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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 COMM. FILE NO. 0-8483
CENTRAL RESERVE LIFE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Ohio
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(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION)
34-1017531
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I.R.S. EMPLOYER IDENTIFICATION NUMBER
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17800 Royalton Road, Strongsville, Ohio 44136
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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(216) 572-2400
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(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Shares, without par value
-------------------------------------
(TITLE OF CLASS)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
State the aggregate market value of the voting stock held by non-affiliates
of the Registrant.
$27,268,618 computed based on the closing price of the
Common Shares on March 26, 1998.
The number of Common Shares, without par value, outstanding as of March 26,
1998: 4,195,172.
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DOCUMENTS INCORPORATED BY REFERENCE:
None
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CENTRAL RESERVE LIFE CORPORATION
INDEX TO
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1997
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PAGE
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PART I
Item 1 Business.................................................... 1
Item 2 Properties.................................................. 8
Item 3 Legal Proceedings........................................... 8
Item 4 Submission of Matters to a Vote of Security Holders......... 8
Executive Officers of the Company and Central........................ 9
PART II
Item 5 Market for Registrant's Common Equity and Related
Shareholder Matters......................................... 10
Item 6 Selected Financial Data..................................... 12
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 12
Item 8 Financial Statements and Supplemental Data.................. 19
Schedule I -- Summary of Investments........................ 47
Schedule II -- Condensed Financial Information of
Registrant.................................................. 48
Schedule III -- Supplementary Insurance Information......... 51
Schedule IV -- Reinsurance.................................. 52
Item 9 Changes in and Disagreement with Accountants on Accounting
and Financial Disclosure.................................... 53
PART III
Item 10 Directors and Executive Officers of the Registrant.......... 53
Item 11 Executive Compensation...................................... 55
Item 12 Security Ownership of Certain Beneficial Owners and
Management.................................................. 56
Item 13 Certain Relationships and Related Transactions.............. 57
PART IV
Item 14 Exhibits, Financial Statements, Financial Statement
Schedules, and Reports on Form 8-K.......................... 58
Signatures........................................................... 62
Index to Exhibits.................................................... 63
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PART I
ITEM 1. BUSINESS
(a) GENERAL DEVELOPMENT OF BUSINESS
Central Reserve Life Corporation (the "Registrant") was incorporated in
1964 as Citation Life Insurance Company under the laws of the State of Ohio. The
present name was adopted in 1976. Unless the context indicates otherwise, the
term "Company" as herein used will refer to Central Reserve Life Corporation
only. This Annual Report on Form 10-K contains both historical and
forward-looking statements. Forward-looking statements are statements other than
historical information or statements of current condition. 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, the inclusion of the forward-looking statements 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 Annual Report. 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.
The Company is a holding company conducting its business through several
subsidiaries. The major business is its insurance operations (see below) and is
conducted by its principal operating subsidiary, Central Reserve Life Insurance
Company ("Central").
In 1996, Central experienced substantial losses incurred in connection with
the newly-issued health insurance plans, 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 Ohio Department of Insurance ("ODI") (mandated by a decline in
Central's surplus), the Company retained Advest, Inc. ("Advest") in February
1997 as its financial advisor for the purpose of raising equity capital and
resolving Central's and the Company's 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
Central's surplus, the Company borrowed $5.2 million from Huntington National
Bank, $5.0 million of which was contributed to the surplus of Central.
In November 1997, the Company entered into a Stock Purchase Agreement (the
"Original Stock Purchase Agreement") with Strategic Acquisition Partners, LLC
("Strategic Partners"), in which the Company agreed to 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. On March 30, 1998, the Company revised its agreement with Strategic
Partners and entered into an amended and restated Stock Purchase Agreement (the
"New Stock Purchase Agreement") with Strategic Partners and two additional
investors, Insurance Partners, L.P. and Insurance Partners Offshore (Bermuda),
L.P. (collectively, "Insurance Partners"). Pursuant to the New Stock Purchase
Agreement, the Company will issue and sell 7,300,000 Common Shares at $5.50 per
share and warrants to purchase an additional 3,650,000 Common Shares at an
exercise price of $5.50 per share for an aggregate purchase price of
$40,150,000. The transaction is subject to shareholder and regulatory approvals
and is anticipated to close by June 30, 1998.
Concurrent with the signing of the Original Stock Purchase Agreement,
Strategic Partners had arranged for an interim loan (the "Bridge Loan") of $20
million to the Company. In consideration of the arrangement,
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the Company issued warrants to purchase 800,000 Common Shares at $6.00 per share
and agreed to later issue warrants to acquire an additional 200,000 Common
Shares subject to shareholders approval. 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 Central and was
evidenced by a surplus note in favor of the Company from Central 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 Central and the surplus note executed by
Central 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.
Also in December 1997, Central entered into a reinsurance treaty with
Reassurance Company of Hannover ("Hannover") in which Central transferred to
Hannover $24,550,000 of reserve liability. In return for Hannover's assumption
of this liability Central transferred $14,550,000 in assets to Hannover. The
reinsurance treaty, which is on a 50/50 quota-share basis, provided Central with
a $10 million initial ceding allowance, which increased Central's statutory
surplus. The combination of the surplus note of $14 million and the $10 million
ceding allowance provided an additional $24 million to the statutory capital and
surplus of Central and removed Central from the regulatory problems that were
created in 1996 and continued in 1997. The treaty was effective January 1, 1997
and accounted for as retroactive reinsurance in the Company's consolidated
financial statements. The Hannover treaty is an integral part of returning
Central to statutory surplus levels in excess of the regulatory risk-based
capital requirements (RBC). Central, in accordance with section 3907.12 of the
Ohio Revised Code, was not required to have written permission of the Ohio
superintendent of insurance to enter into the treaty, since it was less than 80%
of its risk. However, as a matter of normal practices, Central did discuss and
communicate the terms of the Hannover treaty with the Ohio Department of
Insurance (ODI) and did not receive any objection. Central did receive an
opinion from an outside actuary that the Hannover treaty was in compliance with
the relevant sections of Rule 3901-3-07 of the Ohio Insurance Regulations that
establishes accounting requirements for insurers regarding reinsurance ceded. As
with any agreement, a risk exists that the ODI could question the statutory
accounting treatment by Central at its next examination. If, for some reason,
the ODI were to reverse the reinsurance accounting treatment, Central's RBC
levels would fall below the regulatory action level requiring specific
communications to and response from the ODI. Central has had meetings and
discussions with the ODI and has no reasons to believe the accounting treatment
currently being used would be reversed.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
INSURANCE OPERATIONS
The Company owns 100% of Central, which is its principal operating
subsidiary.
Central is an Ohio domiciled Life and Accident and Health insurance
company. Central was incorporated in 1963 and commenced business in 1965. The
Company acquired Central in 1973. As of December 31, 1997, Central was licensed
to transact business in Alabama, Arizona, Arkansas, Colorado, Delaware, Florida,
Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Massachusetts, Michigan,
Mississippi, Missouri, Montana, Nebraska, Nevada, New Mexico, North Carolina,
North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, South Carolina, South
Dakota, Tennessee, Texas, Utah, Virginia, West Virginia, Wisconsin and Wyoming
(35 states).
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
Effective December 31, 1995, the Company redefined its reporting segments,
merging the group life and group accident and health segments together, and
combining the life and annuity segments. The Company's current operating
organization comprises three segments: group life and health; life insurance and
annuities; and corporate and other, which consists of primarily interest income
and interest expense.
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The following table presents the revenues and income (loss) on a GAAP basis
for the last three years attributable to the Company's industry segments. The
Company does not allocate investment assets or identifiable assets by industry
segment.
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1997 1996 1995
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Revenues:
Group Life and Health......................... $263,191,822 $262,509,577 $237,257,385
Life Insurance and Annuities.................. 2,148,895 2,186,184 2,170,138
Corporate and Other........................... 192,605 189,834 381,571
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$265,533,322 $264,885,595 $239,809,094
============ ============ ============
Income (loss) before Federal income taxes:
Group Life and Health......................... $(20,501,411) $(11,735,521) $ 6,180,636
Life Insurance and Annuities.................. (245,584) (183,995) (241,685)
Corporate and Other........................... (341,892) (214,434) 8,274
------------ ------------ ------------
$(21,088,887) $(12,133,950) $ 5,947,225
============ ============ ============
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(c) NARRATIVE DESCRIPTION OF BUSINESS
The operational aspects of the Company's business are primarily in Central;
therefore, this section will contain information that only pertains to Central.
(1) BUSINESS AND PRINCIPAL PRODUCT
Products
Central specializes in meeting the accident and health insurance needs of
small businesses and individuals. Central offers short-term major medical
insurance and comprehensive major medical plans.
Central's principal product is group insurance, which accounted for about
99% of its premiums in 1997. Approximately 2% of the group premiums were for
life insurance and 98% were for accident and health insurance.
Central's annuity products accounted for less than 1/2% of premiums for
1997 and approximately 1% for 1996. Central offered three annuity products in
1997 and 1996, which were a Single Premium Deferred Annuity, a Flexible Premium
Deferred Annuity and a Single Premium Immediate Annuity. Central does not
aggressively market the annuity products but does offer them so as to provide
their agents with an additional product to sell.
Central provides for its customers a comprehensive package of more than 30
managed care controls which help (a) keep insureds' out-of-pocket expenses down,
(b) ensure affordability of the plans, and (c) keep rates attractive at renewal
time. Among these managed care controls are hospital inpatient and outpatient
billing review, independent utilization management, physician code review,
hospital audit review, premium reduction renewal options and a hospice care
program.
Also included as a part of Central's managed care programs are Preferred
Provider Organization (PPO) health plans which are available to both groups and
individuals. Through its PPO plans, Central is able to offer customers a network
of hospitals and physicians that provide medical services at discounted rates.
PPO networks which Central contracts with are situated in 18 states. For
customers located outside Central's existing PPO service areas, Central offers a
supplemental hospital program, through which it obtains discounted hospital
rates by contracting with national PPO networks.
Central provides many other managed care programs such as (a) a drug plan
with a national network of pharmacies which provides prescriptions conveniently
at discounted prices, (b) precertification of all hospital inpatient and certain
outpatient procedures to prevent unnecessary procedures and allow early
identification of serious conditions to which its case management nursing staff
can be focused, (c) case management which allows Central's nursing staff to work
with attending providers to assist in developing treatment plans for
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quality care at appropriate cost and care levels, and (d) a Centers of
Excellence network which is offered for transplant procedures at renowned
institutions with higher recovery rates, for discounted, packaged fee amounts.
Marketing
Central's products are marketed through general agencies established in
Midwestern, Southeastern, and Southwestern states. Regional sales managers are
responsible for recruiting and training the general agents. The general agents,
who are trained by Central, are required to recruit agents in their area,
conduct seminars for the agents and train them in the benefits, underwriting
requirements and general conditions under which Central's insurance plans
operate.
Central supports the general agents in the recruiting and education of
agents through sales brochures and literature, assistance with seminars, and
training programs. Central enhances and facilitates the general agents' and
writing agents' sales efforts through its Co-op Advertising Program, sales and
promotional literature and various sales contests.
Internally, Central's organization supports the agents and emphasizes
customer service with a unique "team" approach. Organized around geographically
dedicated groups of employees, each team consists of several specialists for
each region.
Underwriting
Central controls the quality of its business by maintaining specific
underwriting standards and guidelines. When not restricted by state regulatory
agencies, Central medically underwrites each individual by requiring enrollment
applications, medical health history questionnaires and, in some cases, medical
records.
While members of each group are individually underwritten, Central takes
into account certain group characteristics, such as size, location and industry.
For a discussion of certain business risks, other than underwriting, see Note 1
to the consolidated financial statements and the Results of Operations section
of the Management's Discussion and Analysis (MD&A).
(2) INSURANCE VOLUME, POLICIES AND CERTIFICATES
Although insurance volume (amount of life insurance) is generally a guide
to statistical information for most insurance companies, policies and
certificates in force are a more informative statistic for Central because of
the large percent of business generated in the group accident and health area.
Central requires each insured to carry group life insurance, but the average
requirement is only $10,000. Accordingly, it is more informative to focus on the
number of certificates in force as opposed to volume of insurance.
Following are tables reflecting statistical information on Central's
business.
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1997 1996 1995
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LIFE INSURANCE VOLUME:
Insurance Written......................... $ 496,653,000 $ 458,000,000 $ 467,588,000
In force.................................. $1,192,280,000 $1,293,673,000 $1,175,823,000
Reinsured................................. $ 95,249,000 $ 80,895,000 $ 50,751,000
GROUP POLICIES:
Beginning of Year......................... 43,542 41,884 41,385
Issued during Year........................ 21,170 19,732 21,926
Terminations.............................. (24,264) (18,074) (21,427)
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End of Year............................... 40,448 43,542 41,884
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1997 1996 1995
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GROUP CERTIFICATES:
Beginning of Year......................... 116,304 113,720 102,959
Issued during Year (new).................. 30,377 36,574 44,398
Terminations (net of additions)........... (41,994) (33,990) (33,637)
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End of Year............................... 104,687 116,304 113,720
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(3) GEOGRAPHIC DISTRIBUTION
The geographic distribution of direct premiums and annuity considerations
received (before reinsurance) by Central during 1997 is as follows:
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STATE AMOUNT PERCENT OF TOTAL
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Ohio............................................ $ 87,186,319 33.0%
Indiana......................................... 33,234,006 12.6
Arizona......................................... 16,078,633 6.1
North Carolina.................................. 15,336,045 5.8
Tennessee....................................... 14,588,416 5.5
Michigan........................................ 14,186,321 5.4
Missouri........................................ 11,080,173 4.2
Virginia........................................ 10,224,241 3.9
Kansas.......................................... 10,184,251 3.9
Alabama......................................... 10,103,776 3.8
Colorado........................................ 9,991,803 3.7
South Carolina.................................. 9,422,518 3.6
Pennsylvania.................................... 8,924,532 3.4
West Virginia................................... 7,826,560 3.0
Other........................................... 5,657,923 2.1
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Total................................. $264,025,517 100.0%
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(4) AGENTS
Central's insurance policies are sold by licensed agents and general agents
(brokers). Regional Sales Managers service the brokers. Central does not have
agents who sell exclusively for it. The licensed agents and brokers who produce
insurance business for Central generally have affiliations with and serve in a
similar capacity for one or more other companies which may be competitive with
Central, and a portion of their business may be written by such other companies.
Such agents and brokers are compensated by Central for business produced by them
on a cash commission basis at rates which are believed to be competitive with
those of other life insurance companies.
As of December 31, 1997, Central had 74 brokers/general agents and 14,646
agents licensed.
(5) INVESTMENTS
An important earnings factor for Central, as well as all insurance
companies, is the income from its investment portfolio. The investment
objectives for insurance companies are to maximize yields, preserve principal
and maintain liquidity. Investments must comply with the insurance laws of the
state of domicile. These laws prescribe the kind, quality and concentration of
investments which may be made. Due to the restrictive nature of these laws,
there may be occasions when Central may be precluded from making certain
otherwise attractive investments. As of December 31, 1997, 97.9% of Central's
fixed maturities was of investment grade quality. Central and the Company do not
invest in "junk" bonds or derivatives such as futures, forwards, swaps, and
option contracts, and other financial instruments with similar characteristics
and substantially all its investments are in fixed maturities. However, Central
does invest in mortgage-backed securities some of which are collateralized
mortgage obligations (CMO's). These investments, besides having
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a credit risk, also have the risk of prepayment, during a decline in interest
rates, and the risk of extension during a rise in interest rates. Central
constantly monitors these securities and has reduced its exposure in CMO's from
$28.1 million in 1996 to $24.7 million in 1997. The proceeds were primarily
invested in corporate bonds.
The following tables show various aspects of the fixed maturities
investment portfolio of the Company as of December 31, 1997:
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CARRYING
VALUE PERCENT
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PORTFOLIO MATURITY
Due in one year or less......................................... $ 4,543,941 5.7%
Due after one year through five years........................... 37,543,112 47.0
Due after five years through ten years.......................... 11,979,311 15.0
Due after ten years............................................. 1,099,233 1.4
-----------
55,165,597
Mortgage-backed securities (4.4 average years).................. 24,694,916 30.9
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$79,860,513 100.0%
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CARRYING VALUE
AMORTIZED ESTIMATED ------------------------
COST FAIR VALUE AMOUNT PERCENT
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PORTFOLIO DISTRIBUTION
U.S. Treasury securities............ $16,103,851 $16,253,656 $16,298,121 20.4%
U.S. Agencies....................... 6,948,504 7,063,750 7,063,750 8.8
Obligations of states,
municipalities and political
subdivisions..................... 600,000 603,199 603,199 .8
Corporate bonds..................... 29,137,110 29,652,888 29,652,888 37.1
Foreign bonds....................... 1,531,661 1,547,640 1,547,640 1.9
Mortgage-backed securities:
Federal Home Loan Mortgage....... 9,337,103 9,454,287 9,443,665 11.8
Federal National Mortgage........ 6,825,370 6,887,684 6,870,331 8.6
Other............................ 8,450,756 8,381,050 8,380,919 10.6
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$78,934,355 $79,844,154 $79,860,513 100.0%
=========== =========== =========== =====
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AMORTIZED
COST PERCENT
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QUALITY RATING
Aaa............................................................. $44,203,239 56.0%
Aa.............................................................. 5,604,339 7.1
A............................................................... 22,101,619 28.0
Baa............................................................. 5,367,536 6.8
Ba.............................................................. 1,578,687 2.0
NR.............................................................. 78,935 .1
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$78,934,355 100.0%
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(6) RESERVES
Central is required by the insurance laws of the states in which it is
licensed to set up statutory reserves to meet policy obligations on its ordinary
life policies. These reserves are amounts which, with additions from premiums to
be received and with interest on such reserves compounded annually at certain
assumed rates, are calculated to be sufficient to meet policy obligations as
they mature. The various actuarial factors are determined from mortality tables
and interest rates in effect when the policy is issued. The ordinary life
policies currently issued by Central are valued on the Commissioner's Standard
Ordinary Table of Mortality
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of 1980 under the Commissioners' Reserve Valuation Method and the Net Level
Premium Method. The guaranteed interest rate on policies currently being issued
is 4.5%. On policies issued previously to the current series, guaranteed
interest rates were as specified in the various policies and range from 2.5% to
6%. Under the Commissioners' Reserve Valuation Method, the amount of reserve
provided in the first policy year is less than under the Net Level Premium
Method, but in subsequent years greater additions to reserves are required. To
the extent that the rate of income realized on investments is greater or less
than the assumed interest rate used in the calculation of reserves, reported
earnings are increased or decreased, as the case may be.
The majority of Central's reserves and liabilities for claims, however, are
for its group accident and health business. Statutory and regulatory
requirements are generally less explicit for health insurance reserves and
liabilities than for ordinary life insurance. For its group accident and health
business Central establishes an Active Life Reserve plus a liability for due and
unpaid claims, claims in course of settlement, and incurred but unreported
claims as well as a reserve for the present value of amounts not yet due on
claims. These reserves and liabilities are dependent upon many factors, such as
economic and social conditions, inflation (overall and hospital costs
specifically), changes in doctrines of legal liability and damage awards for
pain and suffering. Therefore, the reserves and liabilities established are
necessarily based on extensive estimates and prior years' statistics. A
consulting actuary is retained by Central to assist in the estimation process
and to certify to the statutory reserves.
(7) REINSURANCE
As is customary among most insurance companies, Central reinsures portions
of the life insurance policies it writes, thereby providing a greater
diversification of risk and minimizing Central's exposure on major risks. While
the effect of reinsurance is to lessen risks to the writing company, it may also
lower income. Although the ceding of reinsurance does not discharge the original
insurer from its primary liability to its policyholder, the insurance company
that assumes the coverage assumes the related liability and becomes the ultimate
source of payment. The maximum amount of exposure that Central retains on any
life is $50,000 on ordinary life and group life. No retention is maintained over
age 70. Maximum retention on impaired risks is $10,000. Central also has
reinsurance on group accident and health claims. Effective January 1, 1995,
Central's reinsurance treaty provides that all individual claims in excess of
$500,000 are 100% reinsured.
In addition to the $500,000 excess reinsurance, Central also entered into a
retroactive reinsurance treaty in December 1997 with Reassurance Company of
Hannover (Hannover). The reinsurance was effective January 1, 1997 and is on a
50/50 quota-share basis on certain group accident and health policies in force
and written during 1997. The treaty provided an initial ceding allowance of $10
million which was accounted for as a deferred reinsurance gain in the
consolidated financial statements and accounted for as special surplus on a
statutory basis. The ceding allowance will be amortized over approximately five
years, the estimated settlement period of the reinsured business. The Hannover
treaty provides for repayment of the $10 million ceding allowance plus 10%
interest, out of the statutory profits, if any, of the reinsured business. Once
the ceding allowance is paid back the quota-share will change to 60/40, with
Central retaining the 60%. The more significant provisions of the Hannover
treaty are: (i) no scheduled partial or total recapture; (ii) no recapture after
24 months; (iii) experience refund provisions allow offsetting against current
and prior year losses; and (iv) Central is not obligated to pay for negative
experience amounts in the case of termination due to expiration of in force
policies or if termination is triggered by action or inaction of Hannover.
Reinsurance treaties in effect at December 31, 1997 were with The Cologne Life
Reinsurance Company, Life ReAssurance Corporation of America, Business Men's
Assurance Company and Reassurance Company of Hannover.
(8) REGULATION
Central, in common with other insurance companies operating in the states
in which it is licensed, is subject to regulation and supervision by state
insurance regulatory agencies (see "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Capital Resources"). These
regulatory bodies have broad administrative powers relating to standards of
solvency, which must be met on a continuing basis, granting and revoking of
licenses, licensing of agents, approval of policy forms, maintenance of adequate
reserves, form and content of financial statements, types of investments
permitted, issuance and sale of stock
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and other matters pertaining to insurance. Central is required to file detailed
annual statements with the respective state regulatory bodies and is subject to
periodic examination by the regulators. The most recent regulatory examination
for Central was made as of December 31, 1995. See Note 4 to the consolidated
financial statements for more information.
(9) COMPETITION
The insurance business is highly competitive. There are over 1,700 legal
reserve life insurance companies in the United States, of which over 600 are
operating in Ohio, Central's principal state of operation. Many of these have
been in business for long periods of time, and have substantially greater
financial resources, larger selling organizations and broader diversification of
risks than Central. Many of these companies are mutual companies, whose earnings
inure to the benefit of their policyholders. Central's principal marketing is in
rural areas where it competes with regional insurance companies. In other areas
it markets its PPO products to compete with the larger insurance companies.
However, the Company believes that the policies and premium rates of Central are
generally competitive with those offered by other companies selling similar
types of insurance in Ohio.
(10) EMPLOYEES
As of December 31, 1997 Central had 510 employees however, during the first
quarter of 1998, due to the Company's financial condition, a reduction in the
work force was implemented, which resulted in an approximate 20% reduction in
staff. See "Business -- General Development of Business" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations." The
Registrant has no employees of its own.
(d) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS
The Company has no foreign operations. Its domestic operations during 1997
were primarily in Ohio.
ITEM 2. PROPERTIES
The Company owns its home office building, located at 17800 Royalton Road,
Strongsville, Ohio. The building, which consists of 121,625 square feet of gross
floor area, was occupied in late 1990 by the Company and all its subsidiaries.
At December 31, 1997, the outstanding principal balance of the mortgage note on
the building was $8,399,028, see Note 9 to the consolidated financial
statements. Central, the principal operating subsidiary, entered into a 15 year
triple net lease agreement with the Company for 100% of the space. All
operations are conducted in this building.
ITEM 3. LEGAL PROCEEDINGS
Other than ordinary routine litigation incidental to the business, the Ohio
Department of Insurance regulatory matter described under "Management's
Discussion and Analysis -- Capital Resources," and the matter regarding Federal
income taxes reflected in Note 5 to the consolidated financial statements,
neither the Company nor any of its subsidiaries is party to any material pending
legal proceeding nor is any of their property the subject thereof.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders through the solicitation of
proxies or otherwise.
8
<PAGE> 11
EXECUTIVE OFFICERS OF THE COMPANY AND CENTRAL
Pursuant to Instruction 3 to Item 401(b) of Regulation S-K, the following
information is reported below.
(a) The executive officers of the Company and Central are as follows:
<TABLE>
<CAPTION>
NAME OF OFFICER
EXECUTIVE OFFICER AGE POSITION SINCE
----------------- --- -------- -------
<S> <C> <C> <C>
Fred Lick, Jr. 66 Chairman of the Board, President & 2/74
Chief Executive Officer and Director
Frank W. Grimone 62 Senior Executive Vice President & 5/74
Chief Financial Officer
Glen A. Laffoon 58 Executive Vice President -- Product 12/74
Development
James A. Weisbarth 46 Executive Vice President, Treasurer & 5/83
Assistant Secretary
Robert S. Zarick 61 Executive Vice President -- Adminis- 5/87
tration
</TABLE>
The current one year terms of office of the executive officers listed above
began May 6, 1997, with their election to office by the Board of Directors at
its meeting following the annual meeting of shareholders held on such date.
There are no arrangements or understandings known to the Company between any
executive officer and any other person pursuant to which any officer was elected
to office. There is no family relationship between any director or executive
officer and any other director or executive officer of the Company.
9
<PAGE> 12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
(a) The Company's Common Shares are traded on the Nasdaq Stock Market tier
of The Nasdaq Stock Market(SM) under the symbol CRLC. The following table shows
the representative high and low prices of the Common Shares for the calendar
quarters indicated. These prices were taken from the Nasdaq Monthly Statistical
Reports.
<TABLE>
<CAPTION>
HIGH LOW DIVIDENDS
---- --- ---------
<S> <C> <C> <C>
1997
First Quarter................... $ 8 1/4 $ 4 1/8 $ -0-
Second Quarter.................. 7 5/8 3 7/8 -0-
Third Quarter................... 7 1/8 5 1/2 -0-
Fourth Quarter.................. 7 4 1/2 -0-
1996
First Quarter................... $10 3/8 $ 8 1/2 $ .13
Second Quarter.................. 9 3/8 6 11/16 .13
Third Quarter................... 9 1/8 6 3/4 .13
Fourth Quarter.................. 9 3/8 6 5/8 .13
</TABLE>
(b) As of March 26, 1998, there were 1,469 record holders of the Common
Shares.
(c) The cash dividends paid by the Company in the past two years are
indicated in the table above. The Company's present source of income, other than
a nominal amount of investment income, is dividends and rent from Central.
Central, the Company's main operating subsidiary, is subject to certain
restrictions which are contained in the Insurance Holding Company statute (Ohio
Revised Code 3901.34) which prevent Central from paying the Company, without the
approval of the Ohio Superintendent of Insurance, any dividend from other than
earned surplus (as defined in the statute). At December 31, 1997, Central had
$24,650,804 of statutory capital and surplus, however it had negative earned
surplus of $7,511,306 due to losses in 1996 and 1997. Because of the negative
earned surplus, Central is not permitted to pay any dividends without approval
of the Ohio Superintendent of Insurance. There can be no assurance that Central
would be able to obtain such approval before returning to profitability and
establishing an adequate positive earned surplus.
(d) In November 1997 concurrent with the signing of the Original Stock
Purchase Agreement, Strategic Partners had arranged for an interim loan of $20
million to the Company which was funded on December 17, 1997. At that time, in
consideration of the agreements by Richard M. Osborne, the controlling investor
in Turkey Vulture Fund XIII, Ltd. (the "Fund"), and Peter W. Nauert, an investor
in Strategic Partners, 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. No commission or other fee was paid in connection with these
warrants.
On December 31, 1996, the Company sold 87,642 unregistered common shares at
$6 per share for a total consideration of $525,852. The shares were sold in a
private placement to general agents of Central and several Company directors. No
commission or other fee was paid in connection with these sales.
The common shares and warrants were exempt from registration in accordance
with Section 4(2) of the Securities Act of 1933, as amended, and exemptions
available under applicable state securities laws.
10
<PAGE> 13
Fred Lick, Chairman of the Board, President and Chief Executive Officer
exercised 50,000 options on April 20, 1997, 10,000 on May 8, 1996, and 10,000 on
December 16, 1996, at $2.83 per share. Total consideration received by the
Company was $141,500 in 1997 and $56,600 in 1996 for the unregistered common
shares issued. The Company also issued 30 unregistered common shares in 1996 to
an employee who exercised 30 options at $6.75 per share for a total
consideration of $202.
11
<PAGE> 14
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
FOR THE YEAR:
Premiums..................... $258,859,307 $258,175,337 $233,168,529 $223,679,071 $208,730,840
Net Investment Income........ 6,527,537 6,700,741 6,454,038 6,515,927 5,367,184
Net realized gains
(losses)................... 146,478 9,517 149,527 (23,024) 707,741
Other Income................. -- -- 37,000 29,237 5,662
------------ ------------ ------------ ------------ ------------
Total Revenues............... $265,533,322 $264,885,595 $239,809,094 $230,201,211 $214,811,427
============ ============ ============ ============ ============
Income (Loss) before Federal
Income Taxes............... $(21,088,887) $(12,133,950) $ 5,947,225 $ 6,872,989 $ 3,104,539
Federal Income Tax
Expense (Benefit).......... (132,531) (2,845,585) 1,442,618 2,059,228 714,190
------------ ------------ ------------ ------------ ------------
Net Income (Loss)............ $(20,956,356) $ (9,288,365) $ 4,504,607 $ 4,813,761 $ 2,390,349
============ ============ ============ ============ ============
Basic earnings (loss) per
share(1)................... $ (5.01) $(2.29) $ 1.12 $ 1.20 $ .59
Diluted earnings (loss) per
share(1)................... $ (5.01)(2) $(2.29)(2) $ 1.07 $ 1.14 $ .57
Previously reported.......... N/A $(2.20) $ 1.07 $ 1.14 $ .57
Cash dividends per share..... -- $ .52 $ .48 $ .44 $ .40
AT YEAR END:
Investments.................. $ 81,927,130 $ 90,723,418 $ 91,310,781 $ 83,230,323 $ 79,030,628
Total Assets................. $135,803,577 $119,388,697 $117,329,039 $107,944,158 $103,613,338
Mortgage Note Payable........ $ 8,399,028 $ 8,503,776 $ 8,599,067 $ 8,685,754 $ 8,764,615
Note Payable................. $ 20,000,000 -- -- -- --
Future Policy Benefits and
Claims Payable............. $ 81,090,299 $ 76,650,884 $ 65,317,522 $ 62,716,877 $ 56,148,504
Retained Earnings
(Accumulated Deficit)...... $ (5,319,327) $ 15,637,029 $ 27,030,102 $ 24,463,447 $ 21,422,301
Shareholders' Equity......... $ 1,511,842 $ 21,467,797 $ 33,300,980 $ 24,530,732 $ 26,856,896
Equity Per Share:
After net unrealized
holding gain (loss)...... $ .36 $5.18 $8.25 $6.08 $6.67
Before net unrealized
holding gain (loss)...... $ .21 $5.24 $8.06 $7.42 N/A
</TABLE>
- ---------------
(1) The earnings per share amounts prior to 1997 have been restated as required
to comply with Statement of Financial Accounting Standards (Statement) No.
128, "Earnings Per Share". For further discussion of earnings per share and
the impact of Statement 128, see the notes to the consolidated financial
statements.
(2) No incremental shares related to options/warrants are included due to the
loss for the year.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY:
Liquidity is the ability of an enterprise to generate adequate amounts of
cash to meet its financial commitments. The major needs for cash are to enable
Central to pay claims and expenses as they come due. Central's primary sources
of cash are premiums and investment income. Central's payments consist of
current
12
<PAGE> 15
claim payments to insureds, managed care expenses, operating expenses such as
salaries, employee benefits, commissions, taxes, etc., and shareholder dividends
payable to the Company. The Company has, in the past, relied on the dividend
from Central to enable it to pay dividends to shareholders. Central and the
Company discontinued paying dividends at the end of 1996 and no dividends were
paid in 1997. By statute, the state regulatory authorities set minimum liquidity
standards to protect both policyholders and shareholders and limit the dividends
payable by Central to the Company. See Item 5.
The majority of the Company's assets are in investments which were
$81,927,130, after a net unrealized holding gain (before taxes of $314,894) of
$926,158 (see below), or 60% of the total assets at December 31, 1997. Fixed
maturities are the primary investment of the Company and were $79,860,513 or 97%
of total investments at December 31, 1997. Other investments consist of
short-term securities and policy loans. The Company is carrying fixed maturities
of $11,898,627 at amortized cost (held to maturity) and fixed maturities of
$67,961,886 at estimated fair value (available for sale) at December 31, 1997.
The Company does not hold any so-called "junk" bonds or what are generally
considered high-yield type securities, and 97.9% of the bonds are of investment
grade quality. In accordance with Statement of Financial Accounting Standards
(Statement) No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," the Company recorded an increase in investments of $926,158 to
reflect the reporting of investments classified as available for sale at fair
value (estimated market value) which was higher than amortized cost. The amount
is reflected in shareholders' equity as a "net unrealized holding gain, net of
$314,894 for taxes". In addition to the fixed maturities, the Company also had
$5.7 million in unrestricted cash and $1.9 million in short-term investments at
December 31, 1997.
During 1997, total assets increased about $16 million, however this was
offset by an increase in total liabilities of about $36 million after debt. The
major reasons for the increase in assets was due to the reinsurance treaty with
Hannover and the $20 million note payable. The Company suffered a large negative
cash flow in 1997 from the operations of Central. (See consolidated cash flow
financial statements.) The negative cash flow was primarily generated from claim
payments, much of what was due to a run off of claims due to lapses. Although
the majority of the lapsed policies had high loss ratios, new business did not
offset the lapses enough to produce a positive cash flow. The Company
anticipates that with the changes made during 1997 and into 1998, that future
operating cash flow needs, including surrenders of annuity policies, can be
provided from premiums and the current investment portfolio.
Liabilities accrued for future policy benefits and policy claims payable
increased 6% to $81,090,299 at December 31, 1997 from $76,650,884 in 1996 or
about $4 million. Certain group accident and health reserves increased
approximately $5.5 million, to $55.5 million from $50 million, however this
increase was offset by surrenders of annuity policies during the year.
Shareholders' equity decreased to $1,511,842 due to the 1997 operating loss,
which included the strengthening of reserves and costs incurred relative to
seeking additional capital. Although the Company's consolidated equity was
$1,511,842, including unrealized gain of $611,264, Central's statutory capital
and surplus was $24,650,804 at December 31, 1997. Central's capital and surplus
includes the $14 million surplus note and the benefit of the $10 million ceding
allowance from the Hannover reinsurance treaty.
CAPITAL RESOURCES:
Central, the major operating subsidiary, suffered a large decrease in its
statutory capital and surplus in 1996 which was primarily due to the $9,321,633
statutory loss. This decrease caused Central to fall under the regulatory action
level (RAL) imposed by the Ohio Department of Insurance under the recently
adopted Risk-Based Capital (RBC) requirements on insurance enterprises.
Early in 1997, A.M. Best lowered Central's rating from B+ to B due to the
losses and decrease in capital and surplus in 1996. Central continued to have
losses in 1997 due to an increase in claim payments and a decrease in premiums,
due to lapses, and a decrease in new business written. Because of the financial
problems of Central, the Company engaged an investment banker to seek additional
capital. In the fourth quarter of 1997, the Company entered into the Original
Stock Purchase Agreement with Strategic Acquisition Partners (Strategic
Partners) pursuant to which the Company would issue and sell 5,000,000 Common
Shares and
13
<PAGE> 16
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. On March 30,
1998, the Company revised its agreement with Strategic Partners and entered into
an amended and restated Stock Purchase Agreement (the "New Stock Purchase
Agreement") with Strategic Partners and two additional investors, Insurance
Partners, L.P. and Insurance Partners Offshore (Bermuda), L.P. (collectively,
"Insurance Partners"). Pursuant to the New Stock Purchase Agreement, the Company
will issue and sell 7,300,000 Common Shares at $5.50 per share and warrants to
purchase an additional 3,650,000 Common Shares at an exercise price of $5.50 per
share for an aggregate purchase price of $40,150,000. The Company hopes to
obtain shareholder and regulatory approval and to close the transaction by June
30, 1998. Concurrent with the signing of the Original Stock Purchase Agreement,
Strategic Partners arranged for an interim loan of $20 million to the Company.
The loan is due June 30, 1998 and bears interest at the prime rate. Proceeds
from the loan, received in December 1997, were used to pay off a $5.2 million
bank loan and a contribution of $14 million, in the form of a surplus note, to
Central.
If Shareholder approval of the equity financing transaction (the "Equity
Financing") 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 in connection with the Bridge Financing, will
remain outstanding and enforceable against the Company. The Bridge Note matures
on June 30, 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
Central. Thus, if Shareholder approval of the Equity Financing 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 Central's current financial
position and its recent efforts to obtain financing. 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 Central which were pledged to Strategic
Partners as collateral for the Bridge Financing. 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.
The Company believes that if the Equity Financing is approved and
consummated, its effect, together with the financial transactions described
above and below, recent expense reductions, and internally generated funds,
should enable the Company to finance the planned growth for the foreseeable
future. If additional funds are required for long-term growth, the Company
believes that these funds could be obtained through equity or debt offerings as
market conditions permit or dictate.
Also in December 1997, Central entered into a reinsurance treaty with
Reassurance Company of Hannover (Hannover). The reinsurance is on a 50/50
quota-share basis on certain group accident and health policies in force and
written during 1997. The treaty provided an initial ceding allowance of $10
million which increased the surplus of Central. The combination of the surplus
note and the ceding allowance added $24 million to the statutory capital and
surplus of Central. The reinsurance treaty also reduced Central's risk exposure
under RBC by approximately 50% and with the additional surplus placed Central
above the action levels under RBC at December 31, 1997.
The only long-term debt the Company had at December 31, 1997, was
$8,399,028, which is the principal amount payable under a loan secured by a
mortgage on the Company's home office building. The Company entered into the
loan agreement in 1990 for $9 million for a term of 10 years bearing interest at
9 1/2% per annum with a 30 year amortization period payment schedule. At the
same time, the Company also entered into a 15 year lease agreement with Central
for 100% of the space. The Company will use the monthly rental payments to pay,
among other expenses, the required mortgage loan payments.
14
<PAGE> 17
The Company has conducted a comprehensive review of its computer systems to
identify the systems that could be affected by the "Year 2000" 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 entered into an Administrative Services Agreement
in March 1998 to outsource its computer operations with an independent vendor.
The vendor is already in compliance with the Year 2000 issue, so there should be
no material additional costs incurred by the Company for the Year 2000 issue.
RESULTS OF OPERATIONS:
1997 compared to 1996
During 1997 premiums increased slightly to $258,859,307 from $258,175,337.
The group life and health segment accounted for 99% of the premiums in 1997. The
group certificates in force decreased about 10% to 104,687 in 1997 compared to
116,304 at the end of 1996. Certificates issued for new group policies were
30,377 in 1997, down 17% from 36,574 in 1996. Total lapses (net of
additions/decreases) in 1997 were 41,994, up 24% from 33,990 in 1996. Overall
the major reason for the flat growth in premiums, decrease in certificates and
increase in lapses can be attributed to the financial condition of Central in
1997 and 1996. The large losses and related decrease in statutory surplus
discouraged new business and required large rate increases. Although
unprofitable business did terminate, it terminated faster than new profitable
business was being issued. The lowering of Central's A.M. Best rating, to B from
B+, also had a negative effect on the sale of ordinary life and annuity policies
during 1997. With the addition of $24 million to Central's statutory surplus
from the surplus note of $14 million, to the Company, and the $10 million
resulting from a reinsurance treaty, the Company anticipates an increase in new
business certificates and a return to a normal lapse ratio in 1998 and future
years.
Net investment income decreased about 2% to $6,527,537 in 1997 from
$6,700,741 in 1996. A decrease in invested assets and a negative cash flow in
1997 were the primary reasons for the decrease.
Benefits and claims incurred expenses increased 3% in 1997 to $210,776,366
in 1997 from $203,677,232 in 1996. The incurred loss ratio was 81.4% for 1997
compared to 78.9% for 1996. The major reasons for the increase in the claims
loss ratio and the level of claims incurred are (a) the continued effect of an
underpriced product sold heavily in 1995, (b) a larger number of unexpected and
unanticipated prior year claims (1996) paid in 1997, resulting in a 1996 reserve
deficiency of approximately $7 million, (c) larger number of annuity policies
lapsed than anticipated, (d) a run off in claims due to rate renewal actions and
(e) a reserve strengthening in the fourth quarter of 1997. With the combination
of the reserve strengthening, rate renewal actions and benefit changes, the
Company anticipates a lower loss ratio in future years.
Commissions remained fairly level in 1997, $35,525,295 compared to
$35,654,815 in 1996 primarily due to premiums remaining flat.
Operating expenses increased 6% to $39,242,350 or 15.2% of premiums in 1997
compared to $36,874,665 or 14.3% of premiums in 1996. Although salaries,
benefits and premium taxes remain the largest portions of the total operating
expenses, other operating expenses increased due to the costs incurred relative
to seeking additional funds for capital and surplus during 1997 for Central.
Interest expense increased 33% to $1,078,198 from $812,833 in 1996. The
increase was due to the $5.2 million loan in June 1997 and the $20 million loan
in December 1997. The $5.2 million loan was paid off in December 1997.
The net loss for 1997 was $20,956,356 or $5.01 per share compared to
$9,288,365 or $2.25 per share in 1996. The Company's revenues increased
approximately $647,000, however claims and expenses increased over $7 million,
the majority being in claims. Central's group accident and health business
represented 98% of the revenues and a higher loss ratio from this segment has a
negative effect on earnings. The statutory loss ratio for the group accident and
health segment increased to 81.7% in 1997 compared to 77.9% in 1996. Although
the losses were higher in 1997, Central received $14 million from the Company
and issued a surplus
15
<PAGE> 18
note for the $14 million and received a $10 million ceding allowance from a
reinsurance treaty, both of which increased Central's statutory capital and
surplus. At December 31, 1997, Central's statutory capital and surplus was
$24,650,804, which was above any regulatory action levels.
The Federal income tax returns for the Company and its subsidiaries have
been examined by the Internal Revenue Service (IRS) for 1991 and 1992. During
the third quarter of 1994, the IRS issued a proposal for adjustments to the
Company's returns for 1991 and 1992. The proposed deficiencies were
approximately $2.4 million of which $215,303 was paid in 1994 and $590,000 paid
in 1997. The balance primarily deals with whether or not the Company's primary
subsidiary, Central, qualified as a life company, for tax purposes. The Company
is vigorously protesting the proposed deficiency and based on discussions with
counsel management believes existing law supports the Company's position.
Therefore, the Company has not recorded a liability for the difference. The tax
case is currently on the May 18, 1998 trial calendar of the United States Tax
Court at Cleveland, Ohio, but it is expected that the case will be submitted as
a legal issue, i.e., without the need for a trial.
If the IRS were to prevail in its position that Central no longer qualifies
as a life company for tax purposes, approximately $2.6 million of tax and
interest would be payable and Federal income taxes would increase in the future.
Presently, as a small life company, Central is permitted, among other things, a
deduction from the first $3 million of income of 60% or $1.8 million. As
Central's income increases above $3 million, the special deduction is reduced
proportionately. Besides relying on favorable existing case law, Central may
have, under certain circumstances, the ability to change and market policies
that could insure its qualifications as a life company for tax purposes in the
future, if the need arises.
RESULTS OF OPERATIONS:
1996 compared to 1995
During 1996, premiums increased 11% to $258,175,337 from $233,168,529 in
1995. The increase was primarily in the group life and health segment which
accounted for about 98% of total premiums. Group certificates in force increased
about 2% to 116,304 in 1996 compared to 113,720 at the end of 1995. Certificates
issued for new group policies were 36,574 in 1996, down 18% from 44,398 in 1995.
A more aggressive pricing in 1996 and additional competition were the cause for
the decrease. Total lapses (net of additions/decreases) in 1996 were 33,990 up
slightly from 33,637 in 1995. Overall, the lapse ratio was in line with the
Company's expectations and consistent with the industry average for small group
business.
Not included in premiums, for generally accepted accounting principles
(GAAP) purposes, were annuity considerations in the amounts of $2,926,416 and
$3,498,442 for 1996 and 1995.
Net investment income increased about 4% to $6,700,741 in 1996 from
$6,454,038 in 1995. The increase was primarily due to an increase in rates. The
Company continued to invest in short-term investments to provide any cash
requirements needed for claims.
Benefits and claims incurred expenses increased 23% in 1996 to $203,677,232
from $165,472,603 in 1995. The incurred loss ratio was 78.9% for 1996 compared
to 71% for 1995. The major reasons for the increase in the claims loss ratio and
the level of claims were (a) the underpricing, as a result of inaccurate
actuarial and managerial projections and conclusions, of a new product (PMO)
introduced in late 1994 and sold heavily in 1995, accounting for 63% of
certificates issued, (b) greater utilization than anticipated and (c) new state
mandates such as guaranteed issue (not subject to medical underwriting) and
preventive benefits, which are medical services that are not for the care,
treatment or diagnosis of an illness. By far the biggest cause was the
underpriced PMO product which contributed to an estimated 80% of the loss before
net investment income. The losses on the new product were recognized in the year
the claims were reported and through actuarial estimates of incurred but not
reported claims. Higher premiums and aggressive rate renewal actions started
April 1, 1996. Because the business is primarily sold on a monthly basis the
full renewal action took 12 months ending March 31, 1997.
In the risk-based capital (RBC) plan that Central filed on March 7, 1997
with the Ohio Department of Insurance (ODI), Central identified certain
conditions that contributed to the regulatory action level (RAL)
16
<PAGE> 19
difficulties. The RBC Financial Plan identified the following conditions: (a)
the PMO product, which was found to be underpriced, was introduced in late 1994
and sold heavily in 1995, (b) the harsh winter of 1995/96, causing numerous
accidents and related heart conditions, (c) greater utilization causing an
increase in claims processed, (d) state mandates requiring guaranteed issue, (e)
state mandated benefits, and (f) the medical trend was higher than expected.
The conditions increased Central's claims expense thereby increasing its
losses and reducing its capital and surplus below the levels required under the
RBC rules. The Company took certain remedial steps, increasing the rates being
charged for the new product and increasing the renewal rates as policyholders'
anniversary dates arrived. The interim targets established by Central were
designed to increase the rates on a monthly basis over a twelve month period to
complete the renewal of all policyholders of the PMO product. At the end of
March 31, 1997, Central reached its target of increasing rates for all renewal
policyholder plans since the rate actions started on April 1, 1996.
Commissions increased 7% to $35,654,815 in 1996 from $33,411,203 in 1995
primarily due to the increase in premiums. As a percentage of premiums they were
13.8% in 1996 and 14.3% in 1995.
Other operating expenses increased 8% to $37,687,498 or 14.6% of premiums
in 1996, compared to $34,978,063 or 15% of premiums in 1995. Salaries, benefits
and premium taxes remained the largest portions of the other operating expenses.
The net loss for 1996 was $9,288,365 or $2.20 per share, after a net tax
benefit of $2,845,585 compared to a net income of $4,504,607 or $1.07 per share
after a tax expense of $1,442,618 in 1995. Because group accident and health
represents 98% of Central's business, a higher loss ratio from this segment has
a negative effect on the Company's earnings. The statutory loss ratio in the
group accident and health segment increased to 77.9% in 1996 from 69.4% in 1995.
IMPACT OF INFLATION:
Inflation rates impact the Company's financial condition and operating
results in several areas. Changes in inflation rates impact the market value of
the investment portfolio and yields on new investments.
Inflation has had an impact on claim costs and overall operating costs and
although it has been lower in the last few years, hospital and medical costs
have still increased at a higher rate than general inflation. While to a certain
extent these increased costs are offset by interest rates (investment income),
hospital charges increased, while the rate of income from investments has not
increased proportionately. The Company will continue to establish premium rates
in accordance with trends in hospital and medical costs along with concentrating
on various cost containment programs. However, there can be no assurance that
these efforts by the Company will fully offset the impact of inflation or that
premiums will equal or exceed increasing health care costs.
LEGISLATIVE DEVELOPMENTS:
In 1996 Congress passed the Health Portability and Accountability Act of
1996, which provides for changes in the health insurance market and went into
effect in July 1997. It guarantees the availability and renewability of health
insurance coverage for certain employees and individuals, and limits the use of
preexisting condition restrictions. The Act creates federal standards for
insurers, health maintenance organizations (HMO's), and employer plans,
including those who self-insure. It permits, however, substantial state
flexibility for compliance with the requirements on insurers. The Company cannot
predict the ultimate timing or effect of any legislative efforts, and no
assurance can be given that any such efforts will not have a material adverse
effect on the Company's business and results of operations.
NEW ACCOUNTING STANDARDS:
In October 1995, the Financial Accounting Standards Board (FASB) has issued
Statement of Financial Accounting Standards (Statement) 123, "Accounting for
Stock-Based Compensation", which was effective for the Company for the year
ended December 31, 1996. The Statement prescribes accounting and reporting
17
<PAGE> 20
standards for all stock-based compensation plans, including employee stock
options, restricted stock and stock appreciation rights. Statement 123 allows
for either the adoption of the "fair value" method of accounting for stock-based
compensation or the continued use of APB No. 25, "Accounting for Stock Issued to
Employees." The Company has elected to continue to comply with APB No. 25. The
Company has not granted any new stock options subsequent to January 1, 1995,
therefore, the pro forma disclosures required by Statement 123 are not
applicable.
In June 1996, FASB issued Statement 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities". Statement 125
provides new accounting and reporting standards for sales, securitizations, and
servicing of receivables and other financial assets, for certain secured
borrowing and collateral transactions, and for extinguishments of liabilities
occurring after December 31, 1996. Statement 127, "Deferral of the Effective
Date of Certain Provisions of FASB Statement No. 125", was issued in December
1996. The impact of Statement 125 and Statement 127 is not expected to be
material to the consolidated financial statements.
In 1997, FASB issued Statement No. 128, "Earnings per Share." Statement 128
replaced the calculation of primary and fully diluted earnings per share with
basic and diluted earnings per share. Unlike primary earnings per share, basic
earnings per share excludes any dilutive effects of options, warrants and
convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. All earnings per share
amounts for all periods have been presented, and where appropriate, restated to
conform to Statement 128 requirements.
In 1997, FASB issued Statement No. 129, "Disclosure of Information about
Capital Structure." Statement 129, which is applicable to all companies,
consolidates the existing guidance in the authoritative literature relating to
an entity's capital structure. Capital structure disclosures required by
Statement 129 include liquidation preferences of preferred stock, information
about the pertinent rights and privileges of the outstanding equity securities,
and the redemption amounts for all issues of capital stock that are redeemable
at fixed or determinable prices on fixed or determinable dates. Statement 129 is
effective for financial statements for periods ending after December 31, 1997
and is not expected to be material to the consolidated financial statements.
In 1997, FASB issued Statement No. 130, "Reporting Comprehensive Income."
Statement 130 establishes new rules for the reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. It does not apply to not-for-profit entities. Disclosure
of total comprehensive income is required in interim period financial
statements. The new rules require that all items that are recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. The rules require companies to (a) display items of other
comprehensive income either below the total for net income, in a separate
statement of comprehensive income, or in a statement of changes in equity, the
alternative we believe many companies will follow, and (b) disclose the
accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of the balance
sheet. Statement 130 does not specify a format for the financial statement that
portrays the components of comprehensive income but requires that a company
display an amount representing total comprehensive income for the periods
reported in that financial statement. The final Statement eliminated the
proposed requirement to display comprehensive income per share because of the
overwhelming negative response the FASB received related to this matter.
Application of Statement 130 will not impact amounts previously reported for net
income or affect the comparability of previously issued financial statements.
The statement is effective for fiscal years beginning after December 15, 1997
and is not considered to have a material effect on the consolidated financial
statements.
In 1997, FASB issued Statement No. 131 "Disclosures About Segments of an
Enterprise and Related Information." Statement 131 significantly changes the way
public companies report segment information in annual financial statements and
also requires those companies to report selected segment information in interim
financial reports to shareholders. The Statement supersedes FASB Statement 14 on
segments. It does not apply to nonpublic enterprises or to not-for-profit
organizations. The FASB concluded that the "industry
18
<PAGE> 21
segment approach" to reporting segment information under Statement 14 is not
providing the information required by financial statement users. Under Statement
131's "management approach," public companies will report financial and
descriptive information about their operating segments. Operating segments are
revenue-producing components of the enterprise for which separate financial
information is produced internally and are subject to evaluation by the chief
operating decision maker in deciding how to allocate resources to segments. In
response to constituent concerns, the FASB added quantitative thresholds,
similar to the Statement 14 guidelines, to determine if a segment must be
reported. Statement 131 is effective for years beginning after December 15,
1997. The Company believes the information required for segment disclosure is
available and compliance with Statement 131 will not be a problem.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
CENTRAL RESERVE LIFE CORPORATION
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ 20
Consolidated Balance Sheets as of December 31, 1997 and
1996...................................................... 21
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995.......................... 22
Consolidated Statements of Shareholders' Equity for the
years ended
December 31, 1997, 1996 and 1995.......................... 23
Consolidated Statements of Cash Flows
for the years ended December 31, 1997, 1996 and 1995...... 24
Notes to Consolidated Financial Statements for the years
ended December 31, 1997, 1996 and 1995.................... 25
Schedule I -- Summary of Investments -- Other than
Investments
in Related Parties........................................ 47
Schedule II -- Condensed Financial Information of
Registrant -- Central Reserve Life Corporation (Parent
Only)..................................................... 48
Schedule III -- Supplementary Insurance Information......... 51
Schedule IV -- Reinsurance.................................. 52
</TABLE>
19
<PAGE> 22
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Central Reserve Life Corporation:
We have audited the consolidated financial statements of Central Reserve
Life Corporation and subsidiaries as listed in the accompanying index. In
connection with our audits of the consolidated financial statements, we also
have audited the financial statement schedules as listed in the accompanying
index. These consolidated financial statements and financial statement schedules
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and financial
statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Central
Reserve Life Corporation and subsidiaries as of December 31, 1997 and 1996, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1997, in conformity with generally
accepted accounting principles. Also in our opinion, the related financial
statement schedules, when considered in relation to the basic consolidated
financial statements taken as a whole, present fairly, in all material respects,
the information set forth therein.
The accompanying consolidated financial statements and financial statement
schedules have been prepared assuming that the Company will continue as a going
concern. As discussed in Note 1 to the consolidated financial statements, the
Company has suffered substantial losses from operations in 1997 and 1996 that
resulted in a significantly reduced net capital position. The Company has
entered into an Amended and Restated Stock Purchase Agreement to issue and sell
7,300,000 Common Shares and warrants to purchase an additional 3,650,000 Common
Shares at an exercise price of $5.50 per share for an aggregate purchase price
of $40,150,000. The closing of the Amended and Restated Stock Purchase Agreement
is subject to shareholder approval and regulatory approvals. In December 1997,
the Company obtained an interim loan of $20 million and that loan is due June
30, 1998. Should the Amended and Restated Stock Purchase Agreement not be
completed before June 30, 1998, and due to regulatory limitations on the
Company's ability to receive dividends from its insurance subsidiary, the
Company, absent some alternative capital resource, will not have the ability to
repay the interim loan. These matters raise substantial doubt about the ability
of the Company to continue as a going concern. Management's plans in regard to
these matters are also described in Note 1 to the consolidated financial
statements. The accompanying consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
KPMG Peat Marwick LLP
Columbus, Ohio
February 20, 1998, except for Notes 1(b) and 7,
as to which the date is March 30, 1998.
20
<PAGE> 23
CENTRAL RESERVE LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
================================================================================
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Investments (Note 2):
Fixed maturities held to maturity, at amortized cost...... $ 11,898,627 $ 11,892,925
Fixed maturities available for sale, at estimated fair
value.................................................. 67,961,886 67,608,937
------------ ------------
Total fixed maturities.......................... 79,860,513 79,501,862
Policy loans.............................................. 96,211 111,646
Short-term investments, at cost which approximates
market................................................. 1,970,406 11,109,910
------------ ------------
Total investments............................... 81,927,130 90,723,418
Cash (Note 2)............................................... 5,632,459 4,649,832
Cash--restricted............................................ 3,930,956 3,822,423
Accrued investment income................................... 1,123,693 988,536
Premiums receivable......................................... 2,098,243 3,049,026
Reinsurance receivable (Note 11)............................ 26,215,765 312,000
Property and equipment, at cost, net of accumulated
depreciation of $7,679,526 and $6,855,062, respectively
(Note 1).................................................. 10,966,512 11,196,987
Deferred federal income taxes (Note 5)...................... 1,356,000 948,363
Federal income taxes recoverable............................ -- 2,245,530
Other assets................................................ 2,552,819 1,452,582
------------ ------------
$135,803,577 $119,388,697
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Policy liabilities and accruals:
Future policy benefits, losses and claims................. $ 24,903,497 $ 33,741,819
Other policy claims and benefits payable (Note 3)......... 56,186,802 42,909,065
Deferred reinsurance gain (Note 11)....................... 10,000,000 --
Other policyholders' funds................................ 7,565,341 6,510,894
Other liabilities......................................... 7,237,067 6,255,346
------------ ------------
105,892,707 89,417,124
Note payable (Note 7)....................................... 20,000,000 --
Mortgage note payable (Note 9).............................. 8,399,028 8,503,776
------------ ------------
Total liabilities............................... 134,291,735 97,920,900
------------ ------------
Commitments and contingencies (Notes 5, 10, 12 and 13)
Shareholders' equity (Notes 4 and 14):
Non-Voting Preferred shares, no par value, authorized
2,000,000 none issued (Note 15)........................ -- --
Common shares, no par value, stated value $.50, authorized
15,000,000, issued and outstanding 4,195,172 in 1997
and 4,145,172 in 1996 (865,845 are reserved for options
and warrants).......................................... 2,097,586 2,072,586
Additional paid-in capital................................ 4,122,319 4,005,819
Net unrealized holding gain (loss)........................ 611,264 (247,637)
Retained earnings (accumulated deficit)................... (5,319,327) 15,637,029
------------ ------------
Total shareholders' equity...................... 1,511,842 21,467,797
------------ ------------
$135,803,577 $119,388,697
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE> 24
CENTRAL RESERVE LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
================================================================================
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Premiums....................................... $258,859,307 $258,175,337 $233,168,529
Net investment income (Note 2)................. 6,527,537 6,700,741 6,454,038
Net realized gains (losses) (Note 2)........... 146,478 9,517 149,527
Other income................................... -- -- 37,000
------------ ------------ ------------
265,533,322 264,885,595 239,809,094
------------ ------------ ------------
Benefits, losses and expenses:
Benefits, claims, losses and settlement
expenses.................................... 210,776,366 203,677,232 165,472,603
Commissions.................................... 35,525,295 35,654,815 33,411,203
Salaries and benefits.......................... 18,112,730 16,855,141 15,066,432
Taxes, licenses and fees....................... 6,366,798 6,136,793 5,541,570
Other operating expenses....................... 14,762,822 13,882,731 13,548,624
Interest expense............................... 1,078,198 812,833 821,437
------------ ------------ ------------
286,622,209 277,019,545 233,861,869
------------ ------------ ------------
Income (loss) before Federal income taxes........ (21,088,887) (12,133,950) 5,947,225
Federal income tax expense (benefit) (Note 5).... (132,531) (2,845,585) 1,442,618
------------ ------------ ------------
Net income (loss) (Note 4)....................... $(20,956,356) $ (9,288,365) $ 4,504,607
============ ============ ============
Earnings (loss) per common share: (Note 8)
Basic.......................................... $(5.01) $(2.29) $1.12
Diluted........................................ $(5.01) $(2.29) $1.07
Previously reported............................ N/A $(2.20) $1.07
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE> 25
CENTRAL RESERVE LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
================================================================================
<TABLE>
<CAPTION>
NET UN-
REALIZED RETAINED
ADDITIONAL GAIN EARNINGS
COMMON PAID-IN (LOSS) ON (ACCUMULATED
SHARES CAPITAL INVESTMENTS DEFICIT)
---------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
Balance, December 31, 1994.............. $2,018,650 $3,475,690 $(5,427,055) $24,463,447
Cash dividends ($.48 per share)....... -- -- -- (1,937,952)
Net income............................ -- -- -- 4,504,607
Exercise of stock options (Note 14)... 100 1,250 -- --
Change in net unrealized holding gain,
net of deferred tax liability of
$399,340........................... -- -- 6,202,243 --
---------- ---------- ----------- -----------
Balance, December 31, 1995.............. 2,018,750 3,476,940 775,188 27,030,102
Cash dividends ($.52 per share)....... -- -- -- (2,104,708)
Net (loss)............................ -- -- -- (9,288,365)
Exercise of stock options (Note 14)... 10,015 46,848 -- --
Private placement to agents and
directors.......................... 43,821 482,031 -- --
Change in net unrealized holding
loss............................... -- -- (1,022,825) --
---------- ---------- ----------- -----------
Balance, December 31, 1996.............. 2,072,586 4,005,819 (247,637) 15,637,029
Net (loss)............................ -- -- -- (20,956,356)
Exercise of stock options (Note 14)... 25,000 116,500 -- --
Change in net unrealized holding gain,
net of deferred tax liability of
$314,894........................... -- -- 858,901 --
---------- ---------- ----------- -----------
$2,097,586 $4,122,319 $ 611,264 $(5,319,327)
========== ========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE> 26
CENTRAL RESERVE LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
================================================================================
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................ $(20,956,356) $ (9,288,365) $ 4,504,607
Adjustments to reconcile net income (loss) to cash
provided by (used in) operating activities:
Depreciation and amortization........................ 840,864 1,057,473 1,111,718
Net realized (gains) losses.......................... (146,478) (9,517) (149,527)
Deferred federal income taxes........................ (722,531) (36,673) 23,592
Changes in assets and liabilities:
Restricted cash................................... (108,533) 164,081 (28,197)
Premiums receivable............................... 950,783 (1,195,921) (196,880)
Reinsurance receivable............................ (1,353,765) -- --
Federal income taxes recoverable.................. 2,245,530 (1,919,150) (80,974)
Accrued investment income......................... (135,157) (15,156) 342,557
Other assets...................................... (1,100,239) (149,552) (762,269)
Future policy benefits, claims and funds
payable......................................... 8,611,801 11,805,490 (153,619)
Other liabilities................................. 981,720 1,366,844 (1,370,327)
------------ ------------ ------------
Net cash provided by (used in) operating
activities...................................... (10,892,361) 1,779,554 3,240,681
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (additions) deletions to furniture and equipment..... (763,124) 244,652 (738,537)
Net proceeds (purchase) of investments -- short-term..... 9,139,504 (1,732,625) (7,126,373)
Purchase of investments -- fixed maturities held to
maturity............................................... (5,702) -- --
Purchase of investments -- fixed maturities available for
sale................................................... (22,113,291) (10,977,540) (15,995,248)
Policy loans............................................. (15,435) (5,205) (5,295)
Proceeds from sale of fixed maturities available for
sale................................................... 3,528,625 176,925 13,537,157
Proceeds from calls/maturity of fixed maturities
available for sale..................................... 19,722,467 10,747,238 6,831,746
Proceeds from calls/maturity of fixed maturities held to
maturity............................................... 13,131 102,803 1,473,228
------------ ------------ ------------
Net cash provided by (used in) investing
activities...................................... 9,506,175 (1,443,752) (2,023,322)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in annuity account balances..................... 1,269,307 2,926,416 3,442,263
Decrease in annuity account balances..................... (4,387,246) (2,110,618) (1,216,997)
Principal payments on long-term debt..................... (104,748) (95,291) (86,687)
Proceeds from note payable............................... 25,200,000 -- --
Repayment of note payable................................ (5,200,000) -- --
Proceeds from exercise of stock options.................. 141,500 56,863 1,350
Proceeds from private placement to agents, directors..... -- 525,852 --
Dividends................................................ -- (2,104,708) (1,937,952)
Reinsurance ceding allowance............................. (14,550,000) -- --
------------ ------------ ------------
Net cash provided by (used in) financing
activities...................................... 2,368,813 (801,486) 201,977
------------ ------------ ------------
Net increase (decrease) in cash................... 982,627 (465,684) 1,419,336
Cash at beginning of year.................................. 4,649,832 5,115,516 3,696,180
------------ ------------ ------------
Cash at end of year........................................ $ 5,632,459 $ 4,649,832 $ 5,115,516
============ ============ ============
Supplemental disclosures of cash flow information:
Cash paid during the year for interest................... $ 1,012,098 $ 812,833 $ 821,437
Cash paid (received) during the year for income taxes.... $ 590,000 $ (889,762) $ 1,500,000
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE> 27
CENTRAL RESERVE LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
================================================================================
NOTE 1 -- SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies followed by the Company that materially
affect financial reporting are summarized below. The accompanying financial
statements have been prepared in accordance with generally accepted accounting
principles (GAAP) which differ from statutory accounting practices prescribed or
permitted by regulatory authorities (see Note 4).
(A) CONSOLIDATION POLICY
The consolidated financial statements include the accounts of Central
Reserve Life Corporation (Company) and its wholly-owned subsidiaries, Central
Reserve Life Insurance Company (Central), Western Reserve Administrative
Services, Inc. (Western) and CRL Asset Management Corporation (AMC). All
significant intercompany accounts and transactions have been eliminated in
consolidation.
The consolidated financial statements include several major financial
transactions that took place in the fourth quarter of 1997. In conjunction with
the Stock Purchase Agreement entered into, the Company entered into a $20
million loan agreement. Proceeds from the loan were used to pay off a $5.2
million bank loan and to contribute $14 million to Central, in the form of a
surplus note. Also, Central entered into a reinsurance treaty that provided an
additional $10 million of statutory surplus. Although these amounts are
eliminated from the Company's shareholder's equity, for statutory purposes they
are accounted as additions to Central's capital and surplus.
(B) DESCRIPTION OF BUSINESS
Central is a life and accident and health insurer licensed in 35 states.
Central principally sells group insurance, however, it offers a full range of
life, health, and annuity products through general agents and independent
writing agents and is subject to competition from other insurers throughout the
United States. Central is subject to regulation by the insurance department of
states in which it is licensed, and undergoes periodic examinations by those
departments.
In 1996, Central experienced substantial losses incurred in connection with
the newly-issued insurance plans, greater utilization than anticipated, new
state mandates, such as guaranteed issue and preventive benefits, and overall
reductions in profitability arising out of industry-wide pricing competition. In
response to these losses, the Company pursued a variety of alternatives to raise
equity capital for the purpose of resolving the Company's immediate financial
concerns created by the magnitude of these losses.
In November 1997, the Company entered into a Stock Purchase Agreement (the
"Original Stock Purchase Agreement") with Strategic Acquisition Partners, LLC
(Strategic Partners), in which the Company agreed to 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. On March 30, 1998, the Company revised its agreement with Strategic
Partners and entered into an amended and restated Stock Purchase Agreement (the
"New Stock Purchase Agreement") with Strategic Partners and two additional
investors, Insurance Partners, L.P. and Insurance Partners Offshore (Bermuda),
L.P. (collectively, "Insurance Partners"). Pursuant to the New Stock Purchase
Agreement, the Company will issue and sell 7,300,000 Common Shares at $5.50 per
share and warrants to purchase an additional 3,650,000 Common Shares at an
exercise price of $5.50 per share for an aggregate purchase price of
$40,150,000. The transaction is subject to shareholder and regulatory approvals.
Concurrent with the signing of the Original Stock Purchase Agreement,
Strategic Partners arranged for an interim loan (the "Bridge Loan") of $20
million to the Company (see Note 7). In consideration of the
25
<PAGE> 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
================================================================================
arrangement, the Company issued warrants to purchase 800,000 Common Shares at
$6.00 per share. The proceeds of the Bridge Loan were used as follows: (i) $5.2
million was utilized to repay outstanding bank debt; (ii) $14 million was used
by the Company to invest in the statutory surplus of Central and was evidenced
by a surplus note in favor of the Company from Central; and (iii) $800,000 was
used to establish an interest reserve at the Company and to pay transaction
expenses. The Bridge Loan, as amended, is due June 30, 1998. As collateral for
the Bridge Loan, the Company pledged to Strategic Partners all of the common
shares of Central and the surplus note executed by Central 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.
Management believes that the New Stock Purchase Agreement will be approved
and completed in the second quarter of 1998 and intends to utilized the proceeds
from that transaction to, among others things, repay the Bridge Loan. Should the
New Stock Purchase Agreement not be completed before June 30, 1998, and due to
regulatory limitations on the Company's ability to receive dividends from its
insurance subsidiary, the Company, absent some alternative capital resource,
will not have the ability to repay the interim loan (see Notes 4 and 7). The
accompanying consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
Additionally, Central entered into a retroactive reinsurance treaty in
December 1997 with Reassurance Company of Hannover (Hannover). The reinsurance
was effective January 1, 1997 and is on a 50/50 quota-share basis on certain
group accident and health policies in force and written during 1997. The treaty
provided an initial ceding allowance of $10 million which was accounted for as a
deferred reinsurance gain in the consolidated financial statements and accounted
for as special surplus on a statutory basis. The Hannover treaty, in combination
with the $14 million surplus note provided to Central through the Bridge Loan
described above, is an integral part of returning Central to statutory surplus
levels in excess of the regulatory risk-based capital requirements (RBC).
Central, in accordance with section 3907.12 of the Ohio Revised Code, was not
required to have written permission of the Ohio superintendent of insurance to
enter into the treaty, since it was less than 80% of its risk. However, as a
matter of normal practices, Central did discuss and communicate the terms of the
Hannover treaty with the Ohio Department of Insurance (ODI) and did not receive
any objection. Central did receive an opinion from an outside actuary that the
Hannover treaty was in compliance with the relevant sections of Rule 3901-3-07
of the Ohio Insurance Regulations that establishes accounting requirements for
insurers regarding reinsurance ceded. As with any agreement, a risk exists that
the ODI could question the statutory accounting treatment by Central at its next
examination. If, for some reason, the ODI were to reverse the reinsurance
accounting treatment, Central's RBC levels would fall below the regulatory
action level requiring specific communications to and response form the ODI.
Central has had meetings and discussions with the ODI and has no reasons to
believe the accounting treatment currently being used would be reversed.
The following is a description of certain risks facing life and accident
and health insurers and how Central mitigates those risks:
Legal/Regulatory Risk is the risk that, changes in the legal or
regulatory environment in which an insurer operates, will create additional
expenses not anticipated by the insurer in pricing its products. That is,
regulatory initiatives designed to reduce insurer profits or otherwise
affecting the industry in which the insurer operates, new legal theories or
insurance company insolvencies through guaranty fund assessments, may
create costs for the insurer beyond those recorded in the financial
statements. Central attempts to mitigate this risk by offering a wide range
of products and by operating in 35 states, thus reducing its exposure to
any single product or non-Federal jurisdiction, and also by employing
underwriting practices which identify and minimize the adverse impact of
this risk.
26
<PAGE> 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
================================================================================
The Health Insurance Portability and Accountability Act of 1996, which
provides for changes in the health insurance market became effective in
July 1997. It guarantees the availability and renewability of health
insurance coverage for certain employees and individuals, and limits the
use of preexisting condition restrictions. The Act creates federal
standards for insurers, health maintenance organizations (HMOs), and
employer plans, including those who self-insure. It permits, however,
substantial state flexibility for compliance with the requirements on
insurers.
Inadequate Pricing Risk is the risk that the premium charged for
insurance and insurance related products is insufficient to cover the costs
associated with the distribution of such products which include: benefits,
claims and losses, settlement expenses, acquisition expenses and other
corporate expenses. Central utilizes a variety of actuarial and/or
qualitative methods to set such pricing levels.
Credit Risk is the risk that issuers of securities owned by Central
will default or that other parties, including reinsurers that have
obligations to Central, will not pay or perform. Central attempts to
minimize this risk by adhering to a conservative investment strategy and by
maintaining sound reinsurance and credit and collection policies.
Interest Rate Risk is the risk that interest rates will change and
cause a decrease in the value of an insurer's investments. This change in
rates may cause certain interest-sensitive products to become uncompetitive
or may cause disintermediation. Central attempts to mitigate this risk by
charging fees for non-conformance with certain policy provisions and/or by
attempting to match the maturity schedule of its assets with the expected
payouts of its liabilities. To the extent that liabilities come due more
quickly than assets mature, an insurer would have to sell assets prior to
maturity and recognize a gain or loss.
In preparing the consolidated financial statements, management is required
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of the date
of the financial statements and revenues and expenses for the reporting period.
Actual results could differ significantly from those estimates.
The estimates susceptible to significant change are those used in
determining the liability for future policy benefits, losses and claims.
Although some variability is inherent in these estimates, management believes
the amounts provided are adequate.
(C) INVESTMENTS
Effective January 1, 1994, the Company adopted the Financial Accounting
Standards Board (FASB) Statement of Financial Accounting Standards (Statement)
No. 115, "Accounting for Certain Investments in Debt and Equity Securities".
Statement 115 requires that investments in all debt securities and those equity
securities with readily determinable market values be classified into one of
three categories: held to maturity, trading or available for sale.
Classification of investments is based upon management's current intent. Debt
securities which management has a positive intent and ability to hold until
maturity are classified as securities held to maturity and are carried at
amortized cost. Unrealized holding gains and losses on securities held to
maturity are not reflected in the consolidated financial statements. Debt and
equity securities that are purchased for short-term resale are classified as
trading securities. Trading securities are carried at estimated fair value, with
unrealized holding gains and losses included in earnings. All other debt and
equity securities not included in the above two categories are classified as
securities available for sale. Securities available for sale are carried at
estimated fair value, with unrealized holding gains and losses reported as a
separate component of shareholders' equity, net of tax. At December 31, 1997,
the Company did not have any investments classified as trading securities.
27
<PAGE> 30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
================================================================================
(D) DEFERRED POLICY ACQUISITION COSTS
Certain costs, principally commissions, which vary with and are directly
related to the production of ordinary life business, have been deferred. The
deferred costs are being amortized through the use of factors over the benefit
period of the related policies. These factors were developed using assumptions
which are consistent with those used in setting rates. Due to the nature of the
business and its persistency experience, the Company does not defer policy
acquisition costs for Central's group business. Deferred policy acquisition
costs at December 31, 1997 and 1996 were $325,572 and $321,567, respectively.
The net amounts amortized to income were $4,005 in 1997, $111,807 in 1996 and
$59,834 in 1995. The decrease in 1997 was due to the decrease in sales of
Central's 10-year term policies.
(E) PROPERTY AND EQUIPMENT
Included in the $10.9 million for property and equipment is approximately
$7.9 million (net of depreciation) for the home office building and $1.6 million
for land. Depreciation for the building is primarily over 31.5 years, except for
certain components which are over 15 years. The straight-line method is used.
Other property and equipment, primarily furniture, fixtures and data
processing equipment, is carried at cost less allowances for depreciation and
amortization. Depreciation is computed on the straight-line method over the
estimated useful lives of the equipment, principally five and seven years.
(F) POLICY RESERVES
Liabilities for future policy benefits on ordinary life insurance have
generally been provided on a net-level premium method based upon estimates of
future investment yield, mortality and withdrawals using Central's experience
and actuarial judgment with an allowance for possible unfavorable deviation from
the expected experience. Future policy benefits for annuity policies in the
accumulation phase have been calculated based on the participant's aggregate
account values. The Company amortizes deferred costs of all ordinary life
policies for Central over the benefit period. The liability for future policy
benefit reserves has been computed using the following assumptions:
(1) The guaranteed interest rate on policies currently being issued is
4.5%.
(2) Estimates of future mortality and withdrawals are based on experience
and established industry tables.
(G) LIFE AND ACCIDENT AND HEALTH CLAIM RESERVES
The liabilities for unpaid accident and health and death claims are
estimated principally based upon past experience for pending, incurred but not
reported, and reopened claims. The liability includes a provision for the
estimated cost of investigating and settling the claim liability. The estimate
of accident and health claim reserves incurred, but not yet due, are computed
using actuarially determined factors based on a combination of claim completion
and loss ratio methods, utilizing durational experience, seasonal cycle, changes
in health care practice, changes in inflation rates and the claims backlog. The
liability is particularly sensitive to recent claims frequency and severity
experience of Central. Management believes the liabilities for unpaid claims are
adequate, but no assurance can be made that the ultimate payments will not
exceed the liability recorded at December 31, 1997.
(H) RECOGNITION OF PREMIUM REVENUES AND BENEFITS
Life premiums are recognized as revenues as they become due. Benefits and
expenses are reported in a manner which results in the recognition of profits
over the life of the policy. Such recognition is accomplished
28
<PAGE> 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
================================================================================
through the provision of liabilities for future benefits over the life of the
contract and the amortization of acquisition costs over the benefit period.
Accident and health insurance premiums are recognized as revenue over the
terms, principally monthly, of the policies. Policy claims are charged to
expense in the period that the claims are incurred.
Contracts that do not subject Central to risks arising from policyholder
mortality or morbidity are referred to as investment contracts. Certain deferred
and flexible annuities are considered investment contracts. Amounts received as
payments for such contracts are accounted for as deposits and included in future
policy benefits, losses and claims.
(I) STOCK OPTIONS
The Company recognizes expense for stock-based employee compensation
arrangements in accordance with the provisions of APB No. 25, "Accounting for
Stock Issued to Employees."
(J) FEDERAL INCOME TAXES
The Company follows Statement 109, "Accounting for Income Taxes". Under the
asset and liability method of Statement 109, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. Under Statement 109, the effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period that includes the
enactment date.
NOTE 2 -- CASH AND INVESTMENTS
The following is the breakdown of net investment income by category of
investments for the years ending December 31:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Fixed maturities.......................... $5,572,238 $5,826,478 $5,570,307
Policy loans.............................. 4,865 5,036 5,517
Short-term investments.................... 757,829 688,911 683,170
Other..................................... 192,605 180,316 195,044
---------- ---------- ----------
$6,527,537 $6,700,741 $6,454,038
========== ========== ==========
</TABLE>
29
<PAGE> 32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
================================================================================
Realized gains and losses are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
--------- ---------- ----------
<S> <C> <C> <C>
Realized gains:
Fixed maturities......................................... $ 149,010 $ 11,390 $ 203,502
Equipment................................................ -- 3,875 --
--------- ---------- ----------
149,010 15,265 203,502
--------- ---------- ----------
Realized losses:
Fixed maturities......................................... 2,532 5,748 52,462
Equipment................................................ -- -- 1,513
--------- ---------- ----------
Total losses..................................... 2,532 5,748 53,975
--------- ---------- ----------
Net realized gains (losses)................................ $ 146,478 $ 9,517 $ 149,527
========= ========== ==========
</TABLE>
30
<PAGE> 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
================================================================================
The amortized cost and estimated fair value of securities held to maturity
and available for sale as of December 31, 1997, are as follows. The estimated
fair value is based on quoted market prices, where available, or on values
obtained from independent pricing services.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------------------------------------
UNREALIZED UNREALIZED
AMORTIZED HOLDING HOLDING ESTIMATED
COST GAINS LOSSES FAIR VALUE
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Held to maturity:
U.S. Treasury securities......... $ 7,549,309 $ 7,869 $ (52,334) $ 7,504,844
Mortgage-backed securities:
Federal Home Loan
Mortgage.................... 2,928,408 11,389 (767) 2,939,030
Federal National Mortgage..... 1,397,987 17,353 -- 1,415,340
Other......................... 22,923 163 (32) 23,054
----------- ----------- --------- -----------
Total held to maturity... $11,898,627 $ 36,774 $ (53,133) $11,882,268
=========== =========== ========= ===========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------------------------------------
UNREALIZED UNREALIZED
AMORTIZED HOLDING HOLDING ESTIMATED
COST GAINS LOSSES FAIR VALUE
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Available for sale:
U.S. Treasury securities......... $ 8,554,542 $ 194,270 $ -- $ 8,748,812
U.S. Agencies.................... 6,948,504 115,246 -- 7,063,750
Obligations of states,
municipalities and political
subdivisions.................. 600,000 3,199 -- 603,199
Corporate bonds.................. 29,137,110 598,824 (83,046) 29,652,888
Foreign bonds.................... 1,531,661 17,356 (1,377) 1,547,640
Mortgage-backed securities:
Federal Home Loan
Mortgage.................... 6,408,695 112,977 (6,415) 6,515,257
Federal National Mortgage..... 5,427,383 51,161 (6,200) 5,472,344
Other......................... 8,427,833 172,641 (242,478) 8,357,996
----------- ----------- --------- -----------
Total available for
sale................... $67,035,728 $ 1,265,674 $(339,516) $67,961,886
=========== =========== ========= ===========
</TABLE>
31
<PAGE> 34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
================================================================================
The amortized cost and estimated fair value of securities held to maturity
and available for sale as of December 31, 1996, are as follows. The estimated
fair value is based on quoted market prices, where available, or on values
obtained from independent pricing services.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------------------------------------------
UNREALIZED UNREALIZED
AMORTIZED HOLDING HOLDING ESTIMATED
COST GAINS LOSSES FAIR VALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Held to maturity:
U.S. Treasury securities........ $ 7,566,238 $ 34,126 $ (152,552) $ 7,447,812
Mortgage-backed securities:
Federal Home Loan
Mortgage................... 2,914,154 -- (47,154) 2,867,000
Federal National Mortgage.... 1,376,577 -- (11,067) 1,365,510
Other........................ 35,956 478 -- 36,434
----------- ----------- ----------- -----------
Total held to
maturity.............. $11,892,925 $ 34,604 $ (210,773) $11,716,756
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------------------------------------------
UNREALIZED UNREALIZED
AMORTIZED HOLDING HOLDING ESTIMATED
COST GAINS LOSSES FAIR VALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Available for sale:
U.S. Treasury securities........ $ 9,555,383 $ 189,079 $ (29,274) $ 9,715,188
U.S. Agencies................... 5,885,671 26,571 (5,625) 5,906,617
Obligations of states,
municipalities and political
subdivisions................. 600,000 1,681 (4,435) 597,246
Corporate bonds................. 26,284,461 290,575 (478,380) 26,096,656
Foreign bonds................... 1,537,836 1,555 (16,311) 1,523,080
Mortgage-backed securities:
Federal Home Loan
Mortgage................... 8,958,427 86,556 (78,004) 8,966,979
Federal National Mortgage.... 6,238,777 60,861 (61,710) 6,237,928
Other........................ 8,796,019 100,977 (331,753) 8,565,243
----------- ----------- ----------- -----------
Total available for
sale.................. $67,856,574 $ 757,855 $(1,005,492) $67,608,937
=========== =========== =========== ===========
</TABLE>
The proceeds, gross realized gains and gross realized losses from the sale
(excluding calls, maturities and pay downs) of fixed maturities available for
sale during each year were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Proceeds................................................... $ 3,528,625 $ 176,925 $13,537,157
Gross realized gains....................................... 56,282 -- 179,825
Gross realized losses...................................... 2,532 5,369 48,854
=========== =========== ===========
</TABLE>
32
<PAGE> 35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
================================================================================
The amortized cost and estimated fair value of fixed maturities at December
31, 1997, by contractual maturity, are as follows. Expected maturities will
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without penalties.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------------
AMORTIZED ESTIMATED
COST FAIR VALUE
----------- -----------
<S> <C> <C>
Held to maturity:
Due in one year or less............................... $2,999,410 $2,998,281
Due after one year through five years................. 3,532,942 3,505,625
Due after five years through ten years................ 1,016,957 1,000,938
----------- -----------
7,549,309 7,504,844
Mortgage-backed securities (3.8 average years)........ 4,349,318 4,377,424
----------- -----------
Total held to maturity........................ $11,898,627 $11,882,268
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------------
AMORTIZED ESTIMATED
COST FAIR VALUE
----------- -----------
<S> <C> <C>
Available for sale:
Due in one year or less............................... $1,539,737 $1,544,531
Due after one year through five years................. 33,468,756 34,010,170
Due after five years through ten years................ 10,731,285 10,962,354
Due after ten years................................... 1,032,039 1,099,233
----------- -----------
46,771,817 47,616,288
Mortgage-backed securities (4.6 average years)........ 20,263,911 20,345,598
----------- -----------
Total available for sale...................... $67,035,728 $67,961,886
=========== ===========
</TABLE>
The Company does not engage in trading market risk sensitive instruments.
Neither does the Company purchase as investments, hedges or for purposes "other
than trading" instruments that are likely to expose the Company to market risk,
whether interest rate, foreign currency exchange, commodity price or equity
price risk. The Company has issued no debt instruments, has entered into no
forward or futures contracts, has purchased no options and has entered no swaps.
Following is a table reflecting the quality of Central's portfolio:
<TABLE>
<CAPTION>
COST
QUALITY RATING AMORTIZED PERCENT
-------------- --------- -------
<S> <C> <C>
Aaa...................................................... $44,203,239 56.0%
Aa....................................................... 5,604,339 7.1
A........................................................ 22,101,619 28.0
Baa...................................................... 5,367,536 6.8
Ba....................................................... 1,578,687 2.0
NR....................................................... 78,935 .1
----------- ------
$78,934,355 100.0%
=========== ======
</TABLE>
33
<PAGE> 36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
================================================================================
Following is a listing of investments, except for bonds and notes of the
U.S. Government or of a U.S. Government agency or authority, which exceeds ten
percent of shareholders' equity at December 31, 1997:
<TABLE>
<CAPTION>
ESTIMATED
BOND FAIR VALUE
---- ----------
<S> <C>
Paine Webber Mtg. Acc. Corp................................. $ 401,650
Paine Webber Mtg. Acc. Corp................................. 483,813
Citibank Housing Sec........................................ 411,776
Prudential Hm Mtg........................................... 947,835
Structured Asset Corp....................................... 1,004,000
Bear Stearns................................................ 1,000,190
Countrywide Funding......................................... 451,920
GE Capital Mtg. Service..................................... 759,465
Countrywide Funding Co...................................... 454,698
CWMBS, Inc.................................................. 429,713
Citicorp. Mortgage SEC...................................... 1,163,821
Paine Webber Mtg. Acc. Corp................................. 849,111
Ontario Prov. Canada........................................ 524,329
Quaker Oats - MTN........................................... 517,655
Hertz Corp.................................................. 501,250
Coles Myer Fin.............................................. 499,687
Baxter International........................................ 530,468
Sears Corp. Notes........................................... 1,026,250
GMAC........................................................ 541,250
Hanson Overseas BV.......................................... 1,043,125
Seagram Ltd................................................. 501,718
Canadian PAC. LTD........................................... 508,485
Martin Marietta Corp........................................ 505,156
Dole Food................................................... 1,010,000
Phillips Electronics NV..................................... 509,531
Carnival Corp............................................... 719,062
Imcera Group, Inc........................................... 491,875
Sonoco Prods. Co............................................ 490,937
Valasis Comm................................................ 556,562
Eastman Chem. Co............................................ 500,156
K Mart Corp. MTN BE......................................... 1,004,375
Amoco CDA Pete Co........................................... 515,400
Federal Express Corp........................................ 365,860
Southwest Airlines.......................................... 439,420
Ashland Inc................................................. 608,750
Heller Financial............................................ 502,968
Citicorp.................................................... 210,375
GATX Cap. Corp.............................................. 502,656
International Lease......................................... 500,625
Commercial Credit Corp...................................... 997,500
Norwest Financial........................................... 756,796
Salomon Smith Barney........................................ 1,008,125
CIT Group Holdings.......................................... 1,003,750
US Bancorp ORE.............................................. 257,578
</TABLE>
34
<PAGE> 37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
================================================================================
<TABLE>
<CAPTION>
ESTIMATED
BOND FAIR VALUE
---- ----------
<S> <C>
First Data Corp............................................. $ 508,700
Mellon Bank Notes........................................... 508,906
Allstate.................................................... 511,093
Salomon Bros................................................ 506,562
Wells Fargo................................................. 493,906
CNA Financial Corp.......................................... 295,781
USL Cap. Corp............................................... 502,968
AON Corp.................................................... 495,468
PNC Funding Corp............................................ 533,125
Countrywide Home............................................ 508,125
Bear Stearns Corp........................................... 1,003,437
Florida Power & Light....................................... 493,593
Southern New England........................................ 1,012,500
Chesapeake & Potomac Tel.................................... 488,281
Michigan Bell Telephone..................................... 499,687
Commonwealth Edison......................................... 511,406
Pacific Gas & Electric...................................... 487,656
Hydro-Quebec................................................ 522,610
BAT Capital Corp............................................ 500,700
Georgia Power............................................... 992,812
St. Louis MO ARPT REV....................................... 501,555
</TABLE>
At December 31, 1997 cash includes approximately $3.9 million held for
self-funded accident and health accounts, which is restricted as to its use.
Central is entitled to investment income from these restricted funds. A
corresponding amount is included in liabilities in the accompanying consolidated
financial statements.
At December 31, 1997 Central had certificates of deposit and fixed
maturities on deposit with various state insurance departments, carried at
$4,194,490, for the protection of policyholders.
35
<PAGE> 38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
================================================================================
NOTE 3 -- LIABILITY FOR OTHER POLICY CLAIMS AND BENEFITS PAYABLE
The following table reflects the activity in the liability for Other Policy
Claims and Benefits Payable, including the claims adjustment expenses (CAE) as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Balance at beginning of year........... $ 42,909,065 $ 35,125,467 $ 35,219,992
Incurred claims and CAE for:
Current year...................... 206,636,150 196,260,939 161,454,853
Prior years....................... 8,274,823 1,134,739 225,632
------------ ------------ ------------
Total incurred............... 214,910,973 197,395,678 161,680,485
------------ ------------ ------------
Paid claims and CAE, net of
reinsurance, for:
Current year...................... 144,056,413 153,758,124 126,329,386
Prior years....................... 57,576,823 35,853,956 35,445,624
------------ ------------ ------------
Total paid................... 201,633,236 189,612,080 161,775,010
------------ ------------ ------------
Balance at end of year................. $ 56,186,802 $ 42,909,065 $ 35,125,467
============ ============ ============
</TABLE>
Claim reserves are estimates of amounts needed to pay reported and
unreported claims based on facts and circumstances known at the time the
reserves are established. Reserves are based on historical claims information,
industry statistics and other factors. The establishment of appropriate reserves
is an inherently uncertain process, and there can be no assurance that the
ultimate liability will not exceed recorded claim reserves. A larger number of
unexpected and unanticipated prior year claims were paid in 1997, resulting in a
large reserve deficiency at December 31, 1996.
NOTE 4 -- DIVIDEND RESTRICTION AND STATUTORY FINANCIAL INFORMATION
Central, the Company's main operating subsidiary, is subject to certain
restrictions which are contained in the Insurance Holding Company statute (Ohio
Revised Code 3901.34) which prevent Central from paying the Company, without the
approval of the Ohio Superintendent of Insurance, any dividend from other than
earned surplus (as defined in the statute). At December 31, 1997, Central had
$24,650,804 of statutory capital and surplus, however it had negative earned
surplus of $7,511,306 due to losses in 1996 and 1997. Because of the negative
earned surplus, Central is not permitted to pay any dividends without approval
of the Ohio Superintendent of Insurance. There can be no assurance that Central
would be able to obtain such approval before returning to profitability and
establishing an adequate positive earned surplus.
36
<PAGE> 39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
================================================================================
Shareholders' capital and surplus and net income (loss) as determined in
accordance with statutory accounting practices for Central differ from GAAP.
Following is a reconciliation showing those differences.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Statutory capital and surplus of insurance
subsidiary......................................... $24,650,804 $16,595,497 $27,477,972
Shareholders' equity of non-insurance subsidiaries... 1,554,244 1,754,636 2,399,919
Add (deduct):
Net unrealized holding gain (loss) before taxes.... 926,158 (247,637) 775,188
Deferred policy acquisition costs.................. 325,572 321,567 209,760
Policyholder reserve adjustments................... 126,744 (144,495) (333,383)
Asset valuation and interest maintenance reserve... 951,457 1,212,445 1,220,336
Non-admitted assets and other adjustments, net..... 620,863 1,027,421 1,038,838
Deferred Federal income taxes...................... 1,356,000 948,363 512,350
Reinsurance ceding allowances...................... (10,000,000) -- --
Surplus note....................................... (14,000,000) -- --
Surplus contribution............................... (5,000,000) -- --
----------- ----------- -----------
Shareholders' equity per accompanying
consolidated financial statements........ $ 1,511,842 $21,467,797 $33,300,980
=========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1997 1996 1995
------------ ----------- -----------
<S> <C> <C> <C>
Statutory net income (loss) of insurance
subsidiary......................................... $(21,616,489) $(9,321,633) $ 4,569,765
Net income (loss) of non-insurance subsidiaries...... (341,892) (223,951) (220,452)
Add (deduct):
Policyholder reserves.............................. 271,240 188,888 96,104
Deferred Federal income tax expense (benefit)...... 722,531 36,673 (23,592)
Deferred policy acquisition costs.................. 4,005 111,807 59,834
Net change in interest maintenance reserve......... 4,249 (80,149) 22,948
------------ ----------- -----------
Net income (loss) per accompanying consolidated
financial statements.......................... $(20,956,356) $(9,288,365) $ 4,504,607
============ =========== ===========
</TABLE>
Central has filed annual financial statements with the Ohio Department of
Insurance (ODI) prepared on the basis of accounting practices prescribed or
permitted by such regulatory authorities. 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. Permitted statutory accounting practices encompass all
accounting practices not prescribed. Central's statutory accounting practices
are all prescribed by the ODI.
The Ohio Department of Insurance imposes risk-based capital (RBC)
requirements on insurance enterprises, including Central. 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, and are set
forth in the RBC requirements. Such formulas focus on four general types
37
<PAGE> 40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
================================================================================
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 other
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 a 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, Central's TAC was $17,137,515 or 1.4
times its ACL and accordingly, Central was at the Regulatory Action Level.
In December 1997, the Company contributed, in the form of a surplus note,
$14 million to Central, from the proceeds of the $20 million loan. Central also
entered into a reinsurance treaty in December 1997, that provided an initial
ceding allowance of $10 million, which increased Central's statutory surplus.
The treaty also provided for a 50/50 quota-share formula relieving Central of
approximately 50% of its insurance risk at December 31, 1997. At December 31,
1997 Central's TAC was $24,927,585 or 3.1 times its ACL and accordingly, Central
was above the Company Action Level.
NOTE 5 -- FEDERAL INCOME TAXES
The Company files a consolidated Federal income tax return with its
subsidiaries. The provision for Federal income tax does not bear the customary
relationship to pretax accounting income because of special tax provisions
available to life insurance companies. Central receives a benefit provided for
"small" life insurance companies.
Under the Life Insurance Company Income Tax Act of 1959, a portion of
insurance companies' net income, prior to 1984, is not subject to Federal income
taxes (within certain limitations) until it is distributed to stockholders, at
which time it is taxed at regular corporate rates. For Federal income tax
purposes, this untaxed income is accumulated in a memorandum account designated
"policyholders' surplus". The accumulated untaxed policyholders' surplus for
Central is $2,869,768.
Federal income tax expense (benefit) is composed of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------
1997 1996 1995
----------- ----------- ----------
<S> <C> <C> <C>
Current................................ $ 590,000 $(2,808,912) $1,419,026
Deferred............................... (722,531) (36,673) 23,592
----------- ----------- ----------
$ (132,531) $(2,845,585) $1,442,618
=========== =========== ==========
</TABLE>
38
<PAGE> 41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
================================================================================
Income tax expense attributable to income from operations differs from the
amounts computed by applying the U.S. Federal income tax rate of 35%. Those
effects are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- ----------
<S> <C> <C> <C>
Computed "expected" tax expense
(benefit)............................ $(7,381,110) $(4,246,883) $2,081,529
Special life insurance deduction....... -- 1,006,747 (486,193)
Tax exempt interest.................... (12,206) (12,206) (13,206)
Change in the beginning-of-the-year
balance of the valuation allowance
for deferred tax assets allocated to
income tax expense................... 6,367,801 (21,953) (187,513)
Tax rate differential.................. 210,889 121,340 (59,472)
Accrual adjustment..................... (104,166) (73,382) 46,026
IRS audit adjustment................... 590,000 -- --
Alternative minimum tax................ -- 365,000 --
Other.................................. 196,261 15,752 61,447
----------- ----------- ----------
$ (132,531) $(2,845,585) $1,442,618
=========== =========== ==========
</TABLE>
The Federal income tax returns for the Company and its subsidiaries have
been examined by the Internal Revenue Service (IRS) for 1991 and 1992. During
the third quarter of 1994, the IRS issued a proposal for adjustments to the
Company's returns for 1991 and 1992. The proposed deficiencies were
approximately $2.4 million of which $215,303 was paid in 1994 and $590,000 paid
in 1997. The balance primarily deals with whether or not the Company's
subsidiary, Central, qualified as a life company, for tax purposes. The Company
intends to vigorously protest the proposed deficiency and based on discussions
with counsel management believes existing law supports the Company's position.
Therefore, the Company has not recorded a liability for the difference. The tax
case is currently on the May 18, 1998, trial calendar of the United States Tax
Court at Cleveland, Ohio, but it is expected that the case will be submitted as
a legal issue, i.e., without the need for a trial.
If the IRS were to prevail in its position that Central no longer qualifies
as a life company for tax purposes, approximately $2.6 million of tax and
interest would be payable and Federal income taxes would increase in the future.
Presently, as a small life company, Central is permitted, among other things, a
deduction from the first $3 million of income of 60% or $1.8 million. As
Central's income increases above $3 million, the special deduction is reduced
proportionately. Besides relying on favorable existing case law, Central may
have, under certain circumstances, the ability to change and market policies
that could insure its qualifications as a life company for tax purposes in the
future, if the need arises.
39
<PAGE> 42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
================================================================================
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1997 and 1996 are presented below:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Deferred tax assets:
Reinsurance ceding allowance........................ $3,400,000 $ --
Deferred acquisition costs.......................... 58,505 581,020
Severance pay....................................... 238,000 --
Net unrealized holding loss......................... -- 84,197
Alternative minimum tax............................. 337,002 --
Difference in reserves established for financial
statement purposes and those for income tax
purposes......................................... 773,862 732,903
Net operating loss carryforward..................... 3,390,010 --
Other............................................... 342,559 174,949
---------- ----------
Gross deferred tax assets...................... 8,539,938 1,573,069
Less valuation allowance....................... (6,660,462) (376,858)
---------- ----------
Net deferred assets......................... 1,879,476 1,196,211
---------- ----------
Deferred tax liabilities:
Net unrealized holding gain......................... 314,894 --
Bond discount accretion............................. 118,595 90,660
Difference in book and tax depreciation............. 89,987 69,905
Other............................................... -- 87,283
---------- ----------
Gross deferred tax liabilities 523,476 247,848
---------- ----------
Deferred tax asset............................. $1,356,000 $ 948,363
========== ==========
</TABLE>
At December 31, 1997, the Company has a tax net operating loss (NOL)
carryforward of approximately $10 million for Federal income tax purposes which
expires in 2012. The Company also has an Alternative Minimum Tax (AMT) credit
carryforward for Federal income tax purposes which can be used indefinitely.
Future changes in ownership, as defined by sections 382 and 383 of the Internal
Revenue Code, could limit the amount of NOL and AMT carryforwards used in any
one year.
The Company determines a valuation allowance based on an analysis of
amounts recoverable in the statutory carryback period, anticipated future
taxable income and available tax planning strategies. In assessing the valuation
allowance established at December 31, 1997 and 1996, estimates were made as to
the potential financial impact on the Company of recent NOLs and the Company's
financial condition described in Note 1. In establishing the valuation
allowance, management considered the recent magnitude of operating losses, the
anticipated closing of the New Stock Purchase Agreement (see Note 1) and the
Company's revised business plan, including institution of expense controls and
revised product development and underwriting guidelines developed in connection
with entering into the New Stock Purchase Agreement. Management believes that
the Company will generate sufficient future taxable income to realize the entire
deferred tax asset prior to the expiration of any NOLs and that the realization
of a $1.3 million net deferred tax asset is more likely than not. There can be
no assurance, however, that the Company will generate enough taxable income to
realize the net deferred tax asset prior to the NOLs expiring.
40
<PAGE> 43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
================================================================================
NOTE 6 -- SURPLUS NOTE
On December 16, 1997, Central issued to the Company a $14 million surplus
note with interest on the unpaid balance payable quarterly at a fixed rate of
8 1/2%. The issuance of the surplus note was approved by the Ohio Department of
Insurance and any payment of interest or principal on the note may be made only
with the prior approval of the Director of Insurance of the State of Ohio.
Central reports the $14 million as surplus rather than a liability under
statutory accounting. The amount is eliminated in the consolidated financial
statements. No interest was paid or accrued at December 31, 1997.
NOTE 7 -- NOTE PAYABLE
Concurrent with the signing of the Original Stock Purchase Agreement, the
Company entered into a $20 million loan on December 16, 1997. The note is due
June 30, 1998 and interest is payable monthly at the prime rate as in effect
from time to time (8.5% at December 31, 1997). The note is collateralized by
100% of the common shares of Central. If Shareholder approval of the New Stock
Purchase Agreement is not obtained, it is likely that the Company will not have
the ability to repay the $20 million loan and will be required immediately to
locate an alternate source of financing to meet its obligations 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 Central's current financial position and
its recent efforts to obtain financing. 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 Central which were pledged to Strategic Partners as
collateral for the loan. 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.
NOTE 8 -- EARNINGS PER SHARE
In February 1997, FASB issued Statement No. 128, "Earnings Per Share". The
Company adopted Statement 128, as required, for its December 31, 1997
consolidated financial statements. Prior years have been restated where
appropriate. For the years presented, the Company presents both basic and
diluted earnings (loss) per share. Basic earnings (loss) per share is computed
by dividing the income (loss) available to common shareholders by the weighted
average number of common shares outstanding for the period. Diluted earnings
(loss) per share reflects the potential dilution that could occur if common
stock equivalents (options/warrants) were exercised and then shared in the
earnings of the Company.
In computing diluted earnings per share, only potential common shares that
are dilutive, those that reduce earnings per share, are included. The exercise
of options and warrants is not assumed if the result would be antidilutive, such
as when a loss from continuing operations is reported. The Company reported such
a loss in both 1997 and 1996, therefore the basic and diluted (loss) per share
are the same. The weighted average number of shares used in the calculation was
4,182,672 for 1997 and 4,052,314 for 1996. For 1995, 4,037,391 was used for
basic and 4,221,636 for diluted earnings per share (EPS) calculation.
41
<PAGE> 44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
================================================================================
As a result of the adoption of Statement 128 in 1997, the Company's
reported earnings (loss) per share for 1996 and 1995 were restated. The effect
of this accounting change on previously reported earnings (loss) per share was
as follows:
<TABLE>
<CAPTION>
PER SHARE AMOUNT 1996 1995
- ---------------- ------ -----
<S> <C> <C>
Primary EPS as reported........................ $(2.20) $1.07
Effect of Statement 128........................ (.09) .05
------ -----
Basic EPS as restated.......................... $(2.29) $1.12
====== =====
Fully diluted EPS as reported.................. $(2.20) $1.07
Effect of Statement 128........................ (.09) --
------ -----
Diluted EPS as restated........................ $(2.29) $1.07
====== =====
</TABLE>
NOTE 9 -- MORTGAGE NOTE PAYABLE
The Company executed a note payable, in December 1990, for $9,000,000
bearing interest at 9 1/2% per annum for 10 years. The Company received
$8,500,000 of the funds in December 1990 and the remaining $500,000 in December
1991. The mortgage note is collateralized by the home office building and by an
assignment of the tenant lease for the building. The Company has been required
to make monthly payments, since January 1991, based on a 30 year amortization
schedule, of $75,677 for 10 years. After five years, the Company has the right
to prepay the loan with a 3% prepayment fee. Principal payments due in the next
four years, assuming no prepayments, are $115,145 in 1998, $126,572 in 1999,
$139,134 in 2000 and $24,496 in 2001, the year the note is due.
NOTE 10 -- COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, Central cedes reinsurance to other
insurers. These arrangements limit the maximum net policy benefit potential on
individual risks. Although the ceding of reinsurance does not discharge the
original insurer from its primary liability to its policyholders, the insurance
company that assumes the coverage also assumes the related liability.
The maximum amount of exposure that Central retains is $50,000 on ordinary
life and group life. No retention is maintained over age 70. Maximum retention
on impaired risks is $10,000. Central also has reinsurance on group accident and
health claims. Effective January 1, 1995, Central's reinsurance treaty provides
that all individual claims in excess of $500,000 are 100% reinsured. In 1997,
Central recovered only about $12,000 in claims. Central also entered into a
50/50 quota-share retroactive reinsurance treaty effective January 1, 1997 on
certain group accident and health policies. Under the provisions of the treaty,
Central cedes 50% of the premiums for these policies and in return receives
reimbursement for 50% of the claims plus a commission and expense allowance. The
overall effect of reinsurance is normally not material to Central's financial
position and results of operations however, in 1997, the Hannover treaty
provided surplus relief (see Note 11) which was material for Central in 1997.
Reinsurance treaties in effect at December 31, 1997 were with The Cologne Life
Reinsurance Company, Life Reassurance Corporation of America, Business Men's
Assurance Company and Reassurance Company of Hannover.
The Company is involved in litigation and may become involved in potential
litigation arising in the ordinary course of business. In the opinion of
management, the effects, if any, of such litigation are not expected to be
material to the Company's consolidated financial condition or results of
operations.
42
<PAGE> 45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
================================================================================
NOTE 11 -- REINSURANCE RECEIVABLE
Under the terms of the retroactive reinsurance treaty with Hannover,
effective January 1, 1997, Central transferred $24,550,000 of reserve
liabilities and received a ceding allowance of $10,000,000, resulting in a net
cash transfer of $14,550,000 to Hannover as of December 31, 1997. Under
statutory accounting, Central reduced its reserve by $24,550,000 and increased
its surplus $10,000,000. For GAAP accounting, the Company did not decrease the
reserves and recorded the $24,550,000 as a receivable and the $10,000,000 as a
deferred reinsurance gain on the balance sheet. For GAAP purposes the deferred
gain will be amortized into earnings over approximately five years, the
estimated settlement period of the reinsured business.
NOTE 12 -- LEASES
Central has operating leases for certain computer processing equipment and
laser printing, publishing equipment which expire at various dates through 2000.
Charges for the leases were $1,080,372, $768,352 and $1,069,723 for 1997,
1996 and 1995, respectively. Future net minimum payments for the operating
leases are as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31, COMPUTER LASER TOTAL
- ------------------------- ---------- --------- ------------
<S> <C> <C> <C>
1998...................... $1,063,080 $ 144,720 $ 1,207,800
1999...................... 1,020,624 144,720 1,165,344
2000...................... 603,679 24,120 627,799
2001...................... 128,648 -- 128,648
---------- --------- ------------
$2,816,031 $ 313,560 $ 3,129,591
========== ========= ============
</TABLE>
NOTE 13 -- EMPLOYMENT CONTRACT
The Company's Chief Executive Officer entered into a five year Employment
Contract effective January 1, 1997 through December 31, 2001. However, effective
January 1, 1998, he entered into a new Employment Contract, which supplanted the
prior five year contract, and his compensation is set at $500,000 for 1998 and
1999 and predicated on an incentive based compensation program for 2000 and
2001. His compensation in 1997 was $966,994.
NOTE 14 -- STOCK OPTIONS AND STOCK ISSUED
Outstanding stock options consist of options granted by the Company at
prices equal to or above market price on the date of grant. On March 15, 1983,
an Incentive Stock Option Plan was adopted. The plan, which expired in May 1993,
provided that key full-time employees of the Company and its subsidiaries were
eligible for participation in the Plan. As of December 31, 1997, 1996 and 1995,
all options were fully vested, subject to employment. The following table
summarizes data regarding all stock options:
<TABLE>
<CAPTION>
1997 1996 1995
-------- ----------- --------
<S> <C> <C> <C>
Number of shares subject to options:
Outstanding at beginning of year......................... 302,740 322,770 325,970
Granted............................................... -- -- --
Expired/cancelled..................................... (186,895) -- (3,000)
Exercised............................................. (50,000) (20,030) (200)
-------- ----------- --------
Outstanding at end of year............................... 65,845 302,740 322,770
======== =========== ========
Price range of options exercised......................... $ 2.83 $2.83-$6.75 $ 6.75
</TABLE>
43
<PAGE> 46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
================================================================================
The exercise price of options outstanding at December 31, 1997, was $6.75
per share and they expire February 25, 1998. Also, on December 17, 1997, in
connection with the arrangement of the $20 million interim loan to the Company,
warrants to purchase 800,000 common shares at $6.00 per share, were issued with
a five year term.
NOTE 15 -- PREFERRED SHARES
The Company has authorized 2,000,000 Non-Voting Preferred Shares, without
par value. The Company has never issued any Non-Voting Preferred Shares,
however, the Board of Directors is authorized at any time to provide for the
issuance of, such shares in one or more series, and to determine the
designations, preferences, limitations and other rights of the shares issued.
Holders of Non-Voting Preferred Shares shall have no voting rights except as
required by law. For each series, the Board of Directors shall determine, prior
to the issuance of any shares thereof, the designations, preferences,
limitations and relative or other rights thereof, including but not limited to
the dividend rate, liquidation price, redemption rights and price, sinking fund
requirements, conversion rights and restrictions on the issuance of such shares.
NOTE 16 -- PENSION PLAN
The Company adopted a noncontributory pension plan in 1978. The plan is a
defined contribution money purchase pension plan with an outside company,
covering substantially all full-time employees of age 20 1/2 or more who have
completed six months or more of service. Participants in the plan begin vesting
after two years of service and are fully vested after seven years. The
contribution was approximately $1,308,000 for 1997, $1,214,000 for 1996 and
$1,137,000 for 1995. In November 1997, the Company amended its pension plan,
effective January 1, 1998, to a 401(k) plan, which does not require Company
contributions, but permits eligible employees to contribute, subject to certain
limitations.
NOTE 17 -- FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
Effective December 31, 1995, the Company redefined its reporting segments,
merging the group life and group accident health segments together, as well as
combining the life and annuity segments. These alignments fit the Company's
current operating organization and produce three segments: group life and
health; life insurance and annuities; and corporate and other, which consists of
primarily interest income and interest expense.
The following table presents the revenues and income (loss), on a GAAP
basis, attributable to the Company's consolidated industry segments. The Company
does not allocate investment assets or identifiable assets by industry segments.
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Group Life and Health................... $263,191,822 $262,509,577 $237,257,385
Life Insurance and Annuities............ 2,148,895 2,186,184 2,170,138
Corporate and Other..................... 192,605 189,834 381,571
------------ ------------ ------------
$265,533,322 $264,885,595 $239,809,094
============ ============ ============
Income (loss) before Federal income taxes:
Group Life and Health................... $(20,501,411) $(11,735,521) $ 6,180,636
Life Insurance and Annuities............ (245,584) (183,995) (241,685)
Corporate and Other..................... (341,892) (214,434) 8,274
------------ ------------ ------------
$(21,088,887) $(12,133,950) $ 5,947,225
============ ============ ============
</TABLE>
44
<PAGE> 47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
================================================================================
NOTE 18 -- DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 (Statement 107)
"Disclosures about Fair Value of Financial Instruments" requires disclosure of
fair value information about existing on and off-balance sheet financial
instruments. In cases where quoted market prices are not available, fair value
is based on estimates using present value or other valuation techniques.
These techniques are significantly affected by the assumptions used,
including the discount rate and estimates of future cash flows. Although fair
value estimates are calculated using assumptions that management believes are
appropriate, changes in assumptions could cause these estimates to vary
materially. In that regard, the derived fair value estimates cannot be
substantiated by comparison to independent markets and, in many cases, could not
be realized in the immediate settlement of the instruments. Statement 107
excludes certain assets and liabilities from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of the Company.
The tax ramifications of the related unrealized gains and losses can have a
significant effect on fair value estimates and have not been considered in the
estimates.
The following methods and assumptions were used by the Company in
estimating its fair value disclosures:
INVESTMENT SECURITIES: Fair value for fixed maturity securities is based
on quoted market prices, where available. For fixed maturity securities not
actively traded, fair value is estimated using values obtained from independent
pricing services.
CASH, SHORT-TERM INVESTMENTS, PREMIUMS RECEIVABLE AND POLICY LOANS: The
carrying amount reported in the consolidated balance sheets for these
instruments approximate their fair value.
ANNUITY POLICIES: The fair value for the annuity reserves is the amount
payable on demand.
OTHER POLICYHOLDERS' FUNDS: The carrying amount reported in the
consolidated balance sheets for these instruments approximate their fair value.
MORTGAGE NOTE PAYABLE AND NOTE PAYABLE: The carrying amount reported in
the consolidated balance sheets for the mortgage note payable and note payable
approximates their fair value.
45
<PAGE> 48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
================================================================================
Carrying amount and estimated fair value of financial instruments subject
to SFAS 107 are as follows as of December 31:
<TABLE>
<CAPTION>
1997 1996
------------------------- -------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
ASSETS
Investments:
Fixed maturities held to maturity...... $11,898,627 $11,882,268 $11,892,925 $11,716,756
Fixed maturities available for sale.... 67,961,886 67,961,886 67,608,937 67,608,937
Policy loans........................... 96,211 96,211 111,646 111,646
Short-term investments................. 1,970,406 1,970,406 11,109,910 11,109,910
Cash..................................... 9,563,415 9,563,415 8,472,255 8,472,255
Premiums receivable...................... 2,098,243 2,098,243 3,049,026 3,049,026
LIABILITIES
Annuity reserves......................... $21,736,606 $21,454,000 $23,211,967 $23,143,000
Other policyholders' funds............... 7,565,341 7,565,341 6,510,894 6,510,894
Mortgage note payable.................... 8,399,028 8,399,028 8,503,776 8,503,776
Note payable............................. 20,000,000 20,000,000 -- --
</TABLE>
NOTE 19 -- QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of quarterly results of operations for the years
ended December 31, 1997 and 1996.
<TABLE>
<CAPTION>
1ST 2ND 3RD 4TH
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
1997
Revenues................................. $68,849,774 $66,511,467 $64,473,579 $65,698,502
Benefits and expenses.................... 71,152,799 70,730,566 68,620,408 76,118,436
Net (loss)............................... (1,828,025) (3,548,099) (4,431,494) (11,148,738)
Basic (loss) per share................... (.44) (.85) (1.06) (2.66)
Diluted (loss) per share(1).............. (.44) (.85) (1.06) (2.66)
Previously reported...................... (.44) (.83) (1.06) N/A
=========== =========== =========== ===========
1996
Revenues................................. $63,086,810 $66,707,618 $67,816,843 $67,274,324
Benefits and expenses.................... 67,325,567 70,083,925 70,004,555 69,605,498
Net (loss)............................... (3,398,757) (2,669,828) (1,665,339) (1,554,441)
Basic (loss) per share................... (.84) (.66) (.41) (.38)
Diluted (loss) per share(1).............. (.84) (.66) (.41) (.38)
Previously reported...................... (.80) (.63) (.40) (.37)
=========== =========== =========== ===========
</TABLE>
- ---------------
(1) No incremental shares related to options and warrants are included due to
losses for the quarters.
46
<PAGE> 49
SCHEDULE I
CENTRAL RESERVE LIFE CORPORATION AND SUBSIDIARIES
SUMMARY OF INVESTMENTS -- OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1997
================================================================================
<TABLE>
<CAPTION>
<S> <C> <C> <C>
COLUMN A COLUMN B COLUMN C COLUMN D
<CAPTION>
- ------------------------------------------------------------------------------------------
AMOUNT ON
BALANCE
TYPE OF INVESTMENT COST VALUE SHEET
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FIXED MATURITIES -- HELD TO MATURITY
U.S. Treasury securities.......................... $ 7,549,309 $ 7,504,844 $ 7,549,309
Mortgage-backed securities........................ 4,349,318 4,377,424 4,349,318
FIXED MATURITIES -- AVAILABLE FOR SALE
U.S. Treasury securities.......................... 8,554,542 8,748,812 8,748,812
U.S. Agencies..................................... 6,948,504 7,063,750 7,063,750
Obligations of states, municipalities and
political subdivisions.......................... 600,000 603,199 603,199
Corporate bonds................................... 29,137,110 29,652,888 29,652,888
Foreign bonds..................................... 1,531,661 1,547,640 1,547,640
Mortgage-backed securities........................ 20,263,911 20,345,597 20,345,597
----------- ----------- -----------
Total fixed maturities.......................... $78,934,355 $79,844,154 $79,860,513
----------- =========== -----------
Policy loans...................................... 96,211 96,211
Short-term investments............................ 1,970,406 1,970,406
----------- -----------
Total investments............................... $81,000,972 $81,927,130
=========== ===========
</TABLE>
See accompanying independent auditors' report.
47
<PAGE> 50
SCHEDULE II
CENTRAL RESERVE LIFE CORPORATION AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CENTRAL RESERVE LIFE CORPORATION (PARENT ONLY)
BALANCE SHEETS
================================================================================
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Investments in subsidiaries*................................ $ 5,006,254 $19,723,504
Property and equipment...................................... 9,525,416 9,707,808
Cash........................................................ 821,054 138,937
Surplus note receivable*.................................... 14,000,000 --
Other....................................................... 626,585 460,061
----------- -----------
$29,979,309 $30,030,310
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable.......................................... $ 68,439 $ 58,737
Note payable.............................................. 20,000,000 --
Mortgage note payable..................................... 8,399,028 8,503,776
----------- -----------
28,467,467 8,562,513
----------- -----------
Shareholders' equity:
Common stock.............................................. 2,097,586 2,072,586
Paid-in capital........................................... 4,122,319 4,005,819
Net unrealized holding gain (loss)........................ 611,264 (247,637)
Retained earnings(accumulated deficit).................... (5,319,327) 15,637,029
----------- -----------
1,511,842 21,467,797
----------- -----------
$29,979,309 $30,030,310
=========== ===========
</TABLE>
- ---------------
*Eliminated in consolidation.
See accompanying independent auditors' report.
48
<PAGE> 51
SCHEDULE II
CENTRAL RESERVE LIFE CORPORATION AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CENTRAL RESERVE LIFE CORPORATION (PARENT ONLY)
STATEMENTS OF OPERATIONS
================================================================================
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1997 1996 1995
------------ ----------- ----------
<S> <C> <C> <C>
Revenues:
Dividend from subsidiaries*..................... $ -- $ 1,500,000 $1,900,000
Inter-company fees*............................. 1,310,000 1,210,000 1,170,000
Other investment income......................... -- -- 25,000
------------ ----------- ----------
1,310,000 2,710,000 3,095,000
------------ ----------- ----------
Operating expenses................................ 1,690,205 1,314,012 1,443,282
Federal income tax expense........................ -- -- --
------------ ----------- ----------
Income (loss) before equity in earnings of
subsidiaries.................................... (380,205) 1,395,988 1,651,718
Equity in earnings (losses) of subsidiaries
(net of dividends).............................. (20,576,151) (10,684,353) 2,852,889
------------ ----------- ----------
Net income (loss).................. $(20,956,356) $(9,288,365) $4,504,607
============ =========== ==========
</TABLE>
- ---------------
*Eliminated in consolidation.
See accompanying independent auditors' report.
49
<PAGE> 52
SCHEDULE II
CENTRAL RESERVE LIFE CORPORATION AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CENTRAL RESERVE LIFE CORPORATION (PARENT ONLY)
STATEMENTS OF CASH FLOWS
================================================================================
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1997 1996 1995
------------ ----------- -----------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income (loss) before equity in subsidiaries... $ (380,205) $ 1,395,988 $ 1,651,718
Change in accounts payable...................... 9,703 41,498 (6,591)
Depreciation.................................... 449,392 444,052 444,052
Change in other assets.......................... (166,525) (221,953) (20,423)
------------ ----------- -----------
Net cash provided by (used in) operating
activities...................................... (87,635) 1,659,585 2,068,756
------------ ----------- -----------
Cash Flows From Investing Activities:
Surplus note receivable*........................ (14,000,000) -- --
Contribution to subsidiary surplus*............. (5,000,000) -- --
Purchase of property and equipment.............. (267,000) (208,375) (2,000)
------------ ----------- -----------
Net cash used in investing activities............. (19,267,000) (208,375) (2,000)
------------ ----------- -----------
Cash Flows From Financing Activities:
Proceeds from note payable...................... 25,200,000 -- --
Repayment of note payable....................... (5,200,000) -- --
Dividends Paid.................................. -- (2,104,708) (1,937,952)
Issuance of common stock........................ 141,500 582,715 1,350
Decrease in mortgage payable.................... (104,748) (95,291) (86,687)
------------ ----------- -----------
Net cash provided by (used in) financing
activities...................................... (20,036,752) (1,617,284) (2,023,289)
------------ ----------- -----------
Net increase (decrease) in cash................... 682,117 (166,074) 43,467
Cash at beginning of year......................... 138,937 305,011 261,544
------------ ----------- -----------
Cash at end of year............................... $ 821,054 $ 138,937 $ 305,011
============ =========== ===========
</TABLE>
- ---------------
*Eliminated in consolidation.
See accompanying independent auditors' report.
50
<PAGE> 53
SCHEDULE III
CENTRAL RESERVE LIFE CORPORATION AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
================================================================================
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F COLUMN G
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
<CAPTION>
FUTURE OTHER BENEFITS
DEFERRED POLICY POLICY CLAIMS
POLICY BENEFITS, CLAIMS NET LOSSES &
ACQUISITION LOSSES & BENEFITS PREMIUM INVESTMENT SETTLEMENT
SEGMENT COST AND CLAIMS PAYABLE REVENUE INCOME EXPENSES
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Year ended December 31, 1997
Group life and health........ $ -- $ 788,438 $56,128,420 $258,170,130 $4,875,214 $202,981,554
Life insurance and
Annuities.................. 325,572 23,760,693 58,382 689,177 1,459,718 7,794,812
Corporate and other.......... -- 354,366 -- -- 192,605 --
-------- ----------- ----------- ------------ ---------- ------------
Total.................. $325,572 $24,903,497 $56,186,802 $258,859,307 $6,527,537 $210,776,366
======== =========== =========== ============ ========== ============
Year ended December 31, 1996:
Group life and health........ $ -- $ 8,025,093 $42,889,233 $257,495,315 $5,014,262 $202,074,527
Life insurance and
Annuities.................. 321,567 25,388,607 19,832 680,022 1,506,163 1,602,705
Corporate and other.......... -- 328,119 -- -- 180,316 --
-------- ----------- ----------- ------------ ---------- ------------
Total.................. $321,567 $33,741,819 $42,909,065 $258,175,337 $6,700,741 $203,677,232
======== =========== =========== ============ ========== ============
Year ended December 31, 1995:
Group life and health........ $ -- $ 6,632,320 $35,095,967 $232,637,514 $4,619,871 $163,799,410
Life insurance and
Annuities.................. 209,760 23,228,579 29,500 531,015 1,639,123 1,673,193
Corporate and other.......... -- 331,156 -- -- 195,044 --
-------- ----------- ----------- ------------ ---------- ------------
Total.................. $209,760 $30,192,055 $35,125,467 $233,168,529 $6,454,038 $165,472,603
======== =========== =========== ============ ========== ============
<CAPTION>
===========================================================
COLUMN H COLUMN I
- -----------------------------------------------------------
AMORTIZA-
TION OF
DEFERRED
ACQUISITION OPERATING
SEGMENT COSTS EXPENSES
- -----------------------------------------------------------
<S> <C> <C>
Year ended December 31, 1997
Group life and health........ $ -- $74,760,633
Life insurance and
Annuities.................. 4,005 546,709
Corporate and other.......... -- 534,496
-------- -----------
Total.................. $ 4,005 $75,841,838
======== ===========
Year ended December 31, 1996:
Group life and health........ $ -- $72,170,571
Life insurance and
Annuities.................. 111,807 767,475
Corporate and other.......... -- 292,460
-------- -----------
Total.................. $111,807 $73,230,506
======== ===========
Year ended December 31, 1995:
Group life and health........ $ -- $67,333,980
Life insurance and
Annuities.................. 59,834 542,956
Corporate and other.......... -- 452,496
-------- -----------
Total.................. $ 59,834 $68,329,432
======== ===========
</TABLE>
See accompanying independent auditors' report.
51
<PAGE> 54
SCHEDULE IV
CENTRAL RESERVE LIFE CORPORATION AND SUBSIDIARIES
REINSURANCE
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
================================================================================
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
PERCENTAGE
ASSUMED FROM OF AMOUNT
GROSS CEDED TO OTHER OTHER NET ASSUMED TO
AMOUNT COMPANIES COMPANIES AMOUNT NET
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1997:
Life insurance in force................. $1,192,280,000 $ 95,249,000 -- $1,097,031,000 --
============== ============== ============== ============== ======
Premiums:
Life insurance........................ $ 7,003,747 $ 166,034 -- $ 6,837,713 --
Accident and health insurance......... 255,157,596 3,136,002 -- 252,021,594 --
-------------- -------------- -------------- -------------- ------
$ 262,161,343 $ 3,302,036 -- $ 258,859,307 --
============== ============== ============== ============== ======
Year ended December 31, 1996:
Life insurance in force................. $1,293,673,000 $ 80,895,000 -- $1,212,778,000 --
============== ============== ============== ============== ======
Premiums:
Life insurance........................ $ 7,829,103 $ 113,910 -- $ 7,715,193 --
Accident and health insurance......... 252,246,994 1,786,850 -- 250,460,144 --
-------------- -------------- -------------- -------------- ------
$ 260,076,097 $ 1,900,760 -- $ 258,175,337 --
============== ============== ============== ============== ======
Year ended December 31, 1995:
Life insurance in force................. $1,175,823,000 $ 50,751,000 -- $1,125,072,000 --
============== ============== ============== ============== ======
Premiums:
Life insurance........................ $ 5,845,546 $ 78,003 -- $ 5,767,543 --
Accident and health insurance......... 228,954,869 1,553,883 -- 227,400,986 --
-------------- -------------- -------------- -------------- ------
$ 234,800,415 $ 1,631,886 -- $ 233,168,529 --
============== ============== ============== ============== ======
</TABLE>
See accompanying independent auditors' report.
52
<PAGE> 55
ITEM 9. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the names, ages, positions and certain other
information concerning the current directors and executive officers of the
Company and Central as of March 26, 1998.
<TABLE>
<CAPTION>
CURRENT
DIRECTOR TERM
NAME AGE POSITION WITH COMPANY SINCE EXPIRES*
---- --- --------------------- -------- --------
<S> <C> <C> <C> <C>
Fred Lick, Jr. 66 Chairman of the Board, President & Chief 1976 1999
Executive Officer and Director
Frank W. Grimone 62 Senior Executive Vice President & Chief -- --
Financial Officer
Glen A. Laffoon 58 Executive Vice President -- Product -- --
Development
James A. Weisbarth 46 Executive Vice President, Treasurer & -- --
Assistant Secretary
Robert S. Zarick 61 Executive Vice President -- Administration -- --
Andrew A. Boemi 53 Director 1997 1998
Michael A. Cavataio 54 Director 1997 1998
John L. McKean 72 Director 1989 1999
John F. Novatney, Jr. 67 Director 1976 1999
Val Rajic 39 Director 1997 1998
David L. Rossio 60 Director 1992 2000
Thomas D. Schulte 62 Director 1992 2000
Robert E. Bruce 76 Director 1998 2000
</TABLE>
- ---------------
* The Board has recommended an amendment to the Code of Regulations of the
Company to eliminate the classification of the Board. 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.
MR. LICK has served as Chairman of the Board, President and Chief Executive
Officer of the Company and of Central and has been a director of the Company
since 1976. He has held these positions for the last five years.
MR. GRIMONE has served as an officer of the Company and Central since May
1974 and has held the position of Executive Vice President and Chief Financial
Officer for both companies for the last five years.
MR. LAFFOON has served as an officer of Central since 1974 and has held
various positions and for the last five years has been an Executive Vice
President of Central.
MR. WEISBARTH has served as an officer of Central since 1983 and holds the
position of Executive Vice President, Treasurer and Assistant Secretary and is
also the Assistant Secretary of the Company.
MR. ZARICK has served as an officer of Central since 1987 and has held the
position of Executive Vice President of Administration for the past five years.
MR. BOEMI 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
53
<PAGE> 56
Director of Marietta Capital Partners, a company engaged in private investment
banking and corporate restructuring. From 1990 to 1996, Mr. Boemi was a partner
in S-K Partners, Ltd., where he specialized in crisis management and in
financial and operational turnarounds of small to mid-size companies.
MR. CAVATAIO 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 1996 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 Corporation since 1994.
MR. MCKEAN has served as director of the Company since 1989. Mr. McKean is
President of Jack McKean Agency, Inc., a life insurance agency.
MR. NOVATNEY has served as a director of the Company and of Central since
1976 and General Counsel of Central since June 1996. Prior to joining Central,
Mr. Novatney was a partner in the law firm of Baker & Hostetler LLP.
MR. RAJIC has served as a director and as acting Chief Operating Officer of
the Company since December 1997. Mr. Rajic has served as President of Strategic
Acquisition Partners, LLC, since 1997. From 1993 to 1997, Mr. Rajic held various
positions, including Senior Vice President, at Pioneer Financial Services, Inc.
Prior to 1993, Mr. Rajic held various positions at American National Bank and
Trust Company of Chicago, a leading middle-market business bank.
MR. ROSSIO has served as a director of the Company and Central Reserve Life
Insurance Company since 1992. Mr. Rossio is President of Rossio Jewelry, Inc.
MR. SCHULTE has served as a director of the Company and Central Reserve
Life Insurance Company since 1994. Mr. Schulte was formerly director of the
Academic Education and Industrial Studies for the Great Oaks Joint Vocational
School and is now retired.
MR. BRUCE served as a director of the Company and of Central from 1987 to
December 1997. Mr. Bruce was re-elected as a member of the Board of Directors of
the Company in March 1998. Mr. Bruce is President of Bruce & Bruce Company,
consulting actuaries, and has been associated with that company since 1947. Mr.
Bruce also serves as a director of Frontier Insurance Company.
54
<PAGE> 57
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the annual compensation paid by Central
Reserve Life Insurance Company ("Central"), the principal operating subsidiary
of the Company, with respect to the calendar years ended December 31, 1997,
1996, and 1995, to the Chief Executive Officer and all other executive officers
of the Company.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY ($) COMPENSATION ($)(1)
--------------------------- ---- ------------------- -------------------
<S> <C> <C> <C>
FRED LICK, JR. 1997 966,994 20,635
Chairman of the Board, President and Chief 1996 966,994 23,671
Executive Officer of the Company and Central 1995 871,166 19,305
FRANK W. GRIMONE 1997 258,000 20,635
Senior Executive Vice President and Chief 1996 258,000 20,755
Financial Officer of the Company and Central 1995 258,000 19,305
GLEN A. LAFFOON 1997 160,000 20,635
Executive Vice President, Product Development, 1996 200,000 20,486
of Central 1995 234,000 19,305
JAMES A. WEISBARTH 1997 160,000 20,635
Treasurer and Assistant Secretary of the Company 1996 150,000 19,653
and Executive Vice President, Treasurer and
Assistant Secretary of Central
ROBERT S. ZARICK 1997 160,000 20,635
Executive Vice President, Administration, of 1996 144,350 18,945
Central
</TABLE>
- ---------------
(1) For the years 1997 and 1995, represents the contribution under a
defined-contribution, money-purchase, pension plan. For 1996, includes the
contribution under a defined-contribution, money-purchase, pension plan of
$19,305 for each officer, except $18,554 for Mr. Zarick, and the following
amounts equal to the full-dollar economic value of the premiums paid in
connection with life insurance policies issued pursuant to the Split-Dollar
Life Insurance Agreements between Central and the following executive
officers: Mr. Lick: $4,366; Mr. Grimone: $1,450; Mr. Laffoon: $1,181; Mr.
Weisbarth: $348; and Mr. Zarick: $391. The Split-Dollar Life Insurance
Agreements were terminated in 1997.
55
<PAGE> 58
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, at March 26, 1998, 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>
AMOUNT & NATURE
OF BENEFICIAL PERCENT OF
NAME AND ADDRESS OWNERSHIP(1) CLASS
---------------- --------------- ----------
<S> <C> <C>
Fred Lick, Jr. 360,000(2) 7.2
17800 Royalton Road
Strongsville, OH 44136
Dimensional Fund Advisors Inc. 258,300(3) 5.1
1299 Ocean Avenue
11th Floor
Santa Monica, CA 90401
Peter W. Nauert 1,200,000(4) 24.0
c/o Strategic Acquisition Partners, LLC
20 North Wacker Drive, Suite 3118
Chicago, Illinois 60606
Strategic Acquisition Partners, LLC 1,200,000(5) 24.0
20 North Wacker Drive, Suite 3118
Chicago, Illinois 60606
Turkey Vulture Fund XIII, Ltd. 1,200,000(6) 24.0
c/o Mr. Richard M. Osborne
7001 Center Street
Mentor, Ohio 44060
Frank W. Grimone 125,000 2.5
Glen A. Laffoon 86,650(7) 1.7
John L. McKean 3,000(8) *
John F. Novatney, Jr. 13,000 *
David L. Rossio 1,000 *
Thomas D. Schulte 2,097(9) *
James A. Weisbarth 14,075 *
Robert S. Zarick 1,000(10) *
Andrew A. Boemi(11) 0 0
Michael A. Cavataio(11) 0 0
Val Rajic(11) 0 0
Robert E. Bruce 12,000 *
All executive officers and directors as 617,822 12.4
a group (13 persons)
</TABLE>
- ---------------
* 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.
56
<PAGE> 59
(3) Dimensional Fund Advisors Inc. ("Dimensional"), a registered investment
advisor, is deemed to have beneficial ownership of 258,300 Common Shares as
of February 11, 1998, 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) 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.
(6) 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.
(7) Includes 41,150 Common Shares held by Mr. Laffoon's spouse and 3,000 Common
Shares held jointly with his spouse.
(8) These Common Shares are held by Jack McKean Agency, Inc. of which Mr.
McKean is the sole shareholder.
(9) These Common Shares are held jointly with Mr. Schulte's spouse.
(10) These Common Shares are held jointly with Mr. Zarick's spouse.
(11) Each such person became a member of the Board in connection with the
consummation of the Bridge Financing.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In order to comply with certain state insurance regulatory requirements
which prohibit providing group life insurance unless at least ten (10) lives are
insured, the Company formed CRL Preferred Group, Inc., International
Professional Group, Inc., North America Preferred Employers, Inc., and Keystone
Employers Group, Inc. to serve as trustees of trusts established to provide
group life insurance to employers with less than ten (10) employees (such
corporations the "Trustee Corporations"). In compliance with state regulations
which require that the Trustee Corporations' shareholders be natural persons,
Mr. Lick and Mr. Grimone hold, for the benefit of the Company, all of the
outstanding shares of the Trustee Corporations and are directors of the Trustee
Corporations. Mr. Weisbarth holds the office of President of the Trustee
Corporations. None of the officers or directors of the Trustee Corporations
receives any compensation for serving in such capacity.
Mr. Val Rajic, who is a director and acting chief operating officer, has
served as the president of Strategic Partners since November 1997.
Mr. Billy B. Hill, Jr. was retained as general counsel of the Company in
January 1998. He also provides legal services for Strategic Partners. Karon
Hill, his spouse, is a 10% shareholder of Strategic Partners.
Concurrent with the signing of the Original 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
57
<PAGE> 60
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.
Mr. Osborne, Mr. Nauert, the Fund and Strategic Partners (collectively the
"Investors") entered into an agreement, dated November 13, 1997 (the "Investors'
Agreement") pursuant to which the Fund agreed to acquire 30% of the Shares and
Equity Warrants that were to be sold by the Company pursuant to the Stock
Purchase Agreement. Strategic Partners anticipates that the Fund will
participate in the financing under the Amended and Restated Stock Purchase
Agreement, although at a reduced level. Upon consummation of the Equity
Financing under the Amended and Restated Stockholders Agreement, the Investors
would own approximately 28% 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 would own approximately 35% of the outstanding Common Shares.
Strategic Partners may assign its right to purchase stock and warrants under the
Amended and Restated Stockholders Agreement, subject to certain restrictions. In
addition, each purchaser under the Amended and Restated Stock Purchasing
Agreement will be required to enter into a Voting Agreement pursuant to which
the purchasers will agree to vote for certain designees to the board of
directors, including one designee of the Fund and two designees of Strategic
Partners, subject to reduction in certain instances.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K.
(a) Filed documents. The following documents are filed as part of this
report:
1. Financial Statements.
Central Reserve Life Corporation and Subsidiaries: Audit Report.
Consolidated Balance Sheets -- December 31, 1997 and 1996.
Consolidated Statements of Operations -- Years ended December 31, 1997,
1996 and 1995.
Consolidated Statements of Shareholders' Equity -- Years ended December
31, 1997, 1996 and 1995.
Consolidated Statements of Cash Flows -- Years ended December 31, 1997,
1996 and 1995.
Notes to Consolidated Financial Statements.
2. Financial Statement Schedules.
Central Reserve Life Corporation and Subsidiaries:
I. Summary of Investments -- Other than Investments in Related
Parties.
II. Condensed Financial Information of Registrant.
III. Supplementary Insurance Information.
IV. Reinsurance.
Other schedules are omitted because of the absence of conditions under
which they are required or because the required information is given in the
consolidated financial statements or notes thereto.
(b) reports on Form 8-K:
58
<PAGE> 61
Current report on Form 8-K dated October 14, 1997 announcing proposed
merger with Standard Management Corporation along with attached Letter
of Intent and News Release.
Current report on Form 8-K dated November 4, 1997 announcing termination
of merger discussions with Standard Management Corporation with attached
News Release.
Current report on Form 8-K dated November 17, 1997 announcing agreement
to sell stock. Attached News Release and Financial Information on the
1997 third quarter.
Current report on Form 8-K dated December 5, 1997 regarding the November
announcement to sell stock. Attached as exhibits were:
2.1 Stock Purchase Agreement, dated as of November 26, 1997, by and
between Strategic Partners and Central Reserve.
99.1 Letter from Strategic Partners to Central Reserve outlining the
terms for the Interim Loan.
99.2 Press Release dated December 2, 1997.
Current report on Form 8-K dated December 30, 1997 announcing receipt of
$20 million loan, $14 million surplus note to subsidiary and
subsidiary's entering into a $10 million reinsurance transaction. The
following exhibits were filed:
2.1 Amendment No. 1 to Stock Purchase Agreement, dated as of December
16, 1997, by and between Strategic Partners and Central Reserve.
10.1 Credit Agreement, dated as of December 16, 1997, by and between
Central Reserve and Strategic Partners.
10.2 Pledge Agreement, dated as of December 16, 1997, by and between
Central Reserve and Strategic Partners.
10.3 Promissory Note, dated as of December 16, 1997, by Central Reserve
in favor of Strategic Partners.
10.4 Warrant to purchase Common Shares, dated December 16, 1997, by
Central Reserve in favor of Peter W. Nauert.
10.5 Warrant to purchase Common Shares, dated December 16, 1997, by
Central Reserve in favor of the Turkey Vulture Fund XIII, Ltd.
10.6 Employment Agreement, dated December 15, 1997, by and between Fred
Lick, Jr. and Central Reserve.
10.7 Employment Agreement, dated December 15, 1997, by and between Fred
Lick, Jr. and CRL.
10.8 Employment Agreement, dated December 16, 1997, by and between
Frank Grimone and Central Reserve and CRL.
10.9 The Central Reserve Life Insurance Company Severance Benefit Plan.
99.1 Form of Meeting Voting Agreement, dated December 16, 1997.
99.2 Press Release dated December 17, 1997.
(c) Exhibits
59
<PAGE> 62
<TABLE>
<CAPTION>
INCORPORATED BY
REFERENCE TO
REGISTRATION OR FORM OR EXHIBIT
EXHIBITS FILE NUMBER REPORT DATE NUMBER
-------- --------------- ------- ---------- -------
<C> <C> <S> <C> <C> <C> <C>
(2) Plan of acquisition, reorganization,
arrangement, liquidation, or succession
(1) Stock Purchase Agreement, dated as of 0-8483 8-K Dec. 1997 2.1
November 26, 1997, by and between
Strategic Partners and Central Reserve.
(2) Amendment No. 1 to Stock Purchase 0-8483 8-K Dec. 1997 2.1
Agreement, dated as of December 16,
1997, by and between Strategic Partners
and Central Reserve.
(3) Amended and Restated Stock Purchase 0-8483 10-K Mar. 1998 2.2
Agreement, dated March 30, 1998, by and
among Strategic Partners, Insurance
Partners, L.P., Insurance Partners
Offshore (Bermuda), L.P. and Central
Reserve.
(3) Articles of Incorporation and By-laws
(1) Amended Articles of Incorporation 0-8483 10-K Mar. 1992 3(a)
(2) Code of Regulations 0-8483 10-K Mar. 1992 3(b)
(3) Amended Articles of Incorporation 0-8483 10-K Mar. 1998 3(c)
(10) Material Contracts
(1) Incentive Stock Option Plan 0-8483 10-K Mar. 1992 10(b)
(2) Agreement of Lease 0-8483 10-K Mar. 1992 10(c)
(3) Mortgage Note 0-8483 10-K Mar. 1992 10(d)
(4) Mortgage 0-8483 10-K Mar. 1992 10(e)
(5) Employment Contract 0-8483 10-K Mar. 1993 10(a)
(6) Credit Agreement, dated as of December 0-8483 8-K Dec. 1997 10.1
16, 1997, by and between Central
Reserve and Strategic Partners.
(7) Pledge Agreement, dated as of December 0-8483 8-K Dec. 1997 10.2
16, 1997, by and between Central
Reserve and Strategic Partners
(8) Promissory Note, dated as of December 0-8483 8-K Dec. 1997 10.3
16, 1997, by Central Reserve in favor
of Strategic Partners.
(9) Warrant to purchase Common Shares, 0-8483 8-K Dec. 1997 10.4
dated December 16, 1997, by Central
Reserve in favor of Peter W. Nauert.
(10) Warrant to purchase Common Shares, 0-8483 8-K Dec. 1997 10.5
dated December 16, 1997, by Central
Reserve in favor of the Turkey Vulture
Fund XIII, Ltd.
(11) Employment Agreement, dated December 0-8483 8-K Dec. 1997 10.6
15, 1997, by and between Fred Lick, Jr.
and Central Reserve
(12) Employment Agreement, dated December 0-8483 8-K Dec. 1997 10.7
15, 1997, by and between Fred Lick, Jr.
and CRL.
(13) Employment Agreement, dated December 0-8483 8-K Dec. 1997 10.8
16, 1997, by and between Frank Grimone
and Central Reserve and CRL.
</TABLE>
60
<PAGE> 63
<TABLE>
<CAPTION>
INCORPORATED BY
REFERENCE TO
REGISTRATION OR FORM OR EXHIBIT
EXHIBITS FILE NUMBER REPORT DATE NUMBER
-------- --------------- ------- ---------- -------
<C> <C> <S> <C> <C> <C> <C>
(14) The Central Reserve Life Insurance 0-8483 8-K Dec. 1997 10.9
Company Severance Benefit Plan.
(15) Reinsurance Agreement between Central 0-8483 10-K Mar. 1998 10.10
Reserve Life Insurance Company and
Reassurance Company of Hannover.
(16) Amendment No. 1 to Credit Agreement, 0-8483 10-K Mar. 1998 10.11
dated as of March 25, 1998 by and
between Central Reserve and Strategic
Partners.
(17) Administrative Services Agreement, 0-8483 10-K Mar. 1998 10.12
dated March 25, 1998 by and between
Mutual Management Company, Inc. and
Central Reserve Life Insurance Company.
(Filed separately with the Commission
under rule 24 b-2).
(18) Amendment No. 1 to Warrant to purchase 0-8483 10-K Mar. 1998 10.13
Common Shares, dated March 30, 1998 by
Central Reserve in favor of Peter
Nauert.
(19) Amendment No. 1 to Warrant to purchase 0-8483 10-K Mar. 1998 10.14
Common Shares, dated March 30, 1998 by
Central Reserve in favor of the Turkey
Vulture Fund XIII, Ltd.
(16) Letter re: change in certifying accountant
(1) Letter regarding change in certifying 0-8483 10-K Mar. 1993 16
accountant.
(21) Subsidiaries of the registrant
(1) Subsidiaries 0-8483 10-K Mar. 1992 21
(27) Financial Data Schedule
(1) Financial Data Schedule 0-8483 10-K Mar. 1998 27
(99) Additional Exhibits
(1) Intent and Release 0-8483 8-K Oct. 1997 99.1
(2) Press Release dated November 13, 1997 0-8483 8-K Nov. 1997 99
(3) Letter from Strategic Partners to 0-8483 8-K Dec. 1997 99.1
Central Reserve outlining the terms for
the Interim Loan.
(4) Press Release dated December 2, 1997 0-8483 8-K Dec. 1997 99.2
(5) Form of Meeting Voting Agreement, dated 0-8483 8-K Dec. 1997 99.1
December 16, 1997.
(6) Press Release dated December 17, 1997. 0-8483 8-K Dec. 1997 99.2
</TABLE>
(d) Financial Statement Schedules
Reference is made to the financial statement schedules contained on
pages 46 through 51 hereof.
61
<PAGE> 64
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE COMPANY HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
<TABLE>
<S> <C>
CENTRAL RESERVE LIFE CORPORATION
By: /s/ FRED LICK, JR.
-----------------------------------------------------
Fred Lick, Jr., President
</TABLE>
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE COMPANY
AND IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
DATE SIGNATURE AND CAPACITY
---- ----------------------
<S> <C>
March 30, 1998 By: /s/ FRED LICK, JR.
-----------------------------------------------------
Fred Lick, Jr., Chairman of the Board of Directors
President, and Principal Executive Officer
March 30, 1998 By: /s/ FRANK W. GRIMONE
-----------------------------------------------------
Frank W. Grimone, Senior Executive Vice President
and Principal Financial and Accounting Officer
March 30, 1998 By: /s/ ANDREW A. BOEMI
-----------------------------------------------------
Andrew A. Boemi, Director
March 30, 1998 By: /s/ MICHAEL A. CAVATAIO
-----------------------------------------------------
Michael A. Cavataio, Director
March 30, 1998 By: /s/ JOHN L. MCKEAN
-----------------------------------------------------
John L. McKean, Director
March 30, 1998 By: /s/ JOHN F. NOVATNEY, JR.
-----------------------------------------------------
John F. Novatney, Director
March 30, 1998 By: /s/ VAL RAJIC
-----------------------------------------------------
Val Rajic, Director
March 30, 1998 By: /s/ DAVID L. ROSSIO
-----------------------------------------------------
David L. Rossio, Director
March 30, 1998 By: /s/ THOMAS D. SCHULTE
-----------------------------------------------------
Thomas D. Schulte, Director
March 30, 1998 By: /s/ ROBERT E. BRUCE
-----------------------------------------------------
Robert E. Bruce, Director
</TABLE>
62
<PAGE> 65
<TABLE>
<CAPTION>
INCORPORATED BY
REFERENCE TO
REGISTRATION OR FORM OR EXHIBIT
EXHIBITS FILE NUMBER REPORT DATE NUMBER
-------- --------------- ------- ---------- -------
<C> <C> <S> <C> <C> <C> <C>
(2) Plan of acquisition, reorganization,
arrangement, liquidation, or succession
(1) Stock Purchase Agreement, dated as of 0-8483 8-K Dec. 1997 2.1
November 26, 1997, by and between
Strategic Partners and Central Reserve.
(2) Amendment No. 1 to Stock Purchase 0-8483 8-K Dec. 1997 2.1
Agreement, dated as of December 16,
1997, by and between Strategic Partners
and Central Reserve.
(3) Amended and Restated Stock Purchase 0-8483 10-K Mar. 1998 2.2
Agreement, dated March 30, 1998, by and
among Strategic Partners, Insurance
Partners, L.P., Insurance Partners
Offshore (Bermuda), L.P. and Central
Reserve.
(3) Articles of Incorporation and By-laws
(1) Amended Articles of Incorporation 0-8483 10-K Mar. 1992 3(a)
(2) Code of Regulations 0-8483 10-K Mar. 1992 3(b)
(3) Amended Articles of Incorporation 0-8483 10-K Mar. 1998 3(c)
(10) Material Contracts
(1) Incentive Stock Option Plan 0-8483 10-K Mar. 1992 10(b)
(2) Agreement of Lease 0-8483 10-K Mar. 1992 10(c)
(3) Mortgage Note 0-8483 10-K Mar. 1992 10(d)
(4) Mortgage 0-8483 10-K Mar. 1992 10(e)
(5) Employment Contract 0-8483 10-K Mar. 1993 10(a)
(6) Credit Agreement, dated as of December 0-8483 8-K Dec. 1997 10.1
16, 1997, by and between Central
Reserve and Strategic Partners.
(7) Pledge Agreement, dated as of December 0-8483 8-K Dec. 1997 10.2
16, 1997, by and between Central
Reserve and Strategic Partners
(8) Promissory Note, dated as of December 0-8483 8-K Dec. 1997 10.3
16, 1997, by Central Reserve in favor
of Strategic Partners.
(9) Warrant to purchase Common Shares, 0-8483 8-K Dec. 1997 10.4
dated December 16, 1997, by Central
Reserve in favor of Peter W. Nauert.
(10) Warrant to purchase Common Shares, 0-8483 8-K Dec. 1997 10.5
dated December 16, 1997, by Central
Reserve in favor of the Turkey Vulture
Fund XIII, Ltd.
(11) Employment Agreement, dated December 0-8483 8-K Dec. 1997 10.6
15, 1997, by and between Fred Lick, Jr.
and Central Reserve
(12) Employment Agreement, dated December 0-8483 8-K Dec. 1997 10.7
15, 1997, by and between Fred Lick, Jr.
and CRL.
(13) Employment Agreement, dated December 0-8483 8-K Dec. 1997 10.8
16, 1997, by and between Frank Grimone
and Central Reserve and CRL.
</TABLE>
63
<PAGE> 66
<TABLE>
<CAPTION>
INCORPORATED BY
REFERENCE TO
REGISTRATION OR FORM OR EXHIBIT
EXHIBITS FILE NUMBER REPORT DATE NUMBER
-------- --------------- ------- ---------- -------
<C> <C> <S> <C> <C> <C> <C>
(14) The Central Reserve Life Insurance 0-8483 8-K Dec. 1997 10.9
Company Severance Benefit Plan.
(15) Reinsurance Agreement between Central 0-8483 10-K Mar. 1998 10.10
Reserve Life Insurance Company and
Reassurance Company of Hannover.
(16) Amendment No. 1 to Credit Agreement, 0-8483 10-K Mar. 1998 10.11
dated as of March 25, 1998 by and
between Central Reserve and Strategic
Partners.
(17) Administrative Services Agreement, 0-8483 10-K Mar. 1998 10.12
dated March 25, 1998 by and between
Mutual Management Company, Inc. and
Central Reserve Life Insurance Company.
(Filed separately with the Commission
under rule 24b-2.)
(18) Amendment No. 1 to Warrant to purchase 0-8483 10-K Mar. 1998 10.13
Common Shares, dated March 30, 1998 by
Central Reserve in favor of Peter
Nauert.
(19) Amendment No. 1 to Warrant to purchase 0-8483 10-K Mar. 1998 10.14
Common Shares, dated March 30, 1998 by
Central Reserve in favor of the Turkey
Vulture Fund XIII, Ltd.
(16) Letter re: change in certifying accountant
(1) Letter regarding change in certifying 0-8483 10-K Mar. 1993 16
accountant.
(21) Subsidiaries of the registrant
(1) Subsidiaries 0-8483 10-K Mar. 1992 21
(27) Financial Data Schedule
(1) Financial Data Schedule 0-8483 10-K Mar. 1998 27
(99) Additional Exhibits
(1) Intent and Release 0-8483 8-K Oct. 1997 99.1
(2) Press Release dated November 13, 1997 0-8483 8-K Nov. 1997 99
(3) Letter from Strategic Partners to 0-8483 8-K Dec. 1997 99.1
Central Reserve outlining the terms for
the Interim Loan.
(4) Press Release dated December 2, 1997 0-8483 8-K Dec. 1997 99.2
(5) Form of Meeting Voting Agreement, dated 0-8483 8-K Dec. 1997 99.1
December 16, 1997.
(6) Press Release dated December 17, 1997. 0-8483 8-K Dec. 1997 99.2
</TABLE>
64
<PAGE> 1
Exhibit 2.2
Amended and Restated Stock Purchase Agreement
by and between
Strategic Acquisition Partners, LLC,
Insurance Partners, L.P.,
Insurance Partners Offshore (Bermuda), L.P.
and
Central Reserve Life Corporation
<PAGE> 2
AMENDED AND RESTATED STOCK PURCHASE AGREEMENT
---------------------------------------------
THIS AMENDED AND RESTATED STOCK PURCHASE AGREEMENT is made and entered
into as of March 30, 1998, by and among Strategic Acquisition Partners, LLC, a
Nevada limited liability company ("SAP"), Insurance Partners, L.P., a Delaware
limited partnership ("IP DELAWARE"), Insurance Partners Offshore (Bermuda),
L.P., a limited partnership organized under the laws of Bermuda ("IP BERMUDA")
(both of IP Delaware and IP Bermuda being sometimes referred to herein as "IP")
(each of SAP, IP Delaware and IP Bermuda being sometimes referred to herein as a
"PURCHASER" and all of them together being sometimes referred to as the
"PURCHASERS"), and Central Reserve Life Corporation, an Ohio corporation (the
"COMPANY").
WHEREAS, the Purchasers desire to purchase, severally,
7,300,000 shares of common stock, without par value, of the Company ("COMMON
STOCK") and warrants to purchase 3,650,000 shares of Common Stock from the
Company in the respective amounts set forth on their respective signature pages
to this Agreement, on the terms set forth herein; and
WHEREAS, in consideration for the Purchase Price (as
hereinafter defined), the Company shall issue Common Stock and warrants to
purchase Common Stock to the Purchasers.
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.
1
<PAGE> 3
"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 or states which, individually
or in the aggregate, represented 5% or more of the Company's premium revenue
(for the year ended December 31, 1997).
"ERISA" shall mean the Employee Retirement and Income Security
Act of 1974, 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.
ARTICLE II
THE TRANSACTION
2.1. SALE AND PURCHASE OF SECURITIES. At Closing, the Company
shall issue, sell, transfer, assign and deliver to each Purchaser, and each
Purchaser shall purchase, accept, assume and receive, all right, title and
interest in and to the number of shares of Common Stock and the number of
warrants to purchase the number of shares of Common Stock set forth on such
Purchaser's signature page to this Agreement, free and clear of any Adverse
Claims. The obligations of the respective Purchasers under this Agreement shall
be several and not joint.
2. 2. PURCHASE PRICE. The purchase price to be paid by each
Purchaser for the shares of Common Stock and the warrants to purchase shares of
Common Stock to be purchased by such Purchaser hereunder shall be equal to the
product of $5.50 multiplied by the number of
2
<PAGE> 4
shares of Common Stock to be purchased by such Purchaser as set forth on such
Purchaser's signature page hereto (with respect to each Purchaser, such
Purchaser's "PURCHASE PRICE").
(a) the Purchase Price to be paid by SAP shall be paid at the
Closing as follows:
(i) SAP shall discharge the aggregate amount of
principal and accrued and unpaid interest of the Company (the
"OBLIGATIONS") under the Credit Agreement, dated as of December 16,
1997, between the Company as borrower, and SAP, as lender (the "CREDIT
AGREEMENT") in an amount equal to SAP's Purchase Price.
(b) the Purchase Price to be paid by IP shall be paid at the
Closing as follows:
(i) a portion of IP's Purchase Price equal to the
difference of (A) the Obligations of the Company under the Credit
Agreement LESS (B) SAP's Purchase Price shall be paid to the Company by
wire transfer of immediately available funds to the account specified
by the Company, which account shall be approved by SAP.
(ii) the remaining portion of IP's Purchase Price
shall be paid to the Company by wire transfer of immediately available
funds to the account specified by the Company.
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 PURCHASERS. At the Closing,
(a) each Purchaser shall deliver or cause to be delivered such
Purchaser's Purchase Price as set forth in Section 2.2; and
(b) each Purchaser shall deliver, or cause to be delivered, a
certificate of such Purchaser certifying as to the continued accuracy
of the representations and warranties as required by Section 11.1 and
compliance with conditions precedent to the Closing;
(c) SAP shall deliver, or cause to be delivered an opinion of
McDermott, Will & Emery relating to the formation and existence of SAP
and its power and authority to enter into this Agreement and the
agreements contemplated hereby.
3
<PAGE> 5
3.3. DELIVERIES BY THE COMPANY. At the Closing, the Company
shall deliver or cause to be delivered to each Purchaser the following:
(a) certificates representing the shares of Common Stock being
purchased by such Purchaser hereunder;
(b) legal opinions of Baker & Hostetler and Jack Novatney, as
appropriate, relating to the due organization of the Company, the
authority of the Company to enter the transactions contemplated hereby,
the capitalization of the Company, the absence of certain conflicts,
the validity, binding nature, and enforceability of this Agreement and
the agreements contemplated hereby, and certain regulatory matters
pertaining to the transactions contemplated hereby;
(c) legal opinion of Latham & Watkins relating to securities
laws matters;
(d) warrants substantially in the form of EXHIBIT A hereto
(the "WARRANTS") issued representing the right to purchase the number
of shares of Common Stock set forth on such Purchaser's signature page
to this Agreement;
(e) certificate of incorporation of the Company, certified as
of a recent date by the Secretary of State of Ohio;
(f) 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;
(g) 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;
(h) 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;
(i) resignations from the directors of the Company named on
Schedule 3.3(i) 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(i);
(j) any third party consents required to consummate the
transactions contemplated hereby; and
(k) 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:
4
<PAGE> 6
(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");
(c) the Stockholders Agreement in the form of EXHIBIT D hereto
(the "STOCKHOLDERS AGREEMENT"); and
(d) 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 each 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
5
<PAGE> 7
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.
(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(c). 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) Except as set forth on Schedule 4.1(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.
6
<PAGE> 8
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 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.
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<PAGE> 9
(b) Except for the Common Shares Purchase Warrants providing
for the purchase of 800,000 shares of Common Stock that were issued by
the Company on December 16, 1997, 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, 1997, 1996 and
1995, and the related Consolidated Statements of Operations,
Shareholders' Equity and Cash Flows for each of the fiscal years ended
December 31, 1997, 1996 and 1995, including the respective notes
thereto, together with the reports of KPMG Peat Marwick LLP relating
thereto ("COMPANY FINANCIAL STATEMENTS"); and (ii) annual audited
Statutory Financial Statements for the Company Insurance Subsidiary for
the years ended December 31, 1997, 1996, and 1995 (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
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<PAGE> 10
taken as a whole for the indicated periods in conformity with GAAP.
Except as set forth on Schedule 4.5(a), since December 31, 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, 1997, 1996, and 1995, 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 unaudited quarterly reports and any
amendments thereto filed with the Commission subsequent to December 31,
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, 1995, 1996 and 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, except
for such deficiencies known to the Company and each Company Insurance
Subsidiary with respect to any such SAP Financial Statements which have
been cured or corrected. 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 December 31,
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
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<PAGE> 11
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 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, 1997 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 December 31, 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) or in respect of
any action taken prior to the date hereof at the direction or consent
of any Purchaser, Billy B. Hill or Val Rajic, since December 31, 1997
to the date of this Agreement the Company has conducted its business in
the ordinary course and there has not been:
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<PAGE> 12
(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;
(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
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<PAGE> 13
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, or 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.
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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 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;
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<PAGE> 15
(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.
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.
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<PAGE> 16
(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.
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<PAGE> 17
(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.
(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 December 31,
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 December 31, 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 December
31, 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
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<PAGE> 18
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 (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
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<PAGE> 19
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 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, the Company Subsidiaries and the ERISA
Affiliates 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 other
than as required by the provisions of SECTION 601 through 608 of ERISA
and SECTION 4980B of the Code or any applicable state law, 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
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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.
(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.
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
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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.
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.
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(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
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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 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
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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.
(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,
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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 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
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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.
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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 1997 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 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 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. Except as set forth on
Schedule 4.30, 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.
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ARTICLE V
REPRESENTATIONS AND WARRANTIES
OF PURCHASERS
Each Purchaser, as to itself only and not as to any other
Purchaser, hereby represents and warrants to the Company as of the date hereof,
and as of the Closing Date, as follows:
5.1. AUTHORITY. Such Purchaser has all requisite limited
liability company or partnership, as applicable, 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 or partnership, as applicable, and other acts or
proceedings required to be taken by such 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 such Purchaser will be, duly executed and delivered
and constitute lawful, valid and legally binding obligations of such 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) such Purchaser's certificate of incorporation or bylaws, (b) any
note, bond, indenture, contract, agreement, permit, license or other instrument
to which such Purchaser is a party or by which such Purchaser or any of its
assets is bound, (c) any order, writ, injunction, decree or judgment of any
court or governmental agency applicable to such Purchaser, or (d) any law, rule
or regulation applicable to Purchaser.
5.3. DUE ORGANIZATION. Such Purchaser is a limited liability
company or partnership, as applicable, duly organized and validly existing under
the laws of its state of formation, and has full power and authority to carry on
the business in which it is engaged.
5.4. BROKERS. Such 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.
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5.5. INVESTMENT REPRESENTATION. (i) Such Purchaser understands
that the Common Stock and Warrants to be purchased by such Purchaser hereunder
have not been, and will not be, registered under the Securities Act as of the
Closing Date or under any state securities laws and are being offered and sold
in reliance upon federal and state exemptions for transactions not involving any
public offering.
(ii) Such 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 Common Stock to be purchased by
such Purchaser hereunder 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. DIRECTORS AND OFFICERS QUESTIONNAIRES. Each Purchaser
shall deliver to the Company such Directors and Officers Questionnaires as the
Company may reasonably request in connection with the transactions contemplated
hereby or regulatory filings pertaining thereto.
5.7. QUALIFICATION AND CONFLICTS. To the knowledge of such
Purchaser, neither such Purchaser nor any person holding any interest in such
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
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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.
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:
(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;
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(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 Purchasers to
report material operational matters and the general status of on-going
operations of the Business. The Company shall promptly notify each 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 each 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 each 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 such 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
any 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 such 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 the Purchasers 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)).
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
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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) or by the Purchasers pursuant to Section 13.1(f), 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 Purchasers $950,000.00 in same day funds (the
"TERMINATION FEE") plus reimbursement of each Purchaser's expenses incurred in
connection with the Transactions contemplated hereby, including, without
limitation, all due diligence expenses and expenses of counsel; PROVIDED, that
if the warrants have been issued pursuant to Section 9.1(s) of the Credit
Agreement in consideration for certain guarantees provided in connection
therewith, the Termination Fee shall be $750,000. The Termination Fee shall be
paid to the respective Purchasers pro rata based on the number of shares of
Common Stock to be purchased by the respective Purchasers hereunder as set forth
on their respective signature pages hereto; PROVIDED, that if the warrants
referred to in the proviso of the preceding sentence have not been issued, the
Termination Fee shall be paid as follows: (i) $200,000 of the Termination Fee
shall be paid to SAP prior to any pro rata allocation among the Purchasers, and
(ii) the remaining portion of the Termination Fee shall be paid to the
respective Purchasers pro rata based on the number of shares of Common Stock to
be purchased by the respective Purchasers hereunder as set forth on their
respective signature pages hereto.
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 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.
7.8 PENSION PLAN. As soon as practicable after the Closing
Date, the Company shall promptly make or cause to be made an amendment to the
Pension Plan for Employees of Central Reserve Life Insurance Company (the
"PENSION PLAN") which shall cause all participants' account balances under the
Pension Plan on January 1, 1998 to be vested as of such date.
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ARTICLE VIII
COVENANTS OF PURCHASERS
8.1. REASONABLE EFFORTS. Each 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, Each 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. Each Purchaser, to the extent required, 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
AND REPRESENTATIONS
9.1. INTERIM LOAN. The proceeds of the loan from SAP to the
Company under the Credit Agreement were used as follows: (i) approximately
$14,000,000 were invested in the Company Insurance Subsidiary and evidenced by a
surplus note; (ii) approximately $5,200,000 were used to satisfy in part the
obligations of the Company to Huntington Bank; and (iii) approximately $800,000
were used to establish an interest reserve at the Company and to pay transaction
expenses. The Company shall repay the principal amount of such loan and any
accrued interest thereon as provided in Section 2.2 from the proceeds of the
purchase of Common Stock and Warrants hereunder. Simultaneously with the payment
referred to in clause (ii) of the first sentence of this Section, the Company
caused 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. The Company has (i) amended its
defined contribution plan such that, from and after January 1, 1998, it shall be
a 401(k) plan through the adoption of the amendment attached hereto as Schedule
9.2(a); 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) effective as of September
30, 1997, terminated its split-dollar life insurance policy for the officers
whose names are set forth on Schedule 9.2(b); and (iii) effective as of December
12, 1997, terminated its retiree health benefits Plan.
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9.3. SEVERANCE PAY PLAN. Prior to December 17, 1997, the
Company terminated its severance pay plan and established a successor severance
pay plan in the form attached to as Schedule 9.3 hereto.
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 cancelled during such period, Purchaser
shall cause the Company to use reasonable efforts to obtain substantially
similar D&O Insurance.
9.5 ADVEST. At Closing, the Company shall pay the fees of
Advest, Inc. in connection with the transactions contemplated hereby.
9.6 REINSURANCE TREATY. The Company has entered into a
reinsurance treaty with the Reassurance Company of Hannover in the form attached
hereto as Schedule 9.7.
9.7 PAYMENT OF FEES AND EXPENSES. At and after the Closing,
the Company shall pay to each of IP and SAP (and designees of SAP) an amount
equal to their direct, out-of-pocket expenses, including fees and expenses of
legal and other professionals, incurred by them (and the designees of SAP) in
connection with their respective investigations of the Company, the negotiation,
execution and delivery of this Agreement and related documents by them and the
performance of their respective obligations hereunder and thereunder; provided,
that the obligations of the Company to pay the expenses of IP and SAP (and
designees of SAP) pursuant to this Section shall not exceed $750,000 in the
aggregate.
9.8 AUTHORIZED SHARES. The Company shall include a proposal in
the Proxy Statement to increase the number of authorized shares of Common Stock
from 15,000,000 to 30,000,000.
9.9 INTEGRATION COVENANTS.
(a) The home office for the Company Insurance subsidiary will remain in
Strongsville, Ohio for the indefinite future, especially concerning
those operations and staff necessary to ensure the continuity and
support of the Company Insurance Subsidiary's sales and marketing
efforts.
(b) The Company Insurance Subsidiary's relationships with its general
agents will remain generally the same for the indefinite future,
subject to further cooperative discussions with Purchasers concerning
the productivity of a particular agent , territory or situation.
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ARTICLE X
CONDITIONS PRECEDENT TO OBLIGATION TO CLOSE
OF PURCHASERS
The obligations of each 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 any Purchaser to own, operate or control the Business.
10.3. CONSENTS. All consents by third parties that are
required for the issuance of the Common Stock and Warrants to each Purchaser or
that are required for the consummation of the transactions contemplated hereby
by the Company, 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 Purchasers
and their counsel.
10.5. HSR ACT MATTERS. The waiting period required by the HSR
Act shall have expired or been terminated.
10.6. SUSPENSION OF TRADING. There shall not have occurred nor
be continuing (i) any general suspension of trading (other than resulting from
the implementation of so-called "circuit breakers" for a period not exceeding
four (4) consecutive hours) 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;
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10.7. 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.
10.8. 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.
10.9 ACCURACY OF WARRANTIES AND PERFORMANCE OF COVENANTS OF
OTHER PURCHASERS. The representations and warranties of each other Purchaser
contained herein shall be accurate in all material respects as if made on the
Closing Date. Each other 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 the execution and delivery of the agreements referred to in Section
3.4 and the purchase of the shares of Common Stock to be purchased by such other
Purchasers under this Agreement.
10.10. CONTRIBUTION OF SURPLUS NOTE. The Company shall have
contributed to the capital of the Company Insurance Subsidiary that certain
Surplus Note, dated December 16, 1997, in the principal amount of $14,000,000,
made by Reserve and payable to the order of the Company.
10.11. PAYMENT OF FEES AND EXPENSES. The Company shall have
paid to each of IP and SAP (and their designees) an amount equal to their
respective direct, out-of-pocket expenses, including fees and expenses of legal
and other professionals, incurred by them (and their designees) in connection
with their respective investigations of the Company, the negotiation, execution
and delivery of this Agreement and related documents by them and the performance
of their respective obligations hereunder and thereunder, to the extent such
fees and expenses shall have been submitted to the Company at or prior to
Closing; PROVIDED, that the obligations of the Company to pay the expenses of IP
and SAP (and designees of SAP) pursuant to this Section shall not exceed
$750,000 in the aggregate.
10.12. BOARD DECLASSIFICATION. The classification of the
Board of Directors shall have been terminated.
10.13. DIRECTOR RESIGNATIONS. A sufficient number of Directors
of the Company (other than Fred Lick and John Novatney) shall have resigned in
order to permit the election of Directors designated for election to the Board
pursuant to the Voting Agreement and the remaining members of the Board shall
have elected as Directors of the Company the persons so designated pursuant to
the Voting Agreement.
10.14 CHIEF EXECUTIVE OFFICER. Peter W. Nauert shall have been
elected Chief Executive Officer of the Company.
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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 each Purchaser contained herein shall be
accurate in all material respects as if made on and as of the Closing Date. Each
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 Common Stock and Warrants by each 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 such Purchaser is a party or to which any
portion of the property of such 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) From and after the Closing, each Purchaser shall,
severally, 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 such 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) From and after the Closing, the Company shall indemnify
and hold harmless each 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
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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 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 and, in the case of either clause (i) or
clause (ii), the settlement contains an unconditional release of the indemnified
party with respect to the Third Party Claim from each person asserting such
claim. 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 the Purchasers 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
indemnifiable claims of the Purchasers (as a group) or the Company equals or
exceeds $1,000,000 but the party entitled to indemnification then will be
entitled to recover the full amount of all such claims;
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12.5 EXCLUSIVE REMEDY. Except in the case of fraud or
intentional breach, from and after the Closing, 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 Purchasers and the
Company;
(b) by Purchasers 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 Purchasers, one or more of the material conditions to
the obligation of Purchaser to close has not been fulfilled by June 30,
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
June 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
40
<PAGE> 42
advisors, on financial and other terms more favorable to the
shareholders of the Company than the terms of the transactions
contemplated hereby;
(f) by Purchasers in the event any of the following shall
occur:
(i) a proposal for an Acquisition Transaction has been made to
the Board and the Board shall fail to reaffirm its approval or
recommendation of this Agreement and the transactions contemplated
hereby on or before the tenth business day following the date on which
such proposal shall have been made;
(ii) the Board of Directors of the Company shall have (A)
withdrawn or adversely modified, or taken a public position materially
inconsistent with, its approval or recommendation of this Agreement or
any of the transactions contemplated hereby (provided that a
"stop-look-and-listen" communication of the nature contemplated in, and
otherwise in compliance with, Rule 14d-9(e) under the Exchange Act made
with respect to an Acquisition Transaction (other than the transaction
contemplated hereby) shall not constitute such a withdrawal, adverse
modification or materially inconsistent public position); or
(iii) the Company shall have announced its intention to pursue
a Superior Proposal.
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 any Purchaser or on the part of any 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, Purchasers 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.
41
<PAGE> 43
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 each 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 or commercial overnight
courier (such as Express Mail, Federal Express, etc.) addressed as follows 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.
If to any Purchaser, to its address listed on the signature pages hereof or such
other address as any Purchaser may provide by notice to the Company.
(a) If to the Company:
Central Reserve Life Corporation
17800 Royalton Road
Strongsville, Ohio 44136
Attention: Fred Lick
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.
42
<PAGE> 44
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. No party may assign this Agreement without the prior written
consent of the other parties; PROVIDED, however, the any Purchaser may assign
rights to acquire the Common Stock and Warrants to be purchased by it hereunder
if (i) any such assignee agrees to be bound by the terms hereof and the terms of
the Voting Agreement and the Stockholders Agreement; (ii) such assignment does
not release such Purchaser of its obligations hereunder; (iii) such assignment
does not delay or impair the timely consummation of the transactions
contemplated hereby; (iv) except as provided in clause (v) of this Section, such
assignee would not own in excess of 10% of the outstanding Common Stock of the
Company immediately following the consummation of the transactions contemplated
hereby; (v) with respect to Turkey Vulture Fund XIII, Ltd. (the "FUND"), the
Fund would not own in excess of 15% of the outstanding Common Stock of the
Company immediately following the consummation of the transactions contemplated
hereby; PROVIDED, FURTHER, that SAP may not assign rights to acquire in excess
of $8,250,000 in Common Stock and Warrants.
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.
43
<PAGE> 45
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.
14.11 ACTION BY PURCHASERS. Any action requiring the consent,
authorization or approval of the Purchasers or any direction by the Purchasers,
in each case under this Agreement, shall require the consent, authorization or
approval of both IP and SAP.
* * *
44
<PAGE> 46
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be executed as of the date first above written.
CENTRAL RESERVE LIFE CORPORATION
By: /s/ Fred Lick, Jr.
-------------------------------
Its: Chairman and C.E.O.
45
<PAGE> 47
SIGNATURE PAGE TO STOCK PURCHASE AGREEMENT
------------------------------------------
NAME OF PURCHASER:
INSURANCE PARTNERS, L.P., a Delaware limited
partnership
By: Insurance GenPar, L.P., its general
partner
By: Insurance GenPar, MGP, L.P.
By: Insurance GenPar, MGP, Inc.
By: /s/ Robert A. Spass
---------------------------------
Name: Robert A. Spass
-------------------------------
Title: Managing Partner
------------------------------
Number of shares: 2,860,072
Warrants to purchase following number
of shares: 1,430,036
Purchase Price: $15,730,396
Address:
One Chase Manhatten Plaza
-------------------------------------------
44th Floor
-------------------------------------------
New York, New York 10005
-------------------------------------------
-------------------------------------------
Attention: Bradley E. Cooper
----------------------------------
Copy to:
Weil, Gotshal & Manges LLP
767 Fifth Avenue
New York, New York 10153
Attention: Thomas A. Roberts
46
<PAGE> 48
SIGNATURE PAGE TO STOCK PURCHASE AGREEMENT
NAME OF PURCHASER:
INSURANCE PARTNERS OFFSHORE (BERMUDA), L.P.
By: Insurance GenPar (Bermuda), L.P.
its general partner
By: Insurance GenPar (Bermuda), MGP, L.P.
By: Insurance GenPar (Bermuda), MGP, Inc.
By: /s/ Robert A. Spass
---------------------------------
Name: Robert A. Spass
-------------------------------
Title: Managing Partner
------------------------------
Number of shares: 1,576,292
Warrants to purchase following number of
shares: 788,146
Purchase Price: $8,669,606
Address:
One Chase Manhatten Plaza
-------------------------------------------
44th Floor
-------------------------------------------
New York, New York 10005
-------------------------------------------
-------------------------------------------
Attention: Bradley E. Cooper
----------------------------------
Copy to:
Weil, Gotshal & Manges LLP
767 Fifth Avenue
New York, New York 10153
Attention: Thomas A. Roberts
47
<PAGE> 49
SIGNATURE PAGE TO STOCK PURCHASE AGREEMENT
NAME OF PURCHASER:
STRATEGIC ACQUISITION PARTNERS, LLC
By: /s/ Susan Brantley
-----------------------------------------
Name: Susan Brantley
---------------------------------------
Title: Assistant Secretary
--------------------------------------
Number of shares: 2,863,636
Warrants to purchase following number of
shares: 1,431,818
Purchase Price: $15,749,998
Address:
20 North Wacker Drive
Suite 3118
Chicago, Illinois 60606
Attention: Billy B. Hill
Copy to:
McDermott, Will & Emery
227 West Monroe Street
Chicago, IL 60606
Attention: Stanley H. Meadows, P.C.
48
The disclosure schedules described herein have not been included with the
filing, but will be supplementary provided to the Commission upon request.
<PAGE> 50
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.
THIS WARRANT AND ANY SECURITIES ACQUIRED UPON THE EXERCISE OF THIS
WARRANT MAY BE SUBJECT TO (I) THE VOTING AGREEMENT, DATED ____________, 1998,
AMONG THE COMPANY AND CERTAIN STOCKHOLDERS OF THE COMPANY, (II) THE STOCKHOLDERS
AGREEMENT, DATED _____________, 1998, AMONG THE COMPANY AND CERTAIN STOCKHOLDERS
OF THE COMPANY.
------------------------------------------
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 (as hereinafter
defined), at the purchase price per share of $5.50 (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 Amended and Restated
Stock Purchase Agreement, dated as of March 30, 1998 (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.
<PAGE> 51
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.
Notwithstanding the foregoing, the Warrantholder may, without the payment of
cash or other consideration (other than the surrender of the right to purchase
certain Warrant Shares implicit in the following formula), exercise this Warrant
for "Net Warrant Shares". The Warrantholder shall provide written notice to the
Company specifying the gross number of Warrant Shares as to which this Warrant
is then exercised. The number of Net Warrant Shares deliverable upon such
exercise will be determined by the following formula: Net Warrant Shares = [WS x
(CP - EP)]/CP, where "WS" is the gross number of Warrant Shares as to which this
Warrant is to be exercised; "CP" is the Closing Price of the Common Shares on
the last trading day preceding the date of the request to exercise this Warrant;
and "EP" shall mean the then applicable Exercise Price.
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
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<PAGE> 52
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.
2. RESTRICTIONS ON TRANSFER; RESTRICTIVE LEGENDS.
2.1 This Warrant 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:
-3-
<PAGE> 53
(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:
(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 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
-4-
<PAGE> 54
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
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, (A) the Exercise
Price then in effect shall be adjusted by multiplying the Exercise
Price in effect immediately prior to such record date by a fraction (i)
the numerator of which shall be such Current Market Price of the Common
Shares on such record date (i.e. prior to such shares trading "ex-")
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 0.10) 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-") and (B) the
number of Warrant Shares shall be adjusted to equal (i) the number of
Warrant Shares for which this Warrant is exercisable immediately prior
to such adjustment multiplied by the Exercise Price then in effect,
divided by (ii) the Exercise Price as adjusted pursuant to clause (A)
above. 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 Exercise Price and
number of Warrant Shares) shall thereafter be
-5-
<PAGE> 55
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) If at any time the Company shall issue (other than
pursuant to a dividend or distribution to the holders of Common Shares
for which an adjustment is made under Section 6.1(a)) or sell any
Common Shares in exchange for consideration in an amount per share less
than the Current Market Price at the time such Common Shares are issued
or sold, then (i) the number of Warrant Shares for which this Warrant
is exercisable shall be adjusted to equal the product obtained by
multiplying the number of Warrant Shares for which this Warrant is
exercisable immediately prior to such issuance or sale by a fraction
(A) the numerator of which shall be the number of Common Shares
outstanding immediately after such issue or sale, and (B) the
denominator of which shall be the number of Common Shares outstanding
immediately prior to such issue or sale, plus the number of Common
Shares which the aggregate offering price of the total number of such
additional Common Shares would purchase at the then Current Market
Price; and (ii) the Warrant Price shall be adjusted to equal the
product of Warrant Price in effect immediately prior to such issue or
sale multiplied by a fraction (x) the numerator of which shall be the
number of Warrant Shares for which this Warrant was exercisable
immediately prior to such issue or sale and (y) the denominator of
which shall be the number of Warrant Shares purchasable immediately
after such issue or sale as determined pursuant to clause (i) above. In
the event the Company shall issue (other than as a dividend or
distribution to the holders of its Common Shares for which an
adjustment is made under Section 6.1(b)) or sell (i) any securities
convertible into or exchangeable for Common Shares, with or without the
payment of additional consideration, either immediately or upon the
occurrence of a specified date or specified event, or (ii) any warrants
or other rights to subscribe for or purchase any Common Shares or
convertible securities (as described in clause (i)), and the price for
which each Common Share is issuable upon such exercise, conversion or
exchange is less than the Current Market Price, then the number of
Warrant Shares for which this Warrant is exercisable and the Warrant
Price shall be adjusted as provided in the first sentence of this
paragraph on the basis that the maximum number of Common Shares
issuable pursuant to the exercise or necessary to effect the conversion
or exchange shall be deemed to have been issued and outstanding and the
Company shall have received all of the consideration payable therefor,
if any, as of the date of the actual issuance of the warrants, other
rights or convertible securities.
(e) 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 adjustment called for by Sections 6.1(a), (b), (c) or (d)
which has not been made as a result of this Section 6.1(e) shall be
made.
-6-
<PAGE> 56
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. 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.
8. 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 date 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
-7-
<PAGE> 57
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).
9. 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.
"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.
"CLOSING PRICE" with respect to the Common Shares on any day shall mean
(i) the closing sale price on such day on the principal stock exchange
(including the Nasdaq Stock Market) on which the Common Shares are then listed
or admitted to trading, (ii) if no such sale takes place on such day on such
exchange, the average of the reported closing bid and asked prices for the
Common Shares, as officially reported on such exchange, and (iii) if the Common
Shares are not listed or admitted to trading on any such exchange, the average
of the closing bid and asked prices of the Common Shares in the over-the-counter
market on such day (A) as reported by the National Association of Securities
Dealers Automated Quotation System or the National Quotation System Bureau
Incorporated or (B) if neither such firm is engaged in the business of reporting
such prices, as reported by a similarly generally accepted reporting service.
"COMMON SHARES" means the common stock, no par value, of the Company
and any capital stock into which such common stock may be changed.
"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
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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 are not so listed or admitted to
unlisted trading privileges or if no such sale is made on at least 7 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 _________, __, 2005. [7 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.
10. MISCELLANEOUS.
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<PAGE> 59
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.
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:
-----------------------------------
-----------------------------------
-----------------------------------
(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
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<PAGE> 60
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 unenforceable 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 are asserted by the Company or by creditors or stockholders of the
Company or otherwise.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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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: __________, 1998
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<PAGE> 62
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 the signature
pages attached hereto (the "Investors").
R E C I T A L S
---------------
A. The Investors have agreed to purchase common shares, without par
value, of the Corporation (the "Common Shares") pursuant to that certain Amended
and Restated 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 (including the Common
Shares issuable upon exercise the Warrants (as defined in the Stock Purchase
Agreement)); (iii) any Common Shares then outstanding which were
<PAGE> 63
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 Amended and Restated Stock
Purchase Agreement of even date herewith between the Corporation and the
Investors.
2. DEMAND REGISTRATION.
2.1 REQUESTS FOR REGISTRATION. Subject to the terms of this
Agreement, the holders of at least thirty percent (30%) of the then outstanding
Registrable Shares (but not less than $5,000,000 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, subject to Section 2.4, 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 two Demand Registrations initiated by Insurance Partners, L.P., one Demand
Registration initiated by Turkey Vulture Fund XIII, Ltd. and one Demand
Registration initiated by Strategic Acquisition Partners, L.L.C. (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 even though
such registration shall not count as a Corporation-paid Demand Registration. In
a Demand Registration other than the four Demand Registrations referred to in
the first sentence of this Section (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
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<PAGE> 64
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. 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 (but not the preparation) 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. In order to
postpone the filing of a registration statement pursuant to this Section 2.5,
the Corporation shall promptly (but in any event within ten (10) days), upon
determining to seek such postponement, deliver to each holder who has requested
the registration of all or any part of its Registrable Shares, a certificate
signed by an executive officer of the Corporation stating that the Corporation
is postponing such filing pursuant to this Section 2.5 and a general statement
of the reason for such postponement and an approximation of the anticipated
delay. Within twenty (20) days after receiving such certificate, the holders of
a majority of the Registrable Shares held who have requested the registration of
all or any part of their respective Registrable Shares and for which
registration was previously requested may withdraw such demand request by giving
written notice to the Corporation; if withdrawn, the demand request shall be
deemed not to have been made for all purposes of this Agreement. The Corporation
may postpone the filing of a particular registration statement pursuant to this
Section 2.5 only once.
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<PAGE> 65
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 or delayed, 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 (which shall be given not less than
thirty (30) days prior to the effective date of the registration statement) 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.
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<PAGE> 66
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 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
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<PAGE> 67
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 and the
underwriters 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 or underwriter may reasonably request in order to
facilitate the disposition of the Registrable Shares;
(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 or underwriter reasonably requests and do any and
all other acts and things which may be reasonably necessary or advisable to
enable such seller or underwriter to consummate the disposition in such
jurisdictions of the Registrable Shares (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) promptly 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 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 or registration statement
so that, as thereafter delivered to the purchasers of such Registrable Shares,
such prospectus or registration statement 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 (i) listed on each
securities exchange on which similar securities issued by the Corporation are
then listed, (ii) authorized to be quoted and/or listed (to the extent
applicable) on the NASD Automated Quotation System or The Nasdaq National Market
if the Registrable Shares so qualify, or (iii) if no similar securities issued
by the Corporation
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<PAGE> 68
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 request 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 or any state securities or other regulatory
authority suspending the effectiveness of such registration statement or the
initiation or threatening of any proceeding for such purpose and promptly use
all best 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;
(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
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<PAGE> 69
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;
(m) make generally available to the Corporation's
securityholders an earnings statement satisfying the provisions of Section 11(a)
of the Securities Act no later than thirty (30) days after the end of the twelve
(12) month period beginning with the first day of the Corporation's first fiscal
quarter commencing after the effective date of a registration statement, which
earnings statement shall cover such twelve (12) month period, and which
requirement will be deemed to be satisfied if the Corporation timely files
complete and accurate information on Forms 10-Q, 10-K, and 8-K under the
Exchange Act and otherwise complies with Rule 158 under the Securities Act;
(n) If requested by the managing underwriter or any seller
promptly incorporate in a prospectus supplement or post-effective amendment such
information as the managing underwriter or any seller reasonably requests to be
included therein, including, without limitation, with respect to the Registrable
Shares being sold by such seller, the purchase price being paid therefor by the
underwriters and with respect to any other terms of the underwritten offering of
the Registrable Shares to be sold in such offering, and promptly make all
required filings of such prospectus supplement or post-effective amendment;
(o) cooperate with each seller and each underwriter
participating in the disposition of such Registrable Shares and their respective
counsel in connection with any filings required to be made with the NASD;
(p) during the period when the prospectus is required to be
delivered under the Securities Act, promptly file all documents required to be
filed with the Commission pursuant to Sections 13(a), 13(c), 14, or 15(d) of the
Exchange Act; and
(q) notify each seller of Registrable Shares promptly of any
request by the Commission for the amending or supplementing of such registration
statement or prospectus or for additional information.
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 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
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annual audit or quarterly review, the expense of any liability insurance
obtained by the Corporation; the expenses and fees for listing the securities to
be registered on each securities exchange, expenses incurred in obtaining any
comfort letters, and all fees and expenses associated with filings required to
be made with the NASD.
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
and reimburse, to the fullest 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 directly
caused by statements or omissions made in reliance on and in strict conformity
with the 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 specifically for inclusion in the registration statement
or prospectus; provided, that the obligation to indemnify
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will be several, and not joint and several, among such sellers of Registrable
Shares, and the liability of each such seller of Registrable Shares will be in
proportion to, and provided further that such liability will be limited to, the
net amount received by such seller from the sale of Registrable Shares pursuant
to such registration statement; further provided, however, that such seller of
Registrable Shares shall not be liable in any such case to the extent that prior
to the filing of any such registration statement or prospectus or amendment
thereof or supplement thereto, such seller has furnished in writing to the
Corporation information expressly for use in such registration statement or
prospectus or any amendment thereof or supplement thereto that corrected or made
not misleading information previously furnished to the Corporation.
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 (provided that the failure
to give such notice shall not limit the rights of such Person except to the
extent such failure to provide notice materially prejudices the indemnifying
Person) 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; provided, however, that any Person entitled to indemnification hereunder
shall have the right to employ separate counsel and to participate in the
defense of such claim, but the fees and expenses of such counsel shall be at the
expense of such Person unless (x) the indemnifying party has agreed to pay such
fees or expenses, or (y) the indemnifying party shall have failed to assume the
defense of such claim and employ counsel reasonably satisfactory to such Person.
If such defense is not assumed by the indemnifying party as permitted hereunder,
the indemnifying party will not be subject to any liability for any settlement
made by the indemnified party without its consent (but such consent will not be
unreasonably delayed or withheld). If such defense is assumed by the
indemnifying party pursuant to the provisions hereof, such indemnifying party
shall not settle or otherwise compromise the applicable claim unless (i) such
settlement or compromise contains a full and unconditional release of the
indemnified party or (ii) the indemnified party otherwise consents in writing.
An indemnifying Person who is not 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 Each party hereto agrees that, if for any reason the
indemnification provisions contemplated by Section 7.1 or 7.2 are unavailable to
or insufficient to hold harmless an indemnified party in respect of any losses,
liabilities, claims, damages, or expenses (or actions in respect thereof)
referred to therein, then each indemnifying party shall contribute to the amount
paid or payable by such indemnified party as a result of such losses,
liabilities, claims, damages, or expenses (or actions in respect thereof) in
such proportion as is appropriate to reflect the relative fault of the
indemnifying party and the indemnified party in connection with the actions
which resulted in the losses, liabilities, claims, damages, or expenses as well
as any other relevant equitable considerations. The relative fault of such
indemnifying party and indemnified party shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a material
fact or omission or alleged omission to state a material fact relates
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to information supplied by such indemnifying party or indemnified party, and the
parties' relative intent, knowledge, access to information, and opportunity to
correct or prevent such statement or omission. The parties hereto agree that it
would not be just and equitable if contribution pursuant to this Section 7.4
were determined by pro rata allocation (even if the holders or any underwriters
or all of them were treated as one Person for such purpose) or by any other
method of allocation that does not take account of the equitable considerations
referred to in this Section 7.4, The amount paid or payable by an indemnified
party as a result of the losses, liabilities, claims, damages, or expenses (or
actions in respect thereafter referred to above shall be deemed to include any
legal or other fees or expenses reasonably incurred by such indemnified party in
connection with investigating or, except as provided in Section 7.3, defending
any such action or claim. Notwithstanding the provisions of this Section 7.4, no
holder shall be required to contribute an amount greater than the dollar amount
by which the net proceeds received by such holder with respect to the sale of
any Registrable Shares exceeds the amount of damages which such holder has
otherwise been required to pay by reason of any and all untrue or alleged untrue
statements of material fact or omissions or alleged omissions of material fact
made in any registration statement, prospectus, or preliminary prospectus or any
amendment thereof or supplement thereto, related to such sale of Registrable
Shares. No Person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the Securities Act) shall be entitled to contribution from any
Person who was not guilty of such fraudulent misrepresentation. The holders'
obligations in this Section 7.4 to contribute shall be several in proportion to
the amount of Registrable Shares registered by them and not joint. If
indemnification is available under this Section 7, the indemnifying parties
shall indemnify each indemnified party to the full extent provided in Sections
7.1 and 7.2 without regard to the relative fault of such indemnifying party or
indemnified party or any other equitable consideration provided for in this
Section 7.4 subject, in the case of the holders, to the limited dollar amounts
get forth in Section 7.2.
7.5 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
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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; provided, that no holder of Registrable
Shares shall be required to make any representations or warranties in connection
with any registration other than as to (i) such holder's ownership of his or its
Registrable Shares to be sold or transferred free and clear of all liens,
claims, and encumbrances, (ii) such holder's power and authority to effect such
transfer, and (iii) such matters pertaining to the compliance with securities
laws as may be reasonably requested; provided, further, that the obligation of
such holder to indemnify pursuant to any such underwriting arrangements shall be
several, not joint and several, among such holders selling Registrable Shares,
and the liability of each such holder will be in proportion to, and provided
further that such liability will be limited to, the net amount received by such
holder from the sale of his or its Registrable Shares pursuant to such
registration.
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, in equity, or otherwise.
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
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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 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.
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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.
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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The parties hereto have executed this Agreement on the date first above
written.
THE CORPORATION:
CENTRAL RESERVE LIFE CORPORATION
By:
----------------------------------------
Its:
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SIGNATURE PAGE TO REGISTRATION RIGHTS AGREEMENT
INSURANCE PARTNERS OFFSHORE (BERMUDA) L.P.
By: Insurance Genpar (Bermuda), L.P.,
its general partner
By: Insurance Gen Par (Bermuda)
MPG, Inc.
By:
---------------------------------------
Name:
------------------------------------
Title:
------------------------------------
Address:
-------------------------------------------
-------------------------------------------
-------------------------------------------
-------------------------------------------
Attention:
---------------------------------
Copy to:
Weil, Goshal & Manges LLP
767 Fifth Avenue
New York, New York 10153
Attention: Thomas A. Roberts
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<PAGE> 78
SIGNATURE PAGE TO REGISTRATION RIGHTS AGREEMENT
INSURANCE PARTNERS, L.P., a Delaware limited partnership
By: Insurance GenPar, L.P., its general partner
By: Insurance GenPar MGP, Inc.
By:
-----------------------------
Name:
---------------------------
Title:
--------------------------
Address:
--------------------------------------------------
--------------------------------------------------
--------------------------------------------------
--------------------------------------------------
Attention:
---------------------------------------
Copy to:
Weil, Gotshal & Manges LLP
767 Fifth Avenue
New York, New York 10153
Attention: Thomas A. Roberts
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<PAGE> 79
SIGNATURE PAGE TO REGISTRATION RIGHTS AGREEMENT
STRATEGIC ACQUISITION PARTNERS, LLC.
By:
-----------------------------------------
Its:
---------------------------------------
Address:
20 North Wacker Drive
Suite 3118
Chicago, Illinois 60606
Attention: Billy B. Hill
Copy to:
McDermott, Will & Emery
227 West Monroe Street
Chicago, IL 60606
Attention: Stanley H. Meadows, P.C.
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<PAGE> 80
SIGNATURE PAGE TO REGISTRATION RIGHTS AGREEMENT
TURKEY VULTURE FUND XIII, LTD.
By:
------------------------------------------
Its:
-----------------------------------------
Address:
7001 Center Street
Mentor, Ohio 44060
Attention: Richard M. Osborne
Copy to:
Kohrman, Jackson & Krantz P.L.L.
1375 East Ninth Street
One Cleveland Center, 20th Floor
Cleveland, Ohio 44114
Attention: Marc C. Krantz
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<PAGE> 81
EXHIBIT C
VOTING AGREEMENT
This VOTING AGREEMENT (the "AGREEMENT") is entered into as of _______,
1998, by and among Central Reserve Life Corporation, an Ohio corporation
(including its successors, the "COMPANY") and the security holders listed on
the signature pages of this Agreement (or who may hereafter become a party
hereto pursuant to the terms hereof).
WHEREAS, pursuant to the Amended and Restated Stock Purchase Agreement
dated as of March 30, 1998, by and among the Company and certain purchasers
identified therein (the "STOCK PURCHASE AGREEMENT"), the Company shall issue
7,300,000 shares of common stock, without par value, of the Company and warrants
to purchase up to 3,650,000 shares of common stock of the Company (the "WARRANT
SHARES");
WHEREAS, upon closing of the transactions contemplated by the Stock
Purchase Agreement (the "CLOSING DATE"), the shares purchased thereunder 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
DEFINITIONS
-----------
1.1 DEFINITIONS. As used in this Agreement, the following terms shall
have the following meanings:
"AFFILIATE" shall mean, with respect to any Person, any Person
who, directly or indirectly, controls, is controlled by, or is under
common control with that Person. For purposes of this definition,
"control," and "controlled by" and when used with respect to any Person
shall mean the power to direct the management and policies of such
Person, directly or indirectly, whether through the ownership of voting
securities, by contract, or otherwise.
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<PAGE> 83
"COMMON STOCK" shall mean shares of the Common Stock, without
par value per share, of the Company, and any capital stock into which
such Common Stock thereafter may be changed.
"COMMON STOCK EQUIVALENTS" shall mean, without duplication
with any other Common Stock or Common Stock Equivalents, any rights,
warrants, options, convertible securities or indebtedness, exchangeable
securities or indebtedness, or other rights, exercisable for or
convertible or exchangeable into, directly or indirectly, Common Stock
and securities convertible or exchangeable into Common Stock, whether
at the time of issuance or upon the passage of time or the occurrence
of some future event.
"DESIGNEE" shall mean an individual designated for election to
the Board of Directors by IP Delaware, SAP, or Osborne pursuant to
Section 2.1 of this Agreement.
"EXCHANGE ACT" shall mean the Securities Exchange Act of 1934,
as amended, and the rules and regulations promulgated by the SEC
thereunder.
"HOLDER" shall mean (i) a securityholder listed on the
signature page hereof and (ii) any direct or indirect transferee of any
such securityholder who shall become a party to this Agreement by
executing a joinder agreement in the form of EXHIBIT A hereto.
"INDEPENDENT DIRECTOR" shall mean a director meeting the
standards of an "independent director" as defined in Rule 4200(a) of
the rules of the NASD as of the Closing Date.
"IP" shall mean, collectively, IP Bermuda and IP Delaware.
"IP BERMUDA" shall mean Insurance Partners Offshore (Bermuda),
L.P., a Bermuda limited partnership.
"IP DELAWARE" shall mean Insurance Partners, L.P., a Delaware
limited partnership.
"IP GROUP" shall mean IP Delaware, IP Bermuda, their
respective Affiliates, the respective officers, directors, and
employees (and members of their respective families and trusts for the
primary benefit of such family members) of the foregoing, and the
respective limited partners of IP Delaware and IP Bermuda.
"IP GROUP CLOSING DATE SHARES" shall mean the number of shares
of Common Stock owned by the IP Group as of the date of this Agreement
as set forth on EXHIBIT B hereto.
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"LICK EMPLOYMENT AGREEMENT" shall mean that certain Employment
Agreement, dated as of December ______, 1997, between the Company and
Fred Lick, Jr.
"OSBORNE" shall mean Turkey Vulture Fund, III, Ltd. an Ohio
limited liability company.
"OSBORNE GROUP" shall mean Osborne, its Affiliates, and their
respective officers, directors, and employees (and members of their
respective families and trusts for the primary benefit of such family
members).
"OSBORNE GROUP CLOSING DATE SHARES" shall mean the number of
shares of Common Stock owned by the Osborne Group as of the date of
this Agreement as set forth on EXHIBIT B hereto.
"PERSON" or " "PERSON" shall mean any individual, corporation,
partnership, limited liability company, joint venture, association,
joint-stock company, trust, unincorporated organization, or government
or other agency or political subdivision thereof.
"REQUIRED HOLDERS" shall mean Holders who then own
beneficially more than 66-2/3% of the aggregate number of shares of
Common Stock subject to this Agreement.
"SAP" shall mean Strategic Acquisition Partners, LLC, a Nevada
limited liability company.
"SAP GROUP" shall mean SAP, its Affiliates, and their
respective officers, directors, and employees (and members of their
respective families and trusts for the primary benefit of such family
members).
"SAP GROUP CLOSING DATE SHARES" shall mean the number of
shares of Common Stock owned by the SAP Group as of the date of this
Agreement as set forth on EXHIBIT B hereto.
"STOCKHOLDERS AGREEMENT" shall mean that certain Stockholders
Agreement, dated as of _____, 1998, among the Company and the various
stockholders party thereto from time to time.
ARTICLE II
ELECTION OF DIRECTORS
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SECTION 2.1 BOARD OF DIRECTORS.
(a) The Holders shall cause the Board of Directors of the Company to
consist of nine directors, some or all, as applicable, of whom shall consist of
the following individuals:
(i) IP DESIGNEES. Four individuals designated by IP, so long
as the IP Group shall own a number of shares of Common Stock equal to
at least 75% of the IP Group Closing Date Shares; three individuals
designated by IP, so long as the IP Group shall own a number of shares
of Common Stock equal to at least 50%, but less than 75%, of the IP
Group Closing Date Shares; two individuals designated by IP, so long as
the IP Group shall own a number of shares of Common Stock equal to at
least 25%, but less than 50%, of the IP Group Closing Date Shares; and
one individual designated by IP, so long as the IP Group shall own a
number of shares of Common Stock equal to at least 10%, but less than
25%, of the IP Group Closing Date Shares;
(ii) SAP DESIGNEES. Two individuals designated by SAP, so long
as the SAP Group shall own a number of shares of Common Stock equal to
at least 50% of the SAP Closing Date Shares; and one individual
designated by SAP, so long as the SAP Group shall own a number of
shares of Common Stock equal to at least 10%, but less than 50%, of the
SAP Group Closing Date Shares;
(iii) OSBORNE DESIGNEE. One individual designated by Osborne,
so long as the Osborne Group shall own a number of shares of Common
Stock equal to at least 25% of the Osborne Group Closing Date Shares;
(iv) NOVATNEY. John Novatney, until the earlier to occur of
(A) December 31, 1999, or (B) the first date as of which the Company
does not have a class of equity securities registered under either
Section 12(b) or 12(g) of the Exchange Act; and
(v) LICK. Fred Lick, Jr. until the earlier to occur of (A)
December 31, 1999, (B) termination of his employment under the Lick Employment
Agreement, or (C) the first date as of which the Company does not have a class
of equity securities registered under either Section 12(b) or 12(g) of the
Exchange Act;
PROVIDED, HOWEVER, that until the first date as of which the Company
does not have a class of equity securities either registered under
Section 12(b) or 12(g) of the Exchange Act, at least two of the
individuals elected to the Board of Directors shall constitute
Independent Directors; and PROVIDED FURTHER, that (i) none of IP, SAP
or Osborne shall be required to designate an individual that
constitutes an Independent Director so long as two individuals who
constitute Independent Directors are nominated to serve as directors
and SAP, IP and Osborne vote for their election; PROVIDED, that if the
Company has cumulative voting with respect to the election of its
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directors, SAP, IP and Osborne shall be permitted to vote in favor of
the SAP Designees, IP Designees and Osborne Designee as provided in
this Section 2.1(a) to the extent necessary to ensure the election of
such Designees prior to casting any votes in favor of such Independent
Directors; (ii) in the event one or two of the individuals to be
designated pursuant to the foregoing provisions must constitute an
Independent Director in order to meet the requirements of the
immediately preceding proviso, then, first, IP shall designate as one
of its designees an individual that constitutes an Independent
Director, and, second, SAP shall designate as one of its designees an
individual that constitutes an Independent Director.
(b) For purposes of the foregoing provisions and SECTION 2.2, in
determining whether any person or group owns a specified number of shares of
Common Stock for purposes of comparison to the number of shares owned by a
person or group on the Closing Date, appropriate adjustment shall be made in
each case to give effect to any stock splits, dividends or combinations.
(c) If, prior to his election to the Board of Directors of the Company
pursuant to SECTION 2.1, any designee shall be unable or unwilling to serve as a
director of the Company, the Holder or Holders who designated such Designee
shall be entitled to nominate a replacement who shall then be a Designee for
purposes of this SECTION 2.1. If, following an election to the Board of
Directors of the Company pursuant to SECTION 2.1, any Designee shall resign or
be removed or be unable to serve for any reason prior to the expiration of his
term as a director of the Company, the Holder or Holders who designated such
Designee shall, within thirty (30) days of such event, notify the Board of
Directors of the Company in writing of a replacement Designee, and either (i)
the Holders shall vote their shares of Common Stock, at any regular or special
meeting called for the purpose of filling positions on the Board of Directors of
the Company or in any written consent executed in lieu of such a meeting of
stockholders, and shall take all such other actions necessary to ensure the
election to the Board of Directors of the Company of such replacement Designee
to fill the unexpired term of the Designee who such new Designee is replacing or
(ii) the Board of Directors shall elect such replacement Designee to fill the
unexpired term of the Designee who such new Designee is replacing. If any Holder
requests that any Designee designated by such Holder be removed as a Director
(with or without cause) by written notice thereof to the Company, then the
Company shall take all actions necessary to effect, and each of the Holders
shall vote all of its capital stock in favor of, such removal upon such request.
(d) Each Holder shall vote its shares of Common Stock at any regular or
special meeting of stockholders of the Company or in any written consent
executed in lieu of such a meeting of stockholders and shall take all other
actions necessary to give effect to the agreements contained in this Agreement
(including, without limitation, the election of Designees as directors as
described herein) and to ensure that the certificate of incorporation and bylaws
as in effect immediately following the date hereof do not, at any time
thereafter, conflict in any respect with the provisions of this Agreement. In
order to effectuate the
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<PAGE> 87
provisions of this SECTION 2.1, each Holder hereby agrees that when any action
or vote is required to be taken by such Holder pursuant to this Agreement, such
Holder shall use its best efforts to call, or cause the appropriate officers and
directors of the Company to call, a special or annual meeting of stockholders of
the Company, as the case may be, or execute or cause to be executed a consent in
writing in lieu of any such meetings pursuant to applicable law.
SECTION 2.2 CONTINUED LISTING. Until the three year
anniversary of the Closing Date, each Holder shall vote its shares of Common
Stock in such manner that the Company shall not be voluntarily delisted from the
Nasdaq National Market, except (y) in connection with (1) a transaction that
would constitute a "Rule 13e-3 transaction" (as that term is defined under Rule
13e-3 under the Exchange Act as in effect on the date hereof) with respect to
the Common Stock or (2) any other transaction that, if it were effected by the
Company or an affiliate thereof, would constitute a "Rule 13e-3 transaction" (as
so defined) with respect to the Common Stock, or (z) if the Company becomes
listed on a national securities exchange.
SECTION 2.3 PROXY. Each Holder hereby grants to each of IP
Delaware, SAP and Osborne, with full powers of substitution, an irrevocable
proxy coupled with an interest as may be necessary to permit each of IP
Delaware, SAP and Osborne, to vote the shares of the Holder granting such proxy
in accordance with the requirements of Section 2.1 (by written consent or
otherwise) in event the Holder fails to vote its shares of Common Stock as
required under Section 2.1 within ten (10) days after notice from the party
holding such proxy requesting such a vote.
SECTION 2.4 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 2.5 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, if required, 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 2.1. 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 2.1
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 2.1.
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<PAGE> 88
ARTICLE III
RESTRICTIONS ON TRANSFER
SECTION 3.1 RESTRICTIONS UPON TRANSFER. No Holder may
effect, cause to be effected or permit any voluntary or involuntary sale,
assignment or transfer of any shares of Common Stock or Common Stock Equivalents
or any interest therein (a "TRANSFER"), except for Transfers pursuant to an
effective registration statement or pursuant to Rule 144 under the Securities
Act, unless the transferee agrees to be bound by the provisions of this
Agreement and the Stockholders Agreement and such Transfer is, where applicable,
made in compliance with the terms of the Stockholders Agreement; PROVIDED, that
the Warrants and the Warrant Shares shall not be subject to this Agreement upon
the Transfer to a beneficial owner other than IP, SAP, or Osborne and their
respective affiliates. Any Transfer not complying with the provisions of this
Agreement shall be void AB INITIO, 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 3.2 RESTRICTIVE LEGENDS.
(a) For the term of this Agreement, each certificate
representing the shares of Common Stock or Common Stock Equivalents 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, VOTING LIMITATIONS, AND OTHER TERMS
AND CONDITIONS CONTAINED IN A VOTING AGREEMENT DATED _______, 1998
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 shares of
Common Stock or Common Stock Equivalents subject hereto 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 and
federal securities laws.
ARTICLE IV
MISCELLANEOUS
SECTION 4.1 TERM. The term of this Agreement shall begin on
the Closing Date and shall remain in effect until the five (5) year anniversary
of the Closing Date.
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<PAGE> 89
SECTION 4.2 AMENDMENT. Any provision of this Agreement may be
amended or waived if, but only if, such amendment or waiver is in writing and is
signed by the Company and the Required Holders; PROVIDED, that, no such
amendment or waiver: (i) that is adverse to any Holder that owns more than 5% of
the outstanding Common Stock shall be effective as to that Holder prior to the
three (3) year anniversary of the Closing Date without the consent of such
Holder or (ii) shall amend SECTION 2.1(A)(IV), SECTION 2.1(A)(V), the first
proviso of SECTION 2.1(A) or SECTION 2.2 unless approved by a majority of the
Independent Directors.
SECTION 4.3 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 4.4 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 4.5 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 4.6 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 IV.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.
SECTION 4.8 SEVERABILITY. In case any provision of this
Agreement shall be held invalid, illegal or unenforceable in any respect for any
reason, the validity, legality, and
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<PAGE> 90
enforceability of any such provision in every other respect and the remaining
provisions shall not in any way be affected or impaired thereby.
SECTION 4.9 NOTICES. Any notices or other communications
required or permitted hereunder shall be in writing, and shall be sufficiently
given if made by hand delivery, by telex, by telecopier, or registered or
certified mail, postage prepaid return receipt requested, addressed as follows
(or at such other address as may be substituted by notice given as herein
provided):
IF TO THE COMPANY:
Central Reserve Life Corporation
17800 Royalton Road
Strongsville, Ohio 44136
Facsimile No.:
---------------------------
Attention:
-------------------------------
If to any Holder, at its address listed on the signature pages hereof
or in any joinder agreement.
Any notice or communication hereunder shall be deemed to have been
given or made as of the date so delivered if personally delivered; when answered
back, if telexed; when receipt is acknowledged, if telecopied; and five (5)
calendar days after mailing if sent by registered or certified mail (except that
a notice of change of address shall not be deemed to have been given until
actually received by the addressee). Failure to mail a notice or communication
to a Holder or any defect in it shall not affect its sufficiency with respect to
other Holders. If a notice or communication is mailed in the manner provided
above, it is duly given, whether or not the addressee receives it.
* * *
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<PAGE> 91
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.
Central Reserve Life Corporation
By:
------------------------------------
Its:
------------------------------------
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<PAGE> 92
SIGNATURE PAGE TO VOTING AGREEMENT
----------------------------------
NAME OF HOLDER:
TURKEY VULTURE FUND XIII, LTD.
By:
--------------------------------------
Its Manager
Address:
7001 Center Street
Mentor, Ohio 44060
Copy to:
Kohrman Jackson & Krantz, P.L.L.
1375 East Ninth Street
One Cleveland Center, 20th Floor
Cleveland, Ohio 44114
Attention: Marc C. Krantz
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<PAGE> 93
SIGNATURE PAGE TO VOTING AGREEMENT
----------------------------------
NAME OF HOLDER:
INSURANCE PARTNERS, L.P., A Delaware
limited partnership
By: Insurance GenPar, L.P., its general
partner
By: Insurance GenPar MGP, Inc.
By:
------------------------
Name:
----------------------
Title:
--------------------
Address:
-----------------------------------------
-----------------------------------------
-----------------------------------------
Attention:
-------------------------------
Copy to:
Weil, Gotshal & Manges LLP
767 Fifth Avenue
New York, New York 10153
Attention: Thomas A. Roberts
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<PAGE> 94
SIGNATURE PAGE TO VOTING AGREEMENT
----------------------------------
NAME OF HOLDER:
INSURANCE PARTNERS OFFSHORE (BERMUDA),
L.P.
By: Insurance GenPar (Bermuda), L.P.,
its general partner
By: Insurance GenPar (Bermuda)
MGP, Inc.
By:
------------------------
Name:
----------------------
Title:
---------------------
Address:
-------------------------------------------
-------------------------------------------
-------------------------------------------
-------------------------------------------
Attention:
----------------------------------
Copy to:
Weil, Gotshal & Manges LLP
767 Fifth Avenue
New York, New York 10153
Attention: Thomas A. Roberts
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<PAGE> 95
SIGNATURE PAGE TO VOTING AGREEMENT
NAME OF HOLDER:
STRATEGIC ACQUISITION PARTNERS, LLC
By:
--------------------------------
Its:
-------------------------------
Address:
20 North Wacker Drive
Suite 3118
Chicago, Illinois 60606
Attention: Billy B. Hill
Copy to:
McDermott, Will & Emery
227 West Monroe Street
Chicago, Illinois 60606
Attention: Stanley H. Meadows, P.C.
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<PAGE> 96
EXHIBIT A
JOINDER AGREEMENT
Reference is made to (i) that certain Voting Agreement, dated
as of _________, 1998, among Central Reserve Life Corporation, an Ohio
corporation (the "COMPANY"), and the persons signatory thereto (as amended and
in effect from time to time, the "VOTING AGREEMENT"), a copy of which is
attached hereto, and (ii) that certain Stockholders Agreement, dated as of
___________, 1998, among the Company and the persons signatory thereto (as
amended and in effect from time to time, the "STOCKHOLDERS AGREEMENT"), copy of
which is attached hereto.
The undersigned, _________________________ [print name], in
order to become the owner or holder of __________ shares of common stock of the
Company, hereby agrees that by the undersigned's execution hereof, the
undersigned is a party to the Voting Agreement and the Stockholders Agreement
subject to all of the restrictions, conditions and obligations applicable to
stockholders set forth in such agreements. This Joinder Agreement shall take
effect and shall become a part of each such agreement immediately upon
execution.
Executed as of the date set forth below.
Signature:
----------------------------------
Address:
-----------------------------------
-----------------------------------
-----------------------------------
-----------------------------------
Date:
-----------------------------------
ACCEPTED:
CENTRAL RESERVE LIFE CORPORATION
By:
---------------------------
Name:
-------------------------
Title:
------------------------
Date:
-------------------------
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<PAGE> 97
================================================================================
STOCKHOLDERS AGREEMENT
CENTRAL RESERVE LIFE CORPORATION
----------------------
Dated as of __________________, 1998
----------------------
================================================================================
<PAGE> 98
TABLE OF CONTENTS
-----------------
ARTICLE I
DEFINITIONS
-----------
1.1 DEFINITIONS................................................. 1
1.2 RULES OF CONSTRUCTION....................................... 3
1.3 OTHER DEFINITIONS........................................... 4
ARTICLE II
CERTAIN OTHER ACTIVITIES; FIDUCIARY DUTIES
------------------------------------------
2.1 OTHER ACTIVITIES OF THE HOLDERS; FIDUCIARY DUTIES........... 4
ARTICLE III
TRANSFERS OF SECURITIES
-----------------------
3.1 DRAG ALONG RIGHTS........................................... 4
3.2 TAG ALONG RIGHTS............................................ 5
3.3 CERTAIN EVENTS NOT DEEMED TRANSFERS......................... 6
3.4 REPLACEMENT OF SECURITIES................................... 7
3.6 RESTRICTIVE LEGEND.......................................... 7
ARTICLE IV
TERMINATION
-----------
4.1 TERMINATION................................................. 7
ARTICLE V
MISCELLANEOUS
-------------
5.1 NOTICES..................................................... 7
5.2 LEGAL HOLIDAYS.............................................. 8
5.3 GOVERNING LAW............................................... 8
5.4 SUCCESSORS AND ASSIGNS...................................... 8
5.5 DUPLICATE ORIGINALS......................................... 8
5.6 SEVERABILITY................................................ 9
5.7 NO WAIVERS; AMENDMENTS...................................... 9
i
<PAGE> 99
STOCKHOLDERS AGREEMENT
----------------------
THIS STOCKHOLDERS AGREEMENT (this "AGREEMENT") dated as of
_________________, 1998, is entered into by and among Central Reserve Life
Corporation, an Ohio corporation (including its successors, the "COMPANY"), and
the security holders listed on the signature pages of this Agreement.
NOW, THEREFORE, for and in consideration of the premises, mutual
covenants, and agreements contained herein and for other good and valuable
consideration, the receipt and adequacy of which are hereby acknowledged, the
parties hereto agree as follows:
ARTICLE I
DEFINITIONS
-----------
1.1 DEFINITIONS. As used in this Agreement, the following terms
shall have the following meanings:
"ACCREDITED INVESTOR" shall mean an "Accredited Investor," as
defined in Regulation D, or any successor rule then in effect.
"AFFILIATE" shall mean, with respect to any Person, any Person
who, directly or indirectly, controls, is controlled by, or is under
common control with that Person. For purposes of this definition,
"CONTROL," and "CONTROLLED BY" when used with respect to any Person
shall mean the power to direct the management and policies of such
Person, directly or indirectly, whether through the ownership of voting
securities, by contract, or otherwise.
"AGREEMENT" shall mean this Agreement, as such from time to
time may be amended.
"COMMON STOCK" shall mean shares of the Common Stock, without
par value per share, of the Company, and any capital stock into which
such Common Stock thereafter may be changed.
"COMMON STOCK EQUIVALENTS" shall mean, without duplication
with any other Common Stock or Common Stock Equivalents, any rights,
warrants, options, convertible securities or indebtedness, exchangeable
securities or indebtedness, or other rights, exercisable for or
convertible or exchangeable into, directly or indirectly, Common Stock
and securities convertible or
<PAGE> 100
exchangeable into Common Stock, whether at the time of issuance or upon
the passage of time or the occurrence of some future event.
"COMPANY" shall have the meaning set forth in the introductory
paragraph hereof.
"CO-SELLER" shall have the meaning set forth in Section 3.1.
"FULLY-DILUTED COMMON STOCK" shall mean, at any time, the then
outstanding Common Stock plus (without duplication) all shares of
Common Stock issuable, whether at such time or upon the passage of time
or the occurrence of future events, upon the exercise, conversion, or
exchange of all then outstanding Common Stock Equivalents.
"HOLDER" shall mean (i) a securityholder listed on the
signature page hereof and (ii) any direct or indirect transferee of any
such securityholder who shall become a party to this Agreement.
"IP BERMUDA" shall mean Insurance Partners Offshore (Bermuda),
L.P., a Bermuda limited partnership.
"IP DELAWARE" shall mean Insurance Partners, L.P., a Delaware
limited partnership.
"IP GROUP" shall mean IP Delaware, IP Bermuda, their
respective Affiliates, the respective officers, directors, and
employees (and members of their respective families and trusts for the
primary benefit of such family members) of any of the foregoing, and
any Person that is a limited partner of IP Delaware or IP Bermuda.
"LEGAL HOLIDAY" shall have the meaning set forth in Section
5.2.
"PARTICIPATION OFFER" shall have the meaning set forth in
Section 3.2.
"PERSON" or "PERSON" shall mean any individual, corporation,
partnership, limited liability company, joint venture, association,
joint-stock company, trust, unincorporated organization, or government
or other agency or political subdivision thereof.
"REGULATION D" shall mean Regulation D promulgated under the
Securities Act by the SEC.
2
<PAGE> 101
"REQUIRED HOLDERS" shall mean Holders who then own
beneficially more than 66 2/3% of the aggregate number of shares of
Common Stock subject to this Agreement.
"SAP" shall mean Strategic Acquisition Partners, LLC, a Nevada
limited liability company.
"SEC" shall mean the Securities and Exchange Commission.
"SECURITIES ACT" shall mean the Securities Act of 1933, as
amended, and the rules and regulations promulgated by the SEC
thereunder.
"SIGNIFICANT DRAG SALE" shall have the meaning set forth in
Section 3.1.
"SIGNIFICANT TAG SALE" shall have the meaning set forth in
Section 3.2.
"SUBSIDIARY" of any Person shall mean (i) a corporation a
majority of whose outstanding shares of capital stock or other equity
interests with voting power, under ordinary circumstances, to elect
directors, is at the time, directly or indirectly, owned by such
Person, by one or more subsidiaries of such Person, or by such Person
and one or more subsidiaries of such Person, and (ii) any other Person
(other than a corporation) in which such Person, a subsidiary of such
Person, or such Person and one or more subsidiaries of such Person,
directly or indirectly, at the date of determination thereof, has (x)
at least a majority ownership interest or (y) the power to elect or
direct the election of the directors or other governing body of such
Person.
"TRANSFER" shall mean any disposition of any Common Stock or
any interest therein that would constitute a "sale" thereof within the
meaning of the Securities Act.
1.2 RULES OF CONSTRUCTION. Unless the context otherwise requires:
(a) a term shall have the meaning assigned to it; (b) "OR" is not exclusive; (c)
words in the singular shall include the plural, and words in the plural shall
include the singular; (d) provisions apply to successive events and
transactions; (e) the words "HEREOF," "HEREIN," "HEREUNDER," and words of
similar import shall refer to this Agreement as a whole and not to any
particular provision of this Agreement; (f) words in the neuter or masculine
gender shall include the feminine, masculine, and neuter genders; (g) all
references to Articles and Sections refer to Articles and Sections of this
Agreement; and (h) "INCLUDE" and derivatives thereof shall mean "including,
without limitation."
3
<PAGE> 102
1.3 OTHER DEFINITIONS. Certain capitalized terms used in this
Agreement, but not defined in this Article I, shall have the meanings set forth
elsewhere in this Agreement.
ARTICLE II
CERTAIN OTHER ACTIVITIES; FIDUCIARY DUTIES
------------------------------------------
2.1 OTHER ACTIVITIES OF THE HOLDERS; FIDUCIARY DUTIES. It is
understood and accepted that the Holders and their Affiliates have interests in
other business ventures which may be in conflict with the activities of the
Company and its Subsidiaries and that, subject to applicable law, nothing in
this Agreement shall limit the current or future business activities of the
Holders whether or not such activities are competitive with those of the Company
and its Subsidiaries. Nothing in this Agreement, express or implied, shall
relieve any officer or director of the Company or any of its Subsidiaries, or
any Holder, of any fiduciary or other duties or obligations they may have to the
Company's stockholders. SAP, its Affiliates, its principals, and their
respective officers and directors (collectively, the "SAP GROUP") shall devote
their best efforts and full business and work time, attention and skill to the
operations, business and affairs of the Company and its Subsidiaries. Without
limiting the generality of the immediately preceding sentence, in the event
there shall become available to any members of the SAP Group, directly or
indirectly, through an affiliate or otherwise, any business opportunity (whether
in the form of a transaction or otherwise) reasonably related to the business of
the Company or any of its Subsidiaries, SAP shall cause such opportunity to be
presented to the Company for its consideration and pursuit; PROVIDED, HOWEVER,
that in the event the Company shall choose not to pursue such opportunity, no
member of the SAP Group shall, directly or indirectly, through an Affiliate or
otherwise, without the prior written consent of the Company (as authorized by
its board of directors) (provided such consent is not unreasonably withheld or
delayed), pursue such opportunity.
ARTICLE III
TRANSFERS OF SECURITIES
-----------------------
3.1 DRAG ALONG RIGHTS.
3.1.1 APPLICABILITY. In connection with any Transfer by
members of the IP Group of shares of Common Stock and/or Common Stock
Equivalents representing more than twenty percent (20%) of the
outstanding shares of Common Stock (provided, that for the purposes of
such calculation, the following shares of Common Stock shall be deemed
to be issued and outstanding: (i) any shares of Common Stock to be
Transferred that are to be
4
<PAGE> 103
issued pursuant to the exercise or conversion of any Common Stock
Equivalents and (ii) any shares of Common Stock underlying any Common
Stock Equivalents that are to be Transferred) in any one transaction or
series of related transactions (a "SIGNIFICANT DRAG SALE"), the IP
Group shall have the right to require each non-selling Holder (each, a
"CO-SELLER") to Transfer a portion of its Common Stock and/or Common
Stock Equivalents which represents the same percentage of the
Fully-Diluted Common Stock held by such Co-Seller as the shares of
Common Stock and/or Common Stock Equivalents being disposed of by the
IP Group represent of the Fully-Diluted Common Stock held by the IP
Group. (For example, if the IP Group is selling sixty-five percent
(65%) of its Fully-Diluted Common Stock position, each Co-Seller shall
be required to sell sixty-five percent (65%) of its Fully-Diluted
Common Stock position.) All Common Stock Transferred by Holders
pursuant to this Section 3.1 shall be sold at the same price and time
and otherwise treated identically with the Common Stock being sold by
the IP Group in all respects.
3.1.2 NOTICE OF SIGNIFICANT DRAG SALE. IP Delaware, on behalf
of the IP Group, shall give each Co-Seller at least thirty (30) days'
prior written notice of any Significant Drag Sale as to which the IP
Group intends to exercise its rights under this Section 3.1. If the IP
Group elects to exercise its rights under this Section 3.1, the
Co-Sellers shall take such actions as may be reasonably required and
otherwise cooperate in good faith with the IP Group in connection with
consummating the Significant Drag Sale (including the voting of any
Common Stock or other voting capital stock of the Company to approve
such Significant Drag Sale). At the closing of such Significant Drag
Sale, each Co- Seller shall deliver certificates for all shares of
Common Stock to be sold by such Co-Seller, duly endorsed for transfer,
with the signature guaranteed, to the purchaser against payment of the
appropriate purchase price.
3.2 TAG ALONG RIGHTS.
3.2.1 APPLICABILITY. In the event any Holder desires to effect
a Transfer (other than a Transfer in an underwritten public offering
pursuant to an effective registration statement under the Securities
Act) of shares of Common Stock and/or Common Stock Equivalents
representing more than twenty percent (20%) of the outstanding shares
of Common Stock (provided, that for the purposes of such calculation,
the following shares of Common Stock shall be deemed to be issued and
outstanding: (i) any shares of Common Stock to be Transferred that are
to be issued pursuant to the exercise or conversion of any Common Stock
Equivalents and (ii) any shares of Common Stock underlying any Common
Stock Equivalents that are to be Transferred) in any one transaction or
series of related transactions (a "SIGNIFICANT TAG SALE"), and the IP
Group does not elect
5
<PAGE> 104
to exercise its rights (if any) under Section 3.1, then at least thirty
(30) days prior to the closing of such Significant Tag Sale, such
Holder shall make an offer (the "PARTICIPATION OFFER") to each
Co-Seller to include in the proposed Significant Tag Sale a portion of
its Common Stock and/or Common Stock Equivalents which represents the
same percentage of such Co-Seller's Fully- Diluted Common Stock as the
shares of Common Stock and/or Common Stock Equivalents being sold by
such Holder represent of its Fully-Diluted Common Stock; PROVIDED,
HOWEVER, that, if the consideration to be received by such Holder
includes any securities, only Co-Sellers who have certified to the
reasonable satisfaction of such Holder that they are Accredited
Investors shall be entitled to participate in such transfer, unless the
transferee consents otherwise.
3.2.2 TERMS OF PARTICIPATION OFFER. The Participation Offer
shall describe the terms and conditions of the proposed Significant Tag
Sale and shall be conditioned upon (i) the consummation of the
transactions contemplated in the Participation Offer with the
transferee named therein, and (ii) each Co- Seller's execution and
delivery of all agreements and other documents as the Holder is
required to execute and deliver in connection with such Significant Tag
Sale (provided that the Co-Seller shall not be required to make any
representations or warranties in connection with such sale or transfer
other than representations and warranties as to (A) such Co-Seller's
ownership of his or its Common Stock to be sold or transferred free and
clear of all liens, claims, and encumbrances, (B) such Co-Seller's
power and authority to effect such transfer, and (C) such matters
pertaining to compliance with securities laws as the transferee may
reasonably require). If any Co-Seller shall accept the Participation
Offer, the Holder shall reduce, to the extent necessary, the number of
shares of Common Stock it otherwise would have sold in the proposed
transfer so as to permit those Co-Sellers who have accepted the
Participation Offer to sell the number of shares of Common Stock that
they are entitled to sell under this Section 3.2, and the Holder and
such Co-Sellers shall transfer the number of shares of Common Stock
specified in the Participation Offer to the proposed transferee in
accordance with the terms of such transfer as set forth in the
Participation Offer.
3.3 CERTAIN EVENTS NOT DEEMED TRANSFERS. In no event shall any
exchange, reclassification, or other conversion of shares into any cash,
securities, or other property pursuant to a merger or consolidation of the
Company or any Subsidiary with, or any sale or transfer by the Company or any
Subsidiary of all or substantially all its assets to, any Person constitute a
Significant Drag Sale or a Significant Tag Sale for purposes of Section 3.1 or
3.2; PROVIDED, HOWEVER, that all of Holders of Common Stock receive the same
consideration per share in such exchange, reclassification, or
6
<PAGE> 105
conversion. In addition, Sections 3.1 and 3.2 shall not apply to any transfer,
sale, or disposition of shares of Common Stock solely among Holders.
3.4 REPLACEMENT OF SECURITIES. If a mutilated certificate
representing Common Stock is surrendered to the Company or if the Holder of a
certificate representing Common Stock claims and submits an affidavit or other
evidence, satisfactory to the Company, to the effect that any such certificate
has been lost, destroyed, or wrongfully taken, the Company shall issue a
replacement certificate if the Company's requirements are met. If required by
the Company, such securityholder must provide an indemnity bond, or other form
of indemnity, sufficient in the judgment of the Company to protect the Company
against any loss which may be suffered; PROVIDED, HOWEVER, that no indemnity
bond or other form of indemnity shall be required from a Holder who is an
Accredited Investor.
3.6 RESTRICTIVE LEGEND. Each certificate representing Common Stock
issued to each Holder or a subsequent transferee shall include a legend in
substantially the following form:
THIS SECURITY IS SUBJECT TO CERTAIN RIGHTS AND RESTRICTIONS
SET FORTH IN THE STOCKHOLDERS AGREEMENT DATED AS OF
[________________], 1998, A COPY OF WHICH MAY BE OBTAINED FROM
THE COMPANY AT ITS PRINCIPAL EXECUTIVE OFFICES.
ARTICLE IV
TERMINATION
-----------
4.1 TERMINATION. The provisions of this Agreement shall terminate
on [__________], 2003 [the five year anniversary of execution and delivery].
ARTICLE V
MISCELLANEOUS
-------------
5.1 NOTICES. Any notices or other communications required or
permitted hereunder shall be in writing, and shall be sufficiently given if made
by hand delivery, by telex, by telecopier, or registered or certified mail,
postage prepaid, return receipt requested, addressed as follows (or at such
other address as may be substituted by notice given as herein provided):
7
<PAGE> 106
If to the Company:
------------------
Central Reserve Life Corporation
17800 Royalton Road
Strongsville, Ohio 44136
Facsimile No.: [__________________]
Attention: [__________________]
If to any Holder, at its address listed on the signature pages hereof.
Any notice or communication hereunder shall be deemed to have been
given or made as of the date so delivered if personally delivered; when answered
back, if telexed; when receipt is acknowledged, if telecopied; and five (5)
calendar days after mailing if sent by registered or certified mail (except that
a notice of change of address shall not be deemed to have been given until
actually received by the addressee). Failure to mail a notice or communication
to a Holder or any defect in it shall not affect its sufficiency with respect to
other Holders. If a notice or communication is mailed in the manner provided
above, it is duly given, whether or not the addressee receives it.
5.2 LEGAL HOLIDAYS. A "LEGAL HOLIDAY" used with respect to a
particular place of payment is a Saturday, a Sunday, or a day on which banking
institutions at such place are not required to be open. If a payment date is a
Legal Holiday at such place, payment may be made at such place on the next
succeeding day that is not a Legal Holiday, and no interest on the amount of
such payment shall accrue for the intervening period.
5.3 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF OHIO, WITHOUT REGARD TO
THE PRINCIPLES OF CONFLICTS OF LAW THEREOF.
5.4 SUCCESSORS AND ASSIGNS. Whether or not an express assignment
has been made pursuant to the provisions of this Agreement, provisions of this
Agreement that are for the Holders' benefit as the holders of any Common Stock
are also for the benefit of, and enforceable by, all subsequent holders of
Common Stock, except as otherwise expressly provided herein. This Agreement
shall be binding upon the Company, each Holder, and their respective successors
and assigns.
5.5 DUPLICATE ORIGINALS. All parties may sign any number of copies
of this Agreement. Each signed copy shall be an original, but all of them
together shall represent the same agreement.
8
<PAGE> 107
5.6 SEVERABILITY. In case any provision in this Agreement shall be
held invalid, illegal, or unenforceable in any respect for any reason, the
validity, legality, and enforceability of any such provision in every other
respect and the remaining provisions shall not in any way be affected or
impaired thereby.
5.7 NO WAIVERS; AMENDMENTS.
5.7.1 No failure or delay on the part of the Company or any
Holder in exercising any right, power, or remedy hereunder shall
operate as a waiver thereof, nor shall any single or partial exercise
of any such right, power, or remedy preclude any other or further
exercise thereof or the exercise of any other right, power, or remedy.
The remedies provided for herein are cumulative and are not exclusive
of any remedies that may be available to the Company or any Holder at
law, in equity, or otherwise.
5.7.2 Any provision of this Agreement may be amended or waived
if, but only if, such amendment or waiver is in writing and is signed
by the Company and the Required Holders; provided that no amendment or
waiver that is adverse to any Holder that owns more than 5% of the
outstanding Common Stock shall be effective as to that Holder prior to
the three year anniversary of the date hereof without such Holder's
consent.
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
9
<PAGE> 108
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date first written above.
CENTRAL RESERVE LIFE CORPORATION
By:
-------------------------------
Name:
-----------------------------
Title:
-----------------------------
10
<PAGE> 109
SIGNATURE PAGE TO STOCKHOLDERS AGREEMENT
----------------------------------------
NAME OF HOLDER:
INSURANCE PARTNERS, L.P., a Delaware
limited partnership
By: Insurance GenPar, L.P., its general partner
By: Insurance GenPar MGP, Inc.
By:
------------------------------
Name:
----------------------------
Title:
---------------------------
Address:
----------------------------------------------------
----------------------------------------------------
----------------------------------------------------
----------------------------------------------------
Attention:
-----------------------------------------
Copy to:
Weil, Gotshal & Manges LLP
767 Fifth Avenue
New York, New York 10153
Attention: Thomas A. Roberts
11
<PAGE> 110
SIGNATURE PAGE TO STOCKHOLDERS AGREEMENT
----------------------------------------
NAME OF HOLDER:
INSURANCE PARTNERS OFFSHORE
(BERMUDA), L.P.
By: Insurance GenPar (Bermuda), L.P., its
general partner
By: Insurance GenPar (Bermuda) MGP,
Inc.
By:
------------------------------
Name:
------------------------------
Title:
------------------------------
Address:
---------------------------------------------------
---------------------------------------------------
---------------------------------------------------
---------------------------------------------------
Attention:
------------------------------------------
Copy to:
Weil, Gotshal & Manges LLP
767 Fifth Avenue
New York, New York 10153
Attention: Thomas A. Roberts
12
<PAGE> 111
SIGNATURE PAGE TO STOCKHOLDERS AGREEMENT
----------------------------------------
NAME OF HOLDER:
STRATEGIC ACQUISITION PARTNERS, LLC
By:
-------------------------------------------------
Name:
-----------------------------------------------
Title:
----------------------------------------------
Address:
----------------------------------------------------
----------------------------------------------------
----------------------------------------------------
----------------------------------------------------
Attention:
------------------------------------------
Copy to:
----------------------------------------------------
----------------------------------------------------
----------------------------------------------------
13
<PAGE> 112
SIGNATURE PAGE TO STOCKHOLDERS AGREEMENT
----------------------------------------
NAME OF HOLDER:
TURKEY VULTURE FUND XIII [____]
By:
-------------------------------------------------
Name:
-----------------------------------------------
Title:
----------------------------------------------
Address:
----------------------------------------------------
----------------------------------------------------
----------------------------------------------------
----------------------------------------------------
Attention:
------------------------------------------
Copy to:
----------------------------------------------------
----------------------------------------------------
----------------------------------------------------
14
<PAGE> 1
Exhibit 3(c)
APPROVED
By EJS
CERTIFICATE OF ADOPTION OF Date 5-13-97
Amount $12,535
AMENDED ARTICLES OF INCORPORATION OF 97051351901
CENTRAL RESERVE LIFE CORPORATION
The undersigned,, Fred Lick, Jr. and Linda S. Standish, do hereby certify that
they are the duly elected, qualified and acting Chairman of the Board and
Secretary, respectively, of CENTRAL RESERVE LIFE CORPORATION ("Corporation"),
an Ohio Corporation for profit with its principal place of business at 17800
Royalton Road, Strongsville, Cuyahoga County, Ohio.
The undersigned further certify that at a meeting of the shareholders of the
Corporation, duly called and held on May 6, 1997, at which a quorum was present
in person or by proxy, Article FOURTH, Section 1 of the Amended Articles of
Incorporation was amended to increase by 5,000,000 (Five Million) the authorized
number of Common Shares, by the affirmative vote of the holders of shares
entitling them to exercise not less than a majority of the voting power of the
Corporation.
The undersigned further certify that no greater vote than not less than a
majority of the voting power of the Corporation was required for this
shareholder action pursuant to Article ELEVENTH of the Corporation's Amended
Articles of Incorporation as a result of the following Action Taken in Writing
by the Board of Directors of the Corporation on March 17, 1997, pursuant to the
provisions of Section 1701.54 of the Ohio Revised Code:
RECEIVED
MAY 13 1997
BOB TAFT
SECRETARY OF STATE
<PAGE> 2
CERTIFICATE OF ADOPTION OF
AMENDED ARTICLES OF INCORPORATION OF
CENTRAL RESERVE LIFE CORPORATION
Page 2
RESOLVED, that Central Reserve Life Corporation ("Corporation")
increase by 5,000,000 (Five Million) the number of authorized Common
Shares of the Corporation and that the Board recommend to the
shareholders of the Corporation that the Corporation's Amended
Articles of Incorporation be amended to increase by 5,000,000 (Five
Million) the number of authorized Common Shares by vote of the
shareholders at the May 6, 1997 Annual Meeting of Shareholders.
The undersigned further certify that on May 6, 1997, by Action Taken in Writing
Without a Meeting by the Board of Directors, pursuant to Section 1701.54 of the
Ohio Revised Code, the following resolution was duly adopted, pursuant to
Section 1701.72(B) of the Ohio Revised Code:
RESOLVED, that the Corporation's existing Amended Articles of
Incorporation and all previously adopted amendments thereto that are
in force on this date, including the May 6, 1997, amendment by the
shareholders to Article FOURTH, Section 1, to increase by 5,000,000
(Five Million) the authorized number of Common Shares, be
consolidated as new Amended Articles of Incorporation of the
Corporation to supersede the
<PAGE> 3
CERTIFICATE OF ADOPTION OF
AMENDED ARTICLES OF INCORPORATION OF
CENTRAL RESERVE LIFE CORPORATION
Page 3
existing Amended Articles of Incorporation of the Corporation;
RESOLVED, that the Amended Articles of Incorporation of Central
Reserve Life Corporation, attached hereto as Exhibit "A", be, and the
same hereby are, adopted to supersede and take the place of the
existing Amended Articles of Incorporation of Central Reserve Life
Corporation.
The undersigned further certify that attached hereto is a true, complete and
correct copy of the Amended Articles of Incorporation (Exhibit "A") referred to
as being adopted in the Resolution set forth in the preceding paragraph.
IN WITNESS WHEREOF, Fred Lick, Jr., Chairman of the Board, and Linda S.
Standish, Secretary, of the Corporation have hereunto subscribed their names
this 6th day of May, 1997.
/s/ Fred Lick, Jr.
----------------------------
Fred Lick, Jr.
Chairman of the Board
/s/ Linda S. Standish
----------------------------
Linda S. Standish
Secretary
<PAGE> 4
EXHIBIT A
---------
AMENDED ARTICLES OF INCORPORATION
OF
CENTRAL RESERVE LIFE CORPORATION
FIRST: The name of this corporation shall be the CENTRAL RESERVE LIFE
CORPORATION.
SECOND: The place in the State of Ohio where its principal office is
to be located is Strongsville, Cuyahoga County.
THIRD: The purpose for which it is formed is to engage in any one or
more lawful acts or activities for which corporations may be formed under
Sections 1701.01 to 1708.98, inclusive, of the Revised Code of Ohio.
The corporation reserves the right at any time and from time to time
substantially to change its purpose in any manner now or hereafter permitted by
statute. Any change of the purposes of the corporation authorized or approved by
the holders of shares entitled to exercise the proportion of the voting power of
the corporation now or hereafter required for such authorization or approval
shall be binding and conclusive upon every shareholder of the corporation as
fully as if such shareholder had voted therefor; and no shareholder,
notwithstanding that he may have voted against such change of purposes or may
have
<PAGE> 5
AMENDED ARTICLES OF INCORPORATION
CENTRAL RESERVE LIFE CORPORATION
ADOPTED MAY 6, 1997
Page 2
objected in writing thereto, shall be entitled to payment of the fair cash value
of his shares.
FOURTH: SECTION 1. AUTHORIZED SHARES. The aggregate number of shares
which the corporation shall have authority to issue is 17,000,000 shares,
consisting of 2,000,000 Non-Voting Preferred Shares, without par value, and
15,000,000 Common Shares, without par value.
SECTION 2. ISSUANCE OF PREFERRED SHARES. The Board of Directors is
authorized at any time, and from time to time, to provide for the issuance of
Non-Voting Preferred Shares in one or more series, and to determine the
designations, preferences, limitations and relative or other rights of the
Non-Voting Preferred Shares or any series thereof. Holders of Non-Voting
Preferred Shares shall have no voting rights except as required by law. For each
series, the Board of Directors shall determine, by resolution or resolutions
adopted prior to the issuance of any shares thereof, the designations,
preferences, limitations and relative or other rights thereof, including but not
limited to the following relative rights and preferences, as to which there may
be variations among different series:
(a) the division of such shares into series and the designation and
authorized number of shares of each series,
(b) the dividend rate,
<PAGE> 6
AMENDED ARTICLES OF INCORPORATION
CENTRAL RESERVE LIFE CORPORATION
ADOPTED MAY 6, 1997
Page 3
(c) the dates of payment of dividends and the dates from which they
are cumulative,
(d) liquidation price,
(e) redemption rights and price,
(f) sinking fund requirements,
(g) conversion rights, and
(h) restrictions on the issuance of such shares.
Prior to the issuance of any shares of a series, but after adoption
by the Board of Directors of the resolution establishing such series, the
appropriate officers of the corporation shall file such documents with the State
of Ohio as may be required by law including, without limitation, an amendment to
these Amended Articles of Incorporation.
SECTION 3. COMMON SHARES. Each Common Share shall entitle the holder
thereof to one vote, in person or by proxy, at any and all meetings of the
shareholders of the corporation, on all propositions before such meetings. Each
Common Share shall be entitled to participate equally in such dividends as may
be declared by the Board of Directors out of funds legally available therefor,
and to participate equally in all distributions of assets upon liquidation.
<PAGE> 7
AMENDED ARTICLES OF INCORPORATION
CENTRAL RESERVE LIFE CORPORATION
ADOPTED MAY 6, 1997
Page 4
FIFTH: Except as otherwise provided herein, every person who is or
has been a director or officer of the corporation and his heirs and legal
representatives is hereby indemnified by the corporation against expenses and
liabilities actually and necessarily incurred by him in connection with the
defense of either (1) any action, suit, or proceeding to which he may be a party
defendant or (2) any claim of liability asserted against him, by reason of his
being or having been a director or officer of the corporation. Without
limitation, the term "expenses" includes any amount paid or agreed to be paid to
the corporation itself. The corporation does not, however, indemnify any
director or officer in respect to any matter as to which he shall be finally
adjudged liable for negligence or misconduct in the performance of his duties as
such director, or officer, nor, in the case of a settlement, unless such
settlement shall be found to be in the interest of the corporation by (1) the
court having jurisdiction of the action, suit or proceeding against such
director or officer or of a suit involving his right to indemnification, or (2)
a majority of the directors of the corporation then in office other than those
involved in such matter (whether or not such majority constitutes a quorum), or,
if there are not at least two directors of the corporation then in office, other
than those involved in such matter, by a majority of a committee (selected by
the Board of Directors) of
<PAGE> 8
AMENDED ARTICLES OF INCORPORATION
CENTRAL RESERVE LIFE CORPORATION
ADOPTED MAY 6, 1997
Page 5
three or more shareholders and directors of the corporation, provided that such
indemnity in case of a settlement shall not be allowed by such directors or
committee of shareholders unless it is found by independent legal counsel
(meaning a lawyer who is not a director, officer, or employee of the
corporation, and is not a partner or professional associate of a director,
officer, or employee of the corporation) that such settlement is reasonable in
amount and in the interest of the corporation. The foregoing right of
indemnification shall be in addition to all rights to which any such director or
officer may be entitled as a matter of law.
Each person (including a director or officer of the corporation) who
at the request of the corporation, acts as a director or officer of any other
corporation in which the corporation owns shares, or of which it is a creditor,
may, by action of the Board of Directors, be indemnified by the corporation to
the same extent that directors of the corporation are indemnified by this
Article FIFTH.
SIXTH: A director or officer of the corporation shall not be
disqualified by his office from dealing or contracting with the corporation as a
vendor, purchaser, employee, agent or otherwise. No transaction, contract or
other act of the corporation shall be void or voidable or in any way affected or
invalidated by reason of the fact that any director or officer,
<PAGE> 9
AMENDED ARTICLES OF INCORPORATION
CENTRAL RESERVE LIFE CORPORATION
ADOPTED MAY 6, 1997
Page 6
or any firm, corporation or trust in which such director or officer is a member
or is a beneficiary, shareholder, director, officer or trustee, is in any way
interested in such transaction, contract or other act, provided the fact that
such director, officer, firm, or corporation is so interested shall be disclosed
or shall be known to the Board of Directors or a majority of such members
thereof as shall be present at any meeting of the Board of Directors, or any
committee of directors having the powers of the full Board of Directors, at
which action upon any such transaction, contract or other act shall be taken:
nor shall any such director or officer be accountable or responsible to the
corporation for or in respect of any transaction, contract or other act of the
corporation or for any gains or profits realized by him by reason of the fact
that he or any firm of which he is a member or any corporation or trust of which
he is a beneficiary, shareholder, director, officer, or trustee, is interested
in such a transaction, contract or other act; and any such director may be
counted in determining the existence of a quorum at any meeting of the Board of
Directors of the corporation which shall authorize or take action in respect of
any such transaction, contract or other act, and may vote thereat to authorize,
ratify, or approve any such transaction, contract or other act with like force
and effect as if he or any firm of which he is a member or any corporation or
trust of which he is a beneficiary,
<PAGE> 10
AMENDED ARTICLES OF INCORPORATION
CENTRAL RESERVE LIFE CORPORATION
ADOPTED MAY 6, 1997
Page 7
shareholder, director, officer, or trustee were not interested in such
transaction, contract or other act.
SEVENTH: The corporation may purchase, from time to time and to the
extent permitted by laws of Ohio, shares of any class of stock issued by it.
Such purchases may be made either in the open market or at a private or public
sale, and in such manner and amounts, from such holder or holders of outstanding
stock of the corporation and at such prices as are fixed by the Board of
Directors. The Board of Directors is hereby empowered to authorize such
purchases from time to time without any vote of the holders of any class of
shares now or hereafter authorized and outstanding at the time of any such
purchase.
EIGHTH: SECTION 1. In the event that any person becomes the
beneficial owner, directly or indirectly, of forty percent or more of the
outstanding shares of the Common Stock and any of such shares of Common Stock
were acquired pursuant to a tender offer (such person hereinafter referred to as
an "Acquiring Person"), each holder of shares of Common Stock, other than the
Acquiring Person or a transferee of the Acquiring Person, shall have the right
until and including the forty-fifth day following the date of mailing the notice
to holders of shares of Common Stock referred to in Section 3 herein to tender
the shares of Common Stock held by such holder to the corporation for repurchase
by the corporation at the Repurchase Price deter-
<PAGE> 11
AMENDED ARTICLES OF INCORPORATION
CENTRAL RESERVE LIFE CORPORATION
ADOPTED MAY 6, 1997
Page 8
mined as provided in Section 5 herein, and each holder, other than the Acquiring
Person or a transferee of the Acquiring Person, of securities convertible into
shares of Common Stock or of options, warrants, or rights exercisable to acquire
shares of Common Stock, shall have the right simultaneously with the conversion
of such securities or exercise of such options, warrants, or rights to tender
the shares of Common Stock to be received thereupon by such holder to the
corporation for repurchase by the corporation at the Repurchase Price; provided
that no holder of shares of Common Stock shall have any right to tender shares
of Common Stock redeemed by the corporation pursuant to this Article EIGHTH if
the corporation, acting pursuant to the action of two-thirds of the members of
its Board of Directors, shall within ten days following the announcement or
publication of such tender offer or following any amendment to such tender offer
recommend to the holders of shares of Common Stock that such tender offer be
accepted by such holders.
SECTION 2. For purposes of this Article EIGHTH:
(a) The term "person" shall include an individual, a corporation,
partnership, trust or other entity. When two or more persons act as a
partnership, limited partnership, syndicate, or other group or otherwise in
concert for the purpose of acquiring shares of Common Stock, such partnership,
syndicate or group shall be deemed a "person".
<PAGE> 12
AMENDED ARTICLES OF INCORPORATION
CENTRAL RESERVE LIFE CORPORATION
ADOPTED MAY 6, 1997
Page 9
(b) For the purpose of determining whether a person is an Acquiring
Person, such person shall be deemed to own beneficially (i) all shares of Common
Stock the voting power of which such person controls or shares, (ii) all shares
of Common Stock which such person has the immediate or future right to acquire,
directly or indirectly, pursuant to agreements, through the exercise of options,
warrants or rights or through the conversion of convertible securities or
otherwise; and all shares of Common Stock which such person has the right to
acquire in such manner shall be deemed to be outstanding shares, but shares of
Common Stock which any other unaffiliated person has the right to acquire in
such manner shall not be deemed to be outstanding shares.
(c) The acquisition of shares of Common Stock by the corporation or
by any person controlled by the corporation shall not give rise to the right in
any person to have shares of Common Stock redeemed pursuant to this Article
EIGHTH.
(d) The right to tender shares of Common Stock to the corporation for
repurchase pursuant to this Article EIGHTH shall attach to such shares and shall
not be personal to the holder thereof.
(e) The term "tender offer" shall mean an offer to acquire or an
acquisition of shares of Common Stock pursuant to a
<PAGE> 13
AMENDED ARTICLES OF INCORPORATION
CENTRAL RESERVE LIFE CORPORATION
ADOPTED MAY 6, 1997
Page 10
request or invitation for tenders or an offer to purchase such shares for cash,
securities or any other consideration.
(f) The term "market purchases" shall mean the acquisition of shares
of Common Stock from holders of such shares in privately negotiated transactions
or in transactions effected through a broker or dealer.
(g) Subject to the provisions of Section 2(b) herein, "outstanding
shares" shall mean shares of Common Stock which at the time in question have
been issued by the corporation and not reacquired and held or retired by it or
held by any subsidiary of the corporation.
SECTION 3. (a) Not later than twenty days following the date on which
the corporation receives credible notice that any person has become an Acquiring
Person whereupon the right shall be engendered to tender shares of Common Stock
to the corporation for repurchase by the corporation under this Article EIGHTH,
the corporation shall give written notice, by first class mail, postage prepaid,
at the addresses shown on the records of the corporation, to each holder of
record of shares of Common Stock (and to any other person known by the
corporation to have rights so to tender pursuant to Section 1 of this Article)
as of a date not more than ten days prior to the date of the mailing pursuant to
this Section 3 and shall advise each such holder of the right to tender shares
for repurchase by the corporation and
<PAGE> 14
AMENDED ARTICLES OF INCORPORATION
CENTRAL RESERVE LIFE CORPORATION
ADOPTED MAY 6, 1997
Page 11
the procedures for such tender and repurchase. In the event that the corporation
fails to give notice as required by this Section 3, any holder entitled to
receive such notice may serve written demand upon the corporation to give such
notice. If within ten days after the receipt of written demand the corporation
fails to give the required notice, such holder may at the expense and on behalf
of the corporation take such reasonable action as may be appropriate to give
notice or to cause notice to be given pursuant to this Section 3.
(b) In the event shares of Common Stock become subject to rights of
repurchase in accordance with this Article EIGHTH, the Directors of the
corporation shall designate a Repurchase Agent, which shall be a corporation or
association (i) organized and doing business under the laws of the United States
or any State, (ii) subject to supervision or examination by Federal or State
authority, (iii) having combined capital and surplus of at least $5,000,000 and
(iv) having the power to exercise corporate trust powers.
(c) For a period of forty-five days from the date of the mailing of
the notice to holders of shares of Common Stock referred to in this Section 3,
holders of shares of Common Stock and other persons entitled to tender shares of
Common Stock to the corporation for repurchase pursuant to this Article EIGHTH
may, at their option, deposit certificates representing all or
<PAGE> 15
AMENDED ARTICLES OF INCORPORATION
CENTRAL RESERVE LIFE CORPORATION
ADOPTED MAY 6, 1997
Page 12
less than all of the shares of Common Stock held of record by them with the
Repurchase Agent, together with written notice that the holder is tendering such
shares for repurchase pursuant to this Article EIGHTH.
(d) The corporation shall promptly deposit in trust with the
Repurchase Agent cash in an amount equal to the aggregate Repurchase Price of
all of the shares of Common Stock deposited with the Repurchase Agent for
purposes of repurchase.
(e) As soon as practicable after receipt by the Repurchase Agent of
the cash deposit by the corporation referred to in this Section 3, the
Repurchase Agent shall issue its checks payable to the order of the persons
entitled to receive the Repurchase Price of all of the shares of Common Stock in
respect of which such cash deposit was made.
SECTION 4. All shares of Common Stock with respect to which
repurchase has been effected pursuant to this Article EIGHTH shall thereupon be
retired.
SECTION 5. (a) The Repurchase Price shall be the amount payable by
the corporation in respect of each share of Common Stock tendered for repurchase
pursuant to this Article EIGHTH and shall be the greater amount determined on
either of the following bases:
(i) The highest price per share of Common Stock, including any
commission paid to brokers or dealers for
<PAGE> 16
AMENDED ARTICLES OF INCORPORATION
CENTRAL RESERVE LIFE CORPORATION
ADOPTED MAY 6, 1997
Page 13
solicitation or whatever, at which shares of Common Stock held by the
Acquiring Person were acquired pursuant to a tender offer, regardless
of when such tender offer was made, or were acquired pursuant to any
market purchase or otherwise within eighteen months prior to the
notice to holders of shares of Common Stock referred to in Section 3
herein. For purposes of this subsection (i), if the consideration
paid in any such acquisition of shares of Common Stock consisted, in
whole or part, of consideration other than cash, the Board of
Directors of the corporation shall take such action, as in its
judgment it deems appropriate, to establish the cash value of such
consideration, but such valuation shall not be less than the cash
value, if any, ascribed to such consideration by the Acquiring
Person; or
(ii) The highest sale price per share of Common Stock for any
trading day during the eighteen months prior to the notice to
holders of shares of Common Stock referred to in Section 3 herein.
For purposes of this subsection (ii), the sale price for any trading
day shall be the mean of the closing high bid and low asked price
per share of Common Stock, or if the shares of Common Stock are
traded on a national securities exchange, the last sale price per
share of Common Stock.
<PAGE> 17
AMENDED ARTICLES OF INCORPORATION
CENTRAL RESERVE LIFE CORPORATION
ADOPTED MAY 6, 1997
Page 14
(b) The determinations to be made pursuant to this Section 5 shall be
made by the Board of Directors not later than the date of the notice to holders
of shares of Common Stock referred to in Section 3 herein. In making such
determinations the Board of Directors may engage such persons and utilize
employees and agents of the corporation, who will, in the judgment of the Board
of Directors, be of assistance to the Board of Directors.
(c) The determinations to be made pursuant to this Section 5, when
made by the Board of Directors acting in good faith shall be conclusive and
binding upon the corporation and its shareholders, including any person referred
to in Section 1 herein.
SECTION 6. No amendment or repeal of this Article adopted after the
notice to holders of shares of Common Stock referred to in Section 3 herein
shall affect the holders' rights of tender for repurchase as to any shares of
Common Stock theretofore or thereafter deposited with the Repurchase Agent for
repurchase by the corporation under this Article EIGHTH pursuant to such notice
or any subsequent notice given pursuant to Section 7 of this Article EIGHTH.
SECTION 7. In the event that repurchase pursuant to this Article
EIGHTH of all or any part of the shares of Common Stock is prohibited or
prevented by Ohio Revised Code Section
<PAGE> 18
AMENDED ARTICLES OF INCORPORATION
CENTRAL RESERVE LIFE CORPORATION
ADOPTED MAY 6, 1997
Page 15
1701.35(B) or any similar provision hereafter enacted or by the insurance
statutes or regulations of the State of Ohio:
(i) The corporation shall so advise the holders of shares of Common
Stock entitled to the rights of tender for repurchase provided in this
Article EIGHTH and shall advise them of their modified rights of tender
for repurchase as provided in this Section in the notice required by
Section 3 of this Article;
(ii) The corporation shall take all of the actions required by this
Article to be taken with respect to a repurchase of all of the shares of
Common Stock deposited with the Repurchase Agent for purposes of
repurchase, provided that it shall determine the number of shares of
Common Stock which may legally be repurchased at the Repurchase Price
and cause the repurchase only of such number of shares by any reasonable
method of allotment selected by the Repurchase Agent, and provided
further that the corporation shall not repurchase a fraction of a share.
After the corporation's deposit in trust with the Repurchase Agent of
the cash deposit provided for in Section 3 in an amount equal to the
aggregate Repurchase Price of all of the shares of Common Stock to be
repurchased at the time pursuant to this Section 7, the Repurchase Agent
shall issue its checks as provided in Section 3(e) and return
<PAGE> 19
AMENDED ARTICLES OF INCORPORATION
CENTRAL RESERVE LIFE CORPORATION
ADOPTED MAY 6, 1997
Page 16
certificates evidencing shares of Common Stock not repurchased to the
record holders thereof;
(iii) The corporation shall have a continuing obligation to
repurchase shares of Common Stock deposited with the Repurchase Agent at
times and from time to time by record holders other than the Acquiring
Person or an assignee of the Acquiring Person pursuant to notices issued
by the corporation in each year succeeding the year in which the first
notice of rights to tender for repurchase is given pursuant to this
Article until all shares so deposited are repurchased. In each such year
the corporation shall determine the number of shares of Common Stock
which may legally be repurchased at the Repurchase Price, which price
for each such year shall be the Repurchase Price originally established
for the first repurchase pursuant to this Article provided that such
Repurchase Price shall be increased by eight percent (8%) per year
compounded and all of the actions required to be taken by this Section 7
by the corporation and the Repurchase Agent for the first repurchase
shall be repeated. Said repurchase notices shall be issued annually no
later than 120 days after the close of the corporation's fiscal year
commencing with the first full fiscal year after the first notice of
rights to tender for repurchase pursuant to this Article EIGHTH,
provided
<PAGE> 20
AMENDED ARTICLES OF INCORPORATION
CENTRAL RESERVE LIFE CORPORATION
ADOPTED MAY 6, 1997
Page 17
that repurchases may be effected more frequently at the election of the
corporation should funds be legally available therefor; and
(iv) Until all of the shares of Common Stock deposited with the
Repurchase Agent pursuant to the last notice of repurchase are
repurchased pursuant to this Article, the corporation shall pay no
dividends in excess of $.01 per share annually on any of its outstanding
stock, whether outstanding at the time the corporation issues its first
notice pursuant to Section 3 or at any time thereafter.
SECTION 8. The provision of this Article EIGHTH shall control with
respect to the price, terms, times, and means of repurchase of shares in
circumstances to which it is applicable, notwithstanding any provision of
Article SEVENTH of these Amended Articles.
NINTH: No holder of stock of any class in this corporation shall be
entitled as of right to subscribe for any part of any stock of any class of the
corporation to be issued under the authorization contained in these Articles of
Incorporation, or by reason of any increase of authorized capital stock of the
corporation. The Board of Directors in its unqualified discretion shall
determine how and to whom any such shares shall be sold.
<PAGE> 21
AMENDED ARTICLES OF INCORPORATION
CENTRAL RESERVE LIFE CORPORATION
ADOPTED MAY 6, 1997
Page 18
TENTH: The affirmative vote of the holders of record of 75 percent
of the shares having voting power with respect to any such proposal AND the
affirmative vote of not less than a majority of such holders of record other
than shares held or beneficially owned by a "Related Person" (as hereinafter
defined) shall be required for the approval or authorization of any "Business
Combination" (as hereinafter defined) of the corporation with any Related
Person; provided, however, that the 75 percent voting requirement and the
majority voting requirement of holders of record of shares other than a Related
Person shall not be applicable if:
1. Two-thirds of the "Continuing Directors" of the corporation (as
hereinafter defined) have approved the Business Combination; or
2. The Business Combination is a merger or consolidation and the
cash or fair market value of the property, securities or other
consideration to be received per share by holders of Common Shares of
the corporation in the Business Combination is not less than the highest
per share price (with appropriate adjustments for recapitalizations and
for stock splits, stock dividends and like distributions), paid by the
Related Person in acquiring any of its holdings of the corporation's
Common Shares.
<PAGE> 22
AMENDED ARTICLES OF INCORPORATION
CENTRAL RESERVE LIFE CORPORATION
ADOPTED MAY 6, 1997
Page 19
For the purposes of this Article TENTH:
(a) The term "Business Combination" shall mean (i) any merger or
consolidation of the corporation or a subsidiary with or into a Related
Person, (ii) any sale, lease, exchange, transfer or other disposition,
including, without limitation, a mortgage or any other security device, of
all or any "Substantial Part" (as hereinafter defined) of the assets either
of the corporation (including, without limitation, any voting securities of
a subsidiary) or of a subsidiary, to a Related Person, (iii) any merger or
consolidation of a Related Person with or into the corporation or a
subsidiary of the corporation, (iv) any sale, lease, exchange, transfer or
other disposition of all or any Substantial Part of the assets of a Related
Person to the corporation or a subsidiary of the corporation, (v) the
issuance of any securities of the corporation or a subsidiary of the
corporation to a Related Person, (vi) any recapitalization that would have
the effect of increasing the voting power of a Related Person, and (vii) any
agreement, contract or other arrangement providing for any of the
transactions described in this definition of Business Combination.
(b) The term "Related Person" shall mean and include any
individual, corporation, partnership or other
<PAGE> 23
AMENDED ARTICLES OF INCORPORATION
CENTRAL RESERVE LIFE CORPORATION
ADOPTED MAY 6, 1997
Page 20
person or entity, other than directors or officers of the corporation,
which, together with its "Affiliates" and "Associates" (as defined on May
25, 1988 at Rule 12b-2 under the Securities Exchange Act of 1934)
"Beneficially Owns" (as defined on May 25, 1988 at Rule 13d-3 under the
Securities Exchange Act of 1934) in the aggregate 20 percent or more of the
outstanding Common Shares of the corporation, and any Affiliate or Associate
of any such individual, corporation, partnership or other person or entity.
(c) The term "Substantial Part" shall mean more than 30 percent
of the fair market value of the total assets of the corporation in question,
as of the end of its most recent fiscal year ending prior to the time the
determination is being made.
(d) Without limitation, any Common Shares of the corporation that
any Related Person has the right to acquire pursuant to any agreement, or
upon exercise of conversion rights, warrants or options, or otherwise, shall
be deemed beneficially owned by the Related Person.
(e) For the purposes of sub-paragraph (2) of this Article TENTH,
the term "other consideration to be received" shall include, without
limitation, Common Shares of the corporation retained by its existing public
shareholders in
<PAGE> 24
AMENDED ARTICLES OF INCORPORATION
CENTRAL RESERVE LIFE CORPORATION
ADOPTED MAY 6, 1997
Page 21
the event of a Business Combination in which the corporation is the
surviving corporation.
(f) The term "Continuing Director" shall mean a director who was
a member of the Board of Directors of the corporation immediately prior to
the time that the Related Person involved in a Business Combination became a
Related Person, or the designated successor of each such director.
ELEVENTH: Notwithstanding any provision of the Revised Code of Ohio,
now or hereafter in force, requiring for any purpose the vote of the holders of
shares of the corporation entitling them to exercise two-thirds or any other
proportion of the voting power of the corporation or of any class or classes
thereof, such action, unless expressly otherwise provided by statute, may be
taken by the vote of the holders of the shares entitling them to exercise not
less than a majority of the voting power of the corporation or of such class or
classes; provided, however, that unless two-thirds of the directors of the
corporation shall act to approve or to recommend to the shareholders the
approval of any of the following matters, the affirmative vote of the holders of
shares entitling them to exercise not less than seventy-five percent (75%) of
the voting power of the corporation and seventy-five percent (75%) of the voting
power of any class or classes of shares of the corporation
<PAGE> 25
AMENDED ARTICLES OF INCORPORATION
CENTRAL RESERVE LIFE CORPORATION
ADOPTED MAY 6, 1997
Page 22
which entitle the holders thereof to vote in respect of any such matter as a
class, shall be required to: a) amend, alter, or repeal the Amended Articles of
Incorporation of the corporation; b) amend, alter, or repeal the Code of
Regulations of the corporation; c) adopt an agreement of merger or consolidation
providing for the merger or consolidation of the corporation with or into one or
more other corporations and requiring shareholder approval; d) adopt a proposed
combination or majority share acquisition involving the issuance of shares of
the corporation; e) adopt a proposal to sell, exchange, transfer or otherwise
dispose of all, or substantially all, of the assets of the corporation or of all
or substantially all of the stock or assets of any major subsidiary of the
corporation; or f) dissolve the corporation.
TWELFTH: These Amended Articles of Incorporation supersede the existing Articles
of Incorporation and any amendments to same.
(LSS NOTE: AMENDMENT TO ARTICLE FOURTH, SECTION 1, ADOPTED BY SHAREHOLDERS ON
MAY 6, 1997, WITH CONSOLIDATED AMENDED ARTICLES OF INCORPORATION ADOPTED BY
BOARD OF DIRECTORS ON MAY 6, 1997.)
<PAGE> 1
Exhibit 10.10
REINSURANCE AGREEMENT
BETWEEN
CENTRAL RESERVE LIFE INSURANCE COMPANY
17800 Royalton Road
Strongsville, Ohio 44136
(Referred to in this Agreement as the Company)
AND
REASSURANCE COMPANY OF HANNOVER
800 N. Magnolia Avenue, Suite 1000
ORLANDO, FLORIDA 32803
(Referred to in this Agreement as the Reinsurer)
COINSURANCE
DECEMBER 15, 1997 HA-9704-0M
<PAGE> 2
TABLE OF CONTENTS
-----------------
<TABLE>
<S> <C>
Coinsurance
Article I Reinsurance Definition
Article II Liability
Article III Plan and Amount of Reinsurance
Article IV Reinsurance Premiums and Payments
Article V Claims
Article VI General Provisions
Article VII Recapture
Article VIII Arbitration
Article IX Reinsurer's Right of Notice of Unusual Practices
Article X Treasury Regulation Section 1.848-2(g)(8) Joint Election
Article XI Duration of Agreement
Article XII Insolvency
Article XIII Representations and Warranties
Article XIV Letters of Credit
Article XV Execution
Schedule A Business Reinsured
Schedule B Reinsurance Forms
Schedule C Experience Refund Calculation
Schedule D Expense Allowances
</TABLE>
(i)
<PAGE> 3
TREATY SYNOPSIS OF COINSURANCE REINSURANCE AGREEMENT
BETWEEN
CENTRAL RESERVE LIFE INSURANCE COMPANY
AND
REASSURANCE COMPANY OF HANNOVER
The Treaty document which follows details a Coinsurance Agreement
between Central Reserve Life Insurance Company (CRLIC) and the Reassurance
Company of Hannover (RCH) to be effective January 1, 1997. The Treaty provides
CRLIC with a $10 million Initial Ceding Allowance on the Company's inforce and
new business written during 1997 under the policy forms outlined in Schedule A
with adjustment to the Settlement Date which will be on or before December 31,
1997. The reinsurance is on a 50/50 quota-share basis on the Company's retained
business with RCH 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 Initial Ceding Allowance
out of the statutory profits on the Business Reinsured. Other important aspects
of the Agreement are as follows:
- - The form of the treaty is Quota Share Coinsurance.
- - Accumulated profits in excess of the Initial Ceding Allowance will be
shared on a 60/40 quota-share basis between CRLIC and RCH once the Initial
Ceding Allowance is repaid plus 10% interest.
- - The Agreement is drafted to conform to reserve credit regulations:
(a) The renewal Expense Allowances are adequate to cover CRLIC's actual
expenses
(b) CRLIC cannot be deprived of surplus or assets except as contemplated
in the regulations
(c) There is no requirement for CRLIC to reimburse RCH for negative
experience
(d) There is no provision for recapture other than as specifically
outlined in Article VII
(e) All forms of contractual risk are permanently transferred
(f) Quarterly settlements are required, and ...
(g) There are no representations or warranties given concerning the future
performance of the Business Reinsured.
- - The Ceding Commission will be held in surplus and amortized into income as
earnings emerge on the Business Reinsured.
- - RCH is an approved reinsurer in Ohio. A letter of credit in the amount
deemed necessary by parties to this Agreement will be provided to allow
CRLIC to take credit for statutory reserves in states where RCH is neither
licensed nor approved.
(ii)
<PAGE> 4
COINSURANCE AGREEMENT
---------------------
This Coinsurance ("Coins") Agreement (the "Agreement") is entered into
as of the date below written by and between the Central Reserve Life Insurance
Company, an Ohio insurer (the "Company"), and Reassurance Company of Hannover, a
Florida reinsurer (the "Reinsurer").
The Company and the Reinsurer mutually agree to reinsure in accordance
with the terms and conditions set forth hereinafter. This Agreement is solely
between the Company and the Reinsurer, and performance of the obligations of
each party under this Agreement shall be rendered solely to the other party. In
no instance shall anyone other than the Company, or the Reinsurer (and/or their
duly appointed and mutually recognized successors or assigns) have any rights
under this Agreement.
This Agreement with its attached Schedules shall constitute the Entire
Agreement between the parties with respect to the Business Reinsured thereunder,
and there are no understandings between the parties other than as expressed in
the Agreement. Any change or modification to the Agreement shall be null and
void unless made by an amendment which is signed by both parties.
Page 1
<PAGE> 5
ARTICLE I
---------
REINSURANCE DEFINITION
----------------------
1.1 BUSINESS REINSURED. The Company agrees to cede to the Reinsurer on
a quota-share basis, and the Reinsurer agrees to assume from the Company, on a
coinsurance basis, 50% of the retained obligations of the Company specified in
Schedule A, except as provided for under Section 1.3 hereof. Under all
circumstances, the Reinsurer's liability hereunder shall not include any amounts
awarded in judgement against the Company, or any other person, firm, corporation
or entity by a court of competent jurisdiction in excess of the policy benefit
losses, whether in the form of punitive damages, attorneys fees, costs of
litigation, or other extra-contractual liability, except as provided for in
Article V.
The Reinsurer's liability under this Agreement shall be limited to
indemnification of the Company.
1.2 PAYMENT OF REINSURANCE. The accounting shall be on a calendar
quarter basis for all items. The initial accounting period shall run from the
Effective Date to the end of the first quarter in which the Settlement Date
falls. The initial accounting for the Settlement Date will be based on the
September 30, 1997 financial results on an estimated basis. A true-up of these
amounts, in addition to an adjustment for the fourth quarter will be reflected
in the fourth quarter treaty accounting. The final accounting period shall run
from the end of the preceding calendar quarter until the termination of this
Agreement. Accounting reports shall be submitted to the Reinsurer by the Company
not later than 30 days after the end of each accounting period. Such reports
shall include information on the amount of reinsurance premiums, commissions,
expenses, claims, and any other items required for NAIC statutory accounting on
the policies reinsured for the preceding accounting period. The monthly "premium
and loss" report shall reflect all transactions for the accounting period as
stated above with the exception of reserves. Annual accounting reports necessary
to the filing of the Reinsurer's Annual Statement blank and its Federal Income
Tax return shall be submitted to the Reinsurer by the Company at the request of
the Reinsurer within 30 days after the end of a calendar year. In addition, the
Company shall provide, on a timely basis, an Actuarial Certification of the
liability included herein. This information will be supplied coincident with the
annual accounting information. The Company will also support the cash flow
testing and/or other regulatory requirements inherent in the assumption of these
liabilities by the Reinsurer.
1.3 OTHER REINSURANCE COVERAGE. If there is applicable reinsurance on
an excess or other basis coincident with the Business Reinsured
under this Agreement, the Reinsurer's liability for such amounts
shall be reduced to the extent of the other benefits provided
under those agreements.
ARTICLE I CONTINUES . . .
Page 2
<PAGE> 6
Termination and/or recapture of any treaty(ies) directly
impacting this Agreement is subject to mutual agreement prior to
termination and/or recapture of those treaty(ies). Other
reinsurance inforce not impacting this Agreement is specifically
excluded from consideration.
..END OF ARTICLE I
Page 3
<PAGE> 7
ARTICLE II
----------
LIABILITY
---------
The liability of the Reinsurer on any reinsurance under this Agreement
begins on January 1, 1997, the Effective Date. The liability of the Reinsurer
will continue in accordance with the terms and conditions of this Agreement, and
will end at the same time as that of the Company.
...END OF ARTICLE II
Page 4
<PAGE> 8
ARTICLE III
-----------
PLAN AND AMOUNT OF REINSURANCE
------------------------------
3.1 The Health business reinsured hereunder shall be on a Coinsurance
basis in a manner consistent with the original policy forms assumed by the
Company. The Reinsurer's amount at risk shall be the amount ceded by the
Company.
3.2 Reductions and terminations of the Company's policies, riders or
benefits shall reduce or terminate the amount reinsured under this Agreement in
a corresponding amount as of the same date, taking into account any changes in
Other Reinsurance Coverage as called for by pertinent treaty language.
3.3 Reinstatement by the Company under its regular rules of policies,
riders or benefits which were reduced, terminated or lapsed, shall automatically
reinstate the reinsurance thereon for the amount that would have been in force
if the insurance had not been reduced, terminated or lapsed.
...END OF ARTICLE III
Page 5
<PAGE> 9
ARTICLE IV
----------
REINSURANCE PREMIUMS AND PAYMENTS
---------------------------------
4.1 INITIAL REINSURANCE TRANSACTION. As a condition precedent to the
Reinsurer's liability hereunder, the Company shall on, or before, December 31,
1997, close on the reinsurance transaction covering the Business Reinsured as
outlined in Schedule A. Effective on or shortly after the day of closing on the
reinsurance transaction contemplated by this Treaty, the Company will transfer a
net amount of assets equal to the difference between 50% of the statutory
reserves and the initial ceding allowance contained in Schedule D.
4.2 SUBSEQUENT REINSURANCE PREMIUMS. Amounts due subsequent to the
initial reinsurance transaction shall be paid to the Reinsurer when determined
in accordance with Article I paragraph 1.2. If the amount of Net Reinsurance
Premiums set forth on any Statement is a negative amount, the Reinsurer shall
pay to the Company an amount equal to such negative amount within twenty (20)
days after the Reinsurer's receipt from the Company of such a Statement.
4.3 ASSOCIATED RIDERS. If any riders are reinsured under this
Agreement, premiums and their related commissions will be paid in accordance
with the Company's contractual obligations at the inception of this Agreement.
4.4 PAYMENTS. The payment of reinsurance premiums by the Company to the
Reinsurer, shall be a condition precedent to the liability of the Reinsurer. The
Reinsurer shall have the right to terminate the reinsurance on risks for which
reinsurance premiums are in default by giving ninety (90) days written notice of
termination to the Company. At the close of the last day of the ninety-day
notice period, all of the Reinsurer's liability for risks subject to the
termination notice, plus for the risk on which premiums went into default during
the ninety-day notice period, shall terminate.
Notwithstanding termination of reinsurance as provided for by this
provision, the Company shall continue to be liable to the Reinsurer for all
unpaid premiums earned by the Reinsurer under this Agreement (see Section 7.3).
The Company may reinstate such terminated reinsurance by paying in
full, prior to expiration of the ninety (90) day termination notice, all unpaid
premiums for the reinsurance which was in force prior to its termination. The
effective date of reinstatement shall be the day the Reinsurer receives all
required premiums. However, there shall be no reinstatement on any risk on which
the Company incurred a claim for insurance after the reinsurance terminated.
ARTICLE IV CONTINUES...
Page 6
<PAGE> 10
4.5 PROCEDURE FOR PAYMENT.
a) FIRST YEAR AND RENEWAL BUSINESS. On or before the twentieth
(20th) day after the close of each quarter, the Company will
submit to the Reinsurer a statement of account, substantially
in accordance with Schedule B showing the premium(s) due on
reinsurance effected in the preceding month(s) and any other
pertinent data mutually agreed upon by the parties hereto. If
a statement shows that a net reinsurance balance is due the
Reinsurer, the Company will include with the statement a
payment for the amount(s) due with interest from the quarter
end calendar reporting period at a rate equal to "I" as
defined in Schedule C. Likewise, should the statement show a
net reinsurance balance due the Company, the Reinsurer shall
remit the amount due with interest within fifteen (15) days
after receipt of the statement.
b) ADJUSTMENTS. If any change is made to the Company's policy
and/or rates that affects the reinsurance, the Company will
provide written notice, on a form mutually agreed upon, to the
Reinsurer. If an adjustment to the premium is to be made, and
a refund is due the Company, it will be included as an
adjustment, with interest at the Schedule C rate of "I", to
the regular quarterly statement prepared for the Reinsurer.
Policy fees, if any, are not pro-rated or refunded on
termination.
4.6 PLACING REINSURANCE IN EFFECT. To effect reinsurance with respect
to policies in force on or after the Effective Date of this Agreement but issued
no later than December 31, 1997, the Company shall settle with the Reinsurer on
the date of execution of this Agreement the initial reinsurance premium
described in Section 4.7 hereunder. The portion of the initial premium described
in Paragraph 4.7, Section 1 a) below, shall be paid by transferring assets
acceptable to the Reinsurer. Such assets shall be valued at their market value
as of the Settlement Date, including any accrued interest thereon (the Reinsurer
shall be entitled to all interest received on such assets after the Effective
Date), and shall be equal to the statutory reserves outstanding as of the date
of the transfer. The initial amount due under this Agreement (if the initial
settlement is after the Effective Date) shall include the amounts described in
Paragraph 4.7, Section 2 below, and shall be recognized by offset against the
Initial Ceding Allowance described in Paragraph 4.7, 1 b).
4.7 PAYMENTS BY THE COMPANY.
1) The initial reinsurance premium payable pursuant to
Section 4.6 above (if payable on or after the
Effective Date) shall be an amount equal to the net
of:
a) the Statutory Reserves as of the Settlement
Date, minus
b) the Initial Ceding Allowance.
ARTICLE IV CONTINUES...
Page 7
<PAGE> 11
2) The Company also shall pay the Reinsurer as
reinsurance premiums the gross premiums plus
additional deposits, plus any interest received in
cash after the Effective Date on assets transferred
in the transaction, net of other reinsurance premiums
paid, the Company receives for coverage it provides
after the Effective Date of this Agreement with
respect to the portion of all policies reinsured
hereunder.
4.8 BENEFITS. The Reinsurer shall reimburse the Company for the gross
amount of all benefits paid by the Company (i.e. without deduction for
reserves), but net of benefits attributable to the portions of the policies
reinsured hereunder which are receivable under other reinsurance agreements.
4.9 POLICY EXPENSE AND COMMISSION ALLOWANCES. The Reinsurer shall pay
the Company the Initial Ceding Allowance as defined in Schedule D. The Reinsurer
shall also pay its proportionate share of the Overhead Expense Allowances,
Premium Taxes and Commission Allowances as defined in Schedule D.
4.10 EXPERIENCE REFUND. The Reinsurer shall pay the Company an
experience refund determined in accordance with Schedule C.
4.11 EXPENSES. The Reinsurer shall bear no part of the expenses
incurred in connection with the policies reinsured hereunder, except as
otherwise provided in Paragraph 4.9.
4.12 ACCOUNTING FOR AMOUNTS DUE REINSURER OR COMPANY
1) Except as otherwise specifically provided herein, all
amounts due to be paid to either the Reinsurer or the
Company shall be determined on a net basis as of the
last day of each accounting period and shall be due
and payable as of such date. If such amounts cannot
be determined as of such date on an exact basis, such
payments may be paid on an estimated basis within
twenty (20) days of the end of the accounting period,
if owed by the Company, and within fifteen (15) days
after receiving the accounting reflecting the
Negative Balance, if owed by the Reinsurer. Any final
adjustments are to be made with interest to the
affected party within 6 months after the end of such
accounting period.
2) Any payment which either the Company or the Reinsurer
shall be obligated to pay to the other may be paid
net of any amount which is then due and unpaid under
this Agreement.
ARTICLE IV CONTINUES...
Page 8
<PAGE> 12
4.13 ELECTRONIC DATA TRANSMISSION. If the Company chooses to report its
reinsurance transactions via electronic media, the Company shall consult with
the Reinsurer to determine the appropriate reporting format. Should the Company
subsequently desire to make changes in the data format or the code structure,
the Company shall communicate such changes to the Reinsurer prior to the use of
such changes in reports to the Reinsurer.
4.14 OTHER ADJUSTMENTS. Other payment adjustments made in the normal
course of business will be shared between the Company and the Reinsurer in
proportion to the amount of liability of each at the time this treaty becomes
effective. Exceptions to normal operating procedures will be discussed with the
Reinsurer prior to any action being taken.
...END OF ARTICLE IV
Page 9
<PAGE> 13
ARTICLE V
---------
CLAIMS
------
SETTLEMENT OF CLAIMS
- --------------------
5.1 Except as otherwise specifically set forth herein, the Reinsurer's
liability to the Company for the reinsurance benefits shall follow the Company's
liability for such amounts of benefits under the terms of its policies.
5.2 The Company shall investigate and settle or defend all claims or
losses. If a contest or compromise results in a reduced claim settlement, then
the Company and the Reinsurer shall participate in proportion to their
respective net liabilities before the reduction.
The Reinsurer will accept the good faith decision of the Company in
settling the claim and shall pay the reinsurance benefit amounts in effect when
the company settles with the claimant, including a proportionate share of any
interest paid to the claimant subject only to the limitations set forth below.
If the Company, in good faith, pays benefits for alternative services
or goods in order to reduce long term claim exposure, then the Reinsurer will
participate proportionately in such benefits.
5.3 The Reinsurer will reimburse the Company for its proportionate
share of legal expenses incurred in the defense of a claim only if the Reinsurer
has been informed in writing in advance, of the Company's intent to incur such
expenses, and the Reinsurer has agreed in writing to participate in such
expenses. If the Company proposes to defend a claim with respect to which the
Reinsurer does not agree to participate in the defense the Reinsurer shall pay
its proportionate share of the loss and the loss adjustment expenses incurred
prior to the Reinsurer's decision not to so participate. Such amounts paid to
the Company shall fully discharge the Reinsurer's obligation hereunder with
respect to such claim.
CONTESTED CLAIMS
- ----------------
5.4 The Company will advise the Reinsurer in writing of any potential
litigation involving reinsurance under this Agreement, and will advise the
Reinsurer of its intention to deny a claim or associated claims, or to contest
policies reinsured under this Agreement. If the Reinsurer agrees with the
Company's intentions in writing, then the Reinsurer will, in addition to its
share of the claim(s), pay its proportionate share of the unusual expense of the
contest, including all reasonable legal fees, investigation fees, and extra
contractual obligation damages arising out of the Company's actions with respect
to such claims.
ARTICLE V CONTINUES...
Page 10
<PAGE> 14
If the Reinsurer does not concur with the Company's action or inaction,
which has been arrived at in good faith, the Reinsurer will advise the Company
of its own suggested actions or inactions, and if the Company follows such
suggested course of actions or inactions, the Reinsurer shall, in addition to
its share of the claim itself, pay its proportionate share of all reasonable
outside expenses incurred relative to the claim, including all legal fees,
investigation fees, extra contractual damages arising out of the Company's
actions, with respect to such claims. If the Company does not follow the
Reinsurer's suggested actions or inactions, the Reinsurer will pay the Company
its proportionate share of the claim only.
5.5 The parties recognize that circumstances may arise in which equity
would require them by law to share proportionately in certain assessed damages.
Such circumstances are difficult to define in advance, but generally would be
those situations (ii) in which the Reinsurer was an active party, (ii) in which
the Reinsurer directed, consented to, approved or ratified, the act, omission,
or course of conduct which ultimately resulted in assessment of punitive and/or
exemplary damages, or (iii) in which such acts or omissions were those of the
selling broker. In such situations, the Company and the Reinsurer will share
proportionately in damages so assessed.
5.6 "Extra Contractual Obligations" shall mean any award made by a
court of competent jurisdiction against the Company, which is not within the
coverage granted by any insurance or reinsurance contract made between the
parties in dispute.
The Reinsurer shall have no liability with respect to Extra Contractual
Obligations arising from:
(a) any assumption of liability of the Company by way of
participation in any mutual scheme designed specifically to
cover Extra Contractual Obligations; or
(b) the fraud of a director, officer, employee, or duly appointed
agent of the writing Company acting individually or
collectively, or in collusion with an individual or
corporation, or with any other organizations or party involved
in the presentation, defense or settlement of any claim.
5.7 "Reserve Strengthening": Should the Company contemplate further
reserve strengthening on inforce and new business effecting the Business
Reinsured prior to December 31, 1997, such reserve strengthening will be deemed
to relate to claims incurred prior to the Effective Date of this Agreement. As
such the additional amount of claim reserve will be segregated and not be made
part of the claim reserve reported and used in the Experience Refund calculation
as set forth in Schedule C. Such amounts will continue to be segregated for all
future reporting. Reserve Strengthening subsequent to January 1, 1998 as it
relates to claims incurred after January 1, 1997 will be discussed with the
Reinsurer prior to its implementation. For purposes of this Agreement, Reserve
Strengthening shall imply the establishment of greater claim reserves, using
different methods than those used in the determination of the September 30,
1997, over the level of claim reserves that would have been established using
consistent methods. If the total claim reserve for the Group A&H line shall
exceed Fifty One Million dollars ($51,000,000) as of December 31, 1997, reserve
strengthening shall be presumed to have occurred but such presumption is subject
to actuarial rebuttal.
..END OF ARTICLE V
Page 11
<PAGE> 15
ARTICLE VI
----------
GENERAL PROVISIONS
------------------
6.1 COMPANY FORMS AND RATES. The Company shall make available to the
Reinsurer on an as needed basis, a copy of its applications, policy and rider
forms, premium and reserve tables (if any), and any and all other forms or
tables needed for proper handling of reinsurance under this Agreement. It will
advise the Reinsurer of any changes or new forms it may adopt.
6.2 ADMINISTRATION BY THE COMPANY OF THE BUSINESS REINSURED. In return
for the payment of the Overhead Expense Allowances as set forth in Schedule D,
the Company agrees to perform all usual and customary servicing functions to
include, but not limited to, the following:
1) All usual and customary policy related customer services for
the insureds, owners, beneficiaries, agents and/or other
interested persons; including but not limited to, address
changes, beneficiary changes, ownership changes, providing
policy related information, reinstatements and providing
duplicate policies. All such services provided shall meet or
exceed standards of service deemed usual and customary in the
insurance industry.
2) File maintenance and administration, including systems
maintenance and administration.
3) Billing and collection of premiums. All premiums collected on
behalf of the Business Reinsured shall be held by the Company
in a fiduciary capacity.
4) Maintenance of the Business Reinsured's financial data in such
form, and communicated at such intervals to the Reinsurer, as
outlined above (see Article I), so as to allow the Reinsurer
to meet any and all reporting requirements it may have.
5) Payments of agents' commissions related to the Business
Reinsured. The Company shall be financially responsible for
all such commissions due on premiums collected after the
Effective Date.
6) The timely filing of rate increases to maintain the viability
of the Business Reinsured. Both the Company and the Reinsurer
mutually recognize that rate monitoring and filing for
increases, where needed, are essential to maintaining the
ARTICLE VI CONTINUES...
Page 12
<PAGE> 16
profitability of the Business Reinsured. The Reinsurer shall have the
right to request that the Company file for rate increases should the
aggregate annual statutory loss ratios on the Business Reinsured exceed
73% in any annual period. If the Company fails to file within 60 days
of the Reinsurer's request, or fails to diligently pursue the granting
of such increases with regulatory authorities, the Expense Allowances
provided for under Schedule D shall be reduced according to the
provisions of that Treaty Schedule. Such allowance reduction will be
effective the first calendar quarter after the later of (a) the end of
such 60 day period, or (b) 30 days after the Reinsurer notifies the
Company that, in its opinion, such increases are not being diligently
pursued. If the Company disagrees with the Reinsurer, and the parties
are unable to amicably resolve their dispute on the handling of the
actions to be taken, the Company shall be entitled to arbitrate the
disagreement under Article VIII of the Treaty.
In the event the Reinsurer considers that the Company has failed to
perform the usual and customary service functions outlined above, or has become
financially impaired to the point that regulatory supervision is imminent
(subject to the provisions below), the Reinsurer may secure other facilities to
perform such functions.
The Reinsurer shall first provide the Company with written notice of
its intent to find an alternative service facility and its reasons for
requesting such a change. If the Company fails to remedy the situation within
ninety (90) days, then, and only then, shall the Reinsurer have the right to
proceed with the change to an alternate service facility.
Should such a transfer occur, the Company shall surrender the service
function to the new carrier, or servicing center, and in turn aid in the
effective and efficient conversion of the servicing function to the new
facility. Once effected, the Company shall forfeit all right to future
compensation for such functions.
6.3 REINSURANCE CONDITIONS. The reinsurance is subject to the same
limitations and conditions as the insurance under the policy or policies assumed
by the Company on which reinsurance is based.
6.4 ERRORS AND OMISSIONS. It is understood and agreed that if
non-payment of premiums, within the time specified, or failure to comply with
any terms of this contract is shown to be unintentional, and the result of
misunderstanding or oversight on the part of either the Company or the
Reinsurer, both the Company and the Reinsurer shall be restored to the positions
they would have occupied had no such error or oversight occurred upon payment of
the overlooked amount.
6.5 INSPECTION. The Reinsurer may inspect, at the Home Office of the
Company and at any reasonable time, the original papers and any other books or
documents relating to or affecting the reinsurance under the Reinsurance
Agreement.
ARTICLE VI CONTINUES...
Page 13
<PAGE> 17
6.6 OFFSET PROVISION. Any debts or credits liquidated or unliquidated,
in favor of, or against, either the Reinsurer or the Company, with respect to
this Agreement only, shall be set-off, and only the balance shall be allowed or
paid.
6.7 SEVERABILITY. In the event that any of the provisions herein
contained shall be declared or adjudicated invalid or unenforceable, such
declaration or adjudication shall in no manner affect or impair the validity or
the enforceability of the other and remaining provisions which shall remain in
full force and effect as though such invalid or unenforceable provisions or
clauses had not been herein included or made a part of this Agreement.
6.8 CURRENCY. The reinsurance premiums and the reinsurance benefits
under this Agreement shall be payable in the lawful money of the United States.
6.9 INTEREST ON LATE PAYMENTS. Subject to the reporting requirements of
this Agreement, should any payment not be made within the specified period, the
party to whom the payment is owed can elect to charge interest on such payment
at the rate of .75% per month.
...END OF ARTICLE VI
Page 14
<PAGE> 18
ARTICLE VII
-----------
RECAPTURE AND/OR TERMINATION
----------------------------
7.1 RECAPTURE. Business reinsured under this Agreement is not eligible
for recapture after twenty four (24) months from the Settlement Date. If the
Company elects to exercise its recapture option during the first twenty four
(24) treaty months, such recapture is subject to the terms and conditions as
outlined in the Experience Refund provisions of Schedule C.
7.2 OTHER RECAPTURE FOR FAILURE TO MAKE PAYMENT. Upon the failure by
the Reinsurer to pay the Company any Negative Amounts due the Company pursuant
to Section 4.2 hereof, the Company may, at its option and in its sole discretion
recapture the particular Reinsured Policies for which the Reinsurer has failed
to pay such Negative Amounts; provided, however, that the Company's option may
only be exercised by the Company by delivering to the Reinsurer thirty (30) days
prior written notice of the Company's intent to exercise the Company's option
and the Reinsurer shall be entitled to cure such nonpayment of any Negative
Amounts. Regardless of the Company's exercise of the Company's option, the
Reinsurer shall remain liable to the Company for all unpaid Negative Amounts due
to the Company hereunder.
7.3 PAYMENTS UPON TERMINATION OF REINSURANCE FOR NONPAYMENT.
1) In the event that this Agreement or any portion of
the policies reinsured hereunder is terminated for
nonpayment by either party to this Agreement,
pursuant to any provision hereof, a terminal
accounting and settlement shall take place with
respect to such terminated reinsurance.
2) The terminal accounting date for any such termination
shall be the effective date of a notice of
termination given under this Agreement or such other
date as shall be mutually agreed to in writing.
3) The terminal accounting period shall be the period
commencing on the first day of the calendar quarter
in which any termination is effective and ending on
the terminal accounting date for such termination.
4) The terminal accounting and settlement shall involve
a calculation of the terminal reserve liability then
held by the Reinsurer for the portion of the policies
reinsured hereunder and a calculation of a terminal
experience refund, as described in paragraph 7 below.
Each of these items shall be computed only with
respect to the portion of the policies reinsured
hereunder then being terminated.
ARTICLE VII CONTINUES...
Page 15
<PAGE> 19
5) The Reinsurer shall pay as an amount allowed on
surrender to the Company an amount equal to the
reserves on reinsurance hereunder on a coinsurance
basis on the day immediately prior to the terminal
accounting date with respect to the portion of the
reinsurance hereunder then being terminated.
6) The Reinsurer's liability for reserves on a
coinsurance basis on the reinsurance being terminated
hereunder, shall terminate on the terminal accounting
date, and the Reinsurer shall be obligated to pay
such amount to the Company net of the amounts due
from the experience account.
7) A terminal experience refund shall be computed for
the terminal accounting period on the portion of the
reinsurance hereunder then being terminated. Such
terminal experience refund shall be computed in a
manner consistent with Schedule C. If the terminal
experience refund is positive, such positive amount
shall be paid by the Reinsurer to the Company. If
termination for non payment is not due to action or
inaction on the part of the Reinsurer, and the
terminal experience refund account is negative, the
absolute value of such negative amount shall be paid
by the Company to the Reinsurer.
8) In the event that subsequent to the terminal
accounting and settlement as above provided, an
adjustment is made with respect to any amount taken
into account pursuant to Schedule C, a supplementary
accounting shall take place pursuant to Paragraph 4
of this section. Any amount owed to the Reinsurer or
the Company by reason of such supplementary
accounting shall be paid promptly upon the completion
thereof.
...END OF ARTICLE VII
Page 16
<PAGE> 20
ARTICLE VIII
------------
ARBITRATION
-----------
8.1 AGREEMENT. All differences between the Company and the Reinsurer on
which an agreement cannot be reached, will be decided by arbitration. The
arbitrators will determine the interpretation of the Agreement in accordance
with usual business and reinsurance practices, rather than by strict
technicalities.
8.2 METHOD. Three arbitrators will decide any differences. They must be
active or retired officers of life insurance companies, or reinsurance
companies, employed by other than the two parties to the Agreement, or have been
previously so employed in such a capacity in an insurance or reinsurance
company. In no event may an employee - past or present - of either party or its
affiliates serve as an arbitrator.
Each party will choose one member of the arbitration panel and, once
selected, these two members will choose the third member. If the two arbitration
panel members chosen fail to agree on the selection of the third member of the
panel, the choice will be left to the American Arbitration Association.
Each Company will submit its case in writing to the arbitration panel
within one month of the date the panel is finally established, and the parties
to the Agreement are required to make their arbitrator nominee known to the
other party within 30 days of the announced dispute.
It shall be the function of the arbitration panel to determine
settlement of the differences between the parties based on the evidence
presented, their experience and knowledge of the subject matter, and on the
basis of usual and customary practice rather than to act solely on the basis of
evidence as would be admissible in a court of law. The majority decision of the
panel will be deemed to be the decision of the panel. The Reinsurer and the
Company agree to accept the interpretation of the panel as binding upon both
parties to the Agreement.
The costs of arbitration will be shared equally by the parties to the
Agreement, unless the arbitrators decide otherwise.
The arbitration will be held at the times and places agreed upon by the
arbitrators and their decision shall be rendered within 45 days after they are
impanelled.
... END OF ARTICLE VIII
Page 17
<PAGE> 21
ARTICLE IX
----------
REINSURER'S RIGHT OF NOTICE OF UNUSUAL PRACTICES
------------------------------------------------
9.1 In providing reinsurance facilities to the Company under this
Agreement, the Reinsurer has granted the Company considerable authority with
respect to binding power, reinstatements, claim settlements, and the general
administration of the reinsurance account. To facilitate transactions, the
Reinsurer has required the minimum amount of information and documentation
possible, reflecting its utmost faith and confidence in the Company. Where the
Company does engage in exceptional or uncustomary practices for the Company, the
Company agrees to advise the Reinsurer in writing, and receive a written
acceptance of, said practices from the Reinsurer before assigning any liability
to the Reinsurer with respect to any Business Reinsured affected by such
practices.
...END OF ARTICLE IX
Page 18
<PAGE> 22
ARTICLE X
---------
TREASURY REGULATION SECTION 1.848-2(g)(8) JOINT ELECTION
--------------------------------------------------------
The Company and the Reinsurer hereby agree to the following pursuant to
Section 1.848-2(g)(8) of the Income Tax Regulations issued December 1992, under
Section 848 of the Internal Revenue Code of 1986, as amended. This election
shall be effective for the taxable year ended December 31, 1997 and for all
subsequent taxable years for which this Agreement remains in effect unless such
election is terminated by mutual written agreement of the parties hereto with
the consent, if required, of the Commissioner of the Internal Revenue Service.
10.1. The term "party" will refer to either the Company or the
Reinsurer as appropriate.
10.2. The terms used in this Article are defined by reference to
Treasury Regulation Section 1.848-2 in effect as of December 29, 1992. The term
"net consideration: will refer to either net consideration as defined in
Treasury Regulation Section 1.848-2(f) or: "gross premium and other
consideration" as defined in Treasury Regulation Section 1.848-2(b) as
appropriate.
10.3. Both parties agree to identify this Agreement as one for which
the joint election under Treasury Regulation Section 1.848-2(g)(8) has been made
in a schedule attached to their respective federal income tax returns for the
taxable period ended December 31, 1997.
10.4. The party with the positive net consideration for this Agreement
for each taxable year will capitalize specified policy acquisition expenses with
respect to this Agreement without regard to the general deductions limitation of
Section 848(c)(1).
10.5. Both parties agree to exchange information pertaining to the
amount of net consideration under this Agreement each year to ensure consistency
or as otherwise required by the Internal Revenue Service.
10.6. The Company will submit a schedule to the Reinsurer by May of
each year of its calculation of the net consideration for the preceding calendar
year. This schedule of calculations will be accompanied by a statement signed by
an officer of the Company stating that the Company will report such net
consideration in its tax return for the preceding calendar year.
10.7. The Reinsurer may contest such calculation by providing an
alternative calculation to the Company in writing within 30 days of the
Reinsurer's receipt of the Company's calculation. If the Reinsurer does not so
notify the Company, the Reinsurer will report the net consideration as
determined by the Company in the Reinsurer's tax return for the previous year.
ARTICLE X CONTINUES...
Page 19
<PAGE> 23
10.8. If the Reinsurer contests the Company's calculation of the net
consideration, the parties will act in good faith to reach an agreement as to
the correct amount within thirty (30) days of the date the Reinsurer submits its
alternative calculation. If the Company and the Reinsurer reach agreement on an
amount of net consideration, each party shall report such amount in their
respective tax returns for the previous calendar year.
...END OF ARTICLE X
Page 20
<PAGE> 24
ARTICLE XI
----------
DURATION OF AGREEMENT
---------------------
This Agreement is unlimited in duration, but may be amended in writing
by the mutual consent of the Company and the Reinsurer if signed by both
parties. Existing reinsurance will remain in force until termination of the
Company's policies on which the reinsurance is based, in accordance with the
terms of this Agreement.
This Agreement is subject to the provisional approval by the State of
Ohio Department of Insurance.
At the end of any accounting period, this Agreement shall automatically
terminate if none of the policies hereunder are in force. At such termination, a
final experience refund calculation shall be made; if the result is greater than
zero, the Reinsurer shall pay such amount to the Company, and if the result is
less than zero, no payment shall be made to the Reinsurer.
The termination of the Agreement or of the reinsurance in effect under
this Agreement, pursuant to any provision hereof, shall not extend to, or affect
any of the rights or obligations of the Company and the Reinsurer applicable to
the period prior to the effective date of such termination. Such right or
obligation shall include, but not be limited to, the payment of any amount owed
by reason of supplementary accounting as set forth in Article VII, Paragraph 8.
... END OF ARTICLE XI
Page 21
<PAGE> 25
ARTICLE XII
-----------
INSOLVENCY
----------
12.1 INSOLVENCY OF THE COMPANY.
a) The portion of any risk or obligation assumed by the
Reinsurer, when such portion is ascertained, shall be
payable on demand of the Company, at the same time as
the Company shall pay its net retained portion of
such risk or obligation, with reasonable provision
for verification before payment, and the reinsurance
shall be payable by the Reinsurer, on the basis of
the liability of the Company under the contract, or
contracts, reinsured without diminution because of
the insolvency of the Company.
b) In the event of the insolvency and the appointment of
a conservator, liquidator or statutory successor for
the Company, such portion shall be payable to such
conservator, liquidator, or statutory successor,
immediately upon demand, with reasonable provision
for verification, on the basis of claims allowed
against the insolvent company by any court of
competent jurisdiction, or by any conservator,
liquidator, or statutory successor of the Company, to
allow such claims without diminution because of such
insolvency or because such conservator, liquidator,
or statutory successor has failed to pay all, or a
portion, of any claims.
c) All expenses incurred by the Reinsurer under Section
12.1(b) hereof shall be borne and paid by the
Company, subject to court approval, as part of the
expense of insolvency proceedings, whether
liquidation or rehabilitation. Any claim amounts
which are reduced as a result of the Reinsurer's
action under Section 12.1(a) hereof shall be shared
between the Reinsurer and the Company pro-rata.
d) Upon the Company's Insolvency, the Reinsurer, with
the consent of the Receiver of the Company, may
designate a company acceptable to the Receiver to
directly assume the reinsured policies and acquire
the Company's rights under this Agreement. The
reserve transfer to such company from the Company
which is party to this Agreement shall be reduced to
reflect an Initial Ceding Allowance on the Company's
share determined in a manner consistent with the
Initial Ceding Allowance originally provided under
this Agreement. The reserve transfer and the
Allowance shall be subject to mutual agreement by the
Receiver and the Reinsurer.
ARTICLE XII CONTINUES...
Page 22
<PAGE> 26
12.2 INSOLVENCY OF REINSURER
a) If the Reinsurer shall, during the term of this
Agreement, be unable to pay its debts as they become
due, or the amount of its liabilities shall exceed
the value of its assets, or the Reinsurer shall
otherwise be deemed insolvent, and a liquidator,
rehabilitator, receiver or other statutory successor
be appointed to the Reinsurer, the Company may draw
on the Letter of Credit provided for under Article
XIV for any amount due under this Agreement for an
amount equal to the statutory reserves on the
Business Reinsured less any outstanding LCF as
defined in Schedule D.
...END OF ARTICLE XII
Page 23
<PAGE> 27
ARTICLE XIII
------------
REPRESENTATIONS AND WARRANTIES
------------------------------
THE COMPANY REPRESENTS AND WARRANTS TO THE REINSURER AS FOLLOWS:
----------------------------------------------------------------
13.1 THE MILLIMAN & ROBERTSON REPORT: The Company provided the
Reinsurer with a valuation and appraisal performed by Milliman & Robertson, Inc.
("M&R") which contained all or a portion of the information the Reinsurer relied
upon in evaluating the Business Reinsured. This information was prepared as of
XXXX XX, 1997 for the purpose of preparing the commitment letter issued by the
Reinsurer dated December 4, 1997. The Company represents and warrants that such
current and historical information represented true and correct copies of, or
excerpts from, the Company's books and records.
Since such dates, there have been no material adverse changes to the
business, financial condition and/or other circumstances of, or involving the
business to be reinsured by the Company which would make such provided
information materially inaccurate. A complete and correct copy of the M&R
Reports have been provided to the Reinsurer.
13.2 STATUTORY RESERVES: The Statutory Reserves on the Business
Reinsured were approximately $25 million as of September 30, 1997, and this
amount is not anticipated to materially change prior to the Settlement Date.
13.3 PREMIUM INFORCE: The premium inforce on 50% of the block to be
included in the Business Reinsured was approximately $120 million as of January
1, 1997, and this amount is also not anticipated to materially change prior to
the Settlement Date.
...END OF ARTICLE XIII
Page 24
<PAGE> 28
ARTICLE XIV
-----------
LETTERS OF CREDIT
-----------------
To the extent that the Reinsurer is not an admitted reinsurer, and in
order for the Company to be able to take credit for statutory reserves for the
portion of policies reinsured hereunder, the Reinsurer hereby agrees to apply
for and secure delivery to the Company a clean, irrevocable, and unconditional
Letter of Credit in an amount at least equal to the Reinsurer's liability under
the coinsurance portion of said Agreement.
The Letter of Credit shall be in such a form as will comply with
applicable regulations such that the Company would be able to take credit on its
financial statement filed with the appropriate State Insurance Departments for
the Business Reinsured hereunder. The terms and conditions of the Letter of
Credit shall comply with all requirements of said authorities, including but not
limited to, the following:
The Letter of Credit shall be issued for an initial period of not less
than one year and shall automatically extend for an additional period
of at least one year at each and every expiry date, unless and until,
the Company has received at least 30 days prior notice from the issuing
bank (at least 60 days prior notice from a confirming bank) by
certified mail, registered mail, or receipted hand delivery of its
intention not to extend said Letter of Credit.
The Company and the Reinsurer agree that the Letters of Credit provided
by the Reinsurer pursuant to the provisions of this Agreement, may be drawn upon
at any time, notwithstanding any other provisions in this Agreement, and shall
be utilized by the Company, or its successors, in interest only for one or more
of the following:
(i) to reimburse the Company for the Reinsurer's share of premiums
returned to the owners of policies reinsured under this
Agreement on account of cancellations of such policies.
(ii) to reimburse the Company for the Reinsurer's share of
surrenders and benefits or losses paid by the Company under
the terms and provisions of the policies reinsured under this
Agreement.
(iii) to fund an account with the Company in an amount at least
equal to the deduction, for reinsurance ceded, from the
Company's liabilities for policies ceded under this Agreement.
Such amount shall include, but not be limited to, amounts for
policy reserves, claims and losses incurred, and unearned
premium reserves, and
ARTICLE XIV CONTINUES...
Page 25
<PAGE> 29
(iv) to pay any other amounts the Company claims are due under this
Agreement.
The Company agrees to return to the Reinsurer any amounts withdrawn
from such Letters of Credit which are in excess of the actual amounts required
for (i), (ii) and (iii), or in the case of (iv), above, any amounts that are
subsequently determined not to be due.
All of the foregoing shall be applied without diminution because of
insolvency on the part of the Company or the Reinsurer.
...END OF ARTICLE XIV
Page 26
<PAGE> 30
ARTICLE XV
----------
EXECUTION
---------
In witness of the above, this Agreement is signed in duplicate at the
dates and places indicated, with an Effective Date of JANUARY 1, 1997.
CENTRAL RESERVE LIFE INSURANCE COMPANY
STRONGSVILLE, OHIO
Date: December 17, 1997
------------------------
By: Mark W. Grimone
------------------------
Title: Chief Financial Officer
------------------------
Witness: Jennifer Puzi
------------------------
REASSURANCE COMPANY OF HANNOVER
ORLANDO, FLORIDA
Date: December 17, 1997
------------------------
By: Craig M. Baldwin
------------------------
Title: Vice President & Actuary
------------------------
Witness: Jean M. Lay
------------------------
... END OF ARTICLE XIV
Page 27
<PAGE> 31
SCHEDULE A
----------
BUSINESS REINSURED
------------------
The Business Reinsured under this Agreement shall be 50% of the
retained portion of the benefits payable on all policies, certificates, riders
and/or supplemental benefits inforce as of the Settlement Date and/or issued and
inforce through December 31, 1997. The policy forms to be included as the
Business Reinsured are as follows:
(POLICY FORMS AND PRODUCT DESCRIPTIONS
TO BE SUPPLIED BY THE COMPANY)
...END OF SCHEDULE A
Page 28
<PAGE> 32
SCHEDULE B
----------
REINSURANCE FORMS
-----------------
SCHEDULE B/PART A
-----------------
POLICY EXHIBIT
Reinsured under coinsurance with the Reinsurer
<TABLE>
<CAPTION>
Number of
Policies Benefit
-------- -------
Amount
- ------
<S> <C> <C>
1. Beginning of Period
2. Issued - Less other Reinsurance
3. Reinsurance Assumed
4. Revived
5. Increased
6. TOTAL
7. Health Claims
8. Disability Benefits
9. Lapses
10. Decreased
11. Reinsurance
12. TOTAL
13. In Force, End of Period (6) less (12)
</TABLE>
SCHEDULE B CONTINUES...
Page 29
<PAGE> 33
SCHEDULE B/PART B
-----------------
SUMMARY OF MONETARY TRANSACTIONS
INITIAL ACCOUNTING PERIOD
1. DUE REINSURER
Initial Reinsurance Premium (to include adjustments for
amounts collected and paid from the Effective Date to the
Settlement Date)
2. DUE REINSURED
Initial Ceding Allowance
Due REINSURER - 1 less 2
SUBSEQUENT ACCOUNTING PERIODS*
3. DUE REINSURER
Premiums Paid during the period
Less the Experience Refund
4. DUE REINSURED
Cash Policy Benefits paid net of recoveries from third party
reinsurers Reinsurance premiums incurred by the REINSURED to
third party reinsurers
Commission Allowances Paid
Overhead Expense Allowances Paid
Premium Taxes Paid
Due REINSURER - total of 3 less total of 4
*Note that for all reporting periods the Company will also
supply the Reinsurer with incurred figures to allow for
reconciliation.
...END OF SCHEDULE B
Page 30
<PAGE> 34
SCHEDULE C
----------
EXPERIENCE REFUND CALCULATION
-----------------------------
At the end of each quarter, an experience refund will be calculated on
the Business Reinsured. If positive, this experience refund will be payable to
the Company by the Reinsurer. Should the Company elect to exercise its recapture
option during the first twenty four (24) treaty months after the Settlement Date
of the Agreement, the Company shall be liable for repayment of the then
outstanding LBF as defined below, in addition to an amount sufficient to assure
the Reinsurer of a 15% return on its investment from the Effective Date. Such
calculation shall include the provision for target surplus in the amount of 200%
of the Authorized Control Level RBC using the factor agreed to by the Company
and the Reinsurer as appropriate for the Business Reinsured. The formula for the
calculation of the recapture amount will be agreed to by the parties to this
Agreement. In addition, the recapture shall call for a net cash settlement, with
interest at the rate of "I" as defined below, of all outstanding reserve amounts
as of the recapture date.
Define the following for the Business Reinsured:
<TABLE>
<S> <C> <C> <C>
P = Premiums incurred during the quarter, and experience refunds under
other reinsurance treaties, net of any reinsurance premiums for the Reinsurer's
Share of the Business Reinsured
I = Net Investment income, to be defined as the Reinsurer's net portfolio rate for
the quarter prior to the settlement date applied to the total beginning
reserves for the Business Reinsured. The Company will provide the Reinsurer
with a breakdown of all pertinent reserve elements.
R = Statutory Unearned Premium and Active Life Reserve increase for the quarter
B = Policyholder Benefits incurred during the quarter, net of any reinsurance benefits
recovered under other reinsurance treaties for the Business Reinsured (i.e. incurred
benefits = paid + change in aggregate claim reserve)
A = Overhead Expense Allowances incurred during the quarter
T = Premium Taxes
LBF = Loss Brought Forward from prior quarter end
</TABLE>
(Note: The initial value for LBF will be the Initial Ceding Allowance
as set forth in Schedule D.)
SCHEDULE C CONTINUES...
Page 31
<PAGE> 35
Then:
C = Commission allowances incurred during the quarter
N = Net gain during the quarter
= P + I - R - B - C - A - T
ER = Experience Refund for the quarter, defined as:
= 60%[N - {1.10 to the .25 power x LBF}] , but not
less than zero.
and:
LCF = Loss Carried Forward from current quarter end
(= LBF for next quarter), defined as:
= {1.10 to the .25 power x LBF} - N, but not less
than zero.
...END OF SCHEDULE C
Page 32
<PAGE> 36
SCHEDULE D
----------
EXPENSE ALLOWANCES
------------------
THE INITIAL CEDING ALLOWANCE shall be $10,000,000.
THE OVERHEAD EXPENSE ALLOWANCES: In conjunction with the quarterly
accounting, a proportionate share of the following allowances will be credited
to the Company at the start of each quarter in the premium/claim calculation
based on the number of policies and/or certificates inforce and/or applicable
premium paid during the quarter. Such amounts are consistent with those
presented in the M&R report which the Reinsurer relied upon in its evaluation.
The agreed-to, all inclusive Expense Allowance for the calendar year 1997 will
be 22.6%. Subsequent Expense Allowances for the twenty-four months beginning
January 1, 1998 will be 29.6% of premium. This reimbursement will decrease to
27.6% of premium thereafter. The components of this expense reimbursement are as
follows:
Premium taxes will be reimbursed at 2.5 %
Managed Care will have a cost factor of 2.6%
Commissions are reimbursed at a level of 13%
Overhead Expense Allowance for maintenance will be at 11.5% for 1998
and 1999, and 9.5% thereafter.
If after thirty-six (36) treaty months the amount outstanding in the
treaty experience refund account is still greater than zero, RCH's expense
reimbursement for the maintenance component of the Overhead Expense Allowance as
a percentage of premium to CRLIC will decrease by 1% per year effective the
first quarter following the expiration of the thirty-six month period, subject
to a minimum of 7%. Once the Treaty converts to a 60/40 quota share, this
expense percentage then in effect will remain fixed until effective Treaty
termination.
...END OF SCHEDULE D
Page 33
<PAGE> 1
Exhibit (10)(11)
AMENDMENT NO. 1
TO
CREDIT AGREEMENT
THIS AMENDMENT is made as of the 25th day of March, 1998 by and between
Strategic Acquisition Partners, LLC, a Nevada limited liability company
("Lender") and Central Reserve Life Corporation, an Ohio corporation (the
"Borrower"). Capitalized terms used herein and not otherwise defined shall have
the respective meanings provided in the Credit Agreement referred to below.
WHEREAS, the parties hereto are parties to that certain Credit
Agreement, dated as of December 16, 1997, as amended (the "Credit Agreement");
and
WHEREAS, the parties hereto desire to amend the Credit Agreement to
extend the Termination Date to June 30, 1998 and to permit the accrual of
interest payable under the Credit Agreement until the Termination Date;
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. The definition of "Termination Date" contained in Section 1.1 of the
Credit Agreement is hereby amended and restated in its entirety to read as
follows:
"Termination Date" means the earlier of (a) June 30, 1998 and
(b) the date of termination in whole of the Commitment or the
Loan pursuant to SECTION 5.1, 5.2 or 10.2."
2. The parties agree that if the Company is unable to obtain sufficient
funds to make its regularly scheduled monthly payments of interest on the
principal amount of the Loan after using its best efforts to obtain such funds
(including, without limitation, solicitation of the Ohio insurance commission
requesting that CRL be permitted to make a loan to, or other investment in, the
Company in an amount sufficient to pay any such scheduled interest payments),
the Company shall be permitted to accrue any such interest payments (and as a
result, not be in breach or default under the Credit Agreement or the Note
issued thereunder) until the earlier of (a) the Company's receipt of funds
sufficient to pay such accrued interest (which shall be promptly paid to Lender,
but in any event within 2 Business Days) or (b) the Termination Date.
3. In consideration for the Lender's agreement to extend the
Termination Date and permit the deferral of interest pursuant to Section 2, (i)
the Company shall pay to Lender a nonrefundable fee of $2,500, which fee shall
be payable on the Termination Date and (ii) the Company represents and warrants
to the Lender that:
-1-
<PAGE> 2
(a) The execution, delivery and performance of this Amendment
is within the Company's authority (corporate or otherwise), has been
duly authorized by all necessary action, has received all necessary
consents or approvals (if any shall be required), does not and will not
contravene or conflict with any provision of law or of the charter,
bylaws or other organizational documents of the Company or its
Subsidiaries, or of any other agreement binding upon the Company, its
Subsidiaries or their respective properties;
(b) This Amendment constitutes the legal, valid and binding
obligation of the Company, enforceable against the Company in
accordance with its terms;
(c) No Default or Event of Default has occurred and is
continuing or will result from the terms set forth in this Amendment;
and
(d) The representations and warranties of the Company set
forth in Section 7 of the Credit Agreement (with respect to the
representations and warranties of the Company contained in Section
7.1.6 of the Credit Agreement, the representations and warranties
shall be incorporated by reference from Article IV of the Amended and
Restated Stock Purchase Agreement) or any Related Document are true
and correct as if made on the date hereof, except any such
representation or warranty which speaks to a specific date.
4. Except as specifically amended herein, the Credit Agreement shall
remain in full force and effect and the amendment granted hereunder will not in
any way operate as an amendment or modification of the Credit Agreement or any
Related Document other than as specifically enumerated above.
5. This Amendment shall be governed by and construed in accordance with
the internal substantive laws of the State of Illinois 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.
-2-
<PAGE> 3
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/ Susan Brantley
---------------------------------
Its:
---------------------------------
Central Reserve Life Corporation
By: /s/ Fred Lick, Jr.
----------------------------------
Its: Chairman and CEO
--------------------------------
-3-
<PAGE> 1
Exhibit (10)(13)
AMENDMENT NO. 1
TO
CENTRAL RESERVE LIFE CORPORATION
COMMON SHARES PURCHASE WARRANT
THIS AMENDMENT is made as of the 30th day of March, 1998 by
and between Peter W. Nauert ("Warrantholder") and Central Reserve Life
Corporation, an Ohio corporation (the "Corporation").
WHEREAS, the Company has issued to the Warrantholder that
certain Central Reserve Life Corporation Common Shares Purchase Warrant, dated
as of December 16, 1997 (the "Warrant"); and
WHEREAS, the parties hereto desire to amend the Warrant to
extend the date by which the Company must file a registration statement to
effect registration of the resale of the Warrant Shares (as such term is defined
in the Warrant).
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. The first sentence of paragraph 7 of the Warrant is hereby
amended and restated in its entirety to read as follows:
7. REGISTRATION STATEMENT. The Company shall, at its
expense, file a registration statement with the United States
Securities and Exchange Commission to effect the registration
of the resale of the Warrant Shares under the Securities Act
within 30 days after the earlier to occur of (i) the closing
of the transactions contemplated by that certain Amended and
Restated Stock Purchase Agreement (the "Stock Purchase
Agreement"), dated as of March 30, 1998, by and among
Strategic Acquisition Partners, LLC, Insurance Partners, L.P.,
Insurance Partners Bermuda (Offshore), L.P. and the Company or
(ii) the termination of the Stock Purchase Agreement; 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 prospectus.
2. Except as specifically amended herein, the Warrant shall
remain in full force and effect.
<PAGE> 2
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.
/s/ Peter W. Nauert
-------------------------------------
Peter W. Nauert
Central Reserve Life Corporation
By: /s/ Fred Lick, Jr.
-----------------------------------
Its: /s/ Chairman and C.E.O.
---------------------------------
<PAGE> 1
Exhibit (10)(14)
AMENDMENT NO. 1
TO
CENTRAL RESERVE LIFE CORPORATION
COMMON SHARES PURCHASE WARRANT
THIS AMENDMENT is made as of the 30th day of March, 1998 by
and between Turkey Vulture Fund XIII, Ltd. ("Warrantholder") and Central Reserve
Life Corporation, an Ohio corporation (the "Corporation").
WHEREAS, the Company has issued to the Warrantholder that
certain Central Reserve Life Corporation Common Shares Purchase Warrant, dated
as of December 16, 1997 (the "Warrant"); and
WHEREAS, the parties hereto desire to amend the Warrant to
extend the date by which the Company must file a registration statement to
effect registration of the resale of the Warrant Shares (as such term is defined
in the Warrant).
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. The first sentence of paragraph 7 of the Warrant is hereby
amended and restated in its entirety to read as follows:
7. REGISTRATION STATEMENT. The Company shall, at its
expense, file a registration statement with the United States
Securities and Exchange Commission to effect the registration
of the resale of the Warrant Shares under the Securities Act
within 30 days after the earlier to occur of (i) the closing
of the transactions contemplated by that certain Amended and
Restated Stock Purchase Agreement (the "Stock Purchase
Agreement"), dated as of March 30, 1998, by and among
Strategic Acquisition Partners, LLC, Insurance Partners, L.P.,
Insurance Partners Bermuda (Offshore), L.P. and the Company or
(ii) the termination of the Stock Purchase Agreement; 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 prospectus.
2. Except as specifically amended herein, the Warrant shall
remain in full force and effect.
<PAGE> 2
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.
Turkey Vulture Fund XIII, Ltd.
By: /s/ Richard M. Osborne
------------------------------
Richard M Osborne
Manager
Central Reserve Life Corporation
By: /s/ Fred Lick, Jr.
-------------------------------
Its: Chairman and C.E.O.
-----------------------------
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF CENTRAL RESERVE LIFE CORPORATION AND
SUBSIDIARIES FOR THE YEAR ENDED DECEMBER 31, 1997, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000215403
<NAME> CENTRAL RESERVE LIFE CORP
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1996
<DEBT-HELD-FOR-SALE> 67,961,886
<DEBT-CARRYING-VALUE> 11,898,627
<DEBT-MARKET-VALUE> 11,882,268
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 81,927,130
<CASH> 9,563,130
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 325,572
<TOTAL-ASSETS> 135,803,577
<POLICY-LOSSES> 24,903,497
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 56,186,802
<POLICY-HOLDER-FUNDS> 7,565,341
<NOTES-PAYABLE> 28,399,028
2,097,586
0
<COMMON> 0
<OTHER-SE> (585,744)
<TOTAL-LIABILITY-AND-EQUITY> 135,803,577
258,859,307
<INVESTMENT-INCOME> 6,527,537
<INVESTMENT-GAINS> 146,478
<OTHER-INCOME> 0
<BENEFITS> 210,744,366
<UNDERWRITING-AMORTIZATION> 4,005
<UNDERWRITING-OTHER> 75,841,838
<INCOME-PRETAX> (21,088,887)
<INCOME-TAX> (132,531)
<INCOME-CONTINUING> (20,956,356)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (20,956,356)
<EPS-PRIMARY> (5.01)
<EPS-DILUTED> (5.01)
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
