors authorized the purchase of up
to 400 thousand shares of our common stock to, among other things,
fulfill our obligations under our Employee Stock Purchase Plan. The
Employee Stock Purchase Plan consists of four semi-annual offerings of
common stock beginning on each January 1 and July 1 in each of the
years 2003 and 2004 and terminating on June 30 and December 31 of each
such year. For each of the years 2005 and 2006, the Employee Stock
Purchase Plan will consist of four quarterly offerings of common stock
beginning on the first day of January, April, July and October and
terminating on March 31, June 30, September 30, and December 31 of each
such year. The maximum number of shares issued in any of the
semi-annual and quarterly offerings is 50 thousand and 25 thousand,
respectively.
(2) On November 23, 2004, our Board of Directors authorized us to
repurchase up to $10 million of our outstanding common stock on the
open market, an increase of $5 million from the original authorized
level of $5 million. On January 25, 2005, our Board of Directors
authorized us to expand our existing stock repurchase program to a
total of $15 million of our outstanding common stock, from the
previously authorized level of $10 million.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
See accompanying Exhibit Index included after the signature page of this report
for a list of the exhibits filed, furnished, or incorporated by reference in
this report.
25
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, INC.
Date May 3, 2005 /s/ Tom Wamberg
--------------------- ---------------------------
Tom Wamberg
Chairman of the Board and Chief Executive Officer
Date May 3, 2005 /s/ Jeffrey W. Lemajeur
----------------- ---------------------------
Jeffrey W. Lemajeur
Chief Financial Officer
26
EXHIBIT INDEX
-------------
3.1 Certificate of Incorporation of Clark/Bardes, Inc. (Incorporated herein
by reference to Exhibit 3.1 of our Registration Statement on Form S-1,
File No. 333-56799, filed with the SEC on June 15, 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 our 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
our Registration Statement on Form 8-A, filed with the SEC on February
28, 2002).
3.4 Certification of Amendment of Certificate of Incorporation
(Incorporated herein by reference to Exhibit 3.6 of our Quarterly
Report on Form 10-Q, File No. 001-31256, filed with the SEC on August
14, 2002).
3.5 Certificate of Amendment of Certificate of Incorporation (Incorporated
herein by reference to Exhibit 4.5 of our Registration Statement on
Form S-8, File No. 333-106538, filed with the SEC on June 26, 2003).
3.6 Bylaws of Clark, Inc. (Incorporated herein by reference to Exhibit 4.6
of our Registration Statement on Form S-8, File No. 333-106538, filed
with the SEC on June 26, 2003).
3.7 Certificate of Designation of Series A Junior Participating Preferred
Stock (Incorporated herein by reference to Exhibit 3.4 to Amendment No.
2 to our Registration Statement on Form S-1, File No. 333-56799 filed
with the SEC on August 11, 1998).
4.1 Specimen Certificate for shares of Common Stock, par value $.01 per
share, of Clark Holdings, Inc. (Incorporated herein by reference to
Exhibit 4.1 to Amendment No. 1 to our 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
Holdings, Inc. and The Bank of New York (Incorporated herein by
reference to Exhibit 4.4 of our Quarterly Report on Form 10-Q, File No.
000-24769, filed with the SEC on November 16, 1998).
31.1 Certification of Chief Executive Officer pursuant to Section 302 of
Sarbanes-Oxley Act of 2002.*
31.2 Certification of Chief Financial Officer pursuant to Section 302 of
Sarbanes-Oxley Act of 2002.*
32.1 Certification of Chief Executive Officer and Chief Financial Officer
pursuant to Section 906 of Sarbanes-Oxley Act of 2002.*
- -------------
* filed herewith
27