<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED):
SEPTEMBER 6, 2000
CLARK/BARDES HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 000-24769 52-2103926
(State of incorporation) (Commission file number) (IRS employer
identification no.)
102 SOUTH WYNSTONE PARK DRIVE, #200
NORTH BARRINGTON, ILLINOIS 60010
(ADDRESS AND ZIP CODE OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(847) 304-5800
<PAGE> 2
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On September 6, 2000, Clark/Bardes Holdings, Inc. ("CBH"), a Delaware
corporation, and Clark/Bardes Acquisition, Inc., ("CBA") a Delaware corporation
and wholly owned subsidiary of Clark/Bardes Holdings, Inc., consummated the
merger contemplated under the Agreement of Merger and Plan of Reorganization
(the "Agreement") by and among CBH, CBA, Compensation Resource Group, Inc.
("CRG"), a California corporation, and William MacDonald, Sr. ("MacDonald")
(collectively, the "Sellers"). The Agreement provides for, among other things,
the acquisition by CBH of the businesses and all of the stock of CRG for a
purchase price of approximately $25.3 million consisting of:
(i) a cash payment by wire transfer to the CRG shareholders Sellers of
$6.3 million;
(ii) 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 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.
The purchase price was determined by an arm's length negotiation among the
parties to the Agreement.
In connection with the Merger, MacDonald's employment agreement with CRG was
amended and restated to, among other things, terminate MacDonald's right to
receive a portion of future commissions on in-force policy premiums, which will
instead accrue to the benefit of CBA or its affiliates. In consideration for the
termination of Macdonald's right to the premiums, CBH made a loan to MacDonald
in the amount of $5.2 million, which loan will be forgiven or, in certain
circumstances, repaid.
CRG is an executive compensation and benefits organization providing services
related to the design, funding and administration of non-qualified plans. CRG is
headquartered in Los Angeles, California and has affiliate offices in eleven
other cities. Prior to the acquisition described above, there was no material
relationship between any of the Sellers and Clark/Bardes or any of its
affiliates, any directors or officers of Clark/Bardes, or any associate of any
such director or officer.
The $24.5 million cash portion of the purchase prices was funded by a borrowing
under CBI's existing credit facility with Bank One.
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.
<PAGE> 3
ITEM 7. PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(a) FINANCIAL STATEMENT OF BUSINESS ACQUIRED
The Independent Auditor's Report dated September 22, 2000, and the
following audited financial statements of Compensation Resource
Group, Inc. and Subsidiaries are included herein:
(i) Independent Auditor's Report;
(ii) Consolidated Balance Sheets as of June 30, 2000 and 1999;
(iii) Consolidated Statements of Operations for the years ended
June 30, 2000 and 1999;
(iv) Consolidated Statements of Changes in Stockholder's Equity
for the years ended June 30, 2000 and 1999.
(v) Consolidated Statements of Cash Flows for the years ended June
30, 2000 and 1999.
The following unaudited financial statements of Compensation
Resource Group, Inc. and Subsidiaries, Inc. are included herein:
(i) Balance Sheets as of December 31, 1999; and
(ii) Statements of Income for the six months ended June 30, 2000
and 1999.
(b) PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial statements of the
Company are included herein:
(i) Unaudited Pro Forma Balance Sheets as of June 30, 2000 and
December 31, 1999; and
(ii) Unaudited Pro Forma Income Statements for the years ended
December 31, 1999 and the six month period ended June 30, 2000.
<PAGE> 4
[KPMG LOGO]
COMPENSATION RESOURCE GROUP, INC.
AND SUBSIDIARIES
Consolidated Financial Statements
June 30, 2000 and 1999
(With Independent Auditors' Report Thereon)
<PAGE> 5
[KPMG LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Compensation Resource Group, Inc.:
We have audited the accompanying consolidated balance sheets of Compensation
Resource Group, Inc. and subsidiaries as of June 30, 2000 and 1999 and the
related consolidated statements of operations, changes in stockholders' equity
(deficiency) and cash flows for the years then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Compensation
Resource Group, Inc. and subsidiaries as of June 30, 2000 and 1999 and the
results of their operations and their cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States of
America.
/s/ KPMG LLP
October 16, 2000
<PAGE> 6
COMPENSATION RESOURCE GROUP, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 84,372 211,140
Receivables, net of allowance for doubtful accounts of
$486,010 and $75,000 in 2000 and 1999, respectively 2,612,642 4,961,573
Advances to employees 875,879 1,020,122
Prepaid expenses 189,572 375,156
Income tax receivable 690,814 463,238
Deferred tax asset 1,762,063 153,894
------------ ------------
Total current assets 6,215,342 7,185,123
Furniture, fixtures and improvements, net 959,283 1,149,586
Cash surrender value of life insurance policies 261,497 230,767
Notes receivable from stockholder 245,000 1,061,283
Deferred tax asset 151,733 162,838
Intangible assets 7,367,609 8,234,381
Other assets 469,059 675,246
------------ ------------
$ 15,669,523 18,699,224
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable and accrued expenses $ 4,216,466 3,175,588
Accrued compensation 1,384,657 955,824
Amounts payable to stockholders 324,425 566,651
Short-term debt 5,347,939 3,378,357
Lease obligations 157,324 152,022
------------ ------------
Total current liabilities 11,430,811 8,228,442
Long-term debt 7,225,000 9,000,000
Lease obligation 134,197 290,898
------------ ------------
Total liabilities 18,790,008 17,519,340
------------ ------------
Stockholders' equity (deficiency):
Common stock, no par value. Authorized 1,176,470 shares;
issued and outstanding 1,008,633 and 1,020,883 shares in
2000 and 1999, respectively 286,212 322,505
Contributed capital 68,982 68,982
Unearned compensation (318) (30,976)
(Accumulated deficit) retained earnings (2,448,131) 819,373
------------ ------------
(2,093,255) 1,179,884
Note receivable from stockholder (1,027,230) --
------------ ------------
Net stockholders' equity (deficiency) (3,120,485) 1,179,884
------------ ------------
$ 15,669,523 18,699,224
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE> 7
COMPENSATION RESOURCE GROUP, INC.
AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended June 30, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
Revenues:
Commissions $ 22,086,083 19,796,900
Consulting and service fees 3,899,463 7,189,102
Other 300,588 140,850
------------ ------------
26,286,134 27,126,852
------------ ------------
Expenses:
Salaries and employee benefits 18,839,897 16,951,258
Commissions and selling fees 1,985,844 1,681,947
Furniture, fixtures and improvements 1,295,754 1,269,583
Office and occupancy 2,759,166 2,417,611
Business development and travel 2,571,950 2,173,251
Amortization 866,772 433,386
Interest 1,231,661 633,523
Professional fees 914,272 719,201
Professional activities 774,748 802,064
Delivery and printing 453,296 361,012
------------ ------------
31,693,360 27,442,836
------------ ------------
Loss before income taxes (5,407,226) (315,984)
Income tax expense (benefit) (2,139,722) (361,437)
------------ ------------
Net (loss) income $ (3,267,504) 45,453
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 8
COMPENSATION RESOURCE GROUP, INC.
AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholder's Equity (Deficiency)
Years ended June 30, 2000 and 1999
<TABLE>
<CAPTION>
COMMON STOCK ACCUMULATED
-------------------------- CONTRIBUTED UNEARNED SURPLUS
SHARES AMOUNT CAPITAL COMPENSATION (DEFICIT) NET
---------- ---------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1998 1,091,957 $ 511,027 68,982 (163,861) 773,920 1,190,068
Amortization of unearned
compensation -- -- -- (52,083) -- (52,083)
Net income -- -- -- -- 45,453 45,453
Repurchase of common
stock (71,074) (188,522) -- 184,968 -- (3,554)
---------- ---------- ---------- ---------- ---------- ----------
Balance, June 30, 1999 1,020,883 322,505 68,982 (30,976) 819,373 1,179,884
Amortization of unearned
compensation -- -- -- (5,022) -- (5,022)
Net loss -- -- -- -- (3,267,504) (3,267,504)
Repurchase of common
stock (12,250) (36,293) -- 35,680 -- (613)
---------- ---------- ---------- ---------- ---------- ----------
1,008,633 286,212 68,982 (318) (2,448,131) (2,093,255)
Note receivable from
stockholder -- -- -- -- -- (1,027,230)
---------- ---------- ---------- ---------- ---------- ----------
Balance, June 30, 2000 1,008,633 $ 286,212 68,982 (318) (2,448,131) (3,120,485)
========== ========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 9
COMPENSATION RESOURCE GROUP, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended June 30, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (3,267,504) 45,453
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 1,307,238 948,296
Change in:
Deferred income taxes (1,597,064) 125,609
Receivables, net of allowance for doubtful accounts 2,348,931 (1,486,167)
Prepaid expenses 185,584 62,823
Cash surrender value of life insurance policies (30,730) (31,026)
Other assets 206,187 (187,387)
Accounts payable and accrued expenses 1,040,878 756,782
Accrued compensation 428,833 (974,295)
Amounts payable to stockholders (242,226) 136,192
Income taxes payable (227,576) (1,336,441)
------------ ------------
Net cash provided by (used in) operating activities 152,551 (1,940,161)
------------ ------------
Cash flows from investing activities:
Acquisition of furniture, fixtures and improvements, net (219,505) (641,292)
Net decrease in notes receivable from stockholder (210,947) (948,407)
Increase (decrease) in advances to employees 144,243 (130,033)
Increase in advances to stockholder -- 203,826
Payment for purchase of ECB and COLI -- (8,972,770)
------------ ------------
Net cash used in investing activities (286,209) (10,488,676)
------------ ------------
Cash flows from financing activities:
Proceeds from line of credit 1,969,582 2,828,357
Repayment of line of credit -- (900,000)
Proceeds from long-term debt -- 11,000,000
Repayment of long-term debt (1,775,000) (750,000)
Net additions under capital lease obligations (151,399) 337,399
Repurchase of common stock (36,293) (188,522)
------------ ------------
Net cash provided by financing activities 6,890 12,327,234
------------ ------------
Net decrease in cash (126,768) (101,603)
Cash at beginning of year 211,140 312,743
------------ ------------
Cash at end of year $ 84,372 211,140
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 919,193 431,836
Income taxes 64,970 849,394
Noncash activities--note receivable from stockholder 1,027,230 --
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 10
COMPENSATION RESOURCE GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000 and 1999
(1) ORGANIZATION AND DESCRIPTION OF BUSINESS
Compensation Resource Group, Inc. and subsidiaries (the Company) provide
services related to executive compensation and benefits planning,
focusing on the design, funding and administration of nonqualified
benefit plans.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries, CRG Insurance Agency,
Inc. (CRG), ECB Insurance Agency, Inc. (ECB), COLI Insurance
Agency, Inc. (COLI) and CRG Financial Services, Inc. (CRG
Financial Services). CRG, ECB and COLI are insurance agencies that
market life insurance products. CRG Financial Services is a
registered broker and dealer in securities under the Securities
and Exchange Act of 1934 and intends to sell variable life
insurance products. As of June 30, 2000, CRG Financial Services
has not conducted broker and dealer securities business. All
significant intercompany accounts and transactions have been
eliminated.
(b) USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
(c) REVENUE RECOGNITION
Commission revenue and related commission expense are recognized
and recorded in the period the insurance policies are issued by
the carrier. Consulting and service fee revenue are recognized and
recorded in the period in which services are rendered by the
Company.
(d) FURNITURE, FIXTURES AND IMPROVEMENTS
Furniture, fixtures and improvements are stated at cost, less
accumulated depreciation. Expenditures for additions, betterments
and major renewals, which substantially increase the useful life
of an asset, are capitalized.
The Company depreciates furniture and fixtures and computer
software using the declining-balance method over the useful lives
of the respective assets. Leasehold improvements are amortized on
a straight-line basis over the lesser of the asset life or the
lease term.
6 (Continued)
<PAGE> 11
COMPENSATION RESOURCE GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000 and 1999
(e) INCOME TAXES
The Company accounts for income taxes under the asset and
liability method. Under the asset and liability method, deferred
tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
(f) INTANGIBLE ASSETS
The Company's intangible assets are a result of the January 4,
1999 acquisition of ECB and COLI. Intangible assets include the
present value of future commissions and cost in excess of net
assets acquired. The Company amortizes intangible assets using the
straight-line method over a period of ten years. Recoverability is
reviewed as needed if events or changes in circumstances indicate
that the carrying amount may exceed fair value. Recoverability is
then determined by comparing the undiscounted net cash flows of
the assets to which the intangible assets apply to the net book
value, including intangible assets. Amortization expense in 2000
and 1999 was $866,772 and $433,388, respectively.
(3) ACQUISITION
On January 4, 1999, the Company acquired ECB and COLI. The acquisition
includes ECB and COLI's rights to prospective future commissions on life
insurance contracts. The total cash purchase price was $8,972,770. The
acquisition was accounted for by the purchase method.
Simultaneous with the acquisition, the Company's majority stockholder
purchased 88,235 shares of the Company's common stock from the previous
owner of ECB and COLI for $1,027,230.
Additionally, on January 4, 1999, the Company issued a $1,027,230 note
receivable to the Company's majority stockholder. The proceeds of the
note were used by the Company's majority stockholder to purchase 88,235
shares of the Company's common stock from the previous owner of ECB and
COLI (see note 11).
Results of operations of ECB and COLI are included in the consolidated
statements of operations since their acquisition in January 1999. ECB and
COLI accounted for $1,261,291 in commissions revenue and $177,730 in
expenses for 1999.
7 (Continued)
<PAGE> 12
COMPENSATION RESOURCE GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000 and 1999
(4) FURNITURE, FIXTURES AND IMPROVEMENTS
Furniture, fixtures and improvements at June 30, 2000 and 1999 are as
follows:
<TABLE>
<CAPTION>
2000 1999
---------- ----------
<S> <C> <C>
Furniture and fixtures $1,925,601 2,040,852
Leasehold improvements 134,737 134,737
Computer software 770,867 628,831
---------- ----------
2,831,205 2,804,420
Less accumulated depreciation and amortization 1,871,922 1,654,834
---------- ----------
$ 959,283 1,149,586
========== ==========
</TABLE>
Depreciation and amortization expense for furniture, fixtures and
improvements recorded in 2000 and 1999 were $409,808 and $382,025,
respectively. Property and equipment under capital leases of $627,343 and
$648,354 are included within the above captions together with accumulated
depreciation of $331,153 and $198,712 for the years ended June 30, 2000
and 1999, respectively.
(5) DEBT
The Company entered into a revolving credit agreement dated October 1,
1996 (the Credit Agreement) with an insurance carrier for which the
Company is a broker of their products. During the years ended June 30,
2000 and 1999, approximately 18% and 15%, respectively, of the Company's
commission revenue were earned on sales of the insurance carrier's
products. In addition to accrued interest, the Credit Agreement provides
for $400,000 of available borrowings. Interest accrues at Bank of
America, N.A.'s prime rate on the unpaid principal balance without
including previously accrued interest. The principal balance and all
accrued interest are due September 30, 2001. The insurance carrier has a
right of offset against any other amounts due the Company in the event of
default or an acceleration event, as defined in the Credit Agreement. In
addition to the Credit Agreement, the insurance carrier has made the
Company eligible for an additional cash bonus based upon the volume of
insurance brokered by the Company. The Company may, although is not
required to, use the cash bonus to repay some or all of any amounts due
under the Credit Agreement. At June 30, 2000 and 1999, the amount of
revolving credit borrowings outstanding under this agreement was
$400,000.
The Company had in place a $5,000,000 revolving credit agreement
(Revolving Credit Agreement) with a bank maturing on December 28, 1999.
On April 1, 2000, the maturity date was amended to September 1, 2000. The
Revolving Credit Agreement accrues interest at the bank's prime lending
rate (9.5% at June 30, 2000). The Revolving Credit Agreement is
guaranteed by another insurance carrier. The Company is a broker of the
insurance carrier's products. During the years ended June 30, 2000 and
1999, approximately 12% and 21%, respectively, of the Company's
commission revenue were earned on sales of the insurance carrier's
products. The principal terms of the Revolving Credit Agreement included:
(a) no additional debt borrowings other than the $400,000 line of credit,
$600,000 of capitalized lease obligations and
8 (Continued)
<PAGE> 13
COMPENSATION RESOURCE GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000 and 1999
(b) the Company pledged as collateral renewal commissions on insurance
products. At June 30, 2000 and 1999, the amount of revolving credit
borrowings outstanding under this agreement was $3,422,939 and
$1,728,357, respectively.
Effective January 4, 1999, the Company entered into a $11,000,000 term
loan agreement (1999 Loan) with the same bank as the Revolving Credit
Agreement. The proceeds of the 1999 Loan were used to acquire ECB and
COLI.
The 1999 Loan is guaranteed by the same insurance carrier as the
Revolving Credit Agreement. The 1999 Loan is to be fully amortized over
five years and requires monthly principal payments of $125,000 cash,
beginning February 4, 1999 through January 4, 2000. From February 4, 2000
through January 4, 2001, monthly principal payments are $150,000 each.
From February 4, 2001 through January 4, 2002 monthly principal payments
are $175,000 each. From February 4, 2002 through February 4, 2003 monthly
principal payments are $200,000 each. From February 4, 2003 through
February 4, 2004 monthly principal payments are $266,667 each. The 1999
Loan interest rate is equivalent to LIBOR rate plus 1% (7.19% at June 30,
2000).
In September 2000, the Credit Agreement, Revolving Credit Agreement and
the 1999 Loan were repaid by funds from Clark/Bardes Holdings, Inc., who
purchased the Company on August 31, 2000.
(6) COMMON STOCK
The Company periodically offers the opportunity to purchase shares of the
Company's common stock to certain directors and officers of the Company
for $.05 per share, in accordance with the terms of the Restricted Stock
Plan (the Plan).
The Plan restricts subsequent sales or transfers of the stock and
provides for a valuation of the shares based upon a formula of two times
the previous 12 months' net renewal commissions, plus the book value of
the Company, or in the case of a deficit, net of the Company's
deficiency. Shares vest five years after the date of grant or sooner
under certain conditions related to changes in ownership of the Company.
Plan provisions require the Company to repurchase stock from Plan
participants under certain circumstances.
The Company accounts for the Restricted Stock Plan as a compensating
stock plan. The difference between the issuance price and the price
determined at the date of grant is recognized as unearned compensation
and is shown as a separate reduction of stockholders' equity.
The unearned compensation is recognized as an expense over the vesting
periods. The Company recognized net compensation expense of $30,658 and
$132,885 in 2000 and 1999, respectively.
During fiscal years 2000 and 1999, no shares were issued in connection
with the Plan. In 2000, the Company reacquired at $.05 per share, 12,250
shares from a former employee in accordance with the Plan. In 1999, the
Company reacquired at $.05 per share 71,074 shares from former officers
in accordance with the Plan. At June 30, 2000, there are 2,750 shares
which have been issued, but are not fully vested, under the Plan. There
are no additional shares authorized for Plan use as of June 30, 2000. At
June 30, 1999, there are 101,750 shares which have been issued, but are
not fully vested, under the Plan. An additional 18,837 shares are
authorized for Plan use, but have not been issued as of June 30, 1999.
9 (Continued)
<PAGE> 14
COMPENSATION RESOURCE GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000 and 1999
In connection with the sale of the Company subsequent to year-end, the
Company's majority stockholder relinquished 88,235 shares of the
Company's common stock in exchange for the $1,027,230 note receivable.
Accordingly, the note receivable was reclassified as an equity account as
of June 30, 2000.
(7) STOCK OPTIONS
The Company may issue options to purchase shares of the Company's common
stock to certain officers and employees of the Company in accordance with
the terms of the Stock Option Agreement (the Option Agreement).
Stock options vest after a period of five years from the grant date and
carry an exercise price equal to the fair market value of the common
stock on the date granted. The Option Agreement provided for valuation of
the fair market value of the stock options based upon a formula of two
times the previous 12 months' net renewal commissions, plus the book
value of the Company, or in the case of a deficit, net of the Company's
deficiency. The stock options are exercisable for a ten-year term.
Stock option activity for fiscal years 2000 and 1999 was as follows:
<TABLE>
<CAPTION>
JUNE 30
--------------------------
2000 1999
---------- ----------
<S> <C> <C>
Outstanding at beginning of year 136,750 77,250
Granted 110,000 99,500
Exercised -- --
Forfeited (17,250) (40,000)
Expired -- --
---------- ----------
Outstanding at end of year 229,500 136,750
========== ==========
Exercisable at end of year -- --
========== ==========
</TABLE>
The fair market value of the stock options on the respective grant dates
approximates the fair market value of the common stock at June 30, 2000
and 1999. Stock options were issued with an exercise price of $11.64 in
fiscal years 2000 and 1999.
(8) LEASE OBLIGATIONS
The Company leases its primary office facilities and accounts for this
lease as an operating lease. The lease expires in June 2010. The Company
leases office facilities in Chicago, Cleveland, San Francisco, New York
and Atlanta. The Company is receiving free rent with graduated rental
increases throughout the term of the leases and has recorded within
accounts payable and accrued expenses $509,908 and $105,726 representing
deferred rent as of June 30, 2000 and 1999, respectively. The Company is
recognizing rent expense on a straight-line basis over the life of the
lease. Rent expense under these leases was $1,514,223 and $946,027 in
2000 and 1999, respectively.
10 (Continued)
<PAGE> 15
COMPENSATION RESOURCE GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000 and 1999
The Company leases certain furniture and fixtures under noncancelable
capital leases.
As of June 30, 2000, the minimum lease commitments under all
noncancelable capital and operating leases, assuming the Company does not
exercise the renewal options of its facility lease, are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
---------- ----------
<S> <C> <C>
Year ending June 30:
2001 $ 177,980 1,269,728
2002 103,822 1,034,131
2003 37,231 988,144
2004 1,056 758,215
2005 -- 746,260
Thereafter -- 4,067,117
---------- ----------
Total minimum lease payments 320,089 $8,863,595
==========
Less amount representing interest 65,197
----------
Minimum future lease payments as of June 30, 2000 $ 254,892
==========
</TABLE>
(9) INCOME TAXES
Income taxes for the years ended June 30, 2000 and 1999 consist of the
following:
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
Current:
Federal $ (430,681) (383,726)
State (111,977) (103,320)
------------ ------------
(542,658) (487,046)
------------ ------------
Deferred:
Federal (1,234,197) 102,499
State (362,867) 23,110
------------ ------------
(1,597,064) 125,609
------------ ------------
$ (2,139,722) (361,437)
============ ============
</TABLE>
11 (Continued)
<PAGE> 16
COMPENSATION RESOURCE GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000 and 1999
Income taxes reflected in the consolidated statements of operations for
the years ended June 30, 2000 and 1999 are different from the statutory
federal income tax rate of 34% due to the following:
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
Computed "expected" tax expense $ (1,838,457) (106,361)
Nondeductible entertainment expenses 27,445 22,976
Nondeductible insurance expenses 4,629 6,445
State taxes, net (334,691) 27,271
Other, net 1,352 4,644
Differences related to unearned compensation -- (316,412)
------------ ------------
$ (2,139,722) (361,437)
============ ============
</TABLE>
Temporary differences which give rise to a significant portion of the
deferred tax assets at June 30, 2000 and 1999 relate to executive
compensation, allowance for bad debts and net operating losses. There was
no valuation allowance for deferred tax assets as of June 30, 2000 and
1999. Management of the Company believes that it is more likely than not
that the Company will generate sufficient taxable income in the future to
realize the deferred tax assets as a result of future commissions earned
on renewals of insurance policies previously sold.
Net operating losses of approximately $2.6 million will begin to expire
in 2020.
(10) EMPLOYEE BENEFIT PLAN
Effective March 1, 1996, the Company's employees began participating in
the Compensation Resource Group, Inc. 401(k) Plan (the 401(k) Plan), a
defined contribution plan covering substantially all employees of the
Company. Participants may contribute up to 15% of their salary each
payroll period. The 401(k) Plan has a discretionary employer matching
component for all nonexecutive participants. Total expenses to the
Company during 2000 and 1999 amounted to $82,024 and $108,141,
respectively.
(11) RELATED PARTY TRANSACTIONS
The Company had a $1,027,230 note receivable from the Company's majority
stockholder. The proceeds of the note were used by the Company's majority
stockholder to purchase 88,235 shares of the Company's common stock from
the previous owner of ECB and COLI. The note is secured with 88,235
shares of the Company's common stock. The note bears interest at a rate
equivalent to the Company's 1999 Loan (7.19% at June 30, 2000). Interest
payments accrue on a yearly basis, and principal is scheduled to be
repaid during the year ended June 30, 2004. In August 2000, in connection
with the sale of the Company, the note receivable was exchanged for the
original 88,235 shares.
The Company also has two promissory notes from the Company's majority
stockholder which were received in exchange for two country club
memberships owned by the Company. The notes have no stated interest rate.
The notes become due upon the majority stockholder's termination from the
Company.
12 (Continued)
<PAGE> 17
COMPENSATION RESOURCE GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000 and 1999
Included in commissions and selling fees are amounts paid to directors of
the Company for certain client introductions and contacts to help procure
the sale of the Company's products. Amounts paid in 2000 and 1999 were
$165,448 and $95,524, respectively. At June 30, 2000 and 1999, amounts
due to stockholders were $324,425 and $386,651, respectively.
(12) SUBSEQUENT EVENT
On August 31, 2000, the Company was purchased by Clark/Bardes Holdings,
Inc. (Clark/Bardes) for $12,306,034 which consisted of $6,306,034 in cash
and 596,463 shares of Clark/Bardes common stock at $10.06 per share. The
fair market value of the shares received was based on the average closing
price per share for the 20 trading days immediately prior to the
transaction date.
13
<PAGE> 18
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following table sets forth unaudited pro forma financial information of
the Company for the periods ended and as of the dates indicated. The unaudited
pro forma financial information of the Company set forth below was derived from
the audited and unaudited financial statements of Clark/Bardes Holdings, Inc.
and Compensation Resource Group, Inc.
The unaudited pro forma balance sheets and income statements have been
prepared to give effect to the acquisition of Compensation Resource Group, Inc.
as if such transaction had occurred as of the beginning of each period
presented. The unaudited pro forma financial information of the Company set
forth below is based upon available information and certain assumptions that the
Company believes are reasonable. The unaudited pro forma financial information
of the Company set forth below does not purport to represent what the Company's
financial position or results of operations actually would have been if the
transactions had actually occurred as of such dates or what such results will be
for any future periods.
<PAGE> 19
UNAUDITED PRO FORMA BALANCE SHEET
AS OF DECEMBER 31, 1999
(In Thousands Except Shares)
<TABLE>
<CAPTION>
THE COMPENSATION
COMPANY RESOURCE GROUP ADJUSTMENTS THE COMPANY
(HISTORICAL (HISTORICAL DR/(CR) PRO FORMA
12/31/99) 12/31/99) # $ AS ADJUSTED
----------- -------------- ------- ---------- -----------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 4,832 $ 30 $ $ 4,862
Accounts and notes receivable - net 18,295 2,495 20,790
Prepaid expenses -- 432 432
Deposits and advances 1,123 1,650 2,773
Deferred tax asset -- 154 1 (154) --
---------- ---------- ----------
Total current assets 24,250 4,761 28,857
---------- ---------- ----------
Intangible assets - net
Present value of in force revenue 59,284 -- 5 26,700 85,984
Goodwill 34,440 7,512 1&5 (2,799) 39,153
Non competition agreements 1,267 -- 1,267
---------- ---------- ----------
94,991 7,512 126,404
---------- ---------- ----------
Equipment and leasehold improvements - net 4,505 1,020 5,525
Note receivable - stockholder -- 1,073 1 (1,073) --
Deferred tax asset 282 163 1 (163) 282
Other assets 831 820 1,651
Cash surrender value of life insurance -- 250 250
---------- ---------- ----------
Total assets $ 124,859 $ 15,599 $ 22,511 $ 162,969
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 4,100 $ 3,597 7,697
Commissions and fees 3,475 -- 3,475
Amounts payable to stockholders -- 410 2 (410) --
Accrued liabilities 7,841 -- 7,841
Income taxes 4,350 4,350
Debt maturing within one year 7,252 8,015 2&5 (243) 15,024
Capital lease obligation -- 158 158
---------- ---------- ----------
Total current liabilities 27,018 12,180 38,545
---------- ---------- ----------
Long term debt 35,473 7,700 2&5 12,594 55,767
Capital lease obligation -- 211 211
---------- ---------- ----------
Total Liabilities 62,491 20,091 94,523
---------- ---------- ----------
Stockholders' equity
Preferred stock -- -- --
Common stock - issued and outstanding
December 31, 1999 = 9,629,999 96 322 5 (316) 102
Pro forma = 10,226,442 5
Paid in capital 50,099 69 5 6,003 56,171
Retained earnings 12,173 (4,883) 5 4,883 12,173
---------- ---------- ----------
Total stockholders' equity 62,368 (4,492) 68,446
---------- ---------- ----------
Total liabilities and stockholders'
equity $ 124,859 $ 15,599 $ 22,511 $ 162,969
========== ========== ==========
</TABLE>
<PAGE> 20
<TABLE>
<S> <C> <C>
EXPLANATION OF PRO FORMA ADJUSTMENTS
1 Assets not acquired
Deferred tax asset - current $ 154
Goodwill 7,512
Note receivable - stockholder 1,073
Deferred tax asset 163
----------
total $ 8,902
==========
2 Liabilities not assumed --
Amounts payable to stockholders $ 410
==========
3 Cash paid at closing (borrowed under line of credit)
Purchase of shares $ 6,306
Purchase of assets 5,200
Repayment of debt 13,013
----------
total 24,519
==========
Due in one year 4,900
Long term 19,619
----------
total 24,519
4 Clark/Bardes Holdings, Inc. - common stock issued at closing
596,443 shares @ $ 10.1900 6,078
5 Expenses 845
----------
Total purchase price $ 31,442
==========
6 Allocation of the purchase price
Assets acquired $ 15,599
Assets not acquired 8,902
----------
Net assets acquired 6,697
----------
Liabilities assumed 20,091
Liabilities not assumed 410
----------
Net liabilities assumed 19,681
----------
Excess (12,984)
Debt repaid at closing 13,013
----------
Balance 29
Purchase price 31,442
----------
Excess 31,413
Present value of renewal commissions 26,700
----------
Goodwill $ 4,713
==========
</TABLE>
<PAGE> 21
UNAUDITED PRO FORMA INCOME STATEMENT
AS OF DECEMBER 31, 1999
(In Thousands Except shares)
<TABLE>
<CAPTION>
THE COMPENSATION
COMPANY RESOURCE GROUP ADJUSTMENTS THE COMPANY
(HISTORICAL (HISTORICAL DR/(CR) PRO FORMA
12/31/99) 12/31/99) # $ AS ADJUSTED
----------- -------------- ------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Revenues
Commissions and service fees $ 119,158 $ 22,060 $ -- $ 141,218
Consulting fees -- 3,037 3,037
Other 1,602 2,650 4,252
---------- ---------- ----------
Total revenue 120,760 27,747 148,507
Commission and fee expenses 53,108 1,884 54,992
---------- ---------- ----------
Gross profit 67,652 25,863 93,515
---------- ---------- ----------
Operating expenses
General and administrative 45,153 25,002 70,155
Amortization of intangibles 4,370 866 2 2,272 7,508
---------- ---------- ----------
49,523 25,868 77,663
---------- ---------- ----------
Operating income 18,129 (5) 15,852
Interest
Income 329 -- 329
Expense (3,548) (1,344) 1 (1,108) (6,000)
---------- ---------- ----------
(3,219) (1,344) (5,671)
---------- ---------- ----------
Income before taxes 14,910 (1,349) 10,181
Income taxes 6,079 -- 3 (1,352) 4,727
---------- ---------- ----------
Net income $ 8,831 $ (1,349) $ 5,454
========== ========== ==========
Net income per share:
Basic $ 0.97 $ 0.56
========== ==========
Diluted $ 0.95 $ 0.55
========== ==========
</TABLE>
<PAGE> 22
EXPLANATION OF PRO FORMA ADJUSTMENTS
<TABLE>
<S> <C> <C> <C> <C>
1 Interest on borrowed funds (offset by reduction of existing interest)
$ 24,519 @ 10.0% $ 2,452
==========
2 Amortization of purchased intangibles (offset by $866 of existing amortization)
$ 30,499 $ 3,138
==========
3 Income taxes @ 40%
4 Net income per share
Basic Diluted
---------- ----------
Weighted average shares 9,077,775 9,328,939
Shares issued 596,443 596,443
---------- ----------
Pro forma 9,674,218 9,925,382
========== ==========
</TABLE>
<PAGE> 23
UNAUDITED PRO FORMA BALANCE SHEET
AS OF JUNE 30, 2000
(In Thousands Except Shares)
<TABLE>
<CAPTION>
THE COMPENSATION
COMPANY RESOURCES GROUP ADJUSTMENTS THE COMPANY
(HISTORICAL (HISTORICAL DR/(CR) PRO FORMA
6/30/00) 6/30/00 # $ AS ADJUSTED
----------- --------------- ------- ---------- -----------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 2,285 $ 84 $ 2,369
Accounts and notes receivable - net 10,413 2,613 13,026
Advances to employees -- 876 876
Income tax receivable -- 691 691
Prepaid expenses -- 189 189
Other assets 1,179 1,179
Deferred tax asset -- 1,762 (1,762) --
---------- ---------- ----------
Total current assets 13,877 6,215 18,330
---------- ---------- ----------
Intangible assets - net 124,552 7,368 1 23,383 155,303
Equipment and leasehold improvements - net 6,419 959 7,378
Deferred tax asset -- 152 1 (152) --
Other assets 3,444 730 4,174
Note receivable - stockholder -- 245 1 (245) --
---------- ---------- ----------
Total assets $ 148,292 $ 15,669 $ 185,185
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 3,307 $ 4,216 7,523
Commissions and fees 2,558 1,385 -- 3,943
Accrued bonus - officer/shareholders -- 324 2 (324) --
Accrued liabilities 7,421 -- -- 7,421
Income taxes 566 -- -- 566
Debt maturing within one year 7,502 5,348 (718) 12,132
Capital lease obligation -- 157 157
---------- ---------- ----------
Total current liabilities 21,354 11,430 31,742
---------- ---------- ----------
Long term debt 53,311 7,225 3 13,069 73,605
Deferred Tax Liability 404 -- 404
Deferred Compensation 1,696 -- 1,696
Capital lease obligation -- 134 134
-- -- -- --
---------- ---------- ----------
Total Liabilities 76,765 18,789 107,581
---------- ---------- ----------
Stockholders' equity
Preferred stock -- -- --
Common stock - issued and outstanding
June 30, 2000 = 10,115,334 101 286 3 (281) 106
Pro forma = 10,711,777
Paid in capital 57,336 69 3 6,003 63,408
Retained earnings 14,123 (2,448) 5 2,448 14,123
Treasury stock (33) (1,027) 1,027 (33)
---------- ---------- ----------
Total stockholders' equity 71,527 (3,120) 77,604
---------- ---------- ----------
Total liabilities and stockholders'
equity $ 148,292 $ 15,669 $ 185,185
========== ========== ==========
</TABLE>
<PAGE> 24
<TABLE>
<S> <C> <C>
EXPLANATION OF PRO FORMA ADJUSTMENTS
1 Assets not acquired
Deferred tax asset - current $ 1,762
Note receivable - stockholder 245
Intangible assets - net 7,368
Deferred tax asset - non current 152
----------
total $ 9,527
==========
2 Liabilities not acquired
Amounts payable to stockholders $ 324
==========
3 Cash paid at closing (borrowed under line of credit)
Purchase of shares $ 6,306
Purchase of assets 5,200
Repayment of debt 13,013
----------
$ 24,519
==========
Due in one year $ 4,900
Long term 19,619
----------
24,519
4 Clark/Bardes Holdings, Inc. -common stock issued at closing
596,443 shares @ $ 10.1900 6,078
5 Expenses 845
----------
Total purchase price $ 31,442
==========
6 Allocation of the purchase price (excluding expenses)
Assets acquired $ 15,669
Assets not acquired 9,527
----------
Net assets acquired 6,142
----------
Liabilities assumed 18,790
Liabilities not assumed 324
----------
Net liabilities assumed 18,466
----------
Excess (12,324)
Debt paid at closing 13,013
----------
Balance 689
Purchase price 31,442
----------
Excess 30,753
Present value of renewal commissions 26,700
----------
Goodwill $ 4,053
==========
</TABLE>
<PAGE> 25
UNAUDITED PRO FORMA INCOME STATEMENT
AS OF JUNE 30, 2000
(In Thousands Except shares)
<TABLE>
<CAPTION>
THE COMPENSATION
COMPANY RESOURCES GROUP ADJUSTMENTS THE COMPANY
HISTORICAL HISTORICAL DR/CR PRO FORMA
6/30/00) 6/30/00) # $ AS ADJUSTED
---------- --------------- ------- --------- -----------
<S> <C> <C> <C> <C> <C>
Total revenue $ 55,511 $ 20,011 $ 75,522
Commission and fee expenses 18,912 1,330 20,242
---------- ---------- ----------
Gross profit 36,599 1,985 55,280
---------- ---------- ----------
Operating expenses
General and administrative 29,127 15,858 44,985
Amortization of intangibles 2,664 433 2 1,136 4,233
---------- ---------- ----------
31,791 16,291 49,218
---------- ---------- ----------
Operating income 4,808 (14,306) 6,062
Interest
Income 127 -- 127
Expense (1,825) (292) 1 (934) (3,051)
---------- ---------- ----------
(1,698) (292) (2,924)
---------- ---------- ----------
Income before taxes 3,110 2,098 3,138
Income taxes 1,160 3 316 1,476
---------- ---------- ----------
Net income $ 1,950 $ 2,098 $ 1,662
========== ========== ==========
Net income per share:
Basic $ 0.18 $ 0.16
========== ==========
Diluted $ 0.18 $ 0.16
========== ==========
</TABLE>
<PAGE> 26
EXPLANATION OF PRO FORMA ADJUSTMENTS
<TABLE>
<S> <C> <C> <C> <C>
1 Interest on borrowed funds for 6 months (offset by reduction of existing interest)
$24,519 @ 10.0% $ 1,226
===========
2 Amortization of purchased intangibles (offset by $433 of existing amortization)
$30,753 $ 3,138
===========
3 Income taxes @ 40%
4 Net income per share
Basic Diluted
----------- -----------
Weighted average shares 9,796,824 10,074,062
Shares issued 298,221 298,221
----------- -----------
Pro forma 10,095,045 10,372,283
=========== ===========
</TABLE>
<PAGE> 27
SIGNATURE
CLARK/BARDES HOLDINGS, INC.
Date: September 11, 2000 /s/ Thomas M. Pyra
--------------------------------------
Thomas M. Pyra
Chief Operating Officer and Chief
Financial Officer
