-----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, C5s546RUlelkqd9kjO0DbEypW+E3N0vpAfeOOkm+81+QdZ4NFCZulJOKrhQcxxsJ onZK0VOo+2ujsbMNtfXc4g== 0000892569-99-002700.txt : 19991019 0000892569-99-002700.hdr.sgml : 19991019 ACCESSION NUMBER: 0000892569-99-002700 CONFORMED SUBMISSION TYPE: SC 14D9 PUBLIC DOCUMENT COUNT: 9 FILED AS OF DATE: 19991018 SUBJECT COMPANY: COMPANY DATA: COMPANY CONFORMED NAME: CENTRIS GROUP INC CENTRAL INDEX KEY: 0000798085 STANDARD INDUSTRIAL CLASSIFICATION: SURETY INSURANCE [6351] IRS NUMBER: 330097221 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 14D9 SEC ACT: SEC FILE NUMBER: 005-37241 FILM NUMBER: 99729948 BUSINESS ADDRESS: STREET 1: 650 TOWN CENTER DR STE 1600 CITY: COSTA MESA STATE: CA ZIP: 92626 BUSINESS PHONE: 7145491600 MAIL ADDRESS: STREET 1: 650 TOWN CENTER DRIVE STREET 2: STE 1600 CITY: COSTA MESA STATE: CA ZIP: 92626-1925 FORMER COMPANY: FORMER CONFORMED NAME: US FACILITIES CORP DATE OF NAME CHANGE: 19920703 FILED BY: COMPANY DATA: COMPANY CONFORMED NAME: CENTRIS GROUP INC CENTRAL INDEX KEY: 0000798085 STANDARD INDUSTRIAL CLASSIFICATION: SURETY INSURANCE [6351] IRS NUMBER: 330097221 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 14D9 BUSINESS ADDRESS: STREET 1: 650 TOWN CENTER DR STE 1600 CITY: COSTA MESA STATE: CA ZIP: 92626 BUSINESS PHONE: 7145491600 MAIL ADDRESS: STREET 1: 650 TOWN CENTER DRIVE STREET 2: STE 1600 CITY: COSTA MESA STATE: CA ZIP: 92626-1925 FORMER COMPANY: FORMER CONFORMED NAME: US FACILITIES CORP DATE OF NAME CHANGE: 19920703 SC 14D9 1 SCHEDULE 14D-9 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ SCHEDULE 14D-9 SOLICITATION/RECOMMENDATION STATEMENT PURSUANT TO SECTION 14(D)(4) OF THE SECURITIES EXCHANGE ACT OF 1934 ------------------------ THE CENTRIS GROUP, INC. (NAME OF SUBJECT COMPANY) THE CENTRIS GROUP, INC. (NAME OF PERSON FILING STATEMENT) ------------------------ COMMON STOCK, PAR VALUE $0.01 PER SHARE (INCLUDING ASSOCIATED COMMON STOCK PURCHASE RIGHTS) (TITLE OF CLASS OF SECURITIES) ------------------------ 155904105 (CUSIP NUMBER OF CLASS OF SECURITIES) ------------------------ JOSE A. VELASCO SENIOR VICE PRESIDENT, CHIEF ADMINISTRATIVE OFFICER, SECRETARY AND GENERAL COUNSEL THE CENTRIS GROUP, INC. 650 TOWN CENTER DRIVE, SUITE 1600 COSTA MESA, CALIFORNIA 92626-1925 (714) 549-1600 (NAME, ADDRESS AND TELEPHONE NUMBER OF PERSON AUTHORIZED TO RECEIVE NOTICES AND COMMUNICATIONS ON BEHALF OF THE PERSON FILING THIS STATEMENT) ------------------------ COPIES TO: THOMAS D. MAGILL, ESQ. GIBSON, DUNN & CRUTCHER LLP 4 PARK PLAZA JAMBOREE CENTER IRVINE, CA 92614 (949) 451-3800 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 ITEM 1. SECURITY AND SUBJECT COMPANY. The name of the subject company is The Centris Group, Inc., a Delaware corporation (the "Company"). The address of the principal executive offices of the Company is 650 Town Center Drive, Suite 1600, Costa Mesa, California 92626-1925. The title of the class of equity securities to which this Solicitation/ Recommendation Statement on Schedule 14D-9 (this "Schedule 14D-9" or "Statement") relates is the common stock, $0.01 par value (including associated common stock purchase rights), of the Company. ITEM 2. TENDER OFFER OF THE PURCHASER. This Statement relates to the cash tender offer (the "Offer") described in the Tender Offer Statement on Schedule 14D-1, dated October 18, 1999 (as amended or supplemented, the "Schedule 14D-1"), filed by HCC Insurance Holdings, Inc., a Delaware corporation ("HCC"), and Merger Sub of Delaware, Inc., a Delaware corporation and a wholly owned subsidiary of HCC ("Merger Subsidiary"), with the Securities and Exchange Commission (the "SEC"), relating to an offer to purchase all of the issued and outstanding shares of common stock, par value $0.01 per share (the "Common Stock"), including the associated rights to purchase shares of Common Stock issued pursuant to the Rights Agreement between the Company and American Stock Transfer & Trust Company, dated as of May 24, 1990, as amended, (the "Rights" and, together with the Common Stock, the "Shares"), of the Company at a price of $12.50 per Share net to the seller in cash, without interest (the "Offer Price"), upon the terms and subject to the conditions set forth in Merger Subsidiary's Offer to Purchase, dated October 18, 1999 (the "Offer to Purchase"), and in the related Letter of Transmittal (which together with any amendments or supplements thereto constitute the "Offer Documents"). The Offer is being made in accordance with an Agreement and Plan of Merger, dated as of October 11, 1999 (the "Merger Agreement"), by and among HCC, Merger Subsidiary and the Company. Pursuant to the Merger Agreement, as soon as practicable after completion of the Offer and satisfaction or waiver, if permissible, of certain conditions, Merger Subsidiary will be merged with and into the Company (the "Merger"), and the Company will become a wholly owned subsidiary of HCC (the "Surviving Corporation"). At the effective time of the Merger (the "Effective Time"), each Share issued and outstanding immediately prior to the Effective Time (other than Shares held by HCC, Merger Subsidiary, the Company or any of their wholly-owned subsidiaries and Shares held by shareholders (the "Shareholders") of the Company who will have properly perfected their dissenters' rights, if any, under Delaware law) will be converted into the right to receive the Offer Price. The Offer Documents indicate that the principal executive offices of HCC and Merger Subsidiary are located at c/o HCC Insurance Holdings, Inc., 13403 Northwest Freeway, Houston, Texas 77040-6094. ITEM 3. IDENTITY AND BACKGROUND. (a) The name and address of the Company, which is the person filing this Schedule 14D-9, are set forth in Item 1 above. (b) Except as described herein, in Annex A hereto, and in the exhibits hereto, to the knowledge of the Company, as of the date hereof there are no material contracts, agreements, arrangements or understandings, or any potential or actual conflicts of interest between the Company or its affiliates and (1) the Company, its executive officers, directors or affiliates or (2) the Merger Subsidiary, its executive officers, directors or affiliates. INTERESTS OF CERTAIN PERSONS IN THE OFFER AND THE MERGER In considering the recommendation of the Company's Board of Directors, the Shareholders of the Company should be aware that certain members of the Company's Board of Directors and certain of the Company's officers have interests in the Offer and the Merger which are described herein and in Annex A hereto and which may present them with certain conflicts of interest. Each of the members of the Company's 1 3 Board of Directors was aware of these potential conflicts and considered them along with the other factors described in Item 4(b)(2) below. Certain contracts, agreements, arrangements or understandings between the Company or its affiliates and certain of its executive officers, directors or affiliates are described in the Company's Proxy Statement, dated March 31, 1999, relating to its May 12, 1999 Annual Meeting of Shareholders (the "Proxy Statement") under the headings "Compensation of Directors," "Compensation Committee Of The Board Of Directors Report On Executive Compensation," "Compensation Committee Interlocks And Insider Participation," "Compensation Of Executive Officers," "Employment Agreements With Named Executives" and "Related Transactions." A copy of the applicable portions of the Proxy Statement has been filed as an exhibit to this Schedule 14D-9 and is incorporated herein by reference. Upon consummation of the Offer, all outstanding Company stock options, whether vested or unvested, will be canceled. The holders of Company stock options, including the directors and executive officers of the Company, will receive a cash payment in connection with the cancellation of their options equal to the excess, if any, of $12.50 per Share over the applicable exercise price of their options. Pursuant to the Offer, the directors and executive officers of the Company will receive an aggregate of approximately $16,691,479 in cash for their Shares and Shares issuable upon exercise of outstanding stock options. As of October 11, 1999, the directors and executive officers of the Company as a group beneficially owned 1,963,962 Shares, or approximately 15.84% of the Shares, which includes Shares subject to options, whether vested or unvested, that could be canceled if the Offer is consummated. The Company has been informed by its directors and executive officers that they intend to tender pursuant to the Offer all Shares beneficially owned by them. On October 11, 1999, the Company entered into a consulting agreement (the "Consulting Agreement") with David L. Cargile pursuant to which Mr. Cargile will act as an independent consultant to the Company for a six-month period following his termination as a director and officer on the date that Merger Subsidiary accepts for payment at least a majority of the Shares pursuant to the Offer. The Company will pay Mr. Cargile an aggregate of $360,000 for his consulting services rendered to the Company and his agreements relating to nonsolicitation and confidentiality contained in the Consulting Agreement. This description of the Consulting Agreement is qualified in its entirety by reference to the text of such Consulting Agreement, a copy of which is attached as an exhibit to this Schedule 14D-9 and is incorporated herein by reference. Set forth in the following table is the aggregate maximum amount of all termination, severance, COBRA payments, or other similar benefits to which the certain officers of the Company may be entitled in connection with the Merger and the other transactions contemplated in the Merger Agreement (not including any tax or tax gross up payment) or the cost of life insurance, AD&D or Long Term Disability Insurance. The costs for those are $0.18/$1,000; $0.02/$1,000; and $0.28/$1,000, respectively.
EMPLOYEE AMOUNT($)* -------- ---------- 1. David L. Cargile.............. 2,031,000 2. Charles M. Caporale........... 506,000 3. Mark A. Carney................ 532,000 4. Edward D. Jones, III.......... 291,000 5. Howard S. Singer.............. 585,000 6. Jose A. Velasco............... 546,000 7. Patricia S. Boisseranc........ 149,000 8. Linton R. Groke............... 159,000
EMPLOYEE AMOUNT($)* -------- ---------- 9. David L. Hubert............... 118,000 10. Barbara F. Stoner............. 156,000 11. Lorraine G. Schaefer.......... 91,000 12. Timothy J. Barden............. 166,000 13. James A. Lalko................ 115,000 14. James A. Roberson............. 158,000 15. Gretchen Hesse................ 148,000 16. Andrew M. Weissert............ 63,000
- --------------- * rounded to nearest thousand 2 4 On May 17, 1999, the Company granted vested options to purchase 6,000 Shares at the price of $10.50 per Share to each of Roxani M. Gillespie, John F. Kooken, L. Steven Medgyesy and Charles L. Schultz, each a non-employee director of the Company. THE MERGER AGREEMENT The following description of the Merger Agreement is qualified in its entirety by reference to the text of such Merger Agreement, a copy of which is attached as an exhibit to this Schedule 14D-9 and is incorporated herein by reference. The Offer. The Merger Agreement provides for the making of the Offer. The obligation of Merger Subsidiary to accept for payment or pay for Shares is subject to the satisfaction of the Minimum Condition and certain other conditions that are described in this Section. Pursuant to the Merger Agreement, HCC and Merger Subsidiary expressly reserve the right to waive the conditions to the Offer and to make any change in the terms or conditions of the Offer; provided, however, that without the prior written consent of the Company, no change may be made which (i) except as provided in the next sentence, extends the Offer; (ii) changes the form of consideration to be paid for the Shares; (iii) decreases the price per Share or the number of Shares sought in the Offer; (iv) imposes conditions to the Offer in addition to those set forth in Annex I to the Merger Agreement; (v) changes or waives the Minimum Condition; or (vi) makes any other change to any condition to the Offer set forth in the Annex I to the Merger Agreement which is materially adverse to the holders of Shares. Notwithstanding the foregoing, the Merger Agreement also provides that Merger Subsidiary may, without the consent of the Company, (i) extend the Offer Period until all of the conditions to Merger Subsidiary's obligation to purchase Shares shall be satisfied or waived, including, without limitation, any period required (A) by any rule, regulation, interpretation, or position of the Commission or the staff thereof applicable to the Offer; or (B) pursuant to the HSR Act, shall have been determined; or (C) to obtain necessary approval of each state insurance regulatory agency required for consummation of the Offer; (ii) extend the Offer Period for a period of not more than ten Business Days beyond the expiration thereof, as such may be extended pursuant to subparagraph (i) hereof; (iii) extend the Offer Period for an additional period of not more than ten Business Days beyond that permitted by subparagraphs (i) and (ii) hereof if on the date of such extension, less than 90% of the Fully Diluted Shares have been validly tendered and not properly withdrawn pursuant to the Offer; and (iv) extend the Offer Period for any reason for a period of not more than five Business Days beyond the latest Expiration Date that would be otherwise permitted under clauses (i), (ii), or (iii) of this sentence. Subject to the terms of the Offer in the Merger Agreement and the satisfaction (or waiver to the extent permitted by the Merger Agreement) of the conditions of the Offer, Merger Subsidiary shall accept for payment all Shares validly tendered and not withdrawn pursuant to the Offer as soon as practicable after the applicable expiration of the Offer. Consideration to be Paid in the Merger. The Merger Agreement provides that, following the purchase of Shares pursuant to the Offer and upon the terms (but subject to the conditions) set forth in the Merger Agreement, Merger Subsidiary will be merged with and into the Company with the Company continuing as the surviving corporation. In the Merger, (i) each Share held by the Company as treasury stock or owned by HCC, Merger Subsidiary or any subsidiary of either of them immediately prior to the Effective Time shall be canceled, and no payment shall be made with respect thereto; (ii) each share of common stock of Merger Subsidiary outstanding immediately prior to the Effective Time shall be converted into and become one share of common stock of the Surviving Corporation with the same rights, powers and privileges as the shares so converted and shall constitute the only outstanding shares of capital stock of the Surviving Corporation; and (iii) each Share outstanding immediately prior to the Effective Time shall, except as otherwise provided in the Merger Agreement with respect to Shares as to which appraisal rights have been exercised, be converted into the right to receive $12.50 in cash without interest (the "Merger Consideration"). The Merger Agreement provides that the Merger will be consummated as soon as practicable after satisfaction of or, to the extent permitted thereunder, waiver of the conditions to the Merger and shall become effective at such time as the certificate of merger is duly filed with the Secretary of State of the State of Delaware or, with the consent of the Independent Directors referred to below, at such later time as is specified in the certificate of merger. 3 5 Board Representation. The Merger Agreement provides that, effective upon acceptance for payment by Merger Subsidiary of the Shares tendered pursuant to the Offer, HCC shall be entitled to designate the number of directors, rounded up to the next whole number, on the Company's Board of Directors that equals the product of (i) the total number of directors on the Company's Board of Directors (giving effect to the election of any additional directors pursuant to the Merger Agreement); and (ii) the percentage that the number of Shares owned by HCC or Merger Subsidiary (including Shares accepted for payment) bears to the total number of Shares outstanding. The Company has agreed that it will take all action necessary to cause HCC's designees to be elected or appointed to the Company's Board of Directors, including, without limitation, increasing the number of directors or seeking and accepting resignations of incumbent directors or both; provided, however, that prior to the Effective Time, the Company's Board of Directors shall always have one Independent Director. If the number of Independent Directors is reduced below one for any reason prior to the Effective Time, the departing Independent Director shall be entitled to designate a person to fill such vacancy. No action proposed to be taken by the Company to amend or terminate the Merger Agreement or the certificate of incorporation or by-laws of the Company or waive any action required to be taken by HCC or Merger Subsidiary shall be effective without the approval of the Independent Director. At such times, the Company will use its best efforts to cause individuals designated by HCC to constitute the same percentage as such individuals represent on the Company's Board of Directors of (i) each committee of the Board; (ii) each board of directors of each subsidiary; and (iii) each committee of each such board. The Merger Agreement provides that, from and after the Effective Time, the directors and officers of Merger Subsidiary at the Effective Time will be the initial directors and officers of the Surviving Corporation, each to hold office until his or her respective successors are duly elected or appointed and qualified in accordance with applicable law. Pursuant to the Merger Agreement, the by-laws of Merger Subsidiary, as in effect at the Effective Time, will be the by-laws of the Surviving Corporation until amended in accordance with applicable law, and the Certificate of Incorporation of Merger Subsidiary, as in effect at the Effective Time, will be the Certificate of Incorporation of the Surviving Corporation until amended in accordance with applicable law, except that the name of the Surviving Corporation shall be changed to the name of the Company. Shareholder Meeting. The Merger Agreement provides that, if required by applicable law, the Company will call a meeting of its Shareholders to be held as soon as reasonably practicable following Merger Subsidiary's acquisition of Shares in the Offer for the purpose of voting on the approval and adoption of the Merger Agreement and the Merger. Under the Merger Agreement, at any such meeting, HCC has agreed to make a quorum and to vote all Shares acquired in the Offer or otherwise beneficially owned by it in favor of adoption of the Merger Agreement. If the Minimum Condition is satisfied pursuant to the Offer, Merger Subsidiary will hold at least a majority of the outstanding Shares on a Fully Diluted Basis and will be able to assure that the requisite number of affirmative votes in favor of approval and adoption of the Merger Agreement will be received, even if no other Shareholder votes in favor thereof. If Merger Subsidiary obtains at least 90% of the outstanding Shares, it may effect the Merger without any notice to and without the authorization of the Shareholders of the Company pursuant to the "short-form" merger provisions of Delaware Law. Representations and Warranties. The Merger Agreement contains various representations and warranties of the parties thereto. These include representations and warranties of the Company with respect to corporate organization, standing and power, capital structure, corporate authorization, governmental authorization, non-contravention, subsidiaries, Commission filings, financial statements, absence of certain changes, disclosure documents, undisclosed liabilities, absence of certain changes in stock or benefit plans, litigation, taxes, employee benefits, state takeover statutes, compliance with laws, contracts and debt instruments, opinion of financial advisor, interests of officers and directors, change of control, title to properties, Public Utility Holding Company Act, Year 2000, insurance, investments, investment company, internal controls, assumed and ceded reinsurance agreements, accounts with financial institutions, minute books, stock books, continuing business relationships, insurance reserves, environmental, intellectual property and technology and other matters. 4 6 HCC and Merger Subsidiary have also made certain representations and warranties with respect to corporate existence and power, corporate authorization, governmental authorization, non-contravention, disclosure documents, financing and other matters. Conduct of Business Pending the Merger. The Company has agreed that, during the period from the date of the Merger Agreement to the Effective Time, the Company will, and will cause its subsidiaries to, carry on their respective businesses in the ordinary course in substantially the same manner as theretofore conducted and, to the extent consistent therewith, use all commercially reasonable efforts to preserve intact their current business organizations, keep available the services of their current officers and employees and preserve their relationships with customers, suppliers, licensors, licensees, distributors and others having business dealings with them to the end that their goodwill and ongoing business shall be unimpaired at the Effective Time. The Company has further agreed to (i) comply in all material respects with all laws, statutes, ordinances, rules and regulations applicable to the Company; (ii) take all commercially reasonable steps to preserve the current relationships of the Company with its brokers, reinsurance intermediaries, ceding companies, reinsurers, agents, managing general agents, suppliers and other persons with which the Company has significant business relationships; and (iii) perform its obligations under all Reinsurance Agreements (as defined in the Merger Agreement), Contracts (as defined in the Merger Agreement) and commitments to which it is a party or by or to which it is bound or subject; and (iv) require the Company's Accountants (as defined in the Merger Agreement) to conduct an interim quarterly review with a written report of the Company's Form 10-Q filings for the period ended September 30, 1999, in accordance with generally accepted auditing standards. The Company has further agreed that, during the period from the date of the Merger Agreement to the Effective Time, the Company will not, and will not permit any of its subsidiaries to, without the prior written approval of HCC, (i)(a) declare, set aside or pay any dividends on, or make any other distributions in respect of, any of its capital stock, other than dividends and distributions by any direct or indirect wholly owned subsidiary of the Company to its parent, (b) split, combine or reclassify any of its capital stock or issue or authorize the issuance of any other securities in respect of, in lieu of or in substitution for shares of its capital stock or (c) purchase, redeem or otherwise acquire any shares of capital stock of the Company or any of its subsidiaries or any other securities thereof or any rights, warrants or options to acquire any such shares or other securities (other than in connection with the exercise of Company Options); (ii) issue, deliver, sell, pledge or otherwise encumber any shares of its capital stock, any other voting securities or any securities convertible into, or any rights, warrants or options to acquire, any such shares, voting securities or convertible securities (other than the issuance of Shares upon the exercise of Company Options); (iii) amend its certificate of incorporation, by-laws or other comparable charter or organizational documents; (iv) acquire or agree to acquire (including, without limitation, by merger, consolidation, or acquisitions of stock or assets) any business including through the acquisition of any interest in any corporation, partnership, limited liability company, joint venture, association or other business organization or division thereof; (v) mortgage or otherwise encumber or subject to any lien or, except in the ordinary course of business consistent with past practice and pursuant to existing contracts or commitments, sell, lease, license, transfer or otherwise dispose of any of the Company intellectual property rights or any other material properties or assets; (vi) make or agree to make any new capital expenditures in excess of $100,000; (vii) make any material tax election (unless required by law) or settle or compromise any material income tax liability; (viii) pay, discharge or satisfy any claims, liabilities or obligations (absolute, accrued, asserted or unasserted, contingent or otherwise), or settle any lawsuit other than the payment, discharge, satisfaction or settlement, in the ordinary course of business consistent with past practice and in accordance with their terms and in an amount not to exceed $25,000, or waive the benefits of, or agree to modify in any manner, any confidentiality, standstill or similar agreement to which the Company or any of its subsidiaries is a party; (ix) commence a lawsuit other than (a) for the routine collection of bills or (b) in such cases where the Company in good faith determines that the failure to commence suit would result in a material impairment of a valuable aspect of the Company's business, provided that the Company consults with HCC prior to filing such suit; (x)(a) hire any permanent employee or any other employee whose employment cannot be terminated at will without further payment or enter into or amend any employment or severance agreement or similar arrangements, (b) make any determination as to amounts payable under any plan, arrangement or agreement, providing for discretionary incentive compensation or bonus to any officer, director, employee or independent contractor of the Company or any of its 5 7 subsidiaries, (c) enter into, adopt, or amend (except as required in Sections 2.5 and 5.9 of the Merger Agreement) any agreement, arrangement, or benefit plan so as to increase the liability (whether or not contingent) of the Company or HCC or any of their subsidiaries or ERISA affiliates (as defined in the Merger Agreement) in respect of compensation or benefits except as may be required by law or (d) grant any options or increase any employee or director compensation; (xi) amend, commute, terminate or waive any of its rights under any Reinsurance Agreement pursuant to which the Company has ceded or transferred any of its obligations or liabilities; (xii) conclude any negotiations relating to outstanding issues arising from the purchase of Seaboard Life Insurance Company (USA) and VASA North America, Inc. or the sale of USF RE Insurance Company; (xiii) make any material changes in their investment portfolio or investment guidelines; (xiv) authorize any of, or commit or agree to take any of, the foregoing actions; (xv) take or agree or commit to take any action that would make representation or warranty of the Company hereunder inaccurate in any material respect at, or as of any time prior to, the Effective Time; or (xvi) omit or agree or commit to omit to take any action necessary to prevent any such representation or warranty from being inaccurate in any material respect at any such time. Access to Information. From the Execution Date until the Effective Time, the Company has agreed that it will, and has agreed to cause each of its subsidiaries to, (i) give HCC, its counsel, financial advisors, auditors and other authorized representatives full access (during normal business hours and upon reasonable notice) to the offices, properties, books and records of the Company and the subsidiaries; (ii) furnish to HCC, its counsel, financial advisors, auditors and other authorized representatives all their respective properties, books, contracts, commitments, personnel and records and, during such period, the Company has agreed that it will, and has agreed to cause each of its subsidiaries to, furnish (i) a copy of each report, schedule, registration statement and other document filed by it during such period pursuant to the requirements of Federal or state securities laws, (ii) a copy of each tax return, report and information statement filed by it during such period; and (iii) all other information concerning its business, assets, properties and personnel (including financial and operating data) as such persons may reasonably request and will instruct the Company's employees, counsel and financial advisors to cooperate with HCC in its investigation of the business of the Company and the subsidiaries; provided, however, that the parties have agreed that no investigation pursuant to this paragraph will affect any representation or warranty given by the Company in the Merger Agreement. From the Execution Date until the Effective Time, the Company has agreed to give HCC, its counsel, financial advisors, auditors and other authorized representatives full access (during normal business hours at their actual location) to all accounting, revenue, marketing, producer, processing, and other books, records and data in possession of Company, except such records or data which Company is prevented by contractual obligations with third parties from disclosing; provided, however, that in the event the Company is prohibited from making files or records available because of provisions of third party agreements, then the Company has agreed to inform HCC of the existence of such records, the parties thereto and the subject matter of such records. HCC and the Company have further agreed in the Merger Agreement that, from the Execution Date, the order issued in that certain litigation entitled The Centris Group, Inc. et al. v. HCC Benefits Corporation, et al. Civil Action No. 99-1-4866-28 in the Superior Court of Cobb County, State of Georgia (the "Kelbel Litigation") will be suspended except for the running of any time limitations on Kelbel's activities which shall continue and the restriction on Kelbel shall be of no further force and effect, provided, however, that if the Merger Agreement is terminated by HCC for any reason other than the occurrence of a Trigger Event (defined herein) such restrictions shall be reinstated. The parties have further agreed to use their best efforts to cause the Order in the Kelbel Litigation to be amended to conform to the terms provided in the Merger Agreement. Rights Plan. Pursuant to the Merger Agreement, the Company has agreed that upon execution of the Merger Agreement, it shall take necessary actions under the Rights Plan, including any required amendments to the Rights Plan, so that the commencement or consummation of the Offer, the grant or exercise of any rights under the Stock Option Agreement or the Shareholder Option Agreement or any other acts pursuant to such agreements, respectively, on the terms permitted thereunder, respectively, and as contemplated therein, 6 8 respectively, will not cause (A) the Rights issued pursuant to the Rights Plan to become exercisable under the Rights Plan, (B) HCC, or any subsidiary of HCC, including Merger Subsidiary to be deemed a "10% Shareholder" (as defined in the Rights Plan) or (C) the "10% Stock Ownership Date" (as defined in the Rights Plan) to occur; provided, however, that the Company shall not be required to make such amendments to the Rights Plan if, (i) HCC has not performed or complied in all material respects with the Merger Agreement prior to the consummation of the Offer; or (ii) the Company obtains, and there is in force from the Delaware Court of Chancery, an order permanently, preliminarily or temporarily declaring that the making of such amendments to the Rights Plan would be contrary to the fiduciary duties of the Board of Directors of the Company. The Merger Agreement further provides that in no event shall the Board of Directors of the Company make an amendment of the Rights Plan in favor of any other person without making such amendment in favor of HCC. Affirmative Actions. Pursuant to the Merger Agreement, the Company will retain an independent actuary (the "Actuary") which is acceptable to HCC to prepare an independent actuarial review of all aspects of the Company's business including, without limitation, the Company's property/casualty reserves, including discontinued operations, the medical lines business, recoverable value of the Company's notes receivable and indemnification obligations of the Company. Such actuarial study shall commence no later than five Business Days from the Execution Date and shall be completed no later than two Business Days after receipt of all regulatory approvals to the Merger from required state insurance regulatory agencies. The Company shall make the reserve adjustments to take such other charges, in accordance with GAAP and SAP, consistent with the findings of such actuarial review. Such adjustments and charges shall be recorded on the Company's books no later than three Business Days following the receipt from the Actuary of such review. The Company has further agreed to utilize reasonable commercial efforts and to cooperate with HCC in the establishment of underwriting standards for business commencing January 1, 2000. Termination of Benefit Plans. The Company has agreed in the Merger Agreement to terminate or cause to be terminated The Centris Group, Inc. Employees' Savings Plan and the VASA North America, Inc. 401(k) Profit Sharing Plan prior to the date on which the Company and/or its subsidiaries and ERISA affiliates become members of a "controlled group" with or under "common control" with HCC as such terms are defined in Section 414(b) and 414(c) of the Internal Revenue Code of 1986, as amended (the "Code"). HSR Act Filings; Regulatory Filings; Efforts. Pursuant to the Merger Agreement, each of HCC and the Company has agreed to (i) promptly make or cause to be made the filings required of such party or any of its subsidiaries under the HSR Act with respect to the transactions contemplated by the Merger Agreement; (ii) comply at the earliest practicable date with any request under the HSR Act for additional information, documents, or other material received by such party or any of its subsidiaries from any federal, state or local government or any court, administrative or regulatory agency or commission or other governmental authority or agency, domestic or foreign (a "Governmental Entity") in respect of such filings or such transactions; and (iii) cooperate with the other party in connection with any such filing and in connection with resolving any investigation or other inquiry of any such agency or other Governmental Entity under any Antitrust Laws (as defined below) with respect to any such filing or any such transaction. Each of HCC and the Company has agreed, pursuant to the Merger Agreement, to promptly inform the other of any communication with, and any proposed understanding, undertaking, or agreement with, any Governmental Entity regarding any such filings or any such transaction. The Merger Agreement prohibits the Company from participating in any meeting (whether in person or by telephone) with any Governmental Entity in respect of any such filings, investigation, or other inquiry without HCC's consent and without giving HCC notice of the meeting and, to the extent permitted by such Governmental Entity, the opportunity to attend and participate. Each of HCC and the Company has agreed, pursuant to the Merger Agreement, to use all commercially reasonable efforts to resolve such objections, if any, as may be asserted by any Governmental Entity with respect to the transactions contemplated by the Merger Agreement under the HSR Act, the Sherman Act, as amended, the Clayton Act, as amended, the Federal Trade Commission Act, as amended, and any other Federal, state or foreign statutes, rules, regulations, orders or decrees that are designed to prohibit, restrict or regulate actions having the purpose or effect of monopolization or restraint of trade (collectively, "Antitrust Laws"). In connection therewith, if any administrative or judicial action or proceeding is instituted (or 7 9 threatened to be instituted) challenging any transaction contemplated by the Merger Agreement as violative of any Antitrust Law, and, if by mutual agreement, HCC and the Company decide that litigation is in their best interests, each of HCC and the Company has agreed, pursuant to the Merger Agreement, to cooperate and use all reasonable efforts vigorously to contest and resist any such action or proceeding and to have vacated, lifted, reversed, or overturned any decree, judgment, injunction or other order, whether temporary, preliminary or permanent (each an "Order"), that is in effect and that prohibits, prevents, or restricts consummation of the Merger or any such other transactions. Pursuant to the Merger Agreement, each of HCC and the Company has agreed to use all commercially reasonable efforts to take such action as may be required to cause the expiration of the notice periods under the HSR Act or other Antitrust Laws with respect to such transactions as promptly as possible after the execution of the Merger Agreement. Each of the parties has agreed in the Merger Agreement to promptly make or cause to be made the filings required of each such party or any of its subsidiaries under any insurance regulatory law or act in any state where such filing is required or, at the request of HCC, deemed advisable, and to comply at the earliest practicable date with any requests made by any insurance regulatory agency or any other Governmental Entity for additional information, documents or other material received by such party or any of its subsidiaries and to cooperate with the other party in connection with any such filing and in connection with resolving any investigation or other inquiry or hearing of any such agency or other Governmental Entity under any insurance law relating to licensing, holding company applications, change in control, etc. with respect to any such filing or any such transaction. Each party has further agreed to promptly inform the other party of any communication with, and any proposed understanding, undertaking agreement with, any Governmental Entity or insurance agency regarding any such filings or any such transaction. The Company shall not participate in any meeting (whether, in person or by telephone) with any Governmental Entity or insurance regulatory agency in respect of any such filings, investigation, or other inquiry without HCC's consent and without giving HCC notice of the meeting, and to the extent permitted by such Governmental Entity, the opportunity to attend and participate. Subject to the fiduciary duties of the Board of Directors of the Company as advised in writing by counsel to the Company, each of HCC and the Company has agreed, pursuant to the Merger Agreement, to use all commercially reasonable efforts to take, or cause to be taken, all actions, and to do, or cause to be done, and to assist and cooperate with the other party in doing, all things necessary, proper or advisable to consummate and make effective, in the most expeditious manner practicable, the Offer, the Merger, and the other transactions contemplated by the Merger Agreement, including (i) the obtaining of all other necessary actions or nonactions, waivers, consents and approvals from Governmental Entities and the making of all other necessary registrations and filings (including other filings with Governmental Entities, if any); (ii) the obtaining of all necessary consents, approvals or waivers from third parties; (iii) the preparation of the Company Disclosure Documents (as defined in the Merger Agreement) and the Offer Documents (as defined in the Merger Agreement); and (iv) the execution and delivery of any additional instruments necessary to consummate the transactions contemplated by, and to fully carry out the purposes of the Merger Agreement. Notwithstanding the foregoing, the Merger Agreement provides that (i) neither HCC nor any of its subsidiaries shall be required to divest any of their respective businesses, product lines or assets; (ii) neither HCC nor any of its subsidiaries shall be required to take or agree to take any other action or agree to any limitation that could reasonably be expected to have a Material Adverse Effect (as defined in Section 15) on the business, assets, financial condition, results of operations or prospects of HCC and its subsidiaries or the Surviving Corporation after the Effective Time; (iii) neither the Company nor its subsidiaries shall be required to divest any of their respective businesses, product lines or assets, or to take or agree to take any other action or agree to any limitation that could reasonably be expected to have a Material Adverse Effect; (iv) no party shall be required to agree to the imposition of, or to comply with, certain conditions, obligations or restrictions on HCC or any of its subsidiaries or on the Surviving Corporation or any of its subsidiaries; and (v) neither HCC nor Merger Subsidiary shall be required to waive any of the conditions to the Offer or any of the conditions to the Merger. The Merger Agreement provides that each party will give prompt notice to the other party of (i) any representation or warranty made by such party contained in the Merger Agreement becoming untrue or 8 10 inaccurate in any respect; or (ii) the failure by such party to comply with or satisfy in any respect any covenant, condition or agreement to be complied with or satisfied by such party under the Merger Agreement; provided, however, that no such notification shall affect the representations, warranties, covenants or agreements of the parties or the conditions to the obligations of the parties under the Merger Agreement. The Merger Agreement provides that the Company will give prompt notice to HCC, and HCC or Merger Subsidiary will give prompt notice to the Company of (i) any notice or other communication from any person alleging that the consent of such person is or may be required in connection with the transactions contemplated by the Merger Agreement; (ii) any notice or other communication from any Governmental Entity in connection with the transactions contemplated by the Merger Agreement; and (iii) any actions, suits, claims, investigations or proceedings commenced or, to the best of its knowledge threatened against, relating to or involving or otherwise affecting it or any of its subsidiaries which, if pending on the date of the Merger Agreement would have been required to have been disclosed pursuant to the representations and warranties of the Company or which relate to the consummation of the transactions contemplated by the Merger Agreement. Stock Options. The Merger Agreement provides that, at the time that Merger Subsidiary has accepted for payment all Shares validly transferred and not withdrawn pursuant to the Offer, each outstanding Company Option, whether vested or unvested, shall be canceled, and each holder of any such option shall be paid by Merger Subsidiary promptly for each such option an amount determined by multiplying (i) the excess, if any, of $12.50 per Share over the applicable exercise price of such option by (ii) the number of Shares such holder could have purchased had such holder exercised such option in full immediately prior to the time that Merger Subsidiary has accepted for payment all Shares validly transferred and not withdrawn pursuant to the Offer (as if such Company Option was exercisable in full). Notwithstanding any other provisions of the Merger Agreement, immediately after the acceptance for payment of Shares pursuant to the Offer no Company Options will remain outstanding. Pursuant to the Merger Agreement and as soon as practicable following the date of the Merger Agreement, the Company has agreed to use its commercially reasonable efforts to (i) obtain any consents from holders of Company Options; and (ii) make any amendments to the terms of such stock option or compensation plans or arrangements that, in the case of either clauses (i) or (ii), are necessary to give effect to the transactions contemplated by the Merger Agreement. Notwithstanding any other provision of the Merger Agreement, payment may be withheld in respect of any Company Option until necessary consents are obtained. All amounts payable pursuant to the Merger Agreement in respect of Company Options shall be subject to, and reduced by, any required withholding of taxes and shall be paid without interest. Other Offers. Pursuant to the Merger Agreement, the Company has agreed that, until the termination of the Merger Agreement, the Company and its subsidiaries will not, and will not authorize or permit the officers, directors, employees or other agents of the Company and its subsidiaries to, directly or indirectly, (i) take any action to solicit, initiate or encourage any Acquisition Proposal (as defined below); or (ii) subject to the fiduciary duties of the Board of Directors under applicable law, as advised in writing by Gibson, Dunn & Crutcher LLP, counsel to the Company, and in response to an unsolicited request that has been submitted to the Company's Board of Directors and determined to be a Superior Acquisition Proposal (as defined below), engage in negotiations with, or disclose any nonpublic information relating to the Company or any of its subsidiaries or afford access to the properties, books or records of the Company or any of its subsidiaries to, any person that has advised the Company that it may be considering making, or that has made, an Acquisition Proposal; provided, however, that the foregoing does not prohibit the Company's Board of Directors from taking and disclosing to the Company's Shareholders a position with respect to a tender offer pursuant to Rules 14d-9 and 14e-2 promulgated under the Exchange Act. The Company has agreed to promptly notify HCC after receipt of any Acquisition Proposal or any indication that any person is considering making an Acquisition Proposal or any request for nonpublic information relating to the Company or any of its subsidiaries or for access to the properties, books or records of the Company or any of its subsidiaries by any person that has advised the Company that it may be considering making, or that has made, an Acquisition Proposal and will keep HCC fully informed of the status and details of any such Acquisition Proposal, notice or request. "Acquisition Proposal"means any offer or proposal for, or any indication of interest in, a merger or 9 11 other business combination involving the Company or any of its subsidiaries or the acquisition of any significant equity interest in, or a significant portion of the assets of, the Company or any of its subsidiaries, other than the transactions contemplated by the Merger Agreement; and "Superior Acquisition Proposal" means an Acquisition Proposal which a majority of the Company's disinterested directors determines in its good faith judgment (based on the written advice of Advest) to be more favorable to the Company's Shareholders than the Offer or the Merger, and for which financing, to the extent required, is then committed. Agreement with respect to Director and Officer Indemnification and Insurance. Pursuant to the Merger Agreement, after the Effective Time, HCC will cause the Surviving Corporation to indemnify and hold harmless the present and former officers, directors, employees and agents of the Company (the "Indemnified Parties") in respect of acts or omissions based in whole or in part on, or arising in whole or in part out of, or pertaining to (i) the fact that such Indemnified Party is or was a director, officer or employee of the Company, any of its subsidiaries or any of their respective predecessors or was prior to the Effective Time serving at the request of any such party as an officer, director, employee or agent of another corporation, partnership, trust or other enterprise; or (ii) the Merger Agreement, or any of the transactions contemplated thereby and all actions taken by an Indemnified Party in connection therewith. The parties also agreed to cooperate and use commercially reasonable efforts to defend against and respond to such proceedings to the extent set forth in the next sentence. After the Effective Time, HCC agreed to cause Surviving Corporation to indemnify and hold harmless, as and to the fullest extent permitted by the Company's Certificate of Incorporation and By-Laws in effect on the date of the Merger Agreement and by law, each such Indemnified Party against any losses, claims, damages, liabilities, costs, expenses (including reasonable attorneys' fees and expenses in advance of the final disposition of any claim, suit, proceeding or investigation to each Indemnified Party to repay such advanced expenses if it is finally and unappealably determined that such Indemnified Party was not entitled to indemnification hereunder), judgments, fines and amounts paid in settlement in connection with any such threatened or actual claim, action, suit, proceeding or investigation, and in the event of any such threatened or actual claim, action, suit, proceeding or investigation (whether asserted or arising before or after the Effective Time) (collectively, "Claims"), the Indemnified Parties may retain counsel reasonably satisfactory to them after consultation with the Surviving Corporation; provided, however, that (1) the Surviving Corporation has the right to assume the defense thereof and upon such assumption the Surviving Corporation will not be liable to any Indemnified Party for any legal expenses of other counsel or any other expenses subsequently incurred by an Indemnified Party in connection with the defense thereof, except that if the Surviving Corporation elects not to assume such defense, or counsel for the Indemnified Parties reasonably advises the Indemnified Parties that there are or may be (whether or not any have yet actually arisen) issues which raise conflicts of interest between the Surviving Corporation and the Indemnified Parties, the Indemnified Parties may retain counsel reasonably satisfactory to them, and the Surviving Corporation will pay the reasonable fees and expenses of such counsel for the Indemnified Parties, (2) the Surviving Corporation is obligated pursuant to this paragraph to pay for only one firm of counsel for all Indemnified Parties, (3) the Surviving Corporation will not be liable for any settlement effected without its prior written consent, and (4) the Surviving Corporation will have no obligation hereunder to any Indemnified Party when if a court of competent jurisdiction shall ultimately determine, and such determination shall have become final and nonappealable, that indemnification of such Indemnified Party in the manner contemplated hereby is prohibited by the Certificate of Incorporation or By-Laws of the Company or its subsidiaries or applicable law. Any Indemnified Party wishing to claim indemnification under this provision, upon learning of any such claim, action, suit, proceeding or investigation, shall notify the Surviving Corporation thereof, provided, however, that the failure to so notify shall not affect the obligations of the Surviving Corporation under this provision except (and only) to the extent such failure to notify materially prejudices the Surviving Corporation. Furthermore, the Surviving Corporation agreed that all rights to indemnification and all limitations of liability existing in favor of the Indemnified Parties as provided in the Company's Certificate of Incorporation or By-Laws or in the similar governing documents of any of the Company's subsidiaries as in effect as of the date of the Merger Agreement with respect to matters occurring on or prior to the Effective Time shall survive the Merger and shall continue in full force and effect thereafter, without any amendment thereto; provided, however, that nothing contained in this provision will be deemed to preclude the liquidation; consolidation or merger of the Company or any subsidiary thereof, in which case all of such rights to indemnification and limitations on 10 12 liability will be deemed to so survive and continue notwithstanding any such liquidation, consolidation or merger and shall constitute rights which may be asserted against the Surviving Corporation. Nothing contained in this provision will be deemed to preclude any rights to indemnification or limitations on liability provided in the Company's Certificate of Incorporation or By-Laws or similar governing documents of the Surviving Corporation with respect to matters occurring subsequent to the Effective Time to the extent that the provisions establishing such rights or limitations are not otherwise amended to the contrary. The Surviving Corporation agreed to use its commercially reasonable efforts to cause the persons serving as officers and directors of the Company immediately prior to the Effective Time to be covered for a period of three years from the Effective Date by the directors' and officers' liability insurance policy maintained by the Surviving Corporation (provided that the Surviving Corporation may substitute therefor policies of at least the same coverage and amounts containing terms and conditions of such existing policy and provided further that in no event will the Surviving Corporation be required to expend in any one year an amount in excess of 200% of the annual premiums currently paid by the Company for such insurance) with respect to acts or omissions occurring prior to the Effective Time which were committed by such officers and directors in their capacity as such. A copy of the applicable portions of the Company's Certificate of Incorporation and By-Laws has been filed as an exhibit to this Schedule 14D-9 and is incorporated herein by reference. Regulatory Filings. Pursuant to the terms of the Merger Agreement, the Company has agreed to commence preparation of and, consistent with past practice and on a timely basis, if required prior to the Closing Date, file with or submit to any insurance department or other Governmental Entity with which the Company is required to make such filings or submissions, and, if filed prior to the Closing Date, deliver to the HCC true and complete copies of, the quarterly statutory statement for each quarter of 1999 ended prior to the Closing Date, together with all related notes, exhibits and schedules thereto. The Company has agreed that all such quarterly statements filed with or submitted to any insurance department or Governmental Entity (i) shall be prepared from the books of account and other financial records of the Company; (ii) shall be filed with or submitted to such insurance departments and Governmental Entities, on forms prescribed or permitted thereby; (iii) shall be prepared in accordance with SAP applied on a basis consistent with the past practices of the Company (except as set forth in the notes, exhibits or schedules thereto), and shall comply on their respective dates of filing or submission with the laws of such jurisdictions; (iv) shall present fairly the statutory assets, liabilities, capital and surplus, results of operations and cash flows of the Company as of the dates thereof or for the periods covered thereby (subject to normal estimation of accruals and reserves and normal year-end audit adjustments); and (v) shall not use any accounting practices that are permitted rather than prescribed by the insurance departments and regulatory authorities. Other Agreements. HCC has agreed that it will take all action necessary to cause Merger Subsidiary to perform its obligations under the Merger Agreement and to consummate the Offer and the Merger on the terms and conditions set forth in the Merger Agreement. Employees. Except as otherwise provided in the Merger Agreement, HCC has agreed that it (or the Surviving Corporation) will be a successor employer with respect to, and assume sponsorship of (or cause the Surviving Corporation to assume sponsorship of), in accordance with their terms, all Benefit Plans previously delivered to HCC and all accrued benefits vested thereunder, other than Benefit Plans terminated prior to the Effective Time; it being understood and agreed by the parties that nothing in the Merger Agreement shall prevent HCC or the Surviving Corporation from terminating any such Benefit Plan in accordance with its terms or require HCC or the Surviving Corporation to incur any liability or assume any obligation other than liabilities and obligations under the terms of such plans as in effect on the Execution Date. The term "Benefit Plans" means any collective bargaining agreement or any bonus, pension, profit sharing, deferred compensation, incentive compensation, stock ownership, stock purchase, stock option, phantom stock, stock appreciation right, retirement, vacation, severance, disability, death benefit, hospitalization, medical, workers' compensation, disability, supplementary unemployment benefits, or other plan, arrangement or understanding (whether or not legally binding) or any employment agreement providing compensation or benefits to any current or former employee, officer, director or independent contractor of the Company or any of its 11 13 subsidiaries or any beneficiary thereof or entered into, maintained or contributed to, as the case may be, by the Company or any of its subsidiaries. Conditions to the Merger. Pursuant to the Merger Agreement, the respective obligations of each party to consummate the Merger are subject to the satisfaction of the following conditions: (i) HCC or Merger Subsidiary shall have purchased Shares in an amount equal to at least the Minimum Condition pursuant to the Offer; (ii) if required by applicable law, the adoption of the Merger Agreement by the Shareholders of the Company in accordance with Delaware Law; (iii) no provision of any applicable law or regulation and no judgment, injunction, order or decree shall prohibit the consummation of the Merger; (iv) any applicable waiting period under the HSR Act relating to the Merger shall have expired; (v) other than filing the certificate of merger in accordance with Delaware Law, all consents required to permit the consummation of the Merger shall have been filed, occurred or been obtained (other than those the failure to file, occur or obtain, in the aggregate, could not reasonably be expected to have a Material Adverse Effect or prevent or materially delay the consummation of the Merger); (vi) each Governmental Entity having jurisdiction over the Company or any of its subsidiaries, their business, licenses or permits, shall have, where applicable, approved the transactions contemplated by the Merger Agreement and any "change of control" incidental thereto; (vii) each of the officers and employees whose names are specifically set forth on Annex II to the Merger Agreement shall have executed an agreement to remain in the employment of the Surviving Corporation for a period of up to 120 days after the Effective Time and as of the Effective Time, none of such persons listed on Annex II-A to the Merger Agreement and no more than two of those persons set forth on Annex II-B to the Merger Agreement shall have voluntarily terminated or terminated for Good Reason, as defined in the respective Severance Agreement entered into by each of such persons; and (viii) the Company shall have performed its obligations under Section 5.8 to the Merger Agreement. See "The Merger Agreement -- Affirmative Actions". Termination. The Merger Agreement may be terminated and the Merger may be abandoned at any time prior to the Effective Time (notwithstanding any approval of the Merger Agreement by the Shareholders of the Company) (i) by mutual written consent of the Company and HCC; (ii) by either the Company or HCC, if such party has received an opinion from its counsel that there shall be any law or regulation that makes consummation of the Merger illegal or otherwise prohibited or if any judgement, injunction, order or decree enjoining HCC or the Company from consummating the Merger is entered and such judgment, injunction, order or decree shall become final and nonappealable; (iii) by either the Company or HCC (provided, however, that no party shall be entitled to terminate the Merger Agreement pursuant to this sub-clause (iii) as a result of its breach of this Merger Agreement), (x) if HCC or Merger Subsidiary shall have failed to commence the Offer within five Business Days following the date of the announcement of the Merger Agreement, (y) if HCC or Merger Subsidiary shall not have purchased any Shares pursuant to the Offer prior to February 29, 2000 (or, if the Offer shall have been extended by Merger Subsidiary pursuant to the Merger Agreement, on or prior to March 31, 2000) or (z) the Offer shall have been terminated without HCC or Merger Subsidiary having purchased any Shares pursuant to the Offer; (iv) by HCC upon the occurrence of any Trigger Event described in clauses (i) through (iv) under the heading "Fees and Expenses" below; (v) by the Company, upon the occurrence of any Trigger Event described in clause (i) under the heading "Fees and Expenses" below; and (vi) by either the Company or HCC, if the Merger has not been consummated by June 30, 2000 (provided, however, that the party seeking to terminate the Merger Agreement shall not have breached its obligations under the Merger Agreement in any material respect). Fees and Expenses. Each party to the Merger Agreement has agreed to pay its own fees and expenses and there are no provisions for payment by the Company of the fees and expenses of HCC or Merger Subsidiary or vice versa or at any time prior to the consummation of the Offer as if made at and as of such time, if the Merger Agreement is terminated, except as stated below. The Company has agreed to pay HCC, at HCC's demand and sole election, a fee in immediately available funds equal to $6,000,000 (the "Termination Fee") promptly, but in no event later than one Business Day, after the termination of the Merger Agreement as a result of the occurrence of any of the events set forth below (each a "Trigger Event"): (i) the Company shall have entered into, or shall have publicly announced its intention to enter into, an agreement or an agreement in principle with respect to any Acquisition Proposal; (ii) any person or group (as 12 14 defined in Section 13(d)(3) of the Exchange Act) (other than HCC or any of its affiliates) shall have become the beneficial owner (as defined in Rule 13d-3 promulgated under the Exchange Act) of at least 20% of the outstanding Shares or shall have acquired, directly or indirectly, at least 20% of the assets of the Company; (iii) any representation or warranty made by the Company in, or pursuant to, the Merger Agreement that is qualified as to materiality shall not have been true and correct when made or at any time prior to the consummation of the Offer as if made at and as of such time, or any representation or warranty made by the Company in, or pursuant to, the Merger Agreement that is not so qualified shall not have been true and correct in all material respects when made or at any time prior to the consummation of the Offer as if made at and as of such time, or the Company shall have failed to observe or perform in any material respect any of its obligations under the Merger Agreement; provided, however, that it shall not be a Trigger Event unless the breaches of the representations and warranties without regard to any materiality qualifier or threshold, and failure to perform or breach of any obligation, individually or in the aggregate, have had or could reasonably be expected to have a Material Adverse Effect; or (iv) the Board of Directors of the Company (or any special committee thereof) shall have withdrawn or materially modified in a manner adverse to HCC or Merger Subsidiary its approval or recommendation of the Offer, the Merger into the Merger Agreement the Shareholder Option Agreement and Stock Option Agreement, in any such case whether or not such withdrawal or modification is required by the fiduciary duties of the Company's Board of Directors (or any special committee thereof). The Merger Agreement provides that if it is terminated as a result of the occurrence of a Trigger Event, in addition to the Termination Fee paid or payable by the Company to HCC pursuant to the forgoing, the Company shall assume and pay, or reimburse HCC for, all reasonable fees payable and expenses incurred by HCC (including the fees and expenses of its counsel in connection with the Merger Agreement and the transactions contemplated hereby), up to a maximum of $1,000,000 (the "Expense Reimbursement"). HCC shall not be entitled to the Termination Fee if HCC shall have exercised all or any part of the option granted to HCC in the Stock Option Agreement, but shall be limited to the Expense Reimbursement. Appraisal Rights. Shareholders do not have dissenters' rights as a result of the Offer. However, if the Merger is consummated, Shareholders at the time of the Merger who do not vote in favor of or consent in writing to the Merger will have the right under Delaware Law to dissent and demand appraisal of their Shares in accordance with Section 262 of Delaware Law. Under Delaware Law, dissenting Shareholders who comply with the applicable statutory procedures will be entitled to receive a judicial determination of the fair value of their Shares (exclusive of any element of value arising from the accomplishment or expectation of the Merger) and to receive payment of such fair value in cash, together with a fair rate of interest, if any. Any such judicial determination of the fair value of the Shares could be based upon considerations other than or in addition to the price paid in the Offer (or the Merger) and the market value of the Shares. The Shareholders should recognize that the value so determined could be higher or lower than the price per Share paid pursuant to the Offer or the Merger. Moreover, HCC or Merger Subsidiary may argue in an appraisal proceeding that, for purposes of such a proceeding, the fair value of the Shares is less than the price paid in the Offer (or the Merger). THE FOREGOING SUMMARY OF THE RIGHTS OF DISSENTING SHAREHOLDERS DOES NOT PURPORT TO BE A COMPLETE STATEMENT OF PROCEDURES TO BE FOLLOWED BY SHAREHOLDERS DESIRING TO EXERCISE THEIR DISSENTERS' RIGHTS. SHAREHOLDER OPTION AGREEMENT The following description of the Shareholder Option Agreement is qualified in its entirety by reference to the text of such Shareholder Option Agreement, a copy of which is attached as an exhibit to this Schedule 14D-9 and is incorporated herein by reference. Grant of Stock Option. Under the Shareholder Option Agreement, certain Shareholders named therein (the "Principal Shareholders") have each granted Merger Subsidiary an irrevocable option to purchase, subject to the terms and conditions set forth in the Shareholder Option Agreement, for a price of $12.50 per Share in cash, such Principal Shareholder's Shares and any additional Shares acquired by such Shareholder in any capacity (whether by exercise of options, warrants or rights, the conversion or exchange of convertible or 13 15 exchangeable securities or by means of a purchase, dividend, distribution or otherwise) (collectively, the "Shareholder Shares"). The Shareholder Option Agreement also provides that the number and kind of Shareholder Shares subject to the option and the purchase price therefor shall be appropriately and equitably adjusted in the event of changes in the Company's capital stock. Exercise of Option. Subject to the terms of the Shareholder Option Agreement, Merger Subsidiary has the right to exercise the option, in whole, but not in part, at any time after the date an Acquisition Proposal or a Superior Acquisition Proposal is successfully received and paid for in excess of 50% of the Fully Diluted Shares or a third party has otherwise acquired in excess of 50% of the Fully Diluted Shares. The Shareholder Option Agreement further provides that, once exercisable, the option must be exercised, if at all, within five Business Days. Agreement to Tender. Each of the Principal Shareholders has agreed to validly tender (or cause the record owner of such Shares to validly tender) such Principal Shareholder's Shares in the Offer within two days of the receipt of Merger Subsidiary's offer to purchase relating to the Offer. Each Principal Shareholder has agreed, in the Shareholder Option Agreement, upon receipt of written instructions from Merger Subsidiary, to deliver to the Depositary (i) a Letter of Transmittal with respect to such Principal Shareholder's Shares complying with the terms of the Offer together with instructions directing the Depositary to make payment for such Shares directly to the Principal Shareholder (but if such Shares are not accepted for payment or are withdrawn and are to be returned pursuant to the Offer, to return such Shares to such Principal Shareholder whereupon they shall continue to be held by such Principal Shareholder subject to the terms and conditions of the Shareholder Option Agreement); (ii) the certificates evidencing such Principal Shareholder's Shares; and (iii) all other documents or instruments required to be delivered pursuant to the terms of the Offer. Conditions. The Principal Shareholders' obligations to sell their Shares (other than by tendering pursuant to the Offer) under the Shareholder Option Agreement are subject to the satisfaction of the following conditions: (i) the representations and warranties of Merger Subsidiary set forth in the Shareholder Option Agreement shall be true and correct in all material respects on the date of sale as if made on such date; (ii) if applicable, all waiting periods under the HSR Act to the exercise of the Stock Option shall have expired or been terminated; and (iii) there shall be no preliminary or permanent injunction or other order, decree or ruling issued by a court of competent jurisdiction or by a governmental, regulatory or administrative agency or commission, nor any statute, rule, regulation or order promulgated or enacted by any governmental authority, prohibiting or otherwise restraining such exercise of the Stock Option. No Shopping. Each Principal Shareholder has further agreed to be bound to the obligation and the restrictions placed on him as a director of the Company pursuant to Section 5.4 of the Merger Agreement (this section is discussed herein under the title. See "The Merger Agreement -- Other Offers." Proxy. In entering into the Shareholder Option Agreement, each Principal Shareholder (i) revoked any and all previous proxies granted with respect to such Shareholders' Shares; and (ii) granted Merger Subsidiary a proxy to vote or consent at every annual, special or adjourned meeting, or solicitation of consents, of the Shareholders of the Company (including the right to sign its name as Shareholder to any consent, certificate or other document relating to the Company that the law of the State of Delaware may permit or require) (1) in favor of the adoption of the Merger Agreement and the Shareholder Option Agreement and approval of the Merger and the other transactions contemplated by the Merger Agreement and Shareholder Option Agreement, (2) against any proposal for any recapitalization, merger, sale of assets or other business combination between the Company and any person or entity (other than the Merger) or any other action or agreement that would result in a breach of any covenant, representation or warranty or any other obligation or agreement of the Company under the Merger Agreement not being fulfilled, and (3) in favor of any other matter relating to consummation of the transactions contemplated by the Merger Agreement and the Shareholder Option Agreement. Each Shareholder also agreed to cause such Principal Shareholder's Shares that are outstanding and owned by it beneficially to be voted in accordance with the foregoing. The proxy granted under the Shareholder Option Agreement is irrevocable, but such proxy will be revoked upon termination of the Shareholder Option Agreement in accordance with its terms. 14 16 Shareholders holding an aggregate of up to 1,011,835 Shares are parties to the Shareholder Option Agreement. STOCK OPTION AGREEMENT The following description of the Stock Option Agreement, is qualified in its entirety by reference to the text of such Stock Option Agreement, a copy of which is attached as an exhibit to this Schedule 14D-9 and is incorporated herein by reference. Grant of Stock Option. Under the Stock Option Agreement, the Company granted HCC an option to purchase, subject to the terms and conditions set forth in the Stock Option Agreement, 19.9% of the Company's issued and outstanding Shares, at a price per Share equal to the Merger Consideration (the "HCC Option"). As of October 11, 1999, the HCC Option would be exercisable for 2,295,679 Shares. The HCC Option is exercisable and may be exercised in whole, or in part, at any time and from time to time, until the expiration of the HCC Option as provided in the Stock Option Agreement. The HCC Option shall only be exercisable if, at any time after October 11, 1999 and prior to the expiration of the HCC Option the Company enters into, or publicly announces its intention to enter into, an agreement or an agreement in principle with respect to any Acquisition Proposal or Superior Acquisition Proposal. The HCC Option shall expire at 11:59 P.M. California time on the earlier of the fifth Business Day after the Acquisition Proposal or Superior Acquisition Proposal is terminated or December 31, 2000. The number of Shares of Common Stock of the Company exercisable pursuant to the terms of the HCC Option shall be appropriately adjusted to reflect any change in the Common Stock of the Company after the date of the Stock Option Agreement. Purchase of HCC Option by Company. The Stock Option Agreement provides that if, before the expiration of the HCC Option, there is either (i) an Acquisition Proposal which at any time becomes a Superior Acquisition Proposal (regardless of whether it is consummated); or (ii) the commencement of a tender offer or exchange offer for at least 20% of the Shares of Common Stock of the Company; or (iii) the acquisition by any person or "group" (within the meaning of Rule 13d-5 under the Exchange Act) of at least 20% of the Shares (or rights to acquire shares) of Common Stock of the Company, then, in either event, for a period of 100 days after (x) such Acquisition Proposal becomes a Superior Acquisition Proposal or (y) such event occurs, but prior to the expiration of the HCC Option, HCC shall be entitled to sell the HCC Option to the Company and the Company shall be required to purchase the HCC Option from HCC, for $6,000,000 in cash against HCC's written acknowledgment that it has surrendered all of its rights to the HCC Option. Amendment of Rights Agreement. The Stock Option Agreement provides that the Company agreed that immediately prior to execution of such Agreement, it shall take all necessary action under the Rights Plan, including any required amendment thereto, so that the grant or exercise of the HCC Option on the terms permitted hereunder and as contemplated herein will not cause (i) the Rights to become exercisable under the Rights Plan; (ii) HCC, or any subsidiary of HCC, including Merger Subsidiary to be deemed a "10% Shareholder;" or (iii) the "10% Stock Ownership Date" to occur upon such consummation; provided, however, that the Company shall not be required to make such amendments to the Rights Plan if, (x) HCC has not performed or complied in all material respects with the Stock Option Agreement prior to the exercise of the HCC Option or (y) the Company obtains, and there is in force from the Delaware Court of Chancery, an order permanently, preliminarily or temporarily declaring that the making of such amendments to the Rights Plan would be contrary to the fiduciary duties of the Board of Directors of the Company. Notwithstanding anything else contained herein, in no event shall the Board of Directors of the Company make any comparable amendment of the Rights Plan in favor of any other person without making such amendment in favor of HCC. ITEM 4. THE SOLICITATION OR RECOMMENDATION. (a) RECOMMENDATION OF THE BOARD OF DIRECTORS. The Board of Directors has unanimously (a) determined that the Merger Agreement and the transactions contemplated thereby, including each of the Offer and the Merger, are fair, advisable to and in the best interests of the Company and its Shareholders, (b) approved the Offer and adopted the Merger 15 17 Agreement and the transactions contemplated thereby in accordance with Delaware Law, (c) resolved to recommend that the Shareholders accept the Offer and approve the Merger Agreement, and (d) taken all action necessary to render Section 203 of Delaware Law inapplicable to the Offer and the Merger. (b) BACKGROUND OF THE OFFER; REASONS FOR THE RECOMMENDATION. Background. In January 1998, Stephen L. Way, the Chairman of the Board and Chief Executive Officer of HCC, contacted David L. Cargile, Chairman of the Board and Chief Executive Officer of the Company expressing HCC's interest in informal discussions about a possible business combination. An additional meeting was held in August 1998. The Company's Chief Executive Officer, after consultation with the Company's Board of Directors, advised HCC following those meetings that the Company was not for sale, and that it preferred to remain independent. On October 26, 1998 the Company received an unsolicited letter from HCC expressing HCC's interest in acquiring the Company in an all cash transaction with no financing contingencies, but this letter did not indicate a proposed price. The Company's Board of Directors considered HCC's letter and determined that it would not be appropriate to enter into conversations regarding a potential sale of the Company at that time. In a letter to Mr. Way dated November 12, 1998, the Company stated its reasons for its position, noting among other items, that the Company had several pending transactions and business initiatives, including the purchase of Seaboard Life Insurance Company (USA) and VASA North America, Inc. and the sale or restructuring of its property/casualty reinsurance operations. On January 11, 1999, HCC publicly offered to acquire the 92.2% of the Company it did not already own for $13.25 a share. Based on market conditions in the insurance industry and the medical stop-loss business particularly, and after reviewing the future prospects for the Company at the time, the Company concluded that the offer was not adequate. Accordingly, on January 27, 1999, the Company rejected the takeover bid, to which HCC responded by withdrawing its offer. Shortly after, but as a result of, HCC's unsolicited proposal, the Company received inquiries from several other parties who also expressed an interest in the possibility of a transaction with the Company. These parties were all large multinational insurance companies which were also involved in the medical stop-loss industry. The Company's Board concluded that it would be in the best interest of the Company's Shareholders to determine whether the Company should consider a sale to a buyer willing to pay a price that, in their judgment, reflected the value of the Company. In this connection, Advest, which was already providing financial advice to the Company, was engaged to act as the Company's principal agent and financial advisor should the Company pursue a strategic alliance or a business combination, including a sale of the Company to a third party. During the months of February and March 1999, the Company engaged in conversations with four large and well known insurance companies which had previously expressed an interest in the Company. Each of these parties signed a confidentiality agreement in order to obtain a memorandum prepared by Advest which included pro-forma projections and a financial analysis and valuation. During February and March 1999, members of the Company's senior management met with representatives of each of these companies to review the Advest materials, answer questions and provide additional information. Thereafter, the Company received preliminary non-binding indications of interest ranging from $16.00 to $19.50 per share. On March 31, 1999, the Company, in conjunction with releasing its 1998 Fourth Quarter and Year-End results, issued a statement stating that it was looking at its strategic options, including the possible sale of the Company. Two of these four companies conducted extensive due diligence reviews of the Company and its operations during April and May of 1999. The other two companies did not conduct due diligence. One of these other two other companies indicated early in the process a price range that was below the Company's minimum range. The second of these two companies objected to the terms under which its due diligence was to be conducted and imposed conditions that the Company would not be able to meet. For a variety of reasons, no formal proposals to acquire the Company or binding indications of interest were made by either of the two companies that conducted due diligence. In May 1999, five additional parties were identified by the Company as potential buyers, and each signed a confidentiality agreement and received a memorandum with updated pro-forma projections and a valuation 16 18 analysis. Three of these companies were large insurance companies involved in the medical stop-loss business. The other two were also in insurance-related businesses. In addition, in August 1999, a further updated memorandum was sent to one of the first four companies at its request, but no further interest was expressed by that company after reviewing the revised materials. Conversations with the five additional potential acquirers were conducted through September 1999, which involved meetings and an exchange of information. However, none of these companies conducted due diligence on the Company, and no formal proposals or binding indications of interest were received from any of them. After actively marketing the Company to nine interested potential buyers from February 1999 to date, the Company had not received any formal proposals or binding indications of interest from any party other than HCC. During the period when the Company was involved in due diligence and conversations with the parties described above, HCC continued to intermittently express an interest in a transaction with the Company, directly and through its representatives. HCC was advised informally on various occasions and in writing on April 21, 1999, that it would not be in the best interests of the Company's Shareholders for the Company to have conversations with HCC under existing circumstances, i.e., while conversations were going on with other parties. On July 22, 1999, HCC sent the Company a letter indicating that it was prepared to offer to acquire the Company for a price ranging from $14 to $16 per Share, subject to completion of satisfactory due diligence. The Company responded in writing on July 26, 1999 indicating that it was prepared to proceed with a process that would allow both parties to determine whether a transaction could be accomplished on mutually acceptable terms and conditions. This process included HCC entering into a confidentiality agreement to protect the Company's competitive information, and a standstill provision to restrict HCC from acquiring additional Shares of the Company's stock. HCC and the Company had discussions by telephone and in person on a number of occasions between July 1 and September 15, 1999. Centris wrote to HCC on August 10, 1999 regarding a proposed confidentiality agreement and HCC replied to the issues raised by Centris on August 17, 1999. On August 22, 1999, HCC and the Company entered into a confidentiality agreement, including a six month standstill provision. HCC conducted preliminary due diligence concerning the affairs and activities of the Company from August 30 through September 1, 1999. Following HCC's preliminary due diligence, on September 9, 1999, the Chairman of the Board of HCC indicated to the Chairman of the Board of the Company that HCC was considering a cash tender offer price range of $11 to $12.60 per Share. After consultation with the Company's Board of Directors, the Company's Chairman of the Board advised HCC's Chairman of the Board that an offer price in that range would not be acceptable. Thereafter, on September 15, 1999, representatives of the Company met with representatives of HCC at which time HCC proposed an offer price of $13.25 per Share. The following day, the Company advised HCC that the Company was prepared to negotiate a definitive agreement for the proposed transaction based on the indicated $13.25 per Share price. From September 22, 1999 through September 24, 1999, meetings were held between representatives of HCC, including its legal advisors, and representatives of the Company, including its legal advisors, to negotiate the terms of a definitive merger agreement and related documents, and for HCC to conduct detailed due diligence. No agreement was reached and the negotiations were suspended. On September 29, 1999, the Chief Executive Officers of the Company and HCC met, at which time HCC indicated that it would be willing to pay a price range of $10.50 to $11.50 per Share for the Company's stock. HCC was advised that the price range would not be acceptable to the Company's Board of Directors. After discussions between the two companies' Chief Executive Officers, a price of $12.50 per Share was offered by HCC and the Company's Chief Executive Officer agreed to present that offer to the Company's Board of Directors for its consideration. Further negotiations by representatives of both companies to finalize the definitive agreements and additional due diligence by HCC took place between September 30, 1999 and October 3, 1999. On October 10, 1999, the Company's Board of Directors approved the $12.50 price per Share offer and authorized the Company to enter into the Merger Agreement, the Stock Option Agreement and the Shareholder Option Agreement and other related agreements. Such documents were finalized and executed on October 11, 1999. At approximately 8:00 a.m. New York City time on October 12, 1999, HCC and the Company issued separate press releases announcing the transaction. 17 19 Factors Considered by the Board. In approving the Merger Agreement and the transactions contemplated thereby, and recommending that all Shareholders tender their Shares pursuant to the Offer, the Board of Directors considered a number of factors, including: 1. The Board of Directors's belief, as a result of the Board of Directors's review of the Company's business, its financial condition and prospects, that the Offer and the Merger represent the most attractive financial alternative available to the Company's Shareholders based upon the efforts of management and its financial advisors over the last seven months to explore strategic alternatives and alliances, including the possible sale of the Company. 2. The Board of Directors's judgment, after extensive consultation with its financial advisors, that the likelihood of receiving a more attractive offer was low, because of factors including, among other things: (a) a sharp decline from January through October 1999 in the book value multiples paid in insurance company acquisitions, (b) a prolonged selling period, (c) a significant number of managing general underwriters of medical stop loss have been put up for sale, creating a large supply available for acquisition, thereby depressing the price, (d) the Company's decline in earnings, book value, and projections, and (e) the general decline in prices of financial services stocks, specifically insurance company stocks. 3. The opinion of Advest to the effect that, as of the date of such opinion and based upon and subject to certain factors and assumptions stated therein, the $12.50 per Share consideration to be received by the Company's Shareholders pursuant to the Offer and the Merger is fair from a financial point of view to such Shareholders. THE FULL TEXT OF ADVEST'S OPINION IS ATTACHED AS ANNEX B HERETO AND IS INCORPORATED HEREIN BY REFERENCE. SHAREHOLDERS ARE URGED TO READ SUCH OPINION IN ITS ENTIRETY. 4. The relationship of the $12.50 per Share Offer Price to the historical market prices for the Common Stock, including the fact that such price represents a 25.79% premium over the closing price of the Company's Common Stock on October 8, 1999, the last full trading day prior to the Board of Directors' approval of the Merger Agreement. In addition, the $12.50 per Share Offer Price represents a premium of 34.41% over the $9.30 per Share average closing price for the 30 trading days immediately preceding the Board of Directors' approval of the Merger Agreement. 5. The fact that at the time of the Company's release of its 1998 fourth quarter and year-end results on March 31, 1999, the Board of Directors announced that it had instructed management and its advisors to explore a possible sale of the Company, that the Company engaged in a thorough process of soliciting indications of interest from prospective purchasers and that no prospective purchasers other than HCC had made a proposal for a transaction following that announcement. 6. The Company's prospects if it were to remain independent, including information concerning the Company's business prospects, its financial performance and condition, particularly in the near future, legislative issues, the effect of new technology, its competitive position, as well as the risks inherent in remaining independent as a publicly held "smallcap" company. 7. The likelihood that the proposed acquisition would be consummated, in light of the experience, reputation and financial capabilities of HCC, and that the proposed acquisition would be consummated more quickly than a stock-for-stock merger as compared to the risks to the Company if the acquisition were not consummated or were not consummated for a significant period of time, including a potential negative effect on (a) the Company's employees, its customers and clients directly affecting its sales and operating results, (b) the progress of certain development projects and (c) the Company's stock price. 18 20 8. The view of the Board of Directors, after consultation with its financial and legal advisors, that the terms of the Merger Agreement, including the amounts payable to Merger Subsidiary in the event of termination, would not materially deter bona fide acquisition proposals by third parties on more favorable terms. 9. The availability of appraisal rights under Section 262 of Delaware Law to shareholders of the Company who dissent from the Merger. The foregoing discussion of the information and factors considered by the Board of Directors is not meant to be exhaustive but includes the material factors considered by the Board of Directors in reaching its conclusions and recommendations. In view of the variety of factors considered in its reaching a determination, the Board of Directors did not find it practicable to, and did not, quantify or otherwise assign relative weights to the specific factors considered in reaching its conclusions and recommendations. In addition, individual members of the Board may have given different weights to different factors. ITEM 5. PERSONS RETAINED, EMPLOYED OR TO BE COMPENSATED. The Company retained Advest as its financial advisor in connection with the Offer and the Merger. Pursuant to an engagement letter dated May 18, 1999 (the "Engagement Letter"), the Company has agreed to pay Advest upon consummation of a sale of the Company, including a sale pursuant to the transactions contemplated by the Merger Agreement, a total fee, payable in cash on closing, of 50 basis points of the total dollar amount of the sale (the "Transaction Fee"). The Company has not paid any part of the Transaction Fee to date. Pursuant to the Engagement Letter, the Company has agreed to pay Advest $250,000 upon delivery of Advest's opinion letter to the Company with respect to the fairness of the consideration to be received by the Shareholders in the Offer and the Merger. In addition to the foregoing compensation, pursuant to the Engagement Letter the Company has agreed to reimburse Advest for its reasonable out-of-pocket expenses (including fees and disbursements of its attorneys) and to indemnify it and certain related persons against certain liabilities arising out of the engagement and the transactions in connection therewith, including certain liabilities under the federal securities laws. Except as set forth above, neither the Company nor any person acting on its behalf has or currently intends to employ, retain or compensate any person to make solicitations or recommendations to the Shareholders of the Company on its behalf with respect to the Offer and the Merger. ITEM 6. RECENT TRANSACTIONS AND INTENT WITH RESPECT TO SECURITIES. (a) The Company purchased 25,300 of its Shares at a price of $7.875 per Share and 400 Shares at a price of $7.8125 per Share during the past 60 days under the Company's share repurchase program. To the best of the Company's knowledge, no other transactions in Shares have been effected during the past 60 days by the Company or any of its executive officers, directors or affiliates except that certain officers of the Company have acquired beneficial ownership of Shares under the Company's payroll deduction program and 401(k) Plan, which acquisitions are not material. (b) To the best of the Company's knowledge, to the extent permitted by applicable securities laws, rules or regulations, all of the Company's executive officers, directors and affiliates who own Shares presently intend to tender such Shares to Merger Subsidiary pursuant to the Offer. Certain Shareholders are contractually obligated to tender their Shares to Merger Subsidiary pursuant to the Offer. See "Shareholder Option Agreement" elsewhere in this Statement. ITEM 7. CERTAIN NEGOTIATIONS AND TRANSACTIONS BY SUBJECT COMPANY. (a) Except as set forth herein, the Company is not engaged in any negotiation in response to the Offer which relates to or would result in (i) an extraordinary transaction such as a merger or reorganization, 19 21 involving the Company or any subsidiary of the Company; (ii) a purchase, sale or transfer of a material amount of assets by the Company or any subsidiary of the Company; (iii) a tender offer for or other acquisition of securities by or of the Company; or (iv) any material change in the present capitalization or dividend policy of the Company. (b) Except as set forth herein, there are no transactions, Board resolutions, agreements in principle or signed contracts in response to the Offer that relate to or would result in one or more of the events referred to in Item 7(a) above. ITEM 8. ADDITIONAL INFORMATION TO BE FURNISHED. Short Form Merger. Under Delaware Law, if Merger Subsidiary acquires, pursuant to the Offer or otherwise, at least 90% of the outstanding Shares of Common Stock, Merger Subsidiary will be able to effect the Merger after consummation of the Offer without a vote of the Company's Shareholders. However, if Merger Subsidiary does not acquire at least 90% of the outstanding Shares of Common Stock pursuant to the Offer or otherwise and a vote of the Company's Shareholders is required under Delaware Law, a significantly longer period of time will be required to effect the Merger. ITEM 9. MATERIAL TO BE FILED AS EXHIBITS.
EXHIBIT NUMBER DESCRIPTION ------- ----------- 1 Agreement and Plan of Merger, dated as of October 11, 1999, among HCC Insurance Holdings, Inc., Merger Sub of Delaware, Inc. and The Centris Group, Inc. 2 Shareholder Option Agreement, dated as of October 11, 1999, among Merger Sub of Delaware, Inc. and the shareholders of the Company named therein 3 Stock Option Agreement, dated as of October 11, 1999, between HCC Insurance Holdings, Inc. and The Centris Group, Inc. 4 Letter to Shareholders of The Centris Group, Inc., dated October 18, 1999* 5 Confidentiality Agreement, dated August 22, 1999, between HCC Insurance Holdings, Inc. and The Centris Group, Inc. 6 Consulting Agreement, dated as of October 11, 1999 between The Centris Group, Inc. and David L. Cargile 7 Provisions regarding indemnification of directors and officers from the Company's Certificate of Incorporation and Bylaws 8 Selected pages of the Company's Proxy Statement, dated March 31, 1999, for the Annual Meeting of Shareholders on May 12, 1999 ANNEX A INFORMATION STATEMENT ANNEX B OPINION OF ADVEST, INC.
- --------------- * Included with Schedule 14D-9 mailed to Shareholders. 20 22 SIGNATURE After reasonable inquiry and to the best of my knowledge and belief, I certify that the information set forth in this statement is true, complete and correct. By: /s/ DAVID L. CARGILE ------------------------------------ David L. Cargile Chairman, President and Chief Executive Officer Dated: October 18, 1999 21 23 ANNEX A THE CENTRIS GROUP, INC. 650 TOWN CENTER DRIVE, SUITE 1600 COSTA MESA, CALIFORNIA 92626-1925 INFORMATION STATEMENT PURSUANT TO SECTION 14(F) OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, AND RULE 14F-1 THEREUNDER This Information Statement is being mailed on or about October 18, 1999 as a part of the Solicitation/ Recommendation Statement on Schedule 14D-9 (the "Schedule 14-D-9") of The Centris Group, Inc. (the "Company") to the holders of record of shares of Common Stock, par value $0.01 per share, of the Company (the "Shares") at the close of business on or about October 18, 1999. You are receiving this Information Statement in connection with the possible appointment of persons designated by the Merger Subsidiary (as defined below) to a majority of the seats on the Board of Directors of the Company. On October 11, 1999, the Company, HCC Insurance Holdings, Inc., a Delaware corporation ("HCC"), and Merger Sub of Delaware, Inc., a Delaware corporation and a wholly owned subsidiary of HCC (the "Merger Subsidiary"), entered into an Agreement and Plan of Merger (the "Merger Agreement") in accordance with the terms and subject to the conditions of which (i) HCC will cause the Merger Subsidiary, on HCC's behalf, to commence a tender offer (the "Offer") for all outstanding Shares at a price of $12.50 per Share, net to the seller in cash and without interest thereon, and (ii) the Merger Subsidiary will be merged with and into the Company (the "Merger"), and the Company will be the surviving legal entity. As a result of the Offer and the Merger, the Company will become a wholly owned subsidiary of HCC. This Information Statement is required by Section 14(f) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and Rule 14f-1 thereunder. You are urged to read this Information Statement carefully. You are not, however, required to take any action at this time. Capitalized terms used herein and not otherwise defined herein shall have the meaning set forth in the Schedule 14D-9. Pursuant to the Merger Agreement, the Merger Subsidiary commenced the Offer on October 18, 1999. The Offer is scheduled to expire at Midnight, New York City time, on November 30, 1999, unless the Offer is extended. GENERAL INFORMATION REGARDING THE COMPANY The Shares are the only class of voting securities of the Company outstanding. Each Share has one vote. As of October 11, 1999, there were 11,536,076 Shares outstanding. The Company's Board of Directors currently consists of seven (7) members and is divided into three (3) classes. At each annual meeting of Shareholders, each director in the class to be elected is elected for a three (3) year term. Two directors are elected at two annual meetings and three directors are elected at the third annual meeting. The officers of the Company serve at the discretion of the Board. PROPOSED CHANGES TO THE COMPANY'S BOARD OF DIRECTORS Pursuant to the Merger Agreement, effective upon acceptance for payment by Merger Subsidiary of the Shares tendered pursuant to the Offer, HCC shall be entitled to designate the number of directors (the "HCC Designees"), rounded up to the next whole number, on the Company's Board of Directors (the "Board") that equals the product of (i) the total number of directors on the Company's Board of Directors (giving effect to the election of any additional directors pursuant to the Merger Agreement); and (ii) the percentage that the number of Shares owned by HCC or Merger Subsidiary (including Shares accepted for payment) bears to the total number of Shares outstanding. The Company has agreed that it will take all action necessary to cause HCC's designees to be elected or appointed to the Company's Board of Directors, including, without limitation, increasing the number of directors or seeking and accepting resignations of incumbent directors or both; provided, however, that prior to the Effective Time, the Company's Board of Directors shall always have A-1 24 one Independent Director. If the number of Independent Directors is reduced below one for any reason prior to the Effective Time, the departing Independent Director shall be entitled to designate a person to fill such vacancy. No action proposed to be taken by the Company to amend or terminate the Merger Agreement or the certificate of incorporation or by-laws of the Company or waive any action required to be taken by HCC or Merger Subsidiary shall be effective without the approval of the Independent Director. At such times, the Company will use its best efforts to cause individuals designated by HCC to constitute the same percentage as such individuals represent on the Company's Board of Directors of (i) each committee of the Board; (ii) each board of directors of each subsidiary; and (iii) each committee of each such board. HCC DESIGNEES HCC has informed the Company that it will choose the HCC Designees from the persons listed below. HCC has also informed the Company that each of the HCC Designees has consented to act as a director, if so designated. Biographical information concerning each of the HCC Designees is presented below. Unless otherwise indicated below, the business address of each person is c/o Merger Subsidiary, 13403 Northwest Freeway, Houston, Texas 77040-6094 and each occupation set forth opposite an individual's name refers to employment with HCC. The following biographical information provided herein has been furnished by HCC, and the Company assumes no responsibility for the accuracy or completeness of such information.
PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT; MATERIAL POSITIONS HELD NAME AGE DURING PAST FIVE YEARS ---- --- ----------------------------------- Stephen L. Way................. 50 Chairman of the Board and Chief Executive Officer of HCC since its organization in 1974. Mr. Way was President from HCC's founding until May 1996. Mr. Way is a director of Fresh Del Monte Produce, Inc. and a director of Bradstock Group plc. James M. Berry................. 69 Director of HCC since March 1992. Mr. Berry is the retired Vice Chairman of NationsBank of Texas, N.A., a subsidiary of NationsBank, N.A. (now BankAmerica Corp.). Mr. Berry has been the Executive Vice-President, Finance of Belk, Inc. since May 1995. Mr. Berry also serves as a director of Williams-Sonoma, Inc. Frank J. Bramanti.............. 43 Director and Executive Vice President of HCC since 1982. Mr. Bramanti served as interim President from June 1997 to November 1997. Marvin P. Bush................. 42 Director of HCC since May 1999. Mr. Bush is the President of Winston Capital Management, LLC and serves on the Board of Directors of Fresh Del Monte Produce, Inc. Mr. Bush is also a member of the Board of Trustees for the George Bush Presidential Library and recently served on the Board of Managers at the University of Virginia. Patrick B. Collins............. 70 Director of HCC since December 1993. Mr. Collins is a retired partner of the international accounting firm of PricewaterhouseCoopers LLP, where he held that position from 1967 through 1991. Mr. Collins also serves as a director of Transcoastal Marine Services, Inc. James R. Crane................. 45 Director of HCC since May 1999. Mr. Crane is the Chief Executive Officer, President and Chairman of the Board of Directors of Eagle, USA AirFreight, Inc., the company he founded in 1984. J. Robert Dickerson............ 57 Mr. Dickerson is an attorney and has served as a Director of HCC since 1981.
A-2 25
PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT; MATERIAL POSITIONS HELD NAME AGE DURING PAST FIVE YEARS ---- --- ----------------------------------- Edwin H. Frank, III............ 50 Director of HCC since May 1993. Mr. Frank is the Chairman of File Control.Com. He was formerly the President of Underwriters Indemnity Holdings, Inc., a subsidiary of RLI Corporation, having served in such capacity from 1985 until 1999. Allan W. Fulkerson............. 66 Director of HCC since May 1997. Mr. Fulkerson is the President and director of Century Capital Management, Inc. and the President and a director of Massachusetts Fiduciary Advisors, Inc., and serves as Chairman and Trustee of Century Shares Trust. Mr. Fulkerson is also a director of Mutual Risk Management, Ltd., Terra Nova (Bermuda) Holdings, Ltd. and Wellington Underwriting plc. Walter J. Lack................. 51 Director of HCC since 1981. Mr. Lack is an attorney and a shareholder in the law firm of Engstrom, Lipscomb & Lack, A Professional Corporation, in Los Angeles, California. Mr. Lack also serves as a director of Microvision, Inc. Stephen J. Lockwood............ 52 Director of HCC since 1981. Vice Chairman of the Board of Directors and Chief Executive Officer of the HCC's subsidiary LDG Reinsurance Corporation since 1988. Mr. Lockwood also serves as a director of four mutual funds managed by The Dreyfus Corporation, a subsidiary of Mellon Bank Corporation. John N. Molbeck, Jr............ 52 President and Director of HCC since November 1997. Prior to joining HCC, Mr. Molbeck was the Managing Director of Aon Natural Resources Group, a subsidiary of Aon Corporation and served as the President and Chief Operating Officer of Energy Insurance International, Inc. Edward H. Ellis, Jr............ 56 Senior Vice President and Chief Financial officer of HCC since October 1997. Prior to joining HCC, Mr. Ellis served as a partner with the international accounting firm of PricewaterhouseCoopers LLP from November 1988 to September 1997. Benjamin D. Wilcox............. 55 Mr. Wilcox joined HCC in December 1998 and currently serves as the President and Chief Executive officer of HCC's subsidiary, Houston Casualty Company, and its subsidiary, U.S. Specialty Insurance Company. Mr. Wilcox is also the Chairman of the Board of Directors of HCC's subsidiary, Avemco Insurance Company. Prior to joining HCC, Mr. Wilcox served as a Senior Vice President of Aon Risk Services, Inc., a subsidiary of Aon Corporation. Christopher L. Martin.......... 32 Vice President and Corporate Secretary of Merger Subsidiary since August 1998. Mr. Martin joined HCC as a Vice President, Secretary and General Counsel in July 1997. Prior to joining HCC, Mr. Martin was associated with the law firm of Winstead Sechrest & Minick P.C. in Houston, Texas from August 1992 to June 1997. Mr. Martin also serves as an officer of various of HCC's subsidiaries.
None of the HCC Designees (i) is currently a director of, or holds any position with, the Company, (ii) has a familial relationship with any of the directors or executive officers of the Company or (iii) to HCC's knowledge, beneficially owns any securities (or rights to acquire any securities) of the Company. The Company has been advised by HCC that, to HCC's knowledge, none of the HCC Designees has been involved in any transaction with the Company or any of its directors, executive officers or affiliates that is required to be disclosed pursuant to the rules and regulations of the Commission, except as may be disclosed herein or in the Schedule 14D-9. A-3 26 CURRENT DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY Biographical information concerning each of the Company's current directors and executive officers as of October 11, 1999 is set forth below. Some of the current directors may resign effective immediately following the purchase of Shares by Merger Subsidiary pursuant to the Offer.
NAME AGE POSITION ---- --- -------- David L. Cargile........... 53 Chairman, President, Chief Executive Officer and Director Howard S. Singer........... 53 Executive Vice President -- Corporate Finance and Investor Relations and Director Jose A. Velasco............ 45 Senior Vice President, Chief Administrative Officer, Secretary, General Counsel and Director Roxani M. Gillespie........ 58 Director John F. Kooken............. 67 Director L. Steven Medgyesy......... 66 Director Charles L. Schultz......... 71 Director Charles M. Caporale........ 49 Senior Vice President, Chief Financial Officer and Treasurer Edward D. Jones, III....... 54 Senior Vice President -- Strategic Planning and Government Relations Mark A. Carney............. 41 Senior Vice President
All executive officers other than Charles M. Caporale and Mark A. Carney have been employed by the Company for more than five years. There are no family relationships among any of the executive officers of the Company. There have been no events under bankruptcy or insolvency laws, no criminal proceedings and no judgments or injunctions material to the evaluation of the ability and integrity of any executive officer during the past five years. David L. Cargile joined the Company as a Senior Vice President in December 1991, and was appointed as its President, Chief Operating Officer and a director in August 1994, and as its Chief Executive Officer in March 1995. He was elected as Chairman of the Board in April 1995. Prior to joining the Company Mr. Cargile had served for a number of years as President and Chief Executive Officer of Reinsurance Facilities Corporation, a reinsurance intermediary. He has also served on the boards of directors of a number of companies engaged in the reinsurance business. Howard S. Singer has served as a director of the Company since its founding in 1980. Prior to joining the Company in December 1991 as its Executive Vice President -- Corporate Finance and Investor Relations, Mr. Singer had served as its independent financial consultant. Jose A. Velasco joined the Company in 1986 as Vice President and General Counsel. He currently holds the positions of Senior Vice President, Chief Administrative Officer, General Counsel and Secretary. Prior to joining the Company, Mr. Velasco was in the private practice of law specializing in insurance matters. Mr. Velasco was elected as a director of the Company at the May 1999 Annual Meeting. Roxani M. Gillespie was appointed as a director of the Company in April 1998 to fill the vacancy created by the retirement of Kenneth C. Tyler. With over 25 years experience in the insurance industry, Ms. Gillespie was Insurance Commissioner for the State of California from 1986 until 1991, and since 1991 has been in the private practice of law in San Francisco, California, specializing in insurance matters. John F. Kooken has served as a director of the Company since 1986. Prior to his retirement in 1992, Mr. Kooken was Vice Chairman and Chief Financial Officer of Security Pacific Corporation, the parent of Security Pacific National Bank, Los Angeles. Since June 1992 Mr. Kooken has served as a director of Golden State Bancorp, and since February 1994 he has served as a director of Pacific Gulf Properties, Inc., a real estate investment trust. L. Steven Medgyesy, M.D. has served as a director of the Company since 1983. Until March 1996 he served as Medical Director of the Company's USBenefits Insurance Services, Inc. subsidiary. From 1963 until A-4 27 his retirement in 1993 as the Director of Laboratories at Lincoln West Medical Center, Chicago, Dr. Medgyesy practiced in the field of pathology. Charles L. Schultz was elected a director of the Company in May 1995. From 1985 until his retirement in 1993, Mr. Schultz held the position of Senior Vice President, Finance and Chief Financial Officer of Farmers Group, Inc., the management and holding company for the Farmers Insurance Group. Since November 1995 Mr. Schultz has served as a director of Amwest Insurance Group, a Southern California-based insurance holding company. Charles M. Caporale joined the Company in July 1997 as Senior Vice President, Chief Financial Officer and Treasurer. Before joining the Company, Mr. Caporale began his career at Coopers & Lybrand and served in various capacities in the insurance industry. He joined the Minet group of companies in 1985 where he served in various management positions, including Executive Vice President and Chief Financial Officer of Minet, Inc. Edward D. Jones, III joined the Company in September 1993 as a Vice President and was promoted to Senior Vice President in March, 1998. He is responsible for corporate strategic and business planning, government affairs, customer service, and spearheads the Company's electronic data interchange (EDI) efforts. Before joining the Company, Mr. Jones served as Executive Vice President and as a member of the Board of Directors of Medical Review Systems, a firm that he co-founded in 1990. He has also served as a consultant to and held positions with various academic and governmental organizations. Mark A. Carney joined the Company in September 1997 as a Senior Vice President in connection with the acquisition of INTERRA, Inc., formerly known as INTERRA Reinsurance Group, Inc. ("INTERRA") and continues to serve as INTERRA's President and Chief Operating Officer. In addition, Mr. Carney was appointed President and Chief Operating Officer of the Company's USBenefits Insurance Services, Inc. subsidiary in June 1999. Prior to joining the Company, Mr. Carney held various executive positions with health care companies and founded INTERRA in 1993. From 1993 to 1997 Mr. Carney was Chairman, President and Chief Operating Officer of INTERRA. BOARD MEETINGS AND COMMITTEES The Board of Directors of the Company has five standing Committees: Executive Committee. Has all of the power and authority in the management of the business and affairs of the Company to take action on behalf of the Board of Directors as may be necessary between regular meetings of the Board of Directors, when a special meeting or a telephonic meeting of the full Board of Directors is not possible or practicable. Audit Committee. Meets with the Company's independent auditors to review the scope and results of the independent auditors' activities and to review the results of their audit when it is completed. - Reviews the adequacy of internal financial and accounting controls and the results of the independent auditors' examinations thereof. - Recommends to the Board of Directors the appointment of the Company's independent auditors. - Reports its findings on any of the above to the full Board of Directors, as appropriate. - All members of the Audit Committee are non-employee directors. Investment Committee. Establishes goals for the Company's investment program as well as policies to achieve such goals. - Analyzes current investments and their return and suggests any changes deemed necessary. - Selects independent investment advisors, determines the scope of their duties and responsibilities, approves their fees and monitors and evaluates their performance. A-5 28 Compensation Committee. Establishes criteria and adopts compensation policies applicable to the Company's Chief Executive Officer and executive officers at the level of Senior Vice President and above. - Recommends to the Board of Directors salary, bonus and other forms of direct and indirect compensation to be paid to the Chief Executive Officer. - Evaluates and makes recommendations to the Board of Directors regarding compensation policies and programs applicable to all Company employees. - Administers the Company's annual cash bonus plan and its stock option and other long-term incentive plans. - All members of the Compensation Committee are non-employee directors. Nominating Committee. Reviews and investigates the qualifications of candidates proposed by management or by others (including candidates proposed by Shareholders or members of the Board of Directors) for election by Shareholders or election by the Board of Directors itself to fill a vacancy on the Company's Board of Directors. - Recommendations by Shareholders must be supported by a description of such persons' background and experience, together with the written consents of such persons to serve on the Board if elected, and should be addressed to the Nominating Committee, in care of the Secretary, The Centris Group, Inc., 650 Town Center Drive, Suite 1600, Costa Mesa, California. The table below identifies the current members of each Committee:
COMMITTEE MEMBERS --------- ------- Executive Committee...... Directors Cargile (Chairman), Kooken, Schultz and Velasco Audit Committee.......... Directors Schultz (Chairman), Gillespie and Kooken Compensation Committee... Directors Medgyesy (Chairman), Gillespie, Schultz and Kooken Investment Committee..... Directors Kooken (Chairman), Gillespie, Medgyesy, Schultz and Singer Nominating Committee..... Directors Singer (Chairman), Cargile, Gillespie, Medgyesy and Velasco
There were 13 meetings of the Board of Directors during 1998. The Executive Committee acted once during the year. Other Committees met during 1998 as follows: Audit -- 5 times; Investment -- 2 times; Compensation -- 2 times; and Nominating -- 1 time. All current directors attended or participated by telephone in at least 75% of the meetings of the Board of Directors and the Committees of which they were members during 1998. Committee members are appointed each year at the Board of Directors meeting immediately following the annual meeting of Shareholders. BOARD COMPENSATION Directors who are also full-time employees of the Company receive no additional compensation for their services as directors. Non-employee directors are paid an annual retainer of $12,500 and a fee of $3,000 for each meeting of the Board of Directors attended ($1,000 for telephonic meetings). Such directors are also paid a fee of $1,000 for each Committee meeting ($1,500 for Committee Chairmen). In addition, directors are reimbursed for reasonable out-of-pocket expenses incurred by them in connection with their attendance at Board of Directors and Committee meetings. Non-employee directors are also entitled to receive stock option awards under the Company's Amended and Restated 1991 Directors Stock Option Plan, which was approved by Shareholders in 1996. Under this Plan, on the third business day following each annual meeting, each non-employee director is automatically granted an award of options covering between 6,000 to 9,000 Shares of Common Stock, with the number of options actually granted determined in accordance with a formula related to the Company's return on equity A-6 29 for the prior fiscal year. Based on the Plan formula, each of the non-employee directors received an option grant for 6,000 Shares following the 1999 Annual Meeting, with an exercise price which was the closing price of the Company's stock on the New York Stock Exchange on Monday, May 17, 1999. Those directors who are also employees of the Company may be entitled to additional compensation in their capacity as employees to the extent that they participate in the Company's short-term and long-term incentive compensation plans, as described elsewhere in this Statement. EXECUTIVE COMPENSATION The following table provides information concerning all compensation paid or credited by the Company to the Company's Chief Executive Officer and the four most highly compensated executive officers (measured as of December 31, 1998) (the "Named Executives") for services rendered to the Company and its subsidiaries in all capacities attributable to the fiscal years ended December 31, 1998, 1997 and 1996. SUMMARY COMPENSATION TABLE*
LONG-TERM COMP ---------------------- ANNUAL COMPENSATION NO. OF ------------------------------------------ SECURITIES OTHER UNDERLYING ANNUAL OPTIONS ALL OTHER NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY BONUS(1) COMP GRANTED(2) COMP(3) --------------------------- ----------- -------- -------- ------ ---------- --------- David L. Cargile**..................... 1998 $449,435 -0- (4) -0- $258,813(5) President, and Chief Executive Officer 1997 $437,601 $300,000 (4) 60,000 $260,165(5) 1996 $411,825 $280,000 (4) 45,000 $187,400(5) Howard S. Singer**..................... 1998 $237,989 -0- (4) -0- $ 17,553 Executive Vice President -- 1997 $233,054 $ 47,500 (4) 27,200 $ 17,376 Corporate Finance and Investor Relations 1996 $225,914 $ 56,818 (4) 24,000 $ 9,000 John T. Grush(6)....................... 1998 $293,973 -0- (4) -0- $ 21,576 Senior Vice President and President 1997 $291,646 $ 65,000 (4) 28,800 $ 20,885 of USF RE 1996 $291,646 $ 58,309 (4) 24,000 $ 20,213 Craig J. Kelbel**(7)................... 1998 $244,804 $ 10,000 (4) -0- $ 17,253 Senior Vice President and President 1997 $239,349 $ 25,000 (4) 27,200 $ 18,251 of USBenefits Insurance Services, Inc. 1996 $229,793 $ 69,459 (4) 24,000 $ 12,562 Jose A. Velasco........................ 1998 $218,750 $ 20,000 (4) -0- $ 15,921 Senior Vice President, 1997 $202,312 $ 61,000 (4) 32,000 $ 15,490 Chief Administrative Officer, 1996 $175,380 $ 53,165 (4) 24,000 $ 15,816 Secretary and General Counsel
- --------------- * The Company has excluded from the Summary Compensation Table the columns relating to awards of Restricted Stock and Long-Term Incentive Plan Payouts because no such awards or compensation were earned by or paid to the Named Executives in the fiscal years covered by the table. ** The compensation paid to Messrs. Cargile, Singer and Kelbel during 1998 was pursuant to employment agreements described under "Employment Contracts and Change of Control Arrangements" elsewhere in this Statement. (1) Cash bonus awards under the Company's Incentive Compensation Program (the "Incentive Program") are paid in the first quarter of the year and represent payment for services performed in the prior fiscal year. Accordingly, the table shows the bonus amounts in the year to which they are applicable. The gross amounts paid to all participants under the Incentive Program applicable to fiscal years 1998, 1997 and 1996 were $308,127, $1,085,500 and $1,240,000, respectively. (2) Similar to cash bonus payments described in note (1) above, options granted in the first quarter of each year were for services performed by the executive during the prior fiscal year, and the table indicates the years to which such option grants are applicable. (3) Each of the Named Executives was credited with $10,000 for 1998, $9,500 for 1997 and $9,000 for 1996 as the Company's matching contribution to such executive's participation in the Company's 401(k) A-7 30 Employees Savings Plan. The balance of the amount shown for each year in column (i) for these executives was the Company's matching payment to the executive's voluntary contribution to the Company's Non-Qualified Deferred Compensation Plan, plus interest paid by the Company on the funds in the executive's account under the Non-Qualified Deferred Compensation Plan, except for Mr. Cargile who also received the additional compensation described in Note (5) below. (4) The Company also provides its executive officers health and group term-life insurance and other benefits generally available to all salaried employees, and certain additional noncash benefits, including club memberships and the use and maintenance of automobiles, which benefits in no individual case have an aggregate incremental cost to the Company which exceeds the lesser of $50,000 or 10% of that individual's total salary and bonus as reported in the "Summary Compensation Table." See also "Employment Agreement With Named Executives" elsewhere in this Statement for compensation payments to Mr. Cargile, Mr. Singer and Mr. Kelbel (or their named beneficiaries) in the event of their disability or death during the term of their employment agreements. (5) As a result of the loan forgiveness arrangement and the additional income taxes incurred as a part of Mr. Cargile's relocation in 1995 from Atlanta, Georgia, to Southern California, as required by the Company (see "Employment Contracts and Change of Control Arrangements" elsewhere in this Statement), Mr. Cargile received additional compensation of $248,813 attributable to 1998, $213,357 attributable to 1997 and $178,400 attributable to 1996. (6) Mr. Grush's employment was terminated by the Company on June 30, 1999. (7) Mr. Kelbel resigned from the Company on June 1, 1999. OPTION GRANTS The upper table provides information on stock option grants made in March 1998 to the Named Executives under the Company's 1991 Employee Stock Option Plan based upon the performance of the Named Executives during the 1997 fiscal year. No option grants were made to the Named Executives in March 1999 applicable to their 1998 performance. The lower table also illustrates the comparable potential appreciation in value over a 5-year period of stock held by the Company's Shareholders as a group, and by a unit of 1,000 Shares, from the value of the Company's common stock of $9.75 per Share, which was the closing price of the stock on the New York Stock Exchange on December 31, 1998.
INDIVIDUAL GRANTS (ADJUSTED TO REFLECT 100% STOCK SPLIT) ----------------------------------------------------------- % OF TOTAL POTENTIAL REALIZABLE VALUE OPTIONS AT ASSUMED GRANTED TO ANNUAL RATES OF STOCK NO. OF ALL PRICE APPRECIATION FOR SECURITIES EMPLOYEES OPTION TERM UNDERLYING IN LAST (5-YEAR PERIOD)(2) OPTIONS FISCAL EXERCISE OR --------------------------- GRANTED(1) YEAR(1) BASE PRICE(1) EXPIRATION DATE 5% 10% ---------- ------------ ------------- --------------- ----------- ------------- David L. Cargile.......... 60,000 12.11% $12.38 03/24/08 $466,944 $1,183,354 Howard S. Singer.......... 27,200 5.49% $12.38 03/24/08 $211,868 $ 536,454 John T. Grush(3).......... 28,800 5.81% $12.38 03/24/08 $224,138 $ 568,010 Craig J. Kelbel(4)........ 27,200 5.49% $12.38 03/24/08 $211,868 $ 536,454 Jose A. Velasco........... 32,000 6.46% $12.38 03/24/08 $249,042 $ 631,122
- --------------- (1) All options granted to the Named Executives on March 25, 1998 were applicable to services performed by them during fiscal year 1997. The exercise price of the options, $12.38, was the closing price of the Company's common stock on March 25, 1998, on the New York Stock Exchange. (2) The information set forth in the columns marked "5%" and "10%" is at an assumed annual rate of appreciation over the 5-year period, commencing at the option grant date. The appreciation figures set forth are net of the option exercise price, but before taxes associated with the option exercise. These figures should not be viewed in any way as a forecast of actual results of the future performance of the A-8 31 Company's stock, which will be determined by unknown future events and factors, including market conditions as well as the option holders' continued employment throughout the option vesting period. (3) Mr. Grush's employment was terminated by the Company on June 30, 1999, at which time all of his options lapsed. (4) Mr. Kelbel resigned from the Company on June 1, 1999, at which time all of his options lapsed. OPTION EXERCISES AND HOLDINGS The following table provides information with respect to stock options assigned to the Named Executives in prior years under the Company's 1988 Employee Stock Plan and its 1991 Employee Stock Option Plan, specifically showing: (i) the number and value of Shares acquired by the Named Executives upon exercise of options during the 1998 fiscal year; and (ii) the number and value of exercisable and unexercisable options held at December 31, 1998.
NO. OF SECURITIES NO. OF UNDERLYING VALUE OF UNEXERCISED SHARES VALUE UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS ACQUIRED REALIZED HELD AT 12/31/98 HELD AT 12/31/98(1) ON ON --------------------------- --------------------------- NAME EXERCISE EXERCISE EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---- -------- -------- ----------- ------------- ----------- ------------- David L. Cargile................. -0- -0- 402,500 82,500 $957,000 -0- Howard S. Singer................. -0- -0- 45,000 39,200 $ 71,500 -0- John T. Grush.................... -0- -0- 48,000 40,800 $ 82,500 -0- Craig J. Kelbel.................. -0- -0- 26,000 39,200 -0- -0- Jose A. Velasco.................. -0- -0- 45,000 44,000 $ 71,500 -0-
- --------------- (1) Based on the closing price of the common stock of $9.75 at December 31, 1998 on the New York Stock Exchange, minus the exercise price of the option. LONG-TERM INCENTIVE PLAN -- AWARDS FOR THE THREE-YEAR PERFORMANCE PERIOD COMMENCING JANUARY 1, 1998 As approved by Shareholders at the 1997 Annual Meeting, the Company's Long-Term Incentive -- Performance Unit Plan ("LTI-Plan") provides for cash payment awards intended to qualify as performance-based compensation to satisfy the requirements of Section 162(m) of the Internal Revenue Code of 1986, as amended. Under the LTI-Plan performance units are assigned to each participant at the beginning of a three-year performance period. The number of performance units actually awarded to a participant is determined at the close of the three-year period, based upon: (i) the Company meeting a certain pre-determined average return on equity over the three-year performance period; and (ii) the participant's performance over the performance period relative to the target performance. New three-year performance periods begin annually each January 1 until the LTI-Plan is terminated. The Board of Directors has discretion to make certain awards under the LTI-Plan if the return on equity target thresholds are not met. All payments earned by participants under the LTI-Plan will automatically be deferred into the Company's Non-Qualified Deferred Compensation Plan, which provides for a vesting of the payouts over a two-year period. A-9 32 The following table sets forth the number of units assigned to each of the Named Executives under the LTI-Plan for the three-year performance period of 1998-2000. Each performance unit has a value of $10. As noted above, no awards are made under the LTI-Plan until the end of the performance period, and such awards are dependent upon the achievement of pre-determined performance target levels.
PERFORMANCE OR OTHER ESTIMATED FUTURE PAYOUTS PERIOD UNTIL UNDER NON-STOCK PRICE-BASED PLANS NO. OF MATURATION --------------------------------- NAME UNITS OR PAYOUT THRESHOLD TARGET MAXIMUM ---- ------ ------------ --------- -------- -------- David L. Cargile...................... 15,785 3 years $78,925 $157,800 $236,775 Howard S. Singer...................... 5,969 3 years $29,845 $ 59,690 $ 89,535 John T. Grush......................... 7,361 3 years $36,810 $ 73,620 $110,430 Craig J. Kelbel....................... 6,140 3 years $30,700 $ 61,400 $ 92,100 Jose A. Velasco....................... 5,513 3 years $27,565 $ 55,130 $ 82,695
EMPLOYMENT CONTRACTS AND CHANGE OF CONTROL ARRANGEMENTS David L. Cargile. Mr. Cargile serves as the Company's President and Chief Executive Officer pursuant to a four-year employment agreement entered into in November 1996. This agreement provides for a base annual salary which was $449,435 for the 1998 calendar year, a discretionary cash bonus, and certain other benefits. The Company can terminate Mr. Cargile's employment at any time without cause by paying him 150% of the salary due to him under the remaining term of his employment agreement. In the event of his death or disability Mr. Cargile (or his beneficiary) will be paid the greater of the amount of his then current compensation remaining due for the term of the employment agreement or one (1) year's salary. In connection with his employment and the Company's requirement that he move from Atlanta, Georgia to Southern California, in July 1995 the Company granted to Mr. Cargile a $649,000 interest-bearing loan for the purchase of a residence, secured by a trust deed on that residence. Of that principal amount, $414,765 is being forgiven by a credit on the loan by the Company over a 60-month period. Additionally, the full amount of the loan will be forgiven if Mr. Cargile's employment terminates for any reason. As of October 18, 1999, a principal amount of $307,690 was outstanding on the above-noted loan. In addition, the Company agreed to pay to Mr. Cargile such additional amount as is required to compensate him for the additional state and federal taxes due which will arise as a result of the credit he will receive against the loan balance, and for the increase in state taxes Mr. Cargile will experience as a California resident as contrasted with the state taxes he would have otherwise paid as a resident of Georgia. Howard S. Singer. Pursuant to a four-year employment agreement entered into in December 1996, Mr. Singer serves as the Executive Vice President of the Company at a base annual salary which was $238,091 for the 1998 calendar year, a bonus as may be granted by the Board, and certain other benefits. He is also entitled to a one-time "piggyback" registration right at no cost to him with respect to Company stock he owns. The Company can terminate Mr. Singer's employment at any time without cause by paying him 150% of the salary due to him under the remaining term of his employment agreement. In the event of his death or disability Mr. Singer (or his beneficiary) will be paid the greater of the amount of his then current compensation remaining due for the term of the employment agreement or one (1) year's salary. Craig J. Kelbel. Mr. Kelbel entered into a three-year employment agreement with the Company in November 1996 to serve in the positions of President and Chief Operating Officer of USBenefits and as a Senior Vice President of the Company at a base annual salary which was $244,804 for the 1998 calendar year, and certain other benefits. Mr. Kelbel resigned from the Company on June 1, 1999. Had he not terminated his employment prior to the November 1999 expiration date of his employment agreement, the Company could have terminated Mr. Kelbel's employment at any time without cause by paying him 100% of the salary due to him under the remaining term of his employment agreement. In the event of his death or disability while an employee of the Company, Mr. Kelbel (or his beneficiary) would have been paid the amount of his then current compensation for a period of one (1) year. Mr. Kelbel resigned from the Company on June 1, 1999. A-10 33 Change in Control Agreements. The Company has entered into severance agreements with the Named Executives. Under these agreements, if their employment is terminated by the Company (other than for cause) or is terminated by the executive "for good reason" within two years after a "change in control" of the Company, as those terms are defined in the severance agreements, each of these executives (other than Mr. Cargile) would be entitled to receive a payment of two years annual salary plus an amount equal to the largest annual cash bonuses received during their employment as well as a continuation for two years of life and medical insurance benefits. Mr. Cargile would receive three years annual salary plus one-and-one-half times his largest annual cash bonus, as well as the other benefits noted above. HCC has agreed that should there be any assertion that certain additional tax payments are due on compensation that Mr. Cargile receives in connection with a change of control of the Company, HCC will have the right to contest such assertion and will hold Mr. Cargile harmless from any such additional tax payments. All of the severance agreements further state that if any executive has an employment agreement which also provides for payments upon termination, the executive will receive payments either under the severance agreement or the employment agreement, whichever payment is greater, but may not receive payments under both agreements. On October 11, 1999, the Company and the Merger Subsidiary entered into individual amendments to severance agreements with Charles M. Caporale, Mark A. Carney, Edward D. Jones, III, Jose A. Velasco, Patricia S. Boisseranc, Linton R. Groke, David L. Hubert and Barbara F. Stoner. These amendments provide that if an executive voluntarily terminates his or her employment with the Company within 120 days following the consummation of the Merger, whether or not for "good reason" (as defined in the executive's severance agreement), the executive will not be entitled to receive any of the payments he or she would otherwise be entitled to receive under the executive's severance agreement in connection with a "change in control" (as defined in the executive's severance agreement). However, if the Company or the Merger Subsidiary terminates the employment of an executive for any reason within 120 days following the consummation of the Merger, the executive will be entitled to exercise any and all rights granted to him or her pursuant to the executive's severance agreement without regard to the executive's amendment. As defined in the severance agreements, a "change in control" includes, under specific circumstances, a merger of the Company with another company which results in a 50% change of the combined voting power of the Company's securities or the sale of more than 50% of the Company's assets or, under certain circumstances, the beneficial ownership by any person of more than 10% of the Company's equity securities. COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934 Section 16(a) of the Securities Exchange Act of 1934 requires the Company's directors and executive officers, and persons who own more than 10% of a registered class of the Company's equity securities, to file with the Securities and Exchange Commission reports of ownership and changes in ownership of common stock and other equity securities of the Company and to furnish the Company with copies of all such Section 16(a) reports that they file. Based solely on review of the copies of such reports furnished to the Company and written representations that no other reports were required, the Company believes that during the 1998 fiscal year all filing requirements applicable to its officers and directors were complied with. A-11 34 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth, as of October 11, 1999, the number of Shares deemed to be beneficially owned (including Shares which can be acquired within 60 days) by: (i) each director of the Company; (ii) the Company's Chief Executive Officer; (iii) the Company's four other most highly compensated officers; and (iv) all directors and all executive officers of the Company as a group, and the percentage of such holdings to the total number of shares in the class, as calculated in accordance with the rules and regulations of the Securities and Exchange Commission (the "SEC"). Except as otherwise noted, the indicated owners have sole voting and investment power with respect to the shares specified.
NUMBER AND RIGHT TO ACQUIRE NATURE OF SHARES BENEFICIAL OWNERSHIP PERCENT OF CLASS NAME AND ADDRESS BENEFICIALLY OWNED WITHIN 60 DAYS(1) BENEFICIALLY OWNED ---------------- ------------------ -------------------- ------------------ David L. Cargile......................... 47,005 485,000 4.43% 650 Town Center Drive Costa Mesa, CA 92626 John T. Grush(2)......................... 0 0 * 650 Town Center Drive Costa Mesa, CA 92626 Craig J. Kelbel(3)....................... 89 0 * 650 Town Center Drive Costa Mesa, CA 92626 John F. Kooken........................... 29,400(4) 32,000 * 1170 Lorain Road San Marino, CA 91108 L. Steven Medgyesy, M.D. ................ 594,342(5) 32,000 5.41% 5215 Old Orchard Road, Suite 300 Skokie, IL 60077 Roxani M. Gillespie...................... -0- 12,493 * 2450 Hyde Street San Francisco, CA 94109 Charles M. Schultz....................... -0- 32,000 * 325 South Rimpau Blvd Los Angeles, CA 90020 Howard S. Singer......................... 546,115(6) 84,200 5.42% 5215 Old Orchard Road, Suite 300 Skokie, IL 60077 Jose A. Velasco.......................... 38,989(7) 89,000 1.10% 650 Town Center Drive Costa Mesa, CA 92626 All Directors and Executive Officers of the Company (12 persons) as a group**................................ 1,097,469 866,493 15.84%
- --------------- * Indicates ownership of less than 1% of the Company's outstanding stock. ** As described in Notes (4) and (5) below, Dr. Medgyesy holds Shares as trustee of the Singer Family Trust. Accordingly, to avoid duplicate counting, an aggregate of 172,622 Shares which are beneficially owned by both individuals have been deducted from this total. Neither Kenneth C. Tyler, who retired in April 1998, nor Bernard H. Ross who passed away in November 1998, are included in this group. (1) This column reflects the number of Shares subject to Company stock options that could be canceled if the Offer is consummated. Upon consummation of the Offer, all outstanding Company stock options, whether vested or unvested, will be canceled. The holders of Company stock options, including the directors and executive officers of the Company, will receive a cash payment in connection with the cancellation of their options equal to the excess, if any, of $12.50 per Share over the applicable exercise price of their options. A-12 35 (2) Mr. Grush's employment was terminated by the Company on June 30, 1999. (3) Mr. Kelbel resigned from the Company on June 1, 1999. (4) Includes 1,000 Shares held by Mr. Kooken's wife through her separate individual retirement accounts. (5) Includes 150,932 Shares owned directly by Dr. Medgyesy; 172,622 Shares held by Dr. Medgyesy in his capacity as trustee of the Singer Family Trust, which trust is for the benefit of Howard S. Singer and members of the Singer family; 16,120 Shares held by Dr. Medgyesy's wife; and 252,894 Shares held in various trusts for the benefit of Dr. Medgyesy and members of his family. Dr. Medgyesy disclaims beneficial ownership in 441,636 of said Shares. (6) Includes 337,065 Shares held directly by Mr. Singer; 172,622 Shares held by Dr. Medgyesy in his capacity as trustee of the Singer Family Trust, which trust is for the benefit of Mr. Singer and members of the Singer family; 16,828 Shares held by Mr. Singer's wife as trustee for the benefit of their descendants; 14,000 Shares held by a partnership of which Mr. Singer is the general partner; and 5,600 Shares held by Mr. Singer's individual retirement account. Mr. Singer disclaims beneficial ownership in 209,050 of said Shares. (7) Includes Shares held in the employee's 401(k) account. While the employee votes the Shares in his account at any shareholder meetings, on exiting the account only the cash value of the Shares is distributed and Share certificates are not issued. SECURITY OWNERSHIP OF CERTAIN OTHER SHAREHOLDERS The following table sets forth information regarding the beneficial ownership of each person, other than those affiliated with the management, known to the Company as of October 11, 1999 to be the beneficial owner of more than 5% of its outstanding common stock. The Company believes that the stock in the name of the firms listed below is held by money managers, investment advisors or affiliates on behalf of their respective clients, and that none of such clients is the beneficial owner of more than 5% of the Company's stock.
AMOUNT OF SHARES PERCENT NAME AND ADDRESS BENEFICIALLY OWNED OF CLASS ---------------- ------------------ -------- Kahn Brothers & Co., Inc.................................... 1,057,354(1) 9.17% 555 Madison Avenue, 22nd Floor New York, New York 10022 Hollybank Investments, LP................................... 1,049,400(2) 9.10% Dorsey R. Gardner, General Partner One International Place, Suite 2401 Boston, Massachusetts 02110 Dimensional Fund Advisors Inc............................... 758,700(3) 6.58% 1299 Ocean Avenue, 11th Floor Santa Monica, California 90401
- --------------- (1) As disclosed in a Schedule 13F filed with the SEC on October 8, 1999. The Schedule 13F indicates that Kahn Brothers & Co., Inc. is the beneficial owner of 835,784 Shares and has shared dispositive powers with respect to such 835,784 Shares. (2) As disclosed in a Schedule 13G filed with the SEC on June 25, 1999 and furnished to the Company. The Schedule 13G indicates that Hollybank Investments, LP ("Hollybank") is the beneficial owner of 1,049,400 Shares and has sole voting and dispositive powers with respect to such Shares. Dorsey R. Gardner and Timothy G. Caffrey are the general partners of Hollybank and the managing members of Thistle Investments, LLC ("Thistle"). As disclosed in Hollybank's Schedule 13G, Thistle is the beneficial owner of 88,500 Shares and has sole voting and dispositive powers with respect to such Shares; Mr. Gardner is the beneficial owner of 90,500 Shares and has sole voting and dispositive powers with respect to such Shares; and Mr. Caffrey is the beneficial owner of 1,000 Shares and has sole voting and dispositive powers with respect to such Shares. As stated in the Schedule 13G, except to the extent of A-13 36 their respective interests as limited partners in Hollybank and members of Thistle, Mr. Gardner and Mr. Caffrey disclaim beneficial ownership of the Company Shares held by Hollybank and Thistle. (3) As disclosed in a Schedule 13F filed with the SEC as of June 30, 1999 and furnished to the Company. Dimensional Fund Advisors, Inc. ("Dimensional"), an investment advisor registered under the Investment Advisors Act of 1940, furnishes investment advice to four investment companies also registered under that Act, and serves as investment manager to certain other investment vehicles, including commingled group trusts (these investment companies and investment vehicles are referred to herein as the "Portfolios"). In its role as investment advisor and investment manager, Dimensional possesses both voting and investment power over the 758,700 Shares described in its Schedule 13F that are owned by the Portfolios. All such Shares reported in the Schedule 13F are owned by the Portfolios and Dimensional disclaims beneficial ownership of such Shares. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS As described above under "Employment Contracts and Change of Control Arrangements," in July 1995 the Company made a loan to Mr. Cargile in the amount of $649,000 in connection with the purchase of his principal residence in Southern California, a portion of which loan is being forgiven over a 60-month period. As of October 18, 1999, a principal amount of $307,690 of this loan was outstanding. A-14 37 ANNEX B [ADVEST, INC. LETTERHEAD] OCTOBER 10, 1999 Board of Directors The Centris Group, Inc. 650 Town Center Drive, Suite 1500 Costa Mesa, California 92626 Members of the Board: The Centris Group, Inc. ("Centris" or the "Company") and HCC Insurance Holdings, Inc. ("HCC") intend top enter into an Agreement and Plan of Merger, dated as of October 11, 1999 (the "Agreement"), whereby a newly created wholly-owned subsidiary of HCC ("Merger Subsidiary") will offer to purchase all of the issued and outstanding shares of Centris common stock for $12.50 per share (the "Tender Offer"). Subsequent to the completion of the Tender Offer, Merger Subsidiary will be merged with and into Centris (the "Merger"), and each outstanding share of Centris common stock that was not acquired in the Tender Offer will be converted into the right to receive $12.50 in cash. (The Merger and the Tender Offer together comprise the "Transaction".) At the completion of the Transaction, Centris will be a wholly-owned subsidiary of HCC. In connection with executing the Agreement, Centris will enter into a Stock Option Agreement ("Option Agreement"), dated October 11, 1999, pursuant to which Centris granted to HCC an option to purchase shares equal to 19.9% of shares outstanding at the Option Agreement date, at a price of $12.50 per share, subject to the terms and conditions set forth in the Option Agreement. You have asked us whether, in our opinion, the cash consideration to be received by Centris shareholders is fair, from a financial point of view, to the Company and its shareholders. In arriving at our opinion set forth below, we have, among other things, reviewed the Agreement and Plan of Merger dated October 11, 1999, the Stock Option Agreement dated October 11, 1999, and the Stockholder Option Agreement dated October 11, 1999; the Company's Forms 10-K and 10-Q for the years 1996 through 1998 and the Company's Forms 10-Q for the quarters ended March 31, 1999 and June 30, 1999; the Company's Annual Reports to shareholders (1996 through 1998); the statutory financial statements of the Company's insurance subsidiaries (1996 through 1998); comparative financial and operating data for companies selected for each of the peer groups; and operating projections for Centris prepared by senior management. In addition, we conducted discussions with members of senior management of Centris concerning the financial condition, business, and prospects of the Company. We have, among other things, performed the following analyses and investigations: We compared the proposed purchase price per share to the trading range of Centris' common stock, both in recent months and for the last several years. We compared the proposed purchase price per share on a price/earnings and price/book value basis to recent market valuations of similar publicly traded life/health insurers. We compared the price/earnings and price/ book valuations of the proposed purchase price per share against valuations paid for life/health insurers in similar acquisition transactions. Advest has provided certain investment banking services to Centris in the past and has received fees for rendering these services, including a fee for advising the Company on this Transaction. As part of our engagement, the Company has agreed to pay Advest a fee for delivery of this opinion letter. In preparing this opinion, we have relied on the accuracy and completeness of all information supplied or otherwise made available to us by the Company, and we have not independently verified such information, nor have we undertaken an independent appraisal of the assets or liabilities of the Company. This opinion is necessarily based upon circumstances and conditions as they exist and can be evaluated by us as of the date of this letter. Our opinion is directed to the Board of Directors of Centris and does not constitute a B-1 38 recommendation of any kind to any shareholder of Centris as to whether such shareholder should tender his or her stock in the Tender Offer or how such shareholder should vote at the shareholders' meeting to be held in connection with the Merger. We have assumed for purposes of this opinion that there have been no material changes in the financial condition of the Company from the conditions disclosed in the Company's financial reports. In reliance upon and subject to the foregoing, it is our opinion that, as of the date hereof, the cash consideration to be received by the Company's shareholders in the Transaction is fair, from a financial point of view, to the Company and its shareholders. Very truly yours, ADVEST, INC. /s/ ALLEN NADLER -------------------------------------- By: Allen Nadler Managing Director B-2 39 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 1 Agreement and Plan of Merger, dated as of October 11, 1999, among HCC Insurance Holdings, Inc., Merger Sub of Delaware, Inc. and The Centris Group, Inc. 2 Shareholder Option Agreement, dated as of October 11, 1999, among Merger Sub of Delaware, Inc. and the Shareholders of the Company named therein 3 Stock Option Agreement, dated as of October 11, 1999, between HCC Insurance Holdings, Inc. and The Centris Group, Inc. 4 Letter to Shareholders of The Centris Group, Inc., dated October 18, 1999* 5 Confidentiality Agreement, dated August 22, 1999, between HCC Insurance Holdings, Inc. and The Centris Group, Inc. 6 Consulting Agreement, dated as of October 11, 1999, by and between The Centris Group, Inc. and David L. Cargile 7 Provisions regarding indemnification of directors and officers from the Company's Certificate of Incorporation and Bylaws 8 Selected pages of the Company's Proxy Statement, dated March 31, 1999, for the Annual Meeting of Shareholders on May 12, 1999 ANNEX A INFORMATION STATEMENT ANNEX B OPINION OF ADVEST, INC.
- --------------- * Included with Schedule 14D-9 mailed to Shareholders. EX-1 2 AGREEMENT AND PLAN OF MERGER, DATED OCT 11, 1999 1 EXHIBIT 1 =============================================================================== AGREEMENT AND PLAN OF MERGER DATED AS OF OCTOBER 11, 1999 AMONG HCC INSURANCE HOLDINGS, INC., MERGER SUB OF DELAWARE, INC. AND THE CENTRIS GROUP, INC. =============================================================================== 2 TABLE OF CONTENTS
PAGE ---- ARTICLE 1 THE OFFER............................................................................1 Section 1.1 The Offer............................................................................1 Section 1.2 Company Action.......................................................................3 Section 1.3 Directors............................................................................4 ARTICLE 2 THE MERGER...........................................................................5 Section 2.1 The Merger...........................................................................5 Section 2.2 Conversion of Shares.................................................................5 Section 2.3 Surrender and Payment................................................................6 Section 2.4 Dissenting Shares....................................................................7 Section 2.5 Stock Options........................................................................7 ARTICLE 3 THE SURVIVING CORPORATION............................................................8 Section 3.1 Certificate of Incorporation.........................................................8 Section 3.2 Bylaws...............................................................................8 Section 3.3 Directors and Officers...............................................................8 ARTICLE 4 REPRESENTATIONS AND WARRANTIES.......................................................8 Section 4.1 Representations and Warranties of the Company........................................8 (a) Organization, Standing and Corporate Power...........................................8 (b) Subsidiaries.........................................................................9 (c) Capital Structure...................................................................10 (d) Authority; Noncontravention.........................................................11 (e) SEC Documents; Financial Statements; No Undisclosed Liabilities.....................12 (f) Disclosure Documents................................................................13 (g) Absence of Certain Changes or Events................................................14 (h) Litigation..........................................................................15 (i) Absence of Changes in Stock or Benefit Plans........................................16 (j) Participation and Coverage in Benefit Plans.........................................16 (k) ERISA Compliance....................................................................16 (l) Taxes...............................................................................18 (m) State Takeover Statutes.............................................................20 (n) Brokers; Schedule of Fees and Expenses..............................................20 (o) Licenses and Permits; Agents........................................................20 (p) Contracts; Debt Instruments; Leases.................................................22 (q) Opinion of Financial Advisor........................................................24 (r) Interests of Officers and Directors.................................................24 (s) Technology..........................................................................24 (t) Change of Control...................................................................25 (u) Environmental.......................................................................25 (v) Title to Properties.................................................................27
3 (w) Other Obligations...................................................................27 (x) Public Utility Holding Company Act; Non-Utility Status..............................28 (y) Year 2000...........................................................................28 (z) Insurance...........................................................................29 (aa) Investments.........................................................................29 (bb) Investment Company..................................................................30 (cc) Internal Controls...................................................................30 (dd) Assumed and Ceded Reinsurance Agreements............................................30 (ee) Accounts with Financial Institutions................................................32 (ff) Minute Books; Stock Books; Officers and Directors...................................32 (gg) Continuing Business Relationships...................................................32 (hh) Insurance Reserves..................................................................32 (ii) Disclosure..........................................................................33 Section 4.2 Representations and Warranties of Parent and Merger Subsidiary......................33 (a) Organization, Standing and Corporate Power..........................................33 (b) Authority; Noncontravention.........................................................33 (c) Disclosure Documents................................................................34 (d) Financing...........................................................................35 ARTICLE 5 COVENANTS OF THE COMPANY............................................................35 Section 5.1 Conduct of Business.................................................................35 Section 5.2 Shareholder Meeting; Proxy Material.................................................37 Section 5.3 Access to Information...............................................................38 Section 5.4 Other Offers........................................................................39 Section 5.5 Rights Agreement....................................................................39 Section 5.6 State Takeover Statutes.............................................................40 Section 5.7 Regulatory Filings..................................................................40 Section 5.8 Affirmative Actions.................................................................40 Section 5.9 Termination of Benefit Plans........................................................41 ARTICLE 6 COVENANTS OF PARENT.................................................................41 Section 6.1 Obligations of Merger Subsidiary....................................................41 Section 6.2 Voting of Shares....................................................................41 Section 6.3 Director and Officer Liability......................................................41 Section 6.4 Employees...........................................................................43 ARTICLE 7 COVENANTS OF PARENT AND THE COMPANY.................................................43 Section 7.1 HSR Act Filings; Other Filings Reasonable Efforts; Notification.....................43 Section 7.2 Public Announcements................................................................46 Section 7.3 Confidentiality.....................................................................46 Section 7.4 Interim Financial Statements........................................................46 ARTICLE 8 CONDITIONS TO THE MERGER............................................................47 Section 8.1 Conditions to the Obligations of Each Party.........................................47
ii 4 ARTICLE 9 TERMINATION.........................................................................48 Section 9.1 Termination.........................................................................48 Section 9.2 Effect of Termination...............................................................48 ARTICLE 10 MISCELLANEOUS.......................................................................49 Section 10.1 Notices.............................................................................49 Section 10.2 Survival of Representations and Warranties..........................................49 Section 10.3 Amendments; No Waivers..............................................................50 Section 10.4 Fees and Expenses...................................................................50 Section 10.5 Successors and Assigns..............................................................51 Section 10.6 Governing Law.......................................................................51 Section 10.7 Counterparts; Effectiveness; Interpretation.........................................51 Section 10.8 Enforcement.........................................................................52 Section 10.9 Severability........................................................................52 Section 10.10 Entire Agreement; No Third Party Beneficiaries......................................52
iii 5 AGREEMENT AND PLAN OF MERGER This AGREEMENT AND PLAN OF MERGER ("Agreement"), dated as of October 11, 1999, is entered into among The Centris Group, Inc., a Delaware corporation (the "Company"), HCC Insurance Holdings, Inc., a Delaware corporation ("Parent"), and Merger Sub of Delaware, Inc., a Delaware corporation and a wholly owned subsidiary of Parent ("Merger Subsidiary"). WHEREAS, the respective Boards of Directors of the Company, the Parent and the Merger Subsidiary have determined that it is advisable and in the best interests of their respective shareholders for the Parent and Merger Subsidiary to acquire the Company upon the terms and subject to the conditions set forth herein; and WHEREAS, the Company, the Parent and the Merger Subsidiary desire to make certain representations, warranties, covenants and agreements in connection with this Agreement; and WHEREAS, and furtherance of such acquisition, Parent proposes to cause Merger Subsidiary to make the Offer (as defined in Section 1.1(a)) to purchase all of the issued and outstanding shares of common stock, par value $.01 per share of the Company together with attached right to purchase shares (the "Common Stock") upon the terms and subject to the conditions of this Agreement and the Board of Directors of the Company (the "Board" or the "Board of Directors") has unanimously approved the Offer and recommended that the shareholders of the Company accept the Offer; and WHEREAS, the respective Boards of Directors of the Company, the Parent and Merger Subsidiary have deemed advisable and have approved the Offer and the Merger (as defined in Section 2.1) of the Merger Subsidiary with and into the Company upon the terms and subject to the conditions set forth in this Agreement; and WHEREAS, the Company and the Parent have determined it is advisable and in the best interests of the shareholders of the Company, for the Company to grant an option to Parent to acquire shares of Common Stock and have entered into a Stock Option Agreement dated the date hereof providing therefor. NOW, THEREFORE, in consideration of the representations, warranties and agreements herein contained, and subject to the terms and conditions herein set forth, the parties hereto do hereby agree as follows: ARTICLE 1 THE OFFER Section 1.1 The Offer. (a) Provided that nothing shall have occurred that would result in a failure to satisfy any of the conditions set forth in Annex I hereto, Merger Subsidiary shall, as promptly as practicable after the date hereof, but in no event later than the first Business 6 Day (as defined in Rule 14b-1(c)(6) of the Securities and Exchange Act of 1934, as amended (the "Exchange Act")), following the execution of this Agreement, issue a public announcement of the execution of this Agreement and as promptly as practicable, but in any event within five Business Days following the public announcement of the terms of this Agreement, commence an offer (the "Offer") to purchase all of the outstanding shares of common stock, par value $.01 per share together with attached rights to purchase shares (the "Shares"), of the Company at a price of $12.50 per Share, net to the seller in cash. Such Offer shall remain open for a period not to exceed 30 Business Days (the "Offer Period") subject to extension as provided below. The Offer shall be subject to the condition that there shall be validly tendered in accordance with the terms of the Offer prior to the expiration date of the Offer and not withdrawn a number of Shares which, together with the Shares then owned by Parent and Merger Subsidiary, represents at least a majority (the "Minimum Condition") of the total number of outstanding Shares, assuming the exercise of all outstanding options, rights and convertible securities (if any) (other than options to be canceled pursuant to Section 2.5 hereof, and Shares to be issued pursuant to the Stock Option Agreement defined herein) and the issuance of all Shares that the Company is obligated to issue (such total number of outstanding Shares being hereinafter referred to as the "Fully Diluted Shares") and to the other conditions set forth in Annex I hereto. Parent and Merger Subsidiary expressly reserve the right to waive the conditions to the Offer and to make any change in the terms or conditions of the Offer; provided however, that, without the written consent of the Company, no change may be made which (i) except as provided in the next sentence, extends the Offer; (ii) changes the form of consideration to be paid for the Shares, (iii) decreases the price per Share or the number of Shares sought in the Offer, (iv) imposes conditions to the Offer in addition to those set forth in Annex I, (v) changes or waives the Minimum Condition, or (vi) makes any other change to any condition to the Offer set forth in Annex I which is materially adverse to the holders of Shares. Notwithstanding the foregoing, without the consent of the Company, Merger Subsidiary may (i) extend the Offer Period until all of the conditions to the Merger Subsidiary's obligation to purchase Shares shall be satisfied or waived, including, without limitation, any period required (A) by any rule, regulation, interpretation, or position of the Securities and Exchange Commission (the "SEC") or the staff thereof applicable to the Offer; or (B) pursuant to the HSR Act, defined below, shall have terminated, or (C) to obtain necessary approval of each state insurance regulatory agency required for consummation of the Offer, (ii) extend the Offer Period for a period of not more than 10 Business Days beyond the expiration thereof, as such may be extended pursuant to subparagraph (i) hereof, (iii) extend the Offer Period for an additional period of not more than 10 Business Days beyond that permitted by subparagraphs (i) and (ii) hereof if on the date of such extension, less than ninety percent (90%) of the Fully Diluted Shares have been validly tendered and not properly withdrawn pursuant to the Offer, and (iv) extend the Offer for any reason for a period of not more than five Business Days beyond the latest Expiration Date that would be otherwise permitted under clauses (i), (ii), or (iii) of this sentence. Subject to the terms of the Offer and this Agreement and the satisfaction (or waiver to the extent permitted by this Agreement) of the conditions of the Offer, Merger Subsidiary shall accept for payment all Shares validly tendered and not 2 7 withdrawn pursuant to the Offer as soon as practicable after the applicable expiration of the Offer. (b) A soon as practicable on the date of commencement of the Offer, Parent and Merger Subsidiary shall (i) file with the SEC a Tender Offer Statement on Schedule 14D-1 with respect to the Offer which will contain the offer to purchase and form of the related letter of transmittal (together with any supplements or amendments thereto, collectively the "Offer Documents") and (ii) cause the Offer Documents to be disseminated to holders of Shares. Parent, Merger Subsidiary and the Company each agrees promptly to correct any information provided by it for use in the Offer Documents if and to the extent that it shall have become false or misleading in any material respect. Parent and Merger Subsidiary agree to take all steps necessary to cause the Offer Documents as so corrected to be filed with the SEC and to be disseminated to holders of Shares, in each case as and to the extent required by applicable federal securities laws. Parent and Merger Subsidiary agree to provide the Company and its counsel in writing with any comments Parent, Merger Subsidiary or their counsel may receive from the SEC or its staff, including, but not limited to, comments with respect to the Offer Documents, promptly after receipt of such comments. The Company and its counsel shall be given a reasonable opportunity to review and comment upon the Offer Documents and all amendments and supplements thereto prior to their filing with the SEC. Section 1.2 Company Action. (a) The Company hereby consents to the Offer and represents that its Board of Directors, at a meeting duly called and held, has (i) unanimously determined that this Agreement and the transactions contemplated hereby, including the Offer and the Merger (defined below in Section 2.1), the Stock Option Agreement dated as of the date hereof (the "Stock Option Agreement") and the Shareholder Option Agreement, dated as of the date hereof (the "Shareholder Option Agreement"), among the shareholders of the Company that are named therein and Merger Subsidiary, and the transactions contemplated thereby, are fair to and in the best interest of the Company's shareholders, (ii) unanimously approved this Agreement and the transactions contemplated hereby, including the Offer, the Merger, the Stock Option Agreement and the Shareholder Option Agreement and the transactions contemplated thereby, which approval satisfies in full the requirements of Section 203 of the General Corporation Law of the State of Delaware (the "Delaware Law"), (iii) unanimously resolved to recommend acceptance of the Offer and approval and adoption of this Agreement and the Merger by its shareholders, and (iv) determined that the consummation of the transactions contemplated hereby including the Offering, the Merger, the Stock Option Agreement and the Shareholder Option Agreement and thereby have not, and will not, cause the Rights, as defined herein, to become exercisable. The Company further represents that Advest Investment Banking, Inc. ("Advest") has delivered to the Company's Board of Directors its opinion that the consideration to be paid in the Offer and the Merger is fair to the holders of Shares from a financial point of view. The Company has been advised that each of its directors and executive officers presently intend either to tender their Shares pursuant to the Offer or to vote in favor of the Merger. The Company will promptly furnish Parent and Merger 3 8 Subsidiary with a list of its shareholders, mailing labels and any available listing or computer file containing the names and addresses of all record holders of Shares and lists of securities positions of Shares held in stock depositories, in each case as of the most recent practicable date, and will provide to Parent and Merger Subsidiary such additional information (including, without limitation, updated lists of shareholders, mailing labels and lists of securities positions) and such other assistance as Parent or Merger Subsidiary may reasonably request in connection with the Offer. (b) As soon as practicable on the day that the Offer is commenced the Company will file with the SEC and disseminate to holders of Shares a Solicitation/Recommendation Statement on Schedule 14D-9 (the "Schedule 14D-9") which shall reflect the recommendations of the Company's Board of Directors referred to above, subject to the fiduciary duties of the Board of Directors of the Company as advised in writing by Gibson, Dunn & Crutcher LLP, counsel to the Company. The Company, Parent and Merger Subsidiary each agrees promptly to correct any information provided by it for use in the Schedule 14D-9 if and to the extent that it shall have become false or misleading in any material respect. The Company agrees to take all steps necessary to cause the Schedule 14D-9 as so corrected to be filed with the SEC and to be disseminated to holders of Shares, in each case as and to the extent required by applicable federal securities laws. Parent and its counsel shall be given an opportunity to review and comment on the Schedule 14D-9 prior to its being filed with the SEC. Section 1.3 Directors. (a) Effective upon the payment by Merger Subsidiary for a majority of the Shares pursuant to the Offer, Parent shall be entitled to designate the number of directors, rounded up to the next whole number, on the Company's Board of Directors that equals the product of (i) the total number of directors on the Company's Board of Directors (giving effect to the election of any additional directors pursuant to this Section) and (ii) the percentage that the number of Shares owned by Parent or Merger Subsidiary (including Shares accepted for payment) bears to the total number of Shares outstanding, and the Company shall take all action necessary to cause Parent's designees to be elected or appointed to the Company's Board of Directors, including, without limitation, increasing the number of directors, or seeking and accepting resignations of incumbent directors, or both; provided however, that, prior to the Effective Time (defined below), the Company's Board of Directors shall always have one member who is neither a designee nor an affiliate of Parent or Merger Subsidiary nor an employee of the Company (an "Independent Director"). If the number of Independent Directors is reduced below one for any reason prior to the Effective Time the departing Independent Director shall be entitled to designate a person to fill such vacancy. No action proposed to be taken by the Company to amend or terminate this Agreement or waive any action by Parent or Merger Subsidiary shall be effective without the approval of the Independent Director. At such times, the Company will use its best efforts to cause individuals designated by Parent to constitute the same percentage as such individuals represent on the Company's Board of Directors of (x) each committee of the Board, (y) each board of directors of each Subsidiary (defined below) and (z) each committee of each such board. 4 9 (b) The Company's obligations to appoint designees to the Board of Directors shall be subject to Section 14(f) of the Exchange Act and Rule 14f-1 promulgated thereunder. The Company shall promptly take all actions required pursuant to Section 14(f) and Rule 14f-l in order to fulfill its obligations under this Section 1.3 and shall include in the Schedule 14D-9 such information with respect to the Company and its officers and directors as is required under Section 14(f) and Rule 14f-1 to fulfill its obligations under this Section 1.3. Parent will supply to the Company in writing and be solely responsible for any information with respect to itself and its nominees, officers, directors and affiliates required by Section 14(f) and Rule 14f-1. ARTICLE 2 THE MERGER Section 2.1 The Merger. (a) At the Effective Time, Merger Subsidiary shall be merged (the "Merger") with and into the Company in accordance with Delaware Law, whereupon the separate existence of Merger Subsidiary shall cease, and the Company shall be the surviving corporation (the "Surviving Corporation"). (b) As soon as practicable after satisfaction of or, to the extent permitted hereunder, waiver of all conditions to the Merger, the Company and Merger Subsidiary will file a certificate of merger with the Secretary of State of the State of Delaware and make all other filings or recordings required by Delaware Law in connection with the Merger. The Merger shall become effective at such time as the certificate of merger is duly filed with the Secretary of State of the State of Delaware or, with the consent of the Independent Director, at such later time as is specified in the certificate of merger (the "Effective Time"). (c) From and after the Effective Time, the Surviving Corporation shall possess all the rights, privileges, powers and franchises and be subject to all of the restrictions, disabilities and duties of the Company and Merger Subsidiary, all as provided under Delaware Law. Section 2.2 Conversion of Shares. At the Effective Time: (a) each Share held by the Company as treasury stock or owned by Parent, Merger Subsidiary or any subsidiary of either of them immediately prior to the Effective Time shall be canceled, and no payment shall be made with respect thereto; (b) each share of common stock of Merger Subsidiary outstanding immediately prior to the Effective Time shall be converted into and become one share of common stock of the Surviving Corporation with the same rights, powers and privileges as the shares so converted and shall constitute the only outstanding shares of capital stock of the Surviving Corporation; and 5 10 (c) each Share outstanding immediately prior to the Effective Time shall, except as otherwise provided in Section 2.2(a) or as provided in Section 2.4 with respect to Shares as to which appraisal rights have been exercised, be converted into the right to receive $12.50 in cash without interest (the "Merger Consideration"). Section 2.3 Surrender and Payment. (a) Prior to the Effective Time, Parent shall appoint an exchange agent (the "Exchange Agent") for the purpose of exchanging certificates representing Shares for the Merger Consideration. Parent will make available to the Exchange Agent, as needed, the Merger Consideration to be paid in respect of the Shares (the "Exchange Fund"). For purposes of determining the Merger Consideration to be made available, Parent shall assume that no holder of Shares will perfect the right to appraisal of Shares. Promptly after the Effective Time, Parent will send, or will cause the Exchange Agent to send, to each holder of Shares at the Effective Time a letter of transmittal for use in such exchange (which shall specify that the delivery shall be effected, and risk of loss and title shall pass, only upon proper delivery of the certificates representing Shares to the Exchange Agent). The Exchange Agent shall, pursuant to irrevocable instructions, make the payments provided for in this Section 2.3. The Exchange Fund shall not be used for any other purpose, except as provided in this Agreement. (b) Each holder of Shares that have been converted into a right to receive the Merger Consideration, upon surrender to the Exchange Agent of a certificate or certificates representing such Shares, together with a properly completed letter of transmittal covering such Shares, and such other documents as shall be reasonably requested, will be entitled to receive the Merger Consideration payable in respect of such Shares. Until so surrendered, each such certificate shall, after the Effective Time, represent for all purposes, only the right to receive such Merger Consideration. (c) If any portion of the Merger Consideration is to be paid to a person other than the registered holder of the Shares represented by the certificate or certificates surrendered in exchange therefor, it shall be a condition to such payment that the certificate or certificates so surrendered shall be properly endorsed or otherwise be in proper form for transfer and that the person requesting such payment shall pay to the Exchange Agent any transfer or other taxes required as a result of such payment to a person other than the registered holder of such Shares or establish to the satisfaction of the Exchange Agent that such tax has been paid or is not payable. For purposes of this Agreement, "person" or "Person" means an individual, a corporation, a partnership, a limited liability company, an association, a trust or any other entity or organization, including a government or political subdivision or any agency or instrumentality thereof. (d) After the Effective Time, there shall be no further registration of transfers of Shares. If, after the Effective Time, certificates representing Shares are presented to the Surviving Corporation, they shall be canceled and exchanged for the consideration provided for, and in accordance with the procedures set forth, in this Article 2. 6 11 (e) Any portion of the Exchange Fund made available to the Exchange Agent pursuant to Section 2.3(a) that remains unclaimed by the holders of Shares six months after the Effective Time shall be returned to Parent, upon demand, and any such holder who has not exchanged his Shares for the Merger Consideration in accordance with this Section 2.3 prior to that time shall thereafter look only to Parent for payment of the Merger Consideration in respect of his Shares. Notwithstanding the foregoing, Parent shall not be liable to any holder of Shares for any amount paid to a public official pursuant to applicable abandoned property laws. Any amounts remaining unclaimed by holders of Shares immediately prior to such time as such amounts would otherwise escheat to or become property of any governmental entity shall, to the extent permitted by applicable law, become the property of Parent, free and clear of any claims or interest of any person previously entitled thereto. (f) Any portion of the Merger Consideration made available to the Exchange Agent pursuant to Section 2.3(a) to pay for Shares for which appraisal rights have been perfected shall be returned to Parent, upon demand. Section 2.4 Dissenting Shares. Notwithstanding Section 2.2, Shares outstanding immediately prior to the Effective Time and held by a holder who has not voted in favor of the Merger or consented thereto in writing and who has demanded appraisal for such Shares in accordance with Delaware Law shall not be converted into a right to receive the Merger Consideration, unless such holder fails to perfect or withdraws or otherwise loses the right to appraisal. If after the Effective Time such holder fails to perfect or withdraws or loses the right to appraisal, such Shares shall be treated as if they had been converted as of the Effective Time into a right to receive the Merger Consideration. The Company shall give Parent prompt notice of any demands received by the Company for appraisal of Shares, and Parent shall have the right to participate in all negotiations and proceedings with respect to such demands. The Company shall not, except with the prior written consent of Parent, make any payment with respect to, or settle or offer to settle, any such demands. Section 2.5 Stock Options. (a) At the time that Merger Subsidiary has accepted for payment all Shares validly transferred and not withdrawn pursuant to the Offer, each outstanding Company Option (defined below) shall be canceled, and each holder of any such option shall be paid by Merger Subsidiary promptly for each such option an amount determined by multiplying (i) the excess, if any, of $12.50 per Share over the applicable exercise price of such option by (ii) the number of Shares such holder could have purchased had such holder exercised such option in full immediately prior to the time that Merger Subsidiary has accepted for payment all Shares validly transferred and not withdrawn pursuant to the Offer (as if such Company Option was exercisable in full). "Company Option" means any option granted, whether or not exercisable, and not exercised or expired, to a current or former employee, director or independent contractor of the Company or any of its subsidiaries or any predecessor thereof to purchase Shares pursuant to any stock option, stock bonus, stock award, or stock purchase plan, program, or arrangement of the Company or any of its subsidiaries or any predecessor thereof (collectively, the "Stock 7 12 Plans") or any other contract or agreement (other than the Stock Option Agreement) entered into by the Company or any of its subsidiaries. (b) As soon as practicable following the date of this Agreement, the Company shall use its best efforts to (i) obtain any consents from holders of Company Options and (ii) make any amendments to the terms of such Stock Plans or arrangements that, in the case of either clauses (i) or (ii), are necessary to give effect to the transactions contemplated by Section 2.5(a). Notwithstanding any other provision of this Section 2.5, payment may be withheld in respect of any Company Option until necessary consents are obtained. All amounts payable pursuant to this Section 2.5 shall be subject to, and reduced by, any required withholding of taxes and shall be paid without interest. ARTICLE 3 THE SURVIVING CORPORATION Section 3.1 Certificate of Incorporation. The certificate of incorporation of Merger Subsidiary in effect at the Effective Time shall be the certificate of incorporation of the Surviving Corporation until amended in accordance with applicable law, except that the name of the Surviving Corporation shall be changed to the name of the Company. Section 3.2 Bylaws. The bylaws of Merger Subsidiary in effect at the Effective Time shall be the bylaws of the Surviving Corporation until amended in accordance with applicable law. Section 3.3 Directors and Officers. From and after the Effective Time, until successors are duly elected or appointed and qualified in accordance with applicable law, (i) the directors of Merger Subsidiary at the Effective Time shall be the directors of the Surviving Corporation, and (ii) the officers of the Merger Subsidiary at the Effective Time shall be the officers of the Surviving Corporation. ARTICLE 4 REPRESENTATIONS AND WARRANTIES Section 4.1 Representations and Warranties of the Company. The Company represents and warrants to Parent and Merger Subsidiary as follows: (a) Organization, Standing and Corporate Power. Each of the Company and each of its subsidiaries is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction in which it is incorporated and has the requisite corporate power and authority to carry on its business as now being conducted. Each of the Company and each of its subsidiaries is duly qualified or licensed to do business and is in good standing in each jurisdiction in which the nature of its business or the ownership or leasing of its properties makes such qualification or licensing necessary, other than in such jurisdictions where the failure to be so qualified or licensed (individually or in the aggregate) could not reasonably be expected to have a Material 8 13 Adverse Effect, as defined below, on the Company and its subsidiaries taken as a whole. The Company has delivered to Parent complete and correct copies of its Certificate of Incorporation and By-Laws and the certificates of incorporation or other charter or organizational documents and by-laws of its subsidiaries, in each case as amended to the date of this Agreement. For purposes of this Agreement, a "subsidiary" of any person means another person, an amount of the voting securities, other voting ownership or voting partnership interests of which is sufficient to elect at least a majority of its Board of Directors or other governing body (or, if there are no such voting interests, 50% or more of the equity interests) of which is owned directly or indirectly by such first person. As used herein "Material Adverse Effect" means with respect to the Company, any change in, or effect on, the Company or the business of the Company; in each case including its subsidiaries taken as a whole, which is, or which is reasonably likely to be, materially adverse to the business, operations, assets, liabilities, results of operations, condition (financial or otherwise), prospects, insurance licenses or other material permits of the Company or its subsidiaries or which will, or is reasonably likely to, prevent or materially delay, the transactions contemplated by this Agreement, provided, however, (i) that any effect on the Company or the business of the Company which is due to, arises from, or relates to any action taken by the Company or its subsidiaries after the date of this Agreement at the request of or done at the direction or with the consent of the Parent shall not be considered to have a Material Adverse Effect for any purpose under this Agreement and (ii) provided, further, that a Material Adverse Effect on the Company shall not be deemed to have occurred as a result of (w) the Company establishing additional reserves and taking other charges at September 30, 1999 in the amount of $13.5 million; (x) the Company's independent actuarial review of the Company's reserves and all other aspects of the Company's business, as contemplated by Section 5.8 hereof, and the establishment of appropriate reserve adjustments and other charges (collectively the "Charges") so long as the Charges do not exceed $17 million in the aggregate (there being no presumption that the establishment of reserves or charges in excess of $17 million either will or will not have a Material Adverse Effect); (y) any change (including changes in the market value of invested assets) in general economic conditions affecting the insurance business or their holding companies generally; or (z) the termination of the Management Agreements between the Company and The Continental Insurance Company as a result of a change of control. "Material Adverse Effect" with respect to the Parent, means any change in, or effect on, the Parent which is, or which is reasonably likely to be, materially adverse to the Parent's operations, assets, liabilities, results of operations, condition (financial or otherwise) or prospects, on a consolidated basis, or which will prevent or materially delay the transactions contemplated by this Agreement. (b) Subsidiaries. (i) Section 4.1(b) of the disclosure schedule delivered by the Company to Parent and Merger Subsidiary prior to the execution of this Agreement (the "Disclosure Schedule") lists each subsidiary of the Company and its respective jurisdiction of incorporation and each state in which the Company 9 14 and each of its subsidiaries is licensed or qualified to carry out its businesses. Except as disclosed in Section 4.1(b) of the Disclosure Schedule, all of the outstanding shares of capital stock of each such subsidiary have been validly issued and are fully paid and nonassessable and are owned by the Company, by another subsidiary of the Company or by the Company and another such subsidiary, free and clear of all pledges, claims, liens, charges, encumbrances and security interests of any kind or nature whatsoever (collectively, "Liens") and free of any other limitation or restriction (including any restriction on the right to vote, sell or otherwise dispose of such capital stock). Except for the capital stock of its subsidiaries, the Company does not own, directly or indirectly, any capital stock or other ownership interest in any person except as disclosed in Section 4.1(b)(i) of the Disclosure Schedule. (ii) Except as set forth in Section 4.1(b)(ii) of the Disclosure Schedule there are no corporations, partnerships, limited liability companies, joint ventures, associations or other entities (A) in which the Company owns, of record or beneficially, any direct or indirect equity, membership or other interest or any right (contingent or otherwise) to acquire the same, or (B) which the Company controls, directly or indirectly, by contract or proxy or otherwise, alone or in combination with any other Person. As used herein, unless the context otherwise requires, the term "Company" includes the Company and each of its subsidiaries. (c) Capital Structure. The authorized capital stock of the Company (and not its subsidiaries) consists of 40,000,000 Shares and 5,000,000 shares of Preferred Stock of the Company. As of the date of this Agreement, (i) 11,536,076 Shares were issued and outstanding, (ii) 928,824 Shares were held by the Company in its treasury or by any of the Company's subsidiaries, and (iii) 1,060,453 Shares were reserved for issuance pursuant to the outstanding Company Options. No Shares of Preferred Stock were outstanding. All outstanding Shares of the Company are, and all Shares which may be issued pursuant to the Stock Plans will be, when issued, duly authorized, validly issued, fully paid and nonassessable and not subject to preemptive rights. Except as set forth in Section 4.1(c) of the Disclosure Schedule, there are no bonds, debentures, notes, warrants or other indebtedness or securities of the Company having the right to vote (or convertible into, or exchangeable for, securities having the right to vote) on any matters on which shareholders of the Company may vote. Except as set forth above and in Section 4.1(c) of the Disclosure Schedule, there are no securities, options, warrants, calls, rights, commitments, agreements, arrangements or undertakings of any kind to which the Company or any of its subsidiaries is a party or by which any of them is bound obligating the Company or any of its subsidiaries to issue, deliver or sell, or cause to be issued, delivered or sold, additional shares of capital stock or 10 15 other voting securities of the Company or of any of its subsidiaries or obligating the Company or any of its subsidiaries to issue, grant, extend or enter into any such security, option, warrant, call, right, commitment, agreement, arrangement or undertaking. Except as set forth in Section 4.1(c) of the Disclosure Schedule, there are no outstanding rights, commitments, agreements, arrangements or undertakings of any kind obligating the Company or any of its subsidiaries to repurchase, redeem or otherwise acquire any shares of capital stock or other voting securities of the Company or any of its subsidiaries or any securities of the type described in the two immediately preceding sentences. The Company has delivered to Parent complete and correct copies of the Stock Plans and all forms of Company Options. Section 4.1(c) of the Disclosure Schedule sets forth a complete and accurate list of all Company Options outstanding as of the date of this Agreement and the exercise price of each outstanding Company Option. The authorized and outstanding capital stock of each of the Company's subsidiaries is set forth in Section 4.1(c) of the Disclosure Schedule. (d) Authority; Noncontravention. The Company has the requisite corporate power and authority to enter into this Agreement and, except for any required approval by the Company's shareholders in connection with the consummation of the Merger, to consummate the transactions contemplated by this Agreement. The execution and delivery of this Agreement by the Company and the consummation by the Company of the transactions contemplated by this Agreement have been duly authorized by all necessary corporate action on the part of the Company, except for any required approval by the Company's shareholders in connection with the consummation of the Merger. This Agreement has been duly executed and delivered by the Company and, assuming this Agreement constitutes a valid and binding agreement of Parent and Merger Subsidiary, constitutes a valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except to the extent that enforceability may be limited by applicable bankruptcy, reorganization, insolvency, moratorium or other laws affecting the enforcement of creditors' rights generally and by general principles of equity, regardless of whether such enforceability is considered in a proceeding in equity or at law. Except as set forth in Section 4.1(d) of the Disclosure Schedule, the execution and delivery of this Agreement does not, and the consummation of the transactions contemplated by this Agreement and compliance with the provisions of this Agreement will not, conflict with, or result in any violation of, or default (with or without notice or lapse of time, or both) under, or give rise to a right of termination, cancellation or acceleration of any obligation or to loss of a material benefit under, or result in the creation of any Lien upon any of the properties or assets of the Company or any of its subsidiaries under, (i) the Certificate of Incorporation or By-Laws of the Company or the comparable charter or organizational documents of any of its subsidiaries, (ii) any loan or credit agreement, note, bond, mortgage, indenture, lease or other agreement, instrument, permit, concession, franchise or license applicable to the Company or any of its subsidiaries or their respective properties or assets or (iii) subject to the governmental filings and other matters referred to in the following sentence, any judgment, order, decree, statute, law, ordinance, rule or regulation applicable to the Company or any of its subsidiaries or their respective properties or assets other than, in the case of clause (ii) or (iii) above, any such conflicts, violations, defaults, rights or Liens that individually or in the aggregate could not reasonably be expected to (A) have a Material Adverse Effect, (B) impair the ability of the Company to perform its obligations under this Agreement or (C) prevent or materially delay consummation of any of the transactions contemplated by this Agreement. No consent, approval, order or authorization of, or registration, declaration or filing with or exemption by (collectively, "Consents") any federal, state or local government or any court, administrative or 11 16 regulatory agency or commission or other governmental authority or agency, domestic or foreign (a "Governmental Entity"), is required by or with respect to the Company or any of its subsidiaries in connection with the execution and delivery of this Agreement by the Company or the consummation by the Company of the transactions contemplated by this Agreement, except for (i) the filing of a certificate of merger in accordance with Delaware Law and appropriate documents with the relevant authorities of other states in which the Company is qualified to do business, (ii) the filing of a premerger notification and report form by the Company under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules and regulations thereunder (the "HSR Act"), (iii) compliance with any applicable requirements of the Exchange Act, (iv) such notices, filings and consents as may be required under relevant state property transfer or environmental laws, (v) filing with the insurance regulatory agencies set forth in Section 4.1(d) of the Disclosure Schedule, and (vi) such other consents, approvals, orders, authorizations, registrations, declarations and filings as to which the failure to obtain or make could not reasonably be expected to (x) have a Material Adverse Effect or (y) prevent or materially delay the consummation of any of the transactions contemplated by this Agreement. (e) SEC Documents; Financial Statements; No Undisclosed Liabilities. (i) The Company has filed all required reports, schedules, forms, statements and other documents with the SEC since January 1, 1996 (the "SEC Documents"). As of their respective dates, the SEC Documents complied in all material respects with the requirements of the Securities Act of 1933, as amended, and the rules and regulations thereunder (the "Securities Act"), or the Exchange Act, as the case may be, applicable to such SEC Documents, and none of the SEC Documents contained any untrue statement of a material fact or omitted to state a 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. The financial statements of the Company included in the SEC Documents (the "Financial Statements") comply as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto, have been prepared in accordance with generally accepted accounting principles (except, in the case of unaudited statements, as permitted by Form 10-Q of the SEC) applied on a consistent basis during the periods involved (except as may be indicated in the notes thereto) and fairly present in all material respects the consolidated financial position of the Company and its consolidated subsidiaries as of the dates thereof and the consolidated results of their operations and cash flows for the periods then ended (subject to the items set forth in Section 4.1(e) of the Disclosure Schedule, and in the case of unaudited statements, to normal, recurring year-end audit adjustments). Except as set forth in the Company Filed SEC Documents (defined below) or on Section 4.1(e) of the Disclosure Schedule, neither the Company nor any of its subsidiaries has any liabilities or obligations of any nature (whether accrued, absolute, contingent or otherwise) and there is no existing condition, situation or set of circumstances which are required by generally accepted accounting 12 17 principles to be set forth on a consolidated balance sheet of the Company and its consolidated subsidiaries or in the notes thereto, except for liabilities which, individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect. (ii) The Company has heretofore delivered to the Parent true and complete copies of the Annual Statutory Statements and the Quarterly Statutory Statements filed with each Governmental Entity. Each of the Annual Statutory Statements and Quarterly Statutory Statements was prepared in accordance with Statutory Accounting Practices ("SAP") consistently applied throughout the periods involved, was prepared in accordance with the books and records of the Company, has been audited by the Company's independent public accountants (the "Company's Accountants"), and presents fairly the statutory financial position of the Company at the respective dates thereof and the statutory results of operations and cash flows of the Company for the respective periods then ended, subject to the items set forth in Section 4.1(e) of the Disclosure Schedule, except that the Quarterly Statutory Statements have not been audited and are subject to normal recurring year-end audit adjustments. Except as set forth in Section 4.1(e) of the Disclosure Schedule, each of the Annual Statutory Statements and Quarterly Statutory Statements (i) complies in all material respects with the Insurance Codes, rules and regulations of any jurisdiction in which such statements are required to be filed, (ii) was complete and correct in all material respects when filed, (iii) was filed with or submitted to each jurisdiction in which such statements are required to be filed in a timely manner on forms prescribed or permitted by each such jurisdiction, and (iv) was not prepared utilizing any material accounting practices that are permitted rather than prescribed by each such jurisdiction. Except as set forth in Section 4.1(e) of the Disclosure Schedules, no material deficiency has been asserted with respect to any of the Annual Statutory Statements or Quarterly Statutory Statements by any Governmental Entity. (f) Disclosure Documents. (i) Each document required to be filed by the Company with the SEC in connection with the transactions contemplated by this Agreement (the "Company Disclosure Documents"), including, without limitation, the Schedule 14D-9, the proxy or information statement of the Company (the "Company Proxy Statement"), if any, to be filed with the SEC in connection with the Merger, and any amendments or supplements thereto will, when filed, comply as to form in all material respects with the applicable requirements of the Exchange Act. (ii) At the time the Company Proxy Statement or any amendment or supplement thereto is first mailed to shareholders of the Company, and at the time such shareholders vote on adoption of this Agreement, the Company Proxy Statement, as supplemented or amended, if applicable, will not contain any untrue 13 18 statement of a material fact or omit to state any material fact necessary in order to make the statements made therein, in the light of the circumstances under which they were made, not misleading. At the time of the filing of any Company Disclosure Document other than the Company Proxy Statement and at the time of any distribution thereof, such Company Disclosure Document will not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made therein, in the light of the circumstances under which they were made, not misleading. The representations and warranties contained in this Section 4.1(f)(ii) will not apply to statements or omissions included in the Company Disclosure Documents based upon information furnished to the Company in writing by Parent or Merger Subsidiary specifically for use therein. (iii) The information with respect to the Company or any subsidiary that the Company furnishes to Parent or Merger Subsidiary in writing specifically for use in the Offer Documents will not, at the time of the filing thereof, at the time of any distribution thereof and at the time of the consummation of the Offer, 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 made therein, in the light of the circumstances under which they were made, not misleading. (g) Absence of Certain Changes or Events. Except as disclosed in the SEC Documents filed and publicly available prior to the date of this Agreement (the "Company Filed SEC Documents") or in Section 4.1(g) of the Disclosure Schedule, since December 31, 1998, the Company has conducted its business only in the ordinary course consistent with past practice, and there has not been (i) any event, occurrence or development of a state of circumstances which has had or could reasonably be expected to have a Material Adverse Effect, (ii) any declaration, setting aside or payment of any dividend or other distribution (whether in cash, stock or property) with respect to any of the Company's capital stock or any repurchase, redemption or other acquisition by the Company or any of its subsidiaries of any outstanding shares of capital stock or other securities of the Company or any of its subsidiaries, (iii) any split, combination or reclassification of any of its capital stock or any issuance or the authorization of any issuance of any other securities in respect of, in lieu of or in substitution for shares of its capital stock, (iv) (A) any granting by the Company or any of its subsidiaries to any current or former director, officer or employee of the Company or any of its subsidiaries of any increase in compensation or benefits, except in the ordinary course of business consistent with past practice, (B) any granting by the Company or any of its subsidiaries to any such director, officer or employee of any increase in severance or termination pay (including the acceleration in the exercisability of Company Options or in the vesting of Shares (or other property) or the provision of any tax gross-up), except as was required under employment, severance or termination agreements or plans in effect as of December 31, 1998 which individually or in the aggregate could reasonably be expected to have a Material Adverse Effect, or (C) any entry by the Company or any of its subsidiaries into any employment, deferred compensation, severance or termination 14 19 agreement with any such current or former director, officer or employee, except in the ordinary course of business consistent with past practice, (v) any damage, destruction or loss, whether or not covered by insurance, that has had or could have a Material Adverse Effect, (vi) any change in accounting methods, principles or practices by the Company or any of its subsidiaries, except insofar as may have been required by a change in generally accepted accounting principles, (vii) any amendment of any material term of any outstanding security of the Company or any of its subsidiaries, (viii) any incurrence, assumption or guarantee by the Company or any of its subsidiaries of any material indebtedness for borrowed money other than in the ordinary course of business consistent with past practice, but in no event in the amount of more than $250,000 in the aggregate, (ix) any creation or assumption by the Company or any of its subsidiaries of any Lien on any asset other than in the ordinary course of business consistent with past practice, but in no event in the amount of more than $250,000 for any one transaction or $500,000 in the aggregate, (x) any making of any loan, advance or capital contributions to or investment in any person other than (A) made in the ordinary course of business consistent with past practice, but in no event in the amount of more than $100,000 for any one transaction or $150,000 in the aggregate and (B) investments in cash equivalents made in the ordinary course of business consistent with past practice, (xi) any transaction or commitment made, or any contract or agreement entered into, by the Company or any of its subsidiaries relating to its assets or business (including the acquisition or disposition of any assets or the merger or consolidation with any person) or any relinquishment by the Company or any of its subsidiaries of any contract or other right, in either case, material to the Company or any of its subsidiaries, other than transactions and commitments in the ordinary course of business consistent with past practice and those contemplated by this Agreement, but in no event representing commitments on behalf of the Company or any of its subsidiaries of more than $250,000 for any transaction or $500,000 for any series of transactions, (xii) any material labor dispute, other than routine individual grievances, or any activity or proceeding by a labor union or representative thereof to organize any employees of the Company or any of its subsidiaries, which employees were not subject to a collective bargaining agreement at December 31, 1998, or any material lockouts, strikes, slowdowns, work stoppages or threats thereof by or with respect to such employees or (xiii) any agreement, commitment, arrangement or undertaking by the Company or any of its subsidiaries to perform any action described in clauses (i) through (xii). (h) Litigation. Except as disclosed in Section 4.1(h) of the Disclosure Schedule, there is no suit, action or proceeding pending or, to the knowledge of the Company, threatened against or affecting the Company or any of its subsidiaries that, individually or in the aggregate, could reasonably be expected to (i) have a Material Adverse Effect, (ii) impair the ability of the Company to perform its obligations under this Agreement or (iii) prevent or materially delay the consummation of the Offer, the Merger or any of the other transactions contemplated by this Agreement, nor is there any judgment, decree, injunction, rule or order of any Governmental Entity or arbitrator outstanding against the Company or any of its subsidiaries having, or which, insofar as reasonably can be foreseen, in the future would have, any such effect. Section 4.1(h) of the Disclosure Schedule sets forth, with respect to any pending suit, action or proceeding 15 20 to which the Company or any of its subsidiaries is a party, the forum, the parties thereto, the subject matter thereof and the amount of damages claimed. Any representation or warranty in this Agreement which is expressed as made to the Company's knowledge or to the knowledge of the Company means the knowledge, after reasonable investigation and due inquiry, of the officers of the Company listed on Schedule 4.1(h) of the Disclosure Schedule. (i) Absence of Changes in Stock or Benefit Plans. Except as disclosed in Section 4.1(i) of the Disclosure Schedule, since December 31, 1998, and through the date hereof, there has not been (i) any acceleration, amendment or change of the period of exercisability or vesting of any Company Options or restricted stock, stock bonus or other awards under the Stock Plans or any other options to purchase Shares or stock of any subsidiary of the Company (including any discretionary acceleration of the exercise periods or vesting by the Company's Board of Directors or any committee thereof or any other persons administering a Stock Plan) or authorization of cash payments in exchange for any Company Options, restricted stock, stock bonus or other awards granted under any of such Stock Plans or any other options to purchase Shares as stock of any subsidiary of the Company or (ii) any adoption or amendment by the Company or any of its subsidiaries of any collective bargaining agreement or any bonus, pension, profit sharing, deferred compensation, incentive compensation, stock ownership, stock purchase, stock option, phantom stock, stock appreciation right, retirement, vacation, severance, disability, death benefit, hospitalization, medical, workers' compensation, disability, supplementary unemployment benefits, or other plan, arrangement or understanding (whether or not legally binding) or any employment agreement providing compensation or benefits to any current or former employee, officer, director or independent contractor of the Company or any of its subsidiaries or any beneficiary thereof or entered into, maintained or contributed to, as the case may be, by the Company or any of its subsidiaries or ERISA affiliates (as hereafter defined) (collectively, "Benefit Plans") other than immaterial amendments to any such Benefit Plan. Section 4.1(i) of the Disclosure Schedule sets forth for each of the fifteen most highly compensated employees of the Company, the aggregate maximum amount of all termination, severance or other similar benefits to which such employee is entitled in connection with the Merger and the other transactions contemplated by this Agreement. (j) Participation and Coverage in Benefit Plans. Except as set forth in Section 4.1(j) of the Disclosure Schedule, there has been no adoption of, or amendment to, or change in employee participation or coverage under, or written interpretation or announcement (whether or not written) by the Company or any of its subsidiaries relating to, any Benefit Plans which would increase materially the expense of maintaining such Benefit Plans above the level of the expense incurred in respect thereof for the fiscal year ended on December 31, 1998. (k) ERISA Compliance. (i) Except as otherwise indicated therein, Section 4.1(k) of the Disclosure Schedule lists all Benefit Plans and "employee benefit plans" (defined 16 21 in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")), currently maintained, or contributed to, by the Company or any of its subsidiaries or ERISA affiliates (defined below) for the benefit of any current or former employees, officers or directors of the Company or any of its subsidiaries or ERISA affiliates or under which the Company or any of its subsidiaries or ERISA affiliates has any liability. The Company has delivered to Parent a complete copy of (A) the current plan document for each Benefit Plan (or, in the case of any unwritten Benefit Plans, descriptions thereof), (B) a copy of the most recent Form 5500 filed with the Internal Revenue Service with respect to each Benefit Plan (if any such report was required), (C) the most recent summary plan description for each Benefit Plan for which a summary plan description is required, (D) each trust agreement and group annuity or insurance contract relating to any Benefit Plan, and (E) to the extent still in the Company's possession, all material correspondence to or from the Internal Revenue Service or the Department of Labor from January 1, 1996 through the date hereof to or from the Internal Revenue Service or the Department of Labor relating to any Benefit Plan. For purposes of this Agreement, "ERISA affiliate" of the Company means any person which, together with the Company or any of its subsidiaries, would be treated as a single employer under Section 414 of the Internal Revenue Code of 1986, as amended (the "Code"). (ii) Except as set forth in Section 4.1(k) of the Disclosure Schedule, to the knowledge of the Company, each Benefit Plan has been maintained and administered in compliance with its terms and with the requirements prescribed by any and all applicable statutes, orders, rules and regulations except as would not have a Material Adverse Effect and is, to the extent required by applicable law or contract, fully funded on a termination basis without having any deficit or unfunded actuarial liability. Any Benefit Plan intended to be qualified under Section 401(a) of the Code has obtained from the Internal Revenue Service a favorable determination letter as to its qualified status under the Tax Reform Act of 1986 and, to Company's knowledge, nothing has occurred since the issuance of each such letter which could reasonably be expected to cause the loss of the tax qualified status of any Benefit Plan intended to be qualified under Code Section 401(a). (iii) Except as set forth in Section 4.1(k) of the Disclosure Schedule, no Benefit Plan is or ever has been covered by Title IV of ERISA or Section 412 of the Code and none of the Company, any of its subsidiaries, or any ERISA affiliate has ever participated in, maintained, or contributed to any such plan. To the knowledge of the Company, neither the Company nor any of its subsidiaries or ERISA affiliates has incurred or expects to incur any liability under Title IV of ERISA or any liability or penalty under Section 4975 or 4980B of the Code or Section 502(i) of ERISA. To the knowledge of the Company, none of the Company, any of its subsidiaries, or any ERISA affiliate has ever engaged in, or is a successor or affiliate of any entity that has engaged in, a transaction which is described in Section 4069 of ERISA. 17 22 (iv) Except as set forth in Section 4.1(k) of the Disclosure Schedule, to the Company's knowledge, there are no pending or anticipated material claims against or otherwise involving any of the Benefit Plans and no suit, action or other litigation (excluding claims for benefits incurred in the ordinary course of Benefit Plan activities) has been brought against or with respect to any Benefit Plan. (v) Except as set forth in Section 4.1(k) of the Disclosure Schedule, to the Company's knowledge, all material contributions, reserves or premium payments, required to be made as of the date hereof to or with respect to the Benefit Plans have been made or provided for except as would not have a Material Adverse Effect. (vi) Except as set forth in Section 4.1(k) of the Disclosure Schedule, or as otherwise required by law, neither the Company nor any of its subsidiaries or ERISA affiliates has any obligations for post-retirement or post-termination health (including medical, dental and vision), life (including accidental death and dismemberment), and/or long term disability benefits under any Benefit Plan. Except as set forth in Section 4.1(k) of the Disclosure Schedule, each Benefit Plan, including each plan providing coverage or benefits for retired employees and/or their beneficiaries, may be amended or terminated at any time by the Company or any of its subsidiaries or ERISA affiliates. None of the Benefit Plans are self-insured "multiple employer welfare arrangements" as such term is defined in Section 3(40) of ERISA. (l) Taxes. As used in this Agreement, "tax" or "taxes" shall include all Federal, state, local and foreign income, property, sales, excise and other taxes, tariffs or similar governmental charges or assessments as well as any interest, penalties and additions thereto. (i) The Company and each of its subsidiaries have timely filed all tax returns, statements, reports and forms required to be filed with any tax authority and in accordance with all applicable laws. All such tax returns are correct and complete in all material respects. All taxes owed by the Company and any of its subsidiaries (whether or not shown on any tax return) have been paid (excluding any taxes owed but not yet due). There are no Liens on any of the assets of the Company or any of its subsidiaries that arose in connection with any failure (or alleged failure) to pay any tax. (ii) The Company and each of its subsidiaries has withheld and timely paid all taxes required to have been withheld and paid in connection with amounts paid or owing to any employee, independent contractor, creditor, shareholder, or other third party. (iii) To the knowledge of the Company, there is no potential assessment by a taxing authority of any additional taxes against the Company or any of its subsidiaries for any period for which tax returns have been filed. Except as set 18 23 forth in Section 4.1 (l) (iii) of the Disclosure Schedule no dispute or claim concerning any tax liability of the Company or any of its subsidiaries has been proposed or claimed in writing by any authority. The Company has provided Parent with a list of all Federal, state, local, and foreign income tax returns filed with respect to the Company and any of its subsidiaries for taxable periods ended on or after December 31, 1994, indicating those tax returns that have been audited, and indicating those tax returns that currently are the subject of audit. The Company has provided Parent with correct and complete copies of all its Federal income tax returns, and examination reports, and statements of deficiencies assessed against or agreed to by the Company and any of its subsidiaries since December 31, 1994. (iv) Neither the Company nor any of its subsidiaries has waived any statute of limitations in respect of taxes or agreed to any extension of time with respect to a tax assessment or deficiency. (v) Neither the Company nor any of its subsidiaries has filed a consent pursuant to Section 341(f) of the Code concerning collapsible corporations. Except as set forth on Section 4.1(l)(v) of the Disclosure Schedule, neither the Company nor any of its subsidiaries is a party to any tax allocation or sharing agreement. Neither the Company nor any of its subsidiaries has any liability for the taxes of any person (other than the Company and any of its subsidiaries that is currently a member of the Company's affiliated group filing a consolidated federal income tax return) under Treas. Reg. Section 1.1502-6 (or any similar provision of state, local, or foreign law), as a transferee or successor, by contract, or otherwise. (vi) As of the date of the most recent financial statements included in the Company Filed SEC Documents, the unpaid taxes of the Company and its subsidiaries did not exceed the reserve for taxes (rather than any reserve for deferred taxes established to reflect timing differences between book and tax income) established in such financial statements. (vii) Neither the Company nor any of its subsidiaries is required to include in income any adjustment pursuant to Section 481(a) of the Code (or similar provisions of other law or regulations) in its current or in any future taxable period by reason of a change in accounting method; nor does the Company or any of its subsidiaries have any knowledge that the Internal Revenue Service (or other taxing authority) has proposed or is considering proposing, any such change in accounting method. Except as set forth on Section 4.1(l)(vii) of the Disclosure Schedule, neither the Company nor any of its subsidiaries is a party to any agreement, contract, or arrangement that, individually or collectively, could give rise to the payment of any amount (whether in cash or property, including Company Stock) that would not be deductible pursuant to the terms of Sections 162(a)(1), 162(m), 162(n) or 280G of the Code. 19 24 (viii) The Company qualifies as an insurance company under the Code and the Company has received no notice or other communication relating to or affecting such qualification of the Company as an insurance company. (ix) Section 4.1(l)(ix) of the Disclosure Schedule contains a list of all states, territories and jurisdictions (foreign or domestic) to which any tax is properly payable by the Company. No claim has ever been made by any taxing authority in a jurisdiction in which the Company does not file tax returns that it is or may be subject to tax in that jurisdiction. (m) State Takeover Statutes. The Board of Directors of the Company has approved the Offer, the Merger, this Agreement, and the transactions contemplated hereby and thereby, and such approval is sufficient to render inapplicable to the Offer, the Merger, this Agreement, and the transactions contemplated hereby or thereby, the provisions of Section 203 of Delaware Law. To the best of the Company's knowledge, no other "fair price", "moratorium", "control share acquisition", or other anti-takeover statute or similar statute or regulation, applies or purports to apply to the Offer, the Merger, the Shareholder Option Agreement, this Agreement, the Stock Option Agreement or any of the transactions contemplated hereby or thereby. (n) Brokers; Schedule of Fees and Expenses. No broker, investment banker, financial advisor or other person, other than Advest, the fees and expenses of which will be paid by the Company (and a copy of whose engagement letter and a calculation of the fees that would be due thereunder has been provided to Parent), is entitled to any broker's, finder's, financial advisor's or other similar fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of the Company or any of its subsidiaries. No such engagement letter obligates the Company to continue to use the services or pay fees or expenses in connection with any future transaction. (o) Licenses and Permits; Agents. (i) Except as set forth in Section 4.1(o)(i) of the Disclosure Schedule, the Company and its subsidiaries have all governmental licenses, permits and authorizations (other than those relating to the writing of insurance which are covered by the next sentence) necessary to carry on the Business now being conducted by the Company and its subsidiaries (collectively, the "Permits"), all of which are valid and in full force and effect, except for such Permits the absence of which, individually or in the aggregate, would not have a Material Adverse Effect. The Company and its subsidiaries have been, and are, in compliance in all material respects with all applicable statutes, laws, ordinances, regulations, rules, judgments, decrees or orders of any Governmental Entity, except for such non-compliance which, individually or in the aggregate would not have a Material Adverse Effect, and neither the Company nor any of its subsidiaries has received any notice from any Governmental Entity or any other person that either the Company or any of its subsidiaries is in violation of, or has violated, any 20 25 applicable statutes, laws, ordinances, regulations, rules, judgments, decrees or orders. Section 4.1(o)(i) of the Disclosure Schedule lists all jurisdictions in which the Company is licensed, authorized or permitted to write insurance or reinsurance. The Company has been duly authorized by the relevant state, foreign and other insurance regulatory authorities to write the lines of insurance or reinsurance that it is currently writing in the respective jurisdictions in which it does business. Except as set forth in Section 4.1(o)(i) of the Disclosure Schedule, the Company does not conduct any business or underwrite reinsurance in any foreign jurisdiction which requires any license or approval for the Company to conduct its business as currently conducted. No insurance regulator in any state has notified the Company, orally or in writing, that the Company is commercially domiciled in any jurisdiction, and the Company is not aware of any facts that would result in the Company being commercially domiciled in any state. The insurance licenses listed in Section 4.1(o)(i) of the Disclosure Schedule are the licenses necessary for the Company to conduct the business in the manner and in the areas in which such business is currently being conducted except where the failure to be so licensed would not, individually or in the aggregate, have a Material Adverse Effect, and all of the insurance licenses are valid and in full force and effect. The Company has not received any notice, oral or written, that it has, and to its knowledge it has not, engaged in any activity which would cause modification, limitation, non-renewal, revocation or suspension of any insurance license or permit, and no action, inquiry, investigation or proceeding looking to or contemplating the revocation, modification, limitation, non-renewal or suspension of any thereof is pending or threatened. Except as set forth in Section 4.1(o)(i) of the Disclosure Schedule, (i) all reports, statements, documents, registrations, filings and submissions to state insurance regulatory authorities complied in all respects with applicable law in effect when filed and (ii) no deficiencies have been asserted by any such regulatory authority with respect to such reports, statements, documents, registrations, filings or submissions that have not been satisfied except to the extent that any failure to file such items or such deficiencies would not, individually or in the aggregate, result in a Material Adverse Effect. (ii) To the best of the Company's knowledge, all Persons through whom the Company has placed or sold reinsurance and insurance are duly licensed (to the extent such licensing is required) to sell or place insurance and reinsurance in the jurisdiction where they do so on behalf of the Company. Except as set forth in Section 4.1(o)(ii) of the Disclosure Schedule, no single agent, broker, intermediary or producer generated more than $500,000 of the aggregate gross written premium of the Company during the years ended December 31, 1997 or December 31, 1998 or the period ending August 31, 1999. Except as otherwise set forth in Section 4.1(o)(ii) of the Disclosure Schedule, no Person listed on Section 4.1(o)(ii) of the Disclosure Schedule has given or been given written notice of termination or, to the knowledge of the Company, threatened or been threatened with termination, or threatened or been threatened with a substantial reduction in the amount of premiums to be written by such Person on behalf of the Company. Except as set forth in Section 4.1(o)(ii) of the 21 26 Disclosure Schedule, the Company is not a party to any managing general agency contracts or other similar arrangements. Except as set forth in Section 4.1(o)(ii) of the Disclosure Schedule, the Company is not a party to any fronting or similar agreement to place or sell reinsurance or insurance for any other Person. (p) Contracts; Debt Instruments; Leases. (i) Except as otherwise disclosed in Section 4.1(p)(i)(A)-4.1(p)(i)(F) of the Disclosure Schedule, neither the Company nor any of its subsidiaries is a party to or subject to: (A) any union contract, or any employment, consulting, severance, termination, or indemnification agreement, contract or arrangement providing for future payments, written or oral, with any current or former officer, consultant, director or employee which (1) exceeds $25,000 per annum or (2) requires aggregate annual payments or total payments over the life of such agreement, contract or arrangement to such current or former officer, consultant, director or employee in excess of $25,000 or $50,000, respectively, and is not terminable by it or its subsidiary on 30 days' notice or less without penalty or obligation to make payments related to such termination; (B) any joint venture contract or arrangement or any other agreement which has involved or is expected to involve a sharing of revenues of $50,000 per annum or more with other persons; (C) any lease for real or personal property; (D) any material agreement, contract, policy, license, Permit, document, instrument, arrangement or commitment which has not been terminated or performed in its entirety and not renewed which may be, by its terms, terminated, impaired or adversely affected by reason of the execution of this Agreement, the closing of the Offer or the Merger, or the consummation of the transactions contemplated hereby; (E) any agreement, contract, policy, license, Permit, document, instrument, arrangement or commitment that materially limits the freedom of the Company or any subsidiary of the Company to compete in any line of business or with any person or in any geographic area or which would so materially limit the freedom of the Company or any subsidiary of the Company after the Effective Time; or (F) any other agreement, contract, policy, license, Permit, document, instrument, arrangement or commitment not made in the ordinary course of business which is material to the Company or any of its subsidiaries. 22 27 (ii) All contracts, policies, agreements, leases, licenses, Permits, documents, instruments, arrangements and other commitments listed in Section 4.1(p)(i)(A)-4.1(p)(i)(F) and Section 4.1(p)(iv) of the Disclosure Schedule or otherwise disclosed in the Company Filed SEC Documents are valid and binding agreements of the Company or a subsidiary of the Company and are in full force and effect, except to the extent that enforceability may be limited by applicable bankruptcy, reorganization, insolvency, moratorium or other laws affecting the enforcement of creditors' rights generally and by general principles of equity, regardless of whether such enforceability is considered in a proceeding in equity or at law and neither the Company, any of its subsidiaries nor, to the knowledge of the Company, any other party thereto, is in default in any material respect under the terms of any such contract, plan, arrangement, agreement, lease, license, Permit, instrument or other commitment. (iii) Neither the Company nor any subsidiary of the Company is in default in any material respect under the terms of any exclusive license or distribution agreement or arrangement, true and complete copies or descriptions of all of which have been delivered to Parent. To the knowledge of the Company, none of the parties to any of the contracts identified pursuant to the immediately proceeding sentence, in Section 4.1(p)(i)(A)-4.1(p)(i)(F) of the Disclosure Schedule or otherwise disclosed in the Company Filed SEC Documents has terminated, or in any way expressed an intent to materially reduce or terminate the amount of, its business with the Company or any of its subsidiaries in the future. (iv) Set forth in Section 4.1(p)(iv) of the Disclosure Schedule is (A) a list of all loan or credit agreements, notes, bonds, mortgages, indentures and other agreements and instruments pursuant to which any indebtedness of the Company or any of its subsidiaries in an aggregate principal amount in excess of $100,000 is outstanding or may be incurred and (B) the respective principal amounts currently outstanding thereunder. For purposes of this Section 4.1(p)(iv), "indebtedness" shall mean, with respect to any person, without duplication, (A) all obligations of such person for borrowed money, or with respect to deposits or advances of any kind to such person, (B) all obligations of such person evidenced by bonds, debentures, notes or similar instruments, (C) all obligations of such person upon which interest charges are customarily paid, (D) all obligations of such person under conditional sale or other title retention agreements relating to property purchased by such person, (E) all obligations of such person issued or assumed as the deferred purchase price of property or services (excluding obligations of such person to creditors for raw materials, inventory, services and supplies incurred in the ordinary course of such person's business), (F) all capitalized lease obligations of such person, (G) all obligations of others secured by any Lien on property or assets owned or acquired by such person, whether or not the obligations secured thereby have been assumed, (H) all obligations of such person under interest rate or currency swap transactions (valued at the termination value thereof), (I) all letters of credit issued for the account of such person (excluding letters of credit issued for the benefit of suppliers to support accounts payable 23 28 to suppliers incurred in the ordinary course of business), (J) all obligations of such person to purchase securities (or other property) which arises out of or in connection with the sale of the same or substantially similar securities or property, and (K) all guarantees and arrangements having the economic effect of a guarantee of such person of any indebtedness of any other person. (v) All equipment, fixtures and other Properties owned or leased by the Company (including those listed in the Company's Depreciation Ledger in Section 4.1(p)(v) of the Disclosure Schedule) are (i) in good operating condition and repair, reasonable wear and tear excepted, and (ii) adequate for the Business currently conducted by the Company and suitable in all respects for the purposes for which they are being used, except for such failures to be in such good operating condition or adequacy or suitability which, individually and in the aggregate, do not have a Material Adverse Effect. (q) Opinion of Financial Advisor. The Company has received the opinion of Advest, dated the date hereof, a copy of which has been or, within two business days of the date hereof, will be provided to Parent, to the effect that, as of such date, the consideration to be paid in the Offer and the Merger is fair to the Company's shareholders from a financial point of view. (r) Interests of Officers and Directors. None of the Company's or any of its subsidiaries' officers or directors has any interest in any property, real or personal, tangible or intangible, including inventions, patents, copyrights, trademarks, trade names, trade secrets or know-how, used in or pertaining to the business of the Company or that of its subsidiaries, or any supplier, distributor or customer of the Company or any of its subsidiaries, except for the normal rights of a shareholder and rights under existing employee Benefit Plans and Stock Plans. (s) Technology. (i) Except as set forth in Section 4.1(s) of the Disclosure Schedule, the Company exclusively owns, or is licensed to use, the rights to all patents, trademarks, trade names, service marks, copyrights and any applications therefor, technology, trade secrets, know-how, computer software programs or applications and tangible or intangible proprietary information or material that in any material respect are used or proposed to be used in the business of the Company and any of its subsidiaries as currently conducted or proposed to be conducted (the "Company Intellectual Property Rights"). Section 4.1(s) of the Disclosure Schedule lists: (A) all patents, registered trademarks, trade names, registered service marks, registered copyrights, and any applications therefor included in the Company Intellectual Property Rights; and (B) all material licenses and other agreements to which the Company or any of its subsidiaries is a party and pursuant to which the Company or any of its subsidiaries is authorized to use any Company Intellectual Property Right, and includes the identities of the parties thereto, a description of the nature and subject matter thereof, the applicable 24 29 royalty and the term thereof. Neither the Company nor any of its subsidiaries is, or as a result of the execution, delivery or performance of the Company's obligations hereunder will be, in violation of, or lose any rights pursuant to, any material license or agreement described in Section 4.1(s) of the Disclosure Schedule. (ii) No claims with respect to the Company Intellectual Property Rights have been asserted in writing or, to the knowledge of the Company, are threatened by any person nor does the Company or any subsidiary of the Company know of any valid grounds for any bona fide claims (A) to the effect that the manufacture, sale or use of any product or process as now used or offered or proposed for use or sale by the Company or any subsidiary of the Company infringes on any United States copyright, trade secret, United States patent or other United States intellectual property right of any person, (B) against the use by the Company or any subsidiary of the Company of any Company Intellectual Property Rights, or (C) challenging the ownership, validity or effectiveness of any of the Company Intellectual Property Rights. All granted and issued patents and all registered trademarks and service marks listed in Section 4.1(s) of the Disclosure Schedule and all registered copyrights held by the Company or any of its subsidiaries are valid, enforceable and subsisting. To the Company's knowledge, there has not been and there is not any material unauthorized use, infringement or misappropriation of any of the Company Intellectual Property Rights by any third party, employee or former employee. (t) Change of Control. Except as disclosed in Section 4.1(t) of the Disclosure Schedule, the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby and thereby will not (i) result in any payment (including severance, unemployment compensation, tax gross-up, bonus or otherwise) becoming due to any current or former director, employee or independent contractor of the Company or any of its subsidiaries, from the Company or any of its subsidiaries under any Stock Plan, Benefit Plan, agreement or otherwise, (ii) materially increase any benefits otherwise payable under any Stock Plan, Benefit Plan, agreement or otherwise or (iii) result in the acceleration of the time of payment, exercise or vesting of any such benefits, in each case, that could reasonably be expected to have a Material Adverse Effect. (u) Environmental. Except as set forth in Section 4.1(u) of the Disclosure Schedule, (i) the businesses as presently or formerly engaged in by the Company and its subsidiaries are and have been conducted in compliance in all material respects with all applicable Environmental Laws (defined below), including having all permits, licenses and other approvals and authorizations, during the time the Company (or such subsidiary) engaged in such businesses, (ii) to the knowledge of the Company, the properties presently owned or operated by the Company or any subsidiary of the Company (including soil, groundwater or surface water on, under or adjacent to the properties, and buildings thereon) ("Company Properties") do not contain any Hazardous Substance (defined below) other than as permitted under applicable Environmental Laws, 25 30 (iii) neither the Company nor any subsidiary of the Company has received any notices, demand letters or requests for information from any federal, state, local or foreign governmental entity or any third party indicating that the Company or any subsidiary of the Company may be in violation of, or liable under, any Environmental Law in connection with the ownership or operation of the Company's or any of its subsidiaries' businesses, (iv) there are no civil, criminal or administrative actions, suits, demands, claims, hearings, investigations or proceedings pending or to the knowledge of the Company, threatened against the Company or any subsidiary of the Company with respect to the Company or any subsidiary of the Company or the Company Properties relating to any violation, or alleged violation, of any Environmental Law, (v) to the knowledge of the Company, no reports have been filed, or are required to be filed, by the Company or any subsidiary of the Company concerning the release of any Hazardous Substance or the threatened or actual violation of any Environmental Law on or at Company Properties, (vi) to the knowledge of the Company, no Hazardous Substance has been disposed of, transferred, released or transported from any Company Property during the time such Company Property was owned or operated by the Company or any subsidiary of the Company, other than as permitted under applicable Environmental Law, (vii) to the knowledge of the Company, there have been no environmental investigations, studies, audits, tests, reviews or other analyses conducted by or which are in the possession of the Company or any subsidiary of the Company relating to the Company or any subsidiary of the Company or the Company Properties which have not been delivered to Parent prior to the date hereof, (viii) to the knowledge of the Company, there are no underground storage tanks on, in or under any of the Company Properties and no underground storage tanks have been closed or removed from any Company Properties while such Company Property was in the ownership of the Company or any subsidiary of the Company, (ix) to the knowledge of the Company, there is no asbestos present in any Company Property presently owned or operated by the Company or any subsidiary of the Company in violation of any Environmental Law, and no asbestos has been removed from any Company Property while such Company Property was owned or operated by the Company or any subsidiary of the Company, (x) none of the Company Properties has been used at any time by the Company or any subsidiary of the Company as a sanitary landfill or hazardous waste disposal site, and (xi) neither the Company nor any subsidiary of the Company has incurred, and to the knowledge of the Company, none of the Company Properties are presently subject to, any liabilities (fixed or contingent) relating to any suit, settlement, court order, administrative order, judgment or claim asserted or arising under any Environmental Law. "Environmental Law" means (i) any federal, state, foreign and local law, statute, ordinance, rule, regulation, code, license, permit, authorization, approval, order, judgment, decree, injunction, requirement or agreement with any governmental entity, (A) relating to the protection, preservation or restoration of the environment (including air, water vapor, surface water, groundwater, drinking water supply, surface land, subsurface land, plant and animal life or any other natural resource), or to human health or safety or (B) relating to the exposure to, or the use, storage, recycling, treatment, generation, transportation, processing, handling, labeling, production, release or disposal of, Hazardous Substances, in each case as amended and as now or hereafter in effect and 26 31 (ii) any common law or equitable doctrine (including injunctive relief) that may impose liability or obligations for injuries or damages due to, or threatened as a result of, the presence of or exposure to any Hazardous Substance. "Hazardous Substance" means any substance presently listed, defined, designated or classified as hazardous, toxic, radioactive or dangerous, or otherwise regulated, under any Environmental Law, whether by type or by quantity, including any substance containing any such substance as a component. The term "Hazardous Substance" includes any toxic waste, pollutant, contaminant, hazardous substance, toxic substance, hazardous waste, special waste, or petroleum or any derivative or by-product thereof, radon, radioactive material, asbestos, asbestos containing material, urea formaldehyde foam insulation, lead and polychlorinated biphenyl. (v) Title to Properties. Except as set forth in Section 4.1(v) of the Disclosure Schedule, (i) each of the Company and its subsidiaries has good and marketable or indefeasible title to, or valid leasehold interests in, all its properties and assets, free and clear of all Liens, except for defects in title, easements, restrictive covenants and similar encumbrances or impediments that, in the aggregate, do not and will not materially interfere with the use of the properties or assets subject thereto or affected thereby or otherwise materially impair business operations at such properties; (ii) each of the Company and each of its subsidiaries has complied in all material respects with the terms of all leases to which it is a party and under which it is in occupancy, and all such leases are in full force and effect and each of the Company and each of its subsidiaries enjoys peaceful and undisturbed possession under all such leases; (iii) all royalties, rentals, and other payments due with respect to the Company's its subsidiaries' leasehold or other property interests have been properly and timely paid, except (A) for payments which will not result in grounds for cancellation of the Company's or its subsidiaries' rights and (B) such failures as would not have a Material Adverse Effect; and (iv) neither the Company nor any of its subsidiaries is in default (and there exists no event or circumstance which with notice or the passage of time or both could constitute a default by the Company or its subsidiaries) under the terms of any leases, or other contracts or agreements respecting the Company's or its subsidiaries' which could (A) interfere in any material respect with the operation or use thereof, (B) prevent the Company or its subsidiaries from receiving the proceeds attributable to their interest therein, (C) result in cancellation of the Company's interest therein, or (D) impair the value of the Company's or its subsidiaries' interest therein. (w) Other Obligations. 27 32 (i) except as disclosed in Section 4.1(w) of the Disclosure Schedule, none of the Company and its subsidiaries engages in any futures or options trading or is a party to any related price swaps, hedges, futures or similar instruments. Section 4.1(w) of the Disclosure Schedule discloses a true and correct statement of the position, as of the date hereof, of the Company and its subsidiaries with respect to obligations under Fixed Price Contracts (including, with respect to each Fixed Price Contract, location of delivery and variations in the obligation to take or deliver) and price swaps, hedges, futures or similar instruments to which the Company or any of its subsidiaries is a party and that are material to the Company. "Fixed Price Contracts" shall mean any contracts, commitments or agreements (x) having a remaining term of more than sixty (60) days, wherein the purchase or sale price thereunder throughout part of the remaining life of such contract, commitment or agreement is a fixed amount or an amount that is otherwise reasonably determinable as of the date hereof pursuant to the terms of such contract, commitment or agreement, or (y) which has been hedged with futures contracts or otherwise. (ii) neither the Company nor any of its subsidiaries has entered into, or is a party to, or has any obligations under, any contract for property or services that require payment to be made by the Company or its subsidiaries regardless of whether or not delivery is ever made of such property or services. (x) Public Utility Holding Company Act; Non-Utility Status. Except as set forth in Section 4.1(x) of the Disclosure Schedule, (i) neither the Company nor any of its subsidiaries is a "holding company" or a "subsidiary company" of a "holding company" or an "affiliate" of a "holding company" as such terms are defined in the Public Utility Holding Company Act of 1935, as amended; (ii) neither the Company nor any of its subsidiaries is a regulated utility under the laws of any state; (iii) no claim or complaint to the effect that the Company or any of its subsidiaries is a regulated utility under the laws of any state has been made to the Company or any of its subsidiaries or by or, to the knowledge of the Company, to any public utilities commission of any state; and (iv) neither the Company nor any of its subsidiaries has offered pipeline service or gas transportation services to the general public or to any significant segment thereof or has dedicated its pipelines or related facilities in any manner to public use. (y) Year 2000. To the knowledge of the Company after due inquiry except as disclosed in Section 4.1(y) of the Disclosure Schedule, all of the MIS Systems (other than immaterial systems) and the Facilities (other than immaterial Facilities) are, or prior to November 1, 1999 will be, Year 2000 Compliant. The Company has made inquiries of all material vendors of products or services to the Company and its subsidiaries as to whether those vendors will continue to furnish their products or services to the Company and its subsidiaries without interruption or material delay, on and after January 1, 2000, and as to whether such products and services are Year 2000 compliant. Section 4.1(y) of the Disclosure Schedule sets forth a list of all vendor and supplier Year 2000 inquiry responses received by the Company. "Year 2000 Compliant" means that (i) the MIS Systems accurately process, provide and/or receive all date/time data (including 28 33 calculating, comparing, sequencing, processing and outputting) within, from, into, and between centuries (including the twentieth and twenty-first centuries and the years 1999 and 2000), including leap year calculations, and (ii) neither the Company's or any of its subsidiaries' provision of their products and services nor the performance on functionality of those products and services will be materially adversely impacted by the transition from the twentieth to the twenty-first century. "Facilities" means any facilities or equipment used by the Company or any of its subsidiaries in any location, including HVAC systems, mechanical systems, elevators, security systems, fire suppression systems, telecommunications systems, fax machines, copy machines, and equipment, whether or not owned by the Company or any of its subsidiaries. "MIS Systems" means any computer software and systems (including hardware, firmware, operating system software, utilities software and applications software) used in the ordinary course of business by or on behalf of the Company or any of its subsidiaries, including in conjunction with the Company's or any of its subsidiaries' payroll, accounting, billing/receivables, inventory, asset tracking, customer service, human resources, and e-mail systems. (z) Insurance. Schedule 4.1(z) of the Disclosure Schedule contains a true and complete list of all insurance policies held by either the Company or any of its subsidiaries. All such policies held by the Company or its subsidiaries, are in full force and effect and all related premiums have been paid to date. There are no pending or to the knowledge of the Company, threatened disputes or communications with or from any insurance carrier denying or disputing any claim or regarding cancellation or nonrenewal of any such policy. Since January 1, 1996, the Company has not failed to give any material notice or to present any material claim under any insurance policy or surety bond in due and timely fashion. The Company has given the Parent the most recently available reports for the Company on: (i) accidents, casualties or damages occurring on or to the properties or assets of the Company; and (ii) claims by the Company for damages, reimbursement of losses, contribution or indemnification under any insurance policy and settlements or negotiations of settlements relating thereto, except with respect to claims pursuant to Reinsurance Agreements or Retrocession Arrangements, each as defined herein. (aa) Investments. (i) The Disclosure Schedule sets forth a true and complete list of all bonds, stocks, mortgages and other investments of any type owned by the Company as of the date hereof (collectively, the "Scheduled Investments"). The Company has good and marketable title to each of the Scheduled Investments. (ii) Except as set forth on the Disclosure Schedule, none of the Scheduled Investments is currently in default in the payment of principal or interest, and, to the knowledge of the Company, no event has occurred which reasonably would be expected to result in a diminution of the value of any nonpublicly traded security owned by the Company. 29 34 (iii) There are no Liens on any of the Scheduled Investments, except for (i) those Scheduled Investments deposited with governmental authorities, as indicated on the Disclosure Schedule, (ii) Liens which do not materially detract from the value of the Scheduled Investments subject thereto, and (iii) assets pledged to secure assumed reinsurance contract obligations which assets are listed on the Disclosure Schedule. (iv) The Company has not taken or omitted to take, any action which would result in the Company being unable to enforce the terms of any Scheduled Investment or which would cause any Scheduled Investment to be subject to any valid offset, defense or counterclaim against the right of the Company to enforce the terms of such Scheduled Investment. (v) Except as disclosed on Section 4.1(aa)(v) of the Disclosure Schedule, since December 31, 1998, the Company has not (i) purchased or otherwise invested in, or committed to purchase or otherwise invest in, any interest in real property (including without limitation any extension of credit secured by a mortgage or deed of trust), (ii) purchased or otherwise invested in, or committed to purchase or otherwise invest in, bonds, notes, debentures or other evidences of indebtedness rated lower than "Baa" by Moody's Investors Service Inc. or "BBB" by Standard & Poor's Corporation at the time of purchase, (iii) entered into any contract, agreement or arrangement with any affiliate with respect to the purchase or other acquisition, sale or other disposition or allocation of any Scheduled Investment or (iv) entered into any contract, agreement or arrangement with respect to any foreign investments. (bb) Investment Company. The Company is not an "investment company" within the meaning of the Investment Company Act of 1940. (cc) Internal Controls. The Company maintains a system of internal accounting controls, which it reasonably believes is sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management's general or specific authorization; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset accountability; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate actions are taken with respect to any differences. (dd) Assumed and Ceded Reinsurance Agreements. (i) As used in this Agreement, the term "Reinsurance Agreements" shall mean all assumed and ceded reinsurance and retrocession agreements, contracts, treaties, or other reinsurance or retrocession commitments, arrangements or undertakings of any kind to which the Company is a party or by which the Company or any of its respective Properties may be bound or affected. 30 35 (ii) Set forth in Section 4.1(dd)(ii) of the Disclosure Schedule is a complete and accurate list of each Reinsurance Agreement pursuant to which the Company has assumed business and which was in force at any time after December 31, 1996 and prior to August 31, 1999, including a description of certain of the terms thereof (including the name of the ceding company, the name of the broker, type of contract, inception date, estimated premium and limit). The Company will deliver to the Parent at the Closing a complete and accurate list of each assumed Reinsurance Agreement in force five Business Days prior to the Closing Date, including information similar to Section 4.1(dd)(ii) of the Disclosure Schedule. (iii) Set forth in Section 4.1(dd)(iii) of the Disclosure Schedule is a complete and accurate list of each Reinsurance Agreement pursuant to which the Company has ceded or transferred any portion of its obligations or liabilities under any reinsurance or insurance agreement (a "Retrocession Arrangement") and which was in force at August 31, 1999, including a description of certain of the terms thereof (including the name of the retrocessionaire, type of contract, inception date, estimated premium and limit). Except as set forth in Section 4.1(dd)(iii) of the Disclosure Schedule, (i) to the knowledge of the Company, none of such retrocessionaires is insolvent or the subject of a rehabilitation, liquidation, conservatorship, receivership, bankruptcy or similar proceeding; (ii) the financial condition of any such retrocessionaires is not impaired to the extent that a default thereunder is reasonably anticipated, (iii) no notice of intended cancellation has been received by the Company from of such retrocessionaires; and (iv) the Company is entitled to take full credit in its Annual Statutory Statements for all amounts recoverable by it pursuant to any Retrocession Arrangement, and all such amounts recoverable have been properly recorded in the books and records of account of the Company and are properly reflected in the Annual Statutory Statements. The Company will deliver to the Parent at the Closing a complete and accurate list of each Retrocession Arrangement in force five Business Days prior to the Closing Date including information similar to Section 4.1(dd)(iii) of the Disclosure Schedule. Except as set forth in Section 4.1 (dd) (iii) of the Disclosure Schedule no such Retrocession Arrangement contains any provision providing that any such party thereto may terminate, cancel, or commute the same by reason of the transactions contemplated by this Agreement. (iv) All of the Reinsurance Agreements and Retrocession Arrangements are valid, binding and enforceable against the Company and, to the best of the knowledge of the Company, against the other parties thereto in accordance with their terms and are in full force and effect. Except as set forth in Section 4.1 (dd) (iv) of the Disclosure Schedule the Company is not, and to the best of the knowledge of the Company, no other party thereto is in, or claimed to be in, material breach or material default under any Reinsurance Agreement and Retrocession Arrangements, and no event has occurred which (after notice or lapse of time or both) would become a material breach or material default under, 31 36 or would permit modification, cancellation, acceleration or termination of, any Reinsurance Agreement and Retrocession Arrangements or result in the creation of any material encumbrance upon, or result in any Person obtaining any right to acquire, any Properties, assets or rights of the Company. Except as set forth in Section 4.1 (dd) (iv) of the Disclosure Schedule there are no unresolved disputes under any Reinsurance Agreement or Retrocession Arrangements. (ee) Accounts with Financial Institutions. Section 4.1(ee) of the Disclosure Schedule sets forth a list of all safe deposit boxes, active bank accounts and other time or demand deposits of the Company, together with names and addresses of the applicable financial institution or other depository, the account number and the names of all persons authorized to draw thereon or who have access thereto. (ff) Minute Books; Stock Books; Officers and Directors. The minute books of the Company which have been made available to the Parent for its inspection contain true and complete records of all meetings and consents in lieu of meetings of the Board of Directors (and any committee hereof) of the Company and its shareholders since incorporation and accurately reflect all transactions referred to in such minutes and consents in lieu of meetings. Attached as Section 4.1(ff) of the Disclosure Schedule is a true and correct list of the officers and directors of the Company and each of its subsidiaries as of the date of this Agreement. (gg) Continuing Business Relationships. Except as set forth in Section 4.1(gg) of the Disclosure Schedule as of the date of this Agreement, to the knowledge of the Company, no insured, reinsured, retrocedent or retrocessionaire of the Company or the Parent has informed the Company and the Company has no knowledge that any such party may cease to do business or materially adversely change its volume of business with the Company after the consummation of the transactions contemplated hereby. (hh) Insurance Reserves. (i) The Company's reserves as of December 31, 1998 and each subsequent date on which such reserves may have been redetermined (a) were determined in accordance with SAP; (b) were computed in accordance with generally accepted loss reserve standards and principles; (c) met the requirements of all Governmental Authorities, including all insurance regulatory agencies having authority over the Company; and (d) made reasonable provision, in the aggregate, for all unpaid loss and loss expense obligations, including obligations for incurred but not reported loss and loss adjustment expenses and unearned premiums as of the dates referenced therein. The Company owns assets that qualify as admitted assets under the insurance regulatory requirements of each jurisdiction in which the Company is subject in an amount at least equal to the reserves plus the minimum statutory capital and surplus as required under such insurance regulatory authorities. 32 37 (ii) The Company has delivered or made available to the Parent true and complete copies of all actuarial reports, actuarial certificates on loss and loss adjustment expense reserve reports prepared by or on behalf of the Company and any other report prepared by any third party actuarial consultant on behalf of or made available to the Company or any of its affiliates, in each case relating to the adequacy of the reserves for any period ending on or after December 31, 1995. (ii) Disclosure. No representation or warranty of the Company contained in this Agreement, and no statement contained in the Disclosure Schedule or in any certificate, schedule, annex, list or other writing furnished to the Parent, contains any untrue statement of a material fact or omits to state a material fact necessary to make the statement contained herein or therein, in light of the circumstances under which they were made, not misleading. Section 4.2 Representations and Warranties of Parent and Merger Subsidiary. Parent and Merger Subsidiary represent and warrant to the Company as follows: (a) Organization, Standing and Corporate Power. Each of Parent and Merger Subsidiary is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has the requisite corporate power and authority to carry on its business as now being conducted. (b) Authority; Noncontravention. Parent and Merger Subsidiary have all requisite corporate power and authority to enter into this Agreement and to consummate the transactions contemplated by this Agreement. The execution and delivery of this Agreement and the consummation of the transactions contemplated by this Agreement have been duly authorized by all necessary corporate action on the part of Parent and Merger Subsidiary. This Agreement has been duly executed and delivered by Parent and Merger Subsidiary and, assuming this Agreement constitutes a valid and binding agreement of the Company, constitutes a valid and binding obligation of such party, enforceable against such party in accordance with its terms, except to the extent that enforceability may be limited by applicable bankruptcy, reorganization, insolvency, moratorium or other laws affecting the enforcement of creditors' rights generally and by general principles of equity, regardless of whether such enforceability is considered in a proceeding in equity or at law. The execution and delivery of this Agreement does not, and the consummation of the transactions contemplated by this Agreement and compliance with the provisions of this Agreement will not, conflict with, or result in any violation of, or default (with or without notice or lapse of time, or both) under, or give rise to a right of termination, cancellation or acceleration of any obligation or to loss of a material benefit under, or result in the creation of any Lien upon any of the properties or assets of Parent or any of its subsidiaries under, (i) the certificate of incorporation or By-Laws of Parent or Merger Subsidiary or the comparable charter or organizational documents of any other subsidiary of Parent, (ii) any loan or credit agreement, note, bond, mortgage, indenture, lease or other agreement, instrument, permit, concession, franchise or license applicable to Parent or Merger Subsidiary or their respective properties or assets or (iii) subject to the governmental filings and other matters referred to in the 33 38 following sentence, any judgment, order, decree, statute, law, ordinance, rule or regulation applicable to Parent, Merger Subsidiary or any other subsidiary of Parent or their respective properties or assets, other than, in the case of clause (ii) or (iii), any such conflicts, violations, defaults, rights or Liens that individually or in the aggregate would not (A) have a Material Adverse Effect on Parent or any of its subsidiaries, (B) impair the ability of Parent and Merger Subsidiary to perform their respective obligations under this Agreement or (C) prevent the consummation of any of the transactions contemplated by this Agreement. No Consent is required by or with respect to Parent, Merger Subsidiary or any other subsidiary of Parent in connection with the execution and delivery of this Agreement or the consummation by Parent or Merger Subsidiary, as the case may be, of any of the transactions contemplated by this Agreement, except for (i) the filing of a certificate of merger in accordance with Delaware Law and appropriate documents with the relevant authorities of other states in which the Company is qualified to do business, (ii) the filing of a premerger notification and report form under the HSR Act, (iii) compliance with any applicable requirements of the Exchange Act, (iv) such notices, filings and consents as may be required under relevant state property transfer or environmental laws, (v) filing with the insurance regulatory agencies set forth in Section 4.1(d) of the Disclosure Schedule, and (vi) such other consents, approvals, orders, authorizations, registrations, declarations and filings as may be required under the laws of any foreign country in which the Company or any of its subsidiaries conducts any business or owns any property or assets. (c) Disclosure Documents. (i) The information with respect to Parent and its subsidiaries that Parent furnishes to the Company in writing specifically for use in any Company Disclosure Document will not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements made therein, in the light of the circumstances under which they were made, not misleading (A) in the case of the Company Proxy Statement at the time the Company Proxy Statement or any amendment or supplement thereto is first mailed to shareholders of the Company, at the time the shareholders vote on adoption of this Agreement and at the Effective Time, and (B) in the case of any Company Disclosure Document other than the Company Proxy Statement, at the time of the filing thereof and at the time of any distribution thereof. (ii) The Offer Documents, when filed, will comply as to form in all material respects with the applicable requirements of the Exchange Act and will not at the time of the filing thereof, at the time of any distribution thereof or at the time of consummation of the Offer, contain any untrue statement of a material fact or omit to state any material fact necessary to make the statements made therein, in the light of the circumstances under which they were made, not misleading, provided, however, that this representation and warranty will not apply to statements or omissions in the Offer Documents based upon information furnished to Parent or Merger Subsidiary in writing by the Company specifically for use therein. 34 39 (d) Financing. At the Effective Time, Parent and Merger Subsidiary will have available all funds necessary (i) to satisfy their respective obligations under this Agreement, and (ii) to pay all the related fees and expenses in connection with the foregoing. ARTICLE 5 COVENANTS OF THE COMPANY The Company agrees that: Section 5.1 Conduct of Business. During the period from the date of this Agreement to the Effective Time, the Company shall, and shall cause its subsidiaries to, carry on their respective businesses in the ordinary course in substantially the same manner as heretofore conducted and, to the extent consistent therewith, use all commercially reasonable efforts to preserve intact their current business organizations, keep available the services of their current officers and employees and preserve their relationships with customers, suppliers, licensors, licensees, distributors and others having business dealings with them to the end that their goodwill and ongoing business shall be unimpaired at the Effective Time. The Company will (i) comply in all material respects with all laws, statutes, ordinances, rules and regulations applicable to the Company, (ii) take all commercially reasonable steps to preserve the current relationships of the Company with its brokers, reinsurance intermediaries, ceding companies, reinsurers, agents, managing general agents, suppliers and other persons with which the Company has significant business relationships, and (iii) perform its obligations under all Reinsurance Agreements, Contracts and commitments to which it is a party or by or to which it is bound or subject; and (iv) require the Company's Accountants to conduct an interim quarterly review with a written report of the Company's Form 10-Q filing for the period ended September 30, 1999, in accordance with generally accepted auditing standards. Without limiting the generality of the foregoing, during the period from the date of this Agreement to the Effective Time, the Company shall not, and shall not permit any of its subsidiaries to, without the prior written approval of Parent: (a) (i) declare, set aside or pay any dividends on, or make any other distributions in respect of, any of its capital stock, other than dividends and distributions by any direct or indirect wholly owned subsidiary of the Company to its parent, (ii) split, combine or reclassify any of its capital stock or issue or authorize the issuance of any other securities in respect of, in lieu of or in substitution for shares of its capital stock or (iii) purchase, redeem or otherwise acquire any shares of capital stock of the Company or any of its subsidiaries or any other securities thereof or any rights, warrants or options to acquire any such shares or other securities (other than in connection with the exercise of Company Options); (b) issue, deliver, sell, pledge or otherwise encumber any shares of its capital stock, any other voting securities or any securities convertible into, or any rights, warrants or options to acquire, any such shares, voting securities or convertible securities (other than the issuance of Shares upon the exercise of Company Options); 35 40 (c) amend its certificate of incorporation, by-laws or other comparable charter or organizational documents; (d) acquire or agree to acquire (including, without limitation, by merger, consolidation or acquisitions of stock or assets) any business, including through the acquisition of any interest in any corporation, partnership, limited liability company, joint venture, association or other business organization or division thereof; (e) mortgage or otherwise encumber or subject to any Lien or, except in the ordinary course of business consistent with past practice and pursuant to existing contracts or commitments, sell, lease, license, transfer or otherwise dispose of any of the Company Intellectual Property Rights or any other material properties or assets; (f) make or agree to make any new capital expenditures in excess of $100,000; (g) make any material tax election (unless required by law) or settle or compromise any material income tax liability; (h) pay, discharge or satisfy any claims, liabilities or obligations (absolute, accrued, asserted or unasserted, contingent or otherwise), or settle any lawsuit other than the payment, discharge, satisfaction or settlement, in the ordinary course of business consistent with past practice and in accordance with their terms and in an amount not to exceed $25,000, or waive the benefits of, or agree to modify in any manner, any confidentiality, standstill or similar agreement to which the Company or any of its subsidiaries is a party; (i) commence a lawsuit other than (i) for the routine collection of bills or (ii) in such cases where the Company in good faith determines that the failure to commence suit would result in a material impairment of a valuable aspect of the Company's business, provided that the Company consults with Parent prior to filing such suit; (j) (i) hire any permanent employee or any other employee whose employment cannot be terminated at will without further payment or enter into or amend any employment or severance agreement or similar arrangements, (ii) make any determination as to amounts payable under any plan, arrangement, or agreement, providing for discretionary incentive compensation or bonus to any officer, director, employee or independent contractor of the Company or any of its subsidiaries, (iii) enter into, adopt, or amend (except as required by Sections 2.5 and 5.9) any agreement, arrangement, or Benefit Plan so as to increase the liability (whether or not contingent) of the Company or the Parent or any of their subsidiaries or ERISA affiliates in respect of compensation or benefits except as may be required by law, or (iv) grant any options or increase any employee or director compensation; 36 41 (k) amend, commute, terminate or waive any of its rights under any Reinsurance Agreement pursuant to which the Company has ceded or transferred any of its obligations or liabilities. (l) conclude any negotiations relating to outstanding issues arising from the Eureko/VASA purchase or the Folksamerica/USF RE sale. (m) make any material changes in their investment portfolio or investment guidelines. (n) authorize any of, or commit or agree to take any of, the foregoing actions; or (o) (i) take or agree or commit to take any action that would make any representation or warranty of the Company hereunder inaccurate in any material respect at, or as of any time prior to, the Effective Time or (ii) omit or agree or commit to omit to take any action necessary to prevent any such representation or warranty from being inaccurate in any material respect at any such time. Section 5.2 Shareholder Meeting; Proxy Material. The Company shall cause a meeting of its shareholders (the "Company Shareholder Meeting") to be duly called and held as soon as reasonably practicable following Merger Subsidiary's acquisition of Shares in the Offer for the purpose of voting on the approval and adoption of this Agreement and the Merger unless a vote of shareholders of the Company is not required by Delaware Law. The Directors of the Company shall, subject to their fiduciary duties as advised in writing by Gibson, Dunn & Crutcher LLP, counsel to the Company, recommend approval and adoption of this Agreement and the Merger by the Company's shareholders. In connection with such meeting, the Company (i) will promptly prepare and file with the SEC, will use its best efforts to have cleared by the SEC and will thereafter mail to its shareholders as promptly as practicable the Company Proxy Statement and all other proxy materials for such meeting, (ii) subject to the fiduciary duties of the Board of Directors of the Company as advised in writing by Gibson, Dunn & Crutcher LLP, counsel to the Company, will use its best efforts to obtain the necessary approvals by its shareholders of this Agreement and the transactions contemplated hereby and (iii) will otherwise comply with all legal requirements applicable to such meeting. The Company, Parent and Merger Subsidiary, as the case may be, shall promptly prepare and file any other filings required under the Exchange Act or any other federal or state securities or corporate laws relating to the Merger and the transactions contemplated herein (the "Other Filings"). Each of the parties hereto shall notify the other parties hereto promptly of the receipt by it of any comments from the SEC or its Staff and of any request of the SEC for amendments or supplements to the Company Proxy Statement or by the SEC or any other governmental officials with respect to any Other Filings or for additional information and will supply the other parties hereto with copies of all correspondence between it and its representatives, on the one hand, and the SEC or the members of its Staff or any other governmental officials, on the other hand, with respect to the Company Proxy Statement, any Other Filings or the Merger. The Company, Parent and Merger Subsidiary each shall use all reasonable efforts to obtain and furnish the information required to be included in the Company Proxy Statement or any Other Filings. If at any time prior to the time of 37 42 approval of this Agreement and the Merger by the Company's shareholders there shall occur any event that should be set forth in an amendment or supplement to the Company Proxy Statement, the Company shall promptly prepare and mail to its shareholders such amendment or supplement. The Company shall not mail the Company Proxy Statement or, except as required by the Exchange Act or the rules and regulations promulgated thereunder, any amendment or supplement thereto to its shareholders to which Parent reasonably objects. At the Company Shareholder Meeting, Parent, the Merger Subsidiary and their respective affiliates will vote all Shares owned by them in favor of approval and adoption of this Agreement, the Merger and the transactions contemplated hereby and thereby. Notwithstanding the foregoing, in the event that Parent and Merger Subsidiary shall acquire at least 90% of the outstanding Shares pursuant to the Offer or otherwise, the parties hereto agree, at the request of Parent and Merger Subsidiary, to take all necessary and appropriate action to cause the Merger to become effective in accordance with Section 253 of the DGCL, as soon as reasonably practicable after such acquisition and the satisfaction or waiver of the conditions of this Agreement, without a meeting of the shareholders of the Company. Section 5.3 Access to Information. (a) From the date hereof until the Effective Time, the Company shall, and shall cause each of its subsidiaries to, give Parent, its counsel, financial advisors, auditors and other authorized representatives full access (during normal business hours and upon reasonable notice) to the offices, properties, books and records of the Company and the subsidiaries, will furnish to Parent, its counsel, financial advisors, auditors and other authorized representatives all their respective properties, books, contracts, commitments, personnel and records and, during such period, the Company shall, and shall cause each of its subsidiaries to, furnish (i) a copy of each report, schedule, registration statement and other document filed by it during such period pursuant to the requirements of Federal or state securities laws, (ii) a copy of each tax return, report and information statement filed by it during such period, and (iii) all other information concerning its business, assets, properties and personnel (including financial and operating data) as such persons may reasonably request and will instruct the Company's employees, counsel and financial advisors to cooperate with Parent in its investigation of the business of the Company and the subsidiaries; provided that no investigation pursuant to this Section 5.3 shall affect any representation or warranty given by the Company hereunder. (b) From the date hereof until the Effective Time, the Company will give Parent, its counsel, financial advisors, auditors and other authorized representatives full access (during normal business hours at their actual location) to all accounting, revenue, marketing, producer, processing, and other books, records and data in possession of Company, except such records or data which Company is prevented by contractual obligations with third parties from disclosing; provided that in the event the Company is prohibited from making files or records available because of provisions of third party agreements, then the Company shall inform Parent of the existence of such records, the parties thereto and the subject matter of such records. 38 43 (c) From the date hereof, the order issued in that certain litigation entitled The Centris Group, Inc. et al. v. HCC Benefits Corporation, et al. Civil Action No. 99-1-4866-28 in the Superior Court of Cobb County, State of Georgia (the "Kelbel Litigation") shall be suspended except for the running of any time limitations on Mr. Craig Kelbel's ("Kelbel") activities which shall continue and the restriction on Kelbel shall be of no further force and effect, provided, however, that if this Agreement is terminated by Parent for any reason other than the occurrence of a Trigger Event, as defined herein, such restrictions shall be reinstated. The parties agree to use their best efforts to cause the Order in the Kelbel Litigation to be amended to conform to the terms hereof. Section 5.4 Other Offers. Until the termination of this Agreement, the Company and its subsidiaries will not, and will not authorize or permit the officers, directors, employees or other agents of the Company and its subsidiaries to, directly or indirectly, (i) take any action to solicit, initiate or encourage any Acquisition Proposal (defined below) or (ii) subject to the fiduciary duties of the Board of Directors under applicable law, as advised in writing by Gibson, Dunn & Crutcher LLP, counsel to the Company, and in response to an unsolicited request that has been submitted to the Company's Board of Directors and determined to be a Superior Acquisition Proposal (defined below), engage in negotiations with, or disclose any nonpublic information relating to the Company or any of its subsidiaries or afford access to the properties, books or records of the Company or any of its subsidiaries to, any person that has advised the Company that it may be considering making, or that has made, an Acquisition Proposal, provided, however, nothing herein shall prohibit the Company's Board of Directors from taking and disclosing to the Company's shareholders a position with respect to a tender offer pursuant to Rules 14d-9 and 14e-2 promulgated under the Exchange Act. The Company will promptly notify Parent after receipt of any Acquisition Proposal or any indication that any person is considering making an Acquisition Proposal or any request for nonpublic information relating to the Company or any of its subsidiaries or for access to the properties, books or records of the Company or any of its subsidiaries by any person that has advised the Company that it may be considering making, or that has made, an Acquisition Proposal and will keep Parent fully informed of the status and details of any such Acquisition Proposal, notice or request. For purposes of this Agreement, "Acquisition Proposal" means any offer or proposal for, or any indication of interest in, a merger or other business combination involving the Company or any of its subsidiaries or the acquisition of any significant equity interest in, or a significant portion of the assets of, the Company or any of its subsidiaries, other than the transactions contemplated by this Agreement. "Superior Acquisition Proposal" means an Acquisition Proposal which a majority of the disinterested directors determines in its good faith judgment (based on the written advice of Advest) to be more favorable to the Company's shareholders than the Offer or the Merger, and for which financing, to the extent required, is then committed. Section 5.5 Rights Agreement. The Company hereby agrees that upon execution of this Agreement, it shall take all necessary action under the Rights Agreement dated as of May 24, 1990, as amended, by and between the Company and American Stock Transfer & Trust Company (the "Rights Agreement"), including any required amendment thereto, so that commencement of the Offer, the consummation of the Offer, the grant or exercise of any rights under the Stock Option Agreement or the Shareholder Option Agreement or any other acts 39 44 pursuant hereto or thereto on the terms permitted hereunder and thereunder and as contemplated herein and therein will not cause (A) the rights (the "Rights") issued pursuant to the Rights Agreement to become exercisable under the Rights Agreement, (B) the Parent, or any subsidiary of the Parent, including Merger Subsidiary to be deemed a "10% Stockholder" (as defined in the Rights Agreement) or (C) the "10% Stock Ownership Date" (as defined in the Rights Agreement) to occur, provided, however, that the Company shall not be required to make such amendments to the Rights Agreement if, (i) the Parent has not performed or complied in all material respects with this Agreement prior to the consummation of the Offer or (ii) the Company obtains, and there is in force from the Delaware Court of Chancery, an order permanently, preliminarily or temporarily declaring that the making of such amendments to the Rights Agreement would be contrary to the fiduciary duties of the Board of Directors of the Company. Notwithstanding anything else contained herein, in no event shall the Board of Directors of the Company make an amendment of the Rights Agreement in favor of any other person without making such amendment in favor of the Parent. Section 5.6 State Takeover Statutes. If any "fair price", "control share acquisition", "moratorium" or other anti-takeover statute, or similar statute or regulation shall become applicable to this Agreement, the Shareholder Option Agreement, the Stock Option Agreement or any of the transactions contemplated hereby or thereby, including, without limitation, the Offer or the Merger, the Company and its Board of Directors shall take all action necessary to ensure that the Offer, the Merger and the other transactions contemplated hereby and thereby, may be consummated as promptly as practicable on the terms contemplated hereby and otherwise to minimize the effect of such statute or regulation on the Offer, the Merger and the other transactions contemplated hereby or thereby. Section 5.7 Regulatory Filings. The Company covenants and agrees to commence preparation of and, consistent with past practice and on a timely basis, if required prior to the Closing Date, file with or submit to any insurance department or other Governmental Entity with which the Company is required to make such filings or submissions, and, if filed prior to the Closing Date, deliver to the Parent true and complete copies of, the quarterly statutory statement for each quarter of 1999 ended prior to the Closing Date, together with all related notes, exhibits and schedules thereto. All such quarterly statements filed with or submitted to any insurance department or Governmental Entity (i) shall be prepared from the books of account and other financial records of the Company, (ii) shall be filed with or submitted to such insurance departments and Governmental Entities, on forms prescribed or permitted thereby, (iii) shall be prepared in accordance with SAP applied on a basis consistent with the past practices of the Company (except as set forth in the notes, exhibits or schedules thereto), and shall comply on their respective dates of filing or submission with the laws of such jurisdictions, (iv) shall present fairly the statutory assets, liabilities, capital and surplus, results of operations and cash flows of the Company as of the dates thereof or for the periods covered thereby (subject to normal estimation of accruals and reserves and normal year-end audit adjustments), and (v) shall not use any accounting practices that are permitted rather than prescribed by the insurance departments and regulatory authorities. Section 5.8 Affirmative Actions. The Company shall retain an independent actuary (the "Actuary") which is acceptable to Parent to prepare an independent actuarial review of all 40 45 aspects of the Company's business, including, without limitation, the Company's property/casualty reserves, including discontinued operations, the medical lines business, recoverable value of the Company's notes receivable and indemnification obligations of the Company. Such actuarial study shall commence no later than five Business Days from the date this Agreement is executed and shall be completed no later than two Business Days after receipt of all regulatory approvals to the Merger from required state insurance regulatory agencies. The Company shall make the reserve adjustments and take such other charges, in accordance with GAAP and SAP, consistent with the findings of such actuarial review. Such adjustments and charges shall be recorded on the Company's books no later than three Business Days following the receipt from the Actuary of such review. The Company further agrees to utilize reasonable commercial efforts and to cooperate with Parent in the establishment of underwriting standards for business commencing January 1, 2000. Section 5.9 Termination of Benefit Plans. The Company shall terminate or cause to be terminated The Centris Group, Inc. Employees' Savings Plan and the VASA North America, Inc. 401(k) Profit Sharing Plan prior to the date on which the Company and/or its subsidiaries and ERISA affiliates become members of a "controlled group" with or under "common control" with Parent as such terms are defined in Section 414(b) and 414(c) of the Code. ARTICLE 6 COVENANTS OF PARENT Parent agrees that: Section 6.1 Obligations of Merger Subsidiary. Parent will take all action necessary to cause Merger Subsidiary to perform its obligations under this Agreement and to consummate the Offer and the Merger on the terms and conditions set forth in this Agreement. Section 6.2 Voting of Shares. Parent agrees to be present and vote all Shares acquired in the Offer or otherwise beneficially owned by it in favor of adoption of this Agreement at the Company Shareholder Meeting. Section 6.3 Director and Officer Liability. (a) After the Effective Time, Parent will cause the Surviving Corporation to indemnify and hold harmless the present and former officers, directors, employees and agents of the Company and its subsidiaries (the "Indemnified Parties") in respect of acts or omissions based in whole or in part on, or arising in whole or in part out of, or pertaining to (i) the fact that such Indemnified Party is or was a director, officer or employee of the Company, any of its subsidiaries or any of their respective predecessors or was prior to the Effective Time serving at the request of any such party as an officer, director, employee or agent of another corporation, partnership, trust or other enterprise or (ii) this Agreement, or any of the transactions contemplated hereby and all actions taken by an Indemnified Party in connection herewith. The parties hereto agree to cooperate and use commercially reasonable efforts to defend against and respond to such proceedings to the extent set forth in the next sentence. It is understood and agreed that after the Effective Time, Parent shall cause Surviving Corporation to indemnify and hold harmless, as and to the fullest extent permitted by the Company's Certificate of Incorporation and By-Laws in effect on the date hereof and by law, each such Indemnified 41 46 Party against any losses, claims, damages, liabilities, costs, expenses (including reasonable attorneys' fees and expenses payable as incurred and in advance of the final disposition of any claim, suit, proceeding or investigation subject to the obligation of each Indemnified Party to repay such advanced expenses if it is finally and unappealably determined that such Indemnified Party was not entitled to indemnification hereunder), judgments, fines and amounts paid in settlement in connection with any such threatened or actual claim, action, suit, proceeding or investigation, and in the event of any such threatened or actual claim, action, suit, proceeding or investigation (whether asserted or arising before or after the Effective Time) (collectively, "Claims"), the Indemnified Parties may retain counsel reasonably satisfactory to them after consultation with the Surviving Corporation, provided, however, that (1) the Surviving Corporation shall have the right to assume the defense thereof and upon such assumption the Surviving Corporation shall not be liable to any Indemnified Party for any legal expenses of other counsel or any other expenses subsequently incurred by an Indemnified Party in connection with the defense thereof, except that if the Surviving Corporation elects not to assume such defense, or counsel for the Indemnified Parties reasonably advises the Indemnified Parties that there are or may be (whether or not any have yet actually arisen) issues which raise conflicts of interest between the Surviving Corporation and the Indemnified Parties, the Indemnified Parties may retain counsel reasonably satisfactory to them, and the Surviving Corporation shall pay the reasonable fees and expenses of such counsel for the Indemnified Parties, (2) the Surviving Corporation shall be obligated pursuant to this paragraph to pay for only one firm of counsel for all Indemnified Parties, (3) the Surviving Corporation shall not be liable for any settlement effected without its prior written consent, and (4) the Surviving Corporation shall have no obligation hereunder to any Indemnified Party when and if a court of competent jurisdiction shall ultimately determine, and such determination shall have become final and nonappealable, that indemnification of such Indemnified Party in the manner contemplated hereby is prohibited by the Certificate of Incorporation or By-Laws of the Company or its subsidiaries or applicable law. Any Indemnified Party wishing to claim indemnification under this Section 6.3, upon learning of any such claim, action, suit, proceeding or investigation, shall notify the Surviving Corporation thereof, provided that the failure to so notify shall not affect the obligations of the Surviving Corporation under this Section 6.3 except (and only) to the extent such failure to notify materially prejudices the Surviving Corporation. (b) Without limiting any of the obligations under paragraph (a) of this Section 6.3, the Surviving Corporation agrees that all rights to indemnification and all limitations of liability existing in favor of the Indemnified Parties as provided in the Company's Certificate of Incorporation or By-Laws or in the similar governing documents of any of the Company's subsidiaries as in effect as of the date of this Agreement with respect to matters occurring on or prior to the Effective Time shall survive the Merger and shall continue in full force and effect thereafter, without any amendment thereto; provided, however, that nothing contained in this Section 6.3(b) shall be deemed to preclude the liquidation, consolidation or merger of the Company or any subsidiary thereof, in which case all of such rights to indemnification and limitations on liability shall be deemed to so survive and continue notwithstanding any such liquidation, consolidation or merger and shall constitute rights which may be asserted against the Surviving Corporation. Nothing contained in this Section 6.3(b) shall be deemed to preclude any rights to indemnification or limitations on liability provided in the Company's Certificate of Incorporation or By-Laws or similar governing documents of the Surviving Corporation with 42 47 respect to matters occurring subsequent to the Effective Time to the extent that the provisions establishing such rights or limitations are not otherwise amended to the contrary. (c) The Surviving Corporation shall use its commercially reasonable effects to cause the persons serving as officers and directors of the Company and its subsidiaries immediately prior to the Effective Time to be covered for a period of three years from the Effective Date by the directors' and officers' liability insurance policy maintained by the Surviving Corporation (provided that the Surviving Corporation may substitute therefor policies of at least the same coverage and amounts containing terms and conditions which are not less advantageous to such directors and officers than the terms and conditions of such existing policy and provided further that in no event will the Surviving Corporation be required to expend in any one year an amount in excess of 200% of the annual premiums currently paid by the Company for such insurance) with respect to acts or omissions occurring prior to the Effective Time which were committed by such officers and directors in their capacity as such. (d) The provisions of this Section 6.3 are intended to be for the benefit of, and shall be enforceable by, each Indemnified Party and his or her heirs and representatives. Section 6.4 Employees. Parent agrees at the Effective Time that it (or the Surviving Corporation) shall be a successor employer with respect to, and shall assume sponsorship of (or cause the Surviving Corporation to assume sponsorship of), in accordance with their terms all Benefit Plans and "employee benefit plans" (as defined in Section 3(3) of ERISA) previously delivered to Parent and all accrued benefits vested thereunder, other than Benefit Plans terminated prior to the Effective Time; it being understood and agreed that nothing in this Section 6.4 shall prevent Parent from terminating any such Benefit Plan in accordance with its terms or shall require Parent or the Surviving Corporation to incur any liability or assume any obligation other than liabilities and obligations existing under the terms of such plans as in effect as of the date hereof. ARTICLE 7 COVENANTS OF PARENT AND THE COMPANY The parties hereto agree that: Section 7.1 HSR Act Filings; Other Filings Reasonable Efforts; Notification. (a) Each of Parent and the Company shall (i) promptly make or cause to be made the filings required of such party or any of its subsidiaries under the HSR Act with respect to the transactions contemplated by this Agreement, (ii) comply at the earliest practicable date with any request under the HSR Act for additional information, documents, or other material received by such party or any of its subsidiaries from the Federal Trade Commission or the Department of Justice or any other Governmental Entity in respect of such filings or such transactions, and (iii) cooperate with the other party in connection with any such filing and in connection with resolving any investigation or other inquiry of any such agency or other Governmental Entity under any Antitrust Laws (defined below) with respect to any such filing or any such transaction. 43 48 Each party shall promptly inform the other party of any communication with, and any proposed understanding, undertaking, or agreement with, any Governmental Entity regarding any such filings or any such transaction. The Company shall not participate in any meeting (whether in person or by telephone) with any Governmental Entity in respect of any such filings, investigation, or other inquiry without Parent's consent and without giving Parent notice of the meeting and, to the extent permitted by such Governmental Entity, the opportunity to attend and participate. (b) Each of Parent and the Company shall use all commercially reasonable efforts to resolve such objections, if any, as may be asserted by any Governmental Entity with respect to the transactions contemplated by this Agreement under the HSR Act, the Sherman Act, as amended, the Clayton Act, as amended, the Federal Trade Commission Act, as amended, and any other Federal, state or foreign statutes, rules, regulations, orders or decrees that are designed to prohibit, restrict or regulate actions having the purpose or effect of monopolization or restraint of trade (collectively, "Antitrust Laws"). In connection therewith, if any administrative or judicial action or proceeding is instituted (or threatened to be instituted) challenging any transaction contemplated by this Agreement as violative of any Antitrust Law, and, if by mutual agreement, Parent and the Company decide that litigation is in their best interests, each of Parent and the Company shall cooperate and use all reasonable efforts vigorously to contest and resist any such action or proceeding and to have vacated, lifted, reversed, or overturned any decree, judgment, injunction or other order, whether temporary, preliminary or permanent (each an "Order"), that is in effect and that prohibits, prevents, or restricts consummation of any such transaction. Each of Parent and the Company shall use all commercially reasonable efforts to take such action as may be required to cause the expiration of the notice periods under the HSR Act or other Antitrust Laws with respect to such transactions as promptly as possible after the execution of this Agreement. (c) Each of the parties agrees to promptly make or cause to be made the filings required of each such party or any of its subsidiaries under any insurance regulatory law or act in any state where such filing is required or, at the request of Parent, deemed advisable, and to comply at the earliest practicable date with any requests made by any insurance regulatory agency or any other Governmental Entity for additional information, documents or other material received by such party or any of its subsidiaries and to cooperate with the other party in connection with any such filing and in connection with resolving any investigation or other inquiry or hearing of any such agency or other Governmental Entity under any insurance law relating to licensing, holding company applications, change in control, etc. with respect to any such filing or any such transaction. Each party shall promptly inform the other party of any communication with, and any proposed understanding, undertaking agreement with, any Governmental Entity or insurance agency regarding any such filings or any such transaction. The Company shall not participate in any meeting (whether in person or by telephone) with any Governmental Entity or insurance regulatory agency in respect of any such filings, investigation, or other inquiry without Parent's consent and without giving Parent notice of the meeting, and to the extent permitted by such Governmental Entity, the opportunity to attend and participate. 44 49 (d) Each of the parties agrees to use all commercially reasonable efforts to take, or cause to be taken, all actions, and to do, or cause to be done, and to assist and cooperate with the other parties in doing, all things necessary, proper or advisable to consummate and make effective, in the most expeditious manner practicable, the Offer, the Merger, and the other transactions contemplated by this Agreement, including (i) the obtaining of all other necessary actions or nonactions, waivers, consents and approvals from Governmental Entities and the making of all other necessary registrations and filings (including other filings with Governmental Entities, if any), (ii) the obtaining of all necessary consents, approvals or waivers from third parties, (iii) the preparation of the Company Disclosure Documents and the Offer Documents, and (iv) the execution and delivery of any additional instruments necessary to consummate the transactions contemplated by, and to fully carry out the purposes of, this Agreement. (e) Notwithstanding anything to the contrary in Section 7.1(a), 7.1(b), 7.1(c), or 7.1(d), (i) neither Parent nor any of its subsidiaries shall be required to divest any of their respective businesses, product lines or assets, or to take or agree to take any other action or agree to any limitation that could reasonably be expected to have a material adverse effect on the business, assets, financial condition, results of operations or prospects of Parent or any of its subsidiaries or the Surviving Corporation after the Effective Time, (ii) neither the Company nor its subsidiaries shall be required to divest any of their respective businesses, product lines or assets, or to take or agree to take any other action or agree to any limitation that could reasonably be expected to have a Material Adverse Effect, (iii) no party shall be required to agree to the imposition of, or to comply with, any condition, obligation or restriction on Parent or any of its subsidiaries or on the Surviving Corporation or any of its subsidiaries of the type referred to in clause (a) or (b) of Annex I and (iv) neither Parent nor Merger Subsidiary shall be required to waive any of the conditions to the Offer set forth in Annex I or any of the conditions to the Merger set forth in Article 8. (f) Each of the Company and Parent agree to give prompt notice to the other of (i) any representation or warranty made by such party contained in this Agreement becoming untrue or inaccurate in any respect or (ii) the failure by such party to comply with or satisfy in any respect any covenant, condition or agreement to be complied with or satisfied by such party under this Agreement; provided, however, that no such notification shall affect the representations, warranties, covenants or agreements of the parties or the conditions to the obligations of the parties under this Agreement. (g) The Company shall give prompt notice to Parent, and Parent or Merger Subsidiary shall give prompt notice to the Company, of: (i) any notice or other communication from any person alleging that the consent of such person is or may be required in connection with the transactions contemplated by this Agreement; (ii) any notice or other communication from any Governmental Entity in connection with the transactions contemplated by this Agreement; and 45 50 (iii) any actions, suits, claims, investigations or proceedings commenced or, to the best of its knowledge threatened against, relating to or involving or otherwise affecting it or any of its subsidiaries which, if pending on the date of this Agreement would have been required to have been disclosed pursuant to this Agreement or which relate to the consummation of the transactions contemplated by this Agreement. Section 7.2 Public Announcements. Each party will consult with the others before issuing, and provide the others the opportunity to review and comment upon, any press release or other public statements with respect to the transactions contemplated by this Agreement, the Shareholder Option Agreement and the Stock Option Agreement, including the Offer and the Merger, and each party shall not issue any such press release or make any such public statement prior to such consultation, except as may be required by applicable law, court process or by obligations pursuant to any listing agreement with any national securities exchange or with the NASD. Section 7.3 Confidentiality. The terms of the letter agreement, agreed and consented to by the Parent on August 22, 1999, between the Company and the Parent (the "Confidentiality Agreement") are hereby incorporated by reference and shall continue in full force and effect except the last sentence of Section (5) on page 4, which is hereby deleted in its entirety until the Closing, at which time such Confidentiality Agreement and the obligations of the Parent under this Section 7.3 shall terminate; provided, however, that the Confidentiality Agreement shall not terminate in respect of that portion of such confidential information relating exclusively to matters not related to the transactions contemplated by this Agreement. If this Agreement is, for any reason, terminated prior to the Closing, the Confidentiality Agreement shall continue in full force and effect in respect of such confidential information. After the Closing Date, each of the persons who were the Company's officers, directors and affiliates as of the date hereof shall keep all non-public information relating to the Company and the Parent confidential on the same terms as set forth in the Confidentiality Agreement. Section 7.4 Interim Financial Statements. The Company shall, as soon as available, but no later than 60 days after the end of the relevant month or quarter, as the case may be, deliver promptly to the Parent any and all final monthly and quarterly financial statements for the Company, audited or unaudited, prepared for the management of the Company after the date of this Agreement and prior to the Closing Date. 46 51 ARTICLE 8 CONDITIONS TO THE MERGER Section 8.1 Conditions to the Obligations of Each Party. The obligations of the Company, Parent and Merger Subsidiary to consummate the Merger are subject to the satisfaction of the following conditions: (a) if required by Delaware law, this Agreement shall have been adopted by the shareholders of the Company in accordance with such law; (b) any applicable waiting period under the HSR Act relating to the Merger shall have expired; (c) no provision of any applicable law or regulation and no judgment, injunction, order or decree shall prohibit the consummation of the Merger; (d) Parent or Merger Subsidiary shall have purchased Shares in an amount equal to at least the Minimum Condition pursuant to the Offer; and (e) other than the filing of the certificate of merger in accordance with Delaware Law, all Consents required to permit the consummation of the Merger including those set forth in Sections 4.1(d) and 4.2(b) and those of any insurance regulatory agency or body shall have been filed, occurred or been obtained (other than any such Consents the failure to file, occur or obtain, in the aggregate, could not reasonably be expected to (i) have a Material Adverse Effect or (ii) prevent or materially delay the consummation of the Merger). (f) each Governmental Entity having jurisdiction over the Company or any of its subsidiaries, their business, licenses or permits, shall have, where applicable, approved the transactions contemplated by this Agreement and any "change of control" incidental thereto. (g) each of the Officers and employees whose names are set forth on Annex II shall have executed an agreement to remain in the employment of the Surviving Corporation for a period of 120 days after the Effective Time and as of the Effective Time, none of such persons listed on Annex II-A, and no more than two of those persons set forth on Annex II-B shall have voluntarily terminated or terminated for Good Reason, as defined in the respective Severance Agreements entered into by each of such persons. (h) The Company shall have performed its obligations under Section 5.8 hereof. 47 52 ARTICLE 9 TERMINATION Section 9.1 Termination. This Agreement may be terminated and the Merger may be abandoned at any time prior to the Effective Time (notwithstanding any approval of this Agreement by the shareholders of the Company): (a) by mutual written consent of the Company and Parent; (b) by either the Company or Parent, if the Merger has not been consummated by June 30, 2000 (provided that the party seeking to terminate the Agreement shall not have breached its obligations under this Agreement in any material respect); (c) by either the Company or Parent, if such party has received an opinion from its counsel that there shall be any law or regulation that makes consummation of the Merger illegal or otherwise prohibited or if any judgment, injunction, order or decree enjoining Parent or the Company from consummating the Merger is entered and such judgment, injunction, order or decree shall become final and nonappealable; (d) by either the Company or Parent (provided that no party shall be entitled to terminate this Agreement pursuant to this clause (d) as a result of its breach of this Agreement), (x) if Parent or Merger Subsidiary shall have failed to commence the Offer within five business days following the date of this Agreement, (y) if Parent or Merger Subsidiary shall not have purchased any Shares pursuant to the Offer prior to February 29, 2000 (or, if the Offer shall have been extended by Merger Subsidiary pursuant to this Agreement, on or prior to March 31, 2000) or (z) the Offer shall have been terminated without Parent or Merger Subsidiary having purchased any Shares pursuant to the Offer; (e) by Parent, upon the occurrence of any Trigger Event described in clauses (i) through (iii) of Section 10.4(b); or (f) by the Company, upon the occurrence of any Trigger Event described in clause (i) of Section 10.4(b). Section 9.2 Effect of Termination. If this Agreement is terminated pursuant to Section 9.1, this Agreement shall become void and of no effect with no liability on the part of any party hereto or their respective officers and directors, except that the agreements contained in Sections 10.4 and 10.6 shall survive the termination hereof and except to the extent that such termination results from the material breach by a party of any representations, warranties, covenants or agreements set forth in this Agreement. 48 53 ARTICLE 10 MISCELLANEOUS Section 10.1 Notices. All notices, requests and other communications to any party hereunder shall be in writing (including telecopy or similar writing) and shall be given, if to Parent or Merger Subsidiary, to: HCC Insurance Holdings, Inc. 13403 Northwest Freeway Houston, Texas 77040-6094 Telecopy: (713) 462-2401 Attention: Frank J. Bramanti with a copy (which shall not constitute notice) to: Winstead Sechrest & Minick P.C. 910 Travis, Suite 2400 Houston, Texas 77002 Telecopy: (713) 650-2400 Attention: Arthur S. Berner if to the Company, to: The Centris Group, Inc. 650 Town Center Drive Suite 1600 Costa Mesa, California 92626 Telecopy: (714) 434-0750 Attention: Jose A. Velasco with a copy (which shall not constitute notice) to: Gibson, Dunn & Crutcher LLP 4 Park Plaza Irvine, California 92614 Telecopy: (949) 451-4220 Attention: Robert E. Dean or such other address or telecopy number as such party may hereafter specify for the purpose by notice to the other parties hereto. Each such notice, request or other communication shall be effective when delivered at the address specified in this Section. Section 10.2 Survival of Representations and Warranties. The representations, warranties and agreements contained herein and in any certificate or other writing delivered pursuant hereto shall not survive the Effective Time or the termination of this Agreement except for the agreements set forth in Sections 10.4 and 10.6. 49 54 Section 10.3 Amendments; No Waivers. (a) Any provision of this Agreement may be amended or waived prior to the Effective Time if, and only if, such amendment or waiver is in writing and signed, in the case of an amendment, by the Company, Parent and Merger Subsidiary or in the case of a waiver, by the party against whom the waiver is to be effective; provided, however, that after the adoption of this Agreement by the shareholders of the Company, no such amendment or waiver shall, without the further approval of such shareholders, alter or change (i) the amount or kind of consideration to be received in exchange for any shares of capital stock of the Company, (ii) any term of the certificate of incorporation of the Surviving Corporation or (iii) any of the terms or conditions of this Agreement if such alteration or change would adversely affect the holders of any shares of capital stock of the Company. (b) No failure or delay by any party in exercising any right, power or privilege 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 right, power or privilege. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by law. Section 10.4 Fees and Expenses. (a) Except as otherwise provided in this Section, all costs and expenses incurred in connection with this Agreement shall be paid by the party incurring such cost or expense. (b) The Company agrees to pay to Parent, at Parent's demand and sole election, a fee (the "Termination Fee") in immediately available funds, promptly, but in no event later than one business day, after the termination of this Agreement as a result of the occurrence of any of the events set forth below (a "Trigger Event") in an amount equal to $6,000,000 in the case of the occurrence of a Trigger Event described below: (i) the Company shall have entered into, or shall have publicly announced its intention to enter into, an agreement or an agreement in principle with respect to any Acquisition Proposal; (ii) any person or group (as defined in Section 13(d)(3) of the Exchange Act) (other than Parent or any of its affiliates) shall have become the beneficial owner (as defined in Rule 13d-3 promulgated under the Exchange Act) of at least 20% of the outstanding Shares or shall have acquired, directly or indirectly, at least 20% of the assets of the Company; (iii) any representation or warranty made by the Company in, or pursuant to, this Agreement that is qualified as to materiality shall not have been true and correct when made or at any time prior to the consummation of the Offer as if made at and as of such time, or any representation or warranty made by the Company in, or pursuant to, this Agreement that is not so qualified shall not have 50 55 been true and correct in all material respects when made or at any time prior to the consummation of the Offer as if made at and as of such time, or the Company shall have failed to observe or perform in any material respect any of its obligations under this Agreement; provided that it shall not be a Trigger Event unless the breaches of the representations and warranties without regard to any materiality qualifier or threshold, and failure to perform or breach of any obligation, individually or in the aggregate, could reasonably be expected to have or result in a Material Adverse Effect; or (iv) the Board of Directors of the Company (or any special committee thereof) shall have withdrawn or materially modified in a manner adverse to Parent or Merger Subsidiary its approval or recommendation of the Offer, the Merger, this Agreement, the Shareholder Option Agreement, the Stock Option Agreement in any such case whether or not such withdrawal or modification is required by the fiduciary duties of the Board of Directors (or any special committee thereof). (c) If this Agreement is terminated as a result of the occurrence of a Trigger Event, in addition to the Termination Fee paid or payable by the Company to Parent pursuant to Section 10.4(b), Company shall assume and pay, or reimburse Parent for, all reasonable fees payable and expenses incurred by Parent (including the fees and expenses of its counsel) in connection with this Agreement and the transactions contemplated hereby, up to a maximum of $1,000,000. (d) Parent shall not be entitled to the Termination Fee if Parent shall have exercised all or any part of the option granted to Parent in the Stock Option Agreement. Section 10.5 Successors and Assigns. The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, provided that no party may assign, delegate or otherwise transfer any of its rights or obligations under this Agreement without the consent of the other parties hereto except that Merger Subsidiary may transfer or assign, in whole or from time to time in part, to one or more of Parent or any of its wholly-owned subsidiaries, the right to purchase Shares pursuant to the Offer, but any such transfer or assignment will not relieve Merger Subsidiary of its obligations under the Offer or prejudice the rights of tendering shareholders to receive payment for Shares validly tendered and accepted for payment pursuant to the Offer. Section 10.6 Governing Law. This Agreement shall be construed in accordance with and governed by the laws of the State of Delaware (without reference to the Delaware conflicts of law provisions). Section 10.7 Counterparts; Effectiveness; Interpretation. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Agreement shall become effective when each party hereto shall have received counterparts hereof signed by all of the other parties hereto. When a reference is made in this Agreement to a Section, such reference 51 56 shall be to a Section of this Agreement unless otherwise indicated. The table of contents and headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Whenever the words "include", "includes" or "including" are used in this Agreement, they shall be deemed to be followed by the words "without limitation". Section 10.8 Enforcement. The parties agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the parties shall be entitled to an injunction or injunctions to prevent breaches of this Agreement and to enforce specifically the terms and provisions of this Agreement in any court of the United States or any state having jurisdiction, this being in addition to any other remedy to which they are entitled at law or in equity. Section 10.9 Severability. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any rule of law or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect. Upon such determination that any term other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible to the fullest extent permitted by applicable law in an acceptable manner to the end that the transactions contemplated hereby are fulfilled to the extent possible. Section 10.10 Entire Agreement; No Third Party Beneficiaries. This Agreement (including the Disclosure Schedule) and the Confidentiality Agreement dated as of August 22, 1999 between Parent and the Company (a) constitute the entire agreement and supersede all prior agreements and understandings, both written and oral, among the parties hereto with respect to the subject matter hereof, and (b) are not intended to confer upon any person other than the parties hereto any rights or remedies hereunder other than rights to indemnity under Section 6.3. 52 57 The parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written. THE CENTRIS GROUP, INC. By: /s/ DAVID L. CARGILE ------------------------------------ Name: David L. Cargile ---------------------------------- Title: President and Chief Executive Officer --------------------------------- HCC INSURANCE HOLDINGS, INC. By: /s/ STEPHEN L. WAY ------------------------------------ Name: Stephen L. Way ---------------------------------- Title: Chairman of the Board and Chief Executive Officer --------------------------------- MERGER SUB OF DELAWARE, INC. By: /s/ STEPHEN L. WAY ------------------------------------ Name: Stephen L. Way ---------------------------------- Title: Chairman of the Board and Chief Executive Officer --------------------------------- 53 58 ANNEX I Notwithstanding any other provision of the Offer, Parent and Merger Subsidiary shall not be required to accept for payment or (subject to any applicable rules and regulations of the SEC, including Rule 14e-1(c) under the Exchange Act (relating to Merger Subsidiary's obligation to pay for or return tendered Shares after the termination or withdrawal of the Offer)) to pay for any Shares, and may terminate the Offer, if (i) by the expiration of the Offer (as permitted to be extended), the Minimum Condition shall not have been satisfied, (ii) by the expiration of the Offer (as permitted to be extended), the applicable waiting period under the HSR Act shall not have expired or been terminated, (iii) by the expiration of the Offer (as permitted to be extended), all regulatory approvals of Governmental Entities shall not have been received, or (iv) at any time on or after October 3, 1999, and prior to the acceptance for payment of Shares pursuant to the Offer, any of the following conditions exist: (a) there shall be instituted or pending any action or proceeding by any Governmental Entity or by any other person, domestic or foreign, before any Governmental Entity or arbitrator, (i) challenging or seeking to make illegal, to delay materially or otherwise directly or indirectly to restrain or prohibit the making of the Offer, the acceptance for payment of or payment for some of or all the Shares by Parent or Merger Subsidiary or the consummation by Parent or Merger Subsidiary of the Merger, seeking to obtain material damages or otherwise directly or indirectly relating to the transactions contemplated by the Shareholder Option Agreement, this Agreement, the Offer or the Merger, (ii) seeking to restrain or prohibit Parent's or Merger Subsidiary's ownership or operation (or that of their respective subsidiaries or affiliates) of all or any material portion of the business or assets of the Company or any of its subsidiaries or of Parent and its subsidiaries or to compel Parent or any of its subsidiaries or affiliates to dispose of or hold separate all or any material portion of the business or assets of the Company or any of its subsidiaries or of Parent and its subsidiaries (iii) seeking to impose material limitations on the ability of Parent or any of its subsidiaries or affiliates effectively to exercise full rights of ownership of the Shares, including, without limitation, the right to vote any Shares acquired or owned by Parent or any of its subsidiaries or affiliates on all matters properly presented to the Company's shareholders, (iv) seeking to require divestiture by Parent or any of its subsidiaries or affiliates of any Shares, or (v) that otherwise, in the reasonable judgment of Parent, is likely to materially adversely affect the business, assets, liabilities, operations, condition (financial or otherwise), results of operations or prospects of the Company or any of its subsidiaries, or Parent and its subsidiaries, taken as a whole; or (b) there shall be any action taken, or any statute, rule, regulation, injunction, order or decree proposed, enacted, enforced, promulgated, issued or deemed applicable to the Shareholder Option Agreement, the Stock Option Agreement, this Agreement, the Offer or the Merger, by any Governmental Entity or arbitrator (other than the application of the waiting period provisions of the HSR Act to the Shareholder Option Agreement, the Stock Option Agreement, this Agreement, the Offer or the Merger), that, in the reasonable judgment of Parent, is substantially likely, directly or indirectly, to result in any of the consequences referred to in clauses (i) through (v) of paragraph (a) above; or 54 59 (c) any change (other than changes requested by, or done at the direction or with the consent of Parent) shall have occurred or been threatened (or any development shall have occurred or been threatened involving a prospective change) in the business, assets, liabilities, financial condition, capitalization, operations, results of operations or prospects of the Company or any of its subsidiaries that, has, or is likely to have, a Material Adverse Effect (as defined in the Agreement) on the Company and its subsidiaries taken as a whole; or (d) there shall have occurred (i) any general suspension of trading in, or limitation on prices for, securities on the New York Stock Exchange or in the NASDAQ over-the-counter market in the United States, (ii) a declaration of a banking moratorium or any suspension of payments in respect of banks in the United States, (iii) any material limitation (whether or not mandatory) by any Governmental Entity on the extension of credit by banks or other lending institutions, (iv) a commencement of a war or armed hostilities or other national or international calamity directly or indirectly involving the United States which would reasonably be expected to have a Material Adverse Effect or prevent (or materially delay) the consummation of the Offer or (v) in the case of any of the foregoing existing at the time of commencement of the Offer, a material acceleration or worsening thereof; or (e) a tender or exchange offer for some or all of the Shares shall have been publicly made by another person, or it shall have been publicly disclosed or Parent shall have otherwise learned that any person or "group" (as defined in Section 13(d)(3) of the Exchange Act) (other than Parent or any of its affiliates) shall have acquired or made an offer to acquire beneficial ownership (as defined in Rule 13d-3 promulgated under the Exchange Act) of more than 20% of the outstanding Shares through the acquisition of stock, the formation of a group or otherwise, or shall have been granted any option, right or warrant, conditional or otherwise, to acquire beneficial ownership of more than 20% of the outstanding Shares; or (f) any Consent (other than the filing of the certificate of merger or approval by the shareholders of the Company of the Merger (if required by Delaware law)) required to be filed, occurred or been obtained by the Company or any of its subsidiaries or Parent of any of its subsidiaries (including Merger Subsidiary) in connection with the execution and delivery of this Agreement, the Offer and the consummation of the transactions contemplated by this Agreement shall not have been filed, occurred or been obtained (other than any such Consents as to which the failure to file, occur or obtain in the aggregate, could not reasonably be expected to (i) have a Material Adverse Effect or (ii) prevent or materially delay the consummation of the Offer or the Merger); or (g) the Company shall have breached or failed to perform in any material respect any of its covenants or agreements under this Agreement, or any of the representations and warranties of the Company set forth in this Agreement that are qualified as to materiality shall not be true when made or at any time prior to consummation of the Offer as if made at and as of such time, or any of the representations and warranties set forth in this Agreement that are not so qualified shall not be true in any material respect when made or at any time prior to the consummation of the Offer as if made at and as of such time; or 55 60 (h) any party to the Shareholder Option Agreement (other than Merger Subsidiary or Parent) shall have breached or failed to perform in any material respect any of their agreements under the Shareholder Option Agreement or any of the representations and warranties of any such party set forth in the Shareholder Option Agreement shall not be true in any material respect, in each case, when made or at any time prior to the consummation of the Offer as if made at and as of such time, or the Shareholder Option Agreement shall have been invalidated or terminated with respect to any Shares subject thereto; or (i) this Agreement or the Shareholder Option Agreement shall have been terminated in accordance with its terms; or (j) the Board of Directors of the Company (or any special committee thereof) shall have withdrawn or materially modified in a manner adverse to Parent or Merger Subsidiary its approval or recommendation of the Offer, the Merger or this Agreement or its approval of the entry by Parent and Merger Subsidiary into the Stock Option Agreement; or (k) the Company shall have entered into, or shall have publicly announced its intention to enter into, an agreement or agreement in principle with respect to any Acquisition Proposal; The foregoing conditions are for the sole benefit of Parent and Merger Subsidiary and may be asserted by Parent in its sole discretion regardless of the circumstances giving rise to any such condition or (other than the Minimum Condition) may be waived by Parent and Merger Subsidiary in their discretion in whole at any time or in part from time to time. The failure by Parent or Merger Subsidiary at any time to exercise its rights under any of the foregoing conditions shall not be deemed a waiver of any such right; the waiver of any such right with respect to particular facts and circumstances shall not be deemed a waiver with respect to any other facts and circumstances, and each such right shall be deemed an ongoing right which may be asserted at any time or from time to time. 56 61 ANNEX II ANNEX II-A Charles M. Caporale Mark A. Carney Edward D. Jones, III Jose A. Velasco ANNEX II-B In addition to those persons set forth in II-A above whose names are hereby incorporated by reference, the following additional persons: Patricia S. Boisseranc Linton R. Groke David L. Hubert Barbara F. Stoner 1 EX-2 3 SHAREHOLDER OPTION AGREEMENT,DATED AS OF OCT 11,99 1 EXHIBIT 2 SHAREHOLDER OPTION AGREEMENT This SHAREHOLDER OPTION AGREEMENT, dated as of October 11, 1999 (the "Agreement"), among Merger Sub of Delaware, Inc., a Delaware corporation ("Buyer"), and the holders (the "Shareholders") of the shares of common stock, $.01 par value together with attached rights issued pursuant to the Rights Agreement (as defined in the Merger Agreement, hereafter defined) to purchase shares (the "Shares") of The Centris Group, Inc. a Delaware corporation (the "Company"), listed on Exhibit A hereof. WHEREAS, HCC Insurance Holdings, Inc., a Delaware corporation and parent of Buyer ("Parent"), Buyer and the Company have entered into an Agreement and Plan of Merger of even date herewith (the "Merger Agreement") which provides for, upon the terms and subject to the conditions set forth thereunder, (i) the commencement of a tender offer (the "Offer") for all of the outstanding Shares at a price of $12.50 per share in cash, and (ii) the subsequent merger of the Buyer with and into the Company (the "Merger"); and WHEREAS, Buyer and Shareholders wish to enter into this Shareholder Option Agreement whereby Buyer will be granted stock options pursuant to the terms hereof to acquire from the Shareholders their Shares of the Company. NOW, THEREFORE, in consideration of the mutual covenants, agreements and promises set forth herein and other good and valuable consideration the sufficiency of which is hereby acknowledged, the parties hereto do hereby agree as follows: ARTICLE 1 STOCK OPTION Section 1.1 Grant of Stock Option. Each of the Shareholders hereby grants to Buyer an irrevocable option (the "Option") to purchase pursuant to the terms hereof all, but not in any part less than all, of the Shares set forth opposite such Shareholder's name on Exhibit A hereto and any additional Shares acquired by such Shareholder in any capacity (whether by exercise of options, warrants or rights, the conversion or exchange of convertible or exchangeable securities or by means of a purchase, dividend, distribution or otherwise) (such "Shareholder's Shares" and, collectively, the "Shareholder Shares") at a purchase price of $12.50 per Shareholder Share (as may be adjusted pursuant to Sections 1.2(c), (d) or (e), the "Purchase Price"). Section 1.2 Exercise of Option. (a) Subject to the conditions set forth in Section 1.5 hereof, the Option may be exercised by Buyer, in whole, but not in part, at any time after the date (i) an Acquisition Proposal or a Superior Acquisition Proposal (as defined in the Merger Agreement) shall have received tenders of and paid for in excess of 50% of the Fully Diluted Shares (as defined in the Merger Agreement) (a "Successful Third-Party Offer") or (ii) a third party has otherwise acquired in excess of 50% of the Fully Diluted Shares. Once Buyer has received notice as set forth herein from any Shareholder that the Option is exercisable, the Option must then be 2 exercised, if at all, within five Business Days. In the event Buyer wishes to exercise the Option for the Shareholder Shares, Buyer shall send a written notice (the "Exercise Notice") to the Shareholder specifying the place, the date (not less than one nor more than five Business Days from the date of the Exercise Notice (if such date is reasonably practicable for Shareholder performance) and the time for the closing of such purchase; provided that such date and time may be earlier than one Business Day after the Exercise Notice if reasonably practicable. The closing of a purchase of Shareholder Shares pursuant to this Section 1.2(a) (the "Closing") shall take place at the place, on the date and at the time designated by Buyer in its Exercise Notice, provided that if, at the date of the Closing herein provided for, the conditions set forth in Section 1.5 shall not have been satisfied (or waived), Buyer may postpone the Closing until a date within five Business Days after such conditions are satisfied and the term of the Option will be correspondingly extended. (b) Buyer shall not be under any obligation to deliver any Exercise Notice and may allow the Option to terminate without purchasing any Shareholder Shares hereunder; provided however that once Buyer has delivered to the Shareholders an Exercise Notice, subject to the terms and conditions of this Agreement, Buyer shall be bound to effect the purchase as described in such Exercise Notice. (c) In the event the Option is exercised and Buyer or any of its affiliates sells, including by direct disposition, merger or otherwise, the Shares so acquired within two years of the date of such exercise, Buyer shall pay the Shareholders, in respect of each Share acquired thereby, an amount equal to the proceeds received by Buyer or any of its affiliates in respect of such disposition less the Purchase Price. The provisions of this Section 1.2(c) shall be void and of no further force or effect if Buyer acquires 100% of the Company Shares pursuant to the Merger Agreement or otherwise. (d) In the event the Option is exercised and within two years of the date of exercise of the Option, Buyer or any of its affiliates acquires (directly or through a series of transactions) Shares which together with any Shares then owned by Buyer or any of its affiliates is in excess of 50% of the Fully Diluted Shares, Buyer shall pay each Shareholder an additional sum in respect of each Share acquired by Buyer from the Shareholder equal to the highest tender offer price per share actually paid in the Successful Third-Party Offer less the initial Purchase Price paid to Shareholder at the time the Option was exercised. (e) In the event the Option has been exercised and the consideration per Share to be paid by Buyer pursuant to the Offer is increased (the "New Purchase Price"), Buyer shall promptly pay to each Shareholder the product of the New Purchase Price multiplied by the number of such Shareholder's Shares as to which the Option has been exercised less the initial Purchase Price paid to Shareholder at the time the Option was exercised. Section 1.3 Closing. At the Closing, (a) each Shareholder shall deliver to Buyer (in accordance with Buyer's instructions) a certificate or certificates (the "Certificates") representing all of such Shareholder's Shares, duly endorsed or accompanied by stock powers duly executed 2 3 in blank and (b) Buyer shall pay to such Shareholder, by wire transfer in immediately available funds to the account such Shareholder specifies in writing prior to the Closing, an amount equal to (i) the number of such Shareholder's Shares being purchased at the Closing multiplied by (ii) the Purchase Price (the "Purchase Amount"). Section 1.4 Agreement to Tender. (a) Each of the Shareholders hereby agrees to validly tender (or cause the record owner of such shares to validly tender) such Shareholder's Shares pursuant to and in accordance with the Offer (as defined in the Merger Agreement) within two days of the receipt of Buyer's offer to purchase relating to the Offer. Upon receipt of written instructions from the Buyer, each Shareholder shall promptly deliver to the depositary (the "Depositary") designated in the Offer (i) a letter of transmittal with respect to such Shareholder's Shares complying with the terms of the Offer together with instructions directing the Depositary to make payment for such Shares directly to the Shareholder (but if such Shares are not accepted for payment or are withdrawn and are to be returned pursuant to the Offer, to return such Shares to such Shareholder whereupon they shall continue to be held by such Shareholder subject to the terms and conditions of this Agreement), (ii) the Certificates representing such Shareholder's Shares and (iii) all other documents or instruments required to be delivered pursuant to the terms of the Offer (such documents in clauses (i) through (iii) collectively being hereinafter referred to as the "Tender Documents"). Tender by a Shareholder pursuant to this Section 1.4(a) shall suspend such Shareholder's further obligations under this Agreement unless and until such tendered Shareholder's Shares are not accepted for payment or are withdrawn and are to be returned to such Shareholder pursuant to the Offer, in which event, the Shareholder's further obligations under this Agreement shall be reinstated in full force and effect. For all its Shares validly tendered in the Offer and not withdrawn, each Shareholder will be entitled to receive the highest price paid by Buyer pursuant to the Offer, as such Offer may be amended from time to time. Notwithstanding the foregoing, tender of any Shares subject to pledge shall be subject to Buyer's agreement to enter into an escrow or other arrangement satisfactory to the pledgee-lender to facilitate the satisfaction of debt obligations with respect to any such pledged Shares. Each Shareholder agrees to execute any documentation to effectuate such escrow or other arrangement provided that such documentation preserves the rights of such tendering Shareholder hereunder. (b) Buyer agrees that if an Acquisition Proposal or a Superior Acquisition Proposal is made for the Shares, Buyer shall give each Shareholder written notice at least two Business Days prior to the tender of any Shares beneficially owned by Buyer or its affiliates in such Acquisition Proposal or Superior Acquisition Proposal. Notwithstanding anything to the contrary herein, if Buyer or any of its affiliates tender (or retender, if previously withdrawn) Shares in such Acquisition Proposal or Superior Acquisition Proposal, Buyer shall consent to the Shareholders tendering (or retendering, if previously withdrawn) their Shares pursuant to such Acquisition Proposal or Superior Acquisition Proposal and such Shares may be released from the terms of this Option and sold in such Acquisition Proposal or Superior Acquisition Proposal. If Buyer or its affiliates subsequently withdraw all Shares tendered pursuant to such Acquisition Proposal or Superior Acquisition Proposal and gives Shareholders sufficient notice to take 3 4 action, Shareholders shall withdraw their tender of shares to such Acquisition Proposal or Superior Acquisition Proposal. No tender, withdrawal or retender by Buyer or Shareholder to an Acquisition Proposal permitted pursuant to this Section 1.4(b) shall extend the period for exercise of the Option pursuant to Section 1.2(a). Section 1.5 Conditions. The obligation of each Shareholder to sell such Shareholder's Shares at any Closing is subject to the following conditions: (a) The representations and warranties of Buyer contained in Article 4 shall be true and correct in all material respects on the date thereof as if made on such date; (b) All waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules and regulations promulgated thereunder (the "HSR Act") applicable to such exercise of the Option shall have expired or been terminated; and (c) There shall be no preliminary or permanent injunction or other order, decree or ruling issued by a court of competent jurisdiction or by a governmental, regulatory or administrative agency or commission, nor any statute, rule, regulation or order promulgated or enacted by any governmental authority, prohibiting or otherwise restraining such exercise of the Option. Section 1.6 Adjustment Upon Changes in Capitalization or Merger. In the event of any change in the Company's capital stock by reason of stock dividends, stock splits, mergers, consolidations, recapitalizations, combinations, conversions, exchanges of shares, extraordinary or liquidating dividends, or other changes in the corporate or capital structure of the Company which would have the effect of diluting or changing the Buyer's rights hereunder, each Shareholder shall take such steps in connection with such consolidation, merger, liquidation or other such action within such Shareholders' powers as shareholders of the Company as may be necessary to assure that the provisions of this Agreement shall thereafter apply as nearly as possible to any securities or property thereafter deliverable upon exercise of the Option. ARTICLE 2 GRANT OF PROXY Section 2.1 Proxy. Each Shareholder hereby revokes any and all previous proxies granted with respect to such Shareholder's Shares. Each Shareholder, by this Agreement, with respect to such Shareholder's Shares, does hereby constitute and appoint Buyer, or any nominee of Buyer, with full power of substitution, as its true and lawful attorney and proxy, for and in its name, place and stead, to vote each of such Shareholder's Shares as its proxy, at every annual, special or adjourned meeting, or solicitation of consents, of the Company (including the right to sign its name (as Shareholder) to any consent, certificate or other document relating to the Company that the law of the State of Delaware may permit or require) (i) in favor of the adoption of the Merger Agreement and this Agreement and approval of the Merger and the other transactions contemplated hereby and thereby, (ii) against any Acquisition Proposal or Superior Acquisition Proposal (as defined in the Merger Agreement) and any other action or agreement 4 5 that would result in a breach of any covenant, representation or warranty or any other obligation or agreement of the Company under the Merger Agreement not being fulfilled, and (iii) in favor of any other matter relating to consummation of the transactions contemplated by the Merger Agreement and this Agreement. Each Shareholder further agrees to cause such Shareholder's Shares that are outstanding and owned by it beneficially to be voted in accordance with the foregoing. The proxy granted by each Shareholder pursuant to this Article 2 is irrevocable and is granted in consideration of Buyer's entering into this Agreement and the Merger Agreement; provided, however, that such proxy shall be revoked upon termination of this Agreement in accordance with its terms. ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDERS Each of the Shareholders severally represents and warrants to the Buyer that: Section 3.1 Valid Title. Except as noted on Exhibit A, each such Shareholder is the sole, true, lawful and beneficial owner of such Shareholder's Shares with no restrictions on such Shareholder's voting rights or rights of disposition pertaining thereto which will survive the Closing. At any Closing, such Shareholder will convey good and valid title to such Shareholder's Shares being purchased free and clear of any and all claims, liens, charges, encumbrances and security interests. None of such Shareholder's Shares is subject to any voting trust or other agreement or arrangement with respect to the voting of such Shares. Section 3.2 Non-Contravention. The execution, delivery and performance by such Shareholder of this Agreement and the consummation of the transactions contemplated hereby (i) are within such Shareholder's powers, have been duly authorized by all necessary action (including any consultation, approval or other action by or with any other person), (ii) require no action by or in respect of, or filing with, any governmental body, agency, official or authority (except as may be required under the HSR Act or by any insurance regulatory agency or body), and (iii) do not and will not contravene or constitute a default under, or give rise to a right of termination, cancellation or acceleration of any right or obligation of such Shareholder or to a loss of any benefit of such Shareholder under, any provision of applicable law or regulation or of any agreement, judgment, injunction, order, decree, or other instrument binding on such Shareholder or result in the imposition of any lien on any asset of such Shareholder. Section 3.3 Binding Effect. This Agreement has been duly executed and delivered by such Shareholder and is the valid and binding agreement of such Shareholder, enforceable against such Shareholder in accordance with its terms, except as enforcement may be limited by bankruptcy, insolvency, moratorium or other similar laws relating to creditors' rights generally. If this Agreement is being executed in a representative or fiduciary capacity, the person signing this Agreement has full power and authority to enter into and perform such Agreement. Section 3.4 Total Shares. Such Shareholder is the record and/or Beneficial Owner of the number of Shares, as such ownership is set forth next to such Shareholder's name on 5 6 Exhibit A hereto. Except as set forth on Exhibit A, such Shares, constitute all of the Shares, owned of record or Beneficially Owned by such Shareholder. Except as set forth on Exhibit A, neither such Shareholder nor any beneficial owner or owners of such Shareholder's Shares own any options to purchase or rights to subscribe for or otherwise acquire any securities of the Company. Except as set forth on Exhibit A, each Shareholder has sole voting power and sole power to issue instructions with respect to the matters set forth in Article 2 of this Agreement, sole power of disposition, sole power of conversion, sole power to demand appraisal rights and sole power to agree to all of the matters set forth in this Agreement, in each case with respect to all of the Shares, beneficially owned by such Shareholder with no limitations, qualifications or restrictions on such rights, subject to applicable securities laws and the terms of this Agreement. The terms "Beneficially Owned" or "Beneficial Ownership" with respect to any securities shall mean having "beneficial ownership" of such securities as determined pursuant to Rule 13d-3 under the Securities Exchange Act of 1934, as amended. Section 3.5 Finder's Fees. No investment banker, broker or finder, other than Advest, Inc., is entitled to a commission or fee from Shareholder or the Company in respect of this Agreement based upon any arrangement or agreement made by or on behalf of such Shareholder. ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF BUYER The Buyer represents and warrants to each of the Shareholders: Section 4.1 Corporate Power and Authority. Buyer is duly organized, validly existing and in good standing under the laws of Delaware. Buyer has all requisite corporate power and authority to enter into this Agreement and to perform its obligations hereunder. The execution, delivery and performance by Buyer of this Agreement and the consummation by Buyer of the transactions contemplated hereby have been duly authorized by the board of directors of Buyer and no other corporate action on the part of Buyer is necessary to authorize the execution, delivery or performance by Buyer of this Agreement and the consummation by Buyer of the transactions contemplated hereby. This Agreement has been duly executed and delivered by Buyer and is a valid and binding agreement of Buyer, enforceable against it in accordance with its terms, except as enforcement may be limited by bankruptcy, insolvency, moratorium or other similar laws relating to creditors' rights generally. Section 4.2 Acquisition for Buyer's Account. Any Shareholder Shares to be acquired upon exercise of the Option will be acquired by Buyer for its own account and not with a view to the public distribution or resale thereof and will not be transferred except in compliance with the Securities Act of 1933, as amended. ARTICLE 5 COVENANTS OF THE SHAREHOLDERS Each of the Shareholders hereby covenants and agrees that: 6 7 Section 5.1 No Proxies for or Encumbrances on Shareholder Shares. Except pursuant to the terms of this Agreement, such Shareholder shall not, without the prior written consent of Buyer, directly or indirectly, (i) grant any proxies or enter into any voting trust or other agreement or arrangement with respect to the voting of any Shares or (ii) acquire, sell, assign, transfer, encumber or otherwise dispose of, or enter into any contract, option or other arrangement or understanding with respect to the direct or indirect acquisition or sale, assignment, transfer, encumbrance or other disposition of, any Shares, any shares of preferred stock or any warrants during the term of this Agreement other than the acquisition of Shares by means of existing options, warrants or other convertible securities, provided that upon exercise or acquisition the Shares become Shareholder Shares subject to this Agreement. Section 5.2 Other Offers. Each Shareholder in his or its capacity as a shareholder of the Company agrees to be bound to his obligations and the restrictions placed upon him as a director of the Company pursuant to Section 5.4 of the Merger Agreement. Section 5.3 Conduct of Shareholders. Such Shareholder will not (i) take, agree or commit to take any action that would make any representation and warranty of such Shareholder hereunder inaccurate in any respect as of any time prior to the termination of this Agreement or (ii) omit, or agree or commit to omit, to take any action necessary to prevent any such representation or warranty from being inaccurate in any respect at any such time. Section 5.4 Disclosure. Each Shareholder hereby permits Buyer to publish and disclose in the offer documents and, if approval of the Company's shareholders is required under applicable law, a proxy statement (including all documents and schedules filed with the SEC) their identity and ownership of the Shares and the nature of their commitments, arrangements and understandings under this Agreement. ARTICLE 6 MISCELLANEOUS Section 6.1 Termination of Agreement. This Agreement shall terminate and unexercised Options, if any, shall expire on the earliest to occur of (a) termination of the Merger Agreement pursuant to Section 9.1(a), (b), (c) or (d) thereof; (b) upon consummation of the Offer by payment for Shares duly tendered pursuant to the Offer; or (c) December 31, 2000. No such termination of this Agreement shall relieve any party hereto from any liability for any breach of this Agreement prior to its termination. Upon termination of this Agreement, all proxies granted pursuant to Article 2 shall lapse. Any obligation of Buyer to pay the Option Purchase Amount for Shareholder Shares acquired through exercise of the Option, as such Option Purchase Amount may be adjusted pursuant to Sections 1.2, 1.3 or 1.4(a), shall survive termination of this Agreement. Section 6.2 Indemnification of Shareholders. If the grant or exercise of the Option or proxy made by any Shareholder pursuant to Sections 1.1 or 2.1, respectively, hereof results in any violation or alleged violation of insurance laws or regulations, Buyer will indemnify each such Shareholder against all claims, actions, suits, proceedings or investigations, losses, 7 8 damages, liabilities (or actions in respect thereof), costs and expenses (including reasonable fees and expenses of counsel) if brought by an insurance regulatory body or insurance agency having jurisdiction over the subject matter hereof arising out of or based upon such violation or alleged violation and unless Buyer shall have assumed the defense thereof, as provided below, (a) Buyer shall pay as incurred the reasonable fees and expenses of counsel selected by the Shareholder, which counsel shall be reasonably satisfactory to Buyer, promptly as statements therefor are received, and (b) Buyer will cooperate in the defense of any such matter; provided, however, that Buyer shall not be liable for any settlement effected without its prior written consent (which consent shall not be unreasonably withheld); and provided, further, that Buyer shall not be obliged pursuant to this Section 6.2 to pay the fees and disbursements of more than one counsel for all Shareholders in any single action except to the extent that, in the opinion of counsel for the Shareholders, two or more of such Shareholders have conflicting interests in the outcome of such action. In the event any person asserts a claim against a Shareholder for which such Shareholder intends to seek indemnification hereunder, such Shareholder shall give prompt notice to Buyer, and shall permit Buyer to assume the defense of any such claim or any litigation resulting therefrom with counsel selected by Buyer, which counsel shall be Winstead Sechrest & Minick P.C. (unless such firm shall have a conflict of interest) or other counsel reasonably acceptable to such Shareholder; provided that such Shareholder may participate in such defense at its own expense, and provided further that the failure of any Shareholder to give notice as provided herein shall not relieve Buyer of its obligations under this Section 6.2 except to the extent Buyer is materially prejudiced thereby. Buyer shall not, in the defense of any such claim or litigation, except with the consent of the Shareholder being indemnified, consent to the entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Shareholder of a release from all liability in respect of such claim or litigation. Each Shareholder shall promptly furnish such information regarding itself or the claim in question as Buyer may reasonably request and as shall be reasonably required in connection with the defense of such claim and litigation resulting therefrom. Section 6.3 Expenses. All costs and expenses incurred in connection with this Agreement shall be paid by the party incurring such cost or expense. Section 6.4 Further Assurances. (a) In the event the Buyer exercises the Option, the Buyer and the Shareholders will each execute and deliver or cause to be executed and delivered all further documents and instruments and use commercially reasonable efforts to secure such consents and take all such further action as may be reasonably necessary in order to consummate the transactions contemplated hereby or to enable the Buyer and any assignee to exercise and enjoy all benefits and rights of the Shareholders with respect to the Option and the Shareholder Shares. (b) Buyer and each of the Shareholders acknowledge that it is Buyer's obligation to obtain the consent or approval of any insurance regulatory body or insurance agency that may be required for the grant or exercise of the Option or the proxy granted pursuant 8 9 to this Agreement. Each of the Shareholders agrees to cooperate fully with Buyer in obtaining any such consent or approval. Notwithstanding the preceding sentence, the period in which the Option is exercisable pursuant to the terms of Section 1.2 hereof will not be extended by this Section 6.4(b). Section 6.5 Additional Agreements. Subject to the terms and conditions of this Agreement, each of the parties hereto agrees to use commercially reasonable efforts to take, or cause to be taken, all action and to do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations and which may be required under any agreements, contracts, commitments, instruments, understandings, arrangements or restrictions of any kind to which such party is a party or by which such party is governed or bound, to consummate and make effective the transactions contemplated by this Agreement. Section 6.6 Specific Performance. The parties hereto agree that the Buyer may be irreparably damaged if for any reason any Shareholder failed to sell such Shareholder's Shares (or other securities deliverable pursuant to Section 1.3 upon exercise of the Option or to perform any of its other obligations under this Agreement, and that the Buyer would not have an adequate remedy at law for money damages in such event. Accordingly, the Buyer shall be entitled to specific performance and injunctive and other equitable relief to enforce the performance of this Agreement by each Shareholder. This provision is without prejudice to any other rights that the Buyer may have against any Shareholder for any failure to perform its obligations under this Agreement. Section 6.7 Notices. All notices, requests, claims, demands and other communications hereunder shall be deemed to have been duly given when delivered in person, by telecopy, or by registered or certified mail (postage prepaid, return receipt requested) to such party and shall be given: (a) if to Buyer to: Merger Sub of Delaware, Inc. 13403 Northwest Freeway Houston, Texas 77040 Telecopy: (713) 462-2401 Attention: Frank J. Bramanti 9 10 with copies (which shall not constitute notice) to: Winstead Sechrest & Minick P.C. 910 Travis, Suite 2400 Houston, Texas 77002 Telecopy: (713) 650-2400 Attention: Arthur S. Berner and Gibson, Dunn & Crutcher LLP 4 Park Plaza Irvine, California 92614 Telecopy: (949) 451-3800 Attention: Robert E. Dean (b) if to a Shareholder, at the address set forth below such Shareholder's name on the signature pages hereto. Section 6.8 Survival of Representations and Warranties. All representations and warranties contained in this Agreement shall survive delivery of and payment for the Shareholder Shares. Section 6.9 Severability. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any rule of law, or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner adverse to any party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner to the end that transactions contemplated hereby are fulfilled to the maximum extent possible. Section 6.10 Amendments. This Agreement may not be modified, amended, altered or supplemented, except upon the execution and delivery of a written agreement executed by the parties hereto. Section 6.11 Successors and Assigns. The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, successors and assigns, provided that Buyer may assign its rights and obligations to any affiliate of Buyer in which case Buyer shall remain liable hereunder; and provided, further, that no Shareholder may assign, delegate or otherwise transfer any of its rights or obligations under this Agreement without the consent of the Buyer. 10 11 Section 6.12 Governing Law. This Agreement shall be construed in accordance with and governed by the law of the State of Delaware regardless of the laws that might otherwise govern under applicable principles of conflicts of laws thereof. Section 6.13 Jurisdiction. Each of the parties hereto (a) consents to submit itself to the non-exclusive personal jurisdiction of any court of the United States located in the State of Delaware or of any Delaware state court in the event any dispute arises out of this Agreement or the transactions contemplated by this Agreement, and (b) agrees that it will not attempt to deny or defeat such personal jurisdiction by motion or other request for leave from any such court. Section 6.14 Counterparts; Effectiveness. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Agreement shall become effective when each party hereto shall have received counterparts hereof signed by all of the other parties hereto. Section 6.15 Definitions. Capitalized terms used herein but not otherwise defined shall have the meanings ascribed to them in the Merger Agreement. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the day and year first above written. Merger Sub of Delaware, Inc. By: /s/ STEPHEN L. WAY -------------------------------- Name: Stephen L. Way ------------------------------ Title: Chairman of the Board and Chief Executive Officer ----------------------------- /s/ DAVID L. CARGILE ------------------------------------ David L. Cargile 26231 Mount Diablo Road Laguna Hills, CA 92653 Telephone: (949) 831-2123 Facsimile: (949) 360-9558 [Signatures continued on next page] 11 12 /s/ L. STEVEN MEDGYESY, M.D. ----------------------------------- L. Steven Medgyesy, M.D. 161 East Chicago Avenue Apt. 40D & E Chicago, IL 60611 Telephone: (312) 787-0108 Facsimile: (312) 787-1741 /s/ ROBERT M. LEVIN ----------------------------------- Robert M. Levin Co-Trustee of the Greedy Hand Trust 161 East Chicago Avenue Apt. 40D&E Chicago, IL 60611 Telephone: (312) 787-0108 Facsimile: (312) 787-1741 /s/ ERMA S. MEDGYESY ----------------------------------- Erma S. Medgyesy Co-Trustee of the Greedy Hand Trust 161 East Chicago Avenue Apt. 40D&E Chicago, IL 60611 Telephone: (312) 787-0108 Facsimile: (312) 787-1741 /s/ HOWARD S. SINGER ----------------------------------- Howard S. Singer, Trustee of the Laura Descendants Trust 2956 Techny Road Northbrook, IL 60062 Telephone: (847) 272-2842 Facsimile: (847) 272-3556 S-1 (Signature Page to Shareholder Option Agreement) 13 /s/ HOWARD S. SINGER ----------------------------------- Howard S. Singer, Trustee of the Laura Family Trust 2956 Techny Road Northbrook, IL 60062 Telephone: (847) 272-2842 Facsimile: (847) 272-3556 /s/ HOWARD S. SINGER ----------------------------------- Howard S. Singer, Trustee of the LSM Daughter Trust 2956 Techny Road Northbrook, IL 60062 Telephone: (847) 272-2842 Facsimile: (847) 272-3556 /s/ HOWARD S. SINGER ----------------------------------- Howard S. Singer, Trustee of the Laura L. Trust 2956 Techny Road Northbrook, IL 60062 Telephone: (847) 272-2842 Facsimile: (847) 272-3556 /s/ HOWARD S. SINGER ----------------------------------- Howard S. Singer, Trustee of the LSM Trust 2956 Techny Road Northbrook, IL 60062 Telephone: (847) 272-2842 Facsimile: (847) 272-3556 /s/ HOWARD S. SINGER ----------------------------------- Howard S. Singer, Trustee of the L. Steven Jr. Trust 2956 Techny Road Northbrook, IL 60062 Telephone: (847) 272-2842 Facsimile: (847) 272-3556 S-2 (Signature Page to Shareholder Option Agreement) 14 /s/ HOWARD S. SINGER ----------------------------------- Howard S. Singer, Trustee of the LSM Children Trust 2956 Techny Road Northbrook, IL 60062 Telephone: (847) 272-2842 Facsimile: (847) 272-3556 /s/ HOWARD S. SINGER ----------------------------------- Howard S. Singer, Trustee of the LSM Son Trust 2956 Techny Road Northbrook, IL 60062 Telephone: (847) 272-2842 Facsimile: (847) 272-3556 /s/ HOWARD S. SINGER ----------------------------------- Howard S. Singer, Trustee of the L. Steven Jr. Descendants Trust 2956 Techny Road Northbrook, IL 60062 Telephone: (847) 272-2842 Facsimile: (847) 272-3556 /s/ HOWARD S. SINGER ----------------------------------- Howard S. Singer, Trustee of the L. Steven Jr. Family Trust 2956 Techny Road Northbrook, IL 60062 Telephone: (847) 272-2842 Facsimile: (847) 272-3556 /s/ ROBERT M. LEVIN ----------------------------------- Robert M. Levin Co-Trustee of the Popcorn Trust 161 East Chicago Avenue Apt. 40D&E Chicago, IL 60611 Telephone: (312) 787-0108 Facsimile: (312) 787-1741 S-2 (Signature Page to Shareholder Option Agreement) 15 /s/ LAURA MEDGYESY ----------------------------------- Laura Medgyesy Co-Trustee of the Popcorn Trust 161 East Chicago Avenue Apt. 40D&E Chicago, IL 60611 Telephone: (312) 787-0108 Facsimile: (312) 787-1741 ----------------------------------- Erma S. Medgyesy, Co-Trustee of the Hit & Run Trust 161 East Chicago Avenue Apt. 40D&E Chicago, IL 60611 Telephone: (312) 787-0108 Facsimile: (312) 787-1741 /s/ LASZLO STEVEN MEDGYESY ----------------------------------- Laszlo Steven Medgyesy, Co-Trustee of the Hit & Run Trust 161 East Chicago Avenue Apt. 40D&E Chicago, IL 60611 Telephone: (312) 787-0108 Facsimile: (312) 787-1741 /s/ ERMA S. MEDGYESY ----------------------------------- Erma S. Medgyesy, 161 East Chicago Avenue Apt. 40D&E Chicago, IL 60611 Telephone: (312) 787-0108 Facsimile: (312) 787-1741 S-2 (Signature Page to Shareholder Option Agreement) 16 /s/ HOWARD S. SINGER ----------------------------------- Howard S. Singer 2956 Techny Road Northbrook, IL 60062 Telephone: (847) 272-2842 Facsimile: (847) 272-3556 /s/ HOWARD S. SINGER ----------------------------------- Howard S. Singer, general partner of UBI Partnership 2956 Techny Road Northbrook, IL 60062 Telephone: (847) 272-2842 Facsimile: (847) 272-3556 /s/ ALISA M. SINGER ----------------------------------- Alisa M. Singer, Trustee of the Howard and Alisa Singer Descendants Trust 2956 Techny Road Northbrook, IL 60062 Telephone: (847) 272-2842 Facsimile: (847) 272-3556 /s/ HOWARD S. SINGER ----------------------------------- Howard S. Singer IRA, Bear Stearns Security Corp. Custodian (individual retirement account f/b/o Howard S. Singer) 2956 Techny Road Northbrook, IL 60062 Telephone: (847) 272-2842 Facsimile: (847) 272-3556 /s/ L. STEVEN MEDGYESY ----------------------------------- L. Steven Medgyesy, Trustee of the Singer Family Trust 2956 Techny Road Northbrook, IL 60062 Telephone: (847) 272-2842 Facsimile: (847) 272-3556 S-2 (Signature Page to Shareholder Option Agreement) 17 EXHIBIT A
SHAREHOLDER(1) SHARES OPTIONS(2) David L. Cargile 44,000(3) 485,000 L. Steven Medgyesy, M.D. 150,932 32,000 Howard Singer, Trustee of the L. Steven Medgyesy Family Trust(4),(5) 67,060 0 Robert M. Levin and Erma S. Medgyesy, Co-Trustees of the Greedy Hand Trust(4) 100,000 0 Robert M. Levin and Laura Medgyesy, Co-Trustees of the Popcorn Trust(4) 68,834 0 Erma S. Medgyesy and Laszlo Steven Medgyesy, Jr., Co-Trustees of the Hit & Run Trust(4) 85,834 0 Erma S. Medgyesy 16,120 0 Howard S. Singer 270,005 84,200 UBI Partnership, Howard S. Singer, general partner 14,000 0 Alisa M. Singer, Trustee of the Howard and Alisa Singer Descendants Trust(4) 16,828 0 Howard S. Singer IRA, Bear Stearns Security Corp. Custodian (individual retirement 5,600 0 account f/b/o/ Howard S. Singer) L. Steven Medgyesy, Trustee of the Singer Family Trust(4) 172,622 0
- -------- (1) Certain of the Shares set forth above have been pledged to secure certain obligations of the Shareholders. In addition, certain of the shares set forth above may deemed "beneficially owned" for federal securities law purposes by more than one Shareholder. Such additional beneficial ownership is not reflected in the above table in order to avoid duplicative reporting of Shares. (2) Any options held by a Shareholder to purchase additional Shares ("Company Options") are not subject to the Option granted to Buyer pursuant to this Agreement. Pursuant to Section 1.1 of this Agreement, to the extent any Company Option held by a Shareholder is exercised prior to the exercise of the Option granted pursuant to this Agreement, the Shares issuable by the Company to the Shareholder under such Company Option will become subject to this Agreement. As of the date hereof, the Company Options held by the Shareholders are noted on this Exhibit A for information only. (3) Mr. Cargile may be deemed a "beneficial owner" of 3,000 Shares owned by his daughter, Amanda Cargile, who resides with him. Those 3,000 Shares are not included in Mr. Cargile's Shareholder Shares and are not subject to this Agreement. (4) With respect to each of the above-mentioned Shareholders that are trusts, the trustees thereof hold legal title and sole power to vote and dispose of the Shares held by the subject trust. (5) The L. Steven Medgyesy Family Trust is actually ten individual trusts, each holding 6,706 Shares. EX-3 4 STOCK OPTION AGREEMENT, DATED AS OF OCT 11, 1999 1 EXHIBIT 3 STOCK OPTION AGREEMENT This STOCK OPTION AGREEMENT (the "Agreement") made and entered into this 11th day of October, 1999 by and between HCC INSURANCE HOLDINGS, INC. ("Parent"), a Delaware corporation, and THE CENTRIS GROUP, INC. (the "Company"), a Delaware corporation. WHEREAS, Parent, Merger Sub of Delaware, Inc., a Delaware corporation and wholly owned subsidiary of Parent (the "Merger Subsidiary"); and the Company have entered into an Agreement and Plan of Merger of even date herewith (the "Merger Agreement") whereby Parent through Merger Subsidiary will acquire the Company at a price of $12.50 per share in cash; and WHEREAS, Parent and the Company wish to enter into this Stock Option Agreement whereby Parent will be granted a stock option pursuant to the terms hereof to acquire shares of common stock $.01 par value together with attached rights to purchase shares (the "Common Stock") of the Company. NOW, THEREFORE, in consideration of the mutual covenants, agreements and promises set forth herein and other good and valuable consideration the sufficiency of which is hereby acknowledged, the parties hereto do hereby agree as follows: 1. Grant of Option. The Company hereby grants to Parent an option (the "Option") to purchase, subject to the terms hereof, 2,327,797 shares of Common Stock of the Company (the "Option Shares") equal to approximately 19.9% of the shares of Common Stock issued and outstanding as of the date hereof, at a price per share of $12.50 (the "Option Price"); provided, however, that in no event shall the number of shares of Common Stock for which this Option is exercisable exceed 19.9% of the Company's issued and outstanding shares of Common Stock (without giving effect to any Option Shares subject to or issued pursuant to this Option). The number of Option Shares of Common Stock that may be received upon the exercise of the Option and the Option Price are, subject to adjustment as set forth at Section 5. The Option shall be nontransferable, except as expressly provided herein. The Option shall become exercisable and may be exercised in whole, or in part, at any time and from time to time, until the expiration of the Option as provided herein. The Option shall only be exercisable if, at any time after the date hereof and prior to the expiration of the Option, the Company shall have entered into, or shall have publicly announced its intention to enter into, an agreement or an agreement in principle with respect to any Acquisition Proposal or Superior Acquisition Proposal (as defined in the Merger Agreement). The Option shall expire at 11:59 p.m. California time on the earlier of the fifth Business Day after the Acquisition Proposal or Superior Acquisition Proposal is terminated or December 31, 2000. 2. Exercise of Option. Upon exercise of all or any part of the Option, Parent shall pay the aggregate exercise price attributable to such exercise to the Company by certified or official bank check or by wire transfer of funds. 2 3. Option Shares; Certificates. The Option Shares acquired upon exercise of the Option shall be validly issued, fully paid and nonassessable and the certificate or certificates evidencing the Option Shares shall constitute good delivery, shall be registered in the name of Parent and shall bear the legend: "The shares evidenced by this certificate have not been registered under the Securities Act of 1933, as amended, and may not be sold or transferred except in compliance with that Act. The transfer of the shares represented by this certificate are further subject to certain provisions of an agreement between the registered holder hereof and The Centris Group, Inc. A copy of such agreement is on file at the principal office of The Centris Group, Inc. and will be provided to the holder hereof without charge upon receipt by The Centris Group, Inc. of a written request therefor." It is understood and agreed that: (i) the reference to the transfer restrictions of the Securities Act of 1933, as amended (the "1933 Act"), in the above legend shall be removed by delivery of substitute certificate(s) without such reference if Parent shall have delivered to the Company a copy of a letter from the staff of the Securities and Exchange Commission (the "SEC"), or an opinion of counsel, in form and substance reasonably satisfactory to the Company, to the effect that such legend is not required for purposes of the 1933 Act; (ii) the reference to the provisions of this Agreement in the above legend shall be removed by delivery of substitute certificate(s) without such reference if the shares have been sold or transferred in compliance with the provisions of this Agreement and under circumstances that do not require the retention of such reference in the opinion of counsel, in form and substance reasonably satisfactory to the Company; and (iii) the legend shall be removed in its entirety if the conditions in the preceding subsections (i) and (ii) are both satisfied. In addition, such certificates shall bear any other legend as may be required by law. 4. Parent Representations for Exercise. In connection with the exercise of the Option, Parent shall furnish the Company with such representations and commitments with respect to the Option Shares as shall be reasonably requested by the Company in order to insure compliance with the 1933 Act. 5. Adjustment of Shares. (a) In the event that any shares of Common Stock are redeemed, repurchased, retired or otherwise cease to be outstanding after the date of this Agreement, or in the event of any exercise of stock options held by employees or directors of the Company the number of shares of Common Stock subject to the Option shall be decreased or increased, as appropriate, so that, after such redemption, repurchase, retirement or exercise or other action, such number equals 19.9% of the number of shares of Common Stock then issued and outstanding without giving effect to any shares subject to or issued pursuant to this Option. Nothing contained in this Section 5(a) or elsewhere in this Agreement shall be deemed to authorize the Company or the Parent to redeem, repurchase or retire shares in breach of any provision of the Merger Agreement. 2 3 (b) In addition to the adjustment in the number of shares of Common Stock that are purchasable upon exercise of the Option pursuant to Section 5(a) of this Agreement, the number of shares of Common Stock purchasable upon the exercise of the Option and the Option Price shall be subject to adjustment from time to time as provided in this Section 5(b). In the event of any change in, or distributions in respect of, the Common Stock by reason of stock dividends, split-ups, mergers, recapitalizations, combinations, subdivisions, conversions, exchanges of shares, distributions on or in respect of the Common Stock the type and number of Option Shares purchasable upon exercise hereof and the Option Price shall be appropriately adjusted in such manner as shall fully preserve the economic benefits provided hereunder and proper provision shall be made in any agreement governing any such transaction to provide for such proper adjustment and the full satisfaction of the Company's obligations hereunder. 6. Repurchase of Option. If, before the expiration of the Option, there is either (i) an Acquisition Proposal which at any time becomes a Superior Acquisition Proposal (each as defined in the Merger Agreement) (regardless of whether it is consummated) or (ii) the commencement of a tender offer or exchange offer for at least 20% of the shares of Common Stock of the Company or (iii) the acquisition by any person or "group" (within the meaning of Rule 13d-5 under the Securities Exchange Act of 1934, as amended) of at least 20% of the shares (or rights to acquire shares) of Common Stock of the Company, then, in either event, for a period of 100 days after (x) such Acquisition Proposal becomes a Superior Acquisition Proposal (as defined in the Merger Agreement) or (y) such event occurs, but prior to the expiration of the Option, Parent shall be entitled to sell the Option to the Company and the Company shall be required to purchase the Option from Parent, for $6,000,000 in cash against Parent's written acknowledgment that it has surrendered all of its rights to the Option. 7. Notice of Repurchase. If Parent determines to sell the Option to the Company, Parent shall give the Company written notice of such determination. 8. Closing of Repurchase. The closing of the sale of the Option shall take place at the Houston offices of Winstead Sechrest & Minick P.C. in Houston, Texas at 9:30 a.m. Houston time on the 3rd business day after Parent has given the Company written notice of its intention to sell the Option to the Company. 9. Expiration Upon Payment of Termination Fee. Notwithstanding anything to the contrary herein, the Option shall expire if the Parent shall have been paid or shall be paid the Termination Fee pursuant to Section 10.4 of the Merger Agreement. 10. Amendment of Rights Agreement. The Company hereby agrees that immediately prior to execution of this Agreement, it shall take all necessary action under the Rights Agreement, dated as of May 24, 1990, as amended by and between the Company and American Stock Transfer & Trust Company (the "Rights Agreement"), including any required amendment thereto, so that the grant or exercise of the Option on the terms permitted hereunder and as contemplated herein will not cause (i) the rights (the "Rights") issued pursuant to the Rights Agreement to become exercisable under the Rights Agreement, (ii) the Parent, or any subsidiary of the Parent, including Merger Subsidiary to be deemed a "10% Stockholder" (as defined in the 3 4 Rights Agreement) or (iii) the "10% Stock Ownership Date" (as defined in the Rights Agreement) to occur upon such consummation, provided, however, that the Company shall not be required to make such amendments to the Rights Agreement if, (x) the Parent has not performed or complied in all material respects with this Agreement prior to the exercise of the Option or (y) the Company obtains, and there is in force from the Delaware Court of Chancery, an order permanently, preliminarily or temporarily declaring that the making of such amendments to the Rights Agreement would be contrary to the fiduciary duties of the Board of Directors of the Company. Notwithstanding anything else contained herein, in no event shall the Board of Directors of the Company make any comparable amendment of the Rights Agreement in favor of any other person without making such amendment in favor of the Parent. 11. Representations and Warranties of the Company. The Company hereby represents and warrants to Parent as follows: (a) The Company has full corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly and validly authorized by the Board of Directors of the Company and no other corporate proceedings on the part of the Company are necessary to authorize this Agreement or to consummate the transactions so contemplated. This Agreement has been duly and validly executed and delivered by the Company. (b) The Company has taken all necessary corporate action to authorize and reserve and to permit it to issue, and at all times from the date hereof through the termination of this Agreement in accordance with its terms will have reserved for issuance upon the exercise of the Option, that number of shares of Common Stock equal to the maximum number of shares of Common Stock at any time and from time to time issuable hereunder, and all such shares, upon issuance pursuant hereto, will be duly authorized, validly issued, fully paid, nonassessable, and will be delivered free and clear of all claims, liens, encumbrance and security interests and not subject to any preemptive rights. 12. Representations and Warranties of the Parent. Parent hereby represents and warrants to the Company that: (a) Parent has all requisite corporate power and authority to enter into this Agreement and, subject to any approvals or consents to herein, to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of Parent. This Agreement has been duly executed and delivered by Parent. (b) The Option is not being, and any shares of Common Stock or other securities acquired by Parent upon exercise of the Option will not be, acquired with a view to the public distribution thereof and will not be transferred or otherwise disposed of except in a transaction registered or exempt from registration under the 1933 Act. 4 5 13. Equitable Remedies. The parties hereto acknowledge that damages would be an inadequate remedy for a breach of this Agreement by either party hereto and that the obligations of the parties hereto shall be enforceable by either party hereto through injunctive or other equitable relief. 14. Validity. If any term, provision, covenant or restriction contained in this Agreement is held by a court or a federal or state regulatory agency of competent jurisdiction to be invalid, void or unenforceable, the remainder of the terms, provisions and covenants and restrictions contained in this Agreement shall remain in full force and effect, and shall in no way be affected, impaired or invalidated. 15. Filings; Waiting Period. Each of Parent and the Company will use commercially reasonable efforts to make all filings with, and to obtain all consents of, all governmental authorities necessary to the consummation of the transactions contemplated by this Agreement, including, without limitation, to promptly make or cause to be made the filings required of such party or any of its subsidiaries under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules and regulations thereunder and the expiration or termination of any prescribed waiting period. 16. Notices. All notices, requests, claims, demands and other communications hereunder shall be deemed to have been duly given when delivered in person, by cable, telegram, telecopy or telex, or by registered or certified mail (postage prepaid, return receipt requested) at the respective addresses of the parties set forth in the Merger Agreement. 17. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, regardless of the laws that might otherwise govern under applicable principles of conflicts of laws thereof. 18. Counterparts. This Agreement may be executed in two counterparts, each of which shall be deemed to be an original, but all of which shall constitute one and the same agreement. 19. Expenses. Except as otherwise expressly provided herein, each of the parties hereto shall bear and pay all costs and expenses incurred by it or on its behalf in connection with the transactions contemplated hereunder, including fees and expenses of its own financial consultants, investment bankers, accountants and counsel. 20. Entire Agreement. Except as otherwise expressly provided herein or in the Merger Agreement, this Agreement contains the entire agreement between the parties with respect to the transactions contemplated hereunder and supersedes all prior arrangements or understandings with respect thereof, written or oral. The terms and conditions of this Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective successors and permitted assigns. Nothing in this Agreement, expressed or implied, is intended to confer upon any party, other than the parties hereto, and their respective successors and permitted assigns, any rights, remedies, obligations or liabilities under or by reason of this Agreement, except as expressly provided herein. 5 6 21. Capitalized Terms. Capitalized terms used in this Agreement and not defined herein shall have the meanings ascribed thereto in the Merger Agreement. IN WITNESS WHEREOF, each of the parties has caused this Agreement to be executed on its behalf by its officers thereunto duly authorized, all as of the date first above written. HCC INSURANCE HOLDINGS, INC. /s/ STEPHEN L. WAY --------------------------------------------- By: Stephen L. Way Chairman of the Board and Chief Executive Officer THE CENTRIS GROUP, INC. /s/ DAVID L. CARGILE --------------------------------------------- By: David L. Cargile Chairman of the Board and Chief Executive Officer 6 EX-4 5 LETTER TO SHAREHOLDERS OF CENTRIS GROUP 10-18-1999 1 EXHIBIT 4 [LOGO] [THE CENTRIS GROUP] October 18, 1999 To Our Shareholders: On behalf of the Board of Directors of The Centris Group, Inc. (the "Company"), I am pleased to inform you that on October 11, 1999 the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") with HCC Insurance Holdings, Inc. and Merger Sub of Delaware, Inc., a wholly owned subsidiary of HCC Insurance Holdings, Inc. Pursuant to the Merger Agreement, Merger Sub of Delaware, Inc. commenced today a tender offer (the "Offer") to purchase all outstanding shares of the Company's common stock, including associated common stock purchase rights ("Shares"), for $12.50 per Share in cash. Under the Merger Agreement, upon satisfaction of certain conditions, including the tender of at least a majority of the fully-diluted Shares of the Company, the Offer will be followed by a merger (the "Merger") in which any remaining Shares will be converted into the right to receive $12.50 per Share in cash, without interest (except any Shares as to which the holder has properly exercised dissenter's rights of appraisal). All of the directors and executive officers of the Company have indicated their intention to tender their Shares in the Offer. THE BOARD OF DIRECTORS OF THE COMPANY UNANIMOUSLY HAS DETERMINED THAT THE OFFER AND THE MERGER ARE FAIR TO, ADVISABLE AND IN THE BEST INTERESTS OF, THE COMPANY AND ITS SHAREHOLDERS, HAS APPROVED THE OFFER AND ADOPTED THE MERGER AGREEMENT AND RECOMMENDS ACCEPTANCE OF THE OFFER BY THE COMPANY'S SHAREHOLDERS. In arriving at its recommendation, the Board of Directors gave careful consideration to a number of factors which are described in the attached Solicitation/Recommendation Statement on Schedule 14D-9 (the "Schedule 14D-9"). Among other things, the Board of Directors considered the opinion of its financial advisor, Advest, Inc., that the consideration to be received by the Company's shareholders pursuant to the Offer and the Merger is fair from a financial point of view to the Company and its shareholders. In addition to the attached Schedule 14D-9, also enclosed is the Offer to Purchase dated October 18, 1999, together with related materials, including a Letter Of Transmittal, to be used for tendering your Shares in the Offer. These documents set forth the terms and conditions of the Offer and provide instructions as to how to tender your Shares. We urge you to read these documents carefully before making your decision with respect to tendering your Shares pursuant to the Offer. Your Directors thank you for your continued support. Very truly yours, /s/ DAVID L. CARGILE David L. Cargile Chairman of the Board, President and Chief Executive Officer EX-5 6 CONNFIDENTIALITY AGREEMENT, DATED AUGUST 22,1999 1 EXHIBIT 5 August 22, 1999 PRIVATE AND CONFIDENTIAL ------------------------ Stephen L. Way Chairman & Chief Executive Officer HCC Insurance Holdings, Inc. 13403 Northwest Freeway Houston, TX 77040-6094 RE: CONFIDENTIALITY AGREEMENT Dear Stephen: In connection with your consideration of a possible transaction with The Centris Group, Inc. ("Centris"), we will provide you, upon your request, certain financial and other information (the "Evaluation Material") concerning the business and affairs of Centris. The terms "you" or "your" in this Agreement include HCC Insurance Holdings, Inc. and all of its affiliates as that term is defined in the Federal Securities laws. The term "Evaluation Material" includes all information furnished to you in connection with a possible transaction, regardless of the source or manner in which it is furnished, whether written or oral or electronically stored or transmitted, furnished before or after the date hereof to you or your Representatives (as defined below) by Centris (which shall be deemed to include its directors, officers, employees, agents and representatives), or by other sources together with any analyses, compilations, studies, or other documents or records prepared by you or your Representatives, containing, reflecting, or resulting from such information; provided, however, Evaluation Material does not include information which (i) is or becomes generally available to the public other than as a result of a disclosure by you or your directors, officers, employees, affiliates, agents, accountants, attorneys, financial advisors or any of their affiliates, representatives, agents or advisors, (all of the foregoing collectively referred to as "your Representatives"); or (ii) was or becomes available to you on a non-confidential basis from a source other than Centris, provided that such source is not known to you to be bound by a confidentiality agreement or other contractual, legal or fiduciary obligations of non-disclosure with Centris; or (iii) was lawfully within your possession prior to its being furnished to you by or on behalf of Centris, as evidenced by your written records, provided that the source of such information was not known to you to be bound by a confidentiality agreement or prohibited from furnishing the information to you due to a contractual, legal or fiduciary obligation with Centris in respect thereof; or (iv) is independently developed by you without any reliance on or use of the Evaluation Material. 2 Stephen L. Way August 22, 1999 Page 2 As a condition to you and your Representatives being furnished with any Evaluation Material, you agree as follows: (1) You recognize and acknowledge the competitive value and confidential nature of the Evaluation Material and the damage that could result to Centris if information contained therein is disclosed to any third party. The Evaluation Material will not be used by you or your affiliates or Representatives in any way detrimental to Centris, including, without limitation, in competition with Centris. (2) You agree that the Evaluation Material will be used solely for the purpose of evaluating a possible transaction between Centris and you. You also agree that you and your Representatives will keep the Evaluation Material confidential and will not disclose any of the Evaluation Material now or hereafter received or obtained from Centris, or any of their representatives to any third party, without the prior written consent of Centris; provided, however, that any of the Evaluation Material may be disclosed to your Representatives who need to know the information contained in the Evaluation Material for the purpose of evaluating a possible transaction with Centris and who agree to keep such information confidential and to be bound by this Agreement to the same extent as if they were parties hereto (it being understood and agreed that your Representatives shall be informed by you of the confidential nature of the Evaluation Material and shall be directed by you to treat the Evaluation Material confidentially). In any event, you shall be fully legally responsible for any improper use of the Evaluation Material by your Representatives. (3) In addition, Centris will not and, without the prior written consent of Centris, or unless required by valid court order or other valid order of an adjudicatory body, neither you nor your Representatives will disclose to any person (which shall include, without limitation, any corporation, company, group, partnership or individual) (a) that the Evaluation Material has been made available to you, (b) that you have inspected any portion thereof, (c) that discussions or negotiations are taking place concerning a possible transaction with Centris or (d) any of the terms, conditions or other facts with respect to any such possible transaction, including the status thereof. (4) In the event that the transaction contemplated by this agreement is not consummated, or upon Centris' request, all Evaluation Materials (and all copies, extracts or other reproductions in whole or in part thereof) provided to you by Centris or its representatives shall be returned to Centris (or, with Centris' written 3 Stephen L. Way August 22, 1999 Page 3 permission, destroyed, and, if requested by Centris, such destruction shall be certified in writing to Centris by an authorized officer supervising such destruction) and not retained by you or your Representatives in any form (electronically or otherwise) or for any reason. All documents, copies, summaries and analyses, memoranda, notes and other writings, including information in electronic form whatsoever which was prepared by you or your Representatives and which contain Evaluation Material shall be destroyed or purged, and, if requested by Centris, such destruction shall be certified in writing to Centris by an authorized officer supervising such destruction. (5) You agree that (except as permitted in the following paragraph) for a period of six (6) months from the date of this Agreement, neither you nor any of your affiliates or associates will, in any manner, alone or in concert with third parties (whether or not pursuant to any legally binding agreement or commitment), without the prior written approval of the Board of Directors or Executive Committee of Centris (i) acquire, or offer to acquire, directly or indirectly, record or beneficial ownership of any equity securities of Centris or of any subsidiary of Centris; (ii) acquire or offer to acquire, directly or indirectly, any options or other rights to acquire any equity securities of Centris or of any subsidiary of Centris (whether or not exercisable only after the passage of time or the occurrence of any event); (iii) acquire or offer to acquire, directly or indirectly, any assets of Centris; (iv) offer to enter into any acquisition or other business combination transaction relating to Centris or to any subsidiary of Centris; (v) make, or in any way participate, directly or indirectly, in any "solicitation" of "proxies" or "written authorization or consent" (as such terms are used in the proxy rules of the Securities and Exchange Commission) to vote, or seek to advise or influence any person with respect to the voting of any voting securities of Centris; (vi) otherwise act alone or in concert with third parties, to seek to control or influence the management, the Board of Directors or the policies of Centris; (vii) directly or indirectly participate in or encourage the formation of any "group" (within the meaning of Section 13 (d) (3) of the Securities Exchange Act of 1934) which owns or seeks or offers to acquire record or beneficial ownership of equity securities of Centris (including rights to acquire such equity securities) or which seeks or offers to affect control of Centris or otherwise seeks or proposes to do any of the acts specified in (i) through (vi) above; (viii) propose, or publicly announce or otherwise disclose any request for permission or consent in respect of, any of the foregoing; or (ix) advise, assist or encourage any third parties in connection with any of the foregoing. You also agree during such period not to (a) request Centris (or its directors, officers, employees or agents), directly or indirectly, to amend or waive any provision of this paragraph (including this 4 Stephen L. Way August 22, 1999 Page 4 sentence) or (b) take any action which would require Centris to make a public announcement regarding the possibility of a business combination or merger without the prior written approval as noted above. Notwithstanding the generality of the foregoing, this Agreement shall not prohibit: (i) the purchase by you, or of any investment fund managed by you or any of your affiliates, of equity securities of Centris; provided that no such purchase shall result in the beneficial ownership by you, taken in the aggregate with any such investment funds, of five percent (5%) or more of the outstanding shares of any class of equity securities of Centris; (ii) an offer by you to acquire all of the outstanding shares of Centris common stock at a purchase price of $14.00 per share or greater; or (iii) in the event the Board of Directors of Centris shall approve an "Acquisition Transaction" with another party, an offer by you to acquire all of the outstanding stock of Centris, or the purchase of shares of common stock pursuant to your offer. As used herein, an "Acquisition Transaction" means any transaction in which all or substantially all of the assets of Centris, or a majority of the common stock of Centris will be acquired by any person, or a merger in which the shares of common stock of Centris outstanding immediately prior to such transaction, or of any other person issued in exchange for such Centris shares, will represent either (a) less than a majority of the outstanding shares of the surviving corporation in such merger; or (b) (if the surviving corporation is a wholly owned subsidiary of another corporation) less than a majority of the outstanding shares of such parent corporation, immediately upon completion of such merger. In the event that, while this Section 5 remains in effect, Centris determines not to oppose any publicly disclosed offer by a third party for an Acquisition Transaction, Centris will afford you an opportunity, not less than five (5) business days, to submit a competing offer and to make public disclosure concerning the same. This Section 5 shall terminate and be of no further effect in the event Centris' stockholders' equity shall be reduced by 5% or more from the amount thereof as of June 30, 1999, without giving effect to: (i) any reduction of up to $3.8 million resulting from the repurchase of common stock of Centris, and (ii) any unrealized loss on investments resulting from a general change in interest rates or other general changes in market conditions. (6) Neither you nor your Representatives will initiate any communications with any employee of Centris concerning the Evaluation Material without the prior consent of the Chairman of Centris or his appointed representative. 5 Stephen L. Way August 22, 1999 Page 5 (7) Neither you nor your Representatives will initiate discussions with respect to the prospective employment of Centris' employees with you or any of your Representatives for a period of twelve (12) months after the date of signing this Agreement without the prior written consent of Centris. (8) Neither Centris nor its agents make any representations or warranties as to the accuracy or completeness of the Evaluation Material. Centris and its agents expect that you will conduct your own independent investigation and analysis. You agree that neither Centris nor any of its officers, directors, employees, agents or representatives shall have any liability to you or your Representatives resulting from the use of the Evaluation Material supplied by Centris or any of its representatives under this Agreement. (9) No delay or failure in exercising any right, power or privilege hereunder shall be construed to be a waiver thereof, nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any right, power or privilege hereunder. (10) Notwithstanding anything to the contrary set forth herein, in the event that you or any of your Representatives are requested or become legally compelled (by oral questions, interrogatories, request for information or documents, subpoena, civil investigative demand or similar process) to disclose any of the Evaluation Material or take any other action prohibited hereby, you will provide Centris with prompt written notice so that Centris may seek a protective order or other appropriate remedy and/or waive compliance with the provisions of this Agreement. In the event that such protective order or other remedy is not obtained, or that Centris waives compliance with the provisions of this Agreement, you will use commercially reasonable efforts to furnish only that portion of the Evaluation Material or take only such action which is legally required and to obtain reliable assurances that confidential treatment will be accorded any Evaluation Material so furnished. (11) It is understood that Centris may institute appropriate proceedings against you to enforce its rights hereunder. Because the harm which may be done to Centris by the disclosure of the Evaluation Material, you acknowledge and agree that money damages would not be a sufficient remedy for any violation of the terms of this Agreement. Accordingly, you agree that Centris shall be entitled to specific performance and injunctive relief as remedies for any violation by you of your obligations hereunder. These remedies shall not be deemed to be the exclusive 6 Stephen L. Way August 22, 1999 Page 6 remedies for a violation of the terms of this Agreement but shall be in addition to all other remedies available to Centris at law or equity. (12) You understand and agree that no contract or Agreement providing for a transaction between you and Centris shall be deemed to exist unless and until a definitive transaction agreement (a "Transaction Agreement") has been executed and delivered by the parties to this Agreement, and you hereby waive, in advance, any claim (including, without limitation, breach of contract) in connection with a possible transaction unless and until both parties hereto shall have entered into a Transaction Agreement. You also agree that unless and until a Transaction Agreement between us has been executed and delivered, Centris has no legal obligation of any kind whatsoever with respect to any such transaction by virtue of this Agreement or any other written or oral expression with respect to such transaction except, in the case of this Agreement or any other written agreement, for the matters specifically agreed to herein or therein. (13) This Agreement is made pursuant to and to be construed under and conclusively deemed for all purposes to be governed by the laws of the State of California (without giving effect to the principles of conflict of laws) and any judicial proceeding arising out of this Agreement or any matter related thereto shall be brought in the Superior Court of the County of Orange of the State of California, or in the United States District Court for the Central District of California. By execution and delivery of this Agreement, each party accepts the jurisdiction of such courts as noted above, and agrees to be bound by any judgment rendered therein in connection with this Agreement. The prevailing party of any litigation arising out of this Agreement shall be entitled to receive from the losing party all costs and expenses, including the reasonable counsel fees incurred by the prevailing party. (14) This Agreement shall be binding on and inure to the benefit of the parties hereto and their respective successors and assigns. (15) Your confidentiality obligations with respect to the Evaluation Material shall survive the date of this Agreement for a period of two (2) years. 7 Stephen L. Way August 22, 1999 Page 7 If the terms hereof are acceptable, please sign and return to Centris one copy of this Agreement to evidence your acceptance of and agreement to the foregoing, whereupon this Agreement will become a binding agreement. Very truly yours, THE CENTRIS GROUP, INC. By: /s/ DAVID L. CARGILE ----------------------------------------------- David L. Cargile Chairman, President and Chief Executive Officer Agreed and consented to this 22nd day of August, 1999: HCC INSURANCE HOLDINGS, INC. By: /s/ STEPHEN L. WAY ----------------------------------------------- Stephen L. Way Chairman and Chief Executive Officer DLC/mks EX-6 7 CONSULTING AGREEMENT, DATED AS OF OCT 11, 1999 1 EXHIBIT 6 CONSULTING AGREEMENT THIS CONSULTING AGREEMENT (the "Agreement") is entered into as of October 11, 1999, between The Centris Group, Inc., a Delaware corporation (the "Company"), and David L. Cargile ("Cargile"). Capitalized terms not defined herein shall have the meanings ascribed to them in the Merger Agreement (hereafter defined). RECITALS A. The Company, HCC Insurance Holdings, Inc., a Delaware corporation ("HCC") and Merger Sub of Delaware, Inc., a Delaware corporation ("Merger Subsidiary"), have entered into an Agreement and Plan of Merger, dated as of October 11, 1999, relating to the acquisition of the Company by HCC (the "Merger Agreement"). B. Cargile has served as a director, Chairman of the Board, President and Chief Executive Officer of the Company, and has gained an expertise in the specialty insurance business conducted by the Company. C. HCC has advised Cargile that his service as a director and officer of the Company will be terminated on the date that the Merger Subsidiary accepts for payments at least a majority of Company Shares pursuant to the Offer. D. HCC desires that the Company continue to receive the benefit of Cargile's expertise for six months following termination of his full-time employment by having him serve as an independent consultant to the Company. AGREEMENT In consideration of the mutual covenants and agreements contained herein, the parties hereby agree as follows: 1. Term. The term of this Agreement shall commence on the first day after the Merger Subsidiary accepts for payments at least a majority of Company Shares pursuant to the Offer and shall expire six months thereafter (the "Term"). 2. Consulting Services. During the Term of this Agreement, Cargile shall provide the Company consulting services as reasonably requested by the Company (the "Services"). Without limiting the foregoing, the Services shall include strategic, management and financial advisory services comparable to such services he heretofore provided the Company as its Chief Executive Officer, all such Services to be provided as requested by the Company. Cargile shall have no authority to act on behalf of the Company. The services provided herein by Cargile shall not preclude Cargile from accepting any full or part time employment with any other employer or from engaging in consulting services for any other company or entity. The Company agrees that Cargile may give such other obligations priority over Cargile's obligations hereunder. 3. Consulting Compensation. For Services, the Company shall pay Cargile $30,000 per month and for Cargile's covenants of nonsolicitation and confidentiality under this Agreement, the Company shall pay Cargile $30,000 per month (a total of $360,000 for the six months), payable at the same times per month as the Company's regular compensation schedule for employees (with the first and last calendar months of the period covered by this Agreement prorated as necessary). Any payments not made by the Company as required hereunder shall bear interest at 8% per annum. 4. Expenses; Transportation. If the Company requests that Cargile incur expenses in connection with the Services that he is to provide under this Agreement, the Company shall pay directly or reimburse Cargile for all such expenses (including travel on a first class basis). Cargile agrees to provide the Company verification of all expenses as currently required by the Company. During the term of this Agreement, the 2 Company agrees to permit Cargile to continue to utilize the Company automobile currently provided to him and to pay for all expenses thereof (including operating expenses) on the same basis as is in effect on the date hereof. 5. No Withholding. Because Cargile is retained as an independent contractor and not as an employee, the Company and Cargile acknowledge and agree that no federal and state taxes or social security contributions shall be made by the Company from the payments made to Cargile pursuant to Section 3, and that Cargile will remain solely liable for the payment of all such taxes. Cargile further acknowledges that the Company will report compensation paid pursuant to this Agreement on a Form 1099 at the end of the year 2000. 6. Continuation of Employment. Nothing contained in this Agreement shall be construed to create or imply any contract of employment between Cargile and the Company, to confer upon Cargile any right to continue in the employ of the Company (either before or after the Offer is consummated) or to confer on the Company any right to require Cargile's continued employment. 7. Nonsolicitation. Cargile hereby covenants that during the term of this Agreement he will not, directly or indirectly, (i) solicit or engage in any discussions relating to the hiring of any Company employee to become an employee of any other trade or business or as a consultant to any other trade or business or (ii) solicit or engage in any discussions with any person or entity to terminate such person's contractual and/or business relationship with the Company. 8. Confidentiality. Cargile agrees that during the Term of this Agreement, he will not disclose to any person, or otherwise use or exploit, any proprietary or confidential information, including without limitation trade secrets, customer lists, proposals, reports, methods, processes, techniques, computer software or programming, budgets or other financial information or non-public information, regarding the Company, its business, properties or affairs, obtained by Cargile at any time during Cargile's employment by the Company, except to the extent necessary in the performance of his duties for the Company. This Section 8 shall not apply to information that is in the public domain, information that is generally known in the insurance industry, or information that Cargile can demonstrate he acquired independently of his employment with or in rendering Services to the Company. 9. Indemnification. The Company shall indemnify Cargile to the same extent and subject to the same limitations as if he was an officer or employee of the Company with respect to any work undertaken by Cargile at the Company's request under this Agreement. 10. Notices. All notices, demands or other communications provided for in this Agreement shall be in writing and shall be delivered during normal business hours by hand, by Federal Express, United Parcel Service or other reputable overnight delivery service, by telecopy (confirmation of receipt received), or by United States mail, certified or registered, return receipt requested, and shall be deemed delivered when so delivered by hand, overnight delivery or telecopy, or if mailed five days after the date of mailing, properly addressed as follows: If to the Company: If to Cargile: The Centris Group, Inc. David L. Cargile 650 Town Center Drive 26231 Mount Diablo Road Costa Mesa, CA 92626 Laguna Hills, CA 92653 Attn: Chief Executive Officer Telecopy: (949) 831-2123 Telecopy: (714) 549-1600
or such other address as either party may have furnished to the other in writing in accordance herewith. 11. Miscellaneous. No provisions of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by Cargile and the Company. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or 2 3 dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement. 12. Governing Law. This Agreement shall be governed by and construed in accordance with the internal laws, and not the laws pertaining to choice or conflicts of laws, of the State of California. 13. Validity. The invalidity or unenforceability of any provisions of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 14. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 15. Legal Fees and Expenses. It is the intent of the Company that Cargile not be required to incur any legal fees or disbursements associated with the enforcement of his rights under this Agreement. The Company or its successor shall pay or cause to be paid and shall reimburse Cargile for any and all reasonable attorneys' and related fees and expenses so incurred by Cargile. 16. Successors. The parties expressly agree that this Agreement shall be binding upon and inure to the benefit of their respective subsidiaries, affiliated companies, heirs, administrators, successors and assigns, as applicable. 17. Modification. The parties understand and agree that this Agreement may not be altered, amended, modified, or otherwise changed in any respect or particular whatsoever except in writing duly executed by each of the Parties or their authorized representatives. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. THE CENTRIS GROUP, INC. By: /s/ JOSE A. VELASCO ------------------------------------ Name: Jose A. Velasco Title: Senior Vice President, Chief Operations Officer, Secretary and General Counsel CARGILE By: /s/ DAVID L. CARGILE ------------------------------------ David L. Cargile 3 EX-7 8 PROVISIONS REGARDING INDEMNIFICATION OF DIRECTORS 1 EXHIBIT 7 EXCERPT FROM RESTATED CERTIFICATE OF INCORPORATION NINTH: A. Each person who was or is made a party or is threatened to be made a party to or is involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative ("proceeding"), by reason of the fact that he or she, or a person of whom he or she is the legal representative, is or was a director or officer of this Corporation or is or was serving at the request of this Corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, whether the basis of such proceeding is alleged activity in an official capacity as a director, officer, employee or agent or in any other capacity while serving as a director, officer, employee or agent, shall be indemnified and held harmless by this Corporation to the fullest extent authorized by the General Corporation Law of Delaware, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits this Corporation to provide broader indemnification rights than said Law permitted this Corporation to provide prior to such amendment) against all expenses, liability and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by such person in connection with any such proceeding and such indemnification shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of his or her heirs, executors and administrators; provided, however, that this Corporation shall indemnify any such person seeking indemnity in connection with a proceeding (or part thereof) initiated by such person only if such proceeding (or part thereof) was authorized by the board of directors of this Corporation. Such right shall be a contract right and shall include the right to be paid by this Corporation expenses incurred in defending any such proceeding in advance of its final disposition; provided however, that if the Delaware General Corporation Law requires the payment of such expenses incurred by a director or officer in his or her capacity as a director or officer (and not in any other capacity in which service was or is rendered by such person while a director or officer, including, without limitation, service to an employee benefit plan) in advance of the final disposition of such proceeding, it shall be made only upon delivery to this Corporation of an undertaking, by or on behalf of such director or officer, to repay all amounts so advanced if it should be determined ultimately that such director or officer is not entitled to be indemnified under this Article or otherwise. B. If a claim under section A. is not paid in full by this Corporation within ninety (90) days after a written claim has been received by this Corporation, the claimant may at any time thereafter institute a proceeding against this Corporation to recover the unpaid amount of the claim and, if successful in whole or in part, the claimant shall be entitled to be paid also the expense of prosecuting such proceeding. It shall be a defense to any such proceeding (other than a proceeding brought to enforce a claim for expenses incurred in defending any proceeding in advance of its final disposition where the required undertaking, if any, has been tendered to this Corporation) that 2 the claimant has not met the standards of conduct which make it permissible under the General Corporation Law of Delaware for this Corporation to indemnify the claimant for the amount claimed, but the burden of proving such defense shall be on this Corporation. Neither the failure of this Corporation (including its board of directors, independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such proceeding that indemnification of the claimant is proper in the circumstances because he or she has met the applicable standard of conduct set forth in the General Corporation Law of Delaware, nor an actual determination by this Corporation (including its board of directors, independent legal counsel, or its stockholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the proceeding or create a presumption that claimant has not met the applicable standard of conduct. C. The rights conferred on any person by sections A. and B. shall not be exclusive of any other right which such person may have or hereafter acquire under any statute, provision of this Restated Certificate of Incorporation, by- law of this Corporation, agreement, vote of stockholders or disinterested directors or otherwise. D. This Corporation may maintain insurance, at its expense, to protect itself and any such director, officer, employee or agent of this Corporation or another corporation, partnership, joint venture, trust or other enterprise against any such expense, liability or loss, whether or not this Corporation would have the power to indemnify such person against such expense, liability or loss under the Delaware General Corporation Law. TENTH: A director of this Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under section 174 of the Delaware General Corporation Law, or (iv) for any transaction from which the director derived an improper personal benefit. Any repeal or modification of the foregoing paragraph by the stockholders of the Corporation shall not adversely affect any right or protection of a director of the Corporation existing at the time of such repeal or modification. 3 EXCERPT FROM BY-LAWS ARTICLE VIII - INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 1. Right to Indemnification. Each person who was or is made a party or is threatened to be made a party to or is involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative ("proceeding"), by reason of the fact that he or she or a person of whom he or she is the legal representative, is or was a director or officer of the Corporation or is or was serving at the request of the Corporation as a director or officer, employee or agent of another corporation, or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, whether the basis of such proceeding is alleged activity in an official capacity as a director, officer, employee or agent or in any other capacity while serving as a director, officer, employee or agent, shall be indemnified and held harmless by the Corporation to the fullest extent authorized by the Delaware General Corporation Law, as the same exists or may hereafter be amended, (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than said Law permitted the Corporation to provide prior to such amendment) against all expenses, liability and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by such person in connection with any such proceeding and such indemnification shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of his or her heirs, executors and administrators; provided, however, that the Corporation shall indemnify any such person seeking indemnity in connection with a proceeding (or part thereof) initiated by such person only if such proceeding (or part thereof) was authorized by the Board of Directors of the Corporation. Such right shall be a contract right and shall include the right to be paid by the Corporation expenses incurred in defending any such proceeding in advance of its final disposition; provided, however, that, if the Delaware General Corporation Law requires, the payment of such expenses incurred by a director or officer of the Corporation in his or her capacity as a director or officer (and not in any other capacity in which service was or is rendered by such person while a director or officer, including, without limitation, service to an employee benefit plan) in advance of the final disposition of such proceeding, shall be made only upon delivery to the Corporation of an undertaking, by or on behalf of such director or officer, to repay all amounts so advanced if it should be determined ultimately that such director or officer is not entitled to be indemnified under this Section or otherwise. EX-8 9 SELECTED PAGES OF THE COMPANY'S PROXY STATEMENT 1 EXHIBIT 8 EXCERPTS FROM PROXY STATEMENT Compensation of Directors Directors who are also full-time employees of the Company receive no additional compensation for their services as directors. Non-employee directors are paid an annual retainer of $12,500 and a fee of $3,000 for each meeting of the Board attended ($1,000 for telephonic meetings). Such directors are also paid a fee of $1,000 for each Committee meeting ($1,500 for Committee Chairmen). In addition, directors are reimbursed for reasonable out-of-pocket expenses incurred by them in connection with their attendance at Board and Committee meetings. Non-employee directors are also entitled to receive stock option awards under the Company's Amended and Restated 1991 Directors Stock Option Plan, which was approved by stockholders in 1996. Under this Plan, on the third business day following each annual meeting, each non-employee director is automatically granted an award of options covering between 6,000 to 9,000 shares of common stock, with the number of options actually granted determined in accordance with a formula related to the Company's return on equity for the prior fiscal year. Based on the Plan formula, each of the non-employee directors will receive an option grant for 6,000 shares following the 1999 Annual Meeting, with an exercise price which will be the closing price of the Company's stock on the New York Stock Exchange on Monday, May 17, 1999. Those directors who are also employees of the Company may be entitled to additional compensation in their capacity as employees to the extent that they participate in the Company's short-term and long-term incentive compensation plans, as described elsewhere in this Proxy Statement. 2 THE CENTRIS GROUP, INC. Compensation Committee Of The Board Of Directors Report On Executive Compensation General The Compensation Program of The Centris Group, Inc. for the 1998 fiscal year consisted of three components: annual cash salaries, discretionary cash bonuses under its Incentive Compensation Program and discretionary long-term awards (a Stock Option Plan and a Long-Term Incentive Plan). Base salaries of all employees, except for the Chief Executive Officer, are generally set in accordance with the Company's Salary Administration Program which provides a framework for determining an employee's salary level. This determination is based upon a variety of factors that include job function, expertise, experience and the competitive placement of each position relative to other companies whose business operations are similar. Management of the Company establishes the base salaries for those employees who are below the level of the senior officers, while the salaries of the senior officers are established by the Compensation Committee on the recommendation of the Chief Executive Officer. The Company's Salary Administration Program was prepared with input from an independent, nationally known compensation consultant and is periodically updated with information on salary levels for companies of a generally similar size from various sources, including salary surveys and analyses presented by the independent compensation consultant. The cash bonus amount which an eligible participant can receive under the Incentive Compensation Program depends on the component of the Incentive Compensation Program in which each person participates, the extent to which the Company meets a predetermined net income target for the respective year, and the participant's job performance for that year as determined by each participant's supervisor. Payments of bonuses below the level of senior officers are made at the discretion of the Chief Executive Officer. The Compensation Committee is required to approve the total amount of all bonus payments (excluding the Chief Executive Officer) under the Incentive Compensation Program. The Compensation Committee specifically approves the bonus payments and awards under the Company's employee Stock Option Plan and Long-Term Incentive Plan for each of the senior officers, based upon recommendations from the Chief Executive Officer. The salary, bonus payments, Stock Options and Long-Term Incentive Plan awards for the Chief Executive Officer are determined by the Compensation Committee and recommended to the full Board, which may adopt, modify or reject such recommendations. Directors who are also employees do not participate in the discussions or vote on matters affecting any aspect of their own compensation. Compensation Policies for Executives The goals of the Company's Compensation Program have been to further the Company's business objectives, and at the same time to attract and retain high quality executives and to equitably reward individuals who contribute to the Company's success. This approach seeks to link executive compensation with achievement of profitability goals and the strategic goal of enhancing stockholder value by tying the value of some part of the senior executives' compensation to the Company's long-term performance. Base Salaries. The Company provides executive officers with salaries which are generally in the third highest quartile of the range of competitive salaries paid to executives of companies in similar sectors of the insurance industry. The Company periodically updates 3 information on executive salary levels for companies of a generally similar size presented by the Company's independent compensation consultant. Executive officers are evaluated on March 1 of each year, and any adjustments to their salaries are effective as of that date. Annual Bonuses. Generally awards under the Incentive Compensation Program are contingent on achievement of a Company net after-tax income target, which is established in advance each year by the Compensation Committee. Bonuses are awarded following the end of each year, after the Company's year-end results have been determined. Under the Incentive Compensation Program, the Compensation Committee has full discretionary authority with respect to bonus awards. Therefore, if the Company's net income target is reached, the bonus award may be less than the target amount for any executive; if the Company's net income target is not met, the Compensation Committee has the authority to grant bonuses to executives. While the Company did not meet its net income target for 1998, bonuses ranging between 4% to 14% of their annual salaries were paid to certain senior executives. The Committee concluded that payment of a limited amount of bonuses was appropriate in light of significant efforts by senior executives to reposition the Company, including the successful completion of the acquisition of the VASA Group of companies. The Committee's decisions were based upon recommendations from the Chief Executive Officer as a result of his evaluation of each executive's overall performance and the results of the operations under the executive's direction as compared to the Company's business plan for 1998. Long-term Incentive Plans. The Company has adopted a Long-Term Incentive-Performance Unit Plan ("LTI-Plan") and a Non-Qualified Deferred Compensation Plan. The LTI-Plan was approved by the Company's stockholders at the 1997 Annual Meeting, and both of these Plans were first implemented for fiscal year 1997. The LTI-Plan provides for cash payment awards which qualify as performance based compensation under Section 162(m) of the Internal Revenue Code. Under the LTI-Plan, a target number of performance units are assigned to key employees at the beginning of a three-year performance period, but the actual number of performance units awarded to the participant is determined after the close of the performance period. The first performance period began on January 1, 1997 and ends on December 31, 1999. New three-year performance periods begin annually, each January 1. Each performance unit assigned in the three-year performance periods beginning in 1997 and 1998 had a value of $10. Awards are based upon the Company meeting pre-determined annual return on equity (ROE) targets, and for purposes of the Plan ROE is calculated as the average return on equity over the three-year performance period. The Company must meet a minimum level of ROE over the three year period before actual awards, which require Committee approval, will be made to the participants. Payouts of awards under the Plan are automatically deferred into the Non-Qualified Deferred Compensation Plan and vest over a two year period. The Chief Executive Officer has the authority, subject to approval by the Committee and the Board and in conformity with the non-discretionary requirements of Section 162(m) of the Internal Revenue Code, to adjust a participant's payout to take into account strategic and financial events or conditions, including, but not limited to, recognizing a participant's business unit's results for the performance period. In addition, in 1997 the Compensation Committee adopted stock option grant guidelines which are also aimed at more closely tying executive compensation and incentives to long-term performance. Under these guidelines, senior executives may be awarded options at 4 predetermined target levels which are generally based upon their position in the Company. The number of options awarded is determined by the Compensation Committee after receiving recommendations from the Chief Executive Officer, based on his evaluation of the Company's and the executive's performance during the prior fiscal year. While option grants are considered by the Committee in March of each year based on the prior year's results, no options were granted to the senior executives in March 1999 applicable to their performance in the 1998 fiscal year. Compensation of Chief Executive Officer David L. Cargile, the Company's Chairman, President and Chief Executive Officer, serves under an employment agreement entered into in November 1996, the terms of which are described in "Employment Agreements With Named Executives" elsewhere in this Proxy Statement. This agreement provides for an annual base salary that can be increased and supplemented at the discretion of the Board of Directors. Mr. Cargile's compensation, based on 1998 results, was reviewed by the Committee in March 1999. The Committee's compensation decisions for Mr. Cargile reflect its view of his contribution in revitalizing the Company after he assumed responsibilities for its operations in August 1994. Under his leadership and initiative since that date, the Company has demonstrated meaningful growth and improvement in its financial results--including its revenues, income, its total assets, return on equity, stockholders' equity, book value, stockholder dividends and its stock price. Furthermore, under Mr. Cargile's direction and pursuant to his plan, during 1998 the Company completed the acquisition of the VASA Group of companies, including its medical stop-loss operations and insurance subsidiaries. This transaction permitted the Company to re-allocate its assets by discontinuing its property/casualty reinsurance operations and transferring the reinsurance of the medical stop-loss business to the newly acquired insurance subsidiaries. The Committee believes that these actions will strengthen the Company's capital base and stabilize earnings going forward by increasing the Company's non-risk fee income and reducing its exposure to losses from natural catastrophes. The Committee reviewed all the foregoing factors in determining the compensation of the Company's Chief Executive Officer. The factors were not assigned specific weight by members of the Committee, but rather were weighed subjectively by each member. In light of the foregoing, the Compensation Committee concluded that an increase in Mr. Cargile's compensation as the Company's Chief Executive Officer was appropriate considering his level of responsibility, his leadership abilities, his contributions to the continued growth of the Company and the focus and direction which he provided. The Committee then explained to the Board the basis for its decisions, and the Board concurred in the Committee's recommendations. Accordingly, Mr. Cargile was given a 5% salary increase and assigned 15,785 performance units as his target under the Company's LTI-Plan for the 1998-2000 performance period. However, at Mr. Cargile's specific request, no bonus award or option grant was made to Mr. Cargile applicable to fiscal year 1998. 5 Deductibility of Executive Compensation The 1993 Omnibus Budget Reconciliation Act ("OBRA") provides that the income tax deductions of publicly traded companies in tax years beginning on or after January 1, 1994 may be limited to the extent total compensation (including base salary, annual bonus, stock option exercises and nonqualified benefits) for certain executive officers exceeds $1,000,000 in any one year. Under OBRA, the deduction limit does not apply to payments which meet certain requirements to qualify as "performance-based" compensation. The Compensation Committee intends to consider various alternatives to preserve the deductibility of compensation payments to the extent it is reasonably practicable and consistent with its other objectives. In this connection, the Company has obtained stockholder approval of the Company's 1997 Long-Term Incentive-Performance Unit Plan, and intends to operate the Plan within the requirements of Section 162(m) of the Internal Revenue Code to preserve the corporate deductibility of executive compensation. The Company may, however, pay compensation which is not deductible in limited circumstances when sound management of the Company so requires. The Committee believes that if any loss of deductibility occurs it would not be materially adverse to the Company. For fiscal year 1998, no executive officer's taxable compensation exceeded the $1,000,000 limit on deductibility. Compensation Committee L. Steven Medgyesy, M.D. (Chairman)(/1/) Charles L. Schultz Roxani M. Gillespie - --------- (1) Bernard H. Ross was Chairman of the Compensation Committee until his death in November, 1998. The above Report of the Compensation Committee will not be deemed to be incorporated by reference into any filing by the Company under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that the Company specifically incorporates the same by reference. Compensation Committee Interlocks And Insider Participation The members of the Compensation Committee during 1998 were Bernard H. Ross (Chairman until his death in November, 1998), Dr. L. Steven Medgyesy, Charles L. Schultz and Roxani M. Gillespie. Ms. Gillespie was appointed to replace Kenneth C. Tyler, who resigned as a director in April 1998. All of the directors who served on the Compensation Committee during 1998 were non-employee directors. 6 COMPENSATION OF EXECUTIVE OFFICERS Summary Compensation Table* The following table provides information concerning all compensation paid or credited by the Company to the Named Executives for services rendered to the Company and its subsidiaries in all capacities attributable to the fiscal years ended December 31, 1998, 1997 and 1996.
LONG-TERM COMP ------------------------------- No. of ANNUAL COMEPNSATION Securities --------------------------------------------- Underlying Other Annual Options All Other Comp Name and Principal Position Fiscal Year Salary Bonus (/1/) Comp Granted (/2/) (/3/) - --------------------------- ----------- ------ ----------- ------------ ------------- -------------- David L. Cargile** 1998 $449,435 -0- (/4/) -0- $258,813 (/5/) President, and Chief 1997 $437,601 $300,000 (/4/) 60,000 $260,165 (/5/) Executive Officer 1996 $411,825 $280,000 (/4/) 45,000 $187,400 (/5/) Howard S. Singer** 1998 $237,989 -0- (/4/) -0- $ 17,553 Executive Vice President-- 1997 $233,054 $ 47,500 (/4/) 27,200 17,376 Corporate Finance 1996 $225,914 $ 56,818 (/4/) 24,000 9,000 and Investor Relations John T. Grush 1998 $293,973 -0- (/4/) -0- $ 21,576 Senior Vice President and 1997 $291,646 $ 65,000 (/4/) 28,800 $ 20,885 President of USF RE 1996 $291,646 $ 58,309 (/4/) 24,000 $ 20,213 Craig J. Kelbel** 1998 $244,804 $ 10,000 (/4/) -0- $ 17,253 Senior Vice President and 1997 $239,349 $ 25,000 (/4/) 27,200 $ 18,251 President of USBenefits 1996 $229,793 $ 69,459 (/4/) 24,000 $ 12,562 Insurance Services, Inc. Jose A. Velasco 1998 $218,750 $ 20,000 (/4/) -0- $ 15,921 Senior Vice President, Chief 1997 $202,312 $ 61,000 (/4/) 32,000 $ 15,490 Administrative Officer, 1996 $175,380 $ 53,165 (/4/) 24,000 $ 15,816 Secretary and General Counsel
* The Company has excluded from the Summary Compensation Table the columns relating to awards of Restricted Stock (column "f") and Long-Term Incentive Plan Payouts (column "h") because no such awards or compensation were earned by or paid to the Named Executives in the fiscal years covered by the table. ** The compensation paid to Messrs. Cargile, Singer and Kelbel during 1998 was pursuant to employment agreements described under "Employment Agreements With Named Executives" elsewhere in this Proxy Statement. 7 (1) Cash bonus awards under the Company's Incentive Compensation Program (the "Incentive Program") are paid in the first quarter of the year and represent payment for services performed in the prior fiscal year. Accordingly, the table shows the bonus amounts in the year to which they are applicable. The gross amounts paid to all participants under the Incentive Program applicable to fiscal years 1998, 1997 and 1996 were $308,127, $1,085,500 and $1,240,000, respectively. (2) Similar to cash bonus payments described in note (1) above, options granted in the first quarter of each year were for services performed by the executive during the prior fiscal year, and the table indicates the years to which such option grants are applicable. (3) Each of the Named Executives was credited with $10,000 for 1998, $9,500 for 1997 and $9,000 for 1996 as the Company's matching contribution to such executive's participation in the Company's 401(k) Employees Savings Plan. The balance of the amount shown for each year in column (i) for these executives was the Company's matching payment to the executive's voluntary contribution to the Company's Non-Qualified Deferred Compensation Plan, plus interest paid by the Company on the funds in the executive's account under the Non-Qualified Deferred Compensation Plan, except for Mr. Cargile who also received the additional compensation described in Note (5) below. (4) The Company also provides its executive officers health and group term-life insurance and other benefits generally available to all salaried employees, and certain additional noncash benefits, including club memberships and the use and maintenance of automobiles, which benefits in no individual case have an aggregate incremental cost to the Company which exceeds the lesser of $50,000 or 10% of that individual's total salary and bonus as reported in the "Summary Compensation Table." See also "Employment Agreement With Named Executives" elsewhere in this Proxy Statement for compensation payments to Mr. Cargile, Mr. Singer and Mr. Kelbel (or their named beneficiaries) in the event of their disability or death during the term of their employment agreements. (5) As a result of the loan forgiveness arrangement and the additional income taxes incurred as a part of Mr. Cargile's relocation in 1995 from Atlanta, Georgia, to Southern California, as required by the Company (see "Employment Agreements With Named Executives" elsewhere in this Proxy Statement), Mr. Cargile received additional compensation of $248,813 attributable to 1998, $213,357 attributable to 1997 and $178,400 attributable to 1996. Option Grants in Last Fiscal Year The upper table provides information on stock option grants made in March 1998 to the Named Executives under the Company's 1991 Employee Stock Option Plan based upon the performance of the Named Executives during the 1997 fiscal year. No option grants were made to the Named Executives in March 1999 applicable to their 1998 performance. The lower table also illustrates the comparable potential appreciation in value over a 5-year period of stock held by the Company's stockholders as a group, and by a unit of 1,000 shares, from the value of the 8 Company's common stock of $9.75 per share, which was the closing price of the stock on the New York Stock Exchange on December 31, 1998.
INDIVIDUAL GRANTS (Adjusted to reflect 100% stock split) -------------------------------------------------------------------- POTENTIAL REALIZABLE % of Total VALUE AT ASSUMED No. of Options ANNUAL RATES OF STOCK Securities Granted to All PRICE APPREC FOR OPTION Underlying Employees in TERM (5-YR PERIOD) (/2/) Options Last Fiscal Yr Exercise or ------------------------ Granted (/1/) (/1/) Base Price (/1/) Expiration Date 5% 10% ------------- -------------- ---------------- --------------- -- --- David L. Cargile 60,000 12.11% $12.38 03/24/08 $ 466,944 $ 1,183,354 Howard S. Singer 27,200 5.49% $12.38 03/24/08 $ 211,868 $ 536,454 John T. Grush 28,800 5.81% $12.38 03/24/08 $ 224,138 $ 568,010 Craig J. Kelbel 27,200 5.49% $12.38 03/24/08 $ 211,868 $ 536,454 Jose A. Velasco 32,000 6.46% $12.38 03/24/08 $ 249,042 $ 631,122 POTENTIAL GAIN FOR STOCKHOLDERS AT RATE OF ------------------ All Stockholders N/A N/A N/A N/A $90,168,636 $219,816,827 Per 1,000 Shares N/A N/A N/A N/A $ 90,168 $ 219,816
(1) All options granted to the Named Executives on March 25, 1998 were applicable to services performed by them during fiscal year 1997. The exercise price of the options, $12.38, was the closing price of the Company's common stock on March 25, 1998, on the New York Stock Exchange. (2) The information set forth in columns (f) and (g) is at an assumed annual rate of appreciation over the 5-year period, commencing at the option grant date. The appreciation figures set forth are net of the option exercise price, but before taxes associated with the option exercise. These figures should not be viewed in any way as a forecast of actual results of the future performance of the Company's stock, which will be determined by unknown future events and factors, including market conditions as well as the option holders' continued employment throughout the option vesting period. 9 Option Exercises And Year-End Value Table The following table provides information with respect to stock options assigned to the Named Executives in prior years under the Company's 1988 Employee Stock Plan and its 1991 Employee Stock Option Plan, specifically showing: (i) the number and value of shares acquired by the Named Executives upon exercise of options during the 1998 fiscal year; and (ii) the number and value of exercisable and unexercisable options held at December 31, 1998.
NO. OF SECURITIES UNDERLYING No. of UNEXERCISED OPTIONS HELD AT VALUE OF UNEXERCISED IN-THE-MONEY Shares Value 12/31/98 OPTIONS (/1/) HELD AT 12/31/98 Acquired on Realized on ----------------------------- --------------------------------- Name Exercise Exercise Exercisable Unexercisable Exercisable Unexercisable - ---- ----------- ----------- ----------- ------------- ----------- ------------- David L. Cargile -0- -0- 402,500 82,500 $957,000 -0- Howard S. Singer -0- -0- 45,000 39,200 $ 71,500 -0- John T. Grush -0- -0- 48,000 40,800 $ 82,500 -0- Craig J. Kelbel -0- -0- 26,000 39,200 -0- -0- Jose A. Velasco -0- -0- 45,000 44,000 $ 71,500 -0-
(1) Based on the closing price of the common stock of $9.75 at December 31, 1998 on the New York Stock Exchange, minus the exercise price of the option. Long-Term Incentive Plan--Awards for the Three-Year Performance Period Commencing January 1, 1998 As approved by stockholders at the 1997 Annual Meeting, the Company's Long-Term Incentive--Performance Unit Plan ("LTI-Plan") provides for cash payment awards intended to qualify as performance-based compensation to satisfy the requirements of Section 162(m) of the Internal Revenue Code. Under the LTI-Plan performance units are assigned to each participant at the beginning of a three-year performance period. The number of performance units actually awarded to a participant is determined at the close of the three-year period, based upon: (i) the Company meeting a certain pre-determined average return on equity over the three-year performance period; and (ii) the participant's performance over the performance period relative to the target performance. New three-year performance periods begin annually each January 1 until the LTI-Plan is terminated. The Board of Directors has discretion to make certain awards under the LTI-Plan if the return on equity target thresholds are not met. All payments earned by participants under the LTI-Plan will automatically be deferred into the Company's Non-Qualified Deferred Compensation Plan, which provides for a vesting of the payouts over a two-year period. The following table sets forth the number of units assigned to each of the Named Executives under the LTI-Plan for the three-year performance period of 1998-2000. Each performance unit has a value of $10. As noted above, no awards are made under the LTI-Plan 10 until the end of the performance period, and such awards are dependent upon the achievement of pre-determined performance target levels.
Performance or Other ESTIMATED FUTURE PAYOUTS Period Until UNDER NON-STOCK PRICE-BASED PLANS Maturation or -------------------------------------------------- Name No. of Units Payout Threshold Target Maximum - ---- ------------ ------------- --------- ------ ------- David L. Cargile 15,785 3 years $78,925 $157,800 $236,775 Howard S. Sinder 5,969 3 years $29,845 $ 59,690 $ 89,535 John T. Grush 7,361 3 years $36,810 $ 73,620 $110,430 Craig J. Kelbel 6,140 3 years $30,700 $ 61,400 $ 92,100 Jose A. Velasco 5,513 3 years $27,565 $ 55,130 $ 82,695
Employment Agreements With Named Executives David L. Cargile. Mr. Cargile serves as the Company's President and Chief Executive Officer pursuant to a four-year employment agreement entered into in November 1996. This agreement provides for a base annual salary which was $449,435 for the 1998 calendar year, a discretionary cash bonus, and certain other benefits. The Company can terminate Mr. Cargile's employment at any time without cause by paying him 150% of the salary due to him under the remaining term of his employment agreement. In the event of his death or disability Mr. Cargile (or his beneficiary) will be paid the greater of the amount of his then current compensation remaining due for the term of the employment agreement or one (1) year's salary. In connection with his employment and the Company's requirement that he move from Atlanta, Georgia to Southern California, in July 1995 the Company granted to Mr. Cargile a $649,000 interest-bearing loan for the purchase of a residence, secured by a trust deed on that residence. Of that principal amount, $414,765 is being forgiven by a credit on the loan by the Company over a 60-month period. Additionally, the full amount of the loan will be forgiven if Mr. Cargile's employment terminates for any reason. As of February 28, 1999, $363,262 of the principal amount of the above-noted loan was outstanding. In addition, the Company agreed to pay to Mr. Cargile such additional amount as is required to compensate him for the additional state and federal taxes due which will arise as a result of the credit he will receive against the loan balance, and for the increase in state taxes Mr. Cargile will experience as a California resident as contrasted with the state taxes he would have otherwise paid as a resident of Georgia. (See Note (5) to "Summary Compensation Table" elsewhere in this Proxy Statement.) Howard S. Singer. Pursuant to a four-year employment agreement entered into in December 1996, Mr. Singer serves as the Executive Vice President of the Company at a base annual salary which was $238,091 for the 1998 calendar year, a bonus as may be granted by the Board, and certain other benefits. He is also entitled to a one-time "piggyback" registration right at no cost to him with respect to Company stock owned by Mr. Singer. The Company can terminate Mr. Singer's employment at any time without cause by paying him 150% of the salary due to him under the remaining term of his employment agreement. In the event of his death or disability Mr. Singer (or his beneficiary) will be paid the greater of the amount of his then current compensation remaining due for the term of the employment agreement or one (1) year's salary. Craig J. Kelbel. Mr. Kelbel entered into a three-year employment agreement with the Company in November 1996 to serve in the positions of President and Chief Operating Officer of USBenefits and as a Senior Vice President of the Company at a base annual salary which was $244,804 for the 1998 calendar year, and certain other benefits. The Company can terminate Mr. Kelbel's employment at any time without cause by paying him 100% of the salary due to him 11 under the remaining term of his employment agreement. In the event of his death or disability Mr. Kelbel (or his beneficiary) will be paid the amount of his then current compensation for a period of one (1) year. Change in Control Agreements. The Company has entered into severance agreements with the Named Executives. Under these agreements, if their employment is terminated by the Company (other than for cause) or is terminated by the executive "for good reason" within two years after a "change in control" of the Company, as those terms are defined in the severance agreements, each of these executives (other than Mr. Cargile) would be entitled to receive a payment of two years annual salary plus an amount equal to the largest annual cash bonuses received during their employment as well as a continuation for two years of life and medical insurance benefits. Mr. Cargile would receive three years annual salary plus one-and-one-half times his largest annual cash bonus, as well as the other benefits noted above. All of these agreements further state that if any executive has an employment agreement which also provides for payments upon termination, the executive will receive payments either under the severance agreement or the employment agreement, whichever payment is greater, but may not receive payments under both agreements. As defined in the severance agreements, a "change in control" includes, under specific circumstances, a merger of the Company with another company which results in a 50% change of the combined voting power of the Company's securities or the sale of more than 50% of the Company's assets or, under certain circumstances, the beneficial ownership by any person of more than 10% of the Company's equity securities. RELATED TRANSACTIONS As described above under "Employment Agreements With Named Executives," in July 1995 the Company made a loan to Mr. Cargile in the amount of $649,000 in connection with the purchase of his principal residence in Southern California, a portion of which loan is being forgiven over a 60-month period. As of February 28, 1999, a principal amount of $363,262 of this loan was outstanding. -----END PRIVACY-ENHANCED MESSAGE-----