SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
Commission File No. 24769
Clark/Bardes Holdings, Inc.
(Exact name of Registrant as specified in its charter)
Delaware 52-2103926
(State of incorporation) (I.R.S. Employer Identification No.)
102 South Wynstone Park Drive, #200
North Barrington, Illinois 60010
(Address of principal executive offices) (Zip code)
Registrant's telephone number: (847) 304-5800
Securities Registered Pursuant to Section 12(g) of the Act:
Title of Securities Exchanges on which Registered
None Not applicable
Securities Registered Pursuant to Section 12(b) 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 [ ]
As of November 9, 2000, there were 12,646,606 shares of common stock
outstanding.
<PAGE>
TABLE OF CONTENTS
PAGE
PART I-FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at September 30, 2000 4
and December 31, 1999
Condensed Consolidated Statements of Income for the three 5
months and nine months ended September 30, 2000 and September 30, 1999
Condensed Consolidated Statements of Cash Flows for the 6
nine months ended September 30, 2000 and September 30, 1999
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial 15
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 30
Part Ii. Other Information
Item 1. Legal Proceedings 30
Item 2. Changes in Securities and Use of Proceeds 31
Item 6. Exhibits and Reports on Form 8-K 31
SIGNATURES 32
EXHIBITS
Index to Exhibits 33
<PAGE>
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, and Section 21E of the
Securities Exchange Act of 1934. Words such as "estimate," "believe," "project,"
"expect," "intend," "predict," and similar expressions, as they relate to
Clark/Bardes Holdings, Inc. and its subsidiaries (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, realization of
renewal revenue, acquisition risks, competitive factors and pricing pressures,
dependence on certain insurance companies, changes in legal and regulatory
requirements, litigation and general economic conditions and other factors. If
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, 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. Clark/Bardes disclaims any intent or obligation to update or alter
any of the forward-looking statements, whether in response to new information,
unforeseen events, changed circumstances or otherwise.
<PAGE>
Part 1. Financial Information
ITEM 1. FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Clark/bardes Holdings, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
<S> <C> <C>
September 30, December 31,
2000 1999
Unaudited Audited
(dollars in thousands
except share amounts)
ASSETS
Current Assets
Cash and cash equivalents $ 6,177 $ 4,832
Accounts and notes receivable - net 16,863 18,295
Other current assets 2,309 1,123
------------ ------------
Total Current Assets 25,349 24,250
Intangible Assets - Net 155,541 94,991
Equipment and Leasehold Improvements - Net 8,108 4,505
Deferred Tax Asset - 282
Other Assets 4,402 831
------------ ------------
Total Assets $ 193,400 $ 124,859
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 7,813 $ 4,100
Commissions and fees 3,208 3,475
Income taxes 618 4,350
Accrued liabilities 10,627 7,841
Debt maturing within one year 6,524 7,252
------------ ------------
Total Current Liabilities 28,790 27,018
Long Term Debt 58,071 35,473
Deferred Tax Liability 272 -
Deferred Compensation 1,944 -
Stockholders' Equity
Preferred stock
Authorized - 1,000,000 shares; $.01 par value, none issued - -
Common stock
Authorized - 20,000,000 shares; $.01 par value
Issued and outstanding - 12,646,606 in 2000 and 9,629,999 in 1999 126 96
Paid in capital 88,947 50,099
Retained earnings 15,283 12,173
Treasury stock - 2,077 shares at cost (33) -
------------ ------------
------------ ------------
Total Stockholders' Equity 104,323 62,368
------------ ------------
------------ ------------
Total Liabilities and Stockholders' Equity $ 193,400 $ 124,859
============ ============
</TABLE>
see accompanying notes to condensed consolidated financial statements
<PAGE>
<TABLE>
<CAPTION>
CLARK/BARDES HOLDINGS, INC. AND SUBSIDIARIES
Unaudited
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<S> <C> <C> <C> <C>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
(dollars in thousands except share amounts)
Total Revenue $ 34,645 $ 25,655 $ 90,156 $ 79,431
Commission and fee expense 11,757 10,456 30,669 37,672
----------- ----------- ----------------------
----------- ----------- ----------- ----------------------
Gross Profit 22,888 15,199 59,487 41,759
----------- ----------- ----------- ----------------------
Operating Expenses
General and administrative 17,357 11,332 46,484 29,789
Amortization 1,933 1,237 4,597 3,009
Acquisition integration and reorganization expenses 518 - 518 -
----------- ----------- ----------- ----------------------
19,808 12,569 51,599 32,798
----------- ----------- ----------- ----------------------
Operating Income 3,080 2,630 7,888 8,961
Interest
Income 78 133 205 291
Expense (1,485) (923) (3,310) (2,500)
----------- ----------- ----------- ----------------------
(1,407) (790) (3,105) (2,209)
----------- ----------- ----------- ----------------------
Income before taxes 1,673 1,840 4,783 6,752
Income taxes 514 804 1,674 2,809
----------- ----------- ----------- ----------------------
Net Income $ 1,159 $ 1,036 $ 3,109 $ 3,943
=========== =========== =========== ======================
Basic Net Income per Common Share
Net income $ 0.11 $ 0.11 $ 0.31 $ 0.44
----------- ----------- ----------- -----------
Weighted average shares 10,697,924 9,629,157 10,099,451 8,891,628
----------- ----------- ----------- -----------
Diluted Net Income per Common Share
Net income $ 0.11 $ 0.11 $ 0.30 $ 0.43
----------- ----------- ----------- -----------
Weighted average shares 10,875,931 9,865,535 10,358,231 9,118,669
----------- ----------- ----------- -----------
</TABLE>
see accompanying notes to condensed consolidated financial statements
<PAGE>
<TABLE>
<CAPTION>
CLARK/BARDES HOLDINGS, INC. AND SUBSIDIARIES
Unaudited
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<S> <C> <C>
Nine Months Ended
September 30,
2000 1999
Cash From Operating Activities - Net $ 10,475 $ 10,609
Investing Activities
Purchases of businesses (52,673) (53,289)
Purchases of equipment - net (2,805) (5,880)
Other (1,217) (622)
------------ ------------
------------ ------------
(56,695) (59,791)
------------ ------------
Financing Activities - -
Proceeds from borrowings 57,100 68,216
Repayment of borrowings (35,229) (51,497)
Sale and issuance of common stock 25,915 23,766
Other (221) -
------------ ------------
------------ ------------
47,565 40,485
------------ ------------
Increase (Decrease) in Cash 1,345 (8,697)
Cash and Cash Equivalents at Beginning of Period 4,832 12,102
------------ ------------
Cash and Cash Equivalents at End of Period $ 6,177 $ 3,405
============ ============
see accompanying notes to condensed consolidated financial statements
</TABLE>
<PAGE>
CLARK/BARDES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
Unaudited
1. NATURE OF OPERATIONS, SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND
BASIS OF PRESENTATION
The unaudited consolidated financial statements include the accounts of
Clark/Bardes Holdings, Inc. and its wholly owned subsidiaries (collectively,
CBH). Through its four operating divisions, Clark/Bardes Consulting -
Compensation Resource Group, Bank Compensation Strategies, HealthCare
Compensation Strategies and Pearl Meyer & Partners, CBH designs, markets and
administers life insurance products, compensation, and benefit programs to U. S.
corporations, banks, and healthcare organizations. CBH 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, CBH provides long-term administrative services for
executive benefits and insurance and provides compensation consulting services.
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 notes 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 and nine month period ended
September 30, 2000, are not necessarily indicative of the results that may be
expected for the year ended December 31, 2000.
The balance sheet at December 31, 1999 has been derived from the audited
financial statements at that date but does not include all of the information
and notes 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, 1999.
2. ACQUISITION OF COMPENSATION RESOURCE GROUP, INC.
On September 6, 2000, CBH acquired all the issued and outstanding capital
stock of Compensation Resource Group ("CRG") for a total purchase price of $30.5
million, not including acquisition expenses, estimated to be $652,000 consisting
of the following:
(i) a cash payment to the CRG selling shareholders of $11.5 million,
(ii)the issuance by CBH of 596,463 shares of its common stock, having an
aggregate value of $6.0 million based on the average closing price of
the common stock on September 5, 2000; and,
(iii)the assumption and repayment of approximately $13.0 million of
long-term debt.
CRG is an executive compensation and benefits organization that provides
the design, marketing and administration of non-qualified plans. CRG is
headquartered in Los Angeles, California and has affiliated offices in seven
other cities. Prior to the acquisition, there was no material relationship
between CRG and Clark/Bardes
The $24.5 million cash portion of the purchase price was borrowed under
CBH's existing credit facility with Bank One.
<PAGE>
Coincident with the foregoing transaction, CBH will enter into a bonus
arrangement for certain key executives and employees of CRG. This arrangement
will provide for the payment of bonuses of up to $20 million if certain
stipulated financial objectives are achieved during the years ended December 31,
2003 to 2005.
The acquisition of CRG has been accounted for as a purchase with most of
the purchase price allocated to the present value of in-force revenue and
amortized over a period of thirty years. The remainder has been allocated to
goodwill and amortized over twenty years. The purchase price allocation is
preliminary.
The unaudited financial information below presents the results of CBH and
CRG as if the acquisition had occurred on January 1, 1999.
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
Pro forma
Revenue $ 40,237 $ 29,698 $114,949 $104,139
Net income (loss) (340) (850) (1,431) 3,174
Diluted earnings
(loss) per share (.03) (.08) (.13) .33
3. ACQUISITION OF PEARL MEYER & PARTNERS, INC.
On June 21, 2000, CBH acquired all of the issued and outstanding capital
stock of Pearl Meyer & Partners, Inc. for a total purchase price of $26.6
million. The purchase price consisted of a cash payment, at closing, of $21.9
million and the issuance of 250,000 shares of CBH common stock with a value of
$4.0 million. Acquisition expenses were $720,000. The $22.6 million cash portion
of the purchase price was borrowed under CBH's line of credit.
The acquisition will be accounted for as a purchase and the goodwill will
be amortized over a twenty-year period. The purchase price allocation is
preliminary.
In addition to the initial purchase price, $2.0 million of additional cash
consideration will be paid in the first quarter of 2002 upon the achievement of
a defined performance objective during the eighteen months subsequent to the
purchase. This payment, when earned, will be accounted for as additional
purchase price to be amortized over the remainder of the original twenty-year
period.
Pearl Meyer is a New York City based consulting firm specializing in
executive compensation and retention programs. The Pearl Meyer organization
became Clark/Bardes' fourth operating division. Prior to the acquisition, there
was no material relationship between CBH and Pearl Meyer.
The unaudited pro forma information below presents the results of CBH and
Pearl Meyer & Partners as if the acquisition had occurred on January 1, 1999.
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
Pro forma
Revenue $ 34,645 $ 28,362 $ 96,425 $ 88,029
Net income 1,159 4,923 1,136 5,782
Diluted earnings
per share .11 .11 .55 .53
4. ACQUISITION OF W. M. SHEEHAN & COMPANY, INC.
On June 13, 2000, CBH acquired certain assets, principally working capital
and equipment, and assumed certain liabilities of W. M. Sheehan & Company, Inc.
("Sheehan"). The purchase price was $367,000 cash paid at closing. The
acquisition has been accounted for as a purchase and the goodwill will be
amortized over twenty years. The allocation of the purchase price is
preliminary.
<PAGE>
In addition to the purchase price paid at closing, an additional $650,000
will be paid upon the achievement of certain revenue and earnings objectives
during the years ended June 30, 2001 through 2004. The payments will be made 23%
in cash and 77% in CBH common stock based on values at time of issuance. The
additional payments will be accounted for as goodwill and amortized over the
remaining twenty-year period.
5. ACQUISITION OF INSURANCE ALLIANCES GROUP, INC.
On May 5, 2000, CBH acquired the business of Insurance Alliances Group,
Inc. ("IAG"). There were no assets or liabilities acquired or assumed. IAG is a
Stamford, Connecticut insurance firm specializing in executive estate planning.
The purchase price for the business was $3.5 million consisting of $2.8
million cash at closing and 49,143 shares of CBH common stock having a value of
$700,000. The cash portion of the purchase price was borrowed under CBH's line
of credit. The acquisition will be accounted for as a purchase and the entire
purchase price has been allocated to the net present value of renewal revenue
from insurance in force at the time of the acquisition and will be amortized
over a period of thirty years. The allocation of the purchase price is
preliminary.
6. ACQUISITION OF THE WAMBERG ORGANIZATION AND WAMBERG FINANCIAL
CORPORATION
On September 1, 1999, CBH purchased certain assets and assumed certain
liabilities of The Wamberg Organization and purchased all of the outstanding
stock of Wamberg Financial Corporation for a purchase price of $17.9 million and
expenses of $266,000.
The asset purchase agreement provides for the payment of an additional
$11.9 million upon the attainment of certain stipulated annual financial
objectives starting with the periods ended December 31, 1999 through December
31, 2002. As of December 31, 1999, the financial objectives for 1999 had been
met and a $1.5 million cash payment was made to W. T. Wamberg in the first
quarter of 2000. This payment was recorded as additional purchase price and will
be amortized as goodwill over the remaining twenty-year period commencing with
the effective date of the acquisition.
On January 4, 1999, CBI purchased the right to receive approximately 27.5%
of the commissions and fees related to renewal revenue of certain inforce
policies existing on June 30, 1998, due to W. T. Wamberg and The Wamberg
Organization, for a cash payment of $7.5 million. Concurrent with the September
1, 1999 acquisition of The Wamberg Organization, CBI purchased all of the
renewal revenue not acquired on January 4, 1999. All renewal revenue acquired in
these transactions will revert to Mr. Wamberg on August 31, 2018.
The acquisition of The Wamberg Organization and Wamberg Financial
Corporation has been accounted for as a purchase. The unaudited pro forma
information below presents our results of operations and those of The Wamberg
Organization and Wamberg Financial Corporation as if the acquisition occurred on
January 1, 1999.
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
Pro forma
Revenue $ 34,645 $ 27,246 $ 90,156 $ 87,058
Net income 1,059 4,514 1,159 3,109
Diluted earnings
per share .11 .11 .30 .49
7. Acquisition of Mcg/healthcare
On April 5, 1999, CBH purchased the assets and business and assumed certain
liabilities of Phynque, Inc., d/b/a Management Compensation Group/HealthCare, a
Minnesota corporation, for a purchase price of $35.6 million and $372,000 of
closing costs.
<PAGE>
MCG/HealthCare is a 170 employee executive benefit consulting organization
servicing the health care industry and is headquartered in Minneapolis,
Minnesota. Prior to the acquisition, there was no material relationship between
CBH and MCG/HealthCare. Subsequent to the acquisition, MCG/HealthCare became the
HealthCare Compensation Strategies division.
The acquisition of MCG/HealthCare has been accounted for as a purchase. The
unaudited pro forma information below presents the results of CBH and
MCG/HealthCare as if the acquisition had occurred on January 1, 1999:
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
Pro forma
Revenue $ 34,645 $ 25,655 $ 90,156 $ 85,188
Net income 1,159 1,036 3,109 4,328
Diluted earnings
per share .11 .11 .30 .47
8. Private Placement
On September 11, 2000, CBH sold 1,888,887 shares of common stock to a group
of investors for $25.1 million, net of expenses, in a private placement
transaction. The proceeds from this sale were used for debt reduction and
acquisitions.
The 1,888,887 shares were sold to the investors for $13.50 per share and
have been registered for resale by the investors if they deem it appropriate to
resell them.
9. Credit Facility
On August 23, 2000, CBH and its subsidiary, CBI, expanded its December 28,
1999 credit facility from $100.0 million to $114.3 million and added another
bank to the existing group of bank lenders. The principal changes in the
structure of the facility are the increase of the working capital limit from
$5.0 million to $10.0 million and the expansion of the borrowing base.
The credit facility contains restrictive covenants requiring 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.
On June 29, 2000, a third interest rate swap went into effect, setting the
underlying London Interbank offered Rate-based rate at 7.24% on $20.0 million of
debt.
10. Recent Accounting Pronouncements
FASB Accounting Standard - Derivatives and Hedging Activities
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This statement requires that all
derivatives be measured at fair value and recognized as either assets or
liabilities on the balance sheet. Changes in the fair values of derivative
instruments will be recognized in either earnings or comprehensive income,
depending on the designated use and effectiveness of the instruments. The FASB
amended this pronouncement in June 1999 to defer the effective date of SFAS No.
133 for one year. CBH must adopt SFAS No. 133 no later than January 1, 2001.
Because of CBH's minimal use of derivatives, management does not anticipate
the adoption of the new Statement will have a significant effect on earnings or
the financial position of CBH.
<PAGE>
FASB Interpretation - Stock Compensation
In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation". Interpretation No. 44 was
issued in order to clarify issues arising from Accounting Principles Board (APB)
Opinion No. 25 "Accounting for Stock Issued to Employees," which was previously
issued in October 1972. Interpretation No. 44 is effective July 1, 2000, but
certain conclusions cover specific events that occur either after December 15,
1998 or January 12, 2000.
The main issues addressed by Interpretation No. 44 are; (a) the definition
of an employee for purposes of applying APB Opinion No. 25, (b) the criteria for
determining whether a plan qualifies as a non-compensatory plan, (c) the
accounting consequences of modifications to the terms of a previously fixed
stock option award, and, (d) the accounting for an exchange of stock
compensation awards in a business combination.
The adoption of Interpretation No. 44 did not have a material impact on
CBH's results of operations or financial position.
SEC Staff Accounting Bulletin - Revenue Recognition
In December 1999, the SEC issued Staff Accounting Bulletin (SAB) No. 101,
"Revenue Recognition in Financial Statements," which must be adopted for years
beginning after December 15, 2000. SAB No. 101 provides guidance on revenue
recognition, as well as criteria for when revenue is realized and earned.
CBH does not expect that SAB No. 101 will have a material impact on results
of operations or financial position.
11. Earnings Per Share
The following table sets forth the computation of historical basic and
diluted earnings per share:
<TABLE>
<CAPTION>
EARNINGS PER SHARE
The following table sets forth the computation of historical basic and diluted earnings per share:
<S> <C> <C> <C> <C>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
(dollars in thousands)
Numerator
Net income for basic earnings per share $ 1,159 $ 1,036 $ 3,109 $ 3,943
------------- ------------ ------------ -------------
Numerator for diluted earnings per share $ 1,159 $ 1,036 $ 3,109 $ 3,943
Denominator
Denominator for basic earnings per share -
weighted average shares 10,697,924 9,629,157 10,099,451 8,891,628
Effect of dilutive securities:
Stock options 178,007 236,378 259,080 227,041
------------- ------------ ------------ -------------
Denominator for diluted earnings per share -
weighted average shares - diluted 10,875,931 9,865,535 10,358,531 9,118,669
============= ============ ============ =============
Per Share
Basic earnings $ 0.11 $ 0.11 $ 0.31 $ 0.44
============= ============ ============ =============
Diluted earnings $ 0.11 $ 0.11 $ 0.30 $ 0.43
============= ============ ============ =============
</TABLE>
<PAGE>
12. 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 changes in federal tax laws. In recent federal budget proposals,
provisions have been offered to amend existing rules related to policies
covering employees, officers and directors. If such proposals are enacted, they
could significantly reduce the attractiveness of business-owned life insurance
to companies that traditionally have high debt to equity ratios, such as banks.
While CBH believes there is insufficient support in Congress to enact such a
change, at this time, CBH is unable to predict the outcome of any such
legislative proposal by the current or any future Congress.
As CBH's business grows, working capital and capital expenditure
requirements will also continue to increase. CBH believes that net cash flows
from operations will be sufficient to finance debt repayments, working capital
requirement and capital expenditures for the next twelve months. However, there
can be no assurance that the net cash flows from operations will be sufficient
to meet anticipated requirements or that CBH will not require additional debt or
equity financing within this time frame. CBH may continue to issue stock to
finance future acquisitions.
13. Segments and Related Information
CBH has four reportable segments:
Clark/Bardes Consulting - Compensation Resource Group
Bank Compensation Strategies
HealthCare Compensation Strategies
Pearl Meyer & Partners
On September 6, CBH acquired all of the outstanding common stock of
Compensation Resource Group, Inc. (CRG), an independent company specializing in
the design, marketing and administration of non-qualified executive compensation
plans using company owned life insurance (COLI) products. In acquiring CRG, CBH
reorganized its divisions as follows:
o The division formerly known as Clark/Bardes was renamed
Clark/Bardes Consulting - Compensation Resource Group and will
consist of a Los Angeles, California headquarters with service
centers in Dallas, Texas and Bethesda, Maryland.
In 1999, CBH reported Clark/Bardes of Washington, D.C. (formerly
Schoenke & Associates) as a segment. During 1999, this segment was
combined with the operations of what was the Clark/Bardes division
and was no longer a separately reportable segment.
o The bank owned life insurance (BOLI) product sold by the
Clark/Bardes division is in the process of being transferred to
Bank Compensation Strategies thus placing all of CBH's bank owned
life insurance business in one division. The effect of this
transfer is not yet reflected in the revenues of this segment nor
in the results of Bank Compensation Strategies. For the year ended
December 31, 1999, BOLI accounted for 56.6 % of the Clark/Bardes
Consulting - Compensation Resource Group total revenue.
HealthCare Compensation Strategies became a segment with the acquisition of
MCG HealthCare on April 5, 1999. Pearl Meyer & Partners became a segment with
the acquisition of Pearl Meyer & Partners, Inc. on June 21, 2000.
The four reportable segments operate as independent and autonomous
divisions with a central corporate staff responsible for finance, strategic
planning and human resources. CBH's segments are in the business of designing,
marketing and administering employee benefit programs for large corporations;
community, regional and money center banks; healthcare organizations and
executive compensation consulting. The distinction between these segments is
each has its own client base as well as its own marketing, administrative staffs
and management.
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
Revenues from External Customers
Clark/Bardes Consulting - Compensation Resource Group $ 17,655 $ 12,557 $ 47,133 $ 47,167
Bank Compensation Strategies 7,911 7,002 22,811 20,266
HealthCare Compensation Strategies 5,996 6,096 16,843 11,998
Pearl Meyer & Partners 2,860 - 3,066 -
------------ ----------- ------------ ----------
Total segments - reported 34,422 25,655 89,853 79,431
Reconciling items 223 - 303 -
------------
------------ ----------- ------------ ----------
Total consolidated - reported $ 34,645 $ 25,655 $ 90,156 $ 79,431
============ =========== ============ ==========
Operating Income
Clark/Bardes Consulting - Compensation Resource Group $ 3,100 $ 1,924 $ 11,764 $ 8,630
Bank Compensation Strategies 1,398 522 1,322 1,538
HealthCare Compensation Strategies 516 877 780 1,504
Pearl Meyer & Partners 426 - 533 -
------------ ----------- ------------ ----------
Total segments - reported 5,440 3,323 14,399 11,672
Corporate overhead (2,360) (694) (6,511) (2,712)
Interest - net (1,407) (791) (3,105) (2,209)
------------ ----------- ------------ ----------
Income before taxes $ 1,673 $ 1,838 $ 4,783 $ 6,751
============ =========== ============ ==========
Depreciation and Amortization
Clark/Bardes Consulting - Compensation Resource Group $ 947 $ 580 $ 2,203 $ 1,562
Bank Compensation Strategies 377 297 1,119 831
HealthCare Compensation Strategies 622 569 1,863 1,163
Pearl Meyer & Partners 389 - 424 -
------------ ----------- ------------ ----------
Total segments - reported 2,335 1,446 5,609 3,556
Reconciling items 78 - 154 -
------------ ----------- ------------ ----------
Total consolidated - reported $ 2,413 $ 1,446 $ 5,763 $ 3,556
============ =========== ============ ==========
Identifiable Assets
Clark/Bardes Consulting - Compensation Resource Group $ 90,560 $ 54,760
Bank Compensation Strategies 32,733 27,849
HealthCare Compensation Strategies 34,437 34,688
Pearl Meyer & Partners 29,697 -
------------ ----------
Total segments - reported 187,427 117,297
Deferred tax asset - 55
Holding company assets - non operating 5,973 -
------------ ----------
Total consolidated - reported $ 193,400 $ 117,352
============ ==========
Capital Expenditures
Clark/Bardes Consulting - Compensation Resource Group $ 675 $ 3,440
Bank Compensation Strategies 502 279
HealthCare Compensation Strategies 907 2,161
Pearl Meyer & Partners 255 -
------------ ----------
Total segments - reported 2,339 5,880
Reconciling items 466 -
------------ ----------
Total consolidated - reported $ 2,805 $ 5,880
============ ==========
</TABLE>
<PAGE>
CBH evaluates performance and allocates resources based on profit and loss
from operations before income taxes, interest or corporate administrative
expenses. The accounting policies of the reporting segments are the same as
those described in the summary of significant policies. There are no significant
inter-segment revenues or expenses.
14. Income Taxes
Income taxes for the quarter ended September 30, 2000, reflect CBH's
overall effective tax rate for the year of 35% less the net of tax benefit of a
refund of state income taxes incurred in prior years.
15. Litigation
On July 25, 2000, Constellation Energy Group, Inc. ("Constellation") filed
a civil action against Clark/Bardes, Inc., ("CBI"), a wholly owned subsidiary of
CBH, in the United States District Court for the District of Maryland. The suit
asserts a claim of $7.5 million with pre-judgment and post-judgment interest,
costs and expenses and such other relief as the court deems proper against CBI
under ERISA for breach of fiduciary duty in connection with the administration
of benefit plans for Baltimore Gas and Electric Company and state common law
claims for breach of contract, professional negligence and breach of fiduciary
duty.
CBI denies each and all of the allegations in the Constellation action and
intends to vigorously defend itself. As previously disclosed, CBI has entered
into an agreement by which the parties agreed to attempt to resolve their
differences by negotiation.
Constellation has been a CBI client since January 1993 and CBI believes
this action is without merit. However, there can be no assurance that this
matter will be resolved in CBI's favor. In this event, we believe our exposure,
if any, is fully insured.
16. ACQUISITION OF FORREST, WAGNER & ASSOCIATES, INC.
On October 23, 2000, CBH acquired all of the outstanding stock of Forrest,
Wagner & Associates, Inc. ("FWA") for a purchase price of $4,235,000, not
including expenses, of which $3,485,000 was paid in cash at the closing. The
remaining $750,000 is payable upon the achievement of certain financial criteria
by December 31, 2004.
FWA is a Phoenix, Arizona based firm specializing in marketing and
administering non-qualified executive benefit plans funded primarily by Company
owned life insurance. FWA is affiliated with Compensation Resource Group, Inc.
The acquisition will be accounted for as a purchase with most of the
purchase price amortized based on the net present value of future renewal
revenue over twenty years. Additional payments, when made, will be accounted for
as goodwill and amortized over the remainder of the initial twenty-year period.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Tables in thousands of dollars except per
share amounts)
Overview
Our net income was $1.2 million or $.11 per diluted share, for the third
quarter and $3.1 million, or $.30 per diluted share, for the nine-month period
ended September 30, 2000. In 1999, we reported net income of $1.0 million or
$.11 per diluted share, for the third quarter and net income of $3.9 million, or
$.43 per diluted share, for the nine-month period ended September 30.
Results for both the third quarter and year to date September 30, 2000 were
adversely affected by $518,000 of non-recurring expenses related to the
elimination of several executive positions and the costs of integrating our
newest acquisition, Compensation Resource Group. The effect of this change was
to reduce diluted earnings per share for the current quarter by $.03 and year to
date by $.03.
Acquisitions
Since January 1, 2000, we have made seven acquisitions:
o Compensation Resource Group, a company specializing in non-qualified
deferred compensation plans,
o Pearl Meyer & Partners, an independent executive compensation firm
which became our fourth operating segment - executive compensation and
benefits consulting;
o Insurance Alliances Group, an estate planning firm, which has been
renamed Clark/Bardes Partners; and,
o The Christiansen Group, the Watson Company and W. M. Sheehan & Company;
three add-on acquisitions for our Bank Compensation Strategies
division.
We may have several acquisitions under consideration at any point in time.
Our evaluation focus is on the quality of the management, future earnings and
growth potential and the financial asset values in the book of renewal business
that will be realized for many years after the acquisition takes place.
Compensation Resources Group, Inc.
On September 6, 2000, we acquired all the issued and outstanding capital
stock of Compensation Resource Group ("CRG") for a total purchase price of $30.5
million, not including acquisition expenses, estimated to be $652,000,
consisting of:
o a cash payment to the CRG shareholders Sellers of $11.5 million,
o the issuance by CBH of 596,463 shares of its common stock, par value
$.01 per share (the "Common Stock"), having an aggregate value of $6.0
million based on the closing price of the Common Stock on September 5,
2000; and,
o the assumption and repayment of approximately $13.0 million of
long-term debt.
<PAGE>
For the periods prior to the acquisition; CRG had revenue and net income as
follows:
Nine Months Ended Fiscal Years Ended
September 30, June 30,
1999 2000 1999
---- ---- ----
(Unaudited) (Audited)
Revenue $ 24,708 $ 26,286 $ 27,126
Net income (loss) 1,735 (3,268) 45
CRG is an executive compensation and benefits organization that provides
the design, marketing and administration of non-qualified plans. CRG is
headquartered in Los Angeles, California and has affiliated offices in seven
other cities. Prior to the acquisition, there was no material relationship
between CRG and Clark/Bardes.
The $24.5 million cash portion of the purchase prices was borrowed under our
existing credit facility with Bank One.
In connection with the acquisition, we entered into a bonus arrangement for
certain key executives and employees of CRG. This arrangement will provide for
the payment of bonuses of up to $20 million if certain stipulated financial
objectives are achieved during the years ended December 31, 2003 to 2005.
The acquisition of CRG will be accounted for as a purchase with most of the
purchase price allocated to the present value of in-force revenue and amortized
over a period of thirty years. The remainder will be allocated to goodwill and
amortized over twenty years. The purchase price allocation is preliminary.
The unaudited financial information below presents our results with CRG as
if the acquisition occurred on January 1, 1999.
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
Pro forma
Revenue $ 40,237 $ 29,698 $ 114,949 $104,139
Net income (loss) (340) (1,044) (1,431) 3,174
Diluted earnings
(loss) per share (.03) (.11) (.13) .33
Pearl Meyer & Partners, Inc.
On June 21, 2000, we acquired all of the issued and outstanding capital
stock of Pearl Meyer & Partners, Inc. for a total purchase price of $26.6
million including acquisition expenses of $720,000. The purchase price consisted
of a cash payment at closing of $21.9 million and the issuance of 250,000 shares
of our common stock with a value based on the closing NASDAQ price on June 21,
2000 of $4.0 million. The cash portion of the purchase price was borrowed under
our line of credit.
The acquisition has been accounted for as a purchase and the goodwill will
be amortized over a twenty-year period. The purchase price allocation is
preliminary.
In addition to the purchase price, $2.0 million of additional consideration
will be paid in the first quarter of 2002 upon the achievement of a defined
performance objective during the first eighteen months subsequent to the
purchase. These payments, when earned, will be accounted for as additional
purchase price to be amortized over the remainder of the original twenty-year
period.
<PAGE>
For the periods prior to the acquisition, Pearl Meyer & Partners had
revenue and net income as follows:
Nine Months Ended Fiscal Years Ended
September 30, December 31,
1999 1999 1998
---- ---- ----
(Unaudited) (Audited)
Revenue $ 8,598 $ 12,579 $ 11,230
Net income 3,746 757 232
Pearl Meyer & Partners was an S corporation and, accordingly, did not pay
federal income taxes.
Pearl Meyer & Partners is a New York City based consulting firm
specializing in executive compensation and retention programs. The Pearl Meyer
organization became Clark/Bardes' fourth operating division. Prior to the
acquisition, there was no material relationship between Pearl Meyer and
ourselves.
The unaudited pro forma information below presents our results and those of
Pearl Meyer & Partners as if the acquisition had occurred on January 1, 1999.
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
Pro forma
Revenue $ 34,645 $ 28,362 $ 96,425 $ 88,029
Net income 1,159 1,136 5,782 4,923
Diluted earnings
per share .11 .12 .55 .53
W. M. Sheehan & Company, Inc.
On June 13, 2000, we acquired certain assets, principally working capital
and equipment and assumed certain liabilities of W. M. Sheehan & Company, Inc.
("Sheehan"). The purchase price was $367,000 cash paid at closing. The
acquisition will be accounted for as a purchase and the goodwill amortized over
twenty years. The allocation of the purchase price is preliminary.
In addition to the purchase price paid at closing, $650,000 will be paid
upon the achievement of certain revenue and earnings objectives during the years
ended June 30, 2001 through 2004. The payments will be divided 23% cash and 77%
CBH common stock based on value at time of issuance. The additional payments
will be accounted for as goodwill and amortized over the remaining twenty-year
period. Sheehan's financial results are included with those of our Bank
Compensation Strategies division.
Insurance Alliances Group, Inc.
On May 5, 2000, we acquired the business of Insurance Alliances Group, Inc.
("IAG"). There were no other assets or liabilities acquired or assumed. IAG is a
Stamford, Connecticut insurance firm specializing in executive estate planning.
Subsequent to the acquisition, IAG became Clark/Bardes Partners.
The purchase price for the business was $3.5 million consisting of $2.8
million cash at closing and 49,143 shares of our common stock having a value of
$700,000. The cash portion of the purchase price was borrowed under our line of
credit. This acquisition has been accounted for as a purchase and the entire
purchase price was allocated to the net present value of renewal revenue from
insurance in force at the time of the acquisition and will be amortized over a
period of thirty years. The financial performance of IAG since its acquisition
has been insignificant.
The Wamberg Organization and Wamberg Financial Corporation
On September 1, 1999, we purchased certain assets and assumed certain
liabilities of The Wamberg Organization and purchased all of the outstanding
stock of Wamberg Financial Corporation, for a purchase price of $17.9 million
and expenses of approximately $266,000.
<PAGE>
The asset purchase agreement provides for the payment of an additional
$11.9 million upon the attainment of certain stipulated annual financial
objectives starting with the period ended December 31, 1999 through December 31,
2002. As of December 31, 1999, the financial objectives for 1999 were met, and a
$1.5 million cash payment was made to W. T. Wamberg in the first quarter of
2000. This payment was recorded as goodwill and will be amortized on an annual
basis until August 31, 2018.
On January 4, 1999, we purchased the right to receive approximately 27.5%
of the commissions and fees on renewal revenue from certain inforce policies
existing on June 30, 1998, due to W. T. Wamberg and The Wamberg Organization,
for a cash payment of $7.5 million. Concurrent with the acquisition of The
Wamberg Organization, we purchased all of the renewal revenue not acquired on
January 4, 1999. All renewal revenue acquired in these transactions will revert
to Mr. Wamberg on August 31, 2018.
The acquisition of The Wamberg Organization and Wamberg Financial
Corporation has been accounted for as a purchase. The unaudited pro forma
information below presents our results of operations and those of The Wamberg
Organization and Wamberg Financial Corporation as if the acquisition occurred on
January 1, 1999.
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
Pro forma
Revenue $ 34,645 $ 27,246 $ 90,156 $ 87,058
Net income 1,159 1,059 3,109 4,514
Diluted earnings
per share .11 .11 .30 .49
MCG/HealthCare
On April 5, 1999, we purchased the assets and business and assumed certain
liabilities of Phynque, Inc., d/b/a Management Compensation Group/HealthCare, a
Minnesota corporation, for a purchase price of $35.6 million and $372,000 of
closing costs.
MCG/HealthCare is a 170 employee executive benefit consulting organization
servicing the healthcare industry and is headquartered in Minneapolis,
Minnesota. Prior to the acquisition, there was no material relationship between
MCG/HealthCare and us. Subsequent to the acquisition, MCG/HealthCare became the
HealthCare Compensation Strategies Division.
The acquisition of MCG/HealthCare has been accounted for as a purchase. The
unaudited pro forma information below presents our results and those of
MCG/HealthCare as if the acquisition had occurred on January 1, 1999:
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
Pro forma
Revenue $ 34,645 $ 25,655 $ 90,256 $ 85,188
Net income 1,159 1,036 3,109 4,328
Diluted earnings
per share .11 .11 .30 .47
Additional Acquisition
On October 23, 2000, we acquired all of the outstanding stock of Forrest,
Wagner & Associates, Inc. ("FWA") for a purchase price of $4,235,000, not
including expenses of which $3,485,000 was paid in cash at the closing. The
remaining $750,000 is payable upon the achievement of certain financial criteria
by December 31, 2004.
FWA is a Phoenix, Arizona based firm specializing in marketing and
administering non-qualified executive benefit plans funded primarily by Company
owned life insurance. FWA is affiliated with Compensation Resource Group, Inc.
<PAGE>
The acquisition will be accounted for as a purchase with most of the
purchase price amortized based on the net present value of future renewal
revenue over the next twenty years. Additional payments, when made, will be
accounted for as goodwill and amortized over the remainder of the initial
twenty-year period.
Revenue Sources and Recognition
Our operating units derive their revenue primarily from:
o Commissions paid by the insurance companies that underwrite the policies
underlying the various insurance programs;
o Executive compensation program and benefit consulting fees; and,
o Fees paid by clients in connection with program design and
administrative services.
Our commission revenue is typically paid annually and extends for a period
of ten years or more after the sale. Commissions paid by insurance companies
vary by policy and by program and usually represent a percentage of the premium
or the cash surrender value of the insurance policies underlying the program.
Included in total revenue are:
o First Year Commissions and Fees. First year commission 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. Fee revenue is recognized when earned.
o Renewal Commissions. Renewal commission revenue is recognized on the
date that the renewal premium is due or paid to the insurance company.
Consolidated Results of Operations
<TABLE>
<S> <C> <C> <C> <C> <C>
Nine Months Ended September %0Change
-------------------------------------------
2000 1999 1998 00/99 99/98
Total revenue $ 90,156 $ 79,431 $ 46,626 13.5 70.4
Gross profit 59,487 41,759 17,371 42.5 140.4
% of total revenue 66.0% 52.6% 37.3%
General and administrative expenses 47,002 29,789 13,022 57.8 128.8
% of total revenue 52.1% 37.5% 27.9%
Operating income, excluding amortization 12,485 11,970 4,349 4.3 175.2
% of total revenue 13.8% 15.1% 9.3%
Interest - net 3,105 2,209 2,180 40.6 1.3
% of total revenue 3.4% 2.8% 4.7%
Income taxes 3,283 4,061 - (19.1)
Effective tax rate 35.0% 41.6% 0.0%
Income before amortization 6,097 5,700 2,169 7.0 162.8
% of total revenue 6.8% 7.2% 4.7%
Amortization - net of tax 2,988 1,757798 70.1 120.2
% of total revenue 3.3% 2.2% 1.7%
Net income $ 3,109 $ 3,943 $ (5,011) (21.2) (178.7)
% of total revenue 3.4% 5.0% -10.7%
Per diluted common share:
Income before amortization $ 0.59 $ 0.63 $ 0.55 -5.8% 14.1%
Amortization - net of tax $ 0.29 $ 0.19 $ 0.20 49.7% -4.4%
Net income $ 0.30 $ 0.43 $ (1.27) -30.6% -134.2%
Weighted average shares 10,358,231 9,118,669 3,958,602 13.6% 130.4%
</TABLE>
<PAGE>
Clark/Bardes Consulting - Compensation Resource Group
First year revenue for the third quarter increased over the third quarter
of 1999 by $3.2 million or 78.7%. Renewal revenue was also favorable by $1.9
million or 22.6% ahead of the same quarter in 1999. General and administrative
expenses also reflect the previously mentioned $518,000 provision for severance
benefits and reorganization expenses incurred in connection with the integration
of the Compensation Resources Group acquisition.
With its strong third quarter, the Division has pulled ahead of last year's
year to date results. While sales are essentially even with last year, the
reduction in commission expense of $7.2 million as the result of acquiring key
producers more than offset a $4.1 million or 36.7% increase in general and
administrative expense. The acquisition of key producers results in a lower
commission cost, as we are able to pay a lower level of compensation since the
producer no longer bears the overhead burden of an independent office.
<TABLE>
<S> <C> <C> <C> <C>
Three Months Ended September 30,
-------------------------------------
2000 1999 2000 1999
Operating Results Variances - +/(-)
Revenue
First year $ 7,212 $ 4,036 $ 3,176 78.7%
Renewal 10,443 8,521 1,922 22.6
--------------------------
-------------------------
Total 17,655 12,557 5,098 40.6
Commission expense 8,251 6,382 1,869 29.3
------------------------- --------------------------
Gross profit 9,404 6,175 3,229 52.3
% of revenue 53.3% 49.2% - -
------------------------- --------------------------
Expenses
General and administrative 5,501 3,740 1,761 47.1
% of revenue 31.2% 29.8% - -
Amortization of intangibles 803 511 292 57.1
% of revenue 4.5% 4.1% - -
------------------------- --------------------------
------------------------- --------------
Total 6,304 4,251 2,053 48.3
Operating income $ 3,100 $ 1,924 $ 1,176 61.1%
% of revenue 17.6% 15.3% - -
========================= ==========================
Nine Months Ended September 30,
-------------------------------------
2000 1999 2000 1999
Operating Results Variances - +/(-)
Revenue
First year $ 17,646 $ 21,271 $ (3,625) -17.0%
Renewal 29,487 25,896 3,591 13.9
--------------------------
-------------------------
Total 47,133 47,167 (34) (0.1)
Commission expense 18,919 26,122 (7,203) (27.6)
------------------------- --------------------------
Gross profit 28,214 21,045 7,169 34.1
% of revenue 59.9% 44.6% - -
------------------------- --------------------------
Expenses
General and administrative 15,086 11,034 4,052 36.7
% of revenue 32.0% 23.4% - -
Amortization of intangibles 1,881 1,381 500 36.2
% of revenue 4.0% 2.9% - -
------------------------- --------------------------
------------------------- --------------
Total 16,967 12,415 4,552 36.7
Operating income $ 11,247 $ 8,630 $ 2,617 30.3%
% of revenue 23.9% 18.3% - -
========================= ==========================
</TABLE>
<PAGE>
Bank Compensation Strategies
For the quarter, Bank Compensation Strategies revenues were 13% better than
the comparable quarter of 1999. First year revenue was up $520,000 or 11.2% and
renewals increased $390,000 or 16.6%. Gross profits improved from 51.7% of
revenue last year to 64.6% in the 2000 quarter.
For the nine months to date, revenues were up 12.6% or $2.5 million as BCS
continued to benefit from its recent acquisitions. Of equal importance was a
27.8% improvement in gross profit margins also as a result of acquiring in-house
producers. Operating expenses were $2.8 million or 35.1% higher than the year to
date 1999 results as BCS absorbs its recent acquisitions.
<TABLE>
<S> <C> <C> <C> <C>
Three Months Ended September 30,
-------------------------------------
2000 1999 2000 1999
Operating Results Variances - +/(-)
Revenue
First year $ 5,173 $ 4,653 $ 520 11.2%
Renewal 2,739 2,349 390 16.6
--------------------------
-------------------------
Total 7,912 7,002 910 13.0
Commission expense 2,802 3,384 (582) (17.2)
------------------------- --------------------------
Gross profit 5,110 3,618 1,492 41.2
% of revenue 64.6% 51.7% - -
------------------------- --------------------------
Expenses
General and administrative 3,415 2,884 531 18.4
% of revenue 43.2% 41.2% - -
Amortization of intangibles 297 212 85 40.1
% of revenue 3.8% 3.0% - -
------------------------- --------------------------
------------------------- --------------
Total 3,712 3,096 616 19.9
Operating income $ 1,398 $ 522 $ 876 167.8%
% of revenue 17.7% 7.5% - -
========================= ==========================
Nine Months Ended September 30,
-------------------------------------
2000 1999 2000 1999
Operating Results Variances - +/(-)
Revenue
First year $ 15,182 $ 14,119 $ 1,063 7.5%
Renewal 7,629 6,147 1,482 24.1
--------------------------
-------------------------
Total 22,811 20,266 2,545 12.6
Commission expense 9,828 10,111 (283) (2.8)
------------------------- --------------------------
Gross profit 12,983 10,155 2,828 27.8
% of revenue 56.9% 50.1% - -
------------------------- --------------------------
Expenses
General and administrative 10,775 7,976 2,799 35.1
% of revenue 47.2% 39.4% - -
Amortization of intangibles 886 641 245 38.2
% of revenue 3.9% 3.2% - -
------------------------- --------------------------
------------------------- --------------
Total 11,661 8,617 3,044 35.3
Operating income $ 1,322 $ 1,538 $ (216) -14.0%
% of revenue 5.8% 7.6% - -
========================= ==========================
</TABLE>
<PAGE>
HealthCare Compensation Strategies
HealthCare Compensation Strategies revenues for the third quarter were
comparable to the third quarter of 1999. First year revenue declined $1.2
million while renewals were up by $1.1 million as HCS continued to experience
the effects of the financially depressed health care industry. Gross profit of
88.3% for the first quarter of 2000 was almost identical to the 88.6% of the
comparable 1999-quarter.
We did not own HCS until the second quarter of 1999 so the year to date
results are not comparable.
<TABLE>
<S> <C> <C> <C> <C>
Three Months Ended September 30,
-------------------------------------
2000 1999 2000 1999
Operating Results Variances - +/(-)
Revenue
First year $ 4,506 $ 5,694 $ (1,188) -20.9%
Renewal 1,490 402 1,088 270.6
-------------------------- ---------------------------
Total 5,996 6,096 (100) (1.6)
Commission expense 704 692 12 1.7
------------------------- --------------------------
Gross profit 5,292 5,404 (112) (2.1)
% of revenue 88.3% 88.6% - -
------------------------- --------------------------
Expenses
General and administrative 4,327 4,014 313 7.8
% of revenue 72.2% 65.8% - -
Amortization of intangibles 448 514 (66) (12.8)
% of revenue 7.5% 8.4% - -
------------------------- --------------------------
------------------------- --------------
Total 4,775 4,528 247 5.5
Operating income $ 517 $ 876 $ (359) -41.0%
% of revenue 8.6% 14.4% - -
========================= ==========================
Nine Months Ended September 30,
-------------------------------------
2000 1999 2000 1999
Operating Results Variances - +/(-)
Revenue
First year $ 12,611 $ 9,501 $ 3,110 32.7%
Renewal 4,233 2,497 1,736 69.5
----------------------------- --------------------------
Total 16,844 11,998 4,846 40.4
Commission expense 1,921 1,438 483 33.6
------------------------- --------------------------
Gross profit 14,923 10,560 4,363 41.3
% of revenue 88.6% 88.0% - -
------------------------- --------------------------
Expenses
General and administrative 12,793 8,069 4,724 58.5
% of revenue 75.9% 67.3% - -
Amortization of intangibles 1,349 987 362 36.7
% of revenue 8.0% 8.2% - -
------------------------- --------------------------
------------------------- --------------
Total 14,142 9,056 5,086 56.2
Operating income $ 781 $ 1,504 $ (723) -48.1%
% of revenue 4.6% 12.5% - -
========================= ==========================
</TABLE>
<PAGE>
Pearl Meyer & Partners
Pearl Meyer & Partners is our executive compensation consulting division.
It was acquired on June 21, 2000 and the results reflect the operations from
that date to September 30. Despite producing only 8.3% of revenue for the
quarter, this new division contributed 14.3%, our operating income before
amortization.
<TABLE>
<S> <C> <C> <C> <C>
Three Months Ended September 30,
-------------------------------------
2000 1999 2000 1999
Operating Results Variances - +/(-)
Revenue
First year $ 2,860 $ - $ 2,860 -
Renewal - - - -
-------------------------- ------------------------
Total 2,860 - 2,860 -
Commission expense - - - -
------------------------- --------------------------
Gross profit 2,860 - 2,860 -
% of revenue 100.0% - - -
------------------------- --------------------------
Expenses -
General and administrative 2,141 - 2,141 -
% of revenue 74.9% - -
Amortization of intangibles 293 - 293 -
% of revenue 10.2% - - -
------------------------- --------------------------
------------------------- --------------
Total 2,434 - 2,434 -
Operating income $ 426 $ - $ 426 -
% of revenue 14.9% - - -
========================= ==========================
Nine Months Ended September 30,
-------------------------------------
2000 1999 2000 1999
Operating Results Variances - +/(-)
Revenue
First year $ 3,066 $ - $ 3,066 0.0%
Renewal - - - -
------------------------- --------------------------
Total 3,066 - 3,066 -
Commission expense - - - -
------------------------- --------------------------
Gross profit 3,066 - 3,066 -
% of revenue 100.0% _ _ - -
------------------------- --------------------------
Expenses
General and administrative 2,206 - 2,206 -
% of revenue 72.0% - - -
Amortization of intangibles 327 - 327 -
% of revenue 10.7% - - -
------------------------- -------------------------
Total 2,533 - 2,533 -
Operating income $ 533 - $ 533 -
% of revenue 17.4% - - -
========================= ==========================
</TABLE>
<PAGE>
Results Attributable to Acquisitions
As an acquirer, our operating results are significantly influenced by the
contribution of our acquired businesses. For reporting purposes, we consider any
business not appearing in four complete quarters of operating results as being
from acquisitions. After that, they become part of existing business. An
analysis of our operating results, separating acquisitions from existing
businesses is as follows:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Three Months Ended Three Months Ended
September 30, 2000 September 30, 1999
Existing Acquisitions Combined Existing Acquisitions Combined
Revenue
First year $ 14,622 $ 5,223 $ 19,845 $ 8,689 $ 5,694 $ 14,383
Renewal 13,555 1,246 14,801 10,869 402 11,271
---------------------------------------- ---------------------------------------
Total 28,177 6,469 34,646 19,558 6,096 25,654
Commission expense 16,445 (4,688) 11,757 10,792 (335) 10,457
---------------------------------------- ---------------------------------------
Gross profit 11,732 11,157 22,889 8,766 6,431 15,197
General and administrative expense 12,872 5,002 17,874 7,132 4,199 11,331
---------------------------------------- ---------------------------------------
Operating income before amortization (1,140) 6,155 5,015 1,634 2,232 3,866
Amortization of intangibles 1,018 915 1,933 595 642 1,237
---------------------------------------- ---------------------------------------
Operating income $ (2,158) $ 5,240 $ 3,082 $ 1,039 $ 1,590 $ 2,629
======================================== =======================================
Nine Months Ended Nine Months Ended
September 30, 2000 September 30, 1999
Existing Acquisitions Combined Existing Acquisitions Combined
Revenue
First year $ 43,179 $ 5,429 $ 48,608 $ 29,961 $ 14,929 $ 44,890
Renewal 40,302 1,246 41,548 30,797 3,743 34,540
---------------------------------------- ---------------------------------------
Total 83,481 6,675 90,156 60,758 18,672 79,430
Commission expense 37,408 (6,739) 30,669 35,758 1,914 37,672
---------------------------------------- ---------------------------------------
Gross profit 46,073 13,414 59,487 25,000 16,758 41,758
General and administrative expense 41,265 5,736 47,001 17,968 11,821 29,789
---------------------------------------- ---------------------------------------
Operating income before amortization 4,808 7,678 12,486 7,032 4,937 11,969
Amortization of intangibles 2,127 2,470 4,597 1,305 1,704 3,009
---------------------------------------- ---------------------------------------
Operating income $ 2,681 $ 5,208 $ 7,889 $ 5,727 $ 3,233 $ 8,960
======================================== =======================================
</TABLE>
Caution should be observed in analyzing and evaluating the foregoing. While
acquisitions have made, and will continue to make, a substantial contribution to
our operating performance and growth, the resources dedicated to our acquisition
program could have had an impact on the performance of the existing business had
the acquisitions not been made.
Corporate General and Administrative Expenses
In 1999, we established a corporate executive and administrative office in
North Barrington, Illinois to provide direction and coordination for our
financial, strategic planning and human resources activities. During the third
quarter, expenses were $2.9 million up $2.2 million over the third quarter of
last year. For the nine months ended September 30, 2000, expenses were $6.5
million compared with $2.7 million last year.
The year to date expenses is not comparable because the Corporate office
was not formally established until the third quarter of 1999 and staffing and
other expenses did occur until after September 1, 1999.
Interest Expense - Net
Interest expense of $1.4 million for the three months ended September 30,
2000 was $616,000 or 77.9% more than the same quarter last year. For the year to
date, interest expense of $3.1 million exceeded last year's to date by $896,000
or 40.5%.
<PAGE>
The year to date increase results from increased borrowing for acquisitions
- notably Compensation Resource Group, Pearl Meyer & Partners and Insurance
Alliances Group - and an increase in interest rates of over 25% during the last
eighteen months.
Income Taxes
Income taxes for the quarter were $514,000, reflecting an effective rate of
30.7% and $1.7 million for the year to date on an effective rate of 35%, our
anticipated rate for the full year 2000. For the same periods last year, income
taxes were $804,000 for the quarter and $2.8 million year to date showing
effective rates of 43.7% and 41.6%, respectively.
The decrease in the effective tax rate results primarily from the recovery
of prior years state taxes of approximately $480,000. This is a non-recurring
benefit. For succeeding years, we expect our income tax rate to be 37.5%.
Quarterly Results
The following table presents a summary of key revenue and expense
statistics for the most recent eight calendar quarters. This information is not
necessarily indicative of results for any full year or for any subsequent
period.
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Dec Mar Jun Sep Dec Mar Jun Sep
1998 1999 1999 1999 1999 2000 2000 2000
Revenue $ 28,141 $24,057 $29,714 $ 25,655 $41,335 $ 31,147 $ 24,364 $34,646
% of last twelve months 37.6% 28.3% 29.8% 23.9% 34.2% 24.4% 19.9% 26.3%
Gross profit 11,285 9,874 16,681 15,199 25,899 20,263 16,336 22,888
Ratio 40.1% 41.0% 56.1% 59.2% 62.7% 65.1% 67.0% 66.1%
Operating expenses 6,594 6,255 12,202 11,332 15,364 15,013 14,114 17,875
Amortization 434 620 1,152 1,237 1,361 1,335 1,329 1,933
Operating income 4,257 2,999 3,327 2,630 9,174 3,915 893 3,080
% of revenue 15.1% 12.5% 11.2% 10.3% 22.2% 12.6% 3.7% 8.9%
% of gross profit 37.7% 30.4% 19.9% 17.3% 35.4% 19.3% 5.5% 13.5%
</TABLE>
Our operating results can fluctuate considerably when compared on a
consecutive quarterly basis. Because many of our programs are implemented late
in the year, we can experience large increases in both first year and renewal
revenue in the fourth calendar quarter. Operating results may be affected by a
number of other factors, including:
o introduction of new or enhanced programs and services by us or our
competitors;
o client acceptance or rejection of new programs and services;
o program development expenses; and,
o timing of major sales.
Many of these factors are beyond our control and sales cycles can often
take between twelve and eighteen months. In our industry, past operating results
is not a reliable indicator of future performance, particularly on a quarterly
basis.
<PAGE>
Liquidity and Capital Resources
Selected Measures
As of September 30,
2000 1999
---- ----
Cash and cash equivalents $ 6,177 $ 4,832
Working Capital (3,441) (2,768)
Current ratio (to one) .88 .90
Shareholders' equity per common share (1) $ 8.25 $ 6.48
Debt to total capitalization (2) 38.2% 40.7%
(1) total stockholders' equity divided by actual shares outstanding excluding
stock options
(2) current debt plus long term debt divided by current debt plus
long term debt plus stockholders' equity
In addition to our recognized balance sheet assets and liabilities, we have
an on going renewal revenue stream, estimated to be $527.2 million, over the
next ten years. The following table represents the projected gross revenue
associated with our inforce business-owned life insurance policies as of
September 30, 2000. They have not been adjusted for mortality, lapse, or other
factors that may reduce their value. We cannot assure you that commissions under
any of these policies will be received. These projected gross revenues are based
on the beliefs and assumptions of management and are not necessarily indicative
of the revenue that may actually be achieved in the future. Renewal revenue can
be affected by policy surrenders or exchanges, contract changes, asset growth
and mortality rates.
Over the last five years, we have experienced a persistency rate of
approximately 95% of the inforce insurance underlying our programs. As we
continue to diversify and acquire companies specializing in different market
segments, our persistency rates can vary significantly. While we intend to do
all we can to retain our clients, service their accounts and sustain our
persistency, there can be no assurance our persistency rates will remain at this
level.
Projected Gross Renewal Revenue
September 30, 2000
Clark/Bardes
Consulting -- Bank Healthcare
Compensation Compensation Compensation
Resource Group Strategies Strategies Total
2001 $ 54,574 $ 9,594 $ 6,423 $ 70,591
2002 52,473 6,505 7,361 66,339
2003 46,790 4,292 7,271 58,353
2004 40,880 4,318 7,170 52,368
2005 39,292 4,318 6,964 50,574
2006 37,918 4,336 6,705 48,959
2007 35,224 4,358 6,451 46,033
2008 34,280 4,374 6,230 44,884
2009 34,436 4,388 5,777 44,601
2010 34,898 4,392 5,245 44,535
----------------- ----------------- ---------------- ---------------
Total $ 410,765 $ 50,875 $ 65,597 $ 527,237
=============== ======== ================= ===========
<PAGE>
As a financial company with strong operating cash flow and an accessible
working capital line of credit, we believe we have little reason to retain
substantial cash balances. We use the net cash flow from operating activities to
fund capital expenditures and small acquisitions. We expect that large future
acquisitions will be financed primarily through externally available funds.
However, we can offer no assurance that such funds will be available and, if so,
on terms acceptable to us. Summarizing our cash flow:
Nine Months Ended
September 30,
2000 1999
---- ----
Cash flows from (used in):
Operations $ 10,475 $ 10,609
Investing (56,695) (59,791)
Financing 47,565 40,485
Cash Flows from Operating Activities
Our cash flow from operations for the nine months ended September 30, 2000,
compared with the same nine-month period in 1999, was as follows:
Nine Months Ended Increase
September 30, (Decrease)
-------------
2000 1999 In Cash
---- ---- -------
Net income plus non-cash expenses $ 8,873 $ 7,511 $ 1,362
Changes in operating assets and liabilities 1,602 3,098 (1,496)
---------- ---------- -----------
Cash flow from operating activities $ 10,475 $ 10,609 $ (134)
=========== ============= ==========
Our continued strong cash flow from operations allows us to pay down
acquisition debt and continue our acquisition program. We make significant use
of borrowings to finance our acquisitions. Because of these factors, management
has determined to dedicate all excess cash to the reduction of bank borrowings
and, as a result only cash for reasonably foreseeable needs and expenses is
retained.
Cash Used in Investing Activities
For the nine months to date, acquisitions accounted for $52.7 million of
the $56.7 million cash used in investing activities. The balance was comprised
of $2.8 million for purchase of equipment and various assets such as deferred
debt expenses.
Cash Flows from Financing Activities
We presently have a $114.3 million credit facility with a group of banks.
Loans bear interest at a floating rate based on the London InterBank Offered
Rate at the time of borrowing or prime rate at due dates. On August 29, 2000,
CBH's group of lending banks expanded the line of credit from $100.0 to $114.3
million and added another lending bank to the group. The most significant change
in the agreement was the increase in the working capital limit from $5 million
to $10 million and the expansion of the borrowing base. The loan matures on
December 31, 2004, with interest and principal payable quarterly starting March
31, 2000. The credit agreement contains restrictive covenants including the
requirement that all acquisitions in excess of $25 million per year be
pre-approved by the lenders.
On September 11, 2000, we sold 1.9 million shares of registered common
stock to a group of investors, in a private placement, for $13.50 per share. The
net proceeds were $25.1 million and were used for debt reduction and the
acquisition of Compensation Resource Group.
We believe that our net cash flow from operations will continue to provide
sufficient funds to service our debt obligations. We estimate renewal revenue in
future periods, which is not reflected on our balance sheet, to be approximately
$298.2 million over the next five years. However, renewal revenue can be
adversely affected by policy surrenders or exchanges, material contract changes,
asset growth and case mortality rates.
<PAGE>
As our business grows, our working capital and capital expenditures
requirements will also continue to increase. There can be no assurance, however,
that the net cash flows from operations will be sufficient to meet our
anticipated requirements, or that we will not require additional debt or equity
financing. We may continue to issue stock to finance future acquisitions.
Intangible Assets
When we acquire a company, we normally acquire little in the way of
tangible assets such as receivables, furniture and the like. Therefore,
virtually the entire purchase price is allocated to intangible assets.
Intangible assets arising from purchased businesses are our largest and most
important financial assets. Two important elements of our intangible assets
affect our cash flow:
1) the present value of inforce revenue is the net discounted cash flow
from the book of business of those companies having future renewal
revenue at the time we acquired them; and,
2) a potential future tax benefit over the next fifteen years.
Approximately $141.1 million of our gross intangible assets are
expected to be tax deductible.
Intangible assets arising from our purchased businesses consist of the
following:
September 30, December 31,
2000 1999
---- ----
Present value of future cash flows from inforce
revenue...................................... $ 92,932 $ 62,132
Goodwill.......................................... 71,355 36,427
Non-competition agreements........................ 1,750 1,750
----------- --------------
166,037 100,309
Accumulated amortization.......................... (10,496) (5,318)
------------ ---------------
Net.............................................. $155,541 $ 94,991
============ ==============
As a percent of:
Total assets....................................... 80.5% 76.1%
Stockholders' equity............................... 149.2% 152.3%
The amounts allocated to inforce revenue are determined using the
discounted cash flow of future commissions 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 its period of duration, which is normally twenty to thirty years.
Many factors outside our control determine the persistency of our inforce
business and we cannot be sure that the values we allocated will ultimately be
realized.
Goodwill had been amortized over periods of twenty to forty years. In
anticipation of new rules governing amortization expected to be promulgated by
the Financial Accounting Standards Board, goodwill arising from new acquisitions
is amortized over a period not to exceed twenty years. Non-competition
agreements are amortized over five to ten years, according to the terms of the
agreements.
We have adopted Statement of Financial Accounting Standard No. 121
"Accounting for Impairment of Long Lived Assets and Long Lived Assets To Be
Disposed Of." On an annual basis, we review the components of our intangible
assets and make appropriate adjustments if it becomes apparent that the
undiscounted cash flow is less than its unamortized carrying amount. No growth
rates are used in the projection of renewal revenue and, in the opinion of
management, projections are consistent in all respects. If any component of the
inforce revenue base should become unrealizable or accounting regulatory
agencies impose shorter amortization periods, this could have a material adverse
effect on our business, financial condition and operating results. We cannot
assure you that a component of the inforce revenue base will not become
unrealizable or that accounting regulatory bodies will not impose shorter
amortization periods.
<PAGE>
Market Risk
Our primary market risk exposure is to changes in interest rates on
borrowings under our credit agreement. We have a credit facility of $114.3
million with a group of bank lenders. The credit facility provides for a
revolving credit and a term loan. Interest on borrowings under our line of
credit is based on one of two factors, at our option, at the time the funds are
borrowed:
o U. S. prime rate, published in the Wall Street Journal, which will
float for as long as this segment of borrowing is outstanding; or,
o London InterBank offered rate, which is based on the published rate at
the time of the borrowing and will remain fixed at that rate for as
long as this segment of the borrowing is outstanding.
At December 31, 1999, we had total outstanding indebtedness of $42.7
million, or approximately 30.9% of total market capitalization. At September 30,
2000, we had total outstanding indebtedness of $64.6 million or 33.3% of total
market capitalization. Our interest rate risk objective is to limit the impact
of rate fluctuations on earnings and cash flows. To achieve this objective, we
manage our exposure to fluctuations in interest rates through the use of fixed
rate debt instruments to the extent that reasonably favorable rates are
obtainable, and use the interest rate swaps to mitigate interest rate risk and
to effectively lock the interest rate on a portion of our variable debt.
Coincident with the credit facility, we entered into three interest rate
swap agreements with a bank affiliated with the lending group to set the
interest rates. The first agreement, accounted for as interest expense, went
into effect on July 6, 1999, and sets the underlying LIBOR-based interest rate
at 5.76% on $12.8 million of the debt. The second agreement went into effect on
January 18, 2000, and sets the underlying LIBOR-based rate at 5.29% on $13.5
million of the debt. The third agreement went into effect on June 29, 2000, and
sets the underlying LIBOR rate at 7.24% on $20.0 million of our debt. In the
third quarter and year-to-date, these agreements provided savings of $59,000 and
$150,000 respectively.
We do not enter into derivative or interest rate transactions for
speculative purposes. Approximately 7.7% of our outstanding debt was at the
prime rate of 9.5% plus the applicable spread at September 30, 2000. An
additional 71.6% of our outstanding debt at September 30, 2000, was effectively
locked at an interest rate of 6.2% through an interest rate swap agreement for a
notional amount of $46.3 million. While these hedges effectively reduce our
overall cost of borrowings, it should not be inferred that we can borrow at
these reduced rates. Our ability to control interest rates through swap
agreements is limited to the notional amounts under those agreements with such
notional amounts declining on a quarterly basis.
Inflation
Inflation has not had a material effect on our results of operations.
Certain of our expenses, such as compensation, benefits and capital equipment
costs, are subject to normal inflationary pressures. However, the majority of
our service and administrative agreements with clients, which generate fee
income, have a cost of living adjustment tied to the consumer price index.
Management believes that future inflationary pressures will continue to be
offset, because as inflation increases, investment returns will also increase,
resulting in higher cash values and higher commission rates.
Recent Accounting Pronouncements
FASB Accounting Standard - Derivatives and Hedging Activities
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This statement requires that all
derivatives be measured at fair value and recognized as either assets or
liabilities on our balance sheet. Changes in the fair values of derivative
instruments will be recognized in either earnings or comprehensive income,
depending on the designated use and effectiveness of the instruments. The FASB
amended this pronouncement in June 1999 to defer the effective date of SFAS No.
133 for one year. We must adopt SFAS No. 133 no later than January 1, 2001.
<PAGE>
Because of CBH's minimal use of derivatives, management does not anticipate
that the adoption of the new Statement will have a significant effect on
earnings or the financial position of CBH.
FASB Interpretation - Stock Compensation
In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation". Interpretation No. 44 was
issued in order to clarify issues arising from Accounting Principles Board (APB)
Opinion No. 25 "Accounting for Stock Issued to Employees," which was previously
issued in October 1972. Interpretation No. 44 is effective July 1, 2000, but
certain conclusions cover specific events that occur either after December 15,
1998 or January 12, 2000.
The main issues addressed by Interpretation No. 44 are: (a) the definition
of an employee for purposes of applying APB Opinion No. 25, (b) the criteria for
determining whether a plan qualifies as a non-compensatory plan, (c) the
accounting consequences of modifications to the terms of a previously fixed
stock option award, and (d) the accounting for an exchange of stock compensation
awards in a business combination.
The adoption of Interpretation No. 44 did not have a material impact on
CBH's results of operations or financial position.
SEC Staff Accounting Bulletin - Revenue Recognition
In December 1999, the SEC issued Staff Accounting Bulletin (SAB) No. 101,
"Revenue Recognition in Financial Statements," which currently must be adopted
for years ending after December 15, 2000. SAB No. 101 provides additional
guidance on revenue recognition, as well as criteria for when revenue is
realized and earned.
We do not expect that SAB No. 101 to have a material impact on results of
operations or financial position.
ITEM 3A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information required by this item is incorporated by reference from the
Liquidity and Capital Resources section of "Item 2. Management's Discussion and
Analysis of Financial Condition and Results of Operations" in pages 27 through
28 of this Form 10-Q.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On July 25, 2000, Constellation Energy Group, Inc. ("Constellation") filed
a civil action against Clark/Bardes, Inc., ("CBI"), a wholly owned subsidiary of
CBH, in the United States District Court for the District of Maryland. The suit
asserts a claim of $7.5 million with pre-judgment and post-judgment interest,
costs and expenses and such other relief as the court deems proper against CBI
under ERISA for breach of fiduciary duty in connection with the administration
of benefit plans for Baltimore Gas and Electric Company and state common law
claims for breach of contract, professional negligence and breach of fiduciary
duty.
CBI denies each and all of the allegations in the Constellation action and
intends to vigorously defend itself. As previously disclosed, CBI has entered
into an agreement by which the parties agreed to attempt to resolve their
differences in a non-litigious manner and we are still hopeful of doing that.
Constellation has been a CBI client since January 1993 and CBI believes
this action is without merit. However, there can be no assurance that this
matter will be resolved in CBI's favor. In this event, we believe our exposure,
if any, is fully insured.
<PAGE>
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On September 11, 2000, CBH sold 1,888,887 shares of its $.01 par value
common stock to a group of private investors for $13.50 per share. The shares
were registered for sale in a prospectus filed with the Securities and Exchange
Commission that became effective on September 26, 2000 thus allowing the
investor group to sell the shares at any time.
The net proceeds from the sale were $25.1 and was used partially to acquire
CRG and to pay bank debt.
Item 6. Exhibits and Reports On Form 8-K
(a) The list of exhibits required by this Item 6 (a) appears on the Exhibit
Index Attached hereto.
(b) Reports in Form 8-K.
On August 29, 2000, CBH filed with the SEC a Current Report on Form 8-K,
dated August 24, 2000. The Current Report on Form 8-K relates to the resignation
of Melvin G. Todd from his position of President of Clark/Bardes division.
On September 20, 2000, CBH filed with the SEC a Current Report on Form 8-K,
dated September 6, 2000. The Current Report on Form 8-K relates to the
consummation of the merger between CBH and Compensation Resource Group, Inc.
On September 22, 2000, CBH filed with the SEC a Current Report on Form 8-K,
dated July 25, 2000. The Current Report on Form 8-K relates to the filing of a
civil action by Compensation Resource Group, Inc. against CBH arising from the
merger between the two.
On November 6, 2000, CBH filed with the SEC a Current Report on Form 8-K,
dated September 6, 2000. The Current Report on Form 8-K relates to the
consummation of the merger between CBH and Compensation Resource Group, Inc.
<PAGE>
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 November 14, 2000 CLARK/BARDES HOLDINGS, INC.
Date November 14, 2000 /s/ W. T. Wamberg
-----------------------------------
W. T. Wamberg
President and Chief Executive Officer
Date November 14, 2000 /s/ Thomas M. Pyra
--------------------------------------
Thomas M. Pyra
Vice President and Chief Financial
Officer (Principal Financial Officer)
