-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PE5jymR7dGWrNVmpmszwqzu9WZQLe/SLJcvqYZwpA6dm/Qn1WD9L26RFa8xckEuz HmcdqI2DL2nKqmnCTrhw2A== 0000950152-98-009024.txt : 19981118 0000950152-98-009024.hdr.sgml : 19981118 ACCESSION NUMBER: 0000950152-98-009024 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981116 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CENTRAL RESERVE LIFE CORP CENTRAL INDEX KEY: 0000215403 STANDARD INDUSTRIAL CLASSIFICATION: LIFE INSURANCE [6311] IRS NUMBER: 341017531 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-08483 FILM NUMBER: 98751154 BUSINESS ADDRESS: STREET 1: 17800 ROYALTON RD CITY: STRONGSVILLE STATE: OH ZIP: 44136 BUSINESS PHONE: 2165722400 MAIL ADDRESS: STREET 1: 17800 ROYALTON RD CITY: STRONGSVILLE STATE: OH ZIP: 44136 10-Q 1 CENTRAL RESERVE LIFE CORPORATION 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1998 Commission file number 0-8483 CENTRAL RESERVE LIFE CORPORATION ------------------------------------------------------------------ (Exact name of registrant as specified in its charter) OHIO 34-1017531 ---- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 17800 ROYALTON ROAD, STRONGSVILLE, OHIO 44136 ---------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (440) 572-2400 -------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes (X) No ( ) The number of shares outstanding of the registrant's Common Stock at September 30, 1998 was 11,495,172. 2 PART I - FINANCIAL INFORMATION FINANCIAL STATEMENTS PAGE - -------------------- ---- Condensed Consolidated Balance Sheets 3 Condensed Consolidated Statements of Operations 4 Condensed Consolidated Statements of Cash Flows 5 Notes to Condensed Consolidated Financial Statements 6 - 2 - 3 CENTRAL RESERVE LIFE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31, 1998 1997 --------------- -------------- (UNAUDITED) ASSETS Investments: Fixed maturities held to maturity, at amortized cost $ 10,895,192 $ 11,898,627 Fixed maturities available for sale, at fair value 76,824,195 67,961,886 --------------- -------------- Total fixed maturities 87,719,387 79,860,513 Policy loans 103,661 96,211 Short-term investments, at cost which approximate market 19,026,849 1,970,406 --------------- -------------- Total investments 106,849,897 81,927,130 Cash 1,803,962 5,632,459 Cash - restricted 4,402,383 3,930,956 Accrued investment income 1,312,245 1,123,693 Premiums receivable 1,536,637 2,098,243 Reinsurance receivable 44,488,500 26,215,765 Note receivable 3,000,000 - Property and equipment, net 10,290,023 10,966,512 Deferred federal income taxes 656,899 1,356,000 Deferred acquisition costs 4,276,951 325,572 Other assets 1,573,242 2,227,247 --------------- -------------- Total assets $ 180,190,739 $ 135,803,577 =============== ============== LIABILITIES AND SHAREHOLDERS' EQUITY Policy liabilities and accruals: Future policy benefits, losses and claims $ 22,511,691 $ 24,903,497 Other policy claims and benefits payable 77,728,428 56,186,802 Deferred reinsurance gain 17,196,842 10,000,000 Other policyholders' funds 9,359,948 7,565,341 Other liabilities 9,546,058 7,237,067 --------------- -------------- 136,342,967 105,892,707 Note payable - 20,000,000 Mortgage note payable 8,313,700 8,399,028 --------------- -------------- Total liabilities 144,656,667 134,291,735 --------------- -------------- Shareholders' equity: Non-Voting Preferred shares, no par value, authorized 2,000,000 none issued - - Common shares, no par value, stated value $.50, authorized 30,000,000 issued and outstanding 11,495,172 in 1998 and 4,195,172 in 1997 5,747,586 2,097,586 Additional paid-in capital 38,147,266 4,122,319 Retained earnings (accumulated deficit) (10,329,123) (5,319,327) Accumulated other comprehensive income 1,968,343 611,264 --------------- -------------- Total shareholders' equity 35,534,072 1,511,842 --------------- -------------- $ 180,190,739 $ 135,803,577 =============== ==============
See notes to condensed consolidated financial statements. - 3 - 4 CENTRAL RESERVE LIFE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 1998 1997 1998 1997 ------------- ------------- ------------- ------------- REVENUES: Premiums Direct $ 66,773,792 $ 63,676,535 $ 198,132,439 $ 197,113,941 Assumed 18,890,552 - 18,890,552 - Ceded (43,582,310) (932,951) (100,604,782) (2,250,216) ------------- ------------- ------------- ------------- Net premiums 42,082,034 62,743,584 116,418,209 194,863,725 Net investment income 2,114,374 1,627,973 6,147,816 4,845,747 Net realized gains 36,900 102,022 28,548 125,348 Other income 1,178,763 - 1,178,763 - ------------- ------------- ------------- ------------- 45,412,071 64,473,579 123,773,336 199,834,820 ------------- ------------- ------------- ------------- BENEFITS, LOSSES AND EXPENSES: Benefits, claims, losses and settlement expenses 30,081,923 50,496,272 88,218,592 155,397,719 Commissions 6,359,319 8,528,837 19,170,563 26,615,111 Other operating expenses 8,358,362 9,255,802 19,311,696 27,748,519 Interest expense and financing costs 209,357 339,497 2,082,281 742,424 ------------- ------------- ------------- ------------- 45,008,961 68,620,408 128,783,132 210,503,773 ------------- ------------- ------------- ------------- Income (loss) before Federal income taxes 403,110 (4,146,829) (5,009,796) (10,668,953) Federal income tax expense (benefit) - 284,665 - (861,335) ------------- ------------- ------------- ------------- Net income (loss) $ 403,110 $ (4,431,494) $ (5,009,796) $ (9,807,618) ============= ============= ============= ============= Earnings (loss) per common share: Basic $ .04 $ (1.06) $ (.76) $ (2.35) Diluted $ .03 $ (1.06) $ (.76) $ (2.35)
See notes to condensed consolidated financial statements. - 4 - 5 CENTRAL RESERVE LIFE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1998 1997 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ (5,009,796) $ (9,807,618) Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities: Depreciation and amortization 709,453 740,200 Net realized (gains) losses (28,548) (125,348) Deferred federal income taxes 699,101 (915,501) Changes in assets and liabilities: Restricted cash (471,427) (177,362) Premiums receivable 561,606 1,669,792 Reinsurance receivable (38,382,726) (1,045,466) Federal income taxes recoverable - 2,245,530 Accrued investment income (188,552) (133,926) Other assets 267,386 (1,532,737) Future policy benefits, claims and funds payable 23,694,554 3,938,019 Other liabilities 2,821,614 (752,059) Note receivable (3,000,000) - ------------ ------------ Net cash provided by (used in) operating activities (18,327,335) (5,896,476) ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Securities available-for-sale: Purchases (22,032,733) (16,081,390) Sales - - Maturities and calls 15,544,231 17,017,216 Securities held-to-maturity: Purchases - - Maturities and calls - - Net (additions) deletions to furniture and equipment - (255,689) Net proceeds (purchase) of investments - short-term (17,056,443) (1,672,554) Policy loans 7,450 (9,397) ------------ ------------ Net cash provided by (used in) investing activities (23,537,495) (1,001,814) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Increase in annuity account balances 1,170,361 1,907,389 Decrease in annuity account balances (3,920,488) (3,101,488) Principal payments on long-term debt (85,329) (77,624) Proceeds from exercise of stock options - 141,500 Proceeds from equity financing, net of expenses 37,674,947 - Reinsurance ceding allowance 23,196,842 - Proceeds from note payable - 5,200,000 Repayment of note payable (20,000,000) - ------------ ------------ Net cash provided by (used in) financing activities 38,036,333 4,069,777 ------------ ------------ Net increase (decrease) in cash (3,828,497) (2,828,513) Cash at beginning of year 5,632,459 4,649,832 ------------ ------------ Cash at end of quarter $ 1,803,962 $ 1,821,319 ============ ============ Supplemental disclosures of cash flow information: Cash paid during the period for interest $ 1,464,664 $ 716,424 Cash paid (received) during the period for income taxes - -
See notes to condensed consolidated financial statements. - 5 - 6 CENTRAL RESERVE LIFE CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - ---------------------------------------------------------------- Periods ended September 30, 1998 and 1997 Note 1 - Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K/A for the fiscal year ended December 31, 1997. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The consolidated results for the three months and nine months ended September 30, 1998 are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 1998. Note 2 - Comprehensive Income In June 1997, the Financial Accounting Standards Board issued SFAS No. 130, Reporting Comprehensive Income, which requires that an enterprise classify items of other comprehensive income, as defined therein, by their nature in the financial statement and display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of the balance sheet. The Company adopted SFAS No. 130 in the first quarter of 1998. The principal difference between net income as historically reported in the consolidated statements of income and comprehensive income is unrealized gains or losses on securities recorded in shareholders' equity. Comprehensive income is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 1998 1997 1998 1997 ----------- ----------- ----------- ----------- Net income (loss) $ 403,110 $(4,431,494) $(5,009,796) $(9,807,618) Unrealized gain on securities 1,091,793 898,425 1,375,921 998,929 Reclassification adjustment for gains included in net income (24,354) (67,335) (18,842) (82,730) ----------- ----------- ----------- ----------- Comprehensive income $ 1,470,549 $(3,600,404) $(3,652,717) $(8,891,499) =========== =========== =========== ===========
Note 3 - Federal Income Taxes The Federal income tax returns for the Company and its subsidiaries have been examined by the Internal Revenue Service (IRS) for 1991 and 1992. (A current examination of the tax returns for 1993 through 1996 was started in April 1998.) During the third quarter of 1994, the IRS issued a proposal for adjustments to the Company's returns for 1991 and 1992. The proposed deficiencies - 6 - 7 were approximately $2.4 million of which $215,303 was paid in 1994 and $590,000 paid in 1997. The balance primarily deals with whether or not the Company's subsidiary, Central Reserve Life Insurance Company ("Central"), qualified as a life company, for tax purposes. The Company is vigorously protesting the proposed deficiency and based on discussions with counsel, management believes existing law supports the Company's position. Therefore, the Company has not recorded a liability for the difference. On May 18, 1998, the United States Tax Court ruled that the case may be decided without the need for a trial. Note 4 - Computation of Net Income (Loss) Per Common Share
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 1998 1997 1998 1997 ----------- ------------ ------------ ----------- Basic Average common shares outstanding 11,495,172 4,195,172 6,628,505 4,178,505 =========== ============ ============ =========== Net income (loss) $ 403,110 $ (4,431,494) $ (5,009,796) $(9,807,618) =========== ============ ============ =========== Net income (loss) per common share $ .04 $ (1.06) $ (.76) $ (2.35) =========== ============ ============ =========== Diluted Average common shares outstanding 11,495,172 Warrants/stock options - treasury stock method 1,206,667 ----------- Weighted average shares 12,701,839 =========== Net income $ 403,110 =========== Net income per common share $ .03 ===========
Net income (loss) per common share has been computed in accordance with Statement of Financial Accounting Standards (SFAS) No. 128 adopted for the quarter ending December 31, 1997. All net income (loss) per common share amounts shown for the three months and nine months ended September 30, 1997 have been restated to conform to SFAS No. 128. The adoption of SFAS No. 128 for the three months and nine months ended September 30, 1997 had no effect on net income (loss) per common share from the previous method of computing net income (loss) per common share. In computing diluted earnings per share, only potential common shares that are dilutive, those that reduce earnings per share, are included. The exercise of options and warrants is not assumed if the result would be antidilutive, such as when a loss from continuing operations is reported. The Company reported such a loss in the third quarter of 1997 and the nine month periods for 1998 and 1997, therefore the basic and diluted (loss) per share are the same. - 7 - 8 Note 5 - Reinsurance Central entered into a 50/50 quota-share reinsurance treaty with Reassurance Company of Hannover ("RCH") in December 1997 on certain group accident and health policies. Under the provisions of the treaty, Central cedes 50% of the premiums for these policies and in return receives reimbursement for 50% of the claims plus a commission and expense allowance. On August 1, 1998, Central reinsured 100% of the major medical policies of United Benefit Life Insurance Company ("UBL"). Concurrently, Central ceded 80% of the business to RCH. Central also receives a commission and expense allowance in addition to the 80% reimbursement for claims. The following table reflects the effect of the Hannover reinsurance treaties for the period. Other reinsurance is considered immaterial for the Company.
THREE MONTHS ENDING NINE MONTHS ENDING SEPTEMBER 30, SEPTEMBER 30, 1998 1997 1998 1997 ------------- ------------- ------------- ------------- Benefits, claims, losses and settlement expenses $ 74,249,012 $ 50,496,272 $ 177,391,821 $ 155,397,719 Reinsurance recoverable (44,167,089) - (89,173,229) - ------------- ------------- ------------- ------------- Net $ 30,081,923 $ 50,496,272 $ 88,218,592 $ 155,397,719 ============= ============= ============= ============= Commissions Direct $ 9,251,997 $ 8,528,837 $ 27,595,073 $ 26,615,111 Assumed 3,265,570 - 3,265,570 - Reinsurance allowance (6,158,248) - (11,690,080) - ------------- ------------- ------------- ------------- $ 6,359,319 $ 8,528,837 $ 19,170,563 $ 26,615,111 ============= ============= ============= ============= Other operating expenses Direct $ 12,151,044 $ 9,255,802 $ 29,084,078 $ 27,748,519 Assumed 2,160,029 - 2,160,029 - Reinsurance allowance (5,952,711) - (11,932,411) - ------------- ------------- ------------- ------------- $ 8,358,362 $ 9,255,802 $ 19,311,696 $ 27,748,519 ============= ============= ============= =============
- 8 - 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RECENT EVENTS: On March 30, 1998, the Company entered into an amended and restated Stock Purchase Agreement ("the Equity Financing") in which the Company agreed to issue and sell 7,300,000 Common Shares at $5.50 per share and warrants to purchase an additional 3,650,000 Common Shares at an exercise price of $5.50 per share for an aggregate purchase price of $40,150,000. On June 26, 1998, the shareholders of the Company approved the Equity Financing. The transaction closed on July 3, 1998 and is reflected in the accompanying September 30, 1998 financial statements. Proceeds received in July 1998 were used to pay an outstanding $20 million loan, plus interest, and related transaction expenses, such as legal, printing, accounting and investment banking fees, plus a $5 million contribution to the surplus of Central. On August 1, 1998, Central entered into an agreement with United Benefit Life Insurance Company ("UBL") to reinsure 100% of the major medical policies of UBL, covering approximately 100,000 lives with estimated annual premiums of $100 million. Concurrently, Central ceded 80% of the business to Reassurance Company of Hannover ("RCH"), thereby assuming a net risk of 20%. Reserves for estimated claims of $36,500,000 were assumed by Central for which UBL transferred assets of $16,500,000, net of a $20,000,000 ceding allowance provided by Central. Central received a $20,000,000 ceding allowance from RCH for the 80% thereby creating a zero effect on statutory surplus regarding the allowances. The agreement also provides Central with access to UBL's sales force. SUBSEQUENT EVENTS: On November 5, 1998, the Company announced it signed a definitive agreement to purchase Continental General Corporation and its wholly-owned insurance subsidiary, Continental General Insurance Company, from the Western and Southern Life Insurance Company of Cincinnati, Ohio, for a purchase price of $84 million. With a distribution system of 30,000 agents throughout 49 states, Continental General provides health and life insurance products for the senior market, including long-term care, Medicare supplement, and senior life and annuity products, as well as major medical plans. As of September 30, 1998, on a statutory basis, Continental General had assets of approximately $425 million, capital and surplus over $37 million and year to date revenue of over $180 million. Although there is no assurance that the acquisition will be closed, the acquisition is expected to be completed within the next ninety days. The acquisition is subject to regulatory approvals and other customary terms and conditions. At completion, Continental General Corporation and Continental General Insurance Company will be wholly-owned subsidiaries of the Company. The purchase price is expected to be financed through approximately $40 million of bank financing and $15 million of newly issued equity with the remainder derived from cash proceeds available at the Company and reinsurance funding provided by RCH. On November 12, 1998, Central announced that it has signed an agreement to purchase all of the common stock of Provident American Life and Health Insurance Company (PALHICO) from Provident American Corporation (Nasdaq: PAMC) for approximately $5 million. In addition, Central in conjunction with RCH, will assume through reinsurance all the individual and small group health insurance currently in force through PAMC's subsidiaries, PALHICO and Provident Indemnity Life Insurance Company (PILICO), for a payment to PAMC of approximately $10 million. In addition, Central will assume PAMC's administrative service agreement with Health - 9 - 10 Plan Services (HPS). Funding for the $5 million and $1 million of the reinsurance of the transaction is reported to be provided by cash proceeds available from Central and the Company. Although there is no assurance that the transaction will be closed, the purchase and reinsurance are expected to be completed on or before January 1, 1999, subject to customary regulatory approval. The transactions will not affect the policies or benefits of customers insured to PAMC's two subsidiaries. YEAR 2000 COMPLIANCE: The Company has conducted a comprehensive review of its computer systems to identify the systems that could be affected by the "Year 2000" issue. The Year 2000 problem is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a major system failure or miscalculations. The Company entered into an Administrative Services Agreement in March 1998 to outsource its computer operations with an independent vendor. Management of the Company believes the vendor has an effective program in place to resolve the Year 2000 issue and has received information indicating that the vendor's computer systems and applications were certified Year 2000 compliant as of October 1998. The Company paid the vendor approximately $3.0 million in the third quarter of 1998 for the outsourcing. All costs and expenses incurred to address the Year 2000 issue are charged against income on a current basis. The Company does not expect these costs and expenses to be material to the Company's financial condition, annual results of operation or cash flows. In case anything should happen to the vendor or its systems, the Company has a contingency plan in place with another vendor with an estimated cost of $2.5 million. The Company, at the present time, has no reason to believe that the Year 2000 issue is not resolved with the current vendor. However, there can be no assurance that the vendor will be sufficiently Year 2000 compliant so as to avoid an adverse impact on the Company's operations, financial condition and results of operations. In addition, the Company may be adversely impacted by the inability of other companies systems' that interact with the Company to become Year 2000 compliant and by potential interruptions of utility or communications systems as a result of Year 2000 issues. RESULTS OF OPERATIONS: During the quarter ending September 30, 1998, gross direct premiums were $66,773,792, up 5% from $63,676,535 in the same quarter in 1997. Premiums assumed were $18,890,552 for the third quarter in 1998 resulting from the premiums of UBL assumed on August 1, 1998 compared to no premiums assumed in the third quarter of 1997. Total gross premiums were $85,664,344 for the quarter ending September 30, 1998 compared to $63,676,535 for the same quarter in 1997. This represented a 35% increase. For the nine months ending September 30, 1998, gross premiums were $217,022,991 up 10% from $197,113,941 for the same period in 1997. This increase includes $18,890,552 of premiums of UBL. Reinsurance premiums ceded increased to $43,582,310 for the quarter and to $100,604,782 for the nine months ending September 30, 1998. This compares to $932,951 and $2,250,216 for the same periods in 1997. The increase is due to the reinsurance treaties entered into with RCH. Net premiums for 1998 are lower than 1997 because the RCH treaties effect only 1998 premiums received. Certificates in force at September 30, 1998 were 103,420 or a decrease of 1,267 (1%) from 104,687 at December 31, 1997. This compares to a net decrease of 11,603 or 10% for the same period in 1997. New certificates issued for the quarter ending September 30, 1998 were 9,043, up 20% from 7,514 issued in the same quarter in 1997. Lapses were 8,930 for the third quarter in 1998, down 10%, from 9,956 for the third quarter in 1997. For the nine months ending September 30, 1998 new certificates issued were 27,181 up 20% from, 22,692 for the same - 10 - 11 period in 1997. Lapses for the nine months ending September 30, 1998 were 28,448, down 17% from 34,295 for the same period in 1997. The larger number of lapses in 1997 was primarily due to a conversion program of older products into newer products in several states along with rate increases for all renewal policies. The increase in new certificates issued in 1998 was related to the infusion of capital into Central, improving the Risk-Based Capital levels above regulatory action levels, making Central's marketing position more stable. Net investment income increased to $2,114,374 or 30% for the quarter ending September 30, 1998 from $1,627,973 for the same quarter in 1997. For the nine months ending September 30, 1998 net investment income increased to $6,147,816 or 27% from $4,845,747 for the same period in 1997. The increase for both the quarter and nine month period were due to the positive cash flow in 1998 compared to a negative cash flow in 1997 plus the increase in 1998 due to the Equity Financing and surplus contribution to Central. Other income for the quarter and nine months ending September 30, 1998 amounted to $1,178,763 and is primarily the result of the reinsurance treaties with RCH. It consists of the amortization of the deferred gain plus service fees on the assumed business. The benefits and claims incurred loss ratio, after reinsurance, for the quarter and nine months ending September 30, 1998 was 71.5% and 75.8%, respectively, down from 80.5% and 79.7% for the same quarter and period in 1997. Although many of the cost reduction and benefit programs implemented by the Company took longer to develop than originally anticipated, some programs did start to generate some savings during the second quarter. These programs such as rating actions, underwriting changes, claim procedures and certain managed care programs produced savings in the third quarter of 1998. Commissions for the quarter ending September 30, 1998 were $6,359,319, after a reinsurance allowance of $6,158,248 compared to $8,528,837 for the same quarter in 1997. Commissions were $19,170,563, after a reinsurance allowance of $11,690,080, for the nine months ending September 30, 1998, compared to $26,615,111 for the same period in 1997. Total commissions, before the allowance, are higher in 1998 due to the block of business assumed from UBL and the increase in direct and assumed premiums for the quarter. Operating expenses for the quarter ending September 30, 1998, after reinsurance allowances of $5,952,711, were $8,358,362 compared to $9,255,802 for the same quarter in 1997. Operating expenses for the nine months ending September 30, 1998 were $19,311,696 after allowances of $11,932,411 compared to $27,748,519 for the same period in 1997. Total expenses for the quarter and nine months ending September 30, 1998 increased approximately $3 million, in part due to the assumed expenses on the UBL block of business. However, the majority of the increase in the quarter was due to the outsourcing of the Company's computer operations and certain claim processing. Payments increased to approximately $3 million for the third quarter of 1998, for the outsourcing, which covers the Year 2000 issue. Savings are, however, being realized by the Company, with the outsourcing in the areas of salaries, benefits, materials, rent, equipment leases and outside programming services. Also included in the third quarter expenses were about $400,000 for stock option awards ($380,000 for employees) and approximately $500,000 for related reinsurance assumption costs. - 11 - 12 Interest expense and financing costs decreased in the third quarter of 1998 as the Equity Financing was completed on July 3, 1998 and the $20 million loan was paid. Interest expense and financing costs were $2,082,281 for the nine months ending September 30, 1998 compared to $742,424 for the same period in 1997. As indicated above, the primary reason for the increase was interest on the $20 million loan. The Company had net income of $403,110, $.04 basic earnings per share, $.03 diluted earnings per share, for the three months ending September 30, 1998, compared to a net loss of $4,431,494 or $1.06 per share for the same quarter in 1997. For the nine months ending September 30, 1998 the Company had a net loss of $5,009,796 or $.76 per share compared to a loss of $9,807,618 or $2.35 per share for the same period in 1997. The book value of common shares at September 30, 1998 was $3.09 compared to $.36 at December 31, 1997. The main reason for the increase was the result of the Equity Financing. Federal income taxes would increase in the future if the IRS, as indicated in note 3 to the condensed consolidated financial statements, were to prevail in their position that Central no longer qualifies as a life company for tax purposes. Presently, as a small life company, Central is permitted, among other things, a deduction from the first $3,000,000 of income of 60% or $1,800,000, which is decreased by 15% for amounts over $3,000,000. As Central's income increases, the effect is lowered. Management is relying on existing case law applied favorably to another taxpayer to resolve this issue. LIQUIDITY AND CAPITAL RESOURCES: Liquidity is the ability of an enterprise to generate adequate amounts of cash to meet its financial commitments. The major needs for cash are to enable Central to pay claims and expenses as they come due. Central's primary sources of cash are premiums and investment income. Central's payments consist of current claim payments to insureds, managed care expenses, operating expenses such as salaries, employee benefits, commissions, taxes, and shareholder dividends payable to the Company. The Company has, in the past, relied on the dividend from Central to enable it to pay dividends to shareholders. Central and the Company discontinued paying dividends at the end of 1996. By statute, the state regulatory authorities set minimum liquidity standards to protect both policyholders and shareholders and limit the dividends payable by Central to the Company. The majority of the Company's assets are in investments which were $106,849,897 after a net unrealized holding gain (before taxes of $1,013,995) of $2,982,338, or 59% of the total assets at September 30, 1998. Fixed maturities are the primary investment of the Company and were $87,719,387 or 82% of total investments at September 30, 1998. Other investments consist of short-term securities and policy loans. The Company is carrying fixed maturities of $10,895,192 at amortized cost (held to maturity) and fixed maturities of $76,824,195 at estimated fair value (available for sale) at September 30, 1998. The Company does not hold any so-called "junk" bonds or what are generally considered high-yield type securities, and 98% of the bonds are of investment grade quality. In addition to the fixed maturities, the Company also had approximately $19 million in short-term investments at September 30, 1998. Assets increased to $180,190,739 at September 30, 1998 from $135,803,577 at December 31, 1997 primarily as the result of the Equity Financing. The liabilities for future policy benefits and policy claims payable were $100,240,119 at September 30, 1998 compared to $81,090,299 at December 31, 1998, or a 24% increase. The increase was the net result of an increase in reserves - 12 - 13 of $20 million for the UBL block of business reinsured in the third quarter of 1998. During the third quarter of 1998 the Company's backlog in group accident and health claims, created in the first half of 1998, was eliminated through claim payments and the Company was able to release approximately $10 million of the $12 million reserve increase during 1998. The Company's shareholders' equity was $35,534,072 at September 30, 1998 compared to $1,511,842 at December 31, 1997. The increase was primarily due to the Equity Financing. Central's capital and surplus at September 30, 1998 was $29,532,720, compared to $24,650,804 at December 31, 1997, and was above all Risk-Based Capital action levels. The Company believes that cash flow from operating activities will be sufficient to meet its currently anticipated operating and capital expenditure requirements. The Company plans to seek additional equity and debt financing in connection with the proposed acquisition of Continental General. There is no assurance that the Company will be able to obtain such financing on terms that are favorable to the Company. IMPACT OF INFLATION: Inflation rates impact the Company's financial condition and operating results in several areas. Changes in inflation rates impact the market value of the investment portfolio and yields on new investments. Inflation has had an impact on claim costs and overall operating costs and, although it has been lower in the last few years, hospital and medical costs have still increased at a higher rate than general inflation, especially in the area of pharmaceutical costs. While to a certain extent these increased costs are offset by interest rates (investment income), the rate of income from investments has not increased proportionately with increased hospital and medical costs. The Company will continue to establish premium rates in accordance with trends in hospital and medical costs along with concentrating on various cost containment programs. However, there can be no assurance that these efforts by the Company will fully offset the impact of inflation or that premiums will equal or exceed increasing health care costs. FORWARD LOOKING STATEMENTS: This report on Form 10-Q contains both historical and forward-looking statements. Forward-looking statements are statements other than historical information or statements of current condition. These forward-looking statements relate to the plans and objectives of the Company for future operations. In light of the risks and uncertainties inherent in all future projections, the inclusion of the forward-looking statements should not be regarded as a representation by the Company or any other person that the objectives or plans of the Company will be achieved. Many factors could cause the Company's actual results to differ materially from those in the forward-looking statements, including the following: (i) the failure to complete the acquisition of Continental General or PAHLICO; (ii) the failure to obtain favorable financing and funding for the Continental General acquisition; (iii) the failure to successfully integrate the Continental General or PAHLICO and PILICO business into the Company; (iv) the failure to successfully integrate the reinsurance of policies of United Benefit Life Insurance Company into the business of the Company; (v) rising healthcare costs; (vi) business conditions and competition in the health care industry; (vii) developments in healthcare reform and other regulatory issues; (viii) the effect of changes in laws and regulations affecting the Company's business; (ix) adverse changes in interest rates; (x) unforeseen losses with respect to loss and settlement expense reserves for unreported and reported claims; (xi) the Company's ability to develop, distribute and administer competitive products and services in a timely cost-effective manner; (xii) the Company's visibility in the market place and its financial and claims paying ratings; (xiii) the costs of - 13 - 14 defending litigation and the risk of unanticipated material adverse outcomes in such litigation; (xiv) the performance of others on whom the Company relies for reinsurance; (xv) changes in accounting and reporting practices; (xvi) the failure to complete the Year 2000 conversion with the outside vendor or the success of the outside vendor in being Year 2000 compliant; and (xvii) the effect of any future acquisitions. The foregoing review of important factors should not be construed as exhaustive and should be read in conjunction with other cautionary statements that are included in this report. The Company undertakes no obligation to update forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. PART II - OTHER INFORMATION --------------------------- All items of Part II other than Item 6 are either inapplicable to Registrant or would not require a response. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ---------------------------------------- a) Exhibits. Exhibit 10 - Material Contracts 10.15 Employment agreement dated June 30, 1998, by and between Val Rajic and Central Reserve Life Corporation 10.16 Employment agreement dated June 1, 1998, by and between James Weisbarth and Central Reserve Life Insurance Company 10.17 Employment agreement dated June 30, 1998, by and between Peter Nauert and Central Reserve Life Corporation 10.18 Employment agreement dated June 30, 1998, by and between Frank Grimone and Central Reserve Life Insurance Company and Central Reserve Life Corporation 10.19 Employment agreement dated June 1, 1998, by and between Glen Laffoon and Central Reserve Life Insurance Company b) Reports on Form 8-K. Change in control of Registrant regarding the equity financing transaction pursuant to which 7,300,000 Common Shares and Equity Warrants to acquire 3,650,000 Common Shares were issued, filed July 16, 1998 Change in Registrant's certifying accountant from KPMG Peat Marwick LLP to Ernst & Young LLP, filed September 3, 1998 and September 11, 1998 Announcement of Central's agreement to reinsure 100% of major medical policies of United Benefit Life Insurance Company, filed September 15, 1998 - 14 - 15 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. CENTRAL RESERVE LIFE CORPORATION Date: November 15, 1998 By: /s/ Charles E. Miller, Jr. ---------------------- ---------------------------------------- Charles E. Miller, Jr. Executive Vice President, Principal Financial Officer and Chief Accounting Officer - 15 - 16 EXHIBITS -------- Exhibit No. Exhibit ----------- ------- 10.15 Employment agreement dated June 30, 1998, by and between Val Rajic and Central Reserve Life Corporation 10.16 Employment agreement dated June 1, 1998, by and between James Weisbarth and Central Reserve Life Insurance Company 10.17 Employment agreement dated June 30, 1998, by and between Peter Nauert and Central Reserve Life Corporation 10.18 Employment agreement dated June 30, 1998, by and between Frank Grimone and Central Reserve Life Insurance Company and Central Reserve Life Corporation 10.19 Employment agreement dated June 1, 1998, by and between Glen Laffoon and Central Reserve Life Insurance Company - 16 - EX-10.15 2 EXHIBIT 10.15 1 Exhibit 10.15 EMPLOYMENT AGREEMENT -------------------- THIS AGREEMENT is entered into as of the 30th day of June, 1998, by and between Val Rajic ("Rajic") and Central Reserve Life Corporation, an Ohio corporation (the "Company"). WHEREAS, Rajic possesses valuable skills, expertise and abilities in the life, accident and health insurance business; and WHEREAS, the Company wishes to secure the services of Rajic as Executive Vice President of the Company for a three year term, and Rajic is willing to serve in such capacity, all upon the terms and conditions hereinafter set forth. NOW THEREFORE, in consideration of the covenants set forth herein, the parties hereto agree as follows: 1. EMPLOYMENT. The Company hereby retains and engages Rajic as its Executive Vice-President commencing on July 1, 1998 (the "Commencement Date") and, unless sooner terminated as hereinafter provided, ending on the third anniversary of the Commencement Date (the "Term"). Rajic hereby agrees to render such services to the Company upon the terms and conditions set forth in this Agreement. Rajic shall devote such business time to the business and affairs of the Company as is reasonably necessary to the discharge of his duties as Executive Vice-President. Rajic will otherwise be free to pursue active management of his personal investment portfolio. In the event there shall become available to Rajic during the Term, directly or indirectly, through an affiliate or otherwise, any business opportunity (whether in the form of a transaction or otherwise) reasonably related to the business of the Company or any of its subsidiaries, Rajic shall cause such opportunity to be presented to the Company for its consideration and pursuit; PROVIDED, that Rajic shall be free to pursue such opportunity, directly or indirectly, through an affiliate or otherwise, if the Company declines to pursue such opportunity and Rajic obtains the prior written consent of the Company, as authorized by its board of directors (provided such consent is not unreasonably withheld or delayed). 2. COMPENSATION. (a) BASE SALARY. The Company agrees to pay Rajic a base salary at the annual rate of $147,000, as increased from time to time, payable in installments consistent with the Company's payroll practices. (b) STOCK OPTIONS. As an inducement to Rajic to enter into this Agreement, the Company will grant to Rajic on the Commencement Date, options to purchase an aggregate 2 of 125,000 shares of Common Stock (the "Option"). The exercise price of the Options shall be as follows: Number of Options Exercise Price ----------------- -------------- 25,000 $5.50 25,000 $6.50 25,000 $7.50 25,000 $8.50 25,000 $9.50 25,000 of the Options exercisable at $5.50 will vest immediately upon issuance. The remainder of the Options shall vest on the third anniversary of the Commencement Date. Rajic shall forfeit all unvested Options if his employment with the Company is terminated except as otherwise provided in Paragraph 6. The Options shall have the same anti-dilution protections as contained in the warrants issued to Rajic in connection with his equity investment in the Company. (c) OTHER COMPENSATION. Rajic may also receive such cash bonuses or other such cash incentive compensation as the Board of Directors of the Company may approve from time to time in its sole discretion. 3. EXPENSE. The Company will pay or reimburse Rajic for all reasonable business expenses incurred by Rajic in the performance of his duties. 4. DEATH. Rajic's employment by the Company will terminate immediately upon his death; PROVIDED, that in the event of Rajic's death during the Term, Rajic's estate shall be entitled to receive the payment described in clauses (i), (ii), and (ii) of the last sentence of paragraph 6(b). 5. DISABILITY. If Rajic becomes totally or partially disabled during the Term, the Company shall continue to pay to Rajic, as long as such disability continues during the Term, the level of compensations payable to Rajic at the date his disability is determined, reduced dollar-for-dollar to the extent of any disability insurance payments paid to Rajic through insurance programs, the premiums for which were paid by the Company or its subsidiaries. For purposes of this Agreement the term "total disability" shall mean Rajic's inability due to illness, accident or other physical or mental incapacity to engage in the full time performance of his duties under this Agreement as reasonably determined by the Board of Directors of the Company based on such evidence as such Board shall deem appropriate. For purposes of this Agreement, "partial disability" shall mean Rajic's disability due to illness, accident or other physical or mental incapacity to engage in only the partial performance of his duties under this Agreement, as reasonably determined by the Board of Directors of the Company based on such evidence as such Board shall deem appropriate. 2 3 6. TERMINATION. (a) FOR CAUSE. The Company shall have the right to terminate Rajic's employment hereunder at any time during the Term for Cause. For purposes of this Agreement "Cause" shall be limited to Rajic's conviction of a felony or the gross neglect of, and continued failure to perform substantially Rajic's duties under the agreement. Notwithstanding anything herein to the contrary, Rajic's inability to perform the duties of his position due to his death or his total or partial disability shall not be deemed to constitute Cause. If, in the opinion of the Board of Directors of the Company, Rajic's employment shall become subject to termination for Cause, the Board of Directors shall give Rajic notice to that effect which notice shall describe the matter or matters constituting such Cause. If, within thirty (30) days of receipt of such notice, Rajic has not substantially eliminated or cured each such matter or matters, then the Company shall have the right to give Rajic notice of the termination of his employment. Rajic's employment hereunder shall be considered terminated for Cause as of the date specified in such notice of termination unless and until there is a final determination by court of competent jurisdiction that the cause of termination of Rajic's employment did not exist at the time of giving said notice of termination. Upon termination of Rajic's employment for Cause, this Agreement shall terminate without further obligations to Rajic other than the Company's obligation (i) to pay to Rajic within thirty (30) days after the date of termination that portion of Rajic's aggregate compensation that is accrued through the date of termination to the extent not therefore paid and (ii) to pay or provide to pay, to Rajic on a timely basis any other amounts or benefits required to be paid or provided or which Rajic is eligible to receive under any plan, program, policy, practice, contract or agreement of the Company to the extent not theretofore paid or provided. (b) WITHOUT CAUSE. The Company shall have the right to terminate Rajic's employment hereunder without Cause at any time during the Term. If the Board of Directors determines to terminate Rajic's employment without Cause, the Company shall give notice of such termination to Rajic and Rajic's employment hereunder shall be considered terminated without Cause as of the date specified in such notice of termination. Upon termination of Rajic's employment without Cause, Rajic shall be paid the following on the date of termination (except as otherwise noted): (i) that portion of Rajic's aggregate compensation that is accrued through the date of termination to the extent not theretofore paid, (ii) any amounts or benefits required to be paid or provided to which Rajic is eligible to receive under any plan, program, policy, practice, contract or agreement of the Company to the extent not theretofore paid or provided, (iii) all stock awards, options, and cash payments that would have been payable to Rajic pursuant to Paragraph 2(a) and (b) had Rajic remained employed by the Company through the third anniversary of the Commencement Date. 3 4 (c) BY RAJIC. Rajic may terminate his employment hereunder at any time by retirement or resignation, upon notice to the Company. Upon such termination by Rajic, no compensation for any period after the date of such termination shall be payable to Rajic; PROVIDED, that if such termination by Rajic is for Good Reason (as hereafter defined) then Rajic shall be entitled to the payments described in clauses (i), (ii), and (iii) of the last sentence of Paragraph 6(b). "Good Reason" shall mean any of the following: (i) a change in Rajic's status as Executive Vice-President of the Company, the assignment to Rajic of any duties or responsibilities which are inconsistent with Rajic's status as Executive Vice-President of the Company, or a reduction in the duties and responsibilities to be exercised by Rajic as Executive Vice-President of the Company; (ii) any action by the Company that renders Rajic unable to effectively discharge his duties and responsibilities as Executive Vice-President of the Company; or (iii) a failure by the Company to continue in effect, without material change, any benefit or incentive plan or arrangement in which Rajic and all other executive officers of the Company participate, or the taking of any action by the Company that would materially and adversely affect Rajic's participation in, or materially reduce Rajic's benefits under, any such plan or arrangement. (iv) an inability to discharge his duties and responsibilities as a result of the deterioration of his wife's health. (d) CHANGE OF CONTROL. This Agreement shall terminate automatically upon a Change of Control. Upon such termination, Rajic shall be entitled to the payments described in clauses (i), (ii) and (iii) the last sentence of Paragraph 6(b). "Change in Control" shall mean the occurrence of any of the following events: (i) any person (as that term is defined in Section 13(d) of the Securities Exchange Act of 1934, as amended) shall become the "beneficial owner" of securities of the Company representing more than the greater of (x) thirty-three percent (33%) of the combined voting power of the Company's then outstanding voting securities on a fully diluted basis or (y) the largest percentage shareholder on a fully diluted basis; (ii) any consolidation or merger to which the Company is a party, if following such consolidation or merger, the stockholders of the Company immediately prior to such consolidation or merger shall not beneficially own securities representing at least fifty-one percent (51%) of the combined voting power of the outstanding voting securities of the surviving or continuing corporation on a fully diluted basis; or 5 (iii) any sale, lease, exchange or other transfer (in one transaction or in a series of related transactions) of all, or substantially all, of the assets of the Company, other than to an entity (or entities) of which the Company or the stockholders of the Company immediately prior to such transaction beneficially own securities representing at least fifty-one percent (51%) of the combined voting power of the outstanding voting securities on a fully diluted basis. 7. COVENANTS. (a) CONFIDENTIAL INFORMATION AND TRADE SECRETS. During Rajic's employment by the Company, Rajic will enjoy access to the Company's "confidential information" and "trade secrets." For purposes of this Agreement, confidential information shall mean information which is not publicly available including without limitation, information concerning customers, material sources, suppliers, financial projections, marketing plans and operation methods, Rajic's access to which derives solely from Rajic's employment with the Company. For purposes of this Agreement, "trade secrets" shall mean the Company's processes, methodologies and techniques known only to those employees of the Company who need to know such secrets in order to perform their duties on behalf of the Company. The Company takes numerous steps, including these provisions, to protect the confidentiality of its confidential information and trade secrets, which it considers unique, valuable and special assets. (b) RESTRICTED USE AND NON-DISCLOSURE. Rajic, recognizing the Company's significant investment of time, efforts and money in developing and preserving its confidential information, shall not, during his employment hereunder and for a two (2) year period after the end of Rajic's employment hereunder, use for his direct or indirect personal benefit any of the Company's confidential information or trade secrets. For a two (2) year period after the end of Rajic's employment hereunder, Rajic shall not disclose to any person any of the Company's confidential information or trade secrets. (c) RETURN OF THE COMPANY'S PROPERTY. Upon termination of Rajic's employment with the Company, for whatever reason and in whatever manner, Rajic shall return to the Company all copies of all writings and records relating to the Company's business, confidential information or trade secrets that are in Rajic's possession at such time. (d) NON-COMPETITION. During Rajic's employment hereunder and, in the event of a Change in Control or termination of Rajic's employment for any reason other than for Cause, for a period equal to the lesser of twelve (12) months or the remainder of the original term of the Agreement, Rajic shall not engage, directly or indirectly, whether as an owner, partner, employee, officer, director, agent, consultant or otherwise, in any location where the Company or any of its subsidiaries is engaged in business after the date hereof and 6 prior to the termination of Rajic's employment, in a business the same or similar to, any business now, or at any time after the date hereof and prior to Rajic's termination, conducted by the Company or any of its subsidiaries, provided, however, that the mere ownership of 5% or less of the stock of a company whose shares are traded on a national securities exchange or are quoted on the National Association of Securities Dealers Automated Quotation System shall not be deemed ownership which is prohibited hereunder. (e) NON-SOLICITATION. In the event of a Change in Control or termination of Rajic's employment for any reason other than for Cause, for the period equal to the lesser of twelve (12) months or the remainder of the original term of the Agreement, Rajic shall not, directly or indirectly induce employees of the Company or any of its subsidiaries to leave such employment with the result that such employees would engage in business activities which are substantially similar or are closely related to the business activities such employee performed on behalf of the Company and which compete against the Company. (f) ENFORCEABILITY. The necessity of protection against the competition of Rajic and the nature and scope of such protection has been carefully considered by the parties hereto. The parties hereto agree and acknowledge that the duration, scope and geographic areas applicable to the non-competition covenant in this Section 7 are fair, reasonable and necessary, that adequate compensation has been received by Rajic for such obligations, and that these obligations do not prevent Rajic from earning a livelihood. If, however for any reason any court determines that the restrictions in this Agreement are not reasonable, that consideration is inadequate or that Rajic has been prevented from earning a livelihood, such restrictions shall be interpreted, modified or rewritten to include as much of the duration, scope and geographic area identified in this Section 7 as will render such restrictions valid and enforceable. (g) EQUITABLE REMEDIES. Notwithstanding the provisions of Paragraph 10 hereof, in the event of a breach or threatened breach by Rajic of any of the covenants set forth in this Paragraph, the Company or any of its affiliates shall be entitled to seek in any court of proper jurisdiction all appropriate remedies, including without limitation injunctive relief and monetary damages. (h) SURVIVAL. The covenants set forth in this Paragraph shall survive termination of this Agreement. 8. ARBITRATION OF DISPUTES. Any controversy or claim, arising out of or relating to this Agreement or the breach thereof shall be settled by arbitration in the City of Chicago, Illinois, in accordance with the laws of the State of Illinois by three arbitrators, one of whom shall be appointed by the Company, one by Rajic and the third by the first two arbitrators. If the first two arbitrators cannot agree on the appointment of a third arbitrator, then the third arbitrator shall be appointed by the Chief Judge of the United States District Court for the North District of Illinois, Eastern Division. The arbitration shall be conducted in accordance with the rules of the American Arbitration Association, except with respect to the selection of 6 7 arbitrators which shall be provided in this paragraph. Judgement upon the award rendered by the arbitrators may be entered in any court having jurisdiction thereof. The Company shall pay all the fees and expenses of such arbitrator and the other costs or arbitration. In addition, the Company shall pay (or Rajic shall be entitled to recover from the Company, as the case may be) his reasonable attorney's fees and costs and expenses in connection with the successful enforcement of any of his rights hereunder. 9. NOTICES. Any notice required or permitted pursuant to this Agreement shall be deemed to have been properly given if in writing and when delivered personally or by a national overnight courier service or five business days after being sent by United States mail, certified or registered, postage prepaid, addressed as follows: If to the Company: Central Reserve Life Corporation 17800 Royalton Road Strongsville, Ohio 44136 Attention: Fred Lick If to Rajic: 707 South Division Street Barrington, Illinois 60010 With a copy to: McDermott, Will & Emery 227 West Monroe Street Chicago, Illinois 60606 Attention: Stanley H. Meadows, P.C. or to such other place as either party may designate to the other by written notice in accordance with this Paragraph. 10. NO WAIVER. No waiver of any breach of any of the terms or provisions of this Agreement shall be construed or held to be a waiver of any other breach, or waiver of, acquiescence in or consent to any further or succeeding breach thereof. 11. ASSIGNMENT. This Agreement shall not be assignable by either party without the written consent of the other party. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective heirs, personal representatives, successors and permitted assigns. 7 8 12. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Illinois, without regard to its principles of conflicts of law. 13. SEVERABILITY. If any provision of this Agreement is held for any reason to be invalid, it will not invalidate any other provisions of this Agreement which are in themselves valid, nor will it invalidate the provisions of any other agreement between the parties hereto. Rather, such invalid provision shall be construed so as to give it the maximum effect allowed by applicable law. Any other written agreement between the parties hereto shall be conclusively deemed to be an agreement independent of this Agreement. 14. HEADINGS. Paragraph headings hereunder are for convenience only and shall not affect the meaning or interpretation of the provisions of this Agreement. 15. COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original without production of the others. 16. ENTIRE AGREEMENT; AMENDMENT. This Agreement contains the entire agreement and understanding among the parties hereto relating to the subject matters hereof, and supersedes all previous written or oral negotiations, commitments and writings with respect to the subject matter hereof. This Agreement may be amended only by a written instrument signed by each party hereto. * * * 8 9 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. CENTRAL RESERVE LIFE CORPORATION By: --------------------------- Its: --------------------------- --------------------------- Val Rajic 9 EX-10.16 3 EXHIBIT 10.16 1 Exhibit 10.16 EMPLOYMENT AGREEMENT This Employment Agreement ("Agreement") is made between Central Reserve Life Insurance Company, 17800 Royalton Road, Strongsville, Ohio 44136-5197 ("Employer"), and James Weisbarth, 7237 Pine Woods, Olmsted Twp, Ohio 44138 ("Employee"). This Agreement shall be effective June 1, 1998. WHEREAS, Employer is engaged in the insurance business and maintains its corporate office in the City of Strongsville, County of Cuyahoga, State of Ohio; and WHEREAS, Employee is willing to continue to be employed by Employer, and Employer is willing to continue to employ Employee on the terms, covenants and conditions set forth in this Agreement. NOW THEREFORE, in consideration of the mutual covenants and promises of the parties, Employer and Employee covenant and agree as follows: 1) Employer shall continue to employ Employee as a Executive Vice President, Treasurer and Assistant Secretary, solely subject to the supervision and pursuant to the assignments, advices and directions of 2 EMPLOYMENT AGREEMENT Page 2 the Employer. Employee's duties and responsibilities shall continue to include duties and responsibilities as are customarily performed by one holding such a position for Employer and/or other similar businesses or enterprises. 2) The duration of employment pursuant to this Agreement shall be for a period of twelve (12) months, commencing on June 1, 1998 through May 31, 1999; provided, however, that this Agreement shall automatically renew for succeeding one (1)-year terms, unless the Employer provides Employee with at least sixty (60) days' advance written notice that this Agreement and Employee's employment shall terminate as of the close of business on May 31 of the then-current original or renewal termination date (as the case may be) . However, in that event, or in the event Employee shall leave the employment of Employer at any time other than as a voluntary quit or for cause, under Section 16, Employee shall be entitled to severance pay equal to one (1) year's then-current annual salary (less normal administrative deductions), payable in a lump sum within thirty (30) days of departure, such payment to 3 EMPLOYMENT AGREEMENT Page 3 be in lieu of any other severance or termination payment from Employer. 3) During this Agreement, Employer shall pay Employee (according to Employer's normal payroll procedures) and Employee agrees to accept from Employer, in full payment for services under this Agreement, a salary of One Hundred Sixty Thousand Dollars ($160,000.00) for the time period from June 1, 1998 to June 1, 1999, and for each renewal year, provided this Agreement is renewed, Employee shall receive annual reviews and merit increases. In addition to the above stated salary, Employer agrees that it will reimburse Employee for any and all necessary, customary and usual business expenses incurred by Employee, subject to Employer's then-current policies regarding such expenses. In addition to the above salary and reimbursement, Employee shall be provided all fringe benefits on the same basis which Employer normally provides to a regular full-time employee holding Employee's position with the Employer, including, but not limited to, 4 EMPLOYMENT AGREEMENT Page 4 health/dental insurance, life insurance, holidays, vacations (etc.). 4) Employee shall devote all Employee's time, attention, knowledge, and skill solely and exclusively to the business and interest of Employer, and Employer shall be entitled to all of the benefits, emoluments, profits, or other issues arising from or incident to any and all work, services, and advice of Employee, and Employee expressly agrees that during the term of this Agreement, Employee will not be interested, directly or indirectly, in any form, fashion or manner, as partner, officer, director, stockholder, advisor, employee, or in any other form or capacity, in any other business similar to Employer's business or any allied trade. 5) Employee further specifically agrees that Employee will not, at any time during the term of this Agreement and for three (3) years following the termination of this Agreement for any reason, in any manner, either directly or indirectly, communicate to any person, firm or corporation any information of any kind concerning any matters affecting or relating to the business of Employer, including, without limiting the generality of 5 EMPLOYMENT AGREEMENT Page 5 the foregoing, the lists or names of any of its policyholders or customers or agents, the prices it obtains or has obtained or at which it sells or has sold its products, or any other information of, about or concerning the business of Employer, its manner of operation, its plans, processes or other data of any kind, nature or description without regard to whether any or all of the foregoing matters would be deemed confidential, material, proprietary or important, the parties stipulating that as between them, the matters are confidential, material, proprietary or important, and significantly affect the effective and successful conduct of the business of the Employer, and its goodwill, and that any breach of the terms of this paragraph is a material breach of this Agreement. Employee agrees that regardless of any termination of this Agreement, during or at the end of this Agreement or any renewal thereof, Employee will not, for a period of one (1) year thereafter, (i) hire, retain or recruit any of Employer's insurance agents for the purpose of performing services for Employee or another insurance company, or (ii) contact or solicit, directly or indirectly, any person, firm or entity connected with 6 EMPLOYMENT AGREEMENT Page 6 Employer, including its customers or clients, for the purpose of diverting work or business from the Employer. No termination of this Agreement shall terminate the rights and obligations of the parties under this Section, but such rights and obligations shall serve such termination in accordance with the terms of this Section. 6) Following the termination of this Agreement for any reason, Employee hereby agrees and acknowledges that Employee will continue to have a duty of loyalty to Employer, and to the officers, directors, shareholders and employees of Employer, and in recognition of that duty of loyalty, Employee agrees that Employee shall not indulge in any conduct which may reflect adversely upon, nor make any statements disparaging of, Employer, or the officers, directors, shareholders or employees of Employer. 7 EMPLOYMENT AGREEMENT Page 7 7) Employee agrees that the remedy at law for any violation or threatened violation by Employee of Sections 4, 5, and 6 will be inadequate and that, accordingly, Employer shall be entitled to injunctive relief in the event of a violation or threatened violation without being required to post bond or other surety. The foregoing remedies shall be in addition to, and not in limitation of, any other rights or remedies to which Employer is or may be entitled at law, or in equity, or under this Agreement. 8) Notwithstanding any other provisions of this Agreement, this Agreement shall be deemed automatically terminated upon the death of Employee. In such event, Employer shall pay to Employee's personal representative or executor any compensation accrued but unpaid as of such date. Upon the payment of such accrued compensation, Employer shall have no further obligations under this Agreement, including, but not limited to, an obligation to pay a salary, severance or termination pay or any other form of compensation, or to provide any further fringe benefits of any kind or nature. 8 EMPLOYMENT AGREEMENT Page 8 9) This written Agreement contains the sole and entire agreement between the parties and shall supersede any and all other agreements, whether oral or written, between the parties. The parties acknowledge and agree that neither of them has made any representation with respect to the subject matter of this Agreement or any representations inducing its execution and delivery, except such representations as are specifically set forth in this writing, and the parties acknowledge that they have relied on their own judgment in entering into the same. The parties further acknowledge that any statements or representations that may have been made by either of them to the other are void and of no effect and that neither of them has relied on such statements or representations in connection with its dealings with the other. 10) The terms of this Agreement are to be confidential, and Employee shall disclose its terms only to Employee's attorney, tax advisor and/or spouse, if any, subject to disclosure that may be necessary to comply with applicable law or in the event of a dispute leading to mediation and/or arbitration. 9 EMPLOYMENT AGREEMENT Page 9 11) It is agreed that no waiver or modification of this Agreement or of any covenant, condition or limitation contained in it shall be valid unless it is in writing and duly executed by the party to be charged with it, and that no evidence of any waiver or modification shall be offered or received in evidence in any proceeding, arbitration or litigation between the parties arising out of or affecting this Agreement, or the rights or obligations of any party under it, unless such waiver or modification is in writing, duly executed as above. The parties agree that the provisions of this paragraph may not be waived, except by a duly executed writing. 12) If a dispute of any kind arises from or relates in any manner to this Agreement or the breach thereof, and if such dispute cannot be settled through direct discussions, the parties agree to endeavor to first settle the dispute in an amicable manner by mediation administered by and through the American Arbitration Association in accordance with its Commercial Mediation Rules before resorting to arbitration. Thereafter, any unresolved controversy or claim arising from or relating to this Agreement or breach thereof shall be 10 EMPLOYMENT AGREEMENT Page 10 settled by arbitration administered by and through the American Arbitration Association in accordance with its Commercial Arbitration Rules, provided however that only one arbitrator shall be appointed, which arbitrator shall be an attorney licensed in the State of Ohio or an active or retired judge, having experience in employment contracts, and judgment on the award rendered by the arbitrator may be entered in any court haying jurisdiction thereof. This entire process shall be completed through expedited arbitrations within sixty (60) days. 13) The parties agree that it is their intention and covenant that this Agreement be construed in accordance with and under and pursuant to the laws of the State of Ohio. 14) This Agreement shall be binding on and inure to the benefit of the respective parties and their executors, administrators, heirs, personal representative, successors and assigns. 15) Employee shall have the right to voluntarily quit Employee's employment and terminate this Agreement by giving sixty (60) days' advance written notice to Employer at the address provided herein at its Home 11 EMPLOYMENT AGREEMENT Page 11 Office. Notwithstanding any other provision of this Agreement, if Employee shall so voluntarily quit and terminate this Agreement, Employer shall have no further obligations pursuant to the terms of this Agreement, except to pay to Employee accrued salary to the date of termination. 16) Notwithstanding any other provisions of this Agreement to the contrary, Employee's employment and this Agreement may be terminated by the Employer at any time without further compensation or severance pay or fringe benefits for significant just and sufficient cause. For purposes of this paragraph, "significant just and sufficient cause" shall mean any action or non-action involving a material breach of the terms and conditions of this Agreement by Employee which cannot be promptly cured or rectified by Employee to the Employer's reasonable satisfaction, or gross or repeated insubordination or a major interference with the Employer's best interests or business operations. 12 EMPLOYMENT AGREEMENT Page 12 17) Upon termination of this Agreement for any reason, Employee shall immediately return any property of Employer, including, but not limited to, any equipment, credit cards, advertising materials, booklets, training guides, or any other such similar information, materials or documents that Employee has in Employee's possession or control. 18) All notices required to be provided under the terms of this Agreement shall be sent by United States mail, certified, return receipt requested, and to the following addresses: TO EMPLOYER: Central Reserve Life Insurance Company Attention: Human Resources Department 17800 Royalton Road Strongsville, Ohio 44136-5197 TO EMPLOYEE: Mr. James Weisbarth 7237 Pine Woods Way Olmsted Twp. OH 44138 or to the last address known to Employer. 13 EMPLOYMENT AGREEMENT Page 13 ACKNOWLEDGMENT BY EMPLOYEE: BY SIGNING THIS AGREEMENT, I AFFIRM THAT I HAVE CAREFULLY READ AND CONSIDERED ALL OF THE TERMS AND CONDITIONS OF THIS AGREEMENT AND THAT SUCH TERMS AND CONDITIONS ARE UNDERSTOOD, ACCEPTED AND AGREED. IN WITNESS, the parties hereto, having agreed to the terms and conditions of this Agreement, sign this Agreement on the date set opposite their signature below. EMPLOYEE: /s/ James Weisbarth Date: 5/18/98 - ---------------------------- ------------- James Weisbarth EMPLOYER: CENTRAL RESERVE LIFE INSURANCE COMPANY By: /s/Fred Lick, Jr. Date: Aug 13, 1998 ------------------------- ------------- Fred Lick, Jr. EX-10.17 4 EXHIBIT 10.17 1 Exhibit 10.17 EMPLOYMENT AGREEMENT THIS AGREEMENT is entered into as of the 30th day of June, 1998, by and between Peter W. Nauert ("Nauert") and Central Reserve Life Corporation, an Ohio corporation (the "Company"). WHEREAS, Nauert possesses valuable skills, expertise and abilities in the life, accident and health insurance business; and WHEREAS, the Company wishes to secure the services of Nauert as the Chief Executive Officer of the Company for a three year term, and Nauert is willing to serve in such capacity, all upon the terms and conditions hereinafter set forth. NOW THEREFORE, in consideration of the covenants set forth herein, the parties hereto agree as follows: 1. EMPLOYMENT. The Company hereby retains and engages Nauert as its Chief Executive Officer commencing on July 1, 1998 (the "Commencement Date") and, unless sooner terminated as hereinafter provided, ending on the third anniversary of the Commencement Date (the "Term"). Nauert hereby agrees to render such services to the Company upon the terms and conditions set forth in this Agreement. Nauert shall devote such business time to the business and affairs of the Company as is reasonably necessary to the discharge of his duties as Chief Executive Officer. Nauert will otherwise be free to pursue active management of his personal investment portfolio. In the event there shall become available to Nauert during the Term, directly or indirectly, through an affiliate or otherwise, any business opportunity (whether in the form of a transaction or otherwise) reasonably related to the business of the Company or any of its subsidiaries, Nauert shall cause such opportunity to be presented to the Company for its consideration and pursuit; PROVIDED, that Nauert shall be free to pursue such opportunity, directly or indirectly, through an affiliate or otherwise, if the Company declines to pursue such opportunity and Nauert obtains the prior written consent of the Company, as authorized by its board of directors (provided such consent is not unreasonably withheld or delayed). 2. COMPENSATION. (a) STOCK AWARD. In lieu of any annual compensation and as an inducement for Nauert to remain employed by the Company through the third anniversary of the Commencement Date, the Company shall pay Nauert a stock award (the "Stock Award") payable in shares of common stock of the Company (the "Common Stock"), together with a cash payment equal to the taxes payable on the Stock Award, as set forth in this Paragraph 2(a). If Nauert is employed by the Company on the third anniversary of the Commencement Date, Nauert shall receive at such time a number of shares of Common Stock equal to: (i) $1,000,000, divided by the closing price of the Common Stock on the closing date of the Amended and Restated Stock Purchase Agreement, dated as of March 30, 1998, by and among Insurance Partners, L.P., Insurance Partners Offshore (Bermuda), L.P., Strategic Acquisition Partners, LLC and the Company, plus (ii) $1,000,000 divided by the average closing price of the Common Stock for the period from the first anniversary of the Commencement Date through the second anniversary of the Commencement Date, plus (iii) $1,000,000, divided by the average closing 2 price of the Common Stock for the period from the second anniversary of the Commencement Date through the third anniversary of the Commencement Date. The number of shares of Common Stock granted pursuant to the Stock Award shall be adjusted to account for stock splits, stock dividends or other reclassifications of the Common Stock following the Commencement Date. Nauert shall also receive a cash payment equal to the amount of taxes payable on the Stock Award prior to the time such taxes become due. The Stock Award shall be structured to avoid current taxation, however, in the event taxes are payable on the Stock Award prior to receipt by Nauert, the Company shall pay Nauert the amount of taxes payable on the Stock Award prior to the time such taxes become due. All Common Stock paid to Nauert pursuant to this Paragraph 2(a) shall be fully vested immediately upon issuance. Nauert shall forfeit all rights to the Stock Award if his employment with the Company is terminated for any reason other than a Severenceable Event (as hereinafter defined). A "Severenceable Event" shall mean any of the following: (i) termination by the Company for any reason other than for Cause, (ii) termination upon a Change of Control, (iii) termination by Nauert for Good Reason, or (iv) termination due to the death or total or partial disability of Nauert. (b) STOCK OPTIONS. As an inducement to Nauert to enter into this Agreement, the Company will grant to Nauert on the Commencement Date, options to purchase an aggregate of 500,000 shares of Common Stock (the "Options"). The exercise price of the Options shall be as follows:
NUMBER OF OPTIONS EXERCISE PRICE 100,000 $ 6.50 100,000 $ 7.50 100,000 $ 8.50 100,000 $ 9.50 100,000 $10.50
Thirty percent (30%) of the Options will vest immediately upon issuance. The remainder of the Options shall vest as follows: (i) twenty percent (20%) shall vest on the first anniversary of the Commencement Date. (ii) twenty percent (20%) shall vest on the second anniversary of the Commencement Date, and (iii) thirty percent (30%) shall vest on the third anniversary of the Commencement Date. The vesting of all Options shall occur pro rata among the various exercise price levels. All unvested Options shall vest immediately upon the occurrence of a Severenceable Event. Nauert shall forfeit all unvested Options if his employment with the Company is terminated for any reason other than a Severenceable Event. The Options shall have the same anti-dilution protections as contained in the warrants issued to Nauert in connection with his equity investment in the Company. (c) INCENTIVE PAY. Nauert shall receive, with respect to each year of employment, an amount equal to five percent (5%) of the amount by which the Company's pre-tax income for such year exceeds the base case for each year of employment as set forth on EXHIBIT A hereto. -2- 3 (d) OTHER COMPENSATION. Nauert may also receive such cash bonuses or such other incentive compensation as the Board of Directors of the Company may approve from time to time in its sole discretion. (e) ASSIGNMENT BY NAUERT. Notwithstanding anything herein to the contrary, Nauert may assign up to 25% of his right to receive payments pursuant to this Paragraph 2 to a third party. 3. BENEFITS. The Company agrees to provide Nauert with such assistance and work accommodations as are suitable to the character of his position and necessary for the performance of his duties. The Company will maintain an appropriate executive office and staff in reasonable proximity to Nauert's principal residence. Nauert shall be entitled to participate in any employee benefit plans and insurance programs currently offered by the Company, or which it may adopt from time to time, for its executive management or supervisory personnel generally, in accordance with the eligibility requirements for participation therein. 4. EXPENSES. The Company will pay or reimburse Nauert for all reasonable business expenses incurred by Nauert in the performance of his duties, including all costs relating to travel between Nauert's office and the Company's offices in Cleveland, Ohio. 5. DEATH. Nauert's employment by the Company will terminate immediately upon his death; PROVIDED, that in the event of Nauert's death during the Term, Nauert's estate shall be entitled to receive the payment described in the last sentence of Section 7(b). 6. DISABILITY. If Nauert becomes totally or partially disabled during the Term, the Company shall continue to pay to Nauert, as long as such disability continues during the Term, the level of compensation payable to Nauert at the date his disability is determined, reduced dollar-for-dollar to the extent of any disability insurance payments paid to Nauert through insurance programs, the premiums for which were paid by the Company or its subsidiaries. For purposes of this Agreement the term "total disability" shall mean Nauert's inability due to illness, accident or other physical or mental incapacity to engage in the full time performance of his duties under this Agreement as reasonably determined by the Board of Directors of the Company based on such evidence as such Board shall deem appropriate. For purposes of this Agreement, "partial disability" shall mean Nauert's disability due to illness, accident or other physical or mental incapacity to engage in only the partial performance of his duties under this Agreement, as reasonably determined by the Board of Directors of the Company based on such evidence as such Board shall deem appropriate. 7. TERMINATION. (a) FOR CAUSE. The Company shall have the right to terminate Nauert's employment hereunder at any time during the Term for Cause. For purposes of this Agreement "Cause" shall be limited to (i) Nauert's conviction of a felony or (ii) the continued willful malfeasance by Nauert of his duties under this Agreement following repeated written requests by the Company to perform in accordance with the terms hereof. Notwithstanding anything herein to the contrary, Nauert's inability to perform the duties of his position due to his death or his total or partial disability shall not be deemed to constitute Cause. -3- 4 If, in the opinion of the Board of Directors of the Company, Nauert's employment shall become subject to termination for Cause, the Board of Directors shall give Nauert written notice to that effect which notice shall describe the matter or matters constituting such Cause. If, within thirty (30) days of receipt of such notice, Nauert has not substantially eliminated or cured each such matter or matters, then the Company shall have the right to give Nauert notice of the termination of his employment. Nauert's employment hereunder shall be considered terminated for Cause as of the date specified in such notice of termination unless and until there is a final determination by a court of competent jurisdiction that the cause of termination of Nauert's employment did not exist at the time of giving said notice of termination. Upon termination of Nauert's employment for Cause, this Agreement shall terminate without further obligations to Nauert other than the Company's obligation (i) to pay to Nauert within thirty (30) days after the date of termination that portion of Nauert's aggregate compensation that is accrued through the date of termination to the extent not theretofore paid and (ii) to pay or provide to pay, to Nauert on a timely basis any other amounts or benefits required to be paid or provided or which Nauert is eligible to receive under any plan, program, policy, practice, contract or agreement of the Company to the extent not theretofore paid or provided. (b) WITHOUT CAUSE. The Company shall have the right to terminate Nauert's employment hereunder without Cause at any time during the Term. If the Board of Directors determines to terminate Nauert's employment without Cause, the Company shall give notice of such termination to Nauert and Nauert's employment hereunder shall be considered terminated without Cause as of the date specified in such notice of termination. Upon termination of Nauert's employment without Cause, Nauert shall be paid the following on the date of termination (except as otherwise noted): (i) that portion of Nauert's aggregate compensation that is accrued through the date of termination to the extent not theretofore paid, (ii) any amounts or benefits required to be paid or provided to which Nauert is eligible to receive under any plan, program, policy, practice, contract or agreement of the Company to the extent not theretofore paid or provided, (iii) all stock awards and cash payments that would have been payable to Nauert pursuant to Paragraph 2(a) had Nauert remained employed by the Company through the third anniversary of the Commencement Date, and (iv) any incentive pay that would have been payable to Nauert pursuant to Paragraph 2(c) during the remainder of the year of the Term in which Nauert's employment is terminated, the payment of which shall occur following termination when the amount of such incentive pay may be determined. (c) BY NAUERT. Nauert may terminate his employment hereunder at any time by retirement or resignation, upon notice to the Company. Upon such termination by Nauert, no compensation for any period after the date of such termination shall be payable to Nauert; PROVIDED, that if such termination by Nauert is for Good Reason (as hereafter defined) then Nauert shall be entitled to the payments described in clauses (i), (ii), and (iii) of the last sentence of Paragraph 7(b). "Good Reason" shall mean any of the following: (i) if at any time the Board of Directors of the Company does not approve a material course of action recommended by Nauert as Chief Executive Officer or approves a material course of action not recommended by Nauert as Chief Executive Officer; (ii) a change in Nauert's status as Chief Executive Officer of the Company, the assignment to Nauert of any duties or responsibilities which are inconsistent with -4- 5 Nauert's status as Chief Executive Officer of the Company, or a reduction in the duties and responsibilities to be exercised by Nauert as Chief Executive Officer of the Company; (iii) any action by the Company that renders Nauert unable to effectively discharge his duties and responsibilities as Chief Executive Officer of the Company; or (iv) a failure by the Company to continue in effect, without material change, any benefit or incentive plan or arrangement in which Nauert and all other executive officers of the Company participate, or the taking of any action by the Company that would materially and adversely affect Nauert's participation in, or materially reduce Nauert's benefits under, any such plan or arrangement. (d) CHANGE OF CONTROL. This agreement shall terminate automatically upon a Change of Control. Upon such termination, Nauert shall be entitled to the payments described in the last sentence of Paragraph 7(b). "Change of Control" shall mean the occurrence of any of the following events: (i) any person (as that term is defined in Section 13(d) of the Securities Exchange Act of 1934, as amended) shall become the "beneficial owner" of securities of the Company representing the greater of (x) thirty-three percent (33%) of the combined voting power of the Company's then outstanding voting securities on a fully diluted basis or (y) the largest percentage shareholder of the Company's then outstanding voting securities on a fully diluted basis; (ii) any consolidation or merger to which the Company is a party, if following such consolidation or merger, the stockholders of the Company immediately prior to such consolidation or merger shall not beneficially own securities representing at least fifty-one percent (51%) of the combined voting power of the outstanding voting securities on a fully diluted of the surviving or continuing corporation; or (iii) any sale, lease, exchange or other transfer (in one transaction or in a series of related transactions) of all, or substantially all, of the assets of the Company, other than to an entity (or entities) of which the Company or the stockholders of the Company immediately prior to such transaction beneficially own securities representing at least fifty-one percent (51%) of the combined voting power of the outstanding voting securities on a fully diluted basis. 8. MINIMUM INVESTMENT. During the period commencing 180 days after the Commencement Date and extending through the remainder of the Term, Nauert shall retain, directly or indirectly, ownership of not less than 900,000 shares of Common Stock unless, and except to the extent, released from this obligation in writing by the Company. For purposes of this Agreement, "retain indirectly" shall mean and refer to any shares of Common Stock that would be considered to be owned by Nauert under Section 267(c) of the Internal Revenue Code of 1986, as amended (the "Code"), or the income of which would be taxable to Nauert, his spouse or his children, or to any trust of which Nauert would be deemed the owner under any of Sections 671 through 677, inclusive, of the Code. -5- 6 9. TAX GROSS-UP. If upon the occurrence of a Change of Control or the termination of Nauert's employment by Nauert for good reason, Nauert becomes subject to any federal, state or local income or employment tax that may be imposed on the Stock Awards contemplated by Paragraph 2(a) (the "Tax"), the Company shall pay to Nauert upon demand an additional amount (the "Gross-up Payment") (which shall include reimbursement for any penalties and interest that may accrue in respect of such Tax) such that the net amount retained by Nauert after reduction for any federal, state or local income or employment tax imposed on the Gross-Up Payment provided for by this Paragraph shall be equal to the amount of the Tax. For purposes of determining the amount of the Gross-up Payment, Nauert shall be deemed (i) to pay federal income taxes at the highest marginal rate of federal income taxation for the calendar year in which the Gross-up Payment is to be made; (ii) to pay any applicable state and local income taxes at the highest marginal rate of taxation for the calendar year in which the Gross-up Payment is to be made, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes if paid in such year (determined without regard to limitations on deductions based upon the amount of Nauert's adjusted gross income); and (iii) to have otherwise allowable deductions for federal, state, and local income tax least equal to those disallowed because of the inclusion of the Gross-up Payment in Nauert's adjusted gross income. 10. COVENANTS. (a) CONFIDENTIAL INFORMATION AND TRADE SECRETS. During Nauert's employment by the Company, Nauert will enjoy access to the Company's "confidential information" and "trade secrets." For purposes of this Agreement, "confidential information" shall mean information which is not publicly available including without limitation, information concerning customers, material sources, suppliers, financial projections, marketing plans and operation methods, Nauert's access to which derives solely from Nauert's employment with the Company. For purposes of this Agreement, "trade secrets" shall mean the Company's processes, methodologies and techniques known only to those employees of the Company who need to known such secrets in order to perform their duties on behalf of the Company. The Company takes numerous steps, including these provisions, to protect the confidentiality of its confidential information and trade secrets, which it considers unique, valuable and special assets. (b) RESTRICTED USE AND NON-DISCLOSURE. Nauert, recognizing the Company's significant investment of time, efforts and money in developing and preserving its confidential inflation, shall not, during his employment hereunder and for a two (2) year period after the end of Nauert's employment hereunder, use for his direct or indirect personal benefit any of the Company's confidential information or trade secrets. For a two (2) year period after the end of Nauert's employment hereunder, Nauert shall not disclose to any person any of the Company's confidential information or trade secrets. (c) RETURN OF THE COMPANY'S PROPERTY. Upon termination of Nauert's employment with the Company, for whatever reason and in whatever manner, Nauert shall return to the Company all copies of all writings and records relating to the Company's business, confidential information or trade secrets that are in Nauert's possession of such time. (d) NON-COMPETITION. During Nauert's employment hereunder, and in the event of(i) a termination of Nauert's employment by Nauert for Good Reason, or (ii) a termination of -6- 7 Nauert's employment by the Company without Cause, then for a period equal to the lesser of 12 months or the remainder of original term of the Agreement, Nauert shall not engage, directly or indirectly, whether as an owner, partner, employee, officer, director, agent, consultant or otherwise, in any location where the Company or any of its subsidiaries is engaged in business after the date hereof and prior to the termination of Nauert's employment, in a business the same or similar to, any business now, or at any time after the date hereof and prior to Nauert's termination, conducted by the Company or any of its subsidiaries; PROVIDED, HOWEVER, that the mere ownership of 5% or less of the stock of a company whose shares are traded on a national securities exchange or are quoted on the National Association of Securities Dealers Automated Quotation System shall not be deemed ownership which is prohibited hereunder; PROVIDED, FURTHER, that upon the occurrence of a Change of Control, the provisions of this Paragraph 10(d) shall no longer be of any force or effect. (e) NON-SOLICITATION. In the event of (i) a termination of Nauert's employment by Nauert with Good Reason or (ii) a termination of Nauert's employment by the Company without Cause, then during the period equal to the lesser of twelve (12) months or the remainder of the original term of the Agreement, Nauert shall not, directly or indirectly, induce employees of the Company or any of its subsidiaries to leave such employment with the result that such employees would engage in business activities which are substantially similar or are closely related to the business activities such employee performed on behalf of the Company and which compete against the Company; PROVIDED, that upon the occurrence of a Change of Control, the provisions of this Paragraph 10(e) shall no longer be of any force or effect. (f) ENFORCEABILITY. The necessity of protection against the competition of Nauert and the nature and scope of such protection has been carefully considered by the parties hereto. The parties hereto agree and acknowledge that the duration, scope and geographic areas applicable to the non-competition covenant in this Section 9 are fair, reasonable and necessary, that adequate compensation has been received by Nauert for such obligations, and that these obligations do not prevent Nauert from earning a livelihood. If, however for any reason any court determines that the restrictions in this Agreement are not reasonable, that consideration is inadequate or that Nauert has been prevented from earning a livelihood, such restrictions shall be interpreted, modified or rewritten to include as much of the duration, scope and geographic area identified in this Section 9 as well render such restrictions valid and enforceable. (g) EQUITABLE REMEDIES. Notwithstanding the provisions of Paragraph 11 hereof, in the event of a breach or threatened breach by Nauert of any of the covenants set forth in this Paragraph, the Company or any of its affiliates shall be entitled to seek in any court of proper jurisdiction all appropriate remedies, including without limitation injunctive relief and monetary damages. (h) SURVIVAL. The covenants set forth in this Paragraph shall survive termination of this Agreement. -7- 8 11. ARBITRATION OF DISPUTES. Any controversy or claim, arising out of or relating to this Agreement or the breach thereof shall be settled by arbitration in the City of Chicago, Illinois, in accordance with the laws of the State of Illinois by three arbitrators, one of whom shall be appointed by the Company, one by Nauert and the third by the first two arbitrators. If the first two arbitrators, cannot agree on the appointment of a third arbitrator, then the third arbitrator shall be appointed by the Chief Judge of the United States District Court for the North District of Illinois, Eastern Division. The arbitration shall be conducted in accordance with the rules of the American Arbitration Association, except with respect to the selection of arbitrators which shall be as provided in this paragraph. Judgement upon the award rendered by the arbitrators may be entered in any court having jurisdiction thereof. The Company shall pay the fees and expenses of such arbitrator and the other costs of arbitration. In addition, the Company shall pay (or Nauert shall be entitled to recover from the Company, as the case may be) his reasonable attorneys' fees and costs and expenses in connection with the successful enforcement of any of his rights hereunder. 12. NOTICES. Any notice required or permitted pursuant to this Agreement shall be deemed to have been properly given if in writing and when delivered personally or by a national overnight courier service or five business days after being sent by United States mail, certified or registered, postage prepaid, addressed as follows: If to the Company: Central Reserve Life Corporation 17800 Royalton Road Strongsville, Ohio 44136 Attention: Fred Lick If to Nauert Peter W. Nauert 1750 East Golf Road Suite 210 Schaumburg, Illinois 60173 With a copy to: McDermott, Will & Emery 227 West Monroe Street Chicago, Illinois 60606 Attention: Stanley H. Meadows, P.C. or to such other place as either party may designate to the other by written notice in accordance with this Paragraph. -8- 9 13. NO WAIVER. No waiver of any breach of any of the terms or provisions of this Agreement shall be construed or held to be a waiver of any other breach, or waiver of, acquiescence in or consent to any further or succeeding breach thereof 14. ASSIGNMENT. This Agreement shall not be assignable by either party without the written consent of the other party. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective heirs, personal representatives, successors and permitted assigns. 15. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Illinois, without regard to its principles of conflicts of law. 16. SEVERABILITY. If any provision of this Agreement is held for any reason to be invalid, it will not invalidate any other provisions of this Agreement which are in themselves valid, nor will it invalidate the provisions of any other agreement between the parties hereto. Rather, such invalid provision shall be construed so as to give it the maximum effect allowed by applicable law. Any other written agreement between the parties hereto shall be conclusively deemed to be an agreement independent of this Agreement. 17. HEADINGS. Paragraph headings hereunder are for convenience only and shall not affect the meaning or interpretation of the provisions of this Agreement. 18. COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original without production of the others. 19. ENTIRE AGREEMENT; AMENDMENT. This Agreement contains the entire agreement and understanding among the parties hereto relating to the subject matter hereof, and supersedes all previous written or oral negotiations commitments and writings with respect to the subject matter hereof. This Agreement may be amended only by a written instrument signed by each party hereto. * * * -9- 10 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. CENTRAL RESERVE LIFE CORPORATION By: /s/?? ---------------------------- Its: ---------------------------- /s/ Peter W. Nauert ------------------------------- Peter W. Nauert -10- 11 EXHIBIT A 1998 $14,544,000 1999 $30,597,000 2000 $30,093,000 12 EXHIBIT A 1998 $14,544,000 1999 $30,597,000 2000 $30,093,000 EX-10.18 5 EXHIBIT 10.18 1 Exhibit 10.18 EMPLOYMENT/CONSULTING AGREEMENT I PARTIES 1.1 PARTIES. This Employment/Consulting Agreement ("Agreement") is made this 30th day of June, 1998, effective July 1, 1998, by and between Frank Grimone ("Employee") and Central Reserve Life Insurance Company, and Central Reserve Life Corporation, Ohio corporations having their principal offices at 17800 Royalton Road, Strongsville, Ohio 44136- 5197 (hereinafter, collectively "Company"). II RECITALS 2.1 COMPANY. Central Reserve Life Insurance Company is the wholly-owned subsidiary of Central Reserve Life Corporation, a holding company organized under the laws of the State of Ohio. 2.2 EMPLOYEE. Employee is currently Senior Executive Vice President, Chief Financial Officer of Company, and will continue to serve as Chief Financial Officer at the pleasure of the Company through June 30, 1999, at which time Employee may resign from this office. 2 EMPLOYMENT/CONSULTING AGREEMENT Page 2 2.3 PRIOR AGREEMENTS. Employee and Company are parties to prior employment agreements. It is the intention of the parties that all such prior employment agreements be cancelled and supplanted in their entirety by this Agreement. III TERMS OF THE AGREEMENT 3.1 TERM AND COMPENSATION. Company agrees to continue the employment of Employee for a term of six (6) months, commencing July 1, 1998 and ending December 31, 1998, with primary responsibilities devoted to the financial affairs of Company. Commencing January 1, 1999 and continuing to December 31, 2000, Employee shall assume the duties of consultant regarding the financial affairs of Company. Employee shall devote no more than fifty percent (50%) of his time to his duties as a consultant to Company (e.g., no more than 970 hours per calendar year), at reasonable times and places to be mutually agreed upon. During the term from July 1, 1998 to December 31, 1998, Employee shall be paid a salary at the annual rate of $250,000, payable in accordance with Central's normal payroll practices. 3 EMPLOYMENT/CONSULTING AGREEMENT Page 3 Beginning January 1, 1999 and continuing to December 31, 2000, unless otherwise terminated according to the terms of this Agreement, in consideration for the performance of his duties as a financial consultant to Company, Employee shall be paid a consulting fee in the amount of $10,417 per month. During the term of this Agreement, Company shall reimburse Employee for all reasonable travel expenses in accordance with Company's usual reimbursement practices for Employee's expenses incurred in connection with the performance of his duties as an employee of Company from July 1, 1998 until December 31, 1998 and, thereafter, in connection with the performance of his duties as a consultant. Upon termination of his employment, Company shall reimburse Employee for the cost of continuing his health insurance for himself and for his spouse, Joan Grimone, pursuant to COBRA, for a period of eighteen (18) months; thereafter, Company shall reimburse Employee for the cost of a health insurance plan available to Eligible Individuals, as defined under the laws of the State of North Carolina, for himself and for his his spouse, Joan Grimone, until each is eligible for Medicare, at which time such reimbursement shall terminate. 4 EMPLOYMENT/CONSULTING AGREEMENT Page 4 During the term beginning July 1, 1998 and continuing until December 31, 1998, Employee shall continue to receive his fringe benefits on the same basis as he was receiving them as of June 1, 1998, including an allowance for a leased automobile, plus insurance, maintenance and operational expenses through September 30, 1998. Beginning January 1, 1999 and continuing to the termination of this Agreement, unless set forth to the contrary elsewhere in this Agreement, all compensation in any form whatsoever shall terminate, including, but not limited to, any salary, reimbursement and fringe benefits, at which time Employee shall be entitled only to receive the consulting fee, reimbursement for reasonable travel (including full coach air fare) and lodging and car rental, and health insurance, plus his home office expenses for services as a consultant, to include phone, fax, and office supplies and reimbursement for appropriate continuing education seminars. 3.2 VACATION. During the employment term beginning January 1, 1998 to December 31, 1998, Employee is entitled to three (3) weeks' paid vacation. No vacation time prior to January 1, 1998 shall so cumulate. 5 EMPLOYMENT/CONSULTING AGREEMENT Page 5 3.3 INSURANCE BENEFITS AS EMPLOYEE. During the employment term beginning July 1, 1998 to December 31, 1998, Company shall pay Employee the compensation set forth in Section 3.1 herein during any time that he shall suffer either partial or total disability (whether such disability be temporary or permanent), reduced only by the amounts which are paid to Employee under any insurance program purchased by Company or any affiliate. In addition, during Employee's term of employment (July 1, 1998 to December 31, 1998), Company shall furnish Employee, at no cost to him, group life insurance, AD&D, medical and hospital insurance benefits and directors and officers insurance no less than those covering Employee on June 1, 1998, unless mutually agreed upon, and Employee shall be entitled to such additional fringe benefits, if any, that are provided to an executive of his level in Company. 3.4 RETIREMENT BENEFITS. From January 1, 1998 to December 31, 1998, Employee may participate in Company's 401(k) under the same terms and conditions that apply to an executive of his level in Company. Company's pension plan and retirement plan fully paid by Company in effect on January 1, 1982 shall not be terminated or its benefits reduced below the 6 EMPLOYMENT/CONSULTING AGREEMENT Page 6 level in effect on December 31, 1997 as it applies to Employee; provided that after the contribution for the year ending December 31, 1997, Company shall have no further obligation to make contributions to such plan on behalf of Employee. Employee shall also be eligible for Company stock options just like any other similarly situated employee. 3.5 RELOCATION. Employee shall not be required to relocate his place of employment or his residence outside of Cuyahoga County, Ohio, but may relocate his residence from time to time within or without Cuyahoga County at his sole election (including the State of North Carolina). 7 EMPLOYMENT/CONSULTING AGREEMENT Page 7 IV GENERAL COVENANTS 4.1 GENERAL COVENANTS. (a) TERMINATION BY EMPLOYEE. At no time within the term of this Agreement shall Employee terminate this contract or refuse to perform his reasonable and customary duties and responsibilities for Company, except upon a material breach of the terms hereof by Company. Upon termination by Employee because of such breach by Company, the rights of Employee and the obligations of Company shall be the same as those provided as to Employee and Company in Article V herein. (b) TERMINATION BY COMPANY. At no time within the term of this Agreement shall Company terminate this Agreement. If, however, Company shall attempt for any reason whatsoever to terminate its employment of Employee and/or its agreement to engage his services as a consultant, then and in that event, Employee may deem this a material breach of the terms of this Agreement by Company, and the rights of the Employee and the obligations of Company shall be as set forth in Article V herein. 8 EMPLOYMENT/CONSULTING AGREEMENT Page 8 Notwithstanding the provisions of this Section 4.1(b), this Agreement and Employee's employment or agreement to be a consultant hereunder, as the case may be, may be terminated by Company at any time without further compensation for significant just and sufficient cause. For purposes of this paragraph, "significant just and sufficient cause" shall mean any action or non-action involving a material breach of the terms and conditions of the Agreement by Employee, which cannot be promptly cured or rectified by Employee to Company's reasonable satisfaction, or gross or repeated insubordination or a major conflict or interference with Employer's best interests or business operations. (c) ASSIGNABILITY. Neither party shall have the right to assign this Agreement or any rights or obligations hereunder without the prior written consent of the other party. provided however that, upon the sale of all or substantially all of the assets, business and goodwill of Central to another corporation or entity, or upon the merger or consolidation of Company with another corporation or entity, this Agreement shall inure to the benefit of, and be binding upon, both Employee and the corporation or entity purchasing such assets, business and goodwill, or surviving such merger 9 EMPLOYMENT/CONSULTING AGREEMENT Page 9 or consolidation, as the case may be, in the same manner and to the same extent as though such other corporation or entity were the original party to this Agreement. V TERMINATION PAYMENTS 5.1 TERMINATION OBLIGATIONS OF COMPANY. Where applicable, the termination payment obligations of Company shall be Discharged as follows: (a) Employee's annual salary shall become fixed for the unexpired remainder of the initial employment term of this Agreement, July 1, 1998 to December 31, 1998, and Employee's consulting fee shall become fixed for the unexpired remainder of the term of consulting (January 1, 1999 to December 31, 2000); (b) Such annual salary and/or consulting fee owing for the unexpired employment or consulting term, as the case may be, shall then be paid to Employee in one lump sum within thirty (30) days of the effective date of his termination; 10 EMPLOYMENT/CONSULTING AGREEMENT Page 10 (c) Upon termination of employment or consulting services, the reimbursement for health insurance to which Employee is entitled at no cost to Employee under the terms and conditions of Section 3.1 herein shall be continued by Company. Notwithstanding the provisions of this Section 5.1(b) or any other provision of this Agreement, Employee's employment or consulting services, as the case may be, may be terminated by Company at any time without further compensation for significant just and sufficient cause. For purposes of this paragraph, "significant just and sufficient cause" shall mean any action or non-action involving a material breach of the terms and conditions of this Agreement, which cannot be promptly cured or rectified by Employee to Company's reasonable satisfaction, or gross or repeated insubordination or a major conflict or interference with Employer's best interests or business operations. 11 EMPLOYMENT / CONSULTING AGREEMENT Page 11 VI MISCELLANEOUS 6.1 ENTIRE AGREEMENT. This Agreement constitutes the entire agreement between the parties hereto in relation to the subject matter hereof, and no other representations, warranties, covenants, understandings or agreements, oral or otherwise, exist in relation thereto between the parties. 6.2 NO THIRD-PARTY BENEFICIARIES. This Agreement is intended solely for the benefit of Company and Employee and confers no right or benefit upon any other person, including stockholders of Company and other officers and directors of Company. 6.3 SEPARABILITY. Each provision of this Agreement is separable from each other provision, and if any provision shall be found invalid for any reason, the remaining provisions shall continue in full force and effect. 6.4 SECTION HEADINGS. The article and section headings herein are intended only as aids to the location of subject matter, and are neither a part of the substance of the Agreement nor a guide to construction. 12 EMPLOYMENT/CONSULTING AGREEMENT Page 12 6.5 INDEPENDENT CONTRACTOR. Employee's employment shall terminate as of December 31, 1998, at which time, pursuant to the terms of this Agreement, he will be engaged as an independent contractor to perform financial consulting services to Company as provided herein. 6.6 COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be an original, and all such counterparts together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties have signed this Agreement on the day and year first above written, effective July 1, 1998. EMPLOYEE: COMPANY: CENTRAL RESERVE LIFE INSURANCE COMPANY /s/Frank Grimone By: /s/ - ------------------------------- ------------------------------------- Frank Grimone Its: /s/ ------------------------------------ CENTRAL RESERVE LIFE CORPORATION By: /s/ ------------------------------------- Its: /s/ ------------------------------------ EX-10.19 6 EXHIBIT 10.19 1 Exhibit 10.19 EMPLOYMENT AGREEMENT This Employment Agreement ("Agreement") is made between Central Reserve Life Insurance Company, 17800 Royalton Road, Strongsville, Ohio 44136-5197 ("Employer"), and Glen Laffoon, 10135 Oak Branch Strongsville, Ohio 44136 ("Employee"). This Agreement shall be effective June 1, 1998. WHEREAS, Employer is engaged in the insurance business and maintains its corporate office in the City of Strongsville, County of Cuyahoga, State of Ohio; and WHEREAS, Employee is willing to continue to be employed by Employer, and Employer is willing to continue to employ Employee on the terms, covenants and conditions set forth in this Agreement. NOW THEREFORE, in consideration of the mutual covenants and promises of the parties, Employer and Employee covenant and agree as follows: 1) Employer shall continue to employ Employee as a Executive Vice President, Product Development, solely subject to the supervision and pursuant to the assignments, advices and directions of the Employer. 2 EMPLOYMENT AGREEMENT Page 2 Employee's duties and responsibilities shall continue to include duties and responsibilities as are customarily performed by one holding such a position for Employer and/or other similar businesses or enterprises. 2) The duration of employment pursuant to this Agreement shall be for a period of twelve (12) months, commencing on June 1, 1998 through May 31, 1999; provided, however, that this Agreement shall automatically renew for succeeding one (1)-year terms, unless the Employer provides Employee with at least sixty (60) days' advance written notice that this Agreement and Employee's employment shall terminate as of the close of business on May 31 of the then-current original or renewal termination date (as the case may be). However, in that event, or in the event Employee shall leave the employment of Employer at any time other than as a voluntary quit or for cause, under Section 16, Employee shall be entitled to severance pay equal to one (1) year's then-current annual salary (less normal administrative deductions), payable in a lump sum within thirty (30) days of departure, such payment to 3 EMPLOYMENT AGREEMENT Page 3 be in lieu of any other severance or termination payment from Employer. 3) During this Agreement, Employer shall pay Employee (according to Employer's normal payroll procedures) and Employee agrees to accept from Employer, in full payment for services under this Agreement, a salary of One Hundred Sixty Thousand Dollars ($160,000.00) for the time period from June 1, 1998 to June 1, 1999, and for each renewal year, provided this Agreement is renewed, Employee shall receive annual reviews and merit increases. In addition to the above stated salary, Employer agrees that it will reimburse Employee for any and all necessary, customary and usual business expenses incurred by Employee, subject to Employer's then-current policies regarding such expenses. In addition to the above salary and reimbursement, Employee shall be provided all fringe benefits on the same basis which Employer normally provides to a regular full-time employee holding Employee's position with the Employer, including, but not limited to, 4 EMPLOYMENT AGREEMENT Page 4 health/dental insurance, life insurance, holidays, vacations (etc.). 4) Employee shall devote all Employee's time, attention, knowledge, and skill solely and exclusively to the business and interest of Employer, and Employer shall be entitled to all of the benefits, emoluments, profits, or other issues arising from or incident to any and all work, services, and advice of Employee, and Employee expressly agrees that during the term of this Agreement, Employee will not be interested, directly or indirectly, in any form, fashion or manner, as partner, officer, director, stockholder, advisor, employee, or in any other form or capacity, in any other business similar to Employer's business or any allied trade. 5) Employee further specifically agrees that Employee will not, at any time during the term of this Agreement and for three (3) years following the termination of this Agreement for any reason, in any manner, either directly or indirectly, communicate to any person, firm or corporation any information of any kind concerning any matters affecting or relating to the business of Employer, including, without limiting the generality of 5 EMPLOYMENT AGREEMENT Page 5 the foregoing, the lists or names of any of its policyholders or customers or agents, the prices it obtains or has obtained or at which it sells or has sold its products, or any other information of, about or concerning the business of Employer, its manner of operation, its plans, processes or other data of any kind, nature or description without regard to whether any or all of the foregoing matters would be deemed confidential, material, proprietary or important, the parties stipulating that as between them, the matters are confidential, material, proprietary or important, and significantly affect the effective and successful conduct of the business of the Employer, and its goodwill, and that any breach of the terms of this paragraph is a material breach of this Agreement. Employee agrees that regardless of any termination of this Agreement, during or at the end of this Agreement or any renewal thereof, Employee will not, for a period of one (1) year thereafter, (i) hire, retain or recruit any of Employer's insurance agents for the purpose of performing services for Employee or another insurance company, or (ii) contact or solicit, directly or indirectly, any person, firm or entity connected with 6 EMPLOYMENT AGREEMENT Page 6 Employer, including its customers or clients, for the purpose of diverting work or business from the Employer. No termination of this Agreement shall terminate the rights and obligations of the parties under this Section, but such rights and obligations shall serve such termination in accordance with the terms of this Section. 6) Following the termination of this Agreement for any reason, Employee hereby agrees and acknowledges that Employee will continue to have a duty of loyalty to Employer, and to the officers, directors, shareholders and employees of Employer, and in recognition of that duty of loyalty, Employee agrees that Employee shall not indulge in any conduct which may reflect adversely upon, nor make any statements disparaging of, Employer, or the officers, directors, shareholders or employees of Employer. 7 EMPLOYMENT AGREEMENT Page 7 7) Employee agrees that the remedy at law for any violation or threatened violation by Employee of Sections 4, 5, and 6 will be inadequate and that, accordingly, Employer shall be entitled to injunctive relief in the event of a violation or threatened violation without being required to post bond or other surety. The foregoing remedies shall be in addition to, and not in limitation of, any other rights or remedies to which Employer is or may be entitled at law, or in equity, or under this Agreement. 8) Notwithstanding any other provisions of this Agreement, this Agreement shall be deemed automatically terminated upon the death of Employee. In such event, Employer shall pay to Employee's personal representative or executor any compensation accrued but unpaid as of such date. Upon the payment of such accrued compensation, Employer shall have no further obligations under this Agreement, including, but not limited to, an obligation to pay a salary, severance or termination pay or any other form of compensation, or to provide any further fringe benefits of any kind or nature. 8 EMPLOYMENT AGREEMENT Page 8 9) This written Agreement contains the sole and entire agreement between the parties and shall supersede any and all other agreements, whether oral or written, between the parties. The parties acknowledge and agree that neither of them has made any representation with respect to the subject matter of this Agreement or any representations inducing its execution and delivery, except such representations as are specifically set forth in this writing, and the parties acknowledge that they have relied on their own judgment in entering into the same. The parties further acknowledge that any statements or representations that may have been made by either of them to the other are void and of no effect and that neither of them has relied on such statements or representations in connection with its dealings with the other. 10) The terms of this Agreement are to be confidential, and Employee shall disclose its terms only to Employee's attorney, tax advisor and/or spouse, if any, subject to disclosure that may be necessary to comply with applicable law or in the event of a dispute leading to mediation and/or arbitration. 9 EMPLOYMENT AGREEMENT Page 9 11) It is agreed that no waiver or modification of this Agreement or of any covenant, condition or limitation contained in it shall be valid unless it is in writing and duly executed by the party to be charged with it, and that no evidence of any waiver or modification shall be offered or received in evidence in any proceeding, arbitration or litigation between the parties arising out of or affecting this Agreement, or the rights or obligations of any party under it, unless such waiver or modification is in writing, duly executed as above. The parties agree that the provisions of this paragraph may not be waived, except by a duly executed writing. 12) If a dispute of any kind arises from or relates in any manner to this Agreement or the breach thereof, and if such dispute cannot be settled through direct discussions, the parties agree to endeavor to first settle the dispute in an amicable manner by mediation administered by and through the American Arbitration Association in accordance with its Commercial Mediation Rules before resorting to arbitration. Thereafter, any unresolved controversy or claim arising from or relating to this Agreement or breach thereof shall be 10 EMPLOYMENT AGREEMENT Page 10 settled by arbitration administered by and through the American Arbitration Association in accordance with its Commercial Arbitration Rules, provided however that only one arbitrator shall be appointed, which arbitrator shall be an attorney licensed in the State of Ohio or an active or retired judge, having experience in employment contracts, and judgment on the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. This entire process shall be completed through expedited arbitration within sixty (60) days. 13) The parties agree that it is their intention and covenant that this Agreement be construed in accordance with and under and pursuant to the laws of the State of Ohio. 14) This Agreement shall be binding on and inure to the benefit of the respective parties and their executors, administrators, heirs, personal representative, successors and assigns. 15) Employee shall have the right to voluntarily quit Employee's employment and terminate this Agreement by giving sixty (60) days' advance written notice to Employer at the address provided herein at its Home 11 EMPLOYMENT AGREEMENT Page 11 Office. Notwithstanding any other provision of this Agreement, if Employee shall so voluntarily quit and terminate this Agreement, Employer shall have no further obligations pursuant to the terms of this Agreement, except to pay to Employee accrued salary to the date of termination. 16) Notwithstanding any other provisions of this Agreement to the contrary, Employee's employment and this Agreement may be terminated by the Employer at any time without further compensation or severance pay or fringe benefits for significant just and sufficient cause. For purposes of this paragraph, "significant just and sufficient cause" shall mean any action or non-action involving a material breach of the terms and conditions of this Agreement by Employee which cannot be promptly cured or rectified by Employee to the Employer's reasonable satisfaction, or gross or repeated insubordination or a major interference with the Employer's best interests or business operations. 12 EMPLOYMENT AGREEMENT Page 12 17) Upon termination of this Agreement for any reason, Employee shall immediately return any property of Employer, including, but not limited to, any equipment, credit cards, advertising materials, booklets, training guides, or any other such similar information, materials or documents that Employee has in Employee's possession or control. 18) All notices required to be provided under the terms of this Agreement shall be sent by United States mail, certified, return receipt requested, and to the following addresses: TO EMPLOYER: Central Reserve Life Insurance Company Attention: Human Resources Department 17800 Royalton Road Strongsville, Ohio 44136-5197 TO EMPLOYEE: Mr. Glen Laffoon 10135 Oak Branch Tr Strongsville, OH 44136 or to the last address known to Employer. 13 EMPLOYMENT AGREEMENT Page 13 ACKNOWLEDGMENT BY EMPLOYEE: BY SIGNING THIS AGREEMENT, I AFFIRM THAT I HAVE CAREFULLY READ AND CONSIDERED ALL OF THE TERMS AND CONDITIONS OF THIS AGREEMENT AND THAT SUCH TERMS AND CONDITIONS ARE UNDERSTOOD, ACCEPTED AND AGREED. IN WITNESS, the parties hereto, having agreed to the terms and conditions of this Agreement, sign this Agreement on the date set opposite their signature below. EMPLOYEE: /s/ Glen Laffoon Date: 5-27-98 - -------------------------------- ----------------------- Glen Laffoon EMPLOYER: CENTRAL RESERVE LIFE INSURANCE COMPANY By: /s/ Fred Lick, Jr. Date: Aug 12,1998 - -------------------------------- ----------------------- Fred Lick, Jr. Chairman EX-27 7 EXHIBIT 27
7 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS OF CENTRAL RESERVE LIFE CORPORATION AS FILED ON FORM 10-Q FOR THE NINE MONTHS ENDING SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000215403 CENTRAL RESERVE LIFE CORPORATION 9-MOS DEC-31-1997 JAN-01-1998 SEP-30-1998 76,824,195 10,895,192 11,122,299 0 0 0 106,849,897 6,206,345 0 4,276,951 180,190,739 22,511,691 0 77,728,428 9,359,948 8,313,700 0 0 5,747,586 29,786,486 35,534,072 116,418,209 6,147,816 28,548 1,178,763 88,218,592 38,482,259 2,082,281 (5,009,796) 0 (5,009,796) 0 0 0 (5,009,796) (.44) (.44) 0 0 0 0 0 0 0
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