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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 COMM. FILE NO. 0-8483
CERES GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 34-1017531
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(STATE OR OTHER JURISDICTION OF I.R.S. EMPLOYER IDENTIFICATION NUMBER
INCORPORATION OR ORGANIZATION)
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17800 Royalton Road, Strongsville, Ohio 44136
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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(440) 572-2400
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(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Shares, par value $0.001 per share
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(TITLE OF CLASS)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
State the aggregate market value of the voting stock held by non-affiliates
of the Registrant. (The Registrant considers affiliates to be directors,
executive officers and those persons subject to the Voting and Stockholders'
Agreements.)
$28,494,220 computed based on the closing price of the Common Shares on
March 22, 1999.
The number of Common Shares, par value $0.001 per share, outstanding as of
March 22, 1999: 13,497,732.
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DOCUMENTS INCORPORATED BY REFERENCE:
Definitive Proxy Statement for the Annual Meeting of Shareholders to be held
June 10, 1999, into Part III, Items 10, 11, 12 and 13.
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CERES GROUP INC.
INDEX TO
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1998
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PAGE
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PART I
Item 1 Business.................................................... 1
Item 2 Properties.................................................. 10
Item 3 Legal Proceedings........................................... 11
Item 4 Submission of Matters to a Vote of Security Holders......... 11
Executive Officers of the Company.................................... 12
PART II
Item 5 Market for Registrant's Common Equity and Related
Shareholder Matters......................................... 13
Item 6 Selected Financial Data..................................... 14
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 15
Item 7A Quantitative and Qualitative Disclosures About Market
Risk........................................................ 24
Item 8 Financial Statements and Supplemental Data.................. 24
Schedule II -- Condensed Financial Information of
Registrant.................................................. 50
Schedule III -- Supplementary Insurance Information......... 53
Schedule IV -- Reinsurance.................................. 54
Item 9 Changes in and Disagreement with Accountants on Accounting
and Financial Disclosure.................................... 55
PART III
Item 10 Directors and Executive Officers of the Registrant.......... 55
Item 11 Executive Compensation...................................... 55
Item 12 Security Ownership of Certain Beneficial Owners and
Management.................................................. 55
Item 13 Certain Relationships and Related Transactions.............. 55
PART IV
Item 14 Exhibits, Financial Statements, Financial Statement
Schedules, and Reports on Form 8-K.......................... 56
Signatures........................................................... 61
Index to Exhibits.................................................... 62
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PART I
ITEM 1. BUSINESS
(a) GENERAL DEVELOPMENT OF BUSINESS
Ceres Group, Inc. (the "Company") formerly Central Reserve Life
Corporation, was incorporated in 1964 as Citation Life Insurance Company under
the laws of the State of Ohio. "Ceres Group, Inc." became the Company's name in
December 1998 following shareholder approval of the change of the Company's
state of incorporation from Ohio to Delaware through a merger of the Company
into a wholly-owned subsidiary. The Company is a holding company, which through
its subsidiaries, specializes in meeting the accident and health insurance needs
of individuals and small to mid-sized businesses and the health and life
insurance needs of Americans age 65 and older. In 1998, the Company's business
was conducted primarily through its then principal operating subsidiary, Central
Reserve Life Insurance Company ("Central"). Unless the context indicates
otherwise, the term "Company" as herein used will refer to Ceres Group, Inc. and
its subsidiaries.
Regulatory History. In 1996 and 1997, Central experienced substantial
losses incurred in connection with newly-issued health plans, greater
utilization than anticipated, new state mandates such as guaranteed issue and
preventative benefits and overall reductions in profitability arising out of
industry-wide pricing competition. At December 31, 1996, Central's statutory
capital levels were at an amount that subjected Central to mandatory examination
or analysis by the insurance commission of the State of Ohio and possible
required corrective action. In response to the losses and in order to provide a
financial plan to the Ohio Department of Insurance ("ODI") (mandated by the
decline in Central's capital and surplus), the Company retained Advest, Inc.
("Advest") in February 1997 as its financial advisor for the purpose of raising
equity capital and resolving Central's and the Company's financial concerns.
Following Advest's engagement, through June 1997, Advest and the Company
pursued a number of different financing alternatives, including a possible
rights offering and a private placement of equity securities, none of which came
to fruition. In June 1997, in order to address the continued decline in
Central's surplus, the Company borrowed $5.2 million from Huntington National
Bank, $5 million of which was contributed to the surplus of Central.
In December 1997, Central entered into a reinsurance treaty with
Reassurance Company of Hannover ("Hannover") in which Central transferred to
Hannover $24.6 million of reserve liability. In return for Hannover's assumption
of this liability, Central transferred $14.6 million in assets to Hannover. The
reinsurance treaty, which is on a 50/50 quota-share basis, provided Central with
a $10 million initial ceding allowance, which increased Central's statutory
surplus. The treaty was effective January 1, 1997 and accounted for as
retroactive reinsurance in Central's statutory financial statements. The
combination of the surplus note of $14 million (described below) and the $10
million ceding allowance provided an additional $24 million to the statutory
capital and surplus of Central increasing statutory levels in excess of
regulatory risk-based capital requirements and alleviating the regulatory
concerns that were created in 1996 and continued in 1997.
Equity Financing. To further resolve the regulatory problems that arose in
1996 and 1997, on March 30, 1998, the Company entered into an amended and
restated Stock Purchase Agreement, with Strategic Acquisition Partners, LLC
("Strategic Partners") and Insurance Partners, L.P. and Insurance Partners
Offshore (Bermuda), L.P. The March 30, 1998 agreement amended and restated an
agreement entered into on November 26, 1997 between the Company and Strategic
Partners. Following the receipt of shareholder approval, the transaction closed
on July 3, 1998, at which time the Company issued and sold 7,300,000 shares of
its common stock (the "Common Shares") at $5.50 per share and warrants to
purchase an additional 3,650,000 Common Shares at an exercise price of $5.50 per
share (the "Equity Warrants") for an aggregate purchase price of $40.2 million
(the "July Equity Financing").
Concurrent with the signing of the original agreement with Strategic
Partners in November 1997, Strategic Partners had arranged for an interim loan
(the "Bridge Loan") of $20.0 million to the Company.
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The proceeds of the Bridge Loan were used: (i) to repay $5.2 million to
Huntington National Bank, (ii) approximately $14.0 million to invest in the
surplus of Central, evidenced by a surplus note in favor of the Company (the
"$14.0 million Surplus Note"), (iii) approximately $0.8 million to establish an
interest reserve at the Company; and (iv) to pay transaction expenses. In
consideration for the arrangement of the Bridge Loan, the Company issued
warrants to purchase 800,000 Common Shares at $6.00 per share and an additional
200,000 Common Shares upon receipt of shareholder approval in July 1998 (the
"Guarantee Warrants"). The Bridge Loan was paid in full on July 3, 1998 in
connection with the closing of the July Equity Financing. The proceeds of the
July Equity Financing were used to: (i) pay off the Bridge Loan, plus interest,
(ii) pay related transaction expenses, such as legal, printing, accounting and
investment banking fees, and (iii) to make a $5.0 million contribution to the
surplus of Central. The remaining $13.0 million was used for working capital at
the Company. The July Equity Financing resulted in a change of control of the
Company.
Business Plan. In connection with the Bridge Loan obtained by Strategic
Partners for the Company, the Company's Board of Directors approved a
comprehensive business plan which was implemented beginning January 1, 1998, and
has been updated since then. The Company's business plan for future growth is
centered upon further development of its core competencies. These competencies
include the management of health care costs, consolidation of blocks of
business, capitalizing on acquired distribution systems, and the creation of
innovative specialty product lines.
Ceres Health Care, Inc., a wholly-owned subsidiary of the Company, was
established to provide the Company's insurance subsidiaries and acquired blocks
of business with their own proprietary managed care programs. By directly
controlling these activities, the Company expects to achieve greater efficiency,
increased cost savings, and more flexibility in adjusting programs to meet
product and profitability requirements. Some of the managed care programs
developed by Ceres Health Care include:
- Expanded Centers of Excellence programs for catastrophic medical care
- Specialized case management for special conditions such as neonatal care,
cancer and cardiovascular surgery
- Enhanced communication to members on how to maximize benefits for
medically necessary services
- Simplified administration of managed care provisions
- Expanded use of ancillary facility provider discount networks
The Company is positioned financially, organizationally, administratively,
and by its new management to take on a major role as a marketer and consolidator
in the health insurance industry. The Company expects to be an active acquirer
of other insurance companies and blocks of insurance business to increase its
size, efficiency and markets. The Company expects that the resulting
consolidation will streamline corporate functions and lower overall general
expense ratios. The Company may enter into reinsurance transactions with other
reinsurance companies to help accomplish some of the acquisitions. At this time,
the Company has an outstanding purchase agreement with United Benefit Managed
Care Corporation ("United Benefit") to acquire United Benefit Life Insurance
Company, a life and accident and health insurer in Texas ("UBL").
The Company's national distribution force is a key element for continued
growth. The Company plans to maximize the effectiveness and productivity of its
distribution systems through enhanced marketing support programs, expanded sales
activities, and increased product offerings. The Company has initiated a
National Seminar Program in which meetings are held across the nation to
introduce new products and services to both existing and newly-recruited agents.
As new companies and blocks of insurance business are acquired, the Company will
also focus on cross-selling opportunities. Agents will be encouraged to be
licensed by other subsidiaries of the Company in order to expand the portfolio
of products they will be able to offer to their clients.
The Company expects to meet the needs of its agents and customers through
ongoing product development as well as development of work-site marketing
programs. Supplemental products are being introduced that can be sold with or
after the basic plan sale is made to the customer. Such products include cancer
expense, accidental death and injury, critical illness, and dental coverage.
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The senior market has been selected as one of the Company's niches,
representing one of the fastest growing age segments in the country. With the
acquisition of Continental General Corporation and its wholly-owned subsidiary,
Continental General Insurance Company ("CGIC"), from Western and Southern Life
Insurance Company of Cincinnati, Ohio, the Company has accelerated its entrance
into this marketplace. A new series of senior plans are planned to be
introduced, including Medicare supplement, long-term care, home health care, and
senior life and annuities. The development of new products, in conjunction with
the Company's existing portfolio, will provide a broad selling opportunity for
our existing distribution force as well as newly-acquired or recruited agents.
Acquisition of United Benefit Life Insurance Company. On August 1, 1998,
Central entered into an agreement with UBL to reinsure 100% of the major medical
policies of UBL, covering approximately 100,000 lives with estimated annual
premiums of $100 million. Concurrently therewith, Central ceded 80% of the
business to Hannover, thereby assuming a net risk of 20%. Reserves for estimated
claims of $36.5 million were assumed by Central for which UBL transferred assets
of $16.5 million, net of a $20 million ceding allowance provided by Central. In
addition, reserve liabilities assumed by Central exceeded the cash transferred
to Central by UBL as reimbursement for this assumption by $3.0 million, which is
reflected in a note receivable. Central received a $20 million ceding allowance
from Hannover for the 80% thereby creating a zero effect on statutory surplus
regarding the allowances. The agreement also provides Central with access to
UBL's sales force. On March 18, 1999, Central announced the execution of an
agreement with United Benefit to purchase all of the outstanding shares of its
subsidiary, UBL. The agreement is subject to board of directors' approval and
approval by the shareholders of United Benefit, and is also subject to Central's
due diligence, as well as other customary terms and conditions. There is no
assurance that the transaction will be closed.
Acquisition of Provident American Life and Health Insurance Company. On
December 31, 1998, Central acquired Provident American Life and Health Insurance
Company ("PALHIC") from Provident American Corporation ("PAMCO") for $5.5
million in cash. PALHIC is a life and accident and health insurer that markets
managed care health insurance products to individuals and small businesses.
Funds for the acquisition were provided from Central's working capital. In
addition, Central, in conjunction with Hannover, assumed, through reinsurance,
all the individual and small group health insurance in force at December 31,
1998 of Provident Indemnity Life Insurance Company, a subsidiary of PAMCO, for
approximately $10 million. Central's portion of the reinsurance is 10% and
Hannover's is 90%. Central will also have an ongoing relationship with PAMCO and
its e-commerce subsidiary, HealthAxis.com. This provides the Company's insurance
subsidiaries their first entry into mass marketing of insurance products through
the Internet.
Acquisition of Continental General Corporation. On February 17, 1999, the
Company acquired CGIC for $84.5 million in cash. CGIC provides health and life
insurance products for the senior market, including long term care, Medicare
supplement, and senior life and annuity products, as well as major medical
plans. Funds for the acquisition of CGIC were provided as follows: $40 million
by a syndicate of banks arranged by Chase Securities Inc.; $15 million from
2,000,000 newly-issued Common Shares (together with the $40 million loan from
Chase, the "February 1999 Financing"); and the balance from cash available at
the Company. Concurrently with the closing, CGIC entered into a reinsurance
agreement with Hannover reinsuring 50% of all business in force at CGIC on
February 1, 1999 for a ceding allowance of $13 million.
CGIC had approximately $215 million in premiums in 1998 and at December 31,
1998 had approximately $400 million in assets and $37 million in statutory
capital and surplus. The administrative functions of CGIC are expected to remain
in Omaha, Nebraska and will be the base for the Company's senior market
operations.
Because of the July Equity Financing, the implementation of the Company's
new business plan, the reinsurance agreement with UBL and the acquisitions of
PALHIC and CGIC, the Company has undergone numerous changes since January 1,
1998. Although the acquisitions of PALHIC and CGIC had no impact on the
Company's results of operations in 1998, this Form 10-K includes information
with respect to the acquisitions, in addition to information regarding the
historical operations of Central. The Company believes
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this information regarding PALHIC and CGIC is necessary to enable investors to
understand the Company's business in 1999.
INSURANCE OPERATIONS.
Central. The Company owns 100% of Central, which was its principal
operating subsidiary at December 31, 1998. Central is an Ohio domiciled Life and
Accident and Health insurance company. Central was incorporated in 1963 and
commenced business in 1965. The Company acquired Central in 1973. As of December
31, 1998, Central was licensed to transact business in 36 states.
PALHIC. Central owns 100% of PALHIC. PALHIC is a Pennsylvania domiciled
Life and Accident and Health insurance company. PALHIC was incorporated in 1949
and acquired by Central on December 31, 1998. As of December 31, 1998, PALHIC
was licensed to transact business in 40 states and the District of Columbia.
CGIC. The Company owns 100% of CGIC. CGIC is a Nebraska domiciled Life and
Accident and Health insurance company. CGIC was incorporated in 1961 and
acquired by the Company on February 17, 1999. As of February 17, 1999, CGIC was
licensed to transact business in 49 states, the District of Columbia and the
U.S. Virgin Islands.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The Company's reporting segments organization comprises three segments:
group life and health; life insurance and annuities; and corporate and other,
which consists of primarily interest income and interest expense. FASB Statement
No. 131, Disclosurers for Derivative Instruments and Hedging Activities, now
requires disclosure of more information about operating segments. In 1998, the
Company expanded the detail of its disclosures for 1998, 1997 and 1996 which
also included certain reclassifications.
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The following tables present the revenues, expenses and profit (loss),
before federal income taxes, on a GAAP basis for the last three years
attributable to the Company's industry segments. The Company does not allocate
investment assets or other identifiable assets by industry segment.
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1998 1997 1996
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Group Life and Health
Revenues:
Net Premiums............................... $160,201,806 $258,170,130 $257,495,315
Investment income.......................... 5,817,656 5,021,692 5,014,262
Other income............................... 1,696,690 -- --
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167,716,152 263,191,822 262,509,577
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Expenses:
Benefits and claims........................ 114,181,891 208,933,873 202,074,527
Other operating expenses................... 52,762,598 73,589,360 70,960,571
------------ ------------ ------------
166,944,489 282,523,233 273,035,098
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Segment profit (loss) before federal income
taxes...................................... $ 771,663 $(19,331,411) $(10,525,521)
============ ============ ============
Life and Annuity
Revenues:
Net premiums............................. $ 583,091 $ 689,177 $ 680,022
Investment income........................ 1,362,251 1,459,718 1,506,162
------------ ------------ ------------
1,945,342 2,148,895 2,186,184
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Expenses:
Benefits and claims........................ 1,876,784 1,842,493 1,602,705
Other operating expenses................... 366,505 551,986 767,474
------------ ------------ ------------
2,243,289 2,394,479 2,370,179
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Segment profit (loss) before federal income
taxes...................................... $ (297,947) $ (245,584) $ (183,995)
============ ============ ============
Corporate and Other
Revenues:
Investment income........................ $ 485,130 $ 192,605 $ 189,834
============ ============ ============
Expenses:
Interest and financing expenses............ 1,841,334 1,078,198 812,833
Other operating expenses................... 1,886,283 626,299 801,435
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3,727,617 1,704,497 1,614,268
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Segment profit (loss) before federal income
taxes...................................... $ (3,242,487) $ (1,511,892) $ (1,424,434)
============ ============ ============
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The Company does not separately allocate investment or other identifiable
assets by industry segment, nor are income tax (benefits) expenses allocated by
industry segment.
(c) NARRATIVE DESCRIPTION OF BUSINESS
The operational aspects of the Company's business at December 31, 1998 were
in Central.
CENTRAL
(1) BUSINESS AND PRINCIPAL PRODUCTS
Products
Central specializes in meeting the accident and health insurance needs of
small businesses and individuals by offering major medical insurance plans for
small employer groups and individuals, employer partially self-funded plans,
employer stop/loss plans, short-term major medical, and various supplemental
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health insurance plans, such as critical illness, cancer coverage, accident
disability, accidental death and dental.
Central's principal product is group accident and health insurance, which
accounted for about 95% of its premiums in 1998.
The health insurance products offered by Central include programs designed
to manage the cost of health care, in order to keep insureds' premiums at
affordable levels and out-of-pocket expenses as low as possible. These managed
care programs include: pre-certification of care to move high-cost/high-risk
insureds into case management; specialized case management for critical
conditions such as neonatal care, cancer and cardiovascular surgery; utilization
management; maintaining standards of usual and customary charge levels; use of
medical appropriateness protocols; use of ancillary facility discount programs;
and product design for steerage to preferred provider organizations (PPOs).
Central's PPO networks include hospitals and physicians across the nation
which have agreed to provide medical services at discounted rates. In certain
areas, Central also utilizes secondary networks to increase the total discounts
available.
In addition to these provider networks, Central utilizes a Centers of
Excellence network which provides insureds access to transplant and other
necessary high-risk procedures at renowned medical institutions. These selected
facilities have the staff, the experience and the volume of patients to produce
higher recovery rates while offering discounted rates. The purpose of the
program is to provide quality care and improved treatment outcomes in a more
cost-efficient manner.
Through its association with the nation's largest pharmacy benefits
manager, Central also provides its insureds discounts on drug prescription
purchases at over 50,000 participating pharmacies and through mail-order
services.
In 1998, Central established a Benefit Design Department, a new customer
service function which concentrates on retaining more insureds during renewal
periods. The department uses a proactive approach in offering alternatives to
premium rate increases, such as adjustments to deductible levels, coinsurance
amounts and other benefit changes.
Through Central's websites, insureds can communicate directly with the
company and request information or policy and benefit changes.
Marketing
Central's products are marketed through managing general agents throughout
the nation. Regional sales directors are responsible for recruiting managing
general agents and general agents and training them in the benefits,
underwriting requirements and general conditions under which Central's insurance
plan operate.
Central supports its agents through product sales brochures, new product
development, lead generation programs, a national advertising program and
cross-selling opportunities. In addition, Central's national seminar program
assists in recruiting and training new agents and in introducing new products to
existing agents. Regular agent communication includes a monthly newsletter,
commission inserts, special announcements to managing general agents, and access
to the company via the Internet and e-mail.
(2) INSURANCE VOLUME, POLICIES AND CERTIFICATES
Although insurance volume (amount of life insurance) is generally a guide
to statistical information for most insurance companies, policies and
certificates in force are a more informative statistic for Central because of
the large percent of business generated in the group accident and health area.
Central requires each insured to carry group life insurance, but the average
requirement is only $10,000. Accordingly, it is more informative to focus on the
number of certificates in force as opposed to volume of insurance.
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Following are tables reflecting statistical information on Central's
business.
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1998 1997 1996
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LIFE INSURANCE VOLUME:
Insurance Written......................... $ 582,149,000 $ 496,653,000 $ 458,000,000
In force.................................. $1,239,853,000 $1,192,280,000 $1,293,673,000
Reinsured................................. $ 88,477,000 $ 95,249,000 $ 80,895,000
GROUP POLICIES:
Beginning of Year......................... 40,448 43,542 41,884
Issued during Year........................ 25,629 21,170 19,732
Terminations.............................. (21,415) (24,264) (18,074)
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End of Year............................... 44,662 40,448 43,542
============== ============== ==============
GROUP CERTIFICATES:
Beginning of Year......................... 104,687 116,304 113,720
Issued during Year (new).................. 35,178 30,377 36,574
Terminations (net of additions)........... (35,871) (41,994) (33,990)
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End of Year............................... 103,994 104,687 116,304
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(3) GEOGRAPHIC DISTRIBUTION
The geographic distribution of direct premiums and annuity considerations
received (before reinsurance) by Central during 1998 is as follows:
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STATE AMOUNT PERCENT OF TOTAL
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Ohio............................................ $ 80,854,002 30.2%
Indiana......................................... 36,556,311 13.6
North Carolina.................................. 20,599,562 7.7
Arizona......................................... 15,077,048 5.6
Tennessee....................................... 13,980,354 5.2
South Carolina.................................. 13,628,793 5.1
Missouri........................................ 13,475,976 4.7
Kansas.......................................... 13,079,413 4.9
Michigan........................................ 12,678,939 4.7
Alabama......................................... 9,845,228 3.7
Virginia........................................ 9,779,842 3.6
Pennsylvania.................................... 9,744,715 3.6
West Virginia................................... 8,952,516 3.3
Colorado........................................ 5,731,896 2.1
Other........................................... 4,153,266 2.0
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Total................................. $268,137,861 100.0%
============ =====
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(4) AGENTS
Central's insurance policies are sold by licensed agents and general agents
(brokers). Regional Sales Managers service the brokers. Central does not have
agents who sell exclusively for it. The licensed agents and brokers who produce
insurance business for Central generally have affiliations with and serve in a
similar capacity for one or more other companies which may be competitive with
Central, and a portion of their business may be written by such other companies.
Such agents and brokers are compensated by Central for business produced by them
on a cash commission basis at rates which are believed to be competitive with
those of other life insurance companies.
As of December 31, 1998, Central had 105 brokers/general agents and 14,769
agents licensed.
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In August, Central began an agency agreement with the sales force of
Insurance Advisors of America, Inc. ("IAA"), an insurance agency subsidiary of
United Benefit which primarily markets products of UBL, another United Benefit
Subsidiary. Central acquired through reinsurance all of the health insurance
business of UBL. In order to maintain and grow this block of business, Central
enhanced the product portfolio and marketing programs for IAA, the UBL sales
organization. The agency agreement bolsters the Company's sales force in the
Southwest and Southeast.
(5) INVESTMENTS
An important earnings factor for Central, as well as all insurance
companies, is the income from its investment portfolio. The investment
objectives for insurance companies are to maximize yields, preserve principal
and maintain liquidity. Investments must comply with the insurance laws of the
state of domicile. These laws prescribe the kind, quality and concentration of
investments which may be made. Due to the restrictive nature of these laws,
there may be occasions when Central may be precluded from making certain
otherwise attractive investments. As of December 31, 1998, 100% of Central's
fixed maturities was of investment grade quality. Central and the Company do not
invest in "junk" bonds or derivatives such as futures, forwards, swaps, and
option contracts, and other financial instruments with similar characteristics
and substantially all its investments are in fixed maturities. However, Central
does invest in mortgage-backed securities some of which are collateralized
mortgage obligations (CMOs). These investments, besides having a credit risk,
also have the risk of prepayment, during a decline in interest rates, and the
risk of extension during a rise in interest rates. Central constantly monitors
these securities and has reduced its exposure in CMOs from $24.7 million in 1997
to $18.2 million in 1998. The proceeds were primarily invested in corporate
bonds.
(6) RESERVES
Central is required by the insurance laws of the states in which it is
licensed to set up statutory reserves to meet policy obligations on its ordinary
life policies. These reserves are amounts which, with additions from premiums to
be received and with interest on such reserves compounded annually at certain
assumed rates, are calculated to be sufficient to meet policy obligations as
they mature. The various actuarial factors are determined from mortality tables
and interest rates in effect when the policy is issued. The ordinary life
policies currently issued by Central are valued on the Commissioners' Standard
Ordinary Table of Mortality of 1980 under the Commissioners' Reserve Valuation
Method and the Net Level Premium Method. The guaranteed interest rate on
policies currently being issued is 4.5%. On policies issued previously to the
current series, guaranteed interest rates were as specified in the various
policies and range from 2.5% to 6%. Under the Commissioners' Reserve Valuation
Method, the amount of reserve provided in the first policy year is less than
under the Net Level Premium Method, but in subsequent years greater additions to
reserves are required. To the extent that the rate of income realized on
investments is greater or less than the assumed interest rate used in the
calculation of reserves, reported earnings are increased or decreased, as the
case may be.
The majority of Central's reserves and liabilities for claims, however, are
for its group accident and health business. Statutory and regulatory
requirements are generally less explicit for health insurance reserves and
liabilities than for ordinary life insurance. For its group accident and health
business Central establishes an Active Life Reserve plus a liability for due and
unpaid claims, claims in course of settlement, and incurred but unreported
claims as well as a reserve for the present value of amounts not yet due on
claims. These reserves and liabilities are dependent upon many factors, such as
economic and social conditions, inflation (overall and hospital costs
specifically), changes in doctrines of legal liability and damage awards for
pain and suffering. Therefore, the reserves and liabilities established are
necessarily based on extensive estimates and prior years' statistics. A
consulting actuary is retained by Central to assist in the estimation process
and to certify to the statutory reserves.
(7) REINSURANCE
As is customary among many insurance companies, Central reinsures portions
of the life insurance policies it writes, thereby providing a greater
diversification of risk and minimizing Central's exposure on
8
<PAGE> 11
major risks. While the effect of reinsurance is to lessen risks to the writing
company, it may also lower income. Although the ceding of reinsurance does not
discharge the original insurer from its primary liability to its policyholder,
the insurance company that assumes the coverage assumes the related liability
and becomes the ultimate source of payment. The maximum amount of exposure that
Central retains on any life is $50,000 on ordinary life and group life. No
retention is maintained over age 70. Maximum retention on impaired risks is
$10,000. Central also has reinsurance on group accident and health claims.
Effective January 1, 1995, Central's reinsurance treaty provides that all
individual claims in excess of $500,000 are 100% reinsured.
In addition to the $500,000 excess reinsurance, Central also entered into a
retroactive reinsurance treaty in December 1997 with Hannover. The reinsurance
was effective January 1, 1997 and is on a 50/50 quota-share basis on certain
group accident and health policies in force and written during 1997. The treaty
provided an initial ceding allowance of $10 million which was accounted for as a
deferred reinsurance gain in the consolidated financial statements and accounted
for as special surplus on a statutory basis. The ceding allowance will be
amortized over approximately five years, the estimated settlement period of the
reinsured business. The Hannover treaty provides for repayment of the $10
million ceding allowance plus 10% interest, out of the statutory profits, if
any, of the reinsured business. Once the ceding allowance is paid back the
quota-share will change to 60/40, with Central retaining the 60%. The more
significant provisions of the Hannover treaty are: (i) no scheduled partial or
total recapture; (ii) no recapture after 24 months; (iii) experience refund
provisions allow offsetting against current and prior year losses; and (iv)
Central is not obligated to pay for negative experience amounts in the case of
termination due to expiration of in force policies or if termination is
triggered by action or inaction of Hannover.
Effective August 1, 1998, Central entered into a reinsurance treaty with
UBL, a life and accident and health insurer in Texas. Under the terms of the
treaty, Central agreed to assume 100% of UBL's book of business, until such time
as profits earned by Central on the assumed block reach a contractual threshold,
which approximates $20.0 million of pretax income. Upon reaching this threshold,
the quota share percentage is reduced from 100% to 80%, until a second
threshold, which approximates $16.0 million in pretax income, is reached. Upon
reaching the second threshold, the quota share percentage is further reduced
from 80% to 50%. In a separate agreement, IAA agreed to market UBL and Central
policies exclusively. Central paid to UBL a $20.0 million ceding allowance in
connection with this transaction.
In connection with the UBL reinsurance treaty, Central ceded 80% of the
assumed UBL book of business to Hannover. This treaty provided Central an
initial ceding allowance of $20.0 million, which is being accounted for as a
deferred reinsurance gain in the accompanying consolidated financial statements.
Reinsurance treaties in effect at December 31, 1998 were with Reliastar Life,
The Cologne Life Reinsurance Company, Life ReAssurance Corporation of America,
Business Men's Assurance Company and Reassurance Company of Hannover.
(8) REGULATION
The Company's insurance subsidiaries, in common with other insurance
companies operating in the states in which they are licensed, are subject to
regulation and supervision by state insurance regulatory agencies. These
regulatory bodies have broad administrative powers relating to standards of
solvency, which must be met on a continuing basis, granting and revoking of
licenses, licensing of agents, approval of policy forms, maintenance of adequate
reserves, form and content of financial statements, types of investments
permitted, issuance and sale of stock and other matters pertaining to insurance.
The insurance companies are required to file detailed annual statements with the
respective state regulatory bodies and are subject to periodic examination by
the regulators. The most recent regulatory examination for Central was performed
as of December 31, 1995, and for PALHIC and CGIC the examinations were performed
as of December 31, 1997.
Many states have also enacted insurance holding company laws which require
registration and periodic reporting by insurance companies controlled by other
corporations. Such laws vary from state to state but typically require periodic
disclosure concerning the corporation which controls the controlled insurer and
prior notice to, or approval by, the applicable regulator of intercorporate
transfers of assets and other transactions (including payments of dividends in
excess of specified amounts by the controlled insurer) within the holding
9
<PAGE> 12
company system. Such laws often also require the prior approval for the
acquisition of a significant ownership interest (e.g., 10% or more) in the
insurance holding company. The Company's insurance subsidiaries are subject to
such laws and the Company believes they are in compliance in all material
respects with all applicable insurance holding company laws and regulations.
(9) COMPETITION
The insurance business is highly competitive. There are over 1,600 legal
reserve life insurance companies in the United States. Many of these have been
in business for long periods of time, and have substantially greater financial
resources, larger selling organizations and broader diversification of risks
than the Company's insurance subsidiaries. Many of these companies are mutual
companies, whose earnings inure to the benefit of their policyholders. Central's
and PALHIC's principal marketing is in rural areas where they compete with
regional insurance companies. In other areas their PPO products compete with the
larger insurance companies. However, the Company believes that the policies and
premium rates of Central are generally competitive with those offered by other
companies selling similar types of insurance in Ohio.
(10) EMPLOYEES
The Company had approximately 1,000 employees under management at March 22,
1999. The Company considers its employee relations to be good. The dedicated
agents of the Company are independent contractors and not employees of the
Company.
PALHIC
PALHIC specializes in marketing managed care health insurance products to
individuals and small businesses in 40 states, through a distribution system of
27,000 agents. The majority of its business is derived from group association
major medical products sold to individuals. A smaller portion of its business is
derived from traditional life (whole life and limited pay) products. Agents of
PALHIC will be provided with Central products as well, including Central's small
and large group health line, specialty health insurance products, in addition to
CGIC's senior health and life insurance product lines. Through PAMCO and
Internet marketing subsidiary, HealthAxis.com, the Company will have the ability
to offer direct on-line health insurance products through the Internet. In
addition, Central, in conjunction with Hannover, assumed, through reinsurance,
all the individual and small group health insurance in force at December 31,
1998 of Provident Indemnity Life Insurance Company, a subsidiary of PAMCO, for
approximately $10 million. Central's portion of the reinsurance is 10% and
Hannover's is 90%.
CGIC
CGIC, acquired in February 1999, provides health and life insurance
products for the senior market. These products are sold through a distribution
system of 30,000 agents throughout 49 states. CGIC's Omaha facility will be the
base for all of the senior market operations of the Company. CGIC plans to
significantly expand its senior product line by introducing a completely revised
portfolio of senior products, including Medicare supplement, long-term care,
home health care, and senior life and annuity products. In addition, a new line
of major medical and small group health products will be developed for CGIC's
distribution system. These products will also be made available to all of the
Company's distribution force.
(d) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS
The Company has no foreign operations. Its domestic operations during 1998
were primarily in Ohio.
ITEM 2. PROPERTIES
The Company owns a building in Strongsville, Ohio, which consists of
121,625 square feet and is occupied by Central. At December 31, 1998, the
outstanding principal balance of the mortgage note on the building was
approximately $8.3 million. PALHIC leases space in Norristown, Pennsylvania of
approximately 20,000 square feet. CGIC owns and occupies a building in Omaha,
Nebraska which consists of approximately 61,400 square feet.
10
<PAGE> 13
ITEM 3. LEGAL PROCEEDINGS
Other than ordinary routine litigation incidental to the business, and the
matter regarding Federal income taxes reflected in Note G to the consolidated
financial statements, neither the Company nor any of its subsidiaries is party
to any material pending legal proceeding nor is any of their property the
subject thereof.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
a) A Special Meeting of Shareholders in lieu of the Annual Meeting of
Shareholders was held on December 7, 1998.
b) Proxies were solicited for the election of directors by the Company's
management pursuant to Regulation 14A under the Securities Exchange Act of 1934.
No solicitation in opposition to management's nominees as listed in the proxy
statement was made. All of management's nominees were elected to hold office
until the next annual election of directors and until their successors are
elected and qualified pursuant to the vote of the stockholders.
c) The matters voted upon were the following:
1. With respect to the election of nine directors to serve until the
next annual election of directors and until their successors are elected
and qualified.
<TABLE>
<CAPTION>
NAME FOR
---- ---
<S> <C>
Andrew A. Boemi 10,578,053
Michael A. Cavataio 10,578,053
Bradley E. Cooper 10,576,628
Fred Lick, Jr. 10,560,236
Peter W. Nauert 10,579,053
John F. Novatney, Jr. 10,573,065
Richard M. Osborne 10,577,053
Robert A. Spass 10,576,853
Mark H. Tabak 10,577,355
</TABLE>
2. With respect to the proposal which provided, among other things,
for the change of the Company's state of incorporation from Ohio to
Delaware through a merger of the Company into Ceres Group, Inc., a Delaware
corporation and a wholly-owned subsidiary of the Company, and for the
change of the Company's name to "Ceres Group, Inc." in the merger, and for
related changes to the Company's organizational documents.
<TABLE>
<S> <C>
For 9,745,472
Against 24,117
Withheld 49,293
</TABLE>
The total number of shares of the Company's Common Shares, no par
value, outstanding as of the November 2, 1998 record date for the Special
Meeting was 11,495,172.
11
<PAGE> 14
EXECUTIVE OFFICERS OF THE COMPANY
Pursuant to Instruction 3 to Item 401(b) of Regulation S-K, the current
executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Fred Lick, Jr. 67 Chairman of the Board and Director
Peter W. Nauert 55 President, Chief Executive Officer and
Director
Glen A. Laffoon 59 Executive Vice President and
Assistant Secretary
Val Rajic 39 Executive Vice President and Treasurer
Charles E. Miller, Jr. 48 Executive Vice President and
Chief Financial Officer
</TABLE>
The current one year terms of office of the executive officers listed above
began December 7, 1998, with their election to office by the Board of Directors
at its meeting following the special meeting of shareholders held on such date.
There are no arrangements or understandings known to the Company between any
executive officer and any other person pursuant to which any officer was elected
to office. There is no family relationship between any director or executive
officer and any other director or executive officer of the Company.
MR. LICK has served as an officer since 1974 and a director since 1976. He
is currently the Chairman of the Company and Chairman of Central. Prior to July
3, 1998, Mr. Lick was also President and Chief Executive Officer of the Company
and of Central.
MR. NAUERT has served as President and Chief Executive Officer of the
Company since July 3, 1998. Mr. Nauert is also the principal investor in
Strategic Partners and is Principal of Geneva Consolidated, Inc., a company
providing consulting services to small group and life insurance companies. 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.
MR. LAFFOON has served as an officer of the Company since 1991 and an
officer of Central since 1974 and has held various positions in both companies.
Since July 1998, he has served as Executive Vice President of the Company, since
December 1998, he has also served as Assistant Secretary of the Company, and
since June 1998, has served as President and Chief Executive Officer of Central.
MR. RAJIC has served as an officer of the Company since December 1997 and
was a director and acting Chief Operating Officer of the Company from December
1997 to June 1998. Since June 1998, he has held the position of Executive Vice
President of the Company, and since December 1998, he has also served as
Treasurer of the Company. 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. MILLER has served as an officer of the Company since October 1998. He
holds the positions of Executive Vice President and Chief Financial Officer of
the Company. From 1996 to 1998, Mr. Miller served as a principal and President
of Wellington Partners, Inc., an insurance acquisition company. Mr. Miller was
also a consultant to IP Delaware. Prior to 1996, Mr. Miller was Executive Vice
President, Chief Financial Officer and a director of Harcourt General Insurance
Companies.
12
<PAGE> 15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
(a) The Company's Common Shares are traded on the Nasdaq National Market
tier of The Nasdaq Stock Market(SM) under the symbol CERG since December 1998
and under the symbol CRLC prior to that. The following table shows the
representative high and low closing prices of the Common Shares for the calendar
quarters indicated. These prices were taken from the Nasdaq Monthly Statistical
Reports.
<TABLE>
<CAPTION>
HIGH LOW DIVIDENDS
---- --- ---------
<S> <C> <C> <C>
1997
First Quarter................... $ 8 1/4 $ 4 1/8 $ -0-
Second Quarter.................. 7 5/8 3 7/8 -0-
Third Quarter................... 7 1/8 5 1/2 -0-
Fourth Quarter.................. 7 4 1/2 -0-
1998
First Quarter................... $ 8 1/2 $ 4 13/16 $ -0-
Second Quarter.................. 8 1/8 6 3/8 -0-
Third Quarter................... 9 5 13/16 -0-
Fourth Quarter.................. 11 3/8 6 3/4 -0-
</TABLE>
(b) As of March 22, 1999, there were 1,730 record holders of the Common
Shares.
(c) No cash dividends were paid by the Company in the past two years as
indicated in the table above. In 1998, the Company's primary source of income,
other than a nominal amount of investment income, was rent from Central. Central
is subject to certain restrictions which are contained in the Insurance Holding
Company statute (Ohio Revised Code 3901.34) which prevent Central from paying
the Company, without the approval of the Ohio Superintendent of Insurance, any
dividend from other than earned surplus (as defined in the statute) or any
dividend whose value, together with the value of other dividends paid or
distributions made within the preceding 12 months, exceeds the greater of (i)
10% of Central's surplus as regards policyholders as of December 31 next
preceding the dividend payment, or (ii) the net income of Central for the
12-month period ended the December 31 next preceding the dividend payment. At
December 31, 1998, Central had $30,418,544 of statutory capital and surplus, and
earned surplus of $1,056,434. PALHIC and CGIC are also subject to certain
similar restrictions which will effect the Company in 1999 and future years. In
addition, the Company's Credit Agreement with The Chase Manhattan Bank, dated
February 17, 1999, contains financial and other covenants with respect to the
Company that, among other matters, prohibits the payment of cash dividends on
the Common Shares, except upon compliance with certain conditions.
(d) On June 26, 1998, the shareholders of the Company approved an equity
financing transaction pursuant to which 7,300,000 Common Shares were issued and
Equity Warrants to acquire up to 3,650,000 Common Shares at an exercise price of
$5.50 per share, for an aggregate consideration of $40.2 million to a group of
credited investors.
The transaction closed on July 3, 1998 and the proceeds were used to pay
off the Bridge Loan, plus interest, pay related transaction expenses, such as
legal, printing, accounting and investment banking fees, and make a $5 million
contribution to the surplus of Central. The remaining $13.0 million was used for
working capital at the Company.
The Common Shares and Equity Warrants were exempt from registration in
accordance with Section 4(2) of the Securities Act of 1933, as amended, and
exemptions available under applicable state securities laws.
13
<PAGE> 16
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
FOR THE YEAR:
Premiums (net of
reinsurance)................ $160,784,897 $258,859,307 $258,175,337 $233,168,529 $223,679,071
Net Investment Income......... 7,454,180 6,527,537 6,700,741 6,454,038 6,515,927
Net realized gains (losses)... 210,857 146,478 9,517 149,527 (23,024)
Other Income.................. 1,096,690 -- -- 37,000 29,237
Amortization of deferred
reinsurance gain............ 600,000 -- -- -- --
------------ ------------ ------------ ------------ ------------
Total Revenues................ $170,146,624 $265,533,322 $264,885,595 $239,809,094 $230,201,211
============ ============ ============ ============ ============
Income (Loss) before Federal
Income Taxes................ $ (2,768,771) $(21,088,887) $(12,133,950) $ 5,947,225 $ 6,872,989
Federal Income Tax Expense
(Benefit)................... 1,066,888 (132,531) (2,845,585) 1,442,618 2,059,228
------------ ------------ ------------ ------------ ------------
Net Income (Loss)............. $ (3,835,659) $(20,956,356) $ (9,288,365) $ 4,504,607 $ 4,813,761
============ ============ ============ ============ ============
Basic earnings (loss) per
share....................... $ (.49) $ (5.01) $ (2.29) $ 1.12 $ 1.20
Diluted earnings (loss) per
share....................... $ (.49)(1) $ (5.01)(1) $ (2.29)(1) $ 1.07 $ 1.14
Cash dividends per share...... -- -- $ .52 $ .48 $ .44
AT YEAR END:
Investments................... $ 89,826,188 $ 79,956,724 $ 79,613,508 $ 81,933,496 $ 80,979,411
Total Assets.................. $180,233,135 $135,803,577 $119,388,697 $117,329,039 $107,944,158
Mortgage Note Payable......... $ 8,283,884 $ 8,399,028 $ 8,503,776 $ 8,599,067 $ 8,685,754
Note Payable.................. -- $ 20,000,000 -- -- --
Future Policy Benefits and
Claims Payable.............. $ 97,113,067 $ 81,090,299 $ 76,650,884 $ 65,317,522 $ 62,716,877
Retained Earnings (Accumulated
Deficit).................... $ (9,154,986) $ (5,319,327) $ 15,637,029 $ 27,030,102 $ 24,463,447
Shareholders' Equity.......... $ 35,835,714 $ 1,511,842 $ 21,467,797 $ 33,300,980 $ 24,530,732
Equity Per Share:
After accumulated other
comprehensive income
(loss).................... $3.12 $ .36 $5.18 $8.25 $6.08
Before accumulated other
comprehensive income
(loss).................... $3.02 $ .21 $5.24 $8.06 $7.42
</TABLE>
- ---------------
(1) No incremental shares related to options/warrants are included due to the
loss for the year.
14
<PAGE> 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This discussion should be read in conjunction with the consolidated
financial statements, notes and tables included elsewhere in this report.
Management's discussion and analysis may contain forward-looking statements that
are provided to assist in the understanding of anticipated future financial
performance. However, such performance involves risks and uncertainties which
may cause actual results to differ materially from those expressed in the
forward-looking statements. See "Forward-Looking Statements."
GENERAL
The Company is a holding company, which through its subsidiaries,
specializes in meeting the accident and health insurance needs of individuals
and small to mid-sized businesses and the health and life insurance needs of
Americans age 65 and older. In 1998, 1997 and 1996 the Company's business was
conducted primarily through its then principal operating subsidiary, Central.
In 1996 and 1997, Central experienced substantial losses incurred in
connection with newly-issued health plans, greater utilization than anticipated,
new state and federal mandates such as guaranteed issue and preventative
benefits and overall reductions in profitability arising out of industry-wide
pricing competition. In June 1997, in order to address the continued decline in
Central's surplus, the Company borrowed $5.2 million from Huntington National
Bank, $5 million of which was contributed to the surplus of Central.
In December 1997, Central entered into a reinsurance treaty with Hannover
in which Central transferred to Hannover $24.6 million of reserve liability. In
return for Hannover's assumption of this liability, Central transferred $14.6
million in assets to Hannover. The reinsurance treaty, which is on a 50/50
quota-share basis, provided Central with a $10 million initial ceding allowance,
which increased Central's statutory surplus. The combination of the $14.0
million Surplus Note which was invested in connection with the Bridge Loan and
the $10 million ceding allowance provided an additional $24 million to the
statutory capital and surplus of Central, increasing statutory levels in excess
of regulatory risk-based capital requirements and alleviating the regulatory
concerns that were created in 1996 and continued in 1997.
Since January 1, 1998, the Company (1) began a new business plan designed
to increase premium rates, reduce costs and emphasize acquisitions; (2)
completed the July Equity Financing, in which the Company issued and sold
7,300,000 Common Shares at $5.50 per share and Equity 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 approximately $40.2 million; (3) entered into an
agreement with UBL in August 1998 to reinsure 100% of the major medical policies
of UBL, covering approximately 100,000 lives with estimated annual premiums of
$100 million; (4) acquired PALHIC from PAMCO on December 31, 1998 for $5.5
million in cash; (5) acquired CGIC, from Western and Southern Life Insurance
Company of Cincinnati, Ohio, on February 17, 1999 for $84.5 million in cash; (6)
completed the February 1999 Financing; and (7) announced, on March 18, 1999, the
execution of an agreement with United Benefit to purchase all of the outstanding
shares of its subsidiary, UBL, subject to board of directors' approval and
approval by the shareholders of United Benefit, and to Central's due diligence,
as well as other customary terms and conditions.
Because of the implementation of the Company's new business plan, the July
Equity Financing, the February 1999 Financing, the reinsurance agreement with
UBL and the acquisitions of PALHIC and CGIC, the Company has undergone numerous
changes since January 1, 1998. The acquisitions of PALHIC and CGIC had no impact
on the Company's results of operations in 1998, and are therefore not reflected
in the "Results of Operations" discussion below. The Company believes that these
acquisitions will have a material positive impact on the Company's results in
1999.
RESULTS OF OPERATIONS
1998 compared to 1997
Premiums, before reinsurance, in 1998 increased 1% to $264,868,186 from
$262,161,343 in 1997. The group life and health segment accounted for 99% of the
premiums in 1998 and 1997. The group certificates in
15
<PAGE> 18
force decreased slightly to 103,994 at the end of 1998 compared to 104,687 at
the end of 1997. Certificates issued for new group policies were 35,178 in 1998,
up 16% from 30,377 in 1997. Total lapses (net of additions/ decreases) in 1998
were 35,871, down 15% from 41,994 in 1997. The increase in new certificates
issued in 1998 was related to the infusion of capital into Central, improving
the Risk-Based Capital levels above regulatory actions levels in 1997, making
Central's marketing position stronger. The larger number of lapses in 1997 was
primarily due to a conversion program of older products into newer products, in
several states, along with rate increases for all renewal policies.
Reinsurance assumed represents Central's 100% portion of a block of group
health business under a reinsurance agreement entered into in August of 1998
with UBL. The reinsurance ceded amount represents 80% of the above-mentioned
block (Central's final retention is 20%) plus 50% of Central's group health
business in force at December 31, 1997.
Net investment income increased to $7,454,180, or 14%, in 1998 from
$6,527,537 in 1997. The primary reason for the increase was the interest earned
on funds received from the July Equity Financing.
Other income for 1998 was $1,096,690, which consisted of fees for Central
servicing the reinsurance assumed. The amortization of deferred reinsurance gain
represents Central's portion of the $20 million ceding commission paid by
Hannover for the UBL block of group health policies in August 1998.
The benefits, claims, losses and settlement expenses of $116,058,675 for
1998 is 72% of net premiums compared to $210,776,366, or 81%, for 1997. The
decrease in 1998 was due to the Central reinsurance agreements. The lower loss
ratio of 72% is a combination of reinsurance ceded, rate renewal actions, and
managed care programs and benefits changes.
Underwriting, acquisition and insurance expenses, in total, were lower in
1998 compared to 1997 because of the reinsurance allowances as indicated in Note
I to the consolidated financial statements. Before reinsurance expenses and
allowances, commissions were $36,853,066, up 4% from $35,525,925 in 1997
primarily due to an increase in new business and commission rates; salaries and
benefits in 1998 were $15,717,718, down 13% from $18,112,730 in 1997 due to the
reduction in staff during the first half of the year and the discontinuance of
Central's contribution to the pension plan. Other operating expense increased to
$22,450,200, up 52% from $14,758,817 in 1997. The major reason for the increase
was the cost of outsourcing the Company's computer operations for approximately
$5.0 million, including Year 2000 costs, a provision of approximately $1.5
million taken in connection with a UBL note receivable, and a $1.5 million
expense related to a fraud committed in connection with claims administration at
the UBL facility.
The $647,271 amortization of deferred acquisition costs in 1998 is
primarily the amortization of Central's portion of the ceding commission paid
for the UBL block of group health policies.
Interest expense and financing costs increased to $1,841,334, or 71%, from
$1,078,198 in 1997. The increase was due primarily to the increase in interest
from the $20 million Bridge Loan incurred in December 1997. The Bridge Loan was
paid in full in July 1998 from the July Equity Financing.
The net loss for 1998 was $3,835,659, or $.49 per share, compared to a net
loss of $20,956,356, or $5.01 per share, for 1997. The Company's revenues,
before reinsurance, increased approximately $5,000,000. Although benefits,
losses and expenses were reduced as a result of the reinsurance agreements,
Central implemented certain policy benefit and managed care changes along with
premium rate increases.
Although the Company reported a loss for 1998, a provision for federal
income taxes of $1,066,888 was required principally due to the tax treatment
related to the reinsurance transactions effective in 1998. For further
information concerning the provision for income taxes, as well as information
regarding differences between effective tax rates and statutory tax rates, see
Note G of the Notes to Consolidated Financial Statements.
16
<PAGE> 19
RESULTS OF OPERATIONS:
1997 compared to 1996
In 1997 premiums, before reinsurance, increased slightly to $262,161,343
from $260,076,097. The group life and health segment accounted for 99% of the
premiums in 1997. The group certificates in force decreased about 10% to 104,687
in 1997 compared to 116,304 at the end of 1996. Certificates issued for new
group policies were 30,377 in 1997, down 17% from 36,574 in 1996. Total lapses
(net of additions/decreases) in 1997 were 41,994, up 24% from 33,990 in 1996.
Overall the major reason for the flat growth in premiums, decrease in
certificates and increase in lapses can be attributed to the financial condition
of Central in 1997 and 1996. The large losses and related decrease in statutory
surplus discouraged new business and required large rate increases. Although
unprofitable business did terminate, it terminated faster than new profitable
business was being issued. The lowering of Central's A.M. Best rating, to B from
B+, also had a negative effect on the sale of ordinary life and annuity policies
during 1997.
Net investment income decreased about 2% to $6,527,537 in 1997 from
$6,700,741 in 1996. A decrease in invested assets and a negative cash flow in
1997 were the primary reasons for the decrease.
Benefits and claims incurred expenses increased 3% in 1997 to $210,776,366
in 1997 from $203,677,232 in 1996. The incurred loss ratio was 81.4% for 1997
compared to 78.9% for 1996. The major reasons for the increase in the claims
loss ratio and the level of claims incurred were (a) the continued effect of an
underpriced product sold heavily in 1995, (b) a larger number of unexpected and
unanticipated prior year claims (1996) paid in 1997, resulting in a 1996 reserve
deficiency of approximately $7 million, (c) larger number of annuity policies
lapsed than anticipated, (d) a run off in claims due to rate renewal actions and
(e) a reserve strengthening in the fourth quarter of 1997.
Commissions remained fairly level in 1997, $35,525,295 compared to
$35,654,815 in 1996, primarily due to premiums remaining flat.
Operating expenses increased 6% to $39,242,350, or 15.2%, of premiums in
1997 compared to $36,874,665, or 14.3%, of premiums in 1996. Although salaries,
benefits and premium taxes remained the largest portions of the total operating
expenses, other operating expenses increased due to the costs incurred relative
to seeking additional funds for capital and surplus during 1997 for Central.
Interest expense increased 33% to $1,078,198 from $812,833 in 1996. The
increase was due to the $5.2 million loan in June 1997 and the $20 million loan
in December 1997. The $5.2 million loan was paid off in December 1997.
The net loss for 1997 was $20,956,356, or $5.01 per share, compared to
$9,288,365, or $2.25 per share, in 1996. The Company's revenues increased
approximately $647,000, however claims and expenses increased over $7 million,
the majority being in claims. Central's group accident and health business
represented 98% of the revenues and a higher loss ratio from this segment has a
negative effect on earnings. The statutory loss ratio for the group accident and
health segment increased to 81.7% in 1997 compared to 77.9% in 1996. Although
the losses were higher in 1997, Central received $14 million from the Company
and issued a surplus note for the $14 million and received a $10 million ceding
allowance from a reinsurance treaty, both of which increased Central's statutory
capital and surplus. At December 31, 1997, Central's statutory capital and
surplus was $24,650,804, which was above any regulatory action levels.
For information concerning the provision for income taxes, as well
information regarding differences between effective tax rates and statutory tax
rates, see Note G of the Notes to Consolidated Financial Statements.
OPERATING SEGMENT INFORMATION
The Company has identified three distinct operating segments based upon
product types, as follows: group life and health, life insurance and annuities,
and corporate and other.
17
<PAGE> 20
Products included in the group life and health segment include short-term
major medical insurance products and comprehensive major medical plans. Group
life policies are included in this segment because such policies are issued only
in conjunction with health insurance policies, and the costs of administering
those policies are incidental to the administration of the related health
policies.
Products included in the life and annuity segment include term insurance,
single premium deferred annuities, flexible premium deferred annuities, and
single premium immediate annuities. These products are not marketed aggressively
by the Company, and are underwritten as an accommodation product. Such products
are segregated from the group life and health segment based upon significant
differences in the sales and administration of such policies, including the
underwriting and claims adjudication processes.
The corporate and other segment encompasses all other activities of the
organization, including interest income and expense of the parent company.
The group life and health segment had net revenues of $168,000,000 for
1998, compared to $263,000,000 for 1997. The primary reason for the decrease in
net revenue is due to the quota share reinsurance treaties with Hannover and
UBL, which reduced net premium by $101,000,000 ($147,000,000 in ceded premium,
offset by an increase in assumed premium of $46,000,000). The remaining
differences were related to an increase in direct premium of $2,700,000, an
increase in other income of approximately $1,700,000, and an increase in
investment income of approximately $700,000.
Total expenses for the group life and health segment in 1998 were
$167,000,000 compared to $283,000,000 for 1997. The decrease in expenses in 1998
is also primarily related to the reinsurance agreements. Claims and losses ceded
plus commission and expense allowances account for approximately $141,000,000 of
the decrease. This decrease was offset by reinsurance commissions and expenses
paid of approximately $14,000,000, an approximate $4,000,000 increase in new
claims and $5,000,000 in costs for outsourcing the computer operations.
The life and annuity segment had revenues of $1,900,000 in 1998, compared
to $2,100,000 in 1997. The decrease was due to a reduction in life premiums
earned in 1998 and investment income due to a decrease in investments. Expenses
were $2,200,000 in 1998, compared to $2,400,000 in 1997. The primary reason for
the decrease was due to a release of reserves applicable to annuities that were
surrendered for cash.
Revenues for the corporate and other segment were $500,000 in 1998,
compared to $200,000 in 1997. The increase in revenue is related to interest
income earned on proceeds received from the July Equity Financing. Expenses
increased to $3,700,000 in 1998, from $1,700,000 in 1997. The increase in
expense is related to (1) interest expense incurred in 1998 on the Bridge Loan,
which was outstanding from December 1997 through July 1998, (2) $850,000 in
stock based compensation expenses incurred related to 1998 employment agreements
with key employees, and (3) an increase in legal and consulting expenses of
approximately $300,000, which resulted from various business strengthening
projects initiated by new management.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is the ability of an enterprise to generate adequate amounts of
cash to meet its financial commitments. The major needs for cash are to enable
Central to pay claims and expenses as they come due. Central's primary sources
of cash are premiums and investment income. Central's payments consist of
current claim payments to insureds, managed care expenses, operating expenses
such as salaries, employee benefits, commissions, taxes, and shareholder
dividends payable to the Company. The Company has, in the past, relied on the
dividend from Central to enable it to pay dividends to shareholders. Central and
the Company discontinued paying dividends at the end of 1996. By statute, the
state regulatory authorities set minimum liquidity standards to protect both
policyholders and shareholders and limit the dividends payable by Central to the
Company.
The majority of the Company's assets are in investments, which were
$89,826,188 after a net unrealized holding gain (before taxes of $564,528) of
$1,660,376, or 50% of the total assets at December 31, 1998. Fixed maturities
are the primary investment of the Company and were $89,731,756 or 99% of total
investments at December 31, 1998. Other investments consist of policy loans. The
Company is carrying fixed maturities of
18
<PAGE> 21
$8,899,659 at amortized cost (held to maturity) and fixed maturities of
$80,832,097 at estimated fair value (available for sale) at December 31, 1998.
The Company does not hold any so-called "junk" bonds or what are generally
considered high-yield type securities, and 100% of the bonds are of investment
grade quality. In addition to the fixed maturities, the Company also had
$15,031,058 in cash and cash equivalents at December 31, 1998 and a $15 million
line of credit with a major bank. There was no amount outstanding on the line of
credit at December 31, 1998. Effective February 17, 1999, this line of credit
was replaced with a $10 million line of credit as described below.
Assets increased 33% to $180,233,135 at December 31, 1998 from $135,803,577
at December 31, 1997. The increase was primarily due to the July Equity
Financing and reinsurance transactions in 1998.
The total policy liabilities and accruals increased to $97,113,067 at
December 31, 1998, or approximately 20%, from $81,090,299 at December 31, 1997.
The increase was primarily due to an increase in reserves for the UBL block of
policies reinsured in the third quarter of 1998. The Company's shareholders'
equity was $35,835,714 at December 31, 1998 compared to $1,511,842 at December
31, 1997. The increase was primarily due to the July Equity Financing.
To provide funds for the acquisition of CGIC, the Company incurred a debt
of $40 million under a Credit Agreement. Under the terms of the Credit
Agreement, dated as of February 17, 1999, among the Company, various lending
institutions and The Chase Manhattan Bank ("Chase"), as Administrative Agent
(the "Credit Agreement"), the first principal payment of $3.0 million is due
February 17, 2000. Quarterly payments are due thereafter starting with $1.0
million through February 17, 2001; $1.5 million thereafter through February 17,
2002; and $2.25 million every three months thereafter to February 17, 2005.
Interest on the outstanding balance will be determined based on whether the
Company selects a "Base Rate Loan" or a "Eurodollar Loan." Under the Base Rate
Loan, the interest rate will be 2.5% per annum plus the higher of(x) the rate
which is 1/2 of 1% in excess of a federal funds rate and (y) Chase's prime rate
as in effect from time to time. Under the Eurodollar Loan, the interest rate
will be 3.5% per annum plus a Eurodollar rate, which is the arithmetic average
of the offered quotation to first-class banks in the interbank Eurodollar market
by Chase, adjusted for certain reserve requirements. The Credit Agreement also
provides for a $10 million line of credit which bears interest at the same rate
as the $40 million loan. There is currently no amount outstanding under the line
of credit.
The Credit Agreement contains financial and other covenants with respect to
the Company that, among other matters: (1) prohibit the payment of cash
dividends on the Shares, except upon compliance with certain conditions; (2)
restrict the creation of liens and sales of assets; and (3) require that the
Company maintain (a) a leverage ratio (consolidated debt to consolidated total
capital) of 0.50 to 1.00 through December 31, 1999, 0.45 to 1.00 thereafter
through December 31, 2000, 0.40 to 1.00 thereafter through December 31, 2001,
and 0.35 to 1.00 thereafter, (b) an interest coverage ratio (consolidated EBITDA
to consolidated interest expense) of 2.0 to 1 through December 31, 1999, 2.5 to
1 through December 31, 2000, and 3.0 to 1 thereafter, (c) a minimum risk-based
capital ratio for any regulated insurance company subsidiary of the Company of
not less than 125%, and (d) a minimum consolidated net worth of $35.0 million
through December 31,1999, $40.0 million thereafter through December 31, 2000,
$50.0 million thereafter through December 31, 2001, $60.0 million thereafter
through December 31, 2002, and $70.0 million thereafter. In addition, the
Company has pledged the common stock of Continental General Corporation, the
parent of CGIC, Central and other insignificant subsidiaries as security for the
Credit Agreement.
The Company believes that cash flow from operating activities will be
sufficient to meet its currently anticipated operating and capital expenditure
requirements. If additional funds are required for long-term growth, the Company
believes that these funds could be obtained through equity or debt offerings as
market conditions permit or dictate. There is no assurance that the Company will
be able to obtain such financing on terms that are favorable to the Company.
19
<PAGE> 22
MARKET RISK AND MANAGEMENT POLICIES
The following is a description of certain risks facing life and accident
and health insurers and how Central mitigates those risks:
Legal/Regulatory Risk is the risk that changes in the legal or regulatory
environment in which an insurer operate will create additional expenses not
anticipated by the insurer in pricing its products. That is, regulatory
initiatives designed to reduce insurer profits or otherwise affecting the
industry in which the insurer operates, new legal theories or insurance company
insolvencies through guaranty fund assessments, may create costs for the insurer
beyond those recorded in the financial statements. Central attempts to mitigate
this risk by offering a wide range of products and by operating in 36 states,
thus reducing its exposure to any single product of non-Federal jurisdiction,
and also by employing underwriting practices which identify and minimize the
adverse impact of this risk.
Inadequate Pricing Risk is the risk that the premium charged for insurance
and insurance related products is insufficient to cover the costs associated
with the distribution of such products which include: benefits, claims and
losses, settlement expenses, acquisition expenses and other corporate expenses.
Central utilizes a variety of actuarial and/or qualitative methods to set such
pricing levels.
Credit Risk is the risk that issuers of securities owned by Central will
default or that other parties, including reinsurers that have obligations to
Central, will not pay or perform. Central attempts to minimize this risk by
adhering to a conservative investment strategy and by maintaining sound
reinsurance and credit and collection policies.
Interest Rate Risk is the risk that interests rates will change and cause a
decrease in the value of an insurer's investments. This change in rates may
cause certain interest-sensitive products to become uncompetitive or may cause
disintermediation Central attempts to mitigate this risk by charging fees for
non-conformance with certain policy provisions and/or by attempting to match the
maturity schedule of its assets with the expected payouts of its liabilities To
the extent that liabilities come due more quickly than assets mature, an insurer
would have to sell assets prior to maturity and recognize a gain or loss.
IMPACT OF YEAR 2000
The Company is devoting significant resources throughout its business
operations to minimize the risk of potential disruption from the Year 2000
("Y2K") issue. This issue is a result of computer programs having been written
using two digits (rather than four) to define the applicable year. Any
information technology ("IT") systems that have time-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000, which
could result in miscalculations and system failures. The issue also extends to
many "non-IT" systems, such as operating and control systems that rely on
embedded computer chips. In addition, like every other business enterprise, the
Company is at risk from Y2K failures on the part of its major business
counterparts, including suppliers, distributors, licensees and manufacturers, as
well as potential failures in public and private infrastructure services,
including electricity, water, gas, transportation and communications.
System failures resulting from the Y2K issue could adversely affect
operations and financial results in all of the Company's business segments.
Failures may affect such routine but important operations as billing and
collection, payroll operations and daily administration of policyholder claims.
The Company also has business relationships with agents and health providers,
such as hospitals and physicians across the nation. These agents and businesses
are themselves reliant on IT and embedded computer chips to conduct their
operations.
The Company has undertaken a plan to resolve the Y2K issue which involves
the following phases: assessment, strategy, implementation and
testing/certification.
Phase 1 -- Assessment. The Company has fully completed its assessment of
all systems that could be significantly affected by Y2K. The completed
assessment indicated that most of Central's significant IT systems could be
affected. Based on the recent assessments, the Company determined that it will
be required
20
<PAGE> 23
to modify or replace significant portions of Central's hardware and software so
that those systems will properly utilize dates beyond December 31, 1999.
The Company in conjunction with an outside vendor has performed an
assessment of the IT applications critical to the processing of the UBL block of
business. The Company has developed a detailed plan relative to transition of
these policies and processing to the systems and anticipates such transition
will be completed in the second and third quarter of 1999.
The Company has performed an assessment of the IT strategy relative to its
recent acquisitions of PALHIC and CGIC. Critical systems processing the business
applications of PALHIC are processed on systems with an independent outside
vendor. A review of the independent outside vendor's Y2K plan has been performed
and the review indicated the plan is underway and many of the Y2K issues have
been resolved. The remaining Y2K issues are scheduled to be completed and
compliance achieved by June 1999.
CGIC has developed a plan for Y2K compliance and as of December 31, 1998,
all operating systems and applications were Y2K compliant. Other systems such as
those controlling payroll, elevators, telephone system and other building
systems are scheduled to be completed and Y2K compliant by June 1999.
Phase 2 -- Strategy. This phase involves the development of appropriate
strategies for both IT and non-IT systems. The selection of an appropriate
strategy is based upon such factors as the assessments made in Phase 1, the type
of system, the availability of a Y2K-compliant replacement and cost. The
strategy phase has been completed for all IT systems. The Company outsourced IT
systems to an outside vendor as of March 31, 1998 for Central and transitioned
processing of certain critical business applications to the outside vendor later
in 1998. The vendor has represented that the IT systems utilized for processing
certain transactions of Central are Y2K compliant as of December 31, 1998.
Central, in conjunction with the outside vendor, has identified other business
application software that is critical to Central's operations and is in the
process of executing remediation plans relative to such applications. For those
applications the Company and the outside vendor anticipate the systems will be
Y2K compliant by July 31, 1999.
Phase 3 -- Implementation. The implementation phase involves creating
detailed project plans, marshaling necessary resources and executing the
strategies chosen. Central's business application software was sent off-site for
Y2K conversion, which has been completed. Other Central software and hardware
are in the stage of being upgraded or replaced. All upgrades are scheduled for
completion by July 31, 1999.
At Central's headquarters, a new telephone and voice mail systems were
installed in the fourth quarter of 1998. Both systems (hardware and software)
are Y2K compliant. The building security/access systems and employee time
tracking system are being replaced and should be completed by the third quarter
of 1999. Elevator and other building facility systems are being reviewed and
will be upgraded as needed by August 1, 1999.
Phase 4 -- Testing and Certification. This phase includes establishing a
test environment, performing system testing and certifying the results. All
mid-range and mainframe applications are being tested using data from production
systems. The Company cannot estimate precisely when the testing phase will be
completed due to the Company's reliance on the use of an outside vendor for
these systems. However, the Company estimates that all testing should be
completed by July 31, 1999 and certified by September 30, 1999.
The Company will utilize both internal and external resources to reprogram
or replace, test and implement the software and operating equipment for Y2K
modifications.
As indicated in Phase 1, above, the strategy, implementation and testing
and certification phases for PALHIC and CGIC have started and are on schedule
for completion in 1999.
Contingency Plans -- As a precautionary measure, the Company is currently
developing contingency plans for all systems by department and business function
which are expected to be in place by the end of the third quarter of 1999. These
plans include information systems recovery, remote site processing and manual
procedures to ensure that critical business functions continue without effecting
customers and business partners. The Company's subsidiaries can process business
on other systems within the group. A special team will create a plan that will
document how business may be transferred between the companies for processing.
21
<PAGE> 24
The outside vendor is also developing a contingency plan to support the
customers of the back office functions. PALHIC and CGIC have developed
contingency plans to support their systems and customers.
Cost -- The total cost of the Y2K project is estimated at $5.5 million of
which approximately 50% consists of costs related to employees of the Company
and is being funded through operating cash flows. To date, the Company has
incurred approximately $2.6 million related to all phases of the Y2K project.
The estimated additional costs are currently expected to be $2.9 million, which
includes PALHIC and CGIC.
Based upon its efforts to date, the Company believes that the vast majority
of both its IT and its non-IT systems, including all critical and important
systems will remain up and running after January 1, 2000. Accordingly, the
Company does not currently anticipate that internal systems failures will result
in any material adverse effect to its operations or financial condition. During
1999, the Company will also continue and expand its efforts to ensure that major
third-party businesses and public and private providers of infrastructure
services, such as utilities, communications services and transportation, will
also be prepared for Y2K, and to develop contingency plans to address any
failures on their part to become Y2K compliant. At this time, the Company
believes that the most likely "worst-case" scenario involves potential
disruptions in areas in which the Company's operations must rely on the outside
vendor. While such failures could affect important operations of the Company and
its subsidiaries, either directly or indirectly, in a significant manner, the
Company cannot at present estimate either the likelihood or the potential cost
of such failures.
The nature and focus of the Company's efforts to address the Y2K problem
may be revised periodically as interim goals are achieved or new issues are
identified. In addition, it is important to note that the description of the
Company's efforts necessarily involves estimates and projections with respect to
activities required in the future. These estimates and projections are subject
to change as work continues, and such changes may be substantial.
IMPACT OF INFLATION:
Inflation rates impact the Company's financial condition and operating
results in several areas. Changes in inflation rates impact the market value of
the investment portfolio and yields on new investments.
Inflation has had an impact on claim costs and overall operating costs and
although it has been lower in the last few years, hospital and medical costs
have still increased at a higher rate than general inflation, especially in
prescription drug costs. New, more-expensive and wider use of pharmaceuticals is
inflating health care costs. The Office of Personnel Management reported the
costs of prescription drugs increased by 22% in 1998. While to a certain extent
these increased costs are offset by interest rates (investment income), hospital
charges increased, while the rate of income from investments has not increased
proportionately. The Company will continue to establish premium rates in
accordance with trends in hospital and medical costs along with concentrating on
various cost containment programs. However, there can be no assurance that these
efforts by the Company will fully offset the impact of inflation or that
premiums will equal or exceed increasing health care costs.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS:
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement No. 133, Accounting for Derivative Instruments and Hedging Activities,
which is required to be adopted in years beginning after June 15, 1999. The
Statement permits early adoption as of the beginning of any fiscal quarter after
its issuance. The Company expects to adopt the new Statement effective January
1, 2000. The Statement will require the Company to recognize all derivatives on
the balance sheet at fair value. Derivatives that are not hedges must be
adjusted to fair value through income. If a derivative is a hedge, depending on
the nature of the hedge, changes in the fair value of the derivative will either
be offset against the change in fair value of the hedged asset, liability, or
firm commitment through earnings, or recognized in other comprehensive income
until the hedged item is recognized in earnings. The ineffective portion of a
derivative's change in fair value will be immediately recognized in earnings.
The Company does not anticipate that the adoption of this Statement will have a
significant effect on its results of operations or financial position.
22
<PAGE> 25
In December 1997, the AICPA issued SOP 97-3, Accounting by Insurance and
Other Enterprises for Insurance-Related Assessments, which provides guidance for
determining when an insurance or other enterprise should recognize a liability
for guaranty-fund and other insurance-related assessments and guidance for
measuring the liability. This statement is effective for the Company's 1999
financial statements with early adoption permitted. The Company does not expect
adoption of this statement to have a material effect on its financial position
or results of operations.
FORWARD-LOOKING STATEMENTS:
This report on Form 10-K contains both historical and forward-looking
statements. Forward-looking statements are statements other than historical
information or statements of current condition. The forward-looking statements
relate to the plans and objectives of the Company for future operations. In
light of the risks and uncertainties inherent in all future projections, the
inclusion of the forward-looking statements should not be regarded as a
representation by the Company or any other person that the objectives or plans
of the Company will be achieved. Many factors could cause the Company's actual
results to differ materially from those in the forward-looking statements,
including the following:
- the failure to successfully integrate the businesses of PALHIC, CGIC or
UBL into the Company, including the failure to achieve cost
consolidations;
- rising health care costs;
- business conditions and competition in the health care industry;
- developments in health care reform and other regulatory issues;
- changes in laws and regulations affecting the Company's business;
- adverse changes in interest rates;
- unforeseen losses with respect to loss and settlement expense reserves
for unreported and reported claims;
- the Company's ability to develop, distribute and administer competitive
products and services in a timely cost-effective manner;
- the Company's visibility in the market place and its financial and claims
paying ratings;
- the costs of defending litigation and the risk of unanticipated material
adverse outcomes in such litigation, including the litigation with the
Internal Revenue Service;
- the performance of others on whom the Company relies for reinsurance;
- the risk that issuers of securities owned by the Company will default or
that other parties will not pay or perform;
- changes in accounting and reporting practices;
- the failure to complete the Y2K conversion, including the success of the
outside vendor of Central in being Y2K compliant; and
- the effect of any future acquisitions.
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 report, including the risks detailed under "Market
Risk and Management Policies." 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.
23
<PAGE> 26
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Market Risk and Management Policies" section under Item
7. -- Management's Discussion and Analysis of Financial Condition and Results of
Operation.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
CERES GROUP, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Reports............................... 25
Consolidated Balance Sheets as of December 31, 1998 and
1997...................................................... 27
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996.......................... 28
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1998, 1997 and 1996.............. 29
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996.......................... 30
Notes to Consolidated Financial Statements for the years
ended December 31, 1998, 1997 and 1996.................... 31
Schedule II -- Condensed Financial Information of
Registrant -- Ceres Group, Inc. (Parent Only)............. 50
Schedule III -- Supplementary Insurance Information......... 53
Schedule IV -- Reinsurance.................................. 54
</TABLE>
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<PAGE> 27
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Directors Ceres Group, Inc.
We have audited the consolidated balance sheet of Ceres Group, Inc. and
subsidiaries (formerly Central Reserve Life Corporation) as of December 31,
1998, and the related consolidated statements of operations, shareholders'
equity, and cash flows for the year then ended. We have also audited the
information presented in the supplemental schedules as of and for the year ended
December 31, 1998. These consolidated financial statements and supplemental
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion on these consolidated financial statements and
supplemental schedules based on our audit. The consolidated balance sheet of
Ceres Group, Inc. and subsidiaries for the year ended December 31, 1997, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the two years ended December 31, 1997, and the information
presented in the supplemental schedules for those years were audited by other
auditors, whose report dated February 20, 1998, except for Notes B and C, as to
which the date was March 30, 1998, expressed an unqualified opinion on those
statements and supplemental schedules and included an explanatory paragraph that
expressed substantial doubt about the Company's ability to continue as a going
concern, as discussed in Note C to these financial statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audit and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of Ceres Group, Inc. and subsidiaries, at December 31,
1998 and 1997, and the results of its operations and cash flows for each of the
three years ended December 31, 1998, in conformity with generally accepted
accounting principles. Also in our opinion, the related supplemental schedules,
when considered in relation to the basic consolidated financial statements taken
as a whole, present fairly, in all material respects, the information set forth
therein.
Ernst & Young LLP
Cleveland, Ohio
March 17, 1999
25
<PAGE> 28
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Central Reserve Life Corporation:
We have audited the consolidated financial statements of Central Reserve
Life Corporation and subsidiaries as of and for each of the years in the
two-year period ended December 31, 1997 as listed in the accompanying index. In
connection with our audits of the consolidated financial statements, we also
have audited the financial statement schedules as of and for each of the years
in the two-year period ended December 31, 1997 as listed in the accompanying
index. These consolidated financial statements and financial statement schedules
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and financial
statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimate made by
management, as well as evaluating the overall financial statement presentation.
We believe that out audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Central
Reserve Life Corporation and subsidiaries as of December 31, 1997, and the
results of their operations and their cash flows for each of the years in the
two-year period ended December 31, 1997, in conformity with generally accepted
accounting principles. Also in our opinion, the related financial statement
schedules, when considered in relation to the basic consolidated financial
statements taken as a whole, present fairly, in all material respects, the
information set forth therein.
The accompanying consolidated financial statements and financial statement
schedules have been prepared assuming that the Company will continue as a going
concern. As discussed in Note C to the consolidated financial statements, the
Company has suffered substantial losses from operations in 1997 and 1996 that
resulted in a significantly reduced net capital position. The Company has
entered into an Amended and Restated Stock Purchase Agreement to issue and sell
7,300,000 Common Shares and warrants to purchase an additional 3,650,000 Common
Shares at an exercise price of $5.50 per share for an aggregate purchase price
of $40,150,000. The closing of the Amended and Restated Stock Purchase Agreement
in subject to shareholder approval and regulatory approvals. In December 1997,
the Company obtained an interim loan of $20 million and that loan is due June
30, 1998. Should the Amended and Restated Stock Purchase Agreement not be
completed before June 30, 1998, and due to regulatory limitations on the
Company's ability to receive dividends from its insurance subsidiary, the
Company, absent some alternative capital resource, will not have the ability to
repay the interim loan. These matters raise substantial doubt about the ability
of the Company to continue as a going concern. Management's plans in regard to
these matters are also described in Note C to the consolidated financial
statements. The accompanying consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
Columbus, Ohio KPMG LLP
February 20, 1998, except for Notes B and C,
as to which the date is March 30, 1998.
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<PAGE> 29
CERES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Investments
Fixed maturities--Note E:
Held-to-maturity, at amortized cost.................... $ 8,899,659 $ 11,898,627
Available-for-sale, at fair value...................... 80,832,097 67,961,886
------------ ------------
Total fixed maturities............................ 89,731,756 79,860,513
Policy loans.............................................. 94,432 96,211
------------ ------------
Total investments................................. 89,826,188 79,956,724
Cash and cash equivalents................................... 15,031,058 7,602,865
Cash--restricted--Note E.................................... 4,345,322 3,930,956
Accrued investment income................................... 1,343,297 1,123,693
Premiums receivable......................................... 2,203,690 2,098,243
Note receivable--Note I..................................... 7,367,556 --
Reinsurance receivable--Note I.............................. 41,417,031 26,215,765
Property and equipment, net................................. 10,061,688 10,966,512
Deferred federal income taxes--Note G....................... 1,409,479 1,356,000
Deferred acquisition costs.................................. 3,809,737 325,572
Other assets................................................ 3,418,089 2,227,247
------------ ------------
Total assets...................................... $180,233,135 $135,803,577
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Policy liabilities and accruals:
Future policy benefits, losses and claims................. $ 22,717,862 $ 24,903,497
Other policy claims and benefits payable--Note H.......... 74,395,205 56,186,802
------------ ------------
97,113,067 81,090,299
Deferred reinsurance gain--Note I........................... 13,400,000 10,000,000
Other policyholders' funds.................................. 8,845,829 7,565,341
Federal income taxes payable--Note G........................ 1,105,834 385,834
Note payable--Note B........................................ -- 20,000,000
Mortgage note payable--Note J............................... 8,283,884 8,399,028
Reinsurance payable......................................... 2,993,400 --
Commissions payable......................................... 2,978,140 2,794,026
Other liabilities........................................... 9,677,267 4,057,207
------------ ------------
Total liabilities................................. 144,397,421 134,291,735
Shareholders' equity:
Non-voting preferred shares, $.001 par value, 2,000,000
shares authorized, none issued--Note L................. -- --
Common shares, 30,000,000 shares authorized, $.001 par
value, 11,495,172 shares issued and outstanding in
1998, and 15,000,000 shares authorized, no par value,
$.50 stated value, 4,195,172 shares issued and
outstanding in 1997--Note B............................ 11,495 2,097,586
Additional paid-in capital................................ 43,883,357 4,122,319
Retained earnings (deficit)............................... (9,154,986) (5,319,327)
Accumulated other comprehensive income.................... 1,095,848 611,264
------------ ------------
Total shareholders' equity........................ 35,835,714 1,511,842
------------ ------------
Total liabilities and shareholders' equity........ $180,233,135 $135,803,577
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE> 30
CERES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES
Premiums--Note I:
Direct...................................... $264,868,186 $262,161,343 $260,076,097
Assumed..................................... 45,922,385 -- --
Ceded....................................... (150,005,674) (3,302,036) (1,900,760)
------------ ------------ ------------
160,784,897 258,859,307 258,175,337
Net investment income--Note E.................. 7,454,180 6,527,537 6,700,741
Net realized gains--Note E..................... 210,857 146,478 9,517
Other income................................... 1,096,690 -- --
Amortization of deferred reinsurance gain--Note
I........................................... 600,000 -- --
------------ ------------ ------------
170,146,624 265,533,322 264,885,595
BENEFITS, LOSSES AND EXPENSES
Benefits, claims, losses and settlement
expenses.................................... 116,058,675 210,776,366 203,677,232
Underwriting, acquisition and insurance
expenses--Note I............................ 54,368,115 74,763,640 72,417,673
Amortization of deferred acquisition costs..... 647,271 4,005 111,807
Interest expense and financing costs........... 1,841,334 1,078,198 812,833
------------ ------------ ------------
172,915,395 286,622,209 277,019,545
------------ ------------ ------------
Loss before federal income taxes................. (2,768,771) (21,088,887) (12,133,950)
Federal income tax expense (benefit)--Note G..... 1,066,888 (132,531) (2,845,585)
------------ ------------ ------------
NET LOSS......................................... $ (3,835,659) $(20,956,356) $ (9,288,365)
============ ============ ============
Basic and diluted loss per common share.......... $(.49) $(5.01) $(2.29)
</TABLE>
See accompanying notes to consolidated financial statements.
28
<PAGE> 31
CERES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ACCUMULATED
RETAINED OTHER
ADDITIONAL EARNINGS COMPREHENSIVE TOTAL
COMMON PAID IN (ACCUMULATED INCOME SHAREHOLDERS'
STOCK CAPITAL DEFICIT) (LOSS) EQUITY
---------- ----------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1996........... $2,018,750 $ 3,476,940 $27,030,102 $ 775,188 $33,300,980
Cash dividends................... -- -- (2,104,708) -- (2,104,708)
Exercise of stock options--Note
K.............................. 10,015 46,848 56,863
Private placement................ 43,821 482,031 -- -- 525,852
Comprehensive loss:
Net loss....................... -- -- (9,288,365) -- (9,288,365)
Other comprehensive loss, net:
Unrealized loss on
securities................ -- -- -- (1,029,106) (1,029,106)
Reclassification adjustment
for loss included in
operations................ -- -- -- 6,281 6,281
---------- ----------- ----------- ----------- -----------
Other comprehensive loss.... -- -- -- -- (1,022,825)
---------- ----------- ----------- ----------- -----------
Comprehensive loss............. -- -- -- -- (10,311,190)
---------- ----------- ----------- ----------- -----------
Balance, December 31, 1996......... 2,072,586 4,005,819 15,637,029 (247,637) 21,467,797
Exercise of stock options--Note
K.............................. 25,000 116,500 -- -- 141,500
Comprehensive loss:
Net loss....................... -- -- (20,956,356) -- (20,956,356)
Other comprehensive income,
net:
Unrealized gain on
securities................ -- -- -- 955,576 955,576
Reclassification adjustment
for gains included in
operations................ -- -- -- (96,675) (96,675)
---------- ----------- ----------- ----------- -----------
Other comprehensive
income.................... -- -- -- -- 858,901
---------- ----------- ----------- ----------- -----------
Comprehensive loss............. -- -- -- -- (20,097,455)
---------- ----------- ----------- ----------- -----------
Balance, December 31, 1997......... 2,097,586 4,122,319 (5,319,327) 611,264 1,511,842
Issuance of common shares--Note
B.............................. 3,650,000 34,024,947 -- -- 37,674,947
Change to $.001 par value........ (5,736,091) 5,736,091 -- -- --
Comprehensive loss:
Net loss....................... -- -- (3,835,659) -- (3,835,659)
Other comprehensive income,
net:
Unrealized gain on
securities................ -- -- -- 613,764 613,764
Reclassification adjustment
for gains included in
operations................ -- -- -- (129,180) (129,180)
---------- ----------- ----------- ----------- -----------
Other comprehensive income..... -- -- -- -- 484,584
---------- ----------- ----------- ----------- -----------
Comprehensive loss................. -- -- -- -- (3,351,075)
---------- ----------- ----------- ----------- -----------
Balance, December 31, 1998......... $ 11,495 $43,883,357 $(9,154,986) $ 1,095,848 $35,835,714
========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
29
<PAGE> 32
CERES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
----------- ------------ -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss................................................... $(3,835,659) $(20,956,356) $(9,288,365)
Adjustments to reconcile net loss to cash provided by (used
in) operating activities:
Depreciation and amortization............................ 513,328 840,864 1,057,473
Net realized gains....................................... (210,857) (146,478) (9,517)
Deferred federal income tax benefit...................... (382,240) (722,531) (36,673)
Changes in assets and liabilities:
Restricted cash........................................ (414,366) (108,533) 164,081
Premiums receivable.................................... (105,447) 950,783 (1,195,921)
Reinsurance receivable................................. (15,201,266) (1,353,765) --
Federal income tax payable............................. 720,000
Federal income taxes recoverable....................... 2,245,530 (1,919,150)
Accrued investment income.............................. (219,604) (135,157) (15,156)
Other assets........................................... (1,190,845) (1,100,239) (149,552)
Future policy benefits, claims and funds payable....... 21,938,976 8,611,801 11,805,490
Reinsurance payable.................................... 2,993,400 -- --
Commissions payable.................................... (184,114) -- --
Other liabilities...................................... 5,620,060 981,720 1,366,844
Deferred Policy acquisition costs...................... 3,484,165 -- --
Deferred Reinsurance gain.............................. (3,400,000) -- --
----------- ------------ -----------
Net cash provided by (used in) operating activities........ 10,493,762 (10,892,361) 1,779,554
----------- ------------ -----------
INVESTING ACTIVITIES
Net disposals (purchases) of furniture and equipment....... 301,954 (763,124) 244,652
Purchase of fixed maturities held-to-maturity.............. (5,702)
Purchase of fixed maturities available-for-sale............ (33,099,685) (22,113,291) (10,977,540)
Decrease in Policy loans, net.............................. (1,779) (15,435) (5,205)
Proceeds from sale of fixed maturities
available-for-sale....................................... 7,836,700 3,528,625 176,925
Proceeds from calls and maturities of fixed maturities
available-for-sale....................................... 13,317,705 19,722,467 10,747,238
Proceeds from calls and maturities of fixed maturities
held-to-maturity......................................... 3,023,009 13,131 102,803
----------- ------------ -----------
Net cash (used in) provided by investing activities........ (8,622,096) 366,671 288,873
----------- ------------ -----------
FINANCING ACTIVITIES
Increase in annuity account balances....................... 482,504 1,269,307 2,926,416
Decrease in annuity account balances....................... (5,118,224) (4,387,246) (2,110,618)
Principal payments on long-term debt....................... (115,144) (104,748) (95,291)
Increase in note receivable................................ (7,367,556)
Proceeds from notes payable................................ -- 25,200,000 --
Repayment of note payable.................................. (20,000,000) (5,200,000) --
Proceeds from exercise of stock options.................... 141,500 56,863
Proceeds from issuance of common shares.................... 37,674,947 -- --
Proceeds from private placement to agents, directors....... -- -- 525,852
Dividends.................................................. -- -- (2,104,708)
Reinsurance ceding allowance, net.......................... -- (14,550,000) --
----------- ------------ -----------
Net cash provided by (used in) financing activities........ 5,556,527 2,368,813 (801,486)
----------- ------------ -----------
Net increase (decrease) in cash............................ 7,428,193 (8,156,877) 1,266,941
Cash and cash equivalents at beginning of year............. 7,602,865 15,759,742 14,492,801
----------- ------------ -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR................... $15,031,058 $ 7,602,865 $15,759,742
=========== ============ ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for interest..................... $ 1,661,880 $ 1,012,098 $ 812,833
Cash paid (received) during the year for income taxes...... $ 650,000 $ 590,000 $ (889,762)
</TABLE>
See accompanying notes to consolidated financial statements.
30
<PAGE> 33
CERES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
A. SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
SUMMARY OF BUSINESS
Ceres Group, Inc. (the "Company"), known as Central Reserve Life
Corporation prior to December 8, 1998, operated in 1998 and prior periods
primarily through its wholly-owned subsidiary, Central Reserve Life Insurance
Company ("Central"). Central is a life and accident and health insurer,
domiciled in Ohio, offering a full range of life, health, and annuity products
distributed through general agents and independent writing agents. While Central
is licensed in 36 states, approximately 67% of premium volume is generated from
seven states: Ohio, Indiana, North Carolina, Arizona, Michigan, South Carolina,
and Tennessee. As described more fully in Notes D and I, in the latter half of
1998 and early 1999, the Company completed a quota share reinsurance transaction
and two acquisitions, which management anticipates will expand the business of
the Company.
SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements include the accounts of
Ceres Group, Inc. and its wholly-owned subsidiaries, including Central and
Provident American Life and Health Insurance Company, collectively referred to
herein as the "Company." All intercompany transactions have been eliminated in
consolidation.
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles ("GAAP"), which differ from accounting
practices prescribed or permitted by the Ohio Department of Insurance (see Note
M). A summary of significant accounting policies is as follows:
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash and all highly-liquid securities
with maturities of 90 days or less when purchased.
INVESTMENTS
Investments in bonds and mandatory redeemable preferred stocks are
designated at purchase as held-to-maturity or available-for-sale.
Held-to-maturity investments are securities which management has the positive
intent and ability to hold until maturity, and are reported at amortized cost.
Available-for-sale investments are reported at fair value, with unrealized
holding gains and losses reported as a separate component of shareholders'
equity, net of deferred federal income taxes.
Investments in equity securities and non-redeemable preferred stocks are
reported at fair value.
Premiums and discounts arising from the purchase of mortgage-backed
securities are amortized using the interest method over the estimated remaining
term of the securities, adjusted for anticipated prepayments.
Realized gains and losses on the sale of investments are determined using
the specific-identification method, and are credited or charged to income.
The estimated fair value of investments is based upon quoted market prices,
where available, or on values obtained from independent pricing services.
31
<PAGE> 34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
DEFERRED ACQUISITION COSTS
The costs of acquiring and renewing traditional life insurance, principally
commissions, are deferred and amortized over the premium-paying period of the
related policies using assumptions consistent with those used in computing
policy benefit reserves. In 1998, deferred acquisition costs also include
amounts paid to acquire accident and health blocks of business via reinsurance
(see Note I).
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost less allowances for depreciation
and amortization. The home office building is depreciated on the straight-line
method over 31.5 years, except for certain components which are depreciated over
15 years. Depreciation for other property and equipment is computed on the
straight-line basis over the estimated useful lives of the equipment,
principally five and seven years.
POLICY RESERVES
Liabilities for future policy reserves on ordinary life insurance have
generally been provided on a net level premium method based upon estimates of
future investment yield, mortality, and withdrawals using the Company's
experience and actuarial judgment with an allowance for possible unfavorable
deviation from the expected experience. Future policy benefits for annuity
policies in the accumulation phase have been calculated based on the
participant's aggregate account values. The liability for future policy benefit
reserves has been computed using the following assumptions: (i) the guaranteed
interest on policies currently being issued is 4.5%, and (ii) estimates of
future mortality and withdrawals are based on experience and established
industry tables.
LIFE AND ACCIDENT AND HEALTH CLAIM RESERVES
Liabilities for unpaid life and accident and health claims, which include a
provision for estimated costs to investigate and settle claims, are estimated
based upon past experience for pending, incurred but not reported, and reopened
claims. Accident and health claims incurred but not reported are computed using
actuarially-determined factors based on a combination of claim completion and
projected claim cost methods, utilizing durational experience, seasonal cycle,
changes in health care practice, changes in inflation rates, and the claims
backlog. Although considerable variability is inherent in such computations,
management believes that the liabilities for unpaid life and accident and health
claims are adequate. The estimates are continually reviewed and adjusted as
necessary as experience develops or new information becomes known; such
adjustments are included in current operations.
DEFERRED REINSURANCE GAIN
Deferred reinsurance gain consists of initial ceding allowances received
from reinsurers. Such amounts are amortized into income over the estimated
remaining life of the underlying policies reinsured.
COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted FASB Statement No. 130,
Reporting Comprehensive Income ("FAS 130"). FAS 130 establishes new rules for
the reporting and display of comprehensive income and its components; however,
the adoption of this Statement had no impact on the Company's net income or
shareholders' equity. FAS 130 requires unrealized gains or losses on the
Company's available-for-sale securities, which prior to adoption were reported
separately in shareholders' equity, to be included in other comprehensive
income. Prior year financial statements have been reclassified to conform to the
requirements of FAS 130.
32
<PAGE> 35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PREMIUM REVENUE
Life premiums are recognized as revenue when they become due. Accident and
health premiums are recognized as revenue over the terms of the policies.
Amounts received from contracts which do not subject the Company to risks
arising from policyholder mortality or morbidity, principally certain deferred
and flexible annuity products, are not reflected in premium revenue; rather,
such amounts are accounted for as deposits and are included in future policy
benefits, losses and claims.
FEDERAL INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
STOCK-BASED COMPENSATION
The intrinsic value method of accounting is used for stock-based
compensation plans. In accordance with the intrinsic value method, compensation
cost is measured as the excess, if any, of the quoted market price of the equity
instrument awarded at the measurement date over the amount an employee must pay
to acquire the equity instrument. Stock-based compensation costs are recognized
over the period in which employees render services associated with the awards.
EARNINGS PER SHARE
Basic earnings per share are computed by dividing the income available to
common shareholders by the weighted average number of common shares outstanding
for the period. Diluted earnings per share reflects the potential dilution that
could occur if common stock equivalents were exercised and shared in the
earnings of the Company. Only those potential common shares which are dilutive
are included in the computation of diluted earnings per share.
USE OF ESTIMATES
The consolidated financial statements reflect estimates and judgments made
by management that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as of the date of the financial
statements and revenues and expenses for the reporting period. Actual results
could differ significantly from those estimates.
OPERATING SEGMENTS
In June 1997, the FASB issued Statement No. 131, Disclosures About Segments
of an Enterprise and Related Information ("FAS 131"). FAS 131 requires that a
public business enterprise report a measure of segment profit or loss, certain
specific revenue and expense items, and segment assets. It requires
reconciliations of total segment revenues, total segment profit or loss, total
segment assets, and other amounts disclosed for segments to corresponding
amounts in the enterprise's general-purpose financial statements. FAS 131 also
requires that a public business enterprise report descriptive information about
the way that the operating segments were determined, the products and services
provided by the operating segments, differences between the measurements used in
reporting segment information and those used in the enterprise's general-purpose
financial statements, and changes in the measurement of segment amounts from
period to period.
33
<PAGE> 36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
RECLASSIFICATION
Certain amounts presented in the prior year's financial statements have
been reclassified to conform to the current year's method of presentation.
B. EQUITY TRANSACTIONS
In November 1997, the Company entered into a Stock Purchase Agreement
("Original Stock Purchase Agreement") with Strategic Acquisition Partners, LLC
("Strategic"), wherein the Company agreed to issue and sell 5,000,000 common
shares and warrants to purchase an additional 2,500,000 common shares at an
exercise price of $6.50 per share, for an aggregate purchase price of
$27,500,000. On March 30, 1998, the Company entered into an amended and restated
Stock Purchase Agreement ("New Stock Purchase Agreement") with Strategic and two
additional investors: Insurance Partners, L.P. and Insurance Partners Offshore
(Bermuda), L.P. (collectively, "Insurance Partners"). The New Stock Purchase
Agreement was subsequently approved by shareholders, and accordingly, in July
1998 the Company issued and sold 7,300,000 common shares at $5.50 per share and
warrants to purchase an additional 3,650,000 common shares at an exercise price
of $5.50 per share, which expire July 2, 2005, and received proceeds of
$37,675,000, which are net of transaction expenses.
In connection with the Original Stock Purchase Agreement, Strategic
arranged an interim loan (the "Bridge Loan") of $20,000,000 to the Company. The
bridge loan was due June 30, 1998, and bore interest at the prime rate of a
major commercial bank. As consideration for the arrangement, the Company issued
Strategic warrants to purchase 800,000 common shares at $6.00 per share in
December 1997, which expire December 2002, and additional warrants to purchase
200,000 common shares at $6.00 per share in July 1998, which expire on July 2,
2003. Proceeds from the Bridge Loan were used as follows: (i) $5,200,000 was
used to repay outstanding bank debt, (ii) $14,000,000 was used by the Company to
invest in the statutory surplus of Central, and was evidenced by a surplus note
in favor of the Company from Central, and (iii) $800,000 was used to establish
an interest reserve at the Company and to pay transaction expenses. The Bridge
Loan was repaid in full by the Company in July 1998 from the proceeds received
in accordance with the New Stock Purchase Agreement.
C. PRIOR YEAR OPERATING RESULTS
In 1997 and 1996, the Company incurred net losses of approximately
$21,000,000 and $9,300,000, respectively, which resulted in a significantly
reduced net capital position. In addition, at December 31, 1997, it was not
clear if shareholder approval would be granted for the Original Stock Purchase
Agreement or New Stock Purchase Agreement described in Note B. If shareholder
approval had not been granted, the Company would have been required to
immediately obtain an alternate source of funding in order to repay the Bridge
Loan and fund its operations. There was no assurance that such funding could
have been obtained at all or on terms favorable to the Company. The failure to
obtain such funding could have resulted in Strategic exercising its rights as a
secured creditor, and foreclosing upon all the common shares of Central, which
were pledged as collateral under the terms of the Bridge Loan. Such action would
have made it impossible for the Company to continue operations and/or forced the
Company to seek protection under federal bankruptcy law. These matters raised
significant doubt at December 31, 1997 about the Company's ability to continue
as a going concern.
As discussed in Note B, the New Stock Purchase Agreement was approved by
shareholders, resulting in the Company's receipt of net proceeds of $37,675,000,
enabling the Company to satisfy the Bridge Loan obligation and fund operations.
In addition, as reported in the accompanying consolidated financial statements,
the Company reported profitable operations in the third and fourth quarters of
1998. Accordingly, the matters
34
<PAGE> 37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
which raised substantial doubt about the Company's ability to continue as a
going concern at December 31, 1997 have been alleviated.
D. BUSINESS COMBINATIONS
PROVIDENT AMERICAN LIFE AND HEALTH INSURANCE COMPANY
On December 31, 1998, Central acquired 100% of the outstanding common stock
of Provident American Life and Health Insurance Company ("PALHIC") from
Provident American Corporation ("PAMCO") for $5,505,000. PALHIC is a life and
accident and health insurer, domiciled in Pennsylvania, licensed in 40 states
and the District of Columbia, that markets managed care health insurance
products to individuals and small businesses, and critical illness coverage.
Funds for the acquisition were provided from Central's working capital. This
transaction has been accounted for in the accompanying consolidated financial
statements in accordance with the purchase method and accordingly, the purchase
price was allocated to assets and liabilities acquired based upon estimates of
their fair values. There is no impact on the accompanying consolidated statement
of operations for 1998 as a result of this transaction. Revenues of PALHIC are
not material to the consolidated revenues of the Company.
The fair value of assets acquired totaled $6,472,000, consisted principally
of bonds and cash, and liabilities assumed of $967,000, which relate principally
to premiums taxes payable.
Immediately prior to the completion of this transaction, PALHIC ceded 100%
of its insurance in force to Provident Indemnity Life Insurance Company
("PILIC"), a subsidiary of PAMCO.
Effective January 1, 1999, Reassurance Company of Hannover ("Hannover")
assumed from PILIC 100% of its accident and health block of business. As of
January 1, 1999, Central entered into a separate reinsurance agreement with
Hannover, wherein Central assumed from Hannover 10% of the block acquired by
Hannover from PILIC.
CONTINENTAL GENERAL CORPORATION
On February 17, 1999, the Company acquired 100% of the outstanding common
stock of Continental General Corporation ("Continental") from the Western &
Southern Life Insurance Company, a mutual life insurance company domiciled in
Ohio. Continental is a holding company that primarily conducts business through
its wholly-owned subsidiary, Continental General Insurance Company ("CGIC"), a
life and accident and health insurer domiciled in Nebraska, licensed in 49
states. CGIC offers Medicare supplement and individual major medical products,
distributed through independent agents. CGIC also offers long-term care,
ordinary life, universal life, and annuity policies. CGIC has approximately
$215,000,000 in premiums in 1998 and at December 31, 1998 had approximately
$400,000,000 in assets and $37,000,000 in statutory capital and surplus. Total
consideration paid by the Company for the common stock was approximately
$84,500,000, and was financed through reinsurance, debt, cash, and an equity
offering as described further below. This transaction will be accounted for in
accordance with the purchase method.
Effective February 17, 1999, CGIC entered into a reinsurance treaty with
Hannover, whereby CGIC ceded 50% of its in force life, accident and health, and
annuity policies to Hannover, and retained the remaining risk. The treaty
provides an initial ceding allowance of $13,000,000, which will be accounted for
as a deferred reinsurance gain.
On February 17, 1999, the Company entered into a $40,000,000 credit
facility with a syndicate of major commercial banks. In accordance with the
terms of the loan, the first principal payment of $3,000,000 is due February 17,
2000. Quarterly payments are due thereafter as follows: $1,000,000 through
February 17, 2001; $1,500,000 thereafter through February 17, 2002; and
$2,250,000 every three months thereafter to Febru-
35
<PAGE> 38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ary 17, 2005. The loan bears interest at a variable rate (approximately 8.75% at
February 17, 1999). The Company has pledged the common stock of Continental and
Central as security for the loan. The credit facility prohibits the payment of
dividends upon the Company's Common Shares, except upon compliance with certain
conditions.
Effective February 17, 1999, the Company entered into a series of stock
subscription agreements with a group of investors, principally Strategic and
Insurance Partners, wherein the Company issued 2,000,000 common shares at $7.50
per share for $15,000,000.
E. CASH AND INVESTMENTS
The amortized cost and estimated fair value of securities held-to-maturity
and available-for-sale as of December 31, 1998, are as follows:
<TABLE>
<CAPTION>
GROSS UNREALIZED
AMORTIZED ---------------------- ESTIMATED
COST GAINS LOSSES FAIR VALUE
----------- ---------- --------- -----------
<S> <C> <C> <C> <C>
Held-to-maturity:
U.S. Treasury securities........... $ 4,534,001 $ 46,682 $ -- $ 4,580,683
Mortgage-backed securities:
Federal Home Loan Mortgage...... 2,944,479 38,035 -- 2,982,514
Federal National Mortgage....... 1,421,179 33,574 -- 1,454,753
----------- ---------- --------- -----------
Total held-to-maturity..... $ 8,899,659 $ 118,291 $ -- $ 9,017,950
=========== ========== ========= ===========
Available-for-sale:
U.S. Treasury securities........... $11,137,331 $ 243,367 $ -- $11,380,698
U.S. Agencies...................... 3,720,150 147,169 -- 3,867,319
Obligations of states,
municipalities and political
subdivisions.................... 600,000 13,711 -- 613,711
Corporate bonds.................... 43,388,321 866,933 (104,090) 44,151,164
Canadian bonds..................... 6,800,033 172,228 (36) 6,972,225
Mortgage-backed securities:
Federal Home Loan Mortgage...... 2,751,593 53,551 -- 2,805,144
Federal National Mortgage....... 3,221,119 26,887 -- 3,248,006
Other........................... 7,553,174 242,006 (1,350) 7,793,830
----------- ---------- --------- -----------
Total available-for-sale... $79,171,721 $1,765,852 $(105,476) $80,832,097
=========== ========== ========= ===========
</TABLE>
The amortized cost and estimated fair value of securities held-to-maturity
and available-for-sale as of December 31, 1997, are as follows:
<TABLE>
<CAPTION>
GROSS UNREALIZED
AMORTIZED ---------------------- ESTIMATED
COST GAINS LOSSES FAIR VALUE
----------- ---------- --------- -----------
<S> <C> <C> <C> <C>
Held-to-maturity:
U.S. Treasury securities........... $ 7,549,309 $ 7,869 $ (52,334) $ 7,504,844
Mortgage-backed securities:
Federal Home Loan Mortgage...... 2,928,408 11,389 (767) 2,939,030
Federal National Mortgage....... 1,397,987 17,353 -- 1,415,340
Other........................... 22,923 163 (32) 23,054
----------- ---------- --------- -----------
Total held-to-maturity..... $11,898,627 $ 36,774 $ (53,133) $11,882,268
=========== ========== ========= ===========
</TABLE>
36
<PAGE> 39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GROSS UNREALIZED
AMORTIZED ---------------------- ESTIMATED
COST GAINS LOSSES FAIR VALUE
----------- ---------- --------- -----------
<S> <C> <C> <C> <C>
Available-for-sale:
U.S. Treasury securities........... $ 8,554,542 $ 194,270 -- $ 8,748,812
U.S. Agencies...................... 6,948,504 115,246 -- 7,063,750
Obligations of states,
municipalities and political
subdivisions.................... 600,000 3,199 -- 603,199
Corporate bonds.................... 29,137,110 598,824 $ (83,046) 29,652,888
Canadian bonds..................... 1,531,661 17,356 (1,377) 1,547,640
Mortgage-backed securities:
Federal Home Loan Mortgage...... 6,408,695 112,977 (6,415) 6,515,257
Federal National Mortgage....... 5,427,383 51,161 (6,200) 5,472,344
Other........................... 8,427,833 172,641 (242,478) 8,357,996
----------- ---------- --------- -----------
Total available-for-sale... $67,035,728 $1,265,674 $(339,516) $67,961,886
=========== ========== ========= ===========
</TABLE>
The amortized cost and estimated fair value of fixed maturities at December
31, 1998, by contractual maturity, are as follows:
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
COST FAIR VALUE
----------- -----------
<S> <C> <C>
Held-to-maturity:
Due in one year or less................................. $ 2,010,793 $ 2,020,348
Due after one year through five years................... 2,523,208 2,560,335
----------- -----------
4,534,001 4,580,683
Mortgage-backed securities.............................. 4,365,658 4,437,267
----------- -----------
Total held-to-maturity.......................... $ 8,899,659 $ 9,017,950
=========== ===========
Available for sale:
Due in one year or less................................. $ 7,460,414 $ 7,519,857
Due after one year through five years................... 40,066,150 40,902,033
Due after five years through ten years.................. 13,907,513 14,255,175
Due after ten years..................................... 4,211,758 4,308,052
----------- -----------
65,645,835 66,985,117
Mortgage-backed securities.............................. 13,525,886 13,846,980
----------- -----------
Total available-for-sale........................ $79,171,721 $80,832,097
=========== ===========
</TABLE>
Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without
penalties.
Proceeds, gross realized gains and gross realized losses from the sale
(excluding calls, maturities and pay downs) of fixed maturities
available-for-sale during each year were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------
1998 1997 1996
---------- ---------- --------
<S> <C> <C> <C>
Proceeds....................................... $7,925,902 $3,528,625 $176,925
Gross realized gains........................... 165,261 56,282 --
Gross realized losses.......................... 29,397 2,532 5,369
</TABLE>
37
<PAGE> 40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The following is a summary of net investment income by category of
investments:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Fixed maturities............................. $5,433,022 $5,572,238 $5,826,478
Policy loans................................. 5,111 4,865 5,036
Cash equivalents............................. 1,181,595 757,829 688,911
Other........................................ 834,452 192,605 180,316
---------- ---------- ----------
$7,454,180 $6,527,537 $6,700,741
========== ========== ==========
</TABLE>
At December 31, 1998, Central and PALHIC had certificates of deposit and
fixed maturity securities with a carrying value of $11,331,796 on deposit with
various state insurance departments to satisfy regulatory requirements.
At December 31, 1998, cash includes $4,345,322 held for self-funded
accident and health accounts, which is restricted to use. Central is entitled to
investment income from these funds. A corresponding liability is included in the
accompanying consolidated financial statements.
At December 31, 1998, the Company held no unrated or less-than-investment
grade bonds. The Company performs periodic evaluations of the relative credit
standings of the issuers of the bonds held in the Company's portfolio. These
evaluations are considered by the Company in its overall investment strategy.
F. PROPERTY AND EQUIPMENT
Significant components of property and equipment are stated at cost and are
summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
Home office building.................................... $11,059,400 $11,059,400
Land.................................................... 1,610,375 1,610,375
Other property and equipment............................ 5,674,309 5,976,263
----------- -----------
18,344,084 18,646,038
Less accumulated depreciation........................... 8,282,396 7,679,526
----------- -----------
Total......................................... $10,061,688 10,966,512
=========== ===========
</TABLE>
Other property and equipment consists principally of furniture, fixtures,
and data processing equipment. Depreciation expense for the years ended December
31, 1998, 1997 and 1996 was $874,918, $1,104,230, and $1,136,390, respectively.
G. FEDERAL INCOME TAXES
The Company files a consolidated federal income tax return with its
subsidiaries, except PALHIC which is required to file a separate return for five
years. The provision for federal income tax does not bear the customary
relationship to pretax accounting income because of special tax provisions
available to life insurance companies. Central receives a benefit provided for
"small" life insurance companies.
38
<PAGE> 41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Federal income tax expense (benefit) is composed of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------
1998 1997 1996
---------- --------- -----------
<S> <C> <C> <C>
Current...................................... $1,449,128 $ 590,000 $(2,808,912)
Deferred..................................... (382,240) (722,531) (36,673)
---------- --------- -----------
$1,066,888 $(132,531) $(2,845,585)
========== ========= ===========
</TABLE>
Income tax expense attributable to income from operations differs from the
amounts computed by applying the U.S federal income tax rate of 35%. Those
effects are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------
1998 1997 1996
---------- ----------- -----------
<S> <C> <C> <C>
Expected tax benefit at 35%................ $ (969,070) $(7,381,110) $(4,246,883)
Special life insurance deduction........... (367,254) -- 1,006,747
Tax exempt interest........................ (12,206) (12,206) (12,206)
Change in the beginning-of-the-year balance
of the valuation allowance for deferred
tax assets allocated to income tax
expense.................................. 2,327,077 6,367,801 (21,953)
Tax rate differential...................... 27,688 210,889 121,340
Accrual adjustment......................... -- (104,166) (73,382)
IRS audit adjustment....................... -- 590,000 --
Alternative minimum tax.................... -- -- 365,000
Other...................................... 60,653 196,261 15,752
---------- ----------- -----------
$1,066,888 $ (132,531) $(2,845,585)
========== =========== ===========
</TABLE>
The federal income tax returns for the Company and its subsidiaries have
been examined by the Internal Revenue Service ("IRS") for 1991 and 1992. During
the third quarter of 1994, the IRS issued a proposal for adjustments to the
Company's returns for 1991 and 1992. The proposed deficiencies were
approximately $2,400,000 of which $215,303 was paid in 1994 and $590,000 paid in
1997. The balance of approximately $1,600,000 relates to whether or not the
Company's subsidiary, Central, qualified as a life company for tax purposes. The
Company is vigorously protesting the proposed deficiency. Based on discussions
with counsel, management believes existing law supports the Company's position.
Therefore, the Company has not recorded a liability for the difference.
If the IRS were to prevail in its position that Central no longer qualified
as a life company for tax purposes, approximately $2,600,000 of tax and interest
would be payable and federal income taxes would increase in the future.
Presently, as a small life company having less than $500,000,000 in total
assets, Central is permitted, among other things, a deduction from the first
$3,000,000 of income of 60% or $1,800,000. As Central's income increases above
$3,000,000, the special deduction is reduced proportionately.
39
<PAGE> 42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1998 and 1997 are presented below:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Deferred tax assets:
Reinsurance transactions................................ $8,784,598 $3,400,000
Deferred acquisition costs.............................. 71,591 58,505
Severance pay........................................... 231,200 238,000
Alternative minimum tax................................. -- 337,002
Difference in reserves established for financial
statement purposes and those for income tax
purposes............................................. 705,726 773,862
Net operating loss carryforward......................... 841,340 3,390,010
Advance premium......................................... 294,270 247,359
Other................................................... 202,941 95,200
---------- ----------
Gross deferred tax assets............................... 11,131,666 8,539,938
Less valuation allowance.................................. 8,987,539 6,660,462
---------- ----------
Net deferred assets....................................... 2,144,127 1,879,476
---------- ----------
Deferred tax liabilities:
Net unrealized holding gain............................. 564,528 314,894
Bond discount accretion................................. 102,120 118,595
Difference in book and tax depreciation................. 68,000 89,987
---------- ----------
Gross deferred tax liabilities............................ 734,648 523,476
---------- ----------
Deferred tax asset........................................ $1,409,479 $1,356,000
========== ==========
</TABLE>
At December 31, 1998, the Company has a tax net operating loss ("NOL")
carryforward of approximately $2,500,000 for federal income tax purposes which
expires through 2012. Future changes in ownership, as defined by sections 382
and 383 of the Internal Revenue Code, could limit the amount of NOL
carryforwards used in any one year.
The Company determines a valuation allowance based on an analysis of
amounts recoverable in the statutory carryback period and available tax planning
strategies. In assessing the valuation allowance established at December 31,
1998 and 1997, estimates were made as to the potential financial impact on the
Company of recent NOLs and the Company's financial condition described in Notes
B and C. Management believes that the Company will generate sufficient future
taxable income to realize the net deferred tax asset prior to the expiration of
any NOLs and that the realization of a $1,409,479 net deferred tax asset is more
likely than not.
In accordance with federal tax law, a portion of insurance companies' net
income, prior to 1984, is not subject to federal income taxes (within certain
limitations) until it is distributed to policyholders, at which time it is taxed
at regular corporate rates. For federal income tax purposes this untaxed income
is accumulated in a memorandum account designated "policyholders' surplus." At
December 31, 1998, the accumulated untaxed policyholders' surplus for Central is
$2,869,768.
40
<PAGE> 43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
H. LIABILITY FOR OTHER POLICY CLAIMS AND BENEFITS PAYABLE
The following table reflects the activity in the liability for other policy
claims and benefits payable, including the claims adjustment expenses ("CAE"),
net of reinsurance recoverables, as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Balance at beginning of year................. $56,186,802 $42,909,065 $35,125,467
Reserves on block of business reinsured in
1998....................................... 23,500,000 -- --
Incurred claims and CAE, net of reinsurance,
for:
Current year............................... 116,357,433 206,636,150 196,260,939
Prior years................................ (1,696,688) 8,274,823 1,134,739
----------- ----------- -----------
Total incurred........................ 114,660,745 214,910,973 197,395,678
----------- ----------- -----------
Paid claims and CAE, net of reinsurance, for:
Current year............................... 89,952,807 144,056,413 153,758,124
Prior years................................ 29,999,535 57,576,823 35,853,956
----------- ----------- -----------
Total paid............................ 119,952,342 201,633,236 189,612,080
----------- ----------- -----------
Balance at end of year....................... $74,395,205 $56,186,802 $42,909,065
=========== =========== ===========
</TABLE>
The foregoing indicates that a $1,696,688 redundancy in the 1997 reserves
emerged in 1998, and that a $8,274,823 deficiency emerged in 1997. The
deficiency in the 1996 reserves resulted from substantial losses developing on
insurance plans issued in 1995, and higher utilization than anticipated.
I. REINSURANCE ARRANGEMENTS
UNITED BENEFIT LIFE INSURANCE COMPANY
Effective August 1, 1998, Central entered into a reinsurance treaty with
United Benefit Life Insurance Company ("UBL"), a life and accident and health
insurer in Texas. Under the terms of the treaty, Central agreed to assume 100%
of UBL's book of business, until such time as profits earned by Central on the
assumed block reach a contractual threshold, which approximates $20,000,000 of
pretax income. Upon achieving this threshold, the quota share percentage is
reduced from 100% to 80%, until a second threshold, which approximates
$16,000,000 in pretax income, is achieved. Upon achieving the second threshold,
the quota share percentage is further reduced from 80% to 50%. Central paid to
UBL a $20,000,000 ceding allowance in connection with this transaction. In
addition, Central entered into an agency arrangement with respect to the
marketing of UBL policies with Insurance Advisors of America, Inc. ("IAA"), a
subsidiary of United Benefit Managed Care Corporation and an affiliate of UBL,
in exchange for a $7,000,000 note receivable. Central recorded a full valuation
allowance against such note receivable at December 31, 1998.
Reserve liabilities assumed by Central under the UBL agreement on August 1,
1998 exceeded the cash transferred to Central by UBL as reimbursement for this
assumption by $3,000,000, which is reflected in a note receivable. Subsequent to
August 1, 1998, the balance of the note receivable was increased to $7,367,556
as a result of adverse developments in the assumed policy liabilities, net of
amounts ceded to Hannover, and net of an allowance for uncollectability. The
note receivable is secured by the outstanding common stock and assets of UBL,
which assets include real estate, bonds and reinsurance receivables from an
unrelated party, and commissions due to IAA. Effective March 17, 1999, the
Company and UBL executed an agreement for Central to assume ownership of UBL in
satisfaction of the note receivable. The Company anticipates that such
transaction will be completed during the second quarter of 1999.
41
<PAGE> 44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
In connection with the UBL reinsurance treaty, Central ceded to Hannover
80% of the book of business assumed from UBL. This treaty provided Central an
initial ceding allowance of $20,000,000, which is being accounted for as a
deferred reinsurance gain in the accompanying consolidated financial statements,
and will be amortized into income over the duration of the underlying block of
business.
CENTRAL RESERVE LIFE INSURANCE COMPANY
In December 1997, Central entered into a retroactive reinsurance treaty
(the "1997 Treaty") with Hannover. The quota share treaty was effective January
1, 1997, and covered certain group accident and health policies in force and
written during 1997. Under the provisions of the 1997 Treaty, Central cedes 50%
of the premiums of the eligible policies, and in return receives reimbursement
for 50% of the claims paid, plus a commission and expense allowance. In
connection with the 1997 Treaty, Central transferred $24,550,000 of reserves to
Hannover, and received an initial ceding allowance of $10,000,000, resulting in
a net cash transfer of $14,550,000 to Hannover. The initial ceding allowance is
reported as a deferred reinsurance gain, in the accompanying consolidated
financial statements.
In the ordinary course of business, Central maintains other reinsurance
arrangements with other insurers. These arrangements are designed to limit the
maximum amount of exposure that Central retains on a given policy. For ordinary
and group life claims, Central's maximum retention is $50,000, with no retention
maintained over age 70. Maximum retention on substandard risks is $10,000. For
accident and health claims, maximum retention on individual claims is $500,000.
The following table summarizes the net impact of reinsurance arrangements
on benefits, claims, losses and settlement expenses, commissions, and other
operating expenses:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Benefits, claims, losses and settlement
expenses............................. $217,747,183 $211,194,654 $204,446,897
Reinsurance recoverable................ (101,688,508) (418,288) (769,665)
------------ ------------ ------------
$116,058,675 $210,776,366 $203,677,232
============ ============ ============
Underwriting, acquisition and insurance
expenses:
Commissions.......................... $ 36,853,066 $ 35,525,295 $ 35,654,815
Salaries and benefits................ 15,717,718 18,112,730 16,855,141
Taxes, licenses and fees............. 6,448,343 6,366,798 6,136,793
Other operating expense.............. 22,450,200 14,758,817 13,770,924
Reinsurance expenses................. 13,773,476 -- --
Reinsurance allowances............... (40,874,688) -- --
------------ ------------ ------------
$ 54,368,115 $ 74,763,640 $ 72,417,673
============ ============ ============
</TABLE>
Central remains obligated for amounts ceded in the event that the
reinsurers do not meet their obligations.
Other reinsurance arrangements in conjunction with other business
combinations are described in Note D.
42
<PAGE> 45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
J. COMMITMENTS AND CONTINGENCIES
The Company is involved in litigation and may become involved in potential
litigation arising in the ordinary course of business. In the opinion of
management, the effects, if any, of such litigation are not expected to be
material to the Company's consolidated financial condition.
On December 16, 1997, Central issued to the Company a $14,000,000 surplus
note with interest on the unpaid balance payable quarterly at a fixed rate of
8 1/2%. Central reported the $14,000,000 as surplus rather than a liability in
accordance with statutory accounting practices. In June 1998, the Company
converted the surplus note into a capital contribution to Central.
The Company executed a mortgage note payable in December 1990 for
$9,000,000 bearing interest at 9 1/2% per annum for 10 years. The Company
received $8,500,000 of the funds in December 1990 and the remaining $500,000 in
December 1991. The mortgage note is collateralized by the home office building
and by an assignment of the tenant lease for the building. The Company has been
required to make monthly payments, since January 1991, based on a 30 year
amortization schedule, of $75,677 for 10 years. After five years, the Company
has the right to prepay the loan with a 3% prepayment fee. Principal payments
due in the next three years, assuming no prepayments, are $126,572 in 1999,
$139,134 in 2000, and $8,018,178 on January 1, 2001.
At December 31, 1998, the Company maintained a $15,000,000 line of credit
arrangement with a major commercial bank for short-term borrowings. There was no
amount outstanding on the line of credit at December 31, 1998. Effective
February 17, 1999, this line of credit was replaced with a $10,000,000 line of
credit with a syndicate of major commercial banks.
K. STOCK-BASED COMPENSATION
On March 5, 1983, the Company adopted an Incentive Stock Option Plan (the
"1983 Plan"). The 1983 Plan, which expired in May 1993, provided that key
full-time employees of the Company and its subsidiaries were eligible for
participation. The following table summarizes data regarding the 1983 Plan.
<TABLE>
<CAPTION>
1998 1997 1996
-------- --------- -----------
<S> <C> <C> <C>
Number of shares subject to options:
Outstanding at beginning of year..................... 65,845 302,740 322,770
Expired/canceled..................................... (65,845) (186,895) --
Exercised............................................ -- (50,000) (20,030)
-------- --------- -----------
Outstanding at end of year............................. -- 65,845 302,740
======== ========= ===========
Price range of options exercised....................... $ N/A $ 2.83 $2.83-$6.75
</TABLE>
In 1998, pursuant to various individual employment agreements with certain
key officers, and pursuant to the 1998 Key Employee Share Incentive Plan, the
Company granted common stock options to certain employees. Such grants generally
vest over three years, and expire ten years from the date of the grant. Also in
1998, pursuant to an employment contract, the Company provided an award of
common shares to a key employee. The number of shares awarded is contingent upon
the weighted average fair value of the common shares over specified periods, but
is based on a fixed dollar amount. The award vests on July 1, 2001, and
management currently estimates that 395,669 shares will be issued at that date,
based upon the fair value of the Company's shares at December 31, 1998.
43
<PAGE> 46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
A summary of the Company's stock option activity, and the related
information for the years ended December 31, 1998 is as follows:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
EXERCISE
OPTIONS PRICE
--------- ---------
<S> <C> <C>
Outstanding at January 1, 1998....................... -- --
Options granted, with exercise prices:
Greater than fair value at grant date.............. 700,000 $8.36
Equal to fair value at grant date.................. 315,000 6.59
Less than fair value at grant date................. 50,000 5.50
--------- -----
Outstanding at December 31, 1998..................... 1,065,000 $7.70
========= =====
Exercisable at December 31, 1998..................... 240,000 $7.54
========= =====
</TABLE>
Exercise prices for options outstanding at December 31, 1998 ranged from
$5.50 to $10.50. While some options have no expiration date, management
estimates the remaining average contractual life of options awarded is 5 years.
In 1998, the Company recognized $866,000 in compensation expense related to
stock-based compensation.
As required by FASB Statement No. 123, Accounting for Stock-Based
Compensation,the Company has estimated the pro forma impact on net income and
earnings per share of stock-based compensation under the fair value method,
using the Black-Scholes option valuation model.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
Significant underlying assumptions made are summarized as follows:
<TABLE>
<S> <C>
Risk-free rate of return.......................... 4.54%
Dividend yield.................................... 0%
Volatility factor................................. 0.592
Expected life of award............................ 5 years
</TABLE>
Based on the methodology and assumptions delineated above, the weighted
average fair value of options granted in 1998, at grant date, was $3.23 per
share. The pro forma impact would be to increase the net loss by $785,540 and
increase the net loss per share by $0.10 for the year ended December 31, 1998.
L. PREFERRED SHARES
The Company has authorized 2,000,000, $.001 par value Non-Voting Preferred
Shares. The Company has never issued any Non-Voting Preferred Shares, however,
the Board of Directors is authorized at any time to provide for the issuance of,
such shares in one or more series, and to determine the designations,
preferences, limitations and other rights of the shares issued, including but
not limited to the dividend rate,
44
<PAGE> 47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
liquidation preference, redemption rights and price, sinking fund requirements,
conversion rights and restrictions on the issuance of such shares. Holders of
Non-Voting Preferred Shares shall have no voting rights except as required by
law.
M. STATUTORY FINANCIAL INFORMATION
The Company's insurance subsidiaries, Central and PALHIC, are required to
file Annual Statements with state insurance regulatory authorities to whose
jurisdiction those entities are subject. These Annual Statements are prepared on
an accounting basis prescribed or permitted by the domiciliary state insurance
department, which differs from GAAP. Prescribed accounting practices include a
variety of publications of the National Association of Insurance Commissioners
("NAIC"), as well as state laws, regulations and general and administrative
rules. Permitted statutory accounting practices encompass all accounting
practices not prescribed.
The statutory capital and surplus of Central at December 31, 1998, 1997,
and 1996, as reported in the Annual Statement filed with regulatory authorities,
was $30,418,544, $24,650,804, and $16,595,497, respectively, and the statutory
net loss for each of the three years ended December 31, 1998 was $21,162,850,
$21,616,489, and $9,321,633, respectively.
The statutory capital and surplus of PALHIC as reported in its Annual
Statement filed with regulatory authorities at December 31, 1998 was $5,392,945.
At December 31, 1998, total statutory capital and surplus of Central and
PALHIC are approximately $27,900,000 and $3,900,000 in excess of minimum
regulatory requirements, respectively.
Central and PALHIC are subject to certain Risk-Based Capital ("RBC")
requirements as specified by the NAIC. The RBC model serves as a benchmark for
the regulation of life and accident and health insurance companies by state
insurance regulators. At December 31, 1998, both Central and PALHIC exceeded the
minimum RBC requirements.
The amount of dividends which Central and PALHIC can pay is subject to
certain regulatory restrictions. In 1999, Central can pay approximately
$1,056,000 in dividends without the prior approval by the Ohio Insurance
Commissioner. In 1999, PALHIC cannot pay any dividends without the prior
approval of the Pennsylvania Insurance Commissioner as a result of its statutory
unassigned deficit at December 31, 1998.
N. LOSS PER SHARE
The following table sets forth the computation of basic and diluted loss
per share:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------------
1998 1997 1996
----------- ------------ -----------
<S> <C> <C> <C>
Net loss.......................................... $(3,835,659) $(20,956,356) $(9,288,365)
Weighted-average number of common shares
outstanding..................................... 7,845,172 4,182,672 4,052,314
----------- ------------ -----------
Basic and diluted loss per share.................. $ (0.49) $ (5.01) $ (2.29)
=========== ============ ===========
</TABLE>
In 1998, 1997 and 1996, there were no differences between basic and diluted
loss per share because the Company reported net losses in those years, and the
exercise of potential shares would therefore have been antidilutive.
45
<PAGE> 48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
O. EMPLOYEE BENEFIT PLAN
Effective January 1, 1998, the Company's noncontributory pension plan was
converted into a defined contribution 401(k) savings plan (the "Plan").
Employees become eligible to participate in the Plan after six months of
service. Based on the provisions of the Plan, participants may contribute up to
10% of their pretax annual compensation. The Plan provides for an 100% employer
matching contribution only for that portion of participant contributions made to
a fund which holds principally the Company's Shares, up to $1,000 annually. In
1998, total matching contributions expensed by the Company were approximately
$52,000.
Prior to January 1, 1998, the Plan operated as a noncontributory pension
plan, covering substantially all employees who had competed six months of
service. Vesting in accordance with the Plan began after two years of service,
with full vesting after seven years. Total contributions made under the Plan
were $1,308,000 in 1997 and $1,214,000 in 1996.
P. OPERATING SEGMENTS
The Company has identified three distinct operating segments based upon
product types, as follows: group life and health, life insurance and annuities,
and corporate and other.
Products included in the group life and health segment include short-term
major medical insurance products and comprehensive major medical plans. Group
life policies are included in this segment because such policies are issued only
in conjunction with health insurance policies, and the costs of administering
those policies are incidental to the administration of the related health
policies.
Products included in the life and annuity segment include term insurance,
single premium deferred annuities, flexible premium deferred annuities, and
single premium immediate annuities. These products are not marketed aggressively
by the Company, and are underwritten as an accommodation product. Such products
are segregated from the group life and health segment based upon significant
differences in the sales and administration of such policies, including the
underwriting and claims adjudication process.
The corporate and other segment encompasses all other activities of the
organization, including interest income and expense of the parent company.
46
<PAGE> 49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Revenues from each segment are primarily generated from premiums charged to
external policyholders and interest earned on cash and investments, and are
summarized in the following tables:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Group Life and Health
Revenues:
Net Premiums............................... $160,201,806 $258,170,130 $257,495,315
Investment income.......................... 5,817,656 5,021,692 5,014,262
Other income............................... 1,696,690 -- --
------------ ------------ ------------
167,716,152 $263,191,822 262,509,577
============ ============ ============
Expenses:
Benefits and claims........................ 114,181,891 208,933,873 202,074,527
Other operating expenses................... 52,762,598 73,589,360 70,960,571
------------ ------------ ------------
166,944,489 282,523,233 273,035,098
============ ============ ============
Segment profit (loss) before federal income
taxes...................................... $ 771,663 $(19,331,411) $(10,525,521)
============ ============ ============
Life and Annuity
Revenues:
Net premiums............................... $ 583,091 $ 689,177 $ 680,022
Investment income.......................... 1,362,251 1,459,718 1,506,162
------------ ------------ ------------
1,945,342 2,148,895 2,186,184
============ ============ ============
Expenses:
Benefits and claims........................ 1,876,784 1,842,493 1,602,705
Other operating expenses................... 366,505 551,986 767,474
------------ ------------ ------------
2,243,289 2,394,479 2,370,179
============ ============ ============
Segment profit (loss) before federal income
taxes...................................... $ (297,947) $ (245,584) $ (183,995)
============ ============ ============
Corporate and Other
Revenues:
Investment income.......................... $ 485,130 $ 192,605 $ 189,834
============ ============ ============
Expenses:
Interest and financing expenses............ 1,841,334 1,078,198 812,833
Other operating expenses................... 1,886,283 626,299 801,435
------------ ------------ ------------
3,727,617 1,704,497 1,614,268
============ ============ ============
Segment profit (loss) before federal income
taxes.................................... $ (3,242,487) $ (1,511,892) $ (1,424,434)
============ ============ ============
</TABLE>
The Company does not separately allocate investment or other identifiable
assets by industry segment, nor are income tax (benefits) expenses allocated by
industry segment. The Company also expanded the detail of its disclosures for
1998, 1997 and 1996, which included certain reclassifications.
Q. FAIR VALUES OF FINANCIAL INSTRUMENTS
Fair values of financial instruments are based upon quoted market prices,
where available, or on values obtained from independent pricing services. In
cases where quoted market prices are not available, fair value is based on
estimates using present value or other valuation techniques. These techniques
are significantly affected by the assumptions used, including the discount rate
and estimates of future cash flows. Although fair value estimates are calculated
using assumptions that management believes are appropriate, changes in
assumptions could cause these estimates to vary materially. In that regard, the
derived fair value estimates
47
<PAGE> 50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
cannot be substantiated by comparison to independent markets and, in many cases,
could not be realized in the immediate settlement of the instruments.
The tax ramifications of the related unrealized gains and losses can have a
significant effect on fair value estimates and have not been considered in the
estimates.
The following methods and assumptions were used by the Company in
estimating its fair value disclosures:
INVESTMENT SECURITIES -- Fair value for fixed maturity securities is
based on quoted market prices, where available. For fixed maturity
securities not actively traded, fair value is estimated using values
obtained from independent pricing services.
CASH, CASH EQUIVALENTS, PREMIUMS RECEIVABLE, NOTE RECEIVABLE,
REINSURANCE RECEIVABLE, AND POLICY LOANS -- The carrying amounts reported
in the consolidated balance sheets for these instruments approximate their
fair value.
ANNUITY CONTRACTS -- The fair value for the annuity reserves included
in the liability for future policy benefit, losses and claims is the amount
payable on demand.
OTHER POLICYHOLDERS' FUNDS -- The carrying amount reported in the
consolidated balance sheets for these instruments approximate their fair
value.
MORTGAGE NOTE PAYABLE, NOTE PAYABLE AND REINSURANCE PAYABLE -- The
carrying amount reported in the consolidated balance sheets for the
mortgage note payable and note payable approximates their fair value.
Carrying amounts and estimated fair values of financial instruments at
December 31 are summarized as follows:
<TABLE>
<CAPTION>
1998 1997
-------------------------- --------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
ASSETS
Investments:
Fixed maturities held to maturity... $ 8,899,659 $ 9,017,950 $11,898,627 $11,882,268
Fixed maturities available for
sale............................. 80,832,097 80,832,097 67,961,886 67,961,886
Policy loans........................ 94,432 94,432 96,211 96,211
Cash and cash equivalents............. 19,376,380 19,376,380 11,533,821 11,533,821
Premiums receivable................... 2,203,690 2,203,690 2,098,243 2,098,243
Reinsurance receivable................ 41,417,031 41,417,031 26,215,765 26,215,765
Note receivable....................... 7,367,556 7,367,556 -- --
LIABILITIES
Annuity reserve....................... $18,224,007 $18,083,915 $21,736,606 $21,454,000
Other policyholders' funds............ 8,845,829 8,845,829 7,565,341 7,565,341
Mortgage note payable................. 8,283,884 8,283,884 8,399,028 8,399,028
Note payable.......................... -- -- 20,000,000 20,000,000
</TABLE>
R. CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of fixed maturity investments,
cash, cash equivalents and reinsurance receivable.
48
<PAGE> 51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The Company maintains cash and short-term investments with various
financial institutions, and the Company performs periodic evaluations of the
relative credit standings of those financial institutions.
Substantially all of the Company's reinsurance recoverable is due from a
single reinsurer, Hannover. At December 31, 1998, Hannover maintains an "A"
rating from the A.M. Best Company. The Company performs periodic evaluation of
this reinsurer's credit standing.
S. QUARTERLY RESULTS OF OPERATIONS -- (UNAUDITED)
The following is a summary of quarterly results of operations for the years
ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
1998:
Revenues......................... $38,104,509 $40,256,756 $45,412,071 $46,373,288
Benefits and claims.............. 30,642,992(a) 31,289,280(a) 30,081,923 24,044,480
Commissions and general
expenses...................... 9,819,628(a) 12,022,271(a) 14,927,038 20,087,783(b)
Net (loss) income................ (2,358,111) (3,054,795) 403,110 1,174,137
Basic (loss) earnings per
share(c)...................... (.56) (.73) .04 .10
Diluted (loss) earnings per
share(c)...................... (.56) (.73) .03 .09
1997:
Revenues......................... $68,849,774 $66,511,467 $64,473,579 $65,698,502
Benefits and claims.............. 53,204,489 51,696,958 50,496,272 55,378,647
Commissions and general
expenses...................... 17,948,310 19,033,608 18,124,136 20,739,789
Net loss......................... (1,828,025) (3,548,099) (4,431,494) (11,148,738)
Basic loss per share............. (.44) (.85) (1.06) (2.66)
Diluted loss per share........... (.44) (.85) (1.06) (2.66)
</TABLE>
- ---------------
(a) In 1998, the Company reclassified certain items from commissions and general
expenses to benefits and claims related to the first and second quarters.
There was no effect on earnings (loss) or the per share amounts resulting
from these reclassifications.
(b) Includes $3,700,000 related to policy administration fees expensed to
Hannover in 1998.
(c) The sum of basic and diluted income (loss) per share by quarter does not
agree with the amounts reported on the statement of operations due to the
issuance of 7,300,000 Company Common Shares in July 1998.
49
<PAGE> 52
SCHEDULE II
CERES GROUP, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CERES GROUP, INC. (PARENT ONLY)
BALANCE SHEETS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Investments in subsidiaries*................................ $25,344,127 $ 5,006,254
Property and equipment...................................... 9,076,024 9,525,416
Cash and cash equivalents................................... 11,174,736 821,054
Surplus note receivable*.................................... -- 14,000,000
Other....................................................... 734,014 626,585
----------- -----------
$46,328,901 $29,979,309
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable.......................................... $ 2,209,303 $ 68,439
Note payable.............................................. -- 20,000,000
Mortgage note payable..................................... 8,283,884 8,399,028
----------- -----------
10,493,187 28,467,467
=========== ===========
Shareholders' equity:
Common stock.............................................. 11,495 2,097,586
Paid-in capital........................................... 43,883,357 4,122,319
Retained earnings (deficit)............................... (9,154,986) (5,319,327)
Accumulated other comprehensive income.................... 1,095,848 611,264
----------- -----------
35,835,714 1,511,842
----------- -----------
$46,328,901 $29,979,309
=========== ===========
</TABLE>
- ---------------
*Eliminated in consolidation.
See accompanying independent auditors' report.
50
<PAGE> 53
SCHEDULE II
CERES GROUP, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CERES GROUP, INC. (PARENT ONLY)
STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------------
1998 1997 1996
----------- ------------ ------------
<S> <C> <C> <C>
REVENUES
Dividend from subsidiaries*..................... $ -- $ -- $ 1,500,000
Inter-company fees*............................. 930,000 1,310,000 1,210,000
Other investment income......................... 293,344 -- --
----------- ------------ ------------
1,223,344 1,310,000 2,710,000
EXPENSES
Operating expenses................................ 3,712,293 1,690,205 1,314,012
----------- ------------ ------------
(Loss) income before equity in earnings of subsid-
iaries.......................................... (2,488,949) (380,205) 1,395,988
Equity in losses of subsidiaries (net of
dividends)...................................... (1,134,710) (20,576,151) (10,684,353)
----------- ------------ ------------
Net loss..................................... $(3,835,659) $(20,956,356) $ (9,288,365)
=========== ============ ============
</TABLE>
- ---------------
*Eliminated in consolidation.
See accompanying independent auditors' report.
51
<PAGE> 54
SCHEDULE II
CERES GROUP, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CERES GROUP, INC. (PARENT ONLY)
STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------------
1998 1997 1996
------------ ------------ -----------
<S> <C> <C> <C>
Operating activities
Net (loss) income before equity in subsidiaries... $ (2,488,949) $ (380,205) $ 1,395,988
Change in accounts payable...................... 2,140,864 9,703 41,498
Depreciation.................................... 449,392 449,392 444,052
Change in other assets.......................... (107,428) (166,525) (221,953)
------------ ------------ -----------
Net cash (used in) provided by operating
activities...................................... (6,121) (87,635) 1,659,585
Investing activities
Surplus note receivable*........................ 14,000,000 (14,000,000) --
Contribution to subsidiary surplus*............. (21,200,000) (5,000,000) --
Purchase of property and equipment.............. -- (267,000) (208,375)
------------ ------------ -----------
Net cash used in investing activities............. (7,200,000) (19,267,000) (208,375)
Financing activities
Proceeds from note payable...................... -- 25,200,000 --
Repayment of note payable....................... (20,000,000) (5,200,000) --
Dividends paid.................................. -- -- (2,104,708)
Issuance of common stock........................ 37,674,947 141,500 582,715
Decrease in mortgage payable.................... (115,144) (104,748) (95,291)
------------ ------------ -----------
Net cash provided by (used in) financing
activities...................................... 17,559,803 20,036,752 (1,617,284)
------------ ------------ -----------
Net increase (decrease) in cash................... 10,353,682 682,117 (166,074)
Cash and cash equivalents at beginning of year.... 821,054 138,937 305,011
------------ ------------ -----------
Cash and cash equivalents at end of year.......... $ 11,174,736 $ 821,054 $ 138,937
============ ============ ===========
</TABLE>
- ---------------
*Eliminated in consolidation.
See accompanying independent auditors' report.
52
<PAGE> 55
SCHEDULE III
CERES GROUP, INC. AND SUBSIDIARIES
SUPPLEMENTAL INSURANCE INFORMATION
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FUTURE OTHER BENEFITS
POLICY POLICY CLAIMS
DEFERRED BENEFITS CLAIMS NET LOSSES AND
ACQUISITION LOSSES AND BENEFITS PREMIUM INVESTMENT SETTLEMENT
COSTS AND CLAIMS PAYABLE REVENUE INCOME EXPENSES
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Year ended December 31, 1998
Group life and health........ $3,400,000 $ 2,418,631 $74,310,205 $160,201,806 $5,646,805 $114,181,891
Life insurance and
annuities.................. 278,301 20,299,231 85,000 583,091 1,322,245 1,876,784
Corporate and other.......... 131,436 -- -- -- 485,130 --
---------- ----------- ----------- ------------ ---------- ------------
Total.................. $3,809,737 $22,717,862 $74,395,205 $160,784,897 $7,454,180 $116,058,675
========== =========== =========== ============ ========== ============
Year ended December 31, 1997
Group life and health........ $ -- $ 788,438 $56,128,420 $258,170,130 $4,875,214 $208,933,873
Life insurance and
annuities.................. 325,572 23,760,693 58,382 689,177 1,459,718 1,842,493
Corporate and other.......... -- 354,366 -- -- 192,605 --
---------- ----------- ----------- ------------ ---------- ------------
Total.................. $ 325,572 $24,903,497 $56,186,802 $258,859,307 6,527,537 210,776,366
========== =========== =========== ============ ========== ============
Year ended December 31, 1996
Group life and health........ $ -- $ 8,025,093 $42,889,233 $257,495,315 $5,014,262 $202,074,527
Life insurance and
annuities.................. 321,567 25,388,607 19,832 680,022 1,506,163 1,602,705
Corporate and other.......... -- 328,119 -- -- 180,316 --
---------- ----------- ----------- ------------ ---------- ------------
Total.................. $ 321,567 $33,741,819 $42,909,065 $258,175,337 6,700,741 203,677,232
========== =========== =========== ============ ========== ============
<CAPTION>
AMORTIZATION
OF DEFERRED
ACQUISITION OPERATING
COST EXPENSES
- -----------------------------------------------------------
<S> <C> <C>
Year ended December 31, 1998
Group life and health........ $600,000 $52,162,598
Life insurance and
annuities.................. 47,271 319,234
Corporate and other.......... -- 1,886,283
-------- -----------
Total.................. $647,271 $54,368,115
======== ===========
Year ended December 31, 1997
Group life and health........ $ -- $73,589,360
Life insurance and
annuities.................. 4,005 547,981
Corporate and other.......... -- 1,704,497
-------- -----------
Total.................. $ 4,005 $75,841,838
======== ===========
Year ended December 31, 1996
Group life and health........ $ -- $70,960,571
Life insurance and
annuities.................. 111,807 655,667
Corporate and other.......... -- 1,614,268
-------- -----------
Total.................. $111,807 $73,230,506
======== ===========
</TABLE>
See accompanying independent auditors' report.
53
<PAGE> 56
SCHEDULE IV
CERES GROUP, INC. AND SUBSIDIARIES
REINSURANCE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERCENTAGE
CEDED TO ASSUMED FROM OF AMOUNT
GROSS OTHER OTHER NET ASSUMED TO
AMOUNT COMPANIES COMPANIES AMOUNT NET
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1998
Life insurance in force................. $1,239,853,000 $ 88,477,000 $ -- $1,151,376,000
============== ============ =========== ============== ====
Premiums
Life insurance.......................... $ 6,816,641 $ 200,451 $ -- $ 6,616,190
Accident and health insurance........... 258,051,545 149,805,223 45,922,385 154,168,707 30%
-------------- ------------ ----------- -------------- ----
$ 264,868,186 $150,005,674 $45,922,385 $ 160,784,897 29%
============== ============ =========== ============== ====
Year ended December 31, 1997
Life insurance in force................. $1,192,280,000 $ 95,249,000 $ -- $1,097,031,000
============== ============ =========== ============== ====
Premiums
Life insurance.......................... $ 7,003,747 $ 166,034 $ -- $ 6,837,713
Accident and health insurance........... 255,157,596 3,136,002 -- 252,021,594
-------------- ------------ ----------- -------------- ----
$ 262,161,343 $ 3,302,036 $ -- $ 258,859,307
============== ============ =========== ============== ====
Year ended December 31, 1996
Life insurance in force................. $1,293,673,000 $ 80,895,000 $ -- $1,212,778,000
============== ============ =========== ============== ====
Premiums
Life insurance.......................... $ 7,829,103 $ 113,910 $ -- $ 7,715,193
Accident and health insurance........... 252,246,994 1,786,850 -- 250,460,144
-------------- ------------ ----------- -------------- ----
$ 260,076,097 $ 1,900,760 $ -- $ 258,175,337
============== ============ =========== ============== ====
</TABLE>
See accompanying independent auditors' report.
54
<PAGE> 57
ITEM 9. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
As reported on Form 8-K/A dated August 27, 1998, the Company appointed
Ernst & Young LLP as its independent auditors for the fiscal year ending
December 31, 1998 to replace the firm of KPMG LLP which was dismissed as
auditors of the Company effective August 27, 1998. There were no disagreements
with KPMG LLP on any matters of accounting principles or practices, financial
statement disclosure, or auditing scope and procedures which, if not resolved to
the satisfaction of KPMG LLP would have caused KPMG LLP to make reference to the
matter in their report.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item 10 is incorporated herein by
reference to the Company's Proxy Statement to Stockholders in connection with
its annual meeting of Stockholders to be held on June 10, 1999, as well as Part
I of this Annual Report on Form 10-K. The Company expects to file its Proxy
Statement by April 30, 1999.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is incorporated herein by
reference to the Company's Proxy Statement to Stockholders in connection with
its annual meeting of Stockholders to be held on June 10, 1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 12 is incorporated herein by
reference to the Company's Proxy Statement to Stockholders in connection with
its annual meeting of Stockholders to be held on June 10, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 13 is incorporated herein by
reference to the Company's Proxy Statement to Stockholders in connection with
its annual meeting of Stockholders to be held on June 10, 1999.
55
<PAGE> 58
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K.
(a) Filed documents. The following documents are filed as part of this
report:
1. Financial Statements.
Ceres Group, Inc. and Subsidiaries: Audit Report.
Consolidated Balance Sheets -- December 31, 1998 and 1997.
Consolidated Statements of Operations -- Years ended December 31,
1998, 1997 and 1996.
Consolidated Statements of Shareholders' Equity -- Years ended
December 31, 1998, 1997 and 1996.
Consolidated Statements of Cash Flows -- Years ended December 31,
1998, 1997 and 1996.
Notes to Consolidated Financial Statements.
2. Financial Statement Schedules.
Ceres Group, Inc.:
II. Condensed Financial Information of Registrant.
III. Supplementary Insurance Information.
IV. Reinsurance.
Other schedules are omitted because of the absence of conditions under
which they are required or because the required information is given in the
consolidated financial statements or notes thereto.
(b) Reports on Form 8-K:
Current report on Form 8-K dated November 5, 1998 announcing the
Company's definitive agreement to purchase Continental General
Corporation and its wholly-owned insurance subsidiary.
Attached as exhibits were: 99.1 Press release dated November 5, 1998,
issued by the Company.
Current report on Form 8-K dated December 8, 1998 announcing the
Company's name change and reincorporation in the state of Delaware.
Attached as exhibits were:
2.1 Merger Agreement and Plan of Reorganization dated December 8,
1998 between Central Reserve Life Corporation and Ceres Group,
Inc.
3.1 Certificate of Incorporation of Ceres Group, Inc. as filed with
Secretary of State of Delaware on October 22, 1998.
3.2 Bylaws of Ceres Group, Inc.
56
<PAGE> 59
(c) Exhibits
<TABLE>
<CAPTION>
INCORPORATED BY
REFERENCE TO
REGISTRATION OR FORM OR EXHIBIT
EXHIBITS FILE NUMBER REPORT DATE NUMBER
-------- --------------- ------- ----------- -------
<C> <C> <S> <C> <C> <C> <C>
(2) Plan of acquisition, reorganization,
arrangement, liquidation, or succession
(1) Stock Purchase Agreement, dated as of 0-8483 8-K Dec. 1997 2.1
November 26, 1997, by and between
Strategic Partners and Central
Reserve.
(2) Amendment No. 1 to Stock Purchase 0-8483 8-K Dec. 1997 2.1
Agreement, dated as of December 16,
1997, by and between Strategic
Partners and Central Reserve.
(3) Amended and Restated Stock Purchase 0-8483 10-K Mar. 1998 2.2
Agreement, dated March 30, 1998, by
and among Strategic Partners,
Insurance Partners, L.P., Insurance
Partners Offshore (Bermuda), L.P. and
Central Reserve.
(4) Merger Agreement and Plan of 0-8483 8-K Dec. 1998 2.1
Reorganization dated December 8, 1998
between Central Reserve Life
Corporation and Ceres Group, Inc.
(5) Stock Purchase Agreement dated as of 0-8483 8-K Feb. 1999 2.2
November 4, 1998 between The Western
and Southern Life Insurance Company
and Ceres Group, Inc.
(3) Articles of Incorporation and By-laws
(1) Amended Articles of Incorporation 0-8483 10-K Mar. 1992 3(a)
(2) Code of Regulations 0-8483 10-K Mar. 1992 3(b)
(3) Amended Articles of Incorporation 0-8483 10-K Mar. 1998 3(c)
(4) Certificate of Incorporation of Ceres 0-8483 8-K Dec. 1998 3.1
Group, Inc. as filed with Secretary of
Delaware on October 22, 1998
(5) By-laws of Ceres Group, Inc. 0-8483 8-K Dec. 1998 3.2
(4) Instruments defining the rights of security
holders, including indentures
(1) Voting Agreement, dated as of July 1, * 4.1
1998, by and among Ceres Group, Inc.
(as successor-in-interest to Central
Reserve Life Corporation) and the
security holders listed on the
signature pages thereof.
</TABLE>
57
<PAGE> 60
<TABLE>
<CAPTION>
INCORPORATED BY
REFERENCE TO
REGISTRATION OR FORM OR EXHIBIT
EXHIBITS FILE NUMBER REPORT DATE NUMBER
-------- --------------- ------- ----------- -------
<C> <C> <S> <C> <C> <C> <C>
(2) Stockholders Agreement, dated as of * 4.2
July 1, 1998, by and among Ceres
Group, Inc. (as successor-in-interest
to Central Reserve Life Corporation)
and the security holders listed on the
signature pages thereof.
(3) Registration Rights Agreement, dated * 4.3
as of July 1, 1998, between Ceres
Group, Inc. (as successor-in-interest
to Central Reserve Life Corporation)
and the persons and entities set forth
on the signature pages attached
thereto.
(4) Amendment No. 1 to Registration Rights 0-8483 8-K Feb. 1999 4.4
Agreement, dated as of February 17,
1999, between Ceres Group, Inc. (as
successor-in-interest to Central
Reserve Life Corporation) and the
persons and entities set forth on the
signature pages attached thereto.
(10) Material Contracts
(1) Incentive Stock Option Plan 0-8483 10-K Mar. 1992 10(b)
(2) Agreement of Lease 0-8483 10-K Mar. 1992 10(c)
(3) Mortgage Note 0-8483 10-K Mar. 1992 10(d)
(4) Mortgage 0-8483 10-K Mar. 1992 10(e)
(5) Employment Contract 0-8483 10-K Mar. 1993 10(a)
(6) Credit Agreement, dated as of December 0-8483 8-K Dec. 1997 10.1
16, 1997, by and between Central
Reserve and Strategic Partners.
(7) Pledge Agreement, dated as of December 0-8483 8-K Dec. 1997 10.2
16, 1997, by and between Central
Reserve and Strategic Partners
(8) Promissory Note, dated as of December 0-8483 8-K Dec. 1997 10.3
16, 1997, by Central Reserve in favor
of Strategic Partners.
(9) Warrant to purchase Common Shares, 0-8483 8-K Dec. 1997 10.4
dated December 16, 1997, by Central
Reserve in favor of Peter W. Nauert.
(10) Warrant to purchase Common Shares, 0-8483 8-K Dec. 1997 10.5
dated December 16, 1997, by Central
Reserve in favor of the Turkey Vulture
Fund XIII, Ltd.
(11) Employment Agreement, dated December 0-8483 8-K Dec. 1997 10.6
15, 1997, by and between Fred Lick,
Jr. and Central Reserve
(12) Employment Agreement, dated December 0-8483 8-K Dec. 1997 10.7
15, 1997, by and between Fred Lick,
Jr. and CRL.
</TABLE>
58
<PAGE> 61
<TABLE>
<CAPTION>
INCORPORATED BY
REFERENCE TO
REGISTRATION OR FORM OR EXHIBIT
EXHIBITS FILE NUMBER REPORT DATE NUMBER
-------- --------------- ------- ----------- -------
<C> <C> <S> <C> <C> <C> <C>
(13) Employment Agreement, dated December 0-8483 8-K Dec. 1997 10.8
16, 1997, by and between Frank Grimone
and Central Reserve and CRL.
(14) The Central Reserve Life Insurance 0-8483 8-K Dec. 1997 10.9
Company Severance Benefit Plan.
(15) Reinsurance Agreement between Central 0-8483 10-K Mar. 1998 10.10
Reserve Life Insurance Company and
Reassurance Company of Hannover.
(16) Amendment No. 1 to Credit Agreement, 0-8483 10-K Mar. 1998 10.11
dated as of March 25, 1998 by and
between Central Reserve and Strategic
Partners.
(17) Administrative Services Agreement, 0-8483 10-K/A Mar. 1998 10.12
dated March 25, 1998 by and between
Mutual Management Company, Inc. and
Central Reserve Life Insurance
Company.
(18) Amendment No. 1 to Warrant to purchase 0-8483 10-K Mar. 1998 10.13
Common Shares, dated March 30, 1998 by
Central Reserve in favor of Peter
Nauert.
(19) Amendment No. 1 to Warrant to purchase 0-8483 10-K Mar. 1998 10.14
Common Shares, dated March 30, 1998 by
Central Reserve in favor of the Turkey
Vulture Fund XIII, Ltd.
(20) Employment agreement dated June 30, 0-8483 10-Q Sept. 1998 10.15
1998, by and between Val Rajic and
Central Reserve Life Corporation
(21) Employment agreement dated June 1, 0-8483 10-Q Sept. 1998 10.16
1998, by and between James Weisbarth
and Central Reserve Life Insurance
Company
(22) Employment agreement dated June 30, 0-8483 10-Q Sept. 1998 10.17
1998, by and between Peter Nauert and
Central Reserve Life Corporation
(23) Employment agreement dated June 30, 0-8483 10-Q Sept. 1998 10.18
1998, by and between Frank Grimone and
Central Reserve Life Insurance Company
and Central Reserve Life Corporation
(24) Employment agreement dated June 1, 0-8483 10-Q Sept. 1998 10.19
1998, by and between Glen Laffoon and
Central Reserve Life Insurance Company
(25) Employment agreement dated October 1, * 10.20
1998, by and between Charles Miller
and Central Reserve Life Corporation
(26) Reinsurance Agreement dated February * 10.21
1, 1999, between Continental General
Life Insurance Company and Reassurance
Company of Hannover
(27) Credit Agreement dated February 17, 0-8483 8-K Feb. 1999 10.22
1999, among Ceres Group, Inc., the
lending institutions and The Chase
Manhattan Bank, as Administrative
Agent
</TABLE>
59
<PAGE> 62
<TABLE>
<CAPTION>
INCORPORATED BY
REFERENCE TO
REGISTRATION OR FORM OR EXHIBIT
EXHIBITS FILE NUMBER REPORT DATE NUMBER
-------- --------------- ------- ----------- -------
<C> <C> <S> <C> <C> <C> <C>
(16) Letter re: change in certifying accountant
(1) Letter regarding change in certifying 0-8483 8-K Aug. 1998 16.1
accountant.
(21) Subsidiaries of the registrant
(1) Subsidiaries * 21
(23) Consents of experts and counsel
(1) Consent of Ernst & Young LLP * 23.1
(2) Consent of KPMG LLP * 23.2
(27) Financial Data Schedule
(1) Financial Data Schedule * 27
(99) Additional Exhibits
(1) Press Release dated July 6, 1998 0-8483 8-K Jul. 1998 99.3
(2) Press Release dated August 3, 1998 0-8483 8-K Aug. 1998 99.1
(3) Press Release dated November 5, 1998 0-8483 8-K Nov. 1998 99.1
(4) Press Release dated December 30, 1998 0-8483 8-K Dec. 1998 99.1
</TABLE>
* Filed herewith.
60
<PAGE> 63
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE COMPANY HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
<TABLE>
<S> <C>
CERES GROUP, INC.
By: /s/ PETER W. NAUERT
--------------------------
Peter W. Nauert, President
</TABLE>
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE COMPANY
AND IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
DATE SIGNATURE AND CAPACITY
- ----------------------------------------------------- ------------------------------------------------------------
<S> <C>
March 23, 1999 By: /s/ FRED LICK, JR.
---------------------------------------------------------
Fred Lick, Jr., Chairman of the Board of Directors
March 18, 1999 By: /s/ PETER W. NAUERT
---------------------------------------------------------
Peter W. Nauert, President and Chief Executive Officer
March 18, 1999 By: /s/ CHARLES E. MILLER, JR.
---------------------------------------------------------
Charles E. Miller, Jr., Executive Vice President
and Principal Financial and Accounting Officer
March 23, 1999 By: /s/ ANDREW A. BOEMI
---------------------------------------------------------
Andrew A. Boemi, Director
March 18, 1999 By: /s/ MICHAEL A. CAVATAIO
---------------------------------------------------------
Michael A. Cavataio, Director
March 18, 1999 By: /s/ BRADLEY E. COOPER
---------------------------------------------------------
Bradley E. Cooper, Director
March 23, 1999 By: /s/ JOHN F. NOVATNEY, JR.
---------------------------------------------------------
John F. Novatney, Director
March 23, 1999 By: /s/ RICHARD M. OSBORNE
---------------------------------------------------------
Richard M. Osborne, Director
March 18, 1999 By: /s/ ROBERT A. SPASS
---------------------------------------------------------
Robert A. Spass, Director
March 18, 1999 By: /s/ MARK H. TABAK
---------------------------------------------------------
Mark H. Tabak, Director
</TABLE>
61
<PAGE> 64
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
INCORPORATED BY
REFERENCE TO
REGISTRATION OR FORM OR EXHIBIT
EXHIBITS FILE NUMBER REPORT DATE NUMBER
-------- --------------- ------- ----------- -------
<C> <C> <S> <C> <C> <C> <C>
(2) Plan of acquisition, reorganization,
arrangement, liquidation, or succession
(1) Stock Purchase Agreement, dated as of 0-8483 8-K Dec. 1997 2.1
November 26, 1997, by and between
Strategic Partners and Central
Reserve.
(2) Amendment No. 1 to Stock Purchase 0-8483 8-K Dec. 1997 2.1
Agreement, dated as of December 16,
1997, by and between Strategic
Partners and Central Reserve.
(3) Amended and Restated Stock Purchase 0-8483 10-K Mar. 1998 2.2
Agreement, dated March 30, 1998, by
and among Strategic Partners,
Insurance Partners, L.P., Insurance
Partners Offshore (Bermuda), L.P. and
Central Reserve.
(4) Merger Agreement and Plan of 0-8483 8-K Dec. 1998 2.1
Reorganization dated December 8, 1998
between Central Reserve Life
Corporation and Ceres Group, Inc.
(5) Stock Purchase Agreement dated as of 0-8483 8-K Feb. 1999 2.2
November 4, 1998 between The Western
and Southern Life Insurance Company
and Ceres Group, Inc.
(3) Articles of Incorporation and By-laws
(1) Amended Articles of Incorporation 0-8483 10-K Mar. 1992 3(a)
(2) Code of Regulations 0-8483 10-K Mar. 1992 3(b)
(3) Amended Articles of Incorporation 0-8483 10-K Mar. 1998 3(c)
(4) Certificate of Incorporation of Ceres 0-8483 8-K Dec. 1998 3.1
Group, Inc. as filed with Secretary of
Delaware on October 22, 1998
(5) By-laws of Ceres Group, Inc. 0-8483 8-K Dec. 1998 3.2
(4) Instruments defining the rights of security
holders, including indentures
(1) Voting Agreement, dated as of July 1, * 4.1
1998, by and among Ceres Group, Inc.
(as successor-in-interest to Central
Reserve Life Corporation) and the
security holders listed on the
signature pages thereof.
</TABLE>
62
<PAGE> 65
<TABLE>
<CAPTION>
INCORPORATED BY
REFERENCE TO
REGISTRATION OR FORM OR EXHIBIT
EXHIBITS FILE NUMBER REPORT DATE NUMBER
-------- --------------- ------- ----------- -------
<C> <C> <S> <C> <C> <C> <C>
(2) Stockholders Agreement, dated as of * 4.2
July 1, 1998 by and among Ceres Group,
Inc. (as successor-in-interest to
Central Reserve Life Corporation) and
the security holders listed on the
signature pages thereof.
(3) Registration Rights Agreement, dated * 4.3
as of July 1, 1998 between Ceres
Group, Inc. (as successor-in-interest
to Central Reserve Life Corporation)
and the persons and entities set forth
on the signature pages attached
thereto.
(4) Amendment No. 1 to Registration Rights 0-8483 8-K Feb. 1999 4.4
Agreement, dated as of February 17,
1999, between Ceres Group, Inc. (as
successor-in-interest to Central
Reserve Life Corporation) and the
persons and entities set forth on the
signature pages attached thereto.
(10) Material Contracts
(1) Incentive Stock Option Plan 0-8483 10-K Mar. 1992 10(b)
(2) Agreement of Lease 0-8483 10-K Mar. 1992 10(c)
(3) Mortgage Note 0-8483 10-K Mar. 1992 10(d)
(4) Mortgage 0-8483 10-K Mar. 1992 10(e)
(5) Employment Contract 0-8483 10-K Mar. 1993 10(a)
(6) Credit Agreement, dated as of December 0-8483 8-K Dec. 1997 10.1
16, 1997, by and between Central
Reserve and Strategic Partners.
(7) Pledge Agreement, dated as of December 0-8483 8-K Dec. 1997 10.2
16, 1997, by and between Central
Reserve and Strategic Partners.
(8) Promissory Note, dated as of December 0-8483 8-K Dec. 1997 10.3
16, 1997, by Central Reserve in favor
of Strategic Partners.
(9) Warrant to purchase Common Shares, 0-8483 8-K Dec. 1997 10.4
dated December 16, 1997, by Central
Reserve in favor of Peter W. Nauert.
(10) Warrant to purchase Common Shares, 0-8483 8-K Dec. 1997 10.5
dated December 16, 1997, by Central
Reserve in favor of the Turkey Vulture
Fund XIII, Ltd.
(11) Employment Agreement, dated December 0-8483 8-K Dec. 1997 10.6
15, 1997, by and between Fred Lick,
Jr. and Central Reserve.
(12) Employment Agreement, dated December 0-8483 8-K Dec. 1997 10.7
15, 1997, by and between Fred Lick,
Jr. and CRL.
</TABLE>
63
<PAGE> 66
<TABLE>
<CAPTION>
INCORPORATED BY
REFERENCE TO
REGISTRATION OR FORM OR EXHIBIT
EXHIBITS FILE NUMBER REPORT DATE NUMBER
-------- --------------- ------- ----------- -------
<C> <C> <S> <C> <C> <C> <C>
(13) Employment Agreement, dated December 0-8483 8-K Dec. 1997 10.8
16, 1997, by and between Frank Grimone
and Central Reserve and CRL.
(14) The Central Reserve Life Insurance 0-8483 8-K Dec. 1997 10.9
Company Severance Benefit Plan.
(15) Reinsurance Agreement between Central 0-8483 10-K Mar. 1998 10.10
Reserve Life Insurance Company and
Reassurance Company of Hannover.
(16) Amendment No. 1 to Credit Agreement, 0-8483 10-K Mar. 1998 10.11
dated as of March 25, 1998 by and
between Central Reserve and Strategic
Partners.
(17) Administrative Services Agreement, 0-8483 10-K/A Mar. 1998 10.12
dated March 25, 1998 by and between
Mutual Management Company, Inc. and
Central Reserve Life Insurance
Company.
(18) Amendment No. 1 to Warrant to purchase 0-8483 10-K Mar. 1998 10.13
Common Shares, dated March 30, 1998 by
Central Reserve in favor of Peter
Nauert.
(19) Amendment No. 1 to Warrant to purchase 0-8483 10-K Mar. 1998 10.14
Common Shares, dated March 30, 1998 by
Central Reserve in favor of the Turkey
Vulture Fund XIII, Ltd.
(20) Employment agreement dated June 30, 0-8483 10-Q Sept. 1998 10.15
1998, by and between Val Rajic and
Central Reserve Life Corporation.
(21) Employment agreement dated June 1, 0-8483 10-Q Sept. 1998 10.16
1998, by and between James Weisbarth
and Central Reserve Life Insurance
Company
(22) Employment agreement dated June 30, 0-8483 10-Q Sept. 1998 10.17
1998, by and between Peter Nauert and
Central Reserve Life Corporation.
(23) Employment agreement dated June 30, 0-8483 10-Q Sept. 1998 10.18
1998, by and between Frank Grimone and
Central Reserve Life Insurance Company
and Central Reserve Life Corporation.
(24) Employment agreement dated June 1, 0-8483 10-Q Sept. 1998 10.19
1998, by and between Glen Laffoon and
Central Reserve Life Insurance
Company.
(25) Employment agreement dated October 1, * 10.20
1998, by and between Charles Miller
and Central Reserve Life Corporation.
(26) Reinsurance Agreement dated February * 10.21
1, 1999, between Continental General
Life Insurance Company and Reassurace
Company of Hannover.
(27) Credit Agreement dated February 17, 0-8483 8-K Feb. 1999 10.22
1999, among Ceres Group, Inc., the
lending institutions and The Chase
Manhattan Bank, as Administrative
Agent.
</TABLE>
64
<PAGE> 67
<TABLE>
<CAPTION>
INCORPORATED BY
REFERENCE TO
REGISTRATION OR FORM OR EXHIBIT
EXHIBITS FILE NUMBER REPORT DATE NUMBER
-------- --------------- ------- ----------- -------
<C> <C> <S> <C> <C> <C> <C>
(16) Letter re: change in certifying accountant
(1) Letter regarding change in certifying 0-8483 10-K Mar. 1993 16
accountant.
(2) Letter regarding change in certifying 0-8483 8-K Aug. 1998 16.1
accountant.
(21) Subsidiaries of the registrant
(1) Subsidiaries * 21
(23) Consents of expert and counsel
(1) Consent of Ernst & Young LLP * 23.1
(2) Consent of KPMG LLP * 23.2
(27) Financial Data Schedule
(1) Financial Data Schedule * 27
(99) Additional Exhibits
(1) Press Release dated July 6, 1998 0-8483 8-K Jul. 1998 99.3
(2) Press Release dated August 3, 1998 0-8483 8-K Aug. 1998 99.1
(3) Press Release dated November 5, 1998 0-8483 8-K Nov. 1998 99.1
(4) Press Release dated December 30, 1998 0-8483 8-K Dec. 1998 99.1
</TABLE>
* Filed herewith.
65
<PAGE> 1
Exhibit 4.1
VOTING AGREEMENT
This VOTING AGREEMENT (the "AGREEMENT") is entered into as of July 1,
1998, 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
-----------
I.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.
<PAGE> 2
"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 security holder listed on the
signature page hereof and (ii) any direct or indirect transferee of any
such security holder who shall become a party to this Agreement by
executing a joinder agreement in the form of EXHIBIT A hereto.
"INDEPENDENT DIRECTOR" shall mean a director meeting the
standards of an "independent director" as defined in Rule 4200(a) of
the rules of the NASD as of the Closing Date.
"IP" shall mean, collectively, IP Bermuda and IP Delaware.
"IP BERMUDA" shall mean Insurance Partners Offshore (Bermuda),
L.P., a Bermuda limited partnership.
"IP DELAWARE" shall mean Insurance Partners, L.P., a Delaware
limited partnership.
"IP GROUP" shall mean IP Delaware, IP Bermuda, their
respective Affiliates, the respective officers, directors, and
employees (and members of their respective families and trusts for the
primary benefit of such family members) of the foregoing, and the
respective limited partners of IP Delaware and IP Bermuda.
"IP GROUP CLOSING DATE SHARES" shall mean the number of shares
of Common Stock owned by the IP Group as of the date of this Agreement
as set forth on EXHIBIT B hereto.
"LICK EMPLOYMENT AGREEMENT" shall mean that certain Employment
Agreement, dated as of December 15, 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, Peter W. Nauert, Michael
A. Cavataio, Karon Hill and Val Rajic (and members of their respective
families and trusts for the primary benefit of such family members).
<PAGE> 3
"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 July 1, 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;
(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, the SAP Group, IP
<PAGE> 4
\
Group and Osborne Group shall be permitted to vote in favor of the SAP
Designees, IP Designees and Osborne Designee as provided in this
Section 2.1(a) to the extent necessary to ensure the election of such
Designees prior to casting any votes in favor of such Independent
Directors; (ii) in the event one or two of the individuals to be
designated pursuant to the foregoing provisions must constitute an
Independent Director in order to meet the requirements of the
immediately preceding proviso, then, first, IP shall designate as one
of its designees an individual that constitutes an Independent
Director, and, second, SAP shall designate as one of its designees an
individual that constitutes an Independent Director.
(b) For purposes of the foregoing provisions and SECTION 2.2, in
determining whether any person or group owns a specified number of shares of
Common Stock for purposes of comparison to the number of shares owned by a
person or group on the Closing Date, appropriate adjustment shall be made in
each case to give effect to any stock splits, dividends or combinations.
(c) If, prior to his election to the Board of Directors of the Company
pursuant to SECTION 2.1, any designee shall be unable or unwilling to serve as a
director of the Company, the Holder or Holders who designated such Designee
shall be entitled to nominate a replacement who shall then be a Designee for
purposes of this SECTION 2.1. If, following an election to the Board of
Directors of the Company pursuant to SECTION 2.1, any Designee shall resign or
be removed or be unable to serve for any reason prior to the expiration of his
term as a director of the Company, the Holder or Holders who designated such
Designee shall, within thirty (30) days of such event, notify the Board of
Directors of the Company in writing of a replacement Designee, and either (i)
the Holders shall vote their shares of Common Stock, at any regular or special
meeting called for the purpose of filling positions on the Board of Directors of
the Company or in any written consent executed in lieu of such a meeting of
stockholders, and shall take all such other actions necessary to ensure the
election to the Board of Directors of the Company of such replacement Designee
to fill the unexpired term of the Designee who such new Designee is replacing or
(ii) the Board of Directors shall elect such replacement Designee to fill the
unexpired term of the Designee who such new Designee is replacing. If any Holder
requests that any Designee designated by such Holder be removed as a Director
(with or without cause) by written notice thereof to the Company, then the
Company shall take all actions necessary to effect, and each of the Holders
shall vote all of its capital stock in favor of, such removal upon such request.
(d) Each Holder shall vote its shares of Common Stock at any regular or
special meeting of stockholders of the Company or in any written consent
executed in lieu of such a meeting of stockholders and shall take all other
actions necessary to give effect to the agreements contained in this Agreement
(including, without limitation, the election of Designees as directors as
described herein) and to ensure that the certificate of incorporation and bylaws
as in effect immediately following the date hereof do not, at any time
thereafter, conflict in any respect with the provisions of this Agreement. In
order to effectuate the 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.
<PAGE> 5
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; PROVIDED FURTHER, that nothing contained herein shall
restrict the sale, assignment or transfer of any warrants issued by the Company
pursuant to the Credit Agreement dated December 16, 1997 by and between the
Company and SAP. Any Transfer not complying with the provisions of this
Agreement shall be void AB INITIO, shall not be effective for any purpose and
any purported transferee of such a Transfer shall not acquire any right or
interest in such Common Stock or the Company.
SECTION 3.2 RESTRICTIVE LEGENDS.
(a) For the term of this Agreement, each certificate
representing the shares of Common Stock or Common Stock Equivalents subject
hereto, and each instrument or certificate issued upon exchange or transfer
thereof, shall be stamped or otherwise imprinted with the following legend:
"THIS CERTIFICATE AND THE SHARES REPRESENTED HEREBY ARE
SUBJECT TO TRANSFER RESTRICTIONS, VOTING LIMITATIONS, AND OTHER TERMS
AND CONDITIONS CONTAINED IN A VOTING AGREEMENT DATED JULY 1, 1998 BY
AND AMONG THE COMPANY AND CERTAIN OF ITS STOCKHOLDERS, A COPY OF WHICH
IS ON FILE WITH THE SECRETARY OF THE COMPANY."
Page 31 of 136 Pages
<PAGE> 6
(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
<PAGE> 7
provision in every other respect and the remaining provisions shall not in any
way be affected or impaired thereby.
SECTION 4.9 NOTICES. Any notices or other communications
required or permitted hereunder shall be in writing, and shall be sufficiently
given if made by hand delivery, by telex, by telecopier, or registered or
certified mail, postage prepaid return receipt requested, addressed as follows
(or at such other address as may be substituted by notice given as herein
provided):
If to the Company:
------------------
Central Reserve Life Corporation
17800 Royalton Road
Strongsville, Ohio 44136
Facsimile No.: (440) 572-4501
Attention: Fred Lick, Jr.
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.
* * *
<PAGE> 8
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: /s/ Frank W. Grimone
--------------------
Name: Frank W. Grimone
Title: CFO
<PAGE> 9
SIGNATURE PAGE TO VOTING AGREEMENT
INSURANCE PARTNERS, L.P.
By: Insurance GenPar, L.P.,
its general partner
By: Insurance GenPar MGP, L.P.,
its general partner
By: Insurance GenPar MGP, Inc.,
its general partner
By: /s/ Robert A. Spass
----------------------------------
Name: Robert A. Spass
----------------------------------
Title:
----------------------------------
Address:
One Chase Manhattan 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
<PAGE> 10
SIGNATURE PAGE TO VOTING AGREEMENT
INSURANCE PARTNERS OFFSHORE (BERMUDA), L.P.
By: Insurance GenPar (Bermuda), L.P.,
its general partner
By: Insurance GenPar MGP (Bermuda), L.P.,
its general partner
By: Insurance GenPar MGP (Bermuda), Inc.,
its general partner
By: /s/ Robert A. Spass
------------------------
Name: Robert A. Spass
------------------------
Title:
------------------------
Address:
One Chase Manhattan Plaza
44th Floor
New York, New York 10005
Attention: Bradley & Cooper
Copy to:
Weil, Gotshal & Manges LLP
767 Fifth Avenue
New York, New York 10153
Attention: Thomas A. Roberts
<PAGE> 11
SIGNATURE PAGE TO VOTING AGREEMENT
STRATEGIC ACQUISITION PARTNERS, LLC
By: /s/ Val Rajic
-----------------------------
Name: Val Rajic
-----------------------------
Title:
Address:
1750 East Golf Road
Suite 210
Schaumburg, Illinois 60173
Copy to:
McDermott, Will & Emery
227 West Monroe Street
Chicago, Illinois 60606
Attention: Stanley H. Meadows, P.C.
<PAGE> 12
SIGNATURE PAGE TO VOTING AGREEMENT
/s/ Peter W. Nauert
-------------------
Peter W. Nauert
Address:
1750 East Golf Road
Suite 210
Schaumburg, Illinois 60173
Copy to:
McDermott, Will & Emery
227 West Monroe Street
Chicago, Illinois 60606
Attention: Stanley H. Meadows, P.C.
<PAGE> 13
SIGNATURE PAGE TO VOTING AGREEMENT
/s/ Michael A. Cavataio
-------------------------------------------
Michael A. Cavataio
Address:
3125 Ramsgate Road
Rockford, Illinois 61114
<PAGE> 14
SIGNATURE PAGE TO VOTING AGREEMENT
MERCANTILE BANK OF NORTHERN ILLINOIS, TRUSTEE OF
THE CONSECO STOCK OPTION DIRECTOR PLAN FBO
MICHAEL CAVATAIO #08590033
By: /s/ Kathy A. Moffatt
-------------------------------
Name: Kathy A. Moffatt
-------------------------------
Title: Trust Officer
-------------------------------
Address:
P.O. Box 30
Freeport, Illinois 61032
Copy to:
Michael A. Cavataio
3125 Ramsgate Road
Rockford, Illinois 61114
<PAGE> 15
SIGNATURE PAGE TO VOTING AGREEMENT
MERCANTILE BANK OF NORTHERN ILLINOIS, TRUSTEE OF
THE CONSECO STOCK OPTION DIRECTOR PLAN FBO
MICHAEL CAVATAIO #08590034
By: /s/ Kathy A. Moffatt
---------------------------
Name: Kathy A. Moffatt
---------------------------
Title: Trust Officer
---------------------------
Address:
P.O. Box 30
Freeport, Illinois 61032
Copy to:
Michael A. Cavataio
3125 Ramsgate Road
Rockford, Illinois 61114
<PAGE> 16
SIGNATURE PAGE TO VOTING AGREEMENT
/s/ Karon Hill
---------------------------
Karon Hill
Address:
1750 East Golf Road
Suite 210
Schaumburg, Illinois 60173
<PAGE> 17
SIGNATURE PAGE TO VOTING AGREEMENT
/s/ Val Rajic
-------------------
Val Rajic
Address:
1750 East Golf Road
Suite 210
Schaumburg, Illinois 60173
<PAGE> 18
SIGNATURE PAGE TO VOTING AGREEMENT
TURKEY VULTURE FUND XIII, LTD.
By: /s/ Richard M. Osborne
-------------------------
Name: Richard M. Osborne
-------------------------
Title: Manager
-------------------------
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
<PAGE> 19
SIGNATURE PAGE TO VOTING AGREEMENT
/s/ Marc C. Krantz
---------------------------------
Marc C. Krantz
Address:
Kohrman Jackson & Krantz, P.L.L.
1375 East Ninth Street
One Cleveland Center, 20th Floor
Cleveland, Ohio 44114
<PAGE> 20
SIGNATURE PAGE TO VOTING AGREEMENT
KRANTZ FAMILY LIMITED PARTNERSHIP
By: /s/ Byron S. Krantz
-------------------------------
Byron S. Krantz, its General Partner
Address:
Kohrman Jackson & Krantz, P.L.L.
1375 East Ninth Street
One Cleveland Center, 20th Floor
Cleveland, Ohio 44114
<PAGE> 21
SIGNATURE PAGE TO VOTING AGREEMENT
MEDICAL MUTUAL OF OHIO
By: /s/ Robert N. Trombly
--------------------------------
Name: Robert N. Trombly
--------------------------------
Title: Corporate Secretary
--------------------------------
Address:
2060 East Ninth Street
Cleveland, Ohio 44115
Attention: General Counsel
<PAGE> 22
SIGNATURE PAGE TO VOTING AGREEMENT
UNITED PAYORS AND UNITED PROVIDERS, INC.
By: /s/ S. Joseph Bruno
---------------------------
Name: S. Joseph Bruno
---------------------------
Title: V.P. and CFO
---------------------------
Address:
2275 Research Blvd.
6th Floor
Rockville, Maryland 20850
Attention: Joe Mott
<PAGE> 23
SIGNATURE PAGE TO VOTING AGREEMENT
/s/ Howard R. Conant
-----------------------------------
Howard R. Conant
Address:
c/o Lunn Partners
209 South LaSalle Street
Chicago, Illinois 60604
Attention: John Cochrane
<PAGE> 24
SIGNATURE PAGE TO VOTING AGREEMENT
JOSEPH CUSIMANO IRA
By: /s/ Joseph Cusimano IRA
-----------------------------
Name: Joseph Cusimano IRA
-----------------------------
Title:
-----------------------------
Address:
c/o Lunn Partners
209 South LaSalle Street
Chicago, Illinois 60604
<PAGE> 25
SIGNATURE PAGE TO VOTING AGREEMENT
LEG PARTNERS SBIC, L.P.
By: /s/ Lawrence E. Golub
----------------------------------------
Name: Lawrence E. Golub
----------------------------------------
Title: President of Golub GPII Corporation
----------------------------------------
General Partner
Address:
230 Park Avenue
19th Floor
New York, New York 10169
Attention: Lawrence Golub
<PAGE> 26
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:
-----------------------------
<PAGE> 27
EXHIBIT B
================================================================================
INVESTOR CLOSING DATE SHARES
- -------------------------------------- ------------------------------
Insurance Partners, L.P. 2,799,466
- ------------------------- ------------------------------
Insurance Partners Offshore (Bermuda), L.P. 1,545,990
- ------------------------------------------- ------------------------------
Peter W. Nauert 933,636
- ------------------------------------------ ------------------------------
Michael A. Cavataio 130,316
- ------------------------------------------ ------------------------------
Mercantile Bank of Northern Illinois,
Trustee of the Conseco Stock Option
Plan FBO Michael Cavataio
#08590033 37,764
#08590034 13,738
- ------------------------------------------ ------------------------------
Karon Hill 100,000
- ------------------------------------------ -----------------------------
Val Rajic 100,000
- ------------------------------------------ ------------------------------
Strategic Acquisition Partners, LLC -0-
- ------------------------------------------ -----------------------------
Turkey Vulture Fund XIII, Ltd. 720,910
- ------------------------------------------ ------------------------------
Medical Mutual of Ohio 363,636
- ------------------------------------------ ------------------------------
United Payors and United Providers, Inc. 181,818
- ------------------------------------------ ------------------------------
Howard R. Conant 90,909
- ------------------------------------------ ------------------------------
Joseph Cusimano IRA 90,909
- ------------------------------------------ ------------------------------
LEG Partners SBIC, L.P. 181,818
- ------------------------------------------ -----------------------------
Marc C. Krantz 4,546
- ------------------------------------------ ------------------------------
Krantz Family Limited Partnership 4,544
- ------------------------------------------ ------------------------------
<PAGE> 1
EXHIBIT 4.2
STOCKHOLDERS AGREEMENT
by and among
CENTRAL RESERVE LIFE CORPORATION
and
THE SECURITY HOLDERS LISTED ON
THE SIGNATURE PAGES HEREOF
Dated as of July 1, 1998
================================================================================
<PAGE> 2
TABLE OF CONTENTS
-----------------
ARTICLE I
DEFINITIONS
-----------
1.1 Definitions............................................... 1
-----------
1.2 Rules of Construction..................................... 3
---------------------
1.3 Other Definitions......................................... 3
-----------------
ARTICLE II
CERTAIN OTHER ACTIVITIES; FIDUCIARY DUTIES
------------------------------------------
2.1 Other Activities of the Holders; Fiduciary Duties......... 4
-------------------------------------------------
ARTICLE III
TRANSFERS OF SECURITIES
-----------------------
3.1 Drag Along Rights......................................... 4
-----------------
3.2 Tag Along Rights.......................................... 5
----------------
3.3 Certain Events Not Deemed Transfers....................... 6
-----------------------------------
3.4 Replacement of Securities................................. 6
-------------------------
3.5 Restrictive Legend........................................ 6
------------------
ARTICLE IV
TERMINATION
-----------
4.1 Termination............................................... 7
-----------
ARTICLE V
MISCELLANEOUS
-------------
5.1 Notices................................................... 7
-------
5.2 Legal Holidays............................................ 8
--------------
5.3 Governing Law............................................. 8
-------------
5.4 Successors and Assigns.................................... 8
----------------------
5.5 Duplicate Originals....................................... 8
-------------------
5.6 Severability.............................................. 8
------------
5.7 No Waivers; Amendments.................................... 8
----------------------
<PAGE> 3
STOCKHOLDERS AGREEMENT
----------------------
THIS STOCKHOLDERS AGREEMENT (this "AGREEMENT") dated as of July 1,
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 security holder listed on the
signature page hereof and (ii) any direct or indirect transferee of any
such security holder 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.
<PAGE> 4
"IP GROUP" shall mean IP Delaware, IP Bermuda, their respective
Affiliates, the respective officers, directors, and employees (and members
of their respective families and trusts for the primary benefit of such
family members) of any of the foregoing, and any Person that is a limited
partner of IP Delaware or IP Bermuda.
"LEGAL HOLIDAY" shall have the meaning set forth in Section 5.2.
"PARTICIPATION OFFER" shall have the meaning set forth in Section 3.2.
"PERSON" or "PERSON" shall mean any individual, corporation,
partnership, limited liability company, joint venture, association,
joint-stock company, trust, unincorporated organization, or government or
other agency or political subdivision thereof.
"REGULATION D" shall mean Regulation D promulgated under the
Securities Act by the SEC.
"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.
"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
------------------------------------------
<PAGE> 5
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.
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
3.2.1 APPLICABILITY. In the event any Holder desires to effect
a Transfer (other than a Transfer in an underwritten public offering
pursuant to an effective registration statement under the Securities
Act) of shares of Common Stock and/or Common Stock Equivalents
representing more than twenty percent (20%) of the outstanding shares
of Common Stock (provided, that for the purposes of such calculation,
the following shares of Common Stock shall be deemed to be issued and
outstanding: (i) any shares of Common Stock to be Transferred that are
to be issued pursuant to the exercise or conversion of any Common Stock
Equivalents and (ii) any shares of Common Stock
<PAGE> 6
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 Holder represent of
its Fully-Diluted Common Stock; PROVIDED, HOWEEVER, 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 TRANSFER. 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 security holder 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.
3.5 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 JULY 1,
1998, A COPY OF WHICH MAY BE OBTAINED FROM THE COMPANY AT ITS
PRINCIPAL EXECUTIVE OFFICES.
<PAGE> 7
ARTICLE IV
TERMINATION
-----------
4.1 TERMINATION. The provisions of this Agreement shall terminate on
July 1, 2003.
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.: (440) 572-4501
Attention: Fred Lick, Jr.
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.
<PAGE> 8
5.7 NO WAIVERS; AMENDMENTS
5.7.1 No failure or delay on the part of the Company or any
Holder in exercising any right, power, or remedy hereunder shall
operate as a waiver thereof, nor shall any single or partial exercise
of any such right, power, or remedy preclude any other or further
exercise thereof or the exercise of any other right, power, or remedy.
The remedies provided for herein are cumulative and are not exclusive
of any remedies that may be available to the Company or any Holder at
law, in equity, or otherwise.
5.7.2 Any provision of this Agreement may be amended or waived
if, but only if, such amendment or waiver is in writing and is signed
by the Company and the Required Holders; provided that no amendment or
waiver that is adverse to any Holder that owns more than 5% of the
outstanding Common Stock shall be effective as to that Holder prior to
the three year anniversary of the date hereof without such Holder's
consent.
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
<PAGE> 9
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: /s/ Frank W. Grimone
------------------------
Name: Frank W. Grimone
Title: CFO
<PAGE> 10
SIGNATURE PAGE TO STOCKHOLDERS AGREEMENT
INSURANCE PARTNERS, L.P.
By: Insurance GenPar, L.P.,
its general partner
By: Insurance GenPar MGP, L.P.,
its general partner
By: Insurance GenPar MGP, Inc.,
its general partner
By: /s/ Robert Spass
--------------------------
Name: Robert Spass
--------------------------
Title:
--------------------------
Address:
One Chase Manhattan 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
<PAGE> 11
SIGNATURE PAGE TO STOCKHOLDERS AGREEMENT
INSURANCE PARTNERS OFFSHORE (BERMUDA), L.P.
By: Insurance GenPar (Bermuda), L.P.,
its general partner
By: Insurance GenPar MGP (Bermuda), L.P.,
its general partner
By: Insurance GenPar MGP (Bermuda), Inc., its
general partner
By: /s/ Robert Spass
---------------------------
Name: Robert Spass
---------------------------
Title:
---------------------------
Address:
One Chase Manhattan Plaza
44th Floor
New York, New York 10005
Attention: Bradley & Cooper
Copy to:
Weil, Gotshal & Manges LLP
767 Fifth Avenue
New York, New York 10153
Attention: Thomas A. Roberts
<PAGE> 12
SIGNATURE PAGE TO STOCKHOLDERS AGREEMENT
STRATEGIC ACQUISITION PARTNERS, LLC
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
Address:
1750 East Golf Road
Suite 210
Chicago, Illinois 60173
Copy to:
McDermott, Will & Emery
227 West Monroe Street
Chicago, Illinois 60606
Attention: Stanley H. Meadows, P.C.
<PAGE> 13
SIGNATURE PAGE TO STOCKHOLDERS AGREEMENT
/s/ Peter W. Nauert
-----------------------------
Peter W. Nauert
Address:
1750 East Golf Road
Suite 210
Schaumburg, Illinois 60173
Copy to:
McDermott, Will & Emery
227 West Monroe Street
Chicago, Illinois 60606
Attention: Stanley H. Meadows, P.C.
<PAGE> 14
SIGNATURE PAGE TO STOCKHOLDERS AGREEMENT
/s/ Michael A. Cavataio
-----------------------------------
Michael A. Cavataio
Address:
3125 Ramsgate Road
Rockford, Illinois 61114
<PAGE> 15
SIGNATURE PAGE TO STOCKHOLDERS AGREEMENT
MERCANTILE BANK OF NORTHERN ILLINOIS,
TRUSTEE OF THE CONSECO STOCK OPTION
DIRECTOR PLAN FBO
MICHAEL CAVATAIO #08590033
By: /s/ Kathy A. Moffatt
-----------------------------
Name: Kathy A. Moffatt
-----------------------------
Title: Trust Officer
-----------------------------
Address:
P.O. Box 30
Freeport, Illinois 61032
Copy to:
Michael A. Cavataio
3125 Ramsgate Road
Rockford, Illinois 61114
<PAGE> 16
SIGNATURE PAGE TO STOCKHOLDERS AGREEMENT
MERCANTILE BANK OF NORTHERN ILLINOIS,
TRUSTEE OF THE CONSECO STOCK OPTION
DIRECTOR PLAN FBO
MICHAEL CAVATAIO #08590034
By: /s/ Kathy A. Moffatt
---------------------------------
Name: Kathy A. Moffatt
---------------------------------
Title: Trust Officer
---------------------------------
Address:
P.O. Box 30
Freeport, Illinois 61032
Copy to:
Michael A. Cavataio
3125 Ramsgate Road
Rockford, Illinois 61114
<PAGE> 17
SIGNATURE PAGE TO STOCKHOLDERS AGREEMENT
/s/ Karon Hill
-----------------------------
Karon Hill
Address:
1750 East Golf Road
Suite 210
Schaumburg, Illinois 60173
<PAGE> 18
SIGNATURE PAGE TO STOCKHOLDERS AGREEMENT
/s/ Val Rajic
-----------------------------
Val Rajic
Address:
1750 East Golf Road
Suite 210
Schaumburg, Illinois 60173
<PAGE> 19
SIGNATURE PAGE TO STOCKHOLDERS AGREEMENT
TURKEY VULTURE FUND XIII, LTD.
By: /s/ Richard M. Osborne
--------------------------
Name: Richard M. Osborne
--------------------------
Title: Manager
--------------------------
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
<PAGE> 20
SIGNATURE PAGE TO STOCKHOLDERS AGREEMENT
/s/ Marc C. Krantz
-----------------------------
Marc C. Krantz
Address:
Kohrman Jackson & Krantz, P.L.L.
1375 East Ninth Street
One Cleveland Center, 20th Floor
Cleveland, Ohio 44114
<PAGE> 21
SIGNATURE PAGE TO STOCKHOLDERS AGREEMENT
KRANTZ FAMILY LIMITED PARTNERSHIP
By: /s/ Byron S. Krantz
----------------------------------------
Byron S. Krantz, its General Partner
Address:
Kohrman Jackson & Krantz, P.L.L.
1375 East Ninth Street
One Cleveland Center, 20th Floor
Cleveland, Ohio 44114
<PAGE> 22
SIGNATURE PAGE TO STOCKHOLDERS AGREEMENT
MEDICAL MUTUAL OF OHIO
By: /s/ Robert N. Trombly
---------------------------
Name: Robert N. Trombly
---------------------------
Title: Corporate Secretary
---------------------------
Address:
2060 East Ninth Street
Cleveland, Ohio 44115
Attention: General Counsel
<PAGE> 23
SIGNATURE PAGE TO STOCKHOLDERS AGREEMENT
UNITED PAYORS AND UNITED PROVIDERS, INC.
By: /s/ S. Joseph Bruno
-----------------------------------
Name: S. Joseph Bruno
-----------------------------------
Title: Vice President & CFO
-----------------------------------
Address:
2275 Research Blvd.
6th Floor
Rockville, Maryland 20850
Attention: Joe Mott
<PAGE> 24
SIGNATURE PAGE TO STOCKHOLDERS AGREEMENT
/s/ Howard R. Conant
--------------------------------
Howard R. Conant
Address:
c/o Lunn Partners
209 South LaSalle Street
Chicago, Illinois 60604
Attention: John Cochrane
<PAGE> 25
SIGNATURE PAGE TO STOCKHOLDERS AGREEMENT
JOSEPH CUSIMANO IRA
By: /s/ Joseph Cusimano IRA
--------------------------
Name: Joseph Cusimano IRA
--------------------------
Title:
--------------------------
Address:
c/o Lunn Partners
209 South LaSalle Street
Chicago, Illinois 60604
<PAGE> 26
SIGNATURE PAGE TO STOCKHOLDERS AGREEMENT
LEG PARTNERS SBIC, L.P.
By: /s/ Lawrence E. Golub
-----------------------------------------
Name: Lawrence E. Golub
-----------------------------------------
Title: President of Golub GPII Corporation
General Partner
-----------------------------------------
Address:
230 Park Avenue
19th Floor
New York, New York 10169
Attention: Lawrence Golub
<PAGE> 1
EXHIBIT 4.3
CENTRAL RESERVE LIFE CORPORATION
REGISTRATION RIGHTS AGREEMENT
-----------------------------
This Registration Rights Agreement (this "Agreement"), dated as of July 1,
1998, is between CENTRAL RESERVE LIFE CORPORATION, an Ohio corporation (the
"Corporation"), and the persons and entities set forth on the signature pages
attached hereto (the "Investors").
R E C I T A L S
---------------
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.
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
<PAGE> 2
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 dated as of March 30, 1998, by and among the Company,
Strategic Acquisition Partners, LLC, Insurance Partners, L.P.
and Insurance Partners Offshore (Bermuda).
2. DEMAND REGISTRATION.
2.1 REQUESTS FOR REGISTRATION. Subject to the terms of this
Agreement, the holders of at least $5,000,000 of the then market value of the
outstanding Registrable Shares 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, LLC (or its principals
or affiliates) (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
<PAGE> 3
a risk, pro rata among the respective holders of Registrable Shares on the basis
of the number of Registrable Shares owned by such holders, with further
successive pro rata allocations among the holders of Registrable Shares if any
such holder of Registrable Shares has requested the registration of less than
all such Registrable Shares it is entitled to register.
2.5 RESTRICTIONS. The Corporation will not be obligated to
effect any Demand Registration within 180 days after the effective date of a
previous Demand Registration. The Corporation may postpone for up to ninety (90)
days the filing or the effectiveness (but not the preparation) of a registration
statement for a Demand Registration if the Board of Directors of the Corporation
reasonably and in good faith determines that such filing would require a
disclosure of a material fact that would have a material adverse effect on the
Corporation or any plan by the Corporation to engage in any acquisition of
assets (other than in the ordinary course of business) or any merger,
consolidation, tender offer or other significant transaction. In order to
postpone the filing of a registration statement pursuant to this Section 2.5,
the Corporation shall promptly (but in any event within ten (10) days), upon
determining to seek such postponement, deliver to each holder who has requested
the registration of all or any part of its Registrable Shares, a certificate
signed by an executive officer of the Corporation stating that the Corporation
is postponing such filing pursuant to this Section 2.5 and a general statement
of the reason for such postponement and an approximation of the anticipated
delay. Within twenty (20) days after receiving such certificate, the holders of
a majority of the Registrable Shares held who have requested the registration of
all or any part of their respective Registrable Shares and for which
registration was previously requested may withdraw such demand request by giving
written notice to the Corporation; if withdrawn, the demand request shall be
deemed not to have been made for all purposes of this Agreement. The Corporation
may postpone the filing of a particular registration statement pursuant to this
Section 2.5 only once.
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 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
<PAGE> 4
registration creates a substantial risk that the price per Common Share will be
reduced, the Corporation will include in such registration first, the securities
requested to be included therein by the holders requesting such registration and
the Registrable Shares requested to be included in such registration, pro rata
among the holders of such securities on the basis of the number of Common Shares
or Registrable Shares which are owned by such holders, and second, other
securities requested to be included in such registration.
3.4 OTHER REGISTRATIONS. If the Corporation has previously
filed a registration statement with respect to Registrable Shares pursuant to
Section 2 or pursuant to this Section 3, and if such previous registration has
not been withdrawn or abandoned, the Corporation will not file or cause to be
effected any other registration of any of its equity securities or securities
convertible or exchangeable into or exercisable for its equity securities under
the Securities Act (except on Form S-8 or any successor form), whether on its
own behalf or at the request of any holder or holders of such securities, until
a period of at least 180 days has elapsed from the effective date of such
previous registration.
3.5 SELECTION OF UNDERWRITERS. In connection with any
Piggyback Registration, the holders of at least a majority of the Registrable
Shares requested to be registered shall have the right to select the managing
underwriters (subject to the approval of the Corporation which shall not be
unreasonably withheld or delayed) to administer any offering of the
Corporation's securities in which the Corporation does not participate, and the
Corporation will have such right in any offering in which it participates.
4. HOLDBACK AGREEMENTS.
4.1 HOLDER'S 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.
<PAGE> 5
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:
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);
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;
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;
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);
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;
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;
provide a transfer agent and registrar for all such Registrable Shares
not later than the effective date of such registration statement;
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).
<PAGE> 6
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;
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;
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;
at the request of any seller of such Registrable Shares in connection
with an underwritten offering, furnish on the date or dates provided for in the
underwriting agreement: (i) an opinion of counsel, addressed to the underwriters
and the sellers of Registrable Shares, covering such matters as such
underwriters and sellers may reasonably request, including such matters as are
customarily furnished in connection with an underwritten offering and (ii) a
letter or letters from the independent certified public accountants of the
Corporation addressed to the underwriters and the sellers of Registrable Shares,
covering such matters as such underwriters and sellers may reasonably request,
in which letter(s) such accountants shall state, without limiting the generality
of the foregoing, that they are independent certified public accountants within
the meaning of the Securities Act and that in their opinion the financial
statements and other financial data of the Corporation included in the
registration statement, the prospectus(es), or any amendment or supplement
thereto, comply in all material respects with the applicable accounting
requirements of the Securities Act;
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;
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;
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;
<PAGE> 7
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
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.
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
<PAGE> 8
(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 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
<PAGE> 9
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 144 AND RULE 144A. At the request of any holder
of Registrable Shares who proposes to sell securities in compliance with Rule
144 of the Commission, the Corporation will (i) forthwith furnish to such holder
a written statement of compliance with the filing requirements of the Commission
as set forth in Rule 144, as such rule may be amended from time to time and (ii)
make available to the public and such holders such information as will enable
the holders of Registrable Shares to make sales pursuant to Rule 144. Unless the
Corporation is subject to Section 13 or 15(d) of the Exchange Act, the
Corporation will provide to the holder of Registrable Shares and to any
prospective purchaser of Registrable Shares under Rule 144A of the Commission,
the information described in Rule 144A(d)(4) of the Commission.
9. PARTICIPATION IN UNDERWRITTEN REGISTRATIONS. No Person may
participate in any registration hereunder which is underwritten unless such
Person (a) agrees to sell its securities on the basis provided in any
underwriting arrangements approved by such Person or Persons entitled hereunder
to approve such arrangements and (b) completes and executes all questionnaires,
powers of attorney, custody agreements, indemnities, underwriting agreements and
other documents reasonably required under the terms of such underwriting
arrangements; 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.
<PAGE> 10
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.
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
<PAGE> 11
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 the Signature pages
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.]
<PAGE> 12
The parties hereto have executed this Agreement on the date first above
written.
THE CORPORATION:
----------------
CENTRAL RESERVE LIFE CORPORATION
By: /s/ Frank W. Grimone
-------------------------------
Name: Frank W. Grimone
Title: CFO
<PAGE> 13
SIGNATURE PAGE TO REGISTRATION RIGHTS AGREEMENT
INSURANCE PARTNERS, L.P.
By: Insurance GenPar, L.P.,
its General Partner
By: Insurance GenPar MGP, L.P.
its General Partner
By: Insurance GenPar MGP, Inc.,
its General Partner
By: /s/ Robert Spass
---------------------------
Name: Robert Spass
---------------------------
Title:
---------------------------
Address:
One Chase Manhattan Plaza
44th Floor
New York, New York 10005
Attention: Bradley & Cooper
Copy to:
Weil, Gotshal & Manges LLP
767 Fifth Avenue
New York, New York 10153
Attention: Thomas A. Roberts
<PAGE> 14
SIGNATURE PAGE TO REGISTRATION RIGHTS AGREEMENT
INSURANCE PARTNERS OFFSHORE (BERMUDA), L.P.
By: Insurance Genpar (Bermuda), L.P.,
its General Partner
By: Insurance GenPar MGP (Bermuda), L.P.,
its General Partner
By: Insurance GenPar MGP (Bermuda), Inc.,
its General Partner
By: /s/ Robert Spass
-----------------------------
Name: Robert Spass
-----------------------------
Title:
-----------------------------
Address:
One Chase Manhattan Plaza
44th Floor
New York, New York 10005
Attention: Bradley & Cooper
Copy to:
Weil, Goshal & Manges LLP
767 Fifth Avenue
New York, New York 10153
Attention: Thomas A. Roberts
<PAGE> 15
SIGNATURE PAGE TO REGISTRATION RIGHTS AGREEMENT
/s/ Peter W. Nauert
-------------------
Peter W. Nauert
Address:
1750 East Golf Road
Suite 210
Schaumburg, Illinois 60173
Copy to:
McDermott, Will & Emery
227 West Monroe Street
Chicago, Illinois 60606
Attention: Stanley H. Meadows, P.C.
<PAGE> 16
SIGNATURE PAGE TO REGISTRATION RIGHTS AGREEMENT
/s/ Michael A. Cavataio
-----------------------
Michael A. Cavataio
Address:
3125 Ramsgate Road
Rockford, Illinois 61114
<PAGE> 17
SIGNATURE PAGE TO REGISTRATION RIGHTS AGREEMENT
MERCANTILE BANK OF NORTHERN ILLINOIS,
TRUSTEE OF THE CONSECO STOCK OPTION DIRECTOR
PLAN FBO
MICHAEL CAVATAIO #08590033
By: /s/ Kathy A. Moffatt
-------------------------
Name: Kathy A. Moffatt
-------------------------
Title: Trust Officer
-------------------------
Address:
P.O. Box 30
Freeport, Illinois 61032
Copy to:
Michael A. Cavataio
3125 Ramsgate Road
Rockford, Illinois 61114
<PAGE> 18
SIGNATURE PAGE TO REGISTRATION RIGHTS AGREEMENT
MERCANTILE BANK OF NORTHERN ILLINOIS,
TRUSTEE OF THE CONSECO STOCK OPTION DIRECTOR
PLAN FBO
MICHAEL CAVATAIO #08590034
By: /s/ Kathy A. Moffatt
------------------------------
Name: Kathy A. Moffatt
------------------------------
Title: Trust Officer
------------------------------
Address:
P.O. Box 30
Freeport, Illinois 61032
Copy to:
Michael A. Cavataio
3125 Ramsgate Road
Rockford, Illinois 61114
<PAGE> 19
SIGNATURE PAGE TO REGISTRATION RIGHTS AGREEMENT
/s/ Karon Hill
---------------------------------
Karon Hill
Address:
1750 East Golf Road
Suite 210
Schaumburg, Illinois 60173
<PAGE> 20
SIGNATURE PAGE TO REGISTRATION RIGHTS AGREEMENT
/s/ Val Rajic
------------------------------------
Val Rajic
Address:
1750 East Golf Road
Suite 210
Schaumburg, Illinois 60173
<PAGE> 21
SIGNATURE PAGE TO REGISTRATION RIGHTS AGREEMENT
TURKEY VULTURE FUND XIII, LTD.
By: /s/ Richard M. Osborne
------------------------------
Name: Richard M. Osborne
------------------------------
Title: Manager
------------------------------
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
<PAGE> 22
SIGNATURE PAGE TO REGISTRATION RIGHTS AGREEMENT
/s/ Marc C. Krantz
------------------------------------------------
Marc C. Krantz
Address:
Kohrman, Jackson & Krantz P.L.L.
1375 East Ninth Street
One Cleveland Center, 20th Floor
Cleveland, Ohio 44114
<PAGE> 23
SIGNATURE PAGE TO REGISTRATION RIGHTS AGREEMENT
KRANTZ FAMILY LIMITED PARTNERSHIP
By: /s/ Byron S. Krantz
Byron S. Krantz, its General Partner
Address:
Kohrman, Jackson & Krantz P.L.L.
1375 East Ninth Street
One Cleveland Center, 20th Floor
Cleveland, Ohio 44114
<PAGE> 24
SIGNATURE PAGE TO REGISTRATION RIGHTS AGREEMENT
MEDICAL MUTUAL OF OHIO
By: /s/ Robert N. Trombly
-------------------------------------
Name: Robert N. Trombly
-------------------------------------
Title: Corporate Secretary
-------------------------------------
Address:
2060 East Ninth Street
Cleveland, Ohio 44115
Attention: General Counsel
<PAGE> 25
SIGNATURE PAGE TO REGISTRATION RIGHTS AGREEMENT
UNITED PAYORS AND UNITED PROVIDERS, INC.
By: /s/ S. J. Bruno
--------------------------------------
Name: S. J. Bruno
--------------------------------------
Title: V.P. and CFO
--------------------------------------
Address:
2275 Research Blvd.
6th Floor
Rockville, Maryland 20850
Attention: Joe Mott
<PAGE> 26
SIGNATURE PAGE TO REGISTRATION RIGHTS AGREEMENT
/s/ Howard R. Conant
--------------------------------------
Howard R. Conant
Address:
c/o Lunn Partners
209 South LaSalle Street
Chicago, Illinois 60604
Attention: John Cochrane
<PAGE> 27
SIGNATURE PAGE TO REGISTRATION RIGHTS AGREEMENT
JOSEPH CUSIMANO IRA
By: /s/ Joseph Cusimano IRA
----------------------------------
Name: Joseph Cusimano IRA
----------------------------------
Title:
----------------------------------
Address:
c/o Lunn Partners
209 South LaSalle Street
Chicago, Illinois 60604
Attention: John Cochrane
<PAGE> 28
SIGNATURE PAGE TO REGISTRATION RIGHTS AGREEMENT
LEG PARTNERS SBIC, L.P.
By: /s/ Lawrence E. Golub
----------------------------------------
Name: Lawrence E. Golub
----------------------------------------
Title: President of Golub GPII Corporation
General Partner
----------------------------------------
Address:
230 Park Avenue
19th Floor
New York, New York 10169
Attention: Lawrence Golub
<PAGE> 1
Exhibit 10.25
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT is entered into as of the 1st day of October, 1998, by
and between Charles Miller ("Miller") and Central Reserve Life Corporation, an
Ohio corporation (the "Company").
WHEREAS, Miller possesses valuable skills, expertise and abilities in the life,
accident and health insurance business; and
WHEREAS, the Company wishes to secure the services of Miller as Executive Vice
President and Chief Financial Officer ("CFO") of the Company for a three-year
term, and Miller is willing to serve in such capacity, all upon the terms and
conditions set forth.
NOW THEREFORE, in consideration of the covenants set forth herein, the parties
hereto agree as follows:
1. EMPLOYMENT. The Company hereby employs Miller as its CFO
commencing on October 1, 1998 (the "Commencement Date") and,
unless sooner terminated as hereinafter provided, ending on the
third anniversary of the Commencement Date (the "Term"). Miller
hereby agrees to render such services to the Company upon the
terms
<PAGE> 2
EMPLOYMENT AGREEMENT
Page 2
and conditions set forth in this Agreement. Miller shall devote
his full time and attention to the business and affairs of the
Company.
2. COMPENSATION.
(a) BASE SALARY. The Company agrees to pay Miller a base salary
at the annual rate of $175,000 per year, as increased from
time to time, payable in installments consistent with the
Company's payroll practices, subject to review on April 1,
1999.
(b) STOCK OPTIONS. As an inducement to Miller to enter into
this Agreement, the Company will grant to Miller on the
Commencement Date, options to purchase an aggregate of
100,000 shares of Common Stock (the "Options") at an
exercise price of $6.50 per share. 40,000 of the Options
will vest immediately upon issuance. 30,000 of such Options
shall vest on October 1, 2000, and the remaining 30,000
Options shall vest on the third anniversary of the
Commencement Date. Miller shall forfeit all unvested
Options if his employment with the Company is terminated,
except as otherwise provided in Paragraph 6.
<PAGE> 3
EMPLOYMENT AGREEMENT
Page 3
(c) OTHER COMPENSATION. Miller may also receive such cash
bonuses or other such cash-incentive compensation as the
Board of Directors of the Company may approve from time to
time in its sole discretion. In addition, Miller shall
receive a "sign-on" bonus of $50,000 on the Commencement
Date.
3. EXPENSES. The Company will pay or reimburse Miller for all
reasonable business expenses incurred by Miller in the performance
of his duties. In addition, the Company will reimburse Miller for
$4,000 per month with respect to his travel to and from his
Florida home to the Company's offices in Cleveland, Ohio, and
temporary residence in Cleveland through April 1, 1999, at which
time Miller will relocate to Cleveland or the then headquarters of
the Company. In addition, when Miller relocates to the
headquarters of the Company, all reasonable expenses of
relocation, including moving expenses, real estate commissions and
closing costs related to the sale of his Florida residence, shall
be paid by the Company.
<PAGE> 4
EMPLOYMENT AGREEMENT
Page 4
4. DEATH. Miller's employment by the Company will terminate
immediately upon his death; provided, that in the event of
Miller's death during the Term, Miller's estate shall be entitled
to receive the payment described in Paragraph 6(b).
5. DISABILITY. If Miller becomes totally or partially disabled during
the Term, the Company shall continue to pay to Miller, as long as
such disability continues during the Term, the level of
compensation payable to Miller at the date his disability is
determined, reduced dollar-for-dollar to the extent of any
disability insurance payments paid to Miller through insurance
programs, the premiums for which were paid by the Company or its
subsidiaries. For purposes of this Agreement, the term "total
disability" shall mean Miller's inability due to illness, accident
or other physical or mental incapacity to engage in the full-time
performance of his duties under this Agreement, as reasonably
determined by the Board of Directors of the Company based on such
evidence as such Board shall deem appropriate. For purposes of
this Agreement, "partial disability" shall mean Miller's due to
illness, accident or other physical or mental incapacity to
<PAGE> 5
EMPLOYMENT AGREEMENT
Page 5
engage in only the partial performance of his duties under this
Agreement, as reasonably determined by the Board of Directors of
the Company based on such evidence as such Board shall deem
appropriate.
6. TERMINATION.
(a) FOR CAUSE. The Company shall have the right to terminate
Miller's employment hereunder at any time during the Term
for Cause. For purposes of this Agreement, "Cause" shall be
limited to Miller's conviction of a felony or the gross
neglect of, and continued failure to perform substantially
Miller's duties under the Agreement. Notwithstanding
anything herein to the contrary, Miller's inability to
perform the duties of his position due to his death or his
total or partial disability shall not be deemed to
constitute Cause.
If, in the opinion of the Board of Directors of the
Company, Miller's employment shall become subject to
termination for Cause, the Board of Directors shall give
Miller notice to that effect, which notice shall describe
the matter or matters
<PAGE> 6
EMPLOYMENT AGREEMENT
Page 6
constituting such Cause. If, within thirty (30) days of
receipt of such notice, Miller has not substantially
eliminated or cured each such matter or matters, then the
Company shall have the right to give Miller notice of the
termination of his employment. Miller's employment
hereunder shall be considered terminated for Cause as of
the date specified in such notice of termination unless and
until there is a final determination by a court of
competent jurisdiction that the cause of termination of
Miller's employment did not exist at the time of giving
said notice of termination. Upon termination of Miller's
employment for Cause, this Agreement shall terminate
without further obligations to Miller other than the
Company's obligation (i) to pay to Miller within thirty
(30) days after the date of termination that portion of
Miller's aggregate compensation that is accrued through the
date of termination to the extent not theretofore paid and
(ii) to pay or provide to pay, to Miller on a timely basis
any other amounts or benefits required to be paid or
provided or which Miller is eligible to receive under any
plan, program, policy, practice, contract or
<PAGE> 7
EMPLOYMENT AGREEMENT
Page 7
agreement of the Company to the extent not theretofore paid
or provided.
(b) WITHOUT CAUSE. The Company shall have the right to
terminate Miller's employment hereunder without Cause at
any time during the Term. If the Board of Directors
determines to terminate Miller's employment without Cause,
the Company shall give notice of such termination to
Miller, and Miller's employment hereunder shall be
considered terminated without Cause as of the date
specified in such notice of termination. Upon termination
of Miller's employment without Cause, Miller shall be paid
the following on the date of termination (except as
otherwise noted): (i) that portion of Miller's aggregate
compensation and benefits that is accrued through the date
of termination to the extent not theretofore paid and (ii)
all cash payments that would have been payable to Miller
pursuant to Paragraph 2(a) had Miller remained employed by
the Company for one year following the date of termination
pursuant to this Paragraph.
<PAGE> 8
EMPLOYMENT AGREEMENT
Page 8
(c) CHANGE OF CONTROL. In the event that Miller's employment is
terminated in connection with a "change of control" of the
Company, in addition to the compensation described in
Paragraph 6(b) above, Miller shall be entitled to receive
cash compensation equal to the difference between the cash
compensation paid to him under Paragraph 6(b) above and the
cash compensation he would have received under the
Agreement had Miller remained employed by the Company
through the third anniversary of the Commencement Date.
Miller shall also be entitled to become vested in any
Options not previously vested under the terms of Paragraph
2 above. "Change of Control" shall mean the occurrence of
any of the following events:
(i) Any person (as that term is defined in Section 13
(d) of the Securities Exchange Act of 1934, as
amended) shall become the "beneficial owner" of
securities of the Company representing more than the
greater of (x) fifty-one percent (51%) of the
combined voting power of the Company's then
outstanding voting securities on a fully
<PAGE> 9
EMPLOYMENT AGREEMENT
Page 9
diluted basis or (y) the largest percentage
shareholders on a fully diluted basis;
(ii) Any consolidation or merger to which the Company is
a party, if following such consolidation or merger,
the stockholders of the Company immediately prior to
such consolidation or merger shall not beneficially
own securities representing at least fifty-one
percent (51%) of the combined voting power of the
outstanding voting securities of the surviving or
continuing corporation on a fully diluted basis; or
(iii) Any sale, lease, exchange or other transfer (in one
transaction or in a series of related transactions)
of all, or substantially all, of the assets of the
Company, other than to an entity (or entities) of
which the Company or the stockholders of the Company
immediately prior to such transaction beneficially
own securities representing at least fifty-one
percent (51%) of the combined
<PAGE> 10
EMPLOYMENT AGREEMENT
Page 10
voting power of the outstanding voting securities on
a fully diluted basis.
(d) BY MILLER. Miller may terminate his employment
hereunder at any time by retirement or resignation,
upon notice to the Company. Upon such termination by
Miller, no compensation for any period after the
date of such termination shall be payable to Miller.
7. COVENANTS.
(a) CONFIDENTIAL INFORMATION AND TRADE SECRETS. During Miller's
employment by the Company, Miller will enjoy access to the
Company's "confidential information" and "trade secrets".
For purposes of this Agreement, "confidential information"
shall mean information which is not publicly available,
including, without limitation, information concerning
customers, material sources, suppliers financial
projections, marketing plans and operating methods.
Miller's access to which derives solely from Miller's
employment with the Company. For purposes of this
Agreement, "trade secrets" shall mean the Company's
processes,
<PAGE> 11
EMPLOYMENT AGREEMENT
Page 11
methodologies and techniques known only to those employees
of the Company who need to know such secrets in order to
perform their duties on behalf of the Company. The Company
takes numerous steps, including these provisions, to
protect the confidentiality of its confidential information
and trade secrets, which it considers unique, valuable and
special assets.
(b) RESTRICTED USE AND NON-DISCLOSURE. Miller, recognizing the
Company's significant investment of time, efforts and money
in developing and preserving its confidential information,
shall not, during his employment hereunder and for a two
(2)-year period after the end of Miller's employment
hereunder, use for his direct or indirect personal benefit
any of the Company's confidential information or trade
secrets. For a two (2)-year period after the end of
Miller's employment hereunder, Miller shall not disclose to
any person any of the Company's confidential information or
trade secrets.
<PAGE> 12
EMPLOYMENT AGREEMENT
Page 12
(c) RETURN OF THE COMPANY'S PROPERTY. Upon termination of
Miller's employment with the Company, for whatever reason
and in whatever manner, Miller shall return to the Company
all copies of all writings and records relating to the
Company's business, confidential information or trade
secrets that are in Miller's possession at such time.
(d) NON-COMPETITION. During Miller's employment hereunder and,
in the event of a Change in Control or termination of
Miller's employment for any reason other than for Cause,
for a period equal to the lesser of twelve (12) months or
the remainder of the original term of this Agreement,
Miller shall not engage, directly or indirectly, whether as
an owner, partner, employee, officer, director, agent,
consultant or otherwise, in any location where the Company
or any of its subsidiaries is engaged in business after the
date hereof and prior to the termination of Miller's
employment, in a business the same or similar to, any
business now, or at any time after the date hereof and
prior to Miller's termination, conducted by the
<PAGE> 13
EMPLOYMENT AGREEMENT
Page 13
Company or any of its subsidiaries, provided, however, that
the mere ownership of 5% or less of the stock of a company
whose shares are traded on a national securities exchange
or are quoted on the National Association of Securities
Dealers Automated Quotation System shall not be deemed
ownership which is prohibited hereunder.
(e) NON-SOLICITATION. In the event of a Change in Control or
termination of Miller's employment for any reason other
than for Cause, for the period equal to the lesser of
twelve (12) months or the remainder of the original term of
the Agreement, Miller shall not, directly or indirectly,
induce employees of the Company or any of its subsidiaries
to leave such employment with the result that such
employees would engage in business activities which are
substantially similar or are closely related to the
business activities such employee performed on behalf of
the Company and which compete against the Company.
<PAGE> 14
EMPLOYMENT AGREEMENT
Page 14
(f) ENFORCEABILITY. The necessity of protection against the
competition of Miller and the nature and scope of such
protection has been carefully considered by the parties
hereto. The parties hereto agree and acknowledge that the
duration, scope and geograhic areas applicable to the
non-competition covenant in this Section 7 are fair,
reasonable and necessary, that adequate compensation has
been received by Miller for such obligations, and that
these obligations do not prevent Miller from earning a
livelihood. If, however, for any reason any court
determines that the restrictions in this Agreement are not
reasonable, that consideration is inadequate or that Miller
has been prevented from earning a livelihood, such
restrictions shall be interpreted, modified or rewritten to
include as much of the duration, scope and geographic area
identified in this Section 7 as will render such
restrictions valid and enforceable.
(g) EQUITABLE REMEDIES. Notwithstanding the provisions of
Paragraph 10 hereof, in the event of a breach or threatened
breach by Miller of any of
<PAGE> 15
EMPLOYMENT AGREEMENT
Page 15
the covenants set forth in this Paragraph, the Company or
any of its affiliates shall be entitled to seek in any
court of proper jurisdiction all appropriate remedies,
including, without limitation, injunctive relief and
monetary damages.
(h) SURVIVAL. The covenants set forth in this Paragraph shall
survive termination of this Agreement.
8. ARBITRATION OF DISPUTES. Any controversy or claim, arising out of
or relating to this Agreement or the breach thereof shall be
settled by arbitration in the City of Cleveland, Ohio, in
accordance with the laws of the State of Ohio by three
arbitrators, one of whom shall be appointed by the Company, one by
Miller and the third by the first two arbitrators. If the first
two arbitrators cannot agree on the appointment of a third
arbitrator, then the third arbitrator shall be appointed by the
Chief Judge of the United States District Court for the Northern
District of Ohio. The arbitration shall be conducted in accordance
with the rules of the American Arbitration Association, except
<PAGE> 16
EMPLOYMENT AGREEMENT
Page 16
with respect to the selection of arbitrators which shall be
provided in this paragraph. Judgment upon the award rendered by
the arbitrators may be entered in any court having jurisdiction
thereof. The Company shall pay all the fees and expenses of such
arbitrator and the other costs of arbitration. In addition, the
Company shall pay (or Miller shall be entitled to recover from the
Company, as the case may be) his reasonable attorneys' fees and
costs and expenses in connection with the successful enforcement
of any of his rights hereunder.
9. NOTICES. Any notice required or permitted pursuant to this
Agreement shall be deemed to have been properly given if in
writing and when delivered personally or by a national overnight
courier service or five business days after being sent by United
States mail, certified or registered, postage prepaid, addressed
as follows:
If to the Company:
Central Reserve Life Corporation
17800 Royalton Road
Strongsville, Ohio 4136
Attention: General Counsel
<PAGE> 17
EMPLOYMENT AGREEMENT
Page 17
If to Miller:
Mr. Charles Miller
5746 Masters Boulevard
Orlando, Florida 32819
or to such other place as either party may designate to the other
by written notice in accordance with this Paragraph.
10. NO WAIVER. No waiver of any breach of any of the terms or
provisions of this Agreement shall be construed or held to be a
waiver of any other breach, or waiver of, acquiescence in or
consent to any further or succeeding breach thereof.
11. ASSIGNMENT. This Agreement shall not be assignable by either party
without the written consent of the other party. This Agreement
shall be binding upon and shall inure to the benefit of the
parties hereto and their respective heirs, personal
representatives, successors and permitted assigns.
<PAGE> 18
EMPLOYMENT AGREEMENT
Page 18
12. GOVERNING LAW. This Agreement shall be governed by, and construed
in accordance with, the laws of the State of Ohio, without regard
to its principles of conflicts of law.
13. SEVERABILITY. If any provision of this Agreement is held for any
reason to be invalid, it will not invalidate any other provisions
of this Agreement which are in themselves valid, nor will it
invalidate the provisions of any other agreement between the
parties hereto. Rather, such invalid provision shall be construed
so as to give it the maximum effect allowed by applicable law. Any
other written agreement between the parties hereto shall be
conclusively deemed to be an agreement independent of this
Agreement.
14. HEADINGS. Paragraph headings hereunder are for convenience only
and shall not affect the meaning or interpretation of the
provisions of this Agreement.
15. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original without
production of the others.
<PAGE> 19
EMPLOYMENT AGREEMENT
Page 19
16. ENTIRE AGREEMENT; AMENDMENT. This Agreement contains the entire
agreement and understanding among the parties hereto relating to
the subject matters hereof, and supersedes all previous written or
oral negotiations, commitments and writings with respect to the
subject matter hereof. This Agreement may be amended only by a
written instrument signed by each party hereto.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
CENTRAL RESERVE LIFE CORPORATION
By: /s/ Val Rajic
---------------------------------
Its: EXECUTIVE VICE PRESIDENT
/s/ Charles Miller
------------------------------------
Charles Miller
<PAGE> 1
Exhibit 10.26
REINSURANCE AGREEMENT
(hereafter referred to as the "Agreement")
between
CONTINENTAL GENERAL LIFE INSURANCE COMPANY
(hereafter referred to as the "Company")
and
REASSURANCE COMPANY OF HANNOVER
(hereafter referred to as the "Reinsurer")
Effective: 12:01 A.M., Local Standard Time, February 1, 1999
Term: Continuous
Type: COINSURANCE HA-CGIC-01
<PAGE> 2
TABLE OF CONTENTS
-----------------
ARTICLE PAGE
- ------- ----
PREAMBLE ..........................................................4
I DEFINITIONS .......................................................4
II LIABILITY; ALLOWANCES; PROFIT SHARING .............................6
III COMMENCEMENT AND TERMINATION; RECAPTURE ...........................6
IV POLICY REDUCTIONS AND TERMINATIONS ................................6
V PREMIUM ...........................................................7
VI REPORTS AND REMITTANCES; POWER OF ATTORNEY ........................7
VII EXTRA CONTRACTUAL OBLIGATIONS .....................................8
VIII REINSURER'S RIGHT OF NOTICE OF UNUSUAL PRACTICES ..................9
IX ADMINISTRATION OF THE POLICIES ....................................9
X REPRESENTATIONS, WARRANTIES AND COVENANTS .........................9
XI LOSS SETTLEMENTS ..................................................9
XII COINSURANCE; RESERVES ............................................11
XIII ERRORS AND OMISSIONS .............................................11
XIV INSOLVENCY .......................................................11
XV TREASURY REGULATION SECTION 1.848-2 (g)(8) .......................11
XVI TAXES ............................................................12
XVII ACCESS TO RECORDS ................................................13
XVIII ARBITRATION ......................................................13
XIX GOVERNING LAW ....................................................14
XX SUBROGATION ......................................................14
XXI ENTIRE AGREEMENT .................................................14
XXII POLICY CHANGES; RATE INCREASES ...................................14
XXIII OFFSET ...........................................................15
XXIV WAIVER; AMENDMENT ................................................16
XXV NO ASSIGNMENT; BINDING EFFECT ....................................16
XXVI SEVERABILITY .....................................................16
XXVII NOTICES ..........................................................16
XXVIII EXECUTION ........................................................17
-2-
<PAGE> 3
SCHEDULE A - LIFE AND ANUUITY POLICIES ..........................18
SCHEDULE A (CONT.) - ACCIDENT AND HEALTH ........................20
SCHEDULE B - CEDING ALLOWANCE; EXPENSE ALLOWANCE ................27
SCHEDULE C - RECAPTURE; EXPERIENCE REFUND .......................28
-3-
<PAGE> 4
REINSURANCE AGREEMENT
(hereafter referred to as the "Agreement")
between
CONTINENTAL GENERAL LIFE INSURANCE COMPANY
(hereafter referred to as the "Company")
and
REASSURANCE COMPANY OF HANNOVER
(hereafter referred to as the "Reinsurer")
PREAMBLE
- --------
In consideration of the mutual covenants hereinafter contained the parties
hereto agree as follows:
ARTICLE I - DEFINITIONS
- -----------------------
"Claim" means a claim made to the Company by a policyholder, insured,
certificate holder or dependent thereof who is entitled to coverage under a
Policy for which medical treatment, facilities or services contractually covered
by such Policy, and not excluded by such Policy, were rendered or provided to
such policyholder, insured, certificate holder or dependent thereof. A Claim is
incurred on the date it is regarded as being incurred in the administration of
the insured's Claim relating to the same medical treatment, facilities or
services.
"Coinsurance Basis" means reinsurance on a basis whereby the Company cedes to
the Reinsurer reserves underlying the Policies and assets, valued at book value
in accordance with SAP, which assets satisfy the reserve requirements necessary
or required by applicable law or regulation with respect to the Reinsurer's
proportionate share of liability hereunder, and such reserves and assets are
held by the Reinsurer.
"Company" means Continental General Life Insurance Company, a
Nebraska corporation.
"Contested Claim" has the meaning assigned to such term in Article
XI hereof.
"Effective Date" means 12:01 A.M., Local Standard Time, February 1, 1999.
"Extra Contractual Obligations means any and all costs, expenses, damages,
liabilities or obligations of any kind or nature (including without limitation
attorneys fees, consequential and incidental damages, and punitive and exemplary
damages) which are incurred by the Company and arise out of; result from or
relate to any act or omission, whether or not in bad faith, intentional,
willfill, negligent, reckless, careless or otherwise, of the Company in
connection with a Policy, and which are not contractually covered by the terms
and conditions of such Policy.
-4-
<PAGE> 5
"Local Standard Time" means the time at the location of the Company's home
office.
"Loss" means a Claim that has been actually paid by the Company. A Loss is
incurred on the date that the Loss is actually paid by the Company.
"Loss Adjustment Expenses" means all payments to other than employees of fees
and expenses associated with investigation, litigation (including without
limitation reasonable attorney's fees) and settlement of Claims, as
distinguished from the amount of a claimant's recovery from the Company under
such claimant's Policy.
"Modified Pre-tax" means the taxable income to the Reinsurer under this
Agreement consisting of the difference between (A) and (B), where (A) equals the
sum of: (i) pre-tax gain, plus (ii) change in the difference between tax and SAP
reserves on the Policies, plus (iii) capitalized deferred acquisition costs from
this Agreement, minus (iv) amortized deferred acquisition costs from this
Agreement; and (B) equals the sum of: (i) the change in risk-based capital for
the Policies, minus (ii) interest (at the Reinsurer's net portfolio rate) on
risk-based capital on the Policies.
"Person" means an individual, firm, corporation or entity.
"Policy" means the plans of insurance policies, riders, and binders listed on
Schedule A attached hereto and incorporated herein by reference which are issued
by the Company and in force on and after the Effective Date.
"Premium" means premium required by a Policy to be paid and which is actually
collected and received by the Company less premium returned to a Person after
actual collection and receipt by the Company due to rescission or cancellation
of a Policy or reductions or terminations in coverage or benefits under a
Policy.
"Reinsurer" means Reassurance Company of Hannover, a Florida corporation.
"SAP" means the statutory accounting practices and procedures permitted or
prescribed by the insurance department of the State of Nebraska.
"Services" means all of the usual and customary servicing and administrative
functions and duties associated with the Policies, including but not limited
to, premium payments; Claims administration; customer services for insureds,
owners, beneficiaries, agents and other interested Persons; file and record
maintenance and administration including system maintenance and administration;
billing and collection of Premium; maintenance of Policy financial data in such
form to allow the Reinsurer to meet any and all reporting requirements it may
have; and payment of agents' commissions related to Policies.
"Settlement Date" has the meaning assigned to such term in Article VI hereof.
"Suspension Notice" has the meaning assigned to such term in Article XXII
hereof.
-5-
<PAGE> 6
ARTICLE II - LIABILITY: ALLOWANCES; PROFIT SHARING
- --------------------------------------------------
The Company agrees to cede to the Reinsurer, and the Reinsurer agrees to
reinsure from the Company, 50% of Losses under Policies in force on and after
the Effective Date; provided, however, that from and after the date on which the
Company repays the Reinsurer the loss carryforward as calculated by Schedule C
hereto, the Reinsurer and the Company agree that the Company shall cede to the
Reinsurer, and the Reinsurer shall reinsure from the Company, 35% of the
Reinsurer's proportionate share of Losses under Policies hereunder. On and after
such date, the Reinsurer agrees to pay to the Company the SAP profits, earned by
the Reinsurer under its proportionate share of reinsurance hereunder, in excess
of the Reinsurer's maximum Modified Pre-tax target return on its investment of
12%. The Reinsurer agrees to indemnify the Company for such Losses to the extent
provided by this Article II. The Company and the Reinsurer acknowledge and agree
that the reinsurance provided to the Company by the Reinsurer hereunder is on an
original terms basis on the underlying Policies reinsured hereby.
In connection with the reinsurance hereunder the Reinsurer agrees to pay to the
Company (i) a ceding allowance and (ii) expense allowances on the terms and
provisions set forth in Schedule B.
ARTICLE III - COMMENCEMENT AND TERMINATION; RECAPTURE
- -----------------------------------------------------
This Agreement, and the rights, obligations and duties hereunder of the parties
hereto, shall become effective on the Effective Date. The Reinsurer shall
continue to provide reinsurance only for Losses incurred by the Company under
Policies so long as such Policies continue to be in force and this Agreement
continues to be in effect as to such Policies. The Reinsurer shall have no
liability hereunder for Losses paid by the Company under Policies prior to the
Effective Date.
This Agreement may be amended in writing by the mutual written consent of the
parties hereto. This Agreement shall become effective on the Effective Date and
shall remain in effect until its termination, which shall occur upon one party
delivering to the other party ninety (90) days prior written notice of such
termination. On the date of such termination, the Reinsurer shall have no
liability with respect to Policies issued by the Company on and after such date
of termination; provided, however, that the Reinsurer shall continue to remain
liable for reinsurance hereunder with respect to Losses under inforce Policies
as of such termination date.
The Policies may be recaptured by the Company within the first twenty-four
calendar months after the Effective Date upon compliance by the Company with the
recapture provisions of Schedule C hereto. After such twenty-four month period,
the Policies may be recaptured upon terms agreeable to the Reinsurer. Upon
recapture, the Reinsurer shall transfer to the Company assets, valued in
accordance with SAP, equal to the SAP reserves of the Policies recapture as of
the date of such recapture, which calculation of SAP assets shall include
provision for realized capital gains and losses (to account for change in market
value of such assets as of the recapture date).
ARTICLE IV - POLICY REDUCTIONS AND TERMINATIONS
- -----------------------------------------------
The Reinsurer's liability hereunder shall not be increased by reason of the
inability of the Company
-6-
<PAGE> 7
to collect from any other reinsurers any amounts which may become due from such
reinsurers which amounts arise, relate to or result from reinsurance of risk by
such reinsurers under Policies or any other policy issued by the Company.
Reductions and terminations of coverage and benefits under Policies shall reduce
or terminate the Reinsurer's liability hereunder in a corresponding amount as of
the same date.
ARTICLE V - PREMIUM
- -------------------
The Company shall pay to the Reinsurer an amount equal to 50% of Premium with
respect to Policies; provided, however, that from and after the date upon which
the Company repays the Reinsurer the loss carryforward as calculated by Schedule
C hereto, the Reinsurer and the Company agree that the Company shall pay to the
Reinsurer an amount equal to 35% of Premium with respect to Policies.
ARTICLE VI - REPORTS AND REMITTANCES; POWER OF ATTORNEY
- -------------------------------------------------------
Premium funds collected by the Company with respect to the Policies shall be
deposited in a bank account or accounts under the control of the Company and
identified as the Company's Premium account(s). The Company shall authorize the
deposit of checks drawn to its order in this account, as well as the use of this
account for Premium drafting plans with respect to the Policies. Funds may be
transferred or paid from such Company Premium account(s) only:
1. To pay return Premiums to policyholders (provided that such Premiums were
received by the Company hereunder);
2. To pay Claims or fund a bank account, identified as the Company's claim
account, used to pay Claims under Policies, and Loss Adjustment Expenses
with respect to Policies;
3. To pay commissions with respect to Premiums on Policies;
4. To pay the Company estimated Premium taxes with respect to the Policies;
5. To pay the Company's expense allowance provided for in Schedule B hereto;
6. To pay, when applicable, the Company's share of the SAP profits in excess
of the Reinsurer's maximum Modified Pre-tax target return on its
investment of 12%.
7. To pay the net balance due from Premiums each month to the Reinsurer.
Any expenses associated with this account shall be borne by, and interest earned
thereon credited to, the Company.
Within forty-five (45) days after the end of each calendar quarter the Company
(the "Settlement Date") shall deliver in writing to the Reinsurer a report
delineating all of the foregoing, and shall also
-7-
<PAGE> 8
include in such report (i) change in reserves, calculated in accordance with
SAP, on the Policies in force as of the end of the calendar quarter preceding
the Settlement Date (reported on a quarterly basis only) as compared to the
quarter prior thereto; and (ii) such other information as the Reinsurer may
reasonably request. During such forty-five (45) day period, investment income
shall accrue on the net balance due and payable for the applicable calendar
quarter. Such investment income shall accrue at a rate equal the Reinsurer's net
portfolio rate for the quarter prior to the Settlement Date. If the net balance
due is not paid as of the Settlement Date by the party owing such amount, the
investment income rate shall be increased by 3% per annum for the period from
the Settlement Date through and including the actual payment date.
Together with the delivery of each such report by the Company to the Reinsurer,
the Company shall remit all amounts due and payable by the Company to the
Reinsurer, if any, as indicated by such report. Within twenty (20) days after
the Reinsurer's receipt of the report, the Reinsurer shall pay the Company all
amounts due and payable to the Company by the Reinsurer, if any, as indicated by
such report.
If the Company decides to deliver such report via electronic media, the Company
shall consult with the Reinsurer to determine the appropriate reporting format.
Should the Company subsequently desire to make changes in the data format or the
code structure, the Company shall communicate such changes to the Reinsurer
prior to the use of such changes in reports to the Reinsurer.
Upon receipt of a report, the Reinsurer may, in its discretion and upon
reasonable information and belief, contest the information contained in the
report. If the Reinsurer so contests, the Reinsurer shall deliver to the Company
written notice thereof stating the reasons upon which the Reinsurer disputes the
report, and the parties shall use their best efforts to resolve the dispute
within twenty (20) days thereafter. If the parties fail to resolve such dispute
within such period, the dispute shall be resolved by arbitration as provided
herein. During the time such dispute is pending, the Reinsurer shall have the
right to suspend all payment obligations relating to the disputed portion(s) of
such report until resolution of such dispute. If such dispute is resolved by
arbitration in favor of the Company, the Reinsurer shall be liable for interest
(as provided below) on the amount owed by the Reinsurer to the Company as of the
date such amount became past due.
ARTICLE VII - EXTRA CONTRACTUAL OBLIGATIONS
- -------------------------------------------
The Reinsurer shall have no liability for Extra Contractual Obligations, unless
the Reinsurer was an active party or directed, consented to, or ratified the
act, omission or course of conduct which ultimately resulted in assessment of
Extra Contractual Obligations against the Company, in which case the Reinsurer
shall share pro rata in such Extra Contractual Obligations in proportion to the
Reinsurer's liability for a Loss hereunder.
-8-
<PAGE> 9
ARTICLE VIII - REINSURER'S RIGHT OF NOTICE OF UNUSUAL PRACTICES
- ---------------------------------------------------------------
The parties acknowledge and agree that the Reinsurer has placed its utmost good
faith and confidence in the Company, and the parties assume that, except as
otherwise notified by the Company, the underwriting, claims and other insurance
practices employed by the Company with respect to the reinsurance under this
Agreement are consistent with the customary and usual practices of the insurance
industry as a whole. Where the Company does engage in exceptional or uncustomary
practices, the Company agrees to notify the Reinsurer of such practices. The
parties agree that the Company's failure to so notify the Reinsurer will result
in the Reinsurer having no liability hereunder with respect to Losses relating
to such exceptional or uncustomary practices.
ARTICLE IX - ADMINISTRATION OF THE POLICIES
- -------------------------------------------
As of the Effective Date, the Company agrees to perform the Services with the
utmost good faith for as long as the Reinsurer is required to provide
reinsurance hereunder.
If the Reinsurer reasonably believes that the Company has failed to perform the
Services, the Reinsurer shall notify the Company in writing of such failure and
the Company shall have ten (10) business days to cure such failure to the
reasonable satisfaction of the Reinsurer. If the Company fails or refuses to
cure such failure within such period, or has become financially impaired, the
Reinsurer may request the Company to secure another Person to perform the
Services, in which case the Company shall engage another Person selected by the
Company and reasonably satisfactory to the Reinsurer to perform the Services.
Such other Person shall have in good standing all governmental, regulatory and
other licenses, permits and authorizations necessary or required by law to
perform the Services.
In the event the Company is removed from performing the Services pursuant to
this Article, the Company shall deliver to the replacement Person providing the
Services all reports, records, documents, instruments and other information
necessary or required to perform satisfactorily the Services. All costs
associated with the transfer of the Services to another Person shall be borne by
the Company.
ARTICLE X - REPRESENTATIONS, WARRANTIES AND COVENANTS
- -----------------------------------------------------
The Company represents and warrants to the Reinsurer that if required by
applicable law, rule or regulation, each Policy has been filed with the
appropriate governmental or regulatory agency or authority and approval of such
filed Policy has been obtained by the Company from such agency or authority.
The Company covenants and agrees to perform all of its duties and obligations
hereunder with the utmost good faith.
ARTICLE XI - LOSS SETTLEMENTS
- -----------------------------
The Reinsurer shall accept the decision of the Company with respect to a Claim
and the incurrence
-9-
<PAGE> 10
of a Loss, except as otherwise provided herein. The Company agrees to deliver
written notice to the Reinsurer of each Claim which would, if paid, cause the
Reinsurer's liability hereunder to be $50,000 or more prior to such Claim
actually being paid. The Company agrees to deliver to the Reinsurer all
documents, reports and other information in the possession of or known by the
Company relating to such Claim to permit the Reinsurer to evaluate the Claim and
advise the Company in writing with respect to payment of the Claim. If the
Reinsurer fails to advise the Company in writing within twenty (20) days after
the Company's delivery to the Reinsurer of the documents, reports and other
information relating to such Claim, the Company shall pay the Claim and the
Reinsurer shall be estopped from denying reinsurance liability hereunder for
such Loss.
The Company may, in its discretion, deliver written notice to the Reinsurer of
each Claim as to which the Company is uncertain, or has reasonable cause to
believe, that such Claim is or may not be properly payable. In addition, the
Company shall deliver immediately such a notice to the Reinsurer as to each
Claim denied in whole or in part by the Company if a notice of litigation or
threatened litigation is filed with the Company relating to such denied Claim
(each Claim as to which such a notice is delivered is referred to herein as a
"Contested Claim"). The Company agrees to deliver immediately to the Reinsurer
all documents, reports and other information relating to such Contested Claim to
permit the Reinsurer to evaluate the Contested Claim and advise the Company in
writing with respect to payment of the Contested Claim. In the event the Company
complies with the Reinsurer's advice with respect to a Contested Claim, and
Extra Contractual Obligations later arise with respect to such Contested Claim,
the Reinsurer shall share in the Extra Contractual Obligations in proportion to
the Reinsurer's liability for a Loss hereunder, but if the Company fails to give
such notice or to comply with such advice, the Reinsurer shall not share in any
of the Extra Contractual Obligations. In no event shall the Reinsurer be liable
for any Extra Contractual Obligations based upon acts, omissions, facts,
circumstances or events which occurred prior to the Effective Date.
The Company agrees to deliver written notice to the Reinsurer of each Policy
that the Company reasonably believes should be rescinded and Premium reimbursed
to the policyholder prior to the Company actually rescinding such Policy. The
Reinsurer shall review facts surrounding the Policy and the reasons for the
reasonable belief of the Company that the Policy should be rescinded and the
Reinsurer will advise the Company in writing with respect to the rescission of
the Policy within twenty (20) days after the Company delivers its written notice
to the Reinsurer regarding the Policy. In the event the Reinsurer advises the
Company to rescind the Policy and Extra Contractual Obligations later arise due
to such advice from the Reinsurer, the Reinsurer shall share in the Extra
Contractual Obligations in proportion to the Reinsurer's liability for a Loss
hereunder, but if the Company fails to comply with such advice, the Reinsurer
shall not share in any of the Extra Contractual Obligations.
The parties agree that the Company's intentional or grossly negligent acts or
omissions with respect to this Article XI shall relieve the Reinsurer of any
liability hereunder with respect to any such Claim, Loss or Policy.
-10-
<PAGE> 11
ARTICLE XII - COINSURANCE; RESERVES
- -----------------------------------
The reinsurance hereunder shall be on a Coinsurance Basis. The parties agree
that the SAP reserves relating to the Policies, including but not limited to the
Claim reserves (including Loss Adjustment Expenses), the advance premiums, and
uneamed premiums shall be reviewed at least quarterly and that any redundancy or
deficiency thereof shall be adjusted immediately. SAP reserves relating to the
Policies shall be ceded, and assets, acceptable to the Reinsurer (if other than
cash assets) and valued at book value (or marked to market as of the Effective
Date in the case of marketable securities) in accordance with SAP, which assets
satisfy the reserve requirements necessary or required by applicable law or
regulation with respect to the Reinsurer's proportionate share of liability
hereunder, shall be transferred by the Company to the Reinsurer in connection
with the reinsurance hereunder. As of the end of the calendar quarter in which
this Agreement commences and as part of such quarterly accounting and reporting,
the parties agree to true-up the value of the assets transferred based upon the
value of such assets as of the Effective Date and to pay to the other any
amounts owed by one party to the other as a result of such true-up.
ARTICLE XIII - ERRORS AND OMISSIONS
- -----------------------------------
Any inadvertent or clerical delay, error or omission made by any party hereto in
connection with this Agreement shall not relieve either party from any liability
of such party hereunder had such inadvertent or clerical delay, error or
omission not occurred. The parties agree to cure all inadvertent and clerical
delays, errors and omissions immediately upon discovery thereof.
ARTICLE XIV - INSOLVENCY
- ------------------------
In the event of insolvency of the Company, all payments of the Reinsurer for
Losses shall be payable directly to the Company, or to the Company's liquidator,
receiver, conservator or statutory successor, without diminution because of the
insolvency of the Company.
The Company or its liquidator, receiver, conservator or statutory successor
shall give written notice to the Reinsurer of the pendency of a Claim,
indicating the Policy under which such Claim is pending, within a reasonable
time after such Claim is filed in the insolvency proceeding. During the pendency
of such Claim the Reinsurer may investigate such Claim and interpose, at its own
expense, in the proceeding where such Claim is to be adjudicated, any defense or
defenses that it may deem available to the Company or its liquidator, receiver,
conservator or statutory successor.
The expense thus incurred by the Reinsurer shall be chargeable, subject to the
approval of the insolvency court, against the Company as part of the
administrative expenses of the estate to the extent of a pro rata share of the
benefit which may accrue to the Company solely as a result of the defense
undertaken by the Reinsurer.
ARTICLE XV - TREASURY REGULATION SECTION 1.848-2(g)(8) JOINT ELECTION
- ---------------------------------------------------------------------
The Company and the Reinsurer hereby agree to the following pursuant to Section
1.848-2(g)(8) of the Income Tax Regulations issued December 1992, under Section
848 of the Internal Revenue Code
-11-
<PAGE> 12
of 1986, as amended. This election shall be effective for the taxable year ended
December 31, 1999 and for all subsequent taxable years for which this Agreement
remains in effect unless such election is terminated by mutual written agreement
of the parties hereto with the consent, if required, of the Commissioner of the
Internal Revenue Service.
As used in this Article XV, the term "party" will refer to either the Company or
the Reinsurer as appropriate.
The terms used in this Article XV are defined by reference to Treasury
Regulation Section 1.848-2 in effect as of December 29, 1992. The term "net
consideration" will refer to either net consideration as defined in Treasury
Regulation Section 1.848-2(f) or "gross premium and other consideration" as
defined in Treasury Regulation Section 1.848-2(b) as appropriate.
Both parties agree to identify this Agreement as one for which the joint
election under Treasury Regulation Section 1.848-2(g)(8) has been made in a
schedule attached to their respective federal income tax returns for the taxable
period ended December31, 1999.
The party with the positive net consideration for this Agreement for each
taxable year will capitalize specified policy acquisition expenses with respect
to this Agreement without regard to the general deductions limitation of Section
848(c)( 1).
Both parties agree to exchange information pertaining to the amount of net
consideration under this Agreement each year to ensure consistency or as
otherwise required by the Internal Revenue Service.
The Company will submit a schedule to the Reinsurer by July 1st of each year of
its calculation of the net consideration for the preceding calendar year. This
schedule of calculations will be accompanied by a statement signed by an officer
of the Company stating that the Company will report such net consideration in
its tax return for the preceding calendar year.
The Reinsurer may contest such calculation by providing an alternative
calculation to the Company in writing within forty-five (45) days of the
Reinsurer's receipt of the Company's calculation. If the Reinsurer does not so
notify the Company, the Reinsurer will report the net consideration as
determined by the Company in the Reinsurer s tax return for the previous year.
If the Reinsurer disputes the Company's calculation of the net consideration,
the parties will act in good faith to reach an agreement as to the correct
amount within forty-five (45) days of the date the Reinsurer submits its
alternative calculation. If the Company and the Reinsurer reach agreement on an
amount of net consideration, each party shall report such amount in their
respective tax returns for the previous calendar year. If the parties fail to
reach agreement on an amount of net consideration, the dispute shall be resolved
by arbitration as provided herein.
ARTICLE XVI - TAXES
- -------------------
The Company shall not claim a deduction in respect of the ceded Premium
hereunder when making tax returns, other than income or profits tax returns, to
any state or territory of the United States of
-12-
<PAGE> 13
America or the District of Columbia.
Within fifteen (15) days after the Company files with all governmental
authorities its premium tax returns for the preceding calendar year, the Company
shall provide a copy of same to the Reinsurer. Within fifteen (15) days
thereafter, the Reinsurer shall compute the excess or the deficiency of premium
taxes actually paid to the Company for such preceding calendar year based upon
the estimated payment made by the Company each month pursuant to Article VI
hereof. If there exists an excess, the Company agrees to pay such excess amount
to the Reinsurer. If there exists a deficiency, the Reinsurer agrees to pay such
deficiency to the Company. The Company and the Reinsurer agree to pay the other
party, as applicable, such excess or deficiency in Premium taxes within 5 days
after the determination of the actual amount of Premium taxes paid by the
Company.
ARTICLE XVII - ACCESS TO RECORDS
- --------------------------------
The Company shall make available to the Reinsurer and the Reinsurer shall have
the right to inspect (at the Reinsurer's expense), through its authorized
representatives, at all reasonable times, the books, records and papers of the
Company pertaining to the reinsurance provided hereunder and all Claims made and
Losses paid in connection therewith.
ARTICLE XVIII - ARBITRATION
- ---------------------------
Any dispute arising out of this Agreement, whether arising before or after
termination, which is not resolved by the parties shall be submitted to
arbitration for decision by a board of arbitrators composed of two arbiters and
an umpire, meeting in Orlando, Florida unless otherwise agreed. Arbitration
shall be commenced by one party delivering to the other party(ies) written
notice of arbitration, which notice shall set forth the nature of the dispute
and the relief sought. Within thirty (30) days after receipt of such notice,
each party to the dispute shall appoint an arbiter, and within thirty (30) days
thereafter, such arbiters shall appoint the umpire. If any party fails to select
an arbiter within the period prescribed, the other party(ies) shall select the
arbiter(s). If the arbiters so selected fail to agree upon the appointment of an
umpire within such thirty (30) day period, each arbiter shall propose three
names, of whom the other shall decline two, and the decision shall be made by
drawing lots. The members of the board of arbitrators shall be active or
retired, disinterested officers of life, accident and health insurance or
reinsurance companies.
The arbitration hearing shall be commenced within thirty (30) days after the
selection of the umpire. During the pendency of the arbitration, the parties may
provide the board of arbitrators, as well as the other party(ies), briefs and
memorandum of law supporting their respective position in the dispute. The board
of arbitrators shall consider all such briefs and memoranda as well as testimony
at the arbitration.
The board of arbitrators shall follow the Commercial Arbitration Rules and shall
make its decision with due regard to applicable law and to custom and practice
in the insurance and reinsurance industry. The board of arbitrators shall issue
its decision in writing based upon a hearing in which evidence may be introduced
without following strict rules of evidence but in which cross-examination and
rebuttal shall be allowed. The board shall make its decision within sixty (60)
days
-13-
<PAGE> 14
following the termination of the hearing. The majority decision of the board
shall be final, binding, nonappealable and conclusive upon all parties to the
proceeding. The board's decision may be entered as a judgment in any court
having jurisdiction thereof.
Each party shall bear the expenses of its own arbiter and the party against
which the decision of the arbitration board is rendered shall bear the expense
of the umpire, unless the arbitration board, in its discretion, otherwise
allocates expenses. Any remaining costs of the arbitration proceedings shall be
allocated by the arbitration board.
This Article XVIII shall survive any termination of this Agreement.
ARTICLE XIX - GOVERNING LAW
- ---------------------------
This Agreement shall be governed by and construed in accordance with the laws of
the State of Nebraska without regard to applicable principles of conflicts of
law.
ARTICLE XX - SUBROGATION
- ------------------------
The Reinsurer shall be credited with its proportionate share of subrogation
(i.e., reimbursement obtained or recovery made by the Company, less the actual
cost, excluding salaries of officials and employees of the Company and sums paid
to attorneys as retainer, of obtaining such reimbursement or making such
recovery) on account of Losses. The Company hereby agrees to enforce its rights
to subrogation relating to any expenses if requested to do so by the Reinsurer
(at the expense of the Reinsurer), and to prosecute all claims arising out of
such rights.
ARTICLE XXI - ENTIRE AGREEMENT
- ------------------------------
This Agreement constitutes the entire agreement and understanding among the
parties hereto with respect to the subject matter hereof. There are no
agreements or understandings among the parties with respect to the subject
matter hereof other than as expressed in this Agreement.
ARTICLE XXII- POLICY CHANGES; RATE INCREASES
- --------------------------------------------
If any change is made in a Policy by the Company that affects reinsurance
hereunder, the Company shall immediately deliver written notice thereof to the
Reinsurer. Except for Policy Changes required by state or federal law or
regulation, any proposed change shall not be effective until approved in writing
by the Reinsurer.
From and after the Effective Date, the Company shall, or shall cause its duly
appointed actuary or representative to, timely file with all applicable
regulatory authorities a request for rate increases with respect to the Policies
reinsured under this Agreement that are subject to rate increases. Such rate
increase filings shall be made (i) within fifteen (15) days after the date on
which such rate increase filings are requested in writing by the Reinsurer to
the Company, and (ii) in the amounts requested by the Reinsurer up to amounts
permitted by applicable law based upon all relevant factors, including without
limitation, loss experience for the Policies. The costs of calculating the
-14-
<PAGE> 15
rate increase amount, if calculated by an outside actuary or other qualified
outside representative of the Company, shall be borne by the Reinsurer in
proportion to its share of liability hereunder.
The Company agrees to deliver to the Reinsurer within forty-five (45) days after
the end of each calendar quarter a written report showing:
1. The loss experience on the Policies reinsured under this Agreement for
the preceding quarter; and
2. The dates on which rate increase filings were actually made for Policies
reinsured under this Agreement for the preceding quarter, if any; and
3. The amounts of the rate increases which were filed and the amounts which
were approved for Policies reinsured under this Agreement; and
4. Whether approval of the rate increase filings have been obtained; and
5. Any other information reasonably requested by the Reinsurer relating to
the Policies reinsured under this Agreement.
It is acknowledged and agreed that the making of timely rate increase filings as
requested by the Reinsurer under this Agreement is a material inducement to the
Reinsurer agreeing to enter into this Agreement and that absent the assurance
that such filings will be made and the Reinsurer's reliance on such assurance,
the Reinsurer would not have entered into this Agreement. Accordingly, the
parties hereto agree that the failure or refusal by the Company to comply
strictly with the material requirements of this Article XXII shall constitute a
material breach of this Agreement by the Company and the Reinsurer may, in its
discretion, suspend performance of its obligations under this Agreement (without
incurring any liability, including without limitation, interest or other
penalties on amounts due from the Reinsurer hereunder) by delivering to the
Company written notice of the Reinsurer's intent to suspend performance of its
obligations under this Agreement (the "Suspension Notice"). If the Company has
not cured, or diligently pursued the cure of; the material breach of this
Article XXII within ten (10) business days after the date of the Suspension
Notice, then the Reinsurer may, in its discretion, immediately terminate this
Agreement, in which case the Reinsurer shall have no further liability or
obligations whatsoever under this Agreement. On the date of such termination,
the Reinsurer shall have no liability with respect to Policies issued by the
Company on and after such date of termination. The Reinsurer shall continue to
be liable for reinsurance hereunder with respect to Losses under Policies in
force as of the date of termination. Upon a cure of the material breach by the
Company, the Reinsurer shall perform its obligations with respect to such
material breach relating back to the date of such suspension of the Reinsurer's
obligations with no interruption of reinsurance coverage.
ARTICLE XXIII - OFFSET
- ----------------------
The Company or the Reinsurer shall have, and may exercise at any time and from
time to time, the right to offset any balance or balances, whether on account of
Premiums or Losses or otherwise, due
-15-
<PAGE> 16
from one party with respect to this Agreement.
ARTICLE XXIV - WAIVER; AMENDMENT
- --------------------------------
Except as provided herein, any waiver by any party hereto of a breach by the
other party of any provision of this Agreement shall not operate or be construed
as a continuing waiver or a waiver of any subsequent breach by such party.
Except as otherwise provided herein, no waiver shall be valid unless in writing
and signed by the party exercising such waiver. Any modification or amendment of
this Agreement shall be in writing and signed by the parties hereto.
ARTICLE XXV - NO ASSIGNMENT; BINDING EFFECT
- -------------------------------------------
Except as otherwise provided herein, the right, duties and obligations hereunder
of the parties hereto may not be assigned or delegated by any party hereto to
any other Person without the prior written consent of the parties hereto;
provided, however, that the Reinsurer may retrocede any portion of its liability
hereunder. This Agreement shall be binding upon and inure to the benefit of the
parties' respective successors and permitted assigns.
ARTICLE XXVI - SEVERABILITY
- ---------------------------
The invalidity or unenforceability of any provision of this Agreement shall not
affect the validity or enforceability of the remainder of this Agreement, and
any such invalid or unenforceable provision shall be severable from the
remainder of this Agreement.
ARTICLE XXVII - NOTICES
- -----------------------
Any notice or other communication which is required or permitted to be delivered
to any party hereunder shall be in writing and deemed delivered if sent by
government-sponsored mail; an internationally-recognized overnight carrier with
confirmation receipt of delivery; certified mail, return receipt requested; or
facsimile with confirmation receipt of successful and complete transmission
addressed as follows:
If to the Company: Continental General Life Insurance Company
17800 Royalton Road
Strongsville, Ohio 44136
Facsimile: 440/572-4500
Attn: Chief Financial Officer
If to the Reinsurer: Reassurance Company of Hannover
800 N. Magnolia Avenue, Suite 1000
Orlando, Florida 32803
Facsimile: 407/648-1468
Attn: Mr. Craig M. Baldwin
-16-
<PAGE> 17
ARTICLE XXVIII - EXECUTION
- --------------------------
The parties, by and through each of their respective authorized representatives,
have executed this Agreement as of the date below written.
REASSURANCE COMPANY OF HANNOVER
Orlando, Florida
Taxpayer I.D.# 59-2859797
Date: February 22, 1999
-----------------------------
/s/ Craig M. Baldwin
By: -----------------------------
Craig M. Baldwin
Title: Senior Vice President
Witness: /s/
----------------------------
CONTINENTAL GENERAL LIFE INSURANCE COMPANY
Omaha, Nebraska
Taxpayer I.D.# 47-0463747
Date: 2/22/99
-----------------------------
By: /s/ Val Rajic
-----------------------------
Val Rajic
Title: Authorized Officer
Witness:/s/ Mike Owens
-----------------------------
-17-
<PAGE> 18
SCHEDULE A
----------
LIFE AND ANNUITY POLICIES
-------------------------
The life and annuity insurance Policy plans subject to this Agreement are as
follows:
<TABLE>
<CAPTION>
PLAN POLICY FORM # NAMES AND DESCRIPTION
CODE
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
2063 L2063 Flex Prem Annuity IRS Qualified
2064 L2063R Flex Prem Annuity IRS Qualified
2065 L2063R Flex Prem Annuity Non- Qualified
2066 L2063 Flex Prem Annuity Non- Qualified
7000 L7005F Flexible Premium Annuity Non-Qualified
7001 L7000F Flexible Premium Annuity Non-Qualified
7005 L7005F Flexible Premium Annuity Qualified
7006 L7005F/L7010F Flexible Premium Annuity Qualified
7030 G7030F Grp Flexible Prem Deferred Annuity
7055 L7055F Single Premium Deferred Annuity Qualified
7100 L7200F Flexible Premium Annuity Non-Qualified
7105 L7205F/L7210F Flexible Premium Annuity Qualified
7130 G7130C-F13 Grp Flexible Premium Deferred Annuit-ILL
7402 L2067 Retirement Annuity Benefit Rider
7403 L2068 Limited Annuity Benefit Rider
7500 L7500F Flexible Premium Deferred Annuity N.Q.
7505 L7505F/7710F Flexible Premium Deferred Annuity Q
7700 L770F General Flex - Bank Edition (NQ)
7705 L7705F/7710F General Flex - Bank Edition (Q)
7800 L7800F Bonus Single Premium Deferred (NQ)
7801 L7800F Bonus Single Premium Deferred (NQ)
7805 L7805F/7810F Bonus Single Premium Deferred (Q)
7806 L805F/7810F Bonus Single Premium Deferred (Q)
8701 L8701F Flexible Premium Annuity Rider
8702 8702 Flapp II Annuity Rider
9115 L9115F 155YRS81-84 Universal Life - Male
9116 L9115F 155YRS81-84 UniversalLife-Female
9127 L9130F 155YRS81-84 V Life-Band 1 Female
9128 L9130F 155YRS81-84 Versatile Life - Male Band 2
9129 L9130F 155YRS81-84 Versatile Life - Female Band 2
9130 L9130F 155YRS81-84 Versatile Life - Male
9131 L9130F 155YRS81-84 Versatile Life - Female
9132 L9150F 155YRS81-84 Universal Life II - Male
9133 L9150F 155YRS81-84 Universal Life II - Female
9135 L9155F 155YRS81-84 Universal Life III - Male
</TABLE>
-18-
<PAGE> 19
(LIFE AND ANNUITY POLICIES CONT.)
<TABLE>
<CAPTION>
PLAN POLICY FORM# NAME AND DESCRIPTION
CODE
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
9136 L9155F 155YRS81-84 Universal Life III - Female
9160 L9160F 155YRS81-84 VP Life - Male $25,000 - $49,999
9161 L9160F 155YRS81-84 VP Life - Female $25,000 - $49,999
9163 L9160F 155YRS81-84 VP Life - Female $50,000 - $99,999
9170 L9170F The General - Male
9171 L9170F The General - Female
9172 L9170F The 5 Star General - Male
9173 L9170F The S Star General - Female
9180 L9170F K - Life Universal Life
9181 L9170F K - Life Universal Life
9200 L9200F Premier Choice - Male
9201 L9200F Premier Choice - Female
9202 L9200F Premier Choice Plus - Male
9203 L9200F Premier Choice Plus - Female
9300 L9300F Achievalife - Male Band 1
9301 L9300F Achievalife - Female Band 1
9302 L9300F Achievalife - Male Band 2
9303 L9300F Achievalife - Female Band 2
9304 L9300F Achievalife - Male Preferred
9305 L9300F Achievalife - Female Preferred
</TABLE>
-19-
<PAGE> 20
SCHEDULE A (CONTINUED)
----------------------
ACCIDENT AND HEALTH POLICIES
----------------------------
The accident & health insurance Policy plans subject to this Agreement are as
follows:
<TABLE>
<CAPTION>
PLAN POLICY FORM # NAMES AND DESCRIPTION
CODE
- --------------------------------------------------------------------------------
<S> <C> <C>
01A MM-01A COMP MAJ MED OVER 60 1000 DED
01B MF-01B COMPREHENSIVE MAJOR MED-5000 DED
01C MF-01C LIMITED BENEFIT HEALTH-500 DED
01D MF-01D COMP MAJ MED OVER 60 500 DED
01E MF-01E COMP MAJ MED OVER 60 500
01H MF-01H LIMITED BENEFIT HEALTH - 250 DED
02A MF-02A COMPRESHENSIVE MAJOR MED-250 DED
02B MF-02B COMP MAJ MED OVER 60 2500 DED
03A MF-03A MAJ MED OVER 60 1000-D-MONTANA
03B MF-03B MAJ MED OVER 60 10-D-MONTANA
03C MF-03C LIMITED BENEFIT 1000 DED-MONTANA
105 MF-105 HOSP MED SURG/COLUMBUS LIFE
106 MF-106 HOSPITAL SURGICAL MEDICAL
108 MF-108 HOSPITAL SURGICAL MEDICAL
109 MF-109 HOSPITAL SURGICAL MEDICAL
110 MF-110 HOSPITAL MEDICAL EXPENSE POLICY
111 MF-111 MAJOR HOSPITAL PROTECTION
112 MF-112 HOSPITAL SURGICAL MEDICAL
114 MO-C1 HOSP MED SURG-MAJOR MED POLICY
115 MF-115 HOSP MED SURG-MAJOR MED POLICY
116 MF-116 COMPREHENSIVE MAJOR MED-5000 DED
117 MF-117 COMP MAJ MED OVER 60 250 DED
118 MF-118 COMP MAJ MED-500 DED-WISCONSIN
120 MF-120 COMP MAJ MED-1000 DED-TENNESSEE
124 MF-124 COMP MAJ MED-10000 DED-MT OVER 60
125 MF-125 MAJ MED OVER 60-1000 D-CALIFORNIA
126 MF-126 MAJ MED OVER 60 100 D-ARKANSAS
128 MF-128 COMP MAJ MED 100 DED-MARYLAND
12A MF-12A COMP MAJOR MED 1000 DED
12B MF-12B COMP MAJOR MED 2500 DED
12C MF-12C COMP MAJOR MED 5000 DED
12E MF-12E MAJOR MEDICAL-300 DED
12M MF-12M SINGLE PERSON MSA POLICY DED #2
12N MF-12N MSA MAJOR MEDICAL EXPENSE
130 MF-130 MAJ MED OVER 60 100 D-TENNESSEE
</TABLE>
-20-
<PAGE> 21
(ACCIDENT AND HEALTH POLICIES CONT.)
<TABLE>
<CAPTION>
PLAN POLICY FORM # NAMES AND DESCRIPTION
CODE
- --------------------------------------------------------------------------------
<S> <C> <C>
13A MF-13A COMP MAJ MED-10000 DED
14A MF-14A COMP MAJ MED-900
14M MF-14M MSA MAJOR MED EXPENSE POLICY
15A MF-15A LIMITED BENEFIT 600
160 MF-160 STD HEALTH INS POLICY 1000 DED
161 MF-161 BASIC HEALTH INS POLICY 5000 DED
164 MF-164 BASIC INDIV. REFORM CONTRACT
165 MF-165 STD INDIV. REFORM CONTRACT
166 MF-166 BASIC HEALTH PLAN
167 MF-167 STANDAPD HEALTH PLAN
168 MF-0168 MAJOR MED EXPENSE POLICY
169 MF-169 MAJOR MED EXPENSE POLICY
16A MF-16A MAJOR MED-1000 DED
17A MF-17A ASSOC GROUP MAJ MED-5000 DED
19A MF-19A LIMITED BENEFIT HEALTH POL-300
203 MF-203 DISABILITY
204 MF-204 DISABILITY
205 MF-205 DISABILITY
206 MF-206 DISABILITY
207 MF-207 DISABILITY
208 MF-208 DISABILITY INCOME POLICY
211 MF-211 DISABILITY INCOME POLICY - FL
220 MF-220 DISABILITY INCOME/COLUMBUS LIFE
264 MF-264 DISABILITY
302 MF-302 MEDICARE SUPPLEMENT PLAN
303 MF-303 MEDICARE SUPPLEMENT PLAN
304 MF-304 MEDICARE SUPPLEMENT PLAN
307 MF-307 MEDICARE SUPPLEMENT PLAN
308 MF-308 MEDICARE SUPPLEMENT PLAN
309 MF-309 MEDICARE SUPPLEMENT PLAN
310 MF-310 MEDICARE SUPPLEMENT PLAN
311 MF-311 MEDICARE SUPPLEMENT PLAN-MN
312 MF-312 MEDICARE SUPPLEMENT PLAN-MN
313 MF-313 MEDICARE SUPPLEMENT PLAN
314 MF-314 MEDICARE SUPPLEMENT PLAN
316 MF-316 MEDICARE SUPPLEMENT PLAN-MN
317 MF-317 MEDICARE SUPPLEMENT PLAN-VA
318 MF-318 MEDICARE SUPPLEMENT PLAN-WI
319 MF-319 MEDICARE SUPPLEMENT PLAN-FL
320 MF-320 MEDICARE SUPPLEMENT PLAN-MI
</TABLE>
-21-
<PAGE> 22
(ACCIDENT AND HEALTH POLICIES CONT.)
<TABLE>
<CAPTION>
PLAN POLICY FORM # NAMES AND DESCRIPTION
CODE
- --------------------------------------------------------------------------------
<S> <C> <C>
321 MF-321 MEDICARE SUPPLEMENT PLAN-MI
323 MF-323 MEDICARE SUPPLEMENT POLICY
324 MF-324 MEDICARE SUPPLEMENT POLICY
325 MF-325 MEDICARE SUPPLEMENT POLICY
326 MF-326 MEDICARE SUPPLEMENT - MN
327 MF-327 MEDICARE SUPPLEMENT POLICY
328 MF-328 BASIC MEDICARE SUP POLICY
329 MF-329 MEDICARE SUPPLEMENT - MN
330 MF-330 MEDICARE SUPPLEMENT - MN
331 MF-331 MEDICARE SUPPLEMENT - MN
332 MF-332 MEDICARE SUP POLICY-LEVEL
333 MF-333 MEDICARE SUPPLEMENT POLICY
334 MF-334 MEDICARE SUPPLEMENT POLICY
335 MF-335 MEDICARE SUP POLICY-JAN'92
340 MF-340 MEDICARE SUPPLEMENT POLICY
341 MF-341 MEDICARE SUPPLEMENT POLICY
342 MF-342 MEDICARE SUPPLEMENT POLICY
343 MF-343 MEDICARE SUPPLEMENT POLICY
345 MF-345 MEDICARE SUPPLEMENT POLICY
346 MF-346 MEDICARE SUPPLEMENT POLICY
347 MF-347 MEDICARE SUPPLEMENT POLICY
348 MF-348 MEDICARE SUPPLEMENT POLICY
349 MF-349 MEDICARE SUPPLEMENT POLICY
350 MF-350 MEDICARE SUPPLEMENT POLICY
351 MF-351 MEDICARE SUPPLEMENT POLICY
352 MF-352 MEDICARE SUPPLEMENT POLICY
360 MF-360 MEDICARE
361 MF-361 MEDICARE SUP CERTIFICATE
362 MF-362 MEDICARE
363 MF-363 MEDICARE
364 MF-364 MEDICARE
365 MF-365 MEDICARE
366 MF-366 MEDICARE SUPPLEMENT CERT.
367 MF-367 MEDICARE SUPPLEMENT CERT.
368 MF-368 MEDICARE SUPPLEMENT CERT.
370 MF-370 MEDICARE SUPPLEMENT POLICY
390 MF-390 MEDICARE SUPPLEMENT POLICY
391 MF-391 MEDICARE SUPPLEMENT POLICY
392 MF-392 MEDICARE SUPPLEMENT POLICY
</TABLE>
-22-
<PAGE> 23
(ACCIDENT AND HEALTH POLICIES CONT.)
<TABLE>
<CAPTION>
PLAN POLICY FORM # NAMES AND DESCRIPTION
CODE
- --------------------------------------------------------------------------------
<S> <C> <C>
393 MF-393 MEDICARE SUPPLEMENT POLICY
403 MF-403 NURSING CARE FACILITY POLICY
404 MF-404 NURSING CARE FACILITY POLICY
405 MF-405 LONG-TERM CARE INSURANCE
407 MF-407 LONG-TERM CARE INSURANCE
408 MF-408 LONG-TERM CARE INS POLICY
409 MF-409 LONG-TERM CARE INS POLICY
410 MF-410 LONG-TERM CARE INS POLICY
411 IGR-TX LONG-TERM CARE INSURANCE
414 MF-414 LONG-TERM CARE INSURANCE
420 MF-420 LONG-TERM CARE W/O ROP RIDER
421 MF-421 LONG-TERM CARE INSURANCE
422 MF-422 NURSING HOME INSURANCE
423 MF-423 LONGTERM CARE INS POLICY
425 MF-425 MAJOR MEDICAL
426 MO-C1 MAJOR MEDICAL
428 RP(10)(WI) NURSING HOME INS POLICY
429 MF-429 LONG-TERM CARE INSURANCE
430 MF-430 COMPREHENSIVE LONG TERM CARE
431 MF-431 LONG TERM CARE INSURANCE
432 MF-432 LONG TERM CARE INS POLICY
435 MF-435 LONG TERM CARE INSURANCE
436 MF-436 LONG TERM CARE INSURANCE
437 MF-437 BASIC NUR HOME LONG TERM CARE
438 MF-438 BASIC NUR HOME LONG TERM CARE
440 MF-440 LONG TERM CARE UNDER 80W/O ROP
442 MF-442 QUALIFIED LONG TERM CARE
443 MF-443 QUALIFIED LONG TERM CARE
444 MF-444 QUALIFIED LONG TERM CARE
445 MF-445 QUALIFIED LONG TERM CARE
446 MF-446 QUALIFIED LONG TERM CARE INS
449 MF-449 QUALIFIED LONG TERM CARE
450 IG(Q)-1 QUALIFIED LONG TERM CARE INS
528 MF-528 HOSP MED SURG AND MAJ MED OVER 80 $140 FM
529 MF-429 NE PETROLEUM MARKETERS OV 60 500 DED
530 MF-530 COMP MAJ MED OV 602500 DED
540 MF-540 COMP MAJ MED BANKS 2500 DED
</TABLE>
-23-
<PAGE> 24
(ACCIDENT AND HEALTH POLICIES CONT.)
<TABLE>
<CAPTION>
PLAN POLICY FORM # NAMES AND DESCRIPTION
CODE
- --------------------------------------------------------------------------------
<S> <C> <C>
541 MF-541 COMP MAJ MED ASSN/BUS OV 60 1000 DED
542 MF-542 COMP MAJ MED COOP OVER 60 1000 DED
543 MF-543 AAA MAJ MED-250 DED
544 MF-544 COMP MAJ MED BK DEP. OV 60 250 DED
545 MF-545 COMP MAJ MED NE STKGR. OV 60 100 DED
546 MF-546 FRANCHISE MAJ MED EXP 2500 DED
547 MF-547 FRANCHISE MAJ MED EXP 250
625 MF-625 TRAVEL ACCIDENT POLICY
627 MF-627 CANCER POLICY
640 MF-640 EMPLOYEE GROUP HEALTH PLAN
701 MF-701 HOSPITAL INDEMNITY POLICY
702 MF-702 HOSPITAL INDEMNITY POLICY
703 MF-703 HOSPITAL INDEMNITY POLICY
704 MF-704 HOSPITAL INDEMNITY POLICY
705 MF-705 HOSPITAL INDEMNITY POLICY
706 MF-706 HOSPITAL INDEMNITY POLICY OV 64
708 MF-708 HOSPITAL INDEMNITY POLICY
709 MF-709 HOSPITAL INDEMNITY POLICY
730 MF-730 HOSPITAL CONF INDEMNITY
731 MF-731 HOSPITAL CONF INDEMNITY
735 MF-735 HOSPITAL CONF INDEMNITY-FL
750 MF-750 GROUP MEDICAL "WRAP"
800 MF-800 ACCIDENT ONLY POLICY
801 MF-801 ACCIDENT ONLY POLICY
802 MF-802 ACCIDENT ONLY POLICY
804 MF-804 ACCIDENT ONLY POLICY
805 MF-805 ACCIDENT DISABILITY POLICY
810 MF-810 ACCIDENT ONLY POLICY
811 MF-811 ACCIDENT ONLY POLICY
812 MF-912 ACCIDENT ONLY POLICY
815 MF-815 ACCIDENT ONLY POLICY-FL
816 MF-816 ACCIDENT ONLY POLICY
901 MF-901 CANCER POLICY
902 MF-902 CANCER POLICY
903 MF-903 CANCER POLICY
904 MF-904 CANCER POLICY
</TABLE>
-24-
<PAGE> 25
(ACCIDENT AND HEALTH POLICIES CONT.)
<TABLE>
<CAPTION>
PLAN POLICY FORM # NAMES AND DESCRIPTION
CODE
- --------------------------------------------------------------------------------
<S> <C> <C>
905 MF-905 CANCER POLICY 65 OF OLDER
907 MF-907 CANCER AND SPEC DISEASE POLICY
908 MF-908 CANCER AND SPEC DISEASE POLICY
909 MF-909 CANCER AND SPEC DISEASE POLICY
910 MF-910 CANCER AND SPECIFIED DISEASE
911 MF-911 CANCER AND SPECIFIED DISEASE
913 MF-913 CANCER AND SPEC DIS POLICY-FL
914 MF-914 CANCER AND SPEC DIS POLICY-FL
915 MF-915 CANCER AND SPECIFIED DISEASE
DG1 MF-DG1 GROUP DENTAL
DN1 MF-DN1 INDIVIDUAL DENTAL
H04 MF-H04 MAJOR MEDICAL EXPENSE POLICY
H05 MF-H05 HOSPITAL AND SURGICAL POLICY
H07 MF-H07 HOSPITL AND SURGICAL POLICY
HS1 MF-HS1 COMPREHENSIVE MAJ MED 500 DED
HS2 MF-HS2 HOSPITAL SURG EXPENSE 250 DED
HSS MF-HS5 COMPREHENSIVE MAJ MED 10000 DED
PPA MF-PPA PREFERRED PROVIDER POLICY
PPB MF-PPB PREFERRED PROVIDER POLICY
PPC MF-PPC PREFERRED PROVIDER POLICY
PPD MF-PPD PREFERRED PROVIDER POLICY
PPE MF-PPE PRE PROVIDER POLICY 1000 DED
PPF MF-PPF PRE PROVIDER POLICY DED 2500
PPG MF-PPG PRE PROVIDER CERTIFICATE
PPI MF-PPI PREFERRED PROVIDER POLICY
PPJ MF-PPJ PREFERRED PROVIDER POLICY
PPL MF-PPL PREFERRED PROVIDER POLICY
PPM MF-PPM PRE PROVIDER POLICY 250 DED
PPO MF-PPO PREFERRED PROVIDER POLICY
PPQ MF-PPQ PREFERRED PROVIDER POLICY
PPR MF-PPR PREFERRED PROVIDER POLICY
PPS MF-PPS PREFERRED PROVIDER POLICY
PPZ MF-PPZ PREFERRED PROVIDER CERTIFICATE
S10 MF-S10 SHORT TERM NON-RENEWABLE MED
S20 MF-S20 SHORT TERM NON-RENEW MED 600
S21 MF-S21 SHORT TERM NON-RENEW MED 150
SE1 MF-SE1 SMALL EMP GRP PLAN BASIC
SE2 MF-SE2 SMALL EMP GRP PLAN STANDAPD
SE3 MF-SE3 BASIC PLAN
SE4 MF-SE4 STANDARD PLAN
</TABLE>
-25-
<PAGE> 26
(ACCIDENT AND HEALTH POLICIES CONT.)
<TABLE>
<CAPTION>
PLAN POLICY FORM # NAMES AND DESCRIPTION
CODE
- --------------------------------------------------------------------------------
<S> <C> <C>
ST1 MF-ST1 SHORT TERM NON-RENEWABLE MED
STD MF-STD SHORT TERM NON-RENEW MED EXP 600 DED
STM MF-STM SHORT TERM NON-RENEW MED EXP 1200
TIM MF-TIM SHORT TERM NON-RENEW MAJ MED
TIP MF-TIP SHORT TERM NON-RENEW HOSP SURG POLICY
WP1 MF-WP1 MAJOR MED EXPENSE POLICY
WP3 MF-WP3 SURGICAL EXPENSE POLICY
WP4 MF-WP4 BASIC HOSP MEDICAL EXPENSE
WP5 MF-WP5 CANCER POLICY
WP6 MF-WP6 DOCTOR CALL POLICY
</TABLE>
-26-
<PAGE> 27
SCHEDULE B
----------
CEDING ALLOWANCE; EXPENSE ALLOWANCES
------------------------------------
CEDING ALLOWANCE: The ceding allowance payable to the Company by the Reinsurer
is $13,000,000 for 50% of the Losses and Premium under Policies on and after the
Effective Date.
EXPENSE ALLOWANCES: In conjunction with the quarterly accounting, a
proportionate share of the following allowances will be credited to the Company
at the end of each quarter in the premium/claim calculation based on the number
of Policies and/or certificates in force and/or applicable Premium during the
quarter. With respect to the Reinsurer's proportionate share of liability
hereunder, the agreed-to Expense Allowances are as follows:
1. Policy Administration Fee:
(i) Life and Annuity Policies: $35 per Policy, plus a management fee
equal to 3% of collected Premium.
(ii) Accident & Health Policies
a) Medicare Supp.: 10% of collected Premium;
b) Major Medical: 9% of collected Premium;
c) Long Term Care: 6% of collected Premium;
d) All others: 15% of collected Premium;
provided that if the ceding
allowance is not repaid within 5
years after the Effective Date, the
above allowances shall be reduced
effective the first quarter
following expiration of the 5 year
period in an amount equal to the
lesser of (i) the actual amount
required to service the Policies in
accordance with Nebraska law or (ii)
the above allowances. Upon
conversion of this Agreement to
65/35 profit sharing on the
Reinsurer's proportionate share
hereunder, the allowance then in
effect shall remain fixed until
termination of the Agreement.
3. Commissions will be paid on an actually incurred basis.
4. Premium taxes will be paid on an actually incurred basis.
-27-
<PAGE> 28
SCHEDULE C
----------
RECAPTURE; EXPERIENCE REFUND
----------------------------
At the end of each quarter, an experience refund will be calculated on
the Policies reinsured. If positive, this experience refund will be payable to
the Company by the Reinsurer. Should the Company elect to exercise its recapture
option pursuant to Article III hereof, the Company shall be liable for repayment
of the then outstanding LBF as defined below, in addition to an amount
sufficient to assure the Reinsurer of a maximum Modified Pre-tax 12% return on
its investment from the Effective Date. Such calculation shall include the
provision for target surplus in the amount of 200% of the Authorized Control
Level RBC using the factor agreed to by the Company and the Reinsurer as
appropriate for the Policies reinsured. The formula for the calculation of the
recapture amount will be agreed to by the parties to this Agreement. In
addition, the recapture shall call for a net cash settlement, with interest at
the rate of "I" as defined below, of all outstanding reserve amounts as of the
recapture date.
Define the following for the Policies reinsured:
P = Premiums incurred during the quarter, and experience
refunds under other reinsurance treaties, net of
any reinsurance premiums for the Reinsurer's
Share of the Policies reinsured.
I = Net Investment income, to be defined as the
Reinsurer's net portfolio rate for the quarter prior
to the settlement date applied to the total
beginning reserves for the Policies reinsured,
including provision for realized capital gains and
losses. The Company will provide the Reinsurer with
a breakdown of all pertinent reserve elements.
R = Statutory Unearned Premium and Active Life Reserve
increase for the quarter.
B = Policyholder Benefits incurred during the quarter,
net of any reinsurance benefits recovered under
other reinsurance treaties for the Policies
reinsured (i.e. incurred benefits = paid + change in
aggregate claim reserve).
A = Overhead Expense Allowances incurred during the
quarter.
T = Premium Taxes.
LBF = Loss Brought Forward from prior quarter end.
(The initial value for LBF will be the Initial Ceding Allowance set
forth in Schedule B)
-28-
<PAGE> 29
Then:
C = Commission allowances incurred during the quarter.
N = Net gain during the quarter.
- P+I-R-B-C-A-T
ER = Experience Refund for the quarter, defined as:
= 65%[N - {1.12 to the power of .25 x LBF}] ,but not
less than zero.
and:
LCF = Loss Carried Forward from current quarter end (=LBF
for next quarter), defined as:
= {1.12 to the power of .25 x LBF} - N, but not less
than zero.
-29-
<PAGE> 1
Exhibit 21
SUBSIDIARIES
------------
Central Reserve Life Insurance Company is an Ohio Corporation which does
business only under such name.
CRL Asset Management Corporation is an Ohio Corporation which does business only
under such name.
Western Reserve Administrative Services, Inc. is an Ohio Corporation which does
business only under such name.
Ceres Health Care, Inc. is a Delaware Corporation which does business only under
such name.
Ceres Net, Inc. is a Delaware Corporation which does business only under such
name.
Ceres Savers Plan, Inc. is a Delaware Corporation which does business only under
such name.
Continental General Corporation is a Nebraska Corporation which does business
only under such name.
Ceres Administrators, L.L.C. is a Delaware limited liability company whose sole
member is Ceres Group, Inc. and which does business only under such name.
Provident American Life & Health Insurance Company is a Pennsylvania Corporation
which does business only under such name.
Continental General Insurance Company is a Nebraska Corporation which does
business only under such name.
Gontinental Agency Services, Inc. is a Nebraska Corporation which does business
only under such name.
Continental Print & Photo Company is a Nebraska Corporation which does business
only under such name.
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-62657) pertaining to the Retirement Plan for Employees of the
Central Reserve Life Insurance Company of our report dated March 17, 1999,
with respect to the consolidated financial statements and schedules of Ceres
Group, Inc. included in this Annual Report (Form 10-K) for the year ended
December 31, 1998.
Ernst & Young LLP
Cleveland, Ohio
March 26, 1999
<PAGE> 1
Exhibit 23.2
The Board of Directors
Ceres Group, Inc. (formerly Central Reserve Life Corporation):
We consent to the use of our report dated February 20, 1998, except for Notes B
and C, as to which the date is March 30, 1998, related to the consolidated
balance sheet of Ceres Group, Inc. and subsidiaries as of December 31, 1997, and
the related consolidated statements of operations, shareholders' equity, and
cash flows for each of the years in the two-year period ended December 31, 1997,
and all related schedules, which report appears in the December 31, 1998 annual
report on Form 10-K of Ceres Group, Inc. and is incorporated by reference in the
registration statement on Form S-8 of the Company for the Retirement Plan for
Employees of the Central Reserve Life Insurance Company.
Our report dated February 20, 1998, except for Notes B and C, as to which the
date is March 30, 1998, contains an explanatory paragraph that states that the
Company has suffered substantial losses from operations in 1997 and 1996 that
resulted in a significantly reduced net capital position and that in December
1997, the Company obtained an interim loan of $20 million that absent some
future event the Company would not have the ability to repay, which matters
raise substantial doubt about its ability to continue as a going concern. The
consolidated financial statements and financial statement schedules do not
include any adjustments that might result from the outcome of that uncertainty.
KPMG LLP
Columbus, Ohio
March 26, 1999
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF CERES GROUP, INC AND SUBSIDIARIES FOR THE
YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000215403
<NAME> ?????????
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<DEBT-HELD-FOR-SALE> 80,832,097
<DEBT-CARRYING-VALUE> 8,899,659
<DEBT-MARKET-VALUE> 9,017,950
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 89,826,188
<CASH> 19,376,380
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 3,809,737
<TOTAL-ASSETS> 180,233,135
<POLICY-LOSSES> 22,717,862
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 74,395,205
<POLICY-HOLDER-FUNDS> 8,845,829
<NOTES-PAYABLE> 8,283,884
0
0
<COMMON> 11,495
<OTHER-SE> 35,824,219
<TOTAL-LIABILITY-AND-EQUITY> 180,233,135
160,784,897
<INVESTMENT-INCOME> 7,454,180
<INVESTMENT-GAINS> 210,857
<OTHER-INCOME> 1,696,690
<BENEFITS> 116,058,675
<UNDERWRITING-AMORTIZATION> 647,271
<UNDERWRITING-OTHER> 56,209,449
<INCOME-PRETAX> (2,768,771)
<INCOME-TAX> 1,066,888
<INCOME-CONTINUING> (3,835,659)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,835,659)
<EPS-PRIMARY> (.49)
<EPS-DILUTED> (.49)
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
