UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[*] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 0-20882
STANDARD MANAGEMENT CORPORATION
(Exact name of Registrant as specified in its charter)
Indiana No. 35-1773567
(State of incorporation) (I.R.S. employer identification no.)
9100 Keystone Crossing
Indianapolis, Indiana 46240
(Address of principal executive offices)
(317) 574-6200
(Telephone number)
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 [*] No [ ]
As of October 31, 1996, the Registrant had 4,774,270 shares of Common Stock
outstanding.
STANDARD MANAGEMENT CORPORATION
INDEX
PART I. FINANCIAL INFORMATION: PAGE
Item 1. Financial Statements
Consolidated Balance Sheets -
September 30, 1996 (Unaudited) and December 31, 1995 (Audited) 3
Consolidated Statements of Operations -
For the Three Months and Nine Months Ended September 30, 1996 and 1995
(Unaudited) 5
Consolidated Statements of Shareholders' Equity -
For the Nine Months Ended September 30, 1996 and 1995 (Unaudited) 6
Consolidated Statements of Cash Flows -
For the Nine Months Ended September 30, 1996 and 1995 (Unaudited) 7
Notes to Consolidated Financial Statements (Unaudited) 9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 13
PART II. OTHER INFORMATION:
Item 5. Other Information 30
Item 6. Exhibits and Reports on Form 8-K 31
Signatures 32
Exhibit 11 - Statement Re: Computation of Per Share Earnings - 33
For the Three Months and Nine Months Ended September 30, 1996 and 1995
(Unaudited)
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STANDARD MANAGEMENT CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
September 30, December 31,
<S> <C> <C>
1996 1995
(Unaudited) (Audited)
Investments:
Securities available for sale:
Fixed maturity securities, at fair value
(amortized cost: $246,640 in 1996 and $225,643 in 1995) $241,713 $232,092
Equity securities, at fair value (cost: $55 in 1996 and $52 77 52
in 1995)
Mortgage loans on real estate, at unpaid principal balances 3,016 2,963
Policy loans, at unpaid principal balances 7,498 8,509
Real estate, at depreciated cost 547 556
Other invested assets 957 1,367
Short-term investments, at cost, which approximates fair value 12,070 35,058
Total investments 265,878 280,597
Cash 4,411 5,762
Amounts due and recoverable from reinsurers 65,047 33,419
Deferred policy acquisition costs 17,977 10,054
Present value of future profits, less accumulated amortization
of 15,402 15,246
$3,063 in 1996 and $2,803 in 1995
Excess of acquisition cost over net assets acquired, less
accumulated amortization of $286 in 1996 and $393 in 1995 2,279 3,175
Deferred federal income taxes 66 -
Other assets 8,681 8,640
Assets held in separate accounts 126,987 122,705
Total assets $506,728 $479,598
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
STANDARD MANAGEMENT CORPORATION
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
LIABILITIES, REDEEMABLE SECURITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
September 30, December 31,
<S> <C> <C>
1996 1995
(UNAUDITED) (Audited)
Liabilities:
Future policy benefits:
Interest-sensitive annuities and other financial $244,240 $212,500
products
Traditional life insurance 79,623 82,762
Total future policy benefits 323,863 295,262
Policy claims and other policyholders' benefits and 2,582 2,572
funds
326,445 297,834
Accounts payable and accrued expenses 4,826 4,880
Class action litigation and settlement liability - 3,000
Obligations under capital lease 753 1,084
Notes payable 5,671 3,107
Deferred federal income taxes - 2,583
Excess of net assets acquired over acquisition cost,
less
accumulated amortization of $3,492 in 1996 and 3,122 4,163
$2,451 in 1995
Liabilities related to separate accounts 126,987 122,705
Total liabilities 467,804 439,356
Class S Cumulative Convertible Redeemable Preferred
Stock,
par value $10 per share, 11% dividend, redeemable in
February 2003:
Authorized 300,000 shares; issued and outstanding
160,789 shares, redemption value of $10 per share 1,722 -
plus accumulated and unpaid dividends
Shareholders' equity:
Preferred stock, no par value:
Authorized 700,000 shares; none issued and - -
outstanding
Common stock, no par value:
Authorized 20,000,000 shares; issued 5,752,499
shares 40,997 39,808
in 1996 and 5,459,573 shares in 1995
Treasury stock, at cost, 978,229 shares in 1996 and
502,025 shares in 1995 (deduction) (4,741) (2,621)
Unrealized gain (loss) on securities available for (1,892) 2,582
sale
Foreign currency translation adjustment 717 1,159
Retained earnings (deficit) 2,121 (686)
Total shareholders' equity 37,202 40,242
Total liabilities, redeemable securities
and shareholders' equity $506,728 $479,598
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
STANDARD MANAGEMENT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
<S> <C> <C> <C> <C>
1996 1995 1996 1995
Revenues:
Premium income $1,289 $1,203 $ 8,418 $ 3,543
Net investment income 4,979 4,497 14,371 13,677
Net realized investment gains 222 172 677 505
Gain on disposal of subsidiaries - - 886 -
Policy charges 617 541 1,832 1,645
Amortization of excess of net assets acquired over 347 347 1,041 1,041
acquisition cost
Management fees and similar income from separate 257 236 1,093 724
accounts
Administration fee income 145 - 682 -
Other income 113 108 865 257
Total revenues 7,969 7,104 29,865 21,392
Benefits and expenses:
Class action litigation and settlement costs (credit) - - - (314)
Benefits and claims 1,434 1,362 8,657 4,123
Interest credited on interest-sensitive annuities and
other 2,641 2,198 7,645 7,325
financial products
Salaries and wages 1,215 1,117 3,678 3,322
Amortization 564 430 1,723 1,351
Other operating expenses 1,263 1,533 5,173 4,473
Interest expense and financing costs 153 24 430 77
Total benefits and expenses 7,270 6,664 27,306 20,357
Income before federal income taxes, extraordinary gain
on early 699 440 2,559 1,035
redemption of preferred stock and preferred stock
dividends
Federal income tax expense (credit) 228 (762) 56 (5)
Income before extraordinary gain on early redemption
of preferred stock and preferred stock dividends 471 445 3,321 979
Extraordinary gain on early redemption of preferred
stock, 233 - 500 -
net of $- federal income tax
NET INCOME 704 445 3,821 979
Preferred stock dividends 51 - 163 -
Earnings available to common shareholders $653 $445 $3,658 $979
Earnings per share:
Income before extraordinary gain on early redemption
of $.10 $.08 $.65 $.18
preferred stock and preferred stock dividends
Extraordinary gain on early redemption of preferred stock .04 - .09 -
NET INCOME .14 .08 .74 .18
Preferred stock dividends .01 - .02 -
Earnings available to common shareholders $.13 $.08 $.72 $.18
Weighted average number of shares outstanding:
Common shares 4,774,840 5,209,439 4,835,657 5,257,535
Common equivalent shares 165,242 166,956 463,842 90,671
4,940,082 5,376,395 5,299,499 5,348,206
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
STANDARD MANAGEMENT CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
<S> <C> <C> <C> <C>
Amounts Shares
1996 1995 1996 1995
Common stock:
Balance, beginning of period $39,808 $39,695 5,459,573 5,457,906
Issuance of common stock 100 - 20,000 -
Issuance of common stock in connection with
exercise of stock options - 6 - 1,667
Issuance of common stock warrants 239 - - -
5% common stock dividend, plus cash in lieu
of 850 - 272,926 -
fractional shares
Balance, end of period 40,997 39,701 5,752,499 5,459,573
Treasury stock (at cost):
Balance, beginning of period (2,621) (2,221) (502,025) (418,425)
Treasury stock acquired (2,126) (395) (431,026) (82,600)
5% common stock dividend - - (46,402) -
Reissuance of treasury stock in connection
with 6 - 1,224 -
exercises of stock options
Balance, end of period (4,741) (2,616) (978,229) (501,025)
Unrealized gain (loss) on securities:
Balance, beginning of period 2,582 (13,411)
Change in unrealized gain (loss) on
securities available for sale, net (4,474) 13,692
Balance, end of period (1,892) 281
Foreign currency translation adjustments:
Balance, beginning of period 1,159 546
Translation adjustments for the period (442) 804
Balance, end of period 717 1,350
Retained earnings (deficit):
Balance, beginning of period (686) (1,999)
Net income 3,821 979
5% common stock dividend, plus cash in lieu
of fractional shares (850) -
Loss on reissuance of treasury stock (1) -
Other - (4)
Preferred stock dividend (163) -
Balance, end of period 2,121 (1,024)
Total shareholders' equity and common shares $37,202 $37,692 4,774,270 4,956,881
outstanding
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
STANDARD MANAGEMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, Dollars in Thousands)
<TABLE>
<CAPTION>
Nine Months Ended
SEPTEMBER 30,
<S> <C> <C>
1996 1995
OPERATING ACTIVITIES
Net income $3,821 $979
Adjustments to reconcile net income
to net cash provided by operating activities:
Extraordinary gain on early redemption of (500) -
preferred stock
Amortization of deferred policy acquisition costs 837 814
Policy acquisition costs deferred (4,519) (1,102)
Class action litigation and settlement liability - (637)
Deferred income taxes (343) 419
Depreciation and amortization 308 (79)
Change in future policy benefits 5,995 2,679
Net increase (decrease) in policy claims and
other policyholders' benefits and funds (228) (215)
Net realized investment gains (677) (505)
Decrease (increase) in accrued investment income (244) 641
Other (1,693) 3,350
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,757 6,344
FINANCING ACTIVITIES
Issuance of Common Stock - 6
Borrowings under line of credit agreements 2,600 200
Repayments on short-term borrowings
and capital lease obligation (364) (988)
Premiums received on interest-sensitive annuities
and other financial products credited to
policyholder account balances, net of premiums 32,153 10,680
ceded
Return of policyholder account balances on
interest-sensitive annuities and other
financial products, net of premiums ceded (12,993) (13,400)
Redemption of preferred stock (941) -
Proceeds from common and treasury stock sales 106 -
Purchase of common stock for treasury (2,126) (395)
NET CASH PROVIDED (USED) BY FINANCING 18,435 (3,897)
ACTIVITIES
INVESTING ACTIVITIES
Fixed maturity securities available for sale:
Purchases (136,972) (143,025)
Sales 94,247 139,856
Maturities 6,381 2,028
Short-term investments, net 2,647 (1,931)
Other investments, net (68) (186)
Proceeds from sale of property and equipment under
capital lease - 1,396
Proceeds from sale of First International Life
Insurance 11,228 -
Company, less cash transferred to seller of $265
NET CASH USED BY INVESTING (22,537) (1,862)
ACTIVITIES
Net increase (decrease) in cash (1,351) 585
Cash at beginning of period 5,762 1,604
Cash at end of period $ 4,411 $2,189
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
STANDARD MANAGEMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited, Dollars in Thousands)
SUPPLEMENTAL NON-CASH INVESTING AND FINANCING ACTIVITY:
Effective May 31, 1996, the Company terminated and recaptured a
reinsurance agreement with the acquisition of assets with a fair value of
$5,201 and assumed liabilities with a fair value of $4,953. Cash received
at closing on July 31, 1996 in connection with this transaction was $514.
In the nine months ended September 30, 1996, non-cash dividends on
preferred stock of $163 were accrued and the Company issued common stock
warrants with an aggregate value of $239 for which no cash was received.
<PAGE>
STANDARD MANAGEMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles
("GAAP") for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by GAAP for complete
financial statements. Such principles were applied on a basis consistent
with those reflected in the Standard Management Corporation ("SMC") Annual
Report on Form 10-K for the year ended December 31, 1995. However, certain
reclassifications have been made in the 1995 financial statements to
conform with the 1996 presentation.
The results of operations for the interim periods shown in this report
are not necessarily indicative of the results that may be expected for the
fiscal year. This is particularly true in the life insurance industry,
where mortality results in interim periods can vary substantially from such
results over a longer period. In the opinion of management, the
information contained herein reflects all adjustments necessary to make the
results of operations for the interim periods a fair statement of such
operations. All such adjustments are of a normal recurring nature.
The preparation of financial statements requires management to make
estimates and assumptions that affect amounts reported in the financial
statements and accompanying notes. Such estimates and assumptions could
change in the future as more information becomes known, which could impact
the amounts reported and disclosed herein.
The consolidated financial statements for the three month and nine
month periods ended September 30, 1996 include the assets and liabilities
and results of operations of Dixie National Life Insurance Company ("Dixie
National Life") which was acquired on October 2, 1995.
For further information, refer to the consolidated financial
statements and footnotes thereto included in the SMC Annual Report on Form
10-K for the year ended December 31, 1995.
NOTE 2 - STOCK DIVIDEND
SMC declared a 5 percent stock dividend on shares of its common stock
for shareholders of record on May 17, 1996 which was distributed to
shareholders on June 21, 1996. All applicable share and per share amounts
have been retroactively adjusted to reflect this stock dividend.
STANDARD MANAGEMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 - NOTES PAYABLE
SMC has outstanding borrowings at September 30, 1996 pursuant to a
Revolving Line of Credit Agreement with a bank (the "Credit Agreement")
which provides for it to borrow up to $6,000 in the form of a five-year
reducing revolving loan arrangement, which may be extended to seven years
at the discretion of the bank. At September 30, 1996, the total principal
balance borrowed under the Credit Agreement was $5,600. SMC had borrowed
an additional $2,600 since December 31, 1995 to repurchase its Common Stock
and Class S Cumulative Convertible Redeemable Preferred Stock ("Class S
Preferred Stock") and for general corporate purposes. Borrowings under
this Credit Agreement may be used for contributions to surplus of insurance
subsidiaries, acquisition financing, and repurchases of Class S Preferred
Stock and Common Stock of SMC. Interest on the borrowings under the Credit
Agreement is determined, at the option of SMC, to be: (i) a fluctuating
rate of interest to the corporate base rate announced by the bank from time
to time plus 1 percent per annum, or (ii) a rate at LIBOR plus 3.25
percent. The actual weighted average interest rate was 8.89 percent at
September 30, 1996. The debt is also subject to certain restrictions and
covenants considered ordinary for this type of borrowing. They include,
among others, minimum consolidated equity, positive net income, and minimum
consolidated statutory surplus for SMC's insurance subsidiaries.
Additional covenants include limitations on acquisitions, additional
indebtedness, investments, and mergers, consolidations and sales of assets.
As of September 30, 1996, SMC was in compliance with all restrictions and
covenants in the Credit Agreement (SEE NOTE 8).
NOTE 4 - CLASS S PREFERRED STOCK
In connection with the class action lawsuit settlement in March 1995,
300,000 shares designated as Class S Preferred Stock, $10.00 per share par
value, were issued February 8, 1996. The Class S Preferred Stock is
redeemable in February 2003, has an 11 percent annual cumulative dividend
payable in February 2003, and is convertible into SMC common stock at $7.62
per share until February 1998 and $10.00 per share thereafter.
SMC may voluntarily redeem the Class S Preferred Stock prior to
February 2003 at par value plus accumulated and unpaid dividends. As of
September 30, 1996, SMC has repurchased and retired 139,211 shares of Class
S Preferred Stock at a cost of $941 primarily paid through borrowings under
the Credit Agreement. This repurchase resulted in an extraordinary gain on
early redemption of preferred stock of $233 and $500 for the three and nine
month periods ended September 30, 1996, respectively.
<PAGE>
STANDARD MANAGEMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 - NET UNREALIZED GAIN (LOSS) ON SECURITIES AVAILABLE FOR SALE
The components of the balance sheet caption "Unrealized gain (loss) on
securities available for sale" in shareholders' equity are summarized as
follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, December 31,
1996 1995
<S> <C> <C>
Fair value of securities available for sale $241,790 $232,144
Amortized cost of securities available for sale 246,695 225,695
Gross unrealized gain (loss) on (4,905) 6,449
securities available for sale
Adjustments for:
Deferred policy acquisition costs 1,860 (2,380)
Present value of future profits 155 (174)
Deferred federal income tax 996 (1,311)
recoverable (liability)
Minority interest 2 (2)
Net $(1,892) $2,582
unrealized gain (loss) on securities available for
sale
</TABLE>
NOTE 6 - INCOME TAXES
The effective consolidated federal income tax expense (credit) rate
for SMC and subsidiaries (the "Company") was 33 percent and (30) percent
for the three and nine months ended September 30, 1996, compared to (1)
percent and 5 percent for the three and nine months ended September 30,
1995. The large credit for the nine months ended September 30, 1996 is
primarily due to tax benefits of $1,420 related to the sale of First
International Life Insurance Company ("First International") (SEE NOTE 7).
Also, the effective rates in 1995 are less than the statutory rates
primarily because the amortization of excess of net assets acquired over
acquisition cost resulting from the acquisition of Standard Management
International is not subject to United States income tax. The Company also
has received the benefits of a special deduction available to small life
insurance companies and the utilization of operating loss carryforwards in
1995. The benefits of the special deduction available to small life
insurance companies is no longer available because consolidated assets now
exceed $500,000.
NOTE 7 - DISPOSAL OF SUBSIDIARIES
On March 18, 1996, Standard Life Insurance Company of Indiana
("Standard Life"), a wholly-owned subsidiary of SMC, signed a definitive
stock purchase agreement to sell a duplicate charter in the form of its
wholly-owned subsidiary, First International, to Guardian Insurance and
Annuity Co., Inc. ("GIAC"), a subsidiary of The Guardian Life Insurance
Company of America, New York, New York. Standard Life received sale
proceeds of $11,493, including $1,500 for the charter and
STANDARD MANAGEMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
licenses associated with First International and $1,800 of reinsurance
ceding commissions. In addition, First International, Standard Life and
GIAC have entered into a series of reinsurance and other agreements that
include provisions for Standard Life to continue to administer First
International policies in force at the date of sale and retain a majority
of the profits from First International's business in force at the date of
sale in Standard Life.
In an unrelated matter, the Company decided in February 1996 to
terminate the reinsurance agreement between Standard Reinsurance of North
America Ltd. ("Standard Reinsurance") and Salamandra Joint-Stock Insurance
Company in Ukraine ("Salamandra"), and to not renew the Barbados license of
Standard Reinsurance. This resulted in the write-off of SMC's investment
in Standard Reinsurance and certain intangible assets of Standard
Reinsurance amounting to $156.
The combined effect of the gain on sale of First International and
related contracts, and the Standard Reinsurance write-offs, was an increase
in revenues of $886 and a tax benefit of $1,420, for net income of
approximately $2,306 or $.44 per share in the nine months ended September
30, 1996.
NOTE 8 - PENDING ACQUISITION
On July 18, 1996, Standard Life signed a definitive stock purchase
agreement to acquire Shelby Life Insurance Company ("Shelby") from Delta
Life and Annuity Company ("DLAC"), a life insurance company located in
Memphis, Tennessee. Under terms of the agreement, SMC will purchase Shelby
for approximately $14,250, plus acquisition costs, including $13,000 in
cash and 250,000 shares of restricted SMC Common Stock. In addition, an
extraordinary dividend of $3,000 will be paid to the seller at closing.
Financing for the transaction will be provided by senior debt of $10,000
and the balance in subordinated convertible debt.
For GAAP purposes, Shelby had $109,892 in total assets and
shareholder's equity of $16,407 at September 30, 1996, and revenues of
$8,718 and net income of $1,301 for the nine months ended September 30,
1996.
The Shelby acquisition closed on November 8, 1996, effective as of
November 1, 1996.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
GENERAL
The following is an analysis of the material factors affecting the
results of operations and financial condition of the Company. This
analysis should be read in conjunction with the consolidated financial
statements and notes thereto included in this document, as well as the
Company's Annual Report on Form 10-K for the year ended December 31, 1995.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
OPERATING INCOME. The income (loss) from operations (before net
realized investment gains) was $342 for the third quarter of 1996, or $.07
per share, compared to of $323 for the third quarter of 1995, or $.06 per
share. The change resulted from international operations producing income
from operations of $105 compared to a loss from international operations of
$(73) for the third quarter of 1996 and 1995, respectively. The
international operating gains resulted primarily from increased management
fees on an increasing separate account base due to portfolio sales in 1996
and 1995, coupled with a decrease in marketing costs in 1996 when compared
to the third quarter of 1995. The income from operations in the United
States decreased to $237 in 1996 compared to $396 in 1995. The decline was
attributable to an increase in interest expense from borrowings to
repurchase Common Stock and Class S Preferred Stock and additional costs to
convert the operations and expand the marketing effort in Dixie National
Life.
PREMIUM INCOME. Premium income is composed of premiums, including
renewal premiums, received on ordinary life insurance policies.
GAAP premium income for the third quarter of 1996 was $1,289, an
increase of $86 or 7 percent from $1,203 for the third quarter of 1995.
The inclusion of Dixie National Life's premium income of $432 in 1996 in
the results of operations for periods after October 2, 1995 is offset by
the decline in premiums from the cession of a portion of First
International's life insurance business and the regular policy lapses,
surrenders and expiries in the Company's closed blocks of business.
The Company's new product sales are composed primarily of annuity
products. Under GAAP, deposits from interest-sensitive annuities and other
financial products are not recorded as revenues. Net premiums received
from the sales of interest-sensitive annuities and other financial products
(which are not recorded as revenues) were $13,358 compared to $3,664 for
the third quarter of 1996 and 1995, respectively. The increase in net
premium received is partially due to an increase in gross domestic premium
deposits. Gross domestic premium deposits received from interest-sensitive
annuities and financial products were $15,982 for the three months ended
September 30, 1996 compared to $8,409 for the three months ended September
30, 1995. The increase is partially due to an aggressive marketing
campaign implemented by Standard Life with increased crediting interest
rates. Also contributing to the increase in premiums was the continued
development of the Company's distribution system. Since the Company's
operating income is primarily a function of its investment spreads,
mortality experience, and operating expenses, a change in premium deposits
in a single period does not directly cause operating income to change,
although continued increases or decreases in premiums may affect the growth
rate of total assets on which investment spreads are earned.
The Company also decreased the quota-share portion of business ceded
pursuant to a reinsurance agreement, under which 70 percent of a portion of
Standard Life's annuity business pursuant to the terms of the agreement
produced after December 31, 1994 was ceded, to 50 percent at September 1,
1995, which was further decreased to 25 percent effective April 1, 1996.
Premium deposits ceded pursuant to this reinsurance agreement reduced net
premium by $2,625 in the third quarter of 1996 compared to $4,746 in 1995.
NET INVESTMENT INCOME. Net investment income increased to $4,979 for
the third quarter of 1996, 11 percent, from $4,497 for the comparable
period of 1995. The increase resulted primarily from an increase in the
average annualized yield of the Company's investment portfolio to 7.57
percent from 7.22 percent for the third quarter of 1996 and 1995,
respectively.
NET REALIZED INVESTMENT GAINS. Net realized investment gains
increased $50 or 29 percent to $222 from $172 for the third quarter of 1996
and 1995, respectively. Net realized gains from trading account securities
was $23 for the third quarter of 1996 and 1995. Net realized investment
gains fluctuate from period to period and arise when securities are sold in
response to changes in the investment environment which provide
opportunities to maximize return on the investment portfolio without
adversely affecting the quality and overall yield of the investment
portfolio. No significant writedowns on investments were recorded in 1995
or 1996.
The net unrealized gain (loss) on the Company's fixed maturity
portfolio before taxes and other adjustments was $(4,905) at September 30,
1996 compared to $6,449 at December 31, 1995, reflecting the general rise
in interest rates during the quarter which generally caused the fair value
of fixed maturity securities to decrease. The gross unrealized losses and
gains on fixed maturity securities were $(7,242) and $2,337 at September
30, 1996. In the absence of decreases in interest rates the Company may be
unable to realize gains on its investment portfolio at the levels of prior
years or could recognize losses from sales of securities prior to maturity.
The change in market value of the Company's fixed maturity securities is
not expected to have a significant effect on results of operations because
the Company has the present intent and practice to hold most of its
available-for-sale fixed maturity securities to maturity and the Company's
asset/liability management activity is designed to monitor and adjust for
the effects of changes in market interest rates.
POLICY CHARGES. Policy charges, which represent the amounts assessed
against policy account balances for the cost of insurance, administration
and surrenders, increased $76 or 14 percent to $617 for the third quarter
of 1996 compared to $541 for the third quarter of 1995. The increase in
policy charges resulted from the inclusion of Dixie National Life in
operating results for periods after
<PAGE>
October 2, 1995 and an increase in policy surrender charges on flexible
premium deferred annuities ("FPDAs"), which offset the absence of policy
charges from the Company's closed blocks of universal life business which
were sold to GIAC through a reinsurance contract effective January 1, 1996.
AMORTIZATION OF EXCESS OF NET ASSETS ACQUIRED OVER ACQUISITION COST.
Amortization of excess of net assets acquired over acquisition cost
("negative goodwill") is recorded to amortize into earnings the negative
goodwill recorded in connection with the acquisition of Standard Management
International in 1993. The negative goodwill is being amortized on a
straight-line basis over five years. Amortization of negative goodwill was
$347 for the third quarter of 1996 and 1995.
MANAGEMENT FEES AND SIMILAR INCOME FROM SEPARATE ACCOUNTS. Management
fees and similar income is recorded from investment management fee income
recorded by Standard Management International on its separate account
assets and investment contracts. Management fees and similar income from
separate accounts increased $21 or 9 percent to $257 for the third quarter
of 1996 from $236 for the third quarter of 1995. This increase is due
primarily to an increase in the value of assets held in separate accounts
from $94,301 at December 31, 1994 to $126,987 at September 30, 1996 and to
higher service fees being levied on certain transactions.
ADMINISTRATION FEE INCOME. Administration fee income includes
administration fees related to administration agreements with GIAC of $145
for the quarter ended September 30, 1996; there was no such income in the
comparable quarter in 1995.
OTHER INCOME. Other income primarily includes reserve adjustments and
experience refunds in connection with the reinsurance agreement with GIAC
and override commissions received from unaffiliated companies by Standard
Marketing Corporation ("Standard Marketing"), a wholly-owned subsidiary
which is a wholesale distributor of life insurance and annuity products.
Other income increased $5 or 5 percent to $113 for the third quarter of
1996 compared to $108 for the comparable 1995 period. The increase
resulted primarily from increased commissions received by Standard
Marketing from the sale of unaffiliated products.
BENEFITS AND CLAIMS. Benefits and claims include life insurance and
payout annuity benefits paid and changes in policy reserves. Benefits and
claims increased $72 or 5 percent to $1,434 for the third quarter of 1996
from $1,362 for the third quarter of 1995. The increase resulted primarily
from the inclusion of Dixie National Life's benefits and claims in the
results of operations in 1996. Throughout the Company's history, it has
experienced both periods of higher and lower benefit claims. Such
volatility is not uncommon in the life insurance industry and, over
extended periods of time, periods of higher claims experience tend to be
offset by periods of lower claims experience.
INTEREST CREDITED ON INTEREST SENSITIVE ANNUITIES AND OTHER FINANCIAL
PRODUCTS. Interest credited on interest sensitive annuities and other
financial products was $2,641 for the third quarter of 1996, an increase of
$443 or 20 percent from $2,198 for the comparable prior year period. The
increase resulted primarily from the Company's increase of credited
interest rates on new annuity sales and the growth in account values
inforce for FPDAs. At September 30, 1996, the weighted average interest
credited rate for Standard Life's annuities and other financial product
liabilities was 5.40 percent compared to 5.27 percent at December 31, 1995.
Crediting rates offered on new business can be changed at any time in
response to competition and market interest rates.
SALARIES AND WAGES. Salaries and wages were $1,215 for the third
quarter of 1996, an increase of $98 or 9 percent from $1,117 for the
comparable prior year period. This fluctuation was caused primarily by an
increase in the number and average wages of employees in the United States
due to the acquisition of Dixie National Life and the increase in
incentive compensation for the increase in income for the nine months ended
September 30, 1996.
AMORTIZATION. Amortization expense includes charges to operations for
the amortization of deferred policy acquisition costs, the present value of
future profits, the excess of cost over net assets acquired and subsidiary
organization costs. Amortization expense increased $134 or 31 percent to
$564 for the third quarter of 1996 from $430 for the third quarter of 1995.
The increase in current year amortization expense resulted primarily from
the amortization of present value of future profits for the acquisition of
Dixie National Life.
OTHER OPERATING EXPENSES. Other operating expenses decreased $270 or
18 percent to $1,263 for the third quarter of 1996 from $1,533 for the
third quarter of 1995. The decrease in other operating expenses resulted
primarily from a decrease in marketing expenses and a reduction in
international expenses, which offset the expenses of Dixie National Life
included in the results for the third quarter of 1996.
INTEREST EXPENSE AND FINANCING COSTS. Interest expense and financing
costs increased $129 to $153 in 1996 from $24 in 1995. The increase in
interest expense and financing costs during 1996 resulted from the
borrowings on the Credit Agreement related to the repurchase of Common
Stock and Class S Preferred Stock. The borrowings under the Credit
Agreement occurred after September 30, 1995.
FEDERAL INCOME TAXES. Federal income tax expense (credit) was $228
for the third quarter of 1996, compared to $(5) for the third quarter of
1995. The change is primarily due to tax benefits to First International
being recorded in 1995 from the utilization of tax loss carryforwards for
which no tax benefit had previously been recognized. Also, the effective
rates in 1995 are less than the statutory rates primarily because the
amortization of excess of net assets acquired over acquisition cost
resulting from the acquisition of Standard Management International is not
subject to United States income tax. The Company also has received the
benefits of a special deduction available to small life insurance companies
and the utilization of operating loss carryforwards in 1995. The benefits
of the special deduction available to small life insurance companies is no
longer available because consolidated assets now exceed $500,000.
EXTRAORDINARY GAIN ON EARLY REDEMPTION OF PREFERRED STOCK.
Extraordinary gains are recorded on the early redemption of the Class S
Preferred Stock for the amount by which the Company is able to repurchase
the Class S Preferred Stock below its book value. The Company may continue
to repurchase these shares as long as the Class S Preferred Stock is
selling at a substantial discount to book value. The extraordinary gain
was $233 for the three months ended September 30, 1996 compared to no gain
for the prior comparable period.
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
OPERATING INCOME. The income from operations (before net realized
investment gains, gain on disposal of subsidiaries and reduction in
accruals of certain legal expenses) was $616 in 1996, or $.14 per share,
compared to $294 for 1995, or $.05 per share. The change resulted
primarily from international operations producing income from operations of
$440 compared to a loss of $(396) for the nine months ended September 30,
1996 and 1995, respectively. The international operating gains resulted
primarily from increased management fees on an increasing separate account
base due to portfolio sales in 1995 and 1996, and increased value of assets
under management, coupled with a decrease in marketing costs in 1996 when
compared to 1995. The income from operations in the United States
decreased to $176 in 1996 compared to $690 in 1995. The decline was
attributable to an increase in interest expense from borrowings to
repurchase Common Stock and Class S Preferred Stock and additional costs to
convert the operations and expand the marketing effort in Dixie National
Life.
PREMIUM INCOME. GAAP premium income for the nine months ended
September 30, 1996 was $8,418, an increase of $4,875 or 138 percent from
$3,543 for the nine months ended September 30, 1995. This increase is
mainly attributable to recapture of premiums ceded of $4,234 due to the
termination and recapture of a reinsurance agreement with National Mutual
Life Insurance Company ("National Mutual") and the inclusion of Dixie
National Life in the results of operations for periods after October 2,
1995. These amounts offset the decline in premiums from the cession of a
portion of First International's life insurance business and the regular
policy lapses, surrenders and expiries in the Company's closed blocks of
business.
Net premiums received from the sales of interest-sensitive annuities
and other financial products (which are not recorded as revenues) were
$32,153 compared to $10,680 for the nine months ended September 30, 1996
and 1995, respectively. The increase in premium deposits is partially due
to an increase in gross domestic premium deposits. Gross domestic premium
deposits received from interest-sensitive annuities and financial products
were $39,781 for the nine months ended September 30, 1996 compared to
$26,641 for the nine months ended September 30, 1995. The increase is
partially due to an aggressive marketing campaign implemented by Standard
Life with increased crediting interest rates. Also contributing to the
increase in premiums was the continued development of the Company's
distribution system.
As previously mentioned, the Company also decreased the quota-share
portion of business ceded pursuant to a reinsurance agreement from 70
percent to 50 percent at September 1, 1995, which was further decreased to
25 percent effective April 1, 1996. Premium deposits ceded pursuant to
this reinsurance agreement reduced net premium by $7,628 in the nine months
ended September 30, 1996 compared to $15,961 in 1995.
NET INVESTMENT INCOME. Net investment income increased $694 or 5
percent to $14,371 for the nine months ended September 30, 1996 from
$13,677 for the comparable period of 1995. The increase primarily resulted
from an increase in total invested assets (amortized cost) of approximately
9 percent from 1995 to 1996, offset by a decline in the average annualized
yield on the Company's invested assets to 7.28 percent from 7.36 percent
for the nine months ended September 30, 1996 and 1995, respectively. The
decline in yields is primarily due to lower interest rates available on new
investments in 1995. The continued growth in the Company's total invested
assets reflects increased sales of FPDAs and the inclusion of Dixie
National Life in the results of operations effective October 2, 1995 which
was offset by the invested assets ceded in the GIAC reinsurance
transaction.
NET REALIZED INVESTMENT GAINS. Net realized investment gains
increased $172 or 34 percent to $677 from $505 for the nine months ended
September 30, 1996 and 1995, respectively. Net realized gains from trading
account securities increased to $85 from $57 for the nine months ended
September 30, 1996 and 1995, respectively. Net realized investment gains
fluctuate from period to period and arise when securities are sold in
response to changes in the investment environment which provide
opportunities to maximize return on the investment portfolio without
adversely affecting the quality and overall yield of the investment
portfolio.
GAIN ON DISPOSAL OF SUBSIDIARIES. On March 18, 1996, the Company
completed the sale of a duplicate charter associated with First
International to GIAC. The Company received sale proceeds of $11,493,
including $1,500 for the charter and licenses associated with First
International and $1,800 of reinsurance ceding commissions. In addition,
First International, Standard Life and GIAC have entered into a series of
reinsurance and other agreements that include provisions for Standard Life
to administer First International policies in force at the date of sale.
In an unrelated matter, the Company decided in February 1996 to
terminate the reinsurance agreement between Standard Reinsurance and
Salamandra, and to not renew the Barbados license of Standard Reinsurance.
This resulted in the write-off of SMC's investment in Standard Reinsurance
and certain intangible assets of Standard Reinsurance amounting to $156.
The combined effect of the pre-tax gain on the sale of First
International and related contracts, and the Standard Reinsurance write-
offs, was $886 in the first quarter of 1996.
POLICY CHARGES. Policy charges increased $187 or 11 percent to $1,832
for the nine months ended September 30, 1996 compared to $1,645 for the
nine months ended September 30, 1995. The increase in policy charges
resulted from an increase in policy surrender charges on FPDAs and the
inclusion of Dixie National Life in operating results for periods after
October 2, 1995 which offset the absence of policy charges from the
Company's closed blocks of universal life business which were sold to GIAC
through a reinsurance contract effective January 1, 1996.
AMORTIZATION OF EXCESS OF NET ASSETS ACQUIRED OVER ACQUISITION COST.
Amortization of excess of net assets acquired over acquisition cost
("negative goodwill") is recorded to amortize into earnings the negative
goodwill recorded in connection with the acquisition of Standard Management
International in 1993. The negative goodwill is being amortized on a
straight-line basis over five years. Amortization of negative goodwill was
$1,041 for the nine months ended September 30, 1996 and 1995.
<PAGE>
MANAGEMENT FEES AND SIMILAR INCOME FROM SEPARATE ACCOUNTS. Management
fees and similar income from separate accounts increased $369 or 51 percent
to $1,093 for the nine months ended September 30, 1996 from $724 for the
nine months ended September 30, 1995. This increase is due primarily to an
increase in the value of assets held in separate accounts from $94,301 at
December 31, 1994 to $126,987 at September 30, 1996 and to higher service
fees being levied on certain transactions. Net deposits from sales of
unit-linked products by Standard Management International were $9,159 and
$25,764 for the nine months ended September 30, 1996 and 1995,
respectively.
ADMINISTRATION FEE INCOME. Administration fee income includes
administration fees of $307 and other income related to reinsurance and
administration agreements with GIAC and administration fees of $375
collected in connection with the terminated and recaptured reinsurance
agreement with National Mutual. The administration fee income from
National Mutual primarily related to services provided in prior years; the
income was not previously recorded due to uncertainty as to its collection.
The National Mutual fee income will not recur in the future.
Administration fee income was $682 for the nine months ended September 30,
1996; there was no such income for the comparable 1995 period.
OTHER INCOME. Other income increased $608 or 237 percent to $865 for
the nine months ended September 30, 1996 compared to $257 for the
comparable 1995 period. The increase resulted primarily from the reserve
and experience refund adjustments in connection with the reinsurance
agreement with GIAC and increased commissions received by Standard
Marketing from the sale of unaffiliated products.
CLASS ACTION LITIGATION AND SETTLEMENT COSTS. Class action litigation
and settlement costs were recorded to reflect the estimated costs of
litigation and settlement of the shareholder class action lawsuit, based on
the terms of the settlement agreement and assumptions as to the future
estimated legal and other costs to settle the lawsuit, which was settled in
March 1995, and to register the Class S Preferred Stock which was
distributed to the class participants in February 1996. There were no
class action litigation and settlement expenses in the nine months ended
September 30, 1996 and 1995. However, with the signing of the Settlement
Agreement with the 22 persons who previously excluded themselves from the
class and the reevaluation of the future estimated legal and other costs to
settle the lawsuit, SMC recorded a reduction of $314 in the second quarter
of 1995 in the estimated future costs to settle the lawsuit and register
the Class S Preferred Stock.
BENEFITS AND CLAIMS. Benefits and claims increased $4,534 or 110
percent to $8,657 for the nine months ended September 30, 1996 from $4,123
for the nine months ended September 30, 1995. The increase resulted
primarily from an increase in reserves of $4,234 related to the termination
and recapture of a reinsurance agreement with National Mutual, and slightly
higher life insurance benefit claims due to adverse claims experience.
Throughout the Company's history, it has experienced both periods of higher
and lower benefit claims. Such volatility is not uncommon in the life
insurance industry and, over extended periods of time, periods of higher
claims experience tend to be offset by periods of lower claims experience.
<PAGE>
INTEREST CREDITED ON INTEREST SENSITIVE ANNUITIES AND OTHER FINANCIAL
PRODUCTS. Interest credited on interest sensitive annuities and other
financial products was $7,645 for the nine months ended September 30, 1996,
an increase of $320 or 4 percent from $7,325 for the comparable prior year
period. The increase resulted primarily from the Company's increase of
credited interest rates on new annuity sales and the increases in the
growth in policy reserves for FPDAs. At September 30, 1996, the weighted
average interest credited rate for Standard Life's annuities and other
financial product liabilities was 5.40 percent compared to 5.27 percent at
December 31, 1995.
SALARIES AND WAGES. Salaries and wages were $3,678 for the nine
months ended September 30, 1996, an increase of $356 or 11 percent from
$3,322 for the comparable prior year period. This fluctuation was caused
primarily by an increase in the number and average wages of employees in
the United States due to the acquisition of Dixie National Life and the
increase in incentive compensation for the increase in income for the nine
months ended September 30, 1996.
AMORTIZATION. Amortization expense increased $372 or 28 percent to
$1,723 for the nine months ended September 30, 1996 from $1,351 for the
nine months ended September 30, 1995. The increase in current year
amortization expense resulted primarily from increased amortization of
deferred acquisition costs as gross profits from business sold in recent
years began to emerge, increased surrenders and their corresponding
increase in the amortization of deferred acquisition costs, and from the
amortization of present value of future profits for the acquisition of
Dixie National Life. These items more than offset reduced amortization of
excess of cost over net assets acquired and present value of future profits
due to the sale of First International.
OTHER OPERATING EXPENSES. Other operating expenses increased $700 or
16 percent to $5,173 for the nine months ended September 30, 1996 from
$4,473 for the nine months ended September 30, 1995. The increase in other
operating expenses resulted primarily from the expenses of Dixie National
Life included in the results for the nine months ended September 30, 1996
and the increased expenses related to potential acquisitions.
INTEREST EXPENSE AND FINANCING COSTS. Interest expense and financing
costs increased $353 or 458 percent to $430 for the nine months ended
September 30, 1996 from $77 for the nine months ended September 30, 1995.
The increase in interest expense and financing costs during 1996 resulted
primarily from the borrowings on the Credit Agreement. The borrowings
under the Credit Agreement occurred after September 30, 1995.
FEDERAL INCOME TAXES. Federal income tax expense (credit) was $(762)
for the nine months ended September 30, 1996, compared to $56 for the nine
months ended September 30, 1995. The large credit in 1996 is primarily due
to tax benefits related to the sale of First International. Also, the
effective rates in 1995 are less than the statutory rates primarily because
the amortization of excess of net assets acquired over acquisition cost
resulting from the acquisition of Standard Management International is not
subject to United States income tax. The Company also has received the
benefits of a special deduction available to small life insurance companies
and the utilization of operating loss carryforwards in 1995. The benefits
of the special deduction available to small life insurance companies is no
longer available because consolidated assets now exceed $500,000.
EXTRAORDINARY GAIN ON EARLY REDEMPTION OF PREFERRED STOCK.
Extraordinary gains are recorded on the early redemption of the Class S
Preferred Stock for the amount by which the Company is able to repurchase
the Class S Preferred Stock below its book value. The Company will
continue to repurchase these shares as long as the Class S Preferred Stock
is selling at a substantial discount to book value. The extraordinary gain
was $500 for the nine months ended September 30, 1996 compared to no gain
for the prior comparable period.
LIQUIDITY AND CAPITAL RESOURCES
SMC is an insurance holding company. The liquidity requirements of
SMC are met primarily from management fees, equipment rental fees and
payments for other charges and dividends received from SMC's subsidiaries
as well as SMC working capital. These are SMC's primary source of funds to
pay operating expenses and meet debt service obligations. The payment of
dividends and management and other fees by Standard Life to SMC is subject
to restrictions under the insurance laws of Indiana, Standard Life's
jurisdiction of domicile. These internal sources of liquidity have been
supplemented in the past by external sources such as lines of credit and
revolving credit agreements and long-term debt and equity financing in the
capital markets.
The Company reported on a consolidated GAAP basis net cash provided by
operations of $2,757 and $6,344 for the nine months ended September 30,
1996 and 1995, respectively. Although deposits received on the Company's
interest-sensitive annuities and other financial products are not included
in cash flow from operations under GAAP, such funds are available for use
by the Company. Cash provided by operations plus net deposits received,
less net account balances returned to policyholders on interest sensitive
annuities and other financial products, resulted in positive cash flow of
$21,917 and $3,624 for the nine months ended September 30, 1996 and 1995,
respectively.
SMC's "parent company only" operating expenses (not including class
action litigation and settlement costs and interest expense) were $2,369
and $2,007 for the nine months ended September 30, 1996 and 1995,
respectively.
In April 1993, SMC instituted a program to repurchase its Common Stock
from time to time. The purpose of the stock repurchase program is to
enhance shareholder value. The Company has repurchased 979,453 shares of
its Common Stock for $4,747 as of September 30, 1996. At September 30,
1996, the Company is authorized to purchase an additional 521,771 shares
under this program. The Company implemented a policy to issue shares for
the exercise of stock options from treasury stock. The Company has
reissued 1,224 shares in 1996 under this program at a cost of $6. The
repurchases in 1996 have been paid through additional borrowings under the
Credit Agreement.
<PAGE>
In February 1996, SMC instituted a program to repurchase from time to
time up to 300,000 shares of its Class S Preferred Stock in the open market
or privately negotiated transactions. As of October 31, 1996, SMC has
repurchased and retired 139,211 shares of its Class S Preferred Stock for
$941.
On May 1, 1996, the Board of Directors declared a stock dividend of 5
percent on shares of its common stock for shareholders of record on May 17,
1996. The stock dividend was distributed on June 21, 1996, with
shareholders receiving shares of common stock equivalent to 5 percent of
common shares owned as of May 17, 1996 and cash equivalent for fractional
shares. The number of shares issued pursuant to this action was 272,926,
plus cash in lieu of fractional shares.
At October 31, 1996, SMC had "parent company only" cash and short-term
investments of $1,077. These funds are available to the Company for
general corporate purposes including repayment of debt outstanding and
additional capital infusions into Standard Life.
Pursuant to the management services agreement with SMC, Standard Life
paid SMC a monthly fee of $150 during 1996 and 1995 for certain management
services related to the production of business, investment of assets and
evaluation of acquisitions. The agreement was approved by the Indiana
Department of Insurance with the stipulation that Dixie National Life would
pay an annual fee of at least $1,500 to Standard Life during 1996.
Management service agreements between Standard Life and Dixie National
Life, have been approved by the Mississippi Department of Insurance which
call for the payment of fees of $1,524 during 1996. Both of these
agreements provide that they may be modified or terminated by the
department of insurance in the event of financial hardship of Standard Life
or Dixie National Life. The management service agreement between Standard
Life and Dixie National Life currently requires a monthly payment of $100.
The management service agreement between SMC and Standard Life for 1997
will be renegotiated before the end of 1996 and submitted for approval to
the Indiana Department of Insurance.
Pursuant to the management services agreement with SMC, Premier Life
(Luxembourg) paid SMC a management fee of $25 per quarter during 1996 and
1995 for certain management and administrative services. The agreement
provides that it may be modified or terminated by either SMC or Premier
Life (Luxembourg).
At April 1, 1995, SMC sold its property and equipment to a
leasing/financing company for $1,396 and subsequently entered into a
capital lease obligation whereby SMC pays a monthly rental amount of $45.
SMC charges a monthly equipment rental fee to its subsidiaries of $77.
In July 1996, SMC announced that Standard Life signed an agreement to
purchase Shelby from DLAC for approximately $14,250, plus acquisition
costs, including $13,000 in cash and 250,000 shares of restricted SMC
Common Stock. The purchase of Shelby closed on November 8, 1996 and Shelby
was merged into Standard Life on that date. Financing for the transaction
was provided by senior debt of $10,000 and the balance in subordinated
convertible debt. The Company's original Credit Agreement was combined
with the new senior debt in a new credit agreement ("Amended Credit
Agreement"), the terms of which are substantially the same as the original
Credit Agreement's terms.
The Amended Credit Agreement provides for SMC to borrow up to $16,000
in the form of a seven-year reducing revolving loan arrangement. SMC has
agreed to pay a non-use fee of .50 percent per annum on the unused portion
of the commitment. In connection with the original and Amended Credit
Agreement, SMC issued warrants to the bank to purchase 60,000 shares of SMC
Common Stock. Borrowings under the Amended Credit Agreement may be used
for contributions to surplus of insurance subsidiaries, acquisition
financing, and repurchases of Class S Preferred and Common Stock of SMC.
The debt is secured by a Pledge Agreement of all of the issued and
outstanding shares of common stock of Standard Life and Standard Marketing.
Interest on the borrowings under the Credit Agreement is determined, at the
option of SMC, to be: (i) a fluctuating rate of interest to the corporate
base rate announced by the bank from time to time plus 1 percent per annum,
or (ii) a rate at LIBOR plus 3.25 percent. No principal repayments will be
required until November 1998. Indebtedness incurred under the Credit
Agreement is subject to certain restrictions and covenants including, among
other things, certain minimum financial ratios, minimum statutory surplus
requirements for the insurance subsidiaries, minimum consolidated equity
requirements for the Company and certain investment and indebtedness
limitations. As of September 30, 1996, the Company was in compliance with
all restrictions and covenants in the Credit Agreement. At November 8,
1996, SMC had borrowed $15,700 under the Amended Credit Agreement at
interest rates ranging from 8.875 percent to 9.25 percent.
In connection with the acquisition of Shelby, SMC borrowed $4,000 from
an unaffiliated insurance company pursuant to a subordinated convertible
debt agreement which is due in December, 2003 and requires interest
payments in cash at 12 percent per annum, or, if SMC chooses, in non-cash
additional subordinated convertible debt notes at 14 percent per annum
until December 31, 2000. The subordinated convertible notes are
convertible into SMC Common Stock at the rate of $6.00 per share through
November 1997, and $5.75 per share thereafter. SMC may prepay the
subordinated convertible debt with not less than thirty days notice at any
time. The subordinated convertible debt agreement contains terms and
financial covenants substantially similar to those in the Amended Credit
Agreement.
Assuming the continuation of current debt level under the Amended
Credit Agreement ($15,700) and current interest rates (weighted average
rate of 9.1425 percent) and assuming SMC elects the non-cash interest
payment option under the subordinated convertible debt, annual debt service
in 1997 would be approximately $1,435 in interest paid on the Amended
Credit Agreement. In addition, SMC will also pay $539 in rental payments
relating to a capital lease obligation in 1997.
From the funds borrowed by SMC pursuant to the Amended Credit
Agreement and the subordinated convertible debt agreement, $13,000 was
loaned to Standard Life pursuant to an Unsecured Surplus Debenture
Agreement ("Surplus Debenture") which requires Standard Life to make
quarterly interest payments to SMC at a variable corporate base rate plus 2
percent per annum, and annual principal payments of $1,000 per year
beginning in 2007 and concluding in 2019. The interest and principal
payments are subject to quarterly approval by the Indiana Department of
Insurance, depending upon satisfaction of certain financial tests relating
to levels of Standard Life's capital and surplus and general approval of
the Commissioner of the Indiana Department of Insurance. The Company
currently anticipates these quarterly approvals will be granted.
Dividends from Standard Life to SMC are limited by laws applicable to
insurance companies. As an Indiana domiciled insurance company, Standard
Life may pay a dividend or distribution from its surplus profits, without
the prior approval of the Indiana Commissioner of Insurance, if the
dividend or distribution, together with all other dividends and
distributions paid within the preceding twelve months, does not exceed the
greater of (i) net gain from operations or (ii) 10 percent of surplus, in
each case as shown in its preceding annual statutory financial statements.
For the year ended December 31, 1995, Standard Life reported statutory net
gain from operations of $124 and statutory surplus of $10,186. During
1996, Standard Life can pay dividends of $1,019 without regulatory
approval; Standard Life must notify the Indiana regulatory authorities of
their intent to pay dividends at least thirty days prior to payment.
Regulatory approval will be required for additional dividend payments in
excess of this amount by Standard Life during 1996. On June 20, 1996,
Standard Life paid an ordinary dividend on $1,000 to SMC which was not
disapproved by the Indiana Department of Insurance. Also, regulatory
approval is required when dividends to be paid exceed unassigned surplus.
At September 30, 1996, unassigned surplus (deficit) was $(1,512). Until
unassigned surplus returns to a positive amount, all future dividends will
require regulatory approval.
SMC anticipates the available cash from its existing working capital,
plus anticipated 1996 dividends, management fees, rental income and
interest payments on its Surplus Debentures receivable will be more than
adequate to meet its anticipated "parent company only" cash requirements
for 1996.
SMC has a note receivable of $2,858 from an affiliate and a note
payable of $2,858 to a different affiliate. This note receivable and note
payable are eliminated in the consolidated financial statements.
INVESTMENTS. Investment activities are an integral part of the
Company's business; investment income of the Company's insurance
subsidiaries is an important part of its total revenues. Profitability is
significantly affected by spreads between rates credited on insurance
liabilities and interest yield on invested assets. Substantially all
credited rates on FPDAs may be changed at least annually. As of September
30, 1996, the average interest rate credited on the Company's interest-
sensitive liability portfolio, excluding liabilities related to separate
accounts, was approximately 5.40 percent per annum, and the average net
yield of the Company's investment portfolio for the quarter ended September
30, 1996 was 7.57 percent for a spread of 2.17 percent at September 30,
1996, compared to 1.79 percent at September 30, 1995. Increases or
decreases in interest rates could increase or decrease the interest rate
spread between investment yields and interest rates credited on insurance
liabilities, which in turn could have a beneficial or adverse effect on the
future profitability of the Company. Sales of fixed maturity securities
that result in investment gains may also tend to decrease future interest
yields from the portfolio. State insurance laws and regulations prescribe
the types of permitted investments and limit their concentration in certain
classes of investments.
The Company balances the duration of its invested assets with the
expected duration of benefit payments arising from insurance liabilities.
At September 30, 1996, the adjusted modified duration of fixed maturities
and short-term investments for its U.S. insurance subsidiaries was 5.65
years, compared to 5.4 years as of December 31, 1995.
The Company's investment strategy is guided by strategic objectives
established by the Investment Committee of the Board of Directors. The
Company's major investment objectives are: (i) to ensure adequate safety of
investments and to protect and enhance capital; (ii) to maximize after-tax
return on investments; (iii) to match the anticipated duration of
investments with the anticipated duration of policy liabilities; and (iv)
to provide sufficient liquidity to meet cash requirements with minimum
sacrifice of investment yield. Consistent with its strategy, the Company
invests primarily in securities of the U.S. government and its agencies,
investment grade utility and corporate debt securities and collateralized
mortgage obligations ("CMOs"). At September 30, 1996, approximately 94
percent of the book value of the Company's fixed maturity investments was
investment grade. From time to time when opportunities arise, however,
below investment grade securities may be purchased. Protection against
default risk is a primary consideration. The Company has determined it
will not invest more than 7 percent of its bond portfolio in below
investment grade securities.
The Company engages Conseco Capital Management Inc. ("CCM"), a wholly
owned subsidiary of Conseco, Inc., to manage the Company's invested assets
in its United States life insurance subsidiaries (other than mortgage
loans, policy loans, real estate and other invested assets), subject to the
direction of the Company's investment committee. A quarterly fee equal to
.035 percent of the total market value of the assets under management as of
the end of each quarter is paid to CCM for its investment advisory
services.
U.S. INSURANCE OPERATIONS. The principal liquidity requirements of
Standard Life are its contractual obligations to policyholders, dividend,
rent and management fee payments to SMC and other operating expenses. The
primary source of funding for these obligations has been cash flow from
premium income, net investment income, investment sales and maturities and
sales of FPDAs. These sources of liquidity for Standard Life significantly
exceed scheduled uses. Liquidity is also affected by unscheduled benefit
payments including death benefits and policy withdrawals and surrenders.
The amount of withdrawals and surrenders is affected by a variety of
factors such as renewal interest crediting rates, interest rates for
competing products, general economic conditions, Standard Life's A.M. Best
ratings (currently rated "B") and events in the industry which affect
policyholders' confidence.
The policies and annuities issued by Standard Life contain provisions
which allow policyholders to withdraw or surrender their policies under
defined circumstances. These policies and annuities generally contain
provisions which apply penalties or otherwise restrict the ability of
policyholders to make such withdrawals or surrenders. Standard Life
closely monitors the surrender and policy loan activity of its insurance
products and manages the composition of its investment portfolios,
including liquidity, in light of such activity.
Changes in interest rates may affect the incidence of policy
surrenders and other withdrawals. In addition to the potential impact on
liquidity, unanticipated withdrawals in a changing interest rate
environment could adversely affect earnings if the Company were required to
sell investments at reduced values in order to meet liquidity demands. The
Company manages the asset and liability portfolios in order to minimize the
adverse earnings impact of changing market interest rates. The Company
seeks assets which have duration characteristics similar to the liabilities
which they support. The Company also prepares cash flow projections and
performs cash flow tests under various market interest rate scenarios to
assist in evaluating liquidity needs and adequacy. Standard Life currently
expects available liquidity sources and future cash flows to be adequate to
meet the demand for funds.
Statutory surplus is computed according to rules prescribed by the
National Association of Insurance Commissioners ("NAIC"), as modified by
the Indiana Department of Insurance, or the state in which the insurance
subsidiaries do business. Statutory accounting rules are different from
GAAP and are intended to reflect a more conservative perspective. The
Company's long-term growth goals contemplate continued growth in its
insurance businesses. To achieve these growth goals, Standard Life will
need to increase statutory surplus. Additional statutory surplus may be
secured through various sources such as internally generated statutory
earnings, equity sales, infusions by the Company with funds generated
through debt or equity offerings or mergers with other life insurance
companies. With respect to new business, statutory accounting practices
require that: (i) acquisition costs and (ii) reserves for future guaranteed
principal payments and interest in excess of statutory rates, be expensed
in the year the new business is written. These items cause a statutory
loss ("surplus strain") from many insurance products in the year they are
issued. The Company designs its products to minimize such first-year
losses, but certain products continue to cause a statutory loss in the year
written. For each product, the Company controls the amount of net new
premiums written in order to manage the effect of such statutory surplus
strain.
During the first nine months of 1996, the Company produced a statutory
net income of $2,953. As a result, SMC has not made capital contributions
to Standard Life during 1996 in order to maintain adequate levels of
statutory capital and surplus. In March 1996, Standard Life sold its
subsidiary, First International, and realized an increase in statutory
capital and surplus of approximately $4,951 from the statutory gain on the
sale and related reinsurance transactions.
Commencing January 1, 1995, the Company began to reinsure a portion of
its annuity business. The primary purposes of the reinsurance agreement
are to limit the net loss arising from large risks, maintain the Company's
exposure to loss within capital resources, and provide additional capacity
for future growth. Furthermore, these reinsurance agreements have allowed
Standard Life to write volumes of business that it would not otherwise have
been able to write due to regulatory restrictions based on the amount of
its statutory capital and surplus. The Company's largest annuity reinsurer
at September 30, 1996, Winterthur Life Re Insurance Company ("Winterthur"),
is rated "A" (Excellent) by A.M. Best. From January 1, 1995 to August 31,
1995 approximately 70 percent of certain of Standard Life's annuity
business produced was ceded. The Company decreased the quota-share portion
of business ceded to 50 percent at September 1, 1995 and further reduced it
to 25 percent effective April 1, 1996 to reflect the reduced need for
additional capital and increase current earnings potential. Winterthur
limits dividends and other transfers by Standard Life to SMC or affiliated
companies in certain circumstances.
State insurance regulatory authorities impose minimum risk-based
capital requirements on insurance enterprises that were developed by the
NAIC. The formulas for determining the amount of risk-based capital
("RBC") specify various weighting factors that are applied to financial
balances or various levels of activity based on the perceived degree of
risk. Regulatory compliance is determined by a ratio (the "Ratio") of the
enterprise's regulatory total adjusted capital, as defined by the NAIC, to
its authorized control level RBC, as defined by the NAIC. Enterprises
below specific trigger points or ratios are classified within certain
levels, each of which requires specified corrective action. Each of the
Company's insurance subsidiaries has a Ratio that is at least 300 percent
of the minimum RBC requirements; accordingly, the subsidiaries meet the RBC
requirements.
Management believes that operational cash flow of Standard Life will
be sufficient to meet its anticipated needs for 1996. As of September 30,
1996, Standard Life had statutory capital and surplus for regulatory
purposes of $14,656 compared to $12,877 at December 31, 1995. As the life
insurance and annuity business produced by Standard Life and Dixie National
Life increases, Standard Life expects to continue to satisfy statutory
capital and surplus requirements through statutory profits, through the
continued reinsurance of a portion of its new business, and through
additional capital contributions by the Company. During 1996, SMC has not
made any capital contributions to Standard Life. Net cash flow from
operations on a statutory basis of Standard Life, after payment of benefits
and operating expenses, was $30,042 and $4,263 for the nine months ended
September 30, 1996 and year ended December 31, 1995, respectively. If the
need arises for cash which is not readily available, additional liquidity
could be obtained from the sale of invested assets.
Standard Life's acquisition of Shelby, and merger of Shelby into
Standard Life, effective November 1, 1996 is anticipated to have a positive
effect on Standard Life's liquidity and cash flows. Shelby will cease
writing new business effective November 1, 1996, thus reducing the
statutory strain normally associated with the issuance of new policies.
The anticipated profits from Shelby's book of business are expected to
exceed the related interest expense connected with the $13,000 of Surplus
Debentures issued by Standard Life in connection with the acquisition of
Shelby. The statutory net income of Shelby was $1,661 for the year ended
December 31, 1995 and $692 for the nine months ended September 30, 1996.
INTERNATIONAL OPERATIONS. The balance sheet of the Company at
September 30, 1996, includes a $3,122 credit representing the excess of net
assets acquired over acquisition cost on the purchase of Standard
Management International which will be amortized into future earnings.
This amortization is a non-cash credit to the Company statement of
operations.
Standard Management International may pay dividends from accumulated
earnings without regulatory approval. Premier Life (Bermuda) did not pay
dividends in 1995 and 1994. Standard Management International and Premier
Life (Luxembourg) were not permitted to pay dividends in 1995 and 1994 due
to accumulated losses.
Due to the nature of unit-linked products issued by Standard
Management International, which represent over 95 percent of the Standard
Management International portfolio, the investment risk rests with the
policyholder. Investment risk for Standard Management International exists
where Standard Management International makes investment decisions with
respect to the remaining traditional business and for the assets backing
certain actuarial and regulatory reserves. The investments underlying
these liabilities mostly represent short-term investments and fixed
maturity securities. These short-term investments and fixed maturity
securities are normally only bought and/or disposed of on the advice of
independent consulting actuaries who perform an annual exercise comparing
anticipated cash flows on the insurance portfolio with the cash flows from
the fixed maturity securities. Any resulting material mis-matches are then
covered by buying and/or selling the securities as appropriate.
FACTORS THAT MAY AFFECT FUTURE RESULTS
MERGERS, ACQUISITIONS AND CONSOLIDATIONS. The U.S. insurance industry
has experienced an increasing number of mergers, acquisitions,
consolidations and sales of certain business lines. These consolidations
have been driven by a need to reduce costs of distribution and overhead and
maintain business in force. Additionally, increased competition,
regulatory capital requirements and technology costs have also contributed
to the level of consolidation in the industry. These forces are expected
to continue as is the level of industry consolidation. The Company has
been, and continues to be, a buyer in this marketplace.
FOREIGN CURRENCY RISK. Standard Management International
policyholders invest in assets denominated in a wide range of currencies.
Policyholders effectively bear the currency risk, if any, as these
investments are matched by policyholder separate account liabilities.
Therefore, their investment and currency risk is limited to premiums they
have paid. Policyholders are not permitted to invest directly into
options, futures and derivatives. Standard Management International could
be exposed to currency fluctuations if currencies within the conventional
investment portfolio or certain actuarial reserves are mismatched. The
assets and liabilities of this portfolio and the reserves are continually
matched by the company and at regular intervals by the independent actuary.
In addition, Premier Life (Luxembourg)'s shareholder's equity is
denominated in Luxembourg francs. Premier Life (Luxembourg) does not hedge
it's translation risk, but this is currently being reviewed to protect SMC
against currency fluctuations. At September 30, 1996, there is an
unrealized gain from foreign currency translation adjustment of $717.
UNCERTAINTIES REGARDING INTANGIBLE ASSETS. Included in the Company's
financial statements as of September 30, 1996 are certain assets that are
valued for financial statement purposes primarily on the basis of
assumptions established by the Company's management. These assets include
deferred acquisition costs, present value of future profits, costs in
excess of net assets acquired and organization and deferred debt issuance
costs. The total value of these assets reflected in the September 30, 1996
consolidated balance sheet aggregated $32,706 or 6 percent of its assets.
The Company has established procedures to periodically review the
assumptions utilized to value these assets and determine the need to make
any adjustments in such values in the Company's consolidated financial
statements. The Company has determined that the assumptions utilized in
the initial valuation of these assets are consistent with the current
operations of the Company as of September 30, 1996. In February 1996, the
Company decided to terminate the operations of Standard Reinsurance, which
resulted in the write-off of SMC's investment in Standard Reinsurance and
certain intangible assets in the third quarter of 1996 amounting to $156.
REGULATORY ENVIRONMENT. Currently, prescribed or permitted statutory
accounting principles ("SAP") may vary between states and between
companies. The NAIC is in the process of codifying SAP to promote
standardization of methods utilized throughout the industry. Completion of
this project might result in changes in statutory accounting practices for
the Company; however, it is not expected that such changes would materially
impact the Company's statutory capital requirements.
<PAGE>
ACCOUNTING PRONOUNCEMENTS. Effective January 1, 1996, the Company
adopted SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No.
123 requires expanded disclosures of stock-based compensation arrangements
with employees and encourages, but does not require, compensation cost to
be measured based on the fair value of the equity instruments awarded.
Companies are permitted, however, to continue to apply Accounting
Principles Board (APB) Opinion No. 25, which recognizes compensation cost
based on the intrinsic value of the equity instrument awarded. The Company
will continue to apply APB Opinion No. 25 to its stock-based compensation
awards to employees and directors and will disclose the required pro forma
effect on net income and earnings per share in its consolidated financial
statements for the year ended December 31, 1996.
SAFE HARBOR PROVISIONS. Forward-looking statements in this Quarterly
Report on Form 10-Q are made pursuant to the "safe harbor" provisions of
the Private Securities Litigation Reform Act of 1995. There are certain
important factors that could cause results to differ materially from those
anticipated by some of the statements made above. Investors are cautioned
that all forward-looking statements involve risks and uncertainty. In
addition to the factors discussed above, among the other factors that could
cause actual results to differ materially are the following: economic
environment, interest rate changes, product development, regulatory
changes, the results of financing efforts, acquisitions completed or
attempted, the Company's accounting policies, and competition. Additional
information concerning those and other factors is contained in the
Company's Securities and Exchange Commission filings, including but not
limited to the Annual Report on Form 10-K, copies of which are available
from the Company without charge.
<PAGE>
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
Pursuant to SEC rules, the following discloses the information
required to be disclosed on Form 8-K with respect to the acquisition of
Shelby and merger into Standard Life on November 8, 1996.
(a) See Note 8 of Notes to Consolidated Financial Statements on page 12
of this Form 10-Q for a description of the acquisition of Shelby and
merger into Standard Life on November 8, 1996.
(b) The following financial statements are filed pursuant to SEC rules
on Form 8-K:
Financial Statements of Shelby:
SMC has found it to be impractical to complete as of the date of
this Form 10-Q filing the audited financial statements of
Shelby required by Item 7(a) of Form 8-K. SMC will file the
required financial statements as soon as they are available but
in no event later than January 13, 1997.
Pro Forma Financial Information:
SMC has found it to be impractical to complete as of the
date of this Form 10-Q the preparation and filing of the pro forma
financial information required by Item 7(b) of Form 8-K as the
audited financial statements of Shelby required by Item 7(a) of
Form 8-K are currently being prepared. SMC will file
the required pro forma financial data as soon as it is available
but in no event later than January 13, 1997.
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
EXHIBIT 4.4 Amended and Restated Registration Rights Agreement
dated as of November 8, 1996 by and between SMC and
Fleet National Bank.
EXHIBIT 4.5 Form of Fleet National Bank Warrant.
EXHIBIT 4.7 Registration Rights Agreement dated as of
November 8, 1996 by and between SMC and Great American
Reserve Insurance Company ("Great American Reserve").
EXHIBIT 10.17 Second Amendment to Promissory Note from Ramesh H. Bhat
to SMC in the amount of $43 executed October 8, 1996
and due December 15, 1996.
EXHIBIT 10.28 Amended and Restated Revolving Line of Credit Agreement
dated as of November 8, 1996 between SMC and Fleet
National Bank.
EXHIBIT 10.29 Note Agreement dated as of November 8, 1996 between
SMC and Fleet National Bank in the amount of $16,000.
EXHIBIT 10.30 Amended and Restated Pledge Agreement dated as of
November 8, 1996 between SMC and Fleet National Bank.
EXHIBIT 10.32 Note Agreement dated as of November 8, 1996 by and
between SMC and Great American Reserve in the amount of
$4,000.
EXHIBIT 10.33 Senior Subordinated Convertible Note dated as of
November 8, 1996 by and between SMC and Great American
Reserve in the amount of $4,000.
EXHIBIT 10.34 Surplus Debenture dated as of November 8, 1996 by and
between SMC and Standard Life in the amount of $13,000.
EXHIBIT 11 Statement regarding computation of per share earnings.
EXHIBIT 27 Financial Data Schedule, which is submitted
electronically pursuant to Regulation S-K to the
Securities and Exchange Commission (the "Commission")
for information only and not filed.
(b) REPORTS ON FORM 8-K
The Company filed a Current Report on Form 8-K dated August 1, 1996 with
the Commission to report under Item 5 the signing of the Stock Purchase
Agreement to purchase Shelby.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: November 14, 1996
STANDARD MANAGEMENT CORPORATION
(Registrant)
By:/s/ RONALD D. HUNTER
Ronald D. Hunter
Chairman of the Board, President and
Chief Executive Officer
By:/s/ JOHN J. QUINN
John J. Quinn
Executive Vice President, Treasurer and
Chief Financial Officer
(Authorized Officer and Principal Financial
Officer)
EXHIBIT 11
STANDARD MANAGEMENT CORPORATION
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
SEPTEMBER 30, SEPTEMBER 30,
<S> <C> <C> <C> <C>
1996 1995{ (2)} 1996 1995{ (2)}
PRIMARY
Weighted average common shares outstanding 4,774,840 5,209,439 4,685,406 5,257,535
5 percent common stock dividend - - 150,251 -
Common equivalent shares related to:
Stock warrants at average market price 135,381 155,770 98,643 86,030
Stock options at average market price 29,861 11,186 16,659 4,641
Net issuable shares for modified treasury
stock
method (after assumed buyback of 20 percent - - 348,540 -
of
outstanding stock options and warrants)
WEIGHTED AVERAGE PRIMARY SHARES OUTSTANDING 4,940,082 5,376,395 5,299,499 5,348,206
Income before extraordinary gain on early
redemption of $471 $445 $3,321 $979
preferred stock and preferred stock dividends
as reported
Reduction in interest expense and increase in
short-term - - 131 -
investment income for modified treasury stock
method 471 445 3,452 979
Extraordinary gain on early redemption of 233 - 500 -
preferred stock
Net income (as adjusted) 704 445 3,952 979
Preferred stock dividends as reported (51) - (163) -
Preferred stock dividends reduction for modified
stock - - 46 -
method
Earnings available to common shareholders (as $653 $445 $3,835 $979
adjusted)
Earnings Per Share:
Income before extraordinary gain on early
redemption of 0.10 0.08 0.65 0.18
preferred stock and preferred stock
dividends
Extraordinary gain on early redemption of
preferred 0.04 - 0.09 -
stock
NET INCOME 0.14 0.08 0.74 0.18
Preferred stock dividend (0.01) - (0.02) -
Earnings available to common shareholders $0.13 $0.08 $0.72 $0.18
<PAGE>
EXHIBIT 11
STANDARD MANAGEMENT CORPORATION
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three Months Ended Nine Months Ended
SEPTEMBER 30, SEPTEMBER 30,
1996 1995{ (2)} 1996 1995{ (2)}
FULLY DILUTED{ (1)}
Weighted average primary shares outstanding 4,940,082 5,376,395 5,299,499 5,348,206
Incremental common equivalent shares:
Related to options and warrants using the
period-end 75,786 - 33,097 36,147
market price, if higher than average market
price
WEIGHTED AVERAGE FULLY DILUTED SHARES 5,015,868 5,376,395 5,332,596 5,384,353
OUTSTANDING
Income before extraordinary gain on early
redemption of $471 $445 $3,321 $979
preferred stock and preferred stock dividends
as reported
Reduction in interest expense and increase in
short-term - - 125 -
investment income for modified treasury stock
method 471 445 3,446 979
Extraordinary gain on early redemption of 233 - 500 -
preferred stock
Net income (as adjusted) 704 445 3,946 979
Preferred stock dividends as reported (51) - (163) -
Preferred stock dividends reduction for modified
stock - - 46 -
method
Earnings available to common shareholders (as $653 $445 $3,829 $979
adjusted)
Earnings Per Share:
Income before extraordinary gain on early
redemption of 0.10 0.08 0.65 0.18
preferred stock and preferred stock
dividends
Extraordinary gain on early redemption of
preferred 0.04 - 0.09 -
stock
NET INCOME 0.14 0.08 0.74 0.18
Preferred stock dividend (0.01) - (0.02) -
Earnings available to common shareholders $0.13 $0.08 $0.72 $0.18
</TABLE>
(1) This calculation is submitted in accordance with the Securities Exchange
Act of 1934 Release No. 9083 although not required by footnote 2 to
paragraph 14 of APB Opinion No. 15 because it results in dilution of less
than 3 percent.
(2) Share amounts have been retroactively adjusted for the effect of the 5
percent stock dividend distributed on June 21, 1996, to shareholders of
record on May 17, 1996.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT
BETWEEN
STANDARD MANAGEMENT CORPORATION
AND
FLEET NATIONAL BANK
<PAGE>
AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT
THIS AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT (this
"AGREEMENT") is made as of July 18, 1996 by and between STANDARD
MANAGEMENT CORPORATION, an Indiana corporation (the "COMPANY"), and
FLEET NATIONAL BANK, a national banking association (the "STOCKHOLDER").
WHEREAS, the Company and Shawmut Bank Connecticut, National
Association entered into a Revolving Line of Credit Agreement dated as
of November 21, 1995 (the "Existing Credit Agreement") pursuant to which
the Company was indebted to Shawmut Bank Connecticut, National
Association up to the principal amount of $6,000,000; and
WHEREAS, in connection therewith, the Company executed certain
Warrants To Purchase Common Stock of the Company dated as of November
21, 1995 in favor of the Stockholder (the "Initial Warrants") and also
entered into a Registration Rights Agreement dated as of November 21,
1995 by and between Shawmut Bank Connecticut, National Association and
the Company (the "Existing Registration Rights Agreement"); and
WHEREAS, on or about December 1, 1995, Shawmut Bank Connecticut,
National Association merged with the Stockholder, and the Stockholder
succeeded to all of Shawmut Bank Connecticut, National Association's
right, title and interest in the Existing Credit Agreement; and
WHEREAS, the Company has requested that the Stockholder increase
the funds available to the Company under the Existing Credit Agreement
up to the principal amount of $16,000,000; and
WHEREAS, it is a condition precedent to the Stockholder making said
increase available to the Company that (i) the Existing Credit Agreement
be amended and restated in its entirety, (ii) the Company deliver an
additional Warrant To Purchase Common Stock of the Company dated as of
July 18, 1996 (collectively, with the Initial Warrants, referred to
herein as the "WARRANTS") entitling the Stockholder to subscribe for and
purchase 30,000 additional shares of common stock of the Company; and
(iii) that the Existing Registration Rights Agreement be amended and
restated in its entirety; and
WHEREAS, certain capitalized terms used herein are used as
defined in Article 9 herein and in the Initial Warrants and the other
Warrants.
NOW, THEREFORE, in consideration of the mutual covenants
herein contained, and intending to be legally bound hereby, the
parties hereto agree as follows:
1. DEMAND REGISTRATION
1.1. REQUESTS FOR REGISTRATION. (i) At any time, a holder of Warrants
or Warrant Stock may demand registration under the Securities Act of all
or any portion of the Registrable Securities owned by such holder. In
order to accomplish such demand, a holder shall send written notice of
the demand to the Company, and such notice shall specify the number of
Registrable Securities sought to be registered. Unless the Company
elects, at its sole option, to make a cash payment to the holder of the
Warrants or Warrant Stock as more particularly described in Section
1.1(ii) below in lieu of proceeding with a Demand Registration, the
Company shall proceed with any Demand Registration requested by a holder
of Warrants or Warrant Stock if the number of Registrable Securities
which the Stockholders (including the holder requesting the Demand
Registration) shall have elected to include in such Demand Registration
pursuant to this Section 1.1 shall be at least 51% of the Warrant Stock
issued or issuable upon exercise of the Warrants (excluding Warrant Stock
already the subject of a Demand Registration). The minimum share amounts
specified in this Section 1.1 shall be appropriately adjusted to account
for any stock dividend, stock split, recapitalization, merger,
consolidation, reorganization or other action as a result of which
additional shares of Common Stock are issued on account of, in conversion
of or in exchange for shares of outstanding Common Stock.
(ii) If the holder of the Warrants or Warrant Stock makes a
demand for a Demand Registration of all or a portion of the Registrable
Securities owned by such holder, the Company may, instead, at its sole
option, elect to make a cash payment to such holder equal to the value of
the Warrants or Warrant Stock (or the portion thereof being exercised) in
an amount computed using the formula set forth in Section 2.1(iii)(2) of
the Warrants.
1.2. MAXIMUM NUMBER OF DEMAND REGISTRATIONS. In no event shall the
total number of Demand Registrations exceed two.
1.3. PROCEDURE. Within 10 days after receipt of a demand pursuant to
Section 1.1 hereof, the Company shall give written notice of such
requested registration to all other Stockholders and will include in such
registration, subject to the allocation provisions below, all other
Registrable Securities with respect to which the Company has received
written requests for inclusion within 20 days after the Company's mailing
of such notice, plus any securities of the Company that the Company
chooses to include on its own behalf.
1.4. EXPENSES. The Company will pay the Registration Expenses of any
Demand Registration, but the Underwriting Commissions, if such Demand
Registration is underwritten, will be paid by the Selling Stockholders in
proportion to any Registrable Securities to be included on their behalf.
1.5. EXPENSES. The Company shall pay the Registration Expenses of the
first Demand Registration, but the Underwriting Commissions, if such
first Demand Registration is underwritten, will be paid by the Selling
Stockholders in proportion to any Registrable Securities to be included
on their behalf. The Selling Stockholders shall pay the Registration
Expenses and the Underwriting Commissions, if any, of all other Demand
Registrations in proportion to the Registrable Securities included on
their behalf.
1.6. PRIORITY ON DEMAND REGISTRATIONS. If a Demand Registration is
underwritten and the managing underwriters advise the Company in writing
that in their opinion the number of Registrable Securities requested to
be included exceeds the number that can be sold in such offering, at a
price reasonably related to the fair value, the Company will allocate the
Registrable Securities to be included in such Demand Registration, first,
to the holders of Warrants and Warrant Stock PRO RATA on the basis of the
number of shares of Warrant Stock for which the Company has received
written requests for inclusion, and, second, to the Company, and, third,
PRO RATA on the basis of the number of Registrable Securities owned by
the Selling Stockholders.
1.7. SELECTION OF UNDERWRITERS. Any Demand Registration may be
underwritten, at the election of the Selling Stockholders, and the
selection of investment banker(s) and manager(s) and the other decisions
regarding the underwriting arrangements for any such offering will be
made by the Selling Stockholders; PROVIDED, HOWEVER, that the selection
of investment banker(s) and manager(s) shall be subject to the consent of
the Company, such consent not to be unreasonably withheld.
2. PIGGYBACK REGISTRATIONS
2.1. RIGHT TO PIGGYBACK. Whenever the Company proposes to register the
offer, sale or offer and sale of any of its securities for its own behalf
under the Securities Act (other than a Demand Registration), and the
registration form to be used may be used for the registrations of
Registrable Securities to be sold in the manner proposed by the Selling
Stockholders (a "PIGGYBACK REGISTRATION"), the Company will give prompt
written notice to all Stockholders and will include in such Piggyback
Registration, subject to the allocation provisions below, all Registrable
Securities with respect to which the Company has received written
requests for inclusion within 20 days after the Company's mailing of such
notice. The Company shall not select a Restricted Form that would
preclude registration of the Registrable Securities that the Company has
been requested to include in such registration if the Company could use
another available form of registration statement which is not a
Restricted form and the use of which would not give rise to added
Registration Expenses.
2.2. PIGGYBACK EXPENSES. In all Piggyback Registrations, the Company
will pay the Registration Expenses related to the Registrable Securities
of the Selling Stockholders, but the Underwriting Commissions will be
paid by the Selling Stockholders in proportion to any Registrable
Securities included on their behalf.
2.3. PRIORITY ON PRIMARY REGISTRATIONS. If a Piggyback Registration is
an underwritten registration on behalf of the Company, and the managing
underwriters advise the Company in writing that in their opinion the
number of securities requested to be included in such registration
exceeds the number that can be sold in such offering, at a price
reasonable related to fair value, the Company will allocate the
securities to be included as follows: first, the securities the Company
proposes to sell on its own behalf; second, Registrable Securities
requested to be included in such registration, PRO RATA on the basis of
the number of Registrable Securities owned, among the Selling
Stockholders; and third, securities requested to be included in such
registration by any stockholders of the Company other than the Selling
Stockholders.
2.4. WITHDRAWAL OR ABANDONMENT. Nothing contained in this Section 2
shall be construed as limiting or otherwise interfering with the right of
the Company to withdraw or abandon in its sole discretion any
registration statement filed by it in connection with a Piggyback
Registration notwithstanding the inclusion therein of Registrable
Securities.
3. HOLDBACK AGREEMENTS
Each of the Stockholder and the Company agree not to effect any public
sale or public distribution of equity securities of the Company of any
securities convertible into or exchangeable or exercisable for such
securities during the 7 days prior to and the 180 days after any
underwritten registration of equity securities of the Company becomes
effective (except as part of such underwritten registration or except in
connection with obligations of the Company existing on the effective date
of the registration statement relating to such underwritten offering).
4. REGISTRATION PROCEDURES
WHENEVER THE STOCKHOLDERS HAVE REQUESTED THAT ANY REGISTRABLE SECURITIES
BE REGISTERED PURSUANT TO SECTION 1 OF THIS AGREEMENT, UNLESS THE COMPANY
ELECTS, AT ITS SOLE OPTION, TO MAKE A CASH PAYMENT TO THE HOLDER OF THE
WARRANTS OR WARRANT STOCK AS MORE PARTICULARLY DESCRIBED IN SECTION
1.1(II) ABOVE IN LIEU OF PROCEEDING WITH A DEMAND REGISTRATION, THE
COMPANY WILL, AS EXPEDITIOUSLY AS POSSIBLE, OR WHENEVER THE STOCKHOLDERS
HAVE REQUESTED THAT ANY REGISTRABLE SECURITIES BE REGISTERED PURSUANT TO
SECTION 2 OF THIS AGREEMENT, THE COMPANY WILL, TO THE EXTENT APPLICABLE:
(a) PREPARATION AND FILING OF REGISTRATION STATEMENT.
Prepare and file with the Securities and Exchange Commission a
registration statement with respect to such Registrable Securities 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 Company will
furnish each Selling Stockholder with copies of all such documents
proposed to be filed).
(b) PREPARATION AND FILING OF AMENDMENTS AND SUPPLEMENTS.
Prepare and file with the Securities and Exchange Commission such
amendments and supplements to such registration statement and the
prospectus used in connection therewith as may be necessary to keep such
registration statement effective for the greater of (x) a period of not
less than 120 days or (y) until the Registrable Securities included
therein have been sold.
(c) COPIES OF DOCUMENTS. Furnish to each Selling Stockholder
such number of copies of such registration statement, each amendment and
supplement thereto and the prospectus included in such registration
statement (including each preliminary prospectus), and such other
documents as such Selling Stockholder may reasonably request in order to
facilitate the disposition of the Registrable Securities included therein
owned by such Selling Stockholder.
(d) BLUE SKY QUALIFICATIONS. Use its best efforts to
register or quality such Registrable Securities under such other
securities or blue sky laws of such jurisdictions as the Selling
Stockholders or managing underwriters may reasonably request; PROVIDED,
HOWEVER, that in connection with any such registration or qualification
the Company shall not be obligated to file a general consent to service
of process, or to qualify to do business as a foreign corporation, or
otherwise subject itself to taxation in connection with such
qualification or compliance.
(e) NOTIFICATION OF EFFECTIVENESS; AMENDMENTS. Notify each
Selling Stockholder at any time when a prospectus relating to the
Registrable Securities included therein is required to be delivered under
the Securities Act within the period that the Company is required to keep
the registration statement effective of the happening of any event as a
result of which the prospectus included in such registration statement as
theretofore amended or supplemented contains an untrue statement of a
material fact or omits any material fact necessary to make the statements
therein not misleading, and, at the request of any such Selling
Stockholder, the Company will prepare a supplement or amendment to such
prospectus so that, as thereafter delivered to the purchasers of such
Registrable Securities, such prospectus will not contain an untrue
statement of a material fact or omit to state any material fact necessary
to make the statements therein not misleading.
(f) LISTING. Cause all such Registrable Securities to be
listed or included on securities exchanges on which similar securities
issued by the Company are then listed or included.
(g) TRANSFER AGENT AND REGISTRAR. Provide a transfer agent
and registrar for all such Registrable Securities not later than the
effective date of such registration statement.
(h) OTHER AGREEMENTS. Enter into such customary agreement
(including an underwriting agreement containing customary terms and
conditions, including usual and customary indemnification provisions, in
form reasonably acceptable to the Company) and take such other customary
actions as may be reasonable necessary to expedite or facilitate the
disposition of such Registrable Securities.
(i) LETTERS FROM INDEPENDENT ACCOUNTANTS. Obtain a "cold
comfort" letter addressed to the Company from its independent accountants
in such form and covering such matters of the type customarily covered by
"cold comfort" letters delivered by such public accountants.
(j) INSPECTION OF RECORDS. Make available for inspection by
any Selling Stockholder, and, upon execution of a confidentiality
agreement mutually acceptable to all parties, by 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 Company, and cause the Company's
officers, directors and employees to supply all information reasonably
requested by any such seller, underwriter, attorney, accountant or agent
in connection with such registration statement.
5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
THE COMPANY HEREBY REPRESENTS AND WARRANTS TO THE STOCKHOLDERS:
5.1. DUE ORGANIZATION AND GOOD STANDING. The Company is a corporation
duly organized and validly existing under the laws of its jurisdiction of
incorporation and is duly qualified as a foreign corporation in each
jurisdiction in which the failure to be so qualified could reasonably be
expected to have a material adverse effect on the Company.
5.2. DUE AUTHORIZATION; BINDING EFFECT. The execution and delivery of
this Agreement by the Company has been duly authorized by all necessary
corporate action and this Agreement constitutes the legal, valid and
binding obligation of the Company, enforceable against the Company in
accordance with its terms.
5.3. NO VIOLATION OR DEFAULT. The execution and delivery by the Company
of this Agreement does not, and the performance by the Company of its
obligations hereunder will not, violate any provisions of its charter or
by-laws or constitute a default under any other agreement to which the
Company is a party or by which it or its assets may be bound.
<PAGE>
2
6. REPRESENTATIONS AND WARRANTIES OF THE STOCKHOLDER
The Stockholder represents and warrants to the Company:
6.1. DUE ORGANIZATION AND GOOD STANDING. The Stockholder is a national
association, duly organized and validly existing under the laws of the
United States of America and is duly qualified as a foreign corporation
in each jurisdiction in which the failure to be so qualified could
reasonably be expected to have a material adverse effect on such
Stockholder.
6.2. DUE AUTHORIZATION; BINDING EFFECT. The execution and delivery of
this Agreement by the Stockholder has been duly authorized by all
necessary action and this Agreement constitutes the legal, valid and
binding obligation of such Stockholder enforceable against such
Stockholder in accordance with its terms.
6.3. NO VIOLATION. The execution and delivery of this Agreement by the
Stockholder does not, and the performance by such Stockholder of its
obligations hereunder will not, violate any provision of the
organizational documents of such Stockholder.
6.4. NO DEFAULT. The execution and delivery of this Agreement by the
Stockholder does not, and the performance by such Stockholder of its
obligations hereunder will not, violate any other agreement to which such
Stockholder is a party or by which any of its assets may be bound.
7. INFORMATION REGARDING SELLING STOCKHOLDERS
EACH SELLING STOCKHOLDER SHALL PROVIDE TO THE COMPANY SUCH INFORMATION
AS MAY BE REASONABLY REQUESTED BY THE COMPANY FOR USE IN THE PREPARATION
AND FILING OF ANY REGISTRATION STATEMENT COVERING REGISTRABLE SECURITIES
OWNED BY SUCH SELLING STOCKHOLDER, AND THE OBLIGATION OF THE COMPANY TO
INCLUDE REGISTRABLE SECURITIES IN ANY REGISTRATION STATEMENT ON BEHALF OF
ANY SELLING STOCKHOLDER SHALL BE SUBJECT TO SUCH SELLING STOCKHOLDER'S
PROVIDING SUCH INFORMATION AS PROMPTLY AS PRACTICABLE.
<PAGE>
2
8. INDEMNIFICATION
8.1. INDEMNIFICATION BY THE COMPANY. The Company hereby indemnifies, to
the extent permitted by law, each Selling Stockholder, 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 arising out of or resulting from any untrue or alleged
untrue statement of material fact contained in any registration
statement, prospectus or preliminary prospectus or any omission or
alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading except
insofar as the same occurs in reliance upon and in conformity with any
information furnished in writing to the Company by any Selling
Stockholder expressly for use therein or is caused by any such Selling
Stockholder's failure to deliver a copy of the registration statement or
prospectus or any amendments or supplements thereto after the Company has
furnished such Selling Stockholder with copies of the same.
8.2. INDEMNIFICATION BY THE SELLING STOCKHOLDERS. In connection with
any registration statement in which a Selling Stockholder is
participating, each such Selling Stockholder will furnish to the Company
in writing such information as is reasonably requested by the Company for
use in such registration statement or prospectus and will indemnify, to
the extent permitted by law, the Company, its directors and officers and
each person who controls the Company (within the meaning of the
Securities Act) against any losses, claims, damages, liabilities and
expenses arising out of or resulting from any untrue or alleged untrue
statement of material fact or any omission or alleged omission of a
material fact required to be stated in the registration statement or
prospectus or any amendment thereof or supplement thereto or necessary to
make the statements therein not misleading, but only to the extent that
such untrue statement or omission or such alleged untrue statement or
alleged omission occurs in reliance upon and in conformity with
information so furnished in writing by such Selling Stockholder
specifically for use in the registration statement.
8.3. PROCEDURES AS TO INDEMNIFICATION. Any person entitled to
indemnification hereunder shall (i) give prompt notice to the
indemnifying party of any claim with respect to which it may seek
indemnification and (ii) unless in such indemnified party's reasonable
judgment a conflict of interest between such indemnified and indemnifying
parties may exist with respect to such claim, permit such indemnifying
party to assume the defense of such claim with counsel reasonable
satisfactory to the indemnified party. If such defense is assumed, the
indemnifying party will not be subject to any liability for any
settlement made without its consent (but such consent will not be
unreasonably withheld). An indemnifying party 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 party with respect to such claim, unless
in the reasonable judgment of any indemnified party a conflict of
interest may exist between such indemnified party and any other of such
indemnified parties with respect to such claim.
8.4. CONTRIBUTIONPROCEDURES AS TO INDEMNIFICATION. If the
indemnification provided for in this Section 8 is held by a court of
competent jurisdiction to be unavailable to an indemnified party with
respect to any loss, liability, claim, damage, or expense referred to
therein, then the indemnifying party, in lieu of indemnifying such
indemnified party hereunder, shall contribute to the amount paid or
payable by such indemnified party as a result of such loss, liability,
claim, damage, or expense in such proportion as is appropriate to reflect
the relative fault of the indemnifying party on the one hand and of the
indemnified party on the other in connection with the statements or
omissions that resulted in such loss, liability, claim, damage, or
expense (including legal fees or expenses) as well as any other relevant
equitable considerations. The relative fault of the indemnifying party
and of the indemnified party shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a
material fact or the omission to state a material fact relates to
information supplied by the indemnifying party or by the indemnified
party and the parties' relative intent, knowledge, access to information,
and opportunity to correct or prevent such statement or omission. The
Company and each holder of Registrable Securities agree that it would not
be just and equitable if contribution pursuant to this Section 8.4 were
determined by PRO RATA allocation or by any other method of allocation
which does not take into account the equitable considerations referred to
in the immediately preceding paragraph. Notwithstanding the provisions
of this Section 8, an indemnified Holder shall not be required to
contribute any amount in excess of the net proceeds received by the
indemnified Holder from the sale of the Registrable Securities. No
person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the 1933 Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation.
9. Condition to the Company's ObligationsCondition to the Companys
Obligations
In connection with an underwritten offering, it shall be a condition to
the Company's obligations to include Registrable Securities on behalf of
any Selling Stockholder that the underwriters agree to indemnify the
Company, its directors and officers and each person who controls the
Company (within the meaning of the Securities Act) against any losses,
claims, damages, liabilities and expenses arising out of or resulting
from any untrue or alleged untrue statement of material fact or any
omission or alleged omission of a material fact required to be stated in
the registration statement or prospectus or any amendment thereof or
supplement thereto or necessary to make the statements therein no
misleading, but only to the extent that such untrue statement or omission
or such alleged untrue statement or alleged omission is contained in
information furnished in writing by such underwriters on their own behalf
specifically for use in preparing the registration statement.
<PAGE>
2
10. FORM S-3 AND RULE 144FORM S3 AND RULE 144
10.1. AVAILABILITY OF SHORT FORMAVAILABILITY OF SHORT FORM. The
Company represents and warrants that it meets and will use its best
efforts to continue to meet the requirements which must be met by the
Company in order for the Registrable Securities to be registered in a
Demand Registration on Form S-3 under the Securities Act or any
comparable or successor form or forms; and the Company further represents
and warrants that it has registered the Common Stock and will use its
best efforts to register any other Registrable Securities and maintain
the registration of any securities registered under the Securities
Exchange Act of 1934 in accordance with the provisions of that Act.
10.2. CONDITIONS OF RULE 144CONDITIONS OF RULE 144. The Company
represents and warrants that it satisfies and will use its best efforts
to continue to satisfy the conditions set forth in Rule 144 under the
Securities Act which must be satisfied by an issuer in order for a holder
of restricted securities to sell such securities under the provisions of
such rule, including the timely filing of all reports required to be
filed under the Securities Exchange Act of 1934, as amended.
11. DefinitionsDefinitions
11.1. AGREEMENTAGREEMENT. The term "AGREEMENT" shall mean this
Registration Rights Agreement, as the same may be amended from time to
time.
11.2. COMMON STOCKCOMMON STOCK. The term "COMMON STOCK" shall mean
the Common Stock, no par value, of the Company. This definition assumes
that it is Common Stock which is the subject of the Agreement. If the
securities covered are not Common Stock, a new definition would be
required and appropriate changes would need to be made throughout the
Agreement.
11.3. COMPANYCOMPANY. The term "COMPANY" shall have the meaning set
forth in the first paragraph of this Agreement.
11.4. DEMAND REGISTRATIONDEMAND REGISTRATION. The term "DEMAND
REGISTRATION" shall have the meaning set forth in Section 1.1 hereof.
11.6. PIGGYBACK REGISTRATIONPIGGYBACK REGISTRATION. The term
"PIGGYBACK REGISTRATION" shall have the meaning set forth in Section 2.1
hereof.
11.7. REGISTRABLE SECURITIESREGISTRABLE SECURITIES. The term
"REGISTRABLE SECURITIES" means any Common Stock registered in the names
of the Stockholders from time to time, any Warrant Stock issued or
issuable upon exercise of Warrant, and any securities issued or to be
issued with respect to such securities by way of a stock dividend or
stock split or in connection with a combination of shares,
recapitalization, merger, consolidation or other reorganization. As to
any particular Registrable Securities, such securities will cease to be
Registrable Securities when they have been (i) effectively registered
under the Securities Act or disposed of in accordance with the
registration statement covering them or (ii) transferred pursuant to Rule
144 under the Securities Act (or any similar rule then in force).
11.8. REGISTRATION EXPENSESREGISTRATION EXPENSES. The term
"REGISTRATION EXPENSES" means all expenses incident to the Company's
performance of or compliance with this Agreement, including without
limitation all registration and filing fees, fees and expenses of
compliance with securities or blue sky laws, printing expenses, messenger
and delivery expenses, expenses and fees for listing the securities to be
registered on exchanges or trading system on which similar securities
issued by the Company are then listed or included, and fees and
disbursements of counsel for the Company.
11.9. RESTRICTED FORMRESTRICTED FORM. The term "RESTRICTED FORM"
shall mean a form of registration statement under the Securities Act
which imposes for its use a limitation on the maximum value or number of
securities to be included therein.
11.10. SECURITIES ACTSECURITIES ACT. The term "SECURITIES ACT"
shall mean the Securities Act of 1933, as amended.
11.11. SELLING STOCKHOLDERSELLING STOCKHOLDER. The term "SELLING
STOCKHOLDER" means any Stockholder who requests inclusion of all or a
portion of its shares of Registrable Securities in a Demand Registration
pursuant to Sections 1 herein or a Piggyback Registration pursuant to
Section 2.
11.12. SHORT FORMSHORT FORM. The term "SHORT FORM" shall have the
meaning set forth in Section 1.1 hereof.
11.13. STOCKHOLDERSSTOCKHOLDERS. The term "STOCKHOLDER" or shall
have the meaning set forth in the first paragraph hereof, and the term
"STOCKHOLDERS" shall mean, collectively, the Stockholder and any other
holder(s) of Warrants issued by the Company.
11.14. UNDERWRITING COMMISSIONSUNDERWRITING COMMISSIONS. The term
"UNDERWRITING COMMISSIONS" means all underwriting discounts or
commissions relating to the sale of securities of the Company, but
excludes any expenses reimbursed to underwriters.
12. MiscellaneousMiscellaneous
12.1. NOTICESNOTICES. Any notices required hereunder shall be sent
by certified or registered mail, and shall be addressed to the address of
the Company's corporate headquartered in the case of any notice to the
Company, and until changed by notice to the Company, to the Stockholders
at their address set forth opposite their signatures hereto.
12.2. AMENDMENTS AND WAIVERSAMENDMENTS AND WAIVERS. The provisions
of this Agreement may be amended and the Company may take any action
herein prohibited, or omit to perform any act herein required to be
performed by it, if the Company has obtained the written consent of the
Stockholders which own 51% of the Registrable Securities. This provision
would need to be modified depending on the number of Stockholders and the
distribution of the shares among them.
12.3. SUCCESSORS AND ASSIGNSSUCCESSORS AND ASSIGNS. All covenants and
agreements in this Agreement by or on behalf of any of the parties hereto will
bind and inure to the benefit of the respective transferees, successors and
personal representatives of the Stockholders. The rights to cause the Company
to register Registrable Securities pursuant to this Agreement shall follow the
Warrants, and the Warrant Stock and shall be exercisable by the holders of any
Warrants or Warrant Stock, including any transferees of Warrants or Warrant
Stock.
12.4. GOVERNING LAWGOVERNING LAW. All questions concerning the
construction, validity and interpretation of this Agreement will be
governed by the law of the State of Connecticut.
12.5. COUNTERPARTSCOUNTERPARTS. This Agreement may be executed in
any number of counterparts, each of which shall be considered to be an
original instrument and to be effective as of the date first written
above.
IN WITNESS WHEREOF, the parties have executed this Agreement as of
the date first written above.
STANDARD MANAGEMENT CORPORATION
By /s/ STEPHEN M. COONS
Name: Stephen M. Coons
Title: Executive Vice President
and General Counsel
FLEET NATIONAL BANK
By /s/ R.J. KANE
Name: R.J. Kane
Title: Senior Vice President
C&LDOC: S1827241.DOC <<Date>>
EXHIBIT C
THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON THE EXERCISE OF
THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE "SECURITIES ACT") AND MAY NOT BE SOLD OR TRANSFERRED IN
THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER THE
SECURITIES ACT.
No. of Shares of Common Stock: 30,000 Warrant No. 3
WARRANT
To Purchase Common Stock of
STANDARD MANAGEMENT CORPORATION
THIS IS TO CERTIFY THAT FLEET NATIONAL BANK, or its registered
assigns, is entitled, at any time or from time to time prior to the
Expiration Date (as hereinafter defined), to purchase from Standard
Management Corporation, an Indiana corporation (the "COMPANY"), 30,000
shares of Common Stock (as hereinafter defined and subject to adjustment
as provided herein), in whole or in part, at a purchase price of $4.375
per share, all on the terms and conditions and pursuant to the provisions
hereinafter set forth.
1 DEFINITIONS. As used in this Warrant, the following terms have the
respective meanings set forth below:
"ADDITIONAL SHARES OF COMMON STOCK" shall mean all shares of Common
Stock issued or issuable by the Company after the Closing Date, other
than the Warrant Stock.
"AFFILIATE" shall have the meaning set forth in the Revolving Line
of Credit Agreement.
"ASSIGNED VALUE" shall mean, in respect of any share of Common
Stock on any date herein specified (i) if there is a public market for
Common Stock, the average closing price of the Common Stock on the
largest exchange on which such shares are traded (or if not traded on an
exchange, then the average of the closing bid and ask prices quoted
over-the-counter) over the 10 trading days prior to the date of the
determination (as such prices are reported in The Wall Street Journal or
if not so reported, in any nationally recognized financial journal or
newspaper), (ii) if there is no public market for Common Stock, the
highest price at which shares of Common Stock are offered for sale in a
public offering registered pursuant to the Securities Act or in an
arms-length private offering, if any such offering is pending (unless
such offer is revoked prior to such sale) on the date of determination of
the Assigned Value, or (iii) if there is no public market for Common
Stock and no such offering is pending, the fair market value per share of
Common Stock as determined in good faith by the Company's board of
directors.
"BUSINESS DAY" shall mean any day that is not a Saturday or Sunday
or a day on which banks are required or permitted to be closed in the
State of Connecticut.
"CAPITAL STOCK" means, with respect to any Person, any and all
shares, interests, participations or other equivalents (however
designated) of capital stock, including each class of common stock and
preferred stock of such Person.
"CLOSING DATE" shall mean July 18, 1996.
"COMMISSION" shall mean the Securities and Exchange Commission or
any other federal agency then administering the Securities Act and other
federal securities laws.
"COMMON STOCK" shall mean (except where the context otherwise
indicates) the Common Stock, no par value, of the Company as constituted
on the Closing Date, and any Capital Stock into which such Common Stock
may thereafter be changed, and shall also include (i) Capital Stock of
the Company of any other class (regardless of how denominated) issued to
the holders of shares of Common Stock upon any reclassification thereof
which is also not preferred as to dividends or assets over any other
class of stock of the Company and which is not subject to redemption and
(ii) shares of common stock of any successor or acquiring corporation (as
defined in Section 4.7) received by or distributed to the holders of
Common Stock of the Company in the circumstances contemplated by Section
4.7.
"COMMON STOCK OUTSTANDING" shall mean, at any date as of which
the number of shares thereof is to be determined, all issued and
outstanding shares of Common Stock and shall include all shares issuable
in respect of outstanding scrip or any certificates representing
fractional interests in shares of Common Stock.
"CONVERTIBLE SECURITIES" shall mean evidences of indebtedness,
shares of stock or other securities which are convertible into or
exchangeable, with or without payment of additional consideration in cash
or property, for Additional Shares of Common Stock, either immediately or
upon the occurrence of a specified date or a specified event.
"CURRENT MARKET PRICE" shall mean, in respect of any share of
Common Stock on any date herein specified, the Assigned Value per share
of Common Stock as at such date.
"CURRENT WARRANT PRICE" shall mean, in respect of a share of
Common Stock at any date herein specified, the price at which a share of
Common Stock may be purchased pursuant to exercise of this Warrant on
such date.
"EXPIRATION DATE" shall mean July 18, 2003.
"FULLY-DILUTED OUTSTANDING" shall mean, (i) when used with
reference to Common Stock, at any date as of which the number of shares
thereof is to be determined, the number of shares of Common Stock
Outstanding at such date and the number of shares of Common Stock which
would be outstanding if the Warrants, the Company's convertible preferred
stock, if any, and all other outstanding rights, options or warrants to
purchase, or securities convertible into, shares of Common Stock and all
security convertible or exchangeable into any of the foregoing, that are
"in-the-money" were converted into or exercised or exchanged for shares
of Common Stock on such date, and (ii) when used with reference to Voting
Securities, at any date as of which the number of shares thereof is to be
determined, the number of shares of Voting Securities Outstanding at such
date and the number of shares of Voting Securities which would be
outstanding if any outstanding rights, warrants or options to purchase,
or securities convertible into, shares of Voting Securities and all
securities convertible or exchangeable into any of the foregoing, that
are "in-the-money" were converted into or exercised or exchanged for
shares of Voting Securities on such date.
"GAAP" shall mean generally accepted accounting principles in the
United States of America as from time to time in effect.
"HOLDER" shall mean the Person or Persons in whose name this
Warrant or, as applicable, the Warrant Stock, is registered on the books
of the Company maintained for such purpose.
"INITIAL PUBLIC OFFERING" shall mean the first time a
registration statement filed by the Company under the Securities Act with
respect to its securities, whether on behalf of itself or otherwise, is
declared effective, other than a registration statement filed on Form S-8
or any successor forms thereto.
"LIEN" means any mortgage, pledge, lien, encumbrance, charge or
adverse claim affecting title or resulting in an encumbrance against real
or personal property, or a security interest of any kind (including,
without limitation, any conditional sale or other title retention
agreement or any lease in the nature thereof, and any filing of or
agreement to give any financing statement under the Uniform Commercial
Code (or equivalent statutes) of any jurisdiction).
"MAJORITY HOLDERS" shall mean Holders of more than 50% of (i)
Warrants exercisable for the aggregate number of shares of Common Stock
then purchasable upon exercise of all Warrants, whether or not then
exercisable, PLUS (ii) where a provision affects Holders of the Warrant
Stock, the Warrant Stock.
"OTHER PROPERTY" is defined in Section 4.7.
"PERSON" shall have the meaning defined in the Revolving Line of
Credit Agreement.
"REGISTRATION RIGHTS AGREEMENT" shall mean that certain Amended
and Restated Registration Rights Agreement dated as of July 18, 1996 by
and between the Company and Holder.
"RESTRICTED COMMON STOCK" shall mean shares of Common Stock which
are, or which upon their issuance on the exercise of this Warrant would
be, evidenced by a certificate bearing the restrictive legend set forth
in Section 9 herein.
"REVOLVING LINE OF CREDIT AGREEMENT" shall mean that certain
Amended and Restated Revolving Line of Credit Agreement dated as of
November 8, 1996, by and between the Company and Holder.
"SECURITIES ACT" shall mean the Securities Act of 1933, as
amended, or any similar federal statute, and the rules and regulations of
the Commission thereunder, all as the same shall be in effect at the
time.
"SUBSIDIARY" shall have the meaning set forth in the Revolving
Line of Credit Agreement.
"VOTING SECURITIES" means any class of Capital Stock of a
corporation or other equity shares, interests, participations, rights in
or other equivalents (however designated) of a Person other than a
corporation, and any rights (including without limitation debt securities
convertible into Capital Stock), warrants or options exercisable or
exchangeable for or convertible into such Capital Stock or other equity
securities, pursuant to which the holders thereof have (or would have
upon exercise, conversion or exchange) the general voting power under
ordinary circumstances to vote for the election of directors, managers,
trustees or general partners of any Person (irrespective of whether or
not at the time any other class or classes will have or might have voting
power by reason of the happening of any contingency).
"VOTING SECURITIES OUTSTANDING" shall mean, at any date as of
which the number of shares thereof is to be determined, all issued and
outstanding shares of Voting Securities, and shall include all shares issuable
in respect of outstanding scrip or any certificates representing fractional
interests in shares of Voting Securities.
"WARRANTS" shall mean all of the Warrants of the Company issued
prior to or on the date hereof or to be issued subsequent to the date hereof
pursuant to the Revolving Line of Credit Agreement, including this Warrant, and
all warrants issued upon transfer, division or combination of, or in
substitution for, any thereof. All Warrants shall at all times be identical as
to terms and conditions, except as to date of issuance, the purchase price, the
number of shares of Common Stock for which they may be exercised and the date
by which such Warrants must be exercised.
"WARRANT PRICE" shall mean an amount equal to (i) the number of
shares of Common Stock being purchased upon exercise of this Warrant pursuant
to Section 2.1 multiplied by (ii) the Current Warrant Price as of the date of
such exercise.
"WARRANT STOCK" shall mean the shares of Common Stock issuable
to the Holders upon the exercise of this Warrant.
2 EXERCISE OF WARRANT: OTHER AGREEMENTS
1.11834 MANNER OF EXERCISE.
i) From and after the date hereof until 5:00 P.M., New
York City time, on the Expiration Date, Holder may exercise this Warrant, on
any Business Day, for all or any part of the number of shares of Common Stock
purchasable hereunder. In order to exercise this Warrant, in whole or in part,
Holder shall deliver to the Company at its principal office at 9100 Keystone
Crossing, Suite 600, Indianapolis, Indiana 46240, or at the office or agency
designated by the Company pursuant to Section 11, (a) a written notice of
Holder's election to exercise this Warrant, which notice shall specify the
number of shares of Common Stock to be purchased, (b) this Warrant, (c) payment
of the Warrant Price by certified or official bank check from Holder, unless
the Holder is making a cashless exercise pursuant to Section 2.1(iii) herein,
and (d) if the Holder is making a cashless exercise pursuant to Section
2.1(iii) herein, a statement. Such notice shall be substantially in the form
of EXHIBIT A hereto, duly executed by Holder or its agent or attorney.
ii) Upon receipt thereof, the Company shall, as promptly
as practicable, and in any event within ten (10) Business Days thereafter,
execute or cause to be executed and deliver or cause to be delivered to Holder
a certificate or certificates representing the aggregate number of shares of
Common Stock issuable upon such exercise as hereinafter provided. The stock
certificate or certificates so delivered shall be, to the extent possible, in
such denomination or denominations as such Holder shall request in the notice
and shall be registered in the name of Holder or such other name as shall be
designated in the notice. This Warrant shall be deemed to have been exercised
and such certificate or certificates shall be deemed to have been issued, and
Holder or any other Person so designated to be named therein shall be deemed to
have become a holder of record of such shares for all purposes, as of the date
the notice, together with the check or checks and this Warrant, is received by
the Company as described above and all taxes required to be paid by Holder, if
any, pursuant to Section 2.2 prior to the issuance of such shares have been
paid. If this Warrant shall have been exercised in part, the Company shall, at
the time of delivery of the certificate or certificates representing the
Warrant Stock, deliver to Holder a new Warrant evidencing the rights of Holder
to purchase the unpurchased shares of Common Stock called for by this Warrant,
which new Warrant shall in all other respects be identical with this Warrant,
or, at the request of Holder, appropriate notation may be made on this Warrant
and the same returned to Holder.
(iii) (2) In lieu of paying the Warrant Price, Holder may
elect to receive shares of the Company's Common Stock equal to the value of
this Warrant (or the portion thereof being exercised), in which event the
Company shall issue to Holder the number of shares of the Company's Common
Stock computed using the following formula:
X = Y (A-B)
A
Where:
X = the number of shares of Warrant Stock to be issued to the Holder;
Y = the number of shares of Warrant Stock otherwise purchasable (or the
portion thereof being exercised) under this Warrant (at the date
of exercise);
A = the Current Market Price of one share of the Company's Common Stock
(at the date of such exercise);
and
B = the Current Warrant Price (as adjusted to the date of such exercise).
(3) In lieu of paying the Warrant Price, Holder may elect
to receive cash equal to the value of this Warrant (or the portion thereof
being exercised), in which event the Company shall pay to Holder cash in an
amount computed using the following formula:
X = Y (A-B)
Where:
X = the amount of cash to be paid to Holder;
Y = the number of shares of Warrant Stock otherwise purchasable (or
the portion thereof being exercised) under this Warrant (at the
date of exercise);
A = the Current Market Price of one share of the Company's Common Stock
(at the date of such exercise);
and
B = the Current Warrant Price (as adjusted to the date of such exercise).
1.11834 PAYMENT OF TAXES. All shares of Common Stock issuable
upon the exercise of this Warrant pursuant to the terms hereof shall be validly
issued, fully paid and nonassessable and, to the extent permitted by law, free
of liens or preemptive rights. The Company shall pay all expenses in connection
with, and all taxes and other governmental charges that may be imposed with
respect to, the issue or delivery thereof unless such tax is imposed by law on
Holder, in which case such tax or charge shall be paid by Holder. The Company
shall not be required, however, to pay any tax or other charge imposed in
connection with any transfer involved in the issue of any certificate for
shares of Common Stock issuable upon exercise of this Warrant in any name other
than that of Holder, and in such case, the Company shall not be required to
issue or deliver any stock certificate until such tax or other charge has been
paid or it has been established to the satisfaction of the Company that no such
tax or other charge is due.
2.11834 OTHER AGREEMENTS. This Warrant and the Warrant Stock
shall be governed by the terms of this Warrant, the Registration Rights
Agreement and, to the extent applicable, the Revolving Line of Credit Agreement
(the terms of which are hereby incorporated herein by this reference). Each
Holder agrees to be bound by, and shall enjoy the benefits of, this Warrant,
the Registration Rights Agreement and the Revolving Line of Credit Agreement.
The registered holder of the Warrant Stock issued upon exercise of this Warrant
(in whole or in part) shall be entitled to all rights granted pursuant to the
Registration Rights Agreement and agrees to be bound by all of the obligations
and limitations thereof, including the ability of the Company to elect to make
a cash payment to the Holder as more particularly described in Section 1.1(ii)
of the Registration Rights Agreement in lieu of proceeding with a Demand
Registration (as such term is defined in the Registration Rights Agreement).
-2-
<PAGE>
1 TRANSFER. DIVISION AND COMBINATION.
1.11834 TRANSFER. Subject to compliance with Section 9 herein,
Holder shall have the right to transfer of this Warrant and all rights
hereunder and the Warrant Stock, in each case, in whole or in part. Such
transfer shall be registered on the books of the Company to be maintained for
such purpose, upon surrender of this Warrant or the Warrant Stock at the
principal office of the Company referred to in Section 2.1 or the office or
agency designated by the Company pursuant to Section 10, together with, in the
case of this Warrant, a written assignment of this Warrant substantially in the
form of EXHIBIT B hereto duly executed by Holder or its agent or attorney and,
in the case of Warrant Stock, stock powers or other instrument of assignment
duly executed, and, in each case, funds sufficient to pay any transfer taxes
payable upon the making of such transfer.
2.11834 DIVISION AND COMBINATION. This Warrant may be divided or
combined with other Warrants upon presentation hereof at the aforesaid office
or agency of the Company, together with a written notice specifying the names
and denominations in which new Warrants are to be issued, signed by Holder or
its agent or attorney. Subject to compliance with this Section 3, as to any
transfer which may be involved in such division or combination, the Company
shall execute and deliver a new Warrant or Warrants in exchange for the Warrant
or Warrants to be divided or combined in accordance with such notice.
3.11834 EXPENSES. The Company shall prepare, issue and deliver
at its own expense (other than transfer taxes) the new Warrant or Warrants
under this Section 3.
4.11834 MAINTENANCE OF BOOKS. The Company agrees to maintain, at
its aforesaid office or agency, books for the registration and the registration
of transfer of the Warrants.
2 ADJUSTMENTS.
The number of shares of Common Stock for which this Warrant is
exercisable shall be subject to adjustment from time to time as set forth in
this Section 4. The Company shall give each Holder notice of any event
described below which requires an adjustment pursuant to this Section 4 at the
time of such event.
1.11834 STOCK DIVIDENDS. SUBDIVISIONS AND COMBINATIONS. If, at
any time, the Company shall:
i) pay holders of its Common Stock a dividend in, or
otherwise make a distribution of, Additional Shares of Common Stock,
ii) subdivide its outstanding shares of Common Stock
into a larger number of shares of Common Stock,
iii) combine its outstanding shares of Common Stock into
a smaller number of shares of Common Stock, or
iv) issue any shares of equity securities pursuant to a
reclassification of shares of Common Stock,
then the number of shares of Common Stock for which this Warrant is exercisable
immediately after the occurrence of any such event shall be adjusted to equal
the number of shares of Common Stock which a record holder of the same number
of shares of Common Stock for which this Warrant is exercisable immediately
prior to the occurrence of such event would own or be entitled to receive after
the happening of such event.
The Current Warrant Price shall be adjusted to equal the Current
Warrant Price hereunder immediately prior to any such adjustment multiplied by
a fraction, the numerator of which shall be the number of shares on a Fully
Diluted Outstanding basis immediately prior to such adjustment and the
denominator of which shall be the number of shares on a Fully Diluted
Outstanding basis immediately after such event.
1.11834 CERTAIN OTHER DISTRIBUTIONS. If, at any time, the
Company shall pay holders of its Common Stock a dividend in, or otherwise
distribute:
i) cash,
ii) any evidences of its indebtedness, any shares of its
stock or any other securities or property of any nature whatsoever (other than
cash, Convertible Securities or Additional Shares of Common Stock), or
iii) any warrants or other rights to subscribe for or
purchase any evidences of its indebtedness, any shares of its stock or any
other securities or property of any nature whatsoever (other than cash,
Convertible Securities or Additional Shares of Common Stock),
then the number of shares of Common Stock for which this Warrant is exercisable
shall be adjusted to equal the product of the number of shares of Common Stock
for which this Warrant is exercisable immediately prior to such adjustment by a
fraction (I) the numerator of which shall be the Current Market Price per share
of Common Stock at the date of such payment and (II) the denominator of which
shall be (x) such Current Market Price per share of Common Stock minus (y) the
amount allocable to one share of Common Stock of any such cash so distributable
and of the fair value (as determined in good faith by the Board of Directors of
the Company) of any and all such evidences of indebtedness, shares of stock,
other securities or property or warrants or other subscription or purchase
rights so distributable. A reclassification of the Common Stock (other than a
change in par value, or from par value to no par value or from no par value to
par value) into shares of Common Stock and shares of any other class of stock
shall be deemed a distribution by the Company to the holders of its Common
Stock of such shares of such other class of stock within the meaning of this
Section 4.2 and, if the outstanding shares of Common Stock shall be changed
into a larger or smaller number of shares of Common Stock as a part of such
reclassification, such change shall be deemed a subdivision or combination, as
the case may be, of the outstanding shares of Common Stock within the meaning
of Section 4.1.
The Current Warrant Price shall be adjusted to equal the
Current Warrant Price hereunder immediately prior to any such adjustment
multiplied by a fraction, the numerator of which shall be the number of
shares for which this Warrant is exercisable immediately prior to such
adjustment and the denominator of which shall be the number of shares for
which this Warrant is exercisable immediately after such adjustment, as
calculated above.
1.11834 ISSUANCE OF ADDITIONAL SHARES OF COMMON STOCK.
i) If at any time the Company shall (except as
hereinafter provided) issue or sell any Additional Shares of Common Stock
for consideration in an amount per Additional Share of Common Stock less
than the Current Market Price, then the number of shares of Common Stock
for which this Warrant is exercisable shall be adjusted to equal the
product obtained by multiplying the number of shares of Common Stock for
which this Warrant is exercisable immediately prior to such issue or sale
by a fraction (I) the numerator of which shall be the number of Fully
Diluted Outstanding shares of Common Stock immediately after such issue
or sale, and (II) the denominator of which shall be the number of Fully
Diluted Outstanding shares of Common Stock immediately prior to such
issue or sale plus the number of shares which the aggregate offering
price of the total number of such Additional Shares of Common Stock would
purchase at the then Current Market Price. Current Warrant Price shall
be adjusted to equal the Current Warrant Price hereunder immediately
prior to any such adjustment multiplied by a fraction, the numerator of
which shall be the number of shares for which this Warrant is exercisable
immediately prior to such adjustment, and the denominator is the number
of shares for which this Warrant is exercisable immediately after such
adjustment, as calculated above.
ii) The provisions of Section 4.3(i) shall not apply
to any issuance of Additional Shares of Common Stock for which an
adjustment is provided under Section 4.1. No adjustment of the number of
shares of Common Stock for which this Warrant shall be exercisable shall
be made under Section 4.3(i) upon the issuance of any Additional Shares
of Common Stock which are issued pursuant to the exercise of any
warrants, options or other subscription or purchase rights or pursuant to
the exercise of any conversion or exchange rights in any Convertible
Securities, if any such adjustment shall previously have been made upon
the issuance of such warrants or other rights or upon the issuance of
such Convertible Securities (or upon the issuance of any warrant or other
rights therefor) pursuant to Section 4.4.
1.11834 ISSUANCE OF WARRANTS, CONVERTIBLE SECURITIES OR
OTHER RIGHTS. If, at any time, the Company shall take a record of the
holders of its Common Stock for the purpose of entitling them to receive
a distribution of, or shall in any manner (whether directly or by
assumption in a merger in which the Company is the surviving corporation
or otherwise) issue or sell, any warrants, options or other rights to
subscribe for or purchase any Additional Shares of Common Stock or any
Convertible Securities, whether or not the rights to exercise, purchase,
exchange or convert thereunder are immediately exercisable, and the price
per share for which Common Stock is issuable upon the exercise of such
warrants, options or other rights or upon conversion or exchange of such
Convertible Securities shall be less than the Current Market Price in
effect immediately prior to the exercise of this Warrant, then the number
of shares for which this Warrant is exercisable and the Current Warrant
Price shall each be adjusted as provided in Section 4.3 on the basis that
the maximum number of Additional Shares of Common Stock issuable
(assuming immediate exercisability for all shares covered) pursuant to
all such warrants, options or other rights or necessary to effect the
conversion or exchange of all such Convertible Securities shall be deemed
to have been issued as of the date of the exercise of this Warrant. No
further adjustments of the number of shares for which this Warrant is
exercisable or the Current Warrant Price shall be made upon the actual
issue of such Common Stock or of such Convertible Securities upon
exercise of such warrants or other rights or upon the actual issue of
such Common Stock upon such conversion or exchange of such Convertible
Securities.
2.11834 OTHER ACTION AFFECTING WARRANT. If at any time or
from time to time the Company shall take any action in respect of or
affecting the Common Stock other than an action described in any of the
foregoing Sections 4.1 to 4.4, inclusive, then, unless in the reasonable
judgment of the Board of Directors of the Company such action will not
have a materially adverse effect upon the rights of any Holder, the
number of shares of Common Stock for which this Warrant is exercisable
shall be adjusted in such manner and at such time as the Board of
Directors of the Company may in good faith determine to be equitable
under the circumstances.
3.11834 OTHER PROVISIONS APPLICABLE TO ADJUSTMENTS UNDER
SECTION 4.6. The following provisions shall be applicable to the making
of adjustments of the number of shares of Common Stock for which this
Warrant is exercisable provided for in this Section 4:
i) COMPUTATION OF CONSIDERATION. To the extent that
any Additional Shares of Common Stock or any Convertible Securities or
any warrants, options or other rights to subscribe for or purchase any
Additional Shares of Common Stock or any Convertible Securities shall be
issued for cash consideration, the consideration received by the Company
therefor shall be the amount of the cash received by the Company
therefor, or, if such Additional Shares of Common Stock or Convertible
Securities are offered by the Company for subscription, the subscription
price, or, if such Additional Shares of Common Stock or Convertible
Securities are sold to underwriters or dealers for public offering
without a subscription offering, the initial public offering price (in
any such case subtracting any amounts paid or receivable for accrued
interest or accrued dividends and without taking into account any
compensation, discounts or expenses paid or incurred by the Company for
and in the underwriting of, or otherwise in connection with, the issuance
thereof). To the extent that such issuance shall be for a consideration
other than cash, then, except as herein otherwise expressly provided, the
amount of such consideration shall be deemed to be the fair value of such
consideration at the time of such issuance as determined in good faith by
the Board of Directors of the Company (excluding therefrom any director
designated by the transferor thereof). In case any Additional Shares of
Common Stock or any Convertible Securities or any warrants, options or
other rights to subscribe for or purchase such Additional Shares of
Common Stock or Convertible Securities shall be issued in connection with
any merger in which the Company issues any securities, the amount of
consideration therefor shall be deemed to be the fair value, as
determined in good faith by the Board of Directors of the Company
(excluding therefrom any director designated by the transferor thereof),
of such portion of the assets and business of the nonsurviving
corporation as such Board in good faith shall determine to be
attributable to such Additional Shares of Common Stock, Convertible
Securities, warrants, options or other rights, as the case may be. The
consideration for any Additional Shares of Common Stock issuable pursuant
to any warrants, options or other rights to subscribe for or purchase the
same shall be the consideration received by the Company for issuing such
warrants, options or other rights plus the additional consideration
payable to the Company upon exercise of such warrants or other rights.
The consideration for any Additional Shares of Common Stock issuable
pursuant to the terms of any Convertible Securities shall be the
consideration received by the Company for issuing warrants, options or
other rights to subscribe for or purchase such Convertible Securities,
plus the consideration paid or payable to the Company in respect of the
subscription for or purchase of such Convertible Securities, plus the
additional consideration, if any, payable to the Company upon the
exercise of the right of conversion or exchange in such Convertible
Securities. In case of the issuance at any time of any Additional Shares
of Common Stock or Convertible Securities in payment or satisfaction of
any dividends upon any class of stock other than Common Stock, the
Company shall be deemed to have received for such Additional Shares of
Common Stock or Convertible Securities a consideration equal to the
amount of such dividend so paid or satisfied.
ii) WHEN ADJUSTMENTS TO BE MADE. The adjustments
required by this Section 4 shall be made whenever and as often as any
specified event requiring an adjustment shall occur, except that any
adjustment of the number of shares of Common Stock for which this Warrant
is exercisable that would otherwise be required may be postponed (except
in the case of a subdivision or combination of shares of the Common
Stock, as provided for in Section 4.1) up to, but not beyond the date of
exercise if such adjustment either by itself or with other adjustments
not previously made adds or subtracts less than 1% of the shares of
Common Stock for which this Warrant is exercisable immediately prior to
the making of such adjustment. Any adjustment representing a change of
less than such minimum amount (except as aforesaid) which is postponed
shall be carried forward and made as soon as such adjustment, together
with other adjustments required by this Section 4 and not previously
made, would result in a minimum adjustment or on the date of exercise.
For the purpose of any adjustment, any specified event shall be deemed to
have occurred at the close of business on the date of its occurrence.
iii) FRACTIONAL INTERESTS. In computing adjustments
under this Section 4, fractional interests in Common Stock shall be taken
into account to the nearest one-tenth of a share.
iv) WHEN ADJUSTMENT NOT REQUIRED. If the Company shall
take a record of the holders of its Common Stock for the purpose of
entitling them to receive a dividend or distribution or subscription or
purchase rights and shall, thereafter and before the distribution to
stockholders thereof, legally abandon its plan to pay or deliver such
dividend, distribution, subscription or purchase rights, then thereafter
no adjustment shall be required by reason of the taking of such record
and any such adjustment previously made in respect thereof shall be
rescinded and annulled.
1.11834 REORGANIZATION, RECLASSIFICATION, MERGER,
CONSOLIDATION OR DISPOSITION OF ASSETS.
i) In case the Company shall reorganize its capital,
reclassify its Capital Stock, consolidate or merge with or into another
corporation, or sell, transfer or otherwise dispose of all or
substantially all its property, assets or business to another corporation
and, pursuant to the terms of such reorganization, reclassification,
merger, consolidation or disposition of assets, shares of common stock of
the successor or acquiring corporation, or any cash, shares of stock or
other securities or property of any nature whatsoever (including warrants
or other subscription or purchase rights) in addition to or in lieu of
common stock of the successor or acquiring corporation ("OTHER
PROPERTY"), are to be received by or distributed to the holders of Common
Stock of the Company, then each Holder shall have the right thereafter to
receive, upon exercise of such Warrant, the number of shares of common
stock of the successor or acquiring corporation or of the Company, if it
is the surviving corporation, and Other Property receivable upon or as a
result of such reorganization, reclassification, merger, consolidation or
disposition of assets by a holder of the number of shares of Common Stock
for which this Warrant is exercisable immediately prior to such event.
ii) In case of any such reorganization,
reclassification, merger, consolidation or disposition of assets, (a)
Holder shall continue to enjoy, with respect to any shares of common
stock of the successor or acquiring corporation or the Company or any
Other Property consisting of Capital Stock or warrants acquired by
Holder, all the rights and benefits available to Holder pursuant to this
Warrant and all other agreements executed in connection with this Warrant
and/or the Warrant Stock, and (b) the successor or acquiring corporation
(if other than the Company) shall expressly assume the due and punctual
observance and performance of each and every covenant and condition of
this Warrant to be performed and observed by the Company and all the
obligations and liabilities hereunder, subject to such modifications as
may be deemed appropriate (as determined by resolution of the Board of
Directors of the Company) in order to provide for adjustments of shares
of the Common Stock for which this Warrant is exercisable which shall be
as nearly equivalent as practicable to the adjustments provided for in
this Section 3.
iii) For purposes of this Section 4.7, "COMMON STOCK OF
THE SUCCESSOR OR ACQUIRING CORPORATION" shall include stock of such
corporation of any class which is not preferred as to dividends or assets
over any other class of stock of such corporation and which is not
subject to redemption and shall also include any evidences of
indebtedness, shares of stock or other securities which are convertible
into or exchangeable for any such stock, either immediately or upon the
arrival of a specified date or the happening of a specified event and any
warrants or other rights to subscribe for or purchase any such stock. The
foregoing provisions of this Section 4.7 shall similarly apply to
successive reorganizations, reclassifications, mergers, consolidations or
disposition of assets.
iv) The Company shall not consolidate or merge with or
into an Affiliate of the Company, nor sell, transfer or otherwise dispose
of all or substantially all its property, assets or business to such an
Affiliate unless and until (a) such consolidation, merger, sale, transfer
or disposition is fair and equitable to the Company, each Holder and all
holders of Warrant Stock and is on terms which are at least as favorable
as those that would be obtainable in a similar transaction with an
unrelated third party, and (b) each Holder shall have received, at the
Company's sole cost and expense, the opinion of a financial advisor
satisfactory to such Holder in such Holder's reasonable discretion to the
effect that the proposed consolidation, merger, sale, transfer or
disposition satisfies the conditions set forth in the immediately
preceding clause (a).
1.11834 CERTAIN LIMITATIONS. Notwithstanding anything to the
contrary contained in the Company's Articles of Incorporation, Bylaws or
other documents governing the terms of the Company's Capital Stock, the
Company agrees not to amend its Articles of Incorporation or Bylaws,
enter into any other transaction or execute any other document that would
cause a reduction in the par value per share of Common Stock below the
Current Warrant Price.
1 NOTICES TO WARRANT HOLDERS.
1.11834 NOTICE OF ADJUSTMENTS. Whenever the number of shares
of Common Stock for which this Warrant is exercisable is subject to
adjustment pursuant to Section 4, the Company shall forthwith prepare a
certificate to be executed by the chief financial officer of the Company
setting forth, in reasonable detail, the event requiring the adjustment
and the method by which such adjustment was calculated (including a
description of the basis on which the Board of Directors of the Company
determined the fair value of any evidences of indebtedness shares of
stock, other securities or property or warrants or other subscription or
purchase rights referred to in Section 4.6(i)), specifying the number of
shares of Common Stock for which this Warrant is exercisable and (if such
adjustment was made pursuant to Section 4.7) describing the number and
kind of any other shares of stock or Other Property for which this
Warrant is exercisable, and any change in the purchase price or prices
thereof, after giving effect to such adjustment or change. The Company
shall promptly cause a signed copy of such certificate to be delivered to
each Holder in accordance with Section 17.1. The Company shall keep at
its office or agency designated pursuant to Section 10 copies of all such
certificates and cause the same to be available for inspection at said
office during normal business hours by any Holder or any prospective
purchaser of a Warrant designated by a Holder thereof.
2.11834 NOTICE OF CORPORATE ACTION. If at any time:
i) the Company shall take a record of the holders of
its Common Stock for the purpose of entitling them to receive a dividend
(other than a cash dividend payable out of earnings or earned surplus
legally available for the payment of dividends under the laws of the
jurisdiction of incorporation of the Company) or other distribution, or
any right to subscribe for or purchase any evidences of its indebtedness,
any shares of stock of any class or any other securities or property, or
to receive any other right, or
ii) there shall be any capital reorganization of the
Company, any reclassification or recapitalization of the Capital Stock of
the Company or any consolidation or merger of the Company with, or any
sale, transfer or other disposition of all or substantially all the
property, assets or business of the Company to, another corporation, or
iii) there shall be a voluntary or involuntary
dissolution, liquidation or winding up of the Company;
then, in any one or more of such cases, the Company shall give to Holder
(a) at least 20 days' prior written notice of the date on which a record
date shall be selected for such dividend, distribution or right or for
determining rights to vote in respect of any such reorganization,
reclassification, merger, consolidation, sale, transfer, disposition,
dissolution, liquidation or winding up, and (b) in the case of any such
reorganization, reclassification, merger, consolidation, sale, transfer,
disposition, dissolution, liquidation or winding up, at least 20 days'
prior written notice of the date when the same shall take place. Such
notice in accordance with the foregoing clauses also shall specify (I)
with respect to clause (a), the date on which any such record is to be
taken for the purpose of such dividend, distribution or right, the date
on which the holders of Common Stock shall be entitled to any such
dividend, distribution or right, and the amount and character thereof,
and (II) with respect to clauses (a) and (b), the date on which any such
reorganization, reclassification, merger, consolidation, sale, transfer,
disposition, dissolution, liquidation or winding up is to take place and
the time, if any such time is to be fixed, as of which the holders of
Common Stock shall be entitled to exchange their shares of Common Stock
for securities or other property deliverable upon such reorganization,
reclassification, merger, consolidation, sale, transfer, disposition,
dissolution, liquidation or winding up. Each such written notice shall be
sufficiently given if addressed to Holder at the last address of Holder
appearing on the books of the Company and delivered in accordance with
Section 17.1.
1 NO IMPAIRMENT. The Company shall not by any action, including,
without limitation, amending its articles of incorporation or through any
reorganization, reclassification, merger, consolidation, sale, transfer,
disposition, dissolution, winding up, issue or sale of securities or any
other voluntary action, avoid or seek to avoid the observance or
performance of any of the terms of this Warrant, but will at all times in
good faith assist in the carrying out of all such terms and in the taking
of all such actions as may be necessary or appropriate to protect the
rights of Holder against impairment. Without limiting the generality of
the foregoing, the Company will (i) not increase the par value of any
shares of Common Stock receivable upon the exercise of this Warrant above
the amount payable therefor upon such exercise immediately prior to such
increase in par value, (ii) take all such action as may be necessary or
appropriate in order that the Company may validly and legally issue fully
paid and nonassessable shares of Common Stock upon the exercise of this
Warrant, including reducing the par value of its Common Stock, and (iii)
use its best efforts to obtain all such authorizations, exemptions or
consents from any public regulatory body having jurisdiction thereof as
may be necessary to enable the Company to perform its obligations under
this Warrant.
2 RESERVATION AND AUTHORIZATION OF COMMON STOCK: REGISTRATION WITH OR
APPROVAL OF ANY GOVERNMENTAL AUTHORITY.
From and after the date hereof, the Company shall at all times reserve
and keep available for issue upon the exercise of Warrants such number of
its authorized but unissued shares of Common Stock as will be sufficient
to permit the exercise in full of all outstanding Warrants. All shares of
Common Stock which shall be so issuable, when issued upon exercise of any
Warrant and payment therefor in accordance with the terms of such
Warrant, shall be duly and validly issued and fully paid and
nonassessable, and, to the extent permitted by law, free of liens or
preemptive rights.
Before taking any action which would result in an adjustment
in the number of shares of Common Stock for which this Warrant is
exercisable, the Company shall obtain all such authorizations or
exemptions thereof, or consents thereto, as may be necessary from any
public regulatory body or bodies having jurisdiction thereof.
3 TAKING OF RECORD: STOCK AND WARRANT TRANSFER BOOKS. In the case of
all dividends or other distributions by the Company to the holders of its
Common Stock with respect to which any provision of Section 4 refers to
the taking of a record of such holders, the Company will in each such
case take such a record as of the close of business on a Business Day.
The Company will not, at any time, except upon dissolution, liquidation
or winding up of the Company, close its stock transfer books or Warrant
transfer books so as to result in preventing or delaying the exercise or
transfer of any Warrant.
4 RESTRICTIONS OF TRANSFERABILITY. Each Warrant shall be stamped or
otherwise imprinted with a legend in substantially the following form:
"THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON THE EXERCISE
OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "1933 ACT") AND MAY NOT BE SOLD OR TRANSFERRED IN
THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER THE
SECURITIES ACT."
5 LOSS OR MUTILATION. Upon receipt by the Company from any Holder of
evidence reasonably satisfactory to it of the ownership of and the loss,
theft, destruction or mutilation of this Warrant and indemnity reasonably
satisfactory to it, and in case of mutilation upon surrender and
cancellation hereof, the Company will execute and deliver in lieu hereof
a new Warrant of like tenor to such Holder; PROVIDED, in the case of
mutilation, no indemnity shall be required if this Warrant in
identifiable form is surrendered to the Company for cancellation.
6 OFFICE OF THE COMPANY. As long as any of the Warrants remain
outstanding, the Company shall maintain an office or agency (which may be
the principal executive offices of the Company) where the Warrants may be
presented for exercise, registration of transfer, division or combination
as provided in this Warrant. The Company shall notify each Holder in
writing prior to any change of address of the office at which the
Warrants may be presented.
7 LIMITATION OF LIABILITY. No provision hereof, in the absence of
affirmative action by Holder to purchase shares of Common Stock, and no
enumeration herein of the rights or privileges of Holder hereof, shall
give rise to any liability of such Holder for the purchase price of any
Common Stock or as a stockholder of the Company, whether such liability
is asserted by the Company or by creditors of the Company.
8 CAPITALIZATION. As of August 31, 1996, there are outstanding
4,773,395 shares of Common Stock; 979,104 shares of treasury stock of the
Company; and 160,939 outstanding shares of Class S preferred stock and
139,061 shares of treasury Class S preferred stock, which are convertible
into a maximum number of 201,174 shares of Common Stock.
9 REGISTERED HOLDER. Notwithstanding any other provision of this
Warrant, Holder and/or its affiliates may exercise this Warrant solely to
the extent such exercise would not result in Holder and/or its affiliates
holding, directly or indirectly, in excess of 4.99% of the outstanding
Common Stock of the Company (such determination to be made by Holder),
except for an exercise in connection with (i) a widely dispersed public
offering of the Warrant Stock, (ii) a sale of the Warrant Stock in the
secondary market pursuant to the transaction and volume limitations of
Rule 144 under the Securities Act (irrespective of holding periods), or
(iii) a private placement or sale, including those made pursuant to Rule
144A under the Securities Act, so long as Holder and/or its affiliates do
not collectively acquire more than 2% of the Common Stock of the Company
pursuant to any such transfer.
10 UNDERTAKINGS. Holder covenants with the Company that it will not
exercise or attempt to exercise influence over the management or policies
of the Company in connection with this Warrant or any shares of Common
Stock for which this Warrant may be exercised.
11 SHAREHOLDER COMMUNICATIONS. The Company will provide the Registered
Holder with copies of all written communications distributed to
shareholders generally.
12 MISCELLANEOUS.
1.11834 NOTICE GENERALLY. Any notice, demand, request,
consent, approval, declaration, delivery or other communication hereunder
to be made pursuant to the provisions of this Warrant shall be
sufficiently given or made if in writing and either delivered in person
with receipt acknowledged or sent by registered or certified mail, return
receipt requested, postage prepaid, or by telecopy and confirmed by
telecopy answerback, addressed as follows:
i) If to any Holder or holder of the Warrant Stock,
at its last known address appearing on the books of the Company
maintained for such purpose.
-2-
<PAGE>
ii) If to the Company at:
9100 Keystone Crossing
Suite 600
Indianapolis, Indiana 46240
Attention: Stephen M. Coons, Esq.
Telecopy: (317) 574-6227
or at such other address as may be substituted by notice given as herein
provided. The giving of any notice required hereunder may be waived in
writing by the party entitled to receive such notice. Every notice
demand, request, consent, approval, declaration, delivery or other
communication hereunder shall be deemed to have been duly given or served
on the date on which personally delivered, with receipt acknowledged,
telecopied and confirmed by telecopy answerback, or three (3) Business
Days after the same shall have been deposited in the United States mail.
Failure or delay in delivering copies of any notice, demand, request,
approval, declaration, delivery or other communication to the person
designated above to receive a copy shall in no way adversely affect the
effectiveness of such notice, demand, request, approval, declaration,
delivery or other communication.
1.11834 SUCCESSORS AND ASSIGNS. This Warrant and the rights
evidenced hereby (including, without limitation, those relating to the
Warrant Stock) shall inure to the benefit of and be binding upon the
successors of the Company and the successors and assigns of Holder. The
provisions of this Warrant are intended to be for the benefit of all
Holders from time to time of this Warrant and all Holders from time to
time of the Warrant Stock, and shall be enforceable by any such
Holder(s).
2.11834 AMENDMENT.
i) This Warrant and all other Warrants may be
modified or amended or the provisions hereof waived with the written
consent of the Company and the Majority Holders, PROVIDED that no such
Warrant may be modified or amended to reduce the number of shares of
Common Stock for which such Warrant is exercisable or to increase the
Warrant Price without the prior written consent of Holder thereof.
ii) No waivers of, or exceptions to, any term,
condition or provision of this Warrant, in any one or more instances,
shall be deemed to be, or construed as, a further or continuing waiver of
any such term, condition or provision.
1.11834 SEVERABILITY. Wherever possible, each provision of
this Warrant shall be interpreted in such manner as to be effective and
valid under applicable law, but if any provision of this Warrant shall be
prohibited by or invalid under applicable law, such provision shall be
ineffective to the extent of such prohibition or invalidity, without
invalidating the remainder of such provision or the remaining provisions
of this Warrant.
2.11834 HEADINGS. The headings used in this Warrant are for
the convenience of reference only and shall not, for any purpose, be
deemed a part of this Warrant.
3.11834 GOVERNING LAW. This Warrant shall be governed by the
laws of the State of Connecticut, without regard to the provisions
thereof relating to conflict of laws.
IN WITNESS WHEREOF, the Company has caused this Warrant to
be duly executed.
Dated: July 18, 1996
STANDARD MANAGEMENT CORPORATION
By: /s/ STEPHEN M. COONS
Name: Stephen M. Coons
Its: Executive Vice President
and General Counsel
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<PAGE>
EXHIBIT A
SUBSCRIPTION FORM
[To be executed only upon exercise of Warrant]
The undersigned registered owner of this Warrant irrevocably
exercises this Warrant for the purchase of _______ shares of Common Stock
of the Company, and herewith makes payment in the amount of $________
therefor, and requests that certificates for the shares of Common Stock
hereby purchased (and any securities or other property issuable upon such
exercise) be issued in the name of and delivered to ___________, whose
address is ____________ and, if such shares of Common Stock shall not
include all of the shares of Common Stock issuable as provided in this
Warrant, that a new Warrant of like tenor and date for the balance of the
shares of Common Stock issuable hereunder be delivered to the
undersigned. In lieu of paying the purchase price, I hereby make a
cashless exercise of this Warrant for the purchase of _______ shares of
Common Stock of the Company pursuant to Section 2.1(iii) of this Warrant
and request that [$______] [certificates representing _____ shares] be
[paid][issued] and delivered to _______, whose address is ____________.
Fleet National Bank
(Name or Registered Owner)
/s/ R.J. KANE
(Signature of Registered
Owner)
777 Main St.
(Street Address)
Hartford, CT 06115
(City) (State) (zip Code)
-2-
<PAGE>
EXHIBIT B
ASSIGNMENT FORM
FOR VALUE RECEIVED the undersigned registered owner of this
Warrant hereby sells, assigns and transfers unto the Assignee named below
all of the rights of the undersigned under this Warrant, with respect to
the number of shares of Common Stock set forth below:
NAME AND ADDRESS OF ASSIGNEE No. of Shares of Common Stock
and does hereby irrevocably constitute and appoint __________________
attorney-in-fact to register such transfer on the books of
______________________ maintained for the purpose, with full power of
substitution in the premises.
Dated: Print Name:
Signature:
Witness:
NOTICE: The signature on this assignment must correspond with the name
as written upon the face of the within Warrant in every
particular, without alteration or enlargement or any change
whatsoever.
-2-
Registration Rights Agreement
Between
STANDARD MANAGEMENT CORPORATION
and
GREAT AMERICAN RESERVE INSURANCE COMPANY
<PAGE>
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (this "AGREEMENT") is made as of
November 8, 1996 by and between STANDARD MANAGEMENT CORPORATION, an
Indiana corporation (the "COMPANY"), and GREAT AMERICAN RESERVE INSURANCE
COMPANY, a Texas corporation, ("GARCO").
WHEREAS, the Company and GARCO, entered into a Note Agreement dated as
of the date hereof pursuant to which GARCO purchased a Senior
Subordinated Convertible Note in the amount of $4,000,000 (the "NOTE");
and
WHEREAS, the Note is convertible at the option of GARCO into shares of
common stock of the Company (the "CONVERTED STOCK"); and
WHEREAS, it is a condition precedent to GARCO purchasing the Note
(pursuant to the Note Agreement) that this Agreement be entered into; and
WHEREAS, certain capitalized terms used herein are used as defined
in the Note Agreement.
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, and intending to be legally bound hereby, the parties hereto
agree as follows:
1. DEMAND REGISTRATION
1.1. REQUESTS FOR REGISTRATION. At any time, a holder of the Note
or Converted Stock may demand registration under the Securities Act of
all or any portion of the Registrable Securities owned by such holder.
In order to accomplish such demand, a holder shall send written notice of
the demand to the Company, and such notice shall specify the number of
Registrable Securities sought to be registered. The Company shall
proceed with any demand registration requested by a holder of the Note or
Converted Stock if the number of Registrable Securities which GARCO shall
have elected to include in such Demand Registration pursuant to this
Section 1.1 shall be at least 51% of the Converted Stock issued or
issuable upon conversion of the Note. The minimum share amounts
specified in this Section 1.1 shall be appropriately adjusted to account
for any stock dividend, stock split, recapitalization, merger,
consolidation, reorganization or other action as a result of which
additional shares of common stock of the Company are issued on account
of, in conversion of or in exchange for shares of outstanding common
stock.
1.2. MAXIMUM NUMBER OF DEMAND REGISTRATIONS. In no event shall the
total number of Demand Registrations exceed two.
1.3. PROCEDURE. Within 10 days after receipt of a demand pursuant to
Section 1.1 hereof, the Company shall give written notice of such
requested registration to all other Persons who have registration rights
and will include in such registration, subject to the allocation
provisions below, all other Registrable Securities with respect to which
the Company has received written requests for inclusion within 20 days
after the Company's mailing of such notice, plus any securities of the
Company that the Company chooses to include on its own behalf.
1.4. EXPENSES. The Company will pay the Registration Expenses of any
demand registration, but the Underwriting Commissions, if such demand
registration is underwritten, will be paid by GARCO in proportion to any
Registrable Securities to be included on its behalf.
1.5. PRIORITY ON DEMAND REGISTRATIONS. If a demand registration is
underwritten and the managing underwriters advise the Company in writing
that in their opinion the number of Registrable Securities requested to
be included exceeds the number that can be sold in such offering, at a
price reasonably related to the fair value, the Company will allocate the
Registrable Securities to be included in such demand registration, first,
to the holders of Registrable Securities PRO RATA on the basis of the
number of Registrable Securities (collectively, the "Selling
Stockholders") for which the Company has received written requests for
inclusion, and, second, to the Company.
1.6. SELECTION OF UNDERWRITERS. Any demand registration may be
underwritten, at the election of the Selling Stockholders, and the
selection of investment banker(s) and manager(s) and the other decisions
regarding the underwriting arrangements for any such offering will be
made by the Selling Stockholders; PROVIDED, HOWEVER, that the selection
of investment banker(s) and manager(s) shall be subject to the consent of
the Company, such consent not to be unreasonably withheld.
2. PIGGYBACK REGISTRATIONS
2.1. RIGHT TO PIGGYBACK. Whenever the Company proposes to register the
offer, sale or offer and sale of any of its securities for its own behalf
under the Securities Act (other than a demand registration), and the
registration form to be used may be used for the registrations of
Registrable Securities to be sold in the manner proposed by GARCO
("PIGGYBACK REGISTRATION""), the Company will give prompt written notice
to GARCO and will include in such Piggyback Registration, subject to the
allocation provisions below, all Registrable Securities with respect to
which the Company has received written requests for inclusion within 20
days after the Company's mailing of such notice. The Company shall not
select a Restricted Form that would preclude registration of the
Registrable Securities that the Company has been requested to include in
such registration if the Company could use another available form of
registration statement which is not a Restricted Form and the use of
which would not give rise to added Registration Expenses.
2.2. PIGGYBACK EXPENSES. In all Piggyback Registrations, the Company
will pay the Registration Expenses related to the Registrable Securities
of GARCO, but the Underwriting Commissions will be paid by the Selling
Stockholders in proportion to any Registrable Securities included on
their behalf.
2.3. PRIORITY ON PRIMARY REGISTRATIONS. If a Piggyback Registration is
an underwritten registration on behalf of the Company, and the managing
underwriters advise the Company in writing that in their opinion the
number of securities requested to be included in such registration
exceeds the number that can be sold in such offering, at a price
reasonable related to fair value, the Company will allocate the
securities to be included as follows: first, the securities the Company
proposes to sell on its own behalf; and, second, Registrable Securities
requested to be included in such registration, PRO RATA on the basis of
the number of Registrable Securities owned, among the Selling
Stockholders.
2.4. WITHDRAWAL OR ABANDONMENT. Nothing contained in this Section 2
shall be construed as limiting or otherwise interfering with the right of
the Company to withdraw or abandon in its sole discretion any
registration statement filed by it in connection with a Piggyback
Registration notwithstanding the inclusion therein of Registrable
Securities.
3. HOLDBACK AGREEMENTS
Both GARCO and the Company agree not to effect any public sale or public
distribution of equity securities of the Company of any securities
convertible into or exchangeable or exercisable for such securities
during the 7 days prior to and the 180 days after any underwritten
registration of equity securities of the Company becomes effective
(except as part of such underwritten registration or except in connection
with obligations of the Company existing on the effective date of the
registration statement relating to such underwritten offering).
4. REGISTRATION PROCEDURES
Whenever GARCO has requested that any Registrable Securities be
registered pursuant to Section 1 of this Agreement, the Company will, as
expeditiously as possible, or whenever GARCO has requested that any
Registrable Securities be registered pursuant to Section 2 of this
Agreement, the Company will, to the extent applicable:
(a) PREPARATION AND FILING OF REGISTRATION STATEMENT. Prepare and file
with the Securities and Exchange Commission a registration statement with
respect to such Registrable Securities 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 Company will furnish GARCO with copies of all
such documents proposed to be filed).
(b) PREPARATION AND FILING OF AMENDMENTS AND SUPPLEMENTS. Prepare and
file with the Securities and Exchange Commission such amendments and
supplements to such registration statement and the prospectus used in
connection therewith as may be necessary to keep such registration
statement effective for the greater of (x) a period of not less than 120
days or (y) until the Registrable Securities included therein have been
sold.
(c) COPIES OF DOCUMENTS. Furnish to GARCO such number of copies of
such registration statement, each amendment and supplement thereto and
the prospectus included in such registration statement (including each
preliminary prospectus), and such other documents as GARCO may reasonably
request in order to facilitate the disposition of the Registrable
Securities included therein owned by GARCO.
(d) BLUE SKY QUALIFICATIONS. Use its best efforts to register or
quality such Registrable Securities under such other securities or blue
sky laws of such jurisdictions as GARCO or managing underwriters may
reasonably request; PROVIDED, HOWEVER, that in connection with any such
registration or qualification the Company shall not be obligated to file
a general consent to service of process, or to qualify to do business as
a foreign corporation, or otherwise subject itself to taxation in
connection with such qualification or compliance.
(e) NOTIFICATION OF EFFECTIVENESS; AMENDMENTS. Notify GARCO at any
time when a prospectus relating to the Registrable Securities included
therein is required to be delivered under the Securities Act within the
period that the Company is required to keep the registration statement
effective of the happening of any event as a result of which the
prospectus included in such registration statement as theretofore amended
or supplemented contains an untrue statement of a material fact or omits
any material fact necessary to make the statements therein not
misleading, and, at the request of GARCO, the Company will prepare a
supplement or amendment to such prospectus so that, as thereafter
delivered to the purchasers of such Registrable Securities, such
prospectus will not contain an untrue statement of a material fact or
omit to state any material fact necessary to make the statements therein
not misleading.
(f) LISTING. Cause all such Registrable Securities to be listed or
included on securities exchanges on which similar securities issued by
the Company are then listed or included.
(g) TRANSFER AGENT AND REGISTRAR. Provide a transfer agent and
registrar for all such Registrable Securities not later than the
effective date of such registration statement.
(h) OTHER AGREEMENTS. Enter into such customary agreement (including
an underwriting agreement containing customary terms and conditions,
including usual and customary indemnification provisions, in form
reasonably acceptable to the Company) and take such other customary
actions as may be reasonable necessary to expedite or facilitate the
disposition of such Registrable Securities.
(i) LETTERS FROM INDEPENDENT ACCOUNTANTS. Obtain a "cold comfort"
letter addressed to the Company from its independent accountants in such
form and covering such matters of the type customarily covered by "cold
comfort" letters delivered by such public accountants.
(j) INSPECTION OF RECORDS. Make available for inspection by GARCO,
and, upon execution of a confidentiality agreement mutually acceptable to
all parties, by any underwriter participating in any disposition pursuant
to such registration statement and any attorney, accountant or other
agent retained by GARCO or any underwriter, all financial and other
records, pertinent corporate documents and properties of the Company, and
cause the Company's officers, directors and employees to supply all
information reasonably requested by GARCO or any underwriter, attorney,
accountant or agent in connection with such registration statement.
5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to GARCO:
5.1. DUE ORGANIZATION AND GOOD STANDING. The Company is a corporation
duly organized and validly existing under the laws of its jurisdiction of
incorporation and is duly qualified as a foreign corporation in each
jurisdiction in which the failure to be so qualified could reasonably be
expected to have a material adverse effect on the Company.
5.2. DUE AUTHORIZATION; BINDING EFFECT. The execution and delivery of
this Agreement by the Company has been duly authorized by all necessary
corporate action and this Agreement constitutes the legal, valid and
binding obligation of the Company, enforceable against the Company in
accordance with its terms.
5.3. NO VIOLATION OR DEFAULT. The execution and delivery by the Company
of this Agreement does not, and the performance by the Company of its
obligations hereunder will not, violate any provisions of its charter or
by-laws or constitute a default under any other agreement to which the
Company is a party or by which it or its assets may be bound.
6. REPRESENTATIONS AND WARRANTIES OF GARCO
GARCO represents and warrants to the Company:
6.1. DUE ORGANIZATION AND GOOD STANDING. GARCO is a corporation duly
organized and validly existing under the laws of the state of Texas and
is duly qualified as a foreign corporation in each jurisdiction in which
the failure to be so qualified could reasonably be expected to have a
material adverse effect on GARCO.
6.2. DUE AUTHORIZATION; BINDING EFFECT. The execution and delivery of
this Agreement by GARCO has been duly authorized by all necessary action
and this Agreement constitutes the legal, valid and binding obligation of
GARCO enforceable against GARCO in accordance with its terms.
6.3. NO VIOLATION. The execution and delivery of this Agreement by
GARCO does not, and the performance by GARCO of its obligations hereunder
will not, violate any provision of the organizational documents of GARCO.
6.4. NO DEFAULT. The execution and delivery of this Agreement by GARCO
does not, and the performance by GARCO of its obligations hereunder will
not, violate any other agreement to which such Stockholder is a party or
by which any of its assets may be bound.
7. INFORMATION REGARDING GARCO
GARCO shall provide to the Company such information as may be reasonably
requested by the Company for use in the preparation and filing of any
registration statement covering Registrable Securities owned by GARCO,
and the obligation of the Company to include Registrable Securities in
any registration statement on behalf of GARCO shall be subject to GARCO's
providing such information as promptly as practicable.
8. INDEMNIFICATION
8.1. INDEMNIFICATION BY THE COMPANY. The Company hereby indemnifies, to
the extent permitted by law, GARCO, 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
arising out of or resulting from any untrue or alleged untrue statement
of material fact contained in any registration statement, prospectus or
preliminary prospectus or any omission or alleged omission to state
therein a material fact required to be stated therein or necessary to
make the statements therein not misleading except insofar as the same
occurs in reliance upon and in conformity with any information furnished
in writing to the Company by GARCO expressly for use therein or is caused
by GARCO's failure to deliver a copy of the registration statement or
prospectus or any amendments or supplements thereto after the Company has
furnished GARCO with copies of the same.
8.2. INDEMNIFICATION BY GARCO. In connection with any registration
statement in which GARCO is participating, GARCO will furnish to the
Company in writing such information as is reasonably requested by the
Company for use in such registration statement or prospectus and will
indemnify, to the extent permitted by law, the Company, its directors and
officers and each person who controls the Company (within the meaning of
the Securities Act) against any losses, claims, damages, liabilities and
expenses arising out of or resulting from any untrue or alleged untrue
statement of material fact or any omission or alleged omission of a
material fact required to be stated in the registration statement or
prospectus or any amendment thereof or supplement thereto or necessary to
make the statements therein not misleading, but only to the extent that
such untrue statement or omission or such alleged untrue statement or
alleged omission occurs in reliance upon and in conformity with
information so furnished in writing by GARCO specifically for use in the
registration statement.
8.3. PROCEDURES AS TO INDEMNIFICATION. Any person entitled to
indemnification hereunder shall (i) give prompt notice to the
indemnifying party of any claim with respect to which it may seek
indemnification and (ii) unless in such indemnified party's reasonable
judgment a conflict of interest between such indemnified and indemnifying
parties may exist with respect to such claim, permit such indemnifying
party to assume the defense of such claim with counsel reasonable
satisfactory to the indemnified party. If such defense is assumed, the
indemnifying party will not be subject to any liability for any
settlement made without its consent (but such consent will not be
unreasonably withheld). An indemnifying party 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 party with respect to such claim, unless
in the reasonable judgment of any indemnified party a conflict of
interest may exist between such indemnified party and any other of such
indemnified parties with respect to such claim.
8.4. CONTRIBUTION. If the indemnification provided for in this Section 8
is held by a court of competent jurisdiction to be unavailable to an
indemnified party with respect to any loss, liability, claim, damage, or
expense referred to therein, then the indemnifying party, in lieu of
indemnifying such indemnified party hereunder, shall contribute to the
amount paid or payable by such indemnified party as a result of such
loss, liability, claim, damage, or expense in such proportion as is
appropriate to reflect the relative fault of the indemnifying party on
the one hand and of the indemnified party on the other in connection with
the statements or omissions that resulted in such loss, liability, claim,
damage, or expense (including legal fees or expenses) as well as any
other relevant equitable considerations. The relative fault of the
indemnifying party and of the indemnified party shall be determined by
reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission to state a material fact
relates to information supplied by the indemnifying party or by the
indemnified party and the parties' relative intent, knowledge, access to
information, and opportunity to correct or prevent such statement or
omission. The Company and each holder of Registrable Securities agree
that it would not be just and equitable if contribution pursuant to this
Section 8.4 were determined by PRO RATA allocation or by any other method
of allocation which does not take into account the equitable
considerations referred to in the immediately preceding paragraph.
Notwithstanding the provisions of this Section 8, an indemnified holder
shall not be required to contribute any amount in excess of the net
proceeds received by the indemnified holder from the sale of the
Registrable Securities. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the 1933 Act) shall be entitled
to contribution from any person who was not guilty of such fraudulent
misrepresentation.
9. CONDITION TO THE COMPANY'S OBLIGATIONS
In connection with an underwritten offering, it shall be a condition to
the Company's obligations to include Registrable Securities on behalf of
GARCO that the underwriters agree to indemnify the Company, its directors
and officers and each person who controls the Company (within the meaning
of the Securities Act) against any losses, claims, damages, liabilities
and expenses arising out of or resulting from any untrue or alleged
untrue statement of material fact or any omission or alleged omission of
a material fact required to be stated in the registration statement or
prospectus or any amendment thereof or supplement thereto or necessary to
make the statements therein not misleading, but only to the extent that
such untrue statement or omission or such alleged untrue statement or
alleged omission is contained in information furnished in writing by such
underwriters on their own behalf specifically for use in preparing the
registration statement.
10. FORM S-3 AND RULE 144
10.1. AVAILABILITY OF SHORT FORM. The Company represents and warrants
that it meets and will use its best efforts to continue to meet the
requirements which must be met by the Company in order for the
Registrable Securities to be registered in a Demand Registration on Form
S-3 under the Securities Act or any comparable or successor form or
forms; and the Company further represents and warrants that it has
registered the Common Stock and will use its best efforts to register any
other Registrable Securities and maintain the registration of any
securities registered under the Securities Exchange Act of 1934 in
accordance with the provisions of that Act.
10.2. CONDITIONS OF RULE 144. The Company represents and warrants that
it satisfies and will use its best efforts to continue to satisfy the
conditions set forth in Rule 144 under the Securities Act which must be
satisfied by an issuer in order for a holder of restricted securities to
sell such securities under the provisions of such rule, including the
timely filing of all reports required to be filed under the Securities
Exchange Act of 1934, as amended.
11. DEFINITIONS
11.1. REGISTRABLE SECURITIES. The term "REGISTRABLE SECURITIES" means
any common stock of the Company issued or issuable upon exercise of any
convertible notes, warrant, or similar instruments and any securities
issued or to be issued with respect to such securities by way of a stock
dividend or stock split or in connection with a combination of shares,
recapitalization, merger, consolidation or other reorganization. As to
any particular Registrable Securities, such securities will cease to be
Registrable Securities when they have been (i) effectively registered
under the Securities Act or disposed of in accordance with the
registration statement covering them or (ii) transferred pursuant to Rule
144 under the Securities Act (or any similar rule then in force).
11.2. REGISTRATION EXPENSES. The term "REGISTRATION EXPENSES" means all
expenses incident to the Company's performance of or compliance with this
Agreement, including without limitation all registration and filing fees,
fees and expenses of compliance with securities or blue sky laws,
printing expenses, messenger and delivery expenses, expenses and fees for
listing the securities to be registered on exchanges or trading system on
which similar securities issued by the Company are then listed or
included, and fees and disbursements of counsel for the Company.
11.3. RESTRICTED FORM. The term "RESTRICTED FORM" shall mean a form of
registration statement under the Securities Act which imposes for its use
a limitation on the maximum value or number of securities to be included
therein.
11.4. SECURITIES ACT. The term "SECURITIES ACT" shall mean the
Securities Act of 1933, as amended.
11.5. UNDERWRITING COMMISSIONS. The term "UNDERWRITING COMMISSIONS"
means all underwriting discounts or commissions relating to the sale of
securities of the Company, but excludes any expenses reimbursed to
underwriters.
12. MISCELLANEOUS
12.1. NOTICES. Any notices required hereunder shall be sent by
certified or registered mail, and shall be addressed to the address of
the Company's corporate headquartered in the case of any notice to the
Company, and until changed by notice to the Company, to GARCO at 11825
North Pennsylvania Street, Carmel, Indiana 46032, Attention Lawrence W.
Inlow.
12.2. AMENDMENTS AND WAIVERS. The provisions of this Agreement may be
amended and the Company may take any action herein prohibited, or omit to
perform any act herein required to be performed by it, if the Company has
obtained the written consent of GARCO.
12.3. SUCCESSORS AND ASSIGNS. All covenants and agreements in this
Agreement by or on behalf of any of the parties hereto will bind and
inure to the benefit of their respective transferees and successors. The
rights to cause the Company to register Registrable Securities pursuant
to this Agreement shall follow the Note or Converted Stock, and shall be
exercisable by holders of any Note or Converted Stock including any
transferees of the Note or Converted Stock.
12.4. GOVERNING LAW. All questions concerning the construction,
validity and interpretation of this Agreement will be governed by the law
of the State of Indiana.
12.5. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be considered to be an original
instrument and to be effective as of the date first written above.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
STANDARD MANAGEMENT CORPORATION
By /s/ John J. Quinn
Name: John J. Quinn
Title: Executive Vice President
and Chief Financial Officer
GREAT AMERICAN RESERVE
INSURANCE COMPANY
By /s/ Lawrence W. Inlow
Name: Lawrence W. Inlow
Title: Executive Vice President
SECOND AMENDMENT TO $80,000 PROMISSORY NOTE
ORIGINALLY DUE AUGUST 29, 1996
$42,834.61 DUE DATE: AUGUST 29, 1996
REVISED DUE DATE: DECEMBER 15, 1996
On or before the 15th day of December, 1996, for value received, the
undersigned promises to pay to the order of Standard Management Corporation
the sum of Forty-Two Thousand Eight Hundred Thirty-Four Dollars and Sixty-
One Cents ($42,834.61), at 9100 Keystone Crossing, Indianapolis, Indiana
46240, or at such other place as the holder hereof may direct in writing,
with interest thereon at the rate of Prime plus One Percent (1%) per annum
as established from time to time by Bank One Indianapolis, N.A., 111
Monument Circle, Indianapolis, Indiana, 46204, from the date of this
instrument until maturity, and Prime plus One Percent (1%) per annum after
maturity until paid, with attorneys' fees and costs of collection, and
without relief from valuation and appraisement laws.
This note shall be payable in two installments at the rate of Twenty
Thousand Dollars ($20,000) each on October 15, 1996 and December 15, 1996.
Each installment payment shall be first credited to accrued interest and
the balance to principal. The entire unpaid principal balance and accrued
interest shall be payable on December 15, 1996.
The maker(s) and indorser(s) jointly and severally waive demand,
presentment, protest, notice of protest and notice of nonpayment or
dishonor of this note, and each of them consents to extensions of the time
of payment of this note.
No delay or omission on the part of the holder hereof in the exercise
of any right or remedy shall operate as a waiver thereof, and no single or
partial exercise by the holder hereof of any right or remedy shall preclude
other or further exercise thereof or of any other right or remedy.
Signed and delivered at Indianapolis, Indiana this 8th day of October,
1996.
Signature: /S/ RAMESH H. BHAT
Printed: Ramesh H. Bhat
Address: 2710 Lake Avenue
Ft. Wayne, Indiana 46805
AMENDED AND RESTATED
REVOLVING LINE OF CREDIT AGREEMENT
AMENDED AND RESTATED REVOLVING LINE OF CREDIT AGREEMENT dated as
of November 8, 1996, between STANDARD MANAGEMENT CORPORATION, an
Indiana corporation (the "Borrower"), and FLEET NATIONAL BANK, a national
banking association (formerly known as Shawmut Bank Connecticut, National
Association, the "Bank").
W I T N E S S E T H :
WHEREAS, the Borrower and Shawmut Bank Connecticut, National
Association entered into a Revolving Line of Credit Agreement dated as of
November 21, 1995 (the "Existing Credit Agreement") pursuant to which the
Borrower was indebted to Shawmut Bank Connecticut, National Association
up to the principal amount of $6,000,000; and
WHEREAS, on or about December 1, 1995, Shawmut Bank Connecticut,
National Association merged with the Bank, and the Bank succeeded to all
of Shawmut Bank Connecticut, National Association's right, title and
interest in the Existing Credit Agreement, the loan made thereunder and
the other loan documents executed in connection therewith; and
WHEREAS, the Borrower has requested that the Bank increase the
funds available to the Borrower under the Existing Credit Agreement up to
the principal amount of $16,000,000; and
WHEREAS, it is a condition precedent to the Bank making said
increase available to the Borrower that the Existing Credit Agreement be
amended and restated in its entirety as set forth herein; and
WHEREAS, the Borrower desires that the Bank make the increase and
extend credit as provided herein and the Bank is prepared to extend such
credit.
NOW, THEREFORE, in consideration of the premises and for other
good and valuable consideration the receipt and adequacy of which is
hereby acknowledged, the parties hereto hereby agree as follows:
ARTICLE I.
DEFINITIONS AND ACCOUNTING TERMS
SECTION
1 DEFINED TERMS. As used in this Agreement, the following terms have
the following meanings (terms defined in the singular to have the same
meaning when used in the plural and vice versa):
"AFFILIATE" means any Person (i) which directly or indirectly
controls, or is controlled by, or is under common control with the
Borrower or any Subsidiary of the Borrower; (ii) which directly or
indirectly beneficially owns or holds ten percent (10%) or more of any
class of voting stock of the Borrower or any Subsidiary of the Borrower;
or (iii) ten percent (10%) or more of the voting stock of which is
directly or indirectly beneficially owned or held by the Borrower or any
Subsidiary of the Borrower. The term "control" means the possession,
directly or indirectly, of the power to direct or cause the direction of
the management and policies of a Person, whether through the ownership of
voting securities, by contract, or otherwise.
"AGREEMENT" means this Amended and Restated Revolving Line of
Credit Agreement, as renewed, extended, amended, supplemented, or
modified from time to time.
"ANNUAL STATEMENT" shall mean the annual financial statement of
the Borrower or any Subsidiary as required to be filed with Indiana State
Insurance Department or other applicable authority, together with all
exhibits or schedules filed therewith, prepared in conformity with SAP.
"BANK" shall have the meaning assigned to such term in the
introduction to this Agreement.
"BASE RATE" means the rate of interest announced by the Bank from
time to time as its "Base Rate".
"BORROWER" shall have the meaning assigned to such term in the
introduction to this Agreement.
"BUSINESS DAY" means (i) with respect to Eurodollar Loans, any
day on which commercial banks are open for domestic and international
business, including dealings in Dollar deposits in London, England, New
York, New York and Hartford, Connecticut or (ii) with respect to Domestic
Loans, any day other than a Saturday, Sunday, or other day on which
commercial banks in Hartford, Connecticut are authorized or required to
close under the laws of the State of Connecticut or under applicable
federal law.
"CAPITAL LEASES" means all leases which have been or should be
capitalized on the books of the lessee in accordance with GAAP, together
with any other lease which is in substance a financing lease.
"CLOSING FEE" shall have the meaning assigned to such term in
Section 2.4.
"CODE" means the Internal Revenue Code of 1986, as amended from
time to time, or any successor or superseding tax laws of the United
States of America together with all regulations promulgated thereunder.
"COMMITMENT" shall have the meaning assigned to such term in
Section 2.1 of this Agreement.
"DEBT" means (i) all indebtedness or liability for borrowed money
or for the deferred purchase price of property or services (excluding
trade obligations incurred in the ordinary course of business which are
not outstanding more than ninety days from the date of invoice thereof);
(ii) all obligations as lessee under Capital Leases; (iii) all current
liabilities in respect of unfunded vested benefits under any Plans;
(iv) all obligations under letters of credit issued for the account of
any Person; (v) all obligations arising under acceptance facilities;
(vi) all guaranties, endorsements (other than for collection or deposit
in the ordinary course of business), and other contingent obligations to
purchase, to provide funds for payment, to supply funds to invest in any
Person, or otherwise to assure a creditor against loss; (vii) all
obligations secured by any lien on Property, whether or not the
obligations have been assumed by the owner thereof; (viii) all other
items of indebtedness which in accordance with GAAP would be included in
determining total indebtedness as shown on the liability side of a
balance sheet at the date as of which indebtedness is to be determined;
and (ix) all indebtedness or liability of the Borrower to Conseco, Inc.
with respect to a certain subordinated note more particularly described
in Section 5.1(8) herein. Notwithstanding the foregoing, the term "Debt"
shall not include (i) any indebtedness or liability associated with the
issuance in 1996 by the Borrower of 300,000 shares of Class S preferred
stock to various persons in settlement of a certain class action against
the Borrower, the details of which have been disclosed to the Bank, (ii)
any intercompany debt existing on the date hereof between the Borrower
and Standard Management International, S.A., or (iii) any indebtedness
existing on the date hereof between Standard Life and Standard
Development, L.L.C.
"DEFAULT" means any of the events specified in Section 10.1 of
this Agreement, whether or not any requirement for the giving of notice,
the lapse of time, or both, or any other condition, has been satisfied.
"DOLLAR" and the sign "$" shall mean lawful money of the United
States of America.
"DOMESTIC LOAN" shall mean a Revolving Credit Loan or that
portion of the Revolving Credit Loan which bears interest based on the
Base Rate.
"EBIT" means, for any Person, for any period earnings before
Interest Expense, taxes and extraordinary items for such Person
determined in accordance with GAAP.
"ENVIRONMENTAL LAWS" means any and all past and current federal,
state, local or municipal laws, rules, orders, regulations, statutes,
ordinances, codes, decrees or requirements of any Governmental Authority
regulating, relating to or imposing obligations, liability or standards
of conduct concerning environmental protection matters, including without
limitation, Hazardous Materials, as now or may at any time hereafter be
in effect.
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended or supplemented from time to time, and the rules,
regulations and published interpretations issued in connection therewith.
"ERISA AFFILIATE" means any trade or business (whether or not
incorporated) which, together with the Borrower, would be treated as a
single employer under Section 4001 of ERISA.
"EURODOLLAR LOAN" shall mean a Revolving Credit Loan or that
portion of the Revolving Credit Loan which bears interest based on LIBOR.
"EVENT OF DEFAULT" means any of the events specified in
Section 10.1 of this Agreement, provided that any requirement for the
giving of notice, the lapse of time, or both, or any other condition, has
been satisfied.
"FIRST WARRANT" shall have the meaning assigned to such term in
Section 2.12(a) herein.
"FIXED CHARGE COVERAGE RATIO" means, as at any date and
calculated on a consolidated basis, the ratio of (a) the sum of allowable
dividends of the Borrower's insurance Subsidiaries and the Borrower's and
its Subsidiaries' EBIT (calculated for the immediately preceding four
fiscal quarters) to (b) the Borrower's and its Subsidiaries' Interest
Expense plus the amount of principal installments and other principal
maturities of Debt of the Borrower and its Subsidiaries (calculated for
the four fiscal quarters immediately following such date).
"GAAP" means, as to any Person, such accounting practice as, in
the opinion of the independent accountants of recognized national
standing regularly retained by such Person and acceptable to the Bank,
conforms at the time to generally accepted accounting principles,
consistently applied. "Generally accepted accounting principles" means
those principles and practices (i) which are recognized as such by the
Financial Accounting Standards Board, (ii) which are applied for all
periods after the date hereof in a manner consistent with the manner in
which such principles and practices were applied to the most recent
financial statements of such Person furnished to the Bank, and
(iii) which are consistently applied for all periods after the date
hereof so as to reflect properly the financial condition, and results of
operations and changes in financial position, of such Person. If any
change in any accounting principle or practice is required by the
Financial Accounting Standards Board in order for such principle or
practice to continue as to generally accepted accounting principle or
practice, all reports and financial statements required hereunder may be
prepared in accordance with such change only after written notice of such
change is given to the Bank, or only if such change is fully disclosed in
such Person's financial statements.
"GOVERNMENTAL AUTHORITY" means any nation or government, any
state or other political subdivision thereof and any entity exercising
executive, legislative, judicial, regulatory or administrative functions
of or pertaining to government.
"HAZARDOUS MATERIALS" means, any hazardous materials, hazardous
wastes, hazardous constituents, hazardous or toxic substances, petroleum
products (including crude oil or any fraction thereof), defined or
regulated as such in or under any Environmental Law.
"INTEREST EXPENSE" shall mean, with respect to any Person, for
any Period, the sum, for such Person in accordance with GAAP, of (a) all
interest on Debt that is accrued as an expense during such period
(including, without limitation, imputed interest on Capital Lease
obligations), plus (b) all amounts paid, accrued or amortized as an
expense during such period in respect of interest rate protection
agreements, minus (c) all amounts received or accrued as income during
such period in respect of interest rate protection agreements.
"LIBOR" shall mean for any Eurodollar Loan for the then current
Interest Period relating thereto, the rate per annum determined pursuant
to the following formula:
LIBOR = LIBOR BASE RATE
1 - Reserve Percentage
"LIBOR BASE RATE" shall
mean the rate at which
Dollar deposits
approximately equal in
principal amount to such
Eurodollar Loan and for a
maturity approximately
equal to such Interest
Period are offered by major
banks to major banks in
immediately available funds
in the London interbank
market for Dollar deposits
three Business Days prior
to the first day of such
Interest Period.
"RESERVE PERCENTAGE" shall
mean the maximum marginal
percentage as prescribed by
the Board of Governors of
the Federal Reserve System
(or any successor) for
determining the reserve
requirement for Shawmut
Bank Connecticut, National
Association in respect of
Eurodollar deposits having
a maturity equal to the
Interest Period as the
Borrower may elect pursuant
to Sections 3.1 and 3.2
hereof.
"INSURANCE CODE" shall mean the Insurance Code of the State of
Indiana and any other applicable jurisdictions and any successor
statute(s) of similar import, together with the regulations thereunder,
as amended or otherwise modified and in effect from time to time.
References to sections of the Insurance Code shall be construed to also
refer to successor sections.
"INTEREST PERIOD" shall mean the period provided for any
Eurodollar Loan pursuant to Section 3.2.
"LICENSE(S)" shall have the meaning assigned to such term in
Section 7.8 of this Agreement.
"LIEN" means any mortgage, deed of trust, pledge, security
interest, hypothecation, assignment, deposit arrangement, encumbrance,
lien (statutory or other), or preference, priority, or other security
agreement or preferential arrangement, charge, or encumbrance of any kind
or nature whatsoever (including, without limitation, any conditional sale
or other title retention agreement, any financing lease having
substantially the same economic effect as any of the foregoing, and the
filing of any financing statement under the Uniform Commercial Code or
comparable law of any jurisdiction to evidence any of the foregoing).
"LOAN(S)" means the Revolving Credit Loans.
"LOAN DOCUMENTS" means this Agreement, the Note, the Pledge
Agreement, the Warrants, Registration Rights Agreement, and all other
agreements, instruments and documents related to or delivered by the
Borrower or any Subsidiary in connection with any of the foregoing or the
Loans.
"MULTIEMPLOYER PLAN" means a Plan described in Section 4001(a)(3)
of ERISA which covers employees of the Borrower or any ERISA Affiliate.
"NAIC" means the National Association of Insurance Commissioners
and any entity succeeding to any or all of its functions.
"NON-USE FEE" shall have the meaning assigned to such term in
Section 2.5.
"NOTE" shall have the meaning assigned to such term in Section
2.6 of this Agreement.
"PAYMENT OFFICE" means the office of the Bank at 777 Main
Street, Hartford, Connecticut 06115.
"PBGC" means the Pension Benefit Guaranty Corporation or any
entity succeeding to any or all of its functions under ERISA.
"PERSON" means and includes any natural person, partnership,
corporation, business trust, joint stock company, trust, unincorporated
association, joint venture, governmental authority, agency or political
subdivision thereof, or other entity or organization of whatever nature,
whether or not a legal entity.
"PLAN" means any employee benefit or other plan established,
maintained, or to which contributions have been made by the Borrower or
any ERISA Affiliate.
"PLEDGE AGREEMENT" means the Amended and Restated Pledge
Agreement in the form of EXHIBIT B to be delivered by the Borrower under
the terms of this Agreement.
"PLEDGED SHARES" means one hundred percent (100%) of the
shares of common stock issued by each of Standard Life and Standard
Marketing owned by the Borrower, which shares have been pledged by the
Borrower to the Bank under the terms of the Pledge Agreement.
"PROHIBITED TRANSACTION" means any transaction set forth in
Section 406 of ERISA or Section 4975 of the Code.
"PROPERTY" means any interest in any kind of property or
asset, whether real, personal or mixed, or tangible or intangible.
"QUARTERLY PAYMENT DATE" means the first Business Day
following the end of each March, June, September and December of each
calendar year.
"REAL PROPERTIES" shall have the meaning assigned to such
term in Section 6.10 of this Agreement.
"REGISTRATION RIGHTS AGREEMENT" means the registration
rights agreement in the form of Exhibit D to be delivered by the Borrower
under the terms of this Agreement.
"REPORTABLE EVENT" means (i) any of the events set forth in
Sections 4043, 4068 or 4063 of ERISA (ii) any event requiring the
Borrower or any ERISA Affiliate to provide security to a Plan under
Section 401(a) (29) of the Code or (iii) any failure to make payments
required by Section 412(m) of the Code.
"REVOLVING CREDIT LOANS" shall have the meaning assigned to
such term in Section 2.1 of this Agreement.
"SAP" shall mean, as to the Borrower or any Subsidiary, the
statutory accounting practices prescribed or permitted by NAIC and the
insurance commissioner (or other similar authority) in the State of
Indiana and any other applicable jurisdictions, for the preparation of an
annual statement and other financial reports by insurance corporations of
the same type as the Borrower or any such Subsidiary, consistently
applied.
"SECOND WARRANT" shall have the meaning assigned to such
term in Section 2.12(a) herein.
"SHELBY LIFE" means Shelby Life Insurance Company, a
Tennessee corporation.
"STANDARD LIFE" means Standard Life Insurance Company of
Indiana, an Indiana corporation.
"STANDARD MARKETING" means Standard Marketing Corporation,
an Indiana corporation.
"SUBSIDIARY" means, as to any Person, a corporation of which
shares of stock having ordinary voting power (other than stock having
such power only by reason of the happening of a contingency) to elect a
majority of the board of directors or other managers of such corporation
are at the time owned, or the management of which is otherwise
controlled, directly or indirectly, through one or more intermediaries,
or both, by such Person.
"TERMINATION DATE" means (a) November 8, 2003, or (b) such
earlier date as payment of the Loans shall be due (whether by
acceleration or otherwise).
"THIRD WARRANT" shall have the meaning assigned to such term
in Section 2.12(b) herein.
"WARRANTS" means those certain warrants in the form of
Exhibit C delivered by the Borrower to the Bank pursuant to Section 2.12
of this Agreement.
SECTION 1.11834 ACCOUNTING TERMS. All accounting terms not
specifically defined herein shall be construed in accordance with GAAP
consistent with those applied in the preparation of the financial
statements referred to in Section 6.4 of this Agreement, and all
financial data submitted pursuant to this Agreement shall be prepared in
accordance with such principles.
ARTICLE I.
AMOUNT AND TERMS OF THE LOANS
SECTION 1.11834 REVOLVING CREDIT LOANS. The Bank agrees on
the terms and conditions hereinafter set forth, to make loans (the
"Revolving Credit Loans") to the Borrower from time to time during the
period from the date of this Agreement, up to, but not including, the
Termination Date, in an aggregate amount not to exceed at any time
outstanding Sixteen Million Dollars ($16,000,000), as such amount shall
be reduced pursuant to Section 2.2 of this Agreement (the "Commitment").
Each Revolving Credit Loan shall be either a Domestic Loan or a
Eurodollar Loan as the Borrower may elect subject to the provisions of
this Agreement. Within the limits of the Commitment, and subject to the
terms and conditions of this Agreement, the Borrower may borrow, prepay
pursuant to Section 2.8 and 3.4 of this Agreement, and reborrow under
this Section 2.1.
SECTION 2.11834 REDUCTION OF COMMITMENT. (a) The
Commitment shall be reduced to (i) $13,333,334 on November 8, 1998 so
that, for the period beginning November 8, 1998 through November 8,
1999, the Revolving Credit Loans made by the Bank to the Borrower shall
not in the aggregate exceed $13,333,334; (ii) $10,666,668 on November 8,
1999 so that, for the period beginning November 8, 1999 through
November 8, 2000, the Revolving Credit Loans made by the Bank to the
Borrower shall not in the aggregate exceed $10,666, 668; (iii) $8,000,002
on November 8, 2000 so that, for the period beginning November 8,
2000 through November 8, 2001, the Revolving Credit Loans made by the
Bank to the Borrower shall not in the aggregate exceed $8,000,002; (iv)
$5,333,336 on November 8, 2001 so that, for the period beginning
November 8, 2001 through November 8, 2002, the Revolving Credit Loans
made by the Bank to the Borrower shall not in the aggregate exceed
$5,333,336; and (v) $2,666,666 on November 8, 2002, so that, for the
period beginning November 8, 2002 through the Termination Date, the
Revolving Credit Loans made by the Bank to the Borrower shall not in the
aggregate exceed $2,666,666.
(b) The Borrower shall not have any right to terminate in
whole or reduce in part the unused portion of the Commitment.
SECTION 3.11834 NOTICE AND MANNER OF BORROWING.
When the Borrower desires to request Revolving Credit Loans
hereunder: (a) in the case of a Eurodollar Loan, it shall give the Bank
prior notice (which shall be at least three (3) Business Days prior, such
notice to be effective upon receipt by the Bank), confirmed in writing,
specifying the date of the proposed borrowing (which shall be a Business
Day), the amount to be borrowed (which amount shall be in the minimum
amount of $1,000,000 and in integrals of $100,000 above) and the duration
of the first Interest Period therefor; and (b) in the case of a Domestic
Loan, it shall give the Bank prior written or telephonic notice on or
before 11:00 a.m. (Connecticut time) on the date of such borrowing (such
notice to be effective upon receipt by the Bank) of the amount (which
amount, if such Domestic Loan does not utilize the Commitment in full,
shall be in an amount not less than $200,000) and date of the proposed
borrowing (which shall be a Business Day), and if by telephonic notice,
confirmed in writing. Not later than 3:00 p.m. (Connecticut time) on the
date of such Revolving Credit Loan request and upon fulfillment of the
applicable conditions set forth in Article V of this Agreement, the Bank
will make such Revolving Credit Loan available to the Borrower in
immediately available funds by crediting the amount thereof to the
Borrower's account with the Bank.
SECTION 4.11834 CLOSING FEE. The Borrower agrees to pay to
the Bank a closing fee (the "Closing Fee") in an amount equal to $100,000
on the date of this Agreement.
SECTION 5.11834 NON-USE FEE.. The Borrower agrees to pay
to the Bank a non-use fee (the "Non-Use Fee") on the average daily unused
portion of the Commitment then available to the Borrower from the date of
this Agreement until the Termination Date at the rate of one-half of one
percent ( 1/2 of 1%) per annum, based on a year of 360 days for the
actual days elapsed, payable (1) on each Quarterly Payment Date during
the term of the Commitment, commencing on the first Business Day
following the date of this Agreement, and (2) on the Termination Date, or
upon such earlier date as the Commitment shall be terminated.
SECTION 6.11834 COMMITMENT FEE. The Borrower agrees to pay
to the Bank a commitment fee (the "Commitment Fee") on $10,000,000 at the
rate of one-quarter of one percent (1/4 of 1%) per annum, based on a year
of 360 days for the actual days elapsed, payable for the period beginning
on July 18, 1996 and ending on the date hereof .
SECTION 7.11834 THE NOTE. All Revolving Credit Loans made
by the Bank under this Agreement shall be evidenced by, and repaid with
interest in accordance with, a single Amended and Restated Promissory
Note of the Borrower in substantially the form of EXHIBIT A of this
Agreement, duly completed, in the principal amount of up to $16,000,000,
dated the date of this Agreement, payable to the Bank (the "Note"), and
maturing as to principal on the Termination Date. The Bank is hereby
authorized by the Borrower to endorse on the schedule attached to the
Note the amount of each Revolving Credit Loan and of each payment of
principal received by the Bank on account of the Revolving Credit Loans,
which endorsement shall, in the absence of manifest error, be conclusive
as to the outstanding balance of the Revolving Credit Loans made by the
Bank; provided, however, that the failure to make such notation with
respect to any Revolving Loan or payment shall not limit or otherwise
affect the obligations of the Borrower under this Agreement or the Note.
SECTION 8.11834 METHOD OF PAYMENT. The Borrower shall make
each payment under this Agreement and under the Note not later than
12:00 noon (Connecticut time) on the date when due in lawful money of the
United States to the Bank at the Payment Office in immediately available
funds. The Borrower hereby authorizes the Bank to charge from time to
time against any account of the Borrower with the Bank, including,
without limitation, account #50464080, any principal and interest
payments and any other amount so due under this Agreement or the Note.
Whenever any payment to be made under this Agreement or under the Note
shall be stated to be due on any day which is not a Business Day (except
with respect to any Eurodollar Loan), such payment shall be made on the
next succeeding Business Day, and additional interest and Commitment Fee
shall accrue and be payable for the period of such extension.
SECTION 9.11834 MANDATORY PREPAYMENTS. (a) The Borrower
must immediately prepay following each reduction of the Commitment, as
specifically set forth in Section 2.2 herein, the amount by which the
aggregate principal amount of all outstanding Loans exceeds the
Commitment then available, together with accrued interest to the date of
such prepayment on the principal amount prepaid. If, at any time, the
Bank determines that the aggregate principal amount of outstanding Loans
exceeds the then available Commitment, the Borrower shall, upon demand,
immediately prepay an amount equal to such excess, together with accrued
interest to the date of such prepayment on the principal amount prepaid.
(b) The Borrower must also immediately prepay any losses or
expenses incurred by the Bank for which the Borrower has agreed to
indemnify the Bank pursuant to Section 4.4 herein.
(c) Each such prepayment in accordance with paragraph (a)
above shall be applied, first, to any expenses incurred by the Bank;
second, to any interest due on the amount prepaid; third, to the
outstanding principal amount of the Domestic Loans; and, last, to the
outstanding principal amount of Eurodollar Loans, in each case in such
manner as the Bank in its discretion shall determine.
SECTION 10.11834 [Intentionally Omitted]
SECTION 11.11834 USE OF PROCEEDS; SUBLIMIT. The entire
proceeds of the Loans hereunder shall be used by the Borrower for surplus
and acquisition financing purposes only and, specifically, shall be used
by the Borrower to finance the acquisition of Shelby Life from Delta Life
and Annuity Company, provided, however, that, in addition, up to
$4,000,000 of the proceeds of the Loans may be used by the Borrower for
repurchases of (a) preferred stock of the Borrower which is below book
value or (b) common stock of the Borrower from the Borrower's Subsidiary,
Standard Life. The Borrower will not, directly or indirectly, use any
part of such proceeds for the purpose of purchasing or carrying any
margin stock within the meaning of Regulation U of the Board of Governors
of the Federal Reserve System, or to extend credit to any Person for the
purpose of purchasing or carrying any such margin stock.
SECTION 12.11834 SECURITY. Payment of the Loans shall be
secured by a pledge made by the Borrower of 100% of the outstanding
shares of common stock and preferred stock, if any, of two of the
Borrower's Subsidiaries, Standard Life and Standard Marketing, all of
which stock is owned by the Borrower.
SECTION 13.11834 WARRANTS. (a) In order to induce the
Bank to make the Loans to the Borrower, the Borrower delivered to the
Bank, on November 21, 1995, (i) a Warrant entitling the Bank to subscribe
for and purchase 12,000 shares of common stock of the Borrower on the
date of this Agreement (said Warrant for 12,000 shares of common stock
being referred to herein as the "First Warrant") and (ii) a Warrant
entitling the Bank to subscribe for and purchase 18,000 shares of common
stock of the Borrower on the date of this Agreement (said Warrant for
18,000 shares of common stock being referred to herein as the "Second
Warrant"). The First Warrant is exercisable by the Bank immediately or
at any time prior to November 21, 2002. Notwithstanding anything to the
contrary set forth in the Second Warrant or the Registration Rights
Agreement, the Bank is only entitled to exercise the Second Warrant for
shares of common stock of the Borrower to the extent that the Bank has
made advances to the Borrower under the terms of this Agreement as
follows: for each $1,000,000 of the Commitment borrowed or re-borrowed
by the Borrower from the Bank under the terms hereof, the Bank is
entitled to exercise the right to purchase 3,000 shares of common stock
of the Borrower under the terms of the Second Warrant on or prior to
November 21, 2002 (i.e., if the Bank makes an advance or advances to the
Borrower aggregating $1,000,000, the Bank has the immediate right under
the Second Warrant to purchase 3,000 shares of common stock of the
Borrower following the making of such advance(s); if the Bank makes an
advance or advances to the Borrower aggregating $2,000,000, the Bank has
the immediate right under the Second Warrant to purchase 6,000 shares of
common stock of the Borrower following the making of such advance(s); if
the Bank makes an advance or advances to the Borrower aggregating
$3,000,000, the Bank has the immediate right under the Second Warrant to
purchase 9,000 shares of common stock of the Borrower following the
making of such advance(s); if the Bank makes an advance or advances to
the Borrower aggregating $4,000,000, the Bank has the immediate right
under the Second Warrant to purchase 12,000 shares of common stock of the
Borrower following the making of such advance(s); if the Bank makes an
advance or advances to the Borrower aggregating $5,000,000, the Bank has
the immediate right under the Second Warrant to purchase 15,000 shares of
common stock of the Borrower following the making of such advance(s);
and, if the Bank makes an advance or advances to the Borrower aggregating
$6,000,000, the Bank has the immediate right under the Second Warrant to
purchase 18,000 shares of common stock of the Borrower following the
making of such advance(s)). The Bank acknowledges that the maximum
number of shares of common stock of the Borrower which the Bank shall be
entitled to purchase under the First Warrant and the Second Warrant is
30,000.
(b) The Borrower acknowledges that, as of the date hereof,
the Bank has made advances to the Borrower aggregating $5,600,000, and,
therefore, as of the date hereof, has the immediate right under the
Second Warrant to purchase 15,000 shares of common stock of the Borrower.
On or about the date hereof, the Bank contemplates that Loans in the
aggregate amount in excess of $6,000,000 will be advanced to the
Borrower. Notwithstanding the foregoing, to the extent that Loans in the
aggregate amount of $6,000,000 are not advanced by the Bank to the
Borrower under the terms of this Agreement and the Bank is not entitled
to purchase a total of 18,000 shares of common stock of the Borrower
under the Second Warrant by such date which is 10 days prior to November
21, 2002, the Bank shall have the immediate right under the Second
Warrant on any such date which is 10 days prior to and including November
21, 2002 to purchase such number of shares of common stock of the
Borrower which is equal to the number of dollars advanced by the Bank to
the Borrower, but only up to and including $6,000,000, under the terms of
this Agreement multiplied by .003.
(c) In order further to induce the Bank to make the Loans
to the Borrower, the Borrower delivered to the Bank on or about July 18,
1996, a Warrant entitling the Bank to subscribe for and purchase 30,000
additional shares of common stock of the Borrower on the date of this
Agreement (said Warrant for 30,000 additional shares of common stock
being referred to herein as the "Third Warrant"). The Third Warrant
shall be exercisable by the Bank immediately or at any time prior to July
18, 2003.
(d) In addition to the other rights of the Bank more
particularly described in the Warrants, the Bank shall at any time have
the right to either (i) receive from the Borrower, for each of the shares
of Common Stock purchased under the Warrants, a payout in cash equal to
the spread between (a) the Current Market Price (as defined in the
Warrants) of the shares of common stock of the Borrower and (b) the
Current Warrant Price (as defined in the Warrants) for the shares of
common stock of the Borrower, or (ii) request the Borrower to register
the shares subscribed for and purchased under the Warrants, subject to
the terms and conditions of the Warrants and the Registration Rights
Agreement, provided, however, that the Borrower may, at its sole option,
elect to make a cash payout as calculated in (i) above to the Bank in
lieu of proceeding with the registration of such shares.
ARTICLE I.
INTEREST, INTEREST PERIODS, PREPAYMENTS
SECTION 1.11834 INTEREST RATE.
a. INTEREST RATES. Subject to the provisions of this
Agreement, each Revolving Credit Loan shall bear interest at a rate per
annum as the Borrower may elect equal to (1) in the case of Domestic
Loans at the Base Rate plus one (1) percentage point; or (2) in the case
of Eurodollar Loans at LIBOR plus three and one-quarter (3 1/4 ) percent
age points for Interest Periods of one, two, three or six months as the
Borrower may elect.
b. PAYMENT OF INTEREST, DEFAULT RATES. Interest on
each Eurodollar Loan shall be payable at the Payment Office on the last
Business Day of each Interest Period. Interest on each Domestic Loan
shall be payable at the Payment Office on each Quarterly Payment Date
during the term of this Agreement. In addition, interest on any
Revolving Credit Loans shall be payable on the date of any prepayment (on
the amount prepaid) and at maturity (whether by acceleration or
otherwise). Any principal amount not paid within three (3) Business Days
after the due date (at maturity, by acceleration, or otherwise) shall
bear interest thereafter until paid in full, payable on demand, at a rate
which shall be two percent (2%) above the rate which would otherwise be
applicable. Interest shall be calculated on the basis of a 360 day year
for the actual number of days involved and the interest rate with respect
to any Domestic Loan shall change on the effective date of any change in
the Base Rate without notice or demand of any kind.
1.11834 INTEREST PERIODS. Each Interest Period of a
Eurodollar Loan shall commence on the date such Eurodollar Loan is made
and shall end on the date as the Borrower may elect as set forth in
Section 3.1 provided that:
a. any Interest Period which would otherwise end on a
day which is not a Business Day shall be the next preceding Business Day;
b. each Interest Period which commences during an
Interest Period in effect for outstanding Eurodollar Loans shall end on
the last day of such Interest Period then in effect for loans of the same
type;
c. all Interest Periods which commence on the same
date shall end on the same date;
d. each Interest Period which commences before, and
would otherwise end after, the Termination Date, shall end on the
Termination Date; and
e. any Interest Period which begins on a day for
which there is no numerically corresponding day in the calendar month
during which such Interest Period is to end, shall (subject to clause (a)
above) end on the last day of such calendar month.
The Borrower shall elect the initial Interest Period applicable to a
Eurodollar Loan by its notice of borrowing given to the Bank pursuant to
Section 2.3. The Borrower shall elect the duration of each succeeding
Interest Period by giving irrevocable written notice to the Bank of such
duration not less than three (3) Business Days prior to the last day of
the then current Interest Period applicable thereto. If the Bank does
not receive timely notice of the Interest Period elected by the Borrower,
the Borrower shall be deemed to have elected to convert to Domestic Loan
subject to Section 3.3 herein below.
3.3 CHANGE IN INTEREST RATE OPTION. Provided that no Event
of Default shall have occurred and is continuing, and no event, which
with the passage of time or the giving of notice or either, shall be
existing, the Borrower, may, on any Business Day, opt to change any
outstanding Eurodollar Loan or Domestic Loan into a Revolving Credit Loan
of another type of the same aggregate principal amount, provided such
aggregate principal amount meets the minimum borrowing amount
requirements of Section 2.3(a) hereof, and provided further, that any
such change of a Eurodollar Loan to a Domestic Loan shall be made only on
the last Business Day of the then current Interest Period applicable to
such Eurodollar Loan. If the Borrower desires to exercise such option,
it shall give the Bank not less than three (3) Business Days' prior
written notice, specifying the date of such change, the Revolving Credit
Loans to be converted and if the option is to change from a Domestic Loan
to a Eurodollar Loan, the duration of the first Interest Period therefor.
3.4 PREPAYMENTS. At its option and, in the case of a
Domestic Loan, upon the giving of prior written or telephone notice on or
before 1:00 p.m. (Connecticut time) on the date of such prepayment (such
notice to be effective upon receipt by the Bank, upon three (3) Business
Days' prior notice confirmed in writing, the Borrower may prepay any
Domestic Loans or Eurodollar Loans in whole or in part from time to time,
without premium or penalty, but with accrued interest on the principal
being prepaid to the date of such prepayment provided that: (i) each
partial prepayment shall be in the amount of $100,000 or in integral
multiples thereof; and (ii) a Eurodollar Loan may only be prepaid on the
last Business Day of the then current Interest Period with respect
thereto. In the event that any prepayment of a Eurodollar Loan is
required or permitted on a date other than the last Business Day of the
then current Interest Period with respect thereto, the Borrower shall
indemnify the Bank therefor in accordance with Section 4.4 hereof.
ARTICLE I.
FUNDING AND YIELD PROTECTION
SECTION 1.11834 ILLEGALITY. Notwithstanding any other
provisions hereof, if any applicable law, treaty, regulation or
directive, or any change therein or in the interpretation or application
thereof shall make it unlawful for the Bank to make or maintain
Eurodollar Loans, the obligation of the Bank hereunder to make Eurodollar
Loans shall forthwith be cancelled and the Borrower shall, if any such
Revolving Credit Loans are then outstanding, promptly upon request from
the Bank, either pay all such Eurodollar Loans or convert such Eurodollar
Loans to Domestic Loans. If any such payment or conversion of the
Eurodollar Loans is made on a day that is not the last Business Day of
the then current Interest Period applicable to such Eurodollar Loans the
Borrower shall pay the Bank, upon the Bank's request, such amount or
amounts as may be necessary to compensate the Bank for any loss or
expenses sustained or incurred by the Bank in respect of the Eurodollar
Loans as a result of such payment or conversion, including (but not
limited to), any interest or other amounts payable by the Bank to lenders
of funds obtained by the Bank in order to make or maintain such Revolving
Credit Loans. The Bank shall prepare a certificate as to any additional
amounts payable pursuant to the foregoing sentence which certificate
shall be submitted by the Bank to the Borrower and shall be conclusive
absent manifest error.
SECTION 2.11834 INCREASED COSTS. In the event that
applicable law, treaty or governmental regulation, or any change therein
or in the interpretation or application thereof, or compliance by the
Bank with any request or directive (whether or not having the force of
law) from any central bank or other financial, monetary or other
authority, shall:
a. subject to the Bank (or a Bank affiliate) to any
tax of any kind whatsoever with respect to the Agreement, the Commitment,
the Closing Fee, the Non-Use Fee or any Loan or change the basis of
taxation of payments to the Bank (or a Bank affiliate) of principal,
fees, interest or any other amount payable hereunder (except for changes
in the rate of tax on the overall net income of the Bank);
b. impose, modify or hold applicable any reserve,
special deposit or similar requirements against assets held by, or
deposits in or for the account of the Commitment, the Loans, the advances
or any loan or any other loans by, or other commitments to extend credit
or other credit extended or committed now or hereafter by the Bank (or a
Bank affiliate), including (without limitation) pursuant to Regulations
of the Board of Governors of the Federal Reserve System; or
c. impose on the Bank (or a Bank affiliate) any other
condition with respect to this Agreement, the Commitment, the Commitment
Fee, the Non-Use Fee, the Note, or any Loan hereunder;
and the result of any of the foregoing is to increase the
cost to the Bank (or a Bank affiliate) of making, renewing or maintaining
its Commitment or its Loans hereunder (or any part thereof) by an amount
that the Bank deems to be material or to reduce the amount of any payment
(whether of principal, interest or otherwise) in respect of any of the
Commitment or the Loans by an amount that the Bank deems to be material,
then, in any case, the Borrower shall promptly pay the Bank, upon its
demand, such additional amount as will compensate the Bank for such
additional cost or such reduction, as the case may be. The Bank shall
certify the amount of such additional cost or reduced amount to the
Borrower, and such certification shall be conclusive, absent manifest
error.
1.11834 BASIS FOR DETERMINING INTEREST RATE INADEQUATE OR
UNFAIR. In the event that the Bank shall have determined that (a) by
reason of circumstances affecting the Interbank Eurodollar market,
adequate and reasonable means do not exist for determining the LIBOR, or
(b) Dollar deposits in the relevant amount and for the relevant maturity
are not available to the Bank in the Interbank Eurodollar market, with
respect to a proposed Eurodollar Loan or an outstanding Eurodollar Loan,
the Bank shall give the Borrower prompt notice of such determination. If
such notice is given (a) any requested Eurodollar Loan shall be made as a
Domestic Loan, unless the Borrower gives the Bank one Business Day's
prior written notice that its request for such borrowing is cancelled;
(b) any Revolving Credit Loan which was to have been converted to a
Eurodollar Loan shall be continued as a Domestic Loan; and (c) any
outstanding Eurodollar Loan shall be converted to a Domestic Loan on the
last Business Day of the then current Interest Period for such Eurodollar
Loan. Until such notice has been withdrawn, the Bank shall have no
obligation to make Eurodollar Loans or maintain outstanding Eurodollar
Loans and the Borrower shall not have the right to convert Revolving
Credit Loans to Eurodollar Loans.
SECTION 2.11834 INDEMNITY. The Borrower agrees to
indemnify the Bank and to hold the Bank harmless from any loss or expense
that it may sustain or incur as a consequence of any prepayment or any
default by the Borrower in the payment of the principal of or interest on
any Eurodollar Loan or failure by the Borrower to complete a borrowing
or, a prepayment of or conversion of or to a Eurodollar Loan after notice
thereof has been given, including (but not limited to) any interest
payable by the Bank to lenders of funds obtained by it in order to make
or maintain its Revolving Credit Loans hereunder.
SECTION 3.11834 SURVIVAL. The obligations of the Borrower
under this Article IV shall survive the termination of this Agreement and
payment of the Note and the Loans.
ARTICLE I.
CONDITIONS PRECEDENT
SECTION 1.11834 CONDITIONS PRECEDENT TO THE INITIAL
REVOLVING CREDIT LOAN. The obligation of the Bank to make the initial
Revolving Credit Loan to the Borrower is subject to the condition
precedent that the Bank shall have received on or before the day of such
Revolving Credit Loan each of the following, in form and substance
satisfactory to the Bank and its counsel:
(1) AGREEMENT. This Agreement;
(2) NOTE. The Note, duly executed by the Borrower;
(3) CERTIFICATE OF THE BORROWER. A certificate (dated as
of the date of this Agreement) of the Secretary of the Borrower,
certifying, among other things, (a) a true and correct copy of the
Certificate of Incorporation of the Borrower, and all amendments, if any,
thereto, (b) a true and correct copy of the By-Laws of the Borrower as
then in effect, (c) copies of all corporate action taken by the Borrower,
including resolutions of its Board of Directors (i) authorizing the
execution, delivery, and performance of this Agreement, the Note, the
Pledge Agreement, the Warrants and each other document to be delivered by
the Borrower pursuant to this Agreement, and (d) the names and true
signatures of the officers of the Borrower authorized to sign this
Agreement, the Note, and each other document to be delivered by the
Borrower under this Agreement;
(4) PLEDGE AGREEMENTS; STOCK CERTIFICATES. The Pledge
Agreements duly executed by the Borrower, together with certificates
representing the Pledged Shares referred to therein accompanied by
undated stock powers executed in blank;
(5) REGISTRATION RIGHTS AGREEMENT. The Registration Rights
Agreement, duly executed by the Borrower;
(6) WARRANTS. The requisite number of Warrants pursuant to
the terms of Section 2.12 herein;
(7) OPINION OF COUNSEL FOR THE BORROWER. A favorable
opinion of counsel for the Borrower, Standard Life and Standard
Marketing, in form and substance satisfactory to the Bank in all
respects, dated the date of this Agreement;
(8) SUBORDINATED NOTE. A copy of the Subordinated Note in
the principal amount of $4,000,000 payable by the Borrower to Conseco,
Inc., together with evidence of subordination of such indebtedness to the
payment of all obligations owed by the Borrower to the Bank under the
Loan Documents and a copy of all Warrants issued by the Borrower to
Conseco, Inc.;
(9) EVIDENCE OF ACQUISITION. Evidence with respect to the
acquisition by the Borrower of Shelby Life;
(10) INSURANCE REGULATORY APPROVALS. Evidence of all
applicable insurance regulatory approvals, if any, which are necessary or
required in connection with the Borrower's execution, delivery and
performance of the Loan Documents; and
(11) SCHEDULE OF INSURANCE. A schedule of insurance then in
effect pursuant to Section 7.5 of this Agreement.
SECTION 1.11834 CONDITIONS PRECEDENT TO ALL LOANS. The
obligation of the Bank to make each Loan (including the initial Revolving
Credit Loan) shall be subject to the further conditions precedent that
(a) the Bank shall have received written or telephonic notice of each
such Loan pursuant to Section 2.3 of this Agreement, (b) the Bank shall
have received the right to exercise the requisite number of Warrants
pursuant to the terms of Section 2.12 herein, (c) a favorable opinion of
counsel, in form and substance satisfactory to the Bank in all respects,
with respect to the issuance of the Warrants, and (d) on the date of each
such Loan (i) the following statements shall be true (and the acceptance
by the Borrower of the proceeds of such Loan shall constitute a
representation and warranty by the Borrower to the effect that):
(1) The representations and warranties contained in
Article VI of this Agreement are true and correct on and as of the date
of such Loan as though made on and as of such date; and
(2) No Default or Event of Default has occurred and is
continuing, or would result from such Loan; and
(3) The Borrower shall have complied and shall then be in
compliance with all the terms, covenants and conditions of the Agreement;
and
(4) No material adverse change shall have occurred in the
financial condition or business operations of the Borrower or any of its
Subsidiaries as determined by the Bank and the Bank shall have not
determined that an event has occurred which materially adversely affects,
or may materially adversely effect, the ability of the Borrower to
perform its obligations under this Agreement or the Note; and
(5) The Bank shall have received such other approvals,
opinions, or documents as the Bank may reasonably request.
ARTICLE I.
REPRESENTATIONS AND WARRANTIES
In order to induce the Bank to enter into this Agreement and
to make the Loans, the Borrower makes the following representations and
warranties to the Bank:
SECTION 1.11834 INCORPORATION, GOOD STANDING AND DUE
QUALIFICATION. The Borrower and each of its Subsidiaries are
corporations duly incorporated, validly existing, and in good standing
under the laws of the jurisdiction of their respective incorporation;
have the corporate power and authority to own their respective assets and
to transact the business in which they are now engaged; and are duly
qualified as a foreign corporation and in good standing under the laws of
each other jurisdiction in which such qualification is required.
SECTION 2.11834 POWER AND AUTHORITY. The execution,
delivery, and performance by the Borrower of the Loan Documents has been
duly authorized by all necessary corporate action and do not and will not
(i) require any consent or approval of its stockholders which has not
been obtained, (ii) contravene its charter or by-laws, (iii) violate any
provision of any law, rule, regulation (including, without limitation,
Regulation U of the Board of Governors of the Federal Reserve System),
order, writ, judgment, injunction, decree, determination, or award
presently in effect having applicability to the Borrower, (iv) result in
a breach of or constitute a default under any indenture or loan or credit
agreement or any other agreement, lease, or instrument to which the
Borrower is a party or by which it or its Properties may be bound or
affected; (v) result in, or require, the creation or imposition of any
Lien, upon or with respect to any of the Properties now owned or
hereafter acquired by the Borrower, except for Liens in favor of the
Bank; or (vi) cause the Borrower to be in default under any such law,
rule, regulation, order, writ, judgment, injunction, decree,
determination, or award or any such indenture, agreement, lease, or
instrument.
SECTION 3.11834 LEGALLY ENFORCEABLE AGREEMENT. This
Agreement is, and the Note when delivered under this Agreement will be,
the legal, valid, and binding obligations of the Borrower, enforceable
against the Borrower in accordance with their respective terms, except to
the extent that such enforcement may be limited by applicable bankruptcy,
insolvency, and other similar laws affecting creditors' rights generally.
SECTION 4.11834 FINANCIAL STATEMENTS.
a. The consolidated balance sheet of the Borrower and
its Subsidiaries as at December 31, 1995, and the related consolidated
statements of income, stockholders' equity, and cash flows of the
Borrower and its Subsidiaries for the fiscal year ended on December 31,
1995, and the accompanying footnotes, together with (i) the opinion
thereon dated March 18, 1996 of Ernst & Young, independent certified
public accountants, fairly present in all material respects the
consolidated financial condition of the Borrower and its Subsidiaries as
at such dates, and the consolidated results of their operations for the
periods covered by such statements, all in accordance with GAAP applied
on a consistent basis. Neither the Borrower nor any Subsidiary has any
material fixed or contingent liabilities, liabilities for taxes, unusual
forward or long-term commitments or unrealized or anticipated losses from
any unfavorable commitments which are not reflected in such financial
statements or in the notes thereto, other than liabilities arising in the
ordinary course of business since December 31, 1995. Since December 31,
1995, there has been no material adverse change in the consolidated
financial condition or operations, or the prospects or business taken as
a whole, of the Borrower and its Subsidiaries from that set forth in said
financial statements as at said date, other than as previously disclosed
by the Borrower to the Bank in Form 10-Q filings for the periods ended
March 31, 1996 and June 30, 1996.
b. The individual balance sheet of the Borrower and
each of its Subsidiaries as at December 31, 1995, and the related
individual statements of income and stockholders' equity of the Borrower
and each of its Subsidiaries for the fiscal year ended on said date,
copies of which have been furnished to the Bank, fairly present in all
material respects the individual financial condition of the Borrower and
each of its Subsidiaries as at such date, and the individual results of
their respective operations for the period covered by such statements,
all in accordance with GAAP applied on a consistent basis. Since
December 31, 1995, there has been no material adverse change in the
individual financial condition or operations, or the prospects or
business, of the Borrower or any Subsidiary from that set forth in said
financial statements as at said date, other than as previously disclosed
by the Borrower to the Bank in Form 10-Q filings for the periods ended
March 31, 1996 and June 30, 1996.
c. The Annual Statement of Standard Life as filed
with the Insurance Department of the State of Indiana for the fiscal year
ended December 31, 1995, a copy of which has been furnished to the Bank,
is complete and fairly presents the financial condition of Standard Life
as at such date and the results of operations of Standard Life for such
period, all in accordance with SAP.
SECTION 1.11834 NO MATERIAL MISREPRESENTATION. No
information, exhibit, or report furnished by the Borrower to the Bank in
connection with the negotiation, execution and delivery of this Agreement
or the Note contained any material misstatement of fact or omitted to
state a material fact or any fact necessary to make the statement
contained therein not materially misleading.
SECTION 2.11834 LABOR DISPUTES AND ACTS OF GOD. Neither
the business (other than in the ordinary course of its insurance
operations) nor the Properties of the Borrower or any Subsidiary of the
Borrower is affected by any fire, explosion, accident, strike, lockout or
other labor dispute, drought, storm, hail, earthquake, embargo, act of
God or of the public enemy, requisition or taking of property, or other
casualty (whether or not covered by insurance), which materially and
adversely affects such business or Properties or the operations of the
Borrower or any such Subsidiary.
SECTION 3.11834 OTHER AGREEMENTS. Neither the Borrower,
nor any Subsidiary of the Borrower, is a party to any indenture, loan, or
credit agreement, or to any lease or other agreement or instrument, or
subject to any charter or corporate restriction, which could have a
material adverse effect on its business, Properties, operations, or
condition (financial or otherwise), or the ability of the Borrower to
carry out its obligations under the Loan Documents. Neither the
Borrower, nor any Subsidiary of the Borrower, is in default in any
respect in the performance, observance, or fulfillment of any of the
obligations, covenants, or conditions contained in any agreement or
instrument material to its Properties or business to which it is a party.
SECTION 4.11834 LITIGATION. Except as disclosed in
SCHEDULE ONE hereto, there is no pending, or to knowledge of the
Borrower, threatened action, suit, investigation, or proceeding against
or affecting the Borrower, or any Subsidiary of the Borrower, before any
court, governmental agency, or arbitrator, which may, in any one case or
in the aggregate, materially adversely affect the financial condition,
operations, Properties, or business of the Borrower or any Subsidiary of
the Borrower or the ability of the Borrower to perform its obligations
under the Loan Documents.
SECTION 5.11834 GOVERNMENTAL APPROVALS. Except as has
already been obtained or completed, no order, consent, approval, license,
authorization, or validation of, or filing, recording or registration
with, notice to, or exemption by, any governmental or public body or
authority, or any subdivision thereof, is required to authorize, or is
required in connection with (i) the execution, delivery and performance
by the Borrower of the Loan Documents, or (ii) the legality, validity,
binding effect or enforceability of the Loan Documents.
SECTION 6.11834 NO DEFAULTS ON OUTSTANDING JUDGMENTS OR
ORDERS. The Borrower and each of its Subsidiaries have satisfied all
judgments, and neither the Borrower nor any such Subsidiary is in default
with respect to any judgment, writ, injunction, decree, rule, or
regulation of any court, arbitrator, or federal, state, municipal, or
other governmental authority, commission, board, bureau, agency, or
instrumentality, domestic or foreign.
SECTION 7.11834 OWNERSHIP AND LIENS. The Borrower and each
of its Subsidiaries have good, valid and defensible title to all other
respective material Properties, subject to no material Liens, except
(i) as disclosed in SCHEDULE TWO hereto, (ii) for covenants,
restrictions, rights, easements, Liens, encumbrances and minor
irregularities in title which do not materially interfere with the
occupation, use and enjoyment of such Properties in the normal course of
business as presently conducted or materially impair the value thereof
for such business, and (iii) Liens otherwise permitted or contemplated by
Section 6.1 hereof. In all material respects, the Borrower and each of
its Subsidiaries enjoy peaceful and undistributed possession under all
leases under which they respectively operate, and all such leases are
valid and subsisting in all material respects with no default existing
thereunder.
SECTION 8.11834 SUBSIDIARY. The Borrower owns, directly or
indirectly, 100% of the issued and outstanding capital stock of each of
Standard Life, Standard Marketing, Standard Advertising, Inc., Standard
Administrative Services, Inc., Standard Management International, S.A.,
Premium Life (Bermuda), Ltd. and Premium Life (Luxembourg), S.A. In
addition, the Borrower owns 72% of the issued and outstanding capital
stock of Standard Reinsurance of North America, Ltd.; Standard Life owns
99% of the issued and outstanding capital stock of Dixie National Life
Insurance Company; Standard Marketing Corporation owns 57.5% of the
interests in Standard Development, L.L.C.; and Standard Marketing
International, Ltd. and Standard Investor Services Corporation are
Subsidiaries of Standard Marketing. Neither the Borrower, Standard Life
nor Standard Marketing have any other Subsidiaries. All such stock has
been validly issued, is fully paid and non-assessable, and is owned by
the Borrower and/or its Subsidiaries free and clear of all Liens.
SECTION 9.11834 ERISA. The Borrower and each of its
Subsidiaries are in compliance in all material respects with all
applicable provisions of ERISA. Neither a Reportable Event nor a
Prohibited Transaction has occurred and is continuing with respect to any
Plan; no notice of intent to terminate a Plan has been filed nor has any
Plan been terminated; no circumstances exist which constitute grounds
under Section 4042 of ERISA entitling the PBGC to institute proceedings
to terminate, or appoint a trustee to administrate, a Plan, nor has the
PBGC instituted any such proceedings; neither the Borrower nor any ERISA
Affiliate has completely or partially withdrawn under Sections 4201 or
4204 of ERISA from a Multiemployer Plan; the Borrower and each ERISA
Affiliate has met its minimum funding requirements under ERISA with
respect to all of its Plans and the present fair market value of all Plan
assets exceeds the present value of all vested benefits under each Plan,
as determined on the most recent valuation date of the Plan and in
accordance with the provisions of ERISA and the regulations thereunder
for calculating the potential liability of the Borrower or any ERISA
Affiliate to the PBGC or the Plan under Title IV of ERISA; and neither
the Borrower nor any ERISA Affiliate has incurred any liability to the
PBGC under ERISA.
SECTION 10.11834 ENVIRONMENTAL MATTERS. Each of the
representations and warranties set forth in paragraphs (a) through (e) of
this Section is true and correct with respect to each parcel of real
property owned or operated by the Borrower or any Subsidiary (the "Real
Properties"), except to the extent that the facts and circumstances
giving rise to any such failure to be so true and correct would not have
a material adverse effect on the consolidated financial condition or
operations of the Borrower and its Subsidiaries or the Borrower's ability
to meet or fulfill the requirements of any of the Loan Documents.
a. The Real Properties do not contain, and have not
previously contained, in, on, or under, including, without limitation,
the soil and groundwater thereunder, any Hazardous Materials.
b. The Real Properties and all operations and
facilities at the Real Properties are in compliance with all
Environmental Laws, and there is no Hazardous Materials contamination or
violation of any Environmental Law which would interfere with the
continued operation of any of the Real Properties or impair the fair
saleable value thereof. For purposes of this clause (b), "fair saleable
value" of any Real Properties means the gross amount (without deductions
for costs of sale, taxes , or other payments) of money that might be
expected to be realized, as of the evaluation date, from an interested
purchaser aware of all relevant information and a seller, equally
informed, who is interested in disposing of any such Real Properties.
c. Neither the Borrower nor any of its Subsidiaries
has received any complaint, notice of violation, alleged violation,
investigation or advisory action or of potential liability or of
potential responsibility regarding environmental protection matters or
permit compliance with regard to the Real Properties, nor is the Borrower
aware that any Governmental Authority is contemplating delivering to the
Borrower or any of its Subsidiaries any such notice.
d. Hazardous Materials have not been generated,
treated, stored, disposed of, at, on or under any of the Real Properties,
nor have any Hazardous Materials been transferred from the Real
Properties to any other location.
e. There are no governmental, administrative or
judicial proceedings pending or contemplated under any Environmental Laws
to which the Borrower or any of its Subsidiaries is or will be named as a
party with respect to the Real Properties, nor are there any consent
decrees or other decrees, consent orders, administrative orders or other
orders, or other administrative or judicial requirements outstanding
under any Environmental Law with respect to any of the Real Properties.
SECTION 1.11834 OPERATION OF BUSINESS. The Borrower and
each of its Subsidiaries possess all licenses, permits, franchises,
patents, copyrights, trademarks, and trade names, or rights thereto, to
conduct its business substantially as now conducted and as presently
proposed to be conducted, and neither the Borrower nor any of its
Subsidiaries knows of any conflict with or violation of any valid rights
of others with respect to any of the foregoing.
SECTION 2.11834 TAXES. The Borrower and each of its
Subsidiaries have filed all tax returns (foreign, federal, state and
local) required to be filed and have paid all taxes, assessments, and
governmental charges and levies thereon to be due, including interest and
penalties.
SECTION 3.11834 REGULATION U. The Borrower is not engaged
principally, or as one of its important activities, in the business of
extending credit for the purpose of purchasing or carrying margin stocks.
Neither the Borrower nor any Person acting on behalf of the Borrower has
taken or will take any action which might cause the Note or this
Agreement to violate Regulation U or any other regulation of the Board of
Governors of the Federal Reserve System or to violate Section 7 of the
Securities Exchange Act of 1934 or any rule or regulation thereunder, in
each case as now in effect or as the same may hereinafter be in effect.
SECTION 4.11834 DEBT AND LIENS. Set forth in SCHEDULE
THREE hereto is a complete and correct list of all credit agreements,
indentures, purchase agreements, guaranties, Capital Leases, and other
investments, agreements, and arrangements presently in effect providing
for or relating to Debt in respect of which the Borrower or any
Subsidiary of the Borrower is in any manner directly or contingently
obligated; and the maximum principal or face amounts of such Debt, which
are outstanding and which can be outstanding, are correctly stated, and
all Liens of any nature given or agreed to be given as security therefor
are correctly described or indicated in such Schedule.
SECTION 5.11834 INVESTMENT COMPANY ACT. Neither the
Borrower nor any Subsidiary of the Borrower is an "investment company" or
a company "controlled" by an "investment company" within the meaning of
the Investment Company Act of 1940, as amended.
SECTION 6.11834 NO OTHER LINES OF CREDIT. Except for a
certain line of credit in the amount of up to $1,000,000 British Pounds
Sterling issued in favor of Premier Life (Bermuda), Ltd., a Subsidiary of
Standard Management International, S.A., all other lines of credit
previously issued by creditors in favor of the Borrower have been
cancelled on or prior to the date hereof, and, except for the Loans to be
made by the Bank to the Borrower under this Agreement, the Borrower has
no other lines of credit available for the Borrower's use.
SECTION 7.11834 MERGER OF SHELBY LIFE. On the date hereof,
following the acquisition by the Borrower of Shelby Life from Delta Life
and Annuity Company, Shelby Life shall be merged into Standard Life.
ARTICLE I.
AFFIRMATIVE COVENANTS
So long as any Note shall remain unpaid, or the Bank shall
have any Commitment under this Agreement, the Borrower will:
SECTION 1.11834 MAINTENANCE OF EXISTENCE. Preserve and
maintain, and cause each Subsidiary to preserve and maintain, its
corporate existence and good standing in the jurisdiction of its
incorporation, and qualify and remain qualified, and cause each
Subsidiary to qualify and remain qualified, as a foreign corporation in
each jurisdiction in which such qualification is required.
SECTION 2.11834 MAINTENANCE OF RECORDS. Keep, and cause
each Subsidiary to keep, adequate records and books of account, in which
complete entries will be made in accordance with GAAP consistently
applied and SAP, as applicable, reflecting all financial transactions of
the Borrower and its Subsidiaries.
SECTION 3.11834 MAINTENANCE OF PROPERTIES. Maintain, keep,
and preserve, and cause each Subsidiary to maintain, keep, and preserve,
all of its Properties (tangible and intangible) necessary or useful in
the proper conduct of its business in good working order and condition,
ordinary wear and tear excepted.
SECTION 4.11834 CONDUCT OF BUSINESS. Continue, and cause
each Subsidiary to continue, to engage in an efficient and economical
manner in a business of the same general type as now conducted by it on
the date of this Agreement.
SECTION 5.11834 MAINTENANCE OF INSURANCE. Maintain and
cause each Subsidiary to maintain, insurance with financially sound and
reputable insurance companies or associations in such amounts and
covering such risks as are usually carried by companies engaged in the
same or similar business and similarly situated, which insurance may
provide for reasonable deductibility from coverage thereof.
SECTION 6.11834 COMPLIANCE WITH LAWS. Comply, and cause
each Subsidiary to comply, in all material respects with all applicable
laws, rules, regulations, and orders of all foreign, federal, state,
county, municipal and all other applicable governments, departments,
commissions, boards, courts and authorities, required for the performance
or conduct of its operations, such compliance to include, without
limitation, paying before the same become delinquent all taxes,
assessments, and governmental charges imposed upon it or upon its
Properties.
SECTION 7.11834 ENVIRONMENTAL LAWS.
a. Comply with, and ensure compliance by all tenants
and subtenants, if any, with all Environmental Laws and obtain and comply
with and maintain, and ensure that all tenants and subtenants obtain and
comply with and maintain, any and all licenses, approvals, registrations
or permits required by Environmental Laws, except to the extent that
failure to do so would not have a material adverse effect on the
consolidated financial condition or operations of the Borrower and its
Subsidiaries or the Borrower's ability to meet or fulfill the
requirements of any of the Loan Documents.
b. Conduct and complete all investigations, studies,
sampling and testing, and all remedial, removal and other actions
required under all Environmental Laws and promptly comply with all lawful
orders and directives of all Governmental Authorities respecting all
Environmental Laws, except to the extent that the same are being
contested in good faith by appropriate proceedings and the pendency of
such proceedings would not have a material adverse effect on the
consolidated financial condition or operations of the Borrower and its
Subsidiaries or the Borrower's ability to meet or fulfill the
requirements of any of the Loan Documents.
c. Defend, indemnify and hold harmless the Bank, and
its employees, agents, officers and directors, from and against any
claims, demands, penalties, fines, liabilities, settlements, damages,
costs and expenses of whatever kind or nature known or unknown,
contingent or otherwise, arising out of, or in any way relating to
(i) the presence of Hazardous Materials, at anytime, in, on, under, or
emanating from the Real Properties; (ii) the imposition of any lien on
the Real Properties pursuant to Connecticut General
Statutes <section> 22a-452 and (iii) the violation of or noncompliance
with any Environmental Laws applicable to the Real Properties, or any
orders, requirements or demands of Governmental Authorities related
thereto, including without limitation, attorney's and consultant's fees,
investigation and laboratory fees, court costs and litigation expenses,
except to the extent that any of the foregoing arise out of the gross
negligence or willful misconduct of the party seeking indemnification
therefor.
The terms of clause (c) of this Section 7.7 shall survive the payment in
full or termination of all obligations of the Borrower under the Loan
Documents.
SECTION 1.11834 INSURANCE LICENSES. Do, and cause each
Subsidiary to do, all things necessary to preserve and keep in full force
and effect all licenses, permits or authorizations to transact insurance
and reinsurance business (individually, a "License" and collectively, the
"License") or similar qualifications required by the Borrower and any of
its Subsidiaries to engage in the insurance business in all jurisdictions
in which the Company and any of its Subsidiaries are so engaged.
SECTION 2.11834 RIGHT OF INSPECTION. At any reasonable
time and from time to time, permit the Bank or any agent or
representative thereof to examine and make copies of, and abstracts from,
the records and books of account of, and visit the Properties of, the
Borrower and any Subsidiary, and to discuss the affairs, finances and
accounts of the Borrower and any Subsidiary with any of their respective
officers, directors and independent accountants, and to conduct or have
conducted audits of the underwriting practices, actuarial models, loss
reserves, etc. of any Subsidiary.
SECTION 3.11834 REPORTING REQUIREMENTS. Furnish to the
Bank:
(1) FINANCIAL STATEMENTS. The following financial
statements:
i) As soon as available, but in any event within
60 days after the end of each of the first three quarterly
periods of each fiscal year of the Borrower, a copy of (A) the
unaudited consolidated balance sheet of the Borrower and its
Subsidiaries as at the end of each such quarter, the unaudited
consolidated statements of income and stockholders' equity of the
Borrower and its Subsidiaries for the period commencing at the
end of the previous fiscal year and ending with the end of such
quarter, and the unaudited consolidated statements of cash flows
of the Borrower and its Subsidiaries for the portion of the
fiscal year ended with the last day of such quarter; and (B) the
unaudited consolidating balance sheet of the Borrower and its
Subsidiaries as at the end of each such quarter, the unaudited
consolidating statements of income and stockholders' equity of
the Borrower and its Subsidiaries for the period commencing at
the end of the previous fiscal year and ending with the end of
such quarter; in each case, certified by the chief financial
officer or chief accounting officer of the Borrower;
ii) As soon as available, but in any event within
120 days after the end of each fiscal year of the Borrower, a
copy of (A) the consolidated balance sheet of the Borrower and
its Subsidiaries as at the end of such year, the consolidated
statements of income and stockholders' equity of the Borrower and
its Subsidiaries for such fiscal year, and the consolidated
statements of cash flows of the Borrower and its Subsidiaries for
such fiscal year, certified by Ernst & Young or other independent
certified public accountants of nationally recognized standing
acceptable to the Bank in all respects, and, with respect to the
reserves for future policy benefits, by an officer of the
Borrower (each such certification shall be without qualification
or exception, except that such certification may contain
qualifications resulting from changes in accounting or actuarial
principles and methods agreed to by such certified public
accountants and/or officer, provided that nothing in this clause
(A) shall be deemed to permit a "going concern," "going business"
or like qualification or exception or a qualification or
exception arising out of the scope of the audit); and (B) the
consolidating balance sheet of the Borrower and its Subsidiaries
as at the end of such fiscal year, showing inter-company
eliminations and the consolidating statements of income and
stockholders' equity of the Borrower and its Subsidiaries for
such fiscal year, showing inter-company eliminations, certified
by the chief financial officer or the chief accounting officer of
the Borrower as being fairly presented in all material respects
when considered in relation to the consolidated financial
statements of the Borrower and its Subsidiaries;
iii) As soon as available, but in any event within
60 days after the end of each of the first three quarterly
periods of each fiscal year of the Borrower and each of its
Subsidiaries, a copy of the unaudited individual balance sheet of
the Borrower and each of its Subsidiaries as at the end of each
such quarter and the unaudited individual statements of income
and stockholders' equity of the Borrower and each of its
Subsidiaries for the period commencing at the end of the previous
fiscal year and ending with the end of such quarter, and the
unaudited statement of cash flow of the Borrower only for the
portion of the fiscal year ended with the last day of such
quarter, certified by the chief financial officer or chief
accounting officer of the Borrower;
iv) As soon as available, but in any event within
120 days after the end of each fiscal year of the Borrower and
each of its Subsidiaries, a copy of the individual balance sheet
of the Borrower and each of its Subsidiaries as at the end of
such year, the individual statements of income and stockholders'
equity of the Borrower and each of its Subsidiaries for such
fiscal year, and the individual statement of cash flows of the
Borrower only for such fiscal year, certified by the chief
financial officer or chief accounting officer of the Borrower;
v) As soon as available, but in any event within
60 days after the end of each of the first three quarterly
periods of each fiscal year of the Borrower and each of its
Subsidiaries, and within 120 days after the end of each fiscal
year of the Borrower and each of its Subsidiaries, a copy of all
financial statements filed or otherwise furnished by the Borrower
or any of its Subsidiaries to any such department or regulatory
authority including, without limitation, any Annual Statement or
quarterly statement, certified by the chief financial officer or
chief accounting officer of the Borrower or any such
Subsidiaries, as applicable, that all such financial statements
are complete and correct and present fairly in accordance with
SAP the financial position of the Borrower or any such
Subsidiaries, as applicable, for the periods then ended;
vi) As soon as available, but in any event within
150 days after the end of each fiscal year of Standard Life and
its Subsidiaries, a valuation of the business operations of
Standard Life and its Subsidiaries conducted by Milliman and
Robertson, Inc. or by such other independent actuarial firm of
nationally recognized standing acceptable to the Bank in all
respects; and
vii) Any other financial information pertaining to
the Borrower, Standard Life and Standard Marketing reasonably
requested by the Bank.
all such financial statements shall be fairly presented in all material
respects, shall be in reasonable detail, shall be prepared in accordance
with GAAP (or in accordance with SAP if required by, and filed with, any
applicable regulatory authority), in each case applied on a consistent
basis throughout the periods reflected therein or as otherwise permitted
herein, and, with respect to clauses (i), (ii), (iii), (iv) and (v)
above, shall state in comparative form the respective
consolidated/consolidating/individual figures for the corresponding date
and period in the previous fiscal year;
(2) ACTUARIAL OPINION. Within 120 days after the close of
each fiscal year of each of the Borrower and any of its Subsidiaries, as
applicable, a copy of the "Statement of Actuarial Opinion" for each of
the Borrower and any such Subsidiaries which is provided to the
applicable state or local insurance department or regulatory authority as
to the adequacy of loss reserves of the Borrower and any such
Subsidiaries. Such opinion shall be in the format prescribed by the
Insurance Code or other applicable laws;
(3) MANAGEMENT LETTERS. Promptly upon receipt thereof,
copies of any reports submitted to the Borrower or any of its
Subsidiaries by independent certified public accountants in connection
with examination of the financial statements of the Borrower or any of
its Subsidiaries made by such accountant or loss reserve specialists;
(4) CERTIFICATE OF NO DEFAULT. Simultaneously with the
delivery of the quarterly and annual financial statements referred to in
Sections 7.10(1)(i) and (ii) hereof, a certificate of the chief financial
officer or chief accounting officer of the Borrower certifying (i) that
to the best of his knowledge no Default or Event of Default has occurred
and is continuing or, if a Default or Event of Default has occurred and
in continuing, a statements as to the nature thereof and the action which
is proposed to be taken with respect thereto, and (ii) computations
demonstrating compliance with the covenants contained in Article IX
hereof;
(5) NOTICE OF LITIGATION. Promptly after the Borrower
receives written notice of the commencement thereof, notice of all
actions, suits, and proceedings before any arbitrator, court, or
governmental or nongovernmental department, commission, board, bureau,
agency, or instrumentality, domestic or foreign, affecting the Borrower
or any of its subsidiaries which, if determined adversely to the Borrower
or any such Subsidiary, could have material adverse effect on the
financial condition, properties, or operations of the Borrower or such
Subsidiary;
(6) NOTICE OF DEFAULTS AND EVENTS OF DEFAULT. As soon as
possible and in any event within ten (10) Business Days after the
occurrence of each Default or Event of Default, a written notice setting
forth the details of such Default or Event of Default and the action
which is proposed to be taken by the Borrower with respect thereto;
(7) NOTICE OF CERTAIN EVENTS. As soon as possible and in
any event within ten (10) Business Days after the occurrence thereof,
notice of any event or condition having, or which may have, a material
adverse effect on the financial condition, properties, or operations of
the Borrower or any of its Subsidiaries, including, without limitation,
any catastrophic event, any notice of suspension, termination or
revocation of any material License of the Borrower or any Subsidiary by
any Governmental Authority or any notice relating to a proposed
suspension or action which would materially affect the authority or
ability of the Borrower or any Subsidiary to conduct its business;
(8) ERISA REPORTS. As soon as possible (whether or not
requested by the Bank) and in any event within fifteen (15) Business Days
after the Borrower or any such Subsidiary knows or has reason to know
that any Reportable Event or Prohibited Transaction has occurred with
respect to any Plan or that the PBGC or the Borrower or any such
Subsidiary has instituted or will institute proceedings under Title IV or
ERISA to terminate any Plan or the Borrower or any such Subsidiary has
made a Plan amendment which may be treated as a termination under
Section 4041 of ERISA, the Borrower will deliver to the Bank a
certificate of the chief financial officer or chief accounting officer of
the Borrower setting forth details as to such Reportable Event or
Prohibited Transaction or Plan termination or Plan amendment and the
action the Borrower proposes to take with respect thereto;
(9) PROXY STATEMENTS, ETC. Promptly after the sending or
filing thereof, copies of all proxy statements, financial statements and
reports which the Borrower or any of its Subsidiaries sends to its
stockholders and copies of all regular, periodic and special reports, and
all registration statements which the Borrower or any of its Subsidiaries
files with the Securities and Exchange Commission or any governmental
authority which may be substituted therefor, or with any national
securities exchange;
(10) INSURANCE CODE CHANGES. Promptly, notice of any actual
or, to the best of the Borrower's knowledge proposed material changes in
the Insurance Code governing the investment or dividend practices of
Indiana domiciled insurance companies; and
(11) GENERAL INFORMATION. Such other information respecting
the condition or operations, financial or otherwise, of the Borrower or
any of its Subsidiaries, as the Bank may from time to time reasonably
request.
SECTION 1.11834 PERFORMANCE OF OBLIGATIONS. The Borrower
will pay the Note according to the reading, tenor and effect thereof, and
the Borrower will do and perform every act and discharge all of the
obligations provided to be performed and discharged by the Borrower under
this Agreement and the Note at the time or times and in the manner
specified herein or therein.
ARTICLE I.
NEGATIVE COVENANTS
So long as the Note shall remain unpaid, or the Bank shall
have any Commitment under this Agreement, the Borrower will not, without
the prior written consent of the Bank:
SECTION 1.11834 LIENS. Create, incur, assume, or suffer to
exist, or permit any of its Subsidiaries to create, incur, assume or
suffer to exist, any Lien upon or with respect to any of its properties,
now owned or hereafter acquired, except:
(1) Liens in favor of the Bank;
(2) Liens for taxes or assessments or other governmental
charges or levies not yet due and payable or, if due and payable, Liens
which are being contested in good faith by appropriate proceedings and
for which appropriate reserves are maintained;
(3) Liens imposed by law, such as mechanics' materialmen's,
landlords', warehousemen's, and carriers' Liens, and other similar Liens,
securing obligations incurred in the ordinary course of business which
are not past due for more than sixty (60) days or which are being
contested in good faith by appropriate proceedings and for which
appropriate reserves have been established;
(4) Liens under workmen's compensation, unemployment
insurance, social security, or similar legislation;
(5) Liens, deposits, or pledges to secure the performance
of bids, tenders, contracts (other than contract for the payment of
money), leases (permitted under the terms of this Agreement), or public
or statutory obligations; surety, stay, appeal, indemnity, performance,
or other similar bonds, or other similar obligations arising in the
ordinary course of business;
(6) Judgment and other similar Liens arising in connection
with court proceedings, provided the execution or other enforcement of
such Liens is effectively stayed and claims secured thereby are being
actively contested in good faith and by appropriate proceedings;
(7) Easements, rights-of-way, restrictions, and other
similar encumbrances which, in the aggregate, do not materially interfere
with the occupation, use, and enjoyment by the Borrower or any of its
Subsidiaries of the Property or assets encumbered thereby in the normal
course of its business or materially impair the value of the Property
subject thereto; and
(8) Existing Liens specified in SCHEDULE TWO hereto.
SECTION 1.11834 DEBT. Create, incur, assume, or suffer to
exist or permit any Subsidiary to create, incur, assume, or suffer to
exist, any Debt, except:
(1) Debt of the Borrower under this Agreement and the Note;
(2) Accounts payable to trade creditors for goods or
services which are not aged more than sixty (60) days from billing date,
and current operating liabilities (other than for borrowed money) which
are not more than sixty (60) days past due, in each case incurred in the
ordinary course of business and paid within the specified time, unless
contested in good faith and by appropriate proceedings and for which
appropriate reserves are maintained; and
(3) Debt of the Borrower or any of its Subsidiaries, if
any, secured by purchase-money Liens permitted by Section 8.1(8) hereof.
SECTION 1.11834 MERGERS, ETC. Merge or consolidate with,
or sell, assign, lease, or otherwise dispose of (whether in one
transaction or in a series of transactions), all or substantially all of
its assets (whether now owned or hereafter acquired) to any Person, or
acquire all or substantially all of the assets or business of any Person,
or permit any of its Subsidiaries to do so, except that (i) any such
Subsidiary may merge into or transfer assets to the Borrower, (ii) any
such Subsidiary may merge into or consolidate with or transfer assets to
any other Subsidiary of the Borrower, and (iii) the Borrower or any
Subsidiary may merge into or consolidate with any other Person, provided
in each case that immediately after giving effect thereto, no event shall
occur and be continuing which constitutes a Default or an Event of
Default and, in the case of any such merger with another Person to which
the Borrower or any Subsidiary is a party, the Borrower or its Subsidiary
is the surviving corporation.
SECTION 2.11834 LEASES. Create, incur, assume, or suffer
to exist, or permit any of its Subsidiaries to create, incur, assume, or
suffer to exist, any obligation as lessee for the rental or hire of any
real or personal property, except:
(1) Capital Leases, if any, permitted under Section 8.1
hereof;
(2) Leases existing on the date of this Agreement and any
extensions or renewals thereof;
(3) Leases (other than Capital Leases) which do not in the
aggregate require the Borrower and of its Subsidiaries on a consolidated
basis to make payments (including taxes, insurance, maintenance and
similar expense which the Borrower or any of its Subsidiaries is required
to pay under the terms of any lease) in any fiscal year of the Borrower
in excess of $1,430,000; and
(4) Leases between the Borrower and any of its
Subsidiaries.
SECTION 1.11834 SALE AND LEASEBACK. Sell, transfer, or
otherwise dispose of, or permit any of its Subsidiaries to sell,
transfer, or otherwise dispose of, any real or personal property to any
Person and thereafter directly or indirectly lease back the same or
similar Property.
SECTION 2.11834 SALE OF ASSETS. Sell, lease, assign,
transfer, or otherwise dispose of, or permit any of its Subsidiaries to
sell, lease, assign, transfer, or otherwise dispose of, any of its now
owned or hereafter acquired assets (including, without limitation, shares
of stock and indebtedness of any Subsidiary of the Borrower, receivables,
and leasehold interests), except (i) the sale or other disposition of
assets no longer used or useful in the conduct of its business,
(ii) investments disposed of in the ordinary course of its business or
(iii) the proposed discontinuance of operations of Standard Reinsurance
of North America, Ltd.
SECTION 3.11834 LOANS AND INVESTMENTS. Subject to the
limitations set forth below, make, or permit any of its Subsidiaries to
make, any loan or advance to any Person, or purchase or otherwise
acquire, or permit any of its Subsidiaries to purchase or otherwise
acquire, any capital stock, assets, obligations, or other securities of,
make any capital contribution to, or otherwise invest in or acquire any
interest in any Person except that, so long as the Borrower complies at
all times with the financial covenant set forth in Section 9.5 herein,
(i) the Borrower and its Subsidiaries may make investments in fixed
maturities securities rated less than "BBB" by Moody's Investor Services
or Standard & Poor's Corporation and in mortgage loans, real estate,
collateral loans, common and non-redeemable preferred stocks and other
invested assets as long as the total of such investments does not exceed
10% of the total consolidated investments of the Borrower and its
Subsidiaries and (ii) nothing herein shall limit the ability of the
Borrower and its Subsidiaries to invest all or any portion of their
respective assets in fixed maturities securities rated at least "BBB" by
Moody's Investor Service or Standard & Poor's Corporation, other
investment grade bonds or securities guaranteed by the United States
Government.
SECTION 4.11834 GUARANTIES, ETC. Assume, guarantee,
endorse, or otherwise be or become directly or contingently responsible
or liable, or permit any of its Subsidiaries to assume, guarantee,
endorse, or otherwise be or become directly or contingently responsible
or liable (including, but not limited to, an agreement to purchase any
obligation, stock, assets, goods, or services, or to supply or advance
any funds, assets, goods, or services, or to maintain or cause such
Person to maintain a minimum working capital or net worth or otherwise to
assure the creditors of any Person against loss) for obligations of any
Person, except (1) guaranties by endorsement of negotiable instruments
for deposit or collection or similar transactions in the ordinary course
of business; (2) guaranties in favor of the Bank; (3) that certain
guaranty of the Borrower with respect to a certain loan in the principal
amount of $70,000 made by National City Bank, Indiana, to Stephen M.
Coons; and (4) for the transactions listed on SCHEDULE FOUR attached
hereto.
SECTION 5.11834 TRANSACTIONS WITH AFFILIATES. Enter into,
or permit any of its Subsidiaries to enter into, any transaction,
including, without limitation, the purchase, sale, or exchange of
property or the rendering of any service with any Affiliate, which
individually or in the aggregate for the Borrower and its Subsidiaries
aggregate more than $250,000 per fiscal year, except in the ordinary
course of and pursuant to the reasonable requirements of the Borrower's
or such Subsidiary's business and upon fair and reasonable terms no less
favorable to the Borrower or such Subsidiary than would be obtained in a
comparable arm's-length transaction with a Person not an Affiliate and
except for the transactions listed on SCHEDULE FOUR attached hereto.
SECTION 6.11834 STOCK OF SUBSIDIARIES. Sell or otherwise
dispose of any shares of capital stock of any of its Subsidiaries, except
in connection with a transaction permitted under Section 8.3 hereof or
the proposed discontinuance of operations of Standard Reinsurance of
North America, Ltd., or permit any of its Subsidiaries to issue any
additional shares of its capital stock.
SECTION 7.11834 CHANGE IN BUSINESS. Enter into or engage
in, or permit any of its Subsidiaries to enter into or engage in, any
business other than (i) acting as an insurance holding company which
directly and through its Subsidiaries acquires and manages in force life
insurance and annuity business and distributes life insurance and annuity
products, (ii) engaging in investment advisory activities or (iii)
engaging in the management of the assets of its Subsidiaries.
ARTICLE I.
FINANCIAL COVENANTS
So long as any Note shall remain unpaid or the Bank shall
have any Commitment under this Agreement, the Borrower will:
SECTION 1.11834 MINIMUM EQUITY. Maintain at the end of
each fiscal year equity of the Borrower (computed in accordance with
GAAP) of not less than $37,500,000 plus an amount equal to fifty percent
(50%) of consolidated net income (computed in accordance with GAAP)
commencing with the 1997 fiscal year to the extent such consolidated net
income is greater than or equal to zero. Said calculation of equity of
the Borrower shall exclude the effects of Financial Accounting Standard
Board Pronouncement No. 115 (a/k/a FASB No. 115).
SECTION 2.11834 POSITIVE NET INCOME. Maintain at the end
of each fiscal quarter (for the immediately preceding four fiscal
quarters) positive net income (computed in accordance with GAAP) for any
rolling four-quarter period.
SECTION 3.11834 MINIMUM CONSOLIDATED STATUTORY SURPLUS.
Cause the Borrower's U.S. insurance Subsidiaries to maintain at all times
a consolidated surplus (computed in accordance with SAP) of not less than
$23,000,000 plus an amount equal to fifty percent (50%) of consolidated
net income available after the payment of dividends of the Borrower's
U.S. insurance Subsidiaries commencing with the 1997 fiscal year
(computed in accordance with SAP).
SECTION 4.11834 MINIMUM FIXED CHARGE COVERAGE RATIO. Cause
the Borrower and its Subsidiaries to maintain at the end of each fiscal
quarter at all times a Fixed Charge Coverage Ratio of not less than 2.0
to 1.0.
SECTION 5.11834 MAXIMUM PERCENTAGE OF BOND PORTFOLIO.
Cause the percentage of the Borrower's bond portfolio in the NAIC risk
category of 3 or worse not to exceed at any time seven percent (7%).
SECTION 6.11834 INTEREST COVERAGE. Cause the Borrower to
maintain at the end of each fiscal quarter on a consolidated basis a
ratio of the Borrower's and its Subsidiaries' EBIT PLUS allowable
dividends of the Borrower's insurance Subsidiaries to the Borrower's and
its Subsidiaries' total Interest Expense for all outstanding Debt
(including the Loans) of not less than 2.5 to 1.0, measured for the
twelve-month period then ended (a rolling twelve-month calculation to be
measured as of the end of each successive quarter).
SECTION 7.11834 BEST RATING FOR STANDARD LIFE. Cause
Standard Life at all times to maintain a rating by A.M. Best & Company of
"B" or better.
ARTICLE I.
EVENTS OF DEFAULT
SECTION 1.11834 EVENTS OF DEFAULT. If any of the following
events ("Events of Default") shall occur and be continuing:
(1) The Borrower should fail to pay or prepay, as and when
due and payable, any principal or interest due under the Note due under
the other fee or amount provided for in this Agreement or the Note;
(2) Any representation or warranty made or deemed made by
the Borrower in this Agreement or in the Note or which is contained in
any certificate, document, opinion, financial or other statement
furnished at any time or in connection with this Agreement, shall prove
to have been incorrect in any material respect on or as of the date made
or deemed made;
(3) The Borrower shall fail to perform or observe any term,
covenant, or agreement contained in any Loan Document (other than the
provisions of Article VII of this Agreement) to which it is a party on
its part to be performed or observed;
(4) The Borrower shall fail or perform or observe any term,
covenant, or agreement contained in Article VII of this Agreement and
such failure shall remain unremedied until the earlier of ten (10)
Business Days after (i) written notice thereof shall be given to the
Borrower by the Bank, or (ii) the Bank is notified of such failure or
should have been notified of such failure pursuant to Section 7.10(7)
hereof;
(5) The Borrower or any of its Subsidiaries shall (i) fail
to pay any of its Debt (excluding Debt incurred under the Note), (after
giving effect to any applicable grace period), or any interest or premium
thereon, when due (whether by scheduled maturity, required prepayment,
acceleration, demand, or otherwise), or (ii) fail to perform or observe
any term, covenant, or condition on its part to be performed or observed
under any agreement or instrument relating to any such Debt, when
required to be performed or observed, if the effect of such failure to
perform or observe is to accelerate, or to permit the acceleration after
the giving of notice or passage of time, or both, of the maturity of such
Debt, whether or not such failure to perform or observe shall be waived
by the holder of such Debt; or any such Debt shall be declared to be due
and payable, or required to be prepaid (other than by a regularly
scheduled required prepayment), prior to the stated maturity thereof;
(6) The Borrower or any of its Subsidiaries (i) shall
generally not, or shall be unable to, or shall admit in writing its
inability to pay its Debt as such Debt become due; or (ii) shall make an
assignment for the benefit of creditors, petition or apply to any
tribunal for the appointment of a custodian, receiver, or trustee for it
or a substantial part of its assets; or (iii) shall commence any
proceeding under any bankruptcy, reorganization, arrangements,
readjustment of debt, dissolution, or liquidation law or statute of any
jurisdiction, whether now or hereafter in effect; or (iv) shall have any
such petition or application filed or any such proceeding commenced
against it in which an order for relief is entered or adjudication or
appointment is made and which remains undismissed for a period of sixty
(60) days or more; or (v) by any act or omission shall indicate its
consent to, approval of, or acquiescence in any such petition,
application, or proceeding or order for relief or the appointment of a
custodian, receiver, or trustee for all or any substantial part of its
properties; or (vi) shall suffer any such custodianship, receivership, or
trusteeship to continue undischarged for a period of sixty (60) days or
more;
(7) One or more judgments, decrees, or orders for the
payment of money in excess of $250,000 in the aggregate shall be rendered
against the Borrower or any of its Subsidiaries, and such judgments,
decrees, or orders shall continue unsatisfied and in effect for a period
of thirty (30) consecutive days without being vacated, discharged,
satisfied, or stayed or bonded pending appeal;
(8) Any of the following events occur or exist with respect
to the Borrower, any of its Subsidiaries, or any ERISA Affiliate:
(a) any Prohibited Transaction involving any Plan; (b) any Reportable
Event with respect to any Plan; (c) the filing under Section 4041 of
ERISA of a notice of intent to terminate any Plan or the termination of
any Plan; (d) any event or circumstance that might constitute grounds
entitling the PBGC to institute proceedings under Section 4042 of ERISA
for the termination of, or for the appointment of a trustee to
administer, any Plan, or the institution by the PBGC of any such
proceedings; (e) complete or partial withdrawal under Section 4201 or
4204 of ERISA from a Multiemployer Plan or the reorganization,
insolvency, or termination of any Multiemployer Plan; and in each case
above, such event or condition, together with all other events or
conditions, if any, could in the reasonable opinion of the Bank subject
the Borrower, or any of its Subsidiaries, or any ERISA Affiliate to any
tax, penalty, or other liability to a Plan, a Multiemployer Plan, the
PBGC, or otherwise (or any combination thereof) which in the aggregate
exceed or may exceed $250,000;
(9) Any change in the current ownership or management of
the Borrower or Standard Life that would effect a change in "control" (as
such term is defined under the applicable definitional section of the
Indiana Insurance Law) of the Borrower and Standard Life;
(10) The Pledge Agreement shall at any time after its
execution and delivery and for any reason cease: (A) to create a valid
and perfected first priority security interest in and to the property
purported to be subject to such Pledge Agreement; or (B) to be in full
force and effect or shall be declared null and void, or the validity or
enforceability thereof shall be contested by the Borrower or the Borrower
shall deny it has any further liability or obligation under the Pledge
Agreement or the Borrower shall fail to perform any of its obligations
thereunder; or
(11) Any Warrant or the Registration Rights Agreement shall
at any time after execution and delivery and for any reason cease to be
in full force and effect or shall be declared null and void, or the
validity or enforceability shall be contested by the Borrower, or the
Borrower shall deny that it has any further liability thereunder or shall
fail to perform its obligations thereunder;
then, and in any such event, the Bank may, by written notice to the
Borrower, declare the Note, all interest thereon, and all other amounts
payable under this Agreement and the Note to be forthwith due and
payable, whereupon the Note, all such interest, and all such amounts
shall become and be forthwith due and payable, without presentment,
demand, protest, or further notice of any kind, all of which are hereby
expressly waived by the Borrower.
ARTICLE I.
MISCELLANEOUS
SECTION 1.11834 AMENDMENTS, ETC. No amendment,
modification, termination, or waiver of any provision of this Agreement
or the Note, nor consent to any departure by the Borrower therefrom,
shall in any event be effective unless the same shall be in writing and
signed by the Bank and the Borrower, and then such waiver or consent
shall be effective only in the specific instance and for the specific
purpose for which given.
SECTION 2.11834 NOTICES, ETC. Except as otherwise
specified herein, all notices and other communications provided for under
this Agreement and the Note shall be in writing (including telegraphic
communication) and mailed or telegraphed or delivered, if to the
Borrower, at its address at 9100 Keystone Crossing, Suite 600,
Indianapolis, Indiana 46240, Attention: Stephen M. Coons, Esq., and if
to the Bank, at its address at 777 Main Street, Hartford, Connecticut
06115, Attention: Mr. R. J. Kane; or, as to each party, at such other
address as shall be designated by such party in a written notice to the
other party complying as to delivery with the terms of this Section 11.2.
All such notices and communications shall be deemed to have been duly
given or made when actually received by or delivered to the party to
which such notice or other communication is required or permitted to be
given or made under this Agreement or the Note.
SECTION 3.11834 NO WAIVER; REMEDIES. No failure on the
part of the Bank to exercise, and no delay in exercising, any right,
power, or remedy under this Agreement or the Note shall operate as a
waiver thereof; nor shall any single or partial exercise of any right
under this Agreement or the Note preclude any other or further exercise
thereof or the exercise of any other right. The remedies provided in
this Agreement and the Note are cumulative and not exclusive of any
remedies provided by law.
SECTION 4.11834 SUCCESSORS AND ASSIGNS. This Agreement
shall be binding upon and inure to the benefit of the Borrower and the
Bank and their respective successors and assigns, except that the
Borrower may not assign or transfer any of its rights under this
Agreement or the Note without the prior written consent of the Bank.
SECTION 5.11834 COSTS, EXPENSES AND TAXES. The Borrower
agrees to pay on demand all reasonable costs and expenses of the Bank in
connection with the preparation, execution, delivery, and administration
of this Agreement and the Note, and all other documents to be delivered
in connection therewith, including, without limitation, the reasonable
fees and out-of-pocket expenses of outside and corporate (in-house)
counsel for the Bank. The prevailing party in any action to enforce any
provision of this Agreement or the Note, shall be entitled to immediate
reimbursement from the other party for all reasonable costs and expenses
incurred by such party, including, without limitation, all reasonable
legal fees and expenses of such party. In addition, the Borrower shall
pay any and all stamp, recording, and other taxes and fees payable or
determined to be payable in connection with the execution, delivery,
filing and recording of any of the Loan Documents, and agrees to save the
Bank harmless from and against any and all liabilities with respect to or
resulting from any delay in paying or omission to pay such taxes and
fees.
SECTION 6.11834 RIGHT OF SETOFF. Upon the occurrence and
during the continuance of any Event of Default, the Bank is hereby
authorized at any time and from time to time, without notice to the
Borrower (any such notice being expressly waived by the Borrower), to set
off and apply any and all deposits (general or special, time or demand,
provisional or final) at any time held and other indebtedness at any time
owing by the Bank to or for the credit or the account of the Borrower
against any and all of the obligations of the Borrower now or hereafter
existing under this Agreement or the Note, irrespective of whether or not
the Bank shall have made any demand under this Agreement or the Note and
although such obligations may be unmatured. The Bank agrees promptly to
notify the Borrower after any such setoff and application, provided that
the failure to give such notice shall not affect the validity of such
setoff and application. The rights of the Bank under this Section 11.6
are in addition to other rights and remedies (including, without
limitation, other rights of setoff) which the Bank may have.
SECTION 7.11834 GOVERNING LAW. This Agreement and the Note
shall be governed by, and construed in accordance with, the laws of the
State of Connecticut, without regard to principles of conflict of laws.
SECTION 8.11834 SUBMISSION TO JURISDICTION. The Borrower
hereby irrevocably submits to the jurisdiction of any State of
Connecticut or United States Federal court sitting in the State of
Connecticut over any action or proceeding arising out of or relating to
this Agreement or any Note, and the Borrower hereby irrevocably agrees
that all claims in respect of such action or proceeding may be heard and
determined in such State of Connecticut or Federal court. The Borrower
hereby irrevocably appoints CT Corporation Systems at One Commercial
Plaza, Hartford, Connecticut 06103 (the "Process Agent"), as its agent to
receive on behalf of the Borrower and its Property service of copies of
the summons and complaint and any other process which may be served in
any such action or proceeding. Such service may be made by mailing or
delivering a copy of such process to the Borrower in care of the Process
Agent at the Process Agent's above address, and the Borrower hereby
irrevocably authorizes and directs the Process Agent to accept such
service on its behalf. As an alternative method to service, the Borrower
also irrevocably consents to the service of any and all process in any
such action or proceeding by the mailing of copies of such process to the
Borrower at its address specified in Section 11.2 hereof. The Borrower
agrees that a final judgment in any such action or proceeding shall be
conclusive and may be enforced in other jurisdictions by suit on the
judgment or in any other manner provided by law. The Borrower further
waives any objection to venue in such State and any objection to any
action or proceeding in such state on the basis of forum non conveniens.
The Borrower further agrees that any action or proceeding brought against
the Bank shall be brought only in the State of Connecticut or a United
States Federal court sitting in the State of Connecticut. Nothing in
this Section 11.8 shall affect the right of the Bank to serve legal
process in any other manner permitted by law or affect the right of the
Bank to bring any action or proceeding against the Borrower or its
Property in the courts of any other jurisdictions.
SECTION 9.11834 SEVERABILITY OF PROVISIONS. Any provision
of this Agreement or the Note which is prohibited or unenforceable in any
jurisdiction shall, as to such jurisdiction, be ineffective to the extent
of such prohibition or unenforceability without invalidating the
remaining provisions of this Agreement or the Note, or affecting the
validity or enforceability of such provision in any other jurisdiction.
SECTION 10.11834 HEADINGS. Article and Section headings in
this Agreement are included herein for the convenience of reference only
and shall not constitute a part of this Agreement for any other purpose.
SECTION 11.11834 COMPLETE AGREEMENT. This Agreement,
together with the exhibits and schedules to this Agreement, and the Note,
are intended by the parties as a final expression of their agreement and
is intended as a complete statement of the terms and conditions of their
agreement with respect to the subject matter hereof.
SECTION 12.11834 PREJUDGMENT REMEDY WAIVER. THE BORROWER
HEREBY ACKNOWLEDGES THAT THIS AGREEMENT AND THE TRANSACTIONS CONTEMPLATED
HEREUNDER AND UNDER THE OTHER LOAN DOCUMENTS CONSTITUTE COMMERCIAL
TRANSACTIONS AND HEREBY EXPRESSLY WAIVES ANY AND ALL CONSTITUTIONAL
RIGHTS WITH RESPECT TO NOTICE AND HEARING UNDER CHAPTER 903a OF THE
CONNECTICUT GENERAL STATUTES, OR AS OTHERWISE ALLOWED UNDER ANY STATE OR
FEDERAL LAW IN CONNECTION WITH ANY PREJUDGMENT REMEDY AVAILABLE TO THE
BANK.
SECTION 13.11834 TRIAL BY JURY WAIVER. THE BORROWER WAIVES
TRIAL BY JURY IN ANY COURT AND IN ANY SUIT, ACTION OR PROCEEDING ON ANY
MATTER ARISING IN CONNECTION WITH OR IN ANY WAY RELATED TO THE FINANCING
TRANSACTIONS OF WHICH THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS ARE A
PART AND/OR THE ENFORCEMENT OF ANY OF THE BANKS RIGHTS AND REMEDIES. THE
BORROWER ACKNOWLEDGES THAT IT MAKES THIS WAIVER KNOWINGLY, VOLUNTARILY
AND ONLY AFTER EXTENSIVE CONSIDERATION OF THE RAMIFICATIONS OF THIS
WAIVER WITH ITS ATTORNEYS.
SECTION 14.11834 DEFENSES; WAIVER. The Borrower hereby
acknowledges and agrees it is liable to the Bank as set forth in this
Agreement and the Note, and that it does not have any defense, offset,
recoupment or counterclaim with respect thereto all of which are hereby
waived.
1
<PAGE>
1
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers thereunto duly authorized, as of
the date first above written.
STANDARD MANAGEMENT CORPORATION
By: /S/ STEPHEN M. COONS
Name: Stephen M. Coons
Title: General Counsel
FLEET NATIONAL BANK
By: /S/ R.J. KANE
Name: R.J. Kane
Title:Senior Vice President
EXHIBIT A - Note
EXHIBIT B - Pledge Agreement of Borrower
EXHIBIT C - Warrants
EXHIBIT D - Registration Rights Agreement
SCHEDULE ONE - Litigation
SCHEDULE TWO - Liens
SCHEDULE THREE - Debt
SCHEDULE FOUR - Transactions with Affiliates
1
<PAGE>
AMENDED AND RESTATED REVOLVING LINE OF CREDIT AGREEMENT
DATED AS OF NOVEMBER 8, 1996
BETWEEN
STANDARD MANAGEMENT CORPORATION
AND
FLEET NATIONAL BANK
1
EXHIBIT A
NOTE
$16,000,000 November 8,1996
STANDARD MANAGEMENT CORPORATION, a corporation organized under the
laws of Indiana (the "Borrower"), for value received, hereby promises to
pay to the order of FLEET NATIONAL BANK, a national banking association
having an office at 777 Main Street, Hartford, Connecticut (the "Bank"),
the principal sum of SIXTEEN MILLION DOLLARS ($16,000,000), or, if less,
the amount loaned by the Bank to the Borrower pursuant to the Revolving
Line of Credit Agreement referred to below, in lawful money of the United
States of America and in immediately available funds, on the date(s) and
in the manner provided in said Agreement. The Borrower also promises to
pay interest on the unpaid principal balance hereof, for the period such
balance is outstanding, at said principal office, in like money, at the
rates of interest as provided in the Agreement described below, on the
date(s) and in the manner provided in said Agreement.
The date and amount of each type of loan made by the Bank to the
Borrower under this Note and the Agreement referred to below, and each
payment of principal thereof, shall be recorded by the Bank on its books
and, prior to any transfer of this Note (or, at the discretion of the
Bank, at any other time), endorsed by the Bank on the schedule attached
hereto or any continuation thereof.
This is the Note referred to in that certain Amended and Restated
Revolving Line of Credit Agreement dated as of November 8, 1996 by and
between the Borrower and the Bank (as amended from time to time the
"Agreement") and evidences the Loans issued by the Bank thereunder. All
terms not defined herein shall have the meanings given to them in the
Agreement.
The Agreement provides for the acceleration of the maturity of
principal upon the occurrence of certain Events of Default and for
prepayments on the terms and conditions specified therein.
The Borrower waives presentment, notice of dishonor, protest and
any other notice or formality with respect to this Note.
This Note shall be governed by, and interpreted and construed in
accordance with, the laws of the State of Connecticut.
STANDARD MANAGEMENT CORPORATION
By /S/ STEPHEN M. COONS
Name: Stephen M. Coons
Title: Executive Vice President and
General Counsel
<TABLE>
<CAPTION>
Amount of Loan Amount of Payment Balance
DATE Outstanding Notation By
<S> <C> <C> <C> <C>
</TABLE>
AMENDED AND RESTATED PLEDGE AGREEMENT
AMENDED AND RESTATED PLEDGE AGREEMENT, dated as of November
8, 1996, between FLEET NATIONAL BANK, a national banking association
(the "Bank"), and STANDARD MANAGEMENT CORPORATION, an Indiana corporation
(the "Pledgor").
WHEREAS, the Pledgor is the owner of all of the issued and
outstanding capital stock (the "Pledged Shares") of Standard Life
Insurance Company of Indiana, an Indiana corporation ("Standard Life"),
and of Standard Marketing Corporation, an Indiana corporation ("Standard
Marketing," and collectively referred to herein with Standard Life as the
"Subsidiaries"); and
WHEREAS, the Bank and the Pledgor entered into a Revolving Credit
Agreement dated as of November 21, 1995 (the "Existing Credit Agreement")
pursuant to which the Bank agreed to make certain loans to the Pledgor in
the principal amount of up to $6,000,000; and
WHEREAS, as of the date hereof, the Bank and the Pledgor are
entering into an Amended and Restated Revolving Line of Credit Agreement
(as it may hereafter be amended or otherwise modified from time to time
being hereinafter referred to as the "Revolving Line of Credit
Agreement"; terms used herein and not otherwise defined having the
meaning set forth therein) in order to increase the Commitment of the
Bank to make Revolving Credit Loans to the Pledgor under the Existing
Credit Agreement in the principal amount of up to $16,000,000; and
WHEREAS, it is a condition precedent to the making of the
Loans by the Bank to the Pledgor under the Revolving Line of Credit
Agreement that the Pledgor shall have made the pledge and granted the
Bank a perfected security interest in the Pledged Shares as contemplated
by this Amended and Restated Pledge Agreement; and
WHEREAS, each of the parties hereto desires to take such
other actions as may be necessary or desirable so that the Bank will have
a perfected security interest in the Pledged Shares; and
WHEREAS, all terms used herein and not otherwise defined
shall have the meanings set forth in the Revolving Line of Credit
Agreement.
NOW THEREFORE, in consideration of the premises contained
herein and in order to induce the Bank to make the Loans under the
Revolving Line of Credit Agreement, the parties hereto hereby agree as
follows:
SECTION A. PLEDGE AND GRANT OF SECURITY. The Pledgor hereby pledges to
the Bank and grants to the Bank a security interest in the following (the
"Pledged Collateral"):
B. the Pledged Shares and the certificates representing
the Pledged Shares, and all dividends, cash, instruments and other property
from time to time received, receivable or otherwise distributed in respect of
or in exchange for any or all of the Pledged Shares;
C. all additional shares of stock of any issuer from
time to time acquired by the Pledgor in substitution for or in addition to the
Pledged Shares or otherwise in any manner, and the certificates representing
such substituted or additional shares, and all dividends, cash, instruments and
other property from time to time received, receivable or otherwise
distributed in respect of or in exchange for any or all of such shares; and
D. all proceeds of any and all of the foregoing Pledged
Collateral.
SECTION a. SECURITY FOR OBLIGATIONS.
(E. This Agreement secures the payment of all obligations
of the Pledgor to the Bank under the Revolving Line of Credit Agreement, the
Note and the other Loan Documents, now or hereafter existing, whether for
principal, interest, fees, expenses or otherwise, and all obligations of the
Pledgor now or hereafter existing under this Agreement (all such obligations
of the Pledgor being the "Obligations").
(F. The Pledgor immediately shall cause to be duly and
properly filed all necessary financing statements in all locations required
by applicable law in order to effectuate the perfected security interest
contemplated hereby, including immediately filing amendments or other
financing statements upon any substitution or addition to the Pledged
Collateral.
SECTION a. DELIVERY OR OTHER TRANSFER OF PLEDGED COLLATERAL. All
certificates or instruments representing or evidencing the Pledged
Collateral shall be delivered to and held by the Bank pursuant hereto and
shall be in suitable form for transfer by delivery, or shall be accompanied
by duly executed instruments of transfer or assignment in blank, all in form
satisfactory to the Bank.
SECTION b. REPRESENTATIONS AND WARRANTIES. The Pledgor represents and
warrants as follows:
(G. The Pledged Shares have been duly authorized and validly
issued and are fully paid and non-assessable.
(H. The Pledgor is the legal and beneficial owner of the
Pledged Collateral, free and clear of any lien, security interest, option or
other charge or encumbrance except for the security interest created by this
Agreement.
(I. The pledge of, and grant of a security interest in, the
Pledged Collateral pursuant to this Agreement creates a valid and perfected
first priority security interest in the Pledged Collateral, securing the
payment of the Obligations.
(J. All filings and other actions necessary or desirable to
perfect and protect the security interest created by this Agreement have
been duly made or taken, as the case may be, including the filings of UCC
financing statements on Form UCC-1 in the locations set forth on Schedule A
attached hereto, which filings are the only filings necessary to perfect the
Bank's security interest in the Pledged Collateral. Except for such
financing statements as may have been filed in favor of the Bank relating to
the security interest created by this Agreement, no effective financing
statement or other instrument similar in effect covering all or any part of
the Pledged Collateral is on file in any recording office.
(K. No authorization, approval, or other action by, and no
notice to or filing with, any governmental authority or regulatory body is
required either (i) for the pledge of, and grant of a security interest in,
the Pledged Collateral by the Pledgor pursuant to this Agreement or for the
execution, delivery or performance of this Agreement by the Pledgor or (ii)
for the exercise by the Bank of the voting or other rights provided for in
this Agreement or the remedies in respect of the Pledged Collateral pursuant
to this Agreement, except to the extent required by the Brokerage Rules (as
hereinafter defined).
(L. Each of Standard Life and Standard Marketing are
wholly-owned subsidiaries of the Pledgor.
(M. The Pledged Shares constitute one hundred percent (100%)
of the issued and outstanding shares of stock of each of Standard Life and
Standard Marketing as indicated on Schedule I attached hereto.
(N. The Pledged Shares are not subject to any shareholder or
other agreement relating to the sale, pledge, transfer or disposition of the
Pledged Shares.
SECTION 1. PERFECTION OF SECURITY INTEREST IN PROCEEDS OR ADDITIONAL
PLEDGED COLLATERAL. In order to perfect the security interest of the Bank
in any proceeds of the Pledged Collateral or any additional shares of stock
or indebtedness which may be acquired by or otherwise come into the
possession of the Pledgor in substitution for or in addition to any of the
Pledged Collateral, the Pledgor shall cause to be delivered to the Bank any
cash or other property payable in consideration of the sale of any Pledged
Shares and all certificates representing the Pledged Shares or other
securities among the Pledged Collateral, along with duly executed instruments
of transfer or assignment in blank.
SECTION a. VOTING RIGHTS; DIVIDENDS, ETC.
(b. So long as no Event of Default (as defined in the Revolving Line of
Credit Agreement) shall have occurred and be continuing:
O. The Pledgor shall be entitled to exercise any and all
voting and other consensual rights pertaining to the Pledged Collateral or
any part thereof for any purposes not inconsistent with the terms of this
Agreement or the Revolving Line of Credit Agreement.
P. The Pledgor shall be entitled to receive and retain any and
all dividends and interest paid in respect of the Pledged Collateral;
PROVIDED, HOWEVER, that any and all
(A) dividends and interest paid or payable other than in cash in
respect of, and instruments and other property received, receivable or
otherwise distributed in respect of, or in exchange for, any Pledged
Collateral;
(B) dividends and other distributions paid or payable in cash in
respect of any Pledged Collateral in connection with a partial or total
liquidation or dissolution or in connection with a reduction of capital,
capital surplus or paid-in-surplus; and
(C) cash paid, payable or otherwise distributed in respect of
principal of, or in redemption of, or in exchange for, any Pledged
Collateral, shall be delivered forthwith to the Bank to hold as Pledged
Collateral and shall, if received by the Pledgor, be received in trust for the
benefit of the Bank, be segregated from the other property or funds of
the Pledgor, and be forthwith delivered to the Bank as Pledged Collateral
in the same form as so received (with any necessary endorsement).
(a. Upon the occurrence and during the continuance of an Event of
Default:
i) All rights of the Pledgor to exercise the voting and other
consensual rights which it would otherwise be entitled to exercise pursuant
to Section 6(a)(i) hereof and to receive the dividends and interest payments
which it would otherwise be authorized to receive and retain pursuant to
Section 6(a)(ii) hereof shall cease, and all such rights shall thereupon
become vested in the Bank, which shall thereupon have the sole right to
exercise such voting and other consensual rights and to receive and
hold as Pledged Collateral such dividends and interest payments. The Bank
agrees to promptly notify the Pledgor of any such vesting of rights pursuant
to this Section 6(b)(i), provided that the failure to give such notice shall
not affect the validity of any such vesting or otherwise impair the rights
or remedies of the Bank hereunder or otherwise.
ii) All dividends and interest payments which are received by
the Pledgor contrary to the provisions of paragraph (i) of this Section 6(b)
shall be received in trust for the benefit of the Bank or its nominee, shall be
segregated from other funds of the Pledgor and shall be forthwith paid over
to the Bank or its nominee, as Pledged Collateral in the same form as so
received (with any necessary endorsement).
SECTION 2. TRANSFERS AND OTHER LIENS; ADDITIONAL SECURITIES.
(a. The Pledgor agrees that it will not (i) sell or otherwise
dispose of, or grant any option with respect to, any of the Pledged
Collateral, or (ii) create or permit to exist any lien, security interest, or
other charge or encumbrance upon or with respect to any of the Pledged
Collateral, except for the security interest under this Agreement.
(b. The Pledgor agrees that it will cause each of the Subsidiaries to
deliver directly to the Bank or its nominee any stock or other securities
which may be issued in addition to, in substitution for or as a dividend or
distribution relating to any of the Pledged Collateral, and the Pledgor will
promptly take any other action reasonably requested by the Bank to pledge to
the Bank immediately upon acquisition thereof by the Pledgor (whether
directly or indirectly), such additional shares of stock or other securities
or indebtedness to be included in the Pledged Collateral.
SECTION 3. BANK MAY PERFORM. If the Pledgor fails to perform any agreement
contained herein, the Bank may itself perform, or cause performance of, such
agreement, and the expenses of the Bank incurred in connection therewith
shall be payable by the Pledgor under Section 11.
SECTION 4. REASONABLE CARE. The Bank shall be deemed to have exercised
reasonable care in the custody and preservation of the Pledged Collateral
in its possession if the Pledged Collateral is accorded treatment
substantially equal to that which the Bank accords its own property.
SECTION 5. REMEDIES UPON DEFAULT. If any Event of Default shall have
occurred and be continuing:
(a. The Bank may exercise in respect of the Pledged Collateral, in
addition to other rights and remedies provided for herein or otherwise
available to it, all the rights and remedies of a secured party on default
under the Uniform Commercial Code in effect in the State of Connecticut at
that time (the "Code") (whether or not the Code applies to the affected
Collateral), and may also, without notice except as specified below, sell
the Pledged Collateral or any part thereof in one or more parcels at public
or private sale, at any exchange, broker's board or at any of the Bank's
offices or elsewhere, for cash, on credit or for future delivery, and upon
such other terms as the Bank may deem commercially reasonable. The Bank
agrees to attempt to obtain the reasonable value of the Pledged Collateral
upon any such sale. The Pledgor agrees that, to the extent notice of sale
shall be required by law, at least ten days' notice to the Pledgor of the
time and place of any public sale or the time after which any private sale
is to be made shall constitute reasonable notification. The Bank shall not
be obligated to make any sale of Pledged Collateral regardless of notice of
sale having been given. The Bank may adjourn any public or private sale
from time to time by announcement at the time and place fixed therefor, and
such sale may, without further notice, be made at the time and place
to which it was so adjourned.
(b. Any cash held by the Bank as Pledged Collateral and all cash
proceeds received by the Bank in respect of any sale of, collection from, or
other realization upon all or any part of the Pledged Collateral may, in the
discretion of the Bank, be transferred to the Bank as collateral for, and/or
then or at any time thereafter applied in whole or in part by the Bank
against all or any part of the Obligations in such order as the Bank shall
elect. Any surplus of such cash or cash proceeds held by the Bank and
remaining after payment in full of all the Obligations shall be paid over to
the Pledgor or to whomsoever may be lawfully entitled to receive such
surplus.
SECTION 6. FEES AND EXPENSES. The Pledgor will upon demand pay to the Bank
the amount of any and all reasonable expenses, including the reasonable fees
and expenses of its counsel and of any experts and agents, which the Bank may
incur in connection with (a) the administration of this Agreement, (b) the
custody or preservation of, or the sale of, collection from, or other
realization upon, any of the Pledged Collateral, (c) the exercise or
enforcement of any of the rights of the Bank hereunder or (d) the failure by
the Pledgor to perform or observe any of the provisions hereof.
SECTION 7. AMENDMENTS; ETC. No amendment or waiver of any provisions of this
Agreement nor consent to any departure herefrom, shall in any event be
effective unless, in the case of an amendment, the same shall be in writing
and signed by the Pledgor and the Bank and, in the case of a waiver and
consent, the same shall be in writing and signed by the Bank, and then
such waiver or consent shall be effective only in the specific instance and
for the specific purpose for which given.
SECTION 8. ADDRESSES FOR NOTICES. All notices and other communications
provided for hereunder shall be in writing (including telegraphic
communication) and mailed, telegraphed or delivered,
If to the Pledgor:
Standard Management Corporation
9100 Keystone Crossing
Indianapolis, Indiana 46240
Attention: Stephen M. Coons, Esq.
Vice President and General Counsel
If to the Bank:
Fleet National Bank
777 Main Street
Hartford, Connecticut 06115
Attention: R. J. Kane
Vice President
or as to any party at such other address as shall be designated by such
party in a written notice to each other party complying as to delivery
with the terms of this Section. All such notices and other
communications shall, when mailed or telegraphed, respectively, be
effective when deposited in the mails or delivered to the telegraph
company or in the case of personal delivery, upon delivery, in each case,
addressed as aforesaid, except that with respect to notice to the Bank
hereunder, the same shall be effective only upon receipt.
SECTION 9. FURTHER ASSURANCES. The Pledgor agrees
that at any time and from time to time, at the expense of the Pledgor,
the Pledgor will promptly execute and deliver all further instruments and
documents, and take all further action, that may be necessary or
desirable, or that the Bank may reasonably request, in order to perfect
and protect any security interest granted or purported to be granted
hereby or to enable the Bank to exercise and enforce its rights and
remedies hereunder with respect to any Pledged Collateral.
SECTION 10. CONTINUING SECURITY INTERESTS; TRANSFER
OF NOTE. This Agreement shall create a continuing security interest in
the Pledged Collateral and shall (a) remain in full force and effect
until payment in full of the Obligations, (b) be binding upon the
Pledgor, its successors and assigns, (c) be binding upon the Bank, its
successors and assigns and (d) inure to the benefit of the Bank and its
successors, transferees and assigns. Upon the payment in full of the
Obligations, the Pledgor shall be entitled to the return, upon its
request and at its expense, of such of the Pledged Collateral as shall
not have been sold or otherwise applied pursuant to the terms hereof.
SECTION 11. GOVERNING LAW; TERMS. This Agreement
shall be governed by and construed in accordance with the laws of the
State of Connecticut. Unless otherwise defined herein or in the
Revolving Line of Credit Agreement, terms defined in Articles 8 or 9 of
the Uniform Commercial Code in the State of Connecticut are used herein
as therein defined.
<PAGE>
1
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed and delivered as of the date first above
written.
FLEET NATIONAL BANK
By: /S/ R.J. KANE
Name: R. J. Kane
Title: Senior Vice President
STANDARD MANAGEMENT CORPORATION
By: /S/ STEPHEN M. COONS
Name: Stephen M. Coons
Title: Executive Vice President
and General Counsel
<PAGE>
1
SCHEDULE A
Locations for Filing
UCC FINANCING STATEMENTS ON FORM UCC-1
Office of the Secretary of State of Indiana
Marion, Indiana County Recorder Office
<PAGE>
1
SCHEDULE I
Attached to and forming a part of that certain Amended and Restated
Pledge
Agreement dated as of November 8, 1996 by and between
STANDARD MANAGEMENT CORPORATION and
FLEET NATIONAL BANK
<TABLE>
<CAPTION>
Percentage
Stock of
STOCK Class of Certificate Number of Outstanding
ISSUER STOCK NO(S). PAR VALUE SHARES SHARES
<S> <C> <C> <C> <C> <C>
Standard Life Common 1 None 897,033 100%
Insurance Company
of Indiana
Standard Marketing Common 1 None 1,000 100%
Corporation
</TABLE>
C&LDOC: S2478391.DOC <<Date>>
STANDARD MANAGEMENT CORPORATION
NOTE AGREEMENT
Dated as of November 8, 1996
Re:
$4,000,000 Senior Subordinated Convertible Note
Due December 31, 2003
G:\LEGAL\KSK\STAN3.REV
<PAGE>
TABLE OF CONTENTS
PAGE
SECTION 1. DESCRIPTION OF NOTE AND COMMITMENTS 1
1.1 Description of Note 1
1.2 Commitments, Closing Date 1
1.3 Conversion. . . . . . . . . . . . . . . . . . 2
SECTION 2. PREPAYMENT OF NOTE 3
2.1 Restriction on Prepayment 3
2.2 Mandatory Prepayments in Certain Events 3
2.3 Prepayments at Option of the Company 3
2.4 Direct Payment 4
SECTION 3. REPRESENTATIONS 4
3.1 Representations of the Company 4
3.2 Representations of the Purchaser 5
SECTION 4. CLOSING CONDITIONS 5
4.1 Closing Certificate 5
4.2 Legal Opinion 5
4.3 Company's Existence and Authority 6
4.4 Consent and Approvals 6
4.5 Registration Rights Agreement . . . . . . . . 6
4.6 Legality of Investment 6
4.7 Satisfactory Proceedings 6
4.8 Acquisition of Shelby 6
4.9 Use of Proceeds 6
4.10 Waiver of Conditions 7
SECTION 5. COMPANY COVENANTS 7
5.1 Corporate Existence, Etc. 7
5.2 Insurance 7
5.3 Taxes, Claims for Labor and Materials,
Compliance with Laws 8
5.4 Maintenance of Material Properties, Etc. 8
5.5 Nature of Business 9
5.6 Limitations on Indebtedness 9
5.7 Limitations on Liens 9
5.8 Reinsurance 10
5.9 Financial Covenants 10
5.10 Sales of Assets 11
5.11 Loans and Investments . . . . . . . . . . . . 11
5.12 Guaranties, Etc . . . . . . . . . . . . . . . 11
5.13 Mergers 11
5.14 Transactions with Affiliates 12
5.15 Limitation on Sale and Lease-Backs 12
5.16 Repurchases of Note 12
5.17 Dividends 12
5.18 Termination of Pension Plans 13
5.19 Reports and Rights of Inspection 13
5.20 Leases 15
5.21 Investment Advisory Agreement 15
SECTION 6. EVENTS OF DEFAULT AND REMEDIES THEREFOR 15
6.1 Events of Default 15
6.2 Notice to Holders 18
6.3 Acceleration of Maturity 18
6.4 Rescission of Acceleration 18
SECTION 7. AMENDMENTS, WAIVERS AND CONSENTS 19
7.1 Consent Required 19
7.2 Effect of Amendment or Waiver 19
SECTION 8. INTERPRETATION OF AGREEMENT; DEFINITIONS 19
8.1 Definitions 19
8.2 Accounting Principles 26
SECTION 9. MISCELLANEOUS 26
9.1 Note Register 26
9.2 Exchange of Note 26
9.3 Loss, Theft, Etc. of Note 27
9.4 Expenses; Stamp Tax Indemnity 27
9.5 Indemnities 27
9.6 Powers and Rights Not Waived; Remedies
Cumulative 28
9.7 Notices 28
9.8 Reproduction of Documents 28
9.9 Counterparts 29
9.10 Successors and Assigns 29
9.11 Survival of Covenants and Representations 29
9.12 Severability 29
9.13 Governing Law 29
9.14 Captions 30
9.15 Waiver of Jury Trial 30
ATTACHMENTS TO NOTE AGREEMENT:
EXHIBIT A Form of Senior Subordinated Convertible Note
Due December 31, 2003
EXHIBIT B Representations and Warranties
EXHIBIT C Financial Covenants
EXHIBIT D Reporting Requirements
G:\LEGAL\KSK\STAN3.REV
<PAGE>
PAGE
NOTE AGREEMENT
THIS NOTE AGREEMENT (this "Agreement") is made and entered
into as of November 8, 1996 by and between Standard Management Corporation,
an Indiana corporation (the "Company") and Great American Reserve Insurance
Company, a Texas Corporation ("the Purchaser").
WHEREAS, the Company desires that the Purchaser lend money to
the company as provided herein and the Purchaser is prepared to lend such
money.
NOW THEREFORE, in consideration of the premises and for other
good and valuable consideration the receipt and adequacy of which is hereby
acknowledged, the parties hereto hereby agree as follows:
SECTION 1. DESCRIPTION OF NOTE AND COMMITMENT.
1.1. DESCRIPTION OF NOTE. The Company has duly authorized the
issuance and sale of its Senior Subordinated Convertible Note Due December
31, 2003 in the aggregate principal amount of Four Million Dollars
($4,000,000) (the "Note"), in the form of EXHIBIT A, and shall bear
interest at a rate of 12% per annum. The Note will be dated the date of
issue, will bear interest from such date as respectively set forth therein,
payable quarterly on the first day of each January, April, July and October
in each year (commencing January 1, 1997) and at maturity. The Note will
bear interest on overdue principal (including any overdue prepayment of
principal) and on any overdue installment of interest at the Overdue Rate
after the due date thereof, whether by mandatory prepayment, by
acceleration or otherwise, until paid. The Note will be expressed to
mature on December 31, 2003 and will be subject to mandatory prepayments
prior to such date. Interest on the Note shall be computed on the basis of
a 360-day year of twelve 30-day months. At its option until December 31,
2000, the Company may pay quarterly interest by notifying the Purchaser in
writing to add the amount of the interest payment then due and payable to
the Note; PROVIDED, HOWEVER, that for all periods for which the Company
makes such election, the Note shall bear interest at a rate of 14% per
annum. The Note is not subject to prepayment or redemption at the option
of the Company prior to its expressed maturity date except on the terms and
subject to the conditions referred to in SECTION 2 of this Agreement. The
terms which are capitalized herein shall have the meanings set forth in
SECTION 8.1 hereof unless the context shall otherwise require.
1.2. COMMITMENTS, CLOSING DATE. Subject to the terms and conditions
hereof and on the basis of the representations and warranties hereinafter
set forth, the Company agrees to issue and sell to the Purchaser, and the
Purchaser agrees to purchase from the Company on the Closing Date at a
price of 100% of the principal amount, the Note.
Delivery of the Note on the Closing Date will be made at such place
as the parties hereto mutually agree against payment therefor by wire
transfer of federal funds currently and immediately available in
Indianapolis, Indiana, (net of the funds to be paid to the Purchaser for
the purchase of the Warrants and the payment of a fee as specified in
SECTION 4.9) for credit to such account or accounts as the Company shall
specify by not less than three Business Days' prior written notice.
On the Closing Date the Company will deliver to the Purchaser the Note in
the principal amount of Four Million Dollars ($4,000,000).
1.3. CONVERSION. (a) The Purchaser may, at the Purchaser's option,
at any time, and from time to time, prior to payment in full of the Note,
convert the outstanding principal amount of the Note and any accrued and
unpaid interest due pursuant to SECTION 1.1 in whole or in part (the
"Conversion Amount") into fully paid and non-assessable shares (but only
into full shares) of the common stock, without par value of the Company
(the "Common Shares"), at a price equal to the amount of $5.75 per Common
Share (the "Conversion Rate"). Provided, however, the Conversion Rate
shall increase to the amount of $6.00 per Common Share if the Company gives
notice that it intends and has the demonstrated financial ability to prepay
in full the Note within one year after the date hereof; provided, further,
such notice of prepayment must contain evidence satisfactory to Purchaser
of the Company's ability to prepay the Note in full and such evidence may
consist of a bank or other financing commitment letter or a registration
statement. In order to exercise this conversion right, the Purchaser must
send written notice of the conversion to the Company at least 10 days prior
to the specified conversion date. On the conversion date (or as soon
thereafter as is reasonably practicable), the Company shall issue to the
Purchaser a share certificate for the Common Shares acquired upon
conversion. The Purchaser's right to elect to convert the Conversion
Amount of the Note into Common Shares shall not be affected by any
prepayment notice given by the Company, so long as the Company receives the
Purchaser's written notice of the conversion at least five Business Days
before the date upon which Company specified in its notice that it would
prepay the Note;
(b) The Conversion Rate shall be adjusted as provided in the Note.
(c) Notwithstanding any other provisions of this SECTION 1.3 to
the contrary, the conversion rights of the Purchaser shall be subject to
compliance with all applicable federal and state securities laws, and the
Company agrees to execute all required agreements and documents required by
the Company to establish compliance with such laws; and
(d) The Company shall at all times reserve and keep available and
free of preemptive rights out of its authorized but unissued Common Shares,
solely for the purpose of issuance upon conversion of the Note, that number
of Common Shares as shall from time to time be sufficient to effect the
conversion of the Note, and if at any time the number of authorized but
unissued Common Shares shall not be sufficient to effect the exercise of
the Note, the Company shall take the corporate action necessary to increase
the number of its authorized Common Shares to a number sufficient for this
purpose.
SECTION 2. PREPAYMENT OF NOTE.
2.1 RESTRICTION ON PREPAYMENT. No prepayment of the Note may be
made except to the extent and in the manner expressly provided in this
Agreement.
2.2. MANDATORY PREPAYMENTS IN CERTAIN EVENTS. The Note shall be
subject to mandatory prepayment in the amount described below, pro-rata
among all holders, on the terms hereinafter set forth, upon the occurrence
of any of the following events and so long as such prepayment is not
prohibited by the Fleet Credit Agreement:
(a) the Company or any Subsidiary shall sell any assets other than
as permitted by Section 5.10;
(b) the Company or any Subsidiary shall issue any Indebtedness other
than as permitted by SECTION 5.6; or
(c) the Company shall issue and sell any Common Stock in one or more
public offerings or private placements for aggregate cash proceeds to the
Company (net of all reasonable and appropriate commissions, fees and
expenses) in excess of $1,000,000 in any fiscal year.
Any mandatory prepayment made pursuant to this SECTION 2.2 shall be
in an aggregate amount equal to the fair market value of the proceeds to
the Company (net of all reasonable and appropriate fees and expenses) from
any transaction described in clause (a), (b) or (c) and shall be preceded
by the notice hereinafter described.
The prepayment price of the Note prepaid pursuant to this SECTION 2.2
shall be equal to 100% of the principal amount thereof to be prepaid plus
accrued interest thereon to the date fixed for prepayment.
2.3. PREPAYMENTS AT OPTION OF THE COMPANY. The Company, upon not
less than thirty nor more than sixty days' prior written notice of the date
and principal amount of any optional prepayment to the holder of the Note,
shall be entitled to prepay at any time all or any portion of the Note.
Any notice of prepayment pursuant to SECTION 2.2 or this SECTION 2.3
shall (i) make reference to the applicable Section(s), (ii) state whether
the Note is to be prepaid in whole, and (iii) state the prepayment date and
price. The Company shall, on such prepayment date, make the required
prepayment.
2.4. DIRECT PAYMENT. Notwithstanding anything to the contrary in
this Agreement or the Note, in case the Note is owned by the Purchaser or
its nominee (or owned by any other institutional holder who has given
written notice to the Company requesting that the provision of this SECTION
2.4 shall apply), the Company will promptly and punctually pay when due the
principal thereof and interest thereon, without any presentment thereof
directly to such Purchaser or such subsequent holder at the address of such
Purchaser or at such other address as such Purchaser or such subsequent
holder may from time to time designate in writing to the Company or, if a
bank account is designated for the Purchaser or in any written notice to
the Company from such Purchaser or any such subsequent holder, the Company
will make such payments in immediately available funds to such bank
account, marked for attention as indicated, or in such other manner or to
such other account of such Purchaser or such holder in any bank in the
United States as such Purchaser or any such subsequent holder may from time
to time direct in writing. The holder of any Note to which this SECTION
2.4 applies agrees that in the event it shall sell or transfer any such
Note it will (A) prior to the delivery of such Note make a notation thereon
of all principal, if any, prepaid thereon and of the date to which interest
has been paid thereon, and (B) promptly notify the Company in writing of
the name and address of the transferee of the Note so transferred. To the
extent this SECTION 2.4 applies, the Company shall be entitled to presume
conclusively that the original or such subsequent institutional holder as
shall have requested the provisions hereof to apply to its Note remains the
holder of such Note until (1) the Company shall have received from the
transferor thereof written notice of the transfer of such Note and of the
name and address of the transferee, or (2) such Note shall have been
presented to the Company as evidence of the transfer. The Purchaser
agrees, and any subsequent holder requesting direct payment pursuant to
this SECTION 2.4 shall by requesting direct payment be deemed to have
agreed, to return the Note to the Company promptly following the final
payment thereof.
SECTION 3. REPRESENTATIONS.
3.1. REPRESENTATIONS OF THE COMPANY. The Company represents and
warrants that all representations set forth in EXHIBIT B attached hereto
are true and correct as of the date hereof and are incorporated herein by
reference with the same force and effect as though herein set forth in
full.
3.2. REPRESENTATIONS OF THE PURCHASER. The Purchaser represents,
and in entering into this Agreement the Company understands, that (1) the
Purchaser is acquiring the Note for the purpose of investment and not with
a view to the resale or distribution thereof, and that the Purchaser has no
present intention of selling, negotiating, transferring or otherwise
disposing of the Note, but without prejudice, however, to the Purchaser's
right at all times to sell or otherwise dispose of all or any part of the
Note pursuant to a registration statement which has become effective under
the Securities Act of 1933, as amended (the "Act"), or in a transaction
exempt from the registration requirements of such Act, and (2) the
Purchaser is an "accredited investor" as defined in Rule 501(a) of
Regulation D under the Act. The Purchaser acknowledges that the Note it is
purchasing on the Closing Date will not, as of said Closing Date, be
registered under the Act, and except as provided in the Registration Rights
Agreement, that the Company assumes no obligation to register the Note
under the Act and that the Note may only be offered or sold in compliance
with the Act and applicable state securities laws.
SECTION 4. CLOSING CONDITIONS.
The Purchaser's obligations to purchase the Note on the Closing Date
shall be subject to the performance by the Company of its agreements
hereunder which by the terms hereof are to be performed at or prior to the
time of delivery of the Note and to the following further conditions
precedent:
4.1. CLOSING CERTIFICATE. Concurrently with the delivery of the
Note to the Purchaser on the Closing Date, the Purchaser shall have
received a certificate dated the Closing Date, signed by the Secretary of
the Company, certifying, among other things, (a) a true and correct copy of
the Certificate of Incorporation of the Company, and all amendments, if
any, thereto, (b) a true and correct copy of the By-Laws of the Company as
then in effect, (c) copies of all corporate action taken by the Company,
including resolutions of its Board of Directors authorizing the execution,
delivery and performance of this Agreement, the Note and each other
document to be delivered by the Company pursuant to this Agreement, and (d)
the names and true signatures of the officers of the Company authorized to
sign this Agreement, the Note and each other document to be delivered by
the Borrower under this Agreement.
4.2. LEGAL OPINION. Concurrently with the delivery of the Note to
the Purchaser on the Closing Date, the Purchaser shall have received a
favorable opinion of counsel for the Company in form and substance
satisfactory to the Purchaser in all respects, dated the Closing Date.
4.3. COMPANY'S EXISTENCE AND AUTHORITY. On or prior to the Closing
Date, the Purchaser shall have received, in form and substance reasonably
satisfactory to it and its special counsel, such documents and evidence
with respect to the Company establishing the existence and good standing of
the Company and its Subsidiaries and the Company's authorization of the
transactions contemplated by this Agreement.
4.4. CONSENT AND APPROVALS. Any consents or approvals required to
be obtained from any holder or holders of any outstanding Security of the
Company or any other Person and any amendments of agreements pursuant to
which any Securities may have been issued which shall be necessary to
permit the consummation of the transactions contemplated hereby on the
Closing Date shall have been obtained and all such consents or amendments
shall be satisfactory in form and substance to the Purchaser and its
special counsel.
4.5 REGISTRATION RIGHTS AGREEMENT. The parties shall have entered
into a Registration Rights Agreement substantially similar to the
registration rights agreement by and between the Company and Fleet National
Bank.
4.6. LEGALITY OF INVESTMENT. The Note to be purchased by the
Purchaser shall be a legal investment for the Purchaser under the laws of
each jurisdiction to which it may be subject (including legality by virtue
of resort to any so-called basket provisions of such laws).
4.7. SATISFACTORY PROCEEDINGS. All proceedings taken in connection
with the transactions contemplated by this Agreement, and all documents
necessary to the consummation thereof, shall be reasonably satisfactory in
form and substance to the Purchaser and its special counsel, and the
Purchaser shall have received a copy (executed or certified as may be
appropriate) of all legal documents or proceedings taken in connection with
the consummation of said transactions.
4.8. ACQUISITION OF SHELBY. Concurrently with the delivery of the
Note to the Purchaser on the Closing Date, the Company shall have completed
the acquisition of Shelby and made provision satisfactory to the Purchaser
and its special counsel for the statutory merger of Shelby into Standard
Life.
4.9. USE OF PROCEEDS. The Company shall use the proceeds from the
issuance of the Note as follows: (i) Three Million Three Hundred Thousand
dollars ($3,300,000) to pay a portion of the purchase price to acquire
Shelby, (ii) Six Hundred Thousand Dollars ($600,000) to purchase the
Warrants from Conseco, Inc., an Indiana Corporation; and (iii) One Hundred
Thousand Dollars ($100,000) to pay the Purchaser a fee for agreeing to
enter into this Agreement. None of such proceeds will be used, directly or
indirectly, for the purpose, whether immediate, incidental or ultimate, of
purchasing or carrying any "margin stock" within the meaning of Regulation
G or U (or any successor regulation) promulgated by the Board of Governors
of the Federal Reserve System as from time to time in effect.
4.10. WAIVER OF CONDITIONS. If on the Closing Date the Company
fails to tender to the Purchaser the Note to be issued to the Purchaser on
such date or if the conditions specified in this SECTION 4 have not been
fulfilled, the Purchaser may thereupon elect to be relieved of all further
obligations under this Agreement. Without limiting the foregoing, if the
conditions specified in this SECTION 4 have not been fulfilled, the
Purchaser may waive in writing the compliance by the Company with any such
condition to such extent as the Purchaser may in its sole discretion
determine. Nothing in this SECTION 4.10 shall operate to relieve the
Company of any of its obligations hereunder or to waive any of the
Purchaser's rights against the Company.
SECTION 5. COMPANY COVENANTS.
From and after the Closing Date and continuing so long as any amount
remains unpaid under the Note:
5.1. CORPORATE EXISTENCE, ETC. The Company will preserve and keep
in force and effect, and will cause each Subsidiary to preserve and keep in
force and effect, its respective corporate existence and all material
licenses and permits necessary to the proper conduct of its business,
PROVIDED that the foregoing shall not prevent (x) the liquidation of or the
transfer, sale or other disposition of any asset in accordance with SECTION
5.10 or (y) any other transaction otherwise permitted or consented to under
this Agreement.
5.2. INSURANCE. (a) The Company will maintain, and will cause each
Subsidiary to maintain, insurance coverage by financially sound and
reputable insurers in such forms and amounts and against such risks as are
customary for corporations of established reputation engaged in the same or
similar businesses and owning and operating similar properties. The
Company will maintain in force life insurance coverage by a financially
sound and reputable insurer (other than an Affiliate of the Company) on
Ronald D. Hunter in form and substance satisfactory to the purchasers
naming the Company as loss payee in an amount not less than Four Million
Dollars ($4,000,000). The Company shall furnish to the Purchaser on or
prior to the Closing Date a summary of insurance in force as of such date.
The Company shall give notice to the Purchaser of any reduction in coverage
or other material changes to the insurance maintained by the Company and
its Subsidiaries.
(b) At any time that the Company shall own any physical assets, it
shall maintain physical damage insurance coverage at least equal to the
fair market value of such assets and reasonable liability insurance
thereon, and with respect to each liability or physical damage insurance
policy covering any of the property of the Company, the Company will cause
such policy to provide, pursuant to endorsements in form and substance
satisfactory to the Purchaser, that the insurer will give the Purchaser 30
days prior written notice of the termination of such policy.
5.3. TAXES, CLAIMS FOR LABOR AND MATERIALS, COMPLIANCE WITH LAWS.
(a) The Company will promptly pay and discharge, and will cause each
Subsidiary promptly to pay and discharge, all lawful taxes, assessments and
governmental charges or levies imposed upon the Company or such Subsidiary,
respectively, or upon or in respect of all or any part of the Property or
business of the Company or such Subsidiary, and all claims for work, labor
or materials, which if unpaid could become a Lien or charge upon any
Property of the Company or such Subsidiary, which Lien or charge could
materially and adversely affect the Properties, business or financial
condition of the Company and its Subsidiaries considered as one enterprise;
PROVIDED that the Company or such Subsidiary shall not be required to pay
any such tax, assessment, charge, levy, or claim if (1) the validity,
applicability or amount thereof is being contested in good faith by
appropriate actions or proceedings which will prevent the forfeiture or
sale of any material Property of the Company or such Subsidiary or any
material interference with the use thereof by the Company or such
Subsidiary, and (2) the Company or such Subsidiary shall set aside on its
books reserves reasonably deemed by it to be adequate with respect thereto.
(b) The Company will promptly comply, and will cause each Subsidiary
to promptly comply, with all laws, ordinances or governmental rules and
regulations to which it is subject, including without limitation ERISA and
all Environmental Legal Requirements, the violation of which could
materially and adversely affect the Properties, business or financial
condition of the Company and its Subsidiaries considered as one enterprise
or could result in any Lien or charge upon any Property of the Company or
any Subsidiary, which Lien or charge could materially and adversely affect
the properties, business or financial condition of the Company and its
Subsidiaries considered as one enterprise.
5.4. MAINTENANCE OF MATERIAL PROPERTIES, ETC. The Company will
maintain, preserve and keep, and will cause each Subsidiary to maintain,
preserve and keep, its Properties which are used in the conduct of its
business (whether owned in fee or a leasehold interest), excluding any
Properties that the Company or any Subsidiary reasonably determines to be
surplus, obsolete or otherwise not useful in the conduct of its respective
business and excluding any Properties the failure to maintain, preserve and
keep which would not have a material and adverse effect on the Properties,
business or financial condition of the Company and its Subsidiaries
considered as one enterprise, in good repair and working order, normal wear
and tear excepted, and from time to time will make all necessary repairs,
replacements, renewals and additions which in the opinion of the Company
will maintain the efficiency thereof.
5.5. NATURE OF BUSINESS. The Company and its Subsidiaries will
continue to engage in substantially the same types of businesses in which
they are engaged as of the date hereof.
5.6. LIMITATIONS ON INDEBTEDNESS. The Company will not, and will
not permit any Subsidiary to, create, assume, issue, guarantee, suffer to
exist or otherwise incur any Indebtedness, except:
(a) Indebtedness of the Company under this Agreement and the
Note;
(b) Indebtedness existing as of the date hereof and set forth
on SCHEDULE 5.6;
(c) Indebtedness of the Company under the Fleet Credit
Agreement;
(d) Accounts payable to trade creditors for goods or services
which are not aged more than sixty days from billing date, and
current operating liabilities (other than for borrowed money) which
are not more than sixty days past due, in each case incurred in the
ordinary course of business and paid within the specified time,
unless contested in good faith and by appropriate proceedings and for
which appropriate reserves are maintained;
(e) Indebtedness between Subsidiaries of the Company or
between a Subsidiary of the Company and the Company; and
(f) Indebtedness of the Company or any of its Subsidiaries, if
any, secured by purchase-money Liens permitted by SECTION 5.7 hereof.
5.7. LIMITATIONS ON LIENS. The Company will not, and will not
permit any Subsidiary to, create, assume or incur, or suffer to exist, any
mortgage, pledge, security interest, encumbrance, lien or charge of any
kind on its or their property, whether now owned or hereafter acquired, or
upon any income or profits therefrom (collectively, "Liens"), except:
(a) Liens in favor of Fleet National Bank arising under the
Fleet Credit Agreement;
(b) Liens in favor of the Purchaser arising under this
Agreement;
(c) Liens for taxes or assessments or other governmental
charges or levies not yet due and payable or, if due and payable,
Liens which are being contested in good faith by appropriate
proceedings and for which appropriate reserves are maintained;
(d).Liens imposed by law, such as mechanics', materialmen's,
landlords', warehousemen's, and carriers' Liens, and other similar Liens,
securing obligations incurred in the ordinary course of business which are
not past due for more than sixty days or which are being contested in good
faith by appropriate proceedings and for which appropriate reserves have
been established;
(e) Liens under workmen's compensation, unemployment
insurance, social security, or similar legislation;
(f) Liens incurred in the ordinary course of business
relating to deposits or pledges to secure the performance of bids,
tenders, contracts (other than contract for the payment of money),
leases (permitted under the terms of this Agreement), or public or
statutory obligations, surety, stay, appeal, indemnity, performance,
or other similar bonds, or other similar obligations;
(g) Judgment and other similar Liens arising in connection
with court proceedings, provided the execution or other enforcement
of such Liens is effectively stayed and claims secured thereby are
being actively contested in good faith and by appropriate
proceedings;
(h) Easements, rights-of-way, restrictions, and other similar
encumbrances which, in the aggregate, do not materially interfere
with the occupation, use, and enjoyment by the Company or any of its
Subsidiaries of the property or assets encumbered thereby in the
normal course of its business or materially impair the value of the
property subject thereto; and
(i) Existing Liens specified in SCHEDULE 5.7 hereto.
5.8. REINSURANCE. Except for reinsurance on annuity products sold
after the date hereof in the ordinary course of business consistent with
past practice, the Company will not permit any insurance company Subsidiary
to enter into any reinsurance or other similar agreement with respect to
10% or more of its respective assets or liabilities in any fiscal year.
Any reinsurance or other similar agreement will be entered into only with a
company that is rated A or better by A.M. Best Company, Inc.
5.9. FINANCIAL COVENANTS. The Company will comply with all of the
financial covenants set forth in EXHIBIT C attached hereto, and the same is
hereby incorporated by reference with the same force and effect as though
herein set forth in full.
5.10. SALES OF ASSETS. The Company will not, and will not permit
any Subsidiary to, sell, lease, assign, transfer or otherwise dispose of
any of its now owned or hereafter acquired assets (including, without
limitation, shares of stock and indebtedness of any Subsidiary of the
Company, receivables and leasehold interests), except:
(a) the sale or other disposition of assets no longer used or
useful in the conduct of its business; or
(b) investment securities disposed of in the ordinary course
of business.
5.11. LOANS AND INVESTMENTS. Subject to the limitations set forth
below, the Company shall not make, or permit any of its Subsidiaries to
make, any loan or advance to any Person, or purchase or otherwise acquire,
or permit any of its Subsidiaries to purchase or otherwise acquire, any
capital stock, assets, obligations, or other securities of, make any
capital contribution to, or otherwise invest in or acquire any interest in
any Person except that, so long as the Company complies at all times with
the financial covenants set forth in SECTION 5.9 herein, (i) the Company
and its Subsidiaries may make investments in fixed maturities securities
rated less than "BBB" by Moody's Investor Services or Standard & Poor's
Corporation and in mortgage loans, real estate, collateral loans, common
and nonredeemable preferred stocks and other invested assets as long as the
total of such investments does not exceed 10% of the total consolidated
investments of the Company and its Subsidiaries and (ii) nothing herein
shall limit the ability of the Company and its Subsidiaries to invest all
or any portion of their respective assets in fixed maturities securities
rated at least "BBB" by Moody's Investor Service or Standard & Poor's
corporation, other investment grade bonds or securities guaranteed by the
United States Government.
5.12. GUARANTIES, ETC. The Company shall not assume, guarantee,
endorse, or otherwise be or become directly or contingently responsible or
liable, or permit any of its Subsidiaries to assume, guarantee, endorse, or
otherwise be or become directly or contingently responsible or liable
(including, but not limited to, an agreement to purchase any obligation,
stock, assets, goods, or services, or to supply or advance any funds,
assets, goods, or services, or to maintain or cause such Person to maintain
a minimum working capital or net worth or otherwise to assure the creditors
of any Person against loss) for obligations of any Person, except (1)
guarantee by endorsement of negotiable instruments for deposit or
collection or similar transactions in the ordinary course of business; and
(2) existing guaranties specified in SCHEDULE 5.12.
5.13. MERGERS, ETC. The Company will not, and will not permit any
Subsidiary to, merge with or into any Person or consolidate with, or sell,
assign, lease or otherwise dispose of (whether in one transaction or in a
series of transactions), all or substantially all of the assets or business
of any Person, except:
(a) any Subsidiary may merge with or into any Wholly-owned
Subsidiary so long as the Wholly-owned Subsidiary is the surviving
entity; and
(b) any Subsidiary may merge into the Company.
5.14. TRANSACTIONS WITH AFFILIATES.
The Company will not, enter into, or permit any of its Subsidiaries
to enter into, any transaction, including, without limitation, the
purchase, sale, or exchange of property or the rendering of any service
with any Affiliate, which individually or in the aggregate for the Company
and its Subsidiaries aggregate more than $250,000 per fiscal year, except
in the ordinary course of and pursuant to the reasonable requirements of
the Company or such Subsidiary's business and upon fair and reasonable
terms no less favorable to the Company or such Subsidiary than would be
obtained in a comparable arm's-length transaction with a Person not an
Affiliate and except for the transactions listed on SCHEDULE 5.14 and
SCHEDULE 5.17.
5.15. LIMITATION ON SALE AND LEASE-BACKS. Except for existing Liens
specified in SCHEDULE 5.6, the Company will not enter into, or permit any
Subsidiary to enter into, any arrangement with any bank, insurance company
or other lender or investor, or to which any such lender or investor is a
party, providing for the leasing to the Company or any Subsidiary of any
Property or Properties which has been or is to be sold or transferred by
the Company or any Subsidiary to such lender or investor or to any Person
to which funds have been or are to be advanced by such lender or investor,
in whole or in part, on the security of the leased Property.
5.16. REPURCHASES OF NOTE. Neither the Company nor any Subsidiary
nor any Affiliate, directly or indirectly, may repurchase or make any offer
to repurchase the Note unless the offer has been made to repurchase, pro-
rata, from all holders of the Note at the same time and upon equivalent
terms. In case the Company repurchases any Note, such Note shall
thereafter be canceled, the Company shall receive a prepayment credit to be
applied in inverse order of maturity, commencing with the payment due upon
the final maturity of the Note, and no Note shall be issued in substitution
thereof.
5.17. DIVIDENDS. The Company shall cause its Subsidiaries to pay to
the Company such amounts as will be sufficient for the Company to perform
its obligations under the Fleet Credit Agreement, this Agreement and the
Note and the surplus debentures listed on SCHEDULE 5.17 (with respect to
interest payments only) so long as such amounts may be legally paid under
applicable insurance laws or are otherwise approved by insurance
regulators; PROVIDED that the inability of any Subsidiary to pay dividends
shall not affect the Company's payment and other obligations under this
Agreement and the Note.
5.18. TERMINATION OF PENSION PLANS. The Company will not, and will
not permit any Subsidiary to, terminate any Plan maintained by it in a
manner which would result in the imposition of a Lien on any Property of
the Company or any Subsidiary pursuant to ERISA.
5.19. REPORTS AND RIGHTS OF INSPECTION.
(a) The Company will keep, and will cause each Subsidiary to
keep, proper books of record and account in which full and accurate
entries will be made of all dealings or transactions of or in
relation to the business and affairs of the Company or such
Subsidiary, in accordance with GAAP and SAP, and will furnish to the
Purchaser so long as the Purchaser is the holder of any Note and to
each other institutional holder of the then outstanding Note the
reports set forth on EXHIBIT D attached hereto and any special
reports or information requested by and/or furnished to Fleet
National Bank and the same is hereby incorporated by reference with
the same force and effect as though herein set forth in full.
(b) The Company will permit the Purchaser, so long as the
Purchaser is the holder of any Note, (or such Persons as either the
Purchaser or such holder may designate) to visit and inspect any of
the properties of the Company or any Subsidiary, to examine all their
books of account and financial records of operations, and at the
expense of such holder to make copies and extracts therefrom, and to
discuss their respective affairs, finances and accounts with their
respective officers, other executives and independent public
accountants (and by this provision the Company authorizes said
accountants to discuss with the Purchaser the finances and affairs of
the Company and its Subsidiaries), all at such reasonable times and
as often as may be reasonably requested. The Company shall not be
required to pay or reimburse the Purchaser or any such holder for
expenses which the Purchaser or any such holder may incur in
connection with any such visitation or inspection unless a Default or
an Event of Default shall have occurred and be continuing hereunder.
(c) Any information regarding the Company or any Subsidiary
which is, pursuant to this Agreement, provided to, or obtained or
examined by, (1) the Purchaser, or any of the its representatives,
while the Purchaser or its nominee holds the Note, or (2) any other
holder of the Note, or any of its representatives, while such holder
holds such Note, shall be considered and treated by the Purchaser and
its representatives and each other holder of the Note and its
representatives as confidential. The Purchaser agrees that it will
not disclose any such information without the prior written consent
of the Company (which consent shall not be unreasonably withheld)
other than on a confidential basis to (1) any one or more of the
Purchaser's respective directors, employees, agents, attorneys and
accountants who would have access to such information in the normal
course of the performance of such Person's duties and (2) the other
holders of the Note who first agree to be bound by the
confidentiality provisions hereof, or any one or more of the
directors, employees, agents, attorneys and accountants of such other
holders of the Note who would have access to such information in the
normal course of the performance of such Person's duties; PROVIDED
that the Purchaser may disclose or disseminate any such information:
(i) as has become generally available to the public (other
than in violation of this Agreement);
(ii) to such third parties as the Purchaser may, in its
discretion, deem reasonably necessary or desirable in connection with
or in response to (1) compliance with any law (including without
limitation any applicable Freedom of Information Act), ordinance or
governmental order, regulation, rule, policy, subpoena,
investigation, regulatory authority request or requests, or (2) any
order, decree, judgment, subpoena, notice of discovery or similar
ruling or pleading issued, filed served or purported on its face to
be issued, filed or served (x) by or under authority of any court,
tribunal, arbitration board of any governmental or industry agency,
commission, authority, board or similar entity or (y) in connection
with any proceeding, case or matter pending (or on its face purported
to be pending) before any court, tribunal, arbitrator or board of any
governmental agency, commission, authority, similar entity, it being
understood that the Purchaser will use its best efforts to give prior
notice to the Company thereof;
(iii) to any prospective purchaser, securities broker or
dealer or investment banker in connection with the resale or proposed
resale of any portion of the Note after such party shall have agreed
to maintain the confidentiality of any information furnished by the
Company to the extent required hereunder;
(iv) to the NAIC;
(v) to any entity utilizing such information to rate or
classify debt or equity securities or to report to the public
concerning the industry of which it is a part; and
(vi) to enforce or protect its rights under this Agreement or
the Note.
(d) Neither the Purchaser nor any other holder or holders of
the Note will be liable for the breach of this provision by any other
holder of the Note.
5.20. LEASES. The Company shall not create, incur, assume, or
suffer to exist, or permit any of its Subsidiaries to create, incur,
assume, or suffer to exist, any obligation as lessee for the rental or hire
of any real or personal Property, except:
(a) Capitalized Leases, if any, permitted under SECTION 5.7
hereof;
(b) Leases existing on the date of this Agreement and any
extensions or renewals thereof;
(c) Leases (other than Capitalized Leases) which do not in
the aggregate require the Company and its Subsidiaries on a
consolidated basis to make payments (including taxes, insurance,
maintenance and similar expenses which the Company or any of its
Subsidiaries is required to pay under the terms of any lease) in any
fiscal year of the Company in excess of One Million Four Hundred
Thirty Thousand Dollars ($1,430,000); and
(d) Leases between the Company and any of its Subsidiaries.
5.21. INVESTMENT ADVISORY AGREEMENT. Pursuant to that certain
Investment Advisory Agreement between Standard Life and Conseco Capital
Management Inc. ("Conseco Capital") dated as of August 1, 1991, (the
"Investment Advisory Agreement"), Conseco Capital provides investment
advice, among other services, to the Company. Neither the Company nor
Standard Life shall replace Conseco Capital with any other party or allow
any party other than Conseco Capital to provide the services currently
covered under the Investment Advisory Agreement with respect to the
Company, any of the Company's assets or any assets of any of the Company's
Subsidiaries domiciled in the United States without the prior written
consent of the holder of the Note.
SECTION 6. EVENTS OF DEFAULT AND REMEDIES THEREFOR.
6.1. EVENTS OF DEFAULT. If any of the following events ("Events of
Default") shall occur and be continuing:
(a) The Company should fail to pay or prepay, as and when due
and payable, any principal under the Note;
(b) The Company should fail to pay or prepay, as and when due
and payable, any interest due on the Note and such failure to pay or
prepay shall continue for more than three (3) Business Days;
(c) Any representation or warranty made or deemed made by the
Company in this Agreement or in the Note or which is contained in any
certificate, document, opinion, financial or other statement
furnished at any time or in connection with this Agreement, shall
prove to have been incorrect in any material respect on or as of the
date made or deemed made;
(d) The Company shall fail to perform or observe any term,
covenant, or agreement contained in any Loan Document (other than the
provisions of SECTION 5 of this Agreement) to which it is a party on
its part to be performed or observed;
(e) The Company shall fail or perform or observe any term,
covenant, or agreement contained in SECTION 5 of this Agreement and
such failure shall remain unremedied until the earlier of ten (10)
Business Days after (i) written notice thereof shall be given to the
Company by the Purchaser, or (ii) the Company is notified of such
failure or should have been notified of such failure pursuant to
SECTION 6.2 hereof;
(f) An event of default shall occur pursuant to the Fleet
Credit Agreement;
(g) The Company or any of its Subsidiaries shall (i) fail to
pay any of its Debt (after giving effect to any applicable grace
period), or any interest or premium thereon, when due (whether by
scheduled maturity, required prepayment, acceleration, demand, or
otherwise), or (ii) fail to perform or observe any term, covenant, or
condition on its part to be performed or observed under any agreement
or instrument relating to any such Debt, when required to be
performed or observed, if the effect of such failure to perform or
observe is to accelerate, or to permit the acceleration after the
giving of notice or passage of time, or both, of the maturity of such
Debt, whether or not such failure to perform or observe shall be
waived by the holder of such Debt; or any such Debt shall be declared
to be due and payable, or required to be prepaid (other than by a
regularly scheduled required prepayment), prior to the stated
maturity thereof;
(h) The Company or any of its Subsidiaries (i) shall
generally not, or shall be unable to, or shall admit in writing its
inability to pay its Debt as such Debt become due; or (ii) shall make
an assignment for the benefit of creditors, petition or apply to any
tribunal for the appointment of a custodian, receiver, or trustee for
it or a substantial part of its assets; or (iii) shall commence any
proceeding under any bankruptcy, reorganization, arrangements,
readjustment of debt, dissolution, or liquidation law or statute of
any jurisdiction, whether now or hereafter in effect; or (iv) shall
have any such petition or application filed or any such proceeding
commenced against it in which an order for relief is entered or
adjudication or appointment is made and which remains undismissed for
a period of sixty (60) days or more; or (v) by any act or omission
shall indicate its consent to, approval of, or acquiescence in any
such petition, application, or proceeding or order for relief or the
appointment of a custodian, receiver, or trustee for all or any
substantial part of its properties; or (vi) shall suffer any such
custodianship, receivership, or trusteeship to continue undischarged
for a period of sixty (60) days or more;
(i) One or more judgments, decrees, or orders for the payment
of money in excess of $250,000 in the aggregate shall be rendered
against the Company or any of its Subsidiaries, and such judgments,
decrees, or orders shall continue unsatisfied and in effect for a
period of thirty (30) consecutive days without being vacated,
discharged, satisfied, or stayed or bonded pending appeal;
(j) Any of the following events occur or exist with respect
to the Company, any of its Subsidiaries, or any ERISA Affiliate: (a)
any Prohibited Transaction involving any Plan; (b) any Reportable
Event with respect to any Plan; (c) the filing under Section 4041 of
ERISA of a notice of intent to terminate any Plan or the termination
of any Plan; (d) any event or circumstance that might constitute
grounds entitling the PBGC to institute proceedings under Section
4042 of ERISA for the termination of, or for the appointment of a
trustee to administer, any Plan, or the institution by the PBGC of
any such proceedings; (e) complete or partial withdrawal under
Section 4201 or 4204 of ERISA from a Multiemployer Plan or the
reorganization, insolvency, or termination of any Multiemployer Plan;
and in each case above, such event or condition, together with all
other events or conditions, if any, could in the reasonable opinion
of the Purchaser subject the Company, or any of its Subsidiaries, or
any ERISA Affiliate to any tax, penalty, or other liability to a
Plan, a Multiemployer Plan, the PBGC, or otherwise (or any
combination thereof) which in the aggregate exceed or may exceed
$250,000; or
(k) Any change in the current ownership or management of the
Company or Standard Life that would effect a change in "control" (as
such term is defined under the applicable definitional section of the
Indiana Insurance Law) of the Company and Standard Life.
6.2. NOTICE TO HOLDERS. When any Event of Default described in the
foregoing SECTION 6.1 has occurred, or if the holder of the Note or of any
other evidence of Indebtedness of the Company gives any notice or takes any
other action with respect to a claimed default, the Company agrees to give
notice within ten (10) days of such event and the action which is proposed
to be taken by the Company with respect thereto to the holder of the Note
then outstanding, such notice to be in writing and sent in the manner
provided in SECTION 9.7 hereof.
6.3. ACCELERATION OF MATURITY. During the existence of an Event of
Default the holder of the Note who or which has not consented to any waiver
with respect to such Event of Default may, at its option, by notice in
writing to the Company, declare the Note then held by such holder to be,
and such Note shall thereupon become, forthwith due and payable, together
with all interest accrued thereon, and to the extent not prohibited by
applicable law, interest on such principal and accrued interest at the
Overdue Rate for the period from and after the date of acceleration to and
including the date of payment thereof, without any presentment, demand,
protest or other notice of any kind, all of which are hereby expressly
waived, and the Company shall forthwith pay to such holder the entire such
amount. The holder of the Note may proceed to protect and enforce its
rights either by suit in equity and/or by action at law, whether for
specific performance of any covenant or agreement contained in this
Agreement or in the Note, or in aid of the exercise of any power granted
herein or therein or proceed to obtain judgment or any other relief
whatsoever appropriate to the action or proceeding, or proceed to enforce
any other legal or equitable right of any such holder of the Note. Upon
the Note becoming due and payable as a result of any Event of Default as
aforesaid, the Company will forthwith pay in cash to the holder of the Note
the entire principal, and interest accrued on the Note and interest on such
principal, and accrued interest at the Overdue Rate for the period from and
after the date of acceleration to and including the date of payment
thereof. No course of dealing on the part of any holder of the Note nor
any delay or failure on the part of any holder of the Note to exercise any
right shall operate as a waiver of such right or otherwise prejudice such
holder's rights, powers and remedies. The Company further agrees, to the
extent not prohibited by applicable law, to pay to the holder of the Note
all costs and expenses reasonably incurred by it in the collection of the
Note upon any Event of Default hereunder or thereon, including without
limitation reasonable compensation to such holder's or holders' attorneys
for all services rendered in connection therewith.
6.4. RESCISSION OF ACCELERATION. The provisions of SECTION 6.3 are
subject to the condition that if the principal of and accrued interest on
the outstanding Note has been declared immediately due and payable by
reason of the occurrence of any Event of Default, the holder may, by
written notice to the Company, rescind and annul such declaration and the
consequences thereof, PROVIDED that at the time such declaration is
annulled and rescinded:
(a) no judgment or decree shall have been entered for the
payment of any monies due pursuant to the Note or this Agreement;
(b) all arrears of interest upon the Note and all other sums
payable under the Note and under this Agreement (except any principal
or interest on the Note which has become due and payable solely by
reason of such declaration under SECTION 6.3) shall have been duly
paid; and
(c) each and every other Event of Default shall have been
made good, cured or waived pursuant to SECTION 7.1;
and PROVIDED FURTHER, that no such rescission and annulment shall extend to
or affect any subsequent Event of Default or impair any right consequent
thereto.
SECTION 7. AMENDMENTS, WAIVERS AND CONSENTS.
7.1. CONSENT REQUIRED. Any term, covenant, agreement or condition
of this Agreement may, with the consent of the Company, be amended or
compliance therewith may be waived (either generally or in a particular
instance and either retroactively or prospectively), if the Company shall
have obtained the consent in writing of the holder; PROVIDED that without
the written consent of the holder of the Note outstanding, no such waiver,
modification, alteration or amendment shall be effective (a) which will
change the time of payment of the principal of or the interest on the Note
or change the principal amount thereof or change the rate of interest
thereon, or (b) which will change any of the provisions with respect to
prepayments.
7.2. EFFECT OF AMENDMENT OR WAIVER. Any amendment or waiver under
this Agreement shall apply equally to all of the holders of the Note and
shall be binding upon them, upon each future holder of the Note and upon
the Company, whether or not such Note shall have been marked to indicate
such amendment or waiver. No such amendment or waiver shall extend to or
affect any obligation not expressly amended or waived or impair any right
consequent thereon.
SECTION 8. INTERPRETATION OF AGREEMENT; DEFINITIONS.
8.1. DEFINITIONS. Unless the context otherwise requires, the terms
hereinafter set forth when used herein shall have the following meanings,
and the following definitions shall be equally applicable to both the
singular and plural forms of any of the terms herein defined:
"ACT" is defined in SECTION 3.2.
"AFFILIATE" means any Person (other than a Subsidiary) (a) which
directly or indirectly through one or more intermediaries controls, or is
controlled by, or is under common control with, the Company, or (b) which
beneficially owns or holds (i) 10% or more of any class of the Voting Stock
of the Company or (ii) 10% or more of the Voting Stock (or in the case of a
Person which is not a corporation, 10% or more of the equity interest) of
which is beneficially owned or held by the Company or a Subsidiary. The
term "control" means the possession, directly or indirectly, of the power
to direct or cause the direction of the management and policies of a
Person, whether through the ownership of Voting Stock, by contract or
otherwise.
"ANNUAL STATEMENT" shall mean the annual financial statement of the
Company or any Subsidiary as required to be filed with Indiana State
Insurance Department or other applicable authority, together with all
exhibits or schedules filed therewith, prepared in conformity with SAP.
"BUSINESS DAY" means any day other than a Saturday, Sunday or other
day on which The Federal Reserve Bank of Chicago is required by law to
close.
"CAPITAL LEASE" means any lease, the obligation for rentals with
respect to which is required to be capitalized on a balance sheet of the
lessee in accordance with GAAP, or for which the amount of the asset and
liability thereunder as if so capitalized is required to be disclosed in a
note to such balance sheet in accordance with GAAP, together with any other
lease which is in substance a financing lease.
"CLOSING DATE" means November 8, 1996.
"CODE" means the Internal Revenue Code of 1986, as amended from time
to time, or any successor or superseding tax laws of the United States of
America together with all regulations promulgated thereunder.
"COMMON SHARES" is defined in SECTION 1.3.
"CONVERSION AMOUNT" is defined in SECTION 1.3.
"CONVERSION RATE" is defined in SECTION 1.3.
"DEBT" means (i) all indebtedness or liability for borrowed money or
for the deferred purchase price of property or services (excluding trade
obligations incurred in the ordinary course of business which are not
outstanding more than ninety days from the date of invoice thereof); (ii)
all obligations as lessee under Capital Leases; (iii) all current
liabilities in respect of unfunded vested benefits under any Plans; (iv)
all obligations under letters of credit issued for the account of any
Person; (v) all obligations arising under acceptance facilities; (vi) all
guaranties, endorsements (other than for collection or deposit in the
ordinary course of business), and other contingent obligations to purchase,
to provide funds for payment, to supply funds to invest in any Person, or
otherwise to assure a creditor against loss; (vii) all obligations secured
by any lien on Property, whether or not the obligations have been assumed
by the owner thereof; (viii) all other items of indebtedness which in
accordance with GAAP would be included in determining total indebtedness as
shown on the liability side of a balance sheet at the date as of which
indebtedness is to be determined; and (ix) all indebtedness or liability of
the Company to the Purchaser with respect to the Note. Notwithstanding the
foregoing, the term "Debt" shall not include (i) any indebtedness or
liability associated with the issuance in 1996 by the Company of 300,000
shares of Class S preferred stock to various persons in settlement of a
certain class action against the Company, (ii) any intercompany debt
existing on the date hereof between the Company and Standard Management
International, S.A., or (iii) any indebtedness existing on the date hereof
between Standard Life and Standard Development, L.L.C.
"DEFAULT" means any event or condition, the occurrence of which
would, with the lapse of time or the giving of notice, or both, constitute
an Event of Default as defined in SECTION 6.1.
"EBIT" means, for any Person, for any period earnings before Interest
Expense, taxes and extraordinary items for such Person determined in
accordance with GAAP.
"ENVIRONMENTAL LEGAL REQUIREMENT" means any applicable law, statute
or ordinance relating to public health, safety or the environment,
including without limitation any such applicable law, statute or ordinance
relating to releases, discharges or emissions to air, water, land or
groundwater, to the withdrawal or use of groundwater, to the use and
handling of polychlorinated biphenyl or asbestos, to the disposal,
transportation, treatment, storage or management of solid or hazardous
wastes or to exposure to toxic or hazardous materials, to the handling,
transportation, discharge or release of gaseous or liquid substances and
any regulation, order, notice or demand issued pursuant to any such law,
statute or ordinance, in each case applicable to the property of the
Company and its Subsidiaries or the operation, construction or modification
of any thereof, including without limitation the following: the Clean Air
Act, the Federal Water Pollution Control Act, the Safe Drinking Water Act,
the Toxic Substances Control Act, the Comprehensive Environmental Response
Compensation and Liability Act as amended by the Superfund Amendments and
Reauthorization Act of 1986, the Resource Conservation and Recovery Act as
amended by the Solid and Hazardous Waste Amendments of 1984, the
Occupational Safety and Health Act, the Emergency Planning and Community
Right-to-Know Act of 1986, the Solid Waste Disposal Act, and any state
statutes addressing similar matters or providing for financial
responsibility for cleanup or other actions with respect to the release or
threatened release of hazardous substances and any state nuisance statute.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended or supplemented from time to time, and the rules, regulations and
published interpretations issued in connection therewith.
"ERISA AFFILIATE" means any trade or business (whether or not
incorporated) which, together with the Company, would be treated as a
single employer under Section 4001 of ERISA.
"FIXED CHARGE COVERAGE RATIO" means, as at any date and calculated on
a consolidated basis, the ratio of (a) the sum of allowable dividends of
the Company's insurance Subsidiaries and the Company's and its Subsidiaries
EBIT (calculated for immediately preceding four fiscal quarters) to (b) the
Company's and its Subsidiaries' Interest Expense plus the amount of
principal installments and other principal maturities of Debt of the
Company and its Subsidiaries (calculated for the four fiscal quarters
immediately following such date).
"FLEET CREDIT AGREEMENT" means the Amended and Restated Revolving
Line of Credit Agreement between the Company and Fleet National Bank dated
as of November 8, 1996.
"GAAP" means United States generally accepted accounting principles
from time to time in effect and applicable to the consolidated financial
statements of the Company. Whenever any accounting term is used herein
which is not otherwise defined, it shall be interpreted in accordance with
GAAP, except where statutory accounting principles are stated to be
applicable.
"GOVERNMENTAL AUTHORITY" means any nation or government, any state or
other political subdivision thereof and any entity exercising executive,
legislative, judicial, regulatory or administrative functions of or
pertaining to government.
"GUARANTEES" by any Person means all obligations (other than
endorsements in the ordinary course of business of negotiable instruments
for deposit or collection) of such Person guaranteeing or in effect
guaranteeing any obligations of any other Person (the "primary obligor") in
any manner, whether directly or indirectly, including without limitation
all such obligations incurred through an agreement, contingent or
otherwise, by such Person (a) to purchase such obligations or any property
or assets constituting security therefor, (b) to advance or supply funds
(1) for the purchase or payment of such obligations, or (2) to maintain
working capital or other balance sheet condition or (3) otherwise to
advance or make available funds for the purchase or payment of such
obligations, (c) to lease property or to purchase Securities or other
property or services primarily for the purpose of assuring the owner of
such obligations of the ability of the primary obligor to make payment of
the obligations, or (d) otherwise to assure the owner of the obligations of
the primary obligor against loss in respect thereof; PROVIDED, HOWEVER,
that any obligation which is set forth in clause (a), (b), (c) or (d) above
shall not be included in the definition of Guarantees if such obligation is
otherwise included in clause (a), (b), (c) or (d) of the definition of
Indebtedness; PROVIDED, FURTHER, that obligations under life insurance or
annuity policies issued by the Company or its insurance company
Subsidiaries and obligations of the Company or its insurance company
Subsidiaries in respect of reinsurance transactions shall not be included
in the definition of Guarantees. For the purposes of all computations made
under this Agreement, a Guarantee in respect of any Indebtedness for
borrowed money shall be deemed to be Indebtedness equal to the maximum
principal amount of such Indebtedness for borrowed money which has been
guaranteed, and a Guarantee in respect of any other obligation shall be
deemed to be Indebtedness equal to the maximum aggregate amount of the
obligation so guaranteed.
"HAZARDOUS MATERIALS" means, any hazardous materials, hazardous
wastes, hazardous constituents, hazardous or toxic substances, petroleum
products (including crude oil or any fraction thereof), defined or
regulated as such in or under any Environmental Legal Requirement.
"INDEBTEDNESS" of any Person means and includes all (a) obligations
of such Person for borrowed money or to pay the deferred purchase price of
property, (b) obligations secured by any lien or other charge upon property
or assets owned by such Person to the extent of the value of such property
or assets, regardless of whether or not such Person has assumed or become
liable for the payment of such obligations, (c) obligations created or
arising under any conditional sale or other title retention agreement with
respect to property acquired by such Person, notwithstanding the fact that
the rights and remedies of the seller, lender or lessor under such
agreement upon the occurrence of an event of default thereunder are limited
to repossession or sale of property, (d) capitalized rentals under any
Capitalized Lease, and (e) Guarantees; PROVIDED that obligations under
life insurance or annuity polices issued by the Company or its insurance
company Subsidiaries and obligations of the Company or its insurance
company Subsidiaries in respect of reinsurance transactions shall not be
included in the definition of Indebtedness.
"INSURANCE CODE" shall mean the Insurance Code of the State of
Indiana and any other applicable jurisdictions and any successor statute(s)
of similar import, together with the regulations thereunder, as amended or
otherwise modified and in effect from time to time. References to sections
of the Insurance Code shall be construed to also refer to successor
sections.
"INTEREST EXPENSE" shall mean, with respect to any Person, for any
period, the sum, for such Person in accordance with GAAP of (a) all
interest on Debt that is accrued as an expense during such period
(including, without limitation, imputed interest on Capital Lease
obligations), plus (b) all amounts paid, accrued or amortized as an
expenses during such period in respect of interest rate protection
agreements, minus (c) all amounts received or accrued as income during such
period in respect of interest rate protection agreements.
"INVESTMENT" of any Person means any investment so classified under
GAAP, whether by stock purchase, capital contribution, loan, advance,
purchase of property or otherwise.
"LIENS" are defined in SECTION 5.7.
"LOAN DOCUMENTS" means this Agreement, the Note, Registration Rights
Agreement and all other agreements, instruments and documents related to or
delivered by the Company or any Subsidiary in connection with any of the
foregoing.
"MULTIEMPLOYER PLAN" means a Plan described in Section 4001(a)(3) of
ERISA which covers employees of the Company or any ERISA Affiliate.
"NAIC" means the National Association of Insurance Commissioners and
any entity succeeding to any or all of its functions.
"NOTE" is defined in SECTION 1.1.
"OVERDUE RATE" means with respect to any Note 3% per annum over the
interest rate otherwise borne by such Note.
"PBGC" means the Pension Benefit Guaranty Corporation or any entity
succeeding to any or all of its functions under ERISA.
"PERSON" means an individual, partnership, corporation, trust, joint
stock company or unincorporated organization or joint venture, and a
government or agency or political subdivision thereof.
"PLANS" means any employee benefit pension plan which is maintained
by the Company or any Subsidiary and is covered by Title IV of ERISA or
subject to the funding standards of Section 412 of the Internal Revenue
Code of 1986, as amended.
"PROHIBITED TRANSACTION" means any transaction set forth in Section
406 of ERISA or Section 4975 of the Code.
"PROPERTY" means any interest in any kind of property or asset,
whether real, personal or mixed, or tangible or intangible.
"PRO-RATA" means pro-rata based on the aggregate outstanding
principal on all the Notes from time to time.
"REAL PROPERTIES" shall have the meaning assigned to such term in
SCHEDULE 3.1 of this Agreement.
"REPORTABLE EVENT" means (i) any of the events set forth in Sections
4043, 4068 or 4063 of ERISA (ii) any event requiring the Borrower or any
ERISA Affiliate to provide security to a Plan under Section 401(a)(20) of
the Code or (iii) any failure to make payments required by Section 412(m)
of the Code.
"SAP" shall mean, as to any insurance company Subsidiary, the
statutory accounting practices prescribed or permitted by the insurance
regulatory authority of such insurance company Subsidiary's state of
domicile with whom such Subsidiary is required to file its financial
statements.
"SECURITY" has the same meaning as in SECTION 2(1) of the Act.
"SHELBY" means Shelby Life Insurance Company, a Tennessee insurance
company.
The term "SUBSIDIARY" means, as to any particular parent corporation,
any corporation or other entity of which more than 50% (by number of votes)
of the Voting Stock shall be owned by such parent corporation and/or one or
more corporations which are themselves subsidiaries of such parent
corporation. The term "SUBSIDIARY" shall mean a direct or indirect
subsidiary of the Company.
"STANDARD LIFE" means Standard Life Insurance Company of Indiana, an
Indiana corporation.
"VOTING STOCK" means Securities of any class or classes, the holders
of which are ordinarily, in the absence of contingencies, entitled to elect
the corporate directors (or Persons performing similar functions),
irrespective of whether or not at the time Securities of any class or
classes shall have or might have special voting powers or rights by reason
of the occurrence of any contingency.
"WARRANTS" means that certain Warrant No. 4 of the Company, dated
July 1, 1992, to purchase 112,010 shares of Common Stock of the Company,
plus any subsequent replacements, substitutions or additions in connection
with such warrant, which amount is currently equal to 128,922 shares of
Common Stock of the Company.
"WHOLLY-OWNED" when used in connection with any Subsidiary means a
Subsidiary of which all of the issued and outstanding shares of stock
(except shares required by applicable law as directors' qualifying shares)
shall be owned by the Company and/or one or more of its Wholly-owned
Subsidiaries.
8.2. ACCOUNTING PRINCIPLES. Where the character or amount of any
asset or liability or item of income or expense is required to be
determined or any consolidation or other accounting computation is required
to be made for the purposes of this Agreement, the same shall be done in
accordance with GAAP, to the extent applicable, except where statutory
accounting principles are applicable or where GAAP is inconsistent with the
requirements of this Agreement, in which event the latter shall be
controlling.
SECTION 9. MISCELLANEOUS.
9.1. NOTE REGISTER. The Company shall cause to be kept at its
principal office a register for the registration and transfer of the Note
(hereinafter called the "Note Register"), and the Company will register or
transfer or cause to be registered or transferred, as hereinafter provided
and under such reasonable regulations as it may reasonably prescribe, the
Note issued pursuant to this Agreement.
At any time, and from time to time, the holder of such Note that has
been duly registered as hereinabove provided may transfer such Note upon
surrender thereof at the principal office of the Company duly endorsed or
accompanied by a written instrument of transfer duly executed by the holder
of such Note or its attorney duly authorized in writing.
The Person in whose name the Note shall be registered shall be deemed
and treated as the owner and holder thereof for all purposes of this
Agreement. Payment of or on account of the principal, and interest on the
Note shall be made to or upon the written order of such holder.
9.2. EXCHANGE OF NOTE. At any time, and from time to time, upon
surrender of such Note at its office, the Company will deliver in exchange
therefor, without expense to the holder, except as set forth below a Note
for the same aggregate principal amount as the then unpaid principal amount
of the Note so surrendered, in the denomination of $1,000,000 or integral
multiples thereof (except as may be necessary to reflect any principal
amount not evenly divisible by $1,000,000) as such holder shall specify,
dated as of the date to which interest has been paid on the Note so
surrendered or, if such surrender is prior to the payment of any interest
thereon, then dated as of the date of issue, payable to such Person or
Persons as may be designated by such holder, and otherwise of the same form
and tenor as the Note so surrendered for exchange. The Company may require
the payment of a sum sufficient to cover any stamp tax or governmental
charge imposed upon such exchange or transfer.
9.3. LOSS, THEFT, ETC. OF NOTE. Upon receipt of evidence
reasonably satisfactory to the Company of the loss, theft, mutilation or
destruction of the Note, and in the case of any such loss, theft or
destruction upon delivery of a bond of indemnity in such form and amount as
shall be reasonably satisfactory to the Company, or in the event of such
mutilation upon surrender and cancellation of the Note, the Company will
make and deliver without expense to the holder thereof, a new Note, of the
same tenor and form, in lieu of such lost, stolen, destroyed or mutilated
Note. If any Purchaser or any subsequent institutional holder is the owner
of any such lost, stolen or destroyed Note, then the affidavit of any
authorized officer of such owner, setting forth the fact of loss, theft or
destruction and of its ownership of the Note at the time of such loss,
theft or destruction, shall be accepted as satisfactory evidence thereof
and no further indemnity shall be required as a condition to the execution
and delivery of a new Note other than the written agreement of such owner
to indemnify the Company.
9.4. EXPENSES; STAMP TAX INDEMNITY. Whether or not the
transactions herein contemplated shall be consummated, the Company agrees
to pay directly all of the reasonable out-of-pocket expenses incurred by
the Purchaser and each other holder of the Note (including reasonable fees
and disbursements of the Purchaser and its counsel) in connection with the
preparation, execution and delivery of this Agreement and the transactions
contemplated hereby and all similar expenses of any holder of Notes
relating to any amendment, waivers or consents requested or entered into
pursuant to the provisions hereof or relating to any work-out or
restructuring relating to the Company (including, without limitation, the
reasonable fees and expenses of any financial consultant engaged by such
holders in connection therewith). The Company also agrees that it will pay
and save the Purchaser harmless against any and all liability with respect
to stamp and other taxes, if any, which may be payable or which may be
determined to be payable in connection with the execution and delivery of
this Agreement or the Note, whether or not the Note is then outstanding.
The Company agrees to protect and indemnify the Purchaser against any
liability for any and all brokerage fees and commissions payable or claimed
to be payable to any Person in connection with the transactions
contemplated by this Agreement as a result of any action by the Company.
Without limiting the foregoing, the Company agrees to obtain and pay for a
private placement number for the Note and authorizes the submission of such
information as may be required by Standard & Poor's for the purpose of
obtaining such number.
9.5. INDEMNITIES. (a) The Company agrees to indemnify the
Purchaser and all subsequent holders of the Note against any and all
losses, claims, damages, liabilities and expenses (including, without
limitation, attorneys' fees and expenses) incurred by the Purchaser or such
holders arising out of, in any way connected with, or as a result of (i)
any acquisition or attempted acquisition of stock or assets of another
Person or entity by the Company or any Subsidiary, (ii) the use by the
Company or any Subsidiary of any of the proceeds of the Note for the making
or furtherance of any such acquisition or attempted acquisition, and (iii)
any claim, litigation, investigation or proceedings related to any of the
foregoing, whether or not any Purchaser or any such holder is a party
thereto.
(b) The foregoing agreements and indemnities shall remain operative
and in full force and effect regardless of termination of this Agreement,
the consummation of or failure to consummate the transactions contemplated
by this Agreement or any amendment, supplement, modification or waiver
thereunder, the payment in full of the Note, the invalidity or
unenforceability of any term or provision of this Agreement or the Note or
any other document required hereunder, any investigation made by or on
behalf of the Purchaser, the Company or any Subsidiary, or the content or
accuracy of any representation or warranty made under this Agreement or any
other document required hereunder.
9.6. POWERS AND RIGHTS NOT WAIVED; REMEDIES CUMULATIVE. No delay
or failure on the part of the holder of the Note in the exercise of any
power or right shall operate as a waiver thereof; nor shall any single or
partial exercise of the same preclude any other or further exercise
thereof, or the exercise of any other power or right and the rights and
remedies of the holder of the Note are cumulative to and are not exclusive
of any rights or remedies any such holder would otherwise have, and no
waiver or consent, given or extended pursuant to SECTION 7 hereof, shall
extend to or affect any obligation or right not expressly waived or
consented to.
9.7. NOTICES. All communications provided for hereunder shall be
in writing and, if to the Purchaser, delivered or sent by prepaid overnight
air courier, addressed to the Purchaser at 11825 North Pennsylvania
Street, Carmel, Indiana 46032, Attn: Lawrence W. Inlow or such other
address as the Purchaser or the subsequent holder of any Note initially
issued hereunder may designate to the Company in writing, and if to the
Company, delivered or sent by prepaid overnight air courier to the Company
at 9100 Keystone Crossing, Suite 600, Indianapolis, Indiana 46240,
Attention: Ronald D. Hunter, or to such other address as the Company may in
writing designate to each of the Purchaser or to a subsequent holder of any
Note initially issued hereunder.
9.8. REPRODUCTION OF DOCUMENTS. This Agreement and all documents
relating thereto, including without limitation (a) consents, waivers and
modifications which may hereafter be executed, (b) documents received by
the Purchaser at the closing of its purchase of the Note (except the Note
itself), and (c) financial statements, certificates and other information
previously or hereafter furnished to the Purchaser, may be reproduced by
the Purchaser by any photographic, photostatic, microfilm, micro-card,
miniature photographic or other similar process and the Purchaser may
destroy any original document so reproduced. The Company agrees and
stipulates that any such reproduction shall be admissible in evidence as
the original itself in any judicial or administrative proceeding (whether
or not the original is in existence and whether or not such reproduction
was made by the Purchaser in the regular course of business) and that any
enlargement, facsimile or further reproduction of such reproduction shall
likewise be admissible in evidence.
9.9. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each counterpart constituting an original but all together
only one Agreement.
9.10. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon
and shall inure to the benefit of the parties hereto and their respective
permitted successors and assigns, including each successive holder or
holders of the Note; PROVIDED that any subsequent holder of the Note who is
a Subsidiary or an Affiliate of the Company shall not be entitled to the
voting rights contained in SECTIONS 6.3, 6.4 and 7.1 hereof.
9.11. SURVIVAL OF COVENANTS AND REPRESENTATIONS. All covenants,
representations and warranties made by the Company herein and in any
certificates delivered pursuant hereto, whether or not in connection with
the Closing Date, shall survive the closing and the delivery of this
Agreement and the Note.
9.12. SEVERABILITY. Should any part of this Agreement for any
reason be declared invalid, such decision shall not affect the validity of
any remaining portion, which remaining portion shall remain in force and
effect as if this Agreement had been executed with the invalid portion
thereof eliminated and it is hereby declared the intention of the parties
hereto that they would have executed the remaining portion of this
Agreement without including therein any such part, parts, or portion which
may, for any reason, be hereafter declared invalid.
9.13. GOVERNING LAW. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS
OF THE HOLDERS OF THE NOTE AND THE COMPANY HEREUNDER SHALL BE CONSTRUED IN
ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF INDIANA (WITHOUT
GIVING EFFECT TO THE CONFLICT OF LAWS PRINCIPLES THEREOF), CANNOT BE
CHANGED ORALLY AND SHALL BIND AND INURE TO THE BENEFIT OF THE COMPANY, SUCH
HOLDERS AND THEIR RESPECTIVE HEIRS, SUCCESSORS AND ASSIGNS. THE COMPANY
AGREES THAT ANY DISPUTE ARISING OUT OF THIS AGREEMENT SHALL BE SUBJECT TO
THE JURISDICTION OF BOTH THE STATE AND FEDERAL COURTS IN INDIANA. FOR THE
PURPOSE, THE COMPANY HEREBY SUBMITS TO THE JURISDICTION AND VENUE OF THE
STATE AND FEDERAL COURTS IN INDIANA. THE COMPANY FURTHER AGREES TO ACCEPT
SERVICE OF PROCESS OUT OF ANY OF THE BEFORE MENTIONED COURTS IN ANY SUCH
DISPUTE BY REGISTERED OR CERTIFIED MAIL ADDRESSED TO THE COMPANY AT THE
ADDRESS SET FORTH IN THIS AGREEMENT.
9.14. CAPTIONS. The descriptive headings of the various Sections or
parts of this Agreement are for convenience only and shall not affect the
meaning or construction of any of the provisions hereof.
9.15. WAIVER OF JURY TRIAL. The Purchaser or the other holders of
the Note and the Company hereby waive trial by jury in any litigation in
any courts with respect to, in connection with, or arising out of this
Agreement or any instrument or document delivered pursuant to this
Agreement or the validity, protection, interpretation, collection or
enforcement thereof, or any other claim or dispute howsoever arising,
between the Company and the Purchaser or the other holders of the Note.
G:\LEGAL\KSK\STAN3.REV
<PAGE>
PAGE
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their respective officers thereunto duly authorized, as of
the date first above written.
STANDARD MANAGEMENT CORPORATION
By: /S/ JOHN J. QUINN
GREAT AMERICA RESERVE INSURANCE COMPANY
By: /S/ LAWRENCE W. INLOW
G:\LEGAL\KSK\STAN3.REV
SENIOR SUBORDINATED CONVERTIBLE NOTE
$4,000,000 Dated: November 8, 1996
FOR VALUE RECEIVED, the undersigned, STANDARD MANAGEMENT CORPORATION,
an Indiana corporation ("Maker" or the "Company"), promises to pay to the
order of GREAT AMERICAN RESERVE INSURANCE COMPANY, a Texas corporation
("Lender"), in immediately available funds at the office of the Lender at
11825 North Pennsylvania Street, Carmel, Indiana 46032 or at such other
location as the holder hereof may designate from time to time, the
principal amount of Four Million Dollars ($4,000,000) as set forth in a
Note Agreement by and between Lender and Maker, (the "Agreement") to which
this is attached and incorporated therein, together with interest from the
date hereof (computed on the basis of a year of 360 days of twelve 30-day
months) on the outstanding principal balance, to be fixed at a rate equal
to 12% per annum or 14% per annum, in accordance with the following terms:
1. Principal and all unpaid interest which accrues thereon shall be
payable in full at December 31, 2003 (hereinafter the "Maturity").
Interest on the outstanding principal balance of this Note at the rate of
12% per annum, shall be due and payable in cash on a quarterly basis, on
January 1, April 1, July 1 and October 1 (commencing January 1, 1997). At
its option until December 31, 2000, the Company may pay quarterly interest
by notifying the Lender in writing to add the amount of the interest
payment then due and payable to the principal amount of this Note;
PROVIDED, HOWEVER, that for all periods in which the Company makes such
election this Note shall bear interest at a rate of 14% per annum. This
Note will bear interest on overdue principal (including any overdue
prepayment of principal) and on any overdue installment of interest at 3%
per annum over the per annum interest provided for hereunder. Maker may
prepay part or all of the principal due under this Note in accordance with
Section 2 of the Agreement.
2. This Note has been issued pursuant to, and in conjunction with
the Agreement pursuant to which Maker agreed to sell, and Lender agreed to
purchase, the Senior Subordinated Convertible Note Due December 31, 2003
evidenced by this instrument. The terms and provisions of the Agreement
shall govern the terms and provisions of this Note and any conflict between
this Note and the Agreement shall be resolved by the Agreement.
3. This Note may not be offered for sale or sold, or otherwise
transferred in any transaction which would constitute a sale thereof within
the meaning of the Securities Act of 1933, as amended (the "1933 Act"),
unless (i) such security has been registered for sale under the 1933 Act
and registered or qualified upon applicable state securities laws relating
to the offer and sale of securities; or (ii) exemptions from the
registration requirements of the 1933 Act and the registration or
qualification requirements of all such state securities laws are available
and the Maker shall have received an opinion of counsel satisfactory to
Maker that the proposed sale or other disposition of such securities may be
effected without registration under the 1933 Act and would not result in
any violation of any applicable state securities laws relating to the
registration or qualification of securities for sale, such opinion to be
satisfactory to counsel to Maker.
4. The indebtedness evidenced by this Note is subordinated to the
prior payment when due of the principal of, premium, if any, and interest
on all "Senior Indebtedness" (as defined below) of Maker. Therefore, upon
any distribution of its assets in a liquidation or dissolution of Maker, or
in bankruptcy, reorganization, insolvency, receivership or similar
proceedings relating to Maker, Lender will not be entitled to receive
payment of the indebtedness evidenced by this Debenture until the holders
of Senior Indebtedness are paid in full. Upon the occurrence of an "Event
of Default" with respect to any Senior Indebtedness, as such Event of
Default may be defined in such instrument evidencing the Senior
Indebtedness, to the extent such Event of Default permits the holders of
such Senior Indebtedness to accelerate the maturity thereof, then upon
written notice thereof given to Maker by any holder of such Senior
Indebtedness or their representative, no payment shall be made by Maker in
respect to this Note until Maker has cured such Event of Default to the
satisfaction of the holders of such Senior Indebtedness. "Senior
Indebtedness" means the indebtedness outstanding under the Amended and
Restated Revolving Line of Credit between the Maker and Fleet National Bank
dated as of November 8, 1996.
5. The Agreement contains a statement of the events of default under
this Note.
6. The unpaid principal of this Note is convertible at the option of
the Lender, in whole or in part, upon surrender of this Note at the
principal office of the Company, into restricted shares of the Maker's
common stock at a conversion price ("Conversion Price") equal to $5.75 per
share of the Company's common stock; PROVIDED, however that if the Company
delivers a notice providing for the prepayment of the entire amount due and
owing under the Note issue to the Lender or its affiliate within twelve
(12) months of the date hereof, the Conversion Price shall be equal to
$6.00 per share. If the Company delivers a notice providing for the
prepayment of the amount due, the notice shall contain an indication in the
form of a bank commitment, registration statement or other indication
satisfactory to the Lender that the Company has the ability to prepay the
amount due. Upon such conversion, all principal due under this Note shall
be discharged and the Company released from all obligations thereunder,
however, accrued interest shall be paid to the date of conversion. At the
option of the Lender, accrued interest may also be subject to conversion in
the same manner as principal. The conversion price of the Note may be
subject to adjustment in the manner provided at Paragraph 7.
The shares of the Company's common stock issuable upon the exercise of
the conversion feature shall be "restricted securities" as that term is
defined under Rule 144 of the 1933 Act and, as a consequence, may not be
sold or otherwise transferred except pursuant to registration under the
1933 Act or an available exemption therefrom.
7. The number of shares issuable to the Lender upon conversion of
this Note is subject to adjustment from time to time as follows:
7.1 Reorganization, Merger or Sale of Assets. If at any time while
this Note, or any portion thereof, is outstanding there shall be (i) a
reorganization (other than a combination, reclassification, exchange or
subdivision of shares otherwise provided for herein), (ii) a merger or
consolidation with or into another corporation in which the Company is not
the surviving entity, or a reverse triangular merger in which the Company
is the surviving entity but the shares of the Company's capital stock
outstanding immediately prior to the merger are converted by virtue of the
merger into other property, whether in the form of securities, cash or
otherwise, or (iii) a sale or transfer of the Company's properties and
assets as, or substantially as, an entirety to any other person, then, as
part of such reorganization, merger, consolidation, sale or transfer,
lawful provision shall be made so that the holder of this Note shall
thereafter be entitled to receive upon conversion of the Note the number of
shares of stock or other securities or property of the successor
corporation resulting from such reorganization, merger, consolidation, sale
or transfer that a holder of the shares deliverable upon conversion of this
Note would have been entitled to receive in such reorganization,
consolidation, merger, sale or transfer if this Note had been converted
immediately before such reorganization, merger, consolidation, sale or
transfer, all subject to further adjustment as provided in this Section 7.
The foregoing provisions of this Section 7.1 shall similarly apply to
successive reorganizations, consolidations, mergers, sales and transfers
and to the stock or securities of any other corporation that are at the
time receivable upon the conversion of this Note. If the per share
consideration payable to Lender for shares in connection with any such
transaction is in a form other than cash or marketable securities, then the
value of such consideration shall be determined in good faith by the
Company's Board of Directors. In all events, appropriate adjustment (as
determined in good faith by the Company's Board of Directors) shall be made
in the application of the provisions of this Note with respect to the
rights and interest of Lender after the transaction, to the end that the
provisions of this Note shall be applicable after that event, as near as
reasonably may be, in relation to any shares or other property deliverable
after that event upon conversion of this Note.
7.2 Reclassification. If the Company, at any time while this Note,
or any portion thereof, remains outstanding, by reclassification of
securities or otherwise, shall change any of the securities as to which
conversion rights under this Note exist into the same or a different number
of securities of any other class or classes, this Note shall thereafter
represent the right to acquire such number and kind of securities as would
have been issuable as the result of such change with respect to the
securities that were subject to the conversion rights under this Note
immediately prior to such reclassification or other change and the
Conversion Price or number of shares received upon such conversion shall be
appropriately adjusted, all subject to further adjustment as provided in
this Section 7.
7.3 Split, Subdivision or Combination of Shares. If the Company at
any time while this Note, or any portion thereof, remains outstanding shall
split, subdivide or combine the securities as to which conversion rights
under this Note exist, into a different number of securities of the same
class, the number of shares issuable upon conversion shall be
proportionately decreased in the case of a split or subdivision or
proportionately increased in the case of a combination.
7.4 Adjustments for Dividends in Stock or Other Securities or
Property. If while this Note or any portion hereof, remains outstanding
and unexpired the holders of the securities as to which conversion rights
under this Note exist at the time shall have received, or, on or after the
record date fixed for the determination of eligible stockholders, shall
have become entitled to receive, without payment therefor, other or
additional stock or other securities or property (other than cash) of the
Company by way of dividend, then and in each case, this Note shall
represent the right to acquire upon conversion, in addition to the number
of shares of the security receivable upon conversion of this Note, and
without payment of any additional consideration therefor, the amount of
such other or additional stock or other securities or property (other than
cash) of the Company that such holder would hold on the date of such
conversion had it been the holder of record of the security receivable upon
conversion of this Note on the date hereof and had thereafter, during the
period from the date hereof to and including the date of such conversion,
retained such shares and/or all other additional stock, other securities or
property available by this Note as aforesaid during such period, giving
effect to all adjustments called for during such period by the provisions
of this Section 7.
7.5 Issuance of Shares Below Conversion Price.
(a) If while this Note, or any portion hereof, remains outstanding,
the Company shall offer and sell Additional Shares of Common Stock (as
hereinafter defined) for consideration per share less than the Conversion
Price in effect immediately prior to the issuance of such Additional Shares
of Common Stock, the Conversion Price in effect immediately prior to each
such issuance shall forthwith be adjusted upon such issuance to a price
equal to the price paid per share for such Additional Shares of Common
Stock.
(b) For the purpose of the calculations provided in this Section 7.5,
if at any time or from time to time after the date hereof the Company shall
issue any rights or options of the purchase of, or stock or other
securities convertible into, Additional Shares of Common Stock (such Common
Stock or securities being hereinafter referred to as "Convertible
Securities"), then, and in each case, if the Effective Price (as
hereinafter defined) of such rights, options or Convertible Securities
shall be less than the Conversion Price, the Company shall be deemed to
have issued at the time of the issuance of such rights or options or
Convertible Securities the maximum number of Additional Shares of Common
Stock issuable upon exercise or conversion thereof and to have received as
consideration for the issuance of such shares an amount equal to the total
amount of the consideration, if any, payable to the Company upon exercise
or conversion of such options or rights. "Effective Price" shall mean the
quotient determined by dividing the total of all of such consideration by
such maximum number of Additional Shares of Common Stock. No further
adjustment shall be made as a result of the actual issuance of Additional
Shares of Common Stock on the exercise of any such rights or options or the
conversion of any such Convertible Securities. In the case of Convertible
Securities which have a conversion price which is based, in whole or in
part, upon a discount of the market price or value of the Company's common
stock, then for the purposes of calculating the Effective Price, the
consideration shall be deemed to include the minimum conversion price
payable to Company.
If any such rights or options or the conversion privilege represented
by any such Convertible Securities shall expire prior to the Maturity
hereof without having been exercised, the adjustment to the number of
shares available hereunder upon the issuance of such rights, options or
Convertible Securities shall be readjusted to the number of shares that
would have been in effect had an adjustment been made on the basis that the
only Additional Shares of Common Stock so issued were the Additional Shares
of Common Stock, if any, actually issued or sold on the exercise of such
rights or options or rights of conversion of such Convertible Securities,
and such Additional Shares of Common Stock, if any, were issued or sold for
the consideration actually received by the Company for the granting of all
such rights or options, whether or not exercised, plus the consideration
received for issuing or selling the Convertible Securities actually
converted plus the consideration, if any, actually received by the Company
on the conversion of such Convertible Securities.
(c) For the purpose of the calculations provided for in this Section
7.5, if at any time or from time to time after the date hereof the Company
shall issue any rights or options for the purchase of Convertible
Securities, then, in each such case, if the Effective Price thereof is less
than the then Conversion Price, the Company shall be deemed to have issued
at the time of the issuance of such rights or options the maximum number of
Additional Shares of Common Stock issuable upon conversion of the total
amount of Convertible Securities covered by such rights or options and to
have received as consideration for the issuance of such Additional Shares
of Common Stock an amount equal to the amount of consideration, if any,
received by the Company for the issuance of such rights or options, plus
the consideration, if any, payable to the Company upon the conversion of
such Convertible Securities. "Effective Price" shall mean the quotient
determined by dividing the total amount of such consideration by such
maximum number of Additional Shares of Common Stock. No further adjustment
of such Conversion Price adjusted upon the issuance of such rights or
options shall be made as a result of the actual issuance of the Convertible
Securities upon the exercise of such rights or options or upon the actual
issuance of Additional Shares of Common Stock upon the conversion of such
Convertible Securities.
The provisions of subsection (b) above for readjustment upon the
expiration of rights or options or the rights of conversion of Convertible
Securities, shall apply mutatis mutandis to the rights, options and
Convertible Securities referred to in this subsection (c).
(d) The term "Additional Shares of Common Stock" as used herein shall
mean all shares of common stock issued or deemed issued by the Company
after the date hereof, other than (i) securities issued pursuant to or in
connection with the terms of the Agreement and this Note; (ii) shares of
the Company's common stock issued upon conversion of convertible securities
or the exercise of common stock purchase warrants outstanding as of the
date hereof; (iii) shares of the Company's common stock issuable to
employees, officers or directors pursuant to the Company's stock option
plan; and (iv) shares of the Company's common stock issued in connection
with the acquisition of a subsidiary.
7.6 No Impairment. Maker will not, by any voluntary action, avoid or
seek to avoid the observance or performance of any of the terms to be
observed or performed hereunder by Maker, but will at all times in good
faith assist in the carrying out of all the provisions of this Section 7
and in the taking of all such action as may be necessary or appropriate in
order to protect the rights of Lender against impairment.
8. Lender, by acceptance hereof, acknowledges that this Note and the
shares to be issued upon conversion hereof are being acquired solely for
Lender's own account and not as nominee for any other party, and for
investment, and that Lender will not offer, sell or otherwise dispose of
this Note or any shares to be issued upon conversion hereof except under
circumstances that will not result in a violation of applicable federal and
state securities laws. Upon exercise of this Note, Lender shall, if
requested by Maker, confirm in writing, in a form satisfactory to Maker,
that the shares so purchased are being acquired solely for Lender's own
account and not as a nominee for any other party, for investment, and not
with a view toward distribution or resale.
All shares issued upon exercise hereof shall be stamped or imprinted
with a legend in substantially the following form (in addition to any
legend required by state securities laws):
THE SECURITIES REPRESENTED HEREBY HAVE BEEN ACQUIRED FOR INVESTMENT AND
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. SUCH SECURITIES
AND ANY SECURITIES OR SHARES ISSUED UPON CONVERSION THEREOF MAY NOT BE SOLD
OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION
THEREFROM UNDER SAID ACT.
9. Maker covenants that during the term that this Note is
outstanding, Maker will reserve from its authorized and unissued Common
Stock a sufficient number of shares to provide for the issuance of the
shares upon the conversion of this Note, from time to time, will take all
steps necessary to amend its Certificate of Incorporation (the
"Certificate") to provide sufficient reserves of shares of Common Stock
issuable upon the conversion of the Note. Maker further covenants that all
shares that may be issued upon the conversion of this Note and payment of
the Conversion Price, all as set forth herein, will be free from all taxes,
liens and charges in respect of the issue thereof (other than taxes in
respect of any transfer occurring contemporaneously or otherwise specified
herein). Maker agrees that its issuance of this Note shall constitute full
authority to its officers who are charged with the duty of executing stock
certificates to execute the issue the necessary certificates for the shares
upon the conversion of this Note.
10. Whenever the number of shares issuable or the Conversion Price
hereunder shall be adjusted pursuant to Section 7 hereof, the Company shall
issue a certificate signed by its Chief Financial Officer setting forth, in
reasonable detail, the event requiring the adjustment, the amount of the
adjustment, the method by which such adjustment was calculated, and the
Conversion Price and number of shares purchasable hereunder after giving
effect to such adjustment, and shall cause a copy of such certificate to be
mailed (by first-class mail, postage prepaid) to Lender. All notices,
advices and communications under this Note shall be deemed to have been
given, if notice is given as specified in Section 9.7 of the Agreement.
11. Lender shall be entitled to the registration rights set forth in
a certain Registration Rights Agreement of even date herewith by and
between Maker and Lender.
12. Any term of this Note may be amended with the written consent of
the Company and the Holder. Any amendment effected in accordance with this
Section 12 shall be binding upon the Holder, each future holder and the
Company. No waivers of, or exceptions to, any term, condition or provision
of this Note, in any one or more instances, shall be deemed to be, or
construed as, a further or continuing waiver of any such term, condition or
provision.
13. Maker and any other party now or hereafter liable for the payment
of this Note in whole or in part, hereby severally (i) waive demand,
presentment for payment, notice of nonpayment, protest, notice of protest,
notice of intent to accelerate, notice of acceleration and all other
notice, filing of suit and diligence in collecting this Note, (ii) agree to
release of any party primarily or secondarily liable hereon, (iii) agree
that the Lender shall not be required first to institute suit or exhaust
its remedies hereon against Maker or others liable or to become liable
hereon or to enforce its rights against them, and (iv) consent to any
extension or postponement of time of payment of this Note and to any other
indulgence with respect hereto without notice thereof to any of them.
14. This Note will not be transferable at any time on or prior to
Maturity except for transfers to affiliates, successors to the ultimate
parent of the Lender, by operation of law, pursuant to a merger of Lender
into another entity or pursuant to the sale of all or substantially all of
the assets of Lender that are in compliance with all Federal and State
securities laws with respect to this Note.
15. This Note shall bind Maker and its successors and assigns, and
the benefits hereof shall inure to the benefit of Lender and its successors
and assigns. All references herein to "Maker" and "Lender" shall be deemed
to apply to Maker and Lender, respectively, and to their respective
successors and assigns.
16. The corporate law of the State of Indiana shall govern all issues
and questions concerning the relative rights of the Company and its
stockholders. All other questions concerning the construction, validity,
interpretation and enforceability of the Note and the exhibits and
schedules hereto shall be governed by, and construed in accordance with,
the laws of the State of Indiana, without giving effect to any choice of
law or conflict of law rules or provisions (whether of the State of Indiana
or any other jurisdiction) that would cause the application of the laws of
any jurisdiction other than the State of Indiana.
17. The Lender and the Maker agree to submit to personal jurisdiction
and to waive any objection as to venue in the federal or state courts in
Hamilton County, State of Indiana. Service of process on the Maker or the
Lender in any action arising out of or relating to this Note shall be
effective if mailed to such party at the address listed in Section 10
hereof.
STANDARD MANAGEMENT CORPORATION
BY: /S/ JOHN J. QUINN
TITLE: EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
g:\legal\ksk\subco.rev
<PAGE>
FORM OF
NOTICE OF CONVERSION
TO: STANDARD MANAGEMENT CORPORATION
(1) The undersigned hereby elects to purchase shares of
Common Stock of STANDARD MANAGEMENT CORPORATION pursuant to the terms of
the attached Note, and tenders herewith payment of the purchase price for
such shares in full.
(2) In converting this Note, the undersigned hereby confirms and
acknowledges that the shares of Common Stock to be issued upon conversion
thereof are being acquired solely for the account of the undersigned and
not as a nominee for any other party, and for investment, and that the
undersigned will not offer, sell or otherwise dispose of any such shares of
Common Stock except under circumstances that will not result in a violation
of the Securities Act of 1933, as amended, or any state securities laws.
(3) Please issue a certificate or certificates representing said
shares of Common Stock in the name of the undersigned or in such other name
as is specified below:
(Name)
(4) Please issue a new Note for the unexercised portion of the
attached Note in the name of the undersigned or in such other name as is
specified below:
(Name)
g:\legal\ksk\subco.rev
STANDARD LIFE INSURANCE COMPANY OF INDIANA
SURPLUS DEBENTURE
$13,000,000 November 8, 1996
FOR VALUE RECEIVED, STANDARD LIFE INSURANCE COMPANY OF INDIANA, an
Indiana stock life insurance corporation (hereinafter called "Standard Life
of Indiana"), subject to the terms, conditions, restrictions, and
limitations herein contained, promises to pay STANDARD MANAGEMENT
CORPORATION, an Indiana corporation ("SMC"), the principal sum of Thirteen
Million Dollars ($13,000,000) with interest on the unpaid balance thereof
payable quarterly in arrears, beginning December 31, 1996 and on each
calendar quarter end thereafter, until paid in full, at a variable rate
(the "Rate") equal to the corporate base rate as reported by the bank or
branch with the greatest amount of assets in the State of Indiana, as in
effect on the first business day of each month during the term of this
Surplus Debenture plus 2%. In no event shall the Rate increase by more
than 2% in any one year or increase by more than 5% over the term of this
Surplus Debenture over the Rate in effect on the date of execution of this
Surplus Debenture. Both principal and interest on this Surplus Debenture
shall be due and payable in the following manner at the offices of SMC in
Indianapolis, Indiana.
(1) On or before each calendar quarter end commencing December 31,
1996, the Board of Directors of Standard Life of Indiana shall calculate
the surplus of Standard Life of Indiana as of the end of the preceding
fiscal quarter (e.g., December 31, 1996, the surplus calculation shall be
as of September 30, 1996) in accordance with accounting practices required
or permitted by the Insurance Department of the State of Indiana.
(2) On or before January 1 of each calendar year, commencing January
1, 2007, the Board of Directors of Standard Life of Indiana shall calculate
the surplus of Standard Life of Indiana as of the end of the preceding
fiscal quarter in accordance with accounting practices required or
permitted by the Insurance Department of the State of Indiana.
(3) Provided the surplus of Standard Life of Indiana at the time the
calculation required in paragraph (1) above is made, exceeds the surplus of
Standard Life of Indiana at Closing and the prior approval of the
Commissioner of Insurance of the State of Indiana is obtained in accordance
with the provisions of the Indiana Insurance Code, Standard Life of Indiana
shall pay to the holder hereof, on the dates specified in paragraph (1)
above, an amount equal to the lesser of (a) the accrued but unpaid interest
on the unpaid principal balance of this Surplus Debenture or (b) the amount
by which the surplus of Standard Life of Indiana exceeds (the surplus of
Standard Life of Indiana at Closing).
(4) If, at the time the calculation required in paragraph (1) above
is made, the surplus of Standard Life of Indiana does not exceed (the
surplus of Standard Life of Indiana at Closing) by an amount sufficient to
pay all accrued but unpaid interest on this Surplus Debenture, the
remaining accrued but unpaid interest shall bear interest, payable
quarterly in arrears, at the Rate.
(5) Provided the surplus of Standard Life of Indiana exceeds the sum
of (the surplus of Standard Life of Indiana at Closing) plus an amount
equal to all accrued but unpaid interest on January 1 of the calendar year
in which the calculation required in paragraph (2) above is made and the
prior approval of the Commissioner of Insurance of the State of Indiana is
obtained in accordance with the provisions of the Indiana Insurance Code,
Standard Life of Indiana shall pay to the holder hereof an Annual
Installment (herein so called) of principal on this Surplus Debenture
within fifteen (15) days after such calculation is made. Each Annual
Installment of principal becoming due and payable hereunder shall equal the
amount specified therefor in the following amortization schedule or such
lesser amount (or at the sole option of Standard Life of Indiana, such
greater amount) by which the surplus of Standard Life of Indiana exceeds
the sum of (the surplus of Standard Life of Indiana at Closing), plus such
accrued but unpaid interest:
YEAR PRINCIPAL PAYMENT
2007 $1,000,000
2008 $1,000,000
2009 $1,000,000
2010 $1,000,000
2011 $1,000,000
2012 $1,000,000
2013 $1,000,000
2014 $1,000,000
2015 $1,000,000
2016 $1,000,000
2017 $1,000,000
2018 $1,000,000
2019 $1,000,000
If the Annual Installment of principal paid by Standard Life of
Indiana in any calendar year is less than the amount shown for such year in
the foregoing table, the amount shown in the table for the following
calendar year shall be increased by the amount of such deficit and if no
amount is shown in the table for such calendar year, the amount due in the
following calendar year shall be the amount of such deficit. If any
principal of the Surplus Debenture remains unpaid after January 1, 2019,
the Annual Installment of principal due for each year thereafter shall be
such unpaid principal balance or such lesser amount by which the surplus of
Standard Life of Indiana exceeds the sum of (the surplus of Standard Life
of Indiana at Closing) plus accrued interest payable hereunder.
(6) Surplus shall be calculated as required for inclusion in the
Annual Statement of Standard Life of Indiana filed with the Indiana
Department of Insurance as of December 31, of each year.
(7) The obligation of Standard Life of Indiana to pay this Surplus
Debenture shall not be considered or treated as a current or fixed
liability or obligation of Standard Life of Indiana for statutory
accounting purposes under the Indiana Insurance Code and the rules and
regulations promulgated thereunder, except to the extent a payment of
principal or interest has been approved by the Commissioner. For all other
purposes, this Surplus Debenture shall be considered a debt instrument
payable in accordance with and subject to the terms hereof, and shall not
for any purpose be considered or treated as an equity interest in Standard
Life of Indiana.
(8) In the event of liquidation of Standard Life of Indiana, this
Surplus Debenture shall become immediately due and payable and shall be
superior to and in preference of the rights and claims of shareholders of
Standard Life of Indiana; provided, however, that, in any liquidation
proceeding pursuant to the Indiana Insurance Code, all obligations, rights,
and claims hereunder are expressly subordinated to (a) the claims of any
supervisor, conservator, or receiver of Standard Life of Indiana appointed
by the Commissioner of Insurance of the State of Indiana and (b) the claims
of all other creditors, except the claims of shareholders of Standard Life
of Indiana in their capacities as shareholders.
(9) Each payment made hereunder shall be credited first to accrued
but unpaid interest, if any, and the balance of such payment shall be
credited to the principal amount hereof.
<PAGE>
(10) Nothing herein contained shall be construed as prohibiting
Standard Life of Indiana from merging or consolidating with any other
corporation or from selling or reinsuring any part of its business, or from
acquiring all or any part of the assets of any other corporation. In the
event Standard Life of Indiana shall be consolidated or merged into another
corporation or shall sell substantially all of its assets to any other
corporation, the corporation into which Standard Life of Indiana is
consolidated or merged or to which the assets of Standard Life of Indiana
are transferred shall assume the liability of Standard Life of Indiana
hereunder.
(11) No recourse shall be had for the payment of the principal of, or
the interest on, this Surplus Debenture, or for any claims based hereon or
otherwise in respect hereof, against any past, present or future
incorporator, shareholder, officer, or director of Standard Life of
Indiana; such liability being by acceptance and as a part of the
consideration for the issuance hereof, expressly released.
(12) By acceptance and as part of the consideration for the issuance
hereof, the above-named payee and holder hereof expressly acknowledges that
it has been informed and has knowledge that this Surplus Debenture has not
been registered under the Securities Act of 1933, as amended, or the
Securities Act or Blue Sky laws of any state, and that Standard Life of
Indiana has issued this Surplus Debenture pursuant to exemptions from
registration available under such acts. The above-named payee hereof
further expressly acknowledges and agrees that it is acquiring this Surplus
Debenture for investment purposes and not with a view toward a public
distribution hereof and that this Surplus Debenture may not be sold or
otherwise transferred in the absence of an effective registration statement
with respect hereto or an exemption from registration under the Securities
Act of 1933, as amended, or any other applicable securities law.
(13) If this Surplus Debenture is collected through judicial
proceedings, Standard Life of Indiana agrees, subject to the conditions and
restrictions contained herein, to pay reasonable attorneys' fees to the
holder with respect to legal services performed in such collection.
(14) Regardless of the provisions of I.C. 27-1-7-19 specifying the
conditions under which payments on the Surplus Debenture will be approved
or Standard Life of Indiana's satisfaction of the conditions identified
therein, the Commissioner of the Indiana Department of Insurance may refuse
to approve the payment of principal or interest on the Surplus Debenture
(i) on the basis of statutory or regulatory grounds, or (ii) if, in the
determination of the Commissioner, the financial condition of Standard Life
of Indiana does not warrant payment.
IN WITNESS WHEREOF, Standard Life Insurance Company of Indiana has
caused this Surplus Debenture to be fully executed on
November 8, 1996.
STANDARD LIFE INSURANCE
COMPANY OF INDIANA
By: /S/ JOHN J. QUINN
John J. Quinn, Executive
Vice President & Chief
Financial Officer
H:\USER\JAMESCAR\DOCS\CONTRACT\SURPL2.DEB
