<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 14, 1998.
REGISTRATION NO. 333-56799
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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CLARK/BARDES HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 6311 52-2103926
(State or other jurisdiction of (Primary standard industrial (I.R.S. Employer
Incorporation or organization) classification code number) Identification No.)
</TABLE>
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2121 SAN JACINTO, SUITE 2200
DALLAS, TEXAS 75201-7906
TELEPHONE: (214) 871-8717
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
W.T. WAMBERG
CHAIRMAN OF THE BOARD
2121 SAN JACINTO, SUITE 2200
DALLAS, TEXAS 75201-7906
TELEPHONE: (214) 871-8717
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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Copies to:
<TABLE>
<S> <C>
TERRY M. SCHPOK, P.C. PHYLLIS G. KORFF, ESQ.
AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P. SUSAN J. SUTHERLAND, ESQ.
1700 PACIFIC AVENUE, SUITE 4100 SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
DALLAS, TEXAS 75201-4675 919 THIRD AVENUE
(214) 969-2800 NEW YORK, NEW YORK 10022-3897
(212) 735-3000
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after the Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
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If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
- ---------------------
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED AUGUST 14, 1998
PROSPECTUS
4,000,000 SHARES
CLARK BARDES LOGO
COMMON STOCK
------------------------------
All of the 4,000,000 shares of common stock, par value $0.01 per share (the
"Common Stock"), offered hereby (the "Offering") will be sold by Clark/Bardes
Holdings, Inc. ("CBH"). Prior to the Offering, there has been no public market
for CBH's Common Stock. It is currently anticipated that the initial public
offering price will be between $11.50 and $13.50 per share (the "Range"). For a
discussion of the factors to be considered in determining the initial public
offering price, see "Underwriting."
At CBH's request, the Underwriters have reserved up to 600,000 shares of
Common Stock for sale to the directors, officers, employees and designees of CBH
and its wholly owned subsidiary and have agreed to permit them to buy such
shares at the initial price to public. The number of shares of Common Stock
available for sale by CBH to the general public will be reduced to the extent
such persons purchase such reserved shares. Any reserved shares not so purchased
will be offered by the Underwriters to the general public at the initial price
to public.
The Common Stock has been approved for quotation on the Nasdaq National
Market under the symbol "CLKB."
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR CERTAIN CONSIDERATIONS RELEVANT
TO AN INVESTMENT IN THE COMMON STOCK.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
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UNDERWRITING
PRICE TO PUBLIC DISCOUNT(1) PROCEEDS TO CBH(2)
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<S> <C> <C> <C>
Per Share........................... $ $ $
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Total(3)............................ $ $ $
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</TABLE>
(1) CBH has agreed to indemnify the Underwriters against certain liabilities,
including liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(2) Before deducting expenses payable by CBH estimated at $1,500,000.
(3) W.T. Wamberg, CBH's chairman (the "Selling Stockholder"), has granted the
Underwriters a 30-day option to purchase up to 600,000 additional shares of
Common Stock on the same terms and conditions as set forth above, solely to
cover over-allotments, if any. If the option is exercised in full, the total
Price to Public will be $ and the total Underwriting Discount will
be $ . CBH will not receive any of the proceeds from the sale of
shares by Mr. Wamberg. See "Principal and Selling Stockholders" and
"Underwriting."
------------------------------
The shares of Common Stock are offered subject to prior sale, when, as and
if delivered to, and accepted by, the Underwriters and subject to certain other
conditions. The Underwriters reserve the right to withdraw, cancel or modify the
Offering and to reject orders in whole or in part. It is expected that delivery
of the shares of Common Stock will be made on or about , 1998, at the
offices of Bear, Stearns & Co. Inc., 245 Park Avenue, New York, New York 10167.
BEAR, STEARNS & CO. INC.
PIPER JAFFRAY INC.
CONNING & COMPANY
THE DATE OF THIS PROSPECTUS IS , 1998.
<PAGE> 3
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING
OVER-ALLOTMENT, STABILIZING TRANSACTIONS, SYNDICATE SHORT COVERING TRANSACTIONS
AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
<PAGE> 4
PROSPECTUS SUMMARY
The following is a summary of certain information contained herein and is
qualified in its entirety by, and should be read in conjunction with, the more
detailed information and financial statements, including the notes thereto,
contained elsewhere in this Prospectus. Clark/Bardes Holdings, Inc., a Delaware
corporation ("CBH"), and Clark/Bardes, Inc., a Delaware corporation and a wholly
owned subsidiary of CBH ("Clark/ Bardes"), were formed in June 1998 in
contemplation of the Offering and to effect the Merger (as defined below). As a
result of the Merger, Clark/Bardes became the successor corporation to
Clark/Bardes, Inc., a Texas corporation (the "Predecessor Company"). Unless the
context otherwise requires, all references in this Prospectus to the "Company"
mean CBH together with its wholly owned subsidiary Clark/Bardes and the
predecessor of Clark/Bardes, and all dates, periods or events prior to the
Merger refer to the Predecessor Company. Unless otherwise indicated, this
Prospectus and all pro forma financial and statistical information set forth
herein assumes the consummation of the Reorganization (as defined below) and no
exercise of the Underwriters' over-allotment option. For the convenience of the
reader, certain terms have been defined in the Glossary contained elsewhere in
this Prospectus, and any defined terms used herein and not otherwise defined
shall have the meanings given in the Glossary.
THE COMPANY
GENERAL
Since the inception of the Predecessor Company in 1967, Clark/Bardes, the
wholly owned operating subsidiary of CBH, has designed, marketed and
administered insurance-financed employee benefit programs to large corporations
and community, regional and money center banks. The Company's clients use these
sophisticated programs primarily to offset the costs of employee benefit
liabilities and to supplement and secure benefits for key executives. The
Company's revenue is earned primarily from (i) commissions paid to Clark/Bardes
by the insurance companies that underwrite the policies underlying the Company's
programs and (ii) fees paid by clients in connection with initial program design
and the ongoing administrative services provided by the Company. Such
commissions and fees are usually long-term and recurring and are typically paid
annually and extend over a period of ten years or more after a sale.
The Company has experienced rapid growth since December 31, 1995. Effective
September 1, 1997, the Predecessor Company acquired substantially all the assets
and the business of Bank Compensation Strategies, Inc. ("BCS"), a Minnesota
based company that designed, marketed and administered insurance-financed
employee benefit programs and related compensation, salary and benefit plans for
community and regional banks. Through sales generated by a group of specialized
independent producers and the integration of the assets acquired from BCS, the
Company had a customer base of over 1,100 clients as of June 30, 1998.
Additionally, the inforce insurance coverage underlying the Company's programs
has increased from approximately $26.2 billion as of December 31, 1995 to
approximately $46.7 billion as of December 31, 1997 ($43.9 billion excluding
BCS), representing a compound annual growth rate of 33.9% (29.4% excluding BCS).
Income from operations has grown from $2.2 million for the year ended December
31, 1995 to $5.2 million ($4.3 million excluding BCS) for the year ended
December 31, 1997, representing a compound annual growth rate of 53.5% (39.5%
excluding BCS).
Management believes additional growth opportunities exist and that
Clark/Bardes' industry reputation, comprehensive in-house expertise,
sophisticated administrative systems, quality producers and strong relationships
with insurance companies provide the Company with distinct competitive
advantages. The Company intends to increase its market share by combining these
strengths with its core competencies of (i) designing proprietary programs
customized to meet clients' needs, (ii) providing outstanding client service,
and (iii) responding quickly to develop new products and services brought about
by regulatory and legislative changes. In addition, management believes that
Clark/Bardes can be a leader in the consolidation of the highly fragmented
insurance-financed employee benefit industry by offering liquidity, proprietary
benefit and program designs, and administrative support to the owners of smaller
firms. Finally, management intends to leverage the Company's core competencies
by entering into related markets such as compensation consulting and outsourcing
of benefit plan administration services. Additional costs for acquisition
activity, which include
1
<PAGE> 5
both financial expenditures and a reallocation of human resources, will require
substantial cash, and will be financed through cash from operations as well as
future debt and equity offerings by the Company.
The Company has developed the high quality administrative capabilities
necessary to service the executive benefit and insurance programs marketed by
the Company. At June 30, 1998, the Company administered approximately 187,000
benefit and insurance records for over 1,100 clients. At such date, the
insurance policies underlying the Company's employee benefit programs
represented a total of $48.5 billion of inforce insurance coverage. Management
believes that its strong relationship with insurance companies is due to the
Company's history of placing high quality, high persistency policies.
As of July 24, 1998, the Company was represented by 36 producers in 32
independently operated sales offices located in 28 cities throughout the United
States. These producers and the Company's management are expected to own an
aggregate of at least 47.7% of the outstanding Common Stock after giving effect
to the Offering. See "Principal and Selling Stockholders."
INDUSTRY
Beginning in the early 1980s, corporations and banks began using life
insurance to offset the costs of employee benefit liabilities with greater
frequency than in the past. Since that time, several large insurers, including
CIGNA, General American, Great-West, Life Investors and Nationwide, have
committed significant resources to develop business-owned life insurance
products for use in the insurance-financed employee benefit industry.
The use of insurance to offset the costs of employee benefit liabilities
historically has been affected by legislative change, both positive and
negative. In the past, legislation has reduced the usefulness of traditional
pension plans for highly-paid executives which, in turn, has increased the
attractiveness of insurance-financed non-qualified benefit plans. On the other
hand, legislation has limited interest deductibility on policy loans and
restricted the use of business-owned life insurance to employees, officers,
directors and 20-percent owners. The insurance-financed employee benefit
industry will continue to be affected significantly by legislative change.
Consequently, the Company believes that the ability to respond quickly to
legislative initiatives is a competitive advantage which can be used to increase
market share.
The insurance-financed employee benefit industry is highly fragmented.
Management believes that many once dominant producers and producer groups have
not kept pace with the numerous changes affecting the industry, and are
currently faced with a decreasing market share and the inability to provide
adequate administrative support to existing clients. The Company believes that
those producers and producer groups who have not made the necessary and
substantial investment in administrative systems and personnel will continue to
experience difficulties in satisfying their clients' growing needs and demands
and in meeting complex regulatory requirements. Finally, the Company also
believes that the ever-changing legislative and economic environments require
product development systems and personnel that are more sophisticated and cost
intensive than most producers and producer groups are able to justify
economically. Given the highly fragmented nature of the industry, management
expects significant consolidation to occur in the future.
STRATEGY
The Company's goal is to enhance its role as a provider of innovative
benefit and insurance solutions to corporations and banks throughout the United
States. To accomplish this goal, the Company intends to focus on the following:
- Leverage Market Reputation. The Company plans to leverage its reputation
as an industry leader to expand current operations and to enter into
related businesses.
- Design Innovative Programs. The Company intends to use its expertise in
program development to create and market innovative, customized programs
in order to facilitate the Company's penetration of new markets and to
satisfy the financial needs of its clients in a changing regulatory and
economic environment.
2
<PAGE> 6
- Diversify Business. The Company plans to identify and enter into related
businesses in which its core competencies can be profitably employed.
Examples of related businesses include compensation consulting,
outsourcing of benefit plan administrative services and marketing to the
non-profit sector.
- Enhance Administrative Capabilities. The Company intends to continue
distinguishing itself from its competitors by enhancing its
administrative capabilities, providing high quality administrative
services and improving operating margins.
- Pursue Consolidating Acquisitions. The Company intends to take advantage
of the expected consolidation in the insurance-financed employee benefit
market and implement the Company's design, distribution and service model
on a wide-scale basis so as to increase market share, acquire producer
and management talent, enter into new markets and improve operating
margins through integration efficiencies.
Subsequent to the completion of the Offering, the Company intends to
consider the adoption of a combination of plans to encourage ownership of Common
Stock among its employees, producers and directors so as to further align their
interests with those of CBH's stockholders. Examples of such plans include a
commission reinvestment plan for producers, providing the opportunity for
employees to purchase Common Stock through the Company's 401(k) plan and
compensating the non-employee members of the Board of Directors with Common
Stock.
The principal executive office of the Company is located at 2121 San
Jacinto Street, Suite 2200, Dallas, Texas 75201-7906, and its telephone number
is (214) 871-8717.
THE OFFERING
Common Stock offered by CBH......... 4,000,000 Shares
Common Stock to be outstanding after
the Offering........................ 8,059,677 Shares
Use of Proceeds..................... For the payment of certain indebtedness
of the Company, extinguishment of
warrants, consummation of a pending
acquisition, purchase of renewal
revenues from Mr. Wamberg and The
Wamberg Organization and general
corporate purposes, including working
capital and possible future
acquisitions. See "Use of Proceeds,"
"The Reorganization," "Pending
Acquisition" and "Certain Relationships
and Related Transactions."
Nasdaq National Market Symbol....... CLKB
FORWARD-LOOKING STATEMENTS
All statements other than statements of historical fact included in this
Prospectus, including without limitation statements under "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business," regarding the Company's financial position, business
strategy and plans and objectives of management of the Company for future
operations, are forward-looking statements. When used in this Prospectus, words
such as "anticipate," "believe," "estimate," "expect," "intend" and similar
expressions, as they relate to 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. Actual results
could differ materially from those contemplated by the forward-looking
statements as a result of certain factors, such as those disclosed under "Risk
Factors," including but not limited to difficulties associated with changes in
tax legislation, dependence on key producers, the Company's dependence on
persistency of existing business, credit risk related to renewal revenue,
acquisition risks, competitive factors and pricing pressures, dependence
3
<PAGE> 7
on certain insurance companies, changes in legal and regulatory requirements and
general economic conditions. Such 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.
4
<PAGE> 8
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL INFORMATION
The following table sets forth summary historical financial information and
summary pro forma financial information of the Predecessor Company for the
periods ended and as of the dates indicated. The summary historical financial
information of the Predecessor Company set forth below as of and for each of the
years ended December 31, 1993, 1994, 1995, 1996 and 1997 was derived from the
audited financial statements of the Predecessor Company. The summary historical
financial information of the Predecessor Company set forth below as of and for
the six month periods ended June 30, 1997 and 1998 was derived from the
Predecessor Company's unaudited financial statements which, in the opinion of
management, reflect all normal recurring adjustments necessary for the fair
presentation of such financial statements. The results of operations for the six
month period ended June 30, 1998 are not necessarily indicative of the
Predecessor Company's results of operations to be expected for the full year.
The summary unaudited pro forma financial information of the Predecessor
Company set forth below for the year ended December 31, 1997 and the six month
period ended June 30, 1997 gives effect to the Reorganization and the
acquisition by the Predecessor Company of the business and substantially all the
assets of BCS as if such transactions had occurred as of the beginning of the
periods presented. The summary unaudited pro forma financial information of the
Predecessor Company set forth below for the six month period ended June 30, 1998
gives effect to the Reorganization as if such transactions had occurred as of
the beginning of the period presented. The unaudited pro forma income tax
expense, net income and earnings per share information of the Predecessor
Company set forth below for the year ended December 31, 1997 and the six month
period ended June 30, 1998 gives effect to the incurrence of income taxes as if
the Predecessor Company had been taxed as a C corporation as of the beginning of
the periods presented. The summary unaudited pro forma financial information of
the Predecessor Company set forth below does not purport to represent what the
Predecessor Company's results of operations would have been if the BCS
acquisition had actually occurred as of such dates or what such results will be
for any future periods.
The following historical and pro forma information of the Predecessor
Company should be read in conjunction with information included elsewhere
herein, including the financial statements and notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
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1993 1994(1) 1995 1996 1997(2) 1997
ACTUAL ACTUAL ACTUAL ACTUAL ACTUAL PRO FORMA
---------- ---------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME INFORMATION:
Total revenue..................... --(3) --(3) $26,972,732 $33,243,155 $49,455,419 $ 62,264,393
Commission and fee expense........ --(3) --(3) 16,890,862 21,049,704 32,439,092 41,171,626
---------- ---------- ----------- ----------- ----------- ------------
Net revenue..................... $7,913,173 $7,343,507 10,081,870 12,193,451 17,016,327 21,092,767
General and administrative
expense......................... 6,919,933 7,236,896 7,868,997 8,554,420 11,506,335 14,024,448
Amortization of intangibles....... -- -- -- -- 294,630 883,890
Non-recurring operating
expenses........................ -- -- -- -- -- 942,157
---------- ---------- ----------- ----------- ----------- ------------
Income (loss) from operations... 993,240 106,611 2,212,873 3,639,031 5,215,362 5,242,272
Interest and dividend income...... 142,777 171,454 200,577 121,814 188,597 216,600
Interest expense.................. (49,367) (29,396) (6,903) -- (1,111,995) (1,636,620)
Miscellaneous income (expense).... (1,169) (100,498) (86,292) (25,416) 1,925 1,925
---------- ---------- ----------- ----------- ----------- ------------
Total other income (expense).... 92,241 41,560 107,382 96,398 (921,473) (1,418,095)
---------- ---------- ----------- ----------- ----------- ------------
Income (loss) before taxes........ 1,085,481 148,171 2,320,255 3,735,429 4,293,889 3,824,177
Income taxes(benefit)(5).......... 70,517 9,842 102,459 181,444 60,000 1,514,000(6)
---------- ---------- ----------- ----------- ----------- ------------
Net income (loss)............ $1,014,964 $ 138,329 $ 2,217,796 $ 3,553,985 $ 4,233,889 $ 2,310,177
========== ========== =========== =========== =========== ============
Pro forma income tax expense(6)... -- -- -- -- $ 1,700,000 --
===========
Pro forma net income(6)........... -- -- -- -- $ 2,593,889 --
===========
PER SHARE INFORMATION:
Basic earnings (loss) per share... $ .17 $ .02 $ .39 $ .75 $ 1.03 $ .46(7)
Diluted earnings (loss) per
share........................... .17 .02 .39 .75 .99 .46(7)
Dividends per share............... -- .02 .29 .36 1.32 .52
Pro forma basic earnings per
share(6)........................ -- -- -- -- .63 --
Pro forma diluted earnings per
share(6)........................ -- -- -- -- .61 --
<CAPTION>
SIX MONTHS ENDED JUNE 30,
--------------------------------------------------------
1997 1997 1998 1998
ACTUAL PRO FORMA ACTUAL PRO FORMA
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
STATEMENT OF INCOME INFORMATION:
Total revenue..................... $11,283,184 $20,633,005 $28,984,959 $28,984,959
Commission and fee expense........ 7,273,519 13,908,713 18,203,681 18,203,681
----------- ----------- ----------- -----------
Net revenue..................... 4,009,665 6,724,292 10,781,278 10,781,278
General and administrative
expense......................... 4,615,101 6,614,571 8,399,696(4) 8,399,696
Amortization of intangibles....... -- 441,945 441,945 441,945
Non-recurring operating
expenses........................ -- -- -- --
----------- ----------- ----------- -----------
Income (loss) from operations... (605,436) (332,224) 1,939,637 1,939,637
Interest and dividend income...... 68,117 108,917 167,624 167,624
Interest expense.................. -- (638,250) (1,803,750) (1,302,104)
Miscellaneous income (expense).... 146 146 (141) (141)
----------- ----------- ----------- -----------
Total other income (expense).... 68,263 (529,187) (1,636,267) (1,134,621)
----------- ----------- ----------- -----------
Income (loss) before taxes........ (537,173) (861,411) 303,370 805,016
Income taxes(benefit)(5).......... -- (340,000)(6) 14,000 319,000(6)
----------- ----------- ----------- -----------
Net income (loss)............ $ (537,173) $ (521,411) $ 289,370 $ 486,016
=========== =========== =========== ===========
Pro forma income tax expense(6)... -- -- $ 120,000 --
===========
Pro forma net income(6)........... -- -- $ 183,370 --
===========
PER SHARE INFORMATION:
Basic earnings (loss) per share... $ (.12) $ (.10)(7) $ .09 $ .12(7)
Diluted earnings (loss) per
share........................... (.12) (.10)(7) .09 $ .12(7)
Dividends per share............... -- -- -- --
Pro forma basic earnings per
share(6)........................ -- -- .06 --
Pro forma diluted earnings per
share(6)........................ -- -- .06 --
</TABLE>
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<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------
1993 1994(1) 1995 1996 1997
ACTUAL ACTUAL ACTUAL ACTUAL ACTUAL
---------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET INFORMATION:
Cash and cash equivalents......... $2,242,595 $3,022,964 $ 3,968,307 $ 4,881,584 $ 3,782,941
Total assets...................... 10,294,798 7,152,186 9,886,651 8,525,454 36,901,890
Current portion of long-term
debt............................ -- -- -- -- 4,325,000
Long-term debt, excluding current
portion......................... -- -- -- -- 32,838,143
Total liabilities................. 4,222,603 1,991,611 4,099,197 4,714,055 42,581,510
Stockholders' equity (deficit).... 6,072,195 5,160,575 5,787,454 3,811,399 (5,679,620)(8)
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------------
1997 1998
ACTUAL ACTUAL
----------- -----------
<S> <C> <C>
BALANCE SHEET INFORMATION:
Cash and cash equivalents......... $ 2,002,037 $ 6,305,094
Total assets...................... 4,806,135 35,559,778
Current portion of long-term
debt............................ -- 4,325,000
Long-term debt, excluding current
portion......................... -- 31,388,143
Total liabilities................. 1,409,316 40,646,653
Stockholders' equity (deficit).... 3,396,819 (5,086,875)(8)
</TABLE>
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(1) The results of operations in 1994 reflect estimated lost renewal commissions
and fees of approximately $1 million due to the cessation of operations and
subsequent rehabilitation of Confederation Life Insurance Company.
(2) Includes the results of operations attributable to the assets acquired from
BCS for the period beginning September 1, 1997 (the effective date of the
BCS acquisition) and ended December 31, 1997, and reflects the consummation
of such acquisition.
(3) For the period presented, the Predecessor Company reported net revenue only.
Therefore, total revenue and commission and fee expense amounts are not
available.
(4) During the six months ended June 30, 1998, the Company recognized $525,000
of compensation expense related to the restructuring of the stock grant to
Melvin G. Todd, the President and Chief Executive Officer of each of CBH and
Clark/Bardes, and $200,000 of compensation expense for consulting services
related to the start-up health care business. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Entry into
New Business."
(5) Except as noted, income tax expense reflects the Predecessor Company's
liability for state taxes. No provision for federal income taxes has been
made because the Predecessor Company elected to be treated as an S
corporation for federal income tax purposes prior to the Merger.
(6) Income tax is stated on a pro forma basis as if the Predecessor Company had
been treated as a C corporation and taxed at a 39.6% blended rate for
federal and state income tax purposes. Pro forma net income (loss) and pro
forma earnings (loss) per share have been presented after giving effect to
the pro forma income tax adjustment.
(7) Pro forma earnings per share was calculated based on the weighted average
number of shares outstanding during the period adjusted to give effect to
the conversion of the 8.5% Convertible Subordinated Notes due September,
2007 and to the number of shares whose proceeds would be necessary to prepay
$1.0 million of the 8.5% Medium Term Notes due September 2001. Pro forma
basic and diluted weighted average shares outstanding were 5,012,946 and
5,020,223 respectively, for the year ended December 31, 1997. Pro forma
basic and diluted weighted average shares outstanding were both 5,437,858
and 4,115,702 for the six months ended June 30, 1997 and 1998, respectively.
(8) Reflects the decrease in stockholders' equity resulting from repurchases of
2.6 million shares of common stock by the Predecessor Company for aggregate
consideration of approximately $14.0 million and distributions totaling $4.3
million to stockholders in 1997.
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RISK FACTORS
The following factors, which may affect the Company's current position and
future prospects, should be considered carefully in addition to the other
information contained in this Prospectus before purchasing the Common Stock
offered hereby.
FEDERAL TAX LEGISLATION
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. These life insurance products
offer certain advantages, including that (i) the cash value of life insurance
policies grows on a tax deferred basis until withdrawal and (ii) the death
benefits of life insurance policies are received tax-free. In addition, loans
can be made from insurance policies (other than modified endowment policies)
without the imposition of tax.
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 enacted, such proposal would significantly
reduce the attractiveness of business-owned life insurance to companies that
traditionally have high debt/equity ratios. Banks, due to the depositor/debtor
relationship with their depositors, would in particular be negatively affected
by the administration's proposal. To the extent that any tax law amendment is
made retroactive, banks and other clients of the Company may lose the economic
advantages of maintaining the policies underlying their benefit plans. This
could result in significant surrenders of policies from which the Company
currently derives commission and fee revenue. Although management believes that
the Clinton administration's proposal, which is being considered in the current
session of Congress, does not have widespread support in Congress, the Company
is unable to predict the extent to which these or other amendments to existing
laws will be adopted or the effect that any such amendments will have on the
Company's business.
No assurances can be given that the administration's proposal or other
adverse tax proposals will not be enacted in the future or that adverse
interpretations of existing laws will not occur in the future. If the Code were
to be amended to eliminate or reduce the tax-deferred status of the insurance
programs marketed by the Company, or if adverse interpretations of existing laws
occur in the future, the market demand for such programs would be materially
adversely affected.
DEPENDENCE ON KEY PRODUCERS
During 1997, approximately 52.3% of the Company's total revenue was derived
from the marketing activities of five offices operated by producers of the
Company. The largest of these offices, The Wamberg Organization, accounted for
approximately 22.8% of the Company's total revenue. The offices operated by
Steven Cochlan, Malcolm Briggs, Glenn Blackwood and George Blaha collectively
accounted for 29.5% of the Company's total revenue. The producers operating
these offices have entered into producer agreements which include
non-competition provisions for a period of time after termination of the
agreements. The producer agreements are terminable by the Company or the
producers with either 90 or 180 days' written notice depending on the individual
agreement. From time to time producer relationships have been terminated by the
Company or by a producer and there is no assurance that such agreements will not
be terminated at any time by the Company or by a producer in the future or that
the non-competition provisions will be enforced in litigation. See
"Business -- Distribution."
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POTENTIAL LACK OF PERSISTENCY
Companies purchase business-owned life insurance policies primarily to
offset the costs of employee benefit liabilities. These policies usually show
high persistency rates, in part because the policies contain early \termination
penalties and the tax laws typically provide unfavorable tax consequences to the
corporate policyholders if the policies are terminated early. The high
persistency rates are also due to the purpose of the underlying life insurance
policies which are not typically used to fund benefits for specific individuals,
but rather to offset the purchaser's employee benefit costs on an aggregate
basis. Therefore, each policy is usually held to maturity (i.e., the death of
the individual insured covered by such policy), regardless of whether the
insured remains employed by the plan sponsor. High persistency rates are
advantageous to the Company since the Company receives a substantial portion of
its revenue in the form of renewal commissions and fees. If the business
purchaser chooses to let a policy lapse, the Company does not receive any
renewal commissions and fees for insurance policy servicing after the policy
lapses. Although the Company has historically experienced high persistency
rates, there can be no assurance that these high persistency rates will continue
in the future. See "Business -- Persistency."
DEPENDENCE ON KEY PERSONNEL
The Company's performance is substantially dependent on the performance of
its executive officers and key employees. The Company is dependent on the
ability to retain and motivate high quality personnel, especially its
management, producers and program development teams. The loss of the services of
any of its key employees, particularly W.T. Wamberg, Chairman of the Board of
Directors, Melvin G. Todd, President and Chief Executive Officer, and Richard C.
Chapman, Executive Vice President of Clark/Bardes, could have a material adverse
effect on the Company's business, financial condition and operating results.
There can be no assurance that the Company will be successful in retaining its
key personnel. See "Business -- Competition," "-- Employees" and "Management."
CREDIT RISK RELATED TO RENEWAL REVENUE
The Company designs and markets employee benefit programs typically
financed by policies underwritten by insurance companies. The commissions
payable to the Company for the sale of the insurance policies underlying the
Company's programs are usually long term and recurring in nature, typically paid
annually and extending over a period of ten years or more after the sale. Since
the Company derives a substantial portion of its total revenue from renewal
revenue, any financial difficulties encountered by, or the insolvency of, an
insurance company from whom renewal revenue is due could cause the Company to
realize less than the full amount of the renewal revenue to which it is
entitled. The Company's inability to collect renewal revenue could have a
material adverse effect on the Company's business, financial condition and
results of operations.
ACQUISITION RISKS
The Company completed the BCS acquisition in September 1997 and intends to
pursue acquisitions of other complementary businesses. The Company is currently
negotiating an acquisition of the assets of Schoenke & Associates Corporation
and its affiliated companies. There can be no assurance, however, that the
Company will be able to consummate or successfully integrate the operations of
these or future acquisitions within its own operations. Future acquisitions may
require substantial financial expenditures which will need to be financed
through cash from operations as well as future debt and equity offerings by the
Company. In addition, acquisitions involve significant risks, including: (i) the
diversion of management's time and attention to the negotiation of the
acquisition and to the assimilation of the businesses acquired, (ii) the need to
modify financial and other systems and add management resources, (iii) the
potential liabilities of the acquired businesses, (iv) unforeseen difficulties
in the acquired operations, and (v) the possible adverse short-term effects on
the Company's business, financial condition and results of operations.
Additional costs for acquisition activity, which include both financial
expenditures and a reallocation of human resources, will require substantial
cash, and will be financed through cash from operations as well as future debt
and equity offerings by the Company. Furthermore, there can be no assurance that
any business acquired in the future will achieve acceptable levels of revenue
and profitability or otherwise perform as expected. Other than as
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described elsewhere in this Prospectus, the Company has no other arrangements or
understandings with any party with respect to any future acquisition. The
Company, however, continues to monitor further potential acquisition
opportunities. See "Pending Acquisition" and "Business -- Acquisition Strategy."
ABILITY TO GROW AND EXPAND PRODUCTS AND SERVICES
The Company's growth strategy relies in part on its ability to increase its
share of the insurance-financed employee benefit market. The Company intends to
increase its market share by (i) growing its client base in existing product
lines through superior sales, marketing, technology and administration, (ii)
developing new related products and services and (iii) acquiring competitors and
related businesses. There can be no assurance that the Company will have the
financial, managerial, administrative, marketing or other resources necessary to
achieve these growth and acquisition objectives and to overcome difficulties
associated with growth. If the Company were to encounter difficulties in
implementing the growth, development or expansion of its products and services,
such difficulties could have a material adverse effect on the Company's
business, financial condition and results of operations.
In addition, the success of the Company depends in large part on its
ability to attract and retain highly skilled managerial, sales and marketing
personnel. The Company also believes it will need to hire additional technical
personnel to further enhance and develop its programs and services. Competition
for such personnel is intense, and should the Company be unable to hire the
necessary personnel, the development and sale of new or enhanced programs and
services would likely be delayed or prevented. There can be no assurance that
the Company will be able to attract, integrate and retain such highly skilled
personnel. See "Business -- Strategy" and "Management."
COMPETITION
The marketing, design and administration of insurance-financed employee
benefit programs is highly competitive. The Company and its producers compete
with a large number of insurance agents, life insurance brokers, third party
administrators, producer groups and insurance companies, a number of whom have
greater financial resources and can offer alternative programs. The Company's
direct competitors include Compensation Resource Group, Harris Crouch Long Scott
and Miller, Management Compensation Group, Newport Group, TBG Financial and The
Todd Organization. Furthermore, competition exists for producers and other
marketers of life insurance products who have demonstrated sales ability.
National banks, with their existing depositor bases for financial services
products, may pose increasing competition in the future to companies who sell
life insurance products, including the Company. Recent United States Supreme
Court decisions have expanded the authority of national banks to sell life
insurance products. See "Business -- Competition."
Clark/Bardes competes for clients on the basis of reputation, client
service, program and product offerings and the ability to tailor insurance
products and administrative services to the specific needs of a client. Although
certain competitors have access to proprietary programs and products unavailable
to the Company and others offer lower prices for administrative services,
management believes that the Company is in a superior competitive position in
most, if not all, of the meaningful aspects of its business. Management does not
consider its direct competitors to be its greatest competitive threat. Rather,
management believes that the Company's most serious competitive threat will
likely come either from large, diversified financial entities which are willing
to expend significant resources to gain market share or from the larger
competitors that pursue an acquisition or consolidation strategy similar to that
of the Company. See "Business -- Competition."
DEPENDENCE ON INSURANCE COMPANIES
The Company depends heavily on a small number of insurance companies to
underwrite the insurance policies underlying the programs the Company markets.
More specifically, the Company currently utilizes approximately 14 life
insurance companies to underwrite substantially all of the business-owned life
insurance policies underlying the Company's programs of which seven insurance
companies, CIGNA, General American, Great-West, Life Investors, Nationwide,
Phoenix Home Life and West Coast Life, accounted for
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<PAGE> 13
approximately 78.9% of the Company's first year commission revenue for the year
ended December 31, 1997. There is no assurance that these relationships will
continue in the future or that the Company will be able to develop relationships
with other insurance companies.
PRIOR SUBCHAPTER S STATUS
Since 1989, the Predecessor Company elected to be treated for federal
income tax purposes as an S corporation under Subchapter S of the Code and as an
S corporation for certain state income tax purposes under comparable state tax
laws. As a result, the Predecessor Company's historical earnings since 1989 have
been taxed directly to the Predecessor Company's stockholders, at their
individual federal and state income tax rates, rather than to the Predecessor
Company (except for certain state taxes). Further, the Predecessor Company was
required to comply with various Code provisions (or comparable state law
provisions) regarding restrictions on the issuance of classes of stock,
organizational structure, stock ownership and other matters in order to maintain
the Predecessor Company's status as an S corporation. In the event that the
Predecessor Company failed to comply with any of the applicable Code provisions
(or comparable state law provisions) required to maintain S corporation status,
the Predecessor Company would have been subject to corporate level tax and,
therefore, could be required to incur a tax liability with respect to net income
received by the Predecessor Company during any year in which it did not qualify
as an S corporation. The Predecessor Company believes that it qualified as an S
corporation since its election and, therefore, should not be subject to
corporate level income tax (except in certain states) for any period since it
filed its election. No assurance can be given that the Internal Revenue Service
would not challenge the Predecessor Company's S corporation treatment and that a
court would not sustain such challenge. If it were determined that the
Predecessor Company did not qualify as an S corporation, the imposition of
corporate income taxes on the Predecessor Company could have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company has obtained from some Existing Stockholders and is currently
seeking to obtain from the remaining Existing Stockholders an agreement to
indemnify the Company under certain circumstances in the event that the Company
is subject to corporate income tax liability for the Predecessor Company's
failure to qualify as an S corporation. Such indemnification obligation will be
limited to the net tax refund, if any, received by the Existing Stockholders. No
assurance can be given that each Existing Stockholder will enter into such an
agreement. See "The Reorganization -- Termination of S Corporation Status."
ERRORS AND OMISSIONS
The Company markets, designs and administers sophisticated financial
products. Certain of the Company's employees provide accounting, legal,
actuarial and other professional services in connection with marketing,
designing and administering these programs. The Company's clients rely upon the
services and interpretations rendered by the employees of the Company. To the
extent any services or interpretations provided by the Company's employees prove
to be inaccurate, the Company may be liable for the damages, and such liability,
to the extent not covered by existing insurance, could have a material adverse
effect on the Company's business, financial condition and results of operations.
PROTECTION OF PROPRIETARY PROGRAMS AND SERVICES
The Company regards certain of its programs and services as proprietary.
The Company relies primarily on a combination of intellectual property laws,
confidentiality agreements and contractual provisions to protect its proprietary
rights. Trade secret and copyright laws afford the Company limited protection.
Despite the Company's efforts to protect its proprietary rights, unauthorized
parties may attempt to copy aspects of the programs or services marketed by the
Company or to obtain and use information that the Company regards as
proprietary. There can be no assurance that the obligation to maintain the
confidentiality of the Company's proprietary information will prevent disclosure
of such information or that the proprietary programs marketed by the Company
will not be independently developed by the Company's competitors.
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GOVERNMENT REGULATION
The insurance-financed employee benefit market is subject to extensive
regulation by state governments. Clark/Bardes operates in all 50 states through
licenses held by Clark/Bardes or by its producers. In addition, the Company
markets its insurance-financed employee benefit programs in the states of Ohio,
Pennsylvania and Texas through entities licensed in those states for which the
Company provides almost all services by means of administrative service
agreements. In general, state insurance laws establish supervisory agencies with
broad administrative and supervisory powers related to such matters as granting
and revoking licenses, approving individuals and entities to whom commissions
can be paid, licensing insurance agents, transacting business, approving policy
forms and regulating premium rates for some lines of business. Licensing laws
applicable to insurance marketing activities and the receipt of commissions vary
by jurisdiction and are subject to interpretation as to the application of such
requirements to specific activities or transactions. While the Company has not
encountered regulatory problems in the past, no assurance can be given that the
Company would be deemed to be in compliance with all applicable licensing
requirements of each jurisdiction in which the Company operates or that
additional licenses would not be required of the Company or that the Company or
its producers will not encounter regulatory problems in the future, including
any potential sanctions or penalties for operating in a jurisdiction without all
required licenses. See "Business -- Government Regulation" and "-- Ancillary
Business Arrangements."
While the federal government does not directly regulate the marketing of
most insurance products, certain products, such as variable life insurance, must
be registered under the federal securities acts and therefore the producers and
the entities selling such products must be registered with the NASD. The Company
markets such insurance products through an entity registered as a broker-dealer
and for which the Company provides almost all services by means of an
administration and services agreement. The broker-dealer is owned by W.T.
Wamberg (68.2%) and Malcolm Briggs (31.8%). Messrs. Wamberg and Briggs are
stockholders of the Company and Mr. Wamberg is Chairman of the Company. While
the Company has not encountered regulatory problems in the past, no assurance
can be given that the Company or its producers will not encounter regulatory
problems in the future. See "Business -- Government Regulation," "--Ancillary
Business Relationships" and "Management."
FLUCTUATIONS IN OPERATING RESULTS
The Company may experience significant fluctuations in its results of
operations, in particular when such results are compared on a consecutive
quarterly basis. In particular, the Company recognizes a significant increase in
both first year and renewal revenue in the fourth quarter due to the seasonality
of program implementation. In general, results of operations may fluctuate as a
result of a number of factors, including the introduction of new or enhanced
programs and services by the Company or its competitors, client acceptance or
rejection of new programs and services, program development expenses, timing of
significant sales, demand for the Company's administrative services,
competitive, legislative and regulatory conditions in the insurance-financed
employee benefit industry and general economic conditions. Many of these factors
are beyond the Company's control.
The sales cycles for the Company's programs and services are lengthy
(generally between twelve to eighteen months), with first year revenue being
derived from a small number of large cases and subject to a number of factors
beyond the Company's control. For these and other reasons, the revenue of the
Company is difficult to forecast, and the Company believes that comparing its
consecutive quarterly results of operations is not necessarily meaningful or
indicative of the results that the Company may achieve for any subsequent
period. Thus, past operating results should not be considered a reliable
indicator of future performance. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
COMPETING PROGRAMS AND PRODUCTS
The Company's commission income and persistency rates are affected by
certain general economic conditions and market factors such as changes in
interest rates and stock prices. Interest rate fluctuations may have a
significant effect on the sale and profitability of certain insurance-financed
employee benefit programs
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marketed by the Company. For example, if interest rates rise, competing products
may become more attractive to potential purchasers of the programs marketed by
the Company. Further, a prolonged decrease in stock prices may have a
significant effect on the sale and profitability of the Company's programs that
are linked to stock market indices. Thus, economic conditions and other factors
may negatively affect the popularity or economic attractiveness of the programs
marketed by the Company. There can be no assurance that the Company will be able
to compete with alternative products if economic conditions and inflationary
increases make the programs marketed by the Company financially unattractive.
RELIANCE ON INFORMATION PROCESSING SYSTEMS
The Company's ability to provide administrative services depends on its
capacity to store, retrieve, process and manage significant databases and expand
and upgrade periodically its information processing capabilities. Interruption
or loss of the Company's information processing capabilities through loss of
stored data, breakdown or malfunctioning of computer equipment and software
systems, telecommunications failure, or damage caused by fire, tornadoes,
lightning, electrical power outage, or other disruption could have a material
adverse effect on the Company's business, financial condition and results of
operations. Although the Company has disaster recovery procedures in place and
insurance to protect against such contingencies, there can be no assurance that
such insurance or services will continue to be available at reasonable prices,
cover all such losses or compensate the Company for the possible loss of clients
occurring during any period that the Company is unable to provide services. See
"Business -- Administrative Services" and "-- Technology and Administration."
YEAR 2000 ISSUES
There is significant uncertainty regarding the potential costs and effects
of the Year 2000 problem because computer systems that do not properly recognize
date sensitive information when the year changes to 2000 could generate
erroneous data or altogether fail. Based on previous and ongoing internal
reviews, the Company 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, third parties that have relationships with the Company,
including insurance companies and clients, may experience significant Year 2000
issues. These issues may have a serious adverse effect on the operations of such
third parties, including a shut-down of operations for a period of time, which
may, in turn, have a material adverse effect on the Company's business,
financial condition and results of operations. The Company has requested
information from third parties addressing any potential Year 2000 issues with
such third parties; 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 compliance 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 operation and
financial condition.
CONCENTRATION OF STOCK OWNERSHIP
Upon completion of the Offering, Mr. Wamberg will own approximately 24.1%
of the outstanding Common Stock (16.6% if the Underwriters' over-allotment
option is exercised in full) assuming the exercise of all rights to acquire
shares of Common Stock. As a result, Mr. Wamberg will be able to exercise
significant influence over all matters requiring stockholder approval, including
the election of directors and approval of significant corporate transactions.
Such concentration of ownership may also have the effect of delaying, preventing
or deterring a change in control of the Company. See "Principal and Selling
Stockholders."
RELATIONSHIP WITH MR. WAMBERG; CONFLICTS OF INTEREST
The Company has a contractual relationship with Mr. Wamberg, the Chairman
of the Board of CBH and Clark/Bardes, under a Principal Office Agreement
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 Wamberg Organization, which
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is controlled by Mr. Wamberg, accounted for approximately 22.8% of the Company's
total revenue in 1997. Pursuant to the terms of the Principal Office Agreement,
the Company paid approximately $7.8 million and $3.2 million to The Wamberg
Organization in 1997 and for the six months ended June 30, 1998, respectively,
for commissions and fees earned. In July 1998, the Predecessor Company, Mr.
Wamberg and The Wamberg Organization entered into an agreement which provides
for, among other things, a purchase of the renewal revenues due to Mr. Wamberg
and The Wamberg Organization in exchange for a cash payment of approximately
$7.4 million. In addition, the Company reimbursed Mr. Wamberg up to an aggregate
of $100,000 per calendar year for expenses incurred by Mr. Wamberg in his
capacity as the Chairman of each of CBH and Clark/Bardes. The interests of the
Company, on the one hand, and Mr. Wamberg and The Wamberg Organization, on the
other hand, may differ with respect to contractual agreements or other
transactions between the Company and Mr. Wamberg and The Wamberg Organization
resulting in certain conflicts of interest of Mr. Wamberg. See "Certain
Relationships and Related Transactions" and "Management -- Compensation of
Directors."
BENEFITS OF THE OFFERING TO THE EXISTING STOCKHOLDERS
Mr. Wamberg and the other current holders of Common Stock and options to
purchase Common Stock will benefit from the Offering in that a public market
will be created for their stock in the Company. The 1,938,518 shares of Common
Stock that will be owned by Mr. Wamberg after the Offering (1,338,518 shares of
Common Stock if the Underwriters' over-allotment option is exercised in full),
which were acquired at a cost of approximately $7.2 million (an average per
share price of $3.73), will have a value of approximately $24.2 million
(approximately $16.7 million if the Underwriters' over-allotment option is
exercised in full), assuming a market price equal to an assumed public offering
price of $12.50 (the midpoint of the Range). Mr. Wamberg will also realize a
substantial profit on any shares he sells in the Offering as a result of any
exercise of the Underwriters' over-allotment option. See "Principal and Selling
Stockholders."
ABSENCE OF PRIOR PUBLIC MARKET; DETERMINATION OF INITIAL PUBLIC OFFERING PRICE
Prior to the Offering, there has been no public market for the Common
Stock. Although the Common Stock has been approved for quotation on the Nasdaq
National Market, there can be no assurance that an active public market will
develop for the Common Stock or that the Common Stock will trade in the public
market subsequent to the Offering at or above the initial public offering price.
If no active public market for the Common Stock develops, the trading price and
liquidity of the Common Stock will be materially and adversely affected. The
initial public offering price will be determined by negotiations among the
Company and the Underwriters and may not be indicative of the trading price for
the Common Stock after the Offering.
VOLATILITY OF TRADING PRICE
The trading price of the Common Stock could fluctuate significantly in
response to variations in the Company's operating results, changes in earnings
estimates by securities analysts, changes in the Company's business and changes
in general market or economic conditions. In addition, in recent years the stock
market has experienced significant price and volume fluctuations. Such market
fluctuations could have a material adverse effect on the trading price of the
Common Stock.
SUBSTANTIAL DILUTION
Based on an offering price of $12.50 per share (the midpoint of the Range),
purchasers of Common Stock in the Offering will experience immediate and
substantial dilution in the net tangible book value of their shares. As of June
30, 1998, each share of Common Stock had a pro forma net tangible book value of
($5.90) after giving effect to the conversion of the 8.5% Convertible
Subordinates Notes into 813,559 shares of Common Stock at $5.90 per share. After
the Offering, the Stockholder Distribution Amount and the Reorganization, each
share of Common Stock will have a pro forma net tangible book value of $1.41 and
the pro forma dilution to purchasers of Common Stock in the Offering will be
$11.09 per share. See "Dilution."
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POSSIBLE DILUTIVE EFFECT OF ISSUANCE OF ADDITIONAL SHARES
After the Offering, the Company will have an aggregate of 9,740,323 shares
of Common Stock authorized but unissued and not reserved for specific purposes.
All of such shares may be issued without any action or approval by the Company's
stockholders. Management intends to pursue actively acquisitions of competitors
and related businesses and may issue shares of Common Stock in connection with
these acquisitions. In addition, 200,000 shares of Common Stock are reserved
under the Company's Employee Stock Purchase Plan (the "Stock Purchase Plan").
Further, the Company has reserved 2.0 million shares of Common Stock under the
Company's Stock Option Plan, as amended (the "Stock Option Plan"). As of the
date of the Offering, the Company has granted options exercisable for 690,853
shares of Common Stock. Any shares issued in connection with future
acquisitions, exercise of stock options or otherwise would further dilute the
percentage ownership of the Company held by the investors who purchase shares in
the Offering. See "Management -- Stock Option Plan," "-- Employee Stock Purchase
Plan" and "Description of Capital Stock."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of a substantial number of shares of Common Stock in the open market
after the Offering, or the perception that such sales could occur, could
adversely affect the trading price of the Common Stock. Immediately after the
Offering, Mr. Wamberg will hold 1,938,518 shares, representing 24.1% of the
outstanding shares of Common Stock (16.6% if the Underwriters' over-allotment
option is exercised in full) and other principal stockholders will hold
1,123,702 shares, representing 13.0% of the outstanding shares of Common Stock.
See "Principal and Selling Stockholders." A decision by Mr. Wamberg or the other
stockholders to sell shares of Common Stock could adversely affect the trading
price of the Common Stock. Upon consummation of the Offering, the Company will
have 8,059,677 shares of Common Stock outstanding. Of these shares, all shares
sold in the Offering (other than shares, if any, purchased by affiliates of the
Company) will be freely tradable. Of the remaining 4,059,677 shares, 1,580,513
shares will be freely transferable and 2,479,164 shares will be "restricted
securities" as that term is defined in Rule 144 under the Securities Act ("Rule
144"). The executive officers, directors and principal stockholders of the
Company, including Mr. Wamberg, have agreed that, subject to certain
limitations, for a period of 180 days following the date of this Prospectus,
they will not, without the prior written consent of Bear, Stearns & Co. Inc.,
offer, sell or grant any option to purchase or otherwise dispose of Common Stock
or any securities convertible into or exchangeable for Common Stock. Two hundred
thousand shares of Common Stock are reserved under the Stock Purchase Plan, and
2.0 million shares of Common Stock have been reserved for issuance under the
Stock Option Plan, 690,853 of which are issuable upon exercise of options
granted at the date of this Prospectus, including options to purchase 199,163
shares exercisable as of the date of this Prospectus or that will become
exercisable within 60 days after the date of this Prospectus. The Company plans
to register on Form S-8 under the Securities Act the offering and sale of Common
Stock issuable under the Stock Option Plan and the Stock Purchase Plan. See
"Management -- Stock Option Plan," "-- Employee Stock Purchase Plan" and "Shares
Eligible For Future Sale."
ANTI-TAKEOVER CONSIDERATIONS
Certain provisions of CBH's Certificate of Incorporation (the "Certificate
of Incorporation"), CBH's Bylaws (the "Bylaws") and the Delaware General
Corporation Law ("DGCL") may have the effect of discouraging unsolicited
proposals for the acquisition of CBH. Pursuant to the Certificate of
Incorporation, CBH may issue shares of preferred stock in the future without
stockholder approval and upon such terms and conditions, and having such rights,
privileges and preferences, as the Board of Directors may determine. The rights
of the holders of Common Stock will be subject to, and may be adversely affected
by, any such preferred stock. The issuance of preferred stock, while providing
desirable flexibility in connection with possible acquisitions, financings and
other corporate transactions, could have the effect of discouraging a third
party's acquisition of a majority of the Common Stock. CBH has no present plans
to issue any shares of preferred stock. In addition, CBH has adopted a
stockholder rights plan that could further discourage attempts to acquire
control of CBH. CBH's Bylaws provide that stockholders are entitled to call a
special meeting only by a vote of holders of at least 66 2/3% of the total votes
eligible to be cast by holders of Common Stock. In
14
<PAGE> 18
addition, the ability of the stockholders to consent in writing to the taking of
any action in lieu of a meeting is denied. Any changes to provisions of the
Certificate of Incorporation must be approved by a majority of the Board of
Directors and, in certain cases, thereafter must be approved by a vote of
holders of at least 66 2/3% of the total votes eligible to be cast by holders of
Common Stock. The Bylaws may be amended or repealed by the affirmative vote of a
majority of the directors or the affirmative vote of the holders of at least
66 2/3% of the votes eligible to be cast by holders of Common Stock with respect
to such amendment or repeal. In addition, the DGCL restricts certain business
combinations and provides that directors serving on staggered boards of
directors may be removed only for cause unless the certificate of incorporation
otherwise provides. Finally, the Bylaws provide that directors can be removed
only for cause by a vote of holders of at least 66 2/3% of the total votes
eligible to be cast by holders of Common Stock. See "Description of Capital
Stock -- Anti-Takeover Considerations" and "-- Preferred Stock."
ABSENCE OF DIVIDENDS
Following the Offering, CBH intends to retain any future earnings to fund
growth and does not anticipate paying any cash dividends in the foreseeable
future. See "Dividend Policy."
THE REORGANIZATION
OVERVIEW
CBH and Clark/Bardes were formed in June 1998 in contemplation of the
Offering and in order to effect the Merger. CBH was formed to be a holding
company of Clark/Bardes and is not engaged in any business. Clark/Bardes was
formed to be the operating company of CBH and is the successor corporation to
Clark/ Bardes, Inc., a Texas corporation formed in 1967.
In connection with the Offering, each of CBH, Clark/Bardes and the
Predecessor Company entered into a reorganization agreement (the "Reorganization
Agreement") which provides for a two step merger resulting in the Predecessor
Company merging with and into Clark/Bardes (the "Merger") with 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 contemplates a series of transactions,
including (i) a restructuring of Clark/Bardes' 10.5% Senior Secured Notes due
August 2002 and 11.0% Second Priority Senior Secured Notes due August 2004 (such
notes are collectively referred to as the "Restructured Notes"), (ii) the
conversion of Clark/Bardes' 8.5% Convertible Subordinated Notes due September
2007 into 813,559 shares of Common Stock, (iii) an extinguishment by
Clark/Bardes of warrants representing the right to purchase 1,525,424 shares of
Common Stock (such warrants are collectively referred to as the "Warrants"),
(iv) a purchase of renewal revenue due to Mr. Wamberg and The Wamberg
Organization, (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 "Stockholders' Agreement") (all the foregoing transactions, including the
Merger, are collectively referred to as the "Reorganization"). The Merger, which
was consummated effective August 1, 1998, was treated for accounting purposes as
a reorganization of entities under common control utilizing historical cost
which is similar to pooling of interests. The Merger should qualify as a
"reorganization" under Section 368(a) of the Code. Accordingly, the Company
should generally recognize no gain for federal income tax purposes pursuant to
the Merger. The Company's counsel rendered a tax opinion to that effect. See
"Dilution."
THE RESTRUCTURED NOTES
In connection with the consummation of the Offering, Clark/Bardes will
restructure the Restructured 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 will be reset to rates that were 2.5% and 3.5%, respectively,
above the yield on United States Treasury securities maturing two and five
years, respectively, from the date on which the interest rates will be reset.
The Restructured Notes may be prepaid without penalty and will be secured by
15
<PAGE> 19
a first priority security interest in, among other things, all of Clark/Bardes'
renewal commissions other than the renewal commissions from BCS and the Pending
Acquisition. Further, the Company will be subject to significant operational
restrictions and financial covenants, including a requirement that Clark/Bardes
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.
EXTINGUISHMENT OF WARRANTS
In connection with the consummation of the Offering, Clark/Bardes will
extinguish the Warrants in exchange for a payment of $6.5 million by
Clark/Bardes to the warrant holders, which amount is based on an assumed public
offering price of $12.50 per share (the midpoint of the Range). In addition, in
connection with agreeing to the extinguishment of the Warrants, Clark/Bardes
will enter into a five-year production agreement with each of Great West and
Nationwide (the "Carriers") that requires Clark/Bardes to market and sell
insurance products of each Carrier comprising specified percentages of all
insurance products sold by Clark/ Bardes as measured by first year commissions
payable with respect to such business. The percentages will range from 10.0% to
25.0% depending upon the type of insurance product and product exclusivity
provisions. Each agreement will provide that in the event that Clark/Bardes
fails to meet the minimum production requirements, the applicable Carrier will
be entitled to offset future commissions otherwise payable to Clark/ Bardes up
to a maximum amount of $150,000 per year. As a result of the Company's
relationship with the Carriers, including as holders of the Restructured Notes,
the amounts of business placed with each Carrier and the production agreements,
the amount to be paid by the Company to each Carrier to extinguish the Warrants
held by each Carrier is expected to be approximately $1.2 million less than the
amount to be paid by the Company to Life Investors to extinguish an equivalent
number of Warrants held by Life Investors.
PURCHASE OF RENEWAL REVENUE
On July 31, 1998, the Predecessor Company, Mr. Wamberg and The Wamberg
Organization entered into an agreement which provides for, among other things, a
purchase of the renewal revenue due under the Principal Office Agreement with
Mr. Wamberg in exchange for a cash payment of approximately $7.4 million. This
transaction allows Clark/Bardes to retain additional commission and fee revenue
for the ten year period following the consummation of the transaction. 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. This transaction was approved by approximately 99.0% of the disinterested
stockholders of the Predecessor Company at a stockholders' meeting held on July
31, 1998. This transaction will be effective as of January 1, 1999. See "Certain
Relationships and Related Transactions."
TERMINATION OF S CORPORATION STATUS
Since 1989, the Predecessor Company elected to be treated for federal
income tax purposes as an S corporation under Subchapter S of the Code and as an
S corporation for certain state corporate income tax purposes under certain
comparable state laws. As a result, the Predecessor Company's historical
earnings since 1989 have been taxed directly to the Predecessor Company's
stockholders, at their individual federal and state income tax rates, rather
than to the Predecessor Company (except for certain state taxes). Upon the
consummation of the Merger, Clark/Bardes became subject to federal and state
income taxation as a C corporation. At that time, Clark/Bardes recorded a
deferred tax liability on its balance sheet, the amount of which depended upon
timing differences between tax and book accounting. If the Predecessor Company's
S corporation status had terminated as of December 31, 1997, the amount of the
deferred tax liability would have been approximately $1.2 million. See
"Capitalization."
In connection with the termination of the Predecessor Company's S
corporation status, 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 (the "Stockholder Distribution Amount"). The
Company paid the Stockholder Distribution Amount on July 31, 1998.
16
<PAGE> 20
In connection with the Merger, CBH and Clark/Bardes have obtained from
certain Existing Stockholders and are currently seeking to obtain from the
remaining Existing Stockholders a tax indemnification agreement (the "Tax
Agreement") relating to their respective income tax liabilities. Because
Clark/Bardes is subject to corporate income taxation, any reallocation of income
and deductions between the period during which the Predecessor Company was
treated as an S corporation and the period during which Clark/Bardes is subject
to corporate income taxation may increase the taxable income of one party while
decreasing that of another party. Accordingly, the Tax Agreement is intended to
ensure that taxes are borne either by Clark/ Bardes or the Existing Stockholders
to the extent that such parties received the related income. The Tax Agreement
generally provides that, if an adjustment is made to the taxable income of
Clark/Bardes for a year in which the Predecessor Company was treated as an S
corporation, each party will indemnify the other against any increase in the
indemnified party's income tax liability, including interest and penalties, with
respect to such tax year to the extent such increase results in a related
decrease in the income tax liability, including interest and penalties, of the
indemnifying party (whether with respect to the year of the adjustment or over
future years). The Tax Agreement also provides that the Existing Stockholders
will indemnify CBH and Clark/Bardes for any income tax liability incurred as a
result of a determination that the Predecessor Company did not qualify as an S
corporation. Such indemnification obligation will be limited to the net tax
refund, if any, received by the Existing Stockholders.
Clark/Bardes will also indemnify the Existing Stockholders for all taxes
imposed upon them as the result of an indemnification payment under the Tax
Agreement. Any payment made by Clark/Bardes to the Existing Stockholders
pursuant to the Tax Agreement may be considered by the Internal Revenue Service
or state taxing authorities to be non-deductible by Clark/Bardes for income tax
purposes. No assurance can be given that each Existing Stockholder will enter
into the Tax Agreement, in which case neither such Existing Stockholder nor
Clark/Bardes shall be subject to the indemnification obligations under the Tax
Agreement relating to such Existing Stockholder. None of the parties'
obligations under the Tax Agreement are or will be secured, and, therefore,
there can be no assurance that Clark/Bardes or the Existing Stockholders will
have funds available to make any payments which may become due under the Tax
Agreement.
PENDING ACQUISITION
On May 29, 1998, the Predecessor Company entered into a letter of intent
with Schoenke & Associates Corporation, Schoenke & Associates Securities
Corporation, Schoenke & Associates of Hawaii, L.P. (collectively, the "Schoenke
Companies") and Raymond F. Schoenke, Jr., which provides for, among other
things, (i) the acquisition by Clark/Bardes of the businesses and substantially
all of the assets of the Schoenke Companies, (ii) the execution of a
non-competition agreement by each of Mr. Schoenke and the Schoenke Companies,
and (iii) the Schoenke Companies' agreement to deal exclusively with
Clark/Bardes (such transactions, the "Pending Acquisition"). The purchase price
of the Pending Acquisition, which is subject to change based on Clark/Bardes'
due diligence review, is $17.0 million, of which $1.5 million was paid as a
secured refundable deposit and $15.5 million is payable in cash at the closing
of the Pending Acquisition. The consummation of the Pending Acquisition is
subject to numerous conditions, including the consummation of the Offering, the
approval of Clark/Bardes' board of directors, obtaining all requisite regulatory
approvals and the satisfactory completion of Clark/Bardes' due diligence review.
The consummation of the Pending Acquisition must occur on or prior to October 1,
1998. The letter of intent expressly allows the Predecessor Company to enter
into and consummate the Merger. Management believes that the consummation of the
Pending Acquisition is probable. The Pending Acquisition will be accounted for
using the purchase method.
17
<PAGE> 21
USE OF PROCEEDS
The net proceeds to CBH from the sale of 4,000,000 shares of Common Stock
offered by CBH will be approximately $45.0 million at an assumed public offering
price of $12.50 per share (the midpoint of the Range), after deducting estimated
underwriting discounts and commissions and estimated offering expenses payable
by CBH. CBH intends to apply the proceeds as follows: (i) approximately $1.0
million in partial payment of Clark/Bardes' 8.5% Medium Term Notes due September
2001; (ii) approximately $6.5 million to extinguish the Warrants; (iii)
approximately $15.5 million to consummate the Pending Acquisition; (iv)
approximately $7.4 million for the purchase of renewal revenue due to Mr.
Wamberg and The Wamberg Organization; and (v) approximately $14.6 million for
general corporate purposes, including working capital and possible future
acquisitions. See "The Reorganization," "Pending Acquisition" and "Certain
Relationships and Related Transactions." Pending such uses, CBH intends to
invest the net proceeds of the Offering in short-term, investment grade,
interest bearing securities.
Mr. Wamberg has granted the Underwriters an over-allotment option to
purchase 600,000 shares of Common Stock. CBH will not receive any proceeds from
the exercise of the over-allotment option. The net proceeds to be received by
Mr. Wamberg, if the over-allotment option is exercised in full, will be
approximately $7.0 million (assuming the midpoint of the Range) after deducting
underwriting discounts and commissions payable by Mr. Wamberg. See "Principal
and Selling Stockholders."
DIVIDEND POLICY
Following the Offering, CBH intends to retain any future earnings to fund
growth and does not anticipate paying any cash dividends in the foreseeable
future. Any future determination as to CBH's dividend policy will be made at the
discretion of the Board of Directors and will depend on a number of factors,
including restrictions on distributions imposed by the Restructured Notes and
the DGCL, future earnings, capital requirements, financial condition and future
prospects of the Company and such other factors as the Board of Directors may
deem relevant. See "Description of Capital Stock" and "Management's Discussion
and Analysis of Financial Condition and Results of Operation -- Liquidity and
Capital Resources."
DILUTION
The pro forma net tangible consolidated book value of CBH as of June 30,
1998 was $(23,933,742), or $(5.90) per share. "Pro forma net tangible book value
per share" represents the amount of total assets less total liabilities and
intangible assets after the 8.5% Convertible Subordinated Notes are converted
into 813,559 shares of Common Stock at $5.90 per share divided by the number of
shares of Common Stock then outstanding. Without taking into account any other
changes in pro forma net tangible book value after June 30, 1998, other than to
give pro forma effect to (i) the payment of the Stockholder Distribution Amount,
(ii) the Reorganization and (iii) the receipt by CBH of the estimated net
proceeds from the sale of the shares of Common Stock offered hereby at an
assumed public offering price of $12.50 per share (the midpoint of the Range),
the pro forma net tangible book value of CBH as of June 30, 1998 would have been
$11,332,360, or $1.41 per share. This represents an immediate increase of pro
forma net tangible book value of $7.31 per share to the Existing Stockholders
and an immediate dilution of $11.09 per share to new investors at the assumed
initial public offering price. The following table illustrates this per share
dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price....................... $12.50
Net tangible book value as of June 30, 1998............... (5.90)
Decrease due to payment of Stockholder Distribution
Amount................................................. (.79)
Increase due to Reorganization and Offering............... 8.10
------
Pro forma net tangible book value after the Offering........ 1.41
------
Dilution to new investors................................... $11.09
======
</TABLE>
18
<PAGE> 22
The following table summarizes, on a pro forma basis as of June 30, 1998
after giving effect to the Reorganization and the restructuring of a grant of
Common Stock to Mr. Todd (see "Certain Relationships and Related
Transactions -- Restructuring of the Grant of Stock to Melvin Todd"), the
difference between the Existing Stockholders and the investors with respect to
the number of shares issued by CBH and owned by them, the total consideration
received for those shares and the average price paid per share before deduction
of the estimated underwriting discounts and commissions and offering expenses
payable by CBH:
<TABLE>
<CAPTION>
SHARES OF COMMON TOTAL
STOCK ACQUIRED CONSIDERATION AVERAGE
------------------- --------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
--------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing Stockholders.............. 4,059,677 50.4% $10,163,631 16.9% $ 2.50
New Investors...................... 4,000,000 49.6 50,000,000 83.1 12.50
--------- ----- ----------- ----- ------
Total.................... 8,059,677 100.0% $60,163,631 100.0% $ 7.46
========= ===== =========== ===== ======
</TABLE>
The computations in the table set forth above assume no exercise of
outstanding stock options. On the date of this Prospectus, there were 690,853
shares of Common Stock subject to options previously granted at a weighted
average exercise price of $9.74 per share. Any shares issued in connection with
acquisitions, exercise of stock options or otherwise would further dilute the
percentage ownership of the Company held by the investors who purchase shares in
the Offering. See "Management -- Stock Option Plan" and "-- Employee Stock
Purchase Plan."
19
<PAGE> 23
CAPITALIZATION
The following table sets forth as of June 30, 1998 (i) the capitalization
of the Predecessor Company, (ii) the pro forma consolidated capitalization of
the Company adjusted to give effect to the payment of the Stockholder
Distribution Amount and the Reorganization and (iii) the pro forma consolidated
capitalization of the Company further adjusted to give effect to (a) the sale by
CBH of 4,000,000 shares of Common Stock pursuant to the Offering at an assumed
public offering price of $12.50 per share (the midpoint of the Range), after
deducting the estimated underwriting discount and estimated offering expenses
payable by CBH and (b) the application of the estimated net proceeds therefrom.
<TABLE>
<CAPTION>
JUNE 30, 1998
---------------------------------------------------
THE COMPANY
PRO FORMA
ADJUSTED FOR THE
STOCKHOLDER
DISTRIBUTION THE COMPANY
PREDECESSOR AMOUNT AND THE PRO FORMA
COMPANY REORGANIZATION AS ADJUSTED
------------ ------------------ ------------
<S> <C> <C> <C>
Current portion of long-term debt........... $ 4,325,000 $ 3,325,000(1) $ 3,325,000
Long-term debt, excluding current portion:
8.5% Medium Term Notes due September
2001................................... 4,275,000 4,275,000 4,275,000
10.5% Senior Secured Notes due August
2002................................... 10,150,000 10,150,000 10,150,000
11.0% Second Priority Senior Secured Notes
due August 2004........................ 8,900,000 8,900,000 8,900,000
8.5% Convertible Subordinated Notes due
September 2007......................... 4,800,000 --(2) --
AAA Distribution Notes due November
2007................................... 3,263,143 3,263,143 3,263,143
------------ ----------- ------------
Long-term debt, excluding current portion... 31,388,143 26,588,143 26,588,143
Stockholders' equity:
Common Stock ($.01 par value, 20,000,000
shares authorized, 5,983,248 shares
issued and outstanding and 9,983,248
shares issued and outstanding, as
adjusted(3))........................... 5,463,631 59,832(4) 99,832(5)
Paid-in capital........................... -- (952,055)(4) 44,007,945(5)
Retained earnings......................... 3,378,044 --(6) --
Treasury stock (2,737,130 shares, at cost,
and 1,923,571 shares, at cost, as
adjusted).............................. (13,928,550) (9,128,550)(2) (9,128,550)
------------ ----------- ------------
Total stockholders' equity
(deficit)....................... (5,086,875) (10,020,773) 34,979,227
------------ ----------- ------------
Total capitalization.............. $ 30,626,268 $19,892,370 $ 64,892,370
============ =========== ============
</TABLE>
- ---------------
(1) Represents the use of proceeds for the prepayment of $1.0 million aggregate
principal amount of Clark/Bardes 8.5% Medium Term Notes due September 2001.
(2) The 8.5% Convertible Subordinated Notes due September 2007 may be prepaid at
any time at the option of Clark/Bardes. Clark/Bardes intends to provide BCS
and Mr. Wamberg, the holders of such notes, with the required notice of
prepayment immediately after the consummation of the Offering. Each of BCS
and Mr. Wamberg will then have the right to convert the notes into 813,559
shares of Common Stock at $5.90 per share. Management anticipates that all
such notes will be converted into shares of Common Stock.
(3) Excludes 200,000 shares of Common Stock reserved under the Stock Purchase
Plan, and 2.0 million shares reserved for issuance under the Stock Option
Plan, pursuant to which options covering 690,853 shares of Common Stock are
granted but unexercised at a weighted average exercise price of $9.74 per
share as of the date of this Prospectus.
(4) Represents the payment to be made in consideration of extinguishing the
Warrants assuming the mid-point of the Range and the adjustment to record
common stock at $0.01 par value. Paid-in capital also includes $178,044
representing the remaining undistributed earnings reclassified from retained
earnings.
(5) Represents the assumed net proceeds of the Offering after deducting
underwriting discount and estimated expenses of the Offering.
(6) Represents the payment of the Stockholder Distribution Amount and the
reclassification of remaining undistributed earnings to paid-in capital.
20
<PAGE> 24
SELECTED HISTORICAL AND PRO FORMA FINANCIAL INFORMATION
The following table sets forth selected historical financial information
and selected pro forma financial information of the Predecessor Company for the
periods ended and as of the dates indicated. The selected historical financial
information of the Predecessor Company set forth below as of and for each of the
five years ended December 31, 1993, 1994, 1995, 1996 and 1997 was derived from
the audited financial statements of the Predecessor Company. The selected
historical financial information of the Predecessor Company set forth below as
of and for the six month periods ended June 30, 1997 and 1998 was derived from
the Predecessor Company's unaudited financial statements which, in the opinion
of management, reflect all normal recurring adjustments necessary for the fair
presentation of such financial statements. The results of operations for the six
month period ended June 30, 1998 are not necessarily indicative of the
Predecessor Company's results of operations to be expected for the full year.
The selected unaudited pro forma financial information of the Predecessor
Company set forth below for the year ended December 31, 1997 and the six month
period ended June 30, 1997 gives effect to the Reorganization and the
acquisition by the Predecessor Company of the business and substantially all the
assets of BCS as if such transactions had occurred as of the beginning of the
periods presented. The selected unaudited pro forma financial information of the
Predecessor Company set forth below for the six month period ended June 30, 1998
gives effect to the Reorganization as if such transactions had occurred as of
the beginning of the period presented. The unaudited pro forma income tax
expense, net income and earnings per share information of the Predecessor
Company set forth below for the year ended December 31, 1997 and the six month
period ended June 30, 1998 gives effect to the incurrence of income taxes as if
the Predecessor Company had been taxed as a C corporation as of the beginning of
the periods presented. The selected unaudited pro forma financial information of
the Predecessor Company set forth below does not purport to represent what the
Predecessor Company's results of operations would have been if the BCS
acquisition had actually occurred as of such dates or what such results will be
for any future periods.
The following historical and pro forma information of the Predecessor
Company should be read in conjunction with information included elsewhere
herein, including the financial statements and notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------------------
1993 1994(1) 1995 1996 1997 1997
ACTUAL ACTUAL ACTUAL ACTUAL ACTUAL PRO FORMA
----------- ---------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME
INFORMATION:
Total revenue........... --(3) --(3) $26,972,732 $33,243,155 $49,455,419 $62,264,393
Commission and fee
expense............... --(3) --(3) 16,890,862 21,049,704 32,439,092 41,171,626
----------- ---------- ----------- ----------- ----------- -----------
Net revenue........... $ 7,913,173 $7,343,507 10,081,870 12,193,451 17,016,327 21,092,767
General and
administrative
expense............... 6,919,933 7,236,896 7,868,997 8,554,420 11,506,335 14,024,448
Amortization of
intangibles........... -- -- -- -- 294,630 883,890
Non-recurring operating
expenses.............. -- -- -- -- -- 942,157
----------- ---------- ----------- ----------- ----------- -----------
Income (loss) from
operations........... 993,240 106,611 2,212,873 3,639,031 5,215,362 5,242,272
Interest and dividend
income................ 142,777 171,454 200,577 121,814 188,597 216,600
Interest expense........ (49,367) (29,396) (6,903) -- (1,111,995) (1,636,620)
Miscellaneous income
(expense)............. (1,169) (100,498) (86,292) (25,416) 1,925 1,925
----------- ---------- ----------- ----------- ----------- -----------
Total other income
(expense)............ 92,241 41,560 107,382 96,398 (921,473) (1,418,095)
----------- ---------- ----------- ----------- ----------- -----------
Income (loss) before
taxes................. 1,085,481 148,171 2,320,255 3,735,429 4,293,889 3,824,177
Income taxes
(benefit)(5).......... 70,517 9,842 102,459 181,444 60,000 1,514,000(6)
----------- ---------- ----------- ----------- ----------- -----------
Net income
(loss)............ $ 1,014,964 $ 138,329 $ 2,217,796 $ 3,553,985 $ 4,233,889 $2,310,177
=========== ========== =========== =========== =========== ===========
Pro forma income tax
expense(6).............. -- -- -- -- $ 1,700,000
===========
Pro forma net
income(6)............... -- -- -- -- $ 2,593,889 --
===========
PER SHARE INFORMATION:
Basic earnings (loss)
per share............. $ .17 $ .02 $ .39 $ .75 $ 1.03 $ .46(7)
Diluted earnings (loss)
per share............. .17 .02 .39 .75 .99 .46(7)
Dividends per share..... $ -- $ .02 $ .29 $ .36 $ 1.32 $ .52
Pro forma basic earnings
per share(6).......... -- -- -- -- .63 --
Pro forma dilution
earnings per
share(6).............. -- -- -- -- .61 --
<CAPTION>
SIX MONTHS ENDED JUNE 30,
--------------------------------------------------------------------
1997 1997 1998 1998
ACTUAL PRO FORMA ACTUAL PRO FORMA
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
STATEMENT OF INCOME
INFORMATION:
Total revenue........... $11,283,184 $20,633,005 $28,984,959 $28,984,959
Commission and fee
expense............... 7,273,519 13,908,713 18,203,681 18,203,681
----------- ----------- ----------- -----------
Net revenue........... 4,009,665 6,724,292 10,781,278 10,781,278
General and
administrative
expense............... 4,615,101 6,614,571 8,399,696(4) 8,399,696
Amortization of
intangibles........... -- 441,945 441,945 441,945
Non-recurring operating
expenses.............. -- -- -- --
----------- ----------- ----------- -----------
Income (loss) from
operations........... (605,436) (332,224) 1,939,637 1,939,637
Interest and dividend
income................ 68,117 108,917 167,624 167,624
Interest expense........ -- (638,250) (1,803,750) (1,302,104)
Miscellaneous income
(expense)............. 146 146 (141) (141)
----------- ----------- ----------- -----------
Total other income
(expense)............ 68,263 (529,187) (1,636,267) (1,134,621)
----------- ----------- ----------- -----------
Income (loss) before
taxes................. (537,173) (861,411) 303,370 805,016
Income taxes
(benefit)(5).......... -- (340,000)(6) 14,000 319,000(6)
----------- ----------- ----------- -----------
Net income
(loss)............ $ (537,173) $ (521,411) $ 289,370 $ 486,016
=========== =========== =========== ===========
Pro forma income tax
expense(6).............. -- -- $ 120,000 --
===========
Pro forma net
income(6)............... -- -- $ 183,370 --
===========
PER SHARE INFORMATION:
Basic earnings (loss)
per share............. $ (.12) $ (.10)(7) $ .09 $ .12(7)
Diluted earnings (loss)
per share............. (.12) (.10)(7) .09 $ .12(7)
Dividends per share..... $ -- $ -- $ -- --
Pro forma basic earnings
per share(6).......... -- -- .06 --
Pro forma dilution
earnings per
share(6).............. -- -- .06 --
</TABLE>
21
<PAGE> 25
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------------------
1993 1994(1) 1995 1996 1997 1997
ACTUAL ACTUAL ACTUAL ACTUAL ACTUAL PRO FORMA
----------- ---------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET
INFORMATION:
Cash and cash
equivalents........... $ 2,242,595 $3,022,964 $ 3,968,307 $ 4,881,584 $ 3,782,941 --
Total assets............ 10,294,798 7,152,186 9,886,651 8,525,454 36,901,890 --
Current portion of
long-term debt........ -- -- -- -- 4,325,000 --
Long-term debt,
excluding current
portion............... -- -- -- -- 32,838,143 --
Total liabilities....... 4,222,603 1,991,611 4,099,197 4,714,055 42,581,510 --
Stockholders' equity
(deficit)............. 6,072,195 5,160,575 5,787,454 3,811,399 (5,679,620)(8) --
<CAPTION>
SIX MONTHS ENDED JUNE 30,
--------------------------------------------------------------------
1997 1997 1998 1998
ACTUAL PRO FORMA ACTUAL PRO FORMA
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
BALANCE SHEET
INFORMATION:
Cash and cash
equivalents........... $ 2,002,037 -- $ 6,305,094 --
Total assets............ 4,806,135 -- 35,559,778 --
Current portion of
long-term debt........ -- -- 4,325,000 --
Long-term debt,
excluding current
portion............... -- -- 31,388,143 --
Total liabilities....... 1,409,316 -- 40,646,653 --
Stockholders' equity
(deficit)............. 3,396,819 -- (5,086,875)(8) --
</TABLE>
- ---------------
(1) The results of operations in 1994 reflect estimated lost renewal commissions
and fees of approximately $1 million due to the cessation of operations and
subsequent rehabilitation of Confederation Life Insurance Company.
(2) Includes the results of operations attributable to the assets acquired from
BCS for the period beginning September 1, 1997 (the effective date of the
BCS acquisition) and ended December 31, 1997, and reflects the consummation
of such acquisition.
(3) For the period presented, the Predecessor Company reported net revenue only.
Therefore, total revenue and commission and fee expense amounts are not
available.
(4) During the six months ended June 30, 1998, the Company recognized $525,000
of compensation expense related to the restructuring of the stock grant to
Mr. Todd and $200,000 of compensation expense for consulting services
related to the start-up health care business. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Entry into
New Business."
(5) Except as noted, income tax expense reflects the Predecessor Company's
liability for state taxes. No provision for federal income taxes has been
made because the Predecessor Company elected to be treated as an S
corporation for federal income tax purposes prior to the Merger.
(6) Income tax is stated on a pro forma basis as if the Predecessor Company had
been treated as a C corporation and taxed at a 39.6% blended rate for
federal and state income tax purposes. Pro forma net income (loss) and pro
forma earnings (loss) per share have been presented after giving effect to
the pro forma income tax adjustment.
(7) Pro forma earnings per share was calculated based on the weighted average
number of shares outstanding during the period adjusted to give effect to
the conversion of the 8.5% Convertible Subordinated Notes due September,
2007 and to the number of shares whose proceeds would be necessary to prepay
$1.0 million of the 8.5% Medium Term Notes due September 2001. Pro forma
basic and diluted weighted average shares outstanding were 5,012,946 and
5,020,223, respectively, for the year ended December 31, 1997. Pro forma
basic and diluted weighted average shares outstanding were both 5,437,858
and 4,115,702 for the six months ended June 30, 1997 and 1998, respectively.
(8) Reflects the decrease in stockholders' equity resulting from repurchases of
2.6 million shares of common stock by the Predecessor Company for aggregate
consideration of approximately $14.0 million and distributions totaling $4.3
million to stockholders in 1997.
22
<PAGE> 26
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following table sets forth unaudited pro forma financial information of
the Company for the periods ended and as of the dates indicated. The unaudited
pro forma financial information of the Company set forth below was derived from
the audited and unaudited financial statements of the Predecessor Company and
BCS, which are included elsewhere in this Prospectus.
The unaudited pro forma balance sheet has been prepared to give effect to
the Reorganization, the payment of the Stockholder Distribution Amount and the
Offering as though each had occurred as of June 30, 1998. The unaudited pro
forma statements of income have been prepared to give effect to (i) the payment
of the Stockholder Distribution Amount, (ii) the Reorganization, (iii) the
Offering, and (iv) for the year ended December 31, 1997, the BCS acquisition, as
if such transactions had occurred as of the beginning of each period presented.
The unaudited pro forma financial information of the Company set forth below is
based upon available information and certain assumptions that the Company
believes are reasonable. The unaudited pro forma financial information of the
Company set forth below does not purport to represent either what the Company's
financial position or results of operations actually would have been if the
transactions had actually occurred as of such dates or what such results will be
for any future periods.
The following pro forma information of the Company should be read in
conjunction with information included elsewhere herein, including, the financial
statements and notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
23
<PAGE> 27
UNAUDITED PRO FORMA BALANCE SHEET
AS OF JUNE 30, 1998
ASSETS
<TABLE>
<CAPTION>
THE COMPANY
ADJUSTMENTS PRO FORMA
FOR THE ADJUSTED FOR
STOCKHOLDER THE STOCKHOLDER
DISTRIBUTION DISTRIBUTION ADJUSTMENTS THE COMPANY
PREDECESSOR AMOUNT AND THE AMOUNT AND THE FOR THE PRO FORMA
COMPANY REORGANIZATION REORGANIZATION OFFERING AS ADJUSTED
----------- -------------- --------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents...................... $ 6,305,094 $ (1,000,000)(1)
(3,200,000)(2)
(6,533,898)(3)
(7,400,000)(4) $(11,828,804) $45,000,000(6) $33,171,196
Accounts and notes receivable:
Trade........................................ 2,386,839 2,386,839 2,386,839
Affiliates................................... 284,787 284,787 284,787
Notes receivable............................. 388,871 388,871 388,871
------------ ------------ ------------ ----------- -----------
Total accounts and notes receivable...... 3,060,497 -- 3,060,497 -- 3,060,497
Other current assets............................. 231,310 231,310 231,310
Accrued interest receivable...................... 68,674 68,674 68,674
------------ ------------ ------------ ----------- -----------
Total current assets..................... 9,665,575 (18,133,898) (8,468,323) 45,000,000 36,531,677
Equipment and leasehold improvements, net........ 747,336 747,336 747,336
Intangible assets, net........................... 23,646,867 23,646,867 23,646,867
Deferred commission expense...................... -- 7,400,000(4) 7,400,000 7,400,000
Deposit on Pending Acquisition................... 1,500,000 1,500,000 1,500,000
------------ ------------ ------------ ----------- -----------
Total assets............................. $ 35,559,778 $(10,733,898) $ 24,825,880 $45,000,000 $69,825,880
============ ============ ============ =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................... $ 820,927 $ 820,927 $ 820,927
Commissions and fees payable................... 1,864,102 1,864,102 1,864,102
Dividends payable.............................. -- -- --
Accrued expenses and other liabilities......... 1,802,140 1,802,140 1,802,140
Accrued interest payable....................... 446,341 446,341 446,341
Current portion of long-term debt.............. 4,325,000 $ (1,000,000)(1) 3,325,000 3,325,000
------------ ------------ ------------ ----------- -----------
Total current liabilities................ 9,258,510 (1,000,000) 8,258,510 -- 8,258,510
Long-term debt, excluding current portion........ 31,388,143 (4,800,000)(5) 26,588,143 26,588,143
------------ ------------ ------------ ----------- -----------
Total liabilities........................ 40,646,653 (5,800,000) 34,846,653 -- 34,846,653
Stockholders' equity (deficit):
Common Stock...................................
Authorized shares -- 20,000,000; $0.01 par
value; 5,983,248 issued and outstanding
shares and 9,983,248 issued and outstanding
shares, as adjusted........................ 5,463,631 (100,000)(3)
(5,303,799)(6) 59,832 40,000(7) 99,832
Paid-in capital................................ -- (6,433,898)(3)
5,303,799(6)
178,044(2) (952,055) 44,960,000(7) 44,007,945
Retained earnings.............................. 3,378,044 (3,200,000)(2)
(178,044)(2) -- -- --
Less 2,737,130 shares in treasury, at cost and
1,923,571 shares in treasury, at cost, as
adjusted..................................... (13,928,550) 4,800,000(5) (9,128,550) (9,128,550)
------------ ------------ ------------ ----------- -----------
Total stockholders' equity (deficit)..... (5,086,875) (4,933,898) (10,020,773) 45,000,000 34,979,227
------------ ------------ ------------ ----------- -----------
Total liabilities and stockholders'
equity................................. $ 35,559,778 $(10,733,898) $ 24,825,880 $45,000,000 $69,825,880
============ ============ ============ =========== ===========
</TABLE>
- ---------------
(1) Represents the use of proceeds for the prepayment of $1.0 million aggregate
principal amount of Clark/Bardes' 8.5% Medium Term Notes due September 2001.
(2) Represents the payment of the Stockholder Distribution Amount and the
reclassification of remaining undistributed earnings to paid-in capital.
(3) Represents the payment to be made in consideration of extinguishing the
Warrants assuming the mid-point of the Range.
(4) Represents the payment for the purchase of renewal revenue from Mr. Wamberg
and The Wamberg Organization. The purchase of renewal revenue represents a
change in the Principal Office Agreement between Mr. Wamberg and
Clark/Bardes. The purchase price is based on the additional amount of net
revenue provided from the change in the Principal Office Agreement, which is
discounted using a 15.0% rate. The transaction is accounted for as a
purchase of future revenues applying Emerging Issues Task Force (EITF)
Abstract 88-18. Although no assurances can be given, management estimates
that the future benefit period will be approximately 10 years and that the
purchased revenues will amount to approximately $1.6 million of additional
net revenue in 1999, which should result in approximately $765,000 of
operating income after amortization expense. Amortization expense is
calculated under the units-of-revenue method.
(5) Represents Clark/Bardes' 8.5% Convertible Subordinated Notes due September
2007 which are assumed to be converted into 813,559 shares of Common Stock
at $5.90 per share.
(6) Represents the adjustment to record common stock at $0.01 par value.
(7) Represents the assumed net proceeds of the Offering after deducting
underwriting discount and estimated expenses of the Offering.
24
<PAGE> 28
UNAUDITED PRO FORMA STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
ADJUSTMENTS
FOR THE
STOCKHOLDER
DISTRIBUTION THE
ADJUSTMENTS AMOUNT, THE COMPANY
PREDECESSOR FOR THE REORGANIZATION PRO FORMA
COMPANY BCS BCS CLARK/BARDES AND THE AS
(HISTORICAL) (HISTORICAL) ACQUISITION PRO FORMA OFFERING ADJUSTED
------------ ------------ --------------- ------------ -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Total revenue.................. $49,455,419 $12,808,974 -- $62,264,393 $ -- $62,264,393
Commission and fee expense..... 32,439,092 8,732,534 -- 41,171,626 -- 41,171,626
----------- ----------- --------------- ----------- ---------- -----------
Net revenue.................. 17,016,327 4,076,440 -- 21,092,767 -- 21,092,767
General and administrative
expense...................... 11,506,335 2,518,113 -- 14,024,448 -- 14,024,448
Amortization of intangibles.... 294,630 -- 589,260(1) 883,890 -- 883,890
Non-recurring operating
expenses..................... -- 942,157 -- 942,157 -- 942,157
----------- ----------- --------------- ----------- ---------- -----------
Income from operations......... 5,215,362 616,170 (589,260) 5,242,272 -- 5,242,272
----------- ----------- --------------- ----------- ---------- -----------
Interest and dividend income... 188,597 28,003 -- 216,600 -- 216,600
Interest expense............... (1,111,995) -- (1,540,000)(2) (2,651,995) 1,015,375(3) (1,636,620)
Miscellaneous income........... 1,925 -- -- 1,925 -- 1,925
----------- ----------- --------------- ----------- ---------- -----------
Total other income
(expense).................. (921,473) 28,003 (1,540,000) (2,433,470) 1,015,375 (1,418,095)
----------- ----------- --------------- ----------- ---------- -----------
Income before taxes............ 4,293,889 644,173 (2,129,260) 2,808,802 3,824,177
Income taxes................... 60,000 -- 2,000 62,000 1,452,000(4) 1,514,000
----------- ----------- --------------- ----------- ---------- -----------
Net income..................... $ 4,233,889 $ 644,173 $ (2,131,260) $ 2,746,802 $ (436,625) $ 2,310,177
=========== =========== =============== =========== ========== ===========
Per share information:
Basic earnings per share..... $ 1.03 -- -- $ .67 -- $ .46
Diluted earnings per share... .99 -- -- .65 -- .46
Weighted average shares
outstanding:
Basic........................ 4,119,387 -- -- 4,119,387 -- 5,012,946(5)
Diluted...................... 4,398,593 -- -- 4,398,593 -- 5,020,223(5)
</TABLE>
- ---------------
(1) Amortization cost represents the pro forma cost associated with the BCS
acquisition for the period of January 1, 1997 to August 31, 1997.
(2) Interest expense represents the pro forma interest cost associated with the
BCS acquisition for the period of January 1, 1997 to August 31, 1997.
<TABLE>
<S> <C> <C>
BCS interest expense detail:
10.5% Senior Secured Notes due August
2002 $13.5 million X 10.5% X 8/12 = $ 945,000
8.5% Medium Term Notes due September
2001 5.7 million X 8.5% X 8/12 = 323,000
11.0% Second Priority Senior Secured
Notes due August 2004 4.8 million X 8.5% X 8/12 = 272,000
----------
Total pro forma interest for BCS
= $1,540,000
----------
</TABLE>
(3) Cost savings related to interest expense represents the pro forma changes to
the Company's debt as a result of the Reorganization and the Offering. This
includes the restructuring of the 10.5% Senior Secured Notes due August 2002
and 11.0% Second Priority Senior Secured Notes due August 2004, the $1.0
million prepayment of the 8.5% Medium Term Notes due September 2001, and the
anticipated conversion of the 8.5% Convertible Subordinated Notes due
September 2007.
25
<PAGE> 29
<TABLE>
<S> <C> <C>
Interest savings associated with the
Restructured Notes*
10.5% Senior Secured Notes due August
2002
Original balance......................... $14.5 million X 6/12 X (.105 - .08) = 181,250
After February 1998 principal payment.... $13.1 million X 6/12 X (.105 - .08) = 163,125
11.0% Second Priority Senior Secured
Notes due August 2004.................... $ 8.9 million X (.11 - .09) = 178,000
----------
522,375
----------
Interest savings on prepayment
of the 8.5% Medium Term Notes due
September 2001........................... $ 1.0 million X .085 = 85,000
Interest savings on conversion
of the 8.5% Convertible Subordinated
Notes due September 2007................. $ 4.8 million X .085 = 408,000
----------
Total Savings...................... $1,015,375
==========
</TABLE>
* The cost savings related to interest expense on the Restructured Notes is
based on the estimated decrease in the interest rate for each of the
Restructured Notes. The actual interest rates will be reset at the time of
the Offering, based on the following: (i) in the case of the 10.5% Senior
Secured Notes due August 2002, 250 basis points above the yield for United
States Treasury securities maturing in two years; and (ii) in the case of
the 11.0% Second Priority Senior Secured Notes due August 2004, 350 basis
points above the yield for United States Treasury securities maturing in
five years. Based on yields for United States Treasury securities maturing
in two and five years as of August 7, 1998, the interest rate for the 10.5%
Senior Secured Notes due August 2002 would have been reset to 7.875% and the
interest rate for the 11.0% Second Priority Senior Secured Notes due August
2004 would have been reset to 8.875%.
(4) Income tax expense is stated on a pro forma basis as if the Predecessor
Company had been treated as a C corporation and taxed at a 39.6% blended
rate for federal and state income tax purposes.
(5) Pro forma weighted average shares outstanding was calculated based on the
weighted average number of shares outstanding during the period adjusted to
give effect to the conversion of the 8.5% Convertible Subordinated Notes due
September 2007 and to the number of shares whose proceeds would be necessary
to prepay the debt described in footnote (3) above.
26
<PAGE> 30
UNAUDITED PRO FORMA STATEMENT OF INCOME
FOR THE SIX MONTH PERIOD ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
ADJUSTMENTS
FOR THE
STOCKHOLDER
DISTRIBUTION THE
PREDECESSOR AMOUNT, THE COMPANY
COMPANY REORGANIZATION AND PRO FORMA
(HISTORICAL) THE OFFERING AS ADJUSTED
------------ ------------------ -----------
<S> <C> <C> <C>
Total revenue.............................................. $28,984,959 $ -- $28,984,959
Commission and fee expense................................. 18,203,681 -- 18,203,681
----------- -------- -----------
Net revenue.............................................. 10,781,278 -- 10,781,278
General and administrative expense......................... 8,399,696 8,399,696
Amortization of intangibles................................ 441,945 -- 441,945
----------- -------- -----------
Income from operations..................................... 1,939,637 1,939,637
----------- -----------
Interest and dividend income............................... 167,624 -- 167,624
Interest expense........................................... (1,803,750) 501,646(1) (1,302,104)
Miscellaneous expense...................................... (141) -- (141)
----------- -------- -----------
Total other income (expense)............................. (1,636,267) 501,646 (1,134,621)
----------- -------- -----------
Income before taxes........................................ 303,370 501,646 805,016
Income taxes............................................... 14,000 305,000(2) 319,000(2)
----------- -------- -----------
Net income................................................. $ 289,370 $196,646 $ 486,016
=========== ======== ===========
Per Share Information:
Basic earnings per share................................. $ .09 -- $ .12
Diluted earnings per share............................... .09 -- .12
Weighted average shares outstanding:
Basic.................................................... 3,222,143 -- 4,115,702(3)
Diluted.................................................. 3,222,143 -- 4,115,702(3)
</TABLE>
- ---------------
(1) Cost savings related to interest expense represents the pro forma changes to
the Company's debt as a result of the Reorganization and the Offering. This
includes the restructuring of the 10.5% Senior Secured Notes due August 2002
and 11.0% Second Priority Senior Secured Notes due August 2004, the $1.0
million prepayment of the 8.5% Medium Term Notes due September 2001, and the
anticipated conversion of the 8.5% Convertible Subordinated Notes due
September 2007.
<TABLE>
<S> <C> <C>
Interest savings associated with the
Restructured Notes:*
10.5% Senior Secured Notes due
August 2002
$14.5 million X 1/12 X (.105 -
Original balance............. .08) = $ 30,208
After February 1998 principal $13.1 million X 5/12 X (.105 -
payment................... .08) = 135,938
11.0% Second Priority Senior
Secured Notes due August $ 8.9 million X 6/12 X (.110 -
2004........................... .09) = 89,000
--------
255,146
Interest savings on prepayment of
the
8.5% Medium Term Notes due
September 2001................. $ 1 million X 6/12 X .085 = 42,500
Interest savings on conversion of
the
8.5% Convertible Subordinated $ 4.8
Notes due September 2007....... million X 6/12 X 0.85 = 204,000
--------
Total Savings $501,646
========
</TABLE>
27
<PAGE> 31
* The cost savings related to interest expense on the Restructured Notes is
based on the estimated decrease in the interest rate for each of the
Restructured Notes. The actual interest rates will be reset at the time of
the Offering, based on the following: (i) in the case of the 10.5% Senior
Secured Notes due August 2002, 250 basis points above the yield for United
States Treasury securities maturing in two years; and (ii) in the case of
the 11.0% Second Priority Senior Secured Notes due August 2004, 350 basis
points above the yield for United States Treasury securities maturing in
five years. Based on yields for United States Treasury securities maturing
in two and five years as of August 7, 1998, the interest rate for the 10.5%
Senior Secured Notes due August 2002 would have been reset to 7.875% and the
interest rate for the 11.0% Second Priority Senior Secured Notes due August
2004 would have been reset to 8.875%.
(2) Income tax expense is stated on a pro forma basis as if the Predecessor
Company had been treated as a C corporation and taxed at a 39.6% blended
rate for federal and state income tax purposes.
(3) Pro forma weighted average shares outstanding was calculated based on the
weighted average number of shares outstanding during the period adjusted to
give effect to the conversion of the 8.5% Convertible Subordinated Notes due
September 2007 and to the number of shares whose proceeds would be necessary
to prepay the debt described in footnote (1) above.
28
<PAGE> 32
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the Company's financial condition
and results of operations should be read in conjunction with "Selected
Historical and Pro Forma Financial Information" and the Company's financial
statements and notes thereto and other information appearing elsewhere in this
Prospectus. With the exception of historical information, certain of the matters
discussed in this Prospectus are forward-looking statements that involve risks
and uncertainties and actual results could differ materially from those
discussed. Words such as "anticipate," "believe," "estimate," "expect," "intend"
and similar expressions identify forward-looking statements. These
forward-looking statements reflect the Company's current views in respect of
future events in financial performance, but are subject to many uncertainties
and factors relating to the Company's operations and business environment that
may cause its actual results to differ materially from any future results
expressed or implied by such forward-looking statements.
GENERAL
Since the inception of the Predecessor Company in 1967, Clark/Bardes, the
wholly owned operating subsidiary of CBH, has designed, marketed and
administered insurance-financed employee benefit programs to large corporations
and community, regional and money center banks. The Company's clients use these
sophisticated programs primarily to offset the costs of employee benefit
liabilities and to supplement and secure benefits for key executives.
RECENT ACQUISITION
Effective September 1, 1997, the Predecessor Company acquired substantially
all the assets and the business of BCS, a Minnesota based company, for a total
purchase price in cash equal to $24.0 million, plus acquisition related expenses
of $383,440. The Predecessor Company allocated the purchase price as follows:
approximately $10,000 to tangible assets, $1.2 million to two non-compete
agreements with officers of BCS and $23.2 million to goodwill.
BCS was engaged in the business of designing and marketing
insurance-financed employee benefit programs and related compensation, salary
and benefit plans and providing related services to financial institutions. The
Predecessor Company's primary objective in acquiring BCS's business and assets
was to expand the Predecessor Company's capabilities and client base from large
money center banks to the community and regional bank market. For the period
beginning September 1, 1997 (the effective date of the BCS acquisition) to
December 31, 1997, the assets acquired from BCS generated total revenue of $8.5
million, which represented 17.2% of the Predecessor Company's total revenue for
the year ended December 31, 1997.
ENTRY INTO NEW BUSINESS
In early 1998, the Company began using the consulting services of, and have
since entered into consulting agreements with, four new principals -- Scott
Cahill, Jim DeLay, Dan Rigby and Joe Thompson. These agreements provide for an
aggregate amount of $550,000 of fees to be paid by the Company in 1998 to these
new principals for their assistance to the Company in building the Clark/Bardes
Healthcare Compensation Group. This new division will focus its efforts on
executive compensation and benefit plans for large and medium-sized non-profit
healthcare facilities. Two hundred thousand dollars of the fee was expensed
during the first six months of 1998 related to services rendered through that
date and the balance will be expensed in the third and fourth quarters of 1998.
REVENUE AND EXPENSE
CBH, through its wholly owned operating subsidiary Clark/Bardes, derives
its revenue primarily from (i) commissions paid to Clark/Bardes by the insurance
companies that underwrite the policies underlying Clark/Bardes' programs and
(ii) fees paid by clients to Clark/Bardes in connection with program design and
the administrative services provided by Clark/Bardes. Such revenue is usually
long term and recurring and is
29
<PAGE> 33
typically paid annually and extends over a period of ten years or more after a
sale. Commissions paid annually or quarterly by insurance companies vary by
policy and by program and usually represent a percentage of initial or inforce
premium or a percentage of the cash surrender value of the insurance policies
underlying the Company's program. Commissions paid by insurance companies
accounted for approximately 73.3% of the Company's total revenue for the year
ended December 31, 1997. Fees are paid to Clark/Bardes by clients in
consideration for the design and administration of employee benefit plans and
the insurance products underlying such plans. The scope of these services and
fees payable are negotiated on a client-by-client basis. Fees accounted for
approximately 26.7% of the Company's total revenue for the year ended December
31, 1997.
The Company recognizes its revenue at the time the insurance premium is
paid by the client to the insurance company or the renewal premium is due to the
insurance company. After deducting the cost of servicing the benefit programs
and insurance policies, the Company retains approximately 31% of the remaining
revenue, with the producer receiving the balance.
The Company includes in total revenue first year revenue, renewal revenue
and other revenue.
- First Year Revenue. First year revenue is recognized by the Company at
the time the client is contractually committed to purchase the insurance
policies and the premiums are paid by the client to the insurance
company. First year revenue accounted for approximately 39.3% of the
Company's total revenue for the year ended December 31, 1997.
- Renewal Revenue. Renewal revenue is recognized by the Company on the date
that the renewal premium is due to the insurance company. Renewal revenue
in future periods, which is not recognized on the Company's balance
sheet, is estimated by the Company to represent approximately $169.3
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. Over the last
five years, the Company has experienced a persistency rate of
approximately 98.0% of the inforce insurance underlying the Company's
programs. Historically, revenue persistency has tracked with insurance
policy persistency with the exception of Leveraged COLI business, which
was affected by adverse tax law changes, and business related to
Confederation Life Insurance Company, which was impacted by the cessation
of operations and subsequent rehabilitation of that company. In both
instances renewal revenue was adversely impacted even though insurance
policies remained in force. Renewal revenue accounted for approximately
57.5% of the Company's total revenue for the year ended December 31,
1997.
- Other Revenue. Other revenue consists of several miscellaneous sources of
revenue associated with the Company's operations. Other revenue was 3.2%
of the Company's total revenue for the year ended December 31, 1997.
Commission and fee expense comprises the portion of the total revenue paid
to the producer after deducting the cost of servicing policies and other direct
expenses related to sales. Commission and fee expense as a percentage of total
revenue was approximately 65.6% for the year ended December 31, 1997.
REORGANIZATION
CBH and Clark/Bardes were formed in June 1998 in contemplation of the
Offering and in order to effect the Merger. CBH was formed to be a holding
company of Clark/Bardes and is not engaged in any business. Clark/Bardes was
formed to be the operating company of CBH and is the successor corporation to
Clark/ Bardes, Inc., a Texas corporation.
In connection with the Offering, each of CBH, Clark/Bardes and the
Predecessor Company entered into the Reorganization Agreement which provides for
the Merger and contemplates a series of transactions, including (i) a
restructuring of the Restructured Notes, (ii) the conversion of Clark/Bardes'
8.5% Convertible Subordinated Notes due September 2007 into 813,559 shares of
Common Stock, (iii) the extinguishment by Clark/Bardes of the Warrants by the
payment of $6.5 million by Clark/Bardes to the warrant holders, (iv) a
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<PAGE> 34
purchase of renewal revenue due to Mr. Wamberg and The Wamberg Organization, (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 of the
Stockholders' Agreement. The Merger, which was consummated effective August 1,
1998, was treated for accounting purposes as a reorganization of entities under
common control utilizing historical cost which is similar to pooling of
interests. The Merger should qualify as a "reorganization" under Section 368(a)
of the Code. Accordingly, the Company should generally recognize no gain for
federal income tax purposes pursuant to the Merger. The Company's counsel
rendered a tax opinion to that effect. See "Dilution."
EXTINGUISHMENT OF WARRANTS
In connection with the consummation of the Offering, Clark/Bardes will
extinguish the Warrants in exchange for a payment of $6.5 million by
Clark/Bardes to the warrant holders, which amount is based on an assumed public
offering price of $12.50 per share (the midpoint of the Range). In addition, in
connection with agreeing to the extinguishment of the Warrants, Clark/Bardes
will enter into a five-year production agreement with each of the Carriers that
requires Clark/Bardes to market and sell insurance products of each Carrier
comprising specified percentages of all insurance products sold by Clark/Bardes
as measured by first year commissions payable with respect to such business. The
percentages will range from 10.0% to 25.0% depending upon the type of insurance
product and product exclusivity provisions. Each agreement will provide that in
the event that Clark/Bardes fails to meet the minimum production requirements,
the applicable Carrier will be entitled to offset future commissions otherwise
payable to Clark/Bardes up to a maximum amount of $150,000 per year. As a result
of the Company's relationship with Carriers, including as holders of the
Restructured Notes, the amounts of business placed with each Carrier and the
production agreements, the amount to be paid by the Company to each Carrier to
extinguish the Warrants held by each Carrier is expected to be approximately
$1.2 million less than the amount to be paid by the Company to Life Investors to
extinguish an equivalent number of Warrants held by Life Investors.
THE RESTRUCTURED NOTES
In connection with the consummation of the Offering, Clark/Bardes will
restructure the Restructured 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 will be reset to rates that were 2.5% and 3.5%, respectively,
above the yield on United States Treasury securities maturing two and five
years, respectively, from the date on which the interest rates will be reset.
The Restructured Notes may be prepaid without penalty and will be secured by a
first priority security interest in, among other things, all of Clark/Bardes'
renewal commissions other than the renewal commissions from BCS and the Pending
Acquisition. Further, the Company will be subject to significant operational
restrictions and financial covenants, including a requirement that Clark/Bardes
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.
PURCHASE OF RENEWAL REVENUE
On July 31, 1998, the Predecessor Company, Mr. Wamberg and The Wamberg
Organization entered into an agreement which provides for, among other things, a
purchase of the renewal revenue due under the Principal Office Agreement with
Mr. Wamberg in exchange for a cash payment of approximately $7.4 million. This
transaction allows Clark/Bardes to retain additional commission and fee revenue
for the ten year period following the consummation of the transaction. 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. This transaction was approved by approximately 99.0% of the disinterested
stockholders of the Predecessor Company at a stockholders' meeting held on July
31, 1998. This transaction will be effective as of January 1, 1999. See "Certain
Relationships and Related Transactions."
31
<PAGE> 35
TERMINATION OF S CORPORATION STATUS AND INCOME TAXES
Since 1989, the Predecessor Company elected to be treated for federal
income tax purposes as an S corporation under Subchapter S of the Code and as an
S corporation for certain state corporate income tax purposes under certain
comparable state laws. As a result, the Predecessor Company's historical
earnings since 1989 have been taxed directly to the Predecessor Company's
stockholders, at their individual federal and state income tax rates, rather
than to the Predecessor Company (except for certain state taxes). Upon the
consummation of the Merger, Clark/Bardes became subject to federal and state
income taxation as a C corporation. At that time, Clark/Bardes recorded a
deferred tax liability on its balance sheet, the amount of which depended upon
timing differences between tax and book accounting. If the Predecessor Company's
S corporation status had terminated as of December 31, 1997, the amount of the
deferred tax liability would have been approximately $1.2 million. See
"Capitalization."
In connection with the termination of the Predecessor Company's S
corporation status, 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. The Company paid the Stockholder Distribution
on July 31, 1998.
In connection with the Merger, CBH and Clark/Bardes have obtained from
certain Existing Stockholders and are currently seeking to enter into with the
remaining Existing Stockholders the Tax Agreement. Because Clark/Bardes is
subject to corporate income taxation, any reallocation of income and deductions
between the period during which the Predecessor Company was treated as an S
corporation and the period during which Clark/Bardes is subject to corporate
income taxation may increase the taxable income of one party while decreasing
that of another party. Accordingly, the Tax Agreement is intended to ensure that
taxes are borne either by Clark/Bardes or the Existing Stockholders to the
extent that such parties received the related income. The Tax Agreement
generally provides that, if an adjustment is made to the taxable income of
Clark/Bardes for a year in which the Predecessor Company was treated as an S
corporation, each party will indemnify the other against any increase in the
indemnified party's income tax liability, including interest and penalties, with
respect to such tax year to the extent such increase results in a related
decrease in the income tax liability, including interest and penalties, of the
indemnifying party (whether with respect to the year of the adjustment or over
future years). The Tax Agreement also provides that the Existing Stockholders
will indemnify CBH and Clark/Bardes for any income tax liability incurred as a
result of a determination that the Predecessor Company did not qualify as an S
corporation. Such indemnification obligation will be limited to the net tax
refund, if any, received by the Existing Stockholders.
Clark/Bardes will also indemnify the Existing Stockholders for all taxes
imposed upon them as the result of an indemnification payment under the Tax
Agreement. Any payment made by Clark/Bardes to the Existing Stockholders
pursuant to the Tax Agreement may be considered by the Internal Revenue Service
or state taxing authorities to be non-deductible by Clark/Bardes for income tax
purposes. No assurance can be given that each Existing Stockholder will enter
into the Tax Agreement, in which case neither such Existing Stockholder nor
Clark/Bardes shall be subject to the indemnification obligations under the Tax
Agreement relating to such Existing Stockholder. None of the parties'
obligations under the Tax Agreement are or will be secured, and, therefore,
there can be no assurance that Clark/Bardes or the Existing Stockholders will
have funds available to make any payments which may become due under the Tax
Agreement.
QUARTERLY FLUCTUATIONS
The Company has experienced and expects to continue to experience
significant fluctuations in its results of operations, in particular when such
results are compared on a consecutive quarterly basis. Management believes these
quarterly fluctuations are attributable primarily to revenue variations since
operating expenses remain relatively constant throughout the year. Historically,
the Company recognizes a significant increase in both first year and renewal
revenue in the fourth quarter due to the seasonality of program implementation.
In general, results of operations may fluctuate as a result of a number of
factors, including the introduction of new or enhanced programs and services by
the Company or its competitors, client acceptance or rejection of new programs
and services, program development expenses, timing of significant sales, demand
for the Company's administrative services, competitive, legislative and
regulatory conditions in the insurance-financed employee benefit industry and
general economic conditions. In addition, the sales cycles for the Company's
programs
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<PAGE> 36
and services are usually lengthy (generally between twelve to eighteen months),
with first year revenue being derived from a small number of large cases.
The following table sets forth, on a quarterly basis, certain unaudited
statement of income information for the four quarters of each of 1996 and 1997
and the first two quarters of 1998. Such information is not necessarily
indicative of results for any full year or for any subsequent period.
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1996 1996 1996 1996 1997 1997 1997
---------- ---------- ------------- ------------ ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Total revenue........ $5,724,438 $7,041,337 $5,242,973 $15,234,407 $5,510,415 $5,772,769 $11,009,707
Commission and fee
expense............. 3,624,738 4,458,604 3,319,872 9,646,490 3,549,809 3,723,710 7,138,578
---------- ---------- ---------- ----------- ---------- ---------- -----------
Net revenue.......... 2,099,700 2,582,733 1,923,101 5,587,917 1,960,606 2,049,059 3,871,129
General and
administrative
expense............. 1,555,979 1,888,343 1,789,083 3,321,015 1,860,545 2,754,555 2,886,666
Income (loss) before
taxes............... 571,277 702,163 164,929 2,297,060 200,308 (737,481) 888,715
Basic earnings (loss)
per share(1)........ 0.12 0.15 0.04 0.45 0.05 (0.16) 0.20
Diluted earnings
(loss) per
share(1)............ 0.12 0.15 0.04 0.45 0.05 (0.16) 0.20
<CAPTION>
QUARTER ENDED
----------------------------------------
DECEMBER 31, MARCH 31, JUNE 30,
1997 1998 1998
------------ ----------- -----------
<S> <C> <C> <C>
Total revenue........ $27,162,528 $13,754,466 $15,230,493
Commission and fee
expense............. 18,026,995 9,132,248 9,071,433
----------- ----------- -----------
Net revenue.......... 9,135,533 4,622,218 6,159,060
General and
administrative
expense............. 4,004,569 3,370,853 5,028,843
Income (loss) before
taxes............... 3,942,347 185,176 118,194
Basic earnings (loss)
per share(1)........ 1.27 0.06 0.03
Diluted earnings
(loss) per
share(1)............ 1.03 0.06 0.03
</TABLE>
- ---------------
(1) Earnings per share reflects income before taxes less the Predecessor
Company's liability for state taxes, on a per-share basis. No provision for
federal income taxes has been made because the Predecessor Company elected
to be treated as an S corporation for federal income tax purposes prior to
the Merger.
RESULTS OF OPERATIONS
The following discussion compares the results of operations for the
Predecessor Company for the six month period ended June 30, 1998 adjusted to
give effect to the Reorganization with the results of operations for the
Predecessor Company for the six month period ended June 30, 1997 adjusted to
give effect to the BCS acquisition and the Reorganization as if such
transactions had occurred as of the beginning of the periods presented, for the
Predecessor Company on a historical basis for the six month periods ended June
30, 1998 and 1997, and for the Predecessor Company for the years ended December
31, 1997, 1996 and 1995 on a historical basis. The discussion of factors
affecting the changes in, and the trends related to, the results of operations
for the historical comparison of the six month periods ended June 30, 1998 and
1997 has been omitted because such factors are discussed in the pro forma
comparison of such period.
Six Month Periods Ended June 30, 1998 and June 30, 1997--Pro Forma Comparison
The pro forma comparison of the results of operations for the six month
periods ended June 30, 1998 and June 30, 1997 compares the results of operations
for the Predecessor Company for the six month period ended June 30, 1998
adjusted to give effect to the Reorganization with the results of operations for
the Predecessor Company for the six month period ended June 30, 1997 after
giving effect to the Reorganization and the acquisition by the Predecessor
Company of the business and substantially all the assets of BCS as if such
transactions had occurred as of the beginning of the periods presented. The pro
forma financial information of the Predecessor Company set forth below does not
purport to represent what the Predecessor Company's results of operations
actually would have been if the transactions had actually occurred as of the
beginning of the periods presented. Solely for purposes of comparing the results
of operations for the six month periods ended June 30, 1998 and 1997 on a pro
forma basis and notwithstanding the definitions used elsewhere in this
Prospectus, Clark/Bardes means the Predecessor Company as it existed during the
six month period ended June 30, 1997, BCS means BCS as it existed during the six
month period ended June 30, 1997 and the Company means the combined entity of
Clark/Bardes and BCS as it existed during the six month period ended June 30,
1998.
Total Revenue. Total revenue increased to $29.0 million for the six month
period ended June 30, 1998 as compared to $20.6 million for the six month period
ended June 30, 1997, representing an increase of 40.5%.
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<PAGE> 37
This increase reflects rapid revenue growth of both Clark/Bardes and BCS to
$17.2 million and $11.8 million, respectively, for the six month period ended
June 30, 1998 as compared to $11.3 million and $9.3 million, respectively, for
the six month period ended June 30, 1997. These increases were attributable in
part to the Company's renewal revenue increasing to $12.1 million for the six
month period ended June 30, 1998 as compared to $9.8 million for the six month
period ended June 30, 1997, reflecting the Company's increasing amount of
inforce business underlying the Company's programs. The remaining revenue growth
was due to an increase in first year sales.
Commission and Fee Expense. Commission and fee expense increased to $18.2
million for the six month period ended June 30, 1998 as compared to $13.9
million for the six month period ended June 30, 1997, representing an increase
of 30.9%. Commission and fee expense as a percentage of total revenue decreased
to 62.8% for the six month period ended June 30, 1998 as compared to 67.4% for
the six month period ended June 30, 1997. This reduction in commission and fee
expense as a percentage of total revenue for the six month period ended June 30,
1998 was due to a significant increase in revenue, during this period, from
business on which a smaller than usual percentage of revenue was distributed to
producers. This decrease is not representative of a trend, and is not expected
to continue in the future.
General and Administrative Expense. General and administrative expense
increased to $8.4 million for the six month period ended June 30, 1998 as
compared to $6.6 million for the six month period ended June 30, 1997,
representing an increase of 27.0%, well below the 40.5% increase in total
revenues. General and administrative expense as a percent of total revenue was
29.0% for the six month period ended June 30, 1998 as compared to 32.1% for the
six month period ended June 30, 1997. The improvement in general and
administrative expense as a percentage of total revenue was due primarily to the
elimination of certain expenses as a result of the BCS acquisition.
Amortization. Amortization expense equaled $441,945 for each of the six
month periods ended June 30, 1998 and 1997, reflecting the amortization of
intangible assets capitalized as a result of the BCS acquisition in September
1997.
Income (Loss) from Operations. Income from operations increased to $1.9
million in income for the six month period ended June 30, 1998 compared to a
$332,224 loss for the six month period ended June 30, 1997. Income from
operations as a percentage of total revenue ("Operating Margin") increased to
6.7% for the six month period ended June 30, 1998 as compared to (1.6)% for the
six month period ended June 30, 1997. The increase in income from operations was
due primarily to the increase of total revenue of $8.4 million as compared to an
increase in general and administrative expense of only $1.8 million.
Total Other Income (Expense). Other income and expense for the six month
period ended June 30, 1998 was $1.1 million in expense as compared to $529,187
in expense for the six month period ended June 30, 1997. The amount for the six
month period ended June 30, 1998 included interest expense of $1.3 million as
compared to interest expense of $638,250 for the six month period ended June 30,
1997. The interest expense was attributable to the incurrence of debt associated
with the repurchase of shares of common stock of the Predecessor Company
throughout the year and the BCS acquisition in September 1997.
Net Income (Loss). Net income increased to $486,016 for the six month
period ended June 30, 1998 compared to a net loss of $521,411 for the six month
period ended June 30, 1997 primarily due to the increase in income from
operations as described above. Income tax is stated on a pro forma basis as if
the Predecessor Company had been treated as a C corporation and taxed at a 39.6%
blended rate for federal and state income tax purposes.
Six Month Periods Ended June 30, 1998 and June 30, 1997--Historical Comparison
The historical comparison of the results of operations for the six month
periods ended June 30, 1998 and June 30, 1997 compares the actual results of
operations for the Predecessor Company for such periods. The results of
operations for the six month period ended June 30, 1998 include the results of
operations associated with the assets purchased from BCS in September 1997,
while the results of operations for the six month period ended June 30, 1997
reflect the stand-alone historical results of operations for the Predecessor
Company without giving pro forma effect to the BCS acquisition.
34
<PAGE> 38
Total Revenue. Total revenue increased to $29.0 million for the six month
period ended June 30, 1998 as compared to $11.3 million for the six month period
ended June 30, 1997.
Commission and Fee Expense. Commission and fee expense increased to $18.2
million for the six month period ended June 30, 1998 as compared to $7.3 million
for the six month period ended June 30, 1997. This reduction in commission and
fee expense as a percentage of total revenue for the six month period ended June
30, 1998 was due to a significant increase in revenue from business on which a
smaller than usual percentage of revenue was distributed to producers. After
adjusting for these cases and BCS commission and fees, the commission and fee
expense was equivalent to the prior year, as a percentage of total revenue.
General and Administrative Expense. General and administrative expense
increased to $8.4 million for the six month period ended June 30, 1998 as
compared to $4.6 million for the six month period ended June 30, 1997. General
and administrative expense as a percent of total revenue was 29.0% for the six
month period ended June 30, 1998 as compared to 40.9% for the six month period
ended June 30, 1997.
Amortization. Amortization expense was $441,945 for the six month period
ended June 30, 1998, reflecting the amortization of intangible assets
capitalized as a result of the BCS acquisition in September 1997. There was no
amortization expense for the six month period ended June 30, 1997.
Income (Loss) from Operations. Income from operations increased to $1.9
million for the six month period ended June 30, 1998 compared to a loss of
$605,436 for the six month period ended June 30, 1997. Operating Margin
increased to 6.7% for the six month period ended June 30, 1998 from (5.4)% for
the six month period ended June 30, 1997.
Total Other Income (Expense). Other income and expense for the six month
period ended June 30, 1998 was $(1.6) million as compared to $68,263 for the six
month period ended June 30, 1997. The primary factor contributing to this
decrease was $1.8 million of interest expense for the six month period ended
June 30, 1998. There was no interest expense for the six month period ended June
30, 1997. The interest expense was attributable to the incurrence of debt
associated with the repurchase of shares of common stock of the Predecessor
Company throughout the year and the BCS acquisition in September 1997.
Net Income (Loss). Net income increased to $289,370 for the six month
period ended June 30, 1998 compared to a net loss of $537,173 for the six month
period ended June 30, 1997. No provision for federal income taxes was made for
either period since the Predecessor Company was an S corporation prior to the
Merger.
Years Ended December 31, 1997 and 1996--Historical Comparison
Total Revenue. Total revenue increased to $49.5 million for the year ended
December 31, 1997 as compared to $33.2 million for the year ended December 31,
1996, representing an increase of 48.8%. $8.5 million of total revenue for the
year ended December 31, 1997 was associated with the assets acquired from BCS in
September 1997. The remaining increase was due to a growth in renewal revenue to
$23.4 million in 1997 from $21.9 million in 1996, and was also attributable to
an increase in first year sales. The increase in total revenue was accomplished
despite a decrease in the renewal revenue on Leveraged COLI business to $6.1
million for the year ended December 31, 1997 from $9.7 million for the year
ended December 31, 1996, representing a decrease of 37.1%. The Company expects
this trend in Leveraged COLI revenue to continue.
Commission and Fee Expense. Commission and fee expense increased to $32.4
million for the year ended December 31, 1997 as compared to $21.0 million for
the year ended December 31, 1996, representing an increase of 54.1%. Commission
and fee expense as a percentage of total revenue increased to 65.6% for the year
ended December 31, 1997 as compared to 63.3% for the year ended December 31,
1996. Of the $11.4 million increase in commission and fee expense, $6.0 million
was attributable to the assets acquired from BCS in September 1997.
General and Administrative Expense. General and administrative expense
increased to $11.5 million for the year ended December 31, 1997 as compared to
$8.6 million for the year ended December 31, 1996,
35
<PAGE> 39
representing an increase of 34.5%. General and administrative expense as a
percent of total revenue was 23.3% for the year ended December 31, 1997 as
compared to 25.7% for the year ended December 31, 1996. The improvement in
general and administrative expense as a percentage of total revenue was due
primarily to the elimination of certain expenses as a result of the BCS
acquisition.
Amortization. Amortization expense was $294,630 for the year ended December
31, 1997, reflecting the amortization of intangible assets capitalized as a
result of the BCS acquisition in September 1997. There was no amortization
expense for the year ended December 31, 1996.
Income (Loss) from Operations. Income from operations increased to $5.2
million for the year ended December 31, 1997 compared to $3.6 million for the
year ended December 31, 1996, representing an increase of 43.3%. The increase in
income from operations was attributable primarily to the income associated with
the assets acquired from BCS in September 1997. Operating Margin decreased
slightly to 10.5% for the year ended December 31, 1997 from 10.9% for the year
ended December 31, 1996. This decrease in Operating Margin was due to
amortization expense of $294,630 incurred as a result of the BCS acquisition.
Total Other Income (Expense). Other income and expense for the year ended
December 31, 1997 was ($921,473) as compared to $96,398 for the year ended
December 31, 1996. The amount for the year ended December 31, 1997 included
interest expense of $1.1 million. There was no interest expense for the year
ended December 31, 1996. The increase in interest expense was attributable to
the incurrence of debt associated with the repurchase of shares of common stock
of the Predecessor Company throughout the year and the BCS acquisition in
September 1997.
Net Income (Loss). Net income increased to $4.2 million for the year ended
December 31, 1997 compared to $3.6 million for the year ended December 31, 1996,
representing an increase of 19.1%, reflecting the factors discussed above. No
provision for federal income taxes was made for either period since the
Predecessor Company was an S corporation prior to the Merger.
Years Ended December 31, 1996 and 1995--Historical Comparison
Total Revenue. Total revenue increased to $33.2 million for the year ended
December 31, 1996 as compared to $27.0 million for the year ended December 31,
1995, representing an increase of 23.2%. The increase in total revenue was due
primarily to an increase in renewal revenue to $21.9 million from $16.7 million,
an increase of 31.1% which reflected the increased amount of inforce business
underlying the Predecessor Company's programs. The remaining revenue growth was
due to an increase in first year sales. The increase in total revenue was
accomplished despite a decrease in the renewal revenue on Leveraged COLI
business to $9.7 million for the year ended December 31, 1996 from $11.3 million
for the year ended December 31, 1995, representing a decrease of 14.2%.
Commission and Fee Expense. Commission and fee expense increased to $21.0
million for the year ended December 31, 1996 as compared to $16.9 million for
the year ended December 31, 1995, representing an increase of 24.6%. Commission
and fee expense as a percentage of total revenue increased to 63.3% for the year
ended December 31, 1996 as compared to 62.6% for the year ended December 31,
1995.
General and Administrative Expense. General and administrative expense
increased to $8.6 million for the year ended December 31, 1996 as compared to
$7.9 million for the year ended December 31, 1995, representing an increase of
8.7%. General and administrative expense as a percent of total revenue was 25.7%
for the year ended December 31, 1996 as compared to 29.2% for the year ended
December 31, 1995. This improvement was primarily due to operating efficiencies
resulting from increased automation.
Income (Loss) from Operations. Income from operations increased to $3.6
million for the year ended December 31, 1996 compared to $2.2 million for the
year ended December 31, 1997, representing an increase of 64.4%. The increase in
income from operations was attributable primarily to the increased revenue and
to certain operating efficiencies. Operating Margin increased to 10.9% for the
year ended December 31, 1996 from 8.2% for the year ended December 31, 1995.
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<PAGE> 40
Total Other Income (Expense). Other income and expense for the year ended
December 31, 1996 was $96,398 as compared to $107,382 for the year ended
December 31, 1995.
Net Income (Loss). Net income increased to $3.6 million for the year ended
December 31, 1996 compared to $2.2 million for the year ended December 31, 1995,
representing an increase of 60.2%, reflecting the factors discussed above. No
provision for federal income taxes was made for either period since the
Predecessor Company was an S corporation prior to the Merger.
PENDING ACQUISITION
On May 29, 1998, the Predecessor Company entered into a letter of intent
with the Schoenke Companies and Mr. Schoenke, which provides for, among other
things, (i) the acquisition by Clark/Bardes of the businesses and substantially
all the assets of the Schoenke Companies, (ii) the execution of a
non-competition agreement by each of Mr. Schoenke and the Schoenke Companies,
and (iii) the Schoenke Companies' agreement to deal exclusively with
Clark/Bardes. The purchase price of the Pending Acquisition, which is subject to
change based on Clark/Bardes's due diligence review, is $17.0 million, of which
$1.5 million was paid as a secured refundable deposit and $15.5 million is
payable in cash at the closing of the Pending Acquisition. The consummation of
the Pending Acquisition is subject to numerous conditions, including the
consummation of the Offering, the approval of Clark/Bardes's board of directors,
obtaining all requisite regulatory approvals and the satisfactory completion of
Clark/Bardes's due diligence review. The consummation of the Pending Acquisition
must occur on or prior to October 1, 1998. The letter of intent expressly allows
the Predecessor Company to enter into and consummate the Merger. The operations
associated with the Pending Acquisition are anticipated to generate sufficient
cash flow to cover the costs relating to the integration of the purchased
company with Clark/Bardes. The Pending Acquisition will be accounted for using
the purchase method.
LIQUIDITY AND FINANCIAL RESOURCES
Sources of Cash. Historically, the Predecessor Company financed its
operations through internally generated funds and existing cash reserves. For
the years ended December 31, 1995, 1996 and 1997 and the six month period ended
June 30, 1998 the Predecessor Company produced net cash flow from operations of
$2.6 million, $4.3 million, $1.9 million and $5.7 million, respectively. The
large increase in net cash flow from operations for the six month period ended
June 30, 1998 was due largely to the collection of trade receivables, which
decreased by $5.3 million to $2.4 million. As of June 30, 1998 the Company had
cash and cash equivalents of $6.3 million, and total current assets of $9.7
million. As of June 30, 1998 and after giving effect to the Reorganization, the
payment of the Stockholder Distribution Amount and the Offering, the Company
would have had cash and cash equivalents equal to $33.9 million on a pro forma
basis. Pending the application of the net proceeds of the Offering, CBH intends
to invest such proceeds in short-term, investment grade, interest bearing
securities.
Uses of Cash. Capital expenditures and leasehold improvements amounted to
$303,260, $131,057 and $536,983 for the years ended December 31, 1995, 1996 and
1997, respectively. For the year ending December 31, 1998, the Company
anticipates spending approximately $850,000 on capital projects, including
furniture and equipment and upgrades to communication systems and management
information systems. Current liabilities at June 30, 1998 were $9.3 million,
including $4.3 million of current portion of long-term debt. As of June 30, 1998
and after giving effect to the Reorganization, the payment of the Stockholder
Distribution Amount and the Offering, the Company would have had indebtedness
outstanding equal to $29.9 million on a pro forma basis.
On July 31, 1998, the Predecessor Company paid a dividend in an amount
equal to the Stockholder Distribution Amount. This dividend, in the amount of
$3.2 million or $1.00 per share, was paid from existing cash reserves.
In 1997, the Predecessor Company (i) acquired the business and
substantially all the assets of BCS and (ii) repurchased 2.6 million shares of
the Predecessor Company's common stock. The total cost of the BCS acquisition
was $24.0 million plus acquisition-related capital expense of $383,440. The
total cost of the share
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repurchases effected in 1997 was $11.7 million. To effect such transactions, the
Predecessor Company used $2.2 million of cash reserves and issued an aggregate
of $33.9 million of debt consisting of $14.5 million of 10.5% Senior Secured
Notes due August 2002, $8.9 million of 11.0% Second Priority Senior Secured
Notes due August 2004, $5.7 million of 8.5% Medium Term Notes due September 2001
and $4.8 million of 8.5% Convertible Subordinated Notes due September 2007. The
Predecessor Company entered into the share repurchases because the holders of
the shares offered such shares at prices considered favorable by the Predecessor
Company's Board of Directors. See "Certain Relationships and Related
Transactions -- Stock Purchase Agreements."
Credit Facilities. As of June 30, 1998, the Predecessor Company owed an
aggregate of $35.7 million under outstanding debt obligations. The Predecessor
Company's outstanding debt obligations as of June 30, 1998 included the
indebtedness incurred in connection with the BCS acquisition and the share
repurchases described above and $3.2 million of 8.5% AAA Distribution Notes due
November 2007. Upon the consummation of the Offering, Clark/Bardes will prepay
$1.0 million aggregate principal amount of the 8.5% Medium Term Notes due
September 2001. Further, Clark/Bardes anticipates that the 8.5% Convertible
Subordinated Notes due September 2007 will be converted into shares of Common
Stock after Clark/Bardes provides BCS, the holder of such notes, notice of
prepayment. 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 Clark/Bardes' working capital requirements.
In connection with the consummation of the Offering, Clark/Bardes will
restructure the Restructured 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 will be reset to rates that were 2.5% and 3.5%, respectively,
above the yield on United States Treasury securities maturing two and five
years, respectively, from the date on which the interest rates will be reset.
The Restructured Notes may be prepaid without penalty and will be secured by a
first priority security interest in, among other things, all of Clark/Bardes'
renewal commissions other than the renewal commissions from BCS and the Pending
Acquisition. Further, the Company will be subject to significant operational
restrictions and financial covenants, including a requirement that Clark/Bardes
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 believes that its net cash flow from operations will 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 (other than the $15.7 million capitalized in connection
with the BCS acquisition) is estimated by the Company to represent approximately
$169.3 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
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.
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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.
The Company has requested information from third parties addressing any
potential year 2000 issues until such third parties; 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
with other insurance companies that are Year 2000 compliant.
INFLATION
Inflation has not had a material effect on the Predecessor Company's
results of operations. Certain of the Company's expenses, such as compensation,
benefits and capital equipment costs, are subject to normal inflationary
pressures. However, the majority of the Company's service and administrative
agreements with clients, which generate fee income, have a cost of living
adjustment tied to the consumer price index. Management believes that future
inflationary pressures will continue to be offset because as inflation increases
investment returns will also increase, resulting in higher cash values and
higher commission revenue.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standard Board ("FASB") issued
Statement of Financial Accounting Standards ("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 in the accompanying financial statements in
anticipation of the Offering.
As of January 1, 1998, the Company adopted SAFS No. 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
June 30, 1998.
In June 1997, the FASB issued SFAS No. 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.
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BUSINESS
GENERAL
Since the inception of the Predecessor Company in 1967, Clark/Bardes, the
wholly owned operating subsidiary of CBH, has designed, marketed and
administered insurance-financed employee benefit programs to large corporations
and community, regional and money center banks. The Company's clients use these
sophisticated programs primarily to offset the costs of employee benefit
liabilities and to supplement and secure benefits for key executives. The
Company's revenue is earned primarily from (i) commissions paid to Clark/Bardes
by the insurance companies that underwrite the policies underlying the Company's
programs and (ii) fees paid by clients in connection with initial program design
and the ongoing administrative services provided by the Company. Such
commissions and fees are usually long-term and recurring and are typically paid
annually and extend over a period of ten years or more after a sale.
The Company has experienced rapid growth since December 31, 1995. Effective
September 1, 1997, the Predecessor Company acquired substantially all the assets
and the business of BCS, a Minnesota based company that designed, marketed and
administered insurance-financed employee benefit programs and related
compensation, salary and benefit plans for community and regional banks. Through
sales generated by a group of specialized independent producers and the
integration of the assets acquired from BCS, the Company had a customer base of
over 1,100 clients as of June 30, 1998. Additionally, the inforce insurance
coverage underlying the Company's programs has increased from approximately
$26.2 billion as of December 31, 1995 to approximately $46.7 billion as of
December 31, 1997 ($43.9 billion excluding BCS) representing a compound annual
growth rate of 33.9% (29.4% excluding BCS). Income from operations has grown
from $2.2 million for the year ended December 31, 1995 to $5.2 million ($4.3
million excluding BCS) for the year ended December 31, 1997, representing a
compound annual growth rate of 53.5% (39.5% excluding BCS).
Management believes additional growth opportunities exist and that
Clark/Bardes' industry reputation, comprehensive in-house expertise,
sophisticated administrative systems, quality producers and strong relationships
with insurance companies provide the Company with distinct competitive
advantages. The Company intends to increase its market share by combining these
strengths with its core competencies of (i) designing proprietary programs
customized to meet clients' needs, (ii) providing outstanding client service,
and (iii) responding quickly to develop new products and services brought about
by regulatory and legislative changes. In addition, management believes that
Clark/Bardes can be a leader in the consolidation of the highly fragmented
insurance-financed employee benefit industry by offering liquidity, proprietary
benefit and program designs, and administrative support to the owners of smaller
firms. Finally, management intends to leverage the Company's core competencies
by entering into related markets such as compensation consulting and outsourcing
of benefit plan administration services. Additional costs for acquisition
activity, which include both financial expenditures and a reallocation of human
resources, will require substantial cash, and will be financed through cash from
operations as well as future debt and equity offerings by the Company.
The Company has developed the high quality administrative capabilities
necessary to service these executive benefit and insurance programs marketed by
the Company. At June 30, 1998, the Company administered approximately 187,000
benefit and insurance records for over 1,100 clients. At such date, the
insurance policies underlying the Company's employee benefit programs
represented a total of $48.5 billion of inforce insurance coverage. Management
believes that its strong relationship with insurance companies is due to the
Company's history of placing high quality, high persistency policies.
As of July 24, 1998, the Company was represented by 36 producers in 32
independently operated sales offices located in 28 cities throughout the United
States. These producers and the Company's management are expected to own an
aggregate of at least 47.7% of the outstanding Common Stock after giving effect
to the Offering. See "Principal and Selling Stockholders."
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INDUSTRY
Beginning in the early 1980s, corporations and banks began using life
insurance to offset the costs of employee benefit liabilities with greater
frequency than in the past. Since that time, several large insurers, including
CIGNA, General American, Great-West, Life Investors and Nationwide, have
committed significant resources to develop business-owned life insurance
products for use in the insurance-financed employee benefit industry.
The use of insurance to offset the costs of employee benefit liabilities
historically has been affected by legislative change, both positive and
negative. In the past, legislation has reduced the usefulness of traditional
pension plans for highly-paid executives which, in turn, has increased the
attractiveness of insurance-financed non-qualified benefit plans. On the other
hand, legislation has limited interest deductibility on policy loans and
restricted the use of business-owned life insurance to employees, officers,
directors and 20-percent owners. The insurance-financed employee benefit
industry will continue to be affected significantly by legislative change.
Consequently, the Company believes that the ability to respond quickly to
legislative initiatives is a competitive advantage which can be used to increase
market share.
The insurance-financed employee benefit industry is highly fragmented.
Management believes that many once dominant producers and producer groups have
not kept pace with the numerous changes affecting the industry, and are
currently faced with a decreasing market share and the inability to provide
adequate administrative support to existing clients. The Company believes that
those producers and producer groups who have not made the necessary and
substantial investment in administrative systems and personnel will continue to
experience difficulties in satisfying their clients' growing needs and demands
and in meeting complex regulatory requirements. Finally, the Company also
believes that the ever-changing legislative and economic environments require
product development systems and personnel that are more sophisticated and cost
intensive than most producers and producer groups are able to justify
economically. Given the highly fragmented nature of the industry, management
expects significant consolidation to occur in the future.
STRATEGY
The Company's goal is to enhance its role as a provider of innovative
benefit and insurance solutions to corporations and banks throughout the United
States. To accomplish this goal, the Company intends to focus on the following:
- Leverage Market Reputation. The Company plans to leverage its reputation
as an industry leader to expand current operations and to enter into
related businesses.
- Design Innovative Programs. The Company intends to use its expertise in
program development to create and market innovative, customized programs
in order to facilitate the Company's penetration of new markets and to
satisfy the financial needs of its clients in a changing regulatory and
economic environment.
- Diversify Business. The Company plans to identify and enter into related
businesses in which its core competencies can be profitably employed.
Examples of related businesses include compensation consulting,
outsourcing of benefit plan administrative services and marketing to the
non-profit sector.
- Enhance Administrative Capabilities. The Company intends to continue
distinguishing itself from its competitors by enhancing its
administrative capabilities, providing high quality administrative
services and improving operating margins.
- Pursue Consolidating Acquisitions. The Company intends to take advantage
of the expected consolidation in the insurance-financed employee benefit
market and implement the Company's design, distribution and service model
on a wide-scale basis so as to increase market share, acquire producer
and management talent, enter into new markets and improve operating
margins through integration efficiencies.
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Subsequent to the completion of the Offering, the Company intends to
consider the adoption of a combination of plans to encourage ownership of Common
Stock among its employees, producers and directors so as to further align their
interests with those of CBH's stockholders. Examples of such plans include a
commission reinvestment plan for producers, providing the opportunity to
purchase Common Stock through the Company's 401(k) plan and compensating the
non-employee members of the Board of Directors with Common Stock.
ACQUISITION STRATEGY
The insurance-financed employee benefit industry is highly fragmented.
Management believes that significant opportunities exist to create a more
efficient design, distribution and service system for insurance-financed
employee benefit programs. The Company intends to take advantage of these
opportunities by pursuing acquisitions on a selected basis. Management
categorizes potential acquisition targets in two groups. The first group is
comprised of smaller, less sophisticated companies that have not made the
necessary investment in technology and personnel, and are finding it
increasingly difficult to compete with the larger, more-developed firms. The
second group is comprised of viable, sophisticated firms with a solid client
base that are owned by a small number of producers who are eager to affiliate
their firm with a more established organization.
Using the successful BCS acquisition as a model, management has established
guidelines for evaluating a potential acquisition target. The Company is focused
on identifying organizations that can increase the Company's market penetration,
retain quality producers after the consummation of the acquisition, create
cross-selling opportunities, provide significant opportunity for administrative
cost savings and be effected in a manner that is accretive to the Company's
earnings. Using these guidelines, the Company will evaluate a potential
acquisition target based on factors such as the operating results and financial
condition of the target business, its growth potential, the quality of its
management and producers and the expected return in relation to other
acquisition opportunities. As of June 30, 1998, management had identified
approximately 100 companies each with annual revenue in excess of $3.0 million
that are potentially attractive acquisition targets. Management believes that
the Company's leadership, size, industry expertise and reputation,
administrative systems and support and other long-term competitive advantages
provide the Company with a decided advantage in its pursuit to acquire selected
companies.
PROGRAMS AND PRODUCTS
Clark/Bardes designs and markets a diverse array of insurance-financed
employee benefit programs and provides comprehensive administrative services to
meet the needs of its clients. Business-owned life insurance refers to life
insurance policies purchased by a business that insure the lives of a number of
employees. The business pays the premiums on, and is the owner and beneficiary
of, such policies. Business-owned life insurance based programs are used
primarily to offset a client's cost of providing employee benefits and to
supplement and secure benefits for key executives. More specifically, the cash
flow characteristics of business-owned life insurance policies are designed to
match closely the long-term cash flow characteristics of a client's employee
benefit liabilities. Further, business-owned life insurance offers certain
advantages, including (i) the cash value of the policies grows on a tax deferred
basis until withdrawal and (ii) the policies' death benefits are received
tax-free. Finally, the tax deferred nature of the policies provides an
attractive return.
Currently, the Company derives a substantial majority of its total revenue
from the sale of insurance products used to fund the Company's proprietary
programs. The Company maintains relationships with insurance companies such as
CIGNA, General American, Great-West, Life Investors, Nationwide, Phoenix Home
Life and West Coast Life that are strategic in nature, with both parties
committed to developing and delivering creative products with high client value.
The Company, through its actuaries and legal, accounting and other
professionals, works closely with (i) clients to design custom products that
meet the unique organizational needs of such client and (ii) selected insurance
companies to develop unique policy features at competitive pricing.
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The Company has invested significant time and resources in cultivating
relationships with selected carriers, with certain relationships that are
considered strategic in nature. However, the Company does not consider its
future success to be dependent on any specific insurance carrier. Management
believes that there are over 50 top-tier insurance companies with the financial
strength and resources to effectively compete in the large-case market, and
several hundred carriers suitable for the Company's small-case business. The
Company has decided to limit the number of carriers with which it transacts
business in order to maximize its bargaining power and resource utilization.
In connection with agreeing to the extinguishment of the Warrants,
Clark/Bardes entered into a five-year production agreement with each of the
Carriers that requires Clark/Bardes to market and sell insurance products of
each Carrier comprising specified percentages of all insurance products sold by
Clark/Bardes 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 Clark/Bardes fails to meet the minimum production
requirements, the applicable Carrier is entitled to offset future commissions
otherwise payable to Clark/Bardes up to a maximum amount of $150,000 per year.
See "The Reorganization -- Extinguishment of Warrants." Clark/Bardes
contemplates entering into a five-year joint product development and production
agreement with Phoenix Home Life. The agreement contemplates the development of
a new product for distribution by Clark/Bardes subject to minimum production
requirements of at least $15.0 million in new premium. Prior to the development
of the new product, Clark/Bardes will be obligated to sell minimum levels of
existing Phoenix Home Life products. Noncompliance with any such minimum
production amounts would subject Clark/Bardes to penalties of $100,000 for any
twelve month period during which such production is not met. Phoenix Home Life
intends to purchase shares of Common Stock of CBH in the Offering for an
aggregate purchase price of $5.0 million. Clark/Bardes enters into agreements
with the insurance carriers which typically provide for the marketing of the
insurance carrier's insurance products by Clark/Bardes, commission payment rates
by insurance product, licensing of software for product illustrations, mutual
indemnification provisions and short term termination provisions.
Clark/Bardes' overall approach to marketing and client service is
illustrated by the business-owned life insurance marketing process. First, the
Company performs the actuarial and insurable interest calculations necessary to
determine the amount of life insurance an organization needs to purchase. Then,
the Company helps to design a program to meet that particular company's unique
organizational needs. Next, Clark/Bardes arranges for the placement of the
insurance coverage underlying the Company-designed program with a financially
stable insurance company. Last, the Company provides the long-term
administrative services associated with the program and the underlying
business-owned life insurance policy.
The Company markets a wide variety of business-owned life insurance based
programs, including bank-owned life insurance, deferred income plans ("DIPs"),
supplemental executive retirement plans ("SERPs") and supplemental offset plans
("SOPs") and also markets group term carve out plans ("GTCO").
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The following table sets forth the total revenue by product category for
the year ended December 31, 1997, and the amount of first year revenue by
product category for the year ended December 31, 1997:
<TABLE>
<CAPTION>
TOTAL REVENUE FOR FIRST YEAR REVENUE FOR
THE YEAR ENDED THE YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1997
----------------- ----------------------
<S> <C> <C>
Bank-owned life insurance
Large case...................................... $16,180 $10,703
Small case...................................... 8,451 7,101
DIP and SERP...................................... 5,352 424
SOP............................................... 3,379 3,319
GTCO.............................................. 3,534 422
Discontinued products(1).......................... 10,427 367
Miscellaneous case revenue(2)..................... 2,132 180
------- -------
Total................................... $49,455 $22,516
======= =======
</TABLE>
- ---------------
(1) Includes renewal revenue from products used in existing plans which are no
longer marketed for new plans because of legislative changes.
(2) Includes revenue from miscellaneous programs and other revenue sources.
Bank-Owned Life Insurance. Bank-owned life insurance refers to
business-owned life insurance purchased by a bank. The Office of the Comptroller
of the Currency provides guidelines that tie the purchase of bank-owned life
insurance to the costs of offsetting employee benefits on an aggregate basis.
Clark/Bardes was the first organization to implement large case bank-owned life
insurance programs, which are designed for, and marketed to, banks with assets
in excess of $1.0 billion. As a result of the BCS acquisition, the Company now
markets small case bank-owned life insurance programs, which are used to offset
benefit costs for executives and directors of regional and community banks with
assets of less than $1.0 billion. The Company markets a wide variety of
bank-owned life insurance, including fixed yield policies (general account
policies), variable yield policies (separate account policies) and a Protected
Equity Plan(TM) (a hybrid policy which provides the minimum return of a fixed
yield policy with the upside potential of a variable yield policy).
Deferred Income Plans. DIPs allow corporate executives to defer a portion
of their current income on a tax-deferred basis. The deferred income and
interest in a properly designed and administered DIP grows on a tax-deferred
basis until distributions are made to the executive, usually at retirement.
Corporations often purchase life insurance to create an asset in order to offset
the costs of the liability created by a DIP. DIPs can be structured in a variety
of ways, including "traditional" DIPs, which credit the deferred income amount
with a fixed rate of interest and use fixed yield life insurance products to
offset the costs of the Company's liability, and "variable" DIPs, which credit
the deferred income amount with interest based on a bond or equity index and use
variable yield life insurance products to offset the costs of the Company's
liability. In an effort to provide additional security for executives,
corporations usually create a trust to hold the related insurance policies.
As of March 31, 1998, approximately 70.0% of the Fortune 1000 companies
offered some form of a DIP. Because DIPs provide executives with a method to
defer income at little or no cost to the corporation, management believes that
the demand for these plans will continue to rise, as corporations implement new
plans or expand the availability of existing plans.
Supplemental Executive Retirement Plans. SERPs are specifically designed to
supplement the dollar limitation on benefits paid from qualified pension plans.
The 1993 Omnibus Budget Reconciliation Act (the "OBRA") lowered the maximum
dollar amount of compensation that can be used to determine the pension benefits
payable to an executive from a qualified plan to $150,000. OBRA had significant
adverse effects on defined benefit, defined contribution and 401(k) plans. As a
result, non-qualified plans such as SERPs, which are not subject to the same
stringent rules, have increased in popularity. SERPs are funded with the same
insurance products and strategies used to fund DIPs. As of March 31, 1998,
approximately 60.0% of the Fortune 500 companies provided some form of SERP for
their executives.
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Supplemental Offset Plans. SOPs are designed to supplement an executive's
income by restoring retirement benefits previously limited by legislative
changes. Using a technique commonly known as "split dollar," SOPs are funded
with insurance policies. Ownership rights to an individual policy are shared
between the corporation and the executive. The corporation and the executive
share in the insurance policy's increasing cash value and death benefits. The
corporation pays the premiums, but recovers these expenditures from its share of
the policy's proceeds. The executive's interest in such policy is targeted to
equal the present value of the retirement benefits due at the time of such
executive's retirement.
Group Term Carve Out Plans. Currently, a corporation can provide its
employees with a group term life insurance policy death benefit of up to $50,000
on a tax-free basis. The cost of providing a death benefit in excess of $50,000
is currently taxed to the employee as ordinary income. GTCOs replace the taxable
portion of the group term life insurance plan with permanent life insurance.
GTCOs often provide a greater amount of insurance and post-retirement death
benefit to the employee at a competitive overall cost. The corporate plan
sponsor is not an owner or beneficiary of the permanent life insurance policies.
ADMINISTRATIVE SERVICES
Management believes that the Company is recognized as an industry leader in
providing high quality, unique services to its clients partly through the
application of internally developed technology. The Company approaches
administrative service opportunities with a differentiation strategy to generate
significant revenues and profits. The clients' unique requirements and needs are
served through customized, value-added services and intensive client support,
creating brand and client loyalty and resulting in lower sensitivity to price.
The Company further differentiates itself by employing a focused strategy for a
particular buyer group. For instance, Clark/Bardes services segments such as
banking with an insider's view of the industry which results in providing high
quality services customized to a client's needs while achieving lower costs.
Clark/Bardes offers customized enrollment and administrative services for
insurance-financed employee benefit programs, including business-owned life
insurance and non-qualified benefit plans. Due to the many complex requirements
of the administrative process, each client is assigned an account team comprised
of four account specialists who are responsible for servicing the needs of that
client. The administrative services provided by the Company's account
specialists include coordinating and managing the enrollment process,
distributing communication materials, monitoring financial, tax and regulatory
changes, providing accounting reports, performing annual reviews and reporting
historical and projected cash flow and earnings. The account specialists are
supported by the Company's in-house actuarial, legal, accounting and insurance
specialists.
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CLARK/BARDES PLAN SERVICES
[FLOW CHART]
The Company builds its client base by fostering long-term client
relationships. To this end, the training and focus of each account team centers
on the Company's goal of delivering the highest quality program implementation
and administrative services in the industry. This benefits both the client,
through top professional support, and the producer, who can focus more closely
on the sales process. To further emphasize long-term client relationships, the
Company enters into administrative agreements with each client, in most cases
for a term of five to ten years. Finally, the Company's method of calculating
the revenue splits with its producers attempts to ensure the long-term viability
of its administrative services group. More specifically, the Company estimates
the administrative cost for the term of an administrative agreement. Thereafter,
the administrative costs are collected directly from the client or from the
producer's commission if no fees are charged to the client. The purpose of this
arrangement is to ensure that the revenue from new sales is not required to
subsidize the administrative costs of existing cases.
Management believes that the Company's commitment to providing high quality
client and administrative services is one of the primary reasons that the
Company has achieved the success it has enjoyed to date. The Company believes
that its continued focus on, and investment in, the personnel and technology
necessary to deliver this level of client service will bolster the Company's
reputation as an industry leader.
DISTRIBUTION
The Company markets its insurance-financed employee benefit programs and
related administrative services through a group of producers in independently
operated sales offices located throughout the United States. As of July 24,
1998, the Company was represented by 36 producers in 32 offices, with staffing
ranging in size from two persons to over 20 persons. The Company's producers are
expected to own an aggregate of at least 34.7% of the outstanding shares of
Common Stock after giving effect to the Offering. See "Principal and Selling
Stockholders." Each producer is an independent contractor and enters into an
agency agreement with the Company to market programs and services on behalf of
the Company on an exclusive basis. Each agency agreement defines the duties of
the producer to solicit and sell covered business and the revenue splits between
the producer and the Company (typically 69% to the producer and 31% to the
Company) and includes a non-solicitation clause (typically, three years by the
Company and the producer with respect to separate clients (as defined in the
applicable agreement) and five years by the producer with respect to joint
clients), confidentiality agreement and operating guidelines and standards. The
agency agreements can be terminated by either party with either 90 or 180 days
written notice depending upon the individual agreement. As an independent
contractor, each producer is responsible for its own selling expenses and
overhead.
46
<PAGE> 50
Other than The Wamberg Organization (which accounted for approximately
22.8% of 1997 revenues), producers Steven Cochlan and Malcolm Briggs accounted
for approximately 14.6% and 10.4%, respectively, of 1997 revenue and no other
producers accounted for more than 10% of 1997 revenue. The Company recognizes
and seeks to expand its base of producers so as to mitigate any dependency on a
small number of producers for a large portion of the Company's business.
Clark/Bardes and its producers in turn recognize the importance of attracting
and retaining qualified, productive sales professionals. To this end, the
Company and its producers actively recruit and develop new sales professionals
in order to add distribution capacity for the Company. Further, the Company's
acquisition strategy focuses on retaining the productive sales professionals of
the entity being acquired.
EMPLOYEES
As of June 30, 1998, the Company employed approximately 145 persons, of
whom approximately 65 worked in administrative services, 22 worked in program
design, 19 worked in information systems and technical support, 10 worked in
accounting, 6 worked in marketing, and the remainder performed various executive
and administrative functions. The majority of the Company's employees have
college degrees, with several persons holding advanced degrees in law, business
administration or actuarial science. Professional development is a highly valued
industry characteristic, and insurance and financial planning designations such
as FSA, ASA, CLU, CEBS, ChFC, CFP, and FLMI are held by a large number of the
Company's employees. The Company actively encourages continuing education for
employees through expense reimbursement and reward plans. Due to the specialized
nature of the business, Clark/Bardes often recruits experienced persons from
insurance companies, consulting firms and related industries.
MARKETING SUPPORT
Clark/Bardes has made a substantial investment to establish a highly
qualified marketing department. The marketing department's primary focus is to
support the Company's sales efforts. To this end, the marketing department
develops and tracks sales leads for the producers, provides marketing materials
and research and performs the public relations function for the Company and its
producers. The marketing department, which includes a full time copywriter and
graphic artist, produces all the marketing materials used by the Company and its
producers. The Company, through its marketing department, distributes external
newsletters and other program update pieces to approximately 7,500 current and
prospective clients throughout the year and sponsors telephone conferences and
meetings featuring industry experts and nationally recognized speakers. Finally,
the marketing department coordinates the publication of articles written by
Clark/Bardes employees and producers and ensures that Company representatives
are quoted as information sources in major national publications. Management
believes that the efforts of the Company's marketing department have helped make
Clark/Bardes a readily identifiable leader in the insurance-financed employee
benefit industry.
PRODUCER SUPPORT
The Company's producers are supported by a design and analysis department.
The department's primary responsibility is to design a customized
insurance-financed employee benefit program that will effectively offset the
costs of a client's employee benefit liabilities. The design analyst works with
the producer to identify the needs of a prospective client. Next, the design
analyst investigates the availability and pricing of products that are
compatible with that client's needs. Finally, the analyst develops the financial
projections necessary to evaluate the benefit costs and cost recoveries for the
prospective client, together with an analysis of alternatives to assist that
client in making a decision.
TECHNOLOGY AND ADMINISTRATION
The Company has made a significant investment in developing proprietary
financial modeling and administrative systems that support the unique
characteristics of insurance-financed employee benefit programs. Both systems
are generalized and parameter-driven in order to support the special processing
needs of a diverse client base. The Unix-based administrative system utilizes a
relational database that allows the
47
<PAGE> 51
Company to access easily client, participant, policy and benefit information. In
addition, a telephonic application allows individual plan participants access 24
hours a day to account balance and unit price information. In 1998, management
plans to begin migrating the administrative system to a client-server based
environment in order to reduce system development time and to allow the Company
to respond more quickly to changing market and client needs.
Local area networks link all of the Company's personal computers. Internet
mail is utilized to communicate with clients and the sales offices. Management
intends to continue to invest in technology and system development in order to
offer additional services to clients, support new markets, integrate acquired
operations, improve productivity and reduce costs. For example, the Company's
1998 capital budget contemplates implementing intranet and collaborative
workgroup tools to speed communications and to allow information to be easily
shared across the organization. Further, as the Company continues to grow
internally and by acquisitions, management intends to establish a wide area
network to facilitate communications across all locations.
The Company maintains a disaster recovery plan for its local area network
and Unix environments in order to minimize downtime in the event of a major
system failure. The local area network file servers and Unix database servers
are located in a physically secure area and all systems are password-protected
to ensure access is limited to authorized individuals.
PERSISTENCY
Over the last five years, the Company has experienced an average annual
persistency rate of approximately 98.0% of the inforce insurance underlying the
Company's programs. Historically, revenue persistency has tracked with insurance
policy persistency with the exception of Leveraged COLI business, which was
affected by adverse tax law changes, and business related to Confederation Life
Insurance Company, which was impacted by the cessation of operations and
subsequent rehabilitation of that company. In both instances renewal revenue was
adversely impacted even though insurance policies remained in force. The Company
believes that this high persistency rate is attributable to numerous factors.
The first factor relates to the underlying purpose of an insurance-financed
employee benefit program, which is to offset the costs of employee benefit
liabilities and provide long-term benefits to executives. An insurance policy is
not typically used to fund the benefits for a specific individual, but rather to
offset the costs of a client's employee benefit costs on an aggregate basis.
Therefore, the policy is usually held to maturity, regardless of whether any
particular individual insured remains with the client. Second, a client would
suffer unfavorable tax consequences upon the surrender of the underlying
business-owned life insurance policy. The cash value of the policy to the extent
it represents amounts beyond the cash premiums paid by the allowable charges
against the insurance account, or gain on insurance, is taxed immediately at
ordinary income rates upon surrender, and an additional penalty tax applies in
certain instances. A client often has the option of making a tax-free exchange
to another policy. Upon the exchange, however, the client would incur
substantial insurance company-related costs, such as premium taxes. These costs
are normally waived in the event a particular insurance company experiences a
significant reduction in its credit rating. Third, the Company's high
persistency rate is partially attributable to provisions in many interest rate
sensitive products that disallow a full-scale withdrawal or exchange. Finally,
Clark/Bardes has strategically committed resources to provide a high degree of
on-going client service. Management believes that the quality of the Company's
services enhances persistency by distinguishing the Company from its
competitors.
COMPETITION
The marketing, design and administration of insurance-financed employee
benefit programs is highly competitive. The Company and its producers compete
with a large number of insurance agents, life insurance brokers, third party
administrators, producer groups and insurance companies. The Company's direct
competitors include Compensation Resource Group, Harris Crouch Long Scott and
Miller, Management Compensation Group, Newport Group, TBG Financial and The Todd
Organization. Furthermore, competition exists for producers and other marketers
of life insurance products who have demonstrated sales ability. National banks,
with their existing depositor bases for financial services products, may pose
increasing
48
<PAGE> 52
competition in the future to companies who sell life insurance products,
including the Company. Recent United States Supreme Court decisions have
expanded the authority of national banks to sell life insurance products.
Clark/Bardes competes for clients on the basis of reputation, client
service, program and product offerings and the ability to tailor insurance
products and administrative services to the specific needs of a client. Although
certain competitors have access to proprietary programs and products unavailable
to the Company and others offer lower prices for administrative services,
management believes that the Company is in a superior competitive position in
most, if not all, of the meaningful aspects of its business. Management does not
consider its direct competitors to be its greatest competitive threat. Rather,
management believes that the Company's most serious competitive threat will
likely come either from large, diversified financial entities which are willing
to expend significant resources to gain market share or from the larger
competitors that pursue an acquisition or consolidation strategy similar to that
of the Company.
GOVERNMENT REGULATION
The insurance-financed employee benefit market is subject to extensive
regulation by state governments. Clark/Bardes operates in all 50 states through
licenses held by Clark/Bardes or by its producers. In addition, the Company
markets its insurance-financed employee benefit programs in the states of Ohio,
Pennsylvania and Texas through entities licensed in those states for which the
Company provides almost all services by means of administrative service
agreements. In general, state insurance laws generally establish supervisory
agencies with broad administrative and supervisory powers related to such
matters as granting and revoking licenses, approving individuals and entities to
whom commissions can be paid, licensing insurance agents, transacting business,
approving policy forms and regulating premium rates for some lines of business.
Licensing laws applicable to insurance marketing activities and the receipt of
commissions vary by jurisdiction and are subject to interpretation as to the
application of such requirements to specific activities or transactions. While
the Company has not encountered regulatory problems in the past, no assurance
can be given that the Company would be deemed to be in compliance with all
applicable licensing requirements of each jurisdiction in which the Company
operates or that additional licenses would not be required of the Company or
that the Company or its producers will not encounter regulatory problems in the
future, including any potential sanctions or penalties for operating in a
jurisdiction without all required licenses. See "Risk Factors -- Governmental
Regulation."
While the federal government does not directly regulate the marketing of
most insurance products, certain products, such as variable life insurance, must
be registered under the federal securities acts and therefore the producers and
the entities selling such products must be registered with the NASD. The Company
markets such insurance products through an entity registered as a broker-dealer
and for which the Company provides almost all services by means of
administrative service agreements. Further, the Company is subject to various
federal laws and regulations affecting matters such as pensions, age and sex
discrimination, financial services, securities and taxation. In recent years,
the Office of the Comptroller of the Currency has issued a number of rulings
which have expanded the ability of banks to sell certain insurance products.
Further, the United States House of Representatives is currently considering the
Financial Services Act (H.R. 10), which would, among other things, eliminate
existing restrictions on the affiliation of insurance companies, banks and
securities firms. Such legislation and other future federal or state
legislation, if enacted, could result in increased competition, as well as new
opportunities, for the Company. See "Risk Factors -- Governmental Regulation."
ANCILLARY BUSINESS ARRANGEMENTS
Because of various federal and state licensing restrictions, the Company
markets certain products registered with the SEC and its insurance-financed
employee benefit programs in the states of Ohio, Pennsylvania and Texas through
insurance agencies for which the Company provides almost all services by means
of an administration and services agreement (an "Administration and Services
Agreement"). Each of the insurance agencies, Clark/Bardes Securities, Inc., a
Texas corporation licensed as a broker/dealer, Clark/ Bardes Agency of Ohio,
Inc., an Ohio corporation, Clark/Bardes, Inc. of Pennsylvania, a Pennsylvania
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<PAGE> 53
corporation, and Clark/Bardes of Texas, Inc., a Texas corporation, provides the
entity through which the Company's producers sell certain products and conduct
business in such states. In exchange, each of the insurance agencies is a party
to an Administration and Services Agreement pursuant to which such insurance
agency pays the Company to furnish facilities, services, personnel and
assistance, including (i) performing all bookkeeping and accounting functions,
(ii) establishing and maintaining all records required by law and by generally
accepted accounting principles, (iii) furnishing all stationery, forms and
supplies, (iv) providing all necessary clerical and professional staff to
perform the above activities, (v) providing all computer hardware and software
capabilities and facilities, (vi) providing office space, furniture, fixtures,
equipment and supplies, (vii) assisting in the preparation of reports required
by governmental regulatory and supervisory authorities, and (viii) billing and
collection of all premiums. The charges and fees pursuant to the Administration
and Services Agreement are equal to the costs incurred by the Company in
providing the services, personnel and property, plus an additional amount equal
to a certain percentage of such cost. Each insurance agency is solely
responsible for its own activities as an insurance producer and for its
relationship with the producers or employees in the course and scope of their
activities performed on behalf of such agency. Clark/Bardes Securities, Inc.
paid the Company an aggregate of $250,000, $211,000 and $206,000 in 1995, 1996
and 1997, respectively. Clark/Bardes Agency of Ohio, Inc. paid the Company an
aggregate of $0, $0 and $155,000 in 1995, 1996 and 1997, respectively.
Clark/Bardes, Inc. of Pennsylvania paid the Company an aggregate of $66,019,
$27,400, and $86,800 in 1995, 1996 and 1997, respectively. Clark/Bardes of
Texas, Inc. has not conducted any operations to date, and hence no payments have
been made to the Company.
PROPERTIES
The following table sets forth certain information with respect to the
principal facilities used in the Company's operations, both of which are leased:
<TABLE>
<CAPTION>
CURRENT MONTHLY APPROXIMATE LEASE
LOCATION LEASE RATE SQUARE FOOTAGE EXPIRATION DATE
-------- --------------- -------------- ---------------
<S> <C> <C> <C>
Dallas, Texas............................... $46,632 32,000 April 2002
Minneapolis, Minnesota...................... $31,120 15,000 August 2005
</TABLE>
The aggregate monthly lease rate for the properties listed above is
$77,752. The Company subleases approximately 2,300 square feet of its
Minneapolis, Minnesota office space at a monthly rate of $4,804. Management
believes that the Company's existing facilities are adequate to meet its office
space requirements for the foreseeable future.
ADVISORY BOARD
The Company has an advisory board whose primary functions are to offer
guidance to the Company's officers and directors and to provide specific
assistance and advice regarding potential acquisitions. Currently, the advisory
board is comprised of 28 members. While the Company has no obligation to accept
or take any actions recommended by the advisory board, management believes that
the advisory board, because of its members' broad range of experience and
interests, is a valuable source of knowledge from which the Company can draw.
The advisory board meets at least once a year, and management consults with
individual members of the advisory board from time to time on an as-needed
basis.
LEGAL PROCEEDINGS
From time to time, the Company is involved in various claims and lawsuits
incidental to its business, including claims and lawsuits alleging breaches of
contractual obligations under agreements with producers. Such claims include
pending claims by a former producer with BCS alleging misrepresentations by BCS
and related parties in connection with such former producer's agreement with BCS
and claiming damages in connection therewith. The Company does not believe that
these claims will have a material adverse effect on the Company's business,
financial condition and results of operations.
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<PAGE> 54
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
The following table sets forth certain information as of June 30, 1998 with
respect to the executive officers, directors and key employees of CBH and
Clark/Bardes:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
W.T. Wamberg.............................. 45 Chairman of the Board and Director of each
of CBH and Clark/Bardes
Lawrence H. Hendrickson................... 59 Vice Chairman and Director of each of CBH
and Clark/Bardes
Melvin G. Todd............................ 42 President, Chief Executive Officer and
Director of each of CBH and Clark/Bardes
Richard C. Chapman........................ 43 Executive Vice President of Clark/Bardes
Thomas M. Pyra............................ 46 Chief Financial Officer of each of CBH and
Clark/Bardes
James V. Meyer............................ 42 Senior Vice President of Clark/Bardes
James C. Bean............................. 45 Senior Vice President of Clark/Bardes
Larry R. Sluder........................... 51 Senior Vice President and Corporate Actuary
of Clark/Bardes
Keith L. Staudt........................... 47 Vice President, General Counsel and
Secretary of each of CBH and Clark/Bardes
Kathleen L. Cooper........................ 48 Vice President, Insurance Administrator of
Clark/Bardes
William J. Gallegos, Jr................... 38 Vice President, Client Services of
Clark/Bardes
Kurt J. Laning............................ 37 Vice President, Research and Development of
Clark/Bardes
Sue A. Leslie............................. 52 Vice President, Technical Services of
Clark/Bardes
Chris L. Parker........................... 33 Vice President, Design and Analysis of
Clark/Bardes
Ronald A. Roth............................ 40 Vice President, Marketing of Clark/Bardes
Randolph A. Pohlman....................... 55 Director of each of CBH and Clark/Bardes
L. William Seidman........................ 77 Director of each of CBH and Clark/Bardes
George D. Dalton.......................... 70 Director Nominee of each of CBH and
Clark/Bardes
</TABLE>
W.T. WAMBERG has served as the Chairman of the Board of Directors and a
Director of CBH since June 1998, and became the Chairman of the Board of
Directors and a Director of Clark/Bardes upon the consummation of the Merger.
Mr. Wamberg's term as a Director of CBH expires in January 2001. Mr. Wamberg
served as a Director of the Predecessor Company since 1988 and served as the
Chairman of the Board of the Predecessor Company from September 1996 until the
consummation of the Merger. Mr. Wamberg, who has been a producer for the Company
since 1976, is also President and CEO of The Wamberg Organization, Inc., an
independently operated sales office that markets the Company's products. Mr.
Wamberg graduated from Baldwin-Wallace College with a Bachelor of Arts degree in
finance. Mr. Wamberg was formerly President of the Association for Advanced Life
Underwriting.
LAWRENCE H. HENDRICKSON has served as the Vice Chairman of the Board of
Directors and Director of CBH since June 1998, and became the Vice Chairman of
the Board of Directors and a Director of Clark/
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<PAGE> 55
Bardes upon the consummation of the Merger. Mr. Hendrickson's term as Director
of CBH expires in January 2000. From September 1996 until the consummation of
the Merger, Mr. Hendrickson served as the Vice Chairman of the Board of
Directors and a Director of the Predecessor Company. Mr. Hendrickson founded BCS
in May 1982 and since that time and through the date of the BCS acquisition
served as its Chief Executive Officer. Prior to founding BCS, Mr. Hendrickson
was President of L.H. Hendrickson & Co., Inc. providing investment and insurance
solutions to small businesses and affluent individuals since 1960. Mr.
Hendrickson is a graduate of the University of Minnesota with a Bachelor of Arts
degree in business.
MELVIN G. TODD has served as a Director, Chief Executive Officer and
President of CBH since June 1998, and became a Director and the Chief Executive
Officer and President of Clark/Bardes upon the consummation of the Merger. Mr.
Todd's term as a Director of CBH expires in January 1999. From January 1993
until the consummation of the Merger, Mr. Todd served as a Director and the
Chief Executive Officer and President of the Predecessor Company. Prior to
joining the Predecessor Company, Mr. Todd served as a Vice President with The
Great-West Life Assurance Company. Mr. Todd graduated with honors from the
University of Manitoba with a Bachelor of Commerce degree. Mr. Todd is also an
active member of the American Academy of Actuaries and a Fellow of the Society
of Actuaries.
RICHARD C. CHAPMAN became an Executive Vice President of Clark/Bardes upon
the consummation of the Merger. Prior to the Merger, Mr. Chapman served as the
President and Chief Executive Officer of Bank Compensation Strategies Group, an
operating division of the Predecessor Company, since September 1997. Prior to
joining the Predecessor Company, Mr. Chapman was a producer for BCS since 1985,
served as President of BCS since January 1994 and as Chief Executive Officer
since September 1997. Prior to joining BCS, Mr. Chapman was an officer with
First Bank System, a regional bank holding company in Minneapolis, Minnesota.
Mr. Chapman graduated cum laude from Augustana College in Sioux Falls, S.D.,
with a double major in mathematics and business administration.
THOMAS M. PYRA became the Chief Financial Officer of CBH in July 1998 and
became the Chief Financial Officer of Clark/Bardes upon the consummation of the
Merger. Mr. Pyra served as the Chief Financial Officer for the Predecessor
Company from July 1998 until the consummation of the Merger. Prior to joining
the Predecessor Company, Mr. Pyra served as Vice President and Chief Financial
Officer of Geodesic Systems, L.L.C. from April 1997. Mr. Pyra served as Chief
Financial Officer for Recompute Corporation from October 1995 until January 1997
and served as Vice President and Controller of Intercraft Company from October
1992 until June 1995. Mr. Pyra received a Bachelor of Science degree in finance
and an MBA from DePaul University.
JAMES V. MEYER became Senior Vice President of Clark/Bardes upon the
consummation of the Merger and has served in the same capacity for Bank
Compensation Strategies Group, an operating division of the Predecessor Company,
since September 1997. Prior to joining the Predecessor Company, Mr. Meyer served
as Senior Vice President of BCS from November 1995 to December 1996 and as
Executive Vice President of BCS from January 1997 to August 1997. Prior to
joining BCS, Mr. Meyer served as a Vice President at Blanski Peter Kronlage &
Zoch, public accountants, from May 1987 to November 1995. Mr. Meyer graduated
from the University of St. Thomas with a Bachelor of Science degree in
Accounting, and from the American College with a Masters of Science in Financial
Services. Mr. Meyer holds the designations of Certified Public Accountant and
Certified Financial Planner.
JAMES C. BEAN became the Senior Vice President of Clark/Bardes upon the
consummation of the Merger and served in the same capacity for Bank Compensation
Strategies Group, an operating division of the Predecessor Company, since
February 1998. From October 1990 to February 1998, Mr. Bean served as Senior
Vice President and Managing Principal of Mullin Consulting, an executive
benefits firm. Mr. Bean graduated from the University of Minnesota with a
Bachelor of Arts degree in Liberal Arts.
LARRY R. SLUDER became Senior Vice President and Corporate Actuary of
Clark/Bardes upon the consummation of the Merger and has served in the same
capacity for the Predecessor Company from February 1998 until the consummation
of the Merger. From August 1993 to February 1998, Mr. Sluder served as a Vice
President and Corporate Actuary of the Predecessor Company. Prior to joining the
Predecessor Company, Mr. Sluder served as a Consulting Actuary in the executive
benefits and compensation area for an
52
<PAGE> 56
actuarial consulting firm. Mr. Sluder graduated from the University of North
Carolina with a Bachelor of Science degree in mathematics and continued with
graduate studies at Wake Forest University.
KEITH L. STAUDT has served as the Vice President, General Counsel and
Secretary of CBH since June 1998 and became the Vice President, General Counsel
and Secretary of Clark/Bardes upon the consummation of the Merger. Prior to June
1998, Mr. Staudt served the Predecessor Company as General Counsel since March
1995, as Vice President and General Counsel since 1997, and as Vice President,
General Counsel and Secretary since April 1997. From September 1986 to March
1995, Mr. Staudt served as Vice President of Marketing Services for Allianz Life
Insurance Company in Dallas, Texas. Mr. Staudt graduated from the University of
Iowa with a Bachelor of Arts degree in Anthropology and a Juris Doctor degree.
KATHLEEN L. COOPER became Vice President, Insurance Administrator of
Clark/Bardes upon the consummation of the Merger and has served in the same
capacity for Bank Compensation Strategies Group, an operating division of the
Predecessor Company, since September 1997. From November 1990 to September 1997,
Ms. Cooper served as a Vice President, Insurance Administrator, for BCS. Ms.
Cooper joined BCS at the time it was founded in 1982.
WILLIAM J. GALLEGOS, JR. became Vice President, Client Services of
Clark/Bardes upon the consummation of the Merger and has served in the same
capacity for the Predecessor Company since May 1993. From January 1987 to May
1993, Mr. Gallegos served the Predecessor Company in various client service
positions. Prior to joining the Predecessor Company in 1987, Mr. Gallegos held
accounting and financial analyst positions with Chevron and National Resource
Management. Mr. Gallegos graduated from Louisiana State University with a
Bachelor of Science degree in Business Administration and a Masters of Business
Administration from Louisiana Tech University.
KURT J. LANING became Vice President, Product Development of Clark/Bardes
upon the consummation of the Merger and has served in the same capacity for the
Predecessor Company since March 1998. From July 1996 to March 1998, Mr. Laning
served as an Actuarial Consultant for Laning Associates, an actuarial services
company, and from January 1995 to July 1996 served as Assistant Vice President,
Institutional Markets with The Great-West Life Assurance Company. From June 1991
to January 1995, Mr. Laning served as Executive Vice President and Actuary for
Bancsource Insurance Services, Inc. Mr. Laning graduated from the University of
Wisconsin with a Bachelor of Science degree in Actuarial Science.
SUE A. LESLIE became Vice President, Technical Services of Clark/Bardes
upon the consummation of the Merger and has served in the same capacity for the
Predecessor Company since April 1991. Prior to joining the Predecessor Company,
Ms. Leslie was a consultant for system implementations at Continuum, Inc. Ms.
Leslie has more than 25 years experience developing systems for financial
services applications. Ms. Leslie graduated with honors from the University of
Texas with a Bachelor of Arts degree in mathematics.
CHRIS L. PARKER became Vice President, Design and Analysis of Clark/Bardes
upon the consummation of the Merger and has served in the same or similar
capacities for the Predecessor Company since February 1994. From January 1987 to
January 1994, Mr. Parker served as Assistant Manager with The Great-West Life
Assurance Company. Mr. Parker graduated from the University of Illinois with a
Bachelor of Science degree in Actuarial Science.
RONALD A. ROTH became Vice President, Marketing of Clark/Bardes upon the
consummation of the Merger and has served in the same capacity for the
Predecessor Company since March 1993. From May 1989 to March 1993, Mr. Roth was
Marketing Manager for The Great-West Life Assurance Company. Mr. Roth graduated
from the University of Colorado with a Bachelor of Arts degree in Economics.
RANDOLPH A. POHLMAN has served as a Director of CBH since June 1998 and
became a Director of Clark/ Bardes upon the consummation of the Merger. Mr.
Pohlman's term as a Director of CBH expires in January 2001. Since February 1996
until the consummation of the Merger, Mr. Pohlman served as a member of the
Predecessor Company's Advisory Board. Since July 1995 Mr. Pohlman has served as
the Dean at the School of Business and Entrepreneurship at Nova Southeastern
University in Fort Lauderdale, Florida. From April 1990 to July 1995, Mr.
Pohlman served as Director of Human Resources World Wide for Koch Industries.
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<PAGE> 57
Mr. Pohlman graduated from Kansas State University with a Bachelor of Science
and Master of Science degrees in Business Administration and, in addition,
earned a Ph.D. in finance and organizational behavior from Oklahoma State
University.
L. WILLIAM SEIDMAN has served as a Director of CBH since June 1998 and
became a Director of Clark/ Bardes upon the consummation of the Merger. Mr.
Seidman's term as Director of CBH expires in January 2000. From September 1997
until the consummation of the Merger, Mr. Seidman served as a member of the
Predecessor Company's Advisory Board. Mr. Seidman is the chief commentator on
NBC cable network's CNBC and publisher of Bank Director magazine. From 1985 to
1991, Mr. Seidman served as the fourteenth chairman of the Federal Deposit
Insurance Corporation under Presidents Reagan and Bush. He became the first
chairman of the Resolution Trust Corporation in 1989 and served in that capacity
until 1991. Earlier, Mr. Seidman had served as President Reagan's co-chair of
the White House Conference on Productivity, President Ford's Assistant of
Economic Affairs and a member of the Arizona Governor's Commission on Interstate
Banking. The former dean of Arizona State's College of Business, Mr. Seidman
holds an A.B. from Dartmouth (Phi Beta Kappa), an LL.B. from Harvard Law School
and an M.B.A. (with honors) from the University of Michigan.
GEORGE D. DALTON has been nominated to serve as a Director of CBH and
Clark/Bardes. Mr. Dalton's term as a Director of CBH would expire in January
1999. Since July 1984, Mr. Dalton has served as the Chairman of the Board and
Chief Executive Officer of Fiserv Inc., a public company engaged in data
processing outsourcing. Since 1996, Mr. Dalton has served as a director and a
member of the compensation and audit committees of APAC Teleservices, Inc., a
public telemarketing company. Further, Mr. Dalton has served as a director and
member of the compensation committee of ARI Network Services, Inc., a public
company engaged in computer networking services since 1994.
The directors will be divided as evenly as possible into three classes,
denominated Class I, Class II and Class III, with the terms of office of each
class expiring at the 1999, 2000 and 2001 annual meeting of stockholders,
respectively. After his initial term, each Director will serve for a term ending
at the third annual meeting following the annual meeting at which such Director
is elected and until his successor is elected an qualified, or until his earlier
death, resignation or removal. The Directors in each class are as follows: Class
I--Mr. Todd and Mr. Dalton, Class II--Mr. Hendrickson and Mr. Seidman, Class
III--Mr. Wamberg and Mr. Pohlman. All officers are appointed by, and serve at
the discretion of, the Board of Directors. CBH intends to add two more directors
after the Offering.
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EXECUTIVE COMPENSATION
The following table sets forth the annual and long-term compensation with
respect to the Chief Executive Officer of the Company and the Company's four
most highly compensated executive officers in 1997 other than the Chief
Executive Officer for services rendered to the Predecessor Company.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION(1)(2) SECURITIES
------------------------------- UNDERLYING
YEAR SALARY($) BONUS($)(3) OPTIONS(#)
---- --------- ----------- ------------
<S> <C> <C> <C> <C>
Melvin G. Todd................................... 1997 $250,886 $225,007 70,833
President, Chief Executive Officer and Director 1996 250,008 200,006 --
1995 250,000 133,333 --
Richard C. Chapman(4)............................ 1997 84,191 75,000 --
Executive Vice President 1996 -- -- --
1995 -- -- --
Larry R. Sluder.................................. 1997 131,554 78,500 30,145
Senior Vice President and Corporate Actuary 1996 111,000 49,400 --
1995 105,000 28,000 --
Keith L. Staudt.................................. 1997 113,554 50,400 14,640
Vice President, General Counsel and Secretary 1996 102,750 20,550 --
1995 67,846 10,000 --
Sue A. Leslie.................................... 1997 105,000 47,250 16,667
Vice President, Technical Services 1996 100,000 40,000 --
1995 94,500 25,200 --
</TABLE>
- ---------------
(1) Does not include "Other Annual Compensation" because amounts of certain
perquisites and other noncash benefits provided by the Company did not
exceed the lesser of $50,000 or 10.0% of the total annual base salary and
bonus disclosed in this table for the respective officer.
(2) Clark/Bardes does not pay Mr. Wamberg for services other than as Chairman of
the Board and Director. Clark/Bardes pays commission splits to The Wamberg
Organization which in turn pays Mr. Wamberg's salary. See "Certain
Transactions -- Principal Office Agreement with W.T. Wamberg" and
"-- Compensation of Directors."
(3) Represents incentive compensation under employment agreements entered into
with the named executives. See "Management -- Employment and Indemnification
Agreements."
(4) Represents compensation paid by the Predecessor Company for the four month
period ended December 31, 1997.
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<PAGE> 59
The following table sets forth certain information concerning the options
granted to the named executive officers during 1997:
OPTION GRANTS IN LAST YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE VALUE
------------------------------------------------------ AT ASSUMED ANNUAL RATES
NUMBER OF % OF TOTAL OF STOCK PRICE
SECURITIES OPTIONS GRANTED APPRECIATION
UNDERLYING TO EMPLOYEES EXERCISE FOR OPTION TERM(2)
OPTIONS IN PRICE EXPIRATION --------------------------
NAME GRANTED YEAR(1) PER SHARE DATE 5% 10%
---- ---------- --------------- --------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Melvin G. Todd............. 20,833 7.2 $4.80 3/5/07 $ 62,888 $159,372
50,000 17.2 $7.00 3/5/07 $220,113 $557,810
Richard C. Chapman......... -- -- -- -- -- --
-- -- -- -- -- --
Larry R. Sluder............ 5,145 1.8 $4.80 3/5/07 $ 15,531 $ 39,359
25,000 8.6 $7.00 3/5/07 $110,057 $278,905
Keith L. Staudt............ 2,140 .7 $4.80 3/5/07 $ 6,460 $ 16,371
12,500 4.3 $7.00 3/5/07 $ 55,028 $139,452
Sue A. Leslie.............. 4,167 1.4 $4.80 3/5/07 $ 12,579 $ 31,877
12,500 4.3 $7.00 3/5/07 $ 55,028 $139,452
</TABLE>
- ---------------
(1) Options to purchase a total of 140,830 shares of common stock of the
Predecessor Company at an exercise price of $4.80 per share were granted in
1997, and options to purchase a total of 150,000 shares of common stock of
the Predecessor Company at an exercise price of $7.00 per share were granted
in 1997.
(2) In accordance with the rules of the SEC, the amounts shown on this table
represent hypothetical gains that could be achieved for the respective
options if exercised at the end of the option term. These gains are based on
the assumed rates of stock appreciation of 5% and 10% compounded annually
from the date the respective options were granted to their expiration date
and do not reflect the Company's estimates or projections of future Common
Stock prices. The gains shown are net of the option exercise price, but do
not include deductions for taxes or other expenses associated with the
exercise. Actual gains, if any, on stock option exercises will depend on the
future performance of the Common Stock, the option holder's continued
employment through the option period, and the date on which the options are
exercised.
The following table sets forth certain information concerning all
unexercised options held by the named executive officers as of December 31,
1997. For additional information and certain terms of options see
"Management -- Stock Option Plan." No options were exercised during 1997.
AGGREGATE OPTION EXERCISES IN LAST YEAR AND YEAR END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED IN
NUMBER OF UNEXERCISED THE MONEY OPTIONS AT
SHARES OPTIONS AT YEAR-END(#) YEAR-END(1)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Melvin G. Todd.............. -- -- 20,833 50,000 $160,414 $275,000
Richard C. Chapman.......... -- -- -- -- -- --
Larry R. Sluder............. -- -- 6,250 23,895 $ 34,375 $142,741
Keith L. Staudt............. -- -- 3,125 11,515 $ 17,187 $ 68,040
Sue A. Leslie............... -- -- 3,125 13,542 $ 17,187 $ 83,647
</TABLE>
- ---------------
(1) Value for "in-the-money" options represents the positive spread between the
respective exercise prices of outstanding options and an assumed initial
public offering price of $12.50 per share (the midpoint of the Range).
56
<PAGE> 60
COMMITTEES OF THE BOARD OF DIRECTORS
Upon the consummation of the Offering, the Board of Directors will
establish an audit committee (the "Audit Committee"), which will consist of
Messrs. Pohlman and Seidman, a compensation committee (the "Compensation
Committee"), which will consist of Messrs. Pohlman and Seidman, and an executive
committee (the "Executive Committee"), which will consist of Messrs. Wamberg,
Hendrickson and Todd.
The Audit Committee will review the scope and approach of the annual audit,
the annual financial statements of the Company and the auditors' report thereon
and the auditors' comments relative to the adequacy of the Company's system of
internal controls and accounting systems. The Audit Committee will also
recommend to the Board of Directors the appointment of independent public
accountants for the following year. The Audit Committee will consist of at least
two members, both of whom will be independent directors.
The Compensation Committee will review management compensation levels and
provide recommendations to the Board of Directors regarding salaries and other
compensation for the Company's executive officers, including bonuses and
incentive plans, and will administer the Stock Option Plan.
The Executive Committee will have the power and authority of the Board of
Directors to manage the affairs of the Company between meetings. The Executive
Committee will also regularly review significant corporate matters and recommend
action as appropriate to the Board of Directors.
COMPENSATION OF DIRECTORS
The members of the Board of Directors of each of CBH and Clark/Bardes who
are also employees receive no additional compensation for their services as a
director. Prior to the Offering, the Company reimbursed Mr. Wamberg and Mr.
Hendrickson up to an aggregate of $100,000 and $75,000, respectively, per
calendar year for expenses incurred on behalf of CBH and Clark/Bardes. The
Company anticipates adopting new policies regarding director compensation in the
near future.
EMPLOYEE BENEFIT AND RETIREMENT PLANS
The Company maintains a defined contribution plan for its employees that is
qualified under Section 401(k) of the Internal Revenue Code of 1986, as amended
(the "401(k) Plan"). Clark/Bardes matches 50.0% of the first 6.0% of salary that
an eligible participant contributes to the 401(k) Plan.
STOCK OPTION PLAN
A total of 2,000,000 shares of Common Stock has been reserved for issuance
pursuant to the Stock Option Plan. On the date of this Prospectus, there were
690,853 shares of Common Stock subject to options previously granted at a
weighted average exercise price of $9.74 per share. The Stock Option Plan was
initially adopted by the Predecessor Company in March 1997 and assumed, amended
and restated by CBH in July 1998 in connection with the Reorganization.
Subsequent to the amendment of the Stock Option Plan, an aggregate of 400,023
options were granted at the Offering price. The Stock Option Plan is
administered by the Board or the Compensation Committee, who have full authority
to determine the individuals to whom, and the time at which, the options may be
granted and the number of shares covered by each option. Both nonqualified stock
options and incentive stock options (as defined in the Code) may be granted
under the Stock Option Plan. The option price per share is determined by the
Compensation Committee but may not be less than fair market value for incentive
stock options. Options may be granted to officers, employees (including officers
who are also directors), non-employee directors or licensed insurance producers
of the Company or any of its subsidiaries. Incentive stock options are not
transferable or assignable by an optionee other than by will or the laws of
descent and distribution. Nonqualified stock options may be transferred to
certain permitted transferees to the extent permitted in the applicable
nonqualified stock option agreement granting any such nonqualified stock
options.
57
<PAGE> 61
EMPLOYEE STOCK PURCHASE PLAN
In July 1998, the Board of Directors adopted the Stock Purchase Plan, under
which a total of 200,000 shares of Common Stock have been reserved for issuance.
The Board of Directors has appointed a committee to administer the Stock
Purchase Plan. 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 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.
On the commencement date of each offering under the Stock Purchase Plan, a
participating employee will be deemed to have been granted an option to purchase
a maximum number of shares of Common Stock equal to: (i) the percentage of the
employee's base pay that such employee has elected to be withheld (not to exceed
10%), (ii) multiplied by such employee's base pay during the period of such
offering and (iii) divided by the lower of 85% of the closing market price of
the Common Stock on the applicable offering commencement date or 85% of the
closing market price of the Common Stock on the offering termination date.
Options held by a participant shall be exercisable only by that participant.
No employee may be granted options to participate in the Stock Purchase
Plan if, as a result of such grant, such employee would (i) own stock or hold
options to purchase stock possessing 5% or more of the total combined voting
power or value of all classes of stock of the Company or (ii) have rights to
purchase stock under all employee stock purchase plans of the Company that
accrue at a rate in excess of $25,000 in fair market value for any calendar
year.
Unless a participant gives written notice to the Company, such
participant's option for the purchase of Common Stock with payroll deductions
made during an offering shall be deemed to have been exercised automatically on
the offering termination date applicable to such offering, for the purchase of
the number of full shares of Common Stock that the accumulated payroll
deductions at that time will purchase at the applicable option price. A
participant may withdraw payroll deductions credited to his account under the
Stock Purchase Plan at any time.
KEY EXECUTIVE LIFE INSURANCE
The Company maintains and is the sole beneficiary of key man life insurance
policies on the lives of Mr. Wamberg, Mr. Hendrickson, Mr. Todd and Mr. Chapman
in the amounts of $11.0 million, $3.0 million, $1.0 million and $2.0 million,
respectively. See "Risk Factors -- Dependence on Key Personnel."
58
<PAGE> 62
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth the number and percentage of the outstanding
shares of Common Stock owned beneficially as of the date of this Prospectus by:
(i) each person or "group" (as that term is defined in Section 13(d)(3) of the
Exchange Act) known by the Company to beneficially own more than 5% of the
Common Stock, (ii) each director of the Company, (iii) each executive officer of
the Company and (iv) all directors and executive officers as a group.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
OF COMMON STOCK BENEFICIAL OWNERSHIP
PRIOR TO THE OF COMMON STOCK
OFFERING(1) AFTER THE OFFERING(1)
--------------------- ---------------------
NAME OF BENEFICIAL OWNER SHARES PERCENT SHARES PERCENT
------------------------ ---------- -------- ---------- --------
<S> <C> <C> <C> <C>
W.T. Wamberg(2)(3)(4)................................. 1,938,518 47.8% 1,938,518 24.1
Lawrence H. Hendrickson............................... 415,509 10.2% 415,509 5.2
Richard C. Chapman.................................... 304,152 7.5% 304,152 3.8
Melvin G. Todd(5)..................................... 235,774 5.7% 235,774 2.9
William J. Gallegos, Jr.(6)........................... 23,895 * 23,895 *
Sue A. Leslie(7)...................................... 30,833 * 30,833 *
Chris L. Parker(8).................................... 16,368 * 16,368 *
Ronald A. Roth(9)..................................... 27,913 * 27,913 *
Larry R. Sluder(10)................................... 37,723 * 37,723 *
Keith L. Staudt(11)................................... 23,202 * 23,202 *
Randolph A. Pohlman(12)............................... 8,333 * 8,333 *
All directors and executive officers as a group (11
individuals)........................................ 3,062,220 72.1% 3,062,220 37.1%
</TABLE>
- ---------------
* Less than 1%
(1) In computing the number of shares of Common Stock beneficially owned by a
person, shares of Common Stock subject to options and warrants or
convertible debt held by that person that are currently exercisable or that
become exercisable within 60 days of the date of this Prospectus are deemed
outstanding for such person but are not deemed to be outstanding for
purposes of computing the ownership percentage for any other person.
(2) Mr. Wamberg has granted the Underwriters an over-allotment option to
purchase 600,000 shares of Common Stock exercisable at any time during the
30-day period after the date of this Prospectus. After giving effect to the
Offering and if the over-allotment is exercised in full, Mr. Wamberg would
own 1,338,518 shares of Common Stock representing 16.6% of the outstanding
shares of Common Stock.
(3) Mr. Wamberg intends to grant to certain employees of The Wamberg
Organization options to purchase an aggregate of 141,406 shares of Common
Stock at varying exercise prices per share. None of the options to be
granted to the employees of The Wamberg Organization are exercisable within
60 days and therefore Mr. Wamberg remains the beneficial owner of such
shares.
(4) Mr. Wamberg has agreed to purchase $1.2 million in aggregate principal
amount of the Clark/Bardes 8.5% Convertible Subordinated Notes due
September 2007 from BCS, an entity that is wholly owned by Messrs.
Hendrickson, Chapman and Walter Hilgenberg. These notes are convertible at
the election of Mr. Wamberg into 203,390 shares of Common Stock and
therefore the number of shares beneficially owned by Mr. Wamberg include
the 203,390 shares of Common Stock issuable upon conversion of the notes.
(5) Includes 70,833 shares of Common Stock issuable upon exercise of
outstanding stock options exercisable within 60 days of the date of this
Prospectus.
(6) Includes 14,573 shares of Common Stock issuable upon exercise of
outstanding stock options exercisable within 60 days of the date of this
Prospectus.
59
<PAGE> 63
(7) Includes 16,667 shares of Common Stock issuable upon exercise of
outstanding stock options exercisable within 60 days of the date of this
Prospectus.
(8) Includes 14,434 shares of Common Stock issuable upon exercise of
outstanding stock options exercisable within 60 days of the date of this
Prospectus.
(9) Includes 16,413 shares of Common Stock issuable upon exercise of
outstanding stock options exercisable within 60 days of the date of this
Prospectus.
(10) Includes 30,146 shares of Common Stock issuable upon exercise of
outstanding stock options exercisable within 60 days of the date of this
Prospectus.
(11) Includes 14,640 shares of Common Stock issuable upon exercise of
outstanding stock options exercisable within 60 days of the date of this
Prospectus.
(12) Includes 8,333 shares of Common Stock issuable upon exercise of outstanding
stock options exercisable within 60 days of the date of this Prospectus.
60
<PAGE> 64
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
PRINCIPAL OFFICE AGREEMENT WITH W.T. WAMBERG
The Company and 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. Upon request, the Company
will provide to The Wamberg Organization life insurance and benefit plan
illustrations, technical support personnel and such other services as are
reasonably necessary for the sale of the Company's programs. 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
$3,872,000, $4,964,000, and $7,792,000 in 1995, 1996 and 1997, respectively, for
commissions and fees earned. The terms and conditions of Mr. Wamberg's Principal
Office Agreement are similar in all material respects to the terms and
conditions of such agreements with other producers designated as principals.
PURCHASE OF RENEWAL REVENUE FROM W.T. WAMBERG AND THE WAMBERG ORGANIZATION
On July 31, 1998, the Predecessor Company, Mr. Wamberg and The Wamberg
Organization entered into an agreement which provides for, among other things, a
purchase of the renewal revenue due under the Principal Office Agreement with
Mr. Wamberg in exchange for a cash payment of approximately $7.4 million. The
Company considered the opportunity to acquire the renewal revenue from Mr.
Wamberg to be consistent with the Company's overall strategy of acquiring
businesses when suitable opportunities arise. This transaction allows
Clark/Bardes to retain additional commission and fee revenue for the ten year
period following the consummation of the transaction. 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. No independent
valuation of the business to be acquired was performed. This transaction was
approved by approximately 99.0% of the disinterested stockholders of the
Predecessor Company at a stockholders' meeting held on July 31, 1998. This
transaction will be effective as of January 1, 1999.
RESTRUCTURING OF THE GRANT OF STOCK TO MELVIN TODD
In December 1994, the Predecessor Company granted to Mr. Todd 52,500 shares
of the Predecessor Company's common stock effective July 1, 1998 if Mr. Todd is
employed as the Company's CEO at that time. In June 1998, this agreement was
altered to provide that if Mr. Todd is employed as CEO on July 1, 1998 he will
receive shares of Common Stock valued at $301,350 (approximately 24,108 shares
based on the mid-point of the Range), $223,650 in cash and a fully vested five
year option to purchase 30,523 shares of Common Stock exercisable at the initial
public offering price.
STOCK PURCHASE AGREEMENTS
On August 29, 1997, the Predecessor Company purchased from Henry J. Smith,
the retired former Chairman of the Board of Directors of the Predecessor
Company, 702,152 shares of the Predecessor Company's common stock, which
represented all of the shares of common stock owned by Mr. Smith. The shares
were purchased in connection with Mr. Smith's retirement from the Predecessor
Company. The purchase price equaled $4.80 per share for an aggregate of
$3,370,332 and consisted of the payment of cash in the amount of $3,033,290 and
the issuance of a Promissory Note in the principal amount of $337,042, which
amount has been paid in full.
On August 29, 1997, the Predecessor Company purchased an aggregate of
1,396,571 shares of the Predecessor Company's common stock, representing 75% of
the shares of common stock owned by a group of
61
<PAGE> 65
stockholders of the Predecessor Company consisting of Malcolm N. Briggs, Steven
J. Cochlan, G.F. Pendleton, III and Don R. Teasley. The purchase of the shares
was made in connection with obtaining the consent of such stockholders to
certain transactions such as the BCS acquisition. The purchase price, which
included a premium of $1.20 per share for the consent to certain transactions
such as the redomestication of the Company, equalled $6.00 per share for an
aggregate of $8,379,429 and consisted of the payment of cash in the amount of
$7,541,486 and the issuance of Subordinated Promissory Notes in the aggregate
principal amount of $837,943, which amount has been paid in full. Each seller
agreed to vote all shares of capital stock then owned, or thereafter acquired,
in the manner specified or directed by the board of directors.
On November 14, 1997, the Predecessor Company purchased from Don Teasley an
aggregate of 52,242 shares of the Predecessor Company's common stock. The
purchase price equalled $4.20 per share for an aggregate of $219,414 and was
paid in cash. The purchase of such shares was made in connection with the
termination of Mr. Teasley's producer agreement with the Predecessor Company.
The Predecessor Company did not obtain any independent valuation with
respect to any of the above described stock purchases. In each case, the Board
of Directors of the Predecessor Company determined that the purchase price
offered by the holders of such shares was fair in relation to prior transactions
and the circumstances of each such purchase of shares.
PHANTOM STOCK AGREEMENT
The Predecessor Company entered into a Phantom Stock Agreement, dated
September 5, 1997, with Steven J. Cochlan, a producer of the Company. Under this
agreement, Mr. Cochlan is entitled to receive payments expressed in units (the
"Incentive Units") based upon certain levels of revenue received by the Company
on sales of certain products by Mr. Cochlan. Mr. Cochlan will be entitled to
receive payments for the value, if any, of the Incentive Units, beginning April
1, 2003 and every year thereafter until April 1, 2008. Management believes that
it is unlikely that Mr. Cochlan will be entitled to any payments under the
Phantom Stock Agreement based on the required revenue performance levels.
ANCILLARY BUSINESS ARRANGEMENTS
Because of various federal and state licensing restrictions, the Company
markets certain products registered with the SEC and its insurance-financed
employee benefit programs in the states of Ohio, Pennsylvania and Texas through
insurance agencies for which the Company provides almost all services pursuant
to an Administration and Services Agreement. Each of the insurance agencies,
Clark/Bardes Securities, Inc., a Texas corporation licensed as a broker/dealer,
Clark/Bardes Agency of Ohio, Inc., an Ohio corporation, Clark/Bardes, Inc. of
Pennsylvania, a Pennsylvania corporation, and Clark/Bardes of Texas, Inc., a
Texas corporation, provides the entity through which the Company's producers
sell certain products and conduct business in such states. In exchange, each of
the insurance agencies is a party to an Administration and Services Agreement
pursuant to which such insurance agency pays the Company to furnish facilities,
services, personnel and assistance, including (i) performing all bookkeeping and
accounting functions, (ii) establishing and maintaining all records required by
law and by generally accepted accounting principles, (iii) furnishing all
stationary, forms, and supplies, (iv) providing all necessary clerical and
professional staff to perform the above activities, (v) providing all computer
hardware and software capabilities and facilities, (vi) providing office space,
furniture, fixtures, equipment and supplies, (vii) assisting in the preparation
of reports required by governmental regulatory and supervisory authorities, and
(viii) billing and collection of all premiums. The charges and fees pursuant to
the Administration and Services Agreements are equal to the costs incurred by
the Company in providing the services, personnel and property, plus an
additional amount equal to a certain percentage of such cost. Each insurance
agency is solely responsible for its own activities as an insurance producer and
for its relationship with the producers or employees in the course and scope of
their activities performed on behalf of such agency. See "Business -- Ancillary
Business Arrangements."
62
<PAGE> 66
DESCRIPTION OF CAPITAL STOCK
As of the date of this Prospectus, the authorized capital stock of CBH
consists of 20,000,000 shares of Common Stock, par value $0.01 per share, of
which 8,059,677 shares will be outstanding immediately following the Offering,
and 1,000,000 shares of Preferred Stock, par value $0.01 per share (the
"Preferred Stock"), of which no shares will be outstanding immediately following
the Offering. The following summary of CBH's capital stock is qualified in its
entirety by reference to CBH's Certificate of Incorporation and its Bylaws.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share on all
matters voted upon by stockholders, including the election of directors, and do
not have cumulative voting rights. Subject to the rights of holders of any then
outstanding shares of Preferred Stock, the holders of the Common Stock are
entitled to such dividends as may be declared in the discretion of the Board of
Directors out of funds legally available therefor. Holders of Common Stock are
entitled to share ratably in the net assets of CBH upon liquidation after
payment or provision for all liabilities and any preferential liquidation rights
of the Preferred Stock then outstanding. The holders of Common Stock have no
preemptive rights to purchase shares of stock in CBH. The shares of Common Stock
are not subject to any redemption provisions and are not convertible into any
other securities of CBH. All outstanding shares of Common Stock are, and the
shares of Common Stock to be issued by CBH in the Offering will be, upon payment
therefor, fully paid and nonassessable. The rights, preferences and privileges
of holders of Common Stock will be subject to those of the holders of any shares
of Preferred Stock the Company may issue in the future. See "Risk
Factors -- Anti-Takeover Considerations"
PREFERRED STOCK
The Board of Directors may from time to time authorize the issuance of one
or more classes or series of Preferred Stock without stockholder approval.
Subject to the provisions of the Certificate of Incorporation and limitations
prescribed by law, the Board of Directors is authorized to adopt resolutions to
issue the shares, establish the number of shares, change the number of shares
constituting any series, and provide or change the voting powers, designations,
preferences and relative, participating, optional or other special rights,
qualifications, limitations or restrictions on shares of Preferred Stock,
including dividend rights (including whether dividends are cumulative), dividend
rates, terms of redemption (including sinking fund provisions), redemption
prices, conversion rights and liquidation preferences, in each case without any
action or vote by the stockholders. CBH has no current plans to issue any shares
of Preferred Stock of any class or series.
One of the effects of undesignated Preferred Stock may be to enable the
Board of Directors to discourage an attempt to obtain control of CBH by means of
a tender offer, proxy contest, merger or otherwise, and thereby protect CBH's
management. The issuance of Preferred Stock pursuant to the Board of Directors'
authority described above may adversely affect the rights of the holders of
Common Stock. For example, Preferred Stock issued by CBH may rank prior to the
Common Stock as to dividend rights, liquidation preference or both, may have
full or limited voting rights and may be convertible into shares of Common
Stock. Accordingly, the issuance of shares of Preferred Stock may discourage
bids for the Common Stock or may otherwise adversely affect the trading price of
the Common Stock. See "Risk Factors -- Anti-Takeover Considerations."
CERTAIN EFFECTS OF AUTHORIZED BUT UNISSUED STOCK
Upon completion of the Offering there will be 9,740,323 shares of Common
Stock (excluding an aggregate of 2.0 million shares reserved for issuance under
the Stock Option Plan and 200,000 shares reserved for issuance under the Stock
Purchase Plan) and 1,000,000 shares of Preferred Stock available for future
issuance without stockholder approval. These additional shares may be utilized
for a variety of corporate purposes, including to facilitate acquisitions or
future public offerings to raise additional capital. CBH does not
63
<PAGE> 67
currently have any plans to issue additional shares of Common Stock or Preferred
Stock (other than shares of Common Stock issuable under the Stock Option Plan
and the Stock Purchase Plan).
ANTI-TAKEOVER CONSIDERATIONS AND SPECIAL PROVISIONS OF THE CERTIFICATE OF
INCORPORATION, BYLAWS AND DELAWARE LAW
Certificate of Incorporation and Bylaws. A number of provisions of the
Certificate of Incorporation and Bylaws concern matters of corporate governance
and the rights of stockholders. Certain of these provisions, including those
which provide for the classification of the Board of Directors and which grant
the Board of Directors the ability to issue shares of Preferred Stock and to set
the voting rights, preferences and other terms thereof, may be deemed to have an
anti-takeover effect and may discourage takeover attempts not first approved by
the Board of Directors (including takeovers which certain stockholders may deem
to be in their best interests). To the extent takeover attempts are discouraged,
temporary fluctuations in the market price of the Common Stock, which may result
from actual or rumored takeover attempts, may be inhibited. Certain of these
provisions also could delay or frustrate the removal of incumbent directors or
the assumption of control by stockholders, even if such removal or assumption
would be beneficial to the stockholders of CBH. These provisions also could
discourage or make more difficult a merger, tender offer or proxy contest, even
if they could be favorable to the interests of stockholders, and could
potentially depress the market price of the Common Stock. The Board of Directors
believes that these provisions are appropriate to protect the interests of CBH
and its stockholders.
Classified Board of Directors. The Certificate of Incorporation provides
for a Board of Directors that is divided into three classes. The directors in
Class I hold office until the first annual meeting of stockholders following the
Offering, the directors in Class II hold office until the second annual meeting
of stockholders following the Offering, and the directors in Class III hold
office until the third annual meeting of stockholders following the Offering
(or, in each case, until their successors are duly elected and qualified or
until their earlier resignation, removal from office for cause or death), and,
after each such election, the directors in each such class will then serve in
succeeding terms of three years and until their successors are duly elected and
qualified. The classification system of electing directors may tend to
discourage a third party from making a tender offer or otherwise attempting to
obtain control of CBH and may maintain the incumbency of the Board of Directors,
as the classification of the Board of Directors and such other provisions
generally increase the difficulty of, or may delay, replacing a majority of the
directors. The Bylaws provide that directors may only be removed for cause by a
vote of holders of at least 66 2/3% of the total votes eligible to be cast by
holders of Common Stock. Vacancies and newly created directorships may only be
filled by a majority of the directors.
Meetings of Stockholders. The Bylaws provide that annual meetings of
stockholders shall be held at such hour on such day and at such place within or
without the State of Delaware as may be fixed by the Board of Directors. A
special meeting of the stockholders may be called only by the Chairman of the
Board, the President, the Board of Directors or by the written request by a vote
of holders of at least 66 2/3% of the total votes eligible to be cast by holders
of Common Stock.
Advance Notice Provisions. The Bylaws provide that nominations for
directors may not be made by stockholders at any annual or special meeting
thereof unless the stockholder intending to make a nomination notifies CBH of
its intention a specified number of days in advance of the meeting and furnishes
to CBH certain information regarding itself and the intended nominee. The Bylaws
also require a stockholder to provide to the Secretary of CBH advance notice of
business to be brought by such stockholder before any annual or special meeting
of stockholders as well as certain information regarding such stockholder and
others known to support such proposal and any material interest they may have in
the proposed business. These provisions could delay stockholder actions that are
favored by the holders of at least a majority of the outstanding stock of CBH
until the next stockholders' meeting.
No Stockholder Action by Written Consent. The Certificate of Incorporation
provides that any action required or permitted to be taken by the stockholders
of CBH at an annual or special meeting of stockholders must be effected at a
duly called meeting and may not be taken or effected by a written consent of
stockholders in lieu thereof.
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Amendment of the Certificate of Incorporation and Bylaws. The Certificate
of Incorporation provides that an amendment thereof must first be approved by a
majority of the Board of Directors and (with certain exceptions) thereafter must
be approved by a vote of the holders of at least 66 2/3% of the total votes
eligible to be cast by holders of Common Stock with respect to such amendment or
repeal.
The Certificate of Incorporation and Bylaws provide that the Bylaws may be
amended or repealed by the Board of Directors or by the stockholders. Such
action by the Board of Directors requires the affirmative vote of a majority of
the directors then in office. Such action by the stockholders requires the
affirmative vote of the holders of at least 66 2/3% of the total votes eligible
to be cast by holders of Common Stock with respect to such amendment or repeal.
Delaware Statutory Business Combination Provision. CBH is subject to
Section 203 ("Section 203") of the DGCL, which, subject to certain exceptions,
prohibits a publicly held Delaware corporation from engaging in any business
combination with any interested stockholder for a period of three years
following the time that such stockholder became an interested stockholder,
unless: (i) prior to such time, the board of directors of the corporation
approved either the business combination or the transaction which resulted in
the stockholder becoming an interested stockholder; (ii) upon consummation of
the transaction which resulted in the stockholder becoming an interested
stockholder, the interested stockholder owned at least 85.0% of the voting stock
of the corporation outstanding at the time the transaction commenced, excluding
for purposes of determining the number of shares outstanding those shares owned
(x) by persons who are directors and also officers and (y) by employee stock
plans in which employee participants do not have the right to determine
confidentially whether shares held subject to the plan will be tendered in a
tender or exchange offer; or (iii) at or subsequent to such time, the business
combination is approved by the board of directors and authorized at an annual or
special meeting of stockholders, and not by written consent, by the affirmative
vote of at least two-thirds of the outstanding voting stock which is not owned
by the interested stockholder. The application of Section 203 may limit the
ability of stockholders to approve a transaction that they may deem to be in
their best interests.
Section 203 defines "business combination" to include: (i) any merger or
consolidation involving the corporation and the interested stockholder; (ii) any
sale, transfer, pledge or other disposition of 10% or more of the assets of the
corporation to or with the interested stockholder; (iii) subject to certain
exceptions, any transaction which results in the issuance or transfer by the
corporation of any stock of the corporation to the interested stockholder; (iv)
any transaction involving the corporation which has the effect of increasing the
proportionate share of the stock of any class or series of the corporation
beneficially owned by the interested stockholder; or (v) the receipt by the
interested stockholder of the benefit of any loans, advances, guarantees,
pledges or other financial benefits provided by or through the corporation.
Section 203 defines an "interested stockholder" as a person who, together with
affiliates and associates, owns (or within the prior three years did own) 15% or
more of the outstanding voting stock of the corporation. Section 203 would not
apply to transactions with Mr. Wamberg or his affiliates and associates because
Mr. Wamberg became an interested stockholder prior to the time that CBH became
subject to Section 203.
A corporation may, at its option, exclude itself from the coverage of
Section 203 by amending its certificate of incorporation or bylaws by action of
its stockholders to exempt itself from coverage, provided that, with certain
limited exceptions, such bylaw or charter amendment shall not become effective
until 12 months after the date it is adopted. Neither the Certificate of
Incorporation nor the Bylaws contains any such exclusion.
Stockholder Rights Plan
On July 10, 1998, the Board of Directors of CBH declared a dividend of one
preferred share purchase right (a "Right") for each outstanding share of Common
Stock of CBH. The dividend will be payable to stockholders of record on July 20,
1998 (the "Record Date"). Each Right entitles the registered holder to purchase
from CBH one one-thousandth of a share of Junior Participating Preferred Stock,
Series A, par value $0.01 per share (the "Preferred Shares"), of CBH at $63 per
one-thousandth of a Preferred Share (the "Purchase Price") The description and
terms of the Rights are set forth in a Rights Agreement (the "Rights
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<PAGE> 69
Agreement") between CBH and The Bank of New York, as Rights Agent (the "Rights
Agent"), a copy of which has been filed as an exhibit to the Registration
Statement of which this Prospectus is a part.
Initially, the Rights will be attached to all certificates representing
shares of Common Stock ("Common Shares") then outstanding, and no separate Right
Certificates will be distributed. The Rights will separate from the Common
Shares upon the earliest to occur of (i) the close of business 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, if the tenth day after such Acquiring Person
acquires beneficial ownership of 15% or more of the outstanding Common Shares
occurs before the Record Date, the close of business on the Record Date), or
(ii) the close of business 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 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
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 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 the 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
("Right 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 Right
Certificates alone will evidence the Rights. The Rights are not exercisable
until the Distribution Date. The Rights will expire on the date ten years after
the Record Date (the "Final Expiration Date"), unless the Rights are earlier
redeemed or exchanged by CBH, in each case, as described below.
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-thousandth 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
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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 CBH 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.
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 CBH 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 (or of a share of a class or series of CBH's preferred stock
having equivalent rights, preferences and privileges), 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 CBH, 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 CBH 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 CBH
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 stockholder of CBH, including without limitation, the right to vote
or to receive dividends. While the distribution of the Rights will not be
taxable to stockholders of CBH, stockholders may, depending upon the
circumstances, recognize taxable income should the Rights become exercisable or
upon the occurrence of certain events thereafter.
Each outstanding Common Share on the Record Date received one Right. As
long as the Rights are attached to the Common Shares, CBH will issue one Right
with each new Common Share so that all such shares will have attached rights.
CBH will reserve 20,000 Preferred Shares for issuance upon exercise of the
Rights.
The Rights have certain anti-takeover effects. The Rights will cause
substantial dilution to a person or group that attempts to acquire CBH on terms
not approved by CBH's Board of Directors, except pursuant to an offer
conditioned on a substantial number of Rights being acquired. The Rights should
not interfere with any merger or other business combination approved by the
Board of Directors since the Rights may be redeemed by CBH at the Redemption
Price prior to the time that a person or group has acquired beneficial ownership
of 15% or more of the Common Shares.
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Indemnification and Limitation Of Liability. The Certificate of
Incorporation provides that a director shall not be liable to CBH or its
stockholders for monetary damages for breach of fiduciary duty as a director, to
the fullest extent permitted by the DGCL, as it now exists or may hereafter be
amended. The Certificate of Incorporation and the Bylaws also provide that CBH
shall indemnify any and all persons whom it shall have the power to indemnify,
including directors, officers and agents (as determined at the discretion of the
Board of Directors), against any and all expenses, liabilities or other matters,
to the fullest extent permitted by the DGCL. At the present time, there is no
pending litigation or proceeding involving any director, officer, employee or
agent of CBH in which indemnification will be required or permitted. CBH is not
aware of any threatened litigation or proceeding which may result in a claim for
such indemnification.
Preferred Stock. The Certificate of Incorporation permits CBH's Board of
Directors to issue Preferred Stock at any time without stockholder approval. See
"Description of Capital Stock -- Preferred Stock."
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is The Bank of New
York.
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of a substantial number of shares of Common Stock in the
public market could adversely affect trading prices prevailing from time to
time.
Upon completion of the Offering, CBH will have outstanding 8,059,677 shares
of Common Stock. The shares sold in the Offering will be freely tradeable
without restriction under the Securities Act, unless purchased by "affiliates"
of CBH as that term is defined in Rule 144, which is summarized below. Of the
remaining 4,059,677 shares, 1,580,513 shares are freely transferable and
2,479,164 shares are "restricted securities" as that term is defined in Rule 144
("Restricted Shares"). Restricted Shares may be sold in the public market only
if such sale is registered under the Securities Act or if such sale qualifies
for an exemption from registration, such as the one provided by Rule 144. Sales
of the Restricted Shares in the open market, or the availability of such shares
for sale, could adversely affect the trading price of the Common Stock.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned Restricted Shares for at
least one year following the later of the date of the acquisition of such shares
from the issuer or an affiliate of the issuer would be entitled to sell within
any three-month period a number of shares that does not exceed the greater of:
(i) 1.0% of the number of shares of Common Stock then outstanding (approximately
80,597 shares immediately after the Offering) or (ii) the average weekly trading
volume of the Common Stock during the four calendar weeks preceding the filing
of a Form 144 with respect to such sale. Sales under Rule 144 are also subject
to certain manner of sale provisions and notice requirements and the
availability of current public information about the Company. Under Rule 144(k),
a person who is not deemed to have been an affiliate of the Company at any time
during the 90 days preceding a sale, and who has beneficially owned the shares
proposed to be sold for at least two years following the later of the date of
the acquisition of such shares from the issuer or an affiliate of the issuer, is
entitled to sell such shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144.
CBH intends to file registration statements on Form S-8 under the
Securities Act covering the offering and sale of the 2,000,000 shares of Common
Stock reserved for issuance under the Stock Option Plan and the 200,000 shares
reserved for issuance under the Stock Purchase Plan. Accordingly, shares of
Common Stock issued upon exercise of options granted under the Stock Option Plan
or purchased with payroll deductions under the Stock Purchase Plan will be
available for sale in the open market, unless such shares are subject to certain
lock-up agreements. See "Underwriting."
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UNDERWRITING
The underwriters of the Offering named below (the "Underwriters"), for whom
Bear, Stearns & Co. Inc., Piper Jaffray Inc. and Conning & Company are acting as
representatives, have severally agreed with CBH, subject to the terms and
conditions of the Underwriting Agreement (the form of which has been filed as an
exhibit to the Registration Statement on Form S-1 of which this Prospectus is a
part), to purchase from CBH the aggregate number of Shares set forth opposite
their respective names below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
Bear, Stearns & Co. Inc. ...................................
Piper Jaffray Inc. .........................................
Conning & Company...........................................
--------
Total.............................................
========
</TABLE>
The nature of the obligations of the Underwriters is such that all of the
Common Stock must be purchased if any is purchased. Those obligations are
subject, however, to various conditions, including the approval of certain
matters by counsel. CBH has agreed to indemnify the Underwriters against certain
liabilities, including under the Securities Act, and, where such indemnification
is unavailable, to contribute to payments that the Underwriters may be required
to make in respect of such liabilities.
CBH has been advised that the Underwriters propose to offer the Common
Stock directly to the public initially at the public offering price set forth on
the cover page of this Prospectus and to certain selected dealers at such price
less a concession not to exceed $ per share, that the Underwriters may
allow, and such selected dealers may reallow, a concession to certain other
dealers not to exceed $ per share, and that after the commencement of the
Offering, the public offering price and the concessions may be changed.
Mr. Wamberg has granted to the Underwriters an option to purchase in the
aggregate up to 600,000 additional shares of Common Stock solely to cover
over-allotments, if any. The option may be exercised in whole or in part at any
time within 30 days after the date of this Prospectus. To the extent the option
is exercised, the Underwriters will be severally committed, subject to certain
conditions, including the approval of certain matters by counsel, to purchase
the additional shares of Common Stock in proportion to their respective purchase
commitments as indicated in the preceding table.
CBH, its executive officers, directors and principal stockholders,
including Mr. Wamberg, have agreed that, subject to certain limited exceptions,
for a period of at least 180 days after the date of this Prospectus, without the
prior written consent of Bear, Stearns & Co. Inc., they will not, directly or
indirectly, offer or agree to sell, sell or otherwise dispose of any shares of
Common Stock (or securities convertible into, exchangeable for or evidencing the
right to purchase shares of Common Stock).
Prior to the Offering, there has been no public market for the Common
Stock. Consequently, the initial public offering price will be determined
through negotiations among CBH and the representatives of the Underwriters.
Among the factors to be considered in making such determination will be CBH's
financial and operating history and condition, its prospects and prospects for
the industry in which it does business, the management of CBH, prevailing equity
market conditions and the demand for securities considered comparable to those
of CBH.
In order to facilitate the Offering, certain persons participating in the
Offering may engage in transactions that stabilize, maintain or otherwise affect
the price of the Common Stock during and after the Offering. Specifically, the
Underwriters may over-allot or otherwise create a short position in the Common
Stock for
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their own account by selling more shares than have been sold to them by CBH. The
Underwriters may elect to cover any such short position by purchasing shares in
the open market or by exercising the over-allotment option granted to the
Underwriters. In addition, such persons may stabilize or maintain the price of
the Common Stock by bidding for or purchasing shares in the open market and may
impose penalty bids under which selling concessions allowed to syndicate members
or other broker-dealers participating in the Offering are reclaimed if shares
previously distributed in the Offering are repurchased in connection with
stabilization transactions or otherwise. The effect of these transactions may be
to stabilize or maintain the market price of the Common Stock at a level above
that which might otherwise prevail in the open market. The imposition of a
penalty bid may also affect the price of the Common Stock to the extent that it
discourages resales thereof. No representation is made as to the magnitude or
effect of any such stabilization or other transactions. Such transactions may be
effected on the Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
At CBH's request, the Underwriters have reserved up to 600,000 shares of
Common Stock for sale to the Company's directors, officers, employees and
designees and have agreed to permit them to buy such shares at the initial price
to public. The number of shares of Common Stock available for sale by CBH to the
general public will be reduced to the extent such purchasers purchase such
reserved shares. Any reserved shares not so purchased will be offered by the
Underwriters to the general public at the initial price to the public.
Certain of the Underwriters and their affiliates have from time to time
provided, and may continue to provide, investment banking services and general
financing and banking services to CBH and certain of its affiliates for which
such Underwriters or affiliates have received and will receive fees and
commissions.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for CBH by Akin, Gump, Strauss, Hauer & Feld, L.L.P., Dallas, Texas.
Certain matters will be passed upon for the Underwriters by Skadden, Arps,
Slate, Meagher & Flom LLP, New York, New York.
EXPERTS
The financial statements of the Predecessor Company at December 31, 1997
and for the year then ended appearing in this Prospectus and the Registration
Statement have been audited by Ernst & Young LLP, independent auditors, as set
forth in their report thereon appearing elsewhere herein, and are included in
reliance upon such report given upon the authority of such firms as experts in
accounting and auditing. The financial statements of the Predecessor Company at
December 31, 1996 and 1995, and for each of the two years in the period ended
December 31, 1996, appearing in this Prospectus and the Registration Statement
have been audited by Lane Gorman Trubitt, LLP ("Lane Gorman"), independent
auditors, as set forth in their report thereon appearing elsewhere herein, and
are included in reliance upon such report given upon the authority of such firms
as experts in accounting and auditing. The financial statements of Bank
Compensation Strategies, Inc. at December 31, 1996 and 1995, and for each of the
two years in the period ended December 31, 1996, appearing in this Prospectus
and the Registration Statement have been audited by McGladrey & Pullen LLP,
independent auditors, as set forth in their report therein appearing elsewhere
herein, and are included in reliance upon such report given upon the authority
of such firms as experts in accounting and auditing.
On June 2, 1997, the Predecessor Company dismissed Lane Gorman and engaged
Ernst & Young LLP to be its independent auditors. The financial statements of
the Predecessor Company at December 31, 1996 and 1995, and for each of the two
years in the period ended December 31, 1996 did not contain an adverse opinion
or a disclaimer of opinion and were not qualified or modified as to audit scope
or accounting principles. In connection with the audits of the Predecessor
Company's financial statements at December 31, 1996 and 1995, and for each of
the two years in the period ended December 31, 1996, and subsequent interim
periods, there were no disagreements between the Predecessor Company and Lane
Gorman on any matter of accounting principles or practices, financial statement
disclosure or auditing scope or procedure that, if not
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resolved to the satisfaction of Lane Gorman, would have caused such firm to make
reference thereto. The Predecessor Company's decision to change to Ernst & Young
LLP was approved by the Board of Directors of the Predecessor Company.
AVAILABLE INFORMATION
CBH has filed with the SEC, a Registration Statement on Form S-1 (the
"Registration Statement") under the Securities Act with respect to the offering
and sale of Common Stock. This Prospectus does not contain all the information
set forth in the Registration Statement and the exhibits and schedules thereto.
For further information with respect to CBH and the Common Stock, reference is
made to the Registration Statement and to the exhibits and schedules filed
therewith. Statements contained in this Prospectus as to the contents of any
contract or other document referred to are not necessarily complete, and in each
instance reference is made to the copy of such contract or other document filed
as an exhibit to the Registration Statement, each such statement being qualified
in all respects by such reference. A copy of the Registration Statement may be
inspected and copied at the public reference facilities maintained by the SEC at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at its
following regional offices: Northwestern Atrium Center, 500 W. Madison Street,
Suite 1400, Chicago, Illinois 60621-2511; and 7 World Trade Center, 13th Floor,
New York, New York 10048. Copies of such material can be obtained at prescribed
rates from the Public Reference Section of the SEC at Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, or at the SEC's Internet world wide web
site at http://www.sec.gov. The Company intends to distribute to the holders of
Common Stock annual reports containing consolidated statements audited by
independent accountants.
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GLOSSARY
"Acquiring Person" has the meaning set forth in "Description of Capital
Stock -- Anti-Takeover Considerations and Special Provisions of the Certificate
of Incorporation, Bylaws and Delaware Law."
"Actuary" means a person who performs the statistical and mathematical
calculations necessary to compute insurance risks and premiums.
"Administrative agreement" means an arrangement under which the sponsor of
a benefit plan pays a fee in exchange for administrative services provided by
the Company, an insurance company or a third-party administrator.
"Administration and Services Agreement" has the meaning set forth in
"Business -- Ancillary Business Arrangements."
"Audit Committee" has the meaning set forth in "Management -- Committees of
the Board of Directors."
"Beneficiary" means the person or party who is named by the owner of an
insurance policy to receive the policy benefit upon the occurrence of the event
against which the policy insured. Any person (relative, non-relative) or entity
(charity, corporation, trustee, partnership) can be named a beneficiary.
"Bank-owned life insurance" means business-owned life insurance purchased
by a bank. See "Business -- Programs and Products."
"BCS" means Bank Compensation Strategies, Inc., a Minnesota based company
whose assets were acquired by the Predecessor Company effective September 1,
1997.
"Board of Directors" has the meaning set forth in "Risk
Factors -- Anti-Takeover Considerations."
"Broker" means a sales agent who sells insurance products of more than one
insurance company.
"Business-owned life insurance" means life insurance policies purchased by
a business that insure the lives of a number of employees. The business pays the
premiums on, and is the owner and beneficiary of, such policies. Business-owned
life insurance is used primarily to offset a business' cost of providing
employee benefits and to supplement and secure benefits for key executives. The
cash values of the life insurance policies are usually listed as an asset on a
company's balance sheet. See "Business -- Programs and Products."
"Bylaws" has the meaning set forth in "Risk Factors -- Anti-Takeover
Considerations."
"Carriers" has the meaning set forth in "The
Reorganization -- Extinguishment of Warrants."
"Cash value" means the amount of money, before adjustments for factors such
as policy loans, that a policyholder will receive if a permanent life insurance
policy does not remain inforce until the insured's death. Also know as cash
surrender value.
"CBH" means Clark/Bardes Holdings, Inc., a Delaware corporation. CBH owns
all the issued and outstanding shares of capital stock of Clark/Bardes, Inc., a
Delaware corporation.
"Certificate of Incorporation" has the meaning set forth in "Risk
Factors -- Anti-Takeover Considerations."
"CIGNA" means Connecticut General Life Insurance Company, a wholly owned
subsidiary of CIGNA Corporation.
"Clark/Bardes" means Clark/Bardes, Inc., a Delaware corporation, and its
predecessors. All the issued and outstanding shares of capital stock of
Clark/Bardes, Inc. is owned by Clark/Bardes Holdings, Inc., a Delaware
corporation.
"Code" means the Internal Revenue Code of 1986, as amended.
"Common Stock" means the shares of common stock, par value $0.01 per share,
of CBH.
72
<PAGE> 76
"Company" means Clark/Bardes Holdings, Inc., a Delaware corporation,
together with its wholly owned subsidiary Clark/Bardes, Inc. and the predecessor
of such wholly owned subsidiary.
"Compensation Committee" has the meaning set forth in
"Management -- Committees of the Board of Directors."
"DIP" means deferred income plan. See "Business -- Programs and Plans."
"Distribution Date" has the meaning set forth in "Description of Capital
Stock -- Anti-Takeover Considerations and Special Provisions of the Certificate
of Incorporation, Bylaws and Delaware Law."
"Distribution system" means a method of providing products from an
insurance company to consumers.
"DGCL" has the meaning set forth in "Risk Factors -- Anti-Takeover
Considerations."
"Employee benefit plan" means a formal arrangement by which by an employer
provides for the economic and social welfare of its employees. Examples of
employee benefit plans include: (i) pension plans for retirement; (ii) group
life insurance; (iii) group health insurance for illness and accident; (iv)
group disability income insurance for the loss of income due to illness and
accident; (v) accidental death and dismemberment; and (vi) dental insurance,
eyeglass insurance, and legal expense insurance. These plans are established for
the reasons of morale, to reduce turnover, and for certain tax benefits.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended. ERISA is a federal law established to govern private pension plans,
including vesting requirements, funding mechanisms and general plan design and
descriptions.
"Executive Committee" has the meaning set forth in
"Management -- Committees of the Board of Directors."
"Existing Stockholders" has the meaning set forth in "The
Reorganization -- Overview."
"Final Expiration Date" has the meaning set forth in "Description of
Capital Stock -- Anti-Takeover Considerations and Special Provisions of the
Certificate of Incorporation, Bylaws and Delaware Law."
"401(k) Plan" has the meaning set forth in "Management -- Employee and
Retirement Plans."
"Funding mechanism" means a method by which a group insurance plan's claim
costs and administrative expenses are paid.
"General account product" means a life insurance product that is structured
with investments that are held within the insurance company's general account,
as opposed to a separate account. General account products are usually fixed
rate life insurance products with yields that are reset annually based upon the
investments within the general account.
"General American" means General American Life Insurance Company, an
indirect wholly owned subsidiary of General American Mutual Holding Company.
"Great-West" means The Great-West Life & Annuity Insurance Company.
"Group insurance policy" means an insurance policy that is issued to an
organization that is purchasing insurance coverage for a specific group of
people.
"GTCO" means group term carve out plan. See "Business -- Programs and
Plans."
"Inforce" means insurance policies that have not expired.
"Leveraged COLI" means leveraged corporate-owned life insurance. Leveraged
COLI is an insurance product that allows a policyholder to borrow against the
cash value of the policy and to deduct a portion of the interest expense.
Narrowly viewed, these borrowings minimize the cash investment in the policy
while the cash values continue to grow at the declared rate of interest. The
result is an increased or leveraged net yield to the policy. Leveraged COLI was
effectively eliminated by changes in the federal tax laws.
73
<PAGE> 77
"Life Investors" means Life Investors Insurance Company of America, a
member of the AEGON Insurance Group.
"Merger" has the meaning set forth in "The Reorganization -- Overview."
"NASD" means the National Association of Securities Dealers, Inc. which is
an organization of brokers and securities dealers in the over-the-counter market
operation under the auspices of the Securities and Exchange Commission. The
NASD's purpose is to enforce, on a self-regulation basis, the rules of the
Securities and Exchange Commission which are designed to protect investors
against fraud and market manipulation of stocks. Insurance agents selling
variable life insurance, variable annuities and mutual funds are required to be
licensed by the NASD.
"Nationwide" means Nationwide Life Insurance Company, a wholly owned
subsidiary of Nationwide Financial Services, Inc.
"OBRA" has the meaning set forth in "Business -- Programs and Products."
"OCC" means Office of the Comptroller of the Currency which was created as
a result of the National Currency Act of 1863 and the National Banking Act of
1964. The OCC is the prime regulator for all U.S. nationally chartered banks and
is the organization that performs examinations and rulings on the national
banks.
"Offering" means the offer of Common Stock made pursuant to the Prospectus.
"Operating Margin" has the meaning set forth in "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Results of
Operations."
"Pending Acquisition" has the meaning set forth in "Pending Acquisition."
"Pension plan" means an agreement under which an employer establishes an
employee benefit plan to provide its employees with a lifetime monthly income
benefit that begins at an individual employee's retirement. To qualify, an
employee must have met minimum age and service requirements. Benefit formulas
can be either the defined contribution pension (money purchase plan) or the
defined benefit plan.
"Persistency" means the maintenance of insurance policies inforce until
completion of the term for which the policy was written.
"Phoenix Home Life" means Phoenix Home Life Mutual Insurance Company.
"Plan administrator" means the person or entity responsible for all the
administrative functions of an employee benefit plan, including ensuring that an
employee benefit plan complies with ERISA's disclosure and reporting
requirements.
"Plan participant" means an employee who is covered by a private employee
benefit plan established by its employer.
"Plan sponsor" means an employer that establishes a private employee
benefit plan.
"Policy loan" means a loan, the amount of which is based on the cash value
of a life insurance policy. Usually, the policyholder does not have to repay the
loan until the policy matures or until the loan and any outstanding interest
equals the cash value.
"Predecessor Company" means Clark/Bardes, Inc., a Texas corporation. The
Predecessor Company was founded in 1967 and merged with and into Clark/Bardes,
Inc., a Delaware corporation, in connection with the Merger.
"Preferred shares" has the meaning set forth in "Description of Capital
Stock -- Anti-Takeover Considerations and Special Provisions of the Certificate
of Incorporation, Bylaws and Delaware Law."
"Premium" means the specified amount of money that an insurance company
receives in exchange for its promise to provide a policy benefit when a specific
loss occurs. Premiums are calculated by combining expectation of loss and
expense and profit loading.
74
<PAGE> 78
"Producer" means an individual who has contracted with the Company to
market the Company's programs and services on an exclusive basis. Each producer
is an independent contractor and is designated by the Company as either a
principal, representative or associate depending upon such producer's sales
volume.
"Producer agreement" means an agreement which creates a legal relationship
by which one party -- the agent -- is authorized to perform certain acts for
another party -- the principal. In the case of Clark/Bardes, each producer is an
agent of the Company.
"Protected Equity Plan" ("PEP") means a hybrid form of business-owned life
insurance incorporating the features of annual fixed yield insurance and
variable yield insurance. PEP usually involves an investment participation in
the S&P 500 index. The PEP yield is guaranteed to the greater of a percentage
participation in the S&P 500 index annual increase with a set maximum ceiling
yield and a minimum set floor yield. Further, PEP offers the features of a
tax-free yield, a guaranteed minimum yield and a guarantee of principal and
liquidity. It is the first life insurance product to receive patent pending
protection.
"Purchase Price" has the meaning set forth in "Description of Capital
Stock -- Anti-Takeover Considerations and Special Provisions of the Certificate
of Incorporation, Bylaws and Delaware Law."
"Qualified plan" means a private employee retirement plan established by a
plan sponsor that meets certain legal requirements and as a result receives
favorable tax treatment.
"Range" means the spread between the upper and lower values of initial
public offering prices which are anticipated or estimated for the Offering. It
is currently anticipated that the initial public offering price will be $12.50
per share, the midpoint of the Range of $11.50 and $13.50 per share.
"Record Date" has the meaning set forth in "Description of Capital
Stock -- Anti-Takeover Considerations and Special Provisions of the Certificate
of Incorporation, Bylaws and Delaware Law."
"Redemption Price" has the meaning set forth in "Description of Capital
Stock -- Anti-Takeover Considerations and Special Provisions of the Certificate
of Incorporation, Bylaws and Delaware Law."
"Registered product" means an investment product, such as an annuity or a
variable life insurance policy, which must be registered with the Securities and
Exchange Commission or a state securities commission before such product can be
offered or sold in a particular jurisdiction. If an investment product is not
exempt from the registration requirement, the product is called a nonexempt
security.
"Registration Statement" has the meaning set forth in "Available
Information."
"Reorganization" has the meaning set forth in "The
Reorganization -- Overview."
"Reorganization Agreement" has the meaning set forth in "The
Reorganization -- Overview."
"Restricted Shares" has the meaning set forth in "Shares Eligible for
Future Sale."
"Restructured Notes" has the meaning set forth in "The
Reorganization -- Overview."
"Right" has the meaning set forth in "Description of Capital
Stock -- Anti-Takeover Considerations and Special Provisions of the Certificate
of Incorporation, Bylaws and Delaware Law."
"Rights Agent" has the meaning set forth in "Description of Capital
Stock -- Anti-Takeover Considerations and Special Provisions of the Certificate
of Incorporation, Bylaws and Delaware Law."
"Rights Agreement" has the meaning set forth in "Description of Capital
Stock -- Anti-Takeover Considerations and Special Provisions of the Certificate
of Incorporation, Bylaws and Delaware Law."
"Rights Certificate" has the meaning set forth in "Description of Capital
Stock -- Anti-Takeover Considerations and Special Provisions of the Certificate
of Incorporation, Bylaws and Delaware Law."
"Rule 144" has the meaning set forth in "Shares Eligible for Future Sale."
"Sales office" means a field office that is established and maintained by a
producer.
"Schoenke Companies" has the meaning set forth in "Pending Acquisition."
75
<PAGE> 79
"SEC" mean the Securities and Exchange Commission, which is a federal
agency empowered to regulate and supervise the selling of securities, to prevent
unfair practices on security exchanges and over-the-counter markets and to
maintain fair and orderly markets for investors.
"Section 203" has the meaning set forth in "Description of Capital
Stock -- Anti-Takeover Considerations and Special Provisions of the Certificate
of Incorporation, Bylaws and Delaware Law."
"Separate account" means an investment account maintained separately from
an insurance company's general investment account that is established to manage
the funds placed in variable rate products. Variable rate products, such as
variable life insurance policies and variable annuity policies, have fluctuating
yields based upon the investments within the separate account.
"SERP" means supplemental executive retirement plan. See
"Business -- Programs and Plans."
"SOP" means supplemental offset plan. See "Business -- Programs and Plans."
"Split dollar life insurance" means an employee benefit plan under which
the employer and its employees split the cost, cash value and insurance coverage
of the life insurance policy. The employee usually pays a small amount of the
premium, typically tied to a one year term insurance cost, and the employer will
pay the remaining premium. The employer is usually entitled to the policy's cash
value and death proceeds in an amount equal to the sum of its premium payments.
The excess of the policy's cash value and death proceeds are payable to the
employee. Split dollar plans may exist solely as an additional employee benefit,
or may be used to offset employee benefit liabilities.
"Stock Option Plan" has the meaning set forth in "Risk Factors -- Possible
Dilutive Effect of Issuance of Additional Shares."
"Stock Purchase Plan" has the meaning set forth in "Risk
Factors -- Possible Dilutive Effect of Issuance of Additional Shares."
"Stock Transfer Agreement" has the meaning set forth in
"Business -- Ancillary Business Arrangements."
"Stockholder Distribution Amount" has the meaning set forth in "The
Reorganization -- Termination of S Corporation Status."
"Stockholders' Agreement" has the meaning set forth in "The
Reorganization -- Overview."
"Tax Agreement" has the meaning set forth in "The
Reorganization -- Termination of S Corporation Status."
"The Wamberg Organization" means The Wamberg Organization, Inc., an
Illinois corporation. W.T. Wamberg, the Chairman of the Board of CBH and
Clark/Bardes, owns all the issued and outstanding capital stock of The Wamberg
Organization.
"Third-party administrator" means an organization other than an insurance
company that provides administrative services to the plan sponsors of group
benefit plans.
"Underwriters" has the meaning set forth in "Underwriting."
"Underwriting" means the process of identifying and classifying the degree
of risk represented by a proposed insured.
"Variable life insurance" means an investment-oriented life insurance
policy that provides a return linked to an underlying portfolio of securities.
The portfolio is typically a group of mutual funds established by the insurance
company as a separate account, with the policyholder given some investment
discretion in choosing the mix of assets. Variable life insurance offers fixed
premiums and a minimum death benefit. Usually, the higher the total return on
the investment portfolio, the higher the death benefit or surrenders value of
the variable life policy.
"Warrants" has the meaning set forth in "The Reorganization -- Overview."
"West Coast Life" means West Coast Life Insurance Company, a wholly owned
subsidiary of Protective Life Insurance Company.
76
<PAGE> 80
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Clark/Bardes, Inc. (the predecessor to Clark/Bardes
Holdings, Inc.), Reports of Independent Auditors.......... F-2
Clark/Bardes, Inc. (the predecessor to Clark/Bardes
Holdings, Inc.), Balance Sheets at December 31, 1996 and
1997 and at June 30, 1998 (unaudited)..................... F-4
Clark/Bardes, Inc. (the predecessor to Clark/Bardes
Holdings, Inc.), Statements of Income for the years ended
December 31, 1995, 1996 and 1997 and the six months ended
June 30, 1997 and 1998 (unaudited)........................ F-5
Clark/Bardes, Inc. (the predecessor to Clark/Bardes
Holdings, Inc.), Statements of Stockholders' Equity
(Deficit) for the years ended December 31, 1995, 1996 and
1997 and the six months ended June 30, 1998 (unaudited)... F-6
Clark/Bardes, Inc. (the predecessor to Clark/Bardes
Holdings, Inc.), Statements of Cash Flows for the years
ended December 31, 1995, 1996 and 1997 and the six months
ended June 30, 1997 and 1998 (unaudited).................. F-7
Notes to Clark/Bardes, Inc. (the predecessor to Clark/Bardes
Holdings, Inc.), Financial Statements..................... F-8
Bank Compensation Strategies Group, Unaudited Balance Sheet
at August 31, 1997........................................ F-23
Bank Compensation Strategies Group, Unaudited Statement of
Income for the eight months ended August 31, 1997......... F-24
Bank Compensation Strategies Group, Unaudited Statement of
Shareholders' Equity for the eight months ended August 31,
1997...................................................... F-24
Bank Compensation Strategies Group, Unaudited Statement of
Cash Flows for the eight months ended August 31, 1997..... F-25
Bank Compensation Strategies Group, Footnotes to Unaudited
Financial Statements...................................... F-26
Bank Compensation Strategies Group, Independent Auditor's
Report.................................................... F-27
Bank Compensation Strategies Group, Balance Sheets at
December 31, 1996 and 1995................................ F-28
Bank Compensation Strategies Group, Statements of Income for
the years ended December 31, 1996 and 1995................ F-29
Bank Compensation Strategies Group, Statements of
Stockholder's Equity for the years ended December 31, 1996
and 1995.................................................. F-30
Bank Compensation Strategies Group, Statements of Cash Flows
for the years ended December 31, 1996 and 1995............ F-31
Notes to Bank Compensation Strategies Group Financial
Statements................................................ F-32
</TABLE>
F-1
<PAGE> 81
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Clark/Bardes, Inc. (the predecessor to Clark/Bardes Holdings, Inc.)
We have audited the balance sheet of Clark/Bardes, Inc. (the predecessor to
Clark/Bardes Holdings, Inc.) as of December 31, 1997, and the related statements
of income, stockholders' equity (deficit), and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit. The financial statements of Clark/Bardes, Inc.
for the years ended December 31, 1996 and 1995, were audited by other auditors
whose report dated February 7, 1997 expressed an unqualified opinion on those
statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1997 financial statements referred to above present
fairly, in all material respects, the financial position of Clark/Bardes, Inc.
at December 31, 1997, and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Dallas, Texas
February 18, 1998, except for
Note 15, as to which the
date is July 10, 1998
F-2
<PAGE> 82
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Clark/Bardes, Inc. (the predecessor to Clark/Bardes Holdings, Inc.)
We have audited the accompanying balance sheets of Clark/Bardes, Inc. (the
predecessor to Clark/Bardes Holdings, Inc.) as of December 31, 1996, and the
related statements of income, stockholders' equity, and cash flows for each of
the two years then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Clark/Bardes, Inc. as of
December 31, 1996, and the results of its operations and its cash flows for each
of the two years then ended, in conformity with generally accepted accounting
principles.
Dallas, Texas
February 7, 1997
LANE GORMAN TRUBITT, L.L.P.
F-3
<PAGE> 83
CLARK/BARDES, INC.
(THE PREDECESSOR TO CLARK/BARDES HOLDINGS, INC.)
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, PRO FORMA AT
-------------------------- JUNE 30, JUNE 30,
1996 1997 1998 1998 - NOTE 15
----------- ------------ ------------ --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 4,881,584 $ 3,782,941 $ 6,305,094 $ 3,105,094
Accounts and notes receivable:
Trade................................................... 2,667,751 7,720,444 2,386,839 2,386,839
Affiliates.............................................. 122,996 10,636 284,787 284,787
Notes receivable (related parties: $110,887, $205,658
and $120,466 at December 31, 1996 and 1997 and June
30, 1998, respectively)............................... 434,181 477,779 388,871 388,871
----------- ------------ ------------ ------------
Total accounts and notes receivable................. 3,224,928 8,208,859 3,060,497 3,060,497
Other current assets........................................ -- -- 231,310 231,310
Accrued interest receivable................................. 26,423 45,811 68,674 68,674
----------- ------------ ------------ ------------
Total current assets................................ 8,132,935 12,037,611 9,665,575 6,465,575
Equipment and leasehold improvements, net................... 376,850 715,854 747,336 747,336
Intangible assets:
Goodwill (net of accumulated amortization of approximately
$237,000 and $591,000 at December 31, 1997 and June 30,
1998, respectively)..................................... -- 22,897,144 22,542,700 22,542,700
Non-compete agreements (net of accumulated amortization of
approximately $58,000 and $146,000 at December 31, 1997
and June 30, 1998, respectively)........................ -- 1,191,667 1,104,167 1,104,167
----------- ------------ ------------ ------------
-- 24,088,811 23,646,867 23,646,867
Deposit on acquisition...................................... -- -- 1,500,000 1,500,000
Other assets................................................ 15,669 59,614 -- --
----------- ------------ ------------ ------------
Total assets........................................ $ 8,525,454 $ 36,901,890 $ 35,559,778 $ 32,359,778
=========== ============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 312,612 $ 1,142,218 $ 820,927 $ 820,927
Commissions and fees payable.............................. 1,346,486 1,944,490 1,864,102 1,864,102
Dividends payable......................................... 1,720,967 333,915 -- --
Accrued expenses and other liabilities.................... 1,333,990 1,521,419 1,802,140 1,802,140
Accrued interest payable.................................. -- 476,325 446,341 446,341
Current portion of long-term debt (related parties:
$1,425,000 at December 31, 1997 and June 30, 1998)...... -- 4,325,000 4,325,000 4,325,000
----------- ------------ ------------ ------------
Total current liabilities........................... 4,714,055 9,743,367 9,258,510 9,258,510
Long-term debt (related parties: $12,338,144 at December 31,
1997 and June 30, 1998)................................... -- 32,838,143 31,388,143 31,388,143
----------- ------------ ------------ ------------
Total liabilities................................... 4,714,055 42,581,510 40,646,653 40,646,653
Stockholders' equity (deficit):
Common stock:
Authorized shares -- 20,000,000; no par value
Issued and outstanding shares -- 5,957,344, 5,959,140
and 5,983,248 at December 31, 1996, 1997 and June 30,
1998, respectively.................................... 5,053,663 5,162,281 5,463,631 5,641,675
Retained earnings......................................... 3,213,332 3,188,699 3,378,044 --
----------- ------------ ------------ ------------
8,266,995 8,350,980 8,841,675 5,641,675
Less 1,203,291, 2,737,130 and 2,737,130 shares of common
stock in treasury at December 31, 1996, 1997 and June 30,
1998, respectively, at cost (includes notes receivable
from related parties for common stock issued totaling $0,
$568,036 and $465,986 at December 31, 1996, 1997 and June
30, 1998, respectively)................................... (4,455,596) (14,030,600) (13,928,550) (13,928,550)
----------- ------------ ------------ ------------
Total stockholders' equity (deficit)................ 3,811,399 (5,679,620) (5,086,875) (8,286,875)
----------- ------------ ------------ ------------
Total liabilities and stockholders' equity.......... $ 8,525,454 $ 36,901,890 $ 35,559,778 $ 32,359,778
=========== ============ ============ ============
</TABLE>
See notes to financial statements.
F-4
<PAGE> 84
CLARK/BARDES, INC.
(THE PREDECESSOR TO CLARK/BARDES HOLDINGS, INC.)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
--------------------------------------- -------------------------
1995 1996 1997 1997 1998
----------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Commission and service fees.... $25,685,588 $32,353,355 $47,870,880 $11,105,362 $27,856,948
Other (related parties:
$1,264,967, $640,373,
$878,952, $50,000 and
$924,000 for the year ended
December 31, 1995, 1996,
1997 and the six months
ended June 30, 1997 and
1998)....................... 1,287,144 889,800 1,584,539 177,822 1,128,011
----------- ----------- ----------- ----------- -----------
Total revenue.......... 26,972,732 33,243,155 49,455,419 11,283,184 28,984,959
Commission and fee expense
(related parties: $11,931,499,
$16,257,515, $24,152,842,
$6,746,639, and $14,713,526 for
the year ended December 31,
1995, 1996, 1997 and the six
months ended June 30, 1997 and
1998).......................... 16,890,862 21,049,704 32,439,092 7,273,519 18,203,681
----------- ----------- ----------- ----------- -----------
10,081,870 12,193,451 17,016,327 4,009,665 10,781,278
General and administrative
expense........................ 7,868,997 8,554,420 11,506,335 4,615,101 8,399,696
Amortization of intangibles...... -- -- 294,630 -- 441,945
----------- ----------- ----------- ----------- -----------
Income (loss) from operations.... 2,212,873 3,639,031 5,215,362 (605,436) 1,939,637
Other income (expense):
Interest income................ 148,482 119,691 188,597 68,117 167,624
Dividend income................ 52,095 2,123 -- -- --
Interest expense............... (6,903) -- (1,111,995) -- (1,803,750)
Miscellaneous income
(expense)................... (86,292) (25,416) 1,925 146 (141)
----------- ----------- ----------- ----------- -----------
Total other income
(expense)............ 107,382 96,398 (921,473) 68,263 (1,636,267)
----------- ----------- ----------- ----------- -----------
Income (loss) before state
taxes.......................... 2,320,255 3,735,429 4,293,889 (537,173) 303,370
State taxes...................... 102,459 181,444 60,000 -- 14,000
----------- ----------- ----------- ----------- -----------
Net income (loss)................ $ 2,217,796 $ 3,553,985 $ 4,233,889 $ (537,173) $ 289,370
=========== =========== =========== =========== ===========
Dividends per share:............. $ .29 $ .36 $ 1.32 $ -- $ --
=========== =========== =========== =========== ===========
Earnings (loss) per share
(Historical):
Basic.......................... $ .39 $ .75 $ 1.03 $ (.12) $ .09
=========== =========== =========== =========== ===========
Diluted........................ $ .39 $ .75 $ .99 $ (.12) $ .09
=========== =========== =========== =========== ===========
Pro Forma Data (Unaudited) (Note
12):
Pro forma income tax expense... $ 1,700,000 $ 120,000
=========== ===========
Pro forma net income........... $ 2,593,889 $ 183,370
=========== ===========
Pro forma earnings per share:
Basic....................... $ .63 $ .06
=========== ===========
Diluted..................... $ .61 $ .06
=========== ===========
</TABLE>
See notes to financial statements.
F-5
<PAGE> 85
CLARK/BARDES, INC.
(THE PREDECESSOR TO CLARK/BARDES HOLDINGS, INC.)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
NET
UNREALIZED
LOSS ON COMMON STOCK
COMMON STOCK SECURITIES IN TREASURY
---------------------- RETAINED AVAILABLE -------------------------
SHARES AMOUNT EARNINGS FOR SALE SHARES AMOUNT TOTAL
--------- ---------- ---------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995.......... 5,957,344 $5,053,663 $1,078,114 $(52,254) (229,737) $ (918,948) $ 5,160,575
Changes in net unrealized loss on
securities available for sale... -- -- -- 47,179 -- -- 47,179
Net income........................ -- -- 2,217,796 -- -- -- 2,217,796
Dividends......................... -- -- (1,638,096) -- -- -- (1,638,096)
--------- ---------- ---------- -------- ---------- ------------ ------------
Balance at December 31, 1995........ 5,957,344 5,053,663 1,657,814 (5,075) (229,737) (918,948) 5,787,454
Purchase of common stock for
treasury........................ -- -- -- -- (1,123,554) (4,136,648) (4,136,648)
Sale/Grant of treasury stock...... -- -- (277,500) -- 150,000 600,000 322,500
Changes in net unrealized loss on
securities available for sale... -- -- -- 5,075 -- -- 5,075
Net income........................ -- -- 3,553,985 -- -- -- 3,553,985
Dividends......................... -- -- (1,720,967) -- -- -- (1,720,967)
--------- ---------- ---------- -------- ---------- ------------ ------------
Balance at December 31, 1996........ 5,957,344 5,053,663 3,213,332 -- (1,203,291) (4,455,596) 3,811,399
Sale of common stock.............. 1,796 8,618 -- -- -- -- 8,618
Issuance of common stock
warrants........................ -- 100,000 -- -- -- -- 100,000
Purchase of common stock for
treasury........................ -- -- -- -- (2,567,650) (13,969,259) (13,969,259)
Notes receivable from related
parties for treasury stock
issued, net of distribution of
$606,280........................ -- -- -- -- 244,649 (568,036) (568,036)
Sale/Grant of treasury stock...... -- -- -- -- 789,162 4,962,291 4,962,291
Net income........................ -- -- 4,233,889 -- -- -- 4,233,889
Dividends......................... -- -- (4,258,522) -- -- -- (4,258,522)
--------- ---------- ---------- -------- ---------- ------------ ------------
Balance at December 31, 1997........ 5,959,140 5,162,281 3,188,699 -- (2,737,130) (14,030,600) (5,679,620)
Net income (unaudited)............ -- -- 289,370 -- -- -- 289,370
Issuance of common stock
(unaudited)..................... 24,108 301,350 -- -- -- -- 301,350
Dividends paid (unaudited)........ -- -- (100,025) -- -- -- (100,025)
Payments on notes receivable from
related parties for treasury
stock (unaudited)............... -- -- -- -- -- 102,050 102,050
--------- ---------- ---------- -------- ---------- ------------ ------------
Balance at June 30, 1998
(unaudited)....................... 5,983,248 $5,463,631 $3,378,044 $ -- (2,737,130) $(13,928,550) $ (5,086,875)
========= ========== ========== ======== ========== ============ ============
</TABLE>
See notes to financial statements.
F-6
<PAGE> 86
CLARK/BARDES, INC.
(THE PREDECESSOR TO CLARK/BARDES HOLDINGS, INC.)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------------- -------------------------
1995 1996 1997 1997 1998
----------- ----------- ------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)................................ $ 2,217,796 $ 3,553,985 $ 4,233,889 $ (537,173) $ 289,370
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating
activities:
Depreciation and amortization.................. 182,143 187,577 492,609 71,956 578,316
(Gain) loss on disposition of assets........... 86,292 25,416 (1,925) -- 441
Provision for losses on notes receivable....... -- 78,000 -- -- --
Grant of treasury stock........................ -- 172,500 -- -- --
Change in assets and liabilities:
(Increase) decrease in accounts receivable... (1,115,137) 412,495 (4,940,333) 1,386,746 5,059,454
Increase in accrued interest receivable...... (15,328) (10,781) (19,388) (5,287) (22,863)
Increase in other assets..................... -- -- -- -- (10,143)
Increase (decrease) in accounts payable...... 91,560 101,773 829,606 13,576 (321,291)
Increase (decrease) in accrued expenses and
other liabilities.......................... 292,651 417,469 187,429 (864,997) 280,721
Increase (decrease) in accrued interest
payable.................................... -- -- 476,325 -- (29,984)
Increase (decrease) in commissions and
fees payable............................... 835,587 (628,747) 598,004 (732,351) (80,388)
----------- ----------- ------------ ----------- -----------
Net cash provided by (used in) operating
activities..................................... 2,575,564 4,309,687 1,856,216 (667,530) 5,743,633
INVESTING ACTIVITIES
Purchases of marketable securities available for
sale........................................... (253,131) (1,720) -- -- --
Purchase of business............................. -- (24,383,441) -- --
Deposit made for pending acquisition............. -- -- -- (500,000) (1,500,000)
Issuance of notes receivable..................... (768,710) (350,793) (135,000) (114,530) (330,000)
Payments received on notes receivable............ 444,726 574,072 91,402 102,607 418,908
Purchases of equipment and leasehold
improvements................................... (303,260) (131,057) (536,983) (91,953) (66,245)
Proceeds from sale of marketable securities...... -- 1,507,639 -- -- --
Other............................................ 462 (11,299) (42,020) (9,768) --
----------- ----------- ------------ ----------- -----------
Net cash provided by (used in) investing
activities..................................... (879,913) 1,586,842 (25,006,042) (613,644) (1,477,337)
FINANCING ACTIVITIES
Principal payments under capital lease
obligations.................................... (108,816) -- -- -- --
Principal payments on debt....................... -- -- -- -- (1,450,000)
Proceeds from issuance of debt................... -- -- 33,900,000 -- --
Proceeds from issuance of common stock and
warrants....................................... -- 150,000 108,618 8,618 301,350
Treasury stock issued for notes receivable....... -- -- (1,171,305) (335,983) --
Dividends paid................................... (641,492) (996,604) (1,779,162) (1,720,967) (433,940)
Purchase of common stock for treasury............ -- (4,136,648) (13,969,259) -- --
IPO related expenses paid and deferred........... -- -- -- -- (161,553)
Proceeds from sale of treasury stock............. -- -- 4,962,291 449,959 --
----------- ----------- ------------ ----------- -----------
Net cash provided by (used in) financing
activities..................................... (750,308) (4,983,252) 22,051,183 (1,598,373) (1,744,143)
----------- ----------- ------------ ----------- -----------
(Decrease) increase in cash...................... 945,343 913,277 (1,098,643) (2,879,547) 2,522,153
Cash and cash equivalents at beginning of
period......................................... 3,022,964 3,968,307 4,881,584 4,881,584 3,782,941
----------- ----------- ------------ ----------- -----------
Cash and cash equivalents at end of period....... $ 3,968,307 $ 4,881,584 $ 3,782,941 $2,002,037 $ 6,305,094
=========== =========== ============ =========== ===========
Supplemental disclosures of cash flow
information:
Interest paid.................................. $ 6,903 $ -- $ 635,670 $ -- $ 1,797,622
State income taxes paid........................ -- 102,459 181,965 -- 2,000
</TABLE>
See notes to financial statements.
F-7
<PAGE> 87
CLARK/BARDES, INC.
(THE PREDECESSOR TO CLARK/BARDES HOLDINGS, INC.)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997 AND JUNE 30, 1998 (UNAUDITED)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Clark/Bardes, Inc. (the predecessor corporation to Clark/Bardes, Inc., a
Delaware corporation, the wholly-owned subsidiary of Clark/Bardes Holdings, Inc.
(the Company)) (see Note 15) 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 financial statements of the Company have been prepared in
conformity with generally accepted accounting principles (GAAP). 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. Actual results could differ from those estimates.
A summary of the significant accounting policies consistently applied in
the preparation of the accompanying financial statements follows.
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 two financial institutions in excess of the $100,000 limit insured
by the Federal Deposit Insurance Corporation. Uninsured cash in bank balances
aggregate to approximately $632,000, $384,300 and $998,219 at December 31, 1996,
1997, and June 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 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 Bank Compensation Strategies Group (BCS) (see Note
2). Intangible assets consist of goodwill and non-compete agreements with the
former owners of BCS. The amortization periods for the non-compete agreements
are
F-8
<PAGE> 88
CLARK/BARDES, INC.
(THE PREDECESSOR TO CLARK/BARDES HOLDINGS, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5 years and 10 years while goodwill will be amortized over approximately 32
years on a straight-line basis. Amortization expense related to these amounts
totaled $294,630 during 1997 and $441,945 for the six months ended June 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 1995 from 3
clients, in 1996 from 2 clients and in 1997 from 3 clients. Approximately 22%,
23%, 23%, 21% and 17% of the Company's commission and fee revenue for the years
ended 1995, 1996, and 1997 and for the six months ended June 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 1995, 1996, and 1997 were $52,395,
$55,352, and $70,299, respectively, and $10,606 and $130,721 for the six months
ended June 30, 1997 and 1998 (unaudited), respectively.
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.
F-9
<PAGE> 89
CLARK/BARDES, INC.
(THE PREDECESSOR TO CLARK/BARDES HOLDINGS, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 in anticipation of the planned public offering
described in Note 15.
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
June 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.
2. ACQUISITION OF BANK COMPENSATION STRATEGIES GROUP
On September 1, 1997 (the acquisition date), the Company acquired
substantially all of the assets, the client list and the book of business of
Bank Compensation Strategies Group (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.
The remaining $23.2 million was allocated to goodwill. This is being
amortized over approximately 32 years on a straight-line basis. Management
believes that the amortization period properly reflects the
F-10
<PAGE> 90
CLARK/BARDES, INC.
(THE PREDECESSOR TO CLARK/BARDES HOLDINGS, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
long-term nature of the policies and the existing and future revenue
potential associated with BCS's client base, including new business
prospects.
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 BCS combined as if the acquisition had occurred at the beginning of
the respective period shown (excluding any effects of the transactions described
in Note 15):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1996 1997
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Pro Forma:
Revenues................................................. $48,491,000 $62,264,000
Net income............................................... $ 1,915,000 $ 2,747,000
Diluted earnings per share............................... $ 0.41 $ 0.64
</TABLE>
3. NOTES RECEIVABLE
Notes receivable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- JUNE 30,
1996 1997 1998
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Note receivable -- Related party; 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.......... 130,478 130,478 130,478
Note receivable -- Secured by collateral assignment
of insurance commissions/compensation; due in full
plus interest at prime plus 4% on demand.......... 270,816 219,643 215,927
Note receivable -- Related party; secured by renewal
commissions; interest accrues at 12%; due on
demand............................................ -- -- 30,000
Note receivable -- Related party; secured by renewal
commissions; due on demand; interest accrues at
12%. ............................................. -- 60,000 33,072
Note receivable -- Related party; secured by renewal
commissions; due on demand; interest accrues at
prime plus 2%..................................... 100,000 70,658 57,394
Notes receivable -- Related parties and employees;
unsecured; non-interest bearing. ................. 10,887 -- --
-------- -------- --------
512,181 555,779 466,871
Less allowance for uncollectible notes receivable... (78,000) (78,000) (78,000)
-------- -------- --------
$434,181 $477,779 $388,871
======== ======== ========
</TABLE>
The Company recorded interest income from related parties of $4,865, $690,
and $46,106 for the years ended December 31, 1995, 1996, and 1997, respectively,
and $0 and $38,051 for the six months ended June 30,
F-11
<PAGE> 91
CLARK/BARDES, INC.
(THE PREDECESSOR TO CLARK/BARDES HOLDINGS, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
1997 and 1998 (unaudited), respectively. The Company also has accrued interest
receivable of $626, $12,664, and $22,069 from related parties at December 31,
1996, 1997, and at June 30, 1998 (unaudited), respectively.
4. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Major classifications of equipment and leasehold improvements are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- JUNE 30,
1996 1997 1998
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Office furniture and equipment............... $ 1,397,877 $ 2,133,005 $ 2,261,459
Leasehold improvements....................... 57,387 96,116 103,267
----------- ----------- -----------
1,455,264 2,229,121 2,364,726
Accumulated depreciation and amortization.... (1,078,414) (1,513,267) (1,617,390)
----------- ----------- -----------
$ 376,850 $ 715,854 $ 747,336
=========== =========== ===========
</TABLE>
5. TAXES
The Company has elected by consent of its shareholders to be taxed under
the provisions of subchapter S of the Internal Revenue Code. Under those
provisions, the Company does not pay Federal or state corporate income taxes on
its taxable income. Instead, the stockholders are liable for individual Federal
and state income tax on the Company's taxable income as determined under the
cash method of accounting. State taxes, as shown in the accompanying financial
statements, consists primarily of franchise taxes. 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 (See Note 15).
6. FINANCING ARRANGEMENTS
The current and long-term portions of debt consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- JUNE 30,
1996 1997 1998
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Senior Secured Notes (current portion -
$2,900,000)................................. $ -- $14,500,000 $13,050,000
Second Priority Senior Secured Notes.......... -- 8,900,000 8,900,000
Medium Term Notes - Related parties (current
portion -- $1,425,000)...................... -- 5,700,000 5,700,000
Convertible Subordinated Notes - Related
parties..................................... -- 4,800,000 4,800,000
AAA Distribution - Related parties............ -- 3,263,143 3,263,143
----------- ----------- -----------
$ -- $37,163,143 $35,713,143
=========== =========== ===========
</TABLE>
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.
Interest expense was $473,667 and $693,583 and interest paid was $253,750 and
$723,188 for the year ended December 31, 1997 and for the six months ended June
30, 1998, respectively. The Company must comply with certain restrictive
covenants related to maintaining certain financial ratios, limitations on
payments and additional indebtedness, limitations on mergers and liens,
restrictions pertaining to the maintenance of material contracts, maintenance of
insurance, restrictions on distributions to sharehold-
F-12
<PAGE> 92
CLARK/BARDES, INC.
(THE PREDECESSOR TO CLARK/BARDES HOLDINGS, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
ers, and limitations on issuances of common stock; in addition, the Company must
provide the lenders with various financial reports.
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.
Interest expense was $304,577 and $489,500 and interest paid was $163,167 and
$489,500 for the year ended December 31, 1997 and for the six months ended June
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 (see Note 15). The warrants, whose fair
value of $100,000 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, have been accounted for as detachable
stock purchase warrants pursuant to APB 14. 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. The
put right expires when the common stock of the Company becomes publicly traded.
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 $242,250 and
interest paid was $88,825 and $242,250 in 1997 and for the six months ended June
30, 1998, respectively. (See Note 15).
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 $204,000 and interest
paid was $108,800 and $204,000 in 1997 and for the six months ended June 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. (See Note 15).
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 $3,263,144, mature
November 15, 2007 and interest accrues quarterly at 8.5%. Interest expense
incurred was $34,956 and $137,543 and interest paid was $0 and $138,684 in 1997
and for the six months ended June 30, 1998, respectively.
At December 31, 1997, future payments under all financing arrangements are
as follows:
<TABLE>
<S> <C>
1998........................................................ $ 4,325,000
1999........................................................ 4,325,000
2000........................................................ 4,325,000
2001........................................................ 4,325,000
2002........................................................ 5,867,000
Thereafter.................................................. 13,996,143
-----------
$37,163,143
===========
</TABLE>
F-13
<PAGE> 93
CLARK/BARDES, INC.
(THE PREDECESSOR TO CLARK/BARDES HOLDINGS, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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. These shares are
being held in treasury.
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.
In 1995, the Company negotiated an agreement to redeem 204,211 shares of
common stock at a price of $4.50 per share in exchange for an agreement for
provision of administrative services on certain life insurance policies which
are administered by the Company on behalf of an affiliate. The shares were
redeemed on January 4, 1996.
A 1996 stock purchase agreement between the Company and a stockholder
provided for the purchase of 919,343 shares at a price of $3.50 per share, which
were redeemed on January 16, 1996.
The Board of Directors of the Company determined that a $4.50 per share
value in 1995 represented a fair value in light of all relevant circumstances
regarding share value including third party arms-length share transactions. The
Company employed a similar analysis in determining the price of $3.50 per share
as a fair value in January of 1996. The decline in price was due to the seller's
motivation to reduce his interest in the Company as part of an unwind strategy.
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
$7.00 options vest during the period from December 30, 1997 to March 1, 2000
while the $4.80 options vest during the period from March 1, 2000 to March 1,
2002. 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 Base corporate loan rate plus 1.5%. Total notes receivable outstanding
under this program are $102,448.
F-14
<PAGE> 94
CLARK/BARDES, INC.
(THE PREDECESSOR TO CLARK/BARDES HOLDINGS, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 is expected to occur 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 $4,200,000 and $0.95
per share. The effect of options on 1996 net income was not significant and no
options were granted during the six month period ended June 30, 1998. 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% 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>
1995 1996 1997
-------------------------- --------------------------- --------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
------- ---------------- -------- ---------------- ------- ----------------
<S> <C> <C> <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.
F-15
<PAGE> 95
CLARK/BARDES, INC.
(THE PREDECESSOR TO CLARK/BARDES HOLDINGS, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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% of the first 6% of an eligible
participant's contributions to the Plan. Company contributions to the Plan were
$75,282, $84,121, and $108,293 for the years ended December 31, 1995, 1996, and
1997, respectively, and $57,001 and $111,819 for the six months ended June 30,
1997 and 1998 (unaudited), respectively.
Key Executive Life Insurance. The Company maintains and is the sole
beneficiary of key man life insurance policies of $11 million and $3 million on
its Chairman and Vice-Chairman, respectively, and policies ranging from $150,000
to $2 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 years ended December 31, 1995, 1996, and 1997 was
$442,266, $476,750, and $476,033, respectively, and $228,562 and $405,393 for
the six months ended June 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 $122,996, $603,118, and $284,787,
accounts payable of $1,893, $5,277, and $61,679 and accrued expenses of
$996,460, $2,621,523, and $1,366,437 to related parties at December 31, 1996,
1997, and at June 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. In
addition an executive will be granted 52,500 shares of common stock if certain
conditions are met. (See Note 15).
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
F-16
<PAGE> 96
CLARK/BARDES, INC.
(THE PREDECESSOR TO CLARK/BARDES HOLDINGS, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 $3,872,000,
$4,964,000, $7,792,000, $1,639,000 and $3,166,000 in 1995, 1996, 1997 and for
the six months ended June 30, 1997 and 1998 (unaudited), respectively, for
commissions and fees earned. The terms and conditions of Mr. Wamberg's Principal
Office Agreement are similar 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 $22,000, $46,000, and $310,000 in 1995, 1996, and 1997,
respectively, and $108,000 and $127,000 for the six months ended June 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
----------------------------------------------------------------
DECEMBER 31, JUNE 30,
------------------------------------ -------------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Numerator:
Net income (loss).......... $2,217,796 $3,553,985 $4,233,889 $ (537,173) $ 289,370
Effect of dilutive
securities:
Interest on convertible
debt (net of tax)....... -- -- 125,036 -- *
---------- ---------- ---------- ---------- ----------
Numerator for diluted
earnings per share......... $2,217,796 $3,553,985 $4,358,925 $ (537,173) $ 289,370
Denominator:
Denominator for basic
earnings per share --
weighted-average
shares.................. 5,727,607 4,709,252 4,119,387 4,544,299 3,222,143
Effect of dilutive
securities:
Stock options........... -- -- 7,277 * --
Convertible debt........ -- -- 271,929 -- *
---------- ---------- ---------- ---------- ----------
Denominator for diluted
earnings per share --
adjusted
weighted-average shares
and assumed
conversions............. 5,727,607 4,709,252 4,398,593 4,544,299 3,222,143
========== ========== ========== ========== ==========
Basic earnings per
share................. $ 0.39 $ 0.75 $ 1.03 $ (0.12) $ 0.09
========== ========== ========== ========== ==========
Diluted earnings per
share................. $ 0.39 $ 0.75 $ 0.99 $ (0.12) $ 0.09
========== ========== ========== ========== ==========
</TABLE>
F-17
<PAGE> 97
CLARK/BARDES, INC.
(THE PREDECESSOR TO CLARK/BARDES HOLDINGS, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
- ---------------
* 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 15 and has been accounted for as a reverse stock split ( 1/2 share for 1
share).
The following table sets forth the computation of pro forma basic and
diluted earnings per share (unaudited), giving effect to the conversion from an
S corporation to a C corporation as described in Note 15:
<TABLE>
<CAPTION>
PRO FORMA
--------------------------
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
1997 1998
------------ -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Numerator:
Numerator for basic earnings per share:
Net income -- historical.................................. $ 4,233,889 $ 289,370
Proforma adjustment:
State tax expense -- S Corporation........................ 60,000 14,000
Income tax expense -- C Corporation....................... (1,700,000) (120,000)
----------- ----------
Numerator for pro forma basic earnings per share............ 2,593,889 183,370
Effect of dilutive securities:
Interest on convertible debt (net of estimated C
Corporation tax)....................................... 76,680 *
----------- ----------
Numerator for pro forma diluted earnings per share.......... $ 2,670,569 $ 183,370
Denominator:
Denominator for basic earnings per share -- historical...... 4,119,387 3,222,143
Effect of dilutive securities:
Stock options............................................. 7,277 --
Convertible debt.......................................... 271,929 *
----------- ----------
Denominator for diluted earnings per share.................. 4,398,593 3,222,143
----------- ----------
Pro forma basic earnings per share.......................... $ 0.63 $ 0.06
=========== ==========
Pro forma diluted earnings per share........................ $ 0.61 $ 0.06
=========== ==========
</TABLE>
- ---------------
* The effects of convertible debt have not been included as such effects would
be antidilutive.
Pro forma earnings per share reflect net income as if the Company had been
a C corporation for the year ended December 31, 1997 and the six months ended
June 30, 1998 and income taxes have been computed on that basis. (See Note 15).
13. SIGNIFICANT RISKS AND UNCERTAINTIES
The United States Congress passed the Health Insurance Portability and
Accountability Act of 1996 (the "1996 Act"), which contained provisions on
interest deductions on loans under leveraged Corporate Owned Life Insurance
(COLI) policies. With limited exceptions under the 1996 Act, no deduction is
allowed for interest paid or accrued on any indebtedness with respect to COLI
policies. The major provisions of the 1996 Act include (a) grandfathering of
contracts issued prior to June 21, 1986 with an interest rate cap; (b) a key
person exemption with an interest rate cap; and (c) a three-year phase-out for
other leveraged COLI policies (those not within the pre-1986 or key person
exemptions) beginning in 1996. The Company receives a significant amount of
revenue from leveraged COLI policies. The Company projects that operations will
not
F-18
<PAGE> 98
CLARK/BARDES, INC.
(THE PREDECESSOR TO CLARK/BARDES HOLDINGS, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
be materially impacted in spite of the loss of leveraged COLI revenues, because
it has significantly diversified its products.
The Clinton Administration's 1999 budget proposal, issued in February 1998,
contains a provision that would subject all business-owned life insurance to the
interest disallowance rule by removing the employee exception. Although the
Company believes this to be an adverse market condition, it believes all of its
existing business would be fully grandfathered in the event the proposal moves
into the legislative process. The Company believes, at the very least, a key
person exemption would be included in future legislation.
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 (historical)..... 1997 $0.05 $(0.16) $ 0.20 $1.27 $1.03
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 (historical)... 1997 $0.05 $(0.16) $ 0.20 $1.03 $0.99
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
Planned Initial Public Offering
In June 1998, the Board of Directors authorized the registration of up to
$60,000,000 of common stock (plus up to an additional 15% of the offering amount
to cover overallotments), to be offered in a planned initial public offering of
such stock (the "Offering"). The net proceeds to the Company after deducting
estimated underwriting discounts and commissions and estimated offering expenses
are expected to be approximately $45.0 million (4,000,000 shares). The Company
intends to apply the net proceeds from this Offering as follows: a)
approximately $1.0 million in partial payment of the 8.5% Medium Term Notes, b)
approximately $6.5 million to extinguish warrants under the 11% Second Priority
Senior Secured Notes, c) approximately $15.5 million to consummate the pending
acquisition (see below), d) approximately $7.4 million to pay The Wamberg
Organization as consideration for the purchase of renewal revenue pursuant to
the purchase agreement (see below), and e) approximately $14.6 million for
general corporate purposes, including working capital and possible future
acquisitions.
Reorganization
In connection with the aforementioned planned Offering in June 1998,
Clark/Bardes Holdings, Inc. (CBH) and Clark/Bardes, Inc., a Delaware corporation
(Clark/Bardes), were formed. CBH was formed to
F-19
<PAGE> 99
CLARK/BARDES, INC.
(THE PREDECESSOR TO CLARK/BARDES HOLDINGS, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
be the holding company of Clark/Bardes (the successor operating corporation to
Clark/Bardes, Inc.) and is not engaged in any business. Clark/Bardes was formed
to be the operating company of CBH. On July 10, 1998, the Company's Board of
Directors approved a reorganization agreement (the "Reorganization Agreement")
between Clark/Bardes, Inc. (the Predecessor Company) and Clark/Bardes (the
Successor Company) which provides for a two step merger resulting in the
Predecessor Company merging with and into with Clark/Bardes (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
contemplates a series of transactions, including (i) a restructuring of
Clark/Bardes' 10.5% Senior Secured Notes due August 2002 and 11.0% Second
Priority Senior Secured Notes due August 2004 (such notes are collectively
referred to as the "Restructured Notes"), (see below), (ii) the conversion of
Clark/Bardes' $4.8 million aggregate principal amount of 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 by Clark/Bardes 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 Clark/Bardes 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, which will be consummated prior to the consummation of
the Offering, will be 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 aforementioned 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 discussed above, the Company intends to restructure its 10.5% and 11.0%
notes. Under the amended and restated note agreements, the interest rate on the
10.5% notes will be reset to 2.5% above the yield on U.S. Treasury securities
maturing two years from the date on which the interest rate is reset. The
interest rate on the 11% notes will be reset to 3.5% above the yield on U.S.
Treasury securities maturing five years from the date on which the interest rate
is reset. The interest rate will be reset at least five days prior to the
effective date of the Company's Registration Statement. The Restructured Notes
may be prepaid without penalty and are secured by a first priority security
interest in, among other things, all of Clark/Bardes' renewal commissions other
than the renewal commissions from BCS and the Pending Acquisition. Further, the
Company is subject to significant operational restrictions and financial
covenants, including a requirement that Clark/Bardes 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 warrants to purchase 1,525,424 shares of common stock will be
extinguished by the payment of $6.5 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. The payment
will be recorded as a reduction of paid-in capital, consistent with the
accounting used for the original issuance of the warrants. In addition, in
connection with agreeing to the extinguishment of the Warrants, Clark/Bardes
entered into a five-year production agreement with each of Great West and
Nationwide (the "Carriers") that requires Clark/Bardes to market and sell
insurance products of each Carrier comprising specified percentages of all
insurance products sold by Clark/Bardes 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 Clark/Bardes fails to meet the
minimum production
F-20
<PAGE> 100
CLARK/BARDES, INC.
(THE PREDECESSOR TO CLARK/BARDES HOLDINGS, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
requirements, the applicable Carrier is entitled to offset future commissions
otherwise payable to Clark/Bardes 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 Tom
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 $7.4 million. This transaction allows the Company to retain
additional commission and fee revenue for a ten year period following the
consummation of the transaction. The additional revenue equates to approximately
19.0% 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 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 described above, the Company
will cease to be taxed as an S corporation and will become 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 the effective date of change in tax
status, the Company will record deferred taxes on its balance sheet for the
difference between the tax bases and book bases of its assets and liabilities.
If the Company's S corporation status had terminated as of December 31, 1997,
the amount of the deferred tax liability and deferred tax expense would have
been approximately $1.2 million and net income would have been reduced
accordingly by this amount. Pro forma earnings per share (see Note 12) includes
the effects of this conversion. The Company has obtained from certain existing
stockholders and is currently seeking to obtain from the remaining 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 approximately $3.2 million, or approximately $1.00 per share
(the "Stockholder Distribution Amount"). The Stockholder Distribution Amount may
be (i) decreased if the amount of the Predecessor Company's previously earned
amount and undistributed taxable income immediately prior to the consummation of
the Merger (such amount, the "AAA Amount") is less than the Stockholder
Distribution Amount or (ii) increased if the Stockholder Distribution Amount is
less than 42.6% of the taxable income for the period beginning January 1, 1998
and ending on the date the Merger is consummated. The pro forma balance sheet at
June 30, 1998 reflects the pro forma effects of the payment of this $3.2 million
stockholder dividend. In addition, 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. The Company anticipates that the Stockholder
Distribution Amount will be paid prior to the Merger.
Stock Grant Restructuring
The Company's President and CEO had an agreement whereby he would be
granted 52,500 shares of the Predecessor Company's common stock if he is
employed as the Company's CEO on July 1, 1998. As
F-21
<PAGE> 101
CLARK/BARDES, INC.
(THE PREDECESSOR TO CLARK/BARDES HOLDINGS, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
described above, this agreement was amended in June 1998 to provide that he will
receive shares of common stock of CBH valued at $301,350 (estimated to be
approximately 24,108 shares based on the mid-point of the range of the assumed
initial offering prices), $223,650 in cash and a fully vested five year option
to purchase 30,523 shares of CBH common stock exercisable at the initial public
offering price. The Company has recorded compensation expense of $525,000 in its
June 1998 financial statements related to this transaction. The options have
been accounted for in accordance with the Company's policy on stock compensation
(see Note 1).
Pending Acquisition
On May 29, 1998, the Predecessor Company entered into a letter of intent to
acquire the business and substantially all of the assets of an unrelated party.
The purchase price of the pending acquisition, which is subject to change, is
$17 million of which $1.5 million was paid as a secured refundable deposit and
$15.5 million is payable in cash at the closing. The consummation of the
acquisition is subject to numerous conditions including consummation of the
aforementioned offering and obtaining regulatory approvals, among others. The
consummation of this pending acquisition must occur on or prior to October 1,
1998. Management expects to account for this acquisition using the purchase
method.
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 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 expects to
grant approximately 400,000 additional options at the initial public offering
price. 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.
F-22
<PAGE> 102
BANK COMPENSATION STRATEGIES GROUP
BALANCE SHEET
AUGUST 31, 1997
UNAUDITED
ASSETS
<TABLE>
<S> <C>
Current Assets
Cash...................................................... $1,630,651
Accounts receivable:
Commissions............................................ 773,608
Related parties........................................ 40,022
Prepaid expenses.......................................... 30,544
----------
2,474,825
Furniture and Fixtures, less accumulated depreciation of
$302,362.................................................. 189,325
----------
$2,664,150
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable.......................................... $ 368,369
Accrued expenses.......................................... 1,640,318
Amount payable under consulting agreement................. 361,598
Due to related parties.................................... 65,877
Earnest money deposit..................................... 500,000
----------
2,936,162
----------
Stockholders' Equity
Common stock, par value $0.01 per share; 1,000,000 shares
authorized; 10,000 shares issued and outstanding....... 100
Additional paid-in capital................................ 9,900
Accumulated deficit....................................... (282,012)
----------
(272,012)
----------
$2,664,150
==========
</TABLE>
F-23
<PAGE> 103
BANK COMPENSATION STRATEGIES GROUP
STATEMENT OF INCOME
EIGHT MONTHS ENDED AUGUST 31, 1997
UNAUDITED
<TABLE>
<S> <C>
Commissions earned.......................................... $12,808,974
Commissions expense......................................... 8,732,534
-----------
Net commission revenue.................................... 4,076,440
General and administrative expense.......................... 2,518,113
Non-recurring operating expenses............................ 942,157
-----------
Operating income.......................................... 616,170
-----------
Nonoperating income:
Other income.............................................. 28,003
-----------
Net income........................................ $ 644,173
===========
Pro forma data (unaudited):
Pro forma income tax expense.............................. $ 270,000
===========
Pro forma net income...................................... $ 374,173
===========
</TABLE>
STATEMENT OF SHAREHOLDERS' EQUITY
EIGHT MONTHS ENDED AUGUST 31, 1997
UNAUDITED
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
--------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
------ ------ ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance December 31, 1996.................... 10,000 $100 $9,900 $ -- $ 10,000
Net income................................... -- -- -- 644,173 644,173
Distribution declared........................ -- -- -- (926,185) (926,185)
------ ---- ------ --------- ---------
Balance August 31, 1997...................... 10,000 $100 $9,900 $(282,012) $(272,012)
====== ==== ====== ========= =========
</TABLE>
F-24
<PAGE> 104
BANK COMPENSATION STRATEGIES GROUP
STATEMENT OF CASH FLOWS
EIGHT MONTHS ENDED AUGUST 31, 1997
UNAUDITED
<TABLE>
<S> <C>
Cash Flows From Operating Activities
Net income................................................ $ 644,173
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 48,827
Changes in operating assets and liabilities:
Decrease in commissions and related-party
receivable.......................................... 513,803
Increase in prepaid expenses......................... (12,125)
Increase in accounts payable and accrued expenses.... 708,046
-----------
Net cash provided by operating activities......... 1,902,724
-----------
Cash Flows From Investing Activities
Purchases of furniture and fixtures....................... (106,315)
Earnest money received.................................... 500,000
-----------
Net cash provided by investing activities......... 393,685
-----------
Cash Flows From Financing Activities
Principal payments on notes payable....................... (461,687)
Distributions paid to stockholders........................ (926,185)
-----------
Net cash used in financing activities............. (1,387,872)
-----------
Increase in cash and cash equivalents............. 908,537
Cash and Cash Equivalents
Beginning................................................. 722,114
-----------
Ending.................................................... $ 1,630,651
===========
</TABLE>
F-25
<PAGE> 105
BANK COMPENSATION STRATEGIES GROUP
FOOTNOTES TO UNAUDITED FINANCIAL STATEMENTS
EIGHT MONTHS ENDED AUGUST 31, 1997
1. General. The financial statements as of August 31, 1997 and for the
eight months then ended have been prepared by the Company without audit. In the
opinion of management, all adjustments (which include only normal recurring
adjustments) necessary to present fairly the financial position as of August 31,
1997 and the results of operations and cash flows for the eight months ended
August 31, 1997 have been made. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or eliminated.
Pro forma data in the Statement of Income reflects tax expense and net
income as if Bank Compensation Strategies Group had been a C Corporation rather
than an S Corporation for federal income tax purposes for the eight months ended
August 31, 1997.
The results of operations for the eight months ended August 31, 1997 are
not necessarily indicative of the results to be expected for any future interim
period or for the year ending December 31, 1997.
2. Nonrecurring Operating Expenses. Nonrecurring operating expenses consist
of one-time expenses incurred as a result of the sale of the assets of the
Company as follows:
<TABLE>
<S> <C>
Phantom stock agreement cancellation expense.............. $381,782
Employee change of control bonuses........................ 411,875
Legal, Consulting and Professional fees................... 148,500
--------
$942,157
========
</TABLE>
F-26
<PAGE> 106
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Bank Compensation Strategies Group
Bloomington, Minnesota
We have audited the accompanying balance sheets of Bank Compensation
Strategies Group as of December 31, 1996 and 1995, and the related statements of
income, stockholders' equity, and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Bank Compensation Strategies
Group as of December 31, 1996 and 1995, and the results of its operations and
its cash flows for the years then ended, in conformity with generally accepted
accounting principles.
McGLADREY & PULLEN, LLP
St. Paul, Minnesota
February 18, 1997
F-27
<PAGE> 107
BANK COMPENSATION STRATEGIES GROUP
BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
ASSETS
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Current Assets
Cash and cash equivalents (Note 3)........................ $ 722,114 $ 165,195
Accounts receivable:
Commissions............................................ 1,324,431 694,605
Related parties (Note 4)............................... 3,002 68,964
Prepaid expenses.......................................... 18,419 8,047
---------- ----------
2,067,966 936,811
Furniture and Fixtures, less accumulated depreciation
1996 -- $253,836; 1995 -- $197,474........................ 131,837 114,253
---------- ----------
$2,199,803 $1,051,064
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Notes payable to stockholders (Note 2).................... $ 461,687 $ 279,599
Accounts payable.......................................... 488,134 222,931
Accrued expenses:
Compensation........................................... 956,452 309,695
Other.................................................. 190,365 105,599
Due to related parties (Note 4)........................... 93,165 123,240
---------- ----------
$2,189,803 $1,041,064
---------- ----------
Commitments, Contingencies, and Credit Risk (Notes 3, 5, and
6)
Stockholders' Equity (Notes 5 and 6)
Common stock. par value $0.01 per share; 1,000,000 shares
authorized; 10,000 shares issued and outstanding.......... 100 100
Additional paid-in capital................................ 9,900 9,900
---------- ----------
10,000 10,000
---------- ----------
$2,199,803 $1,051,064
========== ==========
</TABLE>
See Notes to Financial Statements.
F-28
<PAGE> 108
BANK COMPENSATION STRATEGIES GROUP
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Commissions earned (Note 3)................................. $15,248,629 $11,293,822
Commissions expense......................................... 10,183,581 7,107,506
----------- -----------
Net commission revenue.................................... 5,065,048 4,186,316
General and administrative expense (Notes 4 and 5).......... 3,535,573 2,897,264
----------- -----------
Operating income.......................................... 1,529,475 1,289,052
Nonoperating income (expense):
Interest income........................................... 29,567 22,372
Interest expense.......................................... -- (4,688)
Other expense, net........................................ (2,119) (2,137)
----------- -----------
Net income........................................ $ 1,556,923 $ 1,304,599
=========== ===========
</TABLE>
See Notes to Financial Statements.
F-29
<PAGE> 109
BANK COMPENSATION STRATEGIES GROUP
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
--------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
------ ------ ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance December 31, 1994............... 10,000 $100 $9,900 $ -- $ 10,000
Net income............................ -- -- -- 1,304,599 1,304,599
Distributions declared................ -- -- -- (1,304,599) (1,304,599)
------ ---- ------ ----------- -----------
Balance, December 31, 1995.............. 10,000 100 9,900 -- 10,000
Net income............................ -- -- -- 1,556,923 1,556,923
Distributions declared................ -- -- -- (1,556,923) (1,556,923)
------ ---- ------ ----------- -----------
Balance December 31, 1996............... 10,000 $100 $9,900 $ -- $ 10,000
====== ==== ====== =========== ===========
</TABLE>
See Notes to Financial Statements.
F-30
<PAGE> 110
BANK COMPENSATION STRATEGIES GROUP
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Cash Flows From Operating Activities
Net Income................................................ $ 1,556,923 $ 1,304,599
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 56,362 49,957
Changes in operating assets and liabilities:
Increase in commissions and related-party
receivable.......................................... (563,864) (259,018)
Increase in prepaid expenses......................... (10,372) (4,641)
Increase in accounts payable and accrued expenses.... 996,726 40,766
Increase (decrease) in due to related parties........ (30,075) 19,306
Decrease in deferred compensation.................... -- (69,678)
----------- -----------
Net cash provided by operating activities......... 2,005,700 1,081,291
----------- -----------
Cash Flows From Investing Activities
Purchases of furniture and fixtures....................... (73,946) (62,565)
Decrease in cash value of life insurance.................. -- 63,661
----------- -----------
Net cash provided by (used in) investing
activities...................................... (73,946) 1,096
----------- -----------
Cash Flows From Financing Activities
Principal payments on notes payable....................... (279,599) (468,474)
Distributions paid to stockholders........................ (1,095,236) (1,025,000)
----------- -----------
Net cash used in financing activities............. (1,374,835) (1,493,474)
----------- -----------
Increase (decrease) in cash and cash
equivalents..................................... 556,919 (411,087)
Cash and Cash Equivalents
Beginning................................................. 165,195 576,282
----------- -----------
Ending.................................................... $ 722,114 $ 165,195
=========== ===========
Supplemental Schedule of Noncash Financing Activities
Distributions to stockholders in the form of notes payable
(Note 2)............................................... $ 461,687 $ 279,599
=========== ===========
</TABLE>
See Notes to Financial Statements.
F-31
<PAGE> 111
BANK COMPENSATION STRATEGIES GROUP
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of business: Bank Compensation Strategies Group (Company) is engaged
in the business of designing and marketing insurance-funded executive
compensation plans in the banking industry. The Company also provides
administrative support for those plans once in place.
Basis of financial statement presentation and accounting estimates: The
financial statements have been prepared in conformity with generally accepted
accounting principles. In preparing the financial statements, management is
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities as of the date of the balance sheet and revenues and
expenses for the period. Actual results could differ from those estimates.
Fair value of financial instruments: The book value of cash, accounts
receivable, accounts payable, and other financial instruments approximate their
fair value principally because of the short-term nature of these instruments.
The carrying value of the Company's Notes payable would not differ significantly
from its fair value.
Cash, cash equivalents, and cash flows: For purposes of reporting cash
flows, cash and cash equivalents includes cash on hand and in banks and money
market funds.
Depreciation: Depreciation is provided using the straight-line method over
two to five years.
Income tax status: The Company, with the consent of its stockholders, has
elected to be taxed under sections of the federal and state income tax laws (S
Corporation), which provide that, in lieu of corporation income taxes, the
stockholders separately account for their pro rata shares of the Company's
income, deductions, losses, and credits. Therefore, these statements do not
include any provision for corporate income taxes.
Commissions: Commissions on new compensation plans are recognized as
revenue upon successful completion of the individual plans. This occurs when the
banking organization implementing the plan transfers funds to the insurance
company for the purchase of a life insurance contract. Revenue is recognized on
plan renewals on the anniversary dates of the life insurance contract. The
Company is only required to recognize a liability upon the cancellation of an
insurance contract if it occurs within the first year of the contract.
Salary reduction 401(k) plan: The Company sponsors a 401(k) plan which
covers substantially all the employees who are eligible as to age and length of
service. A participant may elect to make contributions of up to 5 percent of the
participant's annual compensation. The Company makes matching contributions of
25 percent of each participant's contribution. The participants may elect to
make additional contributions up to 10 percent of their annual compensation
without matching contributions by the Company.
Distributions: Because of its S Corporation election, the liability for
federal and state taxes on the Company's income rests with its stockholders. The
Company has in the past and intends in the future to make distributions to fund
the stockholders' income tax obligations applicable to the aforementioned
federal and state taxes.
2. NOTES PAYABLE TO STOCKHOLDERS
The Company has noninterest-bearing unsecured notes payable to stockholders
of $461,687 and $279,599 at December 31, 1996 and 1995, respectively.
3. COMMITMENTS, CONTINGENCIES, AND CREDIT RISK
Lease commitments: The Company leases its facility under a noncancelable
four-year operating lease which is personally guaranteed by the majority
stockholder. Included in the minimum lease payments is the
F-32
<PAGE> 112
BANK COMPENSATION STRATEGIES GROUP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Company's pro rata share of estimated real estate taxes and operating expenses,
which are subject to change each year based on the actual amount of these
expenses. Future minimum rental payments on the lease are as follows:
<TABLE>
<S> <C>
Years ending December 31:
1997...................................................... $157,500
1998...................................................... 65,600
--------
$223,100
========
</TABLE>
Rent expense for the years ended December 31, 1996 and 1995 approximated
$133,000 and $121,000. respectively.
Financial instruments with concentrations of credit risk:
Concentration over insured limits: The nature of the Company's business
requires that it maintain amounts due from banks which, at times, may exceed
federally insured limits. The Company has not experienced any losses in such
accounts.
The executive compensation plans sold by the Company are underwritten
primarily by five insurance companies. Substantially all of the commission
revenues earned and receivables due are from these companies.
4. RELATED-PARTY TRANSACTIONS
The Company has various transactions with stockholders and LHH & Co., a
financial planning company owned by the son of the Company's chairman.
Amounts due to and from related parties at December 31, 1996, are
summarized as follows:
<TABLE>
<CAPTION>
DUE FROM DUE TO
-------- -------
<S> <C> <C>
LHH & Co.................................................... $3,002 $ --
Stockholders................................................ -- 93,165
------ -------
$3,002 $93,165
====== =======
</TABLE>
Transactions with LHH & Co. include the payment by LHH & Co, to the Company
of annual rent in the approximate amount of $11,000 and the payment by the
Company to LHH & Co, of consulting fees of approximately $36,000 per year. In
addition, the Company paid commissions to LHH & Co. in the amounts of $127,301
and $239,549 for 1995 and 1996, respectively. Management believes that the
allocation of rent to LHH & Co. based upon actual rental costs of the Company is
reasonable.
Transactions with stockholders consist of advances from stockholders for
cash flow purposes following year end S Corporation distributions.
5. INCOME AND APPRECIATION RIGHTS AGREEMENT AND STOCK PURCHASE AGREEMENT
In 1991, the Company entered into an agreement with an individual which
granted certain income and appreciation rights to this individual in exchange
for his continued service to the Company. This agreement is cancelable by either
party at any time. The income and appreciation rights for this individual became
vested as of January 1, 1996, and expense of $77,848. attributable to 1996, was
recorded.
F-33
<PAGE> 113
BANK COMPENSATION STRATEGIES GROUP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. STOCK OPTION AND BONUS AGREEMENT
On January 1, 1994 the Company, Lawrence H. Hendrickson, the Company's
majority shareholder ("Hendrickson") and Richard C. Chapman, the Company's
president ("Chapman"), entered into a combination stock option and bonus
agreement (the 'Agreement"). Pursuant to the Agreement, Hendrickson granted to
Chapman the option to acquire from Hendrickson up to 500 shares per year (on a
cumulative basis) over a 12 year period at a price of $750 per share which the
Board determined was not less than the fair value of the shares on January 1,
1994. The Agreement also provided that Hendrickson could require Chapman to
acquire all of the remaining shares of Hendrickson in the event that the
exercise of any option would reduce Hendrickson's interest below 51%. In
addition, the Agreement provides that in the event Chapman desires to sell his
shares, Hendrickson has a right of first refusal to repurchase the shares. The
Agreement also provides for annual bonuses and distributions to Chapman totaling
an aggregate of 50 percent of Company earnings in excess of $750,000.
In 1995 and in 1996, the Agreement was amended. As a result of the
amendment, the bonus amount paid to Chapman under the Agreement was lowered and
the difference was paid to Hendrickson. In return Hendrickson agreed to lower
the price paid by Chapman for the purchase of shares, so that, on an after tax
basis, the decrease in consideration paid for the purchase of shares
substantially equaled the bonus paid to Hendrickson. In total, both the
aggregate amount of cash bonuses paid by the Company and the total number of
shares covered by the option granted by Hendrickson to Chapman (400 and 600
shares in 1995 and 1996, respectively) in any year were unchanged. The Company
accounted for the 1995 and 1996 option exercises under the original fixed plan
accounting from 1994, since the amendments did not substantively change the
aggregate consideration paid by Chapman or the costs expensed by the Company.
Compensation expense recorded in connection with the bonus plan amounted to
$514,077 in 1996 and $354,878 in 1995.
F-34
<PAGE> 114
------------------------------------------------------
------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE COMMON
STOCK IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT
THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN
THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary..................... 1
Risk Factors........................... 7
The Reorganization..................... 15
Pending Acquisition.................... 17
Use of Proceeds........................ 18
Dividend Policy........................ 18
Dilution............................... 18
Capitalization......................... 20
Selected Historical and Pro Forma
Financial Information................ 21
Unaudited Pro Forma Financial
Information.......................... 22
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 26
Business............................... 37
Management............................. 48
Principal and Selling Stockholders..... 56
Certain Relationships and Related
Transactions......................... 58
Description of Capital Stock........... 60
Shares Eligible for Future Sale........ 65
Underwriting........................... 66
Legal Matters.......................... 67
Experts................................ 67
Available Information.................. 68
Glossary............................... 69
Financial Statements................... F-1
</TABLE>
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
4,000,000 SHARES
[CLARK BARDES LOGO]
COMMON STOCK
------------------------------
PROSPECTUS
------------------------------
BEAR, STEARNS & CO. INC.
PIPER JAFFRAY INC.
CONNING & COMPANY
, 1998
------------------------------------------------------
------------------------------------------------------
<PAGE> 115
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated expenses in connection with the issuance and distribution of
the securities being registered, other than underwriting discounts and
commissions are set forth in the following table. The Company will pay all
expenses of issuance and distribution. Each amount, except for the SEC, Nasdaq
National Market and NASD fees, is estimated.
<TABLE>
<S> <C>
SEC registration fees....................................... $ 16,962
NASD filing fees............................................ $ 6,250
Nasdaq National Market application and initial listing
fee....................................................... $ 78,000
Transfer agent's and registrar's fees and expenses.......... $ 225,000
Printing and engraving expenses............................. $ 375,000
Legal fees and expenses..................................... $ 425,000
Accounting fees and expenses................................ $ 325,000
Blue sky fees and expenses.................................. $ 5,000
Miscellaneous............................................... $ 50,000
----------
Total............................................. $1,506,212
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
CBH's Certificate of Incorporation provides that CBH shall, to the fullest
extent permitted by Section 145 of the DGCL, as amended from time to time,
indemnify all persons whom it may indemnify pursuant thereto.
Section 145 of the DGCL permits a corporation, under specified
circumstances, to indemnify its directors, officers, employees or agents against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlements actually and reasonably incurred by them in connection with any
action, suit or proceeding brought by third parties by reason of the fact that
they were or are directors, officers, employees or agents of the corporation, if
such directors, officers, employees or agents acted in good faith and in a
manner they reasonably believed to be in or not opposed to the best interests of
the corporation and, with respect to any criminal action or proceeding, had no
reason to believe their conduct was unlawful. In a derivative action, i.e., one
by or in the right of the corporation, indemnification may be made only for
expenses actually and reasonably incurred by directors, officers, employees or
agents in connection with the defense or settlement of an action or suit, and
only with respect to a matter as to which they shall have acted in good faith
and in a manner they reasonably believed to be in or not opposed to the best
interests of the corporation, except that no indemnification shall be made if
such person shall have been adjudged liable to the corporation, unless and only
to the extent that the court in which the action or suit was brought shall
determine upon application that the defendant directors, officers, employees or
agents are fairly and reasonably entitled to indemnity for such expenses despite
such adjudication of liability.
CBH's Bylaws provide for indemnification by CBH of its directors, officers
and certain non-officer employees under certain circumstances against expenses
(including attorneys fees, judgments, fines and amounts paid in settlement)
reasonably incurred in connection with the defense or settlement of any
threatened, pending or completed legal proceeding in which any such person is
involved by reason of the fact that such person is or was an officer or employee
of CBH if such person acted in good faith and in a manner he or she reasonably
believed to be in or not opposed to the best interests of CBH, and, with respect
to criminal actions or proceedings, if such person had no reasonable cause to
believe his or her conduct was unlawful. CBH's Certificate of Incorporation also
provides that, to the fullest extent permitted by the DGCL, no
II-1
<PAGE> 116
director shall be personally liable to CBH or its stockholders for monetary
damages resulting from breaches of their fiduciary duty as directors.
Expenses for the defense of any action for which indemnification may be
available may be advanced by CBH under certain circumstances. The general effect
of the foregoing provisions may be to reduce the circumstances which an officer
or director may be required to bear the economic burden of the foregoing
liabilities and expenses. CBH's directors and officers will be covered by
liability insurance indemnifying them against damages arising out of certain
kinds of claims which might be made against them based on their negligent acts
or omissions while acting in their capacity as such.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since January 1995, the Predecessor Company issued and sold the following
unregistered securities:
(1) On April 30, 1996, the Predecessor Company issued 50,000 shares of
common stock pursuant to its stock bonus plan. The shares were valued at
$2.30 per share. The issuance was exempt from registration under Section
4(2) of the Securities Act.
(2) On July 12, 1996, the Predecessor Company issued 50,000 shares of
common stock for $2.00 per share for an aggregate amount of $100,000
pursuant to its stock purchase program. The Predecessor Company used the
proceeds for general corporate purposes. This issuance was exempt from
registration under Section 4(2) of the Securities Act.
(3) On September 26, 1996, the Predecessor Company issued 25,000
shares of common stock pursuant to its stock bonus plan. The shares were
valued at $2.30 per share. The issuance was exempt from registration under
Section 4(2) of the Securities Act.
(4) On December 3, 1996, the Predecessor Company issued 25,000 shares
of common stock for $2.00 per share for an aggregate amount of $50,000
pursuant to its stock purchase program. The Predecessor Company used the
proceeds for general corporate purposes. This issuance was exempt from
registration under Section 4(2) of the Securities Act.
(5) On February 13, 1997, the Predecessor Company issued 25,000 shares
of common stock for $2.00 per share for an aggregate amount of $50,000
pursuant to its stock purchase plan. The Predecessor Company recognized
compensation expense of $70,000 in connection with this issuance, and used
the proceeds for general corporate purposes. This issuance was exempt from
registration under Section 4(2) of the Securities Act.
(6) On April 1, 1997, the Predecessor Company issued 25,000 shares of
common stock pursuant to its stock bonus plan. The shares were valued at
$4.80 per share. The issuance was exempt from registration under Section
4(2) of the Securities Act.
(7) On April 23, 1997, and April 25, 1997 the Predecessor Company
issued an aggregate of 460,408 shares of common stock for $4.80 per share
for an aggregate amount of approximately $2.2 million. The Predecessor
Company used the proceeds of this issuance for general corporate purposes.
This issuance was exempt from registration under Section 4(2) of the
Securities Act.
(8) On November 1, 1997, the Predecessor Company issued 220,000 shares
of common stock for $4.80 per share for an aggregate amount of
approximately $1.1 million and issued 168,403 shares of common stock for
$4.80 per share for promissory notes in the aggregate amount of $808,334.
The Predecessor Company used the proceeds of this issuance for general
corporate purposes. This issuance was exempt from registration under
Section 4(2) of the Securities Act.
(9) On November 17, 1997, the Predecessor Company issued 128,750
shares of common stock for $4.80 per share for an aggregate amount of
$618,000 and issued 6,250 shares of common stock for $4.80 per share for
promissory notes in the aggregate amount of $30,000. The Company used the
proceeds of this issuance for general corporate purposes. This issuance was
exempt from registration under Section 4(2) of the Securities Act.
II-2
<PAGE> 117
(10) On March 5, 1997, the Predecessor Company granted options to
purchase an aggregate of 190,830 shares of common stock to employees and
officers of the Company under its Stock Option Plan. Options to purchase
40,830 and 150,000 shares of common stock were granted at an exercise price
of $4.80 per share and $7.00 per share respectively. These options vest
over a period of time following their respective dates of grant. These
issuances were exempt from registration under Section 4(2) of, and Rule 701
promulgated under, the Securities Act.
(11) On April 2, 1997, the Predecessor Company granted options to
purchase an aggregate of 100,000 shares of common stock to Mr. Pohlman at
an exercise price of $4.80 per share. These options vest over a period of
time following the date of grant. This issuance was exempt from
registration under Section 4(2) of, and Rule 701 promulgated under, the
Securities Act.
(12) On June 30, 1998, the Predecessor Company issued 24,108 shares of
common stock to Mr. Todd and granted an option to purchase an aggregate of
30,523 shares of common stock. The option will be exercisable at the
initial public offering price of Common Stock. These shares were issued and
granted in connection with the restructuring of a grant of stock made at
the time Mr. Todd was originally employed. Each of the issuance and grant
was exempt from registration under Section 4(2) of, and Rule 701
promulgated under, the Securities Act.
(13) On July 10, 1998 the Predecessor Company granted options to
purchase an aggregate of 369,500 shares of common stock to 18 employees,
one director and four producers. Each option will be exercisable at the
initial public offering price of the Common Stock. This grant was exempt
from registration under Section 4(2) of, and Rule 701 promulgated under,
the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBITS
------- --------
<C> <S>
*1.1 -- Underwriting Agreement.
*2.1 -- Reorganization Agreement, by and among Clark/Bardes
Holdings, Inc., Clark/Bardes, Inc. and the Predecessor
Company.
*2.2 -- Letter of Intent, dated May 29, 1998, from Clark/Bardes,
Inc. and the Schoenke Companies.
*2.3 -- Asset Purchase Agreement, dated September 5, 1997, among
Clark/Bardes, Inc., Bank Compensation Strategies, Inc.,
et. al.
*3.1 -- Certificate of Incorporation of CBH.
*3.2 -- Bylaws of CBH.
*3.3 -- Certificate of Amendment.
*3.4 -- Certificate of Designation.
*4.1 -- Specimen Certificate for shares of Common Stock of the
Company.
*4.2 -- Form of Rights Agreement, dated as of July 10, 1998, by
and between Clark/Bardes Holdings, Inc. and The Bank of
New York.
5 -- Opinion of Akin, Gump, Strauss, Hauer & Feld, L.L.P.
*10.1 -- Clark/Bardes Holdings, Inc. 1998 Stock Option Plan.
*10.2 -- Administration and Services Agreement, by and between
Clark/Bardes, Inc. and Clark/Bardes Agency of Ohio, Inc.
*10.3 -- Administration and Services Agreement, by and between
Clark/Bardes, Inc. and Clark/Bardes Securities, Inc.
*10.4 -- Administration and Services Agreement, by and between
Clark/Bardes, Inc. and Clark/Bardes, Inc. of
Pennsylvania.
*10.5 -- Principal Office Agreement, dated July 29, 1993, by and
between W.T. Wamberg and Clark/Bardes, Inc.
</TABLE>
II-3
<PAGE> 118
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBITS
------- --------
<C> <S>
*10.6 -- Buy-Sell Agreement for Clark/Bardes Agency of Ohio, Inc.,
dated April 1996, by and between Clark/Bardes Securities,
Inc., Clark/Bardes Agency of Ohio, Inc. and Robert
Kelleher.
*10.7 -- Note and Warrant Purchase Agreement, dated September 8,
1997, by and between Clark/Bardes, Inc. and Great-West,
Life Investors and Nationwide.
*10.8 -- Note Agreement, dated September 8, 1997, by and between
Clark/Bardes, Inc., Great-West, Life Investors and
Nationwide.
*10.9 -- Form of Common Stock Purchase Warrant, dated September 8,
1997.
*10.10 -- Form of 11.00% Secured Priority Senior Secured Note Due
August 2004.
*10.11 -- Form of 10.50% Senior Secured Note Due August 2004.
*10.12 -- Convertible Subordinated Note, dated September 1997.
*10.13 -- Medium Term Note, dated September 1997.
*10.14 -- Stock Purchase Agreement, dated August 22, 1997, by and
among Clark/Bardes, Inc., Malcolm N. Briggs, Steven J.
Cochlan, G.F. Pendleton, and Don R. Teasley.
*10.15 -- Stock Purchase Agreement, dated August 1997, by and among
Clark/Bardes, Inc. and Henry J. Smith.
*10.16 -- Lease Agreement, dated April 24, 1998, by and between
Northland Center Limited Partnership and Clark/Bardes,
Inc.
*10.17 -- Lease Agreement, dated December 30, 1994, by and between
C-W#5, Ltd., and Clark/Bardes, Inc.
*10.18 -- Letter of Agreement to Purchase Warrants, dated June 11,
1998, to Nationwide.
*10.19 -- Letter of Agreement to Purchase Warrants, dated June 11,
1998 to Life Investors.
*10.20 -- Letter of Agreement to Purchase Warrants, dated June 11,
1998, to Great-West.
*10.21 -- Phantom Stock Agreement, dated September 5, 1997, by and
between Clark/Bardes, Inc. and Steven J. Cochlan.
*10.22 -- Employment Agreement, dated November 21, 1996, by and
between Clark/Bardes, Inc. and Kurt J. Laning.
*10.23 -- Employment Agreement, dated March 28, 1995, by and
between Clark/Bardes, Inc. and Keith L. Staudt.
*10.24 -- Employment Agreement, dated August 23, 1993, by and
between Clark/Bardes, Inc. and Larry Sluder.
*10.25 -- Employment Agreement, dated March 7, 1993, by and between
Clark/Bardes, Inc. and Ronald A. Roth.
*10.26 -- Employment Agreement, dated April 15, 1991, by and
between Clark/Bardes, Inc. and Sue A. Leslie.
*10.27 -- Employment Agreement, dated June 9, 1993, by and between
Clark/Bardes, Inc. and William J. Gallegos.
*10.28 -- Tax Indemnity Agreement by and between Clark/Bardes
Holdings, Inc., Clark/Bardes, Inc. and certain former
shareholders of the Predecessor Company.
*10.29 -- Employee Stock Purchase Plan.
*10.30 -- Form of Employment Agreement, effective as of September
1, 1998, by and between Clark/Bardes, Inc. and Robert E.
Miller.
*10.31 -- Form of Employment Agreement, effective as of July 1,
1998, by and between Clark/Bardes, Inc. and Thomas M.
Pyra.
*10.32 -- Form of Employment Agreement, effective as of July 1,
1998, by and between Clark/Bardes Holdings, Inc. and
Melvin G. Todd.
*10.33 -- Form of Commission Transfer Agreement by and between W.T.
Wamberg, The Wamberg Organization, Inc. and Clark/Bardes,
Inc.
*10.34 -- Letter of Agreement, dated July 24, 1998, to Great-West,
Life Investors and Nationwide.
</TABLE>
II-4
<PAGE> 119
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBITS
------- --------
<C> <S>
*10.35 -- Employment Agreement, dated September 1, 1997, by and
between Clark/ Bardes, Inc. and Richard C. Chapman.
*10.36 -- Form of Amended and Restated Note Agreement, Senior
Secured Notes Due August 9, 2002, by and between
Great-West, Life Investors and Nationwide.
*10.37 -- Form of Amended and Restated Note Agreement, 11.0% Second
Priority Senior Secured Notes Due August 9, 2004, by and
between Great-West, Life Investors and Nationwide.
10.38 -- Put Rights Agreement, dated as of September 9, 1997, by
and among Clark/Bardes, Inc., Great-West, Life Investors
and Nationwide.
10.39 -- Participation Rights Agreement, dated as of September 9,
1997, by and among Clark/Bardes, Inc., Great-West, Life
Investors and Nationwide.
10.40 -- Registration Rights Agreement, dated as of September 9,
1997, by and among Clark/Bardes, Inc., Great-West, Life
Investors and Nationwide.
10.41 -- Form of Letter Agreement between Phoenix Home Life and
Clarke/Bardes.
*16 -- Letter regarding Change in Certifying Accountant.
23.1 -- Consent of Ernst & Young LLP.
23.2 -- Consent of Lane Gorman Trubitt, L.L.P.
23.3 -- Consent of McGladrey & Pullen, LLP.
23.4 -- Consent of Akin, Gump, Strauss, Hauer & Feld, L.L.P.
(included in its opinion filed as Exhibit 5 hereto).
23.5 -- Consent of George D. Dalton
*24 -- Power of Attorney (included on signature page of the
Registration Statement as initially filed).
*27 -- Financial Information Schedule (included in SEC-filed
copy only).
</TABLE>
- ---------------
* Previously filed
(b) Financial Statement Schedules
None.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers, and controlling persons of the
registrant pursuant to Item 14 herein, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of Prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of Prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of the
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new registration statement
II-5
<PAGE> 120
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
The undersigned registrant hereby undertakes to provide to the underwriter
at the closing specified in the underwriting agreements, certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
II-6
<PAGE> 121
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Amendment to the Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Dallas, State of Texas, on August 14, 1998.
CLARK/BARDES HOLDINGS, INC.
By: /s/ MELVIN G. TODD
----------------------------------
Melvin G. Todd, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment to the Registration Statement has been signed by the following
persons in the capacities indicated on August 14, 1998:
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ W. T. WAMBERG Chairman of the Board and Director
- -----------------------------------------------------
W. T. Wamberg
/s/ MELVIN G. TODD President, Chief Executive Officer
- ----------------------------------------------------- (principal executive officer)
Melvin G. Todd and Director
/s/ THOMAS M. PYRA Chief Financial Officer
- ----------------------------------------------------- (principal accounting officer)
Thomas M. Pyra
/s/ LAWRENCE H. HENDRICKSON Director
- -----------------------------------------------------
Lawrence H. Hendrickson
/s/ RANDOLPH A. POHLMAN Director
- -----------------------------------------------------
Randolph A. Pohlman
/s/ L. WILLIAM SEIDMAN Director
- -----------------------------------------------------
L. William Seidman
</TABLE>
By: /s/ MELVIN G. TODD
--------------------------------
Melvin G. Todd
Attorney-in-Fact
II-7
<PAGE> 122
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBITS
------- --------
<C> <S>
*1.1 -- Underwriting Agreement.
*2.1 -- Reorganization Agreement, by and among Clark/Bardes
Holdings, Inc., Clark/Bardes, Inc. and the Predecessor
Company.
*2.2 -- Letter of Intent, dated May 29, 1998, from Clark/Bardes,
Inc. and the Schoenke Companies.
*2.3 -- Asset Purchase Agreement, dated September 5, 1997, among
Clark/Bardes, Inc., Bank Compensation Strategies, Inc.,
et. al.
*3.1 -- Certificate of Incorporation of CBH.
*3.2 -- Bylaws of CBH.
*3.3 -- Certificate of Amendment.
*3.4 -- Certificate of Designation.
*4.1 -- Specimen Certificate for shares of Common Stock of the
Company.
*4.2 -- Form of Rights Agreement, dated as of July 10, 1998, by
and between Clark/Bardes Holdings, Inc. and The Bank of
New York.
5 -- Opinion of Akin, Gump, Strauss, Hauer & Feld, L.L.P.
*10.1 -- Clark/Bardes Holdings, Inc. 1998 Stock Option Plan.
*10.2 -- Administration and Services Agreement, by and between
Clark/Bardes, Inc. and Clark/Bardes Agency of Ohio, Inc.
*10.3 -- Administration and Services Agreement, by and between
Clark/Bardes, Inc. and Clark/Bardes Securities, Inc.
*10.4 -- Administration and Services Agreement, by and between
Clark/Bardes, Inc. and Clark/Bardes, Inc. of
Pennsylvania.
*10.5 -- Principal Office Agreement, dated July 29, 1993, by and
between W.T. Wamberg and Clark/Bardes, Inc.
*10.6 -- Buy-Sell Agreement for Clark/Bardes Agency of Ohio, Inc.,
dated April 1996, by and between Clark/Bardes Securities,
Inc., Clark/Bardes Agency of Ohio, Inc. and Robert
Kelleher.
*10.7 -- Note and Warrant Purchase Agreement, dated September 8,
1997, by and between Clark/Bardes, Inc. and Great-West,
Life Investors and Nationwide.
*10.8 -- Note Agreement, dated September 8, 1997, by and between
Clark/Bardes, Inc., Great-West, Life Investors and
Nationwide.
*10.9 -- Form of Common Stock Purchase Warrant, dated September 8,
1997.
*10.10 -- Form of 11.00% Secured Priority Senior Secured Note Due
August 2004.
*10.11 -- Form of 10.50% Senior Secured Note Due August 2004.
*10.12 -- Convertible Subordinated Note, dated September 1997.
*10.13 -- Medium Term Note, dated September 1997.
*10.14 -- Stock Purchase Agreement, dated August 22, 1997, by and
among Clark/Bardes, Inc., Malcolm N. Briggs, Steven J.
Cochlan, G.F. Pendleton, and Don R. Teasley.
*10.15 -- Stock Purchase Agreement, dated August 1997, by and among
Clark/Bardes, Inc. and Henry J. Smith.
*10.16 -- Lease Agreement, dated April 24, 1998, by and between
Northland Center Limited Partnership and Clark/Bardes,
Inc.
*10.17 -- Lease Agreement, dated December 30, 1994, by and between
C-W#5, Ltd., and Clark/Bardes, Inc.
*10.18 -- Letter of Agreement to Purchase Warrants, dated June 11,
1998, to Nationwide.
*10.19 -- Letter of Agreement to Purchase Warrants, dated June 11,
1998 to Life Investors.
*10.20 -- Letter of Agreement to Purchase Warrants, dated June 11,
1998, to Great-West.
</TABLE>
<PAGE> 123
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBITS
------- --------
<C> <S>
*10.21 -- Phantom Stock Agreement, dated September 5, 1997, by and
between Clark/Bardes, Inc. and Steven J. Cochlan.
*10.22 -- Employment Agreement, dated November 21, 1996, by and
between Clark/Bardes, Inc. and Kurt J. Laning.
*10.23 -- Employment Agreement, dated March 28, 1995, by and
between Clark/Bardes, Inc. and Keith L. Staudt.
*10.24 -- Employment Agreement, dated August 23, 1993, by and
between Clark/Bardes, Inc. and Larry Sluder.
*10.25 -- Employment Agreement, dated March 7, 1993, by and between
Clark/Bardes, Inc. and Ronald A. Roth.
*10.26 -- Employment Agreement, dated April 15, 1991, by and
between Clark/Bardes, Inc. and Sue A. Leslie.
*10.27 -- Employment Agreement, dated June 9, 1993, by and between
Clark/Bardes, Inc. and William J. Gallegos.
*10.28 -- Tax Indemnity Agreement by and between Clark/Bardes
Holdings, Inc., Clark/Bardes, Inc. and certain former
shareholders of the Predecessor Company.
*10.29 -- Form of Employee Stock Purchase Plan.
*10.30 -- Form of Employment Agreement, effective as of September
1, 1998, by and between Clark/Bardes, Inc. and Robert E.
Miller.
*10.31 -- Form of Employment Agreement, effective as of July 1,
1998, by and between Clark/Bardes, Inc. and Thomas M.
Pyra.
*10.32 -- Form of Employment Agreement, effective as of July 1,
1998, by and between Clark/Bardes Holdings, Inc. and
Melvin G. Todd.
*10.33 -- Form of Commission Transfer Agreement by and between W.T.
Wamberg, The Wamberg Organization, Inc. and Clark/Bardes,
Inc.
*10.34 -- Letter of Agreement, dated July 24, 1998, to Great-West,
Life Investors and Nationwide.
*10.35 -- Employment Agreement, dated September 1, 1997, by and
between Clark/Bardes, Inc. and Richard C. Chapman.
*10.36 -- Form of Amended and Restated Note Agreement, Senior
Secured Notes Due August 9, 2002, by and between
Great-West, Life Investors and Nationwide.
*10.37 -- Form of Amended and Restated Note Agreement, 11.0% Second
Priority Senior Secured Notes Due August 9, 2004, by and
between Great-West, Life Investors and Nationwide.
10.38 -- Put Rights Agreement, dated as of September 9, 1997, by
and among Clark/Bardes, Inc., Great-West, Life Investors
and Nationwide.
10.39 -- Participation Rights Agreement, dated as of September 9,
1997, by and among Clark/Bardes, Inc., Great-West, Life
Investors and Nationwide.
10.40 -- Registration Rights Agreement, dated as of September 9,
1997, by and among Clark/Bardes, Inc., Great-West, Life
Investors and Nationwide.
10.41 -- Form of Letter Agreement between Phoenix Home Life and
Clark/Bardes.
*16 -- Letter regarding Change in Certifying Accountant.
23.1 -- Consent of Ernst & Young LLP.
23.2 -- Consent of Lane Gorman Trubitt, L.L.P.
23.3 -- Consent of McGladrey & Pullen, LLP.
23.4 -- Consent of Akin, Gump, Strauss, Hauer & Feld, L.L.P.
(included in its opinion filed as Exhibit 5 hereto).
23.5 -- Consent of George D. Dalton.
*24 -- Power of Attorney (included on signature page of the
Registration Statement as initially filed).
*27 -- Financial Information Schedule (included in SEC-filed
copy only).
</TABLE>
- ---------------
* Previously filed
<PAGE> 1
EXHIBIT 5
[AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P. LETTERHEAD]
August 14, 1998
Clark/Bardes Holdings, Inc.
2121 San Jacinto Street, Suite 220
Dallas, Texas 75201-7906
Ladies and Gentlemen:
We have acted as counsel to Clark/Bardes Holdings, Inc., a Delaware
corporation (the "Company"), in connection with the proposed public offering of
up to 4,600,000 shares of the Company's Common Stock, par value $0.01 per share
(the "Common Stock") and up to 20,000 Series A Junior Participating Preferred
Stock (the "Rights"), as described in Registration Statement No. 333-56799 on
Form S-1 (the "Registration Statement") filed with the Securities and Exchange
Commission.
We have, as counsel, examined such corporate records, certificates and
other documents and reviewed such questions of law as we have deemed necessary,
relevant or appropriate to enable us to render the opinions listed below. In
rendering such opinions, we have assumed the genuineness of all signatures and
the authenticity of all documents examined by us. As to various questions of
fact material to such opinions, we have relied upon representations of the
Company.
Based upon such examination and representations, we advise you that, in our
opinion:
A. The shares of Common Stock that are to be sold and delivered by the
Company as contemplated by the Underwriting Agreement (the "Underwriting
Agreement"), the form of which is filed as Exhibit 1.1 to the Registration
Statement, have been duly authorized by the Company.
B. The shares of Common Stock that are to be sold and delivered by the
Company as contemplated by the Underwriting Agreement will, when issued and
delivered in accordance with the terms of the Underwriting Agreement, be
validly issued, fully paid and non-assessable.
<PAGE> 2
AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P.
Clark/Bardes Holdings, Inc.
August 14, 1998
Page 2
C. The shares of Common Stock that are currently held by the Selling
Stockholder and which are to be sold and delivered by the Selling Stockholder
as contemplated by the Underwriting Agreement, have been validly issued and
are fully paid and non-assessable.
D. The Rights have been duly authorized by the Company.
E. The Rights to be issued in connection with the Common Stock to be
sold and delivered by the Company as contemplated by the Underwriting
Agreement will, when issued, be validly issued.
F. The Rights that are currently held by the Selling Stockholder and
which are to be delivered by the Selling Stockholder in connection with the
Common Stock to be sold and delivered by the Selling Stockholder as
contemplated by the Underwriting Agreement, have been validly issued.
We consent to the filing of this opinion as Exhibit 5 to the Registration
Statement and to the reference to this firm under the caption "Legal Matters"
in the Prospectus contained therein.
Sincerely,
AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P.
<PAGE> 1
EXHIBIT 10.38
EXECUTION COPY
PUT RIGHTS AGREEMENT
THIS PUT RIGHTS AGREEMENT (this "AGREEMENT"), dated as of September 9,
1997, is made and entered into by and among CLARK/BARDES, INC., a Texas
corporation (the "COMPANY"), and GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY,
LIFE INVESTORS INSURANCE COMPANY OF AMERICA and NATIONWIDE LIFE INSURANCE
COMPANY (each a "PURCHASER" and collectively the "PURCHASERS"). Capitalized
terms used and not elsewhere defined in this Agreement shall have the
respective meanings assigned to them in Section 3 of this Agreement.
1. Background. The Company and the Purchasers have entered into that
certain Note and Warrant Purchase Agreement (the "PURCHASE AGREEMENT"), dated
as of September 8, 1997, pursuant to which the Company has agreed, among other
things, to issue and sell its Common Stock Purchase Warrants expiring August 9,
2004 (the "WARRANTS"), evidencing rights to purchase an aggregate of 3,050,847
shares (subject to adjustment as provided therein) of the Company's Common
Stock, no par value per share (the "COMMON STOCK"). This agreement shall become
effective upon the issuance of such Warrants.
2. Put Rights.
2.1 Grant of Put Rights. The Company hereby grants to each
holder of Put Securities the right and option (as to each such holder, its "PUT
RIGHT" and, as to all such holders collectively, the "PUT RIGHTS"), to require
the Company to purchase all or any portion of the Put Securities held by such
holder upon the exercise by such holder of its Put Right in accordance with the
provisions of this Agreement.
2.2 Time of Exercise. The Put Right of any holder of Put
Securities may be exercised at any time during the 45-day period following the
delivery to such holder (pursuant to the terms of the Purchase Agreement)
during the Exercise Period of (i) the Company's annual audited financial
statements for any fiscal year or (ii) the Company's unaudited financial
statements for any second fiscal quarter.
2.3 Manner of Exercise. A holder of Put Securities may
exercise such holder's Put Right with respect to all or any portion of the Put
Securities by delivering written notice thereof (a "PUT NOTICE") to the
Company. Such Put Notice shall specify (i) the number and type of Put
Securities to be purchased from such holder by the Company and (ii) a date,
which shall be no later than 90 days after the date of the Put Notice, upon
which the Company is to purchase such Put Securities (the "PROPOSED PUT CLOSING
DATE"). If the Proposed Put Closing Date is not specified in the Put Notice,
the Proposed Put Closing Date shall be the 90th day after the date of the Put
Notice.
<PAGE> 2
2.4 Determination of Put Price. The purchase price of the Put
Securities specified in the Put Notice (the "PUT PRICE") will be the Market
Value of such Put Securities, as determined by an independent investment bank,
or accounting firm or other organization which is recognized for, and
experienced in, valuing insurance agencies and brokers and similar financial
services firms (the "INDEPENDENT EVALUATOR"), and which is, in any case,
selected and mutually agreed upon by the Required Holder(s) and the Company
(collectively, the "INTERESTED PARTIES"). In the event the Required Holder(s)
or the Company propose an Independent Evaluator and the Interested Parties
cannot agree on that or any other proposed Independent Evaluator within 30
days, the Required Holder(s) and the Company shall each hire an Independent
Evaluator within 15 days thereafter. The cost of such Independent Evaluators
shall be borne by the Company. The determination of the Market Value of such
Put Securities by the Independent Evaluator shall be set forth within 45 days
of its engagement in a written opinion addressed to the Board of Directors of
the Company and to the holders of such Put Securities, and shall be final,
conclusive and binding upon the Company and such holders. In the event that the
Interested Parties hire two Independent Evaluators, the Market Value of such
Put Securities shall be the average of the two values established unless there
is a difference of more than 10%, in which case the Independent Evaluators
shall select a third Independent Evaluator who shall establish a value within
30 days of such engagement and the Market Value of such Put Securities shall be
the average of the two closest values established by the Independent
Evaluators. In the event a third Independent Evaluator is hired, the cost of
such evaluation shall be split evenly between the Company and the Required
Holder(s).
2.5 Form of Payment of Put Price. Payment of the Put Price will,
at the option of the Company, be either made in cash or a combination of cash
and notes (the "PUT NOTES") and will, in the case of Put Securities consisting
of Warrants, be net of the then current exercise price thereof. The Company
shall specify the form of the Put Price in a written notice (the "PUT PRICE
NOTICE") to a holder of Put Securities exercising its Put Right within 15 days
after the Company's receipt of the Put Notice delivered by such holder. In the
case where the Company elects to pay all or a portion of the Put Price in the
form of Put Notes, such Put Notes will bear interest (payable quarterly and
computed on a 360-day year/30-day month basis) at the greater of (i) the
average daily "prime rate" as published in the Southwestern edition of The Wall
Street Journal (the "PRIME RATE") plus 1.0% and (ii) 12% per annum. Fifty
percent of the principal amount of such Put Notes shall be due and payable on
the first anniversary of the Put Closing Date, and the remaining outstanding
principal amount of such Put Notes shall be due and payable on the second
anniversary of the Put Closing Date. The Company may, at any time and from time
to time, and without premium, prepay all or any portion of the outstanding
principal amount of the Put Notes, pro rata among the holders of all Put Notes
then outstanding. In connection with each prepayment of principal, the Company
shall also pay all accrued and unpaid interest thereon. The Put Notes will have
the same terms, covenants and collateral (and priority with respect thereto) as
the Notes (whether or not any Notes are then outstanding).
2
<PAGE> 3
2.6 Put Closing. The consummation of the exercise of the Put
Rights of a holder or holders of Put Securities (the "PUT CLOSING") shall occur
on the Proposed Put Closing Date or, in the event the Market Value of such Put
Securities has not been established as provided under Section 2.3 on or before
the Proposed Put Closing Date, as soon as practicable after the establishment
of such Market Value, and in any event at such time and place as shall be
agreed to by the Company and the Required Holder(s). At the Put Closing, the
Company shall deliver the Put Price of the Put Securities to the appropriate
holder or holders thereof, in immediately available funds, Put Notes, or a
combination thereof, as specified in the Put Price Notice. The holder or
holders of the Put Securities in respect of which Put Rights are being
exercised shall deliver the certificate or certificates representing the
applicable Put Securities to the Company, duly endorsed or accompanied by duly
executed separate assignments, and shall transfer such Put Securities to the
Company free of any claims, liens or other encumbrances created or incurred by
such holder or holders.
3. Definitions. As used herein, unless the context otherwise
requires, the following terms have the following respective meanings:
"COMMON STOCK" shall have the meaning specified in
Section 1.
"COMPANY" shall have the meaning specified in the
introductory paragraph of this Agreement.
"EXCHANGE ACT" shall mean the Securities Exchange Act of
1934, or any similar Federal statute, and the rules and regulations of
the Securities and Exchange Commission thereunder, all as the same shall
be in effect at the time. Reference to a particular section of the
Securities Exchange Act of 1934 shall include a reference to the
comparable section, if any, of any such similar Federal statute.
"EXERCISE PERIOD" shall mean the period of time commencing
September 9, 2002 and ending at such time as (i) the Company is required
under Section 12(g) of the Exchange Act to comply with the reporting
requirements of Section 13 or 15(d) of the Exchange Act and (ii) the
Common Stock is listed on the New York Stock Exchange or the American
Stock Exchange or quoted by the Nasdaq National Market or any successor
thereto or comparable system.
"INDEPENDENT EVALUATOR" shall have the meaning specified
in Section 2.4.
"INTERESTED PARTIES" shall have the meaning specified in
Section 2.4.
"MARKET VALUE" shall be determined on a per share basis
(without taking into account any minority discount) as of the date of
the applicable Put Notice, and shall mean the greatest of (i) the
exercise price of the Warrants, as adjusted pursuant to the anti-
3
<PAGE> 4
dilution provisions of the Warrants; (ii) the probable sale price for
substantially all of the business of the Company that a willing
strategic purchaser would pay in an arm's length transaction; or (iii)
the probable offering price in an initial public offering of the
Company's Common Stock on a firm underwriting commitment basis, net of
commissions, fees and costs that would reasonably be expected to be
incurred in connection with such an initial public offering.
"PRIME RATE" shall have the meaning specified in Section
2.5.
"PROPOSED PUT CLOSING DATE" shall have the meaning
specified in Section 2.3.
"PURCHASE AGREEMENT" shall have the meaning specified in
Section 1.
"PURCHASER" and "PURCHASERS" shall have the respective
meanings specified in the introductory paragraph of this Agreement.
"PUT CLOSING" shall have the meaning specified in
Section 2.5.
"PUT NOTES" shall have the meaning specified in
Section 2.5.
"PUT NOTICE" shall have the meaning specified in
Section 2.3.
"PUT PRICE" shall have the meaning specified in
Section 2.4.
"PUT PRICE NOTICE" shall have the meaning specified in
Section 2.5.
"PUT RIGHT" and "PUT RIGHTS" shall have the respective
meanings specified in Section 2.1 of this Agreement.
"PUT SECURITIES" shall mean, collectively, the Warrants
and the Warrant Stock.
"REQUIRED HOLDER(S)" shall mean, (i) in the event only one
holder of Put Securities is exercising its Put Right at a given time,
such holder, and, (ii) in the event two or more holders of Put
Securities are exercising their respective Put Rights at the same time,
the holders of at least 50.1% of the Put Securities in respect of
which such Put Rights are being exercised, determined with respect to
the number of shares of Warrant Stock then held by each such holder or,
with respect to Warrants, the number of shares of Warrant Stock for
which such Warrants may then be exercised.
"WARRANT STOCK" shall mean (i) any shares of Common Stock
issued or issuable upon exercise of any of the Warrants and (ii) any
securities issued or issuable with respect to any such Common Stock by
way of stock dividend or stock split or in connection with a
4
<PAGE> 5
combination of shares, recapitalization, merger, consolidation or other
reorganization or otherwise.
"WARRANTS" shall have the meaning specified in Section 1.
5. Amendments and Waivers. This Agreement may be amended and
the Company may take any action herein prohibited or omit to perform any act
herein required to be performed by it, only if the Company shall have obtained
the written consent to such amendment, action or omission to act, of the holder
or holders of 66 2/3% of all Put Securities, determined with respect to the
number of shares of Warrant Stock then held by each such holder (or, with
respect to Warrants, the number of shares of Warrant Stock for which such
Warrants may be exercised). Each holder of any Put Securities at the time or
thereafter outstanding shall be bound by any consent authorized by this Section
5, whether or not such Put Securities shall have been marked to indicate such
consent.
6. Nominees for Beneficial Owners. In the event that any Put
Securities are held by a nominee for the beneficial owner thereof, the
beneficial owner thereof may, at its election, be treated as the holder of such
Put Securities for purposes of any request or other action by any holder or
holders of Put Securities pursuant to this Agreement or any determination of
any number or percentage of shares of Put Securities held by any holder or
holders of Put Securities contemplated by this Agreement. If the beneficial
owner of any Put Securities so elects, the Company may require assurances
reasonably satisfactory to it of such owner's beneficial ownership of such Put
Securities.
7. Notices. All communications provided for hereunder shall
be sent by first-class mail and (a) if addressed to a party other than the
Company, addressed to such party in the manner set forth in the Purchase
Agreement, or at such other address as such party shall have furnished to the
Company in writing, or (b) if addressed to the Company, at 2121 San Jacinto,
Suite 2200, Dallas, Texas 75201, Attention: President, or at such other
address, or to the attention of such other officer, as the Company shall have
furnished to each holder of Put Securities at the time outstanding; provided,
however, that any such communication to the Company may also, at the option of
any of the parties hereunder, be either delivered to the Company at its address
set forth above or to any officer of the Company.
8. Assignment. This Agreement shall be binding upon and inure
to the benefit of and be enforceable by the parties hereto and their respective
successors and assigns. In addition, and whether or not any express assignment
shall have been made, the provisions of this Agreement which are for the
benefit of the parties hereto other than the Company shall also be for the
benefit of and enforceable by any subsequent holder of any Put Securities,
subject to the provisions respecting the minimum numbers or percentages of
shares of Put Securities required in order to be entitled to certain rights, or
take certain actions contained herein.
9. Descriptive Headings. The descriptive headings of the
several sections and paragraphs of this Agreement are inserted for reference
only and shall not limit or otherwise affect the meaning hereof.
5
<PAGE> 6
10. Specific Performance. The parties hereto recognize and
agree that money damages may be insufficient to compensate the holders of any
Put Securities for breaches by the Company of the terms hereof and,
consequently, that the equitable remedy of specific performance of the terms
hereof will be available in the event of any such breach.
11. Governing Law. This Agreement shall be construed and
enforced in accordance with, and the rights of the parties shall be governed
by, the laws of the State of New York.
12. Counterparts. This Agreement may be executed
simultaneously in any number of counterparts, each of which shall be deemed an
original, but all such counterparts shall together constitute one and the same
instrument.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK; SIGNATURE PAGE FOLLOWS]
6
<PAGE> 7
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed and delivered by their respective officers thereunto duly authorized
as of the date first above written.
CLARK/BARDES, INC.
By: /s/ MELVIN TODD
--------------------------------
Name: Melvin Todd
Title: CEO
GREAT-WEST LIFE & ANNUITY
INSURANCE COMPANY
By:
--------------------------------
Name:
Title:
By:
--------------------------------
Name:
Title:
LIFE INVESTORS INSURANCE COMPANY
OF AMERICA
By:
--------------------------------
Name:
Title:
NATIONWIDE LIFE INSURANCE COMPANY
By:
--------------------------------
Name:
Title:
<PAGE> 1
EXHIBIT 10.39
EXECUTION COPY
PARTICIPATION RIGHTS AGREEMENT
PARTICIPATION RIGHTS AGREEMENT, dated as of September 9, 1997, by
and among CLARK/BARDES, INC., a Texas corporation (the "COMPANY"), GREAT-WEST
LIFE & ANNUITY INSURANCE COMPANY, LIFE INVESTORS INSURANCE COMPANY OF AMERICA
and NATIONWIDE LIFE INSURANCE COMPANY (each a "PURCHASER" and collectively the
"PURCHASERS") and the holders of the Company's Common Stock, no par value per
share (the "COMMON STOCK"), listed in Schedule I attached hereto or
subsequently made a party hereto pursuant to Section 6 hereof (each a
"STOCKHOLDER" and collectively the "STOCKHOLDERS").
1. Background. The Company and the Purchasers have entered into a
Note and Warrant Purchase Agreement (the "PURCHASE AGREEMENT"), dated as of
September 8, 1997, pursuant to which the Company has agreed, among other
things, to issue and sell its Common Stock Purchase Warrants Expiring August 9,
2004, (the "WARRANTS"), evidencing rights to purchase an aggregate of 3,050,847
shares (subject to adjustment as provided therein) of Common Stock. This
agreement shall become effective upon the issuance of such Warrants.
2. Transfers of Common Stock.
2.1 General. Subject to compliance with the provisions of
Section 2.2 hereof, any Stockholder may transfer shares of Common Stock or
Common Stock Equivalents held by such Stockholder in accordance with applicable
law so long as either (i) such Stockholder first delivers to the Company and
the Tagalong Holders a written agreement of the proposed transferee to become a
party to and be bound by the terms and provisions of this Agreement (unless
such proposed transferee is already a party hereto) or (ii) the transfer (a) is
pursuant to a public offering registered under the Securities Act or (b) is
made in accordance with Rule 144 under the Securities Act (or any similar
successor provision) (a "RULE 144 TRANSFER").
2.2 Rights of Participation. If a Stockholder or Affiliate
thereof proposes to sell shares of Common Stock for value (such Stockholder or
Affiliate thereof being referred to herein as a "TRANSFEROR"), but excluding
(i) a sale which is pursuant to a public offering registered under the
Securities Act or is a Rule 144 Transfer, (ii) a sale to an Affiliate of such
Transferor or (iii) a sale to a Person that is a stockholder of the Company as
of the date of this Agreement, then such Transferor shall offer (the
"PARTICIPATION OFFER") to include in the proposed sale a number of shares of
Common Stock designated by any Tagalong Holder (including, without limitation,
shares of Common Stock issued upon exercise of Warrants subsequent to delivery
of notice by such Transferor to the Tagalong Holders of such proposed sale),
not to exceed, in respect of any such Tagalong Holder, the number of shares
equal to the product of (a) the aggregate number of shares of Common Stock to
be sold by the Transferor to the proposed transferee and (b) a fraction, the
numerator of which shall be the number of shares of Fully Diluted Common Stock
held by such Tagalong Holder and the denominator of which shall be the number
of shares of Fully Diluted
<PAGE> 2
Common Stock held by the Transferor and all Tagalong Holders. The Transferor
shall give written notice to each Tagalong Holder of the Participation Offer
(the "PARTICIPATION OFFER NOTICE") at least 45 days prior to the proposed sale.
The Participation Offer Notice shall specify the proposed transferee, the
number of shares of Common Stock to be sold to such transferee, the amount and
type of consideration to be received therefor, and the place and date on which
the sale is to be consummated. Each Tagalong Holder who wishes to include
shares of Common Stock in the proposed sale in accordance with this Section 2.2
shall so notify the Transferor not more than 30 days after the date of receipt
of the Participation Offer Notice. The Participation Offer shall be conditioned
upon the Transferor's sale of shares pursuant to the transactions contemplated
in the Participation Offer Notice with the transferee named therein. If any
other Tagalong Holders have accepted the Participation Offer, the Transferor
shall reduce to the extent necessary the number of shares it otherwise would
have sold in the proposed sale so as to permit such other Tagalong Holders to
sell the number of shares that they are entitled to sell under this Section
2.2, and the Transferor and such other Tagalong Holders shall sell the number
of shares specified in the Participation Offer to the proposed transferee in
accordance with the terms of such sale set forth in the Participation Offer
Notice.
2.3 Restrictive Legend. Contemporaneously with the execution
and delivery of this Agreement, each certificate representing shares of
presently outstanding Common Stock held by a Stockholder shall be stamped or
otherwise imprinted with a legend (or shall be exchanged for certificates
bearing a legend) in substantially the following form:
"The shares represented by this certificate are subject to certain
restrictions set forth in a Participation Rights Agreement dated as of
September 9, 1997 among the Corporation, Great-West Life & Annuity
Insurance Company, Life Investors Insurance Company of America and
Nationwide Life Insurance Company and the holders of the Corporation's
outstanding Common Stock parties thereto, and such shares may not be
transferred except in compliance with such restrictions. Such
Participation Rights Agreement is on file at the office of the
Corporation and a copy thereof will be furnished without charge to the
holder of the shares represented by this certificate upon written
request."
Each certificate issued upon the direct or indirect transfer of any such
outstanding Common Stock held by a Stockholder shall also be stamped or
otherwise imprinted with the foregoing legend.
2.4 Effect of Violation. Any purported transfer of Common
Stock or Common Stock Equivalents which is not permitted by this Agreement or
which is in violation of such Agreement shall be void and of no force and
effect whatsoever.
3. Definitions. As used herein, unless the context otherwise
requires, the following terms have the following respective meanings:
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<PAGE> 3
"AFFILIATE" shall mean, with respect to any Person, any other
Person who, directly or indirectly, is in control of, is controlled by, or is
under common control with, such Person. As used herein, the term "control"
means possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of a Person, whether through the
ownership of voting securities, by contract or otherwise.
"AGREEMENT" shall mean this Participation Rights Agreement, as
the same may be amended from time to time.
"COMMON STOCK" shall have the meaning specified in the
introductory paragraph of this Agreement.
"COMMON STOCK EQUIVALENTS" shall mean all options, rights or
warrants to purchase shares of Common Stock, all securities convertible into or
exchangeable for shares of Common Stock and all shares of Common Stock into
which shares of Common Stock of another class have been converted.
"COMPANY" shall have the meaning specified in the introductory
paragraph of this Agreement.
"FULLY DILUTED COMMON STOCK" shall mean, at any time, the then
outstanding Common Stock plus (without duplication) all shares of Common Stock
issuable, whether at such time or upon the passage of time or the occurrence of
future events, upon the exercise, conversion or exchange of all then
outstanding options, rights or warrants (including, without limitation, the
Warrants) or securities convertible into or exchangeable for Common Stock.
"RULE 144 TRANSFER" shall have the meaning specified in
Section 2.1.
"PARTICIPATION OFFER" shall have the meaning specified in
Section 2.2.
"PARTICIPATION OFFER NOTICE" shall have the meaning specified in
Section 2.2.
"PERSON" shall mean a corporation, an association, a partnership,
a limited liability company, a business, an individual, a governmental or
political subdivision thereof or a governmental agency.
"PURCHASE AGREEMENT" shall have the meaning specified in
Section 1.
"PURCHASER" and "PURCHASERS" shall have the respective meanings
specified in the introductory paragraph of this Agreement.
-3-
<PAGE> 4
"REQUIRED HOLDERS" shall mean any holder or holders of 66 2/3%
(by number of shares of Common Stock issued or issuable) of the Warrants or of
Common Stock issued upon the exercise of Warrants.
"SECURITIES ACT" shall mean the Securities Act of 1933, as
amended, or any successor statute thereto.
"STOCKHOLDERS" shall mean the parties to this Agreement who are
record or beneficial owners of any shares of Common Stock.
"TAGALONG HOLDER" shall mean any holder of (i) Warrants or (ii)
Common Stock issued upon the exercise of Warrants.
"TRANSFEROR" shall have the meaning specified in Section 2.2.
"WARRANTS" shall have the meaning specified in Section 1.
4. Agreement. A copy of this Agreement shall be filed with the
permanent records of the Company and shall be kept at all times at the
principal place of business of the Company.
5. Further Assurances. Each party agrees to do, or cause to be done,
such further acts and to execute and deliver, or to cause to be executed and
delivered, such further agreements, instruments, certificates and other
documents as may be necessary or appropriate to effectuate and carry out the
purposes of this Agreement.
6. Additional Stockholders to be Made Parties. In addition, the
Company agrees that it shall cause any Person who subsequently acquires ten
percent or more of the outstanding Common Stock of the Company to become a
party to this Agreement and a "Stockholder" for all purposes hereunder by
executing and delivering a supplement to this Agreement in form, scope and
substance satisfactory to the Purchasers.
7. Amendments and Waivers. This Agreement may be amended and the
Stockholders and the Company may take any action herein prohibited or omit to
perform any act herein required to be performed, only if the prior written
consent of the Required Holders to such amendment, action or omission to act
shall have been obtained.
8. Notices. All communications provided for hereunder shall be sent
by first-class mail and (a) if addressed to a Tagalong Holder, addressed to
such Tagalong Holder in the manner set forth in the Purchase Agreement, or at
such other address as such Tagalong Holder shall have furnished to the other
parties hereto in writing, (b) if addressed to the Company, at 2121 San
Jacinto, Suite 2200, Dallas, Texas 75201, Attention: President, or at such
other address, or to the attention of such other officer, as the Company shall
have furnished to the other parties hereto in writing; provided, however, that
any such communication to the Company may also, at the option of any of the
other
-4-
<PAGE> 5
parties hereto, be either delivered to the Company at its address set forth
above or to any officer of the Company, or (c) if to any Stockholder, addressed
to such Stockholder at its address set forth in Schedule I hereto, or at such
other address as such party shall have furnished to the other parties hereto in
writing
9. Assignment. This Agreement shall be binding upon and inure to the
benefit of and be enforceable by the parties hereto and their respective heirs,
executors, administrators, personal representatives, successors and assigns. In
addition, and whether or not any express assignment shall have been made, the
provisions of this Agreement which are for the benefit of the Purchaser shall
also be for the benefit of and enforceable by any subsequent Tagalong Holder.
10. Descriptive Headings. The descriptive headings of the several
sections and paragraphs of this Agreement are inserted for reference only and
shall not limit or otherwise affect the meaning hereof.
11. Specific Performance. The parties hereto recognize and agree that
money damages may be insufficient to compensate the Tagalong Holders for
breaches by the Company or the Stockholders of the terms hereof and,
consequently, that the equitable remedy of specific performance of the terms
hereof will be available in the event of any such breach.
12. Governing Law. This Agreement shall be construed and enforced in
accordance with, and the rights of the parties shall be governed by, the laws
of the State of New York.
13. Counterparts. This Agreement may be executed simultaneously in
any number of counterparts, each of which shall be deemed an original, but all
such counterparts shall together constitute one and the same instrument.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK; SIGNATURE PAGES FOLLOW]
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<PAGE> 6
IN WITNESS WHEREOF, the parties have executed this Agreement, or
caused this Agreement to be executed and delivered by their respective officers
thereunto duly authorized, as of the date first above written.
CLARK/BARDES, INC.
By: /s/ MELVIN TODD
--------------------------------
Name: Melvin Todd
Title: CEO
GREAT-WEST LIFE & ANNUITY
INSURANCE COMPANY
By:
--------------------------------
Name:
Title:
By:
--------------------------------
Name:
Title:
LIFE INVESTORS INSURANCE COMPANY
OF AMERICA
By:
--------------------------------
Name:
Title:
<PAGE> 1
EXHIBIT 10.40
EXECUTION COPY
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT, dated as of September 9, 1997, by
and among CLARK/BARDES, INC., a Texas corporation (the "COMPANY"), and
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY, LIFE INVESTORS INSURANCE COMPANY
OF AMERICA and NATIONWIDE LIFE INSURANCE COMPANY (each a "PURCHASER" and
collectively the "PURCHASERS").
1. Background. The Company and the Purchasers have entered into that
certain Note and Warrant Purchase Agreement (the "PURCHASE AGREEMENT"), dated
as of September 8, 1997, pursuant to which the Company has agreed, among other
things, to issue and sell its Common Stock Purchase Warrants expiring August 9,
2004 (the "WARRANTS"), evidencing rights to purchase an aggregate of 3,050,047
shares (subject to adjustment as provided therein) of the Company's Common
Stock, no par value per share (the "COMMON STOCK"). This agreement shall become
effective upon the issuance of such Warrants.
2. Registration under Securities Act, etc.
2.1 Incidental Registration.
(a) Right to Include Registrable Securities. If the Company at
any time proposes to register any of its securities under the Securities Act
(other than by a registration on Form S-4 or S-8 or any successor or similar
form), whether or not for sale for its own account, it will each such time give
prompt written notice to all holders of Warrants or Registrable Securities of
its intention to do so and of such holders' rights under this Section 2.1.
Upon the written request of any such holder made within 30 days after the
receipt of any such notice (which request shall specify the Registrable
Securities intended to be disposed of by such holder and the intended method of
disposition thereof), the Company will use its best efforts to effect the
registration under the Securities Act of all Registrable Securities which the
Company has been so requested to register by the holders thereof, provided that
if, at any time after giving written notice of its intention to register any
securities and prior to the effective date of the registration statement filed
in connection with such registration, the Company shall determine for any
reason not to register or to delay registration of such securities, the Company
may, at its election, give written notice of such determination to each holder
of Warrants or Registrable Securities and, thereupon, (i) in the case of a
determination not to register, shall be relieved of its obligation to register
any Registrable Securities in connection with such registration (but not from
its obligation to pay the Registration Expenses in connection therewith), and
(ii) in the case of a determination to delay registering, shall be permitted to
delay registering any Registrable Securities, for the same period as the delay
in registering such other securities. The Company will pay all Registration
Expenses in connection with each registration of Registrable Securities
requested pursuant to this Section 2.1.
<PAGE> 2
(b) Priority in Incidental Registrations. If (i) a
registration pursuant to this Section 2.1 involves an underwritten offering of
the securities so being registered, whether or not for sale for the account of
the Company, to be distributed (on a firm commitment basis) by or through one
or more underwriters of recognized standing under underwriting terms
appropriate for such a transaction and (ii) the managing underwriter of such
underwritten offering shall inform the Company and the holders of Warrants or
Registrable Securities requesting such registration by letter of its belief
that the number of securities requested to be included in such registration
exceeds the number which can be sold in (or during the time of) such offering,
then the Company may include all securities proposed by the Company to be sold
for its own account and may decrease the number of Registrable Securities so
proposed to be sold and so requested to be included in such registration (pro
rata among the holders thereof on the basis of the percentage of Registrable
Securities held by such holders) to the extent necessary to reduce the number
of securities to be included in the registration to the level recommended by
the managing underwriter; provided that if securities of the Company other than
(x) securities proposed by the Company to be sold for its own account and (y)
Registrable Securities (collectively, "OTHER SECURITIES") have been proposed to
be included in such registration, no Other Securities may be included in such
registration if the number of Registrable Securities to be included in such
registration has been required to be decreased pursuant to this Section 2.1(b).
2.2 Registration Procedures. If and whenever the Company is
required to use its best efforts to effect the registration of any Registrable
Securities under the Securities Act as provided in Section 2.1, the Company
will as expeditiously as possible:
(i) prepare and (as soon thereafter as possible or in any
event no later than 120 days after the end of the period within which
requests for registration may be given to the Company) file with the
Commission the requisite registration statement to effect such
registration and thereafter use its best efforts to cause such
registration statement to become effective, provided that the Company
may discontinue any registration of its securities which are not
Registrable Securities (and, under the circumstances specified in
Section 2.1(a), its securities which are Registrable Securities) at
any time prior to the effective date of the registration statement
relating thereto;
(ii) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in
connection therewith as may be necessary to keep such registration
statement effective and to comply with the provisions of the Securities
Act with respect to the disposition of all securities covered by such
registration statement until such time as all of such securities have
been disposed of in accordance with the intended methods of disposition
by the seller or sellers thereof set forth in such registration
statement;
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<PAGE> 3
(iii) furnish to each seller of Registrable Securities covered
by such registration statement such number of conformed copies of such
registration statement and of each such amendment and supplement thereto
(in each case including all exhibits), such number of copies of the
prospectus contained in such registration statement (including each
preliminary prospectus and any summary prospectus) and any other
prospectus filed under Rule 424 under the Securities Act, in conformity
with the requirements of the Securities Act, and such other documents,
as such seller may reasonably request;
(iv) use its best efforts to register or qualify all
Registrable Securities and other securities covered by such registration
statement under such other securities or blue sky laws of such
jurisdictions as each seller thereof shall reasonably request, to keep
such registration or qualification in effect for so long as such
registration statement remains in effect, and take any other action
which may be reasonably necessary or advisable to enable such seller to
consummate the disposition in such jurisdictions of the securities owned
by such seller, except that the Company shall not for any such purpose
be required to qualify generally to do business as a foreign corporation
in any jurisdiction wherein it would not but for the requirements of
this subdivision (iv) be obligated to be so qualified or to consent to
general service of process in any such jurisdiction;
(v) use its best efforts to cause all Registrable Securities
covered by such registration statement to be registered with or approved
by such other governmental agencies or authorities as may be necessary
to enable the seller or sellers thereof to consummate the disposition of
such Registrable Securities;
(vi) furnish to each seller of Registrable Securities and each
Requesting Holder a signed counterpart, addressed to such seller and
such Requesting Holder (and underwriters, if any) of:
(x) an opinion of counsel for the Company, dated the
effective date of such registration statement (and, if such
registration includes an underwritten public offering, dated the
date of the closing under the underwriting agreement), reasonably
satisfactory in form and substance to such seller, and
(y) a "comfort" letter, dated the effective date of
such registration statement (and, if such registration includes
an underwritten public offering, dated the date of the closing
under the underwriting agreement), signed by the independent
public accountants who have certified the Company's financial
statements included in such registration statement,
covering substantially the same matters with respect to such
registration statement (and the prospectus included therein) and, in the
case of the accountants' letter, with respect to events subsequent to
the date of such financial statements, as are customarily covered in
opinions
3
<PAGE> 4
of issuer's counsel and in accountants' letters delivered to the
underwriters in underwritten public offerings of securities and, in the
case of the accountants' letter, such other financial matters, and, in
the case of the legal opinion, such other legal matters, as such seller
or such Requesting Holder, if any, may reasonably request;
(vii) notify each seller of Registrable Securities covered by
such registration statement and each Requesting Holder, at any time when
a prospectus relating thereto is required to be delivered under the
Securities Act, upon discovery that, or upon the happening of any event
as a result of which, the prospectus included in such registration
statement, as then in effect, includes an untrue statement of a material
fact or omits to state any material fact required to be stated therein
or necessary to make the statements therein not misleading in the light
of the circumstances under which they were made, and at the request of
any such seller or Requesting Holder promptly prepare and furnish to
such seller or Requesting Holder a reasonable number of copies of a
supplement to or an amendment of such prospectus as may be necessary so
that, as thereafter delivered to the purchasers of such securities, such
prospectus shall not include an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary
to make the statements therein not misleading in the light of the
circumstances under which they were made;
(viii) otherwise use its best efforts to comply with all
applicable rules and regulations of the Commission, and make available
to its security holders, as soon as reasonably practicable, an earnings
statement covering the period of at least twelve months, but not more
than eighteen months, beginning with the first full calendar month after
the effective date of such registration statement, which earnings
statement shall satisfy the provisions of Section 11(a) of the Securities
Act, and will furnish to each such seller at least five business days
prior to the filing thereof a copy of any amendment or supplement to such
registration statement or prospectus and shall not file any thereof to
which any such seller shall have reasonably objected on the grounds that
such amendment or supplement does not comply in all material respects
with the requirements of the Securities Act or of the rules or
regulations thereunder;
(ix) provide and cause to be maintained a transfer agent and
registrar for all Registrable Securities covered by such registration
statement from and after a date not later than the effective date of
such registration statement;
(x) use its best efforts to cause all Registrable Securities
covered by such registration statement to be listed on any securities
exchange on which any of the Registrable Securities are then listed or
to be quoted by the Nasdaq National Market (or any successor thereto or
any comparable system) on which any of the Registrable Securities are
then quoted; and
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<PAGE> 5
(xi) enter into such agreements and take such other actions as
the Requisite Holders shall reasonably request in order to expedite or
facilitate the disposition of such Registrable Securities.
The Company may require each seller of Registrable Securities as to which any
registration is being effected to furnish the Company such information
regarding such seller and the distribution of such securities as the Company
may from time to time reasonably request in writing.
Each holder of Registrable Securities agrees by acquisition of such
Registrable Securities that upon receipt of any notice from the Company of the
happening of any event of the kind described in subdivision (vii) of this
Section 2.2, such holder will forthwith discontinue such holder's disposition
of Registrable Securities pursuant to the registration statement relating to
such Registrable Securities until such holder's receipt of the copies of the
supplemented or amended prospectus contemplated by subdivision (vii) of this
Section 2.2.
2.3 Underwritten Offerings. If the Company at any time
proposes to register any of its securities under the Securities Act as
contemplated by Section 2.1 and such securities are to be distributed by or
through one or more underwriters, the Company will, if requested by any holder
of Warrants or Registrable Securities as provided in Section 2.1 and subject to
the provisions of Section 2.1(b), arrange for such underwriters to include
all the Registrable Securities to be offered and sold by such holder among the
securities to be distributed by such underwriters. The holders of Registrable
Securities to be distributed by such underwriters shall be parties to the
underwriting agreement between the Company and such underwriters and may, at
their option, require that any or all of the representations and warranties by,
and the other agreements on the part of, the Company to and for the benefit of
such underwriters shall also be made to and for the benefit of such holders of
Registrable Securities and that any or all of the conditions precedent to the
obligations of such underwriters under such underwriting agreement be
conditions precedent to the obligations of such holders of Registrable
Securities. Any such holder of Registrable Securities shall not be required to
make any representations or warranties to or agreements with the Company or the
underwriters other than representations, warranties or agreements regarding
such holder, such holder's Registrable Securities and such holder's intended
method of distribution and any other representation required by law.
2.4 Preparation: Reasonable Investigation. In connection with the
preparation and filing of each registration statement under the Securities Act
pursuant to this Agreement, the Company will give the holders of Registrable
Securities registered under such registration statement (or the holders of
Warrants therefor), their underwriters, if any, and their respective counsel
and accountants, the opportunity to participate in the preparation of such
registration statement, each prospectus included therein or filed with the
Commission, and each amendment thereof or supplement thereto, and will give
each of them such access to its books and records and such opportunities to
discuss the business of the Company with its officers and the independent
public accountants who have certified its financial statements as shall be
necessary, in the opinion of such
5
<PAGE> 6
holders' and such underwriters' respective counsel, to conduct a reasonable
investigation within the meaning of the Securities Act.
2.5 Rights of Requesting Holders. The Company will not file
any registration statement under the Securities Act, unless it shall first have
given to all holders of Warrants or Registrable Securities at least 30 days
prior written notice thereof and, if so requested by the Requisite Holders,
shall have consulted with such holders concerning the selection of
underwriters, counsel and independent accountants for the Company for such
offering and registration. If such holders shall so request within 30 days
after such notice, each of them shall be a "REQUESTING HOLDER" hereunder and
shall have the rights of a Requesting Holder provided in this section 2.5 and
in sections 2.2, 2.4 and 2.6. The Company further covenants that a Requesting
Holder shall have the right (a) to participate in the preparation of any such
registration or comparable statement and to require the insertion therein of
material furnished to the Company in writing, which in such Requesting Holder's
judgment should be included, and (b) at the Company's expense, to retain
counsel and/or independent public accountants to assist such Requesting Holder
in such participation. In addition, if any such registration statement refers
to any Requesting Holder by name or otherwise as the holder of any securities
of the Company, then such Requesting Holder shall have the right to require (i)
the insertion therein of language, in form and substance satisfactory to such
Requesting Holder, to the effect that the holding by such Requesting Holder of
such securities does not necessarily make such Requesting Holder a "controlling
person" of the Company within the meaning of the Securities Act and is not to
be construed as a recommendation by such Requesting Holder of the investment
quality of the Company's debt or equity securities covered thereby and that
such holding does not imply that such Requesting Holder will assist in meeting
any future financial requirements of the Company, or (ii) in the event that
such reference to such Requesting Holder by name or otherwise is not required
by the Securities Act or any rules and regulations promulgated thereunder, the
deletion of the reference to such Requesting Holder.
2.6. Indemnification.
(a) Indemnification by the Company. In the event of any
registration of any securities of the Company under the Securities Act, the
Company will, and hereby does, (i) in the case of any registration statement
filed pursuant to Section 2.1 indemnify and hold harmless the seller of any
Registrable Securities covered by such registration statement, its directors
and officers, each other Person who participates as an underwriter in the
offering or sale of such securities and each other Person, if any, who controls
such seller or any such underwriter within the meaning of the Securities Act,
and (ii) in the case of any registration statement of the Company, indemnify
and hold harmless any Requesting Holder, its directors and officers and each
other Person, if any, who controls such Requesting Holder within the meaning of
the Securities Act, in the case of each of clauses (i) and (ii) above, against
any losses, claims, damages or liabilities, joint or several, to which such
seller or Requesting Holder or any such director or officer or underwriter or
controlling person may become subject under the Securities Act or otherwise,
insofar as such losses, claims, damages or liabilities (or actions or
proceedings, whether commenced or threatened, in respect thereof) arise
6
<PAGE> 7
out of or are based upon any untrue statement or alleged untrue statement of
any material fact contained in any registration statement under which such
securities were registered under the Securities Act, any preliminary
prospectus, final prospectus or summary prospectus contained therein, or any
amendment or supplement thereto, or any omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, or any other noncompliance or alleged
noncompliance with the Securities Act or the applicable underwriting agreement,
and the Company will reimburse such seller, such Requesting Holder and each
such director, officer, underwriter and controlling person for any legal or any
other expenses reasonably incurred by them in connection with investigating or
defending any such loss, claim, liability, action or proceeding; provided that
the Company shall not be liable in any such case to the extent that any such
loss, claim, damage, liability (or action or proceeding in respect thereof) or
expense arises out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission made in such registration statement,
any such preliminary prospectus, final prospectus, summary prospectus,
amendment or supplement in reliance upon and in conformity with written
information furnished to the Company through an instrument duly executed by
such seller or Requesting Holder, as the case may be, specifically stating that
it is for use in the preparation thereof and, provided further that the Company
shall not be liable to any Person who participates as an underwriter, in the
offering or sale of Registrable Securities or any other Person, if any, who
controls such underwriter within the meaning of the Securities Act, in any such
case to the extent that any such loss, claim, damage, liability (or action or
proceeding in respect thereof) or expense arises out of such Person's failure
to send or give a copy of the final prospectus, as the same may be then
supplemented or amended, to the Person asserting an untrue statement or alleged
untrue statement or omission or alleged omission at or prior to the written
confirmation of the sale of Registrable Securities to such Person if such
statement or omission was corrected in such final prospectus. Such indemnity
shall remain in full force and effect regardless of any investigation made by
or on behalf of such seller or any such director, officer, underwriter or
controlling person and shall survive the transfer of such securities by such
seller.
(b) Indemnification by the Sellers. The Company may require,
as a condition to including any Registrable Securities in any registration
statement filed pursuant to Section 2.1, that the Company shall have received
an undertaking satisfactory to it from the prospective seller of such
securities, to indemnify and hold harmless (in the same manner and to the same
extent as set forth in subdivision (a) of this Section 2.6) the Company, each
director of the Company, each officer of the Company and each other Person, if
any, who controls the Company within the meaning of the Securities Act, with
respect to any statement or alleged statement in or omission or alleged
omission from such registration statement, any preliminary prospectus, final
prospectus or summary prospectus contained therein, or any amendment or
supplement thereto, if such statement or alleged statement or omission or
alleged omission was made in reliance upon and in conformity with written
information furnished to the Company through an instrument duly executed by
such seller specifically stating that it is for use in the preparation of such
registration statement, preliminary prospectus, final prospectus, summary
prospectus, amendment or supplement. Such indemnity shall remain in full force
and effect, regardless of any investigation made by or on behalf of the Company
7
<PAGE> 8
or any such director, officer or controlling Person and shall survive the
transfer of such securities by such seller.
(c) Notices of Claims, etc. Promptly after receipt by an
indemnified party of notice of the commencement of any action or proceeding
involving a claim referred to in the preceding subdivisions of this Section
2.6, such indemnified party will, if a claim in respect thereof is to be made
against an indemnifying party, give written notice to the latter of the
commencement of such action, provided that the failure of any indemnified party
to give notice as provided herein shall not relieve the indemnifying party of
its obligations under the preceding subdivisions of this Section 2.6, except to
the extent that the indemnifying party is actually prejudiced by such failure
to give notice. In case any such action is brought against an indemnified
party, unless in such indemnified party's reasonable judgment a conflict of
interest between such indemnified and indemnifying parties may exist in respect
of such claim, the indemnifying party shall be entitled to participate in and
to assume the defense thereof, jointly with any other indemnifying party
similarly notified to the extent that it may wish, with counsel reasonably
satisfactory to such indemnified party, and after notice from the indemnifying
party to such indemnified party of its election so to assume the defense
thereof, the indemnifying party shall not be liable to such indemnified party
for any legal or other expenses subsequently incurred by the latter in
connection with the defense thereof other than reasonable costs of
investigation. No indemnifying party shall, without the consent of the
indemnified party, consent to entry of any judgment or enter into any
settlement which does not include as an unconditional term thereof the giving
by the claimant or plaintiff to such indemnified party of a release from all
liability in respect to such claim or litigation.
(d) Other Indemnification. Indemnification similar to that
specified in the preceding subdivisions of this Section 2.6 (with appropriate
modifications) shall be given by the Company and each seller of Registrable
Securities with respect to any required registration or other qualification of
securities under any Federal or state law or regulation of any governmental
authority other than the Securities Act.
(e) Indemnification Payments. The indemnification required by
this Section 2.6 shall be made by periodic payments of the amount thereof
during the course of the investigation or defense as and when bills are
received or expense, loss, damage or liability is incurred.
2.7 Adjustments Affecting Registrable Securities. The Company
will not effect or permit to occur any combination or subdivision of shares
which would adversely affect the ability of the holders of Registrable
Securities or Warrants therefor to include such Registrable Securities in any
registration of its securities contemplated by this Section 2 or the
marketability of such Registrable Securities under any such registration.
8
<PAGE> 9
3. Definitions. As used herein, unless the context otherwise
requires, the following terms have the following respective meanings:
"COMMISSION" shall mean the Securities and Exchange Commission or
any other Federal agency at the time administering the Securities Act.
"COMMON STOCK" shall have the meaning specified in Section 1.
"COMPANY" shall have the meaning specified in the introductory
paragraph of this Agreement.
"EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, or
any similar Federal statute, and the rules and regulations of the
Commission thereunder, all as the same shall be in effect at the time.
Reference to a particular section of the Securities Exchange Act of 1934
shall include a reference to the comparable section, if any, of any such
similar Federal statute.
"OTHER SECURITIES" shall have the meaning specified in Section
2.1(b).
"PERSON" shall mean a corporation, an association, a partnership,
a business, an individual, a governmental or political subdivision
thereof or a governmental agency.
"PURCHASE AGREEMENT" shall have the meaning specified in
Section 1.
"PURCHASER" and "PURCHASERS" shall have the respective meanings
specified in the introductory paragraph of this Agreement.
"REGISTRABLE SECURITIES" shall mean (a) any shares of Common
Stock issued or issuable upon exercise of any of the Warrants and (b)
any securities issued or issuable with respect to any such Common Stock
by way of stock dividend or stock split or in connection with a
combination of shares, recapitalization, merger, consolidation or other
reorganization or otherwise. As to any particular Registrable
Securities, once issued such securities shall cease to be Registrable
Securities when (i) a registration statement with respect to the sale of
such securities shall have become effective under the Securities Act and
such securities shall have been disposed of in accordance with such
registration statement, (ii) they shall have been distributed to the
public pursuant to Rule 144 (or any successor provision) under the
Securities Act, (iii) they shall have been otherwise transferred, new
certificates for them not bearing a legend restricting further transfer
shall have been delivered by the Company and subsequent disposition of
them shall not require registration or qualification of them under the
Securities Act or any similar state law then in force, or (iv) they
shall have ceased to be outstanding.
9
<PAGE> 10
"REGISTRATION EXPENSES" shall mean all expenses incident to the
Company's performance of or compliance with Section 2, including,
without limitation, all registration, filing and National Association of
Securities Dealers fees, all fees and expenses of complying with
securities or blue sky laws, all word processing, duplicating and
printing expenses, messenger and delivery expenses, the fees and
disbursements of counsel for the Company and of its independent public
accountants, including the expenses of any special audits or "cold
comfort" letters required by or incident to such performance and
compliance, the fees and disbursements incurred by the holders of
Registrable Securities to be registered and the holders of Warrants
therefor (but excluding the fees and disbursements of any counsel other
than the single law firm retained by the Requisite Holders on behalf of
all such holders), premiums and other costs of policies of insurance
against liabilities arising out of the public offering of the
Registrable Securities being registered and any fees and disbursements
of underwriters customarily paid by issuers or sellers of securities,
but excluding underwriting discounts and commissions and transfer taxes,
if any, provided that, in any case where Registration Expenses are not
to be borne by the Company, such expenses shall not include salaries of
Company personnel or general overhead expenses of the Company, auditing
fees, premiums or other expenses relating to liability insurance
required by underwriters of the Company or other expenses for the
preparation of financial statements or other data normally prepared by
the Company in the ordinary course of its business or which the Company
would have incurred in any event.
"REQUESTING HOLDER" shall have the meaning specified in
Section 2.5.
"REQUISITE HOLDERS" shall mean, with respect to any registration
of Registrable Securities by the Company pursuant to Section 2, any
holder or holders of 66 2/3% (by number of shares) of the Registrable
Securities to be so registered or of Warrants for such Registrable
Securities.
"SECURITIES ACT" shall mean the Securities Act of 1933, or any
similar Federal statute, and the rules and regulations of the Commission
thereunder, all as of the same shall be in effect at the time.
References to a particular section of the Securities Act of 1933 shall
include a reference to the comparable section, if any, of any such
similar Federal Statute.
4. Rule 144: If the Company shall have filed a registration
statement pursuant to the requirements of Section 12 of the Exchange Act or a
registration statement pursuant to the requirements of the Securities Act, the
Company will file the reports required to be filed by it under the Securities
Act and the Exchange Act and the rules and regulations adopted by the
Commission thereunder (or, if the Company is not required to file such reports,
will, upon the request of any holder of Warrants or Registrable Securities,
make publicly available other information) and will take such further action as
any holder of Warrants or Registrable Securities may reasonably request, all to
the extent required from time to time to enable such holder to sell Registrable
Securities without registration under the Securities Act within the limitation
of the exemptions provided by (a)
10
<PAGE> 11
Rule 144 under the Securities Act, as such Rule may be amended from time to
time or (b) any similar rule or regulation hereafter adopted by the Commission.
Upon the request of any holder of Warrants or Registrable Securities, the
Company will deliver to such holder a written statement as to whether it has
complied with such requirements.
5. Amendments and Waivers. This Agreement may be amended and the
Company may take any action herein prohibited or omit to perform any act herein
required to be performed by it, only if the Company shall have obtained the
written consent to such amendment, action or omission to act, of the Requisite
Holders. Each holder of any Warrants or Registrable Securities at the time or
thereafter outstanding shall be bound by any consent authorized by this Section
5, whether or not such Registrable Securities shall have been marked to
indicate such consent.
6. Nominees for Beneficial Owners. In the event that any Registrable
Securities are held by a nominee for the beneficial owner thereof, the
beneficial owner thereof may, at its election, be treated as the holder of such
Warrants or Registrable Securities for purposes of any request or other action
by any holder or holders of Warrants or Registrable Securities pursuant to this
Agreement or any determination of any number or percentage of shares of
Warrants or Registrable Securities held by any holder or holders of Warrants or
Registrable Securities contemplated by this Agreement. If the beneficial owner
of any Warrants or Registrable Securities so elects, the Company may require
assurances reasonably satisfactory to it of such owner's beneficial ownership
of such Warrants or Registrable Securities.
7. Notices. All communications provided for hereunder shall be sent
by first-class mail and (a) if addressed to a party other than the Company,
addressed to such party in the manner set forth in the Purchase Agreement, or
at such other address as such party shall have furnished to the Company in
writing, or (b) if addressed to the Company, at 2121 San Jacinto, Suite 2200,
Dallas, Texas 75201, Attention: President, or at such other address, or to the
attention of such other officer, as the Company shall have furnished to each
holder of Warrants or Registrable Securities at the time outstanding; provided,
however, that any such communication to the Company may also, at the option of
any of the parties hereunder, be either delivered to the Company at its address
set forth above or to any officer of the Company.
8. Assignment. This Agreement shall be binding upon and inure to the
benefit of and be enforceable by the parties hereto and their respective
successors and assigns. In addition, and whether or not any express assignment
shall have been made, the provisions of this Agreement which are for the
benefit of the parties hereto other than the Company shall also be for the
benefit of and enforceable by any subsequent holder of any Warrants or
Registrable Securities, subject to the provisions respecting the minimum
numbers or percentages of shares of Warrants or Registrable Securities required
in order to be entitled to certain rights, or take certain actions contained
herein.
11
<PAGE> 12
9. Descriptive Headings. The descriptive headings of the several
sections and paragraphs of this Agreement are inserted for reference only and
shall not limit or otherwise affect the meaning hereof.
10. Specific Performance. The parties hereto recognize and agree that
money damages may be insufficient to compensate the holders of any Warrants or
Registrable Securities for breaches by the Company of the terms hereof and,
consequently, that the equitable remedy of specific performance of the terms
hereof will be available in the event of any such breach.
11. Governing Law. This Agreement shall be construed and enforced in
accordance with, and the rights of the parties shall be governed by, the laws
of the State of New York.
12. Counterparts. This Agreement may be executed simultaneously in
any number of counterparts, each of which shall be deemed an original, but all
such counterparts shall together constitute one and the same instrument.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK; SIGNATURE PAGE FOLLOWS]
12
<PAGE> 13
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed and delivered by their respective officers thereunto duly authorized
as of the date first above written.
CLARK/BARDES, INC.
By: /s/ MELVIN TODD
--------------------------------
Name: Melvin Todd
Title: CEO
GREAT-WEST LIFE & ANNUITY
INSURANCE COMPANY
By:
--------------------------------
Name:
Title:
By:
--------------------------------
Name:
Title:
LIFE INVESTORS INSURANCE COMPANY
OF AMERICA
By:
--------------------------------
Name:
Title:
<PAGE> 1
EXHIBIT 10.41
August __, 1998
CLARK/BARDES, INC.
2121 San Jacinto Street
Suite 2200
Dallas, Texas 75201-7906
Attn: Mel Todd, President & CEO
RE: JOINT PRODUCT DEVELOPMENT AND PRODUCTION AGREEMENT
This letter outlines the general terms on which Clark/Bardes, Inc. ("CB") and
Phoenix Home Life Mutual Insurance Company ("PHL") have agreed to enter into a
Joint Product Development and Production Agreement (the "Agreement"). The terms
are as follows:
1. The parties will jointly develop a life insurance product (the
"Product") to be written by PHL (or an appropriate insurance
subsidiary thereof) and exclusively distributed by CB. The parties
will use their commercial best efforts to have the Product ready for
distribution on or before December 31, 1999.
2. CB will use its best efforts to sell and service the Product with both
existing and future clients and/or clients of companies acquired by
CB. This effort will require CB to illustrate and present the Product
to all appropriate potential clients.
3. CB shall have exclusive rights to distribute the Product provided that
the production requirements set forth below are met and subject to
PHL's requirements that CB make the Product available for distribution
by PHL's Career Agency sales force on terms and conditions reasonably
acceptable to CB.
4. CB will commit for a period of five years after the Product is
available for sale, that sales of the Product will comprise at least
seven and one-half percent (7.5%) of CB's total annualized new
premiums in the markets in which similar products are sold subject to
a minimum production level of $15 million of annualized new premiums
from the Product (the "Product Target Production"). For purposes of
determining Product Target Production, the term "annualized new
premium" means annual target premium plus ten
<PAGE> 2
percent (10%) of excess premium, and shall exclude premium from
supplemental offset plans.
5. For the period commencing on the effective date of the Agreement
and ending on the earlier of the fifth anniversary of such effective
date and the date on which the Product is available for sale (the
"Pre-Product Period), CB will commit that sales by CB of PHL insurance
products (or those of PHL's insurance subsidiaries) will satisfy the
following minimum production requirements (the "Pre-Product Target
Production"): (a) $2.5 million of annualized new premiums for the
first twelve month period (or portion thereof on a pro-rated basis) of
the Pre-Product Period, and (b) $5 million of annualized new premiums
(or a portion thereof on a pro-rated basis) for each subsequent twelve
month period (or portion thereof on a pro-rated basis). For this
purposed, the term "annualized new premium" will be defined in the
same way as it is defined for purposes of determining compliance with
Target Production above.
6. At the end of each twelve month period, PHL will determine if the
Product Target Production or the Pre-Product Target Production
requirements, whichever apply, have been met. If CB fails to meet the
applicable requirements, the penalty for non-compliance for each
twelve month period will be $100,000.
7. This letter agreement, which shall be binding upon CB and PHL,
shall be incorporated into a formal document on or before _____, 1998,
which agreement shall contain provisions regarding, among other
things, term and termination, confidentiality, governing laws, and
other customary terms and conditions.
Signed: Signed:
_________________________ __________________________________
Clark/Bardes, Inc. Phoenix Home Life Mutual Insurance
Company
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated February 18, 1998 (except for Note 15, as to which
the date is July 10, 1998), in Amendment No. 3 to the Registration Statement
(Form S-1 No. 333-56799) and related Prospectus of Clark/Bardes, Inc. (the
predecessor company to Clark/Bardes Holdings, Inc.) for the registration of
shares of its common stock.
/s/ ERNST & YOUNG LLP
------------------------------------
ERNST & YOUNG LLP
Dallas, Texas
August 14, 1998
<PAGE> 1
EXHIBIT 23.2
CONSENT OF LANE GORMAN TRUBITT, L.L.P.
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated February 7, 1997, with respect to the financial
statements of Clark/Bardes, Inc. included in Amendment No. 3 to the Registration
Statement (Form S-1 No. 333-56799) and the related Prospectus of Clark/Bardes,
Inc. (the predecessor company to Clark/Bardes Holding, Inc.) for the
registration of its common stock.
/s/ LANE GORMAN TRUBITT, L.L.P.
------------------------------------
LANE GORMAN TRUBITT, L.L.P.
Dallas, Texas
August 14, 1998
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in Amendment No. 3 to Registration Statement
No. 333-56799 on Form S-1 of our report dated February 18, 1997, related to the
financial statements of Bank Compensation Strategies Group as of December 31,
1996 and 1995, and for the years then ended. We also consent to the reference to
our Firm under the caption "Experts" in the Prospectus.
/s/ MCGLADREY & PULLEN, LLP
------------------------------------
MCGLADREY & PULLEN, LLP
Minneapolis, Minnesota
August 14, 1998
<PAGE> 1
EXHIBIT 23.5
CONSENT OF DIRECTOR NOMINEE
I consent to the use of my name as a director nominee in Amendment No. 3 to
the Registration Statement of Clark/Bardes Holdings, Inc. on Form S-1 (File No.
333-56799), and I agree with the statements concerning myself under the caption
"Management -- Executive Officers, Directors and Key Employees."
/s/ GEORGE D. DALTON
------------------------------------
George D. Dalton
August 14, 1998
