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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
CLARK/BARDES HOLDINGS, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 52-2103926
(State of incorporation or organization) (I.R.S. Employer Identification No.)
102 SOUTH WYNSTONE PARK DRIVE, #200
NORTH BARRINGTON, ILLINOIS 60010
(Address of principal executive offices) (Zip code)
(Registrant's telephone number including area code): (847) 304-5800
Securities Registered Pursuant to Section 12(b) of the Act:
TITLE OF SECURITIES EXCHANGES ON WHICH REGISTERED
------------------- -----------------------------
None not applicable
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
(Title of class)
JUNIOR PARTICIPATING PREFERRED STOCK, SERIES A, PURCHASE RIGHTS
PAR VALUE, $.01 PER SHARE
(Title of class)
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 13, 2000, there were 9,769,826 shares of common stock
outstanding.
As of March 13, 2000, the aggregate market value of common equity held by
non-affiliates was $67,704,033.
DOCUMENTS INCORPORATED BY REFERENCE
The definitive proxy statement for the 2000 annual meeting is incorporated
into Part III of this Form 10-K by reference.
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TABLE OF CONTENTS
PAGE
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FORWARD-LOOKING STATEMENTS................................................. 1
PART I
ITEM 1. BUSINESS.................................................... 2
ITEM 2. PROPERTIES.................................................. 14
ITEM 3. LEGAL PROCEEDINGS........................................... 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS....................................... 15
ITEM 6. SELECTED FINANCIAL DATA..................................... 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 17
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK...................................................... 38
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................. 38
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.................................. 38
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......... 39
ITEM 11. EXECUTIVE COMPENSATION...................................... 39
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................ 39
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 39
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K....................................................... 39
SIGNATURES.................................................................
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FORWARD-LOOKING STATEMENTS
This Form 10-K and the documents included or incorporated by reference in
this Form 10-K 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. Such statements may use words such as "anticipate",
"believe", "estimate", "expect", "intend", "predict", or "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 the following:
- changes in tax legislation;
- federal and state regulations;
- our dependence on a select group of insurance companies;
- our dependence on key producers and services of key personnel;
- our dependence on information processing systems and risk of errors or
omissions;
- our dependence on persistency of existing business;
- risks associated with acquisitions;
- significant intangible assets;
- competitive factors and pricing pressures; and
- general economic conditions;
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 what we may have projected. Any forward-looking statements you
read in this Form 10-K 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. All
subsequent written and oral forward-looking statements attributable to us or
individuals acting on our behalf are expressly qualified in their entirety by
this paragraph.
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PART I
ITEM 1. BUSINESS
OUR COMPANY
Clark/Bardes Holdings, Inc. wholly owns Clark/Bardes, Inc., which is the
successor corporation to Clark/Bardes, Inc., a Texas corporation, formed in
1967. Clark/Bardes Holdings and Clark/Bardes were formed in June 1998 in
contemplation of our initial public offering. The initial public offering was
completed on August 19, 1998. Our corporate headquarters is located at 102 South
Wynstone Park Drive, Suite 200, North Barrington, Illinois 60010, and our
telephone number is (847) 304-5800.
We are a nationally recognized firm that provides a variety of compensation
and benefit services to U. S. corporations, banks and healthcare organizations.
Our services include the evaluation, design, implementation and administration
of innovative compensation and benefit programs for executives, key employees
and other professionals. Over 2,200 corporate, banking and healthcare clients
use these customized programs primarily to supplement and secure benefits for
their executives, key employees and professionals and to offset the costs of
employee benefit liabilities. We arrange for our clients to finance these
programs using life insurance and other financial products. Generally our
revenue is earned from:
- consulting fees paid by our clients to evaluate and design executive
compensation and benefit plans;
- first-year and renewal commissions paid to us by the insurance companies
that underwrite the insurance policies underlying our clients'
compensation and benefit programs; and,
- fees paid by our clients for ongoing administrative and other services.
We typically receive renewal commissions and service and administration
fees as long as the insurance policies underlying our clients' programs remain
inforce.
We have three operating divisions. Each of these divisions is focused on
the evaluation, design, implementation and administration of innovative
compensation and benefit programs that help each of their clients attract and
retain executives, key employees and other professionals. Each of our divisions
operates separately from a different location with its own executive, marketing
and administrative staffs. The divisions operate separately because of the
specific expertise required to serve distinct markets and the established name
recognition of each division. Through these divisions, we are able to tailor
compensation and benefit programs and consulting services to the unique needs of
our clients.
Our Clark/Bardes division markets to large corporations and banks with over
$5 billion in assets. The Clark/Bardes division has as clients over 30 of the
top 50 banks in the United States and over 200 large corporations representing a
wide variety of industries. In addition to evaluating, designing, implementing
and administering compensation and benefit programs for large corporations, the
Clark/Bardes division also has been highly successful in providing
business-owned life insurance programs for banks. The bank programs are designed
to offset employee benefit costs, as well as to finance executive benefit
programs.
Our Bank Compensation Strategies division markets to community banks, which
typically have less than $1 billion in assets. We estimate that there are over
7,000 community banks in the United States. Bank Compensation Strategies is a
market leader with over 1,200 community bank clients. In addition to evaluating,
designing, implementing and administering compensation and benefit programs, the
Bank Compensation Strategies division also earns revenue from compensation and
incentive consulting for executives, key employees and other professionals as
well from ownership succession programs. The Bank Compensation Strategies
division also has been highly successful providing business-owned life insurance
programs to community banks.
The Clark/Bardes and Bank Compensation Strategies divisions jointly market
to banks in the $1 billion to $5 billion asset range.
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Our HealthCare Compensation Strategies division markets predominantly to
large, medium sized and not-for-profit, healthcare organizations including
healthcare systems; independent hospitals; managed care organizations; academic
medical centers and teaching hospitals; group medical practices; and hospital
associations. With over 300 clients that represent over 800 hospital and
physician groups, HealthCare Compensation Strategies is a leader in its market.
In addition to evaluating, designing, implementing and administering
compensation and benefit programs for executives, key employees and other
professionals including physicians, the HealthCare Compensation Strategies
division also offers comprehensive compensation and benefits consulting
services.
RECENT DEVELOPMENTS
On February 7, 2000, we signed a letter of intent to acquire substantially
all the assets and assume certain liabilities of a group of privately held
companies engaged in the sale of executive benefit and pension plans to medium
and large corporations.
The total purchase price of the assets, excluding assumed liabilities and
acquisition expenses are expected to be approximately $50 million consisting of:
- a cash payment at closing of $30.1 million,
- 308,428 shares of our common stock with an agreed upon value of $4.9
million
- contingent payments of $15 million, payable 86% cash and 14% CBH common
stock, based on achieving predetermined levels of earnings before
interest, taxes, depreciation and amortization for the years 2000 through
2004.
The transaction is subject to a number of conditions including an on-going
review of the target's financial and business affairs, execution of definitive
purchase agreements, approval of both companies' boards of directors and the
consent of our lenders, among other things.
On September 1, 1999, we acquired substantially all the assets and assumed
certain liabilities of The Wamberg Organization and all of the outstanding stock
of Wamberg Financial Corporation. The sole shareholder of these companies was W.
T. Wamberg, our Chairman and Chief Executive Officer. We acquired specific
operating assets, all of the remaining renewal commissions not previously
acquired and some liabilities, principally accounts payable and employee benefit
obligations. Wamberg Financial Corporation owns an airplane and was engaged in
leasing the airplane solely to The Wamberg Organization.
During 1999, one of the carriers we use, General American Life Insurance
Company experienced financial difficulties as a result of being unable to meet
withdrawal requests under certain guaranteed investment contracts General
American had issued. General American represented approximately 6.0% of total
revenue in 1998 and 4.8% of total revenue in 1999. Upon learning of these
matters, we ceased selling programs financed by insurance policies underwritten
by General American. Since that time, General American's life insurance business
has been sold to MetLife, its financial ratings upgraded, and we expect to
continue to use General American and its acquirer, MetLife, as carriers.
On June 7, 1999, we completed a private placement of 1,000,000 shares of
our common stock at $17 per share, to Conning Insurance Capital Limited
Partnership V, L. P. Conning and General American are both indirect subsidiaries
of General American Mutual Holding Company. As part of the private placement, we
granted Conning registration rights which they may use to have their shares of
our common stock registered along with any shares we may be registering with the
SEC, after December 31, 2002. Proceeds of the sale of our common stock were used
to reduce outstanding debt and for acquisitions.
ACQUISITIONS
Our acquisition program is one of the most important aspects of our growth
strategy. It has become one of the principal means by which we build on the
strengths of our existing businesses and the primary means by which we enter new
business markets such as community banks and healthcare.
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The Clark/Bardes Division
As our original and core business, the Clark/Bardes division has been
expanded by three acquisitions since September 1, 1998: Schoenke & Associates
and Wiedemann & Johnson in 1998, and The Wamberg Organization in 1999. These
acquisitions fit into our Clark/Bardes division because each markets to
corporations and large banks. As a result of these acquisitions, we gained a
substantial book of business as well as a number of talented and experienced
benefits professionals.
The Wamberg Organization. On September 1, 1999, we completed the
acquisition of The Wamberg Organization by acquiring certain operating assets,
all of the remaining renewal commission not previously acquired and some
liabilities. Prior to the acquisition, The Wamberg Organization was one of our
largest independent producers, contributing 17.5% of revenue in 1998 and 15.2%
of revenue for the year 1999. This acquisition allows us to retain all of the
acquired renewal revenues generated by The Wamberg Organization for a
twenty-year period and all new business revenue.
Bank Compensation Strategies Division
Bank Compensation Strategies, Inc. The September 1997 acquisition of Bank
Compensation Strategies, Inc., was the start of our Bank Compensation Strategies
division, which markets to community banks and now performs bank compensation
and benefit consulting.
National Institute for Community Banking. On May 18, 1999, we acquired
National Institute for Community Banking through a merger effective as of
January 1, 1999. National Institute for Community Banking is an important
regional producer in the fast growing regional banking market and, prior to the
acquisition, was a producer for our Bank Compensation Strategies division.
Banking Consultants of America and Financial Institutions Services, Inc. On
October 6, 1999, we acquired Banking Consultants of America and Financial
Institution Services as part of our continuing efforts to strengthen Bank
Compensation Strategies by acquiring strong regional companies that can be
readily absorbed into Bank Compensation Strategies operating structure.
HealthCare Compensation Strategies Division
Management Compensation Group/HealthCare. On April 5, 1999, we purchased
the assets and book of business and assumed certain liabilities of Phynque,
Inc., d/b/a Management Compensation Group/ HealthCare. Management Compensation
Group/HealthCare is a 168 employee executive benefit consulting organization
servicing the healthcare industry, and it now comprises most of our HealthCare
Compensation Strategies division. This division is headquartered in Minneapolis,
Minnesota. Before the acquisition, there was no relationship between us and
Management Compensation Group/HealthCare.
PAST, PRESENT AND FUTURE OF OUR INDUSTRY
Over the past thirty years, the design and implementation of executive
benefit programs has become more sophisticated. Competition for executives as
well as legislation affecting executive compensation and retirement planning has
required that businesses offer new, creative programs to attract and retain
talent. The financing of these programs has also become very specialized.
Effective and efficient financing can help a company create and maintain a
competitive advantage and this has led to the development of innovative
financing techniques. For example, before the 1980's, corporations and banks did
not normally use life insurance to offset the costs of employee benefit
liabilities. Since then, a number of large insurers have committed significant
resources in developing a line of business owned life insurance products for use
in insurance financed employee programs.
Historically the use of insurance has been affected by legislative change.
In the past, legislation has reduced the usefulness of traditional pension plans
for highly paid executives. This, in turn, has increased the attractiveness of
insurance financed non-qualified benefit plans. Additionally, income tax
legislation has limited interest deductibility on policy loans and reduced the
interest deduction of unrelated debt based on the unborrowed cash values of
business-owned life insurance except for policies placed on employees, officers,
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directors and 20 percent owners. We believe that legislative change will
continue to significantly affect our industry in the future. Our ability to
respond quickly to legislative initiatives is a competitive advantage, which we
can use to increase our market share.
The prospects and clients of these programs have become more sophisticated
and more demanding over time. Clients now perform extensive due diligence on the
firms they use to provide their executive benefit programs. Issues relating to
the integrity of the firm, sustainability and technological capability are now
central to their decision-making process. In addition, the client's expectation
on the level of administrative services to be provided has risen substantially.
Many once-dominant producers and groups in our industry who have not kept pace
with these changes are now faced with decreasing market share and the inability
to provide adequate administrative support to existing clients. We believe that
those producers and producer groups who have not made the necessary investment
in administrative systems and personnel will continue to experience difficulties
in satisfying their clients' specific needs and in meeting complex regulatory
requirements. For example, in the early 1990's, community banks went through a
consolidation phase. This consolidation gave bank executives a greater
appreciation and need for expertise regarding the impact of consolidation on
their compensation and benefit programs. This developed into a stronger demand
by the community banking industry for expert advice in addressing estate
planning and continuity planning. In addition, healthcare organizations have
been faced with growing challenges to attract and retain executives. The tax
status of healthcare providers, many of whom are not-for-profit healthcare
organizations, requires tailored compensation and benefits programs in which
policies are typically owned by the executives while being paid for the company.
We believe that the ever-changing legislative, economic and market
environments require product development systems and personnel that are more
sophisticated and cost intensive than most producers and producer groups are
able to justify economically. Given the highly fragmented nature of the
industry, management expects significant consolidation to occur in the future.
STRATEGY AND OPPORTUNITIES FOR GROWTH
Through our three operating divisions, our goal is to further strengthen
our role as a leading provider of innovative compensation and benefit programs
and solutions to corporations, banks and healthcare organizations throughout the
United States. To accomplish this goal, we intend to continue to:
- Leverage Our Market Reputation. Leverage our reputation as an industry
leader to expand current operations and to enter into related businesses.
- Design Innovative Programs. Use our expertise in program development
together with our continued close monitoring of legislative change, to
create and market innovative, customized programs to penetrate new
markets, and to satisfy the financial needs of our clients in a changing
regulatory and economic environment.
- Diversify Our Business. Identify and enter related businesses in which we
can profitably employ our competencies. Examples of recent expansion into
related businesses include compensation and benefit consulting, benefit
plan administrative services and marketing to the not-for-profit sector.
- Enhance Our Administrative Capabilities and Efficiencies. Distinguish
ourselves from our competitors by continuing to enhance our
administrative capabilities, providing high quality administrative
services and improving operating efficiencies.
- Pursue Consolidating Acquisitions. Take advantage of the expected
consolidation in our industry and markets; and implement our design,
distribution and service model on a wide scale to increase market share,
acquire producer and management talent, enter new markets and improve
operating margins through efficiencies achieved by acquisitions.
Most importantly, we plan to continue to provide outstanding service to our
clients.
We believe our industry offers us additional growth opportunities. We
intend to leverage our core competencies by entering into related markets such
as the outsourcing of benefit plan administration services,
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and expanding our product lines to include other executive benefits, such as;
disability income, long term care, and various retirement products. Our
reputation, comprehensive in-house expertise, sophisticated administrative
systems, quality producers and strong relationships with insurance companies,
provide us with distinct competitive advantages. We intend to increase our
market share by combining these strengths with our competencies in:
- designing proprietary programs customized to meet clients' needs;
- providing outstanding client service; and
- responding quickly to develop new products and services brought about by
regulatory and legislative changes.
We are able to offer clients expertise not available elsewhere through the
specialization of our three divisions. Our internal growth efforts will focus on
the development of these divisions.
The Clark/Bardes division has designed and currently administers over 200
client cases, covering over 167,300 policy records for executives, key employees
and other professionals. The large corporate marketplace in which the
Clark/Bardes division does business requires a significant degree of
customization. To meet the efforts of this marketplace, the division is active
in much of our product and systems development efforts. The executive, actuarial
and design staff work closely with insurance carriers to develop customized and
often proprietary products. In addition, the Clark/Bardes division systems
personnel create many of the proprietary systems platforms used by our other
divisions. Growth in this division will focus on providing additional services
to corporations, such as compensation and benefits consulting programs, as well
as marketing individual insurance retirement products to executives, key
employees and other professionals.
The Bank Compensation Strategies division services over 1,200 community
banks. Changes in the community-banking environment present numerous
opportunities for growth in this division. Community banks are becoming
increasingly sophisticated with their compensation and benefit plans as they
need to recruit effective leadership. In addition, consolidation in the
community banking industry has heightened concerns about remaining independent.
Growth opportunities for this division include the recent addition of a
compensation and benefit consulting service as well as new programs to address
estate planning and continuity planning. This division has also completed two
acquisitions of strong, regional firms in its industry.
The HealthCare Compensation Strategies division uses a comprehensive
benefits approach that encompasses a variety of insurance products, ranging from
traditional life insurance policies to disability and long-term care coverage.
With approximately 300 clients that represent over 800 hospitals and physician
groups, the HealthCare Compensation Strategies division is the market leader for
compensation and benefit planning for healthcare executives and physicians. The
healthcare industry's changing environment and complex structure offer many
opportunities for growth. These opportunities include acquiring additional
business through referrals from affiliations, agreements with healthcare
consulting organizations, and leveraging our expertise with other healthcare
sectors such as healthcare maintenance organizations and other health insurance
plans.
We are also focused on external growth. We believe our industry is
fragmented and see numerous opportunities to create better design, distribution
and service systems for our clients' programs. We are taking advantage of these
opportunities by pursuing selected acquisitions. We categorize potential
acquisition targets in the following groups:
- smaller companies that have not made the necessary investment in
technology and personnel, and are finding it harder to compete with
larger, more developed firms;
- larger and more sophisticated firms with a solid client base, owned by a
small number of producers eager to affiliate with a more established
organization; and
- firms offering executive compensation and benefit services that we
currently do not provide or to industry sectors we do not currently
serve.
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In evaluating a potential acquisition target, we identify organizations
that will:
- increase our market penetration;
- retain quality producers after the acquisition is complete;
- create cross-selling opportunities;
- provide opportunities for administrative cost savings; and
- add to our earnings per share.
Once we have identified such a target we look at factors such as operating
results, financial condition, growth potential, and the quality of its
management and producers. Acquisitions will be financed through cash from our
operations, future equity offerings or debt proceeds.
PROGRAMS AND PRODUCTS
We provide compensation and benefit consulting as well as evaluate, design,
implement and administer a diverse array of compensation and benefit programs
for executives, key employees and other professionals. Our programs are financed
by business-owned life insurance and other financial products. Business-owned
life insurance refers to life insurance policies purchased by a business that
insure the lives of a number of its employees. The business pays the premiums
on, and is the owner and beneficiary of such policies. Business-owned life
insurance based programs are used primarily to offset a client's cost of
providing employee benefits and to supplement and secure benefits for
executives, key employees and other professionals. The cash flow characteristics
of business-owned life insurance policies are designed to closely match the
long-term cash flow characteristics of a client's employee benefit liabilities.
Additionally, business-owned life insurance offers three major advantages:
(1) the cash value of the policies grows on a tax deferred basis;
(2) the policies' death benefits are received tax-free; and
(3) the tax-deferred nature of the policies provides an attractive
return.
We earn a majority of our total revenue from selling insurance products
used to fund our proprietary programs. We maintain strategic relationships with
insurance companies such as AEGON, CLARICA, Equitable, Great-West, Mass Mutual,
Nationwide, Phoenix Home Life, Prudential and West Coast Life, in which both
parties are committed to developing and delivering creative products with high
client value. We also work closely with clients to design custom products that
meet the specific organizational needs of the client and with insurance
companies to develop unique policy features at competitive pricing.
We have invested significant time and resources in cultivating
relationships with selected carriers. However, we do not consider our future
success to be dependent on any specific insurance carrier. We limit the number
of carriers with which we transact business in order to maximize our bargaining
power and resource utilization. Substantially all of the policies underlying the
programs that we market are underwritten by 20 life insurance companies, of
which seven accounted for approximately 78.9% of our first-year commission
revenue for 1997, 76.3% for 1998 and 53.6% for 1999. We believe that there are
over 50 top-tier insurance companies with the financial strength and resources
to effectively compete for large-case programs, each of which typically generate
in excess of $5 million in premiums, and several hundred carriers suitable for
our small-case business, each of which typically generate between $1 million and
$5 million in premiums.
We have entered into five-year production agreements with each of
Nationwide and Great West and a five-year product development and production
agreement with Phoenix Home Life. These production agreements require us to
market and sell specified production levels of insurance products of each of
these carriers. Each production agreement grants the insurance carrier the right
to commission offsets of up to $150,000 per year if the specified production
levels are not satisfied. Since inception, we have met the prescribed level and
we believe we will continue to reach the production level required by each of
these
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production agreements. These production agreements specify the insurance
carrier's products that we will market and sell, commission payment rates by
insurance product, software for product illustrations, mutual indemnification
provisions and short-term termination provisions. We may consider entering into
additional product development and production agreements with other insurance
companies in the future.
The following steps comprise our overall approach to the sale, design and
implementation of our compensation and benefit program:
(1) we evaluate a client's existing compensation and benefit programs
to meet that particular company's organizational needs;
(2) we design the compensation and benefit program;
(3) when needed, we perform the actuarial and insurable interest
calculations necessary to determine the amount of life insurance
an organization should purchase;
(4) we compare and present to the client available financing
alternatives and the financial strengths of each;
(5) we arrange for the placement of the insurance coverage or other
financial instruments underlying the program with a financially
stable insurance company; and
(6) we provide the long-term administrative services associated with
the program.
Our Clark/Bardes division and Bank Compensation Strategies division market
a wide variety of business-owned life insurance based programs, including
bank-owned life insurance, deferred income plans, supplemental executive
retirement plans, supplemental offset plans and group term carve out plans.
Our HealthCare Compensation Strategies division markets predominantly to
large and medium sized healthcare organizations. The unique characteristics and
concerns of our HealthCare Compensation Strategies clients greatly influence the
kinds of compensation and benefit products and programs we develop. Many
healthcare organizations are tax exempt and are less concerned about the
immediate income statement effect of the compensation and benefit programs we
implement than are our corporate and banking clients.
The following table sets forth the actual and pro forma total revenue by
division for the year ended December 31, 1998 and 1999, as if all of our
acquisitions had occurred on January 1, 1998:
YEAR ENDED DECEMBER 31,
---------------------------------------
1998 1999
------------------ ------------------
ACTUAL PRO FORMA ACTUAL PRO FORMA
------ --------- ------ ---------
(IN MILLIONS)
Clark/Bardes..................................... $45.4 $ 51.0 $ 73.5 $ 73.5
Bank Compensation Strategies..................... 29.4 29.4 30.8 30.8
HealthCare Compensation Strategies............... -- 26.5 16.4 22.5
----- ------ ------ ------
$74.8 $106.9 $120.7 $126.8
===== ====== ====== ======
OUR PRODUCTS
Bank-Owned Life Insurance. Bank-owned life insurance is business-owned life
insurance purchased by a bank. The Office of the Comptroller of the Currency
provides guidelines that tie the purchase of bank-owned life insurance to the
costs of offsetting employee benefits on an aggregate basis. We were the first
organization to implement large case bank-owned life insurance programs, which
are designed for, and marketed to, banks with assets in excess of $5.0 billion.
Through our Bank Compensation Strategies division, we market smaller case
bank-owned life insurance programs, which are used to offset benefit costs for
executives and directors of regional and community banks that generally have
assets of less than $1.0 billion. We market a wide variety of bank-owned life
insurance, including fixed yield policies, general account policies, variable
yield policies, separate account policies, and a Protected Equity Plan, a hybrid
policy which provides the minimum return of a fixed yield policy with the upside
potential of a variable yield policy. Clark/Bardes and Bank Compensation
Strategies jointly market to banks with $1 billion to $5 billion of assets.
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Deferred Income Plans. Deferred income plans allow corporate executives to
defer a portion of their current income on a tax-deferred basis. The deferred
income and interest in a properly designed and administered deferred income
plans grows on a tax-deferred basis until distributions are made to the
executive, usually at retirement. Corporations often purchase life insurance to
create an asset in order to offset the costs of the liability created by a
deferred income plan. Deferred income plans can be structured in a variety of
ways, including traditional deferred income plans, which credit the deferred
income amount with a fixed rate of interest and use fixed yield life insurance
products to offset the costs of the company's liability, and variable deferred
income plans, which credit the deferred income amount with interest based on a
bond or equity index and use variable yield life insurance products to offset
the costs of the company's liability. In an effort to provide additional
security for executives, corporations usually create a trust to hold the related
insurance policies.
Because deferred income plans provide executives with a method to defer
income at little or no cost to the corporation, management believes that the
demand for these plans will continue to rise, as corporations implement new
plans or expand the availability of existing plans.
Supplemental Executive Retirement Plans. Supplemental executive retirement
plans are specifically designed to supplement the dollar limitation on benefits
paid from qualified pension plans. The 1993 Omnibus Budget Reconciliation Act
lowered the maximum dollar amount of compensation that can be used to determine
the pension benefits payable to an executive from a qualified plan to $160,000
and had other significant adverse effects on defined benefit, defined
contribution and 401(k) plans. As a result, non-qualified plans such as
supplemental executive retirement plans, which are not subject to the same
stringent rules, have increased in popularity. Many supplemental executive
retirement plans are funded with the same insurance products and strategies used
to fund deferred income plans.
Supplemental Offset Plans. Supplemental offset plans are designed to
supplement an executive's income by restoring retirement benefits previously
limited by legislative changes. Supplemental offset plans are funded with
insurance policies using a technique commonly known as "split dollar". Ownership
rights to an individual policy are shared between the corporation and the
executive. The corporation and the executive share in the insurance policy's
increasing cash value and death benefits. The corporation pays the premiums, but
recovers these expenditures from its share of the policy's proceeds. The
executive's interest in such policy is targeted to equal the present value of
the retirement benefits due at the time of such executive's retirement.
Group Term Carve Out Plans. Currently, a corporation can provide its
employees with a group term life insurance policy death benefit of up to $50,000
on a tax-free basis. The cost of providing a death benefit in excess of $50,000
is currently taxed to the employee as ordinary income. Group term carve out
plans replace the taxable portion of the group term life insurance plan with
permanent life insurance. Group term carve out plans often provide a greater
amount of insurance and post-retirement death benefit to the employee at a
competitive overall cost. The corporate plan sponsor is not an owner or
beneficiary of the permanent life insurance policies.
Compensation Consulting. Our HealthCare Compensation Strategies and Bank
Compensation Strategies divisions have leading programs in base salary, short
term and long term incentives, deferred compensation, and other compensation
design plans. The Clark/Bardes division is now initiating similar programs for
its clients.
AlignOne. A specialized integrated executive compensation and benefit
program where CBI performs a complete assessment of a company's executive
benefit needs and then designs a program that individualizes executive benefits,
providing a web-based tracking tool for each executive.
Community Bankers Scholarship Program. The Community Bankers Scholarship
Program is designed for community banks that wish to offer college scholarships
for students within their communities. This turnkey program utilizes life
insurance to provide a cost-effective method for financing the annual cost of
the scholarships. Currently, the Community Bankers Scholarship Program is
marketed solely through our Bank Compensation Strategies division.
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Disability Income Plan. Many corporations currently provide group
Disability Income Protection for their employees. Unfortunately, these plans
have caps that are not sufficient to provide reasonable income replacement for
executives in the event of a disability. Disability Income Plans marketed by our
Clark/Bardes and HealthCare Compensation Strategies divisions supplement the
group plans currently in place, and provide additional income for executives in
the event of a disability.
ExecuFLEX Program. Our HealthCare Compensation Strategies division provides
a total compensation planning approach to the not-for-profit health care market
through its "ExecuFLEX" program. The program includes a base level of benefits,
such as medical, dental, vision, long-term disability, long-term care, and group
term life insurance. In addition, participants are provided an allowance made up
of company contributions and voluntary personal deferrals. The flex allowance is
used to supplement base coverage and to add to their retirement funding. The
ExecuFLEX program is designed to provide maximum flexibility to the participants
at a minimal cost to the organization. The success of ExecuFLEX has led us to
offer the program to companies serviced by all of our operating divisions as
well as additional market segments within the health care industry.
ADMINISTRATIVE SERVICES
We believe that we are recognized as an industry leader in providing high
quality, unique services to our clients. We have developed state of the art
administrative capabilities necessary to service the executive benefit and
insurance programs we market. As of December 31, 1999, we administered over
190,000 benefit and insurance records for over 2,200 clients. As of the same
date, the insurance policies underlying our employee benefit programs
represented a total of approximately $72 billion of inforce insurance coverage
as follows:
BANK HEALTHCARE
CLARK/BARDES COMPENSATION COMPENSATION
DIVISION STRATEGIES STRATEGIES TOTAL
------------ ------------ ------------ -----------
Number of benefit records
administered...................... 167,300 9,200 13,500 190,000
Number of clients................... 200 1,200 800 2,200
Amount of inforce coverage.......... $62 billion $5 billion $5 billion $72 billion
We approach administrative service opportunities with a differentiation
strategy to assure our clients' unique requirements and needs are served through
customized, value-added services and intensive support, creating brand and
client loyalty and resulting in lower sensitivity to price. We further
differentiate ourselves by employing a focused strategy for a particular buyer
group through each of our three divisions. For instance, we service clients in
the community banking industry through our Bank Compensation Strategies division
and not-for-profit healthcare organizations through our HealthCare Compensation
Strategies division with an insider's view of each market which results in
providing high quality administrative services customized to a client's needs
while achieving lower costs.
We offer customized enrollment and administrative services for
insurance-financed employee benefit programs, including business-owned life
insurance and non-qualified benefit plans. Due to the many complex requirements
of the administrative process, each client is assigned an account team comprised
of specialists who are responsible for servicing the needs of that client. The
administrative services provided by each of our divisions' account specialists
include coordinating and managing the enrollment process, distributing
communication materials, monitoring financial, tax and regulatory changes,
providing accounting reports, providing periodic benefit statements to
participants performing annual reviews and reporting historical and projected
cash flow and earnings. Each division's account specialists are supported by
actuarial, financial and insurance specialists.
We build our client base by fostering long-term client relationships. To
this end, the training and focus of each account team centers on our goal of
delivering the highest quality program implementation and administrative
services in the industry. This benefits both the client, through top
professional support, and the producer, who can focus more closely on the sales
process. To further emphasize long-term client relationships, we enter into
administrative agreements with each client, in most cases for a term of five to
ten
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years. Finally, our method of calculating the revenue splits with our producers'
attempts to ensure that the revenue from new sales is not required to subsidize
the administrative costs of existing cases.
We believe that our commitment to providing high quality client and
administrative services is one of the primary reasons that we have achieved the
success we enjoyed to date. We believe that our continued focus on, and
investment in, the personnel and technology necessary to deliver this level of
client service will bolster our reputation as an industry leader.
DISTRIBUTION
Each of our divisions markets our employee benefit programs and related
administrative and consulting services through a group of in-house producers and
producers in independently operated sales offices located throughout the United
States. As of December 31, 1999, we were represented by 67 producers in 48 sales
offices located in 26 states throughout the United States. Producers owned
approximately 13.3% of the outstanding shares of our common stock as of December
31, 1999.
Our independent producers enter into agency agreements with us to market
programs and services on behalf of Clark/Bardes on an exclusive basis. Each
agency agreement defines the duties of the producer to solicit and sell covered
business, the revenue splits between the producer and us, and includes a
confidentiality agreement and operating guidelines and standards. The agency
agreements can generally be terminated by either party with either 90 or 180
days written notice depending upon the individual agreement. We typically pay a
substantial portion of the total sales revenue to the independent producer,
usually from 50% to 65% of gross revenue. Most of our independent producers are
responsible for their own selling expenses and overhead. Non-solicitation
clauses, which prohibit either party from soliciting or selling insurance or
administrative services to the other party's clients are typically three years
with respect to separate clients and usually five years with respect to joint
clients, as defined in the agency agreement. In 1998, we began increasing our
number of in-house producers. Through acquisitions of companies such as
Management Compensation Group/HealthCare, we now generate a significant portion
of our sales revenue through employee-producers, in which we incur the general
and administrative expense of the sales producers in exchange for a lower
commission and fee expense.
Our top three producers collectively accounted for approximately 34.4% of
1998 revenue and 32.0% of 1999 revenue. The largest producer in each period was
The Wamberg Organization, which represented 17.5% of 1998 revenue and 15.2% of
total 1999 revenue. With the acquisition of independent producers such as The
Wamberg Organization and the National Institute for Community Banking, our
dependence on key large producers has decreased. We recognize the importance of
attracting and retaining qualified, productive sales professionals. We and our
producers actively recruit and develop new sales professionals in order to add
to our distribution capacity. Further, our acquisition strategy focuses on
retaining the productive sales professionals of the entity being acquired.
EMPLOYEES
As of December 31, 1999, we employed approximately 439 people as follows:
BANK HEALTHCARE
COMPENSATION COMPENSATION
CLARK/BARDES STRATEGIES STRATEGIES TOTAL
------------ ------------ ------------ -----
Client services......................... 68 24 71 163
Product design.......................... 15 16 1 32
Information systems..................... 14 10 5 29
Sales and marketing..................... 22 18 62 102
Accounting and finance.................. 13 6 5 24
Executive and administrative............ 27 18 24 69
Corporate Headquarters.................. -- -- -- 20
--- -- --- ---
Total......................... 159 92 168 439
=== == === ===
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The majority of our employees have college degrees, with several holding
advanced degrees in law, accounting, business administration or actuarial
science. Professional development is a highly valued industry characteristic,
and insurance and financial planning designations such as FSA, ASA, CLU, CEBS,
ChFC, CFP and FLMI are held by a large number of our employees. We actively
encourage continuing education for employees through expense reimbursement and
reward plans. Due to the specialized nature of the business, we often recruit
experienced persons from insurance companies, consulting firms and related
industries.
MARKETING SUPPORT
We have made a substantial investment in establishing highly qualified
marketing departments in each division. Each marketing department's primary
focus is to support our sales efforts. Each marketing department develops and
tracks sales leads for the producers and provides marketing materials and
research. Collectively, through our marketing departments, we distribute
external newsletters and other program update pieces to approximately 15,000
current and prospective clients throughout the year and sponsor telephone
conferences and meetings featuring industry experts and nationally recognized
speakers. Finally, the public relations and corporate marketing functions
coordinates the publication of articles written by our employees and producers
and ensures that our representatives are quoted as information sources in major
national publications. We believe that the efforts of our marketing departments
have helped make us a readily identifiable leader in the insurance-financed
employee benefit industry.
PRODUCER SUPPORT
Our producers are supported by a design and analysis department in each of
the three divisions. The primary responsibility of each of our design and
analysis departments is to design customized compensation and benefit programs
that will effectively offset the costs of a client's employee benefit
liabilities. The design analyst works with the producer to identify the needs of
a prospective client. The design analyst then investigates the availability and
pricing of products that are compatible with that client's needs. Finally, the
analyst develops the financial projections necessary to evaluate the benefit
costs and cost recoveries for the prospective client, together with an analysis
of alternatives to assist the client in making a decision.
TECHNOLOGY, ADMINISTRATION AND INTEGRATION
We have made a significant investment in developing proprietary modeling
and administrative systems to support the unique characteristics of benefit
programs financed life by insurance and other financial instruments. Reflecting
the diversity of our three divisions, each has its own computer based
information system and professional support staff. All the systems have been
designed and are operated to support the special processing needs of a diverse
client base. The systems use a relational database to facilitate easy access to
client, participant and benefit information. In addition, a telephonic
application allows individual plan participants twenty-four hours a day access
to account balance and unit price information.
Local area networks link all of our personal computers. Internet mail is
utilized to communicate with clients and sales offices. We intend to continue to
invest in technology and system development in order to offer additional
services to clients, support new markets, integrate acquired operations, improve
productivity and reduce costs. For example, in 1999, we implemented intranet and
collaborative workgroup tools to speed communications and to allow information
to be easily shared across the organization. Further, as we continue to grow
internally and by acquisitions, management intends to establish a wide area
network to facilitate communications across all locations.
We maintain a disaster recovery plan for local area network and Unix
environments in order to minimize downtime in the event of a major system
failure. The local area network file servers and Unix database servers are
located in a physically secure areas and all systems are password-protected to
ensure access is limited to authorized individuals. We have not experienced any
year 2000 related difficulties directly or indirectly with clients, carriers or
suppliers.
When acquiring small businesses, we integrate their information systems as
well as their staffs, accounting and administrative systems. In this manner, we
are able to give them technical and administrative
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systems support they could not achieve as a stand-alone unit and, at the same
time, improve their level of client service.
PERSISTENCY
Over the last five years, we have experienced an overall average annual
persistency rate of 95% of the accrued inforce insurance underlying our
programs. We believe that these high persistency rates are attributable to a
number of factors.
- The underlying purpose of the compensation and benefit programs is to
offset the costs of employee benefit liabilities and provide long-term
benefits to executives, key employees and other professionals. Therefore,
the policy is held by the corporation to maturity, regardless of whether
any particular individual insured remains with the client.
- The tax-paying clients of our Clark/Bardes or Bank Compensation
Strategies divisions would incur unfavorable tax consequences upon the
surrender of the underlying business-owned life insurance policy. The
cash value of the policy, to the extent it represents amounts beyond the
cash premiums paid by the allowable charges against the insurance
account, or gain on insurance, is taxed immediately at ordinary income
rates upon surrender, and an additional penalty tax applies in certain
instances. A client often has the option of making a tax-free exchange to
another policy. Upon the exchange, however, the client would incur
substantial insurance company-related costs, such as premium taxes.
- The high persistency rates of all of our divisions are partially
attributable to provisions in many interest rate sensitive products that
disallow a full-scale withdrawal or exchange.
- We provide a high degree of ongoing client service. We believe that the
quality of our services provided through each of our divisions enhances
persistency by distinguishing us from our competitors.
As we continue to diversify and acquire companies in different market
segments, our persistency can begin to vary significantly. While we intend to do
all we can to retain our clients, service their accounts and sustain our
persistency, there can be no assurance our persistency rates will remain at this
level.
COMPETITION
The marketing, design and administration of insurance-financed employee
benefit programs is highly competitive. We compete with consulting firms,
insurance agents, brokers, third party administrators, producer groups and
insurance companies. A number of our competitors offer attractive alternative
programs. The direct competitors of our Clark/Bardes division include:
- Compensation Resource Group;
- Harris, Crouch, Miller, Scott, Long and Mann;
- Management Compensation Group (not related to Management Compensation
Group/HealthCare);
- Newport Group;
- TBG Financial; and
- The Todd Organization (not affiliated with Melvin G. Todd, Chief
Executive Officer of the Clark/ Bardes division).
The competitors of our Bank Compensation Strategies division include The
Benefit Marketing Group, The Todd Organization, and individual insurance agents
in the communities where the community banks are located. Additionally, the
community banking industry is constantly consolidating, which may reduce the
number of potential bank clients for Bank Compensation Strategies. In
competition with our HealthCare Compensation Strategies division are; Hewitt
Associates, Towers Perrin, Mercer Consulting Group and Hay Group, Inc. These
firms, however, do not focus exclusively on healthcare and do not restrict their
practices to executive and physician compensation.
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We compete for clients on the basis of reputation, client service, program
and product offerings and the ability to tailor insurance products and
administrative services to the specific needs of a client. Although certain
competitors may offer attractive programs on pricing, management believes that
we are in a superior competitive position in most, if not all, of the meaningful
aspects of our business, because of our track record, name recognition, industry
focus, specialization and industry expertise. We do not consider our direct
competitors to be our greatest competitive threat. Rather, we believe that our
most serious competitive threat will likely come either from large, diversified
financial entities which are willing to expend significant resources to gain
market share or from the larger competitors that pursue an acquisition or
consolidation strategy similar to ours.
GOVERNMENT REGULATION
State governments extensively regulate our life insurance activities. We
sell our insurance products in all 50 states through licensed insurance
producers. States have broad powers over licensing, payment of commissions,
business practices, policy forms and premium rates and insurance laws vary from
state to state. While we have not encountered regulatory problems in the past,
we cannot assure you that we will always be in compliance with all applicable
regulatory requirements of each state. Additionally, we cannot be sure if we or
our producers will encounter regulatory problems in the future, including any
potential sanctions or penalties for operating in a state without all required
licenses.
While the federal government does not directly regulate the marketing of
most insurance products, some products, such as variable life insurance, must be
registered under the federal securities laws. As a result, our producers and
entities with which we have administrative service agreements related to selling
those products must be registered with the National Association of Securities
Dealers. We market these insurance products through a registered broker-dealer
with which we have a network agreement. While we have not had any regulatory
problems in the past related to these products, we cannot be sure if we or our
producers will not have regulatory problems in the future.
ITEM 2. PROPERTIES
The following table sets forth certain information with respect to the
principal facilities used in our operations, all of which are leased.
CURRENT
MONTHLY SQUARE LEASE
DIVISION -- LOCATION RENT FOOTAGE EXPIRES
- -------------------- -------- ------- -------------
Clark/Bardes -- Dallas, Texas................... $ 43,847 35,619 April 2001
Bank Compensation Strategies -- Bloomington,
Minnesota..................................... 32,266 15,000 August 2005
Clark/Bardes -- Germantown, Maryland............ 20,746 9,831 December 2006
HealthCare Compensation
Strategies -- Minneapolis, Minnesota.......... 91,990 56,231 December 2003
Clark/Bardes Holdings -- North Barrington,
Illinois...................................... 12,500 11,085 February 2009
-------- -------
$201,349 127,766
======== =======
ITEM 3. 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 producers. At this time, we do not
believe that any pending litigation will have a material adverse effect on our
business, financial condition and operating results.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of the fiscal year
covered by this Form 10-K to a vote of our security holders, through the
solicitation of proxies or otherwise.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
On August 19, 1998, we completed an initial public offering of the Common
Stock at a price of $9.00 per share. Our common stock trades on the over the
counter market and is quoted on the Nasdaq National Market under the symbol
"CLKB". The following table sets forth the high and low closing sales price as
reported by the Nasdaq National Market for our common stock for the periods
indicated.
HIGH LOW
------- -------
1998
Third quarter............................................. $10.000 $ 7.125
Fourth quarter............................................ $18.875 $ 8.250
1999
First quarter............................................. $18.250 $13.063
Second quarter............................................ $20.500 $13.000
Third quarter............................................. $20.625 $16.000
Fourth quarter............................................ $20.625 $12.250
2000
First quarter to March 13{................................ $17.250 $14.063
As of March 13, 2000, the closing price of our common stock was $14.063,
there were 9,769,826 shares of our common stock outstanding, and there were
approximately 470 holders of record and 961 beneficial holders of our common
stock.
DIVIDEND POLICY
Prior to our reorganization in July 1998, we conducted our business as an S
corporation for federal income tax purposes. Under this form of organization,
all earnings were deemed to be passed through directly to our shareholders,
whether distributed or not. In order for our shareholders to pay the federal
income taxes imposed by this form of organization, we made distributions to
them. These are shown as distributions or dividends in prior periods in our
financial statements.
We intend to retain future earnings to fund growth and do not plan to pay
any cash dividends in the foreseeable future. Under the terms of a credit
agreement with Bank One, we cannot declare or pay dividends or return capital to
our stockholders, nor can we authorize or make any other distribution, payment
or delivery of property or cash to our stockholders, unless Bank One gives its
prior written consent.
RECENT SALES OF UNREGISTERED SECURITIES
On April 5, 1999, we issued 326,363 shares of our common stock as part of
the purchase price for our acquisition of MCG/HealthCare. The issuance was
exempt from registration under Section 4(2) of the Securities Act of 1933.
On May 17, 1999, we issued 99,851 shares of our common stock as part of the
merger consideration in conjunction with our acquisition of NICB. The issuance
was exempt from registration under Section 4(2) of the Securities Act of 1933.
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On July 7, 1999, we sold 1,000,000 unregistered shares of our $.01 par
value stock to Conning Insurance Limited Capital Partnership for $17 per share
or $16.9 million net of associated expenses. At December 31, 1999, Conning's
shares represented 10.4% of our total outstanding common stock. This issue was
exempt from registration under Section 4(2) of the Securities Act of 1933.
ITEM 6. SELECTED FINANCIAL DATA
The following historical information of Clark/Bardes should be read in
conjunction with information included elsewhere herein, including the financial
statements and notes thereto and "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations." The results of operations
presented below are not necessarily indicative of the results of operations that
may be achieved in the future.
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1995 1996 1997(1) 1998(2) 1999(3)
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
STATEMENT OF OPERATIONS
Total Revenue.................... $ 26,972 $ 33,242 $ 49,455 $ 74,766 $ 120,760
Commission and Fee Expense....... 16,890 21,049 32,439 46,111 53,108
---------- ---------- ---------- ---------- ----------
Gross Profit........... 10,082 12,193 17,016 28,655 67,652
---------- ---------- ---------- ---------- ----------
Operating Expenses
General and Administrative..... 7,955 8,579 11,504 19,616 45,153
Amortization of Intangibles.... -- -- 295 1,232 4,370
Non-recurring Expense(4)....... -- -- -- 4,800 --
---------- ---------- ---------- ---------- ----------
Income from
Operations........... 2,127 3,614 5,217 3,007 18,129
Interest
Income......................... 200 121 189 565 329
Expense........................ (7) -- (1,112) (3,166) (3,548)
---------- ---------- ---------- ---------- ----------
Income Before Taxes.............. 2,320 3,735 4,294 406 14,910
Income Taxes(5).................. 102 181 60 817 6,079
---------- ---------- ---------- ---------- ----------
Net Income (Loss)...... $ 2,218 $ 3,554 $ 4,234 $ (411) $ 8,831
========== ========== ========== ========== ==========
Basic Net Income (Loss) per
Common Share
Net Income (Loss).............. $ 0.39 $ 0.75 $ 1.03 $ (0.08) $ 0.97
Weighted Average Shares........ 5,727,607 4,709,252 4,119,387 5,006,009 9,077,775
Diluted Net Income (Loss) per
Common Share
Net Income (Loss)................ $ 0.39 $ 0.75 $ 0.99 $ (0.08) $ 0.95
Weighted Average Shares.......... 5,727,607 4,709,252 4,398,593 5,006,009 9,328,939
Dividends per common share....... $ 0.29 $ 0.36 $ 1.32 $ -- $ --
BALANCE SHEET
Cash and Cash Equivalents........ $ 3,969 $ 4,882 $ 3,783 $ 12,102 $ 4,832
Total Assets..................... 9,887 8,525 36,901 67,493 124,859
Debt:
Current..................... 4,325 4,344 7,252
Long Term................... 32,838 24,713 35,473
Total Liabilities................ 4,099 4,713 42,581 37,795 62,491
Stockholders' Equity (Deficit)
*(6)........................... 5,788 3,812 (5,680)* 29,698 62,368
- ---------------
(1) Includes the results of operations attributable to the assets acquired from
Bank Compensation Strategies for the period beginning September 1, 1997, the
effective date.
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(2) Includes the results of operations attributable to the assets acquired from
Schoenke from the period beginning September 1, 1998, and also includes the
results of operations attributable to the assets acquired from Wiedemann &
Johnson for the period beginning November 1, 1998.
(3) Includes the results of operations attributable to the acquisition of The
Wamberg Organization and Wamberg Financial Corporation for the period
beginning September 1, 1999 and the purchase of a portion of the renewal
revenue due under the principal office agreement with W. T. Wamberg and The
Wamberg Organization for the period beginning January 1, 1999. Also includes
the results of operations attributable to the acquisition of National
Institute for Community Banking, effective on January 1, 1999. Also includes
the results of operations attributable to the acquisition of Management
Compensation Group/HealthCare for the period beginning April 1, 1999.
(4) We accrued $4.8 million in July 1998 for the fair value of put warrants, we
extinguished these warrants representing 1,525,424 shares of common stock,
by paying $4.8 million to the warrant holders in connection with our initial
public offering. The amount of this payment, which was not tax deductible,
was based upon a negotiated formula determined in the context of our
contractual commitments under the warrants and our business relationship
with the warrant holders.
(5) For periods prior to July 31, 1998, income tax expense reflects the
Clark/Bardes' liability for state income taxes only. No provision for
federal income taxes had been made prior to July 31, 1998 because our
predecessor company elected to be treated as an S corporation for federal
income tax purposes.
(6) Reflects the decrease in stockholders' equity resulting from our predecessor
company's repurchases of 2.6 million shares of its common stock for total
consideration of approximately $14.0 million and distributions totaling $4.3
million to stockholders in 1997.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(Tables shown in thousands of dollars, except 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-K.
OVERVIEW
1999 marked a year in which we achieved solid financial results as we
continued to grow internally and through acquisitions. We reported net income of
$4.9 million, or $0.50 per diluted share, for the fourth quarter, and net income
of $8.8 million, or $0.95 per diluted share, for the year ended December 31,
1999. In 1998, we reported net income of $2.2 million, or $0.27 per diluted
share, for the fourth quarter and a loss of $411,000, or $0.08 per diluted share
for the twelve month period ended December 31, 1998.
Our results for the year ended December 31, 1998, were adversely impacted
by a non-recurring operating charge of $4.8 million to reflect a fair value
adjustment for put warrants previously issued to some of our former note
holders. In addition, we received the benefit of a deferred tax asset of $1.8
million arising from conversion from an S to a C corporation. Had these items
not occurred, net income for the twelve months ended December 31, 1998, would
have been $3.2 million, or $0.57 per diluted share.
ACQUISITIONS
Our acquisition program remains unchanged since it began with the purchase
of Bank Compensation Strategies in September 1997. We seek to acquire
well-managed and growing companies that will provide an entry into a new and
expanding market, as did BCS and MCG, or add to existing businesses as did
Schoenke and The Wamberg Organization.
The companies we acquire are typically privately owned and structured as S
corporations for federal income tax purposes, where virtually all of the income
is passed on to the shareholders. Accordingly, our evaluation focus is on the
quality of the management and future earnings and growth potential. Typically,
we
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also acquire the financial value embedded in a strong book of recurring renewal
business to be realized for many years after the acquisition takes place.
Banking Consultants of America and Financial Institutions Services, Inc.
On October 6, 1999, we acquired all of the assets of Banking Consultants of
America and Financial Institutions Services, Inc. Banking Consultants of America
and Financial Institutions Services, Inc. is a strong regional firm in the
Memphis, Tennessee area and was acquired as part of our Bank Compensation
Strategies division. The purchase price was $1.4 million and approximately
$28,000 of expenses. The acquisition was accounted for as a purchase and the
entire purchase price was allocated to the inforce revenue acquired in the
transaction.
The Wamberg Organization and Wamberg Financial Corporation
On September 1, 1999, we acquired substantially all the assets and assumed
certain liabilities of The Wamberg Organization, and stock of Wamberg Financial
Corporation. The sole shareholder of both of these companies was W. T. Wamberg,
our Chairman and Chief Executive Officer. We acquired all of the remaining
renewal commission not previously acquired, and some liabilities, principally
operating expenses and employee benefits. In addition, we acquired intellectual
property, customer lists, and all rights under existing contracts, leases and
agreements as well as an airplane leased to the Wamberg Organization by Wamberg
Financial Corporation.
The Wamberg Organization has historically produced our largest volume of
revenue -- 17.5% of total revenue in 1998 and 15.2% to August 31, 1999. In light
of the relationship between The Wamberg Organization, Wamberg Financial
Corporation, W. T. Wamberg and us, our board appointed a special committee of
independent, non-employee directors to review the terms of the transaction.
After analyzing the matter and considering all relevant issues, the special
committee recommended that our board approve the transaction.
The total price of the net assets of The Wamberg Organization and the stock
of Wamberg Financial Corporation was $18.0 million and provided for:
- a cash payment of $12.4 million of which $360,000 is held in escrow;
- a cash payment to W. T. Wamberg of $50,000 for his shares of Wamberg
Financial Corporation;
- the direct payment of $1.5 million for outstanding loans of The Wamberg
Organization;
- the assumption of a $3.8 million note payable for the purchase of a
corporate aircraft; and
- expenses of approximately $265,000.
The cash portion of $14.2 million was funded through our existing cash
balances.
In addition to the acquisition price on September 1, 1999, the total
purchase price will include the unamortized balance of $6.9 million resulting
from a purchase on January 4, 1999, of the right to receive approximately 27.5%
of the renewal revenue from certain inforce policies, due The Wamberg
Organization, for a cash payment of $7.5 million. Concurrent with the
acquisition of The Wamberg Organization, we purchased all of the renewal revenue
not acquired on January 4, 1999.
The total initial cost of acquiring the Wamberg Companies is $24.9 million
which includes the $6.9 million unamortized balance of the January purchase. In
addition, cash payments of $11.9 million will be made if The Wamberg
Organization attains certain operating income targets in years 1999 through
2002. These payments are conditional solely on achieving the earnings objectives
and no other condition, such as the continued employment of Mr. Wamberg, has
been imposed. As of December 31, 1999, the financial objectives for that year
had been met and a cash payment of $1.5 million will be made to W.T. Wamberg in
the first quarter of 2000 and will be recorded as additional purchase price. The
acquisition is being accounted for as a purchase and the entire excess purchase
price paid has been allocated to the net present value of future
18
21
revenue to be received until September 1, 2018. This is being amortized on the
basis of the lapsing annual net present value of the remaining years revenue.
On December 22, 1999, the airplane was sold to a leasing company for $4.3
million and Wamberg Financial Corporation entered into a ten-year lease for the
plane at a rental of $27,924 per month. The net proceeds from the sale were used
to repay the note incurred for the original purchase and the net, after-tax
proceeds have been reflected as a reduction of the purchase price. Under the
terms of the lease, Wamberg Financial Corporation can purchase the plane for 85%
of its original cost of $3.7 million after six years or, after ten years, renew
the lease, return the plane or purchase the plane at fair value at that time.
For the period prior to the acquisition, The Wamberg Organization and
Wamberg Financial Corporation had combined revenue and net income as follows:
YEARS ENDED SIX MONTHS
DECEMBER 31, ENDED
---------------- JUNE 30,
1998 1997 1999
------- ------ -----------
Revenues............................................... $10,169 $8,829 $7,628
Net Income............................................. $ 4,005 $3,000 $2,396
Both The Wamberg Organization and Wamberg Financial Corporation were S
corporations and did not pay federal income taxes directly.
The pro forma information below presents our results of operations and
those of The Wamberg Organization and Wamberg Financial Corporation as if the
acquisition occurred on January 1, 1998, reflecting the purchase method of
accounting.
YEARS ENDED
DECEMBER 31,
------------------
1999 1998
-------- -------
Pro forma:
Revenues.................................................. $120,760 $74,766
Net income................................................ 6,751 725
Diluted earnings per share................................ .72 .13
National Institute for Community Banking
On May 18, 1999, we acquired National Institute for Community Banking
(NICB), which, by agreement with its shareholders, was effective January 1,
1999. The acquisition was consummated by merging NICB into us with the NICB
shareholders receiving 99,851 shares of our common stock at $16 per share for a
total value of $1.6 million. As part of the agreement, the NICB shareholders
will receive an additional 384,452 shares of our common stock as consideration
if stipulated revenue and income goals during the years 1999 through 2002 are
achieved. Acquisition expenses were approximately $130,000. NICB was acquired as
an addition to and an expansion of our BCS division.
During 1999, the former NICB shareholders achieved the revenue and income
goals set forth in the agreement for 1999 and an additional 96,113 shares CBH
common were issued to them on January 26, 2000. The value of the shares was $1.4
million and will be accounted for as additional goodwill amortized over
twenty-four years.
MANAGEMENT COMPENSATION GROUP/HEALTHCARE
On April 5, 1999, we purchased the assets and business and assumed certain
liabilities of Phynque, Inc., d/b/a Management Compensation Group/HealthCare
(MCG) for a purchase price of $35.9 million consisting of the following:
- a cash payment of $13.8 million;
- a promissory note for $8.7 million;
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22
- 326,363 shares of common stock, having an aggregate value of $5.3 million
based on the closing price of the common stock on April 5, 1999;
- the direct payment of $3.6 million for certain outstanding loans; and
- the assumption of $4.2 million of liabilities and payment of
approximately $372,000 of closing costs.
The assets acquired included cash, receivables, equipment, intellectual
property, and client lists. The liabilities assumed include commissions,
employee benefits and operating expenses. The $17.8 million cash portion of the
purchase price was funded by a borrowing under our credit facility. The
promissory note is payable in thirty-two equal quarterly installments of
principal and interest at 10% per annum starting April 5, 2000 and it is
guaranteed personally by W. T. Wamberg, our Chairman and Chief Executive
Officer. MCG is a 168 employee executive benefit consulting organization
servicing the healthcare industry and is headquartered in Minneapolis,
Minnesota.
The acquisition of MCG marked our entrance into the not-for-profit
healthcare executive benefit and compensation plan business with the creation of
our newest major operating division, HealthCare Compensation Strategies.
For the periods prior to the acquisition, MCG had revenue and net income as
follows:
FISCAL YEARS ENDED SIX MONTHS
SEPTEMBER 30, ENDED
------------------- MARCH 31,
1998 1997 1999
-------- -------- ----------
Revenues............................................... $26,000 $21,939 $10,986
Net Income (loss)...................................... $ 1,816 $ 379 $(1,696)
MCG was an S corporation and, accordingly, did not pay federal income
taxes.
The pro forma information below presents our results of operations and that
of MCG combined as if the acquisition had occurred on January 1, 1998,
reflecting the purchase method of accounting.
YEARS ENDED DECEMBER 31,
-------------------------
1999 1998
---------- ----------
Pro forma:
Revenues.................................................. $126,518 $100,876
Net income (loss)......................................... 7,464 (1,826)
Diluted earnings (loss) per share......................... .79 (.34)
POSSIBLE ACQUISITION
On February 7, 2000, we signed a letter of intent to acquire substantially
all the assets and assume certain liabilities of a group of privately held
companies, engaged in the sale of executive benefit and compensation plans to
medium and large corporations.
The total purchase price of the assets, excluding assumed liabilities and
acquisition expenses is expected to be approximately $50 million consisting of:
- a cash payment at closing of $30.1 million,
- 308,428 shares of our common stock with an agreed upon value of $4.9
million
- contingent payments of $15 million based on achieving predetermined
levels of earnings before interest, taxes depreciation and amortization
for the years 2000 through 2004.
This acquisition is expected to be funded by borrowing under CBI's bank
line of credit.
The acquisition will be accounted for as a purchase with the purchase price
allocated first to the net present value of future cash flow from renewal
revenue and the remainder, if any, to goodwill.
20
23
The transaction is subject to a number of conditions including an on-going
review of the target's financial and business affairs, execution of definitive
purchase agreements, approval of both companies' boards of directors and the
consent of our lenders, among other things.
OTHER DEVELOPMENTS
Private Placement with Conning
On June 7, 1999, we sold 1,000,000 shares of our common stock at $17 per
share to Conning Insurance Capital Limited Partnership V, L. P. (Conning) in a
private placement. As part of the private placement, we granted Conning
registration rights, which they may use to have their shares of our common stock
registered along with any shares we may be registering with the SEC, after
December 31, 2002.
We also appointed a representative of Conning, Steven F. Piaker, Senior
Vice President, to our board of directors. We further agreed that, when Mr.
Piaker's term expires, we would use our best efforts to elect a Conning
representative to our board of directors. Proceeds of the $17 million sale of
our common stock were used to reduce outstanding debt and for acquisitions.
General American Life Insurance Company
During 1999, one of the carriers we use, General American Life Insurance
Company experienced financial difficulties as a result of being unable to meet
withdrawal requests under certain guaranteed investment contracts General
American had issued. General American represented approximately 6.0% of total
revenue in 1998 and 4.8% of total revenue in 1999. Upon learning of these
matters, we ceased selling programs financed by insurance policies underwritten
by General American. Since that time, General American's life insurance business
has been sold to MetLife, its financial ratings upgraded and we expect to
continue to use General American and MetLife as carriers.
Adverse Tax Court Decision Regarding Leveraged Corporate Owned Life Insurance
On October 19, 1999, the U. S. Tax Court issued a decision denying the
deductibility of interest on policy loans in connection with a leveraged
corporate owned life insurance (COLI) program. In addition, the Internal Revenue
Service has launched a major program against other companies that have purchased
leveraged COLI policies. We have not offered leveraged COLI in our product
offerings since 1995. Consequently, we do not expect any adverse effects of this
recent Tax Court ruling on our future new business revenue stream. However,
because of the varied facts and circumstances surrounding each case, it is
impossible to determine the effects of this case on a client's decision to
continue or surrender any existing policy. Because of the number of other
variables, including adverse tax implications resulting from a surrender,
management does not believe this decision will have any material adverse effects
on us.
REVENUE
Our operating units derive their revenue primarily from:
- commissions paid by the insurance companies that underwrite the policies
underlying the various non-qualified benefit programs;
- fees paid by clients in connection with program design and administrative
services; and
- executive compensation program and benefit consulting fees.
Our revenue is usually long term and recurring, is typically paid annually
and extends for a period of ten years or more after the sale. Commissions paid
by insurance companies vary by policy and by program and usually represent a
percentage of the premium or the cash surrender value of the insurance policies
underlying our program.
Total revenue includes first year commissions, renewal commissions and
fees.
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- First Year Commission Revenue. First year 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 by the client to the insurance company.
- Renewal Commission Revenue. Renewal revenue is recognized on the date
that the renewal premium is due or paid to the insurance company. Renewal
revenue in future periods, which is not recorded on our balance sheet, is
estimated to be approximately $246 million over the next five years.
However, renewal revenue can be affected by policy surrenders or
exchanges, material contract changes, asset growth and case mortality
rates. Over the last five years, we have experienced a persistency rate
of approximately 95% of the accrued inforce insurance underlying our
programs. We can give no assurances that our persistency rate will remain
at this level. As we continue to diversify and acquire companies
specializing in different market segments, our persistency rates can
begin to vary significantly. While we intend to do all we can to retain
our clients, service their accounts and sustain our persistency, there
can be no assurance our persistency rates will remain at this level.
- Other Revenue. Other revenue consists of several sources of revenue
associated with our operations including consulting and administrative
fees.
QUARTERLY RESULTS
Our operating results can fluctuate considerably, especially when compared
on a consecutive quarterly basis, and we can experience large increases in
revenue in the fourth quarter. In addition, operating results can be affected by
a number of other factors, including:
- introduction of new or enhanced programs and services by us or our
competitors;
- client acceptance or rejection of new programs and services;
- program development expenses;
- demand for administrative services;
- competitive, legislative and regulatory changes; and
- general economic conditions.
Many of these factors are beyond our control. The sales cycles of our
Clark/Bardes Division often takes between twelve to eighteen months, with first
year revenue coming from a few large cases. Our revenue is thus difficult to
forecast, and we believe that comparing our consecutive quarterly results of
operations is not necessarily meaningful, nor does it indicate what results we
will achieve for any subsequent period. In our business, past operating results
have not been reliable indicators of future performance.
The following table presents a summary of key revenue and expense
statistics for the most recent eight calendar quarters. This information is not
necessarily indicative of results for any full year or for any subsequent
period.
MAR. JUNE SEPT. DEC. MAR. JUNE SEPT. DEC.
1998 1998 1998 1998 1999 1999 1999 1999
------- ------- ------- ------- ------- ------- ------- -------
Revenue................................. $13,754 $15,230 $17,641 $28,141 $24,057 $29,714 $25,654 $41,335
% of annual........................... 18.4% 20.4% 23.6% 37.6% 19.9% 24.6% 21.2% 34.2%
Gross profit............................ 4,622 6,159 6,589 11,285 9,874 16,681 15,198 25,899
Ratio................................. 33.6% 40.4% 37.4% 40.1% 41.0% 56.1% 59.2% 62.7%
Operating expenses...................... 3,380 5,029 4,613 6,594 6,255 12,202 11,332 15,364
Amortization............................ 221 221 356 434 620 1,152 1,237 1,361
Operating income before non-recurring
expense............................... 1,021 909 1,620 4,257 2,999 3,327 2,629 9,174
% of revenue.......................... 7.5% 6.0% 9.2% 15.1% 12.5% 11.2% 10.3% 22.2%
% of gross profit..................... 22.3% 14.8% 24.6% 37.7% 30.4% 19.9% 17.3% 35.4%
22
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RESULTS OF OPERATIONS
% CHANGE
---------------
1999 1998 1997 99/98 98/97
---------- ---------- ---------- ----- ------
Total revenue........................ $ 120,760 $ 74,766 $ 49,455 61.5 51.2
Commissions and fees................. 53,108 46,111 32,439 15.2 42.1
---------- ---------- ----------
Gross profit......................... 67,652 28,655 17,016 136.1 68.4
% of total revenue......... 56.0% 38.3% 34.4% -- --
General and administrative
expenses........................... 45,153 19,616 11,504 130.2 70.5
% of total revenue......... 37.4% 26.2% 23.3%
Amortization of intangibles.......... 4,370 1,232 295 254.7 317.6
% of total revenue......... 3.6% 1.6% 0.6% -- --
Income before non recurring item and
income taxes....................... 14,910 5,206 4,294 186.4 21.2
% of total revenue......... 12.3% 7.0% 8.7% -- --
Effective tax rate................... 40.8% 201.2% 1.4% -- --
Net income (loss).................... $ 8,831 $ (411) $ 4,234 -- --
% of total revenue......... 7.3% -- 8.6% -- --
Per common share
Basic
Net income (loss).......... $ 0.97 $ (0.08) $ 1.03 -- --
Weighted average shares.... 9,077,775 5,006,009 4,119,387 81.3 21.5
Diluted
Net income (loss).......... $ 0.95 $ (0.08) $ 0.99
Weighted average shares.... 9,328,939 5,006,009 4,398,593 86.4 13.8
REVENUE
Revenue growth from existing business units was mixed for the year ended
December 31, 1999. Overall, revenue for the periods can be summarized as
follows:
YEAR ENDED DECEMBER 31,
-----------------------
1999 1998
---------- ---------
Existing business units..................................... $100,691 $54,657
Acquisitions................................................ 20,069 20,109
-------- -------
Total............................................. $120,760 $74,766
For 1999, acquisitions contributed 16.6% of revenue compared to 26.9% for
1998. By definition, we consider any revenue source appearing in the first full
twelve months of operating results as being from acquisitions. After that, they
become part of existing business.
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YEAR ENDED
DECEMBER 31,
------------------
1999 1998
-------- -------
First year revenue:
Clark/Bardes.............................................. $ 33,547 $13,379
Bank Compensation Strategies.............................. 21,614 23,462
HealthCare Compensation Strategies........................ 12,516 --
-------- -------
67,677 36,841
-------- -------
Renewal revenue:
Clark/Bardes.............................................. 39,981 32,029
Bank Compensation Strategies.............................. 9,243 5,896
HealthCare Compensation Strategies........................ 3,859 --
-------- -------
53,083 37,925
-------- -------
Total............................................. $120,760 $74,766
======== =======
First Year Revenue
CBH continues to experience significant growth in first year revenue from
both its existing businesses and from acquisitions.
INCREASE
--------------
1999 1998
------- ----
Existing business........................................... $17,040
Acquisitions................................................ 13,796
-------
$30,836 83.7%
======= ====
During 1999, a significant percentage of our first-year revenue was
generated from the large-bank market. In this market, we were able to
restructure certain commission arrangements on existing products with our
insurance carriers in order to receive a higher percentage of new-business
revenue in the first year for our independent producers and ourselves while
retaining favorable product performance for our clients. The result of this
restructuring is that we received $5.9 million more of gross revenue in 1999
than we would have if this restructuring had not taken place. In addition,
several large-bank cases were sold using a separate-account product, which
typically generates a higher percentage of first-year commission than our
historical general-account products used in the large-bank market.
All of our first-year revenue is and always has been subject to
charge-back, which gives the insurance company the ability to recover
commissions paid in the event a policy prematurely terminates. Our charge-back
schedules differ by product, and typically apply to first-year commission only.
A typical charge-back schedule, based on a percent of first year commission, is
as follows:
Year 1 Year 2 Year 3 Year 4 Year 5+
100% 50% 50% 25% 0%
As a condition to certain restructured contracts discussed above, the
carriers imposed a higher charge-back schedule, which varies by product and is
typically as follows:
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6+
100% 100% 75% 50% 25% 0%
This revised charge-back schedule relates primarily to certain sales in our
large-bank market. Historically, commission charge-backs are rare, and we have
never experienced a charge-back for policies placed in the large-bank market.
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Renewal Revenue
Our renewal revenue grows through acquisition, and through new business
that generates recurring revenues after the year of sale. As the acquired
divisions and first year revenue continue to grow, renewal revenue will grow as
well. The rate of growth of our renewal revenue is influenced by our acquisition
activity and new business product mix. For example, as we discussed previously,
we made certain large-bank sales with products that generate a higher percentage
of first-year commission than our historical products used in the large-bank
market. This results in a lower growth in renewal revenue in the subsequent year
than would have been achieved with the sale of our historical products. Our
renewal revenue grew at a 40.0% rate for the year, which is broken down as
follows:
INCREASE
-----------------
1999 - 1998
-----------------
Existing business........................................... $ 8,885
Acquisitions................................................ 6,273
-------
$15,158 40.0%
======= =====
The following table represents the gross renewal revenue associated with
our inforce business-owned life insurance policies as of December 31, 1999. This
projected gross revenue is not adjusted for mortality, lapse, or other factors
that may impair realization. We cannot assure you that commissions under these
policies will be received. These projected gross revenues are based on the
beliefs and assumptions of management and are not necessarily indicative of the
revenue that may actually be achieved in the future.
PROJECTED GROSS RENEWAL REVENUE
AS OF DECEMBER 31, 1999
BANK HEALTHCARE
CLARK COMPENSATION COMPENSATION
BARDES STRATEGIES STRATEGIES TOTAL
-------- ------------ ------------ --------
2000............................................. $ 40,915 $10,776 $ 7,282 $ 58,973
2001............................................. 38,522 7,000 7,219 52,741
2002............................................. 36,715 3,952 7,172 47,839
2003............................................. 34,058 3,969 7,047 45,074
2004............................................. 30,530 3,954 6,841 41,325
2005............................................. 30,227 3,934 6,632 40,793
2006............................................. 30,104 3,932 6,409 40,445
2007............................................. 28,238 3,939 6,139 38,316
2008............................................. 26,552 3,951 5,595 36,098
2009............................................. 26,589 3,983 5,070 35,642
-------- ------- ------- --------
Total.................................. $322,450 $49,390 $65,406 $437,246
======== ======= ======= ========
Ten-Year Projection as of December 31, 1998...... $299,120 $40,223 $ -- $339,343
======== ======= ======= ========
COMMISSION EXPENSE AND GROSS PROFIT
While increases in commission expense are closely correlated with increases
in gross revenue, an important operating measurement is gross profit. This is
the amount of revenue we keep after paying commissions to our sales force.
YEAR ENDED DECEMBER 31,
-----------------------
1999 1998
--------- ---------
Commission and fee expense.................................. $53,108 $46,111
Gross profit................................................ $67,652 $28,655
Gross profit ratio.......................................... 56.0% 38.3%
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Our gross profit increased 136.1% for the year as compared to 1998. Several
factors contributed to this improvement:
- the acquisitions of The Wamberg Organization and NICB -- the effect of
which is to eliminate a commission expense that was previously being paid
to certain sales representatives of these organizations on both first
year and renewal revenue;
- the acquisitions of MCG/HealthCare which generates its revenue through
in-house sales staff who are paid a lower commission percentage than our
traditional independent representatives; and
- a higher volume of first year revenue coming from internal sales efforts.
INCREASE
-----------------
1999 - 1998
-----------------
Twelve months:
Existing business......................................... $21,470
Acquisitions.............................................. 17,527
-------
$38,997 136.1%
======= =====
Gross profit for each operating unit is as follows:
YEAR ENDED DECEMBER 31,
-----------------------
1999 1998
--------- ---------
Clark/Bardes................................................ $37,370 $19,058
Bank Compensation Strategies................................ 15,727 9,597
HealthCare Compensation Strategies.......................... 14,555 --
------- -------
$67,652 $28,655
======= =======
Percent of revenue:
Clark/Bardes.............................................. 50.8% 42.0%
Bank Compensation Strategies.............................. 51.1% 32.7%
HealthCare Compensation Strategies........................ 88.5% --
Total Company..................................... 56.0% 38.3%
In addition, the gross profit on the ten-year projected inforce renewal
revenue improved substantially from the prior year, as shown in the table below.
*TEN-YEAR PROJECTED
RENEWAL REVENUE
AS OF DECEMBER 31,
---------------------
1999 1998
-------- --------
Revenue..................................................... $437,243 $339,343
Commission and fee expense.................................. 108,986 156,792
-------- --------
Gross profit................................................ $328,257 $182,551
Gross profit ratio.......................................... 75.1% 53.8%
- ---------------
* This projected revenue is not adjusted for mortality, lapse, or other factors
that may impair realization. We cannot assure you that commissions revenue
under these policies will be received. These projected gross revenues are
based on the beliefs and assumptions of management and are not necessarily
indicative of the revenue that may actually be achieved in the future.
Because of the acquisition of The Wamberg Organization and NICB, commission
and fee expense actually declined from 1998 to 1999. The gross profit on our
ten-year projected renewal revenue as of December 31, 1999 increased 79.8% from
a year ago.
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GENERAL AND ADMINISTRATIVE EXPENSES
YEAR ENDED DECEMBER 31,
-----------------------
1999 1998
--------- ---------
Clark/Bardes................................................ $15,524 $12,259
Bank Compensation Strategies................................ 11,192 5,315
HealthCare Compensation Strategies.......................... 12,570 --
Corporate overhead -- note.................................. 5,867 2,042
------- -------
$45,153 $19,616
======= =======
Percent of gross profit:
Clark/Bardes.............................................. 41.5% 64.3%
Bank Compensation Strategies.............................. 71.2% 55.4%
HealthCare Compensation Strategies........................ 86.4% --
Total Company..................................... 66.7% 68.5%
- ---------------
Note -- prior to 1998, corporate overhead was included in the Clark/Bardes
Division.
The increase in general and administrative expenses should be reviewed in
the same context as the decrease in commission expense. Since the beginning of
the year, four significant events have affected this relationship:
(1) acquisition of The Wamberg Organization;
(2) prior to our acquiring NICB, it functioned as an independent producer for
BCS. With the acquisition, commission previously paid to NICB by BCS has
been replaced, in part, by salaries to the former owners;
(3) consolidation of certain financial and administrative functions into our new
corporate offices in North Barrington, Illinois; and,
(4) with the acquisition of MCG (now HCS), all of HCS' sales force is company
personnel thus, HCS does not rely on any independent producers.
The overall increase is general and administrative expense may be analyzed
as follows:
INCREASE
-----------------
1999 - 1998
-----------------
Existing business........................................... $ 9,951
Acquisitions................................................ 15,586
-------
$25,537 130.2%
======= =====
An important factor to consider, however, is that the rate of increase in
general and administrative expenses remains lower than the rate of increase in
gross profit. By way of comparison for the periods:
INCREASE
-----------------
1999 - 1998
-----------------
Gross profit................................................ $38,997 136.1%
General and administrative expense.......................... $25,537 130.2%
OPERATING INCOME
Operating income increased substantially in 1999 over the full year 1998.
The increase in expense is more than offset by the combined benefit of;
- revenue growth, principally in the large bank market, and
- improved gross profits
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YEAR ENDED DECEMBER 31,
------------------------
1999 1998 % INC./(DEC)
---------- ---------- ------------
Gross profit.............................................. $ 67,652 $ 28,655 136.1%
General and administrative expenses....................... (45,153) (19,616) 130.2%
Amortization of intangibles............................... (4,370) (1,232) 254.7%
-------- --------
Operating income before non-recurring item................ 18,129 7,807 132.2%
Put warrants -- non-recurring............................. -- (4,800) --
-------- --------
Operating income.......................................... $ 18,129 $ 3,007 502.9%
======== ========
Each operating unit contributed positively to our operating income before
the non-recurring item. Comparing our divisions;
1999 1998
----------------- -----------------
$ %/TOTAL $ %/TOTAL
------- ------- ------- -------
Clark/Bardes........................................... $19,751 108.9% $ 6,552 83.9%
Bank Compensation Strategies........................... 3,621 20.0% 3,297 42.2%
HealthCare Compensation Strategies..................... 624 3.4% -- --
Corporate overhead..................................... (5,867) (32.3%) (2,042) (26.1%)
------- -------
$18,129 $ 7,807
======= =======
The relative contribution between existing businesses and acquisitions to
operating income is as follows:
INCREASE
-----------------
1999 - 1998
-----------------
Existing business........................................... $ 8,920
Acquisitions................................................ 1,402
-------
$10,322 132.2%
======= =====
Amortization of intangibles: Amortization expense increased $3.1 million
for the year ended December 31, 1999.
Since September 1997, we have completed four major and three smaller
acquisitions for a total cost of over $100 million. These companies have a
relatively small amount of tangible assets such as accounts receivable and
equipment with the result that most, and in some cases all, of the purchase
price is allocated to intangible assets:
- first is the net present value of the realizable cash flow based on
forecasts we receive from the target and their carriers. These projects
can extend over thirty years and are valued at their present value. The
annual amortization is the net decrease in the remaining present value of
the renewal premiums in the revenue stream; and,
- the remaining excess purchase price is allocated to goodwill. At present,
goodwill is amortized over twenty-five to forty years. The Financial
Accounting Standards Board has announced its intention to issue a new
standard calling for, among other things, that goodwill be amortized over
a period not to exceed twenty years. While we do not anticipate
retroactive application of this proposed new standard, we intend to fully
comply our policy with the standard as it is eventually issued.
In addition to the net present value of inforce revenues and goodwill,
intangibles also include the value of non-competition agreements negotiated with
selling shareholders. These are amortized over their terms on a straight line
basis.
Non-recurring operating expense: In 1998, we recognized a $4.8 million
expense for the increased market value of certain put warrants. Other than our
employee stock option plans, we do not have any other convertible securities
outstanding.
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INTEREST EXPENSE
Net interest costs increased $618,000 or 23.8% for the full year 1999
compared with 1998. The entire additional expense resulted primarily from a net
increase in borrowings of $13.7 million.
- the cash cost of the MCG/HealthCare acquisition -- $17.8 million was
accomplished through bank borrowings and we issued an $8.7 million
promissory note
- we purchased a stream of renewals from the Wamberg Organization in
January 1, 1999, for $7.5 million
- we sold 1,000,000 shares of our common stock to Conning for $16.9
million, net, and applied the proceeds to outstanding bank debt
- we paid down $5.0 million from operating funds
- we borrowed $2.0 million for small acquisitions and working capital.
With increased borrowings as a result of our acquisition program, these
costs may be expected to increase in subsequent quarters.
FEDERAL INCOME TAXES
Federal and state income tax expense was 40.8% of income before taxes for
the year ended December 31, 1999. This compares to a 40% statutory combined
federal and state income tax rate. Like most corporations, we have a certain
amount of expenses that are not deductible for federal income tax purposes. They
are closely controlled and do not exceed the amounts management deems prudent
for such outlays.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1998 AND 1997 ON A HISTORICAL BASIS
Total Revenue. Total revenue increased to $74.8 million for the year ended
December 31, 1998 as compared to $49.5 million for the year ended December 31,
1997, representing an increase of 51.2%. The results for the year ended December
31, 1998 reflects contributions of $45.4 million from the core benefits
business, including Schoenke, and $29.4 million from the BCS community bank
business. Results for the year ended December 31, 1997 reflect contributions of
$41.0 million from the core benefits business and $8.5 million from BCS
community bank business. The breakout of first-year and renewal revenue is as
follows:
1998 1997
----- -----
(IN MILLIONS)
First Year Revenue
Core benefits business.................................... $13.4 $15.6
Community bank business................................... 23.5 7.0
Renewal Revenue
Core benefits business.................................... 32.0 25.4
Community bank business................................... 5.9 1.5
----- -----
Total............................................. $74.8 $49.5
===== =====
Commission and Fee Expense. Commission and fee expense increased to $46.1
million for the year ended December 31, 1998 compared to $32.4 million for the
year ended December 31, 1997, representing an increase of 42.1%. Commission and
fee expense as a percentage of total revenue decreased to 61.6% for the year
ended December 31, 1998 compared to 65.6% for the year ended December 31, 1997.
This reduction in commission and fee expense as a percentage of total revenue
was due to acquisitions and a favorable product mix from business on which a
smaller than usual percentage of revenue was distributed to producers.
Clark/Bardes considers present levels of commission and fee expense as a
percentage of total revenue to be sustainable.
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General and Administrative Expense. General and administrative expense
increased to $19.6 million for the year ended December 31, 1998 compared to
$11.5 million for the year ended December 31, 1997, representing an increase of
70.5%. General and administrative expense as a percent of total revenue was
26.2% for the year ended December 31, 1998 compared to 23.3% for the year ended
December 31, 1997. The increase in general and administrative expense as a
percentage of total revenue reflects additional staffing in 1998 to keep up with
Clark/Bardes' revenue growth, as well as additional corporate overhead costs
associated with becoming a public company.
Amortization. Amortization expense was $1.2 million for the year ended
December 31, 1998, reflecting the full year amortization of intangible assets
capitalized as a result of the BCS acquisition, four months of amortization
expense for the Schoenke acquisition and two months of amortization expense for
the Wiedemann acquisition. Amortization expense was $295,000 for the year ended
December 31, 1997, reflecting the four months of amortization expense for the
BCS acquisition.
Non-recurring Expenses. A non-recurring expense of $4.8 million was
incurred for a market value adjustment for Clark/Bardes warrants with put rights
which were subsequently extinguished.
Income from Operations. Income from operations was $7.8 million for the
year ended December 31, 1998 ($3.0 million including the non-recurring item)
compared to $5.2 million for the year ended December 31, 1997, representing an
increase of 49.7%. The increase represents a full year of income from BCS as
compared to four months of income for the year ended December 31, 1997. The
Schoenke acquisition also contributed to income from operations for the for the
year ended December 31, 1998. Operating Margin (excluding the non-recurring
item) was 10.4% for the year ended December 31, 1998 and 10.5% for the year
ended December 31, 1997.
Interest Expense -- Net. Interest expense for the year ended December 31,
1998 was $2.6 million compared to $921,000 for the year ended December 31, 1997.
The amount for the year ended December 31, 1998 included interest income of
$566,000 and interest expense of $3.2 million as compared to interest income of
$189,000 and interest expense of $1.1 million for the year ended December 31,
1997. Interest income was higher in 1998 due to larger cash balances resulting
primarily from the Clark/Bardes initial public offering. Interest expense was
higher primarily due to a full year of outstanding debt associated with the BCS
acquisition for the year ended December 31, 1998, compared to four months of
outstanding debt in for the year ended December 31, 1997.
Income Before Taxes. Income before taxes was $406,000 for the year ended
December 31, 1998, compared to $4.3 million for the year ended December 31,
1997.
Income Tax Expense. On July 31, 1998, Clark/Bardes changed its tax status
from an S corporation to a C corporation, which changed Clark/Bardes' treatment
for Federal income tax purposes. Clark/Bardes recorded $817,000 of income tax
expense for the year ended December 31, 1998, as compared to $60,000 of state
income tax expense for the year ended December 31, 1997.
Net Income/Loss. Actual net loss was $411,000 for the year ended December
31, 1998. Excluding the non-recurring operating expense and income tax benefit,
net income is estimated at $2.5 million for the year. Net income was $4.2
million for the year ended December 31, 1997, which reflects $60,000 of income
tax expense.
LIQUIDITY AND CAPITAL RESOURCES.
Selected Measures of Liquidity and Capital Resources.
1999 1998 1997
------- ------- ------
Cash and cash equivalents................................... $ 4,832 $12,102 $3,783
Working capital............................................. (2,768) 7,155 2,294
Current ratio............................................... .90 1.55 1.23
Shareholders' equity per common share(1).................... $ 6.47 $ 3.62 $(1.04)
Debt to total capitalization(2)............................. 40.7% 49.5% 118.0%
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- ---------------
(1) total stockholders' equity divided by actual shares outstanding at year end
excluding shares on option
(2) current debt plus long term debt divided by current debt plus long term debt
plus stockholders' equity
In addition to our recognized balance sheet assets and liabilities, we have
an on going renewal revenue stream, that over the next ten years is estimated to
be $437 million. Discounting these renewals to net present value of the
estimated realizable amounts, adjusted for a 95% persistency rate, at the U.S.
Treasury thirty year bond rate yield was as follows for the last three years:
1999..................................................... $252,355
1998..................................................... 210,623
1997..................................................... 187,157
We continue to generate strong cash flow from operations. As a financial
company with strong operating cash flow, we have little need to retain
substantial cash balances. We use the net cash from operating activities to fund
capital expenditures and small acquisitions. 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.
YEAR ENDED DECEMBER 31,
-----------------------
1999 1998 CHANGE
---------- ---------- --------
Cash flows from (used in):
Operations................................................ $ 12,552 $ 4,164 $ 10,678
Investing................................................. (40,282) (19,194) (24,246)
Financing................................................. 20,460 23,349 (2,021)
Cash Flows from Operating Activities
Our cash flow from operations for the twelve months ended December 31,
1999, improved significantly over that of the comparable twelve month period in
1998. The components were:
YEAR ENDED
DECEMBER 31, INCREASE/
---------------- (DECREASE)
1999 1998 IN CASH
------- ------ ----------
Net income (loss) plus non-cash expenses................ $14,016 $1,476 $12,540
Changes in operating assets and liabilities............. (1,464) 2,688 (2,208)
------- ------ -------
Cash flow from operating activities..................... $12,552 $4,164 $10,332
======= ====== =======
In this regard, it is noted that the working capital ratio declined to .90
to one at December 31, 1999 compared with 1.55 to one at December 31, 1998. As
an acquiring company, a significant amount of borrowing is done to finance our
acquisitions. Because of this and the strong cash generated by operations,
management has determined to dedicate all excess cash to the reduction of bank
borrowings and, as a result, only cash for reasonably foreseeable needs and
expenses is retained. As an example, the entire $13.8 million cash portion of
the acquisition of The Wamberg Organization and Wamberg Financial Corporation
was accomplished without any additional borrowings.
Cash Used in Investing Activities
Acquisitions accounted for $38.6 million of the $43.4 million used in
investing activities. The balance was comprised of $5.1 million for purchase of
equipment and various assets such as deferred debt expenses.
Cash spending for acquisitions included:
- - MCG/HealthCare............................................ $17.8 million
- - The Wamberg Corporation and Wamberg Financial corporation
including the $7.5 million purchase of renewal revenue in
January 1999.............................................. $21.3 million
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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 December 1999, we restructured our $65.0 million credit agreement
entered into in January 1999 with Bank One, into a $100.0 million facility. The
loans are at a floating rate based on the London InterBank Offered Rate or prime
rate at due dates. The loan matures on December 31, 2004, with interest and
principal payable quarterly starting March 31, 2000. The credit agreement
contains restrictive covenants which, among other things, require mandatory
prepayments under certain conditions, financial reporting and compliance
certificates, maintenance of financial ratios, restrictions on guarantees and
additional indebtedness, limitations on mergers and acquisitions, prohibition of
cash dividends, limitation on investments, loans and advances, and certain
change in control provisions.
We are obligated to pay a commitment fee based on the daily average of
undrawn funds under the credit agreement. The fee is a minimum of .25% and a
maximum of .50% based on the ratio of consolidated indebtedness to income before
interest, taxes, depreciation and amortization on a rolling quarterly basis. A
ratio of one to one produces the lowest fee and three to one, or more, produces
the highest.
In an effort to reduce interest costs, management has directed that all
cash beyond reasonably foreseeable needs be used to pay down debt. In June, we
sold 1,000,000 shares of common stock to Conning Insurance Capital Limited for
$16.9 million in a private placement. Approximately $12 million was used to pay
the debt on our acquisition credit facility.
Depending upon adherence to the criteria in our loan agreements at the time
of draw down, we have $67.0 million available under our credit lines at December
31, 1999.
We believe that our net cash flow from operations will continue to provide
sufficient funds to service our debt obligations. We estimate renewal revenue in
future periods, which is not reflected on our balance sheet, to represent
approximately $246 million over the next five years. However, renewal revenue
can be adversely affected by policy surrenders or exchanges, material contract
changes, asset growth and case mortality rates.
As our business grows, our working capital and capital expenditures
requirements will also continue to increase. We believe that net cash flows from
operations will be sufficient to finance our debt payments, working capital and
capital expenditures for the next twelve months. There can be no assurance,
however, that the net cash flows from operations will be sufficient to meet our
anticipated requirements or that we will not require additional debt or equity
financing within this time frame. We may continue to issue stock to finance
future acquisitions.
MARKET RISK
Our primary market risk exposure is to changes in interest rates as a
result of our line of credit and long-term debt. At December 31, 1999, we had
total outstanding indebtedness of $42.7 million, or approximately 30.9% of total
market capitalization. Our interest rate risk objective is to limit the impact
of interest rate fluctuations on earnings and cash flows and to lower overall
borrowing costs. To achieve this objective, we manage our exposure to
fluctuations in interest rates for borrowings through the use of fixed rate debt
instruments to the extent that reasonably favorable rates are obtainable with
such arrangements and enter into derivative financial instruments such as
interest rate swaps to mitigate interest rate risk and to effectively lock the
interest rate on a portion of our variable debt.
Interest on borrowings under our line of credit is based on one of two
factors, at our option, at the time the funds are borrowed:
- U.S. prime rate, published in the Wall Street Journal, which will float
as adjusted from time to time, for as long as this segment of borrowing
is outstanding; or,
- London InterBank offered rate, which is based on the published rate at
the time of the borrowing and will remain fixed at that rate for as long
as this segment, or any part, of the borrowing is outstanding.
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We do not enter into derivative or interest rate transactions for
speculative purposes. Approximately 22.7% of our outstanding debt was subject to
fixed rates with a weighted average of 9.5% at December 31, 1999. An additional
69.9% of our outstanding debt at December 31, 1999, was effectively locked at an
interest rate of 5.53% plus a spread based on our leverage ratio, through an
interest rate swap agreement for a notional amount of $30.0 million. We
regularly review interest rate exposure on outstanding borrowings in an effort
to minimize the risk of interest rate fluctuations.
The following table provides information about our debt obligations that
are sensitive to changes in interest rates. The table presents principal cash
flows and related weighted average interest rates by expected maturity dates
totaling $42.7 million.
EXPECTED MATURITY DATE
-----------------------------------------------------------------------------------
2000 2001 2002 2003 2004 THEREAFTER TOTAL FAIR VALUE
------- ------- ------- ------- ------ ---------- -------- ----------
LIABILITIES
Long term debt
Fixed rate............ $ 1,652 $ 948 $ 1,046 $ 1,154 $1,274 $3,650 $ 9,724 $ 9,724
Average interest
rate................ 7.5% 10.0% 10.0% 10.0% 10.0% 10.0%
Variable rate:
U. S. Prime........... $ 600 $ 600 $ 600 $ 600 $ 600 $ 3,000 $ 3,000
London InterBank...... $ 5,000 $ 5,000 $ 5,000 $ 5,000 $5,000 $5,000 $ 30,000 $30,000
Offered
Average interest
rate................ 7.6% 7.6% 7.6% 7.6% 7.6% 7.6%
INTEREST RATE
DERIVATIVES
Interest rate swaps
Variable to fixed
Notional amount....... $30,000 $27,750 $21,750 $15,750 $7,050 $2,250
Average pay rate...... 5.53% 5.53% 5.53% 5.53% 5.53% 5.53%
Average receive
rate................ 7.67% 7.74% 7.84% 8.00% 8.33% 8.33%
The table incorporates only those exposures that exist as of December 31,
1999, and does not consider exposures or positions that could arise after that
date. In addition, because firm commitments are not represented in the table
above, the information presented therein has limited predictive value. As a
result, our ultimate realized gain or loss with respect to interest rate
fluctuations would depend on the exposures that arise during the future period,
prevailing interest rates, and our hedging strategies at that time. There is
inherent rollover risk for borrowings as they mature and are renewed at current
market rates. The extent of this risk is not quantifiable or predictable because
of the variability of future interest rates and our financing requirements.
INFLATION
Inflation has not had a material effect on our results of operations.
Certain of our expenses, such as compensation, benefits and capital equipment
costs, are subject to normal inflationary pressures. However, the majority of
our service and administrative agreements with clients, which generate fee
income, have a cost of living adjustment tied to the consumer price index.
Management believes that future inflationary pressures will continue to be
offset, because as inflation increases, investment returns will also increase,
resulting in higher cash values and higher commission rates.
IMPACT OF YEAR 2000
In late 1999, we completed our remediation and testing of systems for year
2000 compliance. As a result of past planning and implementation efforts, we
experienced no significant disruptions in mission critical information
technology and non-information technology systems, and we believe those systems
successfully responded to the year 2000 date change. We expensed approximately
$400,000 during 1999 in connection with remediating our systems. We are not
aware of any material problems resulting from year 2000 issues, either with
products, internal systems, or the products and services of third parties. We
will continue to monitor
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mission critical computer applications and those of our suppliers and vendors
throughout the year 2000 to ensure that any latent year 2000 matters that may
arise are addressed promptly.
RISK FACTORS
RISKS RELATED TO OUR INDUSTRY
The risks described below are not the only risks we face. Any of the
following risks could have a material adverse effect on our business, financial
condition and operating results. Additional risks and uncertainties of which we
are unaware or currently believe are immaterial may also impair our business
operations. You should carefully consider these risks in reviewing this Form
10-K, and these risks qualify, in their entirety, each forward looking statement
herein.
UNFAVORABLE FEDERAL TAX LEGISLATION COULD IMPACT OUR BUSINESS.
Many of the compensation and benefit programs we design and implement for
our clients are funded by specifically designed life insurance products. The
life insurance products underlying the compensation and benefit programs we sell
currently offer a number of tax advantages, such as:
- the cash value of the policies grows on a tax deferred basis until
withdrawal;
- the policies' death benefits are received tax-free; and
- the tax-deferred nature of the policies provides an attractive return.
If any changes in federal tax laws reduce or eliminate these advantages,
many policies could be surrendered. As a result, we could lose a substantial
amount of renewal income.
Recent amendments to the federal tax laws have reduced the advantages of
purchasing certain business-owned life insurance programs. With some exceptions,
amendments adopted in 1996 eliminated the ability to deduct interest on loans
against the cash value of life insurance policies. In 1997, legislation enacted
an interest disallowance on all business-owned life insurance except for
policies placed on employees, officers, directors and 20-percent owners. The
effect of the 1997 legislation was to reduce interest deductions on general
indebtedness.
In 2000, as part of its budget proposal, the administration sought to
eliminate the "employee, officer and director" exception to the interest
disallowance rule. This is the same proposal that was introduced in 1999 and
1998. To date, the proposal has not obtained congressional support, however, if
enacted, this proposal would significantly affect the Clark/Bardes and Bank
Compensation Strategies divisions because it would reduce the attractiveness of
business-owned life insurance to companies that traditionally have high debt/
equity ratios, such as banks.
Although we believe that the proposal does not have widespread support in
Congress, we cannot predict the effect that any amendments will have on our
Clark/Bardes or Bank Compensation Strategies divisions. We cannot be sure if
this or any other adverse tax proposal will be enacted.
The policies we sell in the healthcare market are often individually owned
and, as a result, could be adversely impacted by a tax law change affecting life
insurance generally. We believe that Congress is unlikely to make a change that
reduces the tax benefits of insurance owned by individuals.
FEDERAL AND STATE REGULATIONS MATERIALLY AFFECT THE WAY WE OPERATE.
State governments extensively regulate our life insurance activities. We
sell our insurance products in all 50 states through licensed insurance
producers. States have broad powers over licensing, payments of commissions,
business practices, policy forms and premium rates. Insurance laws related to
licensing, marketing activities and the receipt of commissions vary from state
to state. While we have not encountered regulatory problems in the past, we
cannot assure you that we and the producers through whom we sell, will always be
in compliance with all applicable regulatory requirements of each state.
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While the federal government does not directly regulate the marketing of
most insurance products, some products, such as variable life insurance, must be
registered under the federal securities laws. As a result, our producers selling
these products must be registered representatives of a broker-dealer registered
with the National Association of Securities Dealers. While we have not had any
regulatory problems in the past related to these products, we cannot be sure
that we or our producers will not have regulatory problems in the future.
WE DEPEND ON A SMALL NUMBER OF INSURANCE COMPANIES.
We depend heavily on a select group of insurance companies to underwrite
the insurance policies underlying the programs we sell. As of December 31, 1999,
20 life insurance companies underwrote substantially all of the insurance
policies underlying our clients' programs. Seven of these companies accounted
for approximately 76.3% of 1998 first year commission revenue and 63.1% of our
first year commission revenue for the year ended December 31, 1999. We cannot be
sure if these relationships will continue or if we will be able to develop
relationships with other insurance companies.
During 1999, one of the carriers we use, General American Life Insurance
Company experienced financial difficulties as a result of being unable to meet
withdrawal requests under certain guaranteed investment contracts General
American had issued. General American represented approximately 6.0% of total
revenue in 1998 and 4.8% of total revenue in 1999. Upon learning of these
matters, we ceased selling programs financed by insurance policies underwritten
by General American. Since that time, General American's insurance business has
been sold to MetLife, its financial ratings upgraded and we expect to continue
to use General American and its acquirer, MetLife as carriers.
CHANGES IN THE MARKET AND THE ECONOMY COULD HELP DEVELOPMENT OF COMPETING
PROGRAMS AND PRODUCTS.
General economic conditions and market factors, such as changes in interest
rates and stock prices, affect our commission and fee income and the extent to
which clients keep a policy inforce year after year. Interest rate fluctuations
can have a significant effect on the sale and profitability of many employee
benefit programs whether they are financed by life insurance or other financial
instruments. For example, if interest rates rise, competing products could
become more attractive to potential purchasers of the programs we market.
Further, a prolonged decrease in stock prices can have a significant effect on
the sale and profitability of our clients' programs that are linked to stock
market indices. We cannot be sure that we will be able to compete with
alternative products if these market forces make our clients' programs
unattractive.
RISKS RELATED TO OUR COMPANY
COMPETITIVE FORCES MAY REDUCE OUR MARKET SHARE.
Our business is highly competitive. We compete with consulting firms,
insurance agents, brokers, third party administrators, producer groups and
insurance companies. A number of our competitors offer attractive alternative
programs. The direct competitors of our Clark/Bardes division include:
- Compensation Resource Group;
- Harris, Crouch, Miller, Scott, Long and Mann;
- Management Compensation Group (not related to Management Compensation
Group/HealthCare);
- Newport Group;
- TBG Financial; and
- The Todd Organization (not affiliated with Melvin G. Todd, president of
Clark/Bardes division).
The competitors of our Bank Compensation Strategies division include The
Benefit Marketing Group, The Todd Organization, and individual insurance agents
in the communities where the community banks are located. Additionally, the
community banking industry is constantly consolidating, which may reduce the
number of potential bank clients for Bank Compensation Strategies. The primary
competition for our
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HealthCare Compensation Strategies division is Hewitt Associates, Towers,
Perrin; Mercer Consulting Group and Hay Group Inc.
We believe our most serious competitive threat will likely come either from
large, diversified financial services firms which are willing and able to expend
a lot of resources to gain market share or from large direct competitors that
choose to pursue an acquisition or consolidation strategy similar to ours. Our
business and market share may be materially adversely affected if we do not
remain competitive.
WE DEPEND ON A FEW KEY PRODUCERS.
During 1999, we derived approximately 75% of our total revenue from the
marketing activities of eleven of our producers' offices, including The Wamberg
Organization. Before our acquisition of The Wamberg Organization, it was our
largest independent producer organization and accounted for approximately 17.5%
of our total revenue in 1998 and 15.2% of our total revenue for the eight month
period ended August 31, 1999. The offices operated by Steven Cochlan, Malcolm
Briggs and George Blaha collectively accounted for approximately 21.5% of our
total revenue in 1998 and 22.3% of our total revenue for 1999. We enter agency
agreements with our producers in which they agree not to compete with us for a
period of time and after their relationship with us terminates. Generally, we
can terminate the producer agreements or the producers can terminate the
agreements with either 90 or 180 days' written notice depending on the
individual agreement. From time to time, we or our producers have terminated
relationships. We cannot be sure if a producer relationship will be terminated
in the future. We cannot be sure that a court will enforce the non-competition
provisions in the agreements.
LACK OF POLICY PERSISTENCY CAN ADVERSELY IMPACT OUR RENEWAL COMMISSIONS AND
FEES.
We derive a substantial portion of our revenue from business-owned life
insurance and other financial instruments that underlie many of our clients'
compensation and benefit programs that are maintained year after year. High
persistency rates are especially important to our Clark/Bardes division and Bank
Compensation Strategies divisions since we derive a substantial portion of our
revenue from these two divisions in the form of renewal commissions and fees. If
the business purchaser chooses to let a policy lapse, we will stop receiving any
renewal commissions and fees. In the past, we have had high persistency rates,
but we cannot assure you that we will continue to have them in the future.
WE ARE DEPENDENT ON THE SERVICES OF KEY PERSONNEL.
Our performance depends largely on the performance of our executive
officers and key employees. It is important to us to keep and motivate high
quality personnel, especially our management, producers and program development
teams. The loss of the services of any of our key employees particularly W. T.
Wamberg, chairman of our board of directors and chief executive officer, Melvin
G. Todd, president of Clark/ Bardes division, Richard C. Chapman, president of
Bank Compensation Strategies, and Donald C. Wegmiller, president of HealthCare
Compensation Strategies, could have a material adverse effect on our business,
financial condition and operating results. We cannot assure you that we will be
successful in retaining our key personnel.
OUR ACQUISITION STRATEGY MAY NOT SUCCEED.
Since September 1997, we have completed seven acquisitions. At any point in
time, we may also be considering several other potential acquisitions. Future
acquisitions may require substantial expenditures that will need to be financed
through cash from operations, bank debt as well as future debt and/or equity
offerings. We cannot assure you that funds will be available through the capital
markets and, if so, on terms acceptable to us.
Acquisitions involve numerous risks, including:
- the diversion of our management's time and attention to the negotiation
of the acquisition and to the assimilation of the businesses acquired;
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- the possible need to modify financial and other systems and add
management resources;
- the potential liabilities of the acquired businesses; and,
- unforeseen difficulties in the acquired operations.
An acquisition may not produce the revenue and profits we expect. Thus, an
acquisition that fails to meet our expectations could have a material adverse
effect on our business, financial condition and operating results.
A SIGNIFICANT AMOUNT OF OUR ASSETS ARE INTANGIBLE ASSETS.
Intangible assets arising from our purchased businesses consisted of the
following at December 31:
1999 1998
------- -------
Present value of inforce revenue............................ $59,284 $25,532
Goodwill.................................................... 34,440 18,552
Non-competition agreements.................................. 1,267 1,125
------- -------
$94,991 $45,209
======= =======
Total assets................................................ 76.1% 67.0%
Stockholders' equity........................................ 152.3% 152.2%
These amounts represent the excess of the purchase price over the value of
the net tangible assets we acquired. The amounts allocated to inforce revenue
are determined using the discounted cash flow of inforce revenue adjusted for
expected persistency, mortality and associated costs. The balance of the excess
purchase price over the net tangible assets is allocated to goodwill. The
inforce revenue is amortized over a period of anticipated benefit, which is
normally thirty years. Many factors outside our control determine the
persistency of our inforce business and we cannot be sure that the values we
allocated will ultimately be realized. Non-competition agreements represent the
negotiated value of such agreements with the former owners of acquired
businesses and are amortized over their contractual terms.
We have adopted Statement of Financial Accounting Standard No. 121
"Accounting for Impairment of Long Lived Assets and Long Lived Assets To Be
Disposed Of." At least annually, we review the components of our intangible
assets and make the appropriate adjustment if it becomes apparent that the
undiscounted cash flow is less than its unamortized carrying amount. No growth
rates are used in the projection of renewal revenue and, in the opinion of
management, projections are consistent in all respects. The Financial Accounting
Standards Board has determined that amortization of goodwill should be a maximum
period of twenty years. We presently amortize the present value of inforce
revenue over thirty years and goodwill for periods of twenty to forty years but
intend to fully comply with any new standards promulgated at the time of any
future acquisitions. If any component of the inforce revenue base should become
unrealizable or the accounting regulatory bodies impose shorter amortization
periods, this could have a material adverse effect on our business, financial
condition and operating results. We cannot assure you that a component of the
inforce revenue base will not become unrealizable or that accounting regulatory
bodies will not impose shorter amortization periods.
FLUCTUATIONS IN OUR REVENUES MAKE OUR OPERATING RESULTS DIFFICULT TO ANALYZE AND
FORECAST.
Our operating results can fluctuate considerably, especially when compared
on a consecutive quarterly basis. Because many of our clients' programs are
implemented late in the year, we can experience large increases in both first
year and renewal revenue in the fourth quarter. Operating results are also
affected by a number of other factors, including:
- introduction of new or enhanced programs and services by us or our
competitors;
- client acceptance or rejection of new programs and services;
- program development expenses;
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- timing of significant sales;
- demand for our administrative services;
- competitive, legislative and regulatory conditions in our industry; and
- general economic conditions.
Many of these factors are beyond our control. The sales cycles of our
programs and services usually last between twelve to eighteen months, with first
year revenue often coming from a few large cases and subject to a number of
factors beyond our control. Our revenue is thus difficult to forecast, and we
believe that comparing our consecutive quarterly results of operations is not
necessarily meaningful, nor does it indicate what results we will achieve for
any subsequent period. In our business, past operating results are not reliable
indicators of future performance.
W.T. WAMBERG OWNS A SIGNIFICANT AMOUNT OF OUR COMMON STOCK.
W.T. Wamberg, our Chairman and Chief Executive Officer, owns 19.7% of our
outstanding common stock. As a result, Mr. Wamberg is able to exercise
significant influence over all matters requiring stockholder approval, including
the election of directors and approval of significant corporate transactions.
This concentration of ownership may also have the effect of delaying, preventing
or deterring a change in control of Clark/ Bardes Holdings that may otherwise be
beneficial to you.
DELAWARE LAW AND OUR CHARTER DOCUMENTS COULD PREVENT AN UNSOLICITED TAKEOVER.
Delaware law, as well as provisions of our certificate of incorporation and
bylaws, could discourage unsolicited proposals to acquire us, even though such a
proposal may be beneficial to you. These provisions include:
- a board of directors classified into three classes of directors with the
directors of each class having staggered, three-year terms;
- our board's authority to issue shares of preferred stock without
shareholder approval; and
- provisions of Delaware law that restrict many business combinations and
provide that directors serving on staggered boards of directors, such as
ours, may be removed only for cause.
In addition, we have adopted a stockholder rights plan that could further
discourage attempts to acquire control of us. These provisions of our
certificate of incorporation, bylaws and Delaware law could discourage tender
offers or other transactions that might otherwise result in your receiving a
premium over the market price for our common stock.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information required by this item is incorporated by reference from the
Liquidity and Capital Resources section of Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations in pages 32 through 33
of this Form 10-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our financial statements begin on page F-1 of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There has been no change in our independent accountants during the past two
fiscal years. There have been no material disagreements with our independent
accountants on our accounting or financial reporting
38
41
that would require our independent accountants to qualify or disclaim their
report on our financial statements, or otherwise require disclosure in this Form
10-K.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 is hereby incorporated by reference
from our proxy statement for the 2000 annual meeting of our stockholders under
the captions "Proposal One -- Election of Directors," and "Directors and
Executive Officers."
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is hereby incorporated by reference
from our 2000 proxy statement under the caption "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is hereby incorporated by reference
from our 2000 proxy statement under the caption "Security Ownership of Certain
Beneficial Owners and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is hereby incorporated by reference
from our 2000 proxy statement under the caption "Certain Relationships and
Related Transactions."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1) Financial Statements
Report of Independent Auditors
Consolidated Balance Sheets as of December 31, 1999 and 1998
Consolidated Statements of Operations for each of the years ended
December 31, 1999, 1998, and 1997
Consolidated Statements of Stockholders' Equity (Deficit) for each of
the years ended December 31, 1999, 1998, and 1997
Consolidated Statements of Cash Flows for each of the years ended
December 31, 1999, 1998, and 1997
Notes to the Consolidated Financial Statements
(2) Financial Statement Schedules
None.
Schedules not listed above have been omitted because they are not
required, are not applicable, are shown in the related financial
statement or notes thereto or the amounts are immaterial.
(3) Exhibits
The information required by this Item 14(a)(3) is set forth in the
Exhibit Index immediately following our financial statements. The
exhibits listed herein will be furnished upon written request to
"Director of Investor Relations" located at our headquarters and
payment of a reasonable fee that will be limited to our reasonable
expense in furnishing such exhibits.
39
42
(b) Reports on Form 8-K
The following current Report on form 8-K was filed during the three months
ended December 31, 1999:
On October 4, 1999, we filed Amendment No. 1 to our Current Report on
Form 8-K filed September 16, 1999, disclosing the acquisition of the
businesses and substantially all the assets of The Wamberg Organization,
Inc. and Wamberg Financial Corporation. The following financial
statements and financial information was filed as part of the Form 8-K,
as amended:
(1) The Independent Auditor's Reports and the following audited
financial statements of The Wamberg Organization and Wamberg
Financial Corporation were included in the Form 8-K, as amended:
(i) Report of Independent Auditors;
(ii) Balance Sheets as of December 31, 1998 and 1997;
(iii) Statements of Income (Loss) and Retained Earnings (Accumulated
Deficit) for the years ended December 31, 1998 and 1997;
(iv) Statements of Cash Flows for the years ended December 31, 1998
and 1997; and
(v) Notes to Financial Statements.
(2) Our unaudited pro forma financial statements were included in the
Form 8-K, as amended:
(i) Unaudited Pro Forma Balance Sheets as of June 30, 1999 and
December 31, 1998; and
(ii) Unaudited Pro Forma Statements of Income for the six months
ended June 30, 1999 and year ended December 31, 1998.
40
43
CLARK/BARDES HOLDINGS, INC.
AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Report of Independent Auditors.............................. F-2
Consolidated Balance Sheets at December 31, 1999 and 1998... F-3
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998, and 1997......................... F-4
Consolidated Statements of Stockholders' Equity (Deficit)
for the years ended December 31, 1999, 1998, and 1997..... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998, and 1997......................... F-6
Notes to Consolidated Financial Statements.................. F-7
F-1
44
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Clark/Bardes Holdings, Inc.
We have audited the accompanying consolidated balance sheets of
Clark/Bardes Holdings, Inc. and subsidiaries as of December 31, 1999 and 1998,
and the related consolidated statements of operations, stockholders' equity
(deficit), and cash flows for each of the three years in the period ended
December 31, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Clark/Bardes
Holdings, Inc. and subsidiaries at December 31, 1999 and 1998, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States.
ERNST & YOUNG LLP
Dallas, Texas
February 18, 2000
F-2
45
CLARK/BARDES HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
----------------------
1999 1998
--------- --------
(DOLLARS IN THOUSANDS
EXCEPT SHARE AMOUNTS)
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 4,832 $12,102
Accounts and notes receivable, net of allowances of $347
and $394, respectively................................. 18,295 8,076
Deposits and advances..................................... 1,123 59
-------- -------
Total current assets.............................. 24,250 20,237
Intangible Assets -- net
Present value of in force revenue......................... 59,284 25,532
Goodwill.................................................. 34,440 18,552
Non competition agreements................................ 1,267 1,125
-------- -------
94,991 45,209
-------- -------
Equipment and Leasehold Improvements -- net................. 4,505 1,178
Deferred Tax Asset.......................................... 282 607
Other Assets................................................ 831 262
-------- -------
Total assets...................................... $124,859 $67,493
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $ 4,100 $ 2,925
Commissions and fees...................................... 3,475 2,634
Income taxes.............................................. 4,350 528
Accrued liabilities....................................... 7,841 2,651
Debt maturing within one year............................. 7,252 4,344
-------- -------
Total current liabilities......................... 27,018 13,082
Long Term Debt.............................................. 35,473 24,713
Stockholders' Equity:
Preferred stock
Authorized -- 1,000,000 shares; $.01 par value, none
issued
Common stock
Authorized -- 20,000,000 shares; $.01 par value
Issued and outstanding -- 9,629,999 in 1999 and
8,202,535 in 1998..................................... 96 82
Paid in capital........................................... 50,099 26,274
Retained earnings......................................... 12,173 3,342
-------- -------
Total stockholders' equity........................ 62,368 29,698
-------- -------
Total liabilities and stockholders' equity........ $124,859 $67,493
======== =======
Balances with related parties:
Accounts receivable -- officers and directors............. $ 20 $ --
Accounts receivable -- affiliates......................... $ 461 $ 872
Commissions and fees payable.............................. $ 26 $ --
Debt maturing within one year............................. $ -- $ 425
Long term debt............................................ $ -- $ 6,113
See accompanying notes to financial statements
F-3
46
CLARK/BARDES HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
---------------------------------------------
1999 1998 1997
------------- ------------- -------------
(DOLLARS IN THOUSANDS EXCEPT SHARE AMOUNTS)
REVENUES
Commissions and service fees........................... $ 119,158 $ 72,264 $ 47,871
Other.................................................. 1,602 2,502 1,584
---------- ---------- ----------
120,760 74,766 49,455
Commission and fee expenses.............................. 53,108 46,111 32,439
---------- ---------- ----------
Gross profit............................................. 67,652 28,655 17,016
OPERATING EXPENSES
General and administrative............................. 45,153 19,616 11,504
Amortization of intangibles............................ 4,370 1,232 295
Put warrants (non-recurring)........................... -- 4,800 --
---------- ---------- ----------
49,523 25,648 11,799
---------- ---------- ----------
OPERATING INCOME......................................... 18,129 3,007 5,217
INTEREST
Income................................................. 329 565 189
Expense................................................ (3,548) (3,166) (1,112)
---------- ---------- ----------
(3,219) (2,601) (923)
---------- ---------- ----------
Income before taxes...................................... 14,910 406 4,294
Income taxes............................................. 6,079 817 60
---------- ---------- ----------
NET INCOME (LOSS)........................................ $ 8,831 $ (411) $ 4,234
========== ========== ==========
BASIC NET INCOME (LOSS) PER COMMON SHARE
Net income (loss)...................................... $ 0.97 $ (0.08) $ 1.03
========== ========== ==========
Weighted average shares................................ 9,077,775 5,006,009 4,119,387
========== ========== ==========
DILUTED NET INCOME (LOSS) PER COMMON SHARE
Net income (loss)...................................... $ 0.95 $ (0.08) $ 0.99
========== ========== ==========
Weighted average shares................................ 9,328,939 5,006,009 4,398,593
========== ========== ==========
DIVIDENDS PER COMMON SHARE............................... -- -- $ 1.32
========== ========== ==========
Transactions with related parties were as follows:
Commissions and service fees........................... $ 1,434 $ 1,585 $ 879
Commission and fee expenses............................ $ 8,071 $ 8,068 $ 24,152
General and administrative expenses.................... $ 45 $ -- $ --
See accompanying notes to financial statements
F-4
47
CLARK/BARDES HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
COMMON STOCK
COMMON STOCK IN TREASURY TOTAL
------------------- PAID IN --------------------- RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL SHARES AMOUNT EARNINGS EQUITY (DEFICIT)
---------- ------ -------- ---------- -------- -------- ----------------
(DOLLARS IN THOUSANDS EXCEPT SHARE AMOUNTS)
Balance at January 1, 1997.............. 5,957,344 $5,054 $ -- (1,203,291) $ (4,456) $ 3,214 $ 3,812
Sale of common stock.................. 1,796 8 8
Issuance of common stock warrants..... 100 100
Purchase of common stock for
treasury............................ (2,567,650) (13,969) (13,969)
Notes receivable from related parties
for stock issued, net of
distribution of $606,280............ 244,649 (568) (568)
Sale/grant of treasury stock.......... 789,162 4,962 4,962
Net income............................ 4,234 4,234
Dividends............................. (4,259) (4,259)
---------- ------ -------- ---------- -------- ------- -------
Balance at December 31, 1997............ 5,959,140 5,162 -- (2,737,130) (14,031) 3,189 (5,680)
Decrease in note receivable from
related party for treasury stock
purchased........................... 471 471
Distribution to S Corp.
shareholders........................ (3,346) (3,346)
Redemption of common stock warrants... (100) (100)
Issuance of common stock in initial
public offering (net of expenses)... 4,000,000 40 31,707 31,747
Retirement of treasury shares and S
Corp. conversion.................... (2,737,130) (5,346) (12,124) 2,737,130 13,560 3,910 --
Issuance of common stock.............. 166,965 218 1,999 2,217
Conversion of 8.5% subordinated
note................................ 813,560 8 4,792 4,800
Net loss................................ (411) (411)
---------- ------ -------- ---------- -------- ------- -------
Balance at December 31, 1998............ 8,202,535 82 26,274 -- -- 3,342 29,698
Decrease in note receivable from related
party for treasury stock purchased.... 89 89
Issuance of common stock in connection
with acquisitions..................... 426,214 4 6,857 6,861
Sale of stock in a private placement.... 1,000,000 10 16,868 16,878
Exercise of stock options............... 1,250 -- 11 11
Net income.............................. 8,831 8,831
---------- ------ -------- ---------- -------- ------- -------
Balance at December 31, 1999............ 9,629,999 $ 96 $ 50,099 -- $ -- $12,173 $62,368
========== ====== ======== ========== ======== ======= =======
See accompanying notes to financial statements
F-5
48
CLARK/BARDES HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(DOLLARS IN THOUSANDS)
OPERATING ACTIVITIES
Net income (loss)......................................... $ 8,831 $ (411) $ 4,234
Adjustments to reconcile net income (loss) to cash
provided by operating activities:
Depreciation and amortization.......................... 5,232 1,571 491
Allowance on receivables............................... (47) 316 --
Changes in operating assets and liabilities
Accounts and notes receivable........................ (6,576) (300) (4,959)
Deposits and advances................................ (542) (59) --
Other assets......................................... (201) (203) (42)
Deferred tax asset................................... 325 (607) --
Accounts payable..................................... (3,522) 1,783 829
Commissions and fees payable......................... 40 689 598
Income taxes payable................................. 3,822 528 --
Accrued liabilities.................................. 5,190 654 663
-------- -------- --------
Cash provided by operating activities....................... 12,552 3,961 1,814
-------- -------- --------
INVESTING ACTIVITIES
Purchases of businesses................................... (38,470) (18,353) (13,883)
Purchases of equipment.................................... (1,812) (801) (537)
-------- -------- --------
Cash used in investing activities........................... (40,282) (19,154) (14,420)
-------- -------- --------
FINANCING ACTIVITIES
Proceeds from borrowings.................................. 57,000 31 23,400
Repayment of borrowings................................... (53,507) (10,137) --
Issuance of common stock and warrants -- net of costs..... 16,878 37,135 108
Notes receivable.......................................... 89 163 (44)
Dividends................................................. -- (3,680) (1,779)
Proceeds from sale of treasury stock -- net............... -- -- 3,791
Purchase of treasury stock................................ -- -- (13,969)
-------- -------- --------
Cash provided by financing activities....................... 20,460 23,512 11,507
-------- -------- --------
INCREASE (DECREASE) IN CASH................................. (7,270) 8,319 (1,099)
Cash and Cash Equivalents at Beginning of the Year........ 12,102 3,783 4,882
-------- -------- --------
Cash and Cash Equivalents at End of the Year.............. $ 4,832 $ 12,102 $ 3,783
======== ======== ========
See accompanying notes to financial statements
F-6
49
CLARK/BARDES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the accounts of Clark/Bardes
Holdings, Inc. (CBH) and its wholly owned subsidiaries, Clark/Bardes, Inc. (CBI)
and Wamberg Financial Corporation. Through its three operating divisions,
Clark/Bardes, Bank Compensation Strategies and HealthCare Compensation
Strategies, CBI designs, markets and administers life insurance products,
compensation, and benefit programs to U.S. corporations, banks and healthcare
organizations. CBI assists its clients in using customized life insurance
products to generate capital, finance long-term benefit liabilities, and
supplement and secure benefits for key employees. In addition, CBI provides
long-term administrative services for executive benefits and insurance and
provides compensation consulting services.
Basis of Presentation -- The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates. In the opinion of management, all adjustments, including normal
recurring accruals, considered necessary for a fair presentation have been
included. All intercompany values and transactions have been eliminated in the
accompanying consolidated financial statements.
A summary of the significant accounting policies consistently applied in
the preparation of the accompanying financial statements follows.
Cash and Cash Equivalents -- CBI considers all highly liquid debt
instruments purchased with a maturity of three months or less to be cash
equivalents. CBI has cash balances at three financial institutions in excess of
the $100,000 limit insured by the Federal Deposit Insurance Corporation.
Uninsured cash in bank balances aggregate to approximately $4,323,000 and
$3,009,000 at December 31, 1999 and 1998, respectively. CBI has not experienced
any losses in such accounts and believes it is not exposed to any significant
credit risk on cash and cash equivalents.
Fair Value of Financial Instruments -- The book values of cash, accounts
and notes receivable, accounts payable, commissions and fees payable and other
financial instruments approximate their fair values principally because of the
short-term nature of these instruments. The carrying value of CBI's long-term
debt does not differ significantly from its fair value.
Equipment and Leasehold Improvements -- Equipment and leasehold
improvements are carried at cost less accumulated depreciation. Depreciation
expense is provided in amounts sufficient to relate the cost of assets to
operations over the estimated service lives using the straight-line method. CBI
depreciates furniture and equipment over periods of three to seven years while
leasehold improvements are amortized over the lease period.
Intangible Assets -- CBI has intangible assets representing the excess of
the costs of acquired businesses over the fair values of the tangible net assets
associated with the acquisition. Intangible assets consist of the net present
value of future cash flows from existing business at the acquisition date,
non-compete agreements with the former owners and goodwill. The amortization
periods for the non-compete agreements are 5 years and 10 years. The net present
value of future cash flows is amortized over 20 to 30 years (the expected
average policy duration) based on the present value of estimated profits
expected to be realized over the life of the existing book of business. Goodwill
is being amortized over a 25 to 40 year period on a straight-line basis.
Amortization expense totaled $4,370,000 in 1999, $1,232,000 in 1998, and
$295,000 in 1997, respectively. Management's policy, in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 121 -- Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,
is to review intangible and other long-lived assets for impairment on an annual
basis or whenever changes in circumstances indicate that an impairment might
exist. When one or more indicators are present, the
F-7
50
CLARK/BARDES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
estimated undiscounted cash flows are compared to the carrying amount of the
assets. If the undiscounted cash flows are less than the carrying amount, an
impairment loss is recorded. The impairment loss is measured by comparing the
fair value of the assets with their carrying amounts and any write-downs are
treated as permanent reductions in the carrying amount of the asset.
Revenue -- First year commissions are recognized as revenue at the time the
policy application is substantially completed, the premium is paid and the
insured party is contractually committed to purchase the insurance policy.
Renewal commission revenue is recognized when the premium or commission is due
and payable. CBI is 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.
Cancellations or other adjustments are accounted for in the period of
cancellation or in the period where an adjustment is determined to be necessary
and are not significant. Service fees are received annually on the policy
anniversary date. Fees related to future services to be provided are recognized
as the services are rendered and fees for program design and placement are
recognized in a manner consistent with commissions. Fees for consulting services
are recognized on a percentage of completion basis as related costs are incurred
over the duration of the project.
CBI generated in excess of 25% of its revenue in 1999 from 8 clients, in
1998 from 8 clients, and in 1997 from 3 clients, respectively, creating a
concentration of credit risk. Approximately 15.2%, 17.5% and 23% of CBI's
commission and fee revenue for the years ended December 31, 1999, 1998 and 1997
respectively, was generated by The Wamberg Organization, which was wholly owned
by CBI's Chairman and Chief Executive Officer and acquired by CBI on September
1, 1999 (see note 2). Substantially, all of the policies underlying the programs
marketed by CBI are underwritten by 20 life insurance companies, of which seven
accounted for approximately 63.1%, 76.3% and 78.9% of CBI's first-year
commission revenue for the years ended December 31, 1999, 1998 and 1997,
respectively.
CBI is party to production agreements (typically, five years in duration)
with some of the insurance companies with which it conducts business. If CBI
fails to meet specified minimum production levels with these carriers, future
commissions otherwise payable to CBI by the insurance carriers will be offset up
to maximum amounts ranging from $100,000 to $150,000 per year, or a total of
$400,000 per year under all agreements combined.
Commissions and Fee Expense -- Commissions and fee expense comprise the
portion of the total commission revenue that is earned by and paid to
independent sales producers.
Advertising -- Advertising and marketing costs provided to third parties
are charged to operations when incurred. Total expenses for 1999, 1998, and 1997
were $1,080,000, $289,000 and $70,000, respectively.
Income Taxes -- Prior to its initial public offering and in connection
therewith, Clark/Bardes ceased to be taxed as an S corporation and became
subject to federal and state income taxation as a C corporation. As an S
corporation, CBI's income, whether or not distributed, was taxed directly to the
stockholders for federal and certain state income tax purposes. At August 1,
1998, the effective date of change in tax status, CBI recorded deferred taxes on
its balance sheet for the difference between the tax bases and book bases of its
assets and liabilities.
Securities and Exchange Commission Staff Accounting Bulletin No.
101 -- Revenue Recognition in Financial Statements -- SAB No. 101 becomes
effective in 2000. CBH has been in compliance with SAB No. 101 and its adoption
is not expected to have any impact on CBH's net income or stockholders' equity.
Derivatives and Hedging Instruments -- In June 1998, the FASB issued SFAS
No. 133 -- Accounting for Derivative Instruments and Hedging Activities, which
is required to be adopted in years beginning after June 15, 2000. The Statement
will require CBI to recognize all derivatives on the balance sheet at fair
value. Derivatives that are not hedges must be adjusted to fair value through
income. If the derivative is a hedge,
F-8
51
CLARK/BARDES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
depending on the nature of the hedge, changes in the fair value of derivatives
will either be offset against the change in fair value of the hedged assets,
liabilities, or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value will be immediately
recognized in earnings. Because of CBI's minimal use of derivatives (note 6),
management does not anticipate that the adoption of the new Statement will have
a significant effect on earnings or the financial position of CBI.
Reclassifications -- CBI has made minor reclassifications of certain prior
years' amounts to conform to the current year's presentation.
2. ACQUISITIONS
Following is a description of the Company's acquisitions made during 1997,
1998 and 1999. The results of operations for each acquired entity have been
included in the accompanying statement of operations as of their effective date.
Banking Consultants of America (BCA) -- Effective October 1, 1999, CBI
purchased certain assets and the businesses of Banking Consultants of America (a
sole proprietorship) and Financial Institution Services, Inc. for a purchase
price of $1.4 million and expenses of $28,000. BCA is a regional provider of
insurance products to banks and will be absorbed by CBI's Bank Compensation
Strategies division. BCA has been accounted for as a purchase and the entire
purchase price was allocated to the net present value of the future cash flows
of BCA's projected renewal revenues.
The Wamberg Organization and Wamberg Financial Corporation -- On September
1, 1999, CBI purchased certain assets and assumed certain liabilities of The
Wamberg Organization and purchased all of the outstanding stock of Wamberg
Financial Corporation for a total purchase price of $18.0 million consisting of:
(i) a cash payment to The Wamberg Organization of $12.4 million;
(ii) a cash payment to W. T. Wamberg of $50,000 for his shares of
Wamberg Financial Corporation;
(iii) a direct payment of $1.5 million for two outstanding loans;
(iv) assumption of a $3.8 million note for the purchase of a corporate
aircraft; and,
(v) expenses of approximately $265,000.
The $14.2 million cash portion of the purchase price was funded from CBI's
existing cash balances. In addition, the asset purchase agreement provides for
the payment of an additional $11.9 million upon the attainment of certain
stipulated annual financial objectives starting with the period ended December
31, 1999 through December 31, 2002. As of December 31, 1999, the financial
objectives for that year had been met; accordingly, a $1.5 million cash payment
will be made to W. T. Wamberg in the first quarter of 2000 and will be recorded
as additional purchase price. In accordance with the asset purchase agreement,
all renewal revenue acquired as of September 1, 1999, remaining inforce on
December 31, 2018, will revert to Mr. Wamberg.
The sole shareholder of The Wamberg Organization and Wamberg Financial
Corporation was W. T. Wamberg, Chairman of CBI and Clark/Bardes Holdings, Inc.
The Wamberg Organization has historically been CBI's largest single producer,
accounting for 17.5% of revenue in 1998 and 15.2% for the year period ended
December 31, 1999. Upon consummation of the September 1, 1999 acquisition, Mr.
Wamberg became President and Chief Executive Officer of Clark/Bardes Holdings,
Inc.
F-9
52
CLARK/BARDES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tangible assets acquired consist primarily of receivables, equipment,
and aircraft. Subsequent to the acquisition, the Company sold the corporate
aircraft previously owned by Wamberg Financial Corporation to an unaffiliated
leasing company for a gain of $502,000 -- net of tax, and simultaneously leased
it back for a ten year period. The gain was not recognized in income as it had
been recorded as part of the purchase price. The proceeds from the sale were
applied to a full repayment of the related note. The monthly rental under the
lease is $27,924 or $335,000 per year. In the five years ended December 31,
2004, total rental will be $1,675,000.
Because of the relationship between The Wamberg Organization, Wamberg
Financial Corporation, W. T. Wamberg and CBI, the CBH board of directors
appointed a special committee comprised of independent, non-employee directors
to negotiate and review the terms of this transaction. The special committee
received a fairness opinion from an independent investment banking firm with
respect to the acquisition and, after analyzing the matter and considering all
relevant issues, recommended that the full board approve the transaction.
The Wamberg Organization leases its 11,085 square feet of office space from
an entity controlled by Mr. Wamberg for an annual rental of $150,000, under a
lease expiring on February 21, 2009.
On January 4, 1999, CBI purchased the right to receive approximately 27.5%
of the commissions, related to renewal revenue of certain inforce policies
existing on June 30, 1998, due under the Principal Office Agreement with W. T.
Wamberg and The Wamberg Organization, for a cash payment of $7.5 million.
Concurrent with the acquisition of the assets and liabilities of The Wamberg
Organization discussed above, CBI purchased all of the renewal revenue not
acquired on January 4, 1999 and the original January 4, 1999 agreement was
superseded. Accordingly, the unamortized balance of $6.9 million at September 1,
1999 under that agreement was combined with the purchase price under the new
purchase agreement. The combined purchase price will be allocated to the net
present value of future revenue to be received until September 1, 2018.
Excluding any payments that may be made by virtue of achieving the stipulated
annual financial objectives, the total cost of The Wamberg Organization and
Wamberg Financial Corporation was $24.9 million, including the $6.9 million
unamortized balance of the January 4 purchase.
The acquisition of The Wamberg Organization and Wamberg Financial
Corporation has been accounted for as a purchase. The pro forma information
below presents the results of operations including those of the Wamberg entities
as if the acquisitions occurred on January 1, 1998.
YEAR ENDED
DECEMBER 31,
--------------------
1999 1998
--------- --------
(IN THOUSANDS EXCEPT
PER SHARE)
Pro Forma:
Revenues.................................................. $120,760 $74,766
Net income................................................ 6,751 725
Diluted earnings per share................................ .72 .13
National Institute for Community Banking -- On May 18, 1999, CBH acquired
all of the issued and outstanding capital stock of National Institute for
Community Banking (NICB) by merging it with and into CBH. Each share of NICB
common stock was converted into CBH common stock on a ratio of 39.7 of CBH
shares for each share of NICB for a total of 484,303 shares of CBH common stock.
By agreement, the effective date of the NICB acquisition was January 1, 1999.
NICB was an independent producer affiliated with Bank Compensation Strategies.
Of the total, 99,851 shares were issued at the closing and 384,452 shares
are issuable upon attaining stipulated revenue and income goals over the
four-year period 1999 to 2002. No other consideration was given.
F-10
53
CLARK/BARDES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The value of the shares received by the selling shareholders was $1.6 million
based on CBH's closing price of $16 on May 18, 1999. Any shares issued will be
accounted for as additional consideration based on their value at the time of
issuance and will increase future amortization expense. The selling shareholders
achieved their financial performance goals for 1999 and, on January 26, 2000 an
additional 96,113 shares having a value of $1.4 million were issued to them.
The acquisition of NICB has been accounted for as a purchase. The entire
cost of the NICB acquisition has been allocated to goodwill and is being
amortized over 25 years.
MCG/Healthcare -- On April 5, 1999, CBI purchased the assets and business
and assumed certain liabilities of Phynque, Inc., d/b/a Management Compensation
Group/HealthCare, a Minnesota corporation, for a purchase price of $35.9 million
consisting of:
(i) a cash payment of $13.8 million;
(ii) a promissory note for $8.7 million;
(iii) 326,363 shares of common stock, having an aggregate value of $5.3
million based on the closing price of the common stock on April 5,
1999;
(iv) the direct payment of $3.6 million for certain outstanding loans;
and,
(v) the assumption of $4.2 million of liabilities and approximately
$372,000 of closing costs.
The assets acquired include cash, receivables and equipment in addition to
all intellectual property, files pertaining to customers, computer software and
systems and related licenses. The liabilities assumed include commissions
payable, accrued employee benefits and operating expenses. The $17.7 million
cash portion of the purchase price was funded by a borrowing under CBI's credit
facility. The promissory note is payable in thirty-two equal quarterly
installments of principal and interest at 10% per annum commencing on April 5,
2000 (see Note 6). The promissory note is partially secured by a personal
guarantee of W. T. Wamberg, Chairman and Chief Executive Office of Clark/Bardes
Holdings.
MCG/HealthCare is a 168 employee executive benefit consulting organization
servicing the healthcare industry. MCG/HealthCare is headquartered in
Minneapolis, Minnesota. Prior to the acquisition described above, there was no
material relationship between CBI and MCG/HealthCare.
The acquisition of MCG/HealthCare has been accounted for as a purchase. The
pro forma information below presents the results of CBI and MCG/HealthCare as if
the acquisition had occurred on January 1, 1998.
YEAR ENDED DECEMBER 31,
-----------------------
1999 1998
---------- ----------
(IN THOUSANDS EXCEPT
PER SHARE)
Pro Forma:
Revenues.................................................. $126,518 $100,876
Net income (loss)......................................... 7,464 (1,826)
Diluted earnings (loss) per share......................... .79 (.34)
Schoenke Companies -- On September 1, 1998, CBI acquired substantially all
of the assets, and the book of business of Schoenke & Associates Corporation and
Schoenke & Associates Securities Corporation based in Germantown, Maryland. The
Schoenke Companies specialize in designing and administering benefit programs
for companies. The Company accounted for the acquisition as a purchase and has
included the operating results of the Schoenke Companies commencing from the
acquisition date in the accompanying financial statements.
F-11
54
CLARK/BARDES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The purchase price was $17.0 million plus related expenses of approximately
$98,000. The purchase price was comprised of $15.0 million in cash and a
promissory note in the principal amount of $2.0 million (see Note 6). CBI
allocated approximately $768,000 of the purchase price to tangible assets
acquired and the remaining $16 million was allocated to the net present value of
estimated realizable future cash flows embedded in the existing inforce book of
business. This intangible asset is being amortized over 30 years which
approximates the average policy duration based on the terms of the policies and
prevailing practices for such benefit programs.
The pro forma information below presents the results of CBI and Schoenke
combined as if the acquisition had occurred January 1, 1997:
YEAR ENDED
DECEMBER 31,
---------------------
1998 1997
--------- ---------
(IN THOUSANDS EXCEPT
PER SHARE)
Pro Forma:
Revenues.................................................. $79,744 $55,920
Net income................................................ 96 3,911
Diluted earnings per share................................ .01 .48
Wiedemann & Johnson Company -- On November 1, 1998, CBI acquired
substantially all of the assets and 75% of the book of business of Wiedemann &
Johnson Company based in Dallas, Texas. The Wiedemann & Johnson Company
specializes in designing, and administering benefit programs for companies. CBI
accounted for the acquisition as a purchase and has included the operating
results of the Wiedemann & Johnson Companies in the financial statements
commencing from the acquisition date.
The purchase price was $6.0 million plus related expenses of approximately
$54,000. The purchase price was comprised of $4.0 million in cash and $2.0
million in common stock represented by 142,857 shares at an agreed upon price
per share. CBI allocated approximately $40,000 of the purchase price to tangible
assets acquired and $6,014,000 to the net present value of estimated realizable
future cash flow embedded in the existing in-force book of business. This
intangible asset is being amortized over 30 years, which approximates the
average policy duration based on the terms of the policies, and prevailing
practices for such benefit programs.
Bank Compensation Strategies -- On September 1, 1997, CBI acquired
substantially all of the assets and the book of business of Bank Compensation
Strategies Group (BCS), a Minneapolis, Minnesota based life insurance agency
engaged in designing and marketing life insurance policies and related
compensation, salary and benefit plans and providing related services to
financial institutions. CBI accounted for the acquisition as a purchase and has
included the operating results of BCS commencing from the acquisition date in
the financial statements.
The purchase price was $24.0 million plus related expenses of approximately
$383,000. The purchase price was comprised of $13.5 million in cash and two
promissory notes in the principal amounts of $5.7 million and $4.8 million (see
Note 6). CBI allocated approximately $10,000 of the purchase price to tangible
assets acquired;
- $1.2 million was allocated to two non-compete agreements with former
officers of BCS. The terms of the agreements are for five and ten years,
which are the respective periods over which the intangible assets are
being amortized.
- $19.1 million was allocated to goodwill. This is being amortized over a
forty year period.
F-12
55
CLARK/BARDES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- $4.1 million was allocated to the net present value of the realizable
cash flows embedded in the existing inforce book of business and is being
amortized over thirty years.
The pro forma information below presents the results of CBI and BCS
combined as if the acquisition had occurred on January 1, 1997:
YEAR ENDED
DECEMBER 31,
1997
--------------
(IN THOUSANDS,
EXCEPT
PER SHARE)
Pro Forma:
Revenues.................................................. $62,264
Net income................................................ 2,219
Diluted earnings (loss) per share......................... .48
3. NOTES RECEIVABLE
Notes receivable consist of the following:
DECEMBER 31,
-------------
1999 1998
----- -----
Secured; interest at prime plus 2%; due on demand........... $100 $130
Secured; interest at prime plus 4%; due on demand........... 163 212
Secured; interest at prime plus 2%; due on demand........... 32 51
---- ----
$295 $393
==== ====
4. INTANGIBLES
Intangible assets represent the excess of the purchase price over the fair
values of the tangible assets of acquired businesses (see note
1 -- Intangibles). The classification of the amounts determined and allocated to
the respective intangible assets are:
DECEMBER 31,
------------------
1999 1998
-------- -------
Present value of future cash flows from in force revenue.... $ 62,711 $26,409
Goodwill.................................................... 36,427 19,077
Non competition agreements.................................. 1,750 1,250
-------- -------
100,888 46,736
Accumulated amortization.................................... (5,897) (1,527)
-------- -------
Net......................................................... $ 94,991 $45,209
======== =======
The amortization periods for these assets are:
- present value of future cash flows from inforce revenues are amortized
over 20 to 30 years, a period representative of the policy duration;
- goodwill is amortized over periods of 25 to 40 years; and
- non competition agreements are amortized over 5 to 10 years, the terms of
the agreements.
F-13
56
CLARK/BARDES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Major classifications of equipment and leasehold improvements are as
follows:
DECEMBER 31,
---------------
1999 1998
------ ------
Office furniture and equipment.............................. $6,458 $2,745
Leasehold improvements...................................... 503 188
------ ------
6,961 2,933
Accumulated depreciation and amortization................... (2,456) (1,755)
------ ------
$4,505 $1,178
====== ======
Depreciation was $862,000, $338,000 and $198,000 for the years 1999, 1998 and
1997, respectively.
6. TAXES
Prior to July 31, 1998, CBI had elected, by consent of its shareholders, to
be taxed under subchapter S of the Internal Revenue Code. Under this election,
CBI did not pay federal income taxes on its taxable income. Instead, the
stockholders were liable for individual federal income tax on CBI's taxable
income as determined under the cash basis method of accounting. Income taxes, as
shown in the accompanying financial statements for periods prior to July 31,
1998, consist primarily of state franchise and income taxes.
In connection with its Initial Public Offering, on August 19, 1998, CBI
ceased to be an S corporation and became subject to federal income taxation as a
C corporation. At July 31, 1998 the tax bases of CBI's net assets was
approximately $1.8 million higher than the financial statement bases. Section
448 of the Internal Revenue Code requires companies changing from the cash
method to the accrual method of accounting for tax purposes to offset the excess
deduction arising from the change against taxable income ratably over four
taxable years. Significant components of the difference were the cash to accrual
basis conversion balances and the accumulated amortization of intangible assets.
In the period ending July 31, 1998, CBI had a pre Initial Public Offering
loss of $3.8 million, which was passed on to the S corporation shareholders.
Federal income tax (benefit) expense consists of the following components:
YEAR ENDED DECEMBER 31,
------------------------
1999 1998 1997
------ ------ ------
Current:
Federal.................................................. $4,848 $1,230 $ --
State and local.......................................... 856 194 60
Deferred:
Federal.................................................. 319 (524) --
State and local.......................................... 56 (83) --
------ ------ ------
$6,079 $ 817 $ 60
====== ====== ======
F-14
57
CLARK/BARDES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of the 1999 and 1998 income tax expense computed by
applying the combined federal and state corporate tax rate of 40% to income
before income taxes to the actual taxes is as follows:
YEAR ENDED
DECEMBER 31,
--------------
1999 1998
------ -----
U.S. Federal statutory rate................................. $5,069 $ 138
State income tax -- net of federal benefit.................. 895 24
Non-deductible expenses and other........................... 115 75
Non-recurring effect of conversion from an S to a C
corporation............................................... -- 779
Nontaxable warrant adjustment............................... -- (199)
------ -----
$6,079 $ 817
====== =====
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets are as follows:
YEAR ENDED
DECEMBER 31,
---------------
1999 1998
------ ------
Deferred tax liabilities
Amortization.............................................. $ 912 $ 426
Other..................................................... -- 50
------ ------
912 476
====== ======
Deferred tax assets
Cash to accrual adjustment................................ 495 739
Accrued liabilities and reserves.......................... 473 314
Deferred revenue.......................................... 226 30
------ ------
1,194 1,083
====== ======
Net deferred tax assets..................................... $ 282 $ 607
====== ======
In assessing the realizability of deferred tax assets, management considers
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 those temporary
differences become deductible. Management considers the scheduled reversal of
deferred tax liabilities, projected future taxable income and tax planning
strategies in making this assessment. Based upon the level of historical taxable
income and projections for future taxable income over the periods with respect
to which the deferred tax assets are deductible, management believes it is more
likely than not that CBI will realize the benefits of these deductible
differences. Accordingly, no valuation allowance is deemed necessary.
F-15
58
CLARK/BARDES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. LONG TERM DEBT
DECEMBER 31,
-----------------
1999 1998
------- -------
(IN THOUSANDS)
Term loan payable to banks.................................. $28,000 $ --
Revolving credit loan payable to banks...................... 5,000 --
Note payable to former shareholders of acquired businesses:
Schoenke & Associates..................................... 1,000 2,019
Phynque, Inc.............................................. 8,724 --
Senior secured notes........................................ -- 11,600
Second priority senior secured notes........................ -- 8,900
Medium term notes -- related parties........................ -- 3,275
AAA distribution -- related parties......................... -- 3,263
------- -------
42,725 29,057
Less Current Maturities..................................... 7,252 4,344
------- -------
$35,473 $24,713
======= =======
Credit Facility -- On January 15, 1999, CBI negotiated a $65 million senior
credit facility and entered into $25 million of floating rate debt fixed for the
first year at 7.08% (the one-year London InterBank Offered Rate plus 2%) under
that facility. Principal and interest are payable quarterly beginning March 31,
1999. The $25 million of proceeds were used to retire existing long term debt.
The credit facility contains restrictive covenants requiring mandatory
prepayments under certain conditions, financial reporting and compliance
certificates, maintenance of financial ratios, restrictions on guarantees and
additional indebtedness, limitations on mergers and acquisitions, prohibition of
cash dividends, limitation on investments, loans, and advances, and changes in
control. All of the assets of CBI, including the CBI stocked owned by CBH, are
pledged as collateral under this credit agreement.
CBI is obligated to pay a commitment fee based on the daily average of
undrawn funds under the credit agreement. The fee is a minimum of .25% and a
maximum of .50% based on the ratio of consolidated indebtedness to income before
interest, taxes, depreciation and amortization for the most recent four quarters
on a rolling quarterly basis. A ratio of one to one produces the lowest fee and
three to one, or more, produces the highest.
Coincident with the credit facility and floating rate agreement, CBI
entered into two interest rate swap agreements with a bank affiliated with the
lending group to set the interest rates. The first agreement, accounted for in
interest expense, went into effect on July 6, 1999 and sets the underlying
LIBOR-based interest rate at 5.76% on $15 million of the debt. The second
agreement went into effect on January 18, 2000 and sets the underlying
LIBOR-based rate at 5.29% on $15 million of the debt.
CBI capitalized $522,000 of costs in connection with the refinancings as
Other Assets on the balance sheet at December 31, 1999. These costs are being
amortized over the life of the agreements.
On December 28, 1999, CBI expanded the credit facility negotiated in
January 1999, to $100 million with the same group of bank lenders. The new
credit facility provides for a revolving credit and a term loan. At the end of
each year, borrowings under the revolving credit are converted to a five-year
term loan. The revolving credit portion terminates on December 31, 2002. The
revolving credit converts to a term loan at the end of each year. The term loan
is payable quarterly at the rate of 5% of the year end balance and $1,250,000
per quarter so the term portion is repaid by December 31, 2004.
F-16
59
CLARK/BARDES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Interest on the outstanding indebtedness is at a spread over the Eurodollar
(London InterBank offered) rate or a base rate equal to the prime rate plus
1/2%, at CBI's choice. The Eurodollar rate remains fixed for the period that
portion of the loan is outstanding and the base rate floats with changes in the
prime rate.
The two interest rate swap agreements, negotiated in 1999, remain in
effect.
Schoenke Notes. During 1998, in connection with the purchase of the
Schoenke Companies, CBI issued $2.0 million of 6.75% notes maturing in two equal
annual installments of $1.0 million on September 1, 1999, and on September 1,
2000. Interest is payable monthly beginning November 1, 1998. Interest expense
was $39,000 and $112,500 and interest paid was $28,000 and $120,000 in 1998 and
1999, respectively.
Phynque, Inc. Notes. In connection with the purchase of Phynque, Inc. d/b/a
Management Compensation Group/HealthCare, CBI issued an $8,724,000 promissory
note payable in thirty-two equal quarterly installments of principal and
interest at 10%. A portion of the promissory note is guaranteed personally by W.
T. Wamberg, Chairman and Chief Executive Officer of CBI and CBH.
At December 31, 1999, future payments under all financing arrangements are
as follows:
2000........................................................ $7,252
2001........................................................ 6,548
2002........................................................ 6,646
2003........................................................ 6,754
2004........................................................ 6,874
Thereafter.................................................. 9,250
8. STOCKHOLDERS' EQUITY
In June 1998, Clark/Bardes, Inc., a Texas corporation (the Predecessor
Company) was merged with Clark/Bardes, Inc., a Delaware corporation (the
Successor Company), a wholly owned subsidiary of Clark/ Bardes Holdings, Inc.
Each existing shareholder of the Predecessor Company received one-half share of
the Successor Company in exchange for each share held.
During 1997, the Predecessor Company repurchased common stock from certain
principals and other stockholders. Under these agreements, 2,567,650 shares were
repurchased at prices ranging from $4.20 to $6.00 per share. These shares were
held in treasury.
In 1997, the Predecessor Company approved an arrangement allowing certain
key associates to purchase shares of common stock. During the year, pursuant to
this arrangement, the Company issued 174,653 shares of common stock at $4.80 per
share. The notes receivable under this arrangement are collateralized by the
shares sold. Amounts due at December 31, 1999 and 1998 for stock purchases were
$7,000 and $97,000. Outstanding principal balances pay interest at 8.5% and
mature in 2000 and 2003.
In June 1998, a return of capital distribution was made to the existing
shareholders. In accounting for this distribution, all of the existing
shareholders' investment, treasury shares and retained earnings were transferred
to paid in capital.
All of the foregoing was done in connection with and in contemplation of an
initial public offering. Also, as part of the initial public offering, CBI
redeemed previously issued warrants to purchase 1,525,424 shares of the
Company's stock for $4.9 million of which $4.8 million was charged to expense
during 1998.
In August 1998, CBH sold 4 million shares of common stock in an initial
public offering for net proceeds of $31.7 million.
F-17
60
CLARK/BARDES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Other significant equity transactions in 1998 were:
- The conversion of $4.8 million of 8.5% convertible subordinated notes
into 813,559 shares at $5.90 per share;
- The issuance of 24,108 shares to the President of the Clark/Bardes
division under an existing bonus arrangement; and
- Issued 142,857 shares having a market value of $2 million to the
controlling shareholders of Wiedemann & Johnson Company in partial
payment for the purchased assets of that Company (see note 2).
In July 1998, the Board of Directors approved the authorization of
1,000,000 shares of $.01 par value junior participating preferred stock. No
shares have been issued as of December 31, 1999.
On June 7, 1999, CBH sold 1,000,000 shares of common stock to Conning
Insurance Capital Partnership V, L. P. for $16.9 million in a private placement
transaction. The proceeds from this sale were used for debt reduction and
acquisitions.
During 1999, CBH also issued shares of its common stock in connection with
certain acquisitions:
- 326,363 shares having a market value of $5.3 million were issued to the
controlling shareholders of Phynque, Inc. in partial payment for the
purchase of the assets of that Company.
- 99,851 shares having a market value of $1.6 million were issued to the
shareholders of National Institute for Community Banking in exchange for
all of the outstanding shares of that Company. Up to 384,452 additional
shares are issuable upon attainment of stipulated performance objectives
by NICB of which 96,113 shares having a value of $1.4 million were issued
in January 2000.
9. BENEFIT PLANS
Incentive Stock Option Plan. The Incentive Stock Option Plan provides
certain employees options to purchase shares for $4.80 and $7.00 per share;
540,830 shares of common stock have been reserved for issuance under this plan
and 190,830 shares had been granted under this program at December 31, 1997. The
$4.80 and $7.00 options (with the exception of 100,000 director options) became
100% vested at the date of the Initial Public Offering. The options expire ten
years from the grant date. In addition, the options are voided within 90 days of
the employee's termination or one year from the date of death.
On April 2, 1997, CBI granted stock options to an individual in his
capacity as a nominee to the Board of Directors for the purchase of 100,000
shares at an exercise price of $4.80; no options were exercised during 1997 or
vested at December 31, 1997. These options were issued in conjunction with
services provided to CBI as an advisor to the Board of Directors and for future
participation as a member of CBH's Board of Directors. These options vest at the
rate of 5,555 shares per month beginning July 1, 1998, the date of the
individual's appointment to the Company's Board of Directors. The fair value of
the common stock at the date of grant was $4.80 as determined by CBH's Board of
Directors based on recent stock transaction; accordingly, no compensation
expense has been recorded.
1998 Stock Option Plan. In 1998, the Board of Directors approved a stock
option plan providing for certain employees, directors and producers to purchase
shares at the fair market value at the time the option is granted. The Plan is
administered by a committee of two non-employee directors who have full
discretion to determine participation, vesting and term of the option, at the
time of the grant providing that no option may
F-18
61
CLARK/BARDES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
have a term greater than ten years from the date of the grant to purchase shares
at the fair market value at the time the option is granted. A total of 2,000,000
shares are reserved for issuance under this plan.
WEIGHTED AVERAGE
ACTIVITY OPTIONS EXERCISE PRICE
- -------- --------- ----------------
Outstanding at January 1, 1997............................ 50,000 $ 1.75
Granted................................................. 290,832 $ 5.93
Exercised............................................... (50,000) $ 1.75
Forfeited............................................... --
---------
Outstanding at December 31, 1997.......................... 290,832 $ 5.93
Granted................................................. 380,689 $ 9.00
Exercised............................................... --
Forfeited............................................... --
---------
Outstanding at December 31, 1998.......................... 671,521 $ 7.67
Granted................................................. 586,323 $15.52
Exercised............................................... (1,250) $ 9.00
Forfeited............................................... (18,750) $16.30
---------
Outstanding at December 31, 1999.......................... 1,237,842 $11.51
---------
Exercisable at December 31, 1999.......................... 558,242 $ 9.36
=========
The options granted in 1999 include 276,600 issued to executives and
employees of the HealthCare Compensation Strategies division in connection with
the acquisition of Phynque, Inc. d/b/a Management Compensation Group HealthCare.
These options vest at the rate of 20% per year beginning in 1999 but are subject
to certain forfeiture provisions if the division fails to attain certain
financial performance goals.
The following table summarizes the stock options outstanding and
exercisable:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ----------------------------------------------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
RANGE OF NUMBER REMAINING EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE PRICE EXERCISABLE PRICE
- --------------- ----------- ---------------- -------- ----------- --------
$4.80 140,832 7.22 years $ 4.80 90,327 $ 4.80
$7.00 150,000 7.00 years $ 7.00 150,000 $ 7.00
$9.00 375,689 6.46 years $ 9.00 187,147 $ 9.00
$14.25-$14.75 141,000 7.93 years $14.74 36,667 $14.74
$15.93-$16.13 103,000 4.62 years $16.10 88,939 $16.13
$16.94-$18.13 50,721 7.00 years $17.81 4,662 $17.81
---------
961,242
Contingent 276,600 $16.13 --
---------
1,237,842
The Company continues to account for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees". Compensation cost for stock options,
if any, is measured as the excess of the quoted market price of the Company's
stock at the date of grant over the amount an employee must pay to acquire the
stock.
F-19
62
CLARK/BARDES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Statement of Financial Accounting Standards ("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 its current
method of accounting as described above, and has adopted the disclosure
requirements of SFAS No. 123.
The pro forma information regarding net income and earnings per share
required by SFAS 123 has been determined as if CBI had 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 1999 and 1998, respectively:
1999 1998 1997
----- ---- ----
Dividend yield.............................................. None None None
Volatility.................................................. 185.0% 73.0% 25%
Risk-free interest rates.................................... 6.3% 4.7% 5.8%
Expected life (years)....................................... 6 6 6
The estimated average fair values of options outstanding in 1999, 1998, and
1997 were $9.88, $4.59 and $1.30 respectively. Had compensation cost for CBI's
stock-based compensation plans been determined in accordance with SFAS No. 123,
CBI's net income (loss) and earnings (loss) per share would have been reduced to
the pro forma amounts indicated below:
YEAR ENDED DECEMBER 31, 1999 1998 1997
- ----------------------- ------ ----- ------
Net income (loss)
As reported............................................... $8,831 $(411) $4,234
Pro forma................................................. $7,777 $(977) $4,200
Diluted earnings (loss) per common and common equivalent
share
As reported............................................... $ .86 $(.08) $ .99
Pro forma................................................. $ .83 $(.20) $ .95
These pro forma amounts are not likely to be representative of the effect
on reported net income for future years.
Savings Investment Plan. The Savings Investment Plan is a defined
contribution profit sharing plan, qualifying under Section 401(k) of the
Internal Revenue Code, covering substantially all eligible employees. At CBI's
discretion, CBI may contribute up to 100% of an eligible participant's
contributions to the Plan up to a maximum of 3% of salary. Company contributions
to the Plan were $388,000, $214,000 and $108,000 for the years ended December
31, 1999, 1998, and 1997 respectively.
Stock Purchase Plan. On July 10, 1998, the Board of Directors adopted the
Stock Purchase Plan, under which a total of 200,000 shares of common stock have
been reserved for issuance. Any employee who has been employed by CBI for 90
days is eligible to participate in offerings under the Stock Purchase Plan.
The Stock Purchase Plan will be implemented by eight semi-annual offerings
of common stock beginning on each January 1 and July 1 in each of the years
1999, 2000, 2001 and 2002, and terminating on June 30 and December 31 of each
such year. The maximum number of shares issued in such years will be 50,000 in
1999, and 50,000 plus the number of unissued shares from prior offerings for
each of 2000, 2001 and 2002. The price of the shares under each offering segment
shall be 85% of the lower of the closing market price on the day before the
segment begins (January 1 or July 1) or on the day the segment ends (June 30 or
December 31).
CBH has determined that it will purchase the requisite shares on the open
market and not issue any additional shares to fulfill this obligation. Future
fulfillment under this Plan may be made through open market purchases or
unissued shares, at CBH's discretion.
F-20
63
CLARK/BARDES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CBH employees purchased 35,617 shares of CBH common stock at an average
cost, to them, of $12.94. CBH's open market purchases of these shares for the
employees were made at an average cost of $16.35. Accordingly, CBH's expense of
this program was $134,000 including administrative expenses.
Key Executive Life Insurance. CBI maintains key man life insurance policies
of $23 million on its Chairman and Chief Executive Officer and policies ranging
from $150,000 to $8.5 million on certain other key executives.
10. COMMITMENTS
Leases -- CBI conducts operations from leased office facilities. Management
expects that, in the normal course of business, leases that expire will be
renewed or replaced by other leases; thus it is anticipated that future minimum
lease commitments will not be less than the amount shown for the year ended
December 31, 1999.
Rental expense for the years ended December 31, 1999, 1998, and 1997 was
$1,974,000, $916,000, and $476,000.
At December 31, 1999, approximate minimum rental commitments under all
non-cancelable leases having terms in excess of a year are as follows:
(IN THOUSANDS)
2000.................................................. $ 2,615
2001.................................................. 2,491
2002.................................................. 2,372
2003.................................................. 1,493
2004.................................................. 1,254
Thereafter............................................ 6,575
-------
$16,800
11. RELATED PARTY TRANSACTIONS
A summary of CBI's related party balances and transactions at December 31,
1999 and 1998 and for the years then ended are:
1999 1998
------ ------
Balances:
Accounts receivable -- officers and directors............. $ 20 $ --
Accounts receivable -- affiliates......................... $ 461 $ 872
Commissions and fees payable.............................. $ 26 $ --
Debt maturing within one year............................. $ -- $ 425
Long term debt............................................ $ -- $6,113
Transactions:
Commissions and service fees.............................. $1,434 $1,585
Commission and fee expense................................ $8,071 $8,068
General and administrative expense........................ $ 45 $ --
CBI has entered into compensation and employment agreements with certain
key employees. The agreements provide for an indefinite employment term,
compensation, stock bonuses, expense reimbursements and participation in benefit
plans and are subject to the employees' compliance with certain provisions. In
addition, nine administrative employees of the Company's HealthCare Compensation
Strategies are entitled
F-21
64
CLARK/BARDES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
to a severance payment in the event they voluntarily terminate their employment.
This was an obligation of MCG/HealthCare at the time of its acquisition and was
$1.1 million at December 31, 1999.
CBI and its Chairman and Chief Executive Officer, Mr. Wamberg, were parties
to a Principal Office Agreement dated July 29, 1993, pursuant to which The
Wamberg Organization marketed, on behalf of CBI, life insurance and
administrative and consulting services, and CBI furnished to The Wamberg
Organization marketing materials and concepts, program design ideas, selected
life insurance products, specimen plan documents and administrative services.
The Wamberg Organization's commissions ranged between 65.0% and 70.0% of total
revenue depending on the amount of total revenue generated from a case.
Commissions and fees payable to The Wamberg Organization were net of any CBI's
administrative costs as determined by the Board of Directors. Pursuant to the
terms of the Principal Office Agreement, The Wamberg Organization was paid
approximately $8,071,000, $8,068,000 and $7,798,000 in 1999, 1998, and 1997,
respectively, for commissions and fees earned. This agreement was subsequently
terminated on September 1, 1999, as a result of the acquisition of The Wamberg
Organization.
On September 1, 1999, CBI purchased certain assets and the business of The
Wamberg Organization and assumed certain liabilities. Simultaneously, Mr.
Wamberg became Chairman and Chief Executive Officer of CBH. (see Note 2).
CBI has transactions with affiliated entities. CBI provides services for
these affiliates and is reimbursed for these services at the Company's
respective costs. Among these affiliates is Clark/Bardes Securities, Inc. a
registered broker-dealer through which CBI sells all its securities products and
receives a commission. Clark/Bardes Securities, Inc. is owned by W.T. Wamberg,
CBH's chairman and Chief Executive Officer.
12. EARNINGS PER SHARE
The following table sets forth the computation of historical basic and
diluted earnings per share:
1999 1998 1997
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Numerator:
Net income (loss) for basic earnings per share..... $ 8,831 $ (411) $ 4,234
Effect of dilutive securities:
Interest on convertible debt (net of tax).......... -- --(1) 125
---------- ---------- ----------
Numerator for diluted earnings per share........... $ 8,831 $ (411) 4,359
========== ========== ==========
Denominator:
Basic earnings per share -- weighted average
shares.......................................... 9,077,775 5,006,009 4,119,387
Effect of dilutive securities:
Stock options...................................... 251,164(3) 7,277
Convertible debt................................... -- --(2) 271,929
---------- ---------- ----------
Diluted earnings per share -- weighted average
shares plus assumed conversions................. 9,328,939 5,006,009 4,398,593
========== ========== ==========
Per share:
Basic earnings (loss).............................. $ 0.97 $ (0.08) $ 1.03
========== ========== ==========
Diluted earnings (loss)............................ $ 0.95 $ (0.08) $ 0.99
========== ========== ==========
F-22
65
CLARK/BARDES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- ---------------
* The effects of options and convertible debt have not been included as such
effects would be antidilutive as follows:
(1) The effect of dilutive securities and interest on convertible debt increases
net income by $166,000.
(2) The effect of dilutive securities on the denominator increases the average
weighted number of shares by;
Stock options............................................. 35,296
Convertible securities.................................... 538,844
Warrants.................................................. 4,489
-------
578,629
=======
(3) Does not include 276,600 stock options issued to certain employees since
they are subject to forfeiture if certain performance goals are not met
during the contingency period.
13. SIGNIFICANT RISKS AND UNCERTAINTIES
Federal tax laws create certain advantages for the purchase of life
insurance products by individuals and corporations; therefore the life insurance
products underlying the benefit programs marketed by the Company are vulnerable
to adverse changes in tax legislation. Amendments to the federal tax laws
enacted in 1996 and 1997 reduced the advantages of certain purchases of
business-owned life insurance. With limited exceptions, the 1996 amendment
eliminated the ability to deduct interest on loans against the cash value of
life insurance policies. In 1997, legislation imposed an interest deduction
disallowance that applied to all business-owned life insurance except for
policies placed on employees, officers, directors and 20 percent owners.
In recent federal budget proposals, certain provisions have been offered to
expand the disallowance rule to policies covering employees, officers and
directors. If such proposals are enacted, it would significantly reduce the
attractiveness of business-owned life insurance to companies that traditionally
have high debt/equity ratios, such as banks. While CBI believes there is
inadequate support in Congress at this time to enact such a change, CBI is
unable to predict the outcome of any such legislative proposal by the current or
any future Congress. CBI believes, at the very least, any such proposal would
fully grandfather existing business.
On October 19, 1999, the United States Tax Court ruled that a domestic
corporation was not entitled to deduct fees and interest on policy loans from a
leveraged corporate-owned life insurance program. Although CBI stopped marketing
leveraged COLI programs in June 1997, management is continuing to evaluate the
impact of this decision, which remains subject to appeal. Nevertheless, this
development may cause some current holders of leveraged COLI policies to elect
to surrender their policies, which would reduce the amount of commissions that
CBH would realize from the total pool of leveraged COLI policies.
F-23
66
CLARK/BARDES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. SEGMENTS AND RELATED INFORMATION
CBH has three reportable segments:
Clark/Bardes
Bank Compensation Strategies
HealthCare Compensation Strategies
In 1998, CBI reported its Clark/Bardes of Washington, D.C. branch (formerly
Schoenke & Associates) as a segment. During 1999, this segment was combined with
the operations of the Clark/Bardes division and therefore it no longer
constitutes a separate reportable segment.
The three reportable segments operate as independent and autonomous
divisions with a central corporate staff responsible for finance, strategic
planning, human resources and employee benefits. All of CBH's segments are in
the same business; the design, marketing and administration of insurance
financed employee benefit programs to large corporations; community, regional
and money center banks; and healthcare organizations. The distinction between
these segments is in their geographical location and that each has its own
client base as well as its own marketing, administrative staffs and management.
CBI evaluates performance and allocates resources based on profit and loss
from operations before income taxes, interest or corporate administrative
expenses. The accounting policies of the reporting segments are the same as
those described in the summary of significant policies. There are no
inter-segment revenues or expenses.
FOR THE YEAR ENDED DECEMBER 31, 1997
-----------------------------------------------------
BANK HEALTHCARE
COMPENSATION COMPENSATION
CLARK/BARDES STRATEGIES STRATEGIES TOTALS
------------ ------------ ------------ --------
Revenues.................................... $41,004 $ 8,451 $ -- $ 49,455
Operating income............................ 4,307 910 -- 5,217
Depreciation and amortization............... 165 328 -- 493
Identifiable assets......................... 9,862 27,039 -- 36,901
Capital expenditures........................ 284 64 -- 348
FOR THE YEAR ENDED DECEMBER 31, 1998 (RESTATED)
-----------------------------------------------------
BANK HEALTHCARE
COMPENSATION COMPENSATION
CLARK/BARDES STRATEGIES STRATEGIES TOTALS
------------ ------------ ------------ --------
Revenues.................................... $45,408 $29,358 $ -- $ 74,766
Operating income............................ 5,811 4,038 -- 9,849
Depreciation and amortization............... 503 1,067 -- 1,570
Identifiable assets......................... 38,232 28,654 -- 66,886
Capital expenditures........................ 310 330 640
FOR THE YEARS ENDED DECEMBER 31, 1999
-----------------------------------------------------
BANK HEALTHCARE
COMPENSATION COMPENSATION
CLARK/BARDES STRATEGIES STRATEGIES TOTALS
------------ ------------ ------------ --------
Revenues.................................... $73,528 $30,784 $16,448 $120,760
Operating income............................ 19,750 3,621 623 23,994
Depreciation and amortization............... 2,481 1,151 1,600 5,232
Identifiable assets......................... 58,280 30,841 35,456 124,577
Capital expenditures........................ 878 498 2,812 4,188
F-24
67
CLARK/BARDES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table presents a reconciliation of revenues, income before taxes
and assets to the amount shown in the financial statements:
1999 1998 1997
-------- ------- -------
Revenues
Total revenues for reportable segments.................... $120,760 $74,766 $49,455
-------- ------- -------
Total consolidated revenues....................... $120,760 $74,766 $49,455
======== ======= =======
Income before taxes
Operating income for reportable segments.................. $ 23,994 $ 9,849 $ 5,217
Unallocated amounts
Corporate overhead..................................... 5,865 2,042 --
Put warrants........................................... -- 4,800 --
Interest -- net........................................ 3,219 2,601 923
-------- ------- -------
9,084 9,443 923
-------- ------- -------
Income before taxes............................... $ 14,910 $ 406 $ 4,294
======== ======= =======
Assets
Total assets for reporting segments....................... $124,577 $66,886 $36,901
Deferred tax asset........................................ 282 607 --
-------- ------- -------
Total assets...................................... $124,859 $67,493 $36,901
======== ======= =======
Geographic Information -- All the Company's revenues are derived from
clients located within the United States.
Major Customers -- CBI generated in excess of 25% of its revenue in 1999
from 8 clients, in 1998 from 8 clients, and in 1997 from 3 clients,
respectively. None of Bank Compensation Strategies or HealthCare Compensation
Strategies customers accounted for more than 10% of revenue. Approximately
15.2%, 17.5%, and 23.0% of CBI's commission and fee revenue for the years ended
1999, 1998, and 1997 respectively, was generated by The Wamberg Organization,
which is wholly owned by CBI's Chairman and Chief Executive Officer.
Substantially all of the policies underlying the programs marketed by CBI are
underwritten by 20 life insurance companies, of which eleven accounted for
approximately 76.1% of CBI's first year revenue for the year ended December 31,
1999 and seven accounted for approximately 63.1%, 76.3% and 78.9% of CBI's first
year revenues for the years ended December 31, 1999, 1998 and 1997,
respectively.
15. ADDITIONAL FINANCIAL INFORMATION
The table that follows provides additional financial information related to
the consolidated financial statements.
Cash Flow Information
YEARS ENDED DECEMBER 31,
-------------------------
1999 1998 1997
------ ------ -------
(IN THOUSANDS)
Cash paid for:
Interest.................................................. $3,125 $3,323 $ 636
Taxes..................................................... $2,335 $ 896 $ 182
Financing Activities:
Notes issued in connection with acquisition............... $8,724 $2,000 $10,500
Reduction of borrowing on conversion of notes............. $ -- $4,800 $ --
F-25
68
CLARK/BARDES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. SUBSEQUENT EVENTS
On February 7, 2000, CBI signed a letter of intent to acquire the business
substantially all the assets and assume certain liabilities of a group of
privately owned companies engaged in the sale of executive benefit and pension
plans to medium and large corporations.
The total purchase price of the assets, excluding assumed liabilities and
acquisition expenses will be approximately $50 million consisting of:
- a cash payment at closing of $30.1 million,
- 308,428 shares of our common stock with an agreed upon value of $4.9
million, and,
- contingent payments of $15 million payable 86% cash and 14% CBH common
stock, based on achieving predetermined levels of earnings before
interest, taxes, depreciation and amortization for the years 2000 through
2004.
The transaction, which will be funded from the Company's existing line of
credit, is subject to a number of conditions including an on-going review of the
target company's financial and business affairs, execution of definitive
purchase agreements, approval of both Clark/Bardes' and the target's boards of
directors and the consent of Clark/Bardes' lenders, among other things.
17. LITIGATION
From time to time, CBI is involved in various claims and lawsuits
incidental to business, including claims and lawsuits alleging breaches of
contractual obligations under agreements with producers. At this time,
management believes there is no pending litigation that will have a material
adverse effect on CBI's business, financial condition or operating results.
18. INTERIM FINANCIAL DATA (UNAUDITED)
QUARTER
------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
----- ------ ------ ------ -------
(IN MILLIONS, EXCEPT PER SHARE DATA)
Summary of Quarterly Results:
Revenue.................................. 1999 $24.1 $ 29.7 $ 25.7 $ 41.3 $ 120.8
1998 13.8 15.2 17.6 28.2 74.8
1997 5.5 5.8 11.0 27.1 49.4
Gross profit............................. 1999 $ 9.9 $ 16.7 $ 15.2 $ 25.9 $ 67.7
1998 4.6 6.2 6.6 11.3 28.7
1997 2.0 2.0 3.9 9.1 17.0
Pre-tax income (loss).................... 1999 $ 2.5 $ 2.4 $ 1.8 $ 8.2 $ 14.9
1998 0.2 (5.2) 1.6 3.8 0.4
1997 0.2 (0.7) 0.9 3.9 4.3
Net income (loss)........................ 1999 $ 1.5 $ 1.4 $ 1.0 $ 4.9 $ 8.8
1998 0.2 (5.2) 2.4 2.2 (0.4)
1997 0.2 (0.7) 0.9 3.8 4.2
Basic earnings (loss) per share.......... 1999 $0.18 $ 0.16 $ 0.11 $ 0.52 $ 0.97
1998 0.06 (1.61) 0.44 0.27 (0.08)
1997 0.05 (0.16) 0.20 1.27 1.03
Diluted earnings (loss) per share........ 1999 $0.17 $ 0.16 $ 0.11 $ .50 $ 0.95
1998 0.06 (1.61) 0.39 .27 (0.08)
1997 0.05 (0.16) 0.20 1.03 0.99
F-26
69
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 HOLDINGS, INC.
By: /s/ W. T. WAMBERG
----------------------------------
W. T. Wamberg
President and Chief Executive
Officer
Date: March 29, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ W. T. WAMBERG Chairman of the Board, March 13, 2000
- ----------------------------------------------------- President, Chief Executive
W. T. Wamberg Officer and Director
/s/ LAWRENCE H. HENDRICKSON Vice Chairman of the Board and March 13, 2000
- ----------------------------------------------------- Director
Lawrence H. Hendrickson
/s/ MELVIN G. TODD President, Clark/Bardes March 13, 2000
- ----------------------------------------------------- Division and Director
Melvin G. Todd
/s/ THOMAS M. PYRA Vice President and Chief March 13, 2000
- ----------------------------------------------------- Financial Officer Principal
Thomas M. Pyra Accounting Officer and Chief
Operating Officer
/s/ RANDOLPH A. POHLMAN Director March 13, 2000
- -----------------------------------------------------
Randolph A. Pohlman
/s/ L. WILLIAM SEIDMAN Director March 13, 2000
- -----------------------------------------------------
L. William Seidman
/s/ GEORGE D. DALTON Director March 13, 2000
- -----------------------------------------------------
George D. Dalton
/s/ STEVEN F. PIAKER Director March 13, 2000
- -----------------------------------------------------
Steven F. Piaker
70
EXHIBIT LIST
EXHIBIT
NUMBER DESCRIPTION
------- -----------
2.1 -- Reorganization Agreement, by and among Clark/Bardes,
Inc., Clark/Bardes, Inc. and the Predecessor Company
(Incorporated herein by reference to Exhibit 2.1 of
Clark/Bardes' Registration Statement of Form S-1, File
No. 333-56799.)
2.2 -- Letter of Intent, dated May 29, 1998, from Clark/Bardes,
Inc. and the Schoenke Companies (Incorporated herein by
reference to Exhibit 2.2 of Clark/Bardes' Registration
Statement on Form S-1, File No. 333-56799.)
2.3 -- Asset Purchase Agreement, dated September 5, 1997, among
Clark/Bardes, Inc., Bank Compensation Strategies, Inc.,
et. al. (Incorporated herein by reference to Exhibit 2.3
of Clark/Bardes' Registration Statement on Form S-1, File
No. 333-56799).
2.4 -- Letter of Understanding, dated October 1, 1998, by and
between Clark/Bardes holdings, Inc. and the Wiedemann &
Johnson Company (Incorporated herein by reference to
Exhibit 10 of Clark/Bardes' Quarterly Report on Form
10-Q, File No. 000-24769, filed with the SEC on November
16, 1998).
2.5 -- Asset Purchase Agreement, dated September 18, 1998, with
Schoenke & Associates Corporation, Schoenke & Associates
Securities Corporation and Raymond F. Schoenke, Jr.
(Incorporated herein by reference to Exhibit 2.2 of
Clark/Bardes' Current Report on Form 8-K, File No.
000-24769, filed with the SEC on October 2, 1998).
2.6 -- Asset Purchase Agreement, dated November 16, 1998, by and
among Clark/ Bardes, Inc., Clark/Bardes, Inc., Wiedemann
& Johnson Company, Bruce Hlavacek and Jennie Hlavacek
(Incorporated herein by reference to Exhibit 2.6 of
Clark/Bardes' Annual Report on Form 10-K, File No.
000-24769, filed with the SEC on March 31, 1999).
2.7 -- Asset Purchase Agreement, dated April 15, 1999, by and
among Clark/Bardes, Inc., Clark/Bardes Holdings, Inc.,
Phynque, Inc., and certain shareholders of Phynque, Inc.
(Incorporated herein by reference to Exhibit 2.1 of
Clark/Bardes' Current Report on Form 8-K, File No.
000-24769, filed with the SEC on April 20, 1999).
2.8 -- Agreement and Plan of Reorganization, dated May 18, 1999,
by and among Clark/Bardes Holdings, Inc., NICB Agency,
Inc., and David Shuster, Lynn High, Kathy Smith, and
Kelly Earls (Incorporated herein by reference to Exhibit
2.8 of Clark/Bardes' Quarterly Report on Form 10-Q, File
No. 000-24769, filed with the SEC on August 16,1999).
2.9 -- Asset and Stock Purchase Agreement, dated September 1,
1999, by and among Clark/Bardes, Inc. and The Wamberg
Organization Inc. and W.T. Wamberg (Incorporated herein
by reference to Exhibit 2.1 of Clark/Bardes' Current
Report on Form 8-K, File No. 000-24769, filed with the
SEC on September 16, 1999).
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 -- 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).
3.3 -- Certificate of Amendment (Incorporated herein by
reference to Exhibit 3.3 of Clark/Bardes' Registration
Statement on Form S-1, File No. 333-56799).
I-1
71
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.4 -- Certificate of Designation (Incorporated herein by
reference to Exhibit 3.4 of Clark/Bardes' Registration
Statement on Form S-1, File No. 333-56799).
3.5 -- Certificate of Merger of NICB Agency, Inc. and
Clark/Bardes Holdings, Inc. (Incorporated herein by
reference to Exhibit 3.5 of Clark/Bardes' Quarterly
Report on Form 10-Q, File No. 000-24769, filed with the
SEC on August 16, 1999).
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, 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).
10.1 -- Clark/Bardes, Inc. 1998 Stock Option Plan (Incorporated
herein by reference to Exhibit 10.1 of Clark/Bardes'
Registration Statement on Form S-1, File No. 333-56799).
10.2 -- Administration and Services Agreement, by and between
Clark/Bardes, Inc. and Clark/Bardes Agency of Ohio, Inc.
(Incorporated herein by reference to Exhibit 10.2 of
Clark/Bardes' Registration Statement on Form S-1, File
No. 333-56799).
10.3 -- Administration and Services Agreement, by and between
Clark/Bardes, Inc. and Clark/Bardes Securities, Inc.
(Incorporated herein by reference to Exhibit 10.3 of
Clark/Bardes' Registration Statement on Form S-1, File
No. 333-56799).
10.4 -- Administration and Services Agreement, by and between
Clark/Bardes, Inc. and Clark/Bardes, Inc. of Pennsylvania
(Incorporated herein by reference to Exhibit 10.4 of
Clark/Bardes' Registration Statement on Form S-1, File
No. 333-56799).
10.5 -- Principal Office Agreement, dated July 29, 1993, by and
between W.T. Wamberg and Clark/Bardes, Inc. (Incorporated
Herein by reference to Exhibit 10.5 of Clark/Bardes'
Registration Statement on Form S-1, File No. 333-56799).
10.6 -- Buy-Sell Agreement for Clark/Bardes Agency of Ohio, Inc.,
dated April 1996, by and between Clark/Bardes Securities,
Inc., Clark/Bardes Agency of Ohio, Inc. and Robert
Kelleher (Incorporated herein by reference to Exhibit
10.6 of Clark/Bardes' Registration Statement on Form S-1,
File No. 333-56799).
10.7 -- Note and Warrant Purchase Agreement, dated September 8,
1997, by and between Clark/Bardes, Inc. and Great-West,
Life Investors and Nationwide (Incorporated herein by
Reference to Exhibit 10.7 of Clark/Bardes' Registration
Statement on Form S-1, File No. 333-56799).
10.8 -- Note Agreement, dated September 8, 1997, by and between
Clark/Bardes, Inc., Great-West, Life Investors and
Nationwide (Incorporated herein by reference to Exhibit
10.8 of Clark/Bardes' Registration Statement on Form S-1,
File No. 333-56799).
10.9 -- Form of Common Stock Purchase Warrant, dated September 8,
1997 (Incorporated herein by reference to Exhibit 10.9 of
Clark/Bardes' Registration Statement on Form S-1, File
No. 333-56799).
I-2
72
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.10 -- Form of 11.00% Secured Priority Senior Secured Note Due
August 2004 (Incorporated herein by reference to Exhibit
10.10 of Clark/Bardes' Registration Statement on Form
S-1, File No. 333-56799)
10.11 -- Form of 10.50% Senior Secured Note Due August 2004
(Incorporated herein by reference to Exhibit 10.11 of
Clark/Bardes' Registration Statement on Form S-1, File
No. 333-56799)
10.12 -- Convertible Subordinated Note, dated September 1997
(Incorporated herein by reference to Exhibit 10.12 of
Clark/Bardes' Registration Statement on Form S-1, File
No. 333-56799).
10.13 -- Medium Term Note, dated September 1997 (Incorporated
herein by reference to Exhibit 10.13 of Clark/Bardes'
Registration Statement on Form S-1, File No. 333-56799).
10.14 -- Stock Purchase Agreement, dated August 22, 1997, by and
among Clark/Bardes, Inc., Malcolm N. Briggs, Steven J.
Cochlan, G.F. Pendleton, and Don R. Teasley (Incorporated
herein by reference to Exhibit 10.14 of Clark/Bardes'
Registration Statement on Form S-1, File No. 333-56799).
10.15 -- Stock Purchase Agreement, dated August 1997, by and among
Clark/Bardes, Inc. and Henry J. Smith (Incorporated
herein by reference to Exhibit 10.15 of Clark/Bardes'
Registration Statement on Form S-1, File No. 333-56799).
10.16 -- Lease Agreement, dated April 24, 1998, by and between
Northland Center Limited Partnership and Clark/Bardes,
Inc. (Incorporated herein by reference to Exhibit 10.16
of Clark/Bardes' Registration Statement on Form S-1, File
No. 333-56799).
10.17 -- Lease Agreement, dated December 30, 1994, by and between
C-W#5, Ltd., and Clark/Bardes, Inc. (Incorporated herein
by reference to Exhibit 10.17 of Clark/Bardes'
Registration Statement on Form S-1, File No. 333-56799).
10.18 -- Letter of Agreement to Purchase Warrants, dated June 11,
1998, to Nationwide (Incorporated herein by reference to
Exhibit 10.18 of Clark/Bardes' Registration Statement on
Form S-1, File No. 333-56799).
10.19 -- Letter of Agreement to Purchase Warrants, dated June 11,
1998, to Life Investors (Incorporated herein by reference
to Exhibit 10.19 of Clark/Bardes' Registration Statement
on Form S-1, File No. 333-56799).
10.20 -- Letter of Agreement to Purchase Warrants, dated June 11,
1998, to Great-West (Incorporated herein by reference to
Exhibit 10.20 of Clark/Bardes' Registration Statement on
Form S-1, File No. 333-56799).
10.21 -- Phantom Stock Agreement, dated September 5, 1997, by and
between Clark/Bardes, Inc. and Steven J. Cochlan
(Incorporated herein by reference to Exhibit 10.21 of
Clark/Bardes' Registration Statement on Form S-1, File
No. 333-56799).
10.22 -- Employment Agreement, dated November 21, 1996, by and
between Clark/Bardes, Inc. and Kurt J. Laning
(Incorporated herein by reference to Exhibit 10.22 of
Clark/Bardes' Registration Statement on Form S-1, File
No. 333-56799).
10.23 -- Employment Agreement, dated March 28, 1995, by and
between Clark/Bardes, Inc. and Keith L. Staudt
(Incorporated herein by reference to Exhibit 10.23 of
Clark/Bardes' Registration Statement on Form S-1, File
No. 333-56799).
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EXHIBIT
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10.24 -- Employment Agreement, dated August 23, 1993, by and
between Clark/Bardes, Inc. and Larry Sluder (Incorporated
herein by reference to Exhibit 10.24 of Clark/Bardes'
Registration Statement on Form S-1, File No. 333-56799).
10.25 -- Employment Agreement, dated March 7, 1993, by and between
Clark/Bardes, Inc. and Ronald A. Roth (Incorporated
herein by reference to Exhibit 10.25 of Clark/ Bardes'
Registration Statement on Form S-1, File No. 333-56799).
10.26 -- Employment Agreement, dated April 15, 1991, by and
between Clark/Bardes, Inc. and Sue A. Leslie
(Incorporated herein by reference to Exhibit 10.26 of
Clark/ Bardes' Registration Statement on Form S-1, File
No. 333-56799).
10.27 -- Employment Agreement, dated June 9, 1993, by and between
Clark/Bardes, Inc. and William J. Gallegos (Incorporated
herein by reference to Exhibit 10.27 of Clark/Bardes'
Registration Statement on Form S-1, File No. 333-56799).
10.28 -- Tax Indemnity Agreement by and between Clark/Bardes
Holdings, Inc., Clark/ Bardes, Inc. and certain former
Shareholders of the Predecessor Company (Incorporated
herein by reference to Exhibit 10.28 of Clark/Bardes'
Registration Statement on Form S-1, File No. 333-56799).
10.29 -- Form of Employee Stock Purchase Plan (Incorporated herein
by reference to Exhibit 10.29 of Clark/Bardes'
Registration Statement on Form S-1, File No. 333-56799).
10.30 -- Form of Employment Agreement, effective as of September
1, 1998, by and between Clark/Bardes, Inc. and Robert E.
Miller (Incorporated herein by reference to Exhibit 10.30
of Clark/Bardes' Registration Statement on Form S-1, File
No. 333-56799).
10.31 -- Form of Employment Agreement, effective as of July 1,
1998, by and between Clark/Bardes, Inc. and Thomas M.
Pyra (Incorporated herein by reference to Exhibit 10.31
of Clark/Bardes' Registration Statement on Form S-1, File
No. 333-56799).
10.32 -- Form of Employment Agreement, effective as of July 1,
1998, by and between Clark/Bardes Holdings, Inc. and
Melvin G. Todd (Incorporated herein by reference to
Exhibit 10.32 of Clark/Bardes' Registration Statement on
Form S-1, File No. 333-56799).
10.33 -- Form of Commission Transfer Agreement by and between W.T.
Wamberg, The Wamberg Organization, Inc. and Clark/Bardes,
Inc. (Incorporated herein by reference to Exhibit 10.33
of Clark/Bardes' Registration Statement on Form S-1, File
No. 333-56799).
10.34 -- Letter of Agreement, dated July 24, 1998, to Great-West,
Life Investors and Nationwide (Incorporated herein by
reference to Exhibit 10.34 of Clark/Bardes' Registration
Statement on Form S-1, File No. 333-56799).
10.35 -- Employment Agreement, dated September 1, 1997, by and
between Clark/Bardes, Inc. and Richard C. Chapman
(Incorporated herein by reference to Exhibit 10.35 of
Clark/Bardes' Registration Statement on Form S-1, File
No. 333-56799).
10.36 -- Put Rights Agreement, dated as of September 9, 1997, by
and among Clark/ Bardes, Inc., Great-West, Life Investors
and Nationwide (Incorporated herein by reference to
Exhibit 10.38 of Clark/Bardes' Registration Statement on
Form S-1, File No. 333-56799).
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EXHIBIT
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10.37 -- Participation Rights Agreement, dated as of September 9,
1997, by and among Clark/Bardes, Inc., Great-West, Life
Investors and Nationwide (Incorporated herein by
reference to Exhibit 10.39 of Clark/Bardes' Registration
Statement on Form S-1, File No. 333-56799).
10.38 -- Registration Rights Agreement, dated as of September 9,
1997, by and among Clark/Bardes, Inc., Great-West, Life
Investors and Nationwide (Incorporated herein by
reference to Exhibit 10.40 of Clark/Bardes' Registration
Statement on Form S-1, File No. 333-56799).
10.39 -- Form of Letter Agreement between Phoenix Home Life and
Clark/Bardes Holdings (Incorporated herein by reference
to Exhibit 10.41 of Clark/Bardes' Registration Statement
on Form S-1, File No. 333-56799).
10.40 -- Letter Agreement, dated August 14, 1998, between
Nationwide and Clark/Bardes Holdings (Incorporated herein
by reference to Exhibit 10.42 of Clark/Bardes'
Registration Statement on Form S-1, File No. 333-56799).
10.41 -- Letter Agreement, dated August 14, 1998, between
Great-West and Clark/Bardes Holdings (Incorporated herein
by reference to Exhibit 10.43 of Clark/Bardes'
Registration Statement on Form S-1, File No. 333-56799).
10.42 -- Letter Agreement, dated August 17, 1998, between General
American and Clark/ Bardes Holdings (Incorporated herein
by reference to Exhibit 10.44 of Clark/ Bardes'
Registration Statement on Form S-1, File No. 333-56799).
10.43 -- 1998 Non-Employee Director Stock Option Plan
(Incorporated herein by reference to Exhibit 4.7 of
Clark/Bardes' Registration Statement on Form S-8, File
No. 333-68163, filed with the SEC on December 1, 1998).
10.44 -- Credit Agreement, dated January 15, 1999, among
Clark/Bardes, Inc., Bank One Texas, N.A., U.S. Bank
National Association, certain financial institutions, and
Banc One Capital Markets, Inc. (Incorporated herein by
reference to Exhibit 10.46 of Clark/Bardes' Annual Report
on Form 10-K, File No. 000-24769, filed with the SEC on
March 31, 1999).
10.45 -- Lease Agreement, dated December 30, 1996, by and between
Bellemead Development Corporation and Schoenke &
Associates Corporation (Incorporated herein by reference
to Exhibit 10.47 of Clark/Bardes' Annual Report on Form
10-K, File No. 000-24769, filed with the SEC on March 31,
1999).
10.46 -- Lease of Office Space, dated February 20, 1990, by and
between T.N.C. Northstar Associates Limited Partnership
and Phynque, Inc., as amended (Incorporated herein by
reference to Exhibit 10.46 of Clark/Bardes' Quarterly
Report on Form 10-Q, File No. 000-24769, filed with the
SEC on August 16, 1999).
10.47 -- Form of Employment Agreement, dated April 5, 1999, by and
between Clark/ Bardes, Inc. and Donald Wegmiller
(Incorporated herein by reference to Exhibit 10.47 of
Clark/Bardes' Quarterly Report on Form 10-Q, File No.
000-24769, filed with the SEC on August 16, 1999).
10.48 -- Employment Agreement, dated as of September 1, 1999, by
and between Clark/ Bardes Holdings, Inc. and W.T. Wamberg
(Incorporated herein by reference to Exhibit 10.48 of
Clark/Bardes' Quarterly Report on Form 10-Q, File No.
000-24769, filed with the SEC on November 12, 1999).
10.49 -- Sublease Agreement, dated as of September 1, 1999, by and
between Clark/Bardes, Inc. and The Wamberg Organization
(Incorporated herein by reference to Exhibit 10.49 of
Clark/Bardes' Quarterly Report on Form 10-Q, File No.
000-24769, filed with the SEC on November 12, 1999).
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EXHIBIT
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*10.50 -- Amended and Restated Credit Agreement, dated as of
December 28, 1999 among Clark/Bardes, Inc. as Borrower,
Bank One Texas, NA as Administrative Agent, U.S. Bank
National Association as Co-Agent, Certain Financial
Institutions as Lenders, and Bank One Capital Markets,
Inc. as Lead Arranger and Sole Book Runner.
22.1 -- Definitive Proxy Statement dated March 30, 2000
(Incorporated herein by reference to File No. 000-24769,
filed with the SEC on March 30, 2000).
*27.1 -- Financial Data Schedule (included with SEC filed copy
only).
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* filed herewith
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