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SCHEDULE 14A
(RULE 14a)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934
(AMENDMENT NO. 1)
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
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[ ] Preliminary Proxy Statement [ ] CONFIDENTIAL, FOR USE OF THE COMMISSION
ONLY (AS PERMITTED BY RULE 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to sec.240.14a-11(c) or sec.240.14a-12
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CENTRAL RESERVE LIFE CORPORATION
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
(--)
(NAME OF PERSON(S) FILING PROXY STATEMENT, IF OTHER THAN THE REGISTRANT)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies: .......
(2) Aggregate number of securities to which transaction applies: ..........
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined): ............
(4) Proposed maximum aggregate value of transaction: ......................
(5) Total fee paid: .......................................................
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid: ...............................................
(2) Form, Schedule or Registration Statement No.: .........................
(3) Filing Party: .........................................................
(4) Date Filed: ...........................................................
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CENTRAL RESERVE LIFE LOGO CENTRAL RESERVE LIFE LOGO
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FRED LICK, JR.
CHAIRMAN OF THE BOARD,
PRESIDENT & CHIEF EXECUTIVE OFFICER
SPECIAL MEETING OF SHAREHOLDERS
EQUITY ISSUANCE PROPOSED -- YOUR VOTE IS VERY IMPORTANT
You are cordially invited to attend a special meeting of our shareholders
at which you will be asked to vote on a proposal concerning a $40,150,000 equity
financing, and two related proposals, intended to strengthen your company's
financial position.
If the equity financing transaction is completed, your company would issue
to certain investors, for an aggregate purchase price of $40,150,000, 7,300,000
common shares and warrants to purchase an additional 3,650,000 common shares.
Because your Board of Directors has determined that the terms of such
equity financing are fair to and in the best interest of our shareholders, the
Board unanimously approved and adopted the agreement governing those
transactions. In reaching its conclusion, the Board of Directors considered,
among other things, the opinion of Advest, Inc., its financial advisor, that the
consideration to be received in the proposed equity financing is fair to the
shareholders of the company from a financial point of view. THE BOARD OF
DIRECTORS RECOMMENDS THAT YOU VOTE FOR APPROVAL OF THE EQUITY FINANCING AND THE
RELATED PROPOSALS.
The equity financing cannot be completed unless our shareholders approve
it. Therefore, we have scheduled a special meeting for our shareholders to vote
on the proposed transaction. YOUR VOTE IS VERY IMPORTANT.
The date, time and place of the meeting is: June 26, 1998, 10:00 a.m.
(local time),
Holiday Inn, Strongsville
15471 Royalton Road
Strongsville, OH 44136
Whether or not you plan to attend the meeting, please take the time to vote
by completing and mailing the enclosed proxy card to us. If you sign and date
and mail your proxy without indicating how you want to vote, your proxy will be
counted as a vote in favor of the proposals. If you abstain or do not vote, it
will have the effect of a vote against the proposals.
This proxy statement provides you with detailed information about the
proposed equity financing and the related proposals. Included with this proxy
statement are copies of the Company's 1997 Annual Report on Form 10-K/A and its
Quarterly Report on Form 10-Q for the period ended March 31, 1998, which provide
you with additional information about the Company. In addition, you may obtain
information about the company from the documents that we have filed with the
Securities and Exchange Commission. We encourage you to read the proxy statement
and the other enclosed documents carefully.
LICK SIGNATURE
Fred Lick, Jr.
Chairman of the Board,
President and Chief Executive
Officer
CRL PLAZA - 17800 ROYALTON ROAD - STRONGSVILLE, OHIO 44136-5197 - 440-572-2400
<PAGE> 3
CENTRAL RESERVE LIFE CORP. LOGO
CENTRAL RESERVE LIFE CORPORATION
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD JUNE 26, 1998
Notice is hereby given that a Special Meeting of Shareholders of Central
Reserve Life Corporation (the "Company") will be held at the Holiday
Inn -- Strongsville, 15471 Royalton Road, Strongsville, Ohio, on June 26, 1998,
at 10:00 a.m., local time, for the following purposes:
1. To consider and vote upon a proposal described in the accompanying
Proxy Statement, which provides for:
Approval of an equity financing transaction (the "Equity Financing")
pursuant to which the Company will, (a) in accordance with the terms
of that certain Amended and Restated Stock Purchase Agreement dated
March 30, 1998 (the"Stock Purchase Agreement"), by and among the
Company, Strategic Acquisition Partners, LLC ("Strategic Partners"),
Insurance Partners, L.P. ("IP Delaware"), and Insurance Partners
Offshore (Bermuda), L.P. ("IP Bermuda" and collectively with IP
Delaware, "Insurance Partners"), a copy of which is attached as
Appendix A to this Proxy Statement, issue and sell to (i) Strategic
Partners, for an aggregate purchase price of $15,749,998 (or $5.50 per
unit), (A) 2,863,636 Common Shares (the 'SAP Shares") and (B) warrants
to purchase an additional 1,431,818 Common Shares at an exercise price
of $5.50 per share (the "SAP Warrants"), (ii) IP Delaware, for an
aggregate purchase price of $15,730,396 (or $5.50 per unit), (A)
2,860,072 Common Shares (the "IP Delaware Shares") and (B) warrants to
purchase an additional 1,430,036 Common Shares at an exercise price of
$5.50 per share (the "IP Delaware Warrants"), and (iii) IP Bermuda,
for an aggregate purchase price of $8,669,606 (or $5.50 per unit), (A)
1,576,292 Common Shares (the "IP Bermuda Shares" and collectively with
the SAP Shares and the IP Delaware Shares, the "Shares") and (B)
warrants to purchase an additional 788,146 Common Shares at an
exercise price of $5.50 per share (the "IP Bermuda Warrants" and
collectively with the SAP Warrants and the IP Delaware Warrants, the
"Equity Warrants"), and (b) issue to Peter W. Nauert, an investor in
Strategic Partners, and to Turkey Vulture Fund XIII, Ltd. (the "Fund")
warrants to purchase an aggregate of 200,000 Common Shares at an
exercise price of $6.00 per share in consideration of certain
guarantees provided by Peter W. Nauert and Richard M. Osborne, the
controlling investor in the Fund, in connection with a bridge
financing transaction (the "Guarantee Warrants") pursuant to which the
Company received $20,000,000 in financing from Strategic Partners.
Approval of the Equity Financing shall be deemed to include approval
of the exercise by one or more of Strategic Partners, the Assignees
(as defined herein), IP Delaware, IP Bermuda, Peter W. Nauert, and the
Fund of all or any portion of the Equity Warrants and/or Guarantee
Warrants at any time or from time to time.
If the Financing Proposal is approved and the Equity Financing is
consummated, Strategic Partners, Insurance Partners, the Fund and the
Assignees will collectively own approximately 67% of the Company's
outstanding Common Shares.
2. To consider and vote upon a proposal which provides for the amendment
and restatement of the Code of Regulations of the Company to eliminate the
classification of the Board of Directors of the Company for purposes of
director elections.
3. To consider and vote upon a proposal which provides for an amendment
to the Company's Amended Articles of Incorporation to increase the Company's
total authorized shares by increasing the number of authorized Common Shares
from 15,000,000 to 30,000,000.
Only shareholders of record at the close of business on May 21, 1998, will
be entitled to notice of, and to vote at, the Special Meeting or any adjournment
thereof.
By order of the Board of Directors.
STANDISH SIGNATURE
LINDA S. STANDISH, Secretary
May 28, 1998
YOUR VOTE IS IMPORTANT
PLEASE SIGN, DATE AND RETURN YOUR PROXY CARD
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING.
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TABLE OF CONTENTS
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PROXY STATEMENT............................................. i
THE SPECIAL MEETING......................................... 1
Date, Time and Place................................... 1
The Proposals.......................................... 1
Votes Required......................................... 2
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING
INFORMATION............................................... 2
CERTAIN CONSIDERATIONS...................................... 3
Financial Condition of the Company..................... 3
Consequences if the Financing Proposal is not
Approved.............................................. 4
Dilution of Existing Shareholders; Change in Control... 4
Change in Majority of Directors........................ 6
Certain Effects of Declassifying the Board............. 6
FINANCIAL AND OTHER INFORMATION............................. 6
Pro Forma Financial Information........................ 6
THE FINANCING PROPOSAL...................................... 8
The Equity Financing................................... 8
Background of the Financing Proposal................... 8
Opinion of Financial Advisor........................... 13
Considerations of the Board............................ 16
Required Shareholder Approvals......................... 17
Meeting Voting Agreements.............................. 18
Interests of Certain Persons in the Financing
Proposal.............................................. 18
Stock Purchase Agreement............................... 19
Registration Rights Agreement.......................... 23
Stockholders Agreement................................. 25
Equity Warrants........................................ 25
New Directors; Management of the Company............... 26
THE DECLASSIFICATION PROPOSAL............................... 28
THE SHARE PROPOSAL.......................................... 29
YEAR 2000 CONVERSION........................................ 29
INFORMATION REGARDING STRATEGIC PARTNERS AND INSURANCE
PARTNERS.................................................. 29
Strategic Partners..................................... 29
Insurance Partners..................................... 30
AGREEMENT AMONG CERTAIN INVESTORS........................... 30
REGULATORY APPROVALS........................................ 31
SECURITY OWNERSHIP OF MANAGEMENT AND PRINCIPAL
SHAREHOLDERS.............................................. 32
SHAREHOLDER PROPOSALS....................................... 35
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE............. 35
APPENDIX A-STOCK PURCHASE AGREEMENT......................... A-1
APPENDIX B-AMENDED CODE..................................... B-1
APPENDIX C-OPINION OF ADVEST, INC........................... C-1
APPENDIX D-ACQUIRING PERSON STATEMENT....................... D-1
APPENDIX E-DIRECTORS........................................ E-1
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CENTRAL RESERVE LIFE CORPORATION
CRL PLAZA
17800 ROYALTON ROAD
STRONGSVILLE, OHIO 44136
PROXY STATEMENT
This Proxy Statement is furnished in connection with the solicitation of
proxies for use at a Special Meeting (the "Meeting") of shareholders of Central
Reserve Life Corporation, an Ohio corporation (the "Company"), to be held on
Friday, June 26, 1998, at 10:00 a.m., local time, at the Holiday
Inn -- Strongsville, 15471 Royalton Road, Strongsville, Ohio, and at any
adjournment thereof. This Proxy Statement and the accompanying form of proxy
("proxy card"), together with the Company's Annual Report on Form 10-K/A for the
fiscal year ended December 31, 1997 (the "Form 10-K/A") and the Company's
Quarterly Report on Form 10-Q for the period ended March 31, 1998 (the "Form
10-Q"), will first be sent to shareholders on or about May 28, 1998.
The close of business on May 21, 1998 has been fixed as the record date
(the "Record Date") for the determination of shareholders entitled to notice of,
and to vote at, the Meeting. At that date the Company had outstanding 4,195,172
Common Shares, without par value ("Common Shares").
At the Meeting, holders of Common Shares will be asked to consider and vote
upon the following matters:
1. A proposal (the "Financing Proposal") described herein, which
provides for:
Approval of an equity financing transaction (the "Equity Financing")
pursuant to which the Company will, (a) in accordance with the terms
of that certain Amended and Restated Stock Purchase Agreement dated
March 30, 1998 (the "Stock Purchase Agreement"), by and among the
Company, Strategic Acquisition Partners, LLC ("Strategic Partners"),
Insurance Partners, L.P. ("IP Delaware), and Insurance Partners
Offshore (Bermuda), L.P. ("IP Bermuda" and collectively with IP
Delaware, "Insurance Partners"), a copy of which is attached as
Appendix A to this Proxy Statement, issue and sell to (i) Strategic
Partners, for an aggregate purchase price of $15,749,998 (or $5.50
per unit), (A) 2,863,636 Common Shares (the "SAP Shares") and (B)
warrants to purchase an additional 1,431,818 Common Shares at an
exercise price of $5.50 per share (the "S&P Warrants"), (ii) IP
Delaware, for an aggregate purchase price of $15,730,396 (or $5.50
per unit), (A) 2,860,072 Common Shares (the "IP Delaware Shares") and
(B) warrants to purchase an additional 1,430,036 Common Shares at an
exercise price of $5.50 per share (the "IP Delaware Warrants"), and
(iii) IP Bermuda, for an aggregate purchase price of $8,669,606 (or
$5.50 per unit), (A) 1,576,292 Common Shares (the "IP Bermuda
Shares") and collectively with the SAP Shares and the IP Delaware
Shares, the "Shares") and (B) warrants to purchase an additional
788,146 Common Shares at an exercise price of $5.50 per share (the
"IP Bermuda Warrants" and collectively with the SAP Warrants and the
IP Delaware Warrants, the "Equity Warrants"), and (b) issue to Peter
W. Nauert, an investor in Strategic Partners, and to Turkey Vulture
Fund XIII, Ltd. (the "Fund") warrants to purchase an aggregate of
200,000 Common Shares at an exercise price of $6.00 per share (the
"Guarantee Warrants") in consideration of certain guarantees provided
by Peter W. Nauert and Richard M. Osborne, the controlling investor
in the Fund, in connection with a bridge financing transaction (the
"Bridge Financing") pursuant to which the Company received
$20,000,000 in financing from Strategic Partners. Approval of the
Equity Financing shall be deemed to include approval of the exercise
by one or more of Strategic Partners, the Assignees (as defined
herein), IP Delaware, IP Bermuda, Peter W. Nauert, and the Fund of
all or any portion of the Equity Warrants and/or Guarantee Warrants
at any time or from time to time.
If the Financing Proposal is approved and the Equity Financing is
consummated, Strategic Partners, Insurance Partners, the Fund and the
Assignees will collectively own approximately 67% of the Company's
outstanding Common Shares.
(i)
<PAGE> 6
2. A proposal (the "Declassification Proposal") which provides for the
amendment and restatement of the Code of Regulations of the Company (the
"Amended Code") to eliminate the classification of the Board of Directors
of the Company (the "Board") for purposes of director elections. The text
of the relevant sections of the Amended Code is attached as Appendix B to
this Proxy Statement.
3. A proposal (the "Share Proposal") which provides for an amendment
to the Company's Amended Articles of Incorporation to increase the
Company's total authorized shares by increasing the number of authorized
Common Shares from 15,000,000 to 30,000,000.
On November 26, 1997 the Company originally entered into a stock purchase
agreement with Strategic Partners (the "Original Stock Purchase Agreement"). The
Original Stock Purchase Agreement provided for the issuance of only 5,000,000
Common Shares at a price of $5.50 per share and Warrants to purchase an
additional 2,500,000 Common Shares at an exercise price of $6.50 per share for
total proceeds of only $27,500,000. On March 30, 1998 the Company entered into
the Stock Purchase Agreement, which brought Insurance Partners into the
transaction as an investor, increased the number of Common Shares (to 7,300,000)
and Equity Warrants (to 3,650,000) that the Company would issue along with the
proceeds the Company would receive (to $40,150,000), and made certain other
changes to the terms of the agreement. See "The Financing
Proposal -- Background of the Financing Proposal."
Of the $40,150,000 purchase price for the Common Shares and the Equity
Warrants, the amount to be paid by Strategic Partners will be paid by
cancellation of a portion of the note evidencing the Bridge Financing (the
"Bridge Note"). The other investors will pay cash, a portion of which the
Company will use to repay the remaining amount owed under the Bridge Note. In
addition, upon the exercise of any Equity Warrants, holders thereof will be
required to pay the exercise price of $5.50 per share, unless such holders
choose to exercise their right under the Equity Warrants to receive net warrant
shares in lieu of any cash payment ("Cashless Exercise"). There can be no
assurance, however, that any of the Equity Warrants will be exercised. The
Financing Proposal, if adopted, will result in a change of control of the
Company based on share ownership and will effectively entitle Strategic
Partners, Insurance Partners, the Fund (which has agreed with Strategic Partners
to purchase from the Company a portion of the Common Shares that were to be
issued to Strategic Partners under the Stock Purchase Agreement), and their
respective assignees, to designate seven of the nine members of the Company's
Board of Directors. On November 12, 1997, the last trading day prior to
announcement of the Company's original agreement in principle with Strategic
Partners, the Company's closing share price was $5.25. On March 27, 1998, the
last trading day prior to announcement of the amendment of the Stock Purchase
Agreement to include the additional equity issuances, the Company's closing
share price was $7.75.
THE BOARD OF DIRECTORS OF THE COMPANY RECOMMENDS THAT SHAREHOLDERS VOTE "FOR"
THE FINANCING PROPOSAL, "FOR" THE DECLASSIFICATION PROPOSAL AND "FOR" THE SHARE
PROPOSAL.
Certain members of the Board have an interest in the transactions
contemplated by the proposals, which shareholders should consider before casting
their votes. See "The Financing Proposal -- Interests of Certain Persons in the
Financing Proposal."
The affirmative vote of both (i) a majority of the Common Shares present at
the Meeting at which the required quorum is present, either in person or by
proxy, and (ii) a majority of the Common Shares present at the Meeting at which
the required quorum is present, either in person or by proxy, which are not
"Interested Shares" (the "Disinterested Vote"), is required to approve the
Financing Proposal. The Company's listing agreement with The Nasdaq Stock Market
("Nasdaq") requires the approval set forth in (i) above, and the Ohio Control
Share Acquisition Act, Ohio Revised Code ss. 1701.831 (the "Control Share Act")
requires the approvals set forth in (i) and (ii) above. "Interested Shares" for
purposes of the Financing Proposal include Common Shares that are beneficially
owned by Peter W. Nauert, Strategic Partners, the Fund and certain related
persons, if any, Common Shares beneficially owned by officers of the Company and
employees of the Company who are also directors of the Company, and Common
Shares acquired by any person after the first date of public disclosure
(November 12, 1997) of a potential control share acquisition and prior to the
Record Date, provided such person and any other person acting in concert with
such person, have paid over $250,000 for such purchased shares or such purchased
shares represent greater than .5% (20,976) of the outstanding Common Shares.
(ii)
<PAGE> 7
The affirmative vote of a majority of the outstanding Common Shares is
required to approve the Declassification Proposal and the Share Proposal.
Only holders of record of Common Shares as of the close of business on the
Record Date will be entitled to notice of, and to vote at, the Meeting or any
adjournment or postponement thereof. Those holders are entitled to one vote per
share on any matter which may properly come before the Meeting, except that
Interested Shares will not be counted for purposes of calculating the
Disinterested Vote.
The presence, either in person or by properly executed proxy, of holders of
a majority of the then outstanding Common Shares and of a majority of the then
outstanding Common Shares that are not Interested Shares is necessary to
constitute a quorum at the Meeting for purposes of taking action on the
Financing Proposal. The presence, either in person or by properly executed
proxy, of the holders of one-third of the then outstanding Common Shares is
necessary to constitute a quorum at the Meeting for purposes of taking action on
the Declassification Proposal and the Share Proposal, although the affirmative
vote of a majority of the outstanding Common Shares is required to approve the
Declassification Proposal and the Share Proposal. Abstentions and broker
non-votes will be included in determining the presence of a quorum. Under Ohio
law and the Company's Amended Articles of Incorporation, broker non-votes and
abstaining votes will have the same effect as votes against the Financing
Proposal, the Declassification Proposal and the Share Proposal. As of the close
of business on the Record Date, there were 4,195,172 Common Shares outstanding
and entitled to vote at the Meeting, approximately 14.8% of which are
beneficially owned by directors and officers of the Company or Central Reserve
Life Insurance Company, the Company's Insurance subsidiary ("CRL") and their
affiliates, including approximately 12% held by officers of the Company (all of
which are Interested Shares), and approximately 9.5% of which are beneficially
owned by Richard M. Osborne through the Fund (all of which are Interested
Shares). Certain officers and directors of the Company, including Fred Lick,
Jr., Chairman, President and Chief Executive Officer of the Company, have
entered into Meeting Voting Agreements (the "Meeting Voting Agreements") with
Strategic Partners, dated December 16, 1997, pursuant to which they have agreed
to vote their Common Shares in favor of the Financing Proposal, the
Declassification Proposal and the Share Proposal, subject to certain exceptions.
There are 644,247 Common Shares subject to the Meeting Voting Agreements which
represent approximately 15% of the outstanding Common Shares. See "The Financing
Proposal -- Meeting Voting Agreements."
The solicitation of proxies is made by and on behalf of the Board. The cost
of the solicitation, including the reasonable expenses of brokerage firms or
other nominees for forwarding proxy materials to beneficial owners, will be
borne by the Company. In addition to solicitation by mail, proxies may be
solicited by telephone or telegraph or personally. The Company has engaged Regan
& Associates, Inc., New York, New York, a company regularly engaged in the
solicitation of proxies and consents, to assist it in the solicitation of
proxies at an estimated cost of $3,750 and otherwise upon customary terms. In
its role as proxy solicitor, Regan & Associates will be seeking information from
the record holders of Common Shares to determine which Common Shares are
Interested Shares and therefore excluded from the calculation of the
Disinterested Vote for purposes of determining whether the Financing Proposal is
approved. Proxies may also be solicited by directors, officers and employees of
the Company without additional compensation.
If the enclosed form of proxy is executed and returned, the shares
represented thereby will be voted in accordance with any specification made by
the shareholder. In the absence of any such specification, proxies will be voted
FOR the Financing Proposal, FOR the Declassification Proposal and FOR the Share
Proposal.
If a quorum is not present at the time the Meeting is convened, the Meeting
may be adjourned with a vote of a majority of the shareholders present at the
Meeting. If the Company proposes to adjourn the Meeting by a vote of the
shareholders, the persons named in the enclosed form of proxy will vote all
Common Shares for which they have voting authority in favor of such adjournment.
If the Financing Proposal, the Declassification Proposal and the Share
Proposal are not approved by the Company's shareholders, the Company may
resolicit shareholder votes at a subsequent date. The Company's ability to
resolicit shareholder votes, however, may be limited by the Company's financial
condition. See "Certain Considerations -- Consequences if the Financing Proposal
is not Approved."
(iii)
<PAGE> 8
Your execution of the enclosed proxy will not affect your right as a
shareholder to attend the Meeting and to vote in person. Any shareholder giving
a proxy has the right to revoke it at any time by either (a) filing with the
Secretary of the Company at or before the Meeting a written notice of revocation
bearing a later date than the proxy, (b) duly executing a subsequent proxy
relating to the same Common Shares and delivering it to the Secretary of the
Company at or before the Meeting, or (c) attending the Meeting and giving notice
of revocation of the proxy (although attendance at the Meeting will not in and
of itself constitute a revocation of a proxy).
The principal executive offices of the Company are located at CRL Plaza,
17800 Royalton Road, Strongsville, Ohio 44136. The Company's telephone number is
(440) 572-2400.
The date of this Proxy Statement is May 28, 1998.
(iv)
<PAGE> 9
THE SPECIAL MEETING
DATE, TIME AND PLACE
This Proxy Statement is furnished in connection with the solicitation of
proxies for use at the Special Meeting of Shareholders of Central Reserve Life
Corporation, an Ohio corporation, to be held on Friday, June 26, 1998, at 10:00
a.m., local time, at the Holiday Inn -- Strongsville, 15471 Royalton Road,
Strongsville, Ohio, and at any adjournment thereof. This Proxy Statement and the
accompanying proxy card, together with the Company's Annual Report on Form
10-K/A for the fiscal year ended December 31, 1997 and the Company's Quarterly
Report on Form 10-Q for the period ended March 31, 1998, will first be sent to
shareholders on or about May 28, 1998.
THE PROPOSALS
At the Meeting, holders of Common Shares will be asked to consider and vote
upon the following matters:
1. The Financing Proposal, which provides for:
Approval of an equity financing transaction pursuant to which the
Company will, (a) in accordance with the terms of the Stock Purchase
Agreement, issue and sell to (i) Strategic Partners, for an aggregate
purchase price of $15,749,998 (or $5.50 per unit), (A) 2,863,636
Common Shares and (B) warrants to purchase an additional 1,431,818
Common Shares at an exercise price of $5.50 per share, (ii) IP
Delaware, for an aggregate purchase price of $15,730,396 (or $5.50
per unit) (A) 2,860,072 Common Shares and (B) warrants to purchase an
additional 1,430,036 Common Shares at an exercise price of $5.50 per
share, and (iii) IP Bermuda, for an aggregate purchase price of
$8,669,606 (or $5.50 per unit), (A) 1,576,292 Common Shares and (B)
warrants to purchase an additional 788,146 Common Shares at an
exercise price of $5.50 per share, and (b) issue to Peter W. Nauert,
an investor in Strategic Partners, and to the Fund warrants to
purchase an aggregate of 200,000 Common Shares at an exercise price
of $6.00 per share in consideration of certain guarantees provided by
Peter W. Nauert and Richard M. Osborne, the controlling investor in
the Fund, in connection with the Bridge Financing. Approval of the
Equity Financing shall be deemed to include approval of the exercise
by one or more of Strategic Partners, the Assignees (as defined
herein), IP Delaware, IP Bermuda, Peter W. Nauert, and the Fund of
all or any portion of the Equity Warrants and/or Guarantee Warrants
at any time or from time to time.
2. The Declassification Proposal, which provides for the amendment and
restatement of the Code of Regulations of the Company to eliminate the
classification of the Board for purposes of director elections. The text of
the relevant sections of the Amended Code is attached as Appendix B to this
Proxy Statement.
3. The Share Proposal, which provides for an amendment to the
Company's Amended Articles of Incorporation to increase the Company's total
authorized shares by increasing the number of authorized Common Shares from
15,000,000 to 30,000,000.
Of the $40,150,000 purchase price for the Shares and the Equity Warrants,
the amount to be paid by Strategic Partners will be paid by cancellation of a
portion of the Bridge Note. The other investors will pay cash, a portion of
which the Company will use to pay the remaining amount owed under the Bridge
Note. In addition, upon the exercise of any Equity Warrants, holders thereof
will be required to pay the exercise price of $5.50 per share, unless such
holders exercise their right to a Cashless Exercise. There can be no assurance,
however, that the Equity Warrants will be exercised. When the Equity Warrants
are exercised, if ever, the Company will use any proceeds received from such
exercise to fund its general working capital needs or to achieve its other
financial objectives as the Board may determine at such time. The Financing
Proposal, if adopted, will result in a change of control of the Company based on
stock ownership and will effectively entitle Strategic Partners, Insurance
Partners, the Fund (which has agreed with Strategic Partners to purchase from
the Company a portion of the Common Shares that were to be issued to Strategic
Partners under the Stock Purchase Agreement), and their respective assignees, to
designate seven of the nine members of the Company's Board of Directors. On the
last
1
<PAGE> 10
trading day prior to announcement of the Company's agreement in principle with
Strategic Partners, the Company's closing share price was $5.25. On March 27,
1998, the last trading day prior to announcement of the amendment of the Stock
Purchase Agreement to include the additional equity issuances, the Company's
closing share price was $7.75.
THE BOARD OF DIRECTORS OF THE COMPANY RECOMMENDS THAT SHAREHOLDERS VOTE "FOR"
THE FINANCING PROPOSAL, "FOR" THE DECLASSIFICATION PROPOSAL AND "FOR" THE SHARE
PROPOSAL.
Certain members of the Board have an interest in the transactions
contemplated by the proposals, which shareholders should consider before casting
their votes. See "The Financing Proposal -- Interests of Certain Persons in the
Financing Proposal."
VOTES REQUIRED
Financing Proposal. The affirmative vote of both (i) a majority of the
Common Shares present at the Meeting, either in person or by proxy, and (ii) a
majority of the Common Shares present at the Meeting, either in person or by
proxy, which are not "Interested Shares" is required to approve the Financing
Proposal. "Interested Shares" for purposes of the Financing Proposal include
Common Shares beneficially owned by Peter W. Nauert, Strategic Partners, the
Fund and certain related persons, if any, Common Shares held by officers of the
Company and employees of the Company who are also directors of the Company, and
Common Shares acquired by any person after the first date of public disclosure
(November 12, 1997) of a potential control share acquisition and prior to the
Record Date, provided such person and any other person acting in concert with
such person, have paid over $250,000 for such purchased shares or such purchased
shares represent greater than .5% (20,976) of the outstanding Common Shares. See
"The Financing Proposal -- Required Shareholder Approvals -- Control Share Act."
As of the Record Date, the Interested Shares held by parties with an interest in
the Equity Financing and by officers of the Company and/or directors who are
also employees of the Company included (a) 400,000 Common Shares held by the
Fund, which constitute approximately 9.5% of the currently outstanding Common
Shares, (b) 1,000 Common Shares held by Peter W. Nauert, which constitute less
than 1% of the outstanding Common Shares and (c) 503,175 outstanding Common
Shares held by officers of the Company, which include (i) 360,000 Common Shares
held by Fred Lick, Jr., Chairman, President and Chief Executive Officer of the
Company; (ii) 125,000 Common Shares held by Frank Grimone, Senior Executive Vice
President and Chief Financial Officer of the Company; (iii) 14,075 Common Shares
held by James A. Weisbarth, Treasurer and Assistant Secretary of the Company;
and (iv) 4,100 Common Shares held by Linda S. Standish, Secretary of the
Company. Common Shares held by officers of the Company equal approximately 12%
of the outstanding Common Shares.
Approval by a majority of the Common Shares present at the Meeting is
required by the Control Share Act and the Nasdaq and, additionally, approval by
a majority of the Common Shares present at the Meeting which are not Interested
Shares is required by the Control Share Act. See "The Financing
Proposal -- Required Shareholder Approvals."
Declassification Proposal and Share Proposal. The Board has unanimously
approved the adoption of the Declassification Proposal and the Share Proposal.
Thus, the affirmative vote of a majority of the outstanding Common Shares is
required to approve the Declassification Proposal and the Share Proposal. See
"The Financing Proposal -- New Directors; Management of the Company -- Article
XI."
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING INFORMATION
This Proxy Statement contains certain forward-looking statements.
Forward-looking statements are statements other than historical information or
statements of current condition. Some forward-looking statements may be
identified by use of terms such as "believes", "anticipates", "intends" or
"expects". The forward-looking statements contained and incorporated by
reference in this Proxy Statement are generally located in the material set
forth under the heading "The Financing Proposal -- New Directors; Management of
the Company -- Business Plan," but may be found in other locations as well.
These forward-looking statements relate to the plans and objectives of the
Company for future operations. In light of the risks and uncertainties inherent
in all projections, including but not limited to those set forth under the
heading "Certain Considerations," the inclusion of the forward-looking
statements in this Proxy Statement should not be regarded as a representation by
the
2
<PAGE> 11
Company or any other person that the objectives or plans of the Company will be
achieved. Many factors could cause the Company's actual results to differ
materially from those in the forward-looking statements, including the
following: (i) the failure to consummate the Equity Financing, (ii) the failure
to successfully implement the business plan for the Company; (iii) rising
healthcare costs; (iv) business conditions and competition in the health care
industry; and (v) developments in healthcare reform and other regulatory issues.
The foregoing review of important factors should not be construed as exhaustive
and should be read in conjunction with other cautionary statements that are
included in this Proxy Statement. The Company undertakes no obligation to update
forward-looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
CERTAIN CONSIDERATIONS
In addition to the other information set forth in this Proxy Statement,
shareholders should consider the following in deciding whether to vote in favor
of the Financing Proposal:
FINANCIAL CONDITION OF THE COMPANY
Central Reserve Life Insurance Company ("CRL"), the Company's insurance
subsidiary, has filed annual financial statements with the Ohio Department of
Insurance ("ODI") prepared on the basis of accounting practices prescribed by
the ODI. Prescribed statutory accounting practices include a variety of
publications of the National Association of Insurance Commissioners, as well as
state laws, regulations and general and administrative rules.
The ODI imposes risk-based capital ("RBC") requirements on insurance
enterprises, including CRL. The RBC Model serves as a benchmark for the
regulation of life insurance companies by state insurance regulators and
provides for targeted surplus levels based on formulas which specify various
weighting factors that are applied to financial balances or various levels of
activity based on the perceived degree of risk, which are set forth in the RBC
requirements. Such formulas focus on four general types of risk: (a) the risk
with respect to the company's assets (asset or default risk); (b) the risk of
adverse insurance experience with respect to the company's liabilities and
obligations (insurance or underwriting risk); (c) the interest rate risk with
respect to the company's business (asset/liability matching); and (d) all other
business risks (management, regulatory action, and contingencies). The amount
determined under such formulas is called the Authorized Control Level RBC
("ACL").
The RBC guidelines define specific capital levels that are determined by
the ratio of the company's total adjusted capital ("TAC") to its ACL. TAC is
equal to statutory capital, plus or minus certain specified adjustments. The
specific capital levels, in declining order, and applicable ratios are generally
as follows: "Company Action Level" where TAC is less than or equal to 2.0 times
ACL; "Regulatory Action Level" where TAC is less than or equal to 1.5 ACL;
"Authorized Control Level" where TAC is less than or equal to 1.0 times ACL; and
"Mandatory Control Level" where TAC is less than or equal to 0.7 times ACL.
Companies at the Company Action Level must submit an RBC financial plan to the
insurance commissioner of the state of domicile. Companies at the Regulatory
Action Level are subject to a mandatory examination or analysis by the
commissioner and possible required corrective actions. At the Authorized Control
Level, a company is subject to, among other things, the commissioner placing it
under regulatory control. At the Mandatory Control Level, the insurance
commissioner is required to place a company under regulatory control. At
December 31, 1996, CRL's TAC was $17,137,515 or 1.4 times its ACL and
accordingly, CRL was at the Regulatory Action Level.
On March 5, 1997, CRL filed its RBC financial plan with the ODI outlining
plans for attaining the levels of RBC required to raise the Company's RBC above
the Company Action Level. The RBC financial plan identifies the conditions that
contributed to the Regulatory Action Level, including underpricing of a new
product, Professional Multi-Option Plans ("PMO"), sold primarily in 1995, and
state mandated benefits 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. The RBC financial plan also
contains corrective actions taken by CRL beginning April 1, 1996, including an
increase in PMO premium rates, changes in certain policy benefits and the
renegotiation of certain provider contracts to produce further cost savings.
3
<PAGE> 12
Subsequent to its March 1997 filing with the ODI, CRL's TAC declined
further. At the end of the third quarter of 1997, CRL's TAC was approximately
$11 million, which would have brought CRL within the Authorized Control Level,
had the ODI chosen to reevaluate CRL's TAC at that time and elected to take
action. Without the infusion of capital into CRL generated through the Bridge
Financing, CRL's fourth quarter TAC may have fallen to a level that would have
required control by the Ohio insurance commissioner.
The Company realized a net loss for 1997 of $20,956,356 or $5.01 per share
compared to a net loss of $9,288,365 or $2.29 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. The Company's group
accident and health business represented 98% of the revenues, and a higher loss
ratio from this segment has had 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, as a result of the capital
infusion into CRL made available through the Bridge Financing and the
reinsurance transaction between CRL and the Reassurance Company of Hannover
("Hannover") described below under "The Financing Proposal -- Background of the
Financing Proposal -- The Bridge Financing and the Guarantee Warrants," CRL's
statutory capital and surplus at December 31, 1997 was $24,650,804, which was
above all RBC action levels.
The corrective actions instituted by the Company under the business plan
being implemented by the Company are taking longer than originally anticipated.
Some of the areas that have not fully benefited from the business plan are
rating actions, underwriting changes, claim procedures and certain managed care
cost programs. The delay in taking certain of these actions has contributed to a
continued high claims loss ratio during the first quarter of 1998.
CONSEQUENCES IF THE FINANCING PROPOSAL IS NOT APPROVED
If shareholder approval of the Financing Proposal is not obtained, the
$20,000,000 note evidencing the Bridge Financing (the "Bridge Note") and 800,000
of the 1,000,000 Guarantee Warrants, which have already been issued to the Fund
and Peter W. Nauert for guarantees provided by Richard M. Osborne and Peter W.
Nauert in connection with the Bridge Financing, will remain outstanding and
enforceable against the Company. The Bridge Note matures on 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 CRL. Thus, if
shareholder approval of the Financing Proposal is not obtained, it is likely
that the Company will not have the ability to repay its obligations under the
Bridge Note and will be required immediately to locate an alternate source of
financing to meet its obligations under the Bridge Note and to fund its
operations. There can be no assurance that the Company would be able to obtain
such a refinancing at all or on terms that are favorable to the Company or its
shareholders, particularly in light of CRL's current financial position and its
recent efforts to obtain financing. See "The Financing Proposal -- Background of
the Financing Proposal. If the Bridge Note is not repaid, it will be in default,
and "Strategic Partners will be entitled to exercise its rights as a secured
creditor, including by foreclosing upon the common shares of CRL, all of which
were pledged to Strategic Partners as collateral for the Bridge Financing. See
"The Financing Proposal -- Background of the Financing Proposal -- The Bridge
Financing and the Guarantee Warrants." As the Company is a holding company with
no operations and limited assets, such foreclosure upon the Company's principal
asset could result in the Common Shares having little or no value, make it
impossible for the Company to continue operations, or force the Company to seek
protection under federal bankruptcy law.
DILUTION OF EXISTING SHAREHOLDERS; CHANGE IN CONTROL
Mr. Osborne, Mr. Nauert, the Fund and Strategic Partners entered into an
agreement (the "SAP/Fund Agreement"), dated November 13, 1997, 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 original stock purchase agreement dated as
of November 26, 1997, by and between the Company and Strategic Partners (the
"Original Stock Purchase Agreement"). Strategic Partners has advised the Company
that, pursuant to subsequent discussions between the parties, Richard Osborne
and Strategic Partners agreed to reduce the total amount of the Fund's
investment (excluding any Guarantee Warrants) to $4,015,000. Under the current
agreement between Mr. Osborne and Strategic Partners, the Fund will purchase
from the Company 730,000 Common Shares and Equity Warrants for
4
<PAGE> 13
an additional 365,000 Common Shares, representing approximately 25% of the
Common Shares and Equity Warrants that Strategic Partners is obligated to
purchase pursuant to the Stock Purchase Agreement. Strategic Partners advised
the Company that it has also assigned a portion of its rights to purchase Common
Shares and Equity Warrants under the Stock Purchase Agreement to Medical Mutual
of Ohio ("MedMutual"), Lunn Partners Securities, LLC ("Lunn Partners") and
United Payors and United Providers ("UP & UP") (collectively, the "Assignees")
pursuant to an agreement (the "Assignment Agreement") between Strategic Partners
and the Assignees. The Assignment Agreement provides that each Assignee will pay
directly to the Company its portion of the aggregate purchase price in exchange
for the number of Common Shares and Equity Warrants set forth below. In
addition, each Assignee has agreed to be bound by the terms of the Stock
Purchase Agreement and has agreed to execute and deliver the Registration Rights
Agreement, the Stockholders Agreement and the Voting Agreement at the Closing.
Strategic Partners assigned a portion of its rights to purchase Common Shares
and Equity Warrants to the Assignees to account for the reduction of the
investment by the Fund. The aggregate number of Common Shares and Equity
Warrants to be purchased by the Assignees is approximately equal to this
reduction. Set forth below is a chart showing the number of Common Shares and
Equity Warrants which will be owned by each of Strategic Partners, Insurance
Partners and the Fund (the "Investors") and their Assignees after the
consummation of the Equity Financing and the related assignments and the
percentage of the fully diluted outstanding Common Shares that each such
Investor or Assignee will purchase.
<TABLE>
<CAPTION>
EQUITY
INVESTOR COMMON SHARES WARRANTS PERCENTAGE
-------- ------------- --------- ----------
<S> <C> <C> <C>
Insurance Partners, L.P............................... 2,860,072 1,430,036 26.6%
Insurance Partners Offshore (Bermuda), L.P............ 1,576,292 788,146 14.6%
------------- --------- -------
TOTAL................................................. 4,436,364 2,218,182 41.2%
============= ========= =======
</TABLE>
The remaining 2,863,636 Common Shares and 1,431,818 Equity Warrants being
sold by the Company pursuant to the Stock Purchase Agreement will be issued to
Strategic Partners and the Assignees as follows(1):
<TABLE>
<CAPTION>
EQUITY
INVESTOR COMMON SHARES WARRANTS PERCENTAGE
-------- ------------- --------- ----------
<S> <C> <C> <C>
Strategic Partners....................................... 1,406,364 703,182 13.1%
Osborne/Fund............................................. 730,000 365,000 6.8%
MedMutual................................................ 363,636 181,818 3.4%
UP & UP.................................................. 181,818 90,909 1.7%
Lunn Partners............................................ 181,818 90,909 1.7%
------------- --------- -------
TOTAL.................................................... 2,863,636 1,431,818 26.6%
============= ========= =======
</TABLE>
- ---------------
(1) This chart excludes Common Shares and Warrants owned by the Investors prior
to the Equity Financing.
Upon consummation of the Equity Financing, the Investors and the Assignees
will control approximately 67% of the outstanding Common Shares, and the
collective ownership interest of other shareholders (including directors, former
directors and officers of the Company and CRL who have signed Meeting Voting
Agreements) will be decreased to 33% 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 and the Assignees will control approximately 76.5% of the
outstanding Common Shares, and the remaining shareholders (including directors,
former directors and officers of the Company and CRL who have signed Meeting
Voting Agreements) will own approximately 23.5% of the outstanding Common
Shares.
Each of the Investors and the Assignees has agreed to vote its Common
Shares pursuant to a voting agreement (the "Voting Agreement") which they,
together with the Company, will enter into in connection with the Equity
Financing. See "The Financing Proposal -- New Directors; Management of the
Company -- The Voting Agreement." The table below sets forth the equity
interests of the Investors, directors, former directors and officers of the
Company and CRL as a group who have signed Meeting Voting Agreements and
existing shareholders (i) at the Record Date, (ii) after the Closing of the
Equity Financing and (iii) upon exercise of the Warrants.
5
<PAGE> 14
<TABLE>
<CAPTION>
RECORD DATE CLOSING WARRANT EXERCISE
------------------ ------------------ ------------------
% OF % OF % OF
COMMON COMMON COMMON COMMON COMMON COMMON
SHARES SHARES SHARES SHARES SHARES SHARES
---------- ------ ---------- ------ ---------- ------
<S> <C> <C> <C> <C> <C> <C>
Investors..................... 401,000(1) 9.6% 7,701,000 67.0% 12,351,000 76.5%
Directors & Officers(2)....... 644,247 15.4% 644,247 5.6% 644,247 4.0%
Existing Shareholders......... 3,149,925 75.0% 3,149,925 27.4% 3,149,925 19.5%
Total Outstanding Common
Shares...................... 4,195,172 100% 11,495,172 100% 16,145,172 100%
</TABLE>
(1) The outstanding 401,000 Common Shares currently held by Investors include
400,000 Common Shares held by the Fund and 1,000 Common Shares are held by
Peter W. Nauert.
(2) Does not include Common Shares held by directors and officers who are
affiliated with the Investors.
CHANGE IN MAJORITY OF DIRECTORS
Upon completion of the Equity Financing, Strategic Partners and Insurance
Partners, in conjunction with the Fund, will be entitled to select seven of the
nine candidates for election to the Board. Pursuant to the terms of the Voting
Agreement, the Investors and the Assignees will vote their Common Shares for
such candidates. See "The Financing Proposal -- New Directors; Management of the
Company -- The Voting Agreement." As a result, if the Financing Proposal is
approved and the closing of the Equity Financing (the "Closing") occurs,
Strategic Partners, Insurance Partners and the Fund will be in a position to
influence materially, if not control, (i) matters requiring approval of the
Board, including the selection of officers of the Company and directors and
officers of its subsidiaries (including CRL) and (ii) the outcome of all matters
requiring shareholder approval, including, subject to the limitations set forth
in the Voting Agreement, the election of directors. See "The Financing
Proposal -- Security Ownership of Management and Principal Shareholders" and
"The Financing Proposal -- New Directors; Management of the Company."
CERTAIN EFFECTS OF DECLASSIFYING THE BOARD
The elimination of the Company's classified board of directors will make a
change of the majority of the directors easier. Under the Company's current
classified board structure (three classes of directors with staggered terms), at
least two annual meetings of shareholders are necessary to change the majority
of the directors of the Company. In contrast, if the Declassification Proposal
is adopted, the majority of the directors can be changed at a single annual or
special meeting of shareholders, as the entire board of directors must stand for
election each year. If the Financing Proposal is approved, however, Strategic
Partners, Insurance Partners and the Fund will control a majority of the votes
that may be cast at any meeting subject to the provisions of the Voting
Agreement.
FINANCIAL AND OTHER INFORMATION
PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma consolidated condensed balance sheet of
the Company as of March 31, 1998 gives effect to the Bridge Financing and the
Equity Financing as if they had occurred on March 31, 1998. See "The Financing
Proposal -- Background of the Financing Proposal." The pro forma adjustments are
based on currently available information and upon certain assumptions that
management believes are reasonable under the circumstances as described in the
accompanying Notes to Unaudited Pro Forma Consolidated Condensed Balance Sheet.
The pro forma financial information does not purport to represent what the
Company's financial position would actually have been if the transactions in
fact had occurred at the date indicated, or to project the Company's financial
position for any future date.
The following information should be read in conjunction with the
accompanying Notes and the Form 10-K/A and the Form 10-Q, which accompany this
Proxy Statement.
6
<PAGE> 15
CENTRAL RESERVE LIFE CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET
AS OF MARCH 31, 1998
<TABLE>
<CAPTION>
HISTORICAL TRANSACTIONS PRO FORMA
------------ ------------ ------------
<S> <C> <C> <C>
ASSETS
Investments............................... $ 90,412,364 $ 90,412,364
Cash...................................... 10,666,812 17,547,000(1)(2) 28,213,812
Other Receivables......................... 3,162,725 3,162,725
Reinsurance receivables................... 31,484,082 31,484,082
Property and equipment, at cost........... 10,726,998 10,726,998
Other assets.............................. 3,134,218 (514,000)(1) 2,620,218
------------ ------------ ------------
Total Assets............................ $149,587,199 $ 17,033,000 166,620,199
============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Policy liabilities and accruals........... 109,505,690 109,505,690
Deferred reinsurance gain................. 12,419,546 12,419,546
Note payable.............................. 20,000,000 (20,000,000)(2) --
Mortgage note payable..................... 8,371,255 8,371,255
------------ ------------ ------------
Total liabilities....................... $150,296,491 $(20,000,000) $130,296,491
------------ ------------ ------------
Shareholders' equity
Common shares, no par value, stated value
$.50.................................... 2,097,586 3,650,000(1) 5,747,586
Additional paid-in capital.............. 4,122,319 33,808,000(1) 37,930,319
Net unrealized holding gain............. 748,241 748,241
Retained earnings....................... (7,677,438) (425,000)(2) (8,102,438)
------------ ------------ ------------
Total shareholders' equity........... (709,292) 37,033,000 36,323,708
------------ ------------ ------------
Total liabilities and shareholders'
equity............................. $149,587,199 $ 17,033,000 $166,620,199
============ ============ ============
Book value per share(3)................... $ (.17) $ 3.16
============ ============
</TABLE>
- ---------------
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET
(1) To record the effects of the sale of 7,300,000 Common Shares to Strategic
Partners and Insurance Partners including $2,178,000 of estimated unpaid and
$514,000 paid transaction fees.
(2) To record the repayment of the $20 million note payable to Strategic
Partners including estimated interest payments from March 31, 1998 through
the assumed pay-off date (June 30, 1998) (approximately $425,000).
(3) Book value per share was calculated using 4,195,172 Common Shares
outstanding at March 31, 1998 and 11,495,172 shares outstanding upon closing
of the proposed transactions. This calculation excludes Common Shares
reserved for issuance upon the exercise of the Warrants and the options
under the Company's stock option and compensation plans and other proposed
agreements. If all of the outstanding Warrants and options were exercised
the total outstanding Common Shares would increase to 16,145,172, the
shareholders' equity would increase from $26,075,000 to $62,398,708 and the
book value would increase to $3.86.
7
<PAGE> 16
THE FINANCING PROPOSAL
The detailed terms of, and conditions to implementation of, the Financing
Proposal and the related transactions are contained in the Stock Purchase
Agreement, which is attached hereto as Appendix A, and in the financing
documents which are attached as Exhibits to the Company's current report on Form
8-K dated December 30, 1997 and to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1997. The statements made in this Proxy
Statement with respect to the Financing Proposal and the related transactions
are qualified in their entirety by reference to the more complete information
set forth in such documents, which are incorporated herein by this reference.
THE EQUITY FINANCING
The Stock Purchase Agreement provides that, subject to the satisfaction or
waiver of certain conditions, including, among others, the approval of the
Equity Financing and the Declassification Proposal by the shareholders,
Strategic Partners and Insurance Partners will purchase an aggregate of
7,300,000 Common Shares and Equity Warrants to acquire up to 3,650,000 Common
Shares at an exercise price equal to $5.50 per share, for an aggregate total
consideration of $40,150,000. The Equity Warrants are exercisable immediately
upon issuance, have a term of seven years from the date of issuance and provide
for adjustments to the exercise price and number of shares underlying such
warrants on certain merger, exchange or reorganization transactions or issuances
of Common Shares (or securities convertible into Common Shares). See "The
Financing Proposal -- Equity Warrants." In addition, the Company has granted
certain registration rights in respect of the Common Shares and the Equity
Warrants under the Registration Rights Agreement. See "The Financing
Proposal -- Registration Rights Agreement."
BACKGROUND OF THE FINANCING PROPOSAL
Background. In 1996, the Company experienced substantial losses incurred
in connection with the newly-issued health insurance plans of the Company,
greater utilization than anticipated, new state mandates such as guaranteed
issue and preventive benefits and overall reductions in profitability arising
out of industry-wide pricing competition. In response to these losses and in
order to provide a financial plan to the ODI (mandated by a decline in CRL's
RBC), the Company retained Advest, Inc. ("Advest") in February 1997 as its
financial advisor for the purpose of raising equity capital and resolving CRL's
RBC issue and the Company's other financial concerns. Advest was selected
because of its experience with, and knowledge of, certain finance transactions
in the insurance industry.
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 such
financing alternatives came to fruition due to a decline in the price of the
Company's Common Shares and a deterioration of the Company's operating position,
the combined effect of which impaired the marketability of securities issuable
by the Company. In June 1997, in order to address the continued decline in CRL's
RBC, the Company borrowed $5.2 million from Huntington National Bank, $5.0
million of which was contributed to the surplus of CRL.
In June and July 1997, the Board and Advest began to explore the
alternative of a third-party strategic investment in, or other strategic
transaction involving, the Company. Advest contacted potential investors and
acquirors/merger partners for the Company. This activity continued until
November, 1997. During this period Advest approached a number of investment
groups and potential merger/acquisition partners (largely other insurance
companies). This resulted in a number of parties indicating some level of
interest in merging with, acquiring or investing in the Company. Throughout
July, August, September and early October 1997, the Company's management and
Advest evaluated the proposals of such interested parties in light of their
impact on shareholder value and the ability of the proponant on an interim basis
to alleviate the Company's regulatory concerns, and, with counsel, sought to
refine and negotiate the terms of the various proposals. The Board met with
management and its advisors frequently during this period to evaluate the status
and relative merits of the alternatives presented to the Company, as well as the
Company's financial position. On October 7, 1997, the Board met with Advest and
counsel and, after a lengthy discussion of the relative merits of alternative
8
<PAGE> 17
transactions, approved the entry by the Company into a letter of intent with
Standard Management Corporation ("SMC"), whose proposal it was believed was the
best in light of all of the circumstances, pursuant to which SMC would acquire
all of the outstanding equity interests in the Company pursuant to a merger in
which each Common Share of the Company would be converted into the right to
receive a number of shares of common stock of SMC equal to $7.00 divided by the
closing price of the SMC common stock over a specified period, subject to
certain limitations.
Prior to September, 1997, Strategic Partners initiated discussions with the
Company. Strategic Partners was formed for the special purpose of (i) making an
investment in the Company and (ii) to secure the funds required to consummate a
transaction with the Company. On September 12, 1997, Geneva Capital Partners,
Fund I ("Geneva"), an affiliate of Strategic Partners, had proposed to make a
$35 million convertible debt investment in the Company, $30.0 million of which
would be reinvested in CRL. On September 24, Geneva had submitted a revised
proposal to make a $25 million debt and common equity investment in the Company,
pursuant to which shareholders of the Company would receive $5 million in cash
and $15 million of a new class of preferred shares of the Company. The Geneva
proposal was revised from a convertible debt investment to a debt and common
equity investment because there was concern whether the Company could adequately
service the convertible debt. The revised proposal was also intended to simplify
valuation of the Geneva offer for the Company's Board. Representatives of Geneva
and Advest negotiated the terms of the Geneva proposal through the remainder of
September and in early October 1997. In September 1997, Mr. Osborne had also
approached the Company regarding a possible cash investment in the Company. On
October 8, Geneva modified its pending proposal, adding a $20 million bridge
financing component that was necessary to prevent the Company from being forced
into supervisory control by the ODI, and on October 9, the predecessor of
Strategic Partners replaced Geneva as the proponent of the pending Geneva
proposals. Although Geneva itself would have been able to make the investment in
the Company, Geneva was a preexisting fund with an existing group of investors.
As discussions with the Company progressed, the identity of the investors that
desired to enter into the Equity Financing with the Company diverged from that
of the existing Geneva group. Strategic Partners was formed as an entity whose
sole investment would be the investment in the Company, and it included only the
Geneva investors (and new investors) interested in the transaction with the
Company. On October 13, Mr. Osborne submitted a proposal to the Company to make
a $15 million convertible preferred stock investment in the Company;
representatives of the Company met with Mr. Osborne following this proposal to
further discuss its terms. On October 13, the Board met with Advest and counsel
and provided such advisors with direction to conduct further negotiations with
Strategic Partners and to permit it to initiate a detailed due diligence
investigation. On October 14, certain affiliates of Strategic Partners executed
confidentiality agreements with the Company which, among other things, provided
for the confidentiality of information received from the Company in connection
with Strategic Partners' due diligence investigation. Thereafter, Strategic
Partners initiated a due diligence investigation of the Company. On October 21,
Strategic Partners modified its pending proposal to eliminate any cash payment
to the Company's shareholders because in light of the Company's declining
financial position, it had determined that all cash proceeds of the investment
were required to improve the capital position of the Company.
On October 28, SMC advised the Company in writing that it was terminating
merger discussions based on its determination that the financial needs of the
Company were excessive. On November 4, the Board met and directed the Company's
advisors to continue their discussions with Strategic Partners and its advisors
and other parties then interested in a strategic transaction with the Company.
Although the Company preferred to obtain an immediate equity investment, the
shareholder approvals required under the Control Share Act and the NASD rules,
and approvals required from the ODI, each in connection with a change in control
of the Company, precluded such an alternative. From November 4 until November
13, the parties and their advisors discussed and negotiated the business terms
and the legal terms of the principles of an agreement between Strategic Partners
and the Company. On November 13, the Board met with its counsel and Advest and
authorized the entry by the Company into a letter of intent concerning the
agreement in principle for the Company to issue Common Shares and Equity
Warrants to Strategic Partners and for Strategic Partners to make the Bridge
Loan. The letter of intent, among other things, provided for reimbursement of up
to $150,000 of Strategic Partners' due diligence expenses if the Company
concluded an alternative transaction with a third party. A letter agreement
concerning transition of management and employees in connection with the Equity
Financing was also entered into on November 13. It set forth, among other
things, an expression of the parties' general intentions on operational matters
and cost
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<PAGE> 18
reductions, the revisions to employment arrangements described below in
" -- Interests of Certain Persons in the Financing Proposal" and certain
employee benefit matters; this letter was superseded by the Original Stock
Purchase Agreement. In connection with this letter of intent, Mr. Osborne, Mr.
Nauert, the Fund and Strategic Partners entered into a letter agreement whereby
Strategic Partners agreed, subject to certain conditions, to permit the Fund to
co-invest with up to 30% of Strategic Partners' investments under the Original
Stock Purchase Agreement, and Mr. Osborne agreed to guarantee a proportionate
amount of the loan under which Strategic Partners would obtain the funds for the
Bridge Loan. The terms of the letter agreement were set forth in more detail in
a formal agreement among such parties. See "Agreement Among Certain Investors."
During the remainder of November 1997, Advest and counsel met with
Strategic Partners and its counsel to negotiate the definitive terms of such
arrangements. On November 26, the Board met with Advest and counsel to evaluate
the terms of the pending proposal and documentation from Strategic Partners (the
"Pending Proposal"). Advest made a detailed presentation to the Board regarding
the principal economic terms of the Pending Proposal, the proposed terms of the
Bridge Financing and the alternatives then available to the Company. Members of
the Board asked a number of questions regarding the structure and terms of the
proposed transactions and the effect thereof on the Company's financial position
and on its shareholders. Following the discussion, representatives of Advest
made a presentation to the Board concerning its analysis of the fairness of the
terms of the Pending Proposal and engaged in a lengthy and thorough discussion
with the Board regarding its findings. Advest concluded its presentation by
delivering its oral opinion, based upon the assumptions made, matters considered
and limits of review set forth in such opinion, that, from a financial point of
view, the proposed consideration to be received in the equity financing
contemplated by the Original Stock Purchase Agreement (the "Initial Proposal")
was fair to the shareholders of the Company. Counsel to the Company then engaged
in a lengthy review with the Board of the material terms and provisions of the
proposed Original Stock Purchase Agreement, the Bridge Financing and the
ancillary agreements and transactions. The directors of the Company who were not
members of management of the Company then voted unanimously (with one director
absent) to approve the Initial Proposal and the Bridge Financing and ancillary
transactions. The entire Board then voted unanimously (with one director absent)
to the same effect. Strategic Partners and the Company subsequently entered into
the definitive Original Stock Purchase Agreement, and the Company received
Strategic Partners' commitment letter for the Bridge Financing.
In early November, 1997, representatives of Strategic Partners approached
Mr. Osborne to explore whether Mr. Osborne would be interested in joining
Strategic Partners in the transaction and withdrawing the proposal made by Mr.
Osborne on October 13, 1997. The result of these discussions was the letter
agreement described below.
The Bridge Financing and the Guarantee Warrants. 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 Financing and related
matters. The Bridge Loan 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 agreed to issue Mr. Nauert and the Fund certain warrants for Common
Shares. The Company is subject to the rules of the Nasdaq, which require that
shareholder approval be obtained prior to issuing securities for less than
market value that are equal to or convertible into 20% or more of the voting
power outstanding before the issuance. In order to comply with this provision,
the Company issued 800,000 Guarantee Warrants at the time of the Bridge
Financing (which issuance did not meet the threshold for requiring shareholder
approval) and agreed to issue 200,000 more Guarantee Warrants only if it
received shareholder approval to do so. Specifically, the Company (i) issued the
Fund a warrant to purchase 240,000 Common Shares at $6.00 per share and agreed
to issue the Fund (after shareholder approval) a warrant to purchase an
additional 60,000 Common Shares at $6.00 per share and (ii) issued Peter W.
Nauert a warrant to purchase 560,000 Common Shares at $6.00 per share and agreed
to issue Peter W. Nauert (after shareholder approval) an additional warrant to
purchase 140,000 Common Shares at $6.00 per share. The Company is required to
file a registration statement with the Commission for the Common Shares issuable
upon exercise of the 800,000 Guarantee Warrants already issued within 30 days
after the earlier to occur of (i) the closing of the transactions contemplated
by the Stock Purchase Agreement or (ii) the termination of the
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<PAGE> 19
Stock Purchase Agreement. The Guarantee Warrants are exercisable for a period of
five years. In conjunction with the funding of the Bridge Loan, CRL also entered
into the reinsurance agreement with Hannover discussed below.
The Bridge Loan bears interest at the prime rate established by American
National Bank and Trust Company of Chicago ("ANB"). The Bridge Loan will mature
on the earliest of (i) June 30, 1998, (ii) consummation of the transactions
contemplated by the Stock Purchase Agreement, or (iii) consummation by the
Company of an alternative share sale or other business combination, at which
time all principal and interest will be fully due and payable on the Bridge
Loan. Prior to maturity, interest will be payable monthly on the unpaid balance
of the Bridge Loan.
The funds for the Bridge Loan were obtained by Strategic Partners from ANB
pursuant to a Credit Agreement between Strategic Partners and ANB. Upon funding
of the Bridge Loan, the Company paid a loan fee of $50,000 ("Loan Fee") to
Strategic Partners, which amount included reimbursement for the fees and
expenses of ANB in connection with Strategic Partners' obtaining the loan funds
from ANB (other than funding fees). The proceeds of the Bridge Loan were used as
follows: (i) approximately $5.2 million was utilized to extinguish the
indebtedness owed by the Company to Huntington National Bank; (ii) approximately
$14 million was used by the Company to invest in the surplus of CRL and was
evidenced by a surplus note in favor of the Company from CRL; (iii)
approximately $650,000 was used to establish an interest reserve at the Company
to pay interest on the Bridge Loan; (iv) approximately $20,000 was used to pay
interest accrued on the loan from Huntington National Bank; (v) $50,000 was used
to pay the Loan Fee and (vi) approximately $73,000 was used to pay the Company's
legal expenses.
As collateral for the Bridge Loan, the Company pledged to Strategic
Partners all of the common shares of CRL and the surplus note executed by CRL in
favor of the Company. The surplus note may only be repaid if and when permitted
by the ODI, regardless of whether it is held by the Company or any pledgee. See
"Certain Considerations -- Consequences if the Financing Proposal is not
Approved." The Company executed a promissory note in favor of Strategic Partners
to evidence the Bridge Loan, and the Company and Strategic Partners executed a
Credit Agreement to govern the transaction. Copies of these documents and the
other financing documents are attached to the Company's current report on Form
8-K, dated December 30, 1997, which is incorporated herein by this reference.
The Credit Agreement includes covenants for the Company and CRL and an operating
plan for CRL which the Company is required to implement during the term of the
Bridge Loan. Contemporaneous with the funding of the Bridge Loan, the Company
obtained the resignation of three of its directors and elected three directors
nominated by Strategic Partners to the Board of the Company. See " -- New
Directors; Management of the Company."
In connection with the Bridge Financing, Hannover provided $10 million of
additional surplus to CRL in the form of a reinsurance transaction in which the
Company transferred to Hannover $24.5 million of reserve liability. In return
for Hannover's assumption of this liability, the Company paid Hannover
$14,550,000. In addition, the treaty between Hannover and CRL provides CRL with
a $10 million initial ceding allowance on CRL's inforce and new business written
during 1997 under certain policy forms. A ceding allowance can be defined as an
allowance that the reinsurer grants to the ceding company that is intended to
cover part or all of the ceding company's acquisition costs and other costs
related to the reinsured business. The ceding allowance is usually calculated as
a percentage of the reinsurance premium paid and reduces the amount of the
reinsurance premium the ceding company must pay. In this reinsurance
transaction, the ceding allowance provided to CRL, together with the $14,550,000
paid by the Company to Hannover, equaled the amount of liability Hannover
assumed. The reinsurance is on a 50/50 quota-share basis, with Hannover
accepting all of the inherent contractual risks on its 50%. Provisions of the
treaty are, as required, in conformity with the Life and Health Reinsurance
Model Regulation (adopted under Rule 3901-3-07 of the Ohio Administrative Code)
and provide for the repayment of the $10 million ceding allowance out of the
statutory profits on the business reinsured. Accumulated profits in excess of
the $10 million ceding allowance will be shared on a 60/40 quota-share basis,
with 60% going to CRL and 40% to Hannover once the $10 million ceding allowance,
plus 10% interest, is repaid. The Agreement is drafted to conform to reserve
credit regulations.
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<PAGE> 20
Hannover committed to this transaction on the condition that Mr. Peter W.
Nauert, an investor in Strategic Partners who has experience in the insurance
industry, remain involved in Strategic Partners and its activities. Upon the
funding by Hannover of the reinsurance transaction, CRL paid Strategic Partners
a fee of $150,000 for its efforts in arranging the Hannover reinsurance.
Increase in the Equity Financing. Following the closing of the Bridge
Financing, in the course of implementing its business plan for CRL, Strategic
Partners found that the rate increases and policy modifications contemplated by
the business plan could not be implemented quickly without resulting in policy
lapses. Strategic Partners determined that the timeline for restoration of
profitability of CRL's insurance operations would likely be longer than
originally anticipated and could require additional capital strength. Therefore,
Strategic Partners initiated informal discussions with Insurance Partners in
January 1998. Insurance Partners was formed in 1994 to make significant equity
investments in the insurance industry. Insurance Partners is a New York based
investment fund composed of a number of investors including Centre Reinsurance,
Keystone, Inc. (formerly the Robert M. Bass Group, Inc.), Chase Manhattan Bank,
Northwestern Mutual Life Insurance Company, AON Corporation, Electronic Data
Systems, Lincoln National Corporation, the Bishop Estate, Ziff Brothers
Investment and Harvard University.
Insurance Partners commenced an independent due diligence investigation of
the Company with respect to a potential co-investment with Strategic Partners in
the Company. This due diligence continued until mid-March 1998, at which time
Insurance Partners notified Strategic Partners that it would proceed with an
investment in the Company only if the total aggregate investment were increased
to at least $40 million. It was the determination of Insurance Partners that
additional capital would be required for the business plan that Strategic
Partners had begun to implement to succeed.
Thereafter, representatives of Strategic Partners and Insurance Partners
approached the Company to discuss modification of the previously approved
Initial Proposal. The new Financing Proposal included modifications, including
the reduction in the Equity Warrant exercise price, which reflected the
increased risk the investors perceived existed due to the Company's continuing
poor financial performance. Advest was asked to analyze the revised joint
proposal of Insurance Partners and Strategic Partners to purchase a total of
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 Company considered the joint proposal of Insurance Partners and
Strategic Partners at its Board meeting on March 25th and continued its
deliberations until March 30th. At a reconvened meeting of the Board on that
date, Strategic Partners presented the Investors' concerns and the reasons
behind the revised proposal. Following Strategic Partners' presentation, the
disinterested directors, which excluded the directors affiliated with the
Investors, met with management of the Company, which presented its view that the
reduction in the issuance of insurance certificates and the attendant loss in
revenues had resulted in the Company's having greater equity needs than were
originally anticipated. Advest made a detailed presentation to the disinterested
directors regarding the principal economic terms of the Financing Proposal and
the alternatives available to the Company. Following the discussion,
representatives of Advest made a presentation to the disinterested directors
concerning its analysis of the fairness of the terms of the Financing Proposal
and engaged in a lengthy and thorough discussion with the disinterested
directors regarding its findings. Advest concluded its presentation by
delivering its oral opinion, based upon the assumptions made, matters considered
and limits of review set forth in such opinion that, from a financial point of
view, the proposed consideration to be received in the Equity Financing was fair
to the shareholders of the Company. Counsel to the Company then engaged in a
lengthy review with the disinterested directors of the material terms and
provisions of the Financing Proposal. Members of the Board then asked questions
regarding the structure and terms of the proposed transactions and the impact
thereof on the Company's financial position and on its shareholders. The
independent directors then voted and unanimously approved the Financing
Proposal. The Financing Proposal was also approved unanimously by the entire
Board.
Contemporaneously with the Board meeting on March 30, 1998, pursuant to
discussions between the parties, Richard Osborne and Strategic Partners agreed
to reduce the total amount of the Fund's investment to $4,015,000. Thereafter,
Strategic Partners assigned a portion of its rights to purchase Common Shares
and Equity Warrants pursuant to the Stock Purchase Agreement to the Assignees in
the approximate amount of the reduction of the Fund's investment. See "Certain
Considerations -- Dilution of Existing Shareholders; Change in Control."
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<PAGE> 21
OPINION OF FINANCIAL ADVISOR
In reaching its decision to recommend the Financing Proposal, the Board
considered, among other things, the advice of its financial adviser, Advest,
Inc. ("Advest"). See " -- Considerations of the Board." A summary of the
analysis which Advest performed in reaching its opinion as to the fairness of
the Equity Financing to the shareholders of the Company (the "Advest Opinion")
is set forth below. The Advest Opinion assumed that the Equity Financing would
be consummated substantially as described in this Proxy Statement.
Advest delivered the Advest Opinion to the Board on March 30, 1998. The
Advest Opinion is to the effect that, as of March 30, 1998, and based upon the
assumptions made, matters considered and limits of review set forth in such
opinion, the consideration to be received by the Company pursuant to the Equity
Financing was fair to the shareholders of the Company.
A COPY OF THE ADVEST OPINION, WHICH SETS FORTH THE ASSUMPTIONS MADE,
MATTERS CONSIDERED AND CERTAIN LIMITATIONS ON THE SCOPE OF REVIEW UNDERTAKEN BY
ADVEST, IS ATTACHED AS APPENDIX C TO THIS PROXY STATEMENT. ADVEST HAS CONSENTED
TO THE USE OF ITS OPINION IN THIS PROXY STATEMENT. THE COMPANY'S SHAREHOLDERS
ARE URGED TO READ SUCH OPINION IN ITS ENTIRETY. THE ADVEST OPINION WAS RENDERED
AT THE REQUEST OF AND FOR THE USE AND BENEFIT OF THE BOARD OF DIRECTORS, WAS
DIRECTED ONLY TO THE FAIRNESS OF THE CONSIDERATION TO BE RECEIVED BY THE COMPANY
PURSUANT TO THE EQUITY FINANCING FROM A FINANCIAL POINT OF VIEW, AND DOES NOT
CONSTITUTE A RECOMMENDATION TO ANY SHAREHOLDER AS TO HOW SUCH SHAREHOLDER SHOULD
VOTE WITH RESPECT TO THE FINANCING PROPOSAL. THE SUMMARY OF THE ANALYSIS WHICH
ADVEST PERFORMED IN REACHING ITS OPINION SET FORTH IN THIS PROXY STATEMENT IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE ADVEST OPINION.
In arriving at the Advest Opinion, Advest reviewed and analyzed (i)
documents used in connection with the proposed Financing Proposal, the Initial
Proposal and other publicly available information concerning the Company which
Advest believed to be relevant to its inquiry, (ii) financial and operating
information with respect to the business operations and prospects of the Company
including annual reports, a draft form 10-K for 1997, 10-Q filings, and annual
and quarterly statutory statements, (iii) a trading history of Common Shares
from 1995 to March 20, 1998 and a comparison of that trading history with those
trading histories of companies Advest deemed comparable to the Company, and (iv)
a comparison of the financial terms of the Financing Proposal and Initial
Proposal with the terms of certain other recent transactions which Advest deemed
relevant. Advest also performed valuations of the proposed issuance of the
Equity Warrants using two analytical methodologies. In addition, Advest had
discussions with the management of the Company concerning its business and
operations, assets, present condition and future prospects. Discussions with
management included reviews of then current operating results, projected
operating results, the status of new premium sales, loss reserves, expense and
combined ratios and the Company's relationship with the ODI. Advest also
undertook such other studies, analyses and investigations as it deemed
appropriate in rendering the Advest Opinion, including a review of the Company's
filings with the Ohio Insurance Commissioner, reviews of equity research on
comparable companies, and reviews of HMO-industry research reports.
Advest had rendered an opinion to the Board with respect to the Initial
Proposal on November 26, 1997 which was similar to the Advest Opinion and based
on a similar analysis to that discussed herein. However, Advest updated its
analysis using, for example, more recent transactions in its comparable
transaction analysis, a more current price for the Common Shares in its
valuation of the Equity Warrants, and more current stock prices in its
comparable company trading multiple analysis. In its presentation to the Board
with respect to the Equity Financing, Advest also noted that since the
acceptance of the Initial Proposal on November 26, 1997, the Company's financial
condition had changed adversely. Advest also noted the absence from the
Financing Proposal of certain conditions precedent contained in the Initial
Proposal, including the condition that the Investors have received financing.
In preparing the Advest Opinion, Advest relied on the accuracy and
completeness of all information supplied or otherwise made available to Advest
by the Company, and Advest did not independently verify such
13
<PAGE> 22
information or undertake an independent evaluation or appraisal of any of the
assets or liabilities of the Company and its subsidiaries or of Strategic
Partners or Insurance Partners. With respect to the financial forecasts
furnished by the Company, Advest assumed that they had been reasonably prepared
and reflected the best currently available estimates and judgment of the
Company's management as to the expected future financial performance of the
Company. The Advest Opinion was necessarily based upon market, economic and
other conditions as they existed on, and could be evaluated as of, the date of
the Advest Opinion. The Advest Opinion did not address the merits of the
underlying decision by the Company to engage in the Equity Financing.
The following is a summary of the material financial and comparative
analyses performed by Advest in arriving at the Advest Opinion.
Share Price Study. Advest reviewed the per share daily price movement of
Common Shares for the period beginning March 20, 1997 and ending November 21,
1997 and the daily volume of trading of Common Shares during the period. Advest
also reviewed price data from March 20, 1993 to March 20, 1998.
Advest noted that (a) the highest closing price for Common Shares in the
past five years was $10 per share, (b) the lowest closing price for Common
Shares in the past five years was $3.88 per share, (c) the closing price for
Common Shares on March 20, 1998 was $6.13 per share and (d) the lowest price for
Common Shares in the six month period preceding the date of the Advest Opinion
was $3.88 per share. Advest also noted that the closing price of the Company
Common Shares immediately before the public announcement of the Initial Proposal
and adverse third quarter operating results was $5.25. On March 27, 1998, the
last trading day prior to announcement of the amendment of the Stock Purchase
Agreement to include the additional equity issuances, the Company's closing
share price was $7.75.
Comparable Company Trading Multiples Analysis. Using reported closing
prices per share on March 20, 1998 of seven accident and health insurance and
disability insurance companies (Delphi Financial Group; Guarantee Life
Corporation; John Alden Financial; PennCorp Financial; Penn Treaty American;
UICI, Inc.; and United Wisconsin Services) (the "Peer Group Companies"), Advest
reviewed the ratio of share price to book value per share of each of the Peer
Group Companies and also compared each of such ratios to the same ratio of the
Company using in place of the closing market price per share of Common Shares on
March 20, 1998, the price per share proposed to be paid in the Equity Financing
(assuming the Equity Warrants reduced the consideration to be received per
Common Share by $.94) and using book value of the Company as of December 31,
1997. Advest also reviewed and compared to the foregoing, similar ratios for the
Company (i) assuming that the Equity Warrants were immediately exercised, and
(ii) assuming no value for the Equity Warrants and that the Equity Financing had
closed on December 31, 1997. In its designation of the Peer Group Companies,
Advest selected smaller, public, health and life insurance companies which focus
on the small group health market.
Advest compared the average of the ratios of share price to book value per
share of the Peer Group Companies to those ratios of the Company discussed in
the immediately preceding paragraph and noted that the Company's ratios on the
assumptions in clauses (i) and (ii) of that paragraph were less than the average
of the Peer Group Companies ratios, but that the Company's ratio based on its
actual book value on December 31, 1997 and the price per share proposed to be
paid in the Equity Financing after deducting the value of the Equity Warrants
exceeded the average of the Peer Group Companies ratios.
Comparable Transactions Analysis. Using publicly available information,
Advest reviewed seven transactions announced or completed between September 3,
1997 and March 9, 1998 that involved the acquisition of 100% of companies in the
life and health insurance industry (the "Comparable Acquisitions"). The
Comparable Acquisitions, and the announcement or effective date for each such
transaction, were: WM Life Insurance Co. (September 3, 1997); Washington
National Corp. (September 22, 1997); AmVesters Financial Corp. (September 22,
1997); General Life Assurance Co. (September 22, 1997); Pierce National Life
Ins. Co. (November 13, 1997); John Alden Financial Corp. (March 9, 1998); and
Westfield Life Insurance Co. (March 19, 1998). Advest's search criteria for
Comparable Acquisitions included: transactions announced or completed between
September 3, 1997 and March 9, 1998; transactions involving public, U.S.
companies; transactions in which
14
<PAGE> 23
100% of the target company was acquired; transactions including health and life
insurance companies; and transactions involving between $20 million and $500
million of purchase consideration.
With respect to each of the Comparable Acquisitions, Advest reviewed the
ratio of the equity value to book value, and the average of the ratios for all
Comparable Acquisitions. Advest noted that the ratio of the equity value of the
Company using the price per share proposed to be paid pursuant to the Equity
Financing (assuming the Equity Warrants reduced the consideration to be received
by $.94 per share for the Common Shares) to the Company's book value on December
31, 1997, exceeded the average of the ratios of the equity value to book value
in the Comparable Acquisitions but did not so exceed such average if one assumed
the immediate exercise of all the Equity Warrants, which immediate exercise is
unlikely in Advest's judgment, or if one assumed that the Equity Financing had
closed on December 31, 1997 and no Warrants were issued.
Other Analysis. Advest used two different methodologies in valuing the
Equity Warrants, one of which resulted in reducing the consideration to be
received per share pursuant to the proposed Equity Financing for the Common
Shares by $.90 and the other by $.98. Advest used the $.94 valuation in the
above-mentioned calculations which was the average of the results of the two
methodologies. The two methodologies (formulas) Advest used were: (i) two times
the current stock price minus the Equity Warrant exercise price, divided by
three and (ii) .35 times the current stock price minus .5 times (the Equity
Warrant exercise price minus the current stock price). In each case Advest
deducted a 20% discount from the result in recognition of the lack of liquidity
of the Equity Warrants. Advest noted in its oral presentation to the Board that
the value of the Equity Warrants would be substantially less if instead of the
current market price, which reflects the public announcement of the Initial
Proposal, the market price of the Common Shares immediately preceding such
announcement was used in the calculations.
Advest noted that a frequently used methodology in evaluating the fairness
of a life insurance company is the liquidation value per share of the company.
However, Advest also noted such methodology is less frequently used with respect
to health insurance companies since loss ratio volatility of health insurance
undermines the reliability of actuarial valuations of such business. Moreover,
such a valuation was not available for the Company at the time the Advest
Opinion was requested by the Board and rendered by Advest.
Advest noted in its oral presentation to the Board that, in Advest's
opinion, the current market price for a Common Share ($6.125 as of March 25,
1998) was higher than it would have been in the absence of the public
announcement of the Initial Proposal. Advest observed that, on the last trading
date prior to such announcement (and the announcement of adverse third quarter
results) the last sale price per share was $5.25.
The summary set forth above does not purport to be a complete description
of the analyses performed by Advest, although it is a summary of the material
financial and comparative analyses performed by Advest in arriving at the Advest
Opinion. Arriving at a fairness opinion is a complex process not necessarily
susceptible to partial analysis or summary description. Advest believes that its
analyses must be considered as a whole and that selecting portions of its
analyses and of the factors considered by it, without considering all such
factors and analyses, could create a misleading view of the processes underlying
the Advest Opinion. Advest did not assign relative weights to any of its
analyses in preparing the Advest Opinion. The matters considered by Advest in
its analyses were based on numerous macroeconomic, operating and financial
assumptions with respect to industry performance, general business and economic
conditions and other matters, many of which are beyond the Company's control and
involve the application of complex methodologies and educated judgment. Any
estimates incorporated in the analyses performed by Advest are not necessarily
indicative of actual past or future results or values, which may be
significantly more or less favorable than such estimates. Estimated values do
not purport to be appraisals and do not necessarily reflect the prices at which
businesses or companies may be sold in the future, and such estimates are
inherently subject to uncertainty. No public company utilized as a comparison is
identical to the Company, and none of the Comparable Acquisitions utilized as a
comparison is identical to the Equity Financing. Accordingly, an analysis of
publicly traded comparable companies and comparable business combinations is not
mathematical; rather it involves complex considerations and judgments concerning
differences in financial and operating characteristics of the comparable
companies and other factors that could affect the public trading value of the
comparable companies or company to which they are being compared.
15
<PAGE> 24
Pursuant to a letter agreement dated February 19, 1997, modified by a
letter agreement dated March 19, 1997, and further modified on April 2, 1998,
the Company agreed to pay to Advest (i) a retainer fee of $50,000, which has
been paid, (ii) an additional fee of $1,078,000, based on a formula of 3% of any
private placement funds actually received by the Company up to $27.5 million,
and 2% on amounts in excess thereof and calculated based on the Equity Financing
in the amount of $40.15 million, to be paid following the closing of the Equity
Financing for acting as financial adviser to the Company including advising with
respect to the Equity Financing, and (iii) an additional fee of $50,000 for
rendering its fairness opinions. In addition, the Company has agreed to
reimburse Advest for its reasonable expenses (including the reasonable fees and
disbursements of its legal counsel) and to indemnify Advest and certain related
parties from and against certain liabilities, including liabilities under the
federal securities laws, arising out of its engagement.
As noted above, Advest has provided financial advisory services to the
Company and has acted as financial adviser to the Company in connection with the
Equity Financing, the Initial Proposal and the Bridge Financing, in addition to
rendering the Advest Opinion.
CONSIDERATIONS OF THE BOARD
The Board believes that, because of the financial condition of the Company
and other factors discussed below, the Financing Proposal and the transactions
contemplated thereby are in the best interests of the Company and its
shareholders, and has unanimously approved the Equity Financing and (with one
director absent) the Bridge Financing. THE BOARD RECOMMENDS THAT SHAREHOLDERS
VOTE "FOR" THE FINANCING PROPOSAL. Certain members of the Board have an interest
in the transactions contemplated by the proposals, which shareholders should
consider before casting their votes. See "The Financing Proposal -- Interests of
Certain Persons in the Financing Proposal."
The Board in consultation with its financial advisor, Advest, has evaluated
the financial, legal, market, operational and management considerations bearing
on the Financing Proposal, as well as the other alternatives available to the
Company. Based on this evaluation, the Board believes that the Financing
Proposal is in the best interests of the Company and its shareholders both in
the immediate future and on a long-term basis. The Board weighed numerous
factors in reaching this decision. The following were the material factors in
the Board's decision:
1. Advest conducted a lengthy and broad-based search for potential
investors, strategic partners and acquirers at the request of the Board
that did not yield definitive alternatives which met the Company's
requirements for immediate capital on terms more favorable to shareholders
than those of the Financing Proposal.
2. The Bridge Financing satisfied CRL's immediate need for capital to
(i) ensure its continued compliance with the RBC requirements established
by the ODI; (ii) repay its outstanding indebtedness and (iii) provide CRL
with a source of capital with which to operate and expand its insurance
business. A failure by the Company and CRL to have obtained an infusion of
capital could have resulted in its failing to meet such RBC requirements or
to repay its outstanding indebtedness, would have severely restricted the
Company's and CRL's continued operations, and could have subjected CRL to
supervisory control by regulatory authorities. The availability of the
Bridge Financing was conditioned on the Company's agreement to pursue the
equity financing contemplated by the Initial Proposal, which was modified
to become the Equity Financing. The Equity Financing provides the Company
with a long-term capital base which will meet CRL's current regulatory
requirements and will provide funds for growth of the Company and CRL,
thereby enhancing the potential for increased value for the Company's
shareholders.
3. The Company's interest in meeting its need for increased capital,
which would be provided by the Financing Proposal, and the elimination of
the financing contingency from the Financing Proposal, which, under the
Initial Proposal, could have prevented the Equity Financing from closing.
4. The opinion of Advest delivered at the March 30, 1998 meeting of
the Board, to the effect that, as of such date, and based upon the
assumptions made, matters considered and limits of review set forth in such
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opinion, from a financial point of view, the consideration to be received
in the proposed Equity Financing is fair to the shareholders of the
Company.
5. The expertise of the Investors in managing insurance companies will
assist the Company in its efforts to operate efficiently and expand its
business, and in attracting other qualified directors, management personnel
and general agents.
6. Notwithstanding that the Investors rather than the public
shareholders at large will control the Company following the Closing, the
Voting Agreement mandates the participation of two independent directors of
the Company following consummation of the Equity Financing.
Liquidation of the Company was not considered as an alternative to the
Financing Proposal, since the Company has a strong franchise and significant
community goodwill, which would not be realized in a liquidation. In addition,
the Company's book of business, which is of material value, would be severely
diminished in a sale or transfer of the Company's assets as the result of its
liquidation.
If the Financing Proposal is approved, no further vote of the shareholders
will be required for the issuance of the Shares and the Equity Warrants and the
remaining Guarantee Warrants or the issuance of Common Shares upon exercise of
Warrants.
REQUIRED SHAREHOLDER APPROVALS
The Company's Board has approved the Financing Proposal and has directed
that the Financing Proposal be submitted to the shareholders of the Company for
approval. Shareholder approval of the Financing Proposal is required under the
Control Share Act and the rules of the Nasdaq.
Control Share Act. The Control Share Act requires that, unless the articles
or regulations of the target corporation otherwise provide, before attempting to
make a "control share acquisition" of an issuing public corporation, the
acquiring person must inform that corporation of the proposed acquisition by
delivering an "acquiring person statement." "Issuing public corporations" are
Ohio corporations having 50 or more shareholders and which also have their
principal places of business, their principal executive offices, or a
substantial percentage of their assets in Ohio and as to which no valid close
corporation agreement exists. The Company is an issuing public corporation
within the meaning of the Control Share Act.
A "control share acquisition" is any acquisition, directly or indirectly by
a person, of shares of an issuing public corporation that, when combined with
all other direct or indirect holdings of the acquiring person, would allow that
person immediately after the acquisition, directly or indirectly, alone or with
others, to exercise (or direct the exercise of) voting power in the election of
directors within the following ranges of voting power: (1) more than one-fifth
(20%) but less than one-third (33 1/3%); (2) more than one-third (33 1/3%) but
less than a majority (50%); or (3) a majority (50%) or more. The Equity
Financing will constitute a control share acquisition of the Company by each of
Strategic Partners and Insurance Partners.
Before attempting a control share acquisition, the acquiring person must
deliver an "acquiring person statement" to the issuing public corporation at its
principal executive offices. The acquiring person statement must be in writing
and contain: (1) the identity of the acquiring person; (2) a statement that the
information is being provided pursuant to the Control Share Act; (3) the number
of shares of the issuing public corporation owned directly or indirectly by the
acquiring person; (4) the range of voting power (set forth above) which the
acquiring person would be able to exercise if the proposed transaction is
consummated; (5) a reasonably detailed description of the terms of the proposed
control-share acquisition; and (6) representations by the acquiring person that
the proposed control-share acquisition would not be contrary to law and that the
acquiring person has the financial capability to make the proposed control-share
acquisition, as well as a reasonably detailed statement of the facts upon which
these representations are based. Strategic Partners and Insurance Partners, L.P.
delivered an acquiring person statement to the Company on May 19, 1998, a copy
of which is attached hereto as Appendix D.
Within 10 days after receiving an acquiring person statement that complies
with the above requirements, the directors of the issuing public corporation
must call a special meeting of shareholders to take a vote on the proposed
control-share acquisition. The Board called the Meeting in response to that
requirement. Notice of the
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<PAGE> 26
special meeting must be given reasonably promptly to all voting and nonvoting
shareholders as of the record date set for the meeting. In addition to notice of
the meeting, the shareholders must also receive a copy of each acquiring
person's statement and a statement authorized by the directors of the issuing
public corporation of the corporation's position or recommendation on the
proposed control-share acquisition, or a statement that the corporation takes no
position or makes no recommendation. This Proxy Statement contains the notice
and statements required by the Control Share Act.
The special meeting of shareholders must be held within 50 days after the
Company's receipt of the acquiring person's statement, unless the acquiring
person agrees in writing to a later date. The Special Meeting of the Company's
shareholders will be held on June 26, 1998. To establish a quorum, at least a
majority of the voting power of the issuing public corporation in the election
of directors as well as a majority of such voting power excluding the voting
power of Interested Shares must be represented at the meeting in person or by
proxy. The proposed acquisition must be approved by a majority of those Common
Shares represented at the meeting as well as by a majority of the voting power,
excluding Interested Shares, represented at the meeting.
Nasdaq. The Company has entered into a listing agreement with Nasdaq
regarding the quotation of the Common Shares on the Nasdaq National Market
System Inc. Among other things, the listing agreement obligates the Company to
comply with certain "non-quantitative designation criteria" promulgated by
Nasdaq. These criteria include the requirement that, with certain exceptions,
issuers quoted on the Nasdaq National Market obtain stockholder approval of the
issuance of common stock (or securities convertible into or exercisable for
common stock) equal to 20% or more of the number of shares or voting power
issued and outstanding before the issuance for less than the greater of book or
market value. Stockholder approval is also required of transactions deemed to
constitute a "change in control." The Equity Financing will constitute such an
issuance and a change in control for purposes of the Nasdaq criteria.
MEETING VOTING AGREEMENTS
As a condition to the Bridge Financing, certain officers and directors of
the Company and its subsidiaries who own Common Shares, including Robert E.
Bruce, Frank W. Grimone, E. Lawrence Hendershot, Glen A. Laffoon, Fred Lick,
Jr., John L. McKean, John F. Novatney, Jr., David L. Rossio, Thomas D. Schulte,
Robert K. Smith, Linda S. Standish, James A. Weisbarth and Robert S. Zarick,
entered into Meeting Voting Agreements. Pursuant to such agreements, each
individual listed above has agreed to vote his or her Common Shares at the
Meeting in favor of the Financing Proposal, the Declassification Proposal and
the Share Proposal, unless the Board accepts a Superior Proposal (as such term
is defined in the Stock Purchase Agreement).
INTERESTS OF CERTAIN PERSONS IN THE FINANCING PROPOSAL
In connection with the Equity Financing and the Bridge Financing, Fred
Lick, Jr., Chairman of the Board, President and Chief Executive Officer of the
Company, and Frank W. Grimone, Senior Executive Vice President and Chief
Financial Officer of the Company, each entered into new employment contracts
with the Company and CRL (the "Lick Employment Agreement" and the "Grimone
Employment Agreement," respectively). Pursuant to the terms of their respective
contracts, Mr. Lick agreed to reduce his annual compensation to $500,000, and
Mr. Grimone agreed to reduce his annual compensation to $250,000. The complete
terms of Mr. Lick's employment contract and Mr. Grimone's employment contract
are contained in the Lick Employment Agreement and the Grimone Employment
Agreement, respectively, copies of which are attached to the Company's Current
Report on Form 8-K, dated December 30, 1997, and which are incorporated herein
by this reference. In addition, pursuant to the terms of the Voting Agreement,
the parties thereto will vote their Common Shares in favor of retaining John F.
Novatney, Jr., General Counsel of CRL, and Fred Lick, Jr. as members of the
Board for specified periods. See "The Financing Proposal -- New Directors;
Management of the Company -- The Voting Agreement."
Also in connection with the Equity Financing and the Bridge Financing, the
Board adopted new severance benefit plans, which eliminated certain severance
benefits in the event of a corporate "change in control" for employees in the
following positions: President and Chief Executive Officer, General Counsel,
Chief Financial Officer, Claims Director, Quality Assurance Director, Computer
Director, Publishing Director, Purchasing Director, Sales Director, Internal
Accounting Director, Facilities Director, Administrative Services Director,
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<PAGE> 27
Fraud Investigation Director, Staff Attorneys, Marketing Director, Negotiations
Director, Development Director, Compliance Directors, Agency Development
Director, Life Operations Vice President, Controller Vice President, Executive
Vice President, Compliance Vice President, Consumer Relations Vice Presidents,
Provider Network Vice President, Medical Director, Project Coordinator Director,
Managed Care Director, Actuarial Director, Technical Support Director,
Utilization Management Director, Regional Group Managers, Team Operations Vice
President, Treasurer, Human Resources Manager, Administration Director, and
Human Resources Vice President. This change was uniformly applicable to all such
employees, so that the infusion of capital by Strategic Partners could not be
deemed a "change in control" for severance benefit purposes. In addition, the
Company's retirement plan was converted to a lower cost 401(k) plan which
provides significant benefits to the Company's employees at a lower cost than
the Company's former defined contribution plan.
Medical Mutual of Ohio, one of the Assignees, is affiliated with Antares
Management Solutions, Inc. (formerly known as Mutual Management Company). The
Company has entered into an Administrative Services Agreement with Antares
Management Solutions, Inc. to outsource all of its computer operations and
certain billing and other administrative services. See "Year 2000 Conversion."
STOCK PURCHASE AGREEMENT
The following is a summary of the material terms of the Stock Purchase
Agreement. Such summary is not a complete description of the Stock Purchase
Agreement and is qualified in its entirety by reference to the text of the Stock
Purchase Agreement, a copy of which is attached hereto as Appendix A and is
incorporated herein by this reference.
General. The Stock Purchase Agreement provides that, subject to the
satisfaction or waiver of certain conditions described below, including, among
others, the approval of the Company's Equity Financing by the shareholders,
Strategic Partners and Insurance Partners (collectively, "Purchasers") and any
assignees of the Purchasers, will purchase an aggregate of 7,300,000 Common
Shares and warrants to purchase 3,650,000 Common Shares at an exercise price
equal to $5.50 per share, for an aggregate total consideration of $40,150,000.
Pursuant to the terms of the Stock Purchase Agreement, effective at the time of
the Closing, the Board will be reconstituted in accordance with the Voting
Agreement to reflect the majority interest in the Company of Strategic Partners
and Insurance Partners.
Representations and Warranties. The Stock Purchase Agreement contains
various customary representations and warranties of the Company and Purchasers,
including without limitation, representations by the Company as to its corporate
status and good standing; the existence of its subsidiaries; its power and
authority to enter into the Stock Purchase Agreement; the enforceability of the
terms of Stock Purchase Agreement; the Company's capitalization; the accuracy
and availability of certain reports and financial statements; the absence of (i)
changes in the Company's business, (ii) violations of law, (iii) undisclosed
liabilities, (iv) litigation, (v) tax obligations, (vi) brokerage commissions
and fees, (vii) breaches of material contracts, (viii) orders, injunctions or
decrees, (ix) sensitive transactions, (x) transactions with affiliates, (xi)
takeover restrictions, and (xii) termination and other payments; the condition
of its corporate properties; the legality of the insurance issued by its
subsidiaries; the adequacy of its reserves; the existence and status of its
reinsurance treaties, employee benefit plans and obligations to employees; its
compliance with environmental, health and safety, and other applicable laws; its
proper filing of regulatory documents; the validity of its insurance policies;
its customers; and its proper preparation of this Proxy Statement. In addition,
the Company made representations as to the use of the proceeds from the Bridge
Loan, the conversion of its defined benefit plan to a defined contribution plan,
the termination of certain other officer and employee benefit plans, certain
modifications to its severance pay plan, the entry by the Company into the
reinsurance treaty with Hannover, the payment of certain fees and expenses of
Purchasers and the inclusion of the Share Proposal in this Proxy Statement.
Purchasers' representations and warranties include, but are not limited to,
representations as to (i) their authority to consummate the transactions
contemplated by the Stock Purchase Agreement; (ii) the validity of the Stock
Purchase Agreement; (iii) Purchasers' due organization; (iv) the absence of
brokerage commissions or fees; (v) Purchasers' compliance with private placement
investor requirements and their intent to acquire the Common Shares and Equity
Warrants solely for their own accounts for investment purposes; (vi) the
delivery by Purchasers
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to the Company of directors' and officers' questionnaires reasonably requested
by the Company in connection with the transactions contemplated by the Stock
Purchase Agreement; and (vii) the absence of any qualification or conflict of
any person holding any interest in Purchasers.
Covenants of the Parties. Pursuant to the terms of the Stock Purchase
Agreement, the Company has agreed to a number of restrictions on the operation
of its business prior to the earlier of the Closing or termination of the Stock
Purchase Agreement. Among other things, the Company has agreed (i) to conduct
its business in the ordinary course of business in substantially the same manner
as conducted in the past; (ii) to use all reasonable efforts to preserve,
protect and maintain its business; (iii) not to make capital expenditures in
excess of $50,000; (iv) not to dispose of any assets or incur any liabilities
outside the ordinary course of business; (v) not to merge, liquidate,
consolidate, amend its articles or regulations or effect any other organic
corporate change; (vi) not to pay any liability outside the ordinary course of
business; (vii) not to make any dividend or distribution or repurchase, redeem
or issue any capital shares; (viii) not to forgive or cancel any material debts
or claims, or waive any material rights; (ix) not to change its credit practices
or methods of maintaining books, accounts or business records; (x) to maintain
each of its facilities and the assets of its business in good repair, order and
condition; (xi) to comply with its obligations under its material contracts;
(xii) except as provided in the Stock Purchase Agreement, to use reasonable
efforts to keep available the services of its present employees and agents and
preserve the goodwill of customers, suppliers and others; (xiii) except as
provided in the Stock Purchase Agreement, not to enter into, amend, terminate or
make any increase under, any compensation plan or other employment arrangement,
except in the ordinary course of business; (xiv) not to enter into any new, or
amend or terminate any of its existing material contracts; (xv) not to sell,
lease or otherwise dispose of any assets, properties, rights or claims; (xvi)
not to incur any debt, obligation or liability, contingent or otherwise, except
liabilities incurred in the ordinary course of business and consistent with past
practice and expenses to be borne by the Company in connection with the
transactions contemplated by the Stock Purchase Agreement; (xvii) not to enter
into any other transactions outside the ordinary course of business; (xviii) not
to take or omit to take any action within its control which could have a
material adverse effect on the Company or could cause any representation or
warranty made by the Company in the Stock Purchase Agreement to become false in
any material respect; and (xix) subject to the Board's satisfaction of its
fiduciary duties which may require it to entertain proposals by other parties
and subject to certain other conditions set forth in the Stock Purchase
Agreement, to negotiate only with Purchasers and not to solicit or entertain any
proposal or offer from any third party regarding the sale, lease, transfer or
other disposition of the capital stock, business or assets of the Company.
In addition, until the Closing, the Company has agreed to confer on a
regular and frequent basis with one or more designated representatives of
Purchasers to report material operational matters and the general status of
ongoing operations of the Company's business. The Company must 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 must keep each Purchaser
fully informed of such events. The Company has also agreed to provide each
Purchaser and certain of its authorized representatives access to all its
properties, facilities, personnel, accountants, customers, vendors, books,
contracts, leases, commitments and records, and to furnish each Purchaser with
all financial and operating data and other information as to the Company's
business and its assets, properties, rights and claims, as each Purchaser may
from time to time reasonably request. The Company has also agreed to use
reasonable efforts to consummate the transactions contemplated by the Stock
Purchase Agreement perform its obligations thereunder, and to make all filings
required by the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended
(the "HSR Act") and to amend the Company's pension plan to cause all
participants' account balances under the Pension Plan on January 1, 1998 to be
vested as of such date.
Purchasers have agreed to use reasonable efforts to consummate the
transactions contemplated by the Stock Purchase Agreement and perform their
obligations thereunder, and to make all necessary filings required by the HSR
Act. They have additionally agreed, subject to certain conditions, to maintain
the Company's existing directors' and officers' liability insurance, or
substantially similar insurance, for a period of five years after the Closing.
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The parties mutually agreed that the home office for CRL will remain in
Strongsville, Ohio for the indefinite future and that CRL'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.
Conditions to Closing of the Equity Financing. The obligations of the
Company to consummate the Equity Financing are subject to the following
conditions, among others: (i) the representations and warranties of Purchasers
contained in the Stock Purchase Agreement shall be accurate in all material
respects, and Purchasers shall have performed in all material respects the
obligations, and complied with each of the covenants, agreements and conditions,
required to be performed or complied with by them on or prior to the Closing;
(ii) no action, suit, proceeding or investigation before any court,
administrative agency or other governmental authority shall be pending or
threatened wherein an unfavorable judgment, decree or order would prevent the
carrying out of the Stock Purchase Agreement or any of the transactions
contemplated thereby, declare unlawful the transactions contemplated thereby, or
cause such transactions to be rescinded; (iii) Purchasers shall have obtained
all consents from third parties that are required for the purchase of the Common
Shares and Equity Warrants by Purchasers, or that are required for the
consummation of the transactions contemplated by the Stock Purchase Agreement,
or that are required in order to prevent a breach or a default under, or a
termination of, any agreement to which any Purchaser is a party or to which any
portion of the property of Purchasers is subject; and (iv) all regulatory
agencies shall have taken such action as may be required to permit the
consummation of the transactions contemplated by the Stock Purchase Agreement,
and such action shall remain in full force and effect and shall be reasonably
satisfactory in form and substance to the Company and its counsel; (v) the
waiting period required by the HSR Act shall have expired or been terminated;
and (vi) the Stock Purchase Agreement and the transactions contemplated thereby
shall have been approved by the shareholders of the Company in accordance with
its Articles of Incorporation, Bylaws and all applicable laws, if required.
The obligations of each Purchaser to consummate the Equity Financing are
subject to the following conditions, among others: (i) the representations and
warranties of the Company contained in the Stock Purchase Agreement shall be
accurate in all material respects, and the Company shall have performed in all
material respects the obligations, and complied with each and all of the
covenants, agreements and conditions required to be performed or complied with
by it on or prior to the Closing; (ii) no action, suit, proceeding or
investigation before or in any court, administrative agency or other
governmental authority shall be pending or threatened wherein an unfavorable
judgment, decree or order would prevent the carrying out the Stock Purchase
Agreement or any of the transactions contemplated thereby, declare unlawful the
transactions contemplated thereby, cause such transactions to be rescinded, or
affect the right of any Purchaser to own, operate or control the business of the
Company; (iii) all consents from third parties that are required for the
issuance of the Common Shares and Equity Warrants to each Purchaser or that are
required for the consummation of the transactions contemplated by the Stock
Purchase Agreement 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; (iv) all regulatory agencies
shall have taken such action as may be required to permit the consummation of
the transactions contemplated by the Stock Purchase Agreement, and such actions
shall remain in full force and effect and shall be reasonably satisfactory in
form and substance to Purchasers and their counsel; (v) the waiting period
required by the HSR Act shall have expired or been terminated; (vi) there shall
not have occurred nor be continuing any general suspension of trading (other
than resulting form the implementation of so-called "circuit breakers" for a
period not exceeding four consecutive hours) in, or limitation on prices for,
securities on any national securities exchange or in the over-the-counter
market, the declaration of a banking moratorium or any suspension of payments in
respect of banks in the United States, or the commencement of war involving an
attack on the continental United States; (vii) the Stock Purchase Agreement and
the transactions contemplated thereby shall have been approved by the
shareholders of the Company in accordance with the Company's Articles of
Incorporation, Bylaws and all applicable laws if required; (viii) the
representations and warranties of each other Purchaser contained in the Stock
Purchase Agreement shall be accurate in all material respects, and 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 prior to Closing including the
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<PAGE> 30
execution of certain agreements and the purchase of the Common Shares to be
purchased by such other Purchaser under the Stock Purchase Agreement; (ix) the
Company shall have contributed to the capital of CRL the Surplus Note, dated
December 16, 1997, in the principal amount of $14,000,000, made by CRL and
payable to the order of the Company; (x) the Company shall have paid the fees
and expenses of Purchasers and their designees (up to a maximum of $750,000 in
the aggregate) incurred by them in connection with their respective
investigations of the Company, the negotiation, execution and delivery of the
Stock Purchase Agreement and related documents, and the performance of their
respective obligations thereunder, to the extent such fees and expenses shall
have been submitted to the Company at or prior to Closing; (xi) the
classification of the Company's Board of Directors shall have been terminated;
(xii) a sufficient number of directors of the Company 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; (xiii) Peter W. Nauert shall have been elected Chief
Executive Officer of the Company and (xiv) there shall not have occurred any
acquisition by any person, entity or group (prior to the Closing), of 15% or
more (after giving effect to the transactions contemplated by the Stock Purchase
Agreement) of either the then outstanding Common Shares or the combined voting
power of the Company's then outstanding voting securities entitled to vote
generally in the election of directors.
The Stock Purchase Agreement permits each party to waive any or all of the
foregoing conditions to its obligations.
Post-Closing Indemnification. Each party agrees to indemnify each other
party and certain of its officers, directors, affiliates and other persons
against (i) any misrepresentation, breach of warranty or failure to fulfill any
covenant or agreement of the indemnifying party under the Stock Purchase
Agreement, and (ii) any and all claims of third parties made based upon facts
alleged that, if true, would have constituted such a misrepresentation, breach
or failure.
The indemnification obligations under the Stock Purchase Agreement survive
for a period of two years from the Closing, except for (i) representations by
the Company as to its organization, qualification, good standing, corporate
power, due authorization of the Stock Purchase Agreement and capital structure,
which shall survive and be enforceable indefinitely, and (ii) representations
and warranties by the Company regarding its taxes, returns and reports, which
survive until the applicable statute of limitation expires.
Assignment; Amendment and Termination of the Stock Purchase Agreement;
Termination Fee. Neither the Company nor any Purchaser may assign its rights
under the Stock Purchase Agreement without the written consent of the other
parties, except that a Purchaser may assign rights to acquire a portion of the
Common Shares and Equity Warrants to be acquired by such Purchaser under the
Stock Purchase Agreement if (i) the assignee agrees to be bound by the Stock
Purchase Agreement, the Voting Agreement and the Stockholders Agreement, (ii)
such assignment does not release such Purchaser of its obligations under the
Stock Purchase Agreement, (iii) such assignment does not delay or impair the
timely consummation of the transactions contemplated by the Stock Purchase
Agreement, (iv) except as described in (v) below, such assignee would not own in
excess of 10% of the outstanding Common Shares immediately following
consummation of the Equity Financing, and (v) if such assignee is the Fund, the
Fund would not own in excess of 15% of the outstanding Common Shares immediately
following consummation of the Equity Financing; provided, however, that
Strategic Partners may not assign rights to acquire in excess of $8,250,000 in
Common Shares and Equity Warrants. Strategic Partners has agreed to assign
rights to acquire certain portions of the Common Shares and Equity Warrants
being purchased by it pursuant to the Stock Purchase Agreement. See "Certain
Considerations -- Dilution of Existing Shareholders; Change in Control."
The Stock Purchase Agreement may be amended only in a writing signed by the
Company and each Purchaser; provided that any exercise of any rights under the
Stock Purchase Agreement or any amendment, waiver, termination or consent with
respect to any provision of the Stock Purchase Agreement on behalf of the
Company may be and shall be exercised and approved by a majority of the
independent directors of the Board.
The Stock Purchase Agreement may be terminated at any time prior to
Closing, whether before or after approval of the Financing Proposal by the
shareholders (i) by mutual written consent of the parties; (ii) by
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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 the Stock Purchase Agreement, and
such order, decree, ruling or other action shall have become final and
non-appealable; (iii) by Purchasers, if one or more of the material conditions
to the obligations of Purchasers to close has not been fulfilled by June 30,
1998; (iv) by the Company if one or more of the material conditions to the
obligation of the Company to close has not been fulfilled by June 30, 1998; and
(v) by the Company in connection with its intention to pursue a written proposal
that has not been solicited by the Company following the date of the Stock
Purchase Agreement relating to a proposed Acquisition Transaction (as defined
below), which proposal is, in the reasonable good faith judgment of the Board,
after consultation with legal and financial advisors, on financial and other
terms more favorable to the shareholders of the Company than the terms of the
transactions contemplated by the Stock Purchase Agreement (such a proposal, a
"Superior Proposal"), provided that such termination shall not be effective
unless the Company has made payment of the termination fee required by the Stock
Purchase Agreement if it is then due and (vi) by Purchasers in the event any of
the following shall occur: (a) a proposal for an Acquisition Transaction (as
defined below) has been made to the Board and the Board shall fail to reaffirm
its approval or recommendation of the Stock Purchase Agreement and the
transactions contemplated thereby on or before the tenth business day following
the date on which such proposal shall have been made; (b) the Board shall have
withdrawn or adversely modified, or taken a public position materially
inconsistent with, its approval or recommendation of the Stock Purchase
Agreement or any of the transactions contemplated thereby (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 (c) the Company shall have
announced its intention to pursue a Superior Proposal.
In the event that (a) a proposal with respect to a transaction relating to
the acquisition of a material portion of the capital stock of the Company or any
of the Company's subsidiaries, its or their assets or business, whether in whole
or in part, whether directly or indirectly, through purchase, merger,
consolidation or otherwise (an "Acquisition Transaction") is commenced by the
Company, publicly proposed, publicly disclosed or communicated to the Company or
any representative or agent thereof after the date of the Stock Purchase
Agreement and prior to the date of the termination of the Stock Purchase
Agreement, (b) the Stock Purchase Agreement is thereafter terminated by the
Company because it accepts a Superior Proposal or by Purchasers for any of the
reasons described in clause (vi) of the previous paragraph and (c) within six
months following such termination an Acquisition Transaction is consummated, or
the Company enters into an agreement relating thereto, then in any such event,
the Company must pay Purchasers $950,000 (the "Termination Fee") plus
reimbursement of each Purchaser's expenses incurred in connection with the
transactions contemplated by the Stock Purchase Agreement including all due
diligence expenses and expenses of counsel; provided, however, that if the
200,000 Guarantee Warrants, the issuance of which require shareholder approval,
are issued, the Termination Fee shall be reduced to $750,000.
REGISTRATION RIGHTS AGREEMENT
The following is a summary of the material terms of the Registration Rights
Agreement. Such summary is not a complete description of the Registration Rights
Agreement and is qualified in its entirety by reference to the text of the
Registration Rights Agreement, the form of which is attached as Exhibit B to the
Stock Purchase Agreement, which is attached hereto as Appendix A and is
incorporated herein by this reference.
The Common Shares and the Equity Warrants will be issued to Strategic
Partners, the Fund, and Insurance Partners pursuant to Section 4(2) of the
Securities Act of 1933, as amended (the "Securities Act"), which provides an
exemption from the registration requirements of the Securities Act, and will not
be registered for public resale. Accordingly, the Company has agreed to register
the Common Shares and the Equity Warrants (including any Common Shares issued
upon exercise of the Equity Warrants) as follows:
Demand Registration. At any time after the Closing date of the Equity
Financing, holders of at least 30% of the then-outstanding Registrable
Shares (as defined below) (but not less than $5,000,000 of the then
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market value) may request that the Company file a registration statement
with the United States Securities and Exchange Commission (the
"Commission") under the Securities Act. The Company is obligated to use its
best efforts to cause such shares to be registered (such a registration, a
"Demand Registration"). "Registrable Shares" means at any time any (i)
then-outstanding Common Shares issued pursuant to the Stock Purchase
Agreement, (ii) then-outstanding Common Shares held by an Investor (as
defined in the Registration Rights Agreement) (including Common Shares
issuable upon exercise of the Equity Warrants), or (iii) then-outstanding
Common Shares issued as, or directly or indirectly upon conversion or
exercise of the securities issued as, a dividend or other distribution with
respect to or replacement of the shares referred to in (i) and (ii) above
and (iv) Common Shares then issuable directly or indirectly upon conversion
or exercise of other securities which were issued as a dividend or other
distribution with respect to or in replacement of shares referred to in (i)
or (ii) above; provided that Registrable Shares shall not include shares
which have been registered under the Securities Act or have been sold to
the public pursuant to Rule 144 of the Commission under the Securities Act.
Demand Registrations will be short-form registrations whenever the Company
is permitted to use any applicable short form.
Piggyback Registration. If the Company proposes to register any of
its Common Shares in connection with a public distribution (other than
pursuant to a Demand Registration under the Registration Rights Agreement
or on any Form S-8 or S-4 or any successor form thereto), it will notify
each holder of Registrable Shares and, if so requested by such holder, will
use its best efforts to register such holder's Registrable Shares.
Registration Expenses. The Company has agreed to pay all expenses
associated with the registration of the Registrable Shares for two Demand
Registrations initiated by Insurance Partners, L.P., one Demand
Registration initiated by the Fund, and one Demand Registration initiated
by IP Delaware (including any short-form registrations), other than
customary underwriting discounts and commissions. In any other Demand
Registration other than the first four Demand Registrations (including any
short-form registrations), the registration expenses of such registration
shall be borne by the holders of Registrable Shares to be registered
thereunder pro rata based on the number of Registrable Shares and other
securities requested or permitted to be included in such registration.
Restrictions. The Company is not obligated to effect any Demand
Registration within 180 days after the effective date of a previous Demand
Registration. The Company may postpone for up to 90 days the filing or the
effectiveness of a registration statement for a Demand Registration if the
Board reasonably and in good faith determines that such filing would
require a disclosure of a material fact that would have a material adverse
effect on the Company or on any plan by the Company to engage in any
acquisition of assets (other than in the ordinary course of business) or
any merger, consolidation, tender offer or other significant transaction.
The Company may postpone the filing of a particular registration statement
for the above reasons only once.
Indemnification. The Company has agreed to indemnify the holders of
Registrable Shares for liabilities 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.
Holdback Agreements. Each holder of Registrable Shares has agreed,
except under certain circumstances, not to effect any public sale or
distribution of Common Shares, or any securities convertible into or
exchangeable or exercisable for Common Shares or make any Demand
Registration during the seven days prior to, and during the 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.
The Company has agreed (i) not to effect any public sale or distribution of
Common Shares, or any securities convertible into Common Shares, during the
seven days prior to and during the 90 days following, the effective date of any
underwritten Demand Registration or any underwritten Piggyback Registration,
unless the underwriters managing the registered public offering otherwise agree,
(ii) to use all reasonable efforts to cause each holder
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of at least 5% of its Common Shares, or any securities convertible into or
exchangeable or exercisable for such Common Shares, to agree not to effect any
public sale or distribution of any such securities during such period, unless
the underwriters managing the registered public offering otherwise agree,
subject to the Company's registration obligations under the Equity Warrants, and
(iii) if requested by the underwriters managing the registered public offering,
to use all reasonable efforts to cause each other holder of its Common Shares,
or any securities convertible into or exchangeable or exercisable for such
Common Shares purchased from the Company at any time (other than in a registered
public offering), to agree not to effect any public sale or distribution of any
such securities during such period, unless the underwriters managing the
registered public offering otherwise agree subject to the registration
obligations of the Company under the Equity Warrants.
STOCKHOLDERS AGREEMENT
The following is a summary of the material terms of the Stockholders
Agreement. Such summary is not a complete description of the Stockholders
Agreement and is qualified in its entirety by reference to the text of the
Stockholders Agreement, the form of which is attached as Exhibit D to the Stock
Purchase Agreement, which is attached hereto as Appendix A and is incorporated
herein by this reference.
Each of Insurance Partners, Strategic Partners, the Fund (the "Shareholder
Parties") and the Company have agreed to enter into the Stockholders Agreement,
which gives each Shareholder Party certain rights with respect to its
outstanding Common Shares in the event of certain sales of Common Shares by
other Shareholder Parties. Specifically, if Insurance Partners disposes of
Common Shares representing more than 20% of the outstanding Common Shares,
Insurance Partners, its affiliates, officers, directors and employees (the "IP
Group") has the right to require each non-selling Shareholder Party (each a
"Co-Seller") to transfer a portion of its Common Shares which represent the same
percentage of the fully diluted Common Shares held by such Co-Seller as the
Common Shares being disposed of by the IP Group represent of the fully diluted
Common Shares held by the IP Group. All Common Shares transferred by Shareholder
Parties pursuant to this provision of the Stockholders Agreement will be sold at
the same price and time and otherwise treated identically with the Common Shares
being sold by the IP Group.
In addition, if any Shareholder Party desires to effect a transfer of
Common Shares (other than a transfer in an underwritten public offering pursuant
to an effective registration statement under the Securities Act) representing
more than 20% of the outstanding Common Shares, then the selling Shareholder
Party must make an offer to each Co-Seller to include in the proposed sale a
portion of such Co-Seller's Common Shares which represents the same percentage
of such Co-Seller's fully diluted Common Shares as the Common Shares being sold
by the selling Shareholder Party represent of its fully diluted Common Shares.
EQUITY WARRANTS
The following is a summary of the material terms of the Equity Warrants.
Such summary is not a complete description of the Equity Warrants and is
qualified in its entirety by reference to the text of the Equity Warrants, the
form of which is attached as Exhibit A to the Stock Purchase Agreement, which is
attached hereto as Appendix A and is incorporated herein by this reference.
In connection with the Equity Financing, the Company would issue to the
Purchasers warrants to acquire up to 3,650,000 Common Shares at an exercise
price equal to $5.50 per share, of which the Assignees will acquire certain
portions. See "Certain Considerations -- Dilution of Existing Shareholders;
Change in Control." The Equity Warrants have seven year terms and may be
exercised immediately upon issuance. Each of the Equity Warrants will bear a
legend indicating that the Equity Warrants have not been registered under the
Securities Act or any state securities laws and that they may not be offered,
sold, transferred, pledged or otherwise disposed of except pursuant to an
effective registration statement under the Securities Act and such laws or an
exemption from registration under such Act and such laws. The Equity Warrants
provide for certain adjustments to the exercise price and the number of Common
Shares underlying such Equity Warrants in the event of any share dividends,
splits or combinations; distributions of Common Shares, other securities or
other evidences of indebtedness issued by the Company; and reorganizations,
mergers or asset sales.
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NEW DIRECTORS; MANAGEMENT OF THE COMPANY
New Directors. Contemporaneously with, and as a condition of, the funding
of the Bridge Loan, the Company obtained the resignations of three of its
directors, Messrs. Robert E. Bruce, William E. Gerstenslager, and E. Lawrence
Hendershot, M.D.; the remaining directors then in office filled these vacancies
by electing three directors designated by Strategic Partners to the Board, Val
Rajic, Michael A. Cavataio and Andrew A. Boemi (the "Interim Directors"). See
Appendix E to this Proxy Statement for biographical information for the Interim
Directors.
Upon consummation of the Equity Financing, the remaining directors of the
Company (other than Messrs. Cavataio, Boemi, Lick and Novatney) will resign. The
directors then in office will, consistent with the Voting Agreement, fill such
vacancies by electing Richard M. Osborne, Peter W. Nauert, Bradley Cooper,
Robert Spass, and Mark Tabak to the Board. Mr. Andrew A. Boemi and Mr. Michael
Cavataio are expected to satisfy the independent director requirement of the
Voting Agreement. See Appendix E to this Proxy Statement for biographical
information for these new directors.
Management of the Company. Strategic Partners is conducting a search for a
chief operating officer and will recommend a suitable candidate if one results
from the search for consideration by the Board. Until such a candidate has been
found, Mr. Val Rajic, the President of Strategic Partners and a newly elected
director of the Company, will act as the Company's chief operating officer and
has been appointed to such position. Mr. Billy B. Hill, Jr., an affiliate of
Strategic Partners, has been retained as General Counsel of the Company. In
addition, the Stock Purchase Agreement requires that as a condition to the
obligations of Purchasers to close the Equity Financing, Peter W. Nauert shall
have been elected Chief Executive Officer of the Company. The other executive
officers of the Company will retain their positions with the Company after the
Closing, and the nature of their severance benefits will not change. The
executive officers of the Company who will serve after the Closing of the Equity
Financing are expected to include: Fred Lick, Jr., Chairman of the Board; Peter
W. Nauert, President and Chief Executive Officer; Frank W. Grimone, Senior
Executive Vice President and Chief Financial Officer; Val Rajic, Executive Vice
President and acting Chief Operating Officer; Glen A. Laffoon, Executive Vice
President; James A. Weisbarth, Treasurer and Assistant Secretary; and Linda S.
Standish, Secretary. In connection with the consummation of the transactions
contemplated by the Stock Purchase Agreement, Messrs. Nauert and Rajic will
enter into mutually agreeable employment agreements with the Company, and Mr.
Hill will enter into a mutually agreeable retention agreement with the Company.
The Voting Agreement. The following is a summary of the material terms of
the Voting Agreement. Such summary is not a complete description of the Voting
Agreement and is qualified in its entirety by reference to the complete text of
the Voting Agreement, the form of which is attached as Exhibit C to the Stock
Purchase Agreement, which is attached hereto as Appendix A and is incorporated
herein by this reference.
At the Closing, the Company, Strategic Partners, Insurance Partners, the
Fund, and the Assignees will enter into the Voting Agreement. The Voting
Agreement will remain in effect until five years from the date of the Closing.
The Voting Agreement provides that Insurance Partners, Strategic Partners, the
Fund, and their respective transferees who execute the Voting Agreement shall
cause the Board to consist of nine directors, some or all, as applicable, of
whom shall consist of the following individuals: (i)(a) four individuals
designated by Insurance Partners, so long as the IP Group owns Common Shares
equal to at least 75% of the Common Shares owned by the IP Group on the Closing
Date, (b) three individuals designated by Insurance Partners, so long as the IP
Group owns Common Shares equal to at least 50%, but less than 75%, of the Common
Shares owned by the IP Group on the Closing Date, (c) two individuals designated
by Insurance Partners, so long as the IP Group owns Common Shares equal to at
least 25%, but less than 50%, of the Common Shares owned by the IP Group on the
Closing Date, and (d) one individual designated by Insurance Partners, so long
as the IP Group owns Common Shares equal to at least 10%, but less than 25%, of
the Common Shares owned by the IP Group on the Closing Date; (ii)(a) two
individuals designated by Strategic Partners, so long as the Strategic Partners
and its affiliates (the "SAP Group") owns Common Shares equal to at least 50% of
the Common Shares owned by the SAP Group on the Closing Date, and (b) one
individual designated by Strategic Partners, so long as the SAP Group owns
Common Shares equal to at least 10%, but less than 50% of the Common Shares
owned by the SAP Group on the Closing Date; and (iii) one individual designated
by the Fund, so long as the Fund and its affiliates (the
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"Osborne Group"), owns Common Shares equal to at least 25% of the Common Shares
owned by the Osborne Group on the Closing Date. (iv) John F. Novatney, Jr. 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 the
Exchange Act; (v) Fred Lick, Jr. until the earlier to occur of (A) December 31,
1999, (B) the first date as of which the Company does not have a class of equity
securities registered under the Exchange Act or (C) expiration of the remaining
term of his employment agreement with the Company, as amended; provided that so
long as the Company has a class of equity securities registered under the
Exchange Act, at least two directors remaining on the Board shall be
"independent" as such term is defined under applicable Nasdaq National Market
System, Inc. standards (such directors are referred to herein as "Independent
Directors"); provided that none of Insurance Partners, Strategic Partners or the
Fund 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 Insurance Partners, Strategic
Partners and the Fund vote for their election; and provided further that the
Company shall not voluntarily be delisted from the Nasdaq National Market
System, Inc. except in connection with a going private transaction or if the
Company becomes listed on another national securities exchange. Under Nasdaq
National Market System, Inc. standards, the term "independent director" means a
person other than an officer or employee of the Company or its subsidiaries or
any other individual having a relationship which, in the opinion of the Board,
would interfere with the exercise of independent judgment in carrying out the
responsibilities of a director.
Article XI. The Eleventh Article of the Company's Amended Articles of
Incorporation provides that unless two-thirds of the Company's directors act to
approve or to recommend to the shareholders the approval of certain matters, the
affirmative vote of 75% of the Common Shares (rather than a simple majority) is
required to approve such matters. These requirements must be satisfied in order
to: (i) amend, alter or repeal the Amended Articles of Incorporation of the
Company; (ii) amend, alter, or repeal the Code of Regulations of the Company;
(iii) adopt an agreement of merger or consolidation providing for the merger or
consolidation of the Company with or into one or more other corporations and
requiring shareholder approval; (iv) adopt a proposed combination or majority
share acquisition involving the issuance of shares of the Company; (v) adopt a
proposal to sell, exchange, transfer or otherwise dispose of all, or
substantially all, of the assets of the Company or of all or substantially all
of the stock or assets of any major subsidiary of the Company; or (vi) dissolve
the Company. Thus, unless two-thirds of the Company's directors approve a matter
described above and assuming that the Equity Warrants and the Guarantee Warrants
are not exercised in full, Strategic Partners, Insurance Partners and the Fund
cannot, as shareholders, approve any of the above types of actions without also
obtaining the approval of other shareholders.
Business Plan. In connection with the financing obtained by Strategic
Partners for the Company, the Board approved a comprehensive business plan which
was implemented beginning January 1, 1998. The plan provided for the Company to
continue a series of rate increase actions which began in April 1996 and
continue to the present. Each policy type has been thoroughly examined with
respect to the cost of particular benefits and where appropriate, benefit
adjustments are being made, coverages are being modified and premium rates are
being increased.
Concurrently with actions taken to increase profitability of the products
sold by the Company, an effort is underway to reduce expenses in all areas of
the Company's operations. The goal is a reduction of expenses by up to $7
million when compared to 1997 expenses. Each area of the Company's operations
has been affected. Employee benefits (including executive perquisites) have been
modified, a hiring and wage freeze has been instituted and a reduction in staff
is presently underway. Further expense reductions will involve consolidation of
operational areas, cancellation of certain long term contracts, material
revision of existing provider relationships and a substantial reduction in the
professional service fees incurred by the Company in recent years.
The Company is also placing a renewed emphasis on achievement of savings
through implementation of managed care techniques, and several contracts are
being negotiated with respect to more efficient management of provider networks,
provision of enhanced utilization review and utilization management services,
large case management and implementation of a disease management strategy. It is
anticipated that these activities will result in additional savings of up to $3
million in 1998.
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In connection with its implementation of such managed care techniques, the
Company provides for its customers a comprehensive package of more than 30
managed care controls. 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 the Company's managed care programs are
Preferred Provider Organization (PPO) health plans which are available to both
groups and individuals. Through its PPO plans, the Company is able to offer
customers a network of hospitals and physicians that provide medical services at
discounted rates. PPO networks which the Company contracts with are situated in
18 states. For customers located outside CRL's existing PPO service areas, the
Company offers a supplemental hospital program, through which it obtains
discounted hospital rates by contracting with national PPO networks.
The Company 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 the
Company's nursing staff to work with attending providers to assist in developing
treatment plans for quality care at appropriate cost and care levels, and (d)
disease management programs such as a "Healthy Baby" and a "Centers of
Excellence" network which is offered for transplant procedures at renowned
institutions with higher recovery rates, for discounted, packaged fee amounts.
In addition, the Company is simplifying its products and developing new
products to be sold through the Company's existing agency distribution system.
The Company plans that all of its products will be modified to enhance
profitability. The Company will continue concentrating on its existing group and
association health products and is presently filing for regulatory approval of
additional health insurance products designed to complement its existing
products. Introduction of new products in the life insurance and senior
insurance segments (such as long-term care) will be deferred until CRL can
implement the transition to its outsourced information systems and completes the
outsourcing of its Ohio claims pursuant to its arrangement with Antares
Management Solutions. See "Year 2000 Conversion."
Each of the above initiatives is being supervised by senior management of
the Company with the support of the Board. Employee incentive programs are
currently under consideration to enhance the interest of employees in the
Company's efforts. At its March 25, 1998 meeting, the Board recommended that the
Compensation Committee of the Board consider adoption of new stock option plans
for executives and general agents to provide such incentives.
The corrective actions instituted by the Company under the business plan
are taking longer than originally anticipated. Some of the areas that have not
fully benefited from the business plan are rating actions, underwriting changes,
claim procedures and certain managed care cost programs. The delay in taking
certain of these actions has contributed to a continued high claims loss ratio
during the first quarter of 1998.
THE DECLASSIFICATION PROPOSAL
It is a condition to the Purchasers' obligation to close the Equity
Financing that the classification of the Board has been eliminated. For the
reasons discussed under "The Financing Proposal -- Considerations of the Board,"
the Board believes it is in the best interests of the shareholders that the
Equity Financing be consummated. Therefore, the Board has recommended an
amendment to Article II, Section 1 and Section 2 of the Code of Regulations of
the Company to eliminate the classification of the Board. The full text of
Article II, Sections 1 and 2 reflecting this amendment is included as Appendix B
to this Proxy Statement.
Upon effectiveness of the 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. For an explanation of the effects of declassification of the Board, see
"Certain Considerations -- Certain Effects of Declassifying the Board."
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The affirmative vote of the holders of a majority of the outstanding Common
Shares is required to adopt the Declassification Proposal.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE "FOR" THE
DECLASSIFICATION PROPOSAL
Certain members of the Board have an interest in the transactions
contemplated by the proposals, which shareholders should consider before casting
their votes. See "The Financing Proposal -- Interests of Certain Persons in the
Financing Proposal."
THE SHARE PROPOSAL
The Share Proposal provides for an amendment to the Company's Amended
Articles of Incorporation to increase the Company's authorized Common Shares
from 15,000,000 to 30,000,000. The increase in authorized Common Shares is
recommended by the Board in order to provide the Company with enough Common
Shares to issue the Common Shares to the Investors in the Equity Financing and
upon exercise of the Warrants, and to provide the Company with increased
flexibility in implementing the strategic objectives of the Company. Except as
described in this Proxy Statement, there are at present no specific plans,
arrangements, negotiations or commitments which will result in the issuance of
additional shares. The additional authorized shares will be available for
issuance from time to time as the Board may determine to be in the best
interests of the Company. To increase the number of authorized Common Shares,
the Company must amend its Amended Articles of Incorporation. Such an amendment
requires shareholder approval.
The affirmative vote of the holders of a majority of the outstanding Common
Shares is required to adopt the Share Proposal.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE "FOR" THE SHARE
PROPOSAL
Certain members of the Board have an interest in the transactions
contemplated by the proposals, which shareholders should consider before casting
their votes. See "The Financing Proposal--Interests of Certain Persons in the
Financing Proposal."
YEAR 2000 CONVERSION
The Year 2000 problem is the result of computer programs being written
using two digits rather than four to define the applicable year. Computer
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 to an independent
vendor. The vendor, Antares Management Solutions, Inc. (formerly known as Mutual
Management Company), an affiliate of Medical Mutual of Ohio, is already in
compliance with Year 2000 requirements. Thus, the Company does not anticipate
any material adverse effect on its business or results of operations arising
from the Year 2000 problem and will incur no material additional costs for the
Year 2000 issue.
INFORMATION REGARDING STRATEGIC PARTNERS AND INSURANCE PARTNERS
STRATEGIC PARTNERS
Strategic Partners is a newly formed Delaware limited liability company
formed for the purpose of making the Bridge Loan and Equity Financing, which has
the following members: Peter W. Nauert, Val Rajic and Karon Hill. "Member" is
the term used for an equity investor in a limited liability company.
Several of the principals and affiliates of Strategic Partners have
substantial experience in the insurance industry and in the management of
insurance companies. Mr. Nauert, Mr. Hill, who is the husband of Karon Hill,
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and Mr. Rajic have been most recently affiliated with Pioneer Financial
Services, Inc. ("Pioneer"), a company that underwrites and markets health
insurance, life insurance and annuities throughout the country. Mr. Nauert
served as Chairman, Chief Executive Officer and Director of Pioneer, Mr. Hill
served as Executive Vice President and General Counsel, and Mr. Rajic held
various positions, including Senior Vice President, at Pioneer.
Strategic Partners has advised the Company that it will have sufficient
funds to consummate the transactions contemplated by the Equity Financing at the
Closing.
INSURANCE PARTNERS
Insurance Partners, L.P. and Insurance Partners Offshore (Bermuda), L.P.
(collectively, "Insurance Partners") are parallel investment partnerships formed
in February 1994 to make significant equity investments in the insurance
industry. Insurance Partners was founded on the premise that the insurance
industry is going through a period of dramatic change in which capital shortages
and management issues will require companies with strong franchises or unique
market positions to turn to outside investors for capital. Insurance Partners
and its related parties have total invested assets and committed capital of
approximately $540 million. Major partners in Insurance Partners include Centre
Reinsurance, Keystone, Inc. (formerly the Robert M. Bass Group, Inc.), The Chase
Manhattan Bank, Northwestern Mutual Life Insurance Company, Aon Corporation,
EDS, Lincoln National Corporation, the Bishop Estate, Ziff Brothers Investment
and Harvard University.
Since its formation in February 1994, Insurance Partners has been involved
in numerous insurance industry transactions, including some of substantial
magnitude and complexity. These transactions have crossed all sectors of the
insurance industry, varied widely in structure, and served to accomplish a range
of seller goals.
Insurance Partners has advised the Company that it will have sufficient
funds to consummate the transactions contemplated by the Equity Financing at the
Closing.
Strategic Partners and Insurance Partners provided the Company with an
acquiring person statement on May 19, 1998, which sets forth their intention to
acquire certain interests in the Company. See Appendix D to this Proxy
Statement, which is incorporated herein by reference.
AGREEMENT AMONG CERTAIN INVESTORS
In connection with the Initial Proposal, Mr. Nauert, Mr. Osborne, Strategic
Partners and the Fund entered into the SAP/Fund Agreement, under which 70% of
the Guarantee Warrants issued by the Company in consideration of the guarantees
provided by Mr. Nauert and Mr. Osborne will be issued to Mr. Nauert and 30% of
the Guarantee Warrants will be issued to the Fund. Also, pursuant to the
SAP/Fund Agreement Mr. Nauert and Mr. Osborne agreed to indemnify and hold
harmless each other against any amount either of them actually pays under their
respective guarantees to ANB in excess of the following percentages of the total
amount actually paid under the guarantees: (i) Mr. Nauert 70% and (ii) Mr.
Osborne 30%.
Pursuant to the SAP/Fund Agreement, the parties agreed that the Fund would
acquire directly from the Company 30% of the Common Shares and Equity Warrants
that were to be available to Strategic Partners pursuant to the Original Stock
Purchase Agreement. Contemporaneously with the Board meeting on March 30, 1998
pursuant to discussions between the parties, Strategic Partners and Richard
Osborne agreed to reduce the total amount of the Fund's investment to
approximately 25% of the Common Shares and Equity Warrants that Strategic
Partners is obligated to purchase pursuant to the Stock Purchase Agreement.
Thereafter, Strategic Partners assigned a portion of its rights to purchase
Common Shares and Equity Warrants pursuant to the Stock Purchase Agreement to
the Assignees in the approximate amount of the reduction of Mr. Osborne's
investment. See "Certain Considerations -- Dilution of Existing Shareholders;
Change in Control."
Mr. Nauert, Mr. Osborne, Strategic Partners and the Fund have also agreed
to vote all of their respective Common Shares in favor of the transactions
contemplated by the Stock Purchase Agreement.
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REGULATORY APPROVALS
The transactions contemplated by the Financing Proposal will require
approval by the ODI. An acquisition statement required to be filed to obtain
such approval has been filed. Although there can be no assurances, management of
the Company believes that the Company should receive the required approvals from
the ODI in the near future. Pursuant to Michigan law, insurance companies
conducting business in the State of Michigan are required to requalify (as a
condition to maintaining an insurance license in the State of Michigan) with the
Michigan Insurance Department within 90 days following a change of control. The
Company has filed a requalification application with the Michigan Insurance
Department for such purpose. Certain other jurisdictions where the Company
conducts business have notice requirements, which the Company has complied with.
Under the HSR Act, and the rules promulgated thereunder, a filing of a
Notification and Report Form ("HSR Form") must be made with the Federal Trade
Commission and the Antitrust Division of the United States Department of
Justice, and the Equity Financing may not be consummated until after the
specified waiting period has expired or been terminated. The Company and IP
Delaware (the only Investor required to file an HSR Form according to the rules
promulgated under the HSR Act) made the required filings under the HSR Act on
April 24, 1998 and received notice on May 5, 1998 that the waiting period had
been terminated.
31
<PAGE> 40
SECURITY OWNERSHIP OF MANAGEMENT AND PRINCIPAL SHAREHOLDERS
The following table sets forth, at the Record Date, and as adjusted to give
effect to the issuance of the Common Shares and the Equity Warrants after
approval of the Financing Proposal and the closing of the Equity Financing,
certain information with respect to the beneficial ownership of Common Shares by
(i) each person known by the Company to own beneficially more than 5% of the
outstanding Common Shares, (ii) each Company director, (iii) each of the named
executive officers and (iv) all Company executive officers and directors as a
group.
<TABLE>
<CAPTION>
AT THE RECORD DATE AS ADJUSTED
----------------------------- -----------------------------
AMOUNT & NATURE AMOUNT & NATURE
OF BENEFICIAL PERCENT OF OF BENEFICIAL PERCENT OF
NAME AND ADDRESS OWNERSHIP(1) CLASS OWNERSHIP CLASS
---------------- --------------- ---------- --------------- ----------
<S> <C> <C> <C> <C>
Fred Lick, Jr. 360,000(2) 7.2 360,000 2.2
17800 Royalton Road
Strongsville, OH 44136
Dimensional Fund Advisors Inc. 258,300(3) 5.1 258,300 1.6
1299 Ocean Avenue, 11th Floor
Santa Monica, CA 90401
Peter W. Nauert(17) 1,201,000(4) 24.0 12,351,000(5) 76.5
c/o Strategic Acquisition Partners, LLC
1750 East Golf Road, Suite 210
Schaumburg, Illinois 60173
Strategic Acquisition Partners, LLC 1,201,000(6) 24.0 12,351,000(7) 76.5
1750 East Golf Road, Suite 210
Schaumburg, Illinois 60173
Richard M. Osborne 1,201,000(8) 24.0 12,351,000(9) 76.5
7001 Center Street
Mentor, Ohio 44060
Turkey Vulture Fund XIII, Ltd. 1,201,000(10) 24.0 12,351,000(11) 76.5
c/o Mr. Richard M. Osborne
7001 Center Street
Mentor, Ohio 44060
Insurance Partners, L.P. 0 0 12,351,000(12) 76.5
One Chase Manhattan Plaza
44th Floor
New York, New York 10005
Insurance Partners Offshore (Bermuda), 0 0 12,351,000(12) 76.5
L.P.
One Chase Manhattan Plaza
44th Floor
New York, New York 10005
Frank W. Grimone 125,000 2.5 125,000 *
Glen A. Laffoon 86,650(13) 1.7 86,650 *
John L. McKean 3,000(14) * 3,000 *
John F. Novatney, Jr. 13,000 * 13,000 *
David L. Rossio 1,000 * 1,000 *
Thomas D. Schulte 2,097(15) * 2,097 *
James A. Weisbarth 14,075 * 14,075 *
Robert S. Zarick 1,000(16) * 1,000 *
Andrew A. Boemi(17) 0 0 0 0
</TABLE>
32
<PAGE> 41
<TABLE>
<CAPTION>
AT THE RECORD DATE AS ADJUSTED
----------------------------- -----------------------------
AMOUNT & NATURE AMOUNT & NATURE
OF BENEFICIAL PERCENT OF OF BENEFICIAL PERCENT OF
NAME AND ADDRESS OWNERSHIP(1) CLASS OWNERSHIP CLASS
---------------- --------------- ---------- --------------- ----------
<S> <C> <C> <C> <C>
Michael A. Cavataio(17) 0 0 0 0
Val Rajic(17) 0 0 0 0
Robert E. Bruce 12,000 * 12,000 *
Bradley E. Cooper(18) 0 0 0 0
Robert A. Spass(18) 0 0 0 0
Mark H. Tabak(18) 0 0 0 0
All executive officers and directors as a 617,822 12.4 599,725 3.7(19)
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.
(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 1,000 Common Shares currently owned by Mr. Nauert and 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 SAP/Fund Agreement. Mr. Nauert disclaims beneficial
ownership of the Common Shares beneficially owned by the Fund.
(5) Includes 1,000 Common Shares currently owned by Mr. Nauert, all of the
Common Shares issued under the Stock Purchase Agreement, all Common Shares
to be issued upon exercise of the Equity Warrants, all Common Shares to be
issued upon exercise of the Guarantee Warrants and 400,000 Common Shares
currently owned by the Fund (collectively, the "Investor Shares"). All of
the Investor Shares will be subject to the Voting Agreement and, as a
result, each of Peter W. Nauert, Strategic Partners, Richard M. Osborne and
the Fund may be deemed to beneficially own, as part of a group, all of the
Investor Shares. Mr. Nauert disclaims beneficial ownership of the Common
Shares beneficially owned by the Investors (other than Strategic Partners)
and the Assignees.
(6) Because it is a party to the SAP/Fund Agreement, Strategic Partners may be
deemed to be the beneficial owners as part of a group under the Exchange
Act, of all Common Shares and Warrants beneficially owned by Mr. Nauert and
the Fund. Strategic Partners disclaims such beneficial ownership.
(7) Includes all of the Investor Shares. All of the Investor Shares will be
subject to the Voting Agreement and, as a result, each of Peter W. Nauert,
Strategic Partners, Richard M. Osborne and the Fund may be deemed to
beneficially own, as part of a group, all of the Investor Shares. Strategic
Partners disclaims beneficial ownership of all Common Shares beneficially
owned by the Investors (other than Strategic Partners) and the Assignees.
33
<PAGE> 42
(8) Mr. Osborne, the manager of and an investor in the Fund, may be deemed to
beneficially own all of the Common Shares beneficially owned by the Fund.
Mr. Osborne disclaims beneficial ownership of the Common Shares owned by
Strategic Partners, Mr. Nauert and Insurance Partners.
(9) Includes all of the Investor Shares. All of the Investor Shares will be
subject to the Voting Agreement and, as a result, each of Peter W. Nauert,
Strategic Partners, Richard M. Osborne and the Fund may be deemed to
beneficially own, as part of a group, all of the Investor Shares. Mr.
Osborne disclaims beneficial ownership of the Common Shares beneficially
owned by the Investors (other than the Fund) and the Assignees.
(10) Includes 400,000 Common Shares owned by the Fund, 240,000 Guarantee
Warrants issued to the Fund at the time of the Bridge Financing, which are
immediately exercisable, 1,000 Common Shares owned by Mr. Nauert and
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 SAP/Fund
Agreement. The Fund disclaims beneficial ownership of the Common Shares
beneficially owned by Mr. Nauert.
(11) Includes all of the Investor Shares. All of the Investor Shares will be
subject to the Voting Agreement and, as a result, each of Peter W. Nauert,
Strategic Partners, Richard M. Osborne and the Fund may be deemed to
beneficially own, as part of a group, all of the Investor Shares. The Fund
disclaims beneficial ownership of the Common Shares beneficially owned by
the Investors (other than the Fund) and the Assignees.
(12) Includes all of the Investor Shares. All of the Investor Shares will be
subject to the Voting Agreement and, as a result, each of IP Delaware and
IP Bermuda may be deemed to beneficially own, as part of a group, all of
the Investor Shares. Insurance Partners disclaims beneficial ownership of
the Common Shares beneficially owned by the other Investors and the
Assignees.
(13) Includes 41,150 Common Shares held by Mr. Laffoon's spouse and 3,000 Common
Shares held jointly with his spouse.
(14) These Common Shares are held by Jack McKean Agency, Inc. of which Mr.
McKean is the sole shareholder.
(15) These Common Shares are held jointly with Mr. Schulte's spouse.
(16) These Common Shares are held jointly with Mr. Zarick's spouse.
(17) Each such person became a member of the Board in connection with the
consummation of the Bridge Financing.
(18) Each such person will become a member of the Board in connection with the
consummation of the Equity Financing.
(19) Excludes the Common Shares owned by directors who will resign at Closing
and directors who are affiliated with the Investors.
34
<PAGE> 43
SHAREHOLDER PROPOSALS
Shareholders who wish to present proposals for action at the next Annual
Meeting of Shareholders of the Company were required to submit their proposal to
the Company no later than December 6, 1997. The Company is not required to
include in the Proxy Statement or form of proxy a shareholder proposal which was
not received by that date or which otherwise failed to meet the requirements for
shareholder proposals established by the regulations of the Commission.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
This Proxy Statement incorporates by reference documents which are not
presented herein. Copies of any such documents relating to the Company, other
than exhibits to such documents (unless such exhibits specifically are
incorporated by reference in such documents), are available without charge, upon
written or oral request, from Central Reserve Life Corporation, CRL Plaza, 17800
Royalton Road, Strongsville, Ohio 44136, Attention: Chief Financial Officer,
telephone (440) 572-2400. In order to ensure timely delivery of the documents
requested, any such request should be made by June 15, 1998.
The following documents previously filed by the Company with the Commission
(File Number 0-8483) are incorporated in this Proxy Statement by reference and
are also included with the mailing for the Special Meeting:
The Company's Annual Report on Form 10-K/A filed with the Commission
on March 31, 1998, as amended.
The Company's Quarterly Report on Form 10-Q filed with the Commission
on May 14, 1998.
All reports and other documents subsequently filed by the Company with the
Commission pursuant to Sections 13(a), 13(c), 14 and 15(d) of the Exchange Act
prior to the date of the Meeting shall be deemed to be incorporated by reference
herein and to be part hereof from the date of the filing of such reports and
documents.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Proxy Statement to the extent that a statement contained
herein, or in any other subsequently filed document that also is or is deemed to
be incorporated by reference herein, modifies or supersedes such statement. Any
such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute part of this Proxy Statement.
SHAREHOLDERS ARE URGED TO SPECIFY THEIR CHOICES AND TO DATE, SIGN, AND
RETURN THE ENCLOSED PROXY IN THE ENCLOSED ENVELOPE. PROMPT RESPONSE IS HELPFUL,
AND YOUR COOPERATION WILL BE APPRECIATED.
By order of the Board.
LICK SIGNATURE
Fred Lick, Jr.
Chairman of the Board,
President and Chief Executive
Officer
May 28, 1998
35
<PAGE> 44
APPENDIX A
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> 45
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.
"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.
A-2
<PAGE> 46
"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 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;
A-3
<PAGE> 47
(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.
3.3. 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:
(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.
A-4
<PAGE> 48
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 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.
A-5
<PAGE> 49
(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.
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.
(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.
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(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 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,
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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 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:
(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;
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(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 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
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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.
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;
(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;
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(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.
(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
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that are reflected in each respective Real Property Lease and (vi)
Encumbrances which do not significantly impair the use, value or
transferability of such property (collectively, "PERMITTED ENCUMBRANCE").
(d) The Company or any of the Company Subsidiaries (as the case may
be), as lessee, has the right under valid and subsisting leases to occupy,
use, possess and control all property leased by the Company or its
Subsidiary, qualified only by the written terms of such leases, copies of
which are attached to Schedule 4.10(d).
(e) The Company and each Company Subsidiary owns or possesses, or
holds a valid right or license to use, all intellectual property, patents,
trademarks, tradenames, service marks, copyrights and licenses, and all
rights with respect to the foregoing (collectively, the "IP RIGHTS"),
necessary for the conduct of its business as now conducted, without any
conflict with the rights of others.
4.11. Insurance Issued by Company Subsidiaries; Reserves; Reinsurance
Treaties.
(a) Each form of insurance policy, policy endorsement or amendment,
reinsurance contract, annuity contract, application form, sales material
and service contract now in use by the Company or any Company Subsidiary in
any jurisdiction has, where required, received interim or final approvals
from the appropriate insurance regulatory authorities of such jurisdiction.
(b) Neither the Company nor any Company Subsidiary has issued any
participating policies or any retrospectively rated policies of insurance,
other than policies with final premiums subject to audit.
(c) (i) Any premium rates required to be filed with or approved by
insurance regulatory authorities have been so filed and have received
interim or final approval from such regulatory authorities, and (ii) all
premiums charged by the Company Subsidiaries conform with such approvals.
(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 other person that is a party to or
bound by any insurance, reinsurance, coinsurance or other similar
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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 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
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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
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
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as of June 30, 1997. The Company Financial Statements contain accurate
accounts of all accrual bonuses, sick leave, severance pay and vacation
benefits for Company and Company Subsidiary employees in accordance with
GAAP. Copies of organizational charts, any employee handbook(s), and any
reports and/or plans prepared or adopted pursuant to the Equal Employment
Opportunity Act of 1972, as amended, have been made available to the
Purchaser.
(c) Each of the Company and the Company Subsidiaries is in compliance
with all applicable laws respecting employment and employment practices,
terms and conditions of employment, wages and hours and occupational safety
and health, and is not engaged in any material unfair labor practice within
the meaning of Section 8 of the National Labor Relations Act, and (i) there
is no proceeding pending or, to the knowledge of the Company, threatened
against it relating to any thereof, or (ii) to the knowledge of the
Company, any investigation pending or threatened against it relating to any
thereof.
4.14. Brokerage Commissions and Fees. All negotiations relating to this
Agreement and the transactions contemplated hereby have been and will be carried
on by the Company directly with the Purchaser, its counsel, accountants and
other representatives in such a manner as not to give rise to any claim against
the Purchaser or the Company for any brokerage commission, finder's fee,
investment advisor's fee or other like payment arising out of the transactions
contemplated hereby, other than the agreement between the Company and Advest,
Inc. relating to certain fees of Advest, Inc. in connection herewith.
The Company has fee agreements with all outside attorneys, accountants, and
other independent experts and advisors it has used or plans to use in connection
with the transactions contemplated by this Agreement, which provide that such
attorneys, accountants, and other independent experts and advisors will be
compensated only at their normal rates plus reasonable out-of-pocket expenses
except as set forth on Schedule 4.14.
4.15. Certain Agreements.
(a) Schedule 4.15(a) sets forth a complete and accurate list of all
material contracts of the Company and the Company Subsidiaries as of the
date of this Agreement, as defined in Item 601(b)(10) of Regulation S-K
(the "MATERIAL CONTRACTS"). The Company and the Company Subsidiaries have
performed all of the respective obligations required to be performed by
them to date and are not in default under or in breach of any term or
provision of any of the Material Contracts or any Real Property Leases to
which any of them is a party, is subject or is otherwise bound, and no
event has occurred that, with the giving of notice or the passage of time
or both, would constitute such a default or breach. There are no events,
facts or circumstances of which constitute or, with the gaining of notice
or the passage of time or both, would constitute a default or breach of any
of the Material Contracts or Real Property Leases by the other parties
thereto. Each of the Material Contracts is a valid and binding agreement of
the Company or a Company Subsidiary, as the case may be, and, to the
Company's knowledge, of all other parties thereto.(b) Schedule 4.15(b) also
accurately identifies all of the following agreements, contracts, or other
instruments written or, to the knowledge of the Company, oral, to which the
Company or the Company Subsidiaries are a party or by which any of them are
bound or affected or by which any of the stock, properties, or assets of
the Company or the Company Subsidiaries are bound or affected, or under
which any of their officers, directors, employees, or shareholders have
rights: (i) any agreements, plans or arrangements under or pursuant to
which any of the benefits of which will be increased, or the vesting of
benefits of which will be increased or accelerated, by the occurrence of
any of the transactions contemplated by this Agreement, or the value of any
of the benefits of which will be calculated on the basis of any of the
transactions contemplated by this Agreement; and (ii) any agreement,
instrument, or understanding of the Company or the Company Subsidiaries
with any third parties, whether or not made in the ordinary and regular
course of business, which materially restricts the ability of the Company
to enter into any line of business or any geographic region. True,
complete, and correct copies of all of the written agreements, contracts,
or other instruments, and written descriptions of the material details of
any oral agreements or instruments identified on Schedule 4.15(b) are
attached to Schedule 4.15(b).
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4.16.Orders Injunctions, Decrees, Compliance With Applicable Laws.
(a) Except as set forth on Schedule 4.16(a), neither the Company nor
the Company Subsidiaries is subject to any order, injunction or decree,
written agreement, consent agreement, or memorandum of understanding of any
governmental body or court, or is in violation of any order, injunction, or
decree, written agreement, consent agreement or memorandum of
understanding.
(b) Except as set forth on Schedule 4.16(b), neither the Company nor
the Company Subsidiaries is subject to any cease-and desist or other order
issued by, or is a party to any written agreement, consent agreement or
memorandum of understanding with, or is a party to any commitment letter or
similar undertaking to, or is subject to any order or directive by, or is a
recipient of any extraordinary supervisory letter from, or has adopted any
board resolutions at the request of (each, whether or not set forth on
Schedule 4.16(b), a "REGULATORY AGREEMENT"), any regulatory agency or other
governmental entity that restricts the conduct of its business or that in
any manner relates to its capital adequacy, its management or its business,
nor has the Company or the Company Subsidiaries been advised by any
regulatory agency or other governmental entity that it is considering
issuing or requesting any Regulatory Agreement.
(c) The Company has delivered to the Purchaser copies of the most
recent examination reports, including related management letters, of the
Company Insurance Subsidiary conducted by any state insurance department
examiners, and reflecting the results of the most recent examinations of
the affairs of such Company Insurance Subsidiary, and will furnish promptly
to the Purchaser any additional such reports or drafts of such reports
received by the Company or any Company Insurance Subsidiary prior to
Closing. Except as set forth on Schedule 4.16(c), all material deficiencies
or violations noted in such examination reports for the periods examined
have either been resolved or are being resolved to the satisfaction of or
accepted by the insurance regulatory authorities of the state conducting
such examinations, without any enforcement action taken against any such
Company Insurance Subsidiary. There are no examinations by 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.
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(c) The Company has heretofore delivered to the Purchaser complete
copies of all periodic reports, statements and other documents (including
exhibits thereto) that the Company has filed with the Commission under the
Exchange Act since January 1, 1994, (collectively, the "COMPANY SEC
REPORTS"). All Company SEC Reports required to be filed with the Commission
by the Company during such period were, after giving effect to Rule 12b-25
of the Exchange Act, filed in a timely manner and complied in all material
respects with the applicable requirements of the Exchange Act and the rules
and regulations promulgated thereunder. At the time filed with the
Commission (or if amended or superseded by a filing prior to the date of
this Agreement, then on the date of such filing), no Company SEC Report
contained any untrue statement of a material fact or omitted to state any
material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they were
made, not misleading.
4.19. Compliance with Environmental Laws and Health and Safety Laws. For
purposes of this Agreement, the term "Environmental Laws" shall mean all
federal, state and local laws including statutes, regulations, ordinances,
codes, rules, orders, directives and other governmental restrictions and
requirements (including, but not limited to, those contained in or evidenced by
permits, temporary permits or exemption letters) relating to the discharge of
air pollutants, water pollutants, solid wastes or process waste water or
otherwise relating to the environment, hazardous wastes, materials or
substances, toxic substances, asbestos or any operations of or use of property
by the Company or the Company Subsidiaries that has an impact on the
environment, including, but not limited to, the Federal Solid Waste Disposal
Act, the Federal Clean Air Act, the Federal Clean Water Act, the Federal
Resource Conservation and Recovery Act of 1976, the Federal Comprehensive
Environmental Response, Compensation and Liability Act of 1980, Toxic Substances
Control Act, Federal Water Pollution Control Act, National Environmental Policy
Act, Federal Occupational Safety and Health Act, regulations of the
Environmental Protection Agency, regulations of the Nuclear Regulatory Agency,
or any applicable federal or state regulatory or administrative agency with
authority over natural resources or environmental protection now in effect, all
as presently amended.
(a) Except as set forth on Schedule 4.19(a)(i) the operations of the
Company and the Company Subsidiaries currently and in the past are in
substantial compliance with all Environmental Laws; (ii) none of the
Company's or the Company Subsidiaries' operations are subject to any
judicial or administrative proceedings, pending or threatened, alleging the
violation of any Environmental Laws; (iii) none of the Company's or the
Company Subsidiaries' operations are the subject of a federal, state or
local investigation, pending or threatened, evaluating whether any remedial
action is needed to respond to a release of any hazardous or toxic waste,
substance or constituent, or any other substance into the environment; (iv)
neither the Company nor the Company Subsidiaries have generated hazardous
waste in the Company's or the Company Subsidiaries' operations in amounts
which are regulated by an Environmental Law; (v) neither the Company nor
the Company Subsidiaries have transported hazardous waste attributable to
the Company's or the Company Subsidiaries' operations for treatment,
storage or disposal in amounts which are regulated by an Environmental Law;
and (vi) neither the Company nor the Company Subsidiaries have reported a
spill or release of a hazardous or toxic waste, substance or constituent or
any other substance in the environment in amounts which are regulated by an
Environmental Law due to the Company's or the Company Subsidiaries'
operations.
(b) Except as set forth in Schedule 4.19(b) all Real Estate is in
compliance with all Environmental Laws; the Real Estate is not subject to
any judicial or administrative proceedings alleging the violation of any
Environmental Laws; the Real Estate is not the subject of a federal, state,
or local investigation evaluating whether any remedial action is needed to
respond to a release of any hazardous or toxic waste, substance or
constituent,or any other substance into, the environment; neither the
Company nor any of the Company Subsidiaries have generated any hazardous
material on the Real Estate in amounts which are regulated by an
Environmental Law; neither the Company nor any of the Company Subsidiaries
have transported any hazardous material from the Real Estate to any waste
treatment, storage or disposal facility in amounts which are regulated by
an Environmental Law.
(c) For the purposes of this Section 4.19, any reference to
"hazardous" or "toxic" waste, substances, or constituents encompasses any
waste, substance, or constituent regulated by, or subject to, the
provisions and
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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 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
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policy or bond, no coverage thereunder is being disputed and all material claims
thereunder have been filed in a timely fashion and all premiums due thereon on
or prior to the date of Closing have been paid as and when due.
4.24. No Investment Company. Neither the Company nor any of the Company
Subsidiaries is an "investment company," or a company "controlled" by an
"investment company," within the meaning of the Investment Company Act of 1940,
as amended.
4.25. Effective Time of Representations, Warranties, Covenants and
Agreements. Each representation and warranty of the Company as set forth in this
Agreement, as updated by any written disclosure schedule shall be deemed to be
made on and as of the date hereof, and as of the Closing Date, except for
representations and warranties made expressly as of a specific date.
4.26. Voting Requirements. Except as set forth on Schedule 4.26, the
affirmative vote of a majority of the outstanding shares of Company Common Stock
entitled to vote on this Agreement is the only vote of the holders of any class
or series of the Company's capital stock necessary to approve this Agreement and
the transactions described herein.
4.27. Customers. To the knowledge of the Company, no customers or agents of
the Company or any Company Subsidiary in the aggregate representing more than
$100,000 in revenue during 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.
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
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(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 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;
(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
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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.
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.
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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 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.
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.
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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.
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
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exchange or in the over-the-counter market, (ii) the declaration of a banking
moratorium or any suspension of payments in respect of banks in the United
States, (iii) the commencement of war involving an attack on the continental
United States or (iv) in the case of any of the foregoing existing as of the
date hereof, a material acceleration or worsening thereof;
10.7. 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.
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.
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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.
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.
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(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 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
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
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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.
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.
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.
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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.
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.
* * *
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.
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<PAGE> 75
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
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<PAGE> 76
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: 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
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<PAGE> 77
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: $15,730,396
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.
The disclosure schedules described herein have not been included with the
filing, but will be supplementary provided to the Commission upon request.
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<PAGE> 78
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.
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
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while the transfer books of the Company for the Common Shares are closed for any
purpose (but not for any period in excess of five days); but any such surrender
of this Warrant for exercise during any period while such books are so closed
shall become effective for exercise immediately upon the reopening of such
books, as if the exercise had been made on the date this Warrant was surrendered
and for the number of shares of Common Shares and at the Exercise Price in
effect at the date of such surrender.
1.2 Warrant Shares Certificate. A stock certificate or certificates for
the Warrant Shares specified in the Exercise Form shall be delivered to the
Warrantholder within three Business Days after receipt of the Exercise Form by
the Company and payment of the purchase price. No fractional shares shall be
issued upon the exercise of this Warrant, provided that the Warrantholder shall
receive, in lieu of any fractional shares, cash in an amount equal to the
product of the fraction multiplied by the Current Market Price per Common Share.
If this Warrant shall been exercised only in part, the Company shall, at the
time of delivery of the stock certificate or certificates, deliver to the
Warrantholder a new Warrant evidencing the rights to purchase the remaining
Warrant Shares, which new Warrant shall in all other respects be identical with
this Warrant.
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:
(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
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<PAGE> 80
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 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
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<PAGE> 81
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 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.
6.2 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
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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 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.
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"COMPANY" has the meaning specified on the cover of this Warrant.
"CURRENT MARKET PRICE" of a share of Common Stock as of a particular date
(the "Determination Date") shall mean:
(i) If the Common Shares are listed or admitted for trading on a
national securities exchange (including The Nasdaq Stock Market), then the
Current Market Price shall be the average of the last 10 "daily sales
prices" of the Common Shares on the principal national securities exchange
on which the Common Shares is listed or admitted for trading on the last 10
trading days prior to the Determination Date, or if not listed or traded on
any such exchange, then the Current Market Price shall be the average of
the last 10 "daily sales prices" of the Common Shares on the
over-the-counter market on the last 10 trading days prior to the
Determination Date. The "daily sales price" shall be the closing price of
the Common Shares at the end of each day; or
(ii) If the Common Shares 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.
10.1 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.
10.2 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.
10.3 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.
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10.4 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
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 10.4 designate another
address or Person for receipt of notices hereunder.
10.5 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.
10.6 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.
10.7 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.
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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> 86
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").
RECITALS
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 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.
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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 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
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<PAGE> 88
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.
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.
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.
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<PAGE> 89
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 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;
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<PAGE> 90
(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 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
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to the underwriters and the sellers of Registrable Shares, covering such
matters as such underwriters and sellers may reasonably request, including
such matters as are customarily furnished in connection with an
underwritten offering and (ii) a letter or letters from the independent
certified public accountants of the Corporation addressed to the
underwriters and the sellers of Registrable Shares, covering such matters
as such underwriters and sellers may reasonably request, in which letter(s)
such accountants shall state, without limiting the generality of the
foregoing, that they are independent certified public accountants within
the meaning of the Securities Act and that in their opinion the financial
statements and other financial data of the Corporation included in the
registration statement, the prospectus(es), or any amendment or supplement
thereto, comply in all material respects with the applicable accounting
requirements of the Securities Act;
(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 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.
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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 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
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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 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.
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9. PARTICIPATION IN UNDERWRITTEN REGISTRATIONS. No Person may participate
in any registration hereunder which is underwritten unless such Person (a)
agrees to sell its securities on the basis provided in any underwriting
arrangements approved by such Person or Persons entitled hereunder to approve
such arrangements and (b) completes and executes all questionnaires, powers of
attorney, custody agreements, indemnities, underwriting agreements and other
documents reasonably required under the terms of such underwriting arrangements;
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 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.
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10.8 Descriptive Headings. The descriptive headings of this Agreement are
inserted for convenience of reference only and do not constitute a part of and
shall not be utilized in interpreting this Agreement.
10.9 Notices. Any notices required or permitted to be sent hereunder shall
be delivered personally or mailed, certified mail, return receipt requested, or
delivered by overnight courier service to the following addresses, or such other
address as any Person designates by written notice to the Corporation, and shall
be deemed to have been given upon delivery, if delivered personally, three days
after mailing, if mailed, or one business day after delivery to the courier, if
delivered by overnight courier service:
If to the Corporation, to:
Central Reserve Life Corporation
17800 Royalton Road
Strongsville, Ohio 44136
with a copy to:
Latham & Watkins
5800 Sears Tower
233 S. Wacker Drive
Chicago, Illinois
Attention: Mark D. Gerstein
If to the Investors, to the addresses set forth on Schedule 1 hereto.
If to holders of the Registrable Shares other than the Investors, to the
addresses set forth on the stock record books of the Corporation.
10.10 Governing Law. All questions concerning the construction, validity
and interpretation of this Agreement, and the performance of the obligations
imposed by this Agreement, shall be governed by the laws of the State of Ohio
applicable to contracts made and wholly to be performed in that state.
10.11 Final Agreement. This Agreement, together with the Stock Purchase
Agreement and all other agreements entered into by the parties hereto pursuant
to the Stock Purchase Agreement, constitutes the complete and final agreement of
the parties concerning the matters referred to herein, and supersedes all prior
agreements and understandings.
10.12 Execution in Counterparts. This Agreement may be executed in any
number of counterparts, each of which when so executed and delivered shall be
deemed an original, and such counterparts together shall constitute one
instrument.
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:
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Its:
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<PAGE> 97
SIGNATURE PAGE TO REGISTRATION RIGHTS AGREEMENT
INSURANCE PARTNERS OFFSHORE
(BERMUDA) L.P.
By: Insurance GenPar (Bermuda), L.P.,
its general partner
By: Insurance GenPar (Bermuda) MPG,
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> 98
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> 99
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> 100
SIGNATURE PAGE TO REGISTRATION RIGHTS AGREEMENT
TURKEY VULTURE FUND XIII, LTD.
By:
--------------------------------------
Its:
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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> 101
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.
"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.
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"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.
"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
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;
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(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
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
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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 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.
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.
A-C-4
<PAGE> 105
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.
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 4.7 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 enforceability of any such provision in every other
respect and the remaining provisions shall not in any way be affected or
impaired thereby.
A-C-5
<PAGE> 106
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.
* * *
A-C-6
<PAGE> 107
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:
------------------------------------
A-C-7
<PAGE> 108
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
A-C-8
<PAGE> 109
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
A-C-9
<PAGE> 110
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
A-C-10
<PAGE> 111
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.
A-C-11
<PAGE> 112
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:___________________________
A-C-12
<PAGE> 113
EXHIBIT D
================================================================================
STOCKHOLDERS AGREEMENT
CENTRAL RESERVE LIFE CORPORATION
------------------------
DATED AS OF , 1998
------------------------
================================================================================
A-D-1
<PAGE> 114
TABLE OF CONTENTS
<TABLE>
<C> <S> <C>
ARTICLE I
DEFINITIONS
1.1 Definitions................................................. A-D-3
1.2 Rules of Construction....................................... A-D-4
1.3 Other Definitions........................................... A-D-4
ARTICLE II
CERTAIN OTHER ACTIVITIES; FIDUCIARY DUTIES
2.1 Other Activities of the Holders; Fiduciary Duties........... A-D-4
ARTICLE III
TRANSFERS OF SECURITIES
3.1 Drag Along Rights........................................... A-D-5
3.2 TAG Along Rights............................................ A-D-5
3.3 Certain Events Not Deemed Transfers......................... A-D-6
3.4 Replacement of Securities................................... A-D-6
3.6 Restrictive Legend.......................................... A-D-6
ARTICLE IV
TERMINATION
4.1 Termination................................................. A-D-6
ARTICLE V
MISCELLANEOUS
5.1 Notices..................................................... A-D-7
5.2 Legal Holidays.............................................. A-D-7
5.3 Governing Law............................................... A-D-7
5.4 Successors and Assigns...................................... A-D-7
5.5 Duplicate Originals......................................... A-D-7
5.6 Severability................................................ A-D-7
5.7 No Waivers; Amendments...................................... A-D-7
</TABLE>
A-D-2
<PAGE> 115
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 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.
A-D-3
<PAGE> 116
"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.
"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."
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
A-D-4
<PAGE> 117
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 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. 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 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
A-D-5
<PAGE> 118
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 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].
A-D-6
<PAGE> 119
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):
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.
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.
A-D-7
<PAGE> 120
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]
A-D-8
<PAGE> 121
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:
A-D-9
<PAGE> 122
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 MPG, Inc.
By:
--------------------------------------
Name:
--------------------------------------
Title:
--------------------------------------
Address:
--------------------------------------
--------------------------------------
--------------------------------------
--------------------------------------
Attention:
--------------------------------------
Copy to:
Weil, Gotshal & Manges LLP
767 Fifth Avenue
New York, New York 10153
Attention: Thomas A. Roberts
A-D-10
<PAGE> 123
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) MPG,
Inc.
By:
--------------------------------------
Name:
--------------------------------------
Title:
--------------------------------------
Address:
--------------------------------------
--------------------------------------
--------------------------------------
--------------------------------------
Attention:
--------------------------------------
Copy to:
Weil, Gotshal & Manges LLP
767 Fifth Avenue
New York, New York 10153
Attention: Thomas A. Roberts
A-D-11
<PAGE> 124
SIGNATURE PAGE TO STOCKHOLDERS AGREEMENT
NAME OF HOLDER:
STRATEGIC ACQUISITION PARTNERS, LLC
By:
--------------------------------------
Name:
--------------------------------------
Title:
--------------------------------------
Address:
--------------------------------------
--------------------------------------
--------------------------------------
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Attention:
--------------------------------------
Copy to:
--------------------------------------
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A-D-12
<PAGE> 125
SIGNATURE PAGE TO STOCKHOLDERS AGREEMENT
NAME OF HOLDER:
TURKEY VULTURE FUND XIII [ ]
By:
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Name:
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Title:
--------------------------------------
Address:
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Attention:
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Copy to:
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A-D-13
<PAGE> 126
APPENDIX B
ARTICLE II
DIRECTORS
Section 1. NUMBER, TERM, ELECTION, AND QUORUM. The number of directors
may be fixed from time to time by the directors at not less than six nor more
than fifteen, but the number of directors may not be reduced so as to abolish
the office of a director during his term. In the absence of contrary action by
the board of directors, the number of directors is nine. Each director shall
hold office until the annual meeting next succeeding his election and until his
successor is elected and qualified, or until his earlier resignation, removal
from office or death. By a vote of a majority of those directors in office, the
directors may fill any vacancy in the board for the unexpired term. Directors
shall be elected at the annual meeting of shareholders, but when the annual
meeting is not held or directors are not elected thereat, they may be elected at
a special meeting called and held for that purpose. Such election shall be by
ballot whenever requested by any shareholder entitled to vote at such election;
but, unless such request is made, the election may be conducted in any manner
approved at such meeting. At each meeting of shareholders for the election of
directors, the persons receiving the greatest number of votes shall be
directors. A majority of the whole authorized number of directors shall
constitute a quorum for the transaction of business, except that a majority of
the directors in office shall constitute a quorum for filling a vacancy on the
board. Whenever less than a quorum is present at the time and place appointed
for any meeting of the board, a majority of those present may adjourn the
meeting from time to time until a quorum shall be present. The act of a majority
of the directors present at a meeting at which a quorum is present shall be the
act of the board.
Section 2. REMOVAL. All the directors or any individual director may be
removed from office, without assigning any cause, by the vote of the holders of
a majority of the voting power entitling them to elect directors in place of
those to be removed, provided that unless all the directors are removed, no
individual director shall be removed in case the votes of a sufficient number of
shares are cast against his removal which, if cumulatively voted at an election
of all the directors would be sufficient to elect at least one director. In case
of any such removal, a new director may be elected at the same meeting for the
unexpired term of each director removed.
B-1
<PAGE> 127
APPENDIX C
ADVEST
ADVEST, INC.
A SUBSIDIARY OF THE ADVEST GROUP, INC. INVESTMENT BANKING
- --------------------------------------------------------------------------------
SERVICING INVESTORS SINCE 1898 ONE ROCKEFELLER PLAZA
NEW YORK, NY 10020
TEL.: (212) 584-4270
FAX: (212) 584-4292
March 30, 1998
Board of Directors
Central Reserve Life Corporation
17800 Royalton Road
Strongsville, Ohio 44136
Dear Sirs:
On November 10, 1997, Strategic Acquisition Partners, LLC ("Strategic")
proposed to purchase 5 million newly issued unregistered shares of common stock
of Central Reserve Life Corporation ("CRLC" or the "Company") at $5.50 per
share, and Strategic would also be issued five-year warrants to purchase an
additional 2,500,000 shares of common stock at a price of $6.50 per share (the
"Investment"). Further, Strategic proposed to make a $20 million loan to CRLC on
or before December 15, and engaged Reassurance Company of Hannover ("Hannover")
to provide an additional $10 million through a reinsurance transaction ("the
Credit Facilities"). In consideration for providing these credit facilities,
Peter W. Nauert, principal equity holder of Strategic, and Richard M. Osborne
would be issued stock purchase warrants for an additional 1,000,000 common
shares of CRLC with an exercise price of $6.00 per share. The terms and
conditions of the proposed Investment and Credit Facilities were set forth in
more detail in the Stock Purchase Agreement (the "Agreement") dated November 26,
1997 and Credit Agreement dated December 16, 1997. The Credit Facilities were
funded on December 17, 1997. These proposals were approved by the CRLC Board of
Directors at a Special Meeting on November 26, 1997.
Subsequent events have caused Strategic to revise its investment offer, and
now it proposes, in conjunction with Insurance Partners, L.P. and Insurance
Partners Offshore (collectively, the "Investors") to instead purchase 7,300,000
shares of newly issued, unregistered shares of common stock at the same price
($5.50 per share) and warrants to purchase an additional 3,650,000 shares of
stock at a price of $5.50 per share, versus the $6.50 exercise price, for an
aggregate initial purchase price of $40,150,000, (the "Revised Investment"). The
terms of the Revised Investment are set forth in an Amended and Restated Stock
Purchase Agreement dated as of March 30, 1998 and agreements ancillary thereto
(the "Amended Agreement"), and such Amended Agreement, among other things,
deleted the financing condition to the Revised Investment. In connection with
the Revised Investment, the maturity of the Credit Facilities was extended to
June 30, 1998.
Advest, Inc. is an investment bank regularly engaged in the valuation of
businesses and their securities in connection with mergers and acquisitions. We
have acted as financial advisor to the Board of Directors of the Company in
connection with the transaction contemplated by the Agreement.
We have been requested by the Company to render our opinion with respect to
the fairness, from a financial point of view, to the Company's stockholders of
the consideration to be received in the Revised Investment.
In arriving at our opinion, we reviewed and analyzed: (1) documents used in
connection with the Revised Investment, the Investment, and Credit Facilities
(including amendments thereto), including the agreements in
C-1
<PAGE> 128
which they are detailed, and other publicly available information concerning the
Company which we believe to be relevant to our inquiry, (2) financial and
operating information with respect to the business operations and prospects of
the Company including annual reports, draft Form 10-K for 1997, and annual and
quarterly statutory statements, (3) a trading history of the Company's common
shares from 1995 to the present and a comparison of that trading history with
those of companies we deemed comparable, (4) a comparison of the financial terms
of the Revised Investment, the Investment, and the Credit Facilities with the
terms of certain other recent transactions which we deemed relevant, and (5) we
have performed valuations of the proposed Warrant Issues using two analytical
methodologies. In addition, we have had discussions with the management of the
Company concerning its business and operations, assets, present condition and
future prospects and undertook such other studies, analyses and investigations
as we deemed appropriate.
We have relied upon the accuracy and completeness of the financial and
other information used by us in arriving at our opinion without independent
verification. We have not made nor obtained any independent evaluations or
appraisals of the assets of CRLC or its subsidiaries, or of the Investors. Our
opinion is necessarily based upon conditions as they exist and can be evaluated
as of the date of this letter. Based upon and subject to the foregoing, we are
of the opinion that, from a financial point of view, the consideration to be
received in the Revised Investment is fair to the stockholders of CRLC.
Very truly yours,
ADVEST, INC.
By: /s/ ALEXANDER M. CLARK
------------------------------------
Alexander M. Clark
Managing Director
C-2
<PAGE> 129
APPENDIX D
ACQUIRING PERSON STATEMENT
PURSUANT TO SECTION 1701.831 OF
THE OHIO REVISED CODE*
------------------------
CENTRAL RESERVE LIFE CORPORATION
(NAME OF ISSUING PUBLIC CORPORATION)
17800 ROYALTON ROAD
STRONGSVILLE, OHIO 44136
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
------------------------
May 19, 1998
This Acquiring Person Statement is being delivered to Central Reserve Life
Corporation, an Ohio corporation ("CRLC"), pursuant to Section 1701.831 of the
Ohio Revised Code by Strategic Acquisition Partners, LLC, an Ohio limited
liability company ("SAP"), on behalf of itself, Turkey Vulture Fund XIII, Ltd.,
an Ohio limited liability company (the "Fund"), and the Assignees as defined
below), Insurance Partners, L.P., a Delaware limited partnership ("IP
Delaware"), and Insurance Partners Offshore (Bermuda), L.P., a limited
partnership organized under the laws of Bermuda ("IP Bermuda" and collectively
with IP Delaware, "IP"), in connection with the Amended and Restated Stock
Purchase Agreement, dated March 30, 1998, by and among SAP, IP, and CRLC (the
"Amended Purchase Agreement") and the consummation of the transactions
contemplated thereby.
1. IDENTITY OF ACQUIRING PERSON.
This Acquiring Person Statement is being delivered to you by (i) SAP, on
behalf of itself, the Fund and the Assignees, and (ii) IP. The principal
executive offices of SAP are located at 1750 East Golf Road, Suite 210,
Shaumburg, Illinois 60173. The principal executive offices of IP Delaware are
located at One Chase Manhattan Plaza, 44th Floor, New York, New York 10008. The
principal executive offices of IP Bermuda are located at One Chase Manhattan
Plaza, 44th Floor, New York, New York 10008.
2. DELIVERY OF ACQUIRING PERSON STATEMENT.
This Acquiring Person Statement is being delivered to you pursuant to
Section 1701.831 of the Ohio Revised Code.
3. OWNERSHIP OF SHARES BY ACQUIRING PERSON.
SAP does not own any shares of common stock, without par value, of CRLC
(the "Common Shares"). SAP may be deemed the beneficial owner of 400,000 Common
Shares owned by the Fund as a result of an agreement among SAP, the Fund, Peter
W. Nauert (an investor in SAP), and Richard M. Osborne (the controlling investor
in the Fund) in which the parties have agreed to vote all of their respective
Common Shares in favor of the transactions contemplated by the Amended Purchase
Agreement. SAP also may be deemed the beneficial owner of 1,000 Common Shares
owned by Mr. Nauert. SAP disclaims beneficial ownership of the Common Shares
owned by the Fund, IP, and the Assignees.
- ---------------
* Notwithstanding the making and delivery of this Acquiring Person
Statement, all rights are reserved (i) to challenge the constitutionality,
validity, and/or legality of all or any part of Section 1701.831 and related
provisions of the Ohio Revised Code and their application to the transactions
referred to herein and/or (ii) to seek an amendment to the Articles of
Incorporation or the Code of Regulations of CRLC to provide that Section
1701.831 and related provisions of the Ohio Revised Code do not apply to control
share acquisitions of Common Shares (as defined below), including pursuant to
the transaction referred to herein.
D-1
<PAGE> 130
Neither IP Delaware nor IP Bermuda owns any Common Shares. Each of IP
Delaware and IP Bermuda disclaims beneficial ownership of the Common Shares
owned by Mr. Nauert, the Fund, SAP and the Assignees.
4. RANGE OF VOTING POWER.
If the proposed control share acquisition is consummated, SAP, IP, the
Fund, and the Assignees, will own, in the aggregate, Common Shares and Warrants
(as defined below) with greater than a majority of the voting power as described
in division (Z)(1)(c) of Section 1701.01 of the Ohio Revised Code.
5. TERMS OF PROPOSED CONTROL SHARE ACQUISITION.
On November 26, 1998, SAP and CRLC entered into a Stock Purchase Agreement
(the "Original Purchase Agreement") pursuant to which SAP would purchase
5,000,000 Common Shares and warrants to purchase an additional 2,500,000 Common
Shares at an exercise price equal to $6.50 per share for an aggregate purchase
price of $27,500,000. In connection with the Original Purchase Agreement, SAP
arranged for a $20.0 million interim loan to CRLC (the "Interim Loan"). The
Interim Loan was funded on December 17, 1997 and the proceeds were used as
follows: (i) approximately $14.0 million was invested in CRLC's insurance
subsidiary, Central Reserve Life Insurance Company ("CRL"); (ii) approximately
$5.2 million was used to satisfy an outstanding loan of CRLC; and (iii) the
remainder was used to establish an interest reserve and to pay transaction
expenses. As collateral for the Interim Loan, CRLC pledged to SAP all of its
shares of CRL and a $14.0 million Surplus Note executed by CRL in favor of CRLC.
At the time the Interim Loan was funded, CRLC obtained the resignations of three
of its nine directors and three new directors designed by SAP were appointed to
the CRLC board. In addition, CRLC issued warrants to purchase 800,000 Common
Shares (plus warrants to purchase an additional 200,000 Common Shares pending
shareholder approval) to Mr. Nauert and the Fund in consideration of certain
guarantees provided by them to facilitate the Interim Loan.
Following the signing of the Original Purchase Agreement, SAP determined
that additional capital would be necessary to successfully implement the
business plan for CRLC proposed by SAP to restore CRLC to profitability. SAP
contacted IP to discuss the possibility of providing additional capital to CRLC.
On March 30, 1998, SAP, IP, and CRLC entered into the Amended Purchase
Agreement pursuant to which SAP and IP would severally purchase 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 (the "Warrants") for an aggregate purchase
price of $40,150,000. The Common Shares would not be registered with the
Securities and Exchange Commission at the time of issuance, however, CRLC would
enter a registration rights agreement at the closing of the transactions
contemplated by the Amended Purchase Agreement (the "Closing") dealing with
registration of the Common Shares. The Warrants would be exercisable immediately
upon issuance, would have a term of seven years, and would include certain
antidilution protections. The holders of the Warrants could elect to exercise
the Warrants without payment of the exercise price by surrendering the Warrants
in exchange for Common Shares equal to the net issuance value of the Warrants.
In addition, the parties would enter into a Voting Agreement at the Closing
pursuant to which IP would designate four directors of CRLC, SAP would designate
two directors, the Fund would designate one director, and John F. Novatney and
Fred Lick, Jr. would continue as directors representing the existing
shareholders. Under the Voting Agreement, each of IP, SAP and the Fund would
agree to vote for the designees of the other parties. The number of directors to
be designated by each of the foregoing investors would be decreased in the event
an investor's holdings dropped below certain levels specified in the Voting
Agreement. A Stockholders Agreement would also be entered at the Closing that
would give the parties certain rights with respect to transfers of Common Shares
by the other parties. Specifically, if IP were to transfer Common Shares
representing more than 20% of the outstanding Common Shares, IP could require
each nonselling party to transfer the same percentage of its Common Shares (on a
fully diluted basis) as IP were transferring. In addition, if any party were to
transfer Common Shares representing more than 20% of the outstanding Common
Shares, the selling shareholder would have to make an offer to the other parties
to include in the proposed sale the same percentage of the nonselling party's
Common Shares (on a fully diluted basis) as the selling shareholder were
transferring. The Amended Purchase Agreement superseded the Original Purchase
Agreement.
D-2
<PAGE> 131
SAP, the Fund, Mr. Nauert, and Mr. Osborne entered into an agreement dated
November 13, 1997 pursuant to which Mr. Osborne would co-invest with SAP for 30%
of the Common Shares and warrants to be issued by CRLC in connection with the
Original Purchase Agreement. In the course of subsequent discussions between the
parties, SAP and the Fund agreed to reduce the total amount of the Fund's
investment under the Amended Purchase Agreement. Thereafter, SAP assigned a
portion of its rights to purchase Common Shares and Warrants to Medical Mutual
of Ohio, Lunn Partners Securities, L.L.C., and United Payors and United
Providers (collectively, the "Assignees") in the approximate amount of the
reduction of the Fund's investment. The following chart sets forth the number of
Common Shares and Warrants that will be issued to each of SAP, IP, the Fund, and
the Assignees at the Closing.
<TABLE>
<CAPTION>
INVESTOR COMMON SHARES WARRANTS
-------- ------------- --------
<S> <C> <C>
Insurance Partners, L.P............................ 2,860,072 1,430,036
Insurance Partners Offshore (Bermuda), L.P. ....... 1,576,292 788,146
Strategic Acquisition Partners, LLC................ 1,406,364 703,182
Turkey Vulture Fund XIII, Ltd. .................... 730,000 365,000
Medical Mutual of Ohio............................. 363,636 181,818
United Payors and United Providers................. 181,818 90,909
Lunn Partners Securities, LLC...................... 181,818 90,909
--------- ---------
TOTAL......................................... 7,300,000 3,650,000
</TABLE>
The consummation of the transactions contemplated by the Amended Purchase
Agreement (including the issuance of Common Shares and the Warrants to SAP and
IP) is subject to certain conditions, including obtaining the requisite
shareholder approvals as required by Section 1701.831 of the Ohio Revised Code.
For additional details regarding the terms of the proposed control share
acquisition reference is made in particular to the information set forth in the
sections entitled "The Financing Proposal", "The Declassification Proposal" and
"The Share Proposal" of the Proxy Statement filed by CRLC with the Securities
Exchange Commission on May 19, 1998 pursuant to Section 14(a) of the Securities
Exchange Act of 1934, as amended (the "Proxy Statement") which information is
incorporated herein by reference.
6. REPRESENTATIONS OF ACQUIRING PERSONS.
SAP represents that the proposed control share acquisition, if consummated,
will not be contrary to Chapter 1701 of the Ohio Revised Code or any law
applicable to SAP. SAP represents that it has the financial capacity to make
such proposed control share acquisition.
Each of IP Delaware and IP Bermuda represents that the proposed control
share acquisition, if consummated, will not be contrary to Chapter 1701 of the
Ohio Revised Code or any law applicable to it. Each of IP Delaware and IP
Bermuda represents that it has the financial capacity to make such proposed
control share acquisition.
The facts upon which these representations are based are set forth in
reasonable detail in the section entitled "Information Regarding Strategic
Partners and Insurance Partners" of the Proxy Statement which information is
incorporated herein by reference.
D-3
<PAGE> 132
STRATEGIC ACQUISITION PARTNERS, LLC
By: /s/ SUSAN BRANTLEY
----------------------------------
Susan Brantley
Assistant Secretary
INSURANCE PARTNERS, L.P.
Insurance GenPar, L.P., its
General Partner
Insurance GenPar MGP, L.P.,
its General Partner
Insurance GenPar MGP,
Inc., its
General Partner
By:
/s/ ROBERT A. SPASS
----------------------------
Robert A. Spass
President
INSURANCE PARTNERS OFFSHORE
(BERMUDA), L.P.
Insurance GenPar (Bermuda), L.P.,
its General Partner
Insurance GenPar MGP
(Bermuda), L.P.,
its General Partner
Insurance GenPar MGP
(Bermuda), Inc.,
its General Partner
By:
/s/ ROBERT A. SPASS
----------------------------
Robert A. Spass
President
D-4
<PAGE> 133
APPENDIX E
DIRECTORS
Andrew A. Boemi, 53, has served as a director of the Company since December
1997. Mr. Boemi is currently the Managing Director of Turnaround Capital
Partners, L.P., a company engaged in investing in small to mid-sized public and
private companies in the early turnaround stages. In 1997, Mr. Boemi served as
the Managing Director of Marietta Capital Partners, a company engaged in private
investment banking and corporate restructuring. From 1990 to 1996, Mr. Boemi was
a Partner of S-K Partners, Ltd., where he specialized in financial and
operational turnarounds of small to mid-sized companies and crisis management.
Michael A. Cavataio, 54, has served as a director of the Company since
December 1997. Mr. Cavataio is a real estate developer in northern Illinois and
southern Wisconsin. Mr. Cavataio served as a director of Pioneer Financial
Services, Inc., a company that underwrites and markets health insurance, life
insurance and annuities throughout the United States, from 1986 to 1997 and
served as Vice Chairman from 1995 to 1997. Mr. Cavataio has served as a director
of Mercantile Bank of Northern Illinois since 1988 and as a director of AON
Funds, Inc., a subsidiary of AON Corp., since 1994.
Bradley E. Cooper, 31, has been a Partner of Insurance Partners Advisors,
L.P. from 1994 to the present. Mr. Cooper served as Vice President of
International Insurance Advisors, Inc. from 1990 to 1994. Mr. Cooper is a
director of Superior National Insurance Group, Inc. and Highlands Insurance
Group, Inc.
Peter W. Nauert, 54, is the Principal of Geneva Consulting, Inc., a company
providing consulting services to small group and life insurance companies. Mr.
Nauert served as Chief Executive Officer and a director of Pioneer Financial
Services from 1982 to 1997. Mr. Nauert served as President of Pioneer Financial
Services from 1982 to 1988 and 1991 to 1995, and served as Chairman from 1988 to
1997. Mr. Nauert had been employed in an executive capacity by one or more of
the insurance subsidiaries of Pioneer Financial Services from 1968 to 1997.
Richard M. Osborne, 52, is President and Chief Executive Officer of OsAir,
Inc., a company he founded in 1963. OsAir, Inc. is a manufacturer of industrial
gases for pipeline delivery and a real property developer. Mr. Osborne is the
sole manager of Turkey Vulture Fund XIII, Ltd. (the "Fund") which began
operations in January 1995. The Fund acquires, holds, sells or otherwise invests
in all types of securities and other investments. Mr. Osborne is a Director of
TIS Mortgage Investment Company and Meridian Point Realty Trust VIII Co.,
publicly-held real estate investment trusts, and a Director and Chairman of the
Board of Pacific Gateway Properties, Inc., a publicly-held real estate company.
Val Rajic, 39, has served as a director and as Chief Operating Officer of
the Company since December 1997. Mr. Rajic has served as President of Strategic
Partners since 1997. From 1993 to 1997, Mr. Rajic held various positions,
including Senior Vice President, at Pioneer Financial Services. Prior to 1993,
Mr. Rajic held various positions at American National Bank and Trust Company of
Chicago, a leading middle market business bank. (Mr. Rajic will resign from the
Company's Board of Directors at the Closing.)
Robert A. Spass, 42, Managing Partner of Insurance Partners Advisors, L.P.
from 1994 to the present. Mr. Spass served as President and Chief Executive
Officer of International Insurance Advisors, Inc. from 1990 to 1994. Mr. Spass
is a director of Superior National Insurance Group, Inc., MMI Companies and
Highlands Insurance Group, Inc. He also served as director of NACOLAH Holding
Corporation until March 1996 and of National Re Corporation until October 1996.
Mark Tabak, 48, President and Chief Executive Officer of International
Managed Care Advisors, LLC from 1996 to the present. Mr. Tabak is also Chairman
of the Board of Directors of Corporate Health Dimension, Inc. and a director of
Provincia Solud. Mr. Tabak served as the President of AIG Managed Care, Inc., a
subsidiary of American International Group from 1993 to 1996. Prior to joining
AIG, Mr. Tabak served as President and Chief Executive Officer of Group Health
Plan. Prior to joining Group Health Plan, he was President of Health America
Development Corporation. Mr. Tabak also founded Clinical Pharmaceuticals, Inc.
E-1
<PAGE> 134
DETACH CARD
- --------------------------------------------------------------------------------
CENTRAL RESERVE LIFE CORPORATION
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR THE SPECIAL MEETING OF SHAREHOLDERS ON JUNE 26, 1998
The undersigned hereby constitutes and appoints Fred Lick, Jr., and Frank W.
Grimone, and each of them, his true and lawful agents and proxies with full
power of substitution in each, to represent the undersigned at the Special
Meeting of Shareholders of Central Reserve Life Corporation to be held at the
Holiday Inn -- Strongsville, 15471 Royalton Road, Strongsville, Ohio, on Friday,
June 26, 1998 and at any adjournment thereof, on all matters coming before said
meeting. If the Company proposes to adjourn the Meeting by a vote of the
Shareholders, Fred Lick, Jr. and Frank W. Grimone will vote all Common Shares
for which they have voting authority in favor of such adjournment.
THE BOARD RECOMMENDS A VOTE "FOR" PROPOSAL 1, "FOR" PROPOSAL 2 AND
"FOR" PROPOSAL 3.
1. Approval of the Financing Proposal.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. Amendment to the Code of Regulations to declassify the Board.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. Amendment to the Articles of Incorporation to increase the number of
authorized Common Shares.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(Continued on Reverse Side)
<PAGE> 135
DETACH CARD
- --------------------------------------------------------------------------------
PROXY NO. SHARES
YOU ARE ENCOURAGED TO SPECIFY YOUR CHOICES BY MARKING THE APPROPRIATE BOXES,
SEE REVERSE SIDE, BUT YOU NEED NOT MARK ANY BOXES IF YOU WISH TO VOTE IN
ACCORDANCE WITH THE BOARD OF DIRECTORS' RECOMMENDATIONS. THE PROXIES CANNOT VOTE
YOUR SHARES UNLESS YOU SIGN AND RETURN THIS CARD.
DATED: , 1998
------------------------------------
Signature
------------------------------------
Signature
------------------------------------
Title
NOTE: Please sign as name appears
hereon. Joint owners should each
sign. When signing as attorney,
executor, administrator, trustee or
guardian, please give full title as
such.
