| CLARK INC ITEM 1A RISK FACTORS You should carefully consider the risks described below together with the other information contained in this 10-K before making a decision to invest in our common stock |
| The risks described below are not the only risks we face |
| Additional risks and uncertainties of which we are unaware or currently believe may be immaterial may also impair our business operations |
| If any of the following risks actually occur, our business, financial condition, and operating results could be adversely affected |
| 10 _________________________________________________________________ [33]Table of Contents Risks related to our industry We are substantially dependent on revenue generated by the sale of business-owned life insurance policies |
| Changes in Federal tax laws and regulations could materially and adversely affect our renewal income and ability to gain new business |
| Many of the compensation and benefit programs we design and implement for our clients are financed with business-owned life insurance |
| Business-owned life insurance programs have tax advantages associated with such products that are attractive to our current and prospective clients |
| Commission revenue from these products represented 66dtta6prca, 69dtta1prca and 72dtta4prca, of our total revenues in 2005, 2004, and 2003, respectively |
| Provisions under the Sarbanes-Oxley Act of 2002 have created uncertainty as to whether certain split dollar policies may be used with respect to certain executives |
| The split-dollar regulations from September 2003 and the Sarbanes-Oxley Act of 2002 have significantly reduced the amount of revenue generated from new split dollar arrangements and may further reduce revenue from existing split dollar arrangements in the near term |
| On October 22, 2004, President Bush signed into law HR 4520, the “American Jobs Creation Act of 2004,” which included provisions affecting deferred compensation arrangements for taxable and tax-exempt employers |
| The legislation created new Section 409A of the Internal Revenue Code which applies to voluntary deferred compensation arrangements, supplemental executive retirement plans, stock appreciation rights (“SARs”) and certain other arrangements which have the effect of deferring compensation |
| Section 409A generally applies to compensation deferrals made after December 31, 2004 |
| Among other things, Section 409A modifies the times at which distributions are permitted from nonqualified deferred compensation arrangements and requires that elections to defer compensation be made earlier than historical practice for many plans |
| The Treasury Department and the IRS issued their initial guidance regarding Section 409A, Notice 2005-1, on December 20, 2004 |
| This initial guidance provided for the transition to the new rules contained in Section 409A In addition, comprehensive proposed Treasury Regulations addressing the application of Section 409A were published in the Federal Register on October 4, 2005 |
| These proposed regulations will become effective January 1, 2007 |
| Most existing deferred compensation programs will have to be modified in accordance with the new rules |
| During the transition period, it is expected that plan sponsors will revise the structure of their current programs and formalize the changes into a compliant plan design by the end of 2006 in accordance with the deadline established by the proposed regulations |
| We believe that deferred compensation plans remain a valuable savings tool |
| However, because of the time and effort required by plan sponsors to come into compliance with the new rules and to communicate the required changes to participants, participant compensation deferrals may be reduced |
| As a result, our revenue from existing and new arrangements may be reduced during the transitional period |
| Beyond the transitional period, it is anticipated that participant deferrals will return to their prior level, although the long-term impact of the new rules remains uncertain at this time |
| There have been several recent congressional proposals to change the federal tax laws with respect to business-owned life insurance |
| On September 17, 2003, the Senate Finance Committee approved legislation proposed by Sen |
| Jeff Bingaman (D-NM) that would tax the death benefits taxpayers receive from certain policies on the lives of former employees |
| Following an intensive lobbying effort by the insurance industry, the Finance Committee on February 2, 2004, reconsidered the business-owned life insurance provision it had previously approved and, in its place, approved legislation that generally would tax the death benefits taxpayers receive from policies on the lives of employees or former employees only in cases where the insured person had not consented to being covered or in the case of a former employee, where the insured was not among the company’s highly-compensated employees at the time of policy issuance |
| This same provision was reintroduced on January 31, 2005, by Senate Finance Committee Chairman Charles Grassley (R-IA) and Senator Max Baucus (D-MT) as part of the National Employee Savings and Trust Equity Guarantee Act (S 219) and was included in the pension bill, the Pension Security and Transparency Act of 2005 (S1783), approved by the Senate on November 16, 2005 |
| We believe that this most recent proposal, if enacted, would not have a material adverse effect on our revenue from the sale of business-owned life insurance policies |
| However, if Congress were to adopt legislation broadly limiting the tax-free payment of death benefits on such policies or otherwise adversely affecting the tax treatment of the policies, future revenue from the sale of business-owned life insurance policies could materially decline |
| On November 1, 2005, the President’s Advisory Panel on Federal Tax Reform released the conclusions of its study on ways to reform the federal tax system |
| Among the panel’s recommendations is a proposal to tax currently, in certain instances, the increase in value (“inside buildup”) of life insurance policies |
| The tax reform panel’s recommendations are not binding on the President and it is unknown whether the President would include any proposal relating to life insurance inside buildup in any tax reform plan he may advance |
| The panel’s recommendation regarding inside buildup would be a fundamental change in the longstanding tax treatment of life insurance and has already encountered significant opposition from the life insurance industry, calling into question the prospects for any such proposal in Congress |
| However, if any such proposal were enacted and applied to business-owned life insurance, it could have a material adverse effect on our revenue from the sale of such insurance |
| 11 _________________________________________________________________ [34]Table of Contents Our business is subject to fluctuations in interest rates, stock prices and general economic conditions |
| General economic conditions and market factors, such as changes in interest rates and stock prices, can affect our commission and fee income and the extent to which clients keep their policies inforce year after year |
| Equity returns and interest rates can have a significant effect on the sale and profitability of many employee benefit programs whether they are financed by life insurance or other financial instruments |
| When interest rates are at historically low levels, our fixed income products become less attractive to potential purchasers |
| Further, a prolonged decrease in stock prices can have an effect on the sale and profitability of our clients’ programs that are linked to stock market indices |
| We cannot guarantee that we will be able to compete with alternative products if these market forces make our clients &apos programs unattractive |
| We are subject to regulation at the state level |
| We sell our insurance products in all 50 states through licensed insurance producers operating as independent agents as well as through our employees |
| States have broad powers over licensing, payments of commissions, business practices, policy forms, and premium rates |
| Insurance laws related to licensing, marketing activities, and the receipt of commissions varies from state to state |
| While we have not encountered significant regulatory problems in the past, we cannot assure you that we, or the producers through whom we sell, will be in compliance at all times with all applicable regulatory requirements of each state |
| As a result of issues arising in connection with the marketing by certain companies in the property and casualty insurance, health insurance, and group life insurance markets, various states have adopted laws and regulations during 2005 that, among other things, impose new disclosure obligations on us with respect to the insurance and other financial products we market |
| These new laws and regulations are, in part, a response to the recent amendment to the Producer Licensing Model Act by the National Association of Insurance Commissioners |
| Depending on the specific requirements of such laws, if any, which are actually adopted by the states where we market insurance, there could be an adverse impact on our revenues |
| We have entered into a number of supplemental compensation arrangements with certain of the insurance carriers whose products we sell |
| The industry-wide usage of supplemental compensation arrangements between distributors and insurance carriers has come under scrutiny from regulatory and law enforcement authorities |
| For example, the Attorney General of the State of New York has commenced an investigation of certain practices in the insurance industry |
| While we believe that our arrangements are in each case appropriate and consistent with applicable law, there exists uncertainty as to whether regulatory authorities or industry participants will seek to alter many practices in the industry, including the terms under supplementary compensation arrangements between distributors and insurance companies |
| Any changes to such practices or terms could have a material adverse effect on our business, financial condition, and results of operations |
| Risks related to our company We face strong competition |
| Our business is highly competitive |
| We compete with consulting firms, insurance brokers, third party administrators, producer groups, and insurance companies |
| A number of our competitors offer attractive alternative programs |
| The direct competitors of our Executive Benefits Practice include Mullin Consulting, TBG Financial, and Westport Worldwide |
| The competitors of our Banking Practice include Charon Planning, Benmark, and Northwestern Mutual Life |
| Additionally, the banking industry is consolidating, which may reduce the number of potential bank clients |
| Primary competitors of our Healthcare Group and Pearl Meyer & Partners include Sullivan & Cotter, Towers Perrin, Fred Cook, and Mercer Consulting Group |
| We may also face competition from large, diversified financial services firms willing and able to expend the resources to enter our markets and from large direct competitors that choose to pursue an acquisition or consolidation strategy similar to ours |
| 12 _________________________________________________________________ [35]Table of Contents Our business depends on the renewal commissions we generate from the life insurance policies underlying our clients &apos compensation and benefit programs |
| We derive a substantial portion of our revenue from the renewal commissions we earn on the business-owned life insurance policies and other financial instruments that underlie our clients &apos compensation and benefit programs |
| We earn these annual commissions so long as the underlying policies remain in existence |
| If a client chooses to cancel a policy, we will stop receiving any renewal commissions and fees on that policy |
| In addition, if a client delays or reduces the annual premiums it pays on the underlying policy due to a flexible premium structure or financial difficulties, our renewal commissions will be correspondingly delayed or reduced |
| Our quarterly operating results vary dramatically |
| Our operating results fluctuate considerably from quarter to quarter |
| We have experienced, and may continue to experience, large concentrations of revenue in the first and fourth quarters |
| Our operating results may be affected by a number of factors including: a significant portion of the funding for our bank-owned life insurance products occurs in the fourth calendar quarter, many deferred compensation plans marketed by our Executive Benefits Practice are financed in the first calendar quarter; and the timing of significant sales can have a material impact on our quarterly operating results |
| Our revenue is difficult to forecast, and we believe that comparing our consecutive quarterly results of operations is not meaningful, nor does it indicate what results we will achieve for any subsequent period |
| In our business, past operating results are not consistently reliable indicators of future performance |
| Significant downward fluctuations in our quarterly operating results could result in a sharp decline in the trading price of our common stock |
| ” We are dependent on our management team |
| Our performance depends largely on the performance of our executive officers and key employees |
| It is important to us to keep and motivate high quality personnel, especially our management, consultants, and program development teams |
| The loss of the services of any key employees could have a material adverse effect on our business, financial condition, and operating results |
| We may not be able to successfully implement our acquisition strategy or integrate the businesses we acquire |
| Since September 1997, we have completed 29 acquisitions |
| At any point in time, we may also be considering several other potential acquisitions |
| Future acquisitions may require substantial expenditures that will be financed through cash from operations, or bank debt as well as future debt and/or equity offerings |
| We cannot assure you that funds will be available from banks or through the capital markets or that they will be available on terms acceptable to us |
| If funds are not available, we may be unable to fully implement our acquisition strategy |
| Acquisitions involve numerous risks, including the diversion of our managementapstas time and attention to the negotiation of the transaction and to the integration of the businesses acquired, the possible need to modify financial and other systems and add management resources, the potential loss of employees of the acquired businesses, the risks of entering new markets with which we have limited experience, and unforeseen difficulties in the acquired operations |
| An acquisition may not produce the revenue and profits we expect |
| Thus, an acquisition that fails to meet our expectations could have a material adverse effect on our business, financial condition, and operating results |
| A substantial portion of our total assets are represented by intangible assets |
| When we acquire a company, we normally acquire few tangible assets |
| Therefore, substantially the entire purchase price for the acquisition is allocated to intangible assets |
| The three primary components of our intangible assets are inforce revenue, goodwill, and non-compete agreements |
| The amount of purchase price allocated to inforce revenue is determined by discounting the cash flow of future commissions adjusted for expected persistency, mortality, and associated costs |
| The persistency of our inforce business is influenced by many factors outside of our control, and we cannot be sure that the value we have allocated will ultimately be realized |
| Non-compete agreements are amortized over the period of the agreements and other identifiable intangibles are amortized over their useful lives |
| The balance of the purchase price not allocated to identifiable intangible assets is classified as goodwill |
| We cannot assure you that all of our inforce revenue will be realizable or that accounting regulatory bodies will not impose different amortization methods |
| A majority of our commission revenue is derived from policies written by a limited number of insurance companies |
| We depend on a select group of insurance companies to underwrite the insurance policies underlying the programs we sell |
| During 2005, 32 life insurance companies underwrote substantially all of the insurance policies underlying our clients &apos programs |
| Seven of these companies accounted for approximately 30dtta6prca of our first year commission revenue in 2005, 55dtta3prca in 2004, and 55dtta7prca in 2003 |
| If our relationship with any of these insurance companies, or their financial condition, were to significantly change for any reason, we could experience a disruption in our ability to provide products and services to our clients |
| Although we believe such disruption would only be short-term and that we would not experience any difficulties in securing replacement relationships with similar insurance companies, any long-term delays in doing so could affect our ability to provide competitive financing alternatives to our clients |
| Major stockholders have the ability to influence stockholder action |
| AEGON, Dimensional Fund Advisors, and Century Management owned approximately 13dtta1prca, 9dtta1prca, and 8dtta6prca respectively, of our outstanding common stock as of December 31, 2005 |
| Tom Wamberg, our Chairman and Chief Executive Officer, owned approximately 8dtta1prca of our outstanding common stock as of December 31, 2005 |
| As a result, these stockholders are able to exercise significant influence over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions |
| This concentration of ownership may also have the effect of delaying, preventing, or deterring a change in control that may otherwise be beneficial to stockholders |
| We are subject to litigation which may have a negative impact on our business and reputation |
| From time to time, we are subject to lawsuits and other claims, which are being handled and defended in the ordinary course of business |
| While we are unable to predict the outcome of these matters, we do not believe, based upon currently available facts, that the ultimate resolution of any of such pending matters will have a material adverse effect on our overall financial condition, results of operations, or cash flows |
| However, adverse developments could negatively impact earnings in a particular future period |