<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
COMMISSION FILE NUMBER 0-20882
STANDARD MANAGEMENT CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<C> <C>
INDIANA NO. 35-1773567
(State of incorporation) (IRS employer identification no.)
</TABLE>
9100 KEYSTONE CROSSING
INDIANAPOLIS, INDIANA 46240
(Address of principal executive offices)
(317) 574-6200
(Telephone)
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, and (2) has been subject to such filing
requirements for the past 90 days: Yes [X] No [ ]
As of August 1, 1997, the Registrant had outstanding 4,870,240 shares of
common stock.
================================================================================
<PAGE> 2
STANDARD MANAGEMENT CORPORATION
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Balance Sheets --
June 30, 1997 (Unaudited) and December 31, 1996
(Audited)....................................................... 3
Consolidated Statements of Operations --
For the Three Months and Six Months Ended June 30, 1997 and 1996
(Unaudited)..................................................... 4
Consolidated Statements of Shareholders' Equity --
For the Six Months June 30, 1997 and 1996
(Unaudited)..................................................... 5
Consolidated Statements of Cash Flows --
For the Six Months Ended June 30, 1997 and 1996
(Unaudited)..................................................... 6
Notes to Consolidated Financial Statements (Unaudited).......... 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................... 11
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings............................................... 23
Item 6. Exhibits and Reports on Form 8-K................................ 23
Signatures................................................................ 24
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STANDARD MANAGEMENT CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
--------- ------------
(UNAUDITED) (AUDITED)
<S> <C> <C>
ASSETS
Investments:
Securities available for sale:
Fixed maturity securities, at fair value (amortized cost: $352,642 in 1997
and $349,151 in 1996).................................................... $350,513 $347,310
Equity securities, at fair value (cost: $55 in 1997 and $58 in 1996)...... 63 62
Mortgage loans, at unpaid principal balances................................ 2,297 3,035
Policy loans, at unpaid principal balances.................................. 9,258 9,903
Real estate, at depreciated cost............................................ 537 546
Other invested assets....................................................... 1,113 865
Short-term investments, at cost, which approximates fair value.............. 18,381 8,417
--------- ------------
Total investments....................................................... 382,162 370,138
Cash.......................................................................... 9,823 5,113
Accrued investment income..................................................... 6,524 6,198
Amounts due and recoverable from reinsurers................................... 69,157 68,811
Deferred policy acquisition costs............................................. 21,274 18,078
Present value of future profits, less accumulated amortization of $4,399 in
1997 and $3,520 in 1996..................................................... 23,113 24,181
Excess of acquisition cost over net assets acquired, less accumulated
amortization of $369 in 1997 and $314 in 1996............................... 2,205 2,260
Other assets.................................................................. 4,957 5,463
Assets held in separate accounts.............................................. 134,808 128,546
--------- ------------
Total assets............................................................ $654,023 $628,788
========= ============
LIABILITIES, REDEEMABLE SECURITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Future policy benefits:
Interest-sensitive annuities and other financial products................. $346,662 $333,633
Traditional life insurance................................................ 87,566 87,106
--------- ------------
Total future policy benefits............................................ 434,228 420,739
Policy claims and other policyholders' benefits and funds................... 4,740 4,585
--------- ------------
438,968 425,324
Accounts payable and accrued expenses....................................... 5,716 6,189
Obligations under capital lease............................................. 395 637
Notes payable............................................................... 26,180 20,060
Deferred federal income taxes............................................... 3,555 3,334
Excess of net assets acquired over acquisition cost, less accumulated
amortization of $4,532 in 1997 and $3,839 in 1996......................... 2,081 2,775
Liabilities related to separate accounts.................................... 134,808 128,546
--------- ------------
Total liabilities....................................................... 611,703 586,865
Class S Cumulative Convertible Redeemable Preferred Stock, par value $10 per
share:
Authorized 300,000 shares; issued and outstanding 158,239 shares in 1997 and
159,889 shares in 1996, redemption value of $10 per share plus accumulated
and unpaid dividends...................................................... 1,825 1,757
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..................... 40,481 40,481
Treasury stock, at cost, 752,356 shares in 1997 and 728,229 shares in 1996
(deduction)............................................................... (3,660) (3,528)
Unrealized loss on securities available for sale............................ (835) (746)
Foreign currency translation adjustment..................................... (1) 691
Retained earnings........................................................... 4,510 3,268
--------- ------------
Total shareholders' equity.............................................. 40,495 40,166
--------- ------------
Total liabilities, redeemable securities and shareholders' equity....... $654,023 $628,788
========= ============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
STANDARD MANAGEMENT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Premium income................................... $ 1,665 $ 5,630 $ 3,562 $ 7,129
Net investment income............................ 7,147 4,731 14,346 9,391
Net realized investment gains.................... 32 218 206 456
Gain on disposal of subsidiaries................. -- -- -- 886
Policy charges................................... 1,344 690 2,783 1,214
Amortization of excess of net assets acquired
over acquisition cost.......................... 347 347 694 694
Management fees and similar income from separate
accounts....................................... 367 452 838 836
Other income..................................... 390 972 881 1,290
--------- --------- --------- ---------
Total revenues................................. 11,292 13,040 23,310 21,896
Benefits and expenses:
Benefits and claims.............................. 1,979 6,396 4,368 7,223
Interest credited on interest-sensitive annuities
and
other financial products....................... 4,172 2,358 8,166 5,004
Salaries and wages............................... 1,453 1,255 2,904 2,463
Amortization..................................... 752 712 1,577 1,159
Other operating expenses......................... 1,441 1,795 3,317 3,910
Interest expense and financing costs............. 548 154 1,078 277
--------- --------- --------- ---------
Total benefits and expenses.................... 10,345 12,670 21,410 20,036
--------- --------- --------- ---------
Income before federal income taxes, extraordinary
gain on early redemption of redeemable preferred
stock and preferred stock dividends.............. 947 370 1,900 1,860
Federal income tax expense (credit)................ 265 185 575 (990)
--------- --------- --------- ---------
Income before extraordinary gain on early
redemption of redeemable preferred stock and
preferred stock dividends........................ 682 185 1,325 2,850
Extraordinary gain on early redemption of
redeemable preferred stock, net of $ -- federal
income tax....................................... -- 166 -- 267
--------- --------- --------- ---------
NET INCOME......................................... 682 351 1,325 3,117
Preferred stock dividends.......................... 41 66 83 112
--------- --------- --------- ---------
Earnings available to common shareholders.......... $ 641 $ 285 $ 1,242 $ 3,005
========== ========== ========== ==========
Earnings per share:
Income before extraordinary gain on early
redemption of redeemable preferred stock and
preferred stock dividends...................... $ .13 $ .04 $ .25 $ .54
Extraordinary gain on early redemption of
redeemable preferred stock..................... -- .03 -- .05
--------- --------- --------- ---------
NET INCOME....................................... .13 .07 .25 .59
Preferred stock dividends........................ .01 .01 .01 .01
--------- --------- --------- ---------
Earnings available to common shareholders........ $ .12 $ .06 $ .24 $ .58
========== ========== ========== ==========
Weighted average number of shares outstanding:
Common shares.................................... 5,014,099 4,760,656 5,019,136 4,866,850
Common equivalent shares......................... 243,794 126,815 267,570 612,358
--------- --------- --------- ---------
5,257,893 4,887,471 5,286,706 5,479,208
========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
STANDARD MANAGEMENT CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
--------------------------------------------
AMOUNTS SHARES
------------------ ----------------------
1997 1996 1997 1996
------- ------- --------- ---------
<S> <C> <C> <C> <C>
Common Stock:
Balance, beginning of period....................... $40,481 $39,808 5,752,499 5,459,573
Issuance of common stock........................ -- 100 -- 20,000
5% common stock dividend........................ -- 850 -- 272,926
------- ------- --------- ---------
Balance, end of period............................. 40,481 40,758 5,752,499 5,752,499
------- ------- --------- ---------
Treasury stock (at cost):
Balance, beginning of period....................... (3,528) (2,621) (728,229) (502,025)
Treasury stock acquired......................... (136) (2,104) (25,000) (426,026)
5% common stock dividend........................ -- -- -- (46,402)
Reissuance of treasury stock in connection with
exercise of stock options..................... 4 2 873 349
------- ------- --------- ---------
Balance, end of period............................. (3,660) (4,723) (752,356) (974,104)
------- ------- --------- ---------
Unrealized gain (loss) on securities:
Balance, beginning of period....................... (746) 2,582
Change in unrealized gain (loss) on securities
available for sale, net....................... (89) (4,595)
------- -------
Balance, end of period............................. (835) (2,013)
------- -------
Foreign currency translation adjustments:
Balance, beginning of period....................... 691 1,159
Translation adjustments for the period.......... (692) (222)
------- -------
Balance, end of period............................. (1) 937
------- -------
Retained earnings (deficit):
Balance, beginning of period....................... 3,268 (686)
Net income...................................... 1,325 3,117
5% common stock dividend, plus cash in lieu of
fractional shares............................. -- (850)
Preferred stock dividend........................ (83) (112)
------- -------
Balance, end of period............................. 4,510 1,469
------- -------
Total shareholders' equity and common shares
outstanding........................................ $40,495 $36,428 5,000,143 4,778,395
======= ======= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
STANDARD MANAGEMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------
1997 1996
-------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net income............................................................. $ 1,325 $ 3,117
Adjustments to reconcile net income to net cash provided by operating
activities:
Amortization of deferred policy acquisition costs.................... 469 575
Policy acquisition costs deferred.................................... (3,598) (2,506)
Deferred federal income taxes........................................ 270 (116)
Depreciation and amortization........................................ 728 200
Future policy benefits and reinsurance recoverable................... 5,334 658
Policy claims and other policyholders' benefits and funds............ 205 (405)
Net realized investment gains........................................ (206) (456)
Accrued investment income............................................ (327) (535)
Extraordinary gain on early redemption of redeemable preferred
stock............................................................. -- (267)
Other................................................................ 190 1,369
-------- ---------
Net cash provided by operating activities......................... 4,390 1,634
FINANCING ACTIVITIES
Borrowings............................................................. 5,628 2,600
Repayments on long term debt and capital lease obligation.............. (265) (239)
Premiums received on interest-sensitive annuities and other financial
products credited to policyholder account balances, net of premiums
ceded................................................................ 25,127 18,796
Return of policyholder account balances on interest-sensitive annuities
and other financial products, net of premiums ceded.................. (17,317) (9,403)
Redemption of redeemable preferred stock............................... (15) (442)
Reissuance of treasury stock in connection with exercise of stock
options.............................................................. 4 --
Proceeds from common and treasury stock sales.......................... -- 102
Purchase of Common Stock for treasury.................................. (136) (2,104)
-------- ---------
Net cash provided by financing activities......................... 13,026 9,310
INVESTING ACTIVITIES
Fixed maturity securities available for sale:
Purchases............................................................ (90,762) (107,403)
Sales................................................................ 70,702 77,578
Maturities........................................................... 16,241 3,562
Short-term investments, net............................................ (9,965) 5,423
Other investments, net................................................. 1,078 (3,218)
Proceeds from sale of First International Life Insurance Company, less
cash transferred to seller of $265................................... -- 11,228
-------- ---------
Net cash provided (used) by investing activities.................. (12,706) (12,830)
-------- ---------
Net increase (decrease) in cash........................................ 4,710 (1,886)
Cash at beginning of period............................................ 5,113 5,762
-------- ---------
Cash at end of period.................................................. $ 9,823 $ 3,876
======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE> 7
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.
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. Certain amounts in the 1996 Consolidated Financial
Statements and Notes have been reclassified to conform with the 1997
presentation.
The nature of the insurance business of Standard Management Corporation
and its consolidated subsidiaries ("SMC" or the "Company") requires management
to make estimates and assumptions that affect the amounts reported in the
consolidated financial statements and accompanying notes. For example, the
Company uses significant estimates and assumptions in calculating deferred
policy acquisition costs, present value of future profit, goodwill, future
policy benefits and deferred federal income taxes. 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 as of and for the quarter and six
months ended June 30, 1997 include the assets and liabilities and results of
operations of Shelby Life Insurance Company ("Shelby Life") which was acquired
and merged into Standard Life Insurance Company of Indiana ("Standard Life"), a
wholly-owned subsidiary of Standard Management Corporation ("Standard
Management"), the unconsolidated parent company, effective November 1, 1996.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Annual Report on Form 10-K of Standard
Management for the year ended December 31, 1996.
NOTE 2 -- COMMON STOCK
Standard Management declared a 5% stock dividend on shares of Standard
Management Common Stock ("SMC Common Stock") for shareholders of record on May
17, 1996 which was distributed on June 21, 1996. All applicable number of
shares and per share amounts included in the consolidated financial statements
and notes have been retroactively adjusted to reflect this stock dividend for
all periods presented.
NOTE 3 -- NOTE PAYABLE
In connection with the acquisition of Shelby Life, Standard Management
borrowed $4,000 from an insurance company pursuant to a subordinated
convertible debt agreement which was due in December 2003 and required interest
payments in cash at 12% per annum, or, if Standard Management chose, in
non-cash additional subordinated convertible debt notes at 14% per annum until
December 31, 2000. At June 30, 1997, this subordinated convertible debt
agreement was amended at the principal amount of $4,372 requiring interest
payments in cash on January 1 and July 1 of each year at 10% per annum. At June
30, 1997, Standard Management borrowed an additional $5,628 from an insurance
company pursuant to another subordinated convertible debt agreement
(collectively, the "Notes") which is due July 2004 unless previously converted,
and requires interest payments in cash on January 1 and July 1 of each year at
10% per annum. Proceeds from the additional borrowings were used for
contributions to surplus of insurance subsidiaries of $2,400, redemption of
Class S Cumulative Convertible Redeemable Preferred Stock ("Class S Preferred
Stock") of approximately $1,840, and the balance for other general corporate
purposes. The Notes are convertible into SMC Common Stock at the
7
<PAGE> 8
STANDARD MANAGEMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
rate of $5.747 per share.
The Notes may be prepaid in whole or in part at the option of Standard
Management commencing on July 1, 2000 at redemption prices equal to 105% of
the principal amount (plus accrued interest) and declining to 102% of the
principal amount plus accrued interest. The Notes may be prepaid prior to
July 1, 2000 under certain limited circumstances. The Notes are subject to
certain restrictions and covenants including, among other things, certain
minimum financial ratios, minimum consolidated equity requirements for SMC,
positive net income, minimum statutory surplus requirements for the Company's
insurance subsidiaries and certain limitations on acquisitions, additional
indebtedness, investments, mergers, consolidations and sales of assets.
NOTE 4 -- REDEEMABLE 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% 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, subject to adjustment under a
formula intended to protect against dilution.
Standard Management may voluntarily redeem the Class S Preferred Stock
prior to February 2003 at redemption value of $10.00 per share plus accumulated
and unpaid dividends. In February 1996, Standard Management 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 private negotiated transactions. As of
June 30, 1997, Standard Management has repurchased and retired 141,761 shares
of Class S Preferred Stock on the open market at a cost of $964. These
repurchases resulted in an extraordinary gain on early redemption of redeemable
preferred stock of $166 and $267 for the three and six month periods ended June
30, 1996. Effective as of August 1, 1997, Standard Management redeemed all
of the issued and outstanding Class S Preferred Stock at redemption value of
$10.00 per share plus accumulated and unpaid dividends.
NOTE 5 -- NET UNREALIZED LOSS ON SECURITIES AVAILABLE FOR SALE
The components of the balance sheet caption "Unrealized loss on securities
available for sale" in shareholders' equity are summarized as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
-------- ------------
<S> <C> <C>
Fair value of securities available for sale......................... $350,576 $347,372
Amortized cost of securities available for sale..................... 352,697 349,209
-------- ------------
Gross unrealized loss on securities available for sale......... (2,121) (1,837)
Adjustments for:
Deferred policy acquisition costs................................. 858 696
Present value of future profits................................... 4 20
Deferred federal income tax recoverable........................... 424 375
-------- ------------
Net unrealized loss on securities available for sale........... $ (835) $ (746)
======== ==========
</TABLE>
8
<PAGE> 9
STANDARD MANAGEMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 6 -- INCOME TAXES
The effective consolidated federal income tax expense (credit) rate for
the Company was 28% and 30% for the three and six months ended June 30, 1997,
compared to 50% and (53)% for the three and six months ended June 30, 1996. The
effective rates in 1997 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 S.A. ("Standard
Management International") is not subject to U.S. income tax. The 50% rate for
the three months ended June 30, 1996 primarily results from the
non-deductibility of losses from non-insurance companies, which do not
consolidate for tax purposes with the life insurance companies. The large
credit for the six month's ended June 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).
NOTE 7 -- DISPOSAL OF SUBSIDIARIES
On March 18, 1996, Standard Life completed the sale of a duplicate
charter associated with its wholly-owned subsidiary, First International, to
Guardian Insurance and Annuity Co., Inc. ("GIAC"), a subsidiary of The Guardian
Group, New York, New York. Standard Life received proceeds of $10,393,
including $1,500 for the charter and licenses associated with First
International. Standard Life realized a net pretax gain of $1,042 and a tax
benefit of $1,420 on this sale or $2,462 ($.45 per share) for the six months
ended June 30, 1996. In addition, First International, Standard Life and GIAC
have entered into a series of other agreements that include provisions for
Standard Life to continue to administer First International policies in force
at the date of sale and for Standard Life to continue to receive the profit
stream from the majority of First International's in force business at the date
of sale.
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 not to renew the Barbados license of Standard Reinsurance
due to an insignificant amount of reinsurance premium volume. This resulted in
the termination of Standard Reinsurance operations and the write-off of the
Company's investment in Standard Reinsurance and certain intangible assets of
Standard Reinsurance amounting to $156 ($.03 per share) for the six months ended
June 30, 1996.
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 effect of approximately
$2,306 or $.42 per share for the six months ended June 30, 1996.
NOTE 8 -- PENDING ACQUISITION
The Company has entered into an Agreement and Plan of Merger dated as of
December 19, 1996, as amended, with Savers Life Insurance Company ("Savers
Life"). Savers Life offers retirement products and Medicare supplement
insurance through 5,000 independent brokers, primarily in North Carolina, South
Carolina and Virginia. The Company will pay approximately $14,200 plus
acquisition costs for the approximately $80,000 asset company, with
shareholders of Savers Life initially receiving $8.00 for each share of Savers
Life Common Stock, consisting of SMC Common Stock and an election of up to
$1.50 per share in cash. The proposed acquisition is subject to normal closing
conditions including Standard Management and Savers Life shareholder approval
and approval by applicable regulatory authorities. The acquisition is expected
to close during 1997.
9
<PAGE> 10
STANDARD MANAGEMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 9 -- RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128 ("SFAS No. 128"), "Earnings
per Share." SFAS No. 128 is required to be adopted on December 31, 1997. At that
time, the Company will be required to change the method currently used to
compute earnings per share and to restate prior periods. Under the new
requirements for calculating primary earning per share, the dilutive effect of
stock options will be excluded. The impact is expected to result in an increase
in primary earnings per share for the quarter ended June 30, 1997 of $.01 per
share and the six months ended June 30, 1997 and 1996 of $.01 and $.04 per
share, respectively. There will be no change in the primary earnings per share
for the quarter ended June 30, 1996. The impact of SFAS No. 128 on the
calculation of fully diluted earnings per share for these quarters is not
expected to be material.
10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The following discussion highlights the material factors affecting the
results of operations and the significant changes in balance sheet items of the
Company on a consolidated basis for the periods listed as well as the Company's
liquidable and capital resources. This discussion 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, 1996.
RESULTS OF OPERATIONS
Three Months Ended June 30, 1997 and 1996
Operating Income. The income from operations (before net realized
investment gains) was $661,000 for the second quarter of 1997, compared to
$60,000 for the comparable period in 1996. The change resulted primarily from
operations in the United States producing income from operations of $192,000
compared to a loss from operations of $(44,000) for the second quarter of 1997
and 1996, respectively. The increase is primarily due to an increase in
interest spreads on an increasing asset base, while operating expenses have
declined when compared to 1996. The income from international operations also
increased to $469,000 for the second quarter of 1997 compared to $104,000 for
the second quarter of 1996. The international operating gains resulted
primarily from decreased operating expenses, reflecting reduced marketing
activity during the period, and the strengthening of the U.S. dollar.
Premium Income. Premium income is composed of premiums, including
renewal premiums, received on ordinary life insurance policies. SMC'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. GAAP premium income for the second quarter of 1997 was $1,665,000,
a decrease of $3,965,000 or 70% from $5,630,000 for the second quarter of 1996.
This decrease is attributable to the recapture of premiums ceded of $4,234,000
due to the termination and recapture of the reinsurance agreement with National
Mutual Life Insurance Company ("National Mutual")in the second quarter of 1996,
which offsets increases in premium income for the inclusion of Shelby Life in
the results of operations for periods after November 1, 1996. SMC recorded net
premium income of $249,000 in the second quarter of 1997 for the Shelby Life
block which more than offsets the decline in premiums from the regular policy
lapses, surrenders and expiries in SMC's closed blocks of business.
Net premium deposits received from the sales of interest-sensitive
annuities and other financial products (which are not recorded as revenues)
were $13,059,000 compared to $14,808,000 for the second quarter of 1997 and
1996, respectively. The decrease in premium deposits is partially due to a
decrease in gross domestic premium deposits. Gross domestic premium deposits
received from interest-sensitive annuities and financial products were
$15,603,000 for the second quarter of 1997 compared to $17,511,000 for the
second quarter of 1996. Since SMC's operating income is primarily a function
of its investment spreads, persistency of annuity inforce business, mortality
experience, and operating expenses, a change in annuity premium deposits in a
single period does not directly cause operating income to change, although
continued increases or decreases in annuity premiums may affect the growth rate
of total assets on which investment spreads are earned.
Net Investment Income. Net investment income increased $2,416,000 or 51% to
$7,147,000 for the second quarter of 1997 from $4,731,000 for the comparable
period of 1996. The increase primarily resulted from an increase in the weighted
average annualized yield of SMC's investment portfolio (exclusive of realized
and unrealized gains and losses) to 7.59% from 7.44% for the second quarter of
1997 and 1996, respectively, and the increase in total invested assets
(amortized cost) of approximately 38.9% from December 31, 1995 to June 30, 1997,
most of which (approximately $100,000,000) occurred in the fourth quarter of
1996 due to the acquisition of Shelby Life. As of June 30, 1997, yields
available on new investments were declining.
Net Realized Investment Gains. Net realized investment gains decreased
$186,000 or 85% to $32,000 from $218,000 for the second quarter of 1997 and
1996, 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. The pretax net unrealized loss on SMC's securities
available for sale increased to $2,121,000 at June 30, 1997 from $1,837,000 at
December 31, 1996. In the absence of
11
<PAGE> 12
decreases in interest rates, SMC 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.
Policy Charges. Policy charges, which represent the amounts assessed
against policyholder account balances for the cost of insurance, policy
administration and surrenders, increased $654,000 or 95% to $1,344,000 for the
second quarter of 1997 compared to $690,000 for the second quarter of 1996.
The increase in policy charges resulted from an increase in policy charges for
Standard Life's universal life insurance products of $485,000 due to the
inclusion of Shelby Life in the results of operations for periods after
November 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
$347,000 for each of the second quarters of 1997 and 1996.
Management Fees and Similar Income From Separate Accounts. Management fees
and similar income from separate accounts consist of the investment management
fees earned by Standard Management International on its separate account assets
and investment contracts. Management fees and similar income from separate
accounts decreased $85,000 to $367,000 for the second quarter of 1997 from
$452,000 for the second quarter of 1996. Such income fluctuates in relationship
to total separate account assets and the return earned on such assets.
Other Income. Other income decreased $582,000 or 60% to $390,000 for the
second quarter of 1997 compared to $972,000 for the comparable 1996 period.
The decrease resulted primarily from the administration fee income of $375,000
collected in connection with the terminated and recaptured reinsurance agreement
with National Mutual in the second quarter of 1996.
Benefit and Claims. Benefits and claims include life insurance and
payout annuity benefits paid and changes in policy reserves. Benefits and
claims decreased $4,417,000 or 69% to $1,979,000 for the second quarter of 1997
from $6,396,000 for the second quarter of 1996. The decrease in benefits and
claims results from an increase in change in policy reserves related to the
termination and recapture of a reinsurance agreement with National Mutual in
the second quarter of 1996. This decrease offset the increase in benefits and
claims from the inclusion of Shelby Life (approximately $850,000 in the second
quarter of 1997) in the results of operations for periods after November 1,
1996. Throughout SMC'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.
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<PAGE> 13
Interest Credited on Interest-Sensitive Annuities and Other Financial
Products. Interest credited on interest-sensitive annuities and other financial
products was $4,172,000 for the second quarter of 1997, an increase of
$1,814,000 or 77% from $2,358,000 for the comparable prior year period. The
increase resulted primarily from the inclusion of interest credited of
$1,965,000 in the second quarter of 1997 from Shelby Life products, increases
in interest credited rates on new annuity sales and the increases in the growth
in policy reserves for annuities from sales. At June 30, 1997, the weighted
average interest credited rate for Standard Life's currently marketed annuities
and other financial product liabilities was 5.68% compared to 5.35% at June 30,
1996.
Salaries and Wages. Salaries and wages were $1,453,000 for the second
quarter of 1997, an increase of $198,000 or 16% from $1,255,000 for the
comparable prior year period. This increase was caused primarily by an increase
in the number of employees in 1997 and an increase in incentive compensation
expense in the second quarter of 1997 of $65,000 based on operating income for
the second quarter of 1997.
Amortization. Amortization expense primarily includes charges to
operations for the amortization of deferred acquisition costs, the present
value of future profits and the excess of cost over net assets acquired.
Amortization expense increased $40,000 or 6% to $752,000 for the second quarter
of 1997 from $712,000 for the second quarter of 1996. The increase in current
year amortization expense resulted primarily from the amortization of present
value of future profits of $187,000 in the second quarter of 1997 for the
acquisition of Shelby Life.
Other Operating Expenses. Other operating expenses decreased $354,000 or
20% to $1,441,000 for the second quarter of 1997 from $1,795,000 for the second
quarter of 1996. The decrease in other operating expenses resulted primarily
from eliminating in 1997 the additional cost to convert the operations and
expand the marketing effort in Dixie National Life incurred in 1996 and a
reduction in international operating expenses.
Interest Expense and Financing Costs. Interest expense and financing
costs increased $394,000 or 256% to $548,000 in the second quarter of 1997 from
$154,000 in the second quarter of 1996. The increase in interest expense and
financing costs during 1997 resulted primarily from increased borrowing of
$10,100,000 on an Amended and Restated Revolving Line of Credit Agreement with
a bank ("Amended Credit Agreement") and borrowings of $4,000,000 from an
insurance company in connection with the acquisition of Shelby Life.
Extraordinary Gain on Early Redemption of Redeemable Preferred Stock.
Extraordinary gains are recorded on the early redemption of the Class S
Preferred Stock for the amount by which SMC is able to repurchase the Class S
Preferred Stock below its book value plus accrued and unpaid dividends. SMC
recorded no extraordinary gain for the second quarter of 1997 compared to
$166,000 for the second quarter of 1996. Effective August 1, 1997, SMC redeemed
all of its issued and outstanding Class S Preferred Stock at redemption value
of $10.00 per share plus accumulated and unpaid dividends.
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<PAGE> 14
SIX MONTHS ENDED JUNE 30, 1997 and 1996
Operating Income. The income from operations (before net realized
investment gains and gain on disposal of subsidiaries) was $1,189,000 in the
first six months of 1997, compared to $274,000 for the comparable period in
1996. The change resulted primarily, from operations in the United States
producing income from operations of $366,000 compared to a loss from operations
of $(61,000) for the first six months of 1997 and 1996, respectively. The
increase is primarily due to an increase in interest spreads on an increasing
asset base, while operating expenses have declined when compared to 1996. The
income from international operations also increased to $823,000 for the first
six months of 1997 compared to $335,000 for the first six months of 1996. The
international operating gains resulted primarily from decreased operating
expenses, reflecting reduced marketing activity during the period, and the
strengthening of the U.S. dollar.
Premium Income. GAAP premium income for the first six months of 1997 was
$3,562,000, a decrease of $3,567,000 or 50% from $7,129,000 for the first six
months of 1996. This decrease is attributable to the recapture of premiums
ceded of $4,234,000 due to the termination and recapture of the reinsurance
agreement with National Mutual in the second quarter of 1996, which offsets
increases in premium income for the inclusion of Shelby Life in the results of
operations for periods after November 1, 1996. SMC recorded net premium income
of $760,000 in the first six months of 1997 for the Shelby Life block which
more than offsets the decline in premiums from the regular policy lapses,
surrenders and expiries in SMC's closed blocks of business.
Net premium deposits received from the sales of interest-sensitive
annuities and other financial products (which are not recorded as revenues) were
$25,127,000 compared to $18,796,000 for the first six months of 1997 and 1996,
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 $29,833,000 for
the six months ended June 30, 1997 compared to $23,799,000 for the six months
ended June 30, 1996. The increase in gross premium deposits is the result of an
aggressive marketing campaign implemented by Standard Life with the
introduction of attractive new annuity products and the effects of increasing
first year crediting rates approximately 1% commencing during the second quarter
of 1996. Also contributing to the increase in premiums is the introduction of
new products, the competitiveness of SMC's products, the continued development
of SMC's distribution system through marketing support from Standard Marketing
and an increase in the agency base achieved through the recruitment of larger
managing general agencies and expanding geographical concentration into the
Mid-South and California.
SMC also decreased the quota-share portion of business ceded pursuant to a
reinsurance agreement from 70% to 50% at September 1, 1995, which was further
decreased to 25% effective April 1, 1996. Premium deposits ceded pursuant to
this reinsurance agreement reduced net premium deposits by $4,706,000 in the
first six months of 1997 compared to $5,003,000 in the first six months of 1996.
Net Investment Income. Net investment income increased $4,955,000 or 53% to
$14,346,000 for the first six months of 1997 from $9,391,000 for the comparable
period of 1996. The increase primarily resulted from an increase in the weighted
average annualized yield of SMC's investment portfolio (exclusive of realized
and unrealized gains and losses) to 7.59% from 7.19% for the first six months of
1997 and 1996, respectively, and the increase in total invested assets
(amortized cost) of approximately 38.9% from December 31, 1995 to June 30, 1997,
most of which (approximately $100,000,000) occurred in the fourth quarter of
1996 due to the acquisition of Shelby Life.
Net Realized Investment Gains. Net realized investment gains decreased
$250,000 or 55% to $206,000 from $456,000 for the first six months of 1997 and
1996, 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.
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<PAGE> 15
Gain on Disposal of Subsidiaries. On March 18, 1996, SMC completed the sale
of a duplicate charter associated with First International to GIAC. SMC received
sale proceeds of $10,393,000, including $1,500,000 for the charter and licenses
associated with First International. In addition, First International, Standard
Life and GIAC have entered into a series of other agreements that include
provisions for Standard Life to retain the economic interest in certain First
International policies and administer First International policies in force at
the date of such sale.
In an unrelated matter, SMC decided in February 1996 to terminate the
reinsurance agreement between Standard Reinsurance and Salamandra, and not to
renew the Barbados license of Standard Reinsurance. This resulted in a first
quarter 1996 write-off of SMC's investment in Standard Reinsurance and certain
intangible assets of Standard Reinsurance amounting to $156,000.
The combined effect of the pre-tax gain on the sale of First International
and related contracts, and the Standard Reinsurance write-offs, was $886,000
pre-tax and $2,306,000 after-tax in the first quarter of 1996.
Policy Charges. Policy charges increased $1,569,000 or 129% to
$2,783,000 for the six months ended June 30, 1997 compared to $1,214,000 for
the six months ended June 30, 1996. The increase in policy charges resulted
from an increase in policy charges for Standard Life's universal life insurance
products of $984,000 due to the inclusion of Shelby Life in the results of
operations for periods after November 1, 1996 and an increase in policy
surrender charges on FPDAs of $294,000. The increase in annuity policy
withdrawals and surrender charges on flexible premium deferred annuities
generally corresponds to the aging and growth of SMC's annuity business in
force.
Management Fees and Similar Income From Separate Accounts. Management
fees and similar income from separate accounts increased $2,000 to $838,000 for
the first six months of 1997 from $836,000 for the first six months of 1996.
Such income fluctuates in relationship to total separate account assets and the
return earned on such assets.
Other Income. Other income decreased $409,000 or 32% to $881,000 for
the first six months of 1997 compared to $1,290,000 for the comparable 1996
period. The decrease resulted primarily from the administration fee income of
$375,000 collected in connection with the terminated and recaptured reinsurance
agreement with National Mutual in the second quarter of 1996.
Benefit and Claims. Benefits and claims decreased $2,855,000 or 40% to
$4,368,000 for the first six months of 1997 from $7,223,000 for the first six
months of 1996. The decrease in benefits and claims results from an increase in
change in policy reserves related to the termination and recapture of a
reinsurance agreement with National Mutual in the second quarter of 1996. This
decrease offset the increase in benefits and claims from the inclusion of
Shelby Life (approximately $1,462,000 in the first six months of 1997) in the
results of operations for periods after November 1, 1996. Throughout SMC'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.
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<PAGE> 16
Interest Credited on Interest-Sensitive Annuities and Other Financial
Products. Interest credited on interest-sensitive annuities and other financial
products was $8,166,000 for the first six months of 1997, an increase of
$3,162,000 or 63% from $5,004,000 for the comparable prior year period. The
increase resulted primarily from the inclusion of interest credited of
$1,907,000 in the first six months of 1997 from Shelby Life products, increases
in interest credited rates on new annuity sales and the increases in the growth
in policy reserves for annuities from sales. At June 30, 1997, the weighted
average interest credited rate for Standard Life's currently marketed annuities
and other financial product liabilities was 5.68% compared to 5.35% at June 30,
1996.
Salaries and Wages. Salaries and wages were $2,904,000 for the first six
months of 1997, an increase of $441,000 or 18% from $2,463,000 for the
comparable prior year period. This increase was caused primarily by an
increase in the number of employees in 1997 and an increase in incentive
compensation expense in the first six months of 1997 of $190,000 based on
operating income for the six months ended June 30, 1997.
Amortization. Amortization expense increased $418,000 or 36% to
$1,577,000 for the first six months of 1997 from $1,159,000 for the first six
months of 1996. The increase in current year amortization expense resulted
primarily from the amortization of present value of future profits of $412,000
in the first six months of 1997 for the acquisition of Shelby Life.
Other Operating Expenses. Other operating expenses decreased $593,000 or
15% to $3,317,000 for the first six months of 1997 from $3,910,000 for the first
six months of 1996. The decrease in other operating expenses resulted primarily
from eliminating in 1997 the additional cost to convert the operations and
expand the marketing effort in Dixie National Life incurred in the first six
months of 1996 and a reduction in international operating expenses.
Interest Expense and Financing Costs. Interest expense and financing costs
increased $801,000 or 289% to $1,078,000 in the six months ended June 30, 1997
from $277,000 in the six months ended June 30, 1996. The increase in interest
expense and financing costs during 1997 resulted primarily from increased
borrowing of $10,100,000 on the Amended Credit Agreement and borrowings of
$4,000,000 from an insurance company in connection with the acquisition of
Shelby Life.
Federal Income Taxes. Federal income tax expense (credit) was $575,000 for
the first six months of 1997, compared to $(990,000) for the first six months of
1996. The large credit in 1996 is primarily due to tax benefits of $1,420,000
related to the sale of First International.
Extraordinary Gain on Early Redemption of Redeemable Preferred
Stock. Extraordinary gains are recorded on the early redemption of the Class S
Preferred Stock for the amount by which SMC is able to repurchase the Class S
Preferred Stock below its book value plus accrued and unpaid dividends. SMC
recorded no extraordinary gain for the first six months of 1997 compared to
$267,000 for the six months ended June 30, 1996. Effective August 1, 1997, SMC
redeemed all of its issued and outstanding Class S Preferred Stock at
redemption value of $10.00 per share plus accumulated and unpaid dividends.
Common and Common Equivalent Shares. The weighted average number of common
and common equivalent shares for the six months ended June 30, 1996 included
522,810 common equivalent shares that were not included in this calculation for
the comparable six months in 1997. These additional common equivalent shares
were included in the 1996 calculation due to the increase in net income in the
first quarter of 1996 from the sale of First International. Such additional
common equivalent shares are not included in any other reporting period. The
inclusion of the additional common equivalent shares in the six months ended
June 30, 1996 calculations had the effect of decreasing earnings per share for
the period by $.03.
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<PAGE> 17
LIQUIDITY AND CAPITAL RESOURCES
Standard Management is an insurance holding company. The liquidity
requirements of Standard Management are met primarily from management fees,
equipment rental fees and payments for other charges and dividends and interest
on Surplus Debentures received from Standard Management's subsidiaries as well
as Standard Management's working capital. These are Standard Management's
primary source of funds to pay operating expenses and meet debt service
obligations. The payment of dividends and interest on Surplus Debentures and
management and other fees by Standard Life to Standard Management 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.
SMC reported on a consolidated GAAP basis net cash provided by operations
of $1,726,000 and $6,331,000 for the years ended December 31, 1996 and 1995,
respectively. Although deposits received on SMC'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 SMC. 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 $26,717,000 and $6,003,000 for the years ended December 31, 1996
and 1995, respectively. Cash generated on a consolidated basis is available to
Standard Management only to the extent that it is generated at Standard
Management level or is available to Standard Management through dividends,
interest, management fees or other payments from subsidiaries.
In April 1993, Standard Management instituted a program to repurchase SMC
Common Stock from time to time. The purpose of the stock repurchase program is
to enhance shareholder value. Standard Management had repurchased 1,134,356
shares of SMC Common Stock for $5,826,000 as of July 31, 1997. Of these
repurchases 419,026 shares were paid for through additional borrowing under
the Amended Credit Agreement, 39,016 shares from the proceeds of the
Notes and the remainder were paid from working capital. At July 31, 1997,
Standard Management was authorized to purchase an additional 365,644 shares
under this program.
Between February 1996 and July 1997 Standard Management repurchased
141,761 shares of Class S Preferred Stock at an aggregate price of $964,000
primarily through additional borrowings under the Amended Credit Agreement. On
August 1, 1997, Standard Management redeemed all of its issued and outstanding
shares of Class S Preferred Stock for an aggregate redemption price of
$1,840,000, redemption value of $10.00 per share plus accumulated and unpaid
dividends. Such redemption was financed from the proceeds of the Notes.
At June 30, 1997, Standard Management had "parent company only" cash
and short-term investments of $5,048,000. This cash balance reflects the
$1,000,000 dividend received from Standard Life in May 1997 and proceeds that
remained at June 30, 1997 from the borrowings from the received Notes. These
funds are available to Standard Management for general corporate purposes.
Standard Management's "parent company only" operating expenses (not including
class action litigation and settlement costs and interest expense) were
$3,470,000 and $2,793,000 for the years ended December 31, 1996 and 1995,
respectively.
Pursuant to the management services agreement with Standard Management,
Standard Life paid Standard Management a monthly fee of $150,000 during 1996
and 1995 for certain management services related to the production of business,
investment of assets and evaluation of acquisitions. The management service
agreement between Standard Management and Standard Life for 1997 has been
renegotiated to increase the monthly fee to $166,667 (annual fee of
$2,000,000). This amended management service agreement has been approved by the
Commissioner of the Indiana Department of Insurance. Pursuant to the management
service agreements with Standard Life, Dixie National Life paid fees of
$1,524,000 for the year ended December 31, 1996. The Mississippi Department of
Insurance has approved a decrease of the monthly payment to $83,333 (annual fee
of $1,000,000) from Dixie National Life to Standard Life in 1997. Both of these
agreements provide that they may be modified or terminated by the Indiana and
Mississippi departments of insurance in the event of financial hardship of
Standard Life or Dixie National Life.
Pursuant to the management services agreement with Standard Management,
Premier Life (Luxembourg), a wholly-owned subsidiary of Standard Management
International, paid Standard Management a management fee of $25,000 per quarter
during 1996 and 1995 for certain management and administrative services. The
agreement provides that it may be modified or terminated by either Standard
Management or Premier Life (Luxembourg). Standard Management does not plan to
modify this agreement in 1997.
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<PAGE> 18
At April 1, 1995, Standard Management sold its property and equipment
to an unaffiliated leasing/ financing company for $1,396,000 and subsequently
entered into a capital lease obligation whereby Standard Management pays a
monthly rental amount of $45,000. Standard Management charges a monthly
equipment rental fee to its subsidiaries for this equipment and additional
equipment purchased after April 1, 1995. The amount of the rental fee income
received from Standard Management's subsidiaries was $592,000 and $853,000 for
the six months ended June 30, 1997 and year ended December 31, 1996,
respectively.
On November 8, 1996, Standard Life acquired through merger Shelby Life
from DLAC for approximately $14,650,000, including $13,000,000 in cash, 250,000
shares of restricted SMC Common Stock (valued at $1,250,000) and $400,000 of
acquisition costs. Financing for the Shelby Life transaction was provided by
senior debt of $10,000,000 under the Amended Credit Agreement and $4,000,000 in
subordinated convertible debt described below.
The Amended Credit Agreement permits Standard Management to borrow up
to $16,000,000 in the form of a seven-year reducing revolving loan arrangement.
Standard Management has agreed to pay a non-use fee of .50% per annum on the
unused portion of the commitment. In connection with the original and Amended
Credit Agreement, Standard Management issued warrants to the bank to purchase
61,500 shares of SMC Common Stock. Borrowing under the Amended Credit Agreement
may be used for contributions to surplus of insurance subsidiaries, acquisition
financing, and repurchases of Class S Preferred and SMC Common Stock. 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 borrowing
under the Amended Credit Agreement is determined, at the option of Standard
Management, to be: (i) a fluctuating rate of interest based on the corporate
base rate announced by the bank from time to time plus one percent per annum,
or (ii) a rate at LIBOR plus 3.25%. Annual principal repayments of $2,667,000
begin in November 1998 and conclude in November 2003. Indebtedness incurred
under the Amended 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 Standard Management and certain investment
and indebtedness limitations. At June 30, 1997, Standard Management was in
compliance with all restrictions and covenants in the Amended Credit Agreement.
At June 30, 1997, Standard Management had borrowed $16,000,000 under the
Amended Credit Agreement at a weighted average interest rate of 9.202%. SMC has
received a commitment to increase the Amended Credit Agreement to $20,000,000
to finance the acquisition of Savers Life.
In connection with the acquisition of Shelby Life, SMC borrowed
$4,000,000 from an insurance company pursuant to a subordinated convertible
debt agreement which was due in December 2003 and required interest payments
in cash at 12% per annum, or, if SMC chose, in non-cash additional subordinated
convertible debt notes at 14% per annum until December 31, 2000. At June 30,
1997, this subordinated convertible debt agreement was amended at the principal
amount of $4,372,000 requiring interest payments in cash on January 1 and July
1 of each year at 10% per annum. At June 30, 1997, Standard Management borrowed
an additional $5,628,000 from an insurance company pursuant to another
subordinated convertible debt agreement (collectively, the "Notes") which is
due July 2004 unless previously converted, and requires interest payments in
cash on January 1 and July 1 of each year at 10% per annum. Proceeds from the
additional borrowings were used for contributions to surplus of insurance
subsidiaries of $2,400,000, redemption of Class S Preferred Stock of
approximately $1,840,000 and the balance for other general corporate purposes.
The Notes are convertible into SMC Common Stock at the rate of $5.747 per
share. The Notes may be prepaid in whole or in part at the option of Standard
Management commencing on July 1, 2000 at redemption prices equal to 105% of the
principal amount (plus accrued interest) and declining to 101% of the
principal amount (plus accrued interest). The Notes may be prepaid prior to
July 1, 2000 under certain limited circumstances. The subordinated convertible
debt agreements contain terms and financial covenants substantially similar to
those in the Amended Credit Agreement.
Assuming an increase in the current level of debt under the Amended
Credit Agreement to $20,000,000 and current interest rates at June 30, 1997
(weighted average rate of 9.202%) Standard Management annual
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<PAGE> 19
debt service would be approximately $2,800,000 in interest paid. In addition,
Standard Management has 1997 obligations under a capital lease of $539,000.
From the funds borrowed by Standard Management pursuant to the Amended
Credit Agreement and the subordinated convertible debt agreements, $13,000,000
was loaned to Standard Life pursuant to a Surplus Debenture which requires
Standard Life to make quarterly interest payments to Standard Management at a
variable corporate base rate plus 2% per annum, and annual principal payments of
$1,000,000 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. Standard Management
currently anticipates these quarterly approvals will be granted. Assuming the
approvals are granted and the June 30, 1997 interest rate of 10.50% continues in
1997, Standard Management will receive interest income of $1,357,000 from its
Surplus Debenture receivable for 1997.
Dividends from Standard Life to Standard Management 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 Commissioner of the Indiana Department 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% of surplus, in each case as
shown in its preceding annual statutory financial statements. Also, regulatory
approval is required when dividends to be paid exceed unassigned statutory
surplus. For the year ended December 31, 1996, Standard Life reported statutory
net gain from operations of $1,427,000, statutory surplus of $22,970,000 and
unassigned surplus of $1,140,000. Standard Life paid a dividend of $1,000,000
on May 1, 1997. Standard Life anticipates paying additional dividends of
approximately $600,000 in the remainder of 1997 and the approval of the
Commissioner of the Indiana Department of Insurance will be required.
Standard Management anticipates the available cash from its existing
working capital, plus anticipated 1997 dividends, management fees, rental income
and interest payments on its Surplus Debenture receivable will be more than
adequate to meet its anticipated "parent company only" cash requirements for
1997.
Standard Management has a note receivable of $2,858,000 from an affiliate
and a note payable of $2,858,000 to a different affiliate. This note receivable
and note payable are eliminated in the consolidated financial statements.
U.S. Insurance Operations. The principal liquidity requirements of Standard
Life are its contractual obligations to policyholders, dividend, rent,
management fee and Surplus Debenture payments to Standard Management 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 that affect policyholders' confidence.
The policies and annuities issued by Standard Life contain provisions that
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 effect on liquidity,
unanticipated withdrawals in a changing interest rate environment could
adversely affect earnings if SMC were required to sell investments at reduced
values to meet liquidity demands. SMC manages the asset and liability portfolios
in order to minimize the adverse earnings effect of changing market interest
rates. SMC seeks assets that have duration characteristics similar to the
liabilities
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<PAGE> 20
that they support. SMC also prepares cash flow projections and performs cash
flow tests under various market interest rate scenarios to assist in evaluating
liquidity needs and adequacy. SMC's U.S. insurance subsidiaries currently expect
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 NAIC, as
modified by the Indiana Department of Insurance, or the states in which the
insurance subsidiaries do business. Statutory accounting rules are different
from GAAP and are intended to reflect a more conservative perspective. With
respect to new business, statutory accounting practices require that: (i)
acquisition costs (primarily commissions and policy issue 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 reduction in statutory surplus ("surplus strain") in the year
written for many insurance products. SMC 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, SMC controls the amount of net new premiums
written to manage the effect of such surplus strain. SMC's long-term growth
goals contemplate continued growth in its insurance businesses. To achieve these
growth goals, SMC's U.S. insurance subsidiaries 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
Standard Management with funds generated through debt or equity offerings or
mergers with other life insurance companies. If additional capital is not
available from one or more of these sources, SMC believes that it could reduce
surplus strain through the use of reinsurance or through reduced writing of new
business.
Standard Life produced statutory net income of $751,000 and $3,291,000 for
the six months ended June 30, 1997 and the year ended December 31, 1996,
respectively. As a result, Standard Management did not make cash capital
contributions to Standard Life during 1996 to maintain adequate levels of
statutory capital and surplus. However, Standard Management contributed
$2,400,000 to Standard Life in the second quarter of 1997 to facilitate growth
in new premiums written. In March 1996, Standard Life sold its subsidiary,
First International, and realized an increase in statutory capital and surplus
of approximately $4,951,000 from the statutory gain on the sale and related
reinsurance transactions.
Commencing January 1, 1995, Standard Life began to reinsure a portion of
its annuity business. This reinsurance agreement has allowed SMC to write
volumes of business that it would not otherwise have been able to write due to
regulatory restrictions based on its ratio of surplus to liabilities as
determined by regulatory authorities in the State of Florida. By reinsuring a
portion of the annuity business, the liability growth is slowed, thereby
avoiding the erosion of surplus that occurs in periods of increasing sales. If
SMC's ratio of surplus to liabilities falls below 4%, the State of Florida could
prohibit SMC from writing new business in Florida. Standard Life's largest
annuity reinsurer at June 30, 1997, Winterthur, is rated "A" ("Excellent") by
A.M. Best. From January 1, 1995 to August 31, 1995, approximately 70% of certain
of Standard Life's annuity business produced was ceded. Standard Life decreased
the quota-share portion of business ceded to 50% at September 1, 1995 and
further reduced it to 25% effective April 1, 1996 to reflect the reduced need
for additional capital and increase current earnings potential. This reduction
was possible since the surplus strain experienced by Standard Life was not as
great as originally anticipated as a result of lower than expected sales in 1995
and the increase in surplus resulting from the sale of First International.
Winterthur limits dividends and other transfers by Standard Life to Standard
Management or affiliated companies in certain circumstances.
Management believes that operational cash flow of Standard Life will be
sufficient to meet its anticipated needs for 1997. As of June 30, 1997, Standard
Life had statutory capital and surplus for regulatory purposes of $25,546,000
compared to $22,970,000 at December 31, 1996. The increase is primarily due to
the capital contribution of $2,400,000 from Standard Management in the second
quarter of 1997 and an increase in admitted goodwill under statutory accounting
practices in connection with the acquisition of Dixie National Life. 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 Standard Management. During 1996, Standard Management did not
make any capital contributions to Standard Life, other than the SMC Common Stock
associated with the Shelby merger. Net cash flow from operations on a statutory
basis of Standard Life, after payment of benefits and operating expenses, was
$17,921,422 and $4,263,011 for the years ended December 31, 1996 and December
31, 1995,
20
<PAGE> 21
respectively. If the need arises for cash which is not readily available,
additional liquidity could be obtained from the sale of invested assets.
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 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 "RBC 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
SMC's insurance subsidiaries has an RBC Ratio that is at least 400% of the
minimum RBC requirements; accordingly, the subsidiaries meet the RBC
requirements.
Standard Life's acquisition of Shelby Life, and merger of Shelby Life into
Standard Life, effective November 1, 1996 is anticipated to have a positive
effect on Standard Life's liquidity and cash flows. Shelby Life ceased writing
new business effective November 1, 1996, thus reducing the surplus strain
normally associated with the issuance of new policies. The anticipated profits
from Shelby Life's book of business are expected to exceed the related interest
expense connected with the $13,000,000 of Surplus Debentures issued by Standard
Life in connection with the acquisition of Shelby Life. The statutory net income
of Shelby Life was $1,660,855 for the year ended December 31, 1995 and $851,472
for the ten months ended October 31, 1996.
International Operations. The consolidated balance sheet of SMC at June 30,
1997, includes a $2,081,000 credit representing the negative goodwill on the
purchase of Standard Management International which will be amortized into
future earnings. This amortization is a non-cash credit to SMC statements of
operations.
Standard Management International dividends are limited to its accumulated
earnings without regulatory approval. Standard Management International and
Premier Life (Luxembourg) were not permitted to pay dividends in 1996 and 1995
due to accumulated losses. Premier Life (Bermuda) did not pay dividends in 1996
and 1995. SMC does not anticipate any dividends from these companies in 1997.
Due to the nature of unit-linked products issued by Standard Management
International, which represent over 91% 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 bought and/or disposed of only on the advice of
independent consulting actuaries who perform an annual analysis comparing
anticipated cash flows on the insurance portfolio with the cash flows from the
fixed maturity securities. Any resulting material mismatches are then covered by
adjusting the securities in the investment portfolio as appropriate.
Proposed Acquisition of Savers Life. The acquisition of Savers Life will
cost approximately $14,200,000, plus acquisition costs, of which approximately
$4,000,000 is to be borrowed in cash under the Amended Credit Agreement. The
balance of the purchase price will be paid in shares of SMC Common Stock. Any
Performance Premium paid will increase the purchase price and will be
distributed in the form of cash and SMC Common Stock. SMC anticipates that
existing working capital, unused proceeds from borrowings under the Amended
Credit Agreement, and management fees and dividends payable by Savers Life will
be adequate to pay the cash portion of any Performance Premium as well as to
cover debt service on the additional borrowings under the Amended Credit
Agreement through 1998.
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.
21
<PAGE> 22
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.
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 shareholders' equity is
denominated in Luxembourg francs. Premier Life (Luxembourg) does not hedge its
translation risk because its shareholders' equity will remain in Luxembourg
francs for the forseeable future and no significant realized foreign exchange
gains or losses are anticipated.
Uncertainties Regarding Intangible Assets. Included in SMC's financial
statements as of June 30, 1997 are certain assets that are valued for financial
statement purposes primarily on the basis of assumptions established by SMC'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
June 30, 1997 consolidated balance sheet aggregated $44,790,000 or 7% of SMC's
assets. SMC 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 SMC's consolidated financial statements. SMC has determined that
the assumptions utilized in the initial valuation of these assets are consistent
with the operations of SMC as of June 30, 1997.
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 SMC's insurance subsidiaries;
however, it is not expected that such changes would materially affect SMC's
insurance subsidiaries' statutory capital requirements.
Financial Services Deregulation. The United States Congress is currently
considering a number of legislative proposals intended to reduce or eliminate
restrictions on affiliations among financial services organizations. Proposals
are extant which would allow banks to own or affiliate with insurers and
securities firms. An increased presence of banks in the life insurance and
annuity businesses may increase competition in these markets. The Company cannot
predict the impact of these proposals on the earnings of the Company.
Recently Issued Accounting Standards. In February 1997, the FASB issued
SFAS No. 128, "Earnings per Share." SFAS No. 128 is required to be adopted on
December 31, 1997. At that time, SMC will be required to change the method
currently used to compute earnings per share and to restate prior periods. Under
the new requirements for calculating primary earnings per share, the dilutive
effect of stock options and stock warrants will be excluded. The impact is
expected to result in an increase in primary earnings per share for the first
six months ended June 30, 1997 and 1996 of $.01 and $.04 per share,
respectively. The impact of SFAS No. 128 on the calculation of fully diluted
earnings per share for these periods is not expected to be material.
Safe Harbor Provisions. Forward-looking statements in this Proxy
Statement/Prospectus 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 immediately above and under "RISK FACTORS", among the other
factors that could cause actual results to differ materially are the following:
economic environment, interest rate changes generally and credited rates on new
business, sales volume, product development, regulatory changes, the results of
financing efforts, SMC's accounting policies, competition, the reinsurance
agreement with GIAC and the acquisition of Shelby Life.
22
<PAGE> 23
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
John J. Quinn, a former officer and director of SMC, was appointed as
the Indiana Commissioner of Insurance in February 1997. In connection with
that appointment he resigned as an officer and director of SMC effective as of
April 15, 1997. He subsequently declined such appointment. On June 19, 1997,
Mr. Quinn commenced an action in the Superior Court of Marion County Indiana,
against SMC claiming that his employment agreement contained a provision to the
effect that, following a termination of his employment with SMC under certain
circumstances, Mr. Quinn would be entitled to receive a lump sum payment equal
to the amount determined by multiplying the number of shares of SMC Common
Stock subject to unexercised stock options previously granted by SMC to Mr.
Quinn on the date of termination, whether or not such options were then
exercisable, by the highest per share fair market value of the SMC Common Stock
on any day during the six-month period ending on the date of termination. Upon
payment of such amount, such unexercised stock options would be deemed to have
been surrendered and canceled. Mr. Quinn further claims that his employment
agreement contained an additional provision that he would be entitled to
receive a lump sum payment equal to two years of annual salary, following
termination of employment. Mr. Quinn has asserted to SMC that he is entitled to
a lump sum termination payment of $1,654,000, and liquidated damages not
exceeding $3,308,000, by virtue of his voluntarily leaving SMC's employment.
SMC disputes Mr. Quinn's claims. Outside counsel is in the process of
investigating and responding to Mr. Quinn's claim. The ultimate outcome of the
action can not presently be determined. Accordingly, no provision for any
liability that may result has been made in the financial statements. Management
believes that the conclusion of such litigation will not have a material adverse
effect on SMC's consolidated financial condition.
SMC is involved in various legal proceedings in the normal course of
business. In most cases, such proceedings involve claims under insurance
policies or other contracts of SMC. The outcomes of these legal proceedings are
not expected to have a material adverse effect on the consolidated financial
position, liquidity, or future results of operations of SMC based on SMC's
current understanding of the relevant facts and law.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit 10.32 Amended and Restated Note Agreement dated as of November 8,
1996, as amended and restated on June 30, 1997, by and
between Standard Management and Great American Reserve
Insurance Company in the amount of $4,371,573.
Exhibit 10.33 Amended and Restated Senior Subordinated Convertible Note
dated as of November 8, 1996, as amended and restated on
June 30, 1997, by and between Standard Management and Great
American Reserve Insurance Company in the amount of
$4,371,573.
Exhibit 10.36 Note Agreement dated as of June 30, 1997 between Standard
Management, Capitol American Life Insurance Company and
Transport Life Insurance Company in the Amount of $5,628,427.
Exhibit 10.37 Senior Subordinated Convertible Note dated as of June 30,
1997 between Standard Management and Capitol American Life
Insurance Company in the amount of $3,628,427.
Exhibit 10.38 Senior Subordinated Convertible Note dated as of June 30,
1997 between Standard Management and Transport Life
Insurance Company in the amount of $2,008,000.
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
A report on Form 8-K/A dated April 10, 1997, as further amended May 20,
1997, was filed with the Commission to report under Item 7, the
financial statements of Shelby Life for the two years ended December 31,
1995 and the pro forma condensed consolidated financial statements as of
September 30, 1996.
23
<PAGE> 24
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: August 14, 1997
STANDARD MANAGEMENT CORPORATION
(Registrant)
By: RONALD D. HUNTER
------------------------------------
Ronald D. Hunter
Chairman of the Board, President and
Chief Executive Officer
(Principal Executive Officer)
By: GERALD R. HOCHGESANG
------------------------------------
Gerald R. Hochgesang
Senior Vice President
(Chief Accounting Officer)
24
<PAGE> 1
================================================================================
STANDARD MANAGEMENT CORPORATION
------------------------
AMENDED AND RESTATED
NOTE AGREEMENT
------------------------
Dated as of November 8, 1996,
as amended and restated on
June 30, 1997
Re:
$4,371,573 Amended and Restated Senior Subordinated
Convertible Notes Due December 31, 2003
================================================================================
<PAGE> 2
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 Prepayments at Option of Holder 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 . . . . . . . . . . . . 4
SECTION 4. CLOSING CONDITIONS . . . . . . . . . . . . . . . . . . . 5
4.1 Closing Certificate . . . . . . . . . . . . . . . . . . . 5
4.2 Legal Opinion . . . . . . . . . . . . . . . . . . . . . . 5
4.3 Company's Existence and Authority . . . . . . . . . . . . 5
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 Waiver of Conditions . . . . . . . . . . . . . . . . . . 6
SECTION 5. COMPANY COVENANTS . . . . . . . . . . . . . . . . . . . . 6
5.1 Corporate Existence, Etc. . . . . . . . . . . . . . . . . 6
5.2 Insurance . . . . . . . . . . . . . . . . . . . . . . . . 7
5.3 Taxes, Claims for Labor and Materials,
Compliance with Laws . . . . . . . . . . . . . . . . . 7
5.4 Maintenance of Material Properties, Etc. . . . . . . . . 8
5.5 Nature of Business . . . . . . . . . . . . . . . . . . . 8
5.6 Limitations on Indebtedness . . . . . . . . . . . . . . . 8
5.7 Limitations on Liens . . . . . . . . . . . . . . . . . . 9
5.8 Reinsurance . . . . . . . . . . . . . . . . . . . . . . . 10
5.9 Financial Covenants . . . . . . . . . . . . . . . . . . . 10
5.10 Sales of Assets . . . . . . . . . . . . . . . . . . . . . 10
5.11 Loans and Investments . . . . . . . . . . . . . . . . . . 10
5.12 Guaranties, Etc . . . . . . . . . . . . . . . . . . . . . 11
5.13 Mergers . . . . . . . . . . . . . . . . . . . . . . . . . 11
5.14 Transactions with Affiliates . . . . . . . . . . . . . . 11
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 . . . . . . . . . . . . . . 12
5.19 Reports and Rights of Inspection . . . . . . . . . . . . 12
<PAGE> 3
5.20 Leases . . . . . . . . . . . . . . . . . . . . . . . . . 13
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 . . . . . . . . . . . . . . . . . . . . 17
6.3 Acceleration of Maturity . . . . . . . . . . . . . . . . 17
6.4 Rescission of Acceleration . . . . . . . . . . . . . . . 18
SECTION 7. AMENDMENTS, WAIVERS AND CONSENTS . . . . . . . . . . . . 18
7.1 Consent Required . . . . . . . . . . . . . . . . . . . . 18
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 . . . . . . . . . . . . . . . . 26
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 . . . . . . . . . . . . . . . . . . . . . . 28
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 . . . . . . . . . . . . . . . . . . . . . . . . 29
9.15 Waiver of Jury Trial . . . . . . . . . . . . . . . . . . 29
ATTACHMENTS TO NOTE AGREEMENT:
EXHIBIT A Form of Amended and Restated Senior Subordinated
Convertible Note Due December 31, 2003
EXHIBIT B Voting Trust Agreement
EXHIBIT C Representations and Warranties
EXHIBIT D Registration Rights Agreement
EXHIBIT E Financial Covenants
EXHIBIT F Reporting Requirements
<PAGE> 4
NOTE AGREEMENT
THIS AMENDED AND RESTATED NOTE AGREEMENT (this "Agreement") is made and
entered into as of November 8, 1996, as amended and restated on June 30, 1997
by and between Standard Management Corporation, an Indiana corporation (the
"Company") and Great American Reserve Insurance Company, a Texas corporation
(the "Purchaser").
WHEREAS, the parties hereto entered into the Note Agreement on November 8,
1996 and both desire to amend and restate such document.
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 of its Amended and Restated Senior Subordinated Convertible Note Due
December 31, 2003 in the principal amount of Four Million Three Hundred
Seventy-One Thousand Five Hundred Seventy-Three Dollars ($4,371,573) to the
Purchaser (the "Note") in the form of Exhibit A, and shall bear interest at a
rate of 10% per annum. The Note will be dated the date of issue, will bear
interest from such date as respectively set forth therein, payable
semi-annually in cash on the first day of each January and July 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 prepayment, by acceleration or otherwise, until paid. The note will
be expressed to mature on december 31, 2003 and will be subject to prepayments
at the option of the holder in certain events prior to such date. Interest on
the note shall be computed on the basis of a 360-day year of twelve 30-day
months. 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 to the Purchaser, and the Purchaser agrees
to replace the original Senior Subordinated Convertible Note Due December 31,
2003 in the principal amount of Four Million Dollars ($4,000,000) (the
"Original Note") plus Three Hundred Seventy-One Thousand Five Hundred
Seventy-Three Dollars ($371,573) of accrued interest thereon with the Note on
the Closing Date.
-1-
<PAGE> 5
Delivery of the Note on the Closing Date will be made at such place as the
parties hereto mutually agree against cancellation of the Original Note and
interest thereon. On the Closing Date, the Company will deliver to the
Purchaser the Note in the principal amount of Four Million Three Hundred
Seventy-One Thousand Five Hundred Seventy-Three Dollars ($4,371,573).
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 $5.747 per Common Share (the "Conversion Rate").
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 exercisable only if
simultaneous with the conversion the Purchaser enters into a Voting Trust
Agreement substantially in the form attached hereto as Exhibit B with respect
to the Common Shares to be issued upon conversion;
(d) 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 laws, (including but not limited to
securities laws and state insurance laws) and the Company agrees to execute all
required agreements and documents required by the Company to establish
compliance with such laws and to cooperate with the Purchaser to obtain any and
all approvals that may be required to be obtained by Purchaser in order to
exercise the conversion rights; and
(e) 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,
-2-
<PAGE> 6
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. Prepayments at Option of Holder in Certain Events. In the event
that a Repurchase Event occurs, the holder of the Note shall have the right, at
such holder's option, pursuant to an irrevocable and unconditional offer by the
Company, to require the Company to prepay all, or any part, of the Note on the
date that is no later than forty-five days after the occurrence of such
Repurchase Event, at a cash price equal to 101% of the principal amount thereof
to be prepaid plus accrued and unpaid interest thereon to the date fixed for
prepayment.
2.3. Prepayments at Option of the Company. The Note may be prepaid in
whole or in part at the option of the Company at the following redemption
prices (expressed as percentages of the principal amount) if prepaid during the
12-month period commencing July 1 of the years indicated below, in each case
together with any accrued but unpaid interest thereon to the prepayment date:
Year Percentage
---- ----------
2000 105%
2001 104%
2002 103%
2003 102%
The Note may be prepaid in whole or in part at the option of the Company prior
to July 1, 2000 at a redemption price of 101% of the principal amount plus
accrued but unpaid interest thereon to the prepayment date only if (i) a Sale
Event occurs or (ii) the average of the closing prices of the Common Shares on
NASDAQ as reported in the Wall Street Journal, for any twenty trading days
within the thirty consecutive trading day period immediately prior to the date
of notice of prepayment equals or exceeds $8.00 per share. The Company shall
mail by first class mail to the holder of the Note a notice of prepayment at
least fifteen Business Days and not more than forty-five Business Days prior to
the prepayment date.
Any notice of prepayment pursuant to Section 2.2 or this Section 2.3 shall
(i) make reference to the applicable Section(s) of this Agreement, (ii) state
whether the Note is to be prepaid in whole or in part, and (iii) state the
prepayment date and price.
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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 C 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
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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 acquire 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
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outstanding Security of the Company or any other Person (including any state
insurance regulators) 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 in the form attached hereto as
Exhibit D.
4.6. Legality of Investment. The Note to be acquired 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. 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 4.8
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.
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<PAGE> 10
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
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<PAGE> 11
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
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(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
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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 E 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.
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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.
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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
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 F
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
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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;
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<PAGE> 17
(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
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<PAGE> 18
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
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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
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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
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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.
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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 June 30, 1997.
"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.
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"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
intercompany debt existing on the date hereof between the Company and Standard
Management International, S.A., or (ii) 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
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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, as to be amended in connection with the closing of the
acquisition of Savers Life.
"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
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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.
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<PAGE> 26
"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.
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"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.
"Repurchase Event" means the occurrence of any of the following events:
(i) any Person is or becomes the beneficial owner, directly or indirectly, of
50% or more of the Company's Voting Stock (other than a Person who beneficially
owns at the Closing Date 5% or more of the Company's Common Shares); (ii)
individuals who at the Closing Date constituted the Board of Directors of the
Company (together with any new directors whose election by such Board or whose
nomination for election by the shareholders of the Company was approved by a
vote of a majority of the directors then still in office who were either
directors at the Closing date or whose election or nomination for election was
previously so approved) cease for any reason to constitute a majority of the
Board of Directors of the Company then in office; (iii) any consolidation or
merger of the Company in which the Company is not the continuing or surviving
corporation (other than a consolidation or merger with a Wholly-owned
Subsidiary; (iv) the Company conveys, transfers, sells or assigns all or
substantially all of its assets to any Person (other thana Wholly-owned
Subsidiary); or (v) the Company distributes individually or in the aggregate
over a twelve-month period in respect of its Common Shares an amount in excess
of 30% of the fair market value of such Common Shares (the fair market value
shall be determined by the closing price of such Common Shares on NASDAQ as of
the date of such distribution.
"Sale Event" means the occurrence of any of the following events: (i) any
Person is or becomes the beneficial owner, directly or indirectly, of 50% or
more of the Company's Voting Stock (other than a Person who beneficially owns
at the Closing Date 5% or more of the Company's Common Shares); (ii) any
consolidation or merger of the Company in which the Company is not the
continuing or surviving corporation (other than a consolidation or merger with
a Wholly-Owned Subsidiary); or (iii) the Company conveys, transfers, sells or
assigns all or substantially all of its assets to any Person (other than a
Wholly-Owned Subsidiary).
"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.
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"Security" has the same meaning as in Section 2(1) of the Act.
"Savers Life" means Savers Life Insurance Company, a North Carolina
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.
"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
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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
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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) the falsity or incorrectness as of the
Closing Date of any representation or warranty of the Company contained in or
made pursuant to this Agreement or the Note, (ii) the existence of any
condition, event or fact constituting, or which with notice or passage of time,
or both, would constitute a default in the observance of any of the Company's
undertakings or covenants under or pursuant to this Agreement or the Note, 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
-27-
<PAGE> 31
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: Rollin M. Dick 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.
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
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<PAGE> 32
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.
-29-
<PAGE> 33
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: Paul B. Pheffer
----------------------------
Name: Paul B. Pheffer
--------------------------
Its: Executive Vice President and Chief Financial Officer
--------------------------
GREAT AMERICAN RESERVE INSURANCE COMPANY
By: Rollin M. Dick
---------------------------
Name: Rollin M. Dick
---------------------------
Its: Executive Vice President and Chief Financial Officer
---------------------------
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<PAGE> 1
EXHIBIT A
AMENDED AND RESTATED
SENIOR SUBORDINATED CONVERTIBLE NOTE
$4,371,573 Dated: November 8, 1996, as
amended and restated
as of June 30, 1997
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 Three Hundred Seventy-One Thousand Five Hundred Seventy-Three Dollars
($4,371,573) as set forth in the Amended and Restated 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 10% 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 10% per annum,
shall be due and payable in cash on a semi-annual basis, on January 1 and July
1 (commencing January 1, 1997). 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
<PAGE> 2
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, as to be amended in connection with
the closing of the Company's acquisition of Savers Life Insurance Company.
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 $5.747 per share of the
Company's common stock. 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
2
<PAGE> 3
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
3
<PAGE> 4
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
4
<PAGE> 5
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 conversions 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.
5
<PAGE> 6
"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.
6
<PAGE> 7
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 dated November 8, 1996 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. This Note completely amends, restates and replaces the
Senior Subordinated Convertible Note dated November 8, 1996 for $4,000,000
payable by the Maker to the Lender. 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
7
<PAGE> 8
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 Marion or
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: Paul B. Pheffer
--------------------------------
TITLE: Executive Vice President and
-----------------------------
Chief Financial Officer
8
<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
STANDARD MANAGEMENT CORPORATION
----------------
NOTE AGREEMENT
----------------
Dated as of June 30, 1997
Re:
$5,628,427 Senior Subordinated Convertible Notes
Due July 1, 2004
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
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 Prepayments at Option of Holder 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 ............................ 4
SECTION 4. CLOSING CONDITIONS .......................................... 5
4.1 Closing Certificate ......................................... 5
4.2 Legal Opinion ............................................... 5
4.3 Company's Existence and Authority ........................... 5
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 Use of Proceeds ............................................. 6
4.9 Waiver of Conditions ........................................ 6
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 ....................................... 7
5.4 Maintenance of Material Properties, Etc. .................... 8
5.5 Nature of Business .......................................... 8
5.6 Limitations on Indebtedness ................................. 8
5.7 Limitations on Liens ........................................ 9
5.8 Reinsurance ................................................. 10
5.9 Financial Covenants ......................................... 10
5.10 Sales of Assets ............................................. 10
5.11 Loans and Investments ....................................... 10
5.12 Guaranties, Etc ............................................. 11
5.13 Mergers ..................................................... 11
5.14 Transactions with Affiliates ................................ 11
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 ................................ 12
<PAGE> 3
5.19 Reports and Rights of Inspection ............................ 12
5.20 Leases ...................................................... 13
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 ........................................... 17
6.3 Acceleration of Maturity .................................... 17
6.4 Rescission of Acceleration .................................. 18
SECTION 7. AMENDMENTS, WAIVERS AND CONSENTS ............................ 18
7.1 Consent Required ............................................ 18
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 ................................... 26
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 ................................................ 28
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 .................................................... 29
9.15 Waiver of Jury Trial ........................................ 29
ATTACHMENTS TO NOTE AGREEMENT:
EXHIBIT A Form of Senior Subordinated Convertible Note
Due July 1, 2004
EXHIBIT B Voting Trust Agreement
EXHIBIT C Representations and Warranties
EXHIBIT D Registration Rights Agreement
EXHIBIT E Financial Covenants
EXHIBIT F Reporting Requirements
<PAGE> 4
NOTE AGREEMENT
THIS NOTE AGREEMENT (this "Agreement") is made and entered into as of
June 30, 1997 by and between Standard Management Corporation, an Indiana
corporation (the "Company"), Capitol American Life Insurance Company, an Arizona
corporation ("Capitol American") and Transport Life Insurance Company, a Texas
corporation ("Transport", and collectively with Capitol American, 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 Notes Due July 1, 2004 in the
principal amounts of Three Million Six Hundred Twenty-Eight Thousand Four
Hundred Twenty-Seven Dollars ($3,628,427) to Capitol American and Two Million
Dollars ($2,000,000) to Transport (collectively, the "Note"), in the form
of Exhibit A-1 and A-2, and shall bear interest at a rate of 10% per annum.
The Note will be dated the date of issue, will bear interest from such date as
respectively set forth therein, payable semi-annually in cash on the first day
of each January and July in each year (commencing January 1, 1998) 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 prepayment, by
acceleration or otherwise, until paid. The Note will be expressed to mature on
July 1, 2004 and will be subject to prepayments at the option of the holder in
certain events prior to such date. Interest on the Note shall be computed on
the basis of a 360-day year of twelve 30-day months. 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.
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<PAGE> 5
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 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 Capitol American the Note in the principal amount of Three
Million Six Hundred Twenty-Eight Thousand Four Hundred Twenty-Seven Dollars
($3,628,427) and to Transport the Note in the principal amount of Two Million
Dollars ($2,000,000).
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 $5.747 per Common Share (the "Conversion Rate"). 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 exercisable only if
simultaneous with the conversion the Purchaser enters into a Voting Trust
Agreement substantially in the form attached hereto as Exhibit B with respect to
the Common Shares to be issued upon conversion;
(d) 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 laws, (including but not limited to
securities laws and state insurance laws) and the Company agrees to execute all
required agreements and documents required by the Company to establish
compliance with such laws and to cooperate with the Purchaser to obtain any and
all approvals that may be required to be obtained by Purchaser in order to
exercise the conversion rights; and
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<PAGE> 6
(e) 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. Prepayments at Option of Holder in Certain Events. In the event
that a Repurchase Event occurs, the holder of the Note shall have the right, at
such holder's option, pursuant to an irrevocable and unconditional offer by the
Company, to require the Company to prepay all, or any part, of the Note on the
date that is no later than forty-five days after the occurrence of such
Repurchase Event, at a cash price equal to 101% of the principal amount thereof
to be prepaid plus accrued and unpaid interest thereon to the date fixed for
prepayment.
2.3. Prepayments at Option of the Company. The Note may be prepaid in
whole or in part at the option of the Company at the following redemption prices
(expressed as percentages of the principal amount) if prepaid during the
12-month period commencing July 1 of the years indicated below, in each case
together with any accrued but unpaid interest thereon to the prepayment date:
<TABLE>
<CAPTION>
Year Percentage
---- ----------
<S> <C>
2000 105%
2001 104%
2002 103%
2003 102%
</TABLE>
The Note may be prepaid in whole or in part at the option of the Company prior
to July 1, 2000 at a redemption price of 101% of the principal amount plus
accrued but unpaid interest thereon to the prepayment date only if (i) a Sale
Event occurs or (ii) the average of the closing prices of the Common Shares on
NASDAQ as reported in the Wall Street Journal, for any twenty trading days
within the thirty consecutive trading day period immediately prior to the date
of notice of prepayment equals or exceeds $8.00 per share. The Company shall
mail by first class mail to the holder of the Note a notice of prepayment at
least fifteen Business Days and not more than forty-five Business Days prior to
the prepayment date.
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<PAGE> 7
Any notice of prepayment pursuant to Section 2.2 or this Section 2.3
shall (i) make reference to the applicable Section(s) of this Agreement, (ii)
state whether the Note is to be prepaid in whole or in part, 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 C 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.
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<PAGE> 8
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
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<PAGE> 9
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 (including any state insurance regulators) 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 in the form attached hereto
as Exhibit D.
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. Use of Proceeds. The Company shall use the proceeds from the
issuance of the Note as follows: (i) to redeem all of the Company's Class S
Convertible Cumulative Redeemable Preferred Stock, (ii) Two Million Four Hundred
Thousand dollars ($2,400,000) to be contributed to Standard Life, and (iii) the
remainder to be held by the Company for general corporate purposes. 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.
4.9. 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
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<PAGE> 10
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
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<PAGE> 11
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;
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<PAGE> 12
(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
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<PAGE> 13
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 E 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,
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<PAGE> 14
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
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<PAGE> 15
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 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
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set forth on Exhibit F 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
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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
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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;
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<PAGE> 19
(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
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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
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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,
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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
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accordance with GAAP, together with any other lease which is in substance a
financing lease.
"Closing Date" means June 30, 1997.
"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 intercompany debt existing
on the date hereof between the Company and Standard Management International,
S.A., or (ii) 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
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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, as to be amended in connection with the closing of the
acquisition of Savers Life.
"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.
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"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
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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.
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"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.
"Repurchase Event" means the occurrence of any of the following events:
(i) any Person is or becomes the beneficial owner, directly or indirectly, of
50% or more of the Company's Voting Stock (other than a Person who beneficially
owns at the Closing Date 5% or more of the Company's Common Shares); (ii)
individuals who at the Closing Date constituted the Board of Directors of the
Company (together with any new directors whose election by such Board or whose
nomination for election by the shareholders of the Company was approved by a
vote of a majority of the directors then still in office who were either
directors at the Closing date or whose election or nomination for election was
previously so approved) cease for any reason to constitute a majority of the
Board of Directors of the Company then in office; (iii) any consolidation or
merger of the Company in which the Company is not the continuing or surviving
corporation (other than a consolidation or merger with a Wholly-owned
Subsidiary; (iv) the Company conveys, transfers, sells or assigns all or
substantially all of its assets to any Person (other thana Wholly-owned
Subsidiary); or (v) the Company distributes individually or in the aggregate
over a twelve-month period in respect of its Common Shares an amount in excess
of 30% of the fair market value of such Common Shares (the fair market value
shall be determined by the closing price of such Common Shares on NASDAQ as of
the date of such distribution.
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<PAGE> 28
"Sale Event" means the occurrence of any of the following events: (i)
any Person is or becomes the beneficial owner, directly or indirectly, of 50% or
more of the Company's Voting Stock (other than a Person who beneficially owns at
the Closing Date 5% or more of the Company's Common Shares); (ii) any
consolidation or merger of the Company in which the Company is not the
continuing or surviving corporation (other than a consolidation or merger with
a Wholly-Owned Subsidiary); or (iii) the Company conveys, transfers, sells or
assigns all or substantially all of its assets to any Person (other than a
Wholly-Owned Subsidiary).
"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.
"Savers Life" means Savers Life Insurance Company, a North Carolina
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.
"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
-25-
<PAGE> 29
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
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<PAGE> 30
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) the falsity or incorrectness as of the
Closing Date of any representation or warranty of the Company contained in or
made pursuant to this Agreement or the Note, (ii) the existence of any
condition, event or fact constituting, or which with notice or passage of time,
or both, would constitute a default in the observance of any of the Company's
undertakings or covenants under or pursuant to this Agreement or the Note, 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.
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<PAGE> 31
(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: Rollin M. Dick 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.
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<PAGE> 32
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.
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.
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<PAGE> 33
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: Paul B. Pheffer
----------------------------------------
Name: Paul B. Pheffer
--------------------------------------
Its: Executive Vice President & CFO
---------------------------------------
CAPITOL AMERICAN LIFE INSURANCE COMPANY
By: Rollin M. Dick
----------------------------------------
Name: Rollin M. Dick
--------------------------------------
Its: Executive Vice President & CFO
---------------------------------------
TRANSPORT LIFE INSURANCE COMPANY
By: Rollin M. Dick
----------------------------------------
Name: Rollin M. Dick
--------------------------------------
Its: Executive Vice President & CFO
---------------------------------------
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<PAGE> 1
SENIOR SUBORDINATED CONVERTIBLE NOTE
$3,628,427 Dated: June 30, 1997
FOR VALUE RECEIVED, the undersigned, STANDARD MANAGEMENT CORPORATION, an
Indiana corporation ("Maker" or the "Company"), promises to pay to the order of
Capitol American Life Insurance Company, an Arizona 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 Three
Million Six Hundred Twenty-Eight Thousand Four Hundred Twenty-Seven Dollars
($3,628,427) as set forth in a Note Agreement by and between Lender, Maker and
Transport Life Insurance Company, (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 10% per annum in accordance
with the following terms:
1. Principal and all unpaid interest which accrues thereon shall be
payable in full at July 1, 2004 (hereinafter the "Maturity"). Interest on the
outstanding principal balance of this Note at the rate of 10% per annum, shall
be due and payable in cash on a semi-annual basis, on January 1 and July 1
(commencing January 1, 1998). 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 July 1, 2004 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
<PAGE> 2
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, as to be amended in connection with
the closing of the Company's acquisition of Savers Life Insurance Company.
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 $5.747 per share of the
Company's common stock. 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.
2
<PAGE> 3
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
3
<PAGE> 4
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)
4
<PAGE> 5
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
5
<PAGE> 6
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
6
<PAGE> 7
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, Lender and Transport Life Insurance Company.
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
7
<PAGE> 8
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 Marion or
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/ Paul B. Pheffer
--------------------------------
TITLE: Executive Vice-President
--------------------------------
8
<PAGE> 1
SENIOR SUBORDINATED CONVERTIBLE NOTE
$2,000,000 Dated: June 30, 1997
FOR VALUE RECEIVED, the undersigned, STANDARD MANAGEMENT CORPORATION,
an Indiana corporation ("Maker" or the "Company"), promises to pay to the order
of Transport Life 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 Two
Million Dollars ($2,000,000) as set forth in a Note Agreement by and between
Lender, Maker and Capitol American Life Insurance Company, (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
10% per annum in accordance with the following terms:
1. Principal and all unpaid interest which accrues thereon shall
be payable in full at July 1, 2004 (hereinafter the "Maturity"). Interest on
the outstanding principal balance of this Note at the rate of 10% per annum,
shall be due and payable in cash on a semi-annual basis, on January 1 and July
1 (commencing January 1, 1998). 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 July 1, 2004 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
<PAGE> 2
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, as to be amended in connection with
the closing of the Company's acquisition of Savers Life Insurance Company.
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 $5.747 per share of
the Company's common stock. 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
2
<PAGE> 3
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
3
<PAGE> 4
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.
4
<PAGE> 5
(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
5
<PAGE> 6
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
6
<PAGE> 7
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, Lender and Capitol American Life Insurance Company.
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,
7
<PAGE> 8
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 Marion or 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.
8
<PAGE> 9
STANDARD MANAGEMENT CORPORATION
BY: /s/ Paul B. Pheffer
------------------------------
TITLE: Executive Vice-President
------------------------------
9
<PAGE> 1
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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
1997 1996 1997 1996(1)
---- ------- ---- -------
<S> <C> <C> <C> <C>
PRIMARY
Weighted average common shares outstanding.................. 5,014,099 4,534,080 5,019,136 4,640,688
5 percent common stock dividend............................. -- 226,576 -- 225,377
Common equivalent shares related to:
Stock warrants at average market price.................... 169,572 109,282 177,516 80,275
Stock options at average market price..................... 74,222 17,533 90,054 10,058
Net issuable shares for modified treasury stock method
(after assumed buyback of 20% of outstanding stock
options and warrants).................................. -- -- -- 522,810
--------- --------- --------- ---------
WEIGHTED AVERAGE PRIMARY SHARES OUTSTANDING................. 5,257,893 4,887,471 5,286,706 5,479,208
========= ========= ========= =========
Income before extraordinary gain on early redemption of
redeemable preferred stock and preferred stock dividends
as reported............................................... $ 682 $ 185 $ 1,325 $ 2,850
Reduction in interest expense and increase in short-term
investment income for modified treasury stock method...... -- -- -- 131
--------- --------- --------- ---------
682 185 1,325 2,981
Extraordinary gain on early redemption of redeemable
preferred stock........................................... -- 166 -- 267
--------- --------- --------- ---------
NET INCOME (AS ADJUSTED).................................... 682 351 1,325 3,248
Preferred stock dividends as reported....................... 41 66 83 112
Preferred stock dividends reduction for modified treasury
stock method.............................................. -- -- -- (46)
--------- --------- --------- ---------
Earnings available to common shareholders (as adjusted)..... $ 641 $ 285 $ 1,242 $ 3,182
========= ========= ========= =========
Earnings Per Share:
Income before extraordinary gain on early redemption of
redeemable preferred stock and preferred stock
dividends.............................................. $ .13 $ .04 $ .25 $ .54
Extraordinary gain on early redemption of redeemable
preferred stock........................................ -- .03 -- .05
--------- --------- --------- ---------
NET INCOME................................................ .13 .07 .25 .59
Preferred stock dividends................................. .01 .01 .01 .01
--------- --------- --------- ---------
Earnings available to common shareholders................. $ .12 $ .06 $ .24 $ .58
========= ========= ========= =========
</TABLE>
- -------------------------
(1) 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.
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENTS OF OPERATIONS FILED
AS PART OF THE QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTERLY PERIOD ENDED
JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH QUARTERLY
REPORT ON FORM 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<DEBT-HELD-FOR-SALE> 350,513
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 63
<MORTGAGE> 2,297
<REAL-ESTATE> 537
<TOTAL-INVEST> 382,162
<CASH> 9,823
<RECOVER-REINSURE> 69,157
<DEFERRED-ACQUISITION> 21,274
<TOTAL-ASSETS> 654,023
<POLICY-LOSSES> 434,228
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 4,740
<NOTES-PAYABLE> 26,180
1,825
0
<COMMON> 40,481
<OTHER-SE> 14
<TOTAL-LIABILITY-AND-EQUITY> 654,023
1,665
<INVESTMENT-INCOME> 7,147
<INVESTMENT-GAINS> 32
<OTHER-INCOME> 2,448
<BENEFITS> 1,979
<UNDERWRITING-AMORTIZATION> 752
<UNDERWRITING-OTHER> 2,894
<INCOME-PRETAX> 947
<INCOME-TAX> 265
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 682
<EPS-PRIMARY> .12
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
