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SCHEDULE 14A
(RULE 14a)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934
(AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
<TABLE>
<S> <C>
[X] Preliminary Proxy Statement [ ] CONFIDENTIAL, FOR USE OF THE COMMISSION
ONLY (AS PERMITTED BY RULE 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to sec.240.14a-11(c) or sec.240.14a-12
</TABLE>
CENTRAL RESERVE LIFE CORPORATION
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
(--)
(NAME OF PERSON(S) FILING PROXY STATEMENT, IF OTHER THAN THE REGISTRANT)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies: .......
(2) Aggregate number of securities to which transaction applies: ..........
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined): ............
(4) Proposed maximum aggregate value of transaction: ......................
(5) Total fee paid: .......................................................
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid: ...............................................
(2) Form, Schedule or Registration Statement No.: .........................
(3) Filing Party: .........................................................
(4) Date Filed: ...........................................................
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<PAGE> 2
[CENTRAL RESERVE LIFE CORPORATION LOGO]
CENTRAL RESERVE LIFE CORPORATION
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD FEBRUARY , 1998
Notice is hereby given that a Special Meeting of Shareholders of Central
Reserve Life Corporation (the "Company") will be held at the Holiday
Inn -- Strongsville, 15471 Royalton Road, Strongsville, Ohio, on
, , 1998, at 10:00 a.m., local time, for the
following purposes:
1. To consider and vote upon a proposal described in the accompanying
Proxy Statement, which provides for:
Approval of an equity financing transaction pursuant to which the
Company will issue and sell 5,000,000 Common Shares and warrants to
purchase an additional 2,500,000 Common Shares at an exercise price
of $6.50 per share for an aggregate purchase price of $27,500,000, in
accordance with the terms of a Stock Purchase Agreement, dated
November 26, 1997, as amended, by and between the Company and
Strategic Acquisition Partners, LLC ("Strategic Partners"), and the
issuance to Peter W. Nauert, an investor in Strategic Partners, and
to Turkey Vulture Fund XIII, Ltd. (the "Fund") of warrants to
purchase an aggregate of 200,000 Common Shares at an exercise price
of $6.00 per share, in consideration of certain guarantees provided
by Peter W. Nauert and Richard M. Osborne, the controlling investor
in the Fund, in connection with a bridge financing transaction
pursuant to which the Company received $20,000,000 in financing from
Strategic Partners.
2. To consider and vote upon a proposal (the "Amendment Proposal")
which provides for the amendment and restatement of the Code of Regulations
of the Company (the "Amended Code") to eliminate the classification of the
Board of Directors of the Company for purposes of director elections.
Only shareholders of record at the close of business on , 1998,
will be entitled to notice of, and to vote at, the Special Meeting or any
adjournment thereof.
By order of the Board of Directors.
[actual signature]
LINDA S. STANDISH, Secretary
February , 1998
YOUR VOTE IS IMPORTANT
PLEASE SIGN, DATE AND RETURN YOUR PROXY CARD
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING.
<PAGE> 3
[LOGO]
CENTRAL RESERVE LIFE CORPORATION
CRL PLAZA
17800 ROYALTON ROAD
STRONGSVILLE, OHIO 44136
PROXY STATEMENT
This Proxy Statement is furnished in connection with the solicitation of
proxies for use at a Special Meeting (the "Meeting") of Shareholders of Central
Reserve Life Corporation, an Ohio corporation (the "Company"), to be held on
, , 1998, at 10:00 a.m., local time, at the Holiday
Inn -- Strongsville, 15471 Royalton Road, Strongsville, Ohio, and at any
adjournment thereof. This Proxy Statement and the accompanying form of proxy
("proxy card"), together with the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996 (the "Form 10-K") and its Quarterly Report
on Form 10-Q for the quarter ended September 30, 1997 (the "Form 10-Q"), will
first be sent to shareholders on or about .
The close of business on , 1998 has been fixed as the record
date (the "Record Date") for the determination of shareholders entitled to
notice of, and to vote at, the Meeting. At that date the Company had outstanding
4,195,172 Common Shares, without par value (the "Common Shares").
At the Meeting, holders of Common Shares (the "Shareholders") will be asked
to consider and vote upon the following matters:
1. A proposal (the "Financing Proposal") described herein, which
provides for:
Approval of an equity financing transaction (the "Equity Financing")
pursuant to which the Company will issue and sell 5,000,000 Common
Shares (the "Shares") and warrants to purchase an additional
2,500,000 Common Shares at an exercise price of $6.50 per share (the
"Equity Warrants") for an aggregate purchase price of $27,500,000, in
accordance with the terms of a Stock Purchase Agreement dated
November 26, 1997 (as amended, the "Stock Purchase Agreement"), by
and between the Company and Strategic Acquisition Partners, LLC
("Strategic Partners"), a copy of which is attached as Appendix A to
this Proxy Statement, and will issue to Peter W. Nauert, an investor
in Strategic Partners, and to Turkey Vulture Fund XIII, Ltd. (the
"Fund") warrants to purchase an aggregate of 200,000 Common Shares at
an exercise price of $6.00 per share (the "Guarantee Warrants"), in
consideration of certain guarantees provided by Peter W. Nauert and
Richard M. Osborne, the controlling investor in the Fund, in
connection with a bridge financing transaction (the "Bridge
Financing") pursuant to which the Company received $20,000,000 in
financing from Strategic Partners.
2. A proposal (the "Amendment Proposal") which provides for the
amendment and restatement of the Code of Regulations of the Company (the
"Amended Code ") to eliminate the classification of the Board of Directors
of the Company (the "Board") for purposes of director elections. The text
of the relevant sections of the Amended Code is attached as Appendix B to
this Proxy Statement.
THE BOARD OF DIRECTORS OF THE COMPANY RECOMMENDS THAT SHAREHOLDERS VOTE "FOR"
THE FINANCING PROPOSAL AND "FOR" THE AMENDMENT PROPOSAL.
The affirmative vote of both (i) a majority of the Common Shares present at
the Meeting at which the required quorum is present, either in person or by
proxy, and (ii) a majority of the Common Shares present at the Meeting at which
the required quorum is present, either in person or by proxy, which are not
"Interested Shares" (the "Disinterested Vote"), is required to approve the
Financing Proposal. The rules of the National Association of Securities Dealers,
Inc. ("NASD") require the approval set forth in (i) above, and the Ohio Control
Share Acquisition Act, Ohio Revised Code ss. 1701.831 (the "Control Share Act")
requires the approvals set forth in (i) and (ii) above. "Interested Shares" for
purposes of the Financing Proposal include Common Shares that are beneficially
owned by Peter W. Nauert, Strategic Partners, the Fund and certain related
persons, if any, and Common Shares beneficially owned by officers of the
Company.
(i)
<PAGE> 4
The affirmative vote of a majority of the outstanding Common Shares is
required to approve the Amendment Proposal.
Only holders of record of Common Shares as of the close of business on the
Record Date will be entitled to notice of, and to vote at, the Meeting or any
adjournment or postponement thereof. Those holders are entitled to one vote per
share on any matter which may properly come before the Meeting, except that
Interested Shares will not be counted for purposes of calculating the
Disinterested Vote.
The presence, either in person or by properly executed proxy, of holders of
a majority of the then outstanding Common Shares and of a majority of the then
outstanding Common Shares that are not Interested Shares is necessary to
constitute a quorum at the Meeting for purposes of taking action on the
Financing Proposal. The presence, either in person or by properly executed
proxy, of the holders of one-third of the then outstanding Common Shares is
necessary to constitute a quorum at the Meeting for purposes of taking action on
the Amendment Proposal, although the affirmative vote of a majority of the
outstanding Common Shares is required to approve the Amendment Proposal.
Abstentions and broker non-votes will be included in determining the presence of
a quorum. Under Ohio law and the Company's Amended Articles of Incorporation,
broker non-votes and abstaining votes will have the same effect as votes against
the Financing Proposal and the Amendment Proposal. As of the close of business
on the Record Date, there were 4,195,172 Common Shares outstanding and entitled
to vote at the Meeting, of which 3,291,997 were not Interested Shares and
approximately 18.9% of which are beneficially owned by directors and officers of
the Company and their affiliates, including approximately 12% held by officers
of the Company (all of which are Interested Shares), and approximately 9.5% of
which are beneficially owned by Richard M. Osborne through the Fund (all of
which are Interested Shares). Certain officers and directors of the Company,
including Fred Lick, Jr., Chairman, President and Chief Executive Officer of the
Company, have entered into Meeting Voting Agreements (the "Meeting Voting
Agreements") with Strategic Partners, dated December 16, 1997, pursuant to which
they have agreed to vote their shares in favor of the Financing Proposal and the
Amendment Proposal, subject to certain exceptions. Shares subject to the Meeting
Voting Agreements represent approximately 15% of the outstanding Common Shares.
The solicitation of proxies is made by and on behalf of the Board. The cost
of the solicitation, including the reasonable expenses of brokerage firms or
other nominees for forwarding proxy materials to beneficial owners, will be
borne by the Company. In addition to solicitation by mail, proxies may be
solicited by telephone or telegraph or personally. The Company has engaged Regan
& Associates, Inc., New York, New York, to assist it in the solicitation of
proxies at an estimated cost of $3,750. Proxies may also be solicited by
directors, officers and employees of the Company without additional
compensation.
If the enclosed form of proxy is executed and returned, the shares
represented thereby will be voted in accordance with any specification made by
the Shareholder. In the absence of any such specification, proxies will be voted
FOR the Financing Proposal and FOR the Amendment Proposal.
If a quorum is not present at the time the Meeting is convened, the Meeting
may be adjourned with a vote of a majority of the Shareholders present at the
Meeting. If the Company proposes to adjourn the Meeting by a vote of the
Shareholders, the persons named in the enclosed form of proxy will vote all
Common Shares for which they have voting authority in favor of such adjournment.
Your execution of the enclosed proxy will not affect your right as a
Shareholder to attend the Meeting and to vote in person. Any Shareholder giving
a proxy has the right to revoke it at any time by either (a) filing with the
Secretary of the Company at or before the Meeting a written notice of revocation
bearing a later date than the proxy, (b) duly executing a subsequent proxy
relating to the same Common Shares and delivering it to the Secretary of the
Company at or before the Meeting, or (c) attending the Meeting and giving notice
of revocation of the proxy (although attendance at the Meeting will not in and
of itself constitute a revocation of a proxy).
The principal executive offices of the Company are located at CRL Plaza,
17800 Royalton Road, Strongsville, Ohio 44136. The Company's telephone number is
(440) 572-2400.
The date of this Proxy Statement is , 1998.
(ii)
<PAGE> 5
THE SPECIAL MEETING
DATE, TIME AND PLACE
This Proxy Statement is furnished in connection with the solicitation of
proxies for use at the Special Meeting of Shareholders of Central Reserve Life
Corporation, an Ohio corporation, to be held on , ,
1998, at 10:00 a.m., local time, at the Holiday Inn -- Strongsville, 15471
Royalton Road, Strongsville, Ohio, and at any adjournment thereof. This Proxy
Statement and the accompanying proxy card, together with the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1996 and its
Quarterly Report on Form 10-Q for the quarter ended September 30, 1997, will
first be sent to Shareholders on or about .
THE PROPOSALS
At the Meeting, holders of Common Shares will be asked to consider and vote
upon the following matters:
1. The Financing Proposal, which provides for:
Approval of an equity financing transaction pursuant to which the
Company will issue and sell 5,000,000 Common Shares and warrants to
purchase an additional 2,500,000 Common Shares at an exercise price
of $6.50 per share for an aggregate purchase price of $27,500,000, in
accordance with the terms of the Stock Purchase Agreement, dated
November 26, 1997, as amended, by and between the Company and
Strategic Partners, and the issuance to Peter W. Nauert and to the
Fund of warrants to purchase an aggregate of 200,000 Common Shares at
an exercise price of $6.00 per share to be issued in consideration of
certain guarantees provided by Peter W. Nauert and Richard M. Osborne
in connection with a bridge financing transaction pursuant to which
the Company received $20,000,000 in financing from Strategic
Partners.
2. The Amendment Proposal, which provides for the amendment and
restatement of the Code of Regulations of the Company to eliminate the
classification of the Board for purposes of director elections. The text of
the relevant sections of the Amended Code is attached as Appendix B to this
Proxy Statement.
THE BOARD OF DIRECTORS OF THE COMPANY RECOMMENDS THAT SHAREHOLDERS VOTE "FOR"
THE FINANCING PROPOSAL AND "FOR" THE AMENDMENT PROPOSAL.
VOTES REQUIRED
Financing Proposal. The affirmative vote of both (i) a majority of the
Common Shares present at the Meeting, either in person or by proxy, and (ii) a
majority of the Common Shares present at the Meeting, either in person or by
proxy, which are not "Interested Shares" is required to approve the Financing
Proposal. "Interested Shares" for purposes of the Financing Proposal include
Common Shares beneficially owned by Peter W. Nauert, Strategic Partners, the
Fund and certain related persons, if any, and Common Shares held by officers of
the Company. See "The Financing Proposal--Required Shareholder
Approvals--Control Share Act". As of the Record Date, the Interested Shares
included (a) 400,000 Common Shares held by the Fund, which constitute
approximately 9.5% of the currently outstanding Common Shares, and (b) 503,175
outstanding Common Shares held by officers of the Company (which shares are
subject to the Meeting Voting Agreements), which include (i) 360,000 Common
Shares held by Fred Lick, Jr., Chairman, President and Chief Executive Officer
of the Company; (ii) 125,000 Common Shares held by Frank Grimone, Senior
Executive Vice President and Chief Financial Officer of the Company; (iii)
14,075 Common Shares held by James A. Weisbarth, Treasurer and Assistant
Secretary of the Company; and (iv) 4,100 Common Shares held by Linda S.
Standish, Secretary of the Company. Together, the Common Shares held by officers
of the Company equal approximately 12% of the outstanding Common Shares.
Approval by a majority of the Common Shares present at the Meeting is
required by the Control Share Act and the NASD and, additionally, approval by a
majority of the Common Shares present at the Meeting which are
1
<PAGE> 6
not Interested Shares is required by the Control Share Act. See "The Financing
Proposal--Required Shareholder Approvals."
Amendment Proposal. The affirmative vote of a majority of the outstanding
Common Shares is required to approve the Amendment Proposal.
VOTING OF SHARES; QUORUM; VOTE BY PROXY
Only holders of record of Common Shares as of the close of business on the
Record Date will be entitled to notice of and to vote at the Meeting or any
adjournment or postponement thereof. Those holders of Common Shares are entitled
to one vote per share on any matter which may properly come before the Meeting,
except that Interested Shares will not be counted for purposes of calculating
the Disinterested Vote. The presence, either in person or by properly executed
proxy, of holders of a majority of the then outstanding Common Shares and of a
majority of the then outstanding Common Shares which are not Interested Shares,
is necessary to constitute a quorum at the Meeting for purposes of taking action
on the Financing Proposal at the Meeting. The presence, either in person or by
properly executed proxy, of the holders of one-third of the then outstanding
Common Shares is necessary to constitute a quorum at the Meeting for purposes of
taking action on the Amendment Proposal at the Meeting. Abstentions and broker
non-votes will be included in determining the presence of a quorum. Under Ohio
law and the Company's Amended Articles of Incorporation, broker non-votes and
abstaining votes will have the same effect as votes against the Financing
Proposal and the Amendment Proposal. As of the close of business on the Record
Date, there were 4,195,172 Common Shares outstanding and entitled to vote at the
Meeting, approximately 903,715 of which are Interested Shares. Certain officers
and directors of the Company, including Fred Lick, Jr. are required to vote in
favor of the Financing Proposal by the Meeting Voting Agreements, subject to
certain exceptions. See "The Financing Proposal--Meeting Voting Agreements."
The solicitation of proxies is made by and on behalf of the Board. The cost
of the solicitation will be borne by the Company, including the reasonable
expenses of brokerage firms or other nominees for forwarding proxy materials to
beneficial owners. In addition to solicitation by mail, proxies may be solicited
by telephone, telegraph or personally. The Company has engaged Regan &
Associates, Inc., New York, New York, to assist it in the solicitation of
proxies at an estimated cost of $3,750. Proxies may also be solicited by
directors, officers and employees of the Company without additional
compensation.
If the enclosed form of proxy is executed and returned, the shares
represented thereby will be voted in accordance with any specification made by
the shareholder. In the absence of any such specification, proxies will be voted
FOR the Financing Proposal and FOR the Amendment Proposal.
If a quorum for either the Financing Proposal or the Amendment Proposal is
not present at the time the Meeting is convened, the Meeting may be adjourned
with a vote of the Shareholders. If the Company proposes to adjourn the Meeting
by a vote of the Shareholders, the persons named in the enclosed form of proxy
will vote all Common Shares for which they have voting authority in favor of
such adjournment.
Your execution of the enclosed proxy will not affect your right as a
Shareholder to attend the Meeting and to vote in person. Any Shareholder giving
a proxy may revoke it at any time by either (a) filing with the Secretary of the
Company at or before the Meeting a written notice of revocation bearing a later
date than the proxy, (b) duly executing a subsequent proxy relating to the same
Common Shares and delivering it to the Secretary of the Company at or before the
Meeting, or (c) attending the Meeting and voting in person (although attendance
at the Meeting will not in and of itself constitute a revocation of a proxy).
CAUTIONARY STATEMENT CONCERNING
FORWARD-LOOKING INFORMATION
This Proxy Statement contains certain forward-looking statements.
Forward-looking statements are statements other than historical information or
statements of current condition. Some forward-looking statements may be
identified by use of terms such as "believes", "anticipates ", "intends" or
"experts". The forward-looking statements contained and incorporated by
reference in this Proxy Statement are generally located in the material set
forth under the heading "The Financing Proposal--New Directors; Management of
the Company--Business
2
<PAGE> 7
Plan," but may be found in other locations as well. These forward-looking
statements relate to the plans and objectives of the Company for future
operations. In light of the risks and uncertainties inherent in all future
projections, including but not limited to those set forth under the heading
"Certain Considerations," the inclusion of the forward-looking statements in
this Proxy Statement should not be regarded as a representation by the Company
or any other person that the objectives or plans of the Company will be
achieved. Many factors could cause the Company's actual results to differ
materially from those in the forward-looking statements, including the
following: (i) the failure to consummate the Equity Financing, (ii) the failure
to successfully implement the business plan for the Company; (iii) rising
healthcare costs; (iv) business conditions and competition in the health care
industry; and (v) developments in healthcare reform and other regulatory issues.
The foregoing review of important factors should not be construed as exhaustive
and should be read in conjunction with other cautionary statements that are
included in this Proxy Statement. The Company undertakes no obligation to update
forward-looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
CERTAIN CONSIDERATIONS
In addition to the other information set forth in this Proxy Statement,
Shareholders should consider the following in deciding whether to vote in favor
of the Financing Proposal:
FINANCIAL CONDITION OF THE COMPANY
Central Reserve Life Insurance Company ("CRL"), the Company's insurance
subsidiary, has filed annual financial statements with the Ohio Department of
Insurance ("ODI") prepared on the basis of accounting practices prescribed by
the ODI. Prescribed statutory accounting practices include a variety of
publications of the National Association of Insurance Commissioners, as well as
state laws, regulations and general and administrative rules.
The ODI imposes risk-based capital ("RBC") requirements on insurance
enterprises, including CRL. The RBC Model serves as a benchmark for the
regulation of life insurance companies by state insurance regulators and
provides for targeted surplus levels based on formulas which specify various
weighting factors that are applied to financial balances or various levels of
activity based on the perceived degree of risk, which are set forth in the RBC
requirements. Such formulas focus on four general types of risk: (a) the risk
with respect to the company's assets (asset or default risk); (b) the risk of
adverse insurance experience with respect to the company's liabilities and
obligations (insurance or underwriting risk); (c) the interest rate risk with
respect to the company's business (asset/liability matching); and (d) all other
business risks (management, regulatory action, and contingencies). The amount
determined under such formulas is called the Authorized Control Level RBC
("ACL").
The RBC guidelines define specific capital levels based on a company's ACL
that are determined by the ratio of the company's total adjusted capital ("TAC")
to its ACL. TAC is equal to statutory capital, plus or minus certain specified
adjustments. The specific capital levels, in declining order, and applicable
ratios are generally as follows: "Company Action Level" where TAC is less than
or equal to 2.0 times ACL; "Regulatory Action Level" where TAC is less than or
equal to 1.5 ACL; "Authorized Control Level" where TAC is less than or equal to
1.0 times ACL; and "Mandatory Control Level" where TAC is less than or equal to
0.7 times ACL. Companies at the Company Action Level must submit an RBC
financial plan to the insurance commissioner of the state of domicile. Companies
at the Regulatory Action Level are subject to a mandatory examination or
analysis by the commissioner and possible required corrective actions. At the
Authorized Control Level, a company is subject to, among other things, the
commissioner placing it under regulatory control. At the Mandatory Control
Level, the insurance commissioner is required to place a company under
regulatory control. At December 31, 1996, CRL's TAC was $17,137,515 or 1.4 times
its ACL and accordingly, CRL was at the Regulatory Action Level.
On March 5, 1997, CRL filed its RBC financial plan with the ODI outlining
plans for attaining the levels of RBC required to raise the Company's RBC above
the Company Action Level. The RBC financial plan identifies the conditions that
contributed to the Regulatory Action Level, including underpricing of a new
product, Professional Multi-Option Plans ("PMO"), sold primarily in 1995, and
state mandated benefits and guaranteed
3
<PAGE> 8
issue. The RBC financial plan also contains corrective actions taken by CRL
beginning April 1, 1996, including an increase of PMO premium rates, changes in
certain policy benefits and the renegotiation of certain provider contracts to
produce further cost savings.
Subsequent to its March 1997 filing with the ODI, CRL's TAC declined
further. At the end of the third quarter of 1997, CRL's TAC was approximately
$11 million, which would have brought CRL within the Authorized Control Level,
had the ODI chosen to reevaluate CRL's TAC at that time and elected to take
action. Without the infusion of capital into CRL generated through the Bridge
Financing, CRL's fourth quarter TAC may have fallen to a level that would have
required control by the Ohio insurance commissioner.
As a result of the capital infusion into CRL made available through the
Bridge Financing and the reinsurance transaction between CRL and the Reassurance
Company of Hannover ("Hannover") described below under "The Financing
Proposal--Background of the Financing Proposal--The Bridge Financing and the
Guarantee Warrants," CRL's TAC at the end of 1997 is expected to exceed 2.0
times ACL, which is beyond the level requiring action under the RBC guidelines.
CONSEQUENCES IF THE FINANCING PROPOSAL IS NOT APPROVED
If Shareholder approval of the Financing Proposal is not obtained, the
$20,000,000 note evidencing the Bridge Financing (the "Bridge Note") and 800,000
of the 1,000,000 Guarantee Warrants, which have already been issued to the Fund
and Peter W. Nauert for guarantees provided by Richard M. Osborne and Peter W.
Nauert in connection with the Bridge Financing, will remain outstanding and
enforceable against the Company. The Bridge Note matures on May 1, 1998 (subject
to extension in certain circumstances to June 1, 1998), at which time the
Company will be required to repay the loan evidenced by the Bridge Note. Because
of regulatory restrictions, it is highly unlikely the Company could receive the
funds to repay the Bridge Note from CRL. Thus, if Shareholder approval of the
Financing Proposal is not obtained, it is likely that the Company will not have
the ability to repay its obligations under the Bridge Note and will be required
immediately to locate an alternate source of financing to meet its obligations
under the Bridge Note and to fund its operations. There can be no assurance that
the Company would be able to obtain such a refinancing at all or on terms that
are favorable to the Company or its Shareholders, particularly in light of CRL's
current financial position and its recent efforts to obtain financing. (See "The
Financing Proposal--Background of the Financing Proposal.") The Company's
failure to obtain sufficient financing within the requisite time may entitle
Strategic Partners to exercise its rights as a secured creditor, including by
foreclosing upon all of the common shares of CRL which were pledged to Strategic
Partners as collateral for the Bridge Financing. See "The Financing
Proposal--Background of the Financing Proposal--The Bridge Financing and the
Guarantee Warrants." As the Company is a holding company with no operations and
limited assets, such foreclosure upon the Company's principal asset could result
in the Common Shares having little or no value, make it impossible for the
Company to continue operations, and/or force the Company to seek protection
under federal bankruptcy law.
DILUTION OF EXISTING SHAREHOLDERS; CHANGE IN CONTROL
Mr. Osborne, Mr. Nauert, the Fund and Strategic Partners (collectively the
"Investors") have entered into an agreement, dated November 13, 1997 (the
"Investors' Agreement") pursuant to which the Fund will acquire 30% of the
Shares and Equity Warrants being sold by the Company pursuant to the Stock
Purchase Agreement. See "Agreement Among Investors." Upon consummation of the
Equity Financing, the Investors will control approximately 58% of the
outstanding Common Shares, and the collective ownership interest of other
Shareholders will be decreased to 42% of the outstanding Common Shares. If all
of the Guarantee Warrants and the Equity Warrants (collectively the "Warrants")
issued pursuant to the Bridge Financing and the Equity Financing are exercised,
the Investors will control approximately 70% of the outstanding Common Shares,
and the remaining Shareholders will own approximately 30% of the outstanding
Common Shares. In addition, each of the Investors has agreed to vote its shares
pursuant to a Voting Agreement which they, together with the Company, will enter
into in connection with the Equity Financing. See "The Financing Proposal--New
Directors; Management of the Company--The Voting Agreement."
4
<PAGE> 9
CHANGE IN MAJORITY OF DIRECTORS
Upon completion of the Equity Financing, Strategic Partners, in conjunction
with the Fund, will be entitled to select seven of the nine candidates for
election to the Board. Pursuant to the terms of the Voting Agreement, Strategic
Partners and the Fund will vote their Common Shares for such candidates. See
"The Financing Proposal--New Directors; Management of the Company--The Voting
Agreement." As a result, if the Financing Proposal is approved and the closing
of the Equity Financing (the "Closing") occurs, Strategic Partners, separately
and in conjunction with the Fund, will be in a position to influence materially,
if not control, (i) matters requiring approval of the Board, including the
selection of officers of the Company and directors and officers of its
subsidiaries (including CRL) and (ii) the outcome of all matters requiring
shareholder approval, including, subject to the limitations set forth in the
Voting Agreement, the election of directors. See "The Financing
Proposal--Security Ownership of Management and Principal Shareholders" and "The
Financing Proposal--New Directors; Management of the Company."
FINANCIAL AND OTHER INFORMATION
PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma consolidated condensed balance sheet of
the Company as of September 30, 1997 gives effect to the Bridge Financing, the
Equity Financing and the reinsurance agreement entered into with Hannover as if
they had occurred on September 30, 1997. See "The Financing Proposal--Background
of the Financing Proposal." The pro forma adjustments are based on currently
available information and upon certain assumptions that management believes are
reasonable under the circumstances as described in the accompanying Notes to
Unaudited Pro Forma Consolidated Condensed Balance Sheet. The pro forma
financial information does not purport to represent what the Company's financial
position would actually have been if the transactions in fact had occurred at
the date indicated, or to project the Company's financial position for any
future date.
The following information should be read in conjunction with the
accompanying Notes and the Form 10-K and the Form 10-Q, which accompany this
Proxy Statement.
5
<PAGE> 10
CENTRAL RESERVE LIFE CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET
AS OF SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
HISTORICAL TRANSACTIONS PRO FORMA
------------ ------------ ------------
<S> <C> <C> <C>
ASSETS
Investments................................ $ 93,099,877 -- $ 93,099,877
Cash....................................... 5,821,104 6,625,000(1)(2)(3)(4)(5) 12,446,104
Other receivables.......................... 2,501,696 -- 2,501,696
Reinsurance receivables.................... -- 24,550,000(5) 24,550,000
Property and equipment, at cost............ 10,733,333 -- 10,733,333
Other assets............................... 5,259,887 (295,000)(3) 4,964,887
------------ ------------ ------------
Total assets..................... $117,415,897 $ 30,880,000 $148,295,897
============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Policy liabilities and accruals............ 91,071,947 720,000(1)(2)(4)(5) 91,791,947
Deferred reinsurance gain.................. -- 10,000,000(5) 10,000,000
Note payable............................... 5,200,000 (5,200,000)(1)(2)(4) --
Mortgage note payable...................... 8,426,152 -- 8,426,152
------------ ------------ ------------
Total liabilities................ $104,698,099 $ 5,520,000 $110,218,099
============ ============ ============
Shareholders' equity
Common shares, no par value, stated value
$.50.................................. 2,097,586 2,500,000(3) 4,597,586
Additional paid-in capital............... 4,122,319 23,580,000(3) 27,702,319
Net realized holding gain................ 668,482 -- 668,482
Retained earnings........................ 5,829,411 (720,000)(1)(2)(4)(5) 5,109,411
------------ ------------ ------------
Total shareholders' equity....... 12,717,798 25,360,000 38,077,798
------------ ------------ ------------
Total liabilities and
shareholders' equity........... $117,415,897 $ 30,880,000 $148,295,897
============ ============ ============
Book value per share(6).................... $ 3.03 $ 4.14
============ ============
</TABLE>
- ---------------
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET
(1) To record the effects of the $20 million note in favor of Strategic Partners
made by the Company including $50,000 in loan origination fees.
(2) To record the repayment of the $5.2 million note payable to Huntington
National Bank including accrued interest of approximately $20,000 through
December 17, 1997.
(3) To record the effects of the sale of 5,000,000 Common Shares to Strategic
Partners net of $1,420,000 of estimated transaction fees.
(4) To record the repayment of the $20 million note payable to Strategic
Partners including estimated interest payments from the initiation date
(December 17, 1997) through the assumed pay-off date (April 1, 1998)
(approximately $500,000).
(5) To record the effects of the reinsurance agreement with Hannover including
establishment of reinsurance receivables ($24,550,000), deferred reinsurance
gain ($10,000,000), origination fees ($150,000) and the reduction of cash
transferred ($14,550,000).
(6) Book value per share was calculated using 4,195,172 Common Shares
outstanding at September 30, 1997 and 9,195,172 Common Shares outstanding
upon closing of the proposed transactions. The exercise price for the
Warrants is higher than the market price as of the date of this Proxy
Statement, therefore no assumption is made for the exercising of the
Warrants as it would be antidilutive.
Representatives of KPMG Peat Marwick LLP, the Company's principal accountants,
will not be present at the Meeting.
6
<PAGE> 11
THE FINANCING PROPOSAL
The detailed terms of, and conditions to implementation of, the Financing
Proposal and the related transactions are contained in the Stock Purchase
Agreement, which is attached hereto as Appendix A, and in the financing
documents which are attached as Exhibits to the Company's current report on Form
8-K dated December 30, 1997. The statements made in this Proxy Statement with
respect to the Financing Proposal and the related transactions are qualified in
their entirety by reference to the more complete information set forth in such
documents, which are incorporated herein by this reference.
THE EQUITY FINANCING
The Stock Purchase Agreement provides that, subject to the satisfaction or
waiver of certain conditions, including, among others, the approval of the
Equity Financing by the Shareholders, Strategic Partners will purchase 5,000,000
Common Shares and Equity Warrants to acquire up to 2,500,000 Common Shares at an
exercise price equal to $6.50 per share, for an aggregate total consideration of
$27,500,000. The Equity Warrants are exercisable immediately upon issuance, have
a term of five years from the date of issuance, grant the holder certain
registration rights, and provide for adjustments to the exercise price and
number of shares underlying such warrants on certain merger, exchange or
reorganization transactions or issuances of Common Shares (or securities
convertible into Common Shares). See "The Financing Proposal -- Equity
Warrants."
The obligation of Strategic Partners to complete the Equity Financing is
subject to a number of conditions, including the ability of Strategic Partners
to obtain financing. See "The Financing Proposal -- Stock Purchase
Agreement -- Conditions to Closing of the Equity Financing."
BACKGROUND OF THE FINANCING PROPOSAL
Background. In 1996, the Company experienced substantial losses incurred in
connection with the newly-issued health insurance plans of the Company, greater
utilization than anticipated, new state mandates such as guaranteed issue and
preventative benefits and overall reductions in profitability arising out of
industry-wide pricing competition. In response to these losses and in order to
provide a financial plan to the ODI (mandated by a decline in CRL's RBC), the
Company retained Advest, Inc. ("Advest") in February 1997 as its financial
advisor for the purpose of raising equity capital and resolving CRL's RBC issue
and the Company's other financial concerns.
Following Advest's engagement, through June 1997, Advest and the Company
pursued a number of different financing alternatives, including a possible
rights offering and a private placement of equity securities, none of which came
to fruition. In June 1997, in order to address the continued decline in CRL's
RBC, the Company borrowed $5.2 million from Huntington National Bank, $5.0
million of which was contributed to the surplus of CRL.
In June and July 1997, the Board and Advest began to explore the
alternative of a third-party strategic investment in, or other strategic
transaction involving, the Company. Several entities expressed an interest in
response to the Company's and Advest's efforts, certain of which sought to make
an investment through a purchase of Common Shares; others of which sought to
merge with or acquire the Company. Throughout July, August, September and early
October 1997, the Company's management and financial advisor evaluated the
proposals of interested parties and, with counsel, sought to refine and
negotiate the terms of the various proposals. The Board met with management and
its advisors frequently during this period to evaluate the status and relative
merits of the alternatives presented to the Company, as well as the Company's
financial position. On October 7, 1997, the Board met with its financial advisor
and counsel and, after a lengthy discussion of the relative merits of
alternative transactions, approved the entry by the Company into a letter of
intent with Standard Management Corporation ("SMC"), pursuant to which SMC would
acquire all of the outstanding equity interests in the Company pursuant to a
merger in which each Common Share of the Company would be converted into the
right to receive a number of shares of common stock of SMC equal to $7.00
divided by the closing price of the SMC common stock over a specified period,
subject to certain limitations.
7
<PAGE> 12
On September 12, 1997, Geneva Capital Partners, Fund I ("Geneva"), an
affiliate of Strategic Partners, had proposed to make a $35 million convertible
debt investment in the Company, $30.0 million of which would be reinvested in
CRL. On September 24, Geneva had submitted a revised proposal to make a $25
million debt and common equity investment in the Company, pursuant to which
shareholders of the Company would receive $5 million in cash and $15 million of
a new class of preferred shares of the Company. Representatives of Geneva and
the Company's financial advisor negotiated the terms of the Geneva proposal
through the remainder of September and in early October 1997. In September 1997,
Mr. Osborne had also approached the Company regarding a possible cash investment
in the Company. On October 8, Geneva modified its pending proposal, adding a $20
million bridge financing component, and on October 9, the predecessor of
Strategic Partners replaced Geneva as the proponent of the pending Geneva
proposals. On October 13, Mr. Osborne submitted a proposal to the Company to
make a $15 million convertible preferred stock investment in the Company;
representatives of the Company met with Mr. Osborne following this proposal to
further discuss its terms. On October 13, the Board met with its financial
advisor and counsel and provided such advisors with direction to conduct further
negotiations with Strategic Partners and to permit it to initiate a detailed due
diligence investigation. On October 14, certain affiliates of Strategic Partners
executed confidentiality agreements with the Company, which among other things,
provided for the confidentiality of information received from the Company in
connection with Strategic Partners' due diligence investigation. Thereafter,
Strategic Partners initiated a due diligence investigation of the Company. On
October 21, Strategic Partners modified its pending proposal to eliminate any
cash payment to the Company's shareholders in light of the Company's declining
financial position.
On October 28, SMC advised the Company in writing that it was terminating
merger discussions. On November 4, the Board met and directed the Company's
advisors to continue their discussions with Strategic Partners and its advisors
and other parties then interested in a strategic transaction with the Company.
On November 13, the Board met with its counsel and financial advisor and
authorized the entry by the Company into a letter of intent concerning the
agreement in principal for the Company to issue the Shares and Equity Warrants
to Strategic Partners and for Strategic Partners to make the Bridge Loan. The
letter of intent, among other things, provided for reimbursement of up to
$150,000 of Strategic Partners' due diligence expenses if the Company concluded
an alternative transaction with a third party. A letter agreement concerning
transition of management and employees in connection with the Equity Financing
was also entered into on November 13. It provided, among other things, an
expression of the parties general intentions on operational matters and cost
reductions, the revisions to employment arrangements described below in
"-- Interests of Certain Persons in the Financing Proposal" and certain employee
benefit matters; this letter was superseded by the Stock Purchase Agreement. In
connection with this letter of intent, Mr. Osborne, Mr. Nauert, the Fund and
Strategic Partners entered into a letter agreement whereby Strategic Partners
agreed subject to certain conditions, to permit Mr. Osborne to co-invest with up
to 30% of Strategic Partners' investments under the Stock Purchase Agreement,
and Mr. Osborne agreed to guarantee a proportionate amount of the loan under
which Strategic Partners would obtain the funds for the Bridge Loan, which
agreement was set forth in more detail in the Investors' Agreement. See
"Agreement Among Investors."
During the remainder of November 1997, the Company's financial advisor and
counsel met with Strategic Partners and its counsel to negotiate the definitive
terms of such arrangements. On November 26, the Board met with its financial
advisor and counsel to evaluate the terms of the pending proposal and
documentation from Strategic Partners (the "Pending Proposal"). Advest made a
detailed presentation to the Board regarding the principal economic terms of the
Pending Proposal, the proposed terms of the Bridge Financing and the
alternatives then available to the Company. Members of the Board asked a number
of questions regarding the structure and terms of the proposed transactions.
Following the discussion, representatives of Advest made a presentation to the
Board concerning its analysis of the fairness of the terms of the Pending
Proposal and engaged in a lengthy and thorough discussion with the Board
regarding its findings. Advest concluded its presentation by delivering its oral
opinion, based upon the assumptions made, matters considered and limits of
review set forth in such opinion, that, from a financial point of view, the
proposed consideration to be received in the Equity Financing was fair to the
shareholders of the Company. See "-- Opinion of Financial Advisor." Counsel to
the Company then engaged in a lengthy review with the Board of the material
terms and provisions of the proposed Stock Purchase Agreement, the Bridge
Financing and the ancillary agreements and transactions. The directors of
8
<PAGE> 13
the Company who were not members of management of the Company then voted
unanimously (with one director absent) to approve the Financing Proposal and the
Bridge Financing and ancillary transactions. The entire Board then voted
unanimously (with one director absent) to the same effect. Strategic Partners
and the Company subsequently entered into the definitive Stock Purchase
Agreement, and the Company received Strategic Partners' commitment letter for
the Bridge Financing.
The Bridge Financing and the Guarantee Warrants. Concurrent with the
signing of the Stock Purchase Agreement, Strategic Partners had arranged for an
interim loan (the "Bridge Loan") of $20 million to the Company. On December 16,
1997, the Board of Directors met with counsel to review and approve of the final
terms and documentation of the Bridge Financing and related matters, which was
funded on December 17, 1997. At that time, in consideration of the agreements by
Richard M. Osborne and Peter W. Nauert to guarantee this financing, and as a
condition to receiving the Bridge Loan, the Company (i) issued the Fund a
warrant to purchase 240,000 Common Shares at $6.00 per share and agreed to issue
the Fund (after Shareholder approval) a warrant to purchase an additional 60,000
Common Shares at $6.00 per share and (ii) issued Peter W. Nauert a warrant to
purchase 560,000 Common Shares at $6.00 per share and agreed to issue Peter W.
Nauert (after Shareholder approval) an additional warrant to purchase 140,000
Common Shares at $6.00 per share. The Company is required to file a registration
statement with the Commission for the Common Shares issuable upon exercise of
the 800,000 Guarantee Warrants already issued within 30 days of the earlier to
occur of (i) the mailing of this Proxy Statement and (ii) termination of the
Stock Purchase Agreement. The other terms and conditions of the Guarantee
Warrants are the same as those of the Equity Warrants. See "The Financing
Proposal -- Equity Warrants." In conjunction with the funding of the Bridge
Financing, CRL also entered into the reinsurance agreement with Hannover
discussed below.
The Bridge Loan bears interest at the prime rate established by American
National Bank and Trust Company of Chicago ("ANB"). The Bridge Loan will mature
on the earliest of (i) May 1, 1998, (ii) consummation of the transactions
contemplated by the Stock Purchase Agreement, or (iii) consummation by the
Company of an alternative share sale or other business combination, at which
time all principal and interest will be fully due and payable on the Bridge
Loan. Prior to maturity, interest will be payable monthly on the unpaid balance
of the Bridge Loan. If the transactions contemplated by the Stock Purchase
Agreement have not closed by May 1, 1998, in the absence of a default by the
Company then existing under the Financing Documents, the maturity of the Bridge
Loan will be automatically extended to June 1, 1998, at which time it shall be
due and payable.
The funds for the Bridge Loan were obtained by Strategic Partners pursuant
to a Credit Agreement between Strategic Partners and ANB. Upon funding of the
Bridge Loan, the Company paid a loan fee of $50,000 to Strategic Partners as
well as fees and expenses of ANB in connection with Strategic Partners'
obtaining the loan funds from ANB (other than funding fees). The proceeds of the
Bridge Loan were used as follows: (i) approximately $5.2 million was utilized to
extinguish the indebtedness owed by the Company to Huntington National Bank,
(ii) approximately $14 million was used by the Company to invest in the surplus
of CRL and was evidenced by a surplus note in favor of the Company from CRL and
(iii) approximately $800,000 was used to establish an interest reserve at the
Company and to pay transaction expenses.
As collateral for the Bridge Loan, the Company pledged to Strategic
Partners all of the common shares of CRL and the surplus note executed by CRL in
favor of the Company. The Company executed a promissory note in favor of
Strategic Partners to evidence the Bridge Loan, and the Company and Strategic
Partners executed a Credit Agreement to govern the transaction. Copies of these
documents and the other financing documents are attached to the Company's
current report on Form 8-K, dated December 30, 1997, which is incorporated
herein by this reference. The Credit Agreement includes covenants for the
Company and CRL and an operating plan for CRL which the Company is required to
implement during the term of the Bridge Loan. Contemporaneous with the funding
of the Bridge Loan, the Company obtained the resignation of three of its
directors and elected three directors nominated by Strategic Partners to the
Board of the Company. See "--New Directors; Management of the Company."
9
<PAGE> 14
In connection with the Bridge Financing, Hannover provided $10 million of
additional surplus to CRL in the form of a reinsurance transaction. The treaty
between Hannover and CRL provides CRL with a $10 million initial ceding
allowance on CRL's inforce and new business written during 1997 under certain
policy forms. The reinsurance is on a 50/50 quota-share basis, with Hannover
accepting all of the inherent contractual risks on its 50%. Provisions of the
treaty are in conformity with the Life and Health Reinsurance Model Regulation
and provide for the repayment of the $10 million ceding allowance out of the
statutory profits on the business reinsured. Accumulated profits in excess of
the $10 million ceding allowance will be shared on a 60/40 quota-share basis,
with 60% going to CRL and 40% to Hannover once the $10 million ceding allowance
is repaid plus 10% interest. The Agreement is drafted to conform to reserve
credit regulations.
Hannover committed to this transaction on the condition that Mr. Peter W.
Nauert, an investor in Strategic Partners who has experience in the insurance
industry, remain involved in Strategic Partners and its activities. Upon the
funding by Hannover of the reinsurance transaction, CRL paid Strategic Partners
a fee of $150,000 for its efforts in arranging the Hannover reinsurance.
OPINION OF FINANCIAL ADVISOR
In reaching its decision to recommend the Financing Proposal, the Board
considered, among other things, the advice of its financial adviser, Advest,
Inc. ("Advest"). A summary of the analysis which Advest performed in reaching
its opinion as to the fairness of the Equity Financing to the Shareholders of
the Company (the "Advest Opinion") is set forth below. The Advest Opinion
assumed that the Equity Financing would be consummated substantially as
described in this Proxy Statement.
Advest delivered the Advest Opinion to the Board on November 26, 1997. The
Advest Opinion is to the effect that, as of November 26, 1997, and based upon
the assumptions made, matters considered and limits of review set forth in such
opinion, the consideration to be received by the Company pursuant to the Equity
Financing was fair to the Shareholders of the Company.
A COPY OF THE ADVEST OPINION, WHICH SETS FORTH THE ASSUMPTIONS MADE,
MATTERS CONSIDERED AND CERTAIN LIMITATIONS ON THE SCOPE OF REVIEW UNDERTAKEN BY
ADVEST, IS ATTACHED AS APPENDIX C TO THIS PROXY STATEMENT. THE COMPANY'S
SHAREHOLDERS ARE URGED TO READ SUCH OPINION IN ITS ENTIRETY. THE ADVEST OPINION
WAS RENDERED AT THE REQUEST OF AND FOR THE USE AND BENEFIT OF THE BOARD OF
DIRECTORS, WAS DIRECTED ONLY TO THE FAIRNESS OF THE CONSIDERATION TO BE RECEIVED
BY THE COMPANY PURSUANT TO THE EQUITY FINANCING FROM A FINANCIAL POINT OF VIEW,
AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY SHAREHOLDER AS TO HOW SUCH
SHAREHOLDER SHOULD VOTE WITH RESPECT TO THE FINANCING PROPOSAL. THE SUMMARY OF
THE ANALYSIS WHICH ADVEST PERFORMED IN REACHING ITS OPINION SET FORTH IN THIS
PROXY STATEMENT IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF
THE ADVEST OPINION.
In arriving at the Advest Opinion, Advest, reviewed and analyzed (i)
documents used in connection with the proposed Financing Proposal and other
publicly available information concerning the Company which Advest believed to
be relevant to its inquiry, (ii) financial and operating information with
respect to the business operations and prospects of the Company including annual
reports, 10-K filings, 10-Q filings, and annual and quarterly statutory
statements, (iii) a trading history of Company Common Shares from November 21,
1996 to the date of the Advest Opinion and a comparison of that trading history
with those trading histories of companies Advest deemed comparable to the
Company, and (iv) a comparison of the financial terms of the proposed Equity
Financing with the terms of certain other recent transactions which Advest
deemed relevant. Advest also performed valuations of the proposed issuance of
the Equity Warrants using two widely accepted analytical bases and compared the
financial terms of the Equity Financing with the financial terms of proposals
made to the Company by other qualified parties. In addition, Advest had
discussions with the management of the Company concerning its business and
operations, assets, present condition and future prospects and undertook such
other studies, analyses and investigations as it deemed appropriate in rendering
the Advest Opinion.
10
<PAGE> 15
In preparing the Advest Opinion, Advest relied on the accuracy and
completeness of all information supplied or otherwise made available to Advest
by the Company, and Advest did not independently verify such information or
undertake an independent evaluation or appraisal of any of the assets or
liabilities of the Company and its subsidiaries or of Strategic Partners. With
respect to the financial forecasts furnished by the Company, Advest assumed that
they had been reasonably prepared and reflected the best currently available
estimates and judgment of the Company's management as to the expected future
financial performance of the Company. The Advest Opinion was necessarily based
upon market, economic and other conditions as they existed on, and could be
evaluated as of, the date of the Advest Opinion. The Advest Opinion did not
address the merits of the underlying decision by the Company to engage in the
Equity Financing.
The following is a summary of the material financial and comparative
analyses performed by Advest in arriving at the Advest Opinion.
Share Price Study. Advest reviewed the per share daily and weekly price
movement of Company Common Shares for the period beginning November 21, 1996 and
ending November 21, 1997 and the daily and weekly volume of trading of Company
Common Shares during the period. Advest also reviewed monthly volume and price
data from November 30, 1992 to November 21, 1997.
Advest noted that the 52 week trading range for Company Common Shares
ranged from $3.88 to $8.25 per share, and the five year trading ranged from
$3.88 to $10.00 per share.
Comparable Company Trading Multiples Analysis. Using reported closing
prices per share on November 24, 1997 of seven accident and health insurance and
disability insurance companies (Delphi Financial Group; Guarantee Life
Corporation; John Alden Financial; PennCorp Financial; Provident American Corp.;
UICI, Inc.; and United Wisconsin Services) (the "Peer Group Companies"), Advest
reviewed the ratio of (i) share price to book value per share, and (ii) share
price to tangible book value per share of each of the Peer Group Companies.
Advest also compared the median of each of such ratios (excluding the highest
value for each), to (a) the same ratios of the Company, and (b) the same ratios
of the Company using in place of the closing market price per share of Common
Shares on November 24, 1997, the price per share proposed to be paid in the
Equity Financing (assuming in one case no value for the Equity Warrants and in
another assuming the Equity Warrants reduced the consideration to be received
per Common Share by $.40). Advest also reviewed and compared to the foregoing,
similar ratios for the Company assuming that the Equity Warrants were
immediately exercised.
Advest compared the median of the ratios of share price to book value per
share and share price to tangible book value per share of the Peer Group
Companies (excluding the highest value for each) to those ratios of the Company
and noted that the Company's ratios in all the scenarios, except that assuming
the immediate exercise of the Equity Warrants (which immediate exercise is
unlikely in Advest's judgment) equaled or exceeded such comparable medians of
the ratios of the Peer Group Companies, with the highest value of the relevant
ratio excluded.
Comparable Transactions Analysis. Using publicly available information,
Advest reviewed nine transactions completed between January 1, 1995 and November
21, 1997 that involved the acquisition of 100% of companies in the life and
accident and health insurance industry (the "Comparable Acquisitions"). The
Comparable Acquisitions, and the effective date for each such transaction, were:
Mid-South Insurance Co. (February 29, 1996), Kentucky Medical Insurance (January
3, 1996); Financial Benefit Group Inc. (April 9, 1996); Independent Insurance
Group Inc. (February 29, 1996); Health Insurance of Vermont (August 30, 1996);
Citizens Security Group Inc. (July 31, 1996); Physicians Insurance Company
(November 21, 1996); Transport Holdings (December 23, 1996); and American
Investment Network (June 19, 1997).
With respect to each of the Comparable Acquisitions, Advest reviewed the
ratio of the equity value to tangible book value, and the median of those
ratios, both including and excluding the highest such ratio. Advest noted that
the ratio of the equity value of the Company using the price per share proposed
to be paid pursuant to the Equity Financing (assuming the Equity Warrants
reduced the consideration to be received by $.40 per share for the Common
Shares) to the Company's tangible book value, exceeded the median of the ratios
of the equity value to tangible book value in the Comparable Acquisitions (which
was the same including or excluding the
11
<PAGE> 16
highest such ratio) but did not so exceed such median if one assumed the
immediate exercise of all the Equity Warrants, which immediate exercise is
unlikely in Advest's judgment.
Other Analysis. Advest used two different methodologies in valuing the
Equity Warrants, one resulted in reducing the consideration to be received per
share pursuant to the proposed Equity Financing for the Common Shares by $.40
and the other by $.47. Advest used the $.40 valuation in the above-mentioned
calculations as, in Advest's judgment, it was the more appropriate value of the
Equity Warrants.
Advest noted that a frequently used methodology in evaluating the fairness
of a price per share of a company is the liquidation value per share of the
company. However, Advest also noted such methodology should be based on an
independent actuarial valuation of the company, and such a valuation was not
available for the Company at the time the Advest Opinion was requested by the
Board and rendered by Advest.
The summary set forth above does not purport to be a complete description
of the analyses performed by Advest, although it is a summary of the material
financial and comparative analyses performed by Advest in arriving at the Advest
Opinion. Arriving at a fairness opinion is a complex process not necessarily
susceptible to partial analysis or summary description. Advest believes that its
analyses must be considered as a whole and that selecting portions of its
analyses and of the factors considered by it, without considering all such
factors and analyses, could create a misleading view of the processes underlying
the Advest Opinion. Advest did not assign relative weights to any of its
analyses in preparing the Advest Opinion. The matters considered by Advest in
its analyses were based on numerous macroeconomic, operating and financial
assumptions with respect to industry performance, general business and economic
conditions and other matters, many of which are beyond the Company's control and
involve the application of complex methodologies and educated judgment. Any
estimates incorporated in the analyses performed by Advest are not necessarily
indicative of actual past or future results or values, which may be
significantly more or less favorable than such estimates. Estimated values do
not purport to be appraisals and do not necessarily reflect the prices at which
businesses or companies may be sold in the future, and such estimates are
inherently subject to uncertainty. No public company utilized as a comparison is
identical to the Company, and none of the Comparable Acquisitions utilized as a
comparison is identical to the Equity Financing. Accordingly, an analysis of
publicly traded comparable companies and comparable business combinations is not
mathematical; rather it involves complex considerations and judgments concerning
differences in financial and operating characteristics of the comparable
companies and other factors that could affect the public trading value of the
comparable companies or company to which they are being compared.
Pursuant to a letter agreement dated February 19, 1997, modified by a
letter agreement dated March 19, 1997, the Company agreed to pay to Advest (i) a
retainer fee of $50,000, which has been paid, (ii) an additional fee of
$825,000, based on a formula, to be paid following the closing of the Equity
Financing for acting as financial adviser to the Company including advising with
respect to the Equity Financing, and (iii) an additional fee of $50,000 for
rendering a fairness opinion. In addition, the Company has agreed to reimburse
Advest for its reasonable expenses (including the reasonable fees and
disbursements of its legal counsel) and to indemnify Advest and certain related
parties from and against certain liabilities, including liabilities under the
federal securities laws, arising out of its engagement.
As noted above, Advest has provided financial advisory services to the
Company and has acted as financial adviser to the Company in connection with the
Equity Financing and the Bridge Financing, in addition to rendering the Advest
Opinion.
CONSIDERATIONS OF THE BOARD
The Board believes that, because of the financial condition of the Company
and other factors discussed below, the Financing Proposal and the transactions
contemplated thereby are in the best interests of the Company and its
Shareholders, and has unanimously (with one director absent) approved the Equity
Financing and the Bridge Financing. THE BOARD RECOMMENDS THAT SHAREHOLDERS VOTE
"FOR" THE FINANCING PROPOSAL.
The Board in consultation with its financial advisor, Advest, has evaluated
the financial, legal, market, operational and management considerations bearing
on the Financing Proposal, as well as the other alternatives
12
<PAGE> 17
available to the Company. Based on this evaluation, the Board believes that the
Financing Proposal is in the best interests of the Company and its Shareholders
both in the immediate future and on a long-term basis. The Board weighed
numerous factors in reaching this decision. The following principal factors
were, among others, material to the Board's decision:
1. Advest conducted a lengthy and broad based search for potential
investors, strategic partners and acquirers at the request of the Board
that did not yield definitive alternatives more attractive to the Company's
Shareholders than the Financing Proposal.
2. The Bridge Financing satisfied CRL's immediate need for capital to
(i) ensure its continued compliance with the risk-based capital
requirements established by the ODI; (ii) repay its outstanding
indebtedness and (iii) provide CRL with a source of capital with which to
operate and expand its insurance business. A failure by the Company and CRL
to have obtained an infusion of capital could have resulted in its failing
to meet such risk-based capital requirements or to repay its outstanding
indebtedness, would have severely restricted the Company's and CRL's
continued operations, and could have subjected CRL to supervisory control
by regulatory authorities. The availability of the Bridge Financing was
conditioned on the Company's agreement to pursue the Equity Financing. The
Equity Financing provides the Company with a long-term capital base which
will meet CRL's current regulatory requirements and will provide funds for
growth of the Company and CRL, thereby enhancing the potential for
increased value for the Company's Shareholders.
3. The opinion of Advest, delivered at the November 26, 1997 meeting
of the Board, to the effect that, as of such date, and based upon the
assumptions made, matters considered and limits of review set forth in such
opinion, that from a financial point of view, the consideration to be
received in the proposed Equity Financing is fair to the Shareholders of
the Company.
4. The expertise of Strategic Partners and its insurance industry
affiliates in managing insurance companies will assist the Company in its
efforts to operate efficiently and expand its business, and in attracting
other qualified directors, management personnel and general agents.
5. Notwithstanding that Strategic Partners rather than the public
Shareholders at large will control the Company following the Closing, the
Voting Agreement mandates the participation of three independent directors
of the Company following consummation of the Equity Financing.
If the Financing Proposal is approved, no further vote of the Shareholders
will be required for the issuance of the Shares and the Equity Warrants and the
remaining Guarantee Warrants or the issuance of Common Shares upon exercise of
Warrants.
REQUIRED SHAREHOLDER APPROVALS
The Company's Board has approved the Financing Proposal and has directed
that the Financing Proposal be submitted to the Shareholders of the Company for
approval. Shareholder approval of the Financing Proposal is required under the
Control Share Act and the rules of the NASD.
Control Share Act. The Control Share Act requires that, unless the articles
or regulations of the target corporation otherwise provide, before attempting to
make a "control share acquisition" of an issuing public corporation, the
acquiring person must inform that corporation of the proposed acquisition by
delivering an "acquiring person statement." "Issuing public corporations" are
Ohio corporations having fifty or more shareholders and which also have their
principal places of business, their principal executive offices, or a
substantial percentage of their assets in Ohio. The Company is an issuing public
corporation within the meaning of the Control Share Act.
A "control share acquisition" is any acquisition of shares that, when
combined with all other direct or indirect holdings of the acquiring person,
would allow that person to exercise (or direct the exercise of) voting power in
the election of directors within the following ranges of voting power: (1) more
than one-fifth (20%) but less than one-third (33 1/3%); (2) more than one-third
(33 1/3%) but less than a majority (50%); or (3) a majority or more (50%). The
Equity Financing will constitute a control share acquisition of the Company.
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Before attempting a control share acquisition, the acquiring person must
deliver an "acquiring person statement" to the issuing public corporation at its
principal executive offices. The statement must contain: (1) the identity of the
acquiring person; (2) a statement that the information is being provided
pursuant to the Control Share Act; (3) the number of shares owned directly or
indirectly by the acquiring person; (4) the range of voting power (set forth
above) which the acquiring person would be able to exercise if the proposed
transaction is consummated; (5) a reasonably detailed description of the terms
of the proposed acquisition; and (6) representations by the acquiring person
that the proposed acquisition would not be contrary to law and that the
acquiring person has the financial capability to make the proposed acquisition,
as well as a reasonably detailed statement of the facts upon which these
representations are based. Strategic Partners delivered an acquiring person
statement to the Company on , 1998, a copy of which is attached
hereto as Appendix E.
Within ten (10) days after receiving an acquiring person statement that
complies with the above requirements, the directors of the issuing public
corporation must call a special meeting of shareholders to take a vote on the
proposed acquisition. The Board called the Meeting in response to that
requirement. Notice of the special meeting must be given reasonably promptly to
all voting and nonvoting shareholders as of the record date set for the meeting.
In addition to notice of the meeting, the shareholders must also receive a copy
of the acquiring person's statement and a statement authorized by the directors
of the issuing public corporation of the corporation's position on the proposed
acquisition, or a statement that the corporation makes no recommendation. This
Proxy Statement contains the notice and statements required by the Control Share
Act.
The special meeting of shareholders must be held within fifty (50) days
after the Company's receipt of the acquiring person's statement, unless the
acquiring person agrees in writing to a later date. The Special Meeting of the
Company's Shareholders will be held on , 1998. To establish a
quorum, at least a majority of the voting power of the issuing public
corporation in the election of directors as well as a majority of such power
excluding Interested Shares must be represented at the meeting in person or by
proxy. The proposed acquisition must be approved by a majority of those Common
Shares represented at the meeting as well as by a majority of the voting power,
excluding Interested Shares represented at the meeting.
NASD. Because transactions in the Company's Common Shares are reported on
The Nasdaq National Market, the Company is subject to the rules of the NASD. The
NASD requires shareholder approval for the issuance by a company of common
shares (or securities convertible into or exercisable for common shares) which
would effect a change in control of an issuer. The Equity Financing will
constitute a change in control for purposes of the NASD rules.
MEETING VOTING AGREEMENTS
As a condition to the Bridge Financing, certain officers and directors of
the Company and its subsidiaries who own Common Shares, including Robert E.
Bruce, Frank W. Grimone, E. Lawrence Hendershot, Glen A. Laffoon, Fred Lick,
Jr., John L. McKean, John F. Novatney, Jr., David L. Rossio, Thomas D. Schulte,
Robert K. Smith, Linda S. Standish and James A. Weisbarth, entered into Meeting
Voting Agreements. Pursuant to such agreements, each individual listed above has
agreed to vote his or her Common Shares at the Meeting in favor of the Financing
Proposal and the Amendment Proposal, unless the Board accepts a Superior
Proposal (as such term is defined in the Stock Purchase Agreement).
INTERESTS OF CERTAIN PERSONS IN THE FINANCING PROPOSAL
In connection with the Equity Financing and the Bridge Financing, Fred
Lick, Jr., Chairman of the Board, President and Chief Executive Officer of the
Company, and Frank W. Grimone, Senior Executive Vice President and Chief
Financial Officer of the Company, each entered into new employment contracts
with the Company and CRL (the "Lick Employment Agreement" and the "Grimone
Employment Agreement," respectively). Pursuant to the terms of their respective
contracts, Mr. Lick agreed to reduce his annual compensation to $500,000, and
Mr. Grimone agreed to reduce his annual compensation to $250,000. The complete
terms of Mr. Lick's employment contract and Mr. Grimone's employment contract
are contained in the Lick Employment Agreement and the Grimone Employment
Agreement, respectively, copies of which are attached to the Company's Current
Report on Form 8-K, dated December 30, 1997, and which are incorporated herein
by this reference. In addition,
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pursuant to the terms of the Voting Agreement, the parties thereto will vote
their Common Shares in favor of retaining John F. Novatney, Jr., General Counsel
of CRL, and Fred Lick, Jr. as members of the Board for specified periods. See
"-- New Directors; Management of the Company -- The Voting Agreement."
Also in connection with the Equity Financing and the Bridge Financing, the
Board adopted new severance benefit plans which reduce substantially the
benefits available to the beneficiaries thereunder.
STOCK PURCHASE AGREEMENT
The following is a summary of the material terms of the Stock Purchase
Agreement. Such summary is not a complete description of the Stock Purchase
Agreement and is qualified in its entirety by reference to the text of the Stock
Purchase Agreement, a copy of which is attached hereto as Appendix A and is
incorporated herein by this reference.
General. The Stock Purchase Agreement provides that, subject to the
satisfaction or waiver of certain conditions described below, including, among
others, the approval of the Equity Financing by the Shareholders, Strategic
Partners will purchase 5,000,000 Common Shares and warrants to acquire up to
2,500,000 Common Shares at an exercise price equal to $6.50 per share, for an
aggregate total consideration of $27,500,000. Pursuant to the terms of the Stock
Purchase Agreement, effective at the time of the Closing, the Board will be
reconstituted in accordance with the Voting Agreement to reflect the majority
interest in the Company of Strategic Partners.
Representations and Warranties. The Stock Purchase Agreement contains
various customary representations and warranties of the Company and Strategic
Partners, including without limitation, representations by the Company as to its
corporate status and good standing; the existence of its subsidiaries; its power
and authority to enter into the Stock Purchase Agreement; the enforceability of
the terms of Stock Purchase Agreement; the Company's capitalization; the
accuracy and availability of certain reports and financial statements; the
absence of (i) changes in the Company's business, (ii) violations of law, (iii)
undisclosed liabilities, (iv) litigation, (v) tax obligations, (vi) brokerage
commissions and fees, (vii) breaches of material contracts, (viii) orders,
injunctions or decrees, (ix) sensitive transactions, (x) transactions with
affiliates, (xi) takeover restrictions, and (xii) termination and other
payments; the condition of its corporate properties; the legality of the
insurance issued by its subsidiaries; the adequacy of its reserves; the
existence and status of its reinsurance treaties, employee benefit plans and
obligations to employees; its compliance with environmental, health and safety,
and other applicable laws; its proper filing of regulatory documents; the
validity of its insurance policies; its customers; and its proper preparation of
this Proxy Statement.
Strategic Partners' representations and warranties include, but are not
limited to, representations as to (i) its authority to consummate the
transactions contemplated by the Stock Purchase Agreement; (ii) the validity of
the Stock Purchase Agreement; (iii) Strategic Partners' due organization; (iv)
the absence of brokerage commissions or fees; (v) Strategic Partners' investment
intent with respect to the Shares; (vi) the ownership structure of Strategic
Partners; (vii) the absence of any qualification or conflict of any person
holding any interest in Strategic Partners; and (viii) Strategic Partners'
ability to finance the transactions contemplated by the Stock Purchase
Agreement.
Covenants of the Parties. Pursuant to the terms of the Stock Purchase
Agreement, the Company has agreed to a number of restrictions on the operation
of its business prior to the earlier of the Closing or termination of the Stock
Purchase Agreement. Among other things, the Company has agreed (i) to conduct
its business in the ordinary course of business in substantially the same manner
as conducted in the past; (ii) to use all reasonable efforts to preserve,
protect and maintain its business; (iii) not to make capital expenditures in
excess of $50,000; (iv) not to dispose of any assets or incur any liabilities
outside the ordinary course of business; (v) not to merge, liquidate,
consolidate, amend its articles or regulations or affect any other organic
corporate change; (vi) not to pay any liability outside the ordinary course of
business; (vii) not to make any dividend or distribution or repurchase, redeem
or issue any capital shares; (viii) not to forgive or cancel any material debts
or claims, or waive any material rights; (ix) not to change its credit practices
or methods of maintaining books, accounts or business records; (x) to maintain
each of its facilities and the assets of its business in good repair, order and
condition; (xi) to comply with its obligations under its material contracts;
(xii) except as provided in the Stock
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Purchase Agreement, to use reasonable efforts to keep available the services of
its present employees and agents and preserve the goodwill of customers,
suppliers and others; (xiii) except as provided in the Stock Purchase Agreement,
not to enter into, amend, terminate or make any increase under, any compensation
plan or other employment arrangement, except in the ordinary course of business;
(xiv) not to enter into any new, or amend or terminate any of its existing
material contracts; (xv) not to sell, lease or otherwise dispose of any assets,
properties, rights or claims; (xvi) not to incur any debt, obligation or
liability, contingent or otherwise, except liabilities incurred in the ordinary
course of business and consistent with past practice and expenses to be borne by
the Company in connection with the transactions contemplated by the Stock
Purchase Agreement; (xvii) not to enter into any other transactions outside the
ordinary course of business; (xviii) not to take or omit to take any action
within its control which could have a material adverse effect on the Company or
could cause any representation or warranty made by the Company in the Stock
Purchase Agreement to become false in any material respect; and (xix) subject to
certain conditions set forth in the Stock Purchase Agreement, to negotiate only
with Strategic Partners and not to solicit or entertain any proposal or offer
from any third party regarding the sale, lease, transfer or other disposition of
the capital stock, business or assets of the Company.
In addition, until the Closing, the Company has agreed to confer on a
regular and frequent basis with one or more designated representatives of
Strategic Partners to report material operational matters and the general status
of ongoing operations of the Company's business. The Company must promptly
notify Strategic Partners of any threatened or actual loss of a material
customer and any material change in the financial condition, results of
operations, personnel, properties, business or prospects of the Company and must
keep Strategic Partners fully informed of such events. The Company has also
agreed to provide Strategic Partners and certain of its authorized
representatives access to all its properties, facilities, personnel,
accountants, customers, vendors, books, contracts, leases, commitments and
records, and to furnish Strategic Partners with all financial and operating data
and other information as to the Company's business and its assets, properties,
rights and claims, as Strategic Partners may from time to time reasonably
request. The Company has also agreed to use reasonable efforts to consummate the
transactions contemplated by the Stock Purchase Agreement and perform its
obligations thereunder, and to make all necessary filings required by the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act").
As a condition to obtaining the Bridge Financing, the Company additionally
agreed to convert its defined benefit plan to a defined contribution plan, to
terminate certain other officer and employee benefit plans, and to modify its
severance pay plan.
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<PAGE> 21
Strategic Partners has agreed to use reasonable efforts to consummate the
transactions contemplated by the Stock Purchase Agreement and perform its
obligations thereunder, and to make all necessary filings required by the HSR
Act. It has additionally agreed, subject to certain conditions, to maintain the
Company's existing directors' and officers' liability insurance, or
substantially similar insurance, for a period of five years after the Closing.
Conditions to Closing of the Equity Financing. The obligations of the
Company to consummate the Equity Financing are subject to the following
conditions, among others: (i) the representations and warranties of Strategic
Partners contained in the Stock Purchase Agreement shall be accurate in all
material respects, and Strategic Partners shall have performed in all material
respects the obligations, and complied with each of the covenants, agreements
and conditions, required to be performed or complied with by it on or prior to
the Closing; (ii) no action, suit, proceeding or investigation before any court,
administrative agency or other governmental authority shall be pending or
threatened wherein an unfavorable judgment, decree or order would prevent the
carrying out of the Stock Purchase Agreement or any of the transactions
contemplated thereby, declare unlawful the transactions contemplated thereby, or
cause such transactions to be rescinded; (iii) Strategic Partners shall have
obtained all consents from third parties that are required for the purchase of
the Shares by Strategic Partners, or that are required for the consummation of
the transactions contemplated by the Stock Purchase Agreement, or that are
required in order to prevent a breach or a default under, or a termination of,
any agreement to which Strategic Partners is a party or to which any portion of
the property of Strategic Partners is subject; and (iv) all regulatory agencies
shall have taken such action as may be required to permit the consummation of
the transactions contemplated by the Stock Purchase Agreement, and such action
shall remain in full force and effect and shall be reasonably satisfactory in
form and substance to the Company and its counsel; (v) the waiting period
required by the HSR Act shall have expired or been terminated; and (vi) the
Stock Purchase Agreement and the transactions contemplated thereby shall have
been approved by the Shareholders of the Company in accordance with applicable
requirements.
The obligations of Strategic Partners to consummate the Equity Financing
are subject to the following conditions, among others: (i) the representations
and warranties of the Company contained in the Stock Purchase Agreement shall be
accurate in all material respects, and the Company shall have performed in all
material respects the obligations, and complied with each and all of the
covenants, agreements and conditions required to be performed or complied with
by it on or prior to the Closing; (ii) no action, suit, proceeding or
investigation before or in any court, administrative agency or other
governmental authority shall be pending or threatened wherein an unfavorable
judgment, decree or order would prevent the carrying out of the purposes of the
Stock Purchase Agreement or any of the transactions contemplated thereby,
declare unlawful the transactions contemplated thereby, cause such transactions
to be rescinded, or affect the right of Strategic Partners to own, operate or
control the business of the Company; (iii) all consents from third parties that
are required for the issuance of the Shares to Strategic Partners or that are
required for the consummation of the transactions contemplated by the Stock
Purchase Agreement, or that are required in order to prevent a breach of, or a
default under, or a termination of, any agreement to which the Company is a
party or to which any portion of the property of the Company is subject, shall
have been obtained or provided for; (iv) all regulatory agencies shall have
taken such action as may be required to permit the consummation of the
transactions contemplated by the Stock Purchase Agreement, and such actions
shall remain in full force and effect and shall be reasonably satisfactory in
form and substance to Strategic Partners and its counsel; (v) the waiting period
required by the HSR Act shall have expired or been terminated; (vi) Strategic
Partners shall have obtained financing of not less than $12 million in
connection with the acquisition of the Shares and the transactions contemplated
by the Stock Purchase Agreement, satisfactory to Strategic Partners; (vii) the
Company and the parties specified therein shall have entered into certain
employment agreements; (viii) there shall not have occurred any suspension of
trading on any national securities exchange or over-the-counter market,
declaration of banking moratorium, or commencement of war involving an attack on
the continental United States; (ix) the Stock Purchase Agreement and the
transactions contemplated thereby shall have been approved by the Shareholders
of the Company in accordance with applicable requirements; and (x) there shall
not have occurred any acquisition by any person, entity or group (prior to the
Closing), of 15% or more (after giving effect to the transactions contemplated
by the Stock Purchase Agreement) of the then outstanding Common Shares of the
Company.
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Each party may waive any or all of the foregoing conditions to its
obligations.
Post-Closing Indemnification. Each party agrees to indemnify the other and
certain of its officers, directors, affiliates and other persons against (i) any
misrepresentation, breach of warranty or failure to fulfill any covenant or
agreement of the indemnifying party under the Stock Purchase Agreement, and (ii)
any and all claims of third parties made based upon facts alleged that, if true,
would have constituted such a misrepresentation, breach or failure.
The indemnification obligations under the Stock Purchase Agreement survive
for a period of two years from the Closing, except for (i) representations by
the Company as to its organization, qualification, good standing, corporate
power, due authorization of the Stock Purchase Agreement and capital structure,
and (ii) representations and warranties by the Company regarding its tax returns
and reports, which survive until the applicable statute of limitation expires.
Assignment; Amendment and Termination of the Stock Purchase Agreement;
Termination Fee. Neither the Company nor Strategic Partners may assign its
rights under the Stock Purchase Agreement without the written consent of the
other party, except that Strategic Partners may assign rights to acquire less
than 50% of the Shares if (i) the assignee agrees to be bound by the Stock
Purchase Agreement and the Voting Agreement, and (ii) such assignment does not
release Strategic Partners of its obligations under the Stock Purchase
Agreement. Strategic Partners has assigned to the Fund rights to acquire 30% of
the Shares and Equity Warrants. See "Agreement Among Investors."
The Stock Purchase Agreement may be amended only in a writing signed by the
Company and Strategic Partners; provided that any exercise of any rights under
the Stock Purchase Agreement or any amendment, waiver, termination or consent
with respect to any provision of the Stock Purchase Agreement on behalf of the
Company may be and shall be exercised and approved by a majority of the
independent directors of the Board.
The Stock Purchase Agreement may be terminated at any time prior to
Closing, whether before or after approval of the Financing Proposal by the
Shareholders (i) by mutual written consent of the parties; (ii) by Strategic
Partners or the Company if any court of competent jurisdiction or governmental
body, authority or agency having jurisdiction shall have issued an order, decree
or ruling or taken any other action restraining, enjoining or otherwise
prohibiting the transactions contemplated by the Stock Purchase Agreement, and
such order, decree, ruling or other action shall have become final and
non-appealable; (iii) by Strategic Partners, if one or more of the material
conditions to the obligations of Strategic Partners to close has not been
fulfilled by May 31, 1998; (iv) by the Company if one or more of the material
conditions to the obligation of the Company to close has not been fulfilled by
May 31, 1998; and (v) by the Company in connection with its intention to pursue
a written proposal that has not been solicited by the Company following the date
of the Stock Purchase Agreement relating to a proposed Acquisition Transaction
(as defined below), which proposal is, in the reasonable good faith judgment of
the Board, after consultation with legal and financial advisors, on financial
and other terms more favorable to the Shareholders of the Company than the terms
of the transactions contemplated by the Stock Purchase Agreement (such a
proposal, a "Superior Proposal"), provided that such termination shall not be
effective unless the Company has made payment of the termination fee required by
the Stock Purchase Agreement if it is then due.
In the event that (a) a proposal with respect to a transaction relating to
the acquisition of a material portion of the capital stock of the Company or any
of the Company's subsidiaries, its or their assets or business, whether in whole
or in part, whether directly or indirectly, through purchase, merger,
consolidation or otherwise (an "Acquisition Transaction") is commenced by the
Company, publicly proposed, publicly disclosed or communicated to the Company or
any representative or agent thereof after the date of the Stock Purchase
Agreement and prior to the date of the termination of this Agreement, (b) the
Stock Purchase Agreement is thereafter terminated by the Company because it
accepts a Superior Proposal and (c) within six months following such termination
an Acquisition Transaction is consummated, or the Company enters into an
agreement relating thereto, then in any such event, the Company must pay
Strategic Partners $950,000 (the "Termination Fee") plus reimbursement of
Strategic Partners expenses incurred in connection with the transactions
contemplated by the Stock Purchase
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Agreement; provided, however, that if the 200,000 Guarantee Warrants, the
issuance of which require Shareholder approval, are issued, the Termination Fee
shall be reduced to $750,000.
REGISTRATION RIGHTS AGREEMENT
The following is a summary of the material terms of the Registration Rights
Agreement. Such summary is not a complete description of the Registration Rights
Agreement and is qualified in its entirety by reference to the text of the
Registration Rights Agreement, the form of which is attached as Exhibit B to the
Stock Purchase Agreement, which is attached hereto as Appendix A and is
incorporated herein by this reference.
The Shares will be issued to Strategic Partners and the Fund pursuant to an
exemption from registration under the Securities Act of 1933, as amended (the
"Securities Act") and will not be registered for public resale. Accordingly, the
Company has agreed to register the Shares as follows:
Demand Registration. At any time after the Closing date of the Equity
Financing, holders of at least 20% of the Registrable Shares (as defined
below) may request that the Company file a registration statement with the
United States Securities and Exchange Commission (the "Commission") under
the Securities Act, and when the anticipated aggregate offering price, net
of underwriting discounts and commissions, would exceed $1,000,000, the
Company is obligated to use its best efforts to cause such shares to be
registered. "Registrable Shares" means all Common Shares (i) issued
pursuant to the Stock Purchase Agreement, (ii) held by the Fund, or (iii)
issued as a dividend or other distribution with respect to the shares
referred to in (i) and (ii) above.
Short Form Registrations. Holders of at least 20% of the Registrable
Shares will have the right to require the Company to use its best efforts
to file not more than three registration statements on Form S-2 or S-3 if
available (or any similar short-form registration form) if the anticipated
aggregate offering price, net of underwriting discounts and commissions,
would exceed $1,000,000.
Piggyback Registration. If the Company proposes to register any of its
Common Shares in connection with a public distribution (other than pursuant
to a demand registration under the Registration Rights Agreement or on any
Form S-8 or S-4 or any successor form thereto), it will notify each holder
of Registrable Shares and, if so requested by such holder, will use its
best efforts to register such holder's Registrable Shares.
Registration Expenses. The Company has agreed to pay all expenses
associated with the registration of the Registrable Shares for the first
three Demand Registrations (including any Short Form Registrations), other
than customary underwriting discounts and commissions. In a Demand
Registration other than the first three Demand Registrations (including any
Short Form Registrations), the registration expenses of such registration
shall be borne by the holders of Registrable Shares to be registered
thereunder pro rata based on the number of Registrable Shares and other
securities requested or permitted to be included in such registration.
Restrictions. The Company is not obligated to effect any Demand
Registration within 180 days after the effective date of a previous Demand
Registration. The Company may postpone for up to 90 days the filing or the
effectiveness of a registration statement for a Demand Registration if the
Board reasonably and in good faith determines that such filing would
require a disclosure of a material fact that would have a material adverse
effect on the Company or on any plan by the Company to engage in any
acquisition of assets (other than in the ordinary course of business) or
any merger, consolidation, tender offer or other significant transaction.
Holdback Agreements. Each holder of Registrable Shares has agreed,
except under certain circumstances, not to effect any public sale or
distribution of Common Shares, or any securities convertible into or
exchangeable or exercisable for Common Shares or make any demand
registration during the seven days prior to, and during the ninety days
following, the effective date of any underwritten Demand Registration or
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any underwritten Piggyback Registration in which Registrable Shares are
included (except as part of such underwritten registration), unless the
underwriters managing the registered public offering otherwise agree.
The Company has agreed (i) not to effect any public sale or distribution of
Common Shares, or any securities convertible into Common Shares, during the
seven days prior to and during the ninety days following, the effective date of
any underwritten Demand Registration or any underwritten Piggyback Registration,
unless the underwriters managing the registered public offering otherwise agree,
(ii) to use all reasonable efforts to cause each holder of at least 5% of its
Common Shares, or any securities convertible into or exchangeable or exercisable
for such Common Shares, to agree not to effect any public sale or distribution
of any such securities during such period, unless the underwriters managing the
registered public offering otherwise agree, subject to the Company's
registration obligations under the Equity Warrants, and (iii) if requested by
the underwriters managing the registered public offering, to use all reasonable
efforts to cause each other holder of its Common Shares, or any securities
convertible into or exchangeable or exercisable for such Common Shares purchased
from the Company at any time (other than in a registered public offering), to
agree not to effect any public sale or distribution of any such securities
during such period, unless the underwriters managing the registered public
offering otherwise agree.
EQUITY WARRANTS
The following is a summary of the material terms of the Equity Warrants.
Such summary is not a complete description of the Equity Warrants and is
qualified in its entirety by reference to the text of the Equity Warrants, the
form of which is attached as Exhibit A to the Stock Purchase Agreement, which is
attached hereto as Appendix A and is incorporated herein by this reference.
In connection with the Equity Financing, the Company would issue to
Strategic Partners warrants to acquire up to 2,500,000 Common Shares at an
exercise price equal to $6.50 per share, of which Mr. Osborne or his designee,
will acquire 30%. See "-- Agreement Among Investors." The Equity Warrants (and
the Guarantee Warrants) have five year terms and may be exercised immediately
upon issuance. Each of the Warrants will bear a legend indicating that the
Warrants have not been registered under the Securities Act or any state
securities laws and that they may not be offered, sold, transferred, pledged or
otherwise disposed of except pursuant to an effective registration statement
under the Securities Act or such laws or an exemption from registration under
such Act and such laws. The Company is obligated pursuant to the terms of the
Equity Warrants (and those Guarantee Warrants that have not yet been issued) to
file, at its expense, a registration statement with the Commission within 30
days after the issuance of such Warrants to effect the registration for the
resale of the Common Shares underlying such Warrants (the "Warrant Shares")
under the Securities Act and to use its best efforts to cause such registration
statement to be declared effective.
The Warrants provide for certain adjustments to the exercise price and the
number of Warrant Shares in the event of any share dividends, splits or
combinations; distributions of shares, other securities or other evidences of
indebtedness issued by the Company; and reorganizations, mergers or asset sales.
NEW DIRECTORS; MANAGEMENT OF THE COMPANY
New Directors. Contemporaneously with the funding of the Bridge Loan, the
Company obtained the resignations of three of its directors, Messrs. Robert E.
Bruce, William E. Gerstenslager, and E. Lawrence Hendershot, M.D. and elected
three directors nominated by Strategic Partners to the Board, Val Rajic, Michael
A. Cavataio and Andrew A. Boemi (the "Interim Directors').
Upon consummation of the Equity Financing, the remaining directors of the
Company (other than the Interim Directors and Messrs. Lick and Novatney) will
resign. The directors then in office will, consistent with the Voting Agreement,
fill such vacancies by electing Richard M. Osborne, Robert F. Nauert, Michael K.
Keefe, and Mr. Robert E. Bruce to the Board. See Appendix D to this Proxy
Statement for biographical information for these new directors.
The Voting Agreement. The following is a summary of the material terms of
the Voting Agreement. Such summary is not a complete description of The Voting
Agreement and is qualified in its entirety by reference to the
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<PAGE> 25
complete text of The Voting Agreement, the form of which is attached as Exhibit
C to the Stock Purchase Agreement, which is attached hereto as Appendix A and is
incorporated herein by this reference.
At the Closing, the Company, Strategic Partners, and Richard M. Osborne,
individually and on behalf of the Fund, will enter into the Voting Agreement.
The Voting Agreement will remain in effect until the earlier of (i) three years
from the date of the Closing or (ii) such date as the total number of Common
Shares of the Company owned by Strategic Partners and Mr. Osborne and their
respective affiliates, exceed the total number of shares owned by such parties
immediately following the Closing Date by 3,500,000 shares.
For the duration of the Voting Agreement, each of Strategic Partners, Mr.
Osborne and the Fund agrees to vote its shares in such a manner that (i) the
five individuals designated by Strategic Partners are elected to the Board at
any annual meeting of Shareholders or special meeting of Shareholders called for
the election of directors or in filling any vacancy on the Board; (ii) the two
individuals designated by Mr. Osborne are elected to the Board at any annual
meeting of Shareholders or special meeting of Shareholders called for the
election of directors or filling any vacancy on the Board; (iii) John F.
Novatney, Jr. is retained as a member of the Board for a period of two years
from the Closing date; (iv) Fred Lick, Jr. is retained as a member of the Board
until the expiration of the remaining term of his employment agreement with the
Company, as amended; (v) at least three Independent Directors remain on the
Board; and (vi) the Company shall not voluntarily be delisted from the Nasdaq
National Market System, Inc. except in connection with a going private
transaction or if the Company becomes listed on another national securities
exchange; provided, however, that so long as the Company is subject to the
reporting requirements of the Securities Exchange Act of 1934, as amended, John
F. Novatney, Jr. will remain a member of the Board for a period of two (2) years
from the Closing date, Fred Lick, Jr. will remain a member of the Board until
the expiration of the remaining term of his employment agreement with the
Company, and at least three (3) members of the Board shall be "independent" as
such term is defined under applicable Nasdaq National Market System, Inc.
standards (such directors are referred to herein as "Independent Directors").
Under NASD standards, the term "independent director" means a person other than
an officer or employee of the Company or its subsidiaries or any other
individual having a relationship which, in the opinion of the Board, would
interfere with the exercise of independent judgment in carrying out the
responsibilities of a director.
Article XI. The Eleventh Article of the Company's Amended Articles of
Incorporation provides that unless two-thirds of the Company's directors act to
approve or to recommend to the Shareholders the approval of certain matters, the
affirmative vote of 75% of the Common Shares (rather than a simple majority) is
required to approve such matters. These requirements must be satisfied in order
to: (i) amend, alter or repeal the Amended Articles of Incorporation of the
Company; (ii) amend, alter, or repeal the Code of Regulations of the Company;
(iii) adopt an agreement of merger or consolidation providing for the merger or
consolidation of the Company with or into one or more other corporations and
requiring Shareholder approval; (iv) adopt a proposed combination or majority
share acquisition involving the issuance of shares of the Company; (v) adopt a
proposal to sell, exchange, transfer or otherwise dispose of all, or
substantially all, of the assets of the Company or of all or substantially all
of the stock or assets of any major subsidiary of the Company; or (vi) dissolve
the Company. Thus, unless two-thirds of the Company's directors approve a matter
described above, Strategic Partners and the Fund cannot, as Shareholders,
approve any of the above types of actions without also obtaining the approval of
some portion of the other Shareholders.
Business Plan. In connection with the financing obtained by Strategic
Partners for the Company, the Board approved a comprehensive business plan which
was implemented beginning January 1, 1998. The Company has implemented a series
of rate increase actions which continue to the present. Each policy type has
been thoroughly examined with respect to the cost of particular benefits and
where appropriate, benefit adjustments are being made, coverages are being
modified and premium rates are being increased.
Concurrently with actions taken to increase profitability of the products
sold by the Company, an effort is underway to reduce expenses in all areas of
the Company's operations. The goal is a reduction of expenses by up to $7
million when compared to 1997 expenses. Each area of the Company's operations
has been affected. Employee benefits (including executive perquisites) have been
modified, a hiring and wage freeze has been instituted and a reduction in staff
is presently underway. Further expense reductions will involve consolidation of
21
<PAGE> 26
operational areas, cancellation of certain long term contracts, material
revision of existing provider relationships and a substantial reduction in the
professional service fees incurred by the Company in recent years.
The Company is also placing a renewed emphasis on achievement of savings
through implementation of managed care techniques, and several contracts are
being negotiated with respect to more efficient management of provider networks,
provision of enhanced utilization review and utilization management services,
large case management and implementation of a disease management strategy. It is
anticipated that these activities will result in additional savings of up to $3
million in 1998.
In addition, the Company is simplifying its products and developing new
products to be sold through the Company's existing agency distribution system.
It is planned that all products of the Company will be modified to enhanced
profitability, and additional simplified products will be introduced to the
agency force.
Each of the above initiatives is being supervised by senior management of
the Company with the support of the Board. Employee incentive programs are
currently under consideration to enhance the interests of employees in the
Companys efforts.
Management of the Company. During the term of the Bridge Loan, Strategic
Partners will conduct a search for a chief operating officer and recommend a
suitable candidate if one results from the search for consideration by the
Board. Until such a candidate has been found, Mr. Val Rajic, the President of
Strategic Partners and a newly elected director of the Company, will act as the
Company's chief operating officer and has been appointed to such position. Mr.
Billy B. Hill, Jr., an affilliate of Strategic Partners, has been appointed to
serve as General Counsel of the Company.
YEAR 2000 CONVERSION
The Company has conducted a comprehensive review of its computer systems to
identify the systems that could be affected by the "Year 2000" issue and is
developing an implementation plan to resolve the issue. The Year 2000 problem is
the result of computer programs being written using two digits rather than four
to define the applicable year. Any of the Company's programs that have
time-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in a major system failure or
miscalculations. The Company presently believes that, with modifications to
existing software and converting to new software, the Year 2000 problem will not
pose significant operational problems for the Company's computer systems as so
modified and converted. Programming, testing and conversion of system
applications are expected to cost between $1.5 to $2.5 million over the next two
years.
INFORMATION REGARDING STRATEGIC PARTNERS
Strategic Partners is a newly formed Delaware limited liability company
formed for the purpose of making the Bridge Loan and Equity Financing, which has
the following members: Peter W. Nauert, Val Rajic and Karon Hill.
Strategic Partners provided the Company with an acquiring person statement
on , 1998, which sets forth its intention to acquire control of the
Company. See Appendix E to this Proxy Statement, which is incorporated herein by
reference.
AGREEMENT AMONG INVESTORS
Mr. Nauert, Mr. Osborne, Strategic Partners and the Fund have entered into
the Investors' Agreement, which governs their investment in the Company. The
parties have agreed that 70% of the Guarantee Warrants issued by the Company in
consideration of the guarantees provided by Mr. Nauert and Mr. Osborne will be
issued to Mr. Nauert and 30% of the Guarantee Warrants will be issued to the
Fund. Also, Mr. Nauert and Mr. Osborne have agreed to indemnify and hold
harmless each other against any amount either of them actually pays under their
respective guarantees to ANB in excess of the following percentages of the total
amount actually paid under the guarantees: (i) Mr. Nauert 70% and (ii) Mr.
Osborne 30%.
22
<PAGE> 27
Strategic Partners and the Fund have agreed that Strategic Partners will
pay 70% of the $27,500,000 purchase price under the Stock Purchase Agreement
upon receipt of 70% of the Common Shares to be issued in the Equity Financing
and 70% of the Equity Warrants and the Fund will pay 30% of the $27,500,000
purchase price under the Stock Purchase Agreement upon receipt of 30% of the
Common Shares to be issued in the Equity Financing and 30% of the Equity
Warrants. If either Strategic Partners or the Fund breaches its covenant to pay
its respective portion of the purchase price under the Stock Purchase Agreement,
the party in breach will assign to the other party Guarantee Warrants to
purchase 300,000 Common Shares. Neither Mr. Nauert nor the Fund may transfer any
Guarantee Warrants if after giving effect to such transfer, the transferor will
have Guarantee Warrants to purchase less than 300,000 Common Shares prior to the
earlier to occur of the Closing or the valid termination of the Stock Purchase
Agreement. In addition, Strategic Partners has agreed to pay Mr. Osborne 30% of
any Termination Fee received by Strategic Partners from the Company.
Mr. Nauert, Mr. Osborne, Strategic Partners and the Fund have also agreed
to vote all of their respective Common Shares in favor of the transactions
contemplated by the Stock Purchase Agreement.
REGULATORY APPROVALS
The HSR Act and the rules and regulations thereunder require that parties
of a certain size to a proposed merger or business combination exceeding a
certain size file with the Antitrust Division of the Department of Justice (the
"Antitrust Division") and the Federal Trade Commission (the "FTC") Notification
and Report Forms ("Forms") with respect to such merger or business combination.
The parties thereafter are required to observe a waiting period before
consummating the reported transaction. The Company and Strategic Partners will
comply with the HSR Act and, if necessary, will file Forms with the Antitrust
Division and the FTC with respect to the transactions contemplated by the
Financing Proposal. The transactions contemplated by the Financing Proposal will
require approval by the ODI. Management of the Company believes, based on
discussions they have had with ODI representatives, that the Company should
receive the required approvals from the ODI by February 28, 1998.
THE AMENDMENT PROPOSAL
The Board believes that it is in the best interests of the Company to
implement the structure of the Board called for by the Voting Agreement. That
structure does not contemplate a classified board. Therefore, the Board has
recommended an amendment to Article II, Section 1 and Section 2 of the Code of
Regulations of the Company to eliminate the classification of the Board. The
full text of Article II, Sections 1 and 2 reflecting this amendment in included
as Appendix B to this Proxy Statement.
Upon effectiveness of such amendment, the Company's directors would no
longer be elected in three classes, each class elected in a separate annual
meeting. Instead, all of the directors would stand for election at each annual
meeting.
The affirmative vote of the holders of a majority of the outstanding Common
Shares is required to adopt the Amendment Proposal.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE "FOR" THE AMENDMENT
PROPOSAL
23
<PAGE> 28
SECURITY OWNERSHIP OF MANAGEMENT AND PRINCIPAL SHAREHOLDERS
The following table sets forth, at the Record Date, and as adjusted to give
effect to the issuance of the Common Shares and the Equity Warrants after
approval of the Financing Proposal and the closing of the Equity Financing,
certain information with respect to the beneficial ownership of the Company's
Common Shares by (i) each person known by the Company to own beneficially more
than 5% of the outstanding Common Shares, (ii) each Company director, (iii) each
of the named executive officers and (iv) all Company executive officers and
directors as a group.
<TABLE>
<CAPTION>
AT THE RECORD DATE AS ADJUSTED
------------------------------ ------------------------------
AMOUNT & NATURE AMOUNT & NATURE
OF BENEFICIAL PERCENT OF OF BENEFICIAL PERCENT OF
NAME AND ADDRESS OWNERSHIP(1) CLASS OWNERSHIP CLASS
- -------------------------------------- --------------- ---------- --------------- ----------
<S> <C> <C> <C> <C>
Fred Lick, Jr. 360,000(2) 7.2 360,000 2.8
17800 Royalton Road
Strongsville, OH 44136
Dimensional Fund Advisors Inc. 258,300(3) 5.1 258,300 2.0
1299 Ocean Avenue
11th Floor
Santa Monica, CA 90401
Peter W. Nauert 1,200,000(4) 24.0 8,900,000(5) 70.1
c/o Strategic Acquisition Partners,
LLC
20 North Wacker Drive, Suite 3118
Chicago, Illinois 60606
Strategic Acquisition Partners, LLC 1,200,000(6) 24.0 8,900,000(7) 70.1
20 North Wacker Drive, Suite 3118
Chicago, Illinois 60606
Turkey Vulture Fund XIII, Ltd. 1,200,000(8) 24.0 8,900,000(9) 70.1
c/o Mr. Richard M. Osborne
7001 Center Street
Mentor, Ohio 44060
Frank W. Grimone 125,000 2.5 125,000 *
Glen A. Laffoon 86,650(10) 1.7 86,650 *
John L. McKean 3,000(11) * 3,000 *
John F. Novatney, Jr. 13,000 * 13,000 *
David L. Rossio 1,000 * 1,000 *
Thomas D. Schulte 2,097(12) * 2,097 *
Robert K. Smith 5,725(13) * 5,725 *
James A. Weisbarth 14,075 * 14,075 *
Robert S. Zarick 1,000(14) * 1,000 *
Andrew A. Boemi(15) 0 0 0 0
Michael A. Cavataio(15) 0 0 0 0
Val Rajic(15) 0 0 0 0
Robert E. Bruce(16) 12,000 * 12,000 *
Michael K. Keefe(16) 0 0 0 0
Robert F. Nauert(16) 0 0 0 0
Richard M. Osborne(17) 1,200,000 12.8 8,900,000 70.1
All executive officers and directors 1,823,547 36.5 9,523,547 75.0
as
a group (17 persons)
</TABLE>
24
<PAGE> 29
- ---------------
* Less than one percent of the outstanding Common Shares of the Company
(1) Unless otherwise indicated, the persons named have sole voting and
investment power with respect to all Common Shares shown as being
beneficially owned by them.
(2) Includes 37,500 Common Shares owned by Mid American Asset Management
Corporation, of which Mr. Lick is the sole beneficial owner.
(3) Dimensional Fund Advisors Inc. ("Dimensional"), a registered investment
advisor, is deemed to have beneficial ownership of 258,300 Common Shares as
of December 31, 1996, according to public reports, all of which shares are
held in portfolios of DFA Investment Dimensions Group Inc., a registered
open-end investment company, or in series of the DFA Investment Trust
Company, a Delaware business trust, or the DFA Group Trust and DFA
Participation Group Trust, investment vehicles for qualified employee
benefit plans, for all of which Dimensional Fund Advisors Inc. serves as
investment manager. Dimensional disclaims beneficial ownership of all such
shares.
(4) Includes the 560,000 Guarantee Warrants issued to Mr. Nauert at the time of
the Bridge Financing, which are all immediately exercisable. Also includes
400,000 Common Shares and 240,000 immediately exercisable Guarantee
Warrants beneficially owned by the Fund of which Mr. Nauert may be deemed
to be the beneficial owner as part of a group (as used in Section 13(d)(3)
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
because he is party to the Investors' Agreement. Mr. Nauert disclaims
beneficial ownership of the Common Shares beneficially owned by the Fund.
(5) Includes 700,000 Guarantee Warrants issued to Mr. Nauert in connection with
the Bridge Financing and the Equity Financing, which are all immediately
exercisable, 3,500,000 Common Shares and 1,750,000 immediately exercisable
Equity Warrants owned by Strategic Partners, in which Mr. Nauert is an
investor and over which he exercises voting control, 300,000 Guarantee
Warrants and 750,000 Equity Warrants, all of which are immediately
exercisable, which are beneficially owned by the Fund, and 1,900,000 Common
Shares owned by the Fund. Mr. Nauert may be deemed to be the beneficial
owner as part of a group under the Exchange Act of the Common Shares and
Warrants beneficially owned by the Fund because he is party to the
Investors' Agreement and will be party to the Voting Agreement. Mr. Nauert
disclaims beneficial ownership of the Common Shares beneficially owned by
the Fund.
(6) Because it is a party to the Investors' Agreement, Strategic Partners may
be deemed to be the beneficial owners as part of a group under the Exchange
Act, of all Common Shares and Warrants beneficially owned by Mr. Nauert and
the Fund. Strategic Partners disclaims such beneficial ownership.
(7) Because it is a party to the Investors' Agreement, Strategic Partners may
be deemed to be the beneficial owners as part of a group under the Exchange
Act, of all Common Shares and Warrants beneficially owned by Mr. Nauert and
the Fund. Strategic Partners disclaims such beneficial ownership.
(8) Includes the 240,000 Guarantee Warrants issued to the Fund at the time of
the Bridge Financing, which are immediately exercisable. Also includes
560,000 immediately exercisable Guarantee Warrants beneficially owned by
Mr. Nauert of which the Fund may be deemed to be the beneficial owner as
part of a group under the Exchange Act because it is party to the
Investors' Agreement. The Fund disclaims beneficial ownership of the Common
Shares beneficially owned by Mr. Nauert.
(9) Includes 1,050,000 Warrants issued in connection with the Equity Financing
and the Bridge Financing, which are all immediately exercisable. Also
includes 3,500,000 Common Shares and 1,750,000 immediately exercisable
Warrants beneficially owned by Strategic Partners and 800,000 immediately
exercisable Guarantee Warrants owned by Mr. Nauert. Because it is a party
to the Investors' Agreement and will be a party to the Voting Agreement,
the Fund may be deemed to be the beneficial owner as part of a group of the
Common Shares beneficially owned by Strategic Partners and Mr. Nauert. The
Fund disclaims such beneficial ownership.
(10) Includes 41,150 Common Shares held by Mr. Laffoon's spouse and 3,000 Common
Shares held jointly with his spouse.
(11) These Common Shares are held by Jack McKean Agency, Inc. of which Mr.
McKean is the sole shareholder.
25
<PAGE> 30
(12) These Common Shares are held jointly with Mr. Schulte's spouse.
(13) Includes 1,500 Common Shares held by the R.K. Smith & Associates, Inc.,
Profit Sharing Plan, of which Mr. Smith is the sole beneficiary, and 4,225
Common Shares held jointly with his spouse.
(14) These Common Shares are held jointly with Mr. Zarick's spouse.
(15) Each such person became a member of the Board in connection with the
consummation of the Bridge Financing.
(16) Each such person will become a member of the Board in connection with the
consummation of the Equity Financing.
(17) Mr. Osborne, the sole investor in the Fund, will be deemed to own all of
the Common Shares beneficially owned by the Fund. Mr. Osborne disclaims
beneficial ownership of the Common Shares beneficially owned by Strategic
Partners and Mr. Nauert.
26
<PAGE> 31
SHAREHOLDER PROPOSALS
Shareholders who wish to present proposals for action at the next Annual
Meeting of Shareholders of the Company were required to submit their proposal to
the Company no later than December 6, 1997. The Company is not required to
include in the proxy statement or form of proxy a Shareholder proposal which was
not received by that date or which otherwise failed to meet the requirements for
Shareholder proposals established by the regulations of the Commission.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
This Proxy Statement incorporates by reference documents which are not
presented herein. Copies of any such documents relating to the Company, other
than exhibits to such documents (unless such exhibits specifically are
incorporated by reference in such documents), are available without charge, upon
written or oral request, from Central Reserve Life Corporation, CRL Plaza, 17800
Royalton Road, Strongsville, Ohio 44136, Attention: Secretary, telephone (440)
572-2400. In order to ensure timely delivery of the documents requested, any
such request should be made by , 1998.
The following documents previously filed by the Company with the Commission
(File Number 0-8483) are incorporated in this Proxy Statement by reference:
(1) The Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996 filed with the Commission on March 28, 1997.
(2) The Company's Quarterly Report on Form 10-Q for the period ended
March 31, 1997 filed with the Commission on May 13, 1997.
(3) The Company's Quarterly Report on Form 10-Q for the period ended
June 30, 1997 filed with the Commission on August 19, 1997.
(4) The Company's Quarterly Report on Form 10-Q for the period ended
September 30, 1997 filed with the Commission on November 14, 1997.
(5) The Company's Current Report on Form 8-K filed with the Commission
on October 14, 1997.
(6) The Company's Current Report on Form 8-K filed with the Commission
on November 4, 1997.
(7) The Company's Current Report on Form 8-K filed with the Commission
on November 17, 1997.
(8) The Company's Current Report on Form 8-K filed with the Commission
on December 5, 1997.
(9) The Company's Current Report on Form 8-K filed with the Commission
on December 30, 1997.
All reports and other documents subsequently filed by the Company with the
Commission pursuant to Sections 13(a), 13(c), 14 and 15(d) of the Exchange Act
prior to the date of the Meeting shall be deemed to be incorporated by reference
herein and to be part hereof from the date of the filing of such reports and
documents.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Proxy Statement to the extent that a statement contained
herein, or in any other subsequently filed document that also is or is deemed to
be incorporated by reference herein, modifies or supersedes such statement. Any
such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute part of this Proxy Statement.
27
<PAGE> 32
SHAREHOLDERS ARE URGED TO SPECIFY THEIR CHOICES AND TO DATE, SIGN, AND
RETURN THE ENCLOSED PROXY IN THE ENCLOSED ENVELOPE. PROMPT RESPONSE IS HELPFUL,
AND YOUR COOPERATION WILL BE APPRECIATED.
By order of the Board.
[actual signature]
Fred Lick, Jr.
Chairman of the Board,
President and Chief Executive Officer
February , 1998
28
<PAGE> 33
APPENDIX A
STOCK PURCHASE AGREEMENT
BY AND BETWEEN
STRATEGIC ACQUISITION PARTNERS, LLC
AND
CENTRAL RESERVE LIFE CORPORATION
A-1
<PAGE> 34
STOCK PURCHASE AGREEMENT
THIS AGREEMENT is made and entered into this 26th day of November, 1997, by
and between Strategic Acquisition Partners, LLC, a Nevada limited liability
company ("PURCHASER"), and Central Reserve Life Corporation, an Ohio corporation
(the "COMPANY").
WHEREAS, Purchaser desires to acquire 5,000,000 shares of common stock,
without par value, of the Company (the "STOCK") from the Company on the terms
set forth herein; and
WHEREAS, in consideration for the Purchase Price (as hereinafter defined),
the Company shall issue the Stock to the Purchaser.
NOW, THEREFORE, in consideration of the premises, representations,
warranties, covenants, agreements and promises herein contained, the parties
agree as follows:
ARTICLE I
DEFINITIONS
For purposes of this Agreement, the following capitalized terms shall have
the following meanings:
"ADVERSE CLAIMS" shall mean all of the following, whether direct or
indirect, accrued, absolute or contingent: (i) security interests, liens,
pledges, charges, escrows, options, proxies, rights of first refusal,
preemptive rights, mortgages, hypothecations, assignments, title retention
agreements, indentures and security agreements, (ii) title defects,
assessments, easements, reservations and encroachments; (iii) contracts of
lease, license and sale; (iv) royalty and commission arrangements; (v)
voting agreements and proxies; and (vi) any other claims, covenants,
limitations, encumbrances, burdens and restrictions of any kind, except for
restrictions under applicable securities laws.
"BUSINESS" shall mean the insurance business as currently conducted by
the Company and the Company Subsidiaries.
"CODE" shall mean the Internal Revenue Code of 1986, as amended.
"COMMISSION" shall mean the Securities Exchange Commission.
"COMPANY MATERIAL ADVERSE EFFECT" shall mean any material adverse
change in the financial condition, results of operations or business of the
Company and the Company Subsidiaries as a whole, taking into account all
relevant factors including without limitation, assets, liabilities,
personnel, business and relationships with suppliers, customers,
distributors, sales representatives, lenders, lessors and others. For
purposes of this Agreement, Company Material Adverse Effect (i) shall also
mean the suspension of, loss of or issuance of a cease and desist order
relating to any insurance license of the Company or any Company
Subsidiaries in any state which is reasonably likely to result in the loss
of 5% or more of the Company's premium revenue (for the year ended December
31, 1996).
"ERISA" shall mean the Employee Retirement and Income Security Act, as
amended.
"EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as
amended
"FACILITIES" shall mean all the real property, buildings and
improvements owned, leased, licensed or otherwise used by the Company or
the Business.
"GAAP" shall mean U.S. generally accepted accounting principles, as
consistently applied by the Company.
"HSR ACT" shall mean the Hart-Scott-Rodino Antitrust Improvements Act
of 1976, as amended.
"SECURITIES ACT" shall mean the Securities Act of 1933, as amended.
A-2
<PAGE> 35
ARTICLE II
THE TRANSACTION
2.1. Sale and Purchase of Stock. At Closing, the Company shall issue,
sell, transfer, assign and deliver to Purchaser, and Purchaser shall purchase,
accept, assume and receive all right, title and interest in and to the Stock
free and clear of any Adverse Claims.
2.2. Purchase Price. The aggregate purchase price for the Stock ("PURCHASE
PRICE") shall be $27,500,000 payable at Closing by the Purchaser as follows:
(a) the aggregate amount of principal and interest accrued on the
obligations of Purchaser to the holder of indebtedness of Purchaser
incurred in connection with the bridge loan agreement between the Company
and Purchaser shall be paid by wire transfer in immediately available funds
to the bank account designated by Purchaser;
(b) the difference of $27,500,000 LESS the amount paid by Purchaser
pursuant to Section 2.2(a) shall be paid to the Company by wire transfer in
immediately available funds to the bank account designated by the Company
at least five banking days in advance of the Closing Date.
ARTICLE III
THE CLOSING
3.1. Closing. The closing of the transaction contemplated by this
Agreement (the "CLOSING") shall occur at 10:00 o'clock on the fifth business day
following satisfaction or waiver of the conditions to closing set forth herein
at the offices of McDermott, Will & Emery, 227 West Monroe Street, Chicago,
Illinois 60606, or at such other time or place as may be mutually agreed upon by
the parties (the "CLOSING DATE"). The Closing shall be deemed to take place as
of the close of business on the Closing Date.
3.2. Deliveries by Purchaser. At the Closing, Purchaser shall deliver or
cause to be delivered the following:
(a) a wire transfer in immediately available funds in the amount of
the Purchase Price to be paid by Purchaser pursuant to Section 2.2;
(b) such other instruments or documents as may be necessary or
appropriate to carry out the transactions contemplated hereby; and
(c) opinion of McDermott, Will & Emery relating to the formation and
existence of Purchaser and its power and authority to enter into this
Agreement and the Agreements contemplated hereby.
3.3. Deliveries by the Company. At the Closing, the Company shall deliver
or cause to be delivered the following:
(a) certificates for the Stock;
(b) a legal opinion of Baker & Hostetler, counsel to the Company,
relating to the due organization of the Company, the authority of the
Company to enter the transactions contemplated hereby, the capitalization
of the Company, and certain regulatory matters pertaining to the
transactions contemplated hereby;
(c) the Warrants substantially in the form of Exhibit A hereto issued
to Purchaser or its designees pursuant to the Warrant Agreement;
(d) certificate of incorporation of the Company, certified as of a
recent date by the Secretary of State of Ohio;
(e) certificates of good standing, certified as of a recent date by
the Secretary of Ohio and of each jurisdiction in which the Company is
qualified to do business;
A-3
<PAGE> 36
(f) a certificate of the Secretary of the Company certifying copies of
the certificate of incorporation, bylaws and resolutions of the Company as
of the Closing Date;
(g) a certificate of the Company certifying as to the continued
accuracy of the representations and warranties as required by Section 10.1
and compliance with conditions precedent to the Closing;
(h) resignations from the directors of the Company named on Schedule
3.3(h) hereto without any claim for compensation other than directors fees
and perquisites earned prior to the dates of such resignations as described
on Schedule 3.3(h);
(i) any third party consents required to consummate the transactions
contemplated hereby; and
(j) such other instruments or documents as may be necessary or
appropriate to carry out the transactions contemplated hereby.
3.4. Closing Agreements. At the Closing, the appropriate parties shall
execute, acknowledge and deliver the following:
(a) the Registration Rights Agreement substantially in the form of
Exhibit B attached hereto (the "REGISTRATION RIGHTS AGREEMENT");
(b) a voting agreement in the form of Exhibit C attached hereto
relating to the election of directors of the Company and certain other
matters referred to therein (the "VOTING AGREEMENT"); and
(c) such other instruments or documents as may be necessary or
appropriate to carry out the transactions contemplated hereby.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to Purchaser as of the date
hereof, and as of the Closing Date, as follows:
4.1. Organization; Qualification; Good Standing; Corporate Power.
(a) The Company is a corporation duly organized, validly existing and
in good standing under the laws of the state of Ohio and is duly qualified
to do business and is in good standing in the state of Ohio and in all
other jurisdictions (whether federal, state, local or foreign) where its
ownership or leasing of property or the conduct of its business requires it
to be qualified and in which the failure to be duly qualified would have a
Company Material Adverse Effect. The Company has the corporate power and
authority to carry on its business as it is now conducted and to own, lease
and operate its assets, properties, and business. The Company has the
corporate power and authority to execute and deliver this Agreement and the
corporate power to consummate the transactions contemplated hereby. The
Company has delivered to the Purchaser complete and correct copies of its
Articles of Incorporation and Code of Regulations (collectively, the
"COMPANY ORGANIZATIONAL DOCUMENTS") as in effect on the date hereof.
(b) The only direct or indirect Subsidiaries of the Company are the
entities listed on Schedule 4.1(b) (collectively, the "COMPANY
SUBSIDIARIES"). The "COMPANY INSURANCE SUBSIDIARY" shall mean Central
Reserve Life Insurance Company. Schedule 4.1(b) sets forth a complete list
of the officers and directors of the Company and each Company Subsidiary.
Except as set forth on Schedule 4.1(b), the Company and each Company
Subsidiary does not have any direct or indirect equity or ownership
interest in any other business or entity and does not have any direct or
indirect obligation or any commitment to invest any funds in any
corporation or other business or entity, other than for investment purposes
in the ordinary course of business in accordance with past practices. For
purposes of this Agreement, the term "SUBSIDIARY" shall mean any
corporation, association or other business entity of which more than 10% of
the outstanding voting stock is owned or controlled, directly or
indirectly, by the Company or by one or more Company Subsidiaries, or by
the Company and one or more of the Company Subsidiaries.
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(c) Set forth on Schedule 4.1(c) is a list of the states of
incorporation or organization for each of the Company Subsidiaries and
states in which each of the Company Subsidiaries is licensed to issue
insurance. Each Company Subsidiary is a corporation duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
incorporation. Each Company Subsidiary has the corporate power and
authority to carry on its business as it is now conducted and to own, lease
and operate its properties, and is duly licensed to issue insurance and is
in good standing in each jurisdiction where its ownership or leasing of
property or the conduct of its business requires it to be qualified. The
Company has delivered to the Purchaser complete and correct copies of each
Company Subsidiary's Articles of Incorporation and Bylaws or Code of
Regulations as in effect on the date hereof.
(d) Except as disclosed on Schedule 4.1(d), the Company and the
Company Subsidiaries hold all material licenses, certificates, permits,
franchises and rights ("PERMITS") from all appropriate federal, state or
other public authorities necessary for the conduct of the business of the
Company and the Company Subsidiaries, and a list of each state in which the
Company has a certificate of authority or is qualified to conduct business
is attached hereto as part of Schedule 4.1(d). Except as set forth on
Schedule 4.1(d), each such license, certificate, permit or franchise is
without qualification or restriction. The Company and the Company
Subsidiaries each have conducted its and their business so as to comply
with all applicable federal, state and local statutes, ordinances,
regulations or rules, and neither the Company nor any of the Company
Subsidiaries is presently charged with, or, to the Company's knowledge,
under governmental investigation with respect to, any actual or alleged
material violations of any statute, ordinance, regulation or rule. To the
Company's knowledge, neither the Company nor the Company Subsidiaries are
the subject of any pending or to the Company's knowledge threatened
proceeding by any regulatory authority having jurisdiction over its or
their business, properties, assets or operations.
(e) A record of all material action taken by the Boards of Directors
of the Company and each Company Subsidiary, and complete and accurate
copies of all material actions taken by written consent of the shareholders
and the Board of Directors of the Company and each Company Subsidiary, and
all minutes of their respective meetings, are contained in the respective
minute books of the Company and each Company Subsidiary. The minute books
or stock ledgers of the Company and each Company Subsidiary, retained by
the Company or by its transfer agent, contain an accurate and complete
record of all issuances, transfers and cancellations of shares of capital
stock of the Company and each Company Subsidiary. The Purchaser has been
given access to and an opportunity to review all such minutes and minute
books.
4.2. Authorization. Except as set forth on Schedule 4.2, the execution,
delivery and performance of this Agreement by the Company and the consummation
of the transactions contemplated hereby and thereby have been duly authorized
and approved by all necessary corporate action, subject to the approval of the
shareholders of the Company, and this Agreement is legally binding on and
enforceable against the Company in accordance with its terms, except as
enforceability may be limited by bankruptcy laws, insolvency laws or other laws
affecting creditors' rights generally. Subject to obtaining the approvals set
forth on Schedule 4.2, the execution and delivery of this Agreement does not,
and the consummation of the transactions contemplated hereby will not, violate
the Company's Articles of Incorporation or Code of Regulations.
4.3. Governmental Authorization. The execution, delivery and performance
by the Company of this Agreement and the consummation of the transactions
contemplated hereby by the Company require no action by or in respect of, or
filing with, any governmental body, agency, official or authority other than:
(a) compliance with any applicable requirements of the HSR Act;
(b) compliance with any applicable requirements of the Securities Act
and the Exchange Act;
(c) compliance with any applicable foreign or state securities or
"blue sky" laws;
(d) compliance with any applicable requirement of Ohio and any other
insurance regulatory authorities having jurisdiction over the Company, any
of the Company Subsidiaries or the transactions described herein;
(e) such other filings or registrations with, or authorizations,
consents or approvals of, governmental bodies, agencies, officials or
authorities, the failure of which to make or obtain would adversely affect
the
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ability of the Company and the Company Subsidiaries to consummate the
transactions contemplated hereby and operate their businesses as heretofore
operated; and
(f) those approvals described on Schedule 4.3.
4.4. Capitalization.
(a) The authorized capitalization of the Company consists of (i)
15,000,000 shares of Common Stock, without par value (the "COMPANY COMMON
STOCK"), of which 4,195,172 are issued and outstanding, and 0 shares are
held by the Company as treasury shares, and (ii) 2,000,000 shares of
preferred stock, without par value (the "PREFERRED STOCK"), of which no
shares are issued and outstanding. The Company has no other class of stock
and there are, and as of the Closing Date there will be, no fractional
shares of Company Common Stock issued or outstanding.
(b) There are outstanding options for the purchase of 65,845 shares of
Company Common Stock granted to certain employees of the Company pursuant
to the Company's Stock Option and Incentive Plan (the "OPTION PLAN") (the
option rights granted pursuant to the Option Plan are sometimes
collectively referred to herein as the "OPTIONS"). The names of the
Optionees, the date of each option to purchase, the number of shares
subject to each such option, the expiration date of each such option, and
the price at which each such option may be exercised are set forth in
Schedule 4.4(b). The Company has reserved an adequate number of shares to
cover exercise of Options. Except with respect to the Options, neither the
Company nor the Company Subsidiaries have granted any outstanding warrants,
options, rights, calls, agreements, understandings or other commitments of
any nature relating to the authorization, issuance, sale or repurchase of
any equity securities of the Company or the Company Subsidiaries. There are
no rights in or claims possessed by a person enforceable against the
Company in law or in equity to compel such an authorization, issuance,
sale, or repurchase. Except as otherwise provided in the Articles of
Incorporation of the Company and except as set forth on Schedule 4.4(b),
all of the issued and outstanding shares of Company Common Stock will be
entitled to vote to approve this Agreement.
(c) The Company owns directly or indirectly all of the issued and
outstanding shares of capital stock of the Company's Subsidiaries. Schedule
4.4(c) accurately identifies the number of shares of authorized and
outstanding capital stock of the Company's Subsidiaries.
(d) All of the outstanding shares of the Company and the Company's
Subsidiaries (i) are duly authorized, validly issued, fully paid,
nonassessable and free of preemptive rights and, in the case of the shares
of the Company Subsidiaries, are owned free and clear of all liens, charges
or encumbrances, except as listed on Schedule 4.4(d) and (ii) have been
issued in compliance with all applicable federal and state securities laws.
Upon issuance, the Stock will be (i) duly authorized, validly issued, fully
paid, nonassessable and free of preemptive rights and (ii) issued in
compliance with all applicable federal and state securities laws.
(e) Upon consummation of the transactions contemplated hereby,
Purchaser will have good and marketable title to and ownership of the Stock
free and clear of all Adverse Claims other than the Ohio General
Corporation Law, the Articles of Incorporation of the Company, the Code of
Regulations of the Company, all federal and state securities laws, the
Registration Rights Agreement or the Voting Agreement.
4.5. Financial Statements.
(a) The Company has furnished to the Purchaser true, correct and
complete copies of: (i) the audited Consolidated Balance Sheets of the
Company as of the fiscal years ended December 31, 1996, 1995 and 1994, and
the related Consolidated Statements of Operations, Shareholders' Equity and
Cash Flows for each of the fiscal years ended December 31, 1996, 1995 and
1994, including the respective notes thereto, together with the reports of
KPMG Peat Marwick LLP relating thereto; (ii) the unaudited Balance Sheets
as of September 30, 1997, and the related unaudited Consolidated Statements
of Operations, Shareholders' Equity and Cash Flows for the period then
ended ("COMPANY FINANCIAL STATEMENTS"); (iii) annual audited Statutory
Financial Statements for the Company Insurance Subsidiary for the years
ended December 31, 1996, 1995 and 1994; and (iv) quarterly Statutory
Financial Statements for periods ended
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March 31, June 30 and September 30, 1997 (collectively, the "STATUTORY
STATEMENTS"). Except as set forth on Schedule 4.5(a), such Company
Financial Statements present fairly the financial position of the Company
and the Company Subsidiaries taken as a whole as of and for the periods
ended on their respective dates and the operating results of the Company
and the Company Subsidiaries taken as a whole for the indicated periods in
conformity with GAAP. Except as set forth on Schedule 4.5(a), since
September 30, 1997 to the date hereof, there have not been any material
adverse changes in the Company's and the Company Subsidiaries' consolidated
financial condition, assets, liabilities or business, other than changes in
the ordinary course of business. The Statutory Statements (i) have been
prepared in accordance with the books and records of the Company Insurance
Subsidiary, (ii) are prepared in accordance with the statutory accounting
provisions of the insurance laws of the applicable jurisdictions, and (iii)
are prepared in a manner consistent with prior periods, except for any
changes required by applicable law. Such Statutory Statements, when read in
conjunction with the notes thereto and any statutory audit reports relating
thereto, present fairly in all respects the statutory financial condition
of the Company Insurance Subsidiary at December 31, 1996, 1995 and 1994 and
at September 30, 1997, and the statutory results of their respective
operations for the periods then ended.
(b) The Company will furnish the Purchaser, at the time of the filing
thereof, with copies of its audited (if prepared) and unaudited quarterly
reports and any amendments thereto filed with the Commission subsequent to
September 30, 1997 until the Closing Date ("SUBSEQUENT COMPANY FINANCIAL
STATEMENTS").
(c) The Subsequent Company Financial Statements, will be, prepared in
accordance with GAAP, utilizing accounting practices consistent with prior
years except as otherwise disclosed, and comply or will comply with
applicable accounting requirements and with the rules and regulations of
the Commission with respect thereto. All of the Subsequent Company
Financial Statements will present fairly, the financial position of the
Company and the Company Subsidiaries taken as a whole and the results of
its and their operations and changes in its and their financial position as
of and for the periods ending on their respective dates.
(d) The Company has delivered to the Purchaser true and complete
copies of the following SAP Financial Statements (as defined hereinafter)
for the Company Insurance Subsidiary: SAP Financial Statements for each
Company Insurance Subsidiary for the years ended December 31, 1994, 1995
and 1996, and for the quarters ended March 31, June 30, and September 30,
1997, and the notes related thereto ("SAP FINANCIAL STATEMENTS"). Each of
the SAP Financial Statements complied in all material respects with all
applicable laws when so filed, and all deficiencies known to the Company
and each Company Insurance Subsidiary with respect to any such SAP
Financial Statements have been cured or corrected or are which the Company
is endeavoring to cure or correct. The Company will furnish the Purchaser
copies of any amendments to prior SAP Financial Statements and any SAP
Financial Statements prepared for periods subsequent to September 30, 1997
and prior to the Closing Date. Each such SAP Financial Statement (and the
notes related thereto), including without limitation, each statement of
admitted assets, liabilities and capital surplus and each of the statements
of operations, changes in unassigned surplus account, and cash flow
contained in the respective SAP Financial Statements, was or will be
prepared in accordance with SAP, is or will be true and complete in all
material respects, and presents or will present fairly the financial
condition, admitted assets and properties and liabilities of each Company
Insurance Subsidiary as of the respective dates thereof, and the results of
operations and changes in capital and surplus and in the cash flow of each
such Company Insurance Subsidiary for and during the respective periods
covered thereby. All reserves with respect to insurance written or assumed
by each Company Insurance Subsidiary as established or reflected on such
SAP Financial Statements, were or will be determined in accordance with
generally accepted actuarial principles and practices and are or will be in
all material respects in accordance with the related insurance, coinsurance
and reinsurance contracts of the Company Insurance Subsidiary, and meet in
all material-respects the requirements of the insurance laws of the
jurisdictions in which such contracts were issued or delivered.
(e) As used herein, "SAP" shall mean the accounting practices
prescribed or permitted by the National Association of Insurance
Commissioners and the insurance regulatory authority in the state in which
each
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Company Insurance Subsidiary is domiciled or qualified to do business, as
the case may be, consistently applied throughout the specified period and
in the immediately prior comparable period. "SAP STATEMENTS" shall mean any
annual statements, quarterly statements and other financial statements and
presentations of any Company Insurance Subsidiary prepared in accordance
with SAP and filed with or submitted to the insurance regulatory authority
in the state in which such Company Insurance Subsidiary is domiciled on
forms prescribed or permitted by such authority.
4.6. Absence of Certain Changes and Undisclosed Liabilities.
(a) Except as set forth on Schedule 4.6(a) or reflected in the Company
Financial Statements or the SAP Financial Statements, since December 31,
1996 to the date of this Agreement, (i) the businesses of the Company and
the Company Subsidiaries have been conducted only in the ordinary course,
in the same manner as theretofore conducted; (ii) neither the Company nor
any Company Subsidiary has declared, set aside or paid any dividend or
distribution in respect of the capital stock of the Company or any Company
Subsidiary, or any direct or indirect redemption, purchase or other
acquisition by the Company or such Company Subsidiary of any such stock;
(iii) neither the Company nor any Company Subsidiary has issued additional
shares or granted new options; and (iv) there has not occurred any event or
circumstance resulting, or reasonably expected to result in a Company
Material Adverse Effect.
(b) Except as described in a Schedule hereto or as and to the extent
reflected or reserved against in the Subsequent Company Financial
Statements in accordance with GAAP, since September 30, 1997, neither the
Company nor the Company Subsidiaries will have, at the date of such
statements, any liabilities or obligations, of any nature, secured or
unsecured (whether accrued, absolute, contingent or otherwise) including,
without limitation, any tax liabilities due or to become due, except which
have been incurred in the ordinary course of business.
(c) Except as disclosed on Schedule 4.6(c), since September 30, 1997
to the date of this Agreement the Company has conducted its business in the
ordinary course and there has not been:
(i) any damage, destruction or other tangible property or
casualty loss (whether or not covered by insurance) which, individually
or in the aggregate, has had or would have a Company Material Adverse
Effect;
(ii) any amendment, termination or waiver by the Company or any
Company Subsidiary, of any material right under any agreement, contract
or other written commitment to which it is a party or by which it is
bound and which is required to be disclosed in Schedule 4.16, other than
in the ordinary course of business;
(iii) any material reduction in the amounts of coverage provided
by existing casualty and liability insurance policies with respect to
the business or properties of the Company or any Company Subsidiary;
(iv) any grant of any severance or termination pay to any
director, officer or, other than in the ordinary course of business
consistent with past practice, any employee of the Company or any
Company Subsidiary, or increase in benefits payable to any director or
officer other than in the ordinary course of business under existing
benefit plans;
(v) any new or amendment to or alteration of any existing bonus,
incentive, compensation, severance, stock option, stock appreciation
right, pension, matching gift, profit-sharing, employee stock ownership,
retirement, pension group insurance, death benefit, or other fringe
benefit plan, arrangement or trust agreement adopted or implemented by
the Company or any Company Subsidiary, excluding individual actions with
respect to non-officer employees in the ordinary course of business
consistent with past practice;
(vi) other than in the ordinary course of business consistent with
past practice, the cancellation, waiver, release or other compromise of
any debt, claim or right in excess of $25,000;
(vii) any material change in any accounting principle or practice
or method or application thereof;
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(viii) the termination, lapse, suspension, revocation of, amendment
of, limitation upon, disposal of or failure to renew any license or
permit necessary for the operation of the business of the Company or any
Company Subsidiary.
(ix) any agreements other than on an arm's-length basis between
the Company and any director, executive officer or affiliate or
associate of the foregoing;
(x) other than in the ordinary course of business consistent with
past practice, any change in any underwriting, actuarial, investment, or
financial reporting practice or policy followed by the Company or any
Company Subsidiary or method or application thereof, or any assumption
underlying such principle, practice or policy;
(xi) other than in the ordinary course of business consistent with
past practice, any termination, amendment, or execution by the Company
or any Company Subsidiary of any reinsurance, coinsurance or similar
contract or treaty, as ceding or assuming insurer;
(xii) any sale, transfer, or conveyance of assets or properties of
the Company or any Company Subsidiary (other than investment securities)
with an individual book value or with any aggregate book value in excess
of $25,000; or
(xiii) any purchase of any investment securities by the Company or
any Company Subsidiary other than purchases of investment grade
commercial paper or cash equivalents.
4.7. No Violation. Except as set forth on Schedule 4.7, neither the
execution and delivery of this Agreement by the Company nor the consummation by
the Company of the transactions contemplated hereby or thereby, nor compliance
by the Company with any of the terms or provisions hereof or thereof, will (i)
violate any provision of the Articles of Incorporation or Bylaws or Code of
Regulations of the Company or any Company Subsidiary, (ii) violate any statute,
code, ordinance, rule, regulation, ("LAWS") judgment, order, writ, decree or
injunction ("ORDERS") applicable to the Company or any of the Company
Subsidiaries or any of their respective properties or assets, or (iii) violate,
conflict with, result in a breach of any provision of or the loss of any benefit
under, constitute a default (or an event which, with notice or lapse of time, or
both, would constitute a default) under, result in the termination of or a right
of termination or cancellation under, accelerate the performance required by, or
result in the creation of any lien, pledge, security interest, charge or other
encumbrance upon any of the respective properties or assets of the Company or
any Company Subsidiary under, any of the terms, conditions or provisions of any
note, bond, mortgage, indenture, deed of trust, license, lease, agreement or
other instrument or obligation to which the Company or any Company Subsidiary is
a party, or by which they or any of their respective properties or assets may be
bound or affected.
4.8. Litigation. Except as set forth on Schedule 4.8, there are no legal,
quasijudicial, administrative, or other actions, suits, proceedings, claims
(including non-contractual claims, bad faith claims and claims against the
Company's or any Company Subsidiary's directors or officers, but excluding
coverage and other claims made with respect to insurance policies issued by the
Company or any Company Subsidiary), or investigations about which the Company
has knowledge, of any kind or nature pending or, to the knowledge of the
Company, threatened against the Company or any of the Company Subsidiaries.
Except as set forth on Schedule 4.8, neither the Company nor the Company
Subsidiaries are subject to or in default with respect to, nor are any of its or
their assets subject to, any outstanding judgment, order or decree of any court
or of any governmental agency or instrumentality.
4.9. Taxes, Returns and Reports.
(a) Except as may be reflected on Schedule 4.9(a), each of the Company
and Company Subsidiaries has duly filed all federal, state, county, local
and foreign tax returns including, without limitation, information returns
and returns of estimated tax (collectively "TAX RETURNS"), required to be
filed by it on or prior to the date hereof, including applicable extensions
(all such Tax Returns being accurate and complete in all material respects)
and has duly paid or made adequate provision for the payment of all Taxes
(as defined below) that have been incurred by it or are due or to the
Company's knowledge, claimed to be due from it by Federal, state, county,
local or foreign taxing authorities on or prior to the date of this
Agreement (including, without limitation, if and to the extent applicable,
those due in respect of its
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properties, income, business, capital stock, deposits, franchises,
licenses, sales and payrolls) other than Taxes that are being contested in
good faith (and which are set forth on Schedule 4.9(a)). Except as set
forth on Schedule 4.9(a), the federal income tax returns of the Company and
Company Subsidiaries have been examined by the Internal Revenue Service
("IRS") for all years through and including 1989, and the deficiencies (if
any) asserted as a result of such examination have been satisfied. Except
as may be reflected on Schedule 4.9(a) there are no disputes pending, or
claims asserted or assessments upon the Company or any Company Subsidiaries
regarding Taxes, nor does the Company or any Company Subsidiaries have
outstanding any currently effective waivers extending the statutory period
of limitation applicable to any Federal, state, county, local or foreign
Tax Return for any period. In addition, except as set forth on Schedule
4.9(a), (i) proper and accurate amounts (in all material respects) have
been withheld by the Company and Company Subsidiaries from their employees,
customers, shareholders and others from whom they are required to withhold
Tax in compliance with all applicable Federal, state, county, local and
foreign laws, and (ii) there are no Tax liens upon any property or assets
of the Company or Company Subsidiaries except liens for current Taxes not
yet due. Except as set forth on Schedule 4.9(a), no property of the Company
or any Company Subsidiaries is property that the Company or any Company
Subsidiaries is or will be required to treat as being owned by another
person pursuant to the provisions of former Section 168(f)(8) of the Code
or is "tax-exempt use property" within the meaning of Section 168(h) of the
Code. Except as set forth on Schedule 4.9(a), neither the Company nor any
Company Subsidiaries has been required to include in income any adjustment
pursuant to Section 481 of the Code by reason of a voluntary change in
accounting method initiated by the Company or any Company Subsidiaries, and
the IRS has not initiated or proposed any such adjustment or change in
accounting method. Except as set forth on Schedule 4.9(a), neither the
Company nor any Company Subsidiaries has entered into a transaction which
is being accounted for as an installment sale under Section 453 of the
Code.
(b) The Financial Statements and the Subsequent Financial Statements
delivered to the Purchaser contain in conformity with GAAP, adequate
accruals for all Taxes with respect to periods covered thereby and all
prior periods;
(c) Except as set forth on Schedule 4.9(c), all Tax deficiencies
asserted or assessed against the Company or any Company Subsidiaries have
been paid or finally settled with no remaining amounts owed;
(d) Except as set forth on Schedule 4.9(d), there is no pending, or to
the knowledge of the Company, threatened action, audit, proceeding or
investigation (of which investigation the Company has knowledge) with
respect to (i) the assessment or collection of Taxes, or (ii) a claim for
refund made by the Company or any Company Subsidiaries with respect to
Taxes previously paid;
(e) Except as set forth on Schedule 4.9(e), there are no outstanding
requests for extensions of time within which to file returns and reports in
respect of any Taxes;
(f) Except as set forth on Schedule 4.9(f), neither the Company nor
any Company Subsidiaries have taken action not in accordance with past
practice that would have the effect of deferring any material Tax liability
from any period ending on or before the Closing Date to any period ending
after such date;
(g) Except as set forth on Schedule 4.9(g), neither the Company nor
any of the Company Subsidiaries is a party to any tax-sharing agreement or
similar arrangement (whether express or implied), including any terminated
agreement, as to which any of them could have any continuing liability
following the Closing Date, nor has any continuing liability for Taxes of
any other corporation pursuant to Treasury Regulation Section 1. 1502-6 (or
similar state, local, or foreign provision); and
(h) As used herein, "TAXES" and all derivations thereof means any
federal, state, local or foreign income, gross receipts, license, payroll,
employment, excise, severance, stamp, occupation, premium, windfall
profits, environmental, customs, duties, capital stock, franchise, profits,
withholding, social security (or similar) unemployment, disability, real
property, personal property, sales, use, transfer, registration, value
added, alternative or add-on minimum, estimated, or other tax, charge, fee
levy or other like assessment of any kind whatsoever, including any
interest, penalty, and/or addition thereto.
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4.10. Corporate Properties.
(a) Schedule 4.10(a) accurately identifies: (i) all real property
owned, beneficially or otherwise, or controlled by the Company or the
Company Subsidiaries, whether owned outright, as a joint venture, or owned
or controlled in any other capacity (all of which shall be defined as "REAL
ESTATE") and such Schedule 4.10(a) sets forth a complete legal description
of the Real Estate and a brief description of any buildings located
thereon; and (ii) all copyrights, patents, trademarks, trade names or
applications pending therefor owned by the Company and the Company
Subsidiaries. Except as set forth on Schedule 4.10(a), all of the Company's
or the Company Subsidiaries' properties, leasehold improvements and
equipment are in reasonable operating condition, except as would not cause
a Company Material Adverse Effect.
(b) Neither the Company nor any Company Subsidiary owns any right,
title or interest in any real property, except as particularly described on
Schedule 4.10(a). Schedule 4.10(b) sets forth a complete and accurate list
and general description of all material leases for real property ("REAL
PROPERTY LEASES") to which the Company or any Company Subsidiary is a party
or by which any of them are bound. The activities of the Company and the
Company Subsidiaries with respect to all real property and Real Property
Leases owned or held by each of them for use in connection with their
respective operations are in all material respects permitted and authorized
by applicable zoning laws, ordinances and regulations and all laws, rules
and regulations of any court, administrative agency or commission or other
governmental authority or instrumentality affecting such properties. The
Company and each Company Subsidiary enjoy peaceful and undisturbed
possession under all Real Property Leases to which they are parties, and
all of such Real Property Leases are valid and in full force and effect.
(c) Except as set forth on Schedule 4.10(c), the Company and the
Company Subsidiaries have good and marketable title to all of their owned
real and personal property, free, clear and discharged of, and from, any
and all liens, mortgages, charges, encumbrances and/or security interests
(each, an "ENCUMBRANCE"), except for (i) Encumbrances for inchoate
mechanics' and materialmen's liens for construction in progress and
workmen's, repairmen's, warehousemen's and carriers' liens arising in the
ordinary course of business, (ii) Encumbrances for Taxes not yet payable,
(iii) Encumbrances arising out of, under, or in connection with, this
Agreement, (iv) Encumbrances and easements of record, (v) rights of
lessors, co-lessees or subleases that are reflected in each respective Real
Property Lease and (vi) Encumbrances which do not significantly impair the
use, value or transferability of such property (collectively, "PERMITTED
ENCUMBRANCE").
(d) The Company or any of the Company Subsidiaries (as the case may
be), as lessee, has the right under valid and subsisting leases to occupy,
use, possess and control all property leased by the Company or its
Subsidiary, qualified only by the written terms of such leases, copies of
which are attached to Schedule 4.10(d).
(e) The Company and each Company Subsidiary owns or possesses, or
holds a valid right or license to use, all intellectual property, patents,
trademarks, tradenames, service marks, copyrights and licenses, and all
rights with respect to the foregoing (collectively, the "IP RIGHTS"),
necessary for the conduct of its business as now conducted, without any
conflict with the rights of others.
4.11. Insurance Issued By Company Subsidiaries; Reserves; Reinsurance
Treaties.
(a) Each form of insurance policy, policy endorsement or amendment,
reinsurance contract, annuity contract, application form, sales material
and service contract now in use by the Company or any Company Subsidiary in
any jurisdiction has, where required, received interim or final approvals
from the appropriate insurance regulatory authorities of such jurisdiction.
(b) Neither the Company nor any Company Subsidiary has issued any
participating policies or any retrospectively rated policies of insurance,
other than policies with final premiums subject to audit.
(c)(i) Any premium rates required to be filed with or approved by
insurance regulatory authorities have been so filed and have received
interim or final approval from such regulatory authorities, and (ii) all
premiums charged by the Company Subsidiaries conform with such approvals.
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(d) Schedule 4.11(d) sets forth the Company and the Company Insurance
Subsidiary's estimated liabilities for unearned premiums, outstanding
claims (including claims due and unpaid, not yet due, and incurred but not
reported) and claims expenses (collectively, "Reserves"), gross and net
reinsurance thereof, as of June 30, 1997, pertaining to the Company's life,
health and annuity insurance businesses. Except as set forth on Schedule
4.11(d), the Reserves were prepared in accordance with the statutory or
other accounting practices prescribed or permitted by the applicable
insurance regulatory authorities. Liabilities for outstanding claims and
claims expenses as of June 30, 1997 have been estimated in full accordance
with the Company's prior practices and procedures.
(e) Schedule 4.11(e) sets forth a list and description of all quota
share, stop loss or other reinsurance or coinsurance agreements to which
either the Company or any Company Subsidiary is a party.
(f) The Company's and the Company Insurance Subsidiary's Reserves,
gross and net of reinsurance assumed or ceded, as of June 30, 1997, and
each of the preceding five calendar years pertaining to the Company's and
the Company Insurance Subsidiary's businesses, have been determined on a
consistent basis except as described in Schedule 4.11(f).
(g) All insurance contract benefits payable by the Company Insurance
Subsidiary and by any other person that is a party to or bound by any
reinsurance, coinsurance or other similar contract with such Company
Insurance Subsidiary, have in all respects been paid or are in the course
of settlement in accordance with the terms of the insurance, reinsurance or
coinsurance contracts under which they arose, except for such benefits
which the Company Insurance Subsidiary reasonably believes there is a basis
to contest payment.
(h) No outstanding insurance contract issued, reinsured, underwritten
or assumed by any Company Insurance Subsidiary entitles the holder thereof
or any other person to receive dividends, distributions or other benefits
based upon the revenues or earnings of such Company Insurance Subsidiary or
any other person;
(i) The underwriting standards utilized and ratings applied by the
Company Insurance Subsidiary and by any other person that is a party to or
bound by any insurance, reinsurance, coinsurance or other similar contract
with any of the Company Insurance Subsidiary conforms in all respects as to
such contracts to the standards and ratings required pursuant to the terms
of the respective insurance, reinsurance, coinsurance or other similar
contracts, except for such non-conformity as would not have a Company
Material Adverse Effect;
(j) All amounts to which each Company Insurance Subsidiary is entitled
under reinsurance, coinsurance or similar contracts (including without
limitation amounts based on paid and unpaid losses) are fully collectible,
in accordance with the terms of such contracts except as would not have a
Company Material Adverse Effect; and
(k) Each insurance agent, general agent, broker, producer, or
representative, for any Company Insurance Subsidiary, is duly licensed
under state insurance laws for the type of business written, sold or
produced by such person in the particular jurisdiction in which such person
writes, sells or produces such business for the Company Insurance
Subsidiary and, where required by law, is duly appointed by the Company to
act as agent for the Company, except where such lack of licensure would not
have a Company Material Adverse Effect.
4.12. Employee Benefit Plans.
(a) Set forth on Schedule 4.12(a) is an accurate description of all
bonus, deferred compensation, pension, retirement, profit-sharing, thrift
savings, employee stock ownership, stock bonus, stock purchase, restricted
stock and stock option plans, all employment or severance contracts, other
material employee benefit plans and any applicable "change in control" or
similar provisions in any plan, contract or arrangement which cover
employees, former employees, agents or independent contractors of the
Company and Company Subsidiaries, and all other benefit plans, contracts or
arrangements covering directors, employees, former employees, agents or
independent contractors of the Company or Company Subsidiaries
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(the "EMPLOYEES"), including, but not limited to, "employee benefit plans"
within the meaning of Section 3(3) of ERISA (collectively, the
"COMPENSATION AND BENEFIT PLANS"). True and complete copies of all
Compensation and Benefit Plans and such other benefit plans, contracts or
arrangements, including, but not limited to, any trust instruments and/or
insurance contracts, if any, forming a part of any such plans and
agreements, and all amendments thereto, including, but not limited to (i)
the actuarial report for such plan (if applicable) for each of the last two
years, and (ii) the most recent determination letter from the IRS (if
applicable) for such plan, are attached as Schedule 4.12(a).
(b) All employee benefit plans, other than any multiemployer plans
("MULTIEMPLOYER PLAN") within the meaning of Sections 3(37) or 4001(a)(3)
of ERISA, covering Employees (the "PLANS"), to the extent subject to ERISA,
are in substantial compliance with ERISA. Each Plan which is an "employee
pension benefit plan" within the meaning of Section 3(2) of ERISA ("PENSION
PLAN") and which is intended to be qualified under Section 401(a) of the
Code, has received a favorable determination letter from the IRS, and the
Company is not aware of any circumstances likely to result in revocation of
any such favorable determination letter. There is no material pending or
threatened litigation relating to the Plans. Neither the Company nor any of
the Company Subsidiaries has engaged in a transaction with respect to any
Plan that, assuming the taxable period of such transaction expired as of
the date hereof, could subject the Company or any of the Company
Subsidiaries to a tax or penalty imposed by either Section 4975 of the Code
or Section 502(i) of ERISA in an amount which would be material.
(c) No liability under Subtitle C or D of Title IV of ERISA has been
or is expected to be incurred by the Company or any of Company Subsidiaries
with respect to any ongoing, frozen or terminated "single-employer plan",
within the meaning of Section 4001(a)(15) of ERISA, currently or formerly
maintained by any of them, or the single-employer plan of any entity which
is considered one employer with the Company or any of Company Subsidiaries
under Section 4001 of ERISA or Section 414 of the Code (an "ERISA
AFFILIATE"). The Company and Company Subsidiaries have not incurred and do
not expect to incur any withdrawal liability with respect to a
Multiemployer Plan under Subtitle E of Title IV of ERISA (regardless of
whether based on contributions of an ERISA Affiliate). No notice of a
"reportable event," within the meaning of Section 4043 of ERISA, for which
the 30-day reporting requirement has not been waived, has been required to
be filed for any Pension Plan or by any ERISA Affiliate within the
twelve-month period ending on the date hereof.
(d) All contributions required to be made under the terms of any Plan
have been timely made. Neither any Pension Plan nor any single-employer
plan of an ERISA Affiliate has an "accumulated funding deficiency" (whether
or not waived) within the meaning of Section 412 of the Code or Section 302
of ERISA. Neither the Company nor the Company Subsidiaries has provided, or
is required to provide, security to any Pension Plan or to any
single-employer plan of an ERISA Affiliate pursuant to section 401(a)(29)
of the Code.
(e) The Company and Company Subsidiaries have not contributed to any
Multiemployer Plan, and are not a party to any Multiemployer Plan.
(f) Neither the Company nor the Company Subsidiaries has any
obligations for retiree health and life benefits under any Plan, except as
set forth on Schedule 4.12(f). Except as set forth on Schedule 4.12(f),
there are no restrictions on the rights of the Company or the Company
Subsidiaries to amend or terminate any such Plan without incurring any
liability thereunder.
(g) Neither the Company nor any of the Company Subsidiaries is a party
to, or is bound by, any collective bargaining agreement, contract, or other
agreement or understanding with a labor union or labor organization, nor is
the Company or any of the Company Subsidiaries the subject of any
proceeding asserting that the Company or any such Subsidiary has committed
an unfair labor practice or seeking to compel the Company or such
Subsidiary to bargain with any labor organization as to wages or conditions
of employment, nor is there any strike involving the Company or any of the
Company Subsidiaries pending or threatened, nor is the Company aware of any
activity involving its or any of its Subsidiaries' employees seeking to
certify a collective bargaining unit or engaging in any other
organizational activity.
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(h) With respect to the Compensation and Benefit Plans, all required
payments, premiums, contributions, reimbursements or accruals for all
periods ending prior to or as of the Closing Date shall have been made or
properly accrued and any bonding with respect to such Compensation and
Benefit Plan required under ERISA is in full force and effect, except which
would not have a Company Material Adverse Effect. None of the Compensation
and Benefit Plans has any unfunded liabilities, except which would not have
a Company Material Adverse Effect. The Company and the Company Subsidiaries
have complied with all terms of ERISA and all regulations thereunder with
respect to all Compensation and Benefit Plans.
(i) The Company has amended its Severance Benefit Plan to exclude the
transactions contemplated hereby from the definition of a "change in
control".
4.13. Employees.
(a) The Company and each Company Subsidiary is in compliance with all
currently applicable laws and regulations respecting employment,
discrimination in employment, terms and conditions of employment, wages,
hours and occupational safety and health and employment practices, and is
not engaged in any unfair labor practice. The Company has complied with all
applicable notice provisions of and has no material obligations under COBRA
with respect to any former employees or qualifying beneficiaries
thereunder. The Company is not a party to any collective bargaining
agreement or other labor union contract nor does the Company know of any
activities or proceedings of any labor union to organize any of its
employees.
(b) Except as disclosed in the Company Financial Statements, all sums
due for employee compensation have been paid, accrued or otherwise provided
for, and all employer contributions for employee benefits, including
deferred compensation obligations, and any benefits under any Compensation
and Benefit Plan have been duly and adequately paid or provided for in
accordance with plan documents. No person treated as an independent
contractor by the Company or any Company Subsidiary is an employee as
defined in Section 3401(c) of the Code, nor has any employee been otherwise
improperly classified, as exempt, nonexempt or otherwise, for purposes of
federal or state income tax withholding or overtime laws, rules or
regulations. Schedule 4.13(c) sets forth the name, title, current annual
compensation rate (including bonus and commissions) and current base salary
rate of each officer of the Company and each Company Subsidiary as of June
30, 1997. The Company Financial Statements contain accurate accounts of all
accrual bonuses, sick leave, severance pay and vacation benefits for
Company and Company Subsidiary employees in accordance with GAAP. Copies of
organizational charts, any employee handbook(s), and any reports and/or
plans prepared or adopted pursuant to the Equal Employment Opportunity Act
of 1972, as amended, have been made available to the Purchaser.
(c) Each of the Company and the Company Subsidiaries is in compliance
with all applicable laws respecting employment and employment practices,
terms and conditions of employment, wages and hours and occupational safety
and health, and is not engaged in any material unfair labor practice within
the meaning of Section 8 of the National Labor Relations Act, and (i) there
is no proceeding pending or, to the knowledge of the Company, threatened
against it relating to any thereof, or (ii) to the knowledge of the
Company, any investigation pending or threatened against it relating to any
thereof.
4.14. Brokerage Commissions and Fees. All negotiations relating to this
Agreement and the transactions contemplated hereby have been and will be carried
on by the Company directly with the Purchaser, its counsel, accountants and
other representatives in such a manner as not to give rise to any claim against
the Purchaser or the Company for any brokerage commission, finder's fee,
investment advisor's fee or other like payment arising out of the transactions
contemplated hereby, other than the agreement between the Company and Advest,
Inc. relating to certain fees of Advest, Inc. in connection herewith.
The Company has fee agreements with all outside attorneys, accountants, and
other independent experts and advisors it has used or plans to use in connection
with the transactions contemplated by this Agreement, which provide that such
attorneys, accountants, and other independent experts and advisors will be
compensated only at their normal rates plus reasonable out-of-pocket expenses
except as set forth on Schedule 4.14.
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4.15. Certain Agreements.
(a) Schedule 4.15(a) sets forth a complete and accurate list of all
material contracts of the Company and the Company Subsidiaries as of the
date of this Agreement, as defined in Item 601(b)(10) of Regulation S-K
(the "MATERIAL CONTRACTS"). The Company and the Company Subsidiaries have
performed all of the respective obligations required to be performed by
them to date and are not in default under or in breach of any term or
provision of any of the Material Contracts or any Real Property Leases to
which any of them is a party, is subject or is otherwise bound, and no
event has occurred that, with the giving of notice or the passage of time
or both, would constitute such a default or breach. There are no events,
facts or circumstances of which constitute or, with the gaining of notice
or the passage of time or both, would constitute a default or breach of any
of the Material Contracts or Real Property Leases by the other parties
thereto. Each of the Material Contracts is a valid and binding agreement of
the Company or a Company Subsidiary, as the case may be, and, to the
Company's knowledge, of all other parties thereto.
(b) Schedule 4.15(b) also accurately identifies all of the following
agreements, contracts, or other instruments written or, to the knowledge of
the Company, oral, to which the Company or the Company Subsidiaries are a
party or by which any of them are bound or affected or by which any of the
stock, properties, or assets of the Company or the Company Subsidiaries are
bound or affected, or under which any of their officers, directors,
employees, or shareholders have rights: (i) any agreements, plans or
arrangements under or pursuant to which any of the benefits of which will
be increased, or the vesting of benefits of which will be increased or
accelerated, by the occurrence of any of the transactions contemplated by
this Agreement, or the value of any of the benefits of which will be
calculated on the basis of any of the transactions contemplated by this
Agreement; and (ii) any agreement, instrument, or understanding of the
Company or the Company Subsidiaries with any third parties, whether or not
made in the ordinary and regular course of business, which materially
restricts the ability of the Company to enter into any line of business or
any geographic region. True, complete, and correct copies of all of the
written agreements, contracts, or other instruments, and written
descriptions of the material details of any oral agreements or instruments
identified on Schedule 4.15(b) are attached to Schedule 4.15(b).
4.16. Orders Injunctions, Decrees, Compliance With Applicable Laws.
(a) Except as set forth on Schedule 4.16(a), neither the Company nor
the Company Subsidiaries is subject to any order, injunction or decree,
written agreement, consent agreement, or memorandum of understanding of any
governmental body or court, or is in violation of any order, injunction, or
decree, written agreement, consent agreement or memorandum of
understanding.
(b) Except as set forth on Schedule 4.16(b), neither the Company nor
the Company Subsidiaries is subject to any cease-and desist or other order
issued by, or is a party to any written agreement, consent agreement or
memorandum of understanding with, or is a party to any commitment letter or
similar undertaking to, or is subject to any order or directive by, or is a
recipient of any extraordinary supervisory letter from, or has adopted any
board resolutions at the request of (each, whether or not set forth on
Schedule 4.16(b), a "REGULATORY AGREEMENT"), any regulatory agency or other
governmental entity that restricts the conduct of its business or that in
any manner relates to its capital adequacy, its management or its business,
nor has the Company or the Company Subsidiaries been advised by any
regulatory agency or other governmental entity that it is considering
issuing or requesting any Regulatory Agreement.
(c) The Company has delivered to the Purchaser copies of the most
recent examination reports, including related management letters, of the
Company Insurance Subsidiary conducted by any state insurance department
examiners, and reflecting the results of the most recent examinations of
the affairs of such Company Insurance Subsidiary, and will furnish promptly
to the Purchaser any additional such reports or drafts of such reports
received by the Company or any Company Insurance Subsidiary prior to
Closing. Except as set forth on Schedule 4.16(c), all material deficiencies
or violations noted in such examination reports for the periods examined
have either been resolved or are being resolved to the satisfaction of or
accepted by the insurance regulatory authorities of the state conducting
such examinations, without any enforcement action taken against any such
Company Insurance Subsidiary. There are no examinations by
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any state insurance department examiners in progress at any Company
Insurance Subsidiary, nor, to the knowledge of the Company, pending or
scheduled with respect to any Company Insurance Subsidiary.
4.17. Shareholders of the Company. Schedule 4.17 accurately identifies the
names and addresses of all of the shareholders who, to the Company's knowledge,
beneficially own more than 5% of Company Common Stock and the number of shares
of stock of the Company beneficially owned by each such shareholder and by each
director and executive officer of the Company as of the date hereof.
4.18. Regulatory Filings.
(a) The Company and the Company Subsidiaries have filed and will
continue to file in a timely manner (after giving effect to the Form 12b-25
filed with the Commission for the quarter ended June 30, 1997) all required
filings with the Commission and any insurance commissioners ("STATE
COMMISSIONERS"), (and will furnish the Purchaser with copies of all such
filings made subsequent to the date hereof until the Closing Date), and all
such filings were or will be, complete and accurate in all material
respects as of the dates of the filings, and no such filing made or will
make any untrue statement of a material fact or omitted or omit to state a
material fact necessary in order to make the statements made, in the light
of the circumstances under which they were made, not misleading. Such
filings and submissions were in substantial compliance with applicable law
when filed or submitted, and no material deficiencies have been asserted by
any regulatory commission, agency or authority with respect to such filings
or submissions. Except as set forth on Schedule 4.18(a) and except for
normal examinations conducted by the IRS and the State Commissioners in the
regular course of the business of the Company or the Company Subsidiaries,
no federal, state or local governmental agency, commission or other entity
has initiated any proceeding or, to the best of the knowledge and belief of
the Company, investigation into the business or operations of the Company
or the Company Subsidiaries within the past three years.
(b) The Company has since January 1, 1992 filed all forms, proxy
statements, schedules, reports and other documents required to be filed by
it with the Commission pursuant to the Exchange Act pursuant to its rules
and regulations.
(c) The Company has heretofore delivered to the Purchaser complete
copies of all periodic reports, statements and other documents (including
exhibits thereto) that the Company has filed with the Commission under the
Exchange Act since January 1, 1994, (collectively, the "COMPANY SEC
REPORTS"). All Company SEC Reports required to be filed with the Commission
by the Company during such period were, after giving effect to Rule 12b-25
of the Exchange Act, filed in a timely manner and complied in all material
respects with the applicable requirements of the Exchange Act and the rules
and regulations promulgated thereunder. At the time filed with the
Commission (or if amended or superseded by a filing prior to the date of
this Agreement, then on the date of such filing), no Company SEC Report
contained any untrue statement of a material fact or omitted to state any
material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they were
made, not misleading.
4.19. Compliance With Environmental Laws and Health and Safety Laws. For
purposes of this Agreement, the term "ENVIRONMENTAL LAWS" shall mean all
federal, state and local laws including statutes, regulations, ordinances,
codes, rules, orders, directives and other governmental restrictions and
requirements (including, but not limited to, those contained in or evidenced by
permits, temporary permits or exemption letters) relating to the discharge of
air pollutants, water pollutants, solid wastes or process waste water or
otherwise relating to the environment, hazardous wastes, materials or
substances, toxic substances, asbestos or any operations of or use of property
by the Company or the Company Subsidiaries that has an impact on the
environment, including, but not limited to, the Federal Solid Waste Disposal
Act, the Federal Clean Air Act, the Federal Clean Water Act, the Federal
Resource Conservation and Recovery Act of 1976, the Federal Comprehensive
Environmental Response, Compensation and Liability Act of 1980, Toxic Substances
Control Act, Federal Water Pollution Control Act, National Environmental Policy
Act, Federal Occupational Safety and Health Act, regulations of the
Environmental Protection Agency, regulations of the Nuclear Regulatory Agency,
or any applicable federal or state regulatory or administrative agency with
authority over natural resources or environmental protection now in effect, all
as presently amended.
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(a) Except as set forth on Schedule 4.19(a)(i) the operations of the
Company and the Company Subsidiaries currently and in the past are in
substantial compliance with all Environmental Laws; (ii) none of the
Company's or the Company Subsidiaries' operations are subject to any
judicial or administrative proceedings, pending or threatened, alleging the
violation of any Environmental Laws; (iii) none of the Company's or the
Company Subsidiaries' operations are the subject of a federal, state or
local investigation, pending or threatened, evaluating whether any remedial
action is needed to respond to a release of any hazardous or toxic waste,
substance or constituent, or any other substance into the environment; (iv)
neither the Company nor the Company Subsidiaries have generated hazardous
waste in the Company's or the Company Subsidiaries' operations in amounts
which are regulated by an Environmental Law; (v) neither the Company nor
the Company Subsidiaries have transported hazardous waste attributable to
the Company's or the Company Subsidiaries' operations for treatment,
storage or disposal in amounts which are regulated by an Environmental Law;
and (vi) neither the Company nor the Company Subsidiaries have reported a
spill or release of a hazardous or toxic waste, substance or constituent or
any other substance in the environment in amounts which are regulated by an
Environmental Law due to the Company's or the Company Subsidiaries'
operations.
(b) Except as set forth in Schedule 4.19(b) all Real Estate is in
compliance with all Environmental Laws; the Real Estate is not subject to
any judicial or administrative proceedings alleging the violation of any
Environmental Laws; the Real Estate is not the subject of a federal, state,
or local investigation evaluating whether any remedial action is needed to
respond to a release of any hazardous or toxic waste, substance or
constituent, or any other substance into, the environment; neither the
Company nor any of the Company Subsidiaries have generated any hazardous
material on the Real Estate in amounts which are regulated by an
Environmental Law; neither the Company nor any of the Company Subsidiaries
have transported any hazardous material from the Real Estate to any waste
treatment, storage or disposal facility in amounts which are regulated by
an Environmental Law.
(c) For the purposes of this Section 4.19, any reference to
"hazardous" or "toxic" waste, substances, or constituents encompasses any
waste, substance, or constituent regulated by, or subject to, the
provisions and regulations of either the Comprehensive Environmental
Response, Compensation, and Liability Act, 42 U.S.C. Sec. 6901 et seq., or
the Toxic Substances Control Act, 15 U.S.C. Sec. 2601 et seq., each as
amended.
(d) The Company has not had any Phase I, Phase II, or Phase III
environmental reports nor any other environmental reports, studies or
surveys prepared with respect to real property owned or leased by the
Company or any Company Subsidiary, nor is the Company in possession of any
of the same with respect to such real property.
4.20. Other Information. No representation or warranty by the Company
contained in this Agreement, or disclosure in any Schedule hereto prepared by
the Company, certificate or other instrument or document furnished or to be
furnished by or on behalf of the Company pursuant to this Agreement contains or
will contain any untrue statement of a material fact or omits or will omit to
state any material fact required to be stated herein or therein which is
necessary to make the statements contained herein or therein not misleading.
4.21. No Sensitive Transactions.
(a) Except as set forth on Schedule 4.21(a), within the past five
years, neither the Company nor the Company Subsidiaries nor, to the
Company's knowledge, any director, employee, or agent of the Company or the
Company Subsidiaries, has directly or indirectly used funds or other assets
of the Company or the Company Subsidiaries for (i) illegal contributions,
gifts or entertainment, or other illegal expenses related to political
activities; (ii) payments to or for the benefit of any governmental
official or employee, other than payments required or permitted by law;
(iii) illegal payments to or for the benefit of any person, firm,
corporation, or other entity, or any officer, employee, agent, or
representative thereof; or (iv) the establishment or maintenance of an
illegal secret or unrecorded fund.
(b) Except as set forth on Schedule 4.21(c), to the Company's
knowledge, no officer or director of the Company or any Company Subsidiary
possesses, directly or indirectly, any financial interest in, or is a
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director, officer or employee of, any corporation or business organization
that is a supplier, customer, lessor, lessee, or competitor or potential
competitor of the Company or any Company Subsidiary or that has entered
into any material contract with the Company or any Company Subsidiary.
Ownership of less than 1% of any class of securities of a company whose
securities are registered under the Exchange Act will not be deemed to be a
financial interest for purposes of this Section.
(c) Schedules 4.15(b) and 4.21(c) list all transactions between
January 1, 1995 and the date of this Agreement involving or for the benefit
of the Company or any Company Subsidiary, on the one hand, and any director
or officer of any member of the Company or any Company Subsidiary or
affiliate of such director or officer, on the other hand, involving (i) any
debtor or creditor relationship, (ii) any transfer or lease of real or
personal property, or (iii) purchases or sales of products or services.
4.22. Takeover Restrictions. Except as set forth on Schedule 4.22, no
"business combination," "moratorium," "control share," or other state
antitakeover statute or regulation (a) prohibits or restricts the Purchaser's
ability to perform its obligations under this Agreement, or its ability to
consummate the transactions contemplated hereby, (b) would have the effect of
invalidating or voiding this Agreement or any provision hereof, (c) would
subject any party hereto to any material impediment or condition in connection
with the exercise of any of its rights under this Agreement, or (d) would
provide any rights to, or permit the exercise of rights by, the Company's
employees or shareholders.
4.23. Insurance. Schedule 4.23 contains a true, correct and complete list
of all general liability, property and casualty, worker's compensation,
directors' and officers', and errors and omissions insurance policies and bonds,
maintained by the Company and the Company Subsidiaries, issued in the past three
years, including the name of the insurer, the policy number, the policy period,
the amount of coverage, the type of policy and any applicable deductibles, and
all such insurance policies and bonds are in full force and effect and have been
in full force and effect at all times during which the Company or any Company
Subsidiary had any insurable interest in the subject of such insurance policies
and bonds. As of the date hereof, neither the Company nor any Subsidiary has
received any notice of cancellation or amendment of any such policy or bond or
is in default under any such policy or bond, no coverage thereunder is being
disputed and all material claims thereunder have been filed in a timely fashion
and all premiums due thereon on or prior to the date of Closing have been paid
as and when due.
4.24. No Investment Company. Neither the Company nor any of the Company
Subsidiaries is an "investment company," or a company "controlled" by an
"investment company," within the meaning of the Investment Company Act of 1940,
as amended.
4.25. Effective Time of Representations, Warranties, Covenants and
Agreements. Each representation and warranty of the Company as set forth in this
Agreement, as updated by any written disclosure schedule shall be deemed to be
made on and as of the date hereof, and as of the Closing Date, except for
representations and warranties made expressly as of a specific date.
4.26. Voting Requirements. Except as set forth on Schedule 4.26, the
affirmative vote of a majority of the outstanding shares of Company Common Stock
entitled to vote on this Agreement is the only vote of the holders of any class
or series of the Company's capital stock necessary to approve this Agreement and
the transactions described herein.
4.27. Customers. To the knowledge of the Company, no customers or agents of
the Company or any Company Subsidiary in the aggregate representing more than
$100,000 in revenue during 1996 intends to terminate, limit or reduce its or
their business relations with the Company or any Company Subsidiary.
4.28. Assessments. Schedule 4.28 sets forth all assessments levied against
the Company or the Company Subsidiaries during 1996 and through June 30, 1997 by
any state insurance regulatory authority, state insurance guaranty fund or state
high risk health pool.
4.29. Termination and Other Payments. No severance and termination
payments, benefits, acceleration of benefit vesting, and other compensation paid
by the Company or any of its subsidiaries, as provided for in this
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Agreement or otherwise, shall constitute "excess parachute payments" under
Section 28OG of the Code, giving effect to any obligations of the Purchaser or
any subsidiary thereof, as provided herein. The disallowance of a deduction
under Section 162(m) of the Code for employee remuneration will not apply to any
amount paid or payable by the Company or any Company Subsidiary under any
contract, benefit plan, program, arrangement or understanding currently in
effect.
4.30. Transactions With Affiliates. Neither the Company nor any of the
Company Subsidiaries is a party to any transaction with any of the following
other than in connection with the sale of insurance in the ordinary course of
business and any employment contract or other employment arrangement: (i)
current or former officer or director of the Company or any of the Company
Subsidiaries; (ii) any parent, spouse, child, brother or sister of any such
officer or director; (iii) any corporation, partnership or other entity of which
any such officer or director or any such family relation is an officer,
director, partner or greater than 10% shareholder (based on percentage ownership
of voting stock); or (iv) any Affiliate of any such persons or entities,
including, without limitation, any transaction involving a contract, agreement
or other arrangement providing for the employment of, furnishing of materials,
products or services by, rental of real or personal property from, or otherwise
requiring payments to, any such person or entity.
4.31. Proxy Statement. The Proxy Statement (as hereinafter defined) shall,
at the time such Proxy Statement or Registration Statement or supplements
thereto are filed with the Commission or are first published, sent or given to
shareholders, as the case may be, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. The Proxy Statement
will comply in all material respects with the requirements of the Exchange Act
and the rules and regulations promulgated thereunder. Notwithstanding the
foregoing two sentences, the Company makes no representation or warranty as to
information included in the Proxy Statement which has been provided by Purchaser
or any person or entity holding an interest therein for purposes of inclusion in
the Proxy Statement.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
OF PURCHASER
Purchaser hereby represents and warrants to the Company as of the date
hereof, and as of the Closing Date, as follows:
5.1. Authority. Purchaser has all requisite limited liability company power
and authority, without the consent of any other person, to execute and deliver
this Agreement and the agreements to be delivered at Closing and to carry out
the transactions contemplated hereby and thereby, except for consents required
under the HSR Act. All limited liability company and other acts or proceedings
required to be taken by Purchaser to authorize the execution, delivery and
performance of this Agreement and all transactions contemplated hereby have been
duly and properly taken.
5.2. Validity. This Agreement has been, and the documents to be delivered
at Closing by Purchaser will be, duly executed and delivered and constitute
lawful, valid and legally binding obligations of Purchaser, enforceable in
accordance with their respective terms, except as enforcement may be limited by
applicable bankruptcy, reorganization, insolvency, moratorium and other laws
affecting creditors' rights generally and by general equitable principles. The
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby will not result in the creation of any lien,
charge or encumbrance of any kind or the acceleration of any indebtedness or
other obligation of Purchaser and are not prohibited by, do not violate or
conflict with any provision of, and do not constitute a default under or a
breach of (a) Purchaser's certificate of incorporation or bylaws, (b) any note,
bond, indenture, contract, agreement, permit, license or other instrument to
which Purchaser is a party or by which Purchaser or any of its assets is bound,
(c) any order, writ, injunction, decree or judgment of any court or governmental
agency, or (d) any law, rule or regulation applicable to Purchaser.
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5.3. Due Organization. Purchaser is a limited liability company organized
and validly existing under the laws of the State of Nevada, and has full power
and authority to carry on the business in which it is engaged.
5.4. Brokers. Purchaser has not retained any broker or finder or incurred
any liability or obligation for any brokerage fees, commissions or finders' fees
with respect to this Agreement or the transactions contemplated hereby.
5.5. Investment Representation. (i) The Purchaser understands that the
Stock has not been, and will not be, registered under the Securities Act as of
the Closing Date or under any state securities laws, is being offered and sold
in reliance upon federal and state exemptions for transactions not involving any
public offering.
(ii) Purchaser represents that:
(A) it is acquiring the Stock and Warrants to be acquired by it
hereunder solely for its own account for investment purposes and not
with a view to the distribution thereof within the meaning of the
Securities Act;
(B) it is a sophisticated investor with knowledge and experience in
business and financial matters;
(C) it has had access to all reports filed by the Company during
the current year and the year preceding the current year pursuant to the
Securities Exchange Act of 1934, as amended, and has had the opportunity
to obtain additional information in order to evaluate the merits and
risks inherent in holding the Stock;
(D) it has not been offered the Stock by any form of general
advertising or general solicitation;
(E) it is able to bear the economic risk and lack of liquidity
inherent in holding the Stock; and
(F) it is an "accredited investor" (as defined in the Securities
Act).
(iii) The certificates representing the Stock shall bear the following
legend:
The shares evidenced by this certificate have not been registered
under the Securities Act of 1933, as amended, or any applicable state
securities laws, and any transfer hereof is subject to compliance with all
applicable federal and state securities laws and regulations.
5.6. Ownership and Control of Purchaser. The person or entities owning
membership interests in Purchaser as of the date hereof are listed on Schedule
5.6 hereto, which Schedule sets forth their respective percentage interests in
Purchaser, the character thereof and who or which persons or entities are the
managers of Purchaser.
5.7. Qualification and Conflicts. To the knowledge of Purchaser, none of
Purchaser or any person holding any interest in Purchaser, directly or
indirectly (each, an "INTERESTED PERSON"), is disqualified from holding a direct
or indirect interest in the Company and its subsidiaries under the regulations
of any state or other governmental entity regulating the Company or any Company
Subsidiaries or the business thereof nor is subject to any regulation, agreement
or other restriction that limits or precludes their ownership of an interest in
the Company or its subsidiaries or restricts their right to participate in the
management thereof.
5.8. Financing. Purchaser has obtained the financing commitment of American
National Bank and Trust Company of Chicago with respect to the funding of the
loans described in Section 9.1 hereof, a true and correct copy of which is
attached hereto as Exhibit 5.8 (the "COMMITMENT").
ARTICLE VI
ACTIONS PENDING CLOSING
6.1. Interim Conduct of Business. From the date hereof until the Closing,
the Company shall operate the Business consistent with prior practice and in the
ordinary course of business and shall use all reasonable efforts to preserve,
protect and maintain the Business. Without limiting the generality of the
foregoing, from the date hereof until the Closing or termination of this
Agreement, except as otherwise agreed by Purchaser in writing or as expressly
contemplated by this Agreement, the Company:
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(a) shall not enter into any transaction involving capital
expenditures, including leases, in excess of $50,000;
(b) shall not dispose of any assets or incur any liabilities outside
the ordinary course of business;
(c) shall not merge, liquidate, consolidate, amend its charter or
bylaws or effect any other organic corporate change;
(d) shall not make any payment of any liability outside the ordinary
course of business;
(e) shall not make any dividend or distribution or repurchase, redeem
or issue any capital stock;
(f) shall not forgive or cancel any material debts or claims, or waive
any material rights;
(g) shall not change credit practices or methods of maintaining books,
accounts or business records;
(h) shall maintain each Facility and the assets of the Business in
good repair, order and condition, reasonable wear and tear excepted;
(i) shall comply with all material obligations under all the Material
Contracts;
(j) except as otherwise provided herein, shall use reasonable efforts
to keep available the services of the present employees and agents (and pay
benefits related thereto in the ordinary course of business and consistent
with applicable law and past practice) and preserve the goodwill of
customers, suppliers and others;
(k) except as otherwise provided herein, shall not enter into, amend
or terminate or agree to enter into, amend or terminate any Compensation
and Benefit Plan or any employment, bonus, severance or retirement contract
or arrangement, nor increase or agree to increase any salary or other form
of compensation or benefits payable or to become payable to any employee,
except in the ordinary course of business consistent with past practice;
(l) shall not enter into, amend or terminate, or agree to enter into,
amend or terminate, any Material Contract;
(m) shall not sell, lease or otherwise dispose of or agree to sell,
lease or otherwise dispose of, any assets, properties, rights or claims;
(n) shall not incur or become subject to, nor agree to incur or become
subject to, any debt, obligation or liability, contingent or otherwise,
except liabilities incurred in the ordinary course of business and
consistent with past practice and expenses to be borne by the Company in
connection with the transactions contemplated hereby;
(o) shall not enter into any other transaction outside the ordinary
course of business;
(p) shall not take or omit to take any action within its control (i)
which could have a Company Material Adverse Effect or (ii) cause any
representation or warranty herein to become false in any material respect.
From the date hereof through the Closing, the Company shall confer on a regular
and frequent basis with one or more designated representatives of Purchaser to
report material operational matters and the general status of on-going
operations of the Business. The Company shall promptly notify Purchaser of any
threatened or actual loss of a material customer and any material change in the
financial condition, results of operations, personnel, properties, business or
prospects of the Company and shall keep Purchaser fully informed of such events.
6.2. Access. The Company shall provide Purchaser and its employees,
lenders, financial advisors, attorneys, accountants and other authorized
representatives access to all properties, facilities, personnel, accountants,
customers, vendors, books, contracts, leases, commitments and records of the
Company, and shall furnish Purchaser with all financial and operating data and
other information as to the Business and the assets, properties, rights and
claims of the Company, as Purchaser may from time to time reasonably request.
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ARTICLE VII
COVENANTS OF THE COMPANY
7.1. Board Representation. Promptly upon the issuance of Stock to the
Purchaser pursuant to the terms hereof, the Company shall use all reasonable
efforts to cause directors of the Company to be elected as provided in the
Voting Agreement.
7.2. Proxy Statement. As promptly as practicable after the execution of
this Agreement, the Company shall prepare and file with the Commission a proxy
statement relating to the meeting of the Company's stockholders to be held in
connection with the transactions contemplated hereby (together with any
amendments thereof or supplements thereto, the "PROXY STATEMENT"). The Proxy
Statement shall include the recommendation of the Board in favor of adopting
this Agreement and approving the transactions contemplated hereby, unless the
Company terminates this Agreement pursuant to Section 13.1(b), (d) or (e).
Except in the event of termination of this Agreement, no modification or
withdrawal of such recommendation shall relieve the Company of its obligation to
submit this Agreement and the transactions contemplated hereby to its
stockholders in accordance with applicable law.
7.3. Continued Assistance. From time to time after Closing, at Purchaser's
request and without further consideration, the Company shall execute,
acknowledge and deliver such documents, instruments or assurances and take such
other action as Purchaser may reasonably request to carry out the provisions
hereof and the transactions contemplated hereby.
7.4. Exclusivity. During the period beginning on the date hereof and ending
upon termination of this Agreement, the Company agrees to negotiate only with
Purchaser and shall not solicit, entertain or support any inquiry, proposal or
offer from any other party regarding the sale, lease, transfer or other
disposition of the capital stock, business or assets of the Company (an
"ACQUISITION PROPOSAL"); PROVIDED however, that nothing contained in this
Agreement shall prevent the Company or its Board of Directors from (A) complying
with Rule 14e-2 promulgated under the Exchange Act with regard to an Acquisition
Proposal; (B) engaging in any discussions or negotiations with, or providing any
information to, any Person in response to an unsolicited bona fide written
Acquisition Proposal by any such Person; or (C) recommending such unsolicited
bona fide written Acquisition Proposal to the shareholders of the Company, if
and only to the extent that, in any such case as if referred to in clause (B) or
(C), that such Acquisition Proposal would, if consummated, result in a Superior
Proposal (as defined in Section 13.1(e)); PROVIDED FURTHER, that if Purchaser is
(i) unable to obtain financing in connection with the acquisition of the Stock
prior to March 1, 1998, or (ii) unable to obtain reinsurance from the
Reassurance Company of Hannover prior to March 1, 1998, then the Company shall
not be bound by the provisions of this Section 7.4.
7.5. Termination Fee. In the event that (a) a proposal with respect to a
transaction relating to the acquisition of a material portion of the capital
stock of the Company or any of the Company's Subsidiaries, its or their assets
or business, whether in whole or in part, whether directly or indirectly,
through purchase, merger, consolidation or otherwise (an "ACQUISITION
TRANSACTION") is commenced by the Company, publicly proposed, publicly disclosed
or communicated to the Company or any representative or agent thereof after the
date of this Agreement and prior to the date of termination of this Agreement,
(b) this agreement is thereafter terminated by the Company pursuant to Section
13.1(e), and (c) within six (6) months following such termination an Acquisition
Transaction is consummated or the Company enters into an agreement relating
thereto, then in any such event, the Company shall pay the Purchaser $750,000.00
in same day funds (the "TERMINATION FEE") plus reimbursement of Purchaser's
expenses incurred in connection with the Transactions contemplated hereby,
including, without limitation, all due diligence expenses and expenses of
counsel.
7.6. Reasonable Efforts. Subject to the provisions of Section 7.4, the
Company shall use its reasonable efforts to consummate the transactions
contemplated by this Agreement and shall not take any other action inconsistent
with its obligations hereunder or which could materially hinder or delay the
consummation of the transactions contemplated hereby. From the date hereof
through the Closing Date, the Company shall use its reasonable efforts to
fulfill its conditions to Closing, perform the covenants required to be
performed by it, obtain
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all necessary consents and cause each of its representations and warranties to
remain true and correct in all respects as of the Closing Date.
7.7. HSR Act. The Company will timely and promptly make or cause to be made
all filings which may be required with respect to the transactions contemplated
by this Agreement under the HSR Act and use its reasonable efforts to cause the
satisfaction or termination of the waiting period under the HSR Act.
ARTICLE VIII
COVENANTS OF PURCHASER
8.1. Reasonable Efforts. Purchaser shall use its reasonable efforts to
consummate the transactions contemplated by this Agreement and shall not take
any other action inconsistent with its obligations hereunder or which could
hinder or delay the consummation of the transactions contemplated hereby. From
the date hereof through the Closing Date, Purchaser shall use reasonable efforts
to fulfill its conditions to Closing, perform the covenants required to be
performed by them, obtain all necessary consents and to cause each of its
representations and warranties to remain true and correct in all respects as of
the Closing Date.
8.2. HSR Act. Purchaser will timely and promptly make or cause to be made
all filings which may be required with respect to the transactions contemplated
by this Agreement under the HSR Act and use its efforts to cause the
satisfaction or termination of the waiting period under the HSR Act.
ARTICLE IX
ADDITIONAL AGREEMENTS
9.1. Interim Loan. After the date hereof and prior to December 17, 1997,
Purchaser shall make available to the Company a loan in the approximate amount
of $20,000,000. The proceeds of such loan shall be used as follows: (i)
$15,000,000 shall be invested in the Company Insurance Subsidiary and evidenced
by a surplus note in a form to be mutually agreed to by the parties and (ii)
$5,000,000 shall be used to satisfy in part the obligations of the Company to
Huntington Bank. The Company shall repay the principal amount of such loan from
the proceeds of the purchase of Stock hereunder. Simultaneously with the payment
referred to in clause (ii) of the first sentence of this Section, the Company
shall cause Huntington Bank to (i) terminate and release its security interest
in the stock of the Company Insurance Subsidiary and (ii) execute and deliver
all documents necessary to effect such termination and release.
9.2. Certain Benefit Plans. Prior to December 17, 1997, the Company shall
(i) amend its defined contribution plan such that, going forward, it shall be a
401(k) plan which shall be reasonably satisfactory in form and substance to
Purchaser; PROVIDED that if such 401(k) plan permits the Company to match the
contributions of its participants, any matching contributions provided by the
Company shall be in common stock of the Company; (ii) terminate its split-dollar
life insurance policy for the officers whose names are set forth on Schedule
9.2; and (iii) terminate its retiree health benefits Plan.
9.3. Severance Pay Plan. The Company hereby waives any "change of control"
provisions contained in its severance pay plan which would otherwise be
triggered by the execution of this Agreement or the consummation of the
transactions contemplated hereby. Prior to December 17, 1997, the Company shall
terminate its severance pay plan.
9.4 Directors and Officer Indemnification. Purchaser shall use reasonable
efforts to cause the Company to maintain the Company's existing directors' and
officers' liability insurance policy ("D&O INSURANCE") for a period of not less
than five years after Closing as long as the annual premium therefor does not
exceed 120% of the premium paid for coverage in 1996; PROVIDED, HOWEVER, that
Purchaser may cause the Company to substitute therefor policies of substantially
similar coverage and amounts containing terms no less advantageous to such
former directors or officers; PROVIDED, further, that if the existing D&O
Insurance expires or is
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cancelled during such period, Purchaser shall cause the Company to use
reasonable efforts to obtain substantially similar D&O Insurance.
9.5 Integration Agreement. The terms of paragraphs 1 through 17 of the
Integration Agreement (as hereinafter defined) are hereby incorporated by
reference as if set forth herein to the extent such terms are not inconsistent
with the terms hereof.
9.6 Advest. At Closing, the Company shall pay the fees of Advest, Inc. in
the amount of $925,000.
ARTICLE X
CONDITIONS PRECEDENT TO OBLIGATION TO CLOSE
OF PURCHASER
The obligations of Purchaser to consummate the transactions to be performed
by it in connection with the Closing is subject to the satisfaction of each of
the following conditions:
10.1. Accuracy of Warranties and Performance of Covenants. The
representations and warranties of the Company contained herein shall be accurate
in all material respects as if made on and as of the Closing Date. The Company
shall have performed in all material respects the obligations and complied with
each and all of the covenants, agreements and conditions required to be
performed or complied with on or prior to the Closing, including execution and
delivery of the agreements referred to in SECTION 3.4.
10.2. No Pending Action. No action, suit, proceeding or investigation
before or in any court, administrative agency or other governmental authority
shall be pending or threatened wherein an unfavorable judgment, decree or order
would prevent the carrying out of this Agreement or any of the transactions
contemplated hereby, declare unlawful the transactions contemplated hereby,
cause such transactions to be rescinded, or affect the right of Purchaser to
own, operate or control the Business.
10.3. Consents. All consents by third parties that are required for the
issuance of the Stock to Purchaser or that are required for the consummation of
the transactions contemplated hereby, or that are required in order to prevent a
breach of or a default under or a termination of any agreement to which the
Company is a party or to which any portion of the property of the Company is
subject, shall have been obtained or provided for.
10.4. Regulatory Approvals. All regulatory agencies shall have taken such
action as may be required to permit the consummation of the transactions
contemplated hereby and such actions shall remain in full force and effect and
shall be reasonably satisfactory in form and substance to Purchaser and its
counsel.
10.5. HSR Act Matters. The waiting period required by the HSR Act shall
have expired or been terminated.
10.6. Bank Financing. Purchaser shall have obtained financing of not less
than $12,000,000 in connection with the acquisition of the Stock and the
transactions contemplated hereby satisfactory to Purchaser.
10.7. Employment and Severance Agreements. The Company and the appropriate
parties shall have entered into the following agreements:
(a) an Employment Agreement with Fred Lick in accordance with the
terms of the Agreement dated November 13, 1997 between Purchaser and the
Company (the "INTEGRATION AGREEMENT");
(b) an Employment Agreement with Frank Grimone in accordance with the
terms of the Integration Agreement;
(c) Employment Agreements for certain key employees in accordance with
the terms of the Integration Agreement; and
(d) Severance Agreements in accordance with the terms of the
Integration Agreement.
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10.8. Suspension of Trading. There shall not have occurred nor be
continuing (i) any general suspension of trading in, or limitation on prices
for, securities on any national securities exchange or in the over-the-counter
market, (ii) the declaration of a banking moratorium or any suspension of
payments in respect of banks in the United States, (iii) the commencement of war
involving an attack on the continental United States or (iv) in the case of any
of the foregoing existing as of the date hereof, a material acceleration or
worsening thereof;
10.9. Shareholder Approval. This Agreement and the transactions
contemplated hereby shall have been approved by the shareholders of the Company
in accordance with the requirements of its Articles of Incorporation, Bylaws and
all applicable laws.
10.10. Change of Control. There shall not have occurred an acquisition by
any person, entity or "group" within the meaning of 13(d)(3) or 14(d)(2) of the
Exchange Act of 15% or more (after giving effect to the transactions
contemplated hereby) of either the then outstanding equity interests of the
Company or the combined voting power of the Company's then outstanding voting
securities entitled to vote generally in the election of directors.
10.11. Reinsurance Treaty. The Company shall have entered into a
reinsurance treaty in an amount not less than $10,000,000 on terms reasonably
satisfactory in form and substance to Purchaser.
10.12. Release of Security Interest. Huntington Bank shall have terminated
and released its security interest in the stock of the Company Insurance
Subsidiary and shall have executed and delivered all documents necessary to
effect such termination and release to the satisfaction of the Purchaser.
ARTICLE XI
CONDITIONS PRECEDENT TO OBLIGATION TO CLOSE
OF THE COMPANY
The obligations of the Company to consummate the transactions to be
performed in connection with the Closing is subject to the satisfaction of each
of the following conditions:
11.1. Accuracy of Warranties and Performance of Covenants. The
representations and warranties of Purchaser contained herein shall be accurate
in all material respects as if made on and as of the Closing Date. Purchaser
shall have performed in all material respects the obligations and complied with
each and all of the covenants, agreements and conditions required to be
performed or complied with on or prior to the Closing, including execution and
delivery of the agreements referred to in SECTION 3.4.
11.2. No Pending Action. No action, suit, proceeding or investigation
before or in any court, administrative agency or other governmental authority
shall be pending or threatened wherein an unfavorable judgment, decree or order
would prevent the carrying out of this Agreement or any of the transactions
contemplated hereby, declare unlawful the transactions contemplated hereby or
cause such transactions to be rescinded.
11.3. Consents. All consents by third parties that are required for the
purchase of the Stock by Purchaser or that are required for the consummation of
the transactions contemplated hereby, or that are required in order to prevent a
breach of or a default under or a termination of any agreement to which the
Purchaser is a party or to which any portion of the property of the Purchaser is
subject, shall have been obtained or provided for.
11.4. Regulatory Approvals. All regulatory agencies shall have taken such
action as may be required to permit the consummation of the transactions
contemplated hereby and such actions shall remain in full force and effect and
shall be reasonably satisfactory in form and substance to the Company and its
counsel.
11.5. HSR Act Matters. The waiting period required by the HSR Act shall
have expired or been terminated.
11.6. Shareholder Approval. This Agreement and the transactions
contemplated hereby shall have been approved by the shareholders of the Company
in accordance with the requirements of its Articles of Incorporation, Bylaws and
all applicable laws if required.
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ARTICLE XII
SURVIVAL AND INDEMNIFICATION
12.1. Survival. All covenants and agreements contained in this Agreement
shall be deemed to be material and to have been relied upon by the parties
hereto and shall survive the Closing and be enforceable until the covenant or
agreement has been fully performed. All representations and warranties contained
in this Agreement shall be deemed to be material and to have been relied upon by
the parties hereto and shall survive the Closing for a period ending two years
from the Closing Date, PROVIDED that the representations and warranties in the
following Sections shall survive and be enforceable indefinitely: Section 4.1,
Section 4.2, Section 4.4; and PROVIDED FURTHER that the representations and
warranties of Section 4.9 shall survive until expiration of the statute of
limitations (and any extensions thereof) applicable to any return relating to
the period prior to Closing or any tax position taken with respect to the period
prior to Closing. No claim for indemnification based upon a representation and
warranty that survives for a limited period of time may be asserted after
expiration of the applicable survival period but any claim asserted prior to
expiration of the applicable survival period shall survive until finally
resolved; PROVIDED that nothing herein shall limit the time in which a party may
bring a claim for fraud or intentional breach.
12.2. Indemnification.
(a) Purchaser shall, indemnify and hold harmless the Company, its
officers, directors, employees, agents and representatives, from and
against any and all loss, diminution in value, damage, cost, expense
(including court costs and attorneys' fees and expenses and costs of
investigation), fine, penalty, suit, action, claim, deficiency, liability
or obligation caused by or arising from (i) any misrepresentation, breach
of warranty or failure to fulfill any covenant or agreement of Purchaser
contained herein and (ii) any and all claims of third parties made based
upon facts alleged that, if true, would have constituted such a
misrepresentation, breach or failure.
(b) The Company shall indemnify and hold harmless Purchaser, its
officers, directors, employees, agents and representatives, from and
against any and all loss, diminution in value, damage, cost, expense
(including court costs and attorneys' fees and expenses and costs of
investigation), fine, penalty, suit, action, claim, deficiency, liability
or obligation caused by or arising from (i) any misrepresentation, breach
of warranty or failure to fulfill any covenant or agreement of the Company
contained herein, and (ii) any and all claims of third parties made based
upon facts alleged that, if true, would constitute such a
misrepresentation, breach or failure.
(c) The representations, warranties, covenants and agreements
contained in this Agreement shall not be affected by any party hereto or by
anyone on behalf of any such party: (i) investigating, verifying or
examining any matters with respect to the Company, the Business, this
Agreement or the transactions contemplated hereby; (ii) having the
opportunity to investigate, verify or examine any matters related to the
Company, the Business, this Agreement or the transactions contemplated
hereby; or (iii) failing to determine or discover any facts which were
determinable or discoverable by any such party. All rights contained in
this Article are cumulative and are in addition to all other rights and
remedies which are otherwise available, pursuant to the terms of this
Agreement or applicable law. All indemnification rights shall be deemed to
apply in favor of the indemnified party's officers, directors,
representatives, subsidiaries, affiliates, successors and assigns.
12.3. Defense of Third Party Claims. With respect to each third party claim
subject to this Article (a "THIRD PARTY CLAIM"), the party seeking
indemnification (the "INDEMNIFIED PARTY") shall give prompt notice to the
indemnifying party (the "INDEMNIFYING PARTY") of the Third Party Claim, provided
that failure to give such notice promptly shall not relieve or limit the
obligations of the Indemnifying Party except to the extent the Indemnifying
Party is materially prejudiced thereby. If the remedy sought in the Third Party
Claim is solely money damages or if the Indemnified Party otherwise permits,
then the Indemnifying Party, at its sole cost and expense, may, upon notice to
the Indemnified Party within fifteen (15) days after the Indemnifying Party
receives notice of the Third Party Claim, assume the defense of the Third Party
Claim. If it assumes the defense of a Third Party Claim, then the Indemnifying
Party shall select counsel reasonably satisfactory to the
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Indemnified Party to conduct the defense. The Indemnifying Party shall not
consent to a settlement of, or the entry of any judgment arising from, any Third
Party Claim, unless (i) the settlement or judgment is solely for money damages
and the Indemnifying Party admits in writing its liability to hold the
Indemnified Party harmless from and against any losses, damages, expenses and
liabilities arising out of such settlement or (ii) the Indemnified Party
consents thereto, which consent shall not be unreasonably withheld. The
Indemnifying Party shall provide the Indemnified Party with fifteen (15) days
prior notice before it consents to a settlement of, or the entry of a judgment
arising from, any Third Party Claim. The Indemnified Party shall be entitled to
participate in the defense of any Third Party Claim, the defense of which is
assumed by the Indemnifying Party, with its own counsel and at its own expense.
With respect to Third Party Claims in which the remedy sought is not solely
money damages, (i) the Indemnifying Party shall, upon notice to the Indemnified
Party within fifteen (15) days after the Indemnifying Party receives notice of
the Third Party Claim, be entitled to participate in the defense with its own
counsel at its own expense and (ii) the Indemnified Party shall not consent to
any settlement of, or entry of any judgment arising from, such Third Party Claim
unless the Indemnifying Party consents thereto, which consent shall not be
unreasonably withheld. If the Indemnifying Party does not elect to assume or
participate in the defense of any Third Party Claim in accordance with the terms
of this Section, then the Indemnifying Party shall be bound by the results
obtained by the Indemnified Party with respect to the Third Party Claim. The
parties shall cooperate in the defense of any Third Party Claim and the relevant
records of each party shall be made available on a timely basis.
12.4. Limitations. Neither Purchaser nor the Company shall be entitled to
indemnification from the other for breaches of representations or warranties
hereunder unless and until the aggregate amount of such party's indemnifiable
claims equal or exceed $1,000,000 but it then will be entitled to recover the
full amount of all such claims;
12.5 Exclusive Remedy. Except in the case of fraud or intentional breach,
the indemnification rights provided pursuant to this Article shall be the
exclusive remedy of the parties with respect to any dispute arising out of or
related to this Agreement and the transactions contemplated hereby.
12.6 Tax Benefits. The amount with respect to which any indemnifying party
is obligated to indemnify any indemnified party from and against shall be
adjusted to take into account any tax benefits reasonably expected to be
realized at determinable times by the indemnified party or its owners (if the
indemnified party is a LLC, partnership or similar entity) as a result of its
incurrence of an indemnified loss and shall also take into account the relevant
effective tax rates applicable to the indemnified party or its owners (if the
indemnified party is a LLC, partnership or similar entity) and the tax
attributes of the indemnified party or its owners (if the indemnified party is a
LLC, partnership or similar entity). An indemnified loss arising from the
inaccuracy of more than one representation or the breach of more than one
warranty or covenant or any combination of inaccuracies or breaches shall only
be recovered once.
ARTICLE XIII
TERMINATION AND WAIVER
13.1. Termination or Abandonment. Notwithstanding anything contained in
this Agreement to the contrary, this Agreement may be terminated and abandoned
at any time prior to the Closing:
(a) by the mutual written consent of Purchaser and the Company;
(b) by Purchaser or the Company if any court of competent jurisdiction
or governmental body, authority or agency having jurisdiction shall have
issued an order, decree or ruling or taken any other action restraining,
enjoining or otherwise prohibiting the transactions contemplated by this
Agreement and such order, decree, ruling or other action shall have become
final and nonappealable;
(c) by Purchaser, if one or more of the material conditions to the
obligation of Purchaser to close has not been fulfilled by April 30, 1998;
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(d) by the Company if one or more of the material conditions to the
obligation of the Company to close has not been fulfilled by April 30,
1998;
(e) by the Company in connection with its intention to pursue a
Superior Proposal (as hereinafter defined); PROVIDED that such termination
under clause (e) hereof shall not be effective unless the Company has made
payment of the Termination Fee required by Section 6.5 if it is then due. A
"Superior Proposal" shall mean a written proposal that has not been
solicited by the Company following the date of this Agreement relating to a
proposed Acquisition Transaction which proposal is, in the reasonable good
faith judgment of the Board, after consultation with legal and financial
advisors, on financial and other terms more favorable to the shareholders
of the Company than the terms of the transactions contemplated hereby.
In the event of termination of this Agreement pursuant to this Section, this
Agreement shall terminate and there shall be no other liability on the part of
the Company to Purchaser or on the part of Purchaser to the Company except as
otherwise provided herein and except liability arising out of a willful breach
of a covenant in this Agreement or fraud, in which event, the non-breaching
party reserves the right to seek all available remedies.
13.2. Extension of Time, Waiver, Etc. At any time prior to the Closing,
Purchaser or the Company may by written instrument:
(a) extend the time for the performance of any of the obligations or
acts of the other party; and
(b) waive compliance with any of the agreements of the other party
contained herein; PROVIDED, HOWEVER, that no failure or delay by any party,
in exercising any right hereunder shall operate as a waiver thereof nor
shall any single or partial exercise thereof preclude any other or further
exercise thereof or the exercise of any other rights hereunder.
ARTICLE XIV
GENERAL PROVISIONS
14.1. Amendments and Waiver. No amendment, waiver, termination or consent
with respect to any provision of this Agreement shall in any event be effective,
unless the same shall be in writing and signed by Purchaser and the Company;
PROVIDED that any exercise of any rights hereunder or any amendment, waiver,
termination or consent with respect to any provision of this Agreement on behalf
of the Company may be and shall be exercised and approved by a majority of the
independent directors of the board of directors of the Company.
14.2. Notices. All notices, requests, demands and other communications
hereunder shall be in writing and shall be delivered in person or sent by
registered or certified mail, postage prepaid, commercial overnight courier
(such as Express Mail, Federal Express, etc.) with written verification of
receipt or by telecopy. A notice shall be deemed given: (a) when delivered by
personal delivery (as evidenced by the receipt); (b) five (5) days after deposit
in the mail if sent by registered or certified mail; (c) one (1) business day
after having been sent by commercial overnight courier as evidenced by the
written verification of receipt; or (d) on the date of confirmation if
telecopied.
(a) If to Purchaser:
-----------------------------------------------------------
-----------------------------------------------------------
-----------------------------------------------------------
-----------------------------------------------------------
(b) If to the Company:
Central Reserve Life Corporation
17800 Royalton Road
Strongsville, Ohio 44136
Attention: Fred Lick
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with a copy to:
Latham & Watkins
5800 Sears Tower
233 South Wacker Drive
Chicago, Illinois 60606
Facsimile 312-993-9767
Attention: Mark D. Gerstein
Any party may change its address for receiving notice by written notice given to
the others named above.
14.3. Expenses. Expect as provided herein, each party shall bear its own
legal, accounting and administrative expenses in connection with the
investigation, negotiation and consummation of the transaction contemplated
hereby.
14.4. Counterparts. 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.
14.5. Successors and Assigns. This Agreement shall bind and inure to the
benefit of the parties named herein and their respective successors and assigns.
Neither party may assign this Agreement without the prior written consent of the
other party; PROVIDED, however, the Purchaser may assign rights to acquire less
than 50% of the Stock if (i) any such assignee agrees to be bound by the terms
hereof and the terms of the Voting Agreement, and (ii) such assignment does not
release Purchaser of its obligations hereunder.
14.6. Entire Transaction. This Agreement and the documents referred to
herein contain the entire understanding among the parties with respect to the
transactions contemplated hereby and supersedes all other agreements,
understandings and undertakings among the parties on the subject matter hereof;
14.7. Applicable Law. This Agreement shall be governed by and construed in
accordance with the internal substantive laws of the State of Ohio applicable to
contracts made and to be performed wholly within said State.
14.8. Other Rules of Construction. References in this Agreement to
sections, schedules and exhibits are to sections of, and schedules and exhibits
to this Agreement unless otherwise indicated. Words in the singular include the
plural and in the plural include the singular. The word "or" is not exclusive.
The word "including" shall mean including, without limitation. The section and
other headings contained in this Agreement are for reference purposes only and
shall not affect in any way the meaning or interpretation of this Agreement. As
used herein, "knowledge," "to the knowledge," "to the best knowledge" or any
similar phrase shall be deemed to refer to the actual knowledge of any of the
Chief Executive officer, Chief Operating officer, Chief Financial Officer,
General Counsel or Chief Internal Actuary.
14.9. Announcements. The parties shall cooperate in the preparation of any
announcements regarding the transactions contemplated by this Agreement. No
announcement of this Agreement or any transaction contemplated hereby shall be
made by any party prior to the Closing without the written approval of the other
party.
14.10. Partial Invalidity. In the event that any provision of this
Agreement shall be held invalid or unenforceable by any court of competent
jurisdiction, such holding shall not invalidate or render unenforceable any
other provision hereof.
* * *
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IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be executed all as of the date first above written.
Strategic Acquisition Partners, LLC
By: /s/ VAL RAJIC
------------------------------------
Its: Manager
Central Reserve Life Corporation
By: /s/ FRED LICK, JR.
------------------------------------
Its: President
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EXHIBIT A
THIS WARRANT AND ANY SECURITIES ACQUIRED UPON THE EXERCISE OF THIS WARRANT
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), OR ANY STATE SECURITIES LAWS AND NEITHER THE SECURITIES NOR
ANY INTEREST THEREIN MAY BE OFFERED, SOLD, TRANSFERRED, PLEDGED OR OTHERWISE
DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH
ACT OR SUCH LAWS OR AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT AND SUCH LAWS
THAT, IN THE OPINION OF COUNSEL FOR THE HOLDER, WHICH COUNSEL AND OPINION ARE
REASONABLY SATISFACTORY TO COUNSEL FOR THIS CORPORATION, IS AVAILABLE.
------------------------------------------------------------------
CENTRAL RESERVE LIFE CORPORATION
COMMON SHARES PURCHASE WARRANT
------------------------------------------------------------------
This certifies that, for good and valuable consideration, Central Reserve
Life Corporation, an Ohio corporation (the "Company"), grants to
(the "Warrantholder"), the right to purchase from the Company
( ) validly issued, fully paid and nonassessable shares
(the "Warrant Shares") of the Company's Common Shares, without par value (the
"Common Shares"), at the purchase price per share of $6.50 (the "Exercise
Price"), at any time prior to 5:00 p.m., New York City time, on the Expiration
Date, all subject to the terms, conditions and adjustments \ herein set forth.
This Warrant was issued in connection with the Stock Purchase Agreement,
dated , 199 (the "Stock Purchase Agreement"), among the Company
and Strategic Acquisition Partners, LLC and is subject to the terms thereof. The
Warrantholder is entitled to the rights and subject to the obligations contained
in the Stock Purchase Agreement relating to this Warrant and the Warrant Shares.
1. DURATION AND EXERCISE OF WARRANT.
1.1 Duration and Exercise of Warrant. Subject to the terms and conditions
set forth herein, this Warrant may be exercised, in whole or in part, by the
Warrantholder by:
(a) the surrender of this Warrant to the Company, with a duly executed
Exercise Form specifying the number of Warrant Shares to be purchased,
during normal business hours on any Business Day prior to the Expiration
Date; and
(b) the delivery of payment to the Company, for the account of the
Company, by cash, wire transfer, certified or official bank check or any
other means approved by the Company, of the Exercise Price for the number
of Warrant Shares specified in the Exercise Form in lawful money of the
United States of America.
The Company agrees that such Warrant Shares shall be deemed to be issued to the
Warrantholder as the record holder of such Warrant Shares as of the close of
business on the date on which this Warrant shall have been surrendered and
payment made for the Warrant Shares as aforesaid. Notwithstanding the foregoing,
no such surrender shall be effective to constitute the Person entitled to
receive such shares as the record holder thereof while the transfer books of the
Company for the Common Shares are closed for any purpose (but not for any period
in excess of five days); but any such surrender of this Warrant for exercise
during any period while such books are so closed shall become effective for
exercise immediately upon the reopening of such books, as if the exercise had
been made on the date this Warrant was surrendered and for the number of shares
of Common Shares and at the Exercise Price in effect at the date of such
surrender.
1.2 Warrant Shares Certificate. A stock certificate or certificates for
the Warrant Shares specified in the Exercise Form shall be delivered to the
Warrantholder within three Business Days after receipt of the Exercise Form by
the Company and payment of the purchase price. No fractional shares shall be
issued upon the exercise of this Warrant, provided that the Warrantholder shall
receive, in lieu of any fractional shares, cash in an amount equal to the
product of the fraction multiplied by the Current Market Price per Common Share.
If this Warrant shall been exercised only in part, the Company shall, at the
time of delivery of the stock certificate or certificates, deliver to the
Warrantholder a new Warrant evidencing the rights to purchase the remaining
Warrant Shares, which new Warrant shall in all other respects be identical with
this Warrant.
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2. RESTRICTIONS ON TRANSFER; RESTRICTIVE LEGENDS.
2.1 This Warrant, including the registration rights pursuant to Section 7
hereof, may be offered, sold, transferred, pledged or otherwise disposed of in
whole or in part, to any person, subject to compliance with any applicable
securities laws.
2.2 Except as otherwise permitted by this Section 2, each stock certificate
for Warrant Shares issued upon the exercise of any Warrant and each stock
certificate issued upon the direct or indirect transfer of any such Warrant
Shares shall be stamped or otherwise imprinted with a legend in substantially
the following form:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS AND
NEITHER THE SECURITIES NOR ANY INTEREST HEREIN MAY BE OFFERED, SOLD,
TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT OR SUCH LAWS OR AN
EXEMPTION FROM REGISTRATION UNDER SUCH ACT AND SUCH LAWS THAT, IN THE
OPINION OF COUNSEL FOR THE HOLDER, WHICH COUNSEL AND OPINION ARE REASONABLY
SATISFACTORY TO COUNSEL FOR THIS CORPORATION, IS AVAILABLE.
Notwithstanding the foregoing, the Warrantholder may require the Company to
issue a Warrant or a stock certificate for Warrant Shares, in each case without
a legend, if either (i) such Warrant or such Warrant Shares, as the case may be,
have been registered for resale under the Securities Act, (ii) the Warrantholder
has delivered to the Company an opinion of legal counsel (from a firm reasonably
satisfactory to the Company) which opinion shall be addressed to the Company and
be reasonably satisfactory in form and substance to the Company's counsel, to
the effect that such registration is not required with respect to such Warrant
or such Warrant Shares, as the case may be, or (iii) such Warrant or Warrant
Shares are sold in compliance with Rule 144 or Rule 144(k) (or any successor
provision then in effect) under the Securities Act, the Company receives
customary representations to such effect and the Company receives an opinion of
counsel to the Company in customary form that such legend may be removed.
3. RESERVATION AND RESIGNATION OF SHARES.
The Company covenants and agrees as follows:
(a) All Warrant Shares that are issued upon the exercise of this
Warrant shall, upon issuance, be validly issued, fully paid and
nonassessable, not subject to any preemptive rights, and free from all
taxes, liens, security interests, charges, and other encumbrances with
respect to the issuance thereof.
(b) During the period within which this Warrant may be exercised, the
Company shall at all times have authorized and reserved, and keep available
free from preemptive rights, a sufficient number of Common Shares to
provide for the exercise of the rights represented by this Warrant.
4. LOSS OR DESTRUCTION OF WARRANT.
Subject to the terms and conditions hereof, upon receipt by the Company of
evidence reasonably satisfactory to it of the loss, theft, or destruction or
mutilation of this Warrant and, in the case of loss, theft or destruction, of
such bond or indemnification as the Company may reasonably require, and, in the
case of such mutilation, upon surrender and cancellation of this Warrant, the
Company will execute and deliver a new Warrant of like tenor.
5. OWNERSHIP OF WARRANT.
The Company may deem and treat the person in whose name this Warrant is
registered as the holder and owner hereof (notwithstanding any notations of
ownership or writing hereon made by anyone other than the Company) for all
purposes and shall not be affected by any notice to the contrary, until
presentation of this Warrant for registration of transfer.
6. CERTAIN ADJUSTMENTS.
6.1 The number of Warrant Shares purchasable upon the exercise of this
Warrant and the Exercise Price shall be subject to adjustment as follows:
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(a) Stock Dividends, Splits, Combinations. If at any time after the
date of the issuance of this Warrant the Company (i) declares a dividend or
other distribution payable in Common Shares or securities convertible into
Common Shares or subdivides its outstanding Common Shares into a larger
number or (ii) combines its outstanding Common Shares into a smaller
number, then (x) the number of Warrant Shares to be delivered upon exercise
of this Warrant will, upon the occurrence of an event set forth in clause
(i) above, be increased and, upon the occurrence of an event set forth in
clause (ii) above, be decreased so that such Warrantholder will be entitled
to receive the number of Common Shares that such Warrantholder would have
owned immediately following such action had this Warrant been exercised
immediately prior thereto and (y) the Exercise Price in effect immediately
prior to such dividend, other distribution, subdivision or combination, as
the case may be, shall be adjusted proportionately by multiplying such
Exception Price by a fraction, of which the numerator shall be the number
of Warrant Shares purchasable upon exercise of this Warrant immediately
prior to such adjustment and of which the denominator shall be the number
of Warrant Shares purchasable immediately thereafter.
(b) Distribution of Stock, Other Securities, Evidence of
Indebtedness. In case the Company shall distribute to the holders of
Common Shares, shares of its capital stock (other than Common Shares or
shares convertible into Common Shares for which adjustment is made under
Section 6.1(a)), stock or other securities of the Company or any other
Person, evidences of indebtedness issued by the Company or any other
Person, assets (excluding cash dividends) or options, Warrants or rights to
subscribe for or purchase the foregoing, then, and in each such case,
immediately following the record date fixed for the determination of the
holders of Common Shares entitled to receive such distribution, the
Exercise Price then in effect shall be adjusted by multiplying the Exercise
Price in effect immediately prior to such record date by fraction (i) the
numerator of which shall be such Current Market Price of the Common Shares
less the then Fair Market Value (as determined by the Board of Directors or
a duly appointed committee thereof) of the portion of the stock, other
securities, evidences of indebtedness so distributed or of such options,
warrants or rights applicable to one Common Share (but such numerator shall
not be less than one) and (ii) the denominator of which shall be the
Current Market Price of one Common Share on such record date (i.e. prior to
such shares trading "ex-"). Such adjustment shall become effective at the
opening of business on the Business Day following the record date for the
determination of stockholders entitled to such distribution.
(c) Reorganization, Merger, Sale of Assets. In case of any capital
reorganization or reclassification or other change of outstanding Common
Shares (other than a change in par value), any consolidation or merger of
the Company with or into another Person (other than a consolidation or
merger of the Company in which the Company is the resulting or surviving
Person and which does not result in any reclassification or change of
outstanding Common Stock) or the sale of all or substantially all of the
assets of the Company or another Person, upon exercise of this Warrant the
Warrantholder shall have the right to receive kind and amount of shares of
stock or other securities or property to which a holder of the number of
Common Shares of the Company deliverable upon exercise of this Warrant
would have been entitled upon such reorganization, reclassification,
consolidation, merger or sale had this Warrant been exercised immediately
prior to such event; and, in such case, appropriate adjustment (as
determined in good faith by the Board of Directors or a duly appointed
committee thereof) shall be made in the application of the provisions of
this Section 6 with respect to the rights and interest thereafter of the
Warrantholder, to the end that the provisions set forth in this Section 6
(including provisions with respect to changes in and other adjustments of
the Exception Price) shall thereafter be applicable, as nearly as
reasonably may be, in relation to any shares of stock or other property
thereafter deliverable upon exercise of this Warrant.
(d) Carryover. Notwithstanding any other provision of this Section
6.1, no adjustment shall be made to the number of Common Shares to be
delivered to the Warrantholder (or to the Exercise Price) if such
adjustment represents less than 1% of the number of shares to be so
delivered, but any lesser adjustment shall be carried forward and shall be
made at the time and together with the next subsequent adjustment that
together with any adjustments so carried forward shall amount to 1% or more
of the number of shares to be so delivered, provided however, that, upon
exercise of this warrant pursuant to Section 1 hereof, any
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adjustment called for by Sections 6.2(a), (b) or (c) which has not been
made as a result of this Section 6.1(d) shall be made.
6.2 No Adjustment For Dividends. Except as provided in Section 6.1, no
adjustment in respect of any dividends shall be made during the term of this
Warrant or upon the exercise of this Warrant. Notwithstanding any other
provision hereof, no adjustments shall be made on Warrant Shares issuable on the
exercise of this Warrant for any cash dividends paid or payable to holders of
record of Common Shares prior to the date as of which the Warrantholder shall be
deemed to be the record holder of such Warrant Shares.
6.3. Notice of Adjustment. Whenever the number of Warrant Shares or the
Exercise Price of such Warrant Shares shall be adjusted, as provided in Section
6.1, the Company shall forthwith file, at the principal office of the Company
(or at such other place as may be designated by the Company), a statement,
certified by the chief financial officer of the Company, showing in detail the
facts requiring such adjustment, the computation by which such adjustment was
made and the Exercise Price that shall be in effect after such adjustment. The
Company shall also cause a copy of such statement to be sent by first class mail
postage prepaid, to the Warrantholder, at such Warrantholder's address as shown
in the records of the Company.
7. REGISTRATION STATEMENT. The Company shall, at its expense, file a
registration statement with the United States Securities and Exchange Commission
within 30 days after the date hereof to effect the registration of the resale of
the Warrant Shares under the Securities Act; provided that the Warrantholder
shall not sell any Warrant Shares pursuant to such registration statement unless
and until it provides to the Company such information as the Company may
reasonably request for use in connection with the identification of the
Warrantholder as a selling stockholder in such registration statement, or any
prospectus included therein, and no such sale shall be made by the Warrantholder
pursuant to such registration statement unless and until such information is
included by the Company in such registration statement or prospectus. The
Company shall in good faith use its best efforts and at its expense to cause
such registration statement to be declared effective as promptly as practicable
thereafter, to amend such registration statement to include additional or
revised information with respect to the selling stockholders and to include in
such registration statement the information provided by the Warrantholder as a
selling stockholder and shall notify the Warrantholder of the effectiveness
thereof and agrees to use its best efforts to maintain the effectiveness of such
registration statement until the Warrant expires according to its terms. The
Company shall indemnify and hold harmless the Warrantholder, its officers,
directors and agents and employees, each person who controls the Warrantholder
(within the meaning of Section 15 of the Securities Act or Section 20 of the
1934 Act) and the officers, directors, agents and employees of any such
controlling person, from and against all damage, loss, liability and expense
(including, without limitation, reasonable expenses of investigation and
reasonable attorneys' fees and expenses in connection with any action, suit or
proceeding)("Losses") incurred or suffered and arising out of or based upon any
untrue or alleged untrue statement of a material fact contained in any such
registration statement, or related prospectus or in any amendment or supplement
thereto, or arising out of or based upon any omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statement therein not misleading, except to the extent the same are based
upon information furnished in writing to the Company by or on behalf of the
Warrantholder expressly for use therein; provided, that the Company shall not be
liable to the Warrantholder to the extent that any such Losses arise out of or
are based upon any untrue statement or alleged untrue statement or omission or
alleged omission made in any preliminary prospectus if either (A)(i) the
Warrantholder failed to send or deliver a copy of the final prospectus with or
prior to the delivery of written confirmation of the sale by the Warrantholder
of a Warrant Share to the person asserting the claim from which such Losses
arise and (ii) the prospectus would have completely corrected such untrue
statement or alleged untrue statement or such omission or alleged omission; or
(B)(i) such untrue statement or alleged untrue statement, omission or alleged
omission is completely corrected in an amendment or supplement to the prospectus
and (ii) having previously been furnished by or on behalf of the Company with
copies of the prospectus as so amended or supplemented, the Warrantholder
thereafter fails to deliver such prospectus as so amended or supplemented, prior
to or concurrently with the sale of a Warrant Share to the person asserting the
claim from which such Losses arise. Promptly after receipt by an indemnified
party under Article XII of the Stock Purchase Agreement of notice of any claim
or the commencement of any action, the indemnified party shall, if a claim in
respect thereof is to be made against the
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Company under such Article XII notify the Company in writing of the claim or the
commencement of that action. No indemnification provided for in such Article XII
shall be available to any party who shall fail to give the notice to the extent
that the party to whom such notice was not given was unaware of the action, suit
or proceeding to which the notice would have related and was prejudiced by the
failure to give the notice, by the omission so to notify such indemnifying party
of any such notification shall not relieve such indemnifying party from any
liability which it may have to the indemnified party otherwise than under
Article XII. If any such claim or action shall be brought against an indemnified
party, and it shall notify the Company thereof, the Company may, or if the
indemnified party requests shall, participate therein and assume the defense
thereof with counsel reasonably satisfactory to the indemnified party. After
notice from the Company to the indemnified party of its election to assume the
defense of such claim or action, the Company shall not be liable to the
indemnified party under Article XII for any legal or other expenses subsequently
incurred by the indemnified party in connection with the defense thereof;
provided, however, if the defendants in any such action include both an
indemnified party and the Company and the indemnified party shall have
reasonably concluded that there may be legal defenses available to the Company,
the indemnified party shall have the right to employ counsel to represent it
and, in that event, the reasonable fees and expenses of such separate counsel
shall be paid by the Company. Neither the Company nor the indemnified party will
accept settlement of such a claim or action without the consent of the others.
8. AMENDMENTS.
Any provision of this Warrant may be amended and the observance thereof
waived only with the written consent of the Company and the Warrantholder.
9. NOTICES OF CORPORATE ACTION.
So long as this Warrant has not been exercised in full, in the event of
(a) any taking by the Company of a record of all holders of Common
Shares for the purpose of determining the holders thereof who are entitled
to receive any dividend (other than cash dividends or distributions paid
from the retained earnings of the Company) or other distribution, or any
right to subscribe for, purchase or otherwise acquire any shares of stock
of any class or any other securities or property, or to receive any other
right;
(b) any capital reorganization of the Company, any reclassification
(other than a change in par value of the Common Shares) or recapitalization
of the capital stock of the Company or any consolidation or merger
involving the Company and any other Person or any transfer of all or
substantially all the assets of the Company to any other Person; or
(c) any voluntary or involuntary dissolution, liquidation or
winding-up of the Company;
the Company will mail to the Warrantholder a notice specifying (i) the date or
expected ate on which any such record is to be taken for the purpose of such
dividend, distribution or right and the amount and character of any such
dividend, distribution or right or (ii) the date or expected date on which any
such reorganization, reclassification, recapitalization, consolidation, merger,
transfer, dissolution, liquidation or winding-up is to take place and the time,
if any such time is to be fixed, as of which the holders of record of Common
Shares shall be entitled to exchange their Common Shares for the securities or
other property, if any, deliverable upon such reorganization, reclassification,
recapitalization, consolidation, merger, transfer, dissolution, liquidation or
winding-up. Such notice shall be delivered at least 5 days prior to the date
therein specified, in the case of any date referred to in the foregoing
subdivisions (i) and (ii).
10. DEFINITIONS.
As used herein, unless the context otherwise requires, the following terms
have the following respective meanings;
"AFFILIATE" means any Person who is an "affiliate" as defined in Rule 12b-2
of the General Rules and Regulations under the Exchange Act.
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"BUSINESS DAY" means any day other than a Saturday, Sunday or a day on
which national banks are authorized by law to close in the State of Ohio.
"COMMON STOCK" has the meaning specified on the cover of this Warrant.
"COMPANY" has the meaning specified on the cover of this Warrant.
"CURRENT MARKET PRICE" of a share of Common Stock as of a particular date
(the "Determination Date") shall mean:
(i) If the Common Shares are listed or admitted for trading on a
national securities exchange (including The Nasdaq Stock Market), then the
Current Market Price shall be the average of the last 10 "daily sales
prices" of the Common Shares on the principal national securities exchange
on which the Common Shares is listed or admitted for trading on the last 10
trading days prior to the Determination Date, or if not listed or traded on
any such exchange, then the Current Market Price shall be the average of
the last 10 "daily sales prices" of the Common Shares on the
over-the-counter market on the last 10 trading days prior to the
Determination Date. The "daily sales price" shall be the closing price of
the Common Shares at the end of each day; or
(ii) If the Common Shares not so listed or admitted to unlisted
trading privileges or if no such sale is made on at least 25 of such days,
then the Current Market Price shall be reasonably determined in good faith
by the Company's Board of Directors or a duly appointed committee of the
Board of Directors (which determination shall be reasonably described in
the written notice delivered to the Warrantholder together with the Common
Shares certificates).
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended, (or
any successor statute thereto) and the rules and regulations of the Commission
promulgated thereunder.
"EXERCISE FORM" means an Exercise Form in the form annexed hereto as
Exhibit A.
"EXERCISE PRICE" has the meaning specified on the cover of this Warrant.
"EXPIRATION DATE" means , , 200 . [5 years]
"FAIR MARKET VALUE" means the amount which a willing buyer would pay a
willing seller in an arm's length transaction.
"PERSON" means any individual, firm, corporation, partnership, limited
liability company, trust, incorporated or unincorporated association, joint
venture, joint stock company, governmental authority or other entity of any
kind, and shall include any successor (by merger or otherwise) of such entity.
"SECURITIES ACT" has the meaning specified on the cover of this Warrant, or
any similar Federal statute, and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.
Reference to a particular section of the Securities Act, shall include a
reference to the comparable section, if any, of any such similar Federal
statute.
"STOCK PURCHASE AGREEMENT" has the meaning specified on the cover of this
Warrant.
"WARRANTHOLDER" has the meaning specified on the cover of this Warrant.
"WARRANT SHARES" has the meaning specified on the cover of this Warrant.
11. MISCELLANEOUS.
11.1 Entire Agreement. This Warrant, together with the Stock Purchase
Agreement, constitute the entire agreement between the Company and the
Warrantholder with respect to this Warrant.
11.2 Binding Effect; Benefit. This Warrant shall inure to the benefit of
and shall be binding upon the Company and the Warrantholder and their respective
successors and assigns. Nothing in this Warrant, expressed or implied, is
intended to or shall confer on any person other than the Company and the
Warrantholder, or their respective successors or assigns, any rights, remedies,
obligations or liabilities under or by reason of this Warrant.
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11.3 Section and Other Headings. The section and other headings contained
in this Warrant are for reference purposes only and shall not be deemed to be a
part of this Warrant or to affect the meaning or interpretation of this Warrant.
11.4 Notices. All notices, demands and other communications provided for
or permitted hereunder shall be made in writing and shall be by registered or
certified first-class mail, return receipt requested, telecopier, courier
service, overnight mail or personal delivery:
(a) if to Warrantholder:
-----------------------------------------------------------
-----------------------------------------------------------
-----------------------------------------------------------
with a copy to:
McDermott, Will & Emery
227 W. Monroe Street
Chicago, IL 60606
Telecopy: (312) 984-3669
Attention: Stanley H. Meadows, P.C.
(b) If to the Company:
Central Reserve Life Corporation
17800 Royalton Road
Strongsville, Ohio 44136
Telecopy:
-----------------------------------------------
Attention:
-----------------------------------------------
with a copy to:
Latham & Watkins
233 South Wacker Drive
Chicago, Illinois 60606
Telecopy: (312) 993-9767
Attention: Mark D. Gerstein
All such notices and communications shall be deemed to have been duly given
when delivered by hand, if personally delivered; when delivered by courier or
overnight mail, if delivered by commercial courier service or overnight mail;
five (5) Business Days after being deposited in the mail, postage prepaid, if
mailed; and when receipt is mechanically acknowledged, if telecopied. Any party
may by notice given in accordance with this Section 11.4 designate another
address or Person for receipt of notices hereunder.
11.5 Severability. Any term or provision of this Warrant which is invalid
or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceability the terms and provisions of this Warrant
or affecting the validity or enforceability of any of the terms or provisions of
this Warrant in any other jurisdiction.
11.6 Governing Law. THIS WARRANT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF OHIO, WITHOUT REGARD TO THE CONFLICTS
OF LAW PRINCIPLES THEREOF.
11.7 No Rights or Liabilities as Stockholder. Nothing containing in this
Warrant shall be determined as conferring upon the Warrantholder any rights as a
stockholder of the Company or as imposing any liabilities on the Warrantholder
to purchase any securities whether such liabilities on the Warrantholder to
purchase any securities whether such liabilities are asserted by the Company or
by creditors or stockholders of the Company or otherwise.
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IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by its
duly authorized officer.
CENTRAL RESERVE LIFE CORPORATION
By:
--------------------------------------
Name:
Title:
Dated: , 199
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EXHIBIT B
CENTRAL RESERVE LIFE CORPORATION
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (this "Agreement"), dated as of
, 199 , is between CENTRAL RESERVE LIFE CORPORATION, an Ohio
corporation (the "Corporation"), and the entities set forth on Schedule 1
attached hereto (the "Investors").
RECITALS
A. The Investors have agreed to purchase common shares, without par value,
of the Corporation (the "Common Shares") pursuant to that certain Stock Purchase
Agreement of even date herewith provided that the parties hereto enter into this
Agreement.
B. The Corporation deems it desirable to enter into this Agreement in order
to induce the Investors to purchase the Common Shares pursuant to the Stock
Purchase Agreement.
AGREEMENTS
In consideration of the premises and the mutual covenants herein contained
and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereto hereby agree as follows:
1. DEFINITIONS. As used in this Agreement.
"Commission" means the Securities and Exchange Commission.
"Common Shares" means the Common Shares, without par value, of the
Corporation.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Person" means a natural person, a partnership, a corporation, a limited
liability company, an association, a joint stock company, a trust, a joint
venture, an unincorporated organization or other entity, or a governmental
entity or any department, agency or political subdivision thereof.
"Public Offering" means any offering by the Corporation of its equity
securities to the public pursuant to an effective registration statement under
the Securities Act or any comparable statement under any comparable federal
statute then in effect.
"Registrable Shares" means at any time (i) any Common Shares then
outstanding which were issued pursuant to the Stock Purchase Agreement; (ii) any
Common Shares then outstanding and held by any Investor; (iii) any Common Shares
then outstanding which were issued as, or were issued directly or indirectly
upon the conversion or exercise of other securities issued as a dividend or
other distribution with respect or in replacement of any shares referred to in
(i) or (ii); and (iv) any Common Shares then issuable directly or indirectly
upon the conversion or exercise of other securities which were issued as a
dividend or other distribution with respect to or in replacement of any shares
referred to in (i) or (ii); provided, however, that Registrable Shares shall not
include any shares which have been registered pursuant to the Securities Act or
which have been sold to the public pursuant to Rule 144 of the Commission under
the Securities Act. For purposes of this Agreement, a Person will be deemed to
be a holder of Registrable Shares whenever such Person has the then-existing
right to acquire such Registrable Shares, whether or not such acquisition
actually has been effected.
"Securities Act" means the Securities Act of 1933, as amended.
"Stock Purchase Agreement" means the Stock Purchase Agreement of even date
herewith between the Corporation and the Investors.
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2. DEMAND REGISTRATION.
2.1 Requests for Registration. Subject to the terms of this Agreement, the
holders of at least twenty percent (20%) of the then outstanding Registrable
Shares (but not less than $1,000,000 of the then market value) may, at any time,
request registration under the Securities Act of all or part of their
Registrable Shares on Form S-1 or any similar long-form registration ("Long-Form
Registrations") or, if available, then at the option of the Company, on Form S-2
or S-3 or any similar short-form registration ("Short-Form Registrations").
Within ten (10) days after receipt of any request pursuant to this Section 2.1,
the Corporation will give written notice of such request to all other holders of
Registrable Shares and will include in such registration all Registrable Shares
with respect to which the Corporation has received written requests for
inclusion within thirty (30) days after delivery of the Corporation's notice.
All registrations requested pursuant to this Section 2 are referred to herein as
"Demand Registrations."
2.2 Payment of Expenses for Demand Registrations. The Corporation will pay
all Registration Expenses (as defined in Section 6 below) for the first three
Demand Registrations (including those under Section 2.3) (whether a Long-Form
Registration or a Short-Form Registration). A registration will not count as one
of the Corporation-paid Demand Registrations until it has become effective and
the holders of Registrable Shares are able to register and sell at least 90% of
the Registrable Shares requested to be included in such registration (or in the
case of a shelf registration, it remains effective for not less than 180 days);
provided, however, that in any event the Corporation will pay all Registration
Expenses in connection with any registration initiated as a Demand Registration.
In a Demand Registration other than the first three Demand Registrations
(including those under Section 2.3), the Registration Expenses of such
registration shall be borne by the holders of Registrable Shares to be
registered thereunder pro rata based on the number of Registrable Shares and
other securities requested or permitted to be included in such registration
pursuant to the terms of this Agreement.
2.3 Short-Form Registrations. In addition to the Long-Form Registrations
provided pursuant to Section 2.1 above, the holders of Registrable Shares will
be entitled to request up to three Short-Form Registrations, provided, however,
that the aggregate offering value of the Registrable Shares requested to be
registered in any Short-Form Registration must be reasonably expected to equal
at least $1,000,000. Demand Registrations will be Short-Form Registrations
whenever the Corporation is permitted to use any applicable short form. The
Corporation will use its best efforts to make Short-Form Registrations available
for the sale of Registrable Shares. If a Short-Form Registration is to be an
underwritten public offering, and if the underwriters for marketing or other
reasons request the inclusion in the registration statement of information which
is not required under the Securities Act to be included in a registration
statement on the applicable form for the Short-Form Registration, the
Corporation will provide such information as may be reasonably requested for
inclusion by the underwriters in the Short-Form Registration.
2.4 Priority. If a Demand Registration is an underwritten public offering
and the managing underwriters advise the Corporation in writing that in their
opinion the inclusion of the number of Registrable Shares and other securities
requested to be included (by the Corporation or others) creates a substantial
risk that the price per Common Share will be reduced, the Corporation will
include in such registration, prior to the inclusion of any securities which are
not Registrable Shares, the number of Registrable Shares requested to be
included which in the opinion of such underwriters can be sold without creating
such a risk, pro rata among the respective Holders of Registrable Shares on the
basis of the number of Registrable Shares owned by such holders, with further
successive pro rata allocations among the Holders of Registrable Shares if any
such holder of Registrable Shares has requested the registration of less than
all such Registrable Shares it is entitled to register.
2.5 Restrictions. The Corporation will not be obligated to effect any
Demand Registration within 180 days after the effective date of a previous
Demand Registration. The Corporation may postpone for up to ninety (90) days the
filing or the effectiveness of a registration statement for a Demand
Registration if the Board of Directors of the Corporation reasonably and in good
faith determines that such filing would require a disclosure of a material fact
that would have a material adverse effect on the Corporation or any plan by the
Corporation to engage in any acquisition of assets (other than in the ordinary
course of business) or any merger, consolidation, tender offer or other
significant transaction.
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2.6 Selection of Underwriters. The holders of at least a majority of the
Registrable Shares included in any Demand Registration shall have the right to
select the investment banker(s) and manager(s) to administer the offering,
subject to the Corporation's approval which will not be unreasonably withheld,
and any existing contract rights of Advest, Inc.
3. PIGGYBACK REGISTRATION.
3.1 Right to Piggyback. Whenever the Corporation proposes to register any
of its equity securities under the Securities Act (other than pursuant to a
Demand Registration hereunder or on Form S-8 or S-4 or any successor form
thereto) and the registration form to be used may be used for the registration
of any Registrable Shares (a "Piggyback Registration"), the Corporation will
give prompt written notice to all holders of the Registrable Shares of its
intention to effect such a registration and will include in such registration
all Registrable Shares (in accordance with the priorities set forth in Sections
3.2 and 3.3 below) with respect to which the Corporation has received written
requests for inclusion within fifteen (15) days after the delivery of the
Corporation's notice.
3.2 Priority on Primary Registrations. If a Piggyback Registration is an
underwritten primary registration on behalf of the Corporation and the managing
underwriters advise the Corporation in writing that in their opinion the number
of securities requested to be included in the registration creates a substantial
risk that the price per Common Share will be reduced, the Corporation will
include in such registration FIRST, the securities that the Corporation proposes
to sell, SECOND, the Registrable Shares requested to be included in such
registration, pro rata among the holders of such Registrable Shares on the basis
of the number of shares which are owned by such holders, and THIRD, other
securities requested to be included in such registration.
3.3 Priority on Secondary Registrations. If a Piggyback Registration is an
underwritten secondary registration on behalf of holders of the Corporation's
securities and the managing underwriters advise the Corporation in writing that
in their opinion the number of securities requested to be included in the
registration creates a substantial risk that the price per Common Share will be
reduced, the Corporation will include in such registration FIRST, the securities
requested to be included therein by the holders requesting such registration and
the Registrable Shares requested to be included in such registration, pro rata
among the holders of such securities on the basis of the number of Common Shares
or Registrable Shares which are owned by such holders, and SECOND, other
securities requested to be included in such registration.
3.4 Other Registrations. If the Corporation has previously filed a
registration statement with respect to Registrable Shares pursuant to Section 2
or pursuant to this Section 3, and if such previous registration has not been
withdrawn or abandoned, the Corporation will not file or cause to be effected
any other registration of any of its equity securities or securities convertible
or exchangeable into or exercisable for its equity securities under the
Securities Act (except on Form S-8 or any successor form), whether on its own
behalf or at the request of any holder or holders of such securities, until a
period of at least 180 days has elapsed from the effective date of such previous
registration.
3.5 Selection of Underwriters. In connection with any Piggyback
Registration, the holders of at least a majority of the Registrable Shares
requested to be registered shall have the right to select the managing
underwriters (subject to the approval of the Corporation which shall not be
unreasonably withheld or delayed) to administer any offering of the
Corporation's securities in which the Corporation does not participate, and the
Corporation will have such right in any offering in which it participates.
4. HOLDBACK AGREEMENTS.
4.1 Holders' Agreements. Each holder of Registrable Shares agrees not to
effect any public sale or distribution of equity securities of the Corporation,
or any securities convertible into or exchangeable or exercisable for such
securities or make any demand for registration under Sections 2 or 3 hereof,
during the seven (7) days prior to, and during the ninety (90) days following,
the effective date of any underwritten Demand Registration or any underwritten
Piggyback Registration in which Registrable Shares are included (except as part
of such underwritten registration), unless the underwriters managing the
registered public offering otherwise agree. Nothing herein shall prevent a
holder of Registrable Shares that is a partnership from making a distribution
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of Registrable Shares to its partners, a holder of Registrable Shares that is a
trust from making a distribution of Registrable Shares to its beneficiaries or a
holder of Registrable Shares that is a corporation from making a distribution of
Registrable Shares to its stockholders, provided that the transferees of such
Registrable Shares agree to be bound by the provisions of this Agreement to the
extent the transferor would be so bound.
4.2 Corporation's Agreements. The Corporation agrees (i) not to effect any
public sale or distribution of its equity securities, or any securities
convertible into or exchangeable or exercisable for such securities, during the
seven (7) days prior to, and during the ninety (90) days following, the
effective date of any underwritten Demand Registration or any underwritten
Piggyback Registration (except as part of such underwritten registration or
pursuant to registrations on Form S-8 or any successor form), unless the
underwriters managing the registered public offering otherwise agree, (ii) to
use all reasonable efforts to cause each holder of at least five percent (5%)
(on a fully diluted basis) of its equity securities, or any securities
convertible into or exchangeable or exercisable for such securities to agree not
to effect any public sale or distribution of any such securities during such
period (except as part of such underwritten registration, if otherwise
permitted), unless the underwriters managing the registered public offering
otherwise agree, subject to the registration obligations of the Company under
the Common Share Purchase Warrants and (iii) if requested by the underwriters
managing the registered public offering, to use all reasonable efforts to cause
each other holder of its equity securities, or any securities convertible into
or exchangeable or exercisable for such securities, purchased from the
Corporation at any time (other than in a registered public offering) to agree
not to effect any public sale or distribution of any such securities during such
period (except as part of such underwritten registration, if otherwise
permitted), unless the underwriters managing the registered public offering
otherwise agree, subject to the registration obligations of the Company under
the Common Share Purchase Warrants.
5. REGISTRATION PROCEDURES. Whenever the holders of Registrable Shares have
requested that any Registrable Shares be registered pursuant to this Agreement,
the Corporation will use its best efforts to effect the registration and sale of
such Registrable Shares in accordance with the intended method of disposition
thereof and, pursuant thereto, the Corporation will as expeditiously as
possible:
(a) prepare and file with the Commission a registration statement with
respect to such Registrable Shares and use its best efforts to cause such
registration statement to become effective (provided that before filing a
registration statement or prospectus, or any amendments or supplements
thereto, the Corporation will furnish copies of all such documents proposed
to be filed to the counsel or counsels for the sellers of the Registrable
Shares covered by such registration statement);
(b) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus(es) used in
connection therewith as may be necessary to keep such registration
statement effective for a period of not less than nine months and comply
with the provisions of the Securities Act with respect to the disposition
of all securities covered by such registration statement during such period
in accordance with the intended methods of disposition by the sellers
thereof set forth in such registration statement;
(c) furnish to each seller of Registrable Shares such number of copies
of such registration statement, each amendment and supplement thereto, the
prospectus(es) included in such registration statement (including each
preliminary prospectus) and such other documents as such seller may
reasonably request in order to facilitate the disposition of the
Registrable Shares owned by such seller;
(d) use its best efforts to register or qualify such Registrable
Shares under such other securities or blue sky laws of such jurisdictions
as any seller reasonably requests and do any and all other acts and things
which may be reasonably necessary or advisable to enable such seller to
consummate the disposition in such jurisdictions of the Registrable Shares
owned by such seller (provided that the Corporation will not be required to
(i) qualify generally to do business in any jurisdiction where it would not
otherwise be required to qualify but for this subparagraph or (ii) consent
to general service of process in any such jurisdiction);
(e) notify each seller of such Registrable Shares, at any time when a
prospectus relating thereto is required to be delivered under the
Securities Act, of the happening of any event as a result of which the
prospectus included in such registration statement contains an untrue
statement of a material fact or omits
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any fact necessary to make the statements therein not misleading, and, at
the request of any such seller, the Corporation will prepare a supplement
or amendment to such prospectus so that, as thereafter delivered to the
purchasers of such Registrable Shares, such prospectus will not contain any
untrue statement of a material fact or omit to state any fact necessary to
make the statements therein not misleading;
(f) cause all such Registrable Shares to be listed on each securities
exchange on which similar securities issued by the Corporation are then
listed, or if no similar securities issued by the Corporation are then
listed on a securities exchange, a securities exchange selected by the
holders of at least a majority of the Registrable Shares included in such
registration;
(g) provide a transfer agent and registrar for all such Registrable
Shares not later than the effective date of such registration statement;
(h) enter into such customary agreements (including underwriting
agreements in customary form) and take all such other actions as the
holders of at least a majority of the Registrable Shares being sold or the
underwriters, if any, reasonably requested in order to expedite or
facilitate the disposition of such Registrable Shares (including, but not
limited to, effecting a stock split or a combination of shares);
(i) make available for inspection by any seller of Registrable Shares,
any underwriter participating in any disposition pursuant to such
registration statement, and any attorney, accountant or other agent
retained by any such seller or underwriter, all financial and other
records, pertinent corporate documents and properties of the Corporation,
and cause the Corporation's officers, directors, employees and independent
accountants to supply all information reasonably requested by any such
seller, underwriter, attorney, accountant or agent in connection with such
registration statement;
(j) advise each seller of such Registrable Shares, promptly after it
shall receive notice or obtain knowledge thereof, of the issuance of any
stop order by the Commission suspending the effectiveness of such
registration statement or the initiation or threatening of any proceeding
for such purpose and promptly use all reasonable efforts to prevent the
issuance of any stop order or to obtain its withdrawal if such stop order
should be issued;
(k) at least forty eight (48) hours prior to the filing of any
registration statement or prospectus, or any amendment or supplement to
such registration statement or prospectus, furnish a copy thereof to each
seller of such Registrable Shares and refrain from filing any such
registration statement, prospectus, amendment or supplement to which
counsel selected by the holders of at least a majority of the Registrable
Shares being registered shall have reasonably objected on the grounds that
such document does not comply in all material respects with the
requirements of the Securities Act or the rules and regulations thereunder,
unless, in the case of an amendment or supplement, in the opinion of
counsel for the Corporation the filing of such amendment or supplement is
reasonably necessary to protect the Corporation from any liabilities under
any applicable federal or state law and such filing will not violate
applicable laws; and
(l) at the request of any seller of such Registrable Shares in
connection with an underwritten offering, furnish on the date or dates
provided for in the underwriting agreement: (i) an opinion of counsel,
addressed to the underwriters and the sellers of Registrable Shares,
covering such matters as such underwriters and sellers may reasonably
request, including such matters as are customarily furnished in connection
with an underwritten offering and (ii) a letter or letters from the
independent certified public accountants of the Corporation addressed to
the underwriters and the sellers of Registrable Shares, covering such
matters as such underwriters and sellers may reasonably request, in which
letter(s) such accountants shall state, without limiting the generality of
the foregoing, that they are independent certified public accountants
within the meaning of the Securities Act and that in their opinion the
financial statements and other financial data of the Corporation included
in the registration statement, the prospectus(es), or any amendment or
supplement thereto, comply in all material respects with the applicable
accounting requirements of the Securities Act.
6. REGISTRATION EXPENSES.
6.1 Corporation's Expenses. Except as provided in Section 2.2 hereof, all
expenses incident to the Corporation's performance of or compliance with this
Agreement, including, but not limited to, all registration
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and filing fees, fees and expenses of compliance with securities or blue sky
laws, printing expenses, messenger and delivery expenses, and fees and
disbursements of counsel for the Corporation and all independent certified
public accountants, underwriters (excluding discounts and commissions) and other
Persons retained by the Corporation (all such expenses being herein called
"Registration Expenses"), will be borne by the Corporation. In addition, the
Corporation will pay its internal expenses (including, but not limited to, all
salaries and expenses of its officers and employees performing legal or
accounting duties), the expense of any annual audit or quarterly review, the
expense of any liability insurance obtained by the Corporation and the expenses
and fees for listing the securities to be registered on each securities
exchange.
6.2 Holder's Expenses. Except as provided in Section 2.2 hereof, in
connection with any registration statement in which Registrable Shares are
included, the Corporation will reimburse the holders of Registrable Shares
covered by such registration for the reasonable cost and expenses incurred by
such holders in connection with such registration, including, but not limited
to, reasonable fees and disbursements of one counsel chosen by the holders of at
least a majority of such Registrable Shares.
7. INDEMNIFICATION.
7.1 By the Corporation. The Corporation agrees to indemnify, to the extent
permitted by law, each holder of Registrable Shares, its officers and directors
and each Person who controls such holder (within the meaning of the Securities
Act) against all losses, claims, damages, liabilities and expenses (including,
but not limited to, attorney's fees) caused by any untrue or alleged untrue
statement of material fact contained in any registration statement, prospectus
or preliminary prospectus, or any amendment thereof or supplement thereto, or
any omission or alleged omission of a material fact, required to be stated
therein or necessary to make the statements therein not misleading, except
insofar as the same are caused by or contained in any information furnished in
writing to the Corporation by such holder expressly for use therein or by such
holder's failure to deliver a copy of the prospectus or any amendments or
supplements thereto after the Corporation has furnished such holder with a
sufficient number of copies of the same. In connection with an underwritten
offering, the Corporation will indemnify such underwriters, their officers and
directors and each Person who controls such underwriters (within the meaning of
the Securities Act) to the extent customary. The payments required by this
Section 7.1 will be made periodically during the course of the investigation or
defense, as and when bills are received or expenses incurred, subject to an
obligation of repayment in the event such indemnity is determined not to be
owed.
7.2 By Each Holder. In connection with any registration statement in which
a holder of Registrable Shares is participating, each such holder will furnish
to the Corporation in writing such information as the Corporation reasonably
requests for use in connection with any such registration statement, preliminary
prospectus or prospectus, or any amendment or supplement thereto and, to the
extent permitted by law, will indemnify the Corporation, its directors and
officers and each Person who controls the Corporation (within the meaning of the
Securities Act) against any losses, claims, damages, liabilities and expenses
resulting from any untrue or alleged untrue statement of material fact contained
in the registration statement, prospectus or preliminary prospectus, or any
amendment thereof or supplement thereto, or any omission or alleged omission of
a material fact required to be stated therein or necessary to make the
statements therein not misleading, but only to the extent that such untrue
statement or omission is contained in any information so furnished in writing by
such holder for inclusion in the registration statement or prospectus; provided
that the obligation to indemnify will be several, not joint and several, among
such holders of Registrable Shares and the liability of each such holder of
Registrable Shares will be in proportion to and limited in all events to the net
amount received by such holder from the sale of Registrable Shares pursuant to
such registration statement.
7.3 Procedure. Any Person entitled to indemnification hereunder will (i)
give prompt written notice to the indemnifying Person of any claim with respect
to which it seeks indemnification and (ii) unless in such indemnified Person's
reasonable judgment a conflict of interest between such indemnified and
indemnifying parties may exist with respect to such claim, permit such
indemnifying Person to assume the defense of such claim with counsel reasonably
satisfactory to the indemnified Person. If such defense is assumed, the
indemnifying Person will not be subject to any liability for any settlement made
by the indemnified Person without its consent (but such consent will not be
unreasonably withheld). An indemnifying Person who is not
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entitled to, or elects not to, assume the defense of a claim will not be
obligated to pay the fees and expenses of more than one counsel for all parties
indemnified by such indemnifying Person with respect to such claim, unless in
the reasonable judgment of any indemnified Person a conflict of interest may
exist between such indemnified Person and any other of such indemnified parties
with respect to such claim.
7.4 Survival. The indemnification provided for under this Agreement will
remain in full force and effect regardless of any investigation made by or on
behalf of the indemnified Person or any officer, director or controlling Person
of such indemnified Person and will survive the transfer of securities. The
Corporation also agrees to make such provisions as are reasonably requested by
any indemnified Person for contribution to such Person in the event the
Corporation's indemnification is unavailable for any reason.
8. COMPLIANCE WITH RULE 144 AND RULE 144A. At the request of any holder of
Registrable Shares who proposes to sell securities in compliance with Rule 144
of the Commission, the Corporation will (i) forthwith furnish to such holder a
written statement of compliance with the filing requirements of the Commission
as set forth in Rule 144, as such rule may be amended from time to time and (ii)
make available to the public and such holders such information as will enable
the holders of Registrable Shares to make sales pursuant to Rule 144. Unless the
Corporation is subject to Section 13 or 15(d) of the Exchange Act, the
Corporation will provide to the holder of Registrable Shares and to any
prospective purchaser of Registrable Shares under Rule 144A of the Commission,
the information described in Rule 144A(d)(4) of the Commission.
9. PARTICIPATION IN UNDERWRITTEN REGISTRATIONS. No Person may participate
in any registration hereunder which is underwritten unless such Person (a)
agrees to sell its securities on the basis provided in any underwriting
arrangements approved by such Person or Persons entitled hereunder to approve
such arrangements and (b) completes and executes all questionnaires, powers of
attorney, custody agreements, indemnities, underwriting agreements and other
documents reasonably required under the terms of such underwriting arrangements.
10. MISCELLANEOUS.
10.1 No Inconsistent Agreements. The Corporation will not hereafter enter
into any agreement with respect to its securities which is inconsistent with the
rights granted to the holders of Registrable Shares in this Agreement.
10.2 Adjustments Affecting Registrable Shares. The Corporation will not
take any action, or permit any change to occur, with respect to its securities
which would adversely affect the ability of the holders of Registrable Shares to
include such Registrable Shares in a registration undertaken pursuant to this
Agreement or which would adversely affect the marketability of such Registrable
Shares in any such registration, including, but not limited to, effecting a
stock split or combination of shares.
10.3 Other Registration Rights. Except as provided in this Agreement, the
Corporation will not hereafter grant to any Person or Persons the right to
request the Corporation to register any equity securities of the Corporation, or
any securities convertible or exchangeable into or exercisable for such
securities, without the prior written consent of the holders of at least a
majority of the Registrable Shares.
10.4 Remedies. Any Person having rights under any provision of this
Agreement will be entitled to enforce such rights specifically, to recover
damages caused by reason of any breach of any provision of this Agreement and to
exercise all other rights granted by law.
10.5 Amendments and Waivers. Except as otherwise expressly provided herein,
the provisions of this Agreement may be amended or waived at any time only by
the written agreement of the Corporation and the holders of at least a majority
of the Registrable Shares; provided, however, that the provisions of this
Agreement may not be amended or waived without the consent of the holders of all
the Registrable Shares adversely affected by such amendment or waiver if such
amendment or waiver adversely affects a portion of the Registrable Shares but
does not so adversely affect all of the Registrable Shares. Any waiver, permit,
consent or approval of any kind or character on the part of any such holders of
any provision or condition of this Agreement must be made in writing and shall
be effective only to the extent specifically set forth in writing. Any amendment
or waiver
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effected in accordance with this paragraph shall be binding upon each holder of
Registrable Securities and the Corporation.
10.6 Successors and Assigns. Except as otherwise expressly provided herein,
all covenants and agreements contained in this Agreement by or on behalf of any
of the parties hereto will bind and inure to the benefit of the respective
successors and assigns of the parties hereto, whether so expressed or not. In
addition, and whether or not any express assignment has been made, the
provisions of this Agreement which are for the benefit of the Investors or
holders of Registrable Shares are also for the benefit of, and enforceable by,
any subsequent holders of such Registrable Shares.
10.7 Severability. Whenever possible, each provision of this Agreement will
be interpreted in such manner as to be effective and valid under applicable law,
but if any provision of this Agreement is held to be prohibited by or invalid
under applicable law, such provision will be ineffective only to the extent of
such prohibition or invalidity, without invalidating the remainder of this
Agreement.
10.8 Descriptive Headings. The descriptive headings of this Agreement are
inserted for convenience of reference only and do not constitute a part of and
shall not be utilized in interpreting this Agreement.
10.9 Notices. Any notices required or permitted to be sent hereunder shall
be delivered personally or mailed, certified mail, return receipt requested, or
delivered by overnight courier service to the following addresses, or such other
address as any Person designates by written notice to the Corporation, and shall
be deemed to have been given upon delivery, if delivered personally, three days
after mailing, if mailed, or one business day after delivery to the courier, if
delivered by overnight courier service:
If to the Corporation, to:
Central Reserve Life Corporation
17800 Royalton Road
Strongsville, Ohio 44136
with a copy to:
Latham & Watkins
5800 Sears Tower
233 S. Wacker Drive
Chicago, Illinois
Attention: Mark D. Gerstein
If to the Investors, to the addresses set forth on Schedule 1 hereto.
If to holders of the Registrable Shares other than the Investors, to the
addresses set forth on the stock record books of the Corporation.
10.10 Governing Law. All questions concerning the construction, validity
and interpretation of this Agreement, and the performance of the obligations
imposed by this Agreement, shall be governed by the laws of the State of Ohio
applicable to contracts made and wholly to be performed in that state.
10.11 Final Agreement. This Agreement, together with the Stock Purchase
Agreement and all other agreements entered into by the parties hereto pursuant
to the Stock Purchase Agreement, constitutes the complete and final agreement of
the parties concerning the matters referred to herein, and supersedes all prior
agreements and understandings.
10.12 Execution in Counterparts. This Agreement may be executed in any
number of counterparts, each of which when so executed and delivered shall be
deemed an original, and such counterparts together shall constitute one
instrument.
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10.13 No Strict Construction. The language used in this Agreement will be
deemed to be the language chosen by the parties hereto to express their mutual
intent, and no rule of strict construction will be used against any Person.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK.
SIGNATURE PAGES FOLLOW.]
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<PAGE> 80
The parties hereto have executed this Agreement on the date first above
written.
THE CORPORATION:
CENTRAL RESERVE LIFE CORPORATION
By:
------------------------------------
Its:
INVESTORS:
STRATEGIC ACQUISITION PARTNERS, LLC
By:
------------------------------------
Its:
TURKEY VULTURE FUND XIII
By:
------------------------------------
Its:
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<PAGE> 81
SCHEDULE 1
Strategic Acquisition Partners, LLC
20 N. Wacker Drive
Suite 3118
Chicago, Illinois 60601
Turkey Vulture Fund XIII
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<PAGE> 82
EXHIBIT C
VOTING AGREEMENT
This VOTING AGREEMENT (the "AGREEMENT") is entered into as of
, 1997, by and among Strategic Acquisition Partners, LLC, a
Nevada limited liability company ("SAP"), Richard Osborne, individually and on
behalf of Turkey Vulture Fund XIII (collectively, "OSBORNE"), and Central
Reserve Life Corporation, an Ohio corporation (the "COMPANY").
WHEREAS, pursuant to the Stock Purchase Agreement dated ,
1997 by and between SAP and the Company (the "STOCK PURCHASE AGREEMENT"), the
Company shall issue 5,000,000 shares of common stock, without par value, of the
Company (which, together with any stock into which such stock is changed or
converted pursuant to a merger, consolidation, reclassification or otherwise,
the "PURCHASED SHARES") and issue up to 3,500,000 shares of common stock of the
Company pursuant to certain warrants issued in connection with the Stock
Purchase Agreement (the "WARRANT SHARES");
WHEREAS, upon closing of the transactions contemplated by the Stock
Purchase Agreement (the "CLOSING DATE"), the Purchased Shares shall constitute a
majority of the common stock of the Company; and
WHEREAS, the parties desire to regulate certain aspects of their
relationship as holders of common stock of the Company.
NOW THEREFORE, in consideration of the agreements and covenants herein
contained and for other good and valuable consideration, the parties hereto
agree as follows:
ARTICLE I
ELECTION OF DIRECTORS
SECTION I.1 BOARD OF DIRECTORS.
(a) For the duration of this Agreement, each of SAP and Osborne and their
respective successors and assigns, and any other holder of common stock of the
Company bound hereby (the "HOLDERS") agrees to vote the Purchased Shares and any
other shares of common stock beneficially owned by the Holders, including the
Warrant Shares which are then beneficially owned by SAP and Osborne and their
respective affiliates (the "SUBJECT SHARES") in such manner that (i) the five
individuals designated by SAP are elected to the board of directors of the
Company (the "BOARD") at any annual meeting of stockholders or special meeting
of stockholders called for the election of directors or in filling any vacancy
on the Board; (ii) the two individuals designated by Osborne are elected to the
Board at any annual meeting of stockholders or special meeting of stockholders
called for the election of directors or in filling any vacancy on the Board;
(iii) John Novatney is retained as a member of the Board for a period of two
years from the Closing Date; (iv) Fred Lick is member of the Board until the
expiration of the remaining term of his employment agreement with the Company,
as amended; (v) at least three (3) members of the Board are "independent" as
such term is defined under applicable NASDAQ National Market System, Inc.
standards (the "INDEPENDENT DIRECTORS"); and (vi) the Company shall not
voluntarily be delisted from the NASDAQ National Market System, Inc. except in
connection with a going private transaction or if the Company becomes listed on
another national securities exchange. Each of SAP and Osborne and their
respective successors and assigns hereby agrees that it shall not take any
action to remove the designees of the other party from the Board, or to take any
action to remove any person agreed to be elected above, including by reduction
in the size of the Board.
(b) If a vacancy shall occur in the office of any director designated
pursuant to Section 1.1(a)(i) or Section 1.1(a)(ii), each party shall instruct
its respective designees on the Board to vote in favor of the individual
designated by the party whose designee's removal or resignation created the
vacancy.
(c) If a vacancy shall occur in the office of any director specified in
clauses (iii) or (iv) of Section 1.1(a) (including following the expiration of
their mandated term), (i) each party shall instruct its respective designees on
the Board to vote in favor of the individual designated by a majority of the
Independent Directors to fill such vacancy and (ii) each Holder shall vote the
Subject Shares in favor of the individual designated by a majority of
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the independent directors to fill such vacancy at the next annual meeting or
special meeting of stockholders called for the election of directors.
SECTION I.2 PROXY. For the duration of this Agreement, Osborne hereby
grants to SAP, with full powers of substitution, and SAP hereby grants to
Osborne, with full powers of substitution, an irrevocable proxy coupled with an
interest as may be necessary to permit such party, to vote the shares of the
Holder granting such proxy in accordance with the requirements of Section 1.1
(by written consent or otherwise) in event the Holder fails to vote its shares
of common stock of the Company as required under Section 1.1 within ten (10)
days after notice from the party holding such proxy requesting such a vote.
SECTION I.3 CUMULATIVE VOTING. As promptly as practicable following the
Closing Date, the Company shall amend its Articles of Incorporation, Code of
Regulations or Bylaws, as the case may be, to eliminate cumulative voting in the
election of directors.
SECTION I.4 PROXY STATEMENT. In connection with any annual meeting of the
stockholders or special meeting of the stockholders of the Company called for
the election of directors, the Company shall prepare and file with the
Securities and Exchange Commission (the "COMMISSION") a proxy statement relating
to such meeting (together with any amendments thereof or supplements thereto,
the "PROXY STATEMENT") which shall include the recommendation of the Board in
favor of electing the directors specified in Section 1.1. Except in the event of
termination of this Agreement, no modification or withdrawal of such
recommendation shall release the Company of its obligation to submit the
election of directors specified in Section 1.1 to its stockholders for their
vote in accordance with applicable law. The Company shall use reasonable efforts
to assure the election of the directors specified in Section 1.1.
ARTICLE II
RESTRICTIONS ON TRANSFER
SECTION II.1 RESTRICTIONS UPON TRANSFER. No Holder may effect, cause to
be effected or permit any voluntary or involuntary sale, assignment or transfer
of any Subject Shares or any interest therein (a "TRANSFER"), except to a
transferee that agrees to be bound by the provisions of this Agreement;
provided, that the Warrant Shares shall not be subject to this Agreement upon
the Transfer to a beneficial owner other than SAP or Osborne and their
respective affiliates. Any Transfer not complying with the provisions of this
Agreement shall not be effective for any purpose and any purported transferee of
such a Transfer shall not acquire any right or interest in such common stock or
the Company.
SECTION II.2 RESTRICTIVE LEGENDS.
(a) For the term of this Agreement, each certificate representing the
Purchased Shares subject hereto, and each instrument or certificate issued upon
exchange or transfer thereof, shall be stamped or otherwise imprinted with the
following legend:
"THIS CERTIFICATE AND THE SHARES REPRESENTED HEREBY ARE SUBJECT TO
TRANSFER RESTRICTIONS CONTAINED IN A VOTING AGREEMENT DATED
, 1997 BY AND AMONG THE COMPANY AND CERTAIN OF ITS
STOCKHOLDERS, A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE
COMPANY."
(b) In addition, each certificate representing Purchased Shares and each
instrument or certificate issued upon exchange or transfer thereof shall be
stamped or otherwise imprinted with the following legend:
"THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, AND MAY NOT BE TRANSFERRED OR OTHERWISE DISPOSED OF
UNLESS IT HAS BEEN REGISTERED THEREUNDER OR, IN THE OPINION OF COUNSEL, AN
EXEMPTION FROM REGISTRATION IS AVAILABLE."
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<PAGE> 84
(c) In addition, each certificate representing Purchased Shares and each
instrument or certificate issued upon exchange or Transfer thereof shall be
stamped or otherwise imprinted with any and all legends required by applicable
state securities laws.
ARTICLE III
MISCELLANEOUS
SECTION III.1 TERM. The term of this Agreement shall begin on the Closing
Date and shall remain in effect until the earlier of (i) three (3) years from
the date thereof or (ii) such date as the total number of shares of common stock
of the Company owned by SAP and Osborne, or their respective affiliates, shall
exceed the total number of shares owned by such parties immediately following
the Closing Date by 3,500,000 shares; PROVIDED, that clauses (iii), (iv) and (v)
of Section 1.1(a) shall remain in effect as long as the Company is subject to
the reporting requirements of the Securities Exchange Act of 1934, as amended
(whether pursuant to Section 12 or 15 thereof).
SECTION III.2 AMENDMENT. Any exercise of rights hereunder or any waiver,
modification, or amendment of this Agreement on behalf of the Company may be and
shall be exercised and approved by a majority of the independent directors of
the Board.
SECTION III.3 SUCCESSORS AND ASSIGNS. All covenants and agreements
contained in this Agreement by or on behalf of any of the parties hereto shall
bind and inure to the benefit of the respective successors and assigns of the
parties hereto including any and all subsequent Holders from time to time.
SECTION III.4 GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of Ohio, as applicable to
contracts executed and to be performed entirely in such state.
SECTION III.5 ENTIRE AGREEMENT. Except as provided below, this Agreement
constitutes the entire agreement of the parties with respect to the subject
matter hereof and may not be modified or amended except in writing.
SECTION III.6 COUNTERPARTS. This Agreement may be executed 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.
SECTION III.7 ENFORCEMENT.
(a) The Holders each acknowledge and agree that irreparable damage will
occur if any of the provisions of this Agreement are not complied with in
accordance with their specific terms. Accordingly, the Company will be entitled
to an injunction to prevent breached of this Agreement and to enforce
specifically its provisions in any court of the United States or any state
having jurisdiction, this being in addition to any other remedy to which the
Company may be entitled at law or in equity.
(b) No failure or delay on the part of any party in the exercise of any
power, right or privilege hereunder shall operate as a waiver thereof, nor shall
any single or partial exercise of any such power, right or privilege preclude
other or further exercise thereof or of any other right, power or privilege.
* * *
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<PAGE> 85
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be signed on its behalf by its duly authorized officers, all as of the day and
year first above written.
Strategic Acquisition Partners, LLC
By:
------------------------------------
Its:
--------------------------------------
Richard Osborne, individually and as
authorized signatory of Turkey Vulture
Fund XIII
Central Reserve Life Corporation
By:
------------------------------------
Its:
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<PAGE> 86
AMENDMENT NO. 1
TO
STOCK PURCHASE AGREEMENT
THIS AMENDMENT is made as of the 16th day of December, 1997 by and between
Strategic Acquisition Partners, LLC, a Nevada limited liability company
("Purchaser") and Central Reserve Life Corporation, an Ohio corporation (the
"Company").
WHEREAS, the parties hereto are parties to that certain Stock Purchase
Agreement, dated as of November 26, 1997 (the "Purchase Agreement"); and
WHEREAS, the parties hereto desire to amend the Purchase Agreement to
increase the Termination Fee (as defined in the Purchase Agreement) to $950,000.
NOW THEREFORE, in consideration of the mutual promises and conditions of
this Amendment, and other good and valuable consideration, the parties hereto
agree as follows:
1. Section 7.5 of the Purchase Agreement is hereby amended and restated in
its entirety to read as follows:
"7.5. Termination Fee. In the event that (a) a proposal with respect
to a transaction relating to the acquisition of a material portion of the
capital stock of the Company or any of the Company's Subsidiaries, its or
their assets or business, whether in whole or in part, whether directly or
indirectly, through purchase, merger, consolidation or otherwise (an
"Acquisition Transaction") is commenced by the Company, publicly proposed,
publicly disclosed or communicated to the Company or any representative or
agent thereof after the date of this Agreement and prior to the date of
termination of this Agreement, (b) this agreement is thereafter terminated
by the Company pursuant to Section 13.1(e), and (c) within six (6) months
following such termination an Acquisition Transaction is consummated or the
Company enters into an agreement relating thereto, then in any such event,
the Company shall pay the Purchaser $950,000.00 in same day funds (the
"Termination Fee") plus reimbursement of Purchaser's expenses incurred in
connection with the Transactions contemplated hereby, including, without
limitation, all due diligence expenses and expenses of counsel."
2. Except as specifically amended herein, the Purchase Agreement shall
remain in full force and effect.
3. This Amendment shall be governed by and construed in accordance with the
internal substantive laws of the State of Ohio applicable to contracts made and
to be performed wholly within said State.
4. 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 WHEREOF, each of the parties hereto has caused this Amendment to
be executed as of the date first above written.
Strategic Acquisition Partners, LLC
By: /s/ VAL RAJIC
--------------------------------------
Its: Manager
Central Reserve Life Corporation
By: /s/ FRANK W. GRIMONE
--------------------------------------
Its: CFO
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<PAGE> 87
AMENDMENT NO. 2
TO
STOCK PURCHASE AGREEMENT
THIS AMENDMENT is made as of the 21st day of January, 1998 by and between
Strategic Acquisition Partners, LLC, a Nevada limited liability company
("Purchaser") and Central Reserve Life Corporation, an Ohio corporation (the
"Company").
WHEREAS, the parties hereto are parties to that certain Stock Purchase
Agreement, dated as of November 26, 1997 (the "Purchase Agreement"), as amended
by Amendment No. 1 to Stock Purchase Agreement dated as of December 16, 1997;
and
WHEREAS, the parties hereto desire to amend the Purchase Agreement (i) to
extend the dates by which certain conditions of Purchaser and the Company must
be satisfied, (ii) to include certain notice information for the Purchaser and
(iii) to decrease the amount of the Termination Fee (as such term is defined in
the Purchase Agreement) under certain circumstances.
NOW THEREFORE, in consideration of the mutual promises and conditions of
this Amendment, and other good and valuable consideration, the parties hereto
agree as follows:
1. Paragraphs(c) and (d) of Section 13.1 of the Purchase Agreement are
hereby amended and restated in their entirety to read as follows:
"(c) by Purchaser, if one or more of the material conditions to the
obligation of Purchaser to close has not been fulfilled by May 31, 1998;
(d) by the Company if one or more of the material conditions to the
obligation of the Company to close has not been fulfilled by May 31,
1998;".
2. Section 14.2(a) is hereby amended and restated in its entirety to
read as follows:
"(a) If to Purchaser:
Strategic Acquisition Partners, LLC
20 North Wacker Drive, Suite 3118
Chicago, Illinois 60606".
3. Section 7.5 of the Purchase Agreement is hereby amended by adding
the following language to the end of the last sentence of the Section:
"provided, however, that if the warrants have been issued pursuant
to Section 9.1(s) of that certain Credit Agreement, dated as of December
16, 1997 between Purchaser and the Company, in consideration for certain
guarantees provided by them in connection with the interim loan
described in Section 9.1 hereof, the Termination Fee shall be $750,000."
4. Except as specifically amended herein, the Purchase Agreement shall
remain in full force and effect.
5. This Amendment shall be governed by and construed in accordance
with the internal substantive laws of the State of Ohio applicable to
contracts made and to be performed wholly within said State.
6. 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.
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IN WITNESS WHEREOF, each of the parties hereto has caused this Amendment to
be executed as of the date first above written.
Strategic Acquisition Partners, LLC
By: /s/ VAL RAJIC
------------------------------------
Its: President
Central Reserve Life Corporation
By: /s/ FRANK W. GRIMONE
------------------------------------
Its: CFO
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<PAGE> 89
APPENDIX B
ARTICLE II
DIRECTORS
Section 1. NUMBER, TERM, ELECTION, AND QUORUM. The number of directors
may be fixed from time to time by the directors at not less than six nor more
than fifteen, but the number of directors may not be reduced so as to abolish
the office of a director during his term. In the absence of contrary action by
the board of directors, the number of directors is nine. Each director shall
hold office until the annual meeting next succeeding his election and until his
successor is elected and qualified, or until his earlier resignation, removal
from office or death. By a vote of a majority of those directors in office, the
directors may fill any vacancy in the board for the unexpired term. Directors
shall be elected at the annual meeting of shareholders, but when the annual
meeting is not held or directors are not elected thereat, they may be elected at
a special meeting called and held for that purpose. Such election shall be by
ballot whenever requested by any shareholder entitled to vote at such election;
but, unless such request is made, the election may be conducted in any manner
approved at such meeting. At each meeting of shareholders for the election of
directors, the persons receiving the greatest number of votes shall be
directors. A majority of the whole authorized number of directors shall
constitute a quorum for the transaction of business, except that a majority of
the directors in office shall constitute a quorum for filling a vacancy on the
board. Whenever less than a quorum is present at the time and place appointed
for any meeting of the board, a majority of those present may adjourn the
meeting from time to time until a quorum shall be present. The act of a majority
of the directors present at a meeting at which a quorum is present shall be the
act of the board.
Section 2. REMOVAL. All the directors or any individual director may be
removed from office, without assigning any cause, by the vote of the holders of
a majority of the voting power entitling them to elect directors in place of
those to be removed, provided that unless all the directors are removed, no
individual director shall be removed in case the votes of a sufficient number of
shares are cast against his removal which, if cumulatively voted at an election
of all the directors would be sufficient to elect at least one director. In case
of any such removal, a new director may be elected at the same meeting for the
unexpired term of each director removed.
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<PAGE> 90
APPENDIX C
ADVEST
ADVEST, INC.
A SUBSIDIARY OF THE ADVEST GROUP, INC. INVESTMENT BANKING
- --------------------------------------------------------------------------------
SERVICING INVESTORS SINCE 1898 ONE ROCKEFELLER PLAZA
NEW YORK, NY 10020
TEL.: (212) 584-4270
FAX: (212) 584-4292
November 26, 1997
Board of Directors
Central Reserve Life Corporation
17800 Royalton Road
Strongsville, Ohio 44136
Dear Sirs:
We understand that Strategic Acquisition Partners, LLC ("Strategic") has
proposed to purchase 5 million newly issued unregistered shares of common stock
of Central Reserve Life Corporation ("CRLC" or the "Company") at $5.50 per
share, and Strategic would also be issued five-year warrants to purchase an
additional 2,500,000 shares of common stock at a price of $6.50 per share (the
"Investment"). Further, Strategic would make a $20 million loan to CRLC on or
before December 15, and has engaged Reassurance Company of Hannover ("Hannover")
to provide an additional $10 million through a reinsurance transaction (the
"Credit Facilities"). In consideration for providing these credit facilities,
Peter W. Nauert principal equity holder of Strategic, would be issued stock
purchase warrants for an additional 1,000,000 common shares of CRLC with an
exercise price of $6.00 per share. The terms and conditions of the proposed
Investment and Credit Facilities are set forth in more detail in the Stock
Purchase Agreement (the "Agreement") dated as of November 26, 1997.
Advest, Inc. is an investment bank regularly engaged in the valuation of
businesses and their securities in connection with mergers and acquisitions. We
have acted as financial advisor to the Board of Directors of the Company in
connection with the transaction contemplated by the Agreement.
We have been requested by the Company to render our opinion with respect to
the fairness, from a financial point of view, to the Company's stockholders of
the consideration to be received in the proposed Investment.
In arriving at our opinion, we reviewed and analyzed: (1) documents used in
connection with the proposed Investment and Credit Facilities including the
Agreement on which they are detailed, and other publicly available information
concerning the Company which we believe to be relevant to our inquiry, (2)
financial and operating information with respect to the business operations and
prospects of the Company including annual reports, 10-KSB filings, 10-QSB
filings, and annual and quarterly statutory statements, (3) a trading history of
the Company's common shares from 1995 to the present and a comparison of that
trading history with those of companies we deemed comparable, (4) a comparison
of the financial terms of the proposed Investment and Credit Facilities with the
terms of certain other recent transactions which we deemed relevant, and (5) we
have performed valuations of the proposed warrant issues using two widely
accepted analytical bases. In addition, we have had discussions with the
management of the Company concerning its business and operations, assets,
present condition and future prospects and undertook such other studies,
analyses and investigations as we deemed appropriate.
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<PAGE> 91
We have relied upon the accuracy and completeness of the financial and
other information used by us in arriving at our opinion without independent
verification. We have not made nor obtained any independent evaluations or
appraisals of the assets of CRLC or its subsidiaries or Strategic. Our opinion
is necessarily based upon conditions as they exist and can be evaluated as of
the date of this letter. Based upon and subject to the foregoing, we are of the
opinion that, from a financial point of view, the consideration to be received
in the proposed Investment is fair to the stockholders of CRLC.
Very truly yours,
ADVEST, INC.
By: /s/ ALEXANDER M. CLARK
------------------------------------
Alexander M. Clark
Managing Director
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<PAGE> 92
APPENDIX D
NEW DIRECTORS
Andrew A. Boemi, 53, has served as a director of the Company since
December 1997. Mr. Boemi is currently the Managing Director of Turnaround
Capital Partners, L.P., a company engaged in investing in small to mid-sized
public and private companies in the early turnaround stages. In 1997, Mr. Boemi
served as the Managing Director of Marietta Capital Partners, a company engaged
in private investment banking and corporate restructuring. From 1990 to 1996,
Mr. Boemi was a Partner of S-K Partners, Ltd., where he specialized in financial
and operational turnarounds of small to mid-sized companies and crisis
management.
Robert E. Bruce, 76, previously served as a director of the Company and of
Central Reserve Life Insurance Company from 1987 until December 1997. Mr. Bruce
is President of Bruce and Bruce Company, consulting actuaries, and has been
associated with that company since 1947. Mr. Bruce also serves as a director of
Frontier Insurance Company.
Michael A. Cavataio, 54, has served as a director of the Company since
December 1997. Mr. Cavataio is a real estate developer in northern Illinois and
southern Wisconsin. Mr. Cavataio served as a director of Pioneer Financial
Services, Inc., a company that underwrites and markets health insurance, life
insurance and annuities throughout the United States, from 1986 to 1997 and
served as Vice Chairman from 1995 to 1997. Mr. Cavataio has served as a director
of Mercantile Bank of Northern Illinois since 1988 and as a director of AON
Funds, Inc., a subsidiary of AON Corp., since 1994.
Michael K. Keefe, 53, has been the Chief Executive Officer and Chairman of
the Board of Keefe Real Estate, Inc., a family owned real estate brokerage
operation, since 1982. Mr. Keefe has been Chairman of the Board of Southern
Wisconsin Bankshares, Inc., a bank holding company, since 1988. Mr. Keefe served
as a director of Pioneer Financial Services, Inc. from 1994 to 1997 and was a
member of the compensation committee from 1996 to 1997. Mr. Keefe is also a
member of the Board of Trustees of Aurora University located in Aurora,
Illinois.
Robert F. Nauert, 73, has been President of Network Air Medical Services
since 1994. Prior to 1994, Mr. Nauert served as President of Pioneer Life
Insurance Company and served as an officer and director of various subsidiaries
of Pioneer Financial Services, Inc. Mr. Nauert is the brother of Peter W.
Nauert, the controlling investor in Strategic Partners.
Richard M. Osborne, 52, is President and Chief Executive Officer of OsAir,
Inc., a company he founded in 1963. OsAir, Inc. is a manufacturer of industrial
gases for pipeline delivery and a real property developer. Mr. Osborne is the
sole manager of Turkey Vulture Fund XIII, Ltd. which began operations in January
1995. The Fund acquires, holds, sells or otherwise invests in all types of
securities and other investments. Mr. Osborne is a director of TIS Mortgage
Investment Company and Meridian Point Realty Trust VIII Co., publicly-held real
estate investment trusts, and a Director and Chairman of the Board of Pacific
Gateway Properties, Inc., a publicly-held real estate company.
Val Rajic, 39, has served as a director and as Chief Operating Officer of
the Company since December 1997. Mr. Rajic has served as President of Strategic
Partners since 1997. From 1993 to 1997, Mr. Rajic held various positions,
including Senior Vice President, at Pioneer Financial Services. Prior to 1993,
Mr. Rajic held various positions at American National Bank and Trust Company of
Chicago, a leading middle market business bank.
D-1
<PAGE> 93
APPENDIX E
ACQUIRING PERSON'S STATEMENT
[TO COME]
D-2
<PAGE> 94
CENTRAL RESERVE LIFE CORPORATION
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR THE SPECIAL MEETING OF SHAREHOLDERS ON
The undersigned hereby constitutes and appoints Fred Lick, Jr., and Frank W.
Grimone, and each of them, his true and lawful agents and proxies with full
power of substitution in each, to represent the undersigned at the Special
Meeting of Shareholders of Central Reserve Life Corporation to be held at the
Holiday Inn -- Strongsville, 15471 Royalton Road, Strongsville, Ohio, on
, March , 1998 and at any adjournment thereof, on all matters coming
before said meeting. If the Company proposes to adjourn the Meeting by a vote of
the Shareholders, Fred Lick, Jr. and Frank W. Grimone will vote all Common
Shares for which they have voting authority in favor of such adjournment.
THE BOARD RECOMMENDS A VOTE "FOR" PROPOSAL 1 AND "FOR" PROPOSAL 2.
1. Approval of the Financing Transaction.
N FOR N AGAINST N ABSTAIN
3. Amendment to the Code of Regulations to declassify the Board.
N FOR N AGAINST N ABSTAIN
(Continued on Reverse Side)
PROXY NO. SHARES
YOU ARE ENCOURAGED TO SPECIFY YOUR CHOICES BY MARKING THE APPROPRIATE BOXES,
SEE REVERSE SIDE, BUT YOU NEED NOT MARK ANY BOXES IF YOU WISH TO VOTE IN
ACCORDANCE WITH THE BOARD OF DIRECTORS' RECOMMENDATIONS. THE PROXIES CANNOT VOTE
YOUR SHARES UNLESS YOU SIGN AND RETURN THIS CARD.
DATED: , 1998
------------------------------------
Signature
------------------------------------
Signature
------------------------------------
Title
NOTE: Please sign as name appears
hereon. Joint owners should each
sign. When signing as attorney,
executor, administrator, trustee or
guardian, please give full title as
such.
