<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 11, 1998.
REGISTRATION NO. 333-56799
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
AMENDMENT NO. 2
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 11, 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.
Application will be made for quotation of the Common Stock 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 $750,000.
(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 $47.0 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 $48.2 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."
Proposed 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
---------- ---------- ----------- ----------- ----------- ------------
Income (loss) from operations... 993,240 106,611 2,212,873 3,639,031 5,215,362 6,184,429
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 (940,232)
---------- ---------- ----------- ----------- ----------- ------------
Total other income (expense).... 92,241 41,560 107,382 96,398 (921,473) (2,360,252)
---------- ---------- ----------- ----------- ----------- ------------
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
Diluted earnings (loss) per
share........................... .17 .02 .39 .75 .99 .46
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
----------- ----------- ----------- -----------
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) $ .09 $ .12
Diluted earnings (loss) per
share........................... (.12) (.10) .09 $ .12
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)(7)
<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)(7)
</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) 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. If the Code were to be
amended to eliminate or reduce the tax-deferred status of the insurance programs
marketed by the Company, 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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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 Company will apply to have the Common Stock 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 $1.50 and
the pro forma dilution to purchasers of Common Stock in the Offering will be
$11.00 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
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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 Reorganization, Clark/Bardes restructured 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
were 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 were reset. The Restructured Notes may
be prepaid without penalty and are secured by a first priority security
15
<PAGE> 19
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.
EXTINGUISHMENT OF WARRANTS
In connection with the Reorganization, Clark/Bardes extinguished the
Warrants in exchange for a payment of $6.5 million by Clark/Bardes to the
warrant holders. 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 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. 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 paid by the Company to each Carrier to
extinguish the Warrants held by each Carrier was approximately $1.2 million less
than the amount 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, net 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 the 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 $45.8 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 $15.4 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
$12,082,360, or $1.50 per share. This represents an immediate increase of pro
forma net tangible book value of $7.40 per share to the Existing Stockholders
and an immediate dilution of $11.00 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............... 8.19
------
Pro forma net tangible book value after the Offering........ 1.50
------
Dilution to new investors................................... $11.00
======
</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) 44,757,945(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) 35,729,227
------------ ----------- ------------
Total capitalization.............. $ 30,626,268 $19,892,370 $ 65,642,370
============ =========== ============
</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
----------- ----------- ----------- ----------- ----------- ------------
Income (loss) from
operations........... 993,240 106,611 2,212,873 3,639,031 5,215,362 6,184,429
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 (940,232)
----------- ----------- ----------- ----------- ----------- ------------
Total other income
(expense)............ 92,241 41,560 107,382 96,398 (921,473) (2,360,252)
----------- ----------- ----------- ----------- ----------- ------------
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
Diluted earnings (loss)
per share............. .17 .02 .39 .75 .99 .46
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 --
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)(7) --
<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
----------- ----------- ----------- -----------
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) $ .09 $ .12
Diluted earnings (loss)
per share............. (.12) (.10) .09 $ .12
Dividends per share..... $ -- $ -- $ -- --
Pro forma basic earnings
per share(6).......... -- -- .06 --
Pro forma dilution
earnings per
share(6).............. -- -- .06 --
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)(7) --
</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) 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.
21
<PAGE> 25
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."
22
<PAGE> 26
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) $45,750,000(6) $33,921,196
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) 45,750,000 37,281,677
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 $45,750,000 $70,575,880
============ ============ ============ =========== ===========
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) 45,710,000(7) 44,757,945
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) 45,750,000 35,729,227
------------ ------------ ------------ ----------- -----------
Total liabilities and stockholders'
equity................................. $ 35,559,778 $(10,733,898) $ 24,825,880 $45,750,000 $70,575,880
============ ============ ============ =========== ===========
</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.
23
<PAGE> 27
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
----------- ----------- --------------- ----------- ---------- -----------
Income from operations......... 5,215,362 1,558,327 (589,260) 6,184,429 -- 6,184,429
----------- ----------- --------------- ----------- ---------- -----------
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 (942,157) -- (940,232) -- (940,232)
----------- ----------- --------------- ----------- ---------- -----------
Total other income
(expense).................. (921,473) (914,154) (1,540,000) (3,375,627) 1,015,375 (2,360,252)
----------- ----------- --------------- ----------- ---------- -----------
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
</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.
<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
----------
$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.
24
<PAGE> 28
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
</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>
Cost 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
Cost savings on prepayment of debt
8.5% Medium Term Notes due
September 2001................. $ 1 million X 6/12 X .085 = 42,500
Cost savings on conversion
Convertible Subordinated Notes $ 4.8
due September 2007............. million X 6/12 X 0.85 = 204,000
--------
Total Savings $501,646
========
</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%.
(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.
25
<PAGE> 29
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
26
<PAGE> 30
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
27
<PAGE> 31
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 Reorganization, Clark/Bardes extinguished the
Warrants in exchange for a payment of $6.5 million by Clark/Bardes to the
warrant holders. In addition, 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. 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 paid by the Company to each
Carrier to extinguish the Warrants held by each Carrier was approximately $1.2
million less than the amount 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 Reorganization, Clark/Bardes restructured 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
were 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 were reset. 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.
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, net 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 the 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 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
28
<PAGE> 32
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 and services are usually lengthy (generally between twelve to eighteen
months), with first year revenue being derived from a small number of large
cases.
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<PAGE> 33
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%. 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,
30
<PAGE> 34
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 is 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.
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.
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.
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<PAGE> 35
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 is 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 is 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, 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
32
<PAGE> 36
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.
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.
33
<PAGE> 37
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 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
34
<PAGE> 38
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 Reorganization, Clark/Bardes restructured 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
were 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 were reset. 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 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. 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
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<PAGE> 39
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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<PAGE> 40
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 $47.0 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 $48.2 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 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").
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
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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.
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
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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.
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
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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.
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.
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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 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
44
<PAGE> 48
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 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,
45
<PAGE> 49
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
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,
46
<PAGE> 50
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.
47
<PAGE> 51
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.
48
<PAGE> 52
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/ Bardes upon the consummation of
the Merger. Mr. Hendrickson's term as Director of CBH expires in
49
<PAGE> 53
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
49
<PAGE> 54
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> 55
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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<PAGE> 56
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.
52
<PAGE> 57
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).
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<PAGE> 58
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.
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<PAGE> 59
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."
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<PAGE> 60
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.
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<PAGE> 61
(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.
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<PAGE> 62
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, net 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 the 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
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<PAGE> 63
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."
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<PAGE> 64
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
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<PAGE> 65
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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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.
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"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.
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"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.
71
<PAGE> 76
"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."
72
<PAGE> 77
"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.
73
<PAGE> 78
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> 79
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> 80
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> 81
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> 82
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> 83
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> 84
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> 85
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> 86
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> 87
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> 88
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> 89
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> 90
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
1,525,426 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.
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> 91
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> 92
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> 93
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> 94
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> 95
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> 96
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 $45.8 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 $15.4 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> 97
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 1,525,425 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 amount 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> 98
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, net 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> 99
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> 100
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> 101
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
-----------
Operating income.......................................... 1,558,327
-----------
Nonoperating income:
Other income.............................................. 28,003
Nonrecurring expenses (Note 2)............................ (942,157)
-----------
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> 102
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> 103
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 Expenses. Nonrecurring 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> 104
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> 105
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> 106
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> 107
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> 108
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> 109
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> 110
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> 111
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> 112
------------------------------------------------------
------------------------------------------------------
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> 113
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.......... $150,000
Printing and engraving expenses............................. $170,000
Legal fees and expenses..................................... $200,000
Accounting fees and expenses................................ $150,000
Blue sky fees and expenses.................................. $ 2,500
Miscellaneous............................................... $ 5,000
--------
Total............................................. $778,712
========
</TABLE>
- ---------------
* To be filed by amendment.
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> 114
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> 115
(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> 116
<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> 117
<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.
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).
*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 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-5
<PAGE> 118
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 10, 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 10, 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
By: /s/ MELVIN G. TODD
-------------------------------------------------
Melvin G. Todd
Attorney-in-Fact
</TABLE>
II-6
<PAGE> 119
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> 120
<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.
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).
*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 1.1
4,000,000 Shares of Common Stock
CLARK/BARDES HOLDINGS, INC.
UNDERWRITING AGREEMENT
___________, 1998
BEAR, STEARNS & CO. INC.
PIPER JAFFRAY INC.
CONNING & COMPANY
as Representatives of the
several Underwriters named in
Schedule I attached hereto
c/o Bear, Stearns & Co. Inc.
245 Park Avenue
New York, N.Y. 10167
Ladies and Gentlemen:
Clark/Bardes Holdings, Inc., a Delaware corporation (the
"Company" or "CBH"), proposes, subject to the terms and conditions stated
herein, to issue and sell to the several underwriters named in Schedule I
hereto (the "Underwriters") an aggregate of 4,000,000 shares (the "Firm
Shares") of its common stock, par value $0.01 per share (the "Common Stock").
In addition, W. Tom Wamberg (the "Selling Stockholder") proposes to grant to
the Underwriters, for the sole purpose of covering over-allotments in
connection with the sale of the Firm Shares, an option to purchase up to an
additional 600,000 shares (the "Additional Shares") of Common Stock as provided
in Section 2 hereof. The Firm Shares and any
<PAGE> 2
Additional Shares purchased by the Underwriters are referred to herein as the
"Shares." The Shares are more fully described in the Registration Statement
referred to below.
1. Representations and Warranties.
(a) The Company represents and warrants to, and
agrees with, the Underwriters that:
(i) The Company has filed with the Securities and
Exchange Commission (the "Commission") a registration statement and amendments
thereto, on Form S-1 (No. 333-56799), for the registration of the Shares under
the Securities Act of 1933, as amended (the "Act"). Such registration
statement, including the prospectus, financial statements and schedules,
exhibits and all other documents filed as a part thereof, as amended at the
time of effectiveness of the registration statement, including any information
deemed to be a part thereof as of the time of effectiveness pursuant to
paragraph (b) of Rule 430A or Rule 434 of the Rules and Regulations of the
Commission under the Act (the "Regulations"), and any additional registration
statement increasing the size of the offering filed pursuant to Rule 462(b) of
the Regulations with respect to the Shares ("Rule 462(b) Registration
Statement"), is herein called the "Registration Statement" and the prospectus,
in the form first filed with the Commission pursuant to Rule 424(b) of the
Regulations or filed as part of the Registration Statement at the time of
effectiveness if no Rule 424(b) or Rule 434 filing is required, is herein
called the "Prospectus." The term "preliminary prospectus" as used herein
means a preliminary prospectus as described in Rule 430 of the Regulations.
(ii) At the time of the effectiveness of the
Registration Statement or the effectiveness of any post-effective amendment to
the Registration Statement, when the Prospectus is first filed with the
Commission pursuant to Rule 424(b) or Rule 434 of the Regulations, when any
supplement to or amendment of the Prospectus is filed with the Commission and
at the Closing Date and the Additional Closing Date, if any (as hereinafter
respectively defined), the Registration Statement and the Prospectus and any
amendments thereof and supplements thereto complied or will comply in all
material respects
2
<PAGE> 3
with the applicable provisions of the Act and the Regulations and do not or
will not contain an untrue statement of a material fact and do not or will not
omit to state any material fact required to be stated therein or necessary in
order to make the statements therein (i) in the case of the Registration
Statement, not misleading and (ii) in the case of the Prospectus, in light of
the circumstances under which they were made, not misleading. When any related
preliminary prospectus was first filed with the Commission (whether filed as
part of the Registration Statement for the registration of the Shares or any
amendment thereto or pursuant to Rule 424(a) of the Regulations) and when any
amendment thereof or supplement thereto was first filed with the Commission,
such preliminary prospectus and any amendments thereof and supplements thereto
complied in all material respects with the applicable provisions of the Act and
the Regulations and did not contain an untrue statement of a material fact and
did not omit to state any material fact required to be stated therein or
necessary in order to make the statements therein in light of the circumstances
under which they were made not misleading. No representation and warranty is
made in this paragraph (ii), however, with respect to any information contained
in or omitted from the Registration Statement or the Prospectus or any related
preliminary prospectus or any amendment thereof or supplement thereto in
reliance upon and in conformity with information furnished in writing to the
Company by or on behalf of any Underwriter through Bear, Stearns & Co. Inc.
("Bear Stearns") as herein stated expressly for use in connection with the
preparation thereof. If Rule 434 is used, the Company will comply with the
requirements of Rule 434.
(iii) No order preventing or suspending the use of
any preliminary prospectus or suspending the effectiveness of the Registration
Statement or any post effective amendment thereof has been issued by the
Commission and no proceedings for that purpose have been instituted, nor are
any such proceedings pending or, to the knowledge of the Company, threatened by
the Commission, and no order suspending the offering of the Shares in any
jurisdiction designated by you has been issued and no proceedings for that
purpose have been instituted or, to the knowledge of the Company, threatened,
and any request of the Commission for additional information (to be included in
the Registration Statement or Prospectus or otherwise) has been complied with.
3
<PAGE> 4
(iv) Ernst & Young LLP, who have certified certain
financial statements and supporting schedules included in the Registration
Statement, are independent public accountants as required by the Act and the
Regulations. Lane Gorman Trubitt LLP and McGladrey & Pullen, LLP, who have
certified certain financial statements and supporting schedules included in the
Registration Statement, were independent public accountants for the period of
time covered by their audit as required by the Act and the Regulations.
(v) Subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus, except
as set forth in the Registration Statement and the Prospectus, there has been
no material adverse change or any development involving a prospective material
adverse change in the business, prospects, properties, operations, condition
(financial or other) or results of operations of the Company and its
subsidiaries, taken as a whole (a "Material Adverse Change"), whether or not
arising from transactions in the ordinary course of business, and since the
date of the latest balance sheet presented in the Registration Statement and
the Prospectus, neither the Company nor any of its subsidiaries has incurred or
undertaken any liabilities or obligations, direct or contingent, which are
material to the Company and its subsidiaries, taken as a whole, except for
liabilities or obligations which are reflected in the Registration Statement
and the Prospectus.
(vi) The Company has all requisite corporate power
and authority to enter into this Agreement and to perform its obligations
hereunder. This Agreement and the transactions contemplated herein have been
duly and validly authorized by the Company and this Agreement has been duly and
validly executed and delivered by the Company.
(vii) The execution, delivery, and performance of
this Agreement and the consummation of the transactions contemplated hereby do
not and will not (i) conflict with or result in a breach of any of the terms
and provisions of, or constitute a default (or an event
4
<PAGE> 5
which with notice or lapse of time, or both, would constitute a default) under,
or result in the creation or imposition of any lien, charge or encumbrance upon
any property or assets of the Company or any of its subsidiaries pursuant to,
any agreement, instrument, franchise, license or permit to which the Company or
any of its subsidiaries is a party or by which any of such entities or their
respective properties or assets may be bound, (ii) violate or conflict with any
provision of the certificate of incorporation or by-laws of the Company or the
constituent documents of any of its subsidiaries or (iii) violate or conflict
with any judgment, decree, order, statute, rule or regulation of any court or
any public, governmental or regulatory agency or body having jurisdiction over
the Company or any of its subsidiaries or any of their respective properties or
assets, except, with respect to clause (iii), such violations or conflicts that
would not, individually or in the aggregate, have a material adverse effect on
the business, prospects, properties, operations, condition (financial or other)
or results of operations of the Company and its subsidiaries, taken as a whole
(a "Material Adverse Effect").
(viii) No consent, approval, authorization, order,
registration, filing, qualification, license or permit of or with any third
party or any court or any public, governmental or regulatory agency or body
having jurisdiction over the Company or any of its subsidiaries or any of their
respective properties or assets is required for the execution, delivery and
performance of this Agreement or the consummation of the transactions contem-
plated hereby, including the issuance, sale and delivery of the Shares to be
issued, sold and delivered by the Company hereunder, except the registration
under the Act of the Shares, approval by the National Association of Securities
Dealers, Inc. ("NASD") of the underwriting arrangements and such consents,
approvals, authorizations, orders, registrations, filings, qualifications,
licenses and permits as have been duly obtained and are in full force and
effect and copies of which have been furnished to you or as may be required
under state securities or Blue Sky laws in connection with the purchase and
distribution of the Shares by the Underwriters.
(ix) All of the outstanding shares of Common Stock
are duly and validly authorized and issued,
5
<PAGE> 6
are fully paid and nonassessable and were not issued and are not now in
violation of or subject to any preemptive or similar rights. The Shares, when
issued, delivered and sold in accordance with this Agreement, will be duly and
validly issued, fully paid and nonassessable, and will not have been issued in
violation of or be subject to any preemptive or similar rights. The Company
had, at June 30, 1998, an authorized and outstanding capitalization as set
forth in the Registration Statement and the Prospectus. The Common Stock, the
Firm Shares and the Additional Shares conform to the descriptions thereof
contained in the Registration Statement and the Prospectus.
(x) Schedule II attached hereto sets forth a
true, complete and correct list of (i) the names of the Company's subsidiaries,
(ii) the jurisdiction of incorporation of each such subsidiary and (iii) the
percentage of shares of issued capital stock of each such subsidiary owned by
the Company. Except as described in the Prospectus, all of the shares of
issued capital stock of each subsidiary as set forth on Schedule II hereto, are
owned directly or indirectly by the Company, free and clear of any lien,
encumbrance, claim, security interest, restriction on transfer, stockholders'
agreement, voting trust or other defect of title whatsoever.
(xi) All of the issued shares of capital stock of
each subsidiary of the Company have been duly and validly authorized and
issued, fully paid and nonassessable and were not issued in violation of any
preemptive or similar rights.
(xii) The Company has been duly incorporated and is
validly existing as a corporation in good standing under the laws of the State
of Delaware. The Company is duly qualified and in good standing as a foreign
corporation in each jurisdiction in which the character or location of its
properties (owned, leased or licensed) or the nature or conduct of its business
makes such qualification necessary, except for those failures to be so
qualified or in good standing which would not have a Material Adverse Effect.
Each subsidiary of the Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of its jurisdiction
of incorporation. Each subsidiary of the Company is duly qualified and in good
standing as a
6
<PAGE> 7
foreign corporation in each jurisdiction in which the character or location of
its properties (owned, leased or licensed) or the nature or conduct of its
business makes such qualification necessary, except for those failures to be so
qualified or in good standing which will not in the aggregate result in a
Material Adverse Effect. Each of the Company and its subsidiaries has all
requisite power and authority, and all necessary consents, approvals,
authorizations, orders, registrations, qualifications, licenses and permits,
including without limitation licenses from the insurance departments of the
various states where the Company or the subsidiaries conduct insurance agency
business (collectively "Licenses"), of and from, and have made all filings with
and satisfied all eligibility and other similar requirements imposed by all
federal, state, local and other governmental authorities, in each case as is
required to own, lease and operate its properties and conduct its business as
now being conducted and as described in the Registration Statement and the
Prospectus, and each such License is in full force and effect, except to the
extent that, individually or in the aggregate, the failure to obtain any such
License or to keep such License in effect or to make any such declaration,
registration or filing or satisfy any such requirement would not result in a
Material Adverse Effect.
(xiii) Except as described in the Prospectus, there
is no litigation or governmental action, suit, proceeding or investigation to
which the Company or any of its subsidiaries is a party or to which any
property of the Company or any of its subsidiaries is subject or which is
pending or, to the actual knowledge of the Company, threatened against the
Company or any of its subsidiaries which might result in any Material Adverse
Change or which is required to be disclosed in the Registration Statement and
the Prospectus. There are no contracts or documents of a character required to
be described in the Registration Statement or the Prospectus or to be filed as
an exhibit to the Registration Statement which are not described or filed as
required by the Act and the Regulations.
(xiv) Except as described in the Prospectus, there
are no contracts, agreements or understandings between the Company and any
person that would give rise to a valid claim against the Company or any
Underwriter for a brokerage commission, finder's fee or other like payment.
7
<PAGE> 8
(xv) The Company has not taken and will not take,
directly or indirectly, any action designed to cause or result in, or which
constitutes or which might reasonably be expected to constitute, the
stabilization or manipulation of the price of the shares of Common Stock to
facilitate the sale or resale of the Shares.
(xvi) The financial statements, including the notes
thereto, and supporting schedules included in the Registration Statement and
the Prospectus present fairly the financial position of the Company as of the
respective dates indicated and the results of its operations for the respective
periods specified; except as otherwise stated in the Registration Statement,
said financial statements have been prepared in conformity with generally
accepted accounting principles ("GAAP") applied on a consistent basis; the
supporting schedules included in the Registration Statement present fairly in
accordance with GAAP the information required to be stated therein; and the
other financial and statistical information and data with respect to the
Company and its subsidiaries set forth in the Registration Statement have been
prepared on a basis consistent with such financial statements and the books and
records of the Company.
(xvii) The pro forma financial statements of the
Company and its subsidiaries and the related notes thereto included in the
Registration Statement present fairly the information shown therein, have been
prepared in accordance with the Commission's rules and guidelines with respect
to pro forma financial statements and have been properly compiled on the bases
described therein, and the assumptions used in the preparation thereof are
reasonable and the adjustments used therein are appropriate to give effect to
the transactions and circumstances referred to therein.
(xviii) Except as described in the Prospectus, no
holder of securities of the Company has any rights to the registration of
securities of the Company because of the filing of the Registration Statement
or otherwise in connection with the sale of the Shares contemplated hereby.
8
<PAGE> 9
(xix) Neither the Company nor any of its subsidiaries
is and, after giving effect to the offering and sale of the Shares and assuming
the Company's business is conducted as described in the Prospectus, none will
be, an "investment company" or an entity "controlled" by an "investment
company," as such terms are defined in the Investment Company Act of 1940 (the
"Investment Company Act").
(xx) Neither the Company nor any of its subsidiaries
is in default (nor has any event occurred which, with notice or lapse of time
or both, would constitute a default) in the performance or observance of, or in
violation of, any obligation, agreement, covenant or condition contained in any
loan agreement, note, contract, instrument, indenture, lease, franchise,
License, mortgage, permit or other agreement to which it is a party or by which
it is bound or to which any of its properties are subject, except for such
defaults that would not, individually or in the aggregate, result in a Material
Adverse Effect. Neither the Company nor any of its subsidiaries is, and at the
Closing Date and the Additional Closing Date, if any will be, in violation of
any provisions of its certificate of incorporation or by-laws or other
constituent documents.
(xxi) Neither the Company nor any of its subsidiaries
owns any real property; and any real property, buildings and personal property
held under lease by the Company and its subsidiaries is held by them under
valid, subsisting and enforceable leases with such exceptions as are not
material and do not interfere with the use thereof made and proposed to be made
by the Company and its subsidiaries.
(xxii) The Company and its subsidiaries own or
possess, or can acquire on reasonable terms, adequate rights to use all
patents, patent applications, trademark, service marks, trade names, trademark
registrations, service mark registrations, copyrights and licenses material to
the Company and its subsidiaries taken as a whole, and have not received any
notice of any claim of conflict with, the rights of others in respect thereof
except for such claims that would not, individually or in the aggregate, result
in a Material Adverse Effect.
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<PAGE> 10
(xxiii) The Company and its subsidiaries have filed
all foreign, federal, state and local tax returns that are required to be filed
or have requested extensions thereof, except for those failures that would not,
individually or in the aggregate, have a Material Adverse Effect, and have paid
all taxes required to be paid by them and any other assessment, fine or penalty
levied against them, to the extent that any of the foregoing is due and
payable, except for any such assessment, fine or penalty that is currently
being contested in good faith.
(xxiv) No labor dispute with the employees of the
Company or any subsidiary exists or, to the actual knowledge of the Company, is
imminent that might have a Material Adverse Effect on the Company and its
subsidiaries taken as a whole.
(xxv) Since the date as of which information is
given in the Prospectus through the date hereof, and except as may otherwise be
contemplated pursuant to the disclosure, or disclosed, in the Registration
Statement, neither the Company nor any subsidiary has (i) issued or granted any
securities, (ii) incurred any liability or obligation, direct or contingent,
other than liabilities and obligations which were incurred in the ordinary
course of business, or (iii) declared or paid any dividend on its capital
stock.
(xxvi) The Company and each of its subsidiaries
maintains a system of internal accounting controls sufficient to provide
reasonable assurance that (i) transactions are executed in accordance with
management's general or specific authorizations; (ii) transactions are recorded
as necessary to permit preparation of financial statements in conformity with
generally accepted accounting principles and to maintain asset accountability;
and (iii) access to assets is permitted only in accordance with management's
general or specific authorization.
(xxvii) The Common Stock has been approved for
quotation, subject only to official notice of issuance, on the Nasdaq National
Market under the symbol "CLKB."
(b) The Selling Stockholder represents and warrants to, and
agrees with, each of the Underwriters and the Company that:
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<PAGE> 11
(i) The Selling Stockholder has entered into an
agreement (the "Lock-up Letter") to the effect that the Selling Stockholder
will not, directly or indirectly, without the prior written consent of Bear
Stearns, offer, sell, offer or agree to sell, grant any option for the sale of
or otherwise dispose (or announce any offer, sale, grant of an option to
purchase or other disposition) of any shares of Common Stock or any securities
convertible into, exercisable for or exchangeable for shares of Common Stock,
for a period of 180 days after the date of the Prospectus except for any such
offers, sales, grants of options or other disposition referenced in or
contemplated by the Prospectus. Certificates in negotiable form representing
all of the Additional Shares to be sold by the Selling Stockholder hereunder
will be delivered to you in accordance with the instructions to be provided by
you in accordance with Section 2(c) of this Agreement.
(ii) The Selling Stockholder has, and on the
Additional Closing Date hereinafter mentioned with respect to the Additional
Shares to be sold by the Selling Stockholder, will have valid and unencumbered
title to the Additional Shares to be sold by the Selling Stockholder; the
Selling Stockholder has full right, power and authority to enter into this
Agreement and the Lock-up Letter and to sell, assign, transfer and deliver the
Additional Shares to be sold by the Selling Stockholder hereunder; and upon the
delivery of and payment for such Additional Shares to be sold by the Selling
Stockholder hereunder, the Underwriters will acquire valid and unencumbered
title to such Additional Shares purchased by them from the Selling Stockholder
hereunder.
(iii) To the extent that any statements or omissions
made in the Registration Statement, the Prospectus or any amendment or
supplement thereto and any related preliminary prospectus filed with the
Commission (whether filed as part of the Registration Statement for the
registration of the Shares or any amendment thereto or pursuant to Rule 424(a)
of the Regulations) and any amendment thereof or supplement thereto, are made
in reliance upon and in conformity with information furnished to the Company by
the Selling Stockholder expressly for use therein and any information relating
to the Selling Stockholder contained therein, at the time of the effectiveness
of the Registration Statement or the
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<PAGE> 12
effectiveness of any post-effective amendment to the Registration Statement,
when the Prospectus is first filed with the Commission pursuant to Rule 424(b)
or Rule 434 of the Regulations, when any supplement to or amendment of the
Prospectus is filed with the Commission and at the Closing Date and the
Additional Closing Date, if any, the Registration Statement and the Prospectus
and any amendments thereof and supplements thereto complied or will comply in
all material respects with the applicable provisions of the Act and the
Regulations and do not or will not contain an untrue statement of a material
fact and do not or will not omit to state any material fact required to be
stated therein or necessary in order to make the statements therein (i) in the
case of the Registration Statement, not misleading and (ii) in the case of the
Prospectus, in light of the circumstances under which they were made, not
misleading.
(iv) The Selling Stockholder has not taken and will
not take, directly or indirectly, any action designed to cause or result in, or
which constitutes or which might reasonably be expected to constitute
stabilization or manipulation of the price of the shares of Common Stock to
facilitate the sale or resale of the Additional Shares.
(v) No consent, approval, authorization or order of,
or filing with, any governmental agency or body or any court is required to be
obtained or made by the Selling Stockholder for the consummation of the
transactions contemplated by this Agreement in connection with the sale of the
Additional Shares to be sold by the Selling Stockholder, except the
registration under the Act of the Shares, approval by NASD of the underwriting
arrangements and such consents, approvals, authorizations, orders,
registrations, filings, qualifications, licenses and permits as have been duly
obtained and are in full force and effect and copies of which have been
furnished to you or as may be required under state securities or Blue Sky laws
in connection with the purchase and distribution of the Additional Shares by
the Underwriters.
(vi) The execution, delivery and performance of this
Agreement and the Lock-up Letter and the consummation of the transactions
herein contemplated will not result in a breach or violation of any of the
terms
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<PAGE> 13
or provisions of, or constitute a default under, (A) any statute, rule,
regulation or order of any governmental agency or body or any court having
jurisdiction over the Selling Stockholder or any of his properties or (B) any
agreement or instrument to which the Selling Stockholder is a party or by which
the Selling Stockholder is bound or to which any of the properties of the
Selling Stockholder is subject.
(vii) The Selling Stockholder agrees that the
Additional Shares to be sold by the Selling Stockholder are subject to the
interests of the Underwriters hereunder; it is intended by the Selling
Stockholder that (A) the obligations of the Selling Stockholder hereunder shall
not be terminated by operation of law, whether by the death or incapacity of
the Selling Stockholder or by the occurrence of any other event; and (B) if the
Selling Stockholder should die or become incapacitated, or if any other such
event should occur, before the delivery of the Additional Shares hereunder,
certificates representing the Additional Shares shall be delivered by or on
behalf of the Selling Stockholder in accordance with the terms and conditions
of this Agreement.
2. Purchase, Sale and Delivery of the Shares.
(a) On the basis of the representations, warranties,
covenants and agreements herein contained, but subject to the terms and
conditions herein set forth, the Company agrees to sell to the Underwriters and
the Underwriters, severally and not jointly, agree to purchase from the
Company, at a purchase price per share of $_______, the number of Firm Shares
set forth opposite the respective names of the Underwriters in Schedule I
hereto plus any additional number of Shares which such Underwriter may become
obligated to purchase pursuant to the provisions of Section 9 hereof.
(b) Payment of the purchase price for, and delivery
of certificates for, the Shares shall be made at the office of Skadden, Arps,
Slate, Meagher & Flom LLP, 919 Third Avenue, New York, New York 10022, or at
such other place as shall be agreed upon by you and the Company, at 10:00 A.M.
on the third or fourth business day (as permitted under Rule 15c6-1 under the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) (unless
postponed in accordance with the
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<PAGE> 14
provisions of Section 9 hereof) following the date of the effectiveness of the
Registration Statement (or, if the Company has elected to rely upon Rule 430A
of the Regulations, the third or fourth business day (as permitted under Rule
15c6-1 under the Exchange Act after the determination of the initial public
offering price of the Shares), or such other time not later than ten business
days after such date as shall be agreed upon by you and the Company (such time
and date of payment and delivery being herein called the "Closing Date").
Payment shall be made to the Company by wire transfer in same day funds,
against delivery to you for the respective accounts of the Underwriters of
certificates for the Firm Shares to be purchased by them. Certificates for the
Firm Shares shall be registered in such name or names and in such authorized
denominations as you may request in writing at least two full business days
prior to the Closing Date. The Company will permit you to examine and package
such certificates for delivery at least one full business day prior to the
Closing Date.
(c) In addition, the Selling Stockholder hereby
grants to the Underwriters the option to purchase up to 600,000 Additional
Shares at the same purchase price per share to be paid by the Underwriters to
the Company for the Firm Shares as set forth in this Section 2, for the sole
purpose of covering over-allotments in the sale of Firm Shares by the
Underwriters. This option may be exercised at any time, in whole or in part,
on or before the thirtieth day following the date of the Prospectus, by written
notice by you to the Selling Stockholder. Such notice shall set forth the
aggregate number of Additional Shares as to which the option is being exercised
and the date and time, as reasonably determined by you, when the Additional
Shares are to be delivered (such date and time being herein sometimes referred
to as the "Additional Closing Date"); provided, however, that the Additional
Closing Date shall not be earlier than the Closing Date or earlier than the
second full business day after the date on which the option shall have been
exercised nor later than the eighth full business day after the date on which
the option shall have been exercised (unless such time and date are postponed
in accordance with the provisions of Section 9 hereof). Certificates for the
Additional Shares to be delivered at the Additional Closing Date shall be
registered in such name or names and in such authorized denominations as you
may
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<PAGE> 15
request in writing at least two full business days prior to the Additional
Closing Date. The Company will permit you to examine and package such
certificates for delivery at least one full business day prior to the
Additional Closing Date.
The number of Additional Shares to be sold to each Underwriter
shall be the number which bears the same ratio to the aggregate number of
Additional Shares being purchased as the number of Firm Shares set forth
opposite the name of such Underwriter in Schedule I hereto (or such number
increased as set forth in Section 9 hereof) bears to the total number of Firm
Shares being purchased from the Company, subject, however, to such adjustments
to eliminate any fractional shares as you in your sole discretion shall make.
Payment for the Additional Shares being purchased shall be
made by wire transfer in same day funds, against delivery of the certificates
for the Additional Shares being purchased to you for the respective accounts of
the Underwriters, at the offices of Skadden, Arps, Slate, Meagher & Flom LLP,
919 Third Avenue, New York, New York 10022, or such other location as may be
mutually acceptable.
3. Offering. Upon your authorization of the release of the
Firm Shares, the Underwriters propose to offer the Shares for sale to the
public upon the terms set forth in the Prospectus.
4. Covenants of the Company. The Company, and, with respect
to subsections (g) and (j), the Selling Stockholder, severally and not jointly,
each covenant and agree with the Underwriters that:
(a) If the Registration Statement has not yet been
declared effective, the Company will use its reasonable best efforts to cause
the Registration Statement and any amendments thereto to become effective as
promptly as possible, and if Rule 430A is used or the filing of the Prospectus
is otherwise required under Rule 424(b) or Rule 434, the Company will file the
Prospectus (properly completed if Rule 430A has been used) pursuant to Rule
424(b) or Rule 434 within the prescribed time
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<PAGE> 16
period and will provide evidence satisfactory to you of such timely filing. If
the Company elects to rely on Rule 434, the Company will prepare and file a
term sheet that complies with the requirements of Rule 434.
The Company will notify you immediately (and, if
requested by you, will confirm such notice in writing) (i) when the
Registration Statement and any amendments thereto become effective, (ii) of any
request by the Commission for any amendment of or supplement to the
Registration Statement or the Prospectus or for any additional information,
(iii) of the mailing or the delivery to the Commission for filing of any
amendment of or supplement to the Registration Statement or the Prospectus,
(iv) of the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or any post-effective amendment
thereto or of the initiation, or the threatening, of any proceedings therefor,
(v) of the receipt of any comments from the Commission, and (vi) of the receipt
by the Company of any notification with respect to the suspension of the
qualification of the Shares for sale in any jurisdiction or the initiation or
threatening of any proceeding for that purpose. If the Commission shall
propose or enter a stop order at any time, the Company will make every
reasonable effort to prevent the issuance of any such stop order and, if
issued, to obtain the lifting of such order as soon as possible. The Company
will not file any amendment to the Registration Statement or any amendment of
or supplement to the Prospectus (including the prospectus required to be filed
pursuant to Rule 424(b)or Rule 434) that differs from the prospectus on file at
the time of the effectiveness of the Registration Statement before or after the
effective date of the Registration Statement to which you shall reasonably
object in writing after being timely furnished in advance a copy thereof.
(b) If at any time when a prospectus relating to the
Shares is required to be delivered under the Act any event shall have occurred
as a result of which the Prospectus as then amended or supplemented would, in
the judgment of the Underwriters or the Company, include an untrue statement of
a material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, or if it shall be
necessary at any
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<PAGE> 17
time to amend or supplement the Prospectus or Registration Statement to comply
with the Act or the Regulations, the Company will notify you promptly and
prepare and file with the Commission an appropriate amendment or supplement (in
form and substance reasonably satisfactory to you) which will correct such
statement or omission and will use its reasonable best efforts to have any
amendment to the Registration Statement declared effective as soon as possible.
(c) The Company will promptly deliver to you three
signed copies of the Registration Statement, including exhibits and all
amendments thereto, and the Company will promptly deliver to each of the
Underwriters such number of copies of any preliminary prospectus, the
Prospectus, the Registration Statement, and all amendments of and supplements
to such documents, if any, as you may reasonably request.
(d) The Company will endeavor in good faith, in
cooperation with you, at or prior to the time of effectiveness of the
Registration Statement, to qualify the Shares for offering and sale under the
securities laws relating to the offering or sale of the Shares of such
jurisdictions as you may designate and to maintain such qualification in effect
for so long as required for the distribution thereof; except that in no event
shall the Company be obligated in connection therewith to qualify as a foreign
corporation or to execute a general consent to service of process.
(e) The Company will make generally available
(within the meaning of Section 11(a) of the Act) to its security holders and to
you as soon as practicable, but not later than 45 days after the end of its
fiscal quarter in which the first anniversary date of the effective date of the
Registration Statement occurs, an earnings statement (in form complying with
the provisions of Rule 158 of the Regulations) covering a period of at least
twelve consecutive months beginning after the effective date of the
Registration Statement.
(f) If the Company elects to rely on Rule 462(b) of
the Regulations, the Company shall both file a Rule 462(b) Registration
Statement with the Commission in compliance with Rule 462(b) by 10:00 p.m., New
York time, on the date of this Agreement, and the Company shall at
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<PAGE> 18
the time of filing either pay to the Commission the filing fee for the Rule
462(b) Registration Statement or give irrevocable instructions for the payment
of such fee pursuant to Rule 111(b) of the Regulations.
(g) During the period of 180 days from the date of
the Prospectus, the Company will not, without the prior written consent of Bear
Stearns, on behalf of the Underwriters, issue, sell, offer or agree to sell,
grant any option for the sale of, or otherwise dispose (or announce any
issuance, offer, sale, grant of an option to sell or other disposition) of,
directly or indirectly, any Common Stock (or any securities convertible into,
exercisable for or exchangeable for Common Stock), and the Company will obtain
the undertaking of each of its officers and directors and all of its
stockholders not to engage in any of the aforementioned transactions on their
own behalf, other than (i) the Company's sale of Firm Shares hereunder, (ii)
the Company's grant of stock options under the Company's Stock Option Plan, as
amended, (iii) the Company's issuance of Common Stock upon the exercise of
presently outstanding stock options, (iv) the conversion of the Company's
subsidiary's 8.5% Convertible Subordinated Notes due September 2007 into
813,559 shares of Common Stock and (v) the Selling Stockholder's sale of the
Additional Shares, if any, hereunder and the other transfers of shares of
Common Stock and grants of options of Common Stock by the Selling Stockholder
and/or The Wamberg Organization referenced in or contemplated by the
Prospectus.
(h) During a period of three years from the
effective date of the Registration Statement, the Company will furnish to you
copies of (i) all reports to its stockholders; and (ii) all reports, financial
statements and proxy or information statements filed by the Company with the
Commission or any national securities exchange.
(i) The Company will apply the proceeds from the
sale of the Shares as set forth under "Use of Proceeds" in the Prospectus.
(j) The Company will not (and will cause its
subsidiaries not to) take, directly or indirectly, any action which is designed
to or which constitutes or which might reasonably be expected to cause or
result in stabilization or manipulation of the price of any security of the
Company or facilitate the sale or resale of the Shares.
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(k) The Company will use its reasonable best efforts
to cause the Shares to be listed for quotation on the Nasdaq National Market
under the symbol "CLKB."
(l) The Company will file with the Commission such
reports as may be required pursuant to Rule 463 of the Regulations.
5. Payment of Expenses. Whether or not the transactions
contemplated in this Agreement are consummated or this Agreement is terminated,
the Company hereby agrees to pay all costs and expenses incident to the
performance of the obligations of the Company hereunder, including those in
connection with (i) preparing, printing, duplicating, filing and distributing
the Registration Statement, as originally filed and all amendments thereof
(including all exhibits thereto), any preliminary prospectus, the Prospectus
and any amendments or supplements thereto, any Rule 462(b) Registration
Statement (including, without limitation, fees and expenses of the Company's
accountants and counsel) and all other documents related to the public offering
of the Shares (including those supplied to the Underwriters in quantities as
hereinabove stated), (ii) the issuance, transfer and delivery of the Shares to
the Underwriters, including any transfer or other taxes payable thereon, (iii)
the qualification of the Shares under state or foreign securities or Blue Sky
laws, including the costs of printing and mailing a preliminary and final "Blue
Sky Survey" and the fees of counsel for the Underwriters and such counsel's
disbursements in relation thereto, (iv) the approval of the Shares for
quotation on the Nasdaq National Market under the symbol "CLKB,"(v) filing fees
of the Commission and the NASD, (vi) the cost of printing certificates
representing the Shares and (vii) the cost and charges of any transfer agent or
registrar. The Selling Stockholder will pay or cause to be paid all costs and
expenses incident to the performance of the Selling Stockholder's obligations
hereunder other than any costs or expenses otherwise provided to be paid for in
this Section by the Company or the Underwriters, including (i) any fees and
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<PAGE> 20
expenses of counsel for the Selling Stockholder and (ii) all expenses and taxes
incident to the sale and delivery of the Shares to be sold by the Selling
Stockholder to the Underwriters hereunder. It is understood that, except as
provided in this Section, and Sections 7(a), 7(b) and 11(d) hereof, the
Underwriters will pay all of their own costs and expenses, including the fees
of their counsel, stock transfer taxes on resale of any of the Shares by them,
and any advertising expenses connected with any offers they may make.
6. Conditions of Underwriters' Obligations. The obligations
of the Underwriters to purchase and pay for the Firm Shares and the Additional
Shares, as provided herein, shall be subject to the accuracy of the
representations and warranties of the Company and the Selling Stockholder
herein contained, as of the date hereof and as of the Closing Date (for
purposes of this Section 6 "Closing Date" shall refer to the Closing Date for
the Firm Shares and any Additional Closing Date, if different, for the
Additional Shares), to the absence from any certificates, opinions, written
statements or letters furnished to you or to Skadden, Arps, Slate, Meagher &
Flom LLP ("Underwriters' Counsel") pursuant to this Section 6 of any
misstatement or omission, to the performance by the Company and the Selling
Stockholder of their obligations hereunder, and to the following additional
conditions:
(a) The Registration Statement shall have become
effective not later than 5:30 p.m., New York time, on the date of this
Agreement, or at such later time and date as shall have been consented to in
writing by you; if the Company shall have elected to rely upon Rule 430A or
Rule 434 of the Regulations, the Prospectus shall have been filed with the
Commission in a timely fashion in accordance with Section 4(a) hereof; and, at
or prior to the Closing Date no stop order suspending the effectiveness of the
Registration Statement or any post-effective amendment thereof shall have been
issued and no proceedings therefor shall have been initiated or threatened by
the Commission.
(b) At the Closing Date you shall have received the
opinion of Akin, Gump, Strauss, Hauer & Feld L.L.P., counsel for the Company,
dated the Closing
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<PAGE> 21
Date addressed to the Underwriters and in form and substance satisfactory to
Underwriters' Counsel, to the effect that:
(i) The Company has been duly incorporated and is
validly existing as a corporation in good standing under the laws of the State
of Delaware. Each subsidiary of the Company has been duly incorporated and is
validly existing as a corporation in good standing under the laws of its
jurisdiction of incorporation.
(ii) The Company had at June 30, 1998, authorized
and outstanding capital stock as set forth in the Prospectus. The Shares to be
delivered on the Closing Date have been duly and validly authorized and, when
delivered by the Company in accordance with this Agreement, will be duly and
validly issued, fully paid and nonassessable and will not have been issued in
violation of or subject to any preemptive or similar rights arising pursuant to
(i) the certificate of incorporation or by-laws of the Company and (ii) the
Delaware General Corporation Law (the "DGCL"). The Common Stock, the Firm
Shares and the Additional Shares conform to the descriptions thereof contained
in the Prospectus.
(iii) The Shares to be sold under this Agreement to
the Underwriters have been approved for quotation, subject to official notice
of issuance, on the Nasdaq National Market under the symbol "CLKB."
(iv) This Agreement has been duly and validly
authorized, executed and delivered by the Company.
(v) The execution, delivery, and performance of
this Agreement by the Company do not and will not (A) to the knowledge of such
counsel conflict with or result in a breach of any of the terms and provisions
of, or constitute a default (or an event which with notice or lapse of time, or
both, would constitute a default) under, or result in the creation or
imposition of any lien, charge or encumbrance upon any property or assets of
the Company or any of its subsidiaries pursuant to, any agreement or instrument
listed as an Exhibit to the Registration Statement, or (B) violate or conflict
with any provision of the certificate of incorporation or by-laws of the
Company or the constituent documents of any
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<PAGE> 22
of its subsidiaries, or, (C) to the knowledge of such counsel violate or
conflict with any Applicable Laws (as hereinafter defined), except with respect
to clauses (A) and (C), such conflicts, breaches, defaults, liens, charges,
encumbrances or violations that would not, individually or in the aggregate,
have a Material Adverse Effect and except that such counsel shall express no
opinion with respect to breaches or violations of or defaults under any
covenant, restriction or provision with respect to financial ratios or tests or
any aspect of the financial condition or results of operations of any party.
The term "Applicable Laws" means those statutes, judgments, rules, regulations,
orders or decrees of any Governmental Authority (as hereinafter defined) of the
State of Delaware, the State of Texas or of the United States of America
applicable to offerings of the type contemplated by this Agreement (other than
securities and anti-fraud laws); provided that, with respect to the State of
Delaware such counsel's opinion shall be limited to matters under the DGCL.
(vi) To such counsel's knowledge, no consent,
approval, authorization or order of any Governmental Authority (as hereinafter
defined) is required for the execution and delivery of this Agreement or the
issuance, sale and delivery of the Shares to be issued, sold and delivered by
the Company hereunder, except the registration under the Act of the Shares,
approval by the NASD of the underwriting arrangements and such consents,
approvals, authorizations and orders as have been duly obtained and are in full
force and effect and copies of which have been furnished to the Underwriters or
as may be required under state securities or Blue Sky laws in connection with
the purchase and distribution of the Shares by the Underwriters (as to which
such counsel need express no opinion); provided, however, that the foregoing
opinion with respect to Governmental Authorities is limited to such consents,
approvals, authorizations and orders which are required under Applicable Laws.
The term "Governmental Authority" means any governmental, legislative,
judicial, administrative or regulatory body of the State of Delaware, the State
of Texas or the United States of America; provided, that, with respect to the
State of Delaware, such opinion shall be limited to matters under the DGCL.
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(vii) The Registration Statement and the Prospectus
and any amendments thereof or supplements thereto (other than the financial
statements and notes thereto and schedules and other financial and statistical
data included, as to which no opinion need be rendered) comply as to form in
all material respects with the requirements of the Act and the Regulations.
(viii) The Registration Statement has been declared
effective under the Act, and, to the knowledge of such counsel, no stop order
suspending the effectiveness of the Registration Statement or any post-
effective amendment thereof has been issued by the Commission nor has any
proceeding for that purpose been instituted or threatened by the Commission;
any required filing of a registration statement pursuant to Rule 462(b) of the
Regulations has been made in the manner and within the time period required by
Rule 462(b); and all filings required by Rule 424(b) of the Regulations have
been made in the manner and within the time period required by Rule 424.
(ix) The Company is not subject to registration and
regulation as an "investment company" or an entity "controlled" by an
"investment company," as such terms are defined in the Investment Company Act.
(x) The statements set forth in the Prospectus
under the caption "Description of Capital Stock", insofar as they purport to
constitute a summary of the terms of the Common Stock, under the captions "Risk
Factors--Anti-Takeover Considerations," "The Reorganization" (insofar as it
describes the Merger (as defined herein)), "Management--Stock Option Plan" and
"--Employee Stock Purchase Plan" insofar as they purport to describe certain
provisions of the laws and documents referred to therein, are correct in all
material respects.
(xi) To the knowledge of such counsel, there are no
contracts or documents of a character required to be described in the
Registration Statement or the Prospectus or to be filed as an exhibit to the
Registration Statement which are not described or filed as required by the Act
and the Regulations.
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(xii) The two step merger of Clark/Bardes, Inc. a
Texas corporation (the "Predecessor Company") into Clark/Bardes, Inc. a
Delaware corporation (the "Merger") should qualify as a "reorganization" under
section 368(a) of the Code. Accordingly, CBH, Clark/Bardes or the Predecessor
Company should generally recognize no gain for federal income tax purposes
pursuant to the Merger.
(xiii) In addition, such opinion shall also contain
a statement that such counsel has participated in conferences with officers and
representatives of the Company, representatives of the independent public
accountants for the Company, the Underwriters, counsel for the Selling
Stockholder and counsel for the Underwriters at which the contents and the
Prospectus and related matters were discussed and, although such counsel is not
passing upon and does not assume responsibility for the accuracy, completeness
or fairness of the statements contained in the Registration Statement or the
Prospectus and have not made any independent check or verification thereof
(except as set forth in clause (x) above), on the basis of the foregoing, no
facts have come to the attention of such counsel which have led such counsel to
believe that either the Registration Statement at the time it became effective,
or any amendment thereof made prior to the Closing Date as of the date of such
amendment, contained an untrue statement of a material fact or omitted to state
any material fact required to be stated therein or necessary to make the
statements therein not misleading or that the Prospectus as of its date (or any
amendment thereof or supplement thereto made prior to the Closing Date as of
the date of such amendment or supplement) and as of the Closing Date contained
or contains an untrue statement of a material fact or omitted or omits to state
any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading (it being understood that such counsel need express no belief or
opinion with respect to the financial statements and notes thereto, pro forma
financial information and schedules and other financial or statistical data
included or incorporated by reference therein).
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In rendering such opinion, such counsel may rely (A) as to
matters involving the application of laws other than the laws of the United
States and jurisdictions in which they are admitted, to the extent such counsel
deems proper and to the extent specified in such opinion, if at all, upon an
opinion or opinions (in form and substance reasonably satisfactory to
Underwriters' Counsel) of other counsel reasonably acceptable to Underwriters'
Counsel, familiar with the applicable laws; and (B) as to matters of fact, to
the extent they deem proper, on certificates of responsible officers of the
Company and certificates or other written statements of officers of departments
of various jurisdictions having custody of documents respecting the corporate
existence or good standing of the Company and its subsidiaries, provided that
copies of any such statements or certificates shall be delivered to
Underwriters' Counsel. The opinion of such counsel for the Company shall state
that the opinion of any such other counsel is in form satisfactory to such
counsel and, in their opinion, you and they are justified in relying thereon.
The opinion of such counsel may make such assumptions, qualifications,
exceptions and limitations applicable to such opinions as are reasonably
acceptable to Underwriters' Counsel.
(c) At the Closing Date you shall have received the
opinion of Keith Staudt, General Counsel for the Company, dated the Closing
Date addressed to the Underwriters and in form and substance satisfactory to
Underwriters' Counsel, to the effect that:
(i) The Company is duly qualified and in good
standing as a foreign corporation in each jurisdiction in which the character
or location of its properties (owned, leased or licensed) or the nature or
conduct of its business makes such qualification necessary, except for those
failures to be so qualified or in good standing which will not in the aggregate
result in a Material Adverse Effect. Each subsidiary of the Company is duly
qualified and in good standing as a foreign corporation in each jurisdiction in
which the character or location of its properties (owned, leased or licensed)
or the nature or conduct of its business makes such qualification necessary,
except for those failures to be so qualified or in good standing which will not
in the aggregate result in a Material Adverse Effect. Each of the Company and
its subsidiaries has all requisite power and authority and all necessary
consents, approvals, authorizations, orders, registrations, qualifications and
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Licenses, of and from, and have made all filings with and satisfied all
eligibility and other similar requirements imposed by all federal, state, local
and other governmental authorities, in each case as is required to own, lease
and operate its properties and conduct its business as now being conducted and
as described in the Registration Statement and the Prospectus, and, to such
counsel's knowledge, each such License is in full force and effect, except to
the extent that, individually or in the aggregate, the failure to obtain any
such License or to keep such License in effect or to make any such declaration,
registration or filing or satisfy any such requirement would not result in a
Material Adverse Effect on the Company's authority to own, lease and operate
its properties and conduct its business as described in the Prospectus.
(ii) All of the outstanding shares of Common Stock
are duly and validly authorized and issued, are fully paid and nonassessable
and were not issued and are not now in violation of or subject to any
preemptive or similar rights arising pursuant to (i) the certificate of
incorporation or by-laws of the Company, (ii) the laws of the State of Delaware
or (iii), to the knowledge of such counsel, any contract or agreement entitling
any person to acquire Common Stock upon the issuance of the Shares. All of the
issued shares of capital stock of each subsidiary of the Company which is a
corporation have been duly and validly authorized and issued, fully paid and
nonassessable and were not issued in violation of any preemptive or similar
rights arising pursuant to (i) the certificate of incorporation or by-laws of
the Company, (ii) the laws of the State of Delaware or (iii), to the knowledge
of such counsel, any contract or agreement entitling any person to acquire
Common Stock upon the issuance of the Shares. Except as described in the
Prospectus, all of the shares of issued capital stock of each subsidiary of the
Company as set forth on Schedule II hereto, are owned directly or indirectly by
the Company, free and clear of any lien, encumbrance, claim, security interest,
restriction on transfer, stockholders' agreement, voting trust or other defect
of title whatsoever.
(iii) To such counsel's knowledge, there is no
litigation or governmental or other action, suit, proceeding or investigation
before any court or before or
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by any public, regulatory or governmental agency or body pending or threatened
against, or involving the properties or business of, the Company or any of its
subsidiaries, which is of a character required to be disclosed in the
Prospectus which has not been properly disclosed therein.
(iv) The execution, delivery, and performance of
this Agreement and the consummation of the transactions contemplated hereby by
the Company do not and will not, to such counsel's knowledge, conflict with or
result in a breach of any of the terms and provisions of, or constitute a
default (or an event which with notice or lapse of time, or both, would
constitute a default) under, or result in the creation or imposition of any
lien, charge or encumbrance upon any property or assets of the Company or any
of its subsidiaries pursuant to, any agreement, instrument, franchise, license
or permit known to such counsel to which the Company or any of its subsidiaries
is a party or by which any of such entities or their respective properties or
assets may be bound (other than contracts or agreements listed as Exhibits to
the Registration Statement, as to which such counsel need not opine).
(v) To the knowledge of such counsel, neither the
Company nor any of its subsidiaries is in default (nor has any event occurred
which, with notice or lapse of time or both, would constitute a default) in the
performance or observance of, or in violation of, any obligation, agreement,
covenant or condition contained in any loan agreement, note, contract,
instrument, indenture, lease, franchise, License, mortgage, permit or other
agreement to which it is a party or by which it is bound or to which any of its
properties are subject, except for such defaults that would not, individually
or in the aggregate, result in a Material Adverse Effect.
(vi) To the knowledge of such counsel, neither the
Company nor any of its subsidiaries is, and at the Closing Date and the
Additional Closing Date, if any, will be, in violation of any provisions of its
certificate of incorporation or by-laws or other constituent documents.
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<PAGE> 28
(vii) The statements set forth in the Prospectus
under the captions "Risk Factors--Federal Tax Legislation," "--Prior Subchapter
S Status," "--Government Regulation," "The Reorganization,"
"Business--Government Regulation," "--Ancillary Business Arrangements" and
"Certain Relationships and Related Transactions" insofar as they purport to
describe certain provisions of the existing laws and documents referred to
therein, are correct in all material respects.
(viii) In addition, such opinion shall also contain
a statement that such counsel has participated in conferences with officers and
representatives of the Company, representatives of the independent public
accountants for the Company, the Underwriters, counsel for the Selling
Stockholder and counsel for the Underwriters at which the contents and the
Prospectus and related matters were discussed and, although such counsel is not
passing upon and does not assume responsibility for the accuracy, completeness
or fairness of the statements contained in the Registration Statement or the
Prospectus and have not made any independent check or verification thereof
(except as set forth in clause (vii) above), on the basis of the foregoing, no
facts have come to the attention of such counsel which have led such counsel to
believe that either the Registration Statement at the time it became effective,
or any amendment thereof made prior to the Closing Date as of the date of such
amendment, contained an untrue statement of a material fact or omitted to state
any material fact required to be stated therein or necessary to make the
statements therein not misleading or that the Prospectus as of its date (or any
amendment thereof or supplement thereto made prior to the Closing Date as of
the date of such amendment or supplement) and as of the Closing Date contained
or contains an untrue statement of a material fact or omitted or omits to state
any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading (it being understood that such counsel need express no belief or
opinion with respect to the financial statements and notes thereto, pro forma
financial information and schedules and other financial or statistical data
included or incorporated by reference therein).
In rendering such opinion, such counsel may rely (A) as to
matters involving the application of laws other than the laws of the United
States and
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jurisdictions in which they are admitted, to the extent such counsel deems
proper and to the extent specified in such opinion, if at all, upon an opinion
or opinions (in form and substance reasonably satisfactory to Underwriters'
Counsel) of other counsel reasonably acceptable to Underwriters' Counsel,
familiar with the applicable laws; and (B) as to matters of fact, to the extent
they deem proper, on certificates of responsible officers of the Company and
certificates or other written statements of officers of departments of various
jurisdictions having custody of documents respecting the corporate existence or
good standing of the Company and its subsidiaries, provided that copies of any
such statements or certificates shall be delivered to Underwriters' Counsel.
The opinion of such counsel for the Company shall state that the opinion of any
such other counsel is in form satisfactory to such counsel and, in their
opinion, you and they are justified in relying thereon. The opinion of such
counsel may make such assumptions, qualifications, exceptions and limitations
applicable to such opinions as are reasonably acceptable to Underwriters'
Counsel.
(d) At the Additional Closing Date you shall have
received the opinion of Vedder, Price, Kaufman & Kammholz, counsel to the
Selling Stockholder, to the effect that:
(i) The Selling Stockholder is the record owner
and to the best of such counsel's knowledge the beneficial owner of the
Additional Shares to be sold by the Selling Stockholder. At the Additional
Closing Date the Selling Stockholder had full right, power and authority to
enter into this Agreement and the Lock-up Letter; and upon payment for the
Additional Shares to be sold by the Selling Stockholder, and delivery of
certificates evidencing such Additional Shares, in accordance with the terms of
this Agreement, and assuming the Underwriters have no notice of an adverse
claim and purchase the Additional Shares in good faith, the Underwriters will
have acquired good and marketable title to the Additional Shares purchased by
them from the Selling Stockholder free and clear of all liens, pledges,
encumbrances or rights of third parties.
(ii) No consent, approval, authorization, order,
registration, filing, qualification, license or permit of or with any third
party or any court or any
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<PAGE> 30
public, governmental or regulatory agency or body having jurisdiction over the
Selling Stockholder or any of his respective properties or assets is required
for the execution, delivery and performance of this Agreement or the
consummation of the transactions contemplated hereby, including the issuance,
sale and delivery of the Additional Shares to be issued, sold and delivered by
the Selling Stockholder hereunder, except the registration under the Act of the
Additional Shares, approval by the National Association of Securities Dealers,
Inc. ("NASD") of the underwriting arrangements and such consents, approvals,
authorizations, orders, registrations, filings, qualifications, licenses and
permits as have been duly obtained and are in full force and effect and copies
of which have been furnished to you or as may be required under state
securities or Blue Sky laws in connection with the purchase and distribution of
the Additional Shares by the Underwriters.
(iii) The execution, delivery and performance of
this Agreement and the Lock-up Letter and the consummation of the transactions
herein contemplated will not (A) violate any applicable statute, rule,
regulation or any order known to us, of any governmental agency or body or any
court of the State of Illinois or the United States of America having
jurisdiction over the Selling Stockholder or any of his properties, or (B)
result in a breach or violation of any of the terms or provisions of, or
constitute a default under, any agreement or instrument filed as an exhibit to
the Registration Statement to which the Selling Stockholder is a party or by
which the Selling Stockholder is bound or to which any of the properties of the
Selling Stockholder is subject, provided that such counsel may state that they
are expressing no opinion in this clause (A) with respect to the state
securities or blue sky laws.
(iv) Each of this Agreement and the Lock-up Letter
has been duly executed and delivered by the Selling Stockholder.
(e) All proceedings taken in connection with the
sale of the Firm Shares and the Additional Shares as herein contemplated shall
be satisfactory in form and substance to you and to Underwriters' Counsel, and
the Underwriters shall have received from said Underwriters' Counsel a
favorable opinion, dated as of the
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<PAGE> 31
Closing Date with respect to the issuance and sale of the Shares, the
Registration Statement and the Prospectus and such other related matters as you
may reasonably require, and the Company shall have furnished to Underwriters'
Counsel such documents as they reasonably request for the purpose of enabling
them to pass upon such matters.
(f) At such Closing Date you shall have received a
certificate of the Chief Executive Officer and Chief Financial Officer of the
Company, dated such Closing Date to the effect that (i) the condition set forth
in subsection (a) of this Section 6 has been satisfied, (ii) as of the date
hereof and as of such Closing Date the representations and warranties of the
Company set forth in Section 1 hereof are accurate, (iii) as of such Closing
Date the obligations of the Company to be performed hereunder on or prior
thereto have been duly performed and (iv) subsequent to the respective dates as
of which information is given in the Registration Statement and the Prospectus,
the Company and its subsidiaries have not sustained any material loss or
interference with their respective businesses or properties from fire, flood,
hurricane, accident or other calamity, whether or not covered by insurance, or
from any labor dispute or any legal or governmental proceeding, and there has
not been any Material Adverse Change, except in each case as described in or
contemplated by the Prospectus.
(g) At the Additional Closing Date, you shall have
received a certificate executed by the Selling Stockholder, dated the
Additional Closing Date, to the effect that (i) as of the Additional Closing
Date, the representations and warranties of the Selling Stockholder set forth
in Section 1(b) hereof are accurate and (ii) as of the Additional Closing Date,
the obligations of the Selling Stockholder to be performed hereunder on or
prior thereto have been duly performed.
(h) At the time this Agreement is executed and at
the Closing Date, you shall have received a letter, from Ernst & Young LLP,
dated as of the date of this Agreement and as of the Closing Date,
respectively, addressed to the Underwriters and in form and substance
satisfactory to you, to the effect that: (i) they are independent certified
public accountants with respect to the Company and its subsidiaries within the
meaning of the Act and the Regulations and stating that the
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information required by Item 509 of Regulation S-K ("Regulation S-K") is
correct insofar as it relates to them; (ii) stating that, in their opinion, the
financial statements and schedules of the Company included in the Registration
Statement and the Prospectus and covered by their opinion therein comply as to
form in all material respects with the applicable accounting requirements of
the Act; (iii) they consent to the use of their report concerning the financial
statements in the Prospectus and to all references to such accountants therein,
including their designation as experts under the caption "Experts" therein;
(iv) on the basis of their limited review in accordance with standards
established by the American Institute of Certified Public Accountants of any
interim unaudited financial statements of the Company, a reading of the minutes
of meetings and consents of the stockholders and boards of directors of the
Company and its subsidiaries and the committees of such boards subsequent to
the date of the most recent audited consolidated balance sheet of the Company
and its subsidiaries included in the Registration Statement and the Prospectus,
inquiries of officers and other employees of the Company and its subsidiaries
who have responsibility for financial and accounting matters of the Company and
its subsidiaries with respect to transactions and events subsequent to the date
of the most recent audited consolidated balance sheet of the Company and its
subsidiaries included in the Registration Statement and the Prospectus and
other specified procedures and inquiries to a date not more than five days
prior to the date of such letter, nothing has come to their attention that
would cause them to believe that: (A) the unaudited financial statements and
schedules of the Company presented in the Registration Statement and the
Prospectus do not comply as to form in all material respects with the
applicable accounting requirements of the Act and the Regulations or that such
unaudited financial statements are not fairly presented in conformity with GAAP
applied on a basis substantially consistent with that of the audited financial
statements included in the Registration Statement and the Prospectus; (B) with
respect to the period subsequent to the date of the most recent balance sheet
of the Company included in the Registration Statement and the Prospectus there
were, as of the date of the most recent available monthly financial statements
of the Company and its subsidiaries, if any, and as of a specified date not
more than five days prior to the date of such letter, any changes in the
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<PAGE> 33
capital stock or any increase in long-term indebtedness of the Company or any
decrease in the net current assets or stockholders' equity of the Company, in
each case as compared with the amounts shown in the most recent balance sheet
presented in the Registration Statement and the Prospectus, except for changes,
increases or decreases which the Registration Statement and the Prospectus
disclose have occurred or may occur or which are set forth in such letter or
(C) that during the period from the date following the date of the most recent
balance sheet of the Company included in the Registration Statement and the
Prospectus to the date of the most recent available monthly financial
statements of the Company and its subsidiaries, if any, and to a specified date
not more than five days prior to the date of such letter, there was any
decrease, as compared with the corresponding period in the prior fiscal year,
in total revenues, or total or per share net income, except for decreases which
the Registration Statement and the Prospectus disclose have occurred or may
occur or which are set forth in such letter; and (v) stating that they have
compared specific dollar amounts, numbers of shares, percentages of revenues
and earnings, and other financial information pertaining to the Company and its
subsidiaries set forth in the Registration Statement and the Prospectus, which
have been specified by you prior to the date of this Agreement, to the extent
that such amounts, numbers, percentages, and information may be derived from
the general accounting and financial records of the Company and its
subsidiaries or from schedules furnished by the Company, and excluding any
questions requiring an interpretation by legal counsel, with the results
obtained from the application of specified readings, inquiries, and other
appropriate procedures specified by you set forth in such letter, and found
them to be in agreement.
(i) At the time this Agreement is executed and at
the Closing Date, you shall have received a letter, from Lane Gorman Trubitt
LLP, dated, respectively, as of the date of this Agreement and as of the
Closing Date addressed to the Underwriters and in form and substance
satisfactory to you, to the effect that: (i) they were for the period of time
covered by their audit independent certified public accountants with respect to
the Company and its subsidiaries within the meaning of the Act and the
Regulations and stating that
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the information required by Item 509 of Regulation S-K is correct insofar as it
relates to them; (ii) stating that, in their opinion, the financial statements
and schedules of the Company included in the Registration Statement and the
Prospectus and covered by their opinion therein comply as to form in all
material respects with the applicable accounting requirements of the Act; and
(iii) they consent to the use of their report concerning the financial
statements in the Prospectus and to all references to such accountants therein,
including their designation as experts under the caption "Experts" therein.
(j) At the time this Agreement is executed and at
the Closing Date, you shall have received a letter, from McGladrey & Pullen,
LLP, dated, respectively, as of the date of this Agreement and as of the
Closing Date addressed to the Underwriters and in form and substance
satisfactory to you, to the effect that: (i) they were for the period of time
covered by their audit independent certified public accountants with respect to
Business Compensation Strategies Group ("BCS") and its subsidiaries within the
meaning of the Act and the Regulations and stating that the information
required by Item 509 of Regulation S-K is correct insofar as it relates to
them; (ii) stating that, in their opinion, the financial statements and
schedules of BCS included in the Registration Statement and the Prospectus and
covered by their opinion therein comply as to form in all material respects
with the applicable accounting requirements of the Act; (iii) they consent to
the use of their report concerning the financial statements in the Prospectus
and to all references to such accountants therein, including their designation
as experts under the caption "Experts" therein; (iv) on the basis of their
limited review in accordance with standards established by the American
Institute of Certified Public Accountants of any interim unaudited financial
statements of BCS, nothing has come to their attention that would cause them to
believe that the unaudited financial statements and schedules of BCS presented
in the Registration Statement and the Prospectus do not comply as to form in
all material respects with the applicable accounting requirements of the Act
and the Regulations or that such unaudited financial statements are not fairly
presented in conformity with GAAP applied on a basis substantially consistent
with that of the audited financial statements included in the Registration
Statement and the Prospectus; and (v)
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stating that they have compared specific dollar amounts, numbers of shares,
percentages of revenues and earnings, and other financial information
pertaining to BCS and its subsidiaries set forth in the Registration Statement
and the Prospectus, which have been specified by you prior to the date of this
Agreement, to the extent that such amounts, numbers, percentages, and
information may be derived from the general accounting and financial records of
BCS and its subsidiaries or from schedules furnished by BCS, and excluding any
questions requiring an interpretation by legal counsel, with the results
obtained from the application of specified readings, inquiries, and other
appropriate procedures specified by you set forth in such letter, and found
them to be in agreement.
(k) Prior to the Closing Date the Company and the
Selling Stockholder shall have furnished to you such further information,
certificates and documents as you may reasonably request.
(l) You shall have received from each stockholder
and each person who is a director or officer of the Company an agreement to the
effect that such person will not, directly or indirectly, without the prior
written consent of Bear Stearns, on behalf of the Underwriters, offer, sell,
offer or agree to sell, grant any option for the sale of, or otherwise dispose
(or announce any offer, sale, grant of an option to purchase or other
disposition) of any shares of Common Stock (or any securities convertible into,
exercisable for or exchangeable or exercisable for shares of Common Stock) for
a period of 180 days after the date of the Prospectus, other than, in the case
of the Selling Stockholder, the sale of the Additional Shares.
(m) At the Closing Date, the Shares shall have been
approved for quotation on the Nasdaq National Market under the symbol "CLKB"
upon notice of issuance.
(n) The Selling Stockholder shall have delivered to
you on or prior to the Additional Closing Date a properly completed and
executed United States Treasury Department Form W-9 (or other applicable form
or statement specified by Treasury Department regulations).
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If any of the conditions specified in this Section 6 shall not
have been fulfilled when and as required by this Agreement, or if any of the
certificates, opinions, written statements or letters furnished to you or to
Underwriters' Counsel pursuant to this Section 6 shall not be in all material
respects reasonably satisfactory in form and substance to you and to
Underwriters' Counsel, all obligations of the Underwriters hereunder may be
cancelled by you at, or at any time prior to, the Closing Date and the
obligations of the Underwriters to purchase the Additional Shares may be
cancelled by you at, or at any time prior to, the Additional Closing Date.
Notice of such cancellation shall be given to the Company in writing, or by
telephone, telex or telegraph, confirmed in writing.
7. Indemnification.
(a) The Company agrees to indemnify and hold
harmless each Underwriter and each person, if any, who controls any Underwriter
within the meaning of Section 15 of the Act or Section 20(a) of the Exchange
Act, against any and all losses, liabilities, claims, damages and expenses
whatsoever as incurred (including, but not limited to, attorneys' fees and any
and all expenses whatsoever incurred in investigating, preparing or defending
against any litigation, commenced or threatened, or any claim whatsoever, and
any and all amounts paid in settlement of any claim or litigation), to which
they or any of them may become subject under the Act, the Exchange Act or
otherwise, insofar as such losses, liabilities, claims, damages or expenses (or
actions in respect thereof) arise out of or are based upon any untrue statement
or alleged untrue statement of a material fact contained in the Registration
Statement for the registration of the Shares, as originally filed or any
amendment thereof, or any related preliminary prospectus or the Prospectus, or
in any supplement thereto or amendment thereof, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not
misleading; provided, however, that the Company will not be liable in any such
case to the extent but only to the extent that any such loss, liability, claim,
damage or expense arises out of or is based upon any such untrue statement or
alleged untrue statement or omission or alleged omission made therein in
reliance upon and in conformity with written information
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<PAGE> 37
furnished to the Company by or on behalf of any Underwriter through Bear
Stearns expressly for use therein; provided further, that with respect to any
preliminary prospectus, such indemnity shall not inure to the benefit of any
Underwriter (or the benefit of any person controlling such Underwriter) if the
person asserting any such losses, liabilities, claims, damages or expenses
purchased Shares that are the subject thereof from such Underwriter and if such
person was not sent or given a copy of the Prospectus at or prior to the
written confirmation of the sale of such Shares to such person in any case
where sending or giving a copy of the Prospectus is required by the Act and the
untrue statement or omission contained in such preliminary prospectus was
corrected in the Prospectus and if the Company shall have fully complied in all
material respects with Sections 4(a) through 4(c) hereof. This indemnity
agreement will be in addition to any liability which the Company may otherwise
have including under this Agreement.
(b) The Selling Stockholder agrees to indemnify and
hold harmless each Underwriter, the Company, each of the directors of the
Company, each of the officers of the Company who shall have signed the
Registration Statement, and each other person, if any, who controls the Company
or any Underwriter within the meaning of Section 15 of the Act or Section 20(a)
of the Exchange Act, against any losses, liabilities, claims, damages and
expenses whatsoever (including, but not limited to, attorneys' fees and any and
all expenses whatsoever incurred in investigating, preparing or defending
against any litigation, commenced or threatened, or any claim whatsoever, and
any and all amounts paid in settlement of any claim or litigation), to which
they or any of them may become subject under the Act, the Exchange Act or
otherwise, insofar as such losses, liabilities, claims, damages or expenses (or
actions in respect thereof) arise out of or are based upon any untrue statement
or alleged untrue statement of a material fact contained in the Registration
Statement for the registration of the Shares, as originally filed or any
amendment thereof, or any related preliminary prospectus or the Prospectus, or
in any amendment thereof or supplement thereto, or arise out of or are based
upon the omission or alleged omission therein of a material fact required to be
stated therein or necessary to make the statements therein not misleading, in
each case to the extent, but
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only to the extent, that any such loss, liability, claim, damage or expense
arises out of or is based upon any such untrue statement or alleged untrue
statement or omission or alleged omission made therein in reliance upon and in
conformity with information relating to or provided to the Company by the
Selling Stockholder expressly for use therein. Notwithstanding the foregoing
provisions of this subsection 7(c), any Selling Stockholder's aggregate
liability under this subsection 7(c) shall be limited to an amount equal to the
product of the number of Additional Shares sold by the Selling Stockholder
pursuant to this Agreement, if any, and the initial public offering price of
the Shares as set forth in the Prospectus. This indemnity will be in addition
to any liability which the Selling Stockholder may otherwise have including
under this Agreement.
(c) Each Underwriter severally, and not jointly,
agrees to indemnify and hold harmless the Company, the Selling Stockholder,
each of the directors of the Company, each of the officers of the Company who
shall have signed the Registration Statement, and each other person, if any,
who controls the Company within the meaning of Section 15 of the Act or Section
20(a) of the Exchange Act, against any and all losses, liabilities, claims,
damages and expenses whatsoever as incurred (including, but not limited to,
attorneys' fees and any and all expenses whatsoever incurred in investigating,
preparing or defending against any litigation, commenced or threatened, or any
claim whatsoever, and any and all amounts paid in settlement of any claim or
litigation), joint or several, to which they or any of them may become subject
under the Act, the Exchange Act or otherwise, insofar as such losses,
liabilities, claims, damages or expenses (or actions in respect thereof) arise
out of or are based upon any untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement for the registration of
the Shares, as originally filed or any amendment thereof, or any related
preliminary prospectus or the Prospectus, or in any amendment thereof or
supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, in each case to the
extent, but only to the extent, that any such loss, liability, claim, damage or
expense arises out of or is based upon any such untrue
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statement or alleged untrue statement or omission or alleged omission made
therein in reliance upon and in conformity with written information furnished
to the Company by or on behalf of any Underwriter through Bear Stearns
expressly for use therein; provided, however, that in no case shall any
Underwriter be liable or responsible for any amount in excess of the
underwriting discount applicable to the Shares purchased by such Underwriter
hereunder. This indemnity will be in addition to any liability which any
Underwriter may otherwise have including under this Agreement. The Company and
the Selling Stockholder acknowledge that the statements set forth in the last
paragraph of the cover page, in the stabilization legend on the inside cover
page and in the third and seventh paragraphs under the caption "Underwriting"
in the Prospectus constitute the only information furnished to the Company in
writing by or on behalf of any Underwriter through Bear, Stearns expressly for
use in the Registration Statement relating to the Shares as originally filed or
in any amendment thereof, any related preliminary prospectus or the Prospectus
or in any amendment thereof or supplement thereto, as the case may be.
(d) Promptly after receipt by an indemnified party
under subsection (a), (b) or (c) above of notice of the commencement of any
action, such indemnified party shall, if a claim in respect thereof is to be
made against the indemnifying party under such subsection, notify each party
against whom indemnification is to be sought in writing of the commencement
thereof (but the failure so to notify an indemnifying party shall not relieve
it from any liability which it may have under this Section 7). In case any
such action is brought against any indemnified party, and it notifies an
indemnifying party of the commencement thereof, the indemnifying party will be
entitled to participate therein, and to the extent it may elect by written
notice delivered to the indemnified party promptly after receiving the
aforesaid notice from such indemnified party, to assume the defense thereof
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 will not be liable to
such indemnified party for any legal or other expenses subsequently incurred by
such indemnified party in connection with the defense thereof,
39
<PAGE> 40
other than the reasonable costs of investigation, unless the indemnifying party
does not so assume the defense thereof if given the opportunity to do so.
Notwithstanding the foregoing, the indemnified party or parties shall have the
right to employ its or their own counsel in any such case, but the fees and
expenses of such counsel shall be at the expense of such indemnified party or
parties unless (i) the employment of such counsel shall have been authorized in
writing by one of the indemnifying parties in connection with the defense of
such action, (ii) the indemnifying parties shall not have employed counsel to
have charge of the defense of such action within a reasonable time after notice
of commencement of the action, or (iii) such indemnified party or parties shall
have reasonably concluded that there may be defenses available to it or them
which are different from or additional to those available to one or all of the
indemnifying parties (in which case the indemnifying parties shall not have the
right to direct the defense of such action on behalf of the indemnified party
or parties), in any of which events such fees and expenses shall be borne by
the indemnifying parties. Anything in this subsection to the contrary
notwithstanding, an indemnifying party shall not be liable for any settlement
of any claim or action effected without its written consent; provided, however,
that such consent was not unreasonably withheld. No indemnifying party shall,
without the prior written consent of the indemnified party, effect the
settlement or compromise of, or consent to the entry of any judgment with
respect to any litigation, pending or threatened, or any investigation or
proceeding by any governmental agency or body, commenced or threatened, or any
claim whatsoever in respect of which indemnification or contribution may be
sought hereunder (whether or not the indemnified party is an actual or
potential party thereto), unless such settlement, compromise or consent (i)
includes an unconditional written release in form and substance satisfactory to
the indemnified party of such indemnified party from all liability arising out
of such litigation, investigation, proceeding or claim and (ii) does not
include a statement as to or an admission of fault, culpability or a failure to
act by or on behalf of any indemnified party.
40
<PAGE> 41
8. Contribution.
(a) In order to provide for contribution in circumstances in
which the indemnification provided for in Section 7 hereof is for any reason
held to be unavailable from any indemnifying party or is insufficient to hold
harmless a party indemnified thereunder, the Company, the Selling Stockholder
and the Underwriters shall contribute to the aggregate losses, claims, damages,
liabilities and expenses of the nature contemplated by such indemnification
provisions (including any investigation, legal and other expenses incurred in
connection with, and any amount paid in settlement of, any action, suit or
proceeding or any claims asserted, but after deducting in the case of losses,
claims, damages, liabilities and expenses suffered by the Company and the
Selling Stockholder any contribution received by the Company or the Selling
Stockholder from persons, other than the Underwriters, who may also be liable
for contribution, including persons who control the Company within the meaning
of Section 15 of the Act or Section 20(a) of the Exchange Act, officers of the
Company who signed the Registration Statement and directors of the Company) as
incurred to which the Company, the Selling Stockholder and one or more of the
Underwriters may be subject, in such proportions as is appropriate to reflect
the relative benefits received by the Company, the Selling Stockholder and the
Underwriters from the offering of the Shares or, if such allocation is not
permitted by applicable law or indemnification is not available as a result of
the indemnifying party not having received notice as provided in Section 7
hereof, in such proportion as is appropriate to reflect not only the relative
benefits referred to above but also the relative fault of the Company, the
Selling Stockholder and the Underwriters in connection with the statements or
omissions which resulted in such losses, claims, damages, liabilities or
expenses, as well as any other relevant equitable considerations. The relative
benefits received by the Company, the Selling Stockholder and the Underwriters
shall be deemed to be in the same proportion as (x) the total proceeds from the
offering (net of underwriting discounts and commissions but before deducting
expenses) received by the Company, (y) the total proceeds from the offering
(net of underwriting discounts and commissions but before deducting expenses)
received by the Selling Stockholder and (z) the underwriting discounts and
commissions
41
<PAGE> 42
received by the Underwriters, respectively, in each case as set forth in the
table on the cover page of the Prospectus. The relative fault of the Company,
the Selling Stockholder and of the Underwriters shall be determined by
reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to state a
material fact relates to information supplied by the Company, the Selling
Stockholder or the Underwriters and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission. The Company, the Selling Stockholder and the Underwriters agree that
it would not be just and equitable if contribution pursuant to this Section 8
were determined by pro rata allocation (even if the Underwriters were treated
as one entity for such purpose) or by any other method of allocation which does
not take account of the equitable considerations referred to above. The
Company and the Selling Stockholder shall be severally and not jointly liable
for the amounts to be contributed by any of them pursuant to the provisions of
this Section 8. Notwithstanding the provisions of this Section 8, (i) in no
case shall any Underwriter be liable or responsible for any amount in excess of
the underwriting discount applicable to the Shares purchased by such
Underwriter hereunder, (ii) in no case shall the Selling Stockholder be liable
or responsible for any amount in excess of an amount equal to the product of
the number of Additional Shares sold by the Selling Stockholder pursuant to
this Agreement, if any, and the initial public offering price of the Shares as
set forth in the Prospectus and (iii) no person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. Notwithstanding the provisions of this Section 8 and the
preceding sentence, no Underwriter shall be required to contribute any amount
in excess of the amount by which the total price at which the Shares
underwritten by it and distributed to the public were offered to the public
exceeds the amount of any damages that such Underwriter has otherwise been
required to pay by reason of such untrue or alleged untrue statement or
omission or alleged omission. For purposes of this Section 8, each person, if
any, who controls an Underwriter within the meaning of Section 15 of the Act or
Section 20(a) of the Exchange Act shall have the same rights to contribution
42
<PAGE> 43
as such Underwriter, and each person, if any, who controls the Company within
the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, each
officer of the Company who shall have signed the Registration Statement and
each director of the Company shall have the same rights to contribution as the
Company, subject in each case to clauses (i) and (iii) of this Section 8. Any
party entitled to contribution will, promptly after receipt of notice of
commencement of any action, suit or proceeding against such party in respect of
which a claim for contribution may be made against another party or parties,
notify each party or parties from whom contribution may be sought, but the
omission to so notify such party or parties shall not relieve the party or
parties from whom contribution may be sought from any obligation it or they may
have under this Section 8 or otherwise. No party shall be liable for
contribution with respect to any action or claim settled without its consent;
provided, however, that such consent was not unreasonably withheld.
(b) The obligations of the Company and the Selling Stockholder
provided for in Section 7 and Section 8 shall be in addition to any liability
which the Company and the Selling Stockholder may otherwise have and shall
extend, upon the same terms and conditions, to each person, if any, who
controls any Underwriter within the meaning of the Act; and the obligations of
the Underwriters provided for in Section 7 and Section 8 shall be in addition
to any liability which the respective Underwriters may otherwise have and shall
extend, upon the such terms and conditions, to each director of the Company, to
each officer of the Company who has signed the Registration Statement and to
each person, if any, who controls the Company within the meaning of the Act.
9. Default by an Underwriter.
(a) If any Underwriter or Underwriters shall default
in its or their obligation to purchase Firm Shares or Additional Shares
hereunder, and if the Firm Shares or Additional Shares with respect to which
such default relates do not (after giving effect to arrangements, if any, made
by you pursuant to subsection (b) below) exceed in the aggregate 10% of the
number of Firm Shares or Additional Shares, as the case may be, which
43
<PAGE> 44
all Underwriters have agreed to purchase hereunder, then such Firm Shares or
Additional Shares to which the default relates shall be purchased by the
non-defaulting Underwriters in proportion to the respective proportions which
the numbers of Firm Shares set forth opposite their respective names in
Schedule I hereto bear to the aggregate number of Firm Shares set forth
opposite the names of the non-defaulting Underwriters.
(b) In the event that such default relates to more
than 10% of the Firm Shares or Additional Shares, as the case may be, you may
in your discretion arrange for yourself or for another party or parties
(including any non-defaulting Underwriter or Underwriters who so agree) to
purchase such Firm Shares or Additional Shares, as the case may be, to which
such default relates on the terms contained herein. In the event that within
five calendar days after such a default you do not arrange for the purchase of
the Firm Shares or Additional Shares, as the case may be, to which such default
relates as provided in this Section 9, this Agreement or, in the case of a
default with respect to the Additional Shares, the obligations of the
Underwriters to purchase and of the Selling Stockholder to sell the Additional
Shares, shall thereupon terminate, without liability on the part of the Company
or the Selling Stockholder with respect thereto (except in each case as
provided in Section 5, 7(a) and 8 hereof) or the Underwriters, but nothing in
this Agreement shall relieve a defaulting Underwriter or Underwriters of its or
their liability, if any, to the other Underwriters, the Company and the Selling
Stockholder for damages occasioned by its or their default hereunder.
(c) In the event that the Firm Shares or Additional
Shares to which the default relates are to be purchased by the non-defaulting
Underwriters, or are to be purchased by another party or parties as aforesaid,
you or the Company or the Selling Stockholder (in the case of the Additional
Shares) shall have the right to postpone the Closing Date or Additional Closing
Date, as the case may be for a period, not exceeding five business days, in
order to effect whatever changes may thereby be made necessary in the
Registration Statement or the Prospectus or in any other documents and
arrangements, and the Company agrees to file promptly any amendment or
supplement to the Registration Statement or the Prospectus which, in the
reasonable opinion of Underwriters'
44
<PAGE> 45
Counsel, may thereby be made necessary or advisable. The term "Underwriter" as
used in this Agreement shall include any party substituted under this Section 9
with like effect as if it had originally been a party to this Agreement with
respect to such Firm Shares or Additional Shares.
10. Survival of Representations and Agreements. All
representations and warranties, covenants and agreements of the Underwriters,
the Company and the Selling Stockholder contained in this Agreement, including
the agreements contained in Section 5, the indemnity agreements contained in
Section 7 and the contribution agreements contained in Section 8, shall remain
operative and in full force and effect regardless of any investigation made by
or on behalf of any Underwriter or any controlling person thereof or by or on
behalf of the Selling Stockholder, the Company, any of its officers and
directors or any controlling person thereof, and shall survive delivery of and
payment for the Shares to and by the Underwriters. The representations
contained in Section 1 and the agreements contained in Sections 5, 7, 8 and
11(d) hereof shall survive the termination of this Agreement, including
termination pursuant to Section 9 or 11 hereof.
11. Effective Date of Agreement; Termination.
(a) This Agreement shall become effective, upon the
later of when (i) you and the Company shall have received notification of the
effectiveness of the Registration Statement or (ii) the execution of this
Agreement. If either the initial public offering price or the purchase price
per Share has not been agreed upon prior to 5:00 p.m., New York time, on the
fifth full business day after the Registration Statement shall have become
effective, this Agreement shall thereupon terminate without liability to the
Company, the Selling Stockholder or the Underwriters except as herein expressly
provided. Until this Agreement becomes effective as aforesaid, it may be
terminated by the Company by notifying you and the Selling Stockholder or by
you notifying the Company and the Selling Stockholder. Notwithstanding the
foregoing, the provisions of this Section 11 and of Sections 1, 5, 7 and 8
hereof shall at all times be in full force and effect.
45
<PAGE> 46
(b) You shall have the right to terminate this
Agreement at any time prior to the Closing Date or the obligations of the
Underwriters to purchase the Additional Shares at any time prior to the
Additional Closing Date, as the case may be, if (i) any domestic or
international event or act or occurrence has materially disrupted, or in your
opinion will in the immediate future materially disrupt, the market for the
Company's securities or securities in general; or (ii) if trading on the New
York Stock Exchange or the Nasdaq National Market shall have been suspended, or
minimum or maximum prices for trading shall have been fixed, or maximum ranges
for prices for securities shall have been required, on the New York Stock
Exchange or the Nasdaq National Market by the New York Stock Exchange or Nasdaq
National Market or by order of the Commission or any other governmental
authority having jurisdiction; or (iii) if a banking moratorium has been
declared by a state or federal authority or if any new restriction materially
adversely affecting the distribution of the Firm Shares or the Additional
Shares, as the case may be, shall have become effective; or (iv) (A) if the
United States becomes engaged in hostilities or there is an escalation of
hostilities involving the United States or there is a declaration of a national
emergency or war by the United States or (B) if there shall have been such
change in political, financial or economic conditions if the effect of any such
event in (A) or (B) as in your judgment makes it impracticable or inadvisable
to proceed with the offering, sale and delivery of the Firm Shares or the
Additional Shares, as the case may be, on the terms contemplated by the
Prospectus.
(c) Any notice of termination pursuant to this
Section 11 shall be by telephone, telex, or telegraph, confirmed in writing by
letter.
(d) If this Agreement shall be terminated pursuant
to any of the provisions hereof (otherwise than pursuant to (i) notification by
you as provided in Section 11(a) hereof or (ii) Section 9(b) or 11(b) hereof),
or if the sale of the Shares provided for herein is not consummated because any
condition to the obligations of the Underwriters set forth herein is not
satisfied or
46
<PAGE> 47
because of any refusal, inability or failure on the part of the Company to
perform any agreement herein or comply with any provision hereof, the Company
will, subject to demand by you, reimburse the Underwriters for all
out-of-pocket expenses (including the fees and expenses of their counsel),
incurred by the Underwriters in connection herewith.
12. Notices. All communications hereunder, except as may be
otherwise specifically provided herein, shall be in writing and , if sent to
any Underwriter, shall be mailed, delivered, or telexed or telegraphed and
confirmed in writing, to such Underwriter c/o Bear, Stearns & Co. Inc., 245
Park Avenue, New York, N.Y. 10167, Attention:_____________; if sent to the
Company, shall be mailed, delivered, or telegraphed and confirmed in writing to
the Company, Clark/Bardes Holdings, Inc. 2121 San Jacinto Street, Suite 2200,
Dallas, Texas 75201-7906, Attention: Melvin Todd; if sent to the Selling
Stockholder, shall be mailed, delivered, or telegraphed and confirmed in
writing to W. Tom Wamberg, Clark/Bardes, Inc., 102 S. Wynstone Park Dr., Suite
200, North Barrington, Illinois 60010, with a copy to: Stanley B. Block, Esq.,
Vedder, Price, Kaufman & Kammholz, 222 N. LaSalle Street, Chicago, Illinois
60601.
13. Parties. This Agreement shall inure solely to the
benefit of, and shall be binding upon, the Underwriters, the Selling
Stockholder and the Company and the controlling persons, directors, officers,
employees and agents referred to in Sections 7 and 8, and their respective
successors and assigns, and no other person shall have or be construed to have
any legal or equitable right, remedy or claim under or in respect of or by
virtue of this Agreement or any provision herein contained. The term
"successors and assigns" shall not include a purchaser, in its capacity as
such, of Shares from any of the Underwriters.
14. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, BUT WITHOUT
REGARD TO PRINCIPLES OF CONFLICTS OF LAW.
47
<PAGE> 48
15. Counterparts. This Agreement may be executed in one
or more counterparts and, when a counterpart has been executed by each party,
all such counterparts taken together shall constitute one and the same
agreement.
16. Authority. The Representatives represent and warrant
that they have been authorized by the several Underwriters to execute and
deliver this Agreement on their behalf and to act for them in the manner
provided by this agreement.
48
<PAGE> 49
If the foregoing correctly sets forth the understanding among
you, the Company and the Selling Stockholder, please so indicate in the space
provided below for that purpose, whereupon this letter shall constitute a
binding agreement among us.
Very truly yours,
Clark/Bardes Holdings, Inc.
By
------------------------------
Name:
Title:
------------------------------
W. Tom Wamberg, in his
individual capacity
Accepted as of the date first above written
BEAR, STEARNS & CO. INC.
CONNING & COMPANY
PIPER JAFFRAY INC.
By: BEAR, STEARNS & CO. INC.
By
---------------------------------------
Name:
Title:
On behalf of themselves and the other
Underwriters named in Schedule I hereto.
49
<PAGE> 50
SCHEDULE I
<TABLE>
<CAPTION>
Maximum Number of
Number of Firm Additional Shares
Name of Underwriter Shares to be Purchased to be Purchased
- ------------------- ---------------------- ---------------
<S> <C> <C>
Bear, Stearns & Co. Inc.
Piper Jaffray Inc.
Conning & Company
Total. . . . . .
-------------- ----------------
-------------- ----------------
</TABLE>
50
<PAGE> 51
SCHEDULE II
[List of subsidiaries of the Company, together with ownership percentages]
<TABLE>
<CAPTION>
Name % Ownership
---- -----------
<S> <C>
Clark/Bardes, Inc., a Delaware corporation 100%
</TABLE>
51
<PAGE> 1
EXHIBIT 2.1
================================================================================
REORGANIZATION AGREEMENT
by and among
CLARK/BARDES HOLDINGS, INC.,
a Delaware corporation ("CBH"),
CLARK/BARDES, INC.,
a Delaware corporation ("Clark/Bardes"),
CLARK/BARDES, INC.,
a Texas corporation ("Predecessor Company")
and
C/B MERGER CO., INC.,
a Texas corporation ("Mergerco")
DATED AS OF JULY 30, 1998
================================================================================
<PAGE> 2
REORGANIZATION AGREEMENT
THIS REORGANIZATION AGREEMENT (this "AGREEMENT"), dated as of July 30,
1998, is made and entered into by and among Clark/Bardes Holdings, Inc., a
Delaware corporation ("CBH"), Clark/Bardes, Inc., a Delaware corporation and
wholly owned subsidiary of CBH ("CLARK/BARDES," and together with CBH, the "C/B
COMPANIES"), Clark/Bardes, Inc., a Texas corporation ("PREDECESSOR COMPANY"),
and C/B Merger Co., Inc., a Texas corporation ("MERGERCO"). CBH, Clark/Bardes,
Predecessor Company and Mergerco are sometimes individually referred to as a
"PARTY" and collectively referred to as the "PARTIES."
PRELIMINARY STATEMENT
The Parties desire to effect a series of transactions which would,
among other things, reorganize Predecessor Company by (i) merging Mergerco with
and into Predecessor Company, with each stockholder of Predecessor Company
(individually, a "STOCKHOLDER" and collectively, the "STOCKHOLDERS") receiving
one-half of one share of CBH's common stock, par value $0.01 per share ("CBH
COMMON STOCK"), for each share of Predecessor Company's common stock, no par
value per share ("PREDECESSOR COMPANY COMMON STOCK"), held by such Stockholder,
(ii) merging Predecessor Company with and into Clark/Bardes, thereby resulting
in Clark/Bardes being the wholly owned operating subsidiary of CBH, (iii)
restructuring Predecessor Company's 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"), (iv) providing notice of
prepayment of Predecessor Company's 8.5% Convertible Subordinated Note due
September 2007 (the "CONVERTIBLE NOTE"), and the subsequent conversion of the
Convertible Note into 1,627,118 shares of Predecessor Company Common Stock, (v)
extinguishing warrants (collectively, the "EXTINGUISHED WARRANTS") representing
the right to purchase 1,525,424 shares of Predecessor Company Common Stock, (vi)
restructuring the grant of Predecessor Company's Common Stock to Melvin Todd,
(vii) purchasing renewal revenue due to Mr. Wamberg and The Wamberg
Organization, Inc., (viii) incorporating a Texas entity for the purpose of
marketing certain insurance products within the State of Texas, and (ix)
terminating certain agreements (the foregoing transactions and all other
transactions specified in this Agreement are collectively referred to as the
"REORGANIZATION").
STATEMENT OF AGREEMENT
NOW, THEREFORE, in consideration of the premises and the mutual
agreements, covenants, representations and warranties set forth in this
Agreement and for other good, valid and binding consideration, the receipt and
sufficiency of which are hereby acknowledged, the Parties, intending to be
legally bound, hereby agree as follows:
ARTICLE 1.
THE RESTRUCTURING MERGER
Section 1.1 The Restructuring Merger. Subject to the terms and
conditions of this Agreement, and in accordance with the Texas Business
Corporation Law (the "TBCL"), at the Restructuring Effective Time (as herein
defined) Mergerco shall be merged with and into
<PAGE> 3
Predecessor Company, with Predecessor Company being the surviving corporation
(the "RESTRUCTURING SURVIVING CORPORATION"), and the separate corporate
existence of Mergerco shall cease (such transaction, the "RESTRUCTURING
MERGER").
Section 1.2 Restructuring Effective Time. The Restructuring Merger
shall be consummated (the "RESTRUCTURING EFFECTIVE TIME") upon the Texas
Secretary of State issuing a certificate of merger (the "RESTRUCTURING
CERTIFICATE OF MERGER").
Section 1.3 Effects of the Restructuring Merger.
(a) Generally; Restructuring Surviving Corporation. The
Restructuring Merger shall have the effects set forth in Article 5.06 of the
TBCL. Predecessor Company shall survive and continue as the surviving
corporation and the separate existence of Mergerco shall cease. The
Restructuring Surviving Corporation may, at any time after the Restructuring
Effective Time, take any action (including executing and delivering any
document) in the name and on behalf of Predecessor Company or Mergerco in order
to carry out and effectuate the transactions contemplated by this Agreement.
(b) Articles of Incorporation and Bylaws. The Articles of
Incorporation and the Bylaws of Predecessor Company, both as in effect at the
Restructuring Effective Time, shall be the Articles of Incorporation and Bylaws
of the Restructuring Surviving Corporation after the Restructuring Effective
Time.
(c) Officers and Directors. The officers and members of the
board of directors of Predecessor Company immediately prior to the Restructuring
Effective Time shall continue to serve in such capacities for the Restructuring
Surviving Corporation after the Restructuring Effective Time until the earlier
of any such person's resignation, removal or death or until a successor is duly
elected and qualified, as the case may be.
(d) Post-Restructuring Effective Time Status. From and after
the Restructuring Effective Time, no shares of Mergerco's common stock shall be
deemed to be outstanding or have any rights other than those rights set forth in
this Agreement.
(e) Assumption of Notes. As of the Restructuring Effective
Time, CBH shall assume all liabilities under, and all obligations and duties
arising pursuant to, Predecessor Company's 8.5% Convertible Subordinated Notes
due September 2007 (the "CONVERTIBLE NOTES").
Section 1.4 Effect on Capital Stock. As of the Restructuring Effective
Time, by virtue of the Restructuring Merger and without any action on the part
of any Party or the holders of the capital stock of any Party:
(a) Cancellation of Predecessor Company Treasury Stock. Each
share of Predecessor Company Common Stock held in treasury by Predecessor
Company shall be cancelled (collectively, the "CANCELLED TREASURY SHARES").
<PAGE> 4
(b) Conversion of Predecessor Company Common Stock. Subject to
Section 1.7, each issued and outstanding share of Predecessor Company Common
Stock (other than the Cancelled Treasury Shares) shall be converted solely into
the right to receive, upon surrender of the certificate formerly evidencing such
share of Predecessor Company Common Stock (a "PREDECESSOR COMPANY STOCK
CERTIFICATE") in accordance with Section 1.5(b), one-half of one share of
newly-issued, fully-paid and non-assessable CBH Common Stock.
(c) Conversion of Predecessor Company Stock Options and
Convertible Notes. Subject to Section 1.7, each outstanding option to purchase
Predecessor Company Common Stock (a "PREDECESSOR COMPANY STOCK OPTION") and each
right to convert into Predecessor Company Common Stock pursuant to the
Convertible Notes shall be converted solely into, respectively, an option to
purchase and a right to convert into, one-half of one share of newly-issued,
fully-paid and non-assessable CBH Common Stock (a "CBH STOCK OPTION").
(d) Dissenting Stockholders. Notwithstanding anything in this
Agreement to the contrary, any issued and outstanding shares of Predecessor
Company Common Stock held by a person who objects to the Restructuring Merger (a
"DISSENTING STOCKHOLDER") and complies with all the provisions of Article 5.12
of the TBCL (such shares, the "DISSENTING SHARES") shall not be converted as
described in Sections 1.4(b), but shall be converted into the right to receive
such consideration as may be determined to be due to such Dissenting Stockholder
pursuant to Article 5.12 of the TBCL. If, after the Restructuring Effective
Time, such Dissenting Stockholder withdraws its demand for appraisal or fails to
perfect or otherwise loses its right to appraisal, in any case pursuant to the
TBCL, the Dissenting Shares shall be deemed to be converted as of the
Restructuring Effective Time into the right to receive the number of shares of
CBH Common Stock as determined pursuant to Section 1.4(b). Predecessor Company
shall give CBH (i) prompt notice of any demands for appraisal received by
Predecessor Company and (ii) the opportunity to participate in and direct all
negotiations and proceedings with respect to any such demands. Predecessor
Company shall not, without the prior written consent of CBH, make any payment
with respect to, or settle, offer to settle or otherwise negotiate, any such
demands.
(e) Conversion of Mergerco Common Stock. Each issued and
outstanding share of Mergerco common stock shall be converted solely into the
right to receive, upon surrender of the certificate formerly evidencing such
share of common stock, one share of newly-issued, fully-paid and non-assessable
Predecessor Company Common Stock.
(f) Redemption of CBH Common Stock. All shares of CBH Common
Stock issued and outstanding immediately prior to the Restructuring Effective
Time shall be redeemed by CBH for an aggregate amount equal to $1,000.
Section 1.5 Exchange of Certificates and Options; Responsibility for
Payments.
(a) Exchange Agent. Prior to the Restructuring Effective Time,
CBH shall authorize The Bank of New York or any other nationally-recognized bank
or trust company to act as the exchange agent hereunder (the "EXCHANGE AGENT").
CBH shall pay all charges and expenses of the Exchange Agent.
<PAGE> 5
(b) Exchange of Predecessor Company Stock Certificates. As
soon as practicable after the Restructuring Effective Time, the Exchange Agent
shall mail and make available to each record holder of a Predecessor Company
Stock Certificate a notice and letter of transmittal in customary form advising
such holder of the effectiveness of the Restructuring Merger and the procedure
for surrendering to the Exchange Agent such Predecessor Company Stock
Certificate for exchange pursuant to this Agreement. Upon the surrender to the
Exchange Agent of such Predecessor Company Stock Certificate, together with such
letter of transmittal duly executed and completed in accordance with the
instructions thereon, the Exchange Agent shall promptly cause to be delivered to
such holder, and each such holder of a Predecessor Company Stock Certificate
will be entitled to receive, (i) a certificate or certificates evidencing the
number of shares (rounded down to the nearest whole number) of CBH Common Stock
into which the shares of Predecessor Company Common Stock evidenced by such
Predecessor Company Stock Certificate were converted in the Restructuring Merger
and (ii) a check payable to such holder representing the payment of cash-in-lieu
of fractional shares of CBH Common Stock and any amount determined in accordance
with Section 1.6 to which such holder is entitled. The Predecessor Company Stock
Certificates so surrendered shall forthwith be cancelled. The shares of CBH
Common Stock into which the shares of Predecessor Company Common Stock shall be
converted in the Restructuring Merger shall be deemed to have been issued at the
Restructuring Effective Time.
(c) Exchange of Predecessor Company Stock Options. As soon as
practicable after the Restructuring Effective Time, CBH shall mail and make
available to each record holder of a Predecessor Company Stock Option a notice
in customary form advising such holder of the effectiveness of the Restructuring
Merger and the procedure for surrendering to CBH the instrument evidencing the
grant of such Predecessor Company Stock Option ("PREDECESSOR COMPANY STOCK
OPTION GRANT") for exchange pursuant to this Agreement. Upon the surrender to
CBH of such Predecessor Company Stock Option Grant, CBH shall promptly cause to
be delivered to such holder, and each such holder of a Predecessor Company Stock
Option Grant will be entitled to receive, (i) an instrument evidencing the grant
of a CBH Stock Option for the number of shares (rounded down to the nearest
whole number) into which the Predecessor Company Stock Option was converted in
the Restructuring Merger and (ii) a check payable to such holder representing
the payment of cash-in-lieu of fractional shares of CBH Common Stock. The
Predecessor Company Stock Option Grant so surrendered shall forthwith be
cancelled.
(d) Lost, Stolen or Destroyed Certificates. In the event any
Predecessor Company Stock Certificate shall have been lost, stolen or destroyed,
the Exchange Agent shall issue and pay to the registered holder of such
certificate the shares and amounts required pursuant to Section 1.5(b), upon the
making of an affidavit of that fact by such holder thereof with such assurances
as the Exchange Agent, in its discretion and as a condition precedent to the
payment of CBH Common Stock, may reasonably require of the holder of such lost,
stolen or destroyed Predecessor Company Stock Certificates.
(e) Unclaimed Stock. At any time following six months after
the Restructuring Effective Time, CBH shall be entitled to require the Exchange
Agent to deliver to it any certificates of CBH Common Stock which had been made
available to the Exchange Agent
<PAGE> 6
and which have not been issued, and thereafter the holders of Predecessor
Company Common Stock shall be entitled to look to CBH (subject to abandoned
property, escheat or other similar laws) only as general creditors thereof with
respect to CBH Common Stock issuable upon due surrender of their Predecessor
Company Stock Certificates. Notwithstanding the foregoing, none of the C/B
Companies, Predecessor Company or the Exchange Agent shall be liable to any
person in respect of any shares of CBH Common Stock delivered to a public
official pursuant to any applicable abandoned property, escheat or similar law.
If any Predecessor Company Stock Certificates shall not have been surrendered
immediately prior to the date on which any payment pursuant to this Article
would otherwise escheat to or become the property of any governmental authority,
the CBH Common Stock in respect of such Predecessor Company Stock Certificates
shall, to the extent permitted by applicable law, become the property of CBH,
free and clear of all claims or interests of any person previously entitled
thereto.
Section 1.6 Dividends; Transfer Taxes. No dividends or distributions
that are declared or made on shares of CBH Common Stock after the Restructuring
Effective Time or with a record date after the Restructuring Effective Time
shall be paid to any person entitled to receive certificates evidencing shares
of CBH Common Stock pursuant to this Agreement unless and until such person
surrenders the Predecessor Company Stock Certificate. Upon such surrender, there
shall be paid to the person in whose name the certificates evidencing such
shares of CBH Common Stock shall be issued, any dividends or distributions which
became payable with respect to such shares of CBH Common Stock between the
Restructuring Effective Time and the time of such surrender. In no event shall
the person entitled to receive such dividends or distributions be entitled to
receive any interest thereon. In the event that any certificates evidencing
shares of CBH Common Stock are to be issued in a name other than that in which
the Predecessor Company Stock Certificate surrendered in exchange therefor are
registered, it shall be a condition of such exchange that the person requesting
such exchange (i) pay to the Exchange Agent any transfer or other taxes required
by reason of the issuance of certificates evidencing such shares of CBH Common
Stock in a name other than that of the registered holder of the Predecessor
Company Stock Certificate surrendered or (ii) establish to the satisfaction of
the Exchange Agent that such tax has been paid or is not applicable.
Section 1.7 No Fractional Shares. No certificate or scrip evidencing a
fractional share of CBH Common Stock shall be issued upon the surrender for
exchange of Predecessor Company Stock Certificates pursuant to this Article, and
no dividend, distribution, stock split or other change in the capital structure
of CBH shall relate to any fractional security, and such fractional interest
shall not entitle the owner thereof to vote or to any rights of a security
holder of CBH. In lieu of any such fractional shares, each holder of Predecessor
Company Common Stock who would otherwise have been entitled to a fraction of a
share of CBH Common Stock upon surrender of Predecessor Company Stock
Certificates for exchange pursuant to this Article shall be paid by CBH an
amount in cash (without interest) upon such surrender equal to such fraction
multiplied by the initial public offering price per share of the CBH Common
Stock.
Section 1.8 Closing of Transfer Books. Upon the date of the
Restructuring Effective Time, the stock transfer books of Predecessor Company
shall be closed and no transfer of Predecessor Company Common Stock shall be
made thereafter. If, after the Restructuring Effective Time, Predecessor Company
Stock Certificates are presented to the Restructuring
<PAGE> 7
Surviving Corporation, such certificates shall be cancelled and exchanged for
certificates evidencing shares of CBH Common Stock and cash as provided in this
Article.
ARTICLE 2.
THE REDOMICILE MERGER
Section 2.1 The Redomicile Merger. Subject to the terms and conditions
of this Agreement, and in accordance with the Delaware General Corporation Law
(the "DGCL"), at the Redomicile Effective Time (as herein defined) Predecessor
Company shall be merged with and into Clark/Bardes, with Clark/Bardes being the
surviving corporation in the Redomicile Merger (the "REDOMICILE SURVIVING
CORPORATION"), and the separate corporate existence of Predecessor Company shall
cease (such transaction, the "REDOMICILE MERGER").
Section 2.2 Redomicile Effective Time. The Redomicile Merger shall be
consummated upon the later to occur of (a) the Delaware Secretary of State
accepting for filing a certificate of merger (the "REDOMICILE CERTIFICATE OF
MERGER") executed by the Parties in accordance with the DGCL or (b) five minutes
after the Restructuring Effective Time (the time at which the Redomicile Merger
is consummated is referred to herein as the "REDOMICILE EFFECTIVE TIME").
Section 2.3 Effects of the Redomicile Merger.
(a) Generally; Redomicile Surviving Corporation. The
Redomicile Merger shall have the effects set forth in Section 259 of the DGCL.
Clark/Bardes shall survive and continue as the surviving corporation and the
separate existence of Predecessor Company shall cease. The Redomicile Surviving
Corporation may, at any time after the Redomicile Effective Time, take any
action (including executing and delivering any document) in the name and on
behalf of Clark/Bardes or Predecessor Company in order to carry out and
effectuate the transactions contemplated by this Agreement.
(b) Certificate of Incorporation and Bylaws. The Certificate
of Incorporation and the Bylaws of Clark/Bardes, both as in effect at the
Redomicile Effective Time, shall be the Certificate of Incorporation and Bylaws
of the Redomicile Surviving Corporation after the Redomicile Effective Time.
(c) Officers and Directors. The officers and members of the
board of directors of Clark/Bardes immediately prior to the Redomicile Effective
Time shall continue to serve in such capacities for the Redomicile Surviving
Corporation after the Redomicile Effective Time until the earlier of any such
person's resignation, removal or death or until a successor is duly elected and
qualified, as the case may be.
(d) Post-Redomicile Effective Time Status. From and after the
Redomicile Effective Time, no shares of Predecessor Company Common Stock shall
be deemed to be outstanding or have any rights other than those rights set forth
in this Agreement.
<PAGE> 8
Section 2.4 Effect on Capital Stock. As of the Redomicile Effective
Time, by virtue of the Redomicile Merger and without any action on the part of
any Party or the holders of the capital stock of any Party, each outstanding
share of Predecessor Company Common Stock (all of which are held by CBH by
virtue of the Restructuring Merger) shall be cancelled.
ARTICLE 3.
REPRESENTATIONS AND WARRANTIES OF THE PARTIES
Each Party represents and warrants that the statements contained in
this Article are correct and complete.
Section 3.1 Corporate Status; Qualification. Each of CBH and
Clark/Bardes is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware. Each of Predecessor Company
and Mergerco is a corporation duly organized, validly existing and in good
standing under the laws of the State of Texas. There is no pending or threatened
proceeding for the dissolution, liquidation, insolvency or rehabilitation of any
of the Parties. Each Party is duly qualified and in good standing as a foreign
entity under the laws of each jurisdiction where qualification is required,
except where the lack of such qualification would not have a material adverse
effect.
Section 3.2 Corporate Power and Authority. Each Party has the corporate
power and authority to execute and deliver this Agreement, to perform its
obligations hereunder and to consummate the transactions contemplated hereby.
Each Party has taken all corporate action necessary to authorize its execution
and delivery of this Agreement, the performance of its obligations hereunder and
the consummation of the transactions contemplated hereby.
Section 3.3 Enforceability. This Agreement has been duly executed and
delivered by each Party and constitutes such Party's legal, valid and binding
obligation enforceable against it in accordance with this Agreements terms,
except as the same may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the enforcement of
creditors' rights generally and general equitable principles regardless of
whether such enforceability is considered in a proceeding at law or in equity.
Section 3.4 CBH Common Stock. Upon consummation of the transactions
contemplated hereby and the issuance and delivery of certificates representing
CBH Common Stock to the Stockholders, the shares of CBH Common Stock will be
duly authorized, validly issued, fully paid, non-assessable shares. The shares
of CBH Common Stock issuable upon exercise of CBH Stock Options have been duly
authorized and reserved for issuance upon such exercise, and when issued upon
exercise in accordance with the terms of CBH Stock Options, such shares of CBH
Common Stock will be duly and validly issued, fully paid and nonassessable.
Section 3.5 No Violation. The execution and delivery of this Agreement
by each Party, the performance by each Party of its obligations hereunder and
the consummation by each Party of the transactions contemplated by this
Agreement will not (a) contravene any provision of any Party's Certificate or
Articles of Incorporation, as the case may be, or Bylaws, (b) violate or
conflict with any law, statute, ordinance, rule, regulation, decree, writ,
injunction, judgment,
<PAGE> 9
ruling or order of any governmental authority or of any arbitration award which
is either applicable to, binding upon, or enforceable against any Party, (c)
conflict with, result in any breach of, or constitute a default (or an event
which would, with the passage of time or the giving of notice or both,
constitute a default) under, or give rise to a right to terminate, amend,
modify, abandon or accelerate, any material contract which is applicable to,
binding upon or enforceable against any Party, (d) result in or require the
creation or imposition of any lien upon or with respect to any of the property
or assets of any Party, (e) give to any individual or entity a right or claim
against any Party, which would have a material adverse effect on such Party, or
(f) require the consent, approval, authorization or permit of, or filing with or
notification to, any governmental authority, any court or tribunal or any other
person, except any governmental permits or licenses required to operate the
business of Redomicile Surviving Corporation.
ARTICLE 4.
ADDITIONAL AGREEMENTS
Section 4.1 Further Transactions. In addition to the Restructuring
Merger and the Redomicile Merger, the Parties desire to provide for the
following transactions, none of which shall be construed as a condition to the
consummation of either of the foregoing mergers:
(a) Debt Restructuring. Clark/Bardes will enter into such
documents as are necessary to restructure the Restructured Notes;
(b) Conversion of Note. The Redomicile Surviving Corporation
will provide notice of prepayment of the Convertible Note, and the subsequent
conversion of the Convertible Note into 813,559 shares of CBH Common Stock;
(c) Extinguish Warrant. The Redomicile Surviving Corporation
will extinguish the Extinguished Warrants representing the right to purchase
762,712 shares of CBH Common Stock;
(d) Restructure of Grant. The Predecessor Company will
restructure the grant of Predecessor Company Common Stock to Melvin Todd;
(e) Purchase of Renewals. Clark/Bardes will purchase renewal
revenue due to Mr. Wamberg and The Wamberg Organization, Inc.;
(f) Incorporate a Texas Entity. The Predecessor Company will
incorporate a Texas entity for the purpose of marketing certain insurance
products within the State of Texas; and
(g) Dividend Distribution. The Predecessor Company will
declare a dividend payable to the Stockholders.
Section 4.2 Further Assurances. Each Party shall execute and deliver
such additional instruments and other documents and shall take such further
actions as may be necessary or appropriate to effectuate, carry out and comply
with all of the terms of this Agreement and the transactions contemplated
hereby.
<PAGE> 10
ARTICLE 5.
CONDITIONS TO CLOSING
The obligations of each of the Parties to effect the transactions
constituting the Reorganization shall be subject to the fulfillment at or prior
to the Restructuring Effective Time of the following conditions, any or all of
which may be waived in writing in whole or in part by the Parties:
Section 5.1 Representations and Warranties. The representations and
warranties of each Party contained in this Agreement shall be true and correct
in all material respects at and as of the Restructuring Effective Time with the
same force and effect as though made at and as of that time except those
representations and warranties which address matters only as of a particular
date shall remain true and correct as of such date.
Section 5.2 Performance of Covenants. Each Party shall have performed
or complied with, in all material respects, all of its obligations required by
this Agreement to be performed or complied with at or prior to the Restructuring
Effective Time.
Section 5.3 Stockholder Approval. The Restructuring Merger shall have
received the requisite approval from the stockholders of each Party.
Section 5.4 Approvals. The Texas Secretary of State shall have accepted
for record the filing of the Restructuring Certificate of Merger. The Delaware
Secretary of State shall have accepted for record the filing of the Redomicile
Certificate of Merger.
Section 5.5 Reorganization Opinion. The Redomicile Surviving
Corporation shall have received an opinion of Akin, Gump, Strauss, Hauer & Feld,
L.L.P. ("AGSH&F") addressed to Redomicile Surviving Corporation dated as of the
Closing Date (as herein defined), in form reasonably satisfactory to Redomicile
Surviving Corporation, that, based upon certificates and letters acceptable to
AGSH&F dated as of the Closing Date, the Redomicile Merger will qualify as a
"reorganization" within the meaning of Section 368 of the Code, with customary
exceptions, assumptions and qualifications.
Section 5.6 Deliveries. Each Party shall have delivered each of the
following documents and instruments:
(a) Certificate of Good Standing. A Certificate of Good
Standing dated within ten business days of the Closing Date issued by the
appropriate Secretary of State;
(b) Secretary Certificate. A certificate of the Secretary or
Assistant Secretary of each Party dated the Closing Date certifying (i) such
Party's Articles or Certificate of Incorporation, as the case may be, Bylaws and
good standing, (ii) the adoption and continued effect of the resolutions of the
appropriate board of directors authorizing this Agreement, the applicable merger
and the Reorganization, and (iii) the incumbency and signatures of the officers
<PAGE> 11
authorized to execute this Agreement and all other documents, instruments and
agreements to be executed pursuant to this Agreement;
(c) Executive Officer Certificate. A certificate of an
executive officer of each Party dated the Closing Date certifying the
satisfaction of the conditions set forth in Sections 5.1 and 5.2;
(d) Other Documents. Such other documents, instruments, and
certificates as may reasonably be requested for the transactions contemplated by
this Agreement.
ARTICLE 6.
CLOSING
Section 6.1 The Closing. Subject to the terms and conditions of this
Agreement, the consummation of the mergers (the "CLOSING") shall take place
concurrently with the satisfaction or waiver of the conditions set forth in
Article 5 hereof, on or before September 1, 1998, at the offices of Akin, Gump,
Strauss, Hauer & Feld, L.L.P., 1700 Pacific Avenue, Suite 4100, in Dallas,
Texas, or such other place and time as the Parties may otherwise agree. The date
on which such Closing occurs is herein referred to as the "CLOSING DATE."
Section 6.2 Procedure at the Closing. At the Closing, the Parties agree
that the following shall occur:
(a) Satisfaction of Conditions. Each Party shall have
satisfied, or have received a written waiver with respect to, each of the
conditions set forth in Article 5 and shall have delivered the documents,
certificates, opinions, consents, and letters required by Article 5.
(b) Issuance of Shares. CBH shall have issued the shares of
CBH Common Stock issuable pursuant to Section 1.4, registered in the names of
the Stockholders and shall deliver certificates representing such shares to the
Exchange Agent.
(c) Grant of Options. CBH shall reissue CBH Stock Options
pursuant to Section 1.4, registered in the names of the appropriate stock option
holders of Predecessor Company and shall deliver such CBH Stock Options to the
appropriate holders of Predecessor Company Stock Options.
ARTICLE 7.
TERMINATION, AMENDMENT AND WAIVER
Section 7.1 Termination. This Agreement may be terminated at any time
prior to the Restructuring Effective Time by mutual written consent of all of
the Parties at any time prior to the Closing.
Section 7.2 Effect of Termination. In the event of termination of this
Agreement pursuant to Section 7.1, this Agreement shall forthwith become void
and of no further force and effect, and the Parties shall be released from any
and all obligations hereunder; provided,
<PAGE> 12
however, that nothing herein shall relieve any Party from liability for the
willful breach of any of its representations, warranties, covenants, or
agreements set forth in this Agreement.
ARTICLE 8.
GENERAL PROVISIONS
Section 8.1 Amendment. No amendment of this Agreement shall be
effective unless in a writing signed by the Parties.
Section 8.2 Counterparts. This Agreement may be executed in any number
of counterparts, each of which shall be deemed to be an original agreement, but
all of which shall constitute one and the same agreement. Any Party may execute
and deliver this Agreement by an executed signature page transmitted by a
facsimile machine.
Section 8.3 Entire Agreement. This Agreement constitutes the entire
agreement and understanding between the Parties and supersedes all prior
agreements and understandings, both written and oral, with respect to the
subject matter of this Agreement.
Section 8.4 Governing Law. EXCEPT FOR ARTICLE 1 WHICH SHALL BE GOVERNED
BY LAWS OF THE STATE OF TEXAS, THIS AGREEMENT SHALL BE GOVERNED BY THE LAWS OF
THE STATE OF DELAWARE, REGARDLESS OF THE LAWS THAT MIGHT OTHERWISE GOVERN UNDER
THE CONFLICTS OF LAWS PRINCIPLES OF SUCH STATE.
Section 8.5 No Assignment. No Party may assign its benefits or delegate
its duties under this Agreement without the prior consent of the other Parties.
Any attempted assignment or delegation without such prior consent shall be void.
Section 8.6 No Third Party Beneficiaries. This Agreement is solely for
the benefit of the Parties and no other person shall have any right, interest,
or claim under this Agreement.
Section 8.7 Notices. All claims, consents, designations, notices,
waivers, and other communications in connection with this Agreement shall be in
writing. Such claims, consents, designations, notices, waivers, and other
communications shall be considered received on the day of actual transmittal
when transmitted by facsimile with written confirmation of such transmittal, on
the next business day following actual transmittal when transmitted by a
nationally recognized overnight courier, or on the third business day following
actual transmittal when transmitted by certified mail, postage prepaid, return
receipt requested; in each case when transmitted to a Party at its address set
forth below (or to such other address to which such Party has notified the other
Parties in accordance with this Section to send such claims, consents,
designations, notices, waivers, and other communications):
All Parties: 2121 San Jacinto, Suite 2200
Dallas, Texas 75201
Attn: Melvin Todd
<PAGE> 13
Section 8.8 Representation by Legal Counsel. Each Party is a
sophisticated person that was advised by experienced legal counsel and other
advisors in the negotiation and preparation of this Agreement.
Section 8.9 Severability. Any provision of this Agreement that is
prohibited or unenforceable in any jurisdiction shall not invalidate the
remaining provisions of this Agreement or affect the validity or enforceability
of such provision in any other jurisdiction. In addition, any such prohibited or
unenforceable provision shall be given effect to the extent possible in the
jurisdiction where such provision is prohibited or unenforceable.
Section 8.10 Specific Performance. Each Party acknowledges that the
benefits derived from the transactions contemplated by this Agreement are unique
and irreplaceable. Accordingly, if any Party improperly abandons or terminates
this Agreement, the non-breaching Parties would not have an adequate remedy at
law. Each Party therefore shall be entitled to a court order requiring such
breaching Party to perform this Agreement.
Section 8.11 Successors. This Agreement shall be binding upon and shall
inure to the benefit of each Party and its heirs, legal representatives,
permitted assigns, and successors, provided that this Section shall not permit
the assignment or other transfer of this Agreement, whether by operation of law
or otherwise, if such assignment of other transfer is not otherwise permitted
under this Agreement.
Section 8.12 Time of the Essence. Time is of the essence in the
performance of this Agreement and all dates and periods specified in this
Agreement.
Section 8.13 Waiver. No provision of this Agreement shall be considered
waived unless such waiver is in writing and signed by the Party that benefits
from the enforcement of such provision. No waiver of any provision in this
Agreement, however, shall be deemed a waiver of a subsequent breach of such
provision or a waiver of a similar provision. In addition, a waiver of any
breach or a failure to enforce any term or condition of this Agreement shall not
in any way affect, limit, or waive a Party's rights under this Agreement at any
time to enforce strict compliance thereafter with every term and condition of
this Agreement.
<PAGE> 14
IN WITNESS WHEREOF, the Parties have caused this Agreement to be
executed and delivered by a duly authorized officer as of the Signing Date.
CBH: CLARK/BARDES HOLDINGS, INC., a Delaware
corporation
By:
---------------------------------------------
Melvin G. Todd, Chief Executive Officer
CLARK/BARDES: CLARK/BARDES, INC., a Delaware corporation
By:
---------------------------------------------
Melvin G. Todd, Chief Executive Officer
PREDECESSOR COMPANY: CLARK/BARDES, INC., a Texas corporation
By:
---------------------------------------------
Melvin G. Todd, Chief Executive Officer
MERGERCO: C/B MERGER CO., INC., a Texas corporation
By:
---------------------------------------------
Melvin G. Todd, Chief Executive Officer
<PAGE> 1
EXHIBIT 3.4
CERTIFICATE OF DESIGNATION
of
SERIES A JUNIOR PARTICIPATING PREFERRED STOCK
of
CLARK/BARDES HOLDINGS, INC.
Pursuant to the provisions of Sections 151 and 103 of the Delaware
General Corporation Law (the "DGCL"), CLARK/BARDES HOLDINGS, INC., a Delaware
corporation (the "Company") hereby certifies as follows:
1. The following resolution was duly adopted by the Board of Directors
of the Company, pursuant to the authority conferred upon the Board of Directors
by Article V of the Company's Certificate of Incorporation and the provisions of
Section 151 of the DGCL, at a duly called meeting of the Board of Directors held
on July 10, 1998:
RESOLVED, that the Board of Directors hereby designate 20,000 shares of
the Company's Preferred Stock, $0.01 par value, as Series A Junior Participating
Preferred Stock with the designations, powers, preferences, and relative,
participating, options or other rights, and the qualifications, limitations or
restrictions thereof as follows:
Section 1. Designation and Amount. The shares of such series shall be
designated as "Junior Participating Preferred Stock, Series A" (the "Series A
Preferred Stock") and the number of shares constituting the Series A Preferred
Stock shall be 20,000. Such number of shares may be increased or decreased by
resolution of the Board of Directors; provided, that no decrease shall reduce
the number of shares of Series A Preferred Stock to a number less than the
number of shares then outstanding plus the number of shares reserved for
issuance upon the exercise of outstanding options, rights or warrants or upon
the conversion of any outstanding securities issued by the Company convertible
into Series A Preferred Stock.
Section 2. Dividends and Distributions.
(A) Subject to the rights of the holders of any shares of any series of
Preferred Stock (or any similar stock) ranking prior and superior to the Series
A Preferred Stock with respect to dividends, the holders of shares of Series A
Preferred Stock, in preference to the holders of Common Stock, par value $0.01
per share (the "Common Stock"), of the Company, and of any other junior stock,
shall be entitled to receive, when, as and if declared by the Board of Directors
out of funds legally available for the purpose, quarterly dividends payable in
cash on the first day of January, April, July and October in each year (each
such date being referred to herein as a "Quarterly Dividend Payment Date"),
commencing on the first Quarterly Dividend Payment Date after the first issuance
of a share or fraction of a share of Series A Preferred Stock, in an amount per
share (rounded to the nearest cent) equal to the greater of (a) $10 or (b)
subject to the provision for adjustment hereinafter set forth, 1000 times the
aggregate per share amount of all cash dividends, and 1000 times the aggregate
per share amount (payable in kind) of all non-cash dividends or other
distributions, other than a dividend payable in shares of Common Stock or a
subdivision of the outstanding shares of Common Stock (by reclassification or
otherwise), declared on the Common Stock since the immediately preceding
Quarterly Dividend Payment Date or, with respect to the first Quarterly Dividend
Payment Date, since the first issuance of any
1
<PAGE> 2
share or fraction of a share of Series A Preferred Stock. In the event the
Company shall at any time declare or pay any dividend on the Common Stock
payable in shares of Common Stock, or effect a subdivision or combination or
consolidation of the outstanding shares of Common Stock (by reclassification or
otherwise than by payment of a dividend in shares of Common Stock) into a
greater or lesser number of shares of Common Stock, then in each such case the
amount to which holders of shares of Series A Preferred Stock were entitled
immediately prior to such event under clause (b) of the preceding sentence shall
be adjusted by multiplying such amount by a fraction, the numerator of which is
the number of shares of Common Stock outstanding immediately after such event
and the denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
(B) The Company shall declare a dividend or distribution on the Series
A Preferred Stock as provided in paragraph (A) of this Section immediately after
it declares a dividend or distribution on the Common Stock (other than a
dividend payable in shares of Common Stock); provided that, in the event no
dividend or distribution shall have been declared on the Common Stock during the
period between any Quarterly Dividend Payment Date and the next subsequent
Quarterly Dividend Payment Date, a dividend of $10 per share on the Series A
Preferred Stock shall nevertheless be payable on such subsequent Quarterly
Dividend Payment Date.
(C) Dividends shall begin to accrue and be cumulative on outstanding
shares of Series A Preferred Stock from the Quarterly Dividend Payment Date next
preceding the date of issue of such shares, unless the date of issue of such
shares is prior to the record date for the first Quarterly Dividend Payment
Date, in which case dividends on such shares shall begin to accrue from the date
of issue of such shares, or unless the date of issue is a Quarterly Dividend
Payment Date or is a date after the record date for the determination of holders
of shares of Series A Preferred Stock entitled to receive a quarterly dividend
and before such Quarterly Dividend Payment Date, in either of which events such
dividends shall begin to accrue and be cumulative from such Quarterly Dividend
Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends
paid on the shares of Series A Preferred Stock in an amount less than the total
amount of such dividends at the time accrued and payable on such shares shall be
allocated pro rata on a share-by-share basis among all such shares at the time
outstanding. The Board of Directors may fix a record date for the determination
of holders of shares of Series A Preferred Stock entitled to receive payment of
a dividend or distribution declared thereon, which record date shall be not more
than 50 days prior to the date fixed for the payment thereof.
Section 3. Voting Rights. The holders of shares of Series A Preferred
Stock shall have the following voting rights:
(A) Subject to the provision for adjustment hereinafter set forth, each
share of Series A Preferred Stock shall entitle the holder thereof to 1000 votes
on all matters submitted to a vote of the shareholders of the Company. In the
event the Company shall at any time declare or pay any dividend on the Common
Stock payable in shares of Common Stock, or effect a subdivision or combination
or consolidation of the outstanding shares of Common Stock (by reclassification
or otherwise than by payment of a dividend in shares of Common Stock) into a
greater or lesser number of shares of Common Stock, then in each such case the
number of votes per share to which holders of shares of Series A Preferred Stock
were entitled immediately prior to such event shall be adjusted by multiplying
such number by a fraction, the numerator of which is the
2
<PAGE> 3
number of shares of Common Stock outstanding immediately after such event and
the denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
(B) Except as otherwise provided herein, in any other Certificate of
Designations creating a series of Preferred Stock or any similar stock, or by
law, the holders of shares of Series A Preferred Stock and the holders of shares
of Common Stock and any other capital stock of the Company having general voting
rights shall vote together as one class on all matters submitted to a vote of
shareholders of the Company.
(C) Except as set forth herein, or as otherwise provided by law,
holders of Series A Preferred Stock shall have no special voting rights and
their consent shall not be required (except to the extent they are entitled to
vote with holders of Common Stock as set forth herein) for taking any corporate
action.
Section 4. Certain Restrictions.
(A) Whenever quarterly dividends or other dividends or distributions
payable on the Series A Preferred Stock as provided in Section 2 are in arrears,
thereafter and until all accrued and unpaid dividends and distributions, whether
or not declared, on shares of Series A Preferred Stock outstanding shall have
been paid in full, the Company shall not:
declare or pay dividends, or make any other distributions,
on any shares of stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series A Preferred
Stock;
declare or pay dividends, or make any other distributions,
on any shares of stock ranking on a parity (either as to dividends or
upon liquidation, dissolution or winding up) with the Series A
Preferred Stock, except dividends paid ratably on the Series A
Preferred Stock and all such parity stock on which dividends are
payable or in arrears in proportion to the total amounts to which the
holders of all such shares are then entitled;
redeem or purchase or otherwise acquire for consideration
shares of any stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series A Preferred
Stock, provided that the Company may at any time redeem, purchase or
otherwise acquire shares of any such junior stock in exchange for
shares of any stock of the Company ranking junior (either as to
dividends or upon dissolution, liquidation or winding up) to the Series
A Preferred Stock; or
redeem or purchase or otherwise acquire for consideration
any shares of Series A Preferred Stock, or any shares of stock ranking
on a parity with the Series A Preferred Stock, except in accordance
with a purchase offer made in writing or by publication (as determined
by the Board of Directors) to all holders of such shares upon such
terms as the Board of Directors, after consideration of the respective
annual dividend rates and other relative rights and preferences of the
respective series and classes, shall determine in good faith will
result in fair and equitable treatment among the respective series or
classes.
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<PAGE> 4
(B) The Company shall not permit any subsidiary of the Company to
purchase or otherwise acquire for consideration any shares of stock of the
Company unless the Company could, under paragraph (A) of this Section 4,
purchase or otherwise acquire such shares at such time and in such manner.
Section 5. Reacquired Shares. Any shares of Series A Preferred Stock
purchased or otherwise acquired by the Company in any manner whatsoever shall be
retired and cancelled promptly after the acquisition thereof. All such shares
shall upon their cancellation become authorized but unissued shares of Preferred
Stock and may be reissued as part of a new series of Preferred Stock subject to
the conditions and restrictions on issuance set forth herein, in the Certificate
of Incorporation, or in any other Certificate of Designations creating a series
of Preferred Stock or any similar stock or as otherwise required by law.
Section 6. Liquidation, Dissolution or Winding Up. Upon any
liquidation, dissolution or winding up of the Company, no distribution shall be
made (1) to the holders of shares of stock ranking junior (either as to
dividends or upon liquidation, dissolution or winding up) to the Series A
Preferred Stock unless, prior thereto, the holders of shares of Series A
Preferred Stock shall have received $1000 per share, plus an amount equal to
accrued and unpaid dividends and distributions thereon, whether or not declared,
to the date of such payment, provided that the holders of shares of Series A
Preferred Stock shall be entitled to receive an aggregate amount per share,
subject to the provision for adjustment hereinafter set forth, equal to 1000
times the aggregate amount to be distributed per share to holders of shares of
Common Stock, or (2) to the holders of shares of stock ranking on a parity
(either as to dividends or upon liquidation, dissolution or winding up) with the
Series A Preferred Stock, except distributions made ratably on the Series A
Preferred Stock and all such parity stock in proportion to the total amounts to
which the holders of all such shares are entitled upon such liquidation,
dissolution or winding up. In the event the Company shall at any time declare or
pay any dividend on the Common Stock payable in shares of Common Stock, or
effect a subdivision or combination or consolidation of the outstanding shares
of Common Stock (by reclassification or otherwise than by payment of a dividend
in shares of Common Stock) into a greater or lesser number of shares of Common
Stock, then in each such case the aggregate amount to which holders of shares of
Series A Preferred Stock were entitled immediately prior to such event under the
proviso in clause (1) of the preceding sentence shall be adjusted by multiplying
such amount by a fraction the numerator of which is the number of shares of
Common Stock outstanding immediately after such event and the denominator of
which is the number of shares of Common Stock that were outstanding immediately
prior to such event.
Section 7. Consolidation, Merger, etc. In case the Company shall enter
into any consolidation, merger, combination or other transaction in which the
shares of Common Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, then in any such case each share of
Series A Preferred Stock shall at the same time be similarly exchanged or
changed into an amount per share, subject to the provision for adjustment
hereinafter set forth, equal to 1000 times the aggregate amount of stock,
securities, cash and/or any other property (payable in kind), as the case may
be, into which or for which each share of Common Stock is changed or exchanged.
In the event the Company shall at any time declare or pay any dividend on the
Common Stock payable in shares of Common Stock, or effect a subdivision or
combination or consolidation of the outstanding shares of Common Stock (by
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<PAGE> 5
reclassification or otherwise than by payment of a dividend in shares of Common
Stock) into a greater or lesser number of shares of Common Stock, then in each
such case the amount set forth in the preceding sentence with respect to the
exchange or change of shares of Series A Preferred Stock shall be adjusted by
multiplying such amount by a fraction, the numerator of which is the number of
shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
Section 8. No Redemption. The shares of Series A Preferred Stock shall
not be redeemable.
Section 9. Rank. The Series A Preferred Stock shall rank, with respect
to the payment of dividends and the distribution of assets, junior to all series
of any other class of the Company's Preferred Stock.
Section 10. Amendment. The Certificate of Incorporation of the Company
shall not be amended in any manner which would materially alter or change the
powers, preferences or special rights of the Series A Preferred Stock so as to
affect them adversely without the affirmative vote of the holders of at least
two-thirds of the outstanding shares of Series A Preferred Stock, voting
together as a single class.
THE UNDERSIGNED, hereby declares and certifies that this Certificate of
Designation is his act and deed and the facts herein are true, and accordingly
has hereunto set his hand this 10th day of July, 1998.
CLARK/BARDES HOLDINGS, INC.
By: /s/ MELVIN G. TODD
------------------------------------
Melvin G. Todd
President and Chief Executive Officer
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EXHIBIT 4.2
================================================================================
RIGHTS AGREEMENT
by and between
CLARK/BARDES HOLDINGS, INC.
(the "Company")
and
THE BANK OF NEW YORK
(the "Rights Agent")
Dated as of July 10, 1998
================================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
PRELIMINARY STATEMENT.............................................................................................1
STATEMENT OF AGREEMENT............................................................................................1
Section 1. Certain Definitions.............................................................................1
Section 2. Appointment of Rights Agent.....................................................................4
Section 3. Issue of Rights Certificates....................................................................4
Section 4. Form of Rights Certificates.....................................................................5
Section 5. Countersignature and Registration...............................................................6
Section 6. Transfer, Split Up, Combination and Exchange of Rights Certificates; Mutilated,
Destroyed, Lost or Stolen Rights Certificates......................................................7
Section 7. Exercise of Rights; Purchase Price; Expiration Date of Rights...................................7
Section 8. Cancellation and Destruction of Rights Certificates.............................................9
Section 9. Availability of Preferred Shares................................................................9
Section 10. Preferred Shares Record Date...................................................................10
Section 11. Adjustment of Purchase Price, Number of Shares or Number of Rights.............................10
Section 12. Certificate of Adjusted Purchase Price or Number of Shares.....................................17
Section 13. Consolidation, Merger or Sale or Transfer of Assets or Earning Power...........................17
Section 14. Fractional Rights and Fractional Shares........................................................18
Section 15. Rights of Action...............................................................................20
Section 16. Agreement of Right Holders.....................................................................20
Section 17. Rights Certificate Holder Not Deemed a Shareholder.............................................21
Section 18. Concerning the Rights Agent....................................................................21
Section 19. Merger or Consolidation or Change of Name of Rights Agent......................................21
</TABLE>
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<PAGE> 3
<TABLE>
<S> <C>
Section 20. Duties of Rights Agent.........................................................................22
Section 21. Change of Rights Agent.........................................................................24
Section 22. Issuance of New Rights Certificates............................................................24
Section 23. Redemption.....................................................................................25
Section 24. Exchange.......................................................................................25
Section 25. Notice of Certain Events.......................................................................27
Section 26. Notices........................................................................................27
Section 27. Supplements and Amendments.....................................................................28
Section 28. Successors.....................................................................................28
Section 29. Determinations and Actions by the Board of Directors, etc......................................28
Section 30. Benefits of this Agreement.....................................................................29
Section 31. Severability...................................................................................29
Section 32. Governing Law..................................................................................29
Section 33. Counterparts...................................................................................29
Section 34. Descriptive Headings...........................................................................29
Exhibit A Form of Certificate of Designation of Series A Junior
Participating Preferred Stock of Clark/Bardes Holdings, Inc.
Exhibit B Form of Rights Certificate
Exhibit C Summary of Rights to Purchase Preferred Shares
</TABLE>
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<PAGE> 4
RIGHTS AGREEMENT
THIS RIGHTS AGREEMENT (this "Agreement"), dated as of July 10, 1998, is
made and entered into by and between Clark/Bardes Holdings, Inc., a Delaware
corporation (the "Company"), and The Bank of New York (the "Rights Agent").
PRELIMINARY STATEMENT
On July 10, 1998 the Board of Directors of the Company has authorized
and declared a dividend of one preferred share purchase right (a "Right") for
each Common Share (as hereinafter defined) of the Company outstanding at the
close of business on July 20, 1998 (the "Record Date"), each Right representing
the right to purchase one one-thousandth of a Preferred Share (as hereinafter
defined), upon the terms and subject to the conditions herein set forth, and has
further authorized and directed the issuance of one Right with respect to each
Common Share that shall become outstanding between the Record Date and the
earliest of the Distribution Date, the Redemption Date and the Final Expiration
Date (as such terms are hereinafter defined).
STATEMENT OF AGREEMENT
NOW, THEREFORE, in consideration of the premises and the mutual
agreements, covenants, representations and warranties set forth in this
Agreement and for other good, valid and binding consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties, intending to be
legally bound, hereby agree as follows:
Section 1. Certain Definitions. For purposes of this Agreement, the
following terms have the meanings indicated:
(a) "Acquiring Person" shall mean any Person (as such term is
hereinafter defined) who or which, together with all Affiliates and Associates
(as such terms are hereinafter defined) of such Person, shall be the Beneficial
Owner (as such term is hereinafter defined) of 15% or more of the Common Shares
of the Company then outstanding, but shall not include the Company, any
Subsidiary (as such term is hereinafter defined) of the Company, any employee
benefit plan of the Company or any Subsidiary of the Company, or any entity
holding Common Shares for or pursuant to the terms of any such plan.
Notwithstanding the foregoing, no Person shall become an "Acquiring Person" as
the result of an acquisition of Common Shares by the Company which, by reducing
the number of shares outstanding, increases the proportionate number of shares
beneficially owned by such Person to 15% or more of the Common Shares of the
Company then outstanding; provided, however, that if a Person shall become the
Beneficial Owner of 15% or more of the Common Shares of the Company then
outstanding by reason of share purchases by the Company and shall, after such
share purchases by the Company, become the Beneficial Owner of any additional
Common Shares of the Company, then such Person shall be deemed to be an
"Acquiring Person". Notwithstanding the foregoing, if the Board of Directors of
the Company determines in good faith that a Person who would otherwise be an
"Acquiring Person", as defined pursuant to the foregoing provisions of this
paragraph (a), has become such
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<PAGE> 5
inadvertently, and such Person divests as promptly as practicable a sufficient
number of Common Shares so that such Person would no longer be an "Acquiring
Person," as defined pursuant to the foregoing provisions of this paragraph (a),
then such Person shall not be deemed to be an "Acquiring Person" for any
purposes of this Agreement.
(b) "Affiliate" and "Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as in
effect on the date of this Agreement.
(c) A Person shall be deemed the "Beneficial Owner" of and shall be
deemed to "beneficially own" any securities:
(i) which such Person or any of such Person's Affiliates or
Associates beneficially owns, directly or indirectly;
(ii) which such Person or any of such Person's Affiliates or
Associates has (A) the right to acquire (whether such right is exercisable
immediately or only after the passage of time) pursuant to any agreement,
arrangement or understanding (other than customary agreements with and
between underwriters and selling group members with respect to a bona fide
public offering of securities), or upon the exercise of conversion rights,
exchange rights, rights (other than these Rights), warrants or options, or
otherwise; provided, however, that a Person shall not be deemed the
Beneficial Owner of, or to beneficially own, securities tendered pursuant
to a tender or exchange offer made by or on behalf of such Person or any of
such Person's Affiliates or Associates until such tendered securities are
accepted for purchase or exchange; or (B) the right to vote pursuant to any
agreement, arrangement or understanding; provided, however, that a Person
shall not be deemed the Beneficial Owner of, or to beneficially own, any
security if the agreement, arrangement or understanding to vote such
security (1) arises solely from a revocable proxy or consent given to such
Person in response to a public proxy or consent solicitation made pursuant
to, and in accordance with, the applicable rules and regulations
promulgated under the Exchange Act and (2) is not also then reportable on
Schedule 13D under the Exchange Act (or any comparable or successor
report); or
(iii) which are beneficially owned, directly or indirectly, by any
other Person with which such Person or any of such Person's Affiliates or
Associates has any agreement, arrangement or understanding (other than
customary agreements with and between underwriters and selling group
members with respect to a bona fide public offering of securities) for the
purpose of acquiring, holding, voting (except to the extent contemplated by
the proviso to Section 1(c)(ii)(B)) or disposing of any securities of the
Company.
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<PAGE> 6
Notwithstanding anything in this definition of Beneficial Ownership to
the contrary, the phrase "then outstanding," when used with reference to a
Person's Beneficial Ownership of securities of the Company, shall mean the
number of such securities then issued and outstanding together with the number
of such securities not then actually issued and outstanding which such Person
would be deemed to own beneficially hereunder.
(d) "Business Day" shall mean any day other than a Saturday, a Sunday,
or a day on which banking institutions in the State of Texas are authorized or
obligated by law or executive order to close.
(e) "Close of Business" on any given date shall mean 5:00 P.M., Dallas,
Texas time, on such date; provided, however, that if such date is not a Business
Day it shall mean 5:00 P.M., Dallas, Texas time, on the next succeeding Business
Day.
(f) "Common Shares" when used with reference to the Company shall mean
the shares of common stock, par value $0.01 per share, of the Company. "Common
Shares" when used with reference to any Person other than the Company shall mean
the capital stock (or equity interest) with the greatest voting power of such
other Person or, if such other Person is a Subsidiary of another Person, the
Person or Persons which ultimately control such first-mentioned Person.
(g) "Distribution Date" shall have the meaning set forth in Section 3
hereof.
(h) "Final Expiration Date" shall have the meaning set forth in Section
7 hereof.
(i) "Person" shall mean any individual, firm, corporation or other
entity, and shall include any successor (by merger or otherwise) of such entity.
(j) "Preferred Shares" shall mean shares of Junior Participating
Preferred Stock, Series A, par value $0.01 per share, of the Company having the
rights and preferences set forth in the Form of Certificate of Amendment
attached to this Agreement as Exhibit A.
(k) "Redemption Date" shall have the meaning set forth in Section 7
hereof.
(l) "Section 11(a)(ii) Event" shall mean any event described in Section
11(a)(ii) hereof.
(m) "Section 13 Event" shall mean any event described in clauses (A),
(B) or (C) of Section 13 hereof.
(n) "Shares Acquisition Date" shall mean the first date of public
announcement by the Company or an Acquiring Person that an Acquiring Person has
become such.
(o) "Subsidiary" of any Person shall mean any corporation or other
entity of which a majority of the voting power of the voting equity securities
or equity interest is owned, directly or indirectly, by such Person.
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<PAGE> 7
(p) "Trigger Event" shall mean any Section 11(a)(ii) Event and/or
Section 13 Event.
Section 2. Appointment of Rights Agent. The Company hereby appoints the
Rights Agent to act as agent for the Company and the holders of the Rights (who,
in accordance with Section 3 hereof, shall prior to the Distribution Date also
be the holders of the Common Shares) in accordance with the terms and conditions
hereof, and the Rights Agent hereby accepts such appointment. The Company may
from time to time appoint such co-rights agents as it may deem necessary or
desirable.
Section 3. Issue of Rights Certificates.
(a) Until the earlier of (i) the close of business on the tenth day
after the Shares Acquisition (or, if the tenth day after the Share Acquisition
Date occurs before the Record Date, the close of business on the Record Date),
or (ii) the close of business on the tenth business day (or such later date as
may be determined by action of the Board of Directors prior to such time as any
Person becomes an Acquiring Person) after the date of the commencement by any
Person (other than the Company, any Subsidiary of the Company, any employee
benefit plan of the Company or of any Subsidiary of the Company or any entity
holding Common Shares for or pursuant to the terms of any such plan) of, or of
the first public announcement of the intention of any Person (other than the
Company, any Subsidiary of the Company, any employee benefit plan of the Company
or of any Subsidiary of the Company or any entity holding Common Shares for or
pursuant to the terms of any such plan) to commence, a tender or exchange offer
within the meaning of Rule 14d-2(a) of the General Rules and Regulations under
the Securities Act, the consummation of which would result in any Person
becoming the Beneficial Owner of Common Shares aggregating 15% or more of the
then outstanding Common Shares (including any such date which is after the date
of this Agreement and prior to the issuance of the Rights; the earlier of such
dates being herein referred to as the "Distribution Date"), (x) the Rights will
be evidenced (subject to the provisions of Section 3(b) hereof) by the
certificates for Common Shares registered in the names of the holders thereof
(which certificates shall also be deemed to be Rights Certificates) and not by
separate Rights Certificates, and (y) the right to receive Rights Certificates
will be transferable only in connection with the transfer of Common Shares. As
soon as practicable after the Distribution Date, the Company will prepare and
execute, the Rights Agent will countersign, and the Company will send or cause
to be sent (and the Rights Agent will, if requested, send) by first-class,
insured, postage-prepaid mail, to each record holder of Common Shares as of the
close of business on the Distribution Date, at the address of such holder shown
on the records of the Company, a Rights Certificate, in substantially the form
of Exhibit B hereto (a "Rights Certificate"), evidencing one Right for each
Common Share so held. As of the Distribution Date, the Rights will be evidenced
solely by such Rights Certificates.
(b) On the Record Date, or as soon as practicable thereafter, the
Company will send a copy of a Summary of Rights to Purchase Preferred Shares, in
substantially the form of Exhibit C hereto (the "Summary of Rights"), by
first-class, postage-prepaid mail, to each record holder of Common Shares as of
the close of business on the Record Date, at the address of such holder shown on
the records of the Company. With respect to certificates for Common Shares
outstanding as of the Record Date, until the Distribution Date, the Rights will
be evidenced by
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<PAGE> 8
such certificates registered in the names of the holders thereof together with a
copy of the Summary of Rights attached thereto. Until the Distribution Date (or
the earliest of the Redemption Date or the Final Expiration Date), the surrender
for transfer of any certificate for Common Shares outstanding on the Record
Date, with or without a copy of the Summary of Rights attached thereto, shall
also constitute the transfer of the Rights associated with the Common Shares
represented thereby.
(c) Certificates for Common Shares which become outstanding (including,
without limitation, reacquired Common Shares referred to in the last sentence of
this paragraph (c)) after the Record Date but prior to the earliest of the
Distribution Date, the Redemption Date or the Final Expiration Date shall have
impressed on, printed on, written on or otherwise affixed to them the following
legend:
This certificate also evidences and entitles the
holder hereof to certain rights as set forth in a Rights
Agreement between Clark/Bardes Holdings, Inc. and The Bank of
New York, dated as of July 10, 1998 (the "Rights Agreement"),
the terms of which are hereby incorporated herein by reference
and a copy of which is on file at the principal executive
offices of Clark/Bardes Holdings, Inc. Under certain
circumstances, as set forth in the Rights Agreement, such
Rights will be evidenced by separate certificates, and will no
longer be evidenced by this certificate. Clark/Bardes
Holdings, Inc. will mail to the holder of this certificate a
copy of the Rights Agreement without charge after receipt of a
written request therefor. Under certain circumstances, as set
forth in the Rights Agreement, Rights issued to any Person who
becomes an Acquiring Person or any Affiliate or Associate
thereof (as defined in the Rights Agreement) whether currently
held by or on behalf of such Person or by any subsequent
holder, may become null and void.
With respect to such certificates containing the foregoing legend, until the
earlier of (i) the Distribution Date, or (ii) the Final Expiration Date, the
Rights associated with the Common Shares represented by such certificates shall
be evidenced by such certificates alone, and the surrender for transfer of any
such certificate shall also constitute the transfer of the Rights associated
with the Common Shares represented thereby. In the event that the Company
purchases or acquires any Common Shares after the Record Date but prior to the
Distribution Date, any Rights associated with such Common Shares shall be deemed
canceled and retired so that the Company shall not be entitled to exercise any
Rights associated with the Common Shares which are no longer outstanding.
Section 4. Form of Rights Certificates.
(a) The Rights Certificates (and the forms of election to purchase
Preferred Shares and of assignment to be printed on the reverse thereof) shall
be substantially the same as Exhibit
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<PAGE> 9
B hereto and may have such marks of identification or designation and such
legends, summaries or endorsements printed thereon as the Company may deem
appropriate and as are not inconsistent with the provisions of this Agreement,
or as may be required to comply with any applicable law or with any rule or
regulation made pursuant thereto or with any rule or regulation of any stock
exchange on which the Rights may from time to time be listed, or to conform to
usage. Subject to the provisions of Section 11 and Section 22 hereof, the Rights
Certificates shall entitle the holders thereof to purchase such number of one
one-thousandth of a Preferred Share as shall be set forth therein at the price
per one one-thousandth of a Preferred Share set forth therein (the "Purchase
Price"), but the number of such one one-thousandth of a Preferred Share and the
Purchase Price shall be subject to adjustment as provided herein.
(b) Any Rights Certificate issued pursuant to Section 3(a) or Section
22 hereof that represents Rights beneficially owned by: (i) an Acquiring Person
or any Associate or Affiliate of an Acquiring Person, (ii) a transferee of an
Acquiring Person (or of any such Associate or Affiliate) who becomes a
transferee after the Acquiring Person becomes such, or (iii) a transferee of an
Acquiring Person (or of any such Associate or Affiliate) who becomes a
transferee prior to or concurrently with the Acquiring Person becoming such and
receives such Rights pursuant to either (A) a transfer (whether or not for
consideration) from the Acquiring Person to holders of equity interests in such
Acquiring Person or to any person with whom such Acquiring Person has any
continuing agreement, arrangement or understanding regarding the transferred
Rights or (B) a transfer which the Board of Directors of the Company has
determined is part of a plan, arrangement or understanding which has as a
primary purpose or effect avoidance of Section 11(a)(ii) hereof, and any Rights
Certificate issued pursuant to Section 6 or Section 11 hereof upon transfer,
exchange, replacement or adjustment of any other Rights Certificate referred to
in this sentence, shall contain (to the extent feasible) the following legend:
The Rights represented by this Rights Certificate are or were
beneficially owned by a Person who was or became an Acquiring Person or
an Affiliate or Associate of an Acquiring Person (as such terms are
defined in the Rights Agreement). Accordingly, this Rights Certificate
and the Rights represented hereby may become null and void in the
circumstances specified in Section 79(e) of such Agreement.
Section 5. Countersignature and Registration. The Rights Certificates
shall be executed on behalf of the Company by its Chairman of the Board, its
Chief Executive Officer, its President, any of its Vice Presidents, or its
Treasurer, either manually or by facsimile signature, shall have affixed thereto
the Company's seal or a facsimile thereof, and shall be attested by the
Secretary or an Assistant Secretary of the Company, either manually or by
facsimile signature. The Rights Certificates shall be manually countersigned by
the Rights Agent and shall not be valid for any purpose unless countersigned. In
case any officer of the Company who shall have signed any of the Rights
Certificates shall cease to be such officer of the Company before
countersignature by the Rights Agent and issuance and delivery by the Company,
such Rights Certificates, nevertheless, may be countersigned by the Rights Agent
and issued and delivered by the Company with the same force and effect as though
the person who signed such Rights Certificates had not ceased to be such officer
of the Company; and any
6
<PAGE> 10
Rights Certificate may be signed on behalf of the Company by any person who, at
the actual date of the execution of such Rights Certificate, shall be a proper
officer of the Company to sign such Rights Certificate, although at the date of
the execution of this Rights Agreement any such person was not such an officer.
Following the Distribution Date, the Rights Agent will keep or cause to
be kept, at its principal office, books for registration and transfer of the
Rights Certificates issued hereunder. Such books shall show the names and
addresses of the respective holders of the Rights Certificates, the number of
Rights evidenced on its face by each of the Rights Certificates and the date of
each of the Rights Certificates.
Section 6. Transfer, Split Up, Combination and Exchange of Rights
Certificates; Mutilated, Destroyed, Lost or Stolen Rights Certificates. Subject
to the provisions of Section 4(b) and Section 14 hereof, at any time after the
close of business on the Distribution Date, and at or prior to the close of
business on the earlier of the Redemption Date or the Final Expiration Date, any
Rights Certificate or Rights Certificates (other than Rights Certificates
representing Rights that have become void pursuant to Section 11(a)(ii) hereof
or that have been exchanged pursuant to Section 24 hereof) may be transferred,
split up, combined or exchanged for another Rights Certificate or Rights
Certificates, entitling the registered holder to purchase a like number of one
one-thousandth of a Preferred Share as the Rights Certificate or Rights
Certificates surrendered then entitled such holder to purchase. Any registered
holder desiring to transfer, split up, combine or exchange any Rights
Certificate or Rights Certificates shall make such request in writing delivered
to the Rights Agent, and shall surrender the Rights Certificate or Rights
Certificates to be transferred, split up, combined or exchanged at the principal
office of the Rights Agent. Thereupon the Rights Agent shall, subject to Section
4(b) hereof, countersign and deliver to the person entitled thereto a Rights
Certificate or Rights Certificates, as the case may be, as so requested. The
Company may require payment of a sum sufficient to cover any tax or governmental
charge that may be imposed in connection with any transfer, split up,
combination or exchange of Rights Certificates.
Upon receipt by the Company and the Rights Agent of evidence reasonably
satisfactory to them of the loss, theft, destruction or mutilation of a Rights
Certificate, and, in case of loss, theft or destruction, of indemnity or
security reasonably satisfactory to them, and, at the Company's request,
reimbursement to the Company and the Rights Agent of all reasonable expenses
incidental thereto, and upon surrender to the Rights Agent and cancellation of
the Rights Certificate if mutilated, the Company will make and deliver a new
Rights Certificate of like tenor to the Rights Agent for delivery to the
registered holder in lieu of the Rights Certificate so lost, stolen, destroyed
or mutilated.
Section 7. Exercise of Rights; Purchase Price; Expiration Date of Rights.
(a) The registered holder of any Rights Certificate may exercise the
Rights evidenced thereby (except as otherwise provided herein) in whole or in
part at any time after the Distribution Date upon surrender of the Rights
Certificate, with the form of election to purchase on the reverse side thereof
duly executed, to the Rights Agent at the principal office of the Rights
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<PAGE> 11
Agent, together with payment of the Purchase Price for each one one-thousandth
of a Preferred Share as to which the Rights are exercised, at or prior to the
earliest of (i) the close of business on July 10, 2008 (the "Final Expiration
Date"), (ii) the time at which the Rights are redeemed as provided in Section 23
hereof (the "Redemption Date"), or (iii) the time at which such Rights are
exchanged as provided in Section 24 hereof.
(b) The Purchase Price for each one one-thousandth of a Preferred Share
purchasable pursuant to the exercise of a Right shall initially be $_______, and
shall be subject to adjustment from time to time as provided in Section 11 or 13
hereof and shall be payable in lawful money of the United States of America in
accordance with paragraph (c) below.
(c) Upon receipt of a Rights Certificate representing exercisable
Rights, with the form of election to purchase duly executed, accompanied by
payment of the Purchase Price for the shares to be purchased and an amount equal
to any applicable transfer tax required to be paid by the holder of such Rights
Certificate in accordance with Section 9 hereof by certified check, cashier's
check or money order payable to the order of the Company, the Rights Agent shall
thereupon promptly (i) (A) requisition from any transfer agent of the Preferred
Shares certificates for the number of Preferred Shares to be purchased and the
Company hereby irrevocably authorizes its transfer agent to comply with all such
requests, or (B) requisition from the depositary agent depositary receipts
representing such number of one one-thousandth of a Preferred Share as are to be
purchased (in which case certificates for the Preferred Shares represented by
such receipts shall be deposited by the transfer agent with the depositary
agent) and the Company hereby directs the depositary agent to comply with such
request, (ii) when appropriate, requisition from the Company the amount of cash
to be paid in lieu of issuance of fractional shares in accordance with Section
14 hereof, (iii) after receipt of such certificates or depositary receipts,
cause the same to be delivered to or upon the order of the registered holder of
such Rights Certificate, registered in such name or names as may be designated
by such holder, and (iv) when appropriate, after receipt, deliver such cash to
or upon the order of the registered holder of such Rights Certificate.
(d) In case the registered holder of any Rights Certificate shall
exercise less than all the Rights evidenced thereby, a new Rights Certificate
evidencing Rights equivalent to the Rights remaining unexercised shall be issued
by the Rights Agent to the registered holder of such Rights Certificate or to
his duly authorized assigns, subject to the provisions of Section 14 hereof.
(e) Notwithstanding anything in this Agreement to the contrary, neither
the Rights Agent nor the Company shall be obligated to undertake any action with
respect to a registered holder upon the occurrence of any purported exercise as
set forth in this Section 7 unless such registered holder shall have (i)
completed and signed the certificate contained in the form of election to
purchase set forth on the reverse side of the Rights Certificate surrendered for
such exercise, and (ii) provided such additional evidence of the identity of the
Beneficial Owner (or former Beneficial Owner) or Affiliates or Associates
thereof as the Company shall reasonably request.
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Section 8. Cancellation and Destruction of Rights Certificates. All
Rights Certificates surrendered for the purpose of exercise, transfer, split up,
combination or exchange shall, if surrendered to the Company or to any of its
agents, be delivered to the Rights Agent for cancellation or in canceled form,
or, if surrendered to the Rights Agent, shall be canceled by it, and no Rights
Certificates shall be issued in lieu thereof except as expressly permitted by
any of the provisions of this Rights Agreement. The Company shall deliver to the
Rights Agent for cancellation and retirement, and the Rights Agent shall so
cancel and retire, any other Rights Certificate purchased or acquired by the
Company otherwise than upon the exercise thereof. The Rights Agent shall deliver
all canceled Rights Certificates to the Company, or shall, at the written
request of the Company, destroy such canceled Rights Certificates, and in such
case shall deliver a certificate of destruction thereof to the Company.
Section 9. Availability of Preferred Shares.
(a) The Company covenants and agrees that it will cause to be reserved
and kept available out of its authorized and unissued Preferred Shares or any
Preferred Shares held in its treasury, the number of Preferred Shares that will
be sufficient to permit the exercise in full of all outstanding Rights in
accordance with Section 7. The Company covenants and agrees that it will take
all such action as may be necessary to ensure that all Preferred Shares
delivered upon exercise of Rights shall, at the time of delivery of the
certificates for such Preferred Shares (subject to payment of the Purchase
Price), be duly and validly authorized and issued and fully paid and
nonassessable shares.
(b) So long as the shares of Preferred Stock (and, following the
occurrence of a Triggering Event, Common Stock and/or other securities) issuable
and deliverable upon the exercise of the Rights may be listed on any national
securities exchange, the Company shall use its best efforts to cause, from and
after such time as the Rights become exercisable, all shares reserved for such
issuance to be listed on such exchange upon official notice of issuance upon
such exercise.
(c) The Company shall use its best efforts to (i) file, as soon as
practicable following the earliest date after the first occurrence of a Section
11(a)(ii) Event on which the consideration to be delivered by the Company upon
exercise of the Rights has been determined in accordance with Section 11(a)(iii)
hereof, a registration statement under the Securities Act of 1933 (the "Act"),
with respect to the securities purchasable upon exercise of the Rights on an
appropriate form, (ii) cause such registration statement to become effective as
soon as practicable after such filing, and (iii) cause such registration
statement to remain effective (with a prospectus at all times meeting the
requirements of the Act) until the earlier of (A) the date as of which the
Rights are no longer exercisable for such securities, and (B) the date of the
expiration of the Rights. The Company will also take such action as may be
appropriate under, or to ensure compliance with, the securities or "blue sky"
laws of the various states in connection with the exercisability of the Rights.
The Company may temporarily suspend, for a period of time not to exceed (90)
days after the date set forth in clause (i) of the first sentence of this
Section 9(c), the exercisability of
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<PAGE> 13
the Rights in order to prepare and file such registration statement and permit
it to become effective. Upon any such suspension, the Company shall issue a
public announcement stating that the exercisability of the Rights has been
temporarily suspended, as well as a public announcement at such time as the
suspension is no longer in effect. In addition, if the Company shall determine
that a registration statement is required following the Distribution Date, the
Company may temporarily suspend the exercisability of the Rights until such time
as a registration statement has been declared effective. Notwithstanding any
provision of this Agreement to the contrary, the Rights shall not be exercisable
in any jurisdiction if the requisite qualification in such jurisdiction shall
not have been obtained, the exercise thereof shall not be permitted under
applicable law or a registration statement shall not have been declared
effective.
(d) The Company further covenants and agrees that it will pay when due
and payable any and all federal and state transfer taxes and charges which may
be payable in respect of the issuance or delivery of the Rights Certificates or
of any Preferred Shares upon the exercise of Rights. The Company shall not,
however, be required to pay any transfer tax which may be payable in respect of
any transfer or delivery of Rights Certificates to a person other than, or the
issuance or delivery of certificates or depositary receipts for the Preferred
Shares in a name other than that of, the registered holder of the Rights
Certificate evidencing Rights surrendered for exercise or to issue or to deliver
any certificates or depositary receipts for Preferred Shares upon the exercise
of any Rights until any such tax shall have been paid (any such tax being
payable by the holder of such Rights Certificate at the time of surrender) or
until it has been established to the Company's reasonable satisfaction that no
such tax is due.
Section 10. Preferred Shares Record Date. Each person in whose name any
certificate for Preferred Shares is issued upon the exercise of Rights shall for
all purposes be deemed to have become the holder of record of the Preferred
Shares represented thereby on, and such certificate shall be dated, the date
upon which the Rights Certificate evidencing such Rights was duly surrendered
and payment of the Purchase Price (and any applicable transfer taxes) was made;
provided, however, that if the date of such surrender and payment is a date upon
which the Preferred Shares transfer books of the Company are closed, such person
shall be deemed to have become the record holder of such shares on, and such
certificate shall be dated, the next succeeding Business Day on which the
Preferred Shares transfer books of the Company are open. Prior to the exercise
of the Rights evidenced thereby, the holder of a Rights Certificate shall not be
entitled to any rights of a holder of Preferred Shares for which the Rights
shall be exercisable, including, without limitation, the right to vote, to
receive dividends or other distributions or to exercise any preemptive rights,
and shall not be entitled to receive any notice of any proceedings of the
Company, except as provided herein.
Section 11. Adjustment of Purchase Price, Number of Shares or Number of
Rights. The Purchase Price, the number of Preferred Shares covered by each Right
and the number of Rights outstanding are subject to adjustment from time to time
as provided in this Section 11.
(a) (i) In the event the Company shall at any time after the date of
this Agreement (A) declare a dividend on the Preferred Shares payable
in Preferred Shares, (B) subdivide the outstanding Preferred Shares,
(C) combine the outstanding Preferred
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<PAGE> 14
Shares into a smaller number of Preferred Shares, or (D) issue any
shares of its capital stock in a reclassification of the Preferred
Shares (including any such reclassification in connection with a
consolidation or merger in which the Company is the continuing or
surviving corporation), except as otherwise provided in this Section
11(a)(ii), the Purchase Price in effect at the time of the record date
for such dividend or of the effective date of such subdivision,
combination or reclassification, and the number and kind of shares of
capital stock issuable on such date, shall be proportionately adjusted
so that the holder of any Right exercised after such time shall be
entitled to receive the aggregate number and kind of shares of capital
stock which, if such Right had been exercised immediately prior to such
date and at a time when the Preferred Shares transfer books of the
Company were open, he would have owned upon such exercise and been
entitled to receive by virtue of such dividend, subdivision,
combination or reclassification; provided, however, that in no event
shall the consideration to be paid upon the exercise of one Right be
less than the aggregate par value of the shares of capital stock of the
Company issuable upon exercise of one Right.
(ii) Subject to Section 24 and to the limitation set forth in
the next paragraph of this Agreement, in the event any Person becomes
an Acquiring Person, each holder of a Right shall thereafter have a
right to receive, upon exercise thereof at a price equal to the then
current Purchase Price multiplied by the number of one one-thousandth
of a Preferred Share for which a Right is then exercisable, in
accordance with the terms of this Agreement and in lieu of Preferred
Shares, such number of Common Shares of the Company as shall equal the
result obtained by (x) multiplying the then current Purchase Price by
the number of one one-thousandth of a Preferred Share for which a Right
is then exercisable and dividing that product by (y) 50% of the then
current per share market price of the Company's Common Shares
(determined pursuant to Section 11(d) hereof) on the date of the
occurrence of such event. In the event that any Person shall become an
Acquiring Person and the Rights shall then be outstanding, the Company
shall not take any action which would eliminate or diminish the
benefits intended to be afforded by the Rights.
From and after the occurrence of such event, any Rights (A)
beneficially owned by any Acquiring Person or any Associate or
Affiliate of such Acquiring Person, (B) a transferee of an Acquiring
Person (of any such Associate or Affiliate) who becomes a transferee
after the Acquiring Person becomes such, or (C) a transferee of an
Acquiring Person (or of any such Associate or Affiliate) who becomes a
transferee prior to or concurrently with the Acquiring Person becoming
such and receives such Rights pursuant to either (1) a transfer
(whether or not for consideration) from the Acquiring Person to holders
of equity interests in such Acquiring Person or to any Person with whom
the Acquiring Person has any continuing agreement, arrangement or
understanding regarding the transferred Rights or (2) a transfer which
the Board of Directors of the Company has determined is part of a plan,
arrangement or understanding which has as a primary purpose or effect
the avoidance of this Section 11(a)(ii), shall be void and no holder of
such Rights shall thereafter have any rights whatsoever with respect to
such rights, whether under provisions of this Agreement or otherwise.
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<PAGE> 15
(iii) In the event that there shall not be sufficient Common
Shares issued but not outstanding or authorized but unissued to permit
the exercise in full of the Rights in accordance with the foregoing
subparagraph (ii), the Company shall (A) determine the value of the
Common Shares issuable upon the exercise of a Right (the "Current
Value"), and (B) with respect to each Right (subject to Section
11(a)(ii) hereof), make adequate provision to substitute for the Common
Shares, upon the exercise of a Right and payment of the applicable
Purchase Price, (1) cash, (2) a reduction in the Purchase Price, (3)
Common Shares or other equity securities of the Company (including,
without limitation, shares, or units of shares, of preferred stock,
such as the Preferred Stock, which the Board has deemed to have
essentially the same value or economic rights as shares of Common
Shares (such shares of preferred stock being referred to as "Common
Shares Equivalents"), (4) debt securities of the Company, (5) other
assets, or (6) any combination of the foregoing, having an aggregate
value equal to the Current Value (less the amount of any reduction in
the Purchase Price), where such aggregate value has been determined by
the Board based upon the advice of a nationally recognized investment
banking firm selected by the Board; provided, however, that if the
Company shall not have made adequate provision to deliver value
pursuant to clause (B) above within 30 days following the later of (x)
the first occurrence of a Section 11(a)(ii) Event and (y) the date on
which the Company's right of redemption pursuant to Section 23(a)
expires (the later of (x) and (y) being referred to herein as the
"Section 11(a)(ii) Trigger Date"), then the Company shall be obligated
to deliver, upon the surrender for exercise of a Right and without
requiring payment of the Purchase Price, Common Shares (to the extent
available) and then, if necessary, cash, which shares and/or cash have
an aggregate value equal to the Spread. For purposes of the preceding
sentence, the term "spread" shall mean the excess of (i) the Current
Value over (ii) the Purchase Price. If the Board determines in good
faith that it is likely that sufficient additional shares of Common
Shares could be authorized for issuance upon exercise in full of the
Rights, the 30 day period set forth above may be extended to the extent
necessary, but not more than 90 days after the Section 11(a)(ii)
Trigger Date, in order that the Company may seek shareholder approval
for the authorization of such additional shares (such 30 day period, as
it may be extended, is herein called the "Substitution Period"). To the
extend that action is to be taken pursuant to the first and/or third
sentences of this Section 11(a)(iii), the Company (1) shall provide,
subject to Section 11(a)(ii) hereof, that such action shall apply
uniformly to all outstanding Rights, and (2) may suspend the
exercisability of the Rights until the expiration of the Substitution
Period in order to seek such shareholder approval for such
authorization of additional shares and/or to decide the appropriate
form of distribution to be made pursuant to such first sentence and to
determine the value thereof. In the event of any such suspension, the
Company shall issue a public announcement stating that the
exercisability of the Rights has been temporarily suspended, as well as
a public announcement at such times the suspension is no longer in
effect. For purposes of this Section 11(a)(iii), the value of such
Common Share shall be the Current Market Price per share of the Common
Share on the Section 11(a)(ii) Trigger Date and the per share or per
unit value of any Common Stock Equivalent shall be deemed to equal the
Current Market Price per share of the Common Share on such date.
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<PAGE> 16
(b) In case the Company shall fix a record date for the issuance of
rights, options or warrants to all holders of Preferred Shares entitling them
(for a period expiring within 45 calendar days after such record date) to
subscribe for or purchase Preferred Shares (or shares having the same rights,
privileges and preferences as the Preferred Shares ("equivalent preferred
shares")) or securities convertible into Preferred Shares or equivalent
preferred shares at a price per Preferred Share or equivalent preferred share
(or having a conversion price per share, if a security convertible into
Preferred Shares or equivalent preferred shares) less than the then current per
share market price of the Preferred Shares (as defined in Section 11(d)) on such
record date, the Purchase Price to be in effect after such record date shall be
determined by multiplying the Purchase Price in effect immediately prior to such
record date by a fraction, the numerator of which shall be the number of
Preferred Shares outstanding on such record date plus the number of Preferred
Shares which the aggregate offering price of the total number of Preferred
Shares and/or equivalent preferred shares so to be offered (and/or the aggregate
initial conversion price of the convertible securities so to be offered) would
purchase at such current market price and the denominator of which shall be the
number of Preferred Shares outstanding on such record date plus the number of
additional Preferred Shares and/or equivalent preferred shares to be offered for
subscription or purchase (or into which the convertible securities so to be
offered are initially convertible); provided, however, that in no event shall
the consideration to be paid upon the exercise of one Right be less than the
aggregate par value of the shares of capital stock of the Company issuable upon
exercise of one Right. In case such subscription price may be paid in a
consideration part or all of which shall be in a form other than cash, the value
of such consideration shall be as determined in good faith by the Board of
Directors of the Company, whose determination shall be described in a statement
filed with the Rights Agent. Preferred Shares owned by or held for the account
of the Company shall not be deemed outstanding for the purpose of any such
computation. Such adjustment shall be made successively whenever such a record
date is fixed; and in the event that such rights, options or warrants are not so
issued, the Purchase Price shall be adjusted to be the Purchase Price which
would then be in effect if such record date had not been fixed.
(c) In case the Company shall fix a record date for the making of a
distribution to all holders of the Preferred Shares (including any such
distribution made in connection with a consolidation or merger in which the
Company is the continuing or surviving corporation) of evidences of indebtedness
or assets (other than a regular quarterly cash dividend or a dividend payable in
Preferred Shares) or subscription rights or warrants (excluding those referred
to in Section 11(b) hereof), the Purchase Price to be in effect after such
record date shall be determined by multiplying the Purchase Price in effect
immediately prior to such record date by a fraction, the numerator of which
shall be the then current per share market price of the Preferred Shares on such
record date, less the fair market value (as determined in good faith by the
Board of Directors of the Company, whose determination shall be described in a
statement filed with the Rights Agent) of the portion of the assets or evidences
of indebtedness so to be distributed or of such subscription rights or warrants
applicable to one Preferred Share and the denominator of which shall be such
current per share market price of the Preferred Shares; provided, however, that
in no event shall the consideration to be paid upon the exercise of one Right be
less than the aggregate par value of the shares of capital stock of the Company
to be issued upon exercise of one Right. Such adjustments shall be made
successively whenever such a
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<PAGE> 17
record date is fixed; and in the event that such distribution is not so made,
the Purchase Price shall again be adjusted to be the Purchase Price which would
then be in effect if such record date had not been fixed.
(d) (i) For the purpose of any computation hereunder, the "current per
share market price" of any security (a "Security" for the purpose of
this Section 11(d)(i)) on any date shall be deemed to be the average of
the daily closing prices per share of such Security for the 30
consecutive Trading Days (as such term is hereinafter defined)
immediately prior to such date; provided, however, that in the event
that the current per share market price of the Security is determined
during a period following the announcement by the issuer of such
Security of (A) a dividend or distribution on such Security payable in
shares of such Security or securities convertible into such shares, or
(B) any subdivision, combination or reclassification of such Security
and prior to the expiration of 30 Trading Days after the ex-dividend
date for such dividend or distribution, or the record date for such
subdivision, combination or reclassification, then, and in each such
case, the current per share market price shall be appropriately
adjusted to reflect the current market price per share equivalent of
such Security. The closing price for each day shall be the last sale
price, regular way, or, in case no such sale takes place on such day,
the average of the closing bid and asked prices, regular way, in either
case as reported in the principal consolidated transaction reporting
system with respect to securities listed or admitted to trading on the
New York Stock Exchange or, if the Security is not listed or admitted
to trading on the New York Stock Exchange, as reported in the principal
consolidated transaction reporting system with respect to securities
listed on the principal national securities exchange on which the
Security is listed or admitted to trading or, if the Security is not
listed or admitted to trading on any national securities exchange, the
last quoted price or, if not so quoted, the average of the high bid and
low asked prices in the over-the-counter market, as reported by the
National Association of Securities Dealers, Inc. Automated Quotations
System ("NASDAQ") or such other system then in use, or, if on any such
date the Security is not quoted by any such organization, the average
of the closing bid and asked prices as furnished by a professional
market maker making a market in the Security selected by the Board of
Directors of the Company. The term "Trading Day" shall mean a day on
which the principal national securities exchange on which the Security
is listed or admitted to trading is open for the transaction of
business or, if the Security is not listed or admitted to trading on
any national securities exchange, a Business Day.
(ii) For the purpose of any computation hereunder, the
"current per share market price" of the Preferred Shares shall be
determined in accordance with the method set forth in Section 11(d)(i).
If the Preferred Shares are not publicly traded, the "current per share
market price" of the Preferred Shares shall be conclusively deemed to
be the current per share market price of the Common Shares as
determined pursuant to Section 11(d)(i) (appropriately adjusted to
reflect any stock split, stock dividend or similar transaction
occurring after the date hereof), multiplied by one thousand. If
neither the Common Shares nor the Preferred Shares are publicly held or
so listed or traded, "current per share market price" shall mean the
fair value per share as determined in good faith by
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<PAGE> 18
the Board of Directors of the Company, whose determination shall be
described in a statement filed with the Rights Agent.
(e) No adjustment in the Purchase Price shall be required unless such
adjustment would require an increase or decrease of at least 1% in the Purchase
Price; provided, however, that any adjustments which by reason of this Section
11(e) are not required to be made shall be carried forward and taken into
account in any subsequent adjustment. All calculations under this Section 11
shall be made to the nearest cent or to the nearest one one-millionth of a
Preferred Share or one ten-thousandth of any other share or security as the case
may be. Notwithstanding the first sentence of this Section 11(e), any adjustment
required by this Section 11 shall be made no later than the earlier of (i) three
years from the date of the transaction which requires such adjustment or (ii)
the date of the expiration of the right to exercise any Rights.
(f) If as a result of an adjustment made pursuant to Section 11(a) or
Section 13 hereof, the holder of any Right thereafter exercised shall become
entitled to receive any shares of capital stock of the Company other than
Preferred Shares, thereafter the number of such other shares so receivable upon
exercise of any Right shall be subject to adjustment from time to time in a
manner and on terms as nearly equivalent as practicable to the provisions with
respect to the Preferred Shares contained in Section 11(a) through (c),
inclusive, and the provisions of Sections 7, 9, 10 and 13 with respect to the
Preferred Shares shall apply on like terms to any such other shares.
(g) All Rights originally issued by the Company subsequent to any
adjustment made to the Purchase Price hereunder shall evidence the right to
purchase, at the adjusted Purchase Price, the number of one one-thousandth of a
Preferred Share purchasable from time to time hereunder upon exercise of the
Rights, all subject to further adjustment as provided herein.
(h) Unless the Company shall have exercised its election as provided in
Section 11(i), upon each adjustment of the Purchase Price as a result of the
calculations made in Sections 11(b) and (c), each Right outstanding immediately
prior to the making of such adjustment shall thereafter evidence the right to
purchase, at the adjusted Purchase Price, that number of one one-thousandth of a
Preferred Share (calculated to the nearest one one-millionth of a Preferred
Share) obtained by (i) multiplying (x) the number of one one-thousandth of a
share covered by a Right immediately prior to this adjustment by (y) the
Purchase Price in effect immediately prior to such adjustment of the Purchase
Price and (ii) dividing the product so obtained by the Purchase Price in effect
immediately after such adjustment of the Purchase Price.
(i) The Company may elect on or after the date of any adjustment of the
Purchase Price to adjust the number of Rights, in substitution for any
adjustment in the number of one one-thousandth of a Preferred Share purchasable
upon the exercise of a Right. Each of the Rights outstanding after such
adjustment of the number of Rights shall be exercisable for the number of one
one-thousandth of a Preferred Share for which a Right was exercisable
immediately prior to such adjustment. Each Right held of record prior to such
adjustment of the number of Rights shall become that number of Rights
(calculated to the nearest one ten-thousandth) obtained by dividing the Purchase
Price in effect immediately prior to adjustment of the Purchase Price by
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<PAGE> 19
the Purchase Price in effect immediately after adjustment of the Purchase Price.
The Company shall make a public announcement of its election to adjust the
number of Rights, indicating the record date for the adjustment, and, if known
at the time, the amount of the adjustment to be made. This record date may be
the date on which the Purchase Price is adjusted or any day thereafter, but, if
the Rights Certificates have been issued, shall be at least 10 days later than
the date of the public announcement. If Rights Certificates have been issued,
upon each adjustment of the number of Rights pursuant to this Section 11(i), the
Company shall, as promptly as practicable, cause to be distributed to holders of
record of Rights Certificates on such record date Rights Certificates
evidencing, subject to Section 14 hereof, the additional Rights to which such
holders shall be entitled as a result of such adjustment, or, at the option of
the Company, shall cause to be distributed to such holders of record in
substitution and replacement for the Rights Certificates held by such holders
prior to the date of adjustment, and upon surrender thereof, if required by the
Company, new Rights Certificates evidencing all the Rights to which such holders
shall be entitled after such adjustment. Rights Certificates so to be
distributed shall be issued, executed and countersigned in the manner provided
for herein and shall be registered in the names of the holders of record of
Rights Certificates on the record date specified in the public announcement.
(j) Irrespective of any adjustment or change in the Purchase Price or
the number of one one-thousandth of a Preferred Share issuable upon the exercise
of the Rights, the Rights Certificates theretofore and thereafter issued may
continue to express the Purchase Price and the number of one thousandth of a
Preferred Share which were expressed in the initial Rights Certificates issued
hereunder.
(k) Before taking any action that would cause an adjustment reducing
the Purchase Price below one one-thousandth of the then par value, if any, of
the Preferred Shares issuable upon exercise of the Rights, the Company shall
take any corporate action which may, in the opinion of its counsel, be necessary
in order that the Company may validly and legally issue fully paid and
nonassessable Preferred Shares at such adjusted Purchase Price.
(l) In any case in which this Section 11 shall require that an
adjustment in the Purchase Price be made effective as of a record date for a
specified event, the Company may elect to defer until the occurrence of such
event the issuing to the holder of any Right exercised after such record date of
the Preferred Shares and other capital stock or securities of the Company, if
any, issuable upon such exercise over and above the Preferred Shares and other
capital stock or securities of the Company, if any, issuable upon such exercise
on the basis of the Purchase Price in effect prior to such adjustment; provided,
however, that the Company shall deliver to such holder a due bill or other
appropriate instrument evidencing such holder's right to receive such additional
shares upon the occurrence of the event requiring such adjustment.
(m) Anything in this Section 11 to the contrary notwithstanding, the Company
shall be entitled to make such reductions in the Purchase Price, in addition to
those adjustments expressly required by this Section 11, as and to the extent
that it in its sole discretion shall determine to be advisable in order that any
consolidation or subdivision of the Preferred Shares, issuance wholly for cash
of
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<PAGE> 20
Preferred Shares at less than the current market price, issuance wholly for cash
of Preferred Shares or securities which by their terms are convertible into or
exchangeable for Preferred Shares, dividends on Preferred Shares payable in
Preferred Shares or issuance of rights, options or warrants referred to
hereinabove in Section 11(b), hereafter made by the Company to holders of its
Preferred Shares shall not be taxable to such shareholders.
(n) In the event that at any time after the date of this Agreement and
prior to the Distribution Date, the Company shall (i) declare or pay any
dividend on the Common Shares payable in Common Shares or (ii) effect a
subdivision, combination or consolidation of the Common Shares (by
reclassification or otherwise than by payment of dividends in Common Shares)
into a greater or lesser number of Common Shares, then in any such case (A) the
number of one one-thousandth of a Preferred Share purchasable after such event
upon proper exercise of each Right shall be determined by multiplying the number
of one one-thousandth of a Preferred Share so purchasable immediately prior to
such event by a fraction, the numerator of which is the number of Common Shares
outstanding immediately before such event and the denominator of which is the
number of Common Shares outstanding immediately after such event, and (B) each
Common Share outstanding immediately after such event shall have issued with
respect to it that number of Rights which each Common Share outstanding
immediately prior to such event had issued with respect to it. The adjustments
provided for in this Section 11(n) shall be made successively whenever such a
dividend is declared or paid or such a subdivision, combination or consolidation
is effected.
Section 12. Certificate of Adjusted Purchase Price or Number of Shares.
Whenever an adjustment is made as provided in Section 11 or 13 hereof, the
Company shall promptly (a) prepare a certificate setting forth such adjustment,
and a brief statement of the facts accounting for such adjustment, (b) file with
the Rights Agent and with each transfer agent for the Common Shares or the
Preferred Shares a copy of such certificate, and (c) mail a brief summary
thereof to each holder of a Rights Certificate in accordance with Section 25
hereof. The Rights Agent shall be fully protected in relying on any such
certificate and/or any adjustment contained therein.
Section 13. Consolidation, Merger or Sale or Transfer of Assets or
Earning Power.
(a) In the event, directly or indirectly, at any time after a Person
has become an Acquiring Person, (i) the Company shall consolidate with, or merge
with and into, any other Person, (ii) any Person shall consolidate with the
Company, or merge with and into the Company and the Company shall be the
continuing or surviving corporation of such merger and, in connection with such
merger, all or part of the Common Shares shall be changed into or exchanged for
stock or other securities of any other Person (or the Company) or cash or any
other property, or (iii) the Company shall sell or otherwise transfer (or one or
more of its Subsidiaries shall sell or otherwise transfer), in one or more
transactions, assets or earning power aggregating 50% or more of the assets or
earning power of the Company and its Subsidiaries (taken as a whole) to any
other Person other than the Company or one or more of its wholly-owned
Subsidiaries, then, and in each such case, proper provision shall be made so
that (A) each holder of a Right (except as otherwise provided herein) shall
thereafter have the right to receive, upon the exercise thereof at a price equal
to the then current Purchase Price
17
<PAGE> 21
multiplied by the number of one one-thousandth of a Preferred Share for which a
Right is then exercisable, in accordance with the terms of this Agreement and in
lieu of Preferred Shares, such number of Common Shares of such other Person
(including the Company as successor thereto or as the surviving corporation) as
shall equal the result obtained by (1) multiplying the then current Purchase
Price by the number of one one-thousandth of a Preferred Share for which a Right
is then exercisable and dividing that product by (2) 50% of the then current per
share market price of the Common Shares of such other Person (determined
pursuant to Section 11(d) hereof) on the date of consummation of such
consolidation, merger, sale or transfer; (B) the issuer of such Common Shares
shall thereafter be liable for, and shall assume, by virtue of such
consolidation, merger, sale or transfer, all the obligations and duties of the
Company pursuant to this Agreement; (C) the term "Company" shall thereafter be
deemed to refer to such issuer; and (D) such issuer shall take such steps
(including, but not limited to, the reservation of a sufficient number of its
Common Shares in accordance with Section 9 hereof) in connection with such
consummation as may be necessary to assure that the provisions hereof shall
thereafter be applicable, as nearly as reasonably may be, in relation to the
Common Shares thereafter deliverable upon the exercise of the Rights. The
Company shall not consummate any such consolidation, merger, sale or transfer
unless prior thereto the Company and such issuer shall have executed and
delivered to the Rights Agent a supplemental agreement so providing. The Company
shall not enter into any transaction of the kind referred to in this Section 13
if at the time of such transaction there are any rights, warrants, instruments
or securities outstanding or any agreements or arrangements which, as a result
of the consummation of such transaction, would eliminate or substantially
diminish the benefits intended to be afforded by the Rights. The provisions of
this Section 13 shall similarly apply to successive mergers or consolidations or
sales or other transfers.
(b) Notwithstanding anything in this Agreement to the contrary, Section
13 shall not be applicable to a transaction described in subparagraphs (x) and
(y) of Section 13(a) if (i) such transaction is consummated with a Person or
Persons who acquired Common Shares pursuant to a tender offer or exchange offer
for all outstanding shares of Common Shares which complies with the provisions
of Section 11(a)(ii)(B) hereof (or a wholly owned subsidiary of any such Person
or Persons), (ii) the price per share of Common Shares offered in such
transaction is not less than the price per share of Common Shares paid to all
holders of Common Shares whose shares were purchased pursuant to such tender
offer or exchange offer and (iii) the form of consideration being offered to the
remaining holders of Common Shares pursuant to such transaction is the same as
the form of consideration paid pursuant to such tender offer or exchange offer.
Upon consummation of any such transaction contemplated by this Section 13(b),
all Rights hereunder shall expire.
Section 14. Fractional Rights and Fractional Shares.
(a) The Company shall not be required to issue fractions of Rights or
to distribute Rights Certificates which evidence fractional Rights. In lieu of
such fractional Rights, there shall be paid to the registered holders of the
Rights Certificates with regard to which such fractional Rights would otherwise
be issuable, an amount in cash equal to the same fraction of the current market
value of a whole Right. For the purposes of this Section 14(a), the current
market value of
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<PAGE> 22
a whole Right shall be the closing price of the Rights for the Trading Day
immediately prior to the date on which such fractional Rights would have been
otherwise issuable. The closing price for any day shall be the last sale price,
regular way, or, in case no such sale takes place on such day, the average of
the closing bid and asked prices, regular way, in either case as reported in the
principal consolidated transaction reporting system with respect to securities
listed or admitted to trading on the New York Stock Exchange or, if the Rights
are not listed or admitted to trading on the New York Stock Exchange, as
reported in the principal consolidated transaction reporting system with respect
to securities listed on the principal national securities exchange on which the
Rights are listed or admitted to trading or, if the Rights are not listed or
admitted to trading on any national securities exchange, the last quoted price
or, if not so quoted, the average of the high bid and low asked prices in the
over-the-counter market, as reported by NASDAQ or such other system then in use
or, if on any such date the Rights are not quoted by any such organization, the
average of the closing bid and asked prices as furnished by a professional
market maker making a market in the Rights selected by the Board of Directors of
the Company. If on any such date no such market maker is making a market in the
Rights, the fair value of the Rights on such date as determined in good faith by
the Board of Directors of the Company shall be used. The Company shall promptly
notify the Rights Agent of any such determination of fair value.
(b) The Company shall not be required to issue fractions of Preferred
Shares (other than fractions which are integral multiples of one one-thousandth
of a Preferred Share) upon exercise of the Rights or to distribute certificates
which evidence fractional Preferred Shares (other than fractions which are
integral multiples of one one-thousandth of a Preferred Share). Fractions of
Preferred Shares in integral multiples of one one-thousandth of a Preferred
Share may, at the election of the Company, be evidenced by depositary receipts,
pursuant to an appropriate agreement between the Company and a depositary
selected by it; provided, that such agreement shall provide that the holders of
such depositary receipts shall have all the rights, privileges and preferences
to which they are entitled as beneficial owners of the Preferred Shares
represented by such depositary receipts. In lieu of fractional Preferred Shares
that are not integral multiples of one one-thousandth of a Preferred Share, the
Company shall pay to the registered holders of Rights Certificates at the time
such Rights are exercised as herein provided an amount in cash equal to the same
fraction of the current market value of one Preferred Share. For the purposes of
this Section 14(b), the current market value of a Preferred Share shall be the
closing price of a Preferred Share (as determined pursuant to the second
sentence of Section 11(d)(i) hereof) for the Trading Day immediately prior to
the date of such exercise.
(c) Following the occurrence of a Triggering Event, the Company shall
not be required to issue fractions of shares of Common Shares upon exercise of
the Rights or to distribute certificates which evidence fractional shares of
Common Shares. In lieu of fractional shares of Common Shares, the Company may
pay to the registered holders of Rights Certificates at the time such Rights are
exercised as herein provided an amount in cash equal to the same fraction of the
current market value of one (1) share of Common Shares. For purposes of this
Section 14(c), the current market value of one share of Common Shares shall be
the closing of one share of Common Shares (as determined pursuant to Section
11(d)(i) hereof) for the Trading Day immediately prior to the date of such
exercise.
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<PAGE> 23
(d) The holder of a Right by the acceptance of the Right expressly
waives his right to receive any fractional Rights or any fractional shares upon
exercise of a Right (except as provided above).
Section 15. Rights of Action. All rights of action in respect of this
Agreement, excepting the rights of action given to the Rights Agent under
Section 18 hereof, are vested in the respective registered holders of the Rights
Certificates (and, prior to the Distribution Date, the registered holders of the
Common Shares); and any registered holder of any Rights Certificate (or, prior
to the Distribution Date, of the Common Shares), without the consent of the
Rights Agent or of the holder of any other Rights Certificate (or, prior to the
Distribution Date, of the Common Shares), may, in his own behalf and for his own
benefit, enforce, and may institute and maintain any suit, action or proceeding
against the Company to enforce, or otherwise act in respect of, his right to
exercise the Rights evidenced by such Rights Certificate in the manner provided
in such Rights Certificate and in this Agreement. Without limiting the foregoing
or any remedies available to the holders of Rights, it is specifically
acknowledged that the holders of Rights would not have an adequate remedy at law
for any breach of this Agreement and will be entitled to specific performance of
the obligations under, and injunctive relief against actual or threatened
violations of the obligations of any Person subject to, this Agreement.
Section 16. Agreement of Right Holders. Every holder of a Right, by
accepting the same, consents and agrees with the Company and the Rights Agent
and with every other holder of a Right that:
(a) prior to the Distribution Date, the Rights will be transferable
only in connection with the transfer of the Common Shares;
(b) after the Distribution Date, the Rights Certificates are
transferable only on the registry books of the Rights Agent if surrendered at
the principal office of the Rights Agent, duly endorsed or accompanied by a
proper instrument of transfer with the appropriate forms and certificates
executed; and
(c) the Company and the Rights Agent may deem and treat the person in
whose name the Rights Certificate (or, prior to the Distribution Date, the
associated Common Shares certificate) is registered as the absolute owner
thereof and of the Rights evidenced thereby (notwithstanding any notations of
ownership or writing on the Rights Certificates or the associated Common Shares
certificate made by anyone other than the Company or the Rights Agent) for all
purposes whatsoever, and neither the Company nor the Rights Agent shall be
affected by any notice to the contrary.
(d) notwithstanding anything in this Agreement to the contrary, neither
the Company nor the Rights Agent shall have any liability to any holder of a
Right or other Person as a result of its inability to perform any of its
obligations under this Agreement by reason of any preliminary or permanent
injunction or other order, decree or ruling issued by a court of competent
jurisdiction or by a governmental, regulatory or administrative agency or
commission, or any statute, rule, regulation or executive order promulgated or
enacted by any governmental
20
<PAGE> 24
authority, prohibiting or otherwise restraining performance of such obligation;
provided, however, the Company must use its best efforts to have any such order,
decree or ruling lifted or otherwise overturned as soon as possible.
Section 17. Rights Certificate Holder Not Deemed a Shareholder. No
holder, as such, of any Rights Certificate shall be entitled to vote, receive
dividends or be deemed for any purpose the holder of the Preferred Shares or any
other securities of the Company which may at any time be issuable on the
exercise of the Rights represented thereby, nor shall anything contained herein
or in any Rights Certificate be construed to confer upon the holder of any
Rights Certificate, as such, any of the rights of a shareholder of the Company
or any right to vote for the election of directors or upon any matter submitted
to shareholders at any meeting thereof, or to give or withhold consent to any
corporate action, or to receive notice of meetings or other actions affecting
shareholders (except as provided in Section 25 hereof), or to receive dividends
or subscription rights, or otherwise, until the Right or Rights evidenced by
such Rights Certificate shall have been exercised in accordance with the
provisions hereof.
Section 18. Concerning the Rights Agent. The Company agrees to pay to
the Rights Agent reasonable compensation for all services rendered by it
hereunder and, from time to time, on demand of the Rights Agent, its reasonable
expenses and counsel fees and other disbursements incurred in the administration
and execution of this Agreement and the exercise and performance of its duties
hereunder. The Company also agrees to indemnify the Rights Agent for, and to
hold it harmless against, any loss, liability, or expense, incurred without
negligence, bad faith or willful misconduct on the part of the Rights Agent, for
anything done or omitted by the Rights Agent in connection with the acceptance
and administration of this Agreement, including the costs and expenses of
defending against any claim of liability in the premises.
The Rights Agent shall be protected and shall incur no liability for,
or in respect of any action taken, suffered or omitted by it in connection with,
its administration of this Agreement in reliance upon any Rights Certificate or
certificate for the Preferred Shares or Common Shares or for other securities of
the Company, instrument of assignment or transfer, power of attorney,
endorsement, affidavit, letter, notice, direction, consent, certificate,
statement, or other paper or document believed by it to be genuine and to be
signed, executed and, where necessary, verified or acknowledged, by the proper
person or persons, or otherwise upon the advice of counsel as set forth in
Section 20 hereof.
Section 19. Merger or Consolidation or Change of Name of Rights Agent.
Any corporation into which the Rights Agent or any successor Rights Agent may be
merged or with which it may be consolidated, or any corporation resulting from
any merger or consolidation to which the Rights Agent or any successor Rights
Agent shall be a party, or any corporation succeeding to the stock transfer or
corporate trust powers of the Rights Agent or any successor Rights Agent, shall
be the successor to the Rights Agent under this Agreement without the execution
or filing of any paper or any further act on the part of any of the parties
hereto; provided, that such corporation would be eligible for appointment as a
successor Rights Agent under the provisions of Section 21 hereof. In case at the
time such successor Rights Agent
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<PAGE> 25
shall succeed to the agency created by this Agreement, any of the Rights
Certificates shall have been countersigned but not delivered, any such successor
Rights Agent may adopt the countersignature of the predecessor Rights Agent and
deliver such Rights Certificates so countersigned; and in case at that time any
of the Rights Certificates shall not have been countersigned, any successor
Rights Agent may countersign such Rights Certificates either in the name of the
predecessor Rights Agent or in the name of the successor Rights Agent; and in
all such cases such Rights Certificates shall have the full force provided in
the Rights Certificates and in this Agreement.
In case at any time the name of the Rights Agent shall be changed and
at such time any of the Rights Certificates shall have been countersigned but
not delivered, the Rights Agent may adopt the countersignature under its prior
name and deliver Rights Certificates so countersigned; and in case at that time
any of the Rights Certificates shall not have been countersigned, the Rights
Agent may countersign such Rights Certificates either in its prior name or in
its changed name; and in all such cases such Rights Certificates shall have the
full force provided in the Rights Certificates and in this Agreement.
Section 20. Duties of Rights Agent. The Rights Agent undertakes the
duties and obligations imposed by this Agreement upon the following terms and
conditions, by all of which the Company and the holders of Rights Certificates,
by their acceptance thereof, shall be bound:
(a) The Rights Agent may consult with legal counsel (who may be legal
counsel for the Company), and the opinion of such counsel shall be full and
complete authorization and protection to the Rights Agent as to any action taken
or omitted by it in good faith and in accordance with such opinion.
(b) Whenever in the performance of its duties under this Agreement the
Rights Agent shall deem it necessary or desirable that any fact or matter
(including, without limitation, the identity of any Acquiring Person and the
determination of "current market price") be proved or established by the Company
prior to taking or suffering any action hereunder, such fact or matter (unless
other evidence in respect thereof be herein specifically prescribed) may be
deemed to be conclusively proved and established by a certificate signed by any
one of the Chairman of the Board, the Chief Executive Officer, the President,
any Vice President, the Treasurer or the Secretary of the Company and delivered
to the Rights Agent; and such certificate shall be full authorization to the
Rights Agent for any action taken or suffered in good faith by it under the
provisions of this Agreement in reliance upon such certificate.
(c) The Rights Agent shall be liable hereunder to the Company and any
other Person only for its own negligence, bad faith or willful misconduct.
(d) The Rights Agent shall not be liable for or by reason of any of the
statements of fact or recitals contained in this Agreement or in the Rights
Certificates (except its countersignature thereof) or be required to verify the
same, but all such statements and recitals are and shall be deemed to have been
made by the Company only.
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<PAGE> 26
(e) The Rights Agent shall not be under any responsibility in respect
of the validity of this Agreement or the execution and delivery hereof (except
the due execution hereof by the Rights Agent) or in respect of the validity or
execution of any Rights Certificate (except its countersignature thereof); nor
shall it be responsible for any breach by the Company of any covenant or
condition contained in this Agreement or in any Rights Certificate; nor shall it
be responsible for any change in the exercisability of the Rights (including the
Rights becoming void pursuant to Section 11(a)(ii) hereof) or any adjustment in
the terms of the Rights (including the manner, method or amount thereof)
provided for in Section 3, 11, 13, 23, or 24, or the ascertaining of the
existence of facts that would require any such change or adjustment (except with
respect to the exercise of Rights evidenced by Rights Certificates after actual
notice that such change or adjustment is required); nor shall it by any act
hereunder be deemed to make any representation or warranty as to the
authorization or reservation of any Preferred Shares to be issued pursuant to
this Agreement or any Rights Certificate or as to whether any Preferred Shares
will, when issued, be validly authorized and issued, fully paid and
nonassessable.
(f) The Company agrees that it will perform, execute, acknowledge and
deliver or cause to be performed, executed, acknowledged and delivered all such
further and other acts, instruments and assurances as may reasonably be required
by the Rights Agent for the carrying out or performing by the Rights Agent of
the provisions of this Agreement.
(g) The Rights Agent is hereby authorized and directed to accept
instructions with respect to the performance of its duties hereunder from any
one of the Chairman of the Board, the Chief Executive Officer, the President,
any Vice President, the Secretary, or the Treasurer of the Company, and to apply
to such officers for advice or instructions in connection with its duties, and
it shall not be liable for any action taken or suffered by it in good faith in
accordance with instructions of any such officer or for any delay in acting
while waiting for those instructions.
(h) The Rights Agent and any shareholder, director, officer or employee
of the Rights Agent may buy, sell or deal in any of the Rights or other
securities of the Company or become pecuniarily interested in any transaction in
which the Company may be interested, or contract with or lend money to the
Company or otherwise act as fully and freely as though it were not Rights Agent
under this Agreement. Nothing herein shall preclude the Rights Agent from acting
in any other capacity for the Company or for any other legal entity.
(i) The Rights Agent may execute and exercise any of the rights or
powers hereby vested in it or perform any duty hereunder either itself or by or
through its attorneys or agents, and the Rights Agent shall not be answerable or
accountable for any act, default, neglect or misconduct of any such attorneys or
agents or for any loss to the Company resulting from any such act, default,
neglect or misconduct, provided reasonable care was exercised in the selection
and continued employment thereof.
(j) No provision of this Agreement shall require the Rights Agent to
expend or risk its own funds or otherwise incur any financial liability in the
performance of any of its duties hereunder or in the exercise of its rights if
there shall be reasonable grounds for believing that
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<PAGE> 27
repayment of such funds or adequate indemnification against such risk or
liability is not reasonably assured to it.
Section 21. Change of Rights Agent. The Rights Agent or any successor
Rights Agent may resign and be discharged from its duties under this Agreement
upon 30 days' notice in writing mailed to the Company and to each transfer agent
of the Common Shares or Preferred Shares by registered or certified mail, and to
the holders of the Rights Certificates by first-class mail. The Company may
remove the Rights Agent or any successor Rights Agent upon 30 days' notice in
writing, mailed to the Rights Agent or successor Rights Agent, as the case may
be, and to each transfer agent of the Common Shares or Preferred Shares by
registered or certified mail, and to the holders of the Rights Certificates by
first-class mail. If the Rights Agent shall resign or be removed or shall
otherwise become incapable of acting, the Company shall appoint a successor to
the Rights Agent. If the Company shall fail to make such appointment within a
period of 30 days after giving notice of such removal or after it has been
notified in writing of such resignation or incapacity by the resigning or
incapacitated Rights Agent or by the holder of a Rights Certificate (who shall,
with such notice, submit his Rights Certificate for inspection by the Company),
then the incumbent Rights Agent or the registered holder of any Rights
Certificate may apply to any court of competent jurisdiction for the appointment
of a new Rights Agent. Any successor Rights Agent, whether appointed by the
Company or by such a court, shall be a corporation organized and doing business
under the laws of the United States or of any state thereof, in good standing,
which is authorized under such laws to exercise corporate trust or stock
transfer powers and is subject to supervision or examination by federal or state
authority and which has at the time of its appointment as Rights Agent a
combined capital and surplus of at least $50 million. After appointment, the
successor Rights Agent shall be vested with the same powers, rights, duties and
responsibilities as if it had been originally named as Rights Agent without
further act or deed; but the predecessor Rights Agent shall deliver and transfer
to the successor Rights Agent any property at the time held by it hereunder, and
execute and deliver any further assurance, conveyance, act or deed necessary for
the purpose. Not later than the effective date of any such appointment the
Company shall file notice thereof in writing with the predecessor Rights Agent
and each transfer agent of the Common Shares or Preferred Shares, and mail a
notice thereof in writing to the registered holders of the Rights Certificates.
Failure to appoint a successor Rights Agent within the 30 day period or to give
any notice provided for in this Section 21, however, or any defect therein,
shall not affect the legality or validity of the resignation or removal of the
Rights Agent or the appointment of the successor Rights Agent, as the case may
be.
Section 22. Issuance of New Rights Certificates. Notwithstanding any of
the provisions of this Agreement or of the Rights to the contrary, the Company
may, at its option, issue new Rights Certificates evidencing Rights in such form
as may be approved by its Board of Directors to reflect any adjustment or change
in the Purchase Price and the number or kind or class of shares or other
securities or property purchasable under the Rights Certificates made in
accordance with the provisions of this Agreement. In addition, in connection
with the issuance or sale of Common Shares following the Distribution Date and
prior to the redemption or expiration of the Rights, the Company (a) shall, with
respect to Common Shares
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<PAGE> 28
so issued or sold pursuant to the exercise of stock options or under any
employee plan or arrangement, granted or awarded as of the Distribution Date, or
upon the exercise, conversion or exchange of securities hereinafter issued by
the Company, and (b) may, in any other case, if deemed necessary or appropriate
by the Board of Directors of the Company, issue Rights Certificates representing
the appropriate number of Rights in connection with such issuance or sale;
provided, however, that (i) no such Rights Certificate shall be issued if, and
to the extent that, the Company shall be advised by counsel that such issuance
would create a significant risk of material adverse tax consequences to the
Company or the Person to whom such Rights Certificates would be issued, and (ii)
no such Rights Certificate shall be issued if, and to the extent that,
appropriate adjustment shall otherwise have been made in lieu of the issuance
thereof.
Section 23. Redemption.
(a) The Board of Directors of the Company may, at its option, at any
time prior to such time as any Person becomes an Acquiring Person, redeem all
but not less than all the then outstanding Rights at a redemption price of $0.01
per Right, appropriately adjusted to reflect any stock split, stock dividend or
similar transaction occurring after the date hereof (such redemption price being
hereinafter referred to as the "Redemption Price"). The redemption of the Rights
by the Board of Directors may be made effective at such time, on such basis and
with such conditions as the Board of Directors in its sole discretion may
establish.
(b) Immediately upon the action of the Board of Directors of the
Company ordering the redemption of the Rights pursuant to paragraph (a) of this
Section 23, and without any further action and without any notice, the right to
exercise the Rights will terminate and the only right thereafter of the holders
of Rights shall be to receive the Redemption Price. The Company shall promptly
give public notice of any such redemption; provided, however, that the failure
to give, or any defect in, any such notice shall not affect the validity of such
redemption. Within 10 days after such action of the Board of Directors ordering
the redemption of the Rights, the Company shall mail a notice of redemption to
all the holders of the then outstanding Rights at their last addresses as they
appear upon the registry books of the Rights Agent or, prior to the Distribution
Date, on the registry books of the transfer agent for the Common Shares. Any
notice which is mailed in the manner herein provided shall be deemed given,
whether or not the holder receives the notice. Each such notice of redemption
will state the method by which the payment of the Redemption Price will be made.
Neither the Company nor any of its Affiliates or Associates may redeem, acquire
or purchase for value any Rights at any time in any manner other than that
specifically set forth in this Section 23 or in Section 24 hereof, and other
than in connection with the purchase of Common Shares prior to the Distribution
Date.
Section 24. Exchange.
(a) The Board of Directors of the Company may, at its option, at any time after
any Person becomes an Acquiring Person, exchange all or part of the then
outstanding and exercisable Rights (which shall not include Rights that have
become void pursuant to the provisions of Section 11(a)(ii) hereof) for Common
Shares at an exchange ratio of one Common
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<PAGE> 29
Share per Right, appropriately adjusted to reflect any stock split, stock
dividend or similar transaction occurring after the date hereof (such exchange
ratio being hereinafter referred to as the "Exchange Ratio"). Notwithstanding
the foregoing, the Board of Directors shall not be empowered to effect such
exchange at any time after any Person (other than the Company, any Subsidiary of
the Company, any employee benefit plan of the Company or any such Subsidiary, or
any entity holding Common Shares for or pursuant to the terms of any such plan),
together with all Affiliates and Associates of such Person, becomes the
Beneficial Owner of 50% or more of the Common Shares then outstanding.
(b) Immediately upon the action of the Board of Directors of the
Company ordering the exchange of any Rights pursuant to paragraph (a) of this
Section 24 and without any further action and without any notice, the right to
exercise such Rights shall terminate and the only right thereafter of a holder
of such Rights shall be to receive that number of Common Shares equal to the
number of such Rights held by such holder multiplied by the Exchange Ratio. The
Company shall promptly give public notice of any such exchange; provided,
however, that the failure to give, or any defect in, such notice shall not
affect the validity of such exchange. The Company promptly shall mail a notice
of any such exchange to all of the holders of such Rights at their last
addresses as they appear upon the registry books of the Rights Agent. Any notice
which is mailed in the manner herein provided shall be deemed given, whether or
not the holder receives the notice. Each such notice of exchange will state the
method by which the exchange of the Common Shares for Rights will be effected
and, in the event of any partial exchange, the number of Rights which will be
exchanged. Any partial exchange shall be effected pro rata based on the number
of Rights (other than Rights which have become void pursuant to the provisions
of Section 11(a)(ii) hereof) held by each holder of Rights.
(c) In the event that there shall not be sufficient Common Shares
issued but not outstanding or authorized but unissued to permit any exchange of
Rights as contemplated in accordance with this Section 24, the Company shall
take all such action as may be necessary to authorize additional Common Shares
for issuance upon exchange of the Rights. In the event the Company shall, after
good faith effort, be unable to take all such action as may be necessary to
authorize such additional Common Shares, the Company shall substitute, for each
Common Share that would otherwise be issuable upon exchange of a Right, a number
of Preferred Shares or fraction thereof such that the current per share market
price of one Preferred Share multiplied by such number or fraction is equal to
the current per share market price of one Common Share as of the date of
issuance of such Preferred Shares or fraction thereof.
(d) The Company shall not be required to issue fractions of Common
Shares or to distribute certificates which evidence fractional Common Shares. In
lieu of such fractional Common Shares, the Company shall pay to the registered
holders of the Rights Certificates with regard to which such fractional Common
Shares would otherwise be issuable an amount in cash equal to the same fraction
of the current market value of a whole Common Share. For the purposes of this
paragraph (d), the current market value of a whole Common Share shall be the
closing price of a Common Share (as determined pursuant to the second sentence
of Section 11(d)(i) hereof) for the Trading Day immediately prior to the date of
exchange pursuant to this Section 24.
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Section 25. Notice of Certain Events.
(a) In case the Company shall propose (i) to pay any dividend payable
in stock of any class to the holders of its Preferred Shares or to make any
other distribution to the holders of its Preferred Shares (other than a regular
quarterly cash dividend), (ii) to offer to the holders of its Preferred Shares
rights or warrants to subscribe for or to purchase any additional Preferred
Shares or shares of stock of any class or any other securities, rights or
options, (iii) to effect any reclassification of its Preferred Shares (other
than a reclassification involving only the subdivision of outstanding Preferred
Shares), (iv) to effect any consolidation or merger into or with, or to effect
any sale or other transfer (or to permit one or more of its Subsidiaries to
effect any sale or other transfer), in one or more transactions, of 50% or more
of the assets or earning power of the Company and its Subsidiaries (taken as a
whole) to, any other Person, (v) to effect the liquidation, dissolution or
winding up of the Company, or (vi) to declare or pay any dividend on the Common
Shares payable in Common Shares or to effect a subdivision, combination or
consolidation of the Common Shares (by reclassification or otherwise than by
payment of dividends in Common Shares), then, in each such case, the Company
shall give to each holder of a Rights Certificate, in accordance with Section 26
hereof, a notice of such proposed action, which shall specify the record date
for the purposes of such stock dividend, or distribution of rights or warrants,
or the date on which such reclassification, consolidation, merger, sale,
transfer, liquidation, dissolution, or winding up is to take place and the date
of participation therein by the holders of the Common Shares and/or Preferred
Shares, if any such date is to be fixed, and such notice shall be so given in
the case of any action covered by clause (i) or (ii) above at least 10 days
prior to the record date for determining holders of the Preferred Shares for
purposes of such action, and in the case of any such other action, at least 10
days prior to the date of the taking of such proposed action or the date of
participation therein by the holders of the Common Shares and/or Preferred
Shares, whichever shall be the earlier.
(b) In case the event set forth in Section 11(a)(ii) hereof shall
occur, then the Company shall as soon as practicable thereafter give to each
holder of a Rights Certificate, in accordance with Section 26 hereof, a notice
of the occurrence of such event, which notice shall describe such event and the
consequences of such event to holders of Rights under Section 11(a)(ii) hereof.
Section 26. Notices. Notices or demands authorized by this Agreement to
be given or made by the Rights Agent or by the holder of any Rights Certificate
to or on the Company shall be sufficiently given or made if sent by first-class
mail, postage prepaid, addressed (until another address is filed in writing with
the Rights Agent) as follows:
Clark/Bardes Holdings, Inc.
2121 San Jacinto Street
Suite 2200
Dallas, Texas 75201-7906
Attention: Corporate Secretary
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<PAGE> 31
Subject to the provisions of Section 21 hereof, any notice or demand authorized
by this Agreement to be given or made by the Company or by the holder of any
Rights Certificate to or on the Rights Agent shall be sufficiently given or made
if sent by first-class mail, postage prepaid, addressed (until another address
is filed in writing with the Company) as follows:
The Bank of New York
Stock Transfer Administration
101 Barclay Street - 12 W
New York, New York 10286
Notices or demands authorized by this Agreement to be given or made by the
Company or the Rights Agent to the holder of any Rights Certificate shall be
sufficiently given or made if sent by first-class mail, postage prepaid,
addressed to such holder at the address of such holder as shown on the registry
books of the Company.
Section 27. Supplements and Amendments. The Company may from time to
time supplement or amend this Agreement without the approval of any holders of
Rights Certificates in order to cure any ambiguity, to correct or supplement any
provision contained herein which may be defective or inconsistent with any other
provisions herein, or to make any other provisions with respect to the Rights
which the Company may deem necessary or desirable, any such supplement or
amendment to be evidenced by a writing signed by the Company and the Rights
Agent; provided, however, that from and after such time as any Person becomes an
Acquiring Person, this Agreement shall not be amended in any manner which would
adversely affect the interests of the holders of Rights.
Section 28. Successors. All the covenants and provisions of this
Agreement by or for the benefit of the Company or the Rights Agent shall bind
and inure to the benefit of their respective successors and assigns hereunder.
Section 29. Determinations and Actions by the Board of Directors, etc.
For all purposes of this Agreement, any calculation of the number of Common
Shares outstanding at any particular time, including for purposes of determining
the particular percentage of such outstanding Common Shares of which any Person
is the Beneficial Owner, shall be made in accordance with the last sentence of
Rule 13d-3(d)(1)(i) of the General Rules and Regulations under the Exchange Act.
The Board of Directors of the Company shall have the exclusive power and
authority to administer this Agreement and to exercise all rights and powers
specifically granted to the Board or to the Company, or as may be necessary or
advisable in the administration of this Agreement, including, without
limitation, the right and power to (i) interpret the provisions of this
Agreement, and (ii) make all determinations deemed necessary or advisable for
the administration of this Agreement (including a determination to redeem or not
redeem the Rights or to amend the Agreement). All such actions, calculations,
interpretations and determinations (including, for purposes of clause (y) below,
all omissions with respect to the foregoing) which are done or made by the Board
in good faith, shall (x) be final, conclusive and binding on the Company, the
Rights Agent, the holders of the Rights and all other parties, and (y) not
subject the Board to any liability to the holders of the Rights.
28
<PAGE> 32
Section 30. Benefits of this Agreement. Nothing in this Agreement shall
be construed to give to any person or corporation other than the Company, the
Rights Agent and the registered holders of the Rights Certificates (and, prior
to the Distribution Date, the Common Shares) any legal or equitable right,
remedy or claim under this Agreement; but this Agreement shall be for the sole
and exclusive benefit of the Company, the Rights Agent and the registered
holders of the Rights Certificates (and, prior to the Distribution Date, the
Common Shares).
Section 31. Severability. If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction or
other authority to be invalid, void or unenforceable, the remainder of the
terms, provisions, covenants and restrictions of this Agreement shall remain in
full force and effect and shall in no way be affected, impaired or invalidated.
Section 32. Governing Law. This Agreement and each Rights Certificate
issued hereunder shall be deemed to be a contract made under the laws of the
State of New York and for all purposes shall be governed by and construed in
accordance with the laws of such State applicable to contracts to be made and
performed entirely within such State.
Section 33. Counterparts. This Agreement may be executed in any number
of counterparts and each of such counterparts shall for all purposes be deemed
to be an original, and all such counterparts shall together constitute but one
and the same instrument.
Section 34. Descriptive Headings. Descriptive headings of the several
Sections of this Agreement are inserted for convenience only and shall not
control or affect the meaning or construction of any of the provisions hereof;
provided, however, that notwithstanding anything in this Agreement to the
contrary, if any such term, provision, covenant or restriction is held by such
court or authority to be invalid, void or unenforceable and the Board of
Directors of the Company determines in its good faith judgment that severing the
invalid language from this Agreement would adversely affect the purpose or
effect of this Agreement, the right of redemption set forth in Section 23 hereof
shall be reinstated and shall not expire until the close of business on the
tenth day following the date of such determination by the Board of Directors.
[SIGNATURE PAGE FOLLOWS]
29
<PAGE> 33
IN WITNESS WHEREOF, the parties hereto have caused this Rights
Agreement to be duly executed and attested, all as of the day and year first
above written.
CLARK/BARDES HOLDINGS, INC.
Attest: By:
----------------------- --------------------------------------------
Name: Melvin G. Todd
Title: President and Chief Executive Officer
THE BANK OF NEW YORK
Attest: By:
----------------------- --------------------------------------------
Title: Name:
----------------- ------------------------------------------
Title:
-----------------------------------------
30
<PAGE> 34
EXHIBIT A
FORM
of
CERTIFICATE OF DESIGNATION
of
SERIES A JUNIOR PARTICIPATING PREFERRED STOCK
of
CLARK/BARDES HOLDINGS, INC.
Pursuant to the provisions of Sections 151 and 103 of the Delaware
General Corporation Law (the "DGCL"), CLARK/BARDES HOLDINGS, INC., A Delaware
corporation (the "Company") hereby certifies as follows:
1. The following resolution was duly adopted by the Board of Directors
of the Company, pursuant to the authority conferred upon the Board of Directors
by Article V of the Company's Certificate of Incorporation and the provisions of
Section 151 of the DGCL, at a duly called meeting of the Board of Directors held
on July 10, 1998:
RESOLVED, that the Board of Directors hereby designate 20,000 shares of
the Company's Preferred Stock, $0.01 par value, as Series A Junior Participating
Preferred Stock with the designations, powers, preferences, and relative,
participating, options or other rights, and the qualifications, limitations or
restrictions thereof as follows:
Section 1. Designation and Amount. The shares of such series shall be
designated as "Junior Participating Preferred Stock, Series A" (the "Series A
Preferred Stock") and the number of shares constituting the Series A Preferred
Stock shall be 20,000. Such number of shares may be increased or decreased by
resolution of the Board of Directors; provided, that no decrease shall reduce
the number of shares of Series A Preferred Stock to a number less than the
number of shares then outstanding plus the number of shares reserved for
issuance upon the exercise of outstanding options, rights or warrants or upon
the conversion of any outstanding securities issued by the Company convertible
into Series A Preferred Stock.
Section 2. Dividends and Distributions.
(A) Subject to the rights of the holders of any shares of any series of
Preferred Stock (or any similar stock) ranking prior and superior to the Series
A Preferred Stock with respect to dividends, the holders of shares of Series A
Preferred Stock, in preference to the holders of Common Stock, par value $0.01
per share (the "Common Stock"), of the Company, and of any other junior stock,
shall be entitled to receive, when, as and if declared by the Board of Directors
out of funds legally available for the purpose, quarterly dividends payable in
cash on the first day of January, April, July and October in each year (each
such date being referred to herein as a
1
<PAGE> 35
"Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend
Payment Date after the first issuance of a share or fraction of a share of
Series A Preferred Stock, in an amount per share (rounded to the nearest cent)
equal to the greater of (a) $10 or (b) subject to the provision for adjustment
hereinafter set forth, 1000 times the aggregate per share amount of all cash
dividends, and 1000 times the aggregate per share amount (payable in kind) of
all non-cash dividends or other distributions, other than a dividend payable in
shares of Common Stock or a subdivision of the outstanding shares of Common
Stock (by reclassification or otherwise), declared on the Common Stock since the
immediately preceding Quarterly Dividend Payment Date or, with respect to the
first Quarterly Dividend Payment Date, since the first issuance of any share or
fraction of a share of Series A Preferred Stock. In the event the Company shall
at any time declare or pay any dividend on the Common Stock payable in shares of
Common Stock, or effect a subdivision or combination or consolidation of the
outstanding shares of Common Stock (by reclassification or otherwise than by
payment of a dividend in shares of Common Stock) into a greater or lesser number
of shares of Common Stock, then in each such case the amount to which holders of
shares of Series A Preferred Stock were entitled immediately prior to such event
under clause (b) of the preceding sentence shall be adjusted by multiplying such
amount by a fraction, the numerator of which is the number of shares of Common
Stock outstanding immediately after such event and the denominator of which is
the number of shares of Common Stock that were outstanding immediately prior to
such event.
(B) The Company shall declare a dividend or distribution on the Series
A Preferred Stock as provided in paragraph (A) of this Section immediately after
it declares a dividend or distribution on the Common Stock (other than a
dividend payable in shares of Common Stock); provided that, in the event no
dividend or distribution shall have been declared on the Common Stock during the
period between any Quarterly Dividend Payment Date and the next subsequent
Quarterly Dividend Payment Date, a dividend of $10 per share on the Series A
Preferred Stock shall nevertheless be payable on such subsequent Quarterly
Dividend Payment Date.
(C) Dividends shall begin to accrue and be cumulative on outstanding
shares of Series A Preferred Stock from the Quarterly Dividend Payment Date next
preceding the date of issue of such shares, unless the date of issue of such
shares is prior to the record date for the first Quarterly Dividend Payment
Date, in which case dividends on such shares shall begin to accrue from the date
of issue of such shares, or unless the date of issue is a Quarterly Dividend
Payment Date or is a date after the record date for the determination of holders
of shares of Series A Preferred Stock entitled to receive a quarterly dividend
and before such Quarterly Dividend Payment Date, in either of which events such
dividends shall begin to accrue and be cumulative from such Quarterly Dividend
Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends
paid on the shares of Series A Preferred Stock in an amount less than the total
amount of such dividends at the time accrued and payable on such shares shall be
allocated pro rata on a share-by-share basis among all such shares at the time
outstanding. The Board of Directors may fix a record date for the determination
of holders of shares of Series A Preferred Stock entitled to receive payment of
a dividend or distribution declared thereon, which record date shall be not more
than 50 days prior to the date fixed for the payment thereof.
2
<PAGE> 36
Section 3. Voting Rights. The holders of shares of Series A Preferred
Stock shall have the following voting rights:
(A) Subject to the provision for adjustment hereinafter set forth, each
share of Series A Preferred Stock shall entitle the holder thereof to 1000 votes
on all matters submitted to a vote of the shareholders of the Company. In the
event the Company shall at any time declare or pay any dividend on the Common
Stock payable in shares of Common Stock, or effect a subdivision or combination
or consolidation of the outstanding shares of Common Stock (by reclassification
or otherwise than by payment of a dividend in shares of Common Stock) into a
greater or lesser number of shares of Common Stock, then in each such case the
number of votes per share to which holders of shares of Series A Preferred Stock
were entitled immediately prior to such event shall be adjusted by multiplying
such number by a fraction, the numerator of which is the number of shares of
Common Stock outstanding immediately after such event and the denominator of
which is the number of shares of Common Stock that were outstanding immediately
prior to such event.
(B) Except as otherwise provided herein, in any other Certificate of
Designations creating a series of Preferred Stock or any similar stock, or by
law, the holders of shares of Series A Preferred Stock and the holders of shares
of Common Stock and any other capital stock of the Company having general voting
rights shall vote together as one class on all matters submitted to a vote of
shareholders of the Company.
(C) Except as set forth herein, or as otherwise provided by law,
holders of Series A Preferred Stock shall have no special voting rights and
their consent shall not be required (except to the extent they are entitled to
vote with holders of Common Stock as set forth herein) for taking any corporate
action.
Section 4. Certain Restrictions.
(A) Whenever quarterly dividends or other dividends or distributions
payable on the Series A Preferred Stock as provided in Section 2 are in arrears,
thereafter and until all accrued and unpaid dividends and distributions, whether
or not declared, on shares of Series A Preferred Stock outstanding shall have
been paid in full, the Company shall not:
(i) declare or pay dividends, or make any other distributions, on
any shares of stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series A Preferred
Stock;
(ii) declare or pay dividends, or make any other distributions, on
any shares of stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Series A Preferred
Stock, except dividends paid ratably on the Series A Preferred Stock
and all such parity stock on which dividends are payable or in arrears
in proportion to the total amounts to which the holders of all such
shares are then entitled;
3
<PAGE> 37
(iii) redeem or purchase or otherwise acquire for consideration
shares of any stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series A Preferred
Stock, provided that the Company may at any time redeem, purchase or
otherwise acquire shares of any such junior stock in exchange for
shares of any stock of the Company ranking junior (either as to
dividends or upon dissolution, liquidation or winding up) to the Series
A Preferred Stock; or
(iv) redeem or purchase or otherwise acquire for consideration any
shares of Series A Preferred Stock, or any shares of stock ranking on a
parity with the Series A Preferred Stock, except in accordance with a
purchase offer made in writing or by publication (as determined by the
Board of Directors) to all holders of such shares upon such terms as
the Board of Directors, after consideration of the respective annual
dividend rates and other relative rights and preferences of the
respective series and classes, shall determine in good faith will
result in fair and equitable treatment among the respective series or
classes.
(B) The Company shall not permit any subsidiary of the Company to
purchase or otherwise acquire for consideration any shares of stock of the
Company unless the Company could, under paragraph (A) of this Section 4,
purchase or otherwise acquire such shares at such time and in such manner.
Section 5. Reacquired Shares. Any shares of Series A Preferred Stock
purchased or otherwise acquired by the Company in any manner whatsoever shall be
retired and cancelled promptly after the acquisition thereof. All such shares
shall upon their cancellation become authorized but unissued shares of Preferred
Stock and may be reissued as part of a new series of Preferred Stock subject to
the conditions and restrictions on issuance set forth herein, in the Certificate
of Incorporation, or in any other Certificate of Designations creating a series
of Preferred Stock or any similar stock or as otherwise required by law.
Section 6. Liquidation, Dissolution or Winding Up. Upon any
liquidation, dissolution or winding up of the Company, no distribution shall be
made (1) to the holders of shares of stock ranking junior (either as to
dividends or upon liquidation, dissolution or winding up) to the Series A
Preferred Stock unless, prior thereto, the holders of shares of Series A
Preferred Stock shall have received $1000 per share, plus an amount equal to
accrued and unpaid dividends and distributions thereon, whether or not declared,
to the date of such payment, provided that the holders of shares of Series A
Preferred Stock shall be entitled to receive an aggregate amount per share,
subject to the provision for adjustment hereinafter set forth, equal to 1000
times the aggregate amount to be distributed per share to holders of shares of
Common Stock, or (2) to the holders of shares of stock ranking on a parity
(either as to dividends or upon liquidation, dissolution or winding up) with the
Series A Preferred Stock, except distributions made ratably on the Series A
Preferred Stock and all such parity stock in proportion to the total amounts to
which the holders of all such shares are entitled upon such liquidation,
dissolution or winding up. In the event the Company shall at any time declare or
pay any dividend on the
4
<PAGE> 38
Common Stock payable in shares of Common Stock, or effect a subdivision or
combination or consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise than by payment of a dividend in shares of Common
Stock) into a greater or lesser number of shares of Common Stock, then in each
such case the aggregate amount to which holders of shares of Series A Preferred
Stock were entitled immediately prior to such event under the proviso in clause
(1) of the preceding sentence shall be adjusted by multiplying such amount by a
fraction the numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of which is the
number of shares of Common Stock that were outstanding immediately prior to such
event.
Section 7. Consolidation, Merger, etc. In case the Company shall enter
into any consolidation, merger, combination or other transaction in which the
shares of Common Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, then in any such case each share of
Series A Preferred Stock shall at the same time be similarly exchanged or
changed into an amount per share, subject to the provision for adjustment
hereinafter set forth, equal to 1000 times the aggregate amount of stock,
securities, cash and/or any other property (payable in kind), as the case may
be, into which or for which each share of Common Stock is changed or exchanged.
In the event the Company shall at any time declare or pay any dividend on the
Common Stock payable in shares of Common Stock, or effect a subdivision or
combination or consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise than by payment of a dividend in shares of Common
Stock) into a greater or lesser number of shares of Common Stock, then in each
such case the amount set forth in the preceding sentence with respect to the
exchange or change of shares of Series A Preferred Stock shall be adjusted by
multiplying such amount by a fraction, the numerator of which is the number of
shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
Section 8. No Redemption. The shares of Series A Preferred Stock shall
not be redeemable.
Section 9. Rank. The Series A Preferred Stock shall rank, with respect
to the payment of dividends and the distribution of assets, junior to all series
of any other class of the Company's Preferred Stock.
Section 10. Amendment. The Certificate of Incorporation of the Company
shall not be amended in any manner which would materially alter or change the
powers, preferences or special rights of the Series A Preferred Stock so as to
affect them adversely without the affirmative vote of the holders of at least
two-thirds of the outstanding shares of Series A Preferred Stock, voting
together as a single class.
5
<PAGE> 39
THE UNDERSIGNED, hereby declares and certifies that this Certificate of
Designation is his act and deed and the facts herein are true, and accordingly
has hereunto set his hand this 10th day of July, 1998.
CLARK/BARDES HOLDINGS, INC.
By:
-------------------------------------
Melvin G. Todd
President and Chief Executive Officer
6
<PAGE> 40
EXHIBIT B
Form of Rights Certificate
Certificate No. R- Rights
NOT EXERCISABLE AFTER JULY 10, 2008 OR EARLIER IF REDEMPTION OR
EXCHANGE OCCURS. THE RIGHTS ARE SUBJECT TO REDEMPTION AT $0.01 PER
RIGHT AND TO EXCHANGE ON THE TERMS SET FORTH IN THE RIGHTS AGREEMENT.
UNDER CERTAIN CIRCUMSTANCES, RIGHTS BENEFICIALLY OWNED BY AN ACQUIRED
PERSON (AS SUCH TERM IS DEFINED IN THE RIGHTS AGREEMENT) AND ANY
SUBSEQUENT HOLDER OF SUCH RIGHTS MAY BECOME NULL AND VOID.
Rights Certificate
CLARK/BARDES HOLDINGS, INC.
This certifies that _____________________, or registered assigns, is
the registered owner of the number of Rights set forth above, each of which
entitles the owner thereof, subject to the terms, provisions and conditions of
the Rights Agreement, dated as of July 10, 1998 (the "Rights Agreement"),
between Clark/Bardes Holdings, Inc., a Delaware corporation (the "Company"), and
The Bank of New York (the "Rights Agent"), to purchase from the Company at any
time after the Distribution Date (as such term is defined in the Rights
Agreement) and prior to 5:00 P.M., Dallas, Texas time, on July 10, 2008 at the
principal office of the Rights Agent, or at the office of its successor as
Rights Agent, one one-thousandth of a fully paid non-assessable share of Junior
Participating Preferred Stock, Series A, par value $0.01 per share (the
"Preferred Shares"), of the Company, at a purchase price of $_____ per one
one-thousandth of a Preferred Share (the "Purchase Price"), upon presentation
and surrender of this Rights Certificate with the Form of Election to Purchase
duly executed. The number of Rights evidenced by this Rights Certificate (and
the number of one one-thousandths of a Preferred Share which may be purchased
upon exercise hereof) set forth above, and the Purchase Price set forth above,
are the number and Purchase Price as of July 10, 1998, based on the Preferred
Shares as constituted at such date. As provided in the Rights Agreement, the
Purchase Price and the number of one one-thousandths of a Preferred Share which
may be purchased upon the exercise of the Rights evidenced by this Rights
Certificate are subject to modification and adjustment upon the happening of
certain events.
This Rights Certificate is subject to all of the terms, provisions and
conditions of the Rights Agreement, which terms, provisions and conditions are
hereby incorporated herein by reference and made a part hereof and to which
Rights Agreement reference is hereby made for a full description of the rights,
limitations of rights, obligations, duties and immunities hereunder of the
Rights Agent, the Company and the holders of the Rights Certificates. Copies of
the Rights Agreement are on file at the principal executive offices of the
Company and the above-mentioned offices of the Rights Agent.
This Rights Certificate, with or without other Rights Certificates,
upon surrender at the principal office of the Rights Agent, may be exchanged for
another Rights Certificate or Rights
<PAGE> 41
Certificates of like tenor and date evidencing Rights entitling the holder to
purchase a like aggregate number of Preferred Shares as the Rights evidenced by
the Rights Certificate or Rights Certificates surrendered shall have entitled
such holder to purchase. If this Rights Certificate shall be exercised in part,
the holder shall be entitled to receive upon surrender hereof another Rights
Certificate or Rights Certificates for the number of whole Rights not exercised.
Subject to the provisions of the Rights Agreement, the Rights evidenced
by this Certificate (i) may be redeemed by the Company at a redemption price of
$0.01 per Right or (ii) may be exchanged in whole or in part for Preferred
Shares or shares of the Company's Common Stock, par value $0.01 per share.
No fractional Preferred Shares will be issued upon the exercise of any
Right or Rights evidenced hereby (other than fractions which are integral
multiples of one one-thousandth of a Preferred Share, which may, at the election
of the Company, be evidenced by depositary receipts), but in lieu thereof a cash
payment will be made, as provided in the Rights Agreement.
No holder of this Rights Certificate shall be entitled to vote or
receive dividends or be deemed for any purpose the holder of the Preferred
Shares or of any other securities of the Company which may at any time be
issuable on the exercise hereof, nor shall anything contained in the Rights
Agreement or herein be construed to confer upon the holder hereof, as such, any
of the rights of a shareholder of the Company or any right to vote for the
election of directors or upon any matter submitted to shareholders at any
meeting thereof, or to give or withhold consent to any corporate action, or to
receive notice of meetings or other actions affecting shareholders (except as
provided in the Rights Agreement), or to receive dividends or subscription
rights, or otherwise, until the Right or Rights evidenced by this Rights
Certificate shall have been exercised as provided in the Rights Agreement.
This Rights Certificate shall not be valid or obligatory for any
purpose until it shall have been countersigned by the Rights Agent.
WITNESS the facsimile signature of the proper officers of the Company
and its corporate seal.
Dated as of .
-----------------
ATTEST: CLARK/BARDES HOLDINGS, INC.
---------------------
----------------------------------------
Melvin G. Todd
President and Chief Executive Officer
2
<PAGE> 42
Countersigned:
THE BANK OF NEW YORK
By:
-----------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
3
<PAGE> 43
Form of Reverse Side of Rights Certificate
FORM OF ASSIGNMENT
(To be executed by the registered holder if such
holder desires to transfer the Rights Certificate.)
FOR VALUE RECEIVED ________________ hereby sells, assigns and transfers
unto ____________________________________ (Please print name and address of
transferee) this Rights Certificate, together with all right, title and interest
therein, and does hereby irrevocably constitute and appoint
______________________ as Attorney, to transfer the within Rights Certificate on
the books of the within-named Company, with full power of substitution.
Dated:
--------------------------------
Signature:
----------------------------
Name:
---------------------------------
Signature Guaranteed:
---------------------------------------------------
Signatures must be guaranteed by a member firm of a registered national
securities exchange, a member of the National Association of Securities Dealers,
Inc., or a commercial bank or trust company having an office or correspondent in
the United States.
- --------------------------------------------------------------------------------
Certificate
The undersigned hereby certifies by checking the appropriate boxes
that:
(1) this Rights Certificate [ ] is [ ] is not being sold, assigned and
transferred by or on behalf of a Person who is or was an Acquiring Person or an
Affiliate or Associate of any such Acquiring Person (as such terms are defined
pursuant to the Rights Agreement)
(2) after due inquiry and to the best knowledge of the undersigned, it
[ ] did [ ] did not acquire the Rights evidenced by this Rights Certificate from
any Person who is, was or subsequently became an Acquiring Person or an
Affiliate or Associate of an Acquiring Person.
Dated: , 19
------------------ ----
Signature:
----------------------
Signature Guaranteed:
-------------------------------
<PAGE> 44
NOTICE
The signature to the foregoing Assignment and Certificate must
correspond to the name as written upon the face of this Rights Certificate in
every particular, without alteration or enlargement or any change whatsoever.
2
<PAGE> 45
Form of Reverse Side of Rights Certificate -continued
FORM OF ELECTION TO PURCHASE
(To be executed if holder desires to exercise
Rights represented by the Rights Certificate.)
To CLARK/BARDES HOLDINGS, INC.:
The undersigned hereby irrevocably elects to exercise _________________
___________________ Rights represented by this Rights Certificate to purchase
the Preferred Shares issuable upon the exercise of such Rights and requests that
certificates for such Preferred Shares be issued in the name of :
Please insert social security or other identifying number:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Please print name and address)
If such number of Rights shall not be all the Rights evidenced by this Rights
Certificate, a new Rights Certificate for the balance remaining of such Rights
shall be registered in the name of and delivered to:
Please insert social security or other identifying number:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Please print name and address)
Dated:
------------------------------------
Signature:
--------------------------------
Name:
-------------------------------------
Signature Guaranteed:
-----------------------------------
Signatures must be guaranteed by a member firm of a registered national
securities exchange, a member of the National Association of Securities Dealers,
Inc., or a commercial bank or trust company having an office or correspondent in
the United States.
- -----------------------------------------------------------------------------
3
<PAGE> 46
Certificate
The undersigned hereby certifies by checking the appropriate boxes
that:
(1) the Rights evidenced by this Rights Certificate [ ] are [ ] are not
being exercised by or on behalf of a Person who is or was an Acquiring Person or
an Affiliate or Associate of any such Acquiring Person (as such terms are
defined pursuant to the Rights Agreement);
(2) after due inquiry and to the best knowledge of the undersigned, it
[ ] did [ ] did not acquire the Rights evidenced by this Rights Certificate from
any Person who is, was or became an Acquiring Person or an Affiliate or
Associate of an Acquiring Person.
Dated: , 19
----------------- ----
Signature:
-----------------------------
Signature Guaranteed:
------------------------------
4
<PAGE> 47
EXHIBIT C
SUMMARY OF RIGHTS TO PURCHASE
PREFERRED SHARES
On July 10, 1998, the Board of Directors of Clark/Bardes Holdings, Inc.
(the "Company") declared a dividend of one preferred share purchase right (a
"Right") for each outstanding share of common stock, par value $0.01 per share
(the "Common Shares"), of the Company. The dividend is payable on July 10, 1998
(the "Record Date") to the shareholders of record on that date. Each Right
entitles the registered holder to purchase from the Company one one-thousandth
of a share of Junior Participating Preferred Stock, Series A, par value $0.01
per share (the "Preferred Shares"), of the Company at a price of $______ per one
one-thousandth of a Preferred Share (the "Purchase Price"), subject to
adjustment. The description and terms of the Rights are set forth in a Rights
Agreement (the "Rights Agreement") between the Company and The Bank of New York,
as Rights Agent (the "Rights Agent").
Until the earlier to occur of (i) 10 days following a public
announcement that a person or group of affiliated or associated persons (an
"Acquiring Person") have acquired beneficial ownership of 15% or more of the
outstanding Common Shares or (ii) 10 business days (or such later date as may be
determined by action of the Board of Directors prior to such time as any person
or group of affiliated persons becomes an Acquiring Person) following the
commencement of, or announcement of an intention to make, a tender offer or
exchange offer the consummation of which would result in the beneficial
ownership by a person or group of 15% or more of the outstanding Common Shares
(the earlier of such dates being called the "Distribution Date"), the Rights
will be evidenced, with respect to any of the Common Share certificates
outstanding as of the Record Date, by such Common Share certificate with a copy
of this Summary of Rights attached thereto.
The Rights Agreement provides that, until the Distribution Date (or
earlier redemption or expiration of the Rights), the Rights will be transferred
with and only with the Common Shares. Until the Distribution Date (or earlier
redemption or expiration of the Rights), new Common Share certificates issued
after the Record Date upon transfer or new issuance of Common Shares will
contain a notation incorporating the Rights Agreement by reference. Until the
Distribution Date (or earlier redemption or expiration of the Rights), the
surrender for transfer of any certificates for Common Shares outstanding as of
the Record Date, even without such notation or a copy of this Summary of Rights
being attached thereto, will also constitute the transfer of the Rights
associated with the Common Shares represented by such certificate. As soon as
practicable following the Distribution Date, separate certificates evidencing
the Rights ("Rights Certificates") will be mailed to holders of record of the
Common Shares as of the close of business on the Distribution Date and such
separate Rights Certificates alone will evidence the Rights.
The Rights are not exercisable until the Distribution Date. The Rights
will expire on July 10, 2008 (the "Final Expiration Date"), unless the Rights
are earlier redeemed or exchanged by the Company, in each case, as described
below.
<PAGE> 48
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 voting rights, the value of the one one-thousandth interest in a Preferred
Share purchasable upon exercise of each Right should approximate the value of
one Common Share.
In the event that the Company is acquired in a merger or other business
combination transaction or 50% or more of its consolidated assets or earning
power are sold after a person or group has become an Acquiring Person, proper
provision will be made so that each holder of a Right will thereafter have the
right to receive, upon the exercise thereof at the then current exercise price
of the Right, that number of shares of common stock of the acquiring company
which at the time of such transaction will have a market value of two times the
exercise price of the Right. In the event that any person or group of affiliated
or associated persons becomes an Acquiring Person, proper provision shall be
made so that each holder of a Right, other than Rights beneficially owned by the
Acquiring Person (which will thereafter be void), will thereafter have the right
to receive upon exercise that number of Common Shares having a market value of
two times the exercise price of the Right.
2
<PAGE> 49
At any time after any person or group becomes an Acquiring Person and
prior to the acquisition by such person or group of 50% or more of the
outstanding Common Shares, the Board of Directors of the Company may exchange
the Rights (other than Rights owned by such person or group which will have
become void), in whole or in part, at an exchange ratio of one Common Share, or
one one-thousandth of a Preferred Share (or of a share of a class or series of
the Company'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 the Company, be evidenced by depositary
receipts) and in lieu thereof, an adjustment in cash will be made based on the
market price of the Preferred Shares on the last trading day prior to the date
of exercise.
At any time prior to the acquisition by a person or group of affiliated
or associated persons of beneficial ownership of 15% or more of the outstanding
Common Shares, the Board of Directors of the Company may redeem the Rights in
whole, but not in part, at a price of $0.01 per Right (the "Redemption Price").
The redemption of the Rights may be made effective at such time on such basis
with such conditions as the Board of Directors in its sole discretion may
establish. Immediately upon any redemption of the Rights, the right to exercise
the Rights will terminate and the only right of the holders of Rights will be to
receive the Redemption Price.
The terms of the Rights may be amended by the Board of Directors of the
Company without the consent of the holders of the Rights, except that from and
after such time as any person or group of affiliated or associated persons
becomes an Acquiring Person no such amendment may adversely affect the interests
of the holders of the Rights.
Until a Right is exercised, the holder thereof, as such, will have no
rights as a shareholder of the Company, including, without limitation, the right
to vote or to receive dividends.
A copy of the Rights Agreement has been filed with the Securities and
Exchange Commission as an Exhibit to a Registration Statement on Form S-1 dated
July 27, 1998 (File No. 333-56799. A copy of the Rights Agreement is available
free of charge from the Company. This summary description of the Rights does not
purport to be complete and is qualified in its entirety by reference to the
Rights Agreement, which is hereby incorporated herein by reference.
3
<PAGE> 1
EXHIBIT 5
[AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P. LETTERHEAD]
August 10, 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 10, 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 10.1
CLARK/BARDES HOLDINGS, INC.
1998 STOCK OPTION PLAN
1. Purpose. The Clark/Bardes Holdings, Inc. 1998 Stock Option Plan (the
"Plan") is intended to advance the interests of Clark/Bardes Holdings, Inc., a
Delaware corporation (the "Company"), and its stockholders, by encouraging and
enabling selected officers, directors, consultants, agents and employees, upon
whose judgment, initiative and effort the Company is largely dependent for the
successful conduct of its business, to acquire and retain a proprietary interest
in the Company by ownership of its stock. It is intended that options which may
qualify for treatment as "incentive stock options" under Section 422 (formerly
Section 422A) of the Internal Revenue Code of 1986, as amended, and all Treasury
Regulations promulgated thereunder (collectively, the "Code"), as well as
options which may not so qualify, may be granted under the Plan. This Plan is an
assumption by the Company, and an amendment and restatement, effective as of the
date specified in Paragraph 15 below, of the Clark/Bardes, Inc. Stock Option
Plan, adopted by the board of directors of Clark/Bardes, Inc. on March 5, 1997
(the "Prior Plan"). This Plan is being adopted by the Company as part of the
reorganization in which the Company was created and Clark/Bardes, Inc. was
merged into a wholly-owned subsidiary of the Company. Pursuant to this Plan and
written agreements entered into with the existing Optionees whose options were
granted under the Prior Plan, all outstanding and unexercised Options under the
Prior Plan ("Existing Options") have been (or will be) amended to become options
to purchase the appropriate number of shares of Company Stock at the appropriate
adjusted exercise price (under the principles described in Code Section 424(a))
and to make such Existing Options fully vested and exercisable. All Existing
Options shall be governed by the terms and provisions of the Prior
<PAGE> 2
Plan, except that (i) the Existing Options shall be amended as described in the
preceding sentence, (ii) the Committee, as defined herein, shall administer such
options and (iii) Paragraph 7 of the Plan shall apply in lieu of Paragraph 7 of
the Prior Plan.
2. Definitions.
(a) "Board" means the board of directors of the Company.
(b) "Committee" means the Board or a committee of the Board to whom its
authority to administer this Plan has been delegated. Any such committee shall
be composed of at least two individuals who shall qualify as "non-employee
directors" within the meaning of Rule 16b-3 promulgated under the Securities
Exchange Act of 1934.
(c) "Common Stock" means the Company's Common Stock, par value $.01 per
share.
(d) "Date of Exercise" means the date on which an Option is validly
exercised pursuant to the Plan.
(e) "Date of Grant" means the date on which an Option is granted under the
Plan, which will be the date the Committee takes the requisite action to grant
the Option, unless the Committee specifies a later date.
(f) "Fair Market Value" of the Company's Common Stock means, at any time
that the Common Stock is not publicly traded, the value of the Common Stock as
determined by the Committee, based on any reasonable valuation method; at any
time the Common Stock is traded on the NASDAQ over-the-counter market, the
closing interdealer bid quotation for the Common Stock (without retail mark-up,
mark-down or conversion) on such date; or at any time the Common Stock is traded
on a national
2
<PAGE> 3
securities exchange or the NASDAQ National Market System, the closing price of
such stock on such exchange or system on such date (or, in each case, if such
date is not a trading day, on the last trading day immediately preceding such
date). For options approved at such times as the Common Stock is not reported or
quoted by any such organization (including options approved prior to the initial
public stock offering of the Company), the fair market value of the shares of
Common Stock shall be the fair market value thereof determined in good faith by
the Committee. In addition to the above rules, Fair Market Value shall be
determined without regard to any restriction other than a restriction which, by
its terms, will never lapse.
(g) "Incentive Stock Option" means an option that qualifies as an incentive
stock option under all of the applicable requirements of the Code.
(h) "Incentive Stock Option Agreement" means the agreement between the
Company and the Optionee, in such form as may from time to time be adopted by
the Committee, under which the Optionee may purchase Common Stock pursuant to
the terms of an Incentive Stock Option granted under the Plan.
(i) "Non-Qualified Stock Option" means an option to purchase Common Stock
granted pursuant to the provisions of the Plan that does not qualify as an
Incentive Stock Option.
(j) "Non-Qualified Stock Option Agreement" means the agreement between the
Company and the Optionee, in such form as may from time to time be adopted by
the Committee, under which the Optionee may purchase Common Stock pursuant to
the terms of a Non-Qualified Stock Option granted under the Plan.
3
<PAGE> 4
(k) "Option" means an option granted under the Plan to purchase a share of
Common Stock.
(l) "Option Agreement" means a Non-Qualified Stock Option Agreement, or an
Incentive Stock Option Agreement.
(m) "Optionee" means a person to whom an Option, which has not expired, has
been granted under the Plan.
(n) "Participant" means any of those persons described in Paragraph 5
hereof who receive a grant of an Option.
(o) "Subsidiary" or "Subsidiaries" means a subsidiary corporation or
corporations of the Company as defined in Section 424(f) of the Code.
(p) "Successor" means the legal representative of the estate of a deceased
Optionee or the person or persons who acquire the right to exercise an Option by
bequest or inheritance or by reason of the death of an Optionee.
3. Administration and Interpretation of Plan. The Plan shall be
administered by the Committee. The Committee shall have full and final authority
in its discretion, subject to the provisions of the Plan: (i) to determine the
individuals to whom, and the time or times at which, Options shall be granted
and the number of shares of Common Stock covered by each Option; (ii) to
construe and interpret the Plan; and (iii) to make all other determinations and
take all other actions deemed necessary or advisable for the proper
administration of the Plan. All such actions and determinations by the Committee
shall be final and conclusively binding for all purposes and upon all persons.
4. Common Stock Subject to Options. The aggregate number of shares of the
Company's Common Stock which may be issued upon the exercise of Options granted
under
4
<PAGE> 5
the Plan shall not exceed 2,000,000, subject to adjustment by the Committee to
reflect, as deemed appropriate by the Board, any stock dividend, stock split,
reverse stock split, share combination, extraordinary cash dividend, warrants or
rights offerings to purchase Common Stock, exchange of shares, reorganization,
merger, recapitalization or the like, of or by the Company that affect the
Common Stock, such that an adjustment is necessary to maintain the benefits or
potential benefits intended to be provided under the Plan. The shares of Common
Stock to be issued upon the exercise of Options may be authorized but unissued
shares, shares issued and reacquired by the Company or shares bought on the open
market for the purposes of the Plan. In the event any Option shall, for any
reason, terminate or expire or be canceled or surrendered without having been
exercised in full, the shares subject to such Option, but not purchased
thereunder, shall again be available for Options to be granted under the Plan.
5. Participants. Options may be granted under the Plan to any person who is
an officer or other key employee (including officers and employees who are also
directors), non-employee directors or a licensed insurance producer of the
Company or any of its Subsidiaries (collectively, "Participants").
6. Terms and Conditions of Options. Any Option granted under the Plan shall
be evidenced by either an Incentive Stock Option Agreement or a Non-Qualified
Stock Option Agreement executed by the Company and the Optionee. Such Option
Agreement shall be subject to the following limitations and conditions:
(a) Option Price. The option price per share with respect to each
Option shall be determined by the Committee but in no instance shall the
option price for any Incentive Stock Option be less than 100% of the Fair
Market Value of a share of the Common Stock on the Date of Grant. However,
nothing contained herein shall prohibit
5
<PAGE> 6
the Committee, in its discretion, from canceling any outstanding options and
reissuing a new Option at a lower exercise price in the event that the Fair
Market Value per share of Common Stock at any time prior to the date of exercise
falls below the exercise price of any Option granted pursuant to the Plan.
(b) Payment of Option Price. Full payment for shares purchased upon
exercising an Option shall be made (i) in cash or by check, (ii) if so permitted
by the Company, by delivery of previously owned shares of Common Stock, (iii)
partly in cash or by check and partly in such stock or (iv) by delivery of the
equivalent thereof acceptable to the Company. The value of shares of Common
Stock delivered in connection with the payment of the option price shall be the
Fair Market Value of such shares on the Date of Exercise of the Option.
(c) Term of Option. The expiration date of each Option shall not be more
than ten (10) years from the Date of Grant.
(d) Vesting. Options may vest either on the Date of Grant or according to
such vesting schedule or event as may be specified by the Committee. Neither an
Optionee nor his Successor shall have any of the rights of a stockholder of the
Company until the certificate or certificates evidencing the shares purchased
pursuant to the exercise of an Option are properly delivered to such Optionee or
his Successor.
(e) Exercise of an Option. Each Option shall be exercisable at any time,
and from time to time, and in no particular order if the Optionee holds more
than one Option, throughout a period commencing on or after the Date of Grant,
or vesting date as specified by the Committee, and ending upon the earliest of
the expiration, cancellation, surrender or termination of the Option; provided
however, that no Option shall be
6
<PAGE> 7
exercisable in whole or in part prior to the date of stockholder approval of the
Plan. Furthermore, the exercise of each Option shall be subject to the condition
that if at any time the Company shall determine in its discretion that the
satisfaction of withholding tax or other withholding liabilities, or that the
listing, registration, or qualification of any share otherwise deliverable upon
such exercise upon any securities exchange or under any state or federal law, or
that the report to, or consent or approval of, any regulatory body, is necessary
or desirable as a condition of, or in connection with, such exercise or the
delivery or purchase of shares pursuant thereto, then in any such event, such
exercise shall not be effective unless such withholding, listing, registration,
qualification, report, consent or approval shall have been effected or obtained
free of any conditions not acceptable to the Company. The Committee may provide
for the alternative exercise of an Option by surrendering the Option in exchange
for an amount of cash or shares of Common Stock equal in amount or value to the
product of (A) the number of shares of Common Stock subject to the Option (or
portion thereof) being exercised and (B) the excess, if any, of (i) the Fair
Market Value of a share of Common Stock on the date of exercise over (ii) the
exercise price of the Option being exercised. Any such alternative exercise of
an Incentive Stock Option shall be in accordance with the Code requirements for
tandem grants of incentive stock options and stock appreciation rights. If an
Option is exercised through a surrender, as described above, the shares of
Common Stock subject to such Option shall be subtracted from the number of
remaining shares available for issuance pursuant to the Plan.
(f) Nontransferability of Option. Except as may otherwise be provided in an
applicable Non-Qualified Stock Option Agreement, no Option shall be transferable
or
7
<PAGE> 8
assignable by an Optionee, voluntarily, or by operation of law, other than by
will or the laws of descent and distribution. Each Option shall be exercisable,
during the Optionee's lifetime, only by the Optionee. No Option or the shares
covered thereby shall be pledged or hypothecated in any way.
(g) Termination of Employment. Except as otherwise provided in an
applicable Option agreement, upon the termination of an Optionee's employment
with the Company or with any of its Subsidiaries for any reason other than
death, the Optionee's Options shall expire unless exercised prior to the date of
the expiration of such Options or within ninety (90) days after said termination
of employment, whichever occurs first. Neither the adoption of this Plan nor the
grant of an Option to an eligible person shall alter in any way the Company's or
the relevant Subsidiary's rights to terminate such person's employment or
directorship at any time with or without cause nor does it confer upon such
person any rights or privileges to continued employment, or any other rights and
privileges, except as specifically provided in the Plan.
(h) Death of Optionee. Except as otherwise provided in an applicable Option
Agreement, if an Optionee dies while in the employ of the Company or any
Subsidiary, his Option shall expire unless exercised (to the extent exercisable
immediately prior to Optionee's death) by his Successor prior to the date of
expiration of such Options or one (1) year from the date of the Optionee's
death, whichever occurs first.
(i) Ten Percent Stockholders. Notwithstanding anything herein to the
contrary, an Option which is intended to qualify as an Incentive Stock Option
may be granted hereunder to any Optionee who, immediately before such Option is
granted,
8
<PAGE> 9
beneficially owns, directly or indirectly, more than 10% of the total voting
power of all classes of stock of the Company only if both of the following
conditions are met:
(i) The option price per share shall be no less than 110% of the Fair
Market Value of a share of Common Stock on the Date of Grant; and
(ii) The expiration date of the Option shall be not more than five (5)
years from the Date of Grant.
(j) Aggregate Fair Market Value. Notwithstanding anything herein to the
contrary, with respect to an Option which is intended to qualify as an Incentive
Stock Option, the aggregate Fair Market Value (determined as of the time the
option is granted) of the Common Stock with respect to which Incentive Stock
Options are exercisable for the first time by an Optionee during any calendar
year (under all incentive stock option plans of the Company, and its parent and
Subsidiary corporations) shall not exceed $100,000.
(k) Other Terms. Each Incentive Stock Option Agreement or Non-Qualified
Stock Option Agreement, as the case may be, may contain such other provisions
(not inconsistent herewith) as the Committee in its discretion may determine,
including, without limitation:
(i) a provision conditioning the exercise of all or part of an Option
upon such matters as the Committee may deem appropriate (if any) such as
the passage of time, or the attainment of certain performance goals
appropriate to reflect the contribution of the Optionee to the performance
of the Company;
(ii) a provision giving the Committee the discretionary authority to
accelerate the exercisability of an Option in spite of any contrary
provision
9
<PAGE> 10
contained in an Option, under such circumstances as the Committee may
deem appropriate;
(iii) the manner in which an Option is to be exercised;
(iv) investment representations; and
(v) confidentiality, nondisclosure, noncompete and nonsolicitation
provisions.
7. Repurchase by the Company.
(a) Except as may otherwise be provided in any applicable Option Agreement
the Company shall have the right, exercisable within 60 days after the later of
(i) the date of Optionee's termination of employment with the Company or a
Subsidiary or termination of service as a director or consultant or (ii) the
date of the exercise by any person other than Optionee of the Option pursuant to
any provision of this Plan, to purchase any shares of Common Stock (or
securities into which any Common Stock has been converted) that were acquired
pursuant to the exercise of an Option under this Plan ("Option Shares"). To the
extent that an Optionee holds exercisable Options at the time of termination of
employment or termination of service as a director or consultant, the Company
may elect to purchase such exercisable Options in the same manner as the Option
Shares at a price equal to the Repurchase Price (as hereinafter defined) less
the exercise price of such exercisable Options.
(b) The Repurchase Price for the purchase of the Option Shares shall be
determined as follows:
(i) if the Common Stock has been registered pursuant to a registration
statement filed under the Securities Act of 1933, as amended, and the rules
and
10
<PAGE> 11
regulations of the Securities and Exchange Commission thereunder (the
"Act"), then the Repurchase Price per share shall be equal to the average
closing price per share of the Common Stock for the 30 days preceding the
date of termination of employment by the Company or a Subsidiary as
published in the Wall Street Journal; or
(ii) if the Common Stock has not been registered under the Act, then
the price shall be the book value per share of Common Stock as of the last
day of the month during which termination of employment with the Company or
a Subsidiary (or termination of service as a Director occurs) as determined
by the formula:
P = A-L
---
S
P = the purchase price (book value) per Option Share,
A = the total assets of the Company and its Subsidiaries (determined
pursuant to generally accepted accounting principles) shown on the
Company's balance sheet for the most recent fiscal year ended,
L = the total liabilities of the Company and its Subsidiaries
(determined pursuant to generally accepted accounting principles)
shown on the Company's balance sheet for the most recent fiscal
year ended,
S = the total number of shares of capital stock of the Company
outstanding on a fully diluted basis as shown on the Company's
balance sheet for the most recent fiscal year ended and as
adjusted for any capital transactions, dividends, or
reclassification of stock subsequent to such date.
(c) To the extent that the Company has the right to purchase Option Shares,
the Company may exercise such right by delivery (upon or within sixty days after
the later of Optionee's termination of employment with the Company or a
Subsidiary (or termination of
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<PAGE> 12
employment with the Company or a Subsidiary (or termination of service
as a director or consultant) or exercise by a person other than Optionee
of the Option) of written notice to the Optionee (or such other person
exercising such Option) stating the full number of Option Shares that
the Company has elected to purchase, the purchase price per Option
Share, and the time of purchase (which time shall not be earlier than 5
days from the date of notice). At the time of purchase, the Optionee
shall deliver the certificate or certificates representing his Option
Shares to the Company at its offices and shall execute any stock powers
or other instruments as may be necessary to transfer full ownership of
the Option Shares to the Company. At the time of purchase, the Company
shall issue its own check within 60 days to the Optionee in an amount
equal to the aggregate purchase price for the Option Shares for which
the Company has exercised its right to purchase, less any amounts
required to be withheld under applicable laws. In the event of
Optionee's death or disability, the Company's right to purchase and the
manner of purchase shall apply with regard to the Optionee's estate,
beneficiary, administrator or personal representative.
8. No Entitlement or Disqualification. The grant of an Option shall not be
deemed either to entitle the Optionee to, or disqualify the Optionee from,
participation in any other grant of options under this Plan or any other stock
option plan of the Company.
9. Allotment of Shares. Subject to the other terms of this Plan, the
Committee shall, in its discretion, determine the number of Options to be
granted from time to time to a Participant.
10. Adjustments. The number of shares of Common Stock covered by each
outstanding Option granted under the Plan and the option price shall be adjusted
to reflect, as deemed appropriate by the Committee in its discretion, any stock
dividend, stock split, reverse
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<PAGE> 13
stock split, share combination, exchange of shares, recapitalization, merger,
consolidation, separation, reorganization, liquidation or the like of or by the
Company. Decisions by the Committee as to what adjustments shall be made, and
the extent thereof, shall be final, binding and conclusive for all purposes and
upon all persons. The Committee shall also have discretion to provide, in an
Option Agreement or prior to exercise of an Option, for the assumption of any
Option granted hereunder or the substitution of other options to acquire stock
of another corporation in accordance with the principles of Code Section 424(a).
11. Designation of Incentive Stock Options. The Committee shall cause each
Option granted hereunder to be clearly designated in the agreement evidencing
such Option, at the time of grant, as to whether or not it is intended to
qualify as an Incentive Stock Option.
12. Notices. Whenever any notice is required or permitted hereunder, such
notice must be in writing and personally delivered or sent by mail. Any notice
required or permitted to be delivered hereunder shall be deemed to be delivered
on the date which it is personally delivered, or, whether actually received or
not, on the third business day after it is deposited in the United States mail,
certified or registered, postage prepaid, addressed to the person who is to
receive it at the address which such person has theretofore specified by written
notice delivered in accordance herewith. The Company or an Optionee may change,
at any time and from time to time, by written notice to the other, the address
which it or he had theretofore specified for receiving notices. Until changed in
accordance herewith, the Company and each Optionee shall specify as its and his
address for receiving notices the address set forth in the option agreement
pertaining to the shares to which such notice relates.
13. Amendment or Discontinuance. The Plan and any Option outstanding
hereunder may be amended or discontinued by the Board without the approval of
the stockholders of the
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<PAGE> 14
Company, except that the Board may not, except as expressly provided in the
Plan, increase the aggregate number of shares which may be issued under Options
granted pursuant to the Plan, change the categories of persons who are
Participants in the Plan or materially increase the benefits which may accrue to
Participants under the Plan, without such approval.
14. Effect of the Plan. Neither the adoption of this Plan nor any action of
the Board or Committee shall be deemed to give any person any right to be
granted an option to purchase Common Stock of the Company or any of its
Subsidiaries, or any other rights except as may be evidenced by an Option
Agreement, or any amendment thereto, duly authorized by the Committee and
executed on behalf of the Company and then only to the extent and on the terms
and conditions expressly set forth therein.
15. Effective Date. This Plan shall be effective on the date of its
adoption by the Board (the "Effective Date"); provided, however, that the
stockholders of the Company must approve the Plan within twelve months of such
Board adoption. In the event such stockholder approval is not timely obtained,
any Options granted after the Effective Date shall be null and void.
16. Term. No option may be granted under this Plan after February 28, 2007.
IN WITNESS WHEREOF, upon authorization of the Board of Directors and the
Stockholders of the Company, the undersigned has caused the Clark/Bardes
Holdings, Inc. 1998 Stock Option Plan to be executed effective as of the 1st
day of August, 1998.
/s/ MELVIN G. TODD
--------------------------------------
Melvin G. Todd
President and Chief Executive Officer
14
<PAGE> 1
EXHIBIT 10.33
COMMISSION TRANSFER AGREEMENT
RELATING TO THE TRANSFER BY
W.T. WAMBERG AND THE WAMBERG ORGANIZATION, INC.
OF THE RIGHTS TO CERTAIN COMMISSIONS
TO CLARK/BARDES, INC.
Dated: July 31, 1998
<PAGE> 2
COMMISSION TRANSFER AGREEMENT
COMMISSION TRANSFER AGREEMENT made as of July 31, 1998 by and between
W.T. WAMBERG ("Principal"), THE WAMBERG ORGANIZATION, INC., an Illinois
corporation and wholly owned by Principal ("TWO"), and CLARK/BARDES, INC., a
Delaware corporation ("CBI").
WITNESSETH:
WHEREAS, Principal is a shareholder in CBI and a successful insurance
producer who markets executive benefit and insurance plans to corporations and
not-for-profit organizations;
WHEREAS, Principal and CBI have entered into that certain Principal
Office Agreement on or about September 30, 1993 (the "Principal Office
Agreement") pursuant to which Principal has agreed to solicit, sell and
implement life insurance or consulting services and CBI has agreed to furnish
Principal marketing-materials, plan design ideas, selected life insurance
products and other services to assist Principal in the sales process;
WHEREAS, the Principal Office Agreement provides a procedure pursuant
to which each of CBI and Principal receive commissions and fees for services
performed thereunder;
WHEREAS, the Principal has assigned certain of these commissions to
TWO; and
WHEREAS, the Principal, TWO and CBI have agreed to reallocate how the
commissions and fees are paid to the Principal, TWO and CBI under the Principal
Office Agreement in exchange for the payment of $7,400,000 by CBI to TWO.
NOW, THEREFORE, in consideration of the premises, conditions and the
mutual covenants and agreements hereinafter set forth, the parties hereto agree
as follows:
1. Commissions to be Transferred. Subject to the terms and conditions
of this Agreement, Principal, TWO and CBI agree to modify the Principal Office
Agreement such that the commissions and fees related to certain Covered Business
(as such term is described in the Principal Office Agreement) shall be modified
as follows (the "Transferred Business"):
(a) Commissions and fees net of any CBI Administrative Costs (as
defined and determined pursuant to the Principal Office Agreement)
which results from the Transferred Business existing as of June 30,
1998 pursuant to the Principal Office Agreement and listed on Exhibit A
hereto (the "Transferred Commissions") shall be divided between
Principal and CBI such that 50% of the Transferred Commissions is
payable to CBI and 50% of the Transferred Commissions is payable to the
Principal, subject to the adjustments described below.
1
<PAGE> 3
(b) Upon receipt of the Transferred Commissions by CBI, CBI shall
pay the Principal 50% of such Transferred Commissions which shall be
distributed on a monthly basis in accordance with the terms of the
Principal Office Agreement. CBI shall keep 31% of such Transferred
Commissions for its own account and CBI shall set up a reserve on the
CBI Balance Sheet equal to 19% of such Transferred Commissions to be
distributed in accordance herewith (the "Commission Account").
(c) Within fifteen (15) days following the end of each month, CBI
shall conduct an accounting to determine the balance of the Commission
Account. If the balance of the Commission Account is greater than the
amounts provided for on Exhibit B (the "Target Amount") with respect to
the applicable month, CBI will distribute 50% of such excess to the
Principal within thirty (30) days following the end of such month. If
the balance of the Commission Account is less than the Target Amount
(the difference referred to as the "Shortfall Amount"), CBI shall
transfer all such amounts in the Commission Account to its own account
within thirty (30) days following the end of such month (the "Transfer
Date") and be entitled to keep all such amounts. In addition, CBI shall
be entitled to receive all Transferred Commissions from the Transfer
Date through the date on which CBI has received Transferred
Commissions, otherwise payable to Principal, equal to the Shortfall
Amount ("Shortfall Commissions"). The Shortfall Commissions shall be in
addition to any other Transferred Commissions which CBI shall otherwise
be entitled to receive. If the balance of the Commission Account is
equal to the Target Amount, no adjustment will be made.
(d) Principal or TWO, as appropriate, and CBI agree to advise the
various insurance companies related to the Transferred Business
described on Exhibit A hereto to pay CBI directly all Transferred
Commissions. CBI shall be the receiving party with respect to all such
commissions and fees and will be responsible for paying Principal its
share of such commissions and fees in accordance herewith.
(e) All commissions and fees not related to Transferred Business
shall be allocated among the parties pursuant to the Principal Office
Agreement. All other terms and provisions of the Principal Office
Agreement, other than the terms and provisions amended pursuant hereto,
shall apply to the Transferred Commissions and the Transferred
Business.
2. Purchase Price. The purchase price to be paid for the transfer of
the Transferred Commissions hereunder shall be $7,400,000 (the "Purchase
Price"). The Purchase Price shall be paid to TWO at the Closing by certified or
cashier's check or wire transfer of funds.
3. Closing. The closing of the transfer of the Transferred Commissions
pursuant to this Agreement (the "Closing") shall take place on January 1, 1999
at such time and place as shall be mutually agreed upon by the parties (the
"Closing Date").
2
<PAGE> 4
4. Representations and Warranties of Principal. As of the date hereof,
and as of the Closing, Principal represents and warrants to CBI and TWO as
follows:
4.1 Capacity and Authority of Principal. Principal has the
power and authority to enter into and perform this Agreement and the
other documents and transactions contemplated hereby. This Agreement
and the other documents executed and delivered by Principal pursuant
hereto constitute the legal, valid and binding obligations of
Principal, enforceable in accordance with their respective terms.
4.2 No Conflict. Neither the execution, delivery or performance of
this Agreement and all other documents in connection herewith nor the
consummation of the transactions contemplated hereby and thereby will
violate or conflict with or constitute a breach of or default under any
contract, instrument, agreement, indenture, license, law, order,
regulation or judgment to which Principal is a party or by which
Principal or the Transferred Commissions may be bound or affected. No
authorization, consent or approval or any order of any governmental or
public authority or agency is required for the execution, delivery or
performance of this Agreement or the consummation of the transactions
contemplated hereby.
5. Representations and Warranties of TWO. As of the date hereof and as
of the Closing, TWO represents and warrants to Principal and CBI as follows:
5.1 Organization, Standing and Authority of TWO. TWO is a
corporation duly organized, validly existing and in good standing under
the laws of Illinois, with the corporate power to execute and deliver
this Agreement and to carry out its obligations hereunder. The
execution, delivery and performance of this Agreement and all other
documents in connection herewith and the consummation of the
transactions contemplated hereby have been duly and validly authorized
by TWO's Board of Directors, and no other corporate proceedings on the
part of TWO are necessary to authorize this Agreement and the
transactions contemplated hereby. All requisite corporate action has
been taken to make them valid and binding upon TWO in accordance with
their respective terms. This Agreement and the other documents executed
and delivered by TWO pursuant hereto constitute legal, valid and
binding obligations of TWO, enforceable in accordance with their
respective terms.
5.2 No Conflict. Neither the execution, delivery or performance of
this Agreement and all other documents in connection herewith nor the
consummation of the transactions contemplated hereby and thereby will
violate or conflict with or constitute a breach of or default under any
contract, instrument, articles of incorporation, by-law, agreement,
indenture, license, law, order, regulation or judgment to which TWO is
a party or by which TWO or the Transferred Commissions may be bound or
affected. No authorization, consent or approval or any order of any
governmental or public authority or agency is required for the
execution, delivery or performance of this Agreement or the
consummation of the transactions contemplated hereby.
3
<PAGE> 5
6. Representations and Warranties of CBI. As of the date hereof and as
of the Closing, CBI represents and warrants to Principal and TWO as follows:
6.1 Organization, Standing and Authority of CBI. CBI is a
corporation duly organized, validly existing and in good standing under
the laws of Delaware, with the corporate power to execute and deliver
this Agreement and to carry out its obligations hereunder. The
execution, delivery and performance of this Agreement and all other
documents in connection herewith and the consummation of the
transactions contemplated hereby have been duly and validly authorized
by CBI's Board of Directors, and no other corporate proceedings on the
part of CBI are necessary to authorize this Agreement and the
transactions contemplated hereby. All requisite corporate action has
been taken to make them valid and binding upon CBI in accordance with
their respective terms. This Agreement and the other documents executed
and delivered by CBI pursuant hereto constitute legal, valid and
binding obligations of CBI, enforceable in accordance with their
respective terms.
6.2 No Conflict. Neither the execution, delivery or performance of
this Agreement and all other documents in connection herewith nor the
consummation of the transactions contemplated hereby and thereby will
violate or conflict with or constitute a breach of or default under any
contract, instrument, articles of incorporation, by-law, agreement,
indenture, license, law, order, regulation or judgment to which CBI is
a party or by which CBI or the Transferred Commissions may be bound or
affected. No authorization, consent or approval or any order of any
governmental or public authority or agency is required for the
execution, delivery or performance of this Agreement or the
consummation of the transactions contemplated hereby.
7. Survival of Representations and Warranties; Indemnities.
7.1 Survival. All representations, warranties and covenants made
by a party herein or hereunder shall be deemed to be relied upon by the
other party regardless of any investigation made by or on behalf of
such party, and all statements made in any certificate, list, schedule,
exhibit or other document delivered pursuant hereto prior to or at the
Closing shall be deemed warranties and representations made under this
Agreement.
7.2 Term of Transferred Commissions. The term of this Agreement
shall expire on December 31, 2008 ( the "Termination Date"). Upon the
Termination Date, the allocation of commissions and fees with respect
to the Transferred Commissions shall revert to the allocations provided
for in the Principal Office Agreement and the terms of this Agreement
related to such allocations shall no longer be applicable.
4
<PAGE> 6
8. Conditions to Obligations of CBI. CBI's obligation to consummate the
transactions contemplated by this Agreement is subject to the following
conditions for the exclusive benefit of CBI, to be fulfilled and/or performed on
or prior to the Closing:
8.1 Accuracy of Representations and Warranties. The
representations and warranties made by Principal and TWO in this
Agreement shall be true and correct in all respects on and as of the
Closing.
8.2 Completion of a IPO. CBI shall have successfully completed its
initial public offering.
9. Conditions to Obligations of Principal and TWO. The obligations of
Principal and TWO to consummate the transactions contemplated by this Agreement
are subject to the following conditions for the exclusive benefit of Principal
and TWO, to be fulfilled and/or performed on or prior to the Closing:
9.1 Accuracy of Representations and Warranties. The
representations and warranties made by CBI in this Agreement shall be
true and correct in all respects on and as of the Closing.
10. Miscellaneous.
10.1 Notice. All notices, requests, demands and other
communications hereunder shall be in writing and shall be deemed duly
given if delivered in person or by courier or if sent by certified or
registered mail, postage prepaid, to the following:
If to Principal or TWO:
Mr. W.T. Wamberg
c/o The Wamberg Organization
102 South Wynstone Park Drive
North Barrington, Illinois 60010
If to CBI:
Mel G. Todd
Clark/Bardes, Inc.
2121 San Jacinto Street, Suite 2200
Dallas, Texas 75201
or to such other address as any party may designate by written notice in the
aforesaid manner.
5
<PAGE> 7
10.2 Assignability. This Agreement shall not be assignable by any
of the parties hereto, without the other parties' written consent.
This Agreement shall inure to the benefit of and be binding upon the
respective successors and any permitted assigns of CBI, Principal and
TWO.
10.3 Governing Law. This Agreement shall be governed by and
construed in accordance with the internal laws of Texas.
10.4 Entire Agreement. This Agreement, the Exhibits hereto, and
other documents delivered or to be delivered pursuant to this
Agreement contain or will contain the entire agreement among the
parties hereto with respect to the transactions contemplated herein.
10.5 Waiver. Any failure of Principal and TWO or CBI to comply
with any obligation, covenant, agreement or condition herein may be
waived in writing by CBI (with respect to TWO and Principal) and
Principal (with respect to CBI), but such waiver or failure to insist
upon strict compliance with such obligation, covenant, agreement or
condition shall not operate as a waiver of, or estoppel with respect
to, any subsequent or other failure.
10.6 Amendment. This Agreement may be amended, modified, or
supplemented only by written agreement of the parties hereto.
10.7 Headings. The section and other headings contained in this
Agreement are for reference purposes only and shall not affect the
interpretation or meaning of this Agreement.
10.8 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same Agreement.
10.9 Further Assurances. The parties will, from time to time
following the Closing, upon the reasonable request of the other party,
execute, acknowledge and deliver in proper form such further
instruments and perform such further acts as may be reasonably
necessary or desirable to give effect to the transactions contemplated
by this Agreement or any Exhibit hereto.
6
<PAGE> 8
IN WITNESS WHEREOF, the parties have executed this Agreement on the
date first above written.
--------------------------------------
W.T. Wamberg
THE WAMBERG ORGANIZATION, INC.
By:
-----------------------------------
Its: President
CLARK/BARDES, INC.
By:
-----------------------------------
Its: President
7
<PAGE> 9
EXHIBIT A
TRANSFERRED BUSINESS
--------------------
8
<PAGE> 10
EXHIBIT B
TARGET AMOUNTS
--------------
9
<PAGE> 1
EXHIBIT 10.34
CLARK/BARDES, INC.
2121 San Jacinto Street
Suite 2200
Dallas, Texas 75201-7906
July 24, 1998
Great-West Life & Annuity Insurance Company
8515 East Orchard Road
3rd Floor, Tower 2
Englewood, Colorado 80111
Attn: Structured Finance Investments
Life Investors Insurance Company of America
c/o AEGON USA Investment Management, Inc.
4333 Edgewood Road N.E.
Cedar Rapids, Iowa 52499-5355
Attn: Director of Private Placements
Nationwide Life Insurance Company
One Nationwide Plaza (1-33-07)
Columbus, Ohio 43215-2220
Attn: Corporate Fixed-Income Securities
Ladies and Gentlemen:
We refer to the Note Agreement, dated as of September 8, 1997, between the
undersigned Clark/Bardes, Inc., a Texas corporation ("CBI-TEXAS"), and each of
you (as amended to date, the "SENIOR NOTE AGREEMENT"), and the Note and Warrant
Purchase Agreement, dated as of September 8, 1997, between CBI-Texas and each of
you (as amended to date, the "NOTE AND WARRANT PURCHASE AGREEMENT" and, together
with the Senior Note Agreement, the "AGREEMENTS"). We also refer to the letter
agreements, each dated as of June 11, 1998, between CBI-Texas and each of you,
respectively (the "WARRANT LETTERS"), pursuant to which you have agreed to sell,
and CBI-Texas has agreed to purchase, upon the terms and conditions set forth
therein, the Common Stock Purchase Warrants (the "WARRANTS") of CBI-Texas issued
to and held by you pursuant to the Note and Warrant Purchase Agreement.
Capitalized terms used but not defined in this letter are used with the meanings
given to such terms in the Agreements.
It is contemplated that Clark/Bardes, Inc., a Delaware corporation
("CBI-DELAWARE"), will become the successor by merger to CBI-Texas. CBI-Texas
prior to such merger, and CBI-Delaware after such merger, are each sometimes
referred to in this letter as the "COMPANY". As you are aware, Clark/Bardes
Holdings, Inc., a Delaware corporation ("CBH") which will own all of the
outstanding capital stock of the Company, has filed with the Securities and
Exchange Commission a Registration Statement on Form S-1 in connection with
the proposed initial public offering of common stock of CBH (the "IPO"). A copy
of the Registration Statement, in the form furnished to each of you, is
referred to in this letter as the "REGISTRATION STATEMENT".
<PAGE> 2
Great-West Life & Annuity Insurance Company
Life Investors Insurance Company of America
Nationwide Life Insurance Company
July 24, 1998
Page 2
Conditions. Your obligations under this letter are expressly conditioned
upon the satisfaction of each of the following conditions precedent (except that
in the case of the matters addressed in the first and second paragraphs of
Section 1 below, and in clauses (F), (K), (L), (M)(1) and (O) of Section VI
below, only conditions (e) and (f) must be satisfied since such matters are not
dependent upon the successful completion of the IPO):
(a) The IPO shall have been consummated not later than December 31,
1998;
(b) CBH shall have received net proceeds from the IPO (i.e., net of
underwriting discounts and commissions and net of expenses payable in
connection with the IPO) of at least $35,000,000;
(c) CBH shall have contributed at least 95% of the net proceeds from
the IPO to the Company;
(d) The Company contemporaneously shall have purchased the Warrants
from each of you as contemplated by the Warrant Letters;
(e) The Company, CBH and you shall have executed all documentation
that in your reasonable judgment is necessary or appropriate with respect to
the matters herein contemplated, and you shall have received such legal
opinions from counsel to the Company and CBH, and your special counsel, as you
may reasonably request in connection with the transaction herein contemplated;
and
(f) No Default or Event of Default shall exist under the Agreements,
both immediately prior to and immediately after giving effect to, the
transactions herein contemplated.
On the terms and subject to satisfaction of the conditions herein stated,
you and the Company agree to modify the Agreements, the Notes issued thereunder
and the Security Documents executed in connection therewith, as hereinafter set
forth. Except as necessary to accomplish the matters addressed herein, the
current provisions of the Agreements, the Notes and the Security Documents
shall not be modified.
I. Reorganization
CBH is and will remain a holding company with no operations of its own.
All operations will instead be conducted through the Company. In addition, a
Texas entity will be incorporated for the purpose of marketing certain
insurance products within the State of Texas. Although this entity will not be
a Subsidiary of the Company, it will be owned by a principal of the Company and
will be subject to a service and maintenance agreement substantially identical
to the other such agreements to which the Company is a party. The Company will
not have Subsidiaries, but will, instead, conduct all operations
<PAGE> 3
Great-West Life & Annuity Insurance Company
Life Investors Insurance Company of America
Nationwide Life Insurance Company
July 24, 1998
Page 3
itself or will, where state law requires, enter into similar service and
maintenance agreements with entities owned by a principal of the Company.
In connection with the transactions described in the preceding paragraph,
the Company's status as a Subchapter S corporation will terminate and the
Company will become subject to federal and state income taxation as a Subchapter
C corporation. In connection with the termination of its Subchapter S status,
the Company intends to declare a dividend to its stockholders of $3,200,000
($1.00 per share). The Company will enter into a tax agreement with existing
stockholders providing for certain reciprocal indemnifications arising out of
income tax adjustments as a result of the Company's change of its status to a
Subchapter C corporation (the "TAX AGREEMENT"). Under the Tax Agreement, the
Company would be entitled to indemnification from and would be required to
indemnify stockholders for certain potential income tax liabilities as described
at pages 14-15 and 25-26 of the Registration Statement.
The Shareholders' Agreement is to be terminated in connection with the IPO.
In this connection, the requirement of the final sentence of paragraph 5R of the
Agreements that life insurance be maintained by the Company to fund redemptions
of the Company's shares under the Shareholders' Agreement would be terminated.
The requirement that the Company maintain at least $15,000,000 of key man
insurance on the life of W.T. Wamberg, as required by paragraph 5R of the
Agreements, would be maintained, as would the requirement that such policies be
collaterally assigned to the Collateral Agent.
II. Interest Rates
The interest rate on the Company's 10.50% Senior Secured Notes due
August 9, 2002 (the "SENIOR SECURED NOTES") would be reset, at least five days
prior to the effective date of the Registration Statement, to a rate that is
2.50% above the yield on a U.S. Treasury security maturing two years from the
date on which the interest rate is reset. The interest rate on the Company's
11.00% Second Priority Senior Secured Notes due August 9, 2004 (the "SECOND
PRIORITY SENIOR SECURED NOTES" and, together with the Senior Secured Notes, the
"NOTES") would be reset at least five days prior to the effective date of the
Registration Statement, to a rate that is 3.50% above the yield on a U.S.
Treasury security maturing five years from the date on which the interest rate
is reset.
III. Prepayments
All prepayments of the principal amount of the Senior Secured Notes and the
Second Priority Senior Secured Notes required or permitted by paragraph 4 of the
Agreements would be permitted without the payment of a Yield Maintenance Amount.
<PAGE> 4
Great-West Life & Annuity Insurance Company
Life Investors Insurance Company of America
Nationwide Life Insurance Company
July 24, 1998
Page 4
IV. Collateral
The Senior Secured Notes, the Second Priority Senior Secured Notes and all
other obligations under the Agreements and related documents would be secured
by a first priority security interest in favor of the Collateral Agent in the
following collateral, including proceeds: All rights of the Company under
agreements relating to the payment to it of fees, commissions and other amounts
(including, without limitation, those payable under service and maintenance
agreements), whether now existing or hereafter arising and whether or not
earned by performance (including all renewals, and the commissions and fees to
be purchased from W.T. Wamberg as described in Section VI(J) below), together
with the proceeds thereof, except rights of the Company under agreements
relating to the payment of commissions and fees, and the proceeds thereof, (i)
in respect of renewal commissions and fees with respect to plans and policies
sold by (a) the BCS division of the Company prior to the date the IPO is
consummated or (b) the Schoenke Companies (as defined in Section V below) prior
to the acquisition by the Company of the Schoenke Companies (it being
understood that new plans and policies sold after the consummation of the IPO
by the BCS division of the Company and new plans and policies sold after the
acquisition of the Schoenke Companies by that portion of the Company's business
that formerly consisted of the Schoenke Companies shall both constitute a
portion of your security) and (ii) commissions, fees and the proceeds thereof
arising from businesses acquired after the consummation of the IPO, which shall
not constitute collateral. No junior or other liens would be permitted with
respect to the collateral for the Notes, other than liens securing certain
Indebtedness under a working capital revolving credit facility of the Company,
as described below in section VI(A). The excepted assets could be collateral
for other Indebtedness permitted by the Agreement. Renewals of plans and
policies will occur within the division or other segment of the Company in
which the original plan or policy was produced. The Company shall maintain a
system of accounting and books and records which will permit the ready
identification of collateral. The holders of the Notes would retain their
respective offset and "super-priority" rights with respect to commissions
payable by them and their affiliates. Appropriate arrangements to minimize
commingling, intercreditor issues and impediments to the enforcement of the
Noteholders' rights and remedies would be required. Collateral for the Notes
and related obligations would also include the collateral assignment of key man
life insurance described above in the first paragraph of Section I.
V. Acquisitions
Acquisitions could be made by the Company by asset purchase, merger or
consolidation, for cash, stock, seller notes or any combination of the
foregoing, so long as no Default or Event of Default would exist either
immediately prior to or after giving effect to the transaction. Paragraph
6(G)(2) of the Agreements would be replaced by the total Indebtedness to
consolidated capitalization test contemplated by Section VI(C) below. This
would require compliance, among other things, with the financial convenants set
forth in paragraphs 6A, 6C, 6D, 6E, and 6F. The acquisition of Schoenke &
Associates Corporation. Schoenke & Associates Securities Corporation and
Schoenke & Associates of Hawaii, L.P. (the "SCHOENKE
<PAGE> 5
Great-West Life & Annuity Insurance Company
Life Investors Insurance Company of America
Nationwide Life Insurance Company
July 24, 1998
Page 5
COMPANIES") would be permitted provided that the purchase price is paid
entirely with the proceeds from the IPO.
VI. Miscellaneous Provisions
(A) Working Capital Facility. The Company would be required to have
a working capital facility of not less than $3,000,000 and not more than
$15,000,000, which would be established no later than March 31, 1999. Up to
$3,000,000 of Indebtedness under the working capital facility would be
permitted to be secured by the collateral for the Notes, and the working
capital facility would be subject to the clean-up requirements of paragraph
6G(3) of the Agreements.
(B) Restricted Payments. The Company would be permitted to make
Restricted Payments (whether in the form of repurchases of treasury stock or
otherwise) while the Notes are outstanding in an aggregate amount not to
exceed the sum of $1,000,000, plus 20% of the Consolidated Net Income (minus
100% in the case of a loss) of the Company, determined on the basis of a
single accounting period commencing on the first day of the fiscal quarter
in which the IPO is consummated.
(C) Indebtedness Incurrence Limitation. The Agreements would be modified
to include a new covenant under which future Indebtedness of the Company
(whether assumed in connection with an acquisition, incurred in connection with
an acquisition or otherwise incurred under the working capital facility or some
other arrangement) would be subject to a total Indebtedness (including the
Notes) to consolidated capitalization incurrence ratio of not more than 0.50 to
1.00. Consolidated capitalization would consist of consolidated Indebtedness
and Consolidated Net Worth.
(D) Benefit Plans. The Company would be permitted to modify its
existing benefit plans to conform with the provisions of benefit plans of
entities that may be acquired in the future.
(E) Medium Term Note and Convertible Subordinated Notes. The Medium Term
Note in the original amount of $5,700,000 payable by the Company to Bank
Compensation Strategies, Inc. could be prepaid by up to $1,000,000 in
connection with the IPO. The amount of such prepayment would be applied to
installments of principal in direct order of maturity. The Medium Term Note
would remain secured by a first priority security interest in its existing
collateral. In order to cause the exercise of conversion rights thereunder,
the Company may offer to prepay the Convertible Subordinated Notes (and may
prepay the Convertible Subordinated Notes if such prepayment offer is in fact
accepted by the holders thereof); provided that any such prepayment offer must
be made no later than three days after consummation of the IPO.
(F) Employment Agreement; Stock Option Plan. The amendments to Mr.
Todd's employment agreement described at pages 14 and 51 of the Registration
Statement would be permitted, as would the
<PAGE> 6
Great-West Life & Annuity Insurance Company
Life Investors Insurance Company of America
Nationwide Life Insurance Company
July 24, 1998
Page 6
revision of the Company's stock option plan to provide for a total of 540,830
shares of common stock (1,081,660 prior to the 1:2 reverse stock split
preparatory to the IPO).
(G) Seller Financing. If an acquisition is financed in whole or in part
with financing provided by the seller, the seller financing Indebtedness must
have a final maturity date on or after September 1, 2002 and a weighted average
life to maturity greater than the weighted average life to maturity of the
Senior Secured Notes at the time of the acquisition.
(H) Interest Coverage Ratio. The interest coverage ratio covenant of
paragraph 6E of the Agreements would be reduced to 2.00 to 1.00 effective
December 31, 1999.
(I) Reporting; Inspection. The reporting requirements of paragraphs 5A
and 5C of the Agreements, which would apply to CBH and Subsidiaries, as well as
to the Company, would be reduced along the lines indicated in the attached
Exhibit A.
(J) Wamberg Commissions. Notwithstanding the provisions of paragraph 6S
of the Agreements, the Principal Office Agreement of W.T. Wamberg would be
amended to provide for a cash payment by the Company of approximately
$7,400,000 in return for a modification of the sharing of commissions and fee
revenues under certain plans so that the Company, after such revision, would
receive 50% and Mr. Wamberg 50% rather than the 31%/69% division now in effect.
(K) CBH Guaranty. CBH would provide an unconditional, irrevocable guaranty
of the Notes and other obligations under the Agreements and related documents.
The guaranty would also contain representations and warranties, and also
covenants, including the reporting requirements applicable to CBH, the total
Indebtedness to consolidated capitalization debt incurrence ratio described
above (with the consolidated figures to be for CBH and the Company), a
prohibition on the creation of Subsidiaries or the making of Investments except
through the Company, a requirement that at least 95% of the net proceeds of any
future equity issuance by CBH be contributed to the Company as equity capital,
various standard, non-financial covenants (e.g., maintenance of existence,
compliance with laws, payment of taxes, etc.), and a prohibition on the creation
of Liens with respect to stock of the Company.
(L) CBH Defaults. Events of Default in the Agreements would be modified
to include CBH (e.g., breach of guarantor covenants, misrepresentation by
guarantor, cross-default to the guarantor Indebtedness, guarantor bankruptcy,
etc.).
(M) Change in Control.
(1) Regardless of whether the IPO is consummated, the Change in
Control definition in the Agreements would be modified to refer to common stock
of CBH.
<PAGE> 7
Great-West Life & Annuity Insurance Company
Life Investors Insurance Company of America
Nationwide Life Insurance Company
July 24, 1998
Page 7
(2) The Change in Control provisions of the Agreements would be
modified to require that W.T. Wamberg and The Wamberg Organization, Inc., an
Illinois corporation, together own at all times at least 10% of the outstanding
and fully diluted common stock of CBH, with such amounts to be adjusted for
stock splits, reverse splits and the effects of dilution from acquisitions and
public offerings subsequent to the IPO.
(N) Stock Options. The Agreement would be modified to eliminate
restrictions on the granting of stock options.
(O) Charter and Bylaw Amendments. The amendments to the Company's
charter and bylaws described at pages 13 and 53-54 of the Registration
Statement would be permitted.
(P) Preferred Stock. CBH's charter would permit the issuance of
preferred stock.
Notwithstanding any provision of this letter or of the Warrant Letters,
the provisions of the Warrants (including without limitation, the antidilution
provisions thereof) will remain in full force and effect until the Warrants are
repurchased in accordance with the provisions of the Warrant Letters.
If you are in agreement with the foregoing, please sign in the space
provided below and fax a copy of this letter to the Company at (214) 871-7690,
Attention: Melvin G. Todd.
Very truly yours,
CLARK/BARDES, INC.
By: /s/ MEL TODD
-----------------------------
Name: MEL TODD
---------------------------
Title: PRESIDENT & CEO
--------------------------
<PAGE> 8
Great-West Life & Annuity Insurance Company
Life Investors Insurance Company of America
Nationwide Life Insurance Company
July 24, 1998
Page 8
ACCEPTED AND AGREED TO
THIS 24TH DAY OF JULY, 1998
GREAT-WEST LIFE & ANNUITY INSURANCE
COMPANY
By: /s/ ERNIE P. FRIESEN
--------------------------------
Name: Ernie P. Friesen
------------------------------
Title: Assistant Vice President
-----------------------------
Investments
By: /s/ A.R. PURCHASE
--------------------------------
Name: A.R. Purchase
------------------------------
Title: Vice President
-----------------------------
Investments
LIFE INVESTORS INSURANCE COMPANY OF
AMERICA
BY: /s/ DAVID R. HALFPAP
--------------------------------
NAME: David R. Halfpap
------------------------------
TITLE: Vice-President
-----------------------------
NATIONWIDE LIFE INSURANCE COMPANY
BY: /s/ MARK W. POEPPELMAN
--------------------------------
NAME: Mark W. Poeppelman
------------------------------
TITLE: Investment Officer
-----------------------------
<PAGE> 1
EXHIBIT 10.35
EXHIBIT J
EMPLOYMENT AGREEMENT
THIS AGREEMENT ("Agreement") entered into on September 1, 1997, by and
between Clark/Bardes, Inc., a Texas corporation (the "Company") and Richard C.
Chapman (the "Employee").
WITNESSETH:
WHEREAS, the Company desires to retain the Employee's experience and
abilities in the business of the Company to serve as Chief Executive Officer of
the Bank Compensation Strategies Division of the Company; and
WHEREAS, the Employee desires to enter into such arrangement with the
Company; and
NOW, THEREFORE, in consideration of the mutual covenants and promises
contained herein, the Company and Employee agree and state as follows:
ARTICLE 1 - DUTIES
The Employee shall serve as Chief Executive Officer of the Bank
Compensation Strategies Division of the Company. The Employee, while serving in
that capacity, shall have the powers and duties generally ascribed to such
offices and such additional authority and duties as may from time to time be
established by the Chief Executive Officer and Board of Directors of the
Company. The Employee shall report and be responsible to the Chief Executive
Officer and Board of Directors of the Company.
ARTICLE 2 - TERM
The term of this agreement shall begin on September 1, 1997 and continue
through December 31, 1998, subject to earlier termination by either party
without cause upon at least ninety (90) days written notice of the termination
to the other party or by the Company for "cause" pursuant to Article 5 hereof.
ARTICLE 3 - COMPENSATION
For the services rendered by Employee hereunder, Employee shall be
entitled to the following compensation:
(a) SALARY. The Employee shall be paid a semi-monthly salary of Ten
Thousand Four Hundred Sixteen and 67/100 Dollars ($10,416.67) to be paid in the
usual payroll of the Company. Unless employment is terminated, this salary will
continue through December 31, 1998 and will be reviewed annually thereafter.
1
<PAGE> 2
(b) BONUS PLAN. (i) If Employee is serving as Chief Executive Officer of
the Bank Compensation Strategies Division hereunder on December 31, 1997, the
Company shall pay a bonus to the employee in accordance with the Bonus Plan set
forth on Schedule I attached hereto and made a part hereof. Said bonus will be
paid to Employee no later than February 28, 1998.
(ii) If Employee is serving as Chief Executive Officer of the Bank
Compensation Strategies Division hereunder on December 31, 1998, the Company
shall pay a bonus to Employee in accordance with the Bonus Plan set forth on
Schedule II attached hereto and made a part hereof. Said bonus will be paid to
Employee no later than February 28, 1999.
The definitions set forth in Appendix A hereto shall apply to the
determination of bonuses hereunder. Bonus schedules substantially similar to
Schedules I and II shall be established by the Company for each calendar year
after 1998 during the term of this Agreement. If Employee is terminated other
than for "cause" and a portion of the bonus has been earned, Employee shall be
paid on a pro-rated basis for the time he has been employed during the
termination year. In determining whether a portion of the bonus has been
earned, the financial performance of the Company for the elapsed portion of the
termination year shall be annualized and the bonus schedules for the
termination year shall be applied to determine the hypothetical bonus amount
for the full termination year. That hypothetical amount shall then be prorated
on the basis of the portion of the termination year for which Employee actually
served the Company.
ARTICLE 4 - NON-COMPETITION AND CONFIDENTIALITY
(a) Confidentiality. Except for and on behalf of the Company with the
consent of or as directed by the Board of Directors of the Company (the
"Board"), the Employee shall keep confidential and shall not divulge to any
other person or entity, during the term of employment or thereafter, any of the
business secrets or other confidential information regarding the Company and
its subsidiaries which has not otherwise become public knowledge; provided,
however, that nothing in this Agreement shall preclude the Employee from
disclosing information (i) to an appropriate extent to parties retained to
perform services for the Company or its subsidiaries or (ii) under any other
circumstances to the extent such disclosure is, in the reasonable judgment of
the Employee, appropriate or necessary to further the best interests of the
Company or its subsidiaries or (iii) as may be required by law.
(b) Records. All papers, books and records of every kind and description
relating to the business and affairs of the Corporation and its subsidiaries,
whether or not prepared by the Employee, other than personal notes prepared by
or at the direction of the Employee, shall be the sole and exclusive property
of the Company, and the Employee shall surrender them to the Company at any
time upon request by the Board.
2
<PAGE> 3
(c) Covenant Not to Compete; Non-Solicitation.
(i) Employee covenants and agrees that during the term of this
Agreement and for a period of twelve (12) months thereafter (the "Non-Compete
Period"), he shall not, in the United States or Canada and in any other
countries in which the Company has done business within the preceding five (5)
years (collectively, the "Territory"), directly or indirectly, either alone or
in partnership or jointly or in conjunction with any person or persons, firm,
association, syndicate, company or corporation as principal, agent, employee,
director, shareholder or in any other manner whatsoever (A) carry on or be
engaged in any business which is in competition with the business of the
Company as existing during the term of this Agreement or at the time of
termination thereof, as the case may be, except on behalf of the Company, or
(B) except on behalf of the Company, solicit any business relating to
non-qualified benefit plans of any kind funded with life insurance from, or
sell any such product or service to, any of the Company's customers in the
Territory or any other person, firm or corporation in the Territory to whom the
Company, directly or indirectly through representatives, has made an offer,
proposal or any solicitation to sell or has sold any life insurance within the
preceding five (5) years. Nothing herein shall prohibit Employee from being an
owner of not more than 1% of the outstanding stock of any class of a
corporation which engages in such prohibited activity, so long as such
corporation is publicly traded and listed on a national securities exchange or
quoted on a national automated quotation system, provided that Employee has no
active participation in the business of such corporation.
(ii) Employee agrees that during the Non-Compete Period he will not
directly or indirectly offer employment to or hire any person who is then
employed by the Company or has been employed by the Company within the twelve
(12) immediately preceding months, except with the prior written consent of the
Company.
(d) Enforcement. The Employee recognizes that the provisions of this
Article 4 are vitally important to the continuing welfare of the Company and
its subsidiaries and that money damages would constitute an inadequate remedy
for any violation thereof. Accordingly, in the event of any such violation by
the Employee, the Company and its subsidiaries, in addition to any other
remedies they may have, shall have the right to compel specific performance
thereof or to seek an injunction restraining any action by the Employee in
violation of this Article 4.
ARTICLE 5 - TERMINATION FOR CAUSE
The Company may terminate this Agreement at any time for "cause," as
defined below, by giving at least five (5) days written notice of termination
to Employee. For purposes of this Agreement, "cause" shall mean (a) the failure
of Employee to comply with any material provision of this Agreement, (b) an act
of willful misconduct or gross negligence committed by Employee in connection
with his employment with the Company or (c) Employee's commission of a crime
involving moral turpitude.
3
<PAGE> 4
ARTICLE 6 - SEVERANCE COMPENSATION
If this Agreement is terminated by the Company other than for "cause," as
defined in Article 5 hereof, the Company shall continue to pay Employee for a
period of twelve (12) months his salary at the rate in effect at the time of
such termination.
ARTICLE 7 - EMPLOYEE BENEFITS
The Employee will be entitled to participate in any hospitalization,
health, dental or sick leave plan, profit sharing plan, or other present or
future group employee benefit plans or programs for which key executives of the
Company are or shall become eligible.
ARTICLE 8 - VACATION
The Employee will be entitled to vacation at the rate of six weeks per
year employed. Vacation will accrue by the same method and will be subject to
the same maximum accumulated vacation limit as pertains to all employees.
ARTICLE 9 - EXPENSES
The Employee will be entitled to reimbursement for travel, lodging,
entertainment and other expenses reasonably incurred in the performance of his
duties as Chief Executive Officer of the Division.
ARTICLE 10 - GENERAL PROVISIONS
(a). Notices. All notices, requests, demands and other communications
hereunder shall be in writing and shall be deemed to have been duly given if
delivered by hand or reputable commercial delivery service or mailed within the
Asiana United States by fist class certified mail, return receipt requested,
postage prepaid, addressed as follows:
(i) If to the Board or the Company, to:
Mel Todd, President
Clark/Bardes, Inc.
2121 San Jacinto Street
Dallas, TX 75201-7906
(ii) If to the Executive, to:
Bank Compensation Strategies Division
3600 West 80th Street
Suite 200
Bloomington, MN 55431-4598
Such addresses may be changed by written notice sent to the other party at the
last recorded address of that party.
4
<PAGE> 5
(b). Venue and Law Governing Agreement. This Agreement shall be governed by
and constructed in accordance with the laws of the State of Texas and venue
shall be in Dallas County, Texas.
(c). Attorney's Fees and Costs. If any action at law or in equity is
necessary to enforce or interpret the terms of this Agreement, the prevailing
party shall be entitled to reasonable attorney's fees, costs and necessary
disbursements in addition to any other relief to which he may be entitled.
(d). Amendment. This Agreement may only be amended by the written consent
of the parties.
(e). Severability. If any provision of this Agreement shall be adjudged by
any court of competent jurisdiction to be invalid or unenforceable for any
reason, such judgment shall not affect, impair or invalidate the remainder of
this Agreement. Furthermore, if the scope of any restriction or requirement
contained in this Agreement is too broad to permit enforcement of such
restriction or requirement to its full extent, then such restriction or
requirement shall be enforced to the maximum extent permitted by law, and the
Executive consents and agrees that any court of competent jurisdiction may so
modify such scope in any proceeding brought to enforce such restriction or
requirement.
(f). Entire Agreement. This Agreement contains the entire understanding
between the parties hereto concerning the subject matter contained herein.
There are no representations, agreements, arrangements, or understandings, oral
or written, between or among the parties hereto, relating to the subject matter
of this Agreement, which are not fully expressed herein.
IN WITNESS WHEREOF, the parties hereto have executed and
delivered this Agreement as of the day and year first above written.
Attest: CLARK/BARDES, INC.
By: /s/ MELVIN G. TODD
- ----------------------- ------------------------------------
Title: President & CEO
---------------------------------
RICHARD C. CHAPMAN
/s/ RICHARD C. CHAPMAN
---------------------------------------
SCHEDULE I
5
<PAGE> 6
1997 Employee Bonus Plan
A. 1997 Sales Bonus
A bonus will be paid to the Employee by the Company, no later than
February 28, 1998, based on the sum of Gross Sales and Commission Revenues
Booked between September 1, 1997 and December 31, 1997 and according to the
following schedule:
<TABLE>
<CAPTION>
GROSS SALES AND
COMMISSION REVENUE BONUS
------------------ --------------
<S> <C>
less than $5.54 million 0
$5.54 to 5.87 million $ 5,000
$5.88 to 6.22 million $ 10,000
$6.23 to 6.56 million $ 15,000
$6.57 to 6.91 million $ 20,000
$6.92 to 7.26 million $ 25,000
$7.27 to 7.60 million $ 30,000
$7.61 to 7.95 million $ 35,000
$7.96 to 8.29 million $ 40,000
$8.30 to 8.64 million $ 45,000
$8.65 million or higher $ 50,000
</TABLE>
B. 1997 Net Revenue Bonus
A bonus will be paid to the Employee by the Company, no later than
February 28, 1998, based on the Company's EBITDA attributable to BCSI for the
period between September 1, 1997 and December 31, 1997 and according to the
following schedule:
<TABLE>
<CAPTION>
EBITDA* BONUS
----------------------------- --------------
<S> <C>
less than $900 thousand 0
$900 to 959 thousand $ 5,000
$960 thousand to 1.01 million $ 10,000
</TABLE>
6
<PAGE> 7
<TABLE>
<S> <C>
$1.02 to 1.06 million $ 15,000
$1.07 to 1.12 million $ 20,000
$1.13 to 1.18 million $ 25,000
$1.19 to 1.23 million $ 30,000
$1.24 to 1.29 million $ 35,000
$1.30 to 1.35 million $ 40,000
$1.38 to 1.40 million $ 45,000
$1.41 million or higher $ 50,000
</TABLE>
* Bonuses payable based on 1997 results will be
accrued in determining EBITDA.
C. Company hereby grants Employee the option to purchase shares in the Company
at a price of $2.64 per share up to and including an amount not to exceed fifty
percent (50%) of the amount paid to Employee pursuant to this Schedule I. This
option will expire April 30, 1998.
If this Agreement is terminated by the Company other than for "cause," as
defined in Article 5 of the Agreement which this Schedule I accompanies, all
options granted pursuant to this Agreement shall become fully exercisable as of
the effective date of such termination.
No option granted to the Employee pursuant to this Agreement shall be
transferable by the Employee otherwise than by will or the laws of descent and
distribution. During the lifetime of the Employee, the options shall be
exercisable only by the Employee. Any attempted assignment, transfer, pledge,
hypothecation or other disposition of such options contrary to the provisions
hereof, or the levy of any execution, attachment or similar process upon the
options shall be null, void and without effect.
In the event the Company declares a stock split or stock dividend, the
number of shares with respect to which options are to be granted by the Company
hereunder, the purchase price for the stock, and the formula for determining
such purchase price shall be adjusted in the same manner that the total number
of issued and outstanding shares of common stock are adjusted because of such
stock dividend or stock split.
7
<PAGE> 8
SCHEDULE II
1998 Employee Bonus Plan
A. 1998 Sales Bonus
A bonus will be paid to the Employee by the Company, no later than
February 28, 1999, based on the sum of Gross Sales and Commission Revenues
booked between January 1, 1998 and December 31, 1998, according to the
following schedule:
Plan = $22.835 million
Maximum Bonus = $125,000.00
<TABLE>
<CAPTION>
ACTUAL RESULTS EXPRESSED
AS A PERCENTAGE OF PLAN
(ROUNDED TO THE NEAREST BONUS
FULL PERCENT) (AS PERCENT OF MAXIMUM)
------------------------ -----------------------
<S> <C>
less than 80% 0
80% to 84% 10%
85% to 89% 20%
90% to 94% 30%
95% to 99% 40%
100% to 104% 50%
105% to 109% 60%
110% to 114% 70%
115% to 119% 80%
120% to 124% 85%
125% to 129% 90%
130% to 134% 95%
135% or higher 100%
</TABLE>
8
<PAGE> 9
B. 1998 Net Income Bonus
A bonus will be paid to the Employee by the Company, no later than
February 28, 1999, based on the Company's EBITDA attributable to BCSI for the
period between January 1, 1998 and December 31, 1998, according to the
following schedule:
EBITDA Plan = $4.027 million
Maximum Bonus = $125,000.00
<TABLE>
<CAPTION>
ACTUAL RESULTS EXPRESSED
AS A PERCENTAGE OF PLAN*
(ROUNDED TO THE NEAREST BONUS
FULL PERCENT) (AS PERCENT OF MAXIMUM)
------------------------ -----------------------
<S> <C>
less than 80% 0
80% to 84% 10%
85% to 89% 20%
90% to 94% 30%
95% to 99% 40%
100% to 104% 50%
105% to 109% 60%
110% to 114% 70%
115% to 119% 80%
120% to 124% 85%
125% to 129% 90%
130% to 134% 95%
135% or higher 100%
</TABLE>
*All bonuses payable based on 1998 results will be accrued in
determining EBITDA.
C. Direct Sales Bonus
Company will pay Employee a Direct Sales Bonus subject to the following
criteria being met:
(1) Employee is considered the Primary Salesman;
9
<PAGE> 10
(2) Sales are measured at 100% of Plan or higher;
(3) Actual Net Income is measured at 100% of plan or higher.
The bonus will be equal to fifty percent (50%) of the Producer's Share of
revenue.
Company reserves the right to require Employee to obtain approval of the
Company, and Company reserves the right to withhold such approval, prior to the
prospecting of any customer for Direct Sales purposes.
D. Company hereby grants Employee the option to purchase shares in the
Company at a price of $2.90 per share up to and including an amount not to
exceed fifty percent (50%) of the amount paid to Employee pursuant to Sections
A and B of this Schedule II. This option will expire April 30, 1999.
If this Agreement is terminated by the Company other than for "cause," as
defined in Article 5 of the Agreement which this Schedule II accompanies, all
options granted pursuant to this Agreement shall become fully exercisable as of
the effective date of such termination.
No option granted to the Employee pursuant to this Agreement shall be
transferable by the Employee otherwise than by will or the laws of descent and
distribution. During the lifetime of the Employee, the options shall be
exercisable only by the Employee. Any attempted assignment, transfer, pledge,
hypothecation or other disposition of such options contrary to the provisions
hereof, or the levy of any execution, attachment or similar process upon the
options shall be null, void and without effect.
In the event the Company declares a stock split or stock dividend, the
number of shares with respect to which options are to be granted by the Company
hereunder, the purchase price for the stock, and the formula for determining
such purchase price shall be adjusted in the same manner that the total number
of issued and outstanding shares of common stock are adjusted because of such
stock dividend or stock split.
10
<PAGE> 11
APPENDIX A - DEFINITIONS
[These definitions should reflect the established accounting and compensation
practices of the Company.]
"ACTUAL NET INCOME" means
"BOOKED" means
"COMMISSION REVENUES" means
"EBITDA" means earnings before income tax, depreciation and amortization.
"GROSS SALES" means
"PLAN" means a particular goal set by the Company for a certain financial
performance criterion.
"PRIMARY SALESMAN" means
"PRODUCER'S SHARE" means
11
<PAGE> 1
EXHIBIT 10.36
DRAFT 8/1/98
================================================================================
CLARK/BARDES, INC.
$14,500,000
____% SENIOR SECURED
NOTES DUE AUGUST 9, 2002
---------------
AMENDED AND RESTATED NOTE AGREEMENT
---------------
DATED AS OF ___________, 1998
================================================================================
<PAGE> 2
TABLE OF CONTENTS
(Not Part of Agreement)
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PARAGRAPH 1. AUTHORIZATION OF ISSUE OF NOTES...................................................2
1A. Authorization of Issues of Notes..............................................2
PARAGRAPH 2. ASSUMPTION OF OBLIGATIONS; EXCHANGE OF NOTES......................................2
2A. Assumption of Original Notes and Other Obligations............................2
PARAGRAPH 3. CONDITIONS PRECEDENT..............................................................3
3. Conditions to Closing.........................................................3
3A. Certain Documents.............................................................3
3B. Representations and Warranties; No Default; No Material
Adverse Change.......................................................6
3C. Delivery and Acceptance Permitted By Applicable Laws..........................6
3D. Completion of Due Diligence...................................................6
3E. Other Information.............................................................6
3F. Related Proceedings...........................................................6
3G. Consummation of Merger........................................................7
3J. Termination of Shareholders' Agreement........................................7
3K. Delivery of Notes to Other Existing Holders...................................7
3L. Proceedings...................................................................7
3M. Accrued Interest..............................................................7
3N. Fees..........................................................................7
PARAGRAPH 4. PREPAYMENTS.......................................................................8
4A. Required Prepayments..........................................................8
4B. Optional Prepayment of Notes..................................................8
4C. Offer to Prepay Notes in the Event of a Change in Control or a
Revenue Maintenance Event............................................8
4D. Partial Payments Pro Rata.....................................................9
4E. Retirement of Notes..........................................................10
PARAGRAPH 5. AFFIRMATIVE COVENANTS............................................................10
5A(1). Information as to Company....................................................10
5A(2). Officer's Certificate........................................................13
5B. Information Required by Rule 144A............................................14
5C. Inspection...................................................................14
5D. Covenant to Secure Notes Equally.............................................15
5E. Corporate Existence, Licenses and Permits; Maintenance of Properties.........15
</TABLE>
ii
<PAGE> 3
<TABLE>
<S> <C> <C>
5F. Maintenance of Material Contracts............................................15
5G. Maintenance of Insurance.....................................................16
5H. Payment of Taxes and Other Claims............................................16
5I. ERISA Compliance.............................................................16
5J. Compliance with Laws.........................................................16
5K. Collateral...................................................................17
5L. Performance of Obligations...................................................17
5M. Maintenance of Key Sales Force...............................................17
5N. Pledge of Notes Payable......................................................18
5O. Maintenance of Key Man Life Insurance Policies...............................18
5P. Creation and Maintenance of Working Capital Facility.........................18
PARAGRAPH 6. NEGATIVE COVENANTS...............................................................19
6A. Total Debt to Annualized Cash Flow Ratio.....................................19
6B. Limitation on Restricted Payments............................................19
6C. Maintenance of Minimum Consolidated Net Worth and
Consolidated Net Income.............................................19
6D. Discounted Commission Fees to Total Debt Ratio...............................20
6E. Interest Coverage Ratio......................................................20
6F. Fixed Charge Coverage Ratio..................................................20
6G. Liens, Indebtedness, and Other Restrictions..................................20
6H. Change of Fiscal Year........................................................24
6I. Change of Business...........................................................24
6J. Certificates of Incorporation; Bylaws; Trade Names...........................24
6K. Other Agreements.............................................................25
6L. Limitation on Certain Restrictive Agreements.................................25
6M. ERISA Matters................................................................25
6N. Only One Class of Capital Stock..............................................25
6O. Prohibition Against Payments and Prepayments of Certain
Indebtedness........................................................25
6P. No Subsidiaries..............................................................26
6Q. Restrictions on Issuances of Common Stock....................................26
6R. Restrictions Upon the Amendment of Certain Documents.........................26
6S. Limitation on Amount of S Corporation Tax Distributions......................27
6T. Prohibition Against Phantom Stock............................................27
PARAGRAPH 7. EVENTS OF DEFAULT................................................................27
7A. Acceleration.................................................................27
7B. Rescission of Acceleration...................................................30
7C. Notice of Acceleration or Rescission.........................................30
7D. Right of Set-off.............................................................31
7E. Notice to Holders of Subordinated Debt; Payment Block........................31
7F. Other Remedies...............................................................31
</TABLE>
iii
<PAGE> 4
<TABLE>
<S> <C> <C>
PARAGRAPH 8. REPRESENTATIONS, COVENANTS AND WARRANTIES........................................32
8A. Organization and Qualification...............................................32
8B. Financial Statements.........................................................32
8C. Actions Pending..............................................................33
8D. Outstanding Indebtedness.....................................................33
8E. Title to Properties..........................................................33
8F. Possession of Franchises, Licenses, Patents and Trademarks...................33
8G. Taxes........................................................................34
8H. Conflicting Agreements and Other Matters.....................................34
8I. Offering of the Original Notes...............................................35
8J. Use of Proceeds..............................................................35
8K. ERISA........................................................................36
8L. Governmental Consent.........................................................36
8M. Environmental Compliance.....................................................36
8N. Fiscal Year..................................................................36
8O. Disclosure...................................................................37
8P. Investment Company Act.......................................................37
8Q. Other Regulation.............................................................37
8R. Other Representations and Warranties.........................................37
8S. Solvency.....................................................................37
8T. Employment Agreements, Non-Competition Agreements and
Principal Office Agreements.........................................37
8U. Insurance Licenses...........................................................38
8V. Undisclosed Liabilities. ...................................................38
8W. Legal Compliance.............................................................38
8X. Certain Tax Matters..........................................................38
8Y. Sales Representatives........................................................38
8Z. Contracts....................................................................38
8AA. Assignment of Insurance Contracts. .........................................40
8BB. Satisfaction of Conditions Precedent to the Schoenke Acquisition,
the Merger and the IPO..............................................40
8CC. Compliance with Laws.........................................................40
8DD. Condition of Property........................................................40
8EE. Books and Records. .........................................................40
8FF. Additional Disclosure........................................................40
8GG. Satisfaction of Conditions Precedent.........................................40
8HH. Certain Affiliates...........................................................41
PARAGRAPH 9. REPRESENTATIONS OF EACH EXISTING HOLDER..........................................41
9A. Nature of Purchase...........................................................41
9B. Source of Funds..............................................................41
</TABLE>
iv
<PAGE> 5
<TABLE>
<S> <C> <C>
PARAGRAPH 10. DEFINITIONS.....................................................................42
10A. Defined Terms................................................................42
10B. Accounting Principles, Terms and Determinations..............................58
PARAGRAPH 11. MISCELLANEOUS...................................................................58
11A. Note Payments................................................................58
11B. Expenses.....................................................................58
11C. Consent to Amendments........................................................59
11D. Form, Registration, Transfer and Exchange of Notes; Lost Notes...............59
11E. Persons Deemed Owners; Participations........................................60
11F. Survival of Representations and Warranties; Entire Agreement.................60
11G. Successors and Assigns.......................................................60
11H. Disclosure to Other Persons..................................................61
11I. Notices......................................................................61
11J. Payments Due on Non-Business Days............................................61
11K. Satisfaction Requirement.....................................................61
11L. Governing Law................................................................62
11M. Waiver of Jury Trial; Consent to Jurisdiction; Limitation of Remedies........62
11N. Indemnification..............................................................63
11O. RELEASE......................................................................64
11P. Relationship of the Parties..................................................65
11Q. FINAL AGREEMENT..............................................................65
11R. Construction. ..............................................................65
11S. Severability.................................................................66
11T. Descriptive Headings.........................................................66
11U. Maximum Interest Payable.....................................................66
11V. Counterparts.................................................................66
11W. Severalty of Obligations.....................................................67
</TABLE>
v
<PAGE> 6
INFORMATION SCHEDULE
SCHEDULE 6G(4) - CERTAIN LOANS, ADVANCES AND INVESTMENTS
SCHEDULE 6M - DESCRIPTION OF BENEFITS PROVIDED BY PLANS
SCHEDULE 8C - LITIGATION
SCHEDULE 8D - INDEBTEDNESS
SCHEDULE 8H - AGREEMENTS RESTRICTING INDEBTEDNESS
SCHEDULE 8T - MATERIAL EMPLOYMENT AGREEMENTS, NON-
COMPETITION AGREEMENTS AND PRINCIPAL
OFFICE AGREEMENTS
SCHEDULE 8U - INSURANCE LICENSES
SCHEDULE 8Z - CONTRACTS
SCHEDULE 8FF(1) - PERFORMANCE BONUSES
SCHEDULE 8FF(2) - PLANS AND MULTIEMPLOYER PLANS
SCHEDULE 8FF(3) - INTELLECTUAL PROPERTY
SCHEDULE A - COMPETITORS
EXHIBIT A - FORM OF NOTE
EXHIBIT B-1 - FORM OF OPINION OF COUNSEL
EXHIBIT B-2 - FORM OF OPINION OF GENERAL COUNSEL
EXHIBIT C - FORM OF OFFICER'S CERTIFICATE
EXHIBIT D - FORM OF COMPLIANCE CERTIFICATE
EXHIBIT E-1 - FORM OF ASSIGNMENT OF LIFE INSURANCE POLICY
EXHIBIT E-2 - FORM OF ASSIGNMENT OF LIFE INSURANCE POLICY
EXHIBIT F - FORM OF COLLATERAL AGENCY AGREEMENT
EXHIBIT G - FORM OF GUARANTY
EXHIBIT H - FORM OF PERFECTION CERTIFICATE
EXHIBIT I - FORM OF SECURITY AGREEMENT
vi
<PAGE> 7
AMENDED AND RESTATED NOTE AGREEMENT
THIS AMENDED AND RESTATED NOTE AGREEMENT (this "AGREEMENT") is
entered into as of _______________, 1998, among CLARK/BARDES, INC., a Delaware
corporation (the "COMPANY"), and each of the institutions named in the
Information Schedule attached hereto (the "EXISTING HOLDERS").
RECITALS
A. Clark/Bardes, Inc., a Texas corporation ("CBI-TEXAS"), and the
Existing Holders entered into that certain Note Agreement dated as of September
8, 1997 (the "ORIGINAL NOTE AGREEMENT") pursuant to which CBI-Texas issued and
sold to the Existing Holders its 10.50% Senior Secured Notes due August 9, 2002
in the aggregate original principal amount of $14,500,000 (the "ORIGINAL
NOTES").
B. Pursuant to the terms of that certain Reorganization Agreement dated
as of _________, 1998 by and among Clark/Bardes Holdings, Inc., a Delaware
corporation and the owner of all outstanding capital stock of the Company
("CBH"), the Company and CBI-Texas (the "REORGANIZATION AGREEMENT"), CBI-Texas
has on __________, 1998 merged with and into the Company (the "MERGER"), with
the Company continuing as the surviving corporation of the Merger.
C. Pursuant to the terms and conditions of the Reorganization
Agreement, as well as by operation of law, the Company has assumed all
liabilities and obligations of CBI-Texas, including without limitation all
liabilities and obligations under the Original Notes, the Original Note
Agreement, the Security Documents (as defined in the Original Note Agreement)
and all other instruments and agreements executed and delivered by CBI-Texas in
connection with the Original Note Agreement (collectively, the "ORIGINAL NOTE
DOCUMENTS").
D. Contemporaneously with the consummation of the Merger, CBH has
effected a registered public offering of 4,000,000 shares of its common stock,
par value $.01, at an initial offering price of $______ per share (the "IPO").
E. The Company and the Existing Holders have agreed that (i) in
furtherance of the assumption of CBI-Texas' liabilities and obligations to be
effected pursuant to the Reorganization Agreement, the Company will expressly
assume CBI-Texas' liabilities and obligations under the Original Note Agreement,
the Original Notes (and any replacements thereof) and the other Original Note
Documents, (ii) in connection with such assumption, each Existing Holder will
surrender the Original Note held by it for one or more notes of the Company of
like principal amount and otherwise in substance of like terms as the Original
Note surrendered, except that such replacement notes shall bear interest at the
rate of ____% per annum, (iii) the Original Note Agreement will be amended and
restated in its entirety hereby to reflect, among other things, the assumption
of the Original Notes by the Company and (iv) CBH will guarantee the obligations
of the Company under
<PAGE> 8
such replacement notes, this Agreement, the Security Documents (as hereinafter
defined), and the other Senior Note Documents (as hereinafter defined).
NOW, THEREFORE, to accomplish the matters contemplated by the
immediately preceding recitals and in consideration of the mutual premises
herein contained and for other valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Original Note Agreement is
hereby amended and restated in its entirety as follows:
PARAGRAPH 1. AUTHORIZATION OF ISSUE OF NOTES.
1A. AUTHORIZATION OF ISSUES OF NOTES. To evidence the Company's
assumption of the obligations of CBI-Texas under the Original Notes pursuant to
paragraph 2A, the Company will authorize the issue of its ____% senior secured
promissory notes in the aggregate principal amount of $14,500,000, to be dated
the date of issue thereof, to mature August 9, 2002, to bear interest on the
unpaid balance thereof from the date thereof until the principal thereof shall
have become due and payable at a rate of ____% per annum and on overdue payments
at the rate specified therein; such ____% senior secured promissory notes shall
be substantially in the form of Exhibit A attached hereto. The term "NOTES" as
used herein shall include each such ____% senior secured promissory note
delivered pursuant to any provision of this Agreement and each such ____% senior
secured promissory note delivered in substitution or exchange for any other Note
pursuant to any such provision. Capitalized terms used herein have the meanings
specified in paragraph 10.
PARAGRAPH 2. ASSUMPTION OF OBLIGATIONS; EXCHANGE OF NOTES.
2A. ASSUMPTION OF ORIGINAL NOTES AND OTHER OBLIGATIONS. Effective upon
the Date of Closing (as hereinafter defined), the Company hereby expressly
assumes the due and punctual payment of the principal of and interest on the
Original Notes, as amended, restated and replaced by the Notes, and the due and
punctual performance and observance of all of the covenants and conditions to be
performed and observed by CBI-Texas under (i) the Original Note Agreement, as
amended and restated hereby, and (ii) the other Original Note Documents, as each
may be amended and restated by a Senior Note Document executed and delivered in
connection herewith.
2B. EXCHANGE OF NOTES. To evidence the Company's assumption of such
obligations pursuant to paragraph 2A, the Company agrees to deliver to each
Existing Holder and, subject to the terms and conditions herein set forth, each
Existing Holder agrees to accept from the Company, the Notes set forth opposite
such Existing Holder's name in the Information Schedule attached hereto. The
Company will deliver to each Existing Holder, at the offices of Baker & Botts,
L.L.P. at 2001 Ross Avenue, Dallas, Texas 75201, one or more Notes registered in
such Existing Holder's name, evidencing the aggregate principal amount of Notes
to be delivered to such Existing Holder and in the denomination or denominations
specified with respect to each Existing Holder in the Information Schedule
attached hereto on the date of closing, which shall be ___________, 1998 or any
other date on or before _____________, 1998 upon which the Company and the
Existing Holders may mutually agree (the "CLOSING" or the "DATE OF CLOSING").
2
<PAGE> 9
PARAGRAPH 3. CONDITIONS PRECEDENT.
3. CONDITIONS TO CLOSING. Each Existing Holder's obligation to accept
the Notes to be delivered to such Existing Holder hereunder is subject to the
satisfaction, on or before the Date of Closing, of the following conditions:
3A. CERTAIN DOCUMENTS. Each Existing Holder shall have received the
following, each dated the Date of Closing (unless a different date is indicated
below), and each in form, scope and substance satisfactory to such Existing
Holder:
(i) the Notes to be delivered to the Existing Holders, duly
executed and delivered by the Company;
(ii) a certified copy of the resolutions of the Board of Directors
of the Company approving each of the Senior Note Documents to which it
is a party, and certified copies of all documents evidencing other
necessary corporate action and governmental approvals, if any, with
respect to each of the Senior Note Documents to which it is a party;
(iii) a certificate of the Secretary or an Assistant Secretary of
the Company certifying the names and true signatures of the officers of
the Company authorized to sign the Senior Note Documents to which it is
a party and the other documents to be delivered hereunder by the
Company;
(iv) a certified copy of the Certificate of Incorporation
(certified by the Secretary of State of the State of Delaware) and
bylaws, each as amended to date, of the Company;
(v) the Guaranty, duly executed and delivered by CBH;
(vi) a certified copy of the resolutions of the Board of Directors
of CBH approving the Guaranty and each of the other Senior Note
Documents to which it is a party, and certified copies of all documents
evidencing other necessary corporate action and governmental approvals,
if any, with respect to the Guaranty and each of the other Senior Note
Documents to which it is a party;
(vii) a certificate of the Secretary or an Assistant Secretary of
CBH certifying the names and true signatures of the officers of CBH
authorized to sign the Guaranty and the other Senior Note Documents to
which it is a party and the other documents to be delivered hereunder
by CBH;
(viii) a certified copy of the Certificate of Incorporation
(certified by the Secretary of State of the State of Delaware) and
bylaws, each as amended to date, of CBH;
3
<PAGE> 10
(ix) favorable opinions of Vedder, Price, Kaufman & Kammholz,
counsel to the Company and CBH, and Keith Staudt, General Counsel to
the Company and CBH, substantially in the form of Exhibit B-1 and
Exhibit B-2 attached hereto, respectively;
(x) a favorable opinion of Baker & Botts, L.L.P., who are acting as
special counsel for the Existing Holders in connection with this
transaction, as to such matters incident to the matters herein
contemplated as such Existing Holder may reasonably request;
(xi) reliance letters in respect of any other legal opinions (such
legal opinions to be in form, scope and substance satisfactory to such
Existing Holder) delivered in connection with the IPO, the Merger, the
Schoenke Acquisition and the other transactions related thereto
(provided that, with respect to the Schoenke Acquisition, the Company
shall not be required to deliver such reliance letters if, after
exercising its best efforts, it has been unable to obtain such reliance
letters);
(xii) certified copies of Requests for Information or Copies (Form
UCC-11) or equivalent reports listing all effective financing
statements which name the Company or any of the Schoenke Companies
(under any of their present names and any previous names) as debtor and
which are filed in all jurisdictions in which the Company or any of the
Schoenke Companies own property or conduct business, together with
copies of such financing statements;
(xiii) the Collateral Agency Agreement, duly executed and delivered
by the Collateral Agent, the Company and the holder of the Medium Term
Note;
(xiv) the Perfection Certificate, duly executed and delivered by
the Company;
(xv) the Assignments of Life Insurance Policy, each duly executed
and delivered by the Company and W. T. Wamberg;
(xvi) an Officer's Certificate substantially in the form of Exhibit
C attached hereto, duly executed and delivered by each of CBH and the
Company;
(xvii) a certified copy of the Tax Indemnification Agreement, duly
executed and delivered by the Company and the shareholders of CBI-Texas
immediately prior to the consummation of the Merger, the terms and
conditions of which shall be in full force and effect and shall not
have been amended, modified or waived except with such Existing
Holder's prior written consent;
(xviii) a certified copy of the Wamberg Principal Office Agreement,
duly executed and delivered by the Company, W.T. Wamberg and The
Wamberg Organization, Inc., amended as provided in the Registration
Statement, the terms and conditions of which shall
4
<PAGE> 11
be in full force and effect and shall not have been further amended,
modified or waived except with such Existing Holder's prior written
consent;
(xix) certified copies of (a) each of the IPO Documents and Merger
Documents, the terms and conditions of which shall be in full force and
effect and shall not have been amended, modified or waived except with
such Existing Holder's prior written consent, and (b) (x) the Schoenke
Acquisition Agreement and any other Schoenke Acquisition Documents
executed and delivered by the parties thereto on or prior to the Date
of Closing, the terms and conditions of which shall be in full force
and effect and shall not have been amended, modified or waived except
with such Existing Holder's prior written consent, together with (y)
the most recent drafts of any Schoenke Acquisition Documents which have
not been executed and delivered by the parties thereto on or before the
Date of Closing;
(xx) copies of (a) (x) a pro forma balance sheet and pro forma
statements of income, changes in shareholders' equity and cash flow for
each of the Company and each division thereof for the fiscal year ended
December 31, 1997 (giving effect to the Schoenke Acquisition, the
Merger and the IPO) and (y) a pro forma balance sheet as at [JUNE 30,
1998] and pro forma statements of income, changes in shareholders'
equity and cash flow for the [SIX-MONTH] period ended on such date for
each of the Company and each division thereof (giving effect to the
Schoenke Acquisition, the Merger and the IPO), certified by an
authorized financial officer of the Company and (b) good-faith,
projected, pro forma financial statements (including, without
limitation, balance sheets and statements of income, changes in
shareholders' equity and cash flow) for each of the Company and each
division thereof for fiscal years 1998 through 2002 (giving effect to
the Schoenke Acquisition, the Merger and the IPO);
(xxi) the Security Documents, duly executed and delivered by the
Company;
(xxii) all Uniform Commercial Code financing statements deemed
necessary or appropriate by such Existing Holder to perfect and
maintain the priority of the Liens in favor of the Collateral Agent
arising under the Security Documents (as defined in the Original Note
Agreement), the Security Documents (as defined in this Agreement), duly
executed and delivered by the Company, to be recorded with the
appropriate filing offices;
(xxiii) certificates of insurance naming the Collateral Agent as
loss payee and the Collateral Agent and all holders of Notes as
additional insureds, as required by paragraph 5G; and
(xxiv) additional documents, lien and judgment searches,
certificates of officers of the Company and the Schoenke Companies,
certificates of public officials and opinions of counsel to the Company
and the Schoenke Companies with respect to legal matters or corporate
or other proceedings related to the transactions contemplated hereby or
by the Schoenke Acquisition, the Merger or the IPO as may be requested
by such Existing Holder.
5
<PAGE> 12
3B. REPRESENTATIONS AND WARRANTIES; NO DEFAULT; NO MATERIAL ADVERSE
CHANGE. The representations and warranties contained in this Agreement, the
other Senior Note Documents, the Schoenke Acquisition Documents, the Merger
Documents and the IPO Documents shall be true on and as of the Date of Closing,
except to the extent of changes caused by the transactions herein contemplated;
there shall exist on the Date of Closing no Event of Default or Default
hereunder, and no Event of Default or Default under and as such terms are
defined in the Original Note Agreement shall have occurred and be continuing
immediately prior to the execution and delivery of this Agreement; there shall
exist or have occurred no condition, event or act which could have a material
adverse effect on the business, condition (financial or other), assets,
properties, operations or prospects of CBH and the Company, and CBH and the
Company shall each have delivered to such Existing Holder an Officer's
Certificate, dated the Date of Closing, to such effects.
3C. DELIVERY AND ACCEPTANCE PERMITTED BY APPLICABLE LAWS. The delivery
by the Company of, and the acceptance by such Existing Holder of, the Notes to
be delivered to such Existing Holder on the Date of Closing on the terms and
conditions herein provided shall not violate any applicable law or governmental
regulation (including, without limitation, section 5 of the Securities Act or
Regulation U or X of the Board of Governors of the Federal Reserve System) and
shall not subject such Existing Holder to any tax, penalty, liability or other
onerous condition under or pursuant to any applicable law or governmental
regulation, and such Existing Holder shall have received such certificates or
other evidence as it may request to establish compliance with this condition.
3D. COMPLETION OF DUE DILIGENCE. The Company shall have completed its
due diligence investigation with respect to the business and assets of the
Schoenke Companies, and such Existing Holder shall have received such
information, analyses and documentation with respect thereto (including, without
limitation, the projected revenues of the Schoenke Companies and analyses
thereof (both historical and prospective) by geographical area, agent and office
and client or prospective client) as it may request.
3E. OTHER INFORMATION. Such Existing Holder shall have received all
documentation and information relating to the business, assets and capital
structure of CBH, the Company and the Schoenke Companies as it may reasonably
request, and such Existing Holder shall have had an opportunity to review such
documentation and information and discuss the same with the management of CBH,
the Company and the Schoenke Companies.
3F. RELATED PROCEEDINGS. All corporate and other proceedings taken or
to be taken in connection with (i) the Schoenke Acquisition, (ii) the Merger,
(iii) the IPO, (iv) the Company's execution and delivery to such Existing Holder
of the Second Priority Notes pursuant to the Second Priority Note Agreement and
(v) the other transactions contemplated hereby and thereby, and all documents
incident thereto, shall be satisfactory in form, scope and substance to such
Existing Holder (including, without limitation, the terms and conditions of any
promissory note payable by any of the Schoenke Companies or the Company to any
stockholder of any of the Schoenke
6
<PAGE> 13
Companies), and such Existing Holder shall have received all such counterpart
originals or certified or other copies of such documents as it may reasonably
request.
3G. CONSUMMATION OF MERGER. Such Existing Holder shall have received
satisfactory evidence that the Merger has been consummated prior to or
concurrently with the delivery of the Notes and the Second Priority Notes,
pursuant to and in accordance with the terms and conditions of the Merger
Documents (no terms thereof having been amended, supplemented, waived or
otherwise modified without such Existing Holder's prior written consent).
3H. CONSUMMATION OF IPO. Such Existing Holder shall have received
satisfactory evidence that (i) the IPO has been consummated on or before
December 31, 1998 and prior to or concurrently with the delivery of the Notes
and the Second Priority Notes, pursuant to and in accordance with the terms and
conditions of the IPO Documents (no terms thereof having been amended,
supplemented, waived or otherwise modified without such Existing Holder's prior
written consent), (ii) CBH has received net proceeds from the IPO (i.e., net of
underwriting discounts and commissions and net of expenses payable in connection
with the IPO) of at least $35,000,000, and (iii) CBH has contributed to the
Company as equity at least 95% of the net proceeds of the IPO.
3I. CONSUMMATION OF WARRANT PURCHASE. The Warrants owned and held by
such Existing Holder shall have been purchased from such Existing Holder upon
the terms and conditions set forth in the letter agreement, dated as of June 11,
1998, between CBI-Texas and such Existing Holder.
3J. TERMINATION OF SHAREHOLDERS' AGREEMENT. Such Existing Holder shall
have received satisfactory evidence that the Shareholders' Agreement has been
terminated prior to or concurrently with the delivery of the Notes.
3K. DELIVERY OF NOTES TO OTHER EXISTING HOLDERS. The Company shall have
delivered to the other Existing Holders the Notes to be accepted by them at the
Closing.
3L. PROCEEDINGS. All corporate and other proceedings taken or to be
taken in connection with the transactions contemplated hereby and all documents
incident thereto shall be satisfactory in substance and form to such Existing
Holder, and such Existing Holder shall have received all such counterpart
originals or certified or other copies of such documents as it may reasonably
request.
3M. ACCRUED INTEREST. Such Existing Holder shall have received payment
of all interest accrued on the Original Note held by it from and including the
last date on which interest on such Original Note was paid through but not
including the Closing Date.
3N. FEES. Without limiting the provisions of paragraph 11B, such
Existing Holder's special counsel shall have received its fees, charges and
disbursements to the extent reflected in a statement of such special counsel
rendered to the Company at least one Business Day prior to the Closing.
7
<PAGE> 14
PARAGRAPH 4. PREPAYMENTS.
4. PREPAYMENTS. The Notes shall be subject to prepayment only with
respect to the prepayments specified in paragraphs 4A, 4B and 4C.
4A. REQUIRED PREPAYMENTS. Until the Notes shall be paid in full, the
Company shall apply to the prepayment of the Notes, without premium, the sum of
$1,450,000 on each February 9th and August 9th beginning on the February 9th
immediately following the Date of Closing, and such principal amounts of the
Notes, together with interest thereon to the prepayment dates, shall become due
on such prepayment dates. The remaining outstanding principal amount of the
Notes, together with interest accrued thereon, shall become due on the maturity
date of the Notes.
4B. OPTIONAL PREPAYMENT OF NOTES.
(i) The Notes shall be subject to prepayment, without premium, in
whole at any time or from time to time in part (in integral multiples
of $600,000), at the option of the Company, at 100% of the principal
amount so prepaid plus interest thereon to the prepayment date. Any
partial prepayment of the Notes pursuant to this paragraph 4B shall be
applied in satisfaction of required payments of principal in inverse
order of their scheduled due dates.
(ii) The Company shall give the holder of each Note irrevocable
written notice of any prepayment pursuant to this paragraph 4B not less
than ten Business Days prior to the prepayment date, specifying such
prepayment date and the principal amount of the Notes, and of the Notes
held by such holder, to be prepaid on such date. Notice of prepayment
having been given as aforesaid, the principal amount of the Notes
specified in such notice, together with interest thereon to the
prepayment date, shall become due and payable on such prepayment date.
The Company shall, on or before the day on which it gives written
notice of any prepayment pursuant to this paragraph 4B, give telephonic
notice of the principal amount of the Notes to be prepaid and the
prepayment date to each holder which shall have designated a recipient
of such notices in the Information Schedule attached hereto or by
notice in writing to the Company.
4C. OFFER TO PREPAY NOTES IN THE EVENT OF A CHANGE IN CONTROL OR A
REVENUE MAINTENANCE EVENT.
(i) Notice of Impending Change in Control. The Company will not
take any action that consummates or finalizes a Change in Control
unless at least 30 days prior to such action it shall have given to
each holder of Notes written notice of such impending Change in
Control.
(ii) Notice of Occurrence of Change in Control or Revenue
Maintenance Event. The Company will, within five Business Days after
any Responsible Officer has knowledge
8
<PAGE> 15
of the occurrence of any Change in Control or Revenue Maintenance
Event, give written notice of such Change in Control or such Revenue
Maintenance Event to each holder of Notes. If a Change in Control or
Revenue Maintenance Event has occurred, such notice shall contain and
constitute an offer to prepay the Notes as described in clause (iii) of
this paragraph 4C and shall be accompanied by the certificate described
in clause (vi) hereof.
(iii) Offer to Prepay Notes. The offer to prepay Notes contemplated
by the foregoing clause (ii) shall be an offer to prepay, in accordance
with and subject to this paragraph 4C, all, but not less than all, the
Notes held by each holder (in this case only, "HOLDER" in respect of
any Note registered in the name of a nominee for a disclosed beneficial
owner shall mean such beneficial owner) on a date specified in such
offer (the "PROPOSED PREPAYMENT DATE"). Such Proposed Prepayment Date
shall be not less than 30 days and not more than 60 days after the date
of such offer (if the Proposed Prepayment Date shall not be specified
in such offer, the Proposed Prepayment Date shall be the 30th day after
the date of such offer).
(iv) Rejection; Acceptance. A holder of Notes may accept the offer
to prepay made pursuant to this paragraph 4C by causing a notice of
such acceptance to be delivered to the Company at least five days prior
to the Proposed Prepayment Date. A failure by a holder of Notes to
respond to an offer to prepay made pursuant to this paragraph 4C shall
be deemed to constitute an acceptance of such offer by such holder.
(v) Prepayment; Reduction of Required Prepayments. Prepayment of
the Notes to be prepaid pursuant to this paragraph 4C shall be at 100%
of the principal amount of such Notes, together with interest on such
Notes accrued to the date of prepayment. The prepayment shall be made
on the Proposed Prepayment Date. Upon any partial prepayment of Notes
pursuant to this paragraph 4C, the principal amount of the required
prepayment of the Notes becoming due under paragraph 4A on or after the
date of such prepayment shall be reduced in the same proportion as the
aggregate unpaid principal amount of Notes is reduced as a result of
such prepayment.
(vi) Officer's Certificate. Each offer to prepay the Notes pursuant
to this paragraph 4C shall be accompanied by a certificate, executed by
a Responsible Officer of the Company and dated the date of such offer,
specifying: (a) the Proposed Prepayment Date; (b) that such offer is
made pursuant to this paragraph 4C; (c) the principal amount of each
Note offered to be prepaid; (d) the interest that would be due on each
Note offered to be prepaid, accrued to the Proposed Prepayment Date;
(e) that the conditions of this paragraph 4C have been fulfilled; and
(g) in reasonable detail, the nature and date of the Change in Control
or Revenue Maintenance Event, as the case may be.
4D. PARTIAL PAYMENTS PRO RATA. Upon any partial prepayment of Notes
pursuant to paragraph 4A or 4B, the principal amount so prepaid shall be
allocated to all Notes at the time outstanding (including, for the purpose of
this paragraph 4D only, all such Notes prepaid or
9
<PAGE> 16
otherwise retired or purchased or otherwise acquired by the Company or any of
its Subsidiaries or Affiliates other than by prepayment pursuant to paragraph
4A, 4B or 4C) in proportion to the respective outstanding principal amounts
thereof. Upon any partial prepayment of Notes pursuant to paragraph 4C, the
principal amount so prepaid shall be allocated to all Notes at the time
outstanding and held by holders who have accepted the Company's offer of
prepayment made pursuant to paragraph 4C (including, for the purpose of this
paragraph 4D only, all such Notes prepaid or otherwise retired or purchased or
otherwise acquired by the Company or any of its Subsidiaries or Affiliates other
than by prepayment pursuant to paragraph 4A, 4B or 4C) in proportion to the
respective outstanding principal amounts thereof.
4E. RETIREMENT OF NOTES. The Company shall not, and shall not permit
any of its Subsidiaries or Affiliates to, prepay or otherwise retire in whole or
in part prior to their stated final maturity (other than by prepayment pursuant
to paragraph 4A, 4B or 4C or upon acceleration of such final maturity pursuant
to paragraph 7A), or purchase or otherwise acquire, directly or indirectly,
Notes held by any holder unless the Company or such Subsidiary or Affiliate
shall have offered to prepay or otherwise retire or purchase or otherwise
acquire, as the case may be, the same proportion of the aggregate principal
amount of Notes held by each other holder of Notes at the time outstanding upon
the same terms and conditions. Any Notes so prepaid or otherwise retired or
purchased or otherwise acquired by the Company or any of its Subsidiaries or
Affiliates shall not be deemed to be outstanding for any purpose under this
Agreement, except as provided in paragraph 4D.
PARAGRAPH 5. AFFIRMATIVE COVENANTS.
5. AFFIRMATIVE COVENANTS.
So long as any Note shall remain unpaid the Company covenants that:
5A(1). INFORMATION AS TO COMPANY. The Company will deliver to each
holder of Notes that is an Institutional Investor:
(i) Quarterly Statements -- within 60 days after the end of
each quarterly fiscal period in each fiscal year of the Company (other
than the last quarterly fiscal period of each such fiscal year),
duplicate copies of:
(a) a consolidating and consolidated balance sheet of the
Company and its Subsidiaries as at the end of such quarter, and
(b) consolidating and consolidated statements of income,
changes in stockholders' equity and cash flows of the Company
and its Subsidiaries for such quarter and (in the case of the
second and third quarters) for the portion of the fiscal year
ending with such quarter,
10
<PAGE> 17
setting forth in each case in comparative form the figures for
the corresponding periods in the previous fiscal year, all in
reasonable detail, prepared in accordance with GAAP applicable
to quarterly financial statements generally, and certified by a
Senior Financial Officer of the Company as fairly presenting, in
all material respects, the financial position of the companies
being reported on and their results of operations and cash
flows, subject to changes resulting from year-end adjustments;
(ii) Annual Statements -- within 105 days after the end of each
fiscal year of the Company, duplicate copies of:
(a) a consolidating and consolidated balance sheet of the
Company and its Subsidiaries as at the end of such year, and
(b) consolidating and consolidated statements of income,
changes in shareholders' equity and cash flows of the Company
and its Subsidiaries for such year,
setting forth in each case in comparative form the figures for the
previous fiscal year, all in reasonable detail, prepared in accordance
with GAAP and, (x) as to the consolidating statements, certified by a
Senior Financial Officer of the Company as fairly presenting, in all
material respects, the financial position of the companies being
reported on and their results of operations and cash flows and, (y) as
to the consolidated statements, accompanied
(A) by an opinion of the Independent Accountant, which
opinion shall state that such financial statements present
fairly, in all material respects, the financial position of the
companies being reported upon and their results of operations
and cash flows and have been prepared in conformity with GAAP,
and that the examination of such accountants in connection with
such financial statements has been made in accordance with
generally accepted auditing standards, and that such audit
provides a reasonable basis for such opinion in the
circumstances, and
(B) a certificate of the Independent Accountant stating that
they have reviewed this Agreement and stating further whether,
in making their audit, they have become aware of any condition
or event that then constitutes a Default or an Event of Default,
and, if they are aware that any such condition or event then
exists, specifying the nature and period of the existence
thereof (it being understood that such accountants shall not be
liable, directly or indirectly, for any failure to obtain
knowledge of any Default or Event of Default unless such
accountants should have obtained knowledge thereof in making an
audit in accordance with generally accepted auditing standards
or did not make such an audit);
(iii) SEC and Other Reports -- promptly upon their becoming
available, one copy of (i) each financial statement, report, notice or
proxy statement sent by the Company or any
11
<PAGE> 18
of its Subsidiaries to public securities holders generally, and (ii)
each regular or periodic report, each registration statement (without
exhibits except as expressly requested by such holder), and each
prospectus and all amendments thereto filed by the Company or any of
its Subsidiaries with the Securities and Exchange Commission and of all
press releases and other statements made available generally by the
Company or any of its Subsidiaries to the public concerning
developments that are material;
(iv) Notice of Default or Event of Default -- promptly, and in
any event within five days after a Responsible Officer becoming aware
of the existence of any Default or Event of Default or that any Person
has given any notice or taken any action with respect to a claimed
default hereunder or that any Person has given any notice or taken any
action with respect to a claimed default of the type referred to in
clause (iii) of paragraph 7A, a written notice specifying the nature
and period of existence thereof and what action the Company is taking
or proposes to take with respect thereto;
(v) ERISA Matters -- promptly, and in any event within five days
after a Responsible Officer becoming aware of any of the following, a
written notice setting forth the nature thereof and the action, if any,
that the Company or an ERISA Affiliate proposes to take with respect
thereto:
(a) with respect to any Plan, any reportable event, as
defined in sec tion 4043(b) of ERISA and the regulations
thereunder, for which notice thereof has not been waived pursuant
to such regulations as in effect on the date hereof; or
(b) the taking by the PBGC of steps to institute, or the
threatening by the PBGC of the institution of, proceedings under
section 4042 of ERISA for the termi nation of, or the appointment
of a trustee to administer, any Plan, or the receipt by the
Company or any ERISA Affiliate of a notice from a Multiemployer
Plan that such action has been taken by the PBGC with respect to
such Multiemployer Plan; or
(c) any event, transaction or condition that could result in
the incurrence of any liability by the Company or any ERISA
Affiliate pursuant to Title I or IV of ERISA or the penalty or
excise tax provisions of the Code relating to employee benefit
plans, or in the imposition of any Lien on any of the rights,
properties or assets of the Company or any ERISA Affiliate
pursuant to Title I or IV of ERISA or such penalty or excise tax
provisions, if such liability or Lien, taken together with any
other such liabilities or Liens then existing, could reasonably
be expected to have a material adverse effect on Company or any
of its Subsidiaries;
(vi) Notices from Governmental Authority -- promptly, and in any
event within 15 days of receipt thereof, copies of any notice to the
Company or any of its Subsidiaries from any federal or state
Governmental Authority relating to any order, ruling, statute or
12
<PAGE> 19
other law or regulation that could reasonably be expected to have a
material adverse effect on the Company or any of its Subsidiaries;
(vii) Projections -- as soon as practicable and in any event
within 105 days after the end of each fiscal year, good faith,
projected consolidating and consolidated balance sheets and good faith,
projected consolidating and consolidated statements of income, cash
flows and stockholders' equity of the Company and its Subsidiaries as
at the end of each of the next five fiscal years, all in reasonable
detail (including, without limitation, a breakdown by each division of
the Company and its Subsidiaries and an enumeration of the assumptions
underlying such balance sheets and financial statements) and
substantially in the form of the projections delivered pursuant to
paragraph 3A(xx)(b), certified by an authorized financial officer of
the Company (such certification to contain, among other things, a
representation and warranty that such projected financial statements
are reasonable based on the assumptions stated therein and the best
information available to the officers of the Company);
(viii) Commission Reports -- as soon as practicable and in any
event within 30 days after the end of each fiscal quarter, commission
renewal reports and reports detailing the composition of the Commission
Fees of the Company and its Subsidiaries (in form, scope and substance
substantially the same as those delivered under and pursuant to
paragraph 5A of the Original Note Agreement) for or as of, as the case
may be, such quarter, certified by an authorized financial officer of
the Company, all in reasonable detail and satisfactory in form, scope
and substance to the Required Holder(s);
(ix) Other Information -- with reasonable promptness, accounts
receivable reports, business reports and policy cancellation reports of
the Company and its Subsidiaries for or as of, as the case may be, any
fiscal quarter, certified by an authorized financial officer of the
Company, as from time to time may be requested by any holder of Notes,
all in reasonable detail and satisfactory in form, scope and substance
to such holder of Notes; and
(x) Requested Information -- with reasonable promptness, such
other data and information relating to the business, operations,
affairs, financial condition, assets or properties of the Company or
any of its Subsidiaries or relating to the ability of the Company or
any of its Subsidiaries to perform its obligations hereunder, under the
Notes or under any of the other Senior Note Documents to which it is a
party, as applicable, as from time to time may be reasonably requested
by any such holder of Notes.
5A(2). OFFICER'S CERTIFICATE. Each set of financial statements
delivered to a holder of Notes pursuant to clause (i) or (ii) of paragraph 5A(1)
shall be accompanied by a certificate of a Senior Financial Officer setting
forth:
(i) Covenant Compliance -- the information (including detailed
calculations) required in order to establish whether the Company was in
compliance with the requirements
13
<PAGE> 20
of paragraphs 6A, 6B, 6C, 6D, 6E, 6F, 6G(2) and 6S, inclusive, during
the quarterly or annual period covered by the statements then being
furnished (including with respect to each such paragraph, where
applicable, the calculations of the maximum or minimum amount, ratio or
percentage, as the case may be, permissible under the terms of such
paragraphs, and the calculation of the amount, ratio or percentage then
in existence), set forth in a Compliance Certificate substantially in
the form of Exhibit D attached hereto; and
(ii) Event of Default -- a statement that such officer has reviewed
the relevant terms hereof and has made, or caused to be made, under his
or her supervision, a review of the transactions and conditions of the
Company and its Subsidiaries from the beginning of the quarterly or
annual period covered by the statements then being furnished to the
date of the certificate and that such review shall not have disclosed
the existence during such period of any condition or event that
constitutes a Default or an Event of Default or, if any such condition
or event existed or exists (including, without limitation, any such
event or condi tion resulting from the failure of the Company or any
Subsidiary to comply with any Environmental Law), specifying the nature
and period of existence thereof and what action the Company shall have
taken or proposes to take with respect thereto.
5B. INFORMATION REQUIRED BY RULE 144A. The Company will, upon the
request of the holder of any Note, provide such holder, and any Qualified
Institutional Buyer designated by such holder, such financial and other
information as such holder may reasonably determine to be necessary in order to
permit compliance with the information requirements of Rule 144A under the
Securities Act in connection with the resale of Notes, except at such times as
the Company is subject to the reporting requirements of section 13 or 15(d) of
the Exchange Act.
5C. INSPECTION. The Company shall permit the representatives of each
holder of Notes that is an Institutional Investor:
(i) No Default -- if no Default or Event of Default then exists, at
the expense of such holder and upon reasonable prior notice to the
Company, to visit the principal executive office of the Company, to
discuss the affairs, finances and accounts of the Company and its
Subsidiaries with the Company's officers, and (with the consent of the
Company, which consent will not be unreasonably withheld) its
independent public ac countants, and (with the consent of the Company,
which consent will not be unreasonably withheld) to visit the other
offices and properties of the Company and each Subsidiary, all at such
reasonable times and as often as may be reasonably requested in
writing; and
(ii) Default -- if a Default or Event of Default then exists, at
the expense of the Company to visit and inspect any of the offices or
properties of the Company or any Subsidiary, to examine all their
respective books of account, records, reports and other papers, to make
copies and extracts therefrom, and to discuss their respective affairs,
finances and accounts with their respective officers and independent
public accountants (and by this provision the Company authorizes said
accountants to discuss the affairs,
14
<PAGE> 21
finances and accounts of the Company and its Subsidiaries), all at
such times and as often as may be requested.
5D. COVENANT TO SECURE NOTES EQUALLY. The Company will, if it or any
Subsidiary shall create or assume any Lien upon any of its property or assets,
whether now owned or hereafter acquired, other than Liens permitted by the
provisions of paragraph 6G(1) (unless prior written consent to the creation or
assumption thereof shall have been obtained pursuant to paragraph 11C), make or
cause to be made effective provision whereby the Notes will be secured by such
Lien equally and ratably with any and all other Indebtedness thereby secured so
long as any such other Indebtedness shall be so secured pursuant to such
agreements and instruments as shall be approved by the Required Holder(s), and
the Company will cause to be delivered to the holder of each Note an opinion of
independent counsel to the effect that such agreements and instruments are
enforceable in accordance with their terms and that the Notes are equally and
ratably secured with such other Indebtedness.
5E. CORPORATE EXISTENCE, LICENSES AND PERMITS; MAINTENANCE OF
PROPERTIES. The Company will at all times do or cause to be done all things
necessary to maintain, preserve and renew its existence as a corporation
organized under the laws of a state of the United States of America, will
preserve and keep in force and effect, and cause each of its Subsidiaries to
preserve and keep in force and effect, all licenses and permits necessary to the
conduct of its and their respective businesses and will maintain and keep, and
will cause each of its Subsidiaries to maintain and keep, its and their
respective properties in good repair, working order and condition, and from time
to time make all necessary and proper repairs, renewals and replacements, so
that the business carried on in connection therewith may be properly and
advantageously conducted at all times in the normal course of business as
conducted prior to the date of repair; provided, however, that nothing contained
in this paragraph 5E shall prevent the Company or any Subsidiary from ceasing or
omitting to exercise any right, license or permit or to make any repair, renewal
or replacement that (i) in the reasonable judgment of the Company or such
Subsidiary is no longer in the best interests of the Company or such Subsidiary
and (ii) such cessation or omission could not reasonably be expected to result
in a material adverse effect on the business, condition (financial or other),
assets, properties, operations or prospects of the Company and its Subsidiaries
taken as a whole.
5F. MAINTENANCE OF MATERIAL CONTRACTS. The Company will, and will
causes its Subsidiaries to, maintain all contracts necessary to the conduct of
its and their respective businesses (including, without limitation, employment
contracts, non-competition agreements and principal office agreements);
provided, however, that nothing contained in this paragraph 5F shall prevent the
Company or any Subsidiary from terminating any contract that (i) in the
reasonable judgment of the Company or such Subsidiary is no longer in the best
interests of the Company or such Subsidiary and (ii) such termination could not
reasonably be expected to result in a material adverse effect on the business,
condition (financial or other), assets, properties, operations or prospects of
the Company and its Subsidiaries taken as a whole.
15
<PAGE> 22
5G. MAINTENANCE OF INSURANCE. The Company will carry and maintain, and
cause each Subsidiary to carry and maintain, insurance (subject to customary
deductibles and retentions) in at least such amounts and against such
liabilities and hazards and by such methods as customarily maintained by other
companies operating similar businesses. The Collateral Agent and all holders of
Notes shall be named as additional insureds, and the Collateral Agent shall be
named as loss payee, on each insurance policy obtained or maintained by the
Company and its Subsidiaries with respect to their properties and businesses.
5H. PAYMENT OF TAXES AND OTHER CLAIMS. The Company will and will cause
each of its Subsidiaries to file all income tax or similar tax returns required
to be filed in any jurisdiction and to pay and discharge all taxes shown to be
due and payable on such returns and all other taxes, assessments, governmental
charges, levies, trade accounts payable and claims for work, labor or materials
(all the foregoing being referred to collectively as "CLAIMS") payable by any of
them, to the extent such Claims have become due and payable and before they have
become delinquent; provided that neither the Company nor any Subsidiary need pay
any Claim if (i) the amount, applicability or validity thereof is contested by
the Company or such Subsidiary on a timely basis in good faith and in
appropriate proceedings, and the Company or a Subsidiary has established
adequate reserves therefor to the extent required by GAAP on the books of the
Company or such Subsidiary or (ii) the nonpayment of all such Claims in the
aggregate could not result in a material adverse change in the business,
condition (financial or other), assets, properties, operations or prospects of
the Company and its Subsidiaries taken as a whole.
5I. ERISA COMPLIANCE. The Company will, and will cause each ERISA
Affiliate to, at all times:
(i) with respect to each Plan, make timely payments of
contributions required to meet the minimum funding standard set forth
in ERISA or the Code with respect thereto and, with respect to any
Multiemployer Plan, make timely payment of contributions required to be
paid thereto as provided by Section 515 of ERISA, and
(ii) comply with all other provisions of ERISA,
except for such failures to make contributions and failures to comply as could
not have a material adverse effect on the business, condition (financial or
other), assets, properties, operations or prospects of the Company and its
Subsidiaries taken as a whole.
5J. COMPLIANCE WITH LAWS. The Company will comply, and will cause each
of its Subsidiaries to comply, with all applicable laws, rules, regulations and
orders (including those relating to protection of the environment) except, in
any such case, where failure to comply could not have a material adverse effect
on the business, condition (financial or otherwise), operations or prospects of
the Company and its Subsidiaries taken as a whole.
16
<PAGE> 23
5K. COLLATERAL. The Company shall execute, and shall cause its
Subsidiaries to execute, any and all documents, financing statements, agreements
and instruments, and take all action (including filing Uniform Commercial Code
and other financing statements, mortgages and deeds of trust), that may be
required under applicable law, or which the Required Holder(s) or the Collateral
Agent may reasonably request in order to effectuate the transactions
contemplated by the Senior Note Documents and in order to grant, preserve,
protect, maintain and perfect the validity and priority of the security
interests and Liens created or purported to be created by the Security Documents
(as defined in the Original Note Agreement) or the Security Documents (as
defined in this Agreement) (it being understood that it is the intent of the
parties that the obligations of the Company and its Subsidiaries under the
Senior Note Documents shall be secured by, among other things, substantially all
the property and assets of the Company and its Subsidiaries (now or hereafter
acquired or created), including, without limitation, real and other properties
acquired subsequent to the Date of Closing, but excluding certain commissions,
fees and the proceeds thereof earned or to be earned by the Company, as more
particularly identified in the Security Agreement [I.E., ALL PROPERTY AND ASSETS
OF THE COMPANY EXCEPT RIGHTS OF THE COMPANY UNDER AGREEMENTS RELATING TO THE
PAYMENT OF COMMISSIONS AND FEES, AND THE PROCEEDS THEREOF, (I) IN RESPECT OF
RENEWAL COMMISSIONS AND FEES WITH RESPECT TO PLANS AND POLICIES SOLD BY (A) THE
BCS DIVISION OF THE COMPANY PRIOR TO THE DATE THE IPO IS CONSUMMATED OR (B) THE
SCHOENKE COMPANIES PRIOR TO THE ACQUISITION BY THE COMPANY OF THE SCHOENKE
COMPANIES (IT BEING UNDERSTOOD THAT NEW PLANS AND POLICIES SOLD AFTER THE
CONSUMMATION OF THE IPO BY THE BCS DIVISION OF THE COMPANY AND NEW PLANS AND
POLICIES SOLD AFTER THE ACQUISITION OF THE SCHOENKE COMPANIES BY THAT PORTION OF
THE COMPANY'S BUSINESS THAT FORMERLY CONSISTED OF THE SCHOENKE COMPANIES SHALL
BOTH CONSTITUTE A PORTION OF YOUR SECURITY) AND (II) COMMISSIONS, FEES AND THE
PROCEEDS THEREOF ARISING FROM BUSINESSES ACQUIRED AFTER THE CONSUMMATION OF THE
IPO, WHICH SHALL NOT CONSTITUTE COLLATERAL]), including, without limitation,
effecting such arrangements which may be appropriate or necessary, or which the
Required Holder(s) or the Collateral Agent may reasonably require, to minimize
commingling, intercreditor issues and other impediments to the enforcement of
the rights and remedies of the holders of Notes. The Company agrees to provide
from time to time such evidence as the Required Holder(s) or the Collateral
Agent shall request as to the perfection and priority status of each such
security interest and Lien. The Company further agrees to maintain a system of
accounting and books and records reasonably satisfactory to the Required
Holder(s) which will permit the ready identification of Collateral.
5L. PERFORMANCE OF OBLIGATIONS. The Company will pay the Notes
according to the reading, tenor and effect thereof. The Company will, and will
cause its Subsidiaries to, do and perform every act and discharge all of the
obligations provided to be performed and discharged by the Company or such
Subsidiary, as the case may be, under the Senior Note Documents to which it is a
party (including, without limitation, this Agreement) at the time or times and
in the manner specified.
5M. MAINTENANCE OF KEY SALES FORCE. The Company will maintain, at all
times, a full time sales force equal to the greater of twenty individuals and
80% of the number of sales representatives and agents as of the end of the
immediately preceding fiscal year.
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<PAGE> 24
5N. PLEDGE OF NOTES PAYABLE. The Company will, and will cause its
Subsidiaries to, promptly deliver to the Collateral Agent pursuant to the
Security Documents all promissory notes payable to the Company or any of its
Subsidiaries, together with any necessary endorsements or instruments of
transfer, other than promissory notes in an aggregate principal amount, at any
time, not to exceed $2,000,000.
5O. MAINTENANCE OF KEY MAN LIFE INSURANCE POLICIES. The Company shall
maintain in full force and effect at all times policies of insurance in such
form and issued by such financially sound and reputable insurers rated at least
A by A.M. Best as shall be acceptable to the Required Holder(s) insuring the
life of W.T. Wamberg in an aggregate amount equal to $15,000,000. Such policies
of insurance shall name the Company as beneficiary and shall be collaterally
assigned to the Collateral Agent.
5P. CREATION AND MAINTENANCE OF WORKING CAPITAL FACILITY. On or before
March 31, 1999, the Company will enter into a revolving working capital facility
upon terms and conditions and pursuant to documentation in all respects
satisfactory to the holders of the Notes, provided that (i) the aggregate
committed amount of the lender or lenders under such facility shall at all times
be at least $3,000,000, (ii) the aggregate principal amount of the Indebtedness
outstanding under such facility may not at any time exceed $15,000,000, (iii)
such Indebtedness may not mature later than three years after the creation of
such facility, (iv) up to $3,000,000 of such Indebtedness may be secured by the
Collateral as provided in the Security Documents, and (v) such Indebtedness
shall be subject to the requirements of paragraph 6G(3). Subject to the
restrictions contained in this Agreement and the other Senior Note Documents,
the Company will at all times maintain such revolving working credit facility
and will maintain its ability to satisfy all conditions precedent to its ability
to obtain advances thereunder.
5Q. MATTERS RELATED TO QUALIFICATION AND LICENSURE. If the Company is
in any way unable to qualify to do business and be licensed as a "life insurance
agent" or similar entity under the laws of any state in which it desires to
conduct business (whether because of restrictions upon having corporate
shareholders or otherwise), it will take all necessary steps to create, or cause
the creation of, an Affiliate that is qualified and licensed under the laws
(including the insurance code or other similar statute) of such state and will
enter into and maintain in effect a management and service agreement or similar
arrangement between itself and the Affiliate (which shall comply with paragraph
6G(8)) under which the net revenues of the Affiliate are paid to the Company in
consideration for services, administration and other maintenance activities
related to the business of the Affiliate.
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<PAGE> 25
PARAGRAPH 6. NEGATIVE COVENANTS.
6. NEGATIVE COVENANTS. So long as any Note shall remain unpaid the
Company covenants that:
6A. TOTAL DEBT TO ANNUALIZED CASH FLOW RATIO. The Company will not
permit the ratio of Total Debt to Annualized Cash Flow at any time during any
period specified below to exceed the ratio set forth opposite such period:
<TABLE>
<CAPTION>
Period Ratio
------ -----
<S> <C>
From the Date of Closing through and 5.0 to 1.0
including December 31, 1998
From January 1, 1999 through and 4.0 to 1.0
including December 31, 1999
and thereafter 3.0 to 1.0
</TABLE>
6B. LIMITATION ON RESTRICTED PAYMENTS. The Company will not and will
not permit any Subsidiary to directly or indirectly declare, order, pay, make or
set apart any sum for any Restricted Payment unless immediately after giving
effect to such action:
(i) the aggregate amount of Restricted Payments of the Company and
its Subsidiaries declared or made during the period commencing on [JULY
1, 1998] and ending on the date such Restricted Payment is declared or
made, inclusive, would not exceed the sum of (a) $1,000,000 plus (b)
20% of Consolidated Net Income for such period (or minus 100% of
Consolidated Net Income for such period if Consolidated Net Income for
such period is a loss); and
(ii) no Default or Event of Default would exist.
6C. MAINTENANCE OF MINIMUM CONSOLIDATED NET WORTH AND CONSOLIDATED NET
INCOME.
(i) The Company will not permit, at any time, Consolidated Net
Worth to be less than the sum of (a) $1,500,000 and (b) an aggregate
amount equal to 80% of its Consolidated Net Income (on an after-tax
basis, but only if a positive number) for each completed fiscal year
beginning with the fiscal year ending December 31, 1998.
(ii) The Company will not, for any fiscal quarter, permit
Consolidated Net Income to be a negative number the absolute value of
which exceeds $1,200,000 and will not, for the four most recently ended
fiscal quarters, permit Consolidated Net Income to be a negative
number.
19
<PAGE> 26
6D. DISCOUNTED COMMISSION FEES TO TOTAL DEBT RATIO. The Company will
not permit, at any time, the ratio of Discounted Commission Fees to Total Debt
to be less than 1.0 to 1.0.
6E. INTEREST COVERAGE RATIO. The Company will not permit the Interest
Coverage Ratio at any time during any period specified below to be less than the
ratio set forth opposite such period:
<TABLE>
<CAPTION>
Period Ratio
------ -----
<S> <C>
From the Date of Closing through and 1.25 to 1.0
including December 31, 1998
From January 1, 1999 through and including 1.60 to 1.0
December 31, 1999
and thereafter 2.0 to 1.0
</TABLE>
6F. FIXED CHARGE COVERAGE RATIO. The Company will not permit the Fixed
Charge Coverage Ratio at any time during any period specified below to be less
than the ratio set forth opposite such period:
<TABLE>
<CAPTION>
Period Ratio
------ -----
<S> <C>
From the Date of Closing through and .90 to 1.0
including December 31, 1999
From January 1, 2000 through and 1.10 to 1.0
including December 31, 2000
and thereafter 1.25 to 1.0
</TABLE>
6G. LIENS, INDEBTEDNESS, AND OTHER RESTRICTIONS. The Company will not
and will not permit any Subsidiary to:
6G(1). LIENS. Create, assume or suffer to exist (upon the happening
of a contingency or otherwise) any Lien upon any of its properties or
assets (including, without limitation, any documents or instruments in
respect of goods or accounts receivable), whether now owned or
hereafter acquired, or any income or profits therefrom (whether or not
provision is made for the equal and ratable securing of the Notes in
accordance with the provisions of paragraph 5D) or assign or otherwise
convey any right to receive income or profits therefrom, except:
(i) Liens in favor of the Collateral Agent securing the
Indebtedness evidenced by the Notes and the payment, performance
and observance of the other obligations under this Agreement and
the other Senior Note Documents;
20
<PAGE> 27
(ii) Liens in favor of the Collateral Agent securing the
Indebtedness evidenced by the Medium Term Note and addressed in
the Security Documents;
(iii) Liens in favor of the Collateral Agent securing the
Indebtedness evidenced by the Second Priority Notes and the
payment, performance and observance of the other obligations
under the Second Priority Note Agreement and the other Second
Priority Note Documents and addressed in the Security Documents;
(iv) Liens in favor of the Collateral Agent securing up to
$3,000,000 of the Indebtedness evidenced by the Working Capital
Notes;
(v) Liens created to secure Indebtedness incurred by the
Company to finance Permitted Acquisitions, provided that (a) such
Liens shall be created substantially simultaneously with any such
Permitted Acquisition and (b) such Liens do not at any time
encumber any property or assets other than the property or assets
acquired in connection with such Permitted Acquisition;
(vi) Liens created to secure other Indebtedness of the
Company permitted under this Agreement, provided that such Liens
shall not attach to or encumber any of the Collateral; and
(vii) Liens incidental to the conduct of business or the
ownership of properties of the Company and its Subsidiaries
(including Liens in connection with worker's compensation,
unemployment insurance and other like laws (other than ERISA
Liens), warehousemen's and mechanic's liens and statutory
landlord's liens) and Liens to secure the performance of bids,
tenders or purchase, construction or sales contracts, or to
secure statutory obligations, property taxes and assessments or
governmental charges, surety or appeal bonds or other Liens of
like general nature which in each case are incurred in the
ordinary course of business and not in connection with the
borrowing of money, the obtaining of advances or credit or the
payment of the deferred purchase price of property and which do
not in any event materially impair the value or use of the
property encumbered thereby in the operation of the business of
the Company and its Subsidiaries; provided in each case, that the
obligation secured is not overdue, or, if overdue, the amount or
validity thereof is being contested by the Company or such
Subsidiary on a timely basis in good faith and in appropriate
proceedings, and the Company or a Subsidiary has established
adequate reserves therefor to the extent required by GAAP on the
books of the Company or such Subsidiary;
21
<PAGE> 28
6G(2). LIMITATION ON INCURRENCE OF INDEBTEDNESS. Create, incur,
assume, guarantee or otherwise become directly or indirectly liable
with respect to any Indebtedness, whether incurred pursuant to the
Working Capital Note Documents, incurred or assumed in connection with
a Permitted Acquisition, or otherwise, unless on the date the Company
or such Subsidiary becomes liable with respect to any such Indebtedness
and immediately after giving effect thereto and to the concurrent
retirement of any other Indebtedness, (i) no Default or Event of
Default exists and (ii) the Capitalization Ratio does not exceed 0.50
to 1.00.
6G(3). CLEAN-UP OF INDEBTEDNESS REPRESENTED BY WORKING CAPITAL
NOTES. Have, at any time, any Indebtedness outstanding under the
Working Capital Notes unless there shall have been during the
immediately preceding twelve months a period of at least 45 consecutive
days during which there shall have been no Indebtedness outstanding
under the Working Capital Notes.
6G(4). LOANS, ADVANCES, INVESTMENTS AND CONTINGENT LIABILITIES.
Except as set forth on Schedule 6G(4), make or permit to remain
outstanding any loan or advance (including, without limitation,
advances of commission fees) to, or extend credit (other than trade
credit extended in the normal course of business to any Person that is
not a Subsidiary of the Company) to, or make or permit to remain
outstanding any Guarantee in connection with the obligations, stock or
dividends of, or own, purchase or acquire any stock, obligations or
securities of, or any other interest in, or make any capital
contribution to, any Person (any of the foregoing, an "INVESTMENT"),
except that the Company or any Subsidiary may:
(i) endorse negotiable instruments for collection in the
ordinary course of business;
(ii) provide Guarantees with respect to the Indebtedness and
other obligations of the Company and its Subsidiaries under the
Senior Note Documents and the Second Priority Note Documents;
(iii) own, purchase or acquire (a) certificates of deposit
of commercial banks organized under the laws of the United States
or any state thereof (having capital resources in excess of
$100,000,000) (provided that neither the Company nor any
Subsidiary may own, purchase, or acquire more than $1,000,000 (in
face amount) of such certificates of deposit from any such
commercial bank) due within one year from the date of purchase
and payable in the United States in United States dollars which
are rated "A" or better by at least two nationally recognized
rating agencies and (b) obligations of the United States
Government, of any state, territory or possession of the United
States of America or any agency thereof maturing within three
years after the acquisition thereof which are rated in one of the
two highest rating classifications by at least one nationally
recognized rating agency;
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(iv) make loans and advances to employees and salespersons
of the Company (who are not shareholders of the Company or any
Subsidiary) granted in the normal and customary course of the
Company's business and not to finance the acquisition of shares
of common stock of CBH or the Company, provided that loans and
advances in the normal and customary course of the Company's
business shall not at any time exceed $400,000;
(v) own and hold promissory notes of former shareholders of
CBI-Texas in an aggregate principal amount not to exceed
$1,320,000 executed in connection with such shareholders'
purchase of up to approximately 1,400,000 shares of common stock
of CBI-Texas repurchased by CBI-Texas from H.G. Smith, provided
that such promissory notes are pledged to the Collateral Agent to
the extent required by paragraph 5N;
(vi) make non-cash recourse loans to shareholders of the
Company in an aggregate principal amount not to exceed, at any
time, $300,000, provided that such loans may not mature more than
three years after the making thereof and the promissory note(s)
representing such loans are pledged to the Collateral Agent to
the extent required by paragraph 5N; and
(vii) make Permitted Acquisitions, if permitted under
paragraph 6G(5).
6G(5). CONSOLIDATION, MERGER, TRANSFER OF ASSETS, ACQUISITIONS,
ETC. (i) Merge or consolidate with or into any Person, (ii) convey,
transfer, lease or otherwise dispose of all or substantially all of its
assets to any Person, (iii) acquire all or substantially all of the
assets or capital stock of any other Person or division thereof, (iv)
adopt or effect any plan of reorganization, recapitalization,
liquidation or dissolution or (v) acquire any properties or assets
other than in the ordinary course of business; provided, that the
Company may make Permitted Acquisitions so long as (a) no Default or
Event of Default would exist either immediately prior thereto or
immediately after giving effect thereto and (b) the Company has
delivered to each holder of Notes an Officer's Certificate to such
effect, which Officer's Certificate shall also demonstrate, with
calculations in reasonable detail, pro forma compliance with the
requirements of paragraphs 6A through 6F inclusive, 6G(2) and 6S.
6G(6). LIMITATION ON ASSET DISPOSITIONS. Except as permitted under
paragraph 6G(5), make or permit to be made any Asset Disposition, other
than the following:
(i) any Asset Disposition involving worthless or obsolete
equipment which is promptly replaced with equipment of comparable
suitability; and
(ii) any Asset Disposition involving inventory sold in the
ordinary course of business pursuant to customary trade terms.
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6G(7). SALE OR DISCOUNT OF RECEIVABLES. Sell with recourse,
discount (other than to the extent of finance and interest charges
included therein) or otherwise sell for less than face value thereof,
any of its notes or accounts receivable, except notes or accounts
receivable the collection of which is doubtful in accordance with
general accepted accounting principles.
6G(8). TRANSACTIONS WITH AFFILIATES. Directly or indirectly,
purchase, acquire or lease any property from, or sell, transfer or
lease any property to, or otherwise deal with, in the ordinary course
of business or otherwise (i) any Affiliate, (ii) any Person owning,
beneficially or of record, directly or indirectly, either individually
or together with all other Persons to whom such Person is related by
blood, adoption or marriage, stock of the Company (of any class having
ordinary voting power for the election of directors) aggregating 5% or
more of such voting power or (iii) any Person related by blood,
adoption or marriage to any Person described or coming within the
provisions of clause (i) or (ii) of this paragraph 6G(8), except (a) in
the ordinary course or business (other than the amendment to the
Wamberg Principal Office Agreement described in the Registration
Statement), (b) pursuant to the reasonable requirements of the
Company's or such Subsidiary's business and (c) upon fair and
reasonable terms no less favorable to the Company or such Subsidiary
than would be obtainable in a comparable arm's-length transaction with
a Person not an Affiliate.
6G(9). LIMITATION ON SALE-LEASEBACK TRANSACTIONS. Enter into any
arrangement with any lender or investor or to which such lender or
investor is a party providing for the leasing by the Company or any
Subsidiary of real or personal property which has been or is to be sold
or transferred by the Company or any Subsidiary to such lender or
investor or to any Person to whom funds have been or are to be advanced
by such lender or investor on the security of such property or rental
obligations of the Company or any Subsidiary (each such arrangement, a
"SALE-LEASEBACK TRANSACTION").
6H. CHANGE OF FISCAL YEAR. The Company will not and will not permit any
Subsidiary to change its fiscal year from its present fiscal year (fiscal year
end of December 31).
6I. CHANGE OF BUSINESS. The Company will not and will not permit any
Subsidiary to change the general character of its business activities or
operations from its current business activities or operations or to engage in
any business activity or operation not reasonably related to its current
business activities or operations as normally conducted as of the Date of
Closing.
6J. CERTIFICATES OF INCORPORATION; BYLAWS; TRADE NAMES. The Company
will not and will not permit any Subsidiary to amend, alter, modify or restate
its articles or certificate of incorporation or bylaws in any way which would
(i) change its corporate name or adopt a trade name, or (ii) in any manner
adversely affect the obligations or covenants of the Company and its
Subsidiaries hereunder or under any of the other Senior Note Documents.
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<PAGE> 31
6K. OTHER AGREEMENTS. The Company will not and will not permit any of
its Subsidiaries to enter into or permit to exist any agreement (i) which would
cause a Default or Event of Default hereunder or (ii) which contains any
provision which would be violated or breached by the performance of the
obligations of the Company and its Subsidiaries hereunder or under any of the
other Senior Note Documents.
6L. LIMITATION ON CERTAIN RESTRICTIVE AGREEMENTS. The Company will not,
and will not permit any of its Subsidiaries to, enter into or suffer to exist
any contractual obligation, other than the Senior Note Documents and the Second
Priority Note Documents, which in any way restricts the ability of the Company
or any of its Subsidiaries to (i) create, incur, assume or suffer to exist any
Lien upon any of its property, assets or revenues, (ii) make any prepayments or
purchases of the Notes required under this Agreement, (iii) make any dividends
or distributions, or any payments required under this Agreement or any other
Senior Note Document or (iv) transfer any of its property or assets to the
Company or a Wholly Owned Subsidiary of the Company.
6M. ERISA MATTERS. The Company will not, and will not permit any
Subsidiary or ERISA Affiliate to, adopt a Plan or amend an existing Plan in a
manner that materially increases the total dollar amount of the benefits
provided by the Plans described in Schedule 6M; provided, however, that the
Company may modify such Plans to conform with the provisions of Plans of
Persons, the capital stock or other equity interests in which, or all or
substantially all of the Assets of which, the Company has acquired in any
Permitted Acquisition. The Company will not, and will not permit any Subsidiary
or ERISA Affiliate to, permit any Plan maintained by the Company, any Subsidiary
or any ERISA Affiliate (a) to engage in any "PROHIBITED TRANSACTION" (as defined
in ERISA), (b) to incur an "ACCUMULATED FUNDING DEFICIENCY" (as defined in
section 302 of ERISA and section 412 of the Code), or (c) to terminate such Plan
in a manner which could result in the imposition of a Lien on the property or
assets of the Company or any of its Subsidiaries.
6N. ONLY ONE CLASS OF CAPITAL STOCK. The Company will not, and will not
permit any Subsidiary to, have any class of capital stock other than its common
stock.
6O. PROHIBITION AGAINST PAYMENTS AND PREPAYMENTS OF CERTAIN
INDEBTEDNESS. The Company will not, and will not permit any of its Subsidiaries
to, prepay any Subordinated Debt or any Indebtedness evidenced by the Medium
Term Note, except that (i) the Medium Term Note may be prepaid in connection
with the IPO by an amount up to $1,000,000, provided that such prepayment is
applied to installments of principal in direct order of maturity; and (ii) in
order to cause the exercise of conversion rights thereunder in connection with
the IPO, the Company may offer to prepay in full the Convertible Subordinated
Notes (and may prepay the Convertible Subordinated Notes if such prepayment
offer is in fact accepted by the holders thereof), provided that any such
prepayment offer must be made no later than three days after consummation of the
IPO. Upon the occurrence and during the continuance of any Default or Event of
Default, the Company will not, and will not permit any Subsidiary to, pay any
principal of or interest or premium on any Subordinated Debt.
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6P. NO SUBSIDIARIES. Notwithstanding anything in this Agreement or any
other Senior Note Document to the contrary, the Company will not create any
Subsidiaries; provided, however, that, if the holders of the Notes consent to
the creation of a Subsidiary pursuant to paragraph 11C, at the cost and expense
of the Company, the Company will (i) execute and deliver a pledge agreement in
favor of the holders of the Notes and in form, scope and substance satisfactory
to the Required Holder(s), (ii) cause each subsequently acquired or organized
Subsidiary (contemporaneously with such acquisition or organization) to execute
and deliver a guaranty agreement in favor of the holders of Notes and in form,
scope and substance satisfactory to the Required Holder(s), (iii) deliver or
cause such Subsidiary to deliver to the Collateral Agent a certificate
representing all capital stock of, or other equity interests in, such
subsequently acquired or organized Subsidiary, together with an undated stock
power or assignment, executed in blank by a Responsible Officer (or take or
cause a Subsidiary to take such other actions as are necessary to provide the
Collateral Agent with a perfected pledge of or security interest in such capital
stock or other equity interests), and (iv) cause such Subsidiary to secure
payment of the Notes and performance and observance of all other obligations of
the Company and its Subsidiaries under the Senior Note Documents by pledging or
creating, or causing to be pledged or created, perfected security interests and
Liens with respect to such of its assets and properties as the Required
Holder(s) shall designate (it being understood that it is the intent of the
parties that such obligations shall be secured by, among other things,
substantially all the property and assets of the Company and its Subsidiaries
(now or hereafter acquired or created), including, without limitation, real and
other properties acquired subsequent to the Date of Closing). The aforementioned
security interests and Liens will be created under the Security Documents and
other security agreements, mortgages, deeds of trust and other instruments and
documents in form, scope and substance satisfactory to the Required Holder(s)
and the Collateral Agent, and the Company will deliver or cause to be delivered
to the Collateral Agent, all such instruments and documents (including, without
limitation, legal opinions, title insurance policies, surveys and lien searches)
as the Required Holder(s) or the Collateral Agent shall request to evidence
compliance with this paragraph 6P.
6Q. RESTRICTIONS ON ISSUANCES OF COMMON STOCK. The Company will not
issue common stock to any Person other than CBH.
6R. RESTRICTIONS UPON THE AMENDMENT OF CERTAIN DOCUMENTS. The Company
will not, and will not permit any Subsidiary to, amend any principal office
agreement, including, without, limitation, the provisions related to the sharing
of commissions (other than the amendment to the Wamberg Principal Office
Agreement described in the Registration Statement), any employment agreement
(other than the amendment to the employment agreement of Melvin G. Todd
described in the Registration Statement), the Non-Compete Agreement or any
Working Capital Note Document in any manner that (i) could result in a material
adverse change in the business, condition (financial or otherwise), prospects or
operations of the Company and its Subsidiaries taken as a whole, (ii) could
result in a material adverse effect on the Company and its Subsidiaries as a
going concern or (iii) could in any manner materially adversely affect the
obligations or covenants of the Company and its Subsidiaries hereunder or under
any of the other Senior Note Documents.
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6S. LIMITATION ON AMOUNT OF S CORPORATION TAX DISTRIBUTIONS.
Notwithstanding any provision in this Agreement to the contrary, (i) no S
Corporation Tax Distributions may be made for any tax period during which the
Company or CBI-Texas was not an S Corporation and (ii) the aggregate amount of S
Corporation Tax Distributions that may be made by the Company for any period
during which the Company or CBI-Texas was an S Corporation shall not exceed the
product of (A) the maximum marginal federal income tax rate applicable to
individuals under Section 1 of the Code, plus 3% and (B) the net taxable income
and gain of the Company or CBI-Texas for such period, less the aggregate amount
of unrecovered net taxable losses of the Company or CBI-Texas for all prior
periods; provided, that a distribution to the former shareholders of CBI-Texas
in the aggregate amount of $3,200,000, as specified in the Registration
Statement, may be made in connection with the IPO.
6T. PROHIBITION AGAINST PHANTOM STOCK. The Company will not, and will
not permit any Subsidiary to, create any "phantom stock" or any equivalent
thereto (other than pursuant to the Cochlan Phantom Stock Agreement).
6U. RENEWALS OF PLANS AND POLICIES. The Company shall ensure that (i)
renewal of plans and policies occurs only within the respective divisions or
other segments of the Company in which the original plans or policies were
produced, and (ii) all resulting renewal commissions and fees in respect of such
original plans or policies are paid to, and accounted for on the books of, such
respective divisions or other segments of the Company.
PARAGRAPH 7. EVENTS OF DEFAULT.
7. EVENTS OF DEFAULT.
7A. ACCELERATION. If any of the following events shall occur and be
continuing for any reason whatsoever (and whether such occurrence shall be
voluntary or involuntary or come about or be effected by operation of law or
otherwise):
(i) the Company defaults in the payment of any principal of any
Note when the same shall become due, either by the terms thereof or
otherwise as herein provided; or
(ii) the Company defaults in the payment of any interest on any
Note for more than five days after the date due; or
(iii) the Company or any Subsidiary (a) defaults (whether as
primary obligor or as guarantor or other surety) in any payment of
principal of or interest on any other Indebtedness (or any obligation
under notes payable or drafts accepted representing extensions of
credit) beyond any period of grace provided with respect thereto, (b)
fails to perform or observe any other agreement, term or condition
contained in any agreement under which any such obligation is created
(or if any other event thereunder or under any such agreement shall
occur and be continuing) and the effect of such failure or other event
is to
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cause such obligation to become due (or to be repurchased by the
Company or any Subsidiary) prior to any stated maturity; provided, that
the aggregate amount of all obligations as to which such a payment
default shall occur and be continuing or such a failure or other event
causing acceleration (or sale to the Company or any Subsidiary) shall
occur and be continuing exceeds $100,000; or
(iv) the Company defaults in the payment of any principal of,
premium payable with respect to or interest on the Medium Term Note,
any Working Capital Note or any AAA Distribution Note when the same
shall become due, either by the terms thereof or otherwise as provided
in the BCS Acquisition Agreement, the Working Capital Documents or the
Share Repurchase Agreements;
(v) any representation or warranty made by the Company or any of
its Subsidiaries herein or in any of the other Senior Note Documents,
or by the Company or any of its officers in any writing furnished in
connection with or pursuant to this Agreement shall be false in any
material respect on the date as of which made; or
(vi) the Company fails to perform or observe any term, covenant or
agreement contained in paragraph 5N, 5O, 5P or 6 or Section 7 or 8 of
the Security Agreement; or
(vii) the Company or any Subsidiary fails to perform or observe any
other agreement, covenant, term or condition contained herein or in any
of the other Senior Note Documents and such failure shall not be
remedied (a) within 30 days after any Responsible Officer obtains (or
should have obtained) knowledge thereof or (b) within 15 days after the
Company receives written notice of such failure from any holder; or
(viii) the Company or any Subsidiary makes an assignment for the
benefit of creditors or is generally not paying its debts as such debts
become due; or
(ix) any decree or order for relief in respect of the Company or
any Subsidiary is entered under any bankruptcy, reorganization,
compromise, arrangement, insolvency, readjustment of debt, dissolution
or liquidation or similar law, whether now or hereafter in effect (the
"BANKRUPTCY LAW"), of any jurisdiction; or
(x) the Company or any Subsidiary petitions or applies to any
Tribunal for, or consents to, the appointment of, or taking possession
by, a trustee, receiver, custodian, liquidator or similar official of
the Company or any Subsidiary, or of any substantial part of the assets
of the Company or any Subsidiary, or commences a voluntary case under
the Bankruptcy Law of the United States or any proceedings (other than
proceedings for the voluntary liquidation and dissolution of a
Subsidiary) relating to the Company or any Subsidiary under the
Bankruptcy Law of any other jurisdiction; or
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(xi) any such petition or application is filed, or any such
proceedings are commenced, against the Company or any Subsidiary and
the Company or such Subsidiary by any act indicates its approval
thereof, consent thereto or acquiescence therein, or an order, judgment
or decree is entered appointing any such trustee, receiver, custodian,
liquidator or similar official, or approving the petition in any such
proceedings, and such order, judgment or decree remains unstayed and in
effect for more than 60 days; or
(xii) any order, judgment or decree is entered in any proceedings
against the Company decreeing the dissolution of the Company and such
order, judgment or decree remains unstayed and in effect for more than
30 days; or
(xiii) any order, judgment or decree is entered in any proceedings
against the Company or any Subsidiary decreeing a split-up of the
Company or such Subsidiary which requires the divestiture of assets
representing a substantial part, or the divestiture of the stock of a
Subsidiary whose assets represent a substantial part, of the
consolidated assets of the Company and its Subsidiaries (determined in
accordance with generally accepted accounting principles) or which
requires the divestiture of assets, or stock of a Subsidiary, which
shall have contributed a substantial part of the Consolidated Net
Income for any of the three fiscal years then most recently ended, and
such order, judgment or decree remains unstayed and in effect for more
than 30 days; or
(xiv) any final judgment or order, or series of final judgments or
orders, in an amount in excess of $100,000, is rendered against the
Company or any Subsidiary and either (i) enforcement proceedings have
been commenced by any creditor upon such judgment or order or (ii)
within 30 days after entry thereof, such judgment is not discharged or
execution thereof stayed pending appeal, or within 30 days after the
expiration of any such stay, such judgment is not discharged; or
(xv) any Termination Event with respect to a Plan shall have
occurred and, within 30 days after the occurrence thereof, (a) such
Termination Event (if correctable) shall not have been corrected and
(b) the then present value of such Plan's vested benefits exceeds the
then current value of assets accumulated in such Plan by more than the
amount of $100,000 (or in the case of a Termination Event involving the
withdrawal of a "substantial employer" (as defined in Section 4001(a)
(2) of ERISA), the withdrawing employer's proportionate share of such
excess shall exceed such amount); or
(xvi) the Company or any of its ERISA Affiliates as employer under
a Multiemployer Plan shall have made a complete or partial withdrawal
from such Multiemployer Plan and the plan sponsor of such Multiemployer
Plan shall have notified such withdrawing employer that such employer
has incurred a withdrawal liability in an aggregate amount exceeding
$100,000; or
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(xvii) any two of W.T. Wamberg, Melvin G. Todd, Richard Chapman and
the chief financial officer or chief operating officer of the Company,
as the case may be, shall no longer continue to be executive officers
of the Company or engaged in the day-to-day management of the affairs
of the Company and its Subsidiaries, provided that the absence of the
chief financial officer or the chief operating officer shall not result
in a Default or an Event of Default pursuant to this clause (xviii)
unless the chief financial officer or the chief operating officer is
not replaced within 180 days; or
(xviii) an "Event of Default" under and as such term is described
in the Guaranty shall have occurred and be continuing;
then (a) if such event is an Event of Default specified in clause (i) or (ii) of
this paragraph 7A, the holder of any Note (other than the Company or any of its
Subsidiaries or Affiliates) may at its option, by notice in writing to the
Company, declare such Note to be, and such Note shall thereupon be and become,
immediately due and payable at par together with interest accrued thereon,
without presentment, demand, protest or other notice of any kind, all of which
are hereby waived by the Company, (b) if such event is an Event of Default
specified in clause (ix), (x) or (xi) of this paragraph 7A, all of the Notes at
the time outstanding shall automatically become immediately due and payable
together with interest accrued thereon, without presentment, demand, protest or
notice of any kind, all of which are hereby waived by the Company, and (c) if
such event is not an Event of Default specified in clause (ix), (x) or (xi) of
this paragraph 7A, the holder(s) of 100% of the aggregate principal amount of
the Notes at the time outstanding may at its or their option, by notice in
writing to the Company, declare all of the Notes to be, and all of the Notes
shall thereupon be and become, immediately due and payable together with
interest accrued thereon, without presentment, demand, protest or other notice
of any kind, all of which are hereby waived by the Company.
7B. RESCISSION OF ACCELERATION. At any time after any or all of the
Notes shall have been declared immediately due and payable pursuant to paragraph
7A, the holder(s) of 100% of the aggregate principal amount of the Notes at the
time outstanding may, by notice in writing to the Company, rescind and annul
such declaration and its consequences if (i) the Company shall have paid all
overdue interest on the Notes, the principal of the Notes which has become due
otherwise than by reason of such declaration, and interest on such overdue
interest and overdue principal at the rate specified in the Notes, (ii) the
Company shall not have paid any amounts which have become due solely by reason
of such declaration, (iii) all Events of Default and Defaults, other than
non-payment of amounts which have become due solely by reason of such
declaration, shall have been cured or waived pursuant to paragraph 11C, and (iv)
no judgment or decree shall have been entered for the payment of any amounts due
pursuant to the Notes or this Agreement. No such rescission or annulment shall
extend to or affect any subsequent Event of Default or Default or impair any
right arising therefrom.
7C. NOTICE OF ACCELERATION OR RESCISSION. Whenever any Note shall be
declared immediately due and payable pursuant to paragraph 7A or any such
declaration shall be rescinded
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and annulled pursuant to paragraph 7B, the Company shall forthwith give written
notice thereof to the holder of each Note at the time outstanding.
7D. RIGHT OF SET-OFF. In addition to any rights and remedies of the
holders of the Notes provided by law (including, without limitation, other
rights of set-off, recoupment or appropriation and application) and upon the
occurrence and continuance of an Event of Default, each holder of a Note shall
have the right, without prior notice to the Company or any of its Subsidiaries,
any such notice being expressly waived by the Company and its Subsidiaries to
the extent permitted by applicable law, upon any amount becoming due and payable
by the Company or any of its Subsidiaries hereunder or under the other Senior
Note Documents or the Second Priority Note Documents (whether at the stated
maturity, by acceleration or otherwise) to set-off, recoup or appropriate and
apply, at any time and from time to time, against such amount, to the extent
permitted by applicable law, any and all commission fees and revenues and any
other credits, indebtedness or claims, in each case whether direct or indirect,
absolute or contingent, matured or unmatured, at any time held or owing or to
become owing by such holder or any affiliate thereof to or for the credit or the
account of the Company or any of its Subsidiaries, whether or not the Collateral
Agent or any holder of a Note has made any demand for payment. Any Person to
whom the holder of any Note has granted a participation pursuant to paragraph
11E of this Agreement shall, to the maximum extent permitted by applicable law,
also have the rights of set-off, recoupment or appropriation and application
provided for in this paragraph 7D in respect of its participating interest, to
the same extent as if the amount of its participating interest were owing
directly to it as a holder of a Note. Each holder of a Note agrees promptly to
notify the Company or any Subsidiary, as applicable, and the Collateral Agent
after any such set-off, recoupment or appropriation and application made by such
holder or, to its knowledge, by a Person to whom such holder has granted such a
participation, provided that, to the extent permitted by applicable law, the
failure to give such notice shall not affect the validity of such set-off,
recoupment or appropriation and application.
7E. NOTICE TO HOLDERS OF SUBORDINATED DEBT; PAYMENT BLOCK. Upon the
occurrence and continuance of any Default or any Event of Default, the Company
shall promptly notify each holder of any Subordinated Debt of such Default and
Event of Default. The Company will not, and will not permit any Subsidiary to,
pay any principal of or interest or premium on any Subordinated Debt during the
continuance of any Default or any Event of Default.
7F. OTHER REMEDIES. If any Event of Default or Default shall occur and
be continuing, (i) the holder of any Note may proceed to protect and enforce its
rights under this Agreement, such Note and the other Senior Note Documents by
exercising such remedies as are available to such holder in respect thereof
under applicable law, either by suit in equity or by action at law, or both,
whether for specific performance of any covenant or other agreement contained in
this Agreement or the other Senior Note Documents or in aid of the exercise of
any power granted in this Agreement or the other Senior Note Documents, and (ii)
both the Collateral Agent and the holders of the Notes may exercise any rights
or remedies in their respective capacities under the Security Documents in
accordance with the provisions thereof. No remedy conferred in this Agreement or
the other Senior Note Documents upon the holder of any Note or the Collateral
Agent is intended to be exclusive of
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any other remedy, and each and every such remedy shall be cumulative and shall
be in addition to every other remedy conferred herein or now or hereafter
existing at law or in equity or by statute or otherwise.
PARAGRAPH 8. REPRESENTATIONS, COVENANTS AND WARRANTIES.
8. REPRESENTATIONS, COVENANTS AND WARRANTIES. The Company represents,
covenants and warrants as follows:
8A. ORGANIZATION AND QUALIFICATION. The Company is a corporation duly
organized and validly existing in good standing under the laws of the State of
Delaware, and is duly licensed and in good standing as a foreign corporation in
each jurisdiction in which the nature of the business transacted or the property
owned is such as to require licensing or qualification as a foreign corporation.
The Company has no Subsidiaries. The execution, delivery and performance by the
Company of the Notes, this Agreement, the other Senior Note Documents, the
Schoenke Acquisition Documents, the IPO Documents and the Merger Documents to
which it is a party are within the Company's corporate powers and have been duly
authorized by all necessary corporate action.
8B. FINANCIAL STATEMENTS. The Company has furnished each Existing
Holder with the following financial statements, identified by a principal
financial officer of the Company: (a) (i) a balance sheet of CBI-Texas at
December 31, 1997, and a statement of income, stockholders' equity and cash
flows of CBI-Texas for such year, all reported on by Ernst & Young LLP, (ii) a
balance sheet of [CBI-TEXAS] as at [JUNE 30, 1998] and a statement of income,
stockholders' equity and cash flows for the [SIX-MONTH PERIOD] ended on each
such date, prepared by [CBI-TEXAS] and (iii) a consolidated balance sheet of the
Schoenke Companies as at [JUNE 30, 1998] and consolidated statements of income,
stockholders' equity and cash flows for the [SIX-MONTH PERIOD] ended on such
date, prepared by the Schoenke Companies and (b) (i) a pro forma balance sheet
of the Company (after giving effect to the Schoenke Acquisition, the Merger and
the IPO and including a breakdown by each division of the Company) as at
December 31, 1997 and pro forma statements of income, stockholder's equity and
cash flows of the Company (after giving effect to the Schoenke Acquisition, the
Merger and the IPO) for such year, prepared by the Company, and (ii) a pro forma
balance sheet of the Company (after giving effect to the Schoenke Acquisition,
the Merger and the IPO and including a breakdown by each division of the
Company) as at [JUNE 30, 1998] and pro forma statements of income, stockholders'
equity and cash flow of the Company (after giving effect to the Schoenke
Acquisition, the Merger and the IPO and including a breakdown by each division
of the Company) for the [SIX-MONTH] period ended on such date, prepared by the
Company. Such financial statements (including any related schedules and/or
notes) are true and correct in all material respects (subject, as to interim
statements, to changes resulting from audits and year-end adjustments), have
been prepared in accordance with generally accepted accounting principles
consistently followed throughout the periods involved and show all liabilities,
direct and contingent, of the Company required to be shown in accordance with
such principles. The balance sheets fairly present the historical or pro forma,
as the case may be, condition of CBI-Texas, the Company or the Schoenke
Companies, as the case may be, as at the dates thereof, and the statements of
income, stockholders'
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equity and cash flows fairly present the, historical or pro forma, as the case
may be, results of the operations of CBI-Texas, the Company or the Schoenke
Companies, as the case may be, and their cash flows for the periods indicated.
There has been no material adverse change in the business, condition (financial
or otherwise), prospects or operations of the Company or CBI-Texas since
December 31, 1997.
8C. ACTIONS PENDING. Other than as described on Schedule 8C, there is
no action, suit, investigation or proceeding pending or, to the knowledge of the
Company, threatened against the Company, or any properties or rights of the
Company, by or before any court, arbitrator or administrative or governmental
body which, if adversely determined, might result in a liability of greater than
$100,000 or might otherwise result in any material adverse change in the
business, condition (financial or otherwise), prospects or operations of the
Company. There is no action, suit, investigation or proceeding pending or
threatened against the Company which purports to affect the validity or
enforceability of this Agreement, any Note, any of the other Senior Note
Documents, any of the Schoenke Acquisition Documents, any of the Merger
Documents or any of the IPO Documents.
8D. OUTSTANDING INDEBTEDNESS. The Company does not have outstanding any
Indebtedness except as permitted by paragraphs 6A, 6D and 6G(2) and all of which
is described in Schedule 8D attached hereto. There exists no default under (and
no waiver of default is currently in effect with respect to) the provisions of
any instrument evidencing such Indebtedness or of any agreement relating
thereto, and no event or condition exists with respect to any Indebtedness of
the Company that would permit (or that with notice or the lapse of time, or
both, would permit) one or more Persons to cause such Indebtedness to become due
and payable before its stated maturity or before its regularly scheduled dates
of payment.
8E. TITLE TO PROPERTIES. The Company has good and marketable title to
its real property (other than property which it leases) and good title to all of
its other properties and assets, including the properties and assets reflected
in the pro forma balance sheet as at [JUNE 30, 1998] referred to in paragraph
8B(b)(ii) (other than properties and assets disposed of in the ordinary course
of business), subject to no Lien of any kind except Liens permitted by paragraph
6G(1). All leases necessary in any material respect for the conduct of the
business of the Company are valid and subsisting and are in full force and
effect.
8F. POSSESSION OF FRANCHISES, LICENSES, PATENTS AND TRADEMARKS. The
Company possesses all franchises, certificates, licenses, permits and other
authorizations from governmental political subdivisions or regulatory
authorities, free from burdensome restrictions, that are necessary in any
material respect for the ownership, maintenance and operation of its properties
and assets, and the Company is not in violation of any thereof in any material
respect. The Company owns or possesses all licenses, permits, franchises,
authorizations, patents, copyrights, service marks, trademarks, trade dress,
logos, corporate names and trade names and rights thereto, that individually or
in the aggregate are material, without known conflict with the rights of others.
To the best knowledge of the Company, no product of the Company infringes in any
material respect any license,
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permit, franchise, authorization, patent, copyright, service mark, trademark,
trade name, trade dress, logo, corporate name or other right owned by any other
Person. To the best knowledge of the Company, there is no material violation by
any Person of any right of the Company with respect to any patent, copyright,
service mark, trademark, trade name, trade dress, logo, corporate name or other
right owned or used by the Company.
8G. TAXES. The Company or CBI-Texas has filed all federal, state and
other income tax returns which, to the knowledge of the officers of the Company,
are required to be filed, and has paid all taxes as shown on such returns and on
all assessments received by it, and has paid, collected and withheld all other
taxes which are otherwise required to be paid, collected or withheld on or prior
to the date hereof, except such taxes as are being contested in good faith by
appropriate proceedings and for which adequate reserves have been established in
accordance with generally accepted accounting principles. There are no
unsatisfied actual or proposed adjustments or assessments for taxes against the
Company or CBI-Texas or, to the knowledge of the Company, any basis for any such
assessment or adjustment. There are no pending audits, actions, proceedings,
disputes, claims or, to the Company's knowledge, investigations with respect to
any taxes payable by or asserted against the Company or CBI-Texas. The Company
or CBI-Texas has not received notice from any governmental authority of its
intent to examine or audit any tax returns of the Company or CBI- Texas.
CBI-Texas has been subject to a valid and effective election to be an S
corporation, within the meaning of section 1361(a)(1) of the Code from the date
of its organization to the date of consummation of the Merger, and such S
corporation election has not been terminated (within the meaning of section
1362(d) of the Code) at any time on or prior to such date. As of the date
hereof, the Company does not have any amounts of "net unrealized built-in gain"
(within the meaning of section 1374(d) of the Code) on which the Company would
be required to pay taxes under Section 1374(a) of the Code if the Company were
to sell any of its assets at any time on or after the date hereof.
8H. CONFLICTING AGREEMENTS AND OTHER MATTERS. The Company is not a
party to any contract or agreement or subject to any charter or other corporate
restriction which materially and adversely affects its business, property or
assets, prospects or financial condition. The execution and delivery of the
Senior Note Documents, the Schoenke Acquisition Documents, the Merger Documents
and the IPO Documents (the Senior Note Documents, the Schoenke Acquisition
Documents, the Merger Documents and the IPO Documents, collectively, the
"TRANSACTION DOCUMENTS") by the Company, the issuance and delivery of the Notes
and the Working Capital Notes by the Company and the conversion of the
Convertible Subordinated Notes and the fulfillment of and compliance with the
respective provisions of the Transaction Documents by the Company do not and
will not conflict with, or result in a breach of the terms, conditions or
provisions of, or constitute a default under, or result in any violation of, or
result in the creation of any Lien (except Liens created under the Security
Documents) upon any of the properties or assets of the Company pursuant to, or
require any authorization, consent, approval, exemption or other action by or
notice to or filing with any court, administrative or governmental body or other
Person (other than (a) routine filings after the date hereof with the Securities
and Exchange Commission and/or state Blue Sky authorities, (b) filings with the
Secretaries of State of the States of Delaware and Texas
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in connection with the Merger, (c) the filing with the Securities and Exchange
Commission of the Registration Statement in connection with the IPO, (d) those
recordations and filings with respect to the Security Documents as are set forth
in the opinion of Keith Staudt, General Counsel of the Company, delivered
pursuant to paragraph 3A(ix) hereof and (e) other consents and approvals
required by the assignment of various licenses and contracts pursuant to the
Schoenke Acquisition Agreement) or result in the revocation, suspension,
limitation or imposition of any material condition upon the license of the
Company to act as a life insurance agent in the State of Texas pursuant to the
Texas Insurance Code or any similar license required or granted by any
administrative or governmental body or other Person pursuant to, the Certificate
of Incorporation or bylaws of the Company, any applicable law (including,
without limitation, any insurance, securities or Blue Sky law), statute, rule or
regulation or any agreement (including, without limitation, (i) any Schoenke
Acquisition Document, (ii) any agreement referred to in Schedule 8Z or any other
material agreement of the Company or the Schoenke Companies, if any, and (iii)
any agreement (other than the Note Documents) set forth or listed in any
schedule or exhibit to, or specifically referred to in, any Schoenke Acquisition
Document or any instrument, order, judgment or decree to which the Company is a
party or otherwise subject (including, without limitation, by virtue of its
assumption of liabilities under the Schoenke Acquisition Agreement)). The
Company is not a party to, or otherwise subject to any provision contained in,
any instrument evidencing Indebtedness of the Company, any agreement relating
thereto or any other contract or agreement (including its charter) which limits
the amount of, or otherwise imposes restrictions on the incurring of,
Indebtedness of the Company of the type to be evidenced by the Notes except as
set forth in the agreements listed in Schedule 8H.
8I. OFFERING OF THE ORIGINAL NOTES. Neither CBI-Texas, the Company nor
any agent acting on behalf of either, directly or indirectly, offered the
Original Notes or any similar security of CBI-Texas or the Company for sale to,
or solicited any offers to buy the Original Notes or any similar security of
CBI-Texas or the Company from, or otherwise approached or negotiated with
respect thereto with, any Person other than institutional investors, and neither
CBI-Texas nor the Company nor any agent acting on behalf of either took or will
take any action which would subject the issuance or sale of the Original Notes
or the delivery of the Notes to the Existing Holders to the provisions of
section 5 of the Securities Act or to the provisions of any securities or Blue
Sky law of any applicable jurisdiction.
8J. USE OF PROCEEDS. The Company does not own or have any present
intention of acquiring any "MARGIN STOCK" as defined in Regulation U (12 CFR
Part 221) of the Board of Governors of the Federal Reserve System ("MARGIN
STOCK"). The proceeds of sale of the Original Notes were used for the purposes
described in paragraph 8J of the Original Note Agreement. None of such proceeds
were or will be used, directly or indirectly, for the purpose, whether
immediate, incidental or ultimate, of purchasing or carrying any margin stock or
for the purpose of maintaining, reducing or retiring any Indebtedness which was
originally incurred to purchase or carry any stock that is currently a margin
stock or for any other purpose which might constitute this transaction a
"PURPOSE CREDIT" within the meaning of such Regulation U. Neither the Company
nor any agent acting on its behalf has taken or will take any action which might
cause this Agreement or the Notes
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to violate Regulation U or any other regulation of the Board of Governors of the
Federal Reserve System or to violate the Exchange Act, in each case as in effect
now or as the same may hereafter be in effect.
8K. ERISA. No accumulated funding deficiency (as defined in section 302
of ERISA and section 412 of the Code), whether or not waived, exists with
respect to any Plan (other than a Multiemployer Plan). No liability to the PBGC
has been or is expected by the Company or any ERISA Affiliate to be incurred
with respect to any Plan (other than a Multiemployer Plan) by the Company or any
ERISA Affiliate which is or would be materially adverse to the business,
condition (financial or otherwise), prospects or operations of the Company.
Neither the Company nor any ERISA Affiliate has incurred or presently expects to
incur any withdrawal liability under Title IV of ERISA with respect to any
Multiemployer Plan which is or would be materially adverse to the business,
condition (financial or otherwise), prospects or operations of the Company. The
execution and delivery of the Original Note Agreement and the issuance and sale
of the Original Notes were, and the execution and delivery of this Agreement and
the issuance and delivery of the Notes will be, exempt from, or did not or will
not involve any transaction which was or is subject to, the prohibi tions of
section 406 of ERISA and did not or will not involve any transaction in
connection with which a penalty could have been or could be imposed under
section 502(i) of ERISA or a tax could have been or could be imposed pursuant to
section 4975 of the Code. The representation by the Company in the next
preceding sentence is made in reliance upon and subject to the accuracy of the
representation of each Existing Holder in paragraph 9B as to the source of funds
used by it to purchase any Original Note.
8L. GOVERNMENTAL CONSENT. Neither the nature of the Company, nor any of
its businesses or properties, nor any relationship between the Company and any
other Person, nor any circumstance in connection with the issuance or delivery
of the Notes is such as to require any authorization, consent, approval,
exemption or other action by or notice to or filing with any court or
administrative or governmental or regulatory body in connection with the
execution and delivery of this Agreement, the other Senior Note Documents, the
Schoenke Acquisition Documents, the IPO Documents or the Merger Documents and
the issuance or delivery of the Notes or fulfillment of or compliance with the
terms and provisions of this Agreement or of the Notes, other than (i) consents
required in connection with the Schoenke Acquisition, all of which have been
obtained or will be obtained prior to the consummation of the Schoenke
Acquisition, (ii) filings to perfect the Liens under the Security Documents,
(iii) filings with the Secretaries of State of the States of Delaware and Texas
in connection with the Merger, (iv) the filing with the Securities and Exchange
Commission of the Registration Statement in connection with the IPO, and (v)
routine filings after the Date of Closing with the Securities and Exchange
Commission and/or state Blue Sky authorities.
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8M. ENVIRONMENTAL COMPLIANCE. The Company and all of its properties and
facilities have complied at all times and in all respects with all federal,
state, local and regional statutes, laws, ordinances and judicial or
administrative orders, judgments, rulings and regulations relating to protection
of the environment except, in any such case, where failure to comply could not
result in a material adverse effect on the business, condition (financial or
otherwise) or operations of the Company.
8N. FISCAL YEAR. The fiscal year of the Company ends as of December
31 of each year.
8O. DISCLOSURE. Neither this Agreement, the other Senior Note Documents
nor any other document, certificate or statement furnished to any Existing
Holder by or on behalf of the Company in connection herewith contains any untrue
statement of a material fact or omits to state a material fact necessary in
order to make the statements contained herein and therein not misleading. There
is no fact peculiar to the Company which materially adversely affects or in the
future may (so far as the Company can now foresee) materially adversely affect
the business, property or assets, or financial condition of the Company and
which has not been set forth in this Agreement, the other Senior Note Documents
or in the other documents, certificates and statements furnished to any Existing
Holder by or on behalf of the Company prior to the date hereof in connection
with the transactions contemplated hereby. The pro forma financial projections
dated as of [__________] and previously delivered to the Existing Holders by the
Company are reasonable based on the assumptions stated therein and the best
information available to the officers of the Company. The Company and the
Schoenke Companies have disclosed the material terms of all existing
transactions with Affiliates to the Existing Holders.
8P. INVESTMENT COMPANY ACT. Neither the Company nor any Person
controlling the Company is an "INVESTMENT COMPANY," or a company "CONTROLLED" by
an "INVESTMENT COMPANY," within the meaning of the Investment Company Act of
1940, as amended.
8Q. OTHER REGULATION. Neither the Company nor any Person controlling
the Company is subject to regulation under any federal or state statute or
regulation, as amended from time to time, which limits the ability of (i) the
Company to issue the Notes or (ii) the Company to perform its respective
obligations under this Agreement, the other Senior Note Documents or the
Schoenke Acquisition Documents.
8R. OTHER REPRESENTATIONS AND WARRANTIES. To induce the Existing
Holders to enter into this Agreement in amendment and restatement of the
Original Note Agreement and to accept the Notes, the Company agrees that the
Existing Holders shall be entitled to rely upon each of the representations and
warranties set forth in any of the Schoenke Acquisition Documents, any of the
Merger Documents and any of the IPO Documents, in each case as fully as if set
forth in this Agreement.
8S. SOLVENCY. The Company is Solvent, both before and after giving
effect to this Agreement, the other Senior Note Documents, the Second Priority
Note Documents, the Schoenke
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Acquisition Documents, the Merger Documents and the IPO Documents and to the
transactions contemplated hereby and thereby.
8T. EMPLOYMENT AGREEMENTS, NON-COMPETITION AGREEMENTS AND PRINCIPAL
OFFICE AGREEMENTS. Schedule 8T describes all material employment agreements,
non-competition agreements and principal office agreements to which the Company
is a party. All of the material employment agreements, non-competition
agreements and principal office agreements described on Schedule 8T are in full
force and effect and no default thereunder or violation of any of the provisions
thereof exists.
8U. INSURANCE LICENSES. All Insurance Licenses of the Company are
listed on Schedule 8U and are in full force and effect. No proceeding or
customer complaint has been filed with insurance regulatory authorities which
could reasonably be expected to lead to revocation, failure to renew,
limitation, suspense or restriction of any such Insurance License.
8V. UNDISCLOSED LIABILITIES. The Company does not have any Liability
(and there is no Basis for any present or future action, suit, proceeding,
hearing, investigation, charge, complaint, claim, or demand against it giving
rise to any Liability), except for (i) Liabilities set forth on the face of the
pro forma balance sheet of the Company dated as of [JUNE 30, 1998] described in
paragraph 3A(xx)(a)(y) and disclosed in any notes thereto and (ii) Liabilities
which have arisen after [JUNE 30, 1998] in the Ordinary Course of Business (none
of which results from, arises out of, relates to, is in the nature of, or was
caused by any breach of a contract, breach of warranty, tort, infringement, or
violation of law).
8W. LEGAL COMPLIANCE. The Company and each of its stockholders,
officers, independent contractors, subagents, consultants and employees who are
required by reason of the nature of their employment by the Company to be
registered or appointed as an insurance agent, insurance broker or insurance
producer with the insurance department of any state or any self-regulatory body
or other governmental entity, is duly registered or appointed as such and such
registration or appointment is in full force and effect, and neither the Company
nor any such other Persons has been enjoined, indicted, convicted or made the
subject of any consent decree or administrative order on account of any material
violation of applicable law in connection with such Person's actions in any of
the foregoing capacities or, any enforcement or disciplinary proceeding alleging
any such violation.
8X. CERTAIN TAX MATTERS. Prior to its conversion to a C Corporation as
described in the Registration Statement, CBI-Texas had never been (i) a member
of an Affiliated Group filing a consolidated federal income Tax Return or (ii)
responsible for any Liability for the taxes of any Person (other than the
Company) as a transferee or successor, by contract, by operation of law, or
otherwise.
8Y. SALES REPRESENTATIVES. To the Company's knowledge, the
stockholders, directors and officers (and employees with responsibility for
sales matters) of the Company and each of the
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Schoenke Companies (excluding, with respect to the Schoenke Companies, Raymond
Schoenke, Jr.), and all sales representatives currently marketing the Company's
and the Schoenke Companies' insurance policies under Representative Agreements
are expected to continue to perform such services after the Date of Closing, and
none has expressed an intention or desire to cease such sales activities.
8Z. CONTRACTS. Except as set forth in Schedule 8Z, the Company is not
a party to, or bound by:
(i) any agreement (or group of related agreements) for the lease of
personal property to or from any Person providing for lease payments in
excess of $20,000 per annum;
(ii) any agreement (or group of related agreements) for the
purchase or sale of supplies, products, or other personal property, or
for the furnishing or receipt of services, the performance of which
will extend over a period of more than one year, result in a material
loss to the Company, or involve consideration in excess of $25,000;
(iii) any agreement concerning a partnership or joint venture;
(iv) any agreement (or group of related agreements) under which it
has created, incurred, assumed, or guaranteed any indebtedness for
borrowed money, or any Capitalized Lease Obligation, or under which it
has imposed a Lien on any of its assets, tangible or intangible, except
for the Liens permitted by paragraph 6G(1);
(v) any agreement concerning confidentiality or noncompetition
other than with insurance carriers and others regarding product
development;
(vi) any agreement or arrangement with any of the shareholders of
the Schoenke Companies;
(vii) any profit sharing, stock option, stock purchase, stock
appreciation, deferred compensation, severance, or other material plan
or arrangement (including, without limitation, any plan or arrangement
with respect to phantom stock or any equivalent thereto) for the
benefit of its current or former directors, officers, and employees;
(viii) any collective bargaining agreement;
(ix) any agreement for the employment of any individual on a
full-time, part-time, consulting, or other basis providing annual
compensation in excess of $50,000 or providing severance benefits or
which is not terminable at the will of the Company;
(x) any agreement or arrangement under which it has advanced or
loaned any amount to any of its directors, officers, and employees;
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(xi) any agreement under which the consequences of a default or
termination could have a material adverse effect on the business,
condition (financial or other), prospects or operations of the Company;
or
(xii) any other agreement (or group of related agreements),
including Vendors' Contracts, the performance of which involves
consideration in excess of $10,000.
With respect to each agreement described in Schedule 8Z attached hereto: (a)
such agreement is legal, valid, binding, enforceable, and in full force and
effect; (b) such agreement will continue to be legal, valid, binding,
enforceable, and in full force and effect on identical terms following the
consummation of the Schoenke Acquisition, the Merger, the IPO and the
transactions contemplated by this Agreement and the other Senior Note Documents;
(c) no party is in breach or default, and no event has occurred which with
notice or lapse of time would constitute a breach or default, or permit
termination, modification, or acceleration, under such agreement; and (d) no
party has repudiated any provision of such agreement. The Company is not a party
to any oral agreement.
8AA. ASSIGNMENT OF INSURANCE CONTRACTS. The Company has no reason to
believe that the notices and consents required to assign the Insurance Contracts
to the Company as provided in Section 3.11 of the Schoenke Acquisition Agreement
will not be obtained.
8BB. SATISFACTION OF CONDITIONS PRECEDENT TO THE SCHOENKE ACQUISITION,
THE MERGER AND THE IPO. All of the conditions precedent to the effectiveness of
the Merger Documents and the IPO Documents have been satisfied. None of the
conditions precedent to the effectiveness of the Merger Documents, the IPO
Documents or the Schoenke Acquisition Documents have been waived without the
express written consent of each of the Existing Holders.
8CC. COMPLIANCE WITH LAWS. The Company has complied with all applicable
laws, rules, regulations and orders (including those relating to protection of
the environment) except, in any such case, where failure to comply could not
have a material adverse effect on the business, condition (financial or
otherwise), operations or prospects of the Company.
8DD. CONDITION OF PROPERTY. All of the property of the Company is in
good repair, working order and condition so that the business carried on in
connection therewith may be properly and advantageously conducted at all times
in the normal course of business.
8EE. BOOKS AND RECORDS. The Company has at all times maintained proper
books of record and account in which full, true and correct entries have been
made in accordance with GAAP.
8FF. ADDITIONAL DISCLOSURE. Schedule 8FF(1) is a true, correct and
complete schedule of all properly accrued performance bonuses payable to
employees and independent sales representatives and agents of the Company.
Schedule 8FF(2) is a true, correct and complete schedule of all Plans and
Multiemployer Plans of the Company and any ERISA Affiliates. Schedule 8FF(3) is
a true, correct and complete schedule of all trademarks, service marks, trade
dress, logos,
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trade names and corporate names of the Company, together with all translations,
adaptations, derivations and combinations thereof, and all applications,
registrations and renewals in connection therewith.
8GG. SATISFACTION OF CONDITIONS PRECEDENT. All of the conditions
precedent to the effectiveness of this Agreement have been satisfied or waived
in writing by each of the Existing Holders.
8HH. CERTAIN AFFILIATES. The arrangements contemplated by paragraph 5Q
are lawful and are customary and are recognized in the industry and
jurisdictions in which the Company operates or proposes to operate, directly or
in conjunction with Affiliates.
PARAGRAPH 9. REPRESENTATIONS OF EACH EXISTING HOLDER.
9. REPRESENTATIONS OF EACH EXISTING HOLDER. Each Existing Holder
represents as follows:
9A. NATURE OF PURCHASE. Such Existing Holder did not acquire the
Original Notes purchased by it under the Original Note Agreement and is not
acquiring the Notes to be delivered to it hereunder in replacement of such
Original Notes with a view to or for sale in connection with any distribution
thereof within the meaning of the Securities Act, provided that the disposition
of such Existing Holder's property shall at all times be and remain within its
control.
9B. SOURCE OF FUNDS. Such Existing Holder represents that at least one
of the following statements is an accurate representation as to each source of
funds (a "SOURCE") used by such Existing Holder to purchase the Original Notes
purchased by it:
(i) the Source constituted assets of a general account maintained
by an insurance company, and the use of such Source for the purchase of
the Original Notes was permitted by the terms of Prohibited Transaction
Class Exemption 95-60; or
(ii) the Source was either (a) an insurance company pooled separate
account, within the meaning of Prohibited Transaction Exemption ("PTE")
90-1 (issued January 29, 1990), or (b) a bank collective investment
fund, within the meaning of PTE 91-38 (issued July 12, 1991) and,
except as such Existing Holder disclosed to the Company in writing, no
employee benefit plan or group of plans maintained by the same employer
or employee organization beneficially owned more than 10% of all assets
allocated to such pooled separate account or collective investment
fund; or
(iii) the Source constituted assets of an "investment fund" (within
the meaning of Part V of the QPAM Exemption) managed by a "qualified
professional asset manager" or "QPAM" (within the meaning of Part V of
the QPAM Exemption), no employee benefit plan's assets that were
included in such investment fund, when combined with the assets of
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all other employee benefit plans established or maintained by the same
employer or by an affiliate (within the meaning of Section V(c)(1) of
the QPAM Exemption) of such employer or by the same employee
organization and managed by such QPAM, exceeded 20% of the total client
assets managed by such QPAM, the conditions of Part I(c) and (g) of the
QPAM Exemption were satisfied, neither the QPAM nor a person
controlling or controlled by the QPAM (applying the definition of
"control" in Section V(e) of the QPAM Exemption) owned a 5% or more
interest in the Company and (a) the identity of such QPAM and (b) the
names of all employee benefit plans whose assets were included in such
investment fund were disclosed to the Company in writing; or
(iv) the Source was a governmental plan; or
(v) the Source was one or more employee benefit plans, or a
separate account or trust fund comprised of one or more employee
benefit plans, each of which was identified to the Company in writing;
or
(vi) the Source did not include assets of any employee benefit
plan, other than a plan exempt from the coverage of ERISA.
As used in this paragraph 9B, the terms "EMPLOYEE BENEFIT PLAN", "GOVERNMENTAL
PLAN", "PARTY IN INTEREST" and "SEPARATE ACCOUNT" shall have the respective
meanings assigned to such terms in Section 3 of ERISA.
PARAGRAPH 10. DEFINITIONS.
10. DEFINITIONS. For the purpose of this Agreement, the terms defined
in the introductory sentence and in paragraphs 1 and 2 shall have the respective
meanings specified therein, and the following terms shall have the meanings
specified with respect thereto below (such meanings to be equally applicable to
both the singular and plural forms of the terms defined):
10A. DEFINED TERMS.
"AAA DISTRIBUTION" shall mean the $0.60 per share distribution to
the shareholders of record of common stock of CBI-Texas on October 31, 1997.
"AAA DISTRIBUTION NOTES" shall mean the subordinated promissory
notes of CBI- Texas to evidence CBI-Texas' borrowing from its shareholders of
the proceeds of the AAA Distribution in an aggregate principal amount not to
exceed $4,143,623.
"AFFILIATE" shall mean at any time, and with respect to any
Person, (i) any other Person that at such time directly or indirectly through
one or more intermediaries Controls, or is Controlled by, or is under common
Control with, such first Person, and (ii) any Person beneficially owning or
holding, directly or indirectly, 10% or more of any class of voting or equity
interests of
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the Company or any Subsidiary or any corporation of which the Company and its
Subsidiaries beneficially own or hold, in the aggregate, directly or indirectly,
10% or more of any class of voting or equity interests. As used in this
definition, "CONTROL" means the possession, directly or indi rectly, of the
power to direct or cause the direction of the management and policies of a
Person, whether through the ownership of voting securities, by contract or
otherwise. Unless the context otherwise clearly requires, any reference to an
"AFFILIATE" is a reference to an Affiliate of the Company.
"AFFILIATED GROUP" shall mean an affiliated group within the
meaning of Section 1504(a) of the Code.
"ANNUALIZED CASH FLOW" shall mean, at any time, (i) prior to
September 30, 1998, Cash Flow for the period commencing September 1, 1997
through to such date, annualized in accordance with accepted financial practice;
and (ii) on or after September 30, 1998, Cash Flow for the most recently ended
four fiscal quarters.
"ASSET DISPOSITION" shall mean, with respect to the Company or any
Subsidiary, any transaction or series of related transactions in which such
Person sells, conveys, transfers or leases (as lessor) or parts with control of
(collectively, for purposes of this definition, a "TRANSFER"), directly or
indirectly, any of its property or assets, including, without limitation, any
Indebtedness of any Subsidiary or capital stock of or other equity interests in
any Subsidiary (including the issuance of such stock or other equity interests
by such Subsidiary), other than transfers of cash or cash equivalents.
"ASSIGNMENT OF LIFE INSURANCE POLICY" shall mean, collectively,
those certain Assignments of Life Insurance Policy, dated September 9, 1997,
executed and delivered by the Company and W. T. Wamberg to the Collateral Agent,
substantially in the form of Exhibit E-1 and E-2 attached hereto, respectively,
as the same may be amended, supplemented and otherwise modified from time to
time.
"BANKRUPTCY LAW" shall have the meaning specified in clause (ix)
of paragraph 7A.
"BASIS" shall mean any past or present fact, situation,
circumstance, status, condition, activity, practice, plan, occurrence, event,
incident, action, failure to act, or transaction that forms or could form the
basis for any specified consequence.
"BCS ACQUISITION AGREEMENT" shall mean that certain Asset Purchase
Agreement among CBI-Texas, Bank Compensation Strategies, Inc., a Minnesota
corporation, and certain individuals dated as of September 5, 1997.
"BUSINESS DAY" shall mean any day on which banks are open for
business in New York City (other than a Saturday, a Sunday or a legal holiday)
in the State of New York.
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"CBH" shall have the meaning specified in Recital B of this
Agreement.
"CAPITALIZATION RATIO" shall mean, as of any date of
determination, the ratio of (i) Indebtedness of the Company and its
Subsidiaries, determined on a consolidated basis in accordance with GAAP, to
(ii) the sum of (a) Consolidated Net Worth plus (b) total Indebtedness of the
Company and its Subsidiaries, as so determined.
"CAPITAL LEASE" shall mean a lease with respect to which the
lessee is required concurrently to recognize the acquisition of an asset and the
incurrence of a liability in accordance with GAAP.
"CAPITAL LEASE OBLIGATION" shall mean, with respect to any Person
and a Capital Lease, the amount of the obligation of such Person as the lessee
under such Capital Lease which would, in accordance with GAAP, appear as a
liability on a balance sheet of such Person.
"CASH FLOW" shall mean, for any period, the sum of Consolidated
Net Income, plus Interest Charges and consolidated taxes, depreciation,
amortization and other non-cash charges to income of the Company and its
Subsidiaries for such period, but only to the extent deducted in the
determination of Consolidated Net Income, less consolidated deferred taxes or
other non-cash items which constitute non-cash contributions to Consolidated Net
Income, excluding in each case all extraordinary and non-recurring items. "CASH
FLOW" for any period shall be determined after giving effect to acquisitions and
dispositions of assets by the Company or any of its Subsidiaries during such
period as if such acquisitions and dispositions had occurred on the first day of
such period.
"CHANGE IN CONTROL" shall mean (i) the failure of the members of
the Control Group to own at all times at least 10% of the then issued and
outstanding common stock of CBH (on a fully diluted basis, with such amounts to
be adjusted for stock splits, reverse splits and the effects of dilution from
Permitted Acquisitions and public equity offerings subsequent to the IPO) or
(ii) any person (as such term is defined in Section 13(d) and Section 14(d)(2)
of the Exchange Act as in effect on the Date of Closing) or related persons
constituting a group (as such term is used in Rule 13d-5 under the Exchange Act
as in effect on the Date of Closing) own, at any time, on a fully diluted basis,
as the result of a single transaction or a series of transactions, at least 30%
of the then issued and outstanding shares of common stock of CBH.
"CLAIMS" shall have the meaning specified in paragraph 5H.
"CLOSING" or "DATE OF CLOSING" shall have the meaning specified in
paragraph 2A.
"COCHLAN PHANTOM STOCK AGREEMENT" shall mean that certain Phantom
Stock Agreement dated as of September 5, 1997, between Steven J. Cochlan and the
Company.
"CODE" shall mean the Internal Revenue Code of 1986, as amended.
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"COLLATERAL" shall mean the collateral described in the Security
Documents which secures payment of the Notes and payment, performance and
observance of the obligations of the Company and its Subsidiaries under this
Agreement and the other Senior Note Documents.
"COLLATERAL AGENT" shall mean Chase Bank of Texas, National
Association, in its capacity as Collateral Agent for Bank Compensation
Strategies, Inc. and the holders of the Notes, the Second Priority Notes and the
Medium Term Note, as provided under the Collateral Agency Agreement, and its
successors and assigns as such Collateral Agent.
"COLLATERAL AGENCY AGREEMENT" shall mean that certain Amended and
Restated Collateral Agency Agreement, dated as of even date herewith, by and
among the Company, Bank Compensation Strategies, Inc., the Collateral Agent and
the holders of the Notes and the Second Priority Notes, substantially in the
form of Exhibit F attached hereto, as the same may be amended, supplemented and
otherwise modified from time to time.
"COMMISSION FEES" shall mean, at any time, 60% of the future
commission fees of the Company and its Subsidiaries payable under products whose
persistency rate is greater than 90% over the last five calendar years exclusive
of products (such as leveraged COLI) whose federal, state or local tax
advantages have been materially decreased pursuant to federal, state or local
legislation or regulations promulgated thereunder; provided, however, that at
any time 180 days after the Date of Closing, such future commission fees shall
not include any such fees which are payable pursuant to contracts or agreements
for which the Company or any of its Subsidiaries have not obtained consents to
the assignment or transfer thereof (unless such consents are not required by
applicable law (such as New York Uniform Commercial Code ss. 9-318(4)).
"COMPETITOR" shall mean any Person specified in Schedule A
attached hereto.
"CONFIDENTIAL INFORMATION" shall mean any material non-public
information regarding the Company that is provided to any holder of any Note,
any Person that purchases a participation in a Note and any offeree of a Note or
a participation therein pursuant to this Agreement other than information (i)
which was publicly known or otherwise known to such holder, such Person or such
offeree at the time of disclosure, (ii) which subsequently becomes publicly
known through no act or omission of such holder, such Person or such offeree or
(iii) which otherwise becomes known to such holder, such Person or such offeree
other than through disclosure by the Company or any Subsidiary.
"CONTROL GROUP" shall mean W.T. Wamberg and The Wamberg
Organization, Inc., an Illinois corporation.
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"CONSOLIDATED NET INCOME" shall mean, with reference to any
period, the net income (or loss) of the Company and its Subsidiaries for such
period (taken as a cumulative whole), as determined in accordance with GAAP,
after deducting, among other items, commission expenses of the Company and its
Subsidiaries and after eliminating all offsetting debits and credits between the
Company and its Subsidiaries and all other items required to be eliminated in
the course of preparation of consolidated financial statements of the Company
and its Subsidiaries in accordance with GAAP, provided that there shall be
excluded:
(i) any net income or gain (but not any net loss) during such
period from any extraordinary items (including, without limitation,
proceeds of life insurance policies),
(ii) the net loss or any undistributed earnings of any Subsidiary
that is not consolidated with the Company in accordance with GAAP for
financial accounting purposes,
(iii) the net income (or loss) of any Person accrued prior to the
date it becomes a Subsidiary or is merged into or consolidated with the
Company or a Subsidiary, and the net income (or loss) of any Person,
substantially all of the assets of which have been acquired in any
manner, realized by such other Person prior to the date of acquisition,
(iv) any aggregate net gain (but not any aggregate net loss)
during such period arising from the sale, conversion, exchange or other
disposition of capital assets (such term to include, without
limitation, (a) all non-current assets and, without duplication, (b)
the following, whether or not current: all fixed assets, whether
tangible or intangible, all inventory sold in conjunction with the
disposition of fixed assets, and all securities), and
(v) any non-cash net income or gain (but not any net loss) during
such period from (a) any one-time change in accounting principles in
accordance with GAAP or (b) any prior period adjustments resulting from
any one-time change in accounting principles in accordance with GAAP.
"CONSOLIDATED NET WORTH" shall mean, at any time,
(i) the sum of (a) the par value (or value stated on the books of
the corporation) of the capital stock (but excluding treasury stock and
capital stock subscribed and unissued) of the Company and its
Subsidiaries plus (b) the amount of paid-in capital and retained
earnings of the Company and its Subsidiaries, in each case as such
amounts would be shown on a consolidated balance sheet of the Company
and its Subsidiaries as of such time prepared in accordance with GAAP,
minus
(ii) to the extent included in clause (i), all amounts properly
attributable to minority interests, if any, in the stock and surplus of
Subsidiaries.
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"CONVERTIBLE SUBORDINATED NOTES" shall mean the unsecured
convertible subordinated promissory notes of CBI-Texas in the aggregate
principal amount of $4,800,000, issued to Bank Compensation Strategies, Inc. in
connection with the BCS Acquisition.
"DISCOUNTED COMMISSION FEES" shall mean, at any time, the amount
obtained by discounting all Commission Fees payable to the Company and its
Subsidiaries for a five year period from their respective scheduled payment
dates to the date of determination, in accordance with accepted financial
practice and at a discount factor (applied on an annual basis) equal to 10% per
annum.
"EBIT" shall mean, for any period, the sum of (i) Consolidated Net
Income plus (ii) to the extent deducted in the determination of Consolidated Net
Income, (a) all provisions for federal, state and other income tax for such
period, and (b) Interest Charges.
"ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended.
"ERISA AFFILIATE" shall mean any corporation which is a member of
the same controlled group of corporations as the Company within the meaning of
section 414(b) of the Code, or any trade or business which is under common
control with the Company within the meaning of section 414(c) of the Code.
"EVENT OF DEFAULT" shall mean any of the events specified in
paragraph 7A, provided that there has been satisfied any requirement in
connection with such event for the giving of notice, or the lapse of time, or
the happening of any further condition, event or act, and "DEFAULT" shall mean
any of such events, whether or not any such requirement has been satisfied.
"EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as
amended.
"FIXED CHARGES" shall mean, with respect to any period, the sum of
(i) Interest Charges, (ii) Lease Rentals, and (iii) the aggregate amount of
principal payments on Indebtedness of the Company and its Subsidiaries made or
to be made during such period.
"FIXED CHARGES COVERAGE RATIO" shall mean, at any time, (i) prior
to September 30, 1998, the ratio of (a) the sum of Cash Flow and Lease Rentals
for the period commencing September 1, 1997 through such date, annualized in
accordance with accepted financial practice, to (b) Fixed Charges for such
period, annualized in accordance with accepted financial practice, and (ii) on
or after September 30, 1998, the ratio of (a) the sum of Cash Flow and Lease
Rentals for the four most recently ended fiscal quarters to (b) Fixed Charges
for the four most recently ended fiscal quarters.
"GAAP" shall have the meaning specified in paragraph 10B.
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"GENERAL AGENT'S CONTRACTS" shall mean the agreements between the
Company or any of the Schoenke Companies, as the case may be, and insurance
companies for the purpose of soliciting applications for insurance and
recruiting producers to solicit applications for insurance.
"GOVERNMENTAL AUTHORITY" means (i) the government of (a) the
United States of America or any state or other political subdivision thereof, or
(b) any jurisdiction in which the Company or any Subsidiary conducts all or any
part of its business, or which asserts jurisdiction over any properties of the
Company or any Subsidiary, or (ii) any entity exercising executive, legislative,
judicial, regulatory or administrative functions of, or pertaining to, any such
government.
"GUARANTEE" shall mean, with respect to any Person, any obligation
(except the endorsement in the ordinary course of business of negotiable
instruments for deposit or collection) of such Person guaranteeing or in effect
guaranteeing (whether by reason of being a general partner of a partnership or
otherwise) any indebtedness, dividend or other obligation of any other Person in
any manner, whether directly or indirectly, including (without limitation)
obligations incurred through an agreement, contingent or otherwise, by such
Person:
(i) to purchase such indebtedness or obligation or any property
constituting security therefor;
(ii) to advance or supply funds (a) for the purchase or payment of
such indebtedness or obligation, or (b) to maintain any working capital
or other balance sheet condition or any income statement condition of
any other Person or otherwise to advance or make available funds for
the purchase or payment of such indebtedness or obligation;
(iii) to lease properties or to purchase properties or services
primarily for the purpose of assuring the owner of such indebtedness or
obligation of the ability of any other Person to make payment of the
indebtedness or obligation; or
(iv) otherwise to assure the owner of such indebtedness or
obligation against loss in respect thereof.
In any computation of the indebtedness or other liabilities of the
obligor under any Guarantee, the indebtedness or other obligations that are the
subject of such Guarantee shall be assumed to be direct obligations of such
obligor.
"GUARANTY" shall mean that certain Guaranty Agreement, dated as of
even date herewith, made by CBH in favor of the holders of the Notes,
substantially in the form of Exhibit G attached hereto, as the same may be
amended, supplemented and otherwise modified from time to time.
"INDEBTEDNESS" shall mean, with respect to any Person, at any
time, without duplication,
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(i) its liabilities for borrowed money;
(ii) its liabilities for the deferred purchase price of property
acquired by such Person (excluding accounts payable arising in the
ordinary course of business but including all liabilities created or
arising under any conditional sale or other title retention agreement
with respect to any such property);
(iii) all liabilities appearing on its balance sheet in accordance
with GAAP in respect of Capital Leases;
(iv) all liabilities for borrowed money secured by any Lien with
respect to any property owned by such Person (whether or not it has
assumed or otherwise become liable for such liabilities);
(v) all its liabilities in respect of letters of credit or
instruments serving a similar function issued or accepted for its
account by banks and other financial institutions (whether or not
representing obligations for borrowed money);
(vi) Swaps of such Person; and
(vii) any Guarantee of such Person with respect to liabilities of
a type described in any of clauses (i) through (vi) hereof.
Indebtedness of any Person shall include all obligations of such Person
of the character described in clauses (i) through (vii) to the extent such
Person remains legally liable in respect thereof notwithstanding that any such
obligation is deemed to be extinguished under GAAP.
"INDEPENDENT ACCOUNTANT" shall mean Ernst & Young LLP or another
"Big Five" independent accounting firm selected by the Company.
"INSTITUTIONAL INVESTOR" shall mean (i) any original purchaser of
a Note, (ii) any holder of a Note holding more than 5% of the aggregate
principal amount of the Notes then outstanding, and (iii) any bank, trust
company, savings and loan association or other financial institution, any
pension plan, any investment company, any insurance company, any broker or
dealer, or any other similar financial institution or entity, regardless of
legal form.
"INSURANCE CONTRACTS" shall mean the General Agent's Contracts,
the Producer's Contracts, the Representative Agreements and the Servicing
Agreements.
"INSURANCE LICENSES" shall mean any license, certificate of
authority, permit or other authorization granted to the Company by any
governmental authority to engage in any life insurance brokerage or agency
business.
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"INTEREST CHARGES" shall mean, with respect to any period, the sum
(without duplication) of the following (in each case, eliminating all offsetting
debits and credits between the Company and its Subsidiaries and all other items
required to be eliminated in the course of the preparation of consolidated
financial statements of the Company and its Subsidiaries in accordance with
GAAP): (i) all interest in respect of Indebtedness of the Company and its
Subsidiaries (including imputed interest on Capital Lease Obligations) deducted
in determining Consolidated Net Income for such period, and (ii) all debt
discount and expense amortized or required to be amortized in the determination
of Consolidated Net Income for such period.
"INTEREST COVERAGE RATIO" shall mean, at any time, (i) prior to
September 30, 1998, the ratio of (a) EBIT for the period commencing September 1,
1997 through such date, annualized in accordance with accepted financial
practice to (b) Interest Charges for such period, annualized in accordance with
accepted financial practice and (ii) on or after September 30, 1998, the ratio
of (a) EBIT for the four immediately preceding fiscal quarters to (b) Interest
Charges for the four immediately preceding fiscal quarters.
"INVESTMENT" shall have the meaning specified in paragraph 6G(4).
"IPO" shall have the meaning specified in Recital D of this
Agreement.
"IPO DOCUMENTS" shall mean the Registration Statement, the
Underwriting Agreement, the Reorganization Agreement and all other written
agreements, documents, instruments and certificates now or hereafter executed
and delivered by any Person in connection with the IPO, and any and all
amendments, supplements and other modifications thereof and all renewals,
extensions, restatements or substitutions from time to time of all or any of the
foregoing.
"LEASE RENTALS" shall mean, with respect to any period, the sum of
the minimum amount of rental and other obligations required to be paid during
such period by the Company or any Subsidiary as lessee under all leases of real
or personal property (other than Capital Leases), excluding any amounts required
to be paid by the lessee (whether or not therein designated as rental or
additional rental) which are on account of maintenance and repairs, insurance,
taxes, assessments, water rates and similar charges, but including any amounts
required to be paid by the lessee (whether or not therein designated as rental
or additional rental) which are based on profits, revenues or sales realized by
the lessee from the leased property or otherwise based on the performance of the
lessee.
"LIABILITIES" shall mean any liability (whether known or unknown,
whether asserted or unasserted, whether absolute or contingent, whether accrued
or unaccrued, whether liquidated or unliquidated, and whether due or to become
due), including any liability for taxes.
"LIEN" shall mean any mortgage, pledge, priority, security
interest, encumbrance, contractual deposit arrangement, lien (statutory or
otherwise) or charge of any kind (including any agreement to give any of the
foregoing, any conditional sale or other title retention agreement, any lease in
the nature thereof, and the filing of or agreement to give any financing
statement under the
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Uniform Commercial Code of any jurisdiction) or any other type of preferential
arrangement for the purpose, or having the effect, of protecting a creditor
against loss or securing the payment or performance of an obligation.
"MEDIUM TERM NOTE" shall mean the secured promissory note of
CBI-Texas in the original principal amount of $5,700,000, issued to Bank
Compensation Strategies, Inc. in connection with the BCS Acquisition.
"MERGER" shall have the meaning specified in Recital B of this
Agreement.
"MERGER DOCUMENTS" shall mean the Reorganization Agreement, the
Certificates of Merger issued by the Secretaries of State of the States of Texas
and Delaware and all other written agreements, documents, instruments and
certificates now or hereafter executed and delivered by any Person which are
required by the terms of the Reorganization Agreement to be delivered to
consummate the Merger, and any and all amendments, supplements and other
modifications thereof and all renewals, extensions, restatements or
substitutions from time to time of all or any of the foregoing.
"MULTIEMPLOYER PLAN" shall mean any Plan which is a "MULTIEMPLOYER
PLAN" (as such term is defined in section 4001(a)(3) of ERISA).
"NON-COMPETE AGREEMENT" shall mean that certain Non-Compete and
Confidentiality Agreement, dated as of September 4, 1997, between the Company
and W.T. Wamberg.
"NOTES" shall have the meaning specified in paragraph 1A.
"OFFICER'S CERTIFICATE" shall mean a certificate signed in the
name of the Company by its President, one of its Vice Presidents or its
Treasurer.
"ORDINARY COURSE OF BUSINESS" shall mean the ordinary course of
business consistent with past custom and practice (including with respect to
quantity and frequency).
"ORIGINAL NOTE AGREEMENT" shall have the meaning specified in
Recital A of this Agreement.
"ORIGINAL NOTE DOCUMENTS" shall have the meaning specified in
Recital C of this Agreement.
"ORIGINAL NOTES" shall have the meaning specified in Recital A of
this Agreement.
"PBGC" shall mean the Pension Benefit Guaranty Corporation or any
successor entity.
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"PERFECTION CERTIFICATE" shall mean the Perfection Certificate,
dated as of even date herewith and executed and delivered by the Company to the
holders of the Notes, substantially in the form of Exhibit H attached hereto.
"PERMITTED ACQUISITION" shall mean (i) the Schoenke Acquisition,
provided that the purchase price therefor is paid entirely with the proceeds
from the IPO, and (ii) the acquisition by the Company, by asset purchase, merger
or consolidation, for cash, stock, seller notes or any combination of the
foregoing, of (a) all of the outstanding capital stock of or other equity
interests in any other Person or (b) all or substantially all of the assets of
any other Person, provided in each case that such Person is engaged in the
business of providing insurance products or related financial services and,
provided further, that if any Permitted Acquisition is to be financed in whole
or in part with financing provided by the seller or its Affiliates, the
Indebtedness created thereby must have a final maturity date on or after
September 1, 2002 and a weighted average life to maturity greater than the
weighted average life to maturity of the Notes at the time of such Permitted
Acquisition.
"PERSON" shall mean and include an individual, a partnership, a
joint venture, a corporation, a trust, a limited liability company, an
unincorporated organization and a government or any department or agency
thereof.
"PLAN" shall mean any "EMPLOYEE PENSION BENEFIT PLAN" (as such
term is defined in section 3 of ERISA) which is or has been established or
maintained, or to which contributions are or have been made, by the Company or
any ERISA Affiliate.
"PRODUCER'S CONTRACTS" shall mean the agreements between any of
the Schoenke Companies or the Company, as the case may be, and insurance
companies for the procurement or submission of insurance policies and variable
annuity contracts.
"PROPOSED PREPAYMENT DATE" shall have the meaning specified in
clause (iii) of paragraph 4C.
"QPAM EXEMPTION" shall mean Prohibited Transaction Class Exemption
84-14 issued by the United States Department of Labor.
"QUALIFIED INSTITUTIONAL BUYER" shall mean a "QUALIFIED
INSTITUTIONAL BUYER" as such term is defined in Rule 144A under the Securities
Act.
"REGISTRATION STATEMENT" shall mean the amended Registration
Statement on Form S-1 of CBH, filed with the Securities and Exchange Commission
on July 23, 1998 in connection with the IPO.
"REORGANIZATION AGREEMENT" shall have the meaning specified in
Recital B of this Agreement.
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"REPRESENTATIVE AGREEMENTS" shall mean the agreements between any
of the Schoenke Companies or the Company, as the case may be, and independent
representatives for the marketing of compensation and benefit plans to financial
institutions.
"REQUIRED HOLDER(S)" shall mean the holder or holders of at least
66 2/3% of the aggregate principal amount of the Notes from time to time
outstanding.
"RESPONSIBLE OFFICER" shall mean the chief executive officer,
chief operating officer, chief financial officer or chief accounting officer of
the Company or any other officer of the Company involved principally in its
financial administration or its controllership function.
"RESTRICTED PAYMENT" shall mean (i) the declaration of any
dividend on, or the incurrence of any liability to make any other payment or
distribution in respect of any capital stock or equity equivalent (except, in
the case of a Subsidiary, dividends or other payments or distributions in
respect of its capital stock or equity to the Company or a Wholly Owned
Subsidiary) or (ii) the distribution on account of the purchase, redemption or
other retirement of any such capital stock or equity equivalent (except, in the
case of a Subsidiary, purchases, redemptions or other retirements of its capital
stock from the Company or a Wholly Owned Subsidiary). "RESTRICTED PAYMENT" shall
not include (a) the incurrence of any liability to make any payment or
distribution in respect of the phantom stock issued pursuant to the Cochlan
Phantom Stock Agreement as in effect on the Date of Closing and (b) the
distribution on account of the purchase, redemption or other retirement of the
phantom stock issued pursuant to the Cochlan Phantom Stock Agreement as in
effect on the Date of Closing.
"REVENUE MAINTENANCE EVENT" shall mean the occurrence of either
(i) an event in which W.T. Wamberg is no longer a principal of the Company or
(ii) an event in which gross revenues (net of commission expenses) of the
Company (or CBI-Texas, for periods prior to the Merger) and its Subsidiaries for
the four immediately preceding fiscal quarters do not exceed $16,000,000.
"S CORPORATION" shall mean an S corporation described Section
1361(a)(1) of the Code.
"S CORPORATION TAX DISTRIBUTIONS" shall mean distributions by the
Company to the former shareholders of CBI-Texas solely to satisfy the income tax
liability of such shareholders with respect to the taxable income of CBI-Texas
for tax periods in which CBI-Texas was an S Corporation.
"SALE-LEASEBACK TRANSACTION" shall have the meaning specified in
paragraph 6G(9).
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"SCHOENKE ACQUISITION" shall mean the acquisition by the Company
of all or substantially all of the assets of the Schoenke Companies and the
assumption by the Company of certain liabilities of the Schoenke Companies
pursuant to the Schoenke Acquisition Documents.
"SCHOENKE ACQUISITION AGREEMENT" shall mean that certain Asset
Purchase Agreement among the Company, the Schoenke Companies and certain
individuals dated as of [______________, 1998].
"SCHOENKE ACQUISITION DOCUMENTS" shall mean the Schoenke
Acquisition Agreement and all other written agreements, documents, instruments
and certificates now or hereafter executed and delivered by any Person which are
required by the terms of the Schoenke Acquisition Agreement to be delivered to
consummate the Schoenke Acquisition, and any and all amendments, supplements and
other modifications thereof and all renewals, extensions, restatements or
substitutions from time to time of all or any of the foregoing.
"SCHOENKE COMPANIES" shall mean Schoenke & Associates Corporation,
a Maryland corporation, Schoenke & Associates Securities Corporation, a Maryland
corporation, and Schoenke & Associates of Hawaii, L.P., a Hawaii limited
partnership.
"SECOND PRIORITY GUARANTY" shall mean the Guaranty Agreement,
dated of even date herewith, made by CBH in favor of the holders of the Second
Priority Notes, as the same may be amended, supplemented and otherwise modified
from time to time.
"SECOND PRIORITY NOTE AGREEMENT" shall mean the Amended and
Restated Note Agreement, dated of even date herewith, by and between the
Existing Holders and the Company, providing for the issuance and delivery of the
Second Priority Notes, as the same may be amended, supplemented and otherwise
modified from time to time.
"SECOND PRIORITY NOTE DOCUMENTS" shall mean the Second Priority
Note Agreement, the Second Priority Notes, the Second Priority Guaranty, the
Security Documents and all other instruments, certificates, documents and other
writings now or hereafter executed and delivered by the Company or any other
Person pursuant to or in connection with any of the foregoing or any of the
transactions contemplated thereby, and any and all amendments, supplements and
other modifications to any of the foregoing.
"SECOND PRIORITY NOTES" shall mean the Second Priority Senior
Secured Notes due 2004 of the Company, dated of even date with the Notes, issued
and delivered to the Existing Holders on the Date of Closing pursuant to the
Second Priority Note Agreement.
"SECURITIES ACT" shall mean the Securities Act of 1933, as
amended.
"SECURITY AGREEMENTS" shall mean the Amended and Restated Security
Agreement, dated as of the Date of Closing and executed and delivered by the
Company to the Collateral Agent,
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substantially in the form of Exhibit I attached hereto, and all security
agreements hereafter executed by any Subsidiary as contemplated under paragraph
6P, as each may be amended, supplemented and otherwise modified from time to
time.
"SECURITY DOCUMENTS" shall mean the Security Agreements, the
Collateral Agency Agreement, the Assignment of Life Insurance Policy and all
financing statements, assignments, pledges, lien entry forms, documents and
other writings executed and delivered from time to time to secure the Notes and
the obligations owed to the holders of Notes in connection therewith (including,
without limitation those executed and delivered pursuant to paragraph 6P), and
any and all amendments, supplements and other modifications thereto.
"SENIOR FINANCIAL OFFICER" means the chief financial officer,
principal accounting officer, treasurer or comptroller of the Company.
"SENIOR NOTE DOCUMENTS" shall mean this Agreement, the Notes, the
Guaranty, the Security Documents and all other instruments, certificates,
documents and other writings now or hereafter executed and delivered by the
Company, any Subsidiary or any other Person pursuant to or in connection with
any of the foregoing or any of the transactions contemplated thereby, and any
and all amendments, supplements and other modifications to any of the foregoing.
"SERVICING AGREEMENTS" shall mean the servicing agreements between
any of the Schoenke Companies or the Company, as the case may be, and insureds
with respect to the servicing of insurance contracts.
"SHARE REPURCHASES" shall mean the share repurchases contemplated
under the Share Repurchase Agreements.
"SHARE REPURCHASE AGREEMENTS" shall mean that certain Stock
Purchase Agreement dated as of August 22, 1997 entered into between CBI-Texas
and Malcolm N. Briggs, Steven J. Cochlan, G.F. Pendleton, III and Donald R.
Teasley and that certain Stock Purchase Agreement dated as of August 22, 1997
between CBI-Texas and Henry J. Smith.
"SHARE REPURCHASE DOCUMENTS" shall mean the Share Repurchase
Agreements and all other written agreements, documents, instruments and
certificates executed and delivered by any Person which were required by the
terms of either of the Share Repurchase Agreements to be delivered to consummate
the Share Repurchases.
"SHAREHOLDERS' AGREEMENT" shall mean that certain Second Amended
and Restated Shareholders' Agreement and Voting Agreement dated as of August 22,
1997, by and among CBI- Texas and the individuals parties thereto.
"SOLVENT" shall mean, with respect to any Person as of the date of
any determination, that on such date (i) the fair value of the property of such
Person (both at fair valuation and at present
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fair saleable value) is greater than the total amount of liabilities, including,
without limitation, contingent liabilities, of such Person, (ii) the present
fair saleable value of the assets of such Person is not less than the amount
that will be required to pay the probable liability of such Person on its debts
as they become absolute and matured, (iii) such Person is able to realize upon
its assets and pay its debts and other liabilities, contingent obligations and
other commitments as they mature in the normal course of business, (iv) such
Person does not intend to, and does not believe that it will, incur debts or
liabilities beyond such Person's ability to pay as such debts and liabilities
mature and (v) such Person is not engaged in business or a transaction, and is
not about to engage in business or a transaction, for which such Person's
property would constitute unreasonably small capital after giving due
consideration to current and anticipated future capital requirements and current
and anticipated future business conduct and the prevailing practice in the
industry in which such Person is engaged. In computing the amount of contingent
liabilities at any time, such liabilities shall be computed at the amount which,
in light of the facts and circumstances existing at such time, represents the
amount that can reasonably be expected to become an actual or matured liability.
"SUBORDINATED DEBT" shall mean the Convertible Subordinated Notes
and the AAA Distribution Notes.
"SUBSIDIARY" shall mean, as to any Person, any corporation,
association or other business entity in which such Person or one or more of its
Subsidiaries or such Person and one or more of its Subsidiaries owns sufficient
equity or voting interests to enable it or them (as a group) ordinarily, in the
absence of contingencies, to elect a majority of the directors (or Persons
performing similar functions) of such entity, and any partnership or joint
venture if more than a 50% interest in the profits or capital thereof is owned
by such Person or one or more of its Subsidiaries or such Per son and one or
more of its Subsidiaries (unless such partnership can and does ordinarily take
major business actions without the prior approval of such Person or one or more
of its Subsidiaries). Unless the context otherwise clearly requires, any
reference to a "SUBSIDIARY" is a reference to a Subsidiary of the Company.
"SWAPS" shall mean with respect to any Person, payment obligations
with respect to interest rate swaps, currency swaps and similar obligations
obligating such Person to make payments, whether periodically or upon the
happening of a contingency. For the purposes of this Agreement, the amount of
the obligation under any Swap shall be the amount determined in respect thereof
as of the end of the then most recently ended fiscal quarter of such Person,
based on the assumption that such Swap had terminated at the end of such fiscal
quarter, and in making such determination, if any agreement relating to such
Swap provides for the netting of amounts payable by and to such Person
thereunder or if any such agreement provides for the simultaneous payment of
amounts by and to such Person, then in each such case, the amount of such
obligation shall be the net amount so determined.
"TAX INDEMNIFICATION AGREEMENT" shall mean the Tax Indemnification
Agreement, dated [AS OF EVEN DATE HEREWITH], by and among the Company and the
shareholders of CBI-Texas immediately prior to the consummation of the Merger.
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"TAX RETURN" shall mean any return, declaration, report, claim for
refund, or information return or statement relating to taxes, including any
schedule or attachment thereto, and including any amendment thereof.
"TERMINATION EVENT" shall mean (i) a Reportable Event described in
Section 4043 of ERISA and the regulations issued thereunder (other than a
Reportable Event not subject to the provision for 30-day notice to the PBGC
under such regulations), or (ii) the withdrawal of the Company or any of its
ERISA Affiliates from a Plan during a plan year in which it was a "SUBSTANTIAL
EMPLOYER" as defined in Section 4001(a)(2) of ERISA, or (iii) the filing of a
notice of intent to terminate a Plan or the treatment of a Plan amendment as a
termination under Section 4041 of ERISA, or (iv) the institution of proceedings
to terminate a Plan by the PBGC, or (v) any other event or condition that might
constitute grounds under Section 4042 of ERISA for the termination of, or the
appointment of a trustee to administer, any Plan.
"TOTAL DEBT" shall mean, at any time, the Indebtedness represented
by the Notes and the Second Priority Notes.
"TRANSACTION DOCUMENTS" shall have the meaning specified in
paragraph 8H.
"TRANSFEREE" shall mean any direct or indirect transferee of all
or any part of any Note purchased by any Existing Holder under this Agreement.
"TRIBUNAL" shall mean any municipal, state, commonwealth, federal,
foreign, territorial or other sovereign, governmental entity, governmental
department, court, commission, board, bureau, agency or instrumentality.
["UNDERWRITING AGREEMENT" SHALL MEAN THAT CERTAIN UNDERWRITING
AGREEMENT DATED AS OF ________, 1998, BY AND AMONG CBH, BEAR, STEARNS & CO.
INC., PIPER JAFFRAY INC. AND CONNING & COMPANY, AS THE SAME MAY BE AMENDED,
SUPPLEMENTED AND OTHERWISE MODIFIED FROM TIME TO TIME.]
"VENDORS' CONTRACTS" shall mean obligations of continued
performance under executory vendor purchase orders for the purchase of supplies,
equipment or services entered into in the Ordinary Course of Business and under
which the supplies, equipment or services subject thereto have not been received
by any of the Schoenke Companies prior to the closing of the Schoenke
Acquisition.
"WARRANTS" shall have the meaning specified in Recital A of the
Second Priority Note Agreement.
"WHOLLY OWNED SUBSIDIARY" shall mean any Subsidiary all of the
equity interests (except directors' qualifying shares) of which are owned,
directly or indirectly, by the Company or other Wholly Owned Subsidiaries.
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"WORKING CAPITAL NOTE DOCUMENTS" shall mean the Working Capital
Notes and all other written agreements, documents, instruments and certificates
now or hereafter executed and delivered by any Person in connection with the
revolving working capital facility described in paragraph 5P, and any and all
amendments, supplements and other modifications thereof and all renewals,
extensions, restatements or substitutions from time to time of all or any of the
foregoing.
"WORKING CAPITAL NOTES" shall mean the promissory notes evidencing
the Indebtedness incurred pursuant to the revolving working capital facility
described in paragraph 5P.
10B. ACCOUNTING PRINCIPLES, TERMS AND DETERMINATIONS. All
references in this Agreement to "GAAP" shall be deemed to refer to generally
accepted accounting principles in effect in the United States at the time of
application thereof. Unless otherwise specified herein, all accounting terms
used herein shall be interpreted, all determinations with respect to accounting
matters hereunder shall be made, and all unaudited financial statements and
certificates and reports as to financial matters required to be furnished
hereunder shall be prepared, in accordance with generally accepted accounting
principles, applied on a basis consistent with the most recent audited
consolidated financial statements of the Company and its Subsidiaries delivered
pursuant to clause (ii) of paragraph 5A(1) or, if no such statements have been
so delivered, the most recent audited financial statements referred to in clause
(a) of paragraph 8B. Wherever reference is made in any provision of this
Agreement to a consolidated balance sheet or other consolidated financial
statement or financial computation with respect to the Company and its
Subsidiaries, if at the time that any such provision is applicable the Company
shall not have any Subsidiary, such terms shall mean a balance sheet or other
financial statement or financial computation, as the case may be, with respect
to the Company only.
PARAGRAPH 11. MISCELLANEOUS.
11. MISCELLANEOUS.
11A. NOTE PAYMENTS. So long as any Existing Holder shall hold any Note,
the Company will make payments of principal of and interest on such Note, which
comply with the terms of this Agreement, by wire transfer of immediately
available funds for credit (not later than 12:00 noon, New York City time, on
the date due) to such Existing Holder's account or accounts as specified in the
Information Schedule attached hereto, or such other account or accounts in the
United States as such Existing Holder may designate in writing, notwithstanding
any contrary provision herein or in any Note with respect to the place of
payment. Each Existing Holder agrees that, before disposing of any Note, such
Existing Holder will make a notation thereon (or on a schedule attached thereto)
of all principal payments previously made thereon and of the date to which
interest thereon has been paid. The Company agrees to afford the benefits of
this paragraph 11A to any Transferee which shall have made the same agreement as
each Existing Holder has made in this paragraph 11A.
11B. EXPENSES. The Company agrees, whether or not the transactions
contemplated hereby shall be consummated, to pay, and save each Existing Holder,
any Transferee and the Collateral
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Agent harmless against liability for the payment of, all out-of-pocket expenses
arising in connection with such transactions, including (i) all document
production and duplication charges and the fees and expenses of any special
counsel engaged by such Existing Holder, such Transferee or the Collateral Agent
in connection with this Agreement, the transactions contemplated hereby and any
subsequent proposed modification of, or proposed consent under, this Agreement
or the other Senior Note Documents, whether or not such proposed modification
shall be effected or proposed consent granted, and (ii) the costs and expenses,
including attorneys' fees, incurred by such Existing Holder, such Transferee or
the Collateral Agent in enforcing (or determining whether or how to enforce) any
rights under this Agreement, the Notes or the other Senior Note Documents or in
responding to any subpoena or other legal process or informal investigative
demand issued in connection with this Agreement, the other Senior Note Documents
or the transactions contemplated hereby or thereby, or by reason of such
Existing Holder's or such Transferee's having acquired any Note, including
without limitation costs and expenses incurred in any bankruptcy case. The
obligations of the Company under this paragraph 11B shall survive the transfer
of any Note or portion thereof or interest therein by such Existing Holder or
any Transferee, the payment of any Note, the enforcement, amendment or waiver of
any provision of this Agreement or the other Senior Note Documents, and the
termination of this Agreement or any of the other Senior Note Documents.
11C. CONSENT TO AMENDMENTS. This Agreement and any of the other Senior
Note Documents 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, if
the Company shall obtain the written consent to such amendment, action or
omission to act, of the Required Holder(s) except that, without the written
consent of the holder or holders of all Notes at the time outstanding, no
amendment to this Agreement shall change the maturity of any Note, or change the
principal of, or the rate or time of payment of interest on any Note, or affect
the time, amount or allocation of any prepayments, or change the proportion of
the principal amount of the Notes required with respect to any consent,
amendment, waiver or declaration. Each holder of any Notes at the time or
thereafter outstanding shall be bound by any consent authorized by this
paragraph 11C, whether or not such Notes shall have been marked to indicate such
consent, but any Notes issued thereafter may bear a notation referring to any
such consent. No course of dealing between the Company and the holder of any
Notes nor any delay in exercising any rights hereunder or under any Notes shall
operate as a waiver of any rights of any holder of such Notes. As used herein
and in the Notes, the term "THIS AGREE MENT" and references thereto shall mean
this Agreement as it may from time to time be amended or supplemented.
11D. FORM, REGISTRATION, TRANSFER AND EXCHANGE OF NOTES; LOST NOTES.
The Notes are issuable as registered notes without coupons in denominations of
at least $100,000, except as may be necessary to reflect any principal amount
not evenly divisible by $100,000. The Company shall keep at its principal office
a register in which the Company shall provide for the registration of Notes and
of transfers of Notes. Upon surrender for registration of transfer of any Note
at the principal office of the Company, the Company shall, at its expense,
execute and deliver one or more new Notes of like tenor and of a like aggregate
principal amount, registered in the name of such transferee or transferees. At
the option of the holder of any Note, such Note may be exchanged for other Notes
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of like tenor and of any authorized denominations, of a like aggregate principal
amount, upon surrender of the Note to be exchanged at the principal office of
the Company. Whenever any Notes are so surrendered for exchange, the Company
shall, at its expense, execute and deliver the Notes which the holder making the
exchange is entitled to receive. Every Note surrendered for registration of
transfer or exchange shall be duly endorsed, or be accompanied by a written
instrument of transfer duly executed, by the holder of such Note or such
holder's attorney duly authorized in writing. Any Note or Notes issued in
exchange for any Note or upon transfer thereof shall carry the rights to unpaid
interest and interest to accrue which were carried by the Note so exchanged or
transferred, so that neither gain nor loss of interest shall result from any
such transfer or exchange. Upon receipt of written notice from the holder of any
Note of the loss, theft, destruction or mutilation of such Note and, in the case
of any such loss, theft or destruction, upon receipt of such holder's unsecured
indemnity agreement, or in the case of any such mutilation upon surrender and
cancellation of such Note, the Company will make and deliver a new Note, of like
tenor, in lieu of the lost, stolen, destroyed or mutilated Note. Any Transferee,
by its acceptance of a Note registered in its name (or the name of its nominee),
shall be deemed to have made the representations set forth in paragraphs 9A and
9B.
11E. PERSONS DEEMED OWNERS; PARTICIPATIONS. Prior to due presentment
for registration of transfer, the Company may treat the Person in whose name any
Note is registered as the owner and holder of such Note for the purpose of
receiving payment of principal of and interest on such Note and for all other
purposes whatsoever, whether or not such Note shall be overdue, and the Company
shall not be affected by notice to the contrary. Subject to the preceding
sentence, the holder of any Note may from time to time grant participations in
such Note to any Person on such terms and conditions as may be determined by
such holder in its sole and absolute discretion, provided that any such
participation shall be in a principal amount of at least $100,000 and each
holder of a Note hereby agrees that, so long as no Event of Default shall have
occurred and be continuing, it will grant participations only to Qualified
Institutional Buyers which are believed by such holder, after reasonable
inquiry, not to be Competitors.
11F. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ENTIRE AGREEMENT. All
representations and warranties contained herein or in the other Senior Note
Documents or otherwise made in writing by or on behalf of the Company in
connection herewith and therewith shall survive the execution and delivery of
this Agreement, the Notes and the other Senior Note Documents, the transfer by
any Existing Holder of any Note or portion thereof or interest therein and the
payment of any Note, and may be relied upon by any Transferee, regardless of any
investigation made at any time by or on behalf of any Existing Holder or any
Transferee. Subject to the preceding sentence, this Agreement, the Notes and the
other Senior Note Documents embody the entire agreement and understanding
between the Existing Holders and the Company and supersede all prior agreements
and understandings relating to the subject matter hereof.
11G. SUCCESSORS AND ASSIGNS. All covenants and other agreements in this
Agreement contained by or on behalf of any of the parties hereto shall bind and
inure to the benefit of the respective successors and assigns of the parties
hereto (including, without limitation, any Transferee)
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whether so expressed or not; provided, however, that each holder of a Note
hereby agrees that, so long as no Event of Default shall have occurred and be
continuing, it will transfer its Notes only to Qualified Institutional Buyers
which are believed by such holder, after reasonable inquiry, not to be
Competitors.
11H. DISCLOSURE TO OTHER PERSONS. The Company acknowledges that the
holder of any Note may deliver copies of any financial statements and other
documents or materials delivered to such holder, and disclose any other
information disclosed to such holder, by or on behalf of the Company or any
Subsidiary in connection with or pursuant to this Agreement and the other Senior
Note Documents to (i) such holder's directors, officers, employees, agents and
professional consultants, (ii) any other holder of any Note, (iii) any Person to
which such holder offers to sell such Note or any part thereof and to which such
holder could then transfer such Note pursuant to paragraph 11G, (iv) any Person
to which such holder sells or offers to sell a participation in all or any part
of such Note and to which such holder could then sell such participation
pursuant to paragraph 11F, (v) any Person from which such holder offers to
purchase any security of the Company and to which such holder could then
transfer such Note pursuant to paragraph 11G, (vi) any federal or state
regulatory authority having jurisdiction over such holder, (vii) the National
Association of Insurance Commissioners or any similar organization or (viii) any
other Person to which such delivery or disclosure may be necessary or
appropriate (a) in compliance with any law, rule, regulation or order applicable
to such holder, (b) in response to any subpoena or other legal process or
informal investigative demand or (c) in connection with any litigation to which
such holder is a party.
11I. NOTICES. All notices or other communications provided for
hereunder (except for the telephonic notice required by paragraph 4B) shall be
in writing and sent by first class mail or nationwide overnight delivery service
(with charges prepaid) and (i) if to any Existing Holder, addressed to such
Existing Holder at the address specified for such communications in the
Information Schedule attached hereto, or at such other address as such Existing
Holder shall have specified to the Company in writing, (ii) if to any other
holder of any Note, addressed to such other holder at such address as such other
holder shall have specified to the Company in writing or, if any such other
holder shall not have so specified an address to the Company, then addressed to
such other holder in care of the last holder of such Note which shall have so
specified an address to the Company, and (iii) if to the Company, addressed to
it at 2121 San Jacinto, Suite 2200, Dallas, Texas 75201, Attention: Melvin G.
Todd or at such other address as the Company shall have specified to the holder
of each Note in writing; provided, however, that any such communication to the
Company may also, at the option of the holder of any Note, be delivered by any
other means either to the Company at its address specified above or to any
officer of the Company.
11J. PAYMENTS DUE ON NON-BUSINESS DAYS. Anything in this Agreement or
the Notes to the contrary notwithstanding, any payment of principal of or
interest on any Note that is due on a date other than a Business Day shall be
made on the next succeeding Business Day. If the date for any payment is
extended to the next succeeding Business Day by reason of the preceding
sentence,
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the period of such extension shall be included in the computation of the
interest payable on such Business Day.
11K. SATISFACTION REQUIREMENT. If any agreement, certificate or other
writing, or any action taken or to be taken, is by the terms of this Agreement
required to be satisfactory to any Existing Holder, the holders of the Notes or
to the Required Holder(s), the determination of such satisfaction shall be made
by such Existing Holder, the holders of the Notes or the Required Holder(s), as
the case may be, in the sole and exclusive judgment (exercised in good faith) of
the Person or Persons making such determination.
11L. GOVERNING LAW. THIS AGREEMENT AND ALL MATTERS RELATING HERETO
SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, AND THE RIGHTS OF THE
PARTIES SHALL BE GOVERNED BY, THE LAW OF THE STATE OF NEW YORK. This Agreement
may not be changed orally, but (subject to the provisions of paragraph 11C) only
by an agreement in writing signed by the party against whom enforcement of any
waiver, change, modification or discharge is sought.
11M. WAIVER OF JURY TRIAL; CONSENT TO JURISDICTION; LIMITATION OF
REMEDIES.
(i) THE COMPANY AND EACH HOLDER OF NOTES EACH HEREBY KNOWINGLY,
VOLUNTARILY, AND INTENTIONALLY WAIVES ANY RIGHTS IT MAY HAVE TO A TRIAL
BY JURY IN ANY LITIGATION OF ANY CLAIM WHICH IS BASED HEREON, OR ARISES
OUT OF, UNDER, OR IN CONNECTION WITH THIS AGREEMENT, THE NOTES OR THE
OTHER SENIOR NOTE DOCUMENTS, OR ANY TRANSACTIONS RELATING HERETO OR
THERETO, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS
(WHETHER ORAL OR WRITTEN), OR ACTIONS OF THE COMPANY, THE HOLDERS OF
THE NOTES OR THE COLLATERAL AGENT. THE COMPANY ACKNOWLEDGES THAT THIS
PROVISION IS A MATERIAL INDUCEMENT FOR THE EXISTING HOLDERS TO ENTER
INTO THIS AGREEMENT.
(ii) ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS
AGREEMENT, THE NOTES, THE OTHER SENIOR NOTE DOCUMENTS OR ANY
TRANSACTIONS RELATING HERETO OR THERETO, OR ANY COURSE OF CONDUCT,
COURSE OF DEALING, STATEMENTS (WHETHER ORAL OR WRITTEN), OR ACTIONS OF
THE COMPANY, THE HOLDERS OF NOTES OR THE COLLATERAL AGENT MAY BE
BROUGHT IN THE COURTS OF THE STATE OF NEW YORK, OR THE UNITED STATES OF
AMERICA FOR THE SOUTHERN DISTRICT OF NEW YORK AND THE COMPANY HEREBY
ACCEPTS FOR ITSELF AND IN RESPECT OF ITS PROPERTY, GENERALLY AND
UNCONDITIONALLY, THE NONEXCLUSIVE JURISDICTION OF THE AFORESAID COURTS.
THE COMPANY AND EACH HOLDER OF NOTES EACH HEREBY IRREVOCABLY WAIVES ANY
OBJECTIONS, INCLUDING, WITHOUT LIMITATION, ANY
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OBJECTION TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON
CONVENIENS, WHICH IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY
SUCH ACTION OR PROCEEDING IN SUCH RESPECTIVE JURISDICTIONS.
(iii) The Company hereby agrees that process may be served on CT
Corporation System, Inc., located at 1633 Broadway, New York, New York
10019. Any and all service of process and any other notice in any such
action, suit or proceeding shall be effective against such parties if
given by registered or certified mail, return receipt requested, or by
any other means or mail which requires a signed receipt, postage
prepaid, mailed to such parties as herein provided in paragraph 11I. In
the event CT Corporation System, Inc. shall not be able to accept
service of process as aforesaid and if the Company shall not maintain
an office in New York City, the Company shall promptly appoint and
maintain an agent qualified to act as an agent for service of process
with respect to all courts in and of the New York City, and acceptable
to the Required Holder(s), as the Company's authorized agent to accept
and acknowledge on the Company's behalf service of any and all process
which may be served in any such action, suit or proceeding.
11N. INDEMNIFICATION. The Company agrees:
(i) TO INDEMNIFY EACH HOLDER OF NOTES AND EACH OF THEIR AFFILIATES
AND EACH OF THEIR OFFICERS, DIRECTORS, EMPLOYEES, SHAREHOLDERS,
REPRESENTATIVES, AGENTS, ATTORNEYS, ACCOUNTANTS AND EXPERTS
("INDEMNIFIED PARTIES") FROM, HOLD EACH OF THEM HARMLESS AGAINST AND
PROMPTLY UPON DEMAND PAY OR REIMBURSE EACH OF THEM FOR, THE INDEMNITY
MATTERS WHICH MAY BE INCURRED BY OR ASSERTED AGAINST OR INVOLVE ANY OF
THEM (WHETHER OR NOT ANY OF THEM IS DESIGNATED A PARTY THERETO) AS A
RESULT OF, ARISING OUT OF OR IN ANY WAY RELATED TO (I) ANY ACTUAL OR
PROPOSED USE BY THE COMPANY OF THE PROCEEDS OF THE NOTES, (II) THE
EXECUTION, DELIVERY AND PERFORMANCE OF THIS AGREEMENT AND THE OTHER
SENIOR NOTE DOCUMENTS, (III) THE OPERATIONS OF THE BUSINESS OF THE
COMPANY AND ITS SUBSIDIARIES, (IV) THE FAILURE OF COMPANY OR ANY OF ITS
SUBSIDIARIES TO COMPLY WITH THE TERMS OF THIS AGREEMENT OR ANY OF THE
OTHER SENIOR NOTE DOCUMENTS OR WITH ANY GOVERNMENTAL REQUIREMENT, (V)
ANY INACCURACY OF ANY REPRESENTATION OR ANY BREACH OF ANY WARRANTY OF
THE COMPANY OR ANY OF ITS SUBSIDIARIES SET FORTH IN THIS AGREEMENT OR
ANY OTHER SENIOR NOTE DOCUMENT, (VI) ANY ASSERTION THAT THE COMPANY WAS
NOT ENTITLED TO RECEIVE THE PROCEEDS RECEIVED PURSUANT TO THIS
AGREEMENT AND THE OTHER SENIOR NOTE DOCUMENTS OR (VII) ANY OTHER ASPECT
OF THE SENIOR NOTE DOCUMENTS, INCLUDING, WITHOUT LIMITATION, THE
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REASONABLE FEES AND DISBURSEMENTS OF COUNSEL AND ALL OTHER EXPENSES
INCURRED IN CONNECTION WITH INVESTIGATING, DEFENDING OR PREPARING TO
DEFEND ANY SUCH ACTION, SUIT, PROCEEDING (INCLUDING ANY INVESTIGATIONS,
LITIGATIONS OR INQUIRIES) OR CLAIM AND INCLUDING ALL INDEMNITY MATTERS
ARISING BY REASON OF THE ORDINARY NEGLIGENCE OF ANY INDEMNIFIED PARTY
(EXCEPT AS TO THE EXTENT ANY SUCH INDEMNITY MATTERS HAVE BEEN CAUSED BY
THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF SUCH INDEMNIFIED PARTY,
IT BEING THE INTENT OF THE PARTIES THAT EACH INDEMNIFIED PARTY SHALL BE
INDEMNIFIED FROM INDEMNITY MATTERS CAUSED BY THE NEGLIGENCE, WHETHER
SOLE, JOINT, CONCURRENT, CONTRIBUTORY, ACTIVE OR PASSIVE, OF SUCH
INDEMNIFIED PARTY); AND
(ii) THE FOREGOING INDEMNITIES SHALL EXTEND TO THE INDEMNIFIED
PARTIES NOTWITHSTANDING THE NEGLIGENCE OF EVERY KIND OR CHARACTER
WHATSOEVER, WHETHER ACTIVE OR PASSIVE, WHETHER AN AFFIRMATIVE ACT OR AN
OMISSION, INCLUDING, WITHOUT LIMITATION, ALL TYPES OF NEGLIGENT CONDUCT
IDENTIFIED IN THE RESTATEMENT (SECOND) OF TORTS OF ONE OR MORE OF THE
INDEMNIFIED PARTIES OR BY REASON OF STRICT LIABILITY IMPOSED WITHOUT
FAULT ON ANY ONE OR MORE OF THE INDEMNIFIED PARTIES. TO THE EXTENT THAT
AN INDEMNIFIED PARTY COMMITTED AN ACT OF GROSS NEGLIGENCE OR WILLFUL
MISCONDUCT, THIS CONTRACTUAL OBLIGATION OF INDEMNIFICATION SHALL
CONTINUE BUT SHALL ONLY EXTEND TO THE PORTION OF THE CLAIM THAT IS
DEEMED TO HAVE OCCURRED BY REASON OF EVENTS OTHER THAN THE GROSS
NEGLIGENCE OR WILLFUL MISCONDUCT OF THE INDEMNIFIED PARTY.
(iii) THE COMPANY AND ITS SUBSIDIARIES AGREE NOT TO ASSERT ANY
CLAIM AGAINST THE HOLDER OF ANY NOTES, ANY OF THEIR AFFILIATES, OR ANY
OF THEIR RESPECTIVE DIRECTORS, OFFICERS, EMPLOYEES, ATTORNEYS, AGENTS
AND ADVISERS, ON ANY THEORY OF LIABILITY, FOR SPECIAL, INDIRECT,
CONSEQUENTIAL OR PUNITIVE DAMAGES ARISING OUT OF OR OTHERWISE RELATING
TO THE SENIOR NOTE DOCUMENTS, ANY OF THE TRANSACTIONS CONTEMPLATED
HEREIN OR THEREIN OR THE ACTUAL OR PROPOSED USE OF THE PROCEEDS OF THE
NOTES.
(iv) The obligations of the Company and its Subsidiaries under
this paragraph 11N shall survive the termination of this Agreement and
the payment in full of the Notes and all other amounts payable
hereunder.
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11O. RELEASE. THE COMPANY AND ITS SUBSIDIARIES EACH HEREBY RELEASE,
DISCHARGE AND ACQUIT FOREVER THE HOLDERS OF THE NOTES AND THEIR RESPECTIVE
OFFICERS, DIRECTORS, AGENTS, EMPLOYEES AND COUNSEL FROM ANY AND ALL CLAIMS
EXISTING AS OF THE DATE HEREOF. AS USED IN THIS PARAGRAPH 11O, THE TERM "CLAIM"
SHALL MEAN ANY AND ALL LIABILITIES, CLAIMS, JUDGMENTS, DEFICIENCIES, INTEREST,
LIENS, COSTS OR EXPENSES (INCLUDING COURT COSTS, PENALTIES, ATTORNEYS' FEES AND
DISBURSEMENTS, AND AMOUNTS PAID IN SETTLEMENT) OF ANY KIND AND CHARACTER
WHATSOEVER, IN EACH CASE WHETHER NOW KNOWN OR UNKNOWN, SUSPECTED OR UNSUSPECTED,
ASSERTED OR UNASSERTED OR PRIMARY OR CONTINGENT, AND WHETHER ARISING OUT OF
WRITTEN DOCUMENTS, UNWRITTEN UNDERTAKINGS OR COURSE OF CONDUCT.
11P. RELATIONSHIP OF THE PARTIES. This Agreement provides for the
making or maintaining of loans by the Existing Holders, in their capacity as
lenders, to the Company, in its capacity as a borrower, and for the payment of
interest and repayment of principal by the Company to the holders of the Notes.
The relationship between the Existing Holders and the Company is limited to that
of creditors/secured parties, on the one hand, and debtor, on the other hand.
The provisions herein for compliance with financial, environmental, and other
covenants, delivery of financial and other reports, and financial and other
inspections, investigations, audits, examinations or tests are intended solely
for the benefit of the holders of the Notes to protect their interests as
lenders in assuring payments of interest and repayment of principal and nothing
contained in this Agreement or any other Senior Note Document shall be construed
as permitting or obligating the holders of the Notes to act as financial or
business advisors or consultants to the Company, as permitting or obligating the
holders of the Notes to control the Company or to conduct or operate the
Company's operations, as creating any fiduciary obligation on the part of the
holders of the Notes to the Company, or as creating any joint venture, agency,
or other relationship between the parties other than as explicitly and
specifically stated in this Agreement. The Company acknowledges that it has had
the opportunity to obtain the advice of experienced counsel of its own choosing
in connection with the negotiation and execution of this Agreement and the other
Senior Note Documents and to obtain the advice of such counsel with respect to
all matters contained herein, including, without limitation, the provision in
paragraph 11M for waiver of trial by jury. The Company further acknowledges that
it is experienced with respect to financial and credit matters and has made its
own independent decision to apply to the Existing Holders for the financial
accommodations provided hereby and to execute and deliver this Agreement and the
other Senior Note Documents.
11Q. FINAL AGREEMENT. THIS AGREEMENT AND THE OTHER SENIOR NOTE
DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENT
OF THE PARTIES. THERE ARE NO ORAL AGREEMENTS BETWEEN THE PARTIES.
65
<PAGE> 72
11R. CONSTRUCTION. The Existing Holders and the Company have
participated jointly in the negotiation and drafting of this Agreement and the
other Senior Note Documents. In the event an ambiguity or question of intent or
interpretation arises, this Agreement or other Senior Note Document, as the case
may be, shall be construed as if drafted jointly by the Existing Holders and the
Company and no presumption or burden of proof shall arise favoring or
disfavoring any Existing Holder or the Company by virtue of the authorship of
any of the provisions of this Agreement or such other Senior Note Document, as
the case may be.
11S. SEVERABILITY. Any provision of this Agreement which is prohibited
or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
11T. DESCRIPTIVE HEADINGS. The descriptive headings of the several
paragraphs of this Agreement are inserted for convenience only and do not
constitute a part of this Agreement.
11U. MAXIMUM INTEREST PAYABLE. The Company, each Existing Holder and
any other holders of the Notes specifically intend and agree to limit
contractually the amount of interest payable under this Agreement, the Notes and
all other instruments and agreements related hereto and thereto to the maximum
amount of interest lawfully permitted to be charged under applicable law.
Therefore, none of the terms of this Agreement, the Notes or any instrument
pertaining to or relating to this Agreement or the Notes shall ever be construed
to create a contract to pay interest at a rate in excess of the maximum rate
permitted to be charged under applicable law, and neither the Company, any
guarantor nor any other party liable or to become liable hereunder, under the
Notes, any guaranty or under any other instruments and agreements related hereto
and thereto shall ever be liable for interest in excess of the amount determined
at such maximum rate, and the provisions of this paragraph 11U shall control
over all other provisions of this Agreement, any Notes, any guaranty or any
other instrument pertaining to or relating to the transactions herein
contemplated. If any amount of interest taken or received by any Existing Holder
or any holder of a Note shall be in excess of said maximum amount of interest
which, under applicable law, could lawfully have been collected by such Existing
Holder or such holder incident to such transactions, then such excess shall be
deemed to have been the result of a mathematical error by all parties hereto and
shall be refunded promptly by the Person receiving such amount to the party
paying such amount, or, at the option of the recipient, credited ratably against
the unpaid principal amount of the Note or Notes held by such Existing Holder or
such holder, respectively. All amounts paid or agreed to be paid in connection
with such transactions which would under applicable law be deemed "INTEREST"
shall, to the extent permitted by such applicable law, be amortized, prorated,
allocated and spread throughout the stated term of this Agreement and the Notes.
"APPLICABLE LAW" as used in this paragraph means that law in effect from time to
time which permits the charging and collection of the highest permissible
lawful, nonusurious rate of interest on the transactions herein contemplated
including laws of the State of New York and of the United States of America, and
"MAXIMUM RATE" as used in this paragraph means, with respect to each of the
Notes, the maximum lawful, nonusurious rates of
66
<PAGE> 73
interest (if any) which under applicable law may be charged to the Company from
time to time with respect to such Notes.
11V. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be an original but all of which together shall
constitute one instrument.
11W. SEVERALTY OF OBLIGATIONS. The issuance of the Notes to the
Existing Holders are to be several issuances, and the obligations of the
Existing Holders under this Agreement are several obligations. Except as
provided in paragraph 3K, no failure by any Existing Holder to perform its
obligations under this Agreement shall relieve any other Existing Holder or the
Company of any of its obligations hereunder, and no Existing Holder shall be
responsible for the obligations of, or any action taken or omitted by, any other
Existing Holder hereunder.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK; SIGNATURE PAGE FOLLOWS]
67
<PAGE> 74
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers thereunto duly authorized, to be effective
as of the date first above written.
CLARK/BARDES, INC.
By:
-------------------------------------
Title:
----------------------------------
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
By:
----------------------------------------
Title:
-------------------------------------
By:
----------------------------------------
Title:
-------------------------------------
LIFE INVESTORS INSURANCE COMPANY OF AMERICA
By:
----------------------------------------
Title:
-------------------------------------
NATIONWIDE LIFE INSURANCE COMPANY
By:
----------------------------------------
Title:
-------------------------------------
68
<PAGE> 1
EXHIBIT 10.37
=================================================================
CLARK/BARDES, INC.
$8,900,000
11.00% SECOND PRIORITY SENIOR SECURED
NOTES DUE AUGUST 9, 2004
---------------
AMENDED AND RESTATED NOTE AGREEMENT
---------------
DATED AS OF __________, 1998
=================================================================
<PAGE> 2
TABLE OF CONTENTS
(Not Part of Agreement)
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PARAGRAPH 1. AUTHORIZATION OF ISSUE OF NOTES.....................................................................2
1A. Authorization of Issues of Notes................................................................2
PARAGRAPH 2. ASSUMPTION OF OBLIGATIONS; EXCHANGE OF NOTES........................................................3
2A. Assumption of Original Notes and Other Obligations..............................................3
PARAGRAPH 3. CONDITIONS PRECEDENT................................................................................3
3. Conditions to Closing....................................................................................3
3A. Certain Documents...............................................................................3
3B. Representations and Warranties; No Default; No Material Adverse Change..........................6
3C. Delivery and Acceptance Permitted By Applicable Laws............................................6
3D. Completion of Due Diligence.....................................................................7
3E. Other Information...............................................................................7
3F. Related Proceedings.............................................................................7
3G. Consummation of Merger..........................................................................7
3J. Termination of Shareholders' Agreement..........................................................8
3K. Delivery of Notes to Other Existing Holders.....................................................8
3L. Proceedings.....................................................................................8
3M. Accrued Interest................................................................................8
3N. Fees............................................................................................8
4. PREPAYMENTS...................................................................................................8
4A. Required Prepayments............................................................................8
4B. Optional Prepayment of Notes....................................................................8
4C. Offer to Prepay Notes in the Event of a Change in Control or a Revenue
Maintenance Event...............................................................................9
4D. Partial Payments Pro Rata......................................................................10
4E. Retirement of Notes............................................................................10
5. AFFIRMATIVE COVENANTS........................................................................................11
5A(1). Information as to Company......................................................................11
5A(2). Officer's Certificate..........................................................................14
5B. Information Required by Rule 144A..............................................................15
5C. Inspection.....................................................................................15
5D. Covenant to Secure Notes Equally...............................................................15
5E. Corporate Existence, Licenses and Permits; Maintenance of Properties...........................16
</TABLE>
ii
<PAGE> 3
<TABLE>
<S> <C> <C>
5F. Maintenance of Material Contracts..............................................................16
5G. Maintenance of Insurance.......................................................................16
5H. Payment of Taxes and Other Claims..............................................................16
5I. ERISA Compliance...............................................................................17
5J. Compliance with Laws...........................................................................17
5K. Collateral.....................................................................................17
5L. Performance of Obligations.....................................................................18
5M. Maintenance of Key Sales Force.................................................................18
5N. Pledge of Notes Payable........................................................................18
5O. Maintenance of Key Man Life Insurance Policies.................................................18
5P. Creation and Maintenance of Working Capital Facility...........................................18
6. NEGATIVE COVENANTS...........................................................................................19
6A. Total Debt to Annualized Cash Flow Ratio.......................................................19
6B. Limitation on Restricted Payments..............................................................19
6C. Maintenance of Minimum Consolidated Net Worth and
Consolidated Net Income........................................................................20
6D. Discounted Commission Fees to Total Debt Ratio.................................................20
6E. Interest Coverage Ratio........................................................................20
6F. Fixed Charge Coverage Ratio....................................................................20
6G. Liens, Indebtedness, and Other Restrictions....................................................21
6H. Change of Fiscal Year..........................................................................25
6I. Change of Business.............................................................................25
6J. Certificates of Incorporation; Bylaws; Trade Names.............................................25
6K. Other Agreements...............................................................................25
6L. Limitation on Certain Restrictive Agreements...................................................25
6M. ERISA Matters..................................................................................25
6N. Only One Class of Capital Stock................................................................26
6O. Prohibition Against Payments and Prepayments of Certain Indebtedness...........................26
6P. No Subsidiaries................................................................................26
6Q. Restrictions on Issuances of Common Stock......................................................27
6R. Restrictions Upon the Amendment of Certain Documents...........................................27
6S. Limitation on Amount of S Corporation Tax Distributions........................................27
6T. Prohibition Against Phantom Stock..............................................................27
7. EVENTS OF DEFAULT............................................................................................28
7A. Acceleration...................................................................................28
7B. Rescission of Acceleration.....................................................................31
7C. Notice of Acceleration or Rescission...........................................................31
7D. Right of Set-off...............................................................................31
7E. Notice to Holders of Subordinated Debt; Payment Block..........................................32
7F. Other Remedies.................................................................................32
</TABLE>
iii
<PAGE> 4
<TABLE>
<S> <C> <C>
8. REPRESENTATIONS, COVENANTS AND WARRANTIES....................................................................32
8A. Organization and Qualification.................................................................32
8B. Financial Statements...........................................................................32
8C. Actions Pending................................................................................33
8D. Outstanding Indebtedness.......................................................................33
8E. Title to Properties............................................................................34
8F. Possession of Franchises, Licenses, Patents and Trademarks.....................................34
8G. Taxes..........................................................................................34
8H. Conflicting Agreements and Other Matters.......................................................35
8I. Offering of the Original Notes.................................................................36
8J. Use of Proceeds................................................................................36
8K. ERISA..........................................................................................36
8L. Governmental Consent...........................................................................37
8M. Environmental Compliance.......................................................................37
8N. Fiscal Year....................................................................................37
8O. Disclosure.....................................................................................37
8P. Investment Company Act.........................................................................37
8Q. Other Regulation...............................................................................38
8R. Other Representations and Warranties...........................................................38
8S. Solvency.......................................................................................38
8T. Employment Agreements, Non-Competition Agreements
and Principal Office Agreements................................................................38
8U. Insurance Licenses.............................................................................38
8V. Undisclosed Liabilities. .....................................................................38
8W. Legal Compliance...............................................................................38
8X. Certain Tax Matters............................................................................39
8Y. Sales Representatives..........................................................................39
8Z. Contracts......................................................................................39
8AA. Assignment of Insurance Contracts. ...........................................................40
8BB. Satisfaction of Conditions Precedent to the Schoenke Acquisition,
the Merger and the IPO.........................................................................40
8CC. Compliance with Laws...........................................................................41
8DD. Condition of Property..........................................................................41
8EE. Books and Records. ...........................................................................41
8FF. Additional Disclosure..........................................................................41
8GG. Satisfaction of Conditions Precedent...........................................................41
8HH. Certain Affiliates.............................................................................41
9. REPRESENTATIONS OF EACH PURCHASER............................................................................41
9A. Nature of Purchase.............................................................................41
9B. Source of Funds................................................................................41
10. DEFINITIONS.................................................................................................42
</TABLE>
iv
<PAGE> 5
<TABLE>
<S> <C> <C>
10A. Defined Terms..................................................................................43
10B. Accounting Principles, Terms and Determinations................................................58
11. MISCELLANEOUS...............................................................................................59
11A. Note Payments..................................................................................59
11B. Expenses.......................................................................................59
11C. Consent to Amendments..........................................................................59
11D. Form, Registration, Transfer and Exchange of Notes; Lost Notes.................................60
11E. Persons Deemed Owners; Participations..........................................................60
11F. Survival of Representations and Warranties; Entire Agreement...................................61
11G. Successors and Assigns.........................................................................61
11H. Disclosure to Other Persons....................................................................61
11I. Notices........................................................................................62
11J. Payments Due on Non-Business Days..............................................................62
11K. Satisfaction Requirement.......................................................................62
11L. Governing Law..................................................................................62
11M. Waiver of Jury Trial; Consent to Jurisdiction; Limitation of Remedies..........................62
11N. Indemnification................................................................................64
11O. RELEASE........................................................................................65
11P. Relationship of the Parties....................................................................65
11Q. FINAL AGREEMENT................................................................................66
11R. Construction. ................................................................................66
11S. Severability...................................................................................66
11T. Descriptive Headings...........................................................................66
11U. Maximum Interest Payable.......................................................................67
11V. Counterparts...................................................................................67
11W. Severalty of Obligations.......................................................................67
</TABLE>
v
<PAGE> 6
INFORMATION SCHEDULE
SCHEDULE 6G(4) - CERTAIN LOANS, ADVANCES AND INVESTMENTS
SCHEDULE 6M - DESCRIPTION OF BENEFITS PROVIDED BY PLANS
SCHEDULE 8C - LITIGATION
SCHEDULE 8D - INDEBTEDNESS
SCHEDULE 8H - AGREEMENTS RESTRICTING INDEBTEDNESS
SCHEDULE 8T - MATERIAL EMPLOYMENT AGREEMENTS, NON-
COMPETITION AGREEMENTS AND PRINCIPAL
OFFICE AGREEMENTS
SCHEDULE 8U - INSURANCE LICENSES
SCHEDULE 8Z - CONTRACTS
SCHEDULE 8FF(1) - PERFORMANCE BONUSES
SCHEDULE 8FF(2) - PLANS AND MULTIEMPLOYER PLANS
SCHEDULE 8FF(3) - INTELLECTUAL PROPERTY
SCHEDULE A - COMPETITORS
EXHIBIT A - FORM OF NOTE
EXHIBIT B-1 - FORM OF OPINION OF COMPANY'S COUNSEL
EXHIBIT B-2 - FORM OF OPINION OF COMPANY'S GENERAL
COUNSEL
EXHIBIT C - FORM OF OFFICER'S CERTIFICATE
EXHIBIT D - FORM OF COMPLIANCE CERTIFICATE
EXHIBIT E - FORM OF GUARANTY
vi
<PAGE> 7
AMENDED AND RESTATED NOTE AGREEMENT
THIS AMENDED AND RESTATED NOTE AGREEMENT (this "AGREEMENT") is
entered into as of _______________, 1998, among CLARK/BARDES, INC., a Delaware
corporation (the "COMPANY"), and each of the institutions named in the
Information Schedule attached hereto (the "EXISTING HOLDERS").
RECITALS
A. Clark/Bardes, Inc., a Texas corporation ("CBI-TEXAS"), and the
Existing Holders entered into that certain Note and Warrant Purchase Agreement
dated as of September 8, 1997 (the "ORIGINAL NOTE AGREEMENT") pursuant to which
CBI-Texas issued and sold to the Existing Holders (i) its 11.00% Second Priority
Senior Secured Notes due August 9, 2004 in the aggregate original principal
amount of $8,900,000 (the "ORIGINAL NOTES") and (ii) Common Stock Purchase
Warrants (the "WARRANTS") evidencing rights to purchase from CBI-Texas an
aggregate of 3,050,847 shares of CBI-Texas' common stock, no par value per
share.
B. CBI-Texas entered into a letter agreement with each of the Existing
Holders, each dated as of June 11, 1998 (collectively, the "WARRANT PURCHASE
AGREEMENTS"), pursuant to which CBI-Texas agreed to purchase, and such Existing
Holder agreed to sell, the Warrants held by such Existing Holder, upon and
subject to the terms and conditions set forth therein, which purchase and sale
is to be consummated immediately prior to the issuance and delivery hereunder of
the Notes (as hereinafter defined) and as a condition to the obligation of the
Existing Holders to accept delivery of such Notes.
C. Pursuant to the terms of that certain Reorganization Agreement dated
as of _________, 1998 by and among Clark/Bardes Holdings, Inc., a Delaware
corporation and the owner of all outstanding capital stock of the Company
("CBH"), the Company and CBI-Texas (the "REORGANIZATION AGREEMENT"), CBI-Texas
has on __________, 1998 merged with and into the Company (the "MERGER"), with
the Company continuing as the surviving corporation of the Merger.
D. Pursuant to the terms and conditions of the Reorganization
Agreement, as well as by operation of law, the Company has assumed all
liabilities and obligations of CBI-Texas, including without limitation (i) all
liabilities and obligations under the Original Notes, the Original Note
Agreement, the Security Documents (as defined in the Original Note Agreement)
and all other instruments and agreements executed and delivered by CBI-Texas in
connection with the Original Note Agreement (collectively, the "ORIGINAL NOTE
DOCUMENTS"), and (ii) all liabilities and obligations under the Warrant Purchase
Agreements.
E. Contemporaneously with the consummation of the Merger, CBH has
effected a registered public offering of 4,000,000 shares of its common stock,
par value $.01, at an initial offering price of $______ per share (the "IPO").
<PAGE> 8
F. The Company and the Existing Holders have agreed that (i) in
furtherance of the assumption of CBI-Texas' liabilities and obligations to be
effected pursuant to the Reorganization Agreement, the Company will expressly
assume CBI-Texas' liabilities and obligations under the Original Note Agreement,
the Original Notes (and any replacements thereof) and the other Original Note
Documents, (ii) in connection with such assumption, each Existing Holder will
surrender the Original Note held by it for one or more notes of the Company of
like principal amount and otherwise in substance of like terms as the Original
Note surrendered, except that such replacement notes shall bear interest at the
rate of ____% per annum, (iii) the Original Note Agreement will be amended and
restated in its entirety hereby to reflect, among other things, the assumption
of the Original Notes by the Company and (iv) CBH will guarantee the obligations
of the Company under such replacement notes, this Agreement, the Security
Documents (as hereinafter defined), and the other Second Priority Note Documents
(as hereinafter defined).
NOW, THEREFORE, to accomplish the matters contemplated by the
immediately preceding recitals and in consideration of the mutual premises
herein contained and for other valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Original Note Agreement is
hereby amended and restated in its entirety as follows:
PARAGRAPH 1. AUTHORIZATION OF ISSUE OF NOTES.
1A. AUTHORIZATION OF ISSUES OF NOTES. To evidence the Company's
assumption of the obligations of CBI-Texas under the Original Notes pursuant to
paragraph 2A, the Company will authorize the issue of its ____% second priority
senior secured promissory notes in the aggregate principal amount of $8,900,000,
to be dated the date of issue thereof, to mature August 9, 2004, to bear
interest on the unpaid balance thereof from the date thereof until the principal
thereof shall have become due and payable at a rate of ____% per annum and on
overdue payments at the rate specified therein; such ____% second priority
senior secured promissory notes shall be substantially in the form of Exhibit A
attached hereto. The term "NOTES" as used herein shall include each such ____%
second priority senior secured promissory note delivered pursuant to any
provision of this Agreement and each such ____% senior secured promissory note
delivered in substitution or exchange for any other Note pursuant to any such
provision. Capitalized terms used herein have the meanings specified in
paragraph 10.
2
<PAGE> 9
PARAGRAPH 2. ASSUMPTION OF OBLIGATIONS; EXCHANGE OF NOTES.
2A. ASSUMPTION OF ORIGINAL NOTES AND OTHER OBLIGATIONS. Effective upon
the Date of Closing (as hereinafter defined), the Company hereby expressly
assumes the due and punctual payment of the principal of and interest on the
Original Notes, as amended, restated and replaced by the Notes, and the due and
punctual performance and observance of all of the covenants and conditions to be
performed and observed by CBI-Texas under (i) the Original Note Agreement, as
amended and restated hereby, and (ii) the other Original Note Documents, as each
may be amended and restated by a Second Priority Note Document executed and
delivered in connection herewith.
2B. EXCHANGE OF NOTES. To evidence the Company's assumption of such
obligations pursuant to paragraph 2A, the Company agrees to deliver to each
Existing Holder and, subject to the terms and conditions herein set forth, each
Existing Holder agrees to accept from the Company, the Notes set forth opposite
such Existing Holder's name in the Information Schedule attached hereto. The
Company will deliver to each Existing Holder, at the offices of Baker & Botts,
L.L.P. at 2001 Ross Avenue, Dallas, Texas 75201, one or more Notes registered in
such Existing Holder's name, evidencing the aggregate principal amount of Notes
to be delivered to such Existing Holder and in the denomination or denominations
specified with respect to each Existing Holder in the Information Schedule
attached hereto on the date of closing, which shall be ___________, 1998 or any
other date on or before _____________, 1998 upon which the Company and the
Existing Holders may mutually agree (the "CLOSING" or the "DATE OF CLOSING").
PARAGRAPH 3. CONDITIONS PRECEDENT.
3. CONDITIONS TO CLOSING. Each Existing Holder's obligation to accept
the Notes to be delivered to such Existing Holder hereunder is subject to the
satisfaction, on or before the Date of Closing, of the following conditions:
3A. CERTAIN DOCUMENTS. Each Existing Holder shall have
received the following, each dated the Date of Closing (unless a different date
is indicated below), and each in form, scope and substance satisfactory to such
Existing Holder:
(i) the Notes to be delivered to the Existing Holders, duly
executed and delivered by the Company;
(ii) a certified copy of the resolutions of the Board of
Directors of the Company approving each of the Second Priority Note
Documents to which it is a party, and certified copies of all documents
evidencing other necessary corporate action and governmental approvals,
if any, with respect to each of the Second Priority Note Documents to
which it is a party;
(iii) a certificate of the Secretary or an Assistant Secretary
of the Company certifying the names and true signatures of the officers
of the Company authorized to sign
3
<PAGE> 10
the Second Priority Note Documents to which it is a party and the
other documents to be delivered hereunder by the Company;
(iv) a certified copy of the Certificate of Incorporation
(certified by the Secretary of State of the State of Delaware) and
bylaws, each as amended to date, of the Company;
(v) the Guaranty, duly executed and delivered by CBH;
(vi) a certified copy of the resolutions of the Board of
Directors of CBH approving the Guaranty and each of the other Second
Priority Note Documents to which it is a party, and certified copies of
all documents evidencing other necessary corporate action and
governmental approvals, if any, with respect to the Guaranty and each
of the other Second Priority Note Documents to which it is a party;
(vii) a certificate of the Secretary or an Assistant Secretary
of CBH certifying the names and true signatures of the officers of CBH
authorized to sign the Guaranty and the other Second Priority Note
Documents to which it is a party and the other documents to be
delivered hereunder by CBH;
(viii) a certified copy of the Certificate of Incorporation
(certified by the Secretary of State of the State of Delaware) and
bylaws, each as amended to date, of CBH;
(ix) favorable opinions of Vedder, Price, Kaufman & Kammholz,
counsel to the Company and CBH, and Keith Staudt, General Counsel to
the Company and CBH, substantially in the form of Exhibit B-1 and
Exhibit B-2 attached hereto, respectively;
(x) a favorable opinion of Baker & Botts, L.L.P., who are
acting as special counsel for the Existing Holders in connection with
this transaction, as to such matters incident to the matters herein
contemplated as such Existing Holder may reasonably request;
(xi) reliance letters in respect of any other legal opinions
(such legal opinions to be in form, scope and substance satisfactory to
such Existing Holder) delivered in connection with the IPO, the Merger,
the Schoenke Acquisition and the other transactions related thereto
(provided that, with respect to the Schoenke Acquisition, the Company
shall not be required to deliver such reliance letters if, after
exercising its best efforts, it has been unable to obtain such reliance
letters);
(xii) certified copies of Requests for Information or Copies
(Form UCC-11) or equivalent reports listing all effective financing
statements which name the Company or any of the Schoenke Companies
(under any of their present names and any previous names) as debtor and
which are filed in all jurisdictions in which the Company or any of the
Schoenke Companies own property or conduct business, together with
copies of such financing statements;
4
<PAGE> 11
(xiii) the Collateral Agency Agreement, duly executed and
delivered by the Collateral Agent, the Company and the holder of the
Medium Term Note;
(xiv) the Perfection Certificate, duly executed and delivered
by the Company;
(xv) the Assignments of Life Insurance Policy, each duly
executed and delivered by the Company and W. T. Wamberg;
(xvi) an Officer's Certificate substantially in the form of
Exhibit C attached hereto, duly executed and delivered by each of CBH
and the Company;
(xvii) a certified copy of the Tax Indemnification Agreement,
duly executed and delivered by the Company and the shareholders of
CBI-Texas immediately prior to the consummation of the Merger, the
terms and conditions of which shall be in full force and effect and
shall not have been amended, modified or waived except with such
Existing Holder's prior written consent;
(xviii) a certified copy of the Wamberg Principal Office
Agreement, duly executed and delivered by the Company, W.T. Wamberg and
The Wamberg Organization, Inc., amended as provided in the Registration
Statement, the terms and conditions of which shall be in full force and
effect and shall not have been further amended, modified or waived
except with such Existing Holder's prior written consent;
(xix) certified copies of (a) each of the IPO Documents and
Merger Documents, the terms and conditions of which shall be in full
force and effect and shall not have been amended, modified or waived
except with such Existing Holder's prior written consent, and (b) (x)
the Schoenke Acquisition Agreement and any other Schoenke Acquisition
Documents executed and delivered by the parties thereto on or prior to
the Date of Closing, the terms and conditions of which shall be in full
force and effect and shall not have been amended, modified or waived
except with such Existing Holder's prior written consent, together with
(y) the most recent drafts of any Schoenke Acquisition Documents which
have not been executed and delivered by the parties thereto on or
before the Date of Closing;
(xx) copies of (a) (x) a pro forma balance sheet and pro forma
statements of income, changes in shareholders' equity and cash flow for
each of the Company and each division thereof for the fiscal year ended
December 31, 1997 (giving effect to the Schoenke Acquisition, the
Merger and the IPO) and (y) a pro forma balance sheet as at [JUNE 30,
1998] and pro forma statements of income, changes in shareholders'
equity and cash flow for the [SIX-MONTH] period ended on such date for
each of the Company and each division thereof (giving effect to the
Schoenke Acquisition, the Merger and the IPO), certified by an
authorized financial officer of the Company and (b) good-faith,
projected, pro forma financial statements (including, without
limitation, balance sheets and statements of income, changes in
shareholders' equity and cash flow) for each of the Company and each
division
5
<PAGE> 12
thereof for fiscal years 1998 through 2002 (giving effect to the
Schoenke Acquisition, the Merger and the IPO);
(xxi) the Security Documents, duly executed and delivered by
the Company;
(xxii) all Uniform Commercial Code financing statements deemed
necessary or appropriate by such Existing Holder to perfect and
maintain the priority of the Liens in favor of the Collateral Agent
arising under the Security Documents (as defined in the Original Note
Agreement), the Security Documents (as defined in this Agreement), duly
executed and delivered by the Company, to be recorded with the
appropriate filing offices;
(xxiii) certificates of insurance naming the Collateral Agent
as loss payee and the Collateral Agent and all holders of Notes as
additional insureds, as required by paragraph 5G; and
(xxiv) additional documents, lien and judgment searches,
certificates of officers of the Company and the Schoenke Companies,
certificates of public officials and opinions of counsel to the Company
and the Schoenke Companies with respect to legal matters or corporate
or other proceedings related to the transactions contemplated hereby or
by the Schoenke Acquisition, the Merger or the IPO as may be requested
by such Existing Holder.
3B. REPRESENTATIONS AND WARRANTIES; NO DEFAULT; NO MATERIAL ADVERSE
CHANGE. The representations and warranties contained in this Agreement, the
other Second Priority Note Documents, the Schoenke Acquisition Documents, the
Merger Documents and the IPO Documents shall be true on and as of the Date of
Closing, except to the extent of changes caused by the transactions herein
contemplated; there shall exist on the Date of Closing no Event of Default or
Default hereunder, and no Event of Default or Default under and as such terms
are defined in the Original Note Agreement shall have occurred and be continuing
immediately prior to the execution and delivery of this Agreement; there shall
exist or have occurred no condition, event or act which could have a material
adverse effect on the business, condition (financial or other), assets,
properties, operations or prospects of CBH and the Company, and CBH and the
Company shall each have delivered to such Existing Holder an Officer's
Certificate, dated the Date of Closing, to such effects.
3C. DELIVERY AND ACCEPTANCE PERMITTED BY APPLICABLE LAWS. The delivery
by the Company of, and the acceptance by such Existing Holder of, the Notes to
be delivered to such Existing Holder on the Date of Closing on the terms and
conditions herein provided shall not violate any applicable law or governmental
regulation (including, without limitation, section 5 of the Securities Act or
Regulation U or X of the Board of Governors of the Federal Reserve System) and
shall not subject such Existing Holder to any tax, penalty, liability or other
onerous condition under or pursuant to any applicable law or governmental
regulation, and such Existing Holder shall have received such certificates or
other evidence as it may request to establish compliance with this condition.
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3D. COMPLETION OF DUE DILIGENCE. The Company shall have completed its
due diligence investigation with respect to the business and assets of the
Schoenke Companies, and such Existing Holder shall have received such
information, analyses and documentation with respect thereto (including, without
limitation, the projected revenues of the Schoenke Companies and analyses
thereof (both historical and prospective) by geographical area, agent and office
and client or prospective client) as it may request.
3E. OTHER INFORMATION. Such Existing Holder shall have received all
documentation and information relating to the business, assets and capital
structure of CBH, the Company and the Schoenke Companies as it may reasonably
request, and such Existing Holder shall have had an opportunity to review such
documentation and information and discuss the same with the management of CBH,
the Company and the Schoenke Companies.
3F. RELATED PROCEEDINGS. All corporate and other proceedings taken or
to be taken in connection with (i) the Schoenke Acquisition, (ii) the Merger,
(iii) the IPO, (iv) the Company's execution and delivery to such Existing Holder
of the Senior Notes pursuant to the Senior Note Agreement and (v) the other
transactions contemplated hereby and thereby, and all documents incident
thereto, shall be satisfactory in form, scope and substance to such Existing
Holder (including, without limitation, the terms and conditions of any
promissory note payable by any of the Schoenke Companies or the Company to any
stockholder of any of the Schoenke Companies), and such Existing Holder shall
have received all such counterpart originals or certified or other copies of
such documents as it may reasonably request.
3G. CONSUMMATION OF MERGER. Such Existing Holder shall have received
satisfactory evidence that the Merger has been consummated prior to or
concurrently with the delivery of the Notes and the Senior Notes, pursuant to
and in accordance with the terms and conditions of the Merger Documents (no
terms thereof having been amended, supplemented, waived or otherwise modified
without such Existing Holder's prior written consent).
3H. CONSUMMATION OF IPO. Such Existing Holder shall have received
satisfactory evidence that (i) the IPO has been consummated on or before
December 31, 1998 and prior to or concurrently with the delivery of the Notes
and the Senior Notes, pursuant to and in accordance with the terms and
conditions of the IPO Documents (no terms thereof having been amended,
supplemented, waived or otherwise modified without such Existing Holder's prior
written consent), (ii) CBH has received net proceeds from the IPO (i.e., net of
underwriting discounts and commissions and net of expenses payable in connection
with the IPO) of at least $35,000,000, and (iii) CBH has contributed to the
Company as equity at least 95% of the net proceeds of the IPO.
3I. CONSUMMATION OF WARRANT PURCHASE. The Warrants owned and held by
such Existing Holder shall have been purchased from such Existing Holder upon
the terms and conditions set forth in the Warrant Purchase Agreement between
CBI-Texas and such Existing Holder.
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3J. TERMINATION OF SHAREHOLDERS' AGREEMENT. Such Existing Holder shall
have received satisfactory evidence that the Shareholders' Agreement has been
terminated prior to or concurrently with the delivery of the Notes.
3K. DELIVERY OF NOTES TO OTHER EXISTING HOLDERS. The Company shall have
delivered to the other Existing Holders the Notes to be accepted by them at the
Closing.
3L. PROCEEDINGS. All corporate and other proceedings taken or to be
taken in connection with the transactions contemplated hereby and all documents
incident thereto shall be satisfactory in substance and form to such Existing
Holder, and such Existing Holder shall have received all such counterpart
originals or certified or other copies of such documents as it may reasonably
request.
3M. ACCRUED INTEREST. Such Existing Holder shall have received payment
of all interest accrued on the Original Note held by it from and including the
last date on which interest on such Original Note was paid through but not
including the Closing Date.
3N. FEES. Without limiting the provisions of paragraph 11B, such
Existing Holder's special counsel shall have received its fees, charges and
disbursements to the extent reflected in a statement of such special counsel
rendered to the Company at least one Business Day prior to the Closing.
PARAGRAPH 4. PREPAYMENTS.
4. PREPAYMENTS. The Notes shall be subject to prepayment only with
respect to the prepayments specified in paragraphs 4A, 4B and 4C.
4A. REQUIRED PREPAYMENTS. Until the Notes shall be paid in full, the
Company shall apply to the prepayment of the Notes, without premium, the sum of
$2,967,000 on August 9th in each of the years 2002 and 2003, and such principal
amounts of the Notes, together with interest thereon to the prepayment dates,
shall become due on such prepayment dates. The remaining outstanding principal
amount of the Notes, together with interest accrued thereon, shall become due on
the maturity date of the Notes.
4B. OPTIONAL PREPAYMENT OF NOTES.
(i) The Notes shall be subject to prepayment, without premium, in
whole at any time or from time to time in part (in integral multiples
of $600,000), at the option of the Company, at 100% of the principal
amount so prepaid plus interest thereon to the prepayment date. Any
partial prepayment of the Notes pursuant to this paragraph 4B shall be
applied in satisfaction of required payments of principal in inverse
order of their scheduled due dates.
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(ii) The Company shall give the holder of each Note
irrevocable written notice of any prepayment pursuant to this paragraph
4B not less than ten Business Days prior to the prepayment date,
specifying such prepayment date and the principal amount of the Notes,
and of the Notes held by such holder, to be prepaid on such date.
Notice of prepayment having been given as aforesaid, the principal
amount of the Notes specified in such notice, together with interest
thereon to the prepayment date, shall become due and payable on such
prepayment date. The Company shall, on or before the day on which it
gives written notice of any prepayment pursuant to this paragraph 4B,
give telephonic notice of the principal amount of the Notes to be
prepaid and the prepayment date to each holder which shall have
designated a recipient of such notices in the Information Schedule
attached hereto or by notice in writing to the Company.
4C. OFFER TO PREPAY NOTES IN THE EVENT OF A CHANGE IN CONTROL OR
A REVENUE MAINTENANCE EVENT.
(i) Notice of Impending Change in Control. The Company will
not take any action that consummates or finalizes a Change in Control
unless at least 30 days prior to such action it shall have given to
each holder of Notes written notice of such impending Change in
Control.
(ii) Notice of Occurrence of Change in Control or Revenue
Maintenance Event. The Company will, within five Business Days after
any Responsible Officer has knowledge of the occurrence of any Change
in Control or Revenue Maintenance Event, give written notice of such
Change in Control or such Revenue Maintenance Event to each holder of
Notes. If a Change in Control or Revenue Maintenance Event has
occurred, such notice shall contain and constitute an offer to prepay
the Notes as described in clause (iii) of this paragraph 4C and shall
be accompanied by the certificate described in clause (vi) hereof.
(iii) Offer to Prepay Notes. The offer to prepay Notes
contemplated by the foregoing clause (ii) shall be an offer to prepay,
in accordance with and subject to this paragraph 4C, all, but not less
than all, the Notes held by each holder (in this case only, "HOLDER" in
respect of any Note registered in the name of a nominee for a disclosed
beneficial owner shall mean such beneficial owner) on a date specified
in such offer (the "PROPOSED PREPAYMENT DATE"). Such Proposed
Prepayment Date shall be not less than 30 days and not more than 60
days after the date of such offer (if the Proposed Prepayment Date
shall not be specified in such offer, the Proposed Prepayment Date
shall be the 30th day after the date of such offer).
(iv) Rejection; Acceptance. A holder of Notes may accept the
offer to prepay made pursuant to this paragraph 4C by causing a notice
of such acceptance to be delivered to the Company at least five days
prior to the Proposed Prepayment Date. A failure by a holder of Notes
to respond to an offer to prepay made pursuant to this paragraph 4C
shall be deemed to constitute an acceptance of such offer by such
holder.
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(v) Prepayment; Reduction of Required Prepayments. Prepayment
of the Notes to be prepaid pursuant to this paragraph 4C shall be at
100% of the principal amount of such Notes, together with interest on
such Notes accrued to the date of prepayment. The prepayment shall be
made on the Proposed Prepayment Date. Upon any partial prepayment of
Notes pursuant to this paragraph 4C, the principal amount of the
required prepayment of the Notes becoming due under paragraph 4A on or
after the date of such prepayment shall be reduced in the same
proportion as the aggregate unpaid principal amount of Notes is reduced
as a result of such prepayment.
(vi) Officer's Certificate. Each offer to prepay the Notes
pursuant to this paragraph 4C shall be accompanied by a certificate,
executed by a Responsible Officer of the Company and dated the date of
such offer, specifying: (a) the Proposed Prepayment Date; (b) that such
offer is made pursuant to this paragraph 4C; (c) the principal amount
of each Note offered to be prepaid; (d) the interest that would be due
on each Note offered to be prepaid, accrued to the Proposed Prepayment
Date; (e) that the conditions of this paragraph 4C have been fulfilled;
and (f) in reasonable detail, the nature and date of the Change in
Control or Revenue Maintenance Event, as the case may be.
4D. PARTIAL PAYMENTS PRO RATA. Upon any partial prepayment of Notes
pursuant to paragraph 4A or 4B, the principal amount so prepaid shall be
allocated to all Notes at the time outstanding (including, for the purpose of
this paragraph 4D only, all such Notes prepaid or otherwise retired or purchased
or otherwise acquired by the Company or any of its Subsidiaries or Affiliates
other than by prepayment pursuant to paragraph 4A, 4B or 4C) in proportion to
the respective outstanding principal amounts thereof. Upon any partial
prepayment of Notes pursuant to paragraph 4C, the principal amount so prepaid
shall be allocated to all Notes at the time outstanding and held by holders who
have accepted the Company's offer of prepayment made pursuant to paragraph 4C
(including, for the purpose of this paragraph 4D only, all such Notes prepaid or
otherwise retired or purchased or otherwise acquired by the Company or any of
its Subsidiaries or Affiliates other than by prepayment pursuant to paragraph
4A, 4B or 4C) in proportion to the respective outstanding principal amounts
thereof.
4E. RETIREMENT OF NOTES. The Company shall not, and shall not permit
any of its Subsidiaries or Affiliates to, prepay or otherwise retire in whole or
in part prior to their stated final maturity (other than by prepayment pursuant
to paragraph 4A, 4B or 4C or upon acceleration of such final maturity pursuant
to paragraph 7A), or purchase or otherwise acquire, directly or indirectly,
Notes held by any holder unless the Company or such Subsidiary or Affiliate
shall have offered to prepay or otherwise retire or purchase or otherwise
acquire, as the case may be, the same proportion of the aggregate principal
amount of Notes held by each other holder of Notes at the time outstanding upon
the same terms and conditions. Any Notes so prepaid or otherwise retired or
purchased or otherwise acquired by the Company or any of its Subsidiaries or
Affiliates shall not be deemed to be outstanding for any purpose under this
Agreement, except as provided in paragraph 4D.
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PARAGRAPH 5. AFFIRMATIVE COVENANTS.
5. AFFIRMATIVE COVENANTS.
So long as any Note shall remain unpaid the Company covenants that:
5A(1). INFORMATION AS TO COMPANY. The Company will deliver to each
holder of Notes that is an Institutional Investor:
(i) Quarterly Statements -- within 60 days after the end of
each quarterly fiscal period in each fiscal year of the Company (other
than the last quarterly fiscal period of each such fiscal year),
duplicate copies of:
(a) a consolidating and consolidated balance sheet of the
Company and its Subsidiaries as at the end of such quarter, and
(b) consolidating and consolidated statements of income,
changes in stockholders' equity and cash flows of the Company
and its Subsidiaries for such quarter and (in the case of the
second and third quarters) for the portion of the fiscal year
ending with such quarter,
setting forth in each case in comparative form the figures for the
corresponding periods in the previous fiscal year, all in reasonable
detail, prepared in accordance with GAAP applicable to quarterly
financial statements generally, and certified by a Senior Financial
Officer of the Company as fairly presenting, in all material respects,
the financial position of the companies being reported on and their
results of operations and cash flows, subject to changes resulting from
year-end adjustments;
(ii) Annual Statements -- within 105 days after the end of
each fiscal year of the Company, duplicate copies of:
(a) a consolidating and consolidated balance sheet of the
Company and its Subsidiaries as at the end of such year, and
(b) consolidating and consolidated statements of income,
changes in shareholders' equity and cash flows of the Company
and its Subsidiaries for such year,
setting forth in each case in comparative form the figures for the
previous fiscal year, all in reasonable detail, prepared in accordance
with GAAP and, (x) as to the consolidating statements, certified by a
Senior Financial Officer of the Company as fairly presenting, in all
material respects, the financial position of the companies being
reported on and their results of operations and cash flows and, (y) as
to the consolidated statements, accompanied
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(A) by an opinion of the Independent Accountant,
which opinion shall state that such financial statements
present fairly, in all material respects, the financial
position of the companies being reported upon and their
results of operations and cash flows and have been prepared in
conformity with GAAP, and that the examination of such
accountants in connection with such financial statements has
been made in accordance with generally accepted auditing
standards, and that such audit provides a reasonable basis for
such opinion in the circumstances, and
(B) a certificate of the Independent Accountant
stating that they have reviewed this Agreement and stating
further whether, in making their audit, they have become aware
of any condition or event that then constitutes a Default or
an Event of Default, and, if they are aware that any such
condition or event then exists, specifying the nature and
period of the existence thereof (it being understood that such
accountants shall not be liable, directly or indirectly, for
any failure to obtain knowledge of any Default or Event of
Default unless such accountants should have obtained knowledge
thereof in making an audit in accordance with generally
accepted auditing standards or did not make such an audit);
(iii) SEC and Other Reports -- promptly upon their becoming
available, one copy of (i) each financial statement, report, notice or
proxy statement sent by the Company or any of its Subsidiaries to
public securities holders generally, and (ii) each regular or periodic
report, each registration statement (without exhibits except as
expressly requested by such holder), and each prospectus and all
amendments thereto filed by the Company or any of its Subsidiaries with
the Securities and Exchange Commission and of all press releases and
other statements made available generally by the Company or any of its
Subsidiaries to the public concerning developments that are material;
(iv) Notice of Default or Event of Default -- promptly, and in
any event within five days after a Responsible Officer becoming aware
of the existence of any Default or Event of Default or that any Person
has given any notice or taken any action with respect to a claimed
default hereunder or that any Person has given any notice or taken any
action with respect to a claimed default of the type referred to in
clause (iii) of paragraph 7A, a written notice specifying the nature
and period of existence thereof and what action the Company is taking
or proposes to take with respect thereto;
(v) ERISA Matters -- promptly, and in any event within five
days after a Responsible Officer becoming aware of any of the
following, a written notice setting forth the nature thereof and the
action, if any, that the Company or an ERISA Affiliate proposes to take
with respect thereto:
(a) with respect to any Plan, any reportable event,
as defined in sec tion 4043(b) of ERISA and the regulations
thereunder, for which notice thereof has not been waived
pursuant to such regulations as in effect on the date hereof;
or
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(b) the taking by the PBGC of steps to institute, or
the threatening by the PBGC of the institution of, proceedings
under section 4042 of ERISA for the termi nation of, or the
appointment of a trustee to administer, any Plan, or the
receipt by the Company or any ERISA Affiliate of a notice from
a Multiemployer Plan that such action has been taken by the
PBGC with respect to such Multiemployer Plan; or
(c) any event, transaction or condition that could
result in the incurrence of any liability by the Company or
any ERISA Affiliate pursuant to Title I or IV of ERISA or the
penalty or excise tax provisions of the Code relating to
employee benefit plans, or in the imposition of any Lien on
any of the rights, properties or assets of the Company or any
ERISA Affiliate pursuant to Title I or IV of ERISA or such
penalty or excise tax provisions, if such liability or Lien,
taken together with any other such liabilities or Liens then
existing, could reasonably be expected to have a material
adverse effect on Company or any of its Subsidiaries;
(vi) Notices from Governmental Authority -- promptly, and in
any event within 15 days of receipt thereof, copies of any notice to
the Company or any of its Subsidiaries from any federal or state
Governmental Authority relating to any order, ruling, statute or other
law or regulation that could reasonably be expected to have a material
adverse effect on the Company or any of its Subsidiaries;
(vii) Projections -- as soon as practicable and in any event
within 105 days after the end of each fiscal year, good faith,
projected consolidating and consolidated balance sheets and good faith,
projected consolidating and consolidated statements of income, cash
flows and stockholders' equity of the Company and its Subsidiaries as
at the end of each of the next five fiscal years, all in reasonable
detail (including, without limitation, a breakdown by each division of
the Company and its Subsidiaries and an enumeration of the assumptions
underlying such balance sheets and financial statements) and
substantially in the form of the projections delivered pursuant to
paragraph 3A(xx)(b), certified by an authorized financial officer of
the Company (such certification to contain, among other things, a
representation and warranty that such projected financial statements
are reasonable based on the assumptions stated therein and the best
information available to the officers of the Company);
(viii) Commission Reports -- as soon as practicable and in any
event within 30 days after the end of each fiscal quarter, commission
renewal reports and reports detailing the composition of the Commission
Fees of the Company and its Subsidiaries (in form, scope and substance
substantially the same as those delivered under and pursuant to
paragraph 5A of the Original Note Agreement) for or as of, as the case
may be, such quarter, certified by an authorized financial officer of
the Company, all in reasonable detail and satisfactory in form, scope
and substance to the Required Holder(s);
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(ix) Other Information -- with reasonable promptness, accounts
receivable reports, business reports and policy cancellation reports of
the Company and its Subsidiaries for or as of, as the case may be, any
fiscal quarter, certified by an authorized financial officer of the
Company, as from time to time may be requested by any holder of Notes,
all in reasonable detail and satisfactory in form, scope and substance
to such holder of Notes; and
(x) Requested Information -- with reasonable promptness, such
other data and information relating to the business, operations,
affairs, financial condition, assets or properties of the Company or
any of its Subsidiaries or relating to the ability of the Company or
any of its Subsidiaries to perform its obligations hereunder, under the
Notes or under any of the other Second Priority Note Documents to which
it is a party, as applicable, as from time to time may be reasonably
requested by any such holder of Notes.
5A(2). OFFICER'S CERTIFICATE. Each set of financial statements
delivered to a holder of Notes pursuant to clause (i) or (ii) of paragraph 5A(1)
shall be accompanied by a certificate of a Senior Financial Officer setting
forth:
(i) Covenant Compliance -- the information (including detailed
calculations) required in order to establish whether the Company was in
compliance with the requirements of paragraphs 6A, 6B, 6C, 6D, 6E, 6F,
6G(2) and 6S, inclusive, during the quarterly or annual period covered
by the statements then being furnished (including with respect to each
such paragraph, where applicable, the calculations of the maximum or
minimum amount, ratio or percentage, as the case may be, permissible
under the terms of such paragraphs, and the calculation of the amount,
ratio or percentage then in existence), set forth in a Compliance
Certificate substantially in the form of Exhibit D attached hereto; and
(ii) Event of Default -- a statement that such officer has
reviewed the relevant terms hereof and has made, or caused to be made,
under his or her supervision, a review of the transactions and
conditions of the Company and its Subsidiaries from the beginning of
the quarterly or annual period covered by the statements then being
furnished to the date of the certificate and that such review shall not
have disclosed the existence during such period of any condition or
event that constitutes a Default or an Event of Default or, if any such
condition or event existed or exists (including, without limitation,
any such event or condition resulting from the failure of the Company
or any Subsidiary to comply with any Environmental Law), specifying the
nature and period of existence thereof and what action the Company
shall have taken or proposes to take with respect thereto.
5B. INFORMATION REQUIRED BY RULE 144A. The Company will, upon the
request of the holder of any Note, provide such holder, and any Qualified
Institutional Buyer designated by such holder, such financial and other
information as such holder may reasonably determine to be necessary in order to
permit compliance with the information requirements of Rule 144A under the
Securities Act in connection with the resale of Notes, except at such times as
the Company is subject to the reporting requirements of section 13 or 15(d) of
the Exchange Act.
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5C. INSPECTION. The Company shall permit the representatives of
each holder of Notes that is an Institutional Investor:
(i) No Default -- if no Default or Event of Default then
exists, at the expense of such holder and upon reasonable prior notice
to the Company, to visit the principal executive office of the Company,
to discuss the affairs, finances and accounts of the Company and its
Subsidiaries with the Company's officers, and (with the consent of the
Company, which consent will not be unreasonably withheld) its
independent public accountants, and (with the consent of the Company,
which consent will not be unreasonably withheld) to visit the other
offices and properties of the Company and each Subsidiary, all at such
reasonable times and as often as may be reasonably requested in
writing; and
(ii) Default -- if a Default or Event of Default then exists,
at the expense of the Company to visit and inspect any of the offices
or properties of the Company or any Subsidiary, to examine all their
respective books of account, records, reports and other papers, to make
copies and extracts therefrom, and to discuss their respective affairs,
finances and accounts with their respective officers and independent
public accountants (and by this provision the Company authorizes said
accountants to discuss the affairs, finances and accounts of the
Company and its Subsidiaries), all at such times and as often as may be
requested.
5D. COVENANT TO SECURE NOTES EQUALLY. The Company will, if it or any
Subsidiary shall create or assume any Lien upon any of its property or assets,
whether now owned or hereafter acquired, other than Liens permitted by the
provisions of paragraph 6G(1) (unless prior written consent to the creation or
assumption thereof shall have been obtained pursuant to paragraph 11C), make or
cause to be made effective provision whereby the Notes will be secured by such
Lien equally and ratably with any and all other Indebtedness thereby secured so
long as any such other Indebtedness shall be so secured pursuant to such
agreements and instruments as shall be approved by the Required Holder(s), and
the Company will cause to be delivered to the holder of each Note an opinion of
independent counsel to the effect that such agreements and instruments are
enforceable in accordance with their terms and that the Notes are equally and
ratably secured with such other Indebtedness.
5E. CORPORATE EXISTENCE, LICENSES AND PERMITS; MAINTENANCE OF
PROPERTIES. The Company will at all times do or cause to be done all things
necessary to maintain, preserve and renew its existence as a corporation
organized under the laws of a state of the United States of America, will
preserve and keep in force and effect, and cause each of its Subsidiaries to
preserve and keep in force and effect, all licenses and permits necessary to the
conduct of its and their respective businesses and will maintain and keep, and
will cause each of its Subsidiaries to maintain and keep, its and their
respective properties in good repair, working order and condition, and from time
to time make all necessary and proper repairs, renewals and replacements, so
that the business
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carried on in connection therewith may be properly and advantageously conducted
at all times in the normal course of business as conducted prior to the date of
repair; provided, however, that nothing contained in this paragraph 5E shall
prevent the Company or any Subsidiary from ceasing or omitting to exercise any
right, license or permit or to make any repair, renewal or replacement that (i)
in the reasonable judgment of the Company or such Subsidiary is no longer in the
best interests of the Company or such Subsidiary and (ii) such cessation or
omission could not reasonably be expected to result in a material adverse effect
on the business, condition (financial or other), assets, properties, operations
or prospects of the Company and its Subsidiaries taken as a whole.
5F. MAINTENANCE OF MATERIAL CONTRACTS. The Company will, and will
causes its Subsidiaries to, maintain all contracts necessary to the conduct of
its and their respective businesses (including, without limitation, employment
contracts, non-competition agreements and principal office agreements);
provided, however, that nothing contained in this paragraph 5F shall prevent the
Company or any Subsidiary from terminating any contract that (i) in the
reasonable judgment of the Company or such Subsidiary is no longer in the best
interests of the Company or such Subsidiary and (ii) such termination could not
reasonably be expected to result in a material adverse effect on the business,
condition (financial or other), assets, properties, operations or prospects of
the Company and its Subsidiaries taken as a whole.
5G. MAINTENANCE OF INSURANCE. The Company will carry and maintain, and
cause each Subsidiary to carry and maintain, insurance (subject to customary
deductibles and retentions) in at least such amounts and against such
liabilities and hazards and by such methods as customarily maintained by other
companies operating similar businesses. The Collateral Agent and all holders of
Notes shall be named as additional insureds, and the Collateral Agent shall be
named as loss payee, on each insurance policy obtained or maintained by the
Company and its Subsidiaries with respect to their properties and businesses.
5H. PAYMENT OF TAXES AND OTHER CLAIMS. The Company will and will cause
each of its Subsidiaries to file all income tax or similar tax returns required
to be filed in any jurisdiction and to pay and discharge all taxes shown to be
due and payable on such returns and all other taxes, assessments, governmental
charges, levies, trade accounts payable and claims for work, labor or materials
(all the foregoing being referred to collectively as "CLAIMS") payable by any of
them, to the extent such Claims have become due and payable and before they have
become delinquent; provided that neither the Company nor any Subsidiary need pay
any Claim if (i) the amount, applicability or validity thereof is contested by
the Company or such Subsidiary on a timely basis in good faith and in
appropriate proceedings, and the Company or a Subsidiary has established
adequate reserves therefor to the extent required by GAAP on the books of the
Company or such Subsidiary or (ii) the nonpayment of all such Claims in the
aggregate could not result in a material adverse change in the business,
condition (financial or other), assets, properties, operations or prospects of
the Company and its Subsidiaries taken as a whole.
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5I. ERISA COMPLIANCE. The Company will, and will cause each ERISA
Affiliate to, at all times:
(i) with respect to each Plan, make timely payments of
contributions required to meet the minimum funding standard set forth
in ERISA or the Code with respect thereto and, with respect to any
Multiemployer Plan, make timely payment of contributions required to be
paid thereto as provided by Section 515 of ERISA, and
(ii) comply with all other provisions of ERISA,
except for such failures to make contributions and failures to comply as could
not have a material adverse effect on the business, condition (financial or
other), assets, properties, operations or prospects of the Company and its
Subsidiaries taken as a whole.
5J. COMPLIANCE WITH LAWS. The Company will comply, and will cause each
of its Subsidiaries to comply, with all applicable laws, rules, regulations and
orders (including those relating to protection of the environment) except, in
any such case, where failure to comply could not have a material adverse effect
on the business, condition (financial or otherwise), operations or prospects of
the Company and its Subsidiaries taken as a whole.
5K. COLLATERAL. The Company shall execute, and shall cause its
Subsidiaries to execute, any and all documents, financing statements, agreements
and instruments, and take all action (including filing Uniform Commercial Code
and other financing statements, mortgages and deeds of trust), that may be
required under applicable law, or which the Required Holder(s) or the Collateral
Agent may reasonably request in order to effectuate the transactions
contemplated by the Second Priority Note Documents and in order to grant,
preserve, protect, maintain and perfect the validity and priority of the
security interests and Liens created or purported to be created by the Security
Documents (as defined in the Original Note Agreement) or the Security Documents
(as defined in this Agreement) (it being understood that it is the intent of the
parties that the obligations of the Company and its Subsidiaries under the
Second Priority Note Documents shall be secured by, among other things,
substantially all the property and assets of the Company and its Subsidiaries
(now or hereafter acquired or created), including, without limitation, real and
other properties acquired subsequent to the Date of Closing, but excluding
certain commissions, fees and the proceeds thereof earned or to be earned by the
Company, as more particularly identified in the Security Agreement [I.E., ALL
PROPERTY AND ASSETS OF THE COMPANY EXCEPT RIGHTS OF THE COMPANY UNDER AGREEMENTS
RELATING TO THE PAYMENT OF COMMISSIONS AND FEES, AND THE PROCEEDS THEREOF, (I)
IN RESPECT OF RENEWAL COMMISSIONS AND FEES WITH RESPECT TO PLANS AND POLICIES
SOLD BY (A) THE BCS DIVISION OF THE COMPANY PRIOR TO THE DATE THE IPO IS
CONSUMMATED OR (B) THE SCHOENKE COMPANIES PRIOR TO THE ACQUISITION BY THE
COMPANY OF THE SCHOENKE COMPANIES (IT BEING UNDERSTOOD THAT NEW PLANS AND
POLICIES SOLD AFTER THE CONSUMMATION OF THE IPO BY THE BCS DIVISION OF THE
COMPANY AND NEW PLANS AND POLICIES SOLD AFTER THE ACQUISITION OF THE SCHOENKE
COMPANIES BY THAT PORTION OF THE COMPANY'S BUSINESS THAT FORMERLY CONSISTED OF
THE SCHOENKE COMPANIES SHALL BOTH CONSTITUTE A PORTION OF YOUR SECURITY) AND
(II) COMMISSIONS, FEES AND THE
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<PAGE> 24
PROCEEDS THEREOF ARISING FROM BUSINESSES ACQUIRED AFTER THE CONSUMMATION OF THE
IPO, WHICH SHALL NOT CONSTITUTE COLLATERAL]), including, without limitation,
effecting such arrangements which may be appropriate or necessary, or which the
Required Holder(s) or the Collateral Agent may reasonably require, to minimize
commingling, intercreditor issues and other impediments to the enforcement of
the rights and remedies of the holders of Notes. The Company agrees to provide
from time to time such evidence as the Required Holder(s) or the Collateral
Agent shall request as to the perfection and priority status of each such
security interest and Lien. The Company further agrees to maintain a system of
accounting and books and records reasonably satisfactory to the Required
Holder(s) which will permit the ready identification of Collateral.
5L. PERFORMANCE OF OBLIGATIONS. The Company will pay the Notes
according to the reading, tenor and effect thereof. The Company will, and will
cause its Subsidiaries to, do and perform every act and discharge all of the
obligations provided to be performed and discharged by the Company or such
Subsidiary, as the case may be, under the Second Priority Note Documents to
which it is a party (including, without limitation, this Agreement) at the time
or times and in the manner specified.
5M. MAINTENANCE OF KEY SALES FORCE. The Company will maintain, at all
times, a full time sales force equal to the greater of twenty individuals and
80% of the number of sales representatives and agents as of the end of the
immediately preceding fiscal year.
5N. PLEDGE OF NOTES PAYABLE. The Company will, and will cause its
Subsidiaries to, promptly deliver to the Collateral Agent pursuant to the
Security Documents all promissory notes payable to the Company or any of its
Subsidiaries, together with any necessary endorsements or instruments of
transfer, other than promissory notes in an aggregate principal amount, at any
time, not to exceed $2,000,000.
5O. MAINTENANCE OF KEY MAN LIFE INSURANCE POLICIES. The Company shall
maintain in full force and effect at all times policies of insurance in such
form and issued by such financially sound and reputable insurers rated at least
A by A.M. Best as shall be acceptable to the Required Holder(s) insuring the
life of W.T. Wamberg in an aggregate amount equal to $15,000,000. Such policies
of insurance shall name the Company as beneficiary and shall be collaterally
assigned to the Collateral Agent.
5P. CREATION AND MAINTENANCE OF WORKING CAPITAL FACILITY. On or before
March 31, 1999, the Company will enter into a revolving working capital facility
upon terms and conditions and pursuant to documentation in all respects
satisfactory to the holders of the Notes, provided that (i) the aggregate
committed amount of the lender or lenders under such facility shall at all times
be at least $3,000,000, (ii) the aggregate principal amount of the Indebtedness
outstanding under such facility may not at any time exceed $15,000,000, (iii)
such Indebtedness may not mature later than three years after the creation of
such facility, (iv) up to $3,000,000 of such Indebtedness may be secured by the
Collateral as provided in the Security Documents, and (v) such Indebtedness
shall be subject to the requirements of paragraph 6G(3). Subject to the
restrictions contained in this
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<PAGE> 25
Agreement and the other Second Priority Note Documents, the Company will at all
times maintain such revolving working credit facility and will maintain its
ability to satisfy all conditions precedent to its ability to obtain advances
thereunder.
5Q. MATTERS RELATED TO QUALIFICATION AND LICENSURE. If the Company is
in any way unable to qualify to do business and be licensed as a "life insurance
agent" or similar entity under the laws of any state in which it desires to
conduct business (whether because of restrictions upon having corporate
shareholders or otherwise), it will take all necessary steps to create, or cause
the creation of, an Affiliate that is qualified and licensed under the laws
(including the insurance code or other similar statute) of such state and will
enter into and maintain in effect a management and service agreement or similar
arrangement between itself and the Affiliate (which shall comply with paragraph
6G(8)) under which the net revenues of the Affiliate are paid to the Company in
consideration for services, administration and other maintenance activities
related to the business of the Affiliate.
PARAGRAPH 6. NEGATIVE COVENANTS.
6. NEGATIVE COVENANTS. So long as any Note shall remain unpaid the
Company covenants that:
6A. TOTAL DEBT TO ANNUALIZED CASH FLOW RATIO. The Company will not
permit the ratio of Total Debt to Annualized Cash Flow at any time during any
period specified below to exceed the ratio set forth opposite such period:
<TABLE>
<CAPTION>
Period Ratio
------ -----
<S> <C>
From the Date of Closing through and 5.0 to 1.0
including December 31, 1998
From January 1, 1999 through and 4.0 to 1.0
including December 31, 1999
and thereafter 3.0 to 1.0
</TABLE>
6B. LIMITATION ON RESTRICTED PAYMENTS. The Company will not and will
not permit any Subsidiary to directly or indirectly declare, order, pay, make or
set apart any sum for any Restricted Payment unless immediately after giving
effect to such action:
(i) the aggregate amount of Restricted Payments of the Company
and its Subsidiaries declared or made during the period commencing on
[JULY 1, 1998] and ending on the date such Restricted Payment is
declared or made, inclusive, would not exceed the sum of (a) $1,000,000
plus (b) 20% of Consolidated Net Income for such period (or minus 100%
of Consolidated Net Income for such period if Consolidated Net Income
for such period is a loss); and
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<PAGE> 26
(ii) no Default or Event of Default would exist.
6C. MAINTENANCE OF MINIMUM CONSOLIDATED NET WORTH AND CONSOLIDATED
NET INCOME.
(i) The Company will not permit, at any time, Consolidated Net
Worth to be less than the sum of (a) $1,500,000 and (b) an aggregate
amount equal to 80% of its Consolidated Net Income (on an after-tax
basis, but only if a positive number) for each completed fiscal year
beginning with the fiscal year ending December 31, 1998.
(ii) The Company will not, for any fiscal quarter, permit
Consolidated Net Income to be a negative number the absolute value of
which exceeds $1,200,000 and will not, for the four most recently ended
fiscal quarters, permit Consolidated Net Income to be a negative
number.
6D. DISCOUNTED COMMISSION FEES TO TOTAL DEBT RATIO. The Company will
not permit, at any time, the ratio of Discounted Commission Fees to Total Debt
to be less than 1.0 to 1.0.
6E. INTEREST COVERAGE RATIO. The Company will not permit the Interest
Coverage Ratio at any time during any period specified below to be less than the
ratio set forth opposite such period:
<TABLE>
<CAPTION>
Period Ratio
------ -----
<S> <C>
From the Date of Closing through and 1.25 to 1.0
including December 31, 1998
From January 1, 1999 through and including 1.60 to 1.0
December 31, 1999
and thereafter 2.0 to 1.0
</TABLE>
6F. FIXED CHARGE COVERAGE RATIO. The Company will not permit the Fixed
Charge Coverage Ratio at any time during any period specified below to be less
than the ratio set forth opposite such period:
<TABLE>
<CAPTION>
Period Ratio
------ -----
<S> <C>
From the Date of Closing through and .90 to 1.0
including December 31, 1999
From January 1, 2000 through and 1.10 to 1.0
including December 31, 2000
and thereafter 1.25 to 1.0
</TABLE>
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<PAGE> 27
6G. LIENS, INDEBTEDNESS, AND OTHER RESTRICTIONS. The Company
will not and will not permit any Subsidiary to:
6G(1). LIENS. Create, assume or suffer to exist (upon the
happening of a contingency or otherwise) any Lien upon any of its
properties or assets (including, without limitation, any documents or
instruments in respect of goods or accounts receivable), whether now
owned or hereafter acquired, or any income or profits therefrom
(whether or not provision is made for the equal and ratable securing of
the Notes in accordance with the provisions of paragraph 5D) or assign
or otherwise convey any right to receive income or profits therefrom,
except:
(i) Liens in favor of the Collateral Agent securing
the Indebtedness evidenced by the Notes and the payment,
performance and observance of the other obligations under
this Agreement and the other Second Priority Note Documents;
(ii) Liens in favor of the Collateral Agent securing
the Indebtedness evidenced by the Medium Term Note and
addressed in the Security Documents;
(iii) Liens in favor of the Collateral Agent securing
the Indebtedness evidenced by the Senior Notes and the
payment, performance and observance of the other obligations
under the Senior Note Agreement and the other Senior Note
Documents and addressed in the Security Documents;
(iv) Liens in favor of the Collateral Agent securing
up to $3,000,000 of the Indebtedness evidenced by the Working
Capital Notes;
(v) Liens created to secure Indebtedness incurred by
the Company to finance Permitted Acquisitions, provided that
(a) such Liens shall be created substantially simultaneously
with any such Permitted Acquisition and (b) such Liens do not
at any time encumber any property or assets other than the
property or assets acquired in connection with such Permitted
Acquisition;
(vi) Liens created to secure other Indebtedness of the
Company permitted under this Agreement, provided that such
Liens shall not attach to or encumber any of the Collateral;
and
(vii) Liens incidental to the conduct of business or
the ownership of properties of the Company and its
Subsidiaries (including Liens in connection with worker's
compensation, unemployment insurance and other like laws
(other than ERISA Liens), warehousemen's and mechanic's liens
and statutory landlord's liens) and Liens to secure the
performance of bids, tenders or purchase, construction or
sales contracts, or to secure statutory obligations, property
taxes and assessments or governmental charges, surety or
appeal bonds or other Liens of like general nature
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<PAGE> 28
which in each case are incurred in the ordinary course of
business and not in connection with the borrowing of money,
the obtaining of advances or credit or the payment of the
deferred purchase price of property and which do not in any
event materially impair the value or use of the property
encumbered thereby in the operation of the business of the
Company and its Subsidiaries; provided in each case, that the
obligation secured is not overdue, or, if overdue, the amount
or validity thereof is being contested by the Company or such
Subsidiary on a timely basis in good faith and in appropriate
proceedings, and the Company or a Subsidiary has established
adequate reserves therefor to the extent required by GAAP on
the books of the Company or such Subsidiary;
6G(2). LIMITATION ON INCURRENCE OF INDEBTEDNESS. Create,
incur, assume, guarantee or otherwise become directly or indirectly
liable with respect to any Indebtedness, whether incurred pursuant to
the Working Capital Note Documents, incurred or assumed in connection
with a Permitted Acquisition, or otherwise, unless on the date the
Company or such Subsidiary becomes liable with respect to any such
Indebtedness and immediately after giving effect thereto and to the
concurrent retirement of any other Indebtedness, (i) no Default or
Event of Default exists and (ii) the Capitalization Ratio does not
exceed 0.50 to 1.00.
6G(3). CLEAN-UP OF INDEBTEDNESS REPRESENTED BY WORKING
CAPITAL NOTES. Have, at any time, any Indebtedness outstanding under
the Working Capital Notes unless there shall have been during the
immediately preceding twelve months a period of at least 45 consecutive
days during which there shall have been no Indebtedness outstanding
under the Working Capital Notes.
6G(4). LOANS, ADVANCES, INVESTMENTS AND CONTINGENT
LIABILITIES. Except as set forth on Schedule 6G(4), make or permit to
remain outstanding any loan or advance (including, without limitation,
advances of commission fees) to, or extend credit (other than trade
credit extended in the normal course of business to any Person that is
not a Subsidiary of the Company) to, or make or permit to remain
outstanding any Guarantee in connection with the obligations, stock or
dividends of, or own, purchase or acquire any stock, obligations or
securities of, or any other interest in, or make any capital
contribution to, any Person (any of the foregoing, an "INVESTMENT"),
except that the Company or any Subsidiary may:
(i) endorse negotiable instruments for collection in
the ordinary course of business;
(ii) provide Guarantees with respect to the
Indebtedness and other obligations of the Company and its
Subsidiaries under the Senior Note Documents and the Second
Priority Note Documents;
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<PAGE> 29
(iii) own, purchase or acquire (a) certificates of
deposit of commercial banks organized under the laws of the
United States or any state thereof (having capital resources
in excess of $100,000,000) (provided that neither the Company
nor any Subsidiary may own, purchase, or acquire more than
$1,000,000 (in face amount) of such certificates of deposit
from any such commercial bank) due within one year from the
date of purchase and payable in the United States in United
States dollars which are rated "A" or better by at least two
nationally recognized rating agencies and (b) obligations of
the United States Government, of any state, territory or
possession of the United States of America or any agency
thereof maturing within three years after the acquisition
thereof which are rated in one of the two highest rating
classifications by at least one nationally recognized rating
agency;
(iv) make loans and advances to employees and
salespersons of the Company (who are not shareholders of the
Company or any Subsidiary) granted in the normal and
customary course of the Company's business and not to finance
the acquisition of shares of common stock of CBH or the
Company, provided that loans and advances in the normal and
customary course of the Company's business shall not at any
time exceed $400,000;
(v) own and hold promissory notes of former
shareholders of CBI-Texas in an aggregate principal amount
not to exceed $1,320,000 executed in connection with such
shareholders' purchase of up to approximately 1,400,000
shares of common stock of CBI-Texas repurchased by CBI-Texas
from H.G. Smith, provided that such promissory notes are
pledged to the Collateral Agent to the extent required by
paragraph 5N;
(vi) make non-cash recourse loans to shareholders of
the Company in an aggregate principal amount not to exceed,
at any time, $300,000, provided that such loans may not
mature more than three years after the making thereof and the
promissory note(s) representing such loans are pledged to the
Collateral Agent to the extent required by paragraph 5N; and
(vii) make Permitted Acquisitions, if permitted under
paragraph 6G(5).
6G(5). CONSOLIDATION, MERGER, TRANSFER OF ASSETS,
ACQUISITIONS, ETC. (i) Merge or consolidate with or into any Person,
(ii) convey, transfer, lease or otherwise dispose of all or
substantially all of its assets to any Person, (iii) acquire all or
substantially all of the assets or capital stock of any other Person or
division thereof, (iv) adopt or effect any plan of reorganization,
recapitalization, liquidation or dissolution or (v) acquire any
properties or assets other than in the ordinary course of business;
provided, that the Company may make Permitted Acquisitions so long as
(a) no Default or Event of Default would exist either immediately prior
thereto or immediately after giving effect thereto and (b) the Company
has delivered to each holder of Notes an Officer's Certificate to such
effect, which Officer's
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<PAGE> 30
Certificate shall also demonstrate, with calculations in reasonable
detail, pro forma compliance with the requirements of paragraphs 6A
through 6F inclusive, 6G(2) and 6S.
6G(6). LIMITATION ON ASSET DISPOSITIONS. Except as permitted
under paragraph 6G(5), make or permit to be made any Asset Disposition,
other than the following:
(i) any Asset Disposition involving worthless or
obsolete equipment which is promptly replaced with equipment
of comparable suitability; and
(ii) any Asset Disposition involving inventory sold
in the ordinary course of business pursuant to customary
trade terms.
6G(7). SALE OR DISCOUNT OF RECEIVABLES. Sell with recourse,
discount (other than to the extent of finance and interest charges
included therein) or otherwise sell for less than face value thereof,
any of its notes or accounts receivable, except notes or accounts
receivable the collection of which is doubtful in accordance with
general accepted accounting principles.
6G(8). TRANSACTIONS WITH AFFILIATES. Directly or indirectly,
purchase, acquire or lease any property from, or sell, transfer or
lease any property to, or otherwise deal with, in the ordinary course
of business or otherwise (i) any Affiliate, (ii) any Person owning,
beneficially or of record, directly or indirectly, either individually
or together with all other Persons to whom such Person is related by
blood, adoption or marriage, stock of the Company (of any class having
ordinary voting power for the election of directors) aggregating 5% or
more of such voting power or (iii) any Person related by blood,
adoption or marriage to any Person described or coming within the
provisions of clause (i) or (ii) of this paragraph 6G(8), except (a) in
the ordinary course or business (other than the amendment to the
Wamberg Principal Office Agreement described in the Registration
Statement), (b) pursuant to the reasonable requirements of the
Company's or such Subsidiary's business and (c) upon fair and
reasonable terms no less favorable to the Company or such Subsidiary
than would be obtainable in a comparable arm's-length transaction with
a Person not an Affiliate.
6G(9). LIMITATION ON SALE-LEASEBACK TRANSACTIONS. Enter into
any arrangement with any lender or investor or to which such lender or
investor is a party providing for the leasing by the Company or any
Subsidiary of real or personal property which has been or is to be sold
or transferred by the Company or any Subsidiary to such lender or
investor or to any Person to whom funds have been or are to be advanced
by such lender or investor on the security of such property or rental
obligations of the Company or any Subsidiary (each such arrangement, a
"SALE-LEASEBACK TRANSACTION").
6H. CHANGE OF FISCAL YEAR. The Company will not and will not permit any
Subsidiary to change its fiscal year from its present fiscal year (fiscal year
end of December 31).
24
<PAGE> 31
6I. CHANGE OF BUSINESS. The Company will not and will not permit any
Subsidiary to change the general character of its business activities or
operations from its current business activities or operations or to engage in
any business activity or operation not reasonably related to its current
business activities or operations as normally conducted as of the Date of
Closing.
6J. CERTIFICATES OF INCORPORATION; BYLAWS; TRADE NAMES. The Company
will not and will not permit any Subsidiary to amend, alter, modify or restate
its articles or certificate of incorporation or bylaws in any way which would
(i) change its corporate name or adopt a trade name, or (ii) in any manner
adversely affect the obligations or covenants of the Company and its
Subsidiaries hereunder or under any of the other Second Priority Note Documents.
6K. OTHER AGREEMENTS. The Company will not and will not permit any of
its Subsidiaries to enter into or permit to exist any agreement (i) which would
cause a Default or Event of Default hereunder or (ii) which contains any
provision which would be violated or breached by the performance of the
obligations of the Company and its Subsidiaries hereunder or under any of the
other Second Priority Note Documents.
6L. LIMITATION ON CERTAIN RESTRICTIVE AGREEMENTS. The Company will not,
and will not permit any of its Subsidiaries to, enter into or suffer to exist
any contractual obligation, other than the Senior Note Documents and the Second
Priority Note Documents, which in any way restricts the ability of the Company
or any of its Subsidiaries to (i) create, incur, assume or suffer to exist any
Lien upon any of its property, assets or revenues, (ii) make any prepayments or
purchases of the Notes required under this Agreement, (iii) make any dividends
or distributions, or any payments required under this Agreement or any other
Second Priority Note Document or (iv) transfer any of its property or assets to
the Company or a Wholly Owned Subsidiary of the Company.
6M. ERISA MATTERS. The Company will not, and will not permit any
Subsidiary or ERISA Affiliate to, adopt a Plan or amend an existing Plan in a
manner that materially increases the total dollar amount of the benefits
provided by the Plans described in Schedule 6M; provided, however, that the
Company may modify such Plans to conform with the provisions of Plans of
Persons, the capital stock or other equity interests in which, or all or
substantially all of the Assets of which, the Company has acquired in any
Permitted Acquisition. The Company will not, and will not permit any Subsidiary
or ERISA Affiliate to, permit any Plan maintained by the Company, any Subsidiary
or any ERISA Affiliate (a) to engage in any "PROHIBITED TRANSACTION" (as defined
in ERISA), (b) to incur an "ACCUMULATED FUNDING DEFICIENCY" (as defined in
section 302 of ERISA and section 412 of the Code), or (c) to terminate such Plan
in a manner which could result in the imposition of a Lien on the property or
assets of the Company or any of its Subsidiaries.
6N. ONLY ONE CLASS OF CAPITAL STOCK. The Company will not, and will not
permit any Subsidiary to, have any class of capital stock other than its common
stock.
6O. PROHIBITION AGAINST PAYMENTS AND PREPAYMENTS OF CERTAIN
INDEBTEDNESS. The Company will not, and will not permit any of its
Subsidiaries to, prepay any Subordinated Debt or
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<PAGE> 32
any Indebtedness evidenced by the Medium Term Note, except that (i) the Medium
Term Note may be prepaid in connection with the IPO by an amount up to
$1,000,000, provided that such prepayment is applied to installments of
principal in direct order of maturity; and (ii) in order to cause the exercise
of conversion rights thereunder in connection with the IPO, the Company may
offer to prepay in full the Convertible Subordinated Notes (and may prepay the
Convertible Subordinated Notes if such prepayment offer is in fact accepted by
the holders thereof), provided that any such prepayment offer must be made no
later than three days after consummation of the IPO. Upon the occurrence and
during the continuance of any Default or Event of Default, the Company will not,
and will not permit any Subsidiary to, pay any principal of or interest or
premium on any Subordinated Debt.
6P. NO SUBSIDIARIES. Notwithstanding anything in this Agreement or any
other Second Priority Note Document to the contrary, the Company will not create
any Subsidiaries; provided, however, that, if the holders of the Notes consent
to the creation of a Subsidiary pursuant to paragraph 11C, at the cost and
expense of the Company, the Company will (i) execute and deliver a pledge
agreement in favor of the holders of the Notes and in form, scope and substance
satisfactory to the Required Holder(s), (ii) cause each subsequently acquired or
organized Subsidiary (contemporaneously with such acquisition or organization)
to execute and deliver a guaranty agreement in favor of the holders of Notes and
in form, scope and substance satisfactory to the Required Holder(s), (iii)
deliver or cause such Subsidiary to deliver to the Collateral Agent a
certificate representing all capital stock of, or other equity interests in,
such subsequently acquired or organized Subsidiary, together with an undated
stock power or assignment, executed in blank by a Responsible Officer (or take
or cause a Subsidiary to take such other actions as are necessary to provide the
Collateral Agent with a perfected pledge of or security interest in such capital
stock or other equity interests), and (iv) cause such Subsidiary to secure
payment of the Notes and performance and observance of all other obligations of
the Company and its Subsidiaries under the Second Priority Note Documents by
pledging or creating, or causing to be pledged or created, perfected security
interests and Liens with respect to such of its assets and properties as the
Required Holder(s) shall designate (it being understood that it is the intent of
the parties that such obligations shall be secured by, among other things,
substantially all the property and assets of the Company and its Subsidiaries
(now or hereafter acquired or created), including, without limitation, real and
other properties acquired subsequent to the Date of Closing). The aforementioned
security interests and Liens will be created under the Security Documents and
other security agreements, mortgages, deeds of trust and other instruments and
documents in form, scope and substance satisfactory to the Required Holder(s)
and the Collateral Agent, and the Company will deliver or cause to be delivered
to the Collateral Agent, all such instruments and documents (including, without
limitation, legal opinions, title insurance policies, surveys and lien searches)
as the Required Holder(s) or the Collateral Agent shall request to evidence
compliance with this paragraph 6P.
6Q. RESTRICTIONS ON ISSUANCES OF COMMON STOCK. The Company will
not issue common stock to any Person other than CBH.
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<PAGE> 33
6R. RESTRICTIONS UPON THE AMENDMENT OF CERTAIN DOCUMENTS. The Company
will not, and will not permit any Subsidiary to, amend any principal office
agreement, including, without, limitation, the provisions related to the sharing
of commissions (other than the amendment to the Wamberg Principal Office
Agreement described in the Registration Statement), any employment agreement
(other than the amendment to the employment agreement of Melvin G. Todd
described in the Registration Statement), the Non-Compete Agreement or any
Working Capital Note Document in any manner that (i) could result in a material
adverse change in the business, condition (financial or otherwise), prospects or
operations of the Company and its Subsidiaries taken as a whole, (ii) could
result in a material adverse effect on the Company and its Subsidiaries as a
going concern or (iii) could in any manner materially adversely affect the
obligations or covenants of the Company and its Subsidiaries hereunder or under
any of the other Second Priority Note Documents.
6S. LIMITATION ON AMOUNT OF S CORPORATION TAX DISTRIBUTIONS.
Notwithstanding any provision in this Agreement to the contrary, (i) no S
Corporation Tax Distributions may be made for any tax period during which the
Company or CBI-Texas was not an S Corporation and (ii) the aggregate amount of S
Corporation Tax Distributions that may be made by the Company for any period
during which the Company or CBI-Texas was an S Corporation shall not exceed the
product of (A) the maximum marginal federal income tax rate applicable to
individuals under Section 1 of the Code, plus 3% and (B) the net taxable income
and gain of the Company or CBI-Texas for such period, less the aggregate amount
of unrecovered net taxable losses of the Company or CBI-Texas for all prior
periods; provided, that a distribution to the former shareholders of CBI-Texas
in the aggregate amount of $3,200,000, as specified in the Registration
Statement, may be made in connection with the IPO.
6T. PROHIBITION AGAINST PHANTOM STOCK. The Company will not, and will
not permit any Subsidiary to, create any "phantom stock" or any equivalent
thereto (other than pursuant to the Cochlan Phantom Stock Agreement).
6U. RENEWALS OF PLANS AND POLICIES. The Company shall ensure that (i)
renewal of plans and policies occurs only within the respective divisions or
other segments of the Company in which the original plans or policies were
produced, and (ii) all resulting renewal commissions and fees in respect of such
original plans or policies are paid to, and accounted for on the books of, such
respective divisions or other segments of the Company.
PARAGRAPH 7. EVENTS OF DEFAULT.
7. EVENTS OF DEFAULT.
7A. ACCELERATION. If any of the following events shall occur and be
continuing for any reason whatsoever (and whether such occurrence shall be
voluntary or involuntary or come about or be effected by operation of law or
otherwise):
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<PAGE> 34
(i) the Company defaults in the payment of any principal of
any Note when the same shall become due, either by the terms thereof or
otherwise as herein provided; or
(ii) the Company defaults in the payment of any interest on
any Note for more than five days after the date due; or
(iii) the Company or any Subsidiary (a) defaults (whether as
primary obligor or as guarantor or other surety) in any payment of
principal of or interest on any other Indebtedness (or any obligation
under notes payable or drafts accepted representing extensions of
credit) beyond any period of grace provided with respect thereto, (b)
fails to perform or observe any other agreement, term or condition
contained in any agreement under which any such obligation is created
(or if any other event thereunder or under any such agreement shall
occur and be continuing) and the effect of such failure or other event
is to cause such obligation to become due (or to be repurchased by the
Company or any Subsidiary) prior to any stated maturity; provided, that
the aggregate amount of all obligations as to which such a payment
default shall occur and be continuing or such a failure or other event
causing acceleration (or sale to the Company or any Subsidiary) shall
occur and be continuing exceeds $100,000; or
(iv) the Company defaults in the payment of any principal of,
premium payable with respect to or interest on the Medium Term Note,
any Working Capital Note or any AAA Distribution Note when the same
shall become due, either by the terms thereof or otherwise as provided
in the BCS Acquisition Agreement, the Working Capital Documents or the
Share Repurchase Agreements;
(v) any representation or warranty made by the Company or any
of its Subsidiaries herein or in any of the other Second Priority Note
Documents, or by the Company or any of its officers in any writing
furnished in connection with or pursuant to this Agreement shall be
false in any material respect on the date as of which made; or
(vi) the Company fails to perform or observe any term,
covenant or agreement contained in paragraph 5N, 5O, 5P or 6 or Section
7 or 8 of the Security Agreement; or
(vii) the Company or any Subsidiary fails to perform or
observe any other agreement, covenant, term or condition contained
herein or in any of the other Second Priority Note Documents and such
failure shall not be remedied (a) within 30 days after any Responsible
Officer obtains (or should have obtained) knowledge thereof or (b)
within 15 days after the Company receives written notice of such
failure from any holder; or
(viii) the Company or any Subsidiary makes an assignment for
the benefit of creditors or is generally not paying its debts as such
debts become due; or
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(ix) any decree or order for relief in respect of the Company
or any Subsidiary is entered under any bankruptcy, reorganization,
compromise, arrangement, insolvency, readjustment of debt, dissolution
or liquidation or similar law, whether now or hereafter in effect (the
"BANKRUPTCY LAW"), of any jurisdiction; or
(x) the Company or any Subsidiary petitions or applies to any
Tribunal for, or consents to, the appointment of, or taking possession
by, a trustee, receiver, custodian, liquidator or similar official of
the Company or any Subsidiary, or of any substantial part of the assets
of the Company or any Subsidiary, or commences a voluntary case under
the Bankruptcy Law of the United States or any proceedings (other than
proceedings for the voluntary liquidation and dissolution of a
Subsidiary) relating to the Company or any Subsidiary under the
Bankruptcy Law of any other jurisdiction; or
(xi) any such petition or application is filed, or any such
proceedings are commenced, against the Company or any Subsidiary and
the Company or such Subsidiary by any act indicates its approval
thereof, consent thereto or acquiescence therein, or an order, judgment
or decree is entered appointing any such trustee, receiver, custodian,
liquidator or similar official, or approving the petition in any such
proceedings, and such order, judgment or decree remains unstayed and in
effect for more than 60 days; or
(xii) any order, judgment or decree is entered in any
proceedings against the Company decreeing the dissolution of the
Company and such order, judgment or decree remains unstayed and in
effect for more than 30 days; or
(xiii) any order, judgment or decree is entered in any
proceedings against the Company or any Subsidiary decreeing a split-up
of the Company or such Subsidiary which requires the divestiture of
assets representing a substantial part, or the divestiture of the stock
of a Subsidiary whose assets represent a substantial part, of the
consolidated assets of the Company and its Subsidiaries (determined in
accordance with generally accepted accounting principles) or which
requires the divestiture of assets, or stock of a Subsidiary, which
shall have contributed a substantial part of the Consolidated Net
Income for any of the three fiscal years then most recently ended, and
such order, judgment or decree remains unstayed and in effect for more
than 30 days; or
(xiv) any final judgment or order, or series of final
judgments or orders, in an amount in excess of $100,000, is rendered
against the Company or any Subsidiary and either (i) enforcement
proceedings have been commenced by any creditor upon such judgment or
order or (ii) within 30 days after entry thereof, such judgment is not
discharged or execution thereof stayed pending appeal, or within 30
days after the expiration of any such stay, such judgment is not
discharged; or
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(xv) any Termination Event with respect to a Plan shall have
occurred and, within 30 days after the occurrence thereof, (a) such
Termination Event (if correctable) shall not have been corrected and
(b) the then present value of such Plan's vested benefits exceeds the
then current value of assets accumulated in such Plan by more than the
amount of $100,000 (or in the case of a Termination Event involving the
withdrawal of a "substantial employer" (as defined in Section 4001(a)
(2) of ERISA), the withdrawing employer's proportionate share of such
excess shall exceed such amount); or
(xvi) the Company or any of its ERISA Affiliates as employer
under a Multiemployer Plan shall have made a complete or partial
withdrawal from such Multiemployer Plan and the plan sponsor of such
Multiemployer Plan shall have notified such withdrawing employer that
such employer has incurred a withdrawal liability in an aggregate
amount exceeding $100,000; or
(xvii) any two of W.T. Wamberg, Melvin G. Todd, Richard
Chapman and the chief financial officer or chief operating officer of
the Company, as the case may be, shall no longer continue to be
executive officers of the Company or engaged in the day-to-day
management of the affairs of the Company and its Subsidiaries, provided
that the absence of the chief financial officer or the chief operating
officer shall not result in a Default or an Event of Default pursuant
to this clause (xviii) unless the chief financial officer or the chief
operating officer is not replaced within 180 days; or
(xviii) an "Event of Default" under and as such term is
described in the Guaranty shall have occurred and be continuing;
then (a) if such event is an Event of Default specified in clause (i) or (ii) of
this paragraph 7A, the holder of any Note (other than the Company or any of its
Subsidiaries or Affiliates) may at its option, by notice in writing to the
Company, declare such Note to be, and such Note shall thereupon be and become,
immediately due and payable at par together with interest accrued thereon,
without presentment, demand, protest or other notice of any kind, all of which
are hereby waived by the Company, (b) if such event is an Event of Default
specified in clause (ix), (x) or (xi) of this paragraph 7A, all of the Notes at
the time outstanding shall automatically become immediately due and payable
together with interest accrued thereon, without presentment, demand, protest or
notice of any kind, all of which are hereby waived by the Company, and (c) if
such event is not an Event of Default specified in clause (ix), (x) or (xi) of
this paragraph 7A, the holder(s) of 100% of the aggregate principal amount of
the Notes at the time outstanding may at its or their option, by notice in
writing to the Company, declare all of the Notes to be, and all of the Notes
shall thereupon be and become, immediately due and payable together with
interest accrued thereon, without presentment, demand, protest or other notice
of any kind, all of which are hereby waived by the Company.
7B. RESCISSION OF ACCELERATION. At any time after any or all of the
Notes shall have been declared immediately due and payable pursuant to paragraph
7A, the holder(s) of 100% of the aggregate principal amount of the Notes at the
time outstanding may, by notice in writing to the
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Company, rescind and annul such declaration and its consequences if (i) the
Company shall have paid all overdue interest on the Notes, the principal of the
Notes which has become due otherwise than by reason of such declaration, and
interest on such overdue interest and overdue principal at the rate specified in
the Notes, (ii) the Company shall not have paid any amounts which have become
due solely by reason of such declaration, (iii) all Events of Default and
Defaults, other than non-payment of amounts which have become due solely by
reason of such declaration, shall have been cured or waived pursuant to
paragraph 11C, and (iv) no judgment or decree shall have been entered for the
payment of any amounts due pursuant to the Notes or this Agreement. No such
rescission or annulment shall extend to or affect any subsequent Event of
Default or Default or impair any right arising therefrom.
7C. NOTICE OF ACCELERATION OR RESCISSION. Whenever any Note shall be
declared immediately due and payable pursuant to paragraph 7A or any such
declaration shall be rescinded and annulled pursuant to paragraph 7B, the
Company shall forthwith give written notice thereof to the holder of each Note
at the time outstanding.
7D. RIGHT OF SET-OFF. In addition to any rights and remedies of the
holders of the Notes provided by law (including, without limitation, other
rights of set-off, recoupment or appropriation and application) and upon the
occurrence and continuance of an Event of Default, each holder of a Note shall
have the right, without prior notice to the Company or any of its Subsidiaries,
any such notice being expressly waived by the Company and its Subsidiaries to
the extent permitted by applicable law, upon any amount becoming due and payable
by the Company or any of its Subsidiaries hereunder or under the other Second
Priority Note Documents or the Senior Note Documents (whether at the stated
maturity, by acceleration or otherwise) to set-off, recoup or appropriate and
apply, at any time and from time to time, against such amount, to the extent
permitted by applicable law, any and all commission fees and revenues and any
other credits, indebtedness or claims, in each case whether direct or indirect,
absolute or contingent, matured or unmatured, at any time held or owing or to
become owing by such holder or any affiliate thereof to or for the credit or the
account of the Company or any of its Subsidiaries, whether or not the Collateral
Agent or any holder of a Note has made any demand for payment. Any Person to
whom the holder of any Note has granted a participation pursuant to paragraph
11E of this Agreement shall, to the maximum extent permitted by applicable law,
also have the rights of set-off, recoupment or appropriation and application
provided for in this paragraph 7D in respect of its participating interest, to
the same extent as if the amount of its participating interest were owing
directly to it as a holder of a Note. Each holder of a Note agrees promptly to
notify the Company or any Subsidiary, as applicable, and the Collateral Agent
after any such set-off, recoupment or appropriation and application made by such
holder or, to its knowledge, by a Person to whom such holder has granted such a
participation, provided that, to the extent permitted by applicable law, the
failure to give such notice shall not affect the validity of such set-off,
recoupment or appropriation and application.
7E. NOTICE TO HOLDERS OF SUBORDINATED DEBT; PAYMENT BLOCK. Upon the
occurrence and continuance of any Default or any Event of Default, the Company
shall promptly notify each holder of any Subordinated Debt of such Default and
Event of Default. The Company will not, and
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will not permit any Subsidiary to, pay any principal of or interest or premium
on any Subordinated Debt during the continuance of any Default or any Event of
Default.
7F. OTHER REMEDIES. If any Event of Default or Default shall occur and
be continuing, (i) the holder of any Note may proceed to protect and enforce its
rights under this Agreement, such Note and the other Second Priority Note
Documents by exercising such remedies as are available to such holder in respect
thereof under applicable law, either by suit in equity or by action at law, or
both, whether for specific performance of any covenant or other agreement
contained in this Agreement or the other Second Priority Note Documents or in
aid of the exercise of any power granted in this Agreement or the other Second
Priority Note Documents, and (ii) both the Collateral Agent and the holders of
the Notes may exercise any rights or remedies in their respective capacities
under the Security Documents in accordance with the provisions thereof. No
remedy conferred in this Agreement or the other Second Priority Note Documents
upon the holder of any Note or the Collateral Agent is intended to be exclusive
of any other remedy, and each and every such remedy shall be cumulative and
shall be in addition to every other remedy conferred herein or now or hereafter
existing at law or in equity or by statute or otherwise.
PARAGRAPH 8. REPRESENTATIONS, COVENANTS AND WARRANTIES.
8. REPRESENTATIONS, COVENANTS AND WARRANTIES. The Company represents,
covenants and warrants as follows:
8A. ORGANIZATION AND QUALIFICATION. The Company is a corporation duly
organized and validly existing in good standing under the laws of the State of
Delaware, and is duly licensed and in good standing as a foreign corporation in
each jurisdiction in which the nature of the business transacted or the property
owned is such as to require licensing or qualification as a foreign corporation.
The Company has no Subsidiaries. The execution, delivery and performance by the
Company of the Notes, this Agreement, the other Second Priority Note Documents,
the Schoenke Acquisition Documents, the IPO Documents and the Merger Documents
to which it is a party are within the Company's corporate powers and have been
duly authorized by all necessary corporate action.
8B. FINANCIAL STATEMENTS. The Company has furnished each Existing
Holder with the following financial statements, identified by a principal
financial officer of the Company: (a) (i) a balance sheet of CBI-Texas at
December 31, 1997, and a statement of income, stockholders' equity and cash
flows of CBI-Texas for such year, all reported on by Ernst & Young LLP, (ii) a
balance sheet of [CBI-TEXAS] as at [JUNE 30, 1998] and a statement of income,
stockholders' equity and cash flows for the [SIX-MONTH PERIOD] ended on each
such date, prepared by [CBI-TEXAS] and (iii) a consolidated balance sheet of the
Schoenke Companies as at [JUNE 30, 1998] and consolidated statements of income,
stockholders' equity and cash flows for the [SIX-MONTH PERIOD] ended on such
date, prepared by the Schoenke Companies and (b) (i) a pro forma balance sheet
of the Company (after giving effect to the Schoenke Acquisition, the Merger and
the IPO and including a breakdown by each division of the Company) as at
December 31, 1997 and pro forma statements of income,
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stockholder's equity and cash flows of the Company (after giving effect to the
Schoenke Acquisition, the Merger and the IPO) for such year, prepared by the
Company, and (ii) a pro forma balance sheet of the Company (after giving effect
to the Schoenke Acquisition, the Merger and the IPO and including a breakdown by
each division of the Company) as at [JUNE 30, 1998] and pro forma statements of
income, stockholders' equity and cash flow of the Company (after giving effect
to the Schoenke Acquisition, the Merger and the IPO and including a breakdown by
each division of the Company) for the [SIX-MONTH] period ended on such date,
prepared by the Company. Such financial statements (including any related
schedules and/or notes) are true and correct in all material respects (subject,
as to interim statements, to changes resulting from audits and year-end
adjustments), have been prepared in accordance with generally accepted
accounting principles consistently followed throughout the periods involved and
show all liabilities, direct and contingent, of the Company required to be shown
in accordance with such principles. The balance sheets fairly present the
historical or pro forma, as the case may be, condition of CBI-Texas, the Company
or the Schoenke Companies, as the case may be, as at the dates thereof, and the
statements of income, stockholders' equity and cash flows fairly present the,
historical or pro forma, as the case may be, results of the operations of
CBI-Texas, the Company or the Schoenke Companies, as the case may be, and their
cash flows for the periods indicated. There has been no material adverse change
in the business, condition (financial or otherwise), prospects or operations of
the Company or CBI-Texas since December 31, 1997.
8C. ACTIONS PENDING. Other than as described on Schedule 8C, there is
no action, suit, investigation or proceeding pending or, to the knowledge of the
Company, threatened against the Company, or any properties or rights of the
Company, by or before any court, arbitrator or administrative or governmental
body which, if adversely determined, might result in a liability of greater than
$100,000 or might otherwise result in any material adverse change in the
business, condition (financial or otherwise), prospects or operations of the
Company. There is no action, suit, investigation or proceeding pending or
threatened against the Company which purports to affect the validity or
enforceability of this Agreement, any Note, any of the other Second Priority
Note Documents, any of the Schoenke Acquisition Documents, any of the Merger
Documents or any of the IPO Documents.
8D. OUTSTANDING INDEBTEDNESS. The Company does not have outstanding any
Indebtedness except as permitted by paragraphs 6A, 6D and 6G(2) and all of which
is described in Schedule 8D attached hereto. There exists no default under (and
no waiver of default is currently in effect with respect to) the provisions of
any instrument evidencing such Indebtedness or of any agreement relating
thereto, and no event or condition exists with respect to any Indebtedness of
the Company that would permit (or that with notice or the lapse of time, or
both, would permit) one or more Persons to cause such Indebtedness to become due
and payable before its stated maturity or before its regularly scheduled dates
of payment.
8E. TITLE TO PROPERTIES. The Company has good and marketable title to
its real property (other than property which it leases) and good title to all of
its other properties and assets, including the properties and assets reflected
in the pro forma balance sheet as at [JUNE 30, 1998] referred to
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in paragraph 8B(b)(ii) (other than properties and assets disposed of in the
ordinary course of business), subject to no Lien of any kind except Liens
permitted by paragraph 6G(1). All leases necessary in any material respect for
the conduct of the business of the Company are valid and subsisting and are in
full force and effect.
8F. POSSESSION OF FRANCHISES, LICENSES, PATENTS AND TRADEMARKS. The
Company possesses all franchises, certificates, licenses, permits and other
authorizations from governmental political subdivisions or regulatory
authorities, free from burdensome restrictions, that are necessary in any
material respect for the ownership, maintenance and operation of its properties
and assets, and the Company is not in violation of any thereof in any material
respect. The Company owns or possesses all licenses, permits, franchises,
authorizations, patents, copyrights, service marks, trademarks, trade dress,
logos, corporate names and trade names and rights thereto, that individually or
in the aggregate are material, without known conflict with the rights of others.
To the best knowledge of the Company, no product of the Company infringes in any
material respect any license, permit, franchise, authorization, patent,
copyright, service mark, trademark, trade name, trade dress, logo, corporate
name or other right owned by any other Person. To the best knowledge of the
Company, there is no material violation by any Person of any right of the
Company with respect to any patent, copyright, service mark, trademark, trade
name, trade dress, logo, corporate name or other right owned or used by the
Company.
8G. TAXES. The Company or CBI-Texas has filed all federal, state and
other income tax returns which, to the knowledge of the officers of the Company,
are required to be filed, and has paid all taxes as shown on such returns and on
all assessments received by it, and has paid, collected and withheld all other
taxes which are otherwise required to be paid, collected or withheld on or prior
to the date hereof, except such taxes as are being contested in good faith by
appropriate proceedings and for which adequate reserves have been established in
accordance with generally accepted accounting principles. There are no
unsatisfied actual or proposed adjustments or assessments for taxes against the
Company or CBI-Texas or, to the knowledge of the Company, any basis for any such
assessment or adjustment. There are no pending audits, actions, proceedings,
disputes, claims or, to the Company's knowledge, investigations with respect to
any taxes payable by or asserted against the Company or CBI-Texas. The Company
or CBI-Texas has not received notice from any governmental authority of its
intent to examine or audit any tax returns of the Company or CBI-Texas.
CBI-Texas has been subject to a valid and effective election to be an S
corporation, within the meaning of section 1361(a)(1) of the Code from the date
of its organization to the date of consummation of the Merger, and such S
corporation election has not been terminated (within the meaning of section
1362(d) of the Code) at any time on or prior to such date. As of the date
hereof, the Company does not have any amounts of "net unrealized built-in gain"
(within the meaning of section 1374(d) of the Code) on which the Company would
be required to pay taxes under Section 1374(a) of the Code if the Company were
to sell any of its assets at any time on or after the date hereof.
8H. CONFLICTING AGREEMENTS AND OTHER MATTERS. The Company is
not a party to any contract or agreement or subject to any charter or other
corporate restriction which materially and
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adversely affects its business, property or assets, prospects or financial
condition. The execution and delivery of the Second Priority Note Documents, the
Schoenke Acquisition Documents, the Merger Documents and the IPO Documents (the
Second Priority Note Documents, the Schoenke Acquisition Documents, the Merger
Documents and the IPO Documents, collectively, the "TRANSACTION DOCUMENTS") by
the Company, the issuance and delivery of the Notes and the Working Capital
Notes by the Company and the conversion of the Convertible Subordinated Notes
and the fulfillment of and compliance with the respective provisions of the
Transaction Documents by the Company do not and will not conflict with, or
result in a breach of the terms, conditions or provisions of, or constitute a
default under, or result in any violation of, or result in the creation of any
Lien (except Liens created under the Security Documents) upon any of the
properties or assets of the Company pursuant to, or require any authorization,
consent, approval, exemption or other action by or notice to or filing with any
court, administrative or governmental body or other Person (other than (a)
routine filings after the date hereof with the Securities and Exchange
Commission and/or state Blue Sky authorities, (b) filings with the Secretaries
of State of the States of Delaware and Texas in connection with the Merger, (c)
the filing with the Securities and Exchange Commission of the Registration
Statement in connection with the IPO, (d) those recordations and filings with
respect to the Security Documents as are set forth in the opinion of Keith
Staudt, General Counsel of the Company, delivered pursuant to paragraph 3A(ix)
hereof and (e) other consents and approvals required by the assignment of
various licenses and contracts pursuant to the Schoenke Acquisition Agreement)
or result in the revocation, suspension, limitation or imposition of any
material condition upon the license of the Company to act as a life insurance
agent in the State of Texas pursuant to the Texas Insurance Code or any similar
license required or granted by any administrative or governmental body or other
Person pursuant to, the Certificate of Incorporation or bylaws of the Company,
any applicable law (including, without limitation, any insurance, securities or
Blue Sky law), statute, rule or regulation or any agreement (including, without
limitation, (i) any Schoenke Acquisition Document, (ii) any agreement referred
to in Schedule 8Z or any other material agreement of the Company or the Schoenke
Companies, if any, and (iii) any agreement (other than the Note Documents) set
forth or listed in any schedule or exhibit to, or specifically referred to in,
any Schoenke Acquisition Document or any instrument, order, judgment or decree
to which the Company is a party or otherwise subject (including, without
limitation, by virtue of its assumption of liabilities under the Schoenke
Acquisition Agreement)). The Company is not a party to, or otherwise subject to
any provision contained in, any instrument evidencing Indebtedness of the
Company, any agreement relating thereto or any other contract or agreement
(including its charter) which limits the amount of, or otherwise imposes
restrictions on the incurring of, Indebtedness of the Company of the type to be
evidenced by the Notes except as set forth in the agreements listed in Schedule
8H.
8I. OFFERING OF THE ORIGINAL NOTES. Neither CBI-Texas, the Company nor
any agent acting on behalf of either, directly or indirectly, offered the
Original Notes or any similar security of CBI-Texas or the Company for sale to,
or solicited any offers to buy the Original Notes or any similar security of
CBI-Texas or the Company from, or otherwise approached or negotiated with
respect thereto with, any Person other than institutional investors, and neither
CBI-Texas nor the Company nor any agent acting on behalf of either took or will
take any action which would subject
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the issuance or sale of the Original Notes or the delivery of the Notes to the
Existing Holders to the provisions of section 5 of the Securities Act or to the
provisions of any securities or Blue Sky law of any applicable jurisdiction.
8J. USE OF PROCEEDS. The Company does not own or have any present
intention of acquiring any "MARGIN STOCK" as defined in Regulation U (12 CFR
Part 221) of the Board of Governors of the Federal Reserve System ("MARGIN
STOCK"). The proceeds of sale of the Original Notes were used for the purposes
described in paragraph 8K of the Original Note Agreement. None of such proceeds
were or will be used, directly or indirectly, for the purpose, whether
immediate, incidental or ultimate, of purchasing or carrying any margin stock or
for the purpose of maintaining, reducing or retiring any Indebtedness which was
originally incurred to purchase or carry any stock that is currently a margin
stock or for any other purpose which might constitute this transaction a
"PURPOSE CREDIT" within the meaning of such Regulation U. Neither the Company
nor any agent acting on its behalf has taken or will take any action which might
cause this Agreement or the Notes to violate Regulation U or any other
regulation of the Board of Governors of the Federal Reserve System or to violate
the Exchange Act, in each case as in effect now or as the same may hereafter be
in effect.
8K. ERISA. No accumulated funding deficiency (as defined in section 302
of ERISA and section 412 of the Code), whether or not waived, exists with
respect to any Plan (other than a Multiemployer Plan). No liability to the PBGC
has been or is expected by the Company or any ERISA Affiliate to be incurred
with respect to any Plan (other than a Multiemployer Plan) by the Company or any
ERISA Affiliate which is or would be materially adverse to the business,
condition (financial or otherwise), prospects or operations of the Company.
Neither the Company nor any ERISA Affiliate has incurred or presently expects to
incur any withdrawal liability under Title IV of ERISA with respect to any
Multiemployer Plan which is or would be materially adverse to the business,
condition (financial or otherwise), prospects or operations of the Company. The
execution and delivery of the Original Note Agreement and the issuance and sale
of the Original Notes were, and the execution and delivery of this Agreement and
the issuance and delivery of the Notes will be, exempt from, or did not or will
not involve any transaction which was or is subject to, the prohibi tions of
section 406 of ERISA and did not or will not involve any transaction in
connection with which a penalty could have been or could be imposed under
section 502(i) of ERISA or a tax could have been or could be imposed pursuant to
section 4975 of the Code. The representation by the Company in the next
preceding sentence is made in reliance upon and subject to the accuracy of the
representation of each Existing Holder in paragraph 9B as to the source of funds
used by it to purchase any Original Note.
8L. GOVERNMENTAL CONSENT. Neither the nature of the Company, nor any of
its businesses or properties, nor any relationship between the Company and any
other Person, nor any circumstance in connection with the issuance or delivery
of the Notes is such as to require any authorization, consent, approval,
exemption or other action by or notice to or filing with any court or
administrative or governmental or regulatory body in connection with the
execution and delivery of this Agreement, the other Second Priority Note
Documents, the Schoenke Acquisition Documents,
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the IPO Documents or the Merger Documents and the issuance or delivery of the
Notes or fulfillment of or compliance with the terms and provisions of this
Agreement or of the Notes, other than (i) consents required in connection with
the Schoenke Acquisition, all of which have been obtained or will be obtained
prior to the consummation of the Schoenke Acquisition, (ii) filings to perfect
the Liens under the Security Documents, (iii) filings with the Secretaries of
State of the States of Delaware and Texas in connection with the Merger, (iv)
the filing with the Securities and Exchange Commission of the Registration
Statement in connection with the IPO, and (v) routine filings after the Date of
Closing with the Securities and Exchange Commission and/or state Blue Sky
authorities.
8M. ENVIRONMENTAL COMPLIANCE. The Company and all of its properties and
facilities have complied at all times and in all respects with all federal,
state, local and regional statutes, laws, ordinances and judicial or
administrative orders, judgments, rulings and regulations relating to protection
of the environment except, in any such case, where failure to comply could not
result in a material adverse effect on the business, condition (financial or
otherwise) or operations of the Company.
8N. FISCAL YEAR. The fiscal year of the Company ends as of
December 31 of each year.
8O. DISCLOSURE. Neither this Agreement, the other Second Priority Note
Documents nor any other document, certificate or statement furnished to any
Existing Holder by or on behalf of the Company in connection herewith contains
any untrue statement of a material fact or omits to state a material fact
necessary in order to make the statements contained herein and therein not
misleading. There is no fact peculiar to the Company which materially adversely
affects or in the future may (so far as the Company can now foresee) materially
adversely affect the business, property or assets, or financial condition of the
Company and which has not been set forth in this Agreement, the other Second
Priority Note Documents or in the other documents, certificates and statements
furnished to any Existing Holder by or on behalf of the Company prior to the
date hereof in connection with the transactions contemplated hereby. The pro
forma financial projections dated as of [__________] and previously delivered to
the Existing Holders by the Company are reasonable based on the assumptions
stated therein and the best information available to the officers of the
Company. The Company and the Schoenke Companies have disclosed the material
terms of all existing transactions with Affiliates to the Existing Holders.
8P. INVESTMENT COMPANY ACT. Neither the Company nor any Person
controlling the Company is an "INVESTMENT COMPANY," or a company "CONTROLLED" by
an "INVESTMENT COMPANY," within the meaning of the Investment Company Act of
1940, as amended.
8Q. OTHER REGULATION. Neither the Company nor any Person controlling
the Company is subject to regulation under any federal or state statute or
regulation, as amended from time to time, which limits the ability of (i) the
Company to issue the Notes or (ii) the Company to perform its respective
obligations under this Agreement, the other Second Priority Note Documents or
the Schoenke Acquisition Documents.
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8R. OTHER REPRESENTATIONS AND WARRANTIES. To induce the Existing
Holders to enter into this Agreement in amendment and restatement of the
Original Note Agreement and to accept the Notes, the Company agrees that the
Existing Holders shall be entitled to rely upon each of the representations and
warranties set forth in any of the Schoenke Acquisition Documents, any of the
Merger Documents and any of the IPO Documents, in each case as fully as if set
forth in this Agreement.
8S. SOLVENCY. The Company is Solvent, both before and after giving
effect to this Agreement, the other Second Priority Note Documents, the Senior
Note Documents, the Schoenke Acquisition Documents, the Merger Documents and the
IPO Documents and to the transactions contemplated hereby and thereby.
8T. EMPLOYMENT AGREEMENTS, NON-COMPETITION AGREEMENTS AND PRINCIPAL
OFFICE AGREEMENTS. Schedule 8T describes all material employment agreements,
non-competition agreements and principal office agreements to which the Company
is a party. All of the material employment agreements, non-competition
agreements and principal office agreements described on Schedule 8T are in full
force and effect and no default thereunder or violation of any of the provisions
thereof exists.
8U. INSURANCE LICENSES. All Insurance Licenses of the Company are
listed on Schedule 8U and are in full force and effect. No proceeding or
customer complaint has been filed with insurance regulatory authorities which
could reasonably be expected to lead to revocation, failure to renew,
limitation, suspense or restriction of any such Insurance License.
8V. UNDISCLOSED LIABILITIES. The Company does not have any Liability
(and there is no Basis for any present or future action, suit, proceeding,
hearing, investigation, charge, complaint, claim, or demand against it giving
rise to any Liability), except for (i) Liabilities set forth on the face of the
pro forma balance sheet of the Company dated as of [JUNE 30, 1998] described in
paragraph 3A(xx)(a)(y) and disclosed in any notes thereto and (ii) Liabilities
which have arisen after [JUNE 30, 1998] in the Ordinary Course of Business (none
of which results from, arises out of, relates to, is in the nature of, or was
caused by any breach of a contract, breach of warranty, tort, infringement, or
violation of law).
8W. LEGAL COMPLIANCE. The Company and each of its stockholders,
officers, independent contractors, subagents, consultants and employees who are
required by reason of the nature of their employment by the Company to be
registered or appointed as an insurance agent, insurance broker or insurance
producer with the insurance department of any state or any self-regulatory body
or other governmental entity, is duly registered or appointed as such and such
registration or appointment is in full force and effect, and neither the Company
nor any such other Persons has been enjoined, indicted, convicted or made the
subject of any consent decree or administrative order on account of any material
violation of applicable law in connection with such Person's actions in any of
the foregoing capacities or, any enforcement or disciplinary proceeding alleging
any such violation.
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8X. CERTAIN TAX MATTERS. Prior to its conversion to a C Corporation as
described in the Registration Statement, CBI-Texas had never been (i) a member
of an Affiliated Group filing a consolidated federal income Tax Return or (ii)
responsible for any Liability for the taxes of any Person (other than the
Company) as a transferee or successor, by contract, by operation of law, or
otherwise.
8Y. SALES REPRESENTATIVES. To the Company's knowledge, the
stockholders, directors and officers (and employees with responsibility for
sales matters) of the Company and each of the Schoenke Companies (excluding,
with respect to the Schoenke Companies, Raymond Schoenke, Jr.), and all sales
representatives currently marketing the Company's and the Schoenke Companies'
insurance policies under Representative Agreements are expected to continue to
perform such services after the Date of Closing, and none has expressed an
intention or desire to cease such sales activities.
8Z. CONTRACTS. Except as set forth in Schedule 8Z, the Company is not
a party to, or bound by:
(i) any agreement (or group of related agreements) for the lease of
personal property to or from any Person providing for lease payments in
excess of $20,000 per annum;
(ii) any agreement (or group of related agreements) for the
purchase or sale of supplies, products, or other personal property, or
for the furnishing or receipt of services, the performance of which
will extend over a period of more than one year, result in a material
loss to the Company, or involve consideration in excess of $25,000;
(iii) any agreement concerning a partnership or joint venture;
(iv) any agreement (or group of related agreements) under which it
has created, incurred, assumed, or guaranteed any indebtedness for
borrowed money, or any Capitalized Lease Obligation, or under which it
has imposed a Lien on any of its assets, tangible or intangible, except
for the Liens permitted by paragraph 6G(1);
(v) any agreement concerning confidentiality or noncompetition
other than with insurance carriers and others regarding product
development;
(vi) any agreement or arrangement with any of the shareholders of
the Schoenke Companies;
(vii) any profit sharing, stock option, stock purchase, stock
appreciation, deferred compensation, severance, or other material plan
or arrangement (including, without limitation, any plan or arrangement
with respect to phantom stock or any equivalent thereto) for the
benefit of its current or former directors, officers, and employees;
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(viii) any collective bargaining agreement;
(ix) any agreement for the employment of any individual on a
full-time, part-time, consulting, or other basis providing annual
compensation in excess of $50,000 or providing severance benefits or
which is not terminable at the will of the Company;
(x) any agreement or arrangement under which it has advanced or
loaned any amount to any of its directors, officers, and employees;
(xi) any agreement under which the consequences of a default or
termination could have a material adverse effect on the business,
condition (financial or other), prospects or operations of the Company;
or
(xii) any other agreement (or group of related agreements),
including Vendors' Contracts, the performance of which involves
consideration in excess of $10,000.
With respect to each agreement described in Schedule 8Z attached hereto: (a)
such agreement is legal, valid, binding, enforceable, and in full force and
effect; (b) such agreement will continue to be legal, valid, binding,
enforceable, and in full force and effect on identical terms following the
consummation of the Schoenke Acquisition, the Merger, the IPO and the
transactions contemplated by this Agreement and the other Second Priority Note
Documents; (c) no party is in breach or default, and no event has occurred which
with notice or lapse of time would constitute a breach or default, or permit
termination, modification, or acceleration, under such agreement; and (d) no
party has repudiated any provision of such agreement. The Company is not a party
to any oral agreement.
8AA. ASSIGNMENT OF INSURANCE CONTRACTS. The Company has no reason to
believe that the notices and consents required to assign the Insurance Contracts
to the Company as provided in Section 3.11 of the Schoenke Acquisition Agreement
will not be obtained.
8BB. SATISFACTION OF CONDITIONS PRECEDENT TO THE SCHOENKE ACQUISITION,
THE MERGER AND THE IPO. All of the conditions precedent to the effectiveness of
the Merger Documents and the IPO Documents have been satisfied. None of the
conditions precedent to the effectiveness of the Merger Documents, the IPO
Documents or the Schoenke Acquisition Documents have been waived without the
express written consent of each of the Existing Holders.
8CC. COMPLIANCE WITH LAWS. The Company has complied with all applicable
laws, rules, regulations and orders (including those relating to protection of
the environment) except, in any such case, where failure to comply could not
have a material adverse effect on the business, condition (financial or
otherwise), operations or prospects of the Company.
8DD. CONDITION OF PROPERTY. All of the property of the Company is in
good repair, working order and condition so that the business carried on in
connection therewith may be properly and advantageously conducted at all times
in the normal course of business.
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8EE. BOOKS AND RECORDS. The Company has at all times maintained proper
books of record and account in which full, true and correct entries have been
made in accordance with GAAP.
8FF. ADDITIONAL DISCLOSURE. Schedule 8FF(1) is a true, correct and
complete schedule of all properly accrued performance bonuses payable to
employees and independent sales representatives and agents of the Company.
Schedule 8FF(2) is a true, correct and complete schedule of all Plans and
Multiemployer Plans of the Company and any ERISA Affiliates. Schedule 8FF(3) is
a true, correct and complete schedule of all trademarks, service marks, trade
dress, logos, trade names and corporate names of the Company, together with all
translations, adaptations, derivations and combinations thereof, and all
applications, registrations and renewals in connection therewith.
8GG. SATISFACTION OF CONDITIONS PRECEDENT. All of the conditions
precedent to the effectiveness of this Agreement have been satisfied or waived
in writing by each of the Existing Holders.
8HH. CERTAIN AFFILIATES. The arrangements contemplated by paragraph 5Q
are lawful and are customary and are recognized in the industry and
jurisdictions in which the Company operates or proposes to operate, directly or
in conjunction with Affiliates.
PARAGRAPH 9. REPRESENTATIONS OF EACH PURCHASER.
9. REPRESENTATIONS OF EACH EXISTING HOLDER. Each Existing Holder
represents as follows:
9A. NATURE OF PURCHASE. Such Existing Holder did not acquire the
Original Notes purchased by it under the Original Note Agreement and is not
acquiring the Notes to be delivered to it hereunder in replacement of such
Original Notes with a view to or for sale in connection with any distribution
thereof within the meaning of the Securities Act, provided that the disposition
of such Existing Holder's property shall at all times be and remain within its
control.
9B. SOURCE OF FUNDS. Such Existing Holder represents that at least one
of the following statements is an accurate representation as to each source of
funds (a "SOURCE") used by such Existing Holder to purchase the Original Notes
purchased by it:
(i) the Source constituted assets of a general account maintained
by an insurance company, and the use of such Source for the purchase of
the Original Notes was permitted by the terms of Prohibited Transaction
Class Exemption 95-60; or
(ii) the Source was either (a) an insurance company pooled separate
account, within the meaning of Prohibited Transaction Exemption ("PTE")
90-1 (issued January 29, 1990), or (b) a bank collective investment
fund, within the meaning of PTE 91-38 (issued July 12, 1991) and,
except as such Existing Holder disclosed to the Company in writing, no
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employee benefit plan or group of plans maintained by the same employer
or employee organization beneficially owned more than 10% of all assets
allocated to such pooled separate account or collective investment
fund; or
(iii) the Source constituted assets of an "investment fund" (within
the meaning of Part V of the QPAM Exemption) managed by a "qualified
professional asset manager" or "QPAM" (within the meaning of Part V of
the QPAM Exemption), no employee benefit plan's assets that were
included in such investment fund, when combined with the assets of all
other employee benefit plans established or maintained by the same
employer or by an affiliate (within the meaning of Section V(c)(1) of
the QPAM Exemption) of such employer or by the same employee
organization and managed by such QPAM, exceeded 20% of the total client
assets managed by such QPAM, the conditions of Part I(c) and (g) of the
QPAM Exemption were satisfied, neither the QPAM nor a person
controlling or controlled by the QPAM (applying the definition of
"control" in Section V(e) of the QPAM Exemption) owned a 5% or more
interest in the Company and (a) the identity of such QPAM and (b) the
names of all employee benefit plans whose assets were included in such
investment fund were disclosed to the Company in writing; or
(iv) the Source was a governmental plan; or
(v) the Source was one or more employee benefit plans, or a
separate account or trust fund comprised of one or more employee
benefit plans, each of which was identified to the Company in writing;
or
(vi) the Source did not include assets of any employee benefit
plan, other than a plan exempt from the coverage of ERISA.
As used in this paragraph 9B, the terms "EMPLOYEE BENEFIT PLAN", "GOVERNMENTAL
PLAN", "PARTY IN INTEREST" and "SEPARATE ACCOUNT" shall have the respective
meanings assigned to such terms in Section 3 of ERISA.
PARAGRAPH 10. DEFINITIONS.
10. DEFINITIONS. For the purpose of this Agreement, the terms defined
in the introductory sentence and in paragraphs 1 and 2 shall have the respective
meanings specified therein, and the following terms shall have the meanings
specified with respect thereto below (such meanings to be equally applicable to
both the singular and plural forms of the terms defined):
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10A. DEFINED TERMS.
"AAA DISTRIBUTION" shall mean the $0.60 per share
distribution to the shareholders of record of common stock of CBI-Texas on
October 31, 1997.
"AAA DISTRIBUTION NOTES" shall mean the subordinated
promissory notes of CBI- Texas to evidence CBI-Texas' borrowing from its
shareholders of the proceeds of the AAA Distribution in an aggregate principal
amount not to exceed $4,143,623.
"AFFILIATE" shall mean at any time, and with respect to any
Person, (i) any other Person that at such time directly or indirectly through
one or more intermediaries Controls, or is Controlled by, or is under common
Control with, such first Person, and (ii) any Person beneficially owning or
holding, directly or indirectly, 10% or more of any class of voting or equity
interests of the Company or any Subsidiary or any corporation of which the
Company and its Subsidiaries beneficially own or hold, in the aggregate,
directly or indirectly, 10% or more of any class of voting or equity interests.
As used in this definition, "CONTROL" means the possession, directly or indi
rectly, of the power to direct or cause the direction of the management and
policies of a Person, whether through the ownership of voting securities, by
contract or otherwise. Unless the context otherwise clearly requires, any
reference to an "AFFILIATE" is a reference to an Affiliate of the Company.
"AFFILIATED GROUP" shall mean an affiliated group within the
meaning of Section 1504(a) of the Code.
"ANNUALIZED CASH FLOW" shall mean, at any time, (i) prior to
September 30, 1998, Cash Flow for the period commencing September 1, 1997
through to such date, annualized in accordance with accepted financial practice;
and (ii) on or after September 30, 1998, Cash Flow for the most recently ended
four fiscal quarters.
"ASSET DISPOSITION" shall mean, with respect to the Company
or any Subsidiary, any transaction or series of related transactions in which
such Person sells, conveys, transfers or leases (as lessor) or parts with
control of (collectively, for purposes of this definition, a "TRANSFER"),
directly or indirectly, any of its property or assets, including, without
limitation, any Indebtedness of any Subsidiary or capital stock of or other
equity interests in any Subsidiary (including the issuance of such stock or
other equity interests by such Subsidiary), other than transfers of cash or cash
equivalents.
"ASSIGNMENT OF LIFE INSURANCE POLICY" shall mean,
collectively, those certain Assignments of Life Insurance Policy, dated
September 9, 1997, executed and delivered by the Company and W. T. Wamberg to
the Collateral Agent, substantially in the form of Exhibit E-1 and E-2 to the
Senior Note Agreement, respectively, as the same may be amended, supplemented
and otherwise modified from time to time.
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"BANKRUPTCY LAW" shall have the meaning specified in clause
(ix) of paragraph 7A.
"BASIS" shall mean any past or present fact, situation,
circumstance, status, condition, activity, practice, plan, occurrence, event,
incident, action, failure to act, or transaction that forms or could form the
basis for any specified consequence.
"BCS ACQUISITION AGREEMENT" shall mean that certain Asset
Purchase Agreement among CBI-Texas, Bank Compensation Strategies, Inc., a
Minnesota corporation, and certain individuals dated as of September 5, 1997.
"BUSINESS DAY" shall mean any day on which banks are open for
business in New York City (other than a Saturday, a Sunday or a legal holiday)
in the State of New York.
"CBH" shall have the meaning specified in Recital C of this
Agreement.
"CAPITALIZATION RATIO" shall mean, as of any date of
determination, the ratio of (i) Indebtedness of the Company and its
Subsidiaries, determined on a consolidated basis in accordance with GAAP, to
(ii) the sum of (a) Consolidated Net Worth plus (b) total Indebtedness of the
Company and its Subsidiaries, as so determined.
"CAPITAL LEASE" shall mean a lease with respect to which the
lessee is required concurrently to recognize the acquisition of an asset and the
incurrence of a liability in accordance with GAAP.
"CAPITAL LEASE OBLIGATION" shall mean, with respect to any
Person and a Capital Lease, the amount of the obligation of such Person as the
lessee under such Capital Lease which would, in accordance with GAAP, appear as
a liability on a balance sheet of such Person.
"CASH FLOW" shall mean, for any period, the sum of
Consolidated Net Income, plus Interest Charges and consolidated taxes,
depreciation, amortization and other non-cash charges to income of the Company
and its Subsidiaries for such period, but only to the extent deducted in the
determination of Consolidated Net Income, less consolidated deferred taxes or
other non-cash items which constitute non-cash contributions to Consolidated Net
Income, excluding in each case all extraordinary and non-recurring items. "CASH
FLOW" for any period shall be determined after giving effect to acquisitions and
dispositions of assets by the Company or any of its Subsidiaries during such
period as if such acquisitions and dispositions had occurred on the first day of
such period.
"CHANGE IN CONTROL" shall mean (i) the failure of the members
of the Control Group to own at all times at least 10% of the then issued and
outstanding common stock of CBH (on a fully diluted basis, with such amounts to
be adjusted for stock splits, reverse splits and the effects of dilution from
Permitted Acquisitions and public equity offerings subsequent to the IPO) or
(ii) any person (as such term is defined in Section 13(d) and Section 14(d)(2)
of the Exchange Act as in
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effect on the Date of Closing) or related persons constituting a group (as such
term is used in Rule 13d-5 under the Exchange Act as in effect on the Date of
Closing) own, at any time, on a fully diluted basis, as the result of a single
transaction or a series of transactions, at least 30% of the then issued and
outstanding shares of common stock of CBH.
"CLAIMS" shall have the meaning specified in paragraph 5H.
"CLOSING" or "DATE OF CLOSING" shall have the meaning
specified in paragraph 2A.
"COCHLAN PHANTOM STOCK AGREEMENT" shall mean that certain
Phantom Stock Agreement dated as of September 5, 1997, between Steven J. Cochlan
and the Company.
"CODE" shall mean the Internal Revenue Code of 1986, as
amended.
"COLLATERAL" shall mean the collateral described in the
Security Documents which secures payment of the Notes and payment, performance
and observance of the obligations of the Company and its Subsidiaries under this
Agreement and the other Second Priority Note Documents.
"COLLATERAL AGENT" shall mean Chase Bank of Texas, National
Association, in its capacity as Collateral Agent for Bank Compensation
Strategies, Inc. and the holders of the Notes, the Senior Notes and the Medium
Term Note, as provided under the Collateral Agency Agreement, and its successors
and assigns as such Collateral Agent.
"COLLATERAL AGENCY AGREEMENT" shall mean that certain Amended
and Restated Collateral Agency Agreement, dated as of even date herewith, by and
among the Company, Bank Compensation Strategies, Inc., the Collateral Agent and
the holders of the Notes and the Senior Notes, substantially in the form of
Exhibit F to the Senior Note Agreement, as the same may be amended, supplemented
and otherwise modified from time to time.
"COMMISSION FEES" shall mean, at any time, 60% of the future
commission fees of the Company and its Subsidiaries payable under products whose
persistency rate is greater than 90% over the last five calendar years exclusive
of products (such as leveraged COLI) whose federal, state or local tax
advantages have been materially decreased pursuant to federal, state or local
legislation or regulations promulgated thereunder; provided, however, that at
any time 180 days after the Date of Closing, such future commission fees shall
not include any such fees which are payable pursuant to contracts or agreements
for which the Company or any of its Subsidiaries have not obtained consents to
the assignment or transfer thereof (unless such consents are not required by
applicable law (such as New York Uniform Commercial Code ss. 9-318(4)).
"COMPETITOR" shall mean any Person specified in Schedule A
attached hereto.
"CONFIDENTIAL INFORMATION" shall mean any material non-public
information regarding the Company that is provided to any holder of any Note,
any Person that purchases a
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participation in a Note and any offeree of a Note or a participation therein
pursuant to this Agreement other than information (i) which was publicly known
or otherwise known to such holder, such Person or such offeree at the time of
disclosure, (ii) which subsequently becomes publicly known through no act or
omission of such holder, such Person or such offeree or (iii) which otherwise
becomes known to such holder, such Person or such offeree other than through
disclosure by the Company or any Subsidiary.
"CONTROL GROUP" shall mean W.T. Wamberg and The Wamberg
Organization, Inc., an Illinois corporation.
"CONSOLIDATED NET INCOME" shall mean, with reference to any
period, the net income (or loss) of the Company and its Subsidiaries for such
period (taken as a cumulative whole), as determined in accordance with GAAP,
after deducting, among other items, commission expenses of the Company and its
Subsidiaries and after eliminating all offsetting debits and credits between the
Company and its Subsidiaries and all other items required to be eliminated in
the course of preparation of consolidated financial statements of the Company
and its Subsidiaries in accordance with GAAP, provided that there shall be
excluded:
(i) any net income or gain (but not any net loss) during such
period from any extraordinary items (including, without limitation,
proceeds of life insurance policies),
(ii) the net loss or any undistributed earnings of any
Subsidiary that is not consolidated with the Company in accordance with
GAAP for financial accounting purposes,
(iii) the net income (or loss) of any Person accrued prior to
the date it becomes a Subsidiary or is merged into or consolidated with
the Company or a Subsidiary, and the net income (or loss) of any
Person, substantially all of the assets of which have been acquired in
any manner, realized by such other Person prior to the date of
acquisition,
(iv) any aggregate net gain (but not any aggregate net loss)
during such period arising from the sale, conversion, exchange or other
disposition of capital assets (such term to include, without
limitation, (a) all non-current assets and, without duplication, (b)
the following, whether or not current: all fixed assets, whether
tangible or intangible, all inventory sold in conjunction with the
disposition of fixed assets, and all securities), and
(v) any non-cash net income or gain (but not any net loss)
during such period from (a) any one-time change in accounting
principles in accordance with GAAP or (b) any prior period adjustments
resulting from any one-time change in accounting principles in
accordance with GAAP.
"CONSOLIDATED NET WORTH" shall mean, at any time,
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(i) the sum of (a) the par value (or value stated on the
books of the corporation) of the capital stock (but excluding treasury
stock and capital stock subscribed and unissued) of the Company and its
Subsidiaries plus (b) the amount of paid-in capital and retained
earnings of the Company and its Subsidiaries, in each case as such
amounts would be shown on a consolidated balance sheet of the Company
and its Subsidiaries as of such time prepared in accordance with GAAP,
minus
(ii) to the extent included in clause (i), all amounts
properly attributable to minority interests, if any, in the stock and
surplus of Subsidiaries.
"CONVERTIBLE SUBORDINATED NOTES" shall mean the unsecured
convertible subordinated promissory notes of CBI-Texas in the aggregate
principal amount of $4,800,000, issued to Bank Compensation Strategies, Inc. in
connection with the BCS Acquisition.
"DISCOUNTED COMMISSION FEES" shall mean, at any time, the
amount obtained by discounting all Commission Fees payable to the Company and
its Subsidiaries for a five year period from their respective scheduled payment
dates to the date of determination, in accordance with accepted financial
practice and at a discount factor (applied on an annual basis) equal to 10% per
annum.
"EBIT" shall mean, for any period, the sum of (i)
Consolidated Net Income plus (ii) to the extent deducted in the determination of
Consolidated Net Income, (a) all provisions for federal, state and other income
tax for such period, and (b) Interest Charges.
"ERISA" shall mean the Employee Retirement Income Security
Act of 1974, as amended.
"ERISA AFFILIATE" shall mean any corporation which is a
member of the same controlled group of corporations as the Company within the
meaning of section 414(b) of the Code, or any trade or business which is under
common control with the Company within the meaning of section 414(c) of the
Code.
"EVENT OF DEFAULT" shall mean any of the events specified in
paragraph 7A, provided that there has been satisfied any requirement in
connection with such event for the giving of notice, or the lapse of time, or
the happening of any further condition, event or act, and "DEFAULT" shall mean
any of such events, whether or not any such requirement has been satisfied.
"EXCHANGE ACT" shall mean the Securities Exchange Act of
1934, as amended.
"FIXED CHARGES" shall mean, with respect to any period, the
sum of (i) Interest Charges, (ii) Lease Rentals, and (iii) the aggregate amount
of principal payments on Indebtedness of the Company and its Subsidiaries made
or to be made during such period.
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"FIXED CHARGES COVERAGE RATIO" shall mean, at any time, (i)
prior to September 30, 1998, the ratio of (a) the sum of Cash Flow and Lease
Rentals for the period commencing September 1, 1997 through such date,
annualized in accordance with accepted financial practice, to (b) Fixed Charges
for such period, annualized in accordance with accepted financial practice, and
(ii) on or after September 30, 1998, the ratio of (a) the sum of Cash Flow and
Lease Rentals for the four most recently ended fiscal quarters to (b) Fixed
Charges for the four most recently ended fiscal quarters.
"GAAP" shall have the meaning specified in paragraph 10B.
"GENERAL AGENT'S CONTRACTS" shall mean the agreements between
the Company or any of the Schoenke Companies, as the case may be, and insurance
companies for the purpose of soliciting applications for insurance and
recruiting producers to solicit applications for insurance.
"GOVERNMENTAL AUTHORIty" means (i) the government of (a) the
United States of America or any state or other political subdivision thereof, or
(b) any jurisdiction in which the Company or any Subsidiary conducts all or any
part of its business, or which asserts jurisdiction over any properties of the
Company or any Subsidiary, or (ii) any entity exercising executive, legislative,
judicial, regulatory or administrative functions of, or pertaining to, any such
government.
"GUARANTEE" shall mean, with respect to any Person, any
obligation (except the endorsement in the ordinary course of business of
negotiable instruments for deposit or collection) of such Person guaranteeing or
in effect guaranteeing (whether by reason of being a general partner of a
partnership or otherwise) any indebtedness, dividend or other obligation of any
other Person in any manner, whether directly or indirectly, including (without
limitation) obligations incurred through an agreement, contingent or otherwise,
by such Person:
(i) to purchase such indebtedness or obligation or any
property constituting security therefor;
(ii) to advance or supply funds (a) for the purchase or
payment of such indebtedness or obligation, or (b) to maintain any
working capital or other balance sheet condition or any income
statement condition of any other Person or otherwise to advance or make
available funds for the purchase or payment of such indebtedness or
obligation;
(iii) to lease properties or to purchase properties or
services primarily for the purpose of assuring the owner of such
indebtedness or obligation of the ability of any other Person to make
payment of the indebtedness or obligation; or
(iv) otherwise to assure the owner of such indebtedness or
obligation against loss in respect thereof.
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In any computation of the indebtedness or other liabilities of the
obligor under any Guarantee, the indebtedness or other obligations that are the
subject of such Guarantee shall be assumed to be direct obligations of such
obligor.
"GUARANTY" shall mean that certain Guaranty Agreement, dated
as of even date herewith, made by CBH in favor of the holders of the Notes,
substantially in the form of Exhibit E attached hereto, as the same may be
amended, supplemented and otherwise modified from time to time.
"INDEBTEDNESS" shall mean, with respect to any Person, at any
time, without duplication,
(i) its liabilities for borrowed money;
(ii) its liabilities for the deferred purchase price of
property acquired by such Person (excluding accounts payable arising in
the ordinary course of business but including all liabilities created
or arising under any conditional sale or other title retention
agreement with respect to any such property);
(iii) all liabilities appearing on its balance sheet in
accordance with GAAP in respect of Capital Leases;
(iv) all liabilities for borrowed money secured by any Lien
with respect to any property owned by such Person (whether or not it
has assumed or otherwise become liable for such liabilities);
(v) all its liabilities in respect of letters of credit or
instruments serving a similar function issued or accepted for its
account by banks and other financial institutions (whether or not
representing obligations for borrowed money);
(vi) Swaps of such Person; and
(vii) any Guarantee of such Person with respect to liabilities
of a type described in any of clauses (i) through (vi) hereof.
Indebtedness of any Person shall include all obligations of such Person
of the character described in clauses (i) through (vii) to the extent such
Person remains legally liable in respect thereof notwithstanding that any such
obligation is deemed to be extinguished under GAAP.
"INDEPENDENT ACCOUNTANT" shall mean Ernst & Young LLP or
another "Big Five" independent accounting firm selected by the Company.
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"INSTITUTIONAL INVESTOR" shall mean (i) any original purchaser
of a Note, (ii) any holder of a Note holding more than 5% of the aggregate
principal amount of the Notes then outstanding, and (iii) any bank, trust
company, savings and loan association or other financial institution, any
pension plan, any investment company, any insurance company, any broker or
dealer, or any other similar financial institution or entity, regardless of
legal form.
"INSURANCE CONTRACTS" shall mean the General Agent's
Contracts, the Producer's Contracts, the Representative Agreements and the
Servicing Agreements.
"INSURANCE LICENSES" shall mean any license, certificate of
authority, permit or other authorization granted to the Company by any
governmental authority to engage in any life insurance brokerage or agency
business.
"INTEREST CHARGES" shall mean, with respect to any period, the
sum (without duplication) of the following (in each case, eliminating all
offsetting debits and credits between the Company and its Subsidiaries and all
other items required to be eliminated in the course of the preparation of
consolidated financial statements of the Company and its Subsidiaries in
accordance with GAAP): (i) all interest in respect of Indebtedness of the
Company and its Subsidiaries (including imputed interest on Capital Lease
Obligations) deducted in determining Consolidated Net Income for such period,
and (ii) all debt discount and expense amortized or required to be amortized in
the determination of Consolidated Net Income for such period.
"INTEREST COVERAGE RATIO" shall mean, at any time, (i) prior
to September 30, 1998, the ratio of (a) EBIT for the period commencing September
1, 1997 through such date, annualized in accordance with accepted financial
practice to (b) Interest Charges for such period, annualized in accordance with
accepted financial practice and (ii) on or after September 30, 1998, the ratio
of (a) EBIT for the four immediately preceding fiscal quarters to (b) Interest
Charges for the four immediately preceding fiscal quarters.
"INVESTMENT" shall have the meaning specified in paragraph
6G(4).
"IPO" shall have the meaning specified in Recital E of this
Agreement.
"IPO DOCUMENTS" shall mean the Registration Statement, the
Underwriting Agreement, the Reorganization Agreement and all other written
agreements, documents, instruments and certificates now or hereafter executed
and delivered by any Person in connection with the IPO, and any and all
amendments, supplements and other modifications thereof and all renewals,
extensions, restatements or substitutions from time to time of all or any of the
foregoing.
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"LEASE RENTALS" shall mean, with respect to any period, the
sum of the minimum amount of rental and other obligations required to be paid
during such period by the Company or any Subsidiary as lessee under all leases
of real or personal property (other than Capital Leases), excluding any amounts
required to be paid by the lessee (whether or not therein designated as rental
or additional rental) which are on account of maintenance and repairs,
insurance, taxes, assessments, water rates and similar charges, but including
any amounts required to be paid by the lessee (whether or not therein designated
as rental or additional rental) which are based on profits, revenues or sales
realized by the lessee from the leased property or otherwise based on the
performance of the lessee.
"LIABILITIES" shall mean any liability (whether known or
unknown, whether asserted or unasserted, whether absolute or contingent, whether
accrued or unaccrued, whether liquidated or unliquidated, and whether due or to
become due), including any liability for taxes.
"LIEN" shall mean any mortgage, pledge, priority, security
interest, encumbrance, contractual deposit arrangement, lien (statutory or
otherwise) or charge of any kind (including any agreement to give any of the
foregoing, any conditional sale or other title retention agreement, any lease in
the nature thereof, and the filing of or agreement to give any financing
statement under the Uniform Commercial Code of any jurisdiction) or any other
type of preferential arrangement for the purpose, or having the effect, of
protecting a creditor against loss or securing the payment or performance of an
obligation.
"MEDIUM TERM NOTE" shall mean the secured promissory note of
CBI-Texas in the original principal amount of $5,700,000, issued to Bank
Compensation Strategies, Inc. in connection with the BCS Acquisition.
"MERGER" shall have the meaning specified in Recital C of this
Agreement.
"MERGER DOCUMENTS" shall mean the Reorganization Agreement,
the Certificates of Merger issued by the Secretaries of State of the States of
Texas and Delaware and all other written agreements, documents, instruments and
certificates now or hereafter executed and delivered by any Person which are
required by the terms of the Reorganization Agreement to be delivered to
consummate the Merger, and any and all amendments, supplements and other
modifications thereof and all renewals, extensions, restatements or
substitutions from time to time of all or any of the foregoing.
"MULTIEMPLOYER PLAN" shall mean any Plan which is a
"MULTIEMPLOYER PLAN" (as such term is defined in section 4001(a)(3) of ERISA).
"NON-COMPETE AGREEMENT" shall mean that certain Non-Compete
and Confidentiality Agreement, dated as of September 4, 1997, between the
Company and W.T.
Wamberg.
"NOTES" shall have the meaning specified in paragraph 1A.
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"OFFICER'S CERTIFICATE" shall mean a certificate signed in the
name of the Company by its President, one of its Vice Presidents or its
Treasurer.
"ORDINARY COURSE OF BUSINESS" shall mean the ordinary course
of business consistent with past custom and practice (including with respect to
quantity and frequency).
"ORIGINAL NOTE AGREEMENT" shall have the meaning specified in
Recital A of this Agreement.
"ORIGINAL NOTE DOCUMENTS" shall have the meaning specified in
Recital D of this Agreement.
"ORIGINAL NOTES" shall have the meaning specified in Recital A
of this Agreement.
"PBGC" shall mean the Pension Benefit Guaranty Corporation or
any successor entity.
"PERFECTION CERTIFICATE" shall mean the Perfection
Certificate, dated as of even date herewith and executed and delivered by the
Company to the holders of the Notes, substantially in the form of Exhibit H to
the Senior Note Agreement.
"PERMITTED ACQUISITION" shall mean (i) the Schoenke
Acquisition, provided that the purchase price therefor is paid entirely with the
proceeds from the IPO, and (ii) the acquisition by the Company, by asset
purchase, merger or consolidation, for cash, stock, seller notes or any
combination of the foregoing, of (a) all of the outstanding capital stock of or
other equity interests in any other Person or (b) all or substantially all of
the assets of any other Person, provided in each case that such Person is
engaged in the business of providing insurance products or related financial
services and, provided further, that if any Permitted Acquisition is to be
financed in whole or in part with financing provided by the seller or its
Affiliates, the Indebtedness created thereby must have a final maturity date on
or after September 1, 2002 and a weighted average life to maturity greater than
the weighted average life to maturity of the Senior Notes at the time of such
Permitted Acquisition.
"PERSON" shall mean and include an individual, a partnership,
a joint venture, a corporation, a trust, a limited liability company, an
unincorporated organization and a government or any department or agency
thereof.
"PLAN" shall mean any "EMPLOYEE PENSION BENEFIT PLAN" (as such
term is defined in section 3 of ERISA) which is or has been established or
maintained, or to which contributions are or have been made, by the Company or
any ERISA Affiliate.
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"PRODUCER'S CONTRACTS" shall mean the agreements between any
of the Schoenke Companies or the Company, as the case may be, and insurance
companies for the procurement or submission of insurance policies and variable
annuity contracts.
"PROPOSED PREPAYMENT DATE" shall have the meaning specified in
clause (iii) of paragraph 4C.
"QPAM EXEMPTION" shall mean Prohibited Transaction Class
Exemption 84-14 issued by the United States Department of Labor.
"QUALIFIED INSTITUTIONAL BUYER" shall mean a "QUALIFIED
INSTITUTIONAL BUYER" as such term is defined in Rule 144A under the Securities
Act.
"REGISTRATION STATEMENT" shall mean the amended Registration
Statement on Form S-1 of CBH, filed with the Securities and Exchange Commission
on July 23, 1998 in connection with the IPO.
"REORGANIZATION AGREEMENT" shall have the meaning specified in
Recital C of this Agreement.
"REPRESENTATIVE AGREEMENTS" shall mean the agreements between
any of the Schoenke Companies or the Company, as the case may be, and
independent representatives for the marketing of compensation and benefit plans
to financial institutions.
"REQUIRED HOLDER(S)" shall mean the holder or holders of at
least 66 2/3% of the aggregate principal amount of the Notes from time to time
outstanding.
"RESPONSIBLE OFFICER" shall mean the chief executive officer,
chief operating officer, chief financial officer or chief accounting officer of
the Company or any other officer of the Company involved principally in its
financial administration or its controllership function.
"RESTRICTED PAYMENT" shall mean (i) the declaration of any
dividend on, or the incurrence of any liability to make any other payment or
distribution in respect of any capital stock or equity equivalent (except, in
the case of a Subsidiary, dividends or other payments or distributions in
respect of its capital stock or equity to the Company or a Wholly Owned
Subsidiary) or (ii) the distribution on account of the purchase, redemption or
other retirement of any such capital stock or equity equivalent (except, in the
case of a Subsidiary, purchases, redemptions or other retirements of its capital
stock from the Company or a Wholly Owned Subsidiary). "RESTRICTED PAYMENT" shall
not include (a) the incurrence of any liability to make any payment or
distribution in respect of the phantom stock issued pursuant to the Cochlan
Phantom Stock Agreement as in effect on the Date of Closing and (b) the
distribution on account of the purchase, redemption or other retirement of the
phantom stock issued pursuant to the Cochlan Phantom Stock Agreement as in
effect on the Date of Closing.
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"REVENUE MAINTENANCE EVENT" shall mean the occurrence of
either (i) an event in which W.T. Wamberg is no longer a principal of the
Company or (ii) an event in which gross revenues (net of commission expenses) of
the Company (or CBI-Texas, for periods prior to the Merger) and its Subsidiaries
for the four immediately preceding fiscal quarters do not exceed $16,000,000.
"S CORPORATION" shall mean an S corporation described Section
1361(a)(1) of the Code.
"S CORPORATION TAX DISTRIBUTIONS" shall mean distributions by
the Company to the former shareholders of CBI-Texas solely to satisfy the income
tax liability of such shareholders with respect to the taxable income of
CBI-Texas for tax periods in which CBI-Texas was an S Corporation.
"SALE-LEASEBACK TRANSACTION" shall have the meaning specified
in paragraph 6G(9).
"SCHOENKE ACQUISITION" shall mean the acquisition by the
Company of all or substantially all of the assets of the Schoenke Companies and
the assumption by the Company of certain liabilities of the Schoenke Companies
pursuant to the Schoenke Acquisition Documents.
"SCHOENKE ACQUISITION AGREEMENT" shall mean that certain Asset
Purchase Agreement among the Company, the Schoenke Companies and certain
individuals dated as of [______________, 1998].
"SCHOENKE ACQUISITION DOCUMENTS" shall mean the Schoenke
Acquisition Agreement and all other written agreements, documents, instruments
and certificates now or hereafter executed and delivered by any Person which are
required by the terms of the Schoenke Acquisition Agreement to be delivered to
consummate the Schoenke Acquisition, and any and all amendments, supplements and
other modifications thereof and all renewals, extensions, restatements or
substitutions from time to time of all or any of the foregoing.
"SCHOENKE COMPANIES" shall mean Schoenke & Associates
Corporation, a Maryland corporation, Schoenke & Associates Securities
Corporation, a Maryland corporation, and Schoenke & Associates of Hawaii, L.P.,
a Hawaii limited partnership.
"SECOND PRIORITY NOTE DOCUMENTS" shall mean this Agreement,
the Notes, the Guaranty, the Security Documents and all other instruments,
certificates, documents and other writings now or hereafter executed and
delivered by the Company, any Subsidiary or any other Person pursuant to or in
connection with any of the foregoing or any of the transactions contemplated
thereby, and any and all amendments, supplements and other modifications to any
of the foregoing.
"SECURITIES ACT" shall mean the Securities Act of 1933, as
amended.
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"SECURITY AGREEMENTS" shall mean the Amended and Restated
Security Agreement, dated as of the Date of Closing and executed and delivered
by the Company to the Collateral Agent, substantially in the form of Exhibit I
to the Senior Note Agreement, and all security agreements hereafter executed by
any Subsidiary as contemplated under paragraph 6P, as each may be amended,
supplemented and otherwise modified from time to time.
"SECURITY DOCUMENTS" shall mean the Security Agreements, the
Collateral Agency Agreement, the Assignment of Life Insurance Policy and all
financing statements, assignments, pledges, lien entry forms, documents and
other writings executed and delivered from time to time to secure the Notes and
the obligations owed to the holders of Notes in connection therewith (including,
without limitation those executed and delivered pursuant to paragraph 6P), and
any and all amendments, supplements and other modifications thereto.
"SENIOR FINANCIAL OFFICER" means the chief financial officer,
principal accounting officer, treasurer or comptroller of the Company.
"SENIOR GUARANTY" shall mean the Guaranty Agreement, dated of
even date herewith, made by CBH in favor of the holders of the Senior Notes, as
the same may be amended, supplemented and otherwise modified from time to time.
"SENIOR NOTE AGREEMENT" shall mean the Amended and Restated
Note Agreement, dated of even date herewith, by and between the Existing Holders
and the Company, providing for the issuance and delivery of the Senior Notes, as
the same may be amended, supplemented and otherwise modified from time to time.
"SENIOR NOTE DOCUMENTS" shall mean the Senior Note Agreement,
the Senior Notes, the Senior Guaranty, the Security Documents and all other
instruments, certificates, documents and other writings now or hereafter
executed and delivered by the Company or any other Person pursuant to or in
connection with any of the foregoing or any of the transactions contemplated
thereby, and any and all amendments, supplements and other modifications to any
of the foregoing.
"SENIOR NOTES" shall mean the Senior Secured Notes due 2002 of
the Company, dated of even date with the Notes, issued and delivered to the
Existing Holders on the Date of Closing pursuant to the Senior Note Agreement.
"SERVICING AGREEMENTS" shall mean the servicing agreements
between any of the Schoenke Companies or the Company, as the case may be, and
insureds with respect to the servicing of insurance contracts.
"SHARE REPURCHASES" shall mean the share repurchases
contemplated under the Share Repurchase Agreements.
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"SHARE REPURCHASE AGREEMENTS" shall mean that certain Stock
Purchase Agreement dated as of August 22, 1997 entered into between CBI-Texas
and Malcolm N. Briggs, Steven J. Cochlan, G.F. Pendleton, III and Donald R.
Teasley and that certain Stock Purchase Agreement dated as of August 22, 1997
between CBI-Texas and Henry J. Smith.
"SHARE REPURCHASE DOCUMENTS" shall mean the Share Repurchase
Agreements and all other written agreements, documents, instruments and
certificates executed and delivered by any Person which were required by the
terms of either of the Share Repurchase Agreements to be delivered to consummate
the Share Repurchases.
"SHAREHOLDERS' AGREEMENT" shall mean that certain Second
Amended and Restated Shareholders' Agreement and Voting Agreement dated as of
August 22, 1997, by and among CBI- Texas and the individuals parties thereto.
"SOLVENT" shall mean, with respect to any Person as of the
date of any determination, that on such date (i) the fair value of the property
of such Person (both at fair valuation and at present fair saleable value) is
greater than the total amount of liabilities, including, without limitation,
contingent liabilities, of such Person, (ii) the present fair saleable value of
the assets of such Person is not less than the amount that will be required to
pay the probable liability of such Person on its debts as they become absolute
and matured, (iii) such Person is able to realize upon its assets and pay its
debts and other liabilities, contingent obligations and other commitments as
they mature in the normal course of business, (iv) such Person does not intend
to, and does not believe that it will, incur debts or liabilities beyond such
Person's ability to pay as such debts and liabilities mature and (v) such Person
is not engaged in business or a transaction, and is not about to engage in
business or a transaction, for which such Person's property would constitute
unreasonably small capital after giving due consideration to current and
anticipated future capital requirements and current and anticipated future
business conduct and the prevailing practice in the industry in which such
Person is engaged. In computing the amount of contingent liabilities at any
time, such liabilities shall be computed at the amount which, in light of the
facts and circumstances existing at such time, represents the amount that can
reasonably be expected to become an actual or matured liability.
"SUBORDINATED DEBT" shall mean the Convertible Subordinated
Notes and the AAA Distribution Notes.
"SUBSIDIARY" shall mean, as to any Person, any corporation,
association or other business entity in which such Person or one or more of its
Subsidiaries or such Person and one or more of its Subsidiaries owns sufficient
equity or voting interests to enable it or them (as a group) ordinarily, in the
absence of contingencies, to elect a majority of the directors (or Persons
performing similar functions) of such entity, and any partnership or joint
venture if more than a 50% interest in the profits or capital thereof is owned
by such Person or one or more of its Subsidiaries or such Per son and one or
more of its Subsidiaries (unless such partnership can and does ordinarily take
major business actions without the prior approval of such Person or one or more
of its Subsidiaries).
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Unless the context otherwise clearly requires, any reference to a "SUBSIDIARY"
is a reference to a Subsidiary of the Company.
"SWAPS" shall mean with respect to any Person, payment
obligations with respect to interest rate swaps, currency swaps and similar
obligations obligating such Person to make payments, whether periodically or
upon the happening of a contingency. For the purposes of this Agreement, the
amount of the obligation under any Swap shall be the amount determined in
respect thereof as of the end of the then most recently ended fiscal quarter of
such Person, based on the assumption that such Swap had terminated at the end of
such fiscal quarter, and in making such determination, if any agreement relating
to such Swap provides for the netting of amounts payable by and to such Person
thereunder or if any such agreement provides for the simultaneous payment of
amounts by and to such Person, then in each such case, the amount of such
obligation shall be the net amount so determined.
"TAX INDEMNIFICATION AGREEMENT" shall mean the Tax
Indemnification Agreement, dated [AS OF EVEN DATE HEREWITH], by and among the
Company and the shareholders of CBI-Texas immediately prior to the consummation
of the Merger.
"TAX RETURN" shall mean any return, declaration, report, claim
for refund, or information return or statement relating to taxes, including any
schedule or attachment thereto, and including any amendment thereof.
"TERMINATION EVENT" shall mean (i) a Reportable Event
described in Section 4043 of ERISA and the regulations issued thereunder (other
than a Reportable Event not subject to the provision for 30-day notice to the
PBGC under such regulations), or (ii) the withdrawal of the Company or any of
its ERISA Affiliates from a Plan during a plan year in which it was a
"SUBSTANTIAL EMPLOYER" as defined in Section 4001(a)(2) of ERISA, or (iii) the
filing of a notice of intent to terminate a Plan or the treatment of a Plan
amendment as a termination under Section 4041 of ERISA, or (iv) the institution
of proceedings to terminate a Plan by the PBGC, or (v) any other event or
condition that might constitute grounds under Section 4042 of ERISA for the
termination of, or the appointment of a trustee to administer, any Plan.
"TOTAL DEBT" shall mean, at any time, the Indebtedness
represented by the Notes and the Senior Notes.
"TRANSACTION DOCUMENTS" shall have the meaning specified in
paragraph 8H.
"TRANSFEREE" shall mean any direct or indirect transferee of
all or any part of any Note purchased by any Existing Holder under this
Agreement.
"TRIBUNAL" shall mean any municipal, state, commonwealth,
federal, foreign, territorial or other sovereign, governmental entity,
governmental department, court, commission, board, bureau, agency or
instrumentality.
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["UNDERWRITING AGREEMENT" SHALL MEAN THAT CERTAIN UNDERWRITING
AGREEMENT DATED AS OF ________, 1998, BY AND AMONG CBH, BEAR, STEARNS & CO.
INC., PIPER JAFFRAY INC. AND CONNING & COMPANY, AS THE SAME MAY BE AMENDED,
SUPPLEMENTED AND OTHERWISE MODIFIED FROM TIME TO TIME.]
"VENDORS' CONTRACTS" shall mean obligations of continued
performance under executory vendor purchase orders for the purchase of supplies,
equipment or services entered into in the Ordinary Course of Business and under
which the supplies, equipment or services subject thereto have not been received
by any of the Schoenke Companies prior to the closing of the Schoenke
Acquisition.
"WARRANTS" shall have the meaning specified in Recital A of
this Agreement.
"WARRANT PURCHASE AGREEMENTS" shall have the meaning specified
in Recital B of this Agreement.
"WHOLLY OWNED SUBSIDIARY" shall mean any Subsidiary all of the
equity interests (except directors' qualifying shares) of which are owned,
directly or indirectly, by the Company or other Wholly Owned Subsidiaries.
"WORKING CAPITAL NOTE DOCUMENTS" shall mean the Working
Capital Notes and all other written agreements, documents, instruments and
certificates now or hereafter executed and delivered by any Person in connection
with the revolving working capital facility described in paragraph 5P, and any
and all amendments, supplements and other modifications thereof and all
renewals, extensions, restatements or substitutions from time to time of all or
any of the foregoing.
"WORKING CAPITAL NOTES" shall mean the promissory notes
evidencing the Indebtedness incurred pursuant to the revolving working capital
facility described in paragraph 5P.
10B. ACCOUNTING PRINCIPLES, TERMS AND DETERMINATIONS. All references in
this Agreement to "GAAP" shall be deemed to refer to generally accepted
accounting principles in effect in the United States at the time of application
thereof. Unless otherwise specified herein, all accounting terms used herein
shall be interpreted, all determinations with respect to accounting matters
hereunder shall be made, and all unaudited financial statements and certificates
and reports as to financial matters required to be furnished hereunder shall be
prepared, in accordance with generally accepted accounting principles, applied
on a basis consistent with the most recent audited consolidated financial
statements of the Company and its Subsidiaries delivered pursuant to clause (ii)
of paragraph 5A(1) or, if no such statements have been so delivered, the most
recent audited financial statements referred to in clause (a) of paragraph 8B.
Wherever reference is made in any provision of this Agreement to a consolidated
balance sheet or other consolidated financial statement or financial computation
with respect to the Company and its Subsidiaries, if at the time that any such
provision is applicable the Company shall not have any Subsidiary, such terms
shall mean a
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balance sheet or other financial statement or financial computation, as the case
may be, with respect to the Company only.
PARAGRAPH 11. MISCELLANEOUS.
11. MISCELLANEOUS.
11A. NOTE PAYMENTS. So long as any Existing Holder shall hold any Note,
the Company will make payments of principal of and interest on such Note, which
comply with the terms of this Agreement, by wire transfer of immediately
available funds for credit (not later than 12:00 noon, New York City time, on
the date due) to such Existing Holder's account or accounts as specified in the
Information Schedule attached hereto, or such other account or accounts in the
United States as such Existing Holder may designate in writing, notwithstanding
any contrary provision herein or in any Note with respect to the place of
payment. Each Existing Holder agrees that, before disposing of any Note, such
Existing Holder will make a notation thereon (or on a schedule attached thereto)
of all principal payments previously made thereon and of the date to which
interest thereon has been paid. The Company agrees to afford the benefits of
this paragraph 11A to any Transferee which shall have made the same agreement as
each Existing Holder has made in this paragraph 11A.
11B. EXPENSES. The Company agrees, whether or not the transactions
contemplated hereby shall be consummated, to pay, and save each Existing Holder,
any Transferee and the Collateral Agent harmless against liability for the
payment of, all out-of-pocket expenses arising in connection with such
transactions, including (i) all document production and duplication charges and
the fees and expenses of any special counsel engaged by such Existing Holder,
such Transferee or the Collateral Agent in connection with this Agreement, the
transactions contemplated hereby and any subsequent proposed modification of, or
proposed consent under, this Agreement or the other Second Priority Note
Documents, whether or not such proposed modification shall be effected or
proposed consent granted, and (ii) the costs and expenses, including attorneys'
fees, incurred by such Existing Holder, such Transferee or the Collateral Agent
in enforcing (or determining whether or how to enforce) any rights under this
Agreement, the Notes or the other Second Priority Note Documents or in
responding to any subpoena or other legal process or informal investigative
demand issued in connection with this Agreement, the other Second Priority Note
Documents or the transactions contemplated hereby or thereby, or by reason of
such Existing Holder's or such Transferee's having acquired any Note, including
without limitation costs and expenses incurred in any bankruptcy case. The
obligations of the Company under this paragraph 11B shall survive the transfer
of any Note or portion thereof or interest therein by such Existing Holder or
any Transferee, the payment of any Note, the enforcement, amendment or waiver of
any provision of this Agreement or the other Second Priority Note Documents, and
the termination of this Agreement or any of the other Second Priority Note
Documents.
11C. CONSENT TO AMENDMENTS. This Agreement and any of the other Second
Priority Note Documents 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, if the Company shall obtain the written
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consent to such amendment, action or omission to act, of the Required Holder(s)
except that, without the written consent of the holder or holders of all Notes
at the time outstanding, no amendment to this Agreement shall change the
maturity of any Note, or change the principal of, or the rate or time of payment
of interest on any Note, or affect the time, amount or allocation of any
prepayments, or change the proportion of the principal amount of the Notes
required with respect to any consent, amendment, waiver or declaration. Each
holder of any Notes at the time or thereafter outstanding shall be bound by any
consent authorized by this paragraph 11C, whether or not such Notes shall have
been marked to indicate such consent, but any Notes issued thereafter may bear a
notation referring to any such consent. No course of dealing between the Company
and the holder of any Notes nor any delay in exercising any rights hereunder or
under any Notes shall operate as a waiver of any rights of any holder of such
Notes. As used herein and in the Notes, the term "THIS AGREEMENT" and
references thereto shall mean this Agreement as it may from time to time be
amended or supplemented.
11D. FORM, REGISTRATION, TRANSFER AND EXCHANGE OF NOTES; LOST NOTES.
The Notes are issuable as registered notes without coupons in denominations of
at least $100,000, except as may be necessary to reflect any principal amount
not evenly divisible by $100,000. The Company shall keep at its principal office
a register in which the Company shall provide for the registration of Notes and
of transfers of Notes. Upon surrender for registration of transfer of any Note
at the principal office of the Company, the Company shall, at its expense,
execute and deliver one or more new Notes of like tenor and of a like aggregate
principal amount, registered in the name of such transferee or transferees. At
the option of the holder of any Note, such Note may be exchanged for other Notes
of like tenor and of any authorized denominations, of a like aggregate principal
amount, upon surrender of the Note to be exchanged at the principal office of
the Company. Whenever any Notes are so surrendered for exchange, the Company
shall, at its expense, execute and deliver the Notes which the holder making the
exchange is entitled to receive. Every Note surrendered for registration of
transfer or exchange shall be duly endorsed, or be accompanied by a written
instrument of transfer duly executed, by the holder of such Note or such
holder's attorney duly authorized in writing. Any Note or Notes issued in
exchange for any Note or upon transfer thereof shall carry the rights to unpaid
interest and interest to accrue which were carried by the Note so exchanged or
transferred, so that neither gain nor loss of interest shall result from any
such transfer or exchange. Upon receipt of written notice from the holder of any
Note of the loss, theft, destruction or mutilation of such Note and, in the case
of any such loss, theft or destruction, upon receipt of such holder's unsecured
indemnity agreement, or in the case of any such mutilation upon surrender and
cancellation of such Note, the Company will make and deliver a new Note, of like
tenor, in lieu of the lost, stolen, destroyed or mutilated Note. Any Transferee,
by its acceptance of a Note registered in its name (or the name of its nominee),
shall be deemed to have made the representations set forth in paragraphs 9A and
9B.
11E. PERSONS DEEMED OWNERS; PARTICIPATIONS. Prior to due presentment
for registration of transfer, the Company may treat the Person in whose name any
Note is registered as the owner and holder of such Note for the purpose of
receiving payment of principal of and interest on such Note and for all other
purposes whatsoever, whether or not such Note shall be overdue, and the
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Company shall not be affected by notice to the contrary. Subject to the
preceding sentence, the holder of any Note may from time to time grant
participations in such Note to any Person on such terms and conditions as may be
determined by such holder in its sole and absolute discretion, provided that any
such participation shall be in a principal amount of at least $100,000 and each
holder of a Note hereby agrees that, so long as no Event of Default shall have
occurred and be continuing, it will grant participations only to Qualified
Institutional Buyers which are believed by such holder, after reasonable
inquiry, not to be Competitors.
11F. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ENTIRE AGREEMENT. All
representations and warranties contained herein or in the other Second Priority
Note Documents or otherwise made in writing by or on behalf of the Company in
connection herewith and therewith shall survive the execution and delivery of
this Agreement, the Notes and the other Second Priority Note Documents, the
transfer by any Existing Holder of any Note or portion thereof or interest
therein and the payment of any Note, and may be relied upon by any Transferee,
regardless of any investigation made at any time by or on behalf of any Existing
Holder or any Transferee. Subject to the preceding sentence, this Agreement, the
Notes and the other Second Priority Note Documents embody the entire agreement
and understanding between the Existing Holders and the Company and supersede all
prior agreements and understandings relating to the subject matter hereof.
11G. SUCCESSORS AND ASSIGNS. All covenants and other agreements in this
Agreement contained by or on behalf of any of the parties hereto shall bind and
inure to the benefit of the respective successors and assigns of the parties
hereto (including, without limitation, any Transferee) whether so expressed or
not; provided, however, that each holder of a Note hereby agrees that, so long
as no Event of Default shall have occurred and be continuing, it will transfer
its Notes only to Qualified Institutional Buyers which are believed by such
holder, after reasonable inquiry, not to be Competitors.
11H. DISCLOSURE TO OTHER PERSONS. The Company acknowledges that the
holder of any Note may deliver copies of any financial statements and other
documents or materials delivered to such holder, and disclose any other
information disclosed to such holder, by or on behalf of the Company or any
Subsidiary in connection with or pursuant to this Agreement and the other Second
Priority Note Documents to (i) such holder's directors, officers, employees,
agents and professional consultants, (ii) any other holder of any Note, (iii)
any Person to which such holder offers to sell such Note or any part thereof and
to which such holder could then transfer such Note pursuant to paragraph 11G,
(iv) any Person to which such holder sells or offers to sell a participation in
all or any part of such Note and to which such holder could then sell such
participation pursuant to paragraph 11F, (v) any Person from which such holder
offers to purchase any security of the Company and to which such holder could
then transfer such Note pursuant to paragraph 11G, (vi) any federal or state
regulatory authority having jurisdiction over such holder, (vii) the National
Association of Insurance Commissioners or any similar organization or (viii) any
other Person to which such delivery or disclosure may be necessary or
appropriate (a) in compliance with any law, rule, regulation or order applicable
to such holder, (b) in response to any subpoena or other legal
61
<PAGE> 68
process or informal investigative demand or (c) in connection with any
litigation to which such holder is a party.
11I. NOTICES. All notices or other communications provided for
hereunder (except for the telephonic notice required by paragraph 4B) shall be
in writing and sent by first class mail or nationwide overnight delivery service
(with charges prepaid) and (i) if to any Existing Holder, addressed to such
Existing Holder at the address specified for such communications in the
Information Schedule attached hereto, or at such other address as such Existing
Holder shall have specified to the Company in writing, (ii) if to any other
holder of any Note, addressed to such other holder at such address as such other
holder shall have specified to the Company in writing or, if any such other
holder shall not have so specified an address to the Company, then addressed to
such other holder in care of the last holder of such Note which shall have so
specified an address to the Company, and (iii) if to the Company, addressed to
it at 2121 San Jacinto, Suite 2200, Dallas, Texas 75201, Attention: Melvin G.
Todd or at such other address as the Company shall have specified to the holder
of each Note in writing; provided, however, that any such communication to the
Company may also, at the option of the holder of any Note, be delivered by any
other means either to the Company at its address specified above or to any
officer of the Company.
11J. PAYMENTS DUE ON NON-BUSINESS DAYS. Anything in this Agreement or
the Notes to the contrary notwithstanding, any payment of principal of or
interest on any Note that is due on a date other than a Business Day shall be
made on the next succeeding Business Day. If the date for any payment is
extended to the next succeeding Business Day by reason of the preceding
sentence, the period of such extension shall be included in the computation of
the interest payable on such Business Day.
11K. SATISFACTION REQUIREMENT. If any agreement, certificate or other
writing, or any action taken or to be taken, is by the terms of this Agreement
required to be satisfactory to any Existing Holder, the holders of the Notes or
to the Required Holder(s), the determination of such satisfaction shall be made
by such Existing Holder, the holders of the Notes or the Required Holder(s), as
the case may be, in the sole and exclusive judgment (exercised in good faith) of
the Person or Persons making such determination.
11L. GOVERNING LAW. THIS AGREEMENT AND ALL MATTERS RELATING HERETO
SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, AND THE RIGHTS OF THE
PARTIES SHALL BE GOVERNED BY, THE LAW OF THE STATE OF NEW YORK. This Agreement
may not be changed orally, but (subject to the provisions of paragraph 11C) only
by an agreement in writing signed by the party against whom enforcement of any
waiver, change, modification or discharge is sought.
11M. WAIVER OF JURY TRIAL; CONSENT TO JURISDICTION; LIMITATION OF
REMEDIES.
(i) THE COMPANY AND EACH HOLDER OF NOTES EACH HEREBY
KNOWINGLY, VOLUNTARILY, AND INTENTIONALLY WAIVES ANY RIGHTS IT
62
<PAGE> 69
MAY HAVE TO A TRIAL BY JURY IN ANY LITIGATION OF ANY CLAIM WHICH IS
BASED HEREON, OR ARISES OUT OF, UNDER, OR IN CONNECTION WITH THIS
AGREEMENT, THE NOTES OR THE OTHER SECOND PRIORITY NOTE DOCUMENTS, OR
ANY TRANSACTIONS RELATING HERETO OR THERETO, OR ANY COURSE OF CONDUCT,
COURSE OF DEALING, STATEMENTS (WHETHER ORAL OR WRITTEN), OR ACTIONS OF
THE COMPANY, THE HOLDERS OF THE NOTES OR THE COLLATERAL AGENT. THE
COMPANY ACKNOWLEDGES THAT THIS PROVISION IS A MATERIAL INDUCEMENT FOR
THE EXISTING HOLDERS TO ENTER INTO THIS AGREEMENT.
(ii) ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS
AGREEMENT, THE NOTES, THE OTHER SECOND PRIORITY NOTE DOCUMENTS OR ANY
TRANSACTIONS RELATING HERETO OR THERETO, OR ANY COURSE OF CONDUCT,
COURSE OF DEALING, STATEMENTS (WHETHER ORAL OR WRITTEN), OR ACTIONS OF
THE COMPANY, THE HOLDERS OF NOTES OR THE COLLATERAL AGENT MAY BE
BROUGHT IN THE COURTS OF THE STATE OF NEW YORK, OR THE UNITED STATES OF
AMERICA FOR THE SOUTHERN DISTRICT OF NEW YORK AND THE COMPANY HEREBY
ACCEPTS FOR ITSELF AND IN RESPECT OF ITS PROPERTY, GENERALLY AND
UNCONDITIONALLY, THE NONEXCLUSIVE JURISDICTION OF THE AFORESAID COURTS.
THE COMPANY AND EACH HOLDER OF NOTES EACH HEREBY IRREVOCABLY WAIVES ANY
OBJECTIONS, INCLUDING, WITHOUT LIMITATION, ANY OBJECTION TO THE LAYING
OF VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS, WHICH IT MAY
NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY SUCH ACTION OR PROCEEDING
IN SUCH RESPECTIVE JURISDICTIONS.
(iii) The Company hereby agrees that process may be served on
CT Corporation System, Inc., located at 1633 Broadway, New York, New
York 10019. Any and all service of process and any other notice in any
such action, suit or proceeding shall be effective against such parties
if given by registered or certified mail, return receipt requested, or
by any other means or mail which requires a signed receipt, postage
prepaid, mailed to such parties as herein provided in paragraph 11I. In
the event CT Corporation System, Inc. shall not be able to accept
service of process as aforesaid and if the Company shall not maintain
an office in New York City, the Company shall promptly appoint and
maintain an agent qualified to act as an agent for service of process
with respect to all courts in and of the New York City, and acceptable
to the Required Holder(s), as the Company's authorized agent to accept
and acknowledge on the Company's behalf service of any and all process
which may be served in any such action, suit or proceeding.
63
<PAGE> 70
11N. INDEMNIFICATION. The Company agrees:
(I) TO INDEMNIFY EACH HOLDER OF NOTES AND EACH OF THEIR
AFFILIATES AND EACH OF THEIR OFFICERS, DIRECTORS, EMPLOYEES,
SHAREHOLDERS, REPRESENTATIVES, AGENTS, ATTORNEYS, ACCOUNTANTS AND
EXPERTS ("INDEMNIFIED PARTIES") FROM, HOLD EACH OF THEM HARMLESS
AGAINST AND PROMPTLY UPON DEMAND PAY OR REIMBURSE EACH OF THEM FOR, THE
INDEMNITY MATTERS WHICH MAY BE INCURRED BY OR ASSERTED AGAINST OR
INVOLVE ANY OF THEM (WHETHER OR NOT ANY OF THEM IS DESIGNATED A PARTY
THERETO) AS A RESULT OF, ARISING OUT OF OR IN ANY WAY RELATED TO (I)
ANY ACTUAL OR PROPOSED USE BY THE COMPANY OF THE PROCEEDS OF THE NOTES,
(II) THE EXECUTION, DELIVERY AND PERFORMANCE OF THIS AGREEMENT AND THE
OTHER SECOND PRIORITY NOTE DOCUMENTS, (III) THE OPERATIONS OF THE
BUSINESS OF THE COMPANY AND ITS SUBSIDIARIES, (IV) THE FAILURE OF
COMPANY OR ANY OF ITS SUBSIDIARIES TO COMPLY WITH THE TERMS OF THIS
AGREEMENT OR ANY OF THE OTHER SECOND PRIORITY NOTE DOCUMENTS OR WITH
ANY GOVERNMENTAL REQUIREMENT, (V) ANY INACCURACY OF ANY REPRESENTATION
OR ANY BREACH OF ANY WARRANTY OF THE COMPANY OR ANY OF ITS SUBSIDIARIES
SET FORTH IN THIS AGREEMENT OR ANY OTHER SECOND PRIORITY NOTE DOCUMENT,
(VI) ANY ASSERTION THAT THE COMPANY WAS NOT ENTITLED TO RECEIVE THE
PROCEEDS RECEIVED PURSUANT TO THIS AGREEMENT AND THE OTHER SECOND
PRIORITY NOTE DOCUMENTS OR (VII) ANY OTHER ASPECT OF THE SECOND
PRIORITY NOTE DOCUMENTS, INCLUDING, WITHOUT LIMITATION, THE REASONABLE
FEES AND DISBURSEMENTS OF COUNSEL AND ALL OTHER EXPENSES INCURRED IN
CONNECTION WITH INVESTIGATING, DEFENDING OR PREPARING TO DEFEND ANY
SUCH ACTION, SUIT, PROCEEDING (INCLUDING ANY INVESTIGATIONS,
LITIGATIONS OR INQUIRIES) OR CLAIM AND INCLUDING ALL INDEMNITY MATTERS
ARISING BY REASON OF THE ORDINARY NEGLIGENCE OF ANY INDEMNIFIED PARTY
(EXCEPT AS TO THE EXTENT ANY SUCH INDEMNITY MATTERS HAVE BEEN CAUSED BY
THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF SUCH INDEMNIFIED PARTY,
IT BEING THE INTENT OF THE PARTIES THAT EACH INDEMNIFIED PARTY SHALL BE
INDEMNIFIED FROM INDEMNITY MATTERS CAUSED BY THE NEGLIGENCE, WHETHER
SOLE, JOINT, CONCURRENT, CONTRIBUTORY, ACTIVE OR PASSIVE, OF SUCH
INDEMNIFIED PARTY); AND
(II) THE FOREGOING INDEMNITIES SHALL EXTEND TO THE
INDEMNIFIED PARTIES NOTWITHSTANDING THE NEGLIGENCE OF EVERY
KIND OR CHARACTER WHATSOEVER, WHETHER ACTIVE OR PASSIVE,
64
<PAGE> 71
WHETHER AN AFFIRMATIVE ACT OR AN OMISSION, INCLUDING, WITHOUT
LIMITATION, ALL TYPES OF NEGLIGENT CONDUCT IDENTIFIED IN THE
RESTATEMENT (SECOND) OF TORTS OF ONE OR MORE OF THE INDEMNIFIED PARTIES
OR BY REASON OF STRICT LIABILITY IMPOSED WITHOUT FAULT ON ANY ONE OR
MORE OF THE INDEMNIFIED PARTIES. TO THE EXTENT THAT AN INDEMNIFIED
PARTY COMMITTED AN ACT OF GROSS NEGLIGENCE OR WILLFUL MISCONDUCT, THIS
CONTRACTUAL OBLIGATION OF INDEMNIFICATION SHALL CONTINUE BUT SHALL ONLY
EXTEND TO THE PORTION OF THE CLAIM THAT IS DEEMED TO HAVE OCCURRED BY
REASON OF EVENTS OTHER THAN THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT
OF THE INDEMNIFIED PARTY.
(III) THE COMPANY AND ITS SUBSIDIARIES AGREE NOT TO ASSERT ANY
CLAIM AGAINST THE HOLDER OF ANY NOTES, ANY OF THEIR AFFILIATES, OR ANY
OF THEIR RESPECTIVE DIRECTORS, OFFICERS, EMPLOYEES, ATTORNEYS, AGENTS
AND ADVISERS, ON ANY THEORY OF LIABILITY, FOR SPECIAL, INDIRECT,
CONSEQUENTIAL OR PUNITIVE DAMAGES ARISING OUT OF OR OTHERWISE RELATING
TO THE SECOND PRIORITY NOTE DOCUMENTS, ANY OF THE TRANSACTIONS
CONTEMPLATED HEREIN OR THEREIN OR THE ACTUAL OR PROPOSED USE OF THE
PROCEEDS OF THE NOTES.
(iv) The obligations of the Company and its Subsidiaries under
this paragraph 11N shall survive the termination of this Agreement and
the payment in full of the Notes and all other amounts payable
hereunder.
11O. RELEASE. THE COMPANY AND ITS SUBSIDIARIES EACH HEREBY RELEASE,
DISCHARGE AND ACQUIT FOREVER THE HOLDERS OF THE NOTES AND THEIR RESPECTIVE
OFFICERS, DIRECTORS, AGENTS, EMPLOYEES AND COUNSEL FROM ANY AND ALL CLAIMS
EXISTING AS OF THE DATE HEREOF. AS USED IN THIS PARAGRAPH 11O, THE TERM "CLAIM"
SHALL MEAN ANY AND ALL LIABILITIES, CLAIMS, JUDGMENTS, DEFICIENCIES, INTEREST,
LIENS, COSTS OR EXPENSES (INCLUDING COURT COSTS, PENALTIES, ATTORNEYS' FEES AND
DISBURSEMENTS, AND AMOUNTS PAID IN SETTLEMENT) OF ANY KIND AND CHARACTER
WHATSOEVER, IN EACH CASE WHETHER NOW KNOWN OR UNKNOWN, SUSPECTED OR UNSUSPECTED,
ASSERTED OR UNASSERTED OR PRIMARY OR CONTINGENT, AND WHETHER ARISING OUT OF
WRITTEN DOCUMENTS, UNWRITTEN UNDERTAKINGS OR COURSE OF CONDUCT.
11P. RELATIONSHIP OF THE PARTIES. This Agreement provides for the
making or maintaining of loans by the Existing Holders, in their capacity as
lenders, to the Company, in its capacity as a borrower, and for the payment of
interest and repayment of principal by the Company to the holders of the Notes.
The relationship between the Existing Holders and the Company is limited to that
of
65
<PAGE> 72
creditors/secured parties, on the one hand, and debtor, on the other hand. The
provisions herein for compliance with financial, environmental, and other
covenants, delivery of financial and other reports, and financial and other
inspections, investigations, audits, examinations or tests are intended solely
for the benefit of the holders of the Notes to protect their interests as
lenders in assuring payments of interest and repayment of principal and nothing
contained in this Agreement or any other Second Priority Note Document shall be
construed as permitting or obligating the holders of the Notes to act as
financial or business advisors or consultants to the Company, as permitting or
obligating the holders of the Notes to control the Company or to conduct or
operate the Company's operations, as creating any fiduciary obligation on the
part of the holders of the Notes to the Company, or as creating any joint
venture, agency, or other relationship between the parties other than as
explicitly and specifically stated in this Agreement. The Company acknowledges
that it has had the opportunity to obtain the advice of experienced counsel of
its own choosing in connection with the negotiation and execution of this
Agreement and the other Second Priority Note Documents and to obtain the advice
of such counsel with respect to all matters contained herein, including, without
limitation, the provision in paragraph 11M for waiver of trial by jury. The
Company further acknowledges that it is experienced with respect to financial
and credit matters and has made its own independent decision to apply to the
Existing Holders for the financial accommodations provided hereby and to execute
and deliver this Agreement and the other Second Priority Note Documents.
11Q. FINAL AGREEMENT. THIS AGREEMENT AND THE OTHER SECOND PRIORITY NOTE
DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENT
OF THE PARTIES. THERE ARE NO ORAL AGREEMENTS BETWEEN THE PARTIES.
11R. CONSTRUCTION. The Existing Holders and the Company have
participated jointly in the negotiation and drafting of this Agreement and the
other Second Priority Note Documents. In the event an ambiguity or question of
intent or interpretation arises, this Agreement or other Second Priority Note
Document, as the case may be, shall be construed as if drafted jointly by the
Existing Holders and the Company and no presumption or burden of proof shall
arise favoring or disfavoring any Existing Holder or the Company by virtue of
the authorship of any of the provisions of this Agreement or such other Second
Priority Note Document, as the case may be.
11S. SEVERABILITY. Any provision of this Agreement which is prohibited
or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
11T. DESCRIPTIVE HEADINGS. The descriptive headings of the several
paragraphs of this Agreement are inserted for convenience only and do not
constitute a part of this Agreement.
66
<PAGE> 73
11U. MAXIMUM INTEREST PAYABLE. The Company, each Existing Holder and
any other holders of the Notes specifically intend and agree to limit
contractually the amount of interest payable under this Agreement, the Notes and
all other instruments and agreements related hereto and thereto to the maximum
amount of interest lawfully permitted to be charged under applicable law.
Therefore, none of the terms of this Agreement, the Notes or any instrument
pertaining to or relating to this Agreement or the Notes shall ever be construed
to create a contract to pay interest at a rate in excess of the maximum rate
permitted to be charged under applicable law, and neither the Company, any
guarantor nor any other party liable or to become liable hereunder, under the
Notes, any guaranty or under any other instruments and agreements related hereto
and thereto shall ever be liable for interest in excess of the amount determined
at such maximum rate, and the provisions of this paragraph 11U shall control
over all other provisions of this Agreement, any Notes, any guaranty or any
other instrument pertaining to or relating to the transactions herein
contemplated. If any amount of interest taken or received by any Existing Holder
or any holder of a Note shall be in excess of said maximum amount of interest
which, under applicable law, could lawfully have been collected by such Existing
Holder or such holder incident to such transactions, then such excess shall be
deemed to have been the result of a mathematical error by all parties hereto and
shall be refunded promptly by the Person receiving such amount to the party
paying such amount, or, at the option of the recipient, credited ratably against
the unpaid principal amount of the Note or Notes held by such Existing Holder or
such holder, respectively. All amounts paid or agreed to be paid in connection
with such transactions which would under applicable law be deemed "INTEREST"
shall, to the extent permitted by such applicable law, be amortized, prorated,
allocated and spread throughout the stated term of this Agreement and the Notes.
"APPLICABLE LAW" as used in this paragraph means that law in effect from time to
time which permits the charging and collection of the highest permissible
lawful, nonusurious rate of interest on the transactions herein contemplated
including laws of the State of New York and of the United States of America, and
"MAXIMUM RATE" as used in this paragraph means, with respect to each of the
Notes, the maximum lawful, nonusurious rates of interest (if any) which under
applicable law may be charged to the Company from time to time with respect to
such Notes.
11V. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be an original but all of which together
shall constitute one instrument.
11W. SEVERALTY OF OBLIGATIONS. The issuance of the Notes to the
Existing Holders are to be several issuances, and the obligations of the
Existing Holders under this Agreement are several obligations. Except as
provided in paragraph 3K, no failure by any Existing Holder to perform its
obligations under this Agreement shall relieve any other Existing Holder or the
Company of any of its obligations hereunder, and no Existing Holder shall be
responsible for the obligations of, or any action taken or omitted by, any other
Existing Holder hereunder.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK; SIGNATURE PAGE FOLLOWS]
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<PAGE> 74
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their respective officers thereunto duly authorized,
to be effective as of the date first above written.
CLARK/BARDES, INC.
By:
----------------------------
Title:
-------------------------
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
By:
----------------------------
Title:
-------------------------
By:
----------------------------
Title:
-------------------------
LIFE INVESTORS INSURANCE COMPANY OF AMERICA
By:
----------------------------
Title:
-------------------------
NATIONWIDE LIFE INSURANCE COMPANY
By:
----------------------------
Title:
-------------------------
<PAGE> 1
EXHIBIT 16
[LANE GORMAN TRUBITT, LLP LETTERHEAD]
June 12, 1998
Securities and Exchange Commission
450 Fifth Street N.W.
Washington, D.C. 20549
Gentlemen:
We have read the statements made by Clark/Bardes Holdings, Inc. (the
"Company"), which we understand will be filed with the Securities and Exchange
Commission, pursuant to Item 11(i) of Form S-1, as part of the Company's
registration statement on Form S-1. We agree with the statements concerning our
firm in such Form S-1.
/s/ LANE GORMAN TRUBITT, LLP
Lane Gorman Trubitt, LLP
<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. 2 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 10, 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. 2 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 10, 1998
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in Amendment No. 2 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 10, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR 6-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998
<PERIOD-START> JAN-01-1997 JAN-01-1998
<PERIOD-END> DEC-31-1997 JUN-30-1998
<CASH> 3,782,941 6,305,094
<SECURITIES> 0 0
<RECEIVABLES> 8,286,859 3,138,497
<ALLOWANCES> 78,000 78,000
<INVENTORY> 0 0
<CURRENT-ASSETS> 12,037,611 9,665,575
<PP&E> 2,229,121 2,364,726
<DEPRECIATION> 1,513,267 1,617,390
<TOTAL-ASSETS> 36,901,890 35,559,778
<CURRENT-LIABILITIES> 9,743,367 9,258,510
<BONDS> 32,383,143 31,388,143
0 0
0 0
<COMMON> 5,162,281 5,463,631
<OTHER-SE> 3,188,699 3,378,044
<TOTAL-LIABILITY-AND-EQUITY> 36,901,890 35,559,778
<SALES> 0 0
<TOTAL-REVENUES> 49,455,419 28,984,959
<CGS> 0 0
<TOTAL-COSTS> 32,439,092 18,203,681
<OTHER-EXPENSES> 11,800,965 8,841,641
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 1,111,995 1,803,750
<INCOME-PRETAX> 4,293,889 303,370
<INCOME-TAX> 60,000 14,000
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 4,233,889 289,370
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
