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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NUMBER: 000-24769
CLARK/BARDES HOLDINGS, INC.
(Exact name of Registrant as specified in its charter)
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DELAWARE 52-2103926
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2121 SAN JACINTO, SUITE 2200
DALLAS, TEXAS 75201-7906
(Address of principal executive offices) (Zip code)
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(Registrant's telephone number including area code): (214) 871-8717
Securities registered pursuant to Section 12(b) of the Act:
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TITLE OF SECURITIES EXCHANGES ON WHICH REGISTERED
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None not applicable
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Securities registered pursuant to section 12(g) of the Act:
COMMON STOCK, PAR VALUE $ .01 PER SHARE
(Title of class)
JUNIOR PARTICIPATING PREFERRED STOCK, SERIES A, PURCHASE RIGHTS
PAR VALUE, $.01 PER SHARE
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 17, 1999, there were 8,202,535 shares of common stock
outstanding.
As of March 17, 1999, the aggregate market value of common equity held by
non-affiliates was $86,188,006.
DOCUMENTS INCORPORATED BY REFERENCE
The definitive proxy statement for the 1999 annual meeting is incorporated
into Part III of this Form 10-K by reference.
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INDEX TO
ANNUAL REPORT ON FORM 10-K
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PAGE
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FORWARD-LOOKING STATEMENTS.............................................. 1
PART I
ITEM 1. BUSINESS.................................................... 1
ITEM 2. PROPERTIES.................................................. 12
ITEM 3. LEGAL PROCEEDINGS........................................... 12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS....................................... 13
ITEM 6. SELECTED FINANCIAL DATA..................................... 14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 15
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK...................................................... 32
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................. 32
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.................................. 32
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......... 33
ITEM 11. EXECUTIVE COMPENSATION...................................... 33
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................ 33
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 33
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K....................................................... 33
SIGNATURES
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FORWARD-LOOKING STATEMENTS
This Form 10-K may contain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act "),
and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). When used in this Form 10-K, words such as "anticipate,"
"believe," "estimate," "expect," "intend," "predict," "project," and similar
expressions, as they relate to Clark/Bardes Holdings, Inc. and Clark/Bardes,
Inc., its subsidiary (collectively, "Clark/Bardes"), or Clark/ Bardes'
management, identify forward-looking statements. Such forward-looking statements
are based on the beliefs of Clark/Bardes' management as well as assumptions made
by and information currently available to Clark/Bardes. These forward-looking
statements are subject to certain risks, uncertainties and assumptions,
including but not limited to, risks, uncertainties and assumptions related to
risks associated with changes in tax legislation, dependence on key producers,
Clark/Bardes' dependence on persistency of existing business, credit risk
related to renewal revenue, acquisition risks, risks related to significant
intangible assets, competitive factors and pricing pressures, dependence on
certain insurance companies, changes in legal and regulatory requirements and
general economic conditions and other factors described in "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially from
those anticipated, expected or projected. Such forward-looking statements
reflect Clark/ Bardes' current views with respect to future events and are
subject to these and other risks, uncertainties and assumptions, relating to
Clark/Bardes' operations, results of operations, growth strategy and liquidity.
All subsequent written and oral forward-looking statements attributable to
Clark/Bardes or individuals acting on Clark/Bardes' behalf are expressly
qualified in their entirety by this paragraph.
PART I
ITEM 1. BUSINESS
THE COMPANY
Clark/Bardes Holdings, Inc., a Delaware corporation ("CBH"), and
Clark/Bardes, Inc., a Delaware corporation and a wholly owned subsidiary of CBH
("CBI"), were formed in June 1998 in contemplation of the initial public
offering that was completed on August 19, 1998. CBH is the holding company for
CBI. CBI is the operating company of CBH and is the successor corporation to
Clark/Bardes, Inc., a Texas corporation (the "Predecessor Company"), formed in
1967.
In connection with the initial public offering, each of CBH, CBI 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 CBI (the "Merger") with each stockholder of the
Predecessor Company receiving one-half of one share of CBH's common stock, par
value $0.01 per share (the "Common Stock"), for each share of Predecessor
Company common stock held by such existing stockholder and a series of
transactions, including (i) a restructuring of CBI's 10.5% Senior Secured Notes
due August 2002 (the "Senior Secured Notes") and 11.0% Second Priority Senior
Secured Notes due August 2004 (the "Second Priority Senior Secured Notes"), (ii)
the conversion of CBI's 8.5% Convertible Subordinated notes due September 2007
into 813,559 shares of Common Stock, (iii) an extinguishment by CBI of warrants
representing the right to purchase 1,525,424 shares of Common Stock, (iv) a
purchase of renewal revenue due to W.T. Wamberg and The Wamberg Organization,
(v) the incorporation of Clark/ Bardes of Texas, Inc., a Texas corporation,
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
former stockholders of the Predecessor Company. 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.
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Unless the context otherwise requires, all references in this Form 10-K to
"Clark/Bardes" means CBH together with its wholly owned subsidiary CBI and the
Predecessor Company, and all dates, periods or events prior to the Merger refer
to the Predecessor Company.
GENERAL
Since its inception in 1967, Clark/Bardes has designed, marketed and
administered insurance-financed employee benefit programs to large corporations
and banks. Clark/Bardes' clients use these sophisticated programs primarily to
offset the costs of employee benefit liabilities and to supplement and secure
benefits for key executives. Clark/Bardes' revenue is earned primarily from (i)
commissions paid by the insurance companies that underwrite the policies
underlying Clark/Bardes' programs and (ii) fees paid by clients in connection
with initial program design and the ongoing administrative services provided by
Clark/Bardes. 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.
Clark/Bardes has experienced rapid growth since December 31, 1995.
Effective September 1, 1997, Clark/Bardes acquired substantially all the assets
and the business of Bank Compensation Strategies, Inc., a Minnesota based
company ("BCS"), that designs, markets and administers insurance-financed
employee benefit programs and related compensation, salary and benefit plans for
community and regional banks.
On September 1, 1998, Clark/Bardes acquired the assets of Schoenke &
Associates Corporation and Schoenke & Associates Securities Corporation
(collectively, "Schoenke") and on November 1, Clark/Bardes acquired the assets
of Wiedemann & Johnson Company ("Wiedemann"). Schoenke and Wiedemann specialize
in the design and administration of insurance based employee benefit plans for
large corporations and banks. Through sales generated by a group of specialized
independent producers and the integration of the assets acquired from BCS,
Clark/Bardes had a client base of over 1,200 as of December 31, 1998.
Additionally, the inforce insurance coverage underlying Clark/Bardes' programs
has increased from approximately $26.2 billion as of December 31, 1995 to
approximately $62.6 billion as of December 31, 1998.
Clark/Bardes has entered into non-binding negotiations to acquire the
businesses and substantially all the assets of two unrelated, privately owned
companies. The aggregate proposed purchase price for both would be approximately
$45.0 million, subject to change. If consummated, the aggregate purchase price
for both acquisitions would consist of approximately $19.9 million in cash at
closing, the assumption of approximately $4.1 million in liabilities, a sellers'
note for approximately $8.7 million and the issuance of approximately 711,000
shares of Common Stock having an agreed upon value of approximately $12.3
million. Of the potentially issuable shares, 384,000 shares of Common Stock,
having a value of $6.8 million, is to be contingent upon the attainment of
specified five year revenue and gross profit performance levels.
In addition, the proposed terms contemplate the issuance of options, under
employment agreements, to acquire approximately 361,000 shares of Common Stock,
at market prices at the time of closing, to certain retained employees of the
target companies upon the attainment of stipulated levels of revenue.
These non-binding negotiations and the consummation of the acquisitions are
subject to Clark/Bardes' ongoing review of the target companies, the execution
of a definitive purchase agreements, and the satisfaction of certain conditions,
including the approvals of Clark/Bardes' board of directors, the boards of
directors of the target companies and the consent of Clark/Bardes lenders, among
others. Accordingly, Clark/Bardes can give no assurance that the acquisitions
will be completed and, if so, on the terms described above.
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 Clark/Bardes with distinct competitive
advantages. Clark/Bardes 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
Clark/Bardes can be a leader in the consolidation of the highly fragmented
insurance-financed employee benefit industry by offering liquidity, proprietary
benefit and
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program designs, and administrative support to the owners of smaller firms.
Finally, management intends to leverage Clark/Bardes' 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 Clark/Bardes.
As of December 31, 1998, Clark/Bardes was represented by 45 producers in 40
independently operated sales offices located in 30 cities throughout the United
States. These producers and Clark/Bardes' management own an aggregate of 51.3%
of the outstanding Common Stock.
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, Clark/Bardes 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. Clark/Bardes 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. Clark/Bardes 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.
CLARK/BARDES SEGMENTS
Clark/Bardes conducts business from locations in Dallas, Texas,
Minneapolis, Minnesota and Germantown, Maryland. Each of these locations has its
own general manager, marketing and administrative staffs. The corporate
executive and administrative staffs are located in the Dallas office.
All of Clark/Bardes' locations are in the same business, the design,
marketing and administration of insurance financed employee benefit programs to
large corporations and community, regional and money center banks. The
distinction between these locations is in their geographical location and that
each has its own client base as well as its own marketing, administrative staffs
and management.
Clark/Bardes evaluates performance and allocates resources based on profit
or loss from operations before income taxes, interest or corporate
administrative expenses. There are no intersegment revenues or expenses and all
revenues come from clients within the United States. In 1998, Clark/Bardes
adopted Statement of Financial Accounting Standards ("SFAS") No. 131 of the
Financial Accounting Standards Board (the "FASB") "Disclosures About Segments of
an Enterprise and Related Information," pursuant to which Clark/Bardes has three
reportable segments based on its locations in Dallas, Minneapolis and
Germantown. For revenue, income and asset information, see footnote 14 of the
financial statements.
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MAJOR CUSTOMER
CBI generated in excess of 25% of its revenue in 1996 from two clients, in
1997 from three clients, and in 1998 from eight clients, respectively.
Approximately 23% and 17.5% of CBI's commission and fee revenue for the years
ended 1997 and 1998, respectively, was generated by The Wamberg Organization,
which is wholly-owned by CBI's Chairman, W.T. Wamberg. Substantially all of the
policies underlying the programs marketed by CBI are underwritten by 14 life
insurance companies, of which seven accounted for approximately 78.9% and 76.3%
of CBI's first-year commission revenue for the years ended December 31, 1997 and
1998.
STRATEGY
Clark/Bardes' 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, Clark/Bardes intends to focus on the following:
- Leverage Market Reputation. Clark/Bardes plans to leverage its reputation
as an industry leader to expand current operations and to enter into
related businesses.
- Design Innovative Programs. Clark/Bardes intends to use its expertise in
program development to create and market innovative, customized programs
in order to facilitate Clark/Bardes' penetration of new markets and to
satisfy the financial needs of its clients in a changing regulatory and
economic environment.
- Diversify Business. Clark/Bardes plans to identify and enter into related
businesses in which its core competencies can be profitably employed.
Examples of related businesses include compensation consulting, benefit
plan administrative services and marketing to the non-profit sector.
- Enhance Administrative Capabilities. Clark/Bardes 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. Clark/Bardes intends to take advantage
of the expected consolidation in the insurance-financed employee benefit
market and implement Clark/Bardes' 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.
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. Clark/Bardes is taking 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 larger and more, 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.
In establishing guidelines for evaluating a potential acquisition target,
Clark/Bardes focuses on identifying organizations that can increase
Clark/Bardes' market penetration, retain quality producers after the
consummation of the acquisition, create cross-selling opportunities, provide
opportunity for administrative cost savings and be effected in a manner that is
accretive to Clark/Bardes' earnings. Using these guidelines, Clark/ Bardes
evaluates 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 December 31, 1998, management had
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identified approximately 100 companies each with annual revenue in excess of
$3.0 million that are potentially attractive acquisition targets. Management
believes Clark/Bardes' leadership, size, industry expertise and reputation,
administrative systems and support and other long-term competitive advantages
provide Clark/ Bardes 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
closely match 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, Clark/Bardes derives a majority of its total revenue from the
sale of insurance products used to fund its proprietary programs. Clark/Bardes
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.
Clark/Bardes, through its actuaries, financial 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.
Clark/Bardes has invested significant time and resources in cultivating
relationships with selected carriers, with certain relationships that are
considered strategic in nature. However, Clark/Bardes 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 Clark/Bardes' small-case business.
Clark/Bardes limits the number of carriers with which it transacts business in
order to maximize its bargaining power and resource utilization.
Clark/Bardes entered into a five-year production agreement with General
American that requires Clark/ Bardes to market and sell insurance products of
General American 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. The production
agreement with General American provides that if Clark/ Bardes fails to meet the
minimum production requirements, General American is entitled to offset future
commissions otherwise payable to Clark/Bardes up to a maximum amount of $150,000
per year. Further, Clark/Bardes has entered into a five-year joint product
development and production agreement with Phoenix Home Life. The agreement
provides for the development of a new product for distribution by Clark/Bardes
subject to minimum production requirements of at least $15.0 million in new
premium. Prior to the development of the new product, Clark/Bardes will be
obligated to sell minimum levels of existing Phoenix Home Life products.
Noncompliance with any such minimum production amounts would subject Clark/
Bardes to penalties of $100,000 for any twelve month period during which such
production is not met.
In August 1998, Clark/Bardes entered into a five-year production agreement
with Nationwide and Great West ("the Carriers") that requires Clark/Bardes to
market and sell insurance products 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.
The production agreement provides that if Clark/Bardes fails to meet the minimum
production requirements, the carriers are entitled to offset future commissions
otherwise payable to Clark/Bardes up to a maximum amount of $150,000 each per
year.
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Clark/Bardes may consider entering into additional product development and
production agreements with other insurance companies in the future. The
agreements entered into by Clark/Bardes with the insurance carriers typically
provide for the marketing of an 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,
Clark/Bardes performs the actuarial and insurable interest calculations
necessary to determine the amount of life insurance an organization needs to
purchase. Then, Clark/Bardes 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 program with a financially
stable insurance company. Last, Clark/Bardes provides the long-term
administrative services associated with the program and the underlying
business-owned life insurance policy.
Clark/Bardes 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 years ended December 31, 1998 and 1997.
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TOTAL REVENUE
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1998 1997
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(IN THOUSANDS)
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Large case.................................................. $22,063 $16,180
Small case................................................ 29,359 8,451
DIP and SERP.............................................. 6,030 5,352
SOP......................................................... 3,033 3,379
GTCO........................................................ 5,116 3,534
Discontinued products(1).................................... 5,430 10,427
Miscellaneous case revenue(2)............................... 3,735 2,132
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Total............................................. $74,766 $49,455
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(1) Includes renewal revenue from products used in existing plans which are no
longer marketed because of legislative changes.
(2) Includes revenue from miscellaneous programs and other revenue sources.
Bank-Owned Life Insurance. Bank-owned life insurance refers to
business-owned life insurance purchased by a bank. The Office of the Comptroller
of the Currency provides guidelines that tie the purchase of bank-owned life
insurance to the costs of offsetting employee benefits on an aggregate basis.
Clark/Bardes was the first organization to implement large case bank-owned life
insurance programs, which are designed for, and marketed to, banks with assets
in excess of $1.0 billion. As a result of the BCS acquisition, Clark/Bardes 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. Clark/Bardes 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 (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
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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.
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 ("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.
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 Clark/Bardes is recognized as an industry leader
in providing high quality, unique services to its clients partly through the
application of internally developed technology. Clark/Bardes 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.
Clark/ Bardes further differentiates itself by employing a focused strategy for
a particular buyer group. For instance, Clark/Bardes services clients in the
banking industry 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 account specialists who are responsible for servicing the needs of that
client. The administrative services provided by Clark/Bardes' 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 Clark/Bardes' in-house actuarial, financial and insurance
specialists.
Clark/Bardes builds its client base by fostering long-term client
relationships. To this end, the training and focus of each account team centers
on Clark/Bardes' 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,
Clark/Bardes enters into administrative agreements with each client, in most
7
<PAGE> 10
cases for a term of five to ten years. Finally, Clark/Bardes' method of
calculating the revenue splits with its producers attempts to ensure the
long-term viability of its administrative services group. 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 Clark/Bardes' commitment to providing high quality
client and administrative services is one of the primary reasons that
Clark/Bardes has achieved the success it has enjoyed to date. Clark/Bardes
believes that its continued focus on, and investment in, the personnel and
technology necessary to deliver this level of client service will bolster
Clark/Bardes' reputation as an industry leader.
DISTRIBUTION
Clark/Bardes markets its insurance-financed employee benefit programs and
related administrative services through a group of producers in independently
operated sales offices located throughout the United States. As of December 31,
1998, Clark/Bardes was represented by 45 producers in 40 offices, with staffing
ranging in size from 2 people to over 20 people. Producers own approximately
15.8% of the outstanding shares of Common Stock. Each producer is an independent
contractor and enters into an agency agreement with Clark/Bardes to market
programs and services on behalf of Clark/Bardes on an exclusive basis. Each
agency agreement defines the duties of the producer to solicit and sell covered
business, the revenue splits between the producer and Clark/Bardes,
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. The
revenue splits typically provide 69% to the producer and 31% to Clark/Bardes.
Non-solicitation clauses are three years with respect to separate clients and
five years with respect to joint clients, as defined in the agency agreement.
Other than The Wamberg Organization, which accounted for approximately
17.5% of 1998 revenues, producers Steven Cochlan and Malcolm Briggs accounted
for approximately 10.7% and 6.2%, respectively, of 1998 revenue and no other
producers accounted for more than 6% of 1998 revenue. Clark/Bardes seeks to
expand its base of producers so as to mitigate any dependency on a small number
of producers for a large portion of Clark/Bardes' business. Clark/Bardes
recognizes the importance of attracting and retaining qualified, productive
sales professionals. Clark/Bardes and its producers actively recruit and develop
new sales professionals in order to add distribution capacity for Clark/Bardes.
Further, Clark/Bardes' acquisition strategy focuses on retaining the productive
sales professionals of the entity being acquired.
EMPLOYEES
As of December 31, 1998, Clark/Bardes employed approximately 192 people, of
whom 84 worked in administrative services, 31 in program design, 23 in
information systems and technical support, 19 in accounting, 12 in marketing,
and the remainder performed various executive and administrative functions. The
majority of Clark/Bardes' employees have college degrees, with several 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 Clark/Bardes' employees.
Clark/Bardes 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 Clark/Bardes' sales efforts. The marketing department develops and
tracks sales leads for the producers, provides marketing materials and research
and performs the public relations function for Clark/Bardes and its producers.
The marketing department, which includes a full time copywriter and graphic
artist, produces all the marketing materials used by Clark/Bardes
8
<PAGE> 11
and its producers. Clark/Bardes, through its marketing department, distributes
external newsletters and other program update pieces to approximately 8,000
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
Clark/Bardes representatives are quoted as information sources in major national
publications. Management believes that the efforts of Clark/Bardes' marketing
department have helped make Clark/Bardes a readily identifiable leader in the
insurance-financed employee benefit industry.
PRODUCER SUPPORT
Clark/Bardes' producers are supported by a design and analysis department.
The design and analysis 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
Clark/Bardes 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 Clark/ Bardes to easily access 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, Clark/Bardes began migrating the
administrative system to a client-server based environment in order to reduce
system development time and to allow Clark/Bardes to respond more quickly to
changing market and client needs.
Local area networks link all of Clark/Bardes' 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, Clark/Bardes'
1999 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 Clark/Bardes continues to grow
internally and by acquisitions, management intends to establish a wide area
network to facilitate communications across all locations.
Clark/Bardes 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. Clark/Bardes presently
believes that the year 2000 issues will not pose significant operational
problems for Clark/Bardes directly or as a result of any year 2000 issues or
suppliers or customers. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Year 2000 Compliance."
PERSISTENCY
Over the last five years, Clark/Bardes has experienced an average annual
persistency rate of inforce insurance in the upper ninety percent range.
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. Clark/Bardes believes that this
high persistency
9
<PAGE> 12
rate is attributable to numerous factors. The first factor relates to the
underlying purpose of an insurance-financed employee benefit program, which is
to offset the costs of employee benefit liabilities and provide long-term
benefits to executives. An insurance policy is not typically used to fund the
benefits for a specific individual, but rather to offset the costs of a client's
employee benefit costs on an aggregate basis. Therefore, the policy is usually
held to maturity, regardless of whether any particular individual insured
remains with the client. Second, a client would suffer unfavorable tax
consequences upon the surrender of the underlying business-owned life insurance
policy. The cash value of the policy, to the extent it represents amounts beyond
the cash premiums paid by the allowable charges against the insurance account,
or gain on insurance, is taxed immediately at ordinary income rates upon
surrender, and an additional penalty tax applies in certain instances. A client
often has the option of making a tax-free exchange to another policy. Upon the
exchange, however, the client would incur substantial insurance company-related
costs, such as premium taxes. These costs are normally waived in the event a
particular insurance company experiences a significant reduction in its credit
rating. Third, Clark/Bardes' 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 Clark/Bardes' services enhances persistency by
distinguishing Clark/Bardes from its competitors.
COMPETITION
The marketing, design and administration of insurance-financed employee
benefit programs is highly competitive. Clark/Bardes and its producers compete
with a large number of insurance agents, life insurance brokers, third party
administrators, producer groups and insurance companies. Clark/Bardes' direct
competitors include Compensation Resource Group, Harris Crouch Long Scott and
Miller, Management Compensation Group, Newport Group, TBG Financial and The Todd
Organization (not related to Melvin G. Todd, President and Chief Executive
Officer of CBH and CBI). 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 Clark/Bardes. 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 Clark/ Bardes and others offer lower prices for administrative services,
management believes that Clark/Bardes 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 Clark/Bardes' 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 Clark/Bardes.
GOVERNMENT REGULATION
The insurance-financed employee benefit market is subject to extensive
regulation by state governments. Clark/Bardes' products are sold in all 50
states through licenses held by Clark/Bardes or by its producers. In addition,
Clark/Bardes markets its insurance-financed employee benefit programs in the
states of Ohio, Pennsylvania and Texas through entities licensed in those states
for which Clark/Bardes 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 Clark/Bardes has not encountered regulatory
problems in the past, no assurance can be given that Clark/Bardes would be
deemed to be in compliance with all applicable licensing requirements of each
10
<PAGE> 13
jurisdiction in which Clark/Bardes operates or that additional licenses would
not be required of Clark/Bardes or that Clark/Bardes 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.
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. Clark/
Bardes markets such insurance products through an entity registered as a
broker-dealer and for which Clark/ Bardes provides almost all services by means
of administrative service agreements. Further, Clark/Bardes is subject to
various federal laws and regulations affecting matters such as pensions, age and
sex discrimination, financial services, securities and taxation. In recent
years, the Office of the Comptroller of the Currency has issued a number of
rulings that have expanded the ability of banks to sell certain insurance
products. In the past, Congress has considered legislation which could, 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 Clark/ Bardes.
ANCILLARY BUSINESS ARRANGEMENTS
Because of various federal and state licensing restrictions, Clark/Bardes
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 Clark/Bardes provides almost all services by means
of 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 Clark/Bardes' 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 Clark/Bardes 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
Clark/Bardes in providing the services, personnel and property. 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 Clark/Bardes an aggregate of $840,000, $206,000 and $211,000 in
1998, 1997 and 1996, respectively. Clark/Bardes Agency of Ohio, Inc. paid
Clark/Bardes an aggregate of $690, $155,000 and $0 in 1998, 1997 and 1996,
respectively. Clark/Bardes, Inc. of Pennsylvania paid Clark/Bardes an aggregate
of $506,000, $87,000 and $27,000 in 1998, 1997 and 1996, respectively.
Clark/Bardes of Texas, Inc. has not conducted any operations to date, and hence
no payments have been made to Clark/Bardes.
SCHOENKE ACQUISITION
On September 18, 1998, Clark/Bardes purchased the business and
substantially all the assets of Schoenke from Raymond F. Schoenke, Jr. for a
total of $17 million consisting of $15 million cash and a $2 million promissory
note, due in two equal installments on September 1, 1999, and September 1, 2000
bearing interest at 6.75% per annum.
Schoenke is a 22 employee executive benefit and compensation firm
headquartered in Maryland, specializing in the design, and administration of
benefit programs for companies. Schoenke has been in
11
<PAGE> 14
business since 1988. The following represents revenues and operating income for
the most recent periods prior to the acquisition:
<TABLE>
<CAPTION>
JUNE 30, 1998 DECEMBER 31, 1997
------------- -----------------
(UNAUDITED) (AUDITED)
------------- -----------------
(IN THOUSANDS)
<S> <C> <C>
Revenues................................................ $3,237 $6,465
Operating income........................................ $ 98 $ 492
</TABLE>
WIEDEMANN ACQUISITION
Effective November 1, 1998, Clark/Bardes acquired substantially all the
assets and 75% of the book business of Wiedemann, based in Dallas, Texas. The
total purchase price was $6.0 million, consisting of cash in the amount of
approximately $4.0 million and 142,857 shares of Common Stock. Acquisition
related expenses were $57,000. Clark/Bardes allocated $40,000 of the purchase
price to tangible assets and the remainder to the net present value of
Wiedemann's expected future profits.
Wiedemann was engaged in the business of the design, implementation and
administration of non-qualified executive benefits programs financed through
life insurance. Clark/Bardes primary objective in acquiring the assets and
business of Wiedemann was to expand Clark/Bardes' client and revenue base and
acquire the experienced Wiedemann support and administrative personnel.
Wiedemann had 10 employees specializing in the design and administration of
benefit programs for companies. The following represents unaudited revenues and
operating expenses for the most recent periods prior to the acquisition:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 AUGUST 31, 1998
----------------- ---------------
UNAUDITED
-----------------------------------
(IN THOUSANDS)
<S> <C> <C>
Revenues.............................................. $2,903 $1,562
Operating income...................................... $ 673 $ 456
</TABLE>
ITEM 2. PROPERTIES
The following table sets forth certain information with respect to the
principal facilities used in Clark/ Bardes' operations, all of which are leased:
<TABLE>
<CAPTION>
CURRENT MONTHLY APPROXIMATE LEASE
LEASE RATE SQUARE FOOTAGE EXPIRATION DATE
------------- -------------- ---------------
<S> <C> <C> <C>
Dallas, Texas........................... $43,847 32,000 April 2001
Minneapolis, Minnesota.................. $32,266 15,000 August 2005
Germantown, Maryland.................... $20,746 14,720 December 2006
</TABLE>
The aggregate monthly lease rate for the properties listed above is
$96,859. Clark/Bardes subleases approximately 2,046 square feet of its
Minneapolis, Minnesota office space at a monthly rate of $4,302. Management
believes that Clark/Bardes' existing facilities are adequate to meet its office
space requirements for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
From time to time, Clark/Bardes is involved in various claims and lawsuits
incidental to its business, including claims and lawsuits alleging breaches of
contractual obligations under agreements with producers. Clark/Bardes does not
believe that these claims will have a material adverse effect on the
Clark/Bardes' business, financial condition and results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of the fiscal year
covered by this Form 10-K to a vote of security holders, through the
solicitation of proxies or otherwise.
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<PAGE> 15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
On August 19, 1998, CBH completed an initial public offering of the Common
Stock at a price of $9.00 per share. The Common Stock is traded on the over the
counter market and is quoted on the Nasdaq National Market under the symbol
"CLKB". The following table sets forth the high and low closing sales price as
reported by the Nasdaq National Market for the Common Stock for the periods
indicated.
<TABLE>
<CAPTION>
1998 HIGH LOW
---- ------- ------
<S> <C> <C>
Third Quarter (beginning August 19, 1998)................... $10.000 $7.125
Fourth Quarter.............................................. $18.875 $8.250
</TABLE>
As of March 17, 1999, the closing price as reported by the Nasdaq National
Market for the Common Stock was $16.625. As of March 17, 1999, there were
approximately 8,202,535 shares of Common Stock outstanding, which includes
approximately 324,000 shares of Common Stock issuable to the remaining holders
of the Predecessor Company's common stock. As of March 17, 1999, there were
approximately 72 record holders and 776 Beneficial holders of the Common Stock.
DIVIDEND POLICY
CBH has never declared or paid any cash dividends on the Common Stock.
Clark/Bardes intends to retain future earnings to fund growth and does not
anticipate paying any cash dividends in the foreseeable future. Under the terms
of Clark/Bardes' Senior Secured Notes due August 9, 2002 and Second Priority
Senior Secured Notes due August 9, 2004, Clark/Bardes cannot declare or pay any
dividends or incur any liability to make any other payment or distribution to
its stockholders, may not make any distributions to purchase, redeem, or retire
any of Clark/Bardes' capital stock, is subject to certain limitations on the
incurrence of indebtedness and must maintain certain financial ratios. Under the
terms of a credit agreement with BankOne Texas, N.A., Clark/Bardes cannot
declare or pay any dividends or return any capital to its shareholders or
authorize or make any other distributions, payment or delivery of property or
cash to its shareholder as such without the prior written consent of BankOne.
RECENT SALES OF UNREGISTERED SECURITIES
On November 16, 1998, Clark/Bardes issued 142,857 shares of Common Stock as
part of the purchase price in conjunction with the Wiedemann acquisition. The
issuance was exempt from registration under Section 4(2) of the Securities Act.
USE OF PROCEEDS
On August 19, 1998, in connection with the initial public offering, CBH's
Registration Statement on Form S-1, File No. 333-56799, was declared effective
by the SEC. CBH sold all 4.0 million shares of Common Stock registered in
connection with the initial public offering at a price of $9.00 per share,
generating gross offering proceeds of $36.0 million. The initial public offering
was managed by Bear, Stearns & Co. Inc., Piper Jaffray Inc. and Conning &
Company. The initial public offering closed on August 24, 1998, and after
deducting approximately $2.5 million in underwriting discounts and commissions
and approximately $1.8 million in other related issuance costs, the net proceeds
received by Clark/Bardes was approximately $31.7 million.
A portion of the net offering proceeds equal to $13.5 million was used to
consummate the purchase of substantially all of the assets of Schoenke. The
total purchase price of Schoenke was $17.0 million consisting of a $1.5 million
secured refundable deposit paid prior to the initial public offering, cash at
closing in the amount of $13.5 million and a promissory note issued by
Clark/Bardes to the sellers of Schoenke in an
13
<PAGE> 16
amount equal to $2.0 million. On August 24, 1998, Clark/Bardes paid certain
warrant holders $4.9 million for the extinguishment of warrants representing the
right to purchase 1,525,424 shares of Common Stock. On August 24, 1998,
Clark/Bardes made a principal prepayment of $1.0 million on its medium term
notes.
On November 19, 1998, approximately $4.1 million was used in partial
payment in the acquisition of all the assets of Wiedemann. Of the total purchase
price of $6.1 million, the remainder was paid through the issuance of 142,857
shares of Common Stock at an agreed upon price of $14 per share. On January 4,
1999, Clark/Bardes purchased renewal revenue from The Wamberg Organization for
approximately $7.5 million. The remaining proceeds of approximately $800,000
have been invested in short-term, investment-grade, interest-bearing securities
and will be used for general corporate purposes, including working capital.
None of the expenses incurred for CBH's account in connection with the
issuance and distribution of the securities registered for underwriting
discounts and commissions, finder's fees, expenses paid to or for underwriters,
other expenses and total expenses resulted in direct or indirect payments to
directors or officers CBH, or to persons owning 10% or more of any class of
equity securities of Clark/Bardes, or to affiliates of Clark/Bardes. Other than
salary and reimbursements paid to directors and officers, none of the offering
proceeds was paid directly or indirectly, to directors, officers, general
partners of the issuer or their associates, or to persons owning 10% or more of
any class of securities of Clark/Bardes, or to affiliates of Clark/Bardes.
ITEM 6. SELECTED FINANCIAL DATA
The following historical information of Clark/Bardes should be read in
conjunction with information included elsewhere herein, including the financial
statements and notes thereto and "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations." The results of operations
presented below are not necessarily indicative of the results of operations that
may be achieved in the future.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------
1994 1995 1996 1997(1) 1998(2)
------ ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME
Total revenue............................. $ -- $26,972 $33,242 $49,455 $74,766
Commission & fee expense.................. -- 16,890 21,049 32,439 46,111
------ ------- ------- ------- -------
Net revenue..................... 7,343(3) 10,082 12,193 17,016 28,655
------ ------- ------- ------- -------
General & admin. expense.................. 7,237 7,869 8,579 11,504 19,616
Amortization of intangibles............... -- -- -- 295 1,232
Non-recurring expenses(4)................. -- -- -- -- 4,800
------ ------- ------- ------- -------
Income from operations.......... 106 2,213 3,614 5,217 3,008
------ ------- ------- ------- -------
Other income (expense)
Interest income......................... 171 200 121 189 565
Interest expense........................ (29) (7) -- (1,112) (3,166)
Miscellaneous........................... (100) (86) -- -- --
------ ------- ------- ------- -------
Total other income (expense).... 42 107 121 (923) (2,601)
------ ------- ------- ------- -------
Income before taxes....................... 148 2,320 3,735 4,294 406
Income taxes(5)........................... 10 102 181 60 817
------ ------- ------- ------- -------
Net income (loss)............... $ 138 $ 2,218 $ 3,554 $ 4,234 $ (411)
====== ======= ======= ======= =======
PER SHARE INFORMATION
Basic earnings (loss) per share........... $ .02 $ .39 $ .75 $ 1.03 $ (.08)
Diluted earnings (loss) per share......... $ .02 $ .39 $ .75 $ .99 $ (.08)
Dividends per share....................... $ .02 $ .29 $ .36 $ 1.32 $ --
</TABLE>
14
<PAGE> 17
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------
1994 1995 1996 1997(1) 1998(2)
------ ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET
Cash & cash equivalents................... $3,023 $ 3.969 $ 4,882 $ 3,783 $12,102
Total assets.............................. 7,152 9,887 8,525 36,901 67,493
Current portion of long-term debt......... -- -- -- 4,325 4,344
Long-term debt, excluding current
portion................................. -- -- -- 32,838 24,713
Total liabilities......................... 1,992 4,099 4,713 42,581 37,795
Stockholders' equity (deficit)............ 5,160 5,788 3,812 (5,680)(6) 29,698
</TABLE>
- ---------------
(1) 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.
(2) Includes the results of operations attributable to the assets acquired from
Schoenke from the period beginning September 1, 1998, the effective date of
the Schoenke acquisition, and ended December 31, 1998. Also includes the
results of operations attributable to the assets acquired from Wiedemann for
the period beginning November 1, 1998, the effective date of the Wiedemann
acquisition, and reflects the consummation of such acquisitions.
(3) For the period presented, Clark/Bardes reported net revenue only. Total
revenue and commission and fee expense amounts are not available.
(4) Amount represents accrual for a non-recurring operating expense related to
the fair value adjustment put warrants.
(5) For periods prior to July 31, 1998, income tax expense reflects the
Clarke/Bardes' liability for state income taxes only. No provision for
federal income taxes had been made prior to such date because Clarke/Bardes
elected to be treated as an S corporation for federal income tax purposes.
(6) 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.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of Clark/Bardes' financial condition
and results of operations should be read in conjunction with Clark/Bardes'
financial statements and notes thereto and other information appearing elsewhere
in this Form 10-K.
GENERAL
Since inception in 1967, Clark/Bardes has designed, marketed and
administered insurance-financed employee benefit programs to large corporations
and community, regional and money center banks. Clark/ Bardes' clients use these
sophisticated programs primarily to offset the costs of employee benefit
liabilities and to supplement and secure benefits for key executives.
RECENT ACQUISITIONS
Effective November 1, 1998, Clark/Bardes acquired substantially all the
assets and 75% of the book of business of Wiedemann, based in Dallas, Texas. The
total purchase price was $6.1 million, consisting of $4.1 million in cash and
142,857 shares of Common Stock at an agreed upon price of $14 per share.
Acquisition related expenses were approximately $54,000. Clark/Bardes allocated
approximately $40,000 of the purchase price to tangible assets and the remainder
to the net present value of Wiedemann's expected future revenue.
15
<PAGE> 18
Wiedemann is engaged in the business of the design, implementation and
administration of non-qualified executive benefits programs financed through
life insurance. Clark/Bardes' primary objective in acquiring the assets and
business of Wiedemann was to expand Clark/Bardes' client and revenue base and
acquire the experienced Wiedemann support and administrative personnel.
Effective September 1, 1998, Clark/Bardes acquired substantially all the
assets and the business of Schoenke, based in Germantown, Maryland, for a
purchase price of $17.0 million in cash and seller-financed notes, plus
acquisition related expenses of $98,000. For the period beginning September 1,
1998 to December 31, 1998, the assets acquired from Schoenke generated total
revenue of $3.5 million, which represented 4.7% of Clark/Bardes' total revenue
for the year ended December 31, 1998.
Effective September 1, 1997, Clark/Bardes acquired substantially all the
assets and the business of BCS, a Minnesota based company, for a total purchase
price equal to $24.0 million, plus acquisition related expenses of $383,000. BCS
generated total revenue of $29.4 million, which represented 39.3% of
Clark/Bardes' total revenue for the year ended December 31, 1998.
Clark/Bardes has entered into non-binding negotiations to acquire the
businesses and substantially all the assets of two unrelated, privately owned
companies. The aggregate proposed purchase price would be approximately $45.0
million, subject to change. If consummated, payment of the purchase price would
be approximately $19.9 in cash at closing, assumption of approximately $4.1
million in liabilities, a sellers' note for approximately $8.7 million and the
issuance of approximately 711,000 shares of Common Stock having an agreed upon
value of approximately $12.3 million. Of the potentially issuable shares,
384,000 shares of Common Stock, having a value of $6.8 million, is to be
contingent upon the attainment of specified five year revenue and gross profit
performance levels.
In addition, the proposed terms contemplate the issuance of options, under
employment agreements, to acquire approximately 361,600 shares of Common Stock,
at market prices at the time of closing, to certain retained employees of the
target companies upon the attainment of stipulated levels of revenue.
These non-binding discussions and the consummation of either acquisition
are subject to Clark Bardes' ongoing review of the target companies, the
execution of definitive purchase agreements, and the satisfaction of certain
conditions, including the approvals of Clark/Bardes' board of directors, the
boards of directors of the target companies and the consent of Clark/Bardes
lenders, among others. Accordingly, Clark/Bardes can give no assurance that the
acquisitions will be completed and, if so, on the terms described above.
ENTRY INTO NEW BUSINESS
In July 1998, Clark/Bardes entered into consulting agreements with four new
principals. These principals have assisted Clark/Bardes in building the
Clark/Bardes Healthcare Compensation Group. This new division is focused on
executive compensation and benefit plans for large and medium-sized non-profit
healthcare facilities. All payments under the compensation consulting agreements
have been made and expensed as of December 31, 1998.
In September 1998, Clark/Bardes entered into an arrangement with Robert
Miller, who formerly led the Minneapolis/St. Paul Financial Institutions
Practice for McGladrey & Pullen, LLP, a public accounting firm. Mr. Miller will
head Clark/Bardes' newest division, Bank Compensation Consulting, a division of
Bank Compensation Strategies. This division will focus on providing
comprehensive compensation consulting services exclusively to the banking
industry. The Bank Compensation Consulting division was officially "launched" in
January 1999.
REVENUE AND EXPENSE
Clark/Bardes derives its revenue primarily from (i) commissions paid by the
insurance companies that underwrite the policies underlying Clark/Bardes'
programs and (ii) fees paid by clients in connection with program design and the
administrative services provided by Clark/Bardes. Such revenue is usually long
term and recurring and is typically paid annually to extend over a period of ten
years or more after a sale. Commissions paid by insurance companies vary by
policy and by program and are usually based on a
16
<PAGE> 19
percentage of premium paid or a percentage of the cash surrender value of the
insurance policies underlying the program. Commissions paid by insurance
companies accounted for approximately 89.7% of Clark/Bardes' total revenue for
the year ended December 31, 1998. Fees are paid 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 10.3%
of Clark/Bardes' total revenue for the year ended December 31, 1998.
Generally, Clark/Bardes 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. Clark/Bardes retains approximately 35% of the
gross revenue, with the producer receiving the balance.
Total revenue includes first year revenue and renewal revenue:
- First Year Revenue. First year revenue is recognized at the time the
client is contractually committed to purchase the insurance policies and
the premiums are paid by the client to the insurance company. First year
revenue accounted for approximately 49.3% of Clark/Bardes' total revenue
for the year ended December 31, 1998.
- Renewal Revenue. Renewal revenue is recognized on the date that the
renewal premium is due to the insurance company.
The following is a chart projecting the next ten years of expected gross
revenues. Amounts in the chart are not adjusted for potential persistency
or mortality lapse. Such expected gross revenues are based upon the
beliefs and certain assumptions of management and are not necessarily
indicative of the revenues that may actually be achieved in the future.
GROSS INFORCE REVENUE AS OF DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
REVENUE SOURCE
---------------------
CORE COMMUNITY
YEAR BENEFITS BANK TOTAL
---- -------- --------- --------
<S> <C> <C> <C>
1999........................................... $ 39,095 $ 8,696 $ 47,791
2000........................................... 37,325 6,778 44,103
2001........................................... 34,949 2,736 37,685
2002........................................... 32,566 3,039 35,605
2003........................................... 30,112 3,071 33,183
2004........................................... 26,520 3,106 29,626
2005........................................... 26,020 3,140 29,160
2006........................................... 26,029 3,178 29,207
2007........................................... 23,769 3,217 26,986
2008........................................... 22,731 3,257 25,988
Totals
Years 1-5.................................... $174,048 $24,323 $198,371
Years 1-10................................... $299,120 $40,223 $339,343
</TABLE>
17
<PAGE> 20
Renewal revenue can be affected by policy surrenders or exchanges,
material contract changes, asset growth and case mortality rates.
Traditionally, Clark/Bardes has experienced persistency rates on the in
force insurance underlying the Clark/Bardes' programs that is in the
upper-ninety percent range, with the exception of Leveraged COLI business,
which was affected by adverse tax law changes, and the restructuring of
Confederation Life Insurance Company. Renewal revenue accounted for
approximately 50.7% of Clark/Bardes' total revenue for the year ended
December 31, 1998.
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 61.7% for the year ended December 31, 1998.
QUARTERLY FLUCTUATIONS
Clark/Bardes 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,
Clark/Bardes 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
Clark/Bardes or its competitors, client acceptance or rejection of new programs
and services, program development expenses, timing of significant sales, demand
for Clark/Bardes' administrative services, competitive, legislative and
regulatory conditions in the insurance-financed employee benefit industry and
general economic conditions.
The following table sets forth unaudited statements of income for the four
quarters of each of 1997 and 1998. Such information is not necessarily
indicative of results for any full year or for any subsequent period.
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1997 1997 1997 1997 1998 1998 1998 1998
--------- --------- ---------- --------- --------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenue................... $5,510 $5,772 $11,009 $27,162 $13,754 $15,230 $17,641 $28,141
Commission and fee expense...... 3,550 3,723 7,138 18,027 9,132 9,071 11,052 16,856
------ ------ ------- ------- ------- ------- ------- -------
Net revenue..................... 1,960 2,049 3,871 9,135 4,622 6,159 6,589 11,285
General and admin. Expense...... 1,860 2,755 2,887 4,004 3,371 5,029 4,613 6,594
Put warrants.................... -- -- -- (5,300) 500 --
Income (loss) before taxes...... $ 200 $ (737) $ 888 $ 3,942 $ 185 $(5,181) $ 1,576 $ 3,841
Basic earnings (loss) per
share(1)...................... $ 0.05 $ (0.1) $ 0.20 $ 1.27 $ 0.06 $ (1.61) $ 0.44 $ 0.27
Diluted earnings (loss) per
share(1)...................... $ 0.05 $ (0.1) $ 0.20 $ 1.03 $ 0.06 $ (1.61) $ 0.39 $ 0.27
</TABLE>
- ---------------
(1) Earnings per share prior to July 31, 1998 reflects income before taxes less
Clark/Bardes' liability for state taxes only, on a per-share basis. No
provision for federal income taxes has been made in those periods because
Clark/Bardes elected to be treated as an S corporation for federal income
tax purposes prior to the Merger.
18
<PAGE> 21
RESULTS OF OPERATIONS
The following table sets forth, with respect to Clark/Bardes for the
periods indicated, the percentage of total revenues represented by certain
revenue, expense and income items:
<TABLE>
<CAPTION>
QUARTER ENDED
YEAR ENDED DECEMBER 31, DECEMBER 31,
------------------------ -------------
1996 1997 1998 1997 1998
------ ------ ------ ----- -----
<S> <C> <C> <C> <C> <C>
Total revenue.................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Commission and fee expense..................... 63.3 65.6 61.6 66.4 59.9
----- ----- ----- ----- -----
Net revenue.................................... 36.7 34.4 38.4 33.6 40.1
----- ----- ----- ----- -----
General and admin. Expenses.................... 25.7 23.3 26.2 15.5 23.4
Amortization of intangibles.................... 0.0 0.6 1.6 0.6 1.5
Non-recurring.................................. 0.0 0.0 (6.4) -- --
Operating expenses
----- ----- ----- ----- -----
Income from operations......................... 10.9 10.5 4.1 17.5 15.2
===== ===== ===== ===== =====
Interest income................................ 0.4 0.4 0.8 0.3 0.6
Interest expense............................... 0.0 (2.2) (4.2) (3.3) (2.1)
Miscellaneous income (expense)................. (0.1) 0.0 0.0 0.0 0.0
----- ----- ----- ----- -----
Total other income (expense)................... 0.3 (1.9) (3.5) (3.0) (1.5)
----- ----- ----- ----- -----
Income before taxes............................ 11.2 8.7 0.7 14.5 13.5
Income taxes................................... 0.5 0.1 1.3 0.2 5.8
----- ----- ----- ----- -----
Net income..................................... 10.7% 8.6% (0.7)% 14.3% 7.9%
===== ===== ===== ===== =====
</TABLE>
COMPARISON OF THREE MONTH PERIODS ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1997
ON A HISTORICAL BASIS
Total Revenue. Total revenue increased to $28.1 million for the three month
period ended December 31, 1998 compared to $27.2 million for the three month
period ended December 31, 1997, representing an increase of 3.6%. The results
for the three month period ended December 31, 1998 reflects contributions of
$18.0 million from the core benefits business (including Schoenke) and $10.1
million from BCS community bank business. The results for the three month period
ended December 31, 1997 reflects contributions of $19.7 million from the core
benefits business and $7.5 million from BCS community bank business. The
breakout of first-year and renewal revenue for the years ended December 31 is as
follows:
<TABLE>
<CAPTION>
1998 1997
----- -----
(IN MILLIONS)
<S> <C> <C>
First Year Revenue
Core benefits business.................................... $ 6.4 $ 9.5
Community bank business................................... 8.1 6.2
Renewal Revenue
Core benefits business.................................... 11.6 10.2
Community bank business................................... 2.0 1.3
----- -----
Total............................................. $28.1 $27.2
===== =====
</TABLE>
Sales for the 1997 fourth quarter were unusually high due to a pending
legislative issue. To illustrate this point, of Clark/Bardes' 1997 revenues, 55%
were generated in the fourth quarter, as compared to 38% in 1998.
Commission and Fee Expense. Commission and fee expense was $16.9 million
for the three month period ended December 31, 1998 compared to $18.0 million for
the three month period ended December 31, 1997, representing a decrease of 6.5%.
Commission and fee expense as a percentage of total revenue decreased to 59.9%
for the three month period ended December 31, 1998 compared to 66.4% for the
three month period ended December 31, 1997. This reduction in commission and fee
expense as a percentage of total revenue was due to both acquisitions (e.g.
Schoenke commission expense was only 8.7% of Schoenke revenues) and a favorable
product mix from business on which a smaller than usual percentage of revenue
was distributed to
19
<PAGE> 22
producers. The reduction in commission expense due to acquisitions is expected
to continue, and present levels of commission and fee expense as a percentage of
total revenue are considered sustainable.
General and Administrative Expense. General and administrative expense
increased to $6.6 million for the three month period ended December 31, 1998
compared to $4.0 million for the three month period ended December 31, 1997,
representing an increase of 65%. General and administrative expense was higher
with an increase in administrative staff and resources which was required in
order to support new and renewal business gained in 1998. General and
administrative expense as a percent of total revenue was 23.4% for the three
month period ended December 31, 1998 compared to 15.5% for the three month
period ended December 31, 1997. General and administrative expense as a
percentage of revenue is usually lower in the fourth quarter than in other
quarters, due to the relatively high revenue typically recognized in the fourth
quarter associated with relatively level expense patterns for the year. The
general and administrative expense as a percent of revenue for the three months
ended December 31, 1997 is low, due to the unusually high revenue combined with
relatively level expense pattern for that period.
Amortization. Amortization expense equaled $433,687 for the three month
period ended December 31, 1998, reflecting the full-period amortization of
intangible assets capitalized as a result of the BCS and Schoenke acquisition
and two months of amortization for the Wiedemann acquisition. Amortization
expense was $159,913 for the three month period ended December 31, 1997, which
reflects the BCS acquisition only.
Income from Operations. Income from operations was $4.3 million for the
three month period ended December 31, 1998, compared to $4.8 million for the
three month period ended December 31, 1997, representing a decrease of 11.8%.
The decrease is due to the revenue and general and administrative expense
factors discussed above, as well as the increase in amortization expense.
Operating Margin was 15.1% for the three month period ended December 31, 1998,
as compared to 17.5% for the three month period ended December 31, 1997.
Other Expense -- Net. Other expense for the three month period ended
December 31, 1998 was $417,017 as compared to $820,096 for the three month
period ended December 31, 1997. The amount for the three months ended December
31, 1998 included interest income of $177,443 and interest expense of $599,630
as compared to interest income of $81,194 and interest expense of $903,386 for
the three months ended December 31, 1997. Interest income was higher for the
three months ended December 31, 1998 due to larger cash balances resulting
primarily from Clark/Bardes' initial public offering. Interest expense was lower
for the three months ended December 31, 1998 due to a lower outstanding debt
balance, as well as lower interest rates resulting from Clark/Bardes' August
1998 debt restructuring.
Income before Income Taxes. Income before taxes was $3.8 million for the
three month period ended December 31, 1998, compared to $3.9 million for the
three month period ended December 31, 1997, representing a decrease of 2.6%.
Income Tax. Effective July 31, 1998, Clark/Bardes changed its tax status
from an S corporation to a C corporation, which changed Clark/Bardes' treatment
for federal income tax purposes. Clark/Bardes recorded $1.6 million of income
tax expense for the three month period ended December 31, 1998, as compared to
$60,000 of state income tax expense for the three month period ended December
31, 1997.
Net Income. Net income was $2.2 million for the three month period ended
December 31, 1998. Net income was $3.9 million for the three month period ended
December 31, 1997. Applying the expected C corporation tax rate, net income is
estimated at $2.3 million for the comparable 1997 period.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1998 AND 1997 ON A HISTORICAL BASIS
Total Revenue. Total revenue increased to $74.8 million for the year ended
December 31, 1998 as compared to $49.5 million for the year ended December 31,
1997, representing an increase of 51.2%. The results for the year ended December
31, 1998 reflects contributions of $45.4 million from the core benefits
business, including Schoenke, and $29.4 million from the BCS community bank
business. Results for the year
20
<PAGE> 23
ended December 31, 1997 reflect contributions of $41.0 million from the core
benefits business and $8.5 million from BCS community bank business. The
breakout of first-year and renewal revenue is as follows:
<TABLE>
<CAPTION>
1998 1997
----- -----
(IN MILLIONS)
<S> <C> <C>
First Year Revenue
Core benefits business.................................... $13.4 $15.6
Community bank business................................... 23.5 7.0
Renewal Revenue
Core benefits business.................................... 32.0 25.4
Community bank business................................... 5.9 1.5
----- -----
Total............................................. $74.8 $49.5
===== =====
</TABLE>
Commission and Fee Expense. Commission and fee expense increased to $46.1
million for the year ended December 31, 1998 compared to $32.4 million for the
year ended December 31, 1997, representing an increase of 42.1%. Commission and
fee expense as a percentage of total revenue decreased to 61.6% for the year
ended December 31, 1998 compared to 65.6% for the year ended December 31, 1997.
This reduction in commission and fee expense as a percentage of total revenue
was due to acquisitions and a favorable product mix from business on which a
smaller than usual percentage of revenue was distributed to producers. Clark/
Bardes considers present levels of commission and fee expense as a percentage of
total revenue to be sustainable.
General and Administrative Expense. General and administrative expense
increased to $19.6 million for the year ended December 31, 1998 compared to
$11.5 million for the year ended December 31, 1997, representing an increase of
70.5%. General and administrative expense as a percent of total revenue was
26.2% for the year ended December 31, 1998 compared to 23.3% for the year ended
December 31, 1997. The increase in general and administrative expense as a
percentage of total revenue reflects additional staffing in 1998 to keep up with
Clark/Bardes' revenue growth, as well as additional corporate overhead costs
associated with becoming a public company.
Amortization. Amortization expense was $1.2 million for the year ended
December 31, 1998, reflecting the full year amortization of intangible assets
capitalized as a result of the BCS acquisition, four months of amortization
expense for the Schoenke acquisition and two months of amortization expense for
the Wiedemann acquisition. Amortization expense was $295,000 for the year ended
December 31, 1997, reflecting the four months of amortization expense for the
BCS acquisition.
Non-recurring Expenses. A non-recurring expense of $4.8 million was
incurred for a market value adjustment for Clark/Bardes warrants with put rights
which were subsequently extinguished.
Income from Operations. Income from operations was $7.8 million for the
year ended December 31, 1998 ($3.0 million including the non-recurring item)
compared to $5.2 million for the year ended December 31, 1997, representing an
increase of 49.7%. The increase represents a full year of income from BCS as
compared to four months of income for the year ended December 31, 1997. The
Schoenke acquisition also contributed to income from operations for the for the
year ended December 31, 1998. Operating Margin (excluding the non-recurring
item) was 10.4% for the year ended December 31, 1998 and 10.5% for the year
ended December 31, 1997.
Other Expense -- Net. Other expense for the year ended December 31, 1998
was $2.6 million compared to $921,473 for the year ended December 31, 1997. The
amount for the year ended December 31, 1998 included interest income of $565,575
and interest expense of $3.2 million as compared to interest income of $188,597
and interest expense of $1.1 million for the year ended December 31, 1997.
Interest income was higher in 1998 due to larger cash balances resulting
primarily from the Clark/Bardes initial public offering. Interest expense was
higher primarily due to a full year of outstanding debt associated with the BCS
acquisition for the year ended December 31, 1998, compared to four months of
outstanding debt in for the year ended December 31, 1997.
21
<PAGE> 24
Income Before Taxes. Income before taxes was $406,000 for the year ended
December 31, 1998, compared to $4.3 million for the year ended December 31,
1997.
Income Tax Expense. On July 31, 1998, Clark/Bardes changed its tax status
from an S corporation to a C corporation, which changed Clark/Bardes' treatment
for Federal income tax purposes. Clark/Bardes recorded $817,320 of income tax
expense for the year ended December 31, 1998, as compared to $60,000 of state
income tax expense for the year ended December 31, 1997.
Net Income Loss. Actual net loss was $410,715 for the year ended December
31, 1998. Excluding the non-recurring operating expense and income tax benefit,
net income is estimated at $2.5 million for the year. Net income was $4.2
million for the year ended December 31, 1997, which reflects $60,000 of income
tax expense.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1997 AND 1996 ON A HISTORICAL BASIS
Total Revenue. Total revenue increased to $49.5 million for the year ended
December 31, 1997 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
$25.4 million ($24.1 million excluding BCS) in 1997 from $23.6 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.
Commission and Fee Expense. Commission and fee expense increased to $32.4
million for the year ended December 31, 1997 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 BCS acquisition.
General and Administrative Expense. General and administrative expense
increased to $11.5 million for the year ended December 31, 1997 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 compared to 25.7% for the year ended December
31, 1996. The improvement in general and administrative expense as a percentage
of total revenue was a result of the BCS acquisition.
Amortization. Amortization expense was $295,000 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 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 was
attributable primarily to the income from BCS. 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 $295,000 incurred as a result of the BCS acquisition.
Other Expense -- Net. Other income and expense for the year ended December
31, 1997 was $923,000 compared to other income of $121,000 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 Clark/Bardes throughout the year and the BCS acquisition in September
1997.
Net Income. 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
22
<PAGE> 25
discussed above. No provision for federal income taxes was made for either
period since Clark/Bardes was an S corporation prior to the Merger.
LIQUIDITY AND FINANCIAL RESOURCES
Sources of Cash. Clark/Bardes produced net cash flow from operations of $4
million for the year ended December 31, 1998, as compared to $1.9 million for
the year ended December 31, 1997. The increase was due largely to strong cash
earnings and a decrease in working capital. As of December 31, 1998,
Clark/Bardes had cash and cash equivalents of $12.1 million, and total current
assets of $20.2 million. The primary source of these cash balances were the
proceeds from the issuance of common stock from Clark/Bardes' initial public
offering.
Uses of Cash. $15.0 million was used to consummate the Schoenke
acquisition. The total purchase price was $17.0 million consisting of a $15.0
million cash and a $2.0 million promissory note issued by Clark/Bardes to the
sellers of Schoenke. On August 24, 1998, Clark/Bardes paid warrant holders $4.9
million in exchange for the extinguishment of warrants representing the right to
purchase 1,525,424 shares of Common Stock at $5.90 per share. On August 24,
1998, Clark/Bardes made a principal prepayment of $1.0 million on its medium
term notes in addition to scheduled principal payments in the amount of $2.9
million for the three months ending December 31, 1998. On November 1, 1998,
Clark/Bardes paid 6.1 million to acquire the assets and business of Wiedemann.
The total purchase price consisted of $4.1 million paid in cash and the issuance
of 142,857 shares of Common Stock.
On July 31, 1998, Clark/Bardes paid a dividend equal to the S Corporation
Stockholder's Distribution Account. This dividend, in the amount of $3.2 million
or $1.00 per share, was paid from existing cash reserves.
Credit Facilities. As of December 31, 1998, Clark/Bardes owed an aggregate
of $29.1 million under outstanding debt obligations. Of this amount, $4.3
million is due within the next twelve months. 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.
Effective August 24, 1998, Clark/Bardes restructured its Senior Secured
Notes and Second Priority Senior Secured Notes. The interest rates on the 10.5%
Senior Secured Notes and the 11.0% Second Priority Senior Secured Notes were
reset to 7.84% and 8.86%, respectively. The restructured notes may be prepaid
without penalty and will be secured by a first priority security interest in,
among other things, all of Clark/ Bardes' renewal commissions other than the
renewal commissions from BCS and Schoenke. Further, Clark/ Bardes is subject to
significant operational restrictions and financial covenants, a prohibition
against certain payments, a limitation on the payment of dividends, a limitation
on the incidence of indebtedness and the maintenance of certain financial
ratios.
In January 1999, CBI entered into a $65.0 million credit agreement
consisting of a $35 million revolving credit Facility and two term loans of $25
million and $5 million. In January 1999 pursuant to the credit agreement,
Clark/Bardes obtained a term loan for $25 million at a fixed rate of 7.08% for
the first year and at a floating rate based upon the one-year London InterBank
offered rate plus 2% thereafter. The term loans are represented by secured
promissory notes maturing December 31, 2004. Principal and interest are payable
quarterly beginning March 31, 1999. The $25.0 million proceeds were used to
retire the Senior Secured Notes, Second Priority Senior Secured Notes, medium
term notes, and AAA distribution notes payable. The credit agreement contains
restrictive covenants which, among other things, require mandatory prepayments
under certain conditions, financial reporting and compliance certificates,
maintenance of financial ratios, restrictions on guarantees and additional
indebtedness, certain limitations on mergers and acquisitions, prohibition of
cash dividends, limitation on investments, loans, and advances, and certain
change in control provisions.
Coincident with the credit agreement and floating rate debt agreements, CBI
has entered into an interest rate swap agreement with a bank affiliated with the
lending group to fix the interest rate at 5.29% on $15 million of the term loan,
thus sustaining no gain or loss on rate fluctuations. There was no cost to CBI
for this arrangement and it does not present a derivative risk.
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Clark/Bardes believes that its net cash flow from operations will continue
to provide sufficient funds to service all of its debt obligations. This belief
is based on the predictability and magnitude of Clark/Bardes' future revenue
stream. Specifically, renewal revenue in future periods, which is not reflected
on Clark/Bardes' balance sheet, is estimated by Clark/Bardes to represent
approximately $198.4 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.
As Clark/Bardes' 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 Clark/Bardes' required debt
payments, working capital needs 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 Clark/Bardes' anticipated requirements or
that Clark/Bardes will not require additional debt or equity financing within
this time frame.
YEAR 2000 COMPLIANCE
The year 2000 issue is the result of computer programs written using two
digits rather than four digits to define "date" fields. Information systems have
time sensitive operations that, as a result of this date field limitation could
disrupt activities in the normal business cycle. Based on previous and ongoing
internal reviews, management believes that the computer equipment and software
used by Clark/Bardes will function properly with respect to dates in the year
2000 and thereafter. However, uncertainty still exists concerning the potential
costs and effects of the year 2000 problem. Clark/Bardes is continuing its
assessment of year 2000 issues and taking steps to prevent these issues from
adversely affecting its future operating results. This ready process includes,
but is not limited to, preparing an inventory of potential year 2000 issues,
determining functions affected, performing remediation as necessary, testing
software and equipment and recording results. This assessment and readiness
process is expected to be completed by mid-year 1999.
In its assessment of year 2000 issues, Clark/Bardes is specifically
focusing on its software applications and associated software products,
hardware, facilities, communications equipment and security systems.
Clark/Bardes' proprietary financial modeling and Unix-based administrative
systems that support its insurance-financed employee benefit programs were
designed to be year 2000 ready. During 1998 Clark/Bardes upgraded its network
software to be year 2000 compliant.
In addition to evaluating its own systems for year 2000 compliance.
Clark/Bardes is also communicating with and requesting information from its
important clients and carriers to determine the extent to which interfaces with
such entities are vulnerable to year 2000 issues and the extent to which the
internal systems of such entities are vulnerable to year 2000 issues. Third
parties that have relationships with Clark/Bardes, including insurance companies
and clients, may experience significant operational difficulties if their
computer systems do not properly recognize date sensitive information when the
year changes to 2000. While these computer malfunction issues may have a
material adverse effect on the operations of such third parties, which may, in
turn, have a material adverse effect on Clark/Bardes, management presently
believes that year 2000 issues will not require Clark/Bardes to incur any
material costs and do not pose significant operational problems. However,
Clark/Bardes 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 Clark/ Bardes or third parties that have
relationships with Clark/Bardes could have a material adverse effect on
Clark/Bardes' business, results of operations and financial condition.
Clark/Bardes believes that to the extent that any insurance companies which have
a relationship with Clark/Bardes are unable to become year 2000 compliant.
Clark/Bardes will be able to enter into relationships on a going forward basis
with other insurance companies that are year 2000 compliant.
Clark/Bardes' costs, as of December 31, 1998, related to the above year
2000 compliance efforts total approximately $78,000. Total costs associated with
Clark/Bardes' year 2000 readiness process, consisting of both internal and
external resources, are expected to range between $150,000 and $200,000.
Clark/Bardes anticipates funding these costs with cash generated from
operations. Clark/Bardes has not yet fully completed its year 2000 assessment
and remediation efforts. Based on its experience to date, Clark/Bardes presently
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believes that the year 2000 issues will not pose significant operational
problems for Clark/Bardes directly or as a result of any year 2000 issues of
suppliers or customers.
INFLATION
Inflation has not had a material effect on the Clark/Bardes' results of
operations. Certain of Clark/ Bardes' expenses, such as compensation, benefits
and capital equipment costs, are subject to normal inflationary pressures.
However, the majority of Clark/Bardes' 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 FASB issued SFAS No. 128, "Earnings per Share." SFAS
No. 128 specifies the computation, presentation and disclosure requirements for
earnings per share for entities with publicly-held common stock. SFAS No. 128 is
effective for financial statements for both interim and annual periods ending
after December 15, 1997 and has been adopted by Clark/Bardes and is presented in
the accompanying financial statements.
As of January 1, 1998, Clark/Bardes adopted SFAS No. 130 "Reporting
Comprehensive Income." SFAS No. 130 establishes new rules for the reporting and
display of comprehensive income and its components. The adoption of this
Statement had no impact on Clark/Bardes' net income or shareholders' equity.
Clark/Bardes has no other comprehensive income as defined by SFAS No. 130 as of
December 31, 1997 or December 31, 1998.
In June 1997, the FASB issued SFAS No. 131 "Disclosures About Segments of
an Enterprise and Related Information." SFAS No. 131 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 Clark/Bardes' financial
condition or results of operations. This statement has been adopted by
Clark/Bardes and is presented in the accompanying financial statements.
RISK FACTORS
The following statements should be considered carefully in reviewing this
Form 10-K and qualify, in their entirety, each forward looking statement herein.
UNFAVORABLE FEDERAL TAX LEGISLATION
Federal tax laws could cause significant surrenders of policies and/or
reduce the tax advantage of certain Clark/Bardes products, and therefore the
life insurance products underlying the benefit programs marketed by Clark/Bardes
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.
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In February 1999, 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 Clark/Bardes may lose the economic
advantages of maintaining the policies underlying their benefit plans. This
could result in significant surrenders of policies from which Clark/Bardes
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, Clark/Bardes
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 Clark/
Bardes' business.
No assurances can be given that the administration's proposal or other
adverse tax proposals will not be enacted in the future or that adverse
interpretations of existing laws will not occur in the future. If the Internal
Revenue Code were to be amended to eliminate or reduce the tax-deferred status
of the insurance programs marketed by Clark/Bardes, or if adverse
interpretations of existing laws occur in the future, the market demand for such
programs would be materially adversely affected.
CLARK/BARDES IS DEPENDENT ON CERTAIN KEY PRODUCERS
During 1998, approximately 44.7% of total revenue was derived from the
marketing activities of five offices operated by producers of Clark/Bardes. The
largest of these offices, The Wamberg Organization, accounted for approximately
23.0% of total revenue. The offices operated by Steven Cochlan, Malcolm Briggs,
and George Blaha collectively accounted for 21.5% of 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 Clark/Bardes 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
Clark/Bardes or by a producer and there is no assurance that such agreements
will not be terminated at any time by Clark/Bardes or by a producer in the
future or that the non-competition provisions will be enforced in litigation.
LACK OF PERSISTENCY CAN ADVERSELY IMPACT RENEWAL COMMISSIONS AND FEES
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 penalties and
the tax laws typically impose 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 that 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 since
Clark/Bardes 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, Clark/Bardes does not receive any renewal commissions and fees for
insurance policy servicing after the policy lapses. Although Clark/Bardes has
historically experienced high persistency rates, there can be no assurance that
these high persistency rates will continue in the future.
CLARK/BARDES IS DEPENDENT ON THE SERVICES OF KEY PERSONNEL SUCH AS W.T. WAMBERG,
MELVIN G. TODD AND RICHARD C. CHAPMAN
Clark/Bardes' performance is substantially dependent on the performance of
its executive officers and key employees. Clark/Bardes 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, could have a material
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adverse effect on Clark/Bardes' business, financial condition and operating
results. There can be no assurance that Clark/Bardes will be successful in
retaining its key personnel.
CREDIT RISK OF INSURANCE COMPANIES FROM WHICH REVENUE IS RECEIVED COULD
ADVERSELY IMPACT RENEWAL INCOME
Clark/Bardes designs and markets employee benefit programs typically
financed by policies underwritten by insurance companies. The commissions
payable for the sale of the insurance policies underlying Clark/ Bardes'
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
Clark/Bardes 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 Clark/Bardes to
realize less than the full amount of the renewal revenue to which it is
entitled. Clark/Bardes' inability to collect renewal revenue could have a
material adverse effect on its business, financial condition and results of
operations.
RISKS ASSOCIATED WITH ACQUISITIONS MAY RESULT IN REVENUES THAT ARE LESS THAN
EXPECTED
Since November 1997, Clark/Bardes has completed three acquisitions, is
actively considering two more acquisitions and has a number of potential
acquisitions under consideration at any point in time. 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
Clark/Bardes. An acquisition may not produce the revenue, earnings or business
that Clark/Bardes anticipated and which is paid for. Furthermore, there can be
no assurance that a business acquired in the future will even achieve acceptable
levels of revenue and profitability. Accordingly, acquisition efforts may not
succeed, and the time capital and management and other resources spent on an
acquisition that fails to meet Clark/Bardes' expectations could cause
Clark/Bardes' business, results of operations and financial condition to be
materially affected. In addition, acquisitions involve numerous other 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 Clark/Bardes' business, financial condition and results of
operations.
SIGNIFICANCE OF INTANGIBLE ASSETS
At December 31, 1998, intangible assets arising from the purchased
businesses consisted of the following:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Present value of in-force revenue........................... $25,532
Unamortized goodwill........................................ 18,552
Non-compete agreements...................................... 1,125
-------
$45,209
=======
</TABLE>
All of these amounts having been determined by the excess of the purchase price
(including acquisition costs) over the net tangible assets acquired. The amounts
allocated to inforce revenue is determined using the discounted cash flow of
inforce revenues adjusted for expected persistency, mortality and associated
costs. The balance of the excess purchase price over the net tangible assets is
allocated to goodwill. The inforce revenue is amortized over a period of
anticipated benefit normally thirty years. There are a number of factors
determining the persistency of such inforce business all of which are beyond
Clark/Bardes' control and there can be no assurance that the values so allocated
will ultimately be realized.
Clark/Bardes has adopted SFAS No. 121 "Accounting for Impairment of Long
Lived Assets and Long Lived Assets To Be Disposed Of." Under SFAS No. 121
Clark/Bardes will periodically (at least annually) review the components of this
asset and make the appropriate adjustment if it becomes apparent that the
residual present value is less than its amortized carrying amount. In 1998, the
FASB announced a study of the
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prevailing amortization periods for goodwill. In its deliberations, the FASB has
tentatively determined that amortization for goodwill should be a maximum period
of ten to twenty years. Clark/Bardes presently amortizes the present value of
inforce revenue over thirty years and goodwill over a period of forty years but
intends to fully comply with any new standards with respect to all future
acquisitions.
CLARK/BARDES' INABILITY TO GROW AND EXPAND PRODUCTS AND SERVICES COULD ADVERSELY
IMPACT FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Clark/Bardes' growth strategy relies in part on its ability to increase its
share of the insurance-financed employee benefit market. Clark/Bardes 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 Clark/Bardes 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 Clark/Bardes 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 Clark/Bardes'
business, financial condition and results of operations.
In addition, the success of Clark/Bardes depends in large part on its
ability to attract and retain highly skilled managerial, sales and marketing
personnel. Clark/Bardes 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 Clark/Bardes 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
Clark/Bardes will be able to attract, integrate and retain such highly skilled
personnel. If any component of the inforce revenue base should become
unrealizable or the accounting regulatory bodies impose shorter amortization
periods, Clark/Bardes' financial positions and future operating results could be
materially adversely affected.
COMPETITIVE FORCES MAY ADVERSELY AFFECT CLARK/BARDES' MARKET SHARE
The marketing, design and administration of insurance-financed employee
benefit programs is highly competitive. Clark/Bardes 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. Clark/Bardes'
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 service
products, may pose increasing competition in the future to companies who sell
life insurance products, including Clark/Bardes. 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 Clark/ Bardes and others offer lower prices for administrative services,
management believes that Clark/Bardes 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 Clark/ Bardes' 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
Clark/Bardes.
CLARK/BARDES IS DEPENDENT ON CERTAIN INSURANCE COMPANIES
Clark/Bardes depends heavily on a small number of insurance companies to
underwrite the insurance policies underlying the programs Clark/Bardes markets.
More specifically, Clark/Bardes currently utilizes
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approximately fourteen life insurance companies to underwrite substantially all
of the business-owned life insurance policies underlying Clark/Bardes' programs
of which nine insurance companies, General American, Great-West, Life Investors,
Nationwide, Transamerica, The Mutual Group, Alexander Hamilton, Jefferson Pilot
and West Coast Life, accounted for approximately 76.4% of Clark/Bardes' first
year commission revenue for the year ended December 31, 1998. There is no
assurance that these relationships will continue in the future or that
Clark/Bardes will be able to develop relationships with other insurance
companies.
ERRORS AND OMISSIONS IN THE SERVICES IT PROVIDES MAY SUBJECT CLARK/BARDES TO
DAMAGES
Clark/Bardes markets, designs and administers sophisticated financial
products. Certain of Clark/Bardes' employees provide financial, actuarial and
other professional services in connection with marketing, designing and
administering these programs. Clark/Bardes' clients rely upon the services and
interpretations rendered by its employees. To the extent any services or
interpretations provided by Clark/Bardes' employees prove to be inaccurate,
Clark/Bardes may be liable for the damages, and such liability, to the extent
not covered by existing insurance, could have a material adverse effect on
Clark/Bardes' business, financial condition and results of operations.
PROTECTION OF PROPRIETARY PROGRAMS AND SERVICES MAY BE INADEQUATE TO PREVENT
LEAKS OR THEIR USE BY OTHERS
Clark/Bardes regards certain of its programs and services as proprietary
and 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 limited protection. Despite
Clark/Bardes' efforts to protect its proprietary rights, unauthorized parties
may attempt to copy aspects of the programs or services marketed by Clark/Bardes
or to obtain and use information that Clark/Bardes regards as proprietary. There
can be no assurance that the obligation to maintain the confidentiality of
Clark/Bardes' proprietary information will prevent disclosure of such
information or that the proprietary programs marketed by Clark/ Bardes will not
be independently developed by competitors.
FEDERAL AND STATE REGULATIONS MATERIALLY AFFECT THE WAY CLARK/BARDES OPERATES IN
EACH STATE
The insurance-financed employee benefit market is subject to extensive
regulation by state governments. Clark/Bardes products are sold in all 50 states
through licenses held by Clark/Bardes or by its producers. In addition,
Clark/Bardes markets its insurance-financed employee benefit programs in the
states of Ohio, Pennsylvania and Texas through entities licensed in those states
for which Clark/Bardes 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
Clark/Bardes has not encountered regulatory problems in the past, no assurance
can be given that Clark/Bardes would be deemed to be in compliance with all
applicable licensing requirements of each jurisdiction in which Clark/Bardes
operates or that additional licenses would not be required of Clark/Bardes or
that Clark/Bardes 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.
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. Clark/
Bardes markets such insurance products through an entity registered as a
broker-dealer and for which Clark/ Bardes 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 Clark/Bardes Holdings and Mr. Wamberg is Chairman of
Clark/Bardes Holdings. While
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Clark/Bardes has not encountered regulatory problems in the past, no assurance
can be given that Clark/ Bardes or its producers will not encounter regulatory
problems in the future.
FLUCTUATIONS IN OPERATING RESULTS MAKE CLARK/BARDES REVENUE AND OPERATING
RESULTS DIFFICULT TO ANALYZE AND FORECAST
Clark/Bardes may experience significant fluctuations in its results of
operations, in particular when such results are compared on a consecutive
quarterly basis. In particular, Clark/Bardes 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 Clark/Bardes or its competitors, client
acceptance or rejection of new programs and services, program development
expenses, timing of significant sales, demand for administrative services,
competitive, legislative and regulatory conditions in the insurance-financed
employee benefit industry and general economic conditions. Many of these factors
are beyond Clark/Bardes' control.
The sales cycles for Clark/Bardes' programs and services are lengthy,
lasting 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 Clark/Bardes' control. For these and other reasons, the revenue
of Clark/Bardes is difficult to forecast, and Clark/Bardes believes that
comparing its consecutive quarterly results of operations is not necessarily
meaningful or indicative of the results that Clark/Bardes may achieve for any
subsequent period. Thus, past operating results should not be considered a
reliable indicator of future performance.
CHANGES IN ECONOMIC AND MARKET CONDITIONS MAY HELP DEVELOPMENT OF COMPETING
PROGRAMS AND PRODUCTS
Clark/Bardes' 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 marketed by Clark/Bardes. For example, if interest
rates rise, competing products may become more attractive to potential
purchasers of the programs marketed by Clark/Bardes. Further, a prolonged
decrease in stock prices may have a significant effect on the sale and
profitability of Clark/Bardes' 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 Clark/Bardes. There can
be no assurance that Clark/Bardes will be able to compete with alternative
products if economic conditions and inflationary increases make the programs
marketed by Clark/Bardes financially unattractive.
RELIANCE ON INFORMATION PROCESSING SYSTEMS
Clark/Bardes' 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 Clark/Bardes' 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 Clark/Bardes' business, financial condition and results of
operations. Although Clark/Bardes has disaster recovery procedures in place and
insurance to protect against such contingencies, these can be no assurance that
such insurance or services will continue to be available at reasonable prices,
cover all such losses or compensate Clark/Bardes for the possible loss of
clients occurring during any period that Clark/ Bardes is unable to provide
services.
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, Clark/Bardes
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believes that the computer equipment and software used by Clark/Bardes will
function properly with respect to dates in the year 2000 and thereafter.
However, third parties that have relationships with Clark/Bardes, 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 Clark/Bardes' business, financial
condition and results of operations. Clark/Bardes has requested information from
third parties addressing any potential year 2000 issues with such third parties;
however, Clark/Bardes 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 Clark/Bardes or third parties
that have relationships with Clark/Bardes could have a material adverse effect
on Clark/Bardes' business, results of operation and financial condition.
RISKS ASSOCIATED WITH CONCENTRATION OF STOCK OWNERSHIP
CBH and CBI's Chairman, Mr. Wamberg, owns approximately 23.4% of the
outstanding Common Stock as of March 17, 1999. As a result, Mr. Wamberg is 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 Clark/Bardes.
CLARK/BARDES' RELATIONSHIP WITH W. T. WAMBERG COULD PRESENT CONFLICTS OF
INTEREST
CBI has a contractual relationship with Mr. Wamberg, the Chairman of the
Board of CBH and CBI under a Principal Office Agreement pursuant to which The
Wamberg Organization markets, on behalf of Clark/Bardes, life insurance and
administrative and consulting services, and Clark/Bardes 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 is controlled by Mr. Wamberg,
accounted for approximately 17.5% of Clark/Bardes' total revenue in 1998.
Pursuant to the terms of the Principal Office Agreement, Clark/Bardes paid
approximately $7.8 million and $8.1 million to The Wamberg Organization in 1997
and 1998, respectively, for commissions and fees earned. In July 1998,
Clark/Bardes, Mr. Wamberg and The Wamberg Organization entered into an agreement
that 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 $7.5 million. In addition, Clark/Bardes 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 Clark/ Bardes, 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 Clark/Bardes and Mr. Wamberg and The
Wamberg Organization resulting in certain conflicts of interest of Mr. Wamberg.
ANTI-TAKEOVER PROVISIONS OF DELAWARE LAW AND CLARK/BARDES CHARTER DOCUMENTS
COULD PREVENT A TAKEOVER BENEFICIAL TO STOCKHOLDERS
Certain provisions of CBH's certificate of incorporation, CBH's bylaws and
the Delaware General Corporation Law may have the effect of discouraging
unsolicited proposals for the acquisition of CBH. Pursuant to its 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 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 CBH's certificate of
incorporation must
31
<PAGE> 34
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 Delaware General Corporation Law 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss arising from adverse changes in market
rates and prices, such as interest rates and other relevant market rate or price
changes. The volatility and liquidity in the markets in which the related
underlying assets are traded directly influence market risk. The following is a
discussion of Clark/ Bardes' primary market risk exposures and how those
exposures are currently managed. The primary market risk for Clark/Bardes'
long-term debt is interest rate risk at the time of refinancing.
In January 1999, CBI entered into a $65 million credit agreement consisting
of a $35 million revolving credit facility and two term loans of $25 million and
$5 million. In January 1999 pursuant to the credit agreement, Clark/Bardes
obtained a term loan for $25 million at a fixed rate of 7.08% for the first year
and at a floating rate based upon the one-year London InterBank Offered Rate
plus 2% thereafter. The term loans are represented by secured promissory notes
maturing December 31, 2004. Principal and interest are payable quarterly
beginning March 31, 1999. The $25.0 million proceeds were used to retire the
Senior Secured Notes, Second Priority Senior Secured Notes, medium term notes,
and AAA distribution notes payable.
Coincident with the agreement and floating rate debt agreements, CBI has
entered into an interest rate swap agreement with a bank affiliated with the
lending group to fix the interest rate at 5.29% on $15 million of the term loan,
thus sustaining no gain or loss on rate fluctuations. There was no cost to CBI
for this arrangement and it does not present a derivative risk.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements of Clark/Bardes appear beginning on page F-1 of
this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Information concerning Clark/Bardes' change of accountant was previously
reported in the Registration Statement on Form S-1, File No. 333-56799, declared
effective by the SEC on August 19, 1998.
32
<PAGE> 35
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 is hereby incorporated by reference
from Clark/Bardes' Proxy statement for the 1999 Annual Meeting of Shareholders
(the "1999 Proxy Statement") under the captions "Proposal One -- Election of
Directors," and "Directors and Executive Officers."
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is hereby incorporated by reference
from the 1999 Proxy Statement under the caption "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is hereby incorporated by reference
from the 1999 Proxy Statement under the caption "Security Ownership of Certain
Beneficial Owners and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is hereby incorporated by reference
from the 1999 Proxy Statement under the caption "Certain Relationships and
Related Transactions."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1) Financial Statements
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Operations for each of the years
ended December 31, 1998, 1997 and 1996
Consolidated Statements of Shareholders' Equity for each of
the years ended December 31, 1998, 1997, and 1996
Consolidated Statements of Cash Flows for each of the years
ended December 31, 1998, 1997, & 1996
Notes to the Consolidated Financial Statements
(2) Financial Statement Schedules
None.
Schedules not listed above have been omitted because they are not
required or are not applicable.
(3) Exhibits
The information required by this Item 14(a)(3) is set forth in the
Exhibit Index immediately following Clark/Bardes' financial statements.
The exhibits listed herein will be furnished upon written request to
"Director of Investor Relations" located at Clark/Bardes' headquarters
and payment of a reasonable fee that will be limited to Clark/Bardes'
reasonable expense in furnishing such exhibits.
33
<PAGE> 36
(b) Reports on Form 8-K.
The following Current Report on Form 8-K was filed during the three months
ended December 31, 1998:
On October 2, 1998, Clark/Bardes filed a Current Report on Form 8-K,
dated September 18, 1998 (the "Form 8-K"), disclosing the acquisition of
the businesses and substantially all of the assets of Schoenke. The
following financial statements and financial information were filed as
part of the Form 8-K:
(1) Balance sheets of Schoenke & Associates Corporation as of December
31, 1996 and 1997 and as of June 30, 1998 (unaudited) and the
related statements of income, changes in stockholders' equity and
cash flows for each of the years in the three year period ended
December 31, 1997 and the six months ended June 30, 1997 and 1998
(unaudited) and related independent auditors report dated June 29,
1998.
(2) Clark/Bardes Holdings, Inc. Unaudited Pro Forma Balance Sheet as of
June 30, 1998 and Unaudited Pro forma Statement of Operations for
the year ended December 30, 1997 and the six months ended June 30,
1998.
34
<PAGE> 37
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Clark/Bardes Holdings, Inc., Reports of Independent
Auditors.................................................. F-2
Clark/Bardes Holdings, Inc., Consolidated Balance Sheets at
December 31, 1998 and 1997................................ F-4
Clark/Bardes Holdings, Inc., Consolidated Statements of
Operations for the years ended December 31, 1998, 1997 and
1996...................................................... F-5
Clark/Bardes Holdings, Inc., Consolidated Statements of
Stockholders'
Equity (Deficit) for the years ended December 31, 1998,
1997 and 1996.......................................... F-6
Clark/Bardes Holdings, Inc., Consolidated Statements of Cash
Flows for the years ended December 31, 1998, 1997 and
1996...................................................... F-7
Notes to Consolidated Financial Statements.................. F-8
</TABLE>
F-1
<PAGE> 38
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Clark/Bardes Holdings, Inc.
We have audited the accompanying consolidated balance sheets of
Clark/Bardes Holdings, Inc. and subsidiary as of December 31, 1998 and 1997, and
the related consolidated statements of operations, stockholders' equity
(deficit), 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. The
financial statements of Clark/Bardes, Inc. (the predecessor to Clark/ Bardes
Holdings, Inc.) for the year ended December 31, 1996, were audited by other
auditors whose report dated February 7, 1997, expressed an unqualified opinion
on those statements.
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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Clark/Bardes Holdings, Inc. and subsidiary at December 31, 1998 and 1997, and
the consolidated results of their operations and their cash flows for the years
then ended in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Dallas, Texas
February 23, 1999
F-2
<PAGE> 39
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Clark/Bardes, Inc. (the predecessor to Clark/Bardes Holdings, Inc.)
We have audited the accompanying statements of income, stockholders'
equity, and cash flows of Clark/Bardes, Inc. (the predecessor to Clark/Bardes
Holdings, Inc.) for the year ended December 31, 1996. 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 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 financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of
Clark/Bardes, Inc. for the year ended December 31, 1996, in conformity with
generally accepted accounting principles.
Lane Gorman Trubitt, L.L.P.
Dallas, Texas
February 7, 1997
F-3
<PAGE> 40
CLARK/BARDES HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1998 1997
--------- ---------
(IN THOUSANDS EXCEPT
SHARES)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $12,102 $ 3,783
Account and notes receivable:
Trade.................................................. 7,145 7,720
Affiliates............................................. 872 11
Notes (related parties: $0 and $205 at December 31,
1998 and 1997, respectively).......................... 393 556
Interest............................................... 60 46
Allowance for uncollectibles........................... (394) (78)
------- -------
Total accounts and notes receivable............... 8,076 8,255
Deposits and advances..................................... 59 --
------- -------
Total current assets.............................. 20,237 12,037
Equipment and leasehold improvements -- net................. 1,178 716
Intangible assets -- net.................................... 45,209 24,089
Deferred tax asset.......................................... 607 --
Other assets................................................ 262 59
------- -------
Total assets...................................... $67,493 $36,901
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 2,925 $ 1,142
Commissions and fees payable.............................. 2,634 1,945
Income taxes.............................................. 528 --
Dividends payable......................................... -- 334
Accrued liabilities....................................... 2,331 1,521
Accrued interest.......................................... 320 476
Current portion of long term debt (related parties: $425
and $1,425 at December 31, 1998 and 1997,
respectively).......................................... 4,344 4,325
------- -------
Total current liabilities......................... 13,082 9,743
Long term debt (related parties: $6,113 and $12,338 at
December 31, 1998 and 1997, respectively)................. 24,713 32,838
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock
Authorized -- 1,000,000 shares; $.01 par value
None issued
Common stock
Authorized -- 20,000,000 shares; $.01 par value, no par
in 1997
Issued and outstanding -- 5,959,140 in 1997 and
8,202,535 in 1998..................................... 82 5,162
Paid in capital........................................... 26,274 --
Retained earnings......................................... 3,342 3,189
Less: treasury stock -- 2,737,130 shares in 1997.......... -- (14,031)
------- -------
Total stockholders' equity (deficit).............. 29,698 (5,680)
------- -------
Total liabilities and stockholders' equity........ $67,493 $36,901
======= =======
</TABLE>
See accompanying notes to financial statements
F-4
<PAGE> 41
CLARK/BARDES HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1998 1997 1996
------- ------- -------
(IN THOUSANDS EXCEPT
PER SHARE DATA)
<S> <C> <C> <C>
REVENUES:
Commissions and service fees.............................. $72,264 $47,871 $32,352
Other (related parties: $1,585, $879 and $640 for the year
ended at December 31, 1998, 1997 and 1996,
respectively).......................................... 2,502 1,584 890
------- ------- -------
Total revenues.................................... 74,766 49,455 33,242
Commission and fee expense (related parties: $8,068, $24,152
and $16,258 for the years ended December 31, 1998, 1997
and 1996, respectively)................................... 46,111 32,439 21,049
------- ------- -------
Net revenue....................................... 28,655 17,016 12,193
------- ------- -------
EXPENSES
General and administrative................................ 19,616 11,504 8,579
Amortization of intangibles............................... 1,232 295 --
Put warrants (non-recurring).............................. 4,800 -- --
------- ------- -------
Total expenses.................................... 25,648 11,799 8,579
------- ------- -------
OPERATING INCOME............................................ 3,007 5,217 3,614
OTHER INCOME (EXPENSE)
Interest income........................................... 565 189 121
Interest expense.......................................... (3,166) (1,112) --
------- ------- -------
Total............................................. (2,601) (923) 121
------- ------- -------
INCOME BEFORE INCOME TAXES.................................. 406 4,294 3,735
INCOME TAXES................................................ 817 60 181
------- ------- -------
NET INCOME (LOSS)........................................... $ (411) $ 4,234 $ 3,554
======= ======= =======
NET INCOME (LOSS) PER SHARE:
Basic..................................................... $ (0.08) $ 1.03 $ 0.75
======= ======= =======
Diluted................................................... $ (0.08) $ 0.99 $ 0.75
======= ======= =======
</TABLE>
See accompanying notes to financial statements
F-5
<PAGE> 42
CLARK/BARDES HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON STOCK
COMMON STOCK IN TREASURY TOTAL
-------------------- PAID-IN --------------------- RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL SHARES AMOUNT EARNINGS EQUITY (DEFICIT)
---------- ------- ------- ---------- -------- -------- ----------------
(IN THOUSANDS EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995......... 5,957,344 $5,054 $ -- (229,737) $ (919) $ 1,653 $ 5,788
Purchase of common stock for
treasury......................... (1,123,554) (4,137) (4,137)
Sale/grant of treasury stock....... 150,000 600 (277) 323
Change in net unrealized loss on
securities....................... 5 5
Net income......................... 3,554 3,554
Dividends.......................... (1,721) (1,721)
---------- ------- ------- ---------- -------- ------- --------
Balance at December 31, 1996......... 5,957,344 5,054 -- (1,203,291) (4,456) 3,214 3,812
Sale of common stock............... 1,796 8 8
Issuance of common stock
warrants......................... 100 100
Purchase of common stock for
treasury......................... (2,567,650) (13,969) (13,969)
Notes receivable from related
parties for treasury stock
issued, net of distribution of
$606,280......................... 244,649 (568) (568)
Sale/grant of treasury stock....... 789,162 4,962 4,962
Net income......................... 4,234 4,234
Dividends.......................... (4,259) (4,259)
---------- ------- ------- ---------- -------- ------- --------
Balance at December 31, 1997......... 5,959,140 5,162 -- (2,737,130) (14,031) 3,189 (5,680)
Decrease in note receivable from
related parties for treasury
stock purchased.................. 471 471
Distributions to shareholders of S
Corp. ........................... (3,346) (3,346)
Redemption of common stock
warrants......................... (100) (100)
Issuance of common stock in initial
public offering (net of
transaction expenses)............ 4,000,000 40 31,707 31,747
Retirement of treasury shares and S
Corp. conversion................. (2,737,130) (5,346) (12,124) 2,737,130 13,560 3,910 --
Issuance of common stock........... 166,965 218 1,999 2,217
Conversion of 8.5% subordinated
note............................. 813,560 8 4,792 -- -- -- 4,800
Net (loss)......................... (411) (411)
---------- ------- ------- ---------- -------- ------- --------
Balance at December 31, 1998......... 8,202,535 $ 82 $26,274 -- $ -- $ 3,342 $ 29,698
========== ======= ======= ========== ======== ======= ========
</TABLE>
See accompanying notes to financial statements
F-6
<PAGE> 43
CLARK/BARDES HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1998 1997 1996
-------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)......................................... $ (411) $ 4,234 $ 3,554
Adjustments to reconcile net income (loss) to cash
provided by operating activities:
Depreciation and amortization.......................... 1,570 493 188
(Gain) loss on disposition of assets................... 1 (2) 25
Allowance for losses on interest and notes
receivable........................................... 316 -- 78
Grant of treasury stock................................ -- -- 173
Changes in operating assets and liabilities
Accounts receivable.................................. (286) (4,940) 412
Interest receivable.................................. (14) (19) (11)
Deposits and advances................................ (59) -- --
Deferred tax asset................................... (607) -- --
Accounts payable..................................... 1,783 829 102
Commissions and fees payable......................... 689 598 (629)
Income taxes payable................................. 528 -- --
Accrued liabilities.................................. 810 187 417
Accrued interest..................................... (156) 476 --
-------- -------- -------
Cash provided by operating activities....................... 4,164 1,856 4,309
-------- -------- -------
INVESTING ACTIVITIES
Purchase of businesses.................................... (22,353) (24,383) --
Notes receivable.......................................... 163 (44) 223
Purchases of equipment -- net............................. (801) (537) (131)
Proceeds from sales of marketable securities.............. -- -- 1,506
Other assets.............................................. (203) (42) (11)
-------- -------- -------
Cash provided by (used in) investing activities............. (23,194) (25,006) 1,587
-------- -------- -------
FINANCING ACTIVITIES
Proceeds from borrowings.................................. 2,031 33,900 --
Repayment of borrowings................................... (10,137) -- --
Issuance of common stock and warrants -- net of costs..... 39,135 108 150
Dividends................................................. (3,680) (1,779) (996)
Proceeds from sale of treasury stock -- net............... -- 3,791 --
Purchase of treasury stock................................ -- (13,969) (4,137)
-------- -------- -------
Cash provided by (used in) financing activities............. 27,349 22,051 (4,983)
-------- -------- -------
INCREASE (DECREASE) IN CASH................................. 8,319 (1,099) 913
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............ 3,783 4,882 3,969
-------- -------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 12,102 $ 3,783 $ 4,882
======== ======== =======
SUPPLEMENTAL INFORMATION
Interest paid............................................. $ 3,323 $ 636 $ --
======== ======== =======
Income taxes paid......................................... $ 896 $ 182 $ 102
======== ======== =======
</TABLE>
See accompanying notes to financial statements
F-7
<PAGE> 44
CLARK/BARDES HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the accounts of Clark/Bardes
Holdings, Inc. (CBH) and its wholly-owned subsidiary, Clark/Bardes, Inc. (CBI).
CBI 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. CBI 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, CBI provides
long-term administrative services for executive benefits and insurance.
Initial Public Offering -- On August 19, 1998, CBH completed an initial
public offering of 4,000,000 shares of Common Stock at a price of $9 per share.
The net proceeds to CBH after deducting underwriting discounts and commissions
and offering expenses were $31.7 million. The net proceeds from this initial
public offering were applied as follows: a) $1.0 million in partial payment of
the 8.5% Medium Term Notes, b) $4.9 million to extinguish warrants under the 11%
Second Priority Senior Secured Notes, c) $13.5 million to consummate the
acquisition of Schoenke and Associates, and d) $4.0 million to acquire Wiedemann
& Johnson Company assets. CBI applied the remaining proceeds to pay
approximately $7.5 million to The Wamberg Organization as consideration for the
purchase of renewal revenue pursuant to the purchase agreement on January 4,
1999, and $800,000 for general corporate purposes, including working capital.
Basis of Presentation -- The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. In the opinion of management, all
adjustments, including normal recurring accruals, considered necessary for a
fair presentation have been included. Actual results could differ from those
estimates.
A summary of the significant accounting policies consistently applied in
the preparation of the accompanying financial statements follows.
Reorganization -- In connection with the initial public offering,
Clark/Bardes Holdings, Inc. (CBH) and Clark/Bardes, Inc., (CBI) both Delaware
corporations, were formed in June 1998. CBH was formed to be the holding company
of CBI and is not engaged in any business. CBI was formed to be the operating
company of CBH. On July 10, 1998, CBI's Board of Directors approved a
reorganization agreement between Clark/ Bardes, Inc., a Texas Corporation (the
Predecessor Company) and CBI (the Successor Company) which provided for a two
step merger resulting in the Predecessor Company merging with and into CBI
resulting in each stockholder of the Predecessor Company receiving one-half of
one share of common stock for each share of Predecessor Company common stock
held by such stockholder, and contemplated 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, (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, (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, (v)
the incorporation of a Texas entity formed for the purpose of marketing certain
insurance products within the state of Texas, and (vi) the termination by its
terms of the Second Amended and Restated Stockholders' Agreement among the
Predecessor Company and each of the existing stockholders. The Merger was
consummated prior to the initial public offering, and was treated for accounting
purposes as a reorganization of entities under common control utilizing
historical cost which is similar to a pooling of interests.
F-8
<PAGE> 45
CLARK/BARDES HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, CBI restructured its 10.5% and 11.0% notes. Under the
amended and restated note agreements, the interest rate on the 10.5% notes was
reset to 7.84%. The interest rate on the 11% notes was reset to 8.86%. The
restructured notes may be prepaid without penalty and are secured by a first
priority security interest in, among other things, all of CBI's renewal
commissions other than the renewal commissions from Bank Compensation Strategies
Group and Schoenke. Further, CBI is subject to significant operational
restrictions and financial covenants, including a requirement that CBI obtain a
working capital credit facility no later than March 31, 1999, a prohibition
against certain payments, a limitation on the payment of dividends, a limitation
on the incurrence of indebtedness and the maintenance of certain financial
ratios. (See note 6)
Put Warrants -- CBI accrued $5.3 million in the six month period ended June
30, 1998, to reflect the obligation of CBI for an amount equal to the
approximate fair value of its common stock put warrants at that date. The final
amount paid to extinguish the warrants in August 1998 was reduced to $4.9
million ($4.8 million charged to income), consequently CBI recorded income of
$500,000 from the adjustment in August 1998. The accrued $5.3 million amount was
reclassified to paid-in capital upon expiration of the put warrants which
occurred with the consummation of the initial public offering. In addition, in
connection with the offering, these warrants to purchase 1,525,424 shares of
common stock were extinguished by the payment of $4.9 million by CBI to the
warrant holders, which represents a negotiated formula of payment determined in
the context of CBI's contractual commitments under the warrants and its business
relationship with the warrant holders. In addition, in connection with agreeing
to the extinguishment of the warrants, CBI entered into a five-year production
agreement with each of Great-West and Nationwide that requires CBI to market and
sell insurance products of each Carrier comprising specified percentages of all
insurance products sold by CBI as measured by first year commissions payable
with respect to such business. The percentages range from 10.0% to 25.0%
depending upon the type of insurance product and product exclusivity provisions.
Each agreement provides that in the event that CBI fails to meet the minimum
production requirements, the applicable carrier is entitled to offset future
commissions otherwise payable to CBI 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 the Chairman of CBH, W.T. Wamberg
and The Wamberg Organization which provides for a purchase of the renewal
revenue due under the Principal Office Agreement with Mr. Wamberg (described in
Note 10) in exchange for a cash payment of approximately $7.5 million. This
transaction allows CBH to retain additional commission and fee revenue for a ten
year period following the consummation of the transaction which occurred in
January 1999. The additional revenue equates to approximately 19.0% of the
commission and fee revenue, prior to deduction of servicing costs, related to
renewal revenue on Mr. Wamberg's and The Wamberg Organization's inforce
business. Upon consummation, CBI recorded 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. (See
note 15)
Termination of S Corporation Status and Stockholder Distribution -- Upon
the consummation of the Reorganization described above, CBI ceased to be taxed
as an S corporation and is subject to federal and state income taxation as a C
corporation. As an S corporation, CBI's income, whether or not distributed, was
taxed directly to the stockholders for federal and certain state income tax
purposes. At August 1, 1998, the effective date of change in tax status, CBI
recorded deferred taxes on its balance sheet for the difference between the tax
bases and book bases of its assets and liabilities.
In connection with the termination of the S corporation status, on July 10,
1998 the Board of Directors of the Predecessor Company declared a dividend to
the stockholders of record on July 31, 1998 in an amount equal to $3.3 million,
or $1.00 per share, which was paid on July 31, 1998. The remaining retained
earnings
F-9
<PAGE> 46
CLARK/BARDES HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
after the assumed distribution, have been reclassified to common stock which
assumes a constructive distribution to the stockholders of the Predecessor
Company followed by a contribution to capital of the Successor Company.
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 was employed as the Company's CEO on July 1, 1998. This
agreement was amended in June 1998 to provide that he receive 24,108 shares of
common stock of CBH, $162,128 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. CBI recorded compensation expense of $525,000 in its June 1998
financial statements related to this transaction and a reduction of compensation
expense of $145,900 in its September 1998 financial statements, to reflect the
then existing stock price. The options have been accounted for in accordance
with CBI's policy on stock compensation.
Cash and Cash Equivalents -- CBI considers all highly liquid debt
instruments purchased with a maturity of three months or less to be cash
equivalents. CBI has cash balances at three financial institutions in excess of
the $100,000 limit insured by the Federal Deposit Insurance Corporation.
Uninsured cash in bank balances aggregate to approximately $3,009,000 and
$384,300 at December 31, 1998 and 1997, respectively. CBI 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 CBI'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. CBI
depreciates furniture and equipment over periods of three to seven years while
leasehold improvements are amortized over their useful lives.
Intangible Assets -- CBI capitalized intangible assets as a result of the
acquisition of the assets and in-force business of Bank Compensation Strategies
Group, the Schoenke Companies, and Wiedemann & Johnson Company (see Note 2).
Intangible assets consist of goodwill, the net present value of future profits
on existing books of business at the acquisition date and non-compete agreements
with the former owners. The amortization periods for the non-compete agreements
are 5 years and 10 years. The net present value of future profits is being
amortized over 30 years (the expected average policy duration) based on the
present value of estimated profits expected to be realized over the life of the
existing book of business. Any changes in estimates of future profits used to
amortize the net present value of future profits will be accounted for as a
catch up adjustment in the period in which the change becomes known. Goodwill is
being amortized over a 40 year period on a straight-line basis. Amortization
expense totaled $1,232,126 and $294,630 during 1998 and 1997, respectively.
Management's policy, in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 121 -- Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of, is to review intangible and other
long-lived assets for impairment on an annual basis or 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 substantially completed, the premium is paid and the
insured party is contractually committed to purchase the
F-10
<PAGE> 47
CLARK/BARDES HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
insurance policy. Renewal commission revenue is recognized when the insurance
policy premium or commission is due. CBI 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.
CBI generated in excess of 25% of its revenue in 1998 from 8 clients, in
1997 from 3 clients, and in 1996 from 2 clients, respectively, creating a
concentration of credit risk. Approximately 17.5% and 23% of CBI's commission
and fee revenue for the years ended 1998 and 1997, respectively, was generated
by The Wamberg Organization, which is wholly-owned by CBI's Chairman.
Substantially all of the policies underlying the programs marketed by CBI are
underwritten by 14 life insurance companies, of which seven accounted for
approximately 76.3% and 78.9% of CBI's first-year commission revenue for the
years ended December 31, 1998 and 1997.
CBI is party to production agreements (typically, five years in duration)
with certain of the insurance companies with which it conducts business. If CBI
fails to meet specified minimum production levels, future commissions otherwise
payable to CBI by the insurance carriers will be offset up to maximum amounts
ranging from $100,000 to $150,000 per year, or a total of $400,000 per year
under all agreements combined.
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 1998, 1997, and 1996
were $288,989, $70,299, and $55,352 respectively.
Stock Compensation -- CBI adopted SFAS No. 123 -- Accounting for
Stock-Based Compensation effective January 1, 1996. SFAS 123 establishes
financial accounting and reporting standards for stock-based compensation. As
permitted by SFAS 123, CBI elected to continue to account for stock-based
compensation as prescribed by APB Opinion No. 25 -- Accounting for Stock Issued
to Employees and to provide pro forma disclosures in the Notes to Financial
Statements of the effects of SFAS 123 on net income and earnings per share (See
Note 8). Equity issued to non-employees is accounted for based on fair value in
accordance with SFAS 123. There was no effect on reported net income as a result
of adopting SFAS 123.
Earnings Per Share -- In February 1997, the Financial Accounting Standards
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 CBI and is presented for all
periods in the accompanying financial statements.
Comprehensive Income -- In 1997, the FASB issued SFAS 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 CBI's net income or shareholders' equity. CBI has no other
comprehensive income as defined by SFAS 130, as of December 31, 1998 or 1997.
Segment Reporting -- In June 1997, 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
F-11
<PAGE> 48
CLARK/BARDES HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
financial statements in the initial year of its application. The adoption of
this Statement had no impact on CBI's consolidated financial condition or
results of operations. See Note 14.
Derivatives and Hedging Instruments -- In June 1998, the FASB issued SFAS
No. 133 -- Accounting for Derivative Instruments and Hedging Activities,which is
required to be adopted in years beginning after June 15, 1999. The Statement
will require CBI to recognize all derivatives on the balance sheet at fair
value. Derivatives that are not hedges must be adjusted to fair value through
income. If the derivative is a hedge, depending on the nature of the hedge,
changes in the fair value of derivatives will either be offset against the
change in fair value of the hedged assets, liabilities, or firm commitments
through earnings or recognized in other comprehensive income until the hedged
item is recognized in earnings. The ineffective portion of a derivative's change
in fair value will be immediately recognized in earnings. CBI had no derivative
positions at December 31, 1998. Management does not anticipate that the adoption
of the new Statement will have a significant effect on earnings or the financial
position of CBI.
Reclassifications -- CBI has made minor reclassifications of certain prior
years' amounts to conform to the current year's presentation.
2. ACQUISITIONS
Bank Compensation Strategies -- On September 1, 1997 CBI acquired
substantially all of the assets and the book of business of Bank Compensation
Strategies Group (BCS), a Minneapolis, Minnesota based life insurance agency
engaged in designing and marketing life insurance policies and related
compensation, salary and benefit plans and providing related services to
financial institutions. CBI 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 was $24.0 million plus related expenses of approximately
$383,000. 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). CBI allocated approximately $10,000 of the purchase price to tangible
assets acquired and the remaining as follows:
$1.2 million was allocated to two non-compete agreements with former
officers of BCS. The terms of the agreements are for five and ten years,
which are the respective periods over which the intangible assets are being
amortized.
$4.1 million was allocated to the net present value of estimated
future profits embedded in the existing in-force book of business. This
amount was determined using a 10% discount and a 2.75% annual lapse factor
for the purchased book of business. This intangible asset is being
amortized over 30 years which approximates the average policy duration. CBI
believes that no other class of identifiable intangible assets acquired in
the BCS acquisition is significant or exceeds 5% of total assets.
The remaining $19.1 million was allocated to goodwill. This is being
amortized over a forty year period. Management believes that the existing
future profit potential associated with the BCS client base will have value
to CBI well beyond the forty year amortization period based on new business
prospects and the long-term nature of the policies.
Management will periodically review these intangibles for impairment in
accordance with its policy (see Note 1).
F-12
<PAGE> 49
CLARK/BARDES HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The unaudited pro forma information below presents the results of CBI and
BCS combined as if the acquisition had occurred on January 1, 1996:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1997 1996
------- -------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Pro Forma:
Revenues.................................................... $62,264 $48,491
Net income*................................................. $ 2,219 $ 1,915
Diluted earnings per share.................................. $ 0.48 $ 0.41
</TABLE>
- ---------------
* "S" Corporation Basis -- see Note 1
Schoenke Companies -- On September 1, 1998 CBI acquired substantially all
of the assets, and the book of business of Schoenke & Associates Corporation and
Schoenke & Associates Securities Corporation based in Germantown, Maryland. The
Schoenke Companies specialize in designing and administering benefit programs
for companies. The Company accounted for the acquisition as a purchase and has
included the operating results of the Schoenke Companies commencing from the
acquisition date in the financial statements.
The purchase price was $17.0 million plus related expenses of approximately
$98,000. The purchase price was comprised of $15.0 million in cash and a
promissory note in the principal amount of $2.0 million (see Note 6). CBI
allocated approximately $768,000 of the purchase price to tangible assets
acquired and the remaining $16 million was allocated to the net present value of
estimated future profits embedded in the existing inforce book of business. This
amount was determined using a 16.1% discount and a 2.5% annual lapse factor for
the purchased book of business. This intangible asset is being amortized over 30
years which approximates the average policy duration based on the terms of the
policies and prevailing practices for such benefit programs. Subsequent to the
purchase date, CBI has refined certain assumptions in the allocation of the
purchase price.
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 CBI and
Schoenke combined as if the acquisition had occurred January 1, 1996:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1998 1997 1996
------- ------- -------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Pro Forma:
Revenues.............................................. $79,744 $55,920 $39,069
Net income............................................ $ 96 $ 3,911 $ 3,054
Diluted earnings per share............................ $ .01 $ 0.48 $ 0.45
</TABLE>
"S" Corporation Basis for 1996 and 1997 -- see Note 1
Wiedemann & Johnson Company -- On November 1, 1998 CBI acquired
substantially all of the assets and 75% of the book of business of Wiedemann &
Johnson Company based in Dallas, Texas. The Wiedemann & Johnson Company
specializes in designing, and administering benefit programs for companies. CBI
accounted for the acquisition as a purchase and has included the operating
results of the Wiedemann & Johnson Companies in the financial statements
commencing from the acquisition date.
F-13
<PAGE> 50
CLARK/BARDES HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The purchase price was $6.0 million plus related expenses of approximately
$54,000. The purchase price was comprised of $4.0 million in cash and $2.0
million in common stock represented by 142,857 shares at an agreed upon price of
the per share. The Company allocated approximately $40,000 of the purchase price
to tangible assets acquired and $6,015,000 to the net present value of estimated
future profits embedded in the existing in-force book of business. This amount
was determined using a 15.2% discount and a 2.5% annual lapse factor for the
purchased book of business. This intangible asset is being amortized over 30
years which approximates the average policy duration.
Management will periodically review these intangibles for impairment in
accordance with its policy (see Note 1).
3. NOTES RECEIVABLE
Notes receivable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1998 1997
------ ------
(IN THOUSANDS)
<S> <C> <C>
Note receivable -- secured by first year and renewal
commissions; interest at prime plus 1%; due on demand..... $ -- $ 75
Note receivable -- secured by collateral assignment of
commissions/compensation; interest at prime plus 2%; due
on demand................................................. 130 130
Note receivable -- secured by collateral assignment of
commissions/compensation; interest at prime plus 4%; due
on demand................................................. 212 220
Note receivable -- secured by renewal commissions; interest
12%; due on demand........................................ -- 60
Note receivable -- secured by renewal commissions; interest
at prime plus 2%; due on demand........................... 51 71
----- -----
393 556
Less allowance for uncollectible notes...................... (342) (78)
----- -----
$ 51 $ 478
===== =====
</TABLE>
CBI recorded interest income from related parties of $7,016, $46,106, and
$690 for the years ended December 31, 1998, 1997, and 1996. The Company also has
accrued interest receivable of $12,664 from related parties at December 31,
1997.
4. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Major classifications of equipment and leasehold improvements are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1998 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Office furniture and equipment.............................. $ 2,745 $ 2,133
Leasehold improvements...................................... 188 96
------- -------
2,933 2,229
Accumulated depreciation and amortization................... (1,755) (1,513)
------- -------
$ 1,178 $ 716
======= =======
</TABLE>
F-14
<PAGE> 51
CLARK/BARDES HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. TAXES
Prior to the reorganization described in Note 1, CBI had elected, by
consent of its shareholders, to be taxed under Subchapter S of the Internal
Revenue Code. Under this election, CBI did not pay federal or state corporate
income taxes on its taxable income. Instead, the stockholders were liable for
individual federal and state income tax on CBI's taxable income as determined
under the cash basis method of accounting. State taxes, as shown in the
accompanying financial statements, consist primarily of franchise taxes.
Upon consummation of the Reorganization described in Note 1, on July 31,
1998 CBI ceased to be an S corporation and became subject to federal and state
income taxation as a C corporation. At July 31, 1998 the net tax bases of CBI's
assets and liabilities was approximately $1.8 million higher than the financial
statement bases. Section 448 of the Internal Revenue Code requires change from
the cash method and to the accrual method of accounting for tax purposes must
offset the excess liabilities against taxable income ratably over four taxable
years. Significant components of the difference were the cash to accrual basis
conversion balances and the accumulated amortization of intangible assets.
In the period ending July 31, 1998, CBI has a pre Initial Public Offering
loss of $3.8 million which was passed on to the pre-IPO shareholders.
Federal income tax benefit (expense) consists of the following components:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997 1996
------- ---- -----
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal................................................... $(1,230) $ -- $ --
State and local........................................... (194) (60) (181)
Deferred:
Federal................................................... 524 -- --
State and local........................................... 83 -- --
------- ---- -----
$ (817) $(60) $(181)
======= ==== =====
</TABLE>
A reconciliation of the 1998 income tax benefit (expense) computed by
applying the combined federal and state corporate tax rate of 39.79% to income
before income taxes to the actual income taxes is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1998
------------
<S> <C>
U.S. Federal statutory rate................................. $ 138
State income tax -- net of federal benefit.................. 24
Non-recurring effect due to conversion from taxation as an S
corporation to a C corporation............................ 779
Nontaxable warrant adjustment............................... (199)
Tax liability adjustment.................................... 50
Other -- net................................................ 25
-----
Provision for income taxes.................................. $(817)
=====
</TABLE>
F-15
<PAGE> 52
CLARK/BARDES HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets as of December 31, 1998 are as
follows:
<TABLE>
<CAPTION>
1998
--------------
(IN THOUSANDS)
<S> <C>
Deferred tax liabilities:
Amortization.............................................. $ (426)
Other..................................................... (50)
------
Total deferred tax liabilities.............................. (476)
------
Deferred tax assets
Cash to accrual adjustment................................ 739
Accrued liabilities & reserves............................ 314
Deferred revenue.......................................... 30
------
Deferred tax assets....................................... 1,083
------
Valuation allowance for deferred tax assets............... --
------
Total deferred tax assets................................... 1,083
------
Net deferred tax assets..................................... $ 607
======
</TABLE>
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income
and tax planning strategies in making this assessment. Based upon the level of
historical taxable income and projections for future taxable income over the
periods with respect to which the deferred tax assets are deductible, management
believes it is more likely than not CBI will realize the benefits of these
deductible differences.
6. FINANCING ARRANGEMENTS
The current and long-term portions of debt consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------
1998 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Senior Secured Notes (current portion -- $2,900).......... $11,600 $14,500
Second Priority Senior Secured Notes...................... 8,900 8,900
Medium Term Notes -- Related parties (current portion --
$1,425)................................................. 3,275 5,700
Convertible Subordinated Notes-- Related parties.......... -- 4,800
Schoenke Notes (current portion -- $1,000)................ 2,000 --
Other (current)........................................... 19 --
AAA Distribution -- Related parties....................... 3,263 3,263
------- -------
$29,057 $37,163
======= =======
</TABLE>
Senior Secured Notes. During 1997, CBI issued $14.5 million of 10.5%
secured promissory notes maturing August 9, 2002; principal is payable
semi-annually beginning February 9, 1998 and interest is payable quarterly. The
notes were restructured in August 1998 and the interest rate was reset to 7.84%.
F-16
<PAGE> 53
CLARK/BARDES HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Interest expense was $474,000 and $1,209,000 and interest paid was $254,000 and
$1,308,000 for the years ended December 31, 1997 and 1998, respectively. CBI
must comply with certain restrictive covenants.
Second Priority Senior Secured Notes. During 1997, CBI issued $8.9 million
of 11% Second Priority Senior Secured Notes maturing in three equal annual
installments beginning August 9, 2002; interest is payable quarterly. The notes
were restructured in August 1998 and the interest rate was reset to 8.86%.
Interest expense was $305,000 and $911,000 and interest paid was $163,000 and
$941,000 for the years ended December 31, 1997 and 1998, respectively. These
notes possess identical restrictive covenants as the Senior Secured Notes.
Medium Term Notes. During 1997, in connection with the purchase of BCS, CBI
issued $5.7 million of Medium Term Notes maturing in four equal annual
installments of $1,425,000 beginning August 15, 1998; interest is payable
quarterly at the corporate base rate of the First Bank of Minnesota which was
8.5% and 7.75% at December 31, 1997 and 1998. Interest expense was $150,000 and
$404,000 and interest paid was $88,000 and $434,000 in 1997 and 1998,
respectively. A prepayment on the principal of $1.0 million was made in August
1998 (see Note 1).
Convertible Subordinated Notes. During 1997, in connection with the
purchase of BCS, CBI issued $4.8 million of 8.5% Convertible Subordinated Notes
maturing in one installment on September 15, 2007; interest was payable
quarterly. Interest expense was $127,000 and $271,000 and interest paid was
$109,000 and $290,000 in 1997 and 1998, respectively. These notes were
convertible into 813,559 shares of common stock, at $5.90 per share. In August
1998, $3.6 million of these notes was converted into 610,170 shares of common
stock, and the remaining $1.2 million was converted in October 1998 into 203,389
shares of common stock.
Schoenke Notes. During 1998, in connection with the purchase of the
Schoenke Companies, CBI issued $2.0 million of 6.75% notes maturing in two equal
annual installments of $1.0 million on September 1, 1999 and on September 1,
2000. Interest is payable monthly beginning November 1, 1998. Interest expense
was $39,000 and interest paid was $28,000 in 1998.
AAA Distribution. CBI made a special dividend distribution of $3,866,000 to
shareholders of record on November 15, 1997 in the form of notes payable. The
notes outstanding at December 31, 1998 and 1997 of $3,263,000, mature November
15, 2007 and interest accrues quarterly at 8.5%. Interest expense incurred was
$278,000 and $35,000 and interest paid was $277,000 and $0 in 1998 and 1997,
respectively.
At December 31, 1998, future payments under all financing arrangements are
as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1999.................................................. $ 4,344
2000.................................................. 5,325
2001.................................................. 4,325
2002.................................................. 5,866
2003.................................................. 2,967
Thereafter............................................ 6,230
-------
$29,057
=======
</TABLE>
CBI is subject to significant operational restrictions and financial
covenants, including a requirement that CBI obtain a working capital credit
facility no later than March 31, 1999, a prohibition against certain payments,
and maintenance of certain financial ratios. (See Note 15.)
F-17
<PAGE> 54
CLARK/BARDES HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. STOCKHOLDERS' EQUITY
During 1997, the Predecessor 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 were
held in treasury.
The Predecessor Company approved a financing arrangement in 1997 allowing
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 at December 31, 1998 and 1997 for
stock purchases were $97,000 and $465,000. Outstanding principal balances pay
interest at 8.5% and mature in 2000 and 2003.
In June 1998, Clark/Bardes, Inc., a Texas corporation, (CBI, Tex.)(the
Predecessor Company) was merged with Clark/Bardes, Inc., a Delaware corporation,
(the Successor Company) a wholly owned subsidiary of Clark/Bardes Holdings, Inc.
Each existing shareholder of CBI, Tex. received one-half share of the Successor
Company in exchange for each share held. In addition, a return of capital
distribution was made to the existing shareholder. In accounting for this
distribution, all of the existing shareholders' investment, treasury shares and
retained earnings were transferred to paid in capital.
All of the foregoing were done in connection with and contemplation of the
Initial Public Offering. Also, as part of the initial public offering, CBI
redeemed previously issued warrants to purchase 1,525,424 shares of the
Company's stock for $4.9 million of which $4.8 million was charged to income
during 1998.
In August 1998, the Company sold 4 million shares of Common Stock in an
Initial Public Offering for net proceeds of $31.7 million.
Other significant equity transactions in 1998 were:
- the conversion of $4.8 million of 8.5% convertible subordinated notes
into 813,559 shares at $5.90 per share
- the issuance of 24,108 shares to the President and CEO under an existing
bonus arrangement
- issued 142,857 shares having a market value of $2 million to the
controlling shareholders of Wiedemann & Johnson Company in partial
payment of the purchased assets of that Company (see Note 2)
In July 1998, the Board of Directors approved the authorization of
1,000,000 shares of $.01 par value junior participating preferred stock. No
shares have been issued as of December 31, 1998.
8. BENEFIT PLANS
Associate Stock Bonus/Stock Purchase Plan. The Associate Stock Bonus/Stock
Purchase Plan for selected associates of CBI 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, CBI issued
50,000 shares and 150,000 shares, respectively, and has recorded compensation
expense of $190,000 and $172,500, respectively, in relation to the stock grants
and options. As of December 31, 1997, this Plan is no longer available.
Incentive Stock Option Plan. The Incentive Stock Option Plan provides
certain employees options to purchase shares for $4.80 and $7.00 per share;
540,830 shares of common stock have been reserved for issuance under this plan
and 190,830 shares had been granted under this program at December 31, 1997. The
$4.80 and $7.00 options (with the exception of 100,000 director options) became
100% vested at the date of
F-18
<PAGE> 55
CLARK/BARDES HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the Initial Public Offering. The options expire ten years from the grant date.
In addition, the options are voided within 90 days of the employee's termination
or one year from the date of death.
Under this plan, participants purchased stock at $4.80 per share and
receive a matching option with an exercise price of $4.80 per share in exchange
for a promissory note and a security agreement; during 1997, 69,997 shares were
issued under this program but none of the options were vested at December 31,
1997. Principal on the notes matures March 1, 2001, is due in four equal annual
installments beginning March 1, 1998 and accrues interest at the prime rate plus
1.5%. Total notes receivable outstanding under this program are $50,000 net of
related allowances at December 31, 1998.
In addition to the Incentive Stock Option Plan, CBI 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 CBI as an
advisor to the Board of Directors and for future participation as a member of
CBI's Board of Directors which occurred in mid-1998. These options vest ratably
at the rate of 5,555 shares per month beginning July 1, 1998 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 CBH's Board of
Directors based on recent stock transactions; accordingly, no compensation
expense has been recorded.
In 1998, CBI adopted, as amended and restated, the Predecessor Company's
Incentive Stock Option Plan providing for certain employees to purchase shares
at the fair market value at the time the option is granted. A total of 2,000,000
shares are reserved for issuance under this plan and 379,023 shares were granted
as options in 1998. The grant date was August 18, 1998 (the date of the IPO) and
the grant price is $9.00 per share. The options vest ratably over a four year
period starting one year from the date of grant.
Pro forma information regarding net income and earnings per share is
required by SFAS 123 and has been determined as if CBI had accounted for its
stock-based compensation plans under the fair value method. The fair value of
each option grant was estimated at the date of grant using the Black-Scholes
option-pricing model with the following weighted average assumptions used for
grants in 1998 and 1997, respectively:
<TABLE>
<CAPTION>
1998 1997
---- ---------
<S> <C> <C>
Dividend yield.............................................. None None
Volatility.................................................. 73% 25%
Risk-free interest rates.................................... 4.7% 5.8%
Expected life (years)....................................... 6 6
</TABLE>
The estimated average fair values of options granted in 1998 and 1997 were
$4.59 and $1.30, respectively.
F-19
<PAGE> 56
CLARK/BARDES HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Had compensation cost for CBI's stock-based compensation plans been
determined in accordance with SFAS No. 123, CBI's net income and earnings per
share would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------
1998 1997
-------- ---------
(IN THOUSANDS - EXCEPT
SHARE DATA)
<S> <C> <C>
Net (loss) income
As reported............................................... $(411) $4,234
Pro forma................................................. $(977) $4,200
Earnings per common and common equivalent share
As reported............................................... $(.08) $ .99
Pro forma................................................. $(.20) $ .95
</TABLE>
The effect of options on 1996 net revenue was not significant.
Option activity for the years ended December 31, 1996, 1997 and 1998 is
summarized as follows:
<TABLE>
<CAPTION>
OPTION PRICE
OPTIONS PER SHARE
-------- ------------
<S> <C> <C>
Outstanding at January 1, 1996.............................. -- $ --
Granted................................................... 200,000 $ 1.75
Exercised................................................. (150,000) $ 1.75
--------
Forfeited................................................. --
Outstanding at December 31, 1996............................ 50,000 $ 1.75
Granted................................................... 290,830 $4.80-$7.00
Exercised................................................. (50,000) $ 1.75
Forfeited................................................. --
--------
Outstanding at December 31, 1997............................ 290,830 $4.80-$7.00
Granted................................................... 380,689 $8.44-$9.00
Exercised................................................. --
Forfeited.................................................
--------
Outstanding at December 31, 1998............................ 671,519 $4.80-$9.00
--------
Exercisable at December 31, 1998............................ 226,826 $4.80-$9.00
========
</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
was 9.7 years. At December 31, 1998, option prices ranged from $4.80 to $9.00
and the weighted-average remaining contractual life of the options is 9.7 years.
Further information regarding CBI's outstanding and exercisable stock options by
exercise price as of December 31, 1998 is presented below:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ----------------------------------------------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
RANGE OF NUMBER REMAINING EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE PRICE EXERCISABLE PRICE
- --------------- ----------- ---------------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$4.80 140,830 8.20 $4.80 74,160 $4.80
$7.00 150,000 8.20 $7.00 150,000 $7.00
$9.00 1,666 9.75 $9.00 1,666 $9.00
$9.00 379,023 9.63 $9.00 1,000 $9.00
</TABLE>
F-20
<PAGE> 57
CLARK/BARDES HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Phantom Stock Agreement. CBI 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 CBI on certain sales generated by
the Principal. The Principal will first be entitled to receive payments for the
value of his Incentive Units on April 1, 2003 and every year thereafter until
April 1, 2008. It is unlikely that the Principal will be entitled to any
payments under the Phantom Stock Agreement based on the required revenue
performance levels.
Savings Investment Plan. The Savings Investment Plan is a defined
contribution profit sharing plan, qualifying under Section 401(k) of the
Internal Revenue Code, covering substantially all eligible employees. At CBI's
discretion, CBI may contribute up to 50% of the first 6% of an eligible
participant's contributions to the Plan. Company contributions to the Plan were
$214,000, $108,000 and $84,000 for the years ended December 31, 1998, 1997 and
1996, respectively.
Stock Purchase and Stock Option Plans -- On July 10, 1998, the Board of
Directors adopted the Stock Purchase Plan, under which a total of 200,000 shares
of Common Stock has been reserved for issuance. Any employee who has been
employed by CBI 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. The price of the shares under each offering segment
shall be 85% of the lower of the closing market price on the day before the
segment begins (January 1 or July 1) or on the day the segment ends (June 30 or
December 31.)
For the offering beginning January 1, 1999 and ending June 30, 1999, a
total of 12,943 shares will be issued to employees enrolled at that date and
assuming no cancellations during the segment period. The closing price of CBI's
common stock on December 31, 1998 was $16.875 thus establishing a purchase price
to the participating employee of $14.34 per share unless the closing price on
June 30, 1999 is less than $16.875. Then 85% of that lower price shall be the
price to the participating employee.
In this first offering, CBI has determined that it will purchase the
requisite 12,943 shares on the open market and not issue any additional shares
to fulfill this obligation. Future fulfillments under this Plan will be made
through open market purchases or unissued shares, at CBI's discretion.
Key Executive Life Insurance. CBI maintains key man life insurance policies
of $23 million and $2 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 -- CBI 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, 1998.
Rental expense for the years ended December 31, 1998, 1997, and 1996 was
$916,000, $476,000 and $477,000.
F-21
<PAGE> 58
CLARK/BARDES HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1998, approximate minimum rental commitments under all
non-cancelable leases having terms in excess of a year are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1999.................................................. $1,335
2000.................................................. 1,318
2001.................................................. 969
2002.................................................. 792
2003.................................................. 793
------
$5,207
======
</TABLE>
10. RELATED PARTY TRANSACTIONS
CBI had accounts receivable of $97,000, and $603,000, accounts payable of
$48,000, and $5,000 and accrued expenses of $1,692,000, and $2,621,000 to
related parties at December 31, 1998 and 1997, respectively.
CBI 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.
CBI 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 CBI, life insurance and administrative and consulting
services, and CBI 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. However, Mr. Wamberg is under a separate
7-year non-compete agreement with CBI. 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 CBI'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 $8,068,000, $7,798,000, and
$4,964,000 in 1998, 1997, and 1996, respectively, for commissions and fees
earned. The terms and conditions of Mr. Wamberg's Principal Office Agreement
were modified July 31, 1998 under the "Commission Transfer Agreement" to provide
for a reallocation of commissions and fees on business existing at June 30, 1998
(see Note 1).
CBI has transactions with affiliated entities. CBI provides services for
affiliates and is reimbursed for these services at the Company's respective
costs.
11. JOINT VENTURE
During 1994, CBI 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. CBI's initial investment was minimal. CBI made advances to the joint
venture in 1994 totaling approximately $100,000, which were expensed as
incurred. CBI'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 CBI by the joint venture have been recorded as other revenues
in the accompanying statements of income in the amount of approximately
$254,000, $310,000, and $46,000 in 1998, 1997, and 1996, respectively.
F-22
<PAGE> 59
CLARK/BARDES HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. EARNINGS PER SHARE
The following table sets forth the computation of historical basic and
diluted earnings per share:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Numerator:
Net income (loss)...................................... $ (410,709) $4,233,889 $3,553,985
Effect of dilutive securities:
Interest on convertible debt (net of tax).............. * 125,036 *
---------- ---------- ----------
Numerator for diluted earnings per share................. (410,709) 4,358,925 3,553,985
Denominator:
Denominator for basic earnings per share
weighted-average shares............................. 5,006,009 4,119,387 4,709,252
Effect of dilutive securities securities:
Stock options.......................................... 7,277
Convertible debt....................................... * 271,929 *
---------- ---------- ----------
Denominator for diluted earnings per share -- adjusted
weighted-average shares and assumed conversions........ 5,006,009 4,398,593 4,709,252
========== ========== ==========
Basic earnings (loss) per share.......................... $ (0.08) $ 1.03 $ 0.75
========== ========== ==========
Diluted earnings (loss) per share........................ $ (0.08) $ 0.99 $ 0.75
========== ========== ==========
</TABLE>
- ---------------
* The effects of options and convertible debt have not been included as such
effects would be antidilutive as follows:
(1) The effect of dilutive securities and interest on convertible debt increases
net income by $166,188.
(2) The effect of dilutive securities on the denominator increases the average
weighted number of shares by:
<TABLE>
<S> <C>
Stock options............................................. 35,296
Convertible securities.................................... 538,844
Warrants.................................................. 4,489
-------
578,629
=======
</TABLE>
The weighted average shares presented gives effect to the Merger described
in Note 1 and has been accounted for as a reverse stock split ( 1/2 share for 1
share).
F-23
<PAGE> 60
CLARK/BARDES HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 1:
<TABLE>
<CAPTION>
PRO FORMA
YEAR ENDED
DECEMBER 31,
1997
------------
(UNAUDITED)
<S> <C>
Numerator:
Numerator for basic earnings per share:
Net income -- historical............................... $ 4,233,889
Proforma adjustment:
State tax expense -- S Corporation..................... 60,000
Income tax expense -- C Corporation.................... (1,700,000)
-----------
Numerator for pro forma basic earnings per share............ 2,593,889
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
Denominator:
Denominator for basic earnings per share -- historical...... 4,119,387
Effect of dilutive securities:
Stock options.......................................... 7,277
Convertible debt....................................... 271,929
-----------
Denominator for diluted earnings per share................ 4,398,593
-----------
Pro forma basic earnings per share........................ $ 0.63
===========
Pro forma diluted earnings per share...................... $ 0.61
===========
</TABLE>
Pro forma earnings per share reflect net income as if CBI had been a C
corporation for the year ended December 31, 1997 and income taxes have been
computed on that basis. (See Note 1).
13. SIGNIFICANT RISKS AND UNCERTAINTIES
Federal tax laws create certain advantages for the purchase of life
insurance products by individuals and corporations; therefore, the life
insurance products underlying the benefit programs marketed by the Company are
vulnerable to adverse changes in tax legislation. Amendments to the federal tax
laws enacted in 1996 and 1997 have reduced the advantages of certain purchases
of business-owned life insurance. With limited exceptions, the 1996 amendment
eliminated the ability to deduct interest on loans against the cash value of
life insurance policies. In 1997, legislation imposed an interest disallowance
rule that applied to all business-owned life insurance except for policies
placed on employees, officers, directors and 20-percent owners. The effect of
the 1997 legislation was to reduce otherwise allowable interest deductions by a
ratio of unborrowed cash value to all other assets.
In 1998, the Clinton administration proposed eliminating the "employee,
officer and director" exception to the interest disallowance rule as a part of
its budget proposal. Congress adjourned its 1998 legislative session without
taking action on the Clinton administration's proposal. In February 1999, the
Clinton budget once again contained a proposal to expand the disallowance rule
to policies covering employees, officers and directors. If such a proposal were
to be enacted, it would significantly reduce the attractiveness of business-
owned life insurance to companies that traditionally have high debt/equity
ratios such as banks. While CBI believes there is inadequate support in Congress
at this time to enact such a change, CBI is unable to predict
F-24
<PAGE> 61
CLARK/BARDES HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the outcome of any such legislative proposal by the current or any future
Congress. CBI believes, at the very least, any such proposal would fully
grandfather existing business. (See Risks in the Management 's Discussion and
Analysis -- Unfavorable Tax Legislation.)
14. SEGMENTS AND RELATED INFORMATION
CBH has three reportable segments:
Clark/Bardes, Inc.
Bank Compensation Strategies (a division of Clark/Bardes, Inc.)
Clark/Bardes, Inc. of Washington, D.C. (formerly Schoenke &
Associates, Inc.) (a division of Clark/Bardes, Inc.)
All of CBH's segments are in the same business; the design, marketing and
administration of insurance financed employee benefit programs to large
corporations and community, regional and money center banks. The distinction
between these segments is in their geographical location and that each has its
own client base as well as its own marketing, administrative staffs and
management.
CBI evaluates performance and allocates resources based on profit or loss
from operations before income taxes, interest or corporate administrative
expenses. The accounting policies of the reporting segments are the same as
those described in the summary of significant policies. There are no
intersegment revenues or expenses.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------------
1998 1997
---------------------------------------------------------- -------------------------------------
BANK CLARK/BARDES, INC. BANK
CLARK/ COMPENSATION OF CLARK/ COMPENSATION
BARDES, INC. STRATEGIES WASHINGTON, D.C. TOTALS BARDES, INC. STRATEGIES TOTALS
------------ ------------ ------------------ ------- ------------ ------------ -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues from
external clients... $41,878 $29,358 $ 3,530 $74,766 $41,004 $ 8,451 $49,455
Depreciation and
amortization....... 232 1,067 271 1,570 165 328 493
Segment profit....... 4,424 4,038 1,387 9,849 4,307 910 5,217
Segment assets....... 18,637 28,654 19,595 66,886 9,862 27,039 36,901
Expenditures for
segment assets..... 270 330 4 604 284 64 348
</TABLE>
F-25
<PAGE> 62
CLARK/BARDES HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Revenues
Total external revenues for reportable segments........... $74,766 $49,455
------- -------
Total consolidated revenues....................... $74,766 $49,455
======= =======
Profit and (Loss)
Total profit for reportable segments...................... $ 9,849 $ 5,217
Unallocated amounts:
Corporate overhead..................................... (2,042) --
Put warrants........................................... (4,800) --
Interest income........................................ 565 189
Interest expense....................................... (3,166) (1,112)
------- -------
Income before taxes............................... $ 406 $ 4,292
======= =======
Assets
Total assets for reportable segments...................... $66,886 $36,901
Deferred tax asset........................................ 607 --
------- -------
Total assets...................................... $67,493 $36,901
======= =======
</TABLE>
In 1996, Clark/Bardes had one operating segment.
Geographic Information -- All of the Company's revenues are derived from
clients located within the United States.
Major Customer -- CBI generated in excess of 25% of its revenue in 1998
from 8 clients, in 1997 from 3 clients, and in 1996 from 2 clients,
respectively. Approximately 17.5% and 23% of CBI's commission and fee revenue
for the years ended 1998 and 1997, respectively, was generated by The Wamberg
Organization, which is wholly-owned by CBI's Chairman. Substantially all of the
policies underlying the programs marketed by CBI are underwritten by 14 life
insurance companies, of which seven accounted for approximately 76.3% and 78.9%
of CBI's first-year commission revenue for the years ended December 31, 1998 and
1997.
15. SUBSEQUENT EVENTS (UNAUDITED)
On January 4, 1999 the purchase of renewal revenue from the Chairman (see
Note 1) for $7.5 million was consummated. CBI has recorded the purchase of the
future revenue stream as an asset which will be amortized using the units of
revenue method over the ten year term of the agreement.
In January, 1999 the CBI negotiated a $65.0 million senior credit facility
and issued $25.0 million of floating rate debt fixed for the first year at 7.08%
(the one-year London InterBank Offered Rate plus 2%) secured promissory notes
maturing December 31, 2004. Principal and interest are payable quarterly
beginning March 31, 1999. The $25.0 million proceeds were used to retire the
senior secured notes, second priority senior secured notes, medium term notes,
and AAA distribution notes payable (see Note 6). The credit facility contains
certain restrictive covenants. The covenants require mandatory prepayments under
certain conditions, financial reporting and compliance certificates, maintenance
of financial ratios, restrictions on guaranties and additional indebtedness,
certain limitations on mergers and acquisitions, prohibition of cash dividends,
limitation on investments, loans, and advances, and certain change in control
provisions.
Coincident with the credit facility and floating rate debt agreements, CBI
has entered into an interest rate swap agreement with a bank affiliated with the
lending group to fix the interest rate at 5.29% on $15 million of the debt. The
effect of this agreement is to hold the rate sustaining no gain or loss on rate
fluctuations. There was no cost to CBI for this arrangement, and it does not
present a derivative risk.
F-26
<PAGE> 63
CLARK/BARDES HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Clark/Bardes has entered into non-binding negotiations to acquire the
businesses and substantially all the assets of two unrelated, privately owned
companies. The aggregate proposed purchase price would be approximately $45.0
million, subject to change. If consummated, payment of the purchase price would
be approximately $19.9 cash at closing, assumption of approximately $4.1 million
in liabilities, a sellers' note for approximately $8.7 million and the issuance
of approximately 711,000 shares of Common Stock having an agreed upon value of
approximately $12.3 million. Of the potentially issuable shares, 384,000 having
a value of $6.8 million, are contingent upon the attainment of specified five
year revenue and gross profit performance levels.
In addition, the proposed terms contemplate the issuance of option to
acquire approximately 361,600 shares of Common Stock, at market prices at the
time of closing, to certain employees of the target companies upon the
attainment of stipulated levels of revenue.
These non-binding discussions and the consummation of the acquisition(s)
are subject to Clark/Bardes' ongoing review of the target Companies, execution
of a definitive purchase agreements, and the satisfaction of certain conditions,
including the approvals of Clark/Bardes' board of directors, the boards of
directors of the target companies and the consent of Clark/Bardes lenders, among
others. Accordingly, Clark/Bardes can give no assurance that the acquisitions
will be completed and, if so, on the terms described above.
16. 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..................................... 1998 $13.8 $ 15.2 $17.6 $28.2 $ 74.8
1997 5.5 5.8 11.0 27.1 49.4
1996 5.7 7.0 5.3 15.2 33.2
Pre-tax income (loss)....................... 1998 $ 0.2 $ (5.2) $ 1.6 $ 3.8 $ 0.4
1997 0.2 (0.7) 0.9 3.9 4.3
1996 0.6 0.7 0.2 2.2 3.7
Net income (loss)........................... 1998 $ 0.2 $ (5.2) $ 2.4 $ 2.2 $ (0.4)
1997 0.2 (0.7) 0.9 3.8 4.2
1996 0.6 0.7 0.2 2.1 3.6
Basic earnings (loss) per share............. 1998 $0.06 $(1.61) $0.44 $0.27 $(0.08)
1997 0.05 (0.16) 0.20 1.27 1.03
1996 0.12 0.15 0.04 0.45 0.75
Diluted earnings (loss) per share........... 1998 $0.06 $(1.61) $0.39 $0.27 $(0.08)
1997 0.05 (0.16) 0.20 1.03 0.99
1996 0.12 0.15 0.04 0.45 0.75
</TABLE>
F-27
<PAGE> 64
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CLARK/BARDES HOLDINGS, INC.
By: /s/ MELVIN G. TODD
----------------------------------
Melvin G. Todd
President and Chief Executive
Officer
Date: March 31, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ W. T. WAMBERG Chairman of the Board and March 31, 1999
- ----------------------------------------------------- Director
W. T. Wamberg
/s/ LAWRENCE H. HENDRICKSON Vice Chairman of the Board and March 31, 1999
- ----------------------------------------------------- Director
Lawrence H. Hendrickson
/s/ MELVIN G. TODD President, Chief Executive March 31, 1999
- ----------------------------------------------------- Officer and Director
Melvin G. Todd (Principal Executive
Officer)
/s/ THOMAS M. PYRA Vice President and Chief March 31, 1999
- ----------------------------------------------------- Financial Officer
Thomas M. Pyra (Principal Accounting
Officer and Principal
Financial Officer)
/s/ RANDOLPH A. POHLMAN Director March 31, 1999
- -----------------------------------------------------
Randolph A. Pohlman
/s/ L. WILLIAM SEIDMAN Director March 31, 1999
- -----------------------------------------------------
L. William Seidman
/s/ GEORGE D. DALTON Director March 31, 1999
- -----------------------------------------------------
George D. Dalton
</TABLE>
<PAGE> 65
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBITS
------- --------
<C> <S>
2.1 -- Reorganization Agreement, by and among Clark/Bardes
Holdings, Inc., Clark/ Bardes, Inc. and the Predecessor
Company (Incorporated herein by reference to Exhibit 2.1
of Clark/Bardes' Registration Statement on Form S-3, File
No. 333-56799).
2.2 -- Letter of Intent, dated May 29, 1998, from Clark/Bardes,
Inc. and the Schoenke Companies (Incorporated herein by
reference to Exhibit 2.2 of Clark/Bardes' Registration
Statement on Form S-3, File No. 333-56799).
2.3 -- Asset Purchase Agreement, dated September 5, 1997, among
Clark/Bardes, Inc., Bank Compensation Strategies, Inc.,
et. al. (Incorporated herein by reference to Exhibit 2.3
of Clark/Bardes' Registration Statement on Form S-3, File
No. 333-56799).
2.4 -- Letter of Understanding, dated October 1, 1998, by and
between Clark/Bardes Holdings, Inc and the Wiedemann &
Johnson Company. (Incorporated herein by reference to
Exhibit 10 of Clark/Bardes' Quarterly Report on Form
10-Q, File No. 000-24769, filed with the SEC on November
16, 1998).
2.5 -- Asset Purchase Agreement, dated September 18, 1998, with
Schoenke & Associates Corporation, Schoenke & Associates
Securities Corporation and Raymond F. Schoenke, Jr.
(Incorporated herein by reference to Exhibit 2.2 of
Clark/Bardes' Current Report on Form 8-K, File No.
000-24769, filed with the SEC on October 2, 1998).
*2.6 -- Asset Purchase Agreement, dated November 16, 1998, by and
among Clark/ Bardes, Inc., Clark/Bardes Holdings, Inc.,
Wiedemann & Johnson Company, Bruce Hlavacek and Jennie
Hlavacek.
3.1 -- Certificate of Incorporation of Clark/Bardes Holdings,
Inc. (Incorporated herein by reference to Exhibit 3.1 of
Clark/Bardes' Registration Statement on Form S-3, File
No. 333-56799, filed with the SEC on July 12, 1998).
3.2 -- Bylaws of Clark/Bardes Holdings, Inc. (Incorporated
herein by reference to Exhibit 3.2 of Clark/Bardes'
Registration Statement on Form S-3, File No. 333-56799,
filed with the SEC on July 12, 1998).
3.3 -- Certificate of Amendment (Incorporated herein by
reference to Exhibit 3.3 of Clark/Bardes' Registration
Statement on Form S-3, File No. 333-56799).
3.4 -- Certificate of Designation (Incorporated herein by
reference to Exhibit 3.4 of Clark/Bardes' Registration
Statement on Form S-3, File No. 333-56799).
4.1 -- Specimen Certificate for shares of Common Stock, par
value $.01 per share, of Clark/Bardes Holdings, Inc.
(Incorporated herein by reference to Exhibit 4.1 of
Clark/Bardes' Amendment No. 1 to the Registration
Statement on Form S-3, File No. 333-56799, filed with the
SEC on July 27, 1998).
4.2 -- Rights Agreement, dated as of July 10, 1998, by and
between Clark/Bardes Holdings, Inc. and The Bank of New
York (Incorporated herein by reference to Exhibit 4.4 of
Clark/Bardes' Quarterly Report on Form 10-Q, File No.
000-24769, filed with the SEC on November 16, 1998).
10.1 -- Clark/Bardes Holdings, Inc. 1998 Stock Option Plan
(Incorporated herein by reference to Exhibit 10.1 of
Clark/Bardes' Registration Statement on Form S-3, File
No. 333-56799).
</TABLE>
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<PAGE> 66
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBITS
------- --------
<C> <S>
10.2 -- Administration and Services Agreement, by and between
Clark/Bardes, Inc. and Clark/Bardes Agency of Ohio, Inc
(Incorporated herein by reference to Exhibit 10.2 of
Clark/Bardes' Registration Statement on Form S-3, File
No. 333-56799).
10.3 -- Administration and Services Agreement, by and between
Clark/Bardes, Inc. and Clark/Bardes Securities, Inc
(Incorporated herein by reference to Exhibit 10.3 of
Clark/Bardes' Registration Statement on Form S-3, File
No. 333-56799).
10.4 -- Administration and Services Agreement, by and between
Clark/Bardes, Inc. and Clark/Bardes, Inc. of Pennsylvania
(Incorporated herein by reference to Exhibit 10.4 of
Clark/Bardes' Registration Statement on Form S-3, File
No. 333-56799).
10.5 -- Principal Office Agreement, dated July 29, 1993, by and
between W.T. Wamberg and Clark/Bardes, Inc (Incorporated
herein by reference to Exhibit 10.5 of Clark/ Bardes'
Registration Statement on Form S-3, File No. 333-56799).
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 (Incorporated herein by reference to Exhibit
10.6 of Clark/Bardes' Registration Statement on Form S-3,
File No. 333-56799).
10.7 -- Note and Warrant Purchase Agreement, dated September 8,
1997, by and between Clark/Bardes, Inc. and Great-West,
Life Investors and Nationwide (Incorporated herein by
reference to Exhibit 10.7 of Clark/Bardes' Registration
Statement on Form S-3, File No. 333-56799).
10.8 -- Note Agreement, dated September 8, 1997, by and between
Clark/Bardes, Inc., Great-West, Life Investors and
Nationwide (Incorporated herein by reference to Exhibit
10.8 of Clark/Bardes' Registration Statement on Form S-3,
File No. 333-56799).
10.9 -- Form of Common Stock Purchase Warrant, dated September 8,
1997 (Incorporated herein by reference to Exhibit 10.9 of
Clark/Bardes' Registration Statement on Form S-3, File
No. 333-56799).
10.10 -- Form of 11.00% Secured Priority Senior Secured Note Due
August 2004 (Incorporated herein by reference to Exhibit
10.10 of Clark/Bardes' Registration Statement on Form
S-3, File No. 333-56799).
10.11 -- Form of 10.50% Senior Secured Note Due August 2004
(Incorporated herein by reference to Exhibit 10.11 of
Clark/Bardes' Registration Statement on Form S-3, File
No. 333-56799).
10.12 -- Convertible Subordinated Note, dated September 1997
(Incorporated herein by reference to Exhibit 10.12 of
Clark/Bardes' Registration Statement on Form S-3, File
No. 333-56799).
10.13 -- Medium Term Note, dated September 1997 (Incorporated
herein by reference to Exhibit 10.13 of Clark/Bardes'
Registration Statement on Form S-3, File No. 333-56799).
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 (Incorporated
herein by reference to Exhibit 10.14 of Clark/Bardes'
Registration Statement on Form S-3, File No. 333-56799).
</TABLE>
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<PAGE> 67
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBITS
------- --------
<C> <S>
10.15 -- Stock Purchase Agreement, dated August 1997, by and among
Clark/Bardes, Inc. and Henry J. Smith (Incorporated
herein by reference to Exhibit 10.15 of Clark/ Bardes'
Registration Statement on Form S-3, File No. 333-56799).
10.16 -- Lease Agreement, dated April 24, 1998, by and between
Northland Center Limited Partnership and Clark/Bardes,
Inc (Incorporated herein by reference to Exhibit 10.16 of
Clark/Bardes' Registration Statement on Form S-3, File
No. 333-56799).
10.17 -- Lease Agreement, dated December 30, 1994, by and between
C-W#5, Ltd., and Clark/Bardes, Inc. (Incorporated herein
by reference to Exhibit 10.17 of Clark/ Bardes'
Registration Statement on Form S-3, File No. 333-56799).
10.18 -- Letter of Agreement to Purchase Warrants, dated June 11,
1998, to Nationwide (Incorporated herein by reference to
Exhibit 10.18 of Clark/Bardes' Registration Statement on
Form S-3, File No. 333-56799).
10.19 -- Letter of Agreement to Purchase Warrants, dated June 11,
1998 to Life Investors (Incorporated herein by reference
to Exhibit 10.19 of Clark/Bardes' Registration Statement
on Form S-3, File No. 333-56799).
10.20 -- Letter of Agreement to Purchase Warrants, dated June 11,
1998, to Great-West (Incorporated herein by reference to
Exhibit 10.20 of Clark/Bardes' Registration Statement on
Form S-3, File No. 333-56799).
10.21 -- Phantom Stock Agreement, dated September 5, 1997, by and
between Clark/ Bardes, Inc. and Steven J. Cochlan
(Incorporated herein by reference to Exhibit 10.21 of
Clark/Bardes' Registration Statement on Form S-3, File
No. 333-56799).
10.22 -- Employment Agreement, dated November 21, 1996, by and
between Clark/Bardes, Inc. and Kurt J. Laning
(Incorporated herein by reference to Exhibit 10.22 of
Clark/Bardes' Registration Statement on Form S-3, File
No. 333-56799).
10.23 -- Employment Agreement, dated March 28, 1995, by and
between Clark/Bardes, Inc. and Keith L. Staudt
(Incorporated herein by reference to Exhibit 10.23 of
Clark/Bardes' Registration Statement on Form S-3, File
No. 333-56799).
10.24 -- Employment Agreement, dated August 23, 1993, by and
between Clark/Bardes, Inc. and Larry Sluder (Incorporated
herein by reference to Exhibit 10.24 of Clark/ Bardes'
Registration Statement on Form S-3, File No. 333-56799).
10.25 -- Employment Agreement, dated March 7, 1993, by and between
Clark/Bardes, Inc. and Ronald A. Roth (Incorporated
herein by reference to Exhibit 10.25 of Clark/ Bardes'
Registration Statement on Form S-3, File No. 333-56799).
10.26 -- Employment Agreement, dated April 15, 1991, by and
between Clark/Bardes, Inc. and Sue A. Leslie
(Incorporated herein by reference to Exhibit 10.26 of
Clark/ Bardes' Registration Statement on Form S-3, File
No. 333-56799).
10.27 -- Employment Agreement, dated June 9, 1993, by and between
Clark/Bardes, Inc. and William J. Gallegos (Incorporated
herein by reference to Exhibit 10.27 of Clark/Bardes'
Registration Statement on Form S-3, File No. 333-56799).
10.28 -- Tax Indemnity Agreement by and between Clark/Bardes
Holdings, Inc., Clark/ Bardes, Inc. and certain former
shareholders of the Predecessor Company (Incorporated
herein by reference to Exhibit 10.28 of Clark/Bardes'
Registration Statement on Form S-3, File No. 333-56799).
</TABLE>
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<PAGE> 68
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBITS
------- --------
<C> <S>
10.29 -- Form of Employee Stock Purchase Plan (Incorporated herein
by reference to Exhibit 10.29 of Clark/Bardes'
Registration Statement on Form S-3, File No. 333-56799).
10.30 -- Form of Employment Agreement, effective as of September
1, 1998, by and between Clark/Bardes, Inc. and Robert E.
Miller (Incorporated herein by reference to Exhibit 10.30
of Clark/Bardes' Registration Statement on Form S-3, File
No. 333-56799).
10.31 -- Form of Employment Agreement, effective as of July 1,
1998, by and between Clark/Bardes, Inc. and Thomas M.
Pyra (Incorporated herein by reference to Exhibit 10.31
of Clark/Bardes' Registration Statement on Form S-3, File
No. 333-56799).
10.32 -- Form of Employment Agreement, effective as of July 1,
1998, by and between Clark/Bardes Holdings, Inc. and
Melvin G. Todd (Incorporated herein by reference to
Exhibit 10.32 of Clark/Bardes' Registration Statement on
Form S-3, File No. 333-56799).
10.33 -- Form of Commission Transfer Agreement by and between W.T.
Wamberg, The Wamberg Organization, Inc. and Clark/Bardes,
Inc. (Incorporated herein by reference to Exhibit 10.33
of Clark/Bardes' Registration Statement on Form S-3, File
No. 333-56799).
10.34 -- Letter of Agreement, dated July 24, 1998, to Great-West,
Life Investors and Nationwide (Incorporated herein by
reference to Exhibit 10.34 of Clark/Bardes' Registration
Statement on Form S-3, File No. 333-56799).
10.35 -- Employment Agreement, dated September 1, 1997, by and
between Clark/Bardes, Inc. and Richard C. Chapman
(Incorporated herein by reference to Exhibit 10.35 of
Clark/Bardes' Registration Statement on Form S-3, File
No. 333-56799).
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 (Incorporated
herein by reference to Exhibit 10.36 of Clark/Bardes'
Registration Statement on Form S-3, File No. 333-56799).
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
(Incorporated herein by reference to Exhibit 10.37 of
Clark/Bardes' Registration Statement on Form S-3, File
No. 333-56799).
10.38 -- Put Rights Agreement, dated as of September 9, 1997, by
and among Clark/ Bardes, Inc., Great-West, Life Investors
and Nationwide (Incorporated herein by reference to
Exhibit 10.38 of Clark/Bardes' Registration Statement on
Form S-3, File No. 333-56799).
10.39 -- Participation Rights Agreement, dated as of September 9,
1997, by and among Clark/Bardes, Inc., Great-West, Life
Investors and Nationwide (Incorporated herein by
reference to Exhibit 10.39 of Clark/Bardes' Registration
Statement on Form S-3, File No. 333-56799).
10.40 -- Registration Rights Agreement, dated as of September 9,
1997, by and among Clark/Bardes, Inc., Great-West, Life
Investors and Nationwide (Incorporated herein by
reference to Exhibit 10.40 of Clark/Bardes' Registration
Statement on Form S-3, File No. 333-56799).
10.41 -- Form of Letter Agreement between Phoenix Home Life and
Clark/Bardes (Incorporated herein by reference to Exhibit
10.41 of Clark/Bardes' Registration Statement on Form
S-3, File No. 333-56799).
</TABLE>
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<PAGE> 69
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBITS
------- --------
<C> <S>
10.42 -- Letter Agreement, dated August 14, 1998, between
Nationwide and Clark/Bardes (Incorporated herein by
reference to Exhibit 10.42 of Clark/Bardes' Registration
Statement on Form S-3, File No. 333-56799).
10.43 -- Letter Agreement, dated August 14, 1998, between
Great-West and Clark/Bardes (Incorporated herein by
reference to Exhibit 10.43 of Clark/Bardes' Registration
Statement on Form S-3, File No. 333-56799).
10.44 -- Letter Agreement, dated as of August 17, 1998, between
General American and Clark/Bardes (Incorporated herein by
reference to Exhibit 10.44 of Clark/Bardes' Registration
Statement on Form S-3, File No. 333-56799).
10.45 -- 1998 Non-Employee Director Stock Option Plan
(Incorporated herein by reference to Exhibit 4.7 of
Clark/Bardes' Registration Statement on Form S-8, File
No. 333-68163, filed with the SEC on December 1, 1998).
*10.46 -- Credit Agreement, dated January 15, 1999, among
Clark/Bardes, Inc., Bank One Texas, N.A., U.S. Bank
National Association, certain financial institutions, and
Banc One Capital Markets, Inc.
*10.47 -- Lease Agreement, dated December 30, 1996, by and between
Bellemead Development Corporation and Schoenke &
Associates Corporation.
*23.1 -- Consent of Ernst & Young LLP.
*23.2 -- Consent of Lane Gorman Trubitt, L.L.P.
*27.1 -- Financial Data Schedule for 1998 Fiscal Year (Included in
SEC-Filed Copy Only).
*27.2 -- Financial Data Schedule for 1997 Fiscal Year (Included in
SEC-Filed Copy Only).
*27.3 -- Financial Data Schedule for Three Months Ended March 31,
1998, Six Months Ended June 30, 1998, and Nine Months
Ended September 30, 1998 (Included in SEC-Filed Copy
Only).
</TABLE>
- ---------------
* Filed herewith.
I-5
<PAGE> 1
EXHIBIT 2.6
================================================================================
ASSET PURCHASE AGREEMENT
by and among
CLARK/BARDES, INC.
and
CLARK/BARDES HOLDINGS, INC.
and
WIEDEMANN & JOHNSON COMPANY,
BRUCE HLAVACEK and JENNIE HLAVACEK
November 16,1998
================================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE 1
PURCHASE AND SALE OF ASSETS ................................................ 1
1.1 Purchased Assets ................................................. 1
1.2 Excluded Assets .................................................. 4
1.3 Assumption of Liabilities ........................................ 4
1.4 Excluded Liabilities ............................................. 4
1.5 Payment of Commissions and Fees .................................. 4
ARTICLE 2
CONSIDERATION FOR THE PURCHASED ASSETS ..................................... 5
2.1 Purchase Price ................................................... 5
2.2 Required Cash Amount Adjustment .................................. 5
2.3 Procedures for Final Determination of Required Cash Amount ....... 5
2.4 Required Cash Amount Definition .................................. 6
2.5 Holdings Stock ................................................... 6
ARTICLE 3
REPRESENTATIONS AND WARRANTIES SELLER AND SHAREHOLDERS ..................... 7
3.1 Organization and Power ........................................... 7
3.2 Subsidiaries ..................................................... 8
3.3 Authorization; No Breach ......................................... 8
3.4 Financial Statements ............................................. 8
3.5 Absence of Undisclosed Liabilities ............................... 8
3.6 No Material Adverse Changes ...................................... 9
3.7 Absence of Certain Developments .................................. 9
3.8 Title and Condition of Properties ................................ 10
3.9 Tax Matters ...................................................... 11
3.10 Contracts and Commitments ........................................ 13
3.11 Proprietary Rights ............................................... 15
3.12 Litigation; Proceedings .......................................... 15
3.13 Brokerage ........................................................ 15
3.14 Governmental Consent, etc ........................................ 15
3.15 Employees ........................................................ 15
3.16 Employee Benefit Plans ........................................... 16
3.17 Insurance ........................................................ 18
3.18 Affiliated Transactions .......................................... 18
3.19 Compliance with Laws; Permits; Certain Operations ................ 18
3.20 Environmental Health and Safety .................................. 18
3.21 Product and Warranty Claims; Warranties .......................... 19
3.22 Disclosure ....................................................... 20
3.23 Closing Date ..................................................... 20
3.24 Name Change ...................................................... 20
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C>
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF PURCHASERS ............................... 20
4.1 Corporate Organization and Power ................................. 20
4.2 Authorization .................................................... 21
4.3 No Violation ..................................................... 21
4.4 Litigation ....................................................... 21
4.5 Closing Date ..................................................... 21
4.6 Brokerage ........................................................ 21
4.7 Capitalization ................................................... 21
4.8 Governmental Consent, etc ........................................ 22
4.9 Disclosure ....................................................... 22
ARTICLE 5
CONDITIONS TO PURCHASERS' OBLIGATION TO CLOSE .............................. 22
5.1 Conditions to Purchasers' Obligation ............................. 22
ARTICLE 6
CONDITIONS TO SELLER'S OBLIGATION TO CLOSE ................................. 24
6.1 Conditions to the Seller's Obligations ........................... 24
ARTICLE 7
CLOSING TRANSACTIONS ....................................................... 24
7.1 The Closing ...................................................... 24
7.2 Action to Be Taken at the Closing ................................ 25
7.3 Closing Documents ................................................ 25
7.4 Nonassignable Contracts .......................................... 27
ARTICLE 8
INDEMNIFICATION ............................................................ 27
8.1 Indemnification by Seller and Shareholders ....................... 27
8.2 Indemnification by Purchasers .................................... 27
8.3 Method of Asserting Claims ....................................... 28
8.4 Survival; Limitations on Liability ............................... 29
ARTICLE 9
TERMINATION ................................................................ 29
9.1 Termination ...................................................... 29
9.2 Effect of Termination ............................................ 30
9.3 Effect of Closing ................................................ 30
ARTICLE 10
ADDITIONAL AGREEMENTS ...................................................... 30
10.1 Survival ......................................................... 30
10.2 Mutual Assistance ................................................ 30
</TABLE>
ii
<PAGE> 4
<TABLE>
<S> <C>
10.3 Press Release and Announcements .................................. 30
10.4 Expenses ......................................................... 31
10.5 Further Transfers ................................................ 31
10.6 Transition Assistance ............................................ 31
10.7 Confidentiality .................................................. 31
10.8 Non-Compete; Non-Solicitation .................................... 31
10.9 Remittances ...................................................... 32
10.10 Best Efforts To Consummate Closing Transactions .................. 32
10.11 Employees and Agents of Seller ................................... 32
10.12 Certain Understandings ........................................... 33
ARTICLE 11
MISCELLANEOUS .............................................................. 33
11.1 Amendment and Waiver ............................................. 33
11.2 Notices .......................................................... 33
11.3 Assignment ....................................................... 34
11.4 Severability ..................................................... 34
11.5 No Third Party Beneficiaries ..................................... 35
11.6 No Strict Construction ........................................... 35
11.7 Captions ......................................................... 35
11.8 Complete Agreement ............................................... 35
11.9 Counterparts ..................................................... 35
11.10 Governing Law .................................................... 35
11.11 Remedies Cumulative .............................................. 35
</TABLE>
iii
<PAGE> 5
EXHIBITS
Exhibit A -- Allocation of Purchase Price
Exhibit B -- Opinion of Seller's Counsel
Exhibit C -- Form of Non-Compete Agreement
Exhibit D -- Form of Investment Letter
Exhibit E -- Opinion of Purchasers' Counsel
Exhibit F -- Officer's Certificate of Seller
Exhibit G -- Officer's Certificate of Purchasers
iv
<PAGE> 6
DISCLOSURE SCHEDULES
Schedule 1.1(a) -- Required Cash Amount Schedule
Schedule 1.1(b) -- Accounts Receivable Schedule
Schedule 1.1(e) -- Wiedemann Real Estate Schedule
Schedule 1.1(f) -- Tangible Property Schedule
Schedule 1.1(g) -- Assumed Insurance Schedule
Schedule 1.1(i) -- Intellectual Property Schedule
Schedule 1.1(k) -- Retained Commissions Schedule
Schedule 1.1(m) -- Customer List Schedule
Schedule 1.2 -- Excluded Asset Schedule
Schedule 3.1 -- Qualifications Schedule
Schedule 3.3 -- Breach of Agreements Schedule
Schedule 3.7 -- Developments Schedule
Schedule 3.8(b) -- Leases Schedule
Schedule 3.9 -- Tax Matters Schedule
Schedule 3.10(a) -- Contracts Schedule
Schedule 3.10(d) -- Customer Contracts Schedule
Schedule 3.11 -- Proprietary Rights Schedule
Schedule 3.12 -- Litigation Schedule
Schedule 3.14 -- Consents Schedule
Schedule 3.16 -- Employee Benefits Schedule
Schedule 3.17 -- Insurance Schedule
Schedule 3.18 -- Affiliated Transactions Schedule
Schedule 3.19(a) -- Compliance Schedule
Schedule 3.19(b) -- Permits Schedule
Schedule 3.21 -- Claims Schedule
v
<PAGE> 7
ASSET PURCHASE AGREEMENT
ASSET PURCHASE AGREEMENT is entered into as of November 16, 1998 (this
"Agreement") to be effective November 1, 1998 (the "Effective Date") by and
among CLARK/BARDES, INC., a Delaware corporation ("CBI"), CLARK/BARDES HOLDINGS,
INC., a Delaware corporation ("Holdings") (CBI and Holdings shall be
individually referred to as "Purchaser" and collectively be referred to as
"Purchasers"), WIEDEMANN & JOHNSON COMPANY, a Texas corporation ("Seller"),
BRUCE HLAVACEK ("Bruce") and JENNIE HLAVACEK ("Jennie") (Bruce and Jennie are
collectively referred to as the "Shareholders").
WITNESSETH
WHEREAS, the Seller is engaged in the sale of life, disability or long-term
care insurance or administrative or consulting services made where a corporation
or other business organization is either the owner of the insurance policies or,
directly or indirectly, the payor of a majority of the premium or administrative
or consulting fees and the purpose or result of the sale is to fund, finance,
study or administer an executive or employee benefit plan (the "Business")
provided, Business does not include group term life insurance or sales to
qualified plans; and
WHEREAS, on the terms and subject to the conditions of this Agreement,
Purchasers desire to acquire from Seller and Seller desires to sell to
Purchasers, a substantial portion of the assets, properties and Business of the
Seller as a going concern.
NOW, THEREFORE, the parties agree as follows:
ARTICLE 1
PURCHASE AND SALE OF ASSETS
1.1 Purchased Assets. On the terms and subject to the conditions of this
Agreement, on the Closing Date (as defined in Section 7.1), Purchasers shall
purchase from Seller, and Seller shall sell, convey, assign, transfer and
deliver to each Purchaser in proportion to the consideration paid by such
Purchaser for the Purchased Assets, all properties, assets, rights and interests
of every kind and nature, whether real or personal, tangible or intangible, and
wherever located and by whomever possessed, of Seller as of the Effective Date
related to or used in, or otherwise associated with, the Business, including,
without limitation, all of the following assets (but excluding all Excluded
Assets as defined in Section 1.2 hereof):
(a) cash, cash equivalents and marketable securities having the
aggregate value equal to the amounts provided for on Schedule 1.1(a) (the
"Required Cash Amount");
(b) all accounts and notes receivable (whether current or noncurrent),
a list, description and aging of which as of the date hereof is set forth on
Schedule 1.1 (b);
<PAGE> 8
(c) all prepayments, prepaid expenses (including, without limitation,
prepaid insurance premiums), deferred charges, advance payments and security
deposits as of the Effective Date and the Closing Date;
(d) all inventories and related supplies located at Seller's
facilities, in transit to or from Seller's facilities or which otherwise relate
to the Business (the "Inventory");
(e) all interests in real estate (including, without limitation, land,
buildings, improvements and that certain security deposit of Nine Thousand Seven
Hundred Ninety-Seven and 29/100 dollars ($9,797.29) pursuant to that certain
Lease Agreement dated as of February 13, 1997 between PL Properties Associates,
L.P. and Wiedemann & Johnson Company (the "Lease Agreement")), whether owned in
fee, leased or otherwise, including but not limited to, the interests listed on
Schedule 1.1(e) (collectively, the "Wiedemann Real Estate") and all licenses,
permits, approvals and qualifications relating to the Wiedemann Real Estate;
(f) all interests in machinery and equipment, fixtures, fittings,
furniture, tools, fixtures, spare parts and supplies and other tangible personal
property, whether owned, leased or otherwise (including, without limitation,
items which have been fully depreciated or expensed), including, without
limitation, such items as set forth on Schedule 1.1(f);
(g) all insurance, insurance reserves and deposits, including, without
limitation, such items as set forth on Schedule 1.1(g);
(h) all office furnishings and related assets;
(i) all intangible assets and intellectual property (including, without
limitation, registered and unregistered trademarks, service marks and trade
names, trade dress and other names, marks and slogans, including the right to
use the name "Wiedemann & Johnson Company" and all variations and permutations
thereof), all publishing and distribution rights, and all associated goodwill;
all statutory, common law and registered copyrights; all patents, inventions,
shop rights, know-how and trade secrets; all registration applications for any
of the foregoing; all interests in and to telephone numbers and all listings
pertaining to Seller in all telephone books and other directories; together with
all rights to use all of the foregoing forever and all other rights in, to, and
under the foregoing in all countries, including, without limitation, such items
as set forth on Schedule 1.1(i);
(j) all discoveries, improvements, processes, data, confidential
information, specifications and ideas, whether patentable or not, all licenses
and other similar agreements, and all drawings, records, books or other indicia,
however evidenced, of the foregoing; all rights in and to any products or other
intellectual property rights under research or development prior to or on the
Closing Date related to the Business;
(k) all rights existing under contracts, leases, licenses, permits,
supply and distribution arrangements, sales and purchase agreements and orders,
employee benefit plans, trusts and other arrangements, employment and consulting
agreements, consignment arrangements, warranties, consents, orders,
registrations, privileges, franchises, memberships, certificates,
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approvals or other similar rights and all other agreements, arrangements and
understandings, including, without limitation, all rights existing under the
contracts listed on the Contracts Schedule and Customer Contracts Schedule (as
defined in Section 3.10 hereto) except for a twenty-five percent (25%) interest
in the second and subsequent year commissions, asset management, client,
service, and any other fees and revenues paid or generated under those certain
contracts listed on Schedule 1.1(k) hereto, which interest will be retained by
Seller (the "Retained Commissions");
(1) the right to receive all mail and other communications addressed to
Wiedemann & Johnson (including, without limitation, mail and communications from
customers, suppliers, distributors, agents and others and accounts receivable
payments), provided that CBI agrees to forward any such mail and communications
and accounts receivable payments that are to Seller not related to the Business
or related to the Excluded Assets or of a personal nature to any officer or
employee of Seller to which it pertains promptly after receipt;
(m) all lists, records and files pertaining to present customers
referenced in Schedule 1 1(m) and all past customers;
(n) all lists, records, books, ledgers, files, documents,
correspondence, business analysis, illustrations, proposals and records of every
kind and nature pertaining to suppliers, distributors, personnel, customers and
agents related to the Business;
(o) all business and marketing plans and proposals and pricing and cost
information;
(p) all computer software and systems, including licenses related
thereto, proprietary or otherwise, including related source codes, data and
documentation;
(q) all creative materials (including, without limitation, photographs,
films, art work, color separations and the like) advertising and promotional
materials and all other printed or written materials;
(r) all goodwill associated with the Wiedemann & Johnson name and all
other intangible property except such goodwill or other intangible property as
described on Schedule 1.2 hereto; and
(s) all other property not referred to above which is either
represented on Seller's balance sheet dated November 1, 1998 or acquired by
Seller thereafter (except for Excluded Assets or such property which has been
sold or otherwise disposed of in the ordinary course of business) related to the
Business.
For purposes of the Agreement, the term "Purchased Assets" means all properties,
assets and rights which Seller shall convey to Purchasers or shall be obligated
to convey to Purchasers under this Agreement.
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1.2 Excluded Assets. Notwithstanding the foregoing, the following assets
(the "Excluded Assets") are expressly excluded from the purchase and sale
contemplated hereby and, as such, are not included in the Purchased Assets:
(a) cash and marketable securities other than the Required Cash Amount;
(b) those certain assets listed on Schedule 1.2 hereto,
(c) all tax returns and related workpapers and correspondence;
(d) all financial and accounting records and related workpapers and
correspondence; and
(e) the minute books, capital stock records, articles of incorporation,
by-laws and corporate seal of Seller, together with annual and other corporate
reports filed with the State of Texas and other states in which the Seller is
qualified to do business, other documents and correspondence that relate to
Seller's corporate organization and maintenance thereof.
1.3 Assumption of Liabilities. Subject to the conditions specified in this
Agreement, on the Closing Date, Purchasers shall assume and agree to pay,
defend, discharge and perform as and when due only the following liabilities and
obligations of Seller (the "Assumed Liabilities"):
(a) Seller's obligations and liabilities under the contracts listed on
the Contracts Schedule (Schedule 3.10(a)) and on the Customer Contract Schedule
(Schedule 3.10(d)) for any activity following the Closing Date;
(b) 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 the Seller prior to the
Closing Date (the "Vender Orders"); and
(c) accrued payroll vacation and other benefits of employees of the
Seller generated in the ordinary course of business to the extent reflected on
the Required Cash Amount Schedule (Schedule 1.1(a)).
1.4 Excluded Liabilities. Notwithstanding anything to the contrary
contained in this Agreement, Purchasers shall not assume or be liable for any
liabilities or obligations of Seller other than the Assumed Liabilities and all
such other liabilities or obligations shall be the responsibility of the Seller
(the "Excluded Liabilities").
1.5 Payment of Commissions and Fees. Purchasers and Seller agree that the
parties shall direct each applicable insurance company to pay directly to the
Seller the Retained Commissions and pay all other fees and commissions related
to the Purchased Assets directly to CBI (the "CBI Commissions"). If for any
reason CBI receives the Retained Commissions, CBI shall pay the Seller its share
of the commissions within seven (7) days after CBI's receipt of the commissions
from the
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respective insurer. If for any reason Seller receives the CBI Commissions,
Seller shall pay CBI its share of the commissions within seven (7) days after
Seller's receipt of the commissions from the respective insurer.
ARTICLE 2
CONSIDERATION FOR THE PURCHASED ASSETS
2.1 Purchase Price. The aggregate purchase price for the Purchased Assets
shall be an amount equal to Six Million and no/100 Dollars ($6,000,000) (the
"Purchase Price") which shall be payable to Seller or its designees on the
Closing Date, subject to terms hereof, as follows:
(a) payable by CBI, by wire transfer of immediately available funds to
such account or accounts as shall have been designated in writing by Seller not
less than three (3) days prior to the Closing Date in an amount equal to Four
Million and no/100 Dollars ($4,000,000), as adjusted pursuant to Section 2.2
hereof; and
(b) payable by Holdings, One Hundred Forty-Two Thousand Eight Hundred
Fifty-Seven (142,857) shares of Holdings' common stock (the "Common Stock
Consideration") valued in the aggregate at Two Million and no/100 Dollars
($2,000,000), based upon the most current closing price of Holdings' common
stock as quoted on the NASDAQ national market (the "Holdings Stock"). At the
direction of the Seller, the Holdings Stock shall be issued one-half each in the
names of Bruce Hlavacek and Jennie Hlavacek. Bruce and Jennie hereby agree to
hold the stock for one (1) year from the date hereof and thereafter comply with
Section 2.5 hereof. The parties hereto agree that the Common Stock Consideration
shall be delivered pursuant hereto on or before November 25, 1998.
The Purchase Price shall be allocated among the Purchased Assets as set
forth in Exhibit A attached hereto. The parties agree that the allocation set
forth in Exhibit A shall be used by them and respected for all purposes,
including income tax purposes if in conformance with the rules and regulations
of the Internal Revenue Code of 1986, as amended (the "Code"), and that the
parties shall follow such allocation for all reporting purposes, including,
without limitation, Internal Revenue Service ("IRS") Form 8594.
2.2 Required Cash Amount Adjustment. Within three (3) days prior to the
Closing, Seller shall notify Purchaser in writing of its good faith estimate of
the Required Cash Amount (as defined in Section 1.1 herein) as of the Effective
Date based on a schedule prepared by Seller as of the Effective Date (the
"Estimated Required Cash Amount"). Within three (3) business days after the
final determination of the Required Cash Amount pursuant to Section 2.3 below,
Seller shall pay Purchasers an amount equal to the excess of the Required Cash
Amount over the Estimated Required Cash Amount by wire transfer of immediately
available funds.
2.3 Procedures for Final Determination of Required Cash Amount. Within
thirty (30) days after the Closing Date, CBI shall prepare and deliver to Seller
at CBI's expense a statement setting forth CBI's determination of the Required
Cash Amount. Within thirty (30) days after
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receipt thereof, Seller shall deliver to CBI a detailed written statement
describing its objections, if any, to such balance sheet and determination of
the Required Cash Amount. If Seller does not raise any objections within the
thirty (30) day period, CBI's determination of the Required Cash Amount shall
become final and binding upon all parties. Upon request by Seller at any time
after receipt of the aforementioned statement, CBI shall make available to
Seller and its accountants and other representatives the work papers used in
determining CBI's calculation of the Required Cash Amount and such other
documents as Seller may reasonably request in connection with their review of
the Required Cash Amount. If Seller does raise any objections, CBI and Seller
shall use reasonable efforts to resolve any such disputes. If a final resolution
is not obtained within thirty (30) days after Seller shall have submitted their
objections to CBI, any remaining disputes shall be resolved by an accounting
firm mutually agreeable to CBI and Seller. If CBI and Seller are unable to
mutually agree on such an accounting firm within five (5) days after the
expiration of said thirty (30) day period, a "big-five" accounting firm shall be
selected by lot after elimination of one firm designated as objectionable by
each of CBI and Seller. The determination of the accounting firm so selected
shall be set forth in writing and shall be conclusive and binding upon the
parties, and the fees and expenses of such accounting firm shall be paid
one-half by CBI and one-half by Seller. The statement setting forth the final
determination of the Required Cash Amount shall be dated effective November 1,
1998.
2.4 Required Cash Amount Definition. For purposes hereof, "Required Cash
Amount" shall be determined as of the opening of business on the Effective Date
and shall be cash in an amount equal to the Seller's accrued liabilities
including, but not limited to, accrued payroll, accrued vacation, other benefits
of employees and other accrued expenses, as detailed on Schedule 1.1 (a) at such
time in excess of the sum of the accounts receivable and other tangible assets
included in the Purchased Assets, excluding any equipment or other furniture and
fixtures, as detailed on Schedule 1.1(a).
2.5 Holdings Stock. Holdings shall issue the Holdings Stock to Bruce and
Jennie subject to the conditions and restrictions set forth in this Section 2.5.
(a) During the period (the "Restriction Period") beginning on the
Closing Date and ending on the one (1) year anniversary of the Closing Date,
Bruce and Jennie shall not sell, assign, exchange, transfer, distribute or
otherwise dispose of (in each case, a "transfer") any shares of Holdings Stock
received by such parties hereunder. Following the Restriction Period, Bruce and
Jennie may transfer their shares of Holdings Stock so long as such transfer is
in accordance with the Securities Act of 1933, as amended. The certificates
evidencing the Holdings Stock delivered to Bruce and Jennie, pursuant to this
Agreement shall bear a legend substantially in the form set forth below:
THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD,
ASSIGNED (OTHER THAN IN CONNECTION WITH A PLEDGE), EXCHANGED,
TRANSFERRED, DISTRIBUTED, CHANGED OR OTHERWISE DISPOSED OF, AND THE
ISSUER SHALL NOT BE REQUIRED TO GIVE EFFECT TO ANY ATTEMPTED SALE,
ASSIGNMENT (OTHER
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THAN IN CONNECTION WITH A PLEDGE), EXCHANGE, TRANSFER,
DISTRIBUTION, OR OTHER DISPOSITION, OTHER THAN IN ACCORDANCE WITH
SECTION 2.5 OF THAT CERTAIN ASSET PURCHASE AGREEMENT DATED AS OF
NOVEMBER __, 1998, BY AND AMONG ISSUER, CLARK/BARDES, INC.,
WIEDEMANN & JOHNSON COMPANY, BRUCE HLAVACEK AND JENNIE HLAVACEK.
(b) Neither Bruce nor Jennie shall transfer any shares of the Holdings
Stock at any time if such transfer would constitute a violation of any federal
or state securities or "blue sky" laws, rules or regulations (collectively,
"Securities Laws"), or a breach of the conditions to any exemption from
registration of the Holdings Stock under any such Securities Laws, or a breach
of any undertaking or agreement of either Bruce or Jennie entered into with
Holdings pursuant to such Securities Laws or in connection with obtaining an
exemption thereunder.
(c) For purposes of this Agreement (and the restrictions set forth in
this Section 2.5), the term "Holdings Stock" shall mean and include (i) the
shares of Holdings issued, granted, conveyed and delivered to Bruce and Jennie
pursuant to Section 2.1 hereof, and (ii) any and all other additional shares of
capital stock of Holdings issued or delivered by Holdings with respect to the
shares of Holdings Stock described in clause (i) hereof, including without
limitation any shares of capital stock of Holdings issued or delivered with
respect to such shares as a result of any stock split, stock dividend, stock
distribution, recapitalization or similar transaction.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF
SELLER AND SHAREHOLDERS
As an inducement to Purchasers to enter into this Agreement, Seller and the
Shareholders hereby, jointly and severally, represent and warrant to Purchasers
as of the Effective Date and as of the Closing Date that:
3.1 Organization and Power. Seller is a corporation duly organized, validly
existing and in good standing under the laws of Texas. Seller is qualified to do
business as a foreign corporation and is in good standing in the jurisdictions
specified on the "Qualifications Schedule" attached hereto as Schedule 3.1,
which are all jurisdictions in which ownership of its properties or the conduct
of its business requires it to be so qualified, except where the failure to do
so would not have a Material Adverse Effect. For purposes of this Agreement,
"Material Adverse Effect", as it relates to Seller, means any material adverse
effect on (a) the financial condition, credit, business, prospects, properties
or operations of the Seller, or (b) the ability of the Seller to perform its
obligations under this Agreement. Seller has all requisite power and authority
and all material licenses, permits and other authorizations necessary to own and
operate its properties and to carry on its business as now conducted as they
relate to the Business. The copies of the certificate of incorporation and
by-laws of Seller which have been previously furnished to Purchasers reflect all
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amendments made thereto at any time prior to the date of this Agreement and are
correct and complete in all material respects.
3.2 Subsidiaries. Seller owns no stock, partnership interest, joint venture
interest or other security or interest in any other corporation, organization or
entity related to the Business which is not listed as an Excluded Asset.
3.3 Authorization; No Breach. The execution, delivery and performance of
this Agreement and the other agreements contemplated hereby and the transactions
contemplated hereby and thereby have been duly and validly authorized by Seller.
No other corporate act or proceeding on the part of Seller, its Board of
Directors or its shareholders is necessary to authorize the execution, delivery
or performance of this Agreement, any other agreement contemplated hereby or the
consummation of the transactions contemplated hereby or thereby. This Agreement
has been duly executed and delivered by Seller and the Shareholders and this
Agreement constitutes and the other agreements contemplated hereby upon
execution and delivery by Seller and the Shareholders shall each constitute, a
valid and binding obligation of Seller, enforceable in accordance with their
terms. Except as disclosed on Schedule 3.3, the execution, delivery and
performance of this Agreement and the other agreements contemplated hereby by
Seller and the Shareholders and the consummation of the transactions
contemplated hereby and thereby do not and shall not (a) conflict with or result
in any breach of any of the provisions of, (b) constitute a default under,
result in a violation of, or cause the acceleration of any obligation under, (c)
result in the creation of any lien, security interest, charge or encumbrance
upon any of the Purchased Assets under, or (d) require any authorization,
consent, approval, exemption or other action by or notice to any court or other
governmental body under the provisions of Seller's certificate of incorporation,
by-laws, any indenture, mortgage, lease, loan agreement or other agreement or
instrument to which Seller or the Shareholders are bound or affected.
3.4 Financial Statements. Seller has furnished CBI with copies of its (a)
audited balance sheet as of December 31, 1997 (the "Latest Balance Sheet") and
the related audited financial statements for the twelve-month period then ended,
(b) audited balance sheets as of December 3 1, 1996, December 31, 1995 and
December 31, 1994 and the related audited financial statements for the fiscal
years then ended, (c) unaudited financial statements as at and for the
nine-month period ended September 30, 1998, and (d) unaudited income statement
and balance sheet through the Closing Date. Each of the foregoing financial
statements has been based upon the information contained in Seller's books and
records (which are accurate and complete in all material respects) and fairly
presents the financial condition and results of operations of Seller as of the
times and for the periods referred to therein, and such financial statements
contain proper accruals and adequate reserves and have been prepared in
accordance with the income tax method of accounting, consistently applied
throughout the periods indicated, except as otherwise noted therein.
3.5 Absence of Undisclosed Liabilities. As of the Closing, Seller shall
have no liabilities or obligations whether accrued, absolute, contingent,
unliquidated or otherwise, whether due or to become due, arising out of or
related to transactions entered into at or prior to the Closing, or out of any
action or inaction by Seller or any employee, agent, licensee or contractor of
any of them at or prior to the Closing, or out of any state of facts existing at
or prior to the Closing, regardless of
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when any such liability or obligation is asserted, including, without
limitation, taxes with respect to or based upon transactions or events occurring
on or before the Closing, except (a) liabilities and obligations under
agreements, contracts, leases or commitments described on the Leases Schedule
(as defined in Section 3.8(b) hereof) and the Contracts Schedule and the
Customer Contracts Schedule (as such terms are defined in Section 3. 10 hereof)
or under agreements, leases, contracts and commitments which are not required
pursuant to this Agreement to be disclosed thereon (but not liabilities for
breaches thereof), (b) liabilities and obligations reflected on Schedule 1.1(a),
and (c) liabilities and obligations which have arisen after the Effective Date
in the ordinary course of business (none of which is a liability for breach of
contract, breach of warranty, tort, infringement, claim or lawsuit).
3.6 No Material Adverse Changes. Since the date of the Latest Balance
Sheet, there has been no material adverse change in the financial condition,
operating results, assets, operations, employee relations, customer relations or
business prospects of Seller.
3.7 Absence of Certain Developments. Except as set forth in the
"Developments Schedule" attached hereto as Schedule 3.7 or as otherwise
contemplated hereby, since the date of the Latest Balance Sheet, Seller has not:
(a) borrowed or agreed to borrow any amount or incurred or become
subject to any material liabilities, except current liabilities incurred in the
ordinary course of business and liabilities under contracts entered into in the
ordinary course of business;
(b) discharged or satisfied, or agreed to discharge or satisfy, any
material lien or encumbrance or paid any material liability, other than current
liabilities paid in the ordinary course of business;
(c) mortgaged, pledged or subjected to any lien, charge or any other
encumbrance, any portion of the Purchased Assets, except liens for current
property taxes not yet due and payable;
(d) sold, assigned or transferred, or agreed to do so, any of the
Purchased Assets, except in the ordinary course of business, or canceled without
fair consideration any material debts or claims owing to or held by it;
(e) sold, assigned, transferred, abandoned or permitted to lapse any
patents, trademarks, trade names, copyrights, trade secrets or other intangible
assets, or disclosed any material proprietary confidential information to any
person;
(f) made or granted, or agreed to make or grant, any bonus or any wage
or salary increase to any employee or group of employees or made or granted any
increase in any employee benefit plan or arrangement (except, in each case, in
accordance with past custom and practice), or amended or terminated, or agreed
to terminate or amend, any existing employee benefit plan or arrangement or
adopted any new employee benefit plan or arrangement; benefit plan or
arrangement;
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(g) made, or agreed to make, any capital expenditures or commitments
therefore that aggregate in excess of $1,000;
(h) made, or agreed to make, any loans or advances to, or guarantees
for the benefit of, any persons;
(i) suffered any extraordinary losses or waived any rights of material
value, whether or not in the ordinary course of business or consistent with past
practice;
(j) entered into, or agreed to enter into, any other material
transaction other than in the ordinary course of business;
(k) made, or agreed to make, any charitable contributions or pledges;
(1) failed to replenish the Seller's supplies in a normal and customary
manner consistent with its prior practice and prudent business practices
prevailing in the industry, or made any purchase commitment in excess of the
normal, ordinary and usual requirements of its business or at any price in
excess of the then current market price or upon terms and conditions more
onerous than those usual and customary in the industry, or made any change in
its selling, pricing, advertising or personnel practice inconsistent with its
prior practice and prudent business practices prevailing in the industry; or
(m) suffered any material damage, destruction or casualty loss to the
Purchased Assets, whether or not covered by insurance.
3.8 Title and Condition of Properties.
(a) The Seller owns no real estate.
(b) The lease described on the "Leases Schedule" attached hereto as
Schedule 3.8(b) (the "Lease") is in full force and effect, and Seller (as
indicated on such schedule) holds a valid and existing leasehold interest under
such lease for the term set forth on the Leases Schedule. The lease described on
the Leases Schedule constitutes the only lease under which Seller holds a
leasehold interest in real estate. Seller has delivered to CBI complete and
accurate copies of the lease described on the Leases Schedule, and such lease
has not been modified in any respect, except to the extent that such
modifications are disclosed by the copies delivered to CBI. Seller is not in
default under such lease, and no other party to such lease has the right to
terminate, accelerate performance under or otherwise modify such lease,
including upon the giving of notice or the passage of time. To the best of
Seller's knowledge, no third party to such lease is in default under such lease.
(c) The real estate demised by the lease described on the Leases
Schedule constitutes all of the real estate presently owned, used or occupied by
Seller in the conduct of the Business.
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(d) Seller owns good and marketable title, free and clear of all liens,
charges, security interests, encumbrances, encroachments and claims of others,
to all of the Purchased Assets, except for leased equipment, for liens of
current taxes not yet due and payable (which shall be prorated) and liens
disclosed on the Latest Balance Sheet ("Permitted Encumbrances"), and all of
such personal property is necessary or useful in the conduct of the Business as
presently conducted by Seller. At the Closing, Seller shall sell, assign,
transfer and convey to CBI by customary Bill of Sale good and marketable title
to all of the personal property included within the Purchased Assets, free and
clear of all liens, security interests, charges, encumbrances and claims of
others, other than Permitted Encumbrances.
(e) Seller's buildings, machinery, equipment and other tangible assets
are in good condition and repair in all material respects (other than normal
wear and tear), have been maintained in accordance with normal industry
standards and are usable in the ordinary course of business. Seller owns or
leases under valid leases all buildings, machinery, equipment and other tangible
assets necessary for the conduct of the Business as presently conducted.
(f) Since the commencement of Seller's tenancy under the Lease
Agreement, Seller has received no notice of any violation of any applicable
zoning, building, fire or other ordinance or other law, regulation or
requirement relating to the operation of the leased real property that is the
subject of the Lease Agreement and Seller has not within three years prior to
the date of this Agreement received any such notice with respect to owned or
leased personal property included in the Purchased Assets, including, without
limitation, applicable environmental protection and occupational health and
safety laws and regulations or any condemnation proceeding with respect to any
properties owned, used or leased by Seller.
(g) The Purchased Assets and the Excluded Assets, together with the
services and arrangements described on the Contracts Schedule, comprise all
assets and services required for the continued conduct of the Business by the
Purchasers as now being conducted. The Purchased Assets and the Excluded Assets,
taken as a whole, constitute all the properties and assets relating to or used
or held for use in connection with the Business during the past twelve months
(except supplies utilized, cash disposed of, accounts receivable collected,
prepaid expenses realized, Contracts fully performed, properties or assets
replaced by equivalent or superior properties or assets, in each case in the
ordinary course of business). Except for the Excluded Assets, there are no
assets or properties used in the operation of the Business and owned by any
person other than the Seller that are not included in the Purchased Assets. The
Purchased Assets are in all material respects adequate for the purposes for
which such assets are currently used or are held for use, and are in reasonably
good repair and operating condition (subject to normal wear and tear) and there
are no facts or conditions affecting the Purchased Assets which could,
individually or in the aggregate, interfere in any material respect with the
use, occupancy or operation thereof as currently used, occupied or operated, or
their adequacy for such use.
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3.9 Tax Matters.
(a) Seller has duly filed all federal, foreign, state and local tax
information and tax returns of any and every nature and description (the
"Returns") required to be filed by it (all such returns being accurate and
complete in all respects) and has duly paid or made provision for the payment of
all taxes and other governmental charges (including without limitation any
interest, penalty or additions to tax thereto) which have been incurred or are
shown to be due on said Returns or are claimed in writing to be due from Seller
or imposed on Seller or its properties, assets, income, franchises, leases,
licenses, sales or use, by any federal, state, local or foreign taxing
authorities (collectively, the "Taxes") on or prior to the date hereof, other
than Taxes which are being contested in good faith and by appropriate
proceedings and as to which Seller has set aside on its books adequate reserves
or which may be attributable to the transactions contemplated hereby. The
amounts recorded as reserves for Taxes on a gross or net basis on Schedule 3.9
are sufficient in the aggregate for payment by Seller of all unpaid Taxes
(including any interest or penalties thereon) for the period ended as of the
Effective Date or for any year or period prior thereto. Except as provided for
on Schedule 3.9, neither the IRS nor any state, local or foreign taxing
authority has ever examined any income tax return of the Seller, whether singly
or as a member of an affiliated group. The "Tax Matters Schedule" attached
hereto as Schedule 3.9 sets forth the date or dates since the date of Seller's
incorporation or organization through which any foreign, state, local or other
taxing authority has examined or is in the process of examining any foreign,
state, local or other returns of Seller. Except as set forth on the "Tax Matters
Schedule", (i) neither the IRS nor any foreign, state, local or other taxing
authority is in the process of examining any federal, foreign, state, local or
other tax return of Seller, (ii) there are no disputes pending, or claims
asserted, for Taxes upon Seller, (iii) Seller has not been required to give any
currently effective waivers extending the statutory period of limitation
applicable to any foreign, federal, state or local return or for any period or
agreed to an extension of time with respect to a Tax assessment or deficiency,
(iv) Seller has in effect no power of attorney or authorization to anyone to
represent it with respect to any Taxes, and (v) no claim has ever been made by
an authority in a jurisdiction where the Seller does not file Returns that
Seller is or may be subject to taxation by that jurisdiction. Seller has not
filed any consolidated federal income tax return with an "affiliated group"
(within the meaning of Section 1504 of the Code), where Seller was not the
common parent of the group. Seller is not nor has it been, a party to any tax
allocation agreement or arrangement pursuant to which it has any contingent or
outstanding liability to anyone. Seller has no liability for Taxes as a
transferee of, or successor to, any other person. Seller has not filed a consent
under Section 341(f) of the Code. Seller and the Shareholders have provided to
Purchaser or its representatives complete and correct copies of their respective
federal, state and local income tax returns filed on or prior to the date hereof
and all examination reports, if any, relating to the audit of such returns by
the IRS or other tax authority for each taxable year beginning on or after
January 1, 1992. Except as disclosed in Schedule 3.9, there exists no proposed
assessment against Seller or the Shareholders or notice, whether formal or
informal, of any deficiency or claim for additional Tax (including, without
limitation, interest, additions to tax or penalties).
(b) All monies required to be withheld from employees, independent
contractors, shareholders, or creditors of Seller for Taxes, including, but not
limited to, income taxes, back-up withholding taxes, social security and
unemployment insurance taxes or collected from customers
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or others as Taxes, including, but not limited to, sales, use or other taxes,
have been withheld or collected and paid, when due, to the appropriate
governmental authority, or if such payment is not yet due, an adequate reserve
has been established for such Taxes.
(c) Seller has not made any payments, is obligated to make any
payments, nor is a party to any agreement that could obligate it to make any
payments that will not be deductible under Code Section 280G. Seller has not
been a United States real property holding corporation within the meaning of
Code Section 897(c)(2) during the applicable period specified in Code Section
897(c)(1)(A)(ii). Seller has not acquired any United States real property
interest, as defined in Code Section 897(c), from a foreign person without
complying with the withholding requirements contained in Code Section 1445.
3.10 Contracts and Commitments.
(a) Except as set forth in Section 3.16 or in the "Contracts Schedule"
attached hereto as Schedule 3.10(a) or in the "Customer Contracts Schedule"
attached hereto as Schedule 3.10(d), Seller is not a party to any:
(i) bonus, pension, profit sharing, retirement or deferred
compensation plan or stock purchase, stock option, hospitalization
insurance or similar plan or practice, whether formal or informal, or
severance agreements or arrangements;
(ii) contract with any labor union or contract for the
employment of any officer, individual employee or other person on a
full-time, part-time or consulting basis;
(iii) mortgaging, pledging or otherwise placing a lien on any of
the Purchased Assets;
(iv) guarantee of any obligation for borrowed money or
otherwise, other than endorsements made for collection in the ordinary
course of business;
(v) agreement or commitment with respect to the lending or
investing of funds to or in other persons or entities;
(vi) license or royalty agreement related to the Business;
(vii) lease or agreement related to the Business under which it
is lessee of or holds or operates any personal property owned by any other
party;
(viii) lease or agreement related to the Business under which it
is lessor of or permits any third party to hold or operate any property,
real or personal, owned or controlled by it;
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(ix) contract or group of related contracts related to the
Business with the same party for the purchase or sale of products or
services other than the Customer Contracts (as defined in Section 3.10(d)
hereof);
(x) other contract related to the Business with any party
continuing over a period of more than six months from the date or dates
thereof, not terminable by it on thirty (30) days' or less notice without
penalties;
(xi) contract which prohibits it from freely engaging in
business anywhere in the world;
(xii) contract relating to the distribution of its products as it
relates to the Business; or
(xiii) other agreements related to the Business whether or not
entered into in the ordinary course of business.
(b) Except as specifically disclosed in the Contracts Schedule or the
Customer Contracts Schedule, (i) no contract or commitment related to the
Business has been breached in any respect by the Seller or to Seller's knowledge
no contract or commitment related to the Business has been breached in any
respect by the other party thereto or canceled by the other party, (ii) since
December 31, 1997, no supplier of the Business has notified Seller that it shall
stop or decrease in any material respect the rate of business done with Seller,
(iii) Seller has in all material respects performed all the obligations required
to be performed by it to the date of this Agreement and is not in receipt of any
claim of default under any material lease, contract, commitment or other
agreement related to the Business to which it is a party; (iv) no event has
occurred which with the passage of time or the giving of notice or both would
result in a breach or default under any lease, contract, instrument or other
agreement related to the Business to which Seller is a party and which is
related to the Business, except for any such event that would not have a
Material Adverse Effect; and (v) Seller is not a party to any contract which is
adverse to the Business's operations, financial condition, operating results or
business prospects.
(c) CBI has been supplied with a true and correct copy of all written
contracts which are referred to on the Contract Schedule and Customer Contracts
Schedule, together with all amendments, waivers or other changes thereto.
(d) Seller has no knowledge of any (i) pending or threatened
termination, cancellation, limitation, modification or change in any of Seller's
business relationship with any customer or group of customers related to the
Business or (ii) changes or pending changes in any business relationship or
other circumstance that could result in the loss of any customers related to the
Business after the date hereof. Each contract, agreement or lease with customers
of Seller relating to the Business ("Customer Contracts") are in one of the
forms attached to the "Customer Contract Schedule" attached hereto as Schedule
3.10(d), except for completion of blanks and have not been modified with respect
to the limitations on liability or service charge increase provisions, whether
in writing, orally, by course of dealings or otherwise, and Seller is not
providing or
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obligated to provide goods or services to others except pursuant to a written
contract in such form in each case. Except as indicated on the Customer Contract
Schedule, (A) each of the Customer Contracts is, valid, enforceable and in full
force and effect in accordance with the terms thereof, (B) there is no existing
default or event or condition which, with notice or lapse of time or both, would
constitute an event of default under any Customer Contract, (C) no Customer
Contract has been amended, modified, supplemented or otherwise altered orally,
in writing or by course of conduct, (D) no Customer Contract requires the
consent of the Customer or any other party to affect a valid assignment thereof
to CBI without causing a default or giving rise to a right of termination
thereunder and (E) to Seller's knowledge, each Customer Contract complies with
all applicable laws, rules and regulations.
3.11 Proprietary Rights. Set forth on the "Proprietary Rights Schedule"
attached hereto as Schedule 3.11 is a list and summary description of all
patents, patent applications, trademarks, service marks, trade names, corporate
names and copyrights owned by Seller which are related to the Business or used
by Seller in the conduct of the Business. Seller owns and possesses all right,
title and interest in and to the proprietary rights necessary to conduct the
Business as presently conducted by Seller. Seller has taken all necessary or
desirable action to protect the proprietary rights necessary or desirable to
conduct the Business as presently conducted by Seller. Seller has not received
any notices of infringement, misappropriation, invalidity or conflict from any
third party with respect to such proprietary rights. Seller has not infringed,
misappropriated or otherwise conflicted with any proprietary rights of any third
parties and, to the best of Seller's knowledge, Seller's proprietary rights have
not been infringed by any third parties.
3.12 Litigation; Proceedings. Except as disclosed on Schedule 3.12, there
are no actions, suits, proceedings, orders or investigations pending against or
affecting Seller or the Purchased Assets at law or in equity, or before or by
any federal, state, municipal or other governmental department, commission,
board, bureau, agency or instrumentality, domestic or foreign, and Seller has no
knowledge of any such threatened actions and there is no basis known to Seller
for any of the foregoing. No officer, director, employee or agent of Seller has
been or is authorized to make or receive, and Seller knows of no such person
making or receiving, any bribe, kickback or other illegal payment at any time.
3.13 Brokerage. There are no claims for brokerage commissions, finders fees
or similar compensation in connection with the transactions contemplated by this
Agreement based on any arrangement or agreement made by or on behalf of Seller.
3.14 Governmental Consent, etc.
(a) No permit, consent, approval or authorization of, or declaration
to or filing with, any governmental or regulatory authority is required in
connection with the execution, delivery or performance of this Agreement by
Seller, or the consummation by Seller of any of the transactions contemplated
hereby, except as disclosed on the "Consents Schedule" attached hereto as
Schedule 3.14.
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(b) The Consents Schedule attached hereto as Schedule 3.14 sets forth
all governmental approvals or consents required for the conduct of the Business
as presently conducted. All such governmental approvals and consents have been
duly obtained and are in full force and effect, and Seller is in compliance with
each of such governmental approvals and consents held by it with respect to the
Purchased Assets and the Business.
3.15 Employees. To Seller's knowledge, no key employee, nor group of
Seller's employees related to the Business, has any plans to terminate
employment with Seller other than to become employed by CBI on the Effective
Date. Seller has complied in all material respects with all applicable laws
relating to the employment of labor and independent contractors related to the
Business, including provisions thereof relating to wages, hours, equal
opportunity, immigration, collective bargaining, disabilities, family leave and
the payment of social security and other taxes. Seller has no existing
relationships with any union or employee representative or any labor relations
problems, and to Seller's knowledge, there has been no union organization
efforts with respect to the Business within the last five years. Except as to
the services provided by Bruce pursuant to the Sales Office Agreement (as
hereinafter defined), Seller has no reason to believe that the services of any
of the present employees of Seller related to the Business will not be available
for continued conduct of the Business after the Closing on substantially the
same terms as now conducted.
3.16 Employee Benefit Plans.
(a) The "Employee Benefits Schedule" attached hereto as Schedule 3.16,
contains a list and a true and correct copy, including all amendments thereto,
of any employee benefit plan, within the meaning of Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), which Seller
and/or any corporation, partnership or other trade or business which is or would
be a member of a controlled group of corporations, group of trades or business
under common control, or an affiliated service group including Seller, under the
provisions of Code Section 414(b),(c),(m) or (o) (each an "ERISA Affiliate")
maintains, to which Seller or any ERISA Affiliate contributes, or is obligated
to contribute, or under which any employee or former employee, officer or former
officer, director, or former director, shareholders or former shareholder of
Seller or any ERISA Affiliate (collectively, "Participants"), or any beneficiary
of any Participant, is covered or has benefit rights and pursuant to which any
liability of Seller or any ERISA Affiliate exists or is reasonably likely to
occur, and each other arrangement, program or plan pursuant to which any benefit
is or shall be provided to any Participant or any Participant's beneficiary,
whether formal or informal, including, without limitation, those providing any
form of medical, health or dental insurance, life, disability and accidental
death and dismemberment insurance, severance pay or benefits continuation,
nonqualified deferred compensation, relocation assistance, vacation pay, tuition
aid, apprenticeship benefits or matching gifts for charitable contributions to
educational or cultural institutions (collectively, the "Benefit Plans"). Except
as set forth on the "Employee Benefits Schedule", neither the Seller nor any
ERISA Affiliate maintains or has entered into any Benefit Plan or other
document, plan or agreement which contains any change in control provisions
which would cause an increase or acceleration of benefits or benefit
entitlements to Participants or their beneficiaries, or other provisions, which
would cause an increase in liability of Seller or to Purchasers as a result of
the transactions contemplated by this Agreement or any related action
thereafter. Each of such plans that is an employee pension benefit plan it plan
within the meaning of
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Section 3(2) of ERISA that is intended to be a qualified plan under Section 401
(a) of the Code has been amended to comply in all material respects with current
law as required and each such plan has obtained a favorable determination letter
with respect to such amendment. Neither the Seller nor Shareholders are aware of
any facts or circumstances that might jeopardize the qualified status of any
such Benefit Plan.
(b) Except as set forth in the "Employee Benefits Schedule", all
accrued contributions and other payments to be made by Seller or any ERISA
Affiliate to any Benefit Plan through the Effective Date have been made or
reserves adequate for such purposes have been set aside therefor as of the
Effective Date. Neither Seller nor any ERISA Affiliate is in default in
performing any of its material contractual obligations under any of the Benefit
Plans or any related trust agreement or insurance contract, and there are no
outstanding liabilities of any Benefit Plan other than liabilities for benefits
to be paid to Participants and beneficiaries in such Benefit Plan in the
ordinary course of business.
(c) There is no pending litigation or, to the best knowledge of
Seller, overtly threatened litigation or pending claim (other than benefit
claims made in the ordinary course) by or on behalf of or against any of the
Benefit Plans (or with respect to the administration of any of the Benefit
Plans) now or heretofore maintained by Seller or any ERISA Affiliate which
allege violations of applicable state or federal law.
(d) Each Benefit Plan is and has been in compliance in all material
respects with, and each such Plan is and has been operated in accordance in all
material respects with the applicable laws, rules and regulations governing such
Plan, including, without limitation, the rules and regulations promulgated by
the Department of Labor, the Pension Benefit Guaranty Corporation ("PBGC") and
the IRS under ERISA, the Code or any other applicable law.
(e) None of the Benefit Plans is or ever has been subject to Title IV
of ERISA, and neither Seller nor any ERISA Affiliate is or has been required to
contribute to an employee benefit plan that is a "multiemployer plan" within the
meaning of Section 3(37) of ERISA nor has been so required during the five-year
period ending on the Closing Date.
(f) All reporting and disclosure requirements of ERISA and the Code
applicable to the Benefit Plans have been satisfied in all material respects.
(g) Neither Seller nor any ERISA Affiliate has any liability on
account of any accumulated funding deficiency (as defined in Section 412 of the
Code) or on account of any failure to make contributions to or pay benefits
under any Benefit Plan, nor is Seller aware of any claim pending or threatened
to be brought by any party regarding such matters. No prohibited transaction has
occurred with respect to any Benefit Plan that would result, directly or
indirectly, in the imposition of any excise tax under Section 4975 of the Code.
(h) None of the Benefit Plans provides for (or has ever provided for)
medical or health care or benefits for any former employee of Seller or any
ERISA Affiliate, except to the extent required by Section 4980B of the Code or
Part 6 of Title I of ERISA.
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(i) Neither Seller nor any ERISA Affiliate is in possession of any
facts which would indicate that any insurance company which has issued an
insurance policy or policies under any of the Benefit Plans is in danger of
becoming insolvent, within the meaning of applicable state law.
(j) The transactions contemplated by this Agreement will not entitle
any Participant or any Participant's beneficiary in any Benefit Plan to any
severance benefit under the terms of any Benefit Plan or any personnel or
employment policy of Seller or any ERISA Affiliate.
3.17 Insurance. The "Insurance Schedule" attached hereto as Schedule 3.17
lists and briefly describes each insurance policy maintained by Seller with
respect to the Purchased Assets. The Seller has delivered to the Purchaser
complete and correct copies of all such policies together with all riders and
amendments thereto. All of such insurance policies are in full force and effect,
and Seller is not and never has been in default with respect to its obligations
under any of such insurance policies. During the three-year period ending on the
date hereof, no Seller has ever been refused any insurance coverage for which it
has applied or had any insurance policy canceled. The Seller shall provide tail
coverage on its errors and omissions insurance policies for a period of three
(3) years from the date hereof to cover any claims following the Closing Date.
3.18 Affiliated Transactions. Except as set forth on the "Affiliated
Transaction Schedule" attached hereto as Schedule 3.18, no officer, director,
shareholder or affiliate of Seller or any person related by blood or marriage to
any such person or any entity in which any such person owns any beneficial
interest is a party to any agreement, contract, commitment or transaction or has
any interest in any property that in each case, is included in the Purchased
Assets.
3.19 Compliance with Laws, Permits, Certain Operations.
(a) Seller and its officers, directors, agents and employees have
complied in all material respects with all applicable laws and regulations of
foreign, federal, state and local governments and all agencies thereof which
affect the Business or the Purchased Assets or to which Seller may otherwise be
subject, and, to Seller's knowledge, no claims have been filed against Seller
alleging a violation of any such law or regulation, except as set forth on the
"Compliance Schedule" attached hereto as Schedule 3.19(a). In particular, but
without limiting the generality of the foregoing, Seller has complied in all
material respects with, and has not received a notice or charge asserting any
violation of, the Immigration Reform and Control Act of 1986, the Occupational
Safety and Health Act of 1970, the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, the Resource Conservation and Recovery
Act of 1976, the Toxic Substances Control Act of 1976, the Americans With
Disabilities Act, or any other state or federal act (including rules and
regulations thereunder) regulating or otherwise affecting the employment of
aliens, employee health and safety, the environment, zoning, building, fire or
other ordinances or any other aspect of the Business.
(b) Seller holds all of the permits, licenses, certificates and other
authorizations of foreign, federal, state and local governmental agencies
required for the conduct of the Business
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all of which are set forth in the "Permits Schedule" attached hereto as Schedule
3.12(b). Seller has not received any notice (and Seller has no reason to
believe) that revocation is being considered with respect to any of such
licenses, permits, certificates or authorizations, or that Seller is in
violation of any such license, permit, certificate or authorization.
3.20 Environmental Health and Safety.
(a) Seller has complied in all material respects with, and is
currently in compliance with all Environmental, Health and Safety Laws, and, to
Seller's knowledge, no action, suit, proceeding, hearing, investigation, charge,
complaint, claim, demand or notice has been threatened, filed or commenced
against it alleging any failure so to comply, alleging any liability under any
Environmental, Health and Safety Laws or requesting any investigation related
thereto. No condition exists or event has occurred which, with or without notice
or the passage of time, would constitute a violation of or give rise to a lien
under any Environmental, Health and Safety Laws, except for violations or liens
that would not have a Material Adverse Effect. Without limiting the generality
of the preceding sentences, Seller has obtained and been in compliance in all
material respects, and is currently in compliance in all material respects, with
all of the terms and conditions of all permits, licenses and other limitations,
restrictions, conditions, standards, prohibitions, requirements, obligations,
schedules and timetables which are contained in, all Environmental Health and
Safety Laws. For purposes hereof, "Environmental, Health and Safety Laws" means
the Comprehensive Environmental Response, Compensation and Liability Act of
1980, the Resource Conservation and Recovery Act of 1976 and the Occupational
Safety and Health Act of 1970, each as amended, together with all other laws
(including statutes, rules, regulations, codes, plans, injunctions, judgments,
orders, decrees, rulings, and charges thereunder) of federal, state, local, and
foreign governments (and all agencies thereof) relating to fines, injunctions,
penalties, damages, liability, contribution, cost recovery, compensation losses
or injuries concerning pollution or protection of the environment, natural
resources, public health and safety, or employee health and safety, or the
protection of human, plant or animal welfare or health, including laws relating
to use, emissions, discharges, releases, or threatened releases of Hazardous
Materials, Extremely Hazardous Substances, pollutants, contaminants, or
chemical, industrial, hazardous, or toxic materials or wastes into or onto
ambient air, surface water, ground water, or lands or otherwise relating to the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport, or handling of Hazardous Materials, Extremely Hazardous Substances,
pollutants, contaminants, or chemical, industrial, hazardous, or toxic materials
or wastes. For purposes hereof, "Extremely Hazardous Substance" means such term
as set forth in Section 302 of the Emergency Planning and Community
Right-to-Know Act of 1986, as amended. For purposes hereof, "Hazardous
Materials" means any dangerous, toxic or hazardous pollutant, contaminant,
chemical, waste, material or substance as defined in, regulated by or governed
by any Environmental, Health, and Safety Laws, federal, state, local or foreign
law, statute, code, ordinance, regulation, rule or other requirement relating to
such substance or otherwise relating to the environment or human health or
safety, including without limitation any waste, material, substance, pollutant
or contaminant that might cause any injury to human health or safety or to the
environment or might subject the Seller to any imposition of penalties, fines,
orders,
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decrees, licenses, permits, judgments, costs or liability under any
Environmental, Health or Safety Laws.
(b) To Seller's knowledge, all properties and equipment used in the
Business of the Seller have been free of asbestos, PCB's, methylene chloride,
trichlorethylene, 1, 2 - transdichloroethylene, dioxins, dibenzofurans and other
hazardous substances.
3.21 Product and Warrants Claims, Warranties. Except as disclosed in the
"Claims Schedule" attached hereto as Schedule 3.2 1, Seller has no knowledge of
and has not received during the past five (5) years any claim or notice with
respect to any occurrences arising out of the use of, or related to, the
products designed, sold, implemented, monitored or serviced by or on behalf of
Seller related to the Business, which has resulted in any claim or notice that
any such products do not conform to any agreement, representation or warranty
made by Seller (or implied by law) with respect to such products. To Seller's
knowledge, Seller is covered against all damages, liability and expenses for any
claims based upon products designed, sold, implemented, monitored or serviced by
or on behalf of Seller (including, but not limited to, costs of investigation
and attorneys' fees and expenses) under policies of insurance described on the
Insurance Schedule, except as to claims for breach of any agreement,
representation or warranty made with respect to such products against which
Seller has established good and sufficient reserves therefor on their books and
records and except where such claims would not have a Material Adverse Effect.
3.22 Disclosure. No representation or warranty of Seller or the
Shareholders contained in this Agreement or any of the schedules, attachments or
exhibits hereto furnished by Seller contain any untrue statement of a material
fact or omit a material fact necessary to make the statements contained herein
or therein, in light of the circumstances in which they were made, not
misleading. There is no material fact which has not been disclosed in writing to
Purchaser of which the Seller or any officer, director or key employee of Seller
is aware and which materially adversely affects or could reasonably be
anticipated to affect materially adversely the Business or the Purchased Assets.
3.23 Closing Date. All of the representations and warranties of Seller and
the Shareholders in this Article 3 and elsewhere in this Agreement and all
information delivered by Seller in any schedule, attachment or exhibit hereto or
in any certificate delivered by Seller to Purchaser are true and correct in all
respects on the date of this Agreement and shall be true and correct in all
respects on the Closing Date.
3.24 Name Change. Seller agrees to change its name from "Wiedemann &
Johnson Company" to a different corporate name within sixty (60) days of the
Closing Date which is not similar to, or could not be confused with, the name
"Wiedemann & Johnson Company."
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ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF PURCHASERS
Purchasers hereby represent and warrant, jointly and severally, to Seller
as of the date hereof and as of the Closing Date that:
4.1 Corporate Organization and Power. Each of CBI and Holdings is a
corporation duly organized, validly existing and in good standing under the laws
of the State of its incorporation and any state in which it conducts business,
except where the failure to do so would not have a Material Adverse Effect on
either CBI or Holdings. For purposes of this Agreement, "Material Adverse
Effect", as it relates to Purchasers, means any material adverse effect on (a)
the financial condition, credit, business, prospects, properties or operations
of the Purchasers or (b) the ability of the Purchasers to perform their
obligations under this Agreement. Each of CBI and Holdings has all requisite
power and authority and all material licenses, permits and other authorizations
necessary to own and operate its properties and to carry on its business as now
conducted as they relate to the business of Purchasers. The copies of the
certificate of incorporation and by-laws of each Purchaser which have been
previously furnished to Seller reflect all amendments made thereto at any time
prior to the date of this Agreement and are correct and complete in all material
respects.
4.2 Authorization. The execution, delivery and performance by each
Purchaser of this Agreement and the other agreements contemplated hereby and the
consummation of the transactions contemplated hereby and thereby have been duly
and validly authorized by all requisite corporate action, and no other corporate
proceedings on the part of either Purchaser are necessary to authorize the
execution, delivery or performance of this Agreement or the other agreements
contemplated hereby. This Agreement constitutes and, upon execution and delivery
by each Purchaser, the other agreements contemplated hereby shall each
constitute a valid and binding obligation of each Purchaser enforceable against
such Purchaser in accordance with their respective terms.
4.3 No Violation. Neither Purchaser is subject to or obligated under its
respective articles of incorporation, any applicable law, rule or regulation of
any governmental authority, or any agreement or instrument, or any license,
franchise or permit, or subject to any order, writ, injunction or decree which
would materially, adversely affect its ability to perform this Agreement or the
other agreements contemplated hereby.
4.4 Litigation. There are no actions, suits, proceedings, orders or
investigations pending or, to the best of each Purchaser's knowledge, threatened
against or affecting such Purchaser, at law or in equity, or before or by any
federal, state, municipal or other governmental department, commission, board,
bureau, agency or instrumentality, domestic or foreign, which would materially
adversely affect such Purchaser's performance under this Agreement or the
consummation of the transactions contemplated hereby.
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4.5 Closing Date. All of the representations and warranties of each
Purchaser contained in this Article 4 and elsewhere in this Agreement and all
information delivered by Purchasers in any schedule, attachment or exhibit
hereto or in any certificate delivered by Purchasers to Seller is true and
correct in all respects as of the date of this Agreement and shall be true and
correct in all respects as of the Closing Date.
4.6 Brokerage. There are no claims for brokerage commissions, finders fees
or similar compensation in connection with the transactions contemplated by this
Agreement based on any arrangement or agreement made by or on behalf of
Purchasers.
4.7 Capitalization. The authorized capital stock of Holdings consists of
20,000,000 shares of common stock. As of the date hereof, not including the
Common Stock Consideration, there were 8,059,677 shares of common stock of
Holdings issued and outstanding. The shares of Common Stock Consideration are
duly authorized, have been validly issued, are fully paid and nonassessable and
have not been issued in violation of, and are not subject to, any preemptive
rights. Upon consummation of the transactions contemplated hereby, the
recipients of the Common Stock Consideration will acquire title to the Common
Stock Consideration, free and clear of all liens, pledges and encumbrances.
4.8 Governmental Consent, etc. No permit, consent, approval or
authorization of, or declaration to or filing with, any governmental or
regulatory authority is required in connection with the execution, delivery or
performance of this Agreement by Holdings or CBI, or the consummation by
Holdings or CBI of any of the transactions contemplated hereby.
4.9 Disclosure. No representation or warranty of Holdings or CBI contained
in this Agreement (including the schedules or attachments furnished by Holdings
or CBI) contains any untrue statement of a material fact or omits a material
fact necessary to make the statements contained herein or therein, in light of
the circumstances in which they were made, not misleading. There is no material
fact which has not been disclosed in writing to Seller of which Holdings or CBI
or any officer, director or key employee of Holdings or CBI is aware and which
materially adversely affects, or could reasonably be anticipated to materially
adverse affect, Holdings or CBI.
ARTICLE 5
CONDITIONS TO PURCHASERS' OBLIGATION TO CLOSE
5.1 Conditions to Purchasers' Obligation. The obligation of Purchasers to
consummate the transactions contemplated by this Agreement is subject to the
satisfaction of the following conditions on or before the Closing Date:
(a) the representations and warranties set forth in Article 3 hereof
shall be true and correct in all material respects at and as of the Closing as
though then made and as though the Closing Date was substituted for the date of
this Agreement;
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(b) Seller shall have performed in all material respects all of the
covenants and agreements required to be performed by it under this Agreement
prior to the Closing;
(c) there shall have been no material adverse change in the operations,
financial condition, operating results, assets or business prospects of the
Business, and there shall have been no material casualty loss or damage to the
Purchased Assets, taken as a whole, whether or not covered by insurance;
(d) all consents by third parties that are required for the transfer of
the Purchased Assets and the Business to Purchasers as contemplated hereby, that
are required for the consummation of the transactions contemplated hereby or
that are required to prevent a breach of, or a default under or a termination or
modification of any instrument, contract, license, lease or other agreement to
which Seller is a party or to which any of the Purchased Assets are subject, and
releases of all liens, charges, security interests, encumbrances and claims of
others on or with respect to the Purchased Assets shall have been obtained on
terms and conditions satisfactory to Purchasers in their sole discretion;
(e) no action or proceeding before any court or government body shall
be pending or threatened which, in the judgment of Purchasers, made in good
faith and upon the advice of counsel, makes it inadvisable or undesirable to
consummate the transactions contemplated hereby by reason of the probability
that the action or proceeding shall result in a judgment, decree or order which
would prevent the carrying out of this Agreement or any of the transactions
contemplated hereby, declare unlawful the transactions contemplated by this
Agreement, cause such transactions to be rescinded or affect the value or use of
the Purchased Assets or Business;
(f) Purchasers shall have received from Seller's counsel, Liddell,
Sapp, Zivley, Hill & LaBoon, LLP, an opinion with respect to the matters set
forth in Exhibit B attached hereto, addressed to Purchasers and dated the
Closing Date, in form and substance reasonably satisfactory to Purchaser;
(g) not less than twenty (20) business days prior to the Closing Date,
Purchasers shall have obtained UCC search reports ("UCC Searches") of Seller
disclosing no liens or encumbrances against the Purchased Assets, other than the
Permitted Encumbrances. If the UCC Searches disclose any title encumbrances,
defects, liens, encumbrances or matters other than Permitted Encumbrances,
Seller shall have caused the same to be removed;
(h) all proceedings to be taken by Seller in connection with the
consummation of the Closing and the other transactions contemplated hereby and
all certificates, opinions, instruments and other documents required to effect
the transactions contemplated hereby reasonably requested by Purchasers shall be
reasonably satisfactory in form and substance to Purchasers and its counsel;
(i) each Purchaser's Board of Directors shall have approved the
transaction contemplated hereby;
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(j) CBI and Bruce shall each have entered into that certain Non-Compete
Agreement in the form set forth in Exhibit C hereto (the "Non-Compete
Agreement");
(k) CBI and Bruce shall have entered into that certain Sales Office
Agreement in a form acceptable to Bruce and the Purchaser (the "Sales Office
Agreement"); and
(1) the Shareholders shall have entered into that certain Investment
Letter pursuant to which it shall make customary investment representations to
Holdings in the form set forth in Exhibit D (the "Investment Letter").
Any conditions specified in this Section 5.1 may be waived by Purchasers;
provided that no such waiver shall be effective unless it is set forth in a
writing executed by Purchasers, except as otherwise provided in Section 9.3.
ARTICLE 6
CONDITIONS TO SELLER'S OBLIGATION TO CLOSE
6.1 Conditions to the Seller's Obligations. The obligation of Seller to
consummate the transactions contemplated by this Agreement are subject to the
satisfaction of the following conditions on or before the Closing Date:
(a) the representations and warranties set forth in Article 4 hereof
shall be true and correct in all material respects at and as of the Closing as
though then made and as though the Closing Date was substituted for the date of
this Agreement throughout such representations and warranties;
(b) each Purchaser shall have performed in all material respects all
the covenants and agreements required to be performed by it under this Agreement
prior to the Closing;
(c) Seller shall have received from Purchasers' counsel, Vedder, Price,
Kaufman & Kammholz, an opinion with respect to the matters set forth in Exhibit
E attached hereto, addressed to Seller and dated the Closing Date, in form and
substance reasonably satisfactory to Seller;
(d) all proceedings to be taken by Purchasers in connection with the
consummation of the Closing and the other transactions contemplated hereby and
all certificates, opinions, instruments and other documents required to effect
the transactions contemplated hereby reasonably requested by Seller shall be
reasonably satisfactory in form and substance to Seller and its counsel; and
(e) Purchaser and Bruce shall each have entered into the Sales Office
Agreement.
Any condition specified in this Section 6.1 may be waived by Seller; provided
that no such waiver shall be effective against Seller unless it is set forth in
a writing executed by Seller, except as otherwise provided in Section 9.3.
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ARTICLE 7
CLOSING TRANSACTIONS
7.1 The Closing. Subject to the conditions contained in this Agreement, the
closing of the transactions contemplated by this Agreement (the "Closing") shall
take place at the offices of Liddell, Sapp, Zivley, Hill & LaBoon, LLP at 10:00
a.m. local time on November 16, 1998, or at such other place or on such other
date as may be mutually agreeable to the parties. The date and time of the
Closing are referred to herein as the "Closing Date."
7.2 Action to Be Taken at the Closing. The sale, conveyance, assignment and
delivery of the Purchased Assets and the payment of the Purchase Price pursuant
to the terms of this Agreement shall take place at the Closing, and,
simultaneously, the other transactions contemplated by this Agreement shall take
place by the delivery of all of the closing documents set forth in Section 7.3.
7.3 Closing Documents.
(a) Seller shall deliver or cause to be delivered to Purchasers at the
Closing the following documents, duly executed by Seller where necessary to make
them effective:
(i) an officer's certificate in the form set forth in Exhibit F
attached hereto, stating that the preconditions specified in Section 5.1(a)
through (n) have been satisfied;
(ii) copies of all necessary third party and governmental
consents, approvals, releases and filings required in order to effect the
transactions contemplated by this Agreement;
(iii) such stamped recordable warranty deeds, instruments of sale,
transfer, assignment, conveyance and delivery (including all vehicle
titles), as are required in order to transfer to Purchasers good and
marketable title to the Purchased Assets, free and clear of all liens,
charges, security interests and other encumbrances, except for Permitted
Encumbrances;
(iv) such estoppel certificates and assignment of Leases as
Purchasers may reasonably request;
(v) certified copies of the resolutions duly adopted by the
Board of Directors and Shareholders of Seller authorizing the execution,
delivery and performance of this Agreement and each of the other agreements
contemplated hereby, and the consummation of all other transactions
contemplated by this Agreement;
(vi) all of Seller's contracts and commitments, files, books,
records and other data relating to the Business and the Purchased Assets;
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(vii) copies of good standing certificates in all jurisdictions
where the Seller is qualified to do business in which ownership of the
Purchased Assets or the conduct of the Business requires Seller to be so
qualified;
(viii) a certificate of the Secretary of Seller, certifying as to
the correctness and completeness of the Articles of Incorporation and
Bylaws of Seller, as appropriate, and all amendments thereto;
(ix) that certain Assignment of Lease regarding the Lease
Agreement between the Seller and the landlord (the "Lease Assignment");
(x) the Non-Compete Agreement;
(xi) the Sales Office Agreement;
(xii) the Investment Letter;
(xiii) an income statement for the period from January 1, 1998
through the Closing Date; and
(xiv) such other documents or instruments as Purchasers may
reasonably request to effect the transactions contemplated hereby.
All of the foregoing documents in this Section 7.3 (a) shall be
reasonably satisfactory in form and substance to Purchasers and shall be dated
as of the Closing Date.
(b) Purchasers shall deliver or cause to be delivered to Seller and the
Shareholders at the Closing the following items, duly executed by Purchasers
where necessary to make them effective:
(i) the amount of the Purchase Price payable at Closing as
provided in Section 2.1;
(ii) the Common Stock Consideration to the Shareholders;
(iii) an officer's certificate in the form set forth as Exhibit G
attached hereto, stating that the preconditions specified in Section 6.1
(a) through (e) hereof have been satisfied;
(iv) copies of all necessary third party and governmental
consents, approvals, releases and filings required in order for Purchasers
to effect the transactions contemplated by this Agreement;
(v) the Lease Assignment;
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(vi) the Non-Compete Agreement;
(vii) the Sales Office Agreement; and
(viii) evidence satisfactory to Seller of approval of the listing
of the Common Stock by the NASDAQ National Market and consent of
underwriters of Holdings; and
(ix) such other documents or instruments as Seller reasonably may
request to effect the transactions contemplated hereby.
All of the foregoing documents in this Section 7.3(b) shall be
reasonably satisfactory in form and substance to Seller and shall be dated as of
the Closing Date.
7.4 Nonassignable Contracts. To the extent that the assignment hereunder by
Seller to Purchasers of the Contracts is not permitted or is not permitted
without the consent of any other party to the Contract, this Agreement shall not
be deemed to constitute an assignment of any such Contract if such consent is
not given or if such assignment otherwise would constitute a breach of, or cause
a loss of contractual benefits under, any such Contract, and Purchasers shall
assume no obligations or liabilities thereunder. Seller shall advise Purchasers
promptly in writing with respect to any Contract which it knows, should know or
has reason to know that it will not receive any required consent. Without in any
way limiting Seller's obligation to obtain all consents necessary for the sale,
transfer, assignment and delivery of the Contracts and the Purchased Assets to
Purchasers hereunder, if any such consent is not obtained or if such assignment
is not permitted irrespective of consent and the Closing hereunder is
consummated, Seller shall cooperate with Purchasers in any reasonable
arrangement designed by Purchasers to provide Purchasers with the rights and
benefits, subject to the obligations, under the Contract, including enforcement
for the benefit of Purchasers of any and all rights of Seller against any other
person arising out of breach or cancellation by such other person and, if
requested by Purchasers, Seller shall act as an agent on behalf of Purchasers or
as Purchasers shall otherwise reasonably require, in each case at Seller's cost.
Seller agrees to continue its existence for at least three (3) years from the
Closing Date.
ARTICLE 8
INDEMNIFICATION
8.1 Indemnification by Seller and Shareholders. Seller and Shareholders,
jointly and severally, agree to and shall indemnify in full Purchasers and their
officers, directors, employees, agents, shareholders and partners (collectively,
the "Purchaser Indemnified Parties") and defend and hold them harmless against
any loss, liability, deficiency, damage, expense or cost (including reasonable
legal expenses), that Purchaser Indemnified Parties may suffer, sustain or
become subject to, as a result of (a) any misrepresentation in any of the
representations or breach of any of the warranties of Seller or the Shareholders
contained in this Agreement or in any exhibits, schedules, certificates or other
agreements or documents delivered or to be delivered pursuant to the terms of
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this Agreement or otherwise incorporated in this Agreement (collectively, the
"Related Documents"), (b) any breach of, or failure to perform, any agreement or
covenant of Seller or the Shareholders contained in this Agreement or any of the
Related Documents, or (c) any matters disclosed on any schedule hereto
(collectively, "Purchaser Losses").
8.2 Indemnification by Purchasers. Purchasers, jointly and severally, agree
to indemnify in full Seller and its officers, directors, employees, agents,
shareholders and partners (collectively, the "Seller Indemnified Parties") and
hold them harmless against any loss, liability, deficiency, damage, expense or
cost (including reasonable legal expenses), which the Seller Indemnified Parties
may suffer, sustain or become subject to as a result of (i) any
misrepresentation in any of the representations or breaches of any of the
warranties of Purchasers contained in this Agreement or in any of the Related
Documents or (ii) any breach of, or failure to perform, any agreement or
covenant of Purchasers contained in this Agreement or any of the Related
Documents (collectively, "Seller Losses") (Purchaser Losses and Seller Losses
shall collectively be referred to as the "Losses").
8.3 Method of Asserting Claims. As used herein, an "Indemnified Party"
shall refer to a "Purchaser Indemnified Party" or "Seller Indemnified Party," as
applicable, the "Notifying Party" shall refer to the party hereto whose
Indemnified Parties are entitled to indemnification hereunder, and the
"Indemnifying Party" shall refer to the party hereto obligated to indemnify such
Notifying Party's Indemnified Parties.
(a) In the event that any of the Indemnified Parties is made a
defendant in or party to any action or proceeding, judicial or administrative,
instituted by any third party for the liability or the costs or expenses of
which are Seller Losses or Purchaser Losses, as the case may be (any such third
party action or proceeding being referred to as a "Claim"), the Notifying Party
shall give the Indemnifying Party prompt notice thereof. The failure to give
such notice shall not affect any Indemnified Party's ability to seek
reimbursement unless such failure has materially and adversely affected the
Indemnifying Party's ability to defend successfully a Claim. The Indemnifying
Party shall be entitled to contest and defend such Claim; provided, that the
Indemnifying Party (i) has a reasonable basis for concluding that such defense
may be successful and (ii) diligently contests and defends such Claim. Notice of
the intention so to contest and defend shall be given by the Indemnifying Party
to the Notifying Party within twenty (20) business days after the Notifying
Party's notice of such Claim (but, in all events, at least five (5) business
days prior to the date that an answer to such Claim is due to be filed). Such
contest and defense shall be conducted by reputable attorneys employed by the
Indemnifying Party. The Notifying Party shall be entitled at any time, at its
own cost and expense (which expense shall not constitute a Loss unless the
Notifying Party reasonably determines that the Indemnifying Party is not
adequately representing or, because of a conflict of interest, may not
adequately represent, any interests of the Indemnified Parties), to participate
in such contest and defense and to be represented by attorneys of its or their
own choosing. If the Notifying Party elects to participate in such defense, the
Notifying Party shall cooperate with the Indemnifying Party in the conduct of
such defense. Neither the Notifying Party nor the Indemnifying Party may
concede, settle or compromise any Claim without the consent of the other party,
which consent shall not be unreasonably withheld or delayed. Notwithstanding the
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foregoing, in the event the Indemnifying Party fails or is not entitled to
contest and defend a claim, the Notifying Party shall be entitled to contest,
defend and settle such Claim.
(b) In the event any Indemnified Party should have a claim against any
Indemnifying Party that does not involve a Claim, the Notifying Party shall
deliver a notice of such claim with reasonable promptness to the Indemnifying
Party. If the Indemnifying Party notifies the Notifying Party that it does not
dispute the claim described in such notice or fails to notify the Notifying
Party within thirty (30) days after delivery of such notice by the Notifying
Party whether the Indemnifying Party disputes the claim described in such
notice, the Loss in the amount specified in the Notifying Party's notice shall
be conclusively deemed a liability of the Indemnifying Party and the
Indemnifying Party shall pay the amount of such Loss to the Indemnified Party on
demand. If the Indemnifying Party has timely disputed its liability with respect
to such claim, a representative of each of the Indemnifying Party and the
Notifying Party (or their respective designees) shall proceed in good faith to
negotiate a resolution of such dispute, and if not resolved through the
negotiations of such representatives or designees within sixty (60) days after
the delivery of the Notifying Party's notice of such claim, such dispute (except
for any such dispute which gives rise or could give rise to equitable relief
under this Agreement) shall be resolved fully and finally in Dallas, Texas by an
arbitrator selected pursuant to, and an arbitration governed by, the Commercial
Arbitration Rules of the American Arbitration Association. The arbitrator shall
resolve the dispute within thirty (30) days after selection and judgment upon
the award rendered by such arbitrator may be entered in any court of competent
jurisdiction.
8.4 Survival; Limitations on Liability.
(a) Subject to the provisions of Section 8.4(b) and Section 10.1
hereof, the covenants, agreements, representations, and warranties contained in
or made pursuant to this Agreement shall survive the Closing.
(b) The liabilities and obligations of the parties (and the
Indemnifying Parties) under this Agreement shall be subject to the limitation
that no Indemnifying Parties shall be responsible for any Losses until the
cumulative aggregate amount thereof shall exceed Ten Thousand Dollars ($10,000.
00) (the "Minimum Amount") in which case such Indemnifying Parties shall then be
liable for all Losses; provided, however, that any provision of this Agreement
to the contrary notwithstanding, the dollar limitations set forth in this
Section 8.4 shall not apply to any Claim relating to breach of Seller's
obligations with respect to Taxes or any claim related to a breach of a
representation or warranty where Seller or Purchaser had knowledge of such
breach at Closing. Notwithstanding the foregoing, the maximum amount required to
be paid by Seller and the Shareholders in the aggregate for Losses under this
Agreement shall not exceed $6,000,000.
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ARTICLE 9
TERMINATION
9.1 Termination. This Agreement may be terminated at any time prior to the
Closing:
(a) by mutual written consent of Purchasers and Seller;
(b) by either Purchasers or Seller if there has been a material
misrepresentation or breach of warranty or breach of covenant on the part of the
other party in the representations and warranties or covenants set forth in this
Agreement and any such misrepresentation or breach, if capable of cure, is not
cured within fifteen (15) days after written notice thereof to such other party,
or if events have occurred which have made it impossible to satisfy a condition
precedent to the terminating party's obligations to consummate the transactions
contemplated hereby (other than as a result of any willful act or omission by
the terminating party); or
(c) by either Purchasers or Seller if the transactions contemplated
hereby have not been consummated by November 30, 1998; provided, that neither
Purchasers nor Seller shall be entitled to terminate this Agreement pursuant to
this subsection (c) if such party's willful breach of this Agreement,
respectively, has prevented the consummation of the transactions contemplated
hereby.
9.2 Effect of Termination. In the event of termination of this Agreement as
provided above, this Agreement shall forthwith become void, and there shall be
no liability on the part of Seller or Purchasers, except for willful breaches of
this Agreement prior to the time of such termination and except for the
provisions of Section 10.7.
9.3 Effect of Closing. Seller and Purchasers shall be deemed to have waived
their respective rights to terminate this Agreement upon the completion of the
Closing. No such waiver shall constitute a waiver of any other rights arising
from the non-fulfillment of any condition precedent set forth in Article 5 or 6
unless such waiver is made in writing.
ARTICLE 10
ADDITIONAL AGREEMENTS
10.1 Survival. The representations, warranties, covenants and agreements
set forth in this Agreement or in any writing delivered to Purchasers or Seller
in connection with this Agreement shall survive the Closing Date and the
consummation of the transactions contemplated hereby for a period of two (2)
years following the Effective Date and shall not be affected by any examination
made for or on behalf of Purchasers or Seller, the knowledge of any of
Purchasers' or Seller's officers, directors, shareholders, employees or agents,
or the acceptance by Purchasers or any Seller of any certificate or opinion;
provided, however, that the representations, warranties, covenants and
agreements made with respect to Sections 3.8, 3.9 and 3.16 hereof shall survive
until the applicable statute of limitations has expired.
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10.2 Mutual Assistance. Subsequent to the Closing, Seller on the one hand
and Purchasers on the other, at their own cost, shall assist each other
(including making records available) in the preparation of their respective tax
returns and the filing and execution of tax elections, if required, as well as
any audits or litigation that may ensue as a result of the filing thereof, to
the extent that such assistance is reasonably requested.
10.3 Press Release and Announcements. No press release related to this
Agreement or the transactions contemplated hereby, or other announcements to the
employees, customers or suppliers of Seller, shall be issued without the joint
approval of Purchasers and Seller. No other public announcement related to this
Agreement or the transactions contemplated hereby shall be made by either party,
except as required by law, in which event the parties shall consult as to the
form and substance of any such announcement required by law.
10.4 Expenses. Each party shall pay all of its expenses in connection with
the negotiation of this Agreement, the performance of its obligations hereunder
and the consummation of the transactions contemplated by this Agreement. Seller
shall pay the cost of recording all documents necessary to place record title to
the Purchased Assets in the condition warranted by or required of Seller by this
Agreement.
10.5 Further Transfers. After the Closing, Seller shall, and shall cause
its affiliates to, execute and deliver such further instruments of conveyance
and transfer and take such additional action as Purchasers may reasonably
request to effect, consummate, confirm or evidence the transfer to Purchasers of
the Purchased Assets. Seller shall execute such documents as may be necessary to
assist Purchasers (or their designees) in preserving or perfecting its rights in
the Purchased Assets.
10.6 Transition Assistance. From the date hereof and until five (5) years
after the Closing, Seller shall not in any manner take any action which is
designed, intended or might be reasonably anticipated to have the effect of
discouraging customers, suppliers, lessors, employees, sales agents and other
business associates from maintaining the same business relationships with
Purchasers after the date of this Agreement as were maintained with Seller prior
to the date of this Agreement.
10.7 Confidentiality. If the transactions contemplated by this Agreement
are not consummated, Purchasers shall maintain the confidentiality of all
information and materials received by it reasonably designated by Seller as
confidential, and Purchasers shall return to Seller or destroy any materials
(and copies thereof) obtained from Seller in connection with the transactions
contemplated hereby. Whether or not the transactions contemplated hereby are
consummated, Seller shall maintain the confidentiality of all information and
materials regarding Purchasers and their affiliates, reasonably designated as
confidential by Purchasers. If the transactions contemplated by this Agreement
are consummated, Seller shall maintain the confidentiality of all proprietary
and other non-public information regarding the Business and the Purchased Assets
and shall turn over to Purchasers all such materials in their possession.
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10.8 Non-Compete; Non-Solicitation.
(a) Although it is understood among the parties that Seller desires to
no longer engage in business operations similar to that of the Business, as an
additional inducement to Purchasers to enter into and to perform their
obligations under this Agreement, Seller and each officer and director of the
Seller agree that, for a period of five (5) years after the Closing Date (the
"Non-Competition Period"), Seller shall not in the United States or in any
foreign country in which Seller currently does business, directly or indirectly,
either for itself or any other person or entity, own, manage, control,
participate in, permit its name to be used by, consult with, render services for
or otherwise assist in any manner any entity that owns, invests in, manages,
controls or engages in the business of selling and distributing products similar
to those of the Business.
(b) Seller agrees that for a period of five (5) years after the
Closing, it shall not directly or indirectly offer employment to or hire any
current or future employee or sales agent of Seller without the prior written
consent of CBI.
(c) If, at the time of enforcement of this Section 10.8, a court shall
hold that the duration, scope or area restrictions stated herein are
unreasonable under circumstances then existing, the parties agree that the
maximum duration, scope or area reasonable under such circumstances shall be
substituted for the stated duration, scope or area.
(d) Seller recognizes and affirms that in the event of breach by it of
any of the provisions of this Section 10.8 money damages would be inadequate and
neither Purchasers nor Seller would have any adequate remedy at law.
Accordingly, Seller and Purchasers agree that the other party shall have the
right, in addition to any other rights and remedies existing in its favor, to
enforce its rights and the obligations under this Section 10.8 by an action or
actions for specific performance, injunction and/or other equitable relief
without posting any bond or security to enforce or prevent any violations,
whether anticipatory, continuing or future, of the provisions of this Section
10.8, including, without limitation, the extension of the Non-Competition Period
by a period equal to (i) the length of the violation of this Section 10.8 plus
(ii) the length of any court proceedings necessary to stop such violation. In
the event of a breach or violation by Seller of any of the provisions of this
Section 10.8, the running of the Non-Competition Period, but not of Seller's
obligations under this Section 10.8, shall be tolled during the period during
which the occurrence of any such breach or violation is investigated and during
the continuance of any such breach or violation.
10.9 Remittances. All remittances, mail and other communications relating
to the Purchased Assets or the Business received by Seller or the officers and
directors of Seller, at any time after the Closing Date shall be immediately
turned over to Purchasers by such parties. Seller shall cooperate with
Purchasers, and take such actions as Purchasers reasonably request, to assure
that customers of the Business send their remittances directly to Purchasers,
and to assure that remittances from customers of the Business which are
improperly sent to Seller are not commingled with Seller's assets and are turned
over to Purchasers.
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10.10 Best Efforts To Consummate Closing Transactions. On the terms and
subject to the conditions contained in this Agreement, Seller and Purchasers
agree to use their respective best efforts to take, or to cause to he taken, all
reasonable actions, and to do, or to cause to be done, all reasonable things,
necessary, proper or advisable under applicable laws and regulations to
consummate, as soon as reasonably practicable, the Closing, including the
satisfaction of all conditions thereto set forth herein.
10.11 Employees and Agents of Seller. Purchasers are under no legal
obligation to employ any personnel presently employed by Seller. Prior to the
Closing Date, CBI may, but shall not be required to, offer employment to such
persons currently employed by Seller as CBI in its sole discretion shall
determine. CBI shall have the absolute right to establish all terms and
conditions of employment, including wages, benefits and benefit plans, for any
employees of Seller to whom it chooses to make an offer of employment to be
employed by CBI. Further, it is expressly agreed that neither Purchaser is bound
to assume, implement or continue any wages, terms and conditions of employment,
benefits or benefit plans which may currently exist for any of Seller's
employees. All such offers of employment shall be on the terms and conditions
established by CBI and shall be contingent upon employment commencing with CBI
only following the Closing Date. Seller agrees not to discourage any individuals
who are offered employment or an agency relationship with CBI from accepting
such employment or agency relationship with CBI.
10.12 Certain Understandings. Holdings and CBI have received from Seller
certain projections and forecasts relating to Seller. Holdings and CBI
acknowledge that (i) there are uncertainties inherent in attempting to make such
projections and forecasts, (ii) Holdings and CBI are familiar with such
uncertainties and are taking full responsibility for making their own evaluation
of the adequacy and accuracy of all projections and forecasts so furnished to
them and (iii) neither Holdings nor CBI shall have any claim against Seller or
its agents with respect to such projections and forecasts. Accordingly, Seller
makes no representations or warranty with respect to such projections or
forecasts.
ARTICLE 11
MISCELLANEOUS
11.1 Amendment and Waiver. This Agreement may be amended, and any provision
of this Agreement may be waived; provided that any such amendment or waiver
shall be binding on Seller and Shareholders only if such amendment or waiver is
set forth in a writing executed by Seller and Shareholders and that any such
amendment or waiver shall be binding upon Purchasers only if such amendment or
waiver is set forth in a writing executed by Purchasers. No course of dealing
between or among any persons having any interest in this Agreement shall be
deemed effective to modify, amend or discharge any part of this Agreement or any
rights or obligations of any person under or by reason of this Agreement.
11.2 Notices. All notices, demands and other communications to be given or
delivered under or by reason of the provisions of this Agreement shall be in
writing and shall be deemed to have been given when personally delivered, mailed
by first class mail, return receipt requested or
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delivered by a nationally recognized courier service. Notices, demands and
communications to Seller or Purchasers shall, unless another address is
specified in writing in accordance herewith, be sent to the address indicated
below:
Notices to Seller
Wiedemann & Johnson Company
1505 LBJ Freeway # 165
Dallas, Texas 75234-6069
Attention: Bruce E. Hlavacek
Phone: (972) 243-0505
Fax: (972) 243-0507
with a copy to:
Liddell, Sapp, Zivley, Hill & LaBoon, LLP
2001 Ross Avenue
Suite 3000
Dallas, Texas 75201-8001
Attention: R. Brent Clifton
Phone: (214) 849-5555
Fax: (214) 849-5599
Notices to Purchasers
Clark/Bardes, Inc.
2121 San Jacinto Street,
Suite 2200
Dallas, Texas 75201
Attention: Mel G. Todd, President
Phone: (214) 871-8717
Fax: (214) 871-7690
with a copy to:
Vedder, Price, Kaufman & Kammholz
222 North LaSalle Street
Chicago, Illinois 60601
Attention: Stanley B. Block, Esq.
Lane R. Moyer, Esq.
Phone: (312) 609-7500
Fax: (312) 609-5005
11.3 Assignment. This Agreement and all of the provisions hereof shall be
binding upon and inure to the benefit of the parties hereto and their respective
heirs, legatees, personal representatives, successors and permitted assigns
(including all successors and assignees in the event
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of Seller's liquidation) as the case may be, but neither this Agreement nor any
of the rights, interests or obligations hereunder of Seller and Shareholders
shall be assignable by Seller and Shareholders without the prior written consent
of Purchasers. Either Purchaser may assign its interest under this Agreement
without restriction to any of its affiliates, existing as of the date hereof or
in the future; provided each Purchaser unconditionally guarantees to Seller and
the Shareholders at the time of such assignment the prompt and complete
performance of all of such affiliates' obligations hereunder.
11.4 Severability. Whenever possible, each provision of this Agreement
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be prohibited
by or invalid under applicable law, such provision shall be ineffective only to
the extent of such prohibition or invalidity, without invalidating the remainder
of such provisions or the remaining provisions of this Agreement.
11.5 No Third Party Beneficiaries. Nothing in this Agreement, whether
express or implied, is intended to confer any rights or remedies under or by
reason of this Agreement on any other persons other than the parties hereto and
the indemnified parties under Sections 8.1 and 8.2 hereof and their respective
successors, permitted assigns, heirs, legatees and personal representatives, as
the case may be, nor is anything in this Agreement intended to relieve or
discharge the obligation or liability of any third persons to any party, nor
shall any provision give any third parties except the indemnified parties under
Sections 8.1 and 8.2 hereof, any right of subrogation or action over or against
any party. This Agreement is not intended to and does not create any third party
beneficiary rights whatsoever, except the indemnified parties under Sections 8.1
and 8.2 hereof.
11.6 No Strict Construction. The language used in this Agreement shall be
deemed to be the language chosen by the parties hereto to express their mutual
intent, and no rule of strict construction shall be applied against any person.
11.7 Captions. The captions used in this Agreement are for convenience of
reference only and do not constitute a part of this Agreement and shall not be
deemed to limit, characterize or in any way affect any provision of this
Agreement, and all provisions of this Agreement shall be enforced and construed
as if no caption had been used in this Agreement.
11.8 Complete Agreement. This document and the documents referred to herein
contain the complete agreement between the parties and supersede any prior
understandings, agreements or representations by or between the parties, written
or oral, which may have related to the subject matter hereof in any way.
11.9 Counterparts. This Agreement may be executed in one or more
counterparts, all of which taken together shall constitute one and the same
instrument.
11. 10 Governing Law. The internal law, not the law of conflicts, of the
State of Texas shall govern all questions concerning the construction, validity
and interpretation of this Agreement and the performance of the obligations
imposed by this Agreement.
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11.11 Remedies Cumulative. Except as set forth in Section 8.3(b), all
remedies of the parties provided herein shall, to the extent permitted by law,
be deemed cumulative and not exclusive of any thereof or of any other remedies
available to the parties, by judicial proceedings or otherwise, to enforce the
performance or observance of the covenants and agreements contained herein, and
every remedy given herein or by law to any party hereto may be exercised from
time to time, and as often as shall be deemed expedient, by such party.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first written above.
CLARK/BARDES, INC.
By:
------------------------------------
Its:
------------------------------------
CLARK/BARDES HOLDINGS, INC.
By:
------------------------------------
Its:
------------------------------------
WIEDEMANN & JOHNSON COMPANY
By:
------------------------------------
Its:
------------------------------------
----------------------------------------
Bruce Hlavacek
----------------------------------------
Jennie Hlavacek
37
<PAGE> 1
EXHIBIT 10.46
================================================================================
CREDIT AGREEMENT
Dated January 15, 1999
among
CLARK/BARDES, INC.
as Borrower,
BANK ONE, TEXAS, N.A.
as Agent,
U.S. BANK NATIONAL ASSOCIATION
as Co-Agent,
CERTAIN FINANCIAL INSTITUTIONS
as Lenders,
and
BANC ONE CAPITAL MARKETS, INC.
as Arranger
================================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
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ARTICLE I ..................................................................................... 1
DEFINITIONS .............................................................................. 1
ARTICLE II .................................................................................... 13
THE CREDITS .............................................................................. 13
2.1 Commitments ........................................................ 13
2.2 Required Payments; Termination ..................................... 14
2.3 Ratable Loans ...................................................... 15
2.4 Types of Advances .................................................. 15
2.5 Commitment Fee; Reductions in Aggregate Commitment ................. 15
2.6 Minimum Amount of Each Advance ..................................... 15
2.7 Optional Principal Payments ........................................ 15
2.8 Method of Selecting Types and Interest Periods for New Advances .... 15
2.9 Conversion and Continuation of Outstanding Advances ................ 16
2.10 Changes in Interest Rate, etc ...................................... 16
2.11 Rates Applicable After Default ..................................... 16
2.12 Method of Payment .................................................. 17
2.13 Noteless Agreement; Evidence of Indebtedness ....................... 17
2.14 Telephonic Notices ................................................. 18
2.15 Interest Payment Dates; Interest and Fee Basis ..................... 18
2.16 Notification of Advances, Interest Rates, Prepayments and
Commitment Reductions .............................................. 18
2.17 Lending Installations .............................................. 18
2.18 Non-Receipt of Funds by the Agent .................................. 18
2.19 Extension of Revolving Credit Termination Date ..................... 19
2.20 Replacement of Lender .............................................. 19
ARTICLE III ................................................................................... 19
YIELD PROTECTION; TAXES .................................................................. 19
3.1 Yield Protection ................................................... 19
3.2 Changes in Capital Adequacy Regulations ............................ 20
3.3 Availability of Types of Advances .................................. 20
3.4 Funding Indemnification ............................................ 21
3.5 Taxes .............................................................. 21
3.6 Lender Statements; Survival of Indemnity ........................... 22
ARTICLE IV .................................................................................... 23
CONDITIONS PRECEDENT ..................................................................... 23
4.1 Initial Advance .................................................... 23
4.2 Each Advance ....................................................... 23
</TABLE>
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<TABLE>
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ARTICLE V ..................................................................................... 24
REPRESENTATIONS AND WARRANTIES ........................................................... 24
5.1. Existence and Standing ............................................. 24
5.2. Authorization and Validity ......................................... 24
5.3. No Conflict; Government Consent .................................... 24
5.4. Financial Statements ............................................... 25
5.5. Material Adverse Change ............................................ 25
5.6. Taxes .............................................................. 25
5.7. Litigation and Contingent Obligations .............................. 25
5.8. Subsidiaries ....................................................... 25
5.9. ERISA .............................................................. 25
5.10. Accuracy of Information ............................................ 26
5.11. Regulation U ....................................................... 26
5.12. Material Agreements ................................................ 26
5.13. Compliance With Laws ............................................... 26
5.14. Ownership of Properties. ........................................... 26
5.15. Plan Assets; Prohibited Transactions ............................... 26
5.16. Environmental Matters .............................................. 26
5.17. Investment Company Act ............................................. 26
5.18. Public Utility Holding Company Act ................................. 27
5.19. Year 2000 .......................................................... 27
5.20. Insurance .......................................................... 27
5.21. Solvency ........................................................... 27
ARTICLE VI .................................................................................... 27
COVENANTS ................................................................................ 27
6.1. Financial Reporting ................................................ 27
6.2. Use of Proceeds .................................................... 29
6.3. Notice of Default .................................................. 29
6.4. Conduct of Business ................................................ 29
6.5. Taxes .............................................................. 29
6.6. Insurance .......................................................... 29
6.7. Compliance with Laws ............................................... 29
6.8. Maintenance of Properties .......................................... 29
6.9. Inspection ......................................................... 29
6.10. Dividends .......................................................... 30
6.11. Indebtedness ....................................................... 30
6.12. Merger ............................................................. 30
6.13. Sale of Assets ..................................................... 30
6.14. Investments and Acquisitions ....................................... 30
6.15. Liens .............................................................. 31
6.16. Rentals ............................................................ 31
6.17. Year 2000 .......................................................... 32
6.18. Affiliates ......................................................... 32
6.19. Subordinated Indebtedness .......................................... 32
6.20. Omitted ............................................................ 32
</TABLE>
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<TABLE>
<S> <C>
6.21. Sale of Accounts ................................................... 32
6.22. Sale and Leaseback Transactions and other Off-Balance Sheet
Liabilities ........................................................ 32
6.23. Contingent Obligations ............................................. 32
6.24. Letters of Credit .................................................. 32
6.25. Financial Covenants ................................................ 32
6.26. Investment Company ................................................. 33
ARTICLE VII ................................................................................... 33
DEFAULTS ................................................................................. 33
ARTICLE VIII .................................................................................. 35
ACCELERATION, WAIVERS, AMENDMENTS AND REMEDIES ........................................... 35
8.1. Acceleration ....................................................... 36
8.2. Amendments ......................................................... 36
8.3. Preservation of Rights ............................................. 36
ARTICLE IX .................................................................................... 37
GENERAL PROVISIONS ....................................................................... 37
9.1. Survival of Representations ........................................ 37
9.2. Governmental Regulation ............................................ 37
9.3. Headings ........................................................... 37
9.4. Entire Agreement ................................................... 37
9.5. Several Obligations; Benefits of this Agreement .................... 37
9.6. Expenses; Indemnification .......................................... 37
9.7. Omitted ............................................................ 38
9.8. Accounting ......................................................... 38
9.9. Severability of Provisions ......................................... 38
9.10. Nonliability of Lenders ............................................ 38
9.11. Confidentiality .................................................... 39
9.12. Nonreliance ........................................................ 39
9.13. Disclosure ......................................................... 39
ARTICLE X ..................................................................................... 39
THE AGENT ................................................................................ 39
10.1. Appointment; Nature of Relationship ................................ 39
10.2 Powers ............................................................. 40
10.3 General Immunity ................................................... 40
10.4 No Responsibility for Loans, Recitals, etc ......................... 40
10.5 Action on Instructions of Lenders .................................. 40
10.6 Employment of Agents and Counsel ................................... 40
10.7 Reliance on Documents; Counsel ..................................... 41
10.8 Agent's Reimbursement and Indemnification .......................... 41
10.9 Notice of Default .................................................. 41
10.10 Rights as a Lender ................................................. 41
10.11 Lender Credit Decision ............................................. 41
</TABLE>
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<TABLE>
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10.12 Successor Agent .................................................... 42
10.13 Agent's Fee ........................................................ 42
10.14 Delegation to Affiliates ........................................... 42
10.15 Execution of Collateral Documents .................................. 42
10.16 Collateral Releases ................................................ 42
10.17 Co-Agents and Arranger ............................................. 43
ARTICLE XI .................................................................................... 43
SETOFF; RATABLE PAYMENTS ................................................................. 43
11.1 Setoff ............................................................. 43
11.2 Ratable Payments ................................................... 43
11.3 Proceeds of Collateral ............................................. 44
ARTICLE XII ................................................................................... 44
BENEFIT OF AGREEMENT; ASSIGNMENTS; PARTICIPATIONS ........................................ 44
12.1. Successors and Assigns ............................................. 44
12.2 Participations ..................................................... 44
12.3 Assignments ........................................................ 45
12.4 Dissemination of Information ....................................... 46
12.5 Tax Treatment ...................................................... 46
ARTICLE XIII .................................................................................. 46
NOTICES .................................................................................. 46
13.1 Notices ............................................................ 46
13.2 Change of Address .................................................. 46
ARTICLE XIV ................................................................................... 47
COUNTERPARTS ............................................................................. 47
ARTICLE XV .................................................................................... 47
CHOICE OF LAW; CONSENT TO JURISDICTION; WAIVER OF JURY TRIAL ............................. 47
15.1 CHOICE OF LAW ...................................................... 47
15.2 CONSENT TO JURISDICTION ............................................ 47
15.3 WAIVER OF JURY TRIAL ............................................... 47
</TABLE>
<PAGE> 6
SCHEDULES AND EXHIBITS
Pricing Schedule
Commitment Schedule
Exhibit A - Form of Opinion
Exhibit B - Form of Compliance Certificate
Exhibit C - Form of Assignment Agreement
Exhibit D - Form of Transfer Instructions
Exhibit E-1 - Form of Term Note
Exhibit E-2 - Form of Revolving Note
Schedule 1 - Subsidiaries and Other Investments
Schedule 2 - Indebtedness and Liens
Schedule 6.11 - Specific Indebtedness
Schedule 6.16 - Operating Leases
<PAGE> 7
CREDIT AGREEMENT
This Credit Agreement, dated as of the 15th, day of January, 1999, is
among CLARK/BARDES, INC., a Delaware corporation, the LENDERS and BANK ONE,
TEXAS, N.A., as Agent. The parties hereto agree as follows:
ARTICLE I
DEFINITIONS
As used in this Agreement:
"ACQUISITION" means any transaction, or any series of related
transactions, consummated on or after the date of this Agreement, by which the
Borrower or any of its Subsidiaries (i) acquires any going business or all or
substantially all of the assets of any firm, corporation or limited liability
company, or division thereof, whether through purchase of assets, merger or
otherwise or (ii) directly or indirectly acquires (in one transaction or as the
most recent transaction in a series of transactions) at least a majority (in
number of votes) of the securities of a corporation which have ordinary voting
power for the election of directors (other than securities having such power
only by reason of the happening of a contingency) or a majority (by percentage
or voting power) of the outstanding ownership interests of a partnership or
limited liability company.
"ACQUISITION EBITDA" is defined in the definition of Consolidated
EBITDA.
"ADVANCE" means a borrowing hereunder, (i) made by the Lenders on the
same Borrowing Date, or (ii) converted or continued by the Lenders on the same
date of conversion or continuation, consisting, in either case, of the aggregate
amount of the several Loans of the same Type and, in the case of Eurodollar
Loans, for the same Interest Period.
"AFFILIATE" of any Person means any other Person directly or indirectly
controlling, controlled by or under common control with such Person. A Person
shall be deemed to control another Person if the controlling Person owns 10% or
more of any class of voting securities (or other ownership interests) of the
controlled Person or possesses, directly or indirectly, the power to direct or
cause the direction of the management or policies of the controlled Person,
whether through ownership of stock, by contract or otherwise.
"AGENT" means Bank One in its capacity as contractual representative of
the Lenders pursuant to Article X, and not in its individual capacity as a
Lender, and any successor Agent appointed pursuant to Article X.
"AGGREGATE COMMITMENT" means the sum of (i) the commitment amount of
the Revolving Credit Facility in the amount of $35,000,000, as reduced from time
to time pursuant to the terms hereof, including, without limitation, Section
2.1.1. and Section 2.5., plus (ii) the amount of the Term Loan.
"AGREEMENT" means this credit agreement, as it may be amended or
modified and in effect from time to time.
CREDIT AGREEMENT (Clark/Bardes, Inc.) Page 1
<PAGE> 8
"AGREEMENT ACCOUNTING PRINCIPLES" means generally accepted accounting
principles as in effect from time to time, applied in a manner consistent with
that used in preparing the financial statements referred to in Section 5.4.
"ALTERNATE BASE RATE" means, for any day, a rate of interest per annum
equal to the higher of (i) the Corporate Base Rate for such day and (ii) the sum
of the Federal Funds Effective Rate for such day plus 1/2% per annum.
"APPLICABLE FEE RATE" means, at any time, the percentage rate per annum
at which Commitment Fees are accruing on the unused portion of the Aggregate
Commitment at such time as set forth in the Pricing Schedule.
"APPLICABLE MARGIN" means, with respect to Advances of any Type at any
time, the percentage rate per annum which is applicable at such time with
respect to Advances of such Type as set forth in the Pricing Schedule.
"ARRANGER" means Banc One Capital Markets, Inc., an Ohio corporation,
and its successors.
"ARTICLE" means an article of this Agreement unless another document is
specifically referenced.
"ASSUMED EXPENSE ALLOWANCE" means an expense and commission percentage
of twenty-five percent (25%).
"AUTHORIZED OFFICER" means any of the Chief Financial Officer, the
Controller, the President of the Borrower, or any other person designated in
writing by any of the foregoing persons, acting singly.
"BANK ONE" means Bank One, Texas, N.A., in its individual capacity, and
its successors.
"BORROWER" means Clark/Bardes, Inc., a Delaware corporation, and its
successors and assigns.
"BORROWING BASE" means an amount equal to the difference between (i)
eighty percent (80%) of the Net Present Value of Renewals, minus (ii) Borrower's
Consolidated Funded Indebtedness, each as indicated in the most recently
delivered quarterly compliance certificate and as such amount is approved by
Agent.
"BORROWING DATE" means a date on which an Advance is made hereunder.
"BORROWING NOTICE" is defined in Section 2.8.
"BUSINESS DAY" means (i) with respect to any borrowing, payment or rate
selection of Eurodollar Advances, a day (other than a Saturday or Sunday) on
which banks generally are open in Dallas and New York for the conduct of
substantially all of their commercial lending activities and on which dealings
in United States dollars are carried on in the London interbank market and (ii)
for all other purposes, a day (other than a Saturday or Sunday) on which banks
generally are open in Dallas for the conduct of substantially all of their
commercial lending activities.
"CAPITAL EXPENDITURES" means, without duplication, any expenditures for
any purchase or other acquisition of any asset which would be classified as a
fixed or capital asset on a consolidated balance sheet of the Borrower and its
Subsidiaries prepared in accordance with Agreement Accounting Principles
excluding (i) the cost of assets acquired with Capitalized Lease Obligations,
(ii) expenditures of insurance
CREDIT AGREEMENT (Clark/Bardes, Inc.) Page 2
<PAGE> 9
proceeds to rebuild or replace any asset after a casualty loss and (iii)
leasehold improvement expenditures for which the Borrower or a Subsidiary is
reimbursed promptly by the lessor.
"CAPITALIZED LEASE" of a Person means any lease of Property by such
Person as lessee which would be capitalized on a balance sheet of such Person
prepared in accordance with Agreement Accounting Principles.
"CAPITALIZED LEASE OBLIGATIONS" of a Person means the amount of the
obligations of such Person under Capitalized Leases which would be shown as a
liability on a balance sheet of such Person prepared in accordance with
Agreement Accounting Principles.
"CASH EQUIVALENT INVESTMENTS" means (i) short-term obligations of, or
fully guaranteed by, the United States of America, (ii) commercial paper rated
A-1 or better by S&P or P-1 or better by Moody's, (iii) demand deposit accounts
maintained in the ordinary course of business, and (iv) certificates of deposit
issued by and time deposits with commercial banks (whether domestic or foreign)
having capital and surplus in excess of $100,000,000; provided in each case that
the same provides for payment of both principal and interest (and not principal
alone or interest alone) and is not subject to any contingency regarding the
payment of principal or interest.
"CHANGE IN CONTROL" means (i) the acquisition by any Person, or two or
more Persons acting in concert, other than any such Person or Persons in the
Control Group, of beneficial ownership (within the meaning of Rule 13d-3 of the
Securities and Exchange Commission under the Securities Exchange Act of 1934) of
25% or more of the outstanding shares of voting stock of the Borrower or Parent;
(ii) Parent shall cease to own, free and clear of all Liens or other
encumbrances, at least 100% of the outstanding shares of voting stock of the
Borrower on a fully diluted basis; (iii) the failure of W. T. Wamberg
("WAMBERG") to (a) continue to be bound under the Principal Office Agreement
between Borrower and Wamberg,, (b) continue to own the greater of (1) 5% of the
outstanding capital stock of Parent or (2) more of the outstanding capital stock
in Parent than any other person in the Control Group or (c) continue to act as
Chairman of the Board of Directors of Parent.
"CODE" means the Internal Revenue Code of 1986, as amended, reformed or
otherwise modified from time to time.
"COLLATERAL" means all of the assets (fixed and intangible) of Borrower
and Parent, including, without limitation, all of the outstanding capital stock
in Borrower, which Collateral is to be pledged to the Lenders pursuant to the
Collateral Documents.
"COLLATERAL DOCUMENTS" means, collectively, (i) the Pledge and Security
Agreement dated of even date herewith executed by Borrower and Parent in favor
of Lenders pursuant to which Borrower and Lender pledged and granted a security
interest in the Collateral, and (ii) the Unlimited Guaranty dated of even date
herewith executed by Parent in favor of Lender.
"COMMITMENT" means, for each Lender, the obligation of such Lender to
make Loans not exceeding such Lender's Commitment Percentage of the Aggregate
Commitment.
"COMMITMENT SCHEDULE" means the Schedule attached hereto identified as
such.
"COMMITMENT PERCENTAGE" means, for each Lender, the percentage of the
Aggregate Commitment such Lender has committed to make available to the Borrower
as set forth in the Commitment Schedule, or
CREDIT AGREEMENT (Clark/Bardes, Inc.) Page 3
<PAGE> 10
as set forth in any Notice of Assignment relating to any assignment that has
become effective pursuant to Section 12.3.2, as such amount may be modified from
time to time pursuant to the terms hereof.
"CONSOLIDATED CAPITAL EXPENDITURES" means, with reference to any
period, the Capital Expenditures of the Borrower and its Subsidiaries calculated
on a consolidated basis for such period.
"CONSOLIDATED EBITDA" means Consolidated Net Income plus, to the extent
deducted from revenues in determining Consolidated Net Income, (i) Consolidated
Interest Expense, (ii) expense for taxes paid during such period, (iii)
depreciation, (iv) amortization and (v) extraordinary losses incurred other than
in the ordinary course of business and other than as a result of discontinuation
of operations, minus, to the extent included in Consolidated Net Income,
extraordinary gains realized other than in the ordinary course of business, all
calculated for the Borrower and its Subsidiaries on a consolidated basis.
Consolidated EBITDA shall be adjusted if Borrower consummates a Permitted
Acquisition during the period in question to include the effect of (x) pro-forma
EBITDA for the company acquired (based on EBITDA [calculated in the same manner
as Consolidated EBITDA] of the company acquired for the four quarters preceding
the date of acquisition), which amount shall be adjusted, with the approval of
Required Lenders, to negate the effect of excessive salaries and quantifiable
non-recurring expenses ("ACQUISITION EBITDA") and (y) pro-forma interest to be
paid on any Permitted Acquisition Indebtedness incurred in connection with such
Acquisition (but only if such Acquisition occurs after the date of this
Agreement). The foregoing adjustment based on Acquisition EBITDA is conditioned
upon receipt and approval by Required Lenders of information substantiating such
adjustment, including, without limitation, audited financial statements (or,
with the consent of Required Lenders, compiled financial statements certified by
the Chief Financial Officer of Borrower) of the company acquired for the most
recently ended fiscal year.
"CONSOLIDATED FUNDED INDEBTEDNESS" means at any time the aggregate
dollar amount of Consolidated Indebtedness which has actually been funded and is
outstanding at such time, whether or not such amount is due or payable at such
time, including, without limitation, all Permitted Acquisition Indebtedness.
"CONSOLIDATED INDEBTEDNESS" means at any time the Indebtedness of the
Borrower and its Subsidiaries calculated on a consolidated basis as of such
time.
"CONSOLIDATED INTEREST EXPENSE" means, with reference to any period,
the interest expense of the Borrower and its Subsidiaries calculated on a
consolidated basis for such period (excluding fees paid to Agent and the Lenders
in connection with closing of the transaction contemplated by this Agreement).
"CONSOLIDATED NET INCOME" means, with reference to any period, the net
income (or loss) of the Borrower and its Subsidiaries calculated on a
consolidated basis for such period.
"CONSOLIDATED NET WORTH" means at any time the consolidated
stockholders' equity of the Borrower and its Subsidiaries calculated on a
consolidated basis as of such time.
"CONTINGENT OBLIGATION" of a Person means any agreement, undertaking or
arrangement by which such Person assumes, guarantees, endorses, contingently
agrees to purchase or provide funds for the payment of, or otherwise becomes or
is contingently liable upon, the obligation or liability of any other Person, or
agrees to maintain the net worth or working capital or other financial condition
of any other Person, or otherwise assures any creditor of such other Person
against loss, including, without limitation, any comfort letter, operating
agreement, take-or-pay contract or the obligations of any such Person as general
partner of a partnership with respect to the liabilities of the partnership.
CREDIT AGREEMENT (Clark/Bardes, Inc.) Page 4
<PAGE> 11
"CONTROL GROUP" means the following individuals: Tom Wamberg, Mel Todd,
Tom Pyra, Larry Hendrickson, and Rich Chapman.
"CONTROLLED GROUP" means all members of a controlled group of
corporations or other business entities and all trades or businesses (whether or
not incorporated) under common control which, together with the Borrower or any
of its Subsidiaries, are treated as a single employer under Section 414 of the
Code.
"CONVERSION/CONTINUATION NOTICE" is defined in Section 2.9.
"CORPORATE BASE RATE" means a rate per annum equal to the corporate
base rate of interest announced by Bank One from time to time, changing when and
as said corporate base rate changes.
"DEFAULT" means an event described in Article VII.
"ENVIRONMENTAL LAWS" means any and all federal, state, local and
foreign statutes, laws, judicial decisions, regulations, ordinances, rules,
judgments, orders, decrees, plans, injunctions, permits, concessions, grants,
franchises, licenses, agreements and other governmental restrictions relating to
(i) the protection of the environment, (ii) the effect of the environment on
human health, (iii) emissions, discharges or releases of pollutants,
contaminants, hazardous substances or wastes into surface water, ground water or
land, or (iv) the manufacture, processing, distribution, use, treatment,
storage, disposal, transport or handling of pollutants, contaminants, hazardous
substances or wastes or the clean-up or other remediation thereof.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time, and any rule or regulation issued thereunder.
"EURODOLLAR ADVANCE" means an Advance which, except as otherwise
provided in Section 2.11, bears interest at the applicable Eurodollar Rate.
"EURODOLLAR BASE RATE" means, with respect to a Eurodollar Advance for
the relevant Interest Period, the applicable London interbank offered rate for
deposits in U.S. dollars appearing on Dow Jones Markets (Telerate) Page 3750 as
of 11:00 a.m. (London time) two Business Days prior to the first day of such
Interest Period, and having a maturity equal to such Interest Period, provided
that, if Dow Jones Markets (Telerate) Page 3750 is not available for any reason,
the applicable Eurodollar Base Rate for the relevant Interest Period shall
instead be the applicable London interbank offered rate for deposits in U.S.
dollars appearing on Reuters Screen FRBD as of 11:00 a.m. (London time) two
Business Days prior to the first day of such Interest Period, and having a
maturity equal to such Interest Period.
"EURODOLLAR LOAN" means a Loan which, except as otherwise provided in
Section 2.11, bears interest at the applicable Eurodollar Rate.
"EURODOLLAR RATE" means, with respect to a Eurodollar Advance for the
relevant Interest Period, the sum of (i) the quotient of (a) the Eurodollar Base
Rate applicable to such Interest Period, divided by (b) one minus the Reserve
Requirement (expressed as a decimal) applicable to such Interest Period, plus
the Applicable Margin. The Eurodollar Rate shall be rounded to the next higher
multiple of 1/16 of 1% if the rate is not such a multiple.
"EXCESS CASH FLOW" means (i) Consolidated Net Income, plus (ii)
Consolidated Interest Expense, plus (iii) depreciation, plus (iv) amortization,
minus (v) payments of principal and interest on the Consolidated Funded
Indebtedness, minus (vi) Consolidated Capital Expenditures, each of which is to
be
CREDIT AGREEMENT (Clark/Bardes, Inc.) Page 5
<PAGE> 12
determined for the 12 month period immediately preceding the date of
determination in accordance with Agreement Accounting Principles.
"EXCLUDED TAXES" means, in the case of each Lender or applicable
Lending Installation and the Agent, taxes imposed on its overall net income, and
franchise taxes imposed on it.
"EXHIBIT" refers to an exhibit to this Agreement, unless another
document is specifically referenced.
"EXTENSION DATE" is defined in Section 2.19.
"EXTENSION REQUEST" is defined in Section 2.19.
"FACILITY TERMINATION DATE" means, (i) with respect to each Term
Conversion, five (5) years after the date of such Term Conversion, and (ii) with
respect to the entire Revolving Credit Facility, December 31, 2006, or any later
date as may be specified as the Facility Termination Date in accordance with
Section 2.19.
"FEDERAL FUNDS EFFECTIVE RATE" means, for any day, an interest rate per
annum equal to the weighted average of the rates on overnight Federal funds
transactions with members of the Federal Reserve System arranged by Federal
funds brokers on such day, as published for such day (or, if such day is not a
Business Day, for the immediately preceding Business Day) by the Federal Reserve
Bank of New York, or, if such rate is not so published for any day which is a
Business Day, the average of the quotations at approximately 10:00 a.m. (Dallas,
Texas time) on such day on such transactions received by the Agent from three
Federal funds brokers of recognized standing selected by the Agent in its sole
discretion.
"FINANCIAL CONTRACT" of a Person means (i) any exchange-traded or
over-the-counter futures, forward, swap or option contract or other financial
instrument with similar characteristics, or (ii) any agreements, devices or
arrangements providing for payments related to fluctuations of interest rates,
exchange rates, forward rates or commodity prices, including, but not limited
to, interest rate swap or exchange agreements, forward currency exchange
agreements, interest rate cap or collar protection agreements, forward rate
currency or interest rate options.
"FLOATING RATE" means, for any day, a rate per annum equal to (i) the
Alternate Base Rate for such day plus (ii) the Applicable Margin, in each case
changing when and as the Alternate Base Rate changes.
"FLOATING RATE ADVANCE" means an Advance which, except as otherwise
provided in Section 2.11, bears interest at the Floating Rate.
"FLOATING RATE LOAN" means a Loan which, except as otherwise provided
in Section 2.11, bears interest at the Floating Rate.
"GUARANTOR" means Parent and its successors and assigns.
"GUARANTY" means that certain Unlimited Guaranty dated as of the date
hereof executed by the Guarantor in favor of the Agent, for the ratable benefit
of the Lenders, as it may be amended or modified and in effect from time to
time.
"INDEBTEDNESS" of a Person means such Person's (i) obligations for
borrowed money, (ii) obligations representing the deferred purchase price of
Property or services (other than accounts payable arising in the
CREDIT AGREEMENT (Clark/Bardes, Inc.) Page 6
<PAGE> 13
ordinary course of such Person's business payable on terms customary in the
trade), (iii) obligations, whether or not assumed, secured by Liens or payable
out of the proceeds or production from Property now or hereafter owned or
acquired by such Person, (iv) obligations which are evidenced by notes,
acceptances, or other instruments, (v) obligations of such Person to purchase
securities or other Property arising out of or in connection with the sale of
the same or substantially similar securities or Property, (vi) Capitalized Lease
Obligations, (vii) Contingent Obligations, (viii) Letters of Credit, (ix) Net
Mark-to-Market Exposure of Rate Hedging Agreements and other Financial
Contracts, (x) Off-Balance Sheet Liabilities, (xi) Operating Lease Obligations,
(xii) Rate Hedging Obligations, (xiii) Sale and Leaseback Transactions and (xiv)
any other obligation for borrowed money or other financial accommodation which
in accordance with Agreement Accounting Principles would be shown as a liability
on the consolidated balance sheet of such Person.
"INTEREST PERIOD" means, with respect to a Eurodollar Advance, a period
of one, three, six or twelve months commencing on a Business Day selected by the
Borrower pursuant to this Agreement. Such Interest Period shall end on the day
which corresponds numerically to such date one, three, six or twelve months
thereafter, provided, however, that if there is no such numerically
corresponding day in such next, third, sixth or twelfth succeeding month, such
Interest Period shall end on the last Business Day of such next, third, sixth or
twelfth succeeding month. If an Interest Period would otherwise end on a day
which is not a Business Day, such Interest Period shall end on the next
succeeding Business Day, provided, however, that if said next succeeding
Business Day falls in a new calendar month, such Interest Period shall end on
the immediately preceding Business Day.
"INVESTMENT" of a Person means any loan, advance (other than
commission, travel and similar advances to officers and employees made in the
ordinary course of business), extension of credit (other than accounts
receivable arising in the ordinary course of business on terms customary in the
trade) or contribution of capital by such Person; stocks, bonds, mutual funds,
partnership interests, notes, debentures or other securities owned by such
Person; any deposit accounts and certificate of deposit owned by such Person;
and structured notes, derivative financial instruments and other similar
instruments or contracts owned by such Person.
"LENDERS" means the lending institutions listed on the signature pages
of this Agreement and their respective successors and assigns.
"LENDING INSTALLATION" means, with respect to a Lender or the Agent,
the office, branch, subsidiary or affiliate of such Lender or the Agent listed
on the signature pages hereof or on a Schedule or otherwise selected by such
Lender or the Agent pursuant to Section 2.17.
"LETTER OF CREDIT" of a Person means a letter of credit or similar
instrument which is issued upon the application of such Person or upon which
such Person is an account party or for which such Person is in any way liable.
"LEVERAGE RATIO" means, as of any date of calculation, the ratio of (i)
Consolidated Funded Indebtedness outstanding on such date to (ii) Consolidated
EBITDA for the Borrower's then most-recently ended four fiscal quarters.
"LIEN" means any lien (statutory or other), mortgage, pledge,
hypothecation, assignment, deposit arrangement, encumbrance or preference,
priority or other security agreement or preferential arrangement of any kind or
nature whatsoever (including, without limitation, the interest of a vendor or
lessor under any conditional sale, Capitalized Lease or other title retention
agreement).
CREDIT AGREEMENT (Clark/Bardes, Inc.) Page 7
<PAGE> 14
"LOAN" means, with respect to a Lender, such Lender's loan made
pursuant to Article II (or any conversion or continuation thereof).
"LOAN DOCUMENTS" means this Agreement and any Term Notes or Revolving
Notes issued pursuant to Section 2.13, the Collateral Documents, the Guaranty
and any other agreement or instrument executed in connection herewith or
therewith.
"MATERIAL ADVERSE EFFECT" means a material adverse effect on (i) the
business, Property, condition (financial or otherwise), or results of operations
of the Borrower and its Subsidiaries taken as a whole, (ii) the ability of the
Borrower to perform its obligations under the Loan Documents to which it is a
party, or (iii) the validity or enforceability of any of the Loan Documents or
the rights or remedies of the Agent or the Lenders thereunder.
"MATERIAL INDEBTEDNESS" is defined in Section 7.5.
"MOODY'S" means Moody's Investors Service, Inc.
"MULTIEMPLOYER PLAN" means a Plan maintained pursuant to a collective
bargaining agreement or any other arrangement to which the Borrower or any
member of the Controlled Group is a party to which more than one employer is
obligated to make contributions.
"NET MARK-TO-MARKET EXPOSURE" of a Person means, as of any date of
determination, the excess (if any) of all unrealized losses over all unrealized
profits of such Person arising from Rate Hedging Agreements. "Unrealized losses"
means the fair market value of the cost to such Person of replacing such Rate
Hedging Agreement as of the date of determination (assuming the Rate Hedging
Agreement were to be terminated as of that date), and "unrealized profits" means
the fair market value of the gain to such Person of replacing such Rate Hedging
Agreement as of the date of determination (assuming such Rate Hedging Agreement
were to be terminated as of that date).
"NET PRESENT VALUE OF RENEWALS"means an amount equal to the product of
(i) the advance rate of 90%, times (ii) the applicable Persistency Rate, times
(iii) one minus the Assumed Expense Allowance, times (iv) the Present Value of
Renewals.
"NON-U.S. LENDER" is defined in Section 3.5(iv).
"NOTE" means any promissory note issued at the request of a Lender
pursuant to Section 2.13 in the form of Exhibit E-1 or E-2, as applicable.
"NOTICE OF ASSIGNMENT" is defined in Section 12.3.2.
"OBLIGATIONS" means all unpaid principal of and accrued and unpaid
interest on the Loans, all accrued and unpaid fees and all expenses,
reimbursements, indemnities and other obligations of the Borrower to the Lenders
or to any Lender, the Agent or any indemnified party arising under the Loan
Documents.
"OFF-BALANCE SHEET LIABILITY" of a Person means (i) any repurchase
obligation or liability of such Person with respect to accounts or notes
receivable sold by such Person, (ii) any liability under any Sale and Leaseback
Transaction which is not a Capitalized Lease, (iii) any liability under any
so-called "synthetic lease" transaction entered into by such Person, or (iv) any
obligation arising with respect to any other transaction which is the functional
equivalent of or takes the place of borrowing but which does not
CREDIT AGREEMENT (Clark/Bardes, Inc.) Page 8
<PAGE> 15
constitute a liability on the balance sheets of such Person, but excluding from
this clause (iv) Operating Leases.
"OPERATING LEASE" of a Person means any lease of Property (other than a
Capitalized Lease) by such Person as lessee which has an original term
(including any required renewals and any renewals effective at the option of the
lessor) of one year or more.
"OPERATING LEASE OBLIGATIONS" means, as at any date of determination,
the amount obtained by aggregating the present values, determined in the case of
each particular Operating Lease by applying a discount rate (which discount rate
shall equal the discount rate which would be applied under Agreement Accounting
Principles if such Operating Lease were a Capitalized Lease) from the date on
which each fixed lease payment is due under such Operating Lease to such date of
determination, of all fixed lease payments due under all Operating Leases of the
Borrower and its Subsidiaries.
"OTHER TAXES" is defined in Section 3.5(ii).
"PARENT" means Clark/Bardes Holdings, Inc., a Delaware corporation, of
which Borrower is a Wholly Owned Subsidiary.
"PARTICIPANTS" is defined in Section 12.2.1.
"PAYMENT DATE" means the first (1st) day of each month.
"PBGC" means the Pension Benefit Guaranty Corporation, or any successor
thereto.
"PERMITTED ACQUISITION" means (a) an Acquisition by the Borrower or an
Affiliate of the Borrower which is approved in writing by Required Lenders or
(b) an Acquisition by Borrower or an Affiliate of the Borrower of companies in
the same industry as the Borrower where (i) the total consideration for such
Acquisition is less than $7,500,000 and the cash portion of such total is less
than $5,000,000 and (ii) financial projections for the Borrower (together with
the entity to be acquired) for the period following such Acquisition (verified
by receipt by Required Lenders of information substantiating such projections,
including, without limitation, audited financial statements [or, with the
consent of Required Lenders, compiled financial statements certified by the
Chief Financial Officer of the Borrower] of the company acquired for the most
recently ended fiscal year, and approval by Required Lenders of the accuracy of
such information and the methodology employed in making such projections) is
delivered to Required Lenders, indicating that such acquisition will not cause
the Borrower to be in default of any covenant contained herein.
"PERMITTED ACQUISITION INDEBTEDNESS" means Indebtedness incurred by the
Borrower or an Affiliate of the Borrower as a portion of the purchase price of a
Permitted Acquisition, which Indebtedness is Subordinated Indebtedness and
otherwise on terms and conditions satisfactory to Agent.
"PERMITTED EMPLOYEE AND PRODUCER LOANS" means (i) secured advances to
the Borrower's employees or producers in the aggregate not to exceed $1,000,000
and (ii) unsecured advances to the Borrower's employees or producers in the
aggregate not to exceed $50,000.
"PERMITTED INDEBTEDNESS" is defined in Section 6.11.
CREDIT AGREEMENT (Clark/Bardes, Inc.) Page 9
<PAGE> 16
"PERMITTED PURCHASE MONEY OBLIGATIONS" means purchase money obligations
(including capital leases) incurred in the ordinary course of business of the
Borrower which are not in excess of $750,000 outstanding at any one time.
"PERMITTED REPURCHASE" is defined in Section 6.10.
"PERSISTENCY RATE" means, for each 12 month period following the date
of this Agreement, the following percentages:
<TABLE>
<CAPTION>
======================================================
Period Persistency Rate
------------------------------------------------------
<S> <C>
Month 1 through 12 95%
------------------------------------------------------
Month 13 through 24 90.25%
------------------------------------------------------
Month 25 through 36 85.74%
------------------------------------------------------
Months 37 through 48 81.45%
------------------------------------------------------
Months 49 through 60 77.38%
------------------------------------------------------
Months 61 through 72 73.51%
------------------------------------------------------
Months 73 through 84 69.83%
------------------------------------------------------
Months 85 through 96 66.34%
------------------------------------------------------
Months 97 through 108 63.03%
------------------------------------------------------
Months 109 through 120 59.87%
======================================================
</TABLE>
"PERSON" means any natural person, corporation, firm, joint venture,
partnership, limited liability company, association, enterprise, trust or other
entity or organization, or any government or political subdivision or any
agency, department or instrumentality thereof.
"PLAN" means an employee pension benefit plan which is covered by Title
IV of ERISA or subject to the minimum funding standards under Section 412 of the
Code as to which the Borrower or any member of the Controlled Group may have any
liability.
"PRESENT VALUE OF RENEWALS" means the net commissions and fees to be
earned by Borrower (after deducting the amount required to be paid to the
producer thereof) on renewals of existing policies and contracts (excluding any
surrendered or lapsed policies or contracts and any policies or contracts for
which Borrower has received notice of non-renewal) for the 10 year period
following the date of determination, discounted to present value at a per annum
rate equal to twelve percent (12%).
"PRICING SCHEDULE" means the Schedule attached hereto identified as
such.
"PROPERTY" of a Person means any and all property, whether real,
personal, tangible, intangible, or mixed, of such Person, or other assets owned,
leased or operated by such Person.
CREDIT AGREEMENT (Clark/Bardes, Inc.) Page 10
<PAGE> 17
"PURCHASERS" is defined in Section 12.3.1.
"RATE HEDGING AGREEMENT" means an agreement, device or arrangement
providing for payments which are related to fluctuations of interest rates,
exchange rates or forward rates, including, but not limited to,
dollar-denominated or cross-currency interest rate exchange agreements, forward
currency exchange agreements, interest rate cap or collar protection agreements,
forward rate currency or interest rate options, puts and warrants.
"RATE HEDGING OBLIGATIONS" of a Person means any and all obligations of
such Person, whether absolute or contingent and howsoever and whensoever
created, arising, evidenced or acquired (including all renewals, extensions and
modifications thereof and substitutions therefor), under (i) any and all Rate
Hedging Agreements, and (ii) any and all cancellations, buy backs, reversals,
terminations or assignments of any Rate Hedging Agreement.
"REGULATION D" means Regulation D of the Board of Governors of the
Federal Reserve System as from time to time in effect and any successor thereto
or other regulation or official interpretation of said Board of Governors
relating to reserve requirements applicable to member banks of the Federal
Reserve System.
"REGULATION U" means Regulation U of the Board of Governors of the
Federal Reserve System as from time to time in effect and any successor or other
regulation or official interpretation of said Board of Governors relating to the
extension of credit by banks for the purpose of purchasing or carrying margin
stocks applicable to member banks of the Federal Reserve System.
"RENTALS" of a Person means the aggregate fixed amounts payable by such
Person under any Operating Lease.
"REPORTABLE EVENT" means a reportable event as defined in Section 4043
of ERISA and the regulations issued under such section, with respect to a Plan,
excluding, however, such events as to which the PBGC has by regulation waived
the requirement of Section 4043(a) of ERISA that it be notified within 30 days
of the occurrence of such event, provided, however, that a failure to meet the
minimum funding standard of Section 412 of the Code and of Section 302 of ERISA
shall be a Reportable Event regardless of the issuance of any such waiver of the
notice requirement in accordance with either Section 4043(a) of ERISA or Section
412(d) of the Code.
"REPORTS" is defined in Section 9.6.
"REQUIRED LENDERS" means Lenders in the aggregate having at least
66.67% of the Aggregate Commitment or, if the Aggregate Commitment has been
terminated, Lenders in the aggregate holding at least 51% of the aggregate
unpaid principal amount of the outstanding Advances.
"RESERVE REQUIREMENT" means, with respect to an Interest Period, the
maximum aggregate reserve requirement (including all basic, supplemental,
marginal and other reserves) which is imposed under Regulation D on Eurocurrency
liabilities.
"REVOLVING CREDIT FACILITY" is defined in Section 2.1.
"REVOLVING CREDIT TERMINATION BALANCE" means the aggregate principal
amount of Advances under the Revolving Credit Facility outstanding on December
31 of each year after giving effect to any Advances made or repaid by such date,
and less the Working Capital Sublimit.
CREDIT AGREEMENT (Clark/Bardes, Inc.) Page 11
<PAGE> 18
"REVOLVING CREDIT TERMINATION DATE" means, (i) with respect to each
Term Conversion of a Year End Balance, December 31 of such year and (ii) with
respect to the entire Revolving Credit Facility, December 31, 2001 or any later
date as may be specified as the Revolving Credit Termination Date in accordance
with Section 2.19 or any earlier date on which the Aggregate Commitment is
reduced to zero or otherwise terminated pursuant to the terms hereof.
"REVOLVING NOTE" is defined in Section 2.13.
"S&P" means Standard and Poor's Ratings Services, a division of The
McGraw Hill Companies, Inc.
"SALE AND LEASEBACK TRANSACTION" means any sale or other transfer of
Property by any Person with the intent to lease such Property as lessee.
"SCHEDULE" refers to a specific schedule to this Agreement, unless
another document is specifically referenced.
"SECTION" means a numbered section of this Agreement, unless another
document is specifically referenced.
"SINGLE EMPLOYER PLAN" means a Plan maintained by the Borrower or any
member of the Controlled Group for employees of the Borrower or any member of
the Controlled Group.
"SUBORDINATED INDEBTEDNESS" of a Person means any Indebtedness of such
Person the payment of which is subordinated to payment of the Obligations to the
written satisfaction of the Required Lenders.
"SUBSIDIARY" of a Person means (i) any corporation more than 50% of the
outstanding securities having ordinary voting power of which shall at the time
be owned or controlled, directly or indirectly, by such Person or by one or more
of its Subsidiaries or by such Person and one or more of its Subsidiaries, or
(ii) any partnership, limited liability company, association, joint venture or
similar business organization more than 50% of the ownership interests having
ordinary voting power of which shall at the time be so owned or controlled.
Unless otherwise expressly provided, all references herein to a "Subsidiary"
shall mean a Subsidiary of the Borrower and a Subsidiary of Parent.
"SUBSTANTIAL PORTION" means, with respect to the Property of the
Borrower and its Subsidiaries, Property which (i) represents more than 15% of
the consolidated assets of the Borrower and its Subsidiaries as would be shown
in the consolidated financial statements of the Borrower and its Subsidiaries as
at the beginning of the twelve-month period ending with the month in which such
determination is made, or (ii) is responsible for more than 15% of the
consolidated net sales or of the consolidated net income of the Borrower and its
Subsidiaries as reflected in the financial statements referred to in clause (i)
above.
"TAXES" means any and all present or future taxes, duties, levies,
imposts, deductions, charges or withholdings, and any and all liabilities with
respect to the foregoing, but excluding Excluded Taxes.
"TERM CONVERSION" is defined in Section 2.1.
"TERM LOAN" means a term loan by the Lenders in accordance with their
Commitment Percentages, in the aggregate amount of $30,000,000.
CREDIT AGREEMENT (Clark/Bardes, Inc.) Page 12
<PAGE> 19
"TERM NOTE" is defined in Section 2.13.
"TRANSFEREE" is defined in Section 12.4.
"TYPE" means, with respect to any Advance, its nature as a Floating
Rate Advance or a Eurodollar Advance.
"UNFUNDED LIABILITIES" means the amount (if any) by which the present
value of all vested and unvested accrued benefits under all Single Employer
Plans exceeds the fair market value of all such Plan assets allocable to such
benefits, all determined as of the then most recent valuation date for such
Plans and as if such Plans were terminated on that date.
"UNMATURED DEFAULT" means an event which but for the lapse of time or
the giving of notice, or both, would constitute a Default.
"WHOLLY-OWNED SUBSIDIARY" of a Person means (i) any Subsidiary all of
the outstanding voting securities of which shall at the time be owned or
controlled, directly or indirectly, by such Person or one or more Wholly-Owned
Subsidiaries of such Person, or by such Person and one or more Wholly-Owned
Subsidiaries of such Person, or (ii) any partnership, limited liability company,
association, joint venture or similar business organization 100% of the
ownership interests having ordinary voting power of which shall at the time be
so owned or controlled.
"WORKING CAPITAL SUBLIMIT" means that portion of the Revolving Credit
Facility which shall be used solely for working capital and other general
corporate purposes, which shall not exceed $5,000,000.
"YEAR END BALANCE" is defined in Section 2.1.
"YEAR 2000 PROBLEM" means any significant risk that computer hardware
or software used in the Borrower's business or operations will not in the case
of any dates or time periods occurring after December 31, 1999 function at least
as effectively as in the case of dates or time periods occurring prior to
January 1, 2000.
"YEAR 2000 PROGRAM" is defined in Section 5.19.
The foregoing definitions shall be equally applicable to both the
singular and plural forms of the defined terms.
ARTICLE II
THE CREDITS
2.1 Commitments.
2.1.1. Revolving Credit Facility. From and including the date of
this Agreement and prior to the Revolving Credit Termination Date, each Lender
severally agrees, on the terms and conditions set forth in this Agreement, to
make revolving Loans to the Borrower from time to time in amounts not to exceed
in the aggregate at any one time outstanding the amount of its Commitment
Percentage of the lesser of (i) the Borrowing Base or (ii) $35,000,000 (the
"REVOLVING CREDIT FACILITY"). Subject to the terms of this
CREDIT AGREEMENT (Clark/Bardes, Inc.) Page 13
<PAGE> 20
Agreement, the Borrower may borrow, repay and reborrow under the Revolving
Credit Facility at any time prior to the Revolving Credit Termination Date.
Commencing on December 31, 1999, and continuing on December 31 of each year
until the Revolving Credit Termination Date, the Revolving Credit Termination
Balance on such date (the "YEAR END BALANCE") shall convert (a "TERM
CONVERSION") to a term loan, to be repaid as provided in Section 2.2. Each
Lender's Commitment to lend under the Revolving Credit Facility shall (i) be
reduced by its Commitment Percentage of the term loans resulting from each Term
Conversion and (ii) expire on the Revolving Credit Termination Date. Principal
payments made (a) on such Year End Balances and (b) after the Revolving Credit
Termination Date, may not be reborrowed. The Revolving Credit Facility (other
than the Working Capital Sublimit, which shall be used for the purposes set
forth in the definition thereof) shall be used solely for (x) the purchase of
assets used in the ordinary course or Borrower's business and (y) Permitted
Acquisitions.
2.1.2. Term Loan. Each Lender severally agrees, on the terms and
conditions set forth in this Agreement, to make it's Commitment Percentage of
the Term Loan to the Borrower in two Advances as follows:
(i) the first Advance under the Term Loan in the amount of
$25,000,000 upon request therefor by Borrower (not to exceed 11
Business Days after the date of this Agreement); and
(ii) the final Advance under the Term Loan in the amount of
$5,000,000 upon request therefor by Borrower (not to exceed 90
days after the date of this Agreement).
2.2 Required Payments; Termination.
2.2.1. Year End Balances. Commencing on the last day of March
following each Term Conversion, and continuing on the last day of each
June, September, December and March thereafter until paid in full,
Borrower shall make a principal payment (in addition to the interest
payments required by Section 2.15) on the Year End Balances to Agent
for the account of each Lender in an amount equal to the Year End
Balance of such Term Conversion, divided by twenty (20).
2.2.2. Term Loan. Commencing on the last day of March, 1999, and
continuing on the last day of each June, September, December and March
thereafter until paid in full, Borrower shall make a principal payment
(in addition to the interest payments required by Section 2.15) on the
Term Loan to Agent for the account of each Lender in an amount equal to
$1,250,000. The Term Loan shall be payable in full on December 31,
2004.
2.2.3. Other Mandatory Principal Payments. In addition to the
principal payments provided for above in Sections 2.2.1 and 2.2.2,
Borrower shall pay to Agent for the account of each Lender 100% of the
net cash proceeds (i.e. gross cash proceeds less ordinary and
reasonable closing costs) of (i) the sale of accounts receivable or
renewals, and (ii) the issuance of other Indebtedness other than
Permitted Indebtedness (without implying the Lenders' consent to any
such Indebtedness except as specifically provided herein). In addition,
Borrower shall pay to Agent for the account of each Lender an annual
payment (on March 31 of each year) of principal in an amount equal to
sixty-five percent (65%) of Excess Cash Flow. If Borrower's
Consolidated Funded Indebtedness exceeds eighty percent (80%) of the
Net Present Value of Renewals as of the end of any of the four (4)
calendar quarters preceding such date, then the mandatory prepayment
required by the previous sentence shall be increased to eighty-five
percent (85%) of Excess Cash Flow. Any mandatory prepayment under this
Section 2.2.3 shall be applied first to the Term Loan, second to any
then
CREDIT AGREEMENT (Clark/Bardes, Inc.) Page 14
<PAGE> 21
existing portion of the Loan which is the subject of a Term Conversion,
and third to the remainder of the Revolving Credit Facility, in each
instance in the inverse order of maturity.
2.2.4. Revolving Credit Facility. On the Revolving Credit
Termination Date which relates to the entire Revolving Credit Facility,
Borrower shall pay to Agent for the account of each Lender, the
outstanding balance of the Working Capital Sublimit of the Revolving
Credit Facility, together with any accrued but unpaid interest, and any
unpaid fees and expenses relating thereto.
Any outstanding Advances and all other unpaid Obligations shall be paid in full
by the Borrower on the Facility Termination Date.
2.3. Ratable Loans. Each Advance hereunder shall consist of Loans made
from the several Lenders ratably in accordance with their respective Commitment
Percentages.
2.4. Types of Advances. The Advances may be Floating Rate Advances or
Eurodollar Advances, or a combination thereof, selected by the Borrower in
accordance with Sections 2.8 and 2.9.
2.5. Commitment Fee; Reductions in Aggregate Commitment. The Borrower
agrees to pay to the Agent for the account of each Lender a commitment fee at a
per annum rate equal to the Applicable Fee Rate on the daily unused portion of
such Lender's Commitment Percentage of the maximum amount of the Revolving
Credit Facility from the date hereof to and including the Revolving Credit
Termination Date, payable at the end of each calendar quarter hereafter and on
the Revolving Credit Termination Date. In addition, the Borrower agrees to pay
to the Agent for the account of each Lender a commitment fee at a per annum rate
equal to the Applicable Fee Rate on such Lender's Commitment Percentage of the
amount of the Term Loan not yet advanced from the date hereof to and including
the date that the Term Loan is fully advanced, payable on the dates of the
Advances under the Term Loan as provided in Section 2.1.2. The Borrower may
permanently reduce the Aggregate Commitment (which shall also result in a
reduction in the commitment fee provided for in the first sentence of this
Section) in whole, or in part ratably among the Lenders in integral multiples of
$5,000,000, upon at least three Business Days' written notice to the Agent,
which notice shall specify the amount of any such reduction, provided, however,
that the amount of the Aggregate Commitment may not be reduced below the
aggregate principal amount of the outstanding Advances. All accrued commitment
fees shall be payable on the effective date of any termination of the
obligations of the Lenders to make Loans hereunder.
2.6. Minimum Amount of Each Advance. Each Eurodollar Advance and each
Floating Rate Advance shall be in the minimum amount of $1,000,000 (and in
multiples of $100,000 if in excess thereof), provided, however, that any
Floating Rate Advance may be in the amount of the unused Aggregate Commitment.
2.7. Optional Principal Payments. The Borrower may from time to time
pay, without penalty or premium, all outstanding Floating Rate Advances, or, in
a minimum aggregate amount of $1,000,000 or any integral multiple of $100,000 in
excess thereof, any portion of the outstanding Floating Rate Advances upon one
Business Days' prior notice to the Agent. The Borrower may from time to time
pay, subject to the payment of any funding indemnification amounts required by
Section 3.4 but without penalty or premium, all outstanding Eurodollar Advances,
or, in a minimum aggregate amount of $1,000,000 or any integral multiple of
$100,000 in excess thereof, any portion of the outstanding Eurodollar Advances
upon three Business Days' prior notice to the Agent. Prior to the occurrence of
an Unmatured Default, principal payments shall be applied to the Loans as
determined by Borrower; after the occurrence of an Unmatured Default, principal
payments shall be applied to the Loans as determined by Required Lenders. In any
event, principal installments applied to the Term Loan shall be applied in the
inverse order of maturity.
CREDIT AGREEMENT (Clark/Bardes, Inc.) Page 15
<PAGE> 22
2.8. Method of Selecting Types and Interest Periods for New Advances.
The Borrower shall select the Type of Advance and, in the case of each
Eurodollar Advance, the Interest Period applicable thereto from time to time.
The Borrower shall give the Agent irrevocable notice (a "BORROWING NOTICE") not
later than 10:00 a.m. (Dallas, Texas time) at least one Business Day before the
Borrowing Date of each Floating Rate Advance and three Business Days before the
Borrowing Date for each Eurodollar Advance, specifying:
(i) the Borrowing Date, which shall be a Business Day, of such
Advance,
(ii) the aggregate amount of such Advance,
(iii) the Type of Advance selected, and
(iv) in the case of each Eurodollar Advance, the Interest Period
applicable thereto.
Not later than noon (Dallas, Texas time) on each Borrowing Date, each Lender
shall make available its Loan or Loans in funds immediately available in Dallas,
Texas to the Agent at its address specified pursuant to Article XIII. The Agent
will make the funds so received from the Lenders available to the Borrower at
the Agent's aforesaid address. Borrower shall be entitled to no more than five
(5) Eurodollar Loans outstanding at any one time.
2.9. Conversion and Continuation of Outstanding Advances. Floating Rate
Advances shall continue as Floating Rate Advances unless and until such Floating
Rate Advances are converted into Eurodollar Advances pursuant to this Section
2.9 or are repaid in accordance with Section 2.7. Each Eurodollar Advance shall
continue as a Eurodollar Advance until the end of the then applicable Interest
Period therefor, at which time such Eurodollar Advance shall be automatically
converted into a Floating Rate Advance unless (x) such Eurodollar Advance is or
was repaid in accordance with Section 2.7 or (y) the Borrower shall have given
the Agent a Conversion/Continuation Notice (as defined below) requesting that,
at the end of such Interest Period, such Eurodollar Advance continue as a
Eurodollar Advance for the same or another Interest Period. Subject to the terms
of Section 2.6, the Borrower may elect from time to time to convert all or any
part of a Floating Rate Advance into a Eurodollar Advance. The Borrower shall
give the Agent irrevocable notice (a "CONVERSION/CONTINUATION NOTICE") of each
conversion of a Floating Rate Advance into a Eurodollar Advance or continuation
of a Eurodollar Advance not later than 10:00 a.m. (Dallas, Texas time) at least
three Business Days prior to the date of the requested conversion or
continuation, specifying:
(i) the requested date, which shall be a Business Day, of such
conversion or continuation,
(ii) the aggregate amount and Type of the Advance which is to be
converted or continued, and
(iii) the amount of such Advance which is to be converted into or
continued as a Eurodollar Advance and the duration of the Interest
Period applicable thereto.
2.10. Changes in Interest Rate, etc. Each Floating Rate Advance shall
bear interest on the outstanding principal amount thereof, for each day from and
including the date such Advance is made or is automatically converted from a
Eurodollar Advance into a Floating Rate Advance pursuant to Section 2.9, to but
excluding the date it is paid or is converted into a Eurodollar Advance pursuant
to Section 2.9 hereof, at a rate per annum equal to the Floating Rate for such
day. Changes in the rate of interest on that portion
CREDIT AGREEMENT (Clark/Bardes, Inc.) Page 16
<PAGE> 23
of any Advance maintained as a Floating Rate Advance will take effect
simultaneously with each change in the Alternate Base Rate. Each Eurodollar
Advance shall bear interest on the outstanding principal amount thereof from and
including the first day of the Interest Period applicable thereto to (but not
including) the last day of such Interest Period at the interest rate determined
by the Agent as applicable to such Eurodollar Advance based upon the Borrower's
selections under Sections 2.8 and 2.9 and otherwise in accordance with the terms
hereof. No Interest Period may end after the Facility Termination Date.
2.11. Rates Applicable After Default. Notwithstanding anything to the
contrary contained in Section 2.8 or 2.9, during the continuance of a Default or
Unmatured Default the Required Lenders may, at their option, by notice to the
Borrower (which notice may be revoked at the option of the Required Lenders
notwithstanding any provision of Section 8.2 requiring unanimous consent of the
Lenders to changes in interest rates), declare that no Advance may be made as,
converted into or continued as a Eurodollar Advance. During the continuance of a
Default the Required Lenders may, at their option, by notice to the Borrower
(which notice may be revoked at the option of the Required Lenders
notwithstanding any provision of Section 8.2 requiring unanimous consent of the
Lenders to changes in interest rates), declare that (i) each Eurodollar Advance
shall bear interest for the remainder of the applicable Interest Period at the
rate otherwise applicable to such Interest Period plus 3% per annum and (ii)
each Floating Rate Advance shall bear interest at a rate per annum equal to the
Floating Rate in effect from time to time plus 3% per annum, provided that,
during the continuance of a Default under Section 7.6 or 7.7, the interest rates
set forth in clauses (i) and (ii) above shall be applicable to all Advances
without any election or action on the part of the Agent or any Lender.
2.12. Method of Payment. All payments of the Obligations hereunder
shall be made, without setoff, deduction, or counterclaim, in immediately
available funds to the Agent at the Agent's address specified pursuant to
Article XIII, or at any other Lending Installation of the Agent specified in
writing by the Agent to the Borrower, by noon (local time) on the date when due
and shall be applied ratably by the Agent among the Lenders. Each payment
delivered to the Agent for the account of any Lender shall be delivered promptly
by the Agent to such Lender in the same type of funds that the Agent received at
its address specified pursuant to Article XIII or at any Lending Installation
specified in a notice received by the Agent from such Lender. The Agent is
hereby authorized to charge the account of the Borrower maintained with Bank One
for each payment of principal, interest and fees as it becomes due hereunder.
2.13. Noteless Agreement; Evidence of Indebtedness. (i) Each Lender
shall maintain in accordance with its usual practice an account or accounts
evidencing the indebtedness of the Borrower to such Lender resulting from each
Loan made by such Lender from time to time, including the amounts of principal
and interest payable and paid to such Lender from time to time hereunder.
(ii) The Agent shall also maintain accounts in which it will record
(a) the amount of each Loan made hereunder, the Type thereof and the Interest
Period with respect thereto, (b) the amount of any principal or interest due and
payable or to become due and payable from the Borrower to each Lender hereunder
and (c) the amount of any sum received by the Agent hereunder from the Borrower
and each Lender's share thereof.
(iii) The entries maintained in the accounts maintained pursuant to
paragraphs (i) and (ii) above shall be prima facie evidence of the existence and
amounts of the Obligations therein recorded; provided, however, that the failure
of the Agent or any Lender to maintain such accounts or any error therein shall
not in any manner affect the obligation of the Borrower to repay the Obligations
in accordance with their terms.
CREDIT AGREEMENT (Clark/Bardes, Inc.) Page 17
<PAGE> 24
(iv) Any Lender may request that its Loans under the Term Loan be
evidenced by a promissory note (a "TERM NOTE"). In such event, the Borrower
shall prepare, execute and deliver to such Lender a Term Note payable to the
order of such Lender in the form attached hereto as Exhibit E-1. Thereafter, the
Loans evidenced by such Term Note and interest thereon shall at all times
(including after any assignment pursuant to Section 12.3) be represented by one
or more Term Notes payable to the order of the payee named therein or any
assignee pursuant to Section 12.3, except to the extent that any such Lender or
assignee subsequently returns any such Term Note for cancellation and requests
that such Loans once again be evidenced as described in paragraphs (i) and (ii)
above.
(v) Any Lender may request that its Loans under the Revolving Credit
Facility be evidenced by a promissory note (a "REVOLVING NOTE"). In such event,
the Borrower shall prepare, execute and deliver to such Lender a Revolving Note
payable to the order of such Lender in the form attached hereto as Exhibit E-2.
Thereafter, the Loans evidenced by such Revolving Note and interest thereon
shall at all times (including after any assignment pursuant to Section 12.3) be
represented by one or more Revolving Notes payable to the order of the payee
named therein or any assignee pursuant to Section 12.3, except to the extent
that any such Lender or assignee subsequently returns any such Revolving Note
for cancellation and requests that such Loans once again be evidenced as
described in paragraphs (i) and (ii) above.
2.14. Telephonic Notices. The Borrower hereby authorizes the Lenders
and the Agent to extend, convert or continue Advances, effect selections of
Types of Advances and to transfer funds based on telephonic notices made by any
person or persons the Agent or any Lender in good faith believes to be acting on
behalf of the Borrower, it being understood that the foregoing authorization is
specifically intended to allow Borrowing Notices and Conversion/Continuation
Notices to be given telephonically. The Borrower agrees to deliver promptly to
the Agent a written confirmation, if such confirmation is requested by the Agent
or any Lender, of each telephonic notice signed by an Authorized Officer. If the
written confirmation differs in any material respect from the action taken by
the Agent and the Lenders, the records of the Agent and the Lenders shall govern
absent manifest error.
2.15. Interest Payment Dates; Interest and Fee Basis. Interest accrued
on each Floating Rate Advance shall be payable on each Payment Date, commencing
with the first such date to occur after the date hereof and at maturity.
Interest accrued on each Eurodollar Advance shall be payable on the last day of
its applicable Interest Period, on any date on which the Eurodollar Advance is
prepaid, whether by acceleration or otherwise, and at maturity. Interest accrued
on each Eurodollar Advance having an Interest Period longer than three months
shall also be payable on the last day of each three-month interval during such
Interest Period. Interest and commitment fees shall be calculated for actual
days elapsed on the basis of a 360-day year. Interest shall be payable for the
day an Advance is made but not for the day of any payment on the amount paid if
payment is received prior to noon (local time) at the place of payment. If any
payment of principal of or interest on an Advance shall become due on a day
which is not a Business Day, such payment shall be made on the next succeeding
Business Day and, in the case of a principal payment, such extension of time
shall be included in computing interest in connection with such payment.
2.16. Notification of Advances, Interest Rates, Prepayments and
Commitment Reductions. Promptly after receipt thereof, the Agent will notify
each Lender of the contents of each Aggregate Commitment reduction notice,
Borrowing Notice, Conversion/Continuation Notice, and repayment notice received
by it hereunder. The Agent will notify each Lender of the interest rate
applicable to each Eurodollar Advance promptly upon determination of such
interest rate and will give each Lender prompt notice of each change in the
Alternate Base Rate.
CREDIT AGREEMENT (Clark/Bardes, Inc.) Page 18
<PAGE> 25
2.17. Lending Installations. Each Lender may book its Loans at any
Lending Installation selected by such Lender and may change its Lending
Installation from time to time. All terms of this Agreement shall apply to any
such Lending Installation and the Loans and any Notes issued hereunder shall be
deemed held by each Lender for the benefit of any such Lending Installation.
Each Lender may, by written notice to the Agent and the Borrower in accordance
with Article XIII, designate replacement or additional Lending Installations
through which Loans will be made by it and for whose account Loan payments are
to be made.
2.18. Non-Receipt of Funds by the Agent. Unless the Borrower or a
Lender, as the case may be, notifies the Agent prior to the date on which it is
scheduled to make payment to the Agent of (i) in the case of a Lender, the
proceeds of a Loan or (ii) in the case of the Borrower, a payment of principal,
interest or fees to the Agent for the account of the Lenders, that it does not
intend to make such payment, the Agent may assume that such payment has been
made. The Agent may, but shall not be obligated to, make the amount of such
payment available to the intended recipient in reliance upon such assumption. If
such Lender or the Borrower, as the case may be, has not in fact made such
payment to the Agent, the recipient of such payment shall, on demand by the
Agent, repay to the Agent the amount so made available together with interest
thereon in respect of each day during the period commencing on the date such
amount was so made available by the Agent until the date the Agent recovers such
amount at a rate per annum equal to (x) in the case of payment by a Lender, the
Federal Funds Effective Rate for such day for the first three days and,
thereafter, the interest rate applicable to the relevant Loan or (y) in the case
of payment by the Borrower, the interest rate applicable to the relevant Loan.
2.19. Extension of Revolving Credit Termination Date. The Borrower may
request an extension of the Revolving Credit Termination Date by submitting a
request for an extension to the Agent (an "EXTENSION REQUEST") no more than 60
days prior to the Revolving Credit Termination Date. The Extension Request must
specify the new Revolving Credit Termination Date requested by the Borrower and
the date (which must be at least 30 days after the Extension Request is
delivered to the Agent) as of which the Lenders must respond to the Extension
Request (the "RESPONSE DATE"). The new Revolving Credit Termination Date shall
be no more than 364 days after the Revolving Credit Termination Date in effect
at the time the Extension Request is received, including the Revolving Credit
Termination Date as one of the days in the calculation of the days elapsed.
Promptly upon receipt of an Extension Request, the Agent shall notify each
Lender of the contents thereof and shall request each Lender to approve the
Extension Request. Each Lender approving the Extension Request shall deliver its
written consent no later than the Response Date. If the consent of each of the
Lenders is received by the Agent, the Revolving Credit Termination Date
specified in the Extension Request shall become effective on the existing
Revolving Credit Termination Date and the Agent shall promptly notify the
Borrower and each Lender of the new Revolving Credit Termination Date.
2.20. Replacement of Lender. If the Borrower is required pursuant to
Section 3.1, 3.2 or 3.5 to make any additional payment to any Lender or if any
Lender's obligation to make or continue, or to convert Floating Rate Advances
into, Eurodollar Advances shall be suspended pursuant to Section 3.3 (any Lender
so affected an "AFFECTED LENDER"), the Borrower may elect, if such amounts
continue to be charged or such suspension is still effective, to replace such
Affected Lender as a Lender party to this Agreement, provided that no Default or
Unmatured Default shall have occurred and be continuing at the time of such
replacement, and provided further that, concurrently with such replacement, (i)
another bank or other entity which is reasonably satisfactory to the Borrower
and the Agent shall agree, as of such date, to purchase for cash the Advances
and other Obligations due to the Affected Lender pursuant to an assignment
substantially in the form of Exhibit C and to become a Lender for all purposes
under this Agreement and to assume all obligations of the Affected Lender to be
terminated as of such date and to comply with the requirements of Section 12.3
applicable to assignments, and (ii) the Borrower shall pay to such Affected
Lender in same day
CREDIT AGREEMENT (Clark/Bardes, Inc.) Page 19
<PAGE> 26
funds on the day of such replacement all interest, fees and other amounts then
accrued but unpaid to such Affected Lender by the Borrower hereunder to and
including the date of termination, including without limitation payments due to
such Affected Lender under Sections 3.1, 3.2 and 3.5.
ARTICLE III
YIELD PROTECTION; TAXES
3.1. Yield Protection. If, on or after the date of this Agreement, the
adoption of any law or any governmental or quasi-governmental rule, regulation,
policy, guideline or directive (whether or not having the force of law), or any
change in the interpretation or administration thereof by any governmental or
quasi-governmental authority, central bank or comparable agency charged with the
interpretation or administration thereof, or compliance by any Lender or
applicable Lending Installation with any request or directive (whether or not
having the force of law) of any such authority, central bank or comparable
agency:
(i) subjects any Lender or any applicable Lending Installation to any
Taxes, or changes the basis of taxation of payments (other than with
respect to Excluded Taxes) to any Lender in respect of its Eurodollar
Loans, or
(ii) imposes or increases or deems applicable any reserve, assessment
insurance charge, special deposit or similar requirement against assets
of, deposits with or for the account of, or credit extended by, any
Lender or any applicable Lending Installation (other than reserves and
assessments taken into account in determining the interest rate
applicable to Eurodollar Advances), or
(iii) imposes any other condition the result of which is to increase
the cost to any Lender or any applicable Lending Installation of
making, funding or maintaining its Eurodollar Loans or reduces any
amount receivable by any Lender or any applicable Lending Installation
in connection with its Eurodollar Loans, or requires any Lender or any
applicable Lending Installation to make any payment calculated by
reference to the amount of Eurodollar Loans held or interest received
by it, by an amount deemed material by such Lender,
and the result of any of the foregoing is to increase the cost to such Lender or
applicable Lending Installation of making or maintaining its Eurodollar Loans or
Commitment or to reduce the return received by such Lender or applicable Lending
Installation in connection with such Eurodollar Loans or Commitment, then,
within 30 days of demand by such Lender and delivery to the Borrower of a
certified calculation of the amounts owed hereunder, the Borrower shall pay such
Lender such additional amount or amounts as will compensate such Lender for such
increased cost or reduction in amount received.
3.2. Changes in Capital Adequacy Regulations. If a Lender determines
the amount of capital required or expected to be maintained by such Lender, any
Lending Installation of such Lender or any corporation controlling such Lender
is increased as a result of a Change, then, within 30 days of demand by such
Lender and delivery to the Borrower of a certified calculation of the amounts
owed hereunder, the Borrower shall pay such Lender the amount necessary to
compensate for any shortfall in the rate of return on the portion of such
increased capital which such Lender determines is attributable to this
Agreement, its Loans or its Commitment to make Loans hereunder (after taking
into account such Lender's policies as to capital adequacy). "CHANGE" means (i)
any change after the date of this Agreement in the Risk-Based Capital Guidelines
or (ii) any adoption of or change in any other law, governmental or
quasi-governmental rule, regulation, policy, guideline, interpretation, or
directive (whether or not having the force of law) after the date of this
Agreement which affects the amount of capital required or expected to be
maintained by any
CREDIT AGREEMENT (Clark/Bardes, Inc.) Page 20
<PAGE> 27
Lender or any Lending Installation or any corporation controlling any Lender.
"RISK-BASED CAPITAL GUIDELINES" means (i) the risk-based capital guidelines in
effect in the United States on the date of this Agreement, including transition
rules, and (ii) the corresponding capital regulations promulgated by regulatory
authorities outside the United States implementing the July 1988 report of the
Basle Committee on Banking Regulation and Supervisory Practices Entitled
"International Convergence of Capital Measurements and Capital Standards,"
including transition rules, and any amendments to such regulations adopted prior
to the date of this Agreement.
3.3. Availability of Types of Advances. If any Lender determines that
maintenance of its Eurodollar Loans at a suitable Lending Installation would
violate any applicable law, rule, regulation, or directive, whether or not
having the force of law, or if the Required Lenders determine that (i) deposits
of a type and maturity appropriate to match fund Eurodollar Advances are not
available or (ii) the interest rate applicable to Eurodollar Advances does not
accurately reflect the cost of making or maintaining Eurodollar Advances, then
the Agent shall suspend the availability of Eurodollar Advances and require any
affected Eurodollar Advances to be repaid or converted to Floating Rate
Advances, subject to the payment of any funding indemnification amounts required
by Section 3.4.
3.4. Funding Indemnification. If any payment of a Eurodollar Advance
occurs on a date which is not the last day of the applicable Interest Period,
whether because of acceleration, prepayment (other than prepayments pursuant to
Section 2.2.3) or otherwise, or a Eurodollar Advance is not made on the date
specified by the Borrower for any reason other than default by the Lenders, the
Borrower will indemnify each Lender for any loss or cost incurred by it
resulting therefrom, including, without limitation, any loss or cost in
liquidating or employing deposits acquired to fund or maintain such Eurodollar
Advance.
3.5. Taxes. (i) All payments by the Borrower to or for the account of
any Lender or the Agent hereunder or under any Note shall be made free and clear
of and without deduction for any and all Taxes. If the Borrower shall be
required by law to deduct any Taxes from or in respect of any sum payable
hereunder to any Lender or the Agent, (a) the sum payable shall be increased as
necessary so that after making all required deductions (including deductions
applicable to additional sums payable under this Section 3.5) such Lender or the
Agent (as the case may be) receives an amount equal to the sum it would have
received had no such deductions been made, (b) the Borrower shall make such
deductions, (c) the Borrower shall pay the full amount deducted to the relevant
authority in accordance with applicable law and (d) the Borrower shall furnish
to the Agent the original copy of a receipt evidencing payment thereof within 30
days after such payment is made.
(ii) In addition, the Borrower hereby agrees to pay any present or
future stamp or documentary taxes and any other excise or property taxes,
charges or similar levies which arise from any payment made hereunder or under
any Note or from the execution or delivery of, or otherwise with respect to,
this Agreement or any Note ("OTHER TAXES").
(iii) The Borrower hereby agrees to indemnify the Agent and each Lender
for the full amount of Taxes or Other Taxes (including, without limitation, any
Taxes or Other Taxes imposed on amounts payable under this Section 3.5) paid by
the Agent or such Lender and any liability (including penalties, interest and
expenses) arising therefrom or with respect thereto. Payments due under this
indemnification shall be made within 30 days of the date the Agent or such
Lender makes demand therefor pursuant to Section 3.6.
(iv) Each Lender that is not incorporated under the laws of the United
States of America or a state thereof (each a "NON-U.S. LENDER") agrees that it
will, not less than ten Business Days after the date of this Agreement, (i)
deliver to each of the Borrower and the Agent two duly completed copies of
United States
CREDIT AGREEMENT (Clark/Bardes, Inc.) Page 21
<PAGE> 28
Internal Revenue Service Form 1001 or 4224, certifying in either case that such
Lender is entitled to receive payments under this Agreement without deduction or
withholding of any United States federal income taxes, and (ii) deliver to each
of the Borrower and the Agent a United States Internal Revenue Form W-8 or W-9,
as the case may be, and certify that it is entitled to an exemption from United
States backup withholding tax. Each Non-U.S. Lender further undertakes to
deliver to each of the Borrower and the Agent (x) renewals or additional copies
of such form (or any successor form) on or before the date that such form
expires or becomes obsolete, and (y) after the occurrence of any event requiring
a change in the most recent forms so delivered by it, such additional forms or
amendments thereto as may be reasonably requested by the Borrower or the Agent.
All forms or amendments described in the preceding sentence shall certify that
such Lender is entitled to receive payments under this Agreement without
deduction or withholding of any United States federal income taxes, unless an
event (including without limitation any change in treaty, law or regulation) has
occurred prior to the date on which any such delivery would otherwise be
required which renders all such forms inapplicable or which would prevent such
Lender from duly completing and delivering any such form or amendment with
respect to it and such Lender advises the Borrower and the Agent that it is not
capable of receiving payments without any deduction or withholding of United
States federal income tax.
(v) For any period during which a Non-U.S. Lender has failed to
provide the Borrower with an appropriate form pursuant to clause (iv), above
(unless such failure is due to a change in treaty, law or regulation, or any
change in the interpretation or administration thereof by any governmental
authority, occurring subsequent to the date on which a form originally was
required to be provided), such Non-U.S. Lender shall not be entitled to
indemnification under this Section 3.5 with respect to Taxes imposed by the
United States; provided that, should a Non-U.S. Lender which is otherwise exempt
from or subject to a reduced rate of withholding tax become subject to Taxes
because of its failure to deliver a form required under clause (iv), above, the
Borrower shall take such steps as such Non-U.S. Lender shall reasonably request
to assist such Non-U.S. Lender to recover such Taxes.
(vi) Any Lender that is entitled to an exemption from or reduction of
withholding tax with respect to payments under this Agreement or any Note
pursuant to the law of any relevant jurisdiction or any treaty shall deliver to
the Borrower (with a copy to the Agent), at the time or times prescribed by
applicable law, such properly completed and executed documentation prescribed by
applicable law as will permit such payments to be made without withholding or at
a reduced rate.
(vii) If the U.S. Internal Revenue Service or any other governmental
authority of the United States or any other country or any political subdivision
thereof asserts a claim that the Agent did not properly withhold tax from
amounts paid to or for the account of any Lender (because the appropriate form
was not delivered or properly completed, because such Lender failed to notify
the Agent of a change in circumstances which rendered its exemption from
withholding ineffective, or for any other reason), such Lender shall indemnify
the Agent fully for all amounts paid, directly or indirectly, by the Agent as
tax, withholding therefor, or otherwise, including penalties and interest, and
including taxes imposed by any jurisdiction on amounts payable to the Agent
under this subsection, together with all costs and expenses related thereto
(including attorneys fees and time charges of attorneys for the Agent, which
attorneys may be employees of the Agent). The obligations of the Lenders under
this Section 3.5(vii) shall survive the payment of the Obligations and
termination of this Agreement.
3.6. Lender Statements; Survival of Indemnity. To the extent reasonably
possible, each Lender shall designate an alternate Lending Installation with
respect to its Eurodollar Loans to reduce any liability of the Borrower to such
Lender under Sections 3.1, 3.2 and 3.5 or to avoid the unavailability of
Eurodollar Advances under Section 3.3, so long as such designation is not, in
the judgment of such Lender,
CREDIT AGREEMENT (Clark/Bardes, Inc.) Page 22
<PAGE> 29
disadvantageous to such Lender. Each Lender shall deliver a written statement of
such Lender to the Borrower (with a copy to the Agent) as to the amount due, if
any, under Section 3.1, 3.2, 3.4 or 3.5. Such written statement shall set forth
in reasonable detail the calculations upon which such Lender determined such
amount and shall be final, conclusive and binding on the Borrower in the absence
of manifest error. Determination of amounts payable under such Sections in
connection with a Eurodollar Loan shall be calculated as though each Lender
funded its Eurodollar Loan through the purchase of a deposit of the type and
maturity corresponding to the deposit used as a reference in determining the
Eurodollar Rate applicable to such Loan, whether in fact that is the case or
not. Unless otherwise provided herein, the amount specified in the written
statement of any Lender shall be payable on demand after receipt by the Borrower
of such written statement. The obligations of the Borrower under Sections 3.1,
3.2, 3.4 and 3.5 shall survive payment of the Obligations and termination of
this Agreement.
ARTICLE IV
CONDITIONS PRECEDENT
4.1. Initial Advance. The Lenders shall not be required to make the
initial Advance hereunder unless the Borrower has furnished to the Agent:
(i) Copies of the articles or certificate of incorporation of the
Borrower and each Guarantor, together with all amendments, and a certificate of
good standing, each certified by the appropriate governmental officer in its
jurisdiction of incorporation.
(ii) Copies, certified by the Secretary or Assistant Secretary of the
Borrower and each Guarantor, of their by-laws and of their Board of Directors'
resolutions and of resolutions or actions of any other body authorizing the
execution of the Loan Documents to which the Borrower and each Guarantor is a
party.
(iii) An incumbency certificate, executed by the Secretary or
Assistant Secretary of the Borrower and each Guarantor, which shall identify by
name and title and bear the signatures of the Authorized Officers and any other
officers of the Borrower and such Guarantor authorized to sign the Loan
Documents to which the Borrower and each Guarantor is a party, upon which
certificate the Agent and the Lenders shall be entitled to rely until informed
of any change in writing by the Borrower or a Guarantor.
(iv) A certificate, signed by the chief financial officer of the
Borrower, stating that on the initial Borrowing Date no Default or Unmatured
Default has occurred and is continuing.
(v) A written opinion of the Borrower's and Guarantors' counsel,
addressed to the Lenders in substantially the form of Exhibit A.
(vi) Any Notes requested by a Lender pursuant to Section 2.13 payable
to the order of each such requesting Lender.
(vii) Written money transfer instructions, in substantially the form
of Exhibit D, addressed to the Agent and signed by an Authorized Officer,
together with such other related money transfer authorizations as the Agent may
have reasonably requested.
(viii) Information satisfactory to the Agent and the Required Lenders
regarding the Borrower's Year 2000 Program.
CREDIT AGREEMENT (Clark/Bardes, Inc.) Page 23
<PAGE> 30
(ix) The Collateral Documents, fully executed by all parties thereto.
(x) The insurance certificate described in Section 5.20.
(xi) A list of all existing insurance policies and contracts included
in the current calculation of Net Present Value of Renewals, certified as true
and correct by the chief financial officer of Borrower.
(xii) Such other documents as any Lender or its counsel may have
reasonably requested.
4.2. Each Advance. The Lenders shall not be required to make any
Advance unless on the applicable Borrowing Date:
(i) There exists no Default or Unmatured Default.
(ii) The representations and warranties contained in Article
V are true and correct as of such Borrowing Date except to the extent
any such representation or warranty is stated to relate solely to an
earlier date, in which case such representation or warranty shall have
been true and correct on and as of such earlier date.
(iii) All legal matters incident to the making of such Advance
shall be satisfactory to the Lenders and their counsel.
Each Borrowing Notice with respect to each such Advance shall
constitute a representation and warranty by the Borrower that the conditions
contained in Sections 4.2(i) and (ii) have been satisfied. Any Lender may
require a duly completed compliance certificate in substantially the form of
Exhibit B as a condition to making an Advance.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
The Borrower represents and warrants to the Lenders that:
5.1. Existence and Standing. Each of the Borrower, Parent and their
respective Subsidiaries is a corporation, partnership (in the case of
Subsidiaries only) or limited liability company duly and properly incorporated
or organized, as the case may be, validly existing and (to the extent such
concept applies to such entity) in good standing under the laws of its
jurisdiction of incorporation or organization and has all requisite authority to
conduct its business in each jurisdiction in which its business is conducted.
5.2. Authorization and Validity. The Borrower has the power and
authority and legal right to execute and deliver the Loan Documents to which it
is a party and to perform its obligations thereunder. The execution and delivery
by the Borrower of the Loan Documents to which it is a party and the performance
of its obligations thereunder have been duly authorized by proper corporate
proceedings, and the Loan Documents to which the Borrower is a party constitute
legal, valid and binding obligations of the Borrower enforceable against the
Borrower in accordance with their terms, except as enforceability may be limited
by bankruptcy, insolvency or similar laws affecting the enforcement of
creditors' rights generally.
CREDIT AGREEMENT (Clark/Bardes, Inc.) Page 24
<PAGE> 31
5.3. No Conflict; Government Consent. Neither the execution and
delivery by the Borrower of the Loan Documents to which it is a party, nor the
consummation of the transactions therein contemplated, nor compliance with the
provisions thereof will violate (i) any law, rule, regulation, order, writ,
judgment, injunction, decree or award binding on the Borrower or any of its
Subsidiaries or (ii) the Borrower's or any Subsidiary's articles or certificate
of incorporation, partnership agreement, certificate of partnership, articles or
certificate of organization, by-laws, or operating or other management
agreement, as the case may be, or (iii) the provisions of any indenture,
instrument or agreement to which the Borrower or any of its Subsidiaries is a
party or is subject, or by which it, or its Property, is bound, or conflict with
or constitute a default thereunder, or result in, or require, the creation or
imposition of any Lien in, of or on the Property of the Borrower or a Subsidiary
pursuant to the terms of any such indenture, instrument or agreement. No order,
consent, adjudication, approval, license, authorization, or validation of, or
filing, recording or registration with, or exemption by, or other action in
respect of any governmental or public body or authority, or any subdivision
thereof, which has not been obtained by the Borrower or any of its Subsidiaries,
is required to be obtained by the Borrower or any of its Subsidiaries in
connection with the execution and delivery of the Loan Documents, the borrowings
under this Agreement, the payment and performance by the Borrower of the
Obligations or the legality, validity, binding effect or enforceability of any
of the Loan Documents.
5.4. Financial Statements. The September 30, 1998, consolidated
financial statements of the Parent, Borrower and their respective Subsidiaries
heretofore delivered to the Lenders were prepared in accordance with generally
accepted accounting principles in effect on the date such statements were
prepared and fairly present the consolidated financial condition and operations
of the Borrower and its Subsidiaries at such date and the consolidated results
of their operations for the period then ended.
5.5. Material Adverse Change. Since September 30, 1998 there has been
no change in the business, Property, prospects, condition (financial or
otherwise) or results of operations of the Parent, Borrower and their respective
Subsidiaries which could reasonably be expected to have a Material Adverse
Effect.
5.6. Taxes. The Parent, Borrower and their respective Subsidiaries have
filed all United States federal tax returns and all other tax returns which are
required to be filed and have paid all taxes due pursuant to said returns or
pursuant to any assessment received by the Borrower or any of its Subsidiaries,
except such taxes, if any, as are being contested in good faith and as to which
adequate reserves have been provided in accordance with Agreement Accounting
Principles. No tax liens have been filed and no claims are being asserted with
respect to any such taxes. The charges, accruals and reserves on the books of
the Borrower and its Subsidiaries in respect of any taxes or other governmental
charges are adequate. If the Borrower or any of its Subsidiaries is a limited
liability company, each such limited liability company qualifies for partnership
tax treatment under United States federal tax law.
5.7. Litigation and Contingent Obligations. There is no litigation,
arbitration, governmental investigation, proceeding or inquiry pending or, to
the knowledge of any of their officers, threatened against or affecting the
Borrower or any of its Subsidiaries which could reasonably be expected to have a
Material Adverse Effect or which seeks to prevent, enjoin or delay the making of
any Loans. Other than any liability incident to any litigation, arbitration or
proceeding which could not reasonably be expected to have a Material Adverse
Effect, the Borrower has no material contingent obligations not provided for or
disclosed in the financial statements referred to in Section 5.4.
5.8. Subsidiaries. Schedule 1 contains an accurate list of all
Subsidiaries of Parent and the Borrower as of the date of this Agreement,
setting forth their respective jurisdictions of organization and the
CREDIT AGREEMENT (Clark/Bardes, Inc.) Page 25
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percentage of their respective capital stock or other ownership interests owned
by Parent, the Borrower or other Subsidiaries. All of the issued and outstanding
shares of capital stock or other ownership interests of such Subsidiaries have
been (to the extent such concepts are relevant with respect to such ownership
interests) duly authorized and issued and are fully paid and non-assessable.
5.9. ERISA. The Unfunded Liabilities of all Single Employer Plans do
not in the aggregate exceed $500,000. Neither the Borrower nor any other member
of the Controlled Group has incurred, or is reasonably expected to incur, any
withdrawal liability to Multiemployer Plans in excess of $500,000 in the
aggregate. Each Plan complies in all material respects with all applicable
requirements of law and regulations, no Reportable Event has occurred with
respect to any Plan, neither the Borrower nor any other member of the Controlled
Group has withdrawn from any Plan or initiated steps to do so, and no steps have
been taken to reorganize or terminate any Plan.
5.10. Accuracy of Information. No information, exhibit or report
furnished by the Borrower or any of its Subsidiaries to the Agent or to any
Lender in connection with the negotiation of, or compliance with, the Loan
Documents contained any material misstatement of fact or omitted to state a
material fact or any fact necessary to make the statements contained therein not
misleading.
5.11. Regulation U. Margin stock (as defined in Regulation U)
constitutes less than 25% of the value of those assets of Parent, the Borrower
and their Subsidiaries which are subject to any limitation on sale, pledge, or
other restriction hereunder.
5.12. Material Agreements. Neither Parent, the Borrower nor any of
their Subsidiaries is a party to any agreement or instrument or subject to any
charter or other corporate restriction which could reasonably be expected to
have a Material Adverse Effect. Neither Parent, the Borrower nor any of their
Subsidiaries is in default in the performance, observance or fulfillment of any
of the obligations, covenants or conditions contained in (i) any agreement to
which it is a party, which default could reasonably be expected to have a
Material Adverse Effect or (ii) any agreement or instrument evidencing or
governing Indebtedness in excess of $50,000.
5.13. Compliance With Laws. Parent, the Borrower and their Subsidiaries
have complied in all material respects with all applicable statutes, rules,
regulations, orders and restrictions of any domestic or foreign government or
any instrumentality or agency thereof having jurisdiction over the conduct of
their respective businesses or the ownership of their respective Property.
5.14. Ownership of Properties. Except as set forth on Schedule 2, on
the date of this Agreement, the Borrower and its Subsidiaries will have good
title, free of all Liens other than those permitted by Section 6.15, to all of
the Property and assets reflected in the Borrower's most recent consolidated
financial statements provided to the Agent as owned by the Borrower and its
Subsidiaries.
5.15. Plan Assets; Prohibited Transactions. Neither Parent nor the
Borrower is an entity deemed to hold "plan assets" within the meaning of 29
C.F.R. ss. 2510.3-101 of an employee benefit plan (as defined in Section 3(3) of
ERISA) which is subject to Title I of ERISA or any plan (within the meaning of
Section 4975 of the Code), neither the execution of this Agreement nor the
making of Loans hereunder gives rise to a prohibited transaction within the
meaning of Section 406 of ERISA or Section 4975 of the Code, and "benefit plan
investors" (as defined in 29 C.F.R. ss. 2510.3-101(f)) do not own 25% or more of
the value of any class of equity interests in the Borrower.
CREDIT AGREEMENT (Clark/Bardes, Inc.) Page 26
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5.16. Environmental Matters. In the ordinary course of its business,
the officers of the Borrower consider the effect of Environmental Laws on the
business of the Borrower and its Subsidiaries, in the course of which they
identify and evaluate potential risks and liabilities accruing to the Borrower
due to Environmental Laws. On the basis of this consideration, the Borrower has
concluded that Environmental Laws cannot reasonably be expected to have a
Material Adverse Effect. Neither the Borrower nor any Subsidiary has received
any notice to the effect that its operations are not in material compliance with
any of the requirements of applicable Environmental Laws or are the subject of
any federal or state investigation evaluating whether any remedial action is
needed to respond to a release of any toxic or hazardous waste or substance into
the environment, which non-compliance or remedial action could reasonably be
expected to have a Material Adverse Effect.
5.17. Investment Company Act. Neither Borrower nor Parent is an
"investment company" or a company "controlled" by an "investment company",
within the meaning of the Investment Company Act of 1940, as amended.
5.18. Public Utility Holding Company Act. Neither the Borrower nor any
Subsidiary is a "holding company" or a "subsidiary company" of a "holding
company", or an "affiliate" of a "holding company" or of a "subsidiary company"
of a "holding company", within the meaning of the Public Utility Holding Company
Act of 1935, as amended.
5.19. Year 2000. The Borrower has made a full and complete assessment
of any potential Year 2000 Problems and has a realistic and achievable program
for remediating such Year 2000 Problems on a timely basis (the "YEAR 2000
PROGRAM"). Based on such assessment and on the Year 2000 Program the Borrower
does not reasonably anticipate that Year 2000 Problems will have a Material
Adverse Effect.
5.20. Insurance. The certificate signed by the President or Chief
Financial Officer of the Borrower, that attests to the existence and adequacy
of, and summarizes, the property and casualty insurance program carried by the
Borrower with respect to itself and its Subsidiaries and that has been furnished
by the Borrower to the Agent and the Lenders, is complete and accurate. This
summary includes the insurer's or insurers' name(s), policy number(s),
expiration date(s), amount(s) of coverage, type(s) of coverage, exclusion(s),
and deductibles. This summary also includes similar information, and describes
any reserves, relating to any self-insurance program that is in effect.
5.21. Solvency. (i) Immediately after the consummation of the
transactions to occur on the date hereof and immediately following the making of
each Loan, if any, made on the date hereof and after giving effect to the
application of the proceeds of such Loans, (a) the fair value of the assets of
the Borrower and its Subsidiaries on a consolidated basis, at a fair valuation,
will exceed the debts and liabilities, subordinated, contingent or otherwise, of
the Borrower and its Subsidiaries on a consolidated basis; (b) the present fair
saleable value of the Property of the Borrower and its Subsidiaries on a
consolidated basis will be greater than the amount that will be required to pay
the probable liability of the Borrower and its Subsidiaries on a consolidated
basis on their debts and other liabilities, subordinated, contingent or
otherwise, as such debts and other liabilities become absolute and matured; (c)
the Borrower and its Subsidiaries on a consolidated basis will be able to pay
their debts and liabilities, subordinated, contingent or otherwise, as such
debts and liabilities become absolute and matured; and (d) the Borrower and its
Subsidiaries on a consolidated basis will not have unreasonably small capital
with which to conduct the businesses in which they are engaged as such
businesses are now conducted and are proposed to be conducted after the date
hereof.
(ii) The Borrower does not intend to, or to permit any of its
Subsidiaries to, and does not believe that it or any of its Subsidiaries will,
incur debts beyond its ability to pay such debts as they mature, taking
CREDIT AGREEMENT (Clark/Bardes, Inc.) Page 27
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into account the timing of and amounts of cash to be received by it or any such
Subsidiary and the timing of the amounts of cash to be payable on or in respect
of its Indebtedness or the Indebtedness of any such Subsidiary.
ARTICLE VI
COVENANTS
During the term of this Agreement, unless the Required Lenders shall
otherwise consent in writing:
6.1. Financial Reporting. The Borrower will maintain, for itself and
each Subsidiary, a system of accounting established and administered in
accordance with generally accepted accounting principles, and furnish to the
Lenders:
(i) Within 90 days after the close of each of its fiscal years, an
unqualified audit report certified by independent certified public accountants
acceptable to the Lenders, prepared in accordance with Agreement Accounting
Principles on a consolidated and consolidating basis (consolidating statements
need not be certified by such accountants) for Borrower, Parent and their
Subsidiaries, including balance sheets as of the end of such period, related
profit and loss and reconciliation of surplus statements, and a statement of
cash flows, accompanied by any management letter prepared by said accountants.
(ii) Within 45 days after the close of the first three quarterly
periods of each of its fiscal years, for itself and its Subsidiaries,
consolidated and consolidating unaudited balance sheets as at the close of each
such period and consolidated and consolidating profit and loss and
reconciliation of surplus statements and a statement of cash flows for the
period from the beginning of such fiscal year to the end of such quarter, all
certified by its chief financial officer.
(iii) As soon as available, but in any event within 90 days after the
beginning of each fiscal year of the Borrower, a copy of the plan and forecast
(including a projected consolidated and consolidating balance sheet, income
statement and funds flow statement) of the Borrower for such fiscal year.
(iv) Together with the financial statements required under Sections
6.1(i) and (ii), a compliance certificate in substantially the form of Exhibit B
signed by an Authorized Officer of Borrower showing the calculations necessary
to determine compliance with this Agreement, showing the calculation of the
Borrowing Base and stating that no Default or Unmatured Default exists, or if
any Default or Unmatured Default exists, stating the nature and status thereof.
(v) Within 270 days after the close of each fiscal year, a statement
of the Unfunded Liabilities of each Single Employer Plan, certified as correct
by an actuary enrolled under ERISA.
(vi) As soon as possible and in any event within 10 days after the
Borrower knows that any Reportable Event has occurred with respect to any Plan,
a statement, signed by an Authorized Officer of Borrower, describing said
Reportable Event and the action which the Borrower proposes to take with respect
thereto.
(vii) As soon as possible and in any event within 10 days after receipt
by the Borrower, a copy of (a) any notice or claim to the effect that the
Borrower or any of its Subsidiaries is or may be liable to any Person as a
result of the release by the Borrower, any of its Subsidiaries, or any other
Person of any toxic
CREDIT AGREEMENT (Clark/Bardes, Inc.) Page 28
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or hazardous waste or substance into the environment, and (b) any notice
alleging any violation of any federal, state or local environmental, health or
safety law or regulation by the Borrower or any of its Subsidiaries, which, in
either case, could reasonably be expected to have a Material Adverse Effect.
(viii) Promptly upon the furnishing thereof to the shareholders of the
Borrower, copies of all financial statements, reports and proxy statements so
furnished.
(ix) Promptly upon the filing thereof, copies of all registration
statements and annual, quarterly, monthly or other regular reports which the
Borrower or any of its Subsidiaries files with the Securities and Exchange
Commission.
(x) Such other information (including non-financial information) as
the Agent or any Lender may from time to time reasonably request.
6.2. Use of Proceeds. The Borrower will, and will cause Parent and
each Subsidiary to, use the proceeds of the Advances for the purposes set forth
in Section 2.1. The Borrower will not, nor will it permit Parent or any
Subsidiary to, use any of the proceeds of the Advances to purchase or carry any
"margin stock" (as defined in Regulation U).
6.3. Notice of Default. The Borrower will, and will cause Parent and
each Subsidiary to, give prompt notice in writing to the Lenders of the
occurrence of any Default or Unmatured Default and of any other development,
financial or otherwise (including, without limitation, developments with respect
to Year 2000 Problems), which could reasonably be expected to have a Material
Adverse Effect.
6.4. Conduct of Business. The Borrower will, and will cause Parent
and each Subsidiary to, carry on and conduct its business in a substantially
similar manner and in a substantially similar field of enterprise as it is
presently conducted and do all things necessary to remain duly incorporated or
organized, validly existing and (to the extent such concept applies to such
entity) in good standing as a domestic corporation, partnership or limited
liability company in its jurisdiction of incorporation or organization, as the
case may be, and maintain all requisite authority to conduct its business in
each jurisdiction in which its business is conducted.
6.5. Taxes. The Borrower will, and will cause Parent and each
Subsidiary to, timely file complete and correct United States federal and
applicable foreign, state and local tax returns required by law and pay when due
all taxes, assessments and governmental charges and levies upon it or its
income, profits or Property, except those which are being contested in good
faith by appropriate proceedings and with respect to which adequate reserves
have been set aside in accordance with Agreement Accounting Principles. At any
time that the Borrower or Parent or any Subsidiary is organized as a limited
liability company, each such limited liability company will qualify for
partnership tax treatment under United States federal tax law.
6.6. Insurance. The Borrower will, and will cause Parent and each
Subsidiary to, maintain with financially sound and reputable insurance companies
insurance on all their Property in such amounts and covering such risks as is
consistent with sound business practice, and the Borrower will furnish to any
Lender upon request full information as to the insurance carried.
6.7. Compliance with Laws. The Borrower will, and will cause Parent
and each Subsidiary to, comply with all laws, rules, regulations, orders, writs,
judgments, injunctions, decrees or awards to which it may be subject including,
without limitation, all Environmental Laws.
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6.8. Maintenance of Properties. The Borrower will, and will cause
Parent and each Subsidiary to, do all things necessary to maintain, preserve,
protect and keep its Property in good repair, working order and condition, and
make all necessary and proper repairs, renewals and replacements so that its
business carried on in connection therewith may be properly conducted at all
times.
6.9. Inspection. The Borrower will, and will cause Parent and each
Subsidiary to, permit the Agent and the Lenders, by their respective
representatives and agents, with reasonable notice, to inspect any of the
Property, books and financial records of the Borrower, Parent and each
Subsidiary, to examine and make copies of the books of accounts and other
financial records of the Borrower, Parent and each Subsidiary, and to discuss
the affairs, finances and accounts of the Borrower, Parent and each Subsidiary
with, and to be advised as to the same by, their respective officers at such
reasonable times and intervals as the Agent or any Lender may designate.
6.10. Dividends. The Borrower will not, nor will it permit Parent or
any Subsidiary to, declare or pay any dividends or make any distributions on its
capital stock (other than dividends payable in its own capital stock) or redeem,
repurchase or otherwise acquire or retire any of its capital stock at any time
outstanding, except (i) that any Subsidiary may declare and pay dividends or
make distributions to the Borrower or to a Wholly-Owned Subsidiary of Parent or
Borrower, (ii) prior to the occurrence of a Default or Unmatured Default,
Borrower may repurchase capital stock of Parent pursuant to its Employee Stock
Purchase Plan ("ESPP Repurchases"), and (iii) prior to the occurrence of a
Default or Unmatured Default, Borrower or Parent may otherwise repurchase or
retire (as applicable) capital stock in Parent in an amount not to exceed
$1,000,000 in the aggregate (a "PERMITTED REPURCHASE").
6.11. Indebtedness. The Borrower will not, nor will it permit Parent or
any Subsidiary to, create, incur or suffer to exist any Indebtedness, except the
following (collectively, the "PERMITTED INDEBTEDNESS"):
(i) The Loans.
(ii) Indebtedness existing on the date hereof and described in
Schedule 2.
(iii) Indebtedness arising under Rate Hedging Agreements related to the
Loans.
(iv) Permitted Acquisition Indebtedness.
(v) Permitted Purchase Money Obligations.
(vi) the Indebtedness described in Schedule 6.11.
6.12. Merger. The Borrower will not, nor will it permit Parent or any
Subsidiary to, merge or consolidate with or into any other Person, except that a
Subsidiary may merge into the Borrower or a Wholly-Owned Subsidiary.
6.13. Sale of Assets. The Borrower will not, nor will it permit Parent
or any Subsidiary to, lease, sell or otherwise dispose of its Property to any
other Person, except:
(i) Sales of inventory in the ordinary course of business.
(ii) Leases, sales or other dispositions of its Property that,
together with all other Property of the Borrower, Parent and their Subsidiaries
previously leased, sold or disposed of (other than inventory in the ordinary
course of business) as permitted by this Section during the twelve-month period
ending with the
CREDIT AGREEMENT (Clark/Bardes, Inc.) Page 30
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month in which any such lease, sale or other disposition occurs,
do not constitute a Substantial Portion of the Property of the Borrower, Parent
and their Subsidiaries.
The Lenders acknowledge that Borrower is obligated to pay a percentage of the
Renewals (as defined in the Collateral Documents) to the producers of such
Renewals pursuant to Principal Office Agreements (or similar oral arrangements)
between Borrower and such producers.
6.14. Investments and Acquisitions. (a) The Borrower will not, nor
will it permit Parent or any Subsidiary to, make or suffer to exist any
Investments (including without limitation, loans and advances to, and other
Investments in, Subsidiaries), or commitments therefor, or to create any
Subsidiary or to become or remain a partner in any partnership or joint venture,
or to make any Acquisition of any Person, except:
(i) Cash Equivalent Investments.
(ii) Existing Investments in Subsidiaries and other
Investments in existence on the date hereof and described in
Schedule 1.
(iii) Permitted Acquisitions.
(iv) Permitted Employee and Producer Loans.
(b) The Borrower will not, nor will it permit Parent or any Subsidiary
to, make or suffer to exist any Permitted Acquisition if the total consideration
for such Acquisition, plus the total consideration for all Acquisitions
consummated during the 12 month period preceding the effective date of such
Permitted Acquisition, is greater than $15,000,000 without the prior written
consent of Required Lenders.
6.15. Liens. (a) The Borrower will not, nor will it permit
Parent or any Subsidiary to, create, incur, or suffer to exist any Lien in, of
or on the Property of the Borrower, Parent or any Subsidiary, except:
(i) Liens for taxes, assessments or governmental charges or levies on
its Property if the same shall not at the time be delinquent or
thereafter can be paid without penalty, or are being contested in good
faith and by appropriate proceedings and for which adequate reserves in
accordance with Agreement Accounting Principles shall have been set
aside on its books.
(ii) Liens imposed by law, such as carriers', warehousemen's and
mechanics' liens and other similar liens arising in the ordinary course
of business which secure payment of obligations not more than 60 days
past due or which are being contested in good faith by appropriate
proceedings and for which adequate reserves shall have been set aside
on its books.
(iii) Liens arising out of pledges or deposits under worker's
compensation laws, unemployment insurance, old age pensions, or other
social security or retirement benefits, or similar legislation.
(iv) Utility easements, building restrictions and such other
encumbrances or charges against real property as are of a nature
generally existing with respect to properties of a similar character
and which do not in any material way affect the marketability of the
same or interfere with the use thereof in the business of the Borrower
or its Subsidiaries.
(v) Liens existing on the date hereof and described in Schedule 2.
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(vii) Liens in favor of the Agent, for the benefit of the Lenders,
granted pursuant to any Collateral Document.
(viii) Liens securing Permitted Purchase Money Obligations on the
assets acquired with the proceeds of such Purchase Money Obligations.
(ix) Liens securing Permitted Acquisition Indebtedness on the assets
acquired in the transaction giving rise to such Permitted Acquisition
Indebtedness.
(b) Borrower shall not, and Borrower shall not permit Parent or any
Subsidiary of Parent or Borrower to, enter into any agreement (excluding this
Agreement or any other Loan Documents) prohibiting the creation or assumption of
any Lien upon any property, revenues, or assets of such Person, whether now
owned or hereafter acquired.
6.16. Rentals. The Borrower will not, nor will it permit Parent or any
Subsidiary to, create, incur or suffer to exist obligations for Rentals in
excess of the sum of (i) those which relate to Operating Leases described on
Schedule 6.16 (including any increases in the Rentals contemplated by the terms
thereof), plus (ii)$500,000, plus (iii) those which relate to Operating Leases
which are assumed in connection with a Permitted Acquisition.
6.17. Year 2000. Not later than July 31, 1999, the Borrower shall have
accomplished all actions necessary to assure that its computer-based systems are
able to effectively process data, including dates, on and after January 1, 2000.
The Borrower shall promptly notify the Bank in writing (i) in the event of any
potential Year 2000 Problem and (ii) in the event that the Borrower believes
that the requirement specified in the first sentence of this Section 6.17 has
not been met or is not likely to be met by July 31, 1999. Such written notice
shall specify and describe in detail the nature of the Year 2000 Problem, or
reason for actual or anticipated failure to satisfy the requirements set forth
in this Section 6.17, as the case may be, including a description of the
equipment or systems involved, the event causing such Year 2000 Problem or
actual or anticipated failure.
6.18. Affiliates. The Borrower will not, and will not permit any
Parent or any Subsidiary to, enter into any transaction (including, without
limitation, the purchase or sale of any Property or service) with, or make any
payment or transfer to, any Affiliate except in the ordinary course of business
and pursuant to the reasonable requirements of the Borrower's or such
Subsidiary's business and upon fair and reasonable terms no less favorable to
the Borrower or such Subsidiary than the Borrower or such Subsidiary would
obtain in a comparable arms-length transaction.
6.19. Subordinated Indebtedness. The Borrower will not, and will not
permit Parent or any Subsidiary to, make any amendment or modification to the
indenture, note or other agreement evidencing or governing any Subordinated
Indebtedness, or directly or indirectly voluntarily prepay, defease or in
substance defease, purchase, redeem, retire or otherwise acquire, any
Subordinated Indebtedness.
6.20. Omitted.
6.21. Sale of Accounts. The Borrower will not, nor will it permit
Parent or any Subsidiary to, sell or otherwise dispose of any accounts
receivable, with or without recourse.
6.22. Sale and Leaseback Transactions and other Off-Balance Sheet
Liabilities. The Borrower will not, nor will it permit Parent or any Subsidiary
to, enter into or suffer to exist any (i) Sale and Leaseback
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Transaction, other than Permitted Indebtedness or (ii) any other transaction
pursuant to which it incurs or has incurred Off-Balance Sheet Liabilities, other
than Permitted Indebtedness.
6.23. Contingent Obligations. The Borrower will not, nor will it
permit Parent or any Subsidiary to, make or suffer to exist any Contingent
Obligation (including, without limitation, any Contingent Obligation with
respect to the obligations of a Subsidiary), except (i) by endorsement of
instruments for deposit or collection in the ordinary course of business and
(ii) for the Guaranty.
6.24. Letters of Credit. The Borrower will not, nor will it permit
Parent or any Subsidiary to, apply for or become liable upon or in respect of
any Letter of Credit.
6.25. Financial Covenants.
6.25.1. Fixed Charge Coverage Ratio. The Borrower will not
permit the ratio, determined as of the end of each of its fiscal
quarters for the then most-recently ended four fiscal quarters, of (i)
Consolidated EBITDA minus Consolidated Capital Expenditures minus taxes
paid during such period to (ii) Consolidated Interest Expense, plus
current maturities of principal Indebtedness (including Capitalized
Lease Obligations), plus any Permitted Repurchases (other than ESPP
Repurchases), all calculated for the Borrower and its Subsidiaries on a
consolidated basis, to be less than (i) for the period from the date of
this Agreement until December 31, 1999, 1.15 to 1.00 and (ii)
thereafter, 1.25 to 1.00.
6.25.2. Leverage Ratio. The Borrower will not permit the
Leverage Ratio, determined as of the end of each of its fiscal quarters
for the then most-recently ended four fiscal quarters to be greater
than (i) so long as the outstanding balance of all of the Loans is less
than or equal to $50,000,000, 3.25 to 1.0 and (ii) following the date
on which the outstanding balance of all of the Loans is greater than
$50,000,000, 3.00 to 1.0.
6.25.3. Minimum Net Worth. The Borrower will at all times
maintain Consolidated Net Worth of not less than the sum of (i)
$21,490,560, plus (ii) 75% of Consolidated Net Income earned in each
fiscal quarter beginning with the quarter ending December 31, 1998
(without deduction for losses), plus (iii) 100% of the net cash
proceeds of any offering of securities after the date of this Agreement
(whether debt or equity and whether public or private).
6.26. Investment Company. The Borrower will cause any Subsidiary of
Borrower or Parent which is an "investment company" or a company "controlled" by
an "investment company", within the meaning of the Investment Company Act of
1940, as amended (15 U.S.C.A. ss. 80a, et seq.) (the "INVESTMENT COMPANY Act")
or which is otherwise subject to the Investment Company Act to be in compliance
with the Investment Company Act, including, without limitation, 15 U.S.C.A. ss.
80a-18(f)(1).
ARTICLE VII
DEFAULTS
The occurrence of any one or more of the following events shall
constitute a Default:
7.1. Any representation or warranty made or deemed made by or on
behalf of the Borrower or any of its Subsidiaries to the Lenders or the Agent
under or in connection with this Agreement, any Loan,
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or any certificate or information delivered in connection with this Agreement or
any other Loan Document shall be materially false on the date as of which made.
7.2. Nonpayment of principal of any Loan when due, or nonpayment of
interest upon any Loan or of any commitment fee or other obligations under any
of the Loan Documents within five days after the same becomes due.
7.3. The breach by the Borrower of any of the terms or provisions of
Article VI , Section 6.2, 6.10, 6.11, 6.12, 6.13, 6.14, 6.25 or 6.26.
7.4. The breach by the Borrower (other than a breach which constitutes
a Default under another Section of this Article VII) of any of the terms or
provisions of this Agreement which is not remedied within ten days after written
notice from the Agent or any Lender; provided, that if such breach can be cured
and Borrower begins and is diligently pursuing a cure thereof prior to the
expiration of the ten day cure period above provided, then Borrower shall not be
in default hereunder if Borrower cures such failure within thirty days after the
above provided written notice of such breach.
7.5. Failure of the Borrower or any of its Subsidiaries or any
Guarantor to pay when due any Indebtedness aggregating in excess of $250,000
("MATERIAL INDEBTEDNESS"); or the default by the Borrower or any of its
Subsidiaries or any Guarantor in the performance(beyond the applicable grace
period with respect thereto, if any) of any term, provision or condition
contained in any agreement under which any such Material Indebtedness was
created or is governed, or any other event shall occur or condition exist, the
effect of which default or event is to cause, or to permit the holder or holders
of such Material Indebtedness to cause, such Material Indebtedness to become due
prior to its stated maturity; or any Material Indebtedness of the Borrower or
any of its Subsidiaries or any Guarantor shall be declared to be due and payable
or required to be prepaid or repurchased (other than by a regularly scheduled
payment) prior to the stated maturity thereof; or the Borrower or any of its
Subsidiaries or any Guarantor shall not pay, or admit in writing its inability
to pay, its debts generally as they become due.
7.6. The Borrower or any of its Subsidiaries or any Guarantor shall
(i) have an order for relief entered with respect to it under the Federal
bankruptcy laws as now or hereafter in effect, (ii) make an assignment for the
benefit of creditors, (iii) apply for, seek, consent to, or acquiesce in, the
appointment of a receiver, custodian, trustee, examiner, liquidator or similar
official for it or any Substantial Portion of its Property, (iv) institute any
proceeding seeking an order for relief under the Federal bankruptcy laws as now
or hereafter in effect or seeking to adjudicate it a bankrupt or insolvent, or
seeking dissolution, winding up, liquidation, reorganization, arrangement,
adjustment or composition of it or its debts under any law relating to
bankruptcy, insolvency or reorganization or relief of debtors or fail to file an
answer or other pleading denying the material allegations of any such proceeding
filed against it, (v) take any corporate or partnership action to authorize or
effect any of the foregoing actions set forth in this Section 7.6 or (vi) fail
to contest in good faith any appointment or proceeding described in Section 7.7.
7.7. Without the application, approval or consent of the Borrower or
any of its Subsidiaries, or any Guarantor, a receiver, trustee, examiner,
liquidator or similar official shall be appointed for the Borrower or any of its
Subsidiaries or any Guarantor or any Substantial Portion of its Property, or a
proceeding described in Section 7.6(iv) shall be instituted against the Borrower
or any of its Subsidiaries or any Guarantor and such appointment continues
undischarged or such proceeding continues undismissed or unstayed for a period
of 60 consecutive days.
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7.8. Any court, government or governmental agency shall condemn, seize
or otherwise appropriate, or take custody or control of, all or any portion of
the Property of the Borrower and its Subsidiaries or any Guarantor which, when
taken together with all other Property of the Borrower and its Subsidiaries or
any Guarantor so condemned, seized, appropriated, or taken custody or control
of, during the twelve-month period ending with the month in which any such
action occurs, constitutes a Substantial Portion.
7.9. The Borrower, Parent or any of their Subsidiaries shall fail
within 30 days to pay, bond or otherwise discharge one or more (i) judgments or
orders for the payment of money in excess of $25,000 (or the equivalent thereof
in currencies other than U.S. Dollars) in the aggregate, or (ii) nonmonetary
judgments or orders which, individually or in the aggregate, could reasonably be
expected to have a Material Adverse Effect, which judgment(s), in any such case,
is/are not stayed on appeal or otherwise being appropriately contested in good
faith.
7.10. The Unfunded Liabilities of all Single Employer Plans shall
exceed in the aggregate $100,000 or any Reportable Event shall occur in
connection with any Plan.
7.11. The Borrower or any other member of the Controlled Group shall
have been notified by the sponsor of a Multiemployer Plan that it has incurred
withdrawal liability to such Multiemployer Plan in an amount which, when
aggregated with all other amounts required to be paid to Multiemployer Plans by
the Borrower or any other member of the Controlled Group as withdrawal liability
(determined as of the date of such notification), exceeds $500,000 or requires
payments exceeding $ 250,000 per annum.
7.12. The Borrower or any other member of the Controlled Group shall
have been notified by the sponsor of a Multiemployer Plan that such
Multiemployer Plan is in reorganization or is being terminated, within the
meaning of Title IV of ERISA, if as a result of such reorganization or
termination the aggregate annual contributions of the Borrower and the other
members of the Controlled Group (taken as a whole) to all Multiemployer Plans
which are then in reorganization or being terminated have been or will be
increased over the amounts contributed to such Multiemployer Plans for the
respective plan years of each such Multiemployer Plan immediately preceding the
plan year in which the reorganization or termination occurs by an amount
exceeding 100,000.
7.13. The Borrower, Parent or any of their Subsidiaries shall (i) be
the subject of any proceeding or investigation pertaining to the release by the
Borrower, any of its Subsidiaries or any other Person of any toxic or hazardous
waste or substance into the environment, or (ii) violate any Environmental Law,
which, in the case of an event described in clause (i) or clause (ii), could
reasonably be expected to have a Material Adverse Effect.
7.14. Any Change in Control shall occur.
7.15. The occurrence of any "default", as defined in any Loan Document
(other than this Agreement) or the breach of any of the terms or provisions of
any Loan Document (other than this Agreement), which default or breach continues
beyond any period of grace therein provided.
7.16. Nonpayment by the Borrower of any Rate Hedging Obligation when
due or the breach by the Borrower of any term, provision or condition contained
in any Rate Hedging Agreement, and the expiration of any applicable cure period.
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7.17. Any Guaranty shall fail to remain in full force or effect or any
action shall be taken to discontinue or to assert the invalidity or
unenforceability of any Guaranty, or any Guarantor shall fail to comply with any
of the terms or provisions of any Guaranty to which it is a party, or any
Guarantor shall deny that it has any further liability under any Guaranty to
which it is a party, or shall give notice to such effect.
7.18. Any Collateral Document shall for any reason fail to create a
valid and perfected first priority security interest in any collateral purported
to be covered thereby, except as permitted by the terms of any Collateral
Document, or any Collateral Document shall fail to remain in full force or
effect or any action shall be taken to discontinue or to assert the invalidity
or unenforceability of any Collateral Document, or the Borrower shall fail to
comply with any of the terms or provisions of any Collateral Document.
7.19. The representations and warranties set forth in Section 5.15
shall at any time not be true and correct.
ARTICLE VIII
ACCELERATION, WAIVERS, AMENDMENTS AND REMEDIES
8.1. Acceleration. If any Default described in Section 7.6 or 7.7
occurs with respect to the Borrower, the obligations of the Lenders to make
Loans hereunder shall automatically terminate and the Obligations shall
immediately become due and payable without any election or action on the part of
the Agent or any Lender. If any other Default occurs, the Required Lenders (or
the Agent with the consent of the Required Lenders) may terminate or suspend the
obligations of the Lenders to make Loans hereunder, or declare the Obligations
to be due and payable, or both, whereupon the Obligations shall become
immediately due and payable, without presentment, demand, protest or notice of
any kind, all of which the Borrower hereby expressly waives.
If, within 30 days after acceleration of the maturity of the
Obligations or termination of the obligations of the Lenders to make Loans
hereunder as a result of any Default (other than any Default as described in
Section 7.6 or 7.7 with respect to the Borrower) and before any judgment or
decree for the payment of the Obligations due shall have been obtained or
entered, the Required Lenders (in their sole discretion) shall so direct, the
Agent shall, by notice to the Borrower, rescind and annul such acceleration
and/or termination.
8.2. Amendments. Subject to the provisions of this Article VIII, the
Required Lenders (or the Agent with the consent in writing of the Required
Lenders) and the Borrower may enter into agreements supplemental hereto for the
purpose of adding or modifying any provisions to the Loan Documents or changing
in any manner the rights of the Lenders or the Borrower hereunder or waiving any
Default hereunder; provided, however, that no such supplemental agreement shall,
without the consent of all of the Lenders:
(i) Extend the final maturity of any Loan or postpone any regularly
scheduled payment of principal of any Loan or forgive all or any portion of the
principal amount thereof, or reduce the rate or extend the time of payment of
interest or fees thereon.
(ii) Reduce the percentage specified in the definition of Required
Lenders.
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(iii) Extend the Facility Termination Date, the Revolving Credit
Termination Date, or reduce the amount or extend the payment date for, the
mandatory payments required under Section 2.2, or increase the amount of the
Aggregate Commitment or of the Commitment of any Lender hereunder, or permit the
Borrower to assign its rights under this Agreement.
(iv) Amend this Section 8.2.
(v) Release any guarantor of any Advance or, except as provided in
the Collateral Documents, in one transaction or series of transactions, release
all or a Substantial Portion of the Collateral.
(vi) Amend the definition of Borrowing Base.
No amendment of any provision of this Agreement relating to the Agent shall be
effective without the written consent of the Agent. The Agent may waive payment
of the fee required under Section 12.3.2 without obtaining the consent of any
other party to this Agreement.
8.3. Preservation of Rights. No delay or omission of the Lenders or the
Agent to exercise any right under the Loan Documents shall impair such right or
be construed to be a waiver of any Default or an acquiescence therein, and the
making of a Loan notwithstanding the existence of a Default or the inability of
the Borrower to satisfy the conditions precedent to such Loan shall not
constitute any waiver or acquiescence. Any single or partial exercise of any
such right shall not preclude other or further exercise thereof or the exercise
of any other right, and no waiver, amendment or other variation of the terms,
conditions or provisions of the Loan Documents whatsoever shall be valid unless
in writing signed by the Lenders required pursuant to Section 8.2, and then only
to the extent in such writing specifically set forth. All remedies contained in
the Loan Documents or by law afforded shall be cumulative and all shall be
available to the Agent and the Lenders until the Obligations have been paid in
full.
ARTICLE IX
GENERAL PROVISIONS
9.1. Survival of Representations. All representations and warranties of
the Borrower contained in this Agreement shall survive the making of the Loans
herein contemplated.
9.2. Governmental Regulation. Anything contained in this Agreement to
the contrary notwithstanding, no Lender shall be obligated to extend credit to
the Borrower in violation of any limitation or prohibition provided by any
applicable statute or regulation.
9.3. Headings. Section headings in the Loan Documents are for
convenience of reference only, and shall not govern the interpretation of any of
the provisions of the Loan Documents.
9.4. Entire Agreement. The Loan Documents embody the entire agreement
and understanding among the Borrower, the Agent and the Lenders and supersede
all prior agreements and understandings among the Borrower, the Agent and the
Lenders relating to the subject matter thereof other than the fee letter
described in Section 10.13.
9.5. Several Obligations; Benefits of this Agreement. The respective
obligations of the Lenders hereunder are several and not joint and no Lender
shall be the partner or agent of any other (except to the extent to which the
Agent is authorized to act as such). The failure of any Lender to perform any of
its
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obligations hereunder shall not relieve any other Lender from any of its
obligations hereunder. This Agreement shall not be construed so as to confer any
right or benefit upon any Person other than the parties to this Agreement and
their respective successors and assigns, provided, however, that the parties
hereto expressly agree that the Arranger shall enjoy the benefits of the
provisions of Sections 9.6, 9.10 and 10.11 to the extent specifically set forth
therein and shall have the right to enforce such provisions on its own behalf
and in its own name to the same extent as if it were a party to this Agreement.
9.6. Expenses; Indemnification. (i) THE BORROWER SHALL REIMBURSE THE
AGENT AND THE ARRANGER FOR ANY COSTS, INTERNAL CHARGES AND OUT-OF-POCKET
EXPENSES (INCLUDING ATTORNEYS' FEES AND TIME CHARGES OF ATTORNEYS FOR THE AGENT,
WHICH ATTORNEYS MAY BE EMPLOYEES OF THE AGENT) PAID OR INCURRED BY THE AGENT OR
THE ARRANGER IN CONNECTION WITH THE PREPARATION, NEGOTIATION, EXECUTION,
DELIVERY, SYNDICATION, REVIEW, AMENDMENT, MODIFICATION, AND ADMINISTRATION OF
THE LOAN DOCUMENTS. THE BORROWER ALSO AGREES TO REIMBURSE THE AGENT, THE
ARRANGER AND THE LENDERS FOR ANY COSTS, INTERNAL CHARGES AND OUT-OF-POCKET
EXPENSES (INCLUDING ATTORNEYS' FEES AND TIME CHARGES OF ATTORNEYS FOR THE AGENT,
THE ARRANGER AND THE LENDERS, WHICH ATTORNEYS MAY BE EMPLOYEES OF THE AGENT, THE
ARRANGER OR THE LENDERS) PAID OR INCURRED BY THE AGENT, THE ARRANGER OR ANY
LENDER IN CONNECTION WITH THE COLLECTION AND ENFORCEMENT OF THE LOAN DOCUMENTS.
EXPENSES BEING REIMBURSED BY THE BORROWER UNDER THIS SECTION INCLUDE, WITHOUT
LIMITATION, COSTS AND EXPENSES INCURRED IN CONNECTION WITH THE REPORTS DESCRIBED
IN THE FOLLOWING SENTENCE. THE BORROWER ACKNOWLEDGES THAT FROM TIME TO TIME BANK
ONE MAY PREPARE AND MAY DISTRIBUTE TO THE LENDERS (BUT SHALL HAVE NO OBLIGATION
OR DUTY TO PREPARE OR TO DISTRIBUTE TO THE LENDERS) CERTAIN AUDIT REPORTS (THE
"REPORTS") PERTAINING TO THE BORROWER'S ASSETS FOR INTERNAL USE BY BANK ONE FROM
INFORMATION FURNISHED TO IT BY OR ON BEHALF OF THE BORROWER, AFTER BANK ONE HAS
EXERCISED ITS RIGHTS OF INSPECTION PURSUANT TO THIS AGREEMENT.
(ii) THE BORROWER HEREBY FURTHER AGREES TO INDEMNIFY THE AGENT, THE
ARRANGER AND EACH LENDER, ITS DIRECTORS, OFFICERS AND EMPLOYEES AGAINST ALL
LOSSES, CLAIMS, DAMAGES, PENALTIES, JUDGMENTS, LIABILITIES AND EXPENSES
(INCLUDING, WITHOUT LIMITATION, ALL EXPENSES OF LITIGATION OR PREPARATION
THEREFOR WHETHER OR NOT THE AGENT, THE ARRANGER OR ANY LENDER IS A PARTY
THERETO) WHICH ANY OF THEM MAY PAY OR INCUR ARISING OUT OF OR RELATING TO THIS
AGREEMENT, THE OTHER LOAN DOCUMENTS, THE TRANSACTIONS CONTEMPLATED HEREBY OR THE
DIRECT OR INDIRECT APPLICATION OR PROPOSED APPLICATION OF THE PROCEEDS OF ANY
LOAN HEREUNDER EXCEPT TO THE EXTENT THAT THEY ARE DETERMINED IN A FINAL
NON-APPEALABLE JUDGMENT BY A COURT OF COMPETENT JURISDICTION TO HAVE RESULTED
FROM THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF THE PARTY SEEKING
INDEMNIFICATION. THE OBLIGATIONS OF THE BORROWER UNDER THIS SECTION 9.6 SHALL
SURVIVE THE TERMINATION OF THIS AGREEMENT.
9.7. Omitted.
9.8. Accounting. Except as provided to the contrary herein, all
accounting terms used herein shall be interpreted and all accounting
determinations hereunder shall be made in accordance with
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Agreement Accounting Principles, except that any calculation or determination
which is to be made on a consolidated basis shall be made for the Borrower and
all its Subsidiaries, including those Subsidiaries, if any, which are
unconsolidated on the Borrower's audited financial statements.
9.9. Severability of Provisions. Any provision in any Loan Document
that is held to be inoperative, unenforceable, or invalid in any jurisdiction
shall, as to that jurisdiction, be inoperative, unenforceable, or invalid
without affecting the remaining provisions in that jurisdiction or the
operation, enforceability, or validity of that provision in any other
jurisdiction, and to this end the provisions of all Loan Documents are declared
to be severable.
9.10. Nonliability of Lenders. The relationship between the Borrower on
the one hand and the Lenders and the Agent on the other hand shall be solely
that of borrower and lender. Neither the Agent, the Arranger nor any Lender
shall have any fiduciary responsibilities to the Borrower. Neither the Agent,
the Arranger nor any Lender undertakes any responsibility to the Borrower to
review or inform the Borrower of any matter in connection with any phase of the
Borrower's business or operations. The Borrower agrees that neither the Agent,
the Arranger nor any Lender shall have liability to the Borrower (whether
sounding in tort, contract or otherwise) for losses suffered by the Borrower in
connection with, arising out of, or in any way related to, the transactions
contemplated and the relationship established by the Loan Documents, or any act,
omission or event occurring in connection therewith, unless it is determined in
a final non-appealable judgment by a court of competent jurisdiction that such
losses resulted from the gross negligence or willful misconduct of the party
from which recovery is sought. Neither the Agent, the Arranger nor any Lender
shall have any liability with respect to, and the Borrower hereby waives,
releases and agrees not to sue for, any special, indirect or consequential
damages suffered by the Borrower in connection with, arising out of, or in any
way related to the Loan Documents or the transactions contemplated thereby.
9.11. Confidentiality. Each Lender agrees to hold any confidential
information which it may receive from the Borrower pursuant to this Agreement in
confidence, except for disclosure (i) to its Affiliates and to other Lenders and
their respective Affiliates, (ii) to legal counsel, accountants, and other
professional advisors to such Lender or to a Transferee, (iii) to regulatory
officials, (iv) to any Person as requested pursuant to or as required by law,
regulation, or legal process, (v) to any Person in connection with any legal
proceeding to which such Lender is a party, (vi) to such Lender's direct or
indirect contractual counterparties in swap agreements or to legal counsel,
accountants and other professional advisors to such counterparties, and (vii)
permitted by Section 12.4.
9.12. Nonreliance. Each Lender hereby represents that it is not relying
on or looking to any margin stock (as defined in Regulation U of the Board of
Governors of the Federal Reserve System) for the repayment of the Loans provided
for herein.
9.13. Disclosure. Borrower and each Lender hereby (i) acknowledge and
agree that (a) one or more Affiliates of Bank One are or may become direct or
indirect equity investors in Borrower or Parent, (b) Bank One is or may become a
lender to, and agent bank for, Borrower or Parent, and (c) Bank One and/or its
Affiliates from time to time may hold other investments in, make other loans to
or have other relationships with Borrower or Parent, and (ii) waive any
liability of Bank One or such Affiliate to Borrower or any Lender, respectively,
arising out of or resulting from such investments, loans or relationships other
than liabilities arising out of the gross negligence or willful misconduct of
Bank One or its Affiliates.
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ARTICLE X
THE AGENT
10.1. Appointment; Nature of Relationship. Bank One is hereby appointed
by each of the Lenders as its contractual representative (herein referred to as
the "AGENT") hereunder and under each other Loan Document, and each of the
Lenders irrevocably authorizes the Agent to act as the contractual
representative of such Lender with the rights and duties expressly set forth
herein and in the other Loan Documents. The Agent agrees to act as such
contractual representative upon the express conditions contained in this Article
X. Notwithstanding the use of the defined term "Agent," it is expressly
understood and agreed that the Agent shall not have any fiduciary
responsibilities to any Lender by reason of this Agreement or any other Loan
Document and that the Agent is merely acting as the contractual representative
of the Lenders with only those duties as are expressly set forth in this
Agreement and the other Loan Documents. In its capacity as the Lenders'
contractual representative, the Agent (i) does not hereby assume any fiduciary
duties to any of the Lenders, (ii) is a "representative" of the Lenders within
the meaning of Section 9-105 of the Uniform Commercial Code and (iii) is acting
as an independent contractor, the rights and duties of which are limited to
those expressly set forth in this Agreement and the other Loan Documents. Each
of the Lenders hereby agrees to assert no claim against the Agent on any agency
theory or any other theory of liability for breach of fiduciary duty, all of
which claims each Lender hereby waives.
10.2. Powers. The Agent shall have and may exercise such powers under
the Loan Documents as are specifically delegated to the Agent by the terms of
each thereof, together with such powers as are reasonably incidental thereto.
The Agent shall have no implied duties to the Lenders, or any obligation to the
Lenders to take any action thereunder except any action specifically provided by
the Loan Documents to be taken by the Agent.
10.3. General Immunity. Neither the Agent nor any of its directors,
officers, agents or employees shall be liable to the Borrower, the Lenders or
any Lender for any action taken or omitted to be taken by it or them hereunder
or under any other Loan Document or in connection herewith or therewith except
to the extent such action or inaction is determined in a final non-appealable
judgment by a court of competent jurisdiction to have arisen from the gross
negligence or willful misconduct of such Person.
10.4. No Responsibility for Loans, Recitals, etc. Neither the Agent nor
any of its directors, officers, agents or employees shall be responsible for or
have any duty to ascertain, inquire into, or verify (a) any statement, warranty
or representation made in connection with any Loan Document or any borrowing
hereunder; (b) the performance or observance of any of the covenants or
agreements of any obligor under any Loan Document, including, without
limitation, any agreement by an obligor to furnish information directly to each
Lender; (c) the satisfaction of any condition specified in Article IV, except
receipt of items required to be delivered solely to the Agent; (d) the existence
or possible existence of any Default or Unmatured Default; (e) the validity,
enforceability, effectiveness, sufficiency or genuineness of any Loan Document
or any other instrument or writing furnished in connection therewith; (f) the
value, sufficiency, creation, perfection or priority of any Lien in any
collateral security; or (g) the financial condition of the Borrower or any
guarantor of any of the Obligations or of any of the Borrower's or any such
guarantor's respective Subsidiaries. The Agent shall have no duty to disclose to
the Lenders information that is not required to be furnished by the Borrower to
the Agent at such time, but is voluntarily furnished by the Borrower to the
Agent (either in its capacity as Agent or in its individual capacity).
10.5. Action on Instructions of Lenders. The Agent shall in all cases
be fully protected in acting, or in refraining from acting, hereunder and under
any other Loan Document in accordance with written instructions signed by the
Required Lenders (unless the consent of more than the Required Lenders is
required pursuant to Section 8.2, in which case the Agent shall in all cases be
fully protected in acting, or in refraining from acting, hereunder and under any
other Loan Document in accordance with written
CREDIT AGREEMENT (Clark/Bardes, Inc.) Page 40
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instructions signed by the Lenders required by such Section), and such
instructions and any action taken or failure to act pursuant thereto shall be
binding on all of the Lenders. The Lenders hereby acknowledge that the Agent
shall be under no duty to take any discretionary action permitted to be taken by
it pursuant to the provisions of this Agreement or any other Loan Document
unless it shall be requested in writing to do so by the Required Lenders. The
Agent shall be fully justified in failing or refusing to take any action
hereunder and under any other Loan Document unless it shall first be indemnified
to its satisfaction by the Lenders pro rata against any and all liability, cost
and expense that it may incur by reason of taking or continuing to take any such
action.
10.6. Employment of Agents and Counsel. The Agent may execute any of
its duties as Agent hereunder and under any other Loan Document by or through
employees, agents, and attorneys-in-fact and shall not be answerable to the
Lenders, except as to money or securities received by it or its authorized
agents, for the default or misconduct of any such agents or attorneys-in-fact
selected by it with reasonable care. The Agent shall be entitled to advice of
counsel concerning the contractual arrangement between the Agent and the Lenders
and all matters pertaining to the Agent's duties hereunder and under any other
Loan Document.
10.7. Reliance on Documents; Counsel. The Agent shall be entitled to
rely upon any Note, notice, consent, certificate, affidavit, letter, telegram,
statement, paper or document believed by it to be genuine and correct and to
have been signed or sent by the proper person or persons, and, in respect to
legal matters, upon the opinion of counsel selected by the Agent, which counsel
may be employees of the Agent.
10.8. Agent's Reimbursement and Indemnification. The Lenders agree to
reimburse and indemnify the Agent ratably in proportion to their respective
Commitments (or, if the Commitments have been terminated, in proportion to their
Commitments immediately prior to such termination) (i) for any amounts not
reimbursed by the Borrower for which the Agent is entitled to reimbursement by
the Borrower under the Loan Documents, (ii) for any other expenses incurred by
the Agent on behalf of the Lenders, in connection with the preparation,
execution, delivery, administration and enforcement of the Loan Documents
(including, without limitation, for any expenses incurred by the Agent in
connection with any dispute between the Agent and any Lender or between two or
more of the Lenders) and (iii) for any liabilities, obligations, losses,
damages, penalties, actions, judgments, suits, costs, expenses or disbursements
of any kind and nature whatsoever which may be imposed on, incurred by or
asserted against the Agent in any way relating to or arising out of the Loan
Documents or any other document delivered in connection therewith or the
transactions contemplated thereby (including, without limitation, for any such
amounts incurred by or asserted against the Agent in connection with any dispute
between the Agent and any Lender or between two or more of the Lenders), or the
enforcement of any of the terms of the Loan Documents or of any such other
documents, provided that (i) no Lender shall be liable for any of the foregoing
to the extent any of the foregoing is found in a final non-appealable judgment
by a court of competent jurisdiction to have resulted from the gross negligence
or willful misconduct of the Agent and (ii) any indemnification required
pursuant to Section 3.5(vii) shall, notwithstanding the provisions of this
Section 10.8, be paid by the relevant Lender in accordance with the provisions
thereof. The obligations of the Lenders under this Section 10.8 shall survive
payment of the Obligations and termination of this Agreement.
10.9. Notice of Default. The Agent shall not be deemed to have
knowledge or notice of the occurrence of any Default or Unmatured Default
hereunder unless the Agent has received written notice from a Lender or the
Borrower referring to this Agreement describing such Default or Unmatured
Default and stating that such notice is a "notice of default". In the event that
the Agent receives such a notice, the Agent shall give prompt notice thereof to
the Lenders.
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10.10. Rights as a Lender. In the event the Agent is a Lender, the
Agent shall have the same rights and powers hereunder and under any other Loan
Document with respect to its Commitment and its Loans as any Lender and may
exercise the same as though it were not the Agent, and the term "Lender" or
"Lenders" shall, at any time when the Agent is a Lender, unless the context
otherwise indicates, include the Agent in its individual capacity. The Agent and
its Affiliates may accept deposits from, lend money to, and generally engage in
any kind of trust, debt, equity or other transaction, in addition to those
contemplated by this Agreement or any other Loan Document, with the Borrower or
any of its Subsidiaries in which the Borrower or such Subsidiary is not
restricted hereby from engaging with any other Person. The Agent, in its
individual capacity, is not obligated to remain a Lender.
10.11. Lender Credit Decision. Each Lender acknowledges that it has,
independently and without reliance upon the Agent, the Arranger or any other
Lender and based on the financial statements prepared by the Borrower and such
other documents and information as it has deemed appropriate, made its own
credit analysis and decision to enter into this Agreement and the other Loan
Documents. Each Lender also acknowledges that it will, independently and without
reliance upon the Agent, the Arranger or any other Lender and based on such
documents and information as it shall deem appropriate at the time, continue to
make its own credit decisions in taking or not taking action under this
Agreement and the other Loan Documents.
10.12. Successor Agent. The Agent may resign at any time by giving
written notice thereof to the Lenders and the Borrower, such resignation to be
effective upon the appointment of a successor Agent or, if no successor Agent
has been appointed, forty-five days after the retiring Agent gives notice of its
intention to resign. The Agent may be removed at any time with or without cause
by written notice received by the Agent from the Required Lenders, such removal
to be effective on the date specified by the Required Lenders. Upon any such
resignation or removal, the Required Lenders shall have the right to appoint, on
behalf of the Borrower and the Lenders, a successor Agent. If no successor Agent
shall have been so appointed by the Required Lenders within thirty days after
the resigning Agent's giving notice of its intention to resign, then the
resigning Agent may appoint, on behalf of the Borrower and the Lenders, a
successor Agent. Notwithstanding the previous sentence, the Agent may at any
time without the consent of the Borrower or any Lender, appoint any of its
Affiliates which is a commercial bank as a successor Agent hereunder. If the
Agent has resigned or been removed and no successor Agent has been appointed,
the Lenders may perform all the duties of the Agent hereunder and the Borrower
shall make all payments in respect of the Obligations to the applicable Lender
and for all other purposes shall deal directly with the Lenders. No successor
Agent shall be deemed to be appointed hereunder until such successor Agent has
accepted the appointment. Any such successor Agent shall be a commercial bank
having capital and retained earnings of at least $100,000,000. Upon the
acceptance of any appointment as Agent hereunder by a successor Agent, such
successor Agent shall thereupon succeed to and become vested with all the
rights, powers, privileges and duties of the resigning or removed Agent. Upon
the effectiveness of the resignation or removal of the Agent, the resigning or
removed Agent shall be discharged from its duties and obligations hereunder and
under the Loan Documents. After the effectiveness of the resignation or removal
of an Agent, the provisions of this Article X shall continue in effect for the
benefit of such Agent in respect of any actions taken or omitted to be taken by
it while it was acting as the Agent hereunder and under the other Loan
Documents. In the event that there is a successor to the Agent by merger, or the
Agent assigns its duties and obligations to an Affiliate pursuant to this
Section 10.12, then the term "Corporate Base Rate" as used in this Agreement
shall mean the prime rate, base rate or other analogous rate of the new Agent.
10.13. Agent's Fee. The Borrower agrees to pay to the Agent, for its
own account, the fees agreed to by the Borrower and the Agent pursuant to that
certain letter agreement dated of even date herewith or as otherwise agreed from
time to time.
CREDIT AGREEMENT (Clark/Bardes, Inc.) Page 42
<PAGE> 49
10.14. Delegation to Affiliates. The Borrower and the Lenders agree
that the Agent may delegate any of its duties under this Agreement to any of its
Affiliates. Any such Affiliate (and such Affiliate's directors, officers, agents
and employees) which performs duties in connection with this Agreement shall be
entitled to the same benefits of the indemnification, waiver and other
protective provisions to which the Agent is entitled under Articles IX and X.
10.15. Execution of Collateral Documents. The Lenders hereby empower
and authorize the Agent to execute and deliver to the Borrower on their behalf
the Collateral Documents and all related financing statements and any financing
statements, agreements, documents or instruments as shall be necessary or
appropriate to effect the purposes of the Collateral Documents.
10.16. Collateral Releases. The Lenders hereby empower and authorize
the Agent to execute and deliver to the Borrower on their behalf any agreements,
documents or instruments as shall be necessary or appropriate to effect any
releases of Collateral which shall be permitted by the terms hereof or of any
other Loan Document or which shall otherwise have been approved by the Required
Lenders (or, if required by the terms of Section 8.2, all of the Lenders) in
writing.
10.17. Co-Agents and Arranger. Neither any of the Lenders identified in
this Agreement as a "co-agent" (if any) nor the Arranger shall have any right,
power, obligation, liability, responsibility or duty under this Agreement other
than those applicable to all Lenders as such. Without limiting the foregoing,
none of such Lenders nor the Arranger shall have or be deemed to have a
fiduciary relationship with any Lender. Each Lender hereby makes the same
acknowledgments with respect to such Lenders as it makes with respect to the
Agent in Section 10.11.
ARTICLE XI
SETOFF; RATABLE PAYMENTS
11.1. Setoff. In addition to, and without limitation of, any rights of
the Lenders under applicable law, if the Borrower becomes insolvent, however
evidenced, or any Default occurs, any and all deposits (including all account
balances, whether provisional or final and whether or not collected or
available) and any other Indebtedness at any time held or owing by any Lender or
any Affiliate of any Lender to or for the credit or account of the Borrower may
be offset and applied toward the payment of the Obligations owing to such
Lender, whether or not the Obligations, or any part hereof, shall then be due.
11.2. Ratable Payments. If any Lender, whether by setoff or otherwise,
has payment made to it upon its Loans (other than payments received pursuant to
Section 3.1, 3.2, 3.4 or 3.5) in a greater proportion than that received by any
other Lender, such Lender agrees, promptly upon demand, to purchase a portion of
the Loans held by the other Lenders so that after such purchase each Lender will
hold its ratable proportion of Loans. If any Lender, whether in connection with
setoff or amounts which might be subject to setoff or otherwise, receives
collateral or other protection for its Obligations or such amounts which may be
subject to setoff, such Lender agrees, promptly upon demand, to take such action
necessary such that all Lenders share in the benefits of such collateral ratably
in proportion to their Loans. In case any such payment is disturbed by legal
process, or otherwise, appropriate further adjustments shall be made. If an
amount to be setoff is to be applied to Indebtedness of the Borrower to a Lender
other than Indebtedness comprised of Loans made by such Lender, such amount
shall be applied ratably to such other Indebtedness and to the Indebtedness
comprised of such Loans.
11.3. Proceeds of Collateral. Lenders agree, among themselves, that
unless otherwise agreed to by Agent and the Required Lenders, all monies
collected or received by Agent after the occurrence of an
CREDIT AGREEMENT (Clark/Bardes, Inc.) Page 43
<PAGE> 50
Event of Default in respect of the security for the Loans, directly or
indirectly, or by any other means shall be applied (a) to all costs of
collection or maintenance of the Collateral, and then to either interest or
principal of the Loans as recommended by Agent and approved by the Required
Lenders (except that any amounts to be applied to interest or principal shall be
distributed to Lenders based on their Commitment Percentage) until the Loans are
paid in full, and (b) to any Rate Hedging Obligations owed to any Lender under
any Rate Hedging Agreement, only after payment in full of the outstanding
principal and interest under the Loans.
ARTICLE XII
BENEFIT OF AGREEMENT; ASSIGNMENTS; PARTICIPATIONS
12.1. Successors and Assigns. The terms and provisions of the Loan
Documents shall be binding upon and inure to the benefit of the Borrower and the
Lenders and their respective successors and assigns, except that (i) the
Borrower shall not have the right to assign its rights or obligations under the
Loan Documents and (ii) any assignment by any Lender must be made in compliance
with Section 12.3. Notwithstanding clause (ii) of this Section, any Lender may
at any time, without the consent of the Borrower or the Agent, assign all or any
portion of its rights under this Agreement and any Note to a Federal Reserve
Bank; provided, however, that no such assignment to a Federal Reserve Bank shall
release the transferor Lender from its obligations hereunder. The Agent may
treat the Person which made any Loan or which holds any Note as the owner
thereof for all purposes hereof unless and until such Person complies with
Section 12.3 in the case of an assignment thereof or, in the case of any other
transfer, a written notice of the transfer is filed with the Agent. Any assignee
or transferee of the rights to any Loan or any Note agrees by acceptance of such
transfer or assignment to be bound by all the terms and provisions of the Loan
Documents. Any request, authority or consent of any Person, who at the time of
making such request or giving such authority or consent is the owner of the
rights to any Loan (whether or not a Note has been issued in evidence thereof),
shall be conclusive and binding on any subsequent holder, transferee or assignee
of the rights to such Loan.
12.2. Participations.
12.2.1. Permitted Participants; Effect. Any Lender may, in the
ordinary course of its business and in accordance with applicable law,
at any time sell to one or more banks or other entities
("PARTICIPANTS") participating interests in any Loan owing to such
Lender, any Note held by such Lender, any Commitment of such Lender or
any other interest of such Lender under the Loan Documents (in amounts
of not less than $5,000,000, or a lesser amount with the consent of
Borrower). In the event of any such sale by a Lender of participating
interests to a Participant, such Lender's obligations under the Loan
Documents shall remain unchanged, such Lender shall remain solely
responsible to the other parties hereto for the performance of such
obligations, such Lender shall remain the owner of its Loans and the
holder of any Note issued to it in evidence thereof for all purposes
under the Loan Documents, all amounts payable by the Borrower under
this Agreement shall be determined as if such Lender had not sold such
participating interests, and the Borrower and the Agent shall continue
to deal solely and directly with such Lender in connection with such
Lender's rights and obligations under the Loan Documents.
CREDIT AGREEMENT (Clark/Bardes, Inc.) Page 44
<PAGE> 51
12.2.2. Voting Rights. Each Lender shall retain the sole right
to approve, without the consent of any Participant, any amendment,
modification or waiver of any provision of the Loan Documents other
than any amendment, modification or waiver with respect to any Loan or
Commitment in which such Participant has an interest which forgives
principal, interest or fees or reduces the interest rate or fees
payable with respect to any such Loan or Commitment, extends the
Revolving Credit Termination Date, postpones any date fixed for any
regularly-scheduled payment of principal of, or interest or fees on,
any such Loan or Commitment, releases any guarantor of any such Loan or
releases all or substantially all of the collateral, if any, securing
any such Loan.
12.2.3. Benefit of Setoff. The Borrower agrees that each
Participant shall be deemed to have the right of setoff provided in
Section 11.1 in respect of its participating interest in amounts owing
under the Loan Documents to the same extent as if the amount of its
participating interest were owing directly to it as a Lender under the
Loan Documents, provided that each Lender shall retain the right of
setoff provided in Section 11.1 with respect to the amount of
participating interests sold to each Participant. The Lenders agree to
share with each Participant, and each Participant, by exercising the
right of setoff provided in Section 11.1, agrees to share with each
Lender, any amount received pursuant to the exercise of its right of
setoff, such amounts to be shared in accordance with Section 11.2 as if
each Participant were a Lender.
12.3. Assignments.
12.3.1. Permitted Assignments. Any Lender may, in the ordinary
course of its business and in accordance with applicable law, at any
time assign to one or more banks or other entities ("PURCHASERS") all
or any part of its rights and obligations under the Loan Documents.
Such assignment shall be substantially in the form of Exhibit C or in
such other form as may be agreed to by the parties thereto. The consent
of the Borrower and the Agent shall be required prior to an assignment
becoming effective with respect to a Purchaser which is not a Lender or
an Affiliate thereof; provided, however, that if a Default has occurred
and is continuing, the consent of the Borrower shall not be required.
Such consent shall not be unreasonably withheld or delayed. Each such
assignment with respect to a Purchaser which is not a Lender or an
Affiliate thereof shall (unless each of the Borrower and the Agent
otherwise consents) be in an amount not less than the lesser of (i)
$5,000,000 or (ii) the remaining amount of the assigning Lender's
Commitment (calculated as at the date of such assignment) or
outstanding Loans (if the applicable Commitment has been terminated).
12.3.2. Effect; Effective Date. Upon (i) delivery to the Agent
of an assignment, together with any consents required by Section
12.3.1, and (ii) payment of a $4,000 fee paid by the assigning Lender
or purchaser to the Agent for processing such assignment (unless such
fee is waived by the Agent), such assignment shall become effective on
the effective date specified in such assignment. The assignment shall
contain a representation by the Purchaser to the effect that none of
the consideration used to make the purchase of the Commitment and Loans
under the applicable assignment agreement constitutes "plan assets" as
defined under ERISA and that the rights and interests of the Purchaser
in and under the Loan Documents will not be "plan assets" under ERISA.
On and after the effective date of such assignment, such Purchaser
shall for all purposes be a Lender party to this Agreement and any
other Loan Document executed by or on behalf of the Lenders and shall
have all the rights and obligations of a Lender under the Loan
Documents, to the same extent as if it were an original party hereto,
and no further consent or action by the Borrower, the Lenders or the
Agent shall be required to release the transferor Lender with respect
to the percentage of the
CREDIT AGREEMENT (Clark/Bardes, Inc.) Page 45
<PAGE> 52
Aggregate Commitment and Loans assigned to such Purchaser. Upon the
consummation of any assignment to a Purchaser pursuant to this Section
12.3.2, the transferor Lender, the Agent and the Borrower shall, if the
transferor Lender or the Purchaser desires that its Loans be evidenced
by Notes, make appropriate arrangements so that new Notes or, as
appropriate, replacement Notes are issued to such transferor Lender and
new Notes or, as appropriate, replacement Notes, are issued to such
Purchaser, in each case in principal amounts reflecting their
respective Commitments, as adjusted pursuant to such assignment.
12.4. Dissemination of Information. The Borrower authorizes each Lender
to disclose to any Participant or Purchaser or any other Person acquiring an
interest in the Loan Documents by operation of law (each a "TRANSFEREE") and any
prospective Transferee any and all information in such Lender's possession
concerning the creditworthiness of the Borrower and its Subsidiaries, including
without limitation any information contained in any Reports; provided that each
Transferee and prospective Transferee agrees to be bound by Section 9.11 of this
Agreement.
12.5. Tax Treatment. If any interest in any Loan Document is
transferred to any Transferee which is organized under the laws of any
jurisdiction other than the United States or any State thereof, the transferor
Lender shall cause such Transferee, concurrently with the effectiveness of such
transfer, to comply with the provisions of Section 3.5(iv).
ARTICLE XIII
NOTICES
13.1. Notices. Except as otherwise permitted by Section 2.14 with
respect to borrowing notices, all notices, requests and other communications to
any party hereunder shall be in writing (including electronic transmission,
facsimile transmission or similar writing) and shall be given to such party: (x)
in the case of the Borrower or the Agent, at its address or facsimile number set
forth on the signature pages hereof, (y) in the case of any Lender, at its
address or facsimile number set forth below its signature hereto or (z) in the
case of any party, at such other address or facsimile number as such party may
hereafter specify for the purpose by notice to the Agent and the Borrower in
accordance with the provisions of this Section 13.1. Each such notice, request
or other communication shall be effective (i) if given by facsimile
transmission, when transmitted to the facsimile number specified in this Section
and confirmation of receipt is received, (ii) if given by mail, 72 hours after
such communication is deposited in the mails with first class postage prepaid,
addressed as aforesaid, or (iii) if given by any other means, when delivered
(or, in the case of electronic transmission, received) at the address specified
in this Section; provided that notices to the Agent under Article II shall not
be effective until received.
13.2. Change of Address. The Borrower, the Agent and any Lender may
each change the address for service of notice upon it by a notice in writing to
the other parties hereto.
CREDIT AGREEMENT (Clark/Bardes, Inc.) Page 46
<PAGE> 53
ARTICLE XIV
COUNTERPARTS
This Agreement may be executed in any number of counterparts, all of
which taken together shall constitute one agreement, and any of the parties
hereto may execute this Agreement by signing any such counterpart. This
Agreement shall be effective when it has been executed by the Borrower, the
Agent and the Lenders and each party has notified the Agent by facsimile
transmission or telephone that it has taken such action.
ARTICLE XV
CHOICE OF LAW; CONSENT TO JURISDICTION; WAIVER OF JURY TRIAL
15.1. CHOICE OF LAW. THE LOAN DOCUMENTS (OTHER THAN THOSE CONTAINING A
CONTRARY EXPRESS CHOICE OF LAW PROVISION) SHALL BE CONSTRUED IN ACCORDANCE WITH
THE INTERNAL LAWS ( BUT WITHOUT REGARD TO THE CONFLICT OF LAWS PROVISIONS OR
PRINCIPLES) OF THE STATE OF TEXAS, BUT GIVING EFFECT TO FEDERAL LAWS APPLICABLE
TO NATIONAL BANKS.
15.2. CONSENT TO JURISDICTION. THE BORROWER HEREBY IRREVOCABLY SUBMITS
TO THE NON-EXCLUSIVE JURISDICTION OF ANY UNITED STATES FEDERAL OR TEXAS STATE
COURT SITTING IN DALLAS, TEXAS IN ANY ACTION OR PROCEEDING ARISING OUT OF OR
RELATING TO ANY LOAN DOCUMENTS AND THE BORROWER HEREBY IRREVOCABLY AGREES THAT
ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED
IN ANY SUCH COURT AND IRREVOCABLY WAIVES ANY OBJECTION IT MAY NOW OR HEREAFTER
HAVE AS TO THE VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN SUCH A
COURT OR THAT SUCH COURT IS AN INCONVENIENT FORUM. NOTHING HEREIN SHALL LIMIT
THE RIGHT OF THE AGENT OR ANY LENDER TO BRING PROCEEDINGS AGAINST THE BORROWER
IN THE COURTS OF ANY OTHER JURISDICTION. ANY JUDICIAL PROCEEDING BY THE BORROWER
AGAINST THE AGENT OR ANY LENDER OR ANY AFFILIATE OF THE AGENT OR ANY LENDER
INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER IN ANY WAY ARISING OUT OF, RELATED
TO, OR CONNECTED WITH ANY LOAN DOCUMENT SHALL BE BROUGHT ONLY IN A COURT IN
DALLAS, TEXAS.
15.3. WAIVER OF JURY TRIAL. THE BORROWER, THE AGENT AND EACH LENDER
HEREBY WAIVE TRIAL BY JURY IN ANY JUDICIAL PROCEEDING INVOLVING, DIRECTLY OR
INDIRECTLY, ANY MATTER (WHETHER SOUNDING IN TORT, CONTRACT OR OTHERWISE) IN ANY
WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITH ANY LOAN DOCUMENT OR THE
RELATIONSHIP ESTABLISHED THEREUNDER.
[No further text on this page]
CREDIT AGREEMENT (Clark/Bardes, Inc.) Page 47
<PAGE> 54
IN WITNESS WHEREOF, the Borrower, the Lenders and the Agent have
executed this Agreement as of the date first above written.
BORROWER:
CLARK/BARDES, INC., a Delaware
corporation,
By:
-------------------------------------
Print Name:
-----------------------------
Title:
----------------------------------
2121 San Jacinto Street;
Suite 2200
Dallas, Texas 75201-7906
Attention: Mel Todd and
Tom Pyra
Telephone: (214) 871-8717
FAX: (214) 720-6050
COMMITMENTS: LENDERS:
Term: $9,230,769 BANK ONE, TEXAS, N.A., a national banking
Revolving: $10,769,231 association,
Individually and as Agent
By:
-------------------------------------
Print Name:
-----------------------------
Title:
----------------------------------
1717 Main Street; Third Floor
Dallas, Texas 75201
Attention: Chris Holder
Telephone: (214) 290-4146
FAX: (214) 290-2305
Term: $9,230,769 U.S. BANK NATIONAL ASSOCIATION, a national
Revolving: $10,769,231 banking association, Individually and as
Co-Agent
By:
-------------------------------------
Print Name:
-----------------------------
Title:
----------------------------------
601 Second Avenue South
Minneapolis, Minnesota 55402-4302
Attention: Jose A. Peris
Telephone: (612) 973-0551
FAX: (612) 973-0832
CREDIT AGREEMENT (Clark/Bardes, Inc.) Page 48
<PAGE> 55
Term: $6,923,077 LASALLE NATIONAL BANK, N.A., a national
Revolving: $8,076,923 banking association
By:
-------------------------------------
Print Name:
-----------------------------
Title:
----------------------------------
135 South LaSalle Street
Chicago, Illinois 60603
Attention: Richard J. Melnick
Telephone: (312) 904-7117
FAX: (312) 904-6353
Term: $4,615,385 COMPASS BANK, an Alabama state bank
Revolving: $5,384,615
By:
-------------------------------------
Print Name:
-----------------------------
Title:
----------------------------------
8080 N. Central Expressway,
Suite 250
Dallas, Texas 75206
Attention: J. Paul Voorhies
Telephone: (214) 706-8065
FAX: (214) 890-8625
CREDIT AGREEMENT (Clark/Bardes, Inc.) Page 49
<PAGE> 1
EXHIBIT 10.47
LEASE AGREEMENT
BETWEEN
BELLEMEAD DEVELOPMENT CORPORATION
AND
SCHOENKE & ASSOCIATES CORPORATION
<PAGE> 2
TABLE OF CONTENTS
20250 CENTURY BOULEVARD
GERMANTOWN, MARYLAND 20874
<TABLE>
<CAPTION>
Paragraph Page
--------- ----
<S> <C> <C>
1 Basic Lease Provisions ................................ 1
2 Demised Premises ...................................... 3
3 Term .................................................. 3
4 Use ................................................... 5
5 Minimum Rent .......................................... 5
6 Cost of Living Adjustments to Rent .................... 6
7 Adjustments to Rent ................................... 6
8 Deposits .............................................. 9
9 Assignment and Subletting ............................. 11
10 Landlord's Work ....................................... 13
11 Maintenance by Tenant ................................. 13
12 Alterations ........................................... 13
13 Tenant's Agreement .................................... 14
14 Entry for Repairs and Inspection ...................... 15
15 Insurance Rating ...................................... 15
16 Tenant's Insurance .................................... 16
17 Tenant's Equipment .................................... 17
18 Utilities and Services ................................ 18
19 Indemnity ............................................. 19
20 Damage to Demised Premises ............................ 19
21 Damage to Personal Property and Person ................ 20
22 Destruction, Fire and Other Casualty .................. 20
23 Bankruptcy or Insolvency .............................. 22
24 Default of Tenant ..................................... 24
25 waiver ................................................ 28
26 Subordination ......................................... 28
27 Condemnation .......................................... 29
28 Rules and Regulations ................................. 30
29 Right of Landlord to Cure Tenant's Default;
Late Payments ....................................... 30
30 Holding Over .......................................... 31
31 No Representations by Landlord ........................ 31
32 Brokers ............................................... 32
33 Notices ............................................... 32
34 Estoppel Certificates ................................. 32
35 Financing Requirements ................................ 32
36 Covenants of Landlord ................................. 33
37 Lien for Rent ......................................... 33
38 Successors and Assigns ................................ 33
39 Entire Agreement ...................................... 34
40 Applicable Law ........................................ 34
41 Limitation of Landlord's Liability .................... 34
42 Waiver of Redemption .................................. 34
43 No Option ............................................. 34
44 Attorney's Fees ....................................... 34
45 Partial Invalidity .................................... 35
</TABLE>
<PAGE> 3
<TABLE>
<S> <C> <C>
46 Pronouns .............................................. 35
47 Parking ............................................... 35
48 Costs Associated with Landlord's Approval ............. 36
</TABLE>
Exhibits
A Demised Premises
A-1 Construction Specifications
A Work Letter
C Rules and Regulations
D Sample Rent Letter
E Cleaning and Char Service Specifications
F Legal Holidays
(ii)
<PAGE> 4
LEASE AGREEMENT
THIS LEASE AGREEMENT ("Lease") is made as of the date set forth below,
by and between BELLEMEAD DEVELOPMENT CORPORATION ("Landlord") and SCHOENKE &
ASSOCIATES CORPORATION ("Tenant").
WITNESSETH
In consideration of the mutual agreements hereinafter set forth, the
parties do hereby mutually agree as follows:
1. BASIC LEASE PROVISIONS. The following are certain lease provisions which
are part of, and, in certain instances, referred to in, subsequent provisions of
this Lease:
(a) Date of Lease: DEC 30 1996
(b) Landlord: Bellemead Development Corporation, a Delaware
Corporation
(c) Tenant: Schoenke & Associates Corporation, a Maryland Corporation
(d) Demised Premises: approximately 14,720 square feet of rentable
area on the 4th floor(s) of the building
located in the 270 Corporate Center
("Center") at 20250 Century Boulevard,
Germantown, Maryland 20874 ("Building")
(e) Term: Ten (10) Years
(f) Estimated Commencement Date: March 1, 1997
(g) Use: General Office and Administrative
(h) Minimum Rent: $242,880 per annum (14,720 square feet at
$16.50 per square foot) $ 20.240 per month
(i) Tenant's Operating Expense Allowance:
See Addendum Paragraph 6
(j) Tenant's Real Estate Tax Allowance:
See Addendum Paragraph 7
(k) Tenant's Pro Rata Share: 13.78% (based on 106,754 rentable square
feet in the Building)
<PAGE> 5
(l) Deposits: $ 100,000 security deposit (see Addendum paragraph 9
for provisions regarding partial release of security
deposit)
$ 20,240 first month's Minimum Rent
(m) Deadline for Delivery of Tenant's Plans and Specifications:
December 31, 1996
(n) Broker: CB Commercial Real Estate Group
6550 Rock Spring Drive, Suite 200
Bethesda, MD 20817
Attn: Brendan Cassidy
Penrose Corporate Advisory Services
15245 Shady Grove Road, Suite 390
Rockville, MD 20850
Attn: Larry E. Walker
Julien J. Studley, Inc.
8180 Greensboro Drive, Suite 750
McLean, VA 22102
Attn: Steve Hubberman
(o) Landlord's Address: Bellemead Development Corporation
20201 Century Boulevard
Germantown, MD 20874
with a copy to:
Bellemead Development Corporation
Four Becker Farm Road
Roseland, NJ 07068
Attn: Legal Department
and an additional copy to
Landlord's Agent:
Bellemead Management Co., Inc.
20251 Century Boulevard
Germantown, MD 20874
(p) Tenant's Address: 20250 Century Boulevard
Fourth Floor
Germantown, MD 20874
Attn: David C. Evans, Chief
Operating and Financial
Officer
-2-
<PAGE> 6
(q) Parking: Forty-four (44) Spaces
(See paragraph 47 for further parking
provisions)
2. DEMISED PREMISES. Landlord does hereby lease to Tenant and Tenant does
hereby lease from Landlord, for the term and upon the conditions herein provided
the premises described in Paragraph 1(d) above and shown on the plan attached
hereto as Exhibit A (the "Demised Premises"). Landlord shall have the right at
its option to relocate Tenant and to substitute for the Demised Premises other
comparable space in the Building or Center containing at least as much rental
area as the original Demised Premises. Landlord shall have the right to notify
Tenant in writing at least sixty (60) days in advance of Landlord's intent to
relocate Tenant and to substitute for the Demised Premises other comparable
space in the Building or Center containing at least as much rental area as the
original Demised Premises. If Tenant is not willing to be relocated, Tenant
shall so notify Landlord within ten (10) days of Tenant's receipt of the initial
notification from Landlord. Landlord shall then have the option of either
requiring Tenant to relocate or allowing Tenant to remain in the original
Demised Premises. If Landlord elects to require Tenant to relocate, Landlord
shall notify Tenant in writing. Tenant shall have ten (10) days from receipt of
such notice to (a) accept such relocation or (b) terminate the Lease without any
penalty whatsoever. In the event Tenant elects to terminate the Lease, Tenant
shall have no less than one hundred fifty (150) days to vacate the Demised
Premises. If Tenant elects to terminate the Lease, Landlord shall have the
option of canceling the relocation by notifying the Tenant in writing within ten
(10) days of Landlord's receipt of Tenant's election to terminate, in which
event Tenant's election to terminate shall be null and void and the Lease shall
continue in full force and effect. In the event Tenant determines to accept such
relocation, Landlord shall relocate Tenant to other comparable space in the
Building or Center containing at least as much rental area as the original
Demised Premises. Such substituted premises shall have substantially the same
floor plan as the Demised Premises and shall be improved by Landlord at its
expense with decorations and improvements at least equal in quantity and quality
to those originally installed in the Demised Premises at Landlord's expense.
Landlord shall pay the Tenant's reasonable costs of moving including, but not
limited to, reasonable costs of reprinting stationery and other business
materials, installation of telecommunication equipment, computer cabling and
mechanical file systems and door lettering.
3. TERM.
(a) This Lease shall be for the term ("Term") set forth in paragraph
1(e) above (or until such Term shall sooner cease ease
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and expire as hereinafter provided) beginning on the Lease Commencement Date
(hereinafter defined) and ending at midnight on the last day of the Term;
provided, however, if the Lease Commencement Date is other than the first day of
a calendar month, the period between the Lease Commencement Date and the first
day of the next calendar month shall be added to the Term.
(b) The parties intend that the Lease Commencement Date be on or about
the date set forth in Paragraph 1 (f) hereof (the "Estimated Commencement
Date"), but the Lease Commencement Date shall be fixed and ascertained as
hereinafter set forth. The Lease Commencement Date shall be the earlier of: (i)
the date upon which the Demised Premises shall be "substantially completed", as
defined in the Work Letter (attached as Exhibit B) or (ii) the date upon which
the Tenant shall take possession of all or any part of the Demised Premises for
the conduct of its business.
(c) After the Lease Commencement Date, Landlord and Tenant, promptly
upon the request of either of them, will execute and deliver to each other an
agreement in recordable form setting forth the Lease Commencement and
Termination Dates.
(d) If prior to the Lease Commencement Date, Tenant shall enter the
Demised Premises to make any installations of its equipment, fixtures and
furnishings, Landlord shall have no liability or obligation for the care or
preservation of Tenant's property, except for damage caused by Landlord's gross
negligence or willful misconduct.
(e) Landlord agrees to provide access to Tenant's outside vendors and
installers of telephone equipment, computer cabling, kardex files and kitchen
appliances during the course of construction, to permit Tenant's installations
of such equipment. Notwithstanding, the parties agree that the failure of such
companies to complete the installation of equipment and to provide service on
the Lease Commencement Date shall not delay or defer the determination of the
Lease Commencement Date and the obligation of Tenant to pay rent therefrom,
unless such delay is caused solely by the Landlord, in which event the
obligation to pay rent shall be delayed one day for each day of delay caused
solely by Landlord; provided, however, that Landlord's, or its agents', actions
in connection with completion of the improvements to the Demised Premises shall
not be deemed to be a cause of delay.
(f) Anything contained in this paragraph to the contrary
notwithstanding, if for any reason the Demised Premises are not ready for
occupancy on the Estimated Commencement Date, this Lease shall nevertheless
continue in full force and effect; the Lease Commencement Date shall be advanced
until the Demised Premises are "substantially completed"; and the termination
date
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shall be adjusted to provide the full Term set forth above; provided, however,
that if the Demised Premises are not substantially completed by one year from
the Estimated Commencement Date, then Tenant shall have the option of
terminating this Lease by providing Landlord with written notice of its decision
to terminate the Lease within thirty (30) days of the first anniversary of the
Estimated Commencement Date.
(g) In the event the Lease Commencement Date is postponed due to any
reason set forth in Paragraph D, subparagraphs 1 through 5, of the Work Letter,
or any other delay caused by Tenant, Tenant shall pay to Landlord as Additional
Rent, one day's rent computed in accordance with this Lease for each calendar
day of delay as liquidated damages.
(h) In the event the Demised Premises are not substantially completed
by the Estimated Commencement Date, Landlord shall not be liable or responsible
for any claims, damages or liabilities by reason of such delay, nor shall the
obligations of Tenant hereunder be affected, except as specifically set forth
above.
4. USE. Tenant will use and occupy the Demised Premises solely for the uses
set forth in Paragraph 1(g) above, in accordance with the certificate of
occupancy and the use permitted under applicable zoning regulations and for no
other purpose. Tenant will not use or occupy the Demised Premises for any
unlawful, disorderly, or hazardous purpose, and will not manufacture any
commodity or prepare or dispense any food or beverage therein, except for
Tenant's personal use in the Demised Premises. Tenant will comply with all
present and future laws, regulations and governmental requirements of any
governmental or public authority having jurisdiction over the Demised Premises.
5. MINIMUM RENT.
(a) Tenant covenants and agrees to pay to Landlord as rent for the
Demised Premises the amount set forth in Paragraph 1(h) above ("Minimum Rent").
Minimum Rent shall be payable in advance on the first day of each calendar month
during the Term of this lease. Tenant shall also pay, as Additional Rent, all
such other sums of money as shall become due from and payable by Tenant to
Landlord under this Lease. Unless otherwise specified herein, Additional Rent
shall be paid by Tenant with the next instillment of Minimum Rent falling due.
Landlord shall have the same remedies for default for the payment of Additional
Rent as are available to Landlord in the case of a default in the payment of
Minimum Rent.
(b) If the Lease Commencement Date occurs on a day other than on the
first day of a month, rent from the Lease Commencement Date until the first day
of the following month
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shall be prorated at the rate of one-thirtieth (1/30) of the fixed monthly
rental for each such day, payable in advance on the Lease Commencement Date.
(c) Tenant will pay said rent without demand, deduction, set-off or
counterclaim, by check to Landlord's Agent: Bellemead Management Co., at Four
Becker Farm Road, Roseland, NJ 07068 or to such other party or to such other
address as Landlord may designate from time to time by written notice to Tenant.
If Landlord shall at any time or times accept said rent after it shall become
due and payable, such acceptance shall not excuse delay upon subsequent
occasions, or constitute a waiver of any or all of Landlord's rights hereunder.
6. COST OF LIVING ADJUSTMENTS TO RENT.
On the first day of the second Lease Year, as hereinafter defined, and
on the first day of each subsequent Lease Year, Annual Rent then in effect shall
be increased by two and one-half percent (2.5%). "Lease Year" shall mean each
twelve month period running from the Lease Commencement Date, or the first day
of the first month following the Lease Commencement Date if the Lease
Commencement Date is other than the first day of a month.
7. ADJUSTMENTS TO RENT.
(a) Commencing with calendar year 1998 and continuing for each calendar
year thereafter throughout the term, including the calendar year in which this
Lease terminates, Tenant shall pay to Landlord as Additional Rent, (i) Tenant's
Pro Rata Share (as defined below) of the excess, if any, of the Operating
Expenses (hereinafter defined) for the Building for such calendar year over
Tenant's specified operating expense allowances set forth in Paragraph 1(i)
above and (ii) Tenant's Pro Rata Share of the excess, if any, of the Real Estate
Taxes (hereinafter defined) for such calendar year over Tenant's specified real
estate tax allowance set forth in Paragraph 1(j) above. Tenant's share of
increases in Operating Expenses for 1998 and for the last calendar year of the
term shall be adjusted by multiplying the Tenant's share for the full calendar
year by a fraction, numerator of which is the number of days during 1997 or the
last calendar year of the term, as applicable, during which the Lease had
commenced and was in effect, and the denominator of which is 365. Landlord and
Tenant hereby agree that Tenant's Pro Rata Share shall be the percentage set
forth in Paragraph 1(k) above ("Pro Rata Share"), which represents the ratio
that the area of the Demised Premises bears to the total rentable area of office
space contained in the Building.
(b) The term "Operating Expenses" shall mean all of the costs and
expenses incurred in operating and maintaining the
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Building, as determined by Landlord, including by way of illustration, but not
limitation: (i) rent taxes, (ii) gross receipts taxes (whether assessed against
the Landlord or assessed against the Tenant and collected by the Landlord, or
both; provided Operating Expenses shall not include any income taxes of
Landlord), (iii) water and sewer charges, (iv) insurance premiums, (v)
utilities, (vi) managements costs, fees and commissions, (vii) maintenance and
repair expenses, including salaries, wages and other personnel costs of
janitors, engineers, superintendents, watchmen and other Building employees,
(viii) supplies, (ix) costs and upkeep of all parking and common areas, and (x)
the costs of any additional services not provided to the Building at the Lease
Commencement Date but thereafter provided by Landlord in the prudent management
of the Building. Operating Expenses shall not include: (i) principal and
interest payments on any mortgages, deeds of trust or other financing
encumbrances, (ii) leasing commissions payable by Landlord, (iii) deductions for
depreciation of the Building, or (iv) those additional exclusions from Operating
Expenses set forth in Paragraph 8 of the Addendum. Operating expenses shall
include the yearly amortization of capital costs incurred by Landlord (i) for
improvements or structural repairs to the Building required to comply with any
changes in the laws, rules or regulations of any governmental authority having
jurisdiction, or (ii) for purposes of reducing operating expenses, which costs
shall be amortized over the useful life of such improvements or repairs as
reasonably estimated by Landlord. If the parking facilities for the Building
ever generate income for the Landlord, such income be applied to offset any
Operating Expenses attributable solely to the operation of the parking
facilities.
(c) The term "Real Estate Taxes" shall include all taxes, general and
special, or ordinary or extraordinary, foreseen or unforeseen, assessed, levied
or imposed upon the Building or the land by any governmental authority or agency
(including W.S.S.C. connection and usage fees). Landlord shall have no
obligation to contest, object or litigate the levying or imposition of Real
Estate Taxes, and may settle, compromise, consent to, waive or otherwise
determine in its discretion any such taxes without consent of Tenant. Real
Estate Taxes which are being contested by Landlord shall be included for
purposes of computing Tenant's Pro Rata Share of increased Real Estate Taxes,
but if Tenant shall have paid any amount of Additional Rent pursuant to this
paragraph and Landlord shall thereafter receive a refund of any portion of any
Real Estate Taxes on which such payments shall have been based, Landlord shall
pay to Tenant its Pro Rata Share of such refund, less all costs involved in
obtaining said refund. If any taxes are separately assessed against Landlord or
the Building due to improvements, alterations, additions and substitutions
undertaken by or at the specific request of Tenant, Tenant shall be solely
responsible for the payment of such tax.
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(d) After the end of each calendar year during the Term, Landlord shall
determine the amount, if any, by which the Operating Expenses for the Building
and the Real Estate Taxes during the preceding calendar year exceeded the
allowances set forth in Paragraphs 1(i) and 1(j), respectively, above. Within
ninety (90) days after the close of each calendar year, Landlord shall provide
to Tenant a detailed written statement of this determination, including Tenant's
Pro Rata Share of increased Operating Expenses and Real Estate Taxes for the
ensuing calendar year ("Expense Statement"). Failure by Landlord to give such
Expense Statement by such date shall not constitute a waiver by Landlord of its
right to require an increase in rent. Upon receipt of the Expense Statement for
the preceding year, Tenant shall pay in full with the next monthly rent falling
due the total amount of increase due for the preceding year and the amount of
any such increase shall be used as an estimate for the ensuing year. Said
estimate shall be divided into twelve (12) equal monthly installments and shall
be payable by Tenant to Landlord concurrently with the regular monthly rent
payments for the balance of that calendar year and shall continue until the next
year's statement is rendered. If the next or any succeeding year results in a
greater increase in Operating Expenses or Real Estate Taxes, then upon receipt
of an Expense Statement from Landlord, Tenant shall pay a lump sum equal to its
Pro Rata Share of such total increase in Operating Expenses and Real Estate
Taxes over the base, less the total of the monthly installments of estimated
increases paid in the previous lease year for which comparison is then being
made to the base; and the estimated monthly installments to be paid for the next
year, following said year, shall be adjusted to reflect such increase. If in any
year Tenant's Pro Rata Share of increased Operating Expenses and/or Real Estate
Taxes be less than the preceding year, then upon receipt of Landlord's Expense
Statement, any other payment made by Tenant on the monthly installment basis
provided above shall be credited toward the next monthly rent falling due and
the estimated monthly installments of Operating Expenses and/or Real Estate
Taxes, as applicable, to be paid shall be adjusted to reflect such lower
Operating Expenses or Real Estate Taxes for the most recent comparison year.
(e) Even though the Term has expired and Tenant has vacated the Demised
Premises, when the final determination is made of Tenant's Pro Rata Share of
increased Operating Expenses and Real Estate Taxes for the year in which the
Lease terminates, Tenant shall immediately pay any increase due over the
estimated expenses paid and conversely any overpayment made in the event said
expenses decrease shall be immediately rebated by Landlord to Tenant.
(f) Each Expense Statement provided by Landlord pursuant to this
paragraph shall be conclusive and binding upon Tenant unless within ninety (90)
days after receipt of the
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Expense Statement, Tenant shall notify Landlord that it disputes the correctness
of the Expense Statement, specifying the respects in which the Expense Statement
is claimed to be incorrect. Tenant, at its expense, shall then have the right to
audit Landlord's books and records relating to the Expense Statement. Pending
determination of the dispute, Tenant shall pay within ten (10) days from notice
any amounts due from Tenant in accordance with the Expense Statement, but such
payment shall be without prejudice to Tenant's position. Tenant shall notify
Landlord in writing of its intent to perform an audit within ninety said ninety
(90) day period. The audit shall be performed at Tenant's expense, during
regular business hours, at the office where Landlord maintains in Operating
Expense records, or, at Tenant's request and expense, Landlord will provide
Tenant with copies of such records. Landlord agrees to maintain all Operating
Expense records for the Building for a minimum of two (2) years. Any audit shall
be conducted by Tenant or by an independent accounting firm that is not
compensated by Tenant on a contingency fee basis. Notwithstanding anything to
the contrary provided herein, in the event the audit reveals a discrepancy of
more than seven percent (7%), Landlord shall reimburse Tenant for the reasonable
costs of the audit. In the event the audit discloses any overpayment by Tenant,
Landlord shall refund such overpayment to Tenant within thirty (30) days of
demand.
(g) In the event that any statute, regulation, or proclamation having
the effect of law prevents an increase in the rent in accordance with any term
or provision of this Lease, the amount of the increase in the rent which would
have gone into effect but for the operation of such statute, regulation, or
proclamation will be accumulated. Said accumulated amount will be payable in
twelve equal monthly installments beginning immediately after such statute,
regulation, or proclamation ceases to prohibit such rental increases and will be
payable in addition to the then current Minimum Rent. If the Demised Premises
are still under Lease at the time that such statute, regulation or proclamation
ceases to prohibit such rental increases, then the current Rent shall be
immediately increased to the level where it would have been had no such statute,
regulation or proclamation ever been in effect.
(h) Notwithstanding anything contained in this article, the rental
payment by Tenant shall in no event be less than the rent specified herein.
8. DEPOSITS. Upon execution of this Lease, Tenant shall deposit with
Landlord the sum set forth in Paragraph 1(1) above as a deposit to be applied
against the first month's Minimum Rent. In addition, Tenant shall pay to
Landlord as a security deposit the sum set forth in Paragraph 1(1) above in
cash or in the form of a letter of credit. If the security deposit is in the
form of a letter of credit, the letter of credit shall be
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irrevocable and unconditional, in standard form, and issued to Landlord for a
term expiring no earlier than thirty (30) days following the expiration of the
term of this Lease. In the event Tenant is unable to obtain a letter of credit
for such term, it may substitute a series of letters of credit, each having a
term of one year. Tenant shall deliver each replacement letter of credit to
Landlord not less than thirty (30) days prior to the end of each lease year.
Upon receipt of the replacement letter of credit, Landlord shall return the
previous letter of credit to Tenant (or the proceeds of the letter of credit
less draws permitted hereunder in the event of Tenant's default). Time is of the
essence as to this requirement and Tenant's failure to deliver the replacement
letter(s) of credit within the time frame set forth herein shall be deemed a
material Default. Such deposit (which, if in the form of cash, shall bear
interest to Tenant) shall be considered as security for the prompt payment and
performance by Tenant of all of Tenant's obligations under this Lease. Provided
there has not been a Default under this Lease, Landlord shall reduce the
security deposit and refund portions thereof to Tenant in accordance with the
schedule contained in Paragraph 9 of the Addendum. Upon expiration of the Term
hereof (or any renewal or extension thereof in accordance with this Lease),
Landlord shall (provided that Tenant is not in default under the terms hereof)
return and pay back such security deposit to Tenant, less such portion thereof
as Landlord shall have appropriated to make good any default by Tenant. In the
event of any Default (as defined hereafter) by Tenant hereunder, Landlord shall
have the right, but shall not be obligated, to draw upon the letter of credit
and apply all or any portion of the security deposit to cure such Default, in
which event Tenant shall be obligated to promptly deposit with Landlord the
amount necessary to restore the security deposit to its original amount. The use
application or retention of the security deposit, or any portion thereof, by
Landlord shall not prevent Landlord from exercising any other right or remedy
provided by this Lease or by law and shall not operate as a limitation on any
recovery to which Landlord may otherwise be entitled. In the event of the sale
or transfer of Landlord's interest in the Building, Landlord shall have the
right to transfer the security deposit to such purchaser or transferee, in which
event Tenant shall be entitled to look to the new Landlord for the return of the
security deposit and Landlord shall thereupon be released from all liability to
Tenant for the return of such security deposit. In the absence of evidence
satisfactory to Landlord of any permitted assignment of the right to receive the
security deposit, or the remaining balance thereof, Landlord may return the same
to the original Tenant, regardless of one or more assignments of Tenant's
interest in this Lease or the security deposit. In such event, upon the return
of the security deposit (or balance thereof) to the original Tenant, Landlord
shall be completely relieved of liability under this paragraph. The security
deposit shall not be mortgaged, assigned or encumbered in any manner whatsoever
by Tenant.
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9. ASSIGNMENT AND SUBLETTING.
(a) Except as otherwise expressly provided to the contrary herein,
Tenant covenants not to assign or transfer this Lease or hypothecate or mortgage
the same or sublet the Demised Premises or any part thereof without the prior
written consent of Landlord, which consent shall not be unreasonably withheld
conditioned or delayed. Sales aggregating fifty percent (50%) or more of the
capital or voting stock of Tenant (if Tenant is a nonpublic corporation) or
transfers aggregating fifty percent (50%) or more of Tenant's partnership
interests or membership interests (if Tenant is a partnership or limited
liability company) shall be deemed to be an assignment of this Lease; provided
the merger or consolidation of Tenant with another entity where the surviving
entity has a net worth of at least equivalent to the greater of (a) the net
worth of Tenant as of the date hereof or (b) the net worth of Tenant immediately
prior to such merger or consolidation, shall not be deemed to be an assignment
of this Lease. Tenant shall also have the right to sublease all or a portion of
the Demised Premises to an affiliate of Tenant without the Landlord's prior
consent; provided Tenant provides Landlord with prior written notice of such
sublease, which notice shall include the form of the sublease. Such subletting
shall not relieve Tenant of any liability under the Lease. For the purposes of
this section, the term "affiliate" shall mean any entity which controls, is
controlled by or is under common control with Tenant. "Control" shall mean the
ownership of at least 51% of the voting stock.
(b) Except as provided in subparagraph (a) above, if Tenant shall
desire to sublet all or any portion of the Demised Premises or assign this
Lease, it shall first submit in writing to Landlord:
(i) the name(s) and address(es) of the proposed subtenant(s) or
assignee(s), and so long as there shall be any vacant space in the
Center, Tenant shall not sublet or assign to an existing tenant of
premises in the Center;
(ii) the terms and conditions of the proposed subletting or
assignment, and so long as there shall be any vacant space in the
Center, the rent for the assignee or subtenant shall not be less than
the fair market rate then being charged for new leases for premises in
the Center.
(iii) the nature and character of the business of the proposed
subtenant or assignee; and
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(iv) banking, financial and other credit information relating to
the proposed subtenant or assignee reasonably sufficient to enable
Landlord to determine the proposed subtenant's or assignee's financial
responsibility.
(c) Tenant shall, by notice in writing as described in subparagraph (b)
above, advise Landlord of its intention to sublease or assign from, on and after
a stated date (which shall not be less than forty-five (45) days after the date
of Tenant's notice) all or any part of the Demised Premises, in which event
Landlord shall have the right, to be exercised by giving written notice to
Tenant within twenty-five (25) days after receipt of Tenant's notice, to
recapture the space described in Tenant's notice. Such recapture notice shall,
if given, cancel and terminate this Lease with respect to the space therein
described as of the date stated in Tenant's notice. In the event less than all
of the Demised Premises are recaptured, Landlord shall be obligated to construct
and erect such partitioning as may be required to sever the portion of the
Demised Premises retained by Tenant from the portion of the Demised Premises
recaptured. Notwithstanding the foregoing, Landlord's recapture right shall not
apply to a sublease of less than 3,000 rentable square feet for less than the
remainder of the Term.
If this Lease is canceled pursuant to the foregoing provision with
respect to less than the entire Demised Premises, the rent, Tenant's Pro Rata
Share pursuant to Paragraph 1(k) hereof and the parking spaces pursuant to
Paragraph 1(q) hereof shall be adjusted on the basis of the number of square
feet retained by Tenant in proportion to the number of square feet originally
demised under this Lease and this Lease, as so amended, shall continue
thereafter in full force and effect.
In addition to the foregoing requirements, no sublease shall be made if
such sublease shall result in an occupancy of more than two (2) tenants,
including Tenant hereunder, or if the sublease shall be for a term of less than
two (2) years, unless the unexpired term of this Lease shall be less than two
(2) years.
If Landlord does not elect to recapture the Demised Premises, Tenant
shall be free for a period of ninety (90) days thereafter to sublet such space
or to assign this Lease to such proposed subtenant(s) or assignee(s) if Landlord
shall consent thereto, which consent shall not be unreasonably withheld or
delayed, provided that such sublease or assignment shall be on the same terms
and conditions set forth in Tenant's notice provided for in subparagraph (b)
above.
(d) In the event Landlord shall not elect to recapture the portion of
the Demised Premises which Tenant desires to
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sublet, or if Tenant shall desire to assign this Lease and Landlord shall not
elect to recapture the Demised Premises, and Landlord shall consent to such
subletting or assignment, fifty percent (50%) of the sums or other economic
consideration received by Tenant as a result of such subletting or assignment,
whether denominated rental or otherwise under the sublease or assignment, which
exceed, in the aggregate, the total sums which Tenant is obligated to pay
Landlord under this Lease (prorated to reflect obligations allocable to that
portion of the Demised Premises subject to such sublease) shall be payable to
Landlord as Additional Rent under this Lease without affecting or reducing other
obligations of Tenant hereunder.
(e) Any subletting or assignment hereunder shall not in any event
release or discharge Tenant hereunder of or from any liability, whether past,
present or future, under this Lease and Tenant shall continue fully liable
hereunder. The subtenant or assignee shall agree to assume, comply with and be
bound by all of the terms, covenants, conditions, provisions and agreements of
this Lease to the extent of the space sublet or assigned; and Tenant shall
deliver to Landlord promptly after execution, an executed copy of such sublease
or assignment and an agreement of assumption or compliance by such subtenant or
assignee.
10. LANDLORD'S WORK. Annexed hereto as Exhibit "B" and made a part hereof
is Landlord's Work Letter (the "Work Letter"). Tenant agrees that it shall
provide to Landlord, on or before the date set forth in Paragraph 1(m) above,
the plans and specifications required by Landlord in accordance with the
provisions of the Work Letter and Landlord agrees that it shall construct the
Demised Premises in accordance with the Work Letter.
11. MAINTENANCE BY TENANT. Tenant shall at its expense keep the Demised
Premises (including all improvements, fixtures and all other property contained
in the Demised Premises) in a neat and clean condition, and in good order and
repair, and will surrender the Demised Premises at the end of the Term in as
good order and condition as they were at the commencement of the Term, except
for reasonable wear and tear and casualties and damages for which Tenant is not
responsible hereunder. Tenant shall not commit or suffer to be committed any
waste upon the Demised Premises or any nuisance or other act or thing which may
disturb the quiet enjoyment of any other tenant in the Building or any person
outside the Building in contravention of such person's legal rights.
12. ALTERATIONS. (a) The original improvement of the Demised Premises by
Landlord for Tenant shall be in accordance with Exhibit B attached hereto.
Tenant will not make or permit anyone to make any alterations, decorations,
additions or improvements, structural or otherwise, in or to the Demised
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Premises or the Building, without the prior written consent of Landlord, which
consent shall not be unreasonably withheld, conditioned or delayed; provided
Landlord's consent shall not be required for any alterations within the Demised
Premises which do not affect the Building's structural components or systems and
which are not visible from the outside of the Building. All alterations,
decorations, additions or improvements permitted by Landlord must conform to all
governmental and insurance rules and regulations established from time to time.
As a condition precedent to such written consent of Landlord, Tenant agrees to
obtain and deliver to Landlord written and unconditional waivers of mechanics'
and materialmens, liens upon the land and Building for all work, labor and
services to be performed, and material to be furnished, by them in connection
with such work, signed by all contractors, subcontractors, materialmen and
laborers to become involved in such work. If, notwithstanding the foregoing, any
mechanic's or materialmen's lien is filed against the Demised Premises, the
Building and/or the land, for work claimed to have been done for, or materials
claimed to have been furnished to, Tenant, such lien shall be discharged by
Tenant within ten (10) days thereafter, at Tenant's sole cost and expense, by
the payment thereof or by filing any bond required by law. If Tenant shall fail
to discharge any such mechanic's or materialmen's lien, Landlord may, at its
option, discharge the same and treat the cost thereof as Additional Rent payable
with the monthly installment of rent next becoming due; it being hereby
expressly covenanted and agreed that such discharge by Landlord shall not be
deemed to waive, or release the default of Tenant in not discharging the same.
It is further understood and agreed that in the event Landlord shall give its
written consent to Tenant's making any such alterations, decorations, additions
or improvements, such written consent shall not be deemed to be an agreement or
consent by Landlord to subject Landlord's interest in the Demised Premises, the
Building or the land to any mechanic's or materialmen's liens which may be filed
in respect of any such alterations, decorations, additions or improvements made
by or in behalf of Tenant.
(b) Landlord reserves the right to (i) construct additional
improvements to the Building beyond those shown on the preliminary floor plans
and (ii) install and maintain pipes, ducts, conduits, wires and structural
elements located in the Demised Premises which serve other parts or other
tenants of the Building, provided that no such installation, construction or
alterations shall materially impair Tenant's use of the Demised Premises.
13. TENANT'S AGREEMENT. Tenant further agrees that no sign, advertisement
or notice shall be inscribed, painted or affixed on any part of the outside or
inside of the Demised Premises or Building, except on the directories and doors
of offices, and then only in such size, color and style as the
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Landlord shall approve; that the Landlord shall have the right to prohibit any
advertisement of any Tenant which in the Landlord's opinion tends to impair the
reputation of the Building or its desirability as a building for offices or for
financial, insurance or other institutions and businesses of like nature, and
upon written notice from the Landlord, Tenant shall refrain from and discontinue
such advertisement; that the Landlord shall have the right to prescribe the
weight, and method of installation and position of safes or other heavy fixtures
or equipment and Tenant shall not install in the Demised Premises any fixtures,
equipment or machinery that will place a load upon any floor exceeding the floor
load per square foot area which such floor was designed to carry; that all
damage done to the Building by taking in or removing a safe or any other article
of Tenant's office equipment, or due to its being in the Demised Premises, shall
be repaired at the expense of Tenant. No freight, furniture or other bulky
matter of any description shall be received into the Building or carried in the
elevators, except as approved by the Landlord. All moving of furniture, material
and equipment shall be under the direct control and supervision of the Landlord,
who shall, however, not be responsible for any damage to or charges for moving
same. Tenant agrees promptly to remove from the public area adjacent to said
Building any of Tenant's merchandise there delivered or deposited.
14. ENTRY FOR REPAIRS AND INSPECTION. Tenant shall permit Landlord, or its
representative(s), to enter the Demised Premises at all reasonable times,
following reasonable notice under the circumstances, to examine, inspect and
protect the same, and to make such alterations and/or repairs as in the judgment
of Landlord may be deemed necessary, or to exhibit the same to prospective
tenants during the last six (6) months of the Term of this Lease. If, in an
emergency, it shall become necessary to make promptly any repairs or
replacements required to be made by Tenant, then Landlord may, at its option,
proceed forthwith to have such repairs or replacements made and to pay the cost
thereof for Tenant's account. Tenant shall reimburse Landlord for the cost of
such repairs or replacements on demand. There shall be no abatement of rent and
no liability by reason of any injury to or interference with Tenant's business
arising from the making of any repairs, alterations or improvements in or to
any portion of the Demised Premises, the Building or in or to fixtures.
15. INSURANCE RATING. Tenant will not conduct or permit to be conducted any
activity or place any equipment in or about the Demised Premises, which will, in
any way, increase the rate of insurance premiums on the Building; and if any
increase in the rate of insurance is stated by any insurance company or by the
applicable Insurance Rating Bureau to be due to any activity or equipment in or
about the Demised Premises, such statement shall be conclusive evidence that the
increase in such rate is due to
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such activity or equipment and, as a result thereof, Tenant shall be liable for
such increase and shall reimburse Landlord therefor, within ten (10) days of
receipt of written notice, and said sum shall be deemed to be Additional Rent.
16. TENANT'S INSURANCE.
(a) Coverage. Tenant shall obtain the issuance of, pay the premiums
therefor, and maintain in full force and effect during the Lease term the
following types of insurance:
(1) Comprehensive Liability. A general comprehensive liability
insurance policy or policies naming Landlord and any mortgagee or ground lessor
of the Building as additional insureds, protecting the Landlord in the amount of
Five Hundred Thousand and No/100 Dollars ($500,000.00) for injuries to or death
of one person, and in the amount of One Million and No/100 Dollars
($1,000,000.00) for injuries or deaths arising out of one accident, and in the
amount of Five Hundred Thousand and No/100 Dollars ($500,000.00) for property
damage, which amounts may be increased from time to time by the Landlord in its
reasonable determination.
(2) All-Risk Property. All-risk property insurance, naming
Landlord and any mortgagee of the Building as additional insureds and loss
payees, written at replacement cost value and with replacement cost endorsement,
covering all of Tenant's personal property in the Demised Premises (including,
without limitation, inventory, trade fixtures, floor coverings, furniture and
other property removable by Tenant under the provisions of this Lease) and all
leasehold improvements installed in the Demised Premises. Any and all proceeds
of such insurance, so long as this Lease shall remain in effect, shall be used
only to repair or replace the items so insured.
(3) Worker's Compensation. If and to the extent required by law,
worker's compensation or similar insurance in form and amounts required by law.
(b) Policy Requirements. All insurance polices required to be procured
by Tenant under this Lease (1) shall be issued by responsible insurance
companies licensed to do business in the jurisdiction in which the Building is
located and shall have such form and content as shall be approved by Landlord
(which approval shall not be unreasonably withheld if such insurance companies
and policies have been approved by the holder of the first deed of trust on the
Building); (ii) shall be written as primary policy coverage and not contributing
with or in excess of any coverage which Landlord may carry; and (iii) shall
contain an express waiver of any right of subrogation by the insurance company
against Landlord, its agents and employees with respect to each and every one of
the insurance polices
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required to be procured by Tenant under this paragraph, on or before the Lease
Commencement Date, and at least thirty (30) days before the expiration of the
expiring policies previously furnished, Tenant shall deliver to Landlord
certified copies of, or duplicate originals of, each such policy or renewal
thereof, as the case may be, together with evidence of payment of all applicable
premiums. Any insurance required to be carried hereunder may be carried under a
blanket policy covering the Demised Premises and other locations of Tenant, and
if Tenant includes the Demised Premises in such blanket coverage, Tenant shall
deliver to Landlord a duplicate original or certified copy of each such
insurance policy or such other evidence that may be satisfactory to Landlord and
the holder of any first deed of trust on the Building. Each and every insurance
policy required to be carried hereunder by or on behalf of Tenant shall provide
that such insurance policy shall not be canceled unless Landlord shall have
received fifteen (15) days' prior written notice of cancellation.
(c) Landlord's Right to Maintain Coverage. In the event Tenant shall
fail to provide such insurance, or shall fail to pay the premiums when due,
Landlord shall have the right to cause such insurance to be issued and to pay
the premiums therefor, or any premiums in default, and to collect same as
Additional Rent together with interest on the amount of such premiums from the
date of payment by Landlord until the date of repayment by Tenant at the rate of
twelve percent (12%) per annum or the highest legal rate, whichever is lower.
(d) No Limitation. Except for the express mutual waiver of the rights
of subrogation, neither the issuance of any insurance policy required under this
Lease nor the minimum limits specified herein shall be deemed to limit or
restrict in any way Tenant's liability arising under or out of this Lease.
(e) Compliance With Insurance Requirements. Tenant shall comply with
all requirements of Landlord's and Tenant's insurance carriers and shall not do
or permit to be done any act or thing upon the Demised Premises that will
invalidate or be in conflict with fire insurance policies covering the Building
or any part thereof, fixtures and property in the Building or the Demised
Premises or any other insurance policies or coverage referred to in this
paragraph, and shall comply with all rules, orders, regulations or requirements
of the Board of Fire Underwriters having jurisdiction, or any other similar body
in the case of such fire insurance policies, and the applicable insurance rating
bureau or similar body in the case of all other such insurance policies.
17. TENANT EQUIPMENT. Maintenance and repair of equipment such as kitchen
fixtures, separate air conditioning equipment, or any other type of special
equipment, whether installed by Tenant
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or by Landlord on behalf of Tenant, shall be the sole responsibility of Tenant
and Landlord shall have no obligation in connection therewith; provided Landlord
agrees to assign to Tenant, to the extent assignable, any warranties it has
received on any such equipment.
18. UTILITIES AND SERVICES. The Landlord shall furnish electric current
required for lighting purposes and the operation of ordinary office equipment
("Normal Office Use") by Tenant in accordance with Paragraph B of the Work
Letter, which usage shall be measured and computed by Landlord's check meter,
water, lavatory supplies, and automatically operated elevator service during
normal business hours, and normal and usual cleaning and char service in
accordance with the Cleaning and Char Specifications attached hereto as Exhibit
E after business hours; the Landlord further agrees to furnish heat, ventilation
and air conditioning during the appropriate seasons of the year, on Monday
through Friday during the hours of 8:00 a.m. through 6:00 p.m. (exclusive of
legal holidays, as set forth on Exhibit F attached hereto and incorporated
herein by reference ("Legal Holidays")), provided, however, that Landlord shall
not be liable for failure to furnish, or for suspension or delays in furnishing,
any of such services caused by breakdown, maintenance or repair work or strike,
riot, civil commotion, or any cause or reason whatever beyond the control of the
Landlord.
Notwithstanding the foregoing, in the event Tenant is unable to operate from any
portion of the Demised Premises for a period in excess of four (4) consecutive
business days as a result of electricity, heating or air conditioning not being
furnished to the Demised Premises resulting from Landlord's negligence or
wrongful acts or as a result of burst, stopped or leaking water, gas, sewer or
steam pipes resulting from Landlord's negligence or wrongful acts and Tenant
shall vacate such portion of the Demised Premises as a result thereof, then the
rental and all other additional charges provided for herein shall abate with
respect to such portion of the Demised Premises (on a pro rata basis) from which
Tenant cannot reasonably operate and vacates from the expiration of such four
(4) consecutive business day period until Tenant can reasonably operate from
such portion of the Demised Premises. Tenant shall only be entitled to such
abatement during such period the Tenant does in fact vacate such portions of the
Demised Premises. Such abatement of rental shall be Tenant's exclusive remedy
for such negligence or wrongful acts of Landlord. In the event Tenant shall
require electric current in excess of that required for Normal Office Use or
during hours other than those set forth above, and Tenant's electrical usage
exceeds 4.5 watts per usable square foot or the cost of such electrical usage
exceeds Tenant's electric allowance set forth in Paragraph 1(i) above, Tenant
shall pay the cost thereof to Landlord on demand. In the event Tenant shall
require heat, ventilation and air-conditioning ("HVAC") in excess of that
required for Normal Office Use or during hours when HVAC is not
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otherwise furnished by Landlord, Tenant shall first procure the written consent
of Landlord, which consent shall not be unreasonably withheld, and Tenant shall
pay the cost thereof, including a reasonable factor for equipment depreciation
and all costs, if any, associated with the installation of meters to measure
cooling energy. Tenant shall notify Landlord in writing at least twenty-four
(24) hours prior to the time it requires additional HVAC. In the event Tenant
shall require water in excess of that usually furnished for the use of the
Demised Premises as general office space (due to the installation or use of
private lavatory and/or shower facilities, or otherwise), Tenant shall first
procure the written consent of Landlord, which Landlord may refuse. Landlord may
condition its consent upon the installation of a separate water meter to measure
the amount of water consumed upon the Demised Premises. The cost of any such
meters and of installation, maintenance and repair thereof shall be paid for by
the Tenant. The Tenant shall execute any and all applications for service or
forms required by WSSC and shall pay Landlord promptly upon demand therefor by
Landlord for all water consumed as shown by said meter, at the rates charged for
such service by WSSC, plus any additional charges imposed by WSSC.
19. INDEMNITY. Tenant shall indemnify Landlord and its agents and employees
and save it harmless from and against any and all claims, actions, damages,
liabilities and expense in connection with loss of life, personal injury and/or
damage to property arising from or out of any occurrence in, upon or at the
Demised Premises and/or the Building and grounds, or the occupancy or use by
Tenant of the Demised Premises or any part thereof, occasioned by any negligent
act or omission of the Tenant, its agents, contractors, employees, servants,
permitted subtenants, invitees or licensees, or resulting from any Default,
breach, violation or nonperformance of this Lease by Tenant. In the event that
Landlord or its agents and employees shall, without fault on its part, be made a
party to any litigation commenced by or against Tenant, then Tenant shall
protect and hold Landlord harmless and shall pay all costs, expenses and
reasonable attorney's fees incurred or paid in connection with such litigation.
Tenant shall pay, satisfy and discharge any and all judgments, orders and
decrees which may be recovered against Landlord in connection with the
foregoing.
20. DAMAGE TO DEMISED PREMISES. All injury to the Demised Premises or the
Building caused by moving the property of Tenant into, in or out of, the said
Building and all breakage done by Tenant or the agents, servants, employees and
visitors of Tenant, shall be repaired by Tenant at the expense of the Tenant. In
the
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event that the Tenant shall fail to do so, following written notice of such
damage from Landlord to Tenant, then the Landlord shall have the right to make
such necessary repairs, alterations and replacements (structural, nonstructural
or otherwise) and any reasonable charge or cost so incurred by the Landlord
shall be paid by Tenant with the right on the part of the Landlord to elect in
its discretion, to regard the same as Additional Rent, in which event such cost
or charge shall become Additional Rent payable with the installment of rent next
becoming due or thereafter falling due under the terms of this Lease. This
provision shall be construed as an additional remedy granted to the Landlord and
not in limitation of any other rights and remedies which the Landlord has or may
have in said circumstances.
21. DAMAGE TO PERSONAL PROPERTY AND PERSON. All property of Tenant, its
agents or invitees, or of any other person, in or on the Demised Premises or the
Building, shall be and remain at the sole risk of Tenant or such agent, invitee
or person. Landlord shall not be liable for any damage to or theft or loss of
such property, whether or not caused by the act or omission of any person, or by
the bursting, leaking or overflowing of water, sewer, steam or sprinkler pipes,
heating or plumbing fixtures, air conditioning or heating failure, gas, noxious
odors or noise, or any other act or thing, except to the extent of the
negligence or willful misconduct of the Landlord, its agents or employees.
Landlord shall not under any circumstances be liable for the interruption of or
any loss to Tenant's business that may result from any of the acts or causes
described above. Landlord shall not be liable for any personal injury to Tenant,
its agents or invitees, or to any other person, arising from the use or
occupancy or condition of the Demised Premises or the Building other than
liability for personal injuries resulting directly from the negligence or
willful misconduct of Landlord, its agents or employees.
22. DESTRUCTION, FIRE AND OTHER CASUALTY. (a) If the Demised Premises or
any part thereof shall be damaged by fire or other casualty, Tenant shall give
immediate notice thereof to Landlord and this Lease shall continue in full force
and effect except as hereinafter set forth.
(b) If the Demised Premises are partially damaged or rendered partially
unusable by fire or other casualty, the damages thereto shall be repaired by and
at the expense of Landlord and the rent, until such repair shall be
substantially completed, shall be apportioned from the day following the
casualty according to the part of the Demised Premises which is usable.
(c) If the Demised Premises are totally damaged or rendered wholly
unusable by fire or other casualty, then the rent
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shall be proportionately paid up to the time of the casualty and thenceforth
shall cease until the date when the Demised Premises shall have been repaired
and restored by Landlord, subject to Landlord's right to elect not to restore
the same as hereinafter provided.
(d) If the Demised Premises are rendered wholly un-usable or (whether
or not the Demised Premises are damaged in whole or in part) if the Building
shall be so damaged that Landlord shall decide to demolish it or to not rebuild
it, then, in any of such events, Landlord may elect to terminate this Lease by
written notice to Tenant given within ninety (90) days after such fire or
casualty in which event this Lease shall expire as of the date of casualty as
fully and completely as if such date were the date set forth above for the
termination of this Lease and Tenant shall forthwith quit, surrender and vacate
the premises without prejudice, however, to Landlord's rights and remedies
against Tenant under the Lease provisions in effect prior to such termination,
and any rent owing shall be paid up to such date and any payments of rent made
by Tenant which were on account of any period subsequent to such date shall be
returned to Tenant. Unless Landlord shall serve a termination notice as provided
for herein, Landlord shall make the repairs and restorations under the
conditions of (b) and (c) hereof, with all reasonable expedition subject to
delays due to adjustment of insurance claims, labor troubles and causes beyond
Landlord's control. In the event the Demised Premises, a substantial portion
thereof, or the Building is damaged by fire and other casualty to the extent
that Tenant's use of the Demised Premises is materially interfered with, and
such damage (a) is not due to the negligence or willful misconduct of Tenant,
its agents or employees; and (b) such damage is not repaired within one hundred
eighty (180) days of the first insurance inspection of the Demised Premises or
Building, then Tenant shall have the right to terminate the Lease provided
Tenant notifies Landlord of its intent to so terminate within thirty (30) days
of the expiration of said one hundred eighty (180) day period.
(e) Nothing contained hereinabove shall relieve Tenant from liability
that may exist as a result of damage from fire or casualty. Notwithstanding the
foregoing, each party shall look first to any insurance in its favor before
making any claim against the other party for recovery for loss or damage
resulting from fire or other casualty, and to the extent that such insurance is
in force and collectible and to the extent permitted by law, Landlord and Tenant
each hereby releases and waives all right to recovery against the other or any
one claiming through or under each of them by way of subrogation or otherwise.
The foregoing release and waiver shall be in force only if both releasors'
insurance policies contain a clause providing that such a release or waiver
shall not invalidate the insurance and also, provided that such a policy can be
obtained without
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additional premiums. Tenant acknowledges that Landlord will not carry insurance
on Tenant's furniture and/or furnishings or any fixtures or equipment,
improvements, or appurtenances removable by Tenant and agrees that Landlord will
not be obligated to repair any damage thereto or replace the same. Any
differences or disputes between Landlord and Tenant in respect to any matters in
this paragraph shall be summarily determined by submitting the same to the
American Arbitration Association in Washington, D.C. Both parties shall
cooperate in expediting the hearing.
23. BANKRUPTCY OR INSOLVENCY.
(a) Conditions to the Assumption and Assignment of the Lease under
Chapter 7 of the Bankruptcy Code. In the event that Tenant shall file a Petition
for Relief pursuant to Title 7 Sections 101 et seq., or an order for Relief is
entered against Tenant, under Chapter 7 of the Bankruptcy Code, and the trustee
of Tenant shall elect to assume this Lease for the purpose of assigning the
same, such election and/or assignment may only be made if all of the terms and
conditions of subsections (b) and (d) hereof are satisfied. If such trustee
shall fail to elect to assume this Lease for the purpose of assigning the same
within sixty (60) days after such trustee shall have been appointed, this Lease
shall be deemed to have been rejected. Landlord shall be thereupon immediately
entitled to possession of the Demised Premises without further obligation to
Tenant or trustee, and this Lease shall be canceled, but Landlord's right to be
compensated for damages in such bankruptcy proceeding shall survive.
(b) Conditions to the Assumption of the Lease in Bankruptcy
Proceedings. In the event that Tenant files a Petition for Reorganization under
Chapter 11 or 13 of the Bankruptcy Code or a proceeding filed by or against
Tenant under any other Chapter of the Bankruptcy Code is converted to a Chapter
11 or 13 proceeding and the trustee of Tenant, or Tenant as a
debtor-in-possession, fails to assume this Lease within sixty (60) days from the
date of filing of the Petition or such conversion, the trustee or
debtor-in-possession shall be deemed to have rejected this Lease. No election to
assume this Lease shall be effective unless in writing and addressed to Landlord
and unless, in Landlord's business judgment, all of the following conditions,
which Landlord and Tenant acknowledge to be commercially reasonable, have been
satisfied:
(i) The trustee or debtor-in-possession has cured or has provided
Landlord adequate assurance (as defined hereunder) that (a) within ten (10) days
from the date of such assumption the trustee will cure all monetary defaults
under this Lease; and (b) within thirty (30) days from the date of such
assumption the trustee will cure all nonmonetary defaults under this Lease.
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(ii) The trustee or debtor-in-possess ion has compensated, or has
provided to Landlord adequate assurance (as defined hereunder) that within ten
(10) days from the date of assumption Landlord will be compensated for any
pecuniary loss incurred by Landlord arising from the default of Tenant, the
trustee, or the debtor-in-possession as recited in Landlord's written statement
of pecuniary loss sent to the trustee or debtor-in-possession.
(iii) The trustee or the debtor-in-possession has provided
Landlord with adequate assurance of the future performance of each of Tenant's
obligations under the Lease; provided, however, that:
(A) The trustee or debtor-in-possess ion shall also deposit
with Landlord, as security for the timely payment of rent, an amount equal to
three (3) months' rent and other monetary charges accruing under this Lease; and
(B) The obligations imposed upon the trustee or
debtor-in-possession shall continue with respect to Tenant after the completion
of bankruptcy proceedings.
(iv) Landlord has determined that the assumption of the Lease
will not breach any provision in any other lease, mortgage, financing agreement
or other agreement by which Landlord is bound relating to the Demised Premises.
For purposes of this section, adequate assurance shall mean: (i) Landlord shall
determine that the trustee or debtor-in-possession has and will continue to have
sufficient unencumbered assets after the payment of all secured obligations and
administrative expenses to assure Landlord that the trustee or
debtor-in-possession will have sufficient funds to fulfill the obligations of
Tenant under this Lease; and (ii) an order shall have been entered segregating
sufficient cash payable to Landlord and/or there shall have been granted a valid
and perfected first lien and security interest in the property of Tenant,
trustee or debtor-in-possession, acceptable as to value and kind to Landlord, to
secure to Landlord the obligation of the trustee or debtor-in-possession to cure
the monetary and/or nonmonetary defaults under this Lease within the time
periods set forth above.
(c) Landlord's Option to Terminate Upon Subsequent Bankruptcy of
Tenant. In the event that this Lease is assumed by a trustee appointed for
Tenant or by Tenant as debtor-in-possession under the provisions of subsection
(b) hereof and, thereafter, Tenant is either adjudicated a bankrupt or files a
subsequent Petition for Reorganization under Chapter 11 of the Bankruptcy Code,
then in such event Landlord may, at its option, terminate this Lease and all
rights of Tenant hereunder, by
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giving written notice of its election to so terminate.
(d) Conditions to the Assignment of the Lease in Bankruptcy
Proceedings. If the trustee or debtor-in-possession has assumed the Lease
pursuant to the terms and provisions of subsections (a) or (b) herein, for the
purpose of assigning (or elects to assign) Tenant's interest under this Lease or
the estate created thereby, to any other person, such interest or estate may be
so assigned only if Landlord shall acknowledge in writing that the intended
assignee has provided adequate assurance as defined in this subsection (d) of
future performance of all of the terms, covenants and conditions of this Lease
to be performed by Tenant. For purposes of this subsection, adequate assurance
of future performance shall mean that Landlord shall have ascertained that each
of the following conditions have been satisfied:
(i) The assignee has submitted a current financial statement
audited by a Certified Public Accountant which shows a net worth and working
capital in amounts determined to be sufficient by Landlord to assure the future
performance by such assignee of Tenant's obligations under this Lease;
(ii) If requested by Landlord, the assignee shall have obtained
guarantees in form and substance satisfactory to Landlord from one or more
persons who satisfy Landlord's standard of creditworthiness; and
(iii) Landlord has obtained all consents or waivers from any
third party required under any lease, mortgage, financing arrangement or other
agreement by which Landlord is bound to enable Landlord to permit such
assignment.
(e) Use and Occupancy Charges. When, pursuant to the Bankruptcy Code,
the trustee or debtor-in-possession shall be obligated to pay reasonable use and
occupancy charges for the use of the Demised Premises or any portion thereof,
such charges shall not be less than the Minimum Rent as defined in this Lease
and other monetary obligations of Tenant for the payment of operating expenses,
real estate taxes, insurance and similar charges.
24. DEFAULT OF TENANT.
(a) Default of Tenant. The following events shall be a default
("Default") of Tenant under this Lease:
(1) Failure of Tenant to make any payment of Minimum Rent within
five (5) days of the date due;
(2) Failure of Tenant to make any payment of Additional Rent
hereunder within five (5) days of the date due;
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(3) Failure of Tenant to perform or comply with any provision of
this Lease to be performed or complied with by Tenant, other than provisions for
the payment of Minimum Rent or Additional Rent, where such failure shall
continue for a period of thirty (30) days after written notice thereof by
Landlord to Tenant; provided that in the event such default cannot be cured
within said thirty (30) day period, then the cure period shall be extended for
up to an additional thirty (30) days, provided Tenant has commenced to cure the
default within the original thirty (30) day period and continues to pursue such
cure diligently;
(4) The taking of this Lease or the Demised Premises, or any part
thereof upon execution or by other process of law directed against Tenant, or
upon or subject to any attachment at the instance of any creditor of or claimant
against Tenant, which execution or attachment shall not be discharged or
disposed of within thirty (30) days after the levy thereof.
(5) If Tenant fails to take possession of at least fifty percent
(50%) of the Demised Premises within a reasonable period of time after the Lease
Commencement Date or vacates or abandons the Demised Premises prior to the
normal expiration of the term; provided Landlord's only remedy in the event of a
Default solely under this subparagraph 5, shall be, at Landlord's option, to
take back the Demised Premises and terminate this Lease.
(6) The involvement of Tenant, or any guarantor of Tenant's
obligations hereunder, in financial difficulties as evidenced by (a) its
admitting in writing its inability to pay its debts generally as they become
due, or (b) its filing a petition in bankruptcy or for reorganization or for the
adoption of an arrangement under the Bankruptcy Code (as now existing or in the
future amended), or an answer or other pleading admitting the material
allegations of such a petition or seeking, consenting to or acquiescing in the
relief provided for under such Code, or (c) its making an assignment of all or a
substantial part of its property for the benefit of its creditors, or (d) its
seeking or consenting to or acquiescing in the appointment of a receiver or
trustee for all or a substantial part of its property or of the Demised
Premises, or (e) its being adjudicated a bankrupt or insolvent, or (f) the entry
of a court order without its consent, which order shall not be vacated, set
aside or stayed within ninety (90) days from the date of entry, appointing a
receiver or trustee for all or a substantial part of its property or approving a
petition filed against it for the effecting of an arrangement in bankruptcy or
for a reorganization pursuant to the Bankruptcy Code or for any other judicial
modification or alteration of the rights of creditors. The provisions of this
paragraph shall apply notwithstanding the payment by Tenant of a security
deposit under paragraph 7 and/or
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the continued willingness and ability of Tenant to pay rent and otherwise
perform hereunder. The receipt by Landlord of payments of rent, as such,
accruing subsequent to the time of Tenant's Default under this paragraph and
before Landlord has actual notice of the occurrence of an event of Default under
this paragraph shall not be deemed a waiver by Landlord of the provisions of
this paragraph.
(b) Remedies Upon Default. Upon the occurrence of a Default, Landlord
shall have the right, at its election, then or at any time thereafter either:
(1) To give Tenant written notice of Landlord's intent to
terminate this Lease on the date of the notice or on any later date specified in
the notice, and on such date Tenant's right to possession of the Demised
Premises shall cease and this Lease shall thereupon be terminated; or
(2) Without demand or notice, to reenter and take possession of
all or any part of the Demised Premises, and expel Tenant and those claiming
through Tenant, and remove the property of Tenant and any other person, either
by summary proceedings or by action at law or in equity or otherwise, without
being deemed guilty of trespass and without prejudice to any remedies for
nonpayment or late payment of rent or breach of covenant. If Landlord elects to
reenter under this subsection, Landlord may terminate this Lease, or, from time
to time, without terminating this Lease, may relet all or any part of the
Demised Premises as agent for Tenant for such term or terms and at such rental
and upon such other terms and conditions as Landlord may deem advisable, with
the right to make alterations and repairs to the Demised Premises. No such
reentry or taking of possession of the Demised Premises by Landlord shall be
construed as an election on Landlord's part to terminate this Lease unless a
written notice of such intention is given to Tenant under subparagraph (b) (1)
above, or unless the termination be decreed by a court of competent jurisdiction
at the instance of Landlord.
(c) Liability of Tenant. If Landlord terminates this Lease pursuant to
subparagraph (b) above, Tenant shall remain liable (in addition to accrued
liabilities) for (1) adjusted Minimum Rent, Additional Rent and any other sums
provided for in this Lease until the date this Lease would have expired had such
termination not occurred, and any and all expenses (including attorney's fees,
disbursements and brokerage fees) incurred by Landlord in reentering and
repossessing the Demised Premises, in making good any Default of Tenant, in
painting, altering, repairing or dividing the Demised Premises, in protecting
and preserving the Demised Premises by use of watchmen and caretakers, and in
reletting the Demised Premises, and any and all expenses which Landlord may
incur during the occupancy of any new tenant; less (2) the net proceeds of any
reletting prior to
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the date this Lease would have expired if it had not been terminated. Tenant
agrees to pay to Landlord the difference between items (1) and (2) above for
each month during the term, at the end of each such month. Any suit brought by
Landlord to enforce collection of such difference for any one month shall not
prejudice Landlord's right to enforce the collection of any difference for any
subsequent month. In addition to the foregoing, and without regard to whether
this Lease has been terminated, Tenant shall pay to Landlord all costs incurred
by Landlord, including reasonable attorney's fees, with respect to any lawsuit
or action instituted or taken by Landlord to enforce the provisions of this
Lease. Tenant's liability shall survive the institution of summary proceedings
and the issuance of any writ of restitution thereunder. Landlord agrees to use
commercially reasonable efforts to mitigate its damages; provided Landlord shall
not be required to relet the Demised Premises prior to leasing any other space
in the Center.
(d) Liquidated Damages. If Landlord terminates this Lease pursuant to
this Paragraph 24, Landlord shall have the right, at any time, at its option,
to require Tenant to pay to Landlord, on demand, as liquidated and agreed final
damages in lieu of Tenant's liability under Paragraph 24(c) the rent and all
other charges which would have been payable from the date of such demand to the
date when this Lease would have expired if it had not been terminated, minus the
fair rental value negotiated in good faith and at arm's length, of the Demised
Premises for the same period, which amount shall be discounted at eight percent
(8%) per annum. If the Demised Premises shall have been relet for all or part of
the remaining balance of the Term by Landlord after a Default but before
presentation of proof of such liquidated damages, the amount of rent reserved
upon such reletting shall be deemed the fair rental value of the Demised
Premises for purposes of the foregoing determination of liquidated damages. Upon
payment of such liquidated and agreed final damages, Tenant shall be released
from all further liability under this Lease with respect to the period after the
date of demand.
(e) Waiver. Tenant, on its own behalf and on behalf of all persons
claiming through Tenant, including all creditors, does hereby waive any and all
rights and privileges, so far as is permitted by law, which Tenant and all such
persons might otherwise have under any present or future law (1) to the service
of any notice of intention to reenter which may otherwise be required to be
given, (2) to redeem the Demised Premises, (3) to reenter or repossess the
Demised Premises, or (4) to restore the operation of this Lease, with respect to
any dispossession of Tenant by judgment or warrant of any court, whether such
dispossession, reentry, expiration or termination be by operation of law or
pursuant to the provisions of this Lease.
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(f) Right to Enjoin, Etc. In the event of any breach or threatened
breach by Tenant or any person(s) claiming through Tenant of any of the
provisions contained in this Lease, Landlord shall be entitled to enjoin such
breach or threatened breach and shall have the right to invoke any right or
remedy allowed at law or otherwise as if reentry, summary proceedings or other
specific remedies were not provided for in this Lease.
(g) Right of Distress. Landlord shall, to the extent permitted by law,
and subject to the prior rights of secured creditors, have (in addition to all
other rights) a right of distress for rent and a lien on all Tenant's personal
property as security for all adjusted Minimum Rent, Additional Rent and any
other sums payable under this Lease.
(h) Remedies Cumulative. All rights and remedies of Landlord under this
Lease shall be cumulative and shall not be exclusive of any other rights and
remedies provided to Landlord now or hereafter existing under law.
25. WAIVER. If under the provisions hereof Landlord shall institute
proceedings and a compromise or settlement thereof shall be made, the same shall
not constitute a waiver of any covenant herein contained nor of any of
Landlord's rights hereunder. No waiver by Landlord of any breach of any
covenant, condition or agreement herein contained shall operate as a waiver of
such covenant, condition or agreement itself, or of any subsequent breach
thereof. No payment by Tenant or receipt by Landlord of a lesser amount than the
monthly installments of rent herein stipulated shall be deemed to be other than
on account of the earliest stipulated rent, nor shall any endorsement or
statement on any check or letter accompanying a check for payment of rent be
deemed an accord and satisfaction and Landlord may accept such check or payment
without prejudice to Landlord's right to recover the balance of such rent or to
pursue any other remedy provided in this Lease. No reentry by Landlord, and no
acceptance by Landlord of keys from Tenant, shall be considered an acceptance
of a surrender of the Lease.
26. SUBORDINATION. This Lease is subject and subordinate to all ground or
underlying leases and to all mortgages and/or deeds of trust which may now or
hereafter affect such leases or the real property of which the Demised Premises
are a part, and to all renewals, modifications, consolidations, replacements and
extensions thereof. This clause shall be self-operative and no further
instrument of subordination shall be required by any mortgagee or trustee. In
confirmation of such subordination, Tenant shall execute promptly any
certificate that the Landlord or the party secured by any deed of trust, or any
successor in interest may request. Tenant hereby constitutes and appoints
Landlord the Tenant's attorney-in-fact to execute any such certificate or
certificates for and on behalf of the Tenant.
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Provided, however, that notwithstanding the foregoing, the party secured by
any such deed of trust shall have the right to recognize this Lease and, in the
event of any foreclosure sale under such deed of trust, this Lease shall
continue in full force and effect at the option of the party secured by such
deed of trust or the purchaser under any such foreclosure sale; and the Tenant
covenants and agrees that it will, at the written request of the party secured
by any such deed of trust, execute, acknowledge and deliver any instrument that
has for its purpose and effect the subordination of said deed of trust to the
lien of this Lease; provided, however, that the party secured by such deed of
trust and any successor in interest shall not be bound by any payment in rent in
advance for more than thirty (30) days or by any amendment or modification of
this Lease made subsequent to the date of recordation of such deed of trust
without the consent of the party secured by such deed of trust or such successor
in interest. Landlord represents that the Building is currently not encumbered
by a mortgage. Landlord agrees to use reasonable efforts to obtain a
non-disturbance agreement from any future mortgage, provided Tenant shall pay
any costs charged by the mortgagee for such non-disturbance agreement. At the
option of any landlord under any ground or underlying lease to which the Lease
is now or may hereafter become subject or subordinate, Tenant agrees that
neither the cancellation nor termination of such ground or underlying lease
shall by operation of law or otherwise, result in cancellation or termination of
this Lease or the obligations of the Tenant hereunder, and Tenant covenants and
agrees to attorn to such Landlord or to any successor to Landlord's interest in
such ground or underlying lease, and in that event, this Lease shall continue as
a direct lease between the Tenant herein and such Landlord or its successor;
and, in any case, such Landlord or successor under such ground or underlying
lease shall not be bound by any prepayment on the part of Tenant of any rent for
more than one month in advance, so that rent shall be payable under this Lease
in accordance with its terms, from the date of the termination of the ground or
underlying lease, as if such prepayment had not been made; and provided, further
such landlord or successor under such ground or underlying lease shall not be
bound by this Lease or any amendment or modification of this Lease unless, prior
to the termination of such ground or underlying lease, a copy of this Lease or
amendment or modification thereof, as the case may be, shall have been delivered
to such landlord or successor.
27. CONDEMNATION. If the whole or a substantial part of the Demised
Premises shall be taken or condemned by any governmental authority for any
public or quasi-public use or purpose, then the Term of this Lease shall cease
and terminate as of the date when title vests in such governmental authority,
and Tenant shall have no claim against Landlord (or otherwise) for any portion
of the amount that may be awarded as damages as a result of such taking or
condemnation or for the value of any
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unexpired Term of the Lease; provided, however, that Tenant may assert any claim
that it may have against the condemning authority for compensation for any
fixtures owned by Tenant and for any relocation expenses compensable by statute.
The rent, however, shall be abated on the date when such title vests in such
governmental authority. If less than a substantial part of the Demised Premises
is taken or condemned by any governmental authority for any public or
quasi-public use or purpose, the rent shall be adjusted on a square footage
basis on the date when title vests in such governmental authority and the Lease
shall otherwise continue in full force and effect. For purposes hereof, a
substantial part of the Demised Premises shall be considered to have been taken
if more than fifty percent (50%) of the Demised Premises are unusable by Tenant.
If a substantial portion of the parking facilities or Building is taken or
condemned by any governmental authority, which taking or condemnation
unreasonably interferes with the operation of Tenant's business, then Tenant
shall have the right to terminate this Lease by providing Landlord written
notice of its election to terminate within thirty (30) days of such taking or
condemnation.
28. RULES AND REGULATIONS. Tenant, its agents and employees shall abide by
and observe the rules and regulations attached hereto as Exhibit C and such
other rules or regulations as may be promulgated from time to time by Landlord
for the operation and maintenance of the Building, provided that the same are in
conformity with common practice and usage in similar buildings and are not
inconsistent with the provisions of this Lease and a copy thereof is sent to
Tenant. Nothing contained in this Lease shall be construed to impose upon
Landlord any duty or obligation to enforce such rules and regulations, or the
terms, conditions or covenants contained in any other lease, as against any
other tenant, and Landlord shall not be liable to Tenant for violation of the
same by any other tenant, its employees, agents, or invitees, provided Landlord
agrees to enforce the rules and regulations in a fair and non-discriminatory
manner.
29. RIGHT OF LANDLORD TO CURE TENANT'S DEFAULT; LATE PAYMENTS. If Tenant
defaults in the making of any payment or in the doing of any act herein required
to be made or done by Tenant, then after ten (10) days notice from Landlord,
Landlord may, but shall not be required to, make such payments or do such act,
and the amount of the expense thereof, if made or done by Landlord, with
interest thereon at the then prime rate charged by Riggs National Bank, from the
date paid by Landlord, shall be paid by Tenant to Landlord and shall constitute
Additional Rent hereunder due and payable with the next monthly installment of
rent; but the making of such payment or the doing of such act by Landlord shall
not operate to cure such Default or to estop Landlord from the pursuit of any
remedy to which Landlord would otherwise be entitled. If Tenant fails to pay any
installment of rent on or before the first day of the calendar month when such
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installment is due and payable, such unpaid installment shall bear interest at
the then prime rate charged by Riggs National Bank, from the date such
installment became due and payable to the date of payment thereof by Tenant. If
Riggs National Bank ceases to publish a prime rate, interest shall be at the
prime rate charged by Citibank, F.S.B. Such interest shall constitute Additional
Rent hereunder due and payable with the next monthly installment of rent. In
addition, Tenant shall pay to Landlord, as a "late charge" five percent (5%) of
any payment herein required to be made by Tenant which is more than ten (10)
days late to cover the costs of collecting accounts past due.
30. HOLDING OVER. If the Tenant shall, without the consent of the Landlord,
continue to remain in the Demised Premises after the expiration of the Term of
this Lease, then and in that event, Tenant shall, by virtue of this Agreement
become a tenant by the month at a monthly rental equal to one hundred fifty
percent (150%) of the monthly installment of rent agreed by the said Tenant to
be paid as aforesaid for the first two (2) months of such holdover, and
thereafter at a rental rate equal to twice the monthly installment of rent in
effect prior to the holdover, commencing said monthly tenancy with the first day
next after the end of the Term above described; in addition, Tenant shall pay to
Landlord all costs and damages incurred by Landlord as a result of Tenant's
holding over, which sums shall be deemed Additional Rent; and said Tenant shall
give to the Landlord at least thirty (30) days' written notice of any intention
to quit the Demised Premises, and Tenant shall be entitled to thirty (30) days'
written notice to quit the Demised Premises, except in the event of non-payment
of rent in advance or of the breach of any other covenant by said Tenant, in
which event the said Tenant shall not be entitled to any notice to quit, the
usual thirty (30) days' notice to quit being hereby expressly waived; provided,
however, that in the event that the Tenant shall hold over after the expiration
of the Term hereby created, and if the Landlord shall desire to regain
possession of the Demised Premises promptly at the expiration of the Term
aforesaid, then at any time prior to Landlord's acceptance of rent from the
Tenant as a monthly tenant hereunder, the Landlord, at its option, may forthwith
re-enter and take possession of the Demised Premises without process, or by any
legal process in force.
31. NO REPRESENTATIONS BY LANDLORD. Except as expressly provided in this
Lease or the Addendum, neither Landlord nor any agent or employee of Landlord
has made any representations or promises with respect to the Demised Premises or
the Building except as herein expressly set forth, and no rights, privileges,
easements or licenses are granted to Tenant except as herein set forth. Tenant,
by taking possession of the Demised Premises, shall accept the same "as is", and
such taking of possession shall be conclusive evidence that the Demised Premises
and the Building are in good and satisfactory condition at the time of
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such taking of possession; subject to the completion of any "punch list" items.
32. BROKERS. Tenant represents and warrants that Tenant has dealt only with
the broker identified in Paragraph 1(n) above in connection with this Lease and
that insofar as Tenant knows, no other broker participated in or negotiated this
Lease or is entitled to any commission in connection therewith and Tenant agrees
to defend, indemnify, and hold Landlord harmless from any claims by any other
broker alleging to have acted on behalf of Tenant. The execution and delivery of
this Lease by Landlord shall be conclusive evidence that Landlord has relied
upon the foregoing representation and warranty in making this Lease.
33. NOTICES. All notices or other communications hereunder shall be in
writing and shall be deemed duly given if delivered in person or sent by
certified or registered mail, return receipt requested, first class, postage
prepaid, (i) if to Landlord, to the address set forth in Paragraph 1(o) above,
and (ii) if to Tenant, at 6550 Rock Spring Drive, Suite 500, Bethesda, MD 20817
prior to the Lease Commencement Date and at the Demised Premises after the Lease
Commencement Date, unless notice of a change of address is given pursuant to the
provisions of this paragraph.
34. ESTOPPEL CERTIFICATES. Tenant agrees, at any time and from time to time,
upon not less than ten (10) days prior written notice by Landlord, to execute,
acknowledge and deliver to Landlord a statement in writing(i) certifying that
this Lease has been unmodified since its execution and is in full force and
effect (or if there have been modifications, that the Lease is in full force and
effect, as modified, and stating the modifications), (ii) stating the dates, if
any, to which the rent and sums hereunder have been paid by Tenant, (iii)
stating whether or not to the knowledge of Tenant, there are then existing any
Defaults under this Lease (and, if so, specifying the same), and (iv) stating
the address to which notices to Tenant should be sent. Any such statement
delivered pursuant hereto shall provide that such statement may be relied upon
by Landlord or any prospective purchaser or mortgagee of the land and Building
or any part therein. Tenant's failure to execute and deliver such statement
within the time specified shall be deemed the equivalent of the delivery of a
statement to the effect that Landlord is in full compliance with the terms of
this Lease. Furthermore, in the event Tenant fails or refuses to execute and
deliver such statement, Landlord may, as the attorney and agent of the Tenant,
execute such statement and in such event the Tenant hereby confirms and ratifies
any such statement so executed.
35. FINANCING REQUIREMENTS. In the event that any bank, insurance company,
university, pension or welfare fund, savings and loan association, real estate
investment trust, business
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trust, or other financial institution providing the first mortgage interim
construction financing for the Building and/or the first mortgage permanent
financing for the Building requires, as a condition of such financing, that
modification to this Lease be obtained, and provided that such modifications (a)
are reasonable, (b) do not adversely affect Tenant's use of the Demised Premises
as herein permitted, (c) do not materially alter the approved architectural
plans and specifications, and (d) do not increase the rentals and other sums
required to be paid by Tenant hereunder, Landlord shall submit such required
modifications to Tenant, and Tenant shall enter into and execute a written
amendment hereto incorporating such required modifications within fifteen (15)
days after the same has been submitted to Tenant by Landlord. If Tenant shall
fail to so enter into and execute such a written amendment, then Landlord shall
thereafter have the right, at its sole option, to cancel and terminate this
Lease, by giving Tenant written notice of such termination and Landlord shall
thereupon be relieved from any and all further liability or obligations
hereunder.
36. COVENANTS OF LANDLORD. Landlord covenants that it has the right to make
this Lease, and that if Tenant shall pay the rental and perform all of Tenant's
obligations under this Lease, Tenant shall, during the term hereof, freely,
peaceably and quietly occupy and enjoy the full possession of the Demised
Premises without molestation or hindrance by Landlord or any party claiming
through or under Landlord. The term "Landlord" as used herein shall mean solely
the owner of Landlord's interest in the property, whomever that may be at the
relevant time, so that in the event of any sale or transfer of Landlord's
interest in the property any prior Landlord shall be freed and relieved of all
covenants and obligations of Lessor hereunder.
37. LIEN FOR RENT. Tenant hereby grants to Landlord, subject to the prior
rights of secured creditors, a lien on all personal property of Tenant now or
hereafter placed in or on the Demised Premises (except such part of any property
as may be exchanged, replaced, or sold from time to time in the ordinary course
of business) and such property shall be and remain subject to such lien of
Landlord for payment of all rent and all other sums agreed to be paid by Tenant
herein or for services or costs relating to the Demised Premises that Tenant may
hereafter agree to pay to Landlord. Said lien shall be in addition to and
cumulative of the Landlord's lien rights provided by law. Landlord may file and
sign for Tenant a Uniform Commercial Code (UCC-1) financing statement describing
such lien and personalty.
38. SUCCESSORS AND ASSIGNS. The terms, covenants and conditions hereof
shall be binding upon and inure to the successors in interest and assigns of the
parties hereto. Landlord may freely and fully assign its interest hereunder.
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39. ENTIRE AGREEMENT. This Lease, together with the Exhibits and any
Addenda attached hereto, contain and embody the entire agreement of the parties
hereto, and no representations, inducements, or agreements, oral or otherwise,
between the parties not contained in this Lease and Exhibits, shall be of any
force or effect. This Lease may not be modified, changed or terminated in whole
or in part in any manner other than by an agreement in writing duly signed by
both parties hereto.
40. APPLICABLE LAWS. It is the agreement of the parties that this Lease is
to be construed under the laws of the jurisdiction in which the Building is
located.
41. LIMITATION OF LANDLORD'S LIABILITY.
(a) The obligations of Landlord under this Lease do not constitute
personal obligations of the individual partners, directors, officers, or
shareholders of Landlord, and Tenant shall look solely to the real estate that
is the subject of this Lease and to no other assets of the Landlord for
satisfaction of any liability in respect of this Lease and will not seek
recourse against the individual partners, directors, officers or shareholders of
Landlord or any of their personal assets for such satisfaction.
(b) Neither Landlord nor Tenant shall be required to perform any of its
obligations under this Lease other than the obligations to make payments
hereunder, nor be liable for loss or damage for failure to do so, nor shall
Tenant thereby be released from any of its obligations under this Lease, where
such failure arises from or through acts of God, strikes, lockouts, labor
difficulties, explosions, sabotage, accidents, riots, civil commotions, acts of
any foreign country, fire and casualty, legal requirements, energy shortage, or
causes beyond the reasonable control of such party, unless such loss or damage
results from willful misconduct or negligence by such party or its employees.
42. WAIVER OF REDEMPTION. Tenant hereby expressly waives, for itself and
all persons claiming by, through, or under it, any right of redemption or for
the restoration of the operation of this Lease under any present or future law
in case Tenant shall be dispossessed for any cause, or in case Landlord shall
obtain possession of the Demised Premises as herein provided.
43. NO OPTION. The submission of this Lease for examination by Tenant does
not constitute a reservation of or option for the Demised, Premises, and this
Lease shall become effective as a lease only upon execution and delivery thereof
by Landlord and Tenant
44. ATTORNEY'S FEES. In the event Tenant or Landlord defaults in the
performance of any of the terms, covenants,
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agreements or conditions contained in this Lease and the non-defaulting party
places the enforcement of this Lease, or any part thereof, or the collection of
any rent due, or to become due hereunder, or recovery of the possession of the
Demised Premises in the hands of an attorney, or files suit upon the same, the
prevailing party shall be entitled to recover its reasonable attorney's fees
from the non-prevailing party.
45. PARTIAL INVALIDITY. If any provision of this Lease or the application
thereof to any person or circumstance shall to any extent be held void,
unenforceable or invalid, by the final ruling of a court of competent
jurisdiction, then in place of such invalid or unenforceable provision, to the
extent practical, there shall be substituted a like but valid and enforceable
provision which comports with the findings of the aforesaid court and most
nearly accomplishes the original intentions of the parties, and, in any event,
the remainder of this Lease or the application of such provision to persons or
circumstances other than those as to which it is held void, unenforceable or
invalid shall not be effected thereby, and each provision of this Lease shall be
valid and enforced to the fullest extent permitted by law.
46. PRONOUNS. Feminine or neuter pronouns shall be substituted for those of
the masculine form, and the plural shall be substituted for the singular number,
in any place or places herein in which the context may require such substitution
or substitutions. The Landlord has been referred to in neuter form, for
convenience.
47. PARKING.
(a) So long as Tenant is not in default under this Lease, Landlord
hereby grants to Tenant, at no additional cost to Tenant, a non-exclusive
license (the "License") to park the number of cars set forth in Paragraph 1(q)
above ("Parking"), for use solely by Tenant and Tenant's employees, guests and
invitees in the parking area or areas serving the Building (the "Designated
Parking Area"). The use of any more than the allotted Parking after thirty (30)
days notice by Landlord, by Tenant, its employees, guests or invitees
("Over-use") shall be deemed an event of default under this Lease and Landlord
may exercise such remedies as are provided pursuant to Paragraph 24 of this
Lease. Landlord shall not be responsible to Tenant for enforcing the License or
violation of the provisions of this paragraph by co-tenants of the Building, by
third parties, or guests or visitors to the Building.
(b) Two (2) of the parking spaces allotted to Tenant shall be designated
and striped (at Landlord's expense) as reserved for the exclusive use of Tenant,
its employees, agents, contractors, servants, permitted subtenants licensees and
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invitees. The reserved spaces shall be located in a specific location to be
mutually agreed upon by Landlord and Tenant. Tenant shall be solely responsible
for assigning the reserved parking spaces and supervising the use of the
reserved parking spaces by its employees.
(c) Landlord shall have the right to revoke the License: (1) in the
event of an Over-use, or (2) in the event of any occurrence not caused by
Landlord which reduces the number of parking spaces in the Designated Parking
Area to the extent of Tenant's Pro Rata Share of the number of parking spaces by
which the Designated Parking Area is so reduced, other than the event of any
condemnation or taking by any lawful authority of any portion of the Designated
Parking Area which reduction is covered by Paragraph 27.
(d) In the event the parking areas serving the Center become
unavailable or restricted to the extent that Tenant cannot reasonably operate
its business on a continuing basis, then Tenant shall have the right to
terminate this Lease by providing Landlord with written notice of its election
to so terminate within thirty (30) days from the date the parking areas become
unavailable.
48. COSTS ASSOCIATED WITH LANDLORD'S APPROVAL. In any and all cases where
Landlord's consent or approval is required under this Lease (excluding consents
for delivery of furniture), Tenant shall, upon Landlord's demand, reimburse
Landlord, as Additional Rent, for all reasonable actual out of pocket costs and
expenses, including but not limited to architectural, engineering and legal
fees, which Landlord incurs in determining whether to grant its consent or
approval. Landlord shall use good faith efforts to advise Tenant of any costs
which may be associated with Tenant's request for Landlord's consent, and Tenant
shall be entitled to withdraw its request.
[SIGNATURES FOLLOW ON NEXT PAGE]
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IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease under seal
the day and year first hereinbefore written.
LANDLORD:
Attest: BELLEMEAD DEVELOPMENT
CORPORATION
/s/ [ILLEGIBLE] By: /s/ [ILLEGIBLE] Sr. Vice President
- ---------------------------------- ----------------------------------
TENANT:
Attest: SCHOENKE & ASSOCIATES CORPORATION
/s/ [ILLEGIBLE] By: /s/ RAYMOND J. SCHOENKE, JR.
- ---------------------------------- ----------------------------------
Raymond J. Schoenke, Jr., Chairman
and Chief Executive Officer
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ADDENDUM TO LEASE
THIS ADDENDUM is made this 30 day of Dec. 1996, by and between BELLEMEAD
DEVELOPMENT CORPORATION ("Landlord") and SCHOENKE & ASSOCIATES CORPORATION
("Tenant") as an Addendum to the Lease Agreement of even date herewith for space
in the building located at 20250 Century Boulevard, Germantown, Maryland 20874
("Lease"). Unless otherwise defined herein, all capitalized terms herein shall
have the same meanings given to them in the Lease.
1. CONDITION OF DEMISED PREMISES. The Demised Premises consist of
approximately 14,720 rentable square feet, measured in accordance with BOMA
standards, and including a core factor of 14%. Notwithstanding anything
contained in the Lease or the Work Letter to the contrary, Landlord shall alter
the Demised Premises, utilizing building standard materials, in accordance with
the notes set forth on Exhibit A and A-1, and in accordance with all applicable
laws. To the extent Exhibits A and A-1 conflict with the Work Letter, the terms
of Exhibits A and A-1 shall control.
2. ADDITIONAL TENANT ALLOWANCE. Landlord shall provide Tenant with an
allowance of Twenty-Nine Thousand Four Hundred Forty and N0/100 Dollars
($29,440.00), or $2.00 per rentable square foot ("Tenant Allowance") to be
applied toward the costs of above standard work (as defined in the Work Letter)
or Tenant's moving expenses. The costs of any above standard work shall include
Landlord's normal 8.5% for overhead and 5% for profit. Prior to commencing any
above standard work, Landlord shall submit to Tenant a written statement of the
cost of such work, which statement shall set forth therein the extent to which,
if at all, the costs of such work exceeds the Tenant Allowance ("Excess Cost").
Tenant agrees to pay the Excess Cost to Landlord promptly upon being billed
therefor. To the extent Tenant elects to use the Tenant Allowance for moving
expenses, Landlord agrees to reimburse Tenant, upon receipt of paid invoices
therefor, for Tenant's reasonable moving expenses, not to exceed the available
portion of the Tenant Allowance.
3. LANDLORD WARRANTIES. Landlord warrants that the Building complies with
all codes and ordinances applicable to the ownership of the Building, including
the Americans with Disabilities Act. Landlord agrees to maintain the Building
and its structural components in accordance with all applicable laws and
regulations. To the best of Landlord's knowledge, (a) no Hazardous Substances
have been stored on or disposed of in the Building and there exists no state of
facts that would be indication of any such storage or disposal of Hazardous
Substances, (b) no lead paint has been used in the Building, and
<PAGE> 42
(c) no asbestos has been used in the Building. As used herein, "Hazardous
Substances" means all materials subject to regulation under the Comprehensive
Environmental Response, Compensation, and Liability Act (Superfund or CERCLA),
42 U.S.C. Sections 9601 et seq., as amended by the Superfund Amendments and
Reauthorization Act of 1986 (SARA).
4. WARRANTY AS TO MECHANICAL EQUIPMENT AND UTILITIES. Landlord warrants the
mechanical equipment and the utilities to be in good serviceable and proper
operating condition, and agrees it will maintain the Building and such equipment
and utilities (including all plumbing, heating and cooling systems, and all
electrical and mechanical devices and fixtures, but excluding any equipment to
be maintained by Tenant pursuant to Paragraph 17 of the Lease) in this condition
during the Term of this Lease.
5. ANNUAL INCREASES TO RENT. On the first day of the second Lease Year, as
hereinafter defined, and on the first day of each subsequent Lease Year, Annual
Rent then in effect shall be increased by two and one-half percent (2.5%).
"Lease Year" shall mean each twelve month period running from the Lease
Commencement Date, or the first day of the first month following the Lease
Commencement Date if the Lease Commencement Date is other than the first day of
a month.
6. OPERATING EXPENSE ALLOWANCE. Paragraph 1(i) of the Lease is hereby
modified to read as follows: Tenant's per rentable square foot per annum general
operating expense allowance shall equal the actual Operating Expenses, as
defined in paragraph 7, incurred by Landlord during the calendar year 1997,
adjusted to reflect 95% occupancy of the Building, divided by 106,794, the total
rentable square feet in the Building. Tenant's per rentable square foot per
annum electrical expense allowance shall equal the actual expenses for electric
current in the Building incurred by Landlord during the calendar year 1997,
adjusted to reflect 95% occupancy of the Building, divided by 106,794, the total
rentable square feet in the Building.
7. REAL ESTATE TAX ALLOWANCE. Paragraph 1(j) of the Lease is hereby
modified to read as follows: Tenant's per rentable square foot per annum real
estate tax allowance shall equal: the total Real Estate Taxes, as defined in
paragraph 7, as would be incurred if the Building were fully assessed during
calendar year 1997, divided by 106,794, the total rentable square feet in the
Building.
8. EXCLUSIONS FROM OPERATING EXPENSES. The following shall be additional
exclusions from operating Expenses under the Lease:
-2-
<PAGE> 43
(a) All costs and expenses, including any labor costs, charges, repairs,
improvements or expenses directly or indirectly related to the ownership or
operation of the rentable area of any retail space in the Building;
(b) Management fees, in excess of four percent (4%).
(c) Costs of decorating, redecorating, or special cleaning or other
services not provided on a regular basis to tenants of the Building;
(d) Wages, salaries, fees and fringe benefits paid to employees of any
property management organization being paid a fee by Landlord for its services
(or to any employees of Landlord who are not assigned to the operation,
management maintenance or repair of the Building on a full-time basis, including
any accounting or clerical personnel and other overhead expenses of Landlord) or
administrative and executive personnel or officers, partners, shareholders, or
directors of Landlord or of Landlord's managing agent above the grade of
building manager;
(e) Loan payments, charges for depreciation of the Building or equipment
and any interest or other financing charge or refinancing costs;
(f) Costs relating to activities for the solicitation and execution of
leases of space in the Building, including legal fees, real estate brokers,
commissions, expenses, fees, and advertising, moving expenses, design fees,
rental concessions, rental credits, tenant improvement allowances, lease
assumptions or any other cost and expenses incurred in the connection with the
leasing of any space in the Building;
(g) Violations of legal requirements in the construction of the Building or
in the Building equipment;
(h) The cost of any repair made by Landlord because of any fire or other
casualty or the total or partial destruction or condemnation of the Building or
any portion of the Building to the extent Landlord receives compensation
therefor through insurance or condemnation proceeds;
(i) Any increase in an insurance premium to the extent that such increase
is caused or attributable to the use, occupancy or act of another tenant, and
actually paid for by such tenant;
(j) Any cost for which Landlord is reimbursed by insurance proceeds,
warranties, service contracts, condemnation proceeds or otherwise;
-3-
<PAGE> 44
(k) The cost of any repairs, alterations, additions, changes, replacements,
renovations, and other items which under generally accepted accounting
principles are properly classified as capital expenditures, unless specifically
provided otherwise in the Lease;
(1) Any operating expense representing an amount paid to a related
corporation, entity, or person which is in excess of the amount which would be
paid in the absence of such relationship; or any amounts paid to any person,
firm or corporation related to or otherwise affiliated with Landlord or any
general partner, officer, director or shareholder of Landlord or any of the
foregoing, to the extent the same exceeds arms-length competitive prices paid in
Rockville, MD for similar services or goods provided;
(m) The cost of tools and equipment used in the construction, operation,
repair and maintenance of the Building;
(n) The cost of alterations, renovations or improvements for rentable space
in the Building;
(o) The cost of overtime or other expense to Landlord in curing its
defaults or performing work expressly provided in this Lease to be borne at
Landlord's expense;
(p) Capital improvements or expenditures incurred to reduce operating
expenses shall be included in Operating Expenses to the lesser of the annual
amortized amount of said improvements or expenditures (over the useful life of
the improvements or item) or the actual annual savings;
(q) Inheritance, gift, transfer, franchise, excise, net income, and profit
taxes, capital levies imposed on Landlord;
(r) Ground rent or similar payments to a ground lessor;
(s) Cost of installing, operating and maintaining any specialty service
operated by Landlord, such as a luncheon, athletic or recreational club in the
Building; any bad debt loss; costs and expenses incurred in connection with any
transfer of an interest in Landlord, Building or the Land; and any cost or
expense necessitated by or resulting from the negligence of Landlord, its agents
or employees.
(t) Reserves for repairs, maintenance and replacements;
(u) Costs relating to maintaining Landlord's existence, either as a
corporation, partnership or other entity, such as trustee's fees, annual fees,
partnership organization or
-4-
<PAGE> 45
administration expenses, deed recordation expenses, legal and accounting fees
(other than with respect to Building operations);
(v) Interest or penalties arising by reason of Landlord's failure to timely
pay any Taxes or Operating Expenses;
(w) Costs incurred to remove any hazardous or toxic wastes, materials or
substances from either the Building or the Land; and
(x) Costs incurred by Landlord for consents or approvals required by tenant
leases, based upon specific requests of tenants.
9. SECURITY DEPOSIT. If the security deposit is in the form of cash, the
deposit will be held in an interest bearing money market fund account in Summit
Bank or such other similar account at another bank where Landlord may maintain
its security deposits in the future. This account will be utilized solely for
security deposits held by the Landlord and be separate from any other accounts
maintained by the Landlord for the operation of the building. Tenant's security
deposit will not be used for any other purpose other than that provided in
Section 8 of the Lease. Provided there has not been a Default under the Lease,
then Landlord shall refund to Tenant portions of the security in accordance with
the following schedule:
(a) At the beginning of the third Lease Year, Landlord shall refund to
Tenant $30,000.00 of the security deposit plus three-tenths of all interest
accrued thereon.
(b) At the beginning of the sixth Lease Year, Landlord shall refund to
Tenant $30,000.00 of the security deposit plus three-sevenths of all interest
accrued thereon.
(c) At the beginning of the ninth Lease Year, Landlord shall refund to
Tenant $30,000.00 of the security deposit plus three-eighths of all interest
accrued thereon.
Landlord's failure to return the Security Deposit in accordance with this
paragraph shall not constitute a default by Landlord under the Lease unless
Tenant notifies Landlord in writing that Tenant is entitled to a partial refund
of the security deposit, and Landlord fails to refund such amount to Tenant
within fifteen (15) days of the date of Tenant's notice.
10. LANDLORD'S INSURANCE AND LIABILITY. Landlord shall maintain at its sole
cost, and maintain during the term of this Lease, fire, extended coverage,
malicious mischief and vandalism insurance on the Demised Premises, in an amount
not less than the full replacement value of the Building and, improvements
therein and comprehensive general liability insurance in an amount not
-5-
<PAGE> 46
less than $5 million combined single limit for bodily injury, property damage
and personal liability. Such policies shall contain an express waiver of any
right of subrogation by the insurance company against Tenant, its agents and
employees.
11. INDEMNIFICATION. Landlord shall indemnify Tenant and its agents and
employees and save Tenant harmless from and against any and all claims, actions,
damages, liabilities and expenses in connection with loss of life, personal
injury and/or damage to property arising out of any occurrence in, upon or at
the common areas of the Building occasioned by any negligent act or omission of
Landlord, its agents, contractors, servants, invitees, licensees or employees,
or resulting from any breach, violation or nonperformance of this Lease by
Landlord.
12. SUBJECT TO RIGHT OF FIRST REFUSAL. The Lease is subject to a right of
first refusal of Telogy Network, Inc. ("Telogy") to lease the Demised Premises.
Landlord has provided or agrees to provide Telogy with notice of the Lease.
13. RIGHT OF REFUSAL. (a) Subject to the prior right of first refusal of
Telogy as to any space that has not been leased on the fourth floor, and subject
to the conditions set forth below, if Landlord hereafter desires to lease all or
any part of space available on the fourth floor of the Building ("Refusal
Space") or the Refusal Space plus any additional space in the Building (and for
purposes thereof, any such additional space shall be deemed to be part of the
Refusal Space) to a prospective third party tenant pursuant to a bona fide
written offer, proposal or term sheet from Landlord to said third party tenant
or from said third party tenant to Landlord, and provided Telogy has notified
Landlord that it does not intend to exercise any refusal rights it has,
Landlord shall give Tenant, in writing, notice ("Refusal Space Notice"), which
Refusal Space Notice shall give Tenant the right to lease the subject Refusal
Space on the same terms and conditions with which Landlord is willing to enter
into a lease with the prospective third. Landlord's Refusal Space Notice shall
specify (a) the Refusal Space that Landlord desires to lease, (b) the date upon
which such Refusal Space shall or is estimated to be available for occupancy,
(c) the annual rate of base rent per square foot of rentable area which Landlord
desires to charge for such Refusal Space, (d) the amount of all rent
adjustment(s) which Landlord desires to charge for such Refusal Space, (e) the
term of the proposed Lease, (f) the tenant improvements/or tenant improvement
allowance that Landlord is willing to make or is offering, (f) and such other
terms and conditions as Landlord deems appropriate. Tenant shall notify
Landlord, in writing, within three (3) business days (time being of the essence)
of receipt of Landlord's Refusal Space Notice whether Tenant elects to lease
all, but not less than all, of the subject Refusal Space on the terms and
conditions contained in
-6-
<PAGE> 47
the Refusal Space Notice. If Tenant fails to notify Landlord of its intention to
lease the subject Refusal Space within the above-referenced three (3) day period
or if Tenant rejects Landlord's offer contained in the Refusal Space Notice,
then Landlord may at any time within 120 days thereafter lease the subject
Refusal Space to any other party on substantially the same terms as those set
forth in the applicable Landlord's Refusal Space Notice, and upon such other
terms and provisions as Landlord may elect, without again complying with the
provisions of this Paragraph and affording Tenant the right to again exercise a
right of first refusal with respect to the applicable Refusal Space. If Landlord
does not lease the Refusal Space within such 120 day period, the provisions of
this Paragraph shall apply again to such space. All of the provisions of this
Lease, to the extent not inconsistent with the provisions contained in the
Refusal Space Notice, or otherwise set forth therein as being otherwise or
inapplicable, shall apply to the lease of the applicable Refusal Space, provided
that there shall be no tenant allowance for such Refusal Space, except as may be
specifically provided for in the Refusal Space Notice. Tenant shall execute an
amendment to this Lease, reflecting all appropriate adjustments within five (5)
business days after Landlord's delivery of such amendment to Tenant.
(b) In addition to the conditions enumerated in subparagraph (a) above,
Tenant's right of refusal for the Refusal Space shall also be strictly
conditioned upon and subject to each of the following (provided, Landlord in its
sole discretion shall be entitled to waive any or all of these conditions):
(i) As of the date of Landlord's Refusal Space Notice, (A) Tenant
shall not be in default under the terms or provisions of this Lease, and (B)
Tenant shall be in occupancy of the entire Demised Premises; except that Tenant
shall be entitled to have sublet no more than 3,000 square feet, provided such
sublease is for less than the remainder of the Term. Tenant's right to lease the
Refusal Space is further conditioned upon Tenant occupying the entire Demised
Premises as of the Commencement Date for such additional premises; and
(ii) Tenant's right of first refusal shall be deemed personal to the
Tenant named on the first and last page of this Lease, or an affiliate of such
Tenant, and may not be assigned or transferred.
-7-
<PAGE> 48
IN WITNESS WHEREOF, the duly authorized officers of the parties hereto have
executed this Addendum to Lease as of the date first above written.
LANDLORD:
Attest: BELLEMEAD DEVELOPMENT
CORPORATION
/s/ [ILLEGIBLE] By: /s/ [ILLEGBILE] Sr. Vice President
- ---------------------------------- ----------------------------------
TENANT:
Attest: SCHOENKE & ASSOCIATES CORPORATION
/s/ [ILLEGIBLE] By: /s/ RAYMOND J. SCHOENKE, JR.
- ---------------------------------- ----------------------------------
Raymond J. Schoenke, Jr., Chairman
and Chief Executive Officer
-8-
<PAGE> 1
EXHIBIT 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement
(Form S-1 No. 333-56799) of Clark/Bardes Holdings, Inc. and in the related
Prospectus of our report dated February 23, 1999, with respect to the 1997 and
1998 consolidated financial statements of Clark/Bardes Holdings, Inc. in this
Annual Report (Form 10-K) for the year ended December 31, 1998.
ERNST & YOUNG LLP
Dallas, Texas
March 29, 1999
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement on
Form S-1 (No. 333-56799) and in the related Prospectus, of our report, dated
February 7, 1997, relating to the financial statements of Clark/Bardes, Inc.
(the predecessor to Clark/Bardes Holdings, Inc.). included in the Annual Report
on Form 10-K for the year ended December 31, 1998.
LANE GORMAN TRUBITT, L.L.P.
Dallas, Texas
March 29, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
STATEMENT OF OPERATIONS AND BALANCE SHEET OF CLARK/BARDES HOLDINGS, INC. AS OF
AND FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 12,102
<SECURITIES> 0
<RECEIVABLES> 8,470
<ALLOWANCES> 394
<INVENTORY> 0
<CURRENT-ASSETS> 20,237
<PP&E> 2,933
<DEPRECIATION> 1,755
<TOTAL-ASSETS> 67,493
<CURRENT-LIABILITIES> 13,063
<BONDS> 0
0
0
<COMMON> 82
<OTHER-SE> 29,616
<TOTAL-LIABILITY-AND-EQUITY> 67,493
<SALES> 72,264
<TOTAL-REVENUES> 74,766
<CGS> 0
<TOTAL-COSTS> 66,959
<OTHER-EXPENSES> 4,235
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,166
<INCOME-PRETAX> 406
<INCOME-TAX> 817
<INCOME-CONTINUING> (411)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (411)
<EPS-PRIMARY> (0.08)
<EPS-DILUTED> (0.08)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
STATEMENT OF OPERATIONS AND BALANCE SHEET OF CLARK/BARDES HOLDINGS, INC. AS OF
AND FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 3,783
<SECURITIES> 0
<RECEIVABLES> 8,333
<ALLOWANCES> 78
<INVENTORY> 0
<CURRENT-ASSETS> 12,037
<PP&E> 2,229
<DEPRECIATION> 1,513
<TOTAL-ASSETS> 36,901
<CURRENT-LIABILITIES> 9,743
<BONDS> 0
0
0
<COMMON> 5,162
<OTHER-SE> (10,842)
<TOTAL-LIABILITY-AND-EQUITY> (5,680)
<SALES> 47,871
<TOTAL-REVENUES> 49,455
<CGS> 0
<TOTAL-COSTS> 44,238
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,112
<INCOME-PRETAX> 4,294
<INCOME-TAX> 60
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,234
<EPS-PRIMARY> 1.03
<EPS-DILUTED> 0.99
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
STATEMENTS OF OPERATIONS AND BALANCE SHEETS OF CLARK/BARDES HOLDINGS, INC. AS OF
AND FOR THE THREE MONTH ENDED MARCH 31, 1998, AS OF AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998, AND AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 1998, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998 DEC-31-1998
<PERIOD-END> MAR-31-1998 JUN-30-1998 SEP-30-1998
<CASH> 4,723 6,305 15,924
<SECURITIES> 0 0 0
<RECEIVABLES> 4,113 3,138 3,161
<ALLOWANCES> 78 78 78
<INVENTORY> 0 0 0
<CURRENT-ASSETS> 8,882 9,666 19,149
<PP&E> 2,263 2,365 2,722
<DEPRECIATION> 1,593 1,617 1,638
<TOTAL-ASSETS> 33,406 35,560 60,885
<CURRENT-LIABILITIES> 7,436 9,259 12,265
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 5,062 5,464 79
<OTHER-SE> (10,481) (15,851) 23,800
<TOTAL-LIABILITY-AND-EQUITY> 33,406 35,560 60,885
<SALES> 0 0 0
<TOTAL-REVENUES> 13,754 28,984 46,625
<CGS> 0 0 0
<TOTAL-COSTS> 12,724 27,053 43,075
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 923 1,804 2,567
<INCOME-PRETAX> 183 (5,011) (3,435)
<INCOME-TAX> 0 0 (806)
<INCOME-CONTINUING> 183 (5,011) (2,446)
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 183 (5,011) (2,446)
<EPS-PRIMARY> 0.06 (1.56) (0.66)
<EPS-DILUTED> 0.06 (1.56) (0.66)
</TABLE>
