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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File No. 000-24769
CLARK/BARDES HOLDINGS, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 52-2103926
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2121 SAN JACINTO, SUITE 2200
DALLAS, TEXAS 75201-7906
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (214) 871-8717
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ ] No [X]
The number of shares outstanding of the registrant's common stock, all
of which comprise a single class with a $0.01 par value, as of November 11,
1998, the latest practicable date, was 8,059,677.
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TABLE OF CONTENTS
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PAGE
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets at September 30, 1998 (Unaudited) and
December 31, 1997........................................ 4
Statements of Income (Unaudited) for the three months and
nine months ended September 30, 1998 and 1997 ........... 6
Statements of Cash Flow (Unauditied) for the nine months
ended September 30, 1998 and 1997........................ 7
Notes to Financial Statements (Unaudited).................... 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................ 23
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.................... 28
Item 6. Exhibits and Reports on Form 8-K............................. 29
SIGNATURES ........................................................... 30
EXHIBITS
Index to Exhibits.................................................... 31
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FORWARD-LOOKING STATEMENTS
This Form 10-Q contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E
of the Securities Exchange Act of 1934, as amended. When used in this Form 10-Q,
words such as "anticipate," "believe," "estimate," "expect," "intend,"
"predict," "project," and similar expressions, as they relate to Clark/Bardes
Holdings, Inc., a Delaware corporation (the "Company") or its management,
identify forward-looking statements. Such forward-looking statements are based
on the beliefs of the Company's management as well as assumptions made by and
information currently available to the Company's management. Such statements are
subject to certain risks, uncertainties and assumptions, including risks,
uncertainties and assumptions related to federal tax legislation, dependence on
key producers, potential lack of persistency, dependence on key personnel,
credit risk related to renewal revenue, acquisition risks and competition.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially from
those anticipated, expected or projected. Such forward-looking statements
reflect the current views of the Company's management with respect to future
events and are subject to these and other risks, uncertainties and assumptions
relating to the operations, results of operations, growth strategy and liquidity
of the Company. All subsequent written and oral forward-looking statements
attributable to the Company or persons acting on its behalf are expressly
qualified in their entirety by this paragraph. The risk factors set forth in the
Company's Registration Statement on Form S-1 (File No. 333-56799) are hereby
incorporated by reference.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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CLARK/BARDES HOLDINGS, INC.
(INCLUDING THE PREDECESSOR COMPANY, AS OF DECEMBER 31, 1997)
BALANCE SHEETS
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ASSETS
SEPTEMBER 30, 1998 DECEMBER 31, 1997
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(unaudited)
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CURRENT ASSETS:
Cash and cash equivalents............................................... $ 15,923,945 $ 3,782,941
Accounts and notes receivable:
Trade............................................................... 2,641,692 7,720,444
Affiliates.......................................................... 61,623 10,636
Notes receivable.................................................... 379,692 477,779
---------------- ----------------
Total accounts and notes receivable................................. 3,083,007 8,208,859
Other current assets.................................................... 62,915 --
Accrued interest receivable............................................. 79,017 45,811
---------------- ----------------
TOTAL CURRENT ASSETS 19,148,884 12,037,611
Equipment and leasehold improvements, net.................................... 1,084,191 715,854
Intangible assets:
Net present value of future profits related to the assets acquired
from Bank Compensation Strategies, Inc. (net of $352,468 of
accumulated amortization at September 30, 1998, and $77,316 at
December 31, 1997, respectively)..................................... 3,703,352 3,978,504
Goodwill related to the assets acquired from Bank Compensation
Strategies, Inc. (net of $489,017 accumulated amortization at
September 30, 1998 and $158,982 at December 31, 1997,
respectively)........................................................ 18,588,605 18,918,640
Noncompete agreements entered into in connection with the acquisition
of assets from Bank Compensation Strategies, Inc. (net of $189,583
accumulated amortization at December 31, 1997, and $58,333 at
December 31, 1997, respectively).................................... 1,060,417 1,191,667
Net present value of future profits related to the assets acquired from
Schoenke & Associates Corporation and its affiliates (net of
$48,549 of accumulated amortization at September 30, 1998)........... 15,080,356 --
Goodwill related to the assets acquired from Schoenke & Associates
Corporation and its affiliates (net of $952 accumulated
amortization at September 30, 1998).................................. 455,968 --
Noncompete agreements entered into in connection with the acquisition
of assets from Schoenke & Associates Corporation and its affiliates
(net of $12,500 accumulated amortization at September 30, 1998)...... 737,500 --
---------------- ----------------
39,626,198 24,088,811
Other assets................................................................. 219,359 59,614
Income tax asset............................................................. 806,211 --
---------------- ----------------
TOTAL ASSETS................................................ $ 60,884,843 $ 36,901,890
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</TABLE>
See notes to financial statements
4
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CLARK/BARDES HOLDINGS, INC.
(INCLUDING THE PREDECESSOR COMPANY, AS OF DECEMBER 31, 1997)
BALANCE SHEETS
(continued)
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LIABILITIES AND STOCKHOLDERS' EQUITY
SEPTEMBER 30, 1998 DECEMBER 31, 1997
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(unaudited)
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CURRENT LIABILITIES:
Accounts payable ........................................................ 2,502,324 1,142,218
Commissions and fees payable ............................................ 1,798,296 1,944,490
Dividends payable ....................................................... -- 333,915
Accrued expenses and other liabilities .................................. 2,182,231 1,521,419
Accrued interest payable ................................................ 257,324 476,325
Current portion of long term debt ....................................... 5,525,000 4,325,000
---------------- ----------------
TOTAL CURRENT LIABILITIES .......................................... 12,265,175 9,743,367
Long-term debt, excluding current portion .................................... 24,741,268 32,838,143
---------------- ----------------
TOTAL LIABILITIES .................................................. 37,006,443 42,581,510
STOCKHOLDERS EQUITY (DEFICIT):
Common stock:
Authorized shares-20,000,000; $.01 par value ........................ 78,563 5,162,281
Issued and outstanding shares-- 7,856,287 at September 30, 1998 and
5,959,140 at December 31, 1997, respectively
Paid in capital ..................................................... 22,677,327 --
Retained earnings ................................................... 1,122,510 3,188,699
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23,878,400 8,350,980
Less 2,737,130 shares of common stock in treasury
at December 31, 1997 ............................................ -- (14,030,600)
---------------- ----------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) ................................ 23,878,400 (5,679,620)
---------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .......................... $ 60,884,843 $ 36,901,890
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</TABLE>
See notes to financial statements.
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CLARK/BARDES HOLDINGS, INC.
(INCLUDING THE PREDECESSOR COMPANY FOR THE
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1997)
STATEMENTS OF INCOME
(UNAUDITED)
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THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
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1998 1997 1998 1997
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Revenue:
Commission and service fees........................ $ 17,052,253 $ 10,642,039 $ 44,909,201 $ 21,747,400
Other.............................................. 589,001 367,668 1,717,012 545,491
------------ ------------ ------------ ------------
Total revenue............................. 17,641,254 11,009,707 46,626,213 22,292,891
Commission and fee expense........................... 11,051,798 7,138,578 29,255,479 14,412,097
------------ ------------ ------------ ------------
6,589,456 3,871,129 17,370,734 7,880,794
General and administrative expense................... 4,613,371 2,679,256 13,021,896 7,293,157
Amortization of intangibles.......................... 356,494 134,717 798,439 134,717
Nonrecurring operating (income) expense-warrants..... (500,000) -- 4,800,000 --
------------ ------------ ------------ ------------
Income (loss) from operations........................ 2,119,591 1,057,156 (1,249,601) 452,920
Other income (expense):
Interest income................................... 220,508 39,285 388,132 107,402
Interest expense.................................. (763,537) (207,411) (2,567,287) (208,609)
Miscellaneous expense, net........................ (460) (317) (601) (171)
------------ ------------ ------------ ------------
Income (loss) before income tax benefit.............. 1,576,102 888,713 (3,429,357) 351,542
Federal and state income tax benefit................. 806,211 -- 801,040 --
------------ ------------ ------------ ------------
NET INCOME (LOSS).................................... $ 2,382,313 $ 888,713 $ (2,628,317) $ 351,542
============ ============ ============ ============
DIVIDENDS PER SHARE.................................. $ -- $ -- $ 0.82 $ --
============ ============ ============ ============
EARNINGS (LOSS) PER SHARE (HISTORICAL):
Basic............................................. $ 0.44 $ 0.20 $ (0.66) $ 0.08
============ ============ ============ ============
Diluted........................................... $ 0.39 $ 0.20 $ (0.66) $ 0.08
============ ============ ============ ============
PRO FORMA DATA:
PRO FORMA INCOME TAX EXPENSE...................... $ 427,200 $ 352,800 $ 544,145 $ 139,600
============ ============ ============ ============
PRO FORMA NET INCOME (LOSS)....................... $ 1,148,902 $ 535,915 $ (3,973,502) $ 211,941
============ ============ ============ ============
PRO FORMA EARNINGS (LOSS) PER SHARE
Basic........................................ $ 0.21 $ 0.12 $ (1.00) $ 0.05
============ ============ ============ ============
Diluted...................................... $ 0.19 $ 0.12 $ (1.00) $ 0.05
============ ============ ============ ============
</TABLE>
See notes to financial statements.
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CLARK/BARDES HOLDINGS, INC.
(INCLUDING THE PREDECESSOR COMPANY, FOR THE NINE
MONTHS ENDED SEPTEMBER 30, 1997)
STATEMENTS OF CASH FLOW
(UNAUDITED)
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NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
1998 1997
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OPERATING ACTIVITIES
Net income (loss)......................................... $ (2,628,317) $ 351,542
Adjustments to reconcile net income to net cash provided:
Depreciation and amortization ........................ 1,019,215 257,350
Loss on disposition of assets ........................ 601 --
Changes in assets and liabilities:
Accounts receivable ............................... 5,027,765 2,207,230
Other current assets .............................. (62,915) (48,733)
Accrued interest receivable ....................... (33,206) (22,551)
Other assets ...................................... (159,745) (2,506)
Deferred income taxes ............................. (806,211) --
Accounts payable .................................. 1,360,106 361,640
Accrued expenses/liabilities ...................... 660,812 (925,975)
Accrued interest payable .......................... (219,001) 207,411
Commission/fees payable ........................... (146,194) (1,346,486)
------------ ------------
Net cash provided by operating activities ............ 4,012,910 1,038,922
INVESTING ACTIVITIES
Purchase of business ..................................... (16,335,825) (24,249,033)
Issuance of notes receivable ............................. (350,000) (530,983)
Payments received on notes receivable .................... 448,087 81,508
Purchases of fixed assets ................................ (332,590) (407,338)
------------ ------------
Net cash used in by investing activities ............. (16,570,328) (25,105,846)
FINANCING ACTIVITIES
Principal payments on debt ............................... (8,928,125) --
Proceeds from issuance of debt ........................... 2,000,000 35,074,985
Proceeds from issuance of common stock and warrants ...... 35,198,201 100,000
Payments received on stock notes receivable .............. 108,401 --
Dividends paid ........................................... (3,680,055) (1,720,967)
Purchase of treasury stock ............................... -- (11,299,886)
Sale of treasury stock ................................... -- 8,618
------------ ------------
Net cash provided by financing activities ............ 24,698,422 22,162,750
------------ ------------
INCREASE (DECREASE) IN CASH .................................. 12,141,004 (1,904,174)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ............. 3,782,941 4,881,584
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ................... $ 15,923,945 $ 2,977,410
============ ============
</TABLE>
See notes to financial statements.
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CLARK/BARDES HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 (UNAUDITED)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The financial statements include the accounts of Clark/Bardes Holdings,
Inc., a Delaware corporation (the "Company"), and Clark/Bardes, Inc., a Delaware
corporation and wholly owned subsidiary of the Company ("CBI"). Clark/Bardes,
Inc., a Texas corporation, was the predecessor company of CBI (the "Predecessor
Company"). The Company is a designer, marketer and administrator of
business-owned life insurance products to large corporations and bank-owned life
insurance to banks in the United States. The Company 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, the Company provides long-term administrative services
for executive benefits and insurance.
Basis of Presentation
The accompanying unaudited financial statements of the Company have
been prepared in conformity with generally accepted accounting principles (GAAP)
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by GAAP for complete financial statements.
Certain reclassifications have been made to the prior years' financial
statements to conform to the current year presentation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. In the opinion of management, all adjustments, including
normal recurring accruals, considered necessary for a fair presentation have
been included. Actual results could differ from those estimates. Operating
results for the nine months ended September 30, 1998 are not necessarily
indicative of the results to be expected for the full year.
A summary of the significant accounting policies consistently applied
in the preparation of the accompanying financial statements follows.
Initial Public Offering
On August 19, 1998, the Company completed an initial public offering
(the "Offering") of 4.0 million shares of common stock, par value $0.01 per
share (the "Common Stock") at an initial price to the public of $9.00 per share.
The net proceeds to the Company, after deducting underwriting discounts and
commissions and offering expenses, were approximately $31.7 million. The Company
applied the net proceeds from the Offering as follows: (a) $1.0 million in
partial payment of the 8.5% Medium Term Notes, (b) $4.9 million to extinguish
warrants under the 11.0% Second Priority Senior Secured Notes, and (c) $13.5
million as part of the consideration to acquire substantially all of the assets
of Schoenke & Associates Corporation and Schoenke & Associates Securities
Corporation (collectively, the "Schoenke Entities"). The Company intends to
apply the remaining proceeds to pay approximately $7.5 million to The Wamberg
Organization as consideration for the purchase of renewal revenue pursuant to
the purchase agreement (see below), and $4.8 million for general corporate
purposes, including working capital.
Reorganization
The Company and CBI were organized in connection with the initial
public offering in June 1998. On July 10, 1998, the Company's Board of Directors
approved a reorganization agreement (the "Reorganization Agreement") between the
Predecessor Company, and CBI which provided for a two step merger resulting in
the
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Predecessor Company merging with and into CBI (the "Merger") resulting in each
stockholder of the Predecessor Company (the "Existing Stockholders") receiving
one-half of one share of Common Stock for each share of Predecessor Company
common stock held by such Existing Stockholder, and contemplated a series of
transactions, including (i) a restructuring of the 10.5% Senior Secured Notes
due August 2002 and 11.0% Second Priority Senior Secured Notes due August 2004
(such notes are collectively referred to as the "Restructured Notes"), (see
below), (ii) the conversion of the 8.5% Convertible Subordinated Notes due
September 2007 into 813,559 shares of Common Stock, at $5.90 per share (the fair
value at the date the notes were issued as determined by recent stock
transactions), (iii) the extinguishment of warrants representing the right to
purchase 1,525,424 shares of Common Stock, (iv) a purchase of renewal revenue
due to Mr. Wamberg and The Wamberg Organization under the Principal Office
Agreement between the Company and Mr. Wamberg (see below), (v) the incorporation
of a Texas entity formed for the purpose of marketing certain insurance products
within the state of Texas, and (vi) the termination by its terms of the Second
Amended and Restated Stockholders' Agreement among the Predecessor Company and
each of the Existing Stockholders. The Merger was consummated prior to the
consummation of the Offering, and is treated for accounting purposes as a
reorganization of entities under common control utilizing historical cost which
is similar to a pooling of interests.
In connection with the Merger, all share amounts in the accompanying
financial statements have been restated in a manner similar to a reverse stock
split to give effect to the Merger.
As a result of the Offering, the interest rates on the Restructured
Notes were reset from 10.5% and 11.0% to 7.84% and 8.86%, respectively. The
Restructured Notes may be prepaid without penalty and are secured by a first
priority security interest in, among other things, all of CBI's renewal
commissions other than the renewal commissions acquired from Bank Compensation
Strategies Group, a Minneapolis, Minnesota based life insurance agency ("BCS"),
and the Schoenke Entities (see Note 2). Further, the Company is subject to
operational restrictions and financial covenants, including a requirement that
CBI obtain a working capital credit facility no later than March 31, 1999, a
prohibition against certain payments, a limitation on the payment of dividends,
a limitation on the incurrence of indebtedness and the maintenance of certain
financial ratios.
The Company accrued $5.3 million in the six month period ended June 30,
1998, to reflect the obligation of the Company in an amount equal to the
approximate fair value of its common stock put warrants at that date (less
$100,000 originally booked as an equity adjustment). The final amount paid to
extinguish the warrants in August 1998 was reduced to $4.9 million, and as a
result the Company recorded income of $500,000 from the adjustment in August
1998. This amount was reclassified to paid-in capital upon consummation of the
initial public offering. In addition, in connection with the offering, these
warrants to purchase 1,525,424 shares of Common Stock were extinguished by the
payment of $4.9 million by the Company to the warrant holders, which represents
the arms-length negotiated formula of payment determined in the context of the
Company's contractual commitments under the warrants and its business
relationship with the warrant holders. In addition, in connection with agreeing
to the extinguishment of the Warrants, CBI entered into a five-year production
agreement with each of Great-West and Nationwide (the "Carriers") that requires
CBI to market and sell insurance products of each Carrier comprising specified
percentages of all insurance products sold by CBI as measured by first year
commissions payable with respect to such business. The percentages range from
10.0% to 25.0% depending upon the type of insurance product and product
exclusivity provisions. Each agreement provides that in the event that CBI fails
to meet the minimum production requirements, the applicable Carrier is entitled
to offset future commissions otherwise payable to the Company up to a maximum
amount of $150,000 per year.
Purchase of Renewal Revenue from the Chairman
On July 10, 1998, the Board of Directors approved an agreement with
W.T. Wamberg and The Wamberg Organization which provides for, among other
things, a purchase of the renewal revenue due under the Principal Office
Agreement with Mr. Wamberg (described in Note 10) in exchange for a cash payment
of approximately $7.5 million. This transaction allows the Company to retain
additional commission and fee revenue for a ten year period following the
consummation of the transaction scheduled for January 1999. The additional
revenue equates to approximately 19.0% of the commission and fee revenue, prior
to deduction of servicing costs, related to renewal revenue on Mr. Wamberg's and
The Wamberg Organization's inforce business as of June 30, 1998. Upon
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consummation, the Company plans to record the purchase of this future revenue
stream as an asset in the amount of the consideration given which will be
amortized using the units of revenue method over the term of the Agreement.
Termination of S Corporation Status and Stockholder Distribution
Upon the consummation of the Reorganization, the Company ceased to be
taxed as an S corporation and is subject to federal and state income taxation as
a C corporation. As an S corporation, the Company's income, whether or not
distributed, was taxed at the stockholder level for federal and certain state
tax purposes. At August 1, 1998, the effective date of change in tax status, the
Company recorded deferred taxes on its balance sheet for the difference between
the tax bases and book bases of its assets and liabilities. The Company has
obtained from certain existing stockholders a tax indemnification agreement.
Under the terms of the tax indemnification agreement, additional tax liabilities
resulting from the reallocation of income and deductions between the period the
Company was treated as an S corporation and the period the Company will be
subject to income taxation will be borne either by the Company or the existing
shareholders to the extent that such parties received the related income.
In connection with the termination of the Predecessor Company's S
corporation status, on July 10, 1998 the Board of Directors of the Predecessor
Company declared a dividend to the stockholders of record on July 31, 1998 in an
amount equal to $3.2 million, or $1.00 per share, which was paid on July 31,
1998. The remaining retained earnings after the assumed distribution, have been
reclassified to common stock which assumes a constructive distribution to the
owners of the Predecessor Company followed by a contribution to capital.
Stock Grant Restructuring
The Company's President and Chief Executive Officer had entered into an
agreement with the Company whereby he would be granted 52,500 shares of the
Predecessor Company's common stock if he was employed as the Company's Chief
Executive Officer on July 1, 1998. This agreement was amended in June 1998 to
provide that he received 24,108 shares of Common Stock, $162,128 in cash and a
fully vested five year option to purchase 30,523 shares of Common Stock at an
exercise price of $9.00 per share. The Company recorded compensation expense of
$525,000 in its June 1998 financial statements related to this transaction and
an adjustment to compensation expense of $145,900 in its September 1998
financial statements. The options have been accounted for in accordance with
the Company's policy on stock compensation.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with
a maturity of three months or less to be cash equivalents. The Company has cash
balances at three financial institutions in excess of the $100,000 limit insured
by the Federal Deposit Insurance Corporation. Uninsured cash in bank balances
aggregate to approximately $384,300 and $1.4 million at December 31, 1997 and
September 30, 1998 (unaudited), respectively. The Company has not experienced
any losses in such accounts and believes it is not exposed to any significant
credit risk on cash and cash equivalents.
Fair Value of Financial Instruments
The book values of cash, accounts and notes receivable, accounts
payable, commissions and fees payable and other financial instruments
approximate their fair values principally because of the short-term nature of
these instruments. The carrying value of the Company's long-term debt would not
differ significantly from its fair value.
Equipment and Leasehold Improvements
Equipment and leasehold improvements are carried at cost less
accumulated depreciation. Depreciation expense is provided in amounts sufficient
to relate the cost of assets to operations over the estimated service lives
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using the straight-line method. The Company depreciates furniture and equipment
over periods of three to five years while leasehold improvements are amortized
over their useful lives.
Intangible Assets
The Company capitalized intangible assets as a result of the
acquisition of the assets and business of BCS and the Schoenke Entities (see
Note 2). Intangible assets consist of goodwill, the net present value of future
profits on existing books of business at the acquisition date and non-compete
agreements with the former owners. The amortization periods for the non-compete
agreements are 5 years and 10 years. The net present value of future profits
will be amortized over 30 years based on the present value of estimated profits
expected to be realized over the life of the existing book of business. Any
changes in estimates of future profits used to amortize the net present value of
future profits will be accounted for as a catch up adjustment in the period in
which the change becomes known. Goodwill will be amortized over a 40 year period
on a straight-line basis. Amortization expense related to these amounts totaled
$294,630 during 1997 and $798,439 for the nine months ended September 30, 1998
(unaudited), respectively. Management's policy, in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 121 -- Accounting for the Impairment
of Long-Lived Assets, is to review intangible and other long-lived assets for
impairment whenever changes in circumstances indicate that an impairment might
exist. When one or more indicators are present, the estimated undiscounted cash
flows are compared to the carrying amount of the assets. If the undiscounted
cash flows are less than the carrying amount, an impairment loss is recorded.
The impairment loss is measured by comparing the fair value of the assets with
their carrying amounts and any write-downs are treated as permanent reductions
in the carrying amount of the asset.
Revenue
First year commissions are recognized as revenue at the time the policy
application is completed, the premium is paid and the insured party is
contractually committed to purchase the insurance policy. Renewal commission
revenue is recognized when the insurance policy premium is due. The Company is
notified in advance if a client plans to surrender, so adjustments in subsequent
periods due to cancellations are not material. Revenue associated with policies
to be surrendered is not recognized. Cancellations or other adjustments are
accounted for in the period of cancellation, or in the period where an
adjustment is determined to be necessary and are not significant. Service fees
are received annually on the policy anniversary date. Fees related to future
services to be provided are recognized as the services are rendered and fees for
program design and placement are recognized in a manner consistent with
commissions.
The Company generated in excess of 25% of its revenue in 1997 from 3
clients. Approximately 23%, 19% and 16% of the Company's commission and fee
revenue for the year ended 1997 and for the nine months ended September 30, 1997
and 1998, respectively, was generated by The Wamberg Organization, which is
wholly-owned by the Company's Chairman. Substantially all of the policies
underlying the programs marketed by the Company are underwritten by 14 life
insurance companies, of which seven accounted for approximately 78.9% of the
Company's first-year commission revenue for the year ended December 31, 1997.
Commissions and Fee Expense
Commissions and fee expense comprise the portion of the total
commission revenue that is earned by and paid to agents.
Advertising
Advertising and marketing costs provided by third parties are charged
to operations when incurred. Total expenses for 1997 were $70,299, and were
$34,641 and $208,108 for the nine months ended September 30, 1997 and 1998
(unaudited), respectively.
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Stock Compensation
The Company adopted SFAS No. 123 -- Accounting for Stock-Based
Compensation (SFAS 123) effective January 1, 1996. SFAS 123 establishes
financial accounting and reporting standards for stock-based compensation. The
Company elected to continue to account for stock-based compensation as
prescribed by APB Opinion No. 25 -- Accounting for Stock Issued to Employees and
to provide pro forma disclosures in the Notes to Financial Statements of the
effects of SFAS 123 on net income and earnings per share (See Note 8). Equity
issued to non-employees is accounted for based on fair value in accordance with
SFAS 123. There was no effect on reported net income as a result of adopting
SFAS 123.
Earnings Per Share
In February 1997, the Financial Accounting Standard Board ("FASB")
issued SFAS No. 128 -- Earnings Per Share. This Statement specifies the
computation, presentation and disclosure requirements for earnings per share for
entities with publicly-held common stock. This Statement is effective for
financial statements for both interim and annual periods ending after December
15, 1997 and has been adopted by the Company and is presented for all periods in
the accompanying financial statements.
Comprehensive Income
As of January 1, 1998, the Company adopted SFAS 130 -- Reporting
Comprehensive Income. Statement 130 establishes new rules for the reporting and
display of comprehensive income and its components. Statement 130 requires
unrealized gains or losses on available-for-sale securities and certain other
items, which prior to adoption were reported separately in shareholders' equity,
to be included in other comprehensive income. The adoption of this Statement had
no impact on the Company's net income or shareholders' equity. The Company has
no other comprehensive income as defined by SFAS 130, as of December 31, 1997 or
September 30, 1998.
Segment Reporting
In June 1997, the FASB issued SFAS 131 -- Disclosures About Segments of
an Enterprise and Related Information. This Statement requires public
enterprises to report selected information about operating segments in annual
and interim reports issued to shareholders. It is effective for financial
statements for fiscal years beginning after December 15, 1997, but it is not
required to be applied to interim financial statements in the initial year of
its application. The adoption of this Statement will have no impact on the
Company's financial condition or results of operations.
Derivatives and Hedging Instruments
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is required to be adopted in years
beginning after June 15, 1999. The Statement will require the Company to
recognize all derivatives on the balance sheet at fair value. Derivatives that
are not hedges must be adjusted to fair value through income. If the derivative
is a hedge, depending on the nature of the hedge, changes in the fair value of
derivatives will either be offset against the change in fair value of the hedged
assets, liabilities, or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value will be immediately
recognized in earnings. The Company had no derivative positions at September 30,
1998. Management does not anticipate that the adoption of the new Statement will
have a significant effect on earnings or the financial position of the Company.
YEAR 2000 COMPLIANCE
The Year 2000 issue is the result of computer programs written using
two digits rather than four digits to define "date" fields. Information systems
have time sensitive operations that, as a result of this data field limitation,
could disrupt activities in the normal business cycle. Based on previous and
ongoing internal reviews, management believes that the computer equipment and
software used by the Company will function properly with respect to dates in the
Year 2000 and thereafter. However, significant uncertainty exists concerning the
potential costs and effects of the Year 2000 problem. The Company is continuing
its assessment of Year 2000 issues and taking steps to prevent these issues from
adversely affecting its future operating results. This ready process includes,
but is not limited to, preparing an inventory of potential Year 2000 issues,
determining functions affected, performing remediation as necessary, testing
software and equipment and recording results.
In its assessment of Year 2000 issues, the Company is specifically
focusing on its software applications and associated software products,
hardware, facilities, communications equipment and security systems. The
Company's proprietary financial modeling and Unix-based administrative systems
that support its insurance-financed employee benefit programs were designed to
be Year 2000 ready. During 1998 the Company upgraded its network software to be
Year 2000 compliant.
In addition to evaluating its own systems for Year 2000 compliance, the
Company is also communicating with and requesting information from its
significant suppliers and customers to determine the extent to which interfaces
with such entities are vulnerable to Year 2000 issues and the extent to which
the internal systems of such entities are vulnerable to Year 2000 issues. Third
parties that have relationships with the Company, including insurance companies
and clients, may experience significant operational difficulties if their
computer systems do not properly recognize date sensitive information when the
year changes to 2000. While these computer malfunction issues may have a
material adverse effect on the operations of such third parties, which may, in
turn, have a material adverse effect on the Company, management presently
believes that Year 2000 issues will not require the Company to incur any
material costs and do not pose significant operational problems for the Company.
However, the Company is not able to determine the extent to which such third
parties, such as insurance companies and clients, may experience Year 2000
issues. Any Year 2000 problem of either the Company or third parties that have
relationships with the Company could have a material adverse effect on the
Company's business, results of operations and financial condition. The Company
believes that to the extent that any insurance companies which have a
relationship with the Company are unable to become Year 2000 compliant, the
Company will be able to enter into relationships on a going forward basis with
other insurance companies that are Year 2000 compliant.
The Company has not yet fully completed its Year 2000 assessment and
remediation efforts. Based on its experience to date, the Company presently
believes that the Year 2000 issues will not pose significant operational
problems for the company directly or as a result of any Year 2000 issues of
suppliers or customers.
12
<PAGE> 13
2. ACQUISITIONS
BANK COMPENSATION STRATEGIES
On September 1, 1997 (the acquisition date), the Company acquired
substantially all of the assets, and the book of business of BCS, a Minneapolis,
Minnesota based life insurance agency engaged in the business of designing and
marketing life insurance policies and related compensation, salary and benefit
plans and providing related services to financial institutions. The Company
accounted for the acquisition as a purchase and has included the operating
results of BCS commencing from the acquisition date in the financial statements.
The purchase price of the acquisition was $24.0 million plus
acquisition related expenses of approximately $383,440. The purchase price was
comprised of $13.5 million in cash and two promissory notes in the principal
amounts of $5.7 million and $4.8 million (see Note 6). The Company allocated
approximately $10,000 of the purchase price to tangible assets acquired and the
remaining as follows:
$1.2 million was allocated to two non-compete agreements
with former officers of BCS. The terms of the agreements are for
five and ten years which are the respective periods over which
the intangible assets are being amortized.
$4.1 million was allocated to the net present value of
estimated future profits embedded in the existing in-force book
of business. The net present value of the existing in-force book
of business was determined using a 10% discount and a 2.75%
annual lapse factor for the purchased book of business. This
intangible asset is being amortized over 30 years which
approximates the average policy duration. The Company believes
that no other class of intangible assets acquired in the BCS
acquisition is significant or exceeds 5% of total assets.
The remaining $19.1 million was allocated to goodwill.
This is being amortized over a forty year period. Management
believes that the existing future profit potential associated
with the BCS client base will have value to the Company well
beyond the forty year amortization period based on new business
prospects and the long-term nature of the policies.
Management will periodically review these intangibles for impairment in
accordance with its policy (see Note 1).
SCHOENKE ENTITIES
Effective September 1, 1998 the Company acquired substantially all of
the assets, and the book of business of the Schoenke Entities based in
Germantown, Maryland. The Schoenke Entities specialize in designing, financing
and administering benefit programs for their clients. The Company accounted for
the acquisition as a purchase and has included the operating
13
<PAGE> 14
results of the Schoenke Entities commencing from the acquisition date in the
financial statements.
The purchase price of the acquisition was $17.0 million plus acquisition
related expenses of approximately $94,082. The purchase price was comprised of
$15.0 million in cash and a promissory note in the principal amount of $2.0
million (see Note 6). The Company allocated approximately $758,000 of the
purchase price to tangible assets acquired and the remaining as follows:
$750,000 was allocated to a 5-year non-compete agreement
with the former owner of the Schoenke Entities. The intangible
asset is being amortized over five years.
Approximately $15.1 million was allocated to the net
present value of estimated future profits embedded in the
existing in-force book of business. The net present value of the
existing in-force book of business was determined using a 15%
discount and a 2.5% annual lapse factor for the purchased book of
business. This intangible asset is being amortized over 30 years
which approximates the average policy duration.
The remaining $456,920 was allocated to goodwill. This is
being amortized over a forty year period. Management believes
that the existing future profit potential associated with client
base of the Schoenke Entities will have a value to the Company
well beyond the forty year amortization period based on new
business prospects and the long-term nature of the policies.
Management will periodically review these intangibles for impairment in
accordance with its policy (see Note 1).
The unaudited pro forma information below presents the results of the
Company and the Schoenke Entities combined as if the acquisition had occurred at
the beginning of the respective period shown:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------------
1998 1997
--------------- ---------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Pro Forma:
Revenues............................. $ 51,528,431 $ 38,961,073
Income (loss) from Operations........ (938,623) 234,610
Net loss............................. (3,116,578) (1,207,966)
Diluted loss per Share............... (0.79) (0.26)
</TABLE>
3. NOTES RECEIVABLE
Notes receivable consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
-------------- --------------
(UNAUDITED)
<S> <C> <C>
Note receivable - Secured by renewal
commissions; interest accrues at 12%; due December 31, 1998 ....... $ 15,000 $ --
Note receivable -- secured by first
year and renewal commissions; interest accrues at
prime plus 1%; due on demand .................................... -- 75,000
Note receivable -- Secured by collateral assignment of
insurance commissions/compensation; due in full plus interest
at prime plus 2% on demand ...................................... 130,478 130,478
Note receivable-- Secured by collateral
assignment of insurance commissions/compensation;
due in full plus interest at prime plus 4% on
demand .......................................................... 215,247 219,643
Note receivable-- secured by
renewal commissions; interest accrues at 12%; due
on demand ....................................................... 30,000 --
Note receivable-- secured by
renewal commissions; due on demand; interest
accrues at 12% .................................................. 8,492 60,000
Note receivable-- secured by
renewal commissions; due on demand; interest
accrues at prime plus 2% ........................................ 53,475 70,658
Notes receivable-- employees;
unsecured; interest accrues at 9.5% ............................. 5,000 --
-------------- --------------
457,692 555,779
Less allowance for uncollectible notes receivable ................. (78,000) (78,000)
-------------- --------------
$ 379,692 $ 477,779
============== ==============
</TABLE>
14
<PAGE> 15
The Company recorded interest income from related parties of $46,106
for the year ended December 31, 1997, and $14,636 and $6,515 for the nine months
ended September 30, 1997 and 1998 (unaudited), respectively. The Company also
has accrued interest receivable of $12,664, and $5,074 from related parties at
December 31, 1997, and at September 30, 1998 (unaudited), respectively.
4. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Major classifications of equipment and leasehold improvements are as
follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
----------- -----------
(UNAUDITED)
<S> <C> <C>
Office furniture and equipment ................ $ 2,566,478 $ 2,133,005
Leasehold improvements ........................ 155,531 96,116
----------- -----------
2,722,009 2,229,121
Accumulated depreciation and amortization ..... (1,637,818) (1,513,267)
----------- -----------
$ 1,084,191 $ 715,854
=========== ===========
</TABLE>
5. TAXES
The Company's effective tax rate of (51.0%) representing a tax benefit,
was less than the combined federal and state statutory income tax rate of 39.7%
primarily due to the Company being taxed as an S corporation through July 31,
1998 and the recording of deferred tax assets and liabilities resulting from the
conversion from an S corporation to a C corporation.
Upon consummation of the Reorganization described in Note 1, the
Company ceased to be taxed as an S corporation and is subject to federal and
state income taxation as a C corporation. At December 31, 1997 the net tax bases
of the Company's assets and liabilities was approximately $2.9 million lower
than the financial statement bases. At July 31, 1998 the net tax bases of the
Company's assets and liabilities was approximately $1.9 million higher than the
financial statement bases. Under Treasury Regulation Section 1.448-1 the Company
is required to change from the cash method and must take the section 481
adjustment into account ratably over four taxable years. The Company recorded a
deferred tax asset of $806,211 using an assumed tax rate of 39.7% at September
30, 1998 to record the conversion from the cash method to accrual and adoption
of FASB 109.
6. FINANCING ARRANGEMENTS
The current and long-term portions of debt consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
----------- -----------
(UNAUDITED)
<S> <C> <C>
Senior Secured Notes (current portion --
$2,900,000) ................................... $11,600,000 $14,500,000
Second Priority Senior Secured Notes ............ 8,900,000 8,900,000
Medium Term Notes -- Related parties
(current portion -- $425,000) ................. 3,275,000 5,700,000
Convertible Subordinated Notes -- Related
parties (current portion - $1,200,000) ........ 1,200,000 4,800,000
Schoenke Notes (current portion - $1,000,000) ... 2,000,000 --
Other ........................................... 28,125 --
AAA Distribution -- Related parties ............. 3,263,143 3,263,143
----------- -----------
$30,266,268 $37,163,143
=========== ===========
</TABLE>
15
<PAGE> 16
Senior Secured Notes. During 1997, the Company issued $14.5 million of
10.5% secured promissory notes maturing August 9, 2002; principal is payable
semi-annually beginning February 9, 1998 and interest is payable quarterly. The
notes were restructured in August 1998. The interest rate was reset to 7.84%.
Interest expense was $473,667 and $990,054 and interest paid was $253,750 and
$1,116,500 for the year ended December 31, 1997 and for the nine months ended
September 30, 1998, respectively. The Company must comply with certain
restrictive covenants (see Note 1).
Second Priority Senior Secured Notes. During 1997, the Company issued
$8.9 million of 11% Second Priority Senior Secured Notes maturing in three equal
annual installments beginning August 9, 2002; interest is payable quarterly. The
notes were restructured in August 1998. The interest rate was reset to 8.86%.
Interest expense was $304,577 and $714,675 and interest paid was $163,167 and
$775,042 for the year ended December 31, 1997 and for the nine months ended
September 30, 1998, respectively. These notes possess identical restrictive
covenants as the Senior Secured Notes. In connection with the issuance of these
notes, the Company authorized the issuance of warrants evidencing rights to
purchase 1,525,424 shares of the Company's no par value common stock at $5.90
per share subject to terms, conditions and adjustments set forth in the warrant
agreement, at any time prior to August 9, 2004. The initial fair value of
$100,000 for the warrants was determined in connection with the entire
transaction pursuant to negotiations between the Company and the purchasers of
warrants and is set forth in the warrant agreement. If the Company defaults in
the payment of the principal of the notes, the expiration date of the warrants
is extended to August 9, 2007. The common shares issuable upon the exercise of
the warrants must be reserved and kept available out of the authorized common
stock. The Company has also granted certain put rights effective after September
9, 2002 to the warrant holders that require the Company to purchase any shares
issued from the exercise of the warrants at the fair value of the shares. No
obligation related to the put rights was recognized at December 31, 1997 as the
exercise price exceeded the fair value of the warrants at that date. The put
right expires when the common stock of the Company becomes publicly traded. The
warrants were extinguished in August 1998 by payment of $4.9 million to the
noteholders (see Note 1).
Medium Term Notes. During 1997, in connection with the purchase of BCS,
the Company issued $5.7 million of Medium Term Notes maturing in four equal
annual installments of $1.425 million beginning August 15, 1998; interest is
payable quarterly at the corporate base rate of the First Bank of Minnesota
which was 8.5% at December 31, 1997. Interest expense was $150,733 and $339,912
and interest paid was $88,825 and $363,375 in 1997 and for the nine months ended
September 30, 1998, respectively. A prepayment on the principal of $1.0 million
was made in August 1998 (see Note 1).
Convertible Subordinated Notes. During 1997, in connection with the
purchase of BCS, the Company issued $4.8 million of 8.5% Convertible
Subordinated Notes maturing in one installment on September 15, 2007; interest
is payable quarterly. Interest expense was $126,933 and $270,040 and interest
paid was $108,800 and $283,640 in 1997 and for the nine months ended September
30, 1998, respectively. These notes are convertible into 813,559 shares of
Common Stock, at $5.90 per share. The conversion feature is available to the
creditors until these notes are paid in full by the Company. In August 1998 $3.6
million of these notes was converted into 610,169 shares of Common Stock at
$5.90 per share and the remaining $1.2 million is to be converted in October
1998.
Schoenke Notes. During 1998, in connection with the purchase of the
Schoenke Entities, the Company issued $2.0 million of 6.75% notes maturing in
two equal annual installments of $1.0 million on September 1, 1999 and on
September 1, 2000. Interest is payable monthly beginning November 1, 1998.
16
<PAGE> 17
AAA Distribution. The Company made a special dividend distribution of
$3,866,412 to shareholders of record on November 15, 1997 in the form of notes
payable. The notes outstanding at December 31, 1997 of $3,263,143, mature
November 15, 2007 and interest accrues quarterly at 8.5%. Interest expense
incurred was $34,956 and $208,025 and interest paid was $0 and $208,025 in 1997
and for the nine months ended September 30, 1998, respectively.
At September 30, 1998, future payments under all financing arrangements
are as follows:
<TABLE>
<S> <C> <C>
1999................ $ 5,525,000
2000................ 5,325,000
2001................ 4,325,000
2002................ 5,900,000
2003................ 3,000,000
Thereafter.......... 6,191,268
------------
$ 30,266,268
============
</TABLE>
7. STOCKHOLDERS' EQUITY
During 1997, the Company repurchased Common Stock from certain
principals and other stockholders. Under these agreements, 2,567,650 shares were
repurchased at prices ranging from $4.20 to $6.00 per share.
The Company approved a financing arrangement in 1997 which allows
certain key associates to purchase shares of Common Stock. During the year,
pursuant to this arrangement, the Company issued 174,653 shares of common stock
at $4.80 per share. The notes receivable under this arrangement are
collateralized by the shares sold. Amounts due to the Company at December 31,
1997 for stock purchases were $465,588. Outstanding principal balances pay
interest at 8.5% and mature in 2000 and 2003.
8. BENEFIT PLANS
Associate Stock Bonus/Stock Purchase Plan. The Associate Stock
Bonus/Stock Purchase Plan for selected associates of the Company provides to
each participant (i) a grant of 25,000 shares of stock and (ii) an option to
purchase another 25,000 shares at a fixed price of $2.00 per share, within three
years from the date the agreement is entered into if certain criteria under the
terms of the plan are satisfied, principally, that certain production levels are
attained. The fair value of the stock granted and options issued were determined
by the Board of Directors considering prior stock transactions. During 1997 and
1996, the Company issued 50,000 shares and 150,000 shares, respectively, and has
recorded compensation expense of $190,000 and $172,500, respectively, in
relation to the stock grants and options. As of December 31, 1997, this Plan is
no longer available.
Incentive Stock Option Plan. The Incentive Stock Option Plan provides
certain employees options to purchase shares for $4.80 and $7.00 per share;
540,830 shares of Common Stock have been reserved for issuance under this plan
and 190,830 shares had been granted under this program at December 31, 1997. The
$4.80 and $7.00 options (with the exception of 100,000 options) became 100%
vested at the date of the initial public offering. The options expire ten years
from the grant date. In addition, the options are voided within 90 days of the
employee's termination or one year from the date of death.
Under this plan, participants purchased stock at $4.80 per share and
receive a matching option with an exercise price of $4.80 per share in exchange
for a promissory note and a security agreement; during 1997, 69,997 shares were
issued under this program but none of the options were vested at December 31,
1997. Principal on the notes matures March 1, 2001, is due in four equal annual
installments beginning March 1, 1998 and accrues interest at the Wall Street
Journal prime rate plus 1.5%. Total notes receivable outstanding under this
program are $18,920 at September 30, 1998.
17
<PAGE> 18
In addition to the Incentive Stock Option Plan, the Company granted
stock options to an individual in his capacity as a director nominee to the
Board of Directors on April 2, 1997 for the purchase of 100,000 shares at an
exercise price of $4.80; no options were exercised during 1997 or vested at
December 31, 1997. These options were issued in conjunction with services
provided to the Company as an advisor to the Board of Directors and for future
participation as a member of the Company's Board of Directors which occurred in
mid-1998. These options vest ratably over a three year period upon the
individual's appointment to the Company's Board of Directors. The fair value of
the Common Stock at the date of grant was $4.80 as determined by the Company's
Board of Directors and based on recent stock transactions; accordingly no
compensation expense has been recorded.
If the fair value of the stock compensation granted had been accounted
for under SFAS 123, the pro forma net income and diluted earnings per share for
the year ended December 31, 1997 would have been approximately $4.2 million and
$0.95 per share. The effect of options on 1996 net income was not significant.
For purposes of pro forma disclosures, the estimated fair value of the options
was determined using the Black-Scholes pricing model using assumptions for the
expected life of the options (7.13 and 6.13 years), a risk-free interest rate of
approximately 5.8%, a volatility factor of 25.0% and no dividends. The effect on
net income of the stock compensation expense for the year presented above is
likely not representative of the effects on reported net income and earnings per
share for future years.
A summary of option activity is as follows:
<TABLE>
<CAPTION>
1996 1997
----------------------------- ------------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
----------- ---------------- ----------- -----------------
<S> <C> <C> <C> <C>
Outstanding -- beginning of year ........ -- $ -- 50,000 $ 1.00
Granted ................................. 200,000 1.75 290,830 5.93
Exercised ............................... (150,000) 2.00 (50,000) 1.00
Forfeited ............................... -- -- -- --
----------- -----------
Outstanding -- end of year .............. 50,000 $ 1.00 290,830 $ 5.93
=========== ===========
Exercisable at end of year .............. -- $ -- 45,833 $ 6.00
Weighted-average fair value of options
granted during the year ............... $ 3.74 $ 4.80
</TABLE>
Exercise prices for options outstanding as of December 31, 1997 ranged
from $4.80 to $7.00. The weighted-average remaining contractual life of those
options is 9.7 years.
Phantom Stock Agreement. The Company entered into a Phantom Stock
Agreement, dated September 5, 1997 with a Principal of the Company. Under this
agreement, the Principal is entitled to receive an award expressed in units
("Incentive Units") based upon the level of revenue received by the Company on
certain sales generated by the Principal. The Principal will first be entitled
to receive payments for the value of his Incentive Units on April 1, 2003 and
every year thereafter until April 1, 2008. It is unlikely that the Principal
will be entitled to any payments under the Phantom Stock Agreement based on the
required revenue performance levels.
Savings Investment Plan. The Savings Investment Plan is a defined
contribution profit sharing Plan qualifying under Section 401(k) of the Internal
Revenue Code covering substantially all employees. At the Company's discretion,
the Company may contribute up to 50.0% of the first 6.0% of an eligible
participant's contributions to the Plan. Company contributions to the Plan were
$108,293 for the year ended December 31, 1997, and $81,726 and $163,142 for the
nine months ended September 30, 1997 and 1998 (unaudited), respectively.
Stock Purchase and Stock Option Plans
On July 10, 1998, the Board of Directors adopted the Stock Purchase
Plan, under which a total of 200,000 shares of Common Stock has been reserved
for issuance. Any employee who has been employed by the Company for 90 days is
eligible to participate in offerings under the Stock Purchase Plan.
The Stock Purchase Plan will be implemented by eight semi-annual
offerings of Common Stock beginning on each January 1 and July 1 in each of the
years 1999, 2000, 2001 and 2002, and terminating on June 30 and
18
<PAGE> 19
December 31 of each such year. The maximum number of shares issued in such years
will be 50,000 in 1999, and 50,000 plus the number of unissued shares from prior
offerings for each of 2000, 2001 and 2002.
In addition, as approved by the Board of Directors on July 10, 1998,
the Company has reserved 2.0 million shares of Common Stock under the Company's
Stock Option Plan, as amended, and as of the date of the Offering granted
378,023 additional options at an exercise price of $9.00 per share. The existing
options outstanding at the date of the initial public offering under the prior
plan became immediately vested, except for 100,000 options outstanding.
Key Executive Life Insurance. The Company maintains and is the sole
beneficiary of key man life insurance policies of $8.0 million and $2.0 million
on its Chairman and Vice-Chairman, respectively, and policies ranging from
$150,000 to $2.0 million on certain other key executives.
9. COMMITMENTS
Leases
The Company conducts operations from leased office facilities.
Management expects that, in the normal course of business, leases that expire
will be renewed or replaced by other leases; thus it is anticipated that future
minimum lease commitments will not be less than the amount shown for the year
ended December 31, 1997.
Rental expense for the year ended December 31, 1997 was $476,033 and
$406,105 and $648,558 for the nine months ended September 30, 1997 and 1998
(unaudited), respectively.
At December 31, 1997, approximate minimum rental commitments under all
non-cancelable leases having terms in excess of a year are as follows:
<TABLE>
<S> <C>
1998 $ 451,806
1999 445,787
2000 446,737
2001 148,430
-------------
$ 1,492,760
=============
</TABLE>
10. RELATED PARTY TRANSACTIONS
The Company had accounts receivable of $603,118, and $61,623, accounts
payable of $5,277, and $76,057 and accrued expenses of $2,621,523, and $(98,350)
to related parties at December 31, 1997, and at September 30, 1998 (unaudited),
respectively.
The Company has entered into compensation and employment agreements
with certain key employees. The agreements provide for an indefinite employment
term, compensation, stock bonuses, expense reimbursements and participation in
benefit plans and are subject to the employees' compliance with certain
provisions.
The Company and its Chairman, Mr. Wamberg, are the parties to a
Principal Office Agreement dated July 29, 1993, pursuant to which The Wamberg
Organization markets, on behalf of the Company, life insurance and
administrative and consulting services, and the Company furnishes to The Wamberg
Organization marketing materials and concepts, program design ideas, selected
life insurance products, specimen plan documents and administrative services.
The agreement can be terminated by either party upon 90 days' written notice.
The Wamberg Organization's commissions range between 65.0% and 70.0% of total
revenue depending on the amount of total revenue generated from a case.
Commissions and fees payable to The Wamberg Organization are net of any of the
Company's administrative costs as determined by the Board of Directors. Pursuant
to the terms of the Principal Office Agreement, The Wamberg Organization was
paid, approximately $7,792,000, $2,922,406 and $4,954,518 in 1997 and for the
nine months ended September 30, 1997 and 1998 (unaudited), respectively, for
commissions and fees earned. The terms and conditions of Mr. Wamberg's Principal
Office Agreement are similar
19
<PAGE> 20
in all material respects to the terms and conditions of such agreements with
other producers designated as principals.
The Company has transactions with affiliated entities. The Company
provides services for affiliates and is reimbursed for these services at the
Company's respective costs.
11. JOINT VENTURE
During 1994, the Company entered into an agreement to jointly develop,
implement, distribute and market certain products for the corporate owned life
insurance market. The investment in this joint venture is accounted for using
the equity method. The Company's initial investment was minimal. The Company
made advances to the joint venture in 1994 totaling approximately $100,000,
which were expensed as incurred. The Company's participation is 50% and all of
the joint venture's net cash flow is distributed quarterly, as provided in the
agreement. Quarterly distributions to the Company by the joint venture have been
recorded as other revenues in the accompanying statements of income in the
amount of approximately $310,000 in 1997, and $216,468 and $190,881 for the nine
months ended September 30, 1997 and 1998 (unaudited), respectively.
12. EARNINGS PER SHARE
The following table sets forth the computation of historical basic and
diluted earnings per share:
<TABLE>
<CAPTION>
HISTORICAL
-----------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31,
----------------------- ------------------------ ------------------------------------
1998 1997 1998 1997 1997 1996 1995
---------- ---------- ----------- ---------- ---------- ---------- ----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Numerator:
Net income (loss) ................. $2,382,313 $ 888,713 $(2,628,317) $ 351,542 $4,233,889 $3,553,985 $2,217,796
Effect of dilutive
securities:
Interest on convertible
debt (net of tax) .............. 39,945 24,414 * 24,414 125,036 -- --
---------- ---------- ----------- ---------- ---------- ---------- ----------
Numerator for diluted
earnings per share ................ $2,422,258 $ 913,127 $(2,628,317) $ 375,956 $4,358,925 $3,553,985 $2,217,796
Denominator:
Denominator for basic
earnings per share --
weighted-average
shares ......................... 5,407,503 4,347,718 3,958,602 4,478,052 4,119,387 4,709,252 5,727,607
Effect of dilutive
securities:
Stock options .................. 221,052 -- * 9837 7,277 -- --
Convertible debt ............... 528,371 265,291 * 89,402 271,929 -- --
---------- ---------- ----------- ---------- ---------- ---------- ----------
Denominator for diluted
earnings per share --
adjusted
weighted-average shares
and assumed
conversions .................... 6,156,926 4,613,009 3,958,602 4,577,291 4,398,593 4,709,252 5,727,607
========== ========== =========== ========== ========== ========== ==========
Basic earnings (loss)
per share .................... $ 0.44 $ 0.20 $ (.66) $ .08 $ 1.03 $ 0.75 $ 0.39
========== ========== =========== ========== ========== ========== ==========
Diluted earnings (loss)
per share .................... $ 0.39 $ 0.20 $ (.66) $ .08 $ 0.99 $ 0.75 $ 0.39
========== ========== =========== ========== ========== ========== ==========
</TABLE>
- ----------
* The effects of options and convertible debt have not been included as such
effects would be antidilutive.
The weighted average shares presented gives effect to the Merger
described in Note 1 and has been accounted for as a reverse stock split ( 1/2
share for 1 share).
20
<PAGE> 21
13. SIGNIFICANT RISKS AND UNCERTAINTIES
Federal tax laws create certain advantages for the purchase of life
insurance products by individuals and corporations, and therefore the life
insurance products underlying the benefit programs marketed by the Company are
vulnerable to adverse changes in tax legislation. Amendments to the federal tax
laws enacted in 1996 and 1997 have reduced the advantages of certain purchases
of business-owned life insurance. With limited exceptions, the 1996 amendment
eliminated the ability to deduct interest on loans against the cash value of
life insurance policies. In 1997, legislation imposed an interest disallowance
rule that applied to all business-owned life insurance except for policies
placed on employees, officers, directors and 20-percent owners. The effect of
the 1997 legislation was to reduce otherwise allowable interest deductions by a
ratio of unborrowed cash value to all other assets.
In February 1998, the Clinton administration proposed eliminating the
"employee, officer and director" exception to the interest disallowance rule as
a part of its budget proposal. If such a proposal were to be enacted, it would
significantly reduce the attractiveness of business-owned life insurance to
companies that traditionally have high debt/equity ratios such as banks.
Congress adjourned its 1998 legislative session without taking action on the
Clinton administration's proposal. The Company is unable to predict whether a
future Congress or administration would introduce the same or similar proposals.
The Company believes, at the very least, any such proposal would fully
grandfather existing business.
21
<PAGE> 22
14. INTERIM FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
QUARTER
---------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
------ ------- ------- ------ ------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Summary of Quarterly Results:
Revenue............................... 1997 $ 5.5 $ 5.8 $ 11.0 $ 27.1 $ 49.4
1996 5.7 7.0 5.3 15.2 33.2
1995 5.6 4.8 3.4 13.2 27.0
Pre-tax income (loss)................. 1997 $ 0.2 $ (0.7) $ 0.9 $ 3.9 $ 4.3
1996 0.6 0.7 0.2 2.2 3.7
1995 0.5 0.0 (0.7) 2.5 2.3
Net income (loss)..................... 1997 $ 0.2 $ (0.7) $ 0.9 $ 3.8 $ 4.2
1996 0.6 0.7 0.2 2.1 3.6
1995 0.5 0.0 (0.7) 2.4 2.2
Basic earnings (loss) per share 1997 $ 0.05 $ (0.16) $ 0.20 $ 1.27 $ 1.03
(historical)..........................
1996 0.12 0.15 0.04 0.45 0.75
1995 0.10 0.00 (0.12) 0.41 0.39
Diluted earnings (loss) per share 1997 $ 0.05 $ (0.16) $ 0.20 $ 1.03 $ 0.99
(historical)..........................
1996 0.12 0.15 0.04 0.45 0.75
1995 0.10 0.00 (0.12) 0.41 0.39
</TABLE>
15. SUBSEQUENT EVENTS
On October 1, 1998, the Company entered into a letter of understanding
with the Wiedemann & Johnson Company (the "Pending Acquisition"), which provides
for, among other things, the acquisition by the Company of the business and the
assets of the Wiedemann & Johnson Company. The purchase price of the Pending
Acquisition is $6.0 million, of which $4.0 million is payable in cash at the
closing of the Pending Acquisition, and the issuance of a maximum of 166,667
shares of Common Stock (not to exceed a fair-market-value of $2.0 million). The
consummation of the Pending Acquisition is subject to numerous conditions,
including the consummation of the Offering, the approval of the Company's board
of directors, obtaining all requisite regulatory approvals and the satisfactory
completion of the Company's due diligence review. The Pending Acquisition is
expected to close prior to November 18, 1998. The operations associated with the
Pending Acquisition are anticipated to generate sufficient cash flow to cover
the costs relating to the integration of the Weidemann & Johnson Company with
the Company. The Pending Acquisition will be accounted for using the purchase
method.
On September 25, 1998, the Board of Directors approved the 1998
Non-Employee Director Stock Option Plan, pursuant to which the Company has
reserved 100,000 shares of Common Stock. On October 1, 1998, the Company issued
options to buy 1,666 shares of Common Stock to a non-employee director at an
exercise price of $9.00 per share pursuant to the 1998 Non-Employee Director
Stock Option Plan, and as of the date of this report, no other options have been
granted under the plan.
22
<PAGE> 23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RECENT ACQUISITIONS
Effective September 1, 1998, Clark/Bardes, Inc., a Delaware
corporation and wholly owned subsidiary of the Company ("CBI"), acquired
substantially all the assets and the business of the Schoenke & Associates
Corporation and Schoenke & Associates Securities Corporation (collectively, the
"Schoenke Entities"), based in Germantown, Maryland. The total purchase price
was $17.0 million consisting of a $1.5 million secured refundable deposit paid
prior to the Company's public offering (the "Offering"), cash at closing in the
amount of $13.5 million and a promissory note issued by the Company in an
amount equal to $2.0 million. Acquisition related expenses were $94,082. The
Company allocated the purchase price as follows: approximately $758,000 to
tangible assets, $750,000 to a non-compete agreement with the seller,
approximately $15.1 million to the net present value of the Schoenke Entities
expected future profits and approximately $457,000 to goodwill.
The Schoenke Entities were engaged in the business of the design,
implementation and administration of non-qualified executive benefits programs
financed through life insurance. The Company's primary objective in acquiring
the Schoenke Entities was to expand the Company's client and revenue base and
acquire the capable sales support and administrative personnel of the Schoenke
Entities. For the period beginning September 1, 1998 (the effective date of the
Schoenke Entities acquisition) to September 30, 1998, the assets acquired from
the Schoenke Entities generated total revenue of $327,259, and contributed
$114,509 to operating income after deducting $62,000 for related amortization
expense. The Company's historical results of operations for the three month and
nine month period ended September 30, 1998 reflect the Schoenke Entities results
from operations for a one month period.
Effective September 1, 1997, Clark/Bardes, Inc., a Texas corporation
and predecessor company (the "Predecessor Company") to CBI, acquired
substantially all the assets and the business of Bank Compensation Strategies,
Inc., a Minnesota based company ("BCS"), for a total purchase price in cash
equal to $24.0 million, plus acquisition related expenses of $383,440. The
historical results of operations for the three month and nine month period
ended September 30, 1998 reflect BCS results from operations for the full
period, and the historical results of operations for the three month and nine
month period ended September 30, 1997 reflect BCS results for a one month
period.
RESULTS OF OPERATIONS
The following discussion compares the results of operations for the
Company on a historical basis for the three month and nine month period ended
September 30, 1998 with the historical results of operations for the Company for
the three month and nine month period ended September 30, 1997. The following
discussion also compares the pro forma results of operations for the Company for
the nine month period ended September 30, 1998 adjusted to give effect to the
acquisition of the Schoenke Entities as if such transaction had occurred at the
beginning of the period presented, with the results of operations for the
Company for the nine month period ended September 30, 1997 adjusted to give
effect to the acquisition of BCS and the Schoenke Entities as if such
transactions had occurred as of the beginning of the period presented. The pro
forma information is provided in Note 2 to the financial statements, entitled
"Acquisitions."
23
<PAGE> 24
Three Month and Nine Month Periods Ended September 30, 1998 and September 30,
1997--Historical Comparison
Total Revenue. Total revenue increased to $17.6 million for the three
month period ended September 30, 1998 as compared to $11.0 million for the three
month period ended September 30, 1997, representing an increase of 60.2%. This
increase reflects the full-period acquisition results of BCS, which contributed
$7.5 million for the three month period ended September 30, 1998 as compared to
$948,404 for the same period ended September 30, 1997 which reflects one month
of BCS operating results. Total revenue increased to $46.6 million for the nine
month period ended September 30, 1998 as compared to $22.3 million for the nine
month period ended September 30, 1997. The results for the nine month period
ended September 30, 1998 reflects contributions of $27.3 million from the core
benefits business (including the Schoenke Entities) and $19.3 million from BCS
community bank business.
The strong revenue growth for the three month and nine month periods
ending September 30, 1998 was achieved despite the loss of approximately $2.8
million of renewal revenue due to a significant downsizing by one particular
customer that resulted in the surrender of their program. At this time,
management does not foresee similar circumstances that would have a material
adverse result with any of its other large customers.
Commission and Fee Expense. Commission and fee expense increased to
$11.0 million for the three month period ended September 30, 1998 as compared to
$7.1 million for the three month period ended September 30, 1997, representing
an increase of 54.8%. Commission and fee expense as a percentage of total
revenue decreased to 62.6% for the three month period ended September 30, 1998
as compared to 64.8% for the three month period ended September 30, 1997. This
reduction in commission and fee expense as a percentage of total revenue was due
to a favorable product mix, from business on which a smaller than usual
percentage of revenue was distributed to producers. This favorable product mix
is not representative of a trend, but management believes the reduction in
commission expense as a percentage of revenues will continue primarily due to
acquisitions. Commission and fee expense increased to $29.3 million for the nine
month period ended September 30, 1998 as compared to $14.4 million for the nine
month period ended September 30, 1997. Commission and fee expense as a
percentage of total revenue decreased to 62.7% for the nine month period ended
September 30, 1998 as compared to 64.6% for the nine month period ended
September 30, 1997. This reduction in commission and fee expense as a percentage
of total revenue was also due to a favorable product mix and is not
representative of a trend.
General and Administrative Expense. General and administrative expense
increased to $4.6 million for the three month period ended September 30, 1998 as
compared to $2.7 million for the three month period ended September 30, 1997,
representing an increase of 72.2%. This increase reflects the full-period
general and administrative expense of BCS, which was $1.3 million for the three
month period ended September 30, 1998 as compared to $262,183 for the same
period ended September 30, 1997 which reflects one month of operating results.
General and administrative expense as a percent of total revenue was 26.2% for
the three month period ended September 30, 1998 as compared to 24.3% for the
three month period ended September 30, 1997. This increase reflects the timing
of general and administrative expense for the quarter. Management believes this
proportionally higher general and administrative expense is temporary and is not
reflective of a trend. General and administrative expense increased to $13.0
million for the nine month period ended September 30, 1998 as compared to $7.3
million for the nine month period ended September 30, 1997, representing an
increase of 78.5%. General and administrative expense as a percent of total
revenue was 28.0% for the nine month period ended September 30, 1998 as compared
to 32.7% for the nine month period ended September 30, 1997. The improvement in
general and administrative expense as a percentage of total revenue over the
nine month period was due primarily to the elimination of certain expenses as a
result of the BCS acquisition.
Amortization. Amortization expense equaled $356,494 for the three month
period ended September 30, 1998 and $798,439 for the nine month period ended
September 30, 1998, reflecting the full-period amortization of intangible assets
capitalized as a result of the BCS acquisition and $62,000 relating to the
acquisition of the Schoenke Entities. Amortization expense was $134,717 for the
three month and nine month period ended September 30, 1997.
Non-recurring Operating (Expense) Income. A non-recurring increase to
operating income of $500,000 was recorded for the three month period ended
September 30, 1998. This amount was related to the final fair market value
adjustment to its common stock put warrants. The Company originally accrued a
$5.3 million non-recurring operating expense in the second quarter of 1998,
which approximated the warrants fair market value at the
23
<PAGE> 25
time. The final amount paid to extinguish the warrants in August 1998 was
reduced by $500,000, resulting in non-recurring operating income for the third
quarter. The non-recurring operating expense equals $4.8 million for the nine
month period ended September 30, 1998.
Income (Loss) from Operations. Income from operations was $2.1 million
for the three month period ended September 30, 1998 ($1.6 million excluding the
non-recurring item), compared to $1.1 million for the three month period ended
September 30, 1997, representing an increase of 100.5% (53.2% excluding the
non-recurring item). This increase primarily reflects the Company's strong
revenue growth for the quarter. Income from operations as a percent of revenue
(excluding the non-recurring item) was 9.2% for the three month period ended
September 30, 1998, as compared to 9.6% for the three month period ended
September 30, 1997. The reduction in income from operations as a percent of
revenue was due to the increase in amortization expense. For the nine month
period ended September 30, 1998 the Company recorded a loss from operations of
$1.2 million ($3.6 million income excluding the non-recurring item), as compared
to $452,920 for the three month period ended September 30, 1997. Income from
operations as a percent of revenue (excluding the non-recurring item) was 7.6%
for the nine month period ended September 30, 1998, as compared to 2.0% for the
nine month period ended September 30, 1997. Strong revenue growth was also the
primary contributing factor for the improvement in operating margin for the nine
month period ending September 30, 1998.
Total Other Income (Expense). Other income and expense for the three
month period ended September 30, 1998 was $543,489 in expense as compared to
$168,443 in expense for the three month period ended September 30, 1997. The
amount for the three month period ended September 30, 1998 included interest
income of $220,508 and interest expense of $763,537 as compared to interest
income of $39,285 and interest expense of $207,411 for the three month period
ended September 30, 1997. Total other income and expense for the nine month
period ended September 30, 1998 was $2.2 million in expense as compared to
$101,378 in expense for the nine month period ended September 30, 1997. The
amount for the nine month period ended September 30, 1998 included interest
income of $388,132 and interest expense of $2.6 million. The increase in
interest expense for the three month and nine month periods ended September 30,
1998 was primarily due to debt incurred as a result of the BCS acquisition.
Income before Income Tax (Expense) Benefit. Income before taxes was
$1.6 million for the three month period ended September 30, 1998 ($1.1 million
excluding the non-recurring item), compared to $888,713 for the three month
period ended September 30, 1997, representing an increase of 77.3% (21.1%
excluding the non-recurring item). Income before taxes (excluding the
non-recurring item) was $1.4 million for the nine month period ended September
30, 1998, compared to $351,542 for the nine month period ended September 30,
1997. The growth in pre-tax income is a reflection of the Company's operating
results offset by its financing costs.
Income Tax (Expense) Benefit. Effective July 31, 1998 the Company
changed its tax status from an S corporation to a C corporation, which
significantly changed the Company's treatment for federal income tax purposes.
As a result of the change, the Company recorded a non-recurring deferred tax
benefit of $806,211. Pro-forma income tax expense, which represents the
estimated income tax expense the Company would have incurred as if it were a C
corporation for the entire period, was $427,200 for the three month period ended
September 30, 1998 and $352,800 for the three month period ended September 30,
1997. Pro-forma income tax expense was $544,145 for the nine month period ended
September 30, 1998 and $139,600 for the nine month period ended September 30,
1997.
Net Income (Loss). Net income was $2.4 million for the three month
period ended September 30, 1998. Excluding the non-recurring operating revenue
and income tax benefit and applying the expected C corporation tax rate, net
income is estimated at $647,100 for the period. Net income was $888,713 for the
three month period ended September 30, 1997. Applying the expected C corporation
tax rate, net income is estimated at $535,915 for the comparable 1997 period.
Based on these estimates, this represents an increase of 20.8%. The net loss for
the nine month period was $2.6 million. Excluding the non-recurring operating
expense and income tax benefit and applying the expected C corporation tax rate,
net income is estimated at $826,500 for the period. Net income was $351,542 for
the nine month period ended September 30, 1997. Applying the expected C
corporation tax rate, net income is estimated at $211,941 for the comparable
1997 period.
25
<PAGE> 26
Three Month and Nine Month Periods Ended September 30, 1998 and September 30,
1997--Pro Forma Comparison
Total Revenue. Pro forma revenue, which is adjusted as if the acquisition
of BCS and the Schoenke Entities had occurred at the beginning of the periods
presented, increased to $51.5 million for the nine month period ended September
30, 1998 as compared to $39.0 million for the nine month period ended September
30, 1997, representing an increase of 32.3%. This increase reflects strong
growth excluding acquisitions, in addition to growth of the acquired entities.
The pro forma results reflect contributions of $32.5 million from the core
benefits business (including the Schoenke Entities) and $19.3 million from BCS
community bank business for the nine month period ended September 30, 1998, as
compared to $25.2 million from the core benefits business (including the
Schoenke Entities) and $13.8 million from BCS community bank business for the
nine month period ended September 30, 1997.
Income (Loss) from Operations. The pro forma loss from operations was
$938,623 for the nine month period ended September 30, 1998, which includes the
non-recurring operating expense of $4.8 million described above. Pro forma
operating income was $3.9 million excluding the non-recurring item, as compared
to $234,610 for the three month period ended September 30, 1997. Income from
operations as a percent of revenue (excluding the non-recurring item) was 7.5%
for the nine month period ended September 30, 1998, as compared to 0.6% for the
nine month period ended September 30, 1997. These figures include pro forma
amortization expense of $1.3 million for the periods presented.
Net Income (Loss). The pro forma net loss was $3.1 million for the nine
month period ended September 30, 1998. Excluding the non-recurring operating
revenue and income tax benefit and applying the expected C corporation tax rate,
net income is estimated at $532,076 for the period. The pro forma net loss was
$1.2 million for the nine month period ended September 30, 1997. Applying the
expected C corporation tax rate, net income is estimated at $728,403 for the
comparable 1997 period.
PENDING ACQUISITION
On October 1, 1998, CBI entered into a letter of understanding with the
Wiedemann & Johnson Company, which provides for, among other things, the
acquisition by CBI of the business and the assets of the Wiedemann & Johnson
Company (the "Pending Acquisition"). The purchase price of the Pending
Acquisition is $6.0 million, of which $4.0 million is payable in cash at the
closing of the Pending Acquisition, and the issuance of a maximum of 166,667
shares of Common Stock (not to exceed a fair market value of $2.0 million). The
consummation of the Pending Acquisition is subject to numerous conditions,
including the approval of the Company's board of directors, obtaining all
requisite regulatory approvals and the satisfactory completion of the Company's
due diligence review. The Pending Acquisition is expected to close prior to
November 18, 1998. The operations associated with the Pending Acquisition are
anticipated to generate sufficient cash flow to cover the costs relating to the
integration of the Wiedemann & Johnson Company with the Company. The Pending
Acquisition will be accounted for using the purchase method.
LIQUIDITY AND FINANCIAL RESOURCES
Sources of Cash. The Company produced net cash flow from operations of
$4.0 million for the nine month period ended September 30, 1998, as compared to
$1.0 million for the nine month period ended September 30, 1997. The large
increase in net cash flow from operations for the three month period ended
September 30, 1998 was due largely to the collection of and resulting decrease
in trade receivables, which decreased by $5.1 million to $2.6 million. Cash flow
from operations includes the $4.8 million payment for the warrants, which was
classified as an operating expense. As of September 30, 1998 the Company had
cash and cash equivalents of $15.9 million, and total current assets of $19.1
million. The primary source of these cash balances was the proceeds from the
initial public offering.
Uses of Cash. $15.0 million was used to consummate the acquisition of
the Schoenke Entities. The total purchase price was $17.0 million, which
includes a $2.0 million promissory note issued by CBI to the sellers of the
Schoenke Entities. On August 24, 1998, CBI paid certain warrant holders an
amount equal
26
<PAGE> 27
to $4.9 million in exchange for the extinguishment of warrants representing the
right to purchase 1,525,424 shares of Common Stock. On August 24, 1998, CBI made
a principal prepayment of $1.0 million on its medium term notes in addition to
scheduled principal payments in the amount of $2.9 million for the three months
ending September 30, 1998.
On July 31, 1998, the Company paid a dividend in an amount equal to
$3.2 million or $1.00 per share. Such amount was paid from existing cash
reserves.
Credit Facilities. As of September 30, 1998, the Company owed an
aggregate of $30.3 million under outstanding debt obligations. Of this amount
$5.5 million is due within the next twelve months. Outstanding debt includes
$1.2 million of convertible notes which have since been converted to Common
Stock. Since January 1, 1998, cash flow from operations was more than sufficient
to cover scheduled principal and interest payments on existing indebtedness as
well as the Company's working capital requirements.
Effective August 24, 1998, the Company restructured its Senior Secured
notes and Second Priority Senior Secured notes. The interest rates on the 10.5%
Senior Secured Notes due August 2002 and the 11.0% Second Priority Senior
Secured Notes due August 2004 were reset to 7.84% and 8.86%, respectively. The
Restructured Notes may be prepaid without penalty and will be secured by a first
priority security interest in, among other things, all of the Company's renewal
commissions other than the renewal commissions from BCS and the Schoenke
Entities. Further, the Company is subject to operational restrictions and
financial covenants, including a requirement that the Company obtain a working
capital credit facility no later than March 31, 1999, a prohibition against
certain payments, a limitation on the payment of dividends, a limitation on the
incurrence of indebtedness and the maintenance of certain financial ratios.
The Company is currently in discussions with potential lenders
regarding establishing a working capital and acquisition capital facility. The
Company expects to have these facilities in place before the end of 1998.
The Company believes that its net cash flow from operations will
continue to provide sufficient funds to service all of its debt obligations.
This belief is based on the predictability and magnitude of the Company's future
revenue stream. Specifically, renewal revenue in future periods, which is not
reflected on the Company's balance sheet is estimated by the Company to
represent approximately $197.3 million in total revenue over the next five
years. However, renewal revenue can be affected by policy surrenders or
exchanges, material contract changes, asset growth and case mortality rates.
Further expansion of the Company's business through acquisitions may
require the Company to incur additional indebtedness or issue equity securities.
There can be no assurance that additional debt (including the working capital
credit facility of at least $3.0 million that the Company is required to obtain
by the Restructured Notes) or equity will be available to the Company or, if
available, will be on terms acceptable to the Company.
As the Company's business grows, its working capital and capital
expenditures will also continue to increase. Management believes that net cash
flows from operations will be sufficient to finance the Company's working
capital and capital expenditures for the next twelve months. There can be no
assurance, however, that the net cash flows from operations will be sufficient
to meet the Company's anticipated requirements or that the Company will not
require additional debt or equity financing within this time frame.
YEAR 2000 COMPLIANCE
The Year 2000 issue is the result of computer programs written using
two digits rather than four digits to define "date" fields. Information systems
have time sensitive operations that, as a result of this data field limitation,
could disrupt activities in the normal business cycle. Based on previous and
ongoing internal reviews, management believes that the computer equipment and
software used by the Company will function properly with respect to dates in the
Year 2000 and thereafter. However, significant uncertainty exists concerning the
potential costs and effects of the Year 2000 problem. The Company is continuing
its assessment of Year 2000 issues and taking steps to prevent these issues from
adversely affecting its future operating results. This ready process includes,
but is not limited to, preparing an inventory of potential Year 2000 issues,
determining functions affected, performing remediation as necessary, testing
software and equipment and recording results.
In its assessment of Year 2000 issues, the Company is specifically
focusing on its software applications and associated software products,
hardware, facilities, communications equipment and security systems. The
Company's proprietary financial modeling and Unix-based administrative systems
that support its insurance-financed employee benefit programs were designed to
be Year 2000 ready. During 1998 the Company upgraded its network software to be
Year 2000 compliant.
In addition to evaluating its own systems for Year 2000 compliance, the
Company is also communicating with and requesting information from its
significant suppliers and customers to determine the extent to which interfaces
with such entities are vulnerable to Year 2000 issues and the extent to which
the internal systems of such entities are vulnerable to Year 2000 issues. Third
parties that have relationships with the Company, including insurance companies
and clients, may experience significant operational difficulties if their
computer systems do not properly recognize date sensitive information when the
year changes to 2000. While these computer malfunction issues may have a
material adverse effect on the operations of such third parties, which may, in
turn, have a material adverse effect on the Company, management presently
believes that Year 2000 issues will not require the Company to incur any
material costs and do not pose significant operational problems for the Company.
However, the Company is not able to determine the extent to which such third
parties, such as insurance companies and clients, may experience Year 2000
issues. Any Year 2000 problem of either the Company or third parties that have
relationships with the Company could have a material adverse effect on the
Company's business, results of operations and financial condition. The Company
believes that to the extent that any insurance companies which have a
relationship with the Company are unable to become Year 2000 compliant, the
Company will be able to enter into relationships on a going forward basis with
other insurance companies that are Year 2000 compliant.
The Company's costs, as of September 30, 1998, related to the above
Year 2000 compliance efforts total approximately $50,000. Total costs associated
with the Company's Year 2000 readiness process, consisting of both internal and
external resources, are expected to range between $150,000 and $200,000. The
Company anticipates financing these costs with cash generated from operations.
The Company has not yet fully completed its Year 2000 assessment and remediation
efforts. Based on its experience to date, the Company presently believes that
the Year 2000 issues will not pose significant operational problems for the
company directly or as a result of any Year 2000 issues of suppliers or
customers.
27
<PAGE> 28
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) Not Applicable.
(b) Not Applicable.
(c) Recent Sales of Unregistered Securities. On July 10, 1998, September
25, 1998 and October 1, 1998, the Company granted options to purchase an
aggregate of 380,689 shares of the Company's common stock, par value $0.01 per
share ("Common Stock") to 18 employees, two directors and four producers. These
options vest over a period of time following their respective dates of grant.
Each option is exercisable at $9.00 per share. These grants were exempt from
registration under Section 4(2) of the Securities Act of 1933, as amended.
(d) Use of Proceeds. On August 19, 1998, in connection with the
Company's initial public offering of Common Stock, the Company's Registration
Statement on Form S-1 (File No. 333-56799) was declared effective by the
Securities and Exchange Commission. The Company sold all 4.0 million shares of
Common Stock registered in connection with the initial public offering at a
price of $9.00 per share, generating gross offering proceeds of $36.0 million.
The offering was managed by Bear, Stearns & Co. Inc., Piper Jaffray Inc. and
Conning & Company. The initial public offering closed on August 24, 1998, and
after deducting approximately $2.5 million in underwriting discounts and
commissions and approximately $1.7 million in other related issuance costs, the
net proceeds received by the Company was approximately $31.8 million.
A portion of the net offering proceeds equal to $13.5 million was used
to consummate the purchase of substantially all of the assets of Schoenke &
Associates Corporation and Schoenke & Associates Securities Corporation
(collectively, the "Schoenke Entities"). The total purchase price of the
Schoenke Entities was $17.0 million consisting of a $1.5 million secured
refundable deposit paid prior to the Offering, cash at closing in the amount of
$13.5 million and a promissory note issued by CBI to the sellers of the Schoenke
Entities in an amount equal to $2.0 million. On August 24, 1998, CBI paid
certain warrant holders an amount equal to $4.9 million in exchange for the
extinguishment of warrants representing the right to purchase 1,525,424 shares
of Common Stock. On August 24, 1998, CBI made a principal prepayment of $1.0
million on its medium term notes. The remaining proceeds of approximately $12.4
million have been invested in short-term, investment-grade, interest-bearing
securities and will be used for general corporate purposes, including working
capital and the possible acquisition of the Wiedemann & Johnson Company, a Texas
corporation, and the purchase of renewal revenue from The Wamberg Organization
for approximately $7.5 million, scheduled for January 1999.
None of the expenses incurred for the Company's account in connection
with the issuance and distribution of the securities registered for underwriting
discounts and commissions, finder's fees, expenses paid to or for underwriters,
other expenses and total expenses resulted in direct or indirect payments to
directors or officers of the Company, or to persons owning 10% or more of any
class of equity securities of the Company, or to affiliates of the Company.
Other than salary and reimbursements paid to directors and officers, none of the
offering proceeds was paid directly or indirectly to directors, officers,
general partners of the issuer or their associates, or to persons owning 10% or
more of any class of securities of the Company, or to affiliates of the Company.
Under the terms of the Company's Senior Secured Notes due August 9, 2002
and Second Priority Senior Secured Notes due August 9, 2004, the Company cannot
declare or pay any dividends or incur any liability to make any other payment or
distribution to its stockholders, may not make any distributions to purchase,
redeem, or retire any of the Company's capital stock, is subject to certain
limitations on the incurrence of indebtedness and must maintain certain
financial ratios.
28
<PAGE> 29
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
4.1 Specimen Certificate for shares of Common Stock, $0.01
par value, of the Company, incorporated herein by
reference to Exhibit 4.1 to the Company's Amendment No.
1 to Form S-1 (No. 333-56799) filed with the Commission
on July 27, 1998.
4.2 Certificate of Incorporation of the Company incorporated
herein by reference to Exhibit 3.1 to the Company's
Registration Statement on Form S-1 (No. 333-56799) filed
with the Commission on July 12, 1998.
4.3 Bylaws of the Company, incorporated by reference to
Exhibit 3.2 to the Company's Registration Statement on
Form S-1 (No. 333-56799) filed with the Commission on
July 12, 1998.
4.4 Rights Agreement, by and between the Company and The
Bank of New York, dated as of July 10, 1998.
10 Letter of Understanding, dated October 1, 1998, by and
between the Company and the Wiedemann & Johnson Company.
11 Statement regarding computation of per share earnings.
27 Financial Data Schedule.
(b) Reports on Form 8-K
A Current Report on Form 8-K, dated September 18, 1998, was filed
on October 2, 1998 relating to CBI's acquisition of the
businesses and substantially all of the assets of Schoenke &
Associates Corporation and Schoenke & Associates Securities
Corporation and containing the balance sheets of Schoenke &
Associates Corporation as of December 31, 1996 and 1997 and as of
June 30, 1998 (unaudited) and the related statements of income,
changes in stockholders' equity, and cash flows for each of the
years in the three-year period ended December 31, 1997 and the
six months ended June 30, 1997 and 1998 (unaudited) and the
Company's Unaudited Pro Forma Balance Sheet as of June 30, 1998
and Unaudited Pro Forma Statement of Operations for the year
ended December 30, 1997 and the six months ended June 30, 1998.
29
<PAGE> 30
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.
Dated: November 16, 1998
CLARK/BARDES HOLDINGS, INC.
/s/ MELVIN G. TODD
-------------------------------------
Melvin G. Todd
President and Chief Executive Officer
/s/ THOMAS M. PYRA
-------------------------------------
Thomas M. Pyra
Chief Financial Officer
30
<PAGE> 31
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- -----------------------
<S> <C>
4.1 Specimen Certificate for shares of Common Stock, $0.01 par
value, of the Company, incorporated herein by reference to
Exhibit 4.1 to the Company's Amendment No. 1 to Form S-1 (No.
333-56799) filed with the Commission on July 27, 1998.
4.2 Certificate of Incorporation of the Company incorporated
herein by reference to Exhibit 3.1 to the Company's
Registration Statement on Form S-1 (No. 333-56799) filed with
the Commission on July 12, 1998.
4.3 Bylaws of the Company, incorporated by reference to Exhibit
3.2 to the Company's Registration Statement on Form S-1 (No.
333-56799) filed with the Commission on July 12, 1998.
4.4 Rights Agreement, by and between the Company and The Bank of
New York, dated as of July 10, 1998.
10 Letter of Understanding, dated October 1, 1998, by and
between the Company and the Wiedemann & Johnson Company.
11 Statement regarding computation of per share earnings.
27 Financial data schedule.
</TABLE>
31
<PAGE> 1
EXHIBIT 4.4
================================================================================
RIGHTS AGREEMENT
by and between
CLARK/BARDES HOLDINGS, INC.
(the "Company")
and
THE BANK OF NEW YORK
(the "Rights Agent")
Dated as of July 10, 1998
================================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
PRELIMINARY STATEMENT........................................................................................1
STATEMENT OF AGREEMENT.......................................................................................1
Section 1. Certain Definitions.............................................................................1
Section 2. Appointment of Rights Agent.....................................................................4
Section 3. Issue of Rights Certificates....................................................................4
Section 4. Form of Rights Certificates.....................................................................6
Section 5. Countersignature and Registration...............................................................6
Section 6. Transfer, Split Up, Combination and Exchange of Rights Certificates; Mutilated,
Destroyed, Lost or Stolen Rights Certificates...................................................7
Section 7. Exercise of Rights; Purchase Price; Expiration Date of Rights...................................8
Section 8. Cancellation and Destruction of Rights Certificates.............................................9
Section 9. Availability of Preferred Shares................................................................9
Section 10. Preferred Shares Record Date...................................................................10
Section 11. Adjustment of Purchase Price, Number of Shares or Number of Rights.............................10
Section 12. Certificate of Adjusted Purchase Price or Number of Shares.....................................17
Section 13. Consolidation, Merger or Sale or Transfer of Assets or Earning Power...........................17
Section 14. Fractional Rights and Fractional Shares........................................................18
Section 15. Rights of Action...............................................................................19
Section 16. Agreement of Right Holders.....................................................................20
Section 17. Rights Certificate Holder Not Deemed a Shareholder.............................................20
Section 18. Concerning the Rights Agent....................................................................21
Section 19. Merger or Consolidation or Change of Name of Rights Agent......................................21
Section 20. Duties of Rights Agent.........................................................................22
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C> <C>
Section 21. Change of Rights Agent. ......................................................................23
Section 22. Issuance of New Rights Certificates. .........................................................24
Section 23. Redemption.....................................................................................25
Section 24. Exchange.......................................................................................25
Section 25. Notice of Certain Events.......................................................................26
Section 26. Notices. .....................................................................................27
Section 27. Supplements and Amendments. ..................................................................28
Section 28. Successors. ..................................................................................28
Section 29. Determinations and Actions by the Board of Directors, etc. ...................................28
Section 30. Benefits of this Agreement. ..................................................................28
Section 31. Severability. ................................................................................28
Section 32. Governing Law. ...............................................................................29
Section 33. Counterparts. ................................................................................29
Section 34. Descriptive Headings. ........................................................................29
</TABLE>
Exhibit A Form of Certificate of Designation of Series A Junior
Participating Preferred Stock of Clark/Bardes Holdings, Inc.
Exhibit B Form of Rights Certificate
Exhibit C Summary of Rights to Purchase Preferred Shares
ii
<PAGE> 4
RIGHTS AGREEMENT
THIS RIGHTS AGREEMENT (this "Agreement"), dated as of July 10, 1998, is
made and entered into by and between Clark/Bardes Holdings, Inc., a Delaware
corporation (the "Company"), and The Bank of New York (the "Rights Agent").
PRELIMINARY STATEMENT
On July 10, 1998, the Board of Directors of the Company authorized and
declared a dividend of one preferred share purchase right (a "Right") for each
Common Share (as hereinafter defined) of the Company outstanding at the close of
business on July 20, 1998 (the "Record Date"), each Right representing the right
to purchase one one-thousandth of a Preferred Share (as hereinafter defined),
upon the terms and subject to the conditions herein set forth, and has further
authorized and directed the issuance of one Right with respect to each Common
Share that shall become outstanding between the Record Date and the earliest of
the Distribution Date, the Redemption Date and the Final Expiration Date (as
such terms are hereinafter defined).
STATEMENT OF AGREEMENT
NOW, THEREFORE, in consideration of the premises and the mutual
agreements, covenants, representations and warranties set forth in this
Agreement and for other good, valid and binding consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties, intending to be
legally bound, hereby agree as follows:
Section 1. Certain Definitions. For purposes of this Agreement, the
following terms have the meanings indicated:
(a) "Acquiring Person" shall mean any Person (as such term is
hereinafter defined) who or which, together with all Affiliates and Associates
(as such terms are hereinafter defined) of such Person, shall be the Beneficial
Owner (as such term is hereinafter defined) of 15% or more of the Common Shares
of the Company then outstanding, but shall not include the Company, any
Subsidiary (as such term is hereinafter defined) of the Company, any employee
benefit plan of the Company or any Subsidiary of the Company, or any entity
holding Common Shares for or pursuant to the terms of any such plan.
Notwithstanding the foregoing, no Person shall become an "Acquiring Person" as
the result of an acquisition of Common Shares by the Company which, by reducing
the number of shares outstanding, increases the proportionate number of shares
beneficially owned by such Person to 15% or more of the Common Shares of the
Company then outstanding; provided, however, that if a Person shall become the
Beneficial Owner of 15% or more of the Common Shares of the Company then
outstanding by reason of share purchases by the Company and shall, after such
share purchases by the Company, become the Beneficial Owner of any additional
Common Shares of the Company, then such Person shall be deemed to be an
"Acquiring Person". Notwithstanding the foregoing, if the Board of Directors of
the Company determines in good faith that a Person who would otherwise be an
"Acquiring Person", as defined pursuant to the foregoing provisions of this
paragraph (a), has become such
1
<PAGE> 5
inadvertently, and such Person divests as promptly as practicable a sufficient
number of Common Shares so that such Person would no longer be an "Acquiring
Person," as defined pursuant to the foregoing provisions of this paragraph (a),
then such Person shall not be deemed to be an "Acquiring Person" for any
purposes of this Agreement.
(b) "Affiliate" and "Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as in
effect on the date of this Agreement.
(c) A Person shall be deemed the "Beneficial Owner" of and shall be
deemed to "beneficially own" any securities:
(i) which such Person or any of such Person's Affiliates or
Associates beneficially owns, directly or indirectly;
(ii) which such Person or any of such Person's Affiliates or
Associates has (A) the right to acquire (whether such right is
exercisable immediately or only after the passage of time) pursuant to
any agreement, arrangement or understanding (other than customary
agreements with and between underwriters and selling group members with
respect to a bona fide public offering of securities), or upon the
exercise of conversion rights, exchange rights, rights (other than
these Rights), warrants or options, or otherwise; provided, however,
that a Person shall not be deemed the Beneficial Owner of, or to
beneficially own, securities tendered pursuant to a tender or exchange
offer made by or on behalf of such Person or any of such Person's
Affiliates or Associates until such tendered securities are accepted
for purchase or exchange; or (B) the right to vote pursuant to any
agreement, arrangement or understanding; provided, however, that a
Person shall not be deemed the Beneficial Owner of, or to beneficially
own, any security if the agreement, arrangement or understanding to
vote such security (1) arises solely from a revocable proxy or consent
given to such Person in response to a public proxy or consent
solicitation made pursuant to, and in accordance with, the applicable
rules and regulations promulgated under the Exchange Act and (2) is not
also then reportable on Schedule 13D under the Exchange Act (or any
comparable or successor report); or
(iii) which are beneficially owned, directly or indirectly, by any
other Person with which such Person or any of such Person's Affiliates
or Associates has any agreement, arrangement or understanding (other
than customary agreements with and between underwriters and selling
group members with respect to a bona fide public offering of
securities) for the purpose of acquiring, holding, voting (except to
the extent contemplated by the proviso to Section 1(c)(ii)(B)) or
disposing of any securities of the Company.
2
<PAGE> 6
Notwithstanding anything in this definition of Beneficial Ownership to
the contrary, the phrase "then outstanding," when used with reference to a
Person's Beneficial Ownership of securities of the Company, shall mean the
number of such securities then issued and outstanding together with the number
of such securities not then actually issued and outstanding which such Person
would be deemed to own beneficially hereunder.
(d) "Business Day" shall mean any day other than a Saturday, a Sunday,
or a day on which banking institutions in the State of Texas are authorized or
obligated by law or executive order to close.
(e) "Close of Business" on any given date shall mean 5:00 P.M., Dallas,
Texas time, on such date; provided, however, that if such date is not a Business
Day it shall mean 5:00 P.M., Dallas, Texas time, on the next succeeding Business
Day.
(f) "Common Shares" when used with reference to the Company shall mean
the shares of common stock, par value $0.01 per share, of the Company. "Common
Shares" when used with reference to any Person other than the Company shall mean
the capital stock (or equity interest) with the greatest voting power of such
other Person or, if such other Person is a Subsidiary of another Person, the
Person or Persons which ultimately control such first-mentioned Person.
(g) "Distribution Date" shall have the meaning set forth in Section 3
hereof.
(h) "Final Expiration Date" shall have the meaning set forth in Section
7 hereof.
(i) "Person" shall mean any individual, firm, corporation or other
entity, and shall include any successor (by merger or otherwise) of such entity.
(j) "Preferred Shares" shall mean shares of Junior Participating
Preferred Stock, Series A, par value $0.01 per share, of the Company having the
rights and preferences set forth in the Form of Certificate of Designation
attached to this Agreement as Exhibit A.
(k) "Redemption Date" shall have the meaning set forth in Section 7
hereof.
(l) "Section 11(a)(ii) Event" shall mean any event described in Section
11(a)(ii) hereof.
(m) "Section 13 Event" shall mean any event described in clauses (a),
(b) or (c) of Section 13 hereof.
(n) "Shares Acquisition Date" shall mean the first date of public
announcement by the Company or an Acquiring Person that an Acquiring Person has
become such.
(o) "Subsidiary" of any Person shall mean any corporation or other
entity of which a majority of the voting power of the voting equity securities
or equity interest is owned, directly or indirectly, by such Person.
3
<PAGE> 7
(p) "Triggering Event" shall mean any Section 11(a)(ii) Event and/or
Section 13 Event.
Section 2. Appointment of Rights Agent. The Company hereby appoints the
Rights Agent to act as agent for the Company and the holders of the Rights (who,
in accordance with Section 3 hereof, shall prior to the Distribution Date also
be the holders of the Common Shares) in accordance with the terms and conditions
hereof, and the Rights Agent hereby accepts such appointment. The Company may
from time to time appoint such co-rights agents as it may deem necessary or
desirable.
Section 3. Issue of Rights Certificates.
(a) Until the earlier of (i) the close of business on the tenth day
after the Shares Acquisition (or, if the tenth day after the Share Acquisition
Date occurs before the Record Date, the close of business on the Record Date),
or (ii) the close of business on the tenth business day (or such later date as
may be determined by action of the Board of Directors prior to such time as any
Person becomes an Acquiring Person) after the date of the commencement by any
Person (other than the Company, any Subsidiary of the Company, any employee
benefit plan of the Company or of any Subsidiary of the Company or any entity
holding Common Shares for or pursuant to the terms of any such plan) of, or of
the first public announcement of the intention of any Person (other than the
Company, any Subsidiary of the Company, any employee benefit plan of the Company
or of any Subsidiary of the Company or any entity holding Common Shares for or
pursuant to the terms of any such plan) to commence, a tender or exchange offer
within the meaning of Rule 14d-2(a) of the General Rules and Regulations under
the Exchange Act, the consummation of which would result in any Person becoming
the Beneficial Owner of Common Shares aggregating 15% or more of the then
outstanding Common Shares (including any such date which is after the date of
this Agreement and prior to the issuance of the Rights; the earlier of such
dates being herein referred to as the "Distribution Date"), (x) the Rights will
be evidenced (subject to the provisions of Section 3(b) hereof) by the
certificates for Common Shares registered in the names of the holders thereof
(which certificates shall also be deemed to be Rights Certificates) and not by
separate Rights Certificates, and (y) the right to receive Rights Certificates
will be transferable only in connection with the transfer of Common Shares. As
soon as practicable after the Distribution Date, the Company will prepare and
execute, the Rights Agent will countersign, and the Company will send or cause
to be sent (and the Rights Agent will, if requested, send) by first-class,
insured, postage-prepaid mail, to each record holder of Common Shares as of the
close of business on the Distribution Date, at the address of such holder shown
on the records of the Company, a Rights Certificate, in substantially the form
of Exhibit B hereto (a "Rights Certificate"), evidencing one Right for each
Common Share so held. As of the Distribution Date, the Rights will be evidenced
solely by such Rights Certificates.
(b) On the Record Date, or as soon as practicable thereafter, the
Company will send a copy of a Summary of Rights to Purchase Preferred Shares, in
substantially the form of Exhibit C hereto (the "Summary of Rights"), by
first-class, postage-prepaid mail, to each record holder of Common Shares as of
the close of business on the Record Date, at the address of such holder shown on
the records of the Company. With respect to certificates for Common Shares
4
<PAGE> 8
outstanding as of the Record Date, until the Distribution Date, the Rights will
be evidenced by such certificates registered in the names of the holders thereof
together with a copy of the Summary of Rights attached thereto. Until the
Distribution Date (or the earliest of the Redemption Date or the Final
Expiration Date), the surrender for transfer of any certificate for Common
Shares outstanding on the Record Date, with or without a copy of the Summary of
Rights attached thereto, shall also constitute the transfer of the Rights
associated with the Common Shares represented thereby.
(c) Certificates for Common Shares which become outstanding (including,
without limitation, reacquired Common Shares referred to in the last sentence of
this paragraph (c)) after the Record Date but prior to the earliest of the
Distribution Date, the Redemption Date or the Final Expiration Date shall have
impressed on, printed on, written on or otherwise affixed to them the following
legend:
This certificate also evidences and entitles the holder
hereof to certain rights as set forth in a Rights Agreement
between Clark/Bardes Holdings, Inc. and The Bank of New York,
dated as of July 10, 1998 (the "Rights Agreement"), the terms of
which are hereby incorporated herein by reference and a copy of
which is on file at the principal executive offices of
Clark/Bardes Holdings, Inc. Under certain circumstances, as set
forth in the Rights Agreement, such Rights will be evidenced by
separate certificates, and will no longer be evidenced by this
certificate. Clark/Bardes Holdings, Inc. will mail to the holder
of this certificate a copy of the Rights Agreement without charge
after receipt of a written request therefor. Under certain
circumstances, as set forth in the Rights Agreement, Rights
issued to any Person who becomes an Acquiring Person or any
Affiliate or Associate thereof (as defined in the Rights
Agreement) whether currently held by or on behalf of such Person
or by any subsequent holder, may become null and void.
With respect to such certificates containing the foregoing legend, until the
earlier of (i) the Distribution Date, or (ii) the Final Expiration Date, the
Rights associated with the Common Shares represented by such certificates shall
be evidenced by such certificates alone, and the surrender for transfer of any
such certificate shall also constitute the transfer of the Rights associated
with the Common Shares represented thereby. In the event that the Company
purchases or acquires any Common Shares after the Record Date but prior to the
Distribution Date, any Rights associated with such Common Shares shall be deemed
canceled and retired so that the Company shall not be entitled to exercise any
Rights associated with the Common Shares which are no longer outstanding.
5
<PAGE> 9
Section 4. Form of Rights Certificates.
(a) The Rights Certificates (and the forms of election to purchase
Preferred Shares and of assignment to be printed on the reverse thereof) shall
be substantially the same as Exhibit B hereto and may have such marks of
identification or designation and such legends, summaries or endorsements
printed thereon as the Company may deem appropriate and as are not inconsistent
with the provisions of this Agreement, or as may be required to comply with any
applicable law or with any rule or regulation made pursuant thereto or with any
rule or regulation of any stock exchange on which the Rights may from time to
time be listed, or to conform to usage. Subject to the provisions of Section 11
and Section 22 hereof, the Rights Certificates shall entitle the holders thereof
to purchase such number of one one-thousandths of a Preferred Share as shall be
set forth therein at the price per one one-thousandth of a Preferred Share set
forth therein (the "Purchase Price"), but the number of such one one-thousandths
of a Preferred Share and the Purchase Price shall be subject to adjustment as
provided herein.
(b) Any Rights Certificate issued pursuant to Section 3(a) or Section
22 hereof that represents Rights beneficially owned by: (i) an Acquiring Person
or any Associate or Affiliate of an Acquiring Person, (ii) a transferee of an
Acquiring Person (or of any such Associate or Affiliate) who becomes a
transferee after the Acquiring Person becomes such, or (iii) a transferee of an
Acquiring Person (or of any such Associate or Affiliate) who becomes a
transferee prior to or concurrently with the Acquiring Person becoming such and
receives such Rights pursuant to either (A) a transfer (whether or not for
consideration) from the Acquiring Person to holders of equity interests in such
Acquiring Person or to any person with whom such Acquiring Person has any
continuing agreement, arrangement or understanding regarding the transferred
Rights or (B) a transfer which the Board of Directors of the Company has
determined is part of a plan, arrangement or understanding which has as a
primary purpose or effect avoidance of Section 11(a)(ii) hereof, and any Rights
Certificate issued pursuant to Section 6 or Section 11 hereof upon transfer,
exchange, replacement or adjustment of any other Rights Certificate referred to
in this sentence, shall contain (to the extent feasible) the following legend:
The Rights represented by this Rights Certificate are or were
beneficially owned by a Person who was or became an Acquiring Person
or an Affiliate or Associate of an Acquiring Person (as such terms are
defined in the Rights Agreement). Accordingly, this Rights Certificate
and the Rights represented hereby may become null and void in the
circumstances specified in Section 11(a)(ii) of such Agreement.
The provisions of Section 11(a)(ii) shall be operative whether or not
the foregoing legend is contained on any such Rights Certificate.
Section 5. Countersignature and Registration. The Rights Certificates
shall be executed on behalf of the Company by its Chairman of the Board, its
Chief Executive Officer, its President, any of its Vice Presidents, or its
Treasurer, either manually or by facsimile signature, shall have affixed thereto
the Company's seal or a facsimile thereof, and shall be attested by the
Secretary or an Assistant Secretary of the Company, either manually or by
6
<PAGE> 10
facsimile signature. The Rights Certificates shall be manually countersigned by
the Rights Agent and shall not be valid for any purpose unless countersigned. In
case any officer of the Company who shall have signed any of the Rights
Certificates shall cease to be such officer of the Company before
countersignature by the Rights Agent and issuance and delivery by the Company,
such Rights Certificates, nevertheless, may be countersigned by the Rights Agent
and issued and delivered by the Company with the same force and effect as though
the person who signed such Rights Certificates had not ceased to be such officer
of the Company; and any Rights Certificate may be signed on behalf of the
Company by any person who, at the actual date of the execution of such Rights
Certificate, shall be a proper officer of the Company to sign such Rights
Certificate, although at the date of the execution of this Rights Agreement any
such person was not such an officer.
Following the Distribution Date, the Rights Agent will keep or cause to
be kept, at its principal office, books for registration and transfer of the
Rights Certificates issued hereunder. Such books shall show the names and
addresses of the respective holders of the Rights Certificates, the number of
Rights evidenced on its face by each of the Rights Certificates and the date of
each of the Rights Certificates.
Section 6. Transfer, Split Up, Combination and Exchange of Rights
Certificates; Mutilated, Destroyed, Lost or Stolen Rights Certificates. Subject
to the provisions of Section 4(b) and Section 14 hereof, at any time after the
close of business on the Distribution Date, and at or prior to the close of
business on the earlier of the Redemption Date or the Final Expiration Date, any
Rights Certificate or Rights Certificates (other than Rights Certificates
representing Rights that have become void pursuant to Section 11(a)(ii) hereof
or that have been exchanged pursuant to Section 24 hereof) may be transferred,
split up, combined or exchanged for another Rights Certificate or Rights
Certificates, entitling the registered holder to purchase a like number of one
one-thousandth of a Preferred Share as the Rights Certificate or Rights
Certificates surrendered then entitled such holder to purchase. Any registered
holder desiring to transfer, split up, combine or exchange any Rights
Certificate or Rights Certificates shall make such request in writing delivered
to the Rights Agent, and shall surrender the Rights Certificate or Rights
Certificates to be transferred, split up, combined or exchanged at the principal
office of the Rights Agent. Thereupon the Rights Agent shall, subject to Section
4(b) hereof, countersign and deliver to the person entitled thereto a Rights
Certificate or Rights Certificates, as the case may be, as so requested. The
Company may require payment of a sum sufficient to cover any tax or governmental
charge that may be imposed in connection with any transfer, split up,
combination or exchange of Rights Certificates.
Upon receipt by the Company and the Rights Agent of evidence reasonably
satisfactory to them of the loss, theft, destruction or mutilation of a Rights
Certificate, and, in case of loss, theft or destruction, of indemnity or
security reasonably satisfactory to them, and, at the Company's request,
reimbursement to the Company and the Rights Agent of all reasonable expenses
incidental thereto, and upon surrender to the Rights Agent and cancellation of
the Rights Certificate if mutilated, the Company will make and deliver a new
Rights Certificate of like tenor to the Rights Agent for delivery to the
registered holder in lieu of the Rights Certificate so lost, stolen, destroyed
or mutilated.
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Section 7. Exercise of Rights; Purchase Price; Expiration Date of
Rights.
(a) The registered holder of any Rights Certificate may exercise the
Rights evidenced thereby (except as otherwise provided herein) in whole or in
part at any time after the Distribution Date upon surrender of the Rights
Certificate, with the form of election to purchase on the reverse side thereof
duly executed, to the Rights Agent at the principal office of the Rights Agent,
together with payment of the Purchase Price for each one one-thousandth of a
Preferred Share as to which the Rights are exercised, at or prior to the
earliest of (i) the close of business on July 10, 2008 (the "Final Expiration
Date"), (ii) the time at which the Rights are redeemed as provided in Section 23
hereof (the "Redemption Date"), or (iii) the time at which such Rights are
exchanged as provided in Section 24 hereof.
(b) The Purchase Price for each one one-thousandth of a Preferred Share
purchasable pursuant to the exercise of a Right shall initially be $63, and
shall be subject to adjustment from time to time as provided in Section 11 or 13
hereof and shall be payable in lawful money of the United States of America in
accordance with paragraph (c) below.
(c) Upon receipt of a Rights Certificate representing exercisable
Rights, with the form of election to purchase duly executed, accompanied by
payment of the Purchase Price for the shares to be purchased and an amount equal
to any applicable transfer tax required to be paid by the holder of such Rights
Certificate in accordance with Section 9 hereof by certified check, cashier's
check or money order payable to the order of the Company, the Rights Agent shall
thereupon promptly (i) (A) requisition from any transfer agent of the Preferred
Shares certificates for the number of Preferred Shares to be purchased and the
Company hereby irrevocably authorizes its transfer agent to comply with all such
requests, or (B) requisition from the depositary agent depositary receipts
representing such number of one one-thousandths of a Preferred Share as are to
be purchased (in which case certificates for the Preferred Shares represented by
such receipts shall be deposited by the transfer agent with the depositary
agent) and the Company hereby directs the depositary agent to comply with such
request, (ii) when appropriate, requisition from the Company the amount of cash
to be paid in lieu of issuance of fractional shares in accordance with Section
14 hereof, (iii) after receipt of such certificates or depositary receipts,
cause the same to be delivered to or upon the order of the registered holder of
such Rights Certificate, registered in such name or names as may be designated
by such holder, and (iv) when appropriate, after receipt, deliver such cash to
or upon the order of the registered holder of such Rights Certificate.
(d) In case the registered holder of any Rights Certificate shall
exercise less than all the Rights evidenced thereby, a new Rights Certificate
evidencing Rights equivalent to the Rights remaining unexercised shall be issued
by the Rights Agent to the registered holder of such Rights Certificate or to
his duly authorized assigns, subject to the provisions of Section 14 hereof.
(e) Notwithstanding anything in this Agreement to the contrary, neither
the Rights Agent nor the Company shall be obligated to undertake any action with
respect to a registered holder upon the occurrence of any purported exercise as
set forth in this Section 7 unless such
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<PAGE> 12
registered holder shall have (i) completed and signed the certificate contained
in the form of election to purchase set forth on the reverse side of the Rights
Certificate surrendered for such exercise, and (ii) provided such additional
evidence of the identity of the Beneficial Owner (or former Beneficial Owner) or
Affiliates or Associates thereof as the Company shall reasonably request.
Section 8. Cancellation and Destruction of Rights Certificates. All
Rights Certificates surrendered for the purpose of exercise, transfer, split up,
combination or exchange shall, if surrendered to the Company or to any of its
agents, be delivered to the Rights Agent for cancellation or in canceled form,
or, if surrendered to the Rights Agent, shall be canceled by it, and no Rights
Certificates shall be issued in lieu thereof except as expressly permitted by
any of the provisions of this Rights Agreement. The Company shall deliver to the
Rights Agent for cancellation and retirement, and the Rights Agent shall so
cancel and retire, any other Rights Certificate purchased or acquired by the
Company otherwise than upon the exercise thereof. The Rights Agent shall deliver
all canceled Rights Certificates to the Company, or shall, at the written
request of the Company, destroy such canceled Rights Certificates, and in such
case shall deliver a certificate of destruction thereof to the Company.
Section 9. Availability of Preferred Shares.
(a) The Company covenants and agrees that it will cause to be reserved
and kept available out of its authorized and unissued Preferred Shares or any
Preferred Shares held in its treasury, the number of Preferred Shares that will
be sufficient to permit the exercise in full of all outstanding Rights in
accordance with Section 7. The Company covenants and agrees that it will take
all such action as may be necessary to ensure that all Preferred Shares
delivered upon exercise of Rights shall, at the time of delivery of the
certificates for such Preferred Shares (subject to payment of the Purchase
Price), be duly and validly authorized and issued and fully paid and
nonassessable shares.
(b) So long as the shares of Preferred Stock (and, following the
occurrence of a Triggering Event, Common Stock and/or other securities) issuable
and deliverable upon the exercise of the Rights may be listed on any national
securities exchange, the Company shall use its best efforts to cause, from and
after such time as the Rights become exercisable, all shares reserved for such
issuance to be listed on such exchange upon official notice of issuance upon
such exercise.
(c) The Company shall use its best efforts to (i) file, as soon as
practicable following the earliest date after the first occurrence of a Section
11(a)(ii) Event on which the consideration to be delivered by the Company upon
exercise of the Rights has been determined in accordance with Section 11(a)(iii)
hereof, a registration statement under the Securities Act of 1933 (the "Act"),
with respect to the securities purchasable upon exercise of the Rights on an
appropriate form, (ii) cause such registration statement to become effective as
soon as practicable after such filing, and (iii) cause such registration
statement to remain effective (with a prospectus at all times meeting the
requirements of the Act) until the earlier of (A) the date as of which the
Rights are no longer exercisable for such securities, and (B) the date of the
expiration of the Rights. The
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<PAGE> 13
Company will also take such action as may be appropriate under, or to ensure
compliance with, the securities or "blue sky" laws of the various states in
connection with the exercisability of the Rights. The Company may temporarily
suspend, for a period of time not to exceed (90) days after the date set forth
in clause (i) of the first sentence of this Section 9(c), the exercisability of
the Rights in order to prepare and file such registration statement and permit
it to become effective. Upon any such suspension, the Company shall issue a
public announcement stating that the exercisability of the Rights has been
temporarily suspended, as well as a public announcement at such time as the
suspension is no longer in effect. In addition, if the Company shall determine
that a registration statement is required following the Distribution Date, the
Company may temporarily suspend the exercisability of the Rights until such time
as a registration statement has been declared effective. Notwithstanding any
provision of this Agreement to the contrary, the Rights shall not be exercisable
in any jurisdiction if the requisite qualification in such jurisdiction shall
not have been obtained, the exercise thereof shall not be permitted under
applicable law or a registration statement shall not have been declared
effective.
(d) The Company further covenants and agrees that it will pay when due
and payable any and all federal and state transfer taxes and charges which may
be payable in respect of the issuance or delivery of the Rights Certificates or
of any Preferred Shares upon the exercise of Rights. The Company shall not,
however, be required to pay any transfer tax which may be payable in respect of
any transfer or delivery of Rights Certificates to a person other than, or the
issuance or delivery of certificates or depositary receipts for the Preferred
Shares in a name other than that of, the registered holder of the Rights
Certificate evidencing Rights surrendered for exercise or to issue or to deliver
any certificates or depositary receipts for Preferred Shares upon the exercise
of any Rights until any such tax shall have been paid (any such tax being
payable by the holder of such Rights Certificate at the time of surrender) or
until it has been established to the Company's reasonable satisfaction that no
such tax is due.
Section 10. Preferred Shares Record Date. Each person in whose name any
certificate for Preferred Shares is issued upon the exercise of Rights shall for
all purposes be deemed to have become the holder of record of the Preferred
Shares represented thereby on, and such certificate shall be dated, the date
upon which the Rights Certificate evidencing such Rights was duly surrendered
and payment of the Purchase Price (and any applicable transfer taxes) was made;
provided, however, that if the date of such surrender and payment is a date upon
which the Preferred Shares transfer books of the Company are closed, such person
shall be deemed to have become the record holder of such shares on, and such
certificate shall be dated, the next succeeding Business Day on which the
Preferred Shares transfer books of the Company are open. Prior to the exercise
of the Rights evidenced thereby, the holder of a Rights Certificate shall not be
entitled to any rights of a holder of Preferred Shares for which the Rights
shall be exercisable, including, without limitation, the right to vote, to
receive dividends or other distributions or to exercise any preemptive rights,
and shall not be entitled to receive any notice of any proceedings of the
Company, except as provided herein.
Section 11. Adjustment of Purchase Price, Number of Shares or Number of
Rights. The Purchase Price, the number of Preferred Shares covered by each Right
and the number of Rights outstanding are subject to adjustment from time to time
as provided in this Section 11.
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<PAGE> 14
(a) (i) In the event the Company shall at any time after the date of this
Agreement (A) declare a dividend on the Preferred Shares payable in Preferred
Shares, (B) subdivide the outstanding Preferred Shares, (C) combine the
outstanding Preferred Shares into a smaller number of Preferred Shares, or (D)
issue any shares of its capital stock in a reclassification of the Preferred
Shares (including any such reclassification in connection with a consolidation
or merger in which the Company is the continuing or surviving corporation),
except as otherwise provided in this Section 11(a)(ii), the Purchase Price in
effect at the time of the record date for such dividend or of the effective date
of such subdivision, combination or reclassification, and the number and kind of
shares of capital stock issuable on such date, shall be proportionately adjusted
so that the holder of any Right exercised after such time shall be entitled to
receive the aggregate number and kind of shares of capital stock which, if such
Right had been exercised immediately prior to such date and at a time when the
Preferred Shares transfer books of the Company were open, he would have owned
upon such exercise and been entitled to receive by virtue of such dividend,
subdivision, combination or reclassification; provided, however, that in no
event shall the consideration to be paid upon the exercise of one Right be less
than the aggregate par value of the shares of capital stock of the Company
issuable upon exercise of one Right.
(ii) Subject to Section 24 and to the limitation set forth in the next
paragraph of this Agreement, in the event any Person becomes an Acquiring
Person, each holder of a Right shall thereafter have a right to receive, upon
exercise thereof at a price equal to the then current Purchase Price multiplied
by the number of one one-thousandths of a Preferred Share for which a Right is
then exercisable, in accordance with the terms of this Agreement and in lieu of
Preferred Shares, such number of Common Shares of the Company as shall equal the
result obtained by (x) multiplying the then current Purchase Price by the number
of one one-thousandths of a Preferred Share for which a Right is then
exercisable and dividing that product by (y) 50% of the then current per share
market price of the Company's Common Shares (determined pursuant to Section
11(d) hereof) on the date of the occurrence of such event (such number of
shares, the "Adjustment Shares"). In the event that any Person shall become an
Acquiring Person and the Rights shall then be outstanding, the Company shall not
take any action which would eliminate or diminish the benefits intended to be
afforded by the Rights.
From and after the occurrence of such event, any Rights (A)
beneficially owned by any Acquiring Person or any Associate or Affiliate of such
Acquiring Person, (B) a transferee of an Acquiring Person (of any such Associate
or Affiliate) who becomes a transferee after the Acquiring Person becomes such,
or (C) a transferee of an Acquiring Person (or of any such Associate or
Affiliate) who becomes a transferee prior to or concurrently with the Acquiring
Person becoming such and receives such Rights pursuant to either (1) a transfer
(whether or not for consideration) from the Acquiring Person to holders of
equity interests in such Acquiring Person or to any Person with whom the
Acquiring Person has any continuing agreement, arrangement or understanding
regarding the transferred Rights or (2) a transfer which the Board of Directors
of the Company has determined is part of a plan, arrangement or understanding
which has as a primary
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<PAGE> 15
purpose or effect the avoidance of this Section 11(a)(ii), shall be null
and void and no holder of such Rights shall thereafter have any rights
whatsoever with respect to such rights, whether under provisions of this
Agreement or otherwise.
(iii) In the event that there shall not be sufficient Common Shares
issued but not outstanding or authorized but unissued to permit the
exercise in full of the Rights in accordance with the foregoing
subparagraph (ii), the Company shall (A) determine the value of the
Adjustment Shares issuable upon the exercise of a Right (the "Current
Value"), and (B) with respect to each Right (subject to Section 11(a)(ii)
hereof), make adequate provision to substitute for the Adjustment Shares,
upon the exercise of a Right and payment of the applicable Purchase Price,
(1) cash, (2) a reduction in the Purchase Price, (3) Common Shares or other
equity securities of the Company (including, without limitation, shares, or
units of shares, of preferred stock, such as the Preferred Stock, which the
Board has deemed to have essentially the same value or economic rights as
shares of Common Shares (such shares of preferred stock being referred to
as "Common Shares Equivalents")), (4) debt securities of the Company, (5)
other assets, or (6) any combination of the foregoing, having an aggregate
value equal to the Current Value (less the amount of any reduction in the
Purchase Price), where such aggregate value has been determined by the
Board based upon the advice of a nationally recognized investment banking
firm selected by the Board; provided, however, that if the Company shall
not have made adequate provision to deliver value pursuant to clause (B)
above within 30 days following the later of (x) the first occurrence of a
Section 11(a)(ii) Event and (y) the date on which the Company's right of
redemption pursuant to Section 23(a) expires (the later of (x) and (y)
being referred to herein as the "Section 11(a)(ii) Trigger Date"), then the
Company shall be obligated to deliver, upon the surrender for exercise of a
Right and without requiring payment of the Purchase Price, Common Shares
(to the extent available) and then, if necessary, cash, which shares and/or
cash have an aggregate value equal to the Spread. For purposes of the
preceding sentence, the term "spread" shall mean the excess of (i) the
Current Value over (ii) the Purchase Price. If the Board determines in good
faith that it is likely that sufficient additional shares of Common Shares
could be authorized for issuance upon exercise in full of the Rights, the
30 day period set forth above may be extended to the extent necessary, but
not more than 90 days after the Section 11(a)(ii) Trigger Date, in order
that the Company may seek shareholder approval for the authorization of
such additional shares (such 30 day period, as it may be extended, is
herein called the "Substitution Period"). To the extent that action is to
be taken pursuant to the first and/or third sentences of this Section
11(a)(iii), the Company (1) shall provide, subject to Section 11(a)(ii)
hereof, that such action shall apply uniformly to all outstanding Rights,
and (2) may suspend the exercisability of the Rights until the expiration
of the Substitution Period in order to seek such shareholder approval for
such authorization of additional shares and/or to decide the appropriate
form of distribution to be made pursuant to such first sentence and to
determine the value thereof. In the event of any such suspension, the
Company shall issue a public announcement stating that the exercisability
of the Rights has been temporarily suspended, as well as a public
announcement at such times the suspension is no longer in effect. For
purposes of this Section 11(a)(iii), the value of each Adjustment Share
shall be the current per share
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<PAGE> 16
market price of the Common Shares on the Section 11(a)(ii) Trigger
Date and the per share or per unit value of any Common Stock
Equivalent shall be deemed to equal the current per share market price
of the Common Shares on such date, in each case as determined pursuant
to Section 11(d) hereof.
(b) In case the Company shall fix a record date for the issuance of
rights, options or warrants to all holders of Preferred Shares entitling them
(for a period expiring within 45 calendar days after such record date) to
subscribe for or purchase Preferred Shares (or shares having the same rights,
privileges and preferences as the Preferred Shares ("equivalent preferred
shares")) or securities convertible into Preferred Shares or equivalent
preferred shares at a price per Preferred Share or equivalent preferred share
(or having a conversion price per share, if a security convertible into
Preferred Shares or equivalent preferred shares) less than the then current per
share market price of the Preferred Shares (as defined in Section 11(d)) on such
record date, the Purchase Price to be in effect after such record date shall be
determined by multiplying the Purchase Price in effect immediately prior to such
record date by a fraction, the numerator of which shall be the number of
Preferred Shares outstanding on such record date plus the number of Preferred
Shares which the aggregate offering price of the total number of Preferred
Shares and/or equivalent preferred shares so to be offered (and/or the aggregate
initial conversion price of the convertible securities so to be offered) would
purchase at such current market price and the denominator of which shall be the
number of Preferred Shares outstanding on such record date plus the number of
additional Preferred Shares and/or equivalent preferred shares to be offered for
subscription or purchase (or into which the convertible securities so to be
offered are initially convertible); provided, however, that in no event shall
the consideration to be paid upon the exercise of one Right be less than the
aggregate par value of the shares of capital stock of the Company issuable upon
exercise of one Right. In case such subscription price may be paid in a
consideration part or all of which shall be in a form other than cash, the value
of such consideration shall be as determined in good faith by the Board of
Directors of the Company, whose determination shall be described in a statement
filed with the Rights Agent. Preferred Shares owned by or held for the account
of the Company shall not be deemed outstanding for the purpose of any such
computation. Such adjustment shall be made successively whenever such a record
date is fixed; and in the event that such rights, options or warrants are not so
issued, the Purchase Price shall be adjusted to be the Purchase Price which
would then be in effect if such record date had not been fixed.
(c) In case the Company shall fix a record date for the making of a
distribution to all holders of the Preferred Shares (including any such
distribution made in connection with a consolidation or merger in which the
Company is the continuing or surviving corporation) of evidences of indebtedness
or assets (other than a regular quarterly cash dividend or a dividend payable in
Preferred Shares) or subscription rights or warrants (excluding those referred
to in Section 11(b) hereof), the Purchase Price to be in effect after such
record date shall be determined by multiplying the Purchase Price in effect
immediately prior to such record date by a fraction, the numerator of which
shall be the then current per share market price of the Preferred Shares on such
record date, less the fair market value (as determined in good faith by the
Board of Directors of the Company, whose determination shall be described in a
statement filed with the Rights Agent) of the portion of the assets or evidences
of indebtedness so to be
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<PAGE> 17
distributed or of such subscription rights or warrants applicable to one
Preferred Share and the denominator of which shall be such current per share
market price of the Preferred Shares; provided, however, that in no event shall
the consideration to be paid upon the exercise of one Right be less than the
aggregate par value of the shares of capital stock of the Company to be issued
upon exercise of one Right. Such adjustments shall be made successively whenever
such a record date is fixed; and in the event that such distribution is not so
made, the Purchase Price shall again be adjusted to be the Purchase Price which
would then be in effect if such record date had not been fixed.
(d) (i) For the purpose of any computation hereunder, the "current per
share market price" of any security (a "Security" for the purpose of this
Section 11(d)(i)) on any date shall be deemed to be the average of the
daily closing prices per share of such Security for the 30 consecutive
Trading Days (as such term is hereinafter defined) immediately prior to
such date; provided, however, that in the event that the current per share
market price of the Security is determined during a period following the
announcement by the issuer of such Security of (A) a dividend or
distribution on such Security payable in shares of such Security or
securities convertible into such shares, or (B) any subdivision,
combination or reclassification of such Security and prior to the
expiration of 30 Trading Days after the ex-dividend date for such dividend
or distribution, or the record date for such subdivision, combination or
reclassification, then, and in each such case, the current per share market
price shall be appropriately adjusted to reflect the current market price
per share equivalent of such Security. The closing price for each day shall
be the last sale price, regular way, or, in case no such sale takes place
on such day, the average of the closing bid and asked prices, regular way,
in either case as reported in the principal consolidated transaction
reporting system with respect to securities listed or admitted to trading
on the New York Stock Exchange or, if the Security is not listed or
admitted to trading on the New York Stock Exchange, as reported in the
principal consolidated transaction reporting system with respect to
securities listed on the principal national securities exchange on which
the Security is listed or admitted to trading or, if the Security is not
listed or admitted to trading on any national securities exchange, the last
quoted price or, if not so quoted, the average of the high bid and low
asked prices in the over-the-counter market, as reported by the National
Association of Securities Dealers, Inc. Automated Quotations System
("NASDAQ") or such other system then in use, or, if on any such date the
Security is not quoted by any such organization, the average of the closing
bid and asked prices as furnished by a professional market maker making a
market in the Security selected by the Board of Directors of the Company.
The term "Trading Day" shall mean a day on which the principal national
securities exchange on which the Security is listed or admitted to trading
is open for the transaction of business or, if the Security is not listed
or admitted to trading on any national securities exchange, a Business Day.
(ii) For the purpose of any computation hereunder, the "current per
share market price" of the Preferred Shares shall be determined in
accordance with the method set forth in Section 11(d)(i). If the Preferred
Shares are not publicly traded, the "current per share market price" of the
Preferred Shares shall be conclusively deemed to be the
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<PAGE> 18
current per share market price of the Common Shares as determined pursuant
to Section 11(d)(i) (appropriately adjusted to reflect any stock split,
stock dividend or similar transaction occurring after the date hereof),
multiplied by one thousand. If neither the Common Shares nor the Preferred
Shares are publicly held or so listed or traded, "current per share market
price" shall mean the fair value per share as determined in good faith by
the Board of Directors of the Company, whose determination shall be
described in a statement filed with the Rights Agent.
(e) No adjustment in the Purchase Price shall be required unless such
adjustment would require an increase or decrease of at least 1% in the Purchase
Price; provided, however, that any adjustments which by reason of this Section
11(e) are not required to be made shall be carried forward and taken into
account in any subsequent adjustment. All calculations under this Section 11
shall be made to the nearest cent or to the nearest one one-millionth of a
Preferred Share or one ten-thousandth of any other share or security as the case
may be. Notwithstanding the first sentence of this Section 11(e), any adjustment
required by this Section 11 shall be made no later than the earlier of (i) three
years from the date of the transaction which requires such adjustment or (ii)
the date of the expiration of the right to exercise any Rights.
(f) If as a result of an adjustment made pursuant to Section 11(a) or
Section 13 hereof, the holder of any Right thereafter exercised shall become
entitled to receive any shares of capital stock of the Company other than
Preferred Shares, thereafter the number of such other shares so receivable upon
exercise of any Right shall be subject to adjustment from time to time in a
manner and on terms as nearly equivalent as practicable to the provisions with
respect to the Preferred Shares contained in Section 11(a) through (c),
inclusive, and the provisions of Sections 7, 9, 10 and 13 with respect to the
Preferred Shares shall apply on like terms to any such other shares.
(g) All Rights originally issued by the Company subsequent to any
adjustment made to the Purchase Price hereunder shall evidence the right to
purchase, at the adjusted Purchase Price, the number of one one-thousandth of a
Preferred Share purchasable from time to time hereunder upon exercise of the
Rights, all subject to further adjustment as provided herein.
(h) Unless the Company shall have exercised its election as provided in
Section 11(i), upon each adjustment of the Purchase Price as a result of the
calculations made in Sections 11(b) and (c), each Right outstanding immediately
prior to the making of such adjustment shall thereafter evidence the right to
purchase, at the adjusted Purchase Price, that number of one one-thousandth of a
Preferred Share (calculated to the nearest one one-millionth of a Preferred
Share) obtained by (i) multiplying (x) the number of one one-thousandth of a
share covered by a Right immediately prior to this adjustment by (y) the
Purchase Price in effect immediately prior to such adjustment of the Purchase
Price and (ii) dividing the product so obtained by the Purchase Price in effect
immediately after such adjustment of the Purchase Price.
(i) The Company may elect on or after the date of any adjustment of the
Purchase Price to adjust the number of Rights, in substitution for any
adjustment in the number of one one-thousandth of a Preferred Share purchasable
upon the exercise of a Right. Each of the Rights
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<PAGE> 19
outstanding after such adjustment of the number of Rights shall be exercisable
for the number of one one-thousandth of a Preferred Share for which a Right was
exercisable immediately prior to such adjustment. Each Right held of record
prior to such adjustment of the number of Rights shall become that number of
Rights (calculated to the nearest one ten-thousandth) obtained by dividing the
Purchase Price in effect immediately prior to adjustment of the Purchase Price
by the Purchase Price in effect immediately after adjustment of the Purchase
Price. The Company shall make a public announcement of its election to adjust
the number of Rights, indicating the record date for the adjustment, and, if
known at the time, the amount of the adjustment to be made. This record date may
be the date on which the Purchase Price is adjusted or any day thereafter, but,
if the Rights Certificates have been issued, shall be at least 10 days later
than the date of the public announcement. If Rights Certificates have been
issued, upon each adjustment of the number of Rights pursuant to this Section
11(i), the Company shall, as promptly as practicable, cause to be distributed to
holders of record of Rights Certificates on such record date Rights Certificates
evidencing, subject to Section 14 hereof, the additional Rights to which such
holders shall be entitled as a result of such adjustment, or, at the option of
the Company, shall cause to be distributed to such holders of record in
substitution and replacement for the Rights Certificates held by such holders
prior to the date of adjustment, and upon surrender thereof, if required by the
Company, new Rights Certificates evidencing all the Rights to which such holders
shall be entitled after such adjustment. Rights Certificates so to be
distributed shall be issued, executed and countersigned in the manner provided
for herein and shall be registered in the names of the holders of record of
Rights Certificates on the record date specified in the public announcement.
(j) Irrespective of any adjustment or change in the Purchase Price or the
number of one one-thousandth of a Preferred Share issuable upon the exercise of
the Rights, the Rights Certificates theretofore and thereafter issued may
continue to express the Purchase Price and the number of one thousandth of a
Preferred Share which were expressed in the initial Rights Certificates issued
hereunder.
(k) Before taking any action that would cause an adjustment reducing the
Purchase Price below one one-thousandth of the then par value, if any, of the
Preferred Shares issuable upon exercise of the Rights, the Company shall take
any corporate action which may, in the opinion of its counsel, be necessary in
order that the Company may validly and legally issue fully paid and
nonassessable Preferred Shares at such adjusted Purchase Price.
(l) In any case in which this Section 11 shall require that an adjustment
in the Purchase Price be made effective as of a record date for a specified
event, the Company may elect to defer until the occurrence of such event the
issuing to the holder of any Right exercised after such record date of the
Preferred Shares and other capital stock or securities of the Company, if any,
issuable upon such exercise over and above the Preferred Shares and other
capital stock or securities of the Company, if any, issuable upon such exercise
on the basis of the Purchase Price in effect prior to such adjustment; provided,
however, that the Company shall deliver to such holder a due bill or other
appropriate instrument evidencing such holder's right to receive such additional
shares upon the occurrence of the event requiring such adjustment.
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<PAGE> 20
(m) Anything in this Section 11 to the contrary notwithstanding, the
Company shall be entitled to make such reductions in the Purchase Price, in
addition to those adjustments expressly required by this Section 11, as and to
the extent that it in its sole discretion shall determine to be advisable in
order that any consolidation or subdivision of the Preferred Shares, issuance
wholly for cash of any Preferred Shares at less than the current market price,
issuance wholly for cash of Preferred Shares or securities which by their terms
are convertible into or exchangeable for Preferred Shares, dividends on
Preferred Shares payable in Preferred Shares or issuance of rights, options or
warrants referred to hereinabove in Section 11(b), hereafter made by the Company
to holders of its Preferred Shares shall not be taxable to such shareholders.
(n) In the event that at any time after the date of this Agreement and
prior to the Distribution Date, the Company shall (i) declare or pay any
dividend on the Common Shares payable in Common Shares or (ii) effect a
subdivision, combination or consolidation of the Common Shares (by
reclassification or otherwise than by payment of dividends in Common Shares)
into a greater or lesser number of Common Shares, then in any such case (A) the
number of one one-thousandth of a Preferred Share purchasable after such event
upon proper exercise of each Right shall be determined by multiplying the number
of one one-thousandth of a Preferred Share so purchasable immediately prior to
such event by a fraction, the numerator of which is the number of Common Shares
outstanding immediately before such event and the denominator of which is the
number of Common Shares outstanding immediately after such event, and (B) each
Common Share outstanding immediately after such event shall have issued with
respect to it that number of Rights which each Common Share outstanding
immediately prior to such event had issued with respect to it. The adjustments
provided for in this Section 11(n) shall be made successively whenever such a
dividend is declared or paid or such a subdivision, combination or consolidation
is effected.
Section 12. Certificate of Adjusted Purchase Price or Number of Shares.
Whenever an adjustment is made as provided in Section 11 or 13 hereof, the
Company shall promptly (a) prepare a certificate setting forth such adjustment,
and a brief statement of the facts accounting for such adjustment, (b) file with
the Rights Agent and with each transfer agent for the Common Shares or the
Preferred Shares a copy of such certificate, and (c) mail a brief summary
thereof to each holder of a Rights Certificate in accordance with Section 25
hereof. The Rights Agent shall be fully protected in relying on any such
certificate and/or any adjustment contained therein.
Section 13. Consolidation, Merger or Sale or Transfer of Assets or Earning
Power.
In the event, directly or indirectly, at any time after a Person has become
an Acquiring Person, (a) the Company shall consolidate with, or merge with and
into, any other Person, (b) any Person shall consolidate with the Company, or
merge with and into the Company and the Company shall be the continuing or
surviving corporation of such merger and, in connection with such merger, all or
part of the Common Shares shall be changed into or exchanged for stock or other
securities of any other Person (or the Company) or cash or any other property,
or (c) the Company shall sell or otherwise transfer (or one or more of its
Subsidiaries shall sell or otherwise transfer), in one or more transactions,
assets or earning power aggregating 50% or
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more of the assets or earning power of the Company and its Subsidiaries (taken
as a whole) to any other Person other than the Company or one or more of its
wholly-owned Subsidiaries, then, and in each such case, proper provision shall
be made so that (i) each holder of a Right (except as otherwise provided herein)
shall thereafter have the right to receive, upon the exercise thereof at a price
equal to the then current Purchase Price multiplied by the number of one
one-thousandth of a Preferred Share for which a Right is then exercisable, in
accordance with the terms of this Agreement and in lieu of Preferred Shares,
such number of Common Shares of such other Person (including the Company as
successor thereto or as the surviving corporation) as shall equal the result
obtained by (A) multiplying the then current Purchase Price by the number of one
one-thousandth of a Preferred Share for which a Right is then exercisable and
dividing that product by (B) 50% of the then current per share market price of
the Common Shares of such other Person (determined pursuant to Section 11(d)
hereof) on the date of consummation of such consolidation, merger, sale or
transfer; (ii) the issuer of such Common Shares shall thereafter be liable for,
and shall assume, by virtue of such consolidation, merger, sale or transfer, all
the obligations and duties of the Company pursuant to this Agreement; (iii) the
term "Company" shall thereafter be deemed to refer to such issuer; and (iv) such
issuer shall take such steps (including, but not limited to, the reservation of
a sufficient number of its Common Shares in accordance with Section 9 hereof) in
connection with such consummation as may be necessary to assure that the
provisions hereof shall thereafter be applicable, as nearly as reasonably may
be, in relation to the Common Shares thereafter deliverable upon the exercise of
the Rights. The Company shall not consummate any such consolidation, merger,
sale or transfer unless prior thereto the Company and such issuer shall have
executed and delivered to the Rights Agent a supplemental agreement so
providing. The Company shall not enter into any transaction of the kind referred
to in this Section 13 if at the time of such transaction there are any rights,
warrants, instruments or securities outstanding or any agreements or
arrangements which, as a result of the consummation of such transaction, would
eliminate or substantially diminish the benefits intended to be afforded by the
Rights. The provisions of this Section 13 shall similarly apply to successive
mergers or consolidations or sales or other transfers.
Section 14. Fractional Rights and Fractional Shares.
(a) The Company shall not be required to issue fractions of Rights or to
distribute Rights Certificates which evidence fractional Rights. In lieu of such
fractional Rights, there shall be paid to the registered holders of the Rights
Certificates with regard to which such fractional Rights would otherwise be
issuable, an amount in cash equal to the same fraction of the current market
value of a whole Right. For the purposes of this Section 14(a), the current
market value of a whole Right shall be the closing price of the Rights for the
Trading Day immediately prior to the date on which such fractional Rights would
have been otherwise issuable. The closing price for any day shall be the last
sale price, regular way, or, in case no such sale takes place on such day, the
average of the closing bid and asked prices, regular way, in either case as
reported in the principal consolidated transaction reporting system with respect
to securities listed or admitted to trading on the New York Stock Exchange or,
if the Rights are not listed or admitted to trading on the New York Stock
Exchange, as reported in the principal consolidated transaction reporting system
with respect to securities listed on the principal national securities exchange
on which the Rights are listed or admitted to trading or, if the Rights are not
listed or admitted to trading on
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any national securities exchange, the last quoted price or, if not so quoted,
the average of the high bid and low asked prices in the over-the-counter market,
as reported by NASDAQ or such other system then in use or, if on any such date
the Rights are not quoted by any such organization, the average of the closing
bid and asked prices as furnished by a professional market maker making a market
in the Rights selected by the Board of Directors of the Company. If on any such
date no such market maker is making a market in the Rights, the fair value of
the Rights on such date as determined in good faith by the Board of Directors of
the Company shall be used. The Company shall promptly notify the Rights Agent of
any such determination of fair value.
(b) The Company shall not be required to issue fractions of Preferred
Shares (other than fractions which are integral multiples of one one-thousandth
of a Preferred Share) upon exercise of the Rights or to distribute certificates
which evidence fractional Preferred Shares (other than fractions which are
integral multiples of one one-thousandth of a Preferred Share). Fractions of
Preferred Shares in integral multiples of one one-thousandth of a Preferred
Share may, at the election of the Company, be evidenced by depositary receipts,
pursuant to an appropriate agreement between the Company and a depositary
selected by it; provided, that such agreement shall provide that the holders of
such depositary receipts shall have all the rights, privileges and preferences
to which they are entitled as beneficial owners of the Preferred Shares
represented by such depositary receipts. In lieu of fractional Preferred Shares
that are not integral multiples of one one-thousandth of a Preferred Share, the
Company shall pay to the registered holders of Rights Certificates at the time
such Rights are exercised as herein provided an amount in cash equal to the same
fraction of the current market value of one Preferred Share. For the purposes of
this Section 14(b), the current market value of a Preferred Share shall be the
closing price of a Preferred Share (as determined pursuant to the second
sentence of Section 11(d)(i) hereof) for the Trading Day immediately prior to
the date of such exercise.
(c) Following the occurrence of a Triggering Event, the Company shall not
be required to issue fractions of shares of Common Shares upon exercise of the
Rights or to distribute certificates which evidence fractional shares of Common
Shares. In lieu of fractional shares of Common Shares, the Company may pay to
the registered holders of Rights Certificates at the time such Rights are
exercised as herein provided an amount in cash equal to the same fraction of the
current market value of one (1) share of Common Shares. For purposes of this
Section 14(c), the current market value of one share of Common Shares shall be
the closing of one share of Common Shares (as determined pursuant to Section
11(d)(i) hereof) for the Trading Day immediately prior to the date of such
exercise.
(d) The holder of a Right by the acceptance of the Right expressly waives
his right to receive any fractional Rights or any fractional shares upon
exercise of a Right (except as provided above).
Section 15. Rights of Action. All rights of action in respect of this
Agreement, excepting the rights of action given to the Rights Agent under
Section 18 hereof, are vested in the respective registered holders of the Rights
Certificates (and, prior to the Distribution Date, the registered holders of the
Common Shares); and any registered holder of any Rights Certificate (or, prior
to the Distribution Date, of the Common Shares), without the consent of
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<PAGE> 23
the Rights Agent or of the holder of any other Rights Certificate (or, prior to
the Distribution Date, of the Common Shares), may, in his own behalf and for his
own benefit, enforce, and may institute and maintain any suit, action or
proceeding against the Company to enforce, or otherwise act in respect of, his
right to exercise the Rights evidenced by such Rights Certificate in the manner
provided in such Rights Certificate and in this Agreement. Without limiting the
foregoing or any remedies available to the holders of Rights, it is specifically
acknowledged that the holders of Rights would not have an adequate remedy at law
for any breach of this Agreement and will be entitled to specific performance of
the obligations under, and injunctive relief against actual or threatened
violations of the obligations of any Person subject to, this Agreement.
Section 16. Agreement of Right Holders. Every holder of a Right, by
accepting the same, consents and agrees with the Company and the Rights Agent
and with every other holder of a Right that:
(a) prior to the Distribution Date, the Rights will be transferable only in
connection with the transfer of the Common Shares;
(b) after the Distribution Date, the Rights Certificates are transferable
only on the registry books of the Rights Agent if surrendered at the principal
office of the Rights Agent, duly endorsed or accompanied by a proper instrument
of transfer with the appropriate forms and certificates executed; and
(c) the Company and the Rights Agent may deem and treat the person in whose
name the Rights Certificate (or, prior to the Distribution Date, the associated
Common Shares certificate) is registered as the absolute owner thereof and of
the Rights evidenced thereby (notwithstanding any notations of ownership or
writing on the Rights Certificates or the associated Common Shares certificate
made by anyone other than the Company or the Rights Agent) for all purposes
whatsoever, and neither the Company nor the Rights Agent shall be affected by
any notice to the contrary.
(d) notwithstanding anything in this Agreement to the contrary, neither the
Company nor the Rights Agent shall have any liability to any holder of a Right
or other Person as a result of its inability to perform any of its obligations
under this Agreement by reason of any preliminary or permanent injunction or
other order, decree or ruling issued by a court of competent jurisdiction or by
a governmental, regulatory or administrative agency or commission, or any
statute, rule, regulation or executive order promulgated or enacted by any
governmental authority, prohibiting or otherwise restraining performance of such
obligation; provided, however, the Company must use its best efforts to have any
such order, decree or ruling lifted or otherwise overturned as soon as possible.
Section 17. Rights Certificate Holder Not Deemed a Shareholder. No holder,
as such, of any Rights Certificate shall be entitled to vote, receive dividends
or be deemed for any purpose the holder of the Preferred Shares or any other
securities of the Company which may at any time be issuable on the exercise of
the Rights represented thereby, nor shall anything contained herein or in any
Rights Certificate be construed to confer upon the holder of any
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<PAGE> 24
Rights Certificate, as such, any of the rights of a shareholder of the Company
or any right to vote for the election of directors or upon any matter submitted
to shareholders at any meeting thereof, or to give or withhold consent to any
corporate action, or to receive notice of meetings or other actions affecting
shareholders (except as provided in Section 25 hereof), or to receive dividends
or subscription rights, or otherwise, until the Right or Rights evidenced by
such Rights Certificate shall have been exercised in accordance with the
provisions hereof.
Section 18. Concerning the Rights Agent. The Company agrees to pay to the
Rights Agent reasonable compensation for all services rendered by it hereunder
and, from time to time, on demand of the Rights Agent, its reasonable expenses
and counsel fees and other disbursements incurred in the administration and
execution of this Agreement and the exercise and performance of its duties
hereunder. The Company also agrees to indemnify the Rights Agent for, and to
hold it harmless against, any loss, liability, or expense, incurred without
negligence, bad faith or willful misconduct on the part of the Rights Agent, for
anything done or omitted by the Rights Agent in connection with the acceptance
and administration of this Agreement, including the costs and expenses of
defending against any claim of liability in the premises.
The Rights Agent shall be protected and shall incur no liability for, or in
respect of any action taken, suffered or omitted by it in connection with, its
administration of this Agreement in reliance upon any Rights Certificate or
certificate for the Preferred Shares or Common Shares or for other securities of
the Company, instrument of assignment or transfer, power of attorney,
endorsement, affidavit, letter, notice, direction, consent, certificate,
statement, or other paper or document believed by it to be genuine and to be
signed, executed and, where necessary, verified or acknowledged, by the proper
person or persons, or otherwise upon the advice of counsel as set forth in
Section 20 hereof.
Section 19. Merger or Consolidation or Change of Name of Rights Agent. Any
corporation into which the Rights Agent or any successor Rights Agent may be
merged or with which it may be consolidated, or any corporation resulting from
any merger or consolidation to which the Rights Agent or any successor Rights
Agent shall be a party, or any corporation succeeding to the stock transfer or
corporate trust powers of the Rights Agent or any successor Rights Agent, shall
be the successor to the Rights Agent under this Agreement without the execution
or filing of any paper or any further act on the part of any of the parties
hereto; provided, that such corporation would be eligible for appointment as a
successor Rights Agent under the provisions of Section 21 hereof. In case at the
time such successor Rights Agent shall succeed to the agency created by this
Agreement, any of the Rights Certificates shall have been countersigned but not
delivered, any such successor Rights Agent may adopt the countersignature of the
predecessor Rights Agent and deliver such Rights Certificates so countersigned;
and in case at that time any of the Rights Certificates shall not have been
countersigned, any successor Rights Agent may countersign such Rights
Certificates either in the name of the predecessor Rights Agent or in the name
of the successor Rights Agent; and in all such cases such Rights Certificates
shall have the full force provided in the Rights Certificates and in this
Agreement.
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In case at any time the name of the Rights Agent shall be changed and at
such time any of the Rights Certificates shall have been countersigned but not
delivered, the Rights Agent may adopt the countersignature under its prior name
and deliver Rights Certificates so countersigned; and in case at that time any
of the Rights Certificates shall not have been countersigned, the Rights Agent
may countersign such Rights Certificates either in its prior name or in its
changed name; and in all such cases such Rights Certificates shall have the full
force provided in the Rights Certificates and in this Agreement.
Section 20. Duties of Rights Agent. The Rights Agent undertakes the duties
and obligations imposed by this Agreement upon the following terms and
conditions, by all of which the Company and the holders of Rights Certificates,
by their acceptance thereof, shall be bound:
(a) The Rights Agent may consult with legal counsel (who may be legal
counsel for the Company), and the opinion of such counsel shall be full and
complete authorization and protection to the Rights Agent as to any action taken
or omitted by it in good faith and in accordance with such opinion.
(b) Whenever in the performance of its duties under this Agreement the
Rights Agent shall deem it necessary or desirable that any fact or matter
(including, without limitation, the identity of any Acquiring Person and the
determination of "current market price") be proved or established by the Company
prior to taking or suffering any action hereunder, such fact or matter (unless
other evidence in respect thereof be herein specifically prescribed) may be
deemed to be conclusively proved and established by a certificate signed by any
one of the Chairman of the Board, the Chief Executive Officer, the President,
any Vice President, the Treasurer or the Secretary of the Company and delivered
to the Rights Agent; and such certificate shall be full authorization to the
Rights Agent for any action taken or suffered in good faith by it under the
provisions of this Agreement in reliance upon such certificate.
(c) The Rights Agent shall be liable hereunder to the Company and any other
Person only for its own negligence, bad faith or willful misconduct.
(d) The Rights Agent shall not be liable for or by reason of any of the
statements of fact or recitals contained in this Agreement or in the Rights
Certificates (except its countersignature thereof) or be required to verify the
same, but all such statements and recitals are and shall be deemed to have been
made by the Company only.
(e) The Rights Agent shall not be under any responsibility in respect of
the validity of this Agreement or the execution and delivery hereof (except the
due execution hereof by the Rights Agent) or in respect of the validity or
execution of any Rights Certificate (except its countersignature thereof); nor
shall it be responsible for any breach by the Company of any covenant or
condition contained in this Agreement or in any Rights Certificate; nor shall it
be responsible for any change in the exercisability of the Rights (including the
Rights becoming void pursuant to Section 11(a)(ii) hereof) or any adjustment in
the terms of the Rights (including the manner, method or amount thereof)
provided for in Section 3, 11, 13, 23, or 24, or the ascertaining of the
existence of facts that would require any such change or adjustment (except
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<PAGE> 26
with respect to the exercise of Rights evidenced by Rights Certificates after
actual notice that such change or adjustment is required); nor shall it by any
act hereunder be deemed to make any representation or warranty as to the
authorization or reservation of any Preferred Shares to be issued pursuant to
this Agreement or any Rights Certificate or as to whether any Preferred Shares
will, when issued, be validly authorized and issued, fully paid and
nonassessable.
(f) The Company agrees that it will perform, execute, acknowledge and
deliver or cause to be performed, executed, acknowledged and delivered all such
further and other acts, instruments and assurances as may reasonably be required
by the Rights Agent for the carrying out or performing by the Rights Agent of
the provisions of this Agreement.
(g) The Rights Agent is hereby authorized and directed to accept
instructions with respect to the performance of its duties hereunder from any
one of the Chairman of the Board, the Chief Executive Officer, the President,
any Vice President, the Secretary, or the Treasurer of the Company, and to apply
to such officers for advice or instructions in connection with its duties, and
it shall not be liable for any action taken or suffered by it in good faith in
accordance with instructions of any such officer or for any delay in acting
while waiting for those instructions.
(h) The Rights Agent and any shareholder, director, officer or employee of
the Rights Agent may buy, sell or deal in any of the Rights or other securities
of the Company or become pecuniarily interested in any transaction in which the
Company may be interested, or contract with or lend money to the Company or
otherwise act as fully and freely as though it were not Rights Agent under this
Agreement. Nothing herein shall preclude the Rights Agent from acting in any
other capacity for the Company or for any other legal entity.
(i) The Rights Agent may execute and exercise any of the rights or powers
hereby vested in it or perform any duty hereunder either itself or by or through
its attorneys or agents, and the Rights Agent shall not be answerable or
accountable for any act, default, neglect or misconduct of any such attorneys or
agents or for any loss to the Company resulting from any such act, default,
neglect or misconduct, provided reasonable care was exercised in the selection
and continued employment thereof.
(j) No provision of this Agreement shall require the Rights Agent to expend
or risk its own funds or otherwise incur any financial liability in the
performance of any of its duties hereunder or in the exercise of its rights if
there shall be reasonable grounds for believing that repayment of such funds or
adequate indemnification against such risk or liability is not reasonably
assured to it.
Section 21. Change of Rights Agent. The Rights Agent or any successor
Rights Agent may resign and be discharged from its duties under this Agreement
upon 30 days' notice in writing mailed to the Company and to each transfer agent
of the Common Shares or Preferred Shares by registered or certified mail, and to
the holders of the Rights Certificates by first-class mail. The Company may
remove the Rights Agent or any successor Rights Agent upon 30 days' notice in
writing, mailed to the Rights Agent or successor Rights Agent, as the case may
be, and to each transfer agent of the Common Shares or Preferred Shares by
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<PAGE> 27
registered or certified mail, and to the holders of the Rights Certificates by
first-class mail. If the Rights Agent shall resign or be removed or shall
otherwise become incapable of acting, the Company shall appoint a successor to
the Rights Agent. If the Company shall fail to make such appointment within a
period of 30 days after giving notice of such removal or after it has been
notified in writing of such resignation or incapacity by the resigning or
incapacitated Rights Agent or by the holder of a Rights Certificate (who shall,
with such notice, submit his Rights Certificate for inspection by the Company),
then the incumbent Rights Agent or the registered holder of any Rights
Certificate may apply to any court of competent jurisdiction for the appointment
of a new Rights Agent. Any successor Rights Agent, whether appointed by the
Company or by such a court, shall be a corporation organized and doing business
under the laws of the United States or of any state thereof, in good standing,
which is authorized under such laws to exercise corporate trust or stock
transfer powers and is subject to supervision or examination by federal or state
authority and which has at the time of its appointment as Rights Agent a
combined capital and surplus of at least $50 million. After appointment, the
successor Rights Agent shall be vested with the same powers, rights, duties and
responsibilities as if it had been originally named as Rights Agent without
further act or deed; but the predecessor Rights Agent shall deliver and transfer
to the successor Rights Agent any property at the time held by it hereunder, and
execute and deliver any further assurance, conveyance, act or deed necessary for
the purpose. Not later than the effective date of any such appointment the
Company shall file notice thereof in writing with the predecessor Rights Agent
and each transfer agent of the Common Shares or Preferred Shares, and mail a
notice thereof in writing to the registered holders of the Rights Certificates.
Failure to appoint a successor Rights Agent within the 30 day period or to give
any notice provided for in this Section 21, however, or any defect therein,
shall not affect the legality or validity of the resignation or removal of the
Rights Agent or the appointment of the successor Rights Agent, as the case may
be.
Section 22. Issuance of New Rights Certificates. Notwithstanding any of the
provisions of this Agreement or of the Rights to the contrary, the Company may,
at its option, issue new Rights Certificates evidencing Rights in such form as
may be approved by its Board of Directors to reflect any adjustment or change in
the Purchase Price and the number or kind or class of shares or other securities
or property purchasable under the Rights Certificates made in accordance with
the provisions of this Agreement. In addition, in connection with the issuance
or sale of Common Shares following the Distribution Date and prior to the
redemption or expiration of the Rights, the Company (a) shall, with respect to
Common Shares so issued or sold pursuant to the exercise of stock options or
under any employee plan or arrangement, granted or awarded as of the
Distribution Date, or upon the exercise, conversion or exchange of securities
hereinafter issued by the Company, and (b) may, in any other case, if deemed
necessary or appropriate by the Board of Directors of the Company, issue Rights
Certificates representing the appropriate number of Rights in connection with
such issuance or sale; provided, however, that (i) no such Rights Certificate
shall be issued if, and to the extent that, the Company shall be advised by
counsel that such issuance would create a significant risk of material adverse
tax consequences to the Company or the Person to whom such Rights Certificates
would be issued, and (ii) no such Rights Certificate shall be issued if, and to
the
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extent that, appropriate adjustment shall otherwise have been made in lieu of
the issuance thereof.
Section 23. Redemption.
(a) The Board of Directors of the Company may, at its option, at any time
prior to such time as any Person becomes an Acquiring Person, redeem all but not
less than all the then outstanding Rights at a redemption price of $0.01 per
Right, appropriately adjusted to reflect any stock split, stock dividend or
similar transaction occurring after the date hereof (such redemption price being
hereinafter referred to as the "Redemption Price"). The redemption of the Rights
by the Board of Directors may be made effective at such time, on such basis and
with such conditions as the Board of Directors in its sole discretion may
establish.
(b) Immediately upon the action of the Board of Directors of the Company
ordering the redemption of the Rights pursuant to paragraph (a) of this Section
23, and without any further action and without any notice, the right to exercise
the Rights will terminate and the only right thereafter of the holders of Rights
shall be to receive the Redemption Price. The Company shall promptly give public
notice of any such redemption; provided, however, that the failure to give, or
any defect in, any such notice shall not affect the validity of such redemption.
Within 10 days after such action of the Board of Directors ordering the
redemption of the Rights, the Company shall mail a notice of redemption to all
the holders of the then outstanding Rights at their last addresses as they
appear upon the registry books of the Rights Agent or, prior to the Distribution
Date, on the registry books of the transfer agent for the Common Shares. Any
notice which is mailed in the manner herein provided shall be deemed given,
whether or not the holder receives the notice. Each such notice of redemption
will state the method by which the payment of the Redemption Price will be made.
Neither the Company nor any of its Affiliates or Associates may redeem, acquire
or purchase for value any Rights at any time in any manner other than that
specifically set forth in this Section 23 or in Section 24 hereof, and other
than in connection with the purchase of Common Shares prior to the Distribution
Date.
Section 24. Exchange.
(a) The Board of Directors of the Company may, at its option, at any time
after any Person becomes an Acquiring Person, exchange all or part of the then
outstanding and exercisable Rights (which shall not include Rights that have
become void pursuant to the provisions of Section 11(a)(ii) hereof) for Common
Shares at an exchange ratio of one Common Share per Right, appropriately
adjusted to reflect any stock split, stock dividend or similar transaction
occurring after the date hereof (such exchange ratio being hereinafter referred
to as the "Exchange Ratio"). Notwithstanding the foregoing, the Board of
Directors shall not be empowered to effect such exchange at any time after any
Person (other than the Company, any Subsidiary of the Company, any employee
benefit plan of the Company or any such Subsidiary, or any entity holding Common
Shares for or pursuant to the terms of any such plan), together with all
Affiliates and Associates of such Person, becomes the Beneficial Owner of 50% or
more of the Common Shares then outstanding.
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<PAGE> 29
(b) Immediately upon the action of the Board of Directors of the Company
ordering the exchange of any Rights pursuant to paragraph (a) of this Section 24
and without any further action and without any notice, the right to exercise
such Rights shall terminate and the only right thereafter of a holder of such
Rights shall be to receive that number of Common Shares equal to the number of
such Rights held by such holder multiplied by the Exchange Ratio. The Company
shall promptly give public notice of any such exchange; provided, however, that
the failure to give, or any defect in, such notice shall not affect the validity
of such exchange. The Company promptly shall mail a notice of any such exchange
to all of the holders of such Rights at their last addresses as they appear upon
the registry books of the Rights Agent. Any notice which is mailed in the manner
herein provided shall be deemed given, whether or not the holder receives the
notice. Each such notice of exchange will state the method by which the exchange
of the Common Shares for Rights will be effected and, in the event of any
partial exchange, the number of Rights which will be exchanged. Any partial
exchange shall be effected pro rata based on the number of Rights (other than
Rights which have become void pursuant to the provisions of Section 11(a)(ii)
hereof) held by each holder of Rights.
(c) In the event that there shall not be sufficient Common Shares issued
but not outstanding or authorized but unissued to permit any exchange of Rights
as contemplated in accordance with this Section 24, the Company shall take all
such action as may be necessary to authorize additional Common Shares for
issuance upon exchange of the Rights. In the event the Company shall, after good
faith effort, be unable to take all such action as may be necessary to authorize
such additional Common Shares, the Company shall substitute, for each Common
Share that would otherwise be issuable upon exchange of a Right, a number of
Preferred Shares or fraction thereof such that the current per share market
price of one Preferred Share multiplied by such number or fraction is equal to
the current per share market price of one Common Share as of the date of
issuance of such Preferred Shares or fraction thereof.
(d) The Company shall not be required to issue fractions of Common Shares
or to distribute certificates which evidence fractional Common Shares. In lieu
of such fractional Common Shares, the Company shall pay to the registered
holders of the Rights Certificates with regard to which such fractional Common
Shares would otherwise be issuable an amount in cash equal to the same fraction
of the current market value of a whole Common Share. For the purposes of this
paragraph (d), the current market value of a whole Common Share shall be the
closing price of a Common Share (as determined pursuant to the second sentence
of Section 11(d)(i) hereof) for the Trading Day immediately prior to the date of
exchange pursuant to this Section 24.
Section 25. Notice of Certain Events.
(a) In case the Company shall propose (i) to pay any dividend payable in
stock of any class to the holders of its Preferred Shares or to make any other
distribution to the holders of its Preferred Shares (other than a regular
quarterly cash dividend), (ii) to offer to the holders of its Preferred Shares
rights or warrants to subscribe for or to purchase any additional Preferred
Shares or shares of stock of any class or any other securities, rights or
options, (iii) to effect any reclassification of its Preferred Shares (other
than a reclassification involving only the
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subdivision of outstanding Preferred Shares), (iv) to effect any consolidation
or merger into or with, or to effect any sale or other transfer (or to permit
one or more of its Subsidiaries to effect any sale or other transfer), in one or
more transactions, of 50% or more of the assets or earning power of the Company
and its Subsidiaries (taken as a whole) to, any other Person, (v) to effect the
liquidation, dissolution or winding up of the Company, or (vi) to declare or pay
any dividend on the Common Shares payable in Common Shares or to effect a
subdivision, combination or consolidation of the Common Shares (by
reclassification or otherwise than by payment of dividends in Common Shares),
then, in each such case, the Company shall give to each holder of a Rights
Certificate, in accordance with Section 26 hereof, a notice of such proposed
action, which shall specify the record date for the purposes of such stock
dividend, or distribution of rights or warrants, or the date on which such
reclassification, consolidation, merger, sale, transfer, liquidation,
dissolution, or winding up is to take place and the date of participation
therein by the holders of the Common Shares and/or Preferred Shares, if any such
date is to be fixed, and such notice shall be so given in the case of any action
covered by clause (i) or (ii) above at least 10 days prior to the record date
for determining holders of the Preferred Shares for purposes of such action, and
in the case of any such other action, at least 10 days prior to the date of the
taking of such proposed action or the date of participation therein by the
holders of the Common Shares and/or Preferred Shares, whichever shall be the
earlier.
(b) In case the event set forth in Section 11(a)(ii) hereof shall occur,
then the Company shall as soon as practicable thereafter give to each holder of
a Rights Certificate, in accordance with Section 26 hereof, a notice of the
occurrence of such event, which notice shall describe such event and the
consequences of such event to holders of Rights under Section 11(a)(ii) hereof.
Section 26. Notices. Notices or demands authorized by this Agreement to be
given or made by the Rights Agent or by the holder of any Rights Certificate to
or on the Company shall be sufficiently given or made if sent by first-class
mail, postage prepaid, addressed (until another address is filed in writing with
the Rights Agent) as follows:
Clark/Bardes Holdings, Inc.
2121 San Jacinto Street, Suite 2200
Dallas, Texas 75201-7906
Attention: Corporate Secretary
Subject to the provisions of Section 21 hereof, any notice or demand authorized
by this Agreement to be given or made by the Company or by the holder of any
Rights Certificate to or on the Rights Agent shall be sufficiently given or made
if sent by first-class mail, postage prepaid, addressed (until another address
is filed in writing with the Company) as follows:
The Bank of New York
Stock Transfer Administration
101 Barclay Street - 12 W
New York, New York 10286
27
<PAGE> 31
Notices or demands authorized by this Agreement to be given or made by the
Company or the Rights Agent to the holder of any Rights Certificate shall be
sufficiently given or made if sent by first-class mail, postage prepaid,
addressed to such holder at the address of such holder as shown on the registry
books of the Company.
Section 27. Supplements and Amendments. The Company may from time to time
supplement or amend this Agreement without the approval of any holders of Rights
Certificates in order to cure any ambiguity, to correct or supplement any
provision contained herein which may be defective or inconsistent with any other
provisions herein, or to make any other provisions with respect to the Rights
which the Company may deem necessary or desirable, any such supplement or
amendment to be evidenced by a writing signed by the Company and the Rights
Agent; provided, however, that from and after such time as any Person becomes an
Acquiring Person, this Agreement shall not be amended in any manner which would
adversely affect the interests of the holders of Rights.
Section 28. Successors. All the covenants and provisions of this Agreement
by or for the benefit of the Company or the Rights Agent shall bind and inure to
the benefit of their respective successors and assigns hereunder.
Section 29. Determinations and Actions by the Board of Directors, etc. The
Board of Directors of the Company shall have the exclusive power and authority
to administer this Agreement and to exercise all rights and powers specifically
granted to the Board or to the Company, or as may be necessary or advisable in
the administration of this Agreement, including, without limitation, the right
and power to (i) interpret the provisions of this Agreement, and (ii) make all
determinations deemed necessary or advisable for the administration of this
Agreement (including a determination to redeem or not redeem the Rights or to
amend the Agreement). All such actions, calculations, interpretations and
determinations (including, for purposes of clause (y) below, all omissions with
respect to the foregoing) which are done or made by the Board in good faith,
shall (x) be final, conclusive and binding on the Company, the Rights Agent, the
holders of the Rights and all other parties, and (y) not subject the Board to
any liability to the holders of the Rights.
Section 30. Benefits of this Agreement. Nothing in this Agreement shall be
construed to give to any person or corporation other than the Company, the
Rights Agent and the registered holders of the Rights Certificates (and, prior
to the Distribution Date, the Common Shares) any legal or equitable right,
remedy or claim under this Agreement; but this Agreement shall be for the sole
and exclusive benefit of the Company, the Rights Agent and the registered
holders of the Rights Certificates (and, prior to the Distribution Date, the
Common Shares).
Section 31. Severability. If any term, provision, covenant or restriction
of this Agreement is held by a court of competent jurisdiction or other
authority to be invalid, void or unenforceable, the remainder of the terms,
provisions, covenants and restrictions of this Agreement shall remain in full
force and effect and shall in no way be affected, impaired or invalidated,
provided, however, that notwithstanding anything in this Agreement to the
28
<PAGE> 32
contrary, if any such term, provision, covenant or restriction is held by such
court or authority to be invalid, void or unenforceable and the Board of
Directors of the Company determines in its good faith judgment that severing the
invalid language from this Agreement would adversely affect the purpose or
effect of this Agreement, the right of redemption set forth in Section 23 hereof
shall be reinstated and shall not expire until the close of business on the
tenth day following the date of such determination by the Board of Directors.
Section 32. Governing Law. This Agreement and each Rights Certificate
issued hereunder shall be deemed to be a contract made under the laws of the
State of New York and for all purposes shall be governed by and construed in
accordance with the laws of such State applicable to contracts to be made and
performed entirely within such State.
Section 33. Counterparts. This Agreement may be executed in any number of
counterparts and each of such counterparts shall for all purposes be deemed to
be an original, and all such counterparts shall together constitute but one and
the same instrument.
Section 34. Descriptive Headings. Descriptive headings of the several
Sections of this Agreement are inserted for convenience only and shall not
control or affect the meaning or construction of any of the provisions hereof.
[SIGNATURE PAGE FOLLOWS]
29
<PAGE> 33
IN WITNESS WHEREOF, the parties hereto have caused this Rights
Agreement to be duly executed and attested, all as of the day and year first
above written.
CLARK/BARDES HOLDINGS, INC.
Attest: By:
--------------------- --------------------------------------
Name: Melvin G. Todd
Title: President and Chief Executive Officer
THE BANK OF NEW YORK
Attest: By:
--------------------- --------------------------------------
Title: Name:
------------- ------------------------------------
Title:
-----------------------------------
30
<PAGE> 34
EXHIBIT A
FORM
of
CERTIFICATE OF DESIGNATION
of
SERIES A JUNIOR PARTICIPATING PREFERRED STOCK
of
CLARK/BARDES HOLDINGS, INC.
Pursuant to the provisions of Sections 151 and 103 of the Delaware
General Corporation Law (the "DGCL"), CLARK/BARDES HOLDINGS, INC., A Delaware
corporation (the "Company") hereby certifies as follows:
1. The following resolution was duly adopted by the Board of Directors
of the Company, pursuant to the authority conferred upon the Board of Directors
by Article V of the Company's Certificate of Incorporation and the provisions of
Section 151 of the DGCL, at a duly called meeting of the Board of Directors held
on July 10, 1998:
RESOLVED, that the Board of Directors hereby designate 20,000 shares of
the Company's Preferred Stock, $0.01 par value, as Series A Junior Participating
Preferred Stock with the designations, powers, preferences, and relative,
participating, options or other rights, and the qualifications, limitations or
restrictions thereof as follows:
Section 1. Designation and Amount. The shares of such series shall be
designated as "Junior Participating Preferred Stock, Series A" (the "Series A
Preferred Stock") and the number of shares constituting the Series A Preferred
Stock shall be 20,000. Such number of shares may be increased or decreased by
resolution of the Board of Directors; provided, that no decrease shall reduce
the number of shares of Series A Preferred Stock to a number less than the
number of shares then outstanding plus the number of shares reserved for
issuance upon the exercise of outstanding options, rights or warrants or upon
the conversion of any outstanding securities issued by the Company convertible
into Series A Preferred Stock.
Section 2. Dividends and Distributions.
(A) Subject to the rights of the holders of any shares of any series of
Preferred Stock (or any similar stock) ranking prior and superior to the Series
A Preferred Stock with respect to dividends, the holders of shares of Series A
Preferred Stock, in preference to the holders of Common Stock, par value $0.01
per share (the "Common Stock"), of the Company, and of any other junior stock,
shall be entitled to receive, when, as and if declared by the Board of Directors
out of funds legally available for the purpose, quarterly dividends payable in
cash on the first day of January, April, July and October in each year (each
such date being referred to herein as a "Quarterly Dividend Payment Date"),
commencing on the first Quarterly Dividend Payment Date after the first issuance
of a share or fraction of a share of Series A Preferred Stock, in an amount per
share (rounded to the nearest cent) equal to the greater of (a) $10 or (b)
subject to the
31
<PAGE> 35
provision for adjustment hereinafter set forth, 1000 times the aggregate per
share amount of all cash dividends, and 1000 times the aggregate per share
amount (payable in kind) of all non-cash dividends or other distributions, other
than a dividend payable in shares of Common Stock or a subdivision of the
outstanding shares of Common Stock (by reclassification or otherwise), declared
on the Common Stock since the immediately preceding Quarterly Dividend Payment
Date or, with respect to the first Quarterly Dividend Payment Date, since the
first issuance of any share or fraction of a share of Series A Preferred Stock.
In the event the Company shall at any time declare or pay any dividend on the
Common Stock payable in shares of Common Stock, or effect a subdivision or
combination or consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise than by payment of a dividend in shares of Common
Stock) into a greater or lesser number of shares of Common Stock, then in each
such case the amount to which holders of shares of Series A Preferred Stock were
entitled immediately prior to such event under clause (b) of the preceding
sentence shall be adjusted by multiplying such amount by a fraction, the
numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event.
(B) The Company shall declare a dividend or distribution on the Series
A Preferred Stock as provided in paragraph (A) of this Section immediately after
it declares a dividend or distribution on the Common Stock (other than a
dividend payable in shares of Common Stock); provided that, in the event no
dividend or distribution shall have been declared on the Common Stock during the
period between any Quarterly Dividend Payment Date and the next subsequent
Quarterly Dividend Payment Date, a dividend of $10 per share on the Series A
Preferred Stock shall nevertheless be payable on such subsequent Quarterly
Dividend Payment Date.
(C) Dividends shall begin to accrue and be cumulative on outstanding
shares of Series A Preferred Stock from the Quarterly Dividend Payment Date next
preceding the date of issue of such shares, unless the date of issue of such
shares is prior to the record date for the first Quarterly Dividend Payment
Date, in which case dividends on such shares shall begin to accrue from the date
of issue of such shares, or unless the date of issue is a Quarterly Dividend
Payment Date or is a date after the record date for the determination of holders
of shares of Series A Preferred Stock entitled to receive a quarterly dividend
and before such Quarterly Dividend Payment Date, in either of which events such
dividends shall begin to accrue and be cumulative from such Quarterly Dividend
Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends
paid on the shares of Series A Preferred Stock in an amount less than the total
amount of such dividends at the time accrued and payable on such shares shall be
allocated pro rata on a share-by-share basis among all such shares at the time
outstanding. The Board of Directors may fix a record date for the determination
of holders of shares of Series A Preferred Stock entitled to receive payment of
a dividend or distribution declared thereon, which record date shall be not more
than 50 days prior to the date fixed for the payment thereof.
Section 3. Voting Rights. The holders of shares of Series A Preferred
Stock shall have the following voting rights:
(A) Subject to the provision for adjustment hereinafter set forth, each
share of Series A Preferred Stock shall entitle the holder thereof to 1000 votes
on all matters submitted to a vote
2
<PAGE> 36
of the shareholders of the Company. In the event the Company shall at any time
declare or pay any dividend on the Common Stock payable in shares of Common
Stock, or effect a subdivision or combination or consolidation of the
outstanding shares of Common Stock (by reclassification or otherwise than by
payment of a dividend in shares of Common Stock) into a greater or lesser number
of shares of Common Stock, then in each such case the number of votes per share
to which holders of shares of Series A Preferred Stock were entitled immediately
prior to such event shall be adjusted by multiplying such number by a fraction,
the numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event.
(B) Except as otherwise provided herein, in any other Certificate of
Designations creating a series of Preferred Stock or any similar stock, or by
law, the holders of shares of Series A Preferred Stock and the holders of shares
of Common Stock and any other capital stock of the Company having general voting
rights shall vote together as one class on all matters submitted to a vote of
shareholders of the Company.
(C) Except as set forth herein, or as otherwise provided by law,
holders of Series A Preferred Stock shall have no special voting rights and
their consent shall not be required (except to the extent they are entitled to
vote with holders of Common Stock as set forth herein) for taking any corporate
action.
Section 4. Certain Restrictions.
(A) Whenever quarterly dividends or other dividends or distributions
payable on the Series A Preferred Stock as provided in Section 2 are in arrears,
thereafter and until all accrued and unpaid dividends and distributions, whether
or not declared, on shares of Series A Preferred Stock outstanding shall have
been paid in full, the Company shall not:
(i) declare or pay dividends, or make any other distributions, on
any shares of stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series A Preferred
Stock;
(ii) declare or pay dividends, or make any other distributions, on
any shares of stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Series A Preferred
Stock, except dividends paid ratably on the Series A Preferred Stock
and all such parity stock on which dividends are payable or in arrears
in proportion to the total amounts to which the holders of all such
shares are then entitled;
(iii) redeem or purchase or otherwise acquire for consideration
shares of any stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series A Preferred
Stock, provided that the Company may at any time redeem, purchase or
otherwise acquire shares of any such junior stock in exchange for
shares of any stock of the Company ranking junior (either as to
dividends or upon dissolution, liquidation or winding up) to the Series
A Preferred Stock; or
3
<PAGE> 37
(iv) redeem or purchase or otherwise acquire for consideration any
shares of Series A Preferred Stock, or any shares of stock ranking on a
parity with the Series A Preferred Stock, except in accordance with a
purchase offer made in writing or by publication (as determined by the
Board of Directors) to all holders of such shares upon such terms as
the Board of Directors, after consideration of the respective annual
dividend rates and other relative rights and preferences of the
respective series and classes, shall determine in good faith will
result in fair and equitable treatment among the respective series or
classes.
(B) The Company shall not permit any subsidiary of the Company to
purchase or otherwise acquire for consideration any shares of stock of the
Company unless the Company could, under paragraph (A) of this Section 4,
purchase or otherwise acquire such shares at such time and in such manner.
Section 5. Reacquired Shares. Any shares of Series A Preferred Stock
purchased or otherwise acquired by the Company in any manner whatsoever shall be
retired and cancelled promptly after the acquisition thereof. All such shares
shall upon their cancellation become authorized but unissued shares of Preferred
Stock and may be reissued as part of a new series of Preferred Stock subject to
the conditions and restrictions on issuance set forth herein, in the Certificate
of Incorporation, or in any other Certificate of Designations creating a series
of Preferred Stock or any similar stock or as otherwise required by law.
Section 6. Liquidation, Dissolution or Winding Up. Upon any
liquidation, dissolution or winding up of the Company, no distribution shall be
made (1) to the holders of shares of stock ranking junior (either as to
dividends or upon liquidation, dissolution or winding up) to the Series A
Preferred Stock unless, prior thereto, the holders of shares of Series A
Preferred Stock shall have received $1000 per share, plus an amount equal to
accrued and unpaid dividends and distributions thereon, whether or not declared,
to the date of such payment, provided that the holders of shares of Series A
Preferred Stock shall be entitled to receive an aggregate amount per share,
subject to the provision for adjustment hereinafter set forth, equal to 1000
times the aggregate amount to be distributed per share to holders of shares of
Common Stock, or (2) to the holders of shares of stock ranking on a parity
(either as to dividends or upon liquidation, dissolution or winding up) with the
Series A Preferred Stock, except distributions made ratably on the Series A
Preferred Stock and all such parity stock in proportion to the total amounts to
which the holders of all such shares are entitled upon such liquidation,
dissolution or winding up. In the event the Company shall at any time declare or
pay any dividend on the Common Stock payable in shares of Common Stock, or
effect a subdivision or combination or consolidation of the outstanding shares
of Common Stock (by reclassification or otherwise than by payment of a dividend
in shares of Common Stock) into a greater or lesser number of shares of Common
Stock, then in each such case the aggregate amount to which holders of shares of
Series A Preferred Stock were entitled immediately prior to such event under the
proviso in clause (1) of the preceding sentence shall be adjusted by multiplying
such amount by a fraction the numerator of which is the number of shares of
Common Stock outstanding immediately after such event and the denominator of
which is the number of shares of Common Stock that were outstanding immediately
prior to such event.
4
<PAGE> 38
Section 7. Consolidation, Merger, etc. In case the Company shall enter
into any consolidation, merger, combination or other transaction in which the
shares of Common Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, then in any such case each share of
Series A Preferred Stock shall at the same time be similarly exchanged or
changed into an amount per share, subject to the provision for adjustment
hereinafter set forth, equal to 1000 times the aggregate amount of stock,
securities, cash and/or any other property (payable in kind), as the case may
be, into which or for which each share of Common Stock is changed or exchanged.
In the event the Company shall at any time declare or pay any dividend on the
Common Stock payable in shares of Common Stock, or effect a subdivision or
combination or consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise than by payment of a dividend in shares of Common
Stock) into a greater or lesser number of shares of Common Stock, then in each
such case the amount set forth in the preceding sentence with respect to the
exchange or change of shares of Series A Preferred Stock shall be adjusted by
multiplying such amount by a fraction, the numerator of which is the number of
shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
Section 8. No Redemption. The shares of Series A Preferred Stock shall
not be redeemable.
Section 9. Rank. The Series A Preferred Stock shall rank, with respect
to the payment of dividends and the distribution of assets, junior to all series
of any other class of the Company's Preferred Stock.
Section 10. Amendment. The Certificate of Incorporation of the Company
shall not be amended in any manner which would materially alter or change the
powers, preferences or special rights of the Series A Preferred Stock so as to
affect them adversely without the affirmative vote of the holders of at least
two-thirds of the outstanding shares of Series A Preferred Stock, voting
together as a single class.
5
<PAGE> 39
THE UNDERSIGNED, hereby declares and certifies that this Certificate of
Designation is his act and deed and the facts herein are true, and accordingly
has hereunto set his hand this 10th day of July, 1998.
CLARK/BARDES HOLDINGS, INC.
By:
------------------------------------
Melvin G. Todd
President and Chief Executive Officer
6
<PAGE> 40
EXHIBIT B
Form of Rights Certificate
Certificate No. R- Rights
NOT EXERCISABLE AFTER JULY 10, 2008 OR EARLIER IF REDEMPTION OR
EXCHANGE OCCURS. THE RIGHTS ARE SUBJECT TO REDEMPTION AT $0.01 PER
RIGHT AND TO EXCHANGE ON THE TERMS SET FORTH IN THE RIGHTS AGREEMENT.
UNDER CERTAIN CIRCUMSTANCES, RIGHTS BENEFICIALLY OWNED BY AN ACQUIRED
PERSON (AS SUCH TERM IS DEFINED IN THE RIGHTS AGREEMENT) AND ANY
SUBSEQUENT HOLDER OF SUCH RIGHTS MAY BECOME NULL AND VOID.
Rights Certificate
CLARK/BARDES HOLDINGS, INC.
This certifies that _____________________, or registered assigns, is
the registered owner of the number of Rights set forth above, each of which
entitles the owner thereof, subject to the terms, provisions and conditions of
the Rights Agreement, dated as of July 10, 1998 (the "Rights Agreement"),
between Clark/Bardes Holdings, Inc., a Delaware corporation (the "Company"), and
The Bank of New York (the "Rights Agent"), to purchase from the Company at any
time after the Distribution Date (as such term is defined in the Rights
Agreement) and prior to 5:00 P.M., Dallas, Texas time, on July 10, 2008 at the
principal office of the Rights Agent, or at the office of its successor as
Rights Agent, one one-thousandth of a fully paid non-assessable share of Junior
Participating Preferred Stock, Series A, par value $0.01 per share (the
"Preferred Shares"), of the Company, at a purchase price of $63 per one
one-thousandth of a Preferred Share (the "Purchase Price"), upon presentation
and surrender of this Rights Certificate with the Form of Election to Purchase
duly executed. The number of Rights evidenced by this Rights Certificate (and
the number of one one-thousandths of a Preferred Share which may be purchased
upon exercise hereof) set forth above, and the Purchase Price set forth above,
are the number and Purchase Price as of July 10, 1998, based on the Preferred
Shares as constituted at such date. As provided in the Rights Agreement, the
Purchase Price and the number of one one-thousandths of a Preferred Share which
may be purchased upon the exercise of the Rights evidenced by this Rights
Certificate are subject to modification and adjustment upon the happening of
certain events.
This Rights Certificate is subject to all of the terms, provisions and
conditions of the Rights Agreement, which terms, provisions and conditions are
hereby incorporated herein by reference and made a part hereof and to which
Rights Agreement reference is hereby made for a full description of the rights,
limitations of rights, obligations, duties and immunities hereunder of the
Rights Agent, the Company and the holders of the Rights Certificates. Copies of
the Rights Agreement are on file at the principal executive offices of the
Company and the above-mentioned offices of the Rights Agent.
This Rights Certificate, with or without other Rights Certificates,
upon surrender at the principal office of the Rights Agent, may be exchanged for
another Rights
<PAGE> 41
Certificate or Rights Certificates of like tenor and date evidencing Rights
entitling the holder to purchase a like aggregate number of Preferred Shares as
the Rights evidenced by the Rights Certificate or Rights Certificates
surrendered shall have entitled such holder to purchase. If this Rights
Certificate shall be exercised in part, the holder shall be entitled to receive
upon surrender hereof another Rights Certificate or Rights Certificates for the
number of whole Rights not exercised.
Subject to the provisions of the Rights Agreement, the Rights evidenced
by this Certificate (i) may be redeemed by the Company at a redemption price of
$0.01 per Right or (ii) may be exchanged in whole or in part for Preferred
Shares or shares of the Company's Common Stock, par value $0.01 per share.
No fractional Preferred Shares will be issued upon the exercise of any
Right or Rights evidenced hereby (other than fractions which are integral
multiples of one one-thousandth of a Preferred Share, which may, at the election
of the Company, be evidenced by depositary receipts), but in lieu thereof a cash
payment will be made, as provided in the Rights Agreement.
No holder of this Rights Certificate shall be entitled to vote or
receive dividends or be deemed for any purpose the holder of the Preferred
Shares or of any other securities of the Company which may at any time be
issuable on the exercise hereof, nor shall anything contained in the Rights
Agreement or herein be construed to confer upon the holder hereof, as such, any
of the rights of a shareholder of the Company or any right to vote for the
election of directors or upon any matter submitted to shareholders at any
meeting thereof, or to give or withhold consent to any corporate action, or to
receive notice of meetings or other actions affecting shareholders (except as
provided in the Rights Agreement), or to receive dividends or subscription
rights, or otherwise, until the Right or Rights evidenced by this Rights
Certificate shall have been exercised as provided in the Rights Agreement.
This Rights Certificate shall not be valid or obligatory for any
purpose until it shall have been countersigned by the Rights Agent.
WITNESS the facsimile signature of the proper officers of the Company
and its corporate seal.
Dated as of .
--------------
ATTEST: CLARK/BARDES HOLDINGS, INC.
------------------
---------------------------------------
Melvin G. Todd
President and Chief Executive Officer
Countersigned:
THE BANK OF NEW YORK
By:
-----------------------------
Name:
------------------------
Title:
-----------------------
2
<PAGE> 42
Form of Reverse Side of Rights Certificate
FORM OF ASSIGNMENT
(To be executed by the registered holder if such
holder desires to transfer the Rights Certificate.)
FOR VALUE RECEIVED ________________ hereby sells, assigns and transfers
unto ____________________________________ (Please print name and address of
transferee) this Rights Certificate, together with all right, title and interest
therein, and does hereby irrevocably constitute and appoint
______________________ as Attorney, to transfer the within Rights Certificate on
the books of the within-named Company, with full power of substitution.
Dated:
----------------------
Signature:
--------------------------
Name:
-------------------------------
Signature Guaranteed:
----------------------------------------
Signatures must be guaranteed by a member firm of a registered national
securities exchange, a member of the National Association of Securities Dealers,
Inc., or a commercial bank or trust company having an office or correspondent in
the United States.
- --------------------------------------------------------------------------------
Certificate
The undersigned hereby certifies by checking the appropriate boxes
that:
(1) this Rights Certificate [ ] is [ ] is not being sold, assigned and
transferred by or on behalf of a Person who is or was an Acquiring Person or an
Affiliate or Associate of any such Acquiring Person (as such terms are defined
pursuant to the Rights Agreement)
(2) after due inquiry and to the best knowledge of the undersigned, it
[ ] did [ ] did not acquire the Rights evidenced by this Rights Certificate from
any Person who is, was or subsequently became an Acquiring Person or an
Affiliate or Associate of an Acquiring Person.
Dated: , 19
------------------ ---
Signature:
--------------------------------
Signature Guaranteed:
--------------------------------
<PAGE> 43
NOTICE
The signature to the foregoing Assignment and Certificate must
correspond to the name as written upon the face of this Rights Certificate in
every particular, without alteration or enlargement or any change whatsoever.
2
<PAGE> 44
Form of Reverse Side of Rights Certificate -continued
FORM OF ELECTION TO PURCHASE
(To be executed if holder desires to exercise
Rights represented by the Rights Certificate.)
To CLARK/BARDES HOLDINGS, INC.:
The undersigned hereby irrevocably elects to exercise
___________________ Rights represented by this Rights Certificate to purchase
the Preferred Shares issuable upon the exercise of such Rights and requests that
certificates for such Preferred Shares be issued in the name of :
Please insert social security
or other identifying number:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Please print name and address)
If such number of Rights shall not be all the Rights evidenced by this Rights
Certificate, a new Rights Certificate for the balance remaining of such Rights
shall be registered in the name of and delivered to:
Please insert social security
or other identifying number:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Please print name and address)
Dated:
----------------------
Signature:
------------------
Name:
-----------------------
Signature Guaranteed:
-----------------------------------
Signatures must be guaranteed by a member firm of a registered national
securities exchange, a member of the National Association of Securities Dealers,
Inc., or a commercial bank or trust company having an office or correspondent in
the United States.
- --------------------------------------------------------------------------------
3
<PAGE> 45
Certificate
The undersigned hereby certifies by checking the appropriate
boxes that:
(1) the Rights evidenced by this Rights Certificate [ ] are [ ]
are not being exercised by or on behalf of a Person who is or was an Acquiring
Person or an Affiliate or Associate of any such Acquiring Person (as such terms
are defined pursuant to the Rights Agreement);
(2) after due inquiry and to the best knowledge of the
undersigned, it [ ] did [ ] did not acquire the Rights evidenced by this Rights
Certificate from any Person who is, was or became an Acquiring Person or an
Affiliate or Associate of an Acquiring Person.
Dated: , 19
------------------ ---
Signature:
--------------------------------
Signature Guaranteed:
-----------------------
4
<PAGE> 46
EXHIBIT C
SUMMARY OF RIGHTS TO PURCHASE
PREFERRED SHARES
On July 10, 1998, the Board of Directors of Clark/Bardes Holdings, Inc.
(the "Company") declared a dividend of one preferred share purchase right (a
"Right") for each outstanding share of common stock, par value $0.01 per share
(the "Common Shares"), of the Company. The dividend is payable on July 20, 1998
(the "Record Date") to the shareholders of record on that date. Each Right
entitles the registered holder to purchase from the Company one one-thousandth
of a share of Junior Participating Preferred Stock, Series A, par value $0.01
per share (the "Preferred Shares"), of the Company at a price of $63 per one
one-thousandth of a Preferred Share (the "Purchase Price"), subject to
adjustment. The description and terms of the Rights are set forth in a Rights
Agreement (the "Rights Agreement") between the Company and The Bank of New York,
as Rights Agent (the "Rights Agent").
Until the earlier to occur of (i) 10 days following a public
announcement that a person or group of affiliated or associated persons (an
"Acquiring Person") has acquired beneficial ownership of 15% or more of the
outstanding Common Shares or (ii) 10 business days (or such later date as may be
determined by action of the Board of Directors prior to such time as any person
or group of affiliated persons becomes an Acquiring Person) following the
commencement of, or announcement of an intention to make, a tender offer or
exchange offer the consummation of which would result in the beneficial
ownership by a person or group of 15% or more of the outstanding Common Shares
(the earlier of such dates being called the "Distribution Date"), the Rights
will be evidenced, with respect to any of the Common Share certificates
outstanding as of the Record Date, by such Common Share certificate with a copy
of this Summary of Rights attached thereto.
The Rights Agreement provides that, until the Distribution Date (or
earlier redemption or expiration of the Rights), the Rights will be transferred
with and only with the Common Shares. Until the Distribution Date (or earlier
redemption or expiration of the Rights), new Common Share certificates issued
after the Record Date upon transfer or new issuance of Common Shares will
contain a notation incorporating the Rights Agreement by reference. Until the
Distribution Date (or earlier redemption or expiration of the Rights), the
surrender for transfer of any certificates for Common Shares outstanding as of
the Record Date, even without such notation or a copy of this Summary of Rights
being attached thereto, will also constitute the transfer of the Rights
associated with the Common Shares represented by such certificate. As soon as
practicable following the Distribution Date, separate certificates evidencing
the Rights ("Rights Certificates") will be mailed to holders of record of the
Common Shares as of the close of business on the Distribution Date and such
separate Rights Certificates alone will evidence the Rights.
The Rights are not exercisable until the Distribution Date. The Rights
will expire on July 10, 2008 (the "Final Expiration Date"), unless the Rights
are earlier redeemed or exchanged by the Company, in each case, as described
below.
<PAGE> 47
The Purchase Price payable, and the number of Preferred Shares or other
securities or property issuable, upon exercise of the Rights are subject to
adjustment from time to time to prevent dilution (i) in the event of a stock
dividend on, or a subdivision, combination or reclassification of, the Preferred
Shares, (ii) upon the grant to holders of the Preferred Shares of certain rights
or warrants to subscribe for or purchase Preferred Shares at a price, or
securities convertible into Preferred Shares with a conversion price, less than
the then current market price of the Preferred Shares, or (iii) upon the
distribution to holders of the Preferred Shares of evidences of indebtedness or
assets (excluding regular periodic cash dividends paid out of earnings or
retained earnings or dividends payable in Preferred Shares) or of subscription
rights or warrants (other than those referred to above).
The number of outstanding Rights and the number of one one-thousandths
of a Preferred Share issuable upon exercise of each Right are also subject to
adjustment in the event of a stock split of the Common Shares or a stock
dividend on the Common Shares payable in Common Shares or subdivisions,
consolidations or combinations of the Common Shares occurring, in any such case,
prior to the Distribution Date.
Preferred Shares purchasable upon exercise of the Rights will not be
redeemable. Each Preferred Share will be entitled to a minimum preferential
quarterly dividend payment of $10 per share but will be entitled to an aggregate
dividend of 1000 times the dividend declared per Common Share. In the event of
liquidation, the holders of the Preferred Shares will be entitled to a minimum
preferential liquidation payment of $1000 per share but will be entitled to an
aggregate payment of 1000 times the payment made per Common Share. Each
Preferred Share will have 1000 votes, voting together with the Common Shares.
Finally, in the event of any merger, consolidation or other transaction in which
Common Shares are exchanged, each Preferred Share will be entitled to receive
1000 times the amount received per Common Share. These rights are protected by
customary antidilution provisions.
Because of the nature of the Preferred Shares' dividend, liquidation
and voting rights, the value of the one one-thousandth interest in a Preferred
Share purchasable upon exercise of each Right should approximate the value of
one Common Share.
In the event that the Company is acquired in a merger or other business
combination transaction or 50% or more of its consolidated assets or earning
power are sold after a person or group has become an Acquiring Person, proper
provision will be made so that each holder of a Right will thereafter have the
right to receive, upon the exercise thereof at the then current exercise price
of the Right, that number of shares of common stock of the acquiring company
which at the time of such transaction will have a market value of two times the
exercise price of the Right. In the event that any person or group of affiliated
or associated persons becomes an Acquiring Person, proper provision shall be
made so that each holder of a Right, other than Rights beneficially owned by the
Acquiring Person (which will thereafter be void), will thereafter have the right
to receive upon exercise that number of Common Shares having a market value of
two times the exercise price of the Right.
2
<PAGE> 48
At any time after any person or group becomes an Acquiring Person and
prior to the acquisition by such person or group of 50% or more of the
outstanding Common Shares, the Board of Directors of the Company may exchange
the Rights (other than Rights owned by such person or group which will have
become void), in whole or in part, at an exchange ratio of one Common Share, or
one one-thousandth of a Preferred Share, per Right (subject to adjustment).
With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments require an adjustment of at least 1% in
such Purchase Price. No fractional Preferred Shares will be issued (other than
fractions which are integral multiples of one one-thousandth of a Preferred
Share, which may, at the election of the Company, be evidenced by depositary
receipts) and in lieu thereof, an adjustment in cash will be made based on the
market price of the Preferred Shares on the last trading day prior to the date
of exercise.
At any time prior to the acquisition by a person or group of affiliated
or associated persons of beneficial ownership of 15% or more of the outstanding
Common Shares, the Board of Directors of the Company may redeem the Rights in
whole, but not in part, at a price of $0.01 per Right (the "Redemption Price").
The redemption of the Rights may be made effective at such time on such basis
with such conditions as the Board of Directors in its sole discretion may
establish. Immediately upon any redemption of the Rights, the right to exercise
the Rights will terminate and the only right of the holders of Rights will be to
receive the Redemption Price.
The terms of the Rights may be amended by the Board of Directors of the
Company without the consent of the holders of the Rights, except that from and
after such time as any person or group of affiliated or associated persons
becomes an Acquiring Person no such amendment may adversely affect the interests
of the holders of the Rights.
Until a Right is exercised, the holder thereof, as such, will have no
rights as a shareholder of the Company, including, without limitation, the right
to vote or to receive dividends.
A copy of the Rights Agreement has been filed with the Securities and
Exchange Commission as an Exhibit to a Registration Statement on Form S-1 dated
July 27, 1998 (File No. 333-56799. A copy of the Rights Agreement is available
free of charge from the Company. This summary description of the Rights does not
purport to be complete and is qualified in its entirety by reference to the
Rights Agreement, which is hereby incorporated herein by reference.
3
<PAGE> 1
EXHIBIT 10
October 1, 1998
Bruce Hlavacek
Wiedemann & Johnson Company
1505 LBJ Freeway #165
Dallas, Texas 75234-6069
Dear Bruce:
This letter is to confirm our recent discussions with respect to the proposed
acquisition by Clark/Bardes, Inc. or its affiliates or assigns ("CBI"), or its
parent, Clark/Bardes Holdings, Inc. ("CBH"), of certain assets as described in
the attached Term Sheet (collectively, the "Purchased Assets") of Wiedemann &
Johnson Company (the "Company"), on the terms and conditions set forth in this
letter and in the Term Sheet attached hereto and made a part hereof (the
"Acquisition"). CBI and the Company are collectively referred to herein as the
"Parties."
The Parties wish to commence negotiating a definitive written acquisition
agreement providing for the Acquisition (a "Definitive Agreement"). The
execution of any such Definitive Agreement would be subject to the satisfactory
completion of CBI's ongoing investigation of the Company's business, would be
subject to the approval by CBI's lenders, would be subject to approval by CBI's
Board of Directors and CBH's Board of Directors and would be subject to any
other conditions referred to in the attached Term Sheet.
The Parties agree to the following provisions which shall be binding agreements
whether or not a Definitive Agreement is entered into or the Acquisition is
consummated:
I. Confidentiality Agreement
The Confidentiality Agreement dated September 29, 1998 executed by CBI and
accepted and agreed to by the Company on September 29, 1998, shall remain in
full force and effect and shall expire two years from the date hereof. The
parties hereto further agree that the Company, CBI and Bruce Hlavacek (the
"Principal") will not, and, as applicable, will direct their directors,
officers, employees, affiliates and advisors not to, disclose to any person the
terms of this transaction except as necessary to implement and conclude the
transactions contemplated hereby or as otherwise required by law.
<PAGE> 2
October 1, 1998
Page 2
I. Exclusive Dealing
A. Unless negotiations among CBI, the Company and the Principal are terminated
(it being understood that the Company and the Principal will not unilaterally
terminate negotiations as long as CBI is proceeding expeditiously in good
faith), the Company, its officers and directors, and the Principal shall not,
directly, or indirectly, through any representative or otherwise, solicit or
entertain offers from, negotiate with or in any manner encourage, discuss,
accept, or consider any proposal from any other person relating to the
Acquisition or the sale of the ownership interest in the Company, in whole or in
part, through purchase, merger, consolidation or otherwise.
A. The Principal and Company will immediately notify CBI regarding any contact
between the Principal, the Company or its representatives and any other person
regarding any such offer or proposal or any related inquiry.
I. Due Diligence
From and after the execution of this letter, the Company and the Principal
shall afford to CBI and its accountants, counsel and other representatives
reasonable access to the Company and shall furnish to CBI all information
concerning the business, assets and properties of the Company for the purpose
of making such review and examination.
I. Expenses
Each party shall bear its own costs and expenses (including all legal,
accounting, investment banking and other costs) with respect to this
transaction, whether the transaction is consummated or not, and the Definitive
Agreement shall so provide.
I. Conduct of Business
During the period from the date hereof through the closing of the transaction,
the Company and the Principal shall cause the Company to operate its business
solely in the ordinary and normal course.
I. Counterparts
This letter may be executed in one or more counterparts, each of which will be
deemed to be an original copy of this letter and all of which, when taken
together, will be deemed to constitute one and the same agreement.
The Parties shall proceed immediately and in good faith to complete the
contemplated transaction. Although CBI represents to the Company and the
Company represents to CBI that each such party intends in good faith to carry
out the contemplated transaction, if no transaction occurs on or before
November 30, 1998, or such other mutually agreed
<PAGE> 3
October 1, 1998
Page 3
upon date, this letter and the Term Sheet shall be of no further force and
effect, except that the provisions of Paragraphs A and D of this letter, and
the related provisions of the Term Sheet, shall remain in full force and effect.
If you are in agreement with the foregoing, please sign and return one copy of
this letter, which thereupon will constitute our agreement with respect to its
subject matter.
Very truly yours,
CLARK/BARDES, INC.
By: /s/ MEL G. TODD
-------------------------------------
Mel G. Todd
President and Chief Executive Officer
AGREED AND ACCEPTED THIS
1ST DAY OF OCTOBER, 1998
WIEDEMANN & JOHNSON COMPANY
By: /s/ BRUCE HLAVACEK
Its: Chief Executive Officer
The undersigned are the owners of not less than 100% of the issued and
outstanding voting shares or other voting ownership interests of the Company
and agrees to this letter and further agrees to proceed in good faith toward
the consummation of the Acquisition upon the above terms and conditions.
Dated: 10/1/98 By: /s/ BRUCE HLAVACEK
----------------------- ------------------------------
Bruce Hlavacek
Dated: 10/1/98 By: /s/ JENNIE HLAVACEK
----------------------- ------------------------------
Jennie Hlavacek
<PAGE> 1
EXHIBIT 11
CLARK/BARDES HOLDINGS, INC.
COMPUTATION OF EARNINGS PER SHARE
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTH ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------------- ---------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Numerator:
Net income (loss) ............ $ 2,382,313 $ 888,713 $(2,628,317) $ 351,541
Effect of dilutive
securities:
Interest on convertible
debt (net of tax) ......... 39,945 24,414 * 24,414
----------- ----------- ----------- ----------
Numerator for diluted
earnings per share ........... $ 2,422,258 $ 913,127 $(2,628,317) $ 375,955
Denominator:
Denominator for basic
earnings per share --
weighted-average
shares .................... 5,407,503 4,347,718 3,958,602 4,478,052
Effect of dilutive
securities:
Stock options ............. 221,052 -- * 9837
Convertible debt .......... 528,371 265,291 * 89,402
----------- ----------- ----------- ----------
Denominator for diluted
earnings per share --
adjusted
weighted-average shares
and assumed
conversions ............... 6,156,926 4,613,009 3,958,602 4,577,291
=========== =========== =========== ==========
Basic earnings (loss)
per share ............... $ 0.44 $ 0.20 $ (0.66) $ 0.08
=========== =========== =========== ==========
Diluted earnings (loss)
per share ............... $ 0.39 $ 0.20 $ (0.66) $ 0.08
=========== =========== =========== ==========
</TABLE>
- ----------
* The effects of options and convertible debt have not been included as such
effects would be antidilutive.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEETS AT SEPTEMBER 30, 1998 (UNAUDITED) AND DECEMBER 31, 1997 AND FROM THE
STATEMENTS OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 (UNAUDITED) OF
CLARK/BARDES HOLDINGS, INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998
<PERIOD-START> JAN-01-1997 JAN-01-1998
<PERIOD-END> DEC-31-1997 SEP-30-1998
<CASH> 3,782,941 15,923,945
<SECURITIES> 0 0
<RECEIVABLES> 8,286,859 3,161,007
<ALLOWANCES> 78,000 78,000
<INVENTORY> 0 0
<CURRENT-ASSETS> 12,037,611 19,148,884
<PP&E> 2,229,121 2,722,009
<DEPRECIATION> 1,513,267 1,637,818
<TOTAL-ASSETS> 36,901,890 60,884,843
<CURRENT-LIABILITIES> 9,743,367 12,265,175
<BONDS> 32,383,143 24,741,268
0 0
0 0
<COMMON> 5,162,281 78,563
<OTHER-SE> 3,188,699 23,799,837
<TOTAL-LIABILITY-AND-EQUITY> 36,901,890 60,884,843
<SALES> 0 0
<TOTAL-REVENUES> 49,455,419 46,626,213
<CGS> 0 0
<TOTAL-COSTS> 32,439,092 29,255,479
<OTHER-EXPENSES> 11,800,965 13,820,335
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 1,111,995 2,567,287
<INCOME-PRETAX> 4,293,889 1,370,643
<INCOME-TAX> 60,000 (801,040)
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 4,233,889 2,171,683
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
