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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NUMBER: 000-24769
CLARK/BARDES HOLDINGS, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 52-2103926
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2121 SAN JACINTO, SUITE 2200
DALLAS, TEXAS 75201-7906
(Address of principal executive offices) (Zip code)
(Registrant's telephone number including area code): (214) 871-8717
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 17, 1999, there were 8,202,535 shares of common stock
outstanding.
As of March 17, 1999, the aggregate market value of common equity held by
non-affiliates was $86,188,006.
DOCUMENTS INCORPORATED BY REFERENCE
The definitive proxy statement for the 1999 annual meeting is incorporated
into Part III of this Form 10-K by reference.
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INDEX TO
ANNUAL REPORT ON FORM 10-K
PAGE
----
FORWARD-LOOKING STATEMENTS.............................................. 1
PART I
ITEM 1. BUSINESS.................................................... 1
ITEM 2. PROPERTIES.................................................. 12
ITEM 3. LEGAL PROCEEDINGS........................................... 12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS....................................... 13
ITEM 6. SELECTED FINANCIAL DATA..................................... 14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 15
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK...................................................... 32
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................. 32
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.................................. 32
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......... 33
ITEM 11. EXECUTIVE COMPENSATION...................................... 33
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................ 33
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 33
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K....................................................... 33
SIGNATURES
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FORWARD-LOOKING STATEMENTS
This Form 10-K may contain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act "),
and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). When used in this Form 10-K, words such as "anticipate,"
"believe," "estimate," "expect," "intend," "predict," "project," and similar
expressions, as they relate to Clark/Bardes Holdings, Inc. and Clark/Bardes,
Inc., its subsidiary (collectively, "Clark/Bardes"), or Clark/ Bardes'
management, identify forward-looking statements. Such forward-looking statements
are based on the beliefs of Clark/Bardes' management as well as assumptions made
by and information currently available to Clark/Bardes. These forward-looking
statements are subject to certain risks, uncertainties and assumptions,
including but not limited to, risks, uncertainties and assumptions related to
risks associated with changes in tax legislation, dependence on key producers,
Clark/Bardes' dependence on persistency of existing business, credit risk
related to renewal revenue, acquisition risks, risks related to significant
intangible assets, competitive factors and pricing pressures, dependence on
certain insurance companies, changes in legal and regulatory requirements and
general economic conditions and other factors described in "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially from
those anticipated, expected or projected. Such forward-looking statements
reflect Clark/ Bardes' current views with respect to future events and are
subject to these and other risks, uncertainties and assumptions, relating to
Clark/Bardes' operations, results of operations, growth strategy and liquidity.
All subsequent written and oral forward-looking statements attributable to
Clark/Bardes or individuals acting on Clark/Bardes' behalf are expressly
qualified in their entirety by this paragraph.
PART I
ITEM 1. BUSINESS
THE COMPANY
Clark/Bardes Holdings, Inc., a Delaware corporation ("CBH"), and
Clark/Bardes, Inc., a Delaware corporation and a wholly owned subsidiary of CBH
("CBI"), were formed in June 1998 in contemplation of the initial public
offering that was completed on August 19, 1998. CBH is the holding company for
CBI. CBI is the operating company of CBH and is the successor corporation to
Clark/Bardes, Inc., a Texas corporation (the "Predecessor Company"), formed in
1967.
In connection with the initial public offering, each of CBH, CBI and the
Predecessor Company entered into a reorganization agreement (the "Reorganization
Agreement") which provides for a two step merger resulting in the Predecessor
Company merging with and into CBI (the "Merger") with each stockholder of the
Predecessor Company receiving one-half of one share of CBH's common stock, par
value $0.01 per share (the "Common Stock"), for each share of Predecessor
Company common stock held by such existing stockholder and a series of
transactions, including (i) a restructuring of CBI's 10.5% Senior Secured Notes
due August 2002 (the "Senior Secured Notes") and 11.0% Second Priority Senior
Secured Notes due August 2004 (the "Second Priority Senior Secured Notes"), (ii)
the conversion of CBI's 8.5% Convertible Subordinated notes due September 2007
into 813,559 shares of Common Stock, (iii) an extinguishment by CBI of warrants
representing the right to purchase 1,525,424 shares of Common Stock, (iv) a
purchase of renewal revenue due to W.T. Wamberg and The Wamberg Organization,
(v) the incorporation of Clark/ Bardes of Texas, Inc., a Texas corporation,
formed for the purpose of marketing certain insurance products within the state
of Texas, and (vi) the termination by its terms of the Second Amended and
Restated Stockholders' Agreement among the Predecessor Company and each of the
former stockholders of the Predecessor Company. The Merger, which was
consummated effective August 1, 1998, was treated for accounting purposes as a
reorganization of entities under common control utilizing historical cost which
is similar to pooling of interests.
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Unless the context otherwise requires, all references in this Form 10-K to
"Clark/Bardes" means CBH together with its wholly owned subsidiary CBI and the
Predecessor Company, and all dates, periods or events prior to the Merger refer
to the Predecessor Company.
GENERAL
Since its inception in 1967, Clark/Bardes has designed, marketed and
administered insurance-financed employee benefit programs to large corporations
and banks. Clark/Bardes' clients use these sophisticated programs primarily to
offset the costs of employee benefit liabilities and to supplement and secure
benefits for key executives. Clark/Bardes' revenue is earned primarily from (i)
commissions paid by the insurance companies that underwrite the policies
underlying Clark/Bardes' programs and (ii) fees paid by clients in connection
with initial program design and the ongoing administrative services provided by
Clark/Bardes. Such commissions and fees are usually long-term and recurring and
are typically paid annually and extend over a period of ten years or more after
a sale.
Clark/Bardes has experienced rapid growth since December 31, 1995.
Effective September 1, 1997, Clark/Bardes acquired substantially all the assets
and the business of Bank Compensation Strategies, Inc., a Minnesota based
company ("BCS"), that designs, markets and administers insurance-financed
employee benefit programs and related compensation, salary and benefit plans for
community and regional banks.
On September 1, 1998, Clark/Bardes acquired the assets of Schoenke &
Associates Corporation and Schoenke & Associates Securities Corporation
(collectively, "Schoenke") and on November 1, Clark/Bardes acquired the assets
of Wiedemann & Johnson Company ("Wiedemann"). Schoenke and Wiedemann specialize
in the design and administration of insurance based employee benefit plans for
large corporations and banks. Through sales generated by a group of specialized
independent producers and the integration of the assets acquired from BCS,
Clark/Bardes had a client base of over 1,200 as of December 31, 1998.
Additionally, the inforce insurance coverage underlying Clark/Bardes' programs
has increased from approximately $26.2 billion as of December 31, 1995 to
approximately $62.6 billion as of December 31, 1998.
Clark/Bardes has entered into non-binding negotiations to acquire the
businesses and substantially all the assets of two unrelated, privately owned
companies. The aggregate proposed purchase price for both would be approximately
$45.0 million, subject to change. If consummated, the aggregate purchase price
for both acquisitions would consist of approximately $19.9 million in cash at
closing, the assumption of approximately $4.1 million in liabilities, a sellers'
note for approximately $8.7 million and the issuance of approximately 711,000
shares of Common Stock having an agreed upon value of approximately $12.3
million. Of the potentially issuable shares, 384,000 shares of Common Stock,
having a value of $6.8 million, is to be contingent upon the attainment of
specified five year revenue and gross profit performance levels.
In addition, the proposed terms contemplate the issuance of options, under
employment agreements, to acquire approximately 361,000 shares of Common Stock,
at market prices at the time of closing, to certain retained employees of the
target companies upon the attainment of stipulated levels of revenue.
These non-binding negotiations and the consummation of the acquisitions are
subject to Clark/Bardes' ongoing review of the target companies, the execution
of a definitive purchase agreements, and the satisfaction of certain conditions,
including the approvals of Clark/Bardes' board of directors, the boards of
directors of the target companies and the consent of Clark/Bardes lenders, among
others. Accordingly, Clark/Bardes can give no assurance that the acquisitions
will be completed and, if so, on the terms described above.
Management believes additional growth opportunities exist and that
Clark/Bardes' industry reputation, comprehensive in-house expertise,
sophisticated administrative systems, quality producers and strong relationships
with insurance companies provide Clark/Bardes with distinct competitive
advantages. Clark/Bardes intends to increase its market share by combining these
strengths with its core competencies of (i) designing proprietary programs
customized to meet clients' needs, (ii) providing outstanding client service,
and (iii) responding quickly to develop new products and services brought about
by regulatory and legislative changes. In addition, management believes
Clark/Bardes can be a leader in the consolidation of the highly fragmented
insurance-financed employee benefit industry by offering liquidity, proprietary
benefit and
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program designs, and administrative support to the owners of smaller firms.
Finally, management intends to leverage Clark/Bardes' core competencies by
entering into related markets such as compensation consulting and outsourcing of
benefit plan administration services. Additional costs for acquisition activity,
which include both financial expenditures and a reallocation of human resources,
will require substantial cash and will be financed through cash from operations
as well as future debt and equity offerings by Clark/Bardes.
As of December 31, 1998, Clark/Bardes was represented by 45 producers in 40
independently operated sales offices located in 30 cities throughout the United
States. These producers and Clark/Bardes' management own an aggregate of 51.3%
of the outstanding Common Stock.
INDUSTRY
Beginning in the early 1980s, corporations and banks began using life
insurance to offset the costs of employee benefit liabilities with greater
frequency than in the past. Since that time, several large insurers, including
CIGNA, General American, Great-West, Life Investors and Nationwide, have
committed significant resources to develop business-owned life insurance
products for use in the insurance-financed employee benefit industry.
The use of insurance to offset the costs of employee benefit liabilities
historically has been affected by legislative change, both positive and
negative. In the past, legislation has reduced the usefulness of traditional
pension plans for highly-paid executives which, in turn, has increased the
attractiveness of insurance-financed non-qualified benefit plans. On the other
hand, legislation has limited interest deductibility on policy loans and
restricted the use of business-owned life insurance to employees, officers,
directors and 20-percent owners. The insurance-financed employee benefit
industry will continue to be affected significantly by legislative change.
Consequently, Clark/Bardes believes that the ability to respond quickly to
legislative initiatives is a competitive advantage which can be used to increase
market share.
The insurance-financed employee benefit industry is highly fragmented.
Management believes that many once dominant producers and producer groups have
not kept pace with the numerous changes affecting the industry and are currently
faced with a decreasing market share and the inability to provide adequate
administrative support to existing clients. Clark/Bardes believes that those
producers and producer groups who have not made the necessary and substantial
investment in administrative systems and personnel will continue to experience
difficulties in satisfying their clients' growing needs and demands and in
meeting complex regulatory requirements. Clark/Bardes also believes that the
ever-changing legislative and economic 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.
CLARK/BARDES SEGMENTS
Clark/Bardes conducts business from locations in Dallas, Texas,
Minneapolis, Minnesota and Germantown, Maryland. Each of these locations has its
own general manager, marketing and administrative staffs. The corporate
executive and administrative staffs are located in the Dallas office.
All of Clark/Bardes' locations are in the same business, the design,
marketing and administration of insurance financed employee benefit programs to
large corporations and community, regional and money center banks. The
distinction between these locations is in their geographical location and that
each has its own client base as well as its own marketing, administrative staffs
and management.
Clark/Bardes evaluates performance and allocates resources based on profit
or loss from operations before income taxes, interest or corporate
administrative expenses. There are no intersegment revenues or expenses and all
revenues come from clients within the United States. In 1998, Clark/Bardes
adopted Statement of Financial Accounting Standards ("SFAS") No. 131 of the
Financial Accounting Standards Board (the "FASB") "Disclosures About Segments of
an Enterprise and Related Information," pursuant to which Clark/Bardes has three
reportable segments based on its locations in Dallas, Minneapolis and
Germantown. For revenue, income and asset information, see footnote 14 of the
financial statements.
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MAJOR CUSTOMER
CBI generated in excess of 25% of its revenue in 1996 from two clients, in
1997 from three clients, and in 1998 from eight clients, respectively.
Approximately 23% and 17.5% of CBI's commission and fee revenue for the years
ended 1997 and 1998, respectively, was generated by The Wamberg Organization,
which is wholly-owned by CBI's Chairman, W.T. Wamberg. Substantially all of the
policies underlying the programs marketed by CBI are underwritten by 14 life
insurance companies, of which seven accounted for approximately 78.9% and 76.3%
of CBI's first-year commission revenue for the years ended December 31, 1997 and
1998.
STRATEGY
Clark/Bardes' goal is to enhance its role as a provider of innovative
benefit and insurance solutions to corporations and banks throughout the United
States. To accomplish this goal, Clark/Bardes intends to focus on the following:
- Leverage Market Reputation. Clark/Bardes plans to leverage its reputation
as an industry leader to expand current operations and to enter into
related businesses.
- Design Innovative Programs. Clark/Bardes intends to use its expertise in
program development to create and market innovative, customized programs
in order to facilitate Clark/Bardes' penetration of new markets and to
satisfy the financial needs of its clients in a changing regulatory and
economic environment.
- Diversify Business. Clark/Bardes plans to identify and enter into related
businesses in which its core competencies can be profitably employed.
Examples of related businesses include compensation consulting, benefit
plan administrative services and marketing to the non-profit sector.
- Enhance Administrative Capabilities. Clark/Bardes intends to continue
distinguishing itself from its competitors by enhancing its
administrative capabilities, providing high quality administrative
services and improving operating margins.
- Pursue Consolidating Acquisitions. Clark/Bardes intends to take advantage
of the expected consolidation in the insurance-financed employee benefit
market and implement Clark/Bardes' design, distribution and service model
on a wide-scale basis so as to increase market share, acquire producer
and management talent, enter into new markets and improve operating
margins through integration efficiencies.
ACQUISITION STRATEGY
The insurance-financed employee benefit industry is highly fragmented.
Management believes that significant opportunities exist to create a more
efficient design, distribution and service system for insurance-financed
employee benefit programs. Clark/Bardes is taking advantage of these
opportunities by pursuing acquisitions on a selected basis. Management
categorizes potential acquisition targets in two groups. The first group is
comprised of smaller, less sophisticated companies that have not made the
necessary investment in technology and personnel, and are finding it
increasingly difficult to compete with the larger, more-developed firms. The
second group is comprised of larger and more, sophisticated firms with a solid
client base that are owned by a small number of producers who are eager to
affiliate their firm with a more established organization.
In establishing guidelines for evaluating a potential acquisition target,
Clark/Bardes focuses on identifying organizations that can increase
Clark/Bardes' market penetration, retain quality producers after the
consummation of the acquisition, create cross-selling opportunities, provide
opportunity for administrative cost savings and be effected in a manner that is
accretive to Clark/Bardes' earnings. Using these guidelines, Clark/ Bardes
evaluates a potential acquisition target based on factors such as the operating
results and financial condition of the target business, its growth potential,
the quality of its management and producers and the expected return in relation
to other acquisition opportunities. As of December 31, 1998, management had
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identified approximately 100 companies each with annual revenue in excess of
$3.0 million that are potentially attractive acquisition targets. Management
believes Clark/Bardes' leadership, size, industry expertise and reputation,
administrative systems and support and other long-term competitive advantages
provide Clark/ Bardes with a decided advantage in its pursuit to acquire
selected companies.
PROGRAMS AND PRODUCTS
Clark/Bardes designs and markets a diverse array of insurance-financed
employee benefit programs and provides comprehensive administrative services to
meet the needs of its clients. Business-owned life insurance refers to life
insurance policies purchased by a business that insure the lives of a number of
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 key executives. More specifically, 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. Further, business-owned life insurance offers certain
advantages, including (i) the cash value of the policies grows on a tax deferred
basis until withdrawal and (ii) the policies' death benefits are received
tax-free. Finally, the tax deferred nature of the policies provides an
attractive return.
Currently, Clark/Bardes derives a majority of its total revenue from the
sale of insurance products used to fund its proprietary programs. Clark/Bardes
maintains relationships with insurance companies such as CIGNA, General
American, Great-West, Life Investors, Nationwide, Phoenix Home Life and West
Coast Life that are strategic in nature, with both parties committed to
developing and delivering creative products with high client value.
Clark/Bardes, through its actuaries, financial and other professionals, works
closely with (i) clients to design custom products that meet the unique
organizational needs of such client and (ii) selected insurance companies to
develop unique policy features at competitive pricing.
Clark/Bardes has invested significant time and resources in cultivating
relationships with selected carriers, with certain relationships that are
considered strategic in nature. However, Clark/Bardes does not consider its
future success to be dependent on any specific insurance carrier. Management
believes that there are over 50 top-tier insurance companies with the financial
strength and resources to effectively compete in the large-case market and
several hundred carriers suitable for Clark/Bardes' small-case business.
Clark/Bardes limits the number of carriers with which it transacts business in
order to maximize its bargaining power and resource utilization.
Clark/Bardes entered into a five-year production agreement with General
American that requires Clark/ Bardes to market and sell insurance products of
General American comprising specified percentages of all insurance products sold
by Clark/Bardes as measured by first year commissions payable with respect to
such business. The percentages range from 10.0% to 25.0% depending upon the type
of insurance product and product exclusivity provisions. The production
agreement with General American provides that if Clark/ Bardes fails to meet the
minimum production requirements, General American is entitled to offset future
commissions otherwise payable to Clark/Bardes up to a maximum amount of $150,000
per year. Further, Clark/Bardes has entered into a five-year joint product
development and production agreement with Phoenix Home Life. The agreement
provides for the development of a new product for distribution by Clark/Bardes
subject to minimum production requirements of at least $15.0 million in new
premium. Prior to the development of the new product, Clark/Bardes will be
obligated to sell minimum levels of existing Phoenix Home Life products.
Noncompliance with any such minimum production amounts would subject Clark/
Bardes to penalties of $100,000 for any twelve month period during which such
production is not met.
In August 1998, Clark/Bardes entered into a five-year production agreement
with Nationwide and Great West ("the Carriers") that requires Clark/Bardes to
market and sell insurance products comprising specified percentages of all
insurance products sold by Clark/Bardes as measured by first year commissions
payable with respect to such business. The percentages range from 10.0% to 25.0%
depending upon the type of insurance product and product exclusivity provisions.
The production agreement provides that if Clark/Bardes fails to meet the minimum
production requirements, the carriers are entitled to offset future commissions
otherwise payable to Clark/Bardes up to a maximum amount of $150,000 each per
year.
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Clark/Bardes may consider entering into additional product development and
production agreements with other insurance companies in the future. The
agreements entered into by Clark/Bardes with the insurance carriers typically
provide for the marketing of an insurance carrier's insurance products by Clark/
Bardes, commission payment rates by insurance product, licensing of software for
product illustrations, mutual indemnification provisions and short term
termination provisions.
Clark/Bardes' overall approach to marketing and client service is
illustrated by the business-owned life insurance marketing process. First,
Clark/Bardes performs the actuarial and insurable interest calculations
necessary to determine the amount of life insurance an organization needs to
purchase. Then, Clark/Bardes helps to design a program to meet that particular
company's unique organizational needs. Next, Clark/Bardes arranges for the
placement of the insurance coverage underlying the program with a financially
stable insurance company. Last, Clark/Bardes provides the long-term
administrative services associated with the program and the underlying
business-owned life insurance policy.
Clark/Bardes markets a wide variety of business-owned life insurance based
programs, including bank-owned life insurance, deferred income plans ("DIPs"),
supplemental executive retirement plans ("SERPs") and supplemental offset plans
("SOPs") and also markets group term carve out plans ("GTCO").
The following table sets forth the total revenue by product category for
the years ended December 31, 1998 and 1997.
TOTAL REVENUE
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1998 1997
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(IN THOUSANDS)
Large case.................................................. $22,063 $16,180
Small case................................................ 29,359 8,451
DIP and SERP.............................................. 6,030 5,352
SOP......................................................... 3,033 3,379
GTCO........................................................ 5,116 3,534
Discontinued products(1).................................... 5,430 10,427
Miscellaneous case revenue(2)............................... 3,735 2,132
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Total............................................. $74,766 $49,455
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(1) Includes renewal revenue from products used in existing plans which are no
longer marketed because of legislative changes.
(2) Includes revenue from miscellaneous programs and other revenue sources.
Bank-Owned Life Insurance. Bank-owned life insurance refers to
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.
Clark/Bardes was 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 $1.0 billion. As a result of the BCS acquisition, Clark/Bardes now
markets small case bank-owned life insurance programs, which are used to offset
benefit costs for executives and directors of regional and community banks with
assets of less than $1.0 billion. Clark/Bardes markets 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).
Deferred Income Plans. DIPs 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 DIP 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 DIP. DIPs can be structured in a variety
of ways, including "traditional" DIPs, 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" DIPs, which credit
the deferred income amount with interest based on a bond or equity index
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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 DIPs 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. SERPs are specifically designed to
supplement the dollar limitation on benefits paid from qualified pension plans.
The 1993 Omnibus Budget Reconciliation Act ("OBRA") 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 $150,000. OBRA had significant
adverse effects on defined benefit, defined contribution and 401(k) plans. As a
result, non-qualified plans such as SERPs, which are not subject to the same
stringent rules, have increased in popularity. SERPs are funded with the same
insurance products and strategies used to fund DIPs.
Supplemental Offset Plans. SOPs are designed to supplement an executive's
income by restoring retirement benefits previously limited by legislative
changes. Using a technique commonly known as "split dollar," SOPs are funded
with insurance policies. 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. GTCOs replace the taxable
portion of the group term life insurance plan with permanent life insurance.
GTCOs 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.
ADMINISTRATIVE SERVICES
Management believes that Clark/Bardes is recognized as an industry leader
in providing high quality, unique services to its clients partly through the
application of internally developed technology. Clark/Bardes approaches
administrative service opportunities with a differentiation strategy to generate
significant revenues and profits. The clients' unique requirements and needs are
served through customized, value-added services and intensive client support,
creating brand and client loyalty and resulting in lower sensitivity to price.
Clark/ Bardes further differentiates itself by employing a focused strategy for
a particular buyer group. For instance, Clark/Bardes services clients in the
banking industry with an insider's view of the industry which results in
providing high quality services customized to a client's needs while achieving
lower costs.
Clark/Bardes offers 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 account specialists who are responsible for servicing the needs of that
client. The administrative services provided by Clark/Bardes' account
specialists include coordinating and managing the enrollment process,
distributing communication materials, monitoring financial, tax and regulatory
changes, providing accounting reports, performing annual reviews and reporting
historical and projected cash flow and earnings. The account specialists are
supported by Clark/Bardes' in-house actuarial, financial and insurance
specialists.
Clark/Bardes builds its client base by fostering long-term client
relationships. To this end, the training and focus of each account team centers
on Clark/Bardes' 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,
Clark/Bardes enters into administrative agreements with each client, in most
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cases for a term of five to ten years. Finally, Clark/Bardes' method of
calculating the revenue splits with its producers attempts to ensure the
long-term viability of its administrative services group. The purpose of this
arrangement is to ensure that the revenue from new sales is not required to
subsidize the administrative costs of existing cases.
Management believes that Clark/Bardes' commitment to providing high quality
client and administrative services is one of the primary reasons that
Clark/Bardes has achieved the success it has enjoyed to date. Clark/Bardes
believes that its continued focus on, and investment in, the personnel and
technology necessary to deliver this level of client service will bolster
Clark/Bardes' reputation as an industry leader.
DISTRIBUTION
Clark/Bardes markets its insurance-financed employee benefit programs and
related administrative services through a group of producers in independently
operated sales offices located throughout the United States. As of December 31,
1998, Clark/Bardes was represented by 45 producers in 40 offices, with staffing
ranging in size from 2 people to over 20 people. Producers own approximately
15.8% of the outstanding shares of Common Stock. Each producer is an independent
contractor and enters into an agency agreement with Clark/Bardes 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 Clark/Bardes,
confidentiality agreement and operating guidelines and standards. The agency
agreements can be terminated by either party with either 90 or 180 days written
notice depending upon the individual agreement. As an independent contractor,
each producer is responsible for its own selling expenses and overhead. The
revenue splits typically provide 69% to the producer and 31% to Clark/Bardes.
Non-solicitation clauses are three years with respect to separate clients and
five years with respect to joint clients, as defined in the agency agreement.
Other than The Wamberg Organization, which accounted for approximately
17.5% of 1998 revenues, producers Steven Cochlan and Malcolm Briggs accounted
for approximately 10.7% and 6.2%, respectively, of 1998 revenue and no other
producers accounted for more than 6% of 1998 revenue. Clark/Bardes seeks to
expand its base of producers so as to mitigate any dependency on a small number
of producers for a large portion of Clark/Bardes' business. Clark/Bardes
recognizes the importance of attracting and retaining qualified, productive
sales professionals. Clark/Bardes and its producers actively recruit and develop
new sales professionals in order to add distribution capacity for Clark/Bardes.
Further, Clark/Bardes' acquisition strategy focuses on retaining the productive
sales professionals of the entity being acquired.
EMPLOYEES
As of December 31, 1998, Clark/Bardes employed approximately 192 people, of
whom 84 worked in administrative services, 31 in program design, 23 in
information systems and technical support, 19 in accounting, 12 in marketing,
and the remainder performed various executive and administrative functions. The
majority of Clark/Bardes' employees have college degrees, with several holding
advanced degrees in law, 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 Clark/Bardes' employees.
Clark/Bardes actively encourages continuing education for employees through
expense reimbursement and reward plans. Due to the specialized nature of the
business, Clark/Bardes often recruits experienced persons from insurance
companies, consulting firms and related industries.
MARKETING SUPPORT
Clark/Bardes has made a substantial investment to establish a highly
qualified marketing department. The marketing department's primary focus is to
support Clark/Bardes' sales efforts. The marketing department develops and
tracks sales leads for the producers, provides marketing materials and research
and performs the public relations function for Clark/Bardes and its producers.
The marketing department, which includes a full time copywriter and graphic
artist, produces all the marketing materials used by Clark/Bardes
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and its producers. Clark/Bardes, through its marketing department, distributes
external newsletters and other program update pieces to approximately 8,000
current and prospective clients throughout the year and sponsors telephone
conferences and meetings featuring industry experts and nationally recognized
speakers. Finally, the marketing department coordinates the publication of
articles written by Clark/Bardes employees and producers and ensures that
Clark/Bardes representatives are quoted as information sources in major national
publications. Management believes that the efforts of Clark/Bardes' marketing
department have helped make Clark/Bardes a readily identifiable leader in the
insurance-financed employee benefit industry.
PRODUCER SUPPORT
Clark/Bardes' producers are supported by a design and analysis department.
The design and analysis department's primary responsibility is to design a
customized insurance-financed employee benefit program 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. Next, the
design analyst 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 that
client in making a decision.
TECHNOLOGY AND ADMINISTRATION
Clark/Bardes has made a significant investment in developing proprietary
financial modeling and administrative systems that support the unique
characteristics of insurance-financed employee benefit programs. Both systems
are generalized and parameter-driven in order to support the special processing
needs of a diverse client base. The Unix-based administrative system utilizes a
relational database that allows Clark/ Bardes to easily access client,
participant, policy and benefit information. In addition, a telephonic
application allows individual plan participants access 24 hours a day to account
balance and unit price information. In 1998, Clark/Bardes began migrating the
administrative system to a client-server based environment in order to reduce
system development time and to allow Clark/Bardes to respond more quickly to
changing market and client needs.
Local area networks link all of Clark/Bardes' personal computers. Internet
mail is utilized to communicate with clients and the sales offices. Management
intends 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, Clark/Bardes'
1999 capital budget contemplates implementing intranet and collaborative
workgroup tools to speed communications and to allow information to be easily
shared across the organization. Further, as Clark/Bardes continues to grow
internally and by acquisitions, management intends to establish a wide area
network to facilitate communications across all locations.
Clark/Bardes maintains a disaster recovery plan for its 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 area and all systems are password-protected
to ensure access is limited to authorized individuals. Clark/Bardes presently
believes that the year 2000 issues will not pose significant operational
problems for Clark/Bardes directly or as a result of any year 2000 issues or
suppliers or customers. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Year 2000 Compliance."
PERSISTENCY
Over the last five years, Clark/Bardes has experienced an average annual
persistency rate of inforce insurance in the upper ninety percent range.
Historically, revenue persistency has tracked with insurance policy persistency
with the exception of leveraged COLI business, which was affected by adverse tax
law changes, and business related to Confederation Life Insurance Company, which
was impacted by the cessation of operations and subsequent rehabilitation of
that company. In both instances renewal revenue was adversely impacted even
though insurance policies remained in force. Clark/Bardes believes that this
high persistency
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rate is attributable to numerous factors. The first factor relates to the
underlying purpose of an insurance-financed employee benefit program, which is
to offset the costs of employee benefit liabilities and provide long-term
benefits to executives. An insurance policy is not typically used to fund the
benefits for a specific individual, but rather to offset the costs of a client's
employee benefit costs on an aggregate basis. Therefore, the policy is usually
held to maturity, regardless of whether any particular individual insured
remains with the client. Second, a client would suffer 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. These costs are normally waived in the event a
particular insurance company experiences a significant reduction in its credit
rating. Third, Clark/Bardes' high persistency rate is partially attributable to
provisions in many interest rate sensitive products that disallow a full-scale
withdrawal or exchange. Finally, Clark/Bardes has strategically committed
resources to provide a high degree of on-going client service. Management
believes that the quality of Clark/Bardes' services enhances persistency by
distinguishing Clark/Bardes from its competitors.
COMPETITION
The marketing, design and administration of insurance-financed employee
benefit programs is highly competitive. Clark/Bardes and its producers compete
with a large number of insurance agents, life insurance brokers, third party
administrators, producer groups and insurance companies. Clark/Bardes' direct
competitors include Compensation Resource Group, Harris Crouch Long Scott and
Miller, Management Compensation Group, Newport Group, TBG Financial and The Todd
Organization (not related to Melvin G. Todd, President and Chief Executive
Officer of CBH and CBI). Furthermore, competition exists for producers and other
marketers of life insurance products who have demonstrated sales ability.
National banks, with their existing depositor bases for financial services
products, may pose increasing competition in the future to companies who sell
life insurance products, including Clark/Bardes. Recent United States Supreme
Court decisions have expanded the authority of national banks to sell life
insurance products.
Clark/Bardes competes 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 have access to proprietary programs and products unavailable
to Clark/ Bardes and others offer lower prices for administrative services,
management believes that Clark/Bardes is in a superior competitive position in
most, if not all, of the meaningful aspects of its business. Management does not
consider its direct competitors to be its greatest competitive threat. Rather,
management believes that Clark/Bardes' 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 that
of Clark/Bardes.
GOVERNMENT REGULATION
The insurance-financed employee benefit market is subject to extensive
regulation by state governments. Clark/Bardes' products are sold in all 50
states through licenses held by Clark/Bardes or by its producers. In addition,
Clark/Bardes markets its insurance-financed employee benefit programs in the
states of Ohio, Pennsylvania and Texas through entities licensed in those states
for which Clark/Bardes provides almost all services by means of administrative
service agreements. In general, state insurance laws generally establish
supervisory agencies with broad administrative and supervisory powers related to
such matters as granting and revoking licenses, approving individuals and
entities to whom commissions can be paid, licensing insurance agents,
transacting business, approving policy forms and regulating premium rates for
some lines of business. Licensing laws applicable to insurance marketing
activities and the receipt of commissions vary by jurisdiction and are subject
to interpretation as to the application of such requirements to specific
activities or transactions. While Clark/Bardes has not encountered regulatory
problems in the past, no assurance can be given that Clark/Bardes would be
deemed to be in compliance with all applicable licensing requirements of each
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jurisdiction in which Clark/Bardes operates or that additional licenses would
not be required of Clark/Bardes or that Clark/Bardes or its producers will not
encounter regulatory problems in the future, including any potential sanctions
or penalties for operating in a jurisdiction without all required licenses.
While the federal government does not directly regulate the marketing of
most insurance products, certain products, such as variable life insurance, must
be registered under the federal securities acts and therefore the producers and
the entities selling such products must be registered with the NASD. Clark/
Bardes markets such insurance products through an entity registered as a
broker-dealer and for which Clark/ Bardes provides almost all services by means
of administrative service agreements. Further, Clark/Bardes is subject to
various federal laws and regulations affecting matters such as pensions, age and
sex discrimination, financial services, securities and taxation. In recent
years, the Office of the Comptroller of the Currency has issued a number of
rulings that have expanded the ability of banks to sell certain insurance
products. In the past, Congress has considered legislation which could, among
other things, eliminate existing restrictions on the affiliation of insurance
companies, banks and securities firms. Such legislation and other future federal
or state legislation, if enacted, could result in increased competition, as well
as new opportunities, for Clark/ Bardes.
ANCILLARY BUSINESS ARRANGEMENTS
Because of various federal and state licensing restrictions, Clark/Bardes
markets certain products registered with the SEC and its insurance-financed
employee benefit programs in the states of Ohio, Pennsylvania and Texas through
insurance agencies for which Clark/Bardes provides almost all services by means
of an administration and services agreement. Each of the insurance agencies
Clark/Bardes Securities, Inc., a Texas corporation licensed as a broker/dealer,
Clark/Bardes Agency of Ohio, Inc., an Ohio corporation, Clark/Bardes, Inc. of
Pennsylvania, a Pennsylvania corporation, and Clark/Bardes of Texas, Inc., a
Texas corporation, provides the entity through which Clark/Bardes' producers
sell certain products and conduct business in such states. In exchange, each of
the insurance agencies is a party to an Administration and Services Agreement
pursuant to which such insurance agency pays Clark/Bardes to furnish facilities,
services, personnel and assistance, including (i) performing all bookkeeping and
accounting functions, (ii) establishing and maintaining all records required by
law and by generally accepted accounting principles, (iii) furnishing all
stationery, forms and supplies, (iv) providing all necessary clerical and
professional staff to perform the above activities, (v) providing all computer
hardware and software capabilities and facilities, (vi) providing office space,
furniture, fixtures, equipment and supplies, (vii) assisting in the preparation
of reports required by governmental regulatory and supervisory authorities, and
(viii) billing and collection of all premiums. The charges and fees pursuant to
the Administration and Services Agreement are equal to the costs incurred by
Clark/Bardes in providing the services, personnel and property. Each insurance
agency is solely responsible for its own activities as an insurance producer and
for its relationship with the producers or employees in the course and scope of
their activities performed on behalf of such agency. Clark/Bardes Securities,
Inc. paid the Clark/Bardes an aggregate of $840,000, $206,000 and $211,000 in
1998, 1997 and 1996, respectively. Clark/Bardes Agency of Ohio, Inc. paid
Clark/Bardes an aggregate of $690, $155,000 and $0 in 1998, 1997 and 1996,
respectively. Clark/Bardes, Inc. of Pennsylvania paid Clark/Bardes an aggregate
of $506,000, $87,000 and $27,000 in 1998, 1997 and 1996, respectively.
Clark/Bardes of Texas, Inc. has not conducted any operations to date, and hence
no payments have been made to Clark/Bardes.
SCHOENKE ACQUISITION
On September 18, 1998, Clark/Bardes purchased the business and
substantially all the assets of Schoenke from Raymond F. Schoenke, Jr. for a
total of $17 million consisting of $15 million cash and a $2 million promissory
note, due in two equal installments on September 1, 1999, and September 1, 2000
bearing interest at 6.75% per annum.
Schoenke is a 22 employee executive benefit and compensation firm
headquartered in Maryland, specializing in the design, and administration of
benefit programs for companies. Schoenke has been in
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business since 1988. The following represents revenues and operating income for
the most recent periods prior to the acquisition:
JUNE 30, 1998 DECEMBER 31, 1997
------------- -----------------
(UNAUDITED) (AUDITED)
------------- -----------------
(IN THOUSANDS)
Revenues................................................ $3,237 $6,465
Operating income........................................ $ 98 $ 492
WIEDEMANN ACQUISITION
Effective November 1, 1998, Clark/Bardes acquired substantially all the
assets and 75% of the book business of Wiedemann, based in Dallas, Texas. The
total purchase price was $6.0 million, consisting of cash in the amount of
approximately $4.0 million and 142,857 shares of Common Stock. Acquisition
related expenses were $57,000. Clark/Bardes allocated $40,000 of the purchase
price to tangible assets and the remainder to the net present value of
Wiedemann's expected future profits.
Wiedemann was engaged in the business of the design, implementation and
administration of non-qualified executive benefits programs financed through
life insurance. Clark/Bardes primary objective in acquiring the assets and
business of Wiedemann was to expand Clark/Bardes' client and revenue base and
acquire the experienced Wiedemann support and administrative personnel.
Wiedemann had 10 employees specializing in the design and administration of
benefit programs for companies. The following represents unaudited revenues and
operating expenses for the most recent periods prior to the acquisition:
DECEMBER 31, 1998 AUGUST 31, 1998
----------------- ---------------
UNAUDITED
-----------------------------------
(IN THOUSANDS)
Revenues.............................................. $2,903 $1,562
Operating income...................................... $ 673 $ 456
ITEM 2. PROPERTIES
The following table sets forth certain information with respect to the
principal facilities used in Clark/ Bardes' operations, all of which are leased:
CURRENT MONTHLY APPROXIMATE LEASE
LEASE RATE SQUARE FOOTAGE EXPIRATION DATE
------------- -------------- ---------------
Dallas, Texas........................... $43,847 32,000 April 2001
Minneapolis, Minnesota.................. $32,266 15,000 August 2005
Germantown, Maryland.................... $20,746 14,720 December 2006
The aggregate monthly lease rate for the properties listed above is
$96,859. Clark/Bardes subleases approximately 2,046 square feet of its
Minneapolis, Minnesota office space at a monthly rate of $4,302. Management
believes that Clark/Bardes' existing facilities are adequate to meet its office
space requirements for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
From time to time, Clark/Bardes is involved in various claims and lawsuits
incidental to its business, including claims and lawsuits alleging breaches of
contractual obligations under agreements with producers. Clark/Bardes does not
believe that these claims will have a material adverse effect on the
Clark/Bardes' business, financial condition and results of operations.
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 security holders, through the
solicitation of proxies or otherwise.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
On August 19, 1998, CBH completed an initial public offering of the Common
Stock at a price of $9.00 per share. The Common Stock is traded 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 the Common Stock for the periods
indicated.
1998 HIGH LOW
---- ------- ------
Third Quarter (beginning August 19, 1998)................... $10.000 $7.125
Fourth Quarter.............................................. $18.875 $8.250
As of March 17, 1999, the closing price as reported by the Nasdaq National
Market for the Common Stock was $16.625. As of March 17, 1999, there were
approximately 8,202,535 shares of Common Stock outstanding, which includes
approximately 324,000 shares of Common Stock issuable to the remaining holders
of the Predecessor Company's common stock. As of March 17, 1999, there were
approximately 72 record holders and 776 Beneficial holders of the Common Stock.
DIVIDEND POLICY
CBH has never declared or paid any cash dividends on the Common Stock.
Clark/Bardes intends to retain future earnings to fund growth and does not
anticipate paying any cash dividends in the foreseeable future. Under the terms
of Clark/Bardes' Senior Secured Notes due August 9, 2002 and Second Priority
Senior Secured Notes due August 9, 2004, Clark/Bardes cannot declare or pay any
dividends or incur any liability to make any other payment or distribution to
its stockholders, may not make any distributions to purchase, redeem, or retire
any of Clark/Bardes' capital stock, is subject to certain limitations on the
incurrence of indebtedness and must maintain certain financial ratios. Under the
terms of a credit agreement with BankOne Texas, N.A., Clark/Bardes cannot
declare or pay any dividends or return any capital to its shareholders or
authorize or make any other distributions, payment or delivery of property or
cash to its shareholder as such without the prior written consent of BankOne.
RECENT SALES OF UNREGISTERED SECURITIES
On November 16, 1998, Clark/Bardes issued 142,857 shares of Common Stock as
part of the purchase price in conjunction with the Wiedemann acquisition. The
issuance was exempt from registration under Section 4(2) of the Securities Act.
USE OF PROCEEDS
On August 19, 1998, in connection with the initial public offering, CBH's
Registration Statement on Form S-1, File No. 333-56799, was declared effective
by the SEC. CBH sold all 4.0 million shares of Common Stock registered in
connection with the initial public offering at a price of $9.00 per share,
generating gross offering proceeds of $36.0 million. The initial public offering
was managed by Bear, Stearns & Co. Inc., Piper Jaffray Inc. and Conning &
Company. The initial public offering closed on August 24, 1998, and after
deducting approximately $2.5 million in underwriting discounts and commissions
and approximately $1.8 million in other related issuance costs, the net proceeds
received by Clark/Bardes was approximately $31.7 million.
A portion of the net offering proceeds equal to $13.5 million was used to
consummate the purchase of substantially all of the assets of Schoenke. The
total purchase price of Schoenke was $17.0 million consisting of a $1.5 million
secured refundable deposit paid prior to the initial public offering, cash at
closing in the amount of $13.5 million and a promissory note issued by
Clark/Bardes to the sellers of Schoenke in an
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amount equal to $2.0 million. On August 24, 1998, Clark/Bardes paid certain
warrant holders $4.9 million for the extinguishment of warrants representing the
right to purchase 1,525,424 shares of Common Stock. On August 24, 1998,
Clark/Bardes made a principal prepayment of $1.0 million on its medium term
notes.
On November 19, 1998, approximately $4.1 million was used in partial
payment in the acquisition of all the assets of Wiedemann. Of the total purchase
price of $6.1 million, the remainder was paid through the issuance of 142,857
shares of Common Stock at an agreed upon price of $14 per share. On January 4,
1999, Clark/Bardes purchased renewal revenue from The Wamberg Organization for
approximately $7.5 million. The remaining proceeds of approximately $800,000
have been invested in short-term, investment-grade, interest-bearing securities
and will be used for general corporate purposes, including working capital.
None of the expenses incurred for CBH's account in connection with the
issuance and distribution of the securities registered for underwriting
discounts and commissions, finder's fees, expenses paid to or for underwriters,
other expenses and total expenses resulted in direct or indirect payments to
directors or officers CBH, or to persons owning 10% or more of any class of
equity securities of Clark/Bardes, or to affiliates of Clark/Bardes. Other than
salary and reimbursements paid to directors and officers, none of the offering
proceeds was paid directly or indirectly, to directors, officers, general
partners of the issuer or their associates, or to persons owning 10% or more of
any class of securities of Clark/Bardes, or to affiliates of Clark/Bardes.
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.
YEARS ENDED DECEMBER 31,
--------------------------------------------------
1994 1995 1996 1997(1) 1998(2)
------ ------- ------- ------- -------
(IN THOUSANDS)
STATEMENT OF INCOME
Total revenue............................. $ -- $26,972 $33,242 $49,455 $74,766
Commission & fee expense.................. -- 16,890 21,049 32,439 46,111
------ ------- ------- ------- -------
Net revenue..................... 7,343(3) 10,082 12,193 17,016 28,655
------ ------- ------- ------- -------
General & admin. expense.................. 7,237 7,869 8,579 11,504 19,616
Amortization of intangibles............... -- -- -- 295 1,232
Non-recurring expenses(4)................. -- -- -- -- 4,800
------ ------- ------- ------- -------
Income from operations.......... 106 2,213 3,614 5,217 3,008
------ ------- ------- ------- -------
Other income (expense)
Interest income......................... 171 200 121 189 565
Interest expense........................ (29) (7) -- (1,112) (3,166)
Miscellaneous........................... (100) (86) -- -- --
------ ------- ------- ------- -------
Total other income (expense).... 42 107 121 (923) (2,601)
------ ------- ------- ------- -------
Income before taxes....................... 148 2,320 3,735 4,294 406
Income taxes(5)........................... 10 102 181 60 817
------ ------- ------- ------- -------
Net income (loss)............... $ 138 $ 2,218 $ 3,554 $ 4,234 $ (411)
====== ======= ======= ======= =======
PER SHARE INFORMATION
Basic earnings (loss) per share........... $ .02 $ .39 $ .75 $ 1.03 $ (.08)
Diluted earnings (loss) per share......... $ .02 $ .39 $ .75 $ .99 $ (.08)
Dividends per share....................... $ .02 $ .29 $ .36 $ 1.32 $ --
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YEARS ENDED DECEMBER 31,
--------------------------------------------------
1994 1995 1996 1997(1) 1998(2)
------ ------- ------- ------- -------
(IN THOUSANDS)
BALANCE SHEET
Cash & cash equivalents................... $3,023 $ 3.969 $ 4,882 $ 3,783 $12,102
Total assets.............................. 7,152 9,887 8,525 36,901 67,493
Current portion of long-term debt......... -- -- -- 4,325 4,344
Long-term debt, excluding current
portion................................. -- -- -- 32,838 24,713
Total liabilities......................... 1,992 4,099 4,713 42,581 37,795
Stockholders' equity (deficit)............ 5,160 5,788 3,812 (5,680)(6) 29,698
- ---------------
(1) Includes the results of operations attributable to the assets acquired from
BCS for the period beginning September 1, 1997, the effective date of the
BCS acquisition, and ended December 31, 1997, and reflects the consummation
of such acquisition.
(2) Includes the results of operations attributable to the assets acquired from
Schoenke from the period beginning September 1, 1998, the effective date of
the Schoenke acquisition, and ended December 31, 1998. Also includes the
results of operations attributable to the assets acquired from Wiedemann for
the period beginning November 1, 1998, the effective date of the Wiedemann
acquisition, and reflects the consummation of such acquisitions.
(3) For the period presented, Clark/Bardes reported net revenue only. Total
revenue and commission and fee expense amounts are not available.
(4) Amount represents accrual for a non-recurring operating expense related to
the fair value adjustment put warrants.
(5) For periods prior to July 31, 1998, income tax expense reflects the
Clarke/Bardes' liability for state income taxes only. No provision for
federal income taxes had been made prior to such date because Clarke/Bardes
elected to be treated as an S corporation for federal income tax purposes.
(6) Reflects the decrease in stockholders' equity resulting from repurchases of
2.6 million shares of common stock by the Predecessor Company for aggregate
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
The following discussion and analysis of Clark/Bardes' financial condition
and results of operations should be read in conjunction with Clark/Bardes'
financial statements and notes thereto and other information appearing elsewhere
in this Form 10-K.
GENERAL
Since inception in 1967, Clark/Bardes has designed, marketed and
administered insurance-financed employee benefit programs to large corporations
and community, regional and money center banks. Clark/ Bardes' clients use these
sophisticated programs primarily to offset the costs of employee benefit
liabilities and to supplement and secure benefits for key executives.
RECENT ACQUISITIONS
Effective November 1, 1998, Clark/Bardes acquired substantially all the
assets and 75% of the book of business of Wiedemann, based in Dallas, Texas. The
total purchase price was $6.1 million, consisting of $4.1 million in cash and
142,857 shares of Common Stock at an agreed upon price of $14 per share.
Acquisition related expenses were approximately $54,000. Clark/Bardes allocated
approximately $40,000 of the purchase price to tangible assets and the remainder
to the net present value of Wiedemann's expected future revenue.
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Wiedemann is engaged in the business of the design, implementation and
administration of non-qualified executive benefits programs financed through
life insurance. Clark/Bardes' primary objective in acquiring the assets and
business of Wiedemann was to expand Clark/Bardes' client and revenue base and
acquire the experienced Wiedemann support and administrative personnel.
Effective September 1, 1998, Clark/Bardes acquired substantially all the
assets and the business of Schoenke, based in Germantown, Maryland, for a
purchase price of $17.0 million in cash and seller-financed notes, plus
acquisition related expenses of $98,000. For the period beginning September 1,
1998 to December 31, 1998, the assets acquired from Schoenke generated total
revenue of $3.5 million, which represented 4.7% of Clark/Bardes' total revenue
for the year ended December 31, 1998.
Effective September 1, 1997, Clark/Bardes acquired substantially all the
assets and the business of BCS, a Minnesota based company, for a total purchase
price equal to $24.0 million, plus acquisition related expenses of $383,000. BCS
generated total revenue of $29.4 million, which represented 39.3% of
Clark/Bardes' total revenue for the year ended December 31, 1998.
Clark/Bardes has entered into non-binding negotiations to acquire the
businesses and substantially all the assets of two unrelated, privately owned
companies. The aggregate proposed purchase price would be approximately $45.0
million, subject to change. If consummated, payment of the purchase price would
be approximately $19.9 in cash at closing, assumption of approximately $4.1
million in liabilities, a sellers' note for approximately $8.7 million and the
issuance of approximately 711,000 shares of Common Stock having an agreed upon
value of approximately $12.3 million. Of the potentially issuable shares,
384,000 shares of Common Stock, having a value of $6.8 million, is to be
contingent upon the attainment of specified five year revenue and gross profit
performance levels.
In addition, the proposed terms contemplate the issuance of options, under
employment agreements, to acquire approximately 361,600 shares of Common Stock,
at market prices at the time of closing, to certain retained employees of the
target companies upon the attainment of stipulated levels of revenue.
These non-binding discussions and the consummation of either acquisition
are subject to Clark Bardes' ongoing review of the target companies, the
execution of definitive purchase agreements, and the satisfaction of certain
conditions, including the approvals of Clark/Bardes' board of directors, the
boards of directors of the target companies and the consent of Clark/Bardes
lenders, among others. Accordingly, Clark/Bardes can give no assurance that the
acquisitions will be completed and, if so, on the terms described above.
ENTRY INTO NEW BUSINESS
In July 1998, Clark/Bardes entered into consulting agreements with four new
principals. These principals have assisted Clark/Bardes in building the
Clark/Bardes Healthcare Compensation Group. This new division is focused on
executive compensation and benefit plans for large and medium-sized non-profit
healthcare facilities. All payments under the compensation consulting agreements
have been made and expensed as of December 31, 1998.
In September 1998, Clark/Bardes entered into an arrangement with Robert
Miller, who formerly led the Minneapolis/St. Paul Financial Institutions
Practice for McGladrey & Pullen, LLP, a public accounting firm. Mr. Miller will
head Clark/Bardes' newest division, Bank Compensation Consulting, a division of
Bank Compensation Strategies. This division will focus on providing
comprehensive compensation consulting services exclusively to the banking
industry. The Bank Compensation Consulting division was officially "launched" in
January 1999.
REVENUE AND EXPENSE
Clark/Bardes derives its revenue primarily from (i) commissions paid by the
insurance companies that underwrite the policies underlying Clark/Bardes'
programs and (ii) fees paid by clients in connection with program design and the
administrative services provided by Clark/Bardes. Such revenue is usually long
term and recurring and is typically paid annually to extend over a period of ten
years or more after a sale. Commissions paid by insurance companies vary by
policy and by program and are usually based on a
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19
percentage of premium paid or a percentage of the cash surrender value of the
insurance policies underlying the program. Commissions paid by insurance
companies accounted for approximately 89.7% of Clark/Bardes' total revenue for
the year ended December 31, 1998. Fees are paid by clients in consideration for
the design and administration of employee benefit plans and the insurance
products underlying such plans. The scope of these services and fees payable are
negotiated on a client-by-client basis. Fees accounted for approximately 10.3%
of Clark/Bardes' total revenue for the year ended December 31, 1998.
Generally, Clark/Bardes recognizes its revenue at the time the insurance
premium is paid by the client to the insurance company or the renewal premium is
due to the insurance company. Clark/Bardes retains approximately 35% of the
gross revenue, with the producer receiving the balance.
Total revenue includes first year revenue and renewal revenue:
- First Year Revenue. First year revenue is recognized at the time the
client is contractually committed to purchase the insurance policies and
the premiums are paid by the client to the insurance company. First year
revenue accounted for approximately 49.3% of Clark/Bardes' total revenue
for the year ended December 31, 1998.
- Renewal Revenue. Renewal revenue is recognized on the date that the
renewal premium is due to the insurance company.
The following is a chart projecting the next ten years of expected gross
revenues. Amounts in the chart are not adjusted for potential persistency
or mortality lapse. Such expected gross revenues are based upon the
beliefs and certain assumptions of management and are not necessarily
indicative of the revenues that may actually be achieved in the future.
GROSS INFORCE REVENUE AS OF DECEMBER 31, 1998
(IN THOUSANDS)
REVENUE SOURCE
---------------------
CORE COMMUNITY
YEAR BENEFITS BANK TOTAL
---- -------- --------- --------
1999........................................... $ 39,095 $ 8,696 $ 47,791
2000........................................... 37,325 6,778 44,103
2001........................................... 34,949 2,736 37,685
2002........................................... 32,566 3,039 35,605
2003........................................... 30,112 3,071 33,183
2004........................................... 26,520 3,106 29,626
2005........................................... 26,020 3,140 29,160
2006........................................... 26,029 3,178 29,207
2007........................................... 23,769 3,217 26,986
2008........................................... 22,731 3,257 25,988
Totals
Years 1-5.................................... $174,048 $24,323 $198,371
Years 1-10................................... $299,120 $40,223 $339,343
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Renewal revenue can be affected by policy surrenders or exchanges,
material contract changes, asset growth and case mortality rates.
Traditionally, Clark/Bardes has experienced persistency rates on the in
force insurance underlying the Clark/Bardes' programs that is in the
upper-ninety percent range, with the exception of Leveraged COLI business,
which was affected by adverse tax law changes, and the restructuring of
Confederation Life Insurance Company. Renewal revenue accounted for
approximately 50.7% of Clark/Bardes' total revenue for the year ended
December 31, 1998.
Commission and fee expense comprises the portion of the total revenue paid
to the producer after deducting the cost of servicing policies and other direct
expenses related to sales. Commission and fee expense as a percentage of total
revenue was approximately 61.7% for the year ended December 31, 1998.
QUARTERLY FLUCTUATIONS
Clark/Bardes has experienced and expects to continue to experience
significant fluctuations in its results of operations, in particular when such
results are compared on a consecutive quarterly basis. Management believes these
quarterly fluctuations are attributable primarily to revenue variations since
operating expenses remain relatively constant throughout the year. Historically,
Clark/Bardes recognizes a significant increase in both first year and renewal
revenue in the fourth quarter due to the seasonality of program implementation.
In general, results of operations may fluctuate as a result of a number of
factors, including the introduction of new or enhanced programs and services by
Clark/Bardes or its competitors, client acceptance or rejection of new programs
and services, program development expenses, timing of significant sales, demand
for Clark/Bardes' administrative services, competitive, legislative and
regulatory conditions in the insurance-financed employee benefit industry and
general economic conditions.
The following table sets forth unaudited statements of income for the four
quarters of each of 1997 and 1998. Such information is not necessarily
indicative of results for any full year or for any subsequent period.
QUARTER ENDED
-----------------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1997 1997 1997 1997 1998 1998 1998 1998
--------- --------- ---------- --------- --------- --------- ---------- ---------
Total revenue................... $5,510 $5,772 $11,009 $27,162 $13,754 $15,230 $17,641 $28,141
Commission and fee expense...... 3,550 3,723 7,138 18,027 9,132 9,071 11,052 16,856
------ ------ ------- ------- ------- ------- ------- -------
Net revenue..................... 1,960 2,049 3,871 9,135 4,622 6,159 6,589 11,285
General and admin. Expense...... 1,860 2,755 2,887 4,004 3,371 5,029 4,613 6,594
Put warrants.................... -- -- -- (5,300) 500 --
Income (loss) before taxes...... $ 200 $ (737) $ 888 $ 3,942 $ 185 $(5,181) $ 1,576 $ 3,841
Basic earnings (loss) per
share(1)...................... $ 0.05 $ (0.1) $ 0.20 $ 1.27 $ 0.06 $ (1.61) $ 0.44 $ 0.27
Diluted earnings (loss) per
share(1)...................... $ 0.05 $ (0.1) $ 0.20 $ 1.03 $ 0.06 $ (1.61) $ 0.39 $ 0.27
- ---------------
(1) Earnings per share prior to July 31, 1998 reflects income before taxes less
Clark/Bardes' liability for state taxes only, on a per-share basis. No
provision for federal income taxes has been made in those periods because
Clark/Bardes elected to be treated as an S corporation for federal income
tax purposes prior to the Merger.
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RESULTS OF OPERATIONS
The following table sets forth, with respect to Clark/Bardes for the
periods indicated, the percentage of total revenues represented by certain
revenue, expense and income items:
QUARTER ENDED
YEAR ENDED DECEMBER 31, DECEMBER 31,
------------------------ -------------
1996 1997 1998 1997 1998
------ ------ ------ ----- -----
Total revenue.................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Commission and fee expense..................... 63.3 65.6 61.6 66.4 59.9
----- ----- ----- ----- -----
Net revenue.................................... 36.7 34.4 38.4 33.6 40.1
----- ----- ----- ----- -----
General and admin. Expenses.................... 25.7 23.3 26.2 15.5 23.4
Amortization of intangibles.................... 0.0 0.6 1.6 0.6 1.5
Non-recurring.................................. 0.0 0.0 (6.4) -- --
Operating expenses
----- ----- ----- ----- -----
Income from operations......................... 10.9 10.5 4.1 17.5 15.2
===== ===== ===== ===== =====
Interest income................................ 0.4 0.4 0.8 0.3 0.6
Interest expense............................... 0.0 (2.2) (4.2) (3.3) (2.1)
Miscellaneous income (expense)................. (0.1) 0.0 0.0 0.0 0.0
----- ----- ----- ----- -----
Total other income (expense)................... 0.3 (1.9) (3.5) (3.0) (1.5)
----- ----- ----- ----- -----
Income before taxes............................ 11.2 8.7 0.7 14.5 13.5
Income taxes................................... 0.5 0.1 1.3 0.2 5.8
----- ----- ----- ----- -----
Net income..................................... 10.7% 8.6% (0.7)% 14.3% 7.9%
===== ===== ===== ===== =====
COMPARISON OF THREE MONTH PERIODS ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1997
ON A HISTORICAL BASIS
Total Revenue. Total revenue increased to $28.1 million for the three month
period ended December 31, 1998 compared to $27.2 million for the three month
period ended December 31, 1997, representing an increase of 3.6%. The results
for the three month period ended December 31, 1998 reflects contributions of
$18.0 million from the core benefits business (including Schoenke) and $10.1
million from BCS community bank business. The results for the three month period
ended December 31, 1997 reflects contributions of $19.7 million from the core
benefits business and $7.5 million from BCS community bank business. The
breakout of first-year and renewal revenue for the years ended December 31 is as
follows:
1998 1997
----- -----
(IN MILLIONS)
First Year Revenue
Core benefits business.................................... $ 6.4 $ 9.5
Community bank business................................... 8.1 6.2
Renewal Revenue
Core benefits business.................................... 11.6 10.2
Community bank business................................... 2.0 1.3
----- -----
Total............................................. $28.1 $27.2
===== =====
Sales for the 1997 fourth quarter were unusually high due to a pending
legislative issue. To illustrate this point, of Clark/Bardes' 1997 revenues, 55%
were generated in the fourth quarter, as compared to 38% in 1998.
Commission and Fee Expense. Commission and fee expense was $16.9 million
for the three month period ended December 31, 1998 compared to $18.0 million for
the three month period ended December 31, 1997, representing a decrease of 6.5%.
Commission and fee expense as a percentage of total revenue decreased to 59.9%
for the three month period ended December 31, 1998 compared to 66.4% for the
three month period ended December 31, 1997. This reduction in commission and fee
expense as a percentage of total revenue was due to both acquisitions (e.g.
Schoenke commission expense was only 8.7% of Schoenke revenues) and a favorable
product mix from business on which a smaller than usual percentage of revenue
was distributed to
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producers. The reduction in commission expense due to acquisitions is expected
to continue, and present levels of commission and fee expense as a percentage of
total revenue are considered sustainable.
General and Administrative Expense. General and administrative expense
increased to $6.6 million for the three month period ended December 31, 1998
compared to $4.0 million for the three month period ended December 31, 1997,
representing an increase of 65%. General and administrative expense was higher
with an increase in administrative staff and resources which was required in
order to support new and renewal business gained in 1998. General and
administrative expense as a percent of total revenue was 23.4% for the three
month period ended December 31, 1998 compared to 15.5% for the three month
period ended December 31, 1997. General and administrative expense as a
percentage of revenue is usually lower in the fourth quarter than in other
quarters, due to the relatively high revenue typically recognized in the fourth
quarter associated with relatively level expense patterns for the year. The
general and administrative expense as a percent of revenue for the three months
ended December 31, 1997 is low, due to the unusually high revenue combined with
relatively level expense pattern for that period.
Amortization. Amortization expense equaled $433,687 for the three month
period ended December 31, 1998, reflecting the full-period amortization of
intangible assets capitalized as a result of the BCS and Schoenke acquisition
and two months of amortization for the Wiedemann acquisition. Amortization
expense was $159,913 for the three month period ended December 31, 1997, which
reflects the BCS acquisition only.
Income from Operations. Income from operations was $4.3 million for the
three month period ended December 31, 1998, compared to $4.8 million for the
three month period ended December 31, 1997, representing a decrease of 11.8%.
The decrease is due to the revenue and general and administrative expense
factors discussed above, as well as the increase in amortization expense.
Operating Margin was 15.1% for the three month period ended December 31, 1998,
as compared to 17.5% for the three month period ended December 31, 1997.
Other Expense -- Net. Other expense for the three month period ended
December 31, 1998 was $417,017 as compared to $820,096 for the three month
period ended December 31, 1997. The amount for the three months ended December
31, 1998 included interest income of $177,443 and interest expense of $599,630
as compared to interest income of $81,194 and interest expense of $903,386 for
the three months ended December 31, 1997. Interest income was higher for the
three months ended December 31, 1998 due to larger cash balances resulting
primarily from Clark/Bardes' initial public offering. Interest expense was lower
for the three months ended December 31, 1998 due to a lower outstanding debt
balance, as well as lower interest rates resulting from Clark/Bardes' August
1998 debt restructuring.
Income before Income Taxes. Income before taxes was $3.8 million for the
three month period ended December 31, 1998, compared to $3.9 million for the
three month period ended December 31, 1997, representing a decrease of 2.6%.
Income Tax. Effective 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 $1.6 million of income
tax expense for the three month period ended December 31, 1998, as compared to
$60,000 of state income tax expense for the three month period ended December
31, 1997.
Net Income. Net income was $2.2 million for the three month period ended
December 31, 1998. Net income was $3.9 million for the three month period ended
December 31, 1997. Applying the expected C corporation tax rate, net income is
estimated at $2.3 million for the comparable 1997 period.
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
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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.
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.
Other Expense -- Net. Other expense for the year ended December 31, 1998
was $2.6 million compared to $921,473 for the year ended December 31, 1997. The
amount for the year ended December 31, 1998 included interest income of $565,575
and interest expense of $3.2 million as compared to interest income of $188,597
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.
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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 $817,320 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 $410,715 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.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1997 AND 1996 ON A HISTORICAL BASIS
Total Revenue. Total revenue increased to $49.5 million for the year ended
December 31, 1997 compared to $33.2 million for the year ended December 31,
1996, representing an increase of 48.8%. $8.5 million of total revenue for the
year ended December 31, 1997 was associated with the assets acquired from BCS in
September 1997. The remaining increase was due to a growth in renewal revenue to
$25.4 million ($24.1 million excluding BCS) in 1997 from $23.6 million in 1996,
and was also attributable to an increase in first year sales. The increase in
total revenue was accomplished despite a decrease in the renewal revenue on
Leveraged COLI business to $6.1 million for the year ended December 31, 1997
from $9.7 million for the year ended December 31, 1996.
Commission and Fee Expense. Commission and fee expense increased to $32.4
million for the year ended December 31, 1997 compared to $21.0 million for the
year ended December 31, 1996, representing an increase of 54.1%. Commission and
fee expense as a percentage of total revenue increased to 65.6% for the year
ended December 31, 1997 as compared to 63.3% for the year ended December 31,
1996. Of the $11.4 million increase in commission and fee expense, $6.0 million
was attributable to the BCS acquisition.
General and Administrative Expense. General and administrative expense
increased to $11.5 million for the year ended December 31, 1997 compared to $8.6
million for the year ended December 31, 1996, representing an increase of 34.5%.
General and administrative expense as a percent of total revenue was 23.3% for
the year ended December 31, 1997 compared to 25.7% for the year ended December
31, 1996. The improvement in general and administrative expense as a percentage
of total revenue was a result of the BCS acquisition.
Amortization. Amortization expense was $295,000 for the year ended December
31, 1997, reflecting the amortization of intangible assets capitalized as a
result of the BCS acquisition in September 1997. There was no amortization
expense for the year ended December 31, 1996.
Income from Operations. Income from operations increased to $5.2 million
for the year ended December 31, 1997 compared to $3.6 million for the year ended
December 31, 1996, representing an increase of 43.3%. The increase was
attributable primarily to the income from BCS. Operating Margin decreased
slightly to 10.5% for the year ended December 31, 1997 from 10.9% for the year
ended December 31, 1996. This decrease in operating margin was due to
amortization expense of $295,000 incurred as a result of the BCS acquisition.
Other Expense -- Net. Other income and expense for the year ended December
31, 1997 was $923,000 compared to other income of $121,000 for the year ended
December 31, 1996. The amount for the year ended December 31, 1997 included
interest expense of $1.1 million. There was no interest expense for the year
ended December 31, 1996. The increase in interest expense was attributable to
the incurrence of debt associated with the repurchase of shares of common stock
of the Clark/Bardes throughout the year and the BCS acquisition in September
1997.
Net Income. Net income increased to $4.2 million for the year ended
December 31, 1997 compared to $3.6 million for the year ended December 31, 1996,
representing an increase of 19.1%, reflecting the factors
22
25
discussed above. No provision for federal income taxes was made for either
period since Clark/Bardes was an S corporation prior to the Merger.
LIQUIDITY AND FINANCIAL RESOURCES
Sources of Cash. Clark/Bardes produced net cash flow from operations of $4
million for the year ended December 31, 1998, as compared to $1.9 million for
the year ended December 31, 1997. The increase was due largely to strong cash
earnings and a decrease in working capital. As of December 31, 1998,
Clark/Bardes had cash and cash equivalents of $12.1 million, and total current
assets of $20.2 million. The primary source of these cash balances were the
proceeds from the issuance of common stock from Clark/Bardes' initial public
offering.
Uses of Cash. $15.0 million was used to consummate the Schoenke
acquisition. The total purchase price was $17.0 million consisting of a $15.0
million cash and a $2.0 million promissory note issued by Clark/Bardes to the
sellers of Schoenke. On August 24, 1998, Clark/Bardes paid warrant holders $4.9
million in exchange for the extinguishment of warrants representing the right to
purchase 1,525,424 shares of Common Stock at $5.90 per share. On August 24,
1998, Clark/Bardes made a principal prepayment of $1.0 million on its medium
term notes in addition to scheduled principal payments in the amount of $2.9
million for the three months ending December 31, 1998. On November 1, 1998,
Clark/Bardes paid 6.1 million to acquire the assets and business of Wiedemann.
The total purchase price consisted of $4.1 million paid in cash and the issuance
of 142,857 shares of Common Stock.
On July 31, 1998, Clark/Bardes paid a dividend equal to the S Corporation
Stockholder's Distribution Account. This dividend, in the amount of $3.2 million
or $1.00 per share, was paid from existing cash reserves.
Credit Facilities. As of December 31, 1998, Clark/Bardes owed an aggregate
of $29.1 million under outstanding debt obligations. Of this amount, $4.3
million is due within the next twelve months. Since January 1, 1998, cash flow
from operations was more than sufficient to cover scheduled principal and
interest payments on existing indebtedness as well as Clark/Bardes' working
capital requirements.
Effective August 24, 1998, Clark/Bardes restructured its Senior Secured
Notes and Second Priority Senior Secured Notes. The interest rates on the 10.5%
Senior Secured Notes and the 11.0% Second Priority Senior Secured Notes were
reset to 7.84% and 8.86%, respectively. The restructured notes may be prepaid
without penalty and will be secured by a first priority security interest in,
among other things, all of Clark/ Bardes' renewal commissions other than the
renewal commissions from BCS and Schoenke. Further, Clark/ Bardes is subject to
significant operational restrictions and financial covenants, a prohibition
against certain payments, a limitation on the payment of dividends, a limitation
on the incidence of indebtedness and the maintenance of certain financial
ratios.
In January 1999, CBI entered into a $65.0 million credit agreement
consisting of a $35 million revolving credit Facility and two term loans of $25
million and $5 million. In January 1999 pursuant to the credit agreement,
Clark/Bardes obtained a term loan for $25 million at a fixed rate of 7.08% for
the first year and at a floating rate based upon the one-year London InterBank
offered rate plus 2% thereafter. The term loans are represented by secured
promissory notes maturing December 31, 2004. Principal and interest are payable
quarterly beginning March 31, 1999. The $25.0 million proceeds were used to
retire the Senior Secured Notes, Second Priority Senior Secured Notes, medium
term notes, and AAA distribution notes payable. 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, certain limitations on mergers and acquisitions, prohibition of
cash dividends, limitation on investments, loans, and advances, and certain
change in control provisions.
Coincident with the credit agreement and floating rate debt agreements, CBI
has entered into an interest rate swap agreement with a bank affiliated with the
lending group to fix the interest rate at 5.29% on $15 million of the term loan,
thus sustaining no gain or loss on rate fluctuations. There was no cost to CBI
for this arrangement and it does not present a derivative risk.
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26
Clark/Bardes believes that its net cash flow from operations will continue
to provide sufficient funds to service all of its debt obligations. This belief
is based on the predictability and magnitude of Clark/Bardes' future revenue
stream. Specifically, renewal revenue in future periods, which is not reflected
on Clark/Bardes' balance sheet, is estimated by Clark/Bardes to represent
approximately $198.4 million in total revenue 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.
As Clark/Bardes' business grows, its working capital and capital
expenditures will also continue to increase. Management believes that net cash
flows from operations will be sufficient to finance Clark/Bardes' required debt
payments, working capital needs 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 Clark/Bardes' anticipated requirements or
that Clark/Bardes will not require additional debt or equity financing within
this time frame.
YEAR 2000 COMPLIANCE
The year 2000 issue is the result of computer programs written using two
digits rather than four digits to define "date" fields. Information systems have
time sensitive operations that, as a result of this date field limitation could
disrupt activities in the normal business cycle. Based on previous and ongoing
internal reviews, management believes that the computer equipment and software
used by Clark/Bardes will function properly with respect to dates in the year
2000 and thereafter. However, uncertainty still exists concerning the potential
costs and effects of the year 2000 problem. Clark/Bardes is continuing its
assessment of year 2000 issues and taking steps to prevent these issues from
adversely affecting its future operating results. This ready process includes,
but is not limited to, preparing an inventory of potential year 2000 issues,
determining functions affected, performing remediation as necessary, testing
software and equipment and recording results. This assessment and readiness
process is expected to be completed by mid-year 1999.
In its assessment of year 2000 issues, Clark/Bardes is specifically
focusing on its software applications and associated software products,
hardware, facilities, communications equipment and security systems.
Clark/Bardes' proprietary financial modeling and Unix-based administrative
systems that support its insurance-financed employee benefit programs were
designed to be year 2000 ready. During 1998 Clark/Bardes upgraded its network
software to be year 2000 compliant.
In addition to evaluating its own systems for year 2000 compliance.
Clark/Bardes is also communicating with and requesting information from its
important clients and carriers to determine the extent to which interfaces with
such entities are vulnerable to year 2000 issues and the extent to which the
internal systems of such entities are vulnerable to year 2000 issues. Third
parties that have relationships with Clark/Bardes, including insurance companies
and clients, may experience significant operational difficulties if their
computer systems do not properly recognize date sensitive information when the
year changes to 2000. While these computer malfunction issues may have a
material adverse effect on the operations of such third parties, which may, in
turn, have a material adverse effect on Clark/Bardes, management presently
believes that year 2000 issues will not require Clark/Bardes to incur any
material costs and do not pose significant operational problems. However,
Clark/Bardes is not able to determine the extent to which such third parties,
such as insurance companies and clients, may experience year 2000 issues. Any
year 2000 problem of either Clark/ Bardes or third parties that have
relationships with Clark/Bardes could have a material adverse effect on
Clark/Bardes' business, results of operations and financial condition.
Clark/Bardes believes that to the extent that any insurance companies which have
a relationship with Clark/Bardes are unable to become year 2000 compliant.
Clark/Bardes will be able to enter into relationships on a going forward basis
with other insurance companies that are year 2000 compliant.
Clark/Bardes' costs, as of December 31, 1998, related to the above year
2000 compliance efforts total approximately $78,000. Total costs associated with
Clark/Bardes' year 2000 readiness process, consisting of both internal and
external resources, are expected to range between $150,000 and $200,000.
Clark/Bardes anticipates funding these costs with cash generated from
operations. Clark/Bardes has not yet fully completed its year 2000 assessment
and remediation efforts. Based on its experience to date, Clark/Bardes presently
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believes that the year 2000 issues will not pose significant operational
problems for Clark/Bardes directly or as a result of any year 2000 issues of
suppliers or customers.
INFLATION
Inflation has not had a material effect on the Clark/Bardes' results of
operations. Certain of Clark/ Bardes' expenses, such as compensation, benefits
and capital equipment costs, are subject to normal inflationary pressures.
However, the majority of Clark/Bardes' 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 revenue.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share." SFAS
No. 128 specifies the computation, presentation and disclosure requirements for
earnings per share for entities with publicly-held common stock. SFAS No. 128 is
effective for financial statements for both interim and annual periods ending
after December 15, 1997 and has been adopted by Clark/Bardes and is presented in
the accompanying financial statements.
As of January 1, 1998, Clark/Bardes adopted SFAS No. 130 "Reporting
Comprehensive Income." SFAS No. 130 establishes new rules for the reporting and
display of comprehensive income and its components. The adoption of this
Statement had no impact on Clark/Bardes' net income or shareholders' equity.
Clark/Bardes has no other comprehensive income as defined by SFAS No. 130 as of
December 31, 1997 or December 31, 1998.
In June 1997, the FASB issued SFAS No. 131 "Disclosures About Segments of
an Enterprise and Related Information." SFAS No. 131 requires public enterprises
to report selected information about operating segments in annual and interim
reports issued to shareholders. It is effective for financial statements for
fiscal years beginning after December 15, 1997, but it is not required to be
applied to interim financial statements in the initial year of its application.
The adoption of this Statement will have no impact on Clark/Bardes' financial
condition or results of operations. This statement has been adopted by
Clark/Bardes and is presented in the accompanying financial statements.
RISK FACTORS
The following statements should be considered carefully in reviewing this
Form 10-K and qualify, in their entirety, each forward looking statement herein.
UNFAVORABLE FEDERAL TAX LEGISLATION
Federal tax laws could cause significant surrenders of policies and/or
reduce the tax advantage of certain Clark/Bardes products, and therefore the
life insurance products underlying the benefit programs marketed by Clark/Bardes
are vulnerable to adverse changes in tax legislation. These life insurance
products offer certain advantages, including that (i) the cash value of life
insurance policies grows on a tax deferred basis until withdrawal and (ii) the
death benefits of life insurance policies are received tax-free. In addition,
loans can be made from insurance policies (other than modified endowment
policies) without the imposition of tax.
Amendments to the federal tax laws enacted in 1996 and 1997 have 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 disallowance rule that applied to 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 otherwise
allowable interest deductions by a ratio of unborrowed cash value to all other
assets.
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In February 1999, the Clinton administration proposed eliminating the
"employee, officer and director" exception to the interest disallowance rule as
a part of its budget proposal. If enacted, such proposal would significantly
reduce the attractiveness of business-owned life insurance to companies that
traditionally have high debt/equity ratios. Banks, due to the depositor/debtor
relationship with their depositors, would in particular be negatively affected
by the administration's proposal. To the extent that any tax law amendment is
made retroactive, banks and other clients of Clark/Bardes may lose the economic
advantages of maintaining the policies underlying their benefit plans. This
could result in significant surrenders of policies from which Clark/Bardes
currently derives commission and fee revenue. Although management believes that
the Clinton administration's proposal, which is being considered in the current
session of Congress, does not have widespread support in Congress, Clark/Bardes
is unable to predict the extent to which these or other amendments to existing
laws will be adopted or the effect that any such amendments will have on Clark/
Bardes' business.
No assurances can be given that the administration's proposal or other
adverse tax proposals will not be enacted in the future or that adverse
interpretations of existing laws will not occur in the future. If the Internal
Revenue Code were to be amended to eliminate or reduce the tax-deferred status
of the insurance programs marketed by Clark/Bardes, or if adverse
interpretations of existing laws occur in the future, the market demand for such
programs would be materially adversely affected.
CLARK/BARDES IS DEPENDENT ON CERTAIN KEY PRODUCERS
During 1998, approximately 44.7% of total revenue was derived from the
marketing activities of five offices operated by producers of Clark/Bardes. The
largest of these offices, The Wamberg Organization, accounted for approximately
23.0% of total revenue. The offices operated by Steven Cochlan, Malcolm Briggs,
and George Blaha collectively accounted for 21.5% of total revenue. The
producers operating these offices have entered into producer agreements which
include non-competition provisions for a period of time after termination of the
agreements. The producer agreements are terminable by Clark/Bardes or the
producers with either 90 or 180 days' written notice depending on the individual
agreement. From time to time producer relationships have been terminated by
Clark/Bardes or by a producer and there is no assurance that such agreements
will not be terminated at any time by Clark/Bardes or by a producer in the
future or that the non-competition provisions will be enforced in litigation.
LACK OF PERSISTENCY CAN ADVERSELY IMPACT RENEWAL COMMISSIONS AND FEES
Companies purchase business-owned life insurance policies primarily to
offset the costs of employee benefit liabilities. These policies usually show
high persistency rates, in part because the policies contain early penalties and
the tax laws typically impose unfavorable tax consequences to the corporate
policyholders if the policies are terminated early. The high persistency rates
are also due to the purpose of the underlying life insurance policies that are
not typically used to fund benefits for specific individuals, but rather to
offset the purchaser's employee benefit costs on an aggregate basis. Therefore,
each policy is usually held to maturity (i.e., the death of the individual
insured covered by such policy), regardless of whether the insured remains
employed by the plan sponsor. High persistency rates are advantageous since
Clark/Bardes receives a substantial portion of its revenue in the form of
renewal commissions and fees. If the business purchaser chooses to let a policy
lapse, Clark/Bardes does not receive any renewal commissions and fees for
insurance policy servicing after the policy lapses. Although Clark/Bardes has
historically experienced high persistency rates, there can be no assurance that
these high persistency rates will continue in the future.
CLARK/BARDES IS DEPENDENT ON THE SERVICES OF KEY PERSONNEL SUCH AS W.T. WAMBERG,
MELVIN G. TODD AND RICHARD C. CHAPMAN
Clark/Bardes' performance is substantially dependent on the performance of
its executive officers and key employees. Clark/Bardes is dependent on the
ability to retain and motivate high quality personnel, especially its
management, producers and program development teams. The loss of the services of
any of its key employees, particularly W.T. Wamberg, Chairman of the Board of
Directors, Melvin G. Todd, President and Chief Executive Officer, and Richard C.
Chapman, Executive Vice President, could have a material
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adverse effect on Clark/Bardes' business, financial condition and operating
results. There can be no assurance that Clark/Bardes will be successful in
retaining its key personnel.
CREDIT RISK OF INSURANCE COMPANIES FROM WHICH REVENUE IS RECEIVED COULD
ADVERSELY IMPACT RENEWAL INCOME
Clark/Bardes designs and markets employee benefit programs typically
financed by policies underwritten by insurance companies. The commissions
payable for the sale of the insurance policies underlying Clark/ Bardes'
programs are usually long term and recurring in nature, typically paid annually
and extending over a period of ten years or more after the sale. Since
Clark/Bardes derives a substantial portion of its total revenue from renewal
revenue, any financial difficulties encountered by, or the insolvency of, an
insurance company from whom renewal revenue is due could cause Clark/Bardes to
realize less than the full amount of the renewal revenue to which it is
entitled. Clark/Bardes' inability to collect renewal revenue could have a
material adverse effect on its business, financial condition and results of
operations.
RISKS ASSOCIATED WITH ACQUISITIONS MAY RESULT IN REVENUES THAT ARE LESS THAN
EXPECTED
Since November 1997, Clark/Bardes has completed three acquisitions, is
actively considering two more acquisitions and has a number of potential
acquisitions under consideration at any point in time. Future acquisitions may
require substantial financial expenditures which will need to be financed
through cash from operations as well as future debt and equity offerings by
Clark/Bardes. An acquisition may not produce the revenue, earnings or business
that Clark/Bardes anticipated and which is paid for. Furthermore, there can be
no assurance that a business acquired in the future will even achieve acceptable
levels of revenue and profitability. Accordingly, acquisition efforts may not
succeed, and the time capital and management and other resources spent on an
acquisition that fails to meet Clark/Bardes' expectations could cause
Clark/Bardes' business, results of operations and financial condition to be
materially affected. In addition, acquisitions involve numerous other risks,
including: (i) the diversion of management's time and attention to the
negotiation of the acquisition and to the assimilation of the businesses
acquired, (ii) the need to modify financial and other systems and add management
resources, (iii) the potential liabilities of the acquired businesses, (iv)
unforeseen difficulties in the acquired operations, and (v) the possible adverse
short-term effects on Clark/Bardes' business, financial condition and results of
operations.
SIGNIFICANCE OF INTANGIBLE ASSETS
At December 31, 1998, intangible assets arising from the purchased
businesses consisted of the following:
(IN THOUSANDS)
Present value of in-force revenue........................... $25,532
Unamortized goodwill........................................ 18,552
Non-compete agreements...................................... 1,125
-------
$45,209
=======
All of these amounts having been determined by the excess of the purchase price
(including acquisition costs) over the net tangible assets acquired. The amounts
allocated to inforce revenue is determined using the discounted cash flow of
inforce revenues 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 normally thirty years. There are a number of factors
determining the persistency of such inforce business all of which are beyond
Clark/Bardes' control and there can be no assurance that the values so allocated
will ultimately be realized.
Clark/Bardes has adopted SFAS No. 121 "Accounting for Impairment of Long
Lived Assets and Long Lived Assets To Be Disposed Of." Under SFAS No. 121
Clark/Bardes will periodically (at least annually) review the components of this
asset and make the appropriate adjustment if it becomes apparent that the
residual present value is less than its amortized carrying amount. In 1998, the
FASB announced a study of the
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prevailing amortization periods for goodwill. In its deliberations, the FASB has
tentatively determined that amortization for goodwill should be a maximum period
of ten to twenty years. Clark/Bardes presently amortizes the present value of
inforce revenue over thirty years and goodwill over a period of forty years but
intends to fully comply with any new standards with respect to all future
acquisitions.
CLARK/BARDES' INABILITY TO GROW AND EXPAND PRODUCTS AND SERVICES COULD ADVERSELY
IMPACT FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Clark/Bardes' growth strategy relies in part on its ability to increase its
share of the insurance-financed employee benefit market. Clark/Bardes intends to
increase its market share by (i) growing its client base in existing product
lines through superior sales, marketing, technology and administration, (ii)
developing new related products and services and (iii) acquiring competitors and
related businesses. There can be no assurance that Clark/Bardes will have the
financial, managerial, administrative, marketing or other resources necessary to
achieve these growth and acquisition objectives and to overcome difficulties
associated with growth. If Clark/Bardes were to encounter difficulties in
implementing the growth, development or expansion of its products and services,
such difficulties could have a material adverse effect on Clark/Bardes'
business, financial condition and results of operations.
In addition, the success of Clark/Bardes depends in large part on its
ability to attract and retain highly skilled managerial, sales and marketing
personnel. Clark/Bardes also believes it will need to hire additional technical
personnel to further enhance and develop its programs and services. Competition
for such personnel is intense, and should Clark/Bardes be unable to hire the
necessary personnel, the development and sale of new or enhanced programs and
services would likely be delayed or prevented. There can be no assurance that
Clark/Bardes will be able to attract, integrate and retain such highly skilled
personnel. If any component of the inforce revenue base should become
unrealizable or the accounting regulatory bodies impose shorter amortization
periods, Clark/Bardes' financial positions and future operating results could be
materially adversely affected.
COMPETITIVE FORCES MAY ADVERSELY AFFECT CLARK/BARDES' MARKET SHARE
The marketing, design and administration of insurance-financed employee
benefit programs is highly competitive. Clark/Bardes and its producers compete
with a large number of insurance agents, life insurance brokers, third party
administrators, producer groups and insurance companies, a number of whom have
greater financial resources and can offer alternative programs. Clark/Bardes'
direct competitors include Compensation Resource Group, Harris Crouch Long Scott
and Miller, Management Compensation Group, Newport Group, TBG Financial and The
Todd Organization. Furthermore, competition exists for producers and other
marketers of life insurance products who have demonstrated sales ability.
National banks, with their existing depositor bases for financial service
products, may pose increasing competition in the future to companies who sell
life insurance products, including Clark/Bardes. Recent United States Supreme
Court decisions have expanded the authority of national banks to sell life
insurance products.
Clark/Bardes competes 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 have access to proprietary programs and products unavailable
to Clark/ Bardes and others offer lower prices for administrative services,
management believes that Clark/Bardes is in a superior competitive position in
most, if not all, of the meaningful aspects of its business. Management does not
consider its direct competitors to be its greatest competitive threat. Rather,
management believes Clark/ Bardes' 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 that of
Clark/Bardes.
CLARK/BARDES IS DEPENDENT ON CERTAIN INSURANCE COMPANIES
Clark/Bardes depends heavily on a small number of insurance companies to
underwrite the insurance policies underlying the programs Clark/Bardes markets.
More specifically, Clark/Bardes currently utilizes
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approximately fourteen life insurance companies to underwrite substantially all
of the business-owned life insurance policies underlying Clark/Bardes' programs
of which nine insurance companies, General American, Great-West, Life Investors,
Nationwide, Transamerica, The Mutual Group, Alexander Hamilton, Jefferson Pilot
and West Coast Life, accounted for approximately 76.4% of Clark/Bardes' first
year commission revenue for the year ended December 31, 1998. There is no
assurance that these relationships will continue in the future or that
Clark/Bardes will be able to develop relationships with other insurance
companies.
ERRORS AND OMISSIONS IN THE SERVICES IT PROVIDES MAY SUBJECT CLARK/BARDES TO
DAMAGES
Clark/Bardes markets, designs and administers sophisticated financial
products. Certain of Clark/Bardes' employees provide financial, actuarial and
other professional services in connection with marketing, designing and
administering these programs. Clark/Bardes' clients rely upon the services and
interpretations rendered by its employees. To the extent any services or
interpretations provided by Clark/Bardes' employees prove to be inaccurate,
Clark/Bardes may be liable for the damages, and such liability, to the extent
not covered by existing insurance, could have a material adverse effect on
Clark/Bardes' business, financial condition and results of operations.
PROTECTION OF PROPRIETARY PROGRAMS AND SERVICES MAY BE INADEQUATE TO PREVENT
LEAKS OR THEIR USE BY OTHERS
Clark/Bardes regards certain of its programs and services as proprietary
and relies primarily on a combination of intellectual property laws,
confidentiality agreements and contractual provisions to protect its proprietary
rights. Trade secret and copyright laws afford limited protection. Despite
Clark/Bardes' efforts to protect its proprietary rights, unauthorized parties
may attempt to copy aspects of the programs or services marketed by Clark/Bardes
or to obtain and use information that Clark/Bardes regards as proprietary. There
can be no assurance that the obligation to maintain the confidentiality of
Clark/Bardes' proprietary information will prevent disclosure of such
information or that the proprietary programs marketed by Clark/ Bardes will not
be independently developed by competitors.
FEDERAL AND STATE REGULATIONS MATERIALLY AFFECT THE WAY CLARK/BARDES OPERATES IN
EACH STATE
The insurance-financed employee benefit market is subject to extensive
regulation by state governments. Clark/Bardes products are sold in all 50 states
through licenses held by Clark/Bardes or by its producers. In addition,
Clark/Bardes markets its insurance-financed employee benefit programs in the
states of Ohio, Pennsylvania and Texas through entities licensed in those states
for which Clark/Bardes provides almost all services by means of administrative
service agreements. In general, state insurance laws establish supervisory
agencies with broad administrative and supervisory powers related to such
matters as granting and revoking licenses, approving individuals and entities to
whom commissions can be paid, licensing insurance agents, transacting business,
approving policy forms and regulating premium rates for some lines of business.
Licensing laws applicable to insurance marketing activities and the receipt of
commissions vary by jurisdiction and are subject to interpretation as to the
application of such requirements to specific activities or transactions. While
Clark/Bardes has not encountered regulatory problems in the past, no assurance
can be given that Clark/Bardes would be deemed to be in compliance with all
applicable licensing requirements of each jurisdiction in which Clark/Bardes
operates or that additional licenses would not be required of Clark/Bardes or
that Clark/Bardes or its producers will not encounter regulatory problems in the
future, including any potential sanctions or penalties for operating in a
jurisdiction without all required licenses.
While the federal government does not directly regulate the marketing of
most insurance products, certain products, such as variable life insurance, must
be registered under the federal securities acts and therefore the producers and
the entities selling such products must be registered with the NASD. Clark/
Bardes markets such insurance products through an entity registered as a
broker-dealer and for which Clark/ Bardes provides almost all services by means
of an administration and services agreement. The broker-dealer is owned by W.T.
Wamberg (68.2%) and Malcolm Briggs (31.8%). Messrs. Wamberg and Briggs are
stockholders of Clark/Bardes Holdings and Mr. Wamberg is Chairman of
Clark/Bardes Holdings. While
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Clark/Bardes has not encountered regulatory problems in the past, no assurance
can be given that Clark/ Bardes or its producers will not encounter regulatory
problems in the future.
FLUCTUATIONS IN OPERATING RESULTS MAKE CLARK/BARDES REVENUE AND OPERATING
RESULTS DIFFICULT TO ANALYZE AND FORECAST
Clark/Bardes may experience significant fluctuations in its results of
operations, in particular when such results are compared on a consecutive
quarterly basis. In particular, Clark/Bardes recognizes a significant increase
in both first year and renewal revenue in the fourth quarter due to the
seasonality of program implementation. In general, results of operations may
fluctuate as a result of a number of factors, including the introduction of new
or enhanced programs and services by Clark/Bardes or its competitors, client
acceptance or rejection of new programs and services, program development
expenses, timing of significant sales, demand for administrative services,
competitive, legislative and regulatory conditions in the insurance-financed
employee benefit industry and general economic conditions. Many of these factors
are beyond Clark/Bardes' control.
The sales cycles for Clark/Bardes' programs and services are lengthy,
lasting generally between twelve to eighteen months, with first year revenue
being derived from a small number of large cases and subject to a number of
factors beyond Clark/Bardes' control. For these and other reasons, the revenue
of Clark/Bardes is difficult to forecast, and Clark/Bardes believes that
comparing its consecutive quarterly results of operations is not necessarily
meaningful or indicative of the results that Clark/Bardes may achieve for any
subsequent period. Thus, past operating results should not be considered a
reliable indicator of future performance.
CHANGES IN ECONOMIC AND MARKET CONDITIONS MAY HELP DEVELOPMENT OF COMPETING
PROGRAMS AND PRODUCTS
Clark/Bardes' commission income and persistency rates are affected by
certain general economic conditions and market factors such as changes in
interest rates and stock prices. Interest rate fluctuations may have a
significant effect on the sale and profitability of certain insurance-financed
employee benefit programs marketed by Clark/Bardes. For example, if interest
rates rise, competing products may become more attractive to potential
purchasers of the programs marketed by Clark/Bardes. Further, a prolonged
decrease in stock prices may have a significant effect on the sale and
profitability of Clark/Bardes' programs that are linked to stock market indices.
Thus, economic conditions and other factors may negatively affect the popularity
or economic attractiveness of the programs marketed by Clark/Bardes. There can
be no assurance that Clark/Bardes will be able to compete with alternative
products if economic conditions and inflationary increases make the programs
marketed by Clark/Bardes financially unattractive.
RELIANCE ON INFORMATION PROCESSING SYSTEMS
Clark/Bardes' ability to provide administrative services depends on its
capacity to store, retrieve, process and manage significant databases and expand
and upgrade periodically its information processing capabilities. Interruption
or loss of Clark/Bardes' information processing capabilities through loss of
stored data, breakdown or malfunctioning of computer equipment and software
systems, telecommunications failure, or damage caused by fire, tornadoes,
lightning, electrical power outage, or other disruption could have a material
adverse effect on Clark/Bardes' business, financial condition and results of
operations. Although Clark/Bardes has disaster recovery procedures in place and
insurance to protect against such contingencies, these can be no assurance that
such insurance or services will continue to be available at reasonable prices,
cover all such losses or compensate Clark/Bardes for the possible loss of
clients occurring during any period that Clark/ Bardes is unable to provide
services.
YEAR 2000 ISSUES
There is significant uncertainty regarding the potential costs and effects
of the year 2000 problem because computer systems that do not properly recognize
date sensitive information when the year changes to 2000 could generate
erroneous data or altogether fail. Based on previous and ongoing internal
reviews, Clark/Bardes
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believes that the computer equipment and software used by Clark/Bardes will
function properly with respect to dates in the year 2000 and thereafter.
However, third parties that have relationships with Clark/Bardes, including
insurance companies and clients, may experience significant year 2000 issues.
These issues may have a serious adverse effect on the operations of such third
parties, including a shut-down of operations for a period of time, which may, in
turn, have a material adverse effect on Clark/Bardes' business, financial
condition and results of operations. Clark/Bardes has requested information from
third parties addressing any potential year 2000 issues with such third parties;
however, Clark/Bardes is not able to determine the extent to which such third
parties, such as insurance companies and clients, may experience year 2000
issues. Any year 2000 compliance problem of either Clark/Bardes or third parties
that have relationships with Clark/Bardes could have a material adverse effect
on Clark/Bardes' business, results of operation and financial condition.
RISKS ASSOCIATED WITH CONCENTRATION OF STOCK OWNERSHIP
CBH and CBI's Chairman, Mr. Wamberg, owns approximately 23.4% of the
outstanding Common Stock as of March 17, 1999. 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. Such concentration of ownership may also have the effect
of delaying, preventing or deterring a change in control of Clark/Bardes.
CLARK/BARDES' RELATIONSHIP WITH W. T. WAMBERG COULD PRESENT CONFLICTS OF
INTEREST
CBI has a contractual relationship with Mr. Wamberg, the Chairman of the
Board of CBH and CBI under a Principal Office Agreement pursuant to which The
Wamberg Organization markets, on behalf of Clark/Bardes, life insurance and
administrative and consulting services, and Clark/Bardes furnishes to The
Wamberg Organization marketing materials and concepts, program design ideas,
selected life insurance products, specimen plan documents and administrative
services. The Wamberg Organization, which is controlled by Mr. Wamberg,
accounted for approximately 17.5% of Clark/Bardes' total revenue in 1998.
Pursuant to the terms of the Principal Office Agreement, Clark/Bardes paid
approximately $7.8 million and $8.1 million to The Wamberg Organization in 1997
and 1998, respectively, for commissions and fees earned. In July 1998,
Clark/Bardes, Mr. Wamberg and The Wamberg Organization entered into an agreement
that provides for, among other things, a purchase of the renewal revenues due to
Mr. Wamberg and The Wamberg Organization in exchange for a cash payment of
approximately $7.5 million. In addition, Clark/Bardes reimbursed Mr. Wamberg up
to an aggregate of $100,000 per calendar year for expenses incurred by Mr.
Wamberg in his capacity as the Chairman of each of CBH and Clark/Bardes. The
interests of Clark/ Bardes, on the one hand, and Mr. Wamberg and The Wamberg
Organization, on the other hand, may differ with respect to contractual
agreements or other transactions between Clark/Bardes and Mr. Wamberg and The
Wamberg Organization resulting in certain conflicts of interest of Mr. Wamberg.
ANTI-TAKEOVER PROVISIONS OF DELAWARE LAW AND CLARK/BARDES CHARTER DOCUMENTS
COULD PREVENT A TAKEOVER BENEFICIAL TO STOCKHOLDERS
Certain provisions of CBH's certificate of incorporation, CBH's bylaws and
the Delaware General Corporation Law may have the effect of discouraging
unsolicited proposals for the acquisition of CBH. Pursuant to its certificate of
incorporation, CBH may issue shares of preferred stock in the future without
stockholder approval and upon such terms and conditions, and having such rights,
privileges and preferences, as the Board of Directors may determine. The rights
of the holders of Common Stock will be subject to, and may be adversely affected
by, any such preferred stock. The issuance of preferred stock, while providing
desirable flexibility in connection with possible acquisitions, financings and
other corporate transactions, could have the effect of discouraging a third
party's acquisition of a majority of the Common Stock. CBH has no present plans
to issue any shares of preferred stock. In addition, CBH has adopted a
stockholder rights plan that could further discourage attempts to acquire
control of CBH. CBH's bylaws provide that stockholders are entitled to call a
special meeting only by a vote of holders of at least 66 2/3% of the total votes
eligible to be cast by holders of Common Stock. In addition, the ability of the
stockholders to consent in writing to the taking of any action in lieu of a
meeting is denied. Any changes to provisions of CBH's certificate of
incorporation must
31
34
be approved by a majority of the Board of Directors and, in certain cases,
thereafter must be approved by a vote of holders of at least 66 2/3% of the
total votes eligible to be cast by holders of Common Stock. The bylaws may be
amended or repealed by the affirmative vote of a majority of the directors or
the affirmative vote of the holders of at least 66 2/3% of the votes eligible to
be cast by holders of Common Stock with respect to such amendment or repeal. In
addition, the Delaware General Corporation Law restricts certain business
combinations and provides that directors serving on staggered boards of
directors may be removed only for cause unless the certificate of incorporation
otherwise provides. Finally, the bylaws provide that directors can be removed
only for cause by a vote of holders of at least 66 2/3% of the total votes
eligible to be cast by holders of Common Stock.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss arising from adverse changes in market
rates and prices, such as interest rates and other relevant market rate or price
changes. The volatility and liquidity in the markets in which the related
underlying assets are traded directly influence market risk. The following is a
discussion of Clark/ Bardes' primary market risk exposures and how those
exposures are currently managed. The primary market risk for Clark/Bardes'
long-term debt is interest rate risk at the time of refinancing.
In January 1999, CBI entered into a $65 million credit agreement consisting
of a $35 million revolving credit facility and two term loans of $25 million and
$5 million. In January 1999 pursuant to the credit agreement, Clark/Bardes
obtained a term loan for $25 million at a fixed rate of 7.08% for the first year
and at a floating rate based upon the one-year London InterBank Offered Rate
plus 2% thereafter. The term loans are represented by secured promissory notes
maturing December 31, 2004. Principal and interest are payable quarterly
beginning March 31, 1999. The $25.0 million proceeds were used to retire the
Senior Secured Notes, Second Priority Senior Secured Notes, medium term notes,
and AAA distribution notes payable.
Coincident with the agreement and floating rate debt agreements, CBI has
entered into an interest rate swap agreement with a bank affiliated with the
lending group to fix the interest rate at 5.29% on $15 million of the term loan,
thus sustaining no gain or loss on rate fluctuations. There was no cost to CBI
for this arrangement and it does not present a derivative risk.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements of Clark/Bardes appear beginning on page F-1 of
this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Information concerning Clark/Bardes' change of accountant was previously
reported in the Registration Statement on Form S-1, File No. 333-56799, declared
effective by the SEC on August 19, 1998.
32
35
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 is hereby incorporated by reference
from Clark/Bardes' Proxy statement for the 1999 Annual Meeting of Shareholders
(the "1999 Proxy Statement") 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 the 1999 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 the 1999 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 the 1999 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
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Operations for each of the years
ended December 31, 1998, 1997 and 1996
Consolidated Statements of Shareholders' Equity for each of
the years ended December 31, 1998, 1997, and 1996
Consolidated Statements of Cash Flows for each of the years
ended December 31, 1998, 1997, & 1996
Notes to the Consolidated Financial Statements
(2) Financial Statement Schedules
None.
Schedules not listed above have been omitted because they are not
required or are not applicable.
(3) Exhibits
The information required by this Item 14(a)(3) is set forth in the
Exhibit Index immediately following Clark/Bardes' financial statements.
The exhibits listed herein will be furnished upon written request to
"Director of Investor Relations" located at Clark/Bardes' headquarters
and payment of a reasonable fee that will be limited to Clark/Bardes'
reasonable expense in furnishing such exhibits.
33
36
(b) Reports on Form 8-K.
The following Current Report on Form 8-K was filed during the three months
ended December 31, 1998:
On October 2, 1998, Clark/Bardes filed a Current Report on Form 8-K,
dated September 18, 1998 (the "Form 8-K"), disclosing the acquisition of
the businesses and substantially all of the assets of Schoenke. The
following financial statements and financial information were filed as
part of the Form 8-K:
(1) Balance sheets of Schoenke & Associates Corporation as of December
31, 1996 and 1997 and as of June 30, 1998 (unaudited) and the
related statements of income, changes in stockholders' equity and
cash flows for each of the years in the three year period ended
December 31, 1997 and the six months ended June 30, 1997 and 1998
(unaudited) and related independent auditors report dated June 29,
1998.
(2) Clark/Bardes Holdings, Inc. Unaudited Pro Forma Balance Sheet as of
June 30, 1998 and Unaudited Pro forma Statement of Operations for
the year ended December 30, 1997 and the six months ended June 30,
1998.
34
37
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Clark/Bardes Holdings, Inc., Reports of Independent
Auditors.................................................. F-2
Clark/Bardes Holdings, Inc., Consolidated Balance Sheets at
December 31, 1998 and 1997................................ F-4
Clark/Bardes Holdings, Inc., Consolidated Statements of
Operations for the years ended December 31, 1998, 1997 and
1996...................................................... F-5
Clark/Bardes Holdings, Inc., Consolidated Statements of
Stockholders'
Equity (Deficit) for the years ended December 31, 1998,
1997 and 1996.......................................... F-6
Clark/Bardes Holdings, Inc., Consolidated Statements of Cash
Flows for the years ended December 31, 1998, 1997 and
1996...................................................... F-7
Notes to Consolidated Financial Statements.................. F-8
F-1
38
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 subsidiary as of December 31, 1998 and 1997, and
the related consolidated statements of operations, stockholders' equity
(deficit), and cash flows for the years then ended. 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. The
financial statements of Clark/Bardes, Inc. (the predecessor to Clark/ Bardes
Holdings, Inc.) for the year ended December 31, 1996, were audited by other
auditors whose report dated February 7, 1997, expressed an unqualified opinion
on those statements.
We conducted our audits in accordance with generally accepted auditing
standards. 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Clark/Bardes Holdings, Inc. and subsidiary at December 31, 1998 and 1997, and
the consolidated results of their operations and their cash flows for the years
then ended in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Dallas, Texas
February 23, 1999
F-2
39
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Clark/Bardes, Inc. (the predecessor to Clark/Bardes Holdings, Inc.)
We have audited the accompanying statements of income, stockholders'
equity, and cash flows of Clark/Bardes, Inc. (the predecessor to Clark/Bardes
Holdings, Inc.) for the year ended December 31, 1996. 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 audit in accordance with generally accepted auditing
standards. 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of
Clark/Bardes, Inc. for the year ended December 31, 1996, in conformity with
generally accepted accounting principles.
Lane Gorman Trubitt, L.L.P.
Dallas, Texas
February 7, 1997
F-3
40
CLARK/BARDES HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
DECEMBER 31,
---------------------
1998 1997
--------- ---------
(IN THOUSANDS EXCEPT
SHARES)
CURRENT ASSETS:
Cash and cash equivalents................................. $12,102 $ 3,783
Account and notes receivable:
Trade.................................................. 7,145 7,720
Affiliates............................................. 872 11
Notes (related parties: $0 and $205 at December 31,
1998 and 1997, respectively).......................... 393 556
Interest............................................... 60 46
Allowance for uncollectibles........................... (394) (78)
------- -------
Total accounts and notes receivable............... 8,076 8,255
Deposits and advances..................................... 59 --
------- -------
Total current assets.............................. 20,237 12,037
Equipment and leasehold improvements -- net................. 1,178 716
Intangible assets -- net.................................... 45,209 24,089
Deferred tax asset.......................................... 607 --
Other assets................................................ 262 59
------- -------
Total assets...................................... $67,493 $36,901
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 2,925 $ 1,142
Commissions and fees payable.............................. 2,634 1,945
Income taxes.............................................. 528 --
Dividends payable......................................... -- 334
Accrued liabilities....................................... 2,331 1,521
Accrued interest.......................................... 320 476
Current portion of long term debt (related parties: $425
and $1,425 at December 31, 1998 and 1997,
respectively).......................................... 4,344 4,325
------- -------
Total current liabilities......................... 13,082 9,743
Long term debt (related parties: $6,113 and $12,338 at
December 31, 1998 and 1997, respectively)................. 24,713 32,838
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock
Authorized -- 1,000,000 shares; $.01 par value
None issued
Common stock
Authorized -- 20,000,000 shares; $.01 par value, no par
in 1997
Issued and outstanding -- 5,959,140 in 1997 and
8,202,535 in 1998..................................... 82 5,162
Paid in capital........................................... 26,274 --
Retained earnings......................................... 3,342 3,189
Less: treasury stock -- 2,737,130 shares in 1997.......... -- (14,031)
------- -------
Total stockholders' equity (deficit).............. 29,698 (5,680)
------- -------
Total liabilities and stockholders' equity........ $67,493 $36,901
======= =======
See accompanying notes to financial statements
F-4
41
CLARK/BARDES HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
---------------------------
1998 1997 1996
------- ------- -------
(IN THOUSANDS EXCEPT
PER SHARE DATA)
REVENUES:
Commissions and service fees.............................. $72,264 $47,871 $32,352
Other (related parties: $1,585, $879 and $640 for the year
ended at December 31, 1998, 1997 and 1996,
respectively).......................................... 2,502 1,584 890
------- ------- -------
Total revenues.................................... 74,766 49,455 33,242
Commission and fee expense (related parties: $8,068, $24,152
and $16,258 for the years ended December 31, 1998, 1997
and 1996, respectively)................................... 46,111 32,439 21,049
------- ------- -------
Net revenue....................................... 28,655 17,016 12,193
------- ------- -------
EXPENSES
General and administrative................................ 19,616 11,504 8,579
Amortization of intangibles............................... 1,232 295 --
Put warrants (non-recurring).............................. 4,800 -- --
------- ------- -------
Total expenses.................................... 25,648 11,799 8,579
------- ------- -------
OPERATING INCOME............................................ 3,007 5,217 3,614
OTHER INCOME (EXPENSE)
Interest income........................................... 565 189 121
Interest expense.......................................... (3,166) (1,112) --
------- ------- -------
Total............................................. (2,601) (923) 121
------- ------- -------
INCOME BEFORE INCOME TAXES.................................. 406 4,294 3,735
INCOME TAXES................................................ 817 60 181
------- ------- -------
NET INCOME (LOSS)........................................... $ (411) $ 4,234 $ 3,554
======= ======= =======
NET INCOME (LOSS) PER SHARE:
Basic..................................................... $ (0.08) $ 1.03 $ 0.75
======= ======= =======
Diluted................................................... $ (0.08) $ 0.99 $ 0.75
======= ======= =======
See accompanying notes to financial statements
F-5
42
CLARK/BARDES HOLDINGS, INC.
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)
---------- ------- ------- ---------- -------- -------- ----------------
(IN THOUSANDS EXCEPT SHARE DATA)
Balance at December 31, 1995......... 5,957,344 $5,054 $ -- (229,737) $ (919) $ 1,653 $ 5,788
Purchase of common stock for
treasury......................... (1,123,554) (4,137) (4,137)
Sale/grant of treasury stock....... 150,000 600 (277) 323
Change in net unrealized loss on
securities....................... 5 5
Net income......................... 3,554 3,554
Dividends.......................... (1,721) (1,721)
---------- ------- ------- ---------- -------- ------- --------
Balance at December 31, 1996......... 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 treasury 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 parties for treasury
stock purchased.................. 471 471
Distributions to shareholders of S
Corp. ........................... (3,346) (3,346)
Redemption of common stock
warrants......................... (100) (100)
Issuance of common stock in initial
public offering (net of
transaction 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
========== ======= ======= ========== ======== ======= ========
See accompanying notes to financial statements
F-6
43
CLARK/BARDES HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
-----------------------------
1998 1997 1996
-------- -------- -------
(IN THOUSANDS)
OPERATING ACTIVITIES
Net income (loss)......................................... $ (411) $ 4,234 $ 3,554
Adjustments to reconcile net income (loss) to cash
provided by operating activities:
Depreciation and amortization.......................... 1,570 493 188
(Gain) loss on disposition of assets................... 1 (2) 25
Allowance for losses on interest and notes
receivable........................................... 316 -- 78
Grant of treasury stock................................ -- -- 173
Changes in operating assets and liabilities
Accounts receivable.................................. (286) (4,940) 412
Interest receivable.................................. (14) (19) (11)
Deposits and advances................................ (59) -- --
Deferred tax asset................................... (607) -- --
Accounts payable..................................... 1,783 829 102
Commissions and fees payable......................... 689 598 (629)
Income taxes payable................................. 528 -- --
Accrued liabilities.................................. 810 187 417
Accrued interest..................................... (156) 476 --
-------- -------- -------
Cash provided by operating activities....................... 4,164 1,856 4,309
-------- -------- -------
INVESTING ACTIVITIES
Purchase of businesses.................................... (22,353) (24,383) --
Notes receivable.......................................... 163 (44) 223
Purchases of equipment -- net............................. (801) (537) (131)
Proceeds from sales of marketable securities.............. -- -- 1,506
Other assets.............................................. (203) (42) (11)
-------- -------- -------
Cash provided by (used in) investing activities............. (23,194) (25,006) 1,587
-------- -------- -------
FINANCING ACTIVITIES
Proceeds from borrowings.................................. 2,031 33,900 --
Repayment of borrowings................................... (10,137) -- --
Issuance of common stock and warrants -- net of costs..... 39,135 108 150
Dividends................................................. (3,680) (1,779) (996)
Proceeds from sale of treasury stock -- net............... -- 3,791 --
Purchase of treasury stock................................ -- (13,969) (4,137)
-------- -------- -------
Cash provided by (used in) financing activities............. 27,349 22,051 (4,983)
-------- -------- -------
INCREASE (DECREASE) IN CASH................................. 8,319 (1,099) 913
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............ 3,783 4,882 3,969
-------- -------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 12,102 $ 3,783 $ 4,882
======== ======== =======
SUPPLEMENTAL INFORMATION
Interest paid............................................. $ 3,323 $ 636 $ --
======== ======== =======
Income taxes paid......................................... $ 896 $ 182 $ 102
======== ======== =======
See accompanying notes to financial statements
F-7
44
CLARK/BARDES HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
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 subsidiary, Clark/Bardes, Inc. (CBI).
CBI is a designer, marketer and administrator of business-owned life insurance
products to large corporations and bank-owned life insurance to banks in the
United States. CBI assists its clients in using customized life insurance
products to generate capital to finance long-term benefit liabilities and to
supplement and secure benefits for key employees. In addition, CBI provides
long-term administrative services for executive benefits and insurance.
Initial Public Offering -- On August 19, 1998, CBH completed an initial
public offering of 4,000,000 shares of Common Stock at a price of $9 per share.
The net proceeds to CBH after deducting underwriting discounts and commissions
and offering expenses were $31.7 million. The net proceeds from this initial
public offering were applied as follows: a) $1.0 million in partial payment of
the 8.5% Medium Term Notes, b) $4.9 million to extinguish warrants under the 11%
Second Priority Senior Secured Notes, c) $13.5 million to consummate the
acquisition of Schoenke and Associates, and d) $4.0 million to acquire Wiedemann
& Johnson Company assets. CBI applied the remaining proceeds to pay
approximately $7.5 million to The Wamberg Organization as consideration for the
purchase of renewal revenue pursuant to the purchase agreement on January 4,
1999, and $800,000 for general corporate purposes, including working capital.
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. In the opinion of management, all
adjustments, including normal recurring accruals, considered necessary for a
fair presentation have been included. Actual results could differ from those
estimates.
A summary of the significant accounting policies consistently applied in
the preparation of the accompanying financial statements follows.
Reorganization -- In connection with the initial public offering,
Clark/Bardes Holdings, Inc. (CBH) and Clark/Bardes, Inc., (CBI) both Delaware
corporations, were formed in June 1998. CBH was formed to be the holding company
of CBI and is not engaged in any business. CBI was formed to be the operating
company of CBH. On July 10, 1998, CBI's Board of Directors approved a
reorganization agreement between Clark/ Bardes, Inc., a Texas Corporation (the
Predecessor Company) and CBI (the Successor Company) which provided for a two
step merger resulting in the Predecessor Company merging with and into CBI
resulting in each stockholder of the Predecessor Company receiving one-half of
one share of common stock for each share of Predecessor Company common stock
held by such stockholder, and contemplated a series of transactions, including;
(i) a restructuring of Clark/Bardes' 10.5% Senior Secured Notes due August 2002
and 11.0% Second Priority Senior Secured Notes due August 2004, (ii) the
conversion of Clark/Bardes' $4.8 million aggregate principal amount of 8.5%
Convertible Subordinated Notes due September 2007 into 813,559 shares of common
stock, at $5.90 per share, (iii) the extinguishment by Clark/Bardes of warrants
representing the right to purchase 1,525,424 shares of Common Stock, (iv) a
purchase of renewal revenue due to Mr. Wamberg and The Wamberg Organization
under the Principal Office Agreement between Clark/Bardes and Mr. Wamberg, (v)
the incorporation of a Texas entity formed for the purpose of marketing certain
insurance products within the state of Texas, and (vi) the termination by its
terms of the Second Amended and Restated Stockholders' Agreement among the
Predecessor Company and each of the existing stockholders. The Merger was
consummated prior to the initial public offering, and was treated for accounting
purposes as a reorganization of entities under common control utilizing
historical cost which is similar to a pooling of interests.
F-8
45
CLARK/BARDES HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In connection with the aforementioned Merger, all share amounts in the
accompanying financial statements have been restated in a manner similar to a
reverse stock split to give effect to the Merger.
As discussed above, CBI restructured its 10.5% and 11.0% notes. Under the
amended and restated note agreements, the interest rate on the 10.5% notes was
reset to 7.84%. The interest rate on the 11% notes was reset to 8.86%. The
restructured notes may be prepaid without penalty and are secured by a first
priority security interest in, among other things, all of CBI's renewal
commissions other than the renewal commissions from Bank Compensation Strategies
Group and Schoenke. Further, CBI is subject to significant operational
restrictions and financial covenants, including a requirement that CBI obtain a
working capital credit facility no later than March 31, 1999, a prohibition
against certain payments, a limitation on the payment of dividends, a limitation
on the incurrence of indebtedness and the maintenance of certain financial
ratios. (See note 6)
Put Warrants -- CBI accrued $5.3 million in the six month period ended June
30, 1998, to reflect the obligation of CBI for an amount equal to the
approximate fair value of its common stock put warrants at that date. The final
amount paid to extinguish the warrants in August 1998 was reduced to $4.9
million ($4.8 million charged to income), consequently CBI recorded income of
$500,000 from the adjustment in August 1998. The accrued $5.3 million amount was
reclassified to paid-in capital upon expiration of the put warrants which
occurred with the consummation of the initial public offering. In addition, in
connection with the offering, these warrants to purchase 1,525,424 shares of
common stock were extinguished by the payment of $4.9 million by CBI to the
warrant holders, which represents a negotiated formula of payment determined in
the context of CBI's contractual commitments under the warrants and its business
relationship with the warrant holders. In addition, in connection with agreeing
to the extinguishment of the warrants, CBI entered into a five-year production
agreement with each of Great-West and Nationwide that requires CBI to market and
sell insurance products of each Carrier comprising specified percentages of all
insurance products sold by CBI as measured by first year commissions payable
with respect to such business. The percentages range from 10.0% to 25.0%
depending upon the type of insurance product and product exclusivity provisions.
Each agreement provides that in the event that CBI fails to meet the minimum
production requirements, the applicable carrier is entitled to offset future
commissions otherwise payable to CBI up to a maximum amount of $150,000 per
year.
Purchase of Renewal Revenue from the Chairman -- On July 10, 1998, the
Board of Directors approved an agreement with the Chairman of CBH, W.T. Wamberg
and The Wamberg Organization which provides for a purchase of the renewal
revenue due under the Principal Office Agreement with Mr. Wamberg (described in
Note 10) in exchange for a cash payment of approximately $7.5 million. This
transaction allows CBH to retain additional commission and fee revenue for a ten
year period following the consummation of the transaction which occurred in
January 1999. The additional revenue equates to approximately 19.0% of the
commission and fee revenue, prior to deduction of servicing costs, related to
renewal revenue on Mr. Wamberg's and The Wamberg Organization's inforce
business. Upon consummation, CBI recorded the purchase of this future revenue
stream as an asset in the amount of the consideration given which will be
amortized using the units of revenue method over the term of the Agreement. (See
note 15)
Termination of S Corporation Status and Stockholder Distribution -- Upon
the consummation of the Reorganization described above, CBI ceased to be taxed
as an S corporation and is 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.
In connection with the termination of the S corporation status, on July 10,
1998 the Board of Directors of the Predecessor Company declared a dividend to
the stockholders of record on July 31, 1998 in an amount equal to $3.3 million,
or $1.00 per share, which was paid on July 31, 1998. The remaining retained
earnings
F-9
46
CLARK/BARDES HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
after the assumed distribution, have been reclassified to common stock which
assumes a constructive distribution to the stockholders of the Predecessor
Company followed by a contribution to capital of the Successor Company.
Stock Grant Restructuring -- The Company's President and CEO had an
agreement whereby he would be granted 52,500 shares of the Predecessor Company's
common stock if he was employed as the Company's CEO on July 1, 1998. This
agreement was amended in June 1998 to provide that he receive 24,108 shares of
common stock of CBH, $162,128 in cash and a fully vested five year option to
purchase 30,523 shares of CBH common stock exercisable at the initial public
offering price. CBI recorded compensation expense of $525,000 in its June 1998
financial statements related to this transaction and a reduction of compensation
expense of $145,900 in its September 1998 financial statements, to reflect the
then existing stock price. The options have been accounted for in accordance
with CBI's policy on stock compensation.
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 $3,009,000 and
$384,300 at December 31, 1998 and 1997, 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 would 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 their useful lives.
Intangible Assets -- CBI capitalized intangible assets as a result of the
acquisition of the assets and in-force business of Bank Compensation Strategies
Group, the Schoenke Companies, and Wiedemann & Johnson Company (see Note 2).
Intangible assets consist of goodwill, the net present value of future profits
on existing books of business at the acquisition date and non-compete agreements
with the former owners. The amortization periods for the non-compete agreements
are 5 years and 10 years. The net present value of future profits is being
amortized over 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. Any changes in estimates of future profits used to
amortize the net present value of future profits will be accounted for as a
catch up adjustment in the period in which the change becomes known. Goodwill is
being amortized over a 40 year period on a straight-line basis. Amortization
expense totaled $1,232,126 and $294,630 during 1998 and 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 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
F-10
47
CLARK/BARDES HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
insurance policy. Renewal commission revenue is recognized when the insurance
policy premium or commission is due. CBI is notified in advance if a client
plans to surrender, so adjustments in subsequent periods due to cancellations
are not material. 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.
CBI generated in excess of 25% of its revenue in 1998 from 8 clients, in
1997 from 3 clients, and in 1996 from 2 clients, respectively, creating a
concentration of credit risk. Approximately 17.5% and 23% of CBI's commission
and fee revenue for the years ended 1998 and 1997, respectively, was generated
by The Wamberg Organization, which is wholly-owned by CBI's Chairman.
Substantially all of the policies underlying the programs marketed by CBI are
underwritten by 14 life insurance companies, of which seven accounted for
approximately 76.3% and 78.9% of CBI's first-year commission revenue for the
years ended December 31, 1998 and 1997.
CBI is party to production agreements (typically, five years in duration)
with certain of the insurance companies with which it conducts business. If CBI
fails to meet specified minimum production levels, 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 agents.
Advertising -- Advertising and marketing costs provided by third parties
are charged to operations when incurred. Total expenses for 1998, 1997, and 1996
were $288,989, $70,299, and $55,352 respectively.
Stock Compensation -- CBI adopted SFAS No. 123 -- Accounting for
Stock-Based Compensation effective January 1, 1996. SFAS 123 establishes
financial accounting and reporting standards for stock-based compensation. As
permitted by SFAS 123, CBI elected to continue to account for stock-based
compensation as prescribed by APB Opinion No. 25 -- Accounting for Stock Issued
to Employees and to provide pro forma disclosures in the Notes to Financial
Statements of the effects of SFAS 123 on net income and earnings per share (See
Note 8). Equity issued to non-employees is accounted for based on fair value in
accordance with SFAS 123. There was no effect on reported net income as a result
of adopting SFAS 123.
Earnings Per Share -- In February 1997, the Financial Accounting Standards
Board ("FASB") issued SFAS No. 128 -- Earnings Per Share. This Statement
specifies the computation, presentation and disclosure requirements for earnings
per share for entities with publicly held common stock. This Statement is
effective for financial statements for both interim and annual periods ending
after December 15, 1997 and has been adopted by CBI and is presented for all
periods in the accompanying financial statements.
Comprehensive Income -- In 1997, the FASB issued SFAS No. 130 -- Reporting
Comprehensive Income. Statement 130 establishes new rules for the reporting and
display of comprehensive income and its components. Statement 130 requires
unrealized gains or losses on available-for-sale securities and certain other
items, which prior to adoption were reported separately in shareholders' equity,
to be included in other comprehensive income. The adoption of this Statement had
no impact on CBI's net income or shareholders' equity. CBI has no other
comprehensive income as defined by SFAS 130, as of December 31, 1998 or 1997.
Segment Reporting -- In June 1997, FASB issued SFAS No. 131 -- Disclosures
about Segments of an Enterprise and Related Information. This Statement requires
public enterprises to report selected information about operating segments in
annual and interim reports issued to shareholders. It is effective for financial
statements for fiscal years beginning after December 15, 1997, but it is not
required to be applied to interim
F-11
48
CLARK/BARDES HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
financial statements in the initial year of its application. The adoption of
this Statement had no impact on CBI's consolidated financial condition or
results of operations. See Note 14.
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, 1999. 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, 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. CBI had no derivative
positions at December 31, 1998. 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
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 and the remaining as follows:
$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.
$4.1 million was allocated to the net present value of estimated
future profits embedded in the existing in-force book of business. This
amount was determined using a 10% discount and a 2.75% annual lapse factor
for the purchased book of business. This intangible asset is being
amortized over 30 years which approximates the average policy duration. CBI
believes that no other class of identifiable intangible assets acquired in
the BCS acquisition is significant or exceeds 5% of total assets.
The remaining $19.1 million was allocated to goodwill. This is being
amortized over a forty year period. Management believes that the existing
future profit potential associated with the BCS client base will have value
to CBI well beyond the forty year amortization period based on new business
prospects and the long-term nature of the policies.
Management will periodically review these intangibles for impairment in
accordance with its policy (see Note 1).
F-12
49
CLARK/BARDES HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The unaudited pro forma information below presents the results of CBI and
BCS combined as if the acquisition had occurred on January 1, 1996:
DECEMBER 31,
-----------------
1997 1996
------- -------
(UNAUDITED)
(IN THOUSANDS)
Pro Forma:
Revenues.................................................... $62,264 $48,491
Net income*................................................. $ 2,219 $ 1,915
Diluted earnings per share.................................. $ 0.48 $ 0.41
- ---------------
* "S" Corporation Basis -- see Note 1
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 financial statements.
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 future profits embedded in the existing inforce book of business. This
amount was determined using a 16.1% discount and a 2.5% annual lapse factor for
the purchased 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. Subsequent to the
purchase date, CBI has refined certain assumptions in the allocation of the
purchase price.
Management will periodically review these intangibles for impairment in
accordance with its policy (see Note 1).
The unaudited pro forma information below presents the results of CBI and
Schoenke combined as if the acquisition had occurred January 1, 1996:
DECEMBER 31,
---------------------------
1998 1997 1996
------- ------- -------
(UNAUDITED)
(IN THOUSANDS)
Pro Forma:
Revenues.............................................. $79,744 $55,920 $39,069
Net income............................................ $ 96 $ 3,911 $ 3,054
Diluted earnings per share............................ $ .01 $ 0.48 $ 0.45
"S" Corporation Basis for 1996 and 1997 -- see Note 1
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.
F-13
50
CLARK/BARDES HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 of
the per share. The Company allocated approximately $40,000 of the purchase price
to tangible assets acquired and $6,015,000 to the net present value of estimated
future profits embedded in the existing in-force book of business. This amount
was determined using a 15.2% discount and a 2.5% annual lapse factor for the
purchased book of business. This intangible asset is being amortized over 30
years which approximates the average policy duration.
Management will periodically review these intangibles for impairment in
accordance with its policy (see Note 1).
3. NOTES RECEIVABLE
Notes receivable consist of the following:
DECEMBER 31,
---------------
1998 1997
------ ------
(IN THOUSANDS)
Note receivable -- secured by first year and renewal
commissions; interest at prime plus 1%; due on demand..... $ -- $ 75
Note receivable -- secured by collateral assignment of
commissions/compensation; interest at prime plus 2%; due
on demand................................................. 130 130
Note receivable -- secured by collateral assignment of
commissions/compensation; interest at prime plus 4%; due
on demand................................................. 212 220
Note receivable -- secured by renewal commissions; interest
12%; due on demand........................................ -- 60
Note receivable -- secured by renewal commissions; interest
at prime plus 2%; due on demand........................... 51 71
----- -----
393 556
Less allowance for uncollectible notes...................... (342) (78)
----- -----
$ 51 $ 478
===== =====
CBI recorded interest income from related parties of $7,016, $46,106, and
$690 for the years ended December 31, 1998, 1997, and 1996. The Company also has
accrued interest receivable of $12,664 from related parties at December 31,
1997.
4. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Major classifications of equipment and leasehold improvements are as
follows:
DECEMBER 31,
-----------------
1998 1997
------- -------
(IN THOUSANDS)
Office furniture and equipment.............................. $ 2,745 $ 2,133
Leasehold improvements...................................... 188 96
------- -------
2,933 2,229
Accumulated depreciation and amortization................... (1,755) (1,513)
------- -------
$ 1,178 $ 716
======= =======
F-14
51
CLARK/BARDES HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. TAXES
Prior to the reorganization described in Note 1, 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 or state corporate
income taxes on its taxable income. Instead, the stockholders were liable for
individual federal and state income tax on CBI's taxable income as determined
under the cash basis method of accounting. State taxes, as shown in the
accompanying financial statements, consist primarily of franchise taxes.
Upon consummation of the Reorganization described in Note 1, on July 31,
1998 CBI ceased to be an S corporation and became subject to federal and state
income taxation as a C corporation. At July 31, 1998 the net tax bases of CBI's
assets and liabilities was approximately $1.8 million higher than the financial
statement bases. Section 448 of the Internal Revenue Code requires change from
the cash method and to the accrual method of accounting for tax purposes must
offset the excess liabilities 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 has a pre Initial Public Offering
loss of $3.8 million which was passed on to the pre-IPO shareholders.
Federal income tax benefit (expense) consists of the following components:
DECEMBER 31,
----------------------
1998 1997 1996
------- ---- -----
(IN THOUSANDS)
Current:
Federal................................................... $(1,230) $ -- $ --
State and local........................................... (194) (60) (181)
Deferred:
Federal................................................... 524 -- --
State and local........................................... 83 -- --
------- ---- -----
$ (817) $(60) $(181)
======= ==== =====
A reconciliation of the 1998 income tax benefit (expense) computed by
applying the combined federal and state corporate tax rate of 39.79% to income
before income taxes to the actual income taxes is as follows:
DECEMBER 31,
1998
------------
U.S. Federal statutory rate................................. $ 138
State income tax -- net of federal benefit.................. 24
Non-recurring effect due to conversion from taxation as an S
corporation to a C corporation............................ 779
Nontaxable warrant adjustment............................... (199)
Tax liability adjustment.................................... 50
Other -- net................................................ 25
-----
Provision for income taxes.................................. $(817)
=====
F-15
52
CLARK/BARDES HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 as of December 31, 1998 are as
follows:
1998
--------------
(IN THOUSANDS)
Deferred tax liabilities:
Amortization.............................................. $ (426)
Other..................................................... (50)
------
Total deferred tax liabilities.............................. (476)
------
Deferred tax assets
Cash to accrual adjustment................................ 739
Accrued liabilities & reserves............................ 314
Deferred revenue.......................................... 30
------
Deferred tax assets....................................... 1,083
------
Valuation allowance for deferred tax assets............... --
------
Total deferred tax assets................................... 1,083
------
Net deferred tax assets..................................... $ 607
======
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will 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 CBI will realize the benefits of these
deductible differences.
6. FINANCING ARRANGEMENTS
The current and long-term portions of debt consist of the following:
DECEMBER 31
-----------------
1998 1997
------- -------
(IN THOUSANDS)
Senior Secured Notes (current portion -- $2,900).......... $11,600 $14,500
Second Priority Senior Secured Notes...................... 8,900 8,900
Medium Term Notes -- Related parties (current portion --
$1,425)................................................. 3,275 5,700
Convertible Subordinated Notes-- Related parties.......... -- 4,800
Schoenke Notes (current portion -- $1,000)................ 2,000 --
Other (current)........................................... 19 --
AAA Distribution -- Related parties....................... 3,263 3,263
------- -------
$29,057 $37,163
======= =======
Senior Secured Notes. During 1997, CBI issued $14.5 million of 10.5%
secured promissory notes maturing August 9, 2002; principal is payable
semi-annually beginning February 9, 1998 and interest is payable quarterly. The
notes were restructured in August 1998 and the interest rate was reset to 7.84%.
F-16
53
CLARK/BARDES HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Interest expense was $474,000 and $1,209,000 and interest paid was $254,000 and
$1,308,000 for the years ended December 31, 1997 and 1998, respectively. CBI
must comply with certain restrictive covenants.
Second Priority Senior Secured Notes. During 1997, CBI issued $8.9 million
of 11% Second Priority Senior Secured Notes maturing in three equal annual
installments beginning August 9, 2002; interest is payable quarterly. The notes
were restructured in August 1998 and the interest rate was reset to 8.86%.
Interest expense was $305,000 and $911,000 and interest paid was $163,000 and
$941,000 for the years ended December 31, 1997 and 1998, respectively. These
notes possess identical restrictive covenants as the Senior Secured Notes.
Medium Term Notes. During 1997, in connection with the purchase of BCS, CBI
issued $5.7 million of Medium Term Notes maturing in four equal annual
installments of $1,425,000 beginning August 15, 1998; interest is payable
quarterly at the corporate base rate of the First Bank of Minnesota which was
8.5% and 7.75% at December 31, 1997 and 1998. Interest expense was $150,000 and
$404,000 and interest paid was $88,000 and $434,000 in 1997 and 1998,
respectively. A prepayment on the principal of $1.0 million was made in August
1998 (see Note 1).
Convertible Subordinated Notes. During 1997, in connection with the
purchase of BCS, CBI issued $4.8 million of 8.5% Convertible Subordinated Notes
maturing in one installment on September 15, 2007; interest was payable
quarterly. Interest expense was $127,000 and $271,000 and interest paid was
$109,000 and $290,000 in 1997 and 1998, respectively. These notes were
convertible into 813,559 shares of common stock, at $5.90 per share. In August
1998, $3.6 million of these notes was converted into 610,170 shares of common
stock, and the remaining $1.2 million was converted in October 1998 into 203,389
shares of common stock.
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 interest paid was $28,000 in 1998.
AAA Distribution. CBI made a special dividend distribution of $3,866,000 to
shareholders of record on November 15, 1997 in the form of notes payable. The
notes outstanding at December 31, 1998 and 1997 of $3,263,000, mature November
15, 2007 and interest accrues quarterly at 8.5%. Interest expense incurred was
$278,000 and $35,000 and interest paid was $277,000 and $0 in 1998 and 1997,
respectively.
At December 31, 1998, future payments under all financing arrangements are
as follows:
(IN THOUSANDS)
1999.................................................. $ 4,344
2000.................................................. 5,325
2001.................................................. 4,325
2002.................................................. 5,866
2003.................................................. 2,967
Thereafter............................................ 6,230
-------
$29,057
=======
CBI is subject to significant operational restrictions and financial
covenants, including a requirement that CBI obtain a working capital credit
facility no later than March 31, 1999, a prohibition against certain payments,
and maintenance of certain financial ratios. (See Note 15.)
F-17
54
CLARK/BARDES HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. STOCKHOLDERS' EQUITY
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.
The Predecessor Company approved a financing arrangement in 1997 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, 1998 and 1997 for
stock purchases were $97,000 and $465,000. Outstanding principal balances pay
interest at 8.5% and mature in 2000 and 2003.
In June 1998, Clark/Bardes, Inc., a Texas corporation, (CBI, Tex.)(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 CBI, Tex. received one-half share of the Successor
Company in exchange for each share held. In addition, a return of capital
distribution was made to the existing shareholder. 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 were done in connection with and contemplation of the
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 income
during 1998.
In August 1998, the Company sold 4 million shares of Common Stock in an
Initial Public Offering for net proceeds of $31.7 million.
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 and CEO under an existing
bonus arrangement
- issued 142,857 shares having a market value of $2 million to the
controlling shareholders of Wiedemann & Johnson Company in partial
payment of 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, 1998.
8. BENEFIT PLANS
Associate Stock Bonus/Stock Purchase Plan. The Associate Stock Bonus/Stock
Purchase Plan for selected associates of CBI provides to each participant (i) a
grant of 25,000 shares of stock and (ii) an option to purchase another 25,000
shares at a fixed price of $2.00 per share, within three years from the date the
agreement is entered into if certain criteria under the terms of the plan are
satisfied, principally, that certain production levels are attained. The fair
value of the stock granted and options issued were determined by the Board of
Directors considering prior stock transactions. During 1997 and 1996, CBI issued
50,000 shares and 150,000 shares, respectively, and has recorded compensation
expense of $190,000 and $172,500, respectively, in relation to the stock grants
and options. As of December 31, 1997, this Plan is no longer available.
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
F-18
55
CLARK/BARDES HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
Under this plan, participants purchased stock at $4.80 per share and
receive a matching option with an exercise price of $4.80 per share in exchange
for a promissory note and a security agreement; during 1997, 69,997 shares were
issued under this program but none of the options were vested at December 31,
1997. Principal on the notes matures March 1, 2001, is due in four equal annual
installments beginning March 1, 1998 and accrues interest at the prime rate plus
1.5%. Total notes receivable outstanding under this program are $50,000 net of
related allowances at December 31, 1998.
In addition to the Incentive Stock Option Plan, CBI granted stock options
to an individual in his capacity as a director nominee to the Board of Directors
on April 2, 1997 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
CBI's Board of Directors which occurred in mid-1998. These options vest ratably
at the rate of 5,555 shares per month beginning July 1, 1998 upon 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 transactions; accordingly, no compensation
expense has been recorded.
In 1998, CBI adopted, as amended and restated, the Predecessor Company's
Incentive Stock Option Plan providing for certain employees 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 and 379,023 shares were granted
as options in 1998. The grant date was August 18, 1998 (the date of the IPO) and
the grant price is $9.00 per share. The options vest ratably over a four year
period starting one year from the date of grant.
Pro forma information regarding net income and earnings per share is
required by SFAS 123 and 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 1998 and 1997, respectively:
1998 1997
---- ---------
Dividend yield.............................................. None None
Volatility.................................................. 73% 25%
Risk-free interest rates.................................... 4.7% 5.8%
Expected life (years)....................................... 6 6
The estimated average fair values of options granted in 1998 and 1997 were
$4.59 and $1.30, respectively.
F-19
56
CLARK/BARDES HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Had compensation cost for CBI's stock-based compensation plans been
determined in accordance with SFAS No. 123, CBI's net income and earnings per
share would have been reduced to the pro forma amounts indicated below:
DECEMBER 31
-----------------------
1998 1997
-------- ---------
(IN THOUSANDS - EXCEPT
SHARE DATA)
Net (loss) income
As reported............................................... $(411) $4,234
Pro forma................................................. $(977) $4,200
Earnings per common and common equivalent share
As reported............................................... $(.08) $ .99
Pro forma................................................. $(.20) $ .95
The effect of options on 1996 net revenue was not significant.
Option activity for the years ended December 31, 1996, 1997 and 1998 is
summarized as follows:
OPTION PRICE
OPTIONS PER SHARE
-------- ------------
Outstanding at January 1, 1996.............................. -- $ --
Granted................................................... 200,000 $ 1.75
Exercised................................................. (150,000) $ 1.75
--------
Forfeited................................................. --
Outstanding at December 31, 1996............................ 50,000 $ 1.75
Granted................................................... 290,830 $4.80-$7.00
Exercised................................................. (50,000) $ 1.75
Forfeited................................................. --
--------
Outstanding at December 31, 1997............................ 290,830 $4.80-$7.00
Granted................................................... 380,689 $8.44-$9.00
Exercised................................................. --
Forfeited.................................................
--------
Outstanding at December 31, 1998............................ 671,519 $4.80-$9.00
--------
Exercisable at December 31, 1998............................ 226,826 $4.80-$9.00
========
Exercise prices for options outstanding as of December 31, 1997 ranged from
$4.80 to $7.00. The weighted-average remaining contractual life of those options
was 9.7 years. At December 31, 1998, option prices ranged from $4.80 to $9.00
and the weighted-average remaining contractual life of the options is 9.7 years.
Further information regarding CBI's outstanding and exercisable stock options by
exercise price as of December 31, 1998 is presented below:
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
- --------------- ----------- ---------------- -------- ----------- --------
$4.80 140,830 8.20 $4.80 74,160 $4.80
$7.00 150,000 8.20 $7.00 150,000 $7.00
$9.00 1,666 9.75 $9.00 1,666 $9.00
$9.00 379,023 9.63 $9.00 1,000 $9.00
F-20
57
CLARK/BARDES HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Phantom Stock Agreement. CBI entered into a Phantom Stock Agreement, dated
September 5, 1997 with a Principal of the Company. Under this agreement, the
Principal is entitled to receive an award expressed in units ("Incentive Units")
based upon the level of revenue received by CBI on certain sales generated by
the Principal. The Principal will first be entitled to receive payments for the
value of his Incentive Units on April 1, 2003 and every year thereafter until
April 1, 2008. It is unlikely that the Principal will be entitled to any
payments under the Phantom Stock Agreement based on the required revenue
performance levels.
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 50% of the first 6% of an eligible
participant's contributions to the Plan. Company contributions to the Plan were
$214,000, $108,000 and $84,000 for the years ended December 31, 1998, 1997 and
1996, respectively.
Stock Purchase and Stock Option Plans -- On July 10, 1998, the Board of
Directors adopted the Stock Purchase Plan, under which a total of 200,000 shares
of Common Stock has 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.)
For the offering beginning January 1, 1999 and ending June 30, 1999, a
total of 12,943 shares will be issued to employees enrolled at that date and
assuming no cancellations during the segment period. The closing price of CBI's
common stock on December 31, 1998 was $16.875 thus establishing a purchase price
to the participating employee of $14.34 per share unless the closing price on
June 30, 1999 is less than $16.875. Then 85% of that lower price shall be the
price to the participating employee.
In this first offering, CBI has determined that it will purchase the
requisite 12,943 shares on the open market and not issue any additional shares
to fulfill this obligation. Future fulfillments under this Plan will be made
through open market purchases or unissued shares, at CBI's discretion.
Key Executive Life Insurance. CBI maintains key man life insurance policies
of $23 million and $2 million on its Chairman and Vice-Chairman, respectively,
and policies ranging from $150,000 to $2 million on certain other key
executives.
9. 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, 1998.
Rental expense for the years ended December 31, 1998, 1997, and 1996 was
$916,000, $476,000 and $477,000.
F-21
58
CLARK/BARDES HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1998, approximate minimum rental commitments under all
non-cancelable leases having terms in excess of a year are as follows:
(IN THOUSANDS)
1999.................................................. $1,335
2000.................................................. 1,318
2001.................................................. 969
2002.................................................. 792
2003.................................................. 793
------
$5,207
======
10. RELATED PARTY TRANSACTIONS
CBI had accounts receivable of $97,000, and $603,000, accounts payable of
$48,000, and $5,000 and accrued expenses of $1,692,000, and $2,621,000 to
related parties at December 31, 1998 and 1997, respectively.
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.
CBI and its Chairman, Mr. Wamberg, are the parties to a Principal Office
Agreement dated July 29, 1993, pursuant to which The Wamberg Organization
markets, on behalf of CBI, life insurance and administrative and consulting
services, and CBI furnishes to The Wamberg Organization marketing materials and
concepts, program design ideas, selected life insurance products, specimen plan
documents and administrative services. The agreement can be terminated by either
party upon 90 days' written notice. However, Mr. Wamberg is under a separate
7-year non-compete agreement with CBI. The Wamberg Organization's commissions
range 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 are net of any of 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 $8,068,000, $7,798,000, and
$4,964,000 in 1998, 1997, and 1996, respectively, for commissions and fees
earned. The terms and conditions of Mr. Wamberg's Principal Office Agreement
were modified July 31, 1998 under the "Commission Transfer Agreement" to provide
for a reallocation of commissions and fees on business existing at June 30, 1998
(see Note 1).
CBI has transactions with affiliated entities. CBI provides services for
affiliates and is reimbursed for these services at the Company's respective
costs.
11. JOINT VENTURE
During 1994, CBI entered into an agreement to jointly develop, implement,
distribute and market certain products for the corporate owned life insurance
market. The investment in this joint venture is accounted for using the equity
method. CBI's initial investment was minimal. CBI made advances to the joint
venture in 1994 totaling approximately $100,000, which were expensed as
incurred. CBI's participation is 50% and all of the joint venture's net cash
flow is distributed quarterly, as provided in the agreement. Quarterly
distributions to CBI by the joint venture have been recorded as other revenues
in the accompanying statements of income in the amount of approximately
$254,000, $310,000, and $46,000 in 1998, 1997, and 1996, respectively.
F-22
59
CLARK/BARDES HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. EARNINGS PER SHARE
The following table sets forth the computation of historical basic and
diluted earnings per share:
1998 1997 1996
---------- ---------- ----------
Numerator:
Net income (loss)...................................... $ (410,709) $4,233,889 $3,553,985
Effect of dilutive securities:
Interest on convertible debt (net of tax).............. * 125,036 *
---------- ---------- ----------
Numerator for diluted earnings per share................. (410,709) 4,358,925 3,553,985
Denominator:
Denominator for basic earnings per share
weighted-average shares............................. 5,006,009 4,119,387 4,709,252
Effect of dilutive securities securities:
Stock options.......................................... 7,277
Convertible debt....................................... * 271,929 *
---------- ---------- ----------
Denominator for diluted earnings per share -- adjusted
weighted-average shares and assumed conversions........ 5,006,009 4,398,593 4,709,252
========== ========== ==========
Basic earnings (loss) per share.......................... $ (0.08) $ 1.03 $ 0.75
========== ========== ==========
Diluted earnings (loss) per share........................ $ (0.08) $ 0.99 $ 0.75
========== ========== ==========
- ---------------
* 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 $166,188.
(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
=======
The weighted average shares presented gives effect to the Merger described
in Note 1 and has been accounted for as a reverse stock split ( 1/2 share for 1
share).
F-23
60
CLARK/BARDES HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets forth the computation of pro forma basic and
diluted earnings per share (unaudited), giving effect to the conversion from an
S corporation to a C corporation as described in Note 1:
PRO FORMA
YEAR ENDED
DECEMBER 31,
1997
------------
(UNAUDITED)
Numerator:
Numerator for basic earnings per share:
Net income -- historical............................... $ 4,233,889
Proforma adjustment:
State tax expense -- S Corporation..................... 60,000
Income tax expense -- C Corporation.................... (1,700,000)
-----------
Numerator for pro forma basic earnings per share............ 2,593,889
Effect of dilutive securities:
Interest on convertible debt (net of estimated C
Corporation tax)....................................... 76,680
-----------
Numerator for pro forma diluted earnings per share.......... 2,670,569
Denominator:
Denominator for basic earnings per share -- historical...... 4,119,387
Effect of dilutive securities:
Stock options.......................................... 7,277
Convertible debt....................................... 271,929
-----------
Denominator for diluted earnings per share................ 4,398,593
-----------
Pro forma basic earnings per share........................ $ 0.63
===========
Pro forma diluted earnings per share...................... $ 0.61
===========
Pro forma earnings per share reflect net income as if CBI had been a C
corporation for the year ended December 31, 1997 and income taxes have been
computed on that basis. (See Note 1).
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 have 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 disallowance
rule that applied to 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 otherwise allowable interest deductions by a
ratio of unborrowed cash value to all other assets.
In 1998, the Clinton administration proposed eliminating the "employee,
officer and director" exception to the interest disallowance rule as a part of
its budget proposal. Congress adjourned its 1998 legislative session without
taking action on the Clinton administration's proposal. In February 1999, the
Clinton budget once again contained a proposal to expand the disallowance rule
to policies covering employees, officers and directors. If such a proposal were
to be 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
F-24
61
CLARK/BARDES HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. (See Risks in the Management 's Discussion and
Analysis -- Unfavorable Tax Legislation.)
14. SEGMENTS AND RELATED INFORMATION
CBH has three reportable segments:
Clark/Bardes, Inc.
Bank Compensation Strategies (a division of Clark/Bardes, Inc.)
Clark/Bardes, Inc. of Washington, D.C. (formerly Schoenke &
Associates, Inc.) (a division of Clark/Bardes, Inc.)
All of CBH's segments are in the same business; the design, marketing and
administration of insurance financed employee benefit programs to large
corporations and community, regional and money center banks. 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 or 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
intersegment revenues or expenses.
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------------
1998 1997
---------------------------------------------------------- -------------------------------------
BANK CLARK/BARDES, INC. BANK
CLARK/ COMPENSATION OF CLARK/ COMPENSATION
BARDES, INC. STRATEGIES WASHINGTON, D.C. TOTALS BARDES, INC. STRATEGIES TOTALS
------------ ------------ ------------------ ------- ------------ ------------ -------
(IN THOUSANDS)
Revenues from
external clients... $41,878 $29,358 $ 3,530 $74,766 $41,004 $ 8,451 $49,455
Depreciation and
amortization....... 232 1,067 271 1,570 165 328 493
Segment profit....... 4,424 4,038 1,387 9,849 4,307 910 5,217
Segment assets....... 18,637 28,654 19,595 66,886 9,862 27,039 36,901
Expenditures for
segment assets..... 270 330 4 604 284 64 348
F-25
62
CLARK/BARDES HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1998 1997
------- -------
Revenues
Total external revenues for reportable segments........... $74,766 $49,455
------- -------
Total consolidated revenues....................... $74,766 $49,455
======= =======
Profit and (Loss)
Total profit for reportable segments...................... $ 9,849 $ 5,217
Unallocated amounts:
Corporate overhead..................................... (2,042) --
Put warrants........................................... (4,800) --
Interest income........................................ 565 189
Interest expense....................................... (3,166) (1,112)
------- -------
Income before taxes............................... $ 406 $ 4,292
======= =======
Assets
Total assets for reportable segments...................... $66,886 $36,901
Deferred tax asset........................................ 607 --
------- -------
Total assets...................................... $67,493 $36,901
======= =======
In 1996, Clark/Bardes had one operating segment.
Geographic Information -- All of the Company's revenues are derived from
clients located within the United States.
Major Customer -- CBI generated in excess of 25% of its revenue in 1998
from 8 clients, in 1997 from 3 clients, and in 1996 from 2 clients,
respectively. Approximately 17.5% and 23% of CBI's commission and fee revenue
for the years ended 1998 and 1997, respectively, was generated by The Wamberg
Organization, which is wholly-owned by CBI's Chairman. Substantially all of the
policies underlying the programs marketed by CBI are underwritten by 14 life
insurance companies, of which seven accounted for approximately 76.3% and 78.9%
of CBI's first-year commission revenue for the years ended December 31, 1998 and
1997.
15. SUBSEQUENT EVENTS (UNAUDITED)
On January 4, 1999 the purchase of renewal revenue from the Chairman (see
Note 1) for $7.5 million was consummated. CBI has recorded the purchase of the
future revenue stream as an asset which will be amortized using the units of
revenue method over the ten year term of the agreement.
In January, 1999 the CBI negotiated a $65.0 million senior credit facility
and issued $25.0 million of floating rate debt fixed for the first year at 7.08%
(the one-year London InterBank Offered Rate plus 2%) secured promissory notes
maturing December 31, 2004. Principal and interest are payable quarterly
beginning March 31, 1999. The $25.0 million proceeds were used to retire the
senior secured notes, second priority senior secured notes, medium term notes,
and AAA distribution notes payable (see Note 6). The credit facility contains
certain restrictive covenants. The covenants require mandatory prepayments under
certain conditions, financial reporting and compliance certificates, maintenance
of financial ratios, restrictions on guaranties and additional indebtedness,
certain limitations on mergers and acquisitions, prohibition of cash dividends,
limitation on investments, loans, and advances, and certain change in control
provisions.
Coincident with the credit facility and floating rate debt agreements, CBI
has entered into an interest rate swap agreement with a bank affiliated with the
lending group to fix the interest rate at 5.29% on $15 million of the debt. The
effect of this agreement is to hold the rate sustaining no gain or loss on rate
fluctuations. There was no cost to CBI for this arrangement, and it does not
present a derivative risk.
F-26
63
CLARK/BARDES HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Clark/Bardes has entered into non-binding negotiations to acquire the
businesses and substantially all the assets of two unrelated, privately owned
companies. The aggregate proposed purchase price would be approximately $45.0
million, subject to change. If consummated, payment of the purchase price would
be approximately $19.9 cash at closing, assumption of approximately $4.1 million
in liabilities, a sellers' note for approximately $8.7 million and the issuance
of approximately 711,000 shares of Common Stock having an agreed upon value of
approximately $12.3 million. Of the potentially issuable shares, 384,000 having
a value of $6.8 million, are contingent upon the attainment of specified five
year revenue and gross profit performance levels.
In addition, the proposed terms contemplate the issuance of option to
acquire approximately 361,600 shares of Common Stock, at market prices at the
time of closing, to certain employees of the target companies upon the
attainment of stipulated levels of revenue.
These non-binding discussions and the consummation of the acquisition(s)
are subject to Clark/Bardes' ongoing review of the target Companies, execution
of a definitive purchase agreements, and the satisfaction of certain conditions,
including the approvals of Clark/Bardes' board of directors, the boards of
directors of the target companies and the consent of Clark/Bardes lenders, among
others. Accordingly, Clark/Bardes can give no assurance that the acquisitions
will be completed and, if so, on the terms described above.
16. INTERIM FINANCIAL DATA (UNAUDITED)
QUARTER
----------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
----- ------ ----- ------ ------
(IN MILLIONS, EXCEPT PER SHARE DATA)
Summary of Quarterly Results:
Revenue..................................... 1998 $13.8 $ 15.2 $17.6 $28.2 $ 74.8
1997 5.5 5.8 11.0 27.1 49.4
1996 5.7 7.0 5.3 15.2 33.2
Pre-tax income (loss)....................... 1998 $ 0.2 $ (5.2) $ 1.6 $ 3.8 $ 0.4
1997 0.2 (0.7) 0.9 3.9 4.3
1996 0.6 0.7 0.2 2.2 3.7
Net income (loss)........................... 1998 $ 0.2 $ (5.2) $ 2.4 $ 2.2 $ (0.4)
1997 0.2 (0.7) 0.9 3.8 4.2
1996 0.6 0.7 0.2 2.1 3.6
Basic earnings (loss) per share............. 1998 $0.06 $(1.61) $0.44 $0.27 $(0.08)
1997 0.05 (0.16) 0.20 1.27 1.03
1996 0.12 0.15 0.04 0.45 0.75
Diluted earnings (loss) per share........... 1998 $0.06 $(1.61) $0.39 $0.27 $(0.08)
1997 0.05 (0.16) 0.20 1.03 0.99
1996 0.12 0.15 0.04 0.45 0.75
F-27
64
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/ MELVIN G. TODD
----------------------------------
Melvin G. Todd
President and Chief Executive
Officer
Date: March 31, 1999
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.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ W. T. WAMBERG Chairman of the Board and March 31, 1999
- ----------------------------------------------------- Director
W. T. Wamberg
/s/ LAWRENCE H. HENDRICKSON Vice Chairman of the Board and March 31, 1999
- ----------------------------------------------------- Director
Lawrence H. Hendrickson
/s/ MELVIN G. TODD President, Chief Executive March 31, 1999
- ----------------------------------------------------- Officer and Director
Melvin G. Todd (Principal Executive
Officer)
/s/ THOMAS M. PYRA Vice President and Chief March 31, 1999
- ----------------------------------------------------- Financial Officer
Thomas M. Pyra (Principal Accounting
Officer and Principal
Financial Officer)
/s/ RANDOLPH A. POHLMAN Director March 31, 1999
- -----------------------------------------------------
Randolph A. Pohlman
/s/ L. WILLIAM SEIDMAN Director March 31, 1999
- -----------------------------------------------------
L. William Seidman
/s/ GEORGE D. DALTON Director March 31, 1999
- -----------------------------------------------------
George D. Dalton
65
EXHIBIT INDEX
EXHIBIT
NO. EXHIBITS
------- --------
2.1 -- Reorganization Agreement, by and among Clark/Bardes
Holdings, Inc., Clark/ Bardes, Inc. and the Predecessor
Company (Incorporated herein by reference to Exhibit 2.1
of Clark/Bardes' Registration Statement on Form S-3, 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-3, 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-3, 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 Holdings, Inc.,
Wiedemann & Johnson Company, Bruce Hlavacek and Jennie
Hlavacek.
3.1 -- Certificate of Incorporation of Clark/Bardes Holdings,
Inc. (Incorporated herein by reference to Exhibit 3.1 of
Clark/Bardes' Registration Statement on Form S-3, File
No. 333-56799, filed with the SEC on July 12, 1998).
3.2 -- Bylaws of Clark/Bardes Holdings, Inc. (Incorporated
herein by reference to Exhibit 3.2 of Clark/Bardes'
Registration Statement on Form S-3, 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-3, File No. 333-56799).
3.4 -- Certificate of Designation (Incorporated herein by
reference to Exhibit 3.4 of Clark/Bardes' Registration
Statement on Form S-3, File No. 333-56799).
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-3, File No. 333-56799, filed with the
SEC on July 27, 1998).
4.2 -- Rights Agreement, dated as of July 10, 1998, by and
between Clark/Bardes Holdings, Inc. and The Bank of New
York (Incorporated herein by reference to Exhibit 4.4 of
Clark/Bardes' Quarterly Report on Form 10-Q, File No.
000-24769, filed with the SEC on November 16, 1998).
10.1 -- Clark/Bardes Holdings, Inc. 1998 Stock Option Plan
(Incorporated herein by reference to Exhibit 10.1 of
Clark/Bardes' Registration Statement on Form S-3, File
No. 333-56799).
I-1
66
EXHIBIT
NO. EXHIBITS
------- --------
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-3, 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-3, 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-3, 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-3, 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-3,
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-3, 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-3,
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-3, File
No. 333-56799).
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-3, 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-3, 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-3, 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-3, 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-3, File No. 333-56799).
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EXHIBIT
NO. EXHIBITS
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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-3, 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-3, 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-3, 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-3, 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-3, 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-3, 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-3, 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-3, 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-3, File
No. 333-56799).
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-3, 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-3, 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-3, 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-3, 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-3, File No. 333-56799).
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68
EXHIBIT
NO. EXHIBITS
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10.29 -- Form of Employee Stock Purchase Plan (Incorporated herein
by reference to Exhibit 10.29 of Clark/Bardes'
Registration Statement on Form S-3, 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-3, 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-3, 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-3, 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-3, 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-3, 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-3, File
No. 333-56799).
10.36 -- Form of Amended and Restated Note Agreement, Senior
Secured Notes Due August 9, 2002, by and between
Great-West, Life Investors and Nationwide (Incorporated
herein by reference to Exhibit 10.36 of Clark/Bardes'
Registration Statement on Form S-3, File No. 333-56799).
10.37 -- Form of Amended and Restated Note Agreement, 11.0% Second
Priority Senior Secured Notes Due August 9, 2004, by and
between Great-West, Life Investors and Nationwide
(Incorporated herein by reference to Exhibit 10.37 of
Clark/Bardes' Registration Statement on Form S-3, File
No. 333-56799).
10.38 -- 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-3, File No. 333-56799).
10.39 -- 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-3, File No. 333-56799).
10.40 -- 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-3, File No. 333-56799).
10.41 -- Form of Letter Agreement between Phoenix Home Life and
Clark/Bardes (Incorporated herein by reference to Exhibit
10.41 of Clark/Bardes' Registration Statement on Form
S-3, File No. 333-56799).
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69
EXHIBIT
NO. EXHIBITS
------- --------
10.42 -- Letter Agreement, dated August 14, 1998, between
Nationwide and Clark/Bardes (Incorporated herein by
reference to Exhibit 10.42 of Clark/Bardes' Registration
Statement on Form S-3, File No. 333-56799).
10.43 -- Letter Agreement, dated August 14, 1998, between
Great-West and Clark/Bardes (Incorporated herein by
reference to Exhibit 10.43 of Clark/Bardes' Registration
Statement on Form S-3, File No. 333-56799).
10.44 -- Letter Agreement, dated as of August 17, 1998, between
General American and Clark/Bardes (Incorporated herein by
reference to Exhibit 10.44 of Clark/Bardes' Registration
Statement on Form S-3, File No. 333-56799).
10.45 -- 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).
*10.46 -- 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.
*10.47 -- Lease Agreement, dated December 30, 1996, by and between
Bellemead Development Corporation and Schoenke &
Associates Corporation.
*23.1 -- Consent of Ernst & Young LLP.
*23.2 -- Consent of Lane Gorman Trubitt, L.L.P.
*27.1 -- Financial Data Schedule for 1998 Fiscal Year (Included in
SEC-Filed Copy Only).
*27.2 -- Financial Data Schedule for 1997 Fiscal Year (Included in
SEC-Filed Copy Only).
*27.3 -- Financial Data Schedule for Three Months Ended March 31,
1998, Six Months Ended June 30, 1998, and Nine Months
Ended September 30, 1998 (Included in SEC-Filed Copy
Only).
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* Filed herewith.
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