-----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, O18469yJkGYlqc/6iYJ3ekAkcT4vDNoV1cL6/a1JMeYsBxIO3zMk85ZWWTC547Bt tJZOmZl8/np9vIAljLHa/g== 0000950152-97-008481.txt : 19971208 0000950152-97-008481.hdr.sgml : 19971208 ACCESSION NUMBER: 0000950152-97-008481 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19971205 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19971205 SROS: NASD 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: 8-K SEC ACT: SEC FILE NUMBER: 000-08483 FILM NUMBER: 97733353 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 8-K 1 CENTRAL RESERVE LIFE CORPORATION FORM 8-K 1 Securities and Exchange Commission Washington, D.C. 20549 FORM 8-K Current Report Pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934 Date of Report: December 2, 1997 (Date of earliest event reported) Central Reserve Life Corporation (Exact Name of Registrant as specified in its charter) Ohio 0-8483 34-1017531 ---- ------ ---------- (State or other jurisdiction of (Commission File Number) (IRS Employee Identification incorporation) Number)
17800 Royalton Road, Strongsville, Ohio 44136 - ---------------------------------------- ----- (Address of Principal Executive Offices) (Zip Code) (216) 572-2400 -------------- (Registrant's telephone number, including area code) 2 ITEM 5. OTHER EVENTS - ------- ------------ On December 2, 1997, Central Reserve Life Corporation, an Ohio corporation ("Central Reserve"), announced that it had entered into a definitive Stock Purchase Agreement with Strategic Acquisition Partners ("Strategic Partners"), pursuant to which Central Reserve will issue to Strategic Partners 5,000,000 shares of its common stock and warrants to acquire up to 2,500,000 shares of its common stock for $27.5 million. Under the terms of the Stock Purchase Agreement, Strategic Partners has agreed to arrange for an interim loan of $20 million (the "Interim Loan") to Central Reserve on or before December 17, 1997, approximately $14 million of which will be invested in Central Reserve's insurance subsidiary, Central Reserve Life Insurance Company. The balance of the net proceeds will be used to satisfy Central Reserve's $5.2 million loan from Huntington National Bank. Central Reserve has agreed to issue warrants to Strategic Partners' investors to purchase an additional 1,000,000 shares of common stock at $6.00 per share in connection with their efforts to secure this financing. Upon issuance of the 5,000,000 shares, Strategic Partners and its investors will own approximately 54 percent of Central Reserve's common stock. If all warrants to be issued are exercised, Strategic Partners and its investors will own approximately 67 percent of Central Reserve's issued and outstanding common stock. The purchase of the stock and warrants is subject to certain conditions, including the approval of Central Reserve's shareholders at a special meeting to be held as soon as practicable, receipt of regulatory approvals, and a financing contingency. The funding of the Interim Loan is subject, among other things, to completion of loan documents between Central Reserve and Strategic Partners and receipt by Strategic Partners of its committed financing. 3 Item 7. Financial Statements and Exhibits (c) Exhibits 2.1 Stock Purchase Agreement, dated as of November 26, 1997, by and between Strategic Partners and Central Reserve.* 99.1 Letter from Strategic Partners to Central Reserve outlining the terms for the Interim Loan. 99.2 Press Release dated December 2, 1997. * The Disclosure Schedule to the Stock Purchase Agreement is omitted. The parties agree to furnish supplementally a copy of this Disclosure Schedule to the Securities and Exchange Commission upon request. 4 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 hereunto duly authorized. Date: December 2, 1997 CENTRAL RESERVE LIFE CORPORATION By: Frank W. Grimone Frank W. Grimone, Chief Financial Officer EX-2.1 2 EXHIBIT 2.1 1 Exhibit 2.1 Stock Purchase Agreement by and between Strategic Acquisition Partners, LLC and Central Reserve Life Corporation 2 STOCK PURCHASE AGREEMENT ------------------------ THIS AGREEMENT is made and entered into this 26th day of November, 1997, by and between Strategic Acquisition Partners, LLC, a Nevada limited liability company ("PURCHASER"), and Central Reserve Life Corporation, an Ohio corporation (the "COMPANY"). WHEREAS, Purchaser desires to acquire 5,000,000 shares of common stock, without par value, of the Company (the "STOCK") from the Company on the terms set forth herein; and WHEREAS, in consideration for the Purchase Price (as hereinafter defined), the Company shall issue the Stock to the Purchaser. NOW, THEREFORE, in consideration of the premises, representations, warranties, covenants, agreements and promises herein contained, the parties agree as follows: ARTICLE I DEFINITIONS For purposes of this Agreement, the following capitalized terms shall have the following meanings: "ADVERSE CLAIMS" shall mean all of the following, whether direct or indirect, accrued, absolute or contingent: (i) security interests, liens, pledges, charges, escrows, options, proxies, rights of first refusal, preemptive rights, mortgages, hypothecations, assignments, title retention agreements, indentures and security agreements, (ii) title defects, assessments, easements, reservations and encroachments; (iii) contracts of lease, license and sale; (iv) royalty and commission arrangements; (v) voting agreements and proxies; and (vi) any other claims, covenants, limitations, encumbrances, burdens and restrictions of any kind, except for restrictions under applicable securities laws. "BUSINESS" shall mean the insurance business as currently conducted by the Company and the Company Subsidiaries. "CODE" shall mean the Internal Revenue Code of 1986, as amended. "COMMISSION" shall mean the Securities Exchange Commission. "COMPANY MATERIAL ADVERSE EFFECT" shall mean any material adverse change in the financial condition, results of operations or business of the Company and the Company Subsidiaries as a whole, taking into account all relevant factors including without limitation, assets, liabilities, personnel, business and relationships with suppliers, customers, distributors, sales representatives, lenders, lessors and others. For purposes of this Agreement, Company Material Adverse Effect (i) shall also mean the suspension of, loss of or issuance of a cease and desist order relating to any insurance license of the 3 Company or any Company Subsidiaries in any state which is reasonably likely to result in the loss of 5% or more of the Company's premium revenue (for the year ended December 31, 1996). "ERISA" shall mean the Employee Retirement and Income Security Act, as amended. "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as amended "FACILITIES" shall mean all the real property, buildings and improvements owned, leased, licensed or otherwise used by the Company or the Business. "GAAP" shall mean U.S. generally accepted accounting principles, as consistently applied by the Company. "HSR ACT" shall mean the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. "SECURITIES ACT" shall mean the Securities Act of 1933, as amended. ARTICLE II THE TRANSACTION 2.1. SALE AND PURCHASE OF STOCK. At Closing, the Company shall issue, sell, transfer, assign and deliver to Purchaser, and Purchaser shall purchase, accept, assume and receive all right, title and interest in and to the Stock free and clear of any Adverse Claims. 2.2. PURCHASE PRICE. The aggregate purchase price for the Stock ("PURCHASE PRICE") shall be $27,500,000 payable at Closing by the Purchaser as follows: (a) the aggregate amount of principal and interest accrued on the obligations of Purchaser to the holder of indebtedness of Purchaser incurred in connection with the bridge loan agreement between the Company and Purchaser shall be paid by wire transfer in immediately available funds to the bank account designated by Purchaser; (b) the difference of $27,500,000 LESS the amount paid by Purchaser pursuant to Section 2.2(a) shall be paid to the Company by wire transfer in immediately available funds to the bank account designated by the Company at least five banking days in advance of the Closing Date. -3- 4 ARTICLE III THE CLOSING 3.1. CLOSING. The closing of the transaction contemplated by this Agreement (the "CLOSING") shall occur at 10:00 o'clock on the fifth business day following satisfaction or waiver of the conditions to closing set forth herein at the offices of McDermott, Will & Emery, 227 West Monroe Street, Chicago, Illinois 60606, or at such other time or place as may be mutually agreed upon by the parties (the "CLOSING DATE"). The Closing shall be deemed to take place as of the close of business on the Closing Date. 3.2. DELIVERIES BY PURCHASER. At the Closing, Purchaser shall deliver or cause to be delivered the following: (a) a wire transfer in immediately available funds in the amount of the Purchase Price to be paid by Purchaser pursuant to Section 2.2; (b) such other instruments or documents as may be necessary or appropriate to carry out the transactions contemplated hereby; and (c) opinion of McDermott, Will & Emery relating to the formation and existence of Purchaser and its power and authority to enter into this Agreement and the Agreements contemplated hereby. 3.3. DELIVERIES BY THE COMPANY. At the Closing, the Company shall deliver or cause to be delivered the following: (a) certificates for the Stock; (b) a legal opinion of Baker & Hostetler, counsel to the Company, relating to the due organization of the Company, the authority of the Company to enter the transactions contemplated hereby, the capitalization of the Company, and certain regulatory matters pertaining to the transactions contemplated hereby; (c) the Warrants substantially in the form of Exhibit A hereto issued to Purchaser or its designees pursuant to the Warrant Agreement; (d) certificate of incorporation of the Company, certified as of a recent date by the Secretary of State of Ohio; (e) certificates of good standing, certified as of a recent date by the Secretary of Ohio and of each jurisdiction in which the Company is qualified to do business; -4- 5 (f) a certificate of the Secretary of the Company certifying copies of the certificate of incorporation, bylaws and resolutions of the Company as of the Closing Date; (g) a certificate of the Company certifying as to the continued accuracy of the representations and warranties as required by Section 10.1 and compliance with conditions precedent to the Closing; (h) resignations from the directors of the Company named on Schedule 3.3(h) hereto without any claim for compensation other than directors fees and perquisites earned prior to the dates of such resignations as described on Schedule 3.3(h); (i) any third party consents required to consummate the transactions contemplated hereby; and (j) such other instruments or documents as may be necessary or appropriate to carry out the transactions contemplated hereby. 3.4. CLOSING AGREEMENTS. At the Closing, the appropriate parties shall execute, acknowledge and deliver the following: (a) the Registration Rights Agreement substantially in the form of Exhibit B attached hereto (the "REGISTRATION RIGHTS AGREEMENT"); (b) a voting agreement in the form of Exhibit C attached hereto relating to the election of directors of the Company and certain other matters referred to therein (the "VOTING AGREEMENT"); and (c) such other instruments or documents as may be necessary or appropriate to carry out the transactions contemplated hereby. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company hereby represents and warrants to Purchaser as of the date hereof, and as of the Closing Date, as follows: 4.1. ORGANIZATION; QUALIFICATION; GOOD STANDING; CORPORATE POWER. (a) The Company is a corporation duly organized, validly existing and in good standing under the laws of the state of Ohio and is duly qualified to do business and is in -5- 6 good standing in the state of Ohio and in all other jurisdictions (whether federal, state, local or foreign) where its ownership or leasing of property or the conduct of its business requires it to be qualified and in which the failure to be duly qualified would have a Company Material Adverse Effect. The Company has the corporate power and authority to carry on its business as it is now conducted and to own, lease and operate its assets, properties, and business. The Company has the corporate power and authority to execute and deliver this Agreement and the corporate power to consummate the transactions contemplated hereby. The Company has delivered to the Purchaser complete and correct copies of its Articles of Incorporation and Code of Regulations (collectively, the "COMPANY ORGANIZATIONAL DOCUMENTS") as in effect on the date hereof. (b) The only direct or indirect Subsidiaries of the Company are the entities listed on Schedule 4.1(b) (collectively, the "COMPANY SUBSIDIARIES"). The "COMPANY INSURANCE SUBSIDIARY" shall mean Central Reserve Life Insurance Company. Schedule 4.1(b) sets forth a complete list of the officers and directors of the Company and each Company Subsidiary. Except as set forth on Schedule 4.1(b), the Company and each Company Subsidiary does not have any direct or indirect equity or ownership interest in any other business or entity and does not have any direct or indirect obligation or any commitment to invest any funds in any corporation or other business or entity, other than for investment purposes in the ordinary course of business in accordance with past practices. For purposes of this Agreement, the term "SUBSIDIARY" shall mean any corporation, association or other business entity of which more than 10% of the outstanding voting stock is owned or controlled, directly or indirectly, by the Company or by one or more Company Subsidiaries, or by the Company and one or more of the Company Subsidiaries. (c) Set forth on Schedule 4.1(c) is a list of the states of incorporation or organization for each of the Company Subsidiaries and states in which each of the Company Subsidiaries is licensed to issue insurance. Each Company Subsidiary is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation. Each Company Subsidiary has the corporate power and authority to carry on its business as it is now conducted and to own, lease and operate its properties, and is duly licensed to issue insurance and is in good standing in each jurisdiction where its ownership or leasing of property or the conduct of its business requires it to be qualified. The Company has delivered to the Purchaser complete and correct copies of each Company Subsidiary's Articles of Incorporation and Bylaws or Code of Regulations as in effect on the date hereof. (d) Except as disclosed on Schedule 4.1(d), the Company and the Company Subsidiaries hold all material licenses, certificates, permits, franchises and rights ("PERMITS") from all appropriate federal, state or other public authorities necessary for the conduct of the business of the Company and the Company Subsidiaries, and a list of each state in which the Company has a certificate of authority or is qualified to conduct business is attached hereto as part of Schedule 4.1(d). Except as set forth on Schedule -6- 7 4.1(d), each such license, certificate, permit or franchise is without qualification or restriction. The Company and the Company Subsidiaries each have conducted its and their business so as to comply with all applicable federal, state and local statutes, ordinances, regulations or rules, and neither the Company nor any of the Company Subsidiaries is presently charged with, or, to the Company's knowledge, under governmental investigation with respect to, any actual or alleged material violations of any statute, ordinance, regulation or rule. To the Company's knowledge, neither the Company nor the Company Subsidiaries are the subject of any pending or to the Company's knowledge threatened proceeding by any regulatory authority having jurisdiction over its or their business, properties, assets or operations. (e) A record of all material action taken by the Boards of Directors of the Company and each Company Subsidiary, and complete and accurate copies of all material actions taken by written consent of the shareholders and the Board of Directors of the Company and each Company Subsidiary, and all minutes of their respective meetings, are contained in the respective minute books of the Company and each Company Subsidiary. The minute books or stock ledgers of the Company and each Company Subsidiary, retained by the Company or by its transfer agent, contain an accurate and complete record of all issuances, transfers and cancellations of shares of capital stock of the Company and each Company Subsidiary. The Purchaser has been given access to and an opportunity to review all such minutes and minute books. 4.2. AUTHORIZATION. Except as set forth on Schedule 4.2, the execution, delivery and performance of this Agreement by the Company and the consummation of the transactions contemplated hereby and thereby have been duly authorized and approved by all necessary corporate action, subject to the approval of the shareholders of the Company, and this Agreement is legally binding on and enforceable against the Company in accordance with its terms, except as enforceability may be limited by bankruptcy laws, insolvency laws or other laws affecting creditors' rights generally. Subject to obtaining the approvals set forth on Schedule 4.2, the execution and delivery of this Agreement does not, and the consummation of the transactions contemplated hereby will not, violate the Company's Articles of Incorporation or Code of Regulations. 4.3. GOVERNMENTAL AUTHORIZATION. The execution, delivery and performance by the Company of this Agreement and the consummation of the transactions contemplated hereby by the Company require no action by or in respect of, or filing with, any governmental body, agency, official or authority other than: (a) compliance with any applicable requirements of the HSR Act; (b) compliance with any applicable requirements of the Securities Act and the Exchange Act; (c) compliance with any applicable foreign or state securities or "blue sky" laws; -7- 8 (d) compliance with any applicable requirement of Ohio and any other insurance regulatory authorities having jurisdiction over the Company, any of the Company Subsidiaries or the transactions described herein; (e) such other filings or registrations with, or authorizations, consents or approvals of, governmental bodies, agencies, officials or authorities, the failure of which to make or obtain would adversely affect the ability of the Company and the Company Subsidiaries to consummate the transactions contemplated hereby and operate their businesses as heretofore operated; and (f) those approvals described on Schedule 4.3. 4.4. CAPITALIZATION. (a) The authorized capitalization of the Company consists of (i) 15,000,000 shares of Common Stock, without par value (the "COMPANY COMMON STOCK"), of which 4,195,172 are issued and outstanding, and 0 shares are held by the Company as treasury shares, and (ii) 2,000,000 shares of preferred stock, without par value (the "PREFERRED STOCK"), of which no shares are issued and outstanding. The Company has no other class of stock and there are, and as of the Closing Date there will be, no fractional shares of Company Common Stock issued or outstanding. (b) There are outstanding options for the purchase of 65,845 shares of Company Common Stock granted to certain employees of the Company pursuant to the Company's Stock Option and Incentive Plan (the "OPTION PLAN") (the option rights granted pursuant to the Option Plan are sometimes collectively referred to herein as the "OPTIONS"). The names of the Optionees, the date of each option to purchase, the number of shares subject to each such option, the expiration date of each such option, and the price at which each such option may be exercised are set forth in Schedule 4.4(b). The Company has reserved an adequate number of shares to cover exercise of Options. Except with respect to the Options, neither the Company nor the Company Subsidiaries have granted any outstanding warrants, options, rights, calls, agreements, understandings or other commitments of any nature relating to the authorization, issuance, sale or repurchase of any equity securities of the Company or the Company Subsidiaries. There are no rights in or claims possessed by a person enforceable against the Company in law or in equity to compel such an authorization, issuance, sale, or repurchase. Except as otherwise provided in the Articles of Incorporation of the Company and except as set forth on Schedule 4.4(b), all of the issued and outstanding shares of Company Common Stock will be entitled to vote to approve this Agreement. (c) The Company owns directly or indirectly all of the issued and outstanding shares of capital stock of the Company's Subsidiaries. Schedule 4.4(c) accurately identifies the number of shares of authorized and outstanding capital stock of the -8- 9 Company's Subsidiaries. (d) All of the outstanding shares of the Company and the Company's Subsidiaries (i) are duly authorized, validly issued, fully paid, nonassessable and free of preemptive rights and, in the case of the shares of the Company Subsidiaries, are owned free and clear of all liens, charges or encumbrances, except as listed on Schedule 4.4(d) and (ii) have been issued in compliance with all applicable federal and state securities laws. Upon issuance, the Stock will be (i) duly authorized, validly issued, fully paid, nonassessable and free of preemptive rights and (ii) issued in compliance with all applicable federal and state securities laws. (e) Upon consummation of the transactions contemplated hereby, Purchaser will have good and marketable title to and ownership of the Stock free and clear of all Adverse Claims other than the Ohio General Corporation Law, the Articles of Incorporation of the Company, the Code of Regulations of the Company, all federal and state securities laws, the Registration Rights Agreement or the Voting Agreement. 4.5. FINANCIAL STATEMENTS. (a) The Company has furnished to the Purchaser true, correct and complete copies of: (i) the audited Consolidated Balance Sheets of the Company as of the fiscal years ended December 31, 1996, 1995 and 1994, and the related Consolidated Statements of Operations, Shareholders' Equity and Cash Flows for each of the fiscal years ended December 31, 1996, 1995 and 1994, including the respective notes thereto, together with the reports of KPMG Peat Marwick LLP relating thereto; (ii) the unaudited Balance Sheets as of September 30, 1997, and the related unaudited Consolidated Statements of Operations, Shareholders' Equity and Cash Flows for the period then ended ("COMPANY FINANCIAL STATEMENTS"); (iii) annual audited Statutory Financial Statements for the Company Insurance Subsidiary for the years ended December 31, 1996, 1995 and 1994; and (iv) quarterly Statutory Financial Statements for periods ended March 31, June 30 and September 30, 1997 (collectively, the "STATUTORY STATEMENTS"). Except as set forth on Schedule 4.5(a), such Company Financial Statements present fairly the financial position of the Company and the Company Subsidiaries taken as a whole as of and for the periods ended on their respective dates and the operating results of the Company and the Company Subsidiaries taken as a whole for the indicated periods in conformity with GAAP. Except as set forth on Schedule 4.5(a), since September 30, 1997 to the date hereof, there have not been any material adverse changes in the Company's and the Company Subsidiaries' consolidated financial condition, assets, liabilities or business, other than changes in the ordinary course of business. The Statutory Statements (i) have been prepared in accordance with the books and records of the Company Insurance Subsidiary, (ii) are prepared in accordance with the statutory accounting provisions of the insurance laws of the applicable jurisdictions, and (iii) are prepared in a manner consistent with prior periods, except for any changes required by applicable law. Such Statutory Statements, when read in conjunction with the notes thereto and any statutory -9- 10 audit reports relating thereto, present fairly in all respects the statutory financial condition of the Company Insurance Subsidiary at December 31, 1996, 1995 and 1994 and at September 30, 1997, and the statutory results of their respective operations for the periods then ended. (b) The Company will furnish the Purchaser, at the time of the filing thereof, with copies of its audited (if prepared) and unaudited quarterly reports and any amendments thereto filed with the Commission subsequent to September 30, 1997 until the Closing Date ("SUBSEQUENT COMPANY FINANCIAL STATEMENTS"). (c) The Subsequent Company Financial Statements, will be, prepared in accordance with GAAP, utilizing accounting practices consistent with prior years except as otherwise disclosed, and comply or will comply with applicable accounting requirements and with the rules and regulations of the Commission with respect thereto. All of the Subsequent Company Financial Statements will present fairly, the financial position of the Company and the Company Subsidiaries taken as a whole and the results of its and their operations and changes in its and their financial position as of and for the periods ending on their respective dates. (d) The Company has delivered to the Purchaser true and complete copies of the following SAP Financial Statements (as defined hereinafter) for the Company Insurance Subsidiary: SAP Financial Statements for each Company Insurance Subsidiary for the years ended December 31, 1994, 1995 and 1996, and for the quarters ended March 31, June 30, and September 30, 1997, and the notes related thereto ("SAP FINANCIAL STATEMENTS"). Each of the SAP Financial Statements complied in all material respects with all applicable laws when so filed, and all deficiencies known to the Company and each Company Insurance Subsidiary with respect to any such SAP Financial Statements have been cured or corrected or are which the Company is endeavoring to cure or correct. The Company will furnish the Purchaser copies of any amendments to prior SAP Financial Statements and any SAP Financial Statements prepared for periods subsequent to September 30, 1997 and prior to the Closing Date. Each such SAP Financial Statement (and the notes related thereto), including without limitation, each statement of admitted assets, liabilities and capital surplus and each of the statements of operations, changes in unassigned surplus account, and cash flow contained in the respective SAP Financial Statements, was or will be prepared in accordance with SAP, is or will be true and complete in all material respects, and presents or will present fairly the financial condition, admitted assets and properties and liabilities of each Company Insurance Subsidiary as of the respective dates thereof, and the results of operations and changes in capital and surplus and in the cash flow of each such Company Insurance Subsidiary for and during the respective periods covered thereby. All reserves with respect to insurance written or assumed by each Company Insurance Subsidiary as established or reflected on such SAP Financial Statements, were or will be determined in accordance with generally accepted actuarial principles and practices and are or will be in all material respects in accordance with the related insurance, coinsurance and reinsurance contracts of the -10- 11 Company Insurance Subsidiary, and meet in all material-respects the requirements of the insurance laws of the jurisdictions in which such contracts were issued or delivered. (e) As used herein, "SAP" shall mean the accounting practices prescribed or permitted by the National Association of Insurance Commissioners and the insurance regulatory authority in the state in which each Company Insurance Subsidiary is domiciled or qualified to do business, as the case may be, consistently applied throughout the specified period and in the immediately prior comparable period. "SAP STATEMENTS" shall mean any annual statements, quarterly statements and other financial statements and presentations of any Company Insurance Subsidiary prepared in accordance with SAP and filed with or submitted to the insurance regulatory authority in the state in which such Company Insurance Subsidiary is domiciled on forms prescribed or permitted by such authority. 4.6. ABSENCE OF CERTAIN CHANGES AND UNDISCLOSED LIABILITIES. (a) Except as set forth on Schedule 4.6(a) or reflected in the Company Financial Statements or the SAP Financial Statements, since December 31, 1996 to the date of this Agreement, (i) the businesses of the Company and the Company Subsidiaries have been conducted only in the ordinary course, in the same manner as theretofore conducted; (ii) neither the Company nor any Company Subsidiary has declared, set aside or paid any dividend or distribution in respect of the capital stock of the Company or any Company Subsidiary, or any direct or indirect redemption, purchase or other acquisition by the Company or such Company Subsidiary of any such stock; (iii) neither the Company nor any Company Subsidiary has issued additional shares or granted new options; and (iv) there has not occurred any event or circumstance resulting, or reasonably expected to result in a Company Material Adverse Effect. (b) Except as described in a Schedule hereto or as and to the extent reflected or reserved against in the Subsequent Company Financial Statements in accordance with GAAP, since September 30, 1997, neither the Company nor the Company Subsidiaries will have, at the date of such statements, any liabilities or obligations, of any nature, secured or unsecured (whether accrued, absolute, contingent or otherwise) including, without limitation, any tax liabilities due or to become due, except which have been incurred in the ordinary course of business. (c) Except as disclosed on Schedule 4.6(c), since September 30, 1997 to the date of this Agreement the Company has conducted its business in the ordinary course and there has not been: (i) any damage, destruction or other tangible property or casualty loss (whether or not covered by insurance) which, individually or in the aggregate, has had or would have a Company Material Adverse Effect; -11- 12 (ii) any amendment, termination or waiver by the Company or any Company Subsidiary, of any material right under any agreement, contract or other written commitment to which it is a party or by which it is bound and which is required to be disclosed in Schedule 4.16, other than in the ordinary course of business; (iii) any material reduction in the amounts of coverage provided by existing casualty and liability insurance policies with respect to the business or properties of the Company or any Company Subsidiary; (iv) any grant of any severance or termination pay to any director, officer or, other than in the ordinary course of business consistent with past practice, any employee of the Company or any Company Subsidiary, or increase in benefits payable to any director or officer other than in the ordinary course of business under existing benefit plans; (v) any new or amendment to or alteration of any existing bonus, incentive, compensation, severance, stock option, stock appreciation right, pension, matching gift, profit-sharing, employee stock ownership, retirement, pension group insurance, death benefit, or other fringe benefit plan, arrangement or trust agreement adopted or implemented by the Company or any Company Subsidiary, excluding individual actions with respect to non-officer employees in the ordinary course of business consistent with past practice; (vi) other than in the ordinary course of business consistent with past practice, the cancellation, waiver, release or other compromise of any debt, claim or right in excess of $25,000; (vii) any material change in any accounting principle or practice or method or application thereof; (viii) the termination, lapse, suspension, revocation of, amendment of, limitation upon, disposal of or failure to renew any license or permit necessary for the operation of the business of the Company or any Company Subsidiary. (ix) any agreements other than on an arm's-length basis between the Company and any director, executive officer or affiliate or associate of the foregoing; (x) other than in the ordinary course of business consistent with past practice, any change in any underwriting, actuarial, investment, or financial reporting practice or policy followed by the Company or any Company Subsidiary or method or application thereof, or any assumption underlying such principle, practice or policy; -12- 13 (xi) other than in the ordinary course of business consistent with past practice, any termination, amendment, or execution by the Company or any Company Subsidiary of any reinsurance, coinsurance or similar contract or treaty, as ceding or assuming insurer; (xii) any sale, transfer, or conveyance of assets or properties of the Company or any Company Subsidiary (other than investment securities) with an individual book value or with any aggregate book value in excess of $25,000; or (xiii) any purchase of any investment securities by the Company or any Company Subsidiary other than purchases of investment grade commercial paper or cash equivalents. 4.7. NO VIOLATION. Except as set forth on Schedule 4.7, neither the execution and delivery of this Agreement by the Company nor the consummation by the Company of the transactions contemplated hereby or thereby, nor compliance by the Company with any of the terms or provisions hereof or thereof, will (i) violate any provision of the Articles of Incorporation or Bylaws or Code of Regulations of the Company or any Company Subsidiary, (ii) violate any statute, code, ordinance, rule, regulation, ("LAWS") judgment, order, writ, decree or injunction ("ORDERS") applicable to the Company or any of the Company Subsidiaries or any of their respective properties or assets, or (iii) violate, conflict with, result in a breach of any provision of or the loss of any benefit under, constitute a default (or an event which, with notice or lapse of time, or both, would constitute a default) under, result in the termination of or a right of termination or cancellation under, accelerate the performance required by, or result in the creation of any lien, pledge, security interest, charge or other encumbrance upon any of the respective properties or assets of the Company or any Company Subsidiary under, any of the terms, conditions or provisions of any note, bond, mortgage, indenture, deed of trust, license, lease, agreement or other instrument or obligation to which the Company or any Company Subsidiary is a party, or by which they or any of their respective properties or assets may be bound or affected. 4.8. LITIGATION. Except as set forth on Schedule 4.8, there are no legal, quasijudicial, administrative, or other actions, suits, proceedings, claims (including non-contractual claims, bad faith claims and claims against the Company's or any Company Subsidiary's directors or officers, but excluding coverage and other claims made with respect to insurance policies issued by the Company or any Company Subsidiary), or investigations about which the Company has knowledge, of any kind or nature pending or, to the knowledge of the Company, threatened against the Company or any of the Company Subsidiaries. Except as set forth on Schedule 4.8, neither the Company nor the Company Subsidiaries are subject to or in default with respect to, nor are any of its or their assets subject to, any outstanding judgment, order or decree of any court or of any governmental agency or instrumentality. 4.9. TAXES, RETURNS AND REPORTS. -13- 14 (a) Except as may be reflected on Schedule 4.9(a), each of the Company and Company Subsidiaries has duly filed all federal, state, county, local and foreign tax returns including, without limitation, information returns and returns of estimated tax (collectively "TAX RETURNS"), required to be filed by it on or prior to the date hereof, including applicable extensions (all such Tax Returns being accurate and complete in all material respects) and has duly paid or made adequate provision for the payment of all Taxes (as defined below) that have been incurred by it or are due or to the Company's knowledge, claimed to be due from it by Federal, state, county, local or foreign taxing authorities on or prior to the date of this Agreement (including, without limitation, if and to the extent applicable, those due in respect of its properties, income, business, capital stock, deposits, franchises, licenses, sales and payrolls) other than Taxes that are being contested in good faith (and which are set forth on Schedule 4.9(a)). Except as set forth on Schedule 4.9(a), the federal income tax returns of the Company and Company Subsidiaries have been examined by the Internal Revenue Service ("IRS") for all years through and including 1989, and the deficiencies (if any) asserted as a result of such examination have been satisfied. Except as may be reflected on Schedule 4.9(a) there are no disputes pending, or claims asserted or assessments upon the Company or any Company Subsidiaries regarding Taxes, nor does the Company or any Company Subsidiaries have outstanding any currently effective waivers extending the statutory period of limitation applicable to any Federal, state, county, local or foreign Tax Return for any period. In addition, except as set forth on Schedule 4.9(a), (i) proper and accurate amounts (in all material respects) have been withheld by the Company and Company Subsidiaries from their employees, customers, shareholders and others from whom they are required to withhold Tax in compliance with all applicable Federal, state, county, local and foreign laws, and (ii) there are no Tax liens upon any property or assets of the Company or Company Subsidiaries except liens for current Taxes not yet due. Except as set forth on Schedule 4.9(a), no property of the Company or any Company Subsidiaries is property that the Company or any Company Subsidiaries is or will be required to treat as being owned by another person pursuant to the provisions of former Section 168(f)(8) of the Code or is "tax-exempt use property" within the meaning of Section 168(h) of the Code. Except as set forth on Schedule 4.9(a), neither the Company nor any Company Subsidiaries has been required to include in income any adjustment pursuant to Section 481 of the Code by reason of a voluntary change in accounting method initiated by the Company or any Company Subsidiaries, and the IRS has not initiated or proposed any such adjustment or change in accounting method. Except as set forth on Schedule 4.9(a), neither the Company nor any Company Subsidiaries has entered into a transaction which is being accounted for as an installment sale under Section 453 of the Code. (b) The Financial Statements and the Subsequent Financial Statements delivered to the Purchaser contain in conformity with GAAP, adequate accruals for all Taxes with respect to periods covered thereby and all prior periods; (c) Except as set forth on Schedule 4.9(c), all Tax deficiencies asserted or -14- 15 assessed against the Company or any Company Subsidiaries have been paid or finally settled with no remaining amounts owed; (d) Except as set forth on Schedule 4.9(d), there is no pending, or to the knowledge of the Company, threatened action, audit, proceeding or investigation (of which investigation the Company has knowledge) with respect to (i) the assessment or collection of Taxes, or (ii) a claim for refund made by the Company or any Company Subsidiaries with respect to Taxes previously paid; (e) Except as set forth on Schedule 4.9(e), there are no outstanding requests for extensions of time within which to file returns and reports in respect of any Taxes; (f) Except as set forth on Schedule 4.9(f), neither the Company nor any Company Subsidiaries have taken action not in accordance with past practice that would have the effect of deferring any material Tax liability from any period ending on or before the Closing Date to any period ending after such date; (g) Except as set forth on Schedule 4.9(g), neither the Company nor any of the Company Subsidiaries is a party to any tax-sharing agreement or similar arrangement (whether express or implied), including any terminated agreement, as to which any of them could have any continuing liability following the Closing Date, nor has any continuing liability for Taxes of any other corporation pursuant to Treasury Regulation Section 1. 1502-6 (or similar state, local, or foreign provision); and (h) As used herein, "TAXES" and all derivations thereof means any federal, state, local or foreign income, gross receipts, license, payroll, employment, excise, severance, stamp, occupation, premium, windfall profits, environmental, customs, duties, capital stock, franchise, profits, withholding, social security (or similar) unemployment, disability, real property, personal property, sales, use, transfer, registration, value added, alternative or add-on minimum, estimated, or other tax, charge, fee levy or other like assessment of any kind whatsoever, including any interest, penalty, and/or addition thereto. 4.10. CORPORATE PROPERTIES. (a) Schedule 4.10(a) accurately identifies: (i) all real property owned, beneficially or otherwise, or controlled by the Company or the Company Subsidiaries, whether owned outright, as a joint venture, or owned or controlled in any other capacity (all of which shall be defined as "REAL ESTATE") and such Schedule 4.10(a) sets forth a complete legal description of the Real Estate and a brief description of any buildings located thereon; and (ii) all copyrights, patents, trademarks, trade names or applications pending therefor owned by the Company and the Company Subsidiaries. Except as set forth on Schedule 4.10(a), all of the Company's or the Company Subsidiaries' properties, leasehold improvements and equipment are in reasonable operating condition, except as would not -15- 16 cause a Company Material Adverse Effect. (b) Neither the Company nor any Company Subsidiary owns any right, title or interest in any real property, except as particularly described on Schedule 4.10(a). Schedule 4.10(b) sets forth a complete and accurate list and general description of all material leases for real property ("REAL PROPERTY LEASES") to which the Company or any Company Subsidiary is a party or by which any of them are bound. The activities of the Company and the Company Subsidiaries with respect to all real property and Real Property Leases owned or held by each of them for use in connection with their respective operations are in all material respects permitted and authorized by applicable zoning laws, ordinances and regulations and all laws, rules and regulations of any court, administrative agency or commission or other governmental authority or instrumentality affecting such properties. The Company and each Company Subsidiary enjoy peaceful and undisturbed possession under all Real Property Leases to which they are parties, and all of such Real Property Leases are valid and in full force and effect. (c) Except as set forth on Schedule 4.10(c), the Company and the Company Subsidiaries have good and marketable title to all of their owned real and personal property, free, clear and discharged of, and from, any and all liens, mortgages, charges, encumbrances and/or security interests (each, an "ENCUMBRANCE"), except for (i) Encumbrances for inchoate mechanics' and materialmen's liens for construction in progress and workmen's, repairmen's, warehousemen's and carriers' liens arising in the ordinary course of business, (ii) Encumbrances for Taxes not yet payable, (iii) Encumbrances arising out of, under, or in connection with, this Agreement, (iv) Encumbrances and easements of record, (v) rights of lessors, co-lessees or subleases that are reflected in each respective Real Property Lease and (vi) Encumbrances which do not significantly impair the use, value or transferability of such property (collectively, "PERMITTED ENCUMBRANCE"). (d) The Company or any of the Company Subsidiaries (as the case may be), as lessee, has the right under valid and subsisting leases to occupy, use, possess and control all property leased by the Company or its Subsidiary, qualified only by the written terms of such leases, copies of which are attached to Schedule 4.10(d). (e) The Company and each Company Subsidiary owns or possesses, or holds a valid right or license to use, all intellectual property, patents, trademarks, tradenames, service marks, copyrights and licenses, and all rights with respect to the foregoing (collectively, the "IP RIGHTS"), necessary for the conduct of its business as now conducted, without any conflict with the rights of others. -16- 17 4.11. INSURANCE ISSUED BY COMPANY SUBSIDIARIES; RESERVES; REINSURANCE TREATIES. (a) Each form of insurance policy, policy endorsement or amendment, reinsurance contract, annuity contract, application form, sales material and service contract now in use by the Company or any Company Subsidiary in any jurisdiction has, where required, received interim or final approvals from the appropriate insurance regulatory authorities of such jurisdiction. (b) Neither the Company nor any Company Subsidiary has issued any participating policies or any retrospectively rated policies of insurance, other than policies with final premiums subject to audit. (c) (i) Any premium rates required to be filed with or approved by insurance regulatory authorities have been so filed and have received interim or final approval from such regulatory authorities, and (ii) all premiums charged by the Company Subsidiaries conform with such approvals. (d) Schedule 4.11(d) sets forth the Company and the Company Insurance Subsidiary's estimated liabilities for unearned premiums, outstanding claims (including claims due and unpaid, not yet due, and incurred but not reported) and claims expenses (collectively, "Reserves"), gross and net reinsurance thereof, as of June 30, 1997, pertaining to the Company's life, health and annuity insurance businesses. Except as set forth on Schedule 4.11(d), the Reserves were prepared in accordance with the statutory or other accounting practices prescribed or permitted by the applicable insurance regulatory authorities. Liabilities for outstanding claims and claims expenses as of June 30, 1997 have been estimated in full accordance with the Company's prior practices and procedures. (e) Schedule 4.11(e) sets forth a list and description of all quota share, stop loss or other reinsurance or coinsurance agreements to which either the Company or any Company Subsidiary is a party. (f) The Company's and the Company Insurance Subsidiary's Reserves, gross and net of reinsurance assumed or ceded, as of June 30, 1997, and each of the preceding five calendar years pertaining to the Company's and the Company Insurance Subsidiary's businesses, have been determined on a consistent basis except as described in Schedule 4.11(f). (g) All insurance contract benefits payable by the Company Insurance Subsidiary and by any other person that is a party to or bound by any reinsurance, coinsurance or other similar contract with such Company Insurance Subsidiary, have in all respects been paid or are in the course of settlement in accordance with the terms of the insurance, reinsurance or coinsurance contracts under which they arose, except for such benefits which the Company Insurance Subsidiary reasonably believes there is a basis to contest -17- 18 payment. (h) No outstanding insurance contract issued, reinsured, underwritten or assumed by any Company Insurance Subsidiary entitles the holder thereof or any other person to receive dividends, distributions or other benefits based upon the revenues or earnings of such Company Insurance Subsidiary or any other person; (i) The underwriting standards utilized and ratings applied by the Company Insurance Subsidiary and by any other person that is a party to or bound by any insurance, reinsurance, coinsurance or other similar contract with any of the Company Insurance Subsidiary conforms in all respects as to such contracts to the standards and ratings required pursuant to the terms of the respective insurance, reinsurance, coinsurance or other similar contracts, except for such non-conformity as would not have a Company Material Adverse Effect; (j) All amounts to which each Company Insurance Subsidiary is entitled under reinsurance, coinsurance or similar contracts (including without limitation amounts based on paid and unpaid losses) are fully collectible, in accordance with the terms of such contracts except as would not have a Company Material Adverse Effect; and (k) Each insurance agent, general agent, broker, producer, or representative, for any Company Insurance Subsidiary, is duly licensed under state insurance laws for the type of business written, sold or produced by such person in the particular jurisdiction in which such person writes, sells or produces such business for the Company Insurance Subsidiary and, where required by law, is duly appointed by the Company to act as agent for the Company, except where such lack of licensure would not have a Company Material Adverse Effect. 4.12. EMPLOYEE BENEFIT PLANS. (a) Set forth on Schedule 4.12(a) is an accurate description of all bonus, deferred compensation, pension, retirement, profit-sharing, thrift savings, employee stock ownership, stock bonus, stock purchase, restricted stock and stock option plans, all employment or severance contracts, other material employee benefit plans and any applicable "change in control" or similar provisions in any plan, contract or arrangement which cover employees, former employees, agents or independent contractors of the Company and Company Subsidiaries, and all other benefit plans, contracts or arrangements covering directors, employees, former employees, agents or independent contractors of the Company or Company Subsidiaries (the "EMPLOYEES"), including, but not limited to, "employee benefit plans" within the meaning of Section 3(3) of ERISA (collectively, the "COMPENSATION AND BENEFIT PLANS"). True and complete copies of all Compensation and Benefit Plans and such other benefit plans, contracts or arrangements, including, but not limited to, any trust instruments and/or insurance contracts, if any, forming a part of any such plans and agreements, and all amendments thereto, including, -18- 19 but not limited to (i) the actuarial report for such plan (if applicable) for each of the last two years, and (ii) the most recent determination letter from the IRS (if applicable) for such plan, are attached as Schedule 4.12(a). (b) All employee benefit plans, other than any multiemployer plans ("MULTIEMPLOYER PLAN") within the meaning of Sections 3(37) or 4001(a)(3) of ERISA, covering Employees (the "PLANS"), to the extent subject to ERISA, are in substantial compliance with ERISA. Each Plan which is an "employee pension benefit plan" within the meaning of Section 3(2) of ERISA ("PENSION PLAN") and which is intended to be qualified under Section 401(a) of the Code, has received a favorable determination letter from the IRS, and the Company is not aware of any circumstances likely to result in revocation of any such favorable determination letter. There is no material pending or threatened litigation relating to the Plans. Neither the Company nor any of the Company Subsidiaries has engaged in a transaction with respect to any Plan that, assuming the taxable period of such transaction expired as of the date hereof, could subject the Company or any of the Company Subsidiaries to a tax or penalty imposed by either Section 4975 of the Code or Section 502(i) of ERISA in an amount which would be material. (c) No liability under Subtitle C or D of Title IV of ERISA has been or is expected to be incurred by the Company or any of Company Subsidiaries with respect to any ongoing, frozen or terminated "single-employer plan", within the meaning of Section 4001(a)(15) of ERISA, currently or formerly maintained by any of them, or the single-employer plan of any entity which is considered one employer with the Company or any of Company Subsidiaries under Section 4001 of ERISA or Section 414 of the Code (an "ERISA AFFILIATE"). The Company and Company Subsidiaries have not incurred and do not expect to incur any withdrawal liability with respect to a Multiemployer Plan under Subtitle E of Title IV of ERISA (regardless of whether based on contributions of an ERISA Affiliate). No notice of a "reportable event," within the meaning of Section 4043 of ERISA, for which the 30-day reporting requirement has not been waived, has been required to be filed for any Pension Plan or by any ERISA Affiliate within the twelve-month period ending on the date hereof. (d) All contributions required to be made under the terms of any Plan have been timely made. Neither any Pension Plan nor any single-employer plan of an ERISA Affiliate has an "accumulated funding deficiency" (whether or not waived) within the meaning of Section 412 of the Code or Section 302 of ERISA. Neither the Company nor the Company Subsidiaries has provided, or is required to provide, security to any Pension Plan or to any single-employer plan of an ERISA Affiliate pursuant to section 401(a)(29) of the Code. (e) The Company and Company Subsidiaries have not contributed to any Multiemployer Plan, and are not a party to any Multiemployer Plan. -19- 20 (f) Neither the Company nor the Company Subsidiaries has any obligations for retiree health and life benefits under any Plan, except as set forth on Schedule 4.12(f). Except as set forth on Schedule 4.12(f), there are no restrictions on the rights of the Company or the Company Subsidiaries to amend or terminate any such Plan without incurring any liability thereunder. (g) Neither the Company nor any of the Company Subsidiaries is a party to, or is bound by, any collective bargaining agreement, contract, or other agreement or understanding with a labor union or labor organization, nor is the Company or any of the Company Subsidiaries the subject of any proceeding asserting that the Company or any such Subsidiary has committed an unfair labor practice or seeking to compel the Company or such Subsidiary to bargain with any labor organization as to wages or conditions of employment, nor is there any strike involving the Company or any of the Company Subsidiaries pending or threatened, nor is the Company aware of any activity involving its or any of its Subsidiaries' employees seeking to certify a collective bargaining unit or engaging in any other organizational activity. (h) With respect to the Compensation and Benefit Plans, all required payments, premiums, contributions, reimbursements or accruals for all periods ending prior to or as of the Closing Date shall have been made or properly accrued and any bonding with respect to such Compensation and Benefit Plan required under ERISA is in full force and effect, except which would not have a Company Material Adverse Effect. None of the Compensation and Benefit Plans has any unfunded liabilities, except which would not have a Company Material Adverse Effect. The Company and the Company Subsidiaries have complied with all terms of ERISA and all regulations thereunder with respect to all Compensation and Benefit Plans. (i) The Company has amended its Severence Benefit Plan to exclude the transactions contemplaced hereby from the definition of a "change in control". 4.13. EMPLOYEES. (a) The Company and each Company Subsidiary is in compliance with all currently applicable laws and regulations respecting employment, discrimination in employment, terms and conditions of employment, wages, hours and occupational safety and health and employment practices, and is not engaged in any unfair labor practice. The Company has complied with all applicable notice provisions of and has no material obligations under COBRA with respect to any former employees or qualifying beneficiaries thereunder. The Company is not a party to any collective bargaining agreement or other labor union contract nor does the Company know of any activities or proceedings of any labor union to organize any of its employees. (b) Except as disclosed in the Company Financial Statements, all sums due for employee compensation have been paid, accrued or otherwise provided for, and all -20- 21 employer contributions for employee benefits, including deferred compensation obligations, and any benefits under any Compensation and Benefit Plan have been duly and adequately paid or provided for in accordance with plan documents. No person treated as an independent contractor by the Company or any Company Subsidiary is an employee as defined in Section 3401(c) of the Code, nor has any employee been otherwise improperly classified, as exempt, nonexempt or otherwise, for purposes of federal or state income tax withholding or overtime laws, rules or regulations. Schedule 4.13(c) sets forth the name, title, current annual compensation rate (including bonus and commissions) and current base salary rate of each officer of the Company and each Company Subsidiary as of June 30, 1997. The Company Financial Statements contain accurate accounts of all accrual bonuses, sick leave, severance pay and vacation benefits for Company and Company Subsidiary employees in accordance with GAAP. Copies of organizational charts, any employee handbook(s), and any reports and/or plans prepared or adopted pursuant to the Equal Employment Opportunity Act of 1972, as amended, have been made available to the Purchaser. (c) Each of the Company and the Company Subsidiaries is in compliance with all applicable laws respecting employment and employment practices, terms and conditions of employment, wages and hours and occupational safety and health, and is not engaged in any material unfair labor practice within the meaning of Section 8 of the National Labor Relations Act, and (i) there is no proceeding pending or, to the knowledge of the Company, threatened against it relating to any thereof, or (ii) to the knowledge of the Company, any investigation pending or threatened against it relating to any thereof. 4.14. BROKERAGE COMMISSIONS AND FEES. All negotiations relating to this Agreement and the transactions contemplated hereby have been and will be carried on by the Company directly with the Purchaser, its counsel, accountants and other representatives in such a manner as not to give rise to any claim against the Purchaser or the Company for any brokerage commission, finder's fee, investment advisor's fee or other like payment arising out of the transactions contemplated hereby, other than the agreement between the Company and Advest, Inc. relating to certain fees of Advest, Inc. in connection herewith. The Company has fee agreements with all outside attorneys, accountants, and other independent experts and advisors it has used or plans to use in connection with the transactions contemplated by this Agreement, which provide that such attorneys, accountants, and other independent experts and advisors will be compensated only at their normal rates plus reasonable out-of-pocket expenses except as set forth on Schedule 4.14. 4.15. CERTAIN AGREEMENTS. (a) Schedule 4.15(a) sets forth a complete and accurate list of all material contracts of the Company and the Company Subsidiaries as of the date of this Agreement, as defined in Item 601(b)(10) of Regulation S-K (the "MATERIAL CONTRACTS"). The Company and the Company Subsidiaries have performed all of the respective obligations -21- 22 required to be performed by them to date and are not in default under or in breach of any term or provision of any of the Material Contracts or any Real Property Leases to which any of them is a party, is subject or is otherwise bound, and no event has occurred that, with the giving of notice or the passage of time or both, would constitute such a default or breach. There are no events, facts or circumstances of which constitute or, with the gaining of notice or the passage of time or both, would constitute a default or breach of any of the Material Contracts or Real Property Leases by the other parties thereto. Each of the Material Contracts is a valid and binding agreement of the Company or a Company Subsidiary, as the case may be, and, to the Company's knowledge, of all other parties thereto. (b) Schedule 4.15(b) also accurately identifies all of the following agreements, contracts, or other instruments written or, to the knowledge of the Company, oral, to which the Company or the Company Subsidiaries are a party or by which any of them are bound or affected or by which any of the stock, properties, or assets of the Company or the Company Subsidiaries are bound or affected, or under which any of their officers, directors, employees, or shareholders have rights: (i) any agreements, plans or arrangements under or pursuant to which any of the benefits of which will be increased, or the vesting of benefits of which will be increased or accelerated, by the occurrence of any of the transactions contemplated by this Agreement, or the value of any of the benefits of which will be calculated on the basis of any of the transactions contemplated by this Agreement; and (ii) any agreement, instrument, or understanding of the Company or the Company Subsidiaries with any third parties, whether or not made in the ordinary and regular course of business, which materially restricts the ability of the Company to enter into any line of business or any geographic region. True, complete, and correct copies of all of the written agreements, contracts, or other instruments, and written descriptions of the material details of any oral agreements or instruments identified on Schedule 4.15(b) are attached to Schedule 4.15(b). 4.16. ORDERS INJUNCTIONS, DECREES, COMPLIANCE WITH APPLICABLE LAWS. (a) Except as set forth on Schedule 4.16(a), neither the Company nor the Company Subsidiaries is subject to any order, injunction or decree, written agreement, consent agreement, or memorandum of understanding of any governmental body or court, or is in violation of any order, injunction, or decree, written agreement, consent agreement or memorandum of understanding. (b) Except as set forth on Schedule 4.16(b), neither the Company nor the Company Subsidiaries is subject to any cease-and desist or other order issued by, or is a party to any written agreement, consent agreement or memorandum of understanding with, or is a party to any commitment letter or similar undertaking to, or is subject to any order or directive by, or is a recipient of any extraordinary supervisory letter from, or has adopted any board resolutions at the request of (each, whether or not set forth on Schedule 4.16(b), a "REGULATORY AGREEMENT"), any regulatory agency or other -22- 23 governmental entity that restricts the conduct of its business or that in any manner relates to its capital adequacy, its management or its business, nor has the Company or the Company Subsidiaries been advised by any regulatory agency or other governmental entity that it is considering issuing or requesting any Regulatory Agreement. (c) The Company has delivered to the Purchaser copies of the most recent examination reports, including related management letters, of the Company Insurance Subsidiary conducted by any state insurance department examiners, and reflecting the results of the most recent examinations of the affairs of such Company Insurance Subsidiary, and will furnish promptly to the Purchaser any additional such reports or drafts of such reports received by the Company or any Company Insurance Subsidiary prior to Closing. Except as set forth on Schedule 4.16(c), all material deficiencies or violations noted in such examination reports for the periods examined have either been resolved or are being resolved to the satisfaction of or accepted by the insurance regulatory authorities of the state conducting such examinations, without any enforcement action taken against any such Company Insurance Subsidiary. There are no examinations by any state insurance department examiners in progress at any Company Insurance Subsidiary, nor, to the knowledge of the Company, pending or scheduled with respect to any Company Insurance Subsidiary. 4.17. SHAREHOLDERS OF THE COMPANY. Schedule 4.17 accurately identifies the names and addresses of all of the shareholders who, to the Company's knowledge, beneficially own more than 5% of Company Common Stock and the number of shares of stock of the Company beneficially owned by each such shareholder and by each director and executive officer of the Company as of the date hereof. 4.18. REGULATORY FILINGS. (a) The Company and the Company Subsidiaries have filed and will continue to file in a timely manner (after giving effect to the Form 12b-25 filed with the Commission for the quarter ended June 30, 1997) all required filings with the Commission and any insurance commissioners ("STATE COMMISSIONERS"), (and will furnish the Purchaser with copies of all such filings made subsequent to the date hereof until the Closing Date), and all such filings were or will be, complete and accurate in all material respects as of the dates of the filings, and no such filing made or will make any untrue statement of a material fact or omitted or omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading. Such filings and submissions were in substantial compliance with applicable law when filed or submitted, and no material deficiencies have been asserted by any regulatory commission, agency or authority with respect to such filings or submissions. Except as set forth on Schedule 4.18(a) and except for normal examinations conducted by the IRS and the State Commissioners in the regular course of the business of the Company or the Company Subsidiaries, no federal, state or local governmental agency, commission or other entity has initiated any proceeding or, to the best of the knowledge -23- 24 and belief of the Company, investigation into the business or operations of the Company or the Company Subsidiaries within the past three years. (b) The Company has since January 1, 1992 filed all forms, proxy statements, schedules, reports and other documents required to be filed by it with the Commission pursuant to the Exchange Act pursuant to its rules and regulations. (c) The Company has heretofore delivered to the Purchaser complete copies of all periodic reports, statements and other documents (including exhibits thereto) that the Company has filed with the Commission under the Exchange Act since January 1, 1994, (collectively, the "COMPANY SEC REPORTS"). All Company SEC Reports required to be filed with the Commission by the Company during such period were, after giving effect to Rule 12b-25 of the Exchange Act, filed in a timely manner and complied in all material respects with the applicable requirements of the Exchange Act and the rules and regulations promulgated thereunder. At the time filed with the Commission (or if amended or superseded by a filing prior to the date of this Agreement, then on the date of such filing), no Company SEC Report contained any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. 4.19. COMPLIANCE WITH ENVIRONMENTAL LAWS AND HEALTH AND SAFETY LAWS. For purposes of this Agreement, the term "ENVIRONMENTAL LAWS" shall mean all federal, state and local laws including statutes, regulations, ordinances, codes, rules, orders, directives and other governmental restrictions and requirements (including, but not limited to, those contained in or evidenced by permits, temporary permits or exemption letters) relating to the discharge of air pollutants, water pollutants, solid wastes or process waste water or otherwise relating to the environment, hazardous wastes, materials or substances, toxic substances, asbestos or any operations of or use of property by the Company or the Company Subsidiaries that has an impact on the environment, including, but not limited to, the Federal Solid Waste Disposal Act, the Federal Clean Air Act, the Federal Clean Water Act, the Federal Resource Conservation and Recovery Act of 1976, the Federal Comprehensive Environmental Response, Compensation and Liability Act of 1980, Toxic Substances Control Act, Federal Water Pollution Control Act, National Environmental Policy Act, Federal Occupational Safety and Health Act, regulations of the Environmental Protection Agency, regulations of the Nuclear Regulatory Agency, or any applicable federal or state regulatory or administrative agency with authority over natural resources or environmental protection now in effect, all as presently amended. (a) Except as set forth on Schedule 4.19(a)(i) the operations of the Company and the Company Subsidiaries currently and in the past are in substantial compliance with all Environmental Laws; (ii) none of the Company's or the Company Subsidiaries' operations are subject to any judicial or administrative proceedings, pending or threatened, alleging the violation of any Environmental Laws; (iii) none of the Company's or the Company Subsidiaries' operations are the subject of a federal, state or local investigation, pending -24- 25 or threatened, evaluating whether any remedial action is needed to respond to a release of any hazardous or toxic waste, substance or constituent, or any other substance into the environment; (iv) neither the Company nor the Company Subsidiaries have generated hazardous waste in the Company's or the Company Subsidiaries' operations in amounts which are regulated by an Environmental Law; (v) neither the Company nor the Company Subsidiaries have transported hazardous waste attributable to the Company's or the Company Subsidiaries' operations for treatment, storage or disposal in amounts which are regulated by an Environmental Law; and (vi) neither the Company nor the Company Subsidiaries have reported a spill or release of a hazardous or toxic waste, substance or constituent or any other substance in the environment in amounts which are regulated by an Environmental Law due to the Company's or the Company Subsidiaries' operations. (b) Except as set forth in Schedule 4.19(b) all Real Estate is in compliance with all Environmental Laws; the Real Estate is not subject to any judicial or administrative proceedings alleging the violation of any Environmental Laws; the Real Estate is not the subject of a federal, state, or local investigation evaluating whether any remedial action is needed to respond to a release of any hazardous or toxic waste, substance or constituent, or any other substance into, the environment; neither the Company nor any of the Company Subsidiaries have generated any hazardous material on the Real Estate in amounts which are regulated by an Environmental Law; neither the Company nor any of the Company Subsidiaries have transported any hazardous material from the Real Estate to any waste treatment, storage or disposal facility in amounts which are regulated by an Environmental Law. (c) For the purposes of this Section 4.19, any reference to "hazardous" or "toxic" waste, substances, or constituents encompasses any waste, substance, or constituent regulated by, or subject to, the provisions and regulations of either the Comprehensive Environmental Response, Compensation, and Liability Act, 42 U.S.C. Sec. 6901 et seq., or the Toxic Substances Control Act, 15 U.S.C. Sec. 2601 et seq., each as amended. (d) The Company has not had any Phase I, Phase II, or Phase III environmental reports nor any other environmental reports, studies or surveys prepared with respect to real property owned or leased by the Company or any Company Subsidiary, nor is the Company in possession of any of the same with respect to such real property. 4.20. OTHER INFORMATION. No representation or warranty by the Company contained in this Agreement, or disclosure in any Schedule hereto prepared by the Company, certificate or other instrument or document furnished or to be furnished by or on behalf of the Company pursuant to this Agreement contains or will contain any untrue statement of a material fact or omits or will omit to state any material fact required to be stated herein or therein which is necessary to make the statements contained herein or therein not misleading. 4.21. NO SENSITIVE TRANSACTIONS. -25- 26 (a) Except as set forth on Schedule 4.21(a), within the past five years, neither the Company nor the Company Subsidiaries nor, to the Company's knowledge, any director, employee, or agent of the Company or the Company Subsidiaries, has directly or indirectly used funds or other assets of the Company or the Company Subsidiaries for (i) illegal contributions, gifts or entertainment, or other illegal expenses related to political activities; (ii) payments to or for the benefit of any governmental official or employee, other than payments required or permitted by law; (iii) illegal payments to or for the benefit of any person, firm, corporation, or other entity, or any officer, employee, agent, or representative thereof; or (iv) the establishment or maintenance of an illegal secret or unrecorded fund. (b) Except as set forth on Schedule 4.21(c), to the Company's knowledge, no officer or director of the Company or any Company Subsidiary possesses, directly or indirectly, any financial interest in, or is a director, officer or employee of, any corporation or business organization that is a supplier, customer, lessor, lessee, or competitor or potential competitor of the Company or any Company Subsidiary or that has entered into any material contract with the Company or any Company Subsidiary. Ownership of less than 1% of any class of securities of a company whose securities are registered under the Exchange Act will not be deemed to be a financial interest for purposes of this Section. (c) Schedules 4.15(b) and 4.21(c) list all transactions between January 1, 1995 and the date of this Agreement involving or for the benefit of the Company or any Company Subsidiary, on the one hand, and any director or officer of any member of the Company or any Company Subsidiary or affiliate of such director or officer, on the other hand, involving (i) any debtor or creditor relationship, (ii) any transfer or lease of real or personal property, or (iii) purchases or sales of products or services. 4.22. TAKEOVER RESTRICTIONS. Except as set forth on Schedule 4.22, no "business combination," "moratorium," "control share," or other state antitakeover statute or regulation (a) prohibits or restricts the Purchaser's ability to perform its obligations under this Agreement, or its ability to consummate the transactions contemplated hereby, (b) would have the effect of invalidating or voiding this Agreement or any provision hereof, (c) would subject any party hereto to any material impediment or condition in connection with the exercise of any of its rights under this Agreement, or (d) would provide any rights to, or permit the exercise of rights by, the Company's employees or shareholders. 4.23. INSURANCE. Schedule 4.23 contains a true, correct and complete list of all general liability, property and casualty, worker's compensation, directors' and officers', and errors and omissions insurance policies and bonds, maintained by the Company and the Company Subsidiaries, issued in the past three years, including the name of the insurer, the policy number, the policy period, the amount of coverage, the type of policy and any applicable deductibles, and all such insurance policies and bonds are in full force and effect and have been in full force and effect at all times during which the Company or any Company Subsidiary had any insurable -26- 27 interest in the subject of such insurance policies and bonds. As of the date hereof, neither the Company nor any Subsidiary has received any notice of cancellation or amendment of any such policy or bond or is in default under any such policy or bond, no coverage thereunder is being disputed and all material claims thereunder have been filed in a timely fashion and all premiums due thereon on or prior to the date of Closing have been paid as and when due. 4.24. NO INVESTMENT COMPANY. Neither the Company nor any of the Company Subsidiaries is an "investment company," or a company "controlled" by an "investment company," within the meaning of the Investment Company Act of 1940, as amended. 4.25. EFFECTIVE TIME OF REPRESENTATIONS, WARRANTIES, COVENANTS AND AGREEMENTS. Each representation and warranty of the Company as set forth in this Agreement, as updated by any written disclosure schedule shall be deemed to be made on and as of the date hereof, and as of the Closing Date, except for representations and warranties made expressly as of a specific date. 4.26. VOTING REQUIREMENTS. Except as set forth on Schedule 4.26, the affirmative vote of a majority of the outstanding shares of Company Common Stock entitled to vote on this Agreement is the only vote of the holders of any class or series of the Company's capital stock necessary to approve this Agreement and the transactions described herein. 4.27. CUSTOMERS. To the knowledge of the Company, no customers or agents of the Company or any Company Subsidiary in the aggregate representing more than $100,000 in revenue during 1996 intends to terminate, limit or reduce its or their business relations with the Company or any Company Subsidiary. 4.28. ASSESSMENTS. Schedule 4.28 sets forth all assessments levied against the Company or the Company Subsidiaries during 1996 and through June 30, 1997 by any state insurance regulatory authority, state insurance guaranty fund or state high risk health pool. 4.29. TERMINATION AND OTHER PAYMENTS. No severance and termination payments, benefits, acceleration of benefit vesting, and other compensation paid by the Company or any of its subsidiaries, as provided for in this Agreement or otherwise, shall constitute "excess parachute payments" under Section 28OG of the Code, giving effect to any obligations of the Purchaser or any subsidiary thereof, as provided herein. The disallowance of a deduction under Section 162(m) of the Code for employee remuneration will not apply to any amount paid or payable by the Company or any Company Subsidiary under any contract, benefit plan, program, arrangement or understanding currently in effect. 4.30. TRANSACTIONS WITH AFFILIATES. Neither the Company nor any of the Company Subsidiaries is a party to any transaction with any of the following other than in connection with the sale of insurance in the ordinary course of business and any employment contract or other employment arrangement: (i) current or former officer or director of the Company or any of the Company Subsidiaries; (ii) any parent, spouse, child, brother or sister of any such officer or director; (iii) any corporation, partnership or other entity of which any such officer or -27- 28 director or any such family relation is an officer, director, partner or greater than 10% shareholder (based on percentage ownership of voting stock); or (iv) any Affiliate of any such persons or entities, including, without limitation, any transaction involving a contract, agreement or other arrangement providing for the employment of, furnishing of materials, products or services by, rental of real or personal property from, or otherwise requiring payments to, any such person or entity. 4.31. PROXY STATEMENT. The Proxy Statement (as hereinafter defined) shall, at the time such Proxy Statement or Registration Statement or supplements thereto are filed with the Commission or are first published, sent or given to shareholders, as the case may be, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. The Proxy Statement will comply in all material respects with the requirements of the Exchange Act and the rules and regulations promulgated thereunder. Notwithstanding the foregoing two sentences, the Company makes no representation or warranty as to information included in the Proxy Statement which has been provided by Purchaser or any person or entity holding an interest therein for purposes of inclusion in the Proxy Statement. ARTICLE V REPRESENTATIONS AND WARRANTIES OF PURCHASER Purchaser hereby represents and warrants to the Company as of the date hereof, and as of the Closing Date, as follows: 5.1. AUTHORITY. Purchaser has all requisite limited liability company power and authority, without the consent of any other person, to execute and deliver this Agreement and the agreements to be delivered at Closing and to carry out the transactions contemplated hereby and thereby, except for consents required under the HSR Act. All limited liability company and other acts or proceedings required to be taken by Purchaser to authorize the execution, delivery and performance of this Agreement and all transactions contemplated hereby have been duly and properly taken. 5.2. VALIDITY. This Agreement has been, and the documents to be delivered at Closing by Purchaser will be, duly executed and delivered and constitute lawful, valid and legally binding obligations of Purchaser, enforceable in accordance with their respective terms, except as enforcement may be limited by applicable bankruptcy, reorganization, insolvency, moratorium and other laws affecting creditors' rights generally and by general equitable principles. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby will not result in the creation of any lien, charge or encumbrance of any kind or the acceleration of any indebtedness or other obligation of Purchaser and are not -28- 29 prohibited by, do not violate or conflict with any provision of, and do not constitute a default under or a breach of (a) Purchaser's certificate of incorporation or bylaws, (b) any note, bond, indenture, contract, agreement, permit, license or other instrument to which Purchaser is a party or by which Purchaser or any of its assets is bound, (c) any order, writ, injunction, decree or judgment of any court or governmental agency, or (d) any law, rule or regulation applicable to Purchaser. 5.3. DUE ORGANIZATION. Purchaser is a limited liability company organized and validly existing under the laws of the State of Nevada, and has full power and authority to carry on the business in which it is engaged. 5.4. BROKERS. Purchaser has not retained any broker or finder or incurred any liability or obligation for any brokerage fees, commissions or finders' fees with respect to this Agreement or the transactions contemplated hereby. 5.5. INVESTMENT REPRESENTATION. (i) The Purchaser understands that the Stock has not been, and will not be, registered under the Securities Act as of the Closing Date or under any state securities laws, is being offered and sold in reliance upon federal and state exemptions for transactions not involving any public offering. (ii) Purchaser represents that: (A) it is acquiring the Stock and Warrants to be acquired by it hereunder solely for its own account for investment purposes and not with a view to the distribution thereof within the meaning of the Securities Act; (B) it is a sophisticated investor with knowledge and experience in business and financial matters; (C) it has had access to all reports filed by the Company during the current year and the year preceding the current year pursuant to the Securities Exchange Act of 1934, as amended, and has had the opportunity to obtain additional information in order to evaluate the merits and risks inherent in holding the Stock; (D) it has not been offered the Stock by any form of general advertising or general solicitation; (E) it is able to bear the economic risk and lack of liquidity inherent in holding the Stock; and (F) it is an "accredited investor" (as defined in the Securities Act). (iii) The certificates representing the Stock shall bear the following legend: -29- 30 The shares evidenced by this certificate have not been registered under the Securities Act of 1933, as amended, or any applicable state securities laws, and any transfer hereof is subject to compliance with all applicable federal and state securities laws and regulations. 5.6. OWNERSHIP AND CONTROL OF PURCHASER. The person or entities owning membership interests in Purchaser as of the date hereof are listed on Schedule 5.6 hereto, which Schedule sets forth their respective percentage interests in Purchaser, the character thereof and who or which persons or entities are the managers of Purchaser. 5.7. QUALIFICATION AND CONFLICTS. To the knowledge of Purchaser, none of Purchaser or any person holding any interest in Purchaser, directly or indirectly (each, an "INTERESTED PERSON"), is disqualified from holding a direct or indirect interest in the Company and its subsidiaries under the regulations of any state or other governmental entity regulating the Company or any Company Subsidiaries or the business thereof nor is subject to any regulation, agreement or other restriction that limits or precludes their ownership of an interest in the Company or its subsidiaries or restricts their right to participate in the management thereof. 5.8. FINANCING. Purchaser has obtained the financing commitment of American National Bank and Trust Company of Chicago with respect to the funding of the loans described in Section 9.1 hereof, a true and correct copy of which is attached hereto as Exhibit 5.8 (the "COMMITMENT"). ARTICLE VI ACTIONS PENDING CLOSING 6.1. INTERIM CONDUCT OF BUSINESS. From the date hereof until the Closing, the Company shall operate the Business consistent with prior practice and in the ordinary course of business and shall use all reasonable efforts to preserve, protect and maintain the Business. Without limiting the generality of the foregoing, from the date hereof until the Closing or termination of this Agreement, except as otherwise agreed by Purchaser in writing or as expressly contemplated by this Agreement, the Company: (a) shall not enter into any transaction involving capital expenditures, including leases, in excess of $50,000; (b) shall not dispose of any assets or incur any liabilities outside the ordinary course of business; (c) shall not merge, liquidate, consolidate, amend its charter or bylaws or effect any other organic corporate change; -30- 31 (d) shall not make any payment of any liability outside the ordinary course of business; (e) shall not make any dividend or distribution or repurchase, redeem or issue any capital stock; (f) shall not forgive or cancel any material debts or claims, or waive any material rights; (g) shall not change credit practices or methods of maintaining books, accounts or business records; (h) shall maintain each Facility and the assets of the Business in good repair, order and condition, reasonable wear and tear excepted; (i) shall comply with all material obligations under all the Material Contracts; (j) except as otherwise provided herein, shall use reasonable efforts to keep available the services of the present employees and agents (and pay benefits related thereto in the ordinary course of business and consistent with applicable law and past practice) and preserve the goodwill of customers, suppliers and others; (k) except as otherwise provided herein, shall not enter into, amend or terminate or agree to enter into, amend or terminate any Compensation and Benefit Plan or any employment, bonus, severance or retirement contract or arrangement, nor increase or agree to increase any salary or other form of compensation or benefits payable or to become payable to any employee, except in the ordinary course of business consistent with past practice; (l) shall not enter into, amend or terminate, or agree to enter into, amend or terminate, any Material Contract; (m) shall not sell, lease or otherwise dispose of or agree to sell, lease or otherwise dispose of, any assets, properties, rights or claims; (n) shall not incur or become subject to, nor agree to incur or become subject to, any debt, obligation or liability, contingent or otherwise, except liabilities incurred in the ordinary course of business and consistent with past practice and expenses to be borne by the Company in connection with the transactions contemplated hereby; (o) shall not enter into any other transaction outside the ordinary course of -31- 32 business; (p) shall not take or omit to take any action within its control (i) which could have a Company Material Adverse Effect or (ii) cause any representation or warranty herein to become false in any material respect. From the date hereof through the Closing, the Company shall confer on a regular and frequent basis with one or more designated representatives of Purchaser to report material operational matters and the general status of on-going operations of the Business. The Company shall promptly notify Purchaser of any threatened or actual loss of a material customer and any material change in the financial condition, results of operations, personnel, properties, business or prospects of the Company and shall keep Purchaser fully informed of such events. 6.2. ACCESS. The Company shall provide Purchaser and its employees, lenders, financial advisors, attorneys, accountants and other authorized representatives access to all properties, facilities, personnel, accountants, customers, vendors, books, contracts, leases, commitments and records of the Company, and shall furnish Purchaser with all financial and operating data and other information as to the Business and the assets, properties, rights and claims of the Company, as Purchaser may from time to time reasonably request. ARTICLE VII COVENANTS OF THE COMPANY 7.1. BOARD REPRESENTATION. Promptly upon the issuance of Stock to the Purchaser pursuant to the terms hereof, the Company shall use all reasonable efforts to cause directors of the Company to be elected as provided in the Voting Agreement. 7.2. PROXY STATEMENT. As promptly as practicable after the execution of this Agreement, the Company shall prepare and file with the Commission a proxy statement relating to the meeting of the Company's stockholders to be held in connection with the transactions contemplated hereby (together with any amendments thereof or supplements thereto, the "PROXY STATEMENT"). The Proxy Statement shall include the recommendation of the Board in favor of adopting this Agreement and approving the transactions contemplated hereby, unless the Company terminates this Agreement pursuant to Section 13.1(b), (d) or (e). Except in the event of termination of this Agreement, no modification or withdrawal of such recommendation shall relieve the Company of its obligation to submit this Agreement and the transactions contemplated hereby to its stockholders in accordance with applicable law. 7.3. CONTINUED ASSISTANCE. From time to time after Closing, at Purchaser's request and without further consideration, the Company shall execute, acknowledge and deliver such documents, instruments or assurances and take such other action as Purchaser may reasonably request to carry out the provisions hereof and the transactions contemplated hereby. -32- 33 7.4. EXCLUSIVITY. During the period beginning on the date hereof and ending upon termination of this Agreement, the Company agrees to negotiate only with Purchaser and shall not solicit, entertain or support any inquiry, proposal or offer from any other party regarding the sale, lease, transfer or other disposition of the capital stock, business or assets of the Company (an "ACQUISITION PROPOSAL"); PROVIDED however, that nothing contained in this Agreement shall prevent the Company or its Board of Directors from (A) complying with Rule 14e-2 promulgated under the Exchange Act with regard to an Acquisition Proposal; (B) engaging in any discussions or negotiations with, or providing any information to, any Person in response to an unsolicited bona fide written Acquisition Proposal by any such Person; or (C) recommending such unsolicited bona fide written Acquisition Proposal to the shareholders of the Company, if and only to the extent that, in any such case as if referred to in clause (B) or (C), that such Acquisition Proposal would, if consummated, result in a Superior Proposal (as defined in Section 13.1(e)); PROVIDED FURTHER, that if Purchaser is (i) unable to obtain financing in connection with the acquisition of the Stock prior to March 1, 1998, or (ii) unable to obtain reinsurance from the Reassurance Company of Hannover prior to March 1, 1998, then the Company shall not be bound by the provisions of this Section 7.4. 7.5. TERMINATION FEE. In the event that (a) a proposal with respect to a transaction relating to the acquisition of a material portion of the capital stock of the Company or any of the Company's Subsidiaries, its or their assets or business, whether in whole or in part, whether directly or indirectly, through purchase, merger, consolidation or otherwise (an "ACQUISITION TRANSACTION") is commenced by the Company, publicly proposed, publicly disclosed or communicated to the Company or any representative or agent thereof after the date of this Agreement and prior to the date of termination of this Agreement, (b) this agreement is thereafter terminated by the Company pursuant to Section 13.1(e), and (c) within six (6) months following such termination an Acquisition Transaction is consummated or the Company enters into an agreement relating thereto, then in any such event, the Company shall pay the Purchaser $750,000.00 in same day funds (the "TERMINATION FEE") plus reimbursement of Purchaser's expenses incurred in connection with the Transactions contemplated hereby, including, without limitation, all due diligence expenses and expenses of counsel. 7.6. REASONABLE EFFORTS. Subject to the provisions of Section 7.4, the Company shall use its reasonable efforts to consummate the transactions contemplated by this Agreement and shall not take any other action inconsistent with its obligations hereunder or which could materially hinder or delay the consummation of the transactions contemplated hereby. From the date hereof through the Closing Date, the Company shall use its reasonable efforts to fulfill its conditions to Closing, perform the covenants required to be performed by it, obtain all necessary consents and cause each of its representations and warranties to remain true and correct in all respects as of the Closing Date. 7.7. HSR ACT. The Company will timely and promptly make or cause to be made all filings which may be required with respect to the transactions contemplated by this Agreement under the HSR Act and use its reasonable efforts to cause the satisfaction or -33- 34 termination of the waiting period under the HSR Act. ARTICLE VIII COVENANTS OF PURCHASER 8.1. REASONABLE EFFORTS. Purchaser shall use its reasonable efforts to consummate the transactions contemplated by this Agreement and shall not take any other action inconsistent with its obligations hereunder or which could hinder or delay the consummation of the transactions contemplated hereby. From the date hereof through the Closing Date, Purchaser shall use reasonable efforts to fulfill its conditions to Closing, perform the covenants required to be performed by them, obtain all necessary consents and to cause each of its representations and warranties to remain true and correct in all respects as of the Closing Date. 8.2. HSR ACT. Purchaser will timely and promptly make or cause to be made all filings which may be required with respect to the transactions contemplated by this Agreement under the HSR Act and use its efforts to cause the satisfaction or termination of the waiting period under the HSR Act. ARTICLE IX ADDITIONAL AGREEMENTS 9.1. INTERIM LOAN. After the date hereof and prior to December 17, 1997, Purchaser shall make available to the Company a loan in the approximate amount of $20,000,000. The proceeds of such loan shall be used as follows: (i) $15,000,000 shall be invested in the Company Insurance Subsidiary and evidenced by a surplus note in a form to be mutually agreed to by the parties and (ii) $5,000,000 shall be used to satisfy in part the obligations of the Company to Huntington Bank. The Company shall repay the principal amount of such loan from the proceeds of the purchase of Stock hereunder. Simultaneously with the payment referred to in clause (ii) of the first sentence of this Section, the Company shall cause Huntington Bank to (i) terminate and release its security interest in the stock of the Company Insurance Subsidiary and (ii) execute and deliver all documents necessary to effect such termination and release. 9.2. CERTAIN BENEFIT PLANS. Prior to December 17, 1997, the Company shall (i) amend its defined contribution plan such that, going forward, it shall be a 401(k) plan which shall be reasonably satisfactory in form and substance to Purchaser; PROVIDED that if such 401(k) plan permits the Company to match the contributions of its participants, any matching contributions provided by the Company shall be in common stock of the Company; (ii) terminate its split-dollar life insurance policy for the officers whose names are set forth on -34- 35 Schedule 9.2; and (iii) terminate its retiree health benefits Plan. 9.3. SEVERANCE PAY PLAN. The Company hereby waives any "change of control" provisions contained in its severance pay plan which would otherwise be triggered by the execution of this Agreement or the consummation of the transactions contemplated hereby. Prior to December 17, 1997, the Company shall terminate its severance pay plan. 9.4 DIRECTORS AND OFFICER INDEMNIFICATION. Purchaser shall use reasonable efforts to cause the Company to maintain the Company's existing directors' and officers' liability insurance policy ("D&O" INSURANCE") for a period of not less than five years after Closing as long as the annual premium therefor does not exceed 120% of the premium paid for coverage in 1996; PROVIDED, HOWEVER, that Purchaser may cause the Company to substitute therefor policies of substantially similar coverage and amounts containing terms no less advantageous to such former directors or officers; PROVIDED, further, that if the existing D&O Insurance expires or is cancelled during such period, Purchaser shall cause the Company to use reasonable efforts to obtain substantially similar D&O Insurance. 9.5 INTEGRATION AGREEMENT. The terms of paragraphs 1 through 17 of the Integration Agreement (as hereinafter defined) are hereby incorporated by reference as if set forth herein to the extent such terms are not inconsistent with the terms hereof. 9.6 ADVEST. At Closing, the Company shall pay the fees of Advest, Inc. in the amount of $925,000. ARTICLE X CONDITIONS PRECEDENT TO OBLIGATION TO CLOSE OF PURCHASER The obligations of Purchaser to consummate the transactions to be performed by it in connection with the Closing is subject to the satisfaction of each of the following conditions: 10.1. ACCURACY OF WARRANTIES AND PERFORMANCE OF COVENANTS. The representations and warranties of the Company contained herein shall be accurate in all material respects as if made on and as of the Closing Date. The Company shall have performed in all material respects the obligations and complied with each and all of the covenants, agreements and conditions required to be performed or complied with on or prior to the Closing, including execution and delivery of the agreements referred to in SECTION 3.4. 10.2. NO PENDING ACTION. No action, suit, proceeding or investigation before or in any court, administrative agency or other governmental authority shall be pending or threatened wherein an unfavorable judgment, decree or order would prevent the carrying out of this Agreement or any of the transactions contemplated hereby, declare unlawful the -35- 36 transactions contemplated hereby, cause such transactions to be rescinded, or affect the right of Purchaser to own, operate or control the Business. 10.3. CONSENTS. All consents by third parties that are required for the issuance of the Stock to Purchaser or that are required for the consummation of the transactions contemplated hereby, or that are required in order to prevent a breach of or a default under or a termination of any agreement to which the Company is a party or to which any portion of the property of the Company is subject, shall have been obtained or provided for. 10.4. REGULATORY APPROVALS. All regulatory agencies shall have taken such action as may be required to permit the consummation of the transactions contemplated hereby and such actions shall remain in full force and effect and shall be reasonably satisfactory in form and substance to Purchaser and its counsel. 10.5. HSR ACT MATTERS. The waiting period required by the HSR Act shall have expired or been terminated. 10.6. BANK FINANCING. Purchaser shall have obtained financing of not less than $12,000,000 in connection with the acquisition of the Stock and the transactions contemplated hereby satisfactory to Purchaser. 10.7. EMPLOYMENT AND SEVERANCE AGREEMENTS. The Company and the appropriate parties shall have entered into the following agreements: (a) an Employment Agreement with Fred Lick in accordance with the terms of the Agreement dated November 13, 1997 between Purchaser and the Company (the "INTEGRATION AGREEMENT"); (b) an Employment Agreement with Frank Grimone in accordance with the terms of the Integration Agreement; (c) Employment Agreements for certain key employees in accordance with the terms of the Integration Agreement; and (d) Severance Agreements in accordance with the terms of the Integration Agreement. 10.8. SUSPENSION OF TRADING. There shall not have occurred nor be continuing (i) any general suspension of trading in, or limitation on prices for, securities on any national securities exchange or in the over-the-counter market, (ii) the declaration of a banking moratorium or any suspension of payments in respect of banks in the United States, (iii) the commencement of war involving an attack on the continental United States or (iv) in the case of any of the foregoing existing as of the date hereof, a material acceleration or worsening thereof; -36- 37 10.9. SHAREHOLDER APPROVAL. This Agreement and the transactions contemplated hereby shall have been approved by the shareholders of the Company in accordance with the requirements of its Articles of Incorporation, Bylaws and all applicable laws. 10.10. CHANGE OF CONTROL. There shall not have occurred an acquisition by any person, entity or "group" within the meaning of 13(d)(3) or 14(d)(2) of the Exchange Act of 15% or more (after giving effect to the transactions contemplated hereby) of either the then outstanding equity interests of the Company or the combined voting power of the Company's then outstanding voting securities entitled to vote generally in the election of directors. 10.11. REINSURANCE TREATY. The Company shall have entered into a reinsurance treaty in an amount not less than $10,000,000 on terms reasonably satisfactory in form and substance to Purchaser. 10.12. RELEASE OF SECURITY INTEREST. Huntington Bank shall have terminated and released its security interest in the stock of the Company Insurance Subsidiary and shall have executed and delivered all documents necessary to effect such termination and release to the satisfaction of the Purchaser. ARTICLE XI CONDITIONS PRECEDENT TO OBLIGATION TO CLOSE OF THE COMPANY The obligations of the Company to consummate the transactions to be performed in connection with the Closing is subject to the satisfaction of each of the following conditions: 11.1. ACCURACY OF WARRANTIES AND PERFORMANCE OF COVENANTS. The representations and warranties of Purchaser contained herein shall be accurate in all material respects as if made on and as of the Closing Date. Purchaser shall have performed in all material respects the obligations and complied with each and all of the covenants, agreements and conditions required to be performed or complied with on or prior to the Closing, including execution and delivery of the agreements referred to in SECTION 3.4. 11.2. NO PENDING ACTION. No action, suit, proceeding or investigation before or in any court, administrative agency or other governmental authority shall be pending or threatened wherein an unfavorable judgment, decree or order would prevent the carrying out of this Agreement or any of the transactions contemplated hereby, declare unlawful the transactions contemplated hereby or cause such transactions to be rescinded. 11.3. CONSENTS. All consents by third parties that are required for the purchase of the Stock by Purchaser or that are required for the consummation of the transactions contemplated hereby, or that are required in order to prevent a breach of or a default under or a -37- 38 termination of any agreement to which the Purchaser is a party or to which any portion of the property of the Purchaser is subject, shall have been obtained or provided for. 11.4. REGULATORY APPROVALS. All regulatory agencies shall have taken such action as may be required to permit the consummation of the transactions contemplated hereby and such actions shall remain in full force and effect and shall be reasonably satisfactory in form and substance to the Company and its counsel. 11.5. HSR ACT MATTERS. The waiting period required by the HSR Act shall have expired or been terminated. 11.6. SHAREHOLDER APPROVAL. This Agreement and the transactions contemplated hereby shall have been approved by the shareholders of the Company in accordance with the requirements of its Articles of Incorporation, Bylaws and all applicable laws if required. ARTICLE XII SURVIVAL AND INDEMNIFICATION 12.1. SURVIVAL. All covenants and agreements contained in this Agreement shall be deemed to be material and to have been relied upon by the parties hereto and shall survive the Closing and be enforceable until the covenant or agreement has been fully performed. All representations and warranties contained in this Agreement shall be deemed to be material and to have been relied upon by the parties hereto and shall survive the Closing for a period ending two years from the Closing Date, PROVIDED that the representations and warranties in the following Sections shall survive and be enforceable indefinitely: Section 4.1, Section 4.2, Section 4.4; and PROVIDED FURTHER that the representations and warranties of Section 4.9 shall survive until expiration of the statute of limitations (and any extensions thereof) applicable to any return relating to the period prior to Closing or any tax position taken with respect to the period prior to Closing. No claim for indemnification based upon a representation and warranty that survives for a limited period of time may be asserted after expiration of the applicable survival period but any claim asserted prior to expiration of the applicable survival period shall survive until finally resolved; PROVIDED that nothing herein shall limit the time in which a party may bring a claim for fraud or intentional breach. 12.2. INDEMNIFICATION. (a) Purchaser shall, indemnify and hold harmless the Company, its officers, directors, employees, agents and representatives, from and against any and all loss, diminution in value, damage, cost, expense (including court costs and attorneys' fees and expenses and costs of investigation), fine, penalty, suit, action, claim, deficiency, liability or obligation caused by or arising from (i) any misrepresentation, breach of warranty or failure to fulfill any -38- 39 covenant or agreement of Purchaser contained herein and (ii) any and all claims of third parties made based upon facts alleged that, if true, would have constituted such a misrepresentation, breach or failure. (b) The Company shall indemnify and hold harmless Purchaser, its officers, directors, employees, agents and representatives, from and against any and all loss, diminution in value, damage, cost, expense (including court costs and attorneys' fees and expenses and costs of investigation), fine, penalty, suit, action, claim, deficiency, liability or obligation caused by or arising from (i) any misrepresentation, breach of warranty or failure to fulfill any covenant or agreement of the Company contained herein, and (ii) any and all claims of third parties made based upon facts alleged that, if true, would constitute such a misrepresentation, breach or failure. (c) The representations, warranties, covenants and agreements contained in this Agreement shall not be affected by any party hereto or by anyone on behalf of any such party: (i) investigating, verifying or examining any matters with respect to the Company, the Business, this Agreement or the transactions contemplated hereby; (ii) having the opportunity to investigate, verify or examine any matters related to the Company, the Business, this Agreement or the transactions contemplated hereby; or (iii) failing to determine or discover any facts which were determinable or discoverable by any such party. All rights contained in this Article are cumulative and are in addition to all other rights and remedies which are otherwise available, pursuant to the terms of this Agreement or applicable law. All indemnification rights shall be deemed to apply in favor of the indemnified party's officers, directors, representatives, subsidiaries, affiliates, successors and assigns. 12.3. DEFENSE OF THIRD PARTY CLAIMS. With respect to each third party claim subject to this Article (a "THIRD PARTY CLAIM"), the party seeking indemnification (the "INDEMNIFIED PARTY") shall give prompt notice to the indemnifying party (the "INDEMNIFYING PARTY") of the Third Party Claim, provided that failure to give such notice promptly shall not relieve or limit the obligations of the Indemnifying Party except to the extent the Indemnifying Party is materially prejudiced thereby. If the remedy sought in the Third Party Claim is solely money damages or if the Indemnified Party otherwise permits, then the Indemnifying Party, at its sole cost and expense, may, upon notice to the Indemnified Party within fifteen (15) days after the Indemnifying Party receives notice of the Third Party Claim, assume the defense of the Third Party Claim. If it assumes the defense of a Third Party Claim, then the Indemnifying Party shall select counsel reasonably satisfactory to the Indemnified Party to conduct the defense. The Indemnifying Party shall not consent to a settlement of, or the entry of any judgment arising from, any Third Party Claim, unless (i) the settlement or judgment is solely for money damages and the Indemnifying Party admits in writing its liability to hold the Indemnified Party harmless from and against any losses, damages, expenses and liabilities arising out of such settlement or (ii) the Indemnified Party consents thereto, which consent shall not be unreasonably withheld. The Indemnifying Party shall provide the Indemnified Party with fifteen (15) days prior notice before it consents to a settlement of, or the entry of a judgment arising from, any Third Party Claim. The Indemnified Party shall be entitled to participate in -39- 40 the defense of any Third Party Claim, the defense of which is assumed by the Indemnifying Party, with its own counsel and at its own expense. With respect to Third Party Claims in which the remedy sought is not solely money damages, (i) the Indemnifying Party shall, upon notice to the Indemnified Party within fifteen (15) days after the Indemnifying Party receives notice of the Third Party Claim, be entitled to participate in the defense with its own counsel at its own expense and (ii) the Indemnified Party shall not consent to any settlement of, or entry of any judgment arising from, such Third Party Claim unless the Indemnifying Party consents thereto, which consent shall not be unreasonably withheld. If the Indemnifying Party does not elect to assume or participate in the defense of any Third Party Claim in accordance with the terms of this Section, then the Indemnifying Party shall be bound by the results obtained by the Indemnified Party with respect to the Third Party Claim. The parties shall cooperate in the defense of any Third Party Claim and the relevant records of each party shall be made available on a timely basis. 12.4. LIMITATIONS. Neither Purchaser nor the Company shall be entitled to indemnification from the other for breaches of representations or warranties hereunder unless and until the aggregate amount of such party's indemnifiable claims equal or exceed $1,000,000 but it then will be entitled to recover the full amount of all such claims; 12.5 EXCLUSIVE REMEDY. Except in the case of fraud or intentional breach, the indemnification rights provided pursuant to this Article shall be the exclusive remedy of the parties with respect to any dispute arising out of or related to this Agreement and the transactions contemplated hereby. 12.6 TAX BENEFITS. The amount with respect to which any indemnifying party is obligated to indemnify any indemnified party from and against shall be adjusted to take into account any tax benefits reasonably expected to be realized at determinable times by the indemnified party or its owners (if the indemnified party is a LLC, partnership or similar entity) as a result of its incurrence of an indemnified loss and shall also take into account the relevant effective tax rates applicable to the indemnified party or its owners (if the indemnified party is a LLC, partnership or similar entity) and the tax attributes of the indemnified party or its owners (if the indemnified party is a LLC, partnership or similar entity). An indemnified loss arising from the inaccuracy of more than one representation or the breach of more than one warranty or covenant or any combination of inaccuracies or breaches shall only be recovered once. ARTICLE XIII TERMINATION AND WAIVER 13.1. TERMINATION OR ABANDONMENT. Notwithstanding anything contained in this Agreement to the contrary, this Agreement may be terminated and abandoned at any time -40- 41 prior to the Closing: (a) by the mutual written consent of Purchaser and the Company; (b) by Purchaser or the Company if any court of competent jurisdiction or governmental body, authority or agency having jurisdiction shall have issued an order, decree or ruling or taken any other action restraining, enjoining or otherwise prohibiting the transactions contemplated by this Agreement and such order, decree, ruling or other action shall have become final and nonappealable; (c) by Purchaser, if one or more of the material conditions to the obligation of Purchaser to close has not been fulfilled by April 30, 1998; (d) by the Company if one or more of the material conditions to the obligation of the Company to close has not been fulfilled by April 30, 1998; (e) by the Company in connection with its intention to pursue a Superior Proposal (as hereinafter defined); PROVIDED that such termination under clause (e) hereof shall not be effective unless the Company has made payment of the Termination Fee required by Section 6.5 if it is then due. A "Superior Proposal" shall mean a written proposal that has not been solicited by the Company following the date of this Agreement relating to a proposed Acquisition Transaction which proposal is, in the reasonable good faith judgment of the Board, after consultation with legal and financial advisors, on financial and other terms more favorable to the shareholders of the Company than the terms of the transactions contemplated hereby. In the event of termination of this Agreement pursuant to this Section, this Agreement shall terminate and there shall be no other liability on the part of the Company to Purchaser or on the part of Purchaser to the Company except as otherwise provided herein and except liability arising out of a willful breach of a covenant in this Agreement or fraud, in which event, the non-breaching party reserves the right to seek all available remedies. 13.2. EXTENSION OF TIME, WAIVER, ETC. At any time prior to the Closing, Purchaser or the Company may by written instrument: (a) extend the time for the performance of any of the obligations or acts of the other party; and (b) waive compliance with any of the agreements of the other party contained herein; PROVIDED, HOWEVER, that no failure or delay by any party, in exercising any right hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other rights hereunder. -41- 42 ARTICLE XIV GENERAL PROVISIONS 14.1. AMENDMENTS AND WAIVER. No amendment, waiver, termination or consent with respect to any provision of this Agreement shall in any event be effective, unless the same shall be in writing and signed by Purchaser and the Company; PROVIDED that any exercise of any rights hereunder or any amendment, waiver, termination or consent with respect to any provision of this Agreement on behalf of the Company may be and shall be exercised and approved by a majority of the independent directors of the board of directors of the Company. 14.2. NOTICES. All notices, requests, demands and other communications hereunder shall be in writing and shall be delivered in person or sent by registered or certified mail, postage prepaid, commercial overnight courier (such as Express Mail, Federal Express, etc.) with written verification of receipt or by telecopy. A notice shall be deemed given: (a) when delivered by personal delivery (as evidenced by the receipt); (b) five (5) days after deposit in the mail if sent by registered or certified mail; (c) one (1) business day after having been sent by commercial overnight courier as evidenced by the written verification of receipt; or (d) on the date of confirmation if telecopied. (a) If to Purchaser: ---------------------- ---------------------- ---------------------- ---------------------- (b) If to the Company: Central Reserve Life Corporation 17800 Royalton Road Strongsville, Ohio 44136 Attention: Fred Lick -42- 43 with a copy to: Latham & Watkins 5800 Sears Tower 233 South Wacker Drive Chicago, Illinois 60606 Facsimile 312-993-9767 Attention: Mark D. Gerstein Any party may change its address for receiving notice by written notice given to the others named above. 14.3. EXPENSES. Expect as provided herein, each party shall bear its own legal, accounting and administrative expenses in connection with the investigation, negotiation and consummation of the transaction contemplated hereby. 14.4. COUNTERPARTS. This Agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 14.5. SUCCESSORS AND ASSIGNS. This Agreement shall bind and inure to the benefit of the parties named herein and their respective successors and assigns. Neither party may assign this Agreement without the prior written consent of the other party; PROVIDED, however, the Purchaser may assign rights to acquire less than 50% of the Stock if (i) any such assignee agrees to be bound by the terms hereof and the terms of the Voting Agreement, and (ii) such assignment does not release Purchaser of its obligations hereunder. 14.6. ENTIRE TRANSACTION. This Agreement and the documents referred to herein contain the entire understanding among the parties with respect to the transactions contemplated hereby and supersedes all other agreements, understandings and undertakings among the parties on the subject matter hereof; 14.7. APPLICABLE LAW. This Agreement shall be governed by and construed in accordance with the internal substantive laws of the State of Ohio applicable to contracts made and to be performed wholly within said State. 14.8. OTHER RULES OF CONSTRUCTION. References in this Agreement to sections, schedules and exhibits are to sections of, and schedules and exhibits to this Agreement unless otherwise indicated. Words in the singular include the plural and in the plural include the singular. The word "or" is not exclusive. The word "including" shall mean including, without limitation. The section and other headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. As used herein, "knowledge," "to the knowledge," "to the best knowledge" or any similar phrase shall be deemed to refer to the actual knowledge of any of the Chief Executive officer, -43- 44 Chief Operating officer, Chief Financial Officer, General Counsel or Chief Internal Actuary. 14.9. ANNOUNCEMENTS. The parties shall cooperate in the preparation of any announcements regarding the transactions contemplated by this Agreement. No announcement of this Agreement or any transaction contemplated hereby shall be made by any party prior to the Closing without the written approval of the other party. 14.10. PARTIAL INVALIDITY. In the event that any provision of this Agreement shall be held invalid or unenforceable by any court of competent jurisdiction, such holding shall not invalidate or render unenforceable any other provision hereof. * * * -44- 45 IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be executed all as of the date first above written. Strategic Acquisition Partners, LLC By: /s/ Val Rajic --------------------------------- Its: Manager --------------------------------- Central Reserve Life Corporation By: /s/ Fred Lick, Jr. --------------------------------- Its: President --------------------------------- -45- 46 EXHIBIT A THIS WARRANT AND ANY SECURITIES ACQUIRED UPON THE EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS AND NEITHER THE SECURITIES NOR ANY INTEREST THEREIN MAY BE OFFERED, SOLD, TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT OR SUCH LAWS OR AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT AND SUCH LAWS THAT, IN THE OPINION OF COUNSEL FOR THE HOLDER, WHICH COUNSEL AND OPINION ARE REASONABLY SATISFACTORY TO COUNSEL FOR THIS CORPORATION, IS AVAILABLE. ------------------------------------------ CENTRAL RESERVE LIFE CORPORATION COMMON SHARES PURCHASE WARRANT ------------------------------------------ This certifies that, for good and valuable consideration, Central Reserve Life Corporation, an Ohio corporation (the "Company"), grants to _____________ (the "Warrantholder"), the right to purchase from the Company _____________________ (________) validly issued, fully paid and nonassessable shares (the "Warrant Shares") of the Company's Common Shares, without par value (the "Common Shares"), at the purchase price per share of $6.50 (the "Exercise Price"), at any time prior to 5:00 p.m., New York City time, on the Expiration Date, all subject to the terms, conditions and adjustments herein set forth. This Warrant was issued in connection with the Stock Purchase Agreement, dated _____________, 199_ (the "Stock Purchase Agreement"), among the Company and Strategic Acquisition Partners, LLC and is subject to the terms thereof. The Warrantholder is entitled to the rights and subject to the obligations contained in the Stock Purchase Agreement relating to this Warrant and the Warrant Shares. I. DURATION AND EXERCISE OF WARRANT. 1.1 Duration and Exercise of Warrant. Subject to the terms and conditions set forth herein, this Warrant may be exercised, in whole or in part, by the Warrantholder by: (a) the surrender of this Warrant to the Company, with a duly executed Exercise Form specifying the number of Warrant Shares to be purchased, during normal business 47 hours on any Business Day prior to the Expiration Date; and (b) the delivery of payment to the Company, for the account of the Company, by cash, wire transfer, certified or official bank check or any other means approved by the Company, of the Exercise Price for the number of Warrant Shares specified in the Exercise Form in lawful money of the United States of America. The Company agrees that such Warrant Shares shall be deemed to be issued to the Warrantholder as the record holder of such Warrant Shares as of the close of business on the date on which this Warrant shall have been surrendered and payment made for the Warrant Shares as aforesaid. Notwithstanding the foregoing, no such surrender shall be effective to constitute the Person entitled to receive such shares as the record holder thereof while the transfer books of the Company for the Common Shares are closed for any purpose (but not for any period in excess of five days); but any such surrender of this Warrant for exercise during any period while such books are so closed shall become effective for exercise immediately upon the reopening of such books, as if the exercise had been made on the date this Warrant was surrendered and for the number of shares of Common Shares and at the Exercise Price in effect at the date of such surrender. 1.2 WARRANT SHARES CERTIFICATE. A stock certificate or certificates for the Warrant Shares specified in the Exercise Form shall be delivered to the Warrantholder within three Business Days after receipt of the Exercise Form by the Company and payment of the purchase price. No fractional shares shall be issued upon the exercise of this Warrant, provided that the Warrantholder shall receive, in lieu of any fractional shares, cash in an amount equal to the product of the fraction multiplied by the Current Market Price per Common Share. If this Warrant shall been exercised only in part, the Company shall, at the time of delivery of the stock certificate or certificates, deliver to the Warrantholder a new Warrant evidencing the rights to purchase the remaining Warrant Shares, which new Warrant shall in all other respects be identical with this Warrant. 2. RESTRICTIONS ON TRANSFER; RESTRICTIVE LEGENDS. 2.1 This Warrant, including the registration rights pursuant to Section 7 hereof, may be offered, sold, transferred, pledged or otherwise disposed of in whole or in part, to any person, subject to compliance with any applicable securities laws. 2.2 Except as otherwise permitted by this Section 2, each stock certificate for Warrant Shares issued upon the exercise of any Warrant and each stock certificate issued upon the direct or indirect transfer of any such Warrant Shares shall be stamped or otherwise imprinted with a legend in substantially the following form: THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS AND NEITHER THE SECURITIES NOR ANY INTEREST HEREIN MAY BE OFFERED, SOLD, TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE 2 48 REGISTRATION STATEMENT UNDER SUCH ACT OR SUCH LAWS OR AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT AND SUCH LAWS THAT, IN THE OPINION OF COUNSEL FOR THE HOLDER, WHICH COUNSEL AND OPINION ARE REASONABLY SATISFACTORY TO COUNSEL FOR THIS CORPORATION, IS AVAILABLE. Notwithstanding the foregoing, the Warrantholder may require the Company to issue a Warrant or a stock certificate for Warrant Shares, in each case without a legend, if either (i) such Warrant or such Warrant Shares, as the case may be, have been registered for resale under the Securities Act, (ii) the Warrantholder has delivered to the Company an opinion of legal counsel (from a firm reasonably satisfactory to the Company) which opinion shall be addressed to the Company and be reasonably satisfactory in form and substance to the Company's counsel, to the effect that such registration is not required with respect to such Warrant or such Warrant Shares, as the case may be, or (iii) such Warrant or Warrant Shares are sold in compliance with Rule 144 or Rule 144(k) (or any successor provision then in effect) under the Securities Act, the Company receives customary representations to such effect and the Company receives an opinion of counsel to the Company in customary form that such legend may be removed. 3. RESERVATION AND RESIGNATION OF SHARES. The Company covenants and agrees as follows: (a) All Warrant Shares that are issued upon the exercise of this Warrant shall, upon issuance, be validly issued, fully paid and nonassessable, not subject to any preemptive rights, and free from all taxes, liens, security interests, charges, and other encumbrances with respect to the issuance thereof. (b) During the period within which this Warrant may be exercised, the Company shall at all times have authorized and reserved, and keep available free from preemptive rights, a sufficient number of Common Shares to provide for the exercise of the rights represented by this Warrant. 4. LOSS OR DESTRUCTION OF WARRANT Subject to the terms and conditions hereof, upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, or destruction or mutilation of this Warrant and, in the case of loss, theft or destruction, of such bond or indemnification as the Company may reasonably require, and, in the case of such mutilation, upon surrender and cancellation of this Warrant, the Company will execute and deliver a new Warrant of like tenor. 3 49 5. OWNERSHIP OF WARRANT The Company may deem and treat the person in whose name this Warrant is registered as the holder and owner hereof (notwithstanding any notations of ownership or writing hereon made by anyone other than the Company) for all purposes and shall not be affected by any notice to the contrary, until presentation of this Warrant for registration of transfer. 6. CERTAIN ADJUSTMENTS. 6.1 The number of Warrant Shares purchasable upon the exercise of this Warrant and the Exercise Price shall be subject to adjustment as follows: (a) STOCK DIVIDENDS, SPLITS, COMBINATIONS. If at any time after the date of the issuance of this Warrant the Company (i) declares a dividend or other distribution payable in Common Shares or securities convertible into Common Shares or subdivides its outstanding Common Shares into a larger number or (ii) combines its outstanding Common Shares into a smaller number, then (x) the number of Warrant Shares to be delivered upon exercise of this Warrant will, upon the occurrence of an event set forth in clause (i) above, be increased and, upon the occurrence of an event set forth in clause (ii) above, be decreased so that such Warrantholder will be entitled to receive the number of Common Shares that such Warrantholder would have owned immediately following such action had this Warrant been exercised immediately prior thereto and (y) the Exercise Price in effect immediately prior to such dividend, other distribution, subdivision or combination, as the case may be, shall be adjusted proportionately by multiplying such Exception Price by a fraction, of which the numerator shall be the number of Warrant Shares purchasable upon exercise of this Warrant immediately prior to such adjustment and of which the denominator shall be the number of Warrant Shares purchasable immediately thereafter. (b) DISTRIBUTION OF STOCK, OTHER SECURITIES, EVIDENCE OF INDEBTEDNESS. In case the Company shall distribute to the holders of Common Shares, shares of its capital stock (other than Common Shares or shares convertible into Common Shares for which adjustment is made under Section 6.1(a)), stock or other securities of the Company or any other Person, evidences of indebtedness issued by the Company or any other Person, assets (excluding cash dividends) or options, Warrants or rights to subscribe for or purchase the foregoing, then, and in each such case, immediately following the record date fixed for the determination of the holders of Common Shares entitled to receive such distribution, the Exercise Price then in effect shall be adjusted by multiplying the Exercise Price in effect immediately prior to such record date by fraction (i) the numerator of which shall be such Current Market Price of the Common Shares less the then Fair Market Value (as determined by the Board of Directors or a duly appointed committee thereof) of the portion of the stock, other securities, evidences of indebtedness so distributed or of such options, warrants or rights applicable to one Common Share (but such numerator shall not be less than one) and (ii) the denominator of which shall be the Current Market Price of one Common Share on such record date (i.e. prior to such shares trading "ex-"). Such adjustment shall become 4 50 effective at the opening of business on the Business Day following the record date for the determination of stockholders entitled to such distribution. (c) REORGANIZATION, MERGER, SALE OF ASSETS. In case of any capital reorganization or reclassification or other change of outstanding Common Shares (other than a change in par value), any consolidation or merger of the Company with or into another Person (other than a consolidation or merger of the Company in which the Company is the resulting or surviving Person and which does not result in any reclassification or change of outstanding Common Stock) or the sale of all or substantially all of the assets of the Company or another Person, upon exercise of this Warrant the Warrantholder shall have the right to receive kind and amount of shares of stock or other securities or property to which a holder of the number of Common Shares of the Company deliverable upon exercise of this Warrant would have been entitled upon such reorganization, reclassification, consolidation, merger or sale had this Warrant been exercised immediately prior to such event; and, in such case, appropriate adjustment (as determined in good faith by the Board of Directors or a duly appointed committee thereof) shall be made in the application of the provisions of this Section 6 with respect to the rights and interest thereafter of the Warrantholder, to the end that the provisions set forth in this Section 6 (including provisions with respect to changes in and other adjustments of the Exception Price) shall thereafter be applicable, as nearly as reasonably may be, in relation to any shares of stock or other property thereafter deliverable upon exercise of this Warrant. (d) CARRYOVER. Notwithstanding any other provision of this Section 6.1, no adjustment shall be made to the number of Common Shares to be delivered to the Warrantholder (or to the Exercise Price) if such adjustment represents less than 1% of the number of shares to be so delivered, but any lesser adjustment shall be carried forward and shall be made at the time and together with the next subsequent adjustment that together with any adjustments so carried forward shall amount to 1% or more of the number of shares to be so delivered, provided however, that, upon exercise of this warrant pursuant to Section 1 hereof, any adjustment called for by Sections 6.2(a), (b) or (c) which has not been made as a result of this Section 6.1(d) shall be made. 6.2 NO ADJUSTMENT FOR DIVIDENDS. Except as provided in Section 6.1, no adjustment in respect of any dividends shall be made during the term of this Warrant or upon the exercise of this Warrant. Notwithstanding any other provision hereof, no adjustments shall be made on Warrant Shares issuable on the exercise of this Warrant for any cash dividends paid or payable to holders of record of Common Shares prior to the date as of which the Warrantholder shall be deemed to be the record holder of such Warrant Shares. 6.3. NOTICE OF ADJUSTMENT. Whenever the number of Warrant Shares or the Exercise Price of such Warrant Shares shall be adjusted, as provided in Section 6.1, the Company shall forthwith file, at the principal office of the Company (or at such other place as may be designated by the Company), a statement, certified by the chief financial officer of the Company, showing in detail the facts requiring such adjustment, the computation by which such adjustment was made 5 51 and the Exercise Price that shall be in effect after such adjustment. The Company shall also cause a copy of such statement to be sent by first class mail postage prepaid, to the Warrantholder, at such Warrantholder's address as shown in the records of the Company. 7. REGISTRATION STATEMENT. The Company shall, at its expense, file a registration statement with the United States Securities and Exchange Commission within 30 days after the date hereof to effect the registration of the resale of the Warrant Shares under the Securities Act; provided that the Warrantholder shall not sell any Warrant Shares pursuant to such registration statement unless and until it provides to the Company such information as the Company may reasonably request for use in connection with the identification of the Warrantholder as a selling stockholder in such registration statement, or any prospectus included therein, and no such sale shall be made by the Warrantholder pursuant to such registration statement unless and until such information is included by the Company in such registration statement or prospectus. The Company shall in good faith use its best efforts and at its expense to cause such registration statement to be declared effective as promptly as practicable thereafter, to amend such registration statement to include additional or revised information with respect to the selling stockholders and to include in such registration statement the information provided by the Warrantholder as a selling stockholder and shall notify the Warrantholder of the effectiveness thereof and agrees to use its best efforts to maintain the effectiveness of such registration statement until the Warrant expires according to its terms. The Company shall indemnify and hold harmless the Warrantholder, its officers, directors and agents and employees, each person who controls the Warrantholder (within the meaning of Section 15 of the Securities Act or Section 20 of the 1934 Act) and the officers, directors, agents and employees of any such controlling person, from and against all damage, loss, liability and expense (including, without limitation, reasonable expenses of investigation and reasonable attorneys' fees and expenses in connection with any action, suit or proceeding)("Losses") incurred or suffered and arising out of or based upon any untrue or alleged untrue statement of a material fact contained in any such registration statement, or related prospectus or in any amendment or supplement thereto, or arising out of or based upon any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statement therein not misleading, except to the extent the same are based upon information furnished in writing to the Company by or on behalf of the Warrantholder expressly for use therein; provided, that the Company shall not be liable to the Warrantholder to the extent that any such Losses arise out of or are based upon any untrue statement or alleged untrue statement or omission or alleged omission made in any preliminary prospectus if either (A)(i) the Warrantholder failed to send or deliver a copy of the final prospectus with or prior to the delivery of written confirmation of the sale by the Warrantholder of a Warrant Share to the person asserting the claim from which such Losses arise and (ii) the prospectus would have completely corrected such untrue statement or alleged untrue statement or such omission or alleged omission; or (B)(i) such untrue statement or alleged untrue statement, omission or alleged omission is completely corrected in an amendment or supplement to the prospectus and (ii) having previously been furnished by or on behalf of the Company with copies of the prospectus as so amended or supplemented, the Warrantholder thereafter fails to deliver such prospectus as so amended or supplemented, prior to or concurrently with the sale of a Warrant Share to the person asserting the claim from which such Losses arise. Promptly after receipt by an indemnified party under Article XII of the Stock 6 52 Purchase Agreement of notice of any claim or the commencement of any action, the indemnified party shall, if a claim in respect thereof is to be made against the Company under such Article XII notify the Company in writing of the claim or the commencement of that action. No indemnification provided for in such Article XII shall be available to any party who shall fail to give the notice to the extent that the party to whom such notice was not given was unaware of the action, suit or proceeding to which the notice would have related and was prejudiced by the failure to give the notice, by the omission so to notify such indemnifying party of any such notification shall not relieve such indemnifying party from any liability which it may have to the indemnified party otherwise than under Article XII. If any such claim or action shall be brought against an indemnified party, and it shall notify the Company thereof, the Company may, or if the indemnified party requests shall, participate therein and assume the defense thereof with counsel reasonably satisfactory to the indemnified party. After notice from the Company to the indemnified party of its election to assume the defense of such claim or action, the Company shall not be liable to the indemnified party under Article XII for any legal or other expenses subsequently incurred by the indemnified party in connection with the defense thereof; PROVIDED, HOWEVER, if the defendants in any such action include both an indemnified party and the Company and the indemnified party shall have reasonably concluded that there may be legal defenses available to the Company, the indemnified party shall have the right to employ counsel to represent it and, in that event, the reasonable fees and expenses of such separate counsel shall be paid by the Company. Neither the Company nor the indemnified party will accept settlement of such a claim or action without the consent of the others. 8. AMENDMENTS. Any provision of this Warrant may be amended and the observance thereof waived only with the written consent of the Company and the Warrantholder. 9. NOTICES OF CORPORATE ACTION. So long as this Warrant has not been exercised in full, in the event of (a) any taking by the Company of a record of all holders of Common Shares for the purpose of determining the holders thereof who are entitled to receive any dividend (other than cash dividends or distributions paid from the retained earnings of the Company) or other distribution, or any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right; (b) any capital reorganization of the Company, any reclassification (other than a change in par value of the Common Shares) or recapitalization of the capital stock of the Company or any consolidation or merger involving the Company and any other Person or any transfer of all or substantially all the assets of the Company to any other Person; or (c) any voluntary or involuntary dissolution, liquidation or winding-up of the Company; 7 53 the Company will mail to the Warrantholder a notice specifying (i) the date or expected ate on which any such record is to be taken for the purpose of such dividend, distribution or right and the amount and character of any such dividend, distribution or right or (ii) the date or expected date on which any such reorganization, reclassification, recapitalization, consolidation, merger, transfer, dissolution, liquidation or winding-up is to take place and the time, if any such time is to be fixed, as of which the holders of record of Common Shares shall be entitled to exchange their Common Shares for the securities or other property, if any, deliverable upon such reorganization, reclassification, recapitalization, consolidation, merger, transfer, dissolution, liquidation or winding-up. Such notice shall be delivered at least 5 days prior to the date therein specified, in the case of any date referred to in the foregoing subdivisions (i) and (ii). 10. DEFINITIONS. As used herein, unless the context otherwise requires, the following terms have the following respective meanings; "AFFILIATE" means any Person who is an "affiliate" as defined in Rule 12b-2 of the General Rules and Regulations under the Exchange Act. "BUSINESS DAY" means any day other than a Saturday, Sunday or a day on which national banks are authorized by law to close in the State of Ohio. "COMMON STOCK" has the meaning specified on the cover of this Warrant. "COMPANY" has the meaning specified on the cover of this Warrant. "CURRENT MARKET PRICE" of a share of Common Stock as of a particular date (the "Determination Date") shall mean: (i) If the Common Shares are listed or admitted for trading on a national securities exchange (including The Nasdaq Stock Market), then the Current Market Price shall be the average of the last 10 "daily sales prices" of the Common Shares on the principal national securities exchange on which the Common Shares is listed or admitted for trading on the last 10 trading days prior to the Determination Date, or if not listed or traded on any such exchange, then the Current Market Price shall be the average of the last 10 "daily sales prices" of the Common Shares on the over-the-counter market on the last 10 trading days prior to the Determination Date. The "daily sales price" shall be the closing price of the Common Shares at the end of each day; or (ii) If the Common Shares not so listed or admitted to unlisted trading privileges or if no such sale is made on at least 25 of such days, then the Current Market Price shall be reasonably determined in good faith by the Company's Board of Directors or a duly appointed committee of the Board of Directors (which determination shall be reasonably 8 54 described in the written notice delivered to the Warrantholder together with the Common Shares certificates). "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended, (or any successor statute thereto) and the rules and regulations of the Commission promulgated thereunder. "EXERCISE FORM" means an Exercise Form in the form annexed hereto as Exhibit A. "EXERCISE PRICE" has the meaning specified on the cover of this Warrant. "EXPIRATION DATE" means _________, __, 200_. [5 years] "FAIR MARKET VALUE" means the amount which a willing buyer would pay a willing seller in an arm's length transaction. "PERSON" means any individual, firm, corporation, partnership, limited liability company, trust, incorporated or unincorporated association, joint venture, joint stock company, governmental authority or other entity of any kind, and shall include any successor (by merger or otherwise) of such entity. "SECURITIES ACT" has the meaning specified on the cover of this Warrant, or any similar Federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. Reference to a particular section of the Securities Act, shall include a reference to the comparable section, if any, of any such similar Federal statute. "STOCK PURCHASE AGREEMENT" has the meaning specified on the cover of this Warrant. "WARRANTHOLDER" has the meaning specified on the cover of this Warrant. "WARRANT SHARES" has the meaning specified on the cover of this Warrant. 11. MISCELLANEOUS. 11.1 ENTIRE AGREEMENT. This Warrant, together with the Stock Purchase Agreement, constitute the entire agreement between the Company and the Warrantholder with respect to this Warrant. 11.2 BINDING EFFECT; BENEFIT. This Warrant shall inure to the benefit of and shall be binding upon the Company and the Warrantholder and their respective successors and assigns. Nothing in this Warrant, expressed or implied, is intended to or shall confer on any person other than the Company and the Warrantholder, or their respective successors or assigns, any rights, remedies, obligations or liabilities under or by reason of this Warrant. 11.3 SECTION AND OTHER HEADINGS. The section and other headings contained in 9 55 this Warrant are for reference purposes only and shall not be deemed to be a part of this Warrant or to affect the meaning or interpretation of this Warrant. 11.4 NOTICES. All notices, demands and other communications provided for or permitted hereunder shall be made in writing and shall be by registered or certified first-class mail, return receipt requested, telecopier, courier service, overnight mail or personal delivery: (a) if to Warrantholder: ______________________________ ______________________________ ______________________________ with a copy to: McDermott, Will & Emery 227 W. Monroe Street Chicago, IL 60606 Telecopy: (312) 984-3669 Attention: Stanley H. Meadows, P.C. (b) if to the Company: Central Reserve Life Corporation 17800 Royalton Road Strongsville, Ohio 44136 Telecopy: _____________ Attention: ____________ with a copy to: Latham & Watkins 233 South Wacker Drive Chicago, Illinois 60606 Telecopy: (312) 993-9767 Attention: Mark D. Gerstein All such notices and communications shall be deemed to have been duly given when delivered by hand, if personally delivered; when delivered by courier or overnight mail, if delivered by commercial courier service or overnight mail; five (5) Business Days after being deposited in the mail, postage prepaid, if mailed; and when receipt is mechanically acknowledged, if telecopied. Any party may by notice given in accordance with this Section 11.4 designate another address or Person for receipt of notices hereunder. 10 56 11.5 SEVERABILITY. Any term or provision of this Warrant which is invalid or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such invalidity or unenforceability without rendering invalid or unenforceability the terms and provisions of this Warrant or affecting the validity or enforceability of any of the terms or provisions of this Warrant in any other jurisdiction. 11.6 GOVERNING LAW. THIS WARRANT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF OHIO, WITHOUT REGARD TO THE CONFLICTS OF LAW PRINCIPLES THEREOF. 11.7 NO RIGHTS OR LIABILITIES AS STOCKHOLDER. Nothing containing in this Warrant shall be determined as conferring upon the Warrantholder any rights as a stockholder of the Company or as imposing any liabilities on the Warrantholder to purchase any securities whether such liabilities on the Warrantholder to purchase any securities whether such liabilities are asserted by the Company or by creditors or stockholders of the Company or otherwise. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 11 57 IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by its duly authorized officer. CENTRAL RESERVE LIFE CORPORATION By:_____________________________ Name: Title: Dated: __________, 199_ 12 58 EXHIBIT B CENTRAL RESERVE LIFE CORPORATION REGISTRATION RIGHTS AGREEMENT ----------------------------- This Registration Rights Agreement (this "Agreement"), dated as of ___________ __, 199_, is between CENTRAL RESERVE LIFE CORPORATION, an Ohio corporation (the "Corporation"), and the entities set forth on Schedule 1 attached hereto (the "Investors"). R E C I T A L S A. The Investors have agreed to purchase common shares, without par value, of the Corporation (the "Common Shares") pursuant to that certain Stock Purchase Agreement of even date herewith provided that the parties hereto enter into this Agreement. B. The Corporation deems it desirable to enter into this Agreement in order to induce the Investors to purchase the Common Shares pursuant to the Stock Purchase Agreement. AGREEMENTS ---------- In consideration of the premises and the mutual covenants herein contained and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: 1. DEFINITIONS. As used in this Agreement. "Commission" means the Securities and Exchange Commission. "Common Shares" means the Common Shares, without par value, of the Corporation. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Person" means a natural person, a partnership, a corporation, a limited liability company, an association, a joint stock company, a trust, a joint venture, an unincorporated organization or other entity, or a governmental entity or any department, agency or political subdivision thereof. "Public Offering" means any offering by the Corporation of its equity securities to the public pursuant to an effective registration statement under the Securities Act or any comparable statement under any comparable federal statute then in effect. 59 "Registrable Shares" means at any time (i) any Common Shares then outstanding which were issued pursuant to the Stock Purchase Agreement; (ii) any Common Shares then outstanding and held by any Investor; (iii) any Common Shares then outstanding which were issued as, or were issued directly or indirectly upon the conversion or exercise of other securities issued as a dividend or other distribution with respect or in replacement of any shares referred to in (i) or (ii); and (iv) any Common Shares then issuable directly or indirectly upon the conversion or exercise of other securities which were issued as a dividend or other distribution with respect to or in replacement of any shares referred to in (i) or (ii); PROVIDED, HOWEVER, that Registrable Shares shall not include any shares which have been registered pursuant to the Securities Act or which have been sold to the public pursuant to Rule 144 of the Commission under the Securities Act. For purposes of this Agreement, a Person will be deemed to be a holder of Registrable Shares whenever such Person has the then-existing right to acquire such Registrable Shares, whether or not such acquisition actually has been effected. "Securities Act" means the Securities Act of 1933, as amended. "Stock Purchase Agreement" means the Stock Purchase Agreement of even date herewith between the Corporation and the Investors. 2. DEMAND REGISTRATION. 2.1 REQUESTS FOR REGISTRATION. Subject to the terms of this Agreement, the holders of at least twenty percent (20%) of the then outstanding Registrable Shares (but not less than $1,000,000 of the then market value) may, at any time, request registration under the Securities Act of all or part of their Registrable Shares on Form S-1 or any similar long-form registration ("Long-Form Registrations") or, if available, then at the option of the Company, on Form S-2 or S-3 or any similar short-form registration ("Short-Form Registrations"). Within ten (10) days after receipt of any request pursuant to this Section 2.1, the Corporation will give written notice of such request to all other holders of Registrable Shares and will include in such registration all Registrable Shares with respect to which the Corporation has received written requests for inclusion within thirty (30) days after delivery of the Corporation's notice. All registrations requested pursuant to this Section 2 are referred to herein as "Demand Registrations." 2.2 PAYMENT OF EXPENSES FOR DEMAND REGISTRATIONS. The Corporation will pay all Registration Expenses (as defined in Section 6 below) for the first three Demand Registrations (including those under Section 2.3) (whether a Long-Form Registration or a Short-Form Registration). A registration will not count as one of the Corporation-paid Demand Registrations until it has become effective and the holders of Registrable Shares are able to register and sell at least 90% of the Registrable Shares requested to be included in such registration (or in the case of a shelf registration, it remains effective for not less than 180 days); PROVIDED, HOWEVER, that in any event the Corporation will pay all Registration Expenses in connection with any registration initiated as a Demand Registration. In a Demand Registration other than the first three Demand Registrations (including those under Section 2.3), the Registration Expenses of such registration shall be borne by the holders of Registrable Shares to be registered thereunder PRO RATA based on the -2- 60 number of Registrable Shares and other securities requested or permitted to be included in such registration pursuant to the terms of this Agreement. 2.3 SHORT-FORM REGISTRATIONS. In addition to the Long-Form Registrations provided pursuant to Section 2.1 above, the holders of Registrable Shares will be entitled to request up to three Short-Form Registrations, provided, however, that the aggregate offering value of the Registrable Shares requested to be registered in any Short-Form Registration must be reasonably expected to equal at least $1,000,000. Demand Registrations will be Short-Form Registrations whenever the Corporation is permitted to use any applicable short form. The Corporation will use its best efforts to make Short-Form Registrations available for the sale of Registrable Shares. If a Short-Form Registration is to be an underwritten public offering, and if the underwriters for marketing or other reasons request the inclusion in the registration statement of information which is not required under the Securities Act to be included in a registration statement on the applicable form for the Short-Form Registration, the Corporation will provide such information as may be reasonably requested for inclusion by the underwriters in the Short-Form Registration. 2.4 PRIORITY. If a Demand Registration is an underwritten public offering and the managing underwriters advise the Corporation in writing that in their opinion the inclusion of the number of Registrable Shares and other securities requested to be included (by the Corporation or others) creates a substantial risk that the price per Common Share will be reduced, the Corporation will include in such registration, prior to the inclusion of any securities which are not Registrable Shares, the number of Registrable Shares requested to be included which in the opinion of such underwriters can be sold without creating such a risk, PRO RATA among the respective Holders of Registrable Shares on the basis of the number of Registrable Shares owned by such holders, with further successive PRO RATA allocations among the Holders of Registrable Shares if any such holder of Registrable Shares has requested the registration of less than all such Registrable Shares it is entitled to register. 2.5 RESTRICTIONS. The Corporation will not be obligated to effect any Demand Registration within 180 days after the effective date of a previous Demand Registration. The Corporation may postpone for up to ninety (90) days the filing or the effectiveness of a registration statement for a Demand Registration if the Board of Directors of the Corporation reasonably and in good faith determines that such filing would require a disclosure of a material fact that would have a material adverse effect on the Corporation or any plan by the Corporation to engage in any acquisition of assets (other than in the ordinary course of business) or any merger, consolidation, tender offer or other significant transaction. 2.6 SELECTION OF UNDERWRITERS. The holders of at least a majority of the Registrable Shares included in any Demand Registration shall have the right to select the investment banker(s) and manager(s) to administer the offering, subject to the Corporation's approval which will not be unreasonably withheld, and any existing contract rights of Advest, Inc. 3. PIGGYBACK REGISTRATION. -3- 61 3.1 RIGHT TO PIGGYBACK. Whenever the Corporation proposes to register any of its equity securities under the Securities Act (other than pursuant to a Demand Registration hereunder or on Form S-8 or S-4 or any successor form thereto) and the registration form to be used may be used for the registration of any Registrable Shares (a "Piggyback Registration"), the Corporation will give prompt written notice to all holders of the Registrable Shares of its intention to effect such a registration and will include in such registration all Registrable Shares (in accordance with the priorities set forth in Sections 3.2 and 3.3 below) with respect to which the Corporation has received written requests for inclusion within fifteen (15) days after the delivery of the Corporation's notice. 3.2 PRIORITY ON PRIMARY REGISTRATIONS. If a Piggyback Registration is an underwritten primary registration on behalf of the Corporation and the managing underwriters advise the Corporation in writing that in their opinion the number of securities requested to be included in the registration creates a substantial risk that the price per Common Share will be reduced, the Corporation will include in such registration FIRST, the securities that the Corporation proposes to sell, SECOND, the Registrable Shares requested to be included in such registration, PRO RATA among the holders of such Registrable Shares on the basis of the number of shares which are owned by such holders, and THIRD, other securities requested to be included in such registration. 3.3 PRIORITY ON SECONDARY REGISTRATIONS. If a Piggyback Registration is an underwritten secondary registration on behalf of holders of the Corporation's securities and the managing underwriters advise the Corporation in writing that in their opinion the number of securities requested to be included in the registration creates a substantial risk that the price per Common Share will be reduced, the Corporation will include in such registration FIRST, the securities requested to be included therein by the holders requesting such registration and the Registrable Shares requested to be included in such registration, PRO RATA among the holders of such securities on the basis of the number of Common Shares or Registrable Shares which are owned by such holders, and SECOND, other securities requested to be included in such registration. 3.4 OTHER REGISTRATIONS. If the Corporation has previously filed a registration statement with respect to Registrable Shares pursuant to Section 2 or pursuant to this Section 3, and if such previous registration has not been withdrawn or abandoned, the Corporation will not file or cause to be effected any other registration of any of its equity securities or securities convertible or exchangeable into or exercisable for its equity securities under the Securities Act (except on Form S-8 or any successor form), whether on its own behalf or at the request of any holder or holders of such securities, until a period of at least 180 days has elapsed from the effective date of such previous registration. 3.5 SELECTION OF UNDERWRITERS. In connection with any Piggyback Registration, the holders of at least a majority of the Registrable Shares requested to be registered shall have the right to select the managing underwriters (subject to the approval of the Corporation which shall not be unreasonably withheld or delayed) to administer any offering of the Corporation's securities in which the Corporation does not participate, and the Corporation will have such right in any offering in which it participates. -4- 62 4. HOLDBACK AGREEMENTS. 4.1 HOLDERS' AGREEMENTS. Each holder of Registrable Shares agrees not to effect any public sale or distribution of equity securities of the Corporation, or any securities convertible into or exchangeable or exercisable for such securities or make any demand for registration under Sections 2 or 3 hereof, during the seven (7) days prior to, and during the ninety (90) days following, the effective date of any underwritten Demand Registration or any underwritten Piggyback Registration in which Registrable Shares are included (except as part of such underwritten registration), unless the underwriters managing the registered public offering otherwise agree. Nothing herein shall prevent a holder of Registrable Shares that is a partnership from making a distribution of Registrable Shares to its partners, a holder of Registrable Shares that is a trust from making a distribution of Registrable Shares to its beneficiaries or a holder of Registrable Shares that is a corporation from making a distribution of Registrable Shares to its stockholders, provided that the transferees of such Registrable Shares agree to be bound by the provisions of this Agreement to the extent the transferor would be so bound. 4.2 CORPORATION'S AGREEMENTS. The Corporation agrees (i) not to effect any public sale or distribution of its equity securities, or any securities convertible into or exchangeable or exercisable for such securities, during the seven (7) days prior to, and during the ninety (90) days following, the effective date of any underwritten Demand Registration or any underwritten Piggyback Registration (except as part of such underwritten registration or pursuant to registrations on Form S-8 or any successor form), unless the underwriters managing the registered public offering otherwise agree, (ii) to use all reasonable efforts to cause each holder of at least five percent (5%) (on a fully diluted basis) of its equity securities, or any securities convertible into or exchangeable or exercisable for such securities to agree not to effect any public sale or distribution of any such securities during such period (except as part of such underwritten registration, if otherwise permitted), unless the underwriters managing the registered public offering otherwise agree, subject to the registration obligations of the Company under the Common Share Purchase Warrants and (iii) if requested by the underwriters managing the registered public offering, to use all reasonable efforts to cause each other holder of its equity securities, or any securities convertible into or exchangeable or exercisable for such securities, purchased from the Corporation at any time (other than in a registered public offering) to agree not to effect any public sale or distribution of any such securities during such period (except as part of such underwritten registration, if otherwise permitted), unless the underwriters managing the registered public offering otherwise agree, subject to the registration obligations of the Company under the Common Share Purchase Warrants. 5. REGISTRATION PROCEDURES. Whenever the holders of Registrable Shares have requested that any Registrable Shares be registered pursuant to this Agreement, the Corporation will use its best efforts to effect the registration and sale of such Registrable Shares in accordance with the intended method of disposition thereof and, pursuant thereto, the Corporation will as expeditiously as possible: (a) prepare and file with the Commission a registration statement with respect to such Registrable Shares and use its best efforts to cause such registration statement to become effective (provided that before filing a registration statement or prospectus, or any -5- 63 amendments or supplements thereto, the Corporation will furnish copies of all such documents proposed to be filed to the counsel or counsels for the sellers of the Registrable Shares covered by such registration statement); (b) prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus(es) used in connection therewith as may be necessary to keep such registration statement effective for a period of not less than nine months and comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement during such period in accordance with the intended methods of disposition by the sellers thereof set forth in such registration statement; (c) furnish to each seller of Registrable Shares such number of copies of such registration statement, each amendment and supplement thereto, the prospectus(es) included in such registration statement (including each preliminary prospectus) and such other documents as such seller may reasonably request in order to facilitate the disposition of the Registrable Shares owned by such seller; (d) use its best efforts to register or qualify such Registrable Shares under such other securities or blue sky laws of such jurisdictions as any seller reasonably requests and do any and all other acts and things which may be reasonably necessary or advisable to enable such seller to consummate the disposition in such jurisdictions of the Registrable Shares owned by such seller (provided that the Corporation will not be required to (i) qualify generally to do business in any jurisdiction where it would not otherwise be required to qualify but for this subparagraph or (ii) consent to general service of process in any such jurisdiction); (e) notify each seller of such Registrable Shares, at any time when a prospectus relating thereto is required to be delivered under the Securities Act, of the happening of any event as a result of which the prospectus included in such registration statement contains an untrue statement of a material fact or omits any fact necessary to make the statements therein not misleading, and, at the request of any such seller, the Corporation will prepare a supplement or amendment to such prospectus so that, as thereafter delivered to the purchasers of such Registrable Shares, such prospectus will not contain any untrue statement of a material fact or omit to state any fact necessary to make the statements therein not misleading; (f) cause all such Registrable Shares to be listed on each securities exchange on which similar securities issued by the Corporation are then listed, or if no similar securities issued by the Corporation are then listed on a securities exchange, a securities exchange selected by the holders of at least a majority of the Registrable Shares included in such registration; (g) provide a transfer agent and registrar for all such Registrable Shares not later than the effective date of such registration statement; (h) enter into such customary agreements (including underwriting agreements in customary form) and take all such other actions as the holders of at least a majority of the Registrable Shares being sold or the underwriters, if any, reasonably requested in order to -6- 64 expedite or facilitate the disposition of such Registrable Shares (including, but not limited to, effecting a stock split or a combination of shares); (i) make available for inspection by any seller of Registrable Shares, any underwriter participating in any disposition pursuant to such registration statement, and any attorney, accountant or other agent retained by any such seller or underwriter, all financial and other records, pertinent corporate documents and properties of the Corporation, and cause the Corporation's officers, directors, employees and independent accountants to supply all information reasonably requested by any such seller, underwriter, attorney, accountant or agent in connection with such registration statement; (j) advise each seller of such Registrable Shares, promptly after it shall receive notice or obtain knowledge thereof, of the issuance of any stop order by the Commission suspending the effectiveness of such registration statement or the initiation or threatening of any proceeding for such purpose and promptly use all reasonable efforts to prevent the issuance of any stop order or to obtain its withdrawal if such stop order should be issued; (k) at least forty eight (48) hours prior to the filing of any registration statement or prospectus, or any amendment or supplement to such registration statement or prospectus, furnish a copy thereof to each seller of such Registrable Shares and refrain from filing any such registration statement, prospectus, amendment or supplement to which counsel selected by the holders of at least a majority of the Registrable Shares being registered shall have reasonably objected on the grounds that such document does not comply in all material respects with the requirements of the Securities Act or the rules and regulations thereunder, unless, in the case of an amendment or supplement, in the opinion of counsel for the Corporation the filing of such amendment or supplement is reasonably necessary to protect the Corporation from any liabilities under any applicable federal or state law and such filing will not violate applicable laws; and (l) at the request of any seller of such Registrable Shares in connection with an underwritten offering, furnish on the date or dates provided for in the underwriting agreement: (i) an opinion of counsel, addressed to the underwriters and the sellers of Registrable Shares, covering such matters as such underwriters and sellers may reasonably request, including such matters as are customarily furnished in connection with an underwritten offering and (ii) a letter or letters from the independent certified public accountants of the Corporation addressed to the underwriters and the sellers of Registrable Shares, covering such matters as such underwriters and sellers may reasonably request, in which letter(s) such accountants shall state, without limiting the generality of the foregoing, that they are independent certified public accountants within the meaning of the Securities Act and that in their opinion the financial statements and other financial data of the Corporation included in the registration statement, the prospectus(es), or any amendment or supplement thereto, comply in all material respects with the applicable accounting requirements of the Securities Act. 6. REGISTRATION EXPENSES. -7- 65 6.1 CORPORATION'S EXPENSES. Except as provided in Section 2.2 hereof, all expenses incident to the Corporation's performance of or compliance with this Agreement, including, but not limited to, all registration and filing fees, fees and expenses of compliance with securities or blue sky laws, printing expenses, messenger and delivery expenses, and fees and disbursements of counsel for the Corporation and all independent certified public accountants, underwriters (excluding discounts and commissions) and other Persons retained by the Corporation (all such expenses being herein called "Registration Expenses"), will be borne by the Corporation. In addition, the Corporation will pay its internal expenses (including, but not limited to, all salaries and expenses of its officers and employees performing legal or accounting duties), the expense of any annual audit or quarterly review, the expense of any liability insurance obtained by the Corporation and the expenses and fees for listing the securities to be registered on each securities exchange. 6.2 HOLDER'S EXPENSES. Except as provided in Section 2.2 hereof, in connection with any registration statement in which Registrable Shares are included, the Corporation will reimburse the holders of Registrable Shares covered by such registration for the reasonable cost and expenses incurred by such holders in connection with such registration, including, but not limited to, reasonable fees and disbursements of one counsel chosen by the holders of at least a majority of such Registrable Shares. 7. INDEMNIFICATION. 7.1 BY THE CORPORATION. The Corporation agrees to indemnify, to the extent permitted by law, each holder of Registrable Shares, its officers and directors and each Person who controls such holder (within the meaning of the Securities Act) against all losses, claims, damages, liabilities and expenses (including, but not limited to, attorney's fees) caused by any untrue or alleged untrue statement of material fact contained in any registration statement, prospectus or preliminary prospectus, or any amendment thereof or supplement thereto, or any omission or alleged omission of a material fact, required to be stated therein or necessary to make the statements therein not misleading, except insofar as the same are caused by or contained in any information furnished in writing to the Corporation by such holder expressly for use therein or by such holder's failure to deliver a copy of the prospectus or any amendments or supplements thereto after the Corporation has furnished such holder with a sufficient number of copies of the same. In connection with an underwritten offering, the Corporation will indemnify such underwriters, their officers and directors and each Person who controls such underwriters (within the meaning of the Securities Act) to the extent customary. The payments required by this Section 7.1 will be made periodically during the course of the investigation or defense, as and when bills are received or expenses incurred, subject to an obligation of repayment in the event such indemnity is determined not to be owed. 7.2 BY EACH HOLDER. In connection with any registration statement in which a holder of Registrable Shares is participating, each such holder will furnish to the Corporation in writing such information as the Corporation reasonably requests for use in connection with any such registration statement, preliminary prospectus or prospectus, or any amendment or supplement thereto and, to the extent permitted by law, will indemnify the Corporation, its directors and officers -8- 66 and each Person who controls the Corporation (within the meaning of the Securities Act) against any losses, claims, damages, liabilities and expenses resulting from any untrue or alleged untrue statement of material fact contained in the registration statement, prospectus or preliminary prospectus, or any amendment thereof or supplement thereto, or any omission or alleged omission of a material fact required to be stated therein or necessary to make the statements therein not misleading, but only to the extent that such untrue statement or omission is contained in any information so furnished in writing by such holder for inclusion in the registration statement or prospectus; PROVIDED that the obligation to indemnify will be several, not joint and several, among such holders of Registrable Shares and the liability of each such holder of Registrable Shares will be in proportion to and limited in all events to the net amount received by such holder from the sale of Registrable Shares pursuant to such registration statement. 7.3 PROCEDURE. Any Person entitled to indemnification hereunder will (i) give prompt written notice to the indemnifying Person of any claim with respect to which it seeks indemnification and (ii) unless in such indemnified Person's reasonable judgment a conflict of interest between such indemnified and indemnifying parties may exist with respect to such claim, permit such indemnifying Person to assume the defense of such claim with counsel reasonably satisfactory to the indemnified Person. If such defense is assumed, the indemnifying Person will not be subject to any liability for any settlement made by the indemnified Person without its consent (but such consent will not be unreasonably withheld). An indemnifying Person who is not entitled to, or elects not to, assume the defense of a claim will not be obligated to pay the fees and expenses of more than one counsel for all parties indemnified by such indemnifying Person with respect to such claim, unless in the reasonable judgment of any indemnified Person a conflict of interest may exist between such indemnified Person and any other of such indemnified parties with respect to such claim. 7.4 SURVIVAL. The indemnification provided for under this Agreement will remain in full force and effect regardless of any investigation made by or on behalf of the indemnified Person or any officer, director or controlling Person of such indemnified Person and will survive the transfer of securities. The Corporation also agrees to make such provisions as are reasonably requested by any indemnified Person for contribution to such Person in the event the Corporation's indemnification is unavailable for any reason. 8. COMPLIANCE WITH RULE 144 AND RULE 144A. At the request of any holder of Registrable Shares who proposes to sell securities in compliance with Rule 144 of the Commission, the Corporation will (i) forthwith furnish to such holder a written statement of compliance with the filing requirements of the Commission as set forth in Rule 144, as such rule may be amended from time to time and (ii) make available to the public and such holders such information as will enable the holders of Registrable Shares to make sales pursuant to Rule 144. Unless the Corporation is subject to Section 13 or 15(d) of the Exchange Act, the Corporation will provide to the holder of Registrable Shares and to any prospective purchaser of Registrable Shares under Rule 144A of the Commission, the information described in Rule 144A(d)(4) of the Commission. 9. PARTICIPATION IN UNDERWRITTEN REGISTRATIONS. No Person may participate in any registration hereunder which is underwritten unless such Person (a) agrees to sell its securities on -9- 67 the basis provided in any underwriting arrangements approved by such Person or Persons entitled hereunder to approve such arrangements and (b) completes and executes all questionnaires, powers of attorney, custody agreements, indemnities, underwriting agreements and other documents reasonably required under the terms of such underwriting arrangements. 10. MISCELLANEOUS. 10.1 NO INCONSISTENT AGREEMENTS. The Corporation will not hereafter enter into any agreement with respect to its securities which is inconsistent with the rights granted to the holders of Registrable Shares in this Agreement. 10.2 ADJUSTMENTS AFFECTING REGISTRABLE SHARES. The Corporation will not take any action, or permit any change to occur, with respect to its securities which would adversely affect the ability of the holders of Registrable Shares to include such Registrable Shares in a registration undertaken pursuant to this Agreement or which would adversely affect the marketability of such Registrable Shares in any such registration, including, but not limited to, effecting a stock split or combination of shares. 10.3 OTHER REGISTRATION RIGHTS. Except as provided in this Agreement, the Corporation will not hereafter grant to any Person or Persons the right to request the Corporation to register any equity securities of the Corporation, or any securities convertible or exchangeable into or exercisable for such securities, without the prior written consent of the holders of at least a majority of the Registrable Shares. 10.4 REMEDIES. Any Person having rights under any provision of this Agreement will be entitled to enforce such rights specifically, to recover damages caused by reason of any breach of any provision of this Agreement and to exercise all other rights granted by law. 10.5 AMENDMENTS AND WAIVERS. Except as otherwise expressly provided herein, the provisions of this Agreement may be amended or waived at any time only by the written agreement of the Corporation and the holders of at least a majority of the Registrable Shares; PROVIDED, HOWEVER, that the provisions of this Agreement may not be amended or waived without the consent of the holders of all the Registrable Shares adversely affected by such amendment or waiver if such amendment or waiver adversely affects a portion of the Registrable Shares but does not so adversely affect all of the Registrable Shares. Any waiver, permit, consent or approval of any kind or character on the part of any such holders of any provision or condition of this Agreement must be made in writing and shall be effective only to the extent specifically set forth in writing. Any amendment or waiver effected in accordance with this paragraph shall be binding upon each holder of Registrable Securities and the Corporation. 10.6 SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided herein, all covenants and agreements contained in this Agreement by or on behalf of any of the parties hereto will bind and inure to the benefit of the respective successors and assigns of the parties hereto, whether so expressed or not. In addition, and whether or not any express assignment has been made, the provisions of this Agreement which are for the benefit of the Investors or holders of -10- 68 Registrable Shares are also for the benefit of, and enforceable by, any subsequent holders of such Registrable Shares. 10.7 SEVERABILITY. Whenever possible, each provision of this Agreement will be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be prohibited by or invalid under applicable law, such provision will be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of this Agreement. 10.8 DESCRIPTIVE HEADINGS. The descriptive headings of this Agreement are inserted for convenience of reference only and do not constitute a part of and shall not be utilized in interpreting this Agreement. 10.9 NOTICES. Any notices required or permitted to be sent hereunder shall be delivered personally or mailed, certified mail, return receipt requested, or delivered by overnight courier service to the following addresses, or such other address as any Person designates by written notice to the Corporation, and shall be deemed to have been given upon delivery, if delivered personally, three days after mailing, if mailed, or one business day after delivery to the courier, if delivered by overnight courier service: If to the Corporation, to: Central Reserve Life Corporation 17800 Royalton Road Strongsville, Ohio 44136 with a copy to: Latham & Watkins 5800 Sears Tower 233 S. Wacker Drive Chicago, Illinois Attention: Mark D. Gerstein If to the Investors, to the addresses set forth on Schedule 1 hereto. If to holders of the Registrable Shares other than the Investors, to the addresses set forth on the stock record books of the Corporation. 10.10 GOVERNING LAW. All questions concerning the construction, validity and interpretation of this Agreement, and the performance of the obligations imposed by this Agreement, shall be governed by the laws of the State of Ohio applicable to contracts made and wholly to be performed in that state. -11- 69 10.11 FINAL AGREEMENT. This Agreement, together with the Stock Purchase Agreement and all other agreements entered into by the parties hereto pursuant to the Stock Purchase Agreement, constitutes the complete and final agreement of the parties concerning the matters referred to herein, and supersedes all prior agreements and understandings. 10.12 EXECUTION IN COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed an original, and such counterparts together shall constitute one instrument. 10.13 NO STRICT CONSTRUCTION. The language used in this Agreement will be deemed to be the language chosen by the parties hereto to express their mutual intent, and no rule of strict construction will be used against any Person. [Remainder of page intentionally left blank. Signature pages follow.] -12- 70 The parties hereto have executed this Agreement on the date first above written. THE CORPORATION: ---------------- CENTRAL RESERVE LIFE CORPORATION By: _______________________________________ Its: _______________________________________ INVESTORS: ---------- STRATEGIC ACQUISITION PARTNERS, LLC By: _______________________________________ Its: _______________________________________ TURKEY VULTURE FUND XIII By: _______________________________________ Its: _______________________________________ -13- 71 SCHEDULE 1 Strategic Acquisition Partners, LLC 20 N. Wacker Drive Suite 3118 Chicago, Illinois 60601 Turkey Vulture Fund XIII ___________________________________ ___________________________________ -14- 72 EXHIBIT C VOTING AGREEMENT This VOTING AGREEMENT (the "AGREEMENT") is entered into as of _____________, 1997, by and among Strategic Acquisition Partners, LLC, a Nevada limited liability company ("SAP"), Richard Osborne, individually and on behalf of Turkey Vulture Fund XIII (collectively, "OSBORNE"), and Central Reserve Life Corporation, an Ohio corporation (the "COMPANY"). WHEREAS, pursuant to the Stock Purchase Agreement dated _____________, 1997 by and between SAP and the Company (the "STOCK PURCHASE AGREEMENT"), the Company shall issue 5,000,000 shares of common stock, without par value, of the Company (which, together with any stock into which such stock is changed or converted pursuant to a merger, consolidation, reclassification or otherwise, the "PURCHASED SHARES") and issue up to 3,500,000 shares of common stock of the Company pursuant to certain warrants issued in connection with the Stock Purchase Agreement (the "WARRANT SHARES"); WHEREAS, upon closing of the transactions contemplated by the Stock Purchase Agreement (the "CLOSING DATE"), the Purchased Shares shall constitute a majority of the common stock of the Company; and WHEREAS, the parties desire to regulate certain aspects of their relationship as holders of common stock of the Company. NOW THEREFORE, in consideration of the agreements and covenants herein contained and for other good and valuable consideration, the parties hereto agree as follows: ARTICLE I ELECTION OF DIRECTORS SECTION I.1 BOARD OF DIRECTORS. (a) For the duration of this Agreement, each of SAP and Osborne and their respective successors and assigns, and any other holder of common stock of the Company bound hereby (the "HOLDERS") agrees to vote the Purchased Shares and any other shares of common stock beneficially owned by the Holders, including the Warrant Shares which are then beneficially owned by SAP and Osborne and their respective affiliates (the "SUBJECT SHARES") in such manner that (i) the five individuals designated by SAP are elected to the board of directors of the Company (the "BOARD") at any annual meeting of stockholders or special meeting of stockholders called for the election of directors or in filling any vacancy on the Board; (ii) the two individuals 73 designated by Osborne are elected to the Board at any annual meeting of stockholders or special meeting of stockholders called for the election of directors or in filling any vacancy on the Board; (iii) John Novatney is retained as a member of the Board for a period of two years from the Closing Date; (iv) Fred Lick is member of the Board until the expiration of the remaining term of his employment agreement with the Company, as amended; (v) at least three (3) members of the Board are "independent" as such term is defined under applicable NASDAQ National Market System, Inc. standards (the "INDEPENDENT DIRECTORS"); and (vi) the Company shall not voluntarily be delisted from the NASDAQ National Market System, Inc. except in connection with a going private transaction or if the Company becomes listed on another national securities exchange. Each of SAP and Osborne and their respective successors and assigns hereby agrees that it shall not take any action to remove the designees of the other party from the Board, or to take any action to remove any person agreed to be elected above, including by reduction in the size of the Board. (b) If a vacancy shall occur in the office of any director designated pursuant to Section 1.1(a)(i) or Section 1.1(a)(ii), each party shall instruct its respective designees on the Board to vote in favor of the individual designated by the party whose designee's removal or resignation created the vacancy. (c) If a vacancy shall occur in the office of any director specified in clauses (iii) or (iv) of Section 1.1(a) (including following the expiration of their mandated term), (i) each party shall instruct its respective designees on the Board to vote in favor of the individual designated by a majority of the Independent Directors to fill such vacancy and (ii) each Holder shall vote the Subject Shares in favor of the individual designated by a majority of the independent directors to fill such vacancy at the next annual meeting or special meeting of stockholders called for the election of directors. SECTION I.2 PROXY. For the duration of this Agreement, Osborne hereby grants to SAP, with full powers of substitution, and SAP hereby grants to Osborne, with full powers of substitution, an irrevocable proxy coupled with an interest as may be necessary to permit such party, to vote the shares of the Holder granting such proxy in accordance with the requirements of Section 1.1 (by written consent or otherwise) in event the Holder fails to vote its shares of common stock of the Company as required under Section 1.1 within ten (10) days after notice from the party holding such proxy requesting such a vote. SECTION I.3 CUMULATIVE VOTING. As promptly as -2- 74 practicable following the Closing Date, the Company shall amend its Articles of Incorporation, Code of Regulations or Bylaws, as the case may be, to eliminate cumulative voting in the election of directors. SECTION I.4 PROXY STATEMENT. In connection with any annual meeting of the stockholders or special meeting of the stockholders of the Company called for the election of directors, the Company shall prepare and file with the Securities and Exchange Commission (the "COMMISSION") a proxy statement relating to such meeting (together with any amendments thereof or supplements thereto, the "PROXY STATEMENT") which shall include the recommendation of the Board in favor of electing the directors specified in Section 1.1. Except in the event of termination of this Agreement, no modification or withdrawal of such recommendation shall release the Company of its obligation to submit the election of directors specified in Section 1.1 to its stockholders for their vote in accordance with applicable law. The Company shall use reasonable efforts to assure the election of the directors specified in Section 1.1. ARTICLE II RESTRICTIONS ON TRANSFER SECTION II.1 RESTRICTIONS UPON TRANSFER. No Holder may effect, cause to be effected or permit any voluntary or involuntary sale, assignment or transfer of any Subject Shares or any interest therein (a "TRANSFER"), except to a transferee that agrees to be bound by the provisions of this Agreement; PROVIDED, that the Warrant Shares shall not be subject to this Agreement upon the Transfer to a beneficial owner other than SAP or Osborne and their respective affiliates. Any Transfer not complying with the provisions of this Agreement shall not be effective for any purpose and any purported transferee of such a Transfer shall not acquire any right or interest in such common stock or the Company. SECTION II.2 RESTRICTIVE LEGENDS. (a) For the term of this Agreement, each certificate representing the Purchased Shares subject hereto, and each instrument or certificate issued upon exchange or transfer thereof, shall be stamped or otherwise imprinted with the following legend: "THIS CERTIFICATE AND THE SHARES REPRESENTED HEREBY ARE SUBJECT TO TRANSFER RESTRICTIONS CONTAINED IN A VOTING AGREEMENT DATED ________________, 1997 BY AND AMONG THE COMPANY AND CERTAIN OF ITS STOCKHOLDERS, A -3- 75 COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE COMPANY." (b) In addition, each certificate representing Purchased Shares and each instrument or certificate issued upon exchange or transfer thereof shall be stamped or otherwise imprinted with the following legend: "THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS IT HAS BEEN REGISTERED THEREUNDER OR, IN THE OPINION OF COUNSEL, AN EXEMPTION FROM REGISTRATION IS AVAILABLE." (c) In addition, each certificate representing Purchased Shares and each instrument or certificate issued upon exchange or Transfer thereof shall be stamped or otherwise imprinted with any and all legends required by applicable state securities laws. ARTICLE III MISCELLANEOUS SECTION III.1 TERM. The term of this Agreement shall begin on the Closing Date and shall remain in effect until the earlier of (i) three (3) years from the date thereof or (ii) such date as the total number of shares of common stock of the Company owned by SAP and Osborne, or their respective affiliates, shall exceed the total number of shares owned by such parties immediately following the Closing Date by 3,500,000 shares; PROVIDED, that clauses (iii), (iv) and (v) of Section 1.1(a) shall remain in effect as long as the Company is subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (whether pursuant to Section 12 or 15 thereof). SECTION III.2 AMENDMENT. Any exercise of rights hereunder or any waiver, modification, or amendment of this Agreement on behalf of the Company may be and shall be exercised and approved by a majority of the independent directors of the Board. SECTION III.3 SUCCESSORS AND ASSIGNS. All covenants and agreements contained in this Agreement by or on behalf of any of the parties hereto shall bind and inure to the benefit of the respective successors and assigns of the parties hereto including any and all subsequent Holders from time to time. SECTION III.4 GOVERNING LAW. This Agreement shall be -4- 76 governed by and construed in accordance with the laws of the State of Ohio, as applicable to contracts executed and to be performed entirely in such state. SECTION III.5 ENTIRE AGREEMENT. Except as provided below, this Agreement constitutes the entire agreement of the parties with respect to the subject matter hereof and may not be modified or amended except in writing. SECTION III.6 COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. SECTION III.7 ENFORCEMENT. (a) The Holders each acknowledge and agree that irreparable damage will occur if any of the provisions of this Agreement are not complied with in accordance with their specific terms. Accordingly, the Company will be entitled to an injunction to prevent breached of this Agreement and to enforce specifically its provisions in any court of the United States or any state having jurisdiction, this being in addition to any other remedy to which the Company may be entitled at law or in equity. (b) No failure or delay on the part of any party in the exercise of any power, right or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or of any other right, power or privilege. * * * -5- 77 IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be signed on its behalf by its duly authorized officers, all as of the day and year first above written. Strategic Acquisition Partners, LLC By:____________________________________ Its:___________________________________ _______________________________________ Richard Osborne, individually and as authorized signatory of Turkey Vulture Fund XIII Central Reserve Life Corporation By:_____________________________________ Its:____________________________________ -6- EX-99.1 3 EXHIBIT 99.1 1 Exhibit 99.1 STRATEGIC ACQUISITION PARTNERS, LLC CIVIC OPERA BUILDING 20 NORTH WACKER DRIVE, SUITE 3118 CHICAGO, ILLINOIS 60606 November 26, 1997 The Board of Directors of Central Reserve Life Corporation C/O: Mr. Fred Lick, Chairman 17800 Royalton Road Strongsville, OH 44316 Gentlemen, The following is an outline of the terms of a proposed $20 million loan from Strategic Acquisition Partners ("Partners") to Central Reserve Life Corporation ("CRLC"): - - The loan amount will be $20 million funded entirely at a closing to occur as soon as possible, but no later than December 17, 1997. - - The loan will bear interest at the prime rate then established by American National Bank and Trust Company of Chicago ("ANB"). - - The loan will mature on the earliest of (i) April 1, 1998, (ii) consummation of the transaction contemplated by the Stock Purchase Agreement between Partners and CRLC of even date, or (iii) consummation by CRLC of an alternative stock sale or other business combination, at which time all principal and interest will be fully due and payable. Prior to maturity, interest will be payable monthly on the unpaid balance. In the event that the transaction contemplated by the Stock Purchase Agreement has not closed by such date, in the absence of a default by CRLC then existing under the documents evidencing the loan, excluding a breach by CRLC which is not willful or material, the loan will be extended to May 1, 1998 at which time it shall be fully and finally due and payable. - - A loan fee of $50,000 will be due and payable upon funding of the loan to Partners as well as all attorneys fee of ANB in connection with Partners' obtaining the loan funds from ANB. - - The proceeds of the loan will be utilized as follows: - Approximately $5 million will be utilized to extinguish the indebtedness of Huntington Bank and the balance will be utilized to establish an interest reserve at CRLC and invest in the surplus of CRLC. A surplus note will be executed by CRLC to invest in the surplus of CLRC's insurance subsidiary, Central Reserve Life ("CRL"). The approximately $14 million investment will be evidenced by a surplus note in favor of CRLC from CRL. 2 - As collateral for the loan, CRLC will pledge to Partners all of the stock of CRL as well as the surplus notes executed by CRL in favor of CRLC, with such pledge agreements to be in form and substance satisfactory to Partners. - The CRLC loan will additionally be guaranteed by CRL and funding of the transaction will be subject to obtainment of appropriate approvals by the Ohio Department of Insurance prior to funding. - A promissory note will be executed in favor of Partners by CRLC to evidence the loan and a loan agreement will be executed between CRLC and Partners to govern the transaction. - The loan agreement will include an operating covenant for CRLC and CRL and an operating plan for CRL which CRLC will implement during the term of the loan. - Contemporaneous with the funding of the loan, CRLC will obtain the resignation of three of its directors and elect three directors nominated by Partners to the Board of CRLC. During the term of the loan Partners will conduct a search for a Chief Operating Officer and recommend a suitable candidate if one results from the search for consideration by CRLC's Board of Directors. - We have requested that Reassurance Company of Hannover provide $10 million additional funds to CRL in the form of a reinsurance transaction. This company has committed to this transaction on the condition that Peter Nauert remain involved in Partners and its activities. Upon funding by Hannover of its reinsurance transaction, Partners will be paid a fee of $150,000 for its efforts in this regard. - To induce Peter W. Nauert and his designees to provide sufficient credit enhancement to allow Partners to obtain the funds necessary for the loan as well as bring Hannover to the transaction, CRLC will issue to Nauert at the funding of the loan and reinsurance transaction warrants to purchase one million shares of the common stock of CRLC at a purchase price of $6.00 per share; provided however that unless an appropriate waiver is obtained from the National Market System, issuance of 200,000 of such warrants may be delayed until shareholder approval for such issuance is obtained (along with the other matters submitted for shareholder consideration pursuant to the Stock Purchase). The Company will diligently seek such waiver as soon as possible. - Prior to the loan funding, the employee contract modifications contemplated by the Integration Letter between Partners and CRLC will be completed and the Severance Plan of CRLC will be terminated with the substitute severance program we discussed being implemented and the Pension Plan will be amended to become a 401k Plan. Of course, the loan commitment of Partners is subject to completion of its loan with ANB, regulatory approvals and legal documentation. Sincerely, /s/ Billy B. Hill, Jr. Billy B. Hill, Jr. for Strategic Acquisition Partners, LLC EX-99.2 4 EXHIBIT 99.2 1 Exhibit 99.2 [CRL Letterhead] DATE: December 2, 1997 CONTACT: At Central Reserve Life: Fred Lick Jr. Chairman, President, CEO (216) 572-2400 Frank Grimone, CFO (216) 572-2400 At SM Berger & Company: Anne S. Babcock (216) 464-6400 FOR IMMEDIATE RELEASE CENTRAL RESERVE LIFE CORPORATION AND STRATEGIC ACQUISITION PARTNERS ANNOUNCE DEFINITIVE STOCK PURCHASE AGREEMENT Strongsville, Ohio, (December 2, 1997) -- Central Reserve Life Corporation (Nasdaq: CRLC) and Strategic Acquisition Partners, LLC today announced that they have entered into a definitive Stock Purchase Agreement. Under the terms of this agreement dated November 25, 1997, Central Reserve Life Corporation (the "Company") will issue to Strategic Acquisition Partners ("Strategic Partners") 5,000,000 shares of its common stock and warrants to acquire up to 2,500,000 shares of its common stock for $27.5 million. This definitive agreement was reached pursuant to an agreement in principle that was announced on November 13, 1997. Strategic Partners has agreed to arrange for an interim loan of $20 million to Central Reserve Life Corporation on or before December 17, 1997, approximately $14 million of which will be invested in the Company's insurance subsidiary, Central Reserve Life Insurance Company ("CRL"). The balance of the net proceeds will be used to satisfy the Company's $5.2 million loan from the Huntington National Bank. The Company has agreed to issue warrants to Strategic Partners' investors to purchase an additional 1,000,000 shares of common stock at $6.00 per share in connection with their efforts to secure this financing. In conjunction with the funding of the interim loan, CRL anticipates that it will enter into reinsurance agreements with the Reassurance Company of Hannover. The interim loan will be repaid with proceeds of the stock and warrant issuance. Upon issuance of the 5,000,000 shares, Strategic Partners and its investors will own approximately 54 percent of the Company's common stock. If all of the warrants to be issued are exercised, Strategic Partners and its investors will own approximately 67 percent of the Company's issued and outstanding common stock. Pursuant to a Voting Agreement to be entered into in connection with the issuance of the shares and warrants, Strategic Partners in conjunction with Richard M. Osborne, a private investor, and presently a 9.5 percent owner of the Company's stock, would be entitled to appoint a total of six out of nine members of the Company's Board of Directors. The agreement also requires that at least three directors be independent in accordance with the standards of the National Market System. Pursuant to his arrangements with Strategic Partners, Mr. Osborne may purchase up to 30 percent of the common stock and warrants that the Company has agreed to sell to Strategic Partners. 2 The purchase of the shares and warrants is subject to certain conditions, including the approval of Central Reserve Life Corporation's shareholders at a special meeting to be held as soon as practicable, receipt of regulatory approvals, and a financing contingency. The funding of the interim loan is subject, among other things, to completion of loan documents between the Company and Strategic Partners and receipt by Strategic Partners of its committed financing. Commenting on the announcement, Fred Lick, Jr., Central Reserve Life Corporation's Chairman, President and Chief Executive Officer, stated, "We are pleased to have reached a definitive agreement with Strategic Acquisition Partners. It is a tremendous boost for this Company and puts to an end our search for a strategic partner to provide the necessary capital infusion. We also look forward to benefiting from Strategic Acquisition Partners' insurance expertise and counsel. Our goal is to work in cooperation with our new investors to promote the long-term profitable growth of Central Reserve Life Corporation by increasing sales, improving operating efficiencies, and quickly restoring the Company to a position of profitability and increased financial strength." Val Rajic, President of Strategic Acquisition Partners, added, "Our sentiments mirror those of Fred Lick. We are pleased to be working with Central Reserve Life Corporation and look forward to a cooperative effort focused on maximizing value for the Company's shareholders, agents, and insureds." Craig Baldwin, Vice President of the Reassurance Company of Hannover, also commented, "It is our pleasure to cooperate with Strategic Acquisition Partners to assist Central Reserve Life Corporation through our reinsurance transaction. We are confident that the Company's ongoing activities will result in profitable growth." This news release contains certain forward-looking statements with respect to the financial condition, results of operations and business of the Company. Such forward-looking statements are subject to inherent risks and uncertainties that may cause actual results to differ materially from those contemplated by such forward looking statements. Factors that may cause actual results to differ materially from those contemplated by such forward looking statements include, among others, rising health care costs, business conditions and competition in the managed care industry, developments in health care reform and other regulatory issues. Central Reserve Life Corporation, through its Ohio-domiciled life insurance company, Central Reserve Life Insurance Company ("CRL"), specializes in meeting the insurance needs of small to mid-size businesses and individuals. Among the products CRL offers are life insurance, annuities, accident and health insurance, short-term major medical and long-term disability. -----END PRIVACY-ENHANCED MESSAGE-----