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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(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, 1999
CLARK/BARDES HOLDINGS, INC.
(Exact name of Registrant as specified in its charter)
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DELAWARE 52-2103926
(State of incorporation or organization) (I.R.S. Employer Identification No.)
102 SOUTH WYNSTONE PARK DRIVE, #200
NORTH BARRINGTON, ILLINOIS 60010
(Address of principal executive offices) (Zip code)
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(Registrant's telephone number including area code): (847) 304-5800
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 13, 2000, there were 9,769,826 shares of common stock
outstanding.
As of March 13, 2000, the aggregate market value of common equity held by
non-affiliates was $67,704,033.
DOCUMENTS INCORPORATED BY REFERENCE
The definitive proxy statement for the 2000 annual meeting is incorporated
into Part III of this Form 10-K by reference.
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TABLE OF CONTENTS
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FORWARD-LOOKING STATEMENTS................................................. 1
PART I
ITEM 1. BUSINESS.................................................... 2
ITEM 2. PROPERTIES.................................................. 14
ITEM 3. LEGAL PROCEEDINGS........................................... 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS....................................... 15
ITEM 6. SELECTED FINANCIAL DATA..................................... 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 17
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK...................................................... 38
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................. 38
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.................................. 38
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......... 39
ITEM 11. EXECUTIVE COMPENSATION...................................... 39
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................ 39
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 39
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K....................................................... 39
SIGNATURES.................................................................
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FORWARD-LOOKING STATEMENTS
This Form 10-K and the documents included or incorporated by reference in
this Form 10-K may contain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Such statements may use words such as "anticipate",
"believe", "estimate", "expect", "intend", "predict", or "project", and similar
expressions, as they relate to us or our management. When we make
forward-looking statements, we are basing them on our management's beliefs and
assumptions, using information currently available to us. These forward-looking
statements are subject to risks, uncertainties and assumptions, including but
not limited to the following:
- changes in tax legislation;
- federal and state regulations;
- our dependence on a select group of insurance companies;
- our dependence on key producers and services of key personnel;
- our dependence on information processing systems and risk of errors or
omissions;
- our dependence on persistency of existing business;
- risks associated with acquisitions;
- significant intangible assets;
- competitive factors and pricing pressures; and
- general economic conditions;
If one or more of these or other risks or uncertainties materialize, or if
our underlying assumptions prove to be incorrect, actual results may vary
materially from what we may have projected. Any forward-looking statements you
read in this Form 10-K reflect our current views with respect to future events
and are subject to these and other risks, uncertainties and assumptions relating
to our operations, results of operations, growth strategy and liquidity. All
subsequent written and oral forward-looking statements attributable to us or
individuals acting on our behalf are expressly qualified in their entirety by
this paragraph.
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PART I
ITEM 1. BUSINESS
OUR COMPANY
Clark/Bardes Holdings, Inc. wholly owns Clark/Bardes, Inc., which is the
successor corporation to Clark/Bardes, Inc., a Texas corporation, formed in
1967. Clark/Bardes Holdings and Clark/Bardes were formed in June 1998 in
contemplation of our initial public offering. The initial public offering was
completed on August 19, 1998. Our corporate headquarters is located at 102 South
Wynstone Park Drive, Suite 200, North Barrington, Illinois 60010, and our
telephone number is (847) 304-5800.
We are a nationally recognized firm that provides a variety of compensation
and benefit services to U. S. corporations, banks and healthcare organizations.
Our services include the evaluation, design, implementation and administration
of innovative compensation and benefit programs for executives, key employees
and other professionals. Over 2,200 corporate, banking and healthcare clients
use these customized programs primarily to supplement and secure benefits for
their executives, key employees and professionals and to offset the costs of
employee benefit liabilities. We arrange for our clients to finance these
programs using life insurance and other financial products. Generally our
revenue is earned from:
- consulting fees paid by our clients to evaluate and design executive
compensation and benefit plans;
- first-year and renewal commissions paid to us by the insurance companies
that underwrite the insurance policies underlying our clients'
compensation and benefit programs; and,
- fees paid by our clients for ongoing administrative and other services.
We typically receive renewal commissions and service and administration
fees as long as the insurance policies underlying our clients' programs remain
inforce.
We have three operating divisions. Each of these divisions is focused on
the evaluation, design, implementation and administration of innovative
compensation and benefit programs that help each of their clients attract and
retain executives, key employees and other professionals. Each of our divisions
operates separately from a different location with its own executive, marketing
and administrative staffs. The divisions operate separately because of the
specific expertise required to serve distinct markets and the established name
recognition of each division. Through these divisions, we are able to tailor
compensation and benefit programs and consulting services to the unique needs of
our clients.
Our Clark/Bardes division markets to large corporations and banks with over
$5 billion in assets. The Clark/Bardes division has as clients over 30 of the
top 50 banks in the United States and over 200 large corporations representing a
wide variety of industries. In addition to evaluating, designing, implementing
and administering compensation and benefit programs for large corporations, the
Clark/Bardes division also has been highly successful in providing
business-owned life insurance programs for banks. The bank programs are designed
to offset employee benefit costs, as well as to finance executive benefit
programs.
Our Bank Compensation Strategies division markets to community banks, which
typically have less than $1 billion in assets. We estimate that there are over
7,000 community banks in the United States. Bank Compensation Strategies is a
market leader with over 1,200 community bank clients. In addition to evaluating,
designing, implementing and administering compensation and benefit programs, the
Bank Compensation Strategies division also earns revenue from compensation and
incentive consulting for executives, key employees and other professionals as
well from ownership succession programs. The Bank Compensation Strategies
division also has been highly successful providing business-owned life insurance
programs to community banks.
The Clark/Bardes and Bank Compensation Strategies divisions jointly market
to banks in the $1 billion to $5 billion asset range.
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Our HealthCare Compensation Strategies division markets predominantly to
large, medium sized and not-for-profit, healthcare organizations including
healthcare systems; independent hospitals; managed care organizations; academic
medical centers and teaching hospitals; group medical practices; and hospital
associations. With over 300 clients that represent over 800 hospital and
physician groups, HealthCare Compensation Strategies is a leader in its market.
In addition to evaluating, designing, implementing and administering
compensation and benefit programs for executives, key employees and other
professionals including physicians, the HealthCare Compensation Strategies
division also offers comprehensive compensation and benefits consulting
services.
RECENT DEVELOPMENTS
On February 7, 2000, we signed a letter of intent to acquire substantially
all the assets and assume certain liabilities of a group of privately held
companies engaged in the sale of executive benefit and pension plans to medium
and large corporations.
The total purchase price of the assets, excluding assumed liabilities and
acquisition expenses are expected to be approximately $50 million consisting of:
- a cash payment at closing of $30.1 million,
- 308,428 shares of our common stock with an agreed upon value of $4.9
million
- contingent payments of $15 million, payable 86% cash and 14% CBH common
stock, based on achieving predetermined levels of earnings before
interest, taxes, depreciation and amortization for the years 2000 through
2004.
The transaction is subject to a number of conditions including an on-going
review of the target's financial and business affairs, execution of definitive
purchase agreements, approval of both companies' boards of directors and the
consent of our lenders, among other things.
On September 1, 1999, we acquired substantially all the assets and assumed
certain liabilities of The Wamberg Organization and all of the outstanding stock
of Wamberg Financial Corporation. The sole shareholder of these companies was W.
T. Wamberg, our Chairman and Chief Executive Officer. We acquired specific
operating assets, all of the remaining renewal commissions not previously
acquired and some liabilities, principally accounts payable and employee benefit
obligations. Wamberg Financial Corporation owns an airplane and was engaged in
leasing the airplane solely to The Wamberg Organization.
During 1999, one of the carriers we use, General American Life Insurance
Company experienced financial difficulties as a result of being unable to meet
withdrawal requests under certain guaranteed investment contracts General
American had issued. General American represented approximately 6.0% of total
revenue in 1998 and 4.8% of total revenue in 1999. Upon learning of these
matters, we ceased selling programs financed by insurance policies underwritten
by General American. Since that time, General American's life insurance business
has been sold to MetLife, its financial ratings upgraded, and we expect to
continue to use General American and its acquirer, MetLife, as carriers.
On June 7, 1999, we completed a private placement of 1,000,000 shares of
our common stock at $17 per share, to Conning Insurance Capital Limited
Partnership V, L. P. Conning and General American are both indirect subsidiaries
of General American Mutual Holding Company. As part of the private placement, we
granted Conning registration rights which they may use to have their shares of
our common stock registered along with any shares we may be registering with the
SEC, after December 31, 2002. Proceeds of the sale of our common stock were used
to reduce outstanding debt and for acquisitions.
ACQUISITIONS
Our acquisition program is one of the most important aspects of our growth
strategy. It has become one of the principal means by which we build on the
strengths of our existing businesses and the primary means by which we enter new
business markets such as community banks and healthcare.
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The Clark/Bardes Division
As our original and core business, the Clark/Bardes division has been
expanded by three acquisitions since September 1, 1998: Schoenke & Associates
and Wiedemann & Johnson in 1998, and The Wamberg Organization in 1999. These
acquisitions fit into our Clark/Bardes division because each markets to
corporations and large banks. As a result of these acquisitions, we gained a
substantial book of business as well as a number of talented and experienced
benefits professionals.
The Wamberg Organization. On September 1, 1999, we completed the
acquisition of The Wamberg Organization by acquiring certain operating assets,
all of the remaining renewal commission not previously acquired and some
liabilities. Prior to the acquisition, The Wamberg Organization was one of our
largest independent producers, contributing 17.5% of revenue in 1998 and 15.2%
of revenue for the year 1999. This acquisition allows us to retain all of the
acquired renewal revenues generated by The Wamberg Organization for a
twenty-year period and all new business revenue.
Bank Compensation Strategies Division
Bank Compensation Strategies, Inc. The September 1997 acquisition of Bank
Compensation Strategies, Inc., was the start of our Bank Compensation Strategies
division, which markets to community banks and now performs bank compensation
and benefit consulting.
National Institute for Community Banking. On May 18, 1999, we acquired
National Institute for Community Banking through a merger effective as of
January 1, 1999. National Institute for Community Banking is an important
regional producer in the fast growing regional banking market and, prior to the
acquisition, was a producer for our Bank Compensation Strategies division.
Banking Consultants of America and Financial Institutions Services, Inc. On
October 6, 1999, we acquired Banking Consultants of America and Financial
Institution Services as part of our continuing efforts to strengthen Bank
Compensation Strategies by acquiring strong regional companies that can be
readily absorbed into Bank Compensation Strategies operating structure.
HealthCare Compensation Strategies Division
Management Compensation Group/HealthCare. On April 5, 1999, we purchased
the assets and book of business and assumed certain liabilities of Phynque,
Inc., d/b/a Management Compensation Group/ HealthCare. Management Compensation
Group/HealthCare is a 168 employee executive benefit consulting organization
servicing the healthcare industry, and it now comprises most of our HealthCare
Compensation Strategies division. This division is headquartered in Minneapolis,
Minnesota. Before the acquisition, there was no relationship between us and
Management Compensation Group/HealthCare.
PAST, PRESENT AND FUTURE OF OUR INDUSTRY
Over the past thirty years, the design and implementation of executive
benefit programs has become more sophisticated. Competition for executives as
well as legislation affecting executive compensation and retirement planning has
required that businesses offer new, creative programs to attract and retain
talent. The financing of these programs has also become very specialized.
Effective and efficient financing can help a company create and maintain a
competitive advantage and this has led to the development of innovative
financing techniques. For example, before the 1980's, corporations and banks did
not normally use life insurance to offset the costs of employee benefit
liabilities. Since then, a number of large insurers have committed significant
resources in developing a line of business owned life insurance products for use
in insurance financed employee programs.
Historically the use of insurance has been affected by legislative change.
In the past, legislation has reduced the usefulness of traditional pension plans
for highly paid executives. This, in turn, has increased the attractiveness of
insurance financed non-qualified benefit plans. Additionally, income tax
legislation has limited interest deductibility on policy loans and reduced the
interest deduction of unrelated debt based on the unborrowed cash values of
business-owned life insurance except for policies placed on employees, officers,
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directors and 20 percent owners. We believe that legislative change will
continue to significantly affect our industry in the future. Our ability to
respond quickly to legislative initiatives is a competitive advantage, which we
can use to increase our market share.
The prospects and clients of these programs have become more sophisticated
and more demanding over time. Clients now perform extensive due diligence on the
firms they use to provide their executive benefit programs. Issues relating to
the integrity of the firm, sustainability and technological capability are now
central to their decision-making process. In addition, the client's expectation
on the level of administrative services to be provided has risen substantially.
Many once-dominant producers and groups in our industry who have not kept pace
with these changes are now faced with decreasing market share and the inability
to provide adequate administrative support to existing clients. We believe that
those producers and producer groups who have not made the necessary investment
in administrative systems and personnel will continue to experience difficulties
in satisfying their clients' specific needs and in meeting complex regulatory
requirements. For example, in the early 1990's, community banks went through a
consolidation phase. This consolidation gave bank executives a greater
appreciation and need for expertise regarding the impact of consolidation on
their compensation and benefit programs. This developed into a stronger demand
by the community banking industry for expert advice in addressing estate
planning and continuity planning. In addition, healthcare organizations have
been faced with growing challenges to attract and retain executives. The tax
status of healthcare providers, many of whom are not-for-profit healthcare
organizations, requires tailored compensation and benefits programs in which
policies are typically owned by the executives while being paid for the company.
We believe that the ever-changing legislative, economic and market
environments require product development systems and personnel that are more
sophisticated and cost intensive than most producers and producer groups are
able to justify economically. Given the highly fragmented nature of the
industry, management expects significant consolidation to occur in the future.
STRATEGY AND OPPORTUNITIES FOR GROWTH
Through our three operating divisions, our goal is to further strengthen
our role as a leading provider of innovative compensation and benefit programs
and solutions to corporations, banks and healthcare organizations throughout the
United States. To accomplish this goal, we intend to continue to:
- Leverage Our Market Reputation. Leverage our reputation as an industry
leader to expand current operations and to enter into related businesses.
- Design Innovative Programs. Use our expertise in program development
together with our continued close monitoring of legislative change, to
create and market innovative, customized programs to penetrate new
markets, and to satisfy the financial needs of our clients in a changing
regulatory and economic environment.
- Diversify Our Business. Identify and enter related businesses in which we
can profitably employ our competencies. Examples of recent expansion into
related businesses include compensation and benefit consulting, benefit
plan administrative services and marketing to the not-for-profit sector.
- Enhance Our Administrative Capabilities and Efficiencies. Distinguish
ourselves from our competitors by continuing to enhance our
administrative capabilities, providing high quality administrative
services and improving operating efficiencies.
- Pursue Consolidating Acquisitions. Take advantage of the expected
consolidation in our industry and markets; and implement our design,
distribution and service model on a wide scale to increase market share,
acquire producer and management talent, enter new markets and improve
operating margins through efficiencies achieved by acquisitions.
Most importantly, we plan to continue to provide outstanding service to our
clients.
We believe our industry offers us additional growth opportunities. We
intend to leverage our core competencies by entering into related markets such
as the outsourcing of benefit plan administration services,
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and expanding our product lines to include other executive benefits, such as;
disability income, long term care, and various retirement products. Our
reputation, comprehensive in-house expertise, sophisticated administrative
systems, quality producers and strong relationships with insurance companies,
provide us with distinct competitive advantages. We intend to increase our
market share by combining these strengths with our competencies in:
- designing proprietary programs customized to meet clients' needs;
- providing outstanding client service; and
- responding quickly to develop new products and services brought about by
regulatory and legislative changes.
We are able to offer clients expertise not available elsewhere through the
specialization of our three divisions. Our internal growth efforts will focus on
the development of these divisions.
The Clark/Bardes division has designed and currently administers over 200
client cases, covering over 167,300 policy records for executives, key employees
and other professionals. The large corporate marketplace in which the
Clark/Bardes division does business requires a significant degree of
customization. To meet the efforts of this marketplace, the division is active
in much of our product and systems development efforts. The executive, actuarial
and design staff work closely with insurance carriers to develop customized and
often proprietary products. In addition, the Clark/Bardes division systems
personnel create many of the proprietary systems platforms used by our other
divisions. Growth in this division will focus on providing additional services
to corporations, such as compensation and benefits consulting programs, as well
as marketing individual insurance retirement products to executives, key
employees and other professionals.
The Bank Compensation Strategies division services over 1,200 community
banks. Changes in the community-banking environment present numerous
opportunities for growth in this division. Community banks are becoming
increasingly sophisticated with their compensation and benefit plans as they
need to recruit effective leadership. In addition, consolidation in the
community banking industry has heightened concerns about remaining independent.
Growth opportunities for this division include the recent addition of a
compensation and benefit consulting service as well as new programs to address
estate planning and continuity planning. This division has also completed two
acquisitions of strong, regional firms in its industry.
The HealthCare Compensation Strategies division uses a comprehensive
benefits approach that encompasses a variety of insurance products, ranging from
traditional life insurance policies to disability and long-term care coverage.
With approximately 300 clients that represent over 800 hospitals and physician
groups, the HealthCare Compensation Strategies division is the market leader for
compensation and benefit planning for healthcare executives and physicians. The
healthcare industry's changing environment and complex structure offer many
opportunities for growth. These opportunities include acquiring additional
business through referrals from affiliations, agreements with healthcare
consulting organizations, and leveraging our expertise with other healthcare
sectors such as healthcare maintenance organizations and other health insurance
plans.
We are also focused on external growth. We believe our industry is
fragmented and see numerous opportunities to create better design, distribution
and service systems for our clients' programs. We are taking advantage of these
opportunities by pursuing selected acquisitions. We categorize potential
acquisition targets in the following groups:
- smaller companies that have not made the necessary investment in
technology and personnel, and are finding it harder to compete with
larger, more developed firms;
- larger and more sophisticated firms with a solid client base, owned by a
small number of producers eager to affiliate with a more established
organization; and
- firms offering executive compensation and benefit services that we
currently do not provide or to industry sectors we do not currently
serve.
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In evaluating a potential acquisition target, we identify organizations
that will:
- increase our market penetration;
- retain quality producers after the acquisition is complete;
- create cross-selling opportunities;
- provide opportunities for administrative cost savings; and
- add to our earnings per share.
Once we have identified such a target we look at factors such as operating
results, financial condition, growth potential, and the quality of its
management and producers. Acquisitions will be financed through cash from our
operations, future equity offerings or debt proceeds.
PROGRAMS AND PRODUCTS
We provide compensation and benefit consulting as well as evaluate, design,
implement and administer a diverse array of compensation and benefit programs
for executives, key employees and other professionals. Our programs are financed
by business-owned life insurance and other financial products. Business-owned
life insurance refers to life insurance policies purchased by a business that
insure the lives of a number of its 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
executives, key employees and other professionals. 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.
Additionally, business-owned life insurance offers three major advantages:
(1) the cash value of the policies grows on a tax deferred basis;
(2) the policies' death benefits are received tax-free; and
(3) the tax-deferred nature of the policies provides an attractive
return.
We earn a majority of our total revenue from selling insurance products
used to fund our proprietary programs. We maintain strategic relationships with
insurance companies such as AEGON, CLARICA, Equitable, Great-West, Mass Mutual,
Nationwide, Phoenix Home Life, Prudential and West Coast Life, in which both
parties are committed to developing and delivering creative products with high
client value. We also work closely with clients to design custom products that
meet the specific organizational needs of the client and with insurance
companies to develop unique policy features at competitive pricing.
We have invested significant time and resources in cultivating
relationships with selected carriers. However, we do not consider our future
success to be dependent on any specific insurance carrier. We limit the number
of carriers with which we transact business in order to maximize our bargaining
power and resource utilization. Substantially all of the policies underlying the
programs that we market are underwritten by 20 life insurance companies, of
which seven accounted for approximately 78.9% of our first-year commission
revenue for 1997, 76.3% for 1998 and 53.6% for 1999. We believe that there are
over 50 top-tier insurance companies with the financial strength and resources
to effectively compete for large-case programs, each of which typically generate
in excess of $5 million in premiums, and several hundred carriers suitable for
our small-case business, each of which typically generate between $1 million and
$5 million in premiums.
We have entered into five-year production agreements with each of
Nationwide and Great West and a five-year product development and production
agreement with Phoenix Home Life. These production agreements require us to
market and sell specified production levels of insurance products of each of
these carriers. Each production agreement grants the insurance carrier the right
to commission offsets of up to $150,000 per year if the specified production
levels are not satisfied. Since inception, we have met the prescribed level and
we believe we will continue to reach the production level required by each of
these
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production agreements. These production agreements specify the insurance
carrier's products that we will market and sell, commission payment rates by
insurance product, software for product illustrations, mutual indemnification
provisions and short-term termination provisions. We may consider entering into
additional product development and production agreements with other insurance
companies in the future.
The following steps comprise our overall approach to the sale, design and
implementation of our compensation and benefit program:
(1) we evaluate a client's existing compensation and benefit programs
to meet that particular company's organizational needs;
(2) we design the compensation and benefit program;
(3) when needed, we perform the actuarial and insurable interest
calculations necessary to determine the amount of life insurance
an organization should purchase;
(4) we compare and present to the client available financing
alternatives and the financial strengths of each;
(5) we arrange for the placement of the insurance coverage or other
financial instruments underlying the program with a financially
stable insurance company; and
(6) we provide the long-term administrative services associated with
the program.
Our Clark/Bardes division and Bank Compensation Strategies division market
a wide variety of business-owned life insurance based programs, including
bank-owned life insurance, deferred income plans, supplemental executive
retirement plans, supplemental offset plans and group term carve out plans.
Our HealthCare Compensation Strategies division markets predominantly to
large and medium sized healthcare organizations. The unique characteristics and
concerns of our HealthCare Compensation Strategies clients greatly influence the
kinds of compensation and benefit products and programs we develop. Many
healthcare organizations are tax exempt and are less concerned about the
immediate income statement effect of the compensation and benefit programs we
implement than are our corporate and banking clients.
The following table sets forth the actual and pro forma total revenue by
division for the year ended December 31, 1998 and 1999, as if all of our
acquisitions had occurred on January 1, 1998:
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YEAR ENDED DECEMBER 31,
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1998 1999
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ACTUAL PRO FORMA ACTUAL PRO FORMA
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(IN MILLIONS)
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Clark/Bardes..................................... $45.4 $ 51.0 $ 73.5 $ 73.5
Bank Compensation Strategies..................... 29.4 29.4 30.8 30.8
HealthCare Compensation Strategies............... -- 26.5 16.4 22.5
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$74.8 $106.9 $120.7 $126.8
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OUR PRODUCTS
Bank-Owned Life Insurance. Bank-owned life insurance is 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. We were 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 $5.0 billion.
Through our Bank Compensation Strategies division, we market smaller case
bank-owned life insurance programs, which are used to offset benefit costs for
executives and directors of regional and community banks that generally have
assets of less than $1.0 billion. We market 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. Clark/Bardes and Bank Compensation
Strategies jointly market to banks with $1 billion to $5 billion of assets.
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Deferred Income Plans. Deferred income plans 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 deferred income
plans 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
deferred income plan. Deferred income plans can be structured in a variety of
ways, including traditional deferred income plans, 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 deferred
income plans, which credit the deferred income amount with interest based on a
bond or equity index and use variable yield life insurance products to offset
the costs of the company's liability. In an effort to provide additional
security for executives, corporations usually create a trust to hold the related
insurance policies.
Because deferred income plans 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. Supplemental executive retirement
plans are specifically designed to supplement the dollar limitation on benefits
paid from qualified pension plans. The 1993 Omnibus Budget Reconciliation Act
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 $160,000
and had other significant adverse effects on defined benefit, defined
contribution and 401(k) plans. As a result, non-qualified plans such as
supplemental executive retirement plans, which are not subject to the same
stringent rules, have increased in popularity. Many supplemental executive
retirement plans are funded with the same insurance products and strategies used
to fund deferred income plans.
Supplemental Offset Plans. Supplemental offset plans are designed to
supplement an executive's income by restoring retirement benefits previously
limited by legislative changes. Supplemental offset plans are funded with
insurance policies using a technique commonly known as "split dollar". 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. Group term carve out
plans replace the taxable portion of the group term life insurance plan with
permanent life insurance. Group term carve out plans 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.
Compensation Consulting. Our HealthCare Compensation Strategies and Bank
Compensation Strategies divisions have leading programs in base salary, short
term and long term incentives, deferred compensation, and other compensation
design plans. The Clark/Bardes division is now initiating similar programs for
its clients.
AlignOne. A specialized integrated executive compensation and benefit
program where CBI performs a complete assessment of a company's executive
benefit needs and then designs a program that individualizes executive benefits,
providing a web-based tracking tool for each executive.
Community Bankers Scholarship Program. The Community Bankers Scholarship
Program is designed for community banks that wish to offer college scholarships
for students within their communities. This turnkey program utilizes life
insurance to provide a cost-effective method for financing the annual cost of
the scholarships. Currently, the Community Bankers Scholarship Program is
marketed solely through our Bank Compensation Strategies division.
9
<PAGE> 12
Disability Income Plan. Many corporations currently provide group
Disability Income Protection for their employees. Unfortunately, these plans
have caps that are not sufficient to provide reasonable income replacement for
executives in the event of a disability. Disability Income Plans marketed by our
Clark/Bardes and HealthCare Compensation Strategies divisions supplement the
group plans currently in place, and provide additional income for executives in
the event of a disability.
ExecuFLEX Program. Our HealthCare Compensation Strategies division provides
a total compensation planning approach to the not-for-profit health care market
through its "ExecuFLEX" program. The program includes a base level of benefits,
such as medical, dental, vision, long-term disability, long-term care, and group
term life insurance. In addition, participants are provided an allowance made up
of company contributions and voluntary personal deferrals. The flex allowance is
used to supplement base coverage and to add to their retirement funding. The
ExecuFLEX program is designed to provide maximum flexibility to the participants
at a minimal cost to the organization. The success of ExecuFLEX has led us to
offer the program to companies serviced by all of our operating divisions as
well as additional market segments within the health care industry.
ADMINISTRATIVE SERVICES
We believe that we are recognized as an industry leader in providing high
quality, unique services to our clients. We have developed state of the art
administrative capabilities necessary to service the executive benefit and
insurance programs we market. As of December 31, 1999, we administered over
190,000 benefit and insurance records for over 2,200 clients. As of the same
date, the insurance policies underlying our employee benefit programs
represented a total of approximately $72 billion of inforce insurance coverage
as follows:
<TABLE>
<CAPTION>
BANK HEALTHCARE
CLARK/BARDES COMPENSATION COMPENSATION
DIVISION STRATEGIES STRATEGIES TOTAL
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Number of benefit records
administered...................... 167,300 9,200 13,500 190,000
Number of clients................... 200 1,200 800 2,200
Amount of inforce coverage.......... $62 billion $5 billion $5 billion $72 billion
</TABLE>
We approach administrative service opportunities with a differentiation
strategy to assure our clients' unique requirements and needs are served through
customized, value-added services and intensive support, creating brand and
client loyalty and resulting in lower sensitivity to price. We further
differentiate ourselves by employing a focused strategy for a particular buyer
group through each of our three divisions. For instance, we service clients in
the community banking industry through our Bank Compensation Strategies division
and not-for-profit healthcare organizations through our HealthCare Compensation
Strategies division with an insider's view of each market which results in
providing high quality administrative services customized to a client's needs
while achieving lower costs.
We offer 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 specialists who are responsible for servicing the needs of that client. The
administrative services provided by each of our divisions' account specialists
include coordinating and managing the enrollment process, distributing
communication materials, monitoring financial, tax and regulatory changes,
providing accounting reports, providing periodic benefit statements to
participants performing annual reviews and reporting historical and projected
cash flow and earnings. Each division's account specialists are supported by
actuarial, financial and insurance specialists.
We build our client base by fostering long-term client relationships. To
this end, the training and focus of each account team centers on our 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, we enter into
administrative agreements with each client, in most cases for a term of five to
ten
10
<PAGE> 13
years. Finally, our method of calculating the revenue splits with our producers'
attempts to ensure that the revenue from new sales is not required to subsidize
the administrative costs of existing cases.
We believe that our commitment to providing high quality client and
administrative services is one of the primary reasons that we have achieved the
success we enjoyed to date. We believe that our continued focus on, and
investment in, the personnel and technology necessary to deliver this level of
client service will bolster our reputation as an industry leader.
DISTRIBUTION
Each of our divisions markets our employee benefit programs and related
administrative and consulting services through a group of in-house producers and
producers in independently operated sales offices located throughout the United
States. As of December 31, 1999, we were represented by 67 producers in 48 sales
offices located in 26 states throughout the United States. Producers owned
approximately 13.3% of the outstanding shares of our common stock as of December
31, 1999.
Our independent producers enter into agency agreements with us 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 us, and includes a
confidentiality agreement and operating guidelines and standards. The agency
agreements can generally be terminated by either party with either 90 or 180
days written notice depending upon the individual agreement. We typically pay a
substantial portion of the total sales revenue to the independent producer,
usually from 50% to 65% of gross revenue. Most of our independent producers are
responsible for their own selling expenses and overhead. Non-solicitation
clauses, which prohibit either party from soliciting or selling insurance or
administrative services to the other party's clients are typically three years
with respect to separate clients and usually five years with respect to joint
clients, as defined in the agency agreement. In 1998, we began increasing our
number of in-house producers. Through acquisitions of companies such as
Management Compensation Group/HealthCare, we now generate a significant portion
of our sales revenue through employee-producers, in which we incur the general
and administrative expense of the sales producers in exchange for a lower
commission and fee expense.
Our top three producers collectively accounted for approximately 34.4% of
1998 revenue and 32.0% of 1999 revenue. The largest producer in each period was
The Wamberg Organization, which represented 17.5% of 1998 revenue and 15.2% of
total 1999 revenue. With the acquisition of independent producers such as The
Wamberg Organization and the National Institute for Community Banking, our
dependence on key large producers has decreased. We recognize the importance of
attracting and retaining qualified, productive sales professionals. We and our
producers actively recruit and develop new sales professionals in order to add
to our distribution capacity. Further, our acquisition strategy focuses on
retaining the productive sales professionals of the entity being acquired.
EMPLOYEES
As of December 31, 1999, we employed approximately 439 people as follows:
<TABLE>
<CAPTION>
BANK HEALTHCARE
COMPENSATION COMPENSATION
CLARK/BARDES STRATEGIES STRATEGIES TOTAL
------------ ------------ ------------ -----
<S> <C> <C> <C> <C>
Client services......................... 68 24 71 163
Product design.......................... 15 16 1 32
Information systems..................... 14 10 5 29
Sales and marketing..................... 22 18 62 102
Accounting and finance.................. 13 6 5 24
Executive and administrative............ 27 18 24 69
Corporate Headquarters.................. -- -- -- 20
--- -- --- ---
Total......................... 159 92 168 439
=== == === ===
</TABLE>
11
<PAGE> 14
The majority of our employees have college degrees, with several holding
advanced degrees in law, accounting, 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 our employees. We actively
encourage continuing education for employees through expense reimbursement and
reward plans. Due to the specialized nature of the business, we often recruit
experienced persons from insurance companies, consulting firms and related
industries.
MARKETING SUPPORT
We have made a substantial investment in establishing highly qualified
marketing departments in each division. Each marketing department's primary
focus is to support our sales efforts. Each marketing department develops and
tracks sales leads for the producers and provides marketing materials and
research. Collectively, through our marketing departments, we distribute
external newsletters and other program update pieces to approximately 15,000
current and prospective clients throughout the year and sponsor telephone
conferences and meetings featuring industry experts and nationally recognized
speakers. Finally, the public relations and corporate marketing functions
coordinates the publication of articles written by our employees and producers
and ensures that our representatives are quoted as information sources in major
national publications. We believe that the efforts of our marketing departments
have helped make us a readily identifiable leader in the insurance-financed
employee benefit industry.
PRODUCER SUPPORT
Our producers are supported by a design and analysis department in each of
the three divisions. The primary responsibility of each of our design and
analysis departments is to design customized compensation and benefit programs
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. The design analyst then 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 the client in making a decision.
TECHNOLOGY, ADMINISTRATION AND INTEGRATION
We have made a significant investment in developing proprietary modeling
and administrative systems to support the unique characteristics of benefit
programs financed life by insurance and other financial instruments. Reflecting
the diversity of our three divisions, each has its own computer based
information system and professional support staff. All the systems have been
designed and are operated to support the special processing needs of a diverse
client base. The systems use a relational database to facilitate easy access to
client, participant and benefit information. In addition, a telephonic
application allows individual plan participants twenty-four hours a day access
to account balance and unit price information.
Local area networks link all of our personal computers. Internet mail is
utilized to communicate with clients and sales offices. We intend 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, in 1999, we implemented intranet and
collaborative workgroup tools to speed communications and to allow information
to be easily shared across the organization. Further, as we continue to grow
internally and by acquisitions, management intends to establish a wide area
network to facilitate communications across all locations.
We maintain a disaster recovery plan for 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 areas and all systems are password-protected to
ensure access is limited to authorized individuals. We have not experienced any
year 2000 related difficulties directly or indirectly with clients, carriers or
suppliers.
When acquiring small businesses, we integrate their information systems as
well as their staffs, accounting and administrative systems. In this manner, we
are able to give them technical and administrative
12
<PAGE> 15
systems support they could not achieve as a stand-alone unit and, at the same
time, improve their level of client service.
PERSISTENCY
Over the last five years, we have experienced an overall average annual
persistency rate of 95% of the accrued inforce insurance underlying our
programs. We believe that these high persistency rates are attributable to a
number of factors.
- The underlying purpose of the compensation and benefit programs is to
offset the costs of employee benefit liabilities and provide long-term
benefits to executives, key employees and other professionals. Therefore,
the policy is held by the corporation to maturity, regardless of whether
any particular individual insured remains with the client.
- The tax-paying clients of our Clark/Bardes or Bank Compensation
Strategies divisions would incur 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.
- The high persistency rates of all of our divisions are partially
attributable to provisions in many interest rate sensitive products that
disallow a full-scale withdrawal or exchange.
- We provide a high degree of ongoing client service. We believe that the
quality of our services provided through each of our divisions enhances
persistency by distinguishing us from our competitors.
As we continue to diversify and acquire companies in different market
segments, our persistency can begin to vary significantly. While we intend to do
all we can to retain our clients, service their accounts and sustain our
persistency, there can be no assurance our persistency rates will remain at this
level.
COMPETITION
The marketing, design and administration of insurance-financed employee
benefit programs is highly competitive. We compete with consulting firms,
insurance agents, brokers, third party administrators, producer groups and
insurance companies. A number of our competitors offer attractive alternative
programs. The direct competitors of our Clark/Bardes division include:
- Compensation Resource Group;
- Harris, Crouch, Miller, Scott, Long and Mann;
- Management Compensation Group (not related to Management Compensation
Group/HealthCare);
- Newport Group;
- TBG Financial; and
- The Todd Organization (not affiliated with Melvin G. Todd, Chief
Executive Officer of the Clark/ Bardes division).
The competitors of our Bank Compensation Strategies division include The
Benefit Marketing Group, The Todd Organization, and individual insurance agents
in the communities where the community banks are located. Additionally, the
community banking industry is constantly consolidating, which may reduce the
number of potential bank clients for Bank Compensation Strategies. In
competition with our HealthCare Compensation Strategies division are; Hewitt
Associates, Towers Perrin, Mercer Consulting Group and Hay Group, Inc. These
firms, however, do not focus exclusively on healthcare and do not restrict their
practices to executive and physician compensation.
13
<PAGE> 16
We compete 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 may offer attractive programs on pricing, management believes that
we are in a superior competitive position in most, if not all, of the meaningful
aspects of our business, because of our track record, name recognition, industry
focus, specialization and industry expertise. We do not consider our direct
competitors to be our greatest competitive threat. Rather, we believe that our
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 ours.
GOVERNMENT REGULATION
State governments extensively regulate our life insurance activities. We
sell our insurance products in all 50 states through licensed insurance
producers. States have broad powers over licensing, payment of commissions,
business practices, policy forms and premium rates and insurance laws vary from
state to state. While we have not encountered regulatory problems in the past,
we cannot assure you that we will always be in compliance with all applicable
regulatory requirements of each state. Additionally, we cannot be sure if we or
our producers will encounter regulatory problems in the future, including any
potential sanctions or penalties for operating in a state without all required
licenses.
While the federal government does not directly regulate the marketing of
most insurance products, some products, such as variable life insurance, must be
registered under the federal securities laws. As a result, our producers and
entities with which we have administrative service agreements related to selling
those products must be registered with the National Association of Securities
Dealers. We market these insurance products through a registered broker-dealer
with which we have a network agreement. While we have not had any regulatory
problems in the past related to these products, we cannot be sure if we or our
producers will not have regulatory problems in the future.
ITEM 2. PROPERTIES
The following table sets forth certain information with respect to the
principal facilities used in our operations, all of which are leased.
<TABLE>
<CAPTION>
CURRENT
MONTHLY SQUARE LEASE
DIVISION -- LOCATION RENT FOOTAGE EXPIRES
- -------------------- -------- ------- -------------
<S> <C> <C> <C>
Clark/Bardes -- Dallas, Texas................... $ 43,847 35,619 April 2001
Bank Compensation Strategies -- Bloomington,
Minnesota..................................... 32,266 15,000 August 2005
Clark/Bardes -- Germantown, Maryland............ 20,746 9,831 December 2006
HealthCare Compensation
Strategies -- Minneapolis, Minnesota.......... 91,990 56,231 December 2003
Clark/Bardes Holdings -- North Barrington,
Illinois...................................... 12,500 11,085 February 2009
-------- -------
$201,349 127,766
======== =======
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
From time to time, we are involved in various claims and lawsuits
incidental to our business, including claims and lawsuits alleging breaches of
contractual obligations under agreements with producers. At this time, we do not
believe that any pending litigation will have a material adverse effect on our
business, financial condition and operating results.
14
<PAGE> 17
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 our security holders, through the
solicitation of proxies or otherwise.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
On August 19, 1998, we completed an initial public offering of the Common
Stock at a price of $9.00 per share. Our common stock trades 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 our common stock for the periods
indicated.
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
1998
Third quarter............................................. $10.000 $ 7.125
Fourth quarter............................................ $18.875 $ 8.250
1999
First quarter............................................. $18.250 $13.063
Second quarter............................................ $20.500 $13.000
Third quarter............................................. $20.625 $16.000
Fourth quarter............................................ $20.625 $12.250
2000
First quarter to March 13{................................ $17.250 $14.063
</TABLE>
As of March 13, 2000, the closing price of our common stock was $14.063,
there were 9,769,826 shares of our common stock outstanding, and there were
approximately 470 holders of record and 961 beneficial holders of our common
stock.
DIVIDEND POLICY
Prior to our reorganization in July 1998, we conducted our business as an S
corporation for federal income tax purposes. Under this form of organization,
all earnings were deemed to be passed through directly to our shareholders,
whether distributed or not. In order for our shareholders to pay the federal
income taxes imposed by this form of organization, we made distributions to
them. These are shown as distributions or dividends in prior periods in our
financial statements.
We intend to retain future earnings to fund growth and do not plan to pay
any cash dividends in the foreseeable future. Under the terms of a credit
agreement with Bank One, we cannot declare or pay dividends or return capital to
our stockholders, nor can we authorize or make any other distribution, payment
or delivery of property or cash to our stockholders, unless Bank One gives its
prior written consent.
RECENT SALES OF UNREGISTERED SECURITIES
On April 5, 1999, we issued 326,363 shares of our common stock as part of
the purchase price for our acquisition of MCG/HealthCare. The issuance was
exempt from registration under Section 4(2) of the Securities Act of 1933.
On May 17, 1999, we issued 99,851 shares of our common stock as part of the
merger consideration in conjunction with our acquisition of NICB. The issuance
was exempt from registration under Section 4(2) of the Securities Act of 1933.
15
<PAGE> 18
On July 7, 1999, we sold 1,000,000 unregistered shares of our $.01 par
value stock to Conning Insurance Limited Capital Partnership for $17 per share
or $16.9 million net of associated expenses. At December 31, 1999, Conning's
shares represented 10.4% of our total outstanding common stock. This issue was
exempt from registration under Section 4(2) of the Securities Act of 1933.
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>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1995 1996 1997(1) 1998(2) 1999(3)
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
Total Revenue.................... $ 26,972 $ 33,242 $ 49,455 $ 74,766 $ 120,760
Commission and Fee Expense....... 16,890 21,049 32,439 46,111 53,108
---------- ---------- ---------- ---------- ----------
Gross Profit........... 10,082 12,193 17,016 28,655 67,652
---------- ---------- ---------- ---------- ----------
Operating Expenses
General and Administrative..... 7,955 8,579 11,504 19,616 45,153
Amortization of Intangibles.... -- -- 295 1,232 4,370
Non-recurring Expense(4)....... -- -- -- 4,800 --
---------- ---------- ---------- ---------- ----------
Income from
Operations........... 2,127 3,614 5,217 3,007 18,129
Interest
Income......................... 200 121 189 565 329
Expense........................ (7) -- (1,112) (3,166) (3,548)
---------- ---------- ---------- ---------- ----------
Income Before Taxes.............. 2,320 3,735 4,294 406 14,910
Income Taxes(5).................. 102 181 60 817 6,079
---------- ---------- ---------- ---------- ----------
Net Income (Loss)...... $ 2,218 $ 3,554 $ 4,234 $ (411) $ 8,831
========== ========== ========== ========== ==========
Basic Net Income (Loss) per
Common Share
Net Income (Loss).............. $ 0.39 $ 0.75 $ 1.03 $ (0.08) $ 0.97
Weighted Average Shares........ 5,727,607 4,709,252 4,119,387 5,006,009 9,077,775
Diluted Net Income (Loss) per
Common Share
Net Income (Loss)................ $ 0.39 $ 0.75 $ 0.99 $ (0.08) $ 0.95
Weighted Average Shares.......... 5,727,607 4,709,252 4,398,593 5,006,009 9,328,939
Dividends per common share....... $ 0.29 $ 0.36 $ 1.32 $ -- $ --
BALANCE SHEET
Cash and Cash Equivalents........ $ 3,969 $ 4,882 $ 3,783 $ 12,102 $ 4,832
Total Assets..................... 9,887 8,525 36,901 67,493 124,859
Debt:
Current..................... 4,325 4,344 7,252
Long Term................... 32,838 24,713 35,473
Total Liabilities................ 4,099 4,713 42,581 37,795 62,491
Stockholders' Equity (Deficit)
*(6)........................... 5,788 3,812 (5,680)* 29,698 62,368
</TABLE>
- ---------------
(1) Includes the results of operations attributable to the assets acquired from
Bank Compensation Strategies for the period beginning September 1, 1997, the
effective date.
16
<PAGE> 19
(2) Includes the results of operations attributable to the assets acquired from
Schoenke from the period beginning September 1, 1998, and also includes the
results of operations attributable to the assets acquired from Wiedemann &
Johnson for the period beginning November 1, 1998.
(3) Includes the results of operations attributable to the acquisition of The
Wamberg Organization and Wamberg Financial Corporation for the period
beginning September 1, 1999 and the purchase of a portion of the renewal
revenue due under the principal office agreement with W. T. Wamberg and The
Wamberg Organization for the period beginning January 1, 1999. Also includes
the results of operations attributable to the acquisition of National
Institute for Community Banking, effective on January 1, 1999. Also includes
the results of operations attributable to the acquisition of Management
Compensation Group/HealthCare for the period beginning April 1, 1999.
(4) We accrued $4.8 million in July 1998 for the fair value of put warrants, we
extinguished these warrants representing 1,525,424 shares of common stock,
by paying $4.8 million to the warrant holders in connection with our initial
public offering. The amount of this payment, which was not tax deductible,
was based upon a negotiated formula determined in the context of our
contractual commitments under the warrants and our business relationship
with the warrant holders.
(5) For periods prior to July 31, 1998, income tax expense reflects the
Clark/Bardes' liability for state income taxes only. No provision for
federal income taxes had been made prior to July 31, 1998 because our
predecessor company elected to be treated as an S corporation for federal
income tax purposes.
(6) Reflects the decrease in stockholders' equity resulting from our predecessor
company's repurchases of 2.6 million shares of its common stock for total
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
(Tables shown in thousands of dollars, except per share amounts)
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with our financial
statements, the notes thereto and other information appearing elsewhere in this
Form 10-K.
OVERVIEW
1999 marked a year in which we achieved solid financial results as we
continued to grow internally and through acquisitions. We reported net income of
$4.9 million, or $0.50 per diluted share, for the fourth quarter, and net income
of $8.8 million, or $0.95 per diluted share, for the year ended December 31,
1999. In 1998, we reported net income of $2.2 million, or $0.27 per diluted
share, for the fourth quarter and a loss of $411,000, or $0.08 per diluted share
for the twelve month period ended December 31, 1998.
Our results for the year ended December 31, 1998, were adversely impacted
by a non-recurring operating charge of $4.8 million to reflect a fair value
adjustment for put warrants previously issued to some of our former note
holders. In addition, we received the benefit of a deferred tax asset of $1.8
million arising from conversion from an S to a C corporation. Had these items
not occurred, net income for the twelve months ended December 31, 1998, would
have been $3.2 million, or $0.57 per diluted share.
ACQUISITIONS
Our acquisition program remains unchanged since it began with the purchase
of Bank Compensation Strategies in September 1997. We seek to acquire
well-managed and growing companies that will provide an entry into a new and
expanding market, as did BCS and MCG, or add to existing businesses as did
Schoenke and The Wamberg Organization.
The companies we acquire are typically privately owned and structured as S
corporations for federal income tax purposes, where virtually all of the income
is passed on to the shareholders. Accordingly, our evaluation focus is on the
quality of the management and future earnings and growth potential. Typically,
we
17
<PAGE> 20
also acquire the financial value embedded in a strong book of recurring renewal
business to be realized for many years after the acquisition takes place.
Banking Consultants of America and Financial Institutions Services, Inc.
On October 6, 1999, we acquired all of the assets of Banking Consultants of
America and Financial Institutions Services, Inc. Banking Consultants of America
and Financial Institutions Services, Inc. is a strong regional firm in the
Memphis, Tennessee area and was acquired as part of our Bank Compensation
Strategies division. The purchase price was $1.4 million and approximately
$28,000 of expenses. The acquisition was accounted for as a purchase and the
entire purchase price was allocated to the inforce revenue acquired in the
transaction.
The Wamberg Organization and Wamberg Financial Corporation
On September 1, 1999, we acquired substantially all the assets and assumed
certain liabilities of The Wamberg Organization, and stock of Wamberg Financial
Corporation. The sole shareholder of both of these companies was W. T. Wamberg,
our Chairman and Chief Executive Officer. We acquired all of the remaining
renewal commission not previously acquired, and some liabilities, principally
operating expenses and employee benefits. In addition, we acquired intellectual
property, customer lists, and all rights under existing contracts, leases and
agreements as well as an airplane leased to the Wamberg Organization by Wamberg
Financial Corporation.
The Wamberg Organization has historically produced our largest volume of
revenue -- 17.5% of total revenue in 1998 and 15.2% to August 31, 1999. In light
of the relationship between The Wamberg Organization, Wamberg Financial
Corporation, W. T. Wamberg and us, our board appointed a special committee of
independent, non-employee directors to review the terms of the transaction.
After analyzing the matter and considering all relevant issues, the special
committee recommended that our board approve the transaction.
The total price of the net assets of The Wamberg Organization and the stock
of Wamberg Financial Corporation was $18.0 million and provided for:
- a cash payment of $12.4 million of which $360,000 is held in escrow;
- a cash payment to W. T. Wamberg of $50,000 for his shares of Wamberg
Financial Corporation;
- the direct payment of $1.5 million for outstanding loans of The Wamberg
Organization;
- the assumption of a $3.8 million note payable for the purchase of a
corporate aircraft; and
- expenses of approximately $265,000.
The cash portion of $14.2 million was funded through our existing cash
balances.
In addition to the acquisition price on September 1, 1999, the total
purchase price will include the unamortized balance of $6.9 million resulting
from a purchase on January 4, 1999, of the right to receive approximately 27.5%
of the renewal revenue from certain inforce policies, due The Wamberg
Organization, for a cash payment of $7.5 million. Concurrent with the
acquisition of The Wamberg Organization, we purchased all of the renewal revenue
not acquired on January 4, 1999.
The total initial cost of acquiring the Wamberg Companies is $24.9 million
which includes the $6.9 million unamortized balance of the January purchase. In
addition, cash payments of $11.9 million will be made if The Wamberg
Organization attains certain operating income targets in years 1999 through
2002. These payments are conditional solely on achieving the earnings objectives
and no other condition, such as the continued employment of Mr. Wamberg, has
been imposed. As of December 31, 1999, the financial objectives for that year
had been met and a cash payment of $1.5 million will be made to W.T. Wamberg in
the first quarter of 2000 and will be recorded as additional purchase price. The
acquisition is being accounted for as a purchase and the entire excess purchase
price paid has been allocated to the net present value of future
18
<PAGE> 21
revenue to be received until September 1, 2018. This is being amortized on the
basis of the lapsing annual net present value of the remaining years revenue.
On December 22, 1999, the airplane was sold to a leasing company for $4.3
million and Wamberg Financial Corporation entered into a ten-year lease for the
plane at a rental of $27,924 per month. The net proceeds from the sale were used
to repay the note incurred for the original purchase and the net, after-tax
proceeds have been reflected as a reduction of the purchase price. Under the
terms of the lease, Wamberg Financial Corporation can purchase the plane for 85%
of its original cost of $3.7 million after six years or, after ten years, renew
the lease, return the plane or purchase the plane at fair value at that time.
For the period prior to the acquisition, The Wamberg Organization and
Wamberg Financial Corporation had combined revenue and net income as follows:
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS
DECEMBER 31, ENDED
---------------- JUNE 30,
1998 1997 1999
------- ------ -----------
<S> <C> <C> <C>
Revenues............................................... $10,169 $8,829 $7,628
Net Income............................................. $ 4,005 $3,000 $2,396
</TABLE>
Both The Wamberg Organization and Wamberg Financial Corporation were S
corporations and did not pay federal income taxes directly.
The pro forma information below presents our results of operations and
those of The Wamberg Organization and Wamberg Financial Corporation as if the
acquisition occurred on January 1, 1998, reflecting the purchase method of
accounting.
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
------------------
1999 1998
-------- -------
<S> <C> <C>
Pro forma:
Revenues.................................................. $120,760 $74,766
Net income................................................ 6,751 725
Diluted earnings per share................................ .72 .13
</TABLE>
National Institute for Community Banking
On May 18, 1999, we acquired National Institute for Community Banking
(NICB), which, by agreement with its shareholders, was effective January 1,
1999. The acquisition was consummated by merging NICB into us with the NICB
shareholders receiving 99,851 shares of our common stock at $16 per share for a
total value of $1.6 million. As part of the agreement, the NICB shareholders
will receive an additional 384,452 shares of our common stock as consideration
if stipulated revenue and income goals during the years 1999 through 2002 are
achieved. Acquisition expenses were approximately $130,000. NICB was acquired as
an addition to and an expansion of our BCS division.
During 1999, the former NICB shareholders achieved the revenue and income
goals set forth in the agreement for 1999 and an additional 96,113 shares CBH
common were issued to them on January 26, 2000. The value of the shares was $1.4
million and will be accounted for as additional goodwill amortized over
twenty-four years.
MANAGEMENT COMPENSATION GROUP/HEALTHCARE
On April 5, 1999, we purchased the assets and business and assumed certain
liabilities of Phynque, Inc., d/b/a Management Compensation Group/HealthCare
(MCG) for a purchase price of $35.9 million consisting of the following:
- a cash payment of $13.8 million;
- a promissory note for $8.7 million;
19
<PAGE> 22
- 326,363 shares of common stock, having an aggregate value of $5.3 million
based on the closing price of the common stock on April 5, 1999;
- the direct payment of $3.6 million for certain outstanding loans; and
- the assumption of $4.2 million of liabilities and payment of
approximately $372,000 of closing costs.
The assets acquired included cash, receivables, equipment, intellectual
property, and client lists. The liabilities assumed include commissions,
employee benefits and operating expenses. The $17.8 million cash portion of the
purchase price was funded by a borrowing under our credit facility. The
promissory note is payable in thirty-two equal quarterly installments of
principal and interest at 10% per annum starting April 5, 2000 and it is
guaranteed personally by W. T. Wamberg, our Chairman and Chief Executive
Officer. MCG is a 168 employee executive benefit consulting organization
servicing the healthcare industry and is headquartered in Minneapolis,
Minnesota.
The acquisition of MCG marked our entrance into the not-for-profit
healthcare executive benefit and compensation plan business with the creation of
our newest major operating division, HealthCare Compensation Strategies.
For the periods prior to the acquisition, MCG had revenue and net income as
follows:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED SIX MONTHS
SEPTEMBER 30, ENDED
------------------- MARCH 31,
1998 1997 1999
-------- -------- ----------
<S> <C> <C> <C>
Revenues............................................... $26,000 $21,939 $10,986
Net Income (loss)...................................... $ 1,816 $ 379 $(1,696)
</TABLE>
MCG was an S corporation and, accordingly, did not pay federal income
taxes.
The pro forma information below presents our results of operations and that
of MCG combined as if the acquisition had occurred on January 1, 1998,
reflecting the purchase method of accounting.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1999 1998
---------- ----------
<S> <C> <C>
Pro forma:
Revenues.................................................. $126,518 $100,876
Net income (loss)......................................... 7,464 (1,826)
Diluted earnings (loss) per share......................... .79 (.34)
</TABLE>
POSSIBLE ACQUISITION
On February 7, 2000, we signed a letter of intent to acquire substantially
all the assets and assume certain liabilities of a group of privately held
companies, engaged in the sale of executive benefit and compensation plans to
medium and large corporations.
The total purchase price of the assets, excluding assumed liabilities and
acquisition expenses is expected to be approximately $50 million consisting of:
- a cash payment at closing of $30.1 million,
- 308,428 shares of our common stock with an agreed upon value of $4.9
million
- contingent payments of $15 million based on achieving predetermined
levels of earnings before interest, taxes depreciation and amortization
for the years 2000 through 2004.
This acquisition is expected to be funded by borrowing under CBI's bank
line of credit.
The acquisition will be accounted for as a purchase with the purchase price
allocated first to the net present value of future cash flow from renewal
revenue and the remainder, if any, to goodwill.
20
<PAGE> 23
The transaction is subject to a number of conditions including an on-going
review of the target's financial and business affairs, execution of definitive
purchase agreements, approval of both companies' boards of directors and the
consent of our lenders, among other things.
OTHER DEVELOPMENTS
Private Placement with Conning
On June 7, 1999, we sold 1,000,000 shares of our common stock at $17 per
share to Conning Insurance Capital Limited Partnership V, L. P. (Conning) in a
private placement. As part of the private placement, we granted Conning
registration rights, which they may use to have their shares of our common stock
registered along with any shares we may be registering with the SEC, after
December 31, 2002.
We also appointed a representative of Conning, Steven F. Piaker, Senior
Vice President, to our board of directors. We further agreed that, when Mr.
Piaker's term expires, we would use our best efforts to elect a Conning
representative to our board of directors. Proceeds of the $17 million sale of
our common stock were used to reduce outstanding debt and for acquisitions.
General American Life Insurance Company
During 1999, one of the carriers we use, General American Life Insurance
Company experienced financial difficulties as a result of being unable to meet
withdrawal requests under certain guaranteed investment contracts General
American had issued. General American represented approximately 6.0% of total
revenue in 1998 and 4.8% of total revenue in 1999. Upon learning of these
matters, we ceased selling programs financed by insurance policies underwritten
by General American. Since that time, General American's life insurance business
has been sold to MetLife, its financial ratings upgraded and we expect to
continue to use General American and MetLife as carriers.
Adverse Tax Court Decision Regarding Leveraged Corporate Owned Life Insurance
On October 19, 1999, the U. S. Tax Court issued a decision denying the
deductibility of interest on policy loans in connection with a leveraged
corporate owned life insurance (COLI) program. In addition, the Internal Revenue
Service has launched a major program against other companies that have purchased
leveraged COLI policies. We have not offered leveraged COLI in our product
offerings since 1995. Consequently, we do not expect any adverse effects of this
recent Tax Court ruling on our future new business revenue stream. However,
because of the varied facts and circumstances surrounding each case, it is
impossible to determine the effects of this case on a client's decision to
continue or surrender any existing policy. Because of the number of other
variables, including adverse tax implications resulting from a surrender,
management does not believe this decision will have any material adverse effects
on us.
REVENUE
Our operating units derive their revenue primarily from:
- commissions paid by the insurance companies that underwrite the policies
underlying the various non-qualified benefit programs;
- fees paid by clients in connection with program design and administrative
services; and
- executive compensation program and benefit consulting fees.
Our revenue is usually long term and recurring, is typically paid annually
and extends for a period of ten years or more after the sale. Commissions paid
by insurance companies vary by policy and by program and usually represent a
percentage of the premium or the cash surrender value of the insurance policies
underlying our program.
Total revenue includes first year commissions, renewal commissions and
fees.
21
<PAGE> 24
- First Year Commission Revenue. First year revenue is recognized at the
time the application is substantially completed, the client is
contractually committed to purchase the insurance policies, and the
premiums are paid by the client to the insurance company.
- Renewal Commission Revenue. Renewal revenue is recognized on the date
that the renewal premium is due or paid to the insurance company. Renewal
revenue in future periods, which is not recorded on our balance sheet, is
estimated to be approximately $246 million over the next five years.
However, renewal revenue can be affected by policy surrenders or
exchanges, material contract changes, asset growth and case mortality
rates. Over the last five years, we have experienced a persistency rate
of approximately 95% of the accrued inforce insurance underlying our
programs. We can give no assurances that our persistency rate will remain
at this level. As we continue to diversify and acquire companies
specializing in different market segments, our persistency rates can
begin to vary significantly. While we intend to do all we can to retain
our clients, service their accounts and sustain our persistency, there
can be no assurance our persistency rates will remain at this level.
- Other Revenue. Other revenue consists of several sources of revenue
associated with our operations including consulting and administrative
fees.
QUARTERLY RESULTS
Our operating results can fluctuate considerably, especially when compared
on a consecutive quarterly basis, and we can experience large increases in
revenue in the fourth quarter. In addition, operating results can be affected by
a number of other factors, including:
- introduction of new or enhanced programs and services by us or our
competitors;
- client acceptance or rejection of new programs and services;
- program development expenses;
- demand for administrative services;
- competitive, legislative and regulatory changes; and
- general economic conditions.
Many of these factors are beyond our control. The sales cycles of our
Clark/Bardes Division often takes between twelve to eighteen months, with first
year revenue coming from a few large cases. Our revenue is thus difficult to
forecast, and we believe that comparing our consecutive quarterly results of
operations is not necessarily meaningful, nor does it indicate what results we
will achieve for any subsequent period. In our business, past operating results
have not been reliable indicators of future performance.
The following table presents a summary of key revenue and expense
statistics for the most recent eight calendar quarters. This information is not
necessarily indicative of results for any full year or for any subsequent
period.
<TABLE>
<CAPTION>
MAR. JUNE SEPT. DEC. MAR. JUNE SEPT. DEC.
1998 1998 1998 1998 1999 1999 1999 1999
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue................................. $13,754 $15,230 $17,641 $28,141 $24,057 $29,714 $25,654 $41,335
% of annual........................... 18.4% 20.4% 23.6% 37.6% 19.9% 24.6% 21.2% 34.2%
Gross profit............................ 4,622 6,159 6,589 11,285 9,874 16,681 15,198 25,899
Ratio................................. 33.6% 40.4% 37.4% 40.1% 41.0% 56.1% 59.2% 62.7%
Operating expenses...................... 3,380 5,029 4,613 6,594 6,255 12,202 11,332 15,364
Amortization............................ 221 221 356 434 620 1,152 1,237 1,361
Operating income before non-recurring
expense............................... 1,021 909 1,620 4,257 2,999 3,327 2,629 9,174
% of revenue.......................... 7.5% 6.0% 9.2% 15.1% 12.5% 11.2% 10.3% 22.2%
% of gross profit..................... 22.3% 14.8% 24.6% 37.7% 30.4% 19.9% 17.3% 35.4%
</TABLE>
22
<PAGE> 25
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
% CHANGE
---------------
1999 1998 1997 99/98 98/97
---------- ---------- ---------- ----- ------
<S> <C> <C> <C> <C> <C>
Total revenue........................ $ 120,760 $ 74,766 $ 49,455 61.5 51.2
Commissions and fees................. 53,108 46,111 32,439 15.2 42.1
---------- ---------- ----------
Gross profit......................... 67,652 28,655 17,016 136.1 68.4
% of total revenue......... 56.0% 38.3% 34.4% -- --
General and administrative
expenses........................... 45,153 19,616 11,504 130.2 70.5
% of total revenue......... 37.4% 26.2% 23.3%
Amortization of intangibles.......... 4,370 1,232 295 254.7 317.6
% of total revenue......... 3.6% 1.6% 0.6% -- --
Income before non recurring item and
income taxes....................... 14,910 5,206 4,294 186.4 21.2
% of total revenue......... 12.3% 7.0% 8.7% -- --
Effective tax rate................... 40.8% 201.2% 1.4% -- --
Net income (loss).................... $ 8,831 $ (411) $ 4,234 -- --
% of total revenue......... 7.3% -- 8.6% -- --
Per common share
Basic
Net income (loss).......... $ 0.97 $ (0.08) $ 1.03 -- --
Weighted average shares.... 9,077,775 5,006,009 4,119,387 81.3 21.5
Diluted
Net income (loss).......... $ 0.95 $ (0.08) $ 0.99
Weighted average shares.... 9,328,939 5,006,009 4,398,593 86.4 13.8
</TABLE>
REVENUE
Revenue growth from existing business units was mixed for the year ended
December 31, 1999. Overall, revenue for the periods can be summarized as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1999 1998
---------- ---------
<S> <C> <C>
Existing business units..................................... $100,691 $54,657
Acquisitions................................................ 20,069 20,109
-------- -------
Total............................................. $120,760 $74,766
</TABLE>
For 1999, acquisitions contributed 16.6% of revenue compared to 26.9% for
1998. By definition, we consider any revenue source appearing in the first full
twelve months of operating results as being from acquisitions. After that, they
become part of existing business.
23
<PAGE> 26
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------
1999 1998
-------- -------
<S> <C> <C>
First year revenue:
Clark/Bardes.............................................. $ 33,547 $13,379
Bank Compensation Strategies.............................. 21,614 23,462
HealthCare Compensation Strategies........................ 12,516 --
-------- -------
67,677 36,841
-------- -------
Renewal revenue:
Clark/Bardes.............................................. 39,981 32,029
Bank Compensation Strategies.............................. 9,243 5,896
HealthCare Compensation Strategies........................ 3,859 --
-------- -------
53,083 37,925
-------- -------
Total............................................. $120,760 $74,766
======== =======
</TABLE>
First Year Revenue
CBH continues to experience significant growth in first year revenue from
both its existing businesses and from acquisitions.
<TABLE>
<CAPTION>
INCREASE
--------------
1999 1998
------- ----
<S> <C> <C>
Existing business........................................... $17,040
Acquisitions................................................ 13,796
-------
$30,836 83.7%
======= ====
</TABLE>
During 1999, a significant percentage of our first-year revenue was
generated from the large-bank market. In this market, we were able to
restructure certain commission arrangements on existing products with our
insurance carriers in order to receive a higher percentage of new-business
revenue in the first year for our independent producers and ourselves while
retaining favorable product performance for our clients. The result of this
restructuring is that we received $5.9 million more of gross revenue in 1999
than we would have if this restructuring had not taken place. In addition,
several large-bank cases were sold using a separate-account product, which
typically generates a higher percentage of first-year commission than our
historical general-account products used in the large-bank market.
All of our first-year revenue is and always has been subject to
charge-back, which gives the insurance company the ability to recover
commissions paid in the event a policy prematurely terminates. Our charge-back
schedules differ by product, and typically apply to first-year commission only.
A typical charge-back schedule, based on a percent of first year commission, is
as follows:
<TABLE>
<S> <C> <C> <C> <C>
Year 1 Year 2 Year 3 Year 4 Year 5+
100% 50% 50% 25% 0%
</TABLE>
As a condition to certain restructured contracts discussed above, the
carriers imposed a higher charge-back schedule, which varies by product and is
typically as follows:
<TABLE>
<S> <C> <C> <C> <C> <C>
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6+
100% 100% 75% 50% 25% 0%
</TABLE>
This revised charge-back schedule relates primarily to certain sales in our
large-bank market. Historically, commission charge-backs are rare, and we have
never experienced a charge-back for policies placed in the large-bank market.
24
<PAGE> 27
Renewal Revenue
Our renewal revenue grows through acquisition, and through new business
that generates recurring revenues after the year of sale. As the acquired
divisions and first year revenue continue to grow, renewal revenue will grow as
well. The rate of growth of our renewal revenue is influenced by our acquisition
activity and new business product mix. For example, as we discussed previously,
we made certain large-bank sales with products that generate a higher percentage
of first-year commission than our historical products used in the large-bank
market. This results in a lower growth in renewal revenue in the subsequent year
than would have been achieved with the sale of our historical products. Our
renewal revenue grew at a 40.0% rate for the year, which is broken down as
follows:
<TABLE>
<CAPTION>
INCREASE
-----------------
1999 - 1998
-----------------
<S> <C> <C>
Existing business........................................... $ 8,885
Acquisitions................................................ 6,273
-------
$15,158 40.0%
======= =====
</TABLE>
The following table represents the gross renewal revenue associated with
our inforce business-owned life insurance policies as of December 31, 1999. This
projected gross revenue is not adjusted for mortality, lapse, or other factors
that may impair realization. We cannot assure you that commissions under these
policies will be received. These projected gross revenues are based on the
beliefs and assumptions of management and are not necessarily indicative of the
revenue that may actually be achieved in the future.
PROJECTED GROSS RENEWAL REVENUE
AS OF DECEMBER 31, 1999
<TABLE>
<CAPTION>
BANK HEALTHCARE
CLARK COMPENSATION COMPENSATION
BARDES STRATEGIES STRATEGIES TOTAL
-------- ------------ ------------ --------
<S> <C> <C> <C> <C>
2000............................................. $ 40,915 $10,776 $ 7,282 $ 58,973
2001............................................. 38,522 7,000 7,219 52,741
2002............................................. 36,715 3,952 7,172 47,839
2003............................................. 34,058 3,969 7,047 45,074
2004............................................. 30,530 3,954 6,841 41,325
2005............................................. 30,227 3,934 6,632 40,793
2006............................................. 30,104 3,932 6,409 40,445
2007............................................. 28,238 3,939 6,139 38,316
2008............................................. 26,552 3,951 5,595 36,098
2009............................................. 26,589 3,983 5,070 35,642
-------- ------- ------- --------
Total.................................. $322,450 $49,390 $65,406 $437,246
======== ======= ======= ========
Ten-Year Projection as of December 31, 1998...... $299,120 $40,223 $ -- $339,343
======== ======= ======= ========
</TABLE>
COMMISSION EXPENSE AND GROSS PROFIT
While increases in commission expense are closely correlated with increases
in gross revenue, an important operating measurement is gross profit. This is
the amount of revenue we keep after paying commissions to our sales force.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1999 1998
--------- ---------
<S> <C> <C>
Commission and fee expense.................................. $53,108 $46,111
Gross profit................................................ $67,652 $28,655
Gross profit ratio.......................................... 56.0% 38.3%
</TABLE>
25
<PAGE> 28
Our gross profit increased 136.1% for the year as compared to 1998. Several
factors contributed to this improvement:
- the acquisitions of The Wamberg Organization and NICB -- the effect of
which is to eliminate a commission expense that was previously being paid
to certain sales representatives of these organizations on both first
year and renewal revenue;
- the acquisitions of MCG/HealthCare which generates its revenue through
in-house sales staff who are paid a lower commission percentage than our
traditional independent representatives; and
- a higher volume of first year revenue coming from internal sales efforts.
<TABLE>
<CAPTION>
INCREASE
-----------------
1999 - 1998
-----------------
<S> <C> <C>
Twelve months:
Existing business......................................... $21,470
Acquisitions.............................................. 17,527
-------
$38,997 136.1%
======= =====
</TABLE>
Gross profit for each operating unit is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1999 1998
--------- ---------
<S> <C> <C>
Clark/Bardes................................................ $37,370 $19,058
Bank Compensation Strategies................................ 15,727 9,597
HealthCare Compensation Strategies.......................... 14,555 --
------- -------
$67,652 $28,655
======= =======
Percent of revenue:
Clark/Bardes.............................................. 50.8% 42.0%
Bank Compensation Strategies.............................. 51.1% 32.7%
HealthCare Compensation Strategies........................ 88.5% --
Total Company..................................... 56.0% 38.3%
</TABLE>
In addition, the gross profit on the ten-year projected inforce renewal
revenue improved substantially from the prior year, as shown in the table below.
<TABLE>
<CAPTION>
*TEN-YEAR PROJECTED
RENEWAL REVENUE
AS OF DECEMBER 31,
---------------------
1999 1998
-------- --------
<S> <C> <C>
Revenue..................................................... $437,243 $339,343
Commission and fee expense.................................. 108,986 156,792
-------- --------
Gross profit................................................ $328,257 $182,551
Gross profit ratio.......................................... 75.1% 53.8%
</TABLE>
- ---------------
* This projected revenue is not adjusted for mortality, lapse, or other factors
that may impair realization. We cannot assure you that commissions revenue
under these policies will be received. These projected gross revenues are
based on the beliefs and assumptions of management and are not necessarily
indicative of the revenue that may actually be achieved in the future.
Because of the acquisition of The Wamberg Organization and NICB, commission
and fee expense actually declined from 1998 to 1999. The gross profit on our
ten-year projected renewal revenue as of December 31, 1999 increased 79.8% from
a year ago.
26
<PAGE> 29
GENERAL AND ADMINISTRATIVE EXPENSES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1999 1998
--------- ---------
<S> <C> <C>
Clark/Bardes................................................ $15,524 $12,259
Bank Compensation Strategies................................ 11,192 5,315
HealthCare Compensation Strategies.......................... 12,570 --
Corporate overhead -- note.................................. 5,867 2,042
------- -------
$45,153 $19,616
======= =======
Percent of gross profit:
Clark/Bardes.............................................. 41.5% 64.3%
Bank Compensation Strategies.............................. 71.2% 55.4%
HealthCare Compensation Strategies........................ 86.4% --
Total Company..................................... 66.7% 68.5%
</TABLE>
- ---------------
Note -- prior to 1998, corporate overhead was included in the Clark/Bardes
Division.
The increase in general and administrative expenses should be reviewed in
the same context as the decrease in commission expense. Since the beginning of
the year, four significant events have affected this relationship:
(1) acquisition of The Wamberg Organization;
(2) prior to our acquiring NICB, it functioned as an independent producer for
BCS. With the acquisition, commission previously paid to NICB by BCS has
been replaced, in part, by salaries to the former owners;
(3) consolidation of certain financial and administrative functions into our new
corporate offices in North Barrington, Illinois; and,
(4) with the acquisition of MCG (now HCS), all of HCS' sales force is company
personnel thus, HCS does not rely on any independent producers.
The overall increase is general and administrative expense may be analyzed
as follows:
<TABLE>
<CAPTION>
INCREASE
-----------------
1999 - 1998
-----------------
<S> <C> <C>
Existing business........................................... $ 9,951
Acquisitions................................................ 15,586
-------
$25,537 130.2%
======= =====
</TABLE>
An important factor to consider, however, is that the rate of increase in
general and administrative expenses remains lower than the rate of increase in
gross profit. By way of comparison for the periods:
<TABLE>
<CAPTION>
INCREASE
-----------------
1999 - 1998
-----------------
<S> <C> <C>
Gross profit................................................ $38,997 136.1%
General and administrative expense.......................... $25,537 130.2%
</TABLE>
OPERATING INCOME
Operating income increased substantially in 1999 over the full year 1998.
The increase in expense is more than offset by the combined benefit of;
- revenue growth, principally in the large bank market, and
- improved gross profits
27
<PAGE> 30
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1999 1998 % INC./(DEC)
---------- ---------- ------------
<S> <C> <C> <C>
Gross profit.............................................. $ 67,652 $ 28,655 136.1%
General and administrative expenses....................... (45,153) (19,616) 130.2%
Amortization of intangibles............................... (4,370) (1,232) 254.7%
-------- --------
Operating income before non-recurring item................ 18,129 7,807 132.2%
Put warrants -- non-recurring............................. -- (4,800) --
-------- --------
Operating income.......................................... $ 18,129 $ 3,007 502.9%
======== ========
</TABLE>
Each operating unit contributed positively to our operating income before
the non-recurring item. Comparing our divisions;
<TABLE>
<CAPTION>
1999 1998
----------------- -----------------
$ %/TOTAL $ %/TOTAL
------- ------- ------- -------
<S> <C> <C> <C> <C>
Clark/Bardes........................................... $19,751 108.9% $ 6,552 83.9%
Bank Compensation Strategies........................... 3,621 20.0% 3,297 42.2%
HealthCare Compensation Strategies..................... 624 3.4% -- --
Corporate overhead..................................... (5,867) (32.3%) (2,042) (26.1%)
------- -------
$18,129 $ 7,807
======= =======
</TABLE>
The relative contribution between existing businesses and acquisitions to
operating income is as follows:
<TABLE>
<CAPTION>
INCREASE
-----------------
1999 - 1998
-----------------
<S> <C> <C>
Existing business........................................... $ 8,920
Acquisitions................................................ 1,402
-------
$10,322 132.2%
======= =====
</TABLE>
Amortization of intangibles: Amortization expense increased $3.1 million
for the year ended December 31, 1999.
Since September 1997, we have completed four major and three smaller
acquisitions for a total cost of over $100 million. These companies have a
relatively small amount of tangible assets such as accounts receivable and
equipment with the result that most, and in some cases all, of the purchase
price is allocated to intangible assets:
- first is the net present value of the realizable cash flow based on
forecasts we receive from the target and their carriers. These projects
can extend over thirty years and are valued at their present value. The
annual amortization is the net decrease in the remaining present value of
the renewal premiums in the revenue stream; and,
- the remaining excess purchase price is allocated to goodwill. At present,
goodwill is amortized over twenty-five to forty years. The Financial
Accounting Standards Board has announced its intention to issue a new
standard calling for, among other things, that goodwill be amortized over
a period not to exceed twenty years. While we do not anticipate
retroactive application of this proposed new standard, we intend to fully
comply our policy with the standard as it is eventually issued.
In addition to the net present value of inforce revenues and goodwill,
intangibles also include the value of non-competition agreements negotiated with
selling shareholders. These are amortized over their terms on a straight line
basis.
Non-recurring operating expense: In 1998, we recognized a $4.8 million
expense for the increased market value of certain put warrants. Other than our
employee stock option plans, we do not have any other convertible securities
outstanding.
28
<PAGE> 31
INTEREST EXPENSE
Net interest costs increased $618,000 or 23.8% for the full year 1999
compared with 1998. The entire additional expense resulted primarily from a net
increase in borrowings of $13.7 million.
- the cash cost of the MCG/HealthCare acquisition -- $17.8 million was
accomplished through bank borrowings and we issued an $8.7 million
promissory note
- we purchased a stream of renewals from the Wamberg Organization in
January 1, 1999, for $7.5 million
- we sold 1,000,000 shares of our common stock to Conning for $16.9
million, net, and applied the proceeds to outstanding bank debt
- we paid down $5.0 million from operating funds
- we borrowed $2.0 million for small acquisitions and working capital.
With increased borrowings as a result of our acquisition program, these
costs may be expected to increase in subsequent quarters.
FEDERAL INCOME TAXES
Federal and state income tax expense was 40.8% of income before taxes for
the year ended December 31, 1999. This compares to a 40% statutory combined
federal and state income tax rate. Like most corporations, we have a certain
amount of expenses that are not deductible for federal income tax purposes. They
are closely controlled and do not exceed the amounts management deems prudent
for such outlays.
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 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.
29
<PAGE> 32
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.
Interest Expense -- Net. Interest expense for the year ended December 31,
1998 was $2.6 million compared to $921,000 for the year ended December 31, 1997.
The amount for the year ended December 31, 1998 included interest income of
$566,000 and interest expense of $3.2 million as compared to interest income of
$189,000 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.
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 $817,000 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 $411,000 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.
LIQUIDITY AND CAPITAL RESOURCES.
Selected Measures of Liquidity and Capital Resources.
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- ------
<S> <C> <C> <C>
Cash and cash equivalents................................... $ 4,832 $12,102 $3,783
Working capital............................................. (2,768) 7,155 2,294
Current ratio............................................... .90 1.55 1.23
Shareholders' equity per common share(1).................... $ 6.47 $ 3.62 $(1.04)
Debt to total capitalization(2)............................. 40.7% 49.5% 118.0%
</TABLE>
30
<PAGE> 33
- ---------------
(1) total stockholders' equity divided by actual shares outstanding at year end
excluding shares on option
(2) current debt plus long term debt divided by current debt plus long term debt
plus stockholders' equity
In addition to our recognized balance sheet assets and liabilities, we have
an on going renewal revenue stream, that over the next ten years is estimated to
be $437 million. Discounting these renewals to net present value of the
estimated realizable amounts, adjusted for a 95% persistency rate, at the U.S.
Treasury thirty year bond rate yield was as follows for the last three years:
<TABLE>
<S> <C>
1999..................................................... $252,355
1998..................................................... 210,623
1997..................................................... 187,157
</TABLE>
We continue to generate strong cash flow from operations. As a financial
company with strong operating cash flow, we have little need to retain
substantial cash balances. We use the net cash from operating activities to fund
capital expenditures and small acquisitions. We expect that large future
acquisitions will be financed primarily through externally available funds.
However, we can offer no assurance that such funds will be available and, if so,
on terms acceptable to us.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1999 1998 CHANGE
---------- ---------- --------
<S> <C> <C> <C>
Cash flows from (used in):
Operations................................................ $ 12,552 $ 4,164 $ 10,678
Investing................................................. (40,282) (19,194) (24,246)
Financing................................................. 20,460 23,349 (2,021)
</TABLE>
Cash Flows from Operating Activities
Our cash flow from operations for the twelve months ended December 31,
1999, improved significantly over that of the comparable twelve month period in
1998. The components were:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, INCREASE/
---------------- (DECREASE)
1999 1998 IN CASH
------- ------ ----------
<S> <C> <C> <C>
Net income (loss) plus non-cash expenses................ $14,016 $1,476 $12,540
Changes in operating assets and liabilities............. (1,464) 2,688 (2,208)
------- ------ -------
Cash flow from operating activities..................... $12,552 $4,164 $10,332
======= ====== =======
</TABLE>
In this regard, it is noted that the working capital ratio declined to .90
to one at December 31, 1999 compared with 1.55 to one at December 31, 1998. As
an acquiring company, a significant amount of borrowing is done to finance our
acquisitions. Because of this and the strong cash generated by operations,
management has determined to dedicate all excess cash to the reduction of bank
borrowings and, as a result, only cash for reasonably foreseeable needs and
expenses is retained. As an example, the entire $13.8 million cash portion of
the acquisition of The Wamberg Organization and Wamberg Financial Corporation
was accomplished without any additional borrowings.
Cash Used in Investing Activities
Acquisitions accounted for $38.6 million of the $43.4 million used in
investing activities. The balance was comprised of $5.1 million for purchase of
equipment and various assets such as deferred debt expenses.
Cash spending for acquisitions included:
<TABLE>
<S> <C>
- - MCG/HealthCare............................................ $17.8 million
- - The Wamberg Corporation and Wamberg Financial corporation
including the $7.5 million purchase of renewal revenue in
January 1999.............................................. $21.3 million
</TABLE>
31
<PAGE> 34
We expect acquisitions to continue and be financed primarily from available
credit lines and possible additional equity. However, we can offer no assurances
such will be the case.
Cash Flows from Financing Activities
In December 1999, we restructured our $65.0 million credit agreement
entered into in January 1999 with Bank One, into a $100.0 million facility. The
loans are at a floating rate based on the London InterBank Offered Rate or prime
rate at due dates. The loan matures on December 31, 2004, with interest and
principal payable quarterly starting March 31, 2000. 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, limitations on mergers and acquisitions, prohibition of
cash dividends, limitation on investments, loans and advances, and certain
change in control provisions.
We are obligated to pay a commitment fee based on the daily average of
undrawn funds under the credit agreement. The fee is a minimum of .25% and a
maximum of .50% based on the ratio of consolidated indebtedness to income before
interest, taxes, depreciation and amortization on a rolling quarterly basis. A
ratio of one to one produces the lowest fee and three to one, or more, produces
the highest.
In an effort to reduce interest costs, management has directed that all
cash beyond reasonably foreseeable needs be used to pay down debt. In June, we
sold 1,000,000 shares of common stock to Conning Insurance Capital Limited for
$16.9 million in a private placement. Approximately $12 million was used to pay
the debt on our acquisition credit facility.
Depending upon adherence to the criteria in our loan agreements at the time
of draw down, we have $67.0 million available under our credit lines at December
31, 1999.
We believe that our net cash flow from operations will continue to provide
sufficient funds to service our debt obligations. We estimate renewal revenue in
future periods, which is not reflected on our balance sheet, to represent
approximately $246 million over the next five years. However, renewal revenue
can be adversely affected by policy surrenders or exchanges, material contract
changes, asset growth and case mortality rates.
As our business grows, our working capital and capital expenditures
requirements will also continue to increase. We believe that net cash flows from
operations will be sufficient to finance our debt payments, working capital and
capital expenditures for the next twelve months. There can be no assurance,
however, that the net cash flows from operations will be sufficient to meet our
anticipated requirements or that we will not require additional debt or equity
financing within this time frame. We may continue to issue stock to finance
future acquisitions.
MARKET RISK
Our primary market risk exposure is to changes in interest rates as a
result of our line of credit and long-term debt. At December 31, 1999, we had
total outstanding indebtedness of $42.7 million, or approximately 30.9% of total
market capitalization. Our interest rate risk objective is to limit the impact
of interest rate fluctuations on earnings and cash flows and to lower overall
borrowing costs. To achieve this objective, we manage our exposure to
fluctuations in interest rates for borrowings through the use of fixed rate debt
instruments to the extent that reasonably favorable rates are obtainable with
such arrangements and enter into derivative financial instruments such as
interest rate swaps to mitigate interest rate risk and to effectively lock the
interest rate on a portion of our variable debt.
Interest on borrowings under our line of credit is based on one of two
factors, at our option, at the time the funds are borrowed:
- U.S. prime rate, published in the Wall Street Journal, which will float
as adjusted from time to time, for as long as this segment of borrowing
is outstanding; or,
- London InterBank offered rate, which is based on the published rate at
the time of the borrowing and will remain fixed at that rate for as long
as this segment, or any part, of the borrowing is outstanding.
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<PAGE> 35
We do not enter into derivative or interest rate transactions for
speculative purposes. Approximately 22.7% of our outstanding debt was subject to
fixed rates with a weighted average of 9.5% at December 31, 1999. An additional
69.9% of our outstanding debt at December 31, 1999, was effectively locked at an
interest rate of 5.53% plus a spread based on our leverage ratio, through an
interest rate swap agreement for a notional amount of $30.0 million. We
regularly review interest rate exposure on outstanding borrowings in an effort
to minimize the risk of interest rate fluctuations.
The following table provides information about our debt obligations that
are sensitive to changes in interest rates. The table presents principal cash
flows and related weighted average interest rates by expected maturity dates
totaling $42.7 million.
<TABLE>
<CAPTION>
EXPECTED MATURITY DATE
-----------------------------------------------------------------------------------
2000 2001 2002 2003 2004 THEREAFTER TOTAL FAIR VALUE
------- ------- ------- ------- ------ ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
LIABILITIES
Long term debt
Fixed rate............ $ 1,652 $ 948 $ 1,046 $ 1,154 $1,274 $3,650 $ 9,724 $ 9,724
Average interest
rate................ 7.5% 10.0% 10.0% 10.0% 10.0% 10.0%
Variable rate:
U. S. Prime........... $ 600 $ 600 $ 600 $ 600 $ 600 $ 3,000 $ 3,000
London InterBank...... $ 5,000 $ 5,000 $ 5,000 $ 5,000 $5,000 $5,000 $ 30,000 $30,000
Offered
Average interest
rate................ 7.6% 7.6% 7.6% 7.6% 7.6% 7.6%
INTEREST RATE
DERIVATIVES
Interest rate swaps
Variable to fixed
Notional amount....... $30,000 $27,750 $21,750 $15,750 $7,050 $2,250
Average pay rate...... 5.53% 5.53% 5.53% 5.53% 5.53% 5.53%
Average receive
rate................ 7.67% 7.74% 7.84% 8.00% 8.33% 8.33%
</TABLE>
The table incorporates only those exposures that exist as of December 31,
1999, and does not consider exposures or positions that could arise after that
date. In addition, because firm commitments are not represented in the table
above, the information presented therein has limited predictive value. As a
result, our ultimate realized gain or loss with respect to interest rate
fluctuations would depend on the exposures that arise during the future period,
prevailing interest rates, and our hedging strategies at that time. There is
inherent rollover risk for borrowings as they mature and are renewed at current
market rates. The extent of this risk is not quantifiable or predictable because
of the variability of future interest rates and our financing requirements.
INFLATION
Inflation has not had a material effect on our results of operations.
Certain of our expenses, such as compensation, benefits and capital equipment
costs, are subject to normal inflationary pressures. However, the majority of
our 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 rates.
IMPACT OF YEAR 2000
In late 1999, we completed our remediation and testing of systems for year
2000 compliance. As a result of past planning and implementation efforts, we
experienced no significant disruptions in mission critical information
technology and non-information technology systems, and we believe those systems
successfully responded to the year 2000 date change. We expensed approximately
$400,000 during 1999 in connection with remediating our systems. We are not
aware of any material problems resulting from year 2000 issues, either with
products, internal systems, or the products and services of third parties. We
will continue to monitor
33
<PAGE> 36
mission critical computer applications and those of our suppliers and vendors
throughout the year 2000 to ensure that any latent year 2000 matters that may
arise are addressed promptly.
RISK FACTORS
RISKS RELATED TO OUR INDUSTRY
The risks described below are not the only risks we face. Any of the
following risks could have a material adverse effect on our business, financial
condition and operating results. Additional risks and uncertainties of which we
are unaware or currently believe are immaterial may also impair our business
operations. You should carefully consider these risks in reviewing this Form
10-K, and these risks qualify, in their entirety, each forward looking statement
herein.
UNFAVORABLE FEDERAL TAX LEGISLATION COULD IMPACT OUR BUSINESS.
Many of the compensation and benefit programs we design and implement for
our clients are funded by specifically designed life insurance products. The
life insurance products underlying the compensation and benefit programs we sell
currently offer a number of tax advantages, such as:
- the cash value of the policies grows on a tax deferred basis until
withdrawal;
- the policies' death benefits are received tax-free; and
- the tax-deferred nature of the policies provides an attractive return.
If any changes in federal tax laws reduce or eliminate these advantages,
many policies could be surrendered. As a result, we could lose a substantial
amount of renewal income.
Recent amendments to the federal tax laws have reduced the advantages of
purchasing certain business-owned life insurance programs. With some exceptions,
amendments adopted in 1996 eliminated the ability to deduct interest on loans
against the cash value of life insurance policies. In 1997, legislation enacted
an interest disallowance on 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 interest deductions on general
indebtedness.
In 2000, as part of its budget proposal, the administration sought to
eliminate the "employee, officer and director" exception to the interest
disallowance rule. This is the same proposal that was introduced in 1999 and
1998. To date, the proposal has not obtained congressional support, however, if
enacted, this proposal would significantly affect the Clark/Bardes and Bank
Compensation Strategies divisions because it would reduce the attractiveness of
business-owned life insurance to companies that traditionally have high debt/
equity ratios, such as banks.
Although we believe that the proposal does not have widespread support in
Congress, we cannot predict the effect that any amendments will have on our
Clark/Bardes or Bank Compensation Strategies divisions. We cannot be sure if
this or any other adverse tax proposal will be enacted.
The policies we sell in the healthcare market are often individually owned
and, as a result, could be adversely impacted by a tax law change affecting life
insurance generally. We believe that Congress is unlikely to make a change that
reduces the tax benefits of insurance owned by individuals.
FEDERAL AND STATE REGULATIONS MATERIALLY AFFECT THE WAY WE OPERATE.
State governments extensively regulate our life insurance activities. We
sell our insurance products in all 50 states through licensed insurance
producers. States have broad powers over licensing, payments of commissions,
business practices, policy forms and premium rates. Insurance laws related to
licensing, marketing activities and the receipt of commissions vary from state
to state. While we have not encountered regulatory problems in the past, we
cannot assure you that we and the producers through whom we sell, will always be
in compliance with all applicable regulatory requirements of each state.
34
<PAGE> 37
While the federal government does not directly regulate the marketing of
most insurance products, some products, such as variable life insurance, must be
registered under the federal securities laws. As a result, our producers selling
these products must be registered representatives of a broker-dealer registered
with the National Association of Securities Dealers. While we have not had any
regulatory problems in the past related to these products, we cannot be sure
that we or our producers will not have regulatory problems in the future.
WE DEPEND ON A SMALL NUMBER OF INSURANCE COMPANIES.
We depend heavily on a select group of insurance companies to underwrite
the insurance policies underlying the programs we sell. As of December 31, 1999,
20 life insurance companies underwrote substantially all of the insurance
policies underlying our clients' programs. Seven of these companies accounted
for approximately 76.3% of 1998 first year commission revenue and 63.1% of our
first year commission revenue for the year ended December 31, 1999. We cannot be
sure if these relationships will continue or if we will be able to develop
relationships with other insurance companies.
During 1999, one of the carriers we use, General American Life Insurance
Company experienced financial difficulties as a result of being unable to meet
withdrawal requests under certain guaranteed investment contracts General
American had issued. General American represented approximately 6.0% of total
revenue in 1998 and 4.8% of total revenue in 1999. Upon learning of these
matters, we ceased selling programs financed by insurance policies underwritten
by General American. Since that time, General American's insurance business has
been sold to MetLife, its financial ratings upgraded and we expect to continue
to use General American and its acquirer, MetLife as carriers.
CHANGES IN THE MARKET AND THE ECONOMY COULD HELP DEVELOPMENT OF COMPETING
PROGRAMS AND PRODUCTS.
General economic conditions and market factors, such as changes in interest
rates and stock prices, affect our commission and fee income and the extent to
which clients keep a policy inforce year after year. Interest rate fluctuations
can have a significant effect on the sale and profitability of many employee
benefit programs whether they are financed by life insurance or other financial
instruments. For example, if interest rates rise, competing products could
become more attractive to potential purchasers of the programs we market.
Further, a prolonged decrease in stock prices can have a significant effect on
the sale and profitability of our clients' programs that are linked to stock
market indices. We cannot be sure that we will be able to compete with
alternative products if these market forces make our clients' programs
unattractive.
RISKS RELATED TO OUR COMPANY
COMPETITIVE FORCES MAY REDUCE OUR MARKET SHARE.
Our business is highly competitive. We compete with consulting firms,
insurance agents, brokers, third party administrators, producer groups and
insurance companies. A number of our competitors offer attractive alternative
programs. The direct competitors of our Clark/Bardes division include:
- Compensation Resource Group;
- Harris, Crouch, Miller, Scott, Long and Mann;
- Management Compensation Group (not related to Management Compensation
Group/HealthCare);
- Newport Group;
- TBG Financial; and
- The Todd Organization (not affiliated with Melvin G. Todd, president of
Clark/Bardes division).
The competitors of our Bank Compensation Strategies division include The
Benefit Marketing Group, The Todd Organization, and individual insurance agents
in the communities where the community banks are located. Additionally, the
community banking industry is constantly consolidating, which may reduce the
number of potential bank clients for Bank Compensation Strategies. The primary
competition for our
35
<PAGE> 38
HealthCare Compensation Strategies division is Hewitt Associates, Towers,
Perrin; Mercer Consulting Group and Hay Group Inc.
We believe our most serious competitive threat will likely come either from
large, diversified financial services firms which are willing and able to expend
a lot of resources to gain market share or from large direct competitors that
choose to pursue an acquisition or consolidation strategy similar to ours. Our
business and market share may be materially adversely affected if we do not
remain competitive.
WE DEPEND ON A FEW KEY PRODUCERS.
During 1999, we derived approximately 75% of our total revenue from the
marketing activities of eleven of our producers' offices, including The Wamberg
Organization. Before our acquisition of The Wamberg Organization, it was our
largest independent producer organization and accounted for approximately 17.5%
of our total revenue in 1998 and 15.2% of our total revenue for the eight month
period ended August 31, 1999. The offices operated by Steven Cochlan, Malcolm
Briggs and George Blaha collectively accounted for approximately 21.5% of our
total revenue in 1998 and 22.3% of our total revenue for 1999. We enter agency
agreements with our producers in which they agree not to compete with us for a
period of time and after their relationship with us terminates. Generally, we
can terminate the producer agreements or the producers can terminate the
agreements with either 90 or 180 days' written notice depending on the
individual agreement. From time to time, we or our producers have terminated
relationships. We cannot be sure if a producer relationship will be terminated
in the future. We cannot be sure that a court will enforce the non-competition
provisions in the agreements.
LACK OF POLICY PERSISTENCY CAN ADVERSELY IMPACT OUR RENEWAL COMMISSIONS AND
FEES.
We derive a substantial portion of our revenue from business-owned life
insurance and other financial instruments that underlie many of our clients'
compensation and benefit programs that are maintained year after year. High
persistency rates are especially important to our Clark/Bardes division and Bank
Compensation Strategies divisions since we derive a substantial portion of our
revenue from these two divisions in the form of renewal commissions and fees. If
the business purchaser chooses to let a policy lapse, we will stop receiving any
renewal commissions and fees. In the past, we have had high persistency rates,
but we cannot assure you that we will continue to have them in the future.
WE ARE DEPENDENT ON THE SERVICES OF KEY PERSONNEL.
Our performance depends largely on the performance of our executive
officers and key employees. It is important to us to keep and motivate high
quality personnel, especially our management, producers and program development
teams. The loss of the services of any of our key employees particularly W. T.
Wamberg, chairman of our board of directors and chief executive officer, Melvin
G. Todd, president of Clark/ Bardes division, Richard C. Chapman, president of
Bank Compensation Strategies, and Donald C. Wegmiller, president of HealthCare
Compensation Strategies, could have a material adverse effect on our business,
financial condition and operating results. We cannot assure you that we will be
successful in retaining our key personnel.
OUR ACQUISITION STRATEGY MAY NOT SUCCEED.
Since September 1997, we have completed seven acquisitions. At any point in
time, we may also be considering several other potential acquisitions. Future
acquisitions may require substantial expenditures that will need to be financed
through cash from operations, bank debt as well as future debt and/or equity
offerings. We cannot assure you that funds will be available through the capital
markets and, if so, on terms acceptable to us.
Acquisitions involve numerous risks, including:
- the diversion of our management's time and attention to the negotiation
of the acquisition and to the assimilation of the businesses acquired;
36
<PAGE> 39
- the possible need to modify financial and other systems and add
management resources;
- the potential liabilities of the acquired businesses; and,
- unforeseen difficulties in the acquired operations.
An acquisition may not produce the revenue and profits we expect. Thus, an
acquisition that fails to meet our expectations could have a material adverse
effect on our business, financial condition and operating results.
A SIGNIFICANT AMOUNT OF OUR ASSETS ARE INTANGIBLE ASSETS.
Intangible assets arising from our purchased businesses consisted of the
following at December 31:
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Present value of inforce revenue............................ $59,284 $25,532
Goodwill.................................................... 34,440 18,552
Non-competition agreements.................................. 1,267 1,125
------- -------
$94,991 $45,209
======= =======
Total assets................................................ 76.1% 67.0%
Stockholders' equity........................................ 152.3% 152.2%
</TABLE>
These amounts represent the excess of the purchase price over the value of
the net tangible assets we acquired. The amounts allocated to inforce revenue
are determined using the discounted cash flow of inforce revenue 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, which is
normally thirty years. Many factors outside our control determine the
persistency of our inforce business and we cannot be sure that the values we
allocated will ultimately be realized. Non-competition agreements represent the
negotiated value of such agreements with the former owners of acquired
businesses and are amortized over their contractual terms.
We have adopted Statement of Financial Accounting Standard No. 121
"Accounting for Impairment of Long Lived Assets and Long Lived Assets To Be
Disposed Of." At least annually, we review the components of our intangible
assets and make the appropriate adjustment if it becomes apparent that the
undiscounted cash flow is less than its unamortized carrying amount. No growth
rates are used in the projection of renewal revenue and, in the opinion of
management, projections are consistent in all respects. The Financial Accounting
Standards Board has determined that amortization of goodwill should be a maximum
period of twenty years. We presently amortize the present value of inforce
revenue over thirty years and goodwill for periods of twenty to forty years but
intend to fully comply with any new standards promulgated at the time of any
future acquisitions. If any component of the inforce revenue base should become
unrealizable or the accounting regulatory bodies impose shorter amortization
periods, this could have a material adverse effect on our business, financial
condition and operating results. We cannot assure you that a component of the
inforce revenue base will not become unrealizable or that accounting regulatory
bodies will not impose shorter amortization periods.
FLUCTUATIONS IN OUR REVENUES MAKE OUR OPERATING RESULTS DIFFICULT TO ANALYZE AND
FORECAST.
Our operating results can fluctuate considerably, especially when compared
on a consecutive quarterly basis. Because many of our clients' programs are
implemented late in the year, we can experience large increases in both first
year and renewal revenue in the fourth quarter. Operating results are also
affected by a number of other factors, including:
- introduction of new or enhanced programs and services by us or our
competitors;
- client acceptance or rejection of new programs and services;
- program development expenses;
37
<PAGE> 40
- timing of significant sales;
- demand for our administrative services;
- competitive, legislative and regulatory conditions in our industry; and
- general economic conditions.
Many of these factors are beyond our control. The sales cycles of our
programs and services usually last between twelve to eighteen months, with first
year revenue often coming from a few large cases and subject to a number of
factors beyond our control. Our revenue is thus difficult to forecast, and we
believe that comparing our consecutive quarterly results of operations is not
necessarily meaningful, nor does it indicate what results we will achieve for
any subsequent period. In our business, past operating results are not reliable
indicators of future performance.
W.T. WAMBERG OWNS A SIGNIFICANT AMOUNT OF OUR COMMON STOCK.
W.T. Wamberg, our Chairman and Chief Executive Officer, owns 19.7% of our
outstanding common stock. 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.
This concentration of ownership may also have the effect of delaying, preventing
or deterring a change in control of Clark/ Bardes Holdings that may otherwise be
beneficial to you.
DELAWARE LAW AND OUR CHARTER DOCUMENTS COULD PREVENT AN UNSOLICITED TAKEOVER.
Delaware law, as well as provisions of our certificate of incorporation and
bylaws, could discourage unsolicited proposals to acquire us, even though such a
proposal may be beneficial to you. These provisions include:
- a board of directors classified into three classes of directors with the
directors of each class having staggered, three-year terms;
- our board's authority to issue shares of preferred stock without
shareholder approval; and
- provisions of Delaware law that restrict many business combinations and
provide that directors serving on staggered boards of directors, such as
ours, may be removed only for cause.
In addition, we have adopted a stockholder rights plan that could further
discourage attempts to acquire control of us. These provisions of our
certificate of incorporation, bylaws and Delaware law could discourage tender
offers or other transactions that might otherwise result in your receiving a
premium over the market price for our common stock.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information required by this item is incorporated by reference from the
Liquidity and Capital Resources section of Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations in pages 32 through 33
of this Form 10-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our financial statements begin on page F-1 of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There has been no change in our independent accountants during the past two
fiscal years. There have been no material disagreements with our independent
accountants on our accounting or financial reporting
38
<PAGE> 41
that would require our independent accountants to qualify or disclaim their
report on our financial statements, or otherwise require disclosure in this Form
10-K.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 is hereby incorporated by reference
from our proxy statement for the 2000 annual meeting of our stockholders 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 our 2000 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 our 2000 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 our 2000 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
Report of Independent Auditors
Consolidated Balance Sheets as of December 31, 1999 and 1998
Consolidated Statements of Operations for each of the years ended
December 31, 1999, 1998, and 1997
Consolidated Statements of Stockholders' Equity (Deficit) for each of
the years ended December 31, 1999, 1998, and 1997
Consolidated Statements of Cash Flows for each of the years ended
December 31, 1999, 1998, and 1997
Notes to the Consolidated Financial Statements
(2) Financial Statement Schedules
None.
Schedules not listed above have been omitted because they are not
required, are not applicable, are shown in the related financial
statement or notes thereto or the amounts are immaterial.
(3) Exhibits
The information required by this Item 14(a)(3) is set forth in the
Exhibit Index immediately following our financial statements. The
exhibits listed herein will be furnished upon written request to
"Director of Investor Relations" located at our headquarters and
payment of a reasonable fee that will be limited to our reasonable
expense in furnishing such exhibits.
39
<PAGE> 42
(b) Reports on Form 8-K
The following current Report on form 8-K was filed during the three months
ended December 31, 1999:
On October 4, 1999, we filed Amendment No. 1 to our Current Report on
Form 8-K filed September 16, 1999, disclosing the acquisition of the
businesses and substantially all the assets of The Wamberg Organization,
Inc. and Wamberg Financial Corporation. The following financial
statements and financial information was filed as part of the Form 8-K,
as amended:
(1) The Independent Auditor's Reports and the following audited
financial statements of The Wamberg Organization and Wamberg
Financial Corporation were included in the Form 8-K, as amended:
(i) Report of Independent Auditors;
(ii) Balance Sheets as of December 31, 1998 and 1997;
(iii) Statements of Income (Loss) and Retained Earnings (Accumulated
Deficit) for the years ended December 31, 1998 and 1997;
(iv) Statements of Cash Flows for the years ended December 31, 1998
and 1997; and
(v) Notes to Financial Statements.
(2) Our unaudited pro forma financial statements were included in the
Form 8-K, as amended:
(i) Unaudited Pro Forma Balance Sheets as of June 30, 1999 and
December 31, 1998; and
(ii) Unaudited Pro Forma Statements of Income for the six months
ended June 30, 1999 and year ended December 31, 1998.
40
<PAGE> 43
CLARK/BARDES HOLDINGS, INC.
AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors.............................. F-2
Consolidated Balance Sheets at December 31, 1999 and 1998... F-3
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998, and 1997......................... F-4
Consolidated Statements of Stockholders' Equity (Deficit)
for the years ended December 31, 1999, 1998, and 1997..... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998, and 1997......................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 44
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 subsidiaries as of December 31, 1999 and 1998,
and the related consolidated statements of operations, stockholders' equity
(deficit), and cash flows for each of the three years in the period ended
December 31, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Clark/Bardes
Holdings, Inc. and subsidiaries at December 31, 1999 and 1998, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States.
ERNST & YOUNG LLP
Dallas, Texas
February 18, 2000
F-2
<PAGE> 45
CLARK/BARDES HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1999 1998
--------- --------
(DOLLARS IN THOUSANDS
EXCEPT SHARE AMOUNTS)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 4,832 $12,102
Accounts and notes receivable, net of allowances of $347
and $394, respectively................................. 18,295 8,076
Deposits and advances..................................... 1,123 59
-------- -------
Total current assets.............................. 24,250 20,237
Intangible Assets -- net
Present value of in force revenue......................... 59,284 25,532
Goodwill.................................................. 34,440 18,552
Non competition agreements................................ 1,267 1,125
-------- -------
94,991 45,209
-------- -------
Equipment and Leasehold Improvements -- net................. 4,505 1,178
Deferred Tax Asset.......................................... 282 607
Other Assets................................................ 831 262
-------- -------
Total assets...................................... $124,859 $67,493
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $ 4,100 $ 2,925
Commissions and fees...................................... 3,475 2,634
Income taxes.............................................. 4,350 528
Accrued liabilities....................................... 7,841 2,651
Debt maturing within one year............................. 7,252 4,344
-------- -------
Total current liabilities......................... 27,018 13,082
Long Term Debt.............................................. 35,473 24,713
Stockholders' Equity:
Preferred stock
Authorized -- 1,000,000 shares; $.01 par value, none
issued
Common stock
Authorized -- 20,000,000 shares; $.01 par value
Issued and outstanding -- 9,629,999 in 1999 and
8,202,535 in 1998..................................... 96 82
Paid in capital........................................... 50,099 26,274
Retained earnings......................................... 12,173 3,342
-------- -------
Total stockholders' equity........................ 62,368 29,698
-------- -------
Total liabilities and stockholders' equity........ $124,859 $67,493
======== =======
Balances with related parties:
Accounts receivable -- officers and directors............. $ 20 $ --
Accounts receivable -- affiliates......................... $ 461 $ 872
Commissions and fees payable.............................. $ 26 $ --
Debt maturing within one year............................. $ -- $ 425
Long term debt............................................ $ -- $ 6,113
</TABLE>
See accompanying notes to financial statements
F-3
<PAGE> 46
CLARK/BARDES HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1999 1998 1997
------------- ------------- -------------
(DOLLARS IN THOUSANDS EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C>
REVENUES
Commissions and service fees........................... $ 119,158 $ 72,264 $ 47,871
Other.................................................. 1,602 2,502 1,584
---------- ---------- ----------
120,760 74,766 49,455
Commission and fee expenses.............................. 53,108 46,111 32,439
---------- ---------- ----------
Gross profit............................................. 67,652 28,655 17,016
OPERATING EXPENSES
General and administrative............................. 45,153 19,616 11,504
Amortization of intangibles............................ 4,370 1,232 295
Put warrants (non-recurring)........................... -- 4,800 --
---------- ---------- ----------
49,523 25,648 11,799
---------- ---------- ----------
OPERATING INCOME......................................... 18,129 3,007 5,217
INTEREST
Income................................................. 329 565 189
Expense................................................ (3,548) (3,166) (1,112)
---------- ---------- ----------
(3,219) (2,601) (923)
---------- ---------- ----------
Income before taxes...................................... 14,910 406 4,294
Income taxes............................................. 6,079 817 60
---------- ---------- ----------
NET INCOME (LOSS)........................................ $ 8,831 $ (411) $ 4,234
========== ========== ==========
BASIC NET INCOME (LOSS) PER COMMON SHARE
Net income (loss)...................................... $ 0.97 $ (0.08) $ 1.03
========== ========== ==========
Weighted average shares................................ 9,077,775 5,006,009 4,119,387
========== ========== ==========
DILUTED NET INCOME (LOSS) PER COMMON SHARE
Net income (loss)...................................... $ 0.95 $ (0.08) $ 0.99
========== ========== ==========
Weighted average shares................................ 9,328,939 5,006,009 4,398,593
========== ========== ==========
DIVIDENDS PER COMMON SHARE............................... -- -- $ 1.32
========== ========== ==========
Transactions with related parties were as follows:
Commissions and service fees........................... $ 1,434 $ 1,585 $ 879
Commission and fee expenses............................ $ 8,071 $ 8,068 $ 24,152
General and administrative expenses.................... $ 45 $ -- $ --
</TABLE>
See accompanying notes to financial statements
F-4
<PAGE> 47
CLARK/BARDES HOLDINGS, INC. AND SUBSIDIARIES
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)
---------- ------ -------- ---------- -------- -------- ----------------
(DOLLARS IN THOUSANDS EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997.............. 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 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 party for treasury stock
purchased........................... 471 471
Distribution to S Corp.
shareholders........................ (3,346) (3,346)
Redemption of common stock warrants... (100) (100)
Issuance of common stock in initial
public offering (net of 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
Decrease in note receivable from related
party for treasury stock purchased.... 89 89
Issuance of common stock in connection
with acquisitions..................... 426,214 4 6,857 6,861
Sale of stock in a private placement.... 1,000,000 10 16,868 16,878
Exercise of stock options............... 1,250 -- 11 11
Net income.............................. 8,831 8,831
---------- ------ -------- ---------- -------- ------- -------
Balance at December 31, 1999............ 9,629,999 $ 96 $ 50,099 -- $ -- $12,173 $62,368
========== ====== ======== ========== ======== ======= =======
</TABLE>
See accompanying notes to financial statements
F-5
<PAGE> 48
CLARK/BARDES HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)......................................... $ 8,831 $ (411) $ 4,234
Adjustments to reconcile net income (loss) to cash
provided by operating activities:
Depreciation and amortization.......................... 5,232 1,571 491
Allowance on receivables............................... (47) 316 --
Changes in operating assets and liabilities
Accounts and notes receivable........................ (6,576) (300) (4,959)
Deposits and advances................................ (542) (59) --
Other assets......................................... (201) (203) (42)
Deferred tax asset................................... 325 (607) --
Accounts payable..................................... (3,522) 1,783 829
Commissions and fees payable......................... 40 689 598
Income taxes payable................................. 3,822 528 --
Accrued liabilities.................................. 5,190 654 663
-------- -------- --------
Cash provided by operating activities....................... 12,552 3,961 1,814
-------- -------- --------
INVESTING ACTIVITIES
Purchases of businesses................................... (38,470) (18,353) (13,883)
Purchases of equipment.................................... (1,812) (801) (537)
-------- -------- --------
Cash used in investing activities........................... (40,282) (19,154) (14,420)
-------- -------- --------
FINANCING ACTIVITIES
Proceeds from borrowings.................................. 57,000 31 23,400
Repayment of borrowings................................... (53,507) (10,137) --
Issuance of common stock and warrants -- net of costs..... 16,878 37,135 108
Notes receivable.......................................... 89 163 (44)
Dividends................................................. -- (3,680) (1,779)
Proceeds from sale of treasury stock -- net............... -- -- 3,791
Purchase of treasury stock................................ -- -- (13,969)
-------- -------- --------
Cash provided by financing activities....................... 20,460 23,512 11,507
-------- -------- --------
INCREASE (DECREASE) IN CASH................................. (7,270) 8,319 (1,099)
Cash and Cash Equivalents at Beginning of the Year........ 12,102 3,783 4,882
-------- -------- --------
Cash and Cash Equivalents at End of the Year.............. $ 4,832 $ 12,102 $ 3,783
======== ======== ========
</TABLE>
See accompanying notes to financial statements
F-6
<PAGE> 49
CLARK/BARDES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
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 subsidiaries, Clark/Bardes, Inc. (CBI)
and Wamberg Financial Corporation. Through its three operating divisions,
Clark/Bardes, Bank Compensation Strategies and HealthCare Compensation
Strategies, CBI designs, markets and administers life insurance products,
compensation, and benefit programs to U.S. corporations, banks and healthcare
organizations. CBI assists its clients in using customized life insurance
products to generate capital, finance long-term benefit liabilities, and
supplement and secure benefits for key employees. In addition, CBI provides
long-term administrative services for executive benefits and insurance and
provides compensation consulting services.
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. Actual results could differ from those
estimates. In the opinion of management, all adjustments, including normal
recurring accruals, considered necessary for a fair presentation have been
included. All intercompany values and transactions have been eliminated in the
accompanying consolidated financial statements.
A summary of the significant accounting policies consistently applied in
the preparation of the accompanying financial statements follows.
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 $4,323,000 and
$3,009,000 at December 31, 1999 and 1998, 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 does 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 the lease period.
Intangible Assets -- CBI has intangible assets representing the excess of
the costs of acquired businesses over the fair values of the tangible net assets
associated with the acquisition. Intangible assets consist of the net present
value of future cash flows from existing business at the acquisition date,
non-compete agreements with the former owners and goodwill. The amortization
periods for the non-compete agreements are 5 years and 10 years. The net present
value of future cash flows is amortized over 20 to 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. Goodwill
is being amortized over a 25 to 40 year period on a straight-line basis.
Amortization expense totaled $4,370,000 in 1999, $1,232,000 in 1998, and
$295,000 in 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
F-7
<PAGE> 50
CLARK/BARDES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 insurance policy.
Renewal commission revenue is recognized when the premium or commission is due
and payable. CBI is notified in advance if a client plans to surrender, so
adjustments in subsequent periods due to cancellations are infrequent and minor.
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. Fees for consulting services
are recognized on a percentage of completion basis as related costs are incurred
over the duration of the project.
CBI generated in excess of 25% of its revenue in 1999 from 8 clients, in
1998 from 8 clients, and in 1997 from 3 clients, respectively, creating a
concentration of credit risk. Approximately 15.2%, 17.5% and 23% of CBI's
commission and fee revenue for the years ended December 31, 1999, 1998 and 1997
respectively, was generated by The Wamberg Organization, which was wholly owned
by CBI's Chairman and Chief Executive Officer and acquired by CBI on September
1, 1999 (see note 2). Substantially, all of the policies underlying the programs
marketed by CBI are underwritten by 20 life insurance companies, of which seven
accounted for approximately 63.1%, 76.3% and 78.9% of CBI's first-year
commission revenue for the years ended December 31, 1999, 1998 and 1997,
respectively.
CBI is party to production agreements (typically, five years in duration)
with some of the insurance companies with which it conducts business. If CBI
fails to meet specified minimum production levels with these carriers, 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
independent sales producers.
Advertising -- Advertising and marketing costs provided to third parties
are charged to operations when incurred. Total expenses for 1999, 1998, and 1997
were $1,080,000, $289,000 and $70,000, respectively.
Income Taxes -- Prior to its initial public offering and in connection
therewith, Clark/Bardes ceased to be taxed as an S corporation and became
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.
Securities and Exchange Commission Staff Accounting Bulletin No.
101 -- Revenue Recognition in Financial Statements -- SAB No. 101 becomes
effective in 2000. CBH has been in compliance with SAB No. 101 and its adoption
is not expected to have any impact on CBH's net income or stockholders' equity.
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, 2000. 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,
F-8
<PAGE> 51
CLARK/BARDES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. Because of CBI's minimal use of derivatives (note 6),
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
Following is a description of the Company's acquisitions made during 1997,
1998 and 1999. The results of operations for each acquired entity have been
included in the accompanying statement of operations as of their effective date.
Banking Consultants of America (BCA) -- Effective October 1, 1999, CBI
purchased certain assets and the businesses of Banking Consultants of America (a
sole proprietorship) and Financial Institution Services, Inc. for a purchase
price of $1.4 million and expenses of $28,000. BCA is a regional provider of
insurance products to banks and will be absorbed by CBI's Bank Compensation
Strategies division. BCA has been accounted for as a purchase and the entire
purchase price was allocated to the net present value of the future cash flows
of BCA's projected renewal revenues.
The Wamberg Organization and Wamberg Financial Corporation -- On September
1, 1999, CBI purchased certain assets and assumed certain liabilities of The
Wamberg Organization and purchased all of the outstanding stock of Wamberg
Financial Corporation for a total purchase price of $18.0 million consisting of:
(i) a cash payment to The Wamberg Organization of $12.4 million;
(ii) a cash payment to W. T. Wamberg of $50,000 for his shares of
Wamberg Financial Corporation;
(iii) a direct payment of $1.5 million for two outstanding loans;
(iv) assumption of a $3.8 million note for the purchase of a corporate
aircraft; and,
(v) expenses of approximately $265,000.
The $14.2 million cash portion of the purchase price was funded from CBI's
existing cash balances. In addition, the asset purchase agreement provides for
the payment of an additional $11.9 million upon the attainment of certain
stipulated annual financial objectives starting with the period ended December
31, 1999 through December 31, 2002. As of December 31, 1999, the financial
objectives for that year had been met; accordingly, a $1.5 million cash payment
will be made to W. T. Wamberg in the first quarter of 2000 and will be recorded
as additional purchase price. In accordance with the asset purchase agreement,
all renewal revenue acquired as of September 1, 1999, remaining inforce on
December 31, 2018, will revert to Mr. Wamberg.
The sole shareholder of The Wamberg Organization and Wamberg Financial
Corporation was W. T. Wamberg, Chairman of CBI and Clark/Bardes Holdings, Inc.
The Wamberg Organization has historically been CBI's largest single producer,
accounting for 17.5% of revenue in 1998 and 15.2% for the year period ended
December 31, 1999. Upon consummation of the September 1, 1999 acquisition, Mr.
Wamberg became President and Chief Executive Officer of Clark/Bardes Holdings,
Inc.
F-9
<PAGE> 52
CLARK/BARDES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tangible assets acquired consist primarily of receivables, equipment,
and aircraft. Subsequent to the acquisition, the Company sold the corporate
aircraft previously owned by Wamberg Financial Corporation to an unaffiliated
leasing company for a gain of $502,000 -- net of tax, and simultaneously leased
it back for a ten year period. The gain was not recognized in income as it had
been recorded as part of the purchase price. The proceeds from the sale were
applied to a full repayment of the related note. The monthly rental under the
lease is $27,924 or $335,000 per year. In the five years ended December 31,
2004, total rental will be $1,675,000.
Because of the relationship between The Wamberg Organization, Wamberg
Financial Corporation, W. T. Wamberg and CBI, the CBH board of directors
appointed a special committee comprised of independent, non-employee directors
to negotiate and review the terms of this transaction. The special committee
received a fairness opinion from an independent investment banking firm with
respect to the acquisition and, after analyzing the matter and considering all
relevant issues, recommended that the full board approve the transaction.
The Wamberg Organization leases its 11,085 square feet of office space from
an entity controlled by Mr. Wamberg for an annual rental of $150,000, under a
lease expiring on February 21, 2009.
On January 4, 1999, CBI purchased the right to receive approximately 27.5%
of the commissions, related to renewal revenue of certain inforce policies
existing on June 30, 1998, due under the Principal Office Agreement with W. T.
Wamberg and The Wamberg Organization, for a cash payment of $7.5 million.
Concurrent with the acquisition of the assets and liabilities of The Wamberg
Organization discussed above, CBI purchased all of the renewal revenue not
acquired on January 4, 1999 and the original January 4, 1999 agreement was
superseded. Accordingly, the unamortized balance of $6.9 million at September 1,
1999 under that agreement was combined with the purchase price under the new
purchase agreement. The combined purchase price will be allocated to the net
present value of future revenue to be received until September 1, 2018.
Excluding any payments that may be made by virtue of achieving the stipulated
annual financial objectives, the total cost of The Wamberg Organization and
Wamberg Financial Corporation was $24.9 million, including the $6.9 million
unamortized balance of the January 4 purchase.
The acquisition of The Wamberg Organization and Wamberg Financial
Corporation has been accounted for as a purchase. The pro forma information
below presents the results of operations including those of the Wamberg entities
as if the acquisitions occurred on January 1, 1998.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------
1999 1998
--------- --------
(IN THOUSANDS EXCEPT
PER SHARE)
<S> <C> <C>
Pro Forma:
Revenues.................................................. $120,760 $74,766
Net income................................................ 6,751 725
Diluted earnings per share................................ .72 .13
</TABLE>
National Institute for Community Banking -- On May 18, 1999, CBH acquired
all of the issued and outstanding capital stock of National Institute for
Community Banking (NICB) by merging it with and into CBH. Each share of NICB
common stock was converted into CBH common stock on a ratio of 39.7 of CBH
shares for each share of NICB for a total of 484,303 shares of CBH common stock.
By agreement, the effective date of the NICB acquisition was January 1, 1999.
NICB was an independent producer affiliated with Bank Compensation Strategies.
Of the total, 99,851 shares were issued at the closing and 384,452 shares
are issuable upon attaining stipulated revenue and income goals over the
four-year period 1999 to 2002. No other consideration was given.
F-10
<PAGE> 53
CLARK/BARDES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The value of the shares received by the selling shareholders was $1.6 million
based on CBH's closing price of $16 on May 18, 1999. Any shares issued will be
accounted for as additional consideration based on their value at the time of
issuance and will increase future amortization expense. The selling shareholders
achieved their financial performance goals for 1999 and, on January 26, 2000 an
additional 96,113 shares having a value of $1.4 million were issued to them.
The acquisition of NICB has been accounted for as a purchase. The entire
cost of the NICB acquisition has been allocated to goodwill and is being
amortized over 25 years.
MCG/Healthcare -- On April 5, 1999, CBI purchased the assets and business
and assumed certain liabilities of Phynque, Inc., d/b/a Management Compensation
Group/HealthCare, a Minnesota corporation, for a purchase price of $35.9 million
consisting of:
(i) a cash payment of $13.8 million;
(ii) a promissory note for $8.7 million;
(iii) 326,363 shares of common stock, having an aggregate value of $5.3
million based on the closing price of the common stock on April 5,
1999;
(iv) the direct payment of $3.6 million for certain outstanding loans;
and,
(v) the assumption of $4.2 million of liabilities and approximately
$372,000 of closing costs.
The assets acquired include cash, receivables and equipment in addition to
all intellectual property, files pertaining to customers, computer software and
systems and related licenses. The liabilities assumed include commissions
payable, accrued employee benefits and operating expenses. The $17.7 million
cash portion of the purchase price was funded by a borrowing under CBI's credit
facility. The promissory note is payable in thirty-two equal quarterly
installments of principal and interest at 10% per annum commencing on April 5,
2000 (see Note 6). The promissory note is partially secured by a personal
guarantee of W. T. Wamberg, Chairman and Chief Executive Office of Clark/Bardes
Holdings.
MCG/HealthCare is a 168 employee executive benefit consulting organization
servicing the healthcare industry. MCG/HealthCare is headquartered in
Minneapolis, Minnesota. Prior to the acquisition described above, there was no
material relationship between CBI and MCG/HealthCare.
The acquisition of MCG/HealthCare has been accounted for as a purchase. The
pro forma information below presents the results of CBI and MCG/HealthCare as if
the acquisition had occurred on January 1, 1998.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1999 1998
---------- ----------
(IN THOUSANDS EXCEPT
PER SHARE)
<S> <C> <C>
Pro Forma:
Revenues.................................................. $126,518 $100,876
Net income (loss)......................................... 7,464 (1,826)
Diluted earnings (loss) per share......................... .79 (.34)
</TABLE>
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 accompanying financial statements.
F-11
<PAGE> 54
CLARK/BARDES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 realizable future cash flows embedded in the existing inforce 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.
The pro forma information below presents the results of CBI and Schoenke
combined as if the acquisition had occurred January 1, 1997:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------------
1998 1997
--------- ---------
(IN THOUSANDS EXCEPT
PER SHARE)
<S> <C> <C>
Pro Forma:
Revenues.................................................. $79,744 $55,920
Net income................................................ 96 3,911
Diluted earnings per share................................ .01 .48
</TABLE>
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.
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
per share. CBI allocated approximately $40,000 of the purchase price to tangible
assets acquired and $6,014,000 to the net present value of estimated realizable
future cash flow embedded in the existing in-force 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.
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;
- $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.
- $19.1 million was allocated to goodwill. This is being amortized over a
forty year period.
F-12
<PAGE> 55
CLARK/BARDES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- $4.1 million was allocated to the net present value of the realizable
cash flows embedded in the existing inforce book of business and is being
amortized over thirty years.
The pro forma information below presents the results of CBI and BCS
combined as if the acquisition had occurred on January 1, 1997:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
--------------
(IN THOUSANDS,
EXCEPT
PER SHARE)
<S> <C>
Pro Forma:
Revenues.................................................. $62,264
Net income................................................ 2,219
Diluted earnings (loss) per share......................... .48
</TABLE>
3. NOTES RECEIVABLE
Notes receivable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1999 1998
----- -----
<S> <C> <C>
Secured; interest at prime plus 2%; due on demand........... $100 $130
Secured; interest at prime plus 4%; due on demand........... 163 212
Secured; interest at prime plus 2%; due on demand........... 32 51
---- ----
$295 $393
==== ====
</TABLE>
4. INTANGIBLES
Intangible assets represent the excess of the purchase price over the fair
values of the tangible assets of acquired businesses (see note
1 -- Intangibles). The classification of the amounts determined and allocated to
the respective intangible assets are:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1999 1998
-------- -------
<S> <C> <C>
Present value of future cash flows from in force revenue.... $ 62,711 $26,409
Goodwill.................................................... 36,427 19,077
Non competition agreements.................................. 1,750 1,250
-------- -------
100,888 46,736
Accumulated amortization.................................... (5,897) (1,527)
-------- -------
Net......................................................... $ 94,991 $45,209
======== =======
</TABLE>
The amortization periods for these assets are:
- present value of future cash flows from inforce revenues are amortized
over 20 to 30 years, a period representative of the policy duration;
- goodwill is amortized over periods of 25 to 40 years; and
- non competition agreements are amortized over 5 to 10 years, the terms of
the agreements.
F-13
<PAGE> 56
CLARK/BARDES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Major classifications of equipment and leasehold improvements are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1999 1998
------ ------
<S> <C> <C>
Office furniture and equipment.............................. $6,458 $2,745
Leasehold improvements...................................... 503 188
------ ------
6,961 2,933
Accumulated depreciation and amortization................... (2,456) (1,755)
------ ------
$4,505 $1,178
====== ======
</TABLE>
Depreciation was $862,000, $338,000 and $198,000 for the years 1999, 1998 and
1997, respectively.
6. TAXES
Prior to July 31, 1998, 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 income taxes on its taxable income. Instead, the
stockholders were liable for individual federal income tax on CBI's taxable
income as determined under the cash basis method of accounting. Income taxes, as
shown in the accompanying financial statements for periods prior to July 31,
1998, consist primarily of state franchise and income taxes.
In connection with its Initial Public Offering, on August 19, 1998, CBI
ceased to be an S corporation and became subject to federal income taxation as a
C corporation. At July 31, 1998 the tax bases of CBI's net assets was
approximately $1.8 million higher than the financial statement bases. Section
448 of the Internal Revenue Code requires companies changing from the cash
method to the accrual method of accounting for tax purposes to offset the excess
deduction arising from the change 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 had a pre Initial Public Offering
loss of $3.8 million, which was passed on to the S corporation shareholders.
Federal income tax (benefit) expense consists of the following components:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Current:
Federal.................................................. $4,848 $1,230 $ --
State and local.......................................... 856 194 60
Deferred:
Federal.................................................. 319 (524) --
State and local.......................................... 56 (83) --
------ ------ ------
$6,079 $ 817 $ 60
====== ====== ======
</TABLE>
F-14
<PAGE> 57
CLARK/BARDES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of the 1999 and 1998 income tax expense computed by
applying the combined federal and state corporate tax rate of 40% to income
before income taxes to the actual taxes is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------
1999 1998
------ -----
<S> <C> <C>
U.S. Federal statutory rate................................. $5,069 $ 138
State income tax -- net of federal benefit.................. 895 24
Non-deductible expenses and other........................... 115 75
Non-recurring effect of conversion from an S to a C
corporation............................................... -- 779
Nontaxable warrant adjustment............................... -- (199)
------ -----
$6,079 $ 817
====== =====
</TABLE>
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 are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------
1999 1998
------ ------
<S> <C> <C>
Deferred tax liabilities
Amortization.............................................. $ 912 $ 426
Other..................................................... -- 50
------ ------
912 476
====== ======
Deferred tax assets
Cash to accrual adjustment................................ 495 739
Accrued liabilities and reserves.......................... 473 314
Deferred revenue.......................................... 226 30
------ ------
1,194 1,083
====== ======
Net deferred tax assets..................................... $ 282 $ 607
====== ======
</TABLE>
In assessing the realizability of deferred tax assets, management considers
the likelihood that some portion or all of the deferred tax assets may 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 that CBI will realize the benefits of these deductible
differences. Accordingly, no valuation allowance is deemed necessary.
F-15
<PAGE> 58
CLARK/BARDES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. LONG TERM DEBT
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1999 1998
------- -------
(IN THOUSANDS)
<S> <C> <C>
Term loan payable to banks.................................. $28,000 $ --
Revolving credit loan payable to banks...................... 5,000 --
Note payable to former shareholders of acquired businesses:
Schoenke & Associates..................................... 1,000 2,019
Phynque, Inc.............................................. 8,724 --
Senior secured notes........................................ -- 11,600
Second priority senior secured notes........................ -- 8,900
Medium term notes -- related parties........................ -- 3,275
AAA distribution -- related parties......................... -- 3,263
------- -------
42,725 29,057
Less Current Maturities..................................... 7,252 4,344
------- -------
$35,473 $24,713
======= =======
</TABLE>
Credit Facility -- On January 15, 1999, CBI negotiated a $65 million senior
credit facility and entered into $25 million of floating rate debt fixed for the
first year at 7.08% (the one-year London InterBank Offered Rate plus 2%) under
that facility. Principal and interest are payable quarterly beginning March 31,
1999. The $25 million of proceeds were used to retire existing long term debt.
The credit facility contains restrictive covenants requiring mandatory
prepayments under certain conditions, financial reporting and compliance
certificates, maintenance of financial ratios, restrictions on guarantees and
additional indebtedness, limitations on mergers and acquisitions, prohibition of
cash dividends, limitation on investments, loans, and advances, and changes in
control. All of the assets of CBI, including the CBI stocked owned by CBH, are
pledged as collateral under this credit agreement.
CBI is obligated to pay a commitment fee based on the daily average of
undrawn funds under the credit agreement. The fee is a minimum of .25% and a
maximum of .50% based on the ratio of consolidated indebtedness to income before
interest, taxes, depreciation and amortization for the most recent four quarters
on a rolling quarterly basis. A ratio of one to one produces the lowest fee and
three to one, or more, produces the highest.
Coincident with the credit facility and floating rate agreement, CBI
entered into two interest rate swap agreements with a bank affiliated with the
lending group to set the interest rates. The first agreement, accounted for in
interest expense, went into effect on July 6, 1999 and sets the underlying
LIBOR-based interest rate at 5.76% on $15 million of the debt. The second
agreement went into effect on January 18, 2000 and sets the underlying
LIBOR-based rate at 5.29% on $15 million of the debt.
CBI capitalized $522,000 of costs in connection with the refinancings as
Other Assets on the balance sheet at December 31, 1999. These costs are being
amortized over the life of the agreements.
On December 28, 1999, CBI expanded the credit facility negotiated in
January 1999, to $100 million with the same group of bank lenders. The new
credit facility provides for a revolving credit and a term loan. At the end of
each year, borrowings under the revolving credit are converted to a five-year
term loan. The revolving credit portion terminates on December 31, 2002. The
revolving credit converts to a term loan at the end of each year. The term loan
is payable quarterly at the rate of 5% of the year end balance and $1,250,000
per quarter so the term portion is repaid by December 31, 2004.
F-16
<PAGE> 59
CLARK/BARDES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Interest on the outstanding indebtedness is at a spread over the Eurodollar
(London InterBank offered) rate or a base rate equal to the prime rate plus
1/2%, at CBI's choice. The Eurodollar rate remains fixed for the period that
portion of the loan is outstanding and the base rate floats with changes in the
prime rate.
The two interest rate swap agreements, negotiated in 1999, remain in
effect.
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 $112,500 and interest paid was $28,000 and $120,000 in 1998 and
1999, respectively.
Phynque, Inc. Notes. In connection with the purchase of Phynque, Inc. d/b/a
Management Compensation Group/HealthCare, CBI issued an $8,724,000 promissory
note payable in thirty-two equal quarterly installments of principal and
interest at 10%. A portion of the promissory note is guaranteed personally by W.
T. Wamberg, Chairman and Chief Executive Officer of CBI and CBH.
At December 31, 1999, future payments under all financing arrangements are
as follows:
<TABLE>
<S> <C>
2000........................................................ $7,252
2001........................................................ 6,548
2002........................................................ 6,646
2003........................................................ 6,754
2004........................................................ 6,874
Thereafter.................................................. 9,250
</TABLE>
8. STOCKHOLDERS' EQUITY
In June 1998, Clark/Bardes, Inc., a Texas corporation (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 the Predecessor Company received one-half share of
the Successor Company in exchange for each share held.
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.
In 1997, the Predecessor Company approved an arrangement 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, 1999 and 1998 for stock purchases were
$7,000 and $97,000. Outstanding principal balances pay interest at 8.5% and
mature in 2000 and 2003.
In June 1998, a return of capital distribution was made to the existing
shareholders. 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 was done in connection with and in contemplation of an
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 expense
during 1998.
In August 1998, CBH sold 4 million shares of common stock in an initial
public offering for net proceeds of $31.7 million.
F-17
<PAGE> 60
CLARK/BARDES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 of the Clark/Bardes
division under an existing bonus arrangement; and
- Issued 142,857 shares having a market value of $2 million to the
controlling shareholders of Wiedemann & Johnson Company in partial
payment for 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, 1999.
On June 7, 1999, CBH sold 1,000,000 shares of common stock to Conning
Insurance Capital Partnership V, L. P. for $16.9 million in a private placement
transaction. The proceeds from this sale were used for debt reduction and
acquisitions.
During 1999, CBH also issued shares of its common stock in connection with
certain acquisitions:
- 326,363 shares having a market value of $5.3 million were issued to the
controlling shareholders of Phynque, Inc. in partial payment for the
purchase of the assets of that Company.
- 99,851 shares having a market value of $1.6 million were issued to the
shareholders of National Institute for Community Banking in exchange for
all of the outstanding shares of that Company. Up to 384,452 additional
shares are issuable upon attainment of stipulated performance objectives
by NICB of which 96,113 shares having a value of $1.4 million were issued
in January 2000.
9. BENEFIT PLANS
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 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.
On April 2, 1997, CBI granted stock options to an individual in his
capacity as a nominee to the Board of Directors 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 CBH's Board of Directors. These options vest at the
rate of 5,555 shares per month beginning July 1, 1998, the date of 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 transaction; accordingly, no compensation
expense has been recorded.
1998 Stock Option Plan. In 1998, the Board of Directors approved a stock
option plan providing for certain employees, directors and producers to purchase
shares at the fair market value at the time the option is granted. The Plan is
administered by a committee of two non-employee directors who have full
discretion to determine participation, vesting and term of the option, at the
time of the grant providing that no option may
F-18
<PAGE> 61
CLARK/BARDES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
have a term greater than ten years from the date of the grant 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.
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
ACTIVITY OPTIONS EXERCISE PRICE
- -------- --------- ----------------
<S> <C> <C>
Outstanding at January 1, 1997............................ 50,000 $ 1.75
Granted................................................. 290,832 $ 5.93
Exercised............................................... (50,000) $ 1.75
Forfeited............................................... --
---------
Outstanding at December 31, 1997.......................... 290,832 $ 5.93
Granted................................................. 380,689 $ 9.00
Exercised............................................... --
Forfeited............................................... --
---------
Outstanding at December 31, 1998.......................... 671,521 $ 7.67
Granted................................................. 586,323 $15.52
Exercised............................................... (1,250) $ 9.00
Forfeited............................................... (18,750) $16.30
---------
Outstanding at December 31, 1999.......................... 1,237,842 $11.51
---------
Exercisable at December 31, 1999.......................... 558,242 $ 9.36
=========
</TABLE>
The options granted in 1999 include 276,600 issued to executives and
employees of the HealthCare Compensation Strategies division in connection with
the acquisition of Phynque, Inc. d/b/a Management Compensation Group HealthCare.
These options vest at the rate of 20% per year beginning in 1999 but are subject
to certain forfeiture provisions if the division fails to attain certain
financial performance goals.
The following table summarizes the stock options outstanding and
exercisable:
<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>
$4.80 140,832 7.22 years $ 4.80 90,327 $ 4.80
$7.00 150,000 7.00 years $ 7.00 150,000 $ 7.00
$9.00 375,689 6.46 years $ 9.00 187,147 $ 9.00
$14.25-$14.75 141,000 7.93 years $14.74 36,667 $14.74
$15.93-$16.13 103,000 4.62 years $16.10 88,939 $16.13
$16.94-$18.13 50,721 7.00 years $17.81 4,662 $17.81
---------
961,242
Contingent 276,600 $16.13 --
---------
1,237,842
</TABLE>
The Company continues to account for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees". Compensation cost for stock options,
if any, is measured as the excess of the quoted market price of the Company's
stock at the date of grant over the amount an employee must pay to acquire the
stock.
F-19
<PAGE> 62
CLARK/BARDES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock-Based Compensation", established accounting and disclosure
requirements using a fair-value-based method of accounting for stock-based
employee compensation plans. The Company has elected to remain on its current
method of accounting as described above, and has adopted the disclosure
requirements of SFAS No. 123.
The pro forma information regarding net income and earnings per share
required by SFAS 123 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 1999 and 1998, respectively:
<TABLE>
<CAPTION>
1999 1998 1997
----- ---- ----
<S> <C> <C> <C>
Dividend yield.............................................. None None None
Volatility.................................................. 185.0% 73.0% 25%
Risk-free interest rates.................................... 6.3% 4.7% 5.8%
Expected life (years)....................................... 6 6 6
</TABLE>
The estimated average fair values of options outstanding in 1999, 1998, and
1997 were $9.88, $4.59 and $1.30 respectively. Had compensation cost for CBI's
stock-based compensation plans been determined in accordance with SFAS No. 123,
CBI's net income (loss) and earnings (loss) per share would have been reduced to
the pro forma amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999 1998 1997
- ----------------------- ------ ----- ------
<S> <C> <C> <C>
Net income (loss)
As reported............................................... $8,831 $(411) $4,234
Pro forma................................................. $7,777 $(977) $4,200
Diluted earnings (loss) per common and common equivalent
share
As reported............................................... $ .86 $(.08) $ .99
Pro forma................................................. $ .83 $(.20) $ .95
</TABLE>
These pro forma amounts are not likely to be representative of the effect
on reported net income for future years.
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 100% of an eligible participant's
contributions to the Plan up to a maximum of 3% of salary. Company contributions
to the Plan were $388,000, $214,000 and $108,000 for the years ended December
31, 1999, 1998, and 1997 respectively.
Stock Purchase Plan. On July 10, 1998, the Board of Directors adopted the
Stock Purchase Plan, under which a total of 200,000 shares of common stock have
been reserved for issuance. 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).
CBH has determined that it will purchase the requisite shares on the open
market and not issue any additional shares to fulfill this obligation. Future
fulfillment under this Plan may be made through open market purchases or
unissued shares, at CBH's discretion.
F-20
<PAGE> 63
CLARK/BARDES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CBH employees purchased 35,617 shares of CBH common stock at an average
cost, to them, of $12.94. CBH's open market purchases of these shares for the
employees were made at an average cost of $16.35. Accordingly, CBH's expense of
this program was $134,000 including administrative expenses.
Key Executive Life Insurance. CBI maintains key man life insurance policies
of $23 million on its Chairman and Chief Executive Officer and policies ranging
from $150,000 to $8.5 million on certain other key executives.
10. 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, 1999.
Rental expense for the years ended December 31, 1999, 1998, and 1997 was
$1,974,000, $916,000, and $476,000.
At December 31, 1999, 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>
2000.................................................. $ 2,615
2001.................................................. 2,491
2002.................................................. 2,372
2003.................................................. 1,493
2004.................................................. 1,254
Thereafter............................................ 6,575
-------
$16,800
</TABLE>
11. RELATED PARTY TRANSACTIONS
A summary of CBI's related party balances and transactions at December 31,
1999 and 1998 and for the years then ended are:
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
Balances:
Accounts receivable -- officers and directors............. $ 20 $ --
Accounts receivable -- affiliates......................... $ 461 $ 872
Commissions and fees payable.............................. $ 26 $ --
Debt maturing within one year............................. $ -- $ 425
Long term debt............................................ $ -- $6,113
Transactions:
Commissions and service fees.............................. $1,434 $1,585
Commission and fee expense................................ $8,071 $8,068
General and administrative expense........................ $ 45 $ --
</TABLE>
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. In
addition, nine administrative employees of the Company's HealthCare Compensation
Strategies are entitled
F-21
<PAGE> 64
CLARK/BARDES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
to a severance payment in the event they voluntarily terminate their employment.
This was an obligation of MCG/HealthCare at the time of its acquisition and was
$1.1 million at December 31, 1999.
CBI and its Chairman and Chief Executive Officer, Mr. Wamberg, were parties
to a Principal Office Agreement dated July 29, 1993, pursuant to which The
Wamberg Organization marketed, on behalf of CBI, life insurance and
administrative and consulting services, and CBI furnished to The Wamberg
Organization marketing materials and concepts, program design ideas, selected
life insurance products, specimen plan documents and administrative services.
The Wamberg Organization's commissions ranged 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 were net of any 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 $8,071,000, $8,068,000 and $7,798,000 in 1999, 1998, and 1997,
respectively, for commissions and fees earned. This agreement was subsequently
terminated on September 1, 1999, as a result of the acquisition of The Wamberg
Organization.
On September 1, 1999, CBI purchased certain assets and the business of The
Wamberg Organization and assumed certain liabilities. Simultaneously, Mr.
Wamberg became Chairman and Chief Executive Officer of CBH. (see Note 2).
CBI has transactions with affiliated entities. CBI provides services for
these affiliates and is reimbursed for these services at the Company's
respective costs. Among these affiliates is Clark/Bardes Securities, Inc. a
registered broker-dealer through which CBI sells all its securities products and
receives a commission. Clark/Bardes Securities, Inc. is owned by W.T. Wamberg,
CBH's chairman and Chief Executive Officer.
12. EARNINGS PER SHARE
The following table sets forth the computation of historical basic and
diluted earnings per share:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Numerator:
Net income (loss) for basic earnings per share..... $ 8,831 $ (411) $ 4,234
Effect of dilutive securities:
Interest on convertible debt (net of tax).......... -- --(1) 125
---------- ---------- ----------
Numerator for diluted earnings per share........... $ 8,831 $ (411) 4,359
========== ========== ==========
Denominator:
Basic earnings per share -- weighted average
shares.......................................... 9,077,775 5,006,009 4,119,387
Effect of dilutive securities:
Stock options...................................... 251,164(3) 7,277
Convertible debt................................... -- --(2) 271,929
---------- ---------- ----------
Diluted earnings per share -- weighted average
shares plus assumed conversions................. 9,328,939 5,006,009 4,398,593
========== ========== ==========
Per share:
Basic earnings (loss).............................. $ 0.97 $ (0.08) $ 1.03
========== ========== ==========
Diluted earnings (loss)............................ $ 0.95 $ (0.08) $ 0.99
========== ========== ==========
</TABLE>
F-22
<PAGE> 65
CLARK/BARDES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- ---------------
* 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 $166,000.
(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>
(3) Does not include 276,600 stock options issued to certain employees since
they are subject to forfeiture if certain performance goals are not met
during the contingency period.
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 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 deduction
disallowance that applied to all business-owned life insurance except for
policies placed on employees, officers, directors and 20 percent owners.
In recent federal budget proposals, certain provisions have been offered to
expand the disallowance rule to policies covering employees, officers and
directors. If such proposals are 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 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.
On October 19, 1999, the United States Tax Court ruled that a domestic
corporation was not entitled to deduct fees and interest on policy loans from a
leveraged corporate-owned life insurance program. Although CBI stopped marketing
leveraged COLI programs in June 1997, management is continuing to evaluate the
impact of this decision, which remains subject to appeal. Nevertheless, this
development may cause some current holders of leveraged COLI policies to elect
to surrender their policies, which would reduce the amount of commissions that
CBH would realize from the total pool of leveraged COLI policies.
F-23
<PAGE> 66
CLARK/BARDES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. SEGMENTS AND RELATED INFORMATION
CBH has three reportable segments:
Clark/Bardes
Bank Compensation Strategies
HealthCare Compensation Strategies
In 1998, CBI reported its Clark/Bardes of Washington, D.C. branch (formerly
Schoenke & Associates) as a segment. During 1999, this segment was combined with
the operations of the Clark/Bardes division and therefore it no longer
constitutes a separate reportable segment.
The three reportable segments operate as independent and autonomous
divisions with a central corporate staff responsible for finance, strategic
planning, human resources and employee benefits. All of CBH's segments are in
the same business; the design, marketing and administration of insurance
financed employee benefit programs to large corporations; community, regional
and money center banks; and healthcare organizations. 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 and 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
inter-segment revenues or expenses.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997
-----------------------------------------------------
BANK HEALTHCARE
COMPENSATION COMPENSATION
CLARK/BARDES STRATEGIES STRATEGIES TOTALS
------------ ------------ ------------ --------
<S> <C> <C> <C> <C>
Revenues.................................... $41,004 $ 8,451 $ -- $ 49,455
Operating income............................ 4,307 910 -- 5,217
Depreciation and amortization............... 165 328 -- 493
Identifiable assets......................... 9,862 27,039 -- 36,901
Capital expenditures........................ 284 64 -- 348
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1998 (RESTATED)
-----------------------------------------------------
BANK HEALTHCARE
COMPENSATION COMPENSATION
CLARK/BARDES STRATEGIES STRATEGIES TOTALS
------------ ------------ ------------ --------
<S> <C> <C> <C> <C>
Revenues.................................... $45,408 $29,358 $ -- $ 74,766
Operating income............................ 5,811 4,038 -- 9,849
Depreciation and amortization............... 503 1,067 -- 1,570
Identifiable assets......................... 38,232 28,654 -- 66,886
Capital expenditures........................ 310 330 640
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1999
-----------------------------------------------------
BANK HEALTHCARE
COMPENSATION COMPENSATION
CLARK/BARDES STRATEGIES STRATEGIES TOTALS
------------ ------------ ------------ --------
<S> <C> <C> <C> <C>
Revenues.................................... $73,528 $30,784 $16,448 $120,760
Operating income............................ 19,750 3,621 623 23,994
Depreciation and amortization............... 2,481 1,151 1,600 5,232
Identifiable assets......................... 58,280 30,841 35,456 124,577
Capital expenditures........................ 878 498 2,812 4,188
</TABLE>
F-24
<PAGE> 67
CLARK/BARDES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table presents a reconciliation of revenues, income before taxes
and assets to the amount shown in the financial statements:
<TABLE>
<CAPTION>
1999 1998 1997
-------- ------- -------
<S> <C> <C> <C>
Revenues
Total revenues for reportable segments.................... $120,760 $74,766 $49,455
-------- ------- -------
Total consolidated revenues....................... $120,760 $74,766 $49,455
======== ======= =======
Income before taxes
Operating income for reportable segments.................. $ 23,994 $ 9,849 $ 5,217
Unallocated amounts
Corporate overhead..................................... 5,865 2,042 --
Put warrants........................................... -- 4,800 --
Interest -- net........................................ 3,219 2,601 923
-------- ------- -------
9,084 9,443 923
-------- ------- -------
Income before taxes............................... $ 14,910 $ 406 $ 4,294
======== ======= =======
Assets
Total assets for reporting segments....................... $124,577 $66,886 $36,901
Deferred tax asset........................................ 282 607 --
-------- ------- -------
Total assets...................................... $124,859 $67,493 $36,901
======== ======= =======
</TABLE>
Geographic Information -- All the Company's revenues are derived from
clients located within the United States.
Major Customers -- CBI generated in excess of 25% of its revenue in 1999
from 8 clients, in 1998 from 8 clients, and in 1997 from 3 clients,
respectively. None of Bank Compensation Strategies or HealthCare Compensation
Strategies customers accounted for more than 10% of revenue. Approximately
15.2%, 17.5%, and 23.0% of CBI's commission and fee revenue for the years ended
1999, 1998, and 1997 respectively, was generated by The Wamberg Organization,
which is wholly owned by CBI's Chairman and Chief Executive Officer.
Substantially all of the policies underlying the programs marketed by CBI are
underwritten by 20 life insurance companies, of which eleven accounted for
approximately 76.1% of CBI's first year revenue for the year ended December 31,
1999 and seven accounted for approximately 63.1%, 76.3% and 78.9% of CBI's first
year revenues for the years ended December 31, 1999, 1998 and 1997,
respectively.
15. ADDITIONAL FINANCIAL INFORMATION
The table that follows provides additional financial information related to
the consolidated financial statements.
Cash Flow Information
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1999 1998 1997
------ ------ -------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash paid for:
Interest.................................................. $3,125 $3,323 $ 636
Taxes..................................................... $2,335 $ 896 $ 182
Financing Activities:
Notes issued in connection with acquisition............... $8,724 $2,000 $10,500
Reduction of borrowing on conversion of notes............. $ -- $4,800 $ --
</TABLE>
F-25
<PAGE> 68
CLARK/BARDES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. SUBSEQUENT EVENTS
On February 7, 2000, CBI signed a letter of intent to acquire the business
substantially all the assets and assume certain liabilities of a group of
privately owned companies engaged in the sale of executive benefit and pension
plans to medium and large corporations.
The total purchase price of the assets, excluding assumed liabilities and
acquisition expenses will be approximately $50 million consisting of:
- a cash payment at closing of $30.1 million,
- 308,428 shares of our common stock with an agreed upon value of $4.9
million, and,
- contingent payments of $15 million payable 86% cash and 14% CBH common
stock, based on achieving predetermined levels of earnings before
interest, taxes, depreciation and amortization for the years 2000 through
2004.
The transaction, which will be funded from the Company's existing line of
credit, is subject to a number of conditions including an on-going review of the
target company's financial and business affairs, execution of definitive
purchase agreements, approval of both Clark/Bardes' and the target's boards of
directors and the consent of Clark/Bardes' lenders, among other things.
17. LITIGATION
From time to time, CBI is involved in various claims and lawsuits
incidental to business, including claims and lawsuits alleging breaches of
contractual obligations under agreements with producers. At this time,
management believes there is no pending litigation that will have a material
adverse effect on CBI's business, financial condition or operating results.
18. 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.................................. 1999 $24.1 $ 29.7 $ 25.7 $ 41.3 $ 120.8
1998 13.8 15.2 17.6 28.2 74.8
1997 5.5 5.8 11.0 27.1 49.4
Gross profit............................. 1999 $ 9.9 $ 16.7 $ 15.2 $ 25.9 $ 67.7
1998 4.6 6.2 6.6 11.3 28.7
1997 2.0 2.0 3.9 9.1 17.0
Pre-tax income (loss).................... 1999 $ 2.5 $ 2.4 $ 1.8 $ 8.2 $ 14.9
1998 0.2 (5.2) 1.6 3.8 0.4
1997 0.2 (0.7) 0.9 3.9 4.3
Net income (loss)........................ 1999 $ 1.5 $ 1.4 $ 1.0 $ 4.9 $ 8.8
1998 0.2 (5.2) 2.4 2.2 (0.4)
1997 0.2 (0.7) 0.9 3.8 4.2
Basic earnings (loss) per share.......... 1999 $0.18 $ 0.16 $ 0.11 $ 0.52 $ 0.97
1998 0.06 (1.61) 0.44 0.27 (0.08)
1997 0.05 (0.16) 0.20 1.27 1.03
Diluted earnings (loss) per share........ 1999 $0.17 $ 0.16 $ 0.11 $ .50 $ 0.95
1998 0.06 (1.61) 0.39 .27 (0.08)
1997 0.05 (0.16) 0.20 1.03 0.99
</TABLE>
F-26
<PAGE> 69
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/ W. T. WAMBERG
----------------------------------
W. T. Wamberg
President and Chief Executive
Officer
Date: March 29, 2000
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>
<C> <S> <C>
/s/ W. T. WAMBERG Chairman of the Board, March 13, 2000
- ----------------------------------------------------- President, Chief Executive
W. T. Wamberg Officer and Director
/s/ LAWRENCE H. HENDRICKSON Vice Chairman of the Board and March 13, 2000
- ----------------------------------------------------- Director
Lawrence H. Hendrickson
/s/ MELVIN G. TODD President, Clark/Bardes March 13, 2000
- ----------------------------------------------------- Division and Director
Melvin G. Todd
/s/ THOMAS M. PYRA Vice President and Chief March 13, 2000
- ----------------------------------------------------- Financial Officer Principal
Thomas M. Pyra Accounting Officer and Chief
Operating Officer
/s/ RANDOLPH A. POHLMAN Director March 13, 2000
- -----------------------------------------------------
Randolph A. Pohlman
/s/ L. WILLIAM SEIDMAN Director March 13, 2000
- -----------------------------------------------------
L. William Seidman
/s/ GEORGE D. DALTON Director March 13, 2000
- -----------------------------------------------------
George D. Dalton
/s/ STEVEN F. PIAKER Director March 13, 2000
- -----------------------------------------------------
Steven F. Piaker
</TABLE>
<PAGE> 70
EXHIBIT LIST
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
2.1 -- Reorganization Agreement, by and among Clark/Bardes,
Inc., Clark/Bardes, Inc. and the Predecessor Company
(Incorporated herein by reference to Exhibit 2.1 of
Clark/Bardes' Registration Statement of Form S-1, 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-1, 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-1, 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, Inc., Wiedemann
& Johnson Company, Bruce Hlavacek and Jennie Hlavacek
(Incorporated herein by reference to Exhibit 2.6 of
Clark/Bardes' Annual Report on Form 10-K, File No.
000-24769, filed with the SEC on March 31, 1999).
2.7 -- Asset Purchase Agreement, dated April 15, 1999, by and
among Clark/Bardes, Inc., Clark/Bardes Holdings, Inc.,
Phynque, Inc., and certain shareholders of Phynque, Inc.
(Incorporated herein by reference to Exhibit 2.1 of
Clark/Bardes' Current Report on Form 8-K, File No.
000-24769, filed with the SEC on April 20, 1999).
2.8 -- Agreement and Plan of Reorganization, dated May 18, 1999,
by and among Clark/Bardes Holdings, Inc., NICB Agency,
Inc., and David Shuster, Lynn High, Kathy Smith, and
Kelly Earls (Incorporated herein by reference to Exhibit
2.8 of Clark/Bardes' Quarterly Report on Form 10-Q, File
No. 000-24769, filed with the SEC on August 16,1999).
2.9 -- Asset and Stock Purchase Agreement, dated September 1,
1999, by and among Clark/Bardes, Inc. and The Wamberg
Organization Inc. and W.T. Wamberg (Incorporated herein
by reference to Exhibit 2.1 of Clark/Bardes' Current
Report on Form 8-K, File No. 000-24769, filed with the
SEC on September 16, 1999).
3.1 -- Certificate of Incorporation of Clark/Bardes, Inc.
(Incorporated herein by reference to Exhibit 3.1 of
Clark/Bardes' Registration Statement on Form S-1, File
No. 333-56799, filed with the SEC on July 12, 1998).
3.2 -- Bylaws of Clark/Bardes, Inc. (Incorporated herein by
reference to Exhibit 3.2 of Clark/Bardes' Registration
Statement on Form S-1, 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-1, File No. 333-56799).
</TABLE>
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<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
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<C> <S>
3.4 -- Certificate of Designation (Incorporated herein by
reference to Exhibit 3.4 of Clark/Bardes' Registration
Statement on Form S-1, File No. 333-56799).
3.5 -- Certificate of Merger of NICB Agency, Inc. and
Clark/Bardes Holdings, Inc. (Incorporated herein by
reference to Exhibit 3.5 of Clark/Bardes' Quarterly
Report on Form 10-Q, File No. 000-24769, filed with the
SEC on August 16, 1999).
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-1, 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, 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, Inc. 1998 Stock Option Plan (Incorporated
herein by reference to Exhibit 10.1 of Clark/Bardes'
Registration Statement on Form S-1, File No. 333-56799).
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-1, 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-1, 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-1, 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-1, 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-1,
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-1, 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-1,
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-1, File
No. 333-56799).
</TABLE>
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<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
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<C> <S>
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-1, 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-1, 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-1, 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-1, 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-1, File No. 333-56799).
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-1, 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-1, 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-1, 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-1, 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-1, 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-1, 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-1, 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-1, 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-1, File
No. 333-56799).
</TABLE>
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<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
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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-1, 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-1, 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-1, 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-1, 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-1, File No. 333-56799).
10.29 -- Form of Employee Stock Purchase Plan (Incorporated herein
by reference to Exhibit 10.29 of Clark/Bardes'
Registration Statement on Form S-1, 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-1, 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-1, 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-1, 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-1, 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-1, 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-1, File
No. 333-56799).
10.36 -- 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-1, File No. 333-56799).
</TABLE>
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<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
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<C> <S>
10.37 -- 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-1, File No. 333-56799).
10.38 -- 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-1, File No. 333-56799).
10.39 -- Form of Letter Agreement between Phoenix Home Life and
Clark/Bardes Holdings (Incorporated herein by reference
to Exhibit 10.41 of Clark/Bardes' Registration Statement
on Form S-1, File No. 333-56799).
10.40 -- Letter Agreement, dated August 14, 1998, between
Nationwide and Clark/Bardes Holdings (Incorporated herein
by reference to Exhibit 10.42 of Clark/Bardes'
Registration Statement on Form S-1, File No. 333-56799).
10.41 -- Letter Agreement, dated August 14, 1998, between
Great-West and Clark/Bardes Holdings (Incorporated herein
by reference to Exhibit 10.43 of Clark/Bardes'
Registration Statement on Form S-1, File No. 333-56799).
10.42 -- Letter Agreement, dated August 17, 1998, between General
American and Clark/ Bardes Holdings (Incorporated herein
by reference to Exhibit 10.44 of Clark/ Bardes'
Registration Statement on Form S-1, File No. 333-56799).
10.43 -- 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).
10.44 -- 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. (Incorporated herein by
reference to Exhibit 10.46 of Clark/Bardes' Annual Report
on Form 10-K, File No. 000-24769, filed with the SEC on
March 31, 1999).
10.45 -- Lease Agreement, dated December 30, 1996, by and between
Bellemead Development Corporation and Schoenke &
Associates Corporation (Incorporated herein by reference
to Exhibit 10.47 of Clark/Bardes' Annual Report on Form
10-K, File No. 000-24769, filed with the SEC on March 31,
1999).
10.46 -- Lease of Office Space, dated February 20, 1990, by and
between T.N.C. Northstar Associates Limited Partnership
and Phynque, Inc., as amended (Incorporated herein by
reference to Exhibit 10.46 of Clark/Bardes' Quarterly
Report on Form 10-Q, File No. 000-24769, filed with the
SEC on August 16, 1999).
10.47 -- Form of Employment Agreement, dated April 5, 1999, by and
between Clark/ Bardes, Inc. and Donald Wegmiller
(Incorporated herein by reference to Exhibit 10.47 of
Clark/Bardes' Quarterly Report on Form 10-Q, File No.
000-24769, filed with the SEC on August 16, 1999).
10.48 -- Employment Agreement, dated as of September 1, 1999, by
and between Clark/ Bardes Holdings, Inc. and W.T. Wamberg
(Incorporated herein by reference to Exhibit 10.48 of
Clark/Bardes' Quarterly Report on Form 10-Q, File No.
000-24769, filed with the SEC on November 12, 1999).
10.49 -- Sublease Agreement, dated as of September 1, 1999, by and
between Clark/Bardes, Inc. and The Wamberg Organization
(Incorporated herein by reference to Exhibit 10.49 of
Clark/Bardes' Quarterly Report on Form 10-Q, File No.
000-24769, filed with the SEC on November 12, 1999).
</TABLE>
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EXHIBIT
NUMBER DESCRIPTION
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*10.50 -- Amended and Restated Credit Agreement, dated as of
December 28, 1999 among Clark/Bardes, Inc. as Borrower,
Bank One Texas, NA as Administrative Agent, U.S. Bank
National Association as Co-Agent, Certain Financial
Institutions as Lenders, and Bank One Capital Markets,
Inc. as Lead Arranger and Sole Book Runner.
22.1 -- Definitive Proxy Statement dated March 30, 2000
(Incorporated herein by reference to File No. 000-24769,
filed with the SEC on March 30, 2000).
*27.1 -- Financial Data Schedule (included with SEC filed copy
only).
</TABLE>
- ---------------
* filed herewith
I-6
<PAGE> 1
EXHIBIT 10.50
================================================================================
AMENDED AND RESTATED CREDIT AGREEMENT
Dated as of December 28, 1999
among
CLARK/BARDES, INC.
as Borrower,
BANK ONE, TEXAS, N.A.
as Administrative Agent,
U.S. BANK NATIONAL ASSOCIATION
as Co-Agent,
CERTAIN FINANCIAL INSTITUTIONS
as Lenders,
and
BANK ONE CAPITAL MARKETS, INC.
as Lead Arranger and Sole Book Runner
===============================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE I DEFINITIONS ........................................................1
ARTICLE II THE CREDITS ......................................................14
2.1 Commitments ........................................14
2.2 Required Payments; Termination .....................15
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 .....................16
2.7 Optional Principal Payments ........................16
2.8 Method of Selecting Types and Interest Periods
for New Advances ...................................16
2.9 Conversion and Continuation of Outstanding
Advances ...........................................16
2.10 Changes in Interest Rate, etc. .....................17
2.11 Rates Applicable After Default .....................17
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 ..............19
2.17 Lending Installations ..............................19
2.18 Non-Receipt of Funds by the Agent ..................19
2.19 Extension of Revolving Credit Termination Date .....19
2.20 Replacement of Lender ..............................19
ARTICLE III YIELD PROTECTION; TAXES .........................................20
3.1 Yield Protection ...................................20
3.2 Changes in Capital Adequacy Regulations ............20
3.3 Availability of Types of Advances ..................21
3.4 Funding Indemnification ............................21
3.5 Taxes ..............................................21
3.6 Lender Statements; Survival of Indemnity ...........23
ARTICLE IV CONDITIONS PRECEDENT .............................................23
4.1 Initial Advance ....................................23
4.2 Each Advance .......................................24
ARTICLE V REPRESENTATIONS AND WARRANTIES ....................................24
5.1 Existence and Standing .............................24
5.2 Authorization and Validity .........................24
5.3 No Conflict; Government Consent ....................25
5.4 Financial Statements ...............................25
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<TABLE>
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5.5 Material Adverse Change ............................25
5.6 Taxes ..............................................25
5.7 Litigation and Contingent Obligations ..............25
5.8 Subsidiaries .......................................26
5.9 ERISA ..............................................26
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 ..............................27
5.17 Investment Company Act .............................27
5.18 Public Utility Holding Company Act .................27
5.19 Year 2000 ..........................................27
5.20 Insurance ..........................................27
5.21 Solvency ...........................................27
ARTICLE VI COVENANTS ........................................................28
6.1 Financial Reporting ................................28
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 ...............................30
6.8 Maintenance of Properties ..........................30
6.9 Inspection .........................................30
6.10 Dividends ..........................................30
6.11 Indebtedness .......................................30
6.12 Merger .............................................30
6.13 Sale of Assets .....................................30
6.14 Investments and Acquisitions .......................31
6.15 Liens ..............................................32
6.16 Reserved ...........................................32
6.17 Year 2000 ..........................................32
6.18 Affiliates .........................................33
6.19 Subordinated Indebtedness ..........................33
6.20 Omitted ............................................33
6.21 Sale of Accounts ...................................33
6.22 Sale and Leaseback Transactions and other Off-
Balance Sheet Liabilities ..........................33
6.23 Contingent Obligations .............................33
6.24 Letters of Credit ..................................33
6.25 Financial Covenants ................................33
6.26 Investment Company .................................34
6.27 Hedging Obligation .................................34
ARTICLE VII DEFAULTS ........................................................34
</TABLE>
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ARTICLE VIII ACCELERATION, WAIVERS, AMENDMENTS AND REMEDIES .................36
8.1 Acceleration .......................................36
8.2 Amendments .........................................37
8.3 Preservation of Rights .............................37
ARTICLE IX GENERAL PROVISIONS ...............................................37
9.1 Survival of Representations ........................37
9.2 Governmental Regulation ............................38
9.3 Headings ...........................................38
9.4 Entire Agreement ...................................38
9.5 Several Obligations; Benefits of this Agreement ....38
9.6 Expenses; Indemnification ..........................38
9.7 Usury Savings Clause ...............................39
9.8 Accounting .........................................39
9.9 Severability of Provisions .........................39
9.10 Nonliability of Lenders ............................40
9.11 Confidentiality ....................................40
9.12 Nonreliance ........................................40
9.13 Disclosure .........................................40
ARTICLE X THE AGENT .........................................................40
10.1 Appointment; Nature of Relationship ................40
10.2 Powers .............................................41
10.3 General Immunity ...................................41
10.4 No Responsibility for Loans, Recitals, etc. ........41
10.5 Action on Instructions of Lenders ..................41
10.6 Employment of Agents and Counsel ...................42
10.7 Reliance on Documents; Counsel .....................42
10.8 Agent's Reimbursement and Indemnification ..........42
10.9 Notice of Default ..................................42
10.10 Rights as a Lender .................................42
10.11 Lender Credit Decision .............................42
10.12 Successor Agent ....................................43
10.13 Agent's Fee ........................................43
10.14 Delegation to Affiliates ...........................43
10.15 Execution of Collateral Documents ..................43
10.16 Collateral Releases ................................43
10.17 Co-Agents and Arranger .............................44
ARTICLE XI SETOFF; RATABLE PAYMENTS .........................................44
11.1 Setoff .............................................44
11.2 Ratable Payments ...................................44
11.3 Proceeds of Collateral .............................44
ARTICLE XII BENEFIT OF AGREEMENT; ASSIGNMENTS; PARTICIPATIONS ...............45
12.1 Successors and Assigns .............................45
12.2 Participations .....................................45
12.3 Assignments ........................................46
</TABLE>
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<TABLE>
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12.4 Dissemination of Information .......................46
12.5 Tax Treatment ......................................46
ARTICLE XIII NOTICES ........................................................47
13.1 Notices ............................................47
13.2 Change of Address ..................................47
ARTICLE XIV COUNTERPARTS ...................................................47
ARTICLE 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 ...............................48
</TABLE>
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
<PAGE> 6
AMENDED AND RESTATED CREDIT AGREEMENT
This Amended and Restated Credit Agreement, dated as of the 28th day of
December, 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:
RECITALS:
I. Borrower, Agent and certain of the Lenders have previously entered
into that certain Credit Agreement (as heretofore amended, modified, and
supplemented, the "EXISTING CREDIT AGREEMENT") dated as of January 15, 1999,
pursuant to which the Lenders agreed to make the Loan available to Borrower. The
Existing Credit Agreement has been previously modified and amended pursuant to
(i) that certain Consent and Agreement dated as of April 6, 1999, (ii) that
certain Consent and Agreement dated as of May 14, 1999, and (iii) that certain
Consent and Agreement dated as of August 30, 1999.
II. Payment and performance of the Obligations (under and as defined in
the Existing Credit Agreement) under the Loan are guaranteed by Parent pursuant
to that certain Guaranty Agreement (the "Existing Guaranty") executed by Parent
in favor of Agent and the Lenders. In connection with the execution of this
Agreement, Schoenke Hawaii (as hereinafter defined) shall execute the Security
Agreement.
III. The Borrower has requested certain modifications and amendments
to, and consents under, the Existing Credit Agreement. The Borrower, Agent and
the Lenders desire to execute this Agreement to amend and restate the Existing
Credit Agreement to effect such changes to the Existing Credit Agreement and to
add certain parties as Lenders hereunder. Accordingly, in consideration of the
mutual covenants and agreements contained herein, and other good and valuable
consideration, the receipt and adequacy of which is hereby acknowledged, 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.
AMENDED AND RESTATED CREDIT AGREEMENT (Clark/Bardes, Inc.) Page 1
<PAGE> 7
"ADVANCE RATE" means, with respect to fees and commissions owing by (i)
insurance companies which are currently included in the Borrowing Base, 80%,
(ii) insurance companies which are not currently included in the Borrowing Base
but with which Borrower subsequently commences doing business (other than those
covered under clause (iii) below), and who have a financial strength rating by
S&P or Moody's below A or are unrated, 0%, and (iii) companies which Borrower
proposes to include in the Borrowing Base and which arise out of an Acquisition
by Borrower, the advance rate set forth below opposite such company's financial
strength rating by S&P or Moody's (or the lower rating in the event of a
conflict):
<TABLE>
<CAPTION>
S&P Rating Moody's Rating Advance Rate
---------- -------------------- ------------
<S> <C> <C>
A or better A or better 80%
A- A2 70%
BBB+ Baa1 50%
BBB Baa2 30%
below BBB or unrated below Baa or unrated 0%
</TABLE>
"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 $75,000,000, 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 Amended and Restated Credit Agreement, as it may
be amended or modified and in effect from time to time.
"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.
AMENDED AND RESTATED CREDIT AGREEMENT (Clark/Bardes, Inc.) Page 2
<PAGE> 8
"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 Bank One Capital Markets, Inc., an Illinois
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%).
"ATTRITION RATE" means the yearly rate of attrition of renewals of
existing policies and contracts, which for purposes of calculating Present Value
of Renewals, is (i) 7.5% with respect to contracts and policies resulting from
the Acquisition of HCS, (ii) 12.5% with respect to contracts and policies
resulting from the acquisition of BCA, (iii) 5% with respect to all other
contracts and policies in effect at the date of this Agreement, and (iv) a rate
to be determined by Agent based on the historical attrition rate of renewals for
any contracts and policies which arise from Acquisitions following the date of
this Agreement.
"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.
"BCA" means Bank Consultants of America.
"BORROWER" means Clark/Bardes, Inc., a Delaware corporation, and its
successors and assigns.
"BORROWING BASE" means an amount equal to (i) the applicable Advance
Rate times the Net Present Value of Renewals, minus (ii) Borrower's Consolidated
Funded Indebtedness (other than that certain Promissory Note dated September 18,
1998 in the stated principal amount of $2,000,000 executed by Borrower as maker
in favor of Schoenke & Associates Securities Corporation as payee (the "Schoenke
Note")), 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 (other than an 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)
AMENDED AND RESTATED CREDIT AGREEMENT (Clark/Bardes, Inc.) Page 3
<PAGE> 9
expenditures of insurance 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 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 (b) 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, and whether
or not such assets would be included on a Balance Sheet of such Person in
accordance with Agreement Accounting Principles) 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 with the Existing Credit Agreement executed by
Borrower and Parent, in favor of Lenders pursuant to which Borrower and Parent
pledged and granted a security interest in the Collateral, (ii) the Guaranty,
and (iii) the Security Agreement.
"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 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.
AMENDED AND RESTATED CREDIT AGREEMENT (Clark/Bardes, Inc.) Page 4
<PAGE> 10
"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 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"). 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.
"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.
AMENDED AND RESTATED CREDIT AGREEMENT (Clark/Bardes, Inc.) Page 5
<PAGE> 11
"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 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.
AMENDED AND RESTATED CREDIT AGREEMENT (Clark/Bardes, Inc.) Page 6
<PAGE> 12
"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, 2007, 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 collectively, (i) Parent and its successors and
assigns, and (ii) each Subsidiary of Borrower or Parent (other than Wamberg
Financial Corporation and Schoenke Hawaii) and its successors and assigns.
"GUARANTY" means that certain Unlimited Guaranty dated as of January
15, 1999, executed by Parent 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.
"HCS" means Health Compensation Strategies, Inc.
"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 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
AMENDED AND RESTATED CREDIT AGREEMENT (Clark/Bardes, Inc.) Page 7
<PAGE> 13
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).
"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.
AMENDED AND RESTATED CREDIT AGREEMENT (Clark/Bardes, Inc.) Page 8
<PAGE> 14
"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" an amount equal to the product of
(i) the advance rate of 90%, times (ii) one minus the Assumed Expense Allowance,
times (iii) 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-l 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
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
AMENDED AND RESTATED CREDIT AGREEMENT (Clark/Bardes, Inc.) Page 9
<PAGE> 15
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 or Subsidiary of the Borrower (which is or becomes a Guarantor
hereunder) which is approved in writing by Required Lenders, and (b) an
Acquisition by Borrower or an Affiliate of the Borrower of companies in the same
or substantially similar industry as the Borrower where (i) the total
consideration for such Acquisition is less than $20,000,000 and the cash portion
of such total is less than $10,000,000; provided, however, if less than fifty
percent (50%) of the assets purchased for such Acquisition are from existing
inforce insurance, the total consideration for such Acquisition 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.
"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.
"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.
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"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 [i]
any surrendered or lapsed policies or contracts and any policies or contracts
for which Borrower has received notice of non-renewal and [ii] any policies or
contracts which secure the Schoenke Note) for the 10 year period following the
date of determination (deducting, for each year after such date, the applicable
Attrition Rate [i.e. multiplied by one minus such applicable Attrition Rate for
each such year]), 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.
"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.
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"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 66.67% 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.
"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, 2002 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.
"SCHOENKE HAWAII" means Schoenke & Associates of Hawaii, L.P., a
Hawaiian limited partnership.
"SECTION" means a numbered section of this Agreement, unless another
document is specifically referenced.
"SECURITY AGREEMENT" means that certain Security Agreement of even date
herewith executed by Schoenke Hawaii in favor of Lenders.
"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" means Indebtedness of Borrower which (i) is
expressly subordinate to the Loans, (ii) is designated by the Borrower in a
certificate delivered to the Agent as "Subordinated Debt" at the time of the
incurrence of such Indebtedness (or in the case of Indebtedness existing on the
date hereof in a certificate delivered to the Agent on the date hereof), and
(iii) is approved in writing by Required Lenders as "Subordinated Debt".
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"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 $25,000,000 (after a
principal payment thereon on the date of this Agreement in the amount of
$1,250,000).
"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.
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"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) $75,000,000 (the
"REVOLVING CREDIT FACILITY"). Subject to the terms of this 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 March 31,
2000, 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; provided, that, the amount of the Term
Conversion on March 31, 2000 may not exceed $30,000,000. 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 continue its Commitment Percentage of
the Term Loan to the Borrower.
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.
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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 make a payment to Agent for the account of each Lender
in an amount equal to (i) the amount by which (A) the balance of the
Revolving Credit Facility at any time outstanding exceeds (B) the
Borrowing Base, and (ii) 100% of the net cash proceeds (i.e. gross
cash proceeds less ordinary and reasonable closing costs) of (X) the
sale of any material asset, including but not limited to the sale of
accounts receivable or renewals, but excluding the Cessna Citation V,
(Y) the issuance of other Indebtedness other than Permitted
Indebtedness (without implying the Lenders' consent to any such
Indebtedness except as specifically provided herein), and (Z) the
issuance of any equity securities by Borrower, Parent or any
Subsidiary of Borrower or Parent (whether public or private,
registered or unregistered). 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 [other than those
made pursuant to subsection (ii)(Z)] shall be applied first to the
Term Loan, second to any then existing portion of the Revolving
Credit Facility 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. Any mandatory prepayment under
subsection (ii)(Z) shall be applied to any then existing portion of
the Revolving Credit Facility which is not the subject of a Term
Conversion, to the extent of the outstanding balance thereof.
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
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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.
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
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"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 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
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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.
(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
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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.
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 Facility 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
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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 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 Regulation. 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
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<PAGE> 26
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 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
AMENDED AND RESTATED CREDIT AGREEMENT (Clark/Bardes, Inc.) Page 21
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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 Internal Revenue Service Form 100 1 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.
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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, 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.
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(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.
(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
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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.
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, 1999 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, 1999 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.
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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 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. Section 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. Section 2510.3-101(f)) do not own 25%
or more of the value of any class of equity interests in the Borrower.
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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 into
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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, and within 120 days after the last day of the third (3rd)
calendar quarter of each year, a self-prepared report, which has been
reviewed by Ernst & Young LLP, or such other independent certified
public accounting firm acceptable to Agent confirming that the inforce
insurance numbers in the year end Borrowing Base compliance
certificate are accurate.
(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.
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(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 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.
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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.
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.
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(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 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) Other than during the existence of a Default, Permitted
Acquisitions (where any Subsidiary thereby created or acquired becomes
a Guarantor by signing a joinder to the Guaranty and signs a joinder
to the Collateral Documents as more particularly described in
subsection (v) below).
(iv) Permitted Employee and Producer Loans.
(v) Other than during the existence of a Default, Investments in
any newly created or acquired Subsidiary so long as such Subsidiary
(i) becomes a Guarantor by signing a joinder to the Guaranty and (ii)
signs a joinder to the Collateral Documents, in each instance within
ten days after it becomes active (i.e. not "inactive"). The Borrower
may establish or create Subsidiaries which are "inactive" (as
hereinafter defined) when established or created without the necessity
of complying with the foregoing requirements so long as such
Subsidiaries remain "inactive"; provided that, as soon as practicable
after, but in no event later than ten days after, each such Subsidiary
so established or created ceases to be "inactive", Borrower shall (i)
cause such Subsidiary to Guaranty the Loans, (ii) cause such
Subsidiary to join the Collateral Documents as a grantor and pledgor
thereunder, and (iii) amend the Collateral Documents to reflect the
pledge by Borrower, Parent or the appropriate Subsidiary of all of the
ownership interests in such new Subsidiary. As used herein, an
"inactive" Subsidiary shall mean any Subsidiary which has no assets or
liabilities, other than as nominally required under applicable law in
order for such Subsidiary to be established or created. "Inactive"
Subsidiaries may include, without limitation, Subsidiaries formed to
reserve a certain corporate or trade name in anticipation of business
being done under that name and those formed in anticipation of an
Acquisition which is pending.
(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 $25,000,000 without the prior written
consent of Required Lenders.
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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.
(vi) Liens in favor of the Agent, for the benefit of the Lenders,
granted pursuant to any Collateral Document.
(vii) Liens securing Permitted Purchase Money Obligations on the
assets acquired with the proceeds of such Purchase Money Obligations.
(viii) 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 Reserved.
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.
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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 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 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) $52,000,000,
plus (ii) 75% of Consolidated Net Income earned in each fiscal quarter
beginning with the quarter ending September 30, 1999 (without
deduction for losses), plus (iii) 100% of the net cash proceeds of any
offering of securities after the date of this Agreement
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(whether debt or equity and whether public or private), plus (iv) 100%
of the shareholder equity of any entity acquired by Borrower, Parent
or any of their respective Subsidiaries.
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. Section 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. Section 80a-18(f)(1).
6.27 Hedging Obligation. The Borrower shall maintain at all times
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 in form,
substance and with financial institutions acceptable to Agent, with respect to
25% of the outstanding balance of the Term Loan and the Revolving Credit
Facility.
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, 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
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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.
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
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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.
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
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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.
(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.
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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 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
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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 Usury Savings Clause. Notwithstanding anything to the contrary in
this Agreement, the Notes or any other Loan Document, or in any other agreement
entered into in connection with the Notes or securing the indebtedness evidenced
by the Notes, whether now existing or hereafter arising and whether written or
oral, it is agreed that the aggregate of all interest and other charges
constituting interest, or adjudicated as constituting interest, and contracted
for, chargeable or receivable under the Notes or otherwise in connection with
the Notes shall under no circumstances exceed the maximum rate of interest
permitted by applicable law. In the event the maturity of the Notes is
accelerated by reason of an election by the holder thereof resulting from a
default thereunder or under any other document executed as security therefor or
in connection therewith, or by voluntary prepayment by the maker, or otherwise,
then earned interest may never include more than the maximum rate of interest
permitted by applicable law. If from any circumstance any holder of any of the
Notes shall ever receive interest or any other charges constituting interest, or
adjudicated as constituting interest, the amount, if any, which would exceed the
maximum rate of interest permitted by applicable law shall be applied to the
reduction of the principal amount owing on such Notes or on account of any other
principal indebtedness of the maker to the holders of such Notes, and not to the
payment of interest, or if such excessive interest exceeds the unpaid balance of
principal thereof and such other indebtedness, the amount of such excessive
interest that exceeds the unpaid balance of principal thereof and such other
indebtedness shall be refunded to the Borrower. All sums paid or agreed to be
paid to the holder of the Notes for the use, forbearance or detention of the
indebtedness of the maker to the holder of such Notes shall be amortized,
prorated, allocated and spread throughout the full term of such indebtedness
until payment in full for the purpose of determining the actual rate on such
indebtedness is uniform throughout the term thereof. The terms "maximum amount"
or "maximum rate" as used in this Agreement, or in any other agreement entered
into in connection with the Notes or securing the indebtedness evidenced by the
Notes, whether now existing or hereafter arising and whether written or oral,
include, as to Chapter 303 of the Texas Finance Code (and as same may be
incorporated by reference in other statutes of the State of Texas), but
otherwise without limitation, that rate based upon the "weekly ceiling";
provided, however, that this designation shall not preclude the rate of interest
contracted for, charged or received in connection with the Loans from being
governed by, or construed in accordance with, any other state or federal law,
including but not limited to, Public Law 96-221. Chapter 346 of the Texas
Finance Code as in effect on the date hereof and as the same may hereafter be
amended or supplemented from time to time, shall not apple to any of the loans
or any loan document.
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 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
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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.
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
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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 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.
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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.
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
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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.
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
AMENDED AND RESTATED CREDIT AGREEMENT (Clark/Bardes, Inc.) Page 43
<PAGE> 49
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 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.
AMENDED AND RESTATED CREDIT AGREEMENT (Clark/Bardes, Inc.) Page 44
<PAGE> 50
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.
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
AMENDED AND RESTATED CREDIT AGREEMENT (Clark/Bardes, Inc.) Page 45
<PAGE> 51
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 (1) 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 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
AMENDED AND RESTATED CREDIT AGREEMENT (Clark/Bardes, Inc.) Page 46
<PAGE> 52
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.
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
AMENDED AND RESTATED CREDIT AGREEMENT (Clark/Bardes, Inc.) Page 47
<PAGE> 53
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.
[REMAINDER OF PAGE INTENTIONALLY BLANK.
SIGNATURES FOUND ON FOLLOWING PAGES.]
AMENDED AND RESTATED CREDIT AGREEMENT (Clark/Bardes, Inc.) Page 48
<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: /s/ THOMAS M. PYRA
------------------------------------------------
Print Name: Thomas M. Pyra
----------------------------------------
Title: CFO & COO
---------------------------------------------
102 S. Wynstone Park Drive, Suite 200
N. Barrington, Illinois 60010
Attention: W.T. Wamburg and Tom Pyra
Telephone: (947) 304-5800
FAX: (847) 304-5878
COMMITMENTS: LENDERS:
Term: $7,500,000 BANK ONE, TEXAS, N.A., a national banking
Revolving: $22,500,000 association, Individually and as Agent
By: /s/ [ILLEGIBLE]
------------------------------------------------
Print Name: [ILLEGIBLE]
----------------------------------------
Title: Vice President
---------------------------------------------
1717 Main Street; Third Floor
Dallas, Texas 75201
Attention: Chris Holder
Telephone: (214) 290-4146
FAX: (214) 290-2305
Term: $7,500,000 U.S. BANK NATIONAL ASSOCIATION, a national banking
Revolving: $22,500,000 association, Individually and as Co-Agent
By: /s/ JASON TORNOW
------------------------------------------------
Print Name: Jason Tornow
----------------------------------------
Title: Corporate Banking Officer
---------------------------------------------
601 Second Avenue South
Minneapolis, Minnesota 55402-4302
Attention: Jose A. Peris
Telephone: (612) 973-0551
FAX: (612) 973-0832
AMENDED AND RESTATED CREDIT AGREEMENT (Clark/Bardes, Inc.) Page 49
<PAGE> 55
LaSalle Bank National Association (f.k.a.
Term: $6,250,000 LASALLE NATIONAL BANK), a national banking
Revolving: $18,750,000 association
By: /s/ RICHARD J. MELNICK
------------------------------------------------
Print Name: Richard J. Melnick
----------------------------------------
Title: First Vice President
---------------------------------------------
135 South LaSalle Street
Chicago, Illinois 60603
Attention: Richard J. Melnick
Telephone: (312) 904-7117
FAX: (312) 904-6353
Term: $3,750,000 COMPASS BANK, an Alabama state bank
Revolving: $11,250,000
By: /s/ TODD D. PING
------------------------------------------------
Print Name: Todd D. Ping
----------------------------------------
Title: Vice President
---------------------------------------------
8080 N. Central Expressway, Suite 250
Dallas, Texas 75206
Attention: Todd Ping
Telephone: (214) 706-8065
FAX: (214) 890-8625
AMENDED AND RESTATED CREDIT AGREEMENT (Clark/Bardes, Inc.) Page 50
<PAGE> 56
PRICING SCHEDULE
<TABLE>
<CAPTION>
APPLICABLE LEVEL I LEVEL II LEVEL III LEVEL IV LEVEL V
MARGIN STATUS STATUS STATUS STATUS STATUS
---------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Eurodollar Rate 1.25% 1.625% 2.00% 2.25% 2.50%
Floating Rate 0.00% 0.00% 0.00% 0.25% 0.50%
</TABLE>
<TABLE>
<CAPTION>
APPLICABLE LEVEL I LEVEL II LEVEL III LEVEL IV LEVEL V
FEE RATE STATUS STATUS STATUS STATUS STATUS
---------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Commitment Fee 0.25% 0.25% 0.35% 0.425% 0.50%
</TABLE>
For the purposes of this Schedule, the following terms have the
following meanings, subject to the final paragraph of this Schedule:
"FINANCIALS" means the annual or quarterly financial statements of the
Borrower delivered pursuant to Section 6.1(i) or (ii).
"LEVEL I STATUS" exists at any date if, as of the last day of the
fiscal quarter of the Borrower referred to in the most recent Financials, the
Leverage Ratio is less than or equal to 1.00 to 1.00.
"LEVEL II STATUS" exists at any date if, as of the last day of the
fiscal quarter of the Borrower referred to in the most recent Financials, (i)
the Borrower has not qualified for Level I Status and (ii) the Leverage Ratio is
less than or equal to 1.50 to 1.00.
"LEVEL III STATUS" exists at any date if, as of the last day of the
fiscal quarter of the Borrower referred to in the most recent Financials, (i)
the Borrower has not qualified for Level I Status or Level II Status and (ii)
the Leverage Ratio is less than or equal to 2.00 to 1.00.
"LEVEL IV STATUS" exists at any date if, as of the last day of the
fiscal quarter of the Borrower referred to in the most recent Financials, (i)
the Borrower has not qualified for Level I Status, Level 11 Status or Level III
Status and (ii) the Leverage Ratio is less than or equal to 2.50 to 1.00.
"LEVEL V STATUS" exists at any date if, as of the last day of the
fiscal quarter of the Borrower referred to in the most recent Financials, (i)
the Borrower has not qualified for Level I Status, Level II Status, Level III
Status or Level IV Status and (ii) the Leverage Ratio is less than or equal to
3.00 to 1.00.
"STATUS" means either Level I Status, Level II Status, Level III
Status, Level IV Status or Level V Status.
The Applicable Margin and Applicable Fee Rate shall be determined in
accordance with the foregoing table based on the Borrower's Status as reflected
in the then most recent Financials. Adjustments, if any, to the Applicable
Margin or Applicable Fee Rate shall be effective five Business Days after the
Agent has received the applicable Financials. If the Borrower fails to deliver
the Financials to the Agent at the time required pursuant to Section 6.1, then
the Applicable Margin and Applicable Fee Rate shall be the highest Applicable
Margin and Applicable Fee Rate set forth in the foregoing table until five days
after such Financials are so delivered.
AMENDED AND RESTATED CREDIT AGREEMENT (Clark/Bardes, Inc.) Page 51
<PAGE> 57
Commitment Schedule
<TABLE>
<CAPTION>
Term Loan Revolving Total Commitment
Lender Commitment Commitment Commitment Percentage
------ ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
1. Bank One, Texas $ 7,500,000 $22,500,000 $ 30,000,000 30%
2. US Bank $ 7,500,000 $22,500,000 $ 30,000,000 30%
3. LaSalle Bank $ 6,250,000 $18,750,000 $ 25,000,000 25%
4. Compass Bank $ 3,750,000 $11,250,000 $ 15,000,000 15%
----------- ----------- ------------ ---
Totals: $25,000,000 $75,000,000 $100,000,000 100%
</TABLE> =========== =========== ============ ===
AMENDED AND RESTATED CREDIT AGREEMENT (Clark/Bardes, Inc.) Page 52
<PAGE> 58
EXHIBIT A
FORM OF OPINION
[SEE ATTACHED]
AMENDED AND RESTATED CREDIT AGREEMENT (Clark/Bardes, Inc.) Page 53
<PAGE> 59
EXHIBIT B
COMPLIANCE CERTIFICATE
To: The Lenders parties to the
Credit Agreement Described Below
This Compliance Certificate is furnished pursuant to that
certain Amended and Restated Credit Agreement dated as of _____________, ____
(as amended, modified, renewed or extended from time to time, the "AGREEMENT")
among Clark/Bardes, Inc. (the "BORROWER"), the lenders party thereto and Bank
One, Texas, N.A., as Agent for the Lenders. Unless otherwise defined herein,
capitalized terms used in this Compliance Certificate have the meanings ascribed
thereto in the Agreement.
THE UNDERSIGNED HEREBY CERTIFIES THAT:
1. I am the duly elected _________ of the Borrower;
2. I have reviewed the terms of the Agreement and I have made, or have
caused to be made under my supervision, a detailed review of the transactions
and conditions of the Borrower and its Subsidiaries during the accounting period
covered by the attached financial statements;
3. The examinations described in paragraph 2 did not disclose, and I
have no knowledge of, the existence of any condition or event which constitutes
a Default or Unmatured Default during or at the end of the accounting period
covered by the attached financial statements or as of the date of this
Certificate, except as set forth below; and
4. Schedule I attached hereto sets forth financial data and
computations evidencing the Borrower's compliance with certain covenants of the
Agreement, all of which data and computations are true, complete and correct.
5. Schedule II hereto sets forth the determination of the interest
rates to be paid for Advances and the commitment fee rates commencing on the
fifth day following the delivery hereof.
6. Schedule III attached hereto sets forth the various reports and
deliveries which are required at this time under the Credit Agreement, the
Security Agreement and the other Loan Documents and the status of compliance.
7. Schedule IV attached hereto sets forth a computation of the
Borrowing Base, together with a list of the cases and policies included in such
computation, all of which data and computations are true, complete and correct.
Described below are the exceptions, if any, to paragraph 3 by listing,
in detail, the nature of the condition or event, the period during which it has
existed and the action which the Borrower has taken, is taking, or proposes to
take with respect to each such condition or event:
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The foregoing certifications, together with the computations set forth in
Schedule I and Schedule II hereto and the financial statements delivered with
this Certificate in support hereof, are made and delivered this ___ day of
________, ____.
-------------------
AMENDED AND RESTATED CREDIT AGREEMENT (Clark/Bardes, Inc.) Page 54
<PAGE> 60
SCHEDULE I TO COMPLIANCE CERTIFICATE
Compliance as of _______,____ with
Sections 6.25.1, 6.25.2 and 6.25.3 of
the Agreement
AMENDED AND RESTATED CREDIT AGREEMENT (Clark/Bardes, Inc.) Page 55
<PAGE> 61
SCHEDULE II TO COMPLIANCE CERTIFICATE
Borrower's Applicable Margin Calculation
AMENDED AND RESTATED CREDIT AGREEMENT (Clark/Bardes, Inc.) Page 56
<PAGE> 62
SCHEDULE III TO COMPLIANCE CERTIFICATE
Reports and Deliveries Currently Due
AMENDED AND RESTATED CREDIT AGREEMENT (Clark/Bardes, Inc.) Page 57
<PAGE> 63
SCHEDULE IV TO COMPLIANCE CERTIFICATE
Calculation as of _______, ____
of
the Borrowing Base
<TABLE>
<S> <C> <C>
I. Net Commissions and Fees (i.e. after deducting for Attrition Rate) to
be earned on existing policies and contracts (less commissions to be
paid to producers) (Attach list as Exhibit A): $
--------------
II. Discounted to present value at 12% equals the Present Value of Renewals $
--------------
III. Multiplied by (i) (90%), and (ii) one minus the assumed expense
allowance equals the Net Present Value of Renewals: $
--------------
IV. Multiplied by applicable Advance Rate:
$ times 80% $
------- --------------
$ times 70% $
------- --------------
$ times 50% $
------- --------------
$ times 30% $
------- --------------
V. Minus the current outstanding balance of the Term Loan and the
Revolving Credit Facility: $
--------------
VI. Minus the other Consolidated Funded Indebtedness equals the
availability under the Revolving Credit Facility: $
--------------
</TABLE>
AMENDED AND RESTATED CREDIT AGREEMENT (Clark/Bardes, Inc.) Page 58
<PAGE> 64
Exhibit A
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Case/Policy Policy Commission Producer Attrition Rate Advance Rate Net Commission
Amount Amount/Fee Commission Amount
(if applicable) Amount %
----------- -------------- ---------- ---------- -------------- ------------ --------------
----------- -------------- ---------- ---------- -------------- ------------ --------------
----------- -------------- ---------- ---------- -------------- ------------ --------------
----------- -------------- ---------- ---------- -------------- ------------ --------------
----------- -------------- ---------- ---------- -------------- ------------ --------------
----------- -------------- ---------- ---------- -------------- ------------ --------------
----------- -------------- ---------- ---------- -------------- ------------ --------------
----------- -------------- ---------- ---------- -------------- ------------ --------------
----------- -------------- ---------- ---------- -------------- ------------ --------------
----------- -------------- ---------- ---------- -------------- ------------ --------------
----------- -------------- ---------- ---------- -------------- ------------ --------------
----------- -------------- ---------- ---------- -------------- ------------ --------------
----------- -------------- ---------- ---------- -------------- ------------ --------------
----------- -------------- ---------- ---------- -------------- ------------ --------------
Total
--------------
</TABLE>
AMENDED AND RESTATED CREDIT AGREEMENT (Clark/Bardes, Inc.) Page 59
<PAGE> 65
EXHIBIT C
ASSIGNMENT AGREEMENT
This Assignment Agreement (this "ASSIGNMENT AGREEMENT") between
________________ (the "ASSIGNOR") and _____________ (the "ASSIGNEE") is dated as
of ________, 19__. The parties hereto agree as follows:
1. PRELIMINARY STATEMENT. The Assignor is a party to an Amended and
Restated Credit Agreement (which, as it may be amended, modified, renewed or
extended from time to time is herein called the "CREDIT AGREEMENT") described in
Item 1 of Schedule 1 attached hereto ("Schedule 1). Capitalized terms used
herein and not otherwise defined herein shall have the meanings attributed to
them in the Credit Agreement.
2. ASSIGNMENT AND ASSUMPTION. The Assignor hereby sells and assigns to
the Assignee, and the Assignee hereby purchases and assumes from the Assignor,
an interest in and to the Assignor's rights and obligations under the Credit
Agreement and the other Loan Documents, such that after giving effect to such
assignment the Assignee shall have purchased pursuant to this Assignment
Agreement the percentage interest specified in Item 3 of Schedule 1 of all
outstanding rights and obligations under the Credit Agreement and the other Loan
Documents relating to the facilities listed in Item 3 of Schedule 1. The
aggregate Commitment (or Loans, if the applicable Commitment has been
terminated) purchased by the Assignee hereunder is set forth in Item 4 of
Schedule 1.
3. EFFECTIVE DATE. The effective date of this Assignment Agreement (the
"EFFECTIVE DATE") shall be the later of the date specified in Item 5 of Schedule
1 or two Business Days (or such shorter period agreed to by the Agent) after
this Assignment Agreement, together with any consents required under the Credit
Agreement, are delivered to the Agent. In no event will the Effective Date occur
if the payments required to be made by the Assignee to the Assignor on the
Effective Date are not made on the proposed Effective Date.
4. PAYMENT OBLIGATIONS. In consideration for the sale and assignment of
Loans hereunder, the Assignee shall pay the Assignor, on the Effective Date, the
amount agreed to by the Assignor and the Assignee. On and after the Effective
Date, the Assignee shall be entitled to receive from the Agent all payments of
principal, interest and fees with respect to the interest assigned hereby. The
Assignee will promptly remit to the Assignor any interest on Loans and fees
received from the Agent which relate to the portion of the Commitment or Loans
assigned to the Assignee hereunder for periods prior to the Effective Date and
not previously paid by the Assignee to the Assignor. In the event that either
party hereto receives any payment to which the other party hereto is entitled
under this Assignment Agreement, then the party receiving such amount shall
promptly remit it to the other party hereto.
5. RECORDATION FEE. The Assignor and Assignee each agree to pay
one-half of the recordation fee required to be paid to the Agent in connection
with this Assignment Agreement unless otherwise specified in Item 6 of Schedule
1.
6. REPRESENTATIONS OF THE ASSIGNOR; LIMITATIONS ON THE ASSIGNOR'S
LIABILITY. The Assignor represents and warrants that (i) it is the legal and
beneficial owner of the interest being assigned by it hereunder, (ii) such
interest is free and clear of any adverse claim created by the Assignor and
(iii) the execution and delivery of this Assignment Agreement by the Assignor is
duly authorized. It is understood and agreed that the assignment and assumption
hereunder are made without recourse to the Assignor and that the Assignor makes
no other representation or warranty of any kind to the Assignee.
AMENDED AND RESTATED CREDIT AGREEMENT (Clark/Bardes, Inc.) Page 60
<PAGE> 66
Neither the Assignor nor any of its officers, directors, employees, agents or
attorneys shall be responsible for (i) the due execution, legality, validity,
enforceability, genuineness, sufficiency or collectibility of any Loan Document,
including without limitation, documents granting the Assignor and the other
Lenders a security interest in assets of the Borrower or any guarantor, (ii) any
representation, warranty or statement made in or in connection with any of the
Loan Documents, (iii) the financial condition or creditworthiness of the
Borrower or any guarantor, (iv) the performance of or compliance with any of the
terms or provisions of any of the Loan Documents, (v) inspecting any of the
property, books or records of the Borrower, (vi) the validity, enforceability,
perfection, priority, condition, value or sufficiency of any collateral securing
or purporting to secure the Loans or (vi) any mistake, error of judgment, or
action taken or omitted to be taken in connection with the Loans or the Loan
Documents.
7. REPRESENTATIONS AND UNDERTAKINGS OF THE ASSIGNEE. The Assignee (i)
confirms that it has received a copy of the Credit Agreement, together with
copies of the financial statements requested by the Assignee and such other
documents and information as it has deemed appropriate to make its own credit
analysis and decision to enter into this Assignment Agreement, (ii) agrees that
it will, independently and without reliance upon the Agent, the Assignor or any
other Lender and based on such documents and information at it shall deem
appropriate at the time, continue to make its own credit decisions in taking or
not taking action under the Loan Documents, (iii) appoints and authorizes the
Agent to take such action as agent on its behalf and to exercise such powers
under the Loan Documents as are delegated to the Agent by the terms thereof,
together with such powers as are reasonably incidental thereto, (iv) confirms
that the execution and delivery of this Assignment Agreement by the Assignee is
duly authorized, (v) agrees that it will perform in accordance with their terms
all of the obligations which by the terms of the Loan Documents are required to
be performed by it as a Lender, (vi) agrees that its payment instructions and
notice instructions are as set forth in the attachment to Schedule 1, (vii)
confirms that none of the funds, monies, assets or other consideration being
used to make the purchase and assumption hereunder are "plan assets" as defined
under ERISA and that its rights, benefits and interests in and under the Loan
Documents will not be "plan assets" under ERISA, (viii) agrees to indemnify and
hold the Assignor harmless against all losses, costs and expenses (including,
without limitation, reasonable attorneys' fees) and liabilities incurred by the
Assignor in connection with or arising in any manner from the Assignee's
non-performance of the obligations assumed under this Assignment Agreement, and
(ix) if applicable, attaches the forms prescribed by the Internal Revenue
Service of the United States certifying that the Assignee is entitled to receive
payments under the Loan Documents without deduction or withholding of any United
States federal income taxes.
8. GOVERNING LAW. This Assignment Agreement shall be governed by the
internal law, and not the law of conflicts, of the State of Texas.
9. NOTICES. Notices shall be given under this Assignment Agreement in
the manner set forth in the Credit Agreement. For the purpose hereof, the
addresses of the parties hereto (until notice of a change is delivered) shall be
the address set forth in the attachment to Schedule 1.
10. COUNTERPARTS; DELIVERY BY FACSIMILE. This Assignment Agreement may
be executed in counterparts. Transmission by facsimile of an executed
counterpart of this Assignment Agreement shall be deemed to constitute due and
sufficient delivery of such counterpart and such facsimile shall be deemed to be
an original counterpart of this Assignment Agreement.
IN WITNESS WHEREOF, the duly authorized officers of the parties hereto
have executed this Assignment Agreement by executing Schedule 1 hereto as of the
date first above written.
AMENDED AND RESTATED CREDIT AGREEMENT (Clark/Bardes, Inc.) Page 61
<PAGE> 67
SCHEDULE 1
to Assignment Agreement
1. Description and Date of Credit Agreement:
2. Date of Assignment Agreement: ________, 19__
3. Amounts (As of Date of Item 2 above):
<TABLE>
<CAPTION>
Revolving Credit Facility Term Loan
------------------------- -----------
<S> <C> <C>
a. Assignee's percentage of
each Facility purchased under _.0000000000% _.0000000000%
the Assignment Agreement
b. Amount of each Facility
purchased under the Assignment $ $
Agreement ----------- ----------
</TABLE>
4. Assignee's Commitment (or Loans
with respect to terminated
Commitments) purchased
hereunder: $
------------
5. Proposed Effective Date:
---------------
6. Non-standard Recordation Fee
Arrangement N/A
Accepted and Agreed:
[NAME OF ASSIGNOR] [NAME OF ASSIGNEE]
By: By:
---------------------------- -----------------------
Title: Title:
------------------------- --------------------
ACCEPTED AND CONSENTED TO BY:
BANK ONE, TEXAS, N.A.
By:
----------------------------
Title:
-------------------------
Attachment to SCHEDULE 1 to ASSIGNMENT AGREEMENT
AMENDED AND RESTATED CREDIT AGREEMENT (Clark/Bardes, Inc.) Page 62
<PAGE> 68
ADMINISTRATIVE INFORMATION SHEET
Attach Assignor's Administrative Information Sheet, which must
include notice addresses for the Assignor and the Assignee
(Sample form shown below)
ASSIGNOR INFORMATION
CONTACT:
Name: Telephone No.:
----------------------------- ------------------------
Fax No.: Telex No.:
----------------------------- ---------------------------
Answerback:
---------------------------
PAYMENT INFORMATION:
Name & ABA # of Destination Bank:
---------------------------------------------
---------------------------------------------
Account Name & Number for Wire Transfer:
-------------------------------------
-------------------------------------
Other Instructions:
-----------------------------------------------------------
- ------------------------------------------------------------------------------
ADDRESS FOR NOTICES FOR ASSIGNOR:
----------------------------------------------
----------------------------------------------
----------------------------------------------
ASSIGNEE INFORMATION
CREDIT CONTACT:
Name: Telephone No.:
----------------------------- ------------------------
Fax No.: Telex No.:
----------------------------- ---------------------------
Answerback:
---------------------------
KEY OPERATIONS CONTACTS:
Booking Installation: Booking Installation:
--------------- -----------------
Name: Name:
------------------------------- ---------------------------------
Telephone No.: Telephone No.:
---------------------- ------------------------
Fax No.: Fax No.:
---------------------------- ------------------------------
Telex No.: Telex No.:
-------------------------- ----------------------------
Answerback: Answerback:
------------------------- ---------------------------
AMENDED AND RESTATED CREDIT AGREEMENT (Clark/Bardes, Inc.) Page 63
<PAGE> 69
PAYMENT INFORMATION:
Name & ABA # of Destination Bank:
----------------------------------------------
----------------------------------------------
Account Name & Number for Wire Transfer:
---------------------------------------
---------------------------------------
Other Instructions:
------------------------------------------------------------
- -------------------------------------------------------------------------------
ADDRESS FOR NOTICES FOR ASSIGNEE:
----------------------------------------------
----------------------------------------------
----------------------------------------------
BOT INFORMATION
Assignee will be called promptly upon receipt of the signed agreement.
INITIAL FUNDING CONTACT: SUBSEQUENT OPERATIONS CONTACT:
Name: Name:
------------------------------- ----------------------------------
Telephone No.: (214) Telephone No.: (214)
---------------- -------------------
Fax No.: (214) Fax No.: (214)
---------------------- -------------------------
BOT Telex No.:
-------------------------
INITIAL FUNDING STANDARDS:
Libor - Fund 2 days after rates are set.
BOT WIRE INSTRUCTIONS:
-------------------------
ADDRESS FOR NOTICES FOR BOT: 1717 Main Street; Third Floor
Dallas, Texas 75201
Attention: Corporate Banking Group
Telephone: (214)
------------------------
Telecopy: (214)
-------------------------
AMENDED AND RESTATED CREDIT AGREEMENT (Clark/Bardes, Inc.) Page 64
<PAGE> 70
EXHIBIT D
LOAN/CREDIT RELATED MONEY TRANSFER INSTRUCTION
To Bank One, Texas, Agent,
as Agent (the "AGENT") under the Credit Agreement
Described Below
Re: Credit Agreement, dated ______________,____ (as the same may be amended or
modified, the "CREDIT AGREEMENT"), among Clark/Bardes, Inc. (the "Borrower"),
the Lenders named therein and the Agent. Capitalized terms used herein and not
otherwise defined herein shall have the meanings assigned thereto in the Credit
Agreement.
The Agent is specifically authorized and directed to act upon the
following standing money transfer instructions with respect to the proceeds of
Advances or other extensions of credit from time to time until receipt by the
Agent of a specific written revocation of such instructions by the Borrower,
provided, however, that the Agent may otherwise transfer funds as hereafter
directed in writing by the Borrower in accordance with Section 13.1 of the
Credit Agreement or based on any telephonic notice made in accordance with
Section 2.14 of the Credit Agreement.
Facility Identification Number(s)
-------------------------------------------
Customer/Account Name
-------------------------------------------------------
Transfer Funds To
-----------------------------------------------------------
-----------------------------------------------------------
For Account No.
-------------------------------------------------------------
Reference/Attention To
------------------------------------------------------
Authorized Officer (Customer Representative) Date
---------------------
- ------------------------------------------- --------------------------
(Please Print) Signature
Bank Officer Name Date
---------------------
- ------------------------------------------ --------------------------
(Please Print) Signature
(Deliver Completed Form to Credit Support Staff For Immediate Processing)
AMENDED AND RESTATED CREDIT AGREEMENT (Clark/Bardes, Inc.) Page 65
<PAGE> 71
EXHIBIT E-1
AMENDED AND RESTATED TERM NOTE
$____________ ______________,_______
Clark/Bardes, Inc., a Delaware corporation (the "BORROWER"), promises
to pay to the order of _____________________________ (the "LENDER") the
aggregate unpaid principal amount of all Loans made by the Lender to the
Borrower pursuant to Article II of the Agreement (as hereinafter defined), in
immediately available funds at the main office of Bank One, Texas, N.A. in
Dallas, Texas, as Agent, together with interest on the unpaid principal amount
hereof at the rates and on the dates set forth in the Agreement. The Borrower
shall pay the principal of and accrued and unpaid interest on the Loans in full
on the Facility Termination Date and shall make such mandatory payments as are
required to be made under the terms of Article II of the Agreement. This Note
amends, restates (but does not extinguish) and evidences the outstanding
indebtedness evidenced by that certain Term Note, dated ____________________,
in the original principal amount of $________ (the "Prior Note"). The liens and
security interests securing the Prior Note have been renewed pursuant to the
Agreement and secure this Note.
The Lender shall, and is hereby authorized to, record on the schedule
attached hereto, or to otherwise record in accordance with its usual practice,
the date and amount of each Loan and the date and amount of each principal
payment hereunder.
This Note is one of the Term Notes issued pursuant to, and is entitled
to the benefits of, the Amended and Restated Credit Agreement dated as of
______________________,______ (which, as it may be amended or modified and in
effect from time to time, is herein called the "AGREEMENT"), among the Borrower,
the lenders party thereto, including the Lender, and Bank One, Texas, N.A., as
Agent, to which Agreement reference is hereby made for a statement of the terms
and conditions governing this Note, including the terms and conditions under
which this Note may be prepaid or its maturity date accelerated. This Note is
secured pursuant to the Collateral Documents and guaranteed pursuant to the
Guaranty, all as more specifically described in the Agreement, and reference is
made thereto for a statement of the terms and provisions thereof. Capitalized
terms used herein and not otherwise defined herein are used with the meanings
attributed to them in the Agreement.
CLARK/BARDES, INC., a Delaware
corporation
By:
--------------------------------
Print Name:
------------------------
Title:
-----------------------------
AMENDED AND RESTATED CREDIT AGREEMENT (Clark/Bardes, Inc.) Page 66
<PAGE> 72
EXHIBIT E-2
AMENDED AND RESTATED REVOLVING NOTE
$____________ ______________,_______
Clark/Bardes, Inc., a Delaware corporation (the "BORROWER"), promises
to pay to the order of _____________________________ (the "LENDER") the
aggregate unpaid principal amount of all Loans made by the Lender to the
Borrower pursuant to Article II of the Agreement (as hereinafter defined), in
immediately available funds at the main office of Bank One, Texas, N.A. in
Dallas, Texas, as Agent, together with interest on the unpaid principal amount
hereof at the rates and on the dates set forth in the Agreement. The Borrower
shall pay the principal of and accrued and unpaid interest on the Loans in full
on the Facility Termination Date and shall make such mandatory payments as are
required to be made under the terms of Article II of the Agreement. This Note
amends, restates (but does not extinguish) and evidences the outstanding
indebtedness evidenced by that certain Revolving Note, dated
____________________, in the original principal amount of $________ (the "Prior
Note"). The liens and security interests securing the Prior Note have been
renewed pursuant to the Agreement and secure this Note.
The Lender shall, and is hereby authorized to, record on the schedule
attached hereto, or to otherwise record in accordance with its usual practice,
the date and amount of each Loan and the date and amount of each principal
payment hereunder.
This Note is one of the Revolving Notes issued pursuant to, and is
entitled to the benefits of, the Amended and Restated Credit Agreement dated as
of ______________________,______ (which, as it may be amended or modified and in
effect from time to time, is herein called the "AGREEMENT"), among the Borrower,
the lenders party thereto, including the Lender, and Bank One, Texas, N.A., as
Agent, to which Agreement reference is hereby made for a statement of the terms
and conditions governing this Note, including the terms and conditions under
which this Note may be prepaid or its maturity date accelerated. This Note is
secured pursuant to the Collateral Documents and guaranteed pursuant to the
Guaranty, all as more specifically described in the Agreement, and reference is
made thereto for a statement of the terms and provisions thereof. Capitalized
terms used herein and not otherwise defined herein are used with the meanings
attributed to them in the Agreement.
CLARK/BARDES, INC., a Delaware
corporation
By:
--------------------------------
Print Name:
------------------------
Title:
-----------------------------
AMENDED AND RESTATED CREDIT AGREEMENT (Clark/Bardes, Inc.) Page 67
<PAGE> 73
SCHEDULE I
SUBSIDIARIES AND OTHER INVESTMENTS
(See Sections 5.8 and 6.14)
<TABLE>
<CAPTION>
=========================================================================
Investment In Jurisdiction of Owned By Percent Ownership
Organization
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Schoenke & Associates Hawaii Borrower 95%
of Hawaii, L.P.
- -------------------------------------------------------------------------
Wamberg Financial Delaware Borrower 100%
Corporation
- -------------------------------------------------------------------------
Borrower Delaware Parent 100%
=========================================================================
</TABLE>
AMENDED AND RESTATED CREDIT AGREEMENT (Clark/Bardes, Inc.) Page 68
<PAGE> 74
SCHEDULE 2
INDEBTEDNESS AND LIENS
(See Sections 5.14, 6.11 and 6.15)
<TABLE>
<CAPTION>
===============================================================================================
Indebtedness Incurred Indebtedness Owed To Property Encumbered Maturity and Amount
By (If Any) of Indebtedness
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Borrower Schoenke & Associates Commission renewals $2,000,000 (9/l/2000)
and/or fees under
Student Loan
Marketing Association
Split Dollar Life
Insurance Program
===============================================================================================
</TABLE>
AMENDED AND RESTATED CREDIT AGREEMENT (Clark/Bardes, Inc.) Page 69
<PAGE> 75
SCHEDULE 6.11
SPECIFIC INDEBTEDNESS
Promissory Note dated September 18, 1998 in the stated principal amount
of $2,000,000 executed by Borrower as maker in favor of Schoenke & Associates
Securities Corporation as payee.
AMENDED AND RESTATED CREDIT AGREEMENT (Clark/Bardes, Inc.) Page 70
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
STATEMENT OF INCOME (AUDITED) FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1999 AND
BALANCE SHEET (AUDITED) AS OF DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 4,832
<SECURITIES> 0
<RECEIVABLES> 18,642
<ALLOWANCES> (347)
<INVENTORY> 0
<CURRENT-ASSETS> 24,250
<PP&E> 9,417
<DEPRECIATION> (2,456)
<TOTAL-ASSETS> 124,859
<CURRENT-LIABILITIES> 27,018
<BONDS> 0
0
0
<COMMON> 96
<OTHER-SE> 62,272
<TOTAL-LIABILITY-AND-EQUITY> 124,859
<SALES> 79,430
<TOTAL-REVENUES> 120,760
<CGS> 0
<TOTAL-COSTS> 102,631
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,548
<INCOME-PRETAX> 14,910
<INCOME-TAX> 6,079
<INCOME-CONTINUING> 8,831
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-BASIC> 0.97
<EPS-DILUTED> 0.95
</TABLE>
