<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File N. 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
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 []
The number of shares outstanding of the registrant's common stock, all
of which comprise a single class with a $0.01 par value, as of May 7, 1999, the
latest practicable date, was 8,528,918.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PART I-FINANCIAL INFORMATION
Item 1. Financial Statements 3
Condensed consolidated balance sheets at March 31, 1999
(Unaudited) and December 31, 1998 (Audited) 4
Condensed consolidated statements of income for the three
months ended March 31, 1999 and 1998 (Unaudited) 5
Condensed consolidated statements of cash flows for the
three months ended March 31, 1999 and 1998 (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About Market
Risk 15
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 17
EXHIBITS
Index to Exhibits 18
</TABLE>
<PAGE> 3
FORWARD-LOOKING STATEMENTS
This Form 10-Q may contain certain forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended and Section
21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act").
When used in this Form 10-Q, 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
changes in tax legislation, dependence on key producers, 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 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations" of this form 10-Q and
Clark/Bardes' other reports filed under the Exchange Act. 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. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
3
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CLARK/BARDES HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
In thousands, except share data:
March 31, December 31,
1999 1998
----------- -----------
(Unaudited) (Note 1)
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 3,760 $ 12,102
Account and notes receivable-net 6,558 8,076
Other current assets 82 59
-------- --------
Total current assets 10,400 20,237
Equipment and leasehold improvements-net 1,137 1,178
Intangible assets-net 44,813 45,209
Deferred commissions-net 7,287 --
Deferred tax asset 451 607
Other assets 642 262
-------- --------
Total Assets $ 64,730 $ 67,493
======== ========
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $ 1,989 $ 2,925
Commissions and fees payable 3,487 2,634
Income taxes 1,075 528
Accrued liabilities 1,207 2,651
Current portion of long term debt 6,000 4,344
-------- --------
Total current liabilities 13,758 13,082
Long term debt 19,759 24,713
Stockholders'
Preferred stock
Authorized-1,000,000 shares; $.01 par
value none issued
Common stock
Authorized-20,000,000 shares; $.01 par value
Issued and outstanding-8,202,535 at both dates 82 82
Paid in capital 26,321 26,274
Retained earnings 4,810 3,342
-------- --------
Total stockholders' equity 31,213 29,698
-------- --------
Total liabilities and stockholders' equity $ 64,730 $ 67,493
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements
4
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CLARK/BARDES HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
In thousands, except share data
<TABLE>
<CAPTION>
Three months ended
March 31,
---------
1999 1998
---------- ----------
<S> <C> <C>
Total revenue $ 24,057 $ 13,754
Commission and fee expense 14,183 9,132
---------- ----------
Net Revenue 9,874 4,622
---------- ----------
Operating expenses
General and administrative 6,255 3,371
Amortization 620 221
---------- ----------
Total expenses 8,875 3.592
---------- ----------
Operating income 2,999 1,030
Interest
Income 68 75
Expense (564) (922)
---------- ----------
Income before income taxes 2,503 183
Income taxes 1,035 --
---------- ----------
Net income $ 1,468 $ 183
========== ==========
Per share
Basic earnings $ 0.18 $ 0.06
========== ==========
Diluted earnings $ 0.17 $ 0.06
========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements
5
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CLARK/BARDES HOLDINGS, INC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(Unaudited)
In thousands
Three months ended
March 31,
1999 1998
---------- ----------
<S> <C> <C>
Cash from operating activities-net .......................... $ 2,853 $ 2,754
Investing activities
Purchases of equipment-net ............................... (61) 20
Deferred commissions purchased ........................... (7,504) --
Other .................................................... (380) (175)
---------- ----------
(7,945) (195)
---------- ----------
Financing activities
Proceeds from borrowings ................................. 25,000 --
Repayments of borrowings ................................. (28,298) (1,450)
Dividends ................................................ -- (169)
Other .................................................... 48 --
---------- ----------
(3,250) (1,619)
---------- ----------
Increase (decrease) in cash and cash equivalents (8,342) 940
Cash and cash equivalents, beginning of period .............. 12,102 3,783
---------- ----------
Cash and cash equivalents, end of period .................... $ 3,760 $ 4,723
========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements
6
<PAGE> 7
CLARK/BARDES HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
(Unaudited)
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 and
provides compensation consulting services.
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 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. CBI applied the remaining proceeds to pay
approximately $7.5 million to the Wamberg Organization for the purchase of
renewal revenue on January 4, 1999 (Note 2), and $800,000 for general corporate
purposes, including working capital.
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments, including
normal recurring accruals, considered necessary for a fair presentation have
been included. Operating results for the three-month period ended March 31,
1999, are not necessarily indicative of the results that may be expected for the
year ended December 31, 1999.
The balance sheet at December 31, 1998 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Registrant Company and Subsidiaries annual
report on Form 10-K for the year ended December 31, 1998.
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 813,560 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
<PAGE> 8
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.
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 became subject to federal and state income taxation as a C
corporation. As an S corporation, CBI's income, whether or not distributed, was
taxed directly to the stockholders for federal and certain state income tax
purposes. At August 1, 1998, the effective date of change in tax status, CBI
recorded deferred taxes on its balance sheet for the difference between the tax
bases and book bases of its assets and liabilities.
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.
2. PURCHASE OF RENEWAL REVENUE FROM THE CHAIRMAN
On January 4, 1999, CBI purchased the right to receive approximately 19% of the
commission and fee revenue, prior to deduction of servicing costs, related to
renewal revenue due under the Principal Office Agreement with the Chairman of
CBH, W. T. Wamberg and the Wamberg Organization, for a cash payment of $7.5
million. This transaction allows CBI to receive approximately $14.2 million over
a ten year period. Under the agreement, CBI will receive all of the revenue due
under the Principal Office Agreement retaining an amount equal to the total sum
purchased. CBI recorded the purchase of this 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.
3. NEW CREDIT FACILITY
In January 1999, CBI negotiated a $65 million senior credit facility and issued
$25 million of floating rate debt fixed for the first year at 7.08%, (the
one-year London InterBank Offered Rate plus 2%) under that facility. Principal
and interest are payable quarterly beginning March 31, 1999. The $25 million
proceeds were used to retire existing long term debt. The credit facility
contains certain restrictive covenants requiring mandatory prepayments under
certain conditions, financial reporting and compliance certificates, maintenance
of financial ratios, restrictions on guarantees and additional indebtedness,
limitations on mergers and acquisitions, prohibition of cash dividends,
limitation on investments, loans, and advances, and changes in control.
Coincident with the credit facility and floating rate agreement, CBI has entered
into two interest rate swap agreements with a bank affiliated with the lending
group to fix the interest rates. The first agreement will go into effect on July
6, 1999 and fixes the interest rate at 5.76% (plus 2% ) on $15 million of the
debt. The second agreement goes into effect on January 18, 2000 and fixes the
rate at 5.29% (plus 2%) on $15 million of the debt.
CBI incurred $400,000 of costs in connection with the refinancing. These costs
have been capitalized and are reflected in Other Assets in the balance sheet at
March 31, 1999 and are being amortized over the life of the debt.
4. ACQUISITION OF SCHOENKE
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
8
<PAGE> 9
companies. The Company accounted for the acquisition as a purchase and has
included the operating results of the Schoenke Companies in the financial
statements commencing from the acquisition date.
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. 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.
The unaudited pro forma information below presents the results of CBI and
Schoenke combined as if the acquisition had occurred January 1, 1998.
<TABLE>
<CAPTION>
March 31
1999 1998
---- ----
<S> <C> <C>
(in thousands)
Pro forma:
Revenues $ 24,057 $ 15,577
Net Income 1,468 508
Diluted earnings per share $ .17 $ .16
</TABLE>
5. SEGMENT INFORMATION
<TABLE>
<CAPTION>
Quarter ending March 31,
(in thousands)
=========================================================================================
1999 1998
-------------------------------------------------- ---------------------------------
Clark/ Bank Clark/Bardes, Inc. Clark/ Bank
Bardes, Compensation of Bardes, Compensation
Inc. Strategies Washington,D.C Totals Inc. Strategies Totals
--- ------------ -------------- ------ ---- ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues from
external clients $17,099 $5,469 $ 1,489 $24,057 $8,532 $5,222 $13,754
Segment profit
(loss) 3,094 (44) 579 3,629 943 587 1,530
Segment assets 18,765 27,311 18,203 64,279 7,169 26,237 33,406
</TABLE>
A reconciliation of total external revenues for reportable segments to total
consolidated revenues and total segment profits (loss) to consolidated income
before taxes is as follows:
9
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<TABLE>
<CAPTION>
Three months ended
March 31,
---------------------------
1999 1998
---- ----
<S> <C> <C>
Revenues
Total external revenues for reportable segments $ 24,057 $ 13,754
---------- ----------
Total consolidated revenues $ 24,057 $ 13,754
========== ==========
Profit and (Loss)
Total profit for reportable segments $ 3,629 $ 1,530
Unallocated amounts:
Corporate overhead (630) (500)
Interest net (496) (847)
---------- ----------
Income before taxes $ 2,503 $ 183
========== ==========
</TABLE>
A reconciliation of total assets for reportable segments with total consolidated
assets at March 31, 1999 and December 31, 1998 is as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---------- ------------
(unaudited)
<S> <C> <C>
Total Assets $ 64,279 $ 66,886
Deferred tax asset 451 607
---------- ----------
Total consolidated assets $ 64,730 $ 67,493
========== ==========
</TABLE>
6. EARNINGS PER SHARE
The following table sets forth the computation of historical basic and diluted
earnings per share
<TABLE>
<CAPTION>
Three months ended
March 31
---------------------------
1999 1998
---- ----
<S> <C> <C>
Numerator:
Net income ($ in thousands) $ 1,468 $ 183
Effect of dilutive securities:
Interest on convertible debt (net of tax) *
Numerator for diluted earnings per share $ 1,468 $ 183
Denominator:
Denominator for basic earnings per share
weighted-average shares 8,202,535 3,222,010
Effect of dilutive securities:
Stock options 219,994 *
Convertible debt -- *
Denominator for diluted earnings per share-
adjusted weighted-average shares and
assumed conversions 8,422,529 3,222,010
Basic earnings per share $ .18 $ .06
Diluted earnings per share $ .17 $ .06
</TABLE>
10
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*The effect of options and convertible debt at March 31, 1998 have not been
included as such effects would be antidilutive.
7. 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 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 Administration's proposal. In February 1999, the Administration 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 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).
8. SUBSEQUENT EVENT
ACQUISITION OF MCG/HEALTHCARE
On April 5, 1999, CBI purchased the assets and business and assumed certain
liabilities of Phynque, Inc., d/b/a Management Compensation Group/HealthCare, a
Minnesota corporation, for a purchase price of $34.6 million consisting of:
(i) a cash payment of $13.8 million;
(ii) a promissory note for $8.7 million;
(iii) 326,363 shares of common stock, having an aggregate value of $5.3
million based on the closing price of the common stock on April 5,
1999;
(iv) the direct payment of $3.6 million for certain outstanding loans;
(v) the assumption of $3.2 million of liabilities.
The purchase price was determined by an arm's length negotiation among the
parties. The assets acquired include cash, receivables and operating assets in
addition to all intangible assets, intellectual property, files pertaining to
customers, computer software and systems and related licenses. The liabilities
assumed include commissions payable, accrued employee benefits and operating
expenses. The $17.4 million cash portion of the purchase price was funded by a
borrowing under CBI's existing credit facility. The promissory note is payable
in thirty-two equal quarterly installments of principal and interest at 10% per
annum of $430,000 commencing on April 5, 2000. The promissory note is secured by
a personal guarantee of W. T. Wamberg, Chairman of Clark/Bardes. Closing costs
and fees connected with the transaction are estimated to be approximately
$500,000.
MCG/HealthCare is a 180 employee executive benefit consulting organization
servicing the healthcare industry. MCG/Healthcare is headquartered in
Minneapolis, Minnesota. Prior to the acquisition described above, there was no
material relationship between CBI and MCG/HealthCare.
11
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PROPOSED ACQUISITION
CBI has entered into non-binding negotiations to acquire, by merger, the stock
of a private company. The aggregate purchase price would be approximately $8.5
million payable in CBH common stock. The number of shares issued is dependent
upon the closing price of CBH stock on the day before the closing. In addition,
the proposed transaction will provide for the possible issuance of up to 384,452
additional shares of CBH common stock dependent upon the attainment of
stipulated revenue and income goals over the four year period 1999 to 2003.
These non-binding discussions and the consummation of the acquisition are
subject to Clark/Bardes' ongoing review of the target company, execution of a
definitive merger agreement, and the satisfaction of certain conditions,
including the approvals of Clark/Bardes' board of directors, the board of
directors of the target company and the consent of Clark/Bardes lenders, among
others. Accordingly, Clark/Bardes can give no assurance that the acquisition
will be completed and, if so, on the terms described above.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
Revenues-Revenues increased 75% to $24.1 million for the first quarter of 1999
from $13.8 million for the comparable quarter of 1998, an increase of $10.3
million. In keeping with Management's stated goals, acquisitions have been, and
continue, to be an important aspect of Clark/Bardes' revenue growth. Reflecting
the related components of Clark/Bardes' revenue, a comparison of the quarters is
as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31
-----------------------
1999 1998
-------- --------
($ in millions)
<S> <C> <C>
First year revenue
Core benefits $ 8.0 $ 1.6
Community banks 3.8 --
Acquisitions .7 4.1
-------- --------
12.5 5.7
Renewal revenue
Core benefits 8.8 7.0
Community banks 1.7
Acquisitions 1.1 1.1
-------- --------
11.6 8.1
-------- --------
Total $ 24.1 $ 13.8
</TABLE>
Revenues from acquisitions comprised 40% of the total revenue for the first
quarter of 1998 and 7.5% for the quarter ended March 31, 1999. Acquisitions
include BCS in the quarter ended March 31, 1998 (only) and Schoenke and
Wiedemann & Johnson in the first quarter of 1999.
Commissions-Commission expenses also rose during the period. Commissions were
$14.2 million in the first quarter of 1999 compared with $9.1 million for the
same quarter in 1998, an increase of $5.1 million or 55%. The percentage
increase in commissions was less than the percentage increase in revenue. Net
revenue retained after commission expense was 41% in the first quarter of 1999
compared with 34% in 1998's first quarter. CBI's recent acquisitions enjoy a
product mix having a lower percentage of revenue paid out to commissioned
producers. Management believes this net revenue margin to be sustainable.
General and administrative expenses-General and administrative expenses for the
quarter ended March 31, 1999 were $6.3 million compared with $3.4 million for
1998. Part of the increase, $714 thousand, was attributable to acquisitions,
while the balance was caused by continued growth.
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Amortization-Amortization of purchased inforce revenue and intangibles was $620
thousand for the first quarter of 1999 compared with $221 thousand for the 1998
period. This is the result of the increased inforce revenue resulting from the
acquisitions and the purchase of the renewal revenue stream from The Wamberg
Organization.
Operating income-Operating income increased 191% in the quarter ended March 31,
1999 compared with the same quarter of 1998. Operating income for the 1999
period was $3.0 million versus $1.0 million for 1998, an increase of $2.0
million. The operating performance of the first quarter can be summarized as
follows:
<TABLE>
<CAPTION>
As a Percent of Revenue
-----------------------
1999 1998
---- ----
<S> <C> <C>
First year revenue ................................ 49% 12%
Renewal revenue ................................... 44 50
Acquisitions ...................................... 7 38
---- ----
Total .................................... 100 100
Commissions ....................................... 59 66
---- ----
Retained revenue ......................... 41 34
Operating expenses
General & administrative ..................... 26 25
Amortization ................................. 3 2
---- ----
29 27
---- ----
Operating income ......................... 12% 7%
==== ====
</TABLE>
The improvement in operating income resulted from a lower rate of commissions
and operating expenses increasing at a lower rate than the increase in revenue.
Interest-Interest expense for the March 31, 1999 quarter was $496 thousand or
$351 thousand less than the $841 thousand reported in the first quarter of 1998,
primarily as a result of lower interest costs--$564 thousand in 1999 versus $923
thousand in 1998. Borrowings at March 31, 1999 were $25.8 million compared with
$35.6 million at March 31, 1998.
As previously reported, Clark/Bardes, Inc., as a company, did not pay Federal
income taxes prior to the initial public offering and reorganization that
occurred on July 31, 1998 because it was an S corporation., Since that time net
income has been fully taxed and may not be comparable to prior periods. Net
income for the first quarter of 1999 was $1.5 million compared with $183
thousand for the quarter ended March 31, 1998.
LIQUIDITY AND SOURCES OF CAPITAL
Cash flows from operations were $2.9 million for the March 31, 1999 period
compared with $2.8 million for the first quarter of 1998. The $2.9 million of
operating cash flow was offset by the payment of $7.5 million for the purchase
of renewal revenue and $3.3 million for the repayment of funded debt in
connection with the refinancing discussed in the following paragraph. At the end
of the first quarter of 1999, cash balances totaled $3.8 million compared to
$12.1 million at December 31, 1998.
In January 1999 CBI negotiated a $65 million senior credit facility and issued
$25 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 million proceeds were used to retire existing
long term debt. 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 guarantees and additional indebtedness, certain limitations on
mergers and acquisitions, prohibition of cash dividends, limitation on
investments, loan, and advances, and change in control provisions.
13
<PAGE> 14
Coincident with the credit facility and floating rate agreements, CBI has
entered into two interest rate swap agreements with a bank affiliated with the
lending group to fix the interest rates. The first agreement will go into effect
on July 6, 1999 and fixes the interest rate at 5.76% (plus 2%) on $15 million of
the debt. The second agreement goes into effect on January 18, 2000 and fixes
the rate at 5.29% (plus 2%) on $15 million of the debt.
On January 4, 1999, Clark/Bardes purchased the renewal revenue due under the
Principal Office Agreement with W. T. Wamberg for $7.5 million cash. This
transaction allows Clark/Bardes to retain additional commission and fee revenue
for a ten year period following the consummation of the transaction. The
additional revenue equates to approximately 19% 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.
Clark/Bardes believes that its net cash flow from operations will continue to
provide sufficient funds to service all of its debt obligations, based upon the
predictability and magnitude of its future revenue stream. Renewal revenue,
however, 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 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 anticipated requirements or that Clark/Bardes will not require
additional debt or equity financing within this time frame.
YEAR 2000 ISSUES
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. Clark/Bardes does not believe
that the year 2000 issues will pose significant operational problems directly or
as a result of any year 2000 issues of suppliers or customers.
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 are 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. 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. Management 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.
14
<PAGE> 15
Total costs related to year 2000 compliance efforts total approximately $80,000.
Total costs associated with year 2000 readiness process, consisting of both
internal and external resources, are expected to range between $150,000 and
$200,000. The Company has not yet fully completed its year 2000 assessment and
remediation efforts, but management's current expectation as to the completion
of these efforts is unchanged from that described in Clark/Bardes' form 10-K for
the year ended December 31, 1998.
The Company's plans to complete the year 2000 modifications are based on
management's best estimates, which are based on numerous assumptions about
future events including the continued availability of certain resources and
other factors. Estimates on the status of completion and the expected completion
dates are based on the level of effort expended to date to total expected staff
effort. However, there can be no guarantee that these estimates will be achieved
and actual results could differ materially from those plans. Specific factors
that might cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes and similar uncertainties.
FORWARD-LOOKING STATEMENTS
The information above contains forward-looking statements, including, without
limitation, statements relating to the Company's plans, strategies, objectives,
expectations, intentions, and adequate resources that are made pursuant to the
"safe harbor" provisions of the Private Securities Litigation Reform Act of
1995. Readers are cautioned that forward-looking statements about Year 2000
should be read in conjunction with the Company's disclosures under the heading
Forward Looking Information.
RECENT ACQUISITIONS
On April 5, 1999 CBH acquired the assets and business of Management Compensation
Group/HealthCare, a Minneapolis, Minnesota based executive benefit consulting
company servicing the healthcare industry. The purchase price was $34.6 million
consisting of cash payments of $17.4 million, a note for $8.7 million, 326,363
shares of CBH common stock for $5.3 million, and the assumption of $3.2 million
of liabilities.
PROPOSED ACQUISITION
CBI has entered into non-binding negotiations to acquire, by merger, the stock
of an unrelated, private company. The aggregate purchase price would be
approximately $8.5 million payable in CBH common stock. The number of shares
issued is dependent upon the closing price of CBH stock on the day before the
closing. In addition, the proposed transaction will provide for the possible
issuance of up to 384,452 additional shares of CBH common stock dependent upon
the attainment of stipulated revenue and income goals over the four year period
1999 to 2003.
These non-binding discussions and the consummation of the acquisition are
subject to Clark/Bardes' ongoing review of the target company, execution of a
definitive merger agreement, and the satisfaction of certain conditions,
including the approvals of Clark/Bardes' board of directors, the board of
directors of the target company, and the consent of Clark/Bardes' lenders, among
others. Accordingly, Clark/Bardes can give no assurance that the acquisition
will be completed, and, if so, on the terms described above.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
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 previously issued debt.
Coincident with the credit facility and floating rate agreements, CBI has
entered into two interest rate swap agreements with a bank affiliated with the
lending group to fix the interest rates. The first agreement will go into effect
on July 6, 1999 and fixes the interest rate at 5.76% (plus 2%) on $15 million of
the debt. The
15
<PAGE> 16
second agreement goes into effect on January 18, 2000 and fixes the rate at
5.29% (plus 2%) on $15 million of the debt.
16
<PAGE> 17
PART II. OTHER INFORMATION.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
4.1 Specimen Certificate for shares of Common Stock, $0.01 par
value, of Clark/Bardes, incorporated herein by reference to
Exhibit 4.1 to Clark/Bardes' Amendment No. 1 to Form S-1
(No. 333-56799) filed with the SEC on July 27, 1998.
4.2 Certificate of Incorporation of Clark/Bardes incorporated
herein by reference to Exhibit 3.1 to Clark/Bardes'
Registration Statement on Form S-1 (No. 333-56799) filed
with the SEC on July 12, 1998.
4.3 Bylaws of the Company, incorporated by reference to Exhibit
3.2 to Clark/Bardes' Registration Statement on Form S-1 (No.
333-57799) filed with the SEC on July 12, 1998.
4.4 Rights Agreement, by and between CBH and The Bank of New
York, dated as of July 10, 1998, incorporated 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
27 Financial Data Schedule.
(b) Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date 5/11/99 CLARK/BARDES HOLDINGS, INC.
---------------------
/s/ MELVIN G. TODD
Date 5/11/99 ------------------------------------------
--------------------- Melvin G. Todd
President and Chief Executive Officer
/s/ THOMAS M. PYRA
Date 5/11/99 ------------------------------------------
--------------------- Thomas M. Pyra
Vice President and Chief Financial Officer
(Principal Accounting Officer and
Principal Financial Officer)
17
<PAGE> 18
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
4.1 Specimen Certificate for shares of Common Stock, $0.01 par value,
of Clark/Bardes, incorporated herein by reference to Exhibit 4.1
to Clark/Bardes" Amendment No. 1 to Form S-1 (No. 333-56799) filed
with the SEC on July 27, 1998.
4.2 Certificate of Incorporation of Clark/Bardes incorporated herein
by reference to Exhibit 3.1 to Clark/Bardes' Registration
Statement on Form S-1 (No. 333-56799) filed with the SEC on July
12, 1998.
4.3 Bylaws of the Company, incorporated by reference to Exhibit 3.2 to
Clark/Bardes' Registration Statement on Form S-1 (No. 333-56799)
filed with the SEC on July 12, 1998.
4.4 Rights Agreement, by and between CBH and The Bank of New York,
dated as of July 10, 1998, incorporated 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.
*27 Financial Data Schedule
</TABLE>
* File herewith
18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED STATEMENT OF OPERATIONS (UNAUDITED) FOR THE THREE MONTHS ENDED MARCH
31, 1999 AND CONDENSED BALANCE SHEET (UNAUDITED) AS OF MARCH 31, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 3,760
<SECURITIES> 0
<RECEIVABLES> 6,558
<ALLOWANCES> 394
<INVENTORY> 0
<CURRENT-ASSETS> 10,400
<PP&E> 2,994
<DEPRECIATION> 1,858
<TOTAL-ASSETS> 64,730
<CURRENT-LIABILITIES> 13,758
<BONDS> 0
0
0
<COMMON> 82
<OTHER-SE> 26,321
<TOTAL-LIABILITY-AND-EQUITY> 64,730
<SALES> 24,057
<TOTAL-REVENUES> 24,057
<CGS> 0
<TOTAL-COSTS> 14,183
<OTHER-EXPENSES> 6,875
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 564
<INCOME-PRETAX> 2,503
<INCOME-TAX> 1,035
<INCOME-CONTINUING> 1,468
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,468
<EPS-PRIMARY> 0.18
<EPS-DILUTED> 0.17
</TABLE>
