SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
Commission file number: 000-24769
Clark/Bardes, Inc.
(Exact name of Registrant as specified in its charter)
Delaware 52-2103926
(State of incorporation or organization) (I.R.S. Employer Identification No.)
102 South Wynstone Park Drive,
North Barrington, Illinois 60010
(Address of principal executive offices) (Zip code)
(Registrant's telephone number) (847) 304-5800
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Securities Exchanges on which Registered
Common Stock, Par Value $.01 per share New York Stock Exchange
Junior Participating Preferred Stock, Series
A, Purchase Rights
Par value, $.01 per share
Securities Registered Pursuant to Section 12(g) of the Act:
None
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 5, 2002, 16,541,111 shares of common stock outstanding and the aggregate market value of common equity held by non-affiliates was approximately $224.0 million.
DOCUMENTS INCORPORATED BY REFERENCE
The definitive proxy statement for the 2002 annual meeting is incorporated into Part III of this Form 10-K by reference.
TABLE OF CONTENTS
Page
FORWARD-LOOKING STATEMENTS........................................................................... 2
PART I
ITEM 1. BUSINESS............................................................................. 3
ITEM 2. PROPERTIES........................................................................... 15
ITEM 3. LEGAL PROCEEDINGS.................................................................... 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................................. 16
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS................
17
ITEM 6. SELECTED FINANCIAL DATA....................................................... 18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
20
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...........................
33
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.......................................... 33
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
34
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................................... 34
ITEM 11. EXECUTIVE COMPENSATION............................................................... 34
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.......................
34
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................................... 34
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.....................
34
SIGNATURES........................................................................................... 61
FORWARD-LOOKING STATEMENTS
This Form 10-K and the documents 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, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements are identified by words such as "anticipate," "believe," "estimate," "expect," "intend," "predict," "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, risks, uncertainties and assumptions related to the following
: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 those anticipated. Any forward-looking statements you read in this Form 10-K or the documents incorporated herein by reference 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. You should specifically consider the factors identified in this Form 10-K, including under the caption "Risk Factors," or in the documents incorporated by reference in this Form 10-K, which could cause actual results to differ materially from those indicated by the forward-looking statements. In light of the foregoing risks and uncertainties, you should not unduly rely on such forward looking statements when deciding whether to buy, sell or hold any of our securities. We disclaim any intent or obligation to update or alter any of the forward-looking statements whether in response to new information, unforeseen events, changed circumstances or otherwise.
Overview
Founded in 1967, Clark/Bardes is one of the leading executive compensation and benefits consulting companies in the United States specializing in servicing large corporations, banks and healthcare organizations. Our mission is to aid our clients by providing services that help them attract, reward and keep their best people. Our services include the evaluation, design, implementation, financing and administration of innovative and customized compensation and benefit programs. We have over 3,600 clients that use our customized programs to supplement and secure benefits for their executives, key employees and other professionals and to offset the costs of employee benefit liabilities and rely on our consultants to structure their compensation programs.
We have experienced significant growth and transition over the last several years. In previous years, a majority of our revenues resulted from commissions paid by insurance companies that underwrite the insurance policies used to finance our clients' benefit programs. As a result of a series of acquisitions, we have transformed ourselves into a value added provider of a wide range of employee compensation and benefit consulting services which has resulted in a more diversified revenue stream. Today, our three major sources of revenue are: (1) first year commissions and related fees paid for the implementation and funding of our benefit programs, (2) renewal commissions and related fees that are paid by the insurance companies and our clients as long as the benefit programs and underlying insurance policies remain inforce, which is typically for a period of ten years or more after the sale and (3) consulting fees paid by our clients to evaluate and design compensation plans.
We are headquartered at 102 S. Wynstone Park Drive, North Barrington, Illinois 60010 and maintain offices nationwide.
Our products and services
We provide executive 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. Typically, in selling, designing and implementing executive compensation and benefit programs we:
Most of our benefit programs are financed by business-owned life insurance and other financial products. Business-owned life insurance refers to life insurance policies purchased and owned by a business on the lives of a select group of employees. The business pays the premiums on, and is the owner and beneficiary of such policies. Business-owned life insurance programs are used primarily to offset a client's cost of providing executive 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, the cash value of the business-owned life insurance policies grows on a tax deferred basis and the policies' death benefits are received tax free, providing an attractive return to the client.
We maintain strategic relationships with insurance companies such as AEGON, AXA/Equitable, General American, Great West, Mass Mutual, Nationwide, Phoenix Life 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 customized products that meet the specific organizational needs of the client and with insurance companies to develop unique policy features at competitive pricing.
Set forth below is a description of our principal benefit plan solutions, compensation consulting services, financing products and administrative services.
Benefit plan solutions
Deferred Income Plans. Deferred income plans allow 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 plan 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, or variable deferred income plans, which credit the deferred income amount with interest based on bond or equity indices 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, we believe that the demand for these plans will continue to increase 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 maximum dollar amount of compensation that can be used to determine the pension benefits payable to an executive from a qualified plan is currently set at $170,000. Accordingly, non-qualified plans such as supplemental executive retirement plans, which are not subject to the same stringent rule, 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. A recent IRS Notice and forthcoming Treasury regulations change the manner in which split dollar arrangements will be taxed. The new treatment will be, in certain respects, less attractive than the historical tax treatment of split dollar arrangements. Consequently, Supplemental Offset Plans may be a less attractive means of restoring executive retirement benefits.
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 taxed to the employee as ordinary income. Group term carve out plans allow companies to provide portable coverage in a customized program of amounts greater than $50,000 that are taxed at lower rates. The purpose of group term carve out plans is to 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.
Disability Income Plan. Many companies provide group disability income insurance for their employees. In many cases, these plans have limits that may not be sufficient to provide reasonable income replacement for executives in the event of a disability. Group disability insurance plans marketed by our Compensation Resource Group and Healthcare Group supplement the group plans currently in place, and provide additional income for executives in the event of a disability.
ExecuFLEX Program. Our Healthcare Group provides a total compensation planning approach to the not-for-profit healthcare 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 the employees' 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 our other operating groups as well as additional market segments within the healthcare industry.
Compensation consulting services
With the acquisition of Pearl Meyer & Partners ("Pearl Meyer") in 2000, we entered the market for senior executive and board of director level executive compensation consulting. At the time of the acquisition, Pearl Meyer was one of the largest independent executive compensation consulting firms in the United States and the acquisition broadened the services we offer to our clients. Our Healthcare Group and Banking Practice have developed compensation consulting programs in base salary, incentives, deferred compensation, and other compensation design plans. With the acquisition of Rich Florin/Solutions, Inc. (f.d.b.a. Executive Alliance) in 2001, which now is our Rewards and Performance (previously known as Corporate Practice) segment, we began providing compensation consulting for technology and intellectual capital companies.
Financing products
Business-Owned Life Insurance. Business-owned life insurance is life insurance purchased and owned by a business on the lives of a select group of its employees. The insurance is used to help finance the business' executive benefit obligations. The insurance is held as a general asset and is not directly linked to the executives' benefits. When utilized by banks, this product is referred to as bank-owned life insurance. We market these programs to banks with assets in excess of $5 billion, as well as to regional and community banks that generally have assets of less than $5 billion. We were one of the first organizations to offer business-owned and bank-owned life insurance programs.
Administrative services
We believe that we are an industry leader in providing high quality and customized administrative services to support the executive benefit and insurance programs we market. As of December 31, 2001, we administered 193,000 policies for 3,600 clients. As of the same date, the insurance policies underlying our employee benefit programs represented a total of approximately $85 billion of inforce insurance coverage as follows.
The following table presents the number of policies administered, clients and inforce coverage as of December 31, 2001.
Compensation Banking Healthcare Compensation
Resource Group Practice Group Consulting Total
Policies administered............... 103,000 79,000 11,000 - 193,000
Clients............................. 830 1,870 600 300 3,600
Inforce coverage.................... $45 billion $35 billion $5 billion - $85 billion
We generate fee-based revenues from providing the administrative services to our clients. We approach administrative services with a strategy focused on servicing our clients' unique requirements and needs through customized, value-added services and intensive support in order to create brand and client loyalty and lower sensitivity to price. We further differentiate ourselves by employing a focused strategy for a particular buyer group through each of our four groups. For instance, we service clients in the banking industry through our Banking Practice and not-for-profit healthcare organizations through our Healthcare Group with an insider's view of each market thereby providing high quality administrative services customized to a client's needs.
We offer customized enrollment and administrative services for our employee benefit programs. In an effort to provide a high level of personalized services, 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 groups' account specialists include coordinating and managing the enrollment process, distributing communication materials, monitoring financial, tax and regulatory changes, providing accounting reports and periodic benefit statements to participants, performing annual reviews and reporting historical and projected cash flow and earnings of the plans. Each group's account specialists are supported by actuarial, financial and insurance experts.
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 consultant, who can focus more closely on the consulting 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 years.
We believe our commitment to providing high quality client and administrative services is one of the primary reasons that we have achieved the success we have enjoyed to date. We believe that our continued focus on, and investment in, the personnel and technology necessary to deliver high-quality service to our clients will bolster our reputation as an industry leader.
Our business units
We operate through four distinct operating groups: (1) Compensation Resource Group, (2) Banking Practice, (3) Healthcare Group, and (4) Compensation Consulting Group. Each of these groups is focused on the evaluation, design, implementation, administration, and financing of innovative compensation and benefit programs that help their clients attract and retain executives, key employees and other professionals. Each of our groups operates separately from different locations with its own executive, marketing and administrative staffs. We have structured these groups to be independent because each has an established reputation in their distinct markets and a specific expertise required to serve these markets. Through these groups, we are able to tailor compensation and benefit programs and consulting services to the unique needs of our clients. At the same time, we emphasize the cross-selling of products and services between our groups. To encourage cross-selling, we have established percentage-based rewards for cross-group referrals.
Compensation Resource Group
One of the leaders in its field, our Compensation Resource Group ("CRG") focuses on the marketing, designing, implementation, administration and financing of non-qualified benefit plans for Fortune 1000 companies and large private companies. This group has designed and currently administers 830 client cases, covering 103,000 policies for executives, key employees and other professionals. The large corporate marketplace in which the Compensation Resource Group does business requires a significant degree of customization. Growth in this group will focus on further penetrating the corporate marketplace and providing additional executive compensation and benefits services to corporations.
Formerly the Clark/Bardes segment, our original core business, this group was expanded and reorganized with the acquisition of CRG in September 2000. The group was also expanded by other acquisitions including Schoenke & Associates, acquired September 1998; Wiedemann & Johnson, acquired November 1998; Forrest, Wagner & Associates, acquired October 2000; Lyons Compensation & Benefits, LLC, acquired August 2001 and Coates Kenney, acquired December 2001. With each of these acquisitions, we obtained a substantial book of business as well as a number of talented and experienced benefits professionals.
Banking Practice
The Banking Practice offers compensation consulting, executive and director benefits programs, and bank-owned life insurance to the bank market. The Banking Practice is a market leader that provides programs to over 20 of the top 50 national banks and more than 1,800 community and regional banks, which typically have less than $1 billion in assets. In addition to compensation and benefit programs, this group also performs incentive consulting as well as the design of ownership succession programs.
This group has completed several acquisitions of regional firms in its industry. The September 1997 acquisition of Bank Compensation Strategies, Inc. was our first acquisition and expanded our products and services into the community and small regional banking market. During 1999, we acquired National Institute for Community Banking and Banking Consultants of America, expanding the group's employee and client base with companies that could be readily absorbed into our operating structure. In September 1999, we acquired The Wamberg Organization, a former independent consultant. During 2000, we acquired Christiansen & Associates, a former independent consultant in the banking practice, along with the Watson Company and W.M. Sheehan & Company, two regional compensation consulting firms in the banking market.
Healthcare Group
During 1999, we purchased Management Compensation Group/Healthcare, an executive benefit consulting organization servicing the healthcare industry. This became our Healthcare Compensation Strategies segment, now known as the Healthcare Group. The Healthcare Group provides specialized compensation and benefit services for large and medium sized not-for-profit healthcare organizations. With approximately 600 clients, the Healthcare Group is a market leader for compensation and benefit planning for healthcare executives and physicians. The Healthcare Group expanded in 2001 with the acquisitions of Partners First in March 2001 and Management Science Associates in July 2001. These acquisitions allowed us to expand our client base and the services we provide to our clients.
The Healthcare Group employs a comprehensive benefits approach that encompasses a variety of insurance products, ranging from traditional life insurance policies to disability and long-term care coverage. The healthcare industry's changing environment and complex structure offer many challenges for the near future. The industry has experienced a great deal of contraction with changes in our national healthcare regulations and compensation structure.
Compensation Consulting Group
Our Compensation Consulting Group provides executive, professional and other employee compensation consulting. The group focuses on two distinct market segments: (1) executive compensation consulting for major companies and (2) compensation consulting for the employees of technology and intellectual capital companies. It is one of the largest executive compensation consulting organizations in the United States.
Our executive compensation consulting practice was created through the acquisition on June 21, 2000 of Pearl Meyer & Partners, Inc., a New York City-based consulting firm specializing in executive compensation and retention programs. The Pearl Meyer organization is focused predominantly on executive compensation consulting for large Fortune 1000 corporations. Our Rewards and Performance (previously know as Corporate Practice) segment which focuses on technology and intellectual-capital oriented companies was formed as a result of the acquisition of Rich, Florin/Solutions, Inc. (f.d.b.a. Executive Alliance), a Boston-based compensation consulting company on March 12, 2001.
Distribution
Each of our groups markets its employee benefit programs and related administrative and consulting services through an in-house sales organization as well as through consultants in independently operated sales offices located throughout the United States. As of December 31, 2001, we were represented by over 130 consultants in 54 offices nationwide. Approximately half of our consultants are independent while the rest are our employees.
Our independent consultants enter into exclusive agency agreements with us to market programs and services on our behalf. Each agreement defines the duties of the consultant to solicit and sell covered business, the revenue splits between the consultant and ourselves, and includes a confidentiality agreement and operating standards. We pay a substantial portion of the total sales revenue to the independent consultant, usually from 50% to 65% of total revenue. All of our independent consultants are responsible for their own operating expenses. Non-solicitation clauses, which prohibit the consultant from soliciting our clients are normally three years with respect to separate clients and usually five years with respect to joint clients. Some of our groups, such as the Healthcare Group and Compensation Consulting Group, generate a significant portion of their sales revenue through employee-consultants and we bear the administrative expense of the sales consultants in exchange for a lower commission and fee expense.
In September 2001, we ended our relationship with three sales consultants formerly contracted to us on an exclusive basis. We determined that our long-term objectives would be best served by terminating the relationship and focusing on growing our business with our employee consultants. They accounted for only 2.9% of our total revenue in 2001.
Many of our products have a securities component and must be sold through a licensed broker/dealer. Clark/Bardes Financial Services, Inc. ("CBFS"), is used by our consultants for distributing these securities-related products. CBFS is designed to function as a full-service broker/dealer, but is currently limited to distributing insurance, annuities and mutual funds. CBFS currently has 175 registered representatives and is licensed to operate in all 50 states. By having our own broker/dealer, we are able to control costs more effectively than when we used an outside broker/dealer.
Our consultants are supported by a design and analysis department in each group. The primary responsibility of the design and analysis department 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 consultant to identify the needs of a prospective client and 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.
We recognize the importance of attracting and retaining qualified, productive sales professionals. We 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.
As our business has grown, internally and through acquisitions, our reliance on a select few high volume consultants has decreased. Our top three consultants collectively accounted for approximately 6.8% of our total revenue in 2001, 10.8% of our total revenue in 2000 and 22.3% of our total revenue in 1999.
Marketing support
Substantial investments have been made in establishing highly qualified marketing departments in each group. Each marketing department's primary focus is to support the sales efforts of their operation. The marketing departments develop and track sales leads for the consultants and provide collateral marketing materials and research. We distribute external newsletters and other program update pieces to approximately 15,000 clients and prospects throughout the year and sponsor conferences and meetings featuring industry experts and nationally recognized speakers. Finally, the public relations and corporate marketing functions coordinate the publication of articles written by our employees and consultants and ensure that our representatives are quoted as thought leaders and industry experts in national, local, and industry trade publications. These efforts have made us the clear leader in the executive compensation and benefits consulting industry.
Our distribution strategy seeks to leverage our relationships within our organization and among our business partners. We attempt to establish relationships with carriers and professional service providers that provide opportunities for cross-utilization of services. We have also developed strategic relationships with several professional service firms that are used as a referral source for our consultants. In addition, we have an advisory board of current and former industry leaders familiar with our products and services who can provide introductions to prospective clients. We believe these relationships assist our consultants in gaining access to the appropriate personnel of prospective clients and more effectively establish a position of trust.
We focus on developing innovative marketing tools using internet technology. Two examples of these tools are BOLIauction.com and BOLInet.com. BOLIauction.com is our online bank-owned life insurance ("BOLI") purchasing system. Using BOLIauction.com's proprietary interface, banks access the best carriers and products through this competitive auction environment. After clients set parameters online for their BOLI program, BOLIauction.com distributes these specifications to the participating carriers. Carriers then submit their responses to BOLIauction.com, the auction begins, and a winning bid is selected.
A total of $9.7 billion in BOLI assets are managed on the site. BOLInet.com allows a client bank to get real-time data on their BOLI assets, and provides powerful data-mining and report writing tools. Forty-five banks are currently registered users of BOLInet.com.
Industry background
Over the past twenty years, as the result of legislative change and increased competition for executive talent, compensation and benefit programs have become more complex and sophisticated. In turn, the financing of these programs has also become increasingly complex. Corporations and banks now commonly use life insurance to offset the costs of employee benefit liabilities and several large insurers, including AEGON, Great West, and Nationwide, have committed significant resources to develop business-owned life insurance products for use in this market. The industry has shifted more toward the use of variable life insurance, which contain equity investment features to meet these needs. There are some non-insurance companies that have started to offer more broadened financial services to try and tap into this already competitive market.
At the same time, the corporations, banks and healthcare organizations that use these services have become more sophisticated and demanding. Clients now regularly perform extensive due diligence on the firms providing their compensation and benefit programs. Issues related to reputation and technological capabilities are now central to their decision-making process. In addition, the client's expectation regarding the level of administrative services to be provided and technological capabilities of a provider has risen substantially. 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 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 that comply with the various not-for-profit compensation and benefit rules.
Our products and services have also historically been effected both positively and negatively by legislative change. In the past, legislation has increased the attractiveness of non-qualified benefit plans for highly-paid executives by limiting the amount of tax-deductible contributions to traditional pension plans. On the other hand, legislation has limited the use of financing instruments, such as certain uses of business-owned life insurance. For example, tax legislation was enacted that disallowed interest deductions on policy loans and essentially eliminated a financing technique for corporations known as "leveraged corporate owned life insurance." A recent IRS Notice and forthcoming Treasury regulations change the manner in which split dollar arrangements will be taxed. The new treatment will be, in certain respects, less attractive than the historical tax treatment of split dollar arrangements. Consequently, this initiative could result in reduced revenue from split dollar arrangements. The insurance-financed employee benefit market will likely continue to be affected significantly by legislative change. Consequently, we believe that the ability to respond quickly to legislative initiatives is a competitive advantage.
We believe that increasing product complexity, growing buyer sophistication, and the changing legislative landscape requires product development systems and personnel that are more sophisticated and cost intensive than most producers and producer groups are able to justify economically. We believe this will continue to drive consolidation in the industry as smaller firms respond in order to stay competitive.
We also believe the industry offers additional growth opportunities. We estimate that there are approximately 15,000 corporations, banks and healthcare institutions that have executive compensation and benefits needs which can be served by us. Of these, we currently have 3,600 as clients. In addition, the rising pay of executives and the nearing of retirement of the baby-boom generation are significant macro-trends that we believe will drive growth in our industry in the future.
Employees
As of December 31, 2001, we employed 778 people as follows:
Compensation Resource Group....................................................................285
Banking Practice...............................................................................174
Healthcare Group...............................................................................213
Compensation Consulting Group...................................................................78
Corporate..................................................................................... 28
Total......................................................................................778
The majority of our employees have college degrees, with several holding advanced degrees in law, accounting, finance, business administration or actuarial science. Professional development is a highly valued industry characteristic, and insurance and financial planning designations, such as Chartered Life Underwriter, Fellow of the Life Management Institute, Fellow of the Society of Actuaries and Certified Financial Planner, 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.
Competition
The executive compensation and benefit consulting market is highly competitive as the margins from this type of work are high. We compete with consulting firms, brokers, third party administrators, producer groups and insurance companies. A number of our competitors offer attractive alternative programs. The direct competitors of our Compensation Resource Group include Management Compensation Group; Mullin Consulting; Newport Group; TBG Financial; and The Todd Organization. The competitors of our Banking Practice include The Benefit Marketing Group; Harris, Crouch, Miller, Scott, Long and Mann; and individual insurance agents in the communities where the community banks are located. Additionally, the banking industry is constantly consolidating, which may reduce the number of potential bank clients. Primary competitors of our Healthcare Group 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. Although our Compensation Consulting Group is one of the best established firms in the high level executive compensation consulting market, there are a number of firms that offer this service and, therefore, compete with our Compensation Consulting Group.
We compete for clients on the basis of reputation, client service, program and product offerings and the ability to tailor our products and administrative services to the specific needs of a client. We believe that we are in a superior competitive position in most of the meaningful aspects of our business, because of our track record, name recognition, industry focus and expertise, and specialization. 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 from large, diversified financial services organizations that are willing to expend significant resources to enter our markets and 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. Insurance laws vary from state to state and states have broad powers over licensing, payment of commissions, business practices, policy forms and premium rates. 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 consultants or the insurance carriers underwriting the policies 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 consultants 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 assure you that we or our consultants will not have regulatory problems in the future.
You should carefully consider the risks described below together with the other information contained in this 10-K or incorporated by reference before making a decision to invest in our common stock. The risks described below are not the only risks we face. Additional risks and uncertainties of which we are unaware or currently believe may be immaterial may also impair our business operations. If any of the following risks actually occur, our business, financial condition and operating results could be adversely affected.
Risks related to our industry
Changes in Federal tax laws could materially and adversely affect our renewal income and ability to gain new business.
Many of the compensation and benefit programs we design and implement for our clients are financed with business-owned life insurance. Business-owned life insurance programs have tax advantages associated with such products that are attractive to our current and prospective clients. Commission revenue from these products represented 80.4%, 80.5% and 86.4%, of our total revenues in 2001, 2000 and 1999, respectively.
Attempts have been made to change the tax laws with respect to insurance funded benefit plans. Although we believe such proposals do not have widespread support in Congress, we cannot assure you that future Federal tax initiatives will not be proposed or enacted. If any changes in Federal tax laws are proposed or enacted that would reduce or eliminate the advantages associated with insurance programs, many policies could be surrendered. As a result, we could lose a substantial amount of renewal income and our ability to write new business could be curtailed.
The Internal Revenue Service has recently launched two major enforcement initiatives that could materially and adversely affect our business.
In recent years, the Internal Revenue Service (“IRS”) has instituted two major initiatives. The first initiative is to disallow the interest deductions on certain leveraged business-owned life insurance programs sold during or prior to 1995. As a result, these programs will be less financially beneficial to our clients. To our knowledge, the IRS has prevailed on every case it has litigated related to this initiative. While we stopped selling leveraged business-owned life insurance programs around the time of this initiative and we do not expect any adverse impact on our revenue from this enforcement initiative, it is impossible to determine the impact of this initiative on a client’s decision to continue or surrender an existing leveraged business-owned life insurance program. The second initiative relates to the tax treatment accorded split dollar life insurance arrangements. A recent IRS Notice and forthcoming Treasury regulations change the manner in which split dollar arrangements will be taxed. The new treatment will be, in certain respects, less attractive than the historical tax treatment of split dollar arrangements. Consequently, this initiative could result in reduced revenue from split dollar arrangements. However, at this time, it is impossible to assess the impact of this initiative on our business.
Our business is subject to fluctuations in interest rates, stock prices and general economic conditions.
General economic conditions and market factors, such as changes in interest rates and stock prices, can affect our commission and fee income and the extent to which clients keep their policies inforce year after year. Equity returns and interest rates 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 increase, 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 guarantee that we will be able to compete with alternative products if these market forces make our clients’ programs unattractive.
The U.S. economy entered a recession in 2001. This decline was exacerbated by the events of September 11, 2001. The general down cycle in the economy may adversely affect the financial condition of our clients, which in turn could result in a significant reduction in demand for compensation and benefit consulting services and programs. Current economic conditions, or any deterioration in those conditions, could have a material adverse effect on our business, financial condition and results of operations.
We are subject to regulation at the state level.
State governments extensively regulate life insurance activities. We sell our insurance products in all 50 states through licensed insurance consultants operating as independent agents as well as through our in-house sales staff. 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 or the consultants through whom we sell will be in compliance at all times with all applicable regulatory requirements of each state.
Risks related to our company
We face strong competition.
Our business is highly competitive. We compete with consulting firms, insurance brokers, third party administrators, producer groups and insurance companies. A number of our competitors offer attractive alternative programs. The direct competitors of our Compensation Resource Group include Management Compensation Group; Mullin Consulting; Newport Group; TBG Financial; and the Todd Organization. The competitors of our Banking Practice include The Benefit Marketing Group; Harris, Crouch, Miller, Scott, Long and Mann; and individual insurance agents where community banks are located. The primary competition for our Healthcare Group is: Hewitt Associates; Towers Perrin; Mercer Consulting Group and Hay Group, Inc. Although Pearl Meyer & Partners is one of the best established firms in the high level executive compensation consulting market, there are a number of firms that offer this service.
We may also face competition from large, diversified financial services firms willing and able to expend the resources to enter our markets and from large direct competitors that choose to pursue an acquisition or consolidation strategy similar to ours.
We are dependent on certain key consultants.
Our top three consultants collectively accounted for approximately 6.8% of our total revenue in 2001, 10.8% of our total revenue in 2000, and 22.3% of our total revenue in 1999. We enter into agreements with our consultants in which they agree not to compete with us for a period of time after their relationship with us terminates. During September 2001, the Compensation Resource Group and three of its consultants agreed to terminate their relationship. Combined, these consultants accounted for 2.9% of our total revenue in 2001.We cannot assure you that we will be able to maintain consultant relationships with our most productive consultants or that any non-competition provisions in the agreements will be honored or enforceable. Our business could suffer in the future as a result of the loss of any of our most productive consultants.
Our business depends on the renewal commissions we generate from the life insurance policies underlying our clients' compensation and benefit programs.
We derive a substantial portion of our revenue from the renewal commissions we earn on the business-owned life insurance policies and other financial instruments that underlie our clients’ compensation and benefit programs. We earn these annual commissions so long as the underlying policies remain in existence. If a client chooses to cancel a policy, we will stop receiving any renewal commissions and fees on that policy. In addition, if a client delays or reduces the annual premiums it pays on the underlying policy due to a flexible premium structure or financial difficulties, our renewal commissions will be correspondingly delayed or reduced. We have historically experienced persistency of 95% on the policies underlying our renewal commissions although we cannot assure you that the persistency rate will not decline in the future.
Our quarterly operating results can vary dramatically.
Our operating results can fluctuate considerably from quarter to quarter. We have experienced and may continue to experience large concentrations of revenue in the first and fourth quarters. Our operating results may be affected by a number of factors including: a significant portion of the funding for our bank-owned life insurance products occurs in the fourth calendar quarter, the majority of deferred compensation plans marketed by our Compensation Resource Group are financed in the first fiscal quarter; and the timing of significant sales can have a material impact on our quarterly operating results.
Our revenue is difficult to forecast, and we believe that comparing our consecutive quarterly results of operations is not 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. Significant downward fluctuations in our quarterly operating results could result in a sharp decline in the trading price of our common stock. See further discussion about the quarterly operating results in Note 20 to the Consolidated Financial Statements under Item 14 “Exhibits, Financial Statement Schedules, and Reports on Form 8-K.”
We may not be able to achieve our projected operating results, which could cause a decline in our stock price.
In this 10K, we publish revenue, earnings before interest, taxes and amortization (“EBITA”) and earnings per share forecasts for 2002. Our forecasts are based on various assumptions and our most informed estimate at the time of preparation. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations--Earnings Guidance.” However, we can offer no assurance that the assumptions will prove accurate or that the forecasts will be achieved. Failure to achieve forecasted results could have a severe adverse impact on the market price of our common stock.
We are dependent on our management team.
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, consultants 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; Thomas M. Pyra, Chief Financial Officer and Chief Operations Officer; James C. Bean, Senior Vice President and Chief Integration Officer; William L. MacDonald, President of our Compensation Resource Group; Richard C. Chapman, President of the Banking Practice; Donald C. Wegmiller, Chairman of our Healthcare Group; Pearl Meyer, President of Pearl Meyer & Partners; and Joe Rich/Beth Florin, Co-Presidents of Rewards and Performance, 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.
We may not be able to successfully implement our acquisition strategy or integrate the businesses we acquire.
Since September 1997, we have completed 19 acquisitions. At any point in time, we may also be considering several other potential acquisitions. Future acquisitions may require substantial expenditures that will 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 from banks or through the capital markets and, if so, on terms acceptable to us. If this were to occur, we may be unable to fully implement our acquisition strategy.
Acquisitions involve numerous risks, including the diversion of our management’s time and attention to the negotiation of the transaction and to the assimilation of the businesses acquired, the possible need to modify financial and other systems and add management resources, 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 substantial portion of our total assets are represented by intangible assets.
When we acquire a company, we normally acquire few tangible assets. Therefore, substantially all of the purchase price for the acquisition is allocated to intangible assets. The two primary components of our intangible assets are inforce revenue and goodwill. The amounts of purchase price allocated to inforce revenue are determined by discounting the cash flow of future commissions adjusted for expected persistency, mortality and associated costs. The balance of the purchase price is allocated to goodwill. The persistency of our inforce business is influenced by many factors outside of our control and we cannot be sure that the value we have allocated will ultimately be realized.
In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 121--Accounting for the Impairment or Disposal of Long-Lived Assets, we review intangible assets including inforce revenue and other long-lived assets for impairment on an annual basis or whenever changes in circumstances indicate that an impairment might exist. When any indicators are present, the estimated undiscounted cash flows are compared to the carrying amount of the assets. An impairment loss is recorded if the undiscounted cash flows are less than the carrying amount. Any write-downs are treated as permanent reductions in the carrying amount of the asset.
If any component of our inforce revenue should become unrealizable, this could have a material adverse effect on our business, financial condition and operating results. We cannot assure you that all of our inforce revenue will be realizable or that accounting regulatory bodies will not impose different amortization methods.
In June, 2001 the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, Business Combinations and No. 142, Goodwill and Other Intangible Assets. Statement 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Statement 141 also includes guidance on the initial recognition and measurement of goodwill and other intangible assets arising from business combinations completed after June 30, 2001. Statement 142 prohibits the amortization of goodwill and intangible assets with indefinite useful lives. Statement 142 requires that these assets be reviewed for impairment at least annually. Indentifiable intangible assets with finite lives will continue to be amortized over their estimated useful lives.
We will apply Statement 142 beginning in the first quarter of 2002. Application of the nonamortization provision of Statement 142 is expected to result in an increase in pre-tax income of $4.0 million with an after-tax effect on EPS of $0.13 to $0.14 per share in 2002. We will test goodwill for impairment using the two-step process prescribed in Statement 142. The first step is a screen for potential impairment, while the second step measures the amount of the impairment, if any. We expect to perform the first of the required impairment tests of goodwill and indefinite lived intangible assets as of January 1, 2002 in the first quarter of 2002. Any impairment charge resulting from these transitional impairment tests will be reflected as the cumulative effect of a change in accounting principle in the first quarter of 2002. We have not determined what the effect of these tests will be on our earnings or financial position.
On January 1, 2002, we adopted Financial Accounting Standards Board Statement of Financial Accounting Standard No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. This statement supersedes SFAS No. 121. Most of the provisions of SFAS No. 121 have been retained; however SFAS No. 144 removes goodwill from its scope and it establishes a primary asset approach to determine the cash flow estimation period for a group of assets. We do not anticipate the adoption of this statement will have a material impact on our consolidated financial statements.
A majority of our commission revenue is derived from policies written by a limited number of insurance companies.
We depend on a select group of insurance companies to underwrite the insurance policies underlying the programs we sell. During 2001, 20 life insurance companies underwrote substantially all of the insurance policies underlying our clients’ programs. Seven of these companies accounted for approximately 60.0% of our first year commission revenue in 2001, 66.3% in 2000, and 63.1% in 1999. If our relationship with any of these insurance companies, or their financial condition, were to significantly change for any reason, we could experience a disruption in our ability to provide products and services to our clients. Although we believe such disruption would only be short-term and that we would not experience any difficulties in securing replacement relationships with similar insurance companies, any long-term delays in doing so could affect our ability to provide competitive financing alternatives to our clients.
Our principal stockholder has the ability to influence stockholder action.
W. T. Wamberg, our Chairman, President and Chief Executive Officer, owned approximately 11.7% of our outstanding common stock as of December 31, 2001. 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 that may otherwise be beneficial to stockholders.
We are subject to litigation which may have a negative impact on our business and reputation.
There are three lawsuits currently pending against us. While we intend to contest these actions, we can offer no assurance that we will be successful. In addition, while our insurance carriers have acknowledged coverage in two of the cases, a loss of any litigation could adversely impact our financial condition, results of operations and cash flows and could damage our business reputation.
Errors or omissions in the services we provide our clients may result in liabilities which could have a material adverse effect on our business and reputation.
We market, design and administer sophisticated financial products and we provide accounting, actuarial and other professional services in connection with marketing, designing and administering these programs. Our clients rely upon the services and interpretations rendered by our employees. To the extent any services or interpretations provided by our employees prove to be inaccurate, we may be liable for the damages, and such liability, to the extent not covered by existing insurance, could have a material adverse effect on our business, financial condition and results of operations.
We are dependent on our information processing systems.
Our ability to provide administrative services depends on our capacity to store, retrieve, process and manage significant databases and expand and upgrade periodically our information processing capabilities. Interruption or loss of our information processing capabilities through loss of stored data, breakdown or malfunctioning of computer equipment and software systems, telecommunications failure, or damage caused by fire, tornadoes, lightning, electrical power outage, or other disruption could have a material adverse effect on our business, financial condition and results of operations. Although we have disaster recovery procedures in place and insurance to protect against such contingencies, we cannot assure you that such insurance or services will continue to be available at reasonable prices, cover all such losses or compensate us for the possible loss of clients occurring during any period that we are unable to provide services.
Risks related to our common stock
The trading price of our common stock may be subject to significant fluctuations.
The trading price of our common stock could fluctuate significantly in response to variations in our operating results, changes in earnings estimates, changes in our business and changes in general market or economic conditions. In addition, in recent years the stock market has experienced significant price and volume fluctuations. Such market fluctuations could result in a sharp decline in the trading price of our common stock and the value of your investment.
The issuance of additional stock will dilute other stockholders.
We have an aggregate of 536,486 shares of common stock authorized but unissued and not reserved for specific purposes. We may issue all of these shares without any action or approval by our stockholders. As of December 31, 2001, we had an aggregate of 2,008,477 unissued shares reserved for issuance under our employee and director incentive and compensation plans. In addition, 93,799 shares are reserved for issuance pursuant to outstanding options which were not granted pursuant to our incentive and compensation plans and 771,229 shares (based on the December 31, 2001 closing price of $25.23 per share) are subject to issuance as contingent payments in connection with our recent acquisitions if stipulated revenue and/or financial targets are achieved. We intend to continue to actively pursue acquisitions of competitors and related businesses and may issue shares of common stock in connection with those acquisitions. Any shares issued in connection with our acquisitions, the exercise of stock options or otherwise would dilute the percentage ownership held by existing stockholders.
Existing stockholders can sell a substantial number of their shares in the public market which could depress our stock price.
Sales of a substantial number of shares of our common stock in the open market, or the perception that such sales could occur, could adversely affect the trading price of our common stock. Mr. Wamberg holds 1,936,580 shares as of December 31, 2001, representing approximately 11.7% of the outstanding shares of common stock and institutional investors (which hold in excess of 5% of our outstanding shares) hold 5,480,054 shares, representing approximately 33.2% of the outstanding shares of common stock. A decision by Mr. Wamberg or the other stockholders to sell shares of our common stock could adversely affect the trading price of our common stock.
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 stockholders. 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 stockholder approval, and Delaware law restrictions on many business combinations and prohibitions on removing directors serving on a staggered board for any reason other than “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.
We do not plan to pay dividends.
We intend to retain any future earnings to fund growth and do not anticipate paying any cash dividends in the foreseeable future. See "Dividend Policy" in Item 5 below.
The following table sets forth information with respect to the principal facilities used in our operations, all of which are leased.
Current
monthly Square
Group-location rent footage Lease expires
Compensation Resource Group--
Dallas, Texas...................................................$70,417 50,000 April 2009
Bethesda, Maryland.........................................21,179 8,519 July 2007
Phoenix, Arizona............................................3,427 2,056 March 2004
Los Angeles, California....................................55,970 37,313 June 2010
Cleveland, Ohio.............................................5,831 3,049 June 2002
Atlanta, Georgia............................................4,498 2,399 December 2002
Chicago, Illinois...........................................7,895 4,734 June 2004
Bedminster, New Jersey......................................6,063 3,000 September 2008
Berkeley, California.......................................16,997 5,483 April 2006
Walnut Creek, California...................................10,056 2,366 April 2006
Waltham, Massachusetts......................................6,507 2,440 November 2004
Banking Practice--
Bloomington, Minnesota....................................$62,252 31,611 September 2005
North Barrington, Illinois.................................12,521 9,391 February 2009
Frisco, Texas..............................................11,054 6,034 February 2005
5 Regional Offices.........................................11,090 5,855 Various
Healthcare Group--
Minneapolis, Minnesota....................................$78,560 44,861 January 2003
St. Louis, Missouri.........................................7,394 3,400 December 2002
Independence, Missouri.....................................20,370 15,248 December 2002
Burnsville, Minnesota.......................................1,050 1,050 October 2003
Flemington, New Jersey........................................840 400 October 2002
Compensation Consulting Group--
New York, New York........................................$79,271 19,000 May 2010
Marlboro, Massachusetts....................................24,615 15,284 July 2005
Corporate office--North Barrington, Illinois......................9,167 6,875 February 2009
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 our consultants. The following is a summary of the current material legal proceedings pending against us.
Constellation Energy Group, Inc. and Baltimore Gas and Electric Company, et al. v. Clark/Bardes, Inc. and New York Life Insurance and Annuity Corporation.
On July 25, 2000, Constellation Energy Group, Inc. (“Constellation”) and related entities filed a civil action against us in the U.S. District Court for the District of Maryland. On September 14, 2001, Constellation amended its complaint and added New York Life Insurance and Annuity Corporation as a defendant. Constellation claims that we failed to take proper action in connection with the administration of an employee benefit life insurance program, resulting in claimed damages of $7.5 million and pre-judgment interest, post-judgment interest, costs and expenses.
We believe we have meritorious defenses to these claims, intend to deny all allegations and to vigorously defend these claims. Our insurance carrier has acknowledged certain coverage in the event we do not prevail.
Madge A. Kunkel, individually and as Personal Representative of the Estate of Donald B. Kunkel, M.D., deceased vs. Banner Health System, et al.
On February 2, 2001, an action was commenced in the Superior Court of Maricopa County, Arizona against various defendants including our Healthcare Group. Ms. Kunkel alleges that her deceased husband was entitled to a life insurance policy in the face amount of $525,000 to be issued by the defendant insurance company under a split dollar life insurance plan sponsored by his defendant employer which was administered by our Healthcare Group. According to the complaint, Dr. Kunkel died before the initial premium was paid by his employer and before the policy was issued. The matter has been submitted to our insurance carriers. We believe we have meritorious defenses to this claim and we intend to vigorously defend the matter.
Frieda Shuster, et al. v. Hyder Mirza, et al. including Clark/Bardes, Inc.
On May 30, 2001, we were named a defendant in a lawsuit filed in the District Court of LaSalle County, Texas alleging gross negligence in connection with the death of an employee when the private aircraft in which he was traveling on company business crashed. Damages are unspecified.
We deny any and all claims and allegations in this action and intend to vigorously defend this matter. The matter is covered by our existing insurance.
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.
Our common stock was traded on the Nasdaq National Market under the symbol CLKB through March 6, 2002. Our common stock began trading on the New York Stock Exchange under the symbol CBC on March 7, 2002 and was no longer quoted on the Nasdaq National Market from that date.
The following table sets forth for the periods indicated the high and low closing prices for our common stock, as reported on the Nasdaq National Market.
High Low
Year ended December 31, 2000:
First Quarter...................................................................17.25 13.69
Second Quarter..................................................................16.81 13.44
Third Quarter...................................................................17.50 9.69
Fourth Quarter..................................................................12.63 9.50
Year ended December 31, 2001:
First Quarter...................................................................12.13 8.00
Second Quarter..................................................................24.13 8.50
Third Quarter...................................................................30.51 17.91
Fourth Quarter..................................................................26.07 19.00
First Quarter to March 5, 2002..................................................27.50 22.49
The closing price of our common stock on March 6, 2002, as reported on the Nasdaq National Market, was $25.57 per share. As of March 5, 2002, we had 16,541,111 outstanding shares of common stock and approximately 700 stockholders of record, which does not include shares held in securities position listings.
Dividend policy
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 our credit agreement with Bank One, as lead agent in a five bank lending group, 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 the bank group gives its prior written consent.
Recent Sales of Unregistered Securities
On September 4, 2001, we issued 39,558 shares of our common stock as part of the purchase price for the acquisition of Lyons Compensation & Benefits. The issue was exempt from registration under Section 4(2) of the Securities Act of 1933. The total value of the shares issued was $1,000,000 and constituted 16.7% of the purchase price paid at closing.
The following historical information 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.
2001(1) 2000(4) 1999(8) 1998(9) 1997(12)
----------- ----------- ------------ ----------- -----------
----------- ----------- ------------ ----------- -----------
Statement of Operations
Total Revenue $230,691 $147,613 $120,760 $74,766 $49,455
Commission and Fee Expense 84,002 50,804 53,108 46,111 32,439
----------- ----------- ------------ ----------- -----------
----------- ----------- ------------ ----------- -----------
Gross Profit 146,689 96,809 67,652 28,655 17,016
----------- ----------- ------------ ----------- -----------
----------- ----------- ------------ ----------- -----------
Operating Expenses
General and Administrative 101,252 68,189 45,153 19,616 11,504
Amortization of Intangibles 11,560 7,138 4,370 1,232 295
Unusual items(2)(5)(9) 2,070 518 -- 4,800 --
----------- ----------- ------------ ----------- -----------
----------- ----------- ------------ ----------- -----------
Income from Operations 31,807 20,964 18,129 3,007 5,217
Non-operating Income(6)(7) 98 1,001 -- -- --
Interest
Income 551 278 329 565 189
Expense (5,738) (4,970) (3,548) (3,166) (1,112)
Settlement of interest (1,981) -- -- -- --
swap (3)
----------- ----------- ------------ ----------- -----------
----------- ----------- ------------ ----------- -----------
Income Before Taxes 24,737 17,273 14,910 406 4,294
Income Taxes(11) 8,725 5,825 6,079 817 60
----------- ----------- ------------ ----------- -----------
----------- ----------- ------------ ----------- -----------
Net Income (Loss) $16,012 $11,448 $8,831 $(411) $4,234
=========== =========== ============ =========== ===========
=========== =========== ============ =========== ===========
Basic Net Income (Loss) per
Common Share:
Net Income (Loss) $1.22 $1.07 $0.97 $(0.08) $1.03
Weighted Average Shares 13,162,899 10,744,718 9,077,775 5,006,009 4,119,387
Diluted Net Income (Loss) per
Common Share:
Net Income (Loss) $1.18 $1.05 $0.95 $(0.08) $0.99
Weighted Average Shares 13,575,830 10,880,093 9,328,939 5,006,009 4,398,593
Dividends per Common share $-- $-- $-- $-- $1.32
Balance Sheet
Cash and Cash Equivalents $10,207 $7,598 $4,832 $12,102 $3,783
Intangible Assets-- Net 187,728 165,373 94,991 45,209 24,089
Total Assets 269,931 219,855 125,524 67,493 36,901
Debt:
Current 1,046 11,968 7,252 4,344 4,325
Long Term 6,079 52,605 35,473 24,713 32,838
Total Liabilities 73,739 107,297 63,156 37,795 42,581
Stockholders' Equity
(Deficit)(13) 196,192 112,558 62,368 29,698 (5,680)
(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
Our net income for 2001 of $16.0 million and $1.18 per diluted common share was the best in our history representing a 39.9% increase over comparable net income of $11.4 million and a 12.4% improvement over diluted earnings per share of $1.05 for the year 2000. We sold substantially all the assets of Insurance Alliances Group in September 2001 and in 2001 wrote off approximately $2.1 million relating to the carrying value of the goodwill and inforce revenue intangible assets arising from this acquisition that was considered not recoverable. We recorded interest expense of approximately $2.0 million as a result of the interest rate swap settlements since we were unable to continue with our hedging program due to the pay off of the bank debt with the proceeds from our secondary offering.
Year ended December 31, 2001 compared to year ended December 31, 2000
Revenue. For the year ended December 31, 2001, our total revenue was $230.7 million, an increase of 56.3% over $147.6 million for the year ended December 31, 2000. This increase was attributable primarily to a full year's results for Compensation Resource Group (full twelve months compared to four months in 2000) and Pearl Meyer (full twelve months compared to six months in 2000), and the addition of Rich Florin/Solutions Inc (f.d.b.a. Executive Alliance) in March 2001. In addition, we had strong sales results in the corporate and community banking markets in 2001.
Gross Profit. Gross profit for 2001 was $146.7 million, a 51.5% increase over $96.8 million for 2000. Gross profit margin for 2001 and 2000 was 63.6% and 65.6%, respectively. Gross profit margin was negatively impacted by more sales in 2001 that were generated by independent consultants who typically are paid higher commissions. However, this was partially offset by the larger percentage of total sales in 2001 generated by our compensation consulting group which had a positive impact on our gross profit margin. We expect a continued improvement in our gross profit margins in future years from the increasing compensation consulting revenue and expected stronger sales results from our employee consultants.
General and administrative expense. General and administrative expense was $101.3 million or 43.9% of revenue in 2001 compared to $68.2 million or 46.2% of revenue in 2000. The increase can be primarily attributed to the full year results of Compensation Resource Group, Pearl Meyer and the 5 acquisitions completed in 2001. As a percentage of revenue, it has declined from 46.2% to 43.9% due to integration activities at the groups and spreading of fixed costs over a larger revenue base.
During 2001, corporate general and adminstrative expense was $11.7 million. Total expenses for 2000 were $9.1 million. This increase over prior year can be attributed primarily to more expenses related to the start up of the reinsurance business and larger bonuses in 2001 as a result of our performance.
Amortization. Amortization was $11.6 million in 2001 or 62.0% higher than the $7.1 million in 2000. This is a result of a full year's amortization cost for Compensation Resource Group and Pearl Meyer. As a result of new accounting rules outlined in FAS 142 which are effective January 1, 2002, goodwill will no longer be amortized. Approximately $4.0 million of the amortization in 2001 related to goodwill.
Interest expense - net. Net interest expense excluding the interest expense for the settlement of an interest rate swap was $5.2 million in 2001 compared to $4.7 million in the prior year. We had additional borrowings of $20.0 million during the year to fund our acquisitions. Our longterm bank debt was paid off with the proceeds from our secondary offering in November 2001.
Income taxes. Income taxes in 2001 were $8.7 million which resulted in an effective tax rate of 35.3% compared with $5.8 million or an effective tax rate of 33.7% in 2000. We received a refund for prior year's taxes of approximately $1.7 million during the year which reduced our rate for the 2001 tax year. In 2000, we received a state tax refund of $500,000 and non-taxable life insurance proceeds of $1.0 million which lowered our effective tax rate in that year.
Net income. Net income of $16.0 million in 2001 represented a $4.6 million, or 39.9% increase over 2000. On a diluted per share basis, earnings of $1.18 were $0.13, or 12.4%, over 2000.
Year ended December 31, 2000 compared to year ended December 31, 1999
Revenue. For the year ended December 31, 2000, our total revenue was $147.6 million, an increase of 22.2% over $120.8 million for the year ended December 31, 1999. This increase in total revenue was attributable primarily to significant increases in first year commission revenue from business-owned life insurance and our acquisitions of Compensation Resource Group and Pearl Meyer in 2000. Revenue also benefited from the inclusion of the Healthcare Group for a full twelve months compared with nine months in 1999.
Gross profit. Gross profit for 2000 was $96.8 million, a 43.1% increase over $67.7 million for 1999. Gross profit margin for 2000 and 1999 was 65.6% and 56.0%, respectively, reflecting the reduction of commissions paid on business generated by The Wamberg Organization, our largest independent consultant which we acquired in September 1999.
General and administrative expense. General and administrative expense was $68.2 million, an increase of $23.0 million, or 51.0%, over 1999. General and administrative expense increased due to the natural increase in expenses required to support increased revenue and operations, the inclusion of our Healthcare Group and other acquisitions for a full year and higher corporate general and administrative expense.
During 2000, corporate general and administrative expense was $9.1 million, including $518,000 of reorganization expenses and $500,000 of legal expenses relating to acquisitions that were not consummated. Results also include the net loss of $603,000 from Insurance Alliance Group operations. Excluding this component, corporate general and administrative expense would have been $8.5 million for 2000. Total expenses for 1999, the year our corporate office was established in North Barrington, were $5.9 million.
Amortization. Amortization of intangibles increased $2.8 million or 63.3% over 1999. The entire amount is attributable to companies acquired in 2000 and the full year's effect of companies acquired in 1999.
Interest expense--net. Net interest expense was $4.7 million in 2000, a 45.8% increase from the $3.2 million net interest expense in 1999. This was due to a $21.8 million increase in our net borrowings in 2000.
Non-operating income. In the fourth quarter of 2000, we received $1.0 million of life insurance proceeds as a result of the death of one of our employees. This one time credit increased net income for 2000 by approximately $0.09 per share.
Income taxes. Income taxes in 2000 were $5.8 million which resulted in an effective tax rate of 33.7% compared with $6.1 million or an effective tax rate of 40.8% in 1999. Tax expense in 2000 was reduced by the receipt of $500,000 of state tax refunds--a direct reduction of our state income tax expense and the receipt of $1.0 million of non-taxable life insurance proceeds as a result of the death of one of our employees.
Net income. Net income of $11.4 million in 2000 represented a $2.6 million, or 29.6% increase over 1999. On a diluted per share basis, earnings of $1.05 were $0.10, or 10.5%, over 1999.
Acquisitions
Our acquisition program continues to remain broadly focused on adding new markets or expanding those in which we already have a presence. We feel we furthered this objective in 2001 by acquiring Rich, Florin/Solutions, Inc. (f.d.b.a. Executive Alliance), a technical and middle management compensation consulting firm, during the first quarter; and Management Science Associates, Inc., a consultant to the healthcare industry, in the third quarter, along with three other acquisitions in 2001.
The companies we acquire are typically privately owned and structured as S corporations with the income taxed directly to the shareholders. Our evaluation focus is on the quality of the management and future earnings and growth potential of the target company. In several of our acquisitions, we also acquire the financial value embedded in a book of recurring renewal business that is expected to be realized for many years after the acquisition takes place. We typically structure a majority of the purchase price in cash. We acquire little in the way of tangible assets, thus creating a substantial amount of intangible assets on our balance sheet.
Up until now, our future renewal revenue stream has been the source of collateral for our acquisition line of credit. As we acquire more businesses that do not have this attribute, this may limit our future borrowing availability.
On March 12, 2001, we acquired the business along with certain assets and liabilities of Rich, Florin/Solutions, Inc. (f.d.b.a. Executive Alliance), a Boston, Massachusetts compensation consulting company. This acquisition created a new operating segment for the company - Rewards and Performance (previously known as Corporate Practice.) The net assets acquired were approximately $1.8 million. The purchase price was $20.8 million; before expenses, consisting of a cash payment at closing of $11.3 million and $9.5 million of contingent payments over the next four years based on the attainment of established financial performance criteria. When earned, the contingent payments will consist of 60% cash and 40% in our common stock. The transaction was funded from our existing line of credit. The initial goodwill of approximately $9.4 million was being amortized over twenty years. Goodwill amortization ceased on December 31, 2001 under new accounting rules.
On August 31, 2001, we acquired the business and certain assets and assumed certain liabilities of Lyons Compensation and Benefits, LLC. This acquisition added several new clients and inforce revenues and strengthened the presence in the Northeast region of the United States for our CRG operating segment.
On September 6, 2000, we acquired all the issued and outstanding capital stock of Compensation Resource Group ("CRG") for a total purchase price of $30.5 million consisting of the following: a cash payment to the CRG selling shareholders of $11.4 million, the issuance of 596,463 shares of our common stock, having an aggregate value of $6.1 million based on the closing price on September 5, 2000, and the repayment of approximately $13.0 million of CRG's long-term debt. Acquisition expenses were $735,000 and are not included in the purchase price above. The cash portion of the purchase price was borrowed under our acquisition and working capital credit facility. The acquisition of CRG has been accounted for as a purchase with $26.7 million of the purchase price allocated to the present value of in-force revenue and amortized over a period of thirty years and $11.6 million allocated to goodwill which will be amortized over twenty years. The goodwill allocation includes $7.1 million of net deferred tax liabilities arising from the portion of the purchase price that will not be deductible for federal income tax purposes. Goodwill amortization ceased on December 31, 2001 under new accounting rules.
CRG is an executive compensation and benefits organization that provides the design, marketing and administration of non-qualified benefit plans. CRG is headquartered in Los Angeles, California and has affiliated offices in seven other cities. Prior to the acquisition, we had no material relationship with CRG.
Coincident with this acquisition, we entered into a bonus arrangement for certain key executives and employees of CRG. This arrangement will provide for the payment of bonuses of up to $20 million if certain stipulated financial objectives are achieved during the years ended December 31, 2003 to 2005. The division president has the opportunity to earn up to $3.5 million in bonuses through 2003 based on certain financial objectives as outlined in the employment agreement.
The unaudited financial information below presents our results and CRG as if the acquisition had occurred on January 1, 1999.
Year Ended December 31,
-------------------------
------------ ------------
2000 1999
Pro Forma
Revenue $181,787 $148,487
Net income 9,500 5,957
Diluted earnings per share 0.84 0.60
On June 21, 2000, we acquired all of the capital stock of Pearl Meyer & Partners, Inc. for a total purchase price of $25.9 million, excluding expenses. The purchase price consisted of a cash payment of $21.9 million and the issuance of 250,000 shares of our common stock with a value of $4.0 million. Acquisition expenses were $720,000. The cash portion of the purchase price was borrowed under our line of credit. For income tax purposes, Pearl Meyer & Partners was an S corporation; consequently the net income was passed on to the shareholders and no taxes were paid by us.
Pearl Meyer is a New York City based consulting firm specializing in executive compensation and retention programs. The Pearl Meyer organization became our fourth operating segment. Prior to the acquisition, there was no material relationship with Pearl Meyer.
The acquisition has been accounted for as a purchase and goodwill of $23.5 million was being amortized over a twenty-year period. Goodwill amortization ceased on December 31, 2001 under new accounting rules.
The unaudited pro forma information below presents the results of Pearl Meyer & Partners and ourselves as if the acquisition had occurred on January 1, 1999.
Year Ended December 31,
-------------------------
------------ ------------
2000 1999
Pro forma
Revenue $154,557 $133,339
Net income 12,143 7,562
Diluted earnings per share 1.10 0.79
Recent Developments
On March 7, 2002, our stock which was previously traded on the NASDAQ under the symbol of CLKB, began trading on the New York Stock Exchange under the symbol of CBC.
On February 26, 2002, we announced the signing of a letter of intent to purchase Comiskey Kaufman, Inc. Comiskey Kaufman is a Houston, Texas based provider of executive benefits consulting for major companies in the Southwest, primarily in Texas. Consummation of the purchase is subject to the approval of both companies’ Boards of Directors, our lending banks and the satisfactory completion of financial and business due diligence.
On February 25, 2002, we announced the purchase of the Federal Policy Group of PricewaterhouseCoopers based in Washington, D.C. Federal Policy Group is a consulting practice representing Fortune 500 companies, trade associations and other businesses before the government on legislative and regulatory policy matters. The purchase price was $11.0 million before expenses consisting of a cash payment at closing of $5.0 million and $6.0 million of contingent payments consisting of cash and stock over the next 4 years based upon attainments of established performance criteria.
Clark/Bardes Reinsurance Company, Ltd. (CBRCL), a wholly owned subsidiary of Clark/Bardes, Inc., was incorporated in the Cayman Islands with Limited Liability effective December 13, 2001. CBRCL was formed in order to increase and diversify our earnings stream by participating in the underwriting profits of the insurance business produced by its various operating segments. The Governor In Council granted approval on December 19, 2001 for the issue of an unrestricted Class “B” insurer’s license to CBRCL, subject to the receipt and approval by the Cayman Monetary Authority of certain outstanding requirements of the Law. As of December 31, 2001, CBRCL had not yet been capitalized nor had it begun its reinsurance operations. The insurance license for CBRCL has been issued and is effective as of February 1, 2002.
Secondary Offering
On November 21 and 30, 2001, we sold 3,693,750 shares of common stock at a price of $19 per share. The entire amount of the proceeds received of $66.0 million was used to repay bank debt.
Tax Enforcement Policy
Last year, we had reported that the Tax Court had found in favor of the Internal Revenue Service in their efforts to disallow an interest deduction by a company having purchased an executive benefit program funded by a life insurance product known as leveraged COLI. Since then, the IRS has continued to litigate the matter with other companies and has prevailed on three more cases. We have not offered leveraged COLI in our product offerings since 1995. Consequently, we do not expect any adverse effects 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 any 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 of the insurance contracts, it is impossible to predict the ultimate effect, if any, this could have on our future renewal revenues.
In January 2001, the Treasury Department and the Internal Revenue Service served notice on taxpayers of their intent to consider taxing the equity increase in what are known as “equity split dollar” arrangements, to the individual beneficiary of the coverage. Heretofore, the individual did not sustain a tax liability until the policy was closed and the equity distributed. The implementation of this notice may have a negative impact on our ability to market new equity split dollar arrangements and could potentially affect existing split dollar arrangements.
Revenue Sources and Recognition
Our operating units derive their revenue primarily from commissions paid by the insurance companies that underwrite the policies underlying the various benefit programs, program design and administrative service fees paid by clients, and executive compensation and benefit consulting fees.
Our commission revenue is usually long term and recurring, is typically paid annually and extend 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.
Other Significant Accounting Policies
Intangible assets
We have 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 inforce revenue is amortized over 20 to 30 years (the expected average policy duration). There are certain assumptions related to persistency, expenses, and discount rates that are used in the calculation of inforce revenue. If any of these assumptions change, it could effect the carrying value of the inforce revenue. Under accounting rules, we periodically review and test the recoverability of these assets.
Related party transactions
In connection with the acquisition of the Wamberg Organization in September 1999, the asset purchase agreement provided for additional payments to W.T. Wamberg, our chief executive officer and previous owner of the Wamberg Organization, upon attainment of certain stipulated annual financial objectives starting with the period ended December 31, 1999 through December 31, 2002. As of December 31, 2001, the financial objectives for those years have been met and a total cash payment of $8.3 million was made to W. T. Wamberg and recorded as additional purchase price. The Board of Directors has approved the distribution of The Wamberg Organization earnout payment prior to the date we are obligated to distribute the proceeds. The earnout target has been achieved and the payment will be made but discounted for the time value of money. $3.5 million was accrued for this payment in the consolidated financial statements at December 31, 2001.
We lease 16,266 square feet of office space controlled by Mr. Wamberg for an annual rental of approximately $260,000, under a lease expiring on February 21, 2009.
We funded our deferred compensation plan at year-end with an insurance policy under which we recognized revenue of $560,000 as stated in our revenue recognition policy. The employment agreement with one of our division presidents was revised in December 2001 to change bonuses for key performance measures. No cash payments were made in December 2001, however $250,000 was accrued as the amount that has been earned to date under the new agreement.
During 2001, we paid William Seidman, a member of our Board of Directors, $75,000 for services in connection with the evaluation of a potential acquisition target.
Our Chairman and Chief Executive officer, Tom Wamberg and Richard Chapman, Executive Vice-President of Clark/Bardes, Inc. and President of the Banking Practice, have collectively invested $1 million in a company which George Dalton, a member of our Board of Directors is founder and majority shareholder.
William Archer, a member of our Board of Directors since February 2001, is a senior policy advisor at Pricewaterhouse Coopers LLP. We previously engaged Pricewaterhouse Coopers LLP to perform various consulting related to the installation of our wide area network and a knowledge management system at one of our compensation consulting practices. During 2001, we paid approximately $726,000 to Pricewaterhouse Coopers LLP for these services.
Fox-Pitt Kelton, co-manager of our November 2001 secondary offering owns Conning Capital Partners. Steve Piaker, a member of our Board of Directors, is a partner with Conning Capital Partners.
Quarterly Results
Our operating results can fluctuate considerably, especially when compared on a consecutive quarterly basis. We can experience large increases in revenue in the first and fourth quarter and operating results may be affected by a number of other factors, including new or enhanced programs and services by us or our competitors and client acceptance or rejection of these programs, program development expenses, competitive, legislative and regulatory changes and general economic conditions. Many of these factors are beyond our control. Sales cycles often take between twelve to eighteen months, with a significant amount of revenue that can come 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.
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.
Dec. Sept. June Mar. Dec. Sept. June Mar.
2001 2001 2001 2001 2000 2000 2000 2000
Revenue $77,264 $43,922 $43,468 $66,037 $57,457 $34,645 $24,364 $31,147
% of annual 33.5% 19.1% 18.8% 28.6% 38.9% 23.5% 16.5% 21.1%
Gross profit 47,260 29,950 30,398 39,081 37,322 22,888 16,336 20,263
Ratio 61.2% 68.2% 69.9% 59.2% 65.0% 66.1% 67.0% 65.1%
Operating expenses 27,932 24,053 24,617 24,650 21,705 17,875 14,114 15,013
Amortization 2,934 2,887 2,940 2,799 2,540 1,933 1,329 1,335
Operating income(1) 14,324 3,010 2,841 11,632 13,076 3,080 893 3,915
% of revenue 18.5% 6.9% 6.5% 17.6% 22.8% 8.9% 3.7% 12.6%
% of gross profit 30.3% 10.1% 9.3% 29.8% 35.0% 13.5% 5.5% 19.3%
Non-operating (expense)
income (21) - (72) 191 1,001 - - -
Interest expense -- net 3,224 1,206 1,447 1,291 1,587 1,407 847 851
(2)
Income taxes 3,946 39 422 4,318 4,151 514 (113) 1,273
Net income $7,133 $1,765 $900 $6,214 $8,339 $1,159 $159 $1,791
Per diluted common share $0.48 $0.13 $0.07 $0.49 $0.65 $0.11 $0.02 $0.18
(1) In the fourth quarter of 2001, we incurred an unusual operating expense of $2.1 million in connection with the writedown of
assets acquired from Insurance Alliances Group.
(2) As we paid off the bank debt during the fourth quarter of 2001, we were unable to continue our hedging program and incurred
$2.0 million of interest expense related to our interest rate swaps.
Segment Results
The following analyses depict the results of each of our operating segments on a stand-alone basis. No allocation of corporate overhead or interest has been made.
Compensation Resource Group
Operating Results
---------------------------------
Year Ended December 31,
---------------------------------
2001 2000 1999
Revenue
First year $42,117 $21,376 $7,884
Renewal 51,674 25,766 24,537
---------- ----------- ----------
---------- ----------- ----------
Total 93,791 47,142 32,421
Commission expense 47,650 20,474 14,023
---------- ----------- ----------
---------- ----------- ----------
Gross profit 46,141 26,668 18,398
% of revenue 49.2% 56.6% 56.7%
---------- ----------- ----------
---------- ----------- ----------
General and administrative 28,915 15,791 9,866
% of revenue 30.8% 33.5% 30.4%
Amortization of 5,703 1,946 951
intangibles
---------- ----------- ----------
---------- ----------- ----------
Total 34,618 17,737 10,817
Operating income $11,523 $8,931 $7,581
========== =========== ==========
========== =========== ==========
% of revenue 12.3% 18.9% 23.4%
Formerly our Clark/Bardes segment, the segment now consists of the original core business as well as the Schoenke, Wiedemann & Johnson, Wamberg Organization, and Compensation Resource Group acquisitions. The segment was reorganized with the acquisition of Compensation Resource Group and renamed Clark/Bardes Consulting — Compensation Resource Group.
In order to streamline the focus of the segment, the bank owned life insurance business of this segment was transferred to the Banking Practice, effective January 1, 2001 and the Clark/Bardes Consulting Compensation Resource Group segment will concentrate on non-qualified executive benefit plans.
Revenue was $93.8 million for 2001 compared to $47.1 million for 2000. This increase of $46.6 million is primarily attributed to a full year of results in 2001 for Compensation Resource Group (full twelve months in 2001 versus 4 months in 2000) and strong first quarter sales. Gross profit as a percentage of revenue declined from 56.6% in 2000 to 49.2% in 2001 due to more sales being generated by senior consultants who are generally paid a higher commission expense. General and administrative expenses increased 83.1% over 2000. This is primarily attributed to a full year of expenses in 2001 for Compensation Resource Group (full twelve months in 2001 versus 4 months in 2000.) Operating income as percentage of revenue declined from 18.9% in 2000 to 12.3% in 2001 as a result of the higher commission expense mentioned above and a full year of amortization expense.
Banking Practice
Operating Results
Year Ended December 31,
---------------------------------
2001 2000 1999
Revenue
First year $55,797 $38,835 $47,204
Renewal 35,964 32,783 24,687
---------- ---------- -----------
---------- ---------- -----------
Total 91,761 71,618 71,891
Commission expense 33,356 27,465 37,192
---------- ---------- -----------
---------- ---------- -----------
Gross profit 58,405 44,153 34,699
% of revenue 63.6% 61.7% 48.3%
General and administrative 25,450 22,268 16,850
% of revenue 27.7% 31.1% 23.4%
Amortization of 1,690 2,625 2,059
intangibles
---------- ---------- -----------
---------- ---------- -----------
Total 27,140 24,893 18,909
Operating income $31,265 $19,260 $15,790
========== ========== ===========
========== ========== ===========
% of revenue 34.1% 26.9% 22.0%
The major component of the Banking Practice is Bank Compensation Strategies and the BOLI business previously included in the CRG segment. Revenue increased 28.1% between 2001 and 2000 primarily due to strong first year sales in the community banking sector. Improvements in the gross profit percentage from 61.7% in 2000 to 63.6% in 2001 relates to more sales being generated by employee consultants who have a lower commission structure and stronger performances by Christiansen and NICB. General and administrative expense as a percentage of revenue was 27.7% in 2001 and 31.1% in 2000. This has improved as a result of consolidation of the majority of the banking business in Minneapolis.
Healthcare Group
Operating Results
Year Ended December 31,
-------------------------------------
2001 2000 1999
Revenue
First year $20,065 $16,870 $12,516
Renewal 5,159 5,269 3,932
------------ ----------- ------------
------------ ----------- ------------
Total 25,224 22,139 16,448
Commission expense 2,996 2,811 1,893
------------ ----------- ------------
------------ ----------- ------------
Gross profit 22,228 19,328 14,555
% of revenue 88.1% 87.3% 88.5%
------------ ----------- ------------
------------ ----------- ------------
General and 21,180 16,932 12,571
administrative
% of revenue 84.0% 76.5% 76.4%
Amortization of 2,382 1,795 1,361
intangibles
------------ ----------- ------------
------------ ----------- ------------
Total 23,562 18,727 13,932
Operating (loss) income ($1,334) $601 $623
============ =========== ============
============ =========== ============
% of revenue (5.3%) 2.7% 3.8%
The Healthcare Group acquired Partners First in March 2001 and Management Science Associates (“MSA”) in July 2001. MSA contributed $4.1 million and $1.2 million of revenue and operating income, respectively, to the consolidated results of the Healthcare Group in 2001. We anticipate the MSA acquisition will provide cross selling opportunities within the Healthcare Group and throughout the Company going forward into 2002.
Compensation Consulting
Operating Results
Year Ended December 31,
---------------------------
2001 2000
Total revenue $19,915 $6,027
Commission expense -- --
------------- -------------
------------- -------------
Gross profit 19,915 6,027
% of revenue 100.0% 100.0%
------------- -------------
------------- -------------
General and administrative 14,244 4,095
% of revenue 71.5% 67.9%
Amortization of 1,570 626
intangibles
------------- -------------
------------- -------------
Total 15,814 4,721
Operating income $4,101 $1,306
============= =============
============= =============
% of revenue 20.6% 21.7%
Although other segments offer compensation consulting in connection with their benefit plan activities, the June 2000 acquisition of Pearl Meyer & Partners represented our major initiative into this vital and logical extension of our business. In 2001, we acquired Rich Florin/Solutions, Inc. (f.d.b.a. Executive Alliance) which helped us expand our compensation consulting services. The performance of compensation consulting was negatively impacted by the events of September 11, 2001 during the later half of third quarter and the beginning of fourth quarter.
Results Attributable to Acquisitions
As an acquirer, our operating results are significantly influenced by the contributions of our acquired businesses. For reporting purposes, we consider the operating results from any business not appearing in four complete quarters as being from acquisitions. After that, they become part of existing business. Non-material acquisitions are not included in the acquisition column. An analysis of our operating results, separating acquisitions from existing business is as follows:
Year Ended Year Ended
December 31, 2001 December 31, 2000
Existing Acquisitions Combined Existing Acquisitions Combined
Revenue
First year $128,477 $8,667 $137,144 $68,484 $14,816 $83,300
Renewal 93,547 - 93,547 60,135 4,178 64,313
----------- ------------ ----------- ----------- ------------ ------------
----------- ------------ ----------- ----------- ------------ ------------
Total 222,024 8,667 230,691 128,619 18,994 147,613
Commission expense 84,002 - 84,002 44,656 6,148 50,804
----------- ------------ ----------- ----------- ------------ ------------
----------- ------------ ----------- ----------- ------------ ------------
Gross profit 138,022 8,667 146,689 83,963 12,846 96,809
General and administrative
Expense 95,659 5,593 101,252 59,594 9,113 68,707
Operating income before
Amortization 42,363 3,074 45,437 24,369 3,733 28,102
Amortization of 11,167 393 11,560 5,373 1,765 7,138
intangibles
IAG writeoff 2,070 - 2,070 - - -
----------- ------------ ----------- ----------- ------------ ------------
----------- ------------ ----------- ----------- ------------ ------------
Operating income $29,126 $2,681 $31,807 $18,996 $1,968 $20,964
=========== ============ =========== =========== ============ ============
In 2001, approximately 3.8% of gross revenue and 8.4% of operating income were from acquisitions while 12.9% of gross revenue and 9.4% of operating income were from acquisitions in 2000. We do not attribute a great deal of significance to these statistics because an acquisition’s contribution to operating performance in any given period is considerably dependent on the timing of the transaction and whether it is considered an acquisition for definition purposes. In addition, the statistics only break-out acquisitions that are considered material to our financial results. Finally, the resources of our existing businesses that are dedicated to our acquisition program could have had an impact on the performance of the existing business had the acquisitions not been made.
Liquidity and Capital Resources
Selected Measures of Liquidity and Capital Resources.
As of December 31,
--------------------------------
---------- ---------- ----------
2001 2000 1999
Cash and cash equivalents $10,207 $7,598 $4,832
Working capital $6,295 $(2,317) $(1,821)
Current ratio-- to one 1.11 .95 .93
Shareholders' equity per common $11.87 $8.88 $6.47
share(1)
Debt to total capitalization(2) 3.5% 36.5% 40.7%
(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
Our working capital ratio at December 31, 2001 was 1.11 to 1 compared to the ratio of .95 to 1 at December 31, 2000. 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 help with the funding of future acquisitions, as a result, only cash for reasonably foreseeable needs and expenses is retained. The debt to total capitalization ratio significantly decreased from 2000 due to the pay off of the debt with the proceeds from our secondary offering. It should be noted that our loan agreements do not impose a working capital covenant or restriction because of the value of our renewal revenue that is used as collateral for our senior debt.
Due to the nature of the commission structure on the insurance policies underlying our clients' benefit programs, we have an on going renewal revenue stream, estimated to be $624.1 million over the next ten years. Our balance sheet currently reflects $98.4 million of renewals, in the form of intangible assets attributed to the net present value of renewals from acquired companies purchased through acquisitions. Other than these intangibles, renewals are not reflected on our balance sheet.
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 pay down existing debt, fund capital expenditures and finance 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.
Year Ended December 31,
-------------------------------------
------------ ------------
2001 2000 1999
Cash flows from (used in):
Operations $28,422 $17,918 $12,552
Investing (34,242) (62,655) (40,282)
Financing 8,429 47,503 20,460
Cash Flows from Operating Activities
Our cash flow from operations for the twelve months ended December 31, 2001, improved significantly over that of the comparable twelve-month period in 2000. The components were:
Year Ended December 31,
2001 2000 1999
Net income plus non-cash expenses $35,222 $19,860 $14,016
Changes in operating assets and
liabilities (6,800) (1,942) (1,464)
----------- ----------- ----------
----------- ----------- ----------
Cash flow from operating activities $28,422 $17,918 $12,552
=========== =========== ==========
The following table represents the estimated gross renewal revenue associated with our inforce business owned life insurance policies as of December 31, 2001. The 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.
Compensation Banking Healthcare
Resource Group Practice Group Total
---------------- --------- ------------ ----------
---------------- --------- ------------ ----------
2002 $52,160 $36,011 $5,914 $94,085
2003 46,457 31,739 5,745 83,941
2004 39,128 24,279 5,308 68,715
2005 31,562 24,955 4,886 61,403
2006 27,996 25,366 4,546 57,908
2007 25,557 24,267 4,176 54,000
2008 23,460 24,621 3,525 51,606
2009 23,409 25,027 2,808 51,244
2010 22,820 25,612 2,083 50,515
2011 23,008 26,301 1,368 50,677
---------------- --------- ------------ ----------
---------------- --------- ------------ ----------
Total December 31, $315,557 $268,178 $40,359 $624,094
2001
================ ========= ============ ==========
================ ========= ============ ==========
Total December 31, $522,752 $61,955 $51,721 $636,428
2000
================ ========= ============ ==========
The bank owned life insurance product sold by the former Clark/Bardes segment which was included in CRG was transferred to the Banking Practice thus placing all of our bank owned life insurance business in one segment, commencing January, 2001.
10 year inforce revenues net of commission expense are $416.7 million for the year ended December 31, 2001.
Cash used in Investing Activities
Acquisitions accounted for $29.5 million used in investing activities and $5.0 million was used for the purchase of equipment.
Cash spending for acquisitions included:
Partners First $1.1
Rich/Florin Solutions 11.4
Management Sceience Associates 4.7
Lyons Compensation and Benefits 5.0
Coates Kenney 0.6
The Wamberg Organization earnout 6.7
-------
$29.5
=======
=======
Because of the income tax structure of the companies we seek to acquire, a substantial amount of the purchase price is paid in cash. This is also due, in part, to our desire to avoid diluting our existing shareholders. 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 2001, we amended our Amended and Restated Credit Agreement dated December 28, 1999 to increase the amount available under the revolving credit facility from $62.0 million to $103.2 million. There is no longer a term loan balance of this facility. We paid off the term portion under the old agreement in December 2001 with the proceeds from our November 2001 secondary offering. Any outstanding debt on December 31, 2002 will convert from the revolving credit facility to term debt and will amortize over 5 years under the term facility agreement.
The restrictive covenants under the loan agreement provide for the maintenance of a minimum ratio of fixed charges, a maximum allowable leverage ratio, a minimum amount of stockholders’ equity; and, a maximum ratio of debt to capitalization. We were in compliance with all restrictive covenants as of December 31, 2001.
In November 2001, we sold 3,693,750 shares in a secondary offering. The entire proceeds from the sale of approximately $66.0 million were used to repay all debt under our credit facility. We will have more flexibility with where our money can be directed because of the pay off of the debt.
We had $103.2 million available under our credit lines at December 31, 2001.
We believe that our cash flow from operations will continue to provide sufficient funds to service our debt obligations. However, as our business grows, our working capital and capital expenditures requirements will also continue to increase. There can be no assurance, 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.
The following table provides information about our debt obligations. The table presents principal cash flows and related interest rates by expected maturity dates totaling $7.1 million.
Expected Maturity Date
2002 2003 2004 2005 2006 Thereafter Total Fair Value
Liabilities
Long term debt
Fixed rate $1,046 $1,154 $1,274 $1,407 $1,553 $691 $7,125 $7,125
Average interest
rate 10.0% 10.0% 10.0% 10.0% 10.0% 10.0%
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.
Recent Accounting Pronouncements
FASB Accounting Standard-- Derivatives and Hedging Activities
As of January 1, 2001, we adopted Financial Accounting Standards Board Statement No. 133, Accounting for Derivative Instruments and Hedging Activities (Statement 133) which was issued in June 1998 together with its amendments Statements 137, Accounting for Derivative Instruments and Hedging Activities — Deferral of the Effective Date of FASB Statement No. 133 and 138, Accounting for Derivative Instruments and Certain Hedging Activities (issued in June 1999 and June 2000, respectively are collectively referred to as Statement 133).
Because of our minimal use of derivatives, the adoption of the new Statement did not have a significant effect on our earnings or financial position. The Statement requires us to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative’s change in fair value will be immediately recognized in earnings.
As a result of the pay off of the debt in November 2001 with the proceeds from the secondary offering, we were unable to continue our hedging program. We recorded $2.0 million as interest expense for the year ended December 31, 2001 related to these interest rate swaps.
Prior to January 1, 2001, we also used interest rate swap contracts for hedging purposes. The net amount paid or received and net amounts accrued through the end of the accounting period were included in interest expense.
FASB Accounting Standard - Business Combination and Goodwill
In June, 2001 the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, Business Combinations and No. 142, Goodwill and Other Intangible Assets. Statement 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Statement 141 also includes guidance on the initial recognition and measurement of goodwill and other intangible assets arising from business combinations completed after June 30, 2001. Statement 142 prohibits the amortization of goodwill and intangible assets with indefinite useful lives. Statement 142 requires that these assets be reviewed for impairment at least annually. Intangible assets with finite lives will continue to be amortized over their estimated useful lives.
We will apply Statement 142 beginning the first quarter of 2002. Application of the nonamortization provision of Statement 142 is expected to result in an increase in pre tax income of $4.0 million with an after tax effect on EPS of $0.13 to $0.14 per share in 2002. We will test goodwill for impairment using the two-step process prescribed in Statement 142. The first step is a screen for potential impairment, while the second step measures the amount of the impairment, if any. We expect to perform the first of the required impairment tests of goodwill and indefinite lived intangible assets as of January 1, 2002 in the first quarter of 2002. Any impairment charge resulting from these transitional impairment tests will be reflected as the cumulative effect of a change in accounting principle in the first quarter of 2002. We have not determined what the effect of these tests will be on our earnings or financial position.
On January 1, 2002, we adopted Financial Accounting Standards Board Statement of Financial Accounting Standard No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. This statement supersedes SFAS No. 121. Most of the provisions of SFAS No. 121 have been retained; however SFAS No. 144 removes goodwill from its scope and it establishes a primary asset approach to determine the cash flow estimation period for a group of assets. We do not anticipate the adoption of this statement to have a material impact on our consolidated financial statements.
Earnings Guidance
Our Company has increased in both size and complexity resulting from both internal growth as well as acquisitions. Assisting the reader in assessing our financial performance and preparing statements enhance that understanding, has always been one of our goals. In furtherance of this goal, we are including earnings guidance in the form of a projection with this report.
Set forth below is a comparison of our actual results for the year ended December 31, 2001 compared to the guidance previously provided.
Year ended December 31, 2001
------------------------------------
Actual Guidance
Revenue
First year $ 137,894 $ 133,906
Renewal and fees 92,797 84,621
------------------------------------
------------------------------------
Total 230,691 218,527
------------------------------------
Gross profit 146,689 144,129
------------------------------------
Earnings before interest,
taxes and amortization (1) 45,437 44,709
------------------------------------
Net income $ 16,012 $ 18,479
====================================
Diluted shares outstanding 13,575,830 13,400,000
Diluted earnings per share (2) $ 1.18 $ 1.38
====================================
(1) EBITA is not a GAAP measurement of earnings. EBITA is management's proxy for measuring pretax cash flow.
(2) We sold substantially all the assets of Insurance Alliances Group in September
2001 and in 2001 wrote off approximately $2.1 million relating to the carrying
value of the goodwill and inforce revenue intangible assets arising from this
acquisition that was considered not recoverable. We recorded interest expense of
approximately $2.0 million as a result of the interest rate swap settlements
since we were unable to continue with our hedging program due to the pay off of
the bank debt with the proceeds from our secondary offering.
Set forth below is the earnings guidance set forth by management for the 2002.
2002 Quarter Ending
-------------------------------------------------------
-------------------------------------------------------
Full Year
March 31 June 30 September 30 December 31 2002
First year revenue $38,140 $34,870 $36,670 $54,020 $163,700
Renewal and other 30,360 17,020 17,300 27,320 92,000
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Gross revenue 68,500 51,890 53,970 81,340 255,700
Gross profit 43,970 35,980 37,190 56,660 173,800
Earnings before interest,
taxes and amortization (EBITA) 16,280 5,360 7,380 22,980 52,000
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Net income 8,675 2,225 3,450 13,330 27,650
============= ============= ============= ============= =============
============= ============= ============= ============= =============
Diluted shares outstanding 17,250 17,350 17,450 17,550 17,400
Diluted earnings per share 0.50 0.13 0.20 0.76 1.59
============= ============= ============= ============= =============
============= ============= ============= ============= =============
2002 Revenue 2002 EBITA
Expected contribution by
market 38% 31%
Corporate Benefits
Banking Practice 38% 63%
Healthcare Compensation 13% 13%
Compensation Consulting 11% 16%
Corporate (23%)
The above forward-looking statements are based on the good faith beliefs of management and the information currently available and are not an assurance of future performance. Such forward-looking statements are based on a number of assumptions by management, including, without limitation:
The foregoing assumptions are inherently subject to significant business, economic, competitive, regulatory and other risks and uncertainties, many of which are beyond our control, and upon assumptions with respect to future business decisions that are subject to change. Forecasts are necessarily speculative in nature, and it can be expected that some or all of the assumptions underlying the forecasts will not materialize. We cannot assure you that the forecasts will be realized, and actual results may be materially higher or lower than the forecasts. Consequently, the inclusion of the forecasts in this 10-K should not be regarded as a representation by us or any other person that the forecasted results will be achieved. Because of such risks and uncertainities and the possibility that one or more of our assumptions may be incorrect, you should not rely on the above forward-looking statements in making any investment decision whether to buy, hold or sell any of our securities.
>At December 31, 2001, we had total outstanding indebtedness of $7.1 million, or approximately 1.7% of total market capitalization. Our outstanding debt was subject to fixed rates of 10.0% at December 31, 2001. We do not enter into derivative or interest rate transactions for speculative purposes. As a result of the pay off of the debt in November 2001 with the proceeds from the secondary offering, we were unable to continue our hedging program. We recorded $2.0 million as interest expense for the year ended December 31, 2001 related to the interest rate swaps we were entered into.
Our financial statements begin on page 40 of this Form 10-K.
On February 27, 2002, Ernst & Young LLP after being notified that it would not be retained to serve as our independent accountants for the 2002 fiscal year, resigned and will cease its relationship with us upon completion of the annual audit for our fiscal year ended December 31, 2001. There have been no material disagreements with our independent accountants on our accounting or financial reporting 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.
On March 14, 2002, we engaged Deloitte & Touche LLP (“Deloitte & Touche”) to serve as our independent public accountants for the fiscal year ending December 31, 2002.
The information required by Item 10 is hereby incorporated by reference from our proxy statement for the 2002 annual meeting of our stockholders under the captions “Proposal One — Election of Directors,” and “Executive Officers.”
The information required by Item 11 is hereby incorporated by reference from our 2002 proxy statement under the caption “Executive Compensation.”
The information required by Item 12 is hereby incorporated by reference from our 2002 proxy statement under the caption “Ownership of Common Stock by Certain Beneficial Owners and Management.”
The information required by Item 13 is hereby incorporated by reference from our 2002 proxy statement under the caption “Certain Relationships and Related Transactions.”
(a)The following documents are filed as part of this report:
Schedules not listed above have been omitted because they are not required, are not applicable, are shown in the related financial statements or notes thereto or the amounts are immaterial.
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.
CLARK/BARDES, INC.
AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
Page
Report of Independent Auditors 37
Consolidated Balance Sheets as of December 31, 2001
and 38
2000
Consolidated Statements of Income for the years ended
December 31, 2001, 2000, and 1999 39
Consolidated Statements of Stockholders' Equity for
the 40
years ended December 31, 2001, 2000 and 1999
Consolidated Statements of Cash Flows for the years
ended 41
December 31, 2001, 2000, and 1999
Notes to Consolidated Financial Statements 42
Board of Directors
Clark/Bardes, Inc.
We have audited the accompanying consolidated balance sheets of Clark/Bardes, Inc. and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2001. 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, Inc. and subsidiaries at December 31, 2001 and 2000, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States.
/s/ERNST & YOUNG LLP
Dallas, Texas
February 22, 2002
CLARK/BARDES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
-----------------------
----------- -----------
2001 2000
(dollars in thousands
except share amounts)
ASSETS
Current Assets
Cash and cash equivalents $10,207 $7,598
Accounts and notes receivable, net of allowances of $822
and $555, respectively 50,927 31,134
Other current assets 2,384 2,809
Deferred tax asset 690 1,861
----------- -----------
----------- -----------
Total current assets 64,208 43,402
Intangible Assets-- net
Present value of inforce revenue 82,097 85,962
Goodwill 104,914 78,419
Non competition agreements 717 992
----------- -----------
----------- -----------
187,728 165,373
Equipment and Leasehold Improvements-- Net 11,005 8,376
Other Assets 6,990 2,704
----------- -----------
----------- -----------
Total assets $269,931 $219,855
=========== ===========
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $4,767 $10,786
Income taxes 3,451 4,121
Accrued liabilities 46,086 17,664
Deferred income 520 1,180
Interest rate swap payable 2,043 -
Debt maturing within one year 1,046 11,968
----------- -----------
----------- -----------
Total current liabilities 57,913 45,719
Deferred Tax Liability 7,146 7,228
Deferred Compensation 2,601 1,745
Long Term Debt 6,079 52,605
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-- 16,524,070 in 2001 and
12,675,309 in 2000 165 127
Paid in capital 156,394 88,810
Retained earnings 39,633 23,621
----------- -----------
----------- -----------
Total stockholders' equity 196,192 112,558
----------- -----------
----------- -----------
Total Liabilities and Stockholders' Equity $269,931 $219,855
=========== ===========
=========== ===========
Related party balances included in the above accounts
Accounts receivable-- officers and directors $- $64
Accrued liabilities $23 $25
See accompanying notes to consolidated financial statements
CLARK/BARDES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31,
---------------------------------------------
--------------- -------------- --------------
2001 2000 1999
(dollars in thousands except share amounts)
REVENUES
Commissions and service fees $229,940 $147,021 $119,158
Other 751 592 1,602
--------------- -------------- --------------
--------------- -------------- --------------
230,691 147,613 120,760
Commission and fee expenses 84,002 50,804 53,108
--------------- -------------- --------------
--------------- -------------- --------------
Gross profit 146,689 96,809 67,652
--------------- -------------- --------------
--------------- -------------- --------------
OPERATING EXPENSES
General and administrative 101,252 68,189 45,153
Amortization of intangibles 11,560 7,138 4,370
Write off of Insurance Alliance Group 2,070 -- --
Acquisition integration and reorganization -- 518 --
--------------- -------------- --------------
--------------- -------------- --------------
114,882 75,845 49,523
--------------- -------------- --------------
--------------- -------------- --------------
OPERATING INCOME 31,807 20,964 18,129
NON-OPERATING INCOME 98 1,001 --
INTEREST
Income 551 278 329
Expense (5,738) (4,970) (3,548)
Interest rate swap settlement (1,981) -- --
--------------- -------------- --------------
--------------- -------------- --------------
(7,168) (4,692) (3,219)
--------------- -------------- --------------
--------------- -------------- --------------
Income before taxes 24,737 17,273 14,910
Income taxes 8,725 5,825 6,079
--------------- -------------- --------------
--------------- -------------- --------------
NET INCOME $16,012 $11,448 $8,831
=============== ============== ==============
=============== ============== ==============
BASIC NET INCOME PER COMMON SHARE
Net income $1.22 $1.07 $0.97
--------------- -------------- --------------
--------------- -------------- --------------
Weighted average shares 13,162,899 10,744,718 9,077,775
=============== ============== ==============
=============== ============== ==============
DILUTED NET INCOME PER COMMON SHARE
Net income $1.18 $1.05 $0.95
--------------- -------------- --------------
--------------- -------------- --------------
Weighted average shares 13,575,830 10,880,093 9,328,939
=============== ============== ==============
=============== ============== ==============
Transactions with related parties:
Commissions and service fees $6 $-- $1,434
Commission and fee expenses $-- $25 $8,071
General and administrative expense $347 $154 $45
See accompanying notes to consolidated financial statements
CLARK/BARDES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock Total
-----------------------
-----------------------
Paid in Retained Stockholders'
Shares Amount Capital Earnings Equity
(dollars in thousands except share amounts)
Balance at January 1, 1999 8,202,535 $82 $26,274 $3,342 $29,698
Decrease in note receivable from related
party for -- -- 89 -- 89
treasury stock purchased
Issuance of common stock in connection
with 426,214 4 6,857 -- 6,861
acquisitions
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
Issuance of common stock in connection
with acquisitions 1,035,433 10 12,947 -- 12,957
Sale of stock in a private placement net 1,888,887 19 25,098 -- 25,117
of expenses
Exercise of stock options-- net of 120,990 2 666 -- 668
redemptions
Net income -- -- -- 11,448 11,448
------------ ---------- ----------- ---------- --------------
------------ ---------- ----------- ---------- --------------
Balance at December 31, 2000 12,675,309 127 88,810 23,621 112,558
Issuance of common stock in
connection 84,664 1 1,548 -- 1,549
with acquisitions
Sale of stock in secondary offering, net 3,693,750 37 65,389 -- 65,426
of expenses
Exercise of stock options - net of 70,347 -- 647 -- 647
redemptions
Net income -- -- -- 16,012 16,012
------------ ---------- ----------- ---------- --------------
------------ ---------- ----------- ---------- --------------
Balance at December 31, 2001 16,524,070 $165 $156,394 $39,633 $196,192
============ ========== =========== ========== ==============
See accompanying notes to consolidated financial statements
CLARK/BARDES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
-----------------------------------
----------- ----------- -----------
2001 2000 1999
(dollars in thousands)
OPERATING ACTIVITIES
Net income $16,012 $11,448 $8,831
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 14,666 8,898 5,232
Allowance for losses on receivables 338 (486) (47)
Loss on disposal of assets 93 - -
Interest rate swap expense 2,043 - -
Write off of IAG 2,070 - -
Changes in operating assets and
liabilities: (16,245) (9,855) (6,576)
Accounts receivable
Other current assets 687 (265) (542)
Deferred tax asset 1,171 731 (588)
Other assets (4,253) (741) (201)
Accounts payable (6,351) 5,940 (3,522)
Income taxes payable (474) (229) 3,822
Accrued liabilities 18,641 (936) 5,230
Deferred income (750) 797 --
Deferred tax liability (82) 871 913
Deferred compensation 856 1,745 --
----------- ----------- -----------
----------- ----------- -----------
Cash provided by operating activities 28,422 17,918 12,552
----------- ----------- -----------
----------- ----------- -----------
INVESTING ACTIVITIES
Purchase of businesses (29,537) (59,158) (38,470)
Purchases of equipment (5,005) (3,497) (1,812)
Other 300 - -
----------- ----------- -----------
----------- ----------- -----------
Cash used in investing activities (34,242) (62,655) (40,282)
----------- ----------- -----------
----------- ----------- -----------
FINANCING ACTIVITIES
Proceeds from borrowings 33,500 63,100 57,000
Repayment of borrowings (90,948) (41,251) (53,507)
Issuance of common stock 65,426 25,117 16,878
Exercise of stock options 451 530 --
Notes receivable - 7 89
----------- ----------- -----------
----------- ----------- -----------
Cash provided by financing activities 8,429 47,503 20,460
----------- ----------- -----------
----------- ----------- -----------
INCREASE (DECREASE) IN CASH 2,609 2,766 (7,270)
Cash and Cash Equivalents at Beginning of the 7,598 4,832 12,102
Year
----------- ----------- -----------
----------- ----------- -----------
Cash and Cash Equivalents at End of the Year $10,207 $7,598 $4,832
=========== =========== ===========
=========== =========== ===========
Cash paid for:
Interest $8,600 $3,965 $3,125
=========== =========== ===========
=========== =========== ===========
Income taxes, net of refunds $7,147 $4,213 $2,335
=========== =========== ===========
=========== =========== ===========
Financing Activities:
Notes issued in connection with acquisition $-- $-- $8,724
=========== =========== ===========
=========== =========== ===========
See accompanying notes to consolidated financial statements
Year ended December 31, 2001
(Tables shown in thousands of dollars, except share amounts)
The consolidated financial statements include the accounts of Clark/Bardes, Inc. and its wholly owned subsidiaries. Through our five operating segments, Compensation Resource Group, Banking Practice, Healthcare Group, Pearl Meyer and Partners, and Rewards and Performance (previously known as Corporate Practice), we design, market and administer compensation and benefit programs to U.S. corporations, banks and healthcare organizations. We design programs for supplementing and securing benefits for their key employees and provide executive compensation consulting services. We assist our clients in using customized life insurance products to finance their long-term benefit liabilities. In addition, we own Clark/Bardes Financial Services, Inc., a registered broker-dealer through which we sell all our securities products and receive a commission. All intercompany amounts and transactions have been eliminated in the accompanying consolidated financial statements.
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.
A summary of the significant accounting policies consistently applied in the preparation of the accompanying consolidated financial statements follows.
Cash and Cash Equivalents — We consider all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. We have cash balances at financial institutions in excess of the $100,000 limit insured by the Federal Deposit Insurance Corporation. Uninsured cash in bank balances aggregated approximately $8.9 million and $7.0 million at December 31, 2001 and 2000, respectively. Clark/Bardes, Inc. 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 and cash equivalents, accounts and notes receivable, accounts payable, and other financial instruments approximate their fair values principally because of the short-term nature of these instruments. The carrying value of our 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 straight line and accelerated methods. We depreciate furniture, equipment and computer software over periods of three to seven years while leasehold improvements are amortized over the lease period.
Intangible Assets — We have 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 inforce revenue is amortized over 20 to 30 years (the expected average policy duration). Goodwill generated from acquisitions prior to July 1, 2001 was being amortized over a 20 to 40 year period on a straight-line basis. Goodwill from acquisitions after July 1, 2001 is not being amortized based on new accounting rules. Amortization expense was $11.6 million in 2001, $7.1 million in 2000, and $4.4 million in 1999. With the adoption of Statements of Financial Accounting Standard (“SFAS”) Nos. 141 – Business Combinations and 142 – Goodwill and Other Intangible Assets, amortization of goodwill will cease as of December 31, 2001 and will be tested annually for impairment. Our 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 any indicators are present, the estimated undiscounted cash flows are compared to the carrying amount of the assets. If the undiscounted cash flows are less than the carrying amount, an impairment loss is recorded. Any write-downs are treated as permanent reductions in the carrying amount of the asset.
Revenue — First year commissions are recognized as revenue in the amount due or paid by the carrier at the time the policy application is substantially completed, the initial premium payment 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 or paid. We are 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 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 compensation and benefit consulting services are based on an agreed hourly rate over the period services are rendered. Fees for compensation and benefit consulting services are recognized on a percentage of completion basis as related costs are incurred over the duration of the project.
We generated in excess of 25% of our revenue in 2001 from 22 clients, in 2000 from 17 clients, and in 1999 from 8 clients of which 15.2% of revenue was generated by The Wamberg Organization. Substantially, all of the policies underlying the programs marketed are underwritten by 20 life insurance companies, of which seven accounted for approximately 60.0%, 66.3%, and 63.1% of Clark/Bardes, Inc. first-year commission revenue for the years ended December 31, 2001, 2000 and 1999, respectively.
Commissions and Fee Expense-- Commissions and fee expense comprise the portion of the total commission revenue that is earned by and paid to both employee and independent sales consultants.
Advertising-- Advertising and marketing costs are charged to operations when incurred. Total expenses for 2001, 2000 and 1999 were $2.1 million, $0.8 million, and $1.1 million, respectively.
Income Taxes — Income taxes are accounted for under the liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and operating loss carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled.
Securities and Exchange Commission Staff Accounting Bulletin No. 101-- Revenue Recognition in Financial Statements-- SAB No. 101 became effective in the first quarter of 2000. Our revenue recognition policy has been in accordance with SAB No. 101 and therefore its adoption did not have any impact on our revenue recognition policies.
Derivatives Financial Instruments — As of January 1, 2001, we adopted Financial Accounting Standards Board Statement No. 133, Accounting for Derivative Instruments and Hedging Activities (Statement 133) which was issued in June 1998 and its amendments Statements 137, Accounting for Derivative Instruments and Hedging Activities — Deferral of the Effective Date of FASB Statement No. 133 and 138, Accounting for Derivative Instruments and Certain Hedging Activities (issued in June 1999 and June 2000, respectively and collectively referred to as Statement 133).
The Statement requires us to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative’s change in fair value will be immediately recognized in earnings.
We entered into interest rate swaps to match floating rate with fixed rate interest payments periodically over the life of our term loan agreement. As a result of the pay off of the debt in November 2001 with the proceeds from the secondary offering, we were unable to continue our hedging program. We recorded $2.0 million as interest expense for the year ended December 31, 2001 related to the interest rate swaps we had entered into.
Prior to January 1, 2001, the Company used interest rate swap contracts for hedging purposes. The net amount paid or received and net amounts accrued through the end of the accounting period were included in interest expense.
Business Combination and Goodwill – In June, 2001 the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, Business Combinations and No. 142, Goodwill and Other Intangible Assets. Statement 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Statement 141 also includes guidance on the initial recognition and measurement of goodwill and other intangible assets arising from business combinations completed after June 30, 2001. Statement 142 prohibits the amortization of goodwill and intangible assets with indefinite useful lives. Statement 142 requires that these assets be reviewed for impairment at least annually. Intangible assets with finite lives will continue to be amortized over their estimated useful lives.
We will apply Statement 142 beginning the first quarter of 2002. Application of the nonamortization provision of Statement 142 is expected to result in an increase in pre tax income of $4.0 million with an after tax effect on EPS of $0.13 to $0.14 per share in 2002. We will test goodwill for impairment using the two-step process prescribed in Statement 142. The first step is a screen for potential impairment while the second step measures the amount of the impairment, if any. We expect to perform the first of the required impairment tests of goodwill and indefinite lived intangible assets as of January 1, 2002 in the first quarter of 2002. Any impairment charge resulting from these transitional impairment tests will be reflected as the cumulative effect of a change in accounting principle in the first quarter of 2002. We have not determined what the effect of these tests will be on our earnings or financial position.
On January 1, 2002, we adopted Financial Accounting Standards Board Statement of Financial Accounting Standard No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. This statement supersedes SFAS No. 121. Most of the provisions of SFAS No. 121 have been retained; however SFAS No. 144 removes goodwill from its scope and it establishes a primary asset approach to determine the cash flow estimation period for a group of assets. We do not anticipate the adoption of this statement to have a material impact on our consolidated financial statements.
Reclassifications-- We have made minor reclassifications of certain prior years' amounts to conform to the current year's presentation.
Following is a description of the acquisitions made during 2001, 2000, and 1999. The results of operations for each acquired entity have been included in the accompanying consolidated statements of income as of the effective date of the respective acquisition.
Rich, Florin/Solutions, Inc. - On March 12, 2001, we acquired certain assets, all of the business, and assumed certain liabilities of Rich, Florin/Solutions, Inc., a Boston, Massachusetts compensation consulting company. The purchase price was $20.8 million, before expenses, consisting of a cash payment at closing of $11.3 million and $9.5 million of contingent payments over the next four years based on the attainment of established financial performance criteria. We acquired net assets of approximately $1.8 million. When earned, the contingent payments will consist of 60% cash and 40% of our common stock. If made, these payments will be accounted for as additional goodwill. The contingent payment related to the objectives set for December 31, 2001 was met and an additional amount was accrued on the balance sheet as of December 31, 2001. The transaction was funded from our existing line of credit. The goodwill of approximately $9.4 million will be amortized over twenty years. Amortization ceased on December 31, 2001 under new accounting rules. It became our fifth operating segment – Rewards and Performance.
In 2001, we also acquired the following entities for a purchase price of $11.5 million paid in cash (cash amount includes expenses paid) and 39,558 shares of stock valued at $1.0 million:
Additional consideration of $7.6 million in cash and $1.5 million in stock is payable if certain objectives are met over the next 3 to 5 years. If earned, these payments will be accounted for as additional goodwill.
Inforce revenue and goodwill recognized in those transactions amounted to $5.7 million and $6.5 million, respectively. Inforce revenue was assigned to the Compensation Resource Group segment along with $380,000 of the goodwill and the remaining goodwill was assigned to the Healthcare Group segment.
Compensation Resource Group, Inc. — On September 6, 2000, we acquired all the issued and outstanding capital stock of Compensation Resource Group (“CRG”) for a total purchase price of $30.5 million consisting of the following: a cash payment to the CRG selling shareholders of $11.4 million, the issuance of 596,463 share of our common stock, having an aggregate value of $6.1 million based on the closing price on September 5, 2000, and the repayment of approximately $13.0 million of CRG’s long-term debt. Acquisition expenses were $735,000 and are not included in the purchase price above. The cash portion of the purchase price was borrowed under our acquisition and working capital credit facility.
CRG is an executive compensation and benefits organization that provides the design, marketing and administration of non-qualified benefit plans. CRG is headquartered in Los Angeles, California and has affiliated offices in seven other cities. Prior to the acquisition, we had no material relationship with CRG.
Coincident with this acquisition, we entered into a bonus arrangement for certain key executives and employees of CRG. This arrangement will provide for the payment of bonuses of up to $20 million if certain stipulated financial objectives are achieved during the years ended December 31, 2003 to 2005. These bonuses will be recorded as expense in the year earned. The division president has the opportunity to earn up to $3.5 million in bonuses through 2003 based on certain financial objectives as outlined in the employment agreement. The acquisition of CRG has been accounted for as a purchase with $26.7 million of the purchase price allocated to the present value of in-force revenue and amortized over a period of thirty years and $11.4 million allocated to goodwill which will be amortized over twenty years. The goodwill allocation includes $7.1 million of net deferred tax liabilities arising from the portion of the purchase price that will not be deductible for federal income tax purposes. Goodwill amortization ceased on December 31, 2001 under new accounting rules.
The unaudited financial information below presents our results and CRG as if the acquisition had occurred on January 1, 1999.
Year Ended December 31,
----------- ------------
2000 1999
Pro Forma
Revenue $181,787 $148,487
Net income 9,500 5,957
Diluted earnings per share 0.84 0.60
Pearl Meyer & Partners, Inc. — On June 21, 2000, we acquired all of the issued and outstanding capital stock of Pearl Meyer & Partners, Inc. (“Pearl Meyer”) for a total purchase price of $25.9 million, not including acquisition expenses. The purchase price consisted of a cash payment of $21.9 million and the issuance of 250,000 shares of common stock with a value of $4.0 million. Acquisition expenses were $720,000. The cash portion of the purchase price was borrowed under our line of credit.
The acquisition has been accounted for as a purchase and goodwill of $23.5 million was amortized over a twenty-year period. Goodwill amortization ceased on December 31, 2001 under new accounting rules.
Pearl Meyer is a New York City based consulting firm specializing in executive compensation and retention programs. The Pearl Meyer organization became our fourth operating segment. Prior to the acquisition, we had no material relationship with Pearl Meyer.
The unaudited pro forma information below presents our results and Pearl Meyer as if the acquisition had occurred on January 1, 1999.
Year Ended December
31,
-----------------------
----------- -----------
2000 1999
Pro Forma
Revenue $154,557 $133,339
Net income 12,143 7,562
Diluted earnings per share 1.10 0.79
In 2000, we also acquired the following 5 entities for a combined purchase price of $8.6 million which consisted of $7.2 million of cash and expenses and 92,857 shares of stock valued at $1.4 million:
Additional consideration of $1.1 million in cash and $5.7 million in stock is payable if certain objectives are met over the next 3 years. If earned, these payments will be accounted for as additional goodwill. Inforce revenue and goodwill recognized in those transactions amounted to $5.0 million and $5.0 million, respectively. Inforce revenue of $2.7 million and goodwill of $2.2 million was assigned to the Compensation Resource Group segment; goodwill of $1.5 million was assigned to the Banking Practice segment; and inforce revenue of $2.3 million and goodwill of $1.3 million was assigned to corporate.
The Wamberg Organization and Wamberg Financial Corporation — On September 1, 1999, we 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 a cash payment to The Wamberg Organization of $12.4 million, a cash payment to W.T. Wamberg of $50,000 for his shares of Wamberg Financial Corporation, a direct payment of $1.5 million for two outstanding loans, assumption of a $3.8 million note for the purchase of a corporate aircraft, and expenses of approximately $265,000.
The $14.2 million cash portion of the purchase price was funded from our 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, 2001, the financial objectives for those years have been met and a total cash payment of $8.3 million was made to W. T. Wamberg and recorded as additional purchase price. Another $3.5 million has been earned and has been recorded as additional purchase price and is expected to be paid out in 2002. 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. The Wamberg Organization has historically been our largest single consultant, accounting for 15.2% of revenue in 1999. Upon consummation of the September 1, 1999 acquisition, Mr. Wamberg became President and Chief Executive Officer of Clark/Bardes, Inc.</P>
The tangible assets acquired consisted primarily of receivables, equipment, and an aircraft. Subsequent to the acquisition, we sold the aircraft 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 and has been recorded as a reduction of the purchase price. The proceeds from the sale were applied to a full repayment of the related note. The monthly 2001 rental under the lease is $27,924 or $335,000 per year. In December 2001, we revised our master lease and obtained a new aircraft with an annual rent of approximately $660,000. The lease is a 6 year term with an option to renew for another 6 years.
On January 4, 1999, we purchased the right to receive approximately 27.5% of the commissions on renewal revenue from certain inforce policies existing on June 30, 1998, due The Wamberg Organization, for a cash payment of $7.5 million. Concurrent with the acquisition of the assets and liabilities of The Wamberg Organization, we purchased all of the renewal revenue not acquired and the original January 4, 1999 agreement was superseded. Accordingly, an unamortized balance of $6.9 million at September 1, 1999 under that agreement was combined with the purchase price under the acquisition agreement. The total purchase price was 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 price 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 acquisition occurred on January 1, 1998.
Year Ended
December 31,
-----------------
1999
Pro Forma:
Revenues $120,760
Net income 6,751
Diluted earnings per share 0.72
MCG/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, a Minnesota corporation, for a purchase price of $35.9 million consisting of a cash payment of $13.8 million, a promissory note for $8.7 million, 326,363 shares of our common stock having an aggregate value of $5.3 million based on the closing price at April 5, 1999, the direct payment of $3.6 million for outstanding loans, the assumption of $4.2 million of liabilities, and $372,000 of closing costs.
The net assets acquired were $1.6 million. The $17.7 million cash portion of the purchase price was funded by borrowing under our 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. The promissory note is partially secured by a personal guarantee of W. T. Wamberg, Chairman and Chief Executive Office of Clark/ Bardes, Inc.
MCG/Healthcare is a 161 employee executive benefit consulting organization servicing the healthcare industry. MCG/Healthcare is headquartered in Minneapolis, Minnesota. Prior to the acquisition described above, we had no material relationship with MCG/Healthcare. The acquisition of MCG/Healthcare has been accounted for as a purchase. The pro forma information below presents our results and MCG/Healthcare as if the acquisition had occurred on January 1, 1999.
Year Ended
December 31,
-------------------
1999
Pro Forma:
Revenues $126,518
Net income 7,464
Diluted earnings per share 0.79
In 1999, we acquired Banking Consultants of America and National Institute for Community Banking for a combined purchase price of $3.1 million which consists of $1.5 million of cash and expense and 99,851 shares with a value of $1.6 million. These acquisitions are included in the Banking Practice segment. Inforce revenue and goodwill recognized in these transactions amounted to $1.4 million and $1.6 million, respectively. Additional consideration of 384,452 shares (with current value as of December 31, 2001 of approximately $9.7 million) is payable if certain objectives are met through 2002. As of December 31, 2001, 288,339 of these shares have been earned. As earned, these payments will be accounted for as additional goodwill.
As a result of our acquisition program, we have $31.0 million of additional consideration issuable to the former owners of our acquired companies excluding the amount that is accrued on the balance sheet at December 31, 2001. These amounts are payable as additional consideration for the operating unit having met certain negotiated performance criteria at the time of the purchase. A summary of the amounts payable if the criteria are met is as follows for acquisitions that were completed as of December 31, 2001:
$25.23 Per
Cash Shares Share Value
----------- ----------- ------------
----------- ----------- ------------
2002 $ 3.4 295,358 $ 7.5
2003 3.5 390,044 9.8
2004 3.2 70,963 1.8
2005 1.4 14,863 0.4
----------- ----------- ------------
----------- ----------- ------------
$ 11.5 771,228 $ 19.5
----------- ----------- ------------
We acquired Insurance Alliances Group in May 2000 with the intent of establishing it as our estate planning segment. We were unable to develop this business to the size and scope we contemplated at the time of its acquisition and on September 21, 2001, we sold substantially all of the assets of this business for $300,000. We have retained and will continue to service the former company’s inforce revenue stream and maintain a production arrangement with the former business owner. During the fourth quarter 2001, we recorded as operating expense, a write down of approximately $2.1 million in the carrying value of the goodwill and inforce revenue intangible assets arising from this acquisition which is considered non recoverable. We determined that the license renewal and administrative fees revenue streams and the goodwill on our books were no longer realizable and should be written off.
Intangible assets represent the excess of the purchase price over the fair values of the tangible assets of acquired businesses. The classification of the amounts determined and allocated to the respective intangible assets are:
December 31,
----------------------
----------- ----------
2001 2000
Gross value of intangibles
Present value of future cash flows from inforce $ 97,123 $94,328
revenue
Goodwill 113,450 82,330
Non competition agreements 1,750 1,750
----------- ----------
----------- ----------
212,323 178,408
Accumulated amortization
Inforce revenue (15,026) (8,366)
Goodwill (8,536) (3,911)
Non competition agreements (1,033) (758)
----------- ----------
----------- ----------
Total accumulated amortization (24,595) (13,035)
----------- ----------
----------- ----------
Net $187,728 $165,373
=========== ==========
Present value of future cash flows from inforce revenues are amortized over 20 to 30 years, a period representative of the policy duration, and non competition agreements are amortized over 5 to 10 years per the terms of the agreements. Goodwill generated from acquisitions completed prior to July 1, 2001 were amortized over periods of 20 to 40 years. Amortization of goodwill ceased December 31, 2001 under new accounting rules.
For the past two years, our amortization has been comprised of the following:
Year Ended December 31,
------------------------------
----------------- ------------
2001 2000
Present value of future cash flows from inforce $7,282 $ 4,601
revenue...................................................................
Goodwill......................................................4,003....... 2,262
Non competition agreements......................................275....... 275
----------------- ------------
----------------- ------------
Total.......................................................$11,560.......$7,138
================= ============
Assuming no reclassification of intangible assets as a result of implementing FAS 141, we estimate that our amortization for 2002 through 2006 for all acquisitions consummated to date will be as follows:
Non-compete
Inforce Revenue agreements Total
------------------ --------------- --------------
2002.......................................... $6,850 $242 $7,092
2003.......................................... 5,953 175 6,128
2004.......................................... 5,214 100 5,314
2005.......................................... 4,457 75 4,532
2006.......................................... 3,683 75 3,758
Clark/Bardes Reinsurance Company, Ltd. (CBRCL), a wholly owned subsidiary of Clark/Bardes, Inc. was incorporated in the Cayman Islands with Limited Liability effective December 13, 2001. CBRCL was formed in order to increase and diversify our earnings stream by participating in the underwriting profits of the insurance business produced by its various operating segments. The Governor In Council granted approval on December 19, 2001 for the issue of an unrestricted Class “B” insurer’s license to CBRCL, subject to the receipt and approval by the Cayman Monetary Authority of certain outstanding requirements of the Law. As of December 31, 2001, CBRCL had not yet been capitalized nor had it begun its reinsurance operations. The insurance license for CBRCL has been issued and is effective as of February 1, 2002.
Major classifications of equipment and leasehold improvements are as follows:
As of December 31,
--------------------
--------- ----------
2001 2000
Computer software, office furniture and $15,818 $10,938
equipment
Leasehold improvements 2,163 1,655
--------- ----------
--------- ----------
17,981 12,593
Accumulated depreciation and amortization (6,976) (4,217)
--------- ----------
--------- ----------
$11,005 $8,376
========= ==========
Depreciation expense was $3.1 million, $1.8 million, and $862,000 for 2001, 2000 and 1999, respectively.
Federal income tax expense from operations consists of the following components:
Year Ended December 31,
----------------------------------------
-------------- ------------- -----------
2001 2000 1999
Current:
$4,887 $ 3,941 $ 4,848
Federal...............................................................................................
State and local..........................1,727...........289 856
Deferred:
1,704 1,458 319
Federal...............................................................................................
State and local............................407.......... 137 56
-------------- ------------- -----------
-------------- ------------- -----------
$8,725 $ 5,825 $ 6,079
============== ============= ===========
Total income taxes incurred consists of the following components:
Year Ended December 31,
------------------------------------
-------------- ----------- ---------
2001 2000 1999
Income tax expense from operations............ $8,725 $5,825 $6,079
Income tax benefit in equity from exercise
of options.............................................. (196) (245) -
-------------- ----------- ---------
-------------- ----------- ---------
Total income tax incurred $8,529 $5,580 $6,079
============== =========== =========
A reconciliation of the 2001 and 2000 income tax expense computed by applying the statutory rate to income before income taxes to the actual taxes is as follows:
Year Ended December 31,
------------------------------------
-------------- ----------- ---------
2001 2000 1999
U.S. Federal statutory rate................... $8,657 $ 6,046 $5,069
State income tax-- net of federal benefit..........................................1,448 518 895
Prior year warrant extinguishment..................................(1,650) - -
Non-deductible goodwill............................................ 299 123 -
Non-taxable life insurance proceeds...................................(67) (350) -
Tax liability adjustment and prior year taxes........................(362) (411) -
Other - net............................................................400 115
(101)
-------------- ----------- ---------
-------------- ----------- ---------
$8,725 $ 5,825 $6,079
============== =========== =========
As a result of a recent Circuit Court case allowing the deductibility of such expenses, we filed an amended Federal income tax return for the year ended December 31, 1998 for an additional deduction of $4.8 million expended in 1998 for the repurchase of certain put warrants. During an audit of our Federal income tax return for the years 1998 and 1999, the Internal Revenue Service approved our amended return and approved a refund of approximately $1.7 million, before interest, for the years under audit. No other audit adjustments were made. Without the benefit of this refund, our effective tax rate would have been 41.9% for the year ended December 31, 2001.</P>
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:
Year Ended December 31,
-------------------------
----------- -------------
2001 2000
Deferred tax liabilities:
Intangible assets.................................$8,903........$7,883
----------- -------------
----------- -------------
Deferred tax assets: -
Cash to accrual adjustment......................................... 235
Accrued liabilities and others........................741.........1,529
Net operating loss..................................1,706.......... 752
----------- -------------
----------- -------------
2,447 2,516
Net deferred tax assets (liabilities)................($6,456)......($5,367)
=========== =============
In assessing the realizability of deferred tax assets, we consider 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 the temporary differences become deductible. We consider 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, we believe it is more likely than not that we will realize the benefits of these deductible differences. Accordingly, no valuation allowance is deemed necessary.
As of December 31,
-------------------
--------- ---------
2001 2000
Term loan payable to banks $ - $49,500
Revolving credit loan payable to banks - 7,000
Notes payable to former shareholder of
acquired 7,125 8,073
businesses
7,125 64,573
Less current maturities 1,046 11,968
$6,079 $52,605
Credit Facility —In December 2001, we amended our December 28, 1999 credit facility to increase the Revolving Credit Facility from $62 million to $103.2 million. There is no longer a term loan portion of this facility. We paid off the term portion under the old agreement in December 2001 with the approximately $66.0 million of proceeds from the sale of 3,693,750 shares of our common stock in our November 2001 secondary offering. Any outstanding debt on December 31, 2002 will convert from the revolving credit facility to term debt and will amortize under the term facility agreement.
The restrictive covenants under the new loan agreement provide for the maintenance of a minimum ratio of fixed charges, a maximum allowable leverage ratio, a minimum amount of net worth (stockholders’ equity), and a maximum ratio of debt to capitalization. We were in compliance with all its restrictive covenants as of December 31, 2001.
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 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.
We entered into three interest rate swap agreements with a bank affiliated with the lending group to set the interest rates. As a result of the pay off of the debt in November 2001 with the proceeds from the secondary offering, we were unable to continue our hedging program with these swaps. We recorded $2.0 million as interest expense for the year ended December 31, 2001 related to these interest rate swaps.
Phynque, Inc. Notes. In connection with the purchase of Phynque, Inc. d/b/a Management Compensation Group/Healthcare, Clark/Bardes Consulting, issued an $8.7 million 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 Clark/Bardes, Inc.
At December 31, 2001, future payments under all financing arrangements are as follows:
2002 $1,046
2003 1,154
2004 1,274
2005 1,407
2006 1,553
Thereafter 691
---------
---------
$7,125
=========
On June 7, 1999, we sold 1,000,000 shares of common stock to Conning Insurance Capital Partnership V, L.P. for $16.9 million, net of expenses, in a private placement transaction. The proceeds from this sale were used for debt reduction and acquisitions.
During 1999, we also issued shares of our common stock in connection with certain acquisitions:
On September 11, 2000, we sold 1,888,887 shares of common stock to a group of investors for $25.1 million, net of expenses, in a private placement transaction. The proceeds from this sale were used for debt reduction and an acquisition. The shares were sold to the investors for $13.50 per share and have been registered for resale by the investors.
During 2000, we also issued shares of common stock in connection with acquisitions:
A number of option holders exercised their options to purchase 120,990 net of shares exchanged in payment during 2000. The excess of the market value of the shares issued over the shares received in exchange was $405,000 and produced a federal income tax benefit of $245,000.
On November 15, 2001, we sold 3,693,750 common shares in an underwritten public offering for $65.4 million or $17.70 per share, net of expenses. The entire net proceeds were used to repay the outstanding revolver and term loan balances under our credit facility.
During 2001, we also issued shares for the following:
Derivative Financial Instruments. We have used derivatives only for hedging purposes. The following is a summary of the Company’s risk management strategies and the effect of these strategies on the Company’s consolidated financial statements.
Cash Flow Hedging Strategy. We entered into three interest-rate swap agreements for interest-rate risk exposure management purposes. The interest-rate swap agreement effectively modified our exposure to interest rate risk by converting our floating rate debt to a fixed rate based on LIBOR. As a result of the repayment of debt discussed below, we incurred an interest charge of approximately $2.0 million related to these interest rate swaps in 2001. On December 21, 2001, we repaid $41.2 of the hedged term debt from the proceeds of the sale of 3,693,750 shares of our common stock in a public offering on November 15, 2001. As a result of the repayment, the cash flow hedge has been effectively discontinued and therefore the $2.0 million related to the settlement of the swaps has been recognized as a component of interest expense in our December 31, 2001 statement of income.
Concentrations of credit risk. Financial instruments that potentially subject us to significant concentrations of credit risk consist principally of cash, trade accounts receivable, and derivatives.
We maintain cash and cash equivalents and short-term investments only with financial institutions having the highest ratings of liquidity. Concentration of credit risk with respect to accounts receivable are minimal because a majority of our receivables are with insurance carriers that have high credit ratings. We are exposed to credit risk in the event of non-performance by counterparties to derivative instruments. We limit this exposure by entering into swap arrangements with one of the members of our group of lending banks.
The following methods and assumptions were used in estimating the fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amount reported in the balance sheet for cash and cash equivalents approximates its fair value.
Accounts receivable and accounts payable: The carrying amounts reported in the balance sheet for accounts receivable and accounts payable approximate their fair value.
Long- and short-term debt: The carrying amounts of the borrowings under our loan arrangements approximate their fair value. The fair values of the long-term debt are estimated using discounted cash flow analyses, based on our current incremental borrowing rates for similar types of borrowing arrangements.
The carrying amounts and fair values of the Company’s financial instruments at December 31 are as follows:
As of December 31,
------------------------------------------------------
------------------------- ----------------------------
2001 2000
Carrying Fair Carrying Fair
Amount Value Amount Value
Cash and cash equivalent..................$10,207... $10,207 $7,598 $7,598
Accounts and notes receivable..............50,927... 50,927 31,134 31,134
Accounts payable............................4,767... 4,767 10,786 10,786
Short-term debt.............................1,046... 1,046 11,968 11,968
Long-term debt..............................6,079... 6,079 52,605 52,605
Interest rate swaps.........................2,043... 2,043 - 7
Incentive Stock Option Plan. The Incentive Stock Option Plan provided certain employees options to purchase shares for $4.80 and $7.00 per share; 190,832 shares were granted and no additional options may be granted under this program. The $4.80 and $7.00 options became fully vested at the date of the Initial Public Offering. The options expire ten years from the grant date and are voided within 90 days of the employee’s termination or one year from date of death.
1998 Stock Option Plan. In 1998, the Board of Directors approved a stock option plan providing for certain employees, directors and consultants to purchase shares at the fair market value at the time the option is granted. The Plan is administered by a committee of 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 have a term greater than ten years from the date of the grant. A total of 2.0 million shares are reserved for issuance under this plan.
1998 Non-Employee Director Stock Option Plan. A total of 100,000 shares of our common stock has been reserved for issuance under our Non-Employee Director Plan approved by the Board of Directors in January 2000. The non-employee director plan is administered by the compensation committee of the board. Only nonqualified options may be granted and all of our non-employee directors participate in the plan. The plan provides for the automatic grant of stock options to purchase 10,000 shares of our common stock to each newly elected non-employee director on the first day of the month following the election. The plan also provides for the automatic grant of stock options to purchase 4,000 shares of our common stock to continuing non-employee directors on the first day of the month immediately following our annual stockholder meeting. The exercise price for stock options granted under the non-employee director plan is the fair market value of our common stock on the date of grant.
As of December 31, 2001, 85,110 options had been granted under the non-employee director plan and a total of 14,890 shares of our common stock remain available for grant.
The following table summarizes the combined status of all of our stock option plans.
Weighted
Average
Options Exercise Price
--------------- ---------------------
--------------- ---------------------
Outstanding at January 1, 1999.................................... 671,521 $ 7.67
Granted......................................................... 586,321 $ 15.52
Exercised....................................................... (1,250) $ 9.00
Forfeited....................................................... (18,750) $ 16.30
---------------
---------------
Outstanding at December 31, 1999....... 1,237,842 $ 11.51
Granted......................................................... 338,100 $ 12.89
Exercised....................................................... (167,866) $ 6.35
Forfeited....................................................... (30,800) $ 12.51
---------------
---------------
Outstanding at December 31, 2000....... 1,377,276 $ 12.56
Granted......................................................... 541,100 $ 17.28
Exercised....................................................... (119,440) $ 8.44
Forfeited....................................................... (38,300) $ 15.40
---------------
---------------
Outstanding at December 31, 2001.................................. 1,760,636 $ 14.23
===============
===============
Exercisable at December 31, 2001.................................. 824,742 $ 11.62
===============
The options granted in 1999 include 263,300 issued to executives and employees of the Healthcare Group segment in connection with the acquisition of MCG/Healthcare. These options vest at the rate of 20% per year beginning in 1999 but are subject to certain forfeiture provisions if the segment fails to attain certain financial performance goals.
The following table summarizes the stock options outstanding and exercisable:
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
(years)
$4.80 - $7.00 93,799 5.2 $5.64 93,799 $5.64
$9.00 291,416 5.2 $9.00 255,166 $9.00
$9.88 - $11.50 325,700 8.3 $10.00 100,267 $10.09
$11.75 - $14.50 193,200 9.2 $13.64 122,363 $13.23
$14.75 - $15.93 195,000 7.8 $14.95 112,587 $14.92
$16.63 - $18.13 436,521 7.3 $16.80 130,560 $16.96
$23.55 - $25.28 225,000 10.0 $25.20 10,000 $23.55
----------------- -----------------
----------------- -----------------
1,760,636 824,742
We 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 is measured as the excess, if any, of the quoted market price of our stock at the date of grant over the amount an employee must pay to acquire the stock.
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. We have elected to remain on the current method of accounting as described above, and have 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 we accounted for our 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 2001, 2000 and 1999, respectively:
2001 2000 1999
Dividend yield................................................None None None
Volatility...................................................64.17% 64.3% 185.0%
Risk-free interest rates......................................5.4% 5.1% 6.3%
Expected life (years)..........................................6.. 6 6
The estimated average fair values of options outstanding in 2001, 2000, and 1999 were $9.00, $9.03, and $9.88 respectively. Had compensation cost for our stock-based compensation plans been determined in accordance with SFAS No. 123, our net income and earnings per share would have been reduced to the pro forma amounts indicated below:
Year Ended December 31,
-----------------------------------
------------ ------------ ---------
2001 2000 1999
Net income
As reported...................................................... $16,012 $11,448 $ 8,831
Pro forma........................................................ $14,136 $10,668 $ 7,777
Diluted earnings per common and common equivalent share
As reported...................................................... $1.18 $ 1.05 $ .95
Pro forma........................................................ $1.04 $ .98 $ .83
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 our discretion, we 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 $1.1 million, $746,000 and $388,000 for the years ended December 31, 2001, 2000, and 1999 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 for 90 days is eligible to participate in offerings under the Stock Purchase Plan.
The Stock Purchase Plan consists of 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 subsequent periods. The price of the shares under each offering segment is 85% of the lower of the closing market price on the day before the offering period begins or on the day the offering period ends.
We have, for the six expired periods prior to December 31, 2001, determined that we will purchase the requisite shares on the open market and have not issued any additional shares to fulfill this obligation. Future fulfillment under this Plan may be made through open market purchases or unissued shares, at our discretion.
During 2001, our employees purchased 52,663 shares of common stock at an average cost, to them, of $13.00 per share. Our open market purchases of these shares for the employees were made at an average cost of $11.67 per share.
Key Executive Life Insurance. We maintain key man life insurance policies of $50.0 million on our Chairman and Chief Executive Officer and policies ranging from $4.0 to $8.5 million on certain other key executives. As part of our Chairman and Chief Executive Officer’s employment agreement, we agree to use the proceeds from the key man life insurance to purchase from the Chairman’s estate up to $20 million of common stock at the closing price on the last trading day immediately preceding his death.
Leases — We conduct operations from leased office facilities. We expect 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 in the table below.
Rental expense for the years ended December 31, 2001, 2000, and, 1999 was $6.0 million, $4.1 million, and $2.0 million, respectively.
At December 31, 2001, approximate minimum rental commitments under all non-cancelable leases having terms in excess of a year are as follows:
2002 $7,269
2003 6,052
2004 5,701
2005 5,203
2006 4,288
Thereafter 7,007
--------
A summary of our related party balances and transactions at December 31, 2001, 2000, and 1999 and for the years then ended are:
2001 2000 1999
Balances:
Accounts receivable -- officers and $- $64 $20
directors
Accounts receivable-- affiliates -- -- $461
Accrued liabilities $23 $25 $26
Transactions:
Commissions and service fees $6 -- $1,434
Commission and fee expense -- $25 $8,071
General and administrative expense $347 $154 $45
We 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 Group are entitled 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 valued at $1.1 million at December 31, 2001.
Chairman and Chief Executive Officer, Mr. Wamberg and Clark/Bardes, Inc. were parties to a Principal Office Agreement dated July 29, 1993, pursuant to which The Wamberg Organization marketed life insurance and administrative and consulting services on our behalf, and we furnished support to The Wamberg Organization. Pursuant to the terms of the Principal Office Agreement, The Wamberg Organization was paid approximately $8.1 million in 1999 for commissions and fees earned. This agreement was subsequently terminated on September 1, 1999, as a result of the acquisition of The Wamberg Organization.
In connection with the acquisition of the Wamberg Organization in September 1999, the asset purchase agreement provided for additional payments to W.T. Wamberg, our chief executive officer and previous owner of the Wamberg Organization, upon attainment of certain stipulated annual financial objectives starting with the period ended December 31, 1999 through December 31, 2002. As of December 31, 2001, the financial objectives for those years have been met and a total cash payment of $8.3 million was made to W. T. Wamberg and recorded as additional purchase price. The Board of Directors has approved the distribution of The Wamberg Organization 2002 earnout payment prior to the date we are obligated to distribute the proceeds. The earnout target has been achieved and the payment will be made but discounted for the time value of money. $3.5 million was accrued for this payment in the consolidated financial statements at December 31, 2001.
We lease 16,266 square feet of office space controlled by Mr. Wamberg for an annual rental of approximately $260,000, under a lease expiring on February 21, 2009.
During 2001, we paid William Seidman, a member of our Board of Directors, $75,000 for services in connection with the evaluation of a potential acquisition target.
Our Chairman and Chief Executive officer, Tom Wamberg and Richard Chapman, Executive Vice-President of Clark/Bardes, Inc. and President of the Banking Practice, have collectively invested $1 million in a company which George Dalton, a member of our Board of Directors is founder and majority shareholder.
William Archer, a member of our Board of Directors since February 2001, is a senior policy advisor at Pricewaterhouse Coopers LLP. We previously engaged Pricewaterhouse Coopers LLP to perform various consulting related to the installation of our wide area network and a knowledge management system at one of our compensation consulting practices. During 2001, we paid approximately $726,000 to Pricewaterhouse Coopers LLP for these services.
Fox-Pitt Kelton, co-manager of our November 2001 secondary offering owns Conning Capital Partners. Steve Piaker, a member of our Board of Directors, is a partner with Conning Capital Partners.
We have transactions with affiliated entities. We provide services for these affiliates and are reimbursed for these services at the Company’s respective costs. Among these affiliates is Clark/Bardes Financial Services, Inc. (“CBFS”) a registered broker-dealer through which we sell all of our securities products and receive a commission. CBFS is consolidated with our results and all intercompany transactions are eliminated.
We funded our deferred compensation plan at year end with an insurance policy under which we recognized revenue of $560,000 as stated in our revenue recognition policy. The employment agreement with one of our division presidents was revised in December 2001 to change bonuses for key performance measures. No cash payments were made in December 2001, however $250,000 was accrued as the amount that has been earned to date under the new agreement.
The following table sets forth the computation of historical basic and diluted earnings per share:
Year Ended December 31,
2001 2000 1999
(dollars in thousands)
Numerator:
Net income for basic and diluted earnings $16,012 $11,448 $8,831
per share
------------ ------------ ------------
Denominator:
Basic earnings per share -- weighted
average 13,162,899 10,744,718 9,077,775
Shares
Effect of dilutive securities:
Stock options 412,931 135,375 251,164
Diluted earnings per share -- weighted
average 13,575,830 10,880,093 9,328,939
shares plus assumed conversions
============ ============ ============
============ ============ ============
Per share:
Basic earnings $1.22 $1.07 $0.97
============ ============ ============
============ ============ ============
Diluted earnings $1.18 $1.05 $0.95
============ ============ ============
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 and policy.
In recent years, the Internal Revenue Service (“IRS”) has begun two major enforcement initiatives. The first initiative is to disallow the interest deductions on certain leveraged business-owned life insurance programs sold during or prior to 1995. As a result, these programs will be less financially beneficial to our clients. The IRS has prevailed on the majority of cases it has litigated related to this initiative. While we stopped selling leveraged business-owned life insurance programs around the time of this initiative and we do not expect any adverse impact on our revenue from this enforcement initiative, it is impossible to determine the impact of this initiative on a client’s decision to continue or surrender an existing leveraged business-owned life insurance program. The second initiative relates to the tax treatment accorded split dollar life insurance arrangements.
A recent IRS Notice and forthcoming Treasury regulations, change the manner in which split dollar arrangements will be taxed in the future. The new treatment will be, in certain respects, less attractive than the historical tax treatment of split dollar arrangements. Consequently, this initiative could result in reduced revenue from split dollar arrangements.
We have five reportable segments:
On September 6, 2000, we acquired all of the outstanding common stock of Compensation Resource Group, Inc. (CRG) an independent company specializing in the design, marketing and administration of non-qualified executive compensation plans using company owned life insurance products. In acquiring CRG, we reorganized as follows:
The Healthcare Group became a segment with the acquisition of Phynque, Inc. (d.b.a. MCG Healthcare) on April 5, 1999. Pearl Meyer & Partners, Inc. (formerly Compensation Consulting) became our fourth segment when it was acquired on June 21, 2000. On March 12, 2001, we acquired the assets and business of Rich, Florin/Solutions, Inc. (f.d.b.a Executive Alliance) and it became the fifth operating segment – Rewards and Performance (formerly Corporate Practice), specializing in technical and middle management compensation consulting. The performance of Pearl Meyer & Partners was negatively impacted by the events of September 11, 2001 during the later half of 3rd quarter and the beginning of 4th quarter.
The five reportable segments operate as independent and autonomous business units with a central corporate staff responsible for finance, strategic planning, and human resources. Each segment has its own client base as well as its own marketing, administration, and management.
We evaluate performance and allocate resources based on income 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.
For the Year Ended December 31,
-------------------------------------
------------ ------------ -----------
2001 2000 1999
Revenues from External Customers
Compensation Resource Group $93,791 $ 47,142 $ 32,421
Banking Practice 91,761 71,618 71,891
Healthcare Group 25,224 22,139 16,448
Pearl Meyer and Partners 11,248 6,027 --
Rewards and Performance 8,667 -- --
------------ ------------ -----------
------------ ------------ -----------
Total segments-- reported 230,691 146,926 120,760
Reconciling items - 687 --
------------ ------------ -----------
------------ ------------ -----------
Total consolidated-- reported $230,691 $147,613 $120,760
============ ============ ===========
============ ============ ===========
Operating Income and Income Before Taxes
Compensation Resource Group $11,523 $8,931 $7,581
Banking Practice 31,265 19,260 15,790
Healthcare Group (1,334) 601 623
Pearl Meyer and Partners 1,421 1,306 --
Rewards and Performance 2,680 -- --
------------ ------------ -----------
------------ ------------ -----------
Total segments-- reported 45,555 30,098 23,994
Corporate overhead (11,678) (9,134) (5,865)
Writeoff of Insurance Alliance Group (2,070) -- --
Non-operating income 98 1,001 --
Interest-- net (1) (7,168) (4,692) (3,219)
------------ ------------ -----------
------------ ------------ -----------
Income before taxes $24,737 $17,273 $14,910
============ ============ ===========
============ ============ ===========
Depreciation and Amortization
Compensation Resource Group $6,778 $2,511 $1,336
Banking Practice 2,128 2,955 2,296
Healthcare Group 3,256 2,479 1,600
Pearl Meyer and Partners 1,653 783 --
Rewards and Performance 496 -- --
------------ ------------ -----------
------------ ------------ -----------
Total segments-- reported 14,311 8,728 5,232
Reconciling items 355 (149) --
------------ ------------ -----------
------------ ------------ -----------
Total consolidated-- reported $14,666 $8,579 $5,232
============ ============ ===========
Identifiable Assets
Compensation Resource Group $93,743 $83,964 $29,542
Banking Practice 79,720 65,156 59,579
Healthcare Group 41,520 33,768 35,456
Pearl Meyer and Partners 31,670 29,627 --
Rewards and Performance 16,364 -- --
------------ ------------ -----------
------------ ------------ -----------
Total segments-- reported 263,017 212,515 124,577
Deferred tax asset 690 1,861 947
Holding company assets-- non operating 6,224 5,479 --
------------ ------------ -----------
------------ ------------ -----------
Total consolidated-- reported $269,931 $219,855 $125,524
============ ============ ===========
============ ============ ===========
Capital Expenditures
Compensation Resource Group $1352 $1,091 $878
Banking Practice 724 1,161 498
Healthcare Group 1,117 663 2,812
Pearl Meyer and Partners 1,104 550 --
Rewards and Performance 154 -- --
------------ ------------ -----------
------------ ------------ -----------
Total segments-- reported 4,451 3,465 4,188
Reconciling items 554 32 --
------------ ------------ -----------
------------ ------------ -----------
Total consolidated-- reported $5,005 $3,497 $4,188
============ ============ ===========
(1) Includes $2.0 million of interest expense incurred related to our interest rate swaps.
Geographic Information — Virtually all the our revenue is derived from clients located in the United States.
Major Customers and Clients — We derive our revenues from the commissions we earn from the carriers we represent, based on sales of benefit programs on behalf of those carriers, to our clients. We generated in excess of 25% of our revenue in 2001 from 22 clients in 2000 from 17 clients, and in 1999 from 8 clients, respectively. None of the Banking Practice or Healthcare Group carriers accounted for more than 10% of revenue. Approximately 15.2% of our commission and fee revenue for the year ended 1999, was generated by The Wamberg Organization, which was wholly owned by our Chairman and Chief Executive Officer. Substantially all of the policies underlying the programs marketed by us are underwritten by 20 life insurance companies, of which seven accounted for approximately 60% of our first year revenue for the year ended December 31, 2001, 66.3% for the year ended December 31, 2000 and 63.1% for the year ended December 31, 1999.
Statement of Income-- In 2001, non-operating income includes $191,000 of life insurance proceeds as a result of the death of an executive and $93,000 on the loss of sale of fixed assets.
In 2000, non-operating income includes $1.0 million death benefit proceeds under a key person insurance policy as the result of the death of an executive of the Banking Practice.
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 our consultants. The following is a summary of the current material legal proceedings pending against us.
Constellation Energy Group, Inc. and Baltimore Gas and Electric Company, et al. v. Clark/Bardes, Inc. and New York Life Insurance and Annuity Corporation.
On July 25, 2000, Constellation Energy Group, Inc. (“Constellation”) and related entities filed a civil action against us in the U.S. District Court for the District of Maryland. On September 14, 2001, Constellation amended its complaint and added New York Life Insurance and Annuity Corporation as a defendant. Constellation claims that we failed to take proper action in connection with the administration of an employee benefit life insurance program, resulting in claimed damages of $7.5 million and pre-judgment interest, post-judgment interest, costs and expenses.
We believe we have meritorious defenses to these claims, intend to deny all allegations and to vigorously defend these claims. Our insurance carrier has acknowledged certain coverage for this action in the event we do not prevail.
Madge A. Kunkel, individually and as Personal Representative of the Estate of Donald B. Kunkel, M.D., deceased vs. Banner Health System, et al.
On February 2, 2001, an action was commenced in the Superior Court of Maricopa County, Arizona against various defendants including our Healthcare Group. Ms. Kunkel alleges that her deceased husband was entitled to a life insurance policy in the face amount of $525,000 to be issued by the defendant insurance company under a split dollar life insurance plan sponsored by his defendant employer which was administered by our Healthcare Group. According to the complaint, Dr. Kunkel died before the initial premium was paid by his employer and before the policy was issued. The matter has been submitted to our insurance carriers. We believe we have meritorious defenses to this claim and we intend to vigorously defend the matter.
Frieda Shuster, et al. v. Hyder Mirza, et al. including Clark/Bardes, Inc.
On May 30, 2001, we were named a defendant in a lawsuit filed in the District Court of LaSalle County, Texas alleging gross negligence in connection with the death of an employee when the private aircraft in which he was traveling on company business crashed. Damages are unspecified.
We deny any and all claims and allegations in this action and intend to vigorously defend this matter. The matter is covered by our existing insurance.
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.
Dec. Sept. June Mar. Dec. Sept. June Mar.
2001 2001 2001 2001 2000 2000 2000 2000
Revenue $77,264 $43,922 $43,468 $66,037 $57,457 $34,645 $24,364 $31,147
% of annual 33.5% 19.1% 18.8% 28.6% 38.9% 23.5% 16.5% 21.1%
Gross profit 47,260 29,950 30,398 39,081 37,322 22,888 16,336 20,263
Ratio 61.2% 68.2% 69.9% 59.2% 65.0% 66.1% 67.0% 65.1%
Operating expenses 27,932 24,053 24,617 24,650 21,705 17,875 14,114 15,013
Amortization 2,934 2,887 2,940 2,799 2,540 1,933 1,329 1,335
Operating income(1) 14,324 3,010 2,841 11,632 13,076 3,080 893 3,915
% of revenue 18.5% 6.9% 6.5% 17.6% 22.8% 8.9% 3.7% 12.6%
% of gross profit 30.3% 10.1% 9.3% 29.8% 35.0% 13.5% 5.5% 19.3%
Non-operating (expense)
income (21) - (72) 191 1,001 - - -
Interest expense -- net 3,224 1,206 1,447 1,291 1,587 1,407 847 851
(2)
Income taxes 3,946 39 422 4,318 4,151 514 (113) 1,273
Net income $7,133 $1,765 $900 $6,214 $8,339 $1,159 $159 $1,791
Per diluted common share $0.48 $0.13 $0.07 $0.49 $0.65 $0.11 $0.02 $0.18
(1) In the fourth quarter of 2001, we incurred an unusual operating expense of $2.1 million in connection with the writedown of
assets acquired from Insurance Alliances Group.
(2) As we paid off the bank debt during the fourth quarter of 2001, we were unable to continue our hedging program and incurred
$2.0 million of interest expense related to our interest rate swaps.
On March 7, 2002, our stock which was previously traded on the NASDAQ under the symbol of CLKB, began trading on the New York Stock Exchange under the symbol of CBC.
On February 26, 2002, we announced the signing of a letter of intent to purchase Comiskey Kaufman, Inc. Comiskey Kaufman is a Houston, Texas based provider of executive benefits consulting for major companies in the Southwest, primarily in Texas. Consummation of the purchase is subject to the approval of both Companies’ Board of Directors, our lending banks and the satisfactory completion of financial and business due diligence. The acquisition is expected to close on or before April 30, 2002.
On February 25, 2002, we announced the purchase of the Federal Policy Group of PricewaterhouseCoopers based in Washington, D.C. Federal Policy Group is a consulting practice representing Fortune 500 companies, trade associations and other businesses before the government on legislative and regulatory policy matters. The purchase price was $11.0 million before expenses consisting of a cash payment at closing of $5.0 million and $6.0 million of contingent payments consisting of cash and stock over the next four years based upon attainment of established performance criteria.
On January 29, 2002, our Board of Directors approved the increase of authorized common shares from 20 million to 40 million. This proposal will be submitted to the shareholders for approval at the April 30, 2002 Annual Shareholder meeting.
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, INC.
By: /s/ W.T. WAMBERG
W. T. Wamberg
President and Chief Executive Officer
Date: March 22, 2002
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.
/s/ W.T. WAMBERG Chairman of the Board, President, March 22, 2002
------------------------------------------
------------------------------------------
W. T. Wamberg Chief Executive Officer and Director
/s/ THOMAS M. PYRA Vice President and Chief Financial March 22, 2002
------------------------------------------
------------------------------------------
Thomas M. Pyra Officer, Principal Accounting
Officer and Chief Operating Officer
/s/ RANDOLPH A. POHLMAN Director March 22, 2002
------------------------------------------
------------------------------------------
Randolph A. Pohlman
/s/ L. WILLIAM SEIDMAN Director March 22, 2002
------------------------------------------
------------------------------------------
L. William Seidman
/s/ GEORGE D. DALTON Director March 22, 2002
------------------------------------------
------------------------------------------
George D. Dalton
/s/ STEVEN F. PIAKER Director March 22, 2002
------------------------------------------
------------------------------------------
Steven F. Piaker
/s/ BILL ARCHER Director March 22, 2002
------------------------------------------
------------------------------------------
Bill Archer
EXHIBIT INDEX
2.1 Reorganization Agreement, dated as of July 30, 1998, by an among Clark/Bardes Holdings, Inc., Clark/Bardes, Inc. and the
Predecessor Company (Incorporated herein by reference to Exhibit 2.1 of Clark/Bardes' Registration Statement on Form S-1,
File No. 333-56799).
2.2 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).
2.3 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).
2.4 Asset Purchase Agreement, dated April l5, 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).
2.5 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).
2.6 Stock Purchase Agreement, dated June 21, 2000 by and among Clark/Bardes, Inc. and Clark/Bardes Holdings, Inc. as Purchasers
and Pearl Meyer, Diane Posnak, Steven E. Hall, Rhonda C. Edelman, Claude E. Johnston and David E. Swinford as Stockholders
(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 July 5, 2000).
2.7 Agreement of Merger and Plan of Reorganization, dated September 6, 2000, by and among Clark/Bardes Holdings, Inc., and
Clark/Bardes Acquisition, Inc., and Compensation Resource Group, Inc. and William L. MacDonald, Sr. (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 11,
2000).
2.8 Asset Purchase Agreement, dated March 12, 2001, by and among Clark/Bardes, Inc., Clark/Bardes Holdings, Inc., Rich,
Florin/Solutions, Inc., Rich, Florin/Solutions Trust and certain shareholders of Rich, Florin/Solutions, Inc. (Incorporated
herein by reference to Exhibit 2.8 of Clark/Bardes' Registration Statement on Form S-3, File No. 333-72232, filed with the
SEC on November 2, 2001).
2.9 Asset Purchase Agreement, dated August 31, 2001, by and among Clark/Bardes Consulting, Inc., Clark/Bardes, Inc. Lyons
Compensation & Benefits, LLC and certain shareholders of Lyons Compensation & Benefits, LLC (Incorporated herein by
reference to Exhibit 29 of Clark/Bardes' Registration Statement on Form S-3, File No. 333-72232, filed with the SEC on
November 2, 2001).
2.10 Membership Interests Purchase Agreement regarding FTPG LLC, dated February 25, 2002, by and among Clark/Bardes, Inc.,
Clark/Bardes Consulting, Inc. and Pricewaterhouse Coopers LLP, Kenneth J. Kies, Patrick J. Raffaniello and FTPG LLC.*
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 Certificate of Amendment of Certificate of Incorporation of Clark/Bardes, Inc. (incorporated herein by reference to Exhibit
3.3 to Amendment No.1 to the Clark/Bardes' Registration Statement on Form S-1, File No. 333-56799), filed with the SEC on
July 27, 1998).
3.3 Certificate of Amendment of Certificate of Incorporation of Clark/Bardes, Inc. (incorporated herein by reference to Exhibit
5 of Clark/Bardes' Registration Statement on Form 8-A, filed with the SEC on February 28, 2002).
3.4 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).
3.5 Certificate of Designation (Incorporated herein by reference to Exhibit 3.4 of Clark/ Bardes' Registration Statement on Form
S-1, File No. 333-56799).
4.1 Specimen Certificate for shares of Common Stock, par value $.01 per share, of Clark/ Bardes Holdings, Inc. (Incorporated
herein by reference to Exhibit 4.1 of Clark/Bardes' Amendment No. 1 to the Registration Statement on Form S-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 Holdings, Inc. and The Bank of New York
(Incorporated herein by reference to Exhibit 4.4 of Clark/Bardes' Quarterly Report on Form 10-Q, File No. 000-24769, filed
with the SEC on November 16, 1998).
10.1 Clark/Bardes, 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 Clark/Bardes Consulting, Inc. Execu-FLEX Benefit Plan, restated effective as of June 1, 2001.*
(a) Amendment No. 1 to Clark/Bardes Consulting, Inc. Execu-FLEX Benefit Plan, effective as of January 1, 2002.*
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 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).
10.6 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).
10.7 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).
10.8 Sublease Agreement, dated as of September 1, 1999, 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).
10.9 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).
10.10 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).
10.11 Form of Clark/Bardes, Inc. 401(k) Savings Plan (Incorporated herein by reference to Exhibit 4.3 of Clark/Bardes'
Registration Statement on Form S-8, File No. 333-68982, filed with the SEC on September 5, 2001).
10.12 Employment Agreement dated October 30, 2001 by and between Clark/ Bardes, Inc. and Thomas M. Pyra.*
10.13 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).
10.14 Employment Agreement effective August 14, 2001 by and between Clark/Bardes, Inc. and Richard C. Chapman.*
10.15 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).
(a) First Amendment, dated March 6, 2002, to the Employment Agreement by and between Clark/Bardes Holdings, Inc. and
W.T. Wamberg*
10.16 Employment Agreement dated as of March 1, 2001 by and between Clark/Bardes Holdings, Inc. and James C. Bean.*
(a)Amendment to the Employment Agreement between James C. Bean and Clark/Bardes Consulting dated November 5, 2001.*
10.17 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 (Incorporated herein by reference to Exhibit 10.50 of
Clark/Bardes' Annual Report on Form 10-K, filed with the SEC on March 29, 2000).
(a)First Amendment to Amended and Restated Credit Agreement as of August 23, 2000 by and among Clark/Bardes, Inc., Bank
One, Texas, N.A. as administrative agent for itself and other designated lenders. (Incorporated herein by reference
to Exhibit 10.51 of Clark/Bardes' Annual Report on Form 10-K/A for the period ending December 31, 200, filed with
the SEC on April 9, 2001).
10.18 Promissory Note dated September 6, 2000 by and among Clark/Bardes Holdings, Inc. and William L. MacDonald, Sr. (Incorporated
herein by reference to Exhibit 10.1 of Clark/Bardes' Current Report on Form 8-K, File No. 000-24769, filed with the SEC on
September 20, 2000).
21 Subsidiaries of the Registrant
23 Consent of Ernst & Young LLP
- ---------------
*filed herewith
Exhibit 2.10
MEMBERSHIP INTERESTS PURCHASE AGREEMENT
regarding
FTPG LLC
by and among
CLARK/BARDES, INC.
CLARK/BARDES CONSULTING, INC.
as Purchasers
and
PRICEWATERHOUSECOOPERS LLP
KENNETH J. KIES
PATRICK J. RAFFANIELLO
as Members
and
FTPG LLC
Dated as of February 25, 2002
Table of Contents
Page
Article 1 DEFINITIONS................................................................................1
Article 2 PURCHASE AND SALE OF MEMBERSHIP INTERESTS..................................................4
2.1 Purchase and Sale of Membership Interests......................................................4
2.2 Assets Upon Sale...............................................................................4
2.3 Excluded Assets................................................................................5
2.4 Liabilities Upon Sale..........................................................................5
2.5 Excluded Liabilities...........................................................................5
2.6 Purchase Price.................................................................................5
2.7 Vesting of Contingent Consideration............................................................6
2.8 Closing........................................................................................8
2.9 Purchasers' Deliveries at Closing..............................................................9
2.10 Consent of Third Parties.......................................................................9
2.11 Stock Consideration............................................................................9
Article 3 REPRESENTATIONS AND WARRANTIES OF MEMBERS.................................................11
3.1 Representations and Warranties................................................................11
Article 4 REPRESENTATIONS AND WARRANTIES OF PURCHASERS..............................................14
4.1 Organization and Authority....................................................................14
4.2 Authority Relating to This Agreement; Conflicts...............................................14
4.3 Litigation....................................................................................15
4.4 Brokers and Finders...........................................................................15
Article 5 CONDITIONS TO THE OBLIGATIONS OF PURCHASERS...............................................15
5.1 Representations and Warranties True at Closing................................................15
5.2 Covenants Performed by Members................................................................15
5.3 No Action to Prevent Completion...............................................................15
Article 6 CONDITIONS TO THE OBLIGATIONS OF PwC......................................................16
6.1 Representations and Warranties True at Closing................................................16
6.2 Payment of Purchase Price.....................................................................16
6.3 Covenants Performed by Purchaser..............................................................16
6.4 No Action to Prevent Completion...............................................................16
6.5 Partner Withdrawals...........................................................................16
Article 7 COVENANTS.................................................................................16
7.1 Purchasers' Access to Properties and Records..................................................16
7.2 Conduct of the Business Prior to Closing Date.................................................17
7.3 Satisfaction of Conditions....................................................................17
7.4 Cooperation...................................................................................17
7.5 Notification of Certain Matters...............................................................17
7.6 Access to Records.............................................................................18
7.7 Governmental Filings..........................................................................18
7.8 Permits.......................................................................................18
7.9 Non-Solicitation of Clients...................................................................18
Article 8 EMPLOYMENT MATTERS........................................................................19
8.1 Employees.....................................................................................19
8.2 Employee Benefit Plans........................................................................19
Article 9 INDEMNITY.................................................................................20
9.1 Survival......................................................................................20
9.2 Seller's Indemnity............................................................................20
9.3 Purchaser's Indemnity.........................................................................21
9.4 Procedure.....................................................................................21
9.5 Limitation on Indemnification.................................................................22
9.6 Indemnification Claims Covered by Insurance and Tax Benefits..................................22
9.7 Contingent Consideration Set Off..............................................................23
Article 10 TERMINATION...............................................................................23
10.1 Mutual Agreement..............................................................................23
10.2 Termination by Either Purchasers or Members...................................................23
10.3 Termination by Purchasers.....................................................................23
10.4 Termination by Members........................................................................23
10.5 Effect of Termination.........................................................................24
Article 11 MISCELLANEOUS.............................................................................24
11.1 Assignment....................................................................................24
11.2 Publicity.....................................................................................24
11.3 Transfer Taxes................................................................................24
11.4 Expenses......................................................................................24
11.5 Further Assurances............................................................................24
11.6 Notices.......................................................................................25
11.7 Entire Agreement and Modification; Waiver.....................................................26
11.8 Governing Law.................................................................................26
11.9 Severability..................................................................................26
11.10 Headings......................................................................................26
11.11 Counterparts..................................................................................26
11.12 Third Party Beneficiaries.....................................................................26
11.13 Representations and Warranties................................................................26
11.14 Arbitration...................................................................................26
Exhibits
Exhibit A - Form of Investment Letter
Disclosure Schedules
Schedule 2.2(a) - Intellectual Property Assets Schedule
Schedule 2.2(b) - Assumed Contracts Schedule
Schedule 2.2(d) - Other Assets Schedule
Schedule 2.2(e) - Business Retainers Schedule
Schedule 2.3(e) - Excluded Assets Schedule
Schedule 2.6 - Shareholders Consideration Schedule
Schedule 3.1.2 - Conflicts Schedule
Schedule 3.1.6 - Material Adverse Change Schedule
Schedule 3.1.7 - Intellectual Property Exception Schedule
Schedule 3.1.8 - Compliance with Laws Schedule
Schedule 3.1.9 - Litigation Schedule
Schedule 3.1.11 - Contracts Schedule
Schedule 3.1.13 - Employee Benefits Schedule
Schedule 3.1.15 - Consents Schedule
Schedule 3.1.16 - Customers Schedule
Schedule 7.9 - Non-Solicitation Schedule
Schedule 8.1 - Affected Employees Schedule
I-2
MEMBERSHIP INTERESTS PURCHASE AGREEMENT
THIS MEMBERSHIP INTERESTS PURCHASE AGREEMENT, including the exhibits and schedules attached hereto and incorporated herein
by reference (collectively, the "Agreement"), is made and entered into as of the 25th day of February, 2002, by and between
Clark/Bardes Consulting, Inc., a Delaware corporation ("Consulting"), Clark/Bardes, Inc., a Delaware corporation ("CBI") (CBI and
Consulting shall collectively be referred to as "Purchasers"), PricewaterhouseCoopers LLP, a Delaware limited liability partnership
("PwC"), Patrick J. Raffaniello ("Raffaniello"), Kenneth J. Kies ("Kies") (Kies, Raffaniello and PwC shall collectively be referred to
as the "Members") and FTPG LLC, a Delaware limited liability company (the "Company").
RECITALS
A........PwC has a business unit known as the Federal Policy Group or the Federal Tax Policy Group (the "Business"); and
B........Subject to the terms and conditions of this Agreement, Purchasers are willing to purchase, and Members are willing
to sell the Membership Interests (as hereinafter defined) of the Company.
In consideration of the mutual covenants and agreements set forth in this Agreement, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties hereby agree as follows:
Article 1.........
DEFINITIONS.
For the purposes of this Agreement, the definitions set forth below shall be applicable.
Acquired Assets shall be as defined in Section 2.2.
Action shall mean any litigation, proceeding, suit or governmental or administrative agency investigation.
Affected Employees shall be as defined in Section 8.1.
Affiliate shall mean, with respect to a Party at any time, another Person, directly or indirectly, through one or more
intermediaries, controlled by, under common control with or which controls, the Party specified at such time.
Approval shall mean any authorization, license, consent, order, permit, approval or other action of, or any filing,
registration or qualification with, any Governmental Authority.
Assets shall mean any asset, property or right, tangible or intangible, real or personal.
Assumed Liabilities shall be as defined in Section 2.4.
Business shall be as defined in the recitals above.
Business Day shall mean a day other than Saturday or Sunday or any other day on which banks in New York City are required to
or may be closed.
Closing shall be as defined in Section 2.8.1.
Closing Date shall be as defined in Section 2.8.1.
Contracts shall be as defined in Section 2.2(b).
Damages shall be as defined in Section 9.3.
Division shall be as defined in Section 2.7.
EBITA shall be as defined in Section 2.7.
EBITA Targets shall be as defined in Section 2.7.
EBITA Target Period shall be as defined in Section 2.7.
Employee Benefit Plans shall be as defined in Section 3.1.13.
Employment Agreements shall be as defined in Section 2.8.2.
ERISA shall be as defined in Section 3.1.13.
Excess EBITA shall be as defined in Section 2.7(b).
Excluded Assets shall be as defined in Section 2.3.
Governmental Authority shall mean any federal, state, county, city or other governmental, administrative or regulatory
authority, agency, instrumentality or court.
Indemnitee shall be as defined in Section 9.4.
Indemnitor shall be as defined in Section 9.4.
Intellectual Property shall include, without limitation, any of the following: (a) patents and applications therefor, and
all reissues, divisions, renewals, extensions, continuations and continuations-in-part there; (b) copyrights, copyright registrations
and applications therefor; (c) trademarks, service marks, tradenames, registrations and applications therefor, unregistered
trademarks; (d) Trade Secrets; and (e) license agreements with respect to the foregoing and goodwill associated therewith.
IRC shall mean the Internal Revenue Code of 1986, as amended.
Knowledge shall mean, in connection with any representation and warranty contained in this Agreement that is expressly
qualified by reference to the Knowledge of PwC or Purchasers, the actual knowledge of Key Management or the actual knowledge of the
executive officers or directors of Purchasers, as the case may be.
Key Management shall mean Kenneth J. Kies and Patrick J. Raffaniello.
Legal Requirements shall mean all constitutions, laws, statutes, ordinances, codes and regulations of Governmental
Authorities.
Lien shall mean any lien, security interest, charge, restriction, adverse claim, mortgage, pledge, hypothecation or
encumbrance of any kind.
Material Adverse Effect on the Business shall mean any change in or effect on the Business, that has a material adverse
effect on the financial condition or results of operations of the Business taken as a whole; provided that none of the following
shall be deemed, either alone or in combination, to constitute a Material Adverse Effect on the Business: (i) conditions affecting
any of the industries or markets in which the Business operates, or (ii) any disruption of customer relationships arising out of or
resulting from actions contemplated by the parties which is attributable to the transactions contemplated hereby or which are taken
following the Closing.
Membership Interests shall mean 100% of the outstanding membership interests in the Company.
Parties shall mean all parties to this Agreement.
Partners and Principals Agreement shall mean PwC's Partners and Principals Agreement as in effect as of the date hereof.
Permit shall mean any Approval exclusively relating to the Business.
Person shall mean any individual, corporation, limited or general partnership, limited liability partnership, limited
liability company, joint venture association, joint stock company, trust, unincorporated organization or government or any
Governmental Authority.
Purchase Price shall be as defined in Section 2.6.
Purchaser Indemnitees shall be as defined in Section 9.2.
Purchasers shall be as defined in the preface hereto.
Purchaser's Damages shall be as defined in Section 9.2.
Securities Laws shall be as defined in Section 2.11.
Seller Indemnitees shall be as defined in Section 9.3.
Seller's Damages shall be as defined in Section 9.3.
Significant Contract shall be defined as in Section 3.1.11.
Third Party Claim shall be as defined in Section 9.4.
Trade Secrets shall mean all technical or other information, designs, processes, procedures, algorithms, formulas,
improvements or modifications which are unique assets of the Business and which provide the Business with a competitive advantage
over competitors which do not possess such information. Trade Secrets include, but are not limited to, system designs and
specifications, programming sequences, algorithms, flowcharts and formulas developed in whole, or in part, by PwC primarily in
connection with the Business.
Article 2.........
PURCHASE AND SALE OF MEMBERSHIP INTERESTS
2.1 Purchase and Sale of Membership Interests. On the terms and subject to the conditions of this Agreement and in
consideration of the obligations of Purchasers herein provided, the Members hereby agree to sell, convey, assign and deliver to
Purchasers, and Purchasers hereby agree to purchase from the Members, at the closing provided for herein (the "Closing"), all of
the Membership Interests in accordance with the terms and conditions of this Agreement free and clear of any and all Liens.
2.2 Assets Upon Sale. On the Closing Date, the assets of the Company shall consist only of those certain properties, assets,
rights and interests, whether real or personal, tangible or intangible, wherever located and by whomever possessed which are
primarily related to, or used in, the operation of the Business all of which are set forth below (the "Acquired Assets"):
(a) Intellectual Property. The Intellectual Property set forth in Schedule 2.2(a) attached hereto, including but not limited
to, the rights to the names "Federal Tax Policy Group" or "Federal Policy Group";
(b) Contracts. Those contracts relating to the Business which are set forth on Schedule 2.2(b) attached hereto which are all
contracts for services to be performed primarily by the Business entered into by PwC (collectively, the "Contracts"); provided
that Purchasers will pay to PwC fifty percent (50%) of any contingent fees received under or in connection with the Contracts set
forth on Schedule 2.2(b)(2);
(c) Books and Records. All books and records primarily relating to the Business, including, without limitation, client lists
primarily relating to the Business, files primarily relating to the Business, marketing databases primarily relating to the
Business and marketing plans primarily relating to the Business;
(d) Other Assets. The assets listed on Schedule 2.2(d) attached hereto; and
(e) Retainers. A pro rata portion of retainers received in respect of engagements of the Business for services to be performed
after the Closing Date as provided for on Schedule 2.2(e) and the rights to perform services under the engagements following the
Closing Date.
If any of the Acquired Assets are owned by an Affiliate of PwC or the Company, PwC shall cause such Affiliate to sell the
Acquired Assets to Purchasers on the terms set forth herein. Promptly after the Closing, PwC and Purchasers shall send a letter to
each client of the Business whose Contracts and files are being transferred as contemplated by this Agreement, explaining the
transactions contemplated by this Agreement and that, as a result, the Contracts and related files are being transferred to
Purchasers, and requesting the client to inform PwC and the Purchasers if they have any questions or concerns about the transition.
During the thirty-day period following the Closing, no persons other than the former partners, principals and employees of the
Business shall have access to any client files, and if any client objects to the transfer of such files during such thirty-day
period, Purchasers will promptly return such files and the related Contract to PwC, whereupon such returned files and Contract will
no longer be deemed an Acquired Asset.
2.3 Excluded Assets. Notwithstanding the foregoing, the following assets (the "Excluded Assets") are expressly excluded from
the purchase and sale contemplated hereby and, as such, are not included in the Acquired Assets:
(a) all accounts receivable of PwC;
(b) income tax accounts and refunds;
(c) the names "PricewaterhouseCoopers," "Price Waterhouse," "Coopers & Lybrand," and "Lybrand, Ross Bros. & Montgomery" and
derivatives thereof, and all trade names, trademarks, service marks and similar intellectual property incorporating such name and
derivatives rights therein, but not including rights to the names "Federal Tax Policy Group" or "Federal Policy Group;"
(d) all real and personal property leases, subleases, licenses and other occupancy and related agreements, including any
leasehold improvements; and
(e) the amounts received by PwC related to the billings sent out on or prior to the Closing Date to the clients listed on
Schedule 2.3(e) attached hereto.
2.4 Liabilities Upon Sale. Subject to the conditions specified in this Agreement, on the Closing Date, Company shall have
assumed only the following liabilities and obligations (the "Assumed Liabilities"): (a) all of the liabilities and obligations
in respect of the Business arising following the date of the Closing related to events or activities following the Closing, and
(b) all liabilities and obligations of PwC and its Affiliates under the Contracts arising after, and in respect of periods
following, the Closing Date.
2.5 Excluded Liabilities. Notwithstanding anything to the contrary contained in this Agreement, on and after the Closing Date
PwC shall assume and agree to pay and discharge in full all known liabilities and obligations of the Company other than the
Assumed Liabilities (the "Excluded Liabilities").
2.6 Purchase Price. The aggregate purchase price for the Membership Interests shall be an amount equal to Eleven Million
Dollars ($11,000,000) (the "Purchase Price") which shall be payable to the Members in accordance with Schedule 2.6 and as follows:
(a) by wire transfer of immediately available funds to such account or accounts as shall have been designated in writing by the
Members in an amount equal to Five Million Dollars ($5,000,000); and
(b) in the form of contingent consideration ("Contingent Consideration"), payment of which is contingent on achieving certain
targets as outlined below, in the total amount of (i) One Million One Hundred Sixty Two Thousand Five Hundred Dollars
($1,162,500) to be paid in Clark/Bardes, Inc. Common Stock ("CBI Common Stock") valued as provided below (the "Stock
Consideration"), and (ii) Four Million Eight Hundred Thirty Seven Thousand Five Hundred Dollars ($4,837,500) payable in cash (the
"Cash Consideration") such that PwC shall only receive cash consideration and Kies and Raffaniello shall each receive Contingent
Consideration in the form of 70% Cash Consideration and 30% Stock Consideration all as described on Schedule 2.6.
Stock Consideration Value: The CBI Common Stock shall be valued at the average closing price per share of
CBI Common Stock on the NASDAQ National Market or NYSE, as applicable, and as published in the Wall Street Journal, for the
twenty (20) trading days immediately prior to the issuance of such Stock Consideration. Kies and Raffaniello hereby agree
that prior to receiving any Stock Consideration, Kies and Raffaniello shall have entered into that certain Investment Letter
pursuant to which they shall make customary investment representations to the Purchasers in substantially the form set forth
in Exhibit A (the "Investment Letter").
2.7 Vesting of Contingent Consideration.
(a) The payment of the Contingent Consideration is contingent on the division of Consulting or a subsidiary of Consulting which
includes the Acquired Assets (the "Division") achieving a certain EBITA Target (as defined below) for the period from the Closing
Date through December 31, 2005 as provided below, as a result of achieving certain aggregate net earnings before interest, taxes
and amortization (including gross revenue less all salaries and other direct expenses of the Division and specifically excluding
corporate overhead of the Purchasers) ("EBITA") targets (the "EBITA Targets"). Following each year that the Division's EBITA
exceeds the EBITA Target (or as otherwise provided pursuant to Section 2.7(b)), a payment of contingent consideration in the form
of stock and cash as provided for above will be made by the earlier of (i) April 15, and (ii) the date there is agreement on the
Contingency Determination, of the year following the performance year based on the following table (2002 EBITA Target will be
adjusted to cover the period from Closing Date through December 31, 2002):
12-Month Period Ending
12/31/XX EBITA Target Maximum Contingent Payment
2002 $2,100,000* $1,500,000
2003 $2,300,000 $1,500,000
2004 $2,500,000 $1,500,000
2005 $2,750,000 $1,500,000
- ---------------------------------------------------------------------------------------------------------------------------------------
*An annualized number.
(b) In the event the EBITA Targets have not been achieved in any year, for every One Dollar ($1.00) the EBITA Target objective
is missed the Maximum Contingent Payment will be reduced by $1.00. In the event EBITA is generated in any year which exceeds the
EBITA Target for such year ("Excess EBITA"), the Excess EBITA shall be credited to the subsequent year's EBITA for purposes of
meeting such applicable year's EBITA Target and if as a result of such carryforward the EBITA Target is met, any remaining Excess
EBITA will be carried to the next subsequent year until all such Excess EBITA has been applied. The Parties agree, however, that
the Contingent Consideration shall not be paid prior to the year it is scheduled in accordance with the table provided above.
(c) Within 75 days of the end of each calendar year, from 2002 through 2005 (the "EBITA Target Period"), for which the EBITA
Target is recognized, Purchasers shall prepare and provide a calculation of the EBITA (the "Contingency Determination").
Consulting shall provide Members with such back-up information and calculations as Members may reasonably request.
(d) If Members do not agree that the Contingency Determination correctly states EBITA for the EBITA Target Period, Members shall
promptly (but not later than thirty (30) days after the delivery of such Contingency Determination) give written notice to
Purchasers of any exceptions thereto (in reasonable detail describing the nature of the disagreement asserted). If Members and
Purchasers reconcile their differences, the Contingency Determination shall be adjusted accordingly and shall thereupon become
final and conclusive upon all of the parties hereto. If Members and Purchasers are unable to reconcile their differences in
writing within thirty (30) days after written notice of exceptions is delivered by Members, the items in dispute shall be
submitted to an arbitrator mutually acceptable to Members and Purchasers, or, if Members and Purchasers cannot agree on an
arbitrator within 10 days after Purchasers' receipt of any objections, an arbitrator as shall be selected by the American
Arbitration Association (the "Arbitrator") to resolve their disagreement. The Arbitrator shall, within thirty (30) days after
its appointment, resolve the differences regarding the Contingency Determination. The decision of the Arbitrator shall be final,
binding and conclusive upon, and its fees, costs and expenses shall be shared equally by, Purchasers and Members. The Arbitrator
shall act as an arbitrator to determine only those issues still in dispute. Each party hereto shall bear the fees, costs and
expenses of its own accountants and other representatives. Upon resolution of any such dispute, or if Members fails to deliver
written objections to Purchasers within the 30-day period provided above, the Contingency Determination shall be deemed final,
binding and conclusive upon the parties.
(e) Purchasers represent and covenant that any EBITA generated by or otherwise applicable to the Division shall be accrued and
recorded in the books and records of the Division.
2.8 Closing.
2.8.1. Closing Date. The closing of the purchase and sale of the Membership Interests (the "Closing") shall take place at the
offices of PricewaterhouseCoopers LLP, New York, New York, on the later of (i) the fifth Business Day following the waiver or
satisfaction of the conditions set forth in Articles 5 and 6 (other than those requiring the exchange of certificates or other
documents or the taking of any action at the Closing) or (ii) February 25, 2002, or at such other place, date or time as
Purchasers and Members may agree in writing. The date of the Closing shall constitute the "Closing Date."
2.8.2. Members' Deliveries at Closing. At the Closing, Members shall deliver or cause to be delivered to Purchasers:
(i) copies of all necessary third party and governmental consents, approvals, releases and filings required in order to effect
the transactions contemplated by this Agreement;
(ii) such instruments of sale, transfer, assignment, conveyance and delivery, as are required in order to transfer to Purchasers
good and marketable title to the Membership Interests, free and clear of all Liens;
(iii) corporate books and records of the Company;
(iv) certified copies of the resolutions duly adopted by the sole Member of the Company (immediately prior to admission of the
Key Management as Members) authorizing the execution, delivery and performance of this Agreement and each of the other agreements
contemplated hereby, and the consummation of all other transactions contemplated by this Agreement;
(v) all of the Acquired Assets;
(vi) copy of a good standing certificate in the Company's jurisdiction of formation;
(vii) a certificate of the Manager of Company, certifying as to the correctness and completeness of the Articles of Organization
and Operating Agreement of Company, as appropriate, and all amendments thereto;
(viii) Counterparts of Employment Agreements (collectively, the "Employment Agreements"), duly executed by Key Management as
applicable;
(ix) such other documents or instruments as Purchasers may reasonably request to effect the transactions contemplated hereby.
All of the foregoing documents in this Section 2.8.2 shall be reasonably satisfactory in form and substance to Purchasers.
2.9 Purchasers' Deliveries at Closing. At the Closing, Purchasers shall deliver or cause to be delivered to Members or its
assignees:
(a) The non-contingent portion of the Purchase Price, in immediately available funds by wire transfer to a bank account
designated by Members by notice to Purchasers at least two (2) Business Days prior to the Closing Date;
(b) Certified resolutions of the Board of Directors of Purchasers authorizing the transactions contemplated by this Agreement;
(c) Counterparts of the Employment Agreements, duly executed by Consulting and the Company; and
(d) such other documents or instruments as PwC may reasonably request to effect the transactions contemplated hereby.
All of the foregoing documents in this Section 2.9 shall be reasonably satisfactory in form and substance to PwC.
2.10 Consent of Third Parties. Nothing in this Agreement shall be construed as an attempt or agreement to assign any Contract or
other Acquired Asset which is not capable of being validly assigned, conveyed and transferred without an Approval or the consent
of a third party unless such Approval or consent shall have been obtained and remains in full force and effect at the Closing.
If such an Approval or consent in respect of a Contract or other Acquired Asset is not obtained prior to the Closing or does not
remain in full force and effect at the Closing, Purchasers and Members will use reasonable efforts to enter into a mutually
agreeable, reasonable and lawful arrangement under which Purchasers obtain the benefits and assume the obligations in respect
thereto (but only to the extent such obligations would have constituted Assumed Liabilities if such assignment occurred on the
Closing Date) from and after the Closing Date in accordance with this Agreement, including subcontracting, sublicensing or
subleasing to Purchasers, and under which Members would enforce for the benefit of the Purchasers, with Purchasers assuming the
obligations to the same extent as if they would have constituted an Assumed Liability, any and all rights of Members against a
third party thereto. Notwithstanding the foregoing, neither party shall be required to pay consideration to any third party to
obtain any such consent or approval, and the sole Closing conditions relating to the obtaining of consents or approvals of third
parties are contained in Article 5 and Article 6.
2.11 Stock Consideration.
(a) During the period beginning on the date of receipt of any CBI Common Stock and ending on the one (1) year anniversary of
receipt of such stock consistent with Rule 144 (a "Restriction Period"), Members who receive CBI Common Stock or their respective
assignee, shall not sell, assign, exchange, transfer, distribute or otherwise dispose of (in each case, "transfer") any shares of
CBI Common Stock received by him hereunder except as otherwise permitted under Rule 144. The recipient of the CBI Common Stock
will execute an Investment Letter upon his receipt of such stock. Following the Restriction Period, Members may transfer their
shares of CBI Common Stock so long as such transfer is in accordance with the Securities Act of 1933, as amended, including
Rule 144 thereunder. The certificates evidencing the CBI Common Stock delivered to Members pursuant to this Agreement shall bear
a legend substantially in the form set forth below:
THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD, ASSIGNED (OTHER THAN IN CONNECTION
WITH A PLEDGE, EXCHANGED, TRANSFERRED, DISTRIBUTED, CHANGED OR OTHERWISE DISPOSED OF, AND THE
ISSUER SHALL NOT BE REQUIRED TO GIVE EFFECT TO ANY ATTEMPTED SALE, ASSIGNMENT (OTHER THAN IN
CONNECTION WITH A PLEDGE), EXCHANGE, TRANSFER, DISTRIBUTION, OR OTHER DISPOSITION OTHER THAN IN
ACCORDANCE WITH SECTION 2.11 OF THAT CERTAIN MEMBERSHIP INTERESTS PURCHASE AGREEMENT DATED AS OF
FEBRUARY 25, 2002, BY AND AMONG CLARK/BARDES CONSULTING, INC., CLARK/BARDES, INC., FTPG LLC,
PRICEWATERHOUSECOOPERS LLP, KENNETH J. KIES AND PATRICK J. RAFFANIELLO.
THE SHARES OF COMMON STOCK REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES LAWS OF ANY STATE OR OTHER JURISDICTION (COLLECTIVELY, THE "SECURITIES LAWS") AND
MAY NOT BE SOLD, DISPOSED OF OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION, EXCEPT
IN ACCORDANCE WITH AN AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF ANY APPLICABLE
SECURITIES LAWS PROVIDED THAT CLARK/BARDES CONSULTING, INC. AND CLARK/BARDES, INC. SHALL HAVE
RECEIVED AN OPINION OF COUNSEL ACCEPTABLE TO THEM CONFIRMING THAT THE REQUIREMENTS OF SUCH
EXEMPTION HAVE BEEN SATISFIED.
(b) Members shall not transfer any shares of the CBI Common Stock at any time if such transfer would constitute a violation of
any federal or state securities or "blue sky" laws, rules or regulations (collectively, "Securities Laws"), or a breach of the
conditions to any exemption from registration of the CBI Common Stock under any such Securities Law on which Members are relying
at the time of his sale, or a breach of any undertaking or agreement of Members entered into with CBI pursuant to such Securities
Laws or in connection with obtaining an exemption thereunder.
(c) For purposes of this Agreement (and the restrictions set forth in this Section 2.11), the term "CBI Common Stock" shall mean
and include (i) the shares of common stock of CBI issued, granted, conveyed and delivered to certain Members pursuant to
Section 2.6 hereof, and (ii) any and all other additional shares of capital stock of CBI issued or delivered by CBI with respect
to the shares of CBI Common Stock described in clause (i) hereof, including without limitation any shares of capital stock of CBI
issued or delivered with respect to such shares as a result of any stock split, stock dividend, stock distribution,
recapitalization or similar transaction.
Article 3
REPRESENTATIONS AND WARRANTIES OF MEMBERS
3.1 Representations and Warranties. Members hereby represent and warrant to Purchasers as of the date of this Agreement that:
3.1.1. Organization and Authority. Company is a limited liability company duly organized, validly existing and in good standing
under the laws of Delaware. Company has all requisite power and authority and all material licenses, permits and other
authorizations necessary to own and operate its properties and to carry on its business as now conducted as they relate to the
Business. PwC is a limited liability partnership, duly organized pursuant to an agreement governed by, and which is validly
existing under, the laws of the State of Delaware.
3.1.2. Authority Relating to This Agreement; Conflicts.
(a) PwC and Company have all necessary partnership or limited liability company power, as applicable, to enter into and to
consummate the transactions contemplated to be consummated by PwC and Company pursuant to this Agreement. This Agreement has
been duly executed and delivered by PwC and Company. The execution and delivery of this Agreement at the Closing and the
performance hereunder by PwC and Company have been duly authorized by all necessary partnership action or other action on the
part of PwC and Company and, assuming due execution of this Agreement by Purchasers, Kies and Raffaniello, this Agreement
constitutes valid and binding obligations of PwC and Company, enforceable against PwC and Company in accordance with their terms.
(b) Except as set forth in Schedule 3.1.2 attached hereto, neither the execution of this Agreement by PwC or the Company nor the
consummation by PwC or the Company of the transactions contemplated hereby and thereby will: (i) result in any violation of any
Legal Requirement now in effect applicable to PwC or the Company; (ii) result in any breach by PwC or the Company of any contract
to which PwC or the Company is a party or by which it or any of the Acquired Assets are bound with such exceptions as would not
reasonably be expected to have a Material Adverse Effect on the Business; (iii) require any Approval; or (iv) violate or conflict
with any provision of PwC's Partners and Principals Agreement. Neither PwC nor Company is a party to any pending or, to PwC's
knowledge, threatened Action in, for or by any Governmental Authority which could reasonably be expected to have a Material
Adverse Effect on the ability of PwC or Company to consummate the transactions contemplated by this Agreement.
3.1.3. Ownership and Delivery of Membership Interests and Assets. Members will transfer at the Closing to Purchasers good and
marketable title to the Membership Interests, free and clear of all Liens. Company owns good and marketable title, free and
clear of all Liens, to all of the Acquired Assets, and all of such personal property is necessary or useful in the conduct of the
Business.
3.1.4. Financial Statements. The pro forma schedules of free cash flow of the Business for the seven-month period ended
January 31, 2002 (which includes a deduction for direct expenses related to the Business) (the "Pro forma Schedules") and the
estimated amounts thereof for the fiscal year ending June 30, 2002 have been provided to Purchasers. The Pro forma Schedules
have been based upon the information contained in PwC's and the Company's books and records (which are accurate and complete in
all material respects). The Pro forma Schedules have not been prepared in accordance with United States generally accepted
accounting principles.
3.1.5. Absence of Undisclosed Liabilities. As of the date of this Agreement, the Company does not have any liability of any nature
whatsoever, except for the Assumed Liabilities.
3.1.6. Absence of Certain Changes or Events. Since January 31, 2002 and except as set forth on Schedule 3.1.6 attached hereto or
as contemplated by this Agreement, (x) there have been no material adverse changes in the financial condition or results of
operations of the Business, and (y) the Business has been conducted in all material respects in the ordinary course.
3.1.7. Intellectual Property. Except as set forth on Schedule 3.1.7 attached hereto, the Business either owns or by license or
otherwise has the right to use all material Intellectual Property necessary to the conduct of the Business. To the knowledge of
PwC, the conduct of the Business by PwC does not currently infringe on any Intellectual Property of any other Person. Except as
otherwise noted in Schedule 3.1.7 attached hereto, as of the date of this Agreement, no Action is pending or, to the Knowledge of
PwC, has been threatened in writing against PwC, regarding the infringement by the Business of any Intellectual Property owned by
any other Person. To PwC's Knowledge, as of the date of this Agreement there is no current infringement or unauthorized use by
any other Person of any Intellectual Property of the Business.
3.1.8. Compliance With Law. Except as set forth on Schedule 3.1.8 attached hereto, the Business is currently being conducted in
compliance with applicable Legal Requirements. Company or PwC holds all Permits necessary for the lawful conduct of the Business
pursuant to all applicable Legal Requirements.
3.1.9. Litigation. Except as set forth on Schedule 3.1.9 attached hereto, as of the date of this Agreement, neither PwC nor
Company is a party to any pending or, to PwC's Knowledge, threatened Action in, for or by any Governmental Authority with respect
to the Business. Except as set forth on Schedule 3.1.9 attached hereto, with respect to the Business, PwC is not subject to any
decree, judgment, order or injunction of any Governmental Authority.
3.1.10. Tax Matters. Either PwC or Company has duly filed all federal, foreign, state and local tax information and tax returns of
any and every nature and description (the "Returns") required to be filed by it as a result of the Business (all such returns
being accurate and complete in all respects) and has duly paid or made provision for the payment of all taxes and other
governmental charges (including without limitation any interest, penalty or additions to tax thereto) which have been incurred or
are shown to be due on said Returns or are claimed in writing to be due from PwC or the Company or imposed on PwC's or the
Company's properties, assets, income, franchises, leases, licenses, sales or use, by any federal, state, local or foreign taxing
authorities (collectively, the "Taxes") on or prior to the date hereof, other than Taxes which are being contested in good faith
and by appropriate proceedings and as to which PwC or the Company has set aside on its books adequate reserves or which may be
attributable to the transactions contemplated hereby.
3.1.11. Contracts. Schedule 3.1.11 attached hereto sets forth a list as of the date of this Agreement of each (x) Contract that is
material to the Business and (y) Contract for the sale of services by the Business that PwC reasonably believes, based on
historical experience, will generate gross revenues of more than $30,000 during the 12-month period commencing on the date hereof
("Significant Contracts"). Except as set forth on Schedule 3.1.11 attached hereto, as of the date of this Agreement (x) neither
Members nor, to PwC's Knowledge, any other party to a Significant Contract is in breach of any Significant Contract and
(y) neither the execution of this Agreement by Members nor the consummation by Members of the transactions contemplated by this
Agreement requires the consent of any other party to a Significant Contract (other than Significant Contracts entered into in the
ordinary course of business that can be terminated without penalty by the customer on sixty (60) or fewer days' notice).
3.1.12. Labor.
(a) There is no material labor strike, organized work stoppage or lockout presently pending or, to the Knowledge of PwC,
threatened against the Business.
(b) To the Knowledge of PwC, there is no union organization campaign relating to any of the employees of the Business.
(c) There are no collective bargaining agreements or similar labor contracts binding upon Company on the date of this Agreement
in respect of employees of the Business.
(d) No partner, director or employee participating in the operation of the Business is subject to a non-competition agreement
except as provided in the Partners and Principals Agreement and any employment agreement with PwC, which restrictions shall be
waived upon the Closing.
(e) The Business has been and is currently being operated in material compliance with all applicable health and safety laws and
regulations.
3.1.13. Employee Benefit Plans. Except as disclosed on Schedule 3.1.13 attached hereto and other than Employee Benefit Plans in
which participation is made exclusively available to partners and principals of PwC, neither PwC nor Company, with respect to the
Business, maintains or contributes to (a) any employee pension benefit plan as defined in Section 3(2) of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), (b) any employee welfare benefit plan as defined in Section 3(1) of ERISA,
(c) any profit sharing, pension, deferred compensation, bonus, stock option, stock purchase, severance or incentive plan or
agreement, (d) any plan or policy providing for "fringe benefits" to its employees, including vacation, paid holidays, personal
leave, employee discount, educational benefit or similar programs, or (e) any other employment-related agreements, in any case
under which employees or former employees of the Business are eligible to participate or derive a benefit (collectively,
"Employee Benefit Plans").
3.1.14. Brokers and Finders. PwC has not retained any broker or finder in connection with transactions contemplated by this
Agreement.
3.1.15. Consents. The Consents Schedule attached hereto as Schedule 3.1.15 sets forth all governmental approvals or thirty-party
consents necessary for, or otherwise material to, the conduct of the Business. All such governmental approvals and consents have
been duly obtained and are in full force and effect, and Company or PwC is in compliance with each of such governmental approvals
and consents held by it with respect to the Acquired Assets and the Business.
3.1.16. Customers. The Company has delivered to Purchasers an accurate list (which is set forth on Schedule 3.1.16) of all
customers of Company and the Business during the past two (2) years, including any customers with respect to which any
transactions are pending as of the date hereof.
Article 4
REPRESENTATIONS AND WARRANTIES OF PURCHASERS.
Purchasers hereby represent and warrant to PwC as of the date of this Agreement that:
4.1 Organization and Authority. Each Purchaser is a corporation duly organized, validly existing and in good standing under
the laws of the State of Delaware. Each Purchaser has all necessary corporate power and authority to enter into and consummate
the transactions contemplated to be consummated by Purchasers pursuant to this Agreement and the Employment Agreements.
4.2 Authority Relating to This Agreement; Conflicts.
4.2.1. This Agreement has been duly executed and delivered by each Purchaser and the Employment Agreements contemplated hereby to
be executed and delivered by each Purchaser at the Closing will be duly executed by such Purchaser and so delivered at the
Closing. The execution and delivery of this Agreement and the Employment Agreements contemplated hereby to be executed and
delivered by each Purchaser at the Closing and the performance hereunder and thereunder by each Purchaser have been duly
authorized by all necessary corporate action on the part of such Purchaser and, assuming due execution of this Agreement by PwC,
Company and Key Management, and the Employment Agreements by Key Management, this Agreement constitutes and the Employment
Agreements will constitute, valid and binding obligations of Purchasers, enforceable against Purchasers in accordance with their
terms.
4.2.2. Neither the execution of this Agreement nor the consummation by Purchasers of the transactions contemplated hereby and
thereby will: (i) result in any violation of any Legal Requirement now in effect applicable to Purchasers; (ii) result in any
breach of any contract to which Purchasers are a party or by which any of their Assets are bound, with such exceptions as would
not reasonably be expected to have a material adverse effect on Purchasers' ability to consummate the transactions contemplated
hereby and by the Employment Agreements; (iii) require any Approval; or (iv) violate or conflict with any provisions of
Purchasers' Articles of Incorporation or Bylaws.
4.3 Litigation. Purchasers are not a party to any pending or, to Purchasers' Knowledge, threatened Action in, for or by any
Governmental Authority which could reasonably be expected to have a material adverse effect on the ability of Purchasers to
consummate the transactions contemplated by this Agreement and the Employment Agreements.
4.4 Brokers and Finders. Neither Purchasers nor any shareholder, director, officer employee, or agent of such Purchaser has
retained any broker or finder in connection with the transactions contemplated by this Agreement.
Article 5
CONDITIONS TO THE OBLIGATIONS OF PURCHASERS.
The obligation of Purchasers under this Agreement to consummate the Closing is subject to the fulfillment, prior to or at
the Closing, of each of the following conditions, each of which may be waived by Purchasers:
5.1 Representations and Warranties True at Closing. The representations and warranties of Members contained in this Agreement
shall be true and correct in all material respects at and as of the Closing Date (except to the extent such representations and
warranties specifically relate to an earlier date, in which case such representations and warranties shall be true and correct as
provided above as of such earlier date).
5.2 Covenants Performed by Members. Each of the covenants and agreements of Members contained in this Agreement to be performed
on or before the Closing Date shall have been duly performed in all material respects.
5.3 No Action to Prevent Completion. There shall not have been instituted and be continuing or threatened, in each case by any
Governmental Authority or arbitrator, any Action to restrain, prohibit or invalidate in any material respect, or to obtain
material damages in respect of, the transactions contemplated by this Agreement or the Employment Agreements. No decree,
judgment, order or injunction of any Governmental Authority having jurisdiction over the Business or Acquired Assets that
restrains, prohibits or invalidates in any material respect the transactions contemplated by this Agreement or the Employment
Agreements shall be in effect.
Article 6
CONDITIONS TO THE OBLIGATIONS OF PwC.
The obligation of PwC under this Agreement to consummate the Closing is subject to the fulfillment, prior to or at the
Closing, of each of the following conditions, each of which may be waived by PwC:
6.1 Representations and Warranties True at Closing. The representations and warranties of Purchasers contained in this
Agreement shall be true and correct in all material respects at and as of the Closing Date (except to the extent such
representations and warranties specifically relate to an earlier date, in which case such representations and warranties shall be
true and correct as provided above as of such earlier date).
6.2 Payment of Purchase Price. Members shall have received a confirmation of a wire transfer to the designated account of
Members for the amount of the Purchase Price in accordance with Section 2.6 hereof.
6.3 Covenants Performed by Purchaser. Each of the covenants and agreements of Purchasers contained in this Agreement to be
performed on or before the Closing Date shall have been duly performed in all material respects.
6.4 No Action to Prevent Completion. There shall not have been instituted and be continuing or threatened, in each case by any
Governmental Authority or arbitrator, any Action to restrain, prohibit or invalidate in any material respect, or to obtain
material damages in respect of, the transactions contemplated by this Agreement or the Employment Agreements. No decree,
judgment, order or injunction of any Governmental Authority having jurisdiction over the Business or Acquired Assets that
restrains, prohibits or invalidates in any material respect the transactions contemplated by this Agreement or the Employment
Agreements shall be in effect.
6.5 Partner Withdrawals. The Key Management shall have executed and delivered the Employment Agreements and documentation
satisfactory to PwC evidencing their withdrawal as partners of PwC.
Article 7
COVENANTS.
7.1 Purchasers' Access to Properties and Records. Throughout the period between the date of this Agreement and the Closing
Date, PwC shall (i) give to Purchasers and Purchasers' authorized representatives reasonable access, during normal business
hours, in such a manner as to not unduly disrupt the normal business activities of PwC, to any and all of the documents, books,
records, and personnel of the Business, (ii) furnish or shall cause to be furnished to Purchasers any and all financial,
technical and operating data and other information pertaining to the Business as Purchasers may from time to time reasonably
request, and (iii) provide or cause to be provided to Purchasers, at Purchasers' expense, such copies or extracts of documents
and records related to the Acquired Assets or Business as Purchasers reasonably may request. Notwithstanding anything in this
Section 7.1 to the contrary, PwC may limit such access described above to the extent that such access could, in the opinion of
PwC's counsel, violate or give rise to liability under applicable Legal Requirements or any contracts to which PwC is a party.
7.2 Conduct of the Business Prior to Closing Date. Between the date of this Agreement and the Closing, and except as otherwise
consented to by an officer of either Purchaser in writing or as permitted by this Agreement, PwC shall cause the Business to be
operated in the ordinary course consistent with past practices.
7.3 Satisfaction of Conditions. Each of Purchasers and Members shall in good faith use its respective reasonable efforts to
take or cause to be taken all actions within its power necessary to satisfy all conditions to its obligations to close and
consummate the transaction contemplated by this Agreement.
7.4 Cooperation. PwC, on the one hand, and Purchasers, on the other hand, will promptly give notice to the other upon becoming
aware that any Action is pending or threatened by or before any Governmental Authority, in each case with respect to the
transactions contemplated by this Agreement. PwC, on the one hand, and Purchasers, on the other hand, (i) will cooperate with
each other in connection with the prosecution, investigation or defense of any such Action, (ii) will supply promptly all
information reasonably and legally requested by the other, by any such Governmental Authority or by any party to any such Action
and (iii) will each use their reasonable efforts to cause any such Action to be determined as promptly as practicable and in a
manner which does not impact adversely on, and is consistent with, the transactions contemplated by this Agreement.
7.5 Notification of Certain Matters. Between the date hereof and the Closing, PwC and Purchasers will give prompt notice in
writing, including, in the case of a notice by PwC pursuant to clause (i) below that is relevant to a Schedule, a revised
Schedule, to the other of (i) any information that becomes known to PwC or Purchasers after the date of this Agreement that
indicates that any representation or warranty of Members or Purchasers, as the case may be, contained herein will not be true and
correct in a manner that would result in a failure of the condition herein specified in Section 5.1, in the case of a notice from
Members, or Section 6.1, in the case of a notice from Purchasers; and (ii) the occurrence after the date of this Agreement of any
event known to PwC or Purchasers which will result, or has a reasonable prospect of resulting, in the failure to satisfy a
condition specified in Article 5 (in the case of Members) or Article 6 (in the case of Purchasers) hereof.
In the case of a notice by PwC pursuant to clause (i) of the first sentence of the preceding paragraph that any
representation or warranty is untrue and such breach results in the failure of the condition contained in Section 5.1, unless prior
to the earlier of (x) the scheduled Closing or (y) 5:00 p.m. New York time, on the fifth Business Day following receipt of such
notice, Purchasers have exercised their rights set forth in Section 10.3 to terminate this Agreement based on such notice (and
revised Schedule, if applicable). Members shall be deemed to have cured the breach of a representation or warranty that otherwise
might have existed, such revised Schedules shall become the Schedules in effect for all purposes thereof and Purchasers shall be
deemed to have waived its right to terminate this Agreement pursuant to Article 10 as a result of such breach.
7.6 Access to Records. For a period of three (3) years after the Closing Date, upon reasonable prior written notice, each of
Purchasers and PwC shall furnish or cause to be furnished to each other and their employees, agents, auditors and representatives
access, during normal business hours, to such information, books and records relating to the Business as is reasonably necessary
for financial reporting and accounting matters, the preparation and filing of tax returns, reports or forms for the defense of
any tax claims, assessments, audits or disputes, or the prosecution or defense of any Action, provided that with respect to any
tax returns or other records relating to tax matters, PwC shall have reasonable access until the applicable statute of
limitations shall have expired. Except as otherwise provided in writing, each Party shall reimburse the other for reasonable
out-of-pocket costs and expenses incurred in assisting the other pursuant to this Section 7.6. Each Party shall have the right
to copy any of such records at its own expense. Purchasers shall retain such records with respect to the Business relating to
periods prior to the Closing Date for a minimum of seven years from the Closing Date. Neither Party shall be required by this
Section 7.6 to take any action that would unreasonably interfere with the conduct of its business or unreasonably disrupt its
normal operations.
7.7 Governmental Filings. Within five (5) Business Days after the date of this Agreement, Purchasers and PwC will prepare and
make their initial filings with any Governmental Authority whose acquiescence or consent is necessary in order for the
transactions hereby to be consummated. PwC and Purchasers will cooperate in responding promptly to any Second Request or other
request for further information from a Governmental Authority, and will in good faith promptly furnish all materials reasonably
required in connection with such filings and any other requests. Purchasers will in good faith use reasonable efforts to
demonstrate that the transactions contemplated hereby should not be opposed by such Governmental Authority, and shall use its
reasonable efforts to eliminate as promptly as practicable any objection any such Governmental Authority may have to the
transactions contemplated hereby. PwC and Purchasers (i) will jointly approve the content and manner of presentation of all
information to be provided to such Governmental Authorities in connection with such filings regarding markets and the relevant
industry and (ii) will consult with each other from time to time regarding the status of such filings and all strategies and
action taken in connection therewith.
7.8 Permits. Purchasers shall be responsible for obtaining Permits required in connection with or as a result of the
transactions contemplated hereby. PwC will reasonably cooperate with Purchasers in obtaining any such Permits.
7.9 Non-Solicitation of Clients. PwC acknowledges and agrees that for a period of two years following the Closing Date (the
"Non-Solicitation Period"), PwC shall not solicit any client set forth on Schedule 7.9 attached hereto to provide services
similar to those provided by the Business; provided that (i) nothing shall prevent PwC from providing services similar to those
provided by the Business both during and after the Non-Solicitation Period to a client that unilaterally requests such services
from PwC, and (ii) PwC may continue to solicit any clients to provide services similar to those provided by the Business both
during and after the Non-Solicitation Period to the extent that the engagements for those services are sourced by Bill Archer,
Mark McConaghy, Don Carlson or Don Longano. For the avoidance of doubt, Purchasers acknowledge that upon the expiry of the
Non-Solicitation Period, PwC may directly or indirectly solicit any client of the Business to provide services similar to those
provided by the Business. Subject to clause (ii) above, PwC will not openly market to clients or actively publicize its ability
to provide services similar to those provided by the Business for a period of six months commencing on the day after the Closing.
Article 8
EMPLOYMENT MATTERS.
8.1 Employees. Purchasers shall offer employment to all of the employees and principals of PwC employed in the Business
effective as of the Closing Date and as listed on Schedule 8.1. Such personnel who accept such employment (the "Affected
Employees") will be employed by Consulting or the Company with comparable compensation and benefits, in the aggregate, as such
Affected Employees received from PwC or the Company immediately prior to the Closing Date, but nothing herein contained shall be
deemed to create an employment contract between either Purchaser and/or any of its affiliates and any such Affected Employee
(other than the Employment Agreements). Purchasers shall have no liability for accrued wages (including salaries and
commissions), severance pay, sick leave or other benefits, or Employee Benefit Plans of any type or nature on account of PwC's
employment or the Company's employment prior to Closing of or termination of employment of such employees, and PwC shall
indemnify Purchasers and hold Purchasers harmless against liability arising out of any claims for such pay or benefits or any
other claims arising from PwC's employment of or termination of employment of such employees.
8.2 Employee Benefit Plans.
8.2.1. Purchasers shall establish, as of the date provided below, plans or programs to provide group life insurance and group
disability benefits as of the Closing Date, medical benefits as of April 1, 2002, vacation as of the Closing Date and other
welfare and fringe benefits as allowed for by the Purchasers' plans to the Affected Employees and their beneficiaries. The plan
or plans to be established by Purchasers shall (i) credit all service with PwC for all purposes under the new plans, including
eligibility, participation and benefit entitlement except this subparagraph (i) shall not apply to Purchasers' employee stock
purchase plan, (ii) waive as of the Closing any pre-existing condition limitation or exclusion which exists as of the Closing
Date with respect to any individual so long as such individual provides Purchasers a HIPPA certification of coverage, and (iii)
credit all payment made for healthcare expenses during the current plan year for purposes of deductibles, co-payments, and
maximum out-of-pocket limits. PwC agrees to provide any COBRA rights to the Affected Employees that they would normally receive
as departing employees of PwC.
8.2.2. PwC shall be responsible for providing any short-term disability benefits payable to any Affected Employee and any of the
Key Management with respect to any period prior to the Closing Date and Purchasers shall be responsible for providing any
short-term disability benefits payable to any Affected Employee and any of the Key Management with respect to any period on or
after the Closing Date and any long-term disability benefits payable to any such person so long as such Affected Employee is not
out on short-term disability or long-term disability as of the Closing Date.
8.2.3. PwC shall provide continuation coverage required by Section 4980B of the IRC or Sections 601 through 608 of ERISA ("COBRA")
to all Affected Employees and Key Management and their covered beneficiaries who are entitled to COBRA coverage with respect to
"qualifying events" (as defined in Section 4980B of the IRC) which are incurred prior to the Closing Date, and PwC agrees to pay
and be responsible for all liability, cost, expense, taxes and sanctions under Section 4980B of the IRC, and interest and
penalties imposed upon, incurred by, or assessed against Purchasers or PwC that arise by reason of or relate to any such failure
to comply with COBRA. Purchasers shall provide payment for any COBRA coverage with respect to any Affected Employees and Key
Management and their covered beneficiaries who are entitled to COBRA coverage with respect to "qualifying events" that are
incurred on or after the Closing Date. Purchasers shall deduct from Affected Employees' salaries the normal payroll deductions
which were deducted by PwC immediately prior to Closing until the Affected Employees are enrolled under Purchasers' plans.
Article 9
INDEMNITY.
9.1 Survival. The representations and warranties contained in Article 3 and Article 4 will terminate (together with the
indemnification obligations of Members and Purchasers under clause (i) of the first sentence of Sections 9.2 and 9.3,
respectively, in respect thereto) on, and be of no further force after, the eighteen-month anniversary of the Closing Date,
except that the representations and warranties contained in Sections 3.1.1, 3.1.2, 4.1 and 4.2 (and the corresponding
indemnification obligations under clause (i) of the first sentence of Sections 9.2 and 9.3) shall survive the Closing, without
limitation. All other representations and warranties contained in, and other provisions of, this Agreement will survive the
Closing in accordance with their terms.
9.2 Seller's Indemnity. If the Closing shall occur, Members shall indemnify and hold harmless Purchasers and each of
Purchaser's directors, officers and employees (collectively, the "Purchaser Indemnitees"), from and against any and all losses,
expenses, liabilities, obligations and judgments, including reasonable attorneys' fees ("Purchaser's Damages"), which arise out
of: (i) the breach of Members of any representation or warranty made by Members in Article 3 hereof; (ii) the non-performance of
any covenant or agreement of Members contained in this Agreement; (iii) any liability or obligation of PwC or the Company that is
not an Assumed Liability that is asserted against or incurred by a Purchaser Indemnitee or other liability relating to or arising
out of the operation of the Business prior to Closing; and (iv) any Action relating to or arising out of the operation of the
Business prior to the Closing.
Notwithstanding any other provision of this Agreement, the remedies provided for in this Section 9.2 shall constitute
Purchasers' sole and exclusive remedy against Members and its Affiliates with respect to breaches of representations, warranties,
covenants or agreements contained in or made pursuant to this Agreement, and except for the obligations of Members under this
Section 9.2, Members and their Affiliates shall have no liability for breaches of representations, warranties, covenants or agreements
contained in or made pursuant to this Agreement.
9.3 Purchaser's Indemnity. If the Closing shall occur, Purchasers shall indemnify and hold harmless PwC and each of PwC's
partners, principals, members, directors, officers and employees and the Members (collectively, the "Seller Indemnitees"), from
and against any and all losses, expenses, liabilities, obligations and judgments, including reasonable attorneys' fees ("Seller's
Damages" and when used together with or in the alternative to Purchaser's Damages, "Damages"), which arise out of: (i) the
breach by Purchasers of any representation or warranty made by Purchasers in Article 4 hereof; (ii) the non-performance of any
covenant or agreement of Purchasers contained in this Agreement; or (iii) any liability or obligation that is asserted against or
incurred by a Seller Indemnitee constituting Assumed Liabilities or relating to or arising out of the operation of the Business
after the Closing.
Notwithstanding any other provision of this Agreement, the remedies provided for in this Section 9.3 shall constitute PwC's
sole and exclusive remedy with respect to breaches of representations, warranties, covenants or agreements contained in or made
pursuant to this Agreement, and except for the obligations of Purchasers under this Section 9.3, Purchasers and their Affiliates
shall have no liability for breaches of representations, warranties, covenants or agreements contained in or made pursuant to this
Agreement.
9.4 Procedure. Any claim for indemnification under Section 9.2 or Section 9.3 will be made in accordance with this
Section 9.4. In the case of any claim for indemnification arising from a claim, action, suit, litigation, investigation or
proceeding made or brought by a third Person (a "Third Party Claim"), the party or parties making a claim for indemnification
("Indemnitee") will give prompt written notice, in no event more than ten (10) days following such Indemnitee's obtaining
knowledge of such Claim, to the indemnifying party ("Indemnitor") describing in reasonable detail the basis of the matter as to
which it will request indemnification hereunder, provided that the failure to notify or delay in notifying an Indemnitor as
provided in this sentence or the next sentence will not relieve the Indemnitor of its obligations pursuant to Section 9.2 or 9.3
above, as applicable, except to the extent that the Indemnitor is prejudiced thereby (it being understood that any claim for
indemnification pursuant to clause (i) of the first sentence of Section 9.2 or Section 9.3 above must be made by notice given as
provided in this sentence or the next sentence within the applicable survival period specified in Section 9.1 above). Any other
claim for indemnification will be made as promptly as practicable after the time the Indemnitee becomes aware of the facts
forming the basis of such claim. The Indemnitor will have the right to assume control of the defense and settlement of any such
Third Party Claim in its name or in the name of the Indemnitee, as appropriate, at the expense of the Indemnitor and with counsel
or other representatives selected by the Indemnitor; provided that the Indemnitor may not settle or compromise any such Third
Party Claim without the consent of the Indemnitee (which consent may not be unreasonably withheld); and further provided that the
Indemnitor (i) has a reasonable basis for concluding that such defense may be successful and (ii) diligently contests and defends
such Claim. Notice of the intention so to content and defend shall be given by the Indemnitor to the Indemnitee within twenty
(20) business days after Indemnitee's notice of such Claim. Such contest and defense shall be conducted by reputable attorneys
employed by the Indemnitor. The Indemnitor will not be responsible for any legal fees of the Indemnitee incurred in
investigating or defending such Third Party Claim after such time as the Indemnitor assumes control of the defense and settlement
of such claim. The Indemnitee will cooperate with the Indemnitor in the Indemnitor's defense and settlement of any such Third
Party Claim and make available its officers and employees and records (and those of its Affiliates), and the Indemnitee agrees to
promptly provide the Indemnitor with such information as to the defense of any such Third Party Claim as the Indemnitor shall
reasonably request. The Indemnitee will have the right to participate in (but not control) the defense of any Claim with counsel
of its choice employed by it at the expense of the Indemnitee. The Indemnitor will have no indemnification obligations with
respect to any Claim which is settled by the Indemnitee without the prior written consent of the Indemnitor (which consent may
not be unreasonably withheld). Any such Third Party Claim settled by the Indemnitee shall provide for the reasonable release of
the Indemnitor (and/or appropriate Affiliates) from liabilities in respect to the subject claim or demand (given against a
reasonable cross-release). Notwithstanding the foregoing, in the event that the Indemnitor fails or is not entitled to contest
and defend a claim, the Indemnitee shall be entitled to contest, defend and settle such Third Party Claim in accordance
herewith. In the event that any Indemnitor is obligated to indemnify any Indemnitee pursuant to this Article 9, the Indemnitor
will, upon payment of such indemnity, be subrogated to all rights of the Indemnitee with respect to claims to which such
indemnification relates.
9.5 Limitation on Indemnification. Notwithstanding any other provisions of this Agreement, the right of Purchaser Indemnitees
to indemnification for Purchaser's Damages or Seller Indemnification for Seller's Damage under Sections 9.2(i) and 9.3(i),
respectively, shall be subject to the following provisions:
(a) No indemnification shall be payable pursuant to clause (i) of the first sentence of Section 9.2 or 9.3 unless the total of
all Purchaser's Damages or Seller's Damages, as applicable, for which indemnification is otherwise required pursuant to such
clause shall exceed $100,000 in the aggregate, whereupon only the amount of such Purchaser's Damages, or Seller's Damages, as
applicable, in excess of the foregoing threshold amount shall be recoverable in accordance with the terms hereof; and
(b) In no event shall the liability of Members for indemnification under Section 9.2(i) exceed fifty percent (50%) of the
portion of the Purchase Price which such Member receives hereunder. In no event shall the liability of Purchasers for
indemnification under Section 9.3(i) exceed the Purchase Price.
The Parties acknowledge that there shall be no limit on indemnification under Sections 9.2(ii), (iii) or (iv) or Sections 9.3(ii) or
(iii).
9.6 Indemnification Claims Covered by Insurance and Tax Benefits. The amount of loss to which either party shall be entitled to
indemnification under this Article 9 shall be limited to the amount by which the losses exceed amounts received by an Indemnitee
under its insurance policies. The Indemnitee shall be obligated to file a good faith claim under its insurance policies so long
as the filing of such claim does not have an adverse effect on any insurance coverage, including but not limited to, an increase
in premium. In the event a claim for insurance is made and proceeds are received following a payment by an Indemnitee to an
Indemnitee for a claim for Damages (the "Indemnification Payment"), the Indemnitee shall remit to the other party the lesser of
(i) the Indemnification Payment, or (ii) an amount equal to such insurance proceeds. The Indemnification Payment shall also be
net of any tax benefits the Indemnitee is entitled to as a result of the Damages.
9.7 Contingent Consideration Set Off. Members agree that, in addition to any other rights or remedies available to Purchasers,
Purchasers may set off against any Contingent Consideration owed Members for any amounts owed Purchasers by Members under this
Agreement.
Article 10
TERMINATION.
10.1 Mutual Agreement. This Agreement may be terminated at any time prior to the Closing Date by the written agreement of
Members and Purchasers.
10.2 Termination by Either Purchasers or Members. This Agreement may be terminated by either Purchasers or Members if the
Closing Date has not occurred by March 31, 2002; provided, that no party may terminate this Agreement pursuant to this Section
10.2 if such party's failure to fulfill any of its agreements or covenants under this Agreement shall have been a principal
reason that the Closing Date shall not have occurred on or before said date.
10.3 Termination by Purchasers. This Agreement may be terminated by Purchasers by written notice to Members if any of the
conditions set forth in Section 5 become incapable of fulfillment on or prior to March 31, 2002, unless principally due to the
failure of Purchasers to perform or comply with any of the agreements or covenants contained herein to be performed or complied
with by it prior to the Closing.
10.4 Termination by Members. This Agreement may be terminated by Members by written notice to Purchasers if any of the
conditions set forth in Section 6 become incapable of fulfillment on or prior to March 31, 2002, unless principally due to the
failure of Members to perform or comply with any of the agreements or covenants contained herein to be performed or complied with
by it prior to the Closing.
10.5 Effect of Termination. In the event of termination of this Agreement pursuant to this Section 10, except with respect to
the provisions of this Section 10.5 and Article 11, which will survive any termination of this Agreement in accordance with their
terms, this Agreement will forthwith become null and void and no Party hereto nor any of their respective partners, principals,
officers, directors, employees, agents, consultants, members or stockholders shall have any obligations hereunder or with respect
to this Agreement, the transactions provided for herein, or the expenses incurred in connection with or in contemplation of such
transactions, except that no Party will be relieved of any obligation under this Section 10.5 and Article 11, or for liability
for the breach of any agreement or covenant of such Party contained in this Agreement occurring prior to termination.
Article 11
MISCELLANEOUS.
11.1 Assignment. This Agreement shall be binding upon and inure to the benefit of the successors and assigns of the Parties;
provided, that the rights and duties of Members or Purchasers under this Agreement may not be assigned without the prior written
consent of the other Party. Notwithstanding the foregoing, PwC or Purchasers may assign this Agreement to any of its respective
Affiliates or successors or any of its respective business units without the consent of the other Party.
11.2 Publicity. Neither Party shall issue a press release or otherwise publicize the transactions contemplated by this Agreement
or otherwise disclose the nature or contents of this Agreement on or prior to the Closing Date except as otherwise required by
applicable Legal Requirements; provided that each party will give the other a reasonable opportunity to consult regarding any
press release or other public statement with respect to the transaction contemplated under this Agreement which includes PwC's
name or the Purchasers' names other than any filing which is required under the Securities Laws.
11.3 Transfer Taxes. Any sales, use, or other transfer taxes arising out of or incurred in connection with the transactions
contemplated by this Agreement shall be paid by PwC.
11.4 Expenses. Except as provided in Section 11.3, each Party will pay its own costs and expenses, including legal and
accounting expenses, related to the transactions provided for herein, irrespective of when incurred and whether or not the
Closing occurs.
11.5 Further Assurances. Members and Purchasers each agrees to use all reasonable good faith efforts to take all actions and to
do all things necessary, proper or advisable to consummate the transactions contemplated hereby. Members will from time to time
subsequent to the Closing Date, at Purchasers' request and expense, execute and deliver such other instruments of conveyance,
assignment and transfer and take such other actions as Purchasers may reasonably request in order to more effectively to convey,
assign, transfer to and vest in Purchasers, the Acquired Assets and the right to operate the Business. Purchasers will from time
to time subsequent to the Closing Date, at PwC's request and expense, execute and deliver such other instruments of conveyance,
assignment and transfer and take such other actions as PwC may reasonably request in order to more effectively accomplish the
assumption of, and discharge PwC from responsibility for, the Assumed Liabilities.
11.6 Notices. Any notice or other communication required or permitted hereunder shall be in writing and shall be mailed by
overnight courier such as Federal Express, or delivered against receipt, as follows:
To Purchasers at: Clark/Bardes, Inc.
102 Wynstone Park Drive
North Barrington, Illinois 60610
Attention: Thomas Pyra, Chief Financial Officer
Phone: (847) 304-5800
Fax: (847) 304-5878
with a copy to: Vedder, Price, Kaufman & Kammholz
222 North LaSalle Street
Chicago, Illinois 60601
Attention: Lane R. Moyer, Esq.
Phone: (312) 609-7500
Fax: (312) 609-5005
To PwC at: PricewaterhouseCoopers LLP
1301 Avenue of the Americas
New York, NY 10019
Attention: Chief Financial Officer
with a copy to: PricewaterhouseCoopers LLP
1301 Avenue of the Americas, 6th Floor
New York, NY 10019
Attention: General Counsel
To Kies at: Kenneth J. Kies
6109 Franklin Park Road
McLean, VA 22101
To Raffaniello at: Patrick J. Raffaniello
1161 Old Gate Court
McLean, VA 22102
or to such other address as a Party has designated by notice in writing to the other Party in the manner provided by this Section.
Any notice or other communication shall be deemed to have been given, made and received upon receipt; provided, that any notice or
communication that is received other than during regular business hours of the recipient shall be deemed to have been given at the
opening of business on the next Business Day of the recipient. A Party may change the address to which notices are to be addressed
by giving the other Party notice in the manner herein set forth.
11.7 Entire Agreement and Modification; Waiver.
(a) This Agreement and the Employment Agreements constitute and contain the entire agreement of the Parties with respect to the
subject matter hereof and supersede any and all prior negotiations, correspondence, understandings and agreements between the
Parties respecting the subject matter hereof. This Agreement may only be amended by written instrument signed by the Parties.
Members have not made and do not make any representations or warranties other than those expressly contained herein.
(b) No breach of any covenant, agreement, representation or warranty made herein shall be deemed waived unless expressly waived
in writing by the Party who might assert such breach. The waiver by any Party hereto of a breach of any term or provision of
this Agreement will not be construed as a waiver of any subsequent breach.
11.8 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware,
without regard to any Legal Requirement that would result in the application of the laws of another jurisdiction.
11.9 Severability. If any provision of this Agreement is held to be unenforceable for any reason, all other provisions of this
Agreement shall be deemed valid and enforceable to the fullest extent possible.
11.10 Headings. The headings appearing at the beginning of the several sections contained herein have been inserted for the
convenience of the Parties and shall not be used to determine the construction or interpretation of this Agreement.
11.11 Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, but both of which
when taken together shall constitute one and the same instrument.
11.12 Third Party Beneficiaries. This Agreement is for the sole benefit of the Parties hereto and their permitted assigns and
successors, and it is not the intention of the Parties to confer third party rights upon any other Person. Notwithstanding the
foregoing, the rights of Purchaser Indemnitees and Seller Indemnitees under Article 9 may be enforced by Purchasers and Members,
respectively, on their behalf.
11.13 Representations and Warranties. Neither the specification of any dollar amount in the representations and warranties set
forth in Articles 3 and 4 nor the indemnification provisions of Article 9 nor the inclusion of any items in any Schedule to this
Agreement will be deemed to constitute an admission by Members or Purchasers, or otherwise imply, that any such amount or the
items so included are material for the purposes of this Agreement.
11.14 Arbitration. Any controversy or claim arising out of or relating to this Agreement shall be submitted to arbitration by
either Party hereto in accordance with the rules of the American Arbitration Association for Commercial Arbitration, and judgment
upon the award rendered by the arbitrators may be entered in any court having proper jurisdiction. The parties to any such
arbitration shall share equally the cost of the arbitrators, but shall each bear its own legal, accounting and similar fees and
expenses; provided, however, that the arbitrators shall require the party or parties, if any, not prevailing in such arbitration
to pay all costs of the arbitrators and to reimburse the prevailing party or parties, if any, for their legal, accounting and
similar fees and expenses in connection with the arbitration. Such arbitration and determination shall be final and binding on
the Parties. Such arbitration shall be held in New York, New York, or such other location as the Parties may agree.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first above set forth.
CLARK/BARDES CONSULTING, INC. PRICEWATERHOUSECOOPERS LLP
By: By:
Title: Title:
CLARK/BARDES, INC.
By: Kenneth J. Kies
Title:
FTPG LLC
By: Patrick J. Raffaniello
Title:
Exhibit 10.2
CLARK/BARDES CONSULTING, INC.
Execu-FLEX BENEFIT PLAN
(Restated Effective as of June 1, 2001)
Article 1
The Plan
1.1 Name/Restatement Date. CLARK/BARDES, INC. (formerly Clark/Bardes Holdings, Inc.) sponsors the Execu-FLEX Benefit Plan
(the "Plan"), originally effective as of January 1, 2000. CLARK/BARDES, INC. desires to and does hereby transfer the sponsorship of
the Plan to the subsidiary that employs the participants under the Plan, CLARK/BARDES CONSULTING, INC. (the "Company"). The Company
has the right to amend the Plan, and exercises its right by restating the Plan and its Exhibits A, B, C and D to reflect its
sponsorship of the Plan, and to make other modifications to the Plan.
1.2 Adoption by Affiliates. With the consent of the Company, this Plan may be adopted by an Affiliate (defined below) for
the benefit of such of its employees as the Affiliate shall designate.
1.3 Purpose. The Company sponsors the Plan to provide designated executives with a reasonable level of benefits, while
providing those employees with a greater choice of benefits. It is intended that the benefits under this Plan will be nontaxable or
tax-deferred under the provisions of the Internal Revenue Code of 1986, as amended.
Article 2
Definitions
Whenever used in the Plan, the following words and phrases shall have the meanings set forth below unless the context plainly
requires a different meaning. When the defined meaning is intended, the term is capitalized:
2.1 "Affiliate" means an entity that is related to the Company through ownership and/or control. If an Affiliate adopts
this Plan, the term "Company," as used in this Plan, shall mean such Affiliate, unless the context clearly indicates otherwise.
2.2 "Cash Compensation" means the Participant's actual total cash compensation from the Company. Cash Compensation shall
not be reduced for any salary reduction contributions (i) to deferred arrangements under Section 401(k) of the Code, (ii) to a
cafeteria plan under Section 125 of the Code, or (iii) to any other nonqualified deferred compensation plan. Cash Compensation shall
not take into account any reimbursed expenses, credits or benefits (including benefits under any plan of deferred compensation), or
any additional cash compensation or compensation payable in a form other than cash.
2.3 "Code" means the Internal Revenue Code of 1986, as amended. References to a Code section shall be deemed to be to that
section as it now exists and to any successor provision.
2.4 "Distribution Date" means the distribution date elected by the Participant for each Capital Accumulation Account credit
under Section 6.4.
2.5 "Entry Date" for any Participant means the first day of the calendar month closest to his or her being named a
Participant and providing to the Company all enrollment materials.
2.6 "FLEX Allowance" means the credits available to a Participant for obtaining Flexible Benefits under this Plan. The FLEX
Allowance shall be expressed as a dollar amount, but may be used only to obtain Flexible Benefits under this Plan.
2.7 "Flexible Benefit" means a benefit available to a Participant through this Plan. Flexible Benefits are described in
Article 6.
2.8 "Flexible Benefit Charge" means the charge to the FLEX Allowance for a Flexible Benefit selected by a Participant under
this Plan. Flexible Benefit Charges are described in Article 6.
2.9 "Participant" means only a key employee of the Company who (i) is specifically designated as a Participant by the
Company and listed on Schedule 1 to the Plan, and (ii) qualifies as a member of the "select group of management or highly compensated
employees" for purposes of the Employee Retirement Income Security Act of 1974.
2.10 "Plan Year" means each 12-month period ending December 31.
2.11 "TVM" (meaning time value of money) for each Plan Year means the rate determined by the Chief Financial Officer of the
Company as of the first day of such Plan Year. For the Plan Year beginning January 1, 2001, the TVM shall be 6.0%.
2.12 "Year of Service" means each consecutive 12-month period of employment with the Company. For an individual who became
an employee of the Company upon the Company's acquisition of the individual's former employer, Years of Service shall include the
period of service with the former employer.
Article 3
Participation
Each Participant shall be eligible to participate in and receive benefits under this Plan as of his or her Entry Date.
Participation shall continue until the Participant terminates employment with the Company, continues employment with the Company but
not in a position covered by the Plan, or is not designated as a Participant by the Company for a Plan Year. To participate in and
receive benefits under this Plan, each Participant agrees to observe all rules and regulations established by the Company for
administering the Plan and shall abide by all decisions of the Company in the construction and administration of the Plan.
Article 4
FLEX Allowance
4.1 FLEX Allowance. The FLEX Allowance for the Plan Year commencing on January 1, 2001, and for each Plan Year thereafter
until changed by the Company, shall be $15,000. The Company can change the FLEX Allowance each Plan Year by written notice to each
Participant. The Company can designate a different FLEX Allowance for designated Participants from time to time.
4.2 Pro Ration - First Year. If a Participant's Entry Date does not coincide with the beginning of a Plan Year, the
Participant's FLEX Allowance for his or her first Plan Year of participation shall be prorated based on the ratio of (a) the number
of full calendar months remaining in the Plan Year as of his or her Entry Date, to (b) 12.
4.3 Pro Ration - Change in Position, Termination. If, during a Plan Year, a Participant's position within the Company is
changed to one not covered by the Plan, or if the Participant terminates employment, the Participant's FLEX Allowance for such Plan
Year shall be prorated based on the ratio of (a) the number of full calendar months from the beginning of the Plan Year to the
beginning of the calendar month closest to the change of position or termination of employment, to (b) 12. Any FLEX Allowance that
has been expended by the Company that is determined not to be available and that cannot be recovered by the Company (by accounting
entry or otherwise) under the Plan shall be subtracted from the cash compensation otherwise payable to the Participant.
Article 5
Flexible Benefit Elections
5.1 Benefit Elections. For each Plan Year in which a Participant is eligible to participate in this Plan, he or she shall
make a benefit election to apply the FLEX Allowance, in such proportions as the Participant chooses, to purchase Flexible Benefits
available under the Plan. Elections shall be made immediately following the Participant's Entry Date, and prior to the beginning of
each subsequent Plan Year at a time designated by the Company. A Participant's benefit election shall be valid and acceptable to the
Company only if the Flexible Benefit Charges for Flexible Benefits selected by the Participant do not exceed the FLEX Allowance
available to the Participant. Except as may be expressly permitted by the Company under uniform rules applicable to all
Participants, a Participant's benefit election for any Plan Year shall be irrevocable.
5.2 Automatic Election. If any FLEX Allowance is not specifically allocated by the Participant, the Company shall credit
such amount to a Capital Accumulation Account described in Section 6.4 with a Distribution Date occurring on the date on which the
Participant terminates employment with the Company.
5.3 Insured Benefit Underwriting. An election of an insured benefit shall not be effective until the applicable insurance
policy is issued with underwriting acceptable to the Company, and the first premium has been paid. If acceptable underwriting is not
available from the carriers providing products under this Plan for other Participants, the FLEX Allowance allocated by the
Participant for the purchase of such insured benefit shall be applied among the other Flexible Benefits as determined by the
Participant within 10 days after receiving notice of the unavailability of the insured benefit.
Article 6
Flexible Benefits
6.1 In General. A Participant may apply the FLEX Allowance to obtain the Flexible Benefits described in this Article 6.
6.2 Long-Term Disability Coverage
6.2.1 Description. A Participant may elect to apply his or her FLEX Allowance to obtain long-term disability
insurance coverage under an individual policy made available by the Company.
6.2.2 Flexible Benefit Charge. The Flexible Benefit Charge for long-term disability coverage shall be the premium
paid by the Company for such coverage, less a Company-determined credit for withdrawing from the Company-sponsored group
disability plan (if applicable), and less any portion of such premium for which the Participant reimburses the Company from
after-tax income, as provided in Exhibit A.
6.2.3 Disability Plan. The rights and obligations of the Participant and the Company in connection with the
disability coverage are contained in the Individual Long-Term Disability Plan attached as Exhibit A.
6.3 Family Supplemental Survivor Benefits
6.3.1 Description. For elections under Section 5.1 that were effective as of January 1, 2000, a Participant could
elect for such Plan Year to apply his or her FLEX Allowance to obtain (i) individual supplemental survivor benefits,
(ii) spouse survivor benefits, and/or (iii) joint survivor benefits. Participants who elected spouse or joint survivor
benefits as of such date and who continue to participate in this Plan may elect to continue such benefits under the terms
described below. For all other elections that are effective on or after January 1, 2001, a Participant may elect to apply his
or her FLEX Allowance only to obtain individual supplemental survivor benefits. Unless otherwise designated by the Company for
select Participants, the Participant's maximum aggregate survivor benefit under such options shall be an amount based on the
Participant's Cash Compensation for the 12-month period preceding the first day of the Plan Year in which the benefits are
first elected, as follows:
--------------------------------------------- -----------------------------------------
Cash Compensation Maximum Aggregate Benefit
============================================= =========================================
============================================= =========================================
Under $150,000 $300,000
--------------------------------------------- -----------------------------------------
--------------------------------------------- -----------------------------------------
$150,000 to $199,999 $400,000
--------------------------------------------- -----------------------------------------
--------------------------------------------- -----------------------------------------
$200,000 to $249,999 $500,000
--------------------------------------------- -----------------------------------------
--------------------------------------------- -----------------------------------------
$250,000 to $299,999 $600,000
--------------------------------------------- -----------------------------------------
--------------------------------------------- -----------------------------------------
$300,000 to $399,999 $750,000
--------------------------------------------- -----------------------------------------
--------------------------------------------- -----------------------------------------
$400,000 or more $1,000,000
--------------------------------------------- -----------------------------------------
The benefits are provided through split-dollar life insurance arrangements. The actual benefits payable under this Section may
be different than the benefits initially elected, depending on the performance of the underlying life insurance policies. The
policies' performance depends on investment decisions made by the Participant or his or her designee with respect to the
policies' cash values.
6.3.2 Flexible Benefit Charge. The Flexible Benefit Charge for each Plan Year for which a Participant elects to
receive survivor benefits shall equal (a) the aggregate actual premiums paid by the Company for the benefits from the
commencement of the contracts, reduced by any portion thereof paid or reimbursed by the Participant, (b) multiplied by the TVM
for the Plan Year. If the Company's sponsorship of the benefits continues post-termination (as provided in Exhibit B), the TVM
charge shall not apply post-termination.
6.3.3 Benefit Election Restrictions. The policies by which the Company makes the survivor benefits available to a
Participant anticipate that the Participant will continue to elect such survivor benefits until the Participant's termination
of employment. However, the Participant may elect to terminate any survivor benefit anytime the cash surrender value of the
policy equals or exceeds the aggregate Company and Participant premiums paid on the policy. Each survivor benefit shall also
terminate if the insured qualifies for, and the Owner (as defined in Exhibit B) of the life insurance contract elects to take
advantage of, benefits under the contract's "Living Needs Benefit" provisions, if any.
6.3.4 Split Dollar Plan. The rights and obligations of the Participant and the Company in connection with the
survivor benefits are contained in the Family Supplemental Survivor Benefit Split Dollar Plan attached as Exhibit B.
6.4 Capital Accumulation Account. A Participant may elect to have the FLEX Allowance credited to a Capital Accumulation
Account as described below. For each such credit, the Participant shall designate a Distribution Date within the parameters in
Exhibit C.
6.4.1 Description. The rights and obligations of the Participant and the Company with regard to the Participant's
Capital Accumulation Account are set forth in Exhibit C.
6.4.2 Flexible Benefit Charge. The Flexible Benefit Charge for credits under the Capital Accumulation Account shall
equal the amount of such credits elected by the Participant.
6.5 Long-Term Care Coverage
6.5.1 Description. A Participant may elect to apply his or her FLEX Allowance to obtain long-term care insurance
coverage made available by the Company for the Participant or the Participant's spouse.
6.5.2 Flexible Benefit Charge. The Flexible Benefit Charge for long-term care coverage shall be the premium paid by
the Company for such coverage.
6.5.3 Long-Term Care Plan. The rights and obligations of the Participant and the Company in connection with the
long-term care coverage are contained in the Long-Term Care Plan attached as Exhibit D.
Article 7
Claims and Review Procedures
7.1 Claims Procedure. The Company shall notify a Participant in writing, within 90 days after his or her written
application for benefits, of his or her eligibility or noneligibility for benefits under the Plan. If the Company determines that a
Participant is not eligible for benefits or full benefits, the notice shall set forth (1) the specific reasons for such denial, (2) a
specific reference to the provisions of the Plan on which the denial is based, (3) a description of any additional information or
material necessary for the claimant to perfect his or her claim, and a description of why it is needed, and (4) an explanation of the
Plan's claims review procedure and other appropriate information as to the steps to be taken if the Participant wishes to have the
claim reviewed. If the Company determines that there are special circumstances requiring additional time to make a decision, the
Company shall notify the Participant of the special circumstances and the date by which a decision is expected to be made, and may
extend the time for up to an additional 90-day period.
7.2 Review Procedure. If a Participant is determined by the Company not to be eligible for benefits, or if the Participant
believes that he or she is entitled to greater or different benefits, the Participant shall have the opportunity to have such claim
reviewed by the Company by filing a petition for review with the Company within 60 days after receipt of the notice issued by the
Company. Said petition shall state the specific reasons which the Participant believes entitle him or her to benefits or to greater
or different benefits. Within 60 days after receipt by the Company of the petition, the Company shall afford the Participant (and
counsel, if any) an opportunity to present his or her position to the Company orally or in writing, and the Participant (or counsel)
shall have the right to review the pertinent documents. The Company shall notify the Participant of its decision in writing within
the 60-day period, stating specifically the basis of its decision, written in a manner calculated to be understood by the Participant
and the specific provisions of the Plan on which the decision is based. If, because of the need for a hearing, the 60-day period is
not sufficient, the decision may be deferred for up to another 60-day period at the election of the Company, but notice of this
deferral shall be given to the Participant. In the event of the death of a Participant, the same procedures shall apply to the
Participant's beneficiaries.
Article 8
Administration and Finances
8.1 Administration. Unless otherwise determined by the Company's Board of Directors ("Board"), the Company's Chief
Executive Officer ("CEO") or his or her designee shall be the named fiduciary and shall act for the Company under this Plan, except
with respect to the CEO's participation, in which case the Board or its designee shall be the named fiduciary and act for the Company.
8.2 Powers of the Company. The Company shall have all powers necessary to administer the Plan, including, without
limitation, powers:
8.2.1 to interpret the provisions of the Plan;
8.2.2 to establish and revise the method of accounting for the Plan and to maintain the accounts; and
8.2.3 to establish rules for the administration of the Plan and to prescribe any forms required to administer the
Plan.
8.3 Actions of the Company. All determinations, interpretations, rules, and decisions of the Company shall be conclusive
and binding upon all persons having or claiming to have any interest or right under the Plan.
8.4 Delegation. The Company shall have the power to delegate specific duties and responsibilities to officers or other
employees of the Company or other individuals or entities. Any delegation by the Company may allow further delegations by the
individual or entity to whom the delegation is made. Any delegation may be rescinded by the Company at any time. Each person or
entity to whom a duty or responsibility has been delegated shall be responsible for the exercise of such duty or responsibility and
shall not be responsible for any act or failure to act of any other person or entity.
8.5 Reports and Records. The Company and those to whom the Company has delegated duties under the Plan shall keep records
of all their proceedings and actions and shall maintain books of account, records, and other data as shall be necessary for the
proper administration of the Plan and for compliance with applicable law.
8.6 Finances. The costs of the Plan shall be borne by the Company, except as otherwise provided herein.
Article 9
Amendments and Termination
9.1 Amendments. The Company may amend the Plan, in full or in part, at any time and from time to time, provided that any
such amendment shall not affect FLEX Allowance earned and allocated by a Participant prior to the effective date of such amendment
unless the Participant consents in writing to such amendment. Any amendment shall be filed with the Plan documents maintained by the
Company.
9.2 Termination. The Company may terminate the Plan at any time. In the event of a Plan termination, the rights of the
parties with respect to any Flexible Benefit under this Plan shall be as set forth in Article 6 and in any applicable exhibits. In
the absence of any such provision, a Participant shall be entitled to no benefits after the termination of this Plan. Except as
expressly provided in this Plan, neither the Company nor any of its employees shall have any further financial obligations hereunder
after the termination of the Plan.
Article 10
Miscellaneous
10.1 No Guaranty of Employment. The adoption and maintenance of the Plan shall not be deemed to be a contract of employment
between the Company and any Participant. Nothing contained herein shall give any Participant the right to be retained in the employ
of the Company or to interfere with the right of the Company to discharge any Participant at any time, nor shall it give the Company
the right to require any Participant to remain in its employ or to interfere with the Participant's right to terminate employment at
any time.
10.2 Limitation on Liability. The Company does not guarantee benefits payable under any insurance policy or other similar
policy described or referred to herein, and any benefits thereunder shall be the exclusive responsibility of the insurer or other
entity that is required to provide such benefits under such contract or policy.
10.3 Benefits Provided Through Third Parties. In the case of any benefit provided through a third party, such as an
insurance company, pursuant to a contract or policy with such third party, if there is any conflict or inconsistency between the
description of benefits contained in this Plan and such contract or policy, the terms of such contract or policy shall control.
10.4 Non-Alienation. Except for transfers, without consideration and for estate planning purposes, of interests in a split
dollar plan and any underlying policy, no benefit payable at any time under this Plan shall be subject in any manner to alienation,
sale, transfer, assignment, pledge, attachment, or encumbrance of any kind.
10.5 Transfers Among Entities. Any Participant who, with the Company's written consent, transfers employment (i) from the
Company to an Affiliate, (ii) from an Affiliate to the Company, or (iii) from an Affiliate to another Affiliate shall not be deemed
to have terminated employment for any purpose under this Plan.
10.6 Exclusive Benefit. The Plan shall be maintained for the exclusive benefit of the Participants and their beneficiaries.
10.7 Notice. The Company shall provide each Participant with reasonable notice of the benefits available under this Plan.
10.8 Participant Rights. In consideration of the Participants' continuing their employment with the Company following their
receipt of notice of eligibility to participate in this Plan, the Company intends to provide the Participants with legally
enforceable rights to their benefits in accordance with the terms of this Plan, subject to the Company's right to amend or terminate
such benefits under Article 9.
10.9 Assignment to Successor. The Company shall assign its rights and obligations under this Plan to any successor
organization resulting from a merger, acquisition or affiliation involving the Company, or resulting from a sale of substantially all
of the Company's assets. Such an assignment shall not be considered to be a termination of the Plan by the Company, or a termination
of employment of any Participant who continues as an employee of the successor organization.
10.10 Applicable Law. The Plan and all rights hereunder shall be governed by and construed according to the laws of
Illinois, except to the extent such laws are preempted by the laws of the United States of America.
CLARK/BARDES CONSULTING, INC.
By _____________________________
Title _________________________
ATTACHMENT 1
SCHEDULE OF PARTICIPANTS
ADDENDUM TO ATTACHMENT 1
Dated as of ________________
SCHEDULE OF PARTICIPANTS
Additions:
Deletions:
EXHIBIT A
CLARK/BARDES CONSULTING, INC.
INDIVIDUAL LONG-TERM DISABILITY PLAN
Article 1
The Plan
1.1 General. Individual long-term disability insurance benefits elected by the Participant pursuant to Section 6.2 of the
CLARK/BARDES CONSULTING, INC. Execu-FLEX Benefit Plan (the "Plan") shall be governed by the terms of this Exhibit A, in addition to
the other terms of the Plan. This Exhibit A shall apply separately to each Participant. No benefits shall be payable for
disabilities arising before the Policy (defined below) has been issued with underwriting acceptable to the Company.
1.2 Definitions. Except as otherwise defined below, and unless the context plainly requires a different meaning, the words
and phrases contained in this Exhibit A shall have the meanings set forth in the Plan. When the defined meaning is intended, the
term is capitalized:
1.2.1 "Insurer" means the insurance company or companies selected by the Company, in its sole discretion, to provide
individual long-term disability insurance coverage for a Participant. The Company may elect to select multiple Insurers under
this Plan.
1.2.2 "Policy" means the long-term disability insurance policy issued by the Insurer for a Participant, together with
any supplementary contracts to the Policy issued by the Insurer.
1.2.3 "Premium Year" means the balance of the Plan Year in which the Policy is issued, and each subsequent Plan Year.
1.2.4 "Termination of Participation" means the date the Participant ceases to participate in the Individual Long-Term
Disability Plan under this Exhibit A, as described in Section 4.1.
Article 2
Policy Underwriting/Issuance
2.1 Insurance Policy. The Company shall assist the Participant in applying for issuance of a Policy providing a level of
coverage and such other provisions as determined by the Company.
2.2 Acceptable Underwriting. If the Insurer offers to issue a Policy with standard underwriting, the Company shall instruct
the Insurer to issue the Policy with the Participant as the named owner.
2.3 Rated Underwriting. If the Insurer offers to issue a Policy with a rating other than standard, the Company shall
communicate the rated offer to the Participant. The Participant shall then elect whether to have the Policy issued with such
rating. If the Participant elects to have the rated policy issued, the Company shall instruct the Insurer to issue the Policy with
the Participant as the named owner. If the Participant elects not to have the Policy issued, then under Article 5 of the Plan the
Participant shall allocate to other Flexible Benefits the FLEX Allowance originally allocated to the disability insurance Policy.
2.4 Decline to Issue. If the Insurer declines to offer to issue a Policy, then under Article 5 of the Plan the Participant
shall allocate to other Flexible Benefits the FLEX Allowance originally allocated to the disability insurance Policy.
2.5 Optional Riders. If the Policy is issued, the Participant shall elect whether to have the Policy issued with any
optional coverages or benefits available under the Policy.
Article 3
Premium Payments
3.1 Premium Payments. The Company shall pay the premium on the Policy each Premium Year (including premiums for optional
coverages or benefits elected under Section 2.5) from the date of issuance to the date of the Participant's Termination of
Participation.
3.2 After-Tax Contributions. At the beginning of each Plan Year, the Participant can elect in writing to reimburse the
Company for all or a portion of the premium on the Policy for such Plan Year from after-tax income so that benefits the Insurer pays
under the Policy are partially or completely free of income tax. The charge to the FLEX Allowance shall be correspondingly reduced.
The Participant's reimbursement shall be through payroll deduction over such Plan Year. The Company does not warrant that any
portion of the benefits will be received free of income tax.
Article 4
Termination of Participation
4.1 Events of Termination of Participation. The Participant's Termination of Participation occurs on the earliest of the
following events:
4.1.1 The termination of the Participant's employment for any reason;
4.1.2 The Participant's change to a position not covered by the Plan;
4.1.3 The Participant's failure to elect continuing premium payments under the Plan; or
4.1.4 The Company's termination of the Plan.
4.2 Mid-Year Terminations. If a Participant's Termination of Participation occurs after the Company has paid a premium on
the Policy but before the end of the coverage period supported by such premium, the Participant shall reimburse the Company (through
deductions from final compensation or otherwise) for the pro rata portion of such premium representing the portion of the coverage
period occurring after the Termination of Participation, calculated from the first day of the month closest to the Participant's
Termination of Participation. Such reimbursement shall take into account any portion of such premium paid by the Participant from
after-tax income.
Article 5
Insurer
The Insurer shall be bound only by the provisions of the Policy. The Insurer shall in no way be bound by or be deemed to have
notice of the provisions of this Plan.
[End of Exhibit A]
EXHIBIT C
CLARK/BARDES CONSULTING, INC.
CAPITAL ACCUMULATION ACCOUNTS
Article 1
General/Definitions
1.1 General. A Capital Accumulation Account established for a Participant pursuant to Section 6.4 of the CLARK/BARDES
CONSULTING, INC. Execu-FLEX Benefit Plan (the "Plan") shall be governed by the terms of this Exhibit C, in addition to the other
terms of the Plan.
1.2 Definitions. Except as otherwise defined below, and unless the context plainly requires a different meaning, the words
and phrases contained in this Exhibit C shall have the meanings set forth in the Plan. When the defined meaning is intended, the
term is capitalized:
1.2.1 "Capital Accumulation Account" means each account maintained on the books of the Company for each Participant,
as described in Article 2, below.
1.2.2 "Capital Accumulation Account Benefit" means the benefit described in Article 3 for each Capital Accumulation
Account.
1.2.3 "Distribution Date" means the distribution date elected by the Participant for each Capital Accumulation
Account credit. The Distribution Date shall be at least two years after the first day of the Plan Year for which such election
is made, or in the case of a Participant who enters the Plan in the middle of the Plan Year, two years after the Participant's
Entry Date. The Participant may elect to postpone the original Distribution Date for each Capital Accumulation Account one
time by selecting a new Distribution Date which is at least two years after the original Distribution Date. To be effective, a
postponement must be communicated to the Company in writing at least one year prior to the original Distribution Date.
1.2.4 "Investment Option" means the alternative investment vehicles designated by the Company under Article 4 for
determining the Investment Return.
1.2.5 "Investment Return" means the amount credited to the Capital Accumulation Account as specified under Article 4.
1.2.6 "Termination of Employment" means the Participant's ceasing to be employed by the Company for any reason
whatsoever, voluntary or involuntary, including by reason of death or disability.
Article 2
Capital Accumulation Account
2.1 Establishing Accounts. The Company shall establish a Capital Accumulation Account on its books for each Participant for
each election of Capital Accumulation Account Benefits, and shall credit the following amounts to each Capital Accumulation Account:
2.1.1 FLEX Allowance. The Company shall credit to the Capital Accumulation Account at the time or times designated
by the Company during the Plan Year 100% of the FLEX Allowance the Participant elected to apply toward Capital Accumulation
Account Benefits (and any portion of the FLEX Allowance the Participant does not utilize for any other purpose when making an
annual election under the Plan) for such Plan Year. If the Participant terminates employment during a Plan Year, the Company
shall increase or decrease the Capital Accumulation Account balance as of the date of termination so that the credit for such
Plan Year reflects only the months of the Plan Year during which the Participant was employed by the Company.
2.1.2 Investment Return. At the time or times designated by the Company during the Plan Year, and as of the date
Capital Accumulation Account Benefits are payable, the Company shall credit the Investment Return on the Capital Accumulation
Account accrued since the immediately preceding crediting of Investment Return, as determined under Article 4.
2.2 Determination of Accounts. Each Capital Accumulation Account as of the last day of each Plan Year and as of the date
Capital Accumulation Account Benefits are payable shall consist of the amounts credited to such Account by the Company pursuant to
Section 2.1, less the amount of any distributions made from such Account.
2.3 Statement of Accounts. The Company shall provide to each Participant, within 120 days after the close of each Plan
Year, a statement in such form as the Company selects setting forth the balance in his or her Capital Accumulation Account(s) as of
the last day of the Plan Year just ended.
2.4 Accounting Device Only. A Capital Accumulation Account shall be utilized solely as a device for the measurement and
determination of the amounts to be paid to the Participant under this Plan. The Participant is a general unsecured creditor of the
Company for the payment of Capital Accumulation Account benefits. The benefits represent the mere promise by the Company to pay such
benefits.
Article 3
Payment of Benefits
3.1 Entitlement to Benefit. A Participant's Capital Accumulation Account Benefit is the balance in the Capital Accumulation
Account as of the date the Participant (or the Participant's beneficiary, if applicable, as described in Section 3.3.1) becomes
entitled to such benefit. The Participant shall be entitled to his or her Capital Accumulation Account Benefit upon the earlier of
(i) remaining employed by the Company to the Distribution Date for such Account; or (ii) Termination of Employment for any reason.
3.2 Payment of Benefits. The Company shall distribute the Participant's Capital Accumulation Account Benefit in a lump sum
not later than 90 days after the event under Section 3.1 entitling the Participant to benefit payments.
3.3 Survivorship Benefits. Upon the death of a Participant, the Company shall pay the Participant's Capital Accumulation
Account Benefit, if any, in accordance with this Section.
3.3.1 Entitlement/Payment. If the Participant dies before receiving the Capital Accumulation Account Benefit, the
Company shall pay the Benefit to the Participant's beneficiary in a lump sum within 90 days after the Company's receipt of
written notification of the Participant's death.
3.3.2 Death of Beneficiary. If a beneficiary dies before receiving the payment due to such beneficiary pursuant to
this Plan, the remaining payments shall be paid to the legal representatives of the beneficiary's estate.
3.3.3 Beneficiary Designations. The Participant shall designate a beneficiary by filing a written notice of such
designation with the Company. The Participant may revoke or modify the designation at any time by a further written
designation. However, no such designation, revocation or modification shall be effective unless signed by the Participant and
accepted by the Company during the Participant's lifetime. The Participant's beneficiary designation shall be deemed
automatically revoked (i) in the event of the death of the beneficiary prior to the Participant's death, or (ii) if the
beneficiary is the Participant's spouse, in the event of dissolution of marriage. If the Participant dies without a valid
beneficiary designation, all payments shall be made to the Participant's surviving spouse, if any, and if none, to the
Participant's estate.
3.3.4 Facility of Payment. If a benefit is payable to a minor or person declared incompetent or to a person
incapable of handling the disposition of his or her property, the Company may pay such benefit to the guardian, legal
representative or person having the care or custody of such minor, incompetent person or incapable person. The Company may
require proof of incompetence, minority or guardianship as it may deem appropriate prior to distribution of the benefit. Such
distribution shall completely discharge the Company from all liability with respect to such benefit.
Article 4
Investment Return
4.1 Determination. The Investment Return shall be the amount necessary to increase or decrease the Participant's Capital
Accumulation Account to what it would have been had the Capital Accumulation Account balance during the Plan Year actually been
invested in the Investment Option(s) selected by the Participant under Section 4.2. The Investment Return shall also be adjusted to
reflect surrender or other charges that would have been incurred if the Account balance had actually been invested in the Investment
Options and withdrawn to pay benefits. If the Participant fails to select an Investment Option, the Investment Return shall be the
Investment Option most similar to a money market account.
4.2 Investment Options. The available Investment Options, and the rules for allocating the Capital Accumulation Account
among such options, shall be determined by the Company. The Company, in its discretion from time to time, may designate phantom
investment in the common stock of the Company's parent, Clark/Bardes, Inc., as one of the available investment options, as described
in Section 4.3. The Company may in its sole discretion amend the Plan's Investment Options from time to time, with respect to future
periods.
Neither the Company, the Board of Directors of the Company nor any member of the Board or any agent, employee or advisor of the
Company shall be liable for any decrease in a Participant's Capital Accumulation Account as a result of the performance or lack
thereof of any Investment Option.
4.3 Phantom Company Stock Investment. When permitted by the Company, the Participant may elect a phantom investment in
Clark/Bardes, Inc. common stock as the investment option for all or a portion of the Capital Accumulation Account. The deemed
purchase or sale price for the stock shall be the price of the last trade of the stock on the applicable date. Any cash dividend
declared on the stock while specified as an investment option shall be deemed to be reinvested in the Company's common stock on the
date such dividend is paid to actual owners of the common stock. The shares deemed acquired with the dividend shall be determined
using the value of the last trade of the stock on the dividend payment date. If price under this Section 4.3 is to be determined for
a day on which no trades occurred, then the price shall be the closing price as of the preceding day on which shares were traded.
Closing prices shall be as reported in the Wall Street Journal for the day specified.
AMENDMENT NO. 1 TO
CLARK/BARDES CONSULTING, INC.
Execu-FLEX BENEFIT PLAN
INTRODUCTION
CLARK/BARDES CONSULTING, INC., sponsors the Execu-FLEX Benefit Plan (the "Plan"), originally effective as of January 1, 2000,
and restated effective as of June 1, 2001. The Company retained the right to amend the Plan. The Company exercises its right of
amendment through this Amendment, and exercises its right by amending through this Amendment No. 1. This amendment shall be
effective January 1, 2002.
AMENDMENT
1. Article 7 of the Plan is replaced with the following new Article 7:
7.1 Claims Procedure. Any individual ("claimant") who has not received benefits under the Plan that he or she
believes should be paid shall make a claim for such benefits as follows:
7.1.1 Initiation - Written Claim. The claimant initiates a claim by submitting to the Company a written
claim for the benefits.
7.1.2 Timing of Company Response. The Company shall respond to such claimant within 90 days after receiving
the claim. If the Company determines that special circumstances require additional time for processing the claim, the
Company can extend the response period by an additional 90 days by notifying the claimant in writing, prior to the end
of the initial 90-day period, that an additional period is required. The notice of extension must set forth the special
circumstances and the date by which the Company expects to render its decision.
7.1.3 Notice of Decision. If the Company denies part or all of the claim, the Company shall notify the
claimant in writing of such denial. The Company shall write the notification in a manner calculated to be understood by
the claimant. The notification shall set forth:
7.1.3.1 The specific reasons for the denial,
7.1.3.2 A reference to the specific provisions of the Plan on which the denial is based,
7.1.3.3 A description of any additional information or material necessary for the claimant to
perfect the claim and an explanation of why it is needed,
7.1.3.4 An explanation of the Plan's review procedures and the time limits applicable to such
procedures, and
7.1.3.5 A statement of the claimant's right to bring a civil action under ERISA Section 502(a)
following an adverse benefit determination on review.
7.2 Review Procedure. If the Company denies part or all of the claim, the claimant shall have the opportunity for
a full and fair review by the Company of the denial, as follows:
7.2.1 Initiation - Written Request. To initiate the review, the claimant, within 60 days after receiving
the Company's notice of denial, must file with the Company a written request for review.
7.2.2 Additional Submissions - Information Access. The claimant shall then have the opportunity to submit
written comments, documents, records and other information relating to the claim. The Company shall also provide the
claimant, upon request and free of charge, reasonable access to, and copies of, all documents, records and other
information relevant (as defined in applicable ERISA regulations) to the claimant's claim for benefits.
7.2.3 Considerations on Review. In considering the review, the Company shall take into account all
materials and information the claimant submits relating to the claim, without regard to whether such information was
submitted or considered in the initial benefit determination.
7.2.4 Timing of Company Response. The Company shall respond in writing to such claimant within 60 days
after receiving the request for review. If the Company determines that special circumstances require additional time
for processing the claim, the Company can extend the response period by an additional 60 days by notifying the claimant
in writing, prior to the end of the initial 60-day period, that an additional period is required. The notice of
extension must set forth the special circumstances and the date by which the Company expects to render its decision.
7.2.5 Notice of Decision. The Company shall notify the claimant in writing of its decision on review. The
Company shall write the notification in a manner calculated to be understood by the claimant. The notification shall
set forth:
7.2.5.1 The specific reasons for the denial,
7.2.5.2 A reference to the specific provisions of the Plan on which the denial is based,
7.2.5.3 A statement that the claimant is entitled to receive, upon request and free of charge,
reasonable access to, and copies of, all documents, records and other information relevant (as defined in
applicable ERISA regulations) to the claimant's claim for benefits, and
7.2.5.4 A statement of the claimant's right to bring a civil action under ERISA Section 502(a).
2. Section 1.2.3 of Exhibit C is replaced with the following new Section 1.2.3:
1.2.3 "Change of Control" means the first to occur of any of the following events:
1.2.3.1 Any "person" (as that term is used in Section 13 and 14(d)(2) of the Securities Exchange Act of 1934 ("Exchange
Act")) becomes the beneficial owner (as that term is used in Section 13(d) of the Exchange Act), directly or indirectly, of 50% or
more of the Company's capital stock entitled to vote in the election of directors;
1.2.3.2 During any period of not more than two consecutive years, not including any period prior to the adoption of this
Plan, individuals who, at the beginning of such period constitute the Board, and any new director (other than a director designated
by a person who has entered into an agreement with the Company to effect a transaction described in Section 1.2.3.1, 1.2.3.3,
1.2.3.4, or 1.2.3.5) whose election by the Board or nomination for election by the Company's stockholders was approved by a vote of
at least three-fourths of the directors then still in office, who either were directors at the beginning of the period or whose
election or nomination for election was previously so approved, cease for any reason to constitute at least a majority of the Board;
1.2.3.3 The shareholders of the Company approve any consolidation or merger of the Company, other than a
consolidation or merger of the Company in which the holders of the common stock of the Company immediately prior to the
consolidation or merger hold more than 50% of the common stock of the surviving corporation immediately after the
consolidation or merger;
1.2.3.4 The shareholders of the Company approve any plan or proposal for the liquidation or dissolution of
the Company;
1.2.3.5 The shareholders of the Company approve the sale or transfer of all or substantially all of the
assets of the Company to parties that are not within a "controlled group of corporations" (as defined in Section 1563 of
the Code) in which the Company is a member;
1.2.3.6 The shareholders of the Company approve any plan or proposal for the liquidation or dissolution of
the division of the Company through which the Participant is employed; or
1.2.3.7 The shareholders of the Company approve the sale or transfer of all or substantially all of the
assets of the division of the Company through which the Participant is employed to parties that are not within a
"controlled group of corporations" (as defined in Section 1563 of the Code) in which the Company is a member.
3. Article 3 of Exhibit C is replaced with the following new Article 3:
3.1 Entitlement to Benefit. A Participant's Capital Accumulation Account Benefit shall equal the vested portion of
the balance in the Capital Accumulation Account as of the date the Participant (or the Participant's beneficiary, if
applicable, as described in Section 3.3.1) becomes entitled to the Capital Accumulation Account Benefit pursuant to the
following terms:
3.1.1 Vesting. Subject to the provisions of section 2.1.1, each year's credit to the Capital Accumulation
Account shall vest 20% on December 31 each year beginning with the year of credit and continuing for the following four
years. Vesting shall be accelerated under the following circumstances:
3.1.1.1 Change of Control. Upon a Change of Control, the balance of the Capital Accumulation
Account as of the date of the Change of Control shall vest 100%. However, all credits under Section 2.1.1 made
on or after the date the Change of Control shall be subject to the general vesting provisions of this Exhibit C
as if the foregoing Change of Control had not occurred.
3.1.1.2 Age 65. The Capital Accumulation Account shall vest 100% if the Participant remains
employed with the Company until attaining age 65.
3.1.1.3 Death. The Capital Accumulation Account shall be vest 100% upon the Participant's death
prior to Termination of Employment for any other reason.
3.1.2 In-service Distributions. A Participant may elect, for each year's credit to the Capital Accumulation
Account under Section 2.1.1, to receive a distribution up to 50% of the vested balance of such contribution upon the
Distribution Date. A Participant may elect an in-service distribution only once for each year's credits under Section
2.1.1. Any portion of the credit not elected to be distributed in this form shall remain subject to the other terms of
this Exhibit C. The Participant shall then be entitled to the in-service benefit upon the earlier of (i) remaining
employed by the Company to the Distribution Date, or (ii) Termination of Employment for any reason.
3.2 Payment of Benefits. The Company shall distribute the Participant's Capital Accumulation Account Benefit,
after any payments required pursuant to Section 3.1.2, in a lump sum not later than 90 days after the event entitling the
Participant to the benefit payment.
3.3 Survivorship Benefits. Upon the death of a Participant, the Company shall pay the Participant's remaining
Capital Accumulation Account Benefit, if any, in accordance with this Section.
3.3.1 Entitlement/Payment. If the Participant dies before receiving the Capital Accumulation Account
Benefit, the Company shall pay the Benefit to the Participant's beneficiary in a lump sum within 90 days after the
Company's receipt of written notification of the Participant's death.
3.3.2 Death of Beneficiary. If a beneficiary dies before receiving the payment due to such beneficiary
pursuant to this Plan, the remaining payments shall be paid to the legal representatives of the beneficiary's estate.
3.3.3 Beneficiary Designations. The Participant shall designate a beneficiary by filing a written notice of
such designation with the Company. The Participant may revoke or modify the designation at any time by a further
written designation. However, no such designation, revocation or modification shall be effective unless signed by the
Participant and accepted by the Company during the Participant's lifetime. The Participant's beneficiary designation
shall be deemed automatically revoked (i) in the event of the death of the beneficiary prior to the Participant's death,
or (ii) if the beneficiary is the Participant's spouse, in the event of dissolution of marriage. If the Participant
dies without a valid beneficiary designation, all payments shall be made to the Participant's surviving spouse, if any,
and if none, to the Participant's estate.
3.3.4 Facility of Payment. If a benefit is payable to a minor or person declared incompetent or to a person
incapable of handling the disposition of his or her property, the Company may pay such benefit to the guardian, legal
representative or person having the care or custody of such minor, incompetent person or incapable person. The Company
may require proof of incompetence, minority or guardianship as it may deem appropriate prior to distribution of the
benefit. Such distribution shall completely discharge the Company from all liability with respect to such benefit.
4. Except as modified above, the Plan shall remain in full force and effect.
CLARK/BARDES CONSULTING, INC.
By _____________________________
Title _________________________
Exhibit 10.12
EMPLOYMENT AGREEMENT
This Employment Agreement (this "Agreement"), is made and entered into as of this __ day of October___, 2001 (the
"Effective Date"), by and between Clark/Bardes, Inc. and/or its successors ("CB"), a Delaware corporation, and Thomas M. Pyra, a
resident of Illinois (the "Employee").
W I T N E S S E T H:
WHEREAS, CB is engaged in business in the State of Illinois and throughout the United States; and
WHEREAS, CB desires to employ the Employee in the capacity of Chief Financial Officer and Chief Operating Officer of the
Company, upon the terms and conditions hereinafter set forth; and
WHEREAS, the Employee is willing to enter into this Agreement with respect to his employment and services upon the terms and
conditions hereinafter set forth,
NOW, THEREFORE, in consideration of the mutual covenants and obligations contained herein, CB hereby employs the Employee
and the Employee hereby accepts such employment upon the terms and conditions hereinafter set forth:
1. Term of Employment. The term of employment under this Agreement shall commence on the Effective Date and shall
extend through October 31, 2002. Absent notice of termination (described below), commencing on November 1, 2002 and continuing
on each subsequent November 1, the term of the Employee's employment shall automatically be extended for an additional 12
months. To cause the Employee's employment to terminate at the end of the original or an extended term, either party, at least
90 days prior to such date, shall give written notice to the other party that the Agreement will terminate.
2. Duties of the Employee. The Employee agrees that during the term of this Agreement, he will devote substantially
all his full professional and business-related time, skills and best efforts to the businesses of CB. The Employee shall report
to the Chief Executive Officer of CB. The Employee may engage in personal investment activities provided such activities do not
interfere with the performance of his duties hereunder or violate the noncompetition and confidential information provisions set
forth herein. Nothing herein, however, will prevent the Employee, (i) upon approval of the Board of Directors of the Company,
from service as a director or trustee of other corporations or businesses which are not in competition with the business of the
Company or in competition with any present or future affiliate of the Company, (ii) from service on civic or charitable boards or
committees, or (iii) from engaging in personal, investment activities; provided such activities do not interfere with the
performance of his duties hereunder or violate the noncompetition and confidential information provisions set forth herein.
Employee shall be indemnified to the same extent as other directors and officers of CB.
3. Compensation.
(a) Base Salary. CB shall pay the Employee an annual base salary of ___Hundred ____ Thousand Dollars ($--0,000) per
annum (or fraction for portions of a year) ("Base Salary"). Such Base Salary may be increased annually during the
Employee's employment with CB in accordance with the then current standard salary administration guidelines of the Company.
The Employee's Base Salary shall be subject to all appropriate federal and state withholding taxes and shall be payable in
accordance with the normal payroll procedures of CB.
(b) Annual Bonus. In addition to the Base Salary set forth in Section 3(a) hereof, the Employee shall receive a target
bonus opportunity each year during his employment of up to ____% of Base Salary. The Annual Bonus shall be paid based upon
criteria set annually for the company.
The Annual Bonus shall be subject to all appropriate federal and state withholding taxes and shall be payable annually on or
before March 1st of the year following the year to which such bonus relates.
4. Fringe Benefits. CB will provide the Executive such perquisites and fringe benefits of employment as are commonly
provided to other senior executives of the Company and/or the Divisions. In addition to the foregoing, CB will
(a) pay the Employee's annual membership dues for the health club of his choice
(b) provide the Employee with the use of an automobile via an automobile allowance in the amount of $1,000 per
month which will be adjusted annually for inflation
The terms of this Agreement shall not foreclose the Employee from participating with other employees of the Company in such fringe
benefits or incentive compensation plans as may be authorized and adopted from time to time by the Company; however, the Employee
must meet any and all eligibility provisions required under said fringe benefits or incentive compensation plans as may be authorized
and adopted from time to time by the Company. The Employee may be granted such other fringe benefits or perquisites as the Employee
and the Company may from time to time agree upon.
5. Employee Benefits. The Employee and his eligible dependents shall be eligible to participate in the employee benefit
programs made available generally to other employees of CB; as well as other executive benefit programs that may be offered to
officers of the Company, provided, however, that the Employee and his eligible dependents must meet any and all eligibility
provisions required under such employee benefit programs. In addition, the Employee is eligible to participate in the Exec-u-flex
program and the Executive Deferred Compensation Plan.
6. Vacations. The Employee shall be entitled to four (4) weeks paid vacation during each full calendar year, and may carry
over up to two (2) weeks of unused vacation to the next succeeding calendar year; provided, however, that at no time may the Employee
have accumulated more than 6 weeks of vacation.
7. Reimbursement of Expenses. CB recognizes that the Employee will incur legitimate business expenses in the course of
rendering services to CB hereunder. Accordingly, CB shall reimburse the Employee, upon presentation of receipts or other adequate
documentation, for all necessary and reasonable business expenses incurred by the Employee in the course of rendering services to CB
under this Agreement.
8. Working Facilities. The Employee shall be furnished an office, administrative assistance and such other facilities and
services suitable to his position and adequate for the performance of his duties ("Working Facilities"), which shall be consistent
with the reasonable policies of CB. The corporate headquarters are located in North Barrington, Illinois.
9. Termination. The employment relationship between the Employee and CB created hereunder shall terminate before the
expiration of the then current terms upon the occurrence of any one of the following events:
(a) Death or Permanent Disability. The death or permanent disability of the Employee. For the purpose of this
Agreement, "permanent disability" of the Employee shall mean "disability" as defined under CB's long-term disability
plan.
(b) Termination for Cause. The following events, actions or inactions by the Employee shall constitute "Cause"
for termination of this Agreement:
(i) Substantial failure of performance by the Employee that is repeated or continued following thirty
(30) days written notice to the Employee of such failure to perform given by the CEO to the
Employee
(ii) Employee's failure to rectify any material breach or perform any reasonable obligation of Employee
under this Agreement within 30 days after written notice of such breach for failure to perform
given by the CEO to the Employee;
(iii) any gross misconduct or gross negligence in the performance of his duties that materially and
adversely affects CB;
(iv) a material breach of the Intellectual Property and Confidentiality Agreement with CB;
(v) the intentional diversion of a financial opportunity away from CB.
(vi) the commission of an act of dishonesty or fraud that is of a material nature and involves a
material breach of trust; and
(vii) the conviction of Employee for any felony or of a crime involving moral turpitude.
(c) Constructive Termination. In the event of:
(i) a material change or reduction in Employee's duties or authority,
(ii) a downward change in Employee's title to which the Employee does not consent
(iii) a change to which Employee does not consent of the principal location in which he is required to
perform his duties hereunder,
(iv) a material reduction in (or a failure to pay or provide) Employee's Earned Base Salary, Annual Bonus, Benefits, vacation
time, or Working Facilities other than as permitted by this Agreement, or
(v) any other material breach by the Company of this Agreement,
Employee shall have the right to terminate his employment and CB shall treat such termination in all
respects as if it had been a termination of employment without cause.
(d) Termination by the Employee with Notice. The Employee may terminate this Agreement at any time without liability to CB
arising from the resignation of the Employee upon ninety (90) days prior written notice to CB. CB retains
the right after proper notice of the Employee's voluntary termination to require the Employee to cease his
employment immediately; provided, however, in such event, CB shall remain obligated to pay the Employee his
salary during the ninety (90) day notice period or the remaining term of this Agreement, whichever is
less. During such ninety (90) day notice period, the Employee shall provide such consulting services to CB
as CB may reasonably request and shall assist CB in training his successor and generally preparing for an
orderly transition.
(e) Termination by CB with Notice. CB may terminate this Agreement at any time upon ninety (90) days prior written notice to
Employee. CB retains the right after proper notice has been given to the Employee to require the Employee
to cease his employment immediately; provided, however, in such event, CB shall remain obligated to pay the
Employee his salary during the ninety (90) day notice period or the remaining term of this Agreement,
whichever is less. During such ninety (90) day notice period, the Employee shall provide such consulting
services to CB as CB may reasonably request and shall assist CB in training his successor and generally
preparing for an orderly transition.
(f) Termination due to Change in Control. If, for any reason within 12 months after a Change of Control (as defined below),
Employee voluntarily resigns or CB or its successor terminates this Agreement, Employee will be entitled to
Compensation Upon Termination as described in 10(f) below. CB will require any successor to all or
substantially all of its assets, expressly to assume and perform this Agreement. Change of Control is
defined as
i. If CB becomes a subsidiary of another corporation or entity or is merged or consolidated into another corporation or entity
or substantially all of the assets of CB are sold to another person, corporation, partnership
or entity; or
ii. Any entity becomes owner of record or beneficiary of 33% of the combined voting power of CB's outstanding securities
entitled to elect the Board of Directors; or
iii. CB's Board of Directors or lender determines that a Change of Control has taken place.
10. Compensation Upon Termination.
(a) General. Unless otherwise provided for herein, upon the termination of the Employee's employment under this Agreement,
before the expiration of the current term, the Employee shall be entitled to
(i) the salary earned by him before the effective date of termination, as provided in Section 3(a)
hereof, prorated on the basis of the number of full days of service rendered by the Employee
during the year to the effective date of termination,
(ii) any accrued, but unpaid, vacation (up to six (6) weeks),
(iii) any authorized but unreimbursed business expenses and
(iv) any benefits to which the Employee is entitled under the employee benefit programs maintained by CB.
The sum of the amounts described in clauses (i) through (iv) will be hereinafter referred to as the "Accrued
Obligations." The Accrued Obligations will be paid to the Employee or his estate or beneficiary, as applicable, in a
lump sum in cash within thirty (30) days of the date of termination.
(b) Termination Because of Death or Permanent Disability. If the Employee's employment hereunder terminates
because of the death or permanent disability of the Employee, the Employee shall be entitled to the Accrued
Obligations set forth in Section 10(a) above, plus any pro-rata (i.e., non-annualized) Annual Bonus for the calendar
year of the Employee's death, which shall be paid in the year following the Employee's death in accordance with CB's
customary practices.
(c) Termination For Cause. If the employment relationship hereunder is terminated by CB for cause (as defined
in Section 9(b) hereof), the Employee shall not be entitled to any amounts other than the Accrued Obligations.
(d) Resignation by the Employee with Notice. If the employment relationship is terminated by the Employee
pursuant to the provisions of Section 9(d) hereof, the Employee shall be entitled to receive his Base Salary during
the ninety day notice period, plus the Accrued Obligations, all to be paid when they would otherwise be due the
Employee.
(e) Constructive Termination or Termination by CB without Cause. In connection with any resignation by Employee due to his
Constructive Termination as described in Section 9(c) above, or in connection with any termination of Employee
without Cause, Employee shall be entitled to receive i) his Base Salary for the ninety day notice period plus (ii)
his Base Salary for a one year period from the date of termination, plus (iii) the pro-rated Annual Bonus for the
calendar year of the Employee's termination, and (iv) any Accrued Obligations, less any amounts already paid during
the notice period. Such amounts shall be paid when they would otherwise be due to the Employee.
(f) Termination due to Change in Control. In connection with any termination by CB of the Employee or resignation by the
Employee due to Change in Control as described in Section 9(f) above, Employee shall be entitled to receive i) his
Base Salary for the ninety day notice period plus (ii) his Base Salary together with an amount equal to the average
of the Annual Bonuses paid for the two-years prior to the Change of Control, and any Accrued Obligations, less any
amounts already paid. Such payments shall be paid on a no less than a monthly basis for the two year period
beginning ninety days from the date notice is given.
(g) Amounts payable under this Section 10 will be reduced by any standard withholding and other authorized deductions.
11. Noncompetition. During the Employee's employment with CB, and for the time period set forth in Section 11(d) below, the
Employee will not:
(a) Accept employment with or render services for compensation (including without limitation, consultation or
research) to, or acquire any kind of ownership in, any person or entity which is engaged in the design, development,
marketing, sale or support of any competitive product or service sold in the United States if that relationship
includes any responsibilities whatsoever with respect to developing, promoting, marketing, soliciting or selling any
product or service (including without limitation, any life insurance or other insurance product or policy) to any
corporation in any state in which CB operates.
(b) Promote, market, solicit, or sell any product or service, including without any limitation, any life
insurance or other insurance product or policy, similar to or competitive with CB or any of its Divisions' ("CB")
Programs to any existing client of CB or any corporation, healthcare, insurance carrier or financial institution
which, during the 13-month period prior to the termination of Employee's employment by CB, either
(i) is listed as either a client, a prospect, or a courtesy prospect on the prospect databases
maintained by the Divisions of the company.
(c) Induce or attempt to induce
(i) any purchaser of any CB Program to cancel, allow to lapse, fail to renew or replace any CB
Program,
(ii) within the 13 month period following termination of Employee's employment, any other employee or
any representative of CB to terminate or alter his, her, or its relationship with CB,
(iii) any insurance company to terminate or alter its relationship with CB,
(iv) any banking association or other trade organization to terminate or alter its relationship with CB
(d) The noncompetition provisions described in sections 11(a), (b), and (c) shall apply as follows:
(i) If CB terminates the Employee pursuant to Section 9(b) (for Cause) or the Employee terminates
pursuant to Section 9(d) (Termination by the Employee with Notice), the noncompetition provisions
in sections 11(a), (b) and (c) shall remain in effect for 12 months after the Employee's
termination.
(ii) If the Employee terminates pursuant to Section 9(c) (for Constructive Termination), the
noncompetition provisions in Section 11(c) shall remain in effect for 12 months after the
Employee's termination.
(iii) If the Employee terminates or CB terminates the Employee pursuant to Section 9(f) (for Change of Control), the
noncompetition provisions in sections 11(a), (b) and (c) shall remain in effect for 24 months
after the Employee's termination.
12. Confidential Information. Employee shall abide by the terms of CB's standard Intellectual Property and Confidentiality
Agreement, which is attached hereto as Exhibit A.
13. Property of CB. The Employee acknowledges that from time to time in the course of providing services pursuant to this
Agreement he shall have the opportunity to inspect and use certain property, both tangible and intangible, of CB and the Employee
hereby agrees that such property shall remain the exclusive property of CB, and the Employee shall have no right or proprietary
interest in such property, whether tangible or intangible, including, without limitation, the Employee's customer and supplier lists,
contract forms, books of account, computer programs and similar property.
14. Equitable Relief. The Employee acknowledges that the services to be rendered by him are of a special, unique, unusual,
extraordinary, and intellectual character, which gives them a peculiar value, and the loss of which cannot reasonably or adequately
be compensated in damages in an action at law, and that a breach by him of any of the provisions contained in this Agreement will
cause CB irreparable injury and damage. The Employee further acknowledges that he possesses unique skills, knowledge and ability and
that competition by him in violation of this Agreement or any other breach of the provisions of this Agreement would be extremely
detrimental to CB. By reason thereof, the Employee agrees that CB shall be entitled, in addition to any other remedies it may have
under this Agreement or otherwise, to injunctive and other equitable relief to prevent or curtail any breach of this Agreement by him.
15. Successors Bound. This Agreement shall be binding upon CB and the Employee, their respective heirs, executors,
administrators or successors in interest.
16. Severability and Reformation. The parties hereto intend all provisions of this Agreement to be enforced to the fullest
extent permitted by law. If, however, any provision of this Agreement is held to be illegal, invalid, or unenforceable under present
or future law, such provision shall be fully severable, and this Agreement shall be construed and enforced as if such illegal,
invalid, or unenforceable provision were never a part hereof, and the remaining provisions shall remain in full force and effect and
shall not be affected by the illegal, invalid, or unenforceable provision or by its severance.
17. Integrated Agreement. This Agreement constitutes the entire Agreement between the parties hereto with regard to the subject
matter hereof, and there are no agreements, understandings, specific restrictions, warranties or representations relating to said
subject matter between the parties other than those set forth herein or herein provided for.
18. Notices. All notices and other communications required or permitted to be given hereunder shall be in writing and shall be
deemed to have been duly given if delivered personally, mailed by certified mail (return receipt requested) or sent by overnight
delivery service, cable, telegram, facsimile transmission or telex to the parties at the following addresses or at such other
addresses as shall be specified by the parties by like notice:
If to CB:
Clark/Bardes Holdings, Inc.
102 South Wynstone Park Drive
North Barrington, Illinois 60010
Attn: Mr. W. T. Wamberg
Chief Executive Officer
With a copy to:
Vedder, Price, Kaufman and Kammholz
222 N. LaSalle Street
Chicago, Illinois 60601
Attn: Lane Moyer, Esq.
If to Thomas M. Pyra
22921 Fox Chase
Deer Park, Illinois 60010
Notice so given shall, in the case of notice so given by mail, be deemed to be given and received on the fourth calendar day
after posting, in the case of notice so given by overnight delivery service, on the date of actual delivery and, in the case of
notice so given by cable, telegram, facsimile transmission, telex or personal delivery, on the date of actual transmission or, as the
case may be, personal delivery.
19. Further Actions. Whether or not specifically required under the terms of this Agreement, each party hereto shall execute
and deliver such documents and take such further actions as shall be necessary in order for such party to perform all of his or its
obligations specified herein or reasonably implied from the terms hereof.
20. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAW, AND NOT THE LAW OF
CONFLICTS, OF THE STATE OF ILLINOIS.
21. Assignment. This Agreement is personal to the Employee and may not be assigned in any way by the Employee without the prior
written consent of CB.
22. Application of Terms. Whenever used herein (1) the terms Clark/Bardes, Inc. (or any abbreviations thereof) shall include
all affiliates and successors thereof.
23. Counterparts. This Agreement may be executed in counterparts, each of which will take effect as an original and all of
which shall evidence one and the same Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the Effective Date.
CLARK/BARDES, INC.
By: /s/ W.T. Wamberg
W. T. Wamberg
Chairman of the Board and
Chief Executive Officer
EMPLOYEE:
Thomas M. Pyra
/s/ Thomas M. Pyra
EMPLOYMENT AGREEMENT
THIS AGREEMENT ("Agreement"), by and between Clark/Bardes, Inc., a Delaware corporation ("Company"), and Richard C.
Chapman, a resident of Minnesota (the "Executive"), shall become effective on June 1, 2000 (the "Effective Date").
WITNESSETH THAT:
WHEREAS, the Company desires to employ the Executive, and the Executive desires to be employed by the Company, in accordance
with the terms and conditions of this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants set forth herein, the Company and the Executive hereby agree as
follows:
1. Employment. The Company hereby agrees to employ the Executive, and the Executive agrees to serve the Company, in the
capacities described herein during the Period of Employment (as defined in Section 2 of this Agreement), in accordance with the terms
and conditions of this Agreement.
2. Period of Employment. The term "Period of Employment" shall mean the period of three (3) years, commencing on the
Effective Date and, unless earlier terminated pursuant to Section 7, ending on the third anniversary of the Effective Date; provided,
however, that the Period of Employment shall automatically be extended on a day by day basis effective on and after the second
anniversary of the Effective Date (so that it is always one (1) year) until such date as either the Company or the Executive shall
have terminated such automatic extension provision by giving written notice to the other.
3. Duties During the Period of Employment.
(a) Duties. During the Period of Employment, the Executive shall be employed as Chief Executive Officer of Clark/Bardes
Banking, the former Bank Compensation Strategies ("BCS") Division of the Company, with overall charge and responsibility for the
business and the affairs of the Division. Executive shall report directly to the Chief Executive Officer of the Company.
(b) Scope. During the Period of Employment, and excluding any periods of vacation and sick leave to which the Executive is
entitled, the Executive shall devote substantially all of his business time and attention to the business and affairs of the Banking
Division. It shall not be a violation of this Agreement for the Executive to (i) serve on corporate, civic or charitable boards or
committees; (ii) deliver lectures, fulfill speaking engagements or teach occasional courses or seminars at educational institutions;
or (iii) manage personal investments, so long as such activities under clauses (i), (ii) and (iii) do not interfere, in any
substantive respect, with the Executive's responsibilities hereunder.
4. Compensation and Other Payments.
(a) Salary. During the Period of Employment, the Company shall pay the Executive an annualized base salary of not less
than Three Hundred Twenty-five Thousand ($325,000) per year (the "Base Salary"). The Executive's Base Salary shall be paid in
accordance with the Company's executive payroll policy. In addition, the Executive's base salary will be adjusted on an annual basis
according to the rate of increase in the Consumer Price Index for All Urban Consumers, which is published by the Bureau of Labor
Statistics of the U.S. Department of Labor. The Base Salary shall be reviewed annually as of the end of each fiscal year during the
Period of Employment by the Chief Executive Officer of the Company with the first such review scheduled to occur December 31, 2001.
Each annual review shall be completed within 60 days after the last day of the fiscal year. Based upon such reviews, the Chief
Executive Officer may increase, but shall not decrease, the Base Salary, (cost of living increase is automatic, based on annual
cpt). Any increase in Base Salary shall not serve to limit or reduce any other obligation to the Executive under this Agreement.
(b) Annual Bonus. In addition to the Base Salary, the Executive shall be eligible to receive an annual bonus of up to
140% of his Base Salary as described on the attached Schedule.
(c) Stock Options. In addition to existing options, the Executive, upon the signing of this Agreement, shall receive
9,000 fully vested options.
(d) Vacations. The Executive shall be entitled to six (6) weeks paid vacation during each calendar year, none of which
will carry over to the next succeeding calendar year.
5. Other Executive Benefits.
(a) Regular Reimbursed Business Expenses. The Company shall promptly reimburse the Executive for all expenses and
disbursements reasonably incurred by the Executive in the performance of his duties hereunder during the Period of Employment.
(b) Benefit Plans. The Executive and his eligible family members shall be entitled to participate immediately, on terms no less
favorable than the terms offered to other senior executives of the Company, in any group and/or executive life, hospitalization or
disability insurance plan, health program, vacation policy, pension, profit sharing, 401(k) and similar benefit plans (qualified,
non-qualified and supplemental) or other fringe benefits (it being understood that items such as stock options are not fringe
benefits) of the Company (collectively referred to as the "Benefits"). Anything contained herein to the contrary notwithstanding,
the benefits described herein shall not duplicate benefits made available to the Executive pursuant to any other provision of this
Agreement.
(c) Perquisites. The Company shall provide the Executive such perquisites of employment as are commonly provided to other
senior executives of the Company. In addition to the foregoing, the Company shall: (1) pay the annual membership dues for
organizations which are business related and (2) pay the annual membership dues for industry organizations, including the Association
for Advanced Underwriting.
6. Noncompetition; Non-Solicitation.
(a) During the Period of Employment, and for two (2) years thereafter (the "non-Competition Period), the Executive shall
not in the United States, and in any other areas in which the Company has done business within five (5) years preceding the Effective
Date (collectively, the "Territory"), directly or indirectly, either alone or in partnership or jointly or in conjunction with any
person or persons, firm, association, syndicate, company or corporation as principal, agent, employee, director, shareholder or in
any other manner whatsoever (i) carry on or be engaged in the business of marketing executive benefit and insurance plans to
community banks, large corporations and other organizations (the "Business") or any other business which is in competition with the
Business as existing on the date hereof, or (ii) solicit business from, or sell to, any of the Company's customers in the Territory
or any other person, firm or corporation in the Territory to whom the Company has sold products within five (5) years preceding the
date of this Agreement where such solicitation or sale would involve the sale of products competitive with the Business. Nothing
herein shall prohibit Executive from being an owner of not more than 5% of the outstanding stock of any class of a corporation, which
is publicly traded, so long as he has no active participation in the business of such corporation.
(b) Executive agrees that during the Period of Employment and for a period of two (2) years thereafter, he will not
directly or indirectly offer employment to any person who is currently or was within the last year employed by the Company, or, is or
will be employed by the Company, except with the prior written consent of the Company.
7. Termination.
(a) Death or Disability. This Agreement and the period of Employment shall terminate automatically upon the Executive's
death. If the Disability of the Executive has occurred (pursuant to the definition of "Disability" set forth below), it may give to
the Executive written notice of its intention to terminate the Executive's employment. In such event, the Executive's employment
with the Company shall terminate effective on the thirtieth day after receipt by the Executive of such notice given at any time after
a period of one hundred eighty (180) consecutive days (or 60 consecutive days three or more times in any single period of 365
consecutive days) of Disability; provided that, within the thirty (30) days after such receipt, the Executive shall not have returned
to full-time performance of the Executive's duties. For purposes of this Agreement, "Disability" means the Executive's inability to
perform his duties hereunder as determined by a physician mutually acceptable to the Company and the Executive (or his
representative).
(b) By the Company for Cause. During the Period of Employment after the Effective Date, the Company may terminate the
Executive's employment for "Cause". For purposes of this Agreement, "Cause" shall mean (i) except in the event of the Executive's
Disability, a substantial, repeated and continued act of misconduct or failure by the Executive to perform his material duties or
obligations to the Company pursuant to this Agreement, as determined by the Chief Executive Officer of the Company, which the
Executive fails to remedy within thirty (30) days after written notice is received by the Executive specifying the alleged act of
misconduct or failure in reasonable detail; (ii) conviction by the Executive of a felony; or (iii) the Company's Chief Executive
Officer determines that the Executive has engaged in a fraudulent act resulting in personal gain or enrichment at the expense of the
Company or other detriment to the Company.
(c) By Executive for Good Reason. During the Period of Employment, the Executive's employment hereunder may be
terminated by the Executive for Good Reason. For purposes of this Agreement, "Good Reason" shall mean, without the Executive's
consent:
(i) the assignment to the Executive of any duties inconsistent in any material respect with the Executive's
position (including status, offices, titles and reporting relationships), authority, duties or responsibilities as
contemplated by Section 3 of this Agreement, or any other action by the Company which results in a significant
diminution in such position, authority, duties or responsibilities, excluding for this Section 7(c) any isolated and
inadvertent action not taken in bad faith and which is remedied by the Company within ten (10) days after receipt of
a notice thereof given by the Executive;
(ii) any failure by the Company to comply with any of the provisions of Section 4 or 5 of this Agreement other
than an isolated and inadvertent failure not taken in bad faith and which is remedied by the Company within ten (10
days) after receipt of notice thereof given by the Executive; and
(iii) the Executive being required, without his consent, to relocate to a principal place of employment outside
of the Minneapolis metropolitan area.
(d) Other than for Cause or Good Reason. The Executive or the Company may terminate this Agreement for any reason other
than for Good Reason or Cause, respectively, upon thirty (30) days written notice to the Company or Executive, as the case may be.
If the Executive terminates the Agreement for any reason, he shall have no liability to the Company or its subsidiaries or affiliates
other than as described in this Agreement in Section 6(a) and 6(b). If the Company terminates the Agreement, or if the Agreement
terminates because of the death of the Executive, the obligations of the Company shall be as set forth in Section 8 hereof.
(e) Notice of Termination. Any termination by the Company or by the Executive shall be communicated by Notice of
Termination to the other party hereto given in accordance with Section 18(b) of this Agreement. For purposes of this Agreement, a
"Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon;
(ii) sets forth in reasonable detail, if necessary, the facts and circumstances claimed to provide a basis for termination of the
Executive's employment under the provision so indicated; and (iii) if the Date of Termination (as defined below) is other than the
date of receipt of such notice, specifies the termination date (which date shall not be less than thirty (30) days after the giving
of such notice). The failure by the Executive or Company to set forth in the Notice of Termination any fact or circumstance which
contributes to a showing of the basis for termination shall not waive any right of such party hereunder or preclude such party from
asserting such fact or circumstance in enforcing his or its rights hereunder.
(f) Date of Termination. "Date of Termination" means the date specified in the Notice of Termination; provided,
however, that if the Executive's employment is terminated by reason of death or Disability, the Date of Termination shall be the date
of death of the Executive or the Disability Effective Date, as the case may be.
8. Obligations of the Company Upon Termination.
(a) Death. If the Executive's employment is terminated by reason of the Executive's death, this Agreement shall
terminate without further obligations to the Executive's legal representatives under this Agreement, other than those obligations
accrued or earned and vested (if applicable) by the Executive as of the Date of Termination, including, but not necessarily limited
to: (i) the Executive's full Base Salary through the Date of Termination at the rate in effect on the Date of Termination,
disregarding any reduction in Base Salary in violation of this Agreement; (ii) any options (which shall become vested and immediately
exercisable); and (iii) any other rights and benefits (including, without limitation, any pro-rata bonuses pursuant to Section 4(b)
of this Agreement and payments due pursuant to Section 5(a) of this Agreement) available to the Executive under employee compensation
and benefit arrangements of the Company (without duplication) in which the Executive was a participant on the Date of Termination,
determined in accordance with the applicable terms and provisions of such arrangements (such amounts specified in clauses (i) through
(iii) are hereinafter referred to as "Accrued Obligations").
(b) Disability. If the Executive's employment is terminated by reason of the Executive's disability, this Agreement
shall terminate, and the Company shall pay to Executive (or in the event of Executive's death after finding of Disability, his
surviving spouse, or if he leaves no spouse, his personal representative, as successor in interest) his Accrued Obligations.
(c) Cause; Other than Good Reason. If the Executive's employment shall be terminated by the Company for Cause or by the
Executive for Other than Good Reason, this Agreement shall terminate, and the Executive shall be entitled to the Accrued Obligations
set forth above.
(d) Change in Control
i. If the Company shall terminate the Executive's employment during the Period of Employment within 12 months following a
Change in Control or if the Executive shall terminate for any reason within 12 months after a Change in Control, then
the Executive shall receive the severance benefits provided for in this Section 8(d).
ii. The Executive shall elect either (A) to receive his annual total cash compensation ("Severance Compensation"), which is
based upon the Executive's total annual base salary plus cash bonus payments for the remaining term of this employment
agreement plus two years thereafter, and be bound by the non-competition and non-solicitation covenants under Section 6
(the "Restrictive Covenants") for 24 months following termination of employment; or (B) to receive no such compensation
and not be bound by the Restrictive Covenants. The Executive shall communicate the selected option to the Company in
writing within thirty (30) business days following the date of the Executive's termination of employment. If the
Executive fails to give timely notice during the five day period, the Executive shall be deemed to have elected no
Severance Compensation and no Restrictive Covenants. Whether the Executive elects Severance Compensation or not, the
Company shall pay the Executive his pro-rated Annual Bonus to the date of termination.
iii. In addition, the Executive shall also receive those other obligations and Benefits accrued or earned and vested (if
applicable) by the Executive as of the Date of Termination, including, but not necessarily limited to, all other Accrued
Obligations.
iv. For the remainder of the Period of Employment (determined without regard to the termination thereof pursuant to Section 7),
or such longer period as any plan, program, practice or policy may provide, the Company shall continue benefits to the
Executive and/or the Executive's family at least equal to those which would have been provided to them in accordance
with Section 5(b) of this Agreement as if the Executive's employment had not been terminated, including (but not by way
of limitation) health insurance and life insurance.
v. For purposes of this Agreement, a "Change of Control" shall be deemed to have occurred if (A) the Company becomes a
subsidiary of another corporation or entity or is merged or consolidated into another corporation or entity or
substantially all of the assets of the Company are sold to another corporation or entity; or (B) any person,
corporation, partnership or other entity, either alone or in conjunction with its "affiliates," as that term is defined
in Rule 405 of the General Rules and Regulations under the Securities Act of 1933, as amended, or other group of
persons, corporations, partnerships or other entities who are not "affiliates" but who are acting in concert, other than
the Executive or his family members, or any person, organization or entity that is controlled by the Executive or his
family members, becomes the owner of record or beneficiary of securities of the Company that represent thirty-three and
one-third percent (33 1/3%) or more of the combined voting power of the Company's then outstanding securities entitled
to elect Board of Directors of the Company; or (C) the Board of Directors of the Company or a committee thereof makes a
determination in its reasonable judgment that a "Change of Control" of the Company has taken place.
(e) Good Reason; Other than for Cause, Death or Disability
i. If (A) the Company shall terminate the Executive's employment (other than for Cause or Disability and except if the
Executive's employment is terminated as a result of his death); or (B) during the Period of Employment, the Executive
shall terminate his employment for Good Reason; then the Executive shall receive the severance benefits provided for in
this Section 8(e).
ii. The Executive shall elect either (A) to receive a full 12 months of Base Salary ("Base Severance Compensation"), and be
bound by the non-competition and non-solicitation covenants under Section 6 (the "Restrictive Covenants") for 24 months
following termination of employment; or (B) to receive no such compensation and not be bound by the Restrictive
Covenants. The Executive shall communicate the selected option to the Company in writing within five (5) business days
following the date of the Executive's termination of employment. If the Executive fails to give timely notice during
the five day period, the Executive shall be deemed to have elected no Severance Compensation and no Restrictive
Covenants. Whether the Executive elects Severance Compensation or not, the Company shall pay the Executive his
pro-rated Annual Bonus to the date of termination.
iii. In addition, the Executive shall also receive those other obligations and Benefits accrued or earned and vested (if
applicable) by the Executive as of the Date of Termination, including, but not necessarily limited to, all other Accrued
Obligations.
It is understood that the Executive's rights under this Section 8 are in lieu of all other rights which the Executive may
otherwise have had upon termination of this Agreement; provided, however, that no provision of this Agreement is intended to
adversely affect the Executive's rights under the Consolidated Omnibus Budget Reconciliation Act of 1985.
9. Mitigation. In no event shall the Executive be obligated to seek other employment or take any other action by way
of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement.
10. Indemnification. The Company shall maintain, for the benefit of the Executive, director and officer liability
insurance in form at least as comprehensive as, and in an amount that is at least equal to, that maintained by the Company on the
Effective Date. In addition, the Executive shall be indemnified by the Company against liability as an officer of the Company and
any subsidiary or affiliate of the Company to the maximum extent permitted by applicable law. The Executive's rights under this
Section 10 shall continue so long as he may be subject to such liability, whether or not this Agreement may have terminated prior
thereto.
11. Confidential Information. The Executive shall abide by the terms of Clark/Bardes, Inc.'s standard Intellectual
Property and Confidentiality Agreement. In addition, during the Period of Employment and for a period of two (2) years immediately
thereafter, Executive shall not, directly or indirectly use any Confidential Information other than pursuant to his employment by and
for the benefit of the Company. The term "Confidential Information" used in this Agreement means all data or information not
generally known outside of the business of the Company relating to its products, customer lists, financial arrangements or contracts,
internal policies, or any non-public financial data or business plan, data, or survey, any product specification, and any description
or plan for any new or revised product.
12. Remedy for Violation of Section 6 or 11. The Executive acknowledges that the Company has no adequate remedy at law
and will be irreparably harmed if the Executive breaches or threatens to breach the provisions of Sections 6 or 11 of this Agreement,
and, therefore, agrees that the company shall be entitled to injunctive relief to prevent any breach or threatened breach of either
such Section and that the Company shall be entitled to specific performance of the terms of each of such Sections in addition to any
other legal or equitable remedy it may have. Nothing in this Agreement shall be construed as prohibiting the Company from pursuing
any other remedies at law or in equity that it may have or any other rights that it may have under any other agreement.
13. Withholding. Anything in this Agreement to the contrary notwithstanding, all payments required to be made by the
Company hereunder to the Executive shall be subject to withholding of such amounts, at the time payments are actually made to the
Executive and received by him, relating to taxes as the Company may reasonably determine it should withhold pursuant to any
applicable law or regulation.
14. Arbitration. Any dispute or controversy between the Company and the Executive, whether arising out of or relating
to this Agreement, the breach of this Agreement, or otherwise, shall be settled by arbitration administered by the American
Arbitration Association ("AAA") in accordance with its Commercial Arbitration Rules then in effect and judgment on the award rendered
by the arbitrator may be entered in any court having jurisdiction thereof. Any arbitration shall be held before a single arbitrator
who shall be selected by the mutual agreement of the company and the Executive, unless the parties are unable to agree to an
arbitrator, in which case, the arbitrator will be selected under the procedures of the AAA. The arbitrator shall have the authority
to award any remedy or relief that a court of competent jurisdiction could order or grant, including, without limitation, the
issuance of an injunction. However, either party may, without inconsistency with this arbitration provision, apply to any court
having jurisdiction over such dispute or controversy and seek interim provisional, injunctive or other equitable relief until the
arbitration award is rendered or the controversy is otherwise resolved. Except as necessary in court proceedings to enforce this
arbitration provision or an award rendered hereunder, or to obtain interim relief, neither a party nor an arbitrator may disclose the
existence, content or results of any arbitration hereunder without the prior written consent of the Company and the Executive. The
company and the Executive acknowledge that this Agreement evidences a transaction involving interstate commerce. Notwithstanding any
choice of law provision included in this Agreement, the United States Federal Arbitration Act shall govern the interpretation and
enforcement of this arbitration provision. The arbitration proceeding shall be conducted in Chicago, Illinois or such other location
to which the parties may agree. The company shall pay the costs of any arbitrator appointed hereunder.
15. Reimbursement of Legal Expenses. In the event that the Executive is successful in pursuing any claim or dispute
involving the Executive's employment with the Company, including any claim or dispute relating to (a) this Agreement, (b) termination
of the Executive's employment with the Company or (c) the failure or refusal of the Company to perform fully in accordance with the
terms hereof, whether in mediation, arbitration or litigation, the company shall promptly reimburse the Executive for all costs and
expenses (including, without limitation, attorneys' fees) relating solely, or allocable, to such successful claim. In any other
case, the Executive and the company shall each bear all their own costs and attorneys fees.
16. Successors.
(a) This Agreement is personal to the Executive and without the prior written consent of the Company shall not be
assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the
benefit of and be enforceable by the Executive's heirs and legal representatives. The Company may assign its rights, duties or
obligations under this Agreement to only an entity with which it has merged or consolidated, or to which it has transferred all, or
substantially all, of its assets.
(b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns.
(c) The Company shall require any successor (whether direct or indirect, by purchase, merger, reorganization,
consolidation, acquisition or property or stock, liquidation, or otherwise) to all or a substantial portion of its assets, by
agreement in form and substance reasonably satisfactory to the Executive, expressly to assume and agree to perform this Agreement in
the same manner and to the same extent that the Company would be required to perform this Agreement if no such succession had taken
place. Regardless of whether such an agreement is executed, this Agreement shall be binding upon any successor of the company in
accordance with the operation of law, and such successor shall be deemed the "Company" for purposes of this Agreement.
(d) As used in this Agreement, the term "Company" shall include any successor to the Company's business and/or assets as
aforesaid which assumes to perform this Agreement by operation of law, or otherwise.
17. Representations.
(a) The company represents and warrants that (i) the execution of this Agreement has been duly authorized by the
Company, including action of the applicable Board of Directors and compensation committee; (ii) the execution, delivery and
performance of this Agreement by the Company does not and will not violate any law, regulation, order, judgment or decree or any
agreement, plan or corporate governance document of the company; and (iii) upon the execution and delivery of the Agreement by the
Executive, this Agreement shall be the valid and binding obligation of the company, enforceable in accordance with its terms, except
to the extent enforceability may be limited by applicable bankruptcy, insolvency or similar laws affecting the enforcement of
creditors' rights generally and by the effect of general principles of equity (regardless of whether enforceability is considered in
a proceeding in equity or at law).
(b) The Executive represents and warrants to the Company the (i) the execution, delivery and performance of this
Agreement by the Executive does not and will not violate any law, regulation, order, judgment or decree or any agreement to which the
Executive is a party or by which he is bound; (ii) the Executive is not a party to or bound by any employment agreement,
non-competition agreement or confidentiality agreement with any other person or entity that would interfere with this Agreement or
his performance of services hereunder; and (iii) upon the execution and delivery of this Agreement by the Company, this Agreement
shall be the valid and binding obligation of the Executive, enforceable in accordance with its terms, except to the extent
enforceability may be limited by applicable bankruptcy, insolvency or similar laws affecting the enforcement of creditors' rights
generally and by the effect of general principles of equity (regardless of whether enforceability is considered in a proceeding in
equity or at law).
18. Miscellaneous.
(a) This Agreement shall be governed by and construed in accordance with the laws of the State of Illinois, without
reference to principles of conflicts of laws. The captions of this Agreement are not part of the provisions hereof and shall have no
force or effect. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto
or the respective successors and legal representatives.
(b) All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other
party, by overnight courier, or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows:
To
Executive:
Richard C. Chapman
Chief Executive Officer
Bank Compensation Strategies
3600 West 80th Street
Minneapolis, MN 55431
Or
To Company:
Attention: Chief Executive Officer
Clark/Bardes, Inc.
102 South Wynstone Park Drive
N. Barrington, Illinois 60010
With a copy to:
Attention: Stan Block
Vedder Price Kaufman & Kammholz
222 N. LaSalle Street
Chicago, Illinois 60601-1003
Or to such other address as any of the parties shall have furnished to the other in writing in accordance herewith. Notice
and communications shall be effective when actually received by the addressee.
(c) None of the provisions of this Agreement shall be deemed to be a penalty.
(d) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or
enforceability of any other provision of this Agreement.
(e) Any party's failure to insist upon strict compliance with any provision hereof shall not be deemed to be a waiver of
such provision or any other provision hereof.
(f) This Agreement (which includes the agreements referenced herein) supersedes any prior employment agreement or
understandings, written or verbal between the Company or the company and the Executive and contains the entire understanding of the
company, the company and the Executive with respect to the subject matter hereof.
(g) This Agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed an
original, but all of which together shall constitute one and the same instrument.
IN WITNESS HEREOF, the parties have duly executed this Agreement as of the day and year first above written.
CLARK/BARDES, INC.
By: /s/ W.T. Wamberg
Richard C. Chapman
/s/ Richard C. Chapman
Exhibit 10.15
FIRST AMENDMENT
TO THE EMPLOYMENT AGREEMENT
BY AND BETWEEN CLARK/BARDES HOLDINGS, INC.
AND W.T. WAMBERG
DATED SEPTEMBER 1, 1999
Effective March 6, 2002, the Employment Agreement by and between Clark/Bardes Holdings, Inc. (now known as Clark/Bardes
Consulting, Inc.) and W.T. Wamberg, dated September 1, 1999, is hereby amended to add the following additional language to the end of
Section 8(a) thereof regarding the obligations of the Company upon the death of W.T. Wamberg:
To the extent that the Company is able to maintain key man life insurance on the life of the Executive as of the date of his
death, the Company agrees to obtain such life insurance and to use the proceeds of such key man life insurance to purchase,
and the Executive agrees that his executor will sell, up to $20 million of common stock of the Company at the closing price
of the stock on the last trading day immediately preceding the Executive's death.
IN WITNESS HEREOF, the parties have executed this First Amendment as of the day and year first above written.
CLARK/BARDES CONSULTING, INC.
By: /s/ W.T. Wamberg
Its: Chief Executive Officer
W.T. Wamberg
/s/ W.T. Wamberg
EMPLOYMENT AGREEMENT
This Employment Agreement (this "Agreement"), is made and entered into as of this 1st day of March, 2001 (the
"Effective Date"), by and between Clark/Bardes Holdings, Inc. and/or its successors ("CB"), a Delaware corporation, and James C.
Bean, a resident of Minnesota (the "Employee").
W I T N E S S E T H:
WHEREAS, CB is engaged in business in the State of Illinois and throughout the United States; and
WHEREAS, CB desires to employ the Employee in the capacity of Chief Integration Officer of the Company, upon the terms and
conditions hereinafter set forth; and
WHEREAS, the Employee is willing to enter into this Agreement with respect to his employment and services upon the terms and
conditions hereinafter set forth,
NOW, THEREFORE, in consideration of the mutual covenants and obligations contained herein, CB hereby employs the Employee
and the Employee hereby accepts such employment upon the terms and conditions hereinafter set forth:
3. Term of Employment. The term of employment under this Agreement shall commence on the Effective Date and shall
extend through March 31, 2002. Absent notice of termination (described below), commencing on April 1, 2002 and continuing on
each subsequent April 1, the term of the Employee's employment shall automatically be extended for an additional 12 months. To
cause the Employee's employment to terminate at the end of the original or an extended term, either party, at least 90 days prior
to such date, shall give written notice to the other party that the Agreement will terminate.
4. Duties of the Employee. The Employee agrees that during the term of this Agreement, he will devote substantially
all his full professional and business-related time, skills and best efforts to the businesses of CB. The Employee shall report
to the Chief Executive Officer of CB. The Employee may engage in personal investment activities provided such activities do not
interfere with the performance of his duties hereunder or violate the noncompetition and confidential information provisions set
forth herein. Nothing herein, however, will prevent the Employee, (i) upon approval of the Board of Directors of the Company,
from service as a director or trustee of other corporations or businesses which are not in competition with the business of the
Company or in competition with any present or future affiliate of the Company, (ii) from service on civic or charitable boards or
committees, or (iii) from engaging in personal, investment activities; provided such activities do not interfere with the
performance of his duties hereunder or violate the noncompetition and confidential information provisions set forth herein.
Employee shall be indemnified to the same extent as other directors and officers of CB.
3. Compensation.
(a) Base Salary. CB shall pay the Employee an annual base salary of Two Hundred Thirty Thousand Dollars ($230,000) per
annum (or fraction for portions of a year) ("Base Salary"). Such Base Salary may be increased during the Employee's
employment with CB in accordance with the then current standard salary administration guidelines of the Company. The
Employee's Base Salary shall be subject to all appropriate federal and state withholding taxes and shall be payable in
accordance with the normal payroll procedures of CB.
(b) Annual Bonus. In addition to the Base Salary set forth in Section 3(a) hereof, the Employee shall receive a target
bonus opportunity each year during his employment of up to 100% of Base Salary. The Annual Bonus shall be paid based upon
criteria set annually for the company.
The Annual Bonus shall be subject to all appropriate federal and state withholding taxes and shall be payable annually on or
before March 1st of the year following the year to which such bonus relates.
4. Fringe Benefits. The terms of this Agreement shall not foreclose the Employee from participating with other employees of
the Company in such fringe benefits or incentive compensation plans as may be authorized and adopted from time to time by the
Company; however, the Employee must meet any and all eligibility provisions required under said fringe benefits or incentive
compensation plans as may be authorized and adopted from time to time by the Company. The Employee may be granted such other fringe
benefits or perquisites as the Employee and the Company may from time to time agree upon.
10. Employee Benefits. The Employee and his eligible dependents shall be eligible to participate in the employee benefit
programs made available generally to other employees of CB; as well as other executive benefit programs that may be offered to
officers of the Company, but excluding such programs that are provided to officers as part of the compensation associated with an
acquisition; provided, however, that the Employee and his eligible dependents must meet any and all eligibility provisions required
under such employee benefit programs. In addition, the Employee is eligible to participate in the Exec-u-flex program and the
Executive Deferred Compensation Plan.
11. Vacations. The Employee shall be entitled to four (4) weeks paid vacation during each full calendar year, and may carry
over up to two (2) weeks of unused vacation to the next succeeding calendar year; provided, however, that at no time may the Employee
have accumulated more than 6 weeks of vacation.
12. Reimbursement of Expenses. CB recognizes that the Employee will incur legitimate business expenses in the course of
rendering services to CB hereunder. Accordingly, CB shall reimburse the Employee, upon presentation of receipts or other adequate
documentation, for all necessary and reasonable business expenses incurred by the Employee in the course of rendering services to CB
under this Agreement, including reasonable business travel to and from Minnesota.
13. Working Facilities. The Employee shall be furnished an office, administrative assistance and such other facilities and
services suitable to his position and adequate for the performance of his duties ("Working Facilities"), which shall be consistent
with the reasonable policies of CB. The corporate headquarters are located in North Barrington, Illinois. The Employee will retain
his office in Minneapolis and will travel to the North Barrington office as required.
14. Termination. The employment relationship between the Employee and CB created hereunder shall terminate before the
expiration of the then current terms upon the occurrence of any one of the following events:
(a) Death or Permanent Disability. The death or permanent disability of the Employee. For the purpose of this
Agreement, "permanent disability" of the Employee shall mean "disability" as defined under CB's long-term disability
plan.
(b) Termination for Cause. The following events, actions or inactions by the Employee shall constitute "Cause"
for termination of this Agreement:
(i) Substantial failure of performance by the Employee that is repeated or continued following thirty
(30) days written notice to the Employee of such failure to perform given by the CEO to the
Employee
(ii) Employee's failure to rectify any material breach or perform any reasonable obligation of Employee
under this Agreement within 30 days after written notice of such breach for failure to perform
given by the CEO to the Employee;
(iii) any gross misconduct or gross negligence in the performance of his duties that materially and
adversely affects CB;
(iv) a material breach of the Intellectual Property and Confidentiality Agreement with CB;
(v) the intentional diversion of a financial opportunity away from CB.
(vi) the commission of an act of dishonesty or fraud that is of a material nature and involves a
material breach of trust; and
(vii) the conviction of Employee for any felony or of a crime involving moral turpitude.
(c) Constructive Termination. In the event of:
(i) a material change or reduction in Employee's duties or authority,
(ii) a downward change in Employee's title to which the Employee does not consent
(iii) a change to which Employee does not consent of the principal location in which he is required to
perform his duties hereunder,
(vi) a material reduction in (or a failure to pay or provide) Employee's Earned Base Salary, Annual Bonus, Benefits, vacation
time, or Working Facilities other than as permitted by this Agreement, or
(v) any other material breach by the Company of this Agreement, Employee shall have the right to
terminate his employment and such termination shall be treated in all respects as if it had been a
termination of employment by CB without cause.
(g) Termination by the Employee with Notice. The Employee may terminate this Agreement at any time without liability to CB
arising from the resignation of the Employee upon ninety (90) days prior written notice to CB. CB retains
the right after proper notice of the Employee's voluntary termination to require the Employee to cease his
employment immediately; provided, however, in such event, CB shall remain obligated to pay the Employee his
salary during the ninety (90) day notice period or the remaining term of this Agreement, whichever is
less. During such ninety (90) day notice period, the Employee shall provide such consulting services to CB
as CB may reasonably request and shall assist CB in training his successor and generally preparing for an
orderly transition.
(h) Termination by CB with Notice. CB may terminate this Agreement at any time without liability upon ninety (90) days prior
written notice to CB. CB retains the right after proper notice has been given to the Employee to require
the Employee to cease his employment immediately; provided, however, in such event, CB shall remain
obligated to pay the Employee his salary during the ninety (90) day notice period or the remaining term of
this Agreement, whichever is less. During such ninety (90) day notice period, the Employee shall provide
such consulting services to CB as CB may reasonably request and shall assist CB in training his successor
and generally preparing for an orderly transition.
10. Compensation Upon Termination.
(b) General. Unless otherwise provided for herein, upon the termination of the Employee's employment under this Agreement,
before the expiration of the current term, the Employee shall be entitled to
(i) the salary earned by him before the effective date of termination, as provided in Section 3(a)
hereof, prorated on the basis of the number of full days of service rendered by the Employee
during the year to the effective date of termination,
(ii) any accrued, but unpaid, vacation (up to six (6) weeks),
(iii) any authorized but unreimbursed business expenses and
(iv) any benefits to which the Employee is entitled under the employee benefit programs maintained by CB.
The sum of the amounts described in clauses (i) through (iv) will be hereinafter referred to as the "Accrued
Obligations." The Accrued Obligations will be paid to the Employee or his estate or beneficiary, as applicable, in a
lump sum in cash within thirty (30) days of the date of termination.
(b) Termination Because of Death or Permanent Disability. If the Employee's employment hereunder terminates
because of the death or permanent disability of the Employee, the Employee shall be entitled to the Accrued
Obligations set forth in Section 10(a) above, plus any pro-rata (i.e., non-annualized) Annual Bonus for the calendar
year of the Employee's death, which shall be paid in the year following the Employee's death in accordance with CB's
customary practices.
(c) Termination For Cause. If the employment relationship hereunder is terminated by CB for cause (as defined
in Section 9(b) hereof), the Employee shall not be entitled to any amounts other than the Accrued Obligations.
(d) Resignation by the Employee with Notice. If the employment relationship is terminated by the Employee
pursuant to the provisions of Section 9(d) hereof, the Employee shall be entitled to receive his Base Salary during
the notice period (such notice period not to exceed the remaining term of this Agreement), plus the Accrued
Obligations, all to be paid when they would otherwise be due the Employee.
(h) Constructive Termination or Termination by CB without Cause. In connection with any resignation by Employee due to his
Constructive Termination as described in Section 9(c) above, or in connection with any termination of Employee
without Cause, Employee shall be entitled to receive his Base Salary for a one year period from the date of
termination, plus the pro-rated Annual Bonus for the calendar year of the Employee's termination, and any Accrued
Obligations, less any amounts already paid during the notice period. Such amounts shall be paid when they would
otherwise be due to the Employee.
(i) Amounts payable under this Section 10 will be reduced by any standard withholding and other authorized deductions.
12. Noncompetition. During the Employee's employment with CB, and for the time period set forth in Section 11(d) below, the
Employee will not:
(a) Accept employment with or render services for compensation (including without limitation, consultation or
research) to, or acquire any kind of ownership in, any person or entity which is engaged in the design, development,
marketing, sale or support of any competitive product or service sold in the United States if that relationship
includes any responsibilities whatsoever with respect to developing, promoting, marketing, soliciting or selling any
product or service (including without limitation, any life insurance or other insurance product or policy) to any
corporation in any state in which CB operates.
(b) Promote, market, solicit, or sell any product or service, including without any limitation, any life
insurance or other insurance product or policy, similar to or competitive with CB or any of its Divisions' ("CB")
Programs to any existing client of CB or any corporation, healthcare, insurance carrier or financial institution
which, during the 13-month period prior to the termination of Employee's employment by CB, either
(i) is listed as either a client, a prospect, or a courtesy prospect on the prospect databases
maintained by the Divisions of the company.
(c) Induce or attempt to induce
(i) any purchaser of any CB Program to cancel, allow to lapse, fail to renew or replace any CB
Program,
(ii) within the 13 month period following termination of Employee's employment, any other employee or
any representative of CB to terminate or alter his, her, or its relationship with CB,
(iii) any insurance company to terminate or alter its relationship with CB,
(v) any banking association or other trade organization to terminate or alter its relationship with CB
(d) The noncompetition provisions described in sections 11(a), (b), and (c) shall apply as follows:
(i) If CB terminates the Employee pursuant to Section 9(b) (for Cause) or the Employee terminates
pursuant to Section 9(d) (Termination by the Employee with Notice), the noncompetition provisions
in sections 11(a), (b) and (c) shall remain in effect for 12 months after the Employee's
termination.
(ii) If the Employee terminates pursuant to Section 9(c) (for Constructive Termination), the
noncompetition provisions in Section 11(c) shall remain in effect for 12 months after the
Employee's termination.
12. Confidential Information. Employee shall abide by the terms of CB's standard Intellectual Property and Confidentiality
Agreement which is attached hereto as Exhibit A.
13. Property of CB. The Employee acknowledges that from time to time in the course of providing services pursuant to this
Agreement he shall have the opportunity to inspect and use certain property, both tangible and intangible, of CB and the Employee
hereby agrees that such property shall remain the exclusive property of CB, and the Employee shall have no right or proprietary
interest in such property, whether tangible or intangible, including, without limitation, the Employee's customer and supplier lists,
contract forms, books of account, computer programs and similar property.
14. Equitable Relief. The Employee acknowledges that the services to be rendered by him are of a special, unique, unusual,
extraordinary, and intellectual character, which gives them a peculiar value, and the loss of which cannot reasonably or adequately
be compensated in damages in an action at law, and that a breach by him of any of the provisions contained in this Agreement will
cause CB irreparable injury and damage. The Employee further acknowledges that he possesses unique skills, knowledge and ability and
that competition by him in violation of this Agreement or any other breach of the provisions of this Agreement would be extremely
detrimental to CB. By reason thereof, the Employee agrees that CB shall be entitled, in addition to any other remedies it may have
under this Agreement or otherwise, to injunctive and other equitable relief to prevent or curtail any breach of this Agreement by him.
15. Successors Bound. This Agreement shall be binding upon CB and the Employee, their respective heirs, executors,
administrators or successors in interest.
16. Severability and Reformation. The parties hereto intend all provisions of this Agreement to be enforced to the fullest
extent permitted by law. If, however, any provision of this Agreement is held to be illegal, invalid, or unenforceable under present
or future law, such provision shall be fully severable, and this Agreement shall be construed and enforced as if such illegal,
invalid, or unenforceable provision were never a part hereof, and the remaining provisions shall remain in full force and effect and
shall not be affected by the illegal, invalid, or unenforceable provision or by its severance.
17. Integrated Agreement. This Agreement constitutes the entire Agreement between the parties hereto with regard to the subject
matter hereof, and there are no agreements, understandings, specific restrictions, warranties or representations relating to said
subject matter between the parties other than those set forth herein or herein provided for.
18. Notices. All notices and other communications required or permitted to be given hereunder shall be in writing and shall be
deemed to have been duly given if delivered personally, mailed by certified mail (return receipt requested) or sent by overnight
delivery service, cable, telegram, facsimile transmission or telex to the parties at the following addresses or at such other
addresses as shall be specified by the parties by like notice:
If to CB:
Clark/Bardes Holdings, Inc.
102 South Wynstone Park Drive
North Barrington, Illinois 60010
Attn: Mr. Thomas M. Pyra
Chief Financial and Chief Operating Officer
With a copy to:
Vedder, Price, Kaufman and Kammholz
222 N. LaSalle Street
Chicago, Illinois 60601
Attn: Lane Moyer, Esq.
If to James C. Bean
26820 Ghostley Road
Rogers, Minnesota 55374
Attn: James C. Bean
Notice so given shall, in the case of notice so given by mail, be deemed to be given and received on the fourth calendar day
after posting, in the case of notice so given by overnight delivery service, on the date of actual delivery and, in the case of
notice so given by cable, telegram, facsimile transmission, telex or personal delivery, on the date of actual transmission or, as the
case may be, personal delivery.
19. Further Actions. Whether or not specifically required under the terms of this Agreement, each party hereto shall execute
and deliver such documents and take such further actions as shall be necessary in order for such party to perform all of his or its
obligations specified herein or reasonably implied from the terms hereof.
20. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAW, AND NOT THE LAW OF
CONFLICTS, OF THE STATE OF ILLINOIS.
21. Assignment. This Agreement is personal to the Employee and may not be assigned in any way by the Employee without the prior
written consent of CB.
22. Application of Terms. Whenever used herein (1) the terms Clark/Bardes Holdings, Inc. (or any abbreviations thereof) shall
include all affiliates and successors thereof.
23. Counterparts. This Agreement may be executed in counterparts, each of which will take effect as an original and all of
which shall evidence one and the same Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the Effective Date.
CLARK/BARDES HOLDINGS, INC.
By: /s/ Thomas M. Pyra
Name: Thomas M. Pyra
Title: Chief Financial and Operating Officer
EMPLOYEE: /s/ James C. Bean
Exhibit 10.16(a)
Amendment to Employment Agreement dated March 1, 2001
Between James C. Bean and Clark/Bardes Consulting
The parties wish to amend the Employment Agreement dated March 1, 2001 as follows:
1. Re-designate subsection 9(c)(v) as 9(c)(vi) and add a new subsection 9(c).
(v) following a Change of Control (as defined below), CB or its successor delivers to Employee a notice of termination
of the evergreen feature under Section 1; or
2. Add to Section 9, Termination.
(f) Termination due to Change in Control. If after a Change of Control (as defined below), Employee terminates on
account of Constructive Termination or CB or its successor terminates the Employee for any reason other than for Cause, Employee will
be entitled to Compensation Upon Termination as described in 10(f) below. CB will require any successor to all or substantially all
of its assets, expressly to assume and perform this Agreement. For purposes of this Agreement, a "Change in Control" shall be deemed
to have occurred if (A) the Company becomes a subsidiary of another corporation or entity or is merged or consolidated into another
corporation or entity or substantially all of the assets of the Company are sold to another corporation or entity; or (B) any person,
corporation, partnership or other entity, either alone or in conjunction with its "affiliates," as that term is defined in Rule 405
of the General Rules and Regulations under the Securities Act of 1933, as amended, or other group of persons, corporation,
partnerships or other entities who are not "affiliates" but who are acting in concert, other than W.T. Wamberg or his family members
or any person, organization or entity that is controlled by W.T. Wamberg or his family members, becomes the owner of record or
beneficially of securities of the Company that represent thirty-three and one-third percent (33 1/3%) or more of the combined voting
power of the Company's then outstanding securities entitled to elect Board of Directors of the Company; or (C) the Board of Directors
of the Company or a committee thereof makes a determination in its reasonable judgment that a "Change of Control" of the Company has
taken place.
3. Change the language in Section 10, Compensation Upon Termination as follows:
(d) Resignation by the Employee with Notice. If the employment relationship is terminated by the Employee pursuant to
the provisions of Section9(d) hereof, the Employee shall be entitled to receive his Base Salary during the ninety day notice period,
plus the Accrued Obligations, all to be paid when they would otherwise be due the Employee.
(e) Constructive Termination or Termination by CB without Cause. In connection with a resignation by Employee due to
his Constructive Termination as described in Section 9(c) above, or in connection with a termination of Employee with notice under
Section 9(e), Employee shall be entitled to receive (i) his Base Salary during the ninety-day notice period (which, in connection
with a constructive termination shall be measured from the date on which the event causing constructive termination occurred), (ii)
his Base Salary for a one-year period commencing on the later of the date of termination or the end of the ninety-day notice period,
plus (iii) the pro-rated Annual Bonus for the calendar year of the Employee's termination, and (iv) any Accrued Obligations. Such
amounts shall be paid when they would otherwise be due to the Employee.
4. Add language in Section 10, Compensation Upon Termination.
(f) Termination due to Change in Control. In connection with any termination by CB or its successor of the Employee or
termination by the Employee due to Change in Control as described in Section 9(f) above, Employee shall, in addition to receiving his
Accrued Obligations, be entitled to receive for a two-year period from the date of termination the sum of (i) his Base Salary and
(ii) an amount equal to the average of the Annual Bonuses paid for the two-years prior to the Change of Control. Such payments shall
be paid on a no less frequently than monthly beginning within 10 business days after the date of termination.
5. Add language to Section 11(d), Noncompetition.
(iii) If the Employee terminates employment or CB or its successor terminates the Employee pursuant to Section 9(f) (for
Change of Control), the noncompetition provisions in sections 11(a), (b) and (c) shall remain in effect for 24 months after the
Employee's termination.
CLARK/BARDES, INC.
BY: /s/ W.T. Wamberg
W. T. Wamberg
Its: Chairman and Chief Executive Officer
BY: /s/ James C. Bean
James C. Bean
Exhibit 21
Subsidiaries of the Registrant
Clark/Bardes Consulting, Inc. (Delaware)
Clark/Bardes of Texas, Inc. (Texas)
Clark/Bardes of Massachusetts Insurance Agency, Inc. (Massachusetts)
Clark/Bardes, Inc. of Pennsylvania (Pennsylvania)
Clark/Bardes Reinsurance Company Limited (Cayman Islands)
Clark/Bardes of Hawaii, LLC (Hawaii)
Clark/Bardes Financial Services, Inc. (California)
Clark/Bardes of Bermuda, Ltd. (Bermuda)
Clark/Bardes Insurance Agency, Inc. (California)
Exhibit 23
CONSENT OF INDEPENDENT AUDITOR
We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-68163) pertaining to the 1998 Non
Employee Director Stock Option Plan and in the Registration Statement (Form S-8 No. 333-68982) pertaining to the Clark/Bardes, Inc.
401(k) Savings Plan of our report dated February 22, 2002, with respect to the consolidated financial statements of Clark/Bardes,
Inc. included in the Annual Report (Form 10-K) for the year ended December 31, 2001.
ERNST & YOUNG LLP
Dallas, Texas
March 27, 2002