SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
(Amendment No. )
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/X/ Preliminary Proxy Statement
/_/ Definitive Proxy Statement
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/_/ Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
HOME STATE HOLDINGS, INC.
- --------------------------------------------------------------------------------
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Home State Holdings, Inc.
3 South Revmont Drive
Shrewsbury, New Jersey 07702
May __, 1997
Dear Fellow Stockholder:
You are cordially invited to attend the 1997 Annual Meeting of
Stockholders of Home State Holdings, Inc., to be held on Wednesday, June 11,
1997, beginning at 9:00 a.m. local time at the Sheraton Eatontown Hotel &
Conference Center, Route 35 and Industrial Way East, Eatontown, New Jersey
07724. Your Board of Directors looks forward to personally greeting those
stockholders who are able to attend.
Information about the meeting and the various matters on which the
stockholders will vote is included in the Notice of Meeting and Proxy Statement
which follow. Also included is a Proxy Card and postage-paid return envelope.
No matter how many shares you own, please sign, date and mail the enclosed
Proxy Card in the return envelope provided. Your vote is important! Whether you
plan to attend the meeting or not, please complete and return your Proxy Card as
promptly as possible.
Sincerely,
Mark S. Vaughn
President and CEO
HOME STATE HOLDINGS, INC.
Notice of Annual Meeting of Stockholders
To Be Held June 11, 1997
The Annual Meeting of Stockholders of Home State Holdings, Inc. will be
held at the Sheraton Eatontown Hotel & Conference Center, Route 35 & Industrial
Way East, Eatontown, New Jersey 07724, on Wednesday, June 11, 1997, at 9:00 a.m.
local time, for the following purposes:
(1) To elect three Class I directors to hold office for three years
and until their respective successors are elected and qualified. The Board
of Directors intends to nominate as Directors the three persons identified
in the accompanying Proxy Statement.
(2) To consider and vote on a proposal to amend the Company's
Certificate of Incorporation to, among other things, facilitate the
election of those Directors which may be designated by the holders of the
Company's Series A Preferred Stock and to give the holders of Series A
Preferred Stock class voting rights on certain matters.
(3) To consider and vote upon a proposal to ratify the appointment
of Coopers & Lybrand L.L.P. as auditors for the fiscal year ending
December 31, 1997.
(4) To transact such other business as may properly come before the
Meeting or any adjournment thereof.
The Board of Directors has fixed April 25, 1997 as the Record Date for
determining the stockholders entitled to receive notice of and to vote at the
meeting.
STOCKHOLDERS ARE CORDIALLY INVITED TO ATTEND THE MEETING IN PERSON.
PLEASE COMPLETE, SIGN AND DATE THE ACCOMPANYING PROXY CARD AND RETURN IT
PROMPTLY IN THE ENCLOSED POSTAGE-PAID ENVELOPE REGARDLESS OF WHETHER YOU PLAN TO
BE PRESENT IN PERSON AT THE ANNUAL MEETING.
By Order of the Board of Directors
Michael H. Monier,
Chairman of the Board and Secretary
May __, 1997
3 South Revmont Drive
Shrewsbury, New Jersey
(908) 935-2600
HOME STATE HOLDINGS, INC.
PROXY STATEMENT
May _, 1997
This Proxy Statement is furnished in connection with the solicitation by
the Board of Directors of Home State Holdings, Inc., 3 South Revmont Drive,
Shrewsbury, New Jersey 07702 (the "Company"), of your proxy for use at the
Annual Meeting of Stockholders to be held on June 11, 1997, or at any
adjournment thereof (the "Meeting"). This Proxy Statement and the accompanying
proxy card are being mailed to stockholders on or about May __, 1997. The
expense of the solicitation will be paid by the Company. Some officers and
regular employees of the Company may solicit proxies personally and by
telephone. Your proxy is revocable by written notice to the Secretary of the
Company at any time prior to exercise, and it shall be suspended if you are
present at the meeting and elect to vote in person.
As of the close of business on April 25, 1997, the Record Date fixed by
the Board of Directors, the Company had outstanding 5,660,000 shares of Common
Stock and 10,000 shares of Series A Cumulative Voting Preferred Stock ("Series A
Preferred Stock"). A majority of the outstanding shares of Common Stock and
Series A Preferred Stock, voting together as a class, will constitute a quorum
at the Meeting.
The required vote for the election of Class I Directors (Proposal 1) is
the affirmative vote of a plurality of the shares present in person or
represented by proxy at the Meeting and entitled to vote on the election of
Class I Directors. The required vote on the amendment of the Company's
Certificate of Incorporation (Proposal 2) is the affirmative vote of a majority
of the Company's outstanding Common Stock and Preferred Stock, voting together
as a class. The required vote on the proposal to ratify the appointment of
Coopers & Lybrand L.L.P. (Proposal 3) and any other matter that may be submitted
to the stockholders is the affirmative vote of a majority of the shares present
in person or represented by proxy at the meeting and entitled to vote on the
matter submitted.
Consistent with applicable state law and the Company's Certificate of
Incorporation and By-Laws, the Company will count all shares represented by
proxy or in person at the Meeting for purposes of determining a quorum. Shares
represented by proxies or voted in person on ballots marked "ABSTAIN" on any
proposal will be treated as shares present or represented at the Meeting for
purposes of such proposal. Shares held in "street name" by brokers but not voted
by such brokers, for any reason, on a particular matter (so-called "broker
non-votes") will not be deemed present or represented at the Meeting for
purposes of such matter, even if such shares have been properly voted by such
broker, in person or by proxy, on one or more other matters brought before the
Meeting. In the election of Class I Directors (Proposal 1), which requires the
affirmative vote of a plurality of the shares present or represented at the
Meeting and entitled to vote, neither broker non-votes nor shares voted
"WITHHOLD" will have the effect of a vote "AGAINST" any or all nominees for a
Class I Director. With respect to the vote on the proposed amendment of the
Company's Certificate of Incorporation (Proposal 2), ballots marked "ABSTAIN"
and broker non-votes will both have the effect of a vote "AGAINST" such
proposal. With respect to the proposal to ratify the appointment of Coopers &
Lybrand L.L.P. (Proposal 3) and the vote on any other matter, ballots marked
"ABSTAIN" will have the effect of a vote "AGAINST" such matter but broker
non-votes will not have the effect of a vote "AGAINST" such matter.
Unless otherwise directed in the accompanying proxy, the persons named
therein will vote FOR the election of the three Director nominees listed below,
FOR the proposal to amend the Certificate of Incorporation of the Company and
FOR the proposal to ratify the appointment of Coopers & Lybrand L.L.P. as
auditors for the fiscal year ending December 31, 1997. As to any other business
which may properly come before the meeting, they will vote in accordance with
their best judgment. The Company does not presently know of any other such
business.
1
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth, as of April 18, 1997, certain
information with respect to the beneficial ownership of the Company's Common
Stock and Series A Preferred Stock by each person known by the Company to own
beneficially more than 5% of the outstanding shares of Common Stock or more than
5% of the outstanding shares of Series A Preferred Stock, based upon Schedules
13G and 13D filed by such beneficial owners with the Securities and Exchange
Commission and information furnished to the Company.
Number of
Shares
Beneficially Percent of
Name and Address of Beneficial Owner Class Owned Class
- ------------------------------------ ------------------ ------------ ----------
Michael H. Monier Common 556,950 (1) 9.8%
c/o Home State Holdings, Inc.
3 South Revmont Drive
Shrewsbury, New Jersey 07702
Edward D. Herrick Common 566,725 (2) 10.0
134 North Oak Street
Telluride, Colorado 81435
Swiss Reinsurance America Corporation Common 700,000 (3) 11.1
237 Park Avenue Series A Preferred 5,000 50.0
New York, New York 10017
Reliance Insurance Company Common 700,000 (3) 11.1
55 East 52nd Street Series A Preferred 5,000 50.0
New York, New York 10055
Marvin Schwartz Common 379,000 6.7
c/o Neuberger & Berman LLC
605 Third Avenue
New York, New York 10158
547 Partners Common 289,922 5.1
21 East 81st Street
New York, New York 10028
Dimensional Fund Advisors, Inc. Common 330,200 (4) 5.8
1299 Ocean Avenue, 11th Floor
Santa Monica, California 90401
- ----------------------
(1) Includes 3,750 shares subject to currently exercisable warrants held by
Mr. Monier and 5,000 shares owned by Woodhaven Capital Corp. ("Woodhaven
Capital"), of which Messrs. Herrick and Monier are stockholders. Does not
include 24,157 shares owned by M&M Partners, L.P. ("M&M"). Mr. Monier's
daughters are limited partners and Christine Tunney is the general
partner of M&M. Mr. Monier disclaims beneficial ownership of the 24,157
shares owned by M&M.
(2) Consists of 546,725 shares owned by Herrick Partners, L..P., of which
Mr. Herrick is the general partner, 15,000 shares owned by Herrick Family
Foundation, of which Mr. Herrick and his wife are co-trustees, and 5,000
shares owned by Woodhaven Capital.
2
(3) Consists of shares subject to currently exercisable warrants.
(4) Dimensional Fund Advisors Inc. ("Dimensional"), a registered investment
advisor, is deemed to have beneficial ownership of 330,200 shares of
Common Stock as of December 31, 1996, all of which shares are held in
portfolios of DFA Investment Dimensions Group Inc., a registered open-end
investment company, or in series of the DFA Investment Trust Company, a
Delaware business trust, or the DFA Group Trust and DFA Participation
Group Trust, investment vehicles for qualified employee benefit plans
with respect to all of which Dimensional serves as investment manager.
Dimensional disclaims beneficial ownership of all such shares.
3
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth, as of April 18, 1997, certain
information with respect to the beneficial ownership of the Company's Common
Stock by: (i) each Director and Director nominee of the Company; (ii) each
executive officer named in the summary compensation table herein; and (iii) all
executive officers, Directors and Director nominees as a group.
Number of
Shares
Beneficially Percent of
Name of Beneficial Owner Owned Class
- ------------------------ ------------ ----------
Mark S. Vaughn 25,668 (1) 0.5%
Michael H. Monier 556,950 (2) 9.8
Edward D. Herrick 566,725 (3) 10.0
Robert M. Baylis 74,000 (4) 1.3
Perez C. Ehrich 1,000 0.0
Eric A. Reehl 26,168 (5) 0.6
Henry Sopher 0 0.0
Harold C. Stowe 15,398 (6) 0.3
William L. Wallace, Sr. (7) 101,711 (8) 1.8
Benn Prybutok 5,500 (9) 0.1
James M. Tennyson, Jr. 2,000(10) 0.0
Robert Abidor (11) 0 0.0
Kenneth E. Edwards 7,000(10) 0.1
All executive officers, Directors and
Director nominees as a group (24 persons) 1,371,020(12) 23.6
- --------------------
(1) Includes 25,168 shares subject to currently exercisable stock options
held by Mr. Vaughn.
(2) Includes 3,750 shares subject to currently exercisable warrants held by
Mr. Monier and 5,000 shares owned by Woodhaven Capital. Does not include
24,157 shares owned by M&M, as to which Mr. Monier disclaims beneficial
ownership.
(3) Consists of 546,725 shares owned by Herrick Partners, L.P., 15,000 shares
owned by Herrick Family Foundation and 5,000 shares owned by Woodhaven
Capital.
(4) Includes 55,000 shares subject to currently exercisable stock options held
by Mr. Baylis.
(5) Includes 25,168 shares subject to currently exercisable stock options
held by Mr. Reehl.
4
(6) Includes 3,000 shares subject to currently exercisable stock options held
by Mr. Stowe and 1,000 shares held by Mr. Stowe as custodian for one of
his children. Does not include 2,000 shares beneficially owned by Mr.
Stowe's other children. Mr. Stowe disclaims beneficial ownership of such
2,000 shares.
(7) Mr. Wallace's profit-sharing plan owns 5,000 shares of common
stock of Quaker City Holdings, which represents less than 1%
of all Quaker City Holdings shares outstanding as of April 25,
1997.
(8) Includes 6,750 shares subject to currently exercisable warrants held by
Mr. Wallace.
(9) Includes 5,000 shares subject to currently exercisable stock options held
by Mr. Prybutok.
(10) Consists of shares subject to currently exercisable stock options.
(11) Mr. Abidor resigned as an officer and Director in 1996.
(12) Includes 114,736 shares subject to currently exercisable stock
options, 10,500 shares subject to currently exercisable
warrants and 5,000 shares owned by Woodhaven Capital.
5
PROPOSAL 1
ELECTION OF DIRECTORS
Under the Certificate of Incorporation and By-Laws of the Company, which
provide for a "classified" Board, three Directors have been nominated for
election at the Annual Meeting to serve a three-year term expiring at the annual
meeting in 2000 and until their respective successors are elected and qualified.
The number of Directors is currently established at nine, of which three serve
as Class I Directors, three serve as Class II Directors and three serve as Class
III Directors.
Perez C. Ehrich, Eric A. Reehl and [Third Class I Director Nominee], the
three nominees listed below, presently serve as Class I Directors of the
Company. If any of the nominees should decline or be unable to act as a
Director, the persons named in the proxy will vote in accordance with their best
judgment. The Company knows of no reason why the nominees would not be available
for election or, if elected, would not be able to serve.
Biographical
The following biographical information is furnished with respect to each
of the three nominees for election at the Annual Meeting as Class I Directors,
each of the current Class II and Class III Directors, whose terms will continue
after the Annual Meeting and a Class I Director who will retire after the Annual
Meeting.
Class I Director Nominees:
Perez C. Ehrich, age 54, became a Director of the Company in August 1993.
Mr. Ehrich is a member of the Audit Committee of the Board. Mr. Ehrich has been
a partner in the law firm of Dorsey & Whitney LLP since December 1995. Prior
thereto, he was a partner in the law firm of Townley & Updike since 1978.
Eric A. Reehl, age 33, has served as Executive Vice President and Chief
Financial Officer and a Director of the Company since June 1996. He has also
served as Assistant Treasurer and Assistant Secretary since August 1993. From
March 1996 to June 1996, he served as Senior Vice President - Corporate
Development. Prior to that he had served as Director of Corporate Development
since August 1993. Mr. Reehl serves as a Director, Executive Vice President and
Chief Financial Officer of Home State Insurance Company ("Home State"), New York
Merchant Bakers Insurance Company ("Merchant Bakers"), Pinnacle Insurance
Company ("Pinnacle"), Westbrook Insurance Company ("Westbrook") and Home Mutual
Insurance Company of Binghamton, NY ("Home Mutual"). He also serves as Executive
Vice President and Chief Financial Officer of Quaker City Insurance Company
("Quaker City"). Home State, Merchant Bakers, Pinnacle, Quaker City and
Westbrook are subsidiaries of the Company. Mr. Reehl also serves as a Director
(or Manager, in the case of limited liability companies) and principal officer
of each of the Company's financial services subsidiaries, and as a Director and
Executive Vice President of Transportation Insurance Network, Inc. ("TIN") and
Transportation Insurance Agency Network, Inc. ("TIAN"), subsidiaries of the
Company. From 1990 to 1993, Mr. Reehl was affiliated in various capacities with
Woodhaven Investors, Inc. ("Woodhaven"), an investment management and consulting
firm. From 1989 to 1990, Mr. Reehl served as Secretary, Treasurer and Director
of Corporate and Portfolio Development for Consolidated Capital Equities
Corporation, a real estate concern in which certain general partnership
interests were purchased by Woodhaven pursuant to a plan of reorganization filed
under Chapter 11 of the Bankruptcy Reform Act of 1978. Prior to 1989, Mr. Reehl
was a bankruptcy and reorganization consultant with Ernst & Young, a public
accounting firm.
[Third Class I Director Nominee]
Retiring Class I Director:
William L. Wallace, Sr., age 73, became a Director of the Company in June
1994. Mr. Wallace has been a management consultant since 1979, specializing in
strategic planning programs for manufacturing companies. Prior thereto, Mr.
Wallace held executive positions with several corporations, including as a
Senior Vice President of Olin Corporation.
6
Class II Directors - Term Expires 1998:
Robert M. Baylis, age 58, has served as a Director of the Company since
December 1995 and is a member of the Executive Committee of the Board. Mr.
Baylis is Director of the International Forum, an executive education program of
The Wharton School. Mr. Baylis served as Vice Chairman of the Board of Directors
of CS First Boston from 1994 until his retirement in 1996 after a 33-year career
with First Boston companies. He was based in Hong Kong as Chairman and Chief
Executive Officer of CS First Boston Pacific, Inc. from March 1993 until August
1994. Prior thereto, he was Vice Chairman of the Board of Directors of First
Boston Corporation from March 1992 to March 1993. Mr. Baylis also serves as a
Director of Gryphon Holdings, Inc., New York Life Insurance Company and Covance,
Inc.
Edward D. Herrick, age 52, has served as a Director of the Company since
its formation and is a member of the Executive and Compensation Committees of
the Board. Mr. Herrick also serves as a Director of most of the Company's
subsidiaries and Home Mutual. In addition, since 1986, Mr. Herrick has been
Managing Director and President of Woodhaven Investors Inc., which serves as
investment advisor to the Company and its subsidiaries. See "Certain
Transactions." Mr. Herrick has been the President of Herrick & Co., an
investment firm, since 1986. Mr. Herrick is a Director of Preferred Holdings,
Inc., an insurance holding company specializing in workers compensation coverage
in the States of Massachusetts, Georgia and New Hampshire. Mr. Herrick is also a
Director of Mobex Communications, Inc., a wireless communication company located
in Boise, Idaho.
Mark S. Vaughn, age 49, has served as President, Chief Executive Officer,
Treasurer and Vice Chairman of the Board of Directors of the Company since June
1996. He has also served as a Director since April 1995. From July 1994 to June
1996, he served as Senior Vice President - Marketing and Underwriting. He also
serves as Chairman of the Board of Directors and Chief Executive Officer of Home
State, Merchant Bakers, Pinnacle, Quaker City, Westbrook and Home Mutual, and as
President of Home State. Mr. Vaughn also serves as a Director (or Manager, in
the case of limited liability companies), President and Chief Executive Officer
(in the case of corporations) of each of the Company's financial services
subsidiaries, and as Chairman of the Board of Directors and Chief Executive
Officer of TIN and TIAN. Mr. Vaughn began his insurance career in 1971 as a
commercial underwriting and marketing representative for The Travelers Insurance
Company. In 1973, he joined Torrence Insurance, Inc., an insurance agency, where
he became a managing partner. In 1981, Mr. Vaughn joined Transamerica Insurance
Group, and assumed increased levels of responsibility during his 13-year career
there. In 1990, Mr. Vaughn was promoted to Senior Vice President and became
responsible for nationwide personal lines operations for all Transamerica
companies.
Class III Directors - Term Expires 1999:
Michael H. Monier, age 56, has served as Chairman of the Board of Directors
of the Company since its formation in 1987 and as Secretary since 1993. Mr.
Monier is a member of the Executive and Compensation Committees of the Board.
Mr. Monier has served as a Director of most of the Company's subsidiaries and
Home Mutual since the commencement of their respective affiliations with the
Company and as Treasurer of Quaker City Holdings since 1990. He is also Vice
President of Tower Hill, Inc., a financial services subsidiary of the Company.
Since 1986, Mr. Monier has been Vice President and Secretary of Woodhaven
Investors Inc., which serves as investment advisor to the Company and its
subsidiaries. See "Certain Transactions." In addition, Mr. Monier has served as
President of Michael Monier and Associates, an investment firm, since 1985, and
he has served as Vice President and Treasurer of Landmark Management, Inc., a
real estate investment firm, since 1974. From 1972 until 1991, Mr. Monier served
as Managing Director of the investment firm of Samson & Monier Associates. Mr.
Monier is Chairman of the Board of Directors and Chief Executive Officer of
Mobex Communications, Inc. of Boise, Idaho, a wireless communications company.
In addition, Mr. Monier is Chairman of the Board and a Director of Higgins
Supply of McGraw, New York, a manufacturer of orthopedic stays, and is a
Director of Preferred Holdings, Inc., an insurance holding company specializing
in workers compensation coverage in the States of Massachusetts, Georgia and New
Hampshire.
Henry Sopher, age 41, became a Director of the Company in October 1996 when
he was designated as such by Swiss Re in connection with Swiss Re's purchase of
shares of Series A Preferred Stock. Since January 1996, Mr. Sopher has been the
Chairman of the Board of Directors of Isis Consulting, Inc., an insurance and
reinsurance consulting venture, located in New York, New York, which is an
affiliate of Swiss Re. From November 1992 to January 1996, Mr. Sopher was a
Director of BCS Management Inc., a consulting company, located in New York, New
York. He was a Senior Manager at Deloitte & Touche in New York, New York from
1980 to 1992 and was an accountant at Neville Russell & Co. in London, England
from 1977 to 1980.
7
Harold C. Stowe, age 50, became a Director of the Company in 1993 and is a
member of the Audit Committee of the Board. He also has served as a Director of
Home State since 1991. Mr. Stowe also is the President and Chief Executive
Officer of Canal Industries, Inc. ("Canal"), a private forest products company
located in Conway, S.C. Mr. Stowe has been affiliated with Canal since 1990.
From 1977 until 1990, Mr. Stowe was affiliated with Springs Industries, Inc., a
textile company, serving in various capacities, including as Treasurer and
Executive Vice President of The Springs Company, a related investment and
management company.
Committees of the Board of Directors
The Board of Directors of the Company has established the following
standing committees, with current membership as noted:
Executive Committee: When the Board is not in session, the Executive
Committee has all of the power and authority of the Board, except that the
Executive Committee has no authority to amend or repeal the By-Laws of the
Company. The members of the Executive Committee are Messrs. Baylis, Herrick and
Monier. The Executive Committee held three meetings during 1996.
Audit Committee: The Audit Committee members are Messrs. Stowe and Ehrich,
who are non-employee Directors. Its functions include to review the scope of the
audit, to review with the independent auditors the Company's accounting
practices and policies, to review with the independent auditors their final
report, to review with independent auditors overall accounting and financial
controls, and to be available to the independent auditors during the year for
consultation purposes. The Audit Committee also recommends to the Board for its
approval the engagement of the independent certified accountants to serve as
auditors for the following year in examining the accounts of the Company. The
Audit Committee met twice during 1996.
Compensation Committee: The Compensation Committee members are Messrs.
Herrick and Monier. The functions of the Compensation Committee are to review
and make recommendations to the Board as regards compensation of the executive
officers of the Company. The Board has also delegated to the Compensation
Committee the power and authority to interpret, construe and implement the
provisions of the Company's 1993 Stock Incentive Plan (the "Plan"), to
administer the Plan and to recommend option grants under the Plan. The
Compensation Committee met twice during 1996.
Strategic Planning Committee: The functions of the Strategic Planning
Committee, which is being formed in April 1997, will be to pursue strategic
alternatives for the Company to improve its financial condition, including,
without limitation, working with insurance regulatory authorities and rating
agencies to maintain and improve the Company's good standing with regulatory
authorities and ratings with rating agencies.
The Board of Directors does not have a standing nominating committee. The
full Board of Directors performs the functions of such a committee.
The Board of Directors of the Company met seven times and took action by
written consent seven times during 1996. During the respective periods in which
they served, each Director attended at least 75% of the meetings of the Board of
Directors and the committees on which he served.
Director Compensation
The Company has provided for the payment of Directors' fees to members of
the Board who are not salaried employees of the Company or any of its
subsidiaries or affiliates and who are not members of firms or corporate
entities which receive fees from the Company or any of its subsidiaries or
affiliates ("non-affiliated Directors"). These payments were established in
recognition of the significant time commitment and work that is attendant to
being a Director and reflect the view that each Director ought to be remunerated
directly or indirectly for his efforts. Payment to non-affiliated Directors has
been established at the rate of $2,000 per each full calendar quarter served
plus $4,000 per each full fiscal year during which such Director serves on a
Committee of the Board.
In addition, Directors are reimbursed for their out-of-pocket expenses and
are eligible to receive stock options under the Plan. In August 1996, when he
was elected Chairman of the Executive Committee, Mr. Baylis was granted options
under the Plan to purchase 25,000 shares at an exercise price of $7.25 per
share.
8
Compensation Committee Interlocks and Insider Participation
Messrs. Monier and Herrick, members of the Compensation Committee, are
principals of Woodhaven Investors Inc. ("Woodhaven"), which provides certain
investment management and consulting services to the Company, its subsidiaries
and Home Mutual, for which Woodhaven received fees of $442,816 in 1996. See
"Certain Transactions." In addition, Mr. Monier received a salary of $80,000 for
his services as an officer of the Company.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and Directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership with the Securities and Exchange Commission. Officers, Directors and
greater-than-ten-percent beneficial owners are required by Securities and
Exchange Commission regulations to furnish the Company with copies of all
Section 16(a) forms they file.
Based on review of the copies of such forms furnished to the Company, the
Company believes that during 1996 all Section 16(a) filing requirements
applicable to its officers, Directors and greater-than-ten-percent beneficial
owners were complied with, except that initial statements of beneficial
ownership of Company securities by Richard Bird, R. Scott Conant, William
Hurlman, Scott Morgan, George Roberts, Henry Sopher and Richard Thomas (none of
whom own any Company securities except Mr. Roberts) were filed late and a change
in the form of beneficial ownership (but not the number) of Company securities
owned by Edward D. Herrick was reported late on an amended annual statement of
changes in beneficial ownership.
9
EXECUTIVE COMPENSATION
The following table sets forth compensation information for services
performed in 1996, 1995 and 1994 for the Company, its subsidiaries and Home
Mutual by those persons who served as the Chief Executive Officer at any time
during 1996 and those persons who, at December 31, 1996, were the four other
most highly compensated executive officers, each of whom earned in excess of
$100,000 in salary and bonus in 1996 (the "Named Executives").
SUMMARY COMPENSATION TABLE(1)
Long-Term
Compensation
Annual Compensation ----------
------------------------------------------- Awards
----------
Securities
Underlying Other
Name & Principal Positions Year Salary Bonus Options Compensation(2)
- -------------------------- ---- ---------- --------- ---------- ---------------
Mark S. Vaughn(3)................... 1996 $200,242 $100,000 -- $7,528
Vice Chairman of the Board of 1995 $175,193 -- -- $5,417
Directors, President and Chief 1994 $75,577 $40,000 20,000 $1,177
Executive Officer of the Company,
Chairman, Chief Executive Officer
and Treasurer of Home State,
Quaker City and Merchant Bakers
Eric A. Reehl....................... 1996 $165,060 $80,000 -- $5,591
Executive Vice President and 1995 $150,068(4) -- -- $4,821
Chief Financial Officer of the 1994 $120,000(4) $80,000 20,000 $3,688
Company and each insurance
subsidiary; Executive Vice
President and Treasurer of TIN
and TIAN; Chief Operating
Officer of financial services
subsidiaries
James M. Tennyson, Jr.(5)........... 1996 $150,141 $20,000 10,000 $5,630
Senior Vice President - 1995 $140,109 -- -- $1,750
Management Information Systems of 1994 $108,151 $10,000 5,000 $250
the Company
Benn Prybutok....................... 1996 $120,056 $25,000 10,000 $5,066
Vice President - Government 1995 $110,000 $25,000 -- $4,632
Affairs of the Company, Pinnacle 1994 $97,334 $25,000 -- $4,096
and Westbrook; President and
Chief Operating Officer of Quaker
City
Robert Abidor....................... 1996 $353,333 $100,000 -- $12,437
Former Vice Chairman of the Board 1995 $312,000(6) -- -- $7,803
of Directors, President and Chief 1994 $260,000(6) $100,000 -- $3,561
Executive Officer of the Company;
Former Chairman, Chief Executive
Officer and Treasurer of Home
State, Quaker City and Merchant
Bakers
Kenneth E. Edwards.................. 1996 $140,055 $50,000 -- $4,656
Senior Vice President - Finance 1995 $130,054 -- -- $5,359
of the Company; Controller 1994 $108,846 $80,000 10,000 $3,580
of Home State, Pinnacle
and Quaker City
10
- ------------------
(1) During the years shown in the table, there were no other annual
compensation reportable or long-term incentive plan payouts to the persons
shown in the table.
(2) Other compensation in 1994, 1995 and 1996 consists of 401(k) plan
contributions and insurance premiums paid by the Company.
(3) Mr. Vaughn joined the Company in July 1994.
(4) Does not include $24,000 and $15,250 distributed to Mr. Reehl as a partner
of PPIM L.P. ("PPIM") in 1994 and 1995, respectively. PPIM provided various
investment banking and other advisory services to Home State and Quaker
City during 1994 and 1995 and earned fees for such services.
(5) Mr. Tennyson joined the Company in April 1994.
(6) Does not include $174,292 and $103,360 distributed to Mr. Abidor as a
partner of PPIM in 1994 and 1995, respectively.
11
Employment Agreements
In January 1997, the Company entered into a three-year amended and
restated employment agreement with Mr. Vaughn and a three-year employment
agreement with Mr. Reehl. The terms of such agreements are extended
automatically after each year for successive additional one-year periods unless
either party notifies the other in writing that it does not wish the term to be
extended. Mr. Vaughn's base annual salary is $225,000 and Mr. Reehl's base
annual salary is $200,000, subject in each case to annual increases at the
discretion of the Compensation Committee of the Board of Directors. In addition
to base annual salary, the Compensation Committee may grant bonuses to such
executives. Each executive is generally entitled to severance pay equal to
(i) three-quarters of three years' base salary upon termination due to
disability; (ii) base salary for up to one year upon voluntary termination by
the executive after the initial three-year period under the agreement;
(iii) base salary for the remaining term of the employment agreement upon
termination constituting or resulting from a breach by the Company under the
employment agreement (provided that in the event of a wrongful termination
during a period when a transaction which would be a change of control (as
defined in the agreement) is under consideration, the executive shall be paid an
amount equal to three times his then current base salary); (iv) a lump sum
severance payment equal to the greater of the initial or then current base
salary for the remaining term of the agreement in the event there is a change of
control and the executive terminates the agreement for good reason (as defined
in the agreement); and (v) a lump sum severance payment equal to 24 months'
salary at the greater of the initial or the then current base salary in the
event there is a change of control and the executive terminates the agreement
without good reason. Each executive has agreed not to compete with the Company
in its lines of business and market area for a period of two years in the case
of termination due to disability and for a period of one year in the case of
voluntary termination as described in clause (ii) above. In addition, each
executive has agreed not to solicit customers or agents of the Company for
provision of competitive services or to interfere with the Company's
relationships with customers, agents, suppliers, investors, shareholders or
employees for a period of 18 months in the event there is a change of control
and he terminates the agreement without good reason (which period is subject to
reduction to the extent that such executive elects to receive a severance
payment equal to less than 18 months of base salary). Each employment agreement
also provides that the executive will be indemnified by the Company to the full
extent permitted under Delaware law.
Mr. Tennyson entered into a February 28, 1997 retention letter with the
Company providing for a bonus of $38,750 if Mr. Tennyson remains employed
through the closing of a financing transaction (as defined in such letter) or a
change in control transaction (as defined in such letter) in 1997 and severance
pay of $77,500 if his employment is terminated without cause (or if he
terminates his employment for good reason, as defined in such letter) in
connection with or prior to the first anniversary of a change of control
transaction.
12
Stock Options
The following table contains information concerning the grant of stock
options made during fiscal year 1996 under the Company's 1993 Stock Incentive
Plan (the "Plan") to the Named Executives:
OPTION GRANTS IN LAST FISCAL YEAR
Individual Grants
--------------------------------------------------------
Potential Realizable
% of Total Value at Assumed
Number of Options Annual Rate of Stock
Securities Granted Price Appreciation for
Underlying to Exercise Option Term
Options Employees Price Expiration -------------------------
Name Granted in 1996 ($/Sh) Date 5% 10%
- ---- ----------- --------- ------- -------- ---------- ----------
Mark S. Vaughn............. 0 0.0% $ -- -- $ 0 $ 0
Eric A. Reehl.............. 0 0.0% -- -- 0 0
James M. Tennyson, Jr...... 5,000 7.75% -- 12/08/04 18,500 44,300
5,000 7.75% 12/09/06 24,350 61,750
Benn Prybutok.............. 5,000 7.75% 08/19/03 15,000 34,700
5,000 7.75% 12/08/04 18,500 44,300
Robert Abidor.............. 0 0.0% -- -- 0 0
Kenneth E. Edwards......... 0 0.0% -- -- 0 0
13
The following table shows the number and value of exercisable and
unexercisable stock options granted under the Plan to the Named
Executives. To date, no options under the Plan have been exercised.
AGGREGATED FISCAL YEAR END OPTION VALUES
Value of Unexercised
Number of Securities Underlying In-the-Money
Unexercised Options at Fiscal Year End (#) Options at Fiscal Year End ($)(1)
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ------------- -------------
Mark S. Vaughn.................. 8,000 12,000 $ 0 $ 0
Eric A. Reehl................... 17,000 18,000 0 0
James M. Tennyson, Jr........... 2,000 8,000 0 0
Benn Prybutok................... 5,000 5,000 0 0
Kenneth E. Edwards.............. 7,000 8,000 0 0
Robert Abidor................... 30,860 -- 0 0
- -------------------------
(1) Market value of underlying securities at year end, minus the exercise price.
Repricing of Outstanding Stock Options
Compensation Committee Report on Option Repricing
Effective as of December 9, 1996, the Compensation Committee of the Board
of Directors (the "Committee"), with the approval of the Board of Directors,
granted stock options to twenty employees, including options which effectively
replaced options granted in 1993 or 1994 to ten of those employees, including
two of the executive officers named in the Summary Compensation Table above
(Messrs. Tennyson and Prybutok). The Committee took this action based on its
conclusion that the prior options had ceased to serve as an effective
performance incentive for the optionees due to the high exercise price of the
options relative to the market price of the Common Stock. The exercise price of
the options granted in 1993 and 1994 was set at $13.25 and $13.00, respectively,
which was the closing sale price of the Common Stock on the date of grant. For
most of the time since the date of the 1994 grants, the Common Stock has traded
at prices substantially below the exercise prices of the 1993 and 1994 options.
Accordingly, the Committee granted new options to certain holders of the 1993
and 1994 options, which prior options were canceled. The new options have an
exercise price of $7.75, representing the closing price of the Common Stock on
the date of grant.
COMPENSATION COMMITTEE
Edward D. Herrick Michael H. Monier
14
Option Repricings During Last Ten Years
The following table provides certain information concerning each
repricing of an option held by any executive officer of the Company during the
Company's last ten fiscal years.
Market
Price of Exercise Length of Original
Number of Stock at Price at Time Option Term
Options Time of of Repricing New Remaining at Date
Name and Repriced or Repricing or Exercise of Repricing or
Principal Position Date Amended Amendment Amendment Price Amendment
- ------------------ ---- ------- --------- --------- ----- ---------
James M. Tennyson, Jr. 12/9/96 5,000 $7.75 $13.00 $7.75 8.0 years
Senior Vice President -
Management
Information Services
Benn Prybutok 12/9/96 5,000 $7.75 $13.25 $7.75 6.7 years
Vice President - 12/9/96 5,000 $7.75 $13.00 $7.75 8.0 years
Government Affairs
James A. Byrne, Jr. 12/9/96 5,000 $7.75 $13.25 $7.75 6.7 years
Vice President - 12/9/96 5,000 $7.75 $13.00 $7.75 8.0 years
Marketing
Vicki F. Blaich 12/9/96 2,500 $7.75 $13.25 $7.75 6.7 years
Vice President - Claims 12/9/96 5,000 $7.75 $13.00 $7.75 8.0 years
Mark R. Fradkin 12/9/96 5,000 $7.75 $13.00 $7.75 8.0 years
Vice President - Personal
Lines Underwriting
Francesco Stancati, Jr. 12/9/96 5,000 $7.75 $13.00 $7.75 8.0 years
Vice President -
Commercial Lines
Underwriting
15
REPORT OF THE COMPENSATION COMMITTEE
The Compensation Committee (hereinafter the "Committee") of the Board of
Directors determines the Company's executive compensation policy and sets
compensation for the Chief Executive Officer and other executive officers. The
Compensation Committee is comprised of Messrs. Herrick and Monier.
The Committee's policy is to offer executive officers competitive
compensation packages that will permit the Company to attract and retain
individuals with superior abilities and to motivate and reward such individuals
on the basis of the Company's performance in an appropriate fashion in the
long-term interests of the Company and its stockholders. Currently, executive
compensation is comprised of salary, annual cash bonuses and long-term incentive
opportunities in the form of stock options under the Company's 1993 Stock
Incentive Plan.
The Committee takes into account various qualitative and quantitative
indicators of corporate and individual performance in determining the level and
composition of compensation for the Chief Executive Officer and other executive
officers. While the Committee considers corporate performance measures such as
premium growth, loss and expense ratios, net income, earnings per share, return
on assets and return on equity, the Committee does not apply any specific
quantitative formula or targets in making compensation decisions. The Committee
also appreciates the importance of achievements that may be difficult to
quantify, and accordingly recognizes qualitative factors, such as successful
supervision of major projects and demonstrated leadership ability. For 1996, an
important qualitative factor in determining incentive compensation awards to
executive officers was the Committee's assessment of their contribution to
improvements in managing the Company's rapidly expanded insurance operations
(including underwriting, claims management, accounting and computer systems and
capability), efforts to control growth in premiums to manageable levels and
increase the proportion of personal auto insurance business to compensate
for the soft commercial insurance market and development of the Company's
insurance-related financial services group.
In addition, the Committee reviews compensation packages reported by
comparable, selected insurance companies to ensure that the Company's practices
are appropriate in relation thereto.
Compensation decisions regarding executive officers other than the Chief
Executive Officer are made in consultation with the President and Chief
Executive Officer of the Company.
Base salaries for the Chief Executive Officer and other executive
officers are established at levels considered appropriate in light of the duties
and scope of responsibilities of each officer's position. Salaries are generally
reviewed periodically and adjusted as warranted to reflect individual officer
performance. The Committee focuses primarily on total annual compensation,
including incentive awards, rather than base salary alone, as the appropriate
reward for executive officer performance and contribution.
The Plan authorizes the Committee to make grants and awards of stock
options, stock appreciation rights, restricted stock and other stock-based
awards to executive officers (as well as Directors, other employees and
consultants) of the Company and its subsidiaries. Upon the conclusion of the
Company's initial public offering in August 1993 and in December 1994, December
1996, January 1997 and March 1997, executive officers of the Company were
granted stock options, based upon the factors referred to above and anticipated
future contributions. Certain of the options granted in December 1996 and
January 1997 replaced previously granted options with a higher exercise price
which were canceled at such time. See "Executive Compensation - Repricing of
Outstanding Stock Options." It is the belief of the Company that such grants
will aid in aligning the interests of the officers with those of the
stockholders by giving such officers a direct stake in the performance of the
Company.
In 1995, bonuses were not awarded to the Company's executive officers.
The Committee decided to wait until 1995 financial results were
determined in the first quarter of 1996 to determine such bonuses, which were
paid in 1996 and are reflected in the Summary Compensation Table above.
Similarly, at the end of 1996, funds which otherwise might have been paid as
executive officer bonuses were retained by the Company in light of disappointing
1996 results. In the judgment of the Committee, such funds will be
better utilized by being made available for selective officer retention efforts
in connection with the Company's efforts to explore options to enhance
stockholder value.
16
In 1993, Congress enacted Section 162(m) of the Internal Revenue Code,
which prevents publicly held corporations from deducting compensation in excess
of $1 million paid to chief executive officers and the four highest compensated
officers unless the compensation is performance-based. The Company's
compensation program currently is not of a level such that this limit would be
expected to apply.
Robert Abidor, who was President and Chief Executive Officer until his
resignation from such positions on June 13, 1996, received a 1996 base salary of
$412,000 until such date, pursuant to an employment agreement between Mr. Abidor
and the Company. He was succeeded as President and Chief Executive Officer by
Mark S. Vaughn, who was formerly Senior Vice President - Marketing and
Underwriting of the Company. Mr. Vaughn's 1996 base salary of $200,000
(representing an increase of $25,000 over his 1995 base salary) was paid
pursuant to an employment agreement between Mr. Vaughn and the Company. Such
employment agreement was amended and restated in January 1997, at a base salary
of $225,000. See "Executive Compensation - Employment Agreements."
The Committee also approved the compensation of the Company's other
executive officers for 1996, following the principles outlined in this report.
COMPENSATION COMMITTEE
Edward D. Herrick Michael H. Monier
17
Stock Performance Graph
The following graph compares the Company's cumulative stockholder return
on its Common Stock with the return on the Center for Research in Security
Prices ("CRSP") NASDAQ Index for United States companies and the average return,
weighted by market capitalization, of a peer group (the "Peer Group") of
property and casualty insurance companies from August 12, 1993 (the first
trading day for the Company's Common Stock) through December 31, 1996, the end
of the Company's last fiscal year. The graph assumes investments of $100 on
August 12, 1993 in the Company's Common Stock (at the initial public offering
price), the NASDAQ CRSP Index (U.S. companies) and the Peer Group and assumes
the reinvestment of dividends. The Peer Group is composed of The Commerce Group,
Inc., Donegal Group Inc., Harleysville Group Inc., Merchants Group, Inc. and
Selective Insurance Group, Inc.
Performance Graph
Comparison of Cumulative Total Return Among
Home State Holdings, Inc., NASDAQ CRSP Index (U.S. Companies) and
Selected Property and Casualty Insurance Companies
Cumulative Total Stockholder Return
[GRAPHIC]
In the printed version of the document, a line graph
appears which depicts the following plot points:
Fiscal Year Ending
----------------------------------------------------
Company 1993 1993 1994 1995 1996
- ------- ------ ------ ------ ------ ------
Home State Holdings Inc. 100.00 108.00 113.68 70.35 58.75
Peer Group 100.00 112.11 90.80 121.04 138.33
Broad Market 100.00 105.00 102.64 145.15 178.55
18
CERTAIN TRANSACTIONS
Woodhaven, a corporation whose principals are Messrs. Monier and Herrick,
principal stockholders and Directors of the Company, provides certain investment
management and consulting services to the Company, its subsidiaries and Home
Mutual consisting primarily of managing the investment and reinvestment of such
companies' excess funds and consulting with respect to the analysis of their
cash flows. Fees paid in 1996 were $442,816. Management believes that these
arrangements are no less favorable than could be obtained from other parties for
services of comparable quality. These arrangements are subject to triennial
review by the applicable insurance regulatory agencies.
The law firm of Dorsey & Whitney LLP, of which Mr. Ehrich is a partner,
has rendered, and expects in the future to render, legal services to the
Company.
In October 1996, the Company, Swiss Re and Reliance entered into
agreements for the Company's insurance subsidiaries to continue to purchase
reinsurance from Swiss Re and Reliance at commercially reasonable and
actuarially sound rates and for Swiss Re and Reliance to provide certain
consulting and management services to the Company. Each of Swiss Re and Reliance
is paid a monthly retainer of $8,333 for such consulting and management
services.
In connection with the October 1996 purchase by Swiss Re of Series A
Preferred Stock and warrants, Isis Consulting, Inc. ("Isis"), of which Mr.
Sopher is Chairman and Treasurer and an affiliate of Swiss Re is a stockholder,
acted as a finder for which services Isis received a fee of $100,000.
PROPOSAL 2
AMENDMENT TO THE
CERTIFICATE OF INCORPORATION
Pursuant to a Securities Purchase Agreement (the "Securities Purchase
Agreement") dated as of October 4, 1996 among the Company, Swiss Re and
Reliance, on October 4, 1996, each of Swiss Re and Reliance acquired for an
aggregate purchase price of $5,000,000 (i) 5,000 shares of Series A Preferred
Stock and (ii) warrants to purchase 700,000 shares of Common Stock at an
exercise price of $9.50 per share (subject to adjustment as provided in the
warrants). See "Security Ownership of Certain Beneficial Owners."
The Securities Purchase Agreement requires the Company to present at the
Annual Meeting, for a vote by the Company's stockholders, this Proposal 2 to
amend the Amended and Restated Certificate of Incorporation (the "Certificate of
Incorporation") of the Company. The amendment (the "Amendment"), described in
more detail below, would facilitate the election of those Directors which may be
designated by Swiss Re and Reliance by, among other things, (i) providing for an
increase in the size of the Board of Directors to not less than eight nor more
than ten members, (ii) permitting class voting and (iii) permitting the removal
of Directors without cause.
The Company, Swiss Re, Reliance, Herrick Partners, L.P. (of which Mr.
Herrick is general partner) and Messrs. Herrick and Monier entered into a
Stockholders' Agreement (the "Stockholders' Agreement") dated as of October 4,
1996 pursuant to which, among other things, (i) Swiss Re has the right to
designate an individual to serve as a Director of the Company (a "Preferred
Director") for so long as Swiss Re holds shares of Series A Preferred Stock,
(ii) each of Swiss Re and Reliance has the right, upon the occurrence of a
Redemption Default (as defined in the Stockholders' Agreement), to designate an
individual to serve as a Director of the Company (each, a "Default Director"),
(iii) the parties to the Stockholders' Agreement have agreed to vote in favor of
the election of any individual so designated by Swiss Re or Reliance, and
(iv) the parties have agreed to vote in favor of the Amendment.
Prior to the execution of the Securities Purchase Agreement, and as a
condition to the closing thereunder, the Board of Directors of the Company
amended the By-Laws to increase the size of the Board of Directors from seven to
no less than eight and to no more than ten, as set by resolution of the Board of
Directors from time to time. Prior to the closing of purchase of Series A
Preferred Stock by Swiss Re and Reliance, the Board of Directors fixed the size
of the Board at nine. Upon the closing of the purchase of Series A Preferred
Stock, Mr. Sopher, who was designated by Swiss Re as a Preferred Director, was
appointed by the Board of Directors as a Class III Director to fill a vacancy on
the Board of Directors.
19
Pursuant to a March 31, 1997 letter agreement among the Company, Swiss Re
and Reliance waiving a breach of a covenant in the Securities Purchase Agreement
requiring the Company to maintain a minimum ratio of "net written premiums" to
"statutory surplus" as of December 31, 1996, the Company agreed to elect an
additional Director acceptable to Swiss Re and Reliance and to form a Strategic
Planning Committee, to be chaired by such new Director. See "Proposal 1 -
Election of Directors."
A description of the proposed Amendment follows. This description is
qualified in its entirety by reference to the Certificate of Incorporation and
the Certificate of Designations, Preferences and Rights of the Series A
Preferred Stock (the "Certificate of Designations"), as proposed to be amended,
attached to this Proxy Statement as Appendices A and B, respectively.
The Amendment would amend the Certificate of Incorporation to provide
that (i) class voting (which currently is prohibited by the Certificate of
Incorporation) be permitted for shares of capital stock of the Corporation,
(ii) Directors be subject to removal with or without cause, (iii) the following
proviso relating to series of preferred stock contained in Section 4.8(b)(vi) of
Article Four be deleted in its entirety: "provided, however, that such series,
if a voting series, shall be entitled to no more than one vote per share and
shall not be entitled to vote as a class on any matter except so specifically
required by law;" (iv) the second sentence of Section 4.2 of Article Four (which
sentence provides that the Common Stock and other voting stock vote together as
a class) be deleted in its entirety; (v) the word "shall" contained in the last
sentence of Section 6.1(a) of Article Six (which sentence provides that
vacancies in the Board of Directors not filled by the Board shall be filled by
stockholders at the next annual meeting) be deleted and replaced with the word
"may"; (vi) the number of members of the Board of Directors be set at not less
than eight and no more than ten (rather than not less than seven or more than
nine); and (vii) the Certificate of Designations designating the Series A
Preferred Stock, which is deemed to constitute a portion of the Certificate of
Incorporation, be amended and restated in its entirety to read as set forth in
the form of Appendix B to this Proxy Statement.
The amendment and restatement of the Certificate of Designations included
in the Amendment would (i) delete Section 1(c) of the Certificate of
Designations which currently entitles holders of Series A Preferred Stock to one
vote per share with respect to each matter submitted to a stockholder vote and
(ii) revise Section 3 thereof to provide that the Series A Preferred Stock shall
have no voting rights except as provided in revised Section 3 or required by
law. Under revised Section 3, the holders of a majority of the Series A
Preferred Stock, voting as a class, would be entitled to elect a Preferred
Director. In addition, upon the occurrence of a Redemption Default (as defined
in the Certificate of Designations), the size of the Board of Directors would be
increased by two, and during the occurrence thereof the holders of a majority of
the Series A Preferred Stock, voting as a class, would be entitled to elect two
Default Directors. Section 3, as revised, would also give holders of 20% of the
Series A Preferred Stock the right to call a special meeting of Series A
Preferred Stockholders to elect the Preferred Director or the Default Directors
and give holders of a majority of the then outstanding Series A Preferred Stock
the right to remove a Preferred Director or a Default Director. Any resulting
vacancy would be filled in the manner provided in Section 3 for the election of
the Preferred Director or a Default Director, as the case may be. Furthermore,
Section 3 of the Certificate of Designations, as amended and restated, would
require the affirmative vote or consent of more than 85% of the outstanding
Series A Preferred Stock, voting separately as a class, to permit the taking of
certain actions defined as "Fundamental Changes", including the creation,
authorization, issuance or sale of certain securities, amendments to the
Certificate of Incorporation or By-laws which would alter, change or affect
adversely the powers, rights, privileges or preferences of the holders of Series
A Preferred Stock or a change in the size of the Board of Directors, except as
permitted in the Stockholders' Agreement.
The parties to the Stockholders Agreement have agreed to vote an
aggregate of 1,134,925 shares of stock, representing 19.8% of the aggregate
outstanding shares of Common Stock and Series A Voting Preferred Stock, in favor
of Proposal 2.
The Amendment may make it more difficult for the Company to take certain
actions which the Board of Directors may deem to be in the best interests of the
Company in the future, as the affirmative vote or consent of holders of 85% of
the then outstanding shares of Series A Preferred Stock would be required to
approve Fundamental Changes, including the creation, authorization or issuance
of certain securities. The Securities Purchase Agreement, the Stockholders'
Agreement and the terms of the Amendment, were negotiated and agreed to by the
Company and the Series A Preferred Stockholders. The Board of Directors
determined that the issuance of the Series A Preferred Stock (the proceeds of
which were used to contribute capital and surplus to Merchant Bakers to maintain
regulatory prescribed surplus and leverage ratios), and the terms and conditions
negotiated in connection therewith, including the Amendment, are in the best
interests of the Company. Accordingly, the Board of Directors of the Company has
unanimously approved the Amendment and recommends the adoption of the Amendment
by the stockholders of the Company.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE APPROVAL OF THE
AMENDMENT TO THE CERTIFICATE OF INCORPORATION.
20
PROPOSAL 3
RATIFICATION OF THE APPOINTMENT
OF INDEPENDENT AUDITORS
The Company's independent auditors for the fiscal year ended December 31,
1996 were Coopers & Lybrand L.L.P. Upon the recommendation of the Audit
Committee, the Company's Board of Directors has re-appointed Coopers & Lybrand
L.L.P. to continue as independent auditors for the Company for the fiscal year
ending December 31, 1997, subject to ratification of such appointment by the
stockholders. Representatives of Coopers & Lybrand L.L.P. are expected to attend
the Annual Meeting. They will be given the opportunity to make a statement if
they desire to do so and will be available to respond to appropriate questions
from stockholders present at the Annual Meeting.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE
RATIFICATION OF THE APPOINTMENT OF COOPERS & LYBRAND L.L.P.
AS THE INDEPENDENT AUDITORS OF THE COMPANY FOR THE FISCAL
YEAR ENDING DECEMBER 31, 1997.
ANNUAL REPORT AND FINANCIAL STATEMENT
The Annual Report of the Company for the fiscal year ended December 31,
1996, which includes its audited financial statements for the year, accompanies
this Proxy Statement.
STOCKHOLDER PROPOSALS
To be considered for inclusion in the Company's proxy statement in
connection with the 1998 Annual Meeting of Stockholders, a stockholder proposal
must be received by the Secretary of the Company, at the address set forth on
the first page of this Proxy Statement, no later than January __, 1998. Any
stockholder proposal submitted to the Company will be subject to SEC Rule 14a-8
under the Securities Exchange Act of 1934.
OTHER MATTERS
The Board of Directors knows of no other matters which will be brought
before the Meeting, but if such matters are properly presented to the Meeting,
proxies solicited hereby will be voted in accordance with the judgment of the
persons holding such proxies. All shares represented by duly executed proxies
will be voted at the Meeting.
YOU ARE CORDIALLY INVITED TO ATTEND THE ANNUAL MEETING IN PERSON. WHETHER OR NOT
YOU PLAN TO ATTEND THE ANNUAL MEETING, YOU ARE REQUESTED TO SIGN AND PROMPTLY
RETURN THE ACCOMPANYING PROXY IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
21
APPENDIX A
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
HOME STATE HOLDINGS, INC.
ARTICLE ONE
The name of the corporation is:
Home State Holdings, Inc. (the "Corporation").
The Corporation's certificate of incorporation was originally filed
with the Delaware Secretary of State on June 30, 1987.
ARTICLE TWO
The address of the Corporation's registered office in the State of
Delaware is Suite L-100, 32 Loockerman Square, Dover, County of Kent, Delaware
19901. The name of the Corporation's registered agent at such address is The
Prentice-Hall Corporation System, Inc.
ARTICLE THREE
The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the Delaware General
Corporation Law, as amended.
ARTICLE FOUR
Section 4.1 Authorized Shares. The total number of shares of stock
which the Corporation shall have authority to issue is TEN MILLION ONE HUNDRED
THOUSAND (10,100,000) shares, of which TEN MILLION (10,000,000) shall be share
of common stock, par value $.01 per share (the "Common Stock") and ONE HUNDRED
THOUSAND (100,000) shall be shares of preferred stock, par value $.01 per share
(the "Preferred Stock").
Effective upon the filing of this Amended and Restated Certificate of
Incorporation, all presently issued and outstanding shares of stock of the
Corporation automatically will be converted into shares of Common Stock as
follows: (i) each share of Class A voting common stock, without par value,
currently issued and outstanding will become 3.62407536 shares of Common Stock;
(ii) each share of Class B non-voting common stock, par value $.01 per share,
currently issued and outstanding will become 3.62407536 shares of Common Stock;
and (iii) each share of cumulative, non-redeemable preferred stock, par value
$10.00 per share, currently issued and outstanding will become .45300942 shares
of Common Stock, with an aggregate stated capital for all shares of Common Stock
resulting therefrom of $40,500. The Corporation shall pay cash, in lieu of
issuing fractional shares of Common Stock, based upon the initial public
offering price of the Common Stock.
Section 4.2 Voting Rights. Except as otherwise required by law, on all
matters to be voted on by the Corporation's stockholders, the Common Stock will
be entitled to one vote per share. Class voting shall be permitted to the extent
provided in the Certificate of Incorporation or in any resolution or resolutions
providing for the issue of a series of Preferred Stock.
Section 4.3 Dividends. When and as dividends are declared thereon,
whether payable in cash, property or securities of the Corporation, each holder
of Common Stock will be entitled to participate in such dividends ratably on a
per share basis.
Section 4.4 Liquidation. The holders of the Common Stock will be
entitled to share ratably on a per share basis in all distributions to the
holders of the Common Stock in any liquidation, dissolution or winding up of the
Corporation.
Section 4.5 Registration of Transfer. The Corporation or its transfer
agent will keep at its principal office (or such other place as the Corporation
reasonably designates) a register for the registration and transfer of shares of
Common Stock. Upon the surrender of any certificate representing shares of
Common Stock at such place, the Corporation will, at the request of the
registered holder of such certificate, execute and deliver a new certificate or
certificates in exchange therefor representing in the aggregate the number of
shares represented by the surrendered certificate, and the Corporation forthwith
will cancel such surrendered certificate. Each such new certificate will be
registered in such name and will represent such number of shares as is requested
by the holder of the surrendered certificate and will be substantially identical
in form to the surrendered certificate. The issuance of new certificates will be
made without charge to the holders of the surrendered certificates for any
issuance tax in respect thereof or other cost incurred by the Corporation in
connection with such issuance.
Section 4.6 Replacement. Upon receipt of evidence reasonably
satisfactory to the Corporation (an affidavit of the registered holder will be
satisfactory) of the ownership and the loss, theft, destruction or mutilation of
any
2
certificate evidencing one or more shares of Common Stock, and in the case
of any such loss, theft or destruction, upon receipt of indemnity reasonably
satisfactory to the Corporation, or, in the case of any such mutilation upon
surrender of such certificate, the Corporation will (at its expense) execute and
deliver in lieu of such certificate a new certificate of like kind representing
the number of shares represented by such lost, stolen, destroyed or mutilated
certificate and dated the date of such lost, stolen, destroyed or mutilated
certificate.
Section 4.7 Notices. All notices referred to in this Amended and
Restated Certificate of Incorporation shall be in writing, shall be delivered
personally or by first class mail, postage prepaid, and shall be deemed to have
been given when received by the Corporation at its principal executive offices
and to any stockholder at such holder's address as it appears in the stock
records of the Corporation (unless otherwise specified in a written notice to
the Corporation by such holder).
Section 4.8 Preferred Stock. (a) Subject to the limitations on voting
rights, convertibility and liquidations value set forth in subsection 4.8(b)
below, the shares of Preferred Stock of the Corporation may be issued form time
to time in one or more series, the shares of each series to have such voting
powers, full or limited, or no voting powers, and such designations, preferences
and relative, participating, optional or other special rights, and
qualifications, limitations or restrictions thereof, as are stated and expressed
herein or in the resolution or resolutions providing for the issue of such
series, adopted by the Board of Directors as hereinafter provided.
(b) Authority is hereby expressly granted to the Board of Directors of
the Corporation, subject to the provisions of this ARTICLE FOUR and to the
limitations prescribed by the Delaware General Corporation Law, as amended, to
authorize the issue of one or more series of Preferred Stock and with respect to
each such series to fix by resolution or resolutions providing for the issue of
such series the voting powers, full or limited, if any, of the shares of such
series and the designations, preferences and relative, participating, optional
or other special rights, and qualifications, limitations or restrictions
thereof. The authority of the Board of Directors with respect to each series
shall include, but not be limited to, the determination of fixing of the
following:
(i) The designation of such series;
(ii) The dividend rate of such series, the conditions and dates
upon which such dividends shall be payable, the relation which such
dividends shall bear to the dividends payable on any other class or
classes of stock or any other series of any class of stock of the
Corporation, and whether such dividends shall be cumulative or
non-cumulative;
3
(iii) Whether the shares of such series shall be subject to
redemption by the Corporation and, if made subject to such redemption,
the times, prices and other terms and conditions of such redemption;
(iv) The terms and amount of any sinking fund provided for the
purchase or redemption of the shares of such series;
(v) Whether or not the shares of such series shall be convertible
into or exchangeable for shares of any other class or classes of any
stock or any other series of any class of stock of the Corporation,
and, if provision is made for conversion or exchange, the times,
prices, rates, adjustments, and other terms and conditions of such
conversion or exchange;
(vi) The extent, if any, to which the holders of shares of such
series shall be entitled to vote with respect to the election of
directors or otherwise and the extent, if any, to which the holders of
shares of such series shall be entitled to vote as a class.
(vii) The restrictions, if any, on the issue or reissue of any
additional Preferred Stock; and
(viii) The rights of the holders of the shares of such series
upon the dissolution of, or upon the distribution of assets of, the
Corporation.
Section 4.9 Amendment and Waiver. No amendment or waiver of any
provision of this ARTICLE FOUR will be effective without prior approval of the
holders of a majority of the then outstanding Common Stock voting as a single
class.
ARTICLE FIVE
The Corporation is to have perpetual existence.
ARTICLE SIX
Section 6.1 Management. The following provisions are inserted for the
management of the business and for the conduct of the affairs of the
Corporation, and for further definition, limitation and regulation of the powers
of the Corporation and of its directors and stockholders:
4
(a) The number of directors of the Corporation shall be at least eight
but not more than ten as from time to time shall be fixed by, or in the manner
provided in, the by-laws. The directors shall be classified with respect to
their tenure of office into three classes as equal in number as possible in the
manner provided in the by-laws. Election of directors need not be by ballot
unless the by-laws so provide. Directors shall be subject to removal with or
without cause. Vacancies on the Board of Directors and newly created
directorships may be filled by the Board of Directors in accordance with the
Delaware General Corporation Law, as amended. In the event that such a vacancy
is not filled by the Board of Directors, the vacancy or vacancies may be filled
by the stockholders at the next annual meeting of stockholders.
(b) The Board of Directors shall have the power without the assent or
vote of the stockholders to make, alter, amend, change, add to or repeal the
by-laws of the Corporation; to fix and vary the amount of capital to be reserved
for any proper purpose; to authorize and cause to be executed mortgages and
liens upon all or any part of the property of the Corporation; to determine the
use and disposition of any surplus or net profits; and to fix the times for the
declaration and payment of dividends.
(c) In addition to the powers and authorities hereinbefore or by
statute expressly conferred upon them, the directors are hereby empowered to
exercise all such powers and do all such acts and things as may be exercised or
done by the Corporation, subject, nevertheless, to the provisions of the statues
of the State of Delaware, of this Amended and Restated Certificate of
Incorporation, and to any by-laws from time to time made by the stockholders;
provided, however, that no by-law so made shall invalidate any prior act of the
directors which would have been valid if such by-law had not been made.
ARTICLE SEVEN
Section 7.1 Indemnification. The Corporation shall, to the full extent
permitted by Section 145 of the Delaware General Corporation Law, as amended,
indemnify all directors and officers of the Corporation whom it may indemnify
pursuant thereto.
ARTICLE EIGHT
Section 8.1 Meetings. Meetings of stockholders may be held within or
without the State of Delaware, as the by-laws of the Corporation and this
Amended and Restated Certificate of Incorporation may provide. The books of the
Corporation may be kept outside the State of Delaware at such place or places as
may be designated from time to time by the Board of Directors or in the by-laws
of the
5
Corporation. Election of directors need not be by written ballot unless the
by-laws of the Corporation so provide.
Section 8.2 Special Meetings of Stockholders; Voting. Special meetings
of the stockholders of the Corporation may be called by the Board of Directors,
such person or persons as may be authorized to call a special meeting by the
Corporation's by-laws, or by the holders of 15% of the shares of capital stock
of the Corporation entitled to vote generally in the election of directors
("Voting Shares"). The holders of a majority of Voting Shares shall constitute a
quorum at all meetings of stockholders. When a quorum is present or represented
by proxy at any meeting, the vote of the holders of a majority of the Voting
Shares present in person or represented and entitled to vote shall decide any
question brought before the meeting, except as otherwise provided by law or the
provisions of ARTICLE FOUR. All Voting Shares shall be entitled to one vote per
share on any matter submitted to a vote of stockholders, except as otherwise
provided by provisions of ARTICLE FOUR. All proxies, ballots, votes and
tabulations that identify the particular vote of holders of Voting Shares shall
be confidential and shall not be disclosed except (a) to independent election
inspectors appointed by the Corporation, who shall not be directors, officers,
or employees of the Corporation, (b) as required by law, or (c) when expressly
requested by the voting stockholder.
Section 8.3 Action By Stockholders In Lieu of A Meeting. Any action
required by the Delaware General Corporation Law, as amended, to be taken at any
annual or special meeting of the stockholders of the Corporation, or any action
which may be taken at any annual or special meeting of such stockholders, may be
taken without a meeting, without prior notice and without a vote, if a consent
or consents in writing, setting forth the action so taken, shall be signed by
the holders of outstanding stock having not less than the minimum number of
votes that would be necessary to authorize or take such action at a meeting at
which all shares entitled to vote thereon were present and voting and shall be
delivered to the Corporation by delivery to its registered office in Delaware,
the Corporation's principal place of business, or an officer or agent of the
Corporation having custody of the book in which proceedings of meetings of
stockholders are recorded. Delivery made to the Corporation's registered office
shall be by hand or by certified or registered mail, return receipt requested.
Section 8.4 Certain Actions Requiring Stockholder Approval. Unless a
Fundamental Transaction (which term, for purposes of this Amended and Restated
Certificate of Incorporation, shall mean the sale, lease or exchange of all or
substantially all of the assets of the Corporation, or a merger or consolidation
or similar transaction on which Voting Shares are entitled to vote) has been
approved by a two-thirds vote of the entire Board of Directors, it shall require
the affirmative vote of two-thirds of the Voting Shares, voting as a class.
6
Section 8.5 Classes of Stock. Except as provided in ARTICLE FOUR, the
designations and the powers, preferences and rights, and the qualifications,
limitations and restrictions thereof in respect of any class or classes of stock
and any series of any class of stock of the Corporation shall be set forth in an
amendment to this Amended and Restated Certificate of Incorporation of the
Corporation.
Section 8.6 Reservation of Shares. The Corporation will at all times
reserve and keep available out of its authorized but unissued shares of Common
Stock, the number of such shares which are sufficient for issuance upon exercise
of any then outstanding warrant, option or similar right to receive or acquire
any class of Common Stock.
Section 8.7 Section 203 Not Applicable. The Corporation will not be
governed by Section 203 of the Delaware General Corporation Law, as amended.
ARTICLE NINE
Section 9.1 Limits on Liability. No director shall be personally liable
to the Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, provide that the foregoing shall not limit the
liability of a direct (a) for any breach of the director's duty of loyalty to
the Corporation or its stockholders, (b) for acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation of law, (c) for
unlawful payment of a dividend or an unlawful stock purchase or redemption under
Section 174 of the Delaware General Corporation Law, as amended from time to
time, except as may be permitted by said Section 174, or (d) for any transaction
from which the director derived an improper personal benefit.
ARTICLE TEN
Section 10.1 Miscellaneous. The Corporation reserves the right to
amend, alter, change or repeal any provision contained in this Amended and
Restated Certificate of Incorporation in the manner now or hereafter prescribed
herein and by the laws of the State of Delaware, and all rights conferred upon
stockholders herein are granted subject to this reservation.
7
APPENDIX B
AMENDED AND RESTATED
CERTIFICATE OF DESIGNATIONS, PREFERENCES AND RIGHTS
OF
SERIES A CUMULATIVE VOTING PREFERRED STOCK
($0.01 PAR VALUE PER SHARE)
OF
HOME STATE HOLDINGS, INC.
Pursuant to Section 151(g) of the
General Corporation Law of the
State of Delaware
We, Mark Vaughn, President, and Eric A. Reehl, Assistant Secretary, of
HOME STATE HOLDINGS, INC. (the "Corporation"), a corporation organized and
existing under and by virtue of the provisions of the General Corporation Law of
the State of Delaware,
DO HEREBY CERTIFY:
FIRST: The Amended and Restated Certificate of Incorporation (the
"Certificate of Incorporation") of the Corporation authorizes the issuance of
100,000 shares of preferred stock, $0.01 par value per share ("Preferred
Stock"), in one or more series, and further authorizes the Board of Directors to
provide by resolution for the issuance of shares of Preferred Stock in one or
more series not exceeding the aggregate number of shares of Preferred Stock
authorized by the Certificate of Incorporation and to determine with respect to
each such series, the voting powers, full or limited, if any, and the
designations, preferences and relative, participating, optional or other rights,
if any, and the qualifications, limitations or restrictions appertaining
thereto.
SECOND: A resolution providing for and in connection with the issuance
of the Preferred Stock was duly adopted by the Executive Committee of the Board
of Directors pursuant to authority granted to it by the Board of Directors
pursuant to authority expressly conferred on the Board of Directors by the
provisions of the Certificate of Incorporation as aforesaid, which resolution
provides as follows:
RESOLVED: that the Board of Directors, pursuant to authority expressly
vested in it by ARTICLE FOUR of the Amended and Restated Certificate of
Incorporation (the "Certificate of Incorporation") of Home State Holdings, Inc.
(the "Corporation"), hereby authorizes the issuance of a series of cumulative
voting preferred stock ("Cumulative Voting Preferred Stock") of the Corporation
and hereby establishes the voting powers, designations, preferences and
relative, participating, optional and other rights, and the qualifications,
limitations and restrictions appertaining thereto in addition to those set forth
in such Certificate of Incorporation (or otherwise provided by law) as follows
(the following, referred to hereinafter as "this resolution" or "this
Certificate of Designations", is to be filed as part of a Certificate of
Designations under Section 151(g) of the General Corporation Law of the State of
Delaware):
1. General.
(a) Designation and Number. The designation of Cumulative Preferred
Stock created by this resolution shall be Series A Cumulative Voting Preferred
Stock, $0.01 par value per share, of the Corporation (the "Series A Preferred
Stock"), and the number of shares of Series A Preferred Stock which the
Corporation shall be authorized to issue shall be 25,000 shares.
(b) Priority. The Series A Preferred Stock shall rank prior to the
Common Stock (as hereinafter defined) and to all other capital stock of the
Corporation now or hereafter authorized or issued (the Common Stock and any such
other capital stock collectively may be referred to herein as the "Junior
Stock"), in each case as to dividends and upon liquidation, dissolution or
winding up.
2. Certain Definitions.
(a) For purposes of this Certificate of Designations, the following
terms shall have the meanings indicated below:
"Business Day" means any day other than a Saturday, Sunday or a
day on which banking institutions in the State of New York are
authorized or obligated by law or executive order to close.
"Board of Directors" means the Board of Directors of the
Corporation.
2
"Call Redemption Price" has the meaning set forth in Section 7(a)
hereof.
"Class Voting Period" has the meaning set forth in Section 3(c)
hereof.
"Commission" means the Securities and Exchange Commission and any
other similar or successor agency of the federal government
administering the Securities Act or the Exchange Act.
"Common Stock" means the Corporation's Common Stock, as presently
authorized by the Certificate of Incorporation and as such Common
Stock may hereafter be changed or for which such Common Stock may be
exchanged after giving effect to the terms of such change or exchange
(by way of reorganization, recapitalization, merger, consolidation or
otherwise).
"Default Director" has the meaning set forth in the Stockholders'
Agreement.
"Dividend Reference Date" has the meaning set forth in Section
4(d) hereof.
"Exchange Act" means the Securities Exchange Act of 1934, as from
time to time amended, and the rules, regulations and interpretations
thereunder.
"Full Cumulative Dividends" means as of any date the amount of
accumulated, accrued and unpaid dividends payable on each share of
Series A Preferred Stock as provided by Section 4 hereof, whether or
not earned or declared and whether or not there shall be funds legally
available for the payment thereof, and in all cases, the term "Full
Cumulative Dividends" shall include all accumulated, accrued and
unpaid dividends owing with respect to any period or Dividend
Reference Date prior to the date on which the amount of Full
Cumulative Dividends is determined.
"Fundamental Change" has the meaning set forth in Section 9
hereof.
"Gulkin Transaction" has the meaning set forth in the Purchase
Agreement.
3
"Insurance Company" has the meaning set forth in the Purchase
Agreement.
"Investment" has the meaning set forth in the Purchase Agreement.
"Junior Preferred Stock" means any Preferred Stock to which the
Series A Preferred Stock ranks prior, in each case, as to dividends,
or upon liquidation, dissolution or winding up. All Preferred Stock of
the Corporation other than the Series A Preferred Stock shall be
Junior Preferred Stock.
"Junior Stock" has the meaning set forth in Section 1(b) hereof.
"Mandatory Redemption Date" has the meaning set forth in Section
6(a) hereof.
"Mandatory Redemption Price" has the meaning set forth in Section
6(a) hereof.
"Material Adverse Effect" has the meaning set forth in the
Purchase Agreement.
"Non-Compliance Event" means any of the following:
(a) the failure by the Corporation to redeem shares of
Series A Preferred Stock in accordance with the provisions of
Section 6(a) or 6(b) hereof for any reason, and such failure in
such redemption of such shares shall have continued for at least
fifteen (15) days; or
(b) the failure by the Corporation to pay Full Cumulative
Dividends on each share of Series A Preferred Stock on any two
(2) consecutive Dividend Reference Dates.
"Non-Payment Notice" has the meaning set forth in Section 6(e) hereof.
"Optional Redemption Price" has the meaning set forth in Section 6(b)
hereof.
"Other Transaction Document" has the meaning set forth in the Purchase
Agreement.
4
"Person" or "person" means an individual, corporation, partnership,
firm, association, joint venture, trust, unincorporated organization,
government, governmental body, agency, political subdivision or other
entity.
"Preferred Director" has the meaning set forth in the Stockholders'
Agreement.
"Preferred Liquidation Value" has the meaning set forth in Section
5(a) hereof.
"Premium Redemption Price" has the meaning set forth in Section 6(a)
hereof.
"Purchase Agreement" means the Securities Purchase Agreement dated as
of October 4, 1996 by and among the Corporation and the Purchasers named
therein (as from time to time assigned, supplemented or amended or as the
terms thereof may be waived).
"Redemption Default" has the meaning set forth in Section 6(e) hereof.
"Redemption Event" means any of the following:
(a) any transaction or series of transactions (including, without
limitation, a tender offer, merger or consolidation) the result of which is that
any Person or group (within the meaning of Sections 13(d)(3) or 14(d)(2) of the
Exchange Act), together with any affiliates or associates of any thereof (within
the meaning of Rule 12b-2 under the Exchange Act) (other than any holder of
Series A Preferred Stock or Warrants or Herrick Partners, L.P. and Michael H.
Monier) shall at any time beneficially own (within the meaning of Rule 13d-3
under the Exchange Act) a percentage of the total voting power of the Common
Stock of the Corporation which is equal to or greater than twenty percent (20%);
or
(b) except in connection with the Gulkin Transaction (provided that
aggregate Investments and Restricted Payments in connection therewith do not
exceed $2,100,000), the sale, lease, transfer, exchange, conveyance or other
disposition (whether through voluntary liquidation, dissolution, winding-up or
otherwise) of all or substantially all of the consolidated assets of the
Corporation and its Subsidiaries in a single transaction or series of related
transactions to any Person (other than the Corporation or a wholly owned
Subsidiary
5
of the Corporation), or the consolidation or merger of the Corporation or any
Subsidiary with or into any other Person (other than with or into the
Corporation or a wholly owned Subsidiary of the Corporation) or the sale,
transfer or other disposition of any capital stock of any Subsidiary (other than
to the Corporation or another wholly owned Subsidiary of the Corporation); or
(c) the Corporation (i) commences a voluntary case or other proceeding
seeking liquidation, reorganization or other relief with respect to itself or
its debts under any bankruptcy, insolvency or other similar law now or hereafter
in effect or seeking the appointment of a trustee, receiver, liquidator,
custodian or other similar official of it or any substantial part of its assets,
or (ii) consents to any such relief or to the appointment of or taking
possession by any such official in an involuntary case or other proceeding
commenced against it, or (iii) makes a general assignment for the benefit of
creditors, or (iv) fails generally, or admits in writing its inability, to pay
its debts as they become due, or (v) takes any corporate action to authorize any
of the foregoing; or
(d) the commencement of an involuntary case or other proceeding against
the Corporation seeking liquidation, reorganization or other relief with respect
to it or its debts under any bankruptcy, insolvency or other similar law now or
hereafter in effect or seeking the appointment of a trustee, receiver,
liquidator, custodian or other similar official of it or any substantial part of
its assets, and such involuntary case or other proceeding remains undismissed or
unstayed for a period of sixty (60) days, or the entry of an order for relief
against the Corporation under the federal bankruptcy laws or any other similar
law now or hereafter in effect; or
(e) the acquisition by the Corporation of the Common Stock (or any
corporate reorganization or recapitalization or other action) if the effect of
such acquisition (or other action) would be either (i) to reduce substantially
or to eliminate the primary public market for the shares of the Common Stock or
(ii) to remove the Corporation from registration with the Commission under the
Exchange Act or (iii) to require the Corporation to make a filing under Section
13(e) of the Exchange Act or (iv) to cause a delisting of the Common Stock from
the Nasdaq National Market (unless such stock is delisted as a result of being
listed on a national securities exchange) or (v) if any shares of the
Corporation's common stock is at any time listed on a national exchange, causing
a delisting of such stock from such exchange; or
(f) at any time, a majority of the members of the Board of Directors
(other than members designated by the holders of Series A Preferred Stock) are
persons other than persons each of whom was both (i) nominated as a director for
his or her then current term by the Board of Directors and was recommended by
the Board of Directors to the Corporation's shareholders for election as a
member of the Board of Directors and (ii) a member of the Board of Directors for
at least one (1) year prior to such term (except that a person chosen by the
Board of Directors as a
6
successor to a director who died in office, resigned from the Board of Directors
because of a disability, or retired, shall be deemed to have satisfied this
clause (ii)); or
(g) the prepayment or making of an unscheduled repayment, in part or in
full, of the Subordinated Notes; or
(h) except as otherwise permitted in Section 6 of the Stockholders'
Agreement, Herrick Partners, L.P., a Delaware limited partnership, ceases to
beneficially own (within the meaning of Rule 13d-3 under the Exchange Act) at
least 477,467 shares, or Michael H. Monier ceases to beneficially own (within
the meaning of Rule 13d-3 under the Exchange Act) at least 465,970 shares, of
the outstanding Common Stock of the Corporation for any reason; provided, that
such number of shares shall be increased or decreased, as appropriate, for any
stock dividends, subdivision of outstanding shares, combination of outstanding
shares or reclassification of shares; or
(i) the failure by the Corporation to pay Full Cumulative Dividends on
each share of Series A Preferred Stock on six (6) consecutive Dividend Reference
Dates; or
(j) the authorization, approval or occurrence of any Fundamental
Change; or
(k) the failure to elect any Preferred Director or Default Director
pursuant to the Stockholders' Agreement, or the removal of any such director
other than as provided in the Stockholders' Agreement; or
(l) at any time the Corporation (i) fails to preserve and keep (and
cause each Subsidiary to preserve and keep) in full force and effect its
existence and the rights and franchises material to the business of the
Corporation and the Subsidiaries taken as a whole, or the Corporation or any
Subsidiary individually, (ii) materially changes the nature or character of its
business activities as a holding company for companies organized as insurance
companies that primarily and predominantly engage in writing insurance or
reinsuring risks underwritten by insurance companies ("Insurance Companies") and
companies in the business of providing premium finance, reinsurance brokerage
and insurance management services to Insurance Companies, (iii) permits any
Subsidiary which is an Insurance Company to change materially the nature of its
business from that of an Insurance Company, or (iv) permits any Subsidiary which
is not an Insurance Company to engage in any business other than the business of
providing premium finance, reinsurance brokerage and insurance management
services to Insurance Companies; or
7
(m) the failure by the Corporation to perform (i) the covenants set
forth in Section 9.1 of the Purchase Agreement or (ii) any covenant or agreement
contained in the Purchase Agreement or any Other Transaction Document (except as
may be waived if permitted thereunder), other than the covenants or agreements
contained in the Reliance Reinsurance Agreement, the Swiss Re Reinsurance
Binders or the Swiss Re Letter Agreement, or the breach by, or default of, the
Corporation (or any of its affiliates) under the Purchase Agreement or any Other
Transaction Document; provided that any such failure, breach or default
described in clause (ii) hereof would have a Material Adverse Effect; or
(n) (i) at any time, the Corporation or any Insurance Subsidiary (x)
fails to perform, breaches or causes a default under, any of its covenants,
agreements or obligations under the Reliance Reinsurance Agreement and such
failure to perform, breach or default shall continue for a period of ten (10)
days following written notice thereof to the Corporation from Reliance or (y)
challenges the validity or enforceability of the Reliance Reinsurance Agreement
or (ii) at any time, the Reliance Reinsurance Agreement shall be judicially
determined to be invalid or unenforceable; provided that only the parties to the
Reliance Reinsurance Agreements (other than the Corporation or any Subsidiary
thereof) may exercise a right of redemption under Section 6(b) hereof with
respect to this clause (n); or
(o) (i) at any time, the Corporation or any Insurance Subsidiary (x)
fails to perform, breaches or causes a default under, any of its covenants,
agreements or obligations under the Swiss Re Reinsurance Binders or the Swiss Re
Letter Agreement and such failure to perform, breach or default shall continue
for a period of ten (10) days following written notice thereof to the
Corporation from Swiss Re or (y) challenges the validity or enforceability of
the Swiss Re Reinsurance Binders or the Swiss Re Letter Agreement or (ii) at any
time, the Swiss Re Reinsurance Binders or the Swiss Re Letter Agreement shall be
judicially determined to be invalid or unenforceable; provided that only the
parties to the Swiss Re Reinsurance Binders or the Swiss Re Letter Agreements
(other than the Corporation or any Subsidiary thereof) may exercise a right of
redemption under Section 6(b) hereof with respect to this clause (o); or
(p) any amendment of the Corporation's Certificate of Incorporation or
By-Laws, or any action by the stockholders of the Corporation or the Board of
Directors, that would have the effect of rendering those provisions of the
amendment effected pursuant to Section 8.15 of the Purchase Agreement intended
to secure the rights, privileges and preferences of the holders of Series A
Preferred Stock inoperative or
8
ineffective, or otherwise adversely affect such rights, privileges and
preferences included in the amendment contemplated by Section 8.15 of the
Purchase Agreement; or
(q) the failure by the Corporation to make any redemption of Series A
Preferred Stock pursuant to Section 6(a) hereof.
"Reliance Reinsurance Agreement" has the meaning set forth in the
Purchase Agreement.
"Reliance" means Reliance Insurance Company, a Pennsylvania
corporation.
"Restricted Payments" has the meaning set forth in the Purchase
Agreement.
"Securities Act" means the Securities Act of 1933, as from time to
time amended, and the rules, regulations and interpretations thereunder.
"Stockholders' Agreement" means the Stockholders' Agreement dated as
of October 4, 1996 by and among the Corporation, Swiss Re, Reliance and the
Edward D. Herrick and Michael H. Monier of the Corporation (as from time to
time assigned, supplemented or amended or as the terms thereof may be
waived).
"Subordinated Notes" means the 11.50% Subordinated Notes due October
3, 2004 issued by the Corporation pursuant to a Purchase Agreement dated
October 3, 1994 among the Corporation and the Investors listed therein.
"Subsidiary", with respect to any Person, means any corporation,
association or other entity controlled by such Person. For purposes of this
definition "control", with respect to any Person, shall mean possession,
directly or indirectly, of the power to direct or cause the direction of
management and policies of such Person, whether through the ownership of
voting securities or by contract or otherwise.
"Swiss Re" means Swiss Reinsurance America Corporation, a New York
corporation.
"Swiss Re Reinsurance Binders" has the meaning set forth in the
Purchase Agreement.
9
"Swiss Re Letter Agreement" has the meaning set forth in the Purchase
Agreement.
"Warrants" means, the Corporation's Class A Warrants to purchase the
Common Stock of the Corporation represented by Class A Warrant Certificates
(as from time to time assigned, supplemented or amended) issued pursuant to
the Purchase Agreement.
(b) The words "hereof", "herein" and "hereunder" and other words of
similar import refer to this Certificate of Designations as a whole and not to
any particular Section or other subdivision.
(c) References herein to the Certificate of Incorporation include such
Certificate as amended by this Certificate of Designations.
3. Voting Rights.
(a) No Voting Rights Generally. Except as otherwise provided herein or
as otherwise provided by law, each share of Series A Preferred Stock shall have
no voting rights.
(b) Preferred Director. The holders of more than fifty percent (50%) of
the then outstanding shares of Series A Preferred Stock, by the affirmative vote
in person or by proxy at a special meeting of stockholders called for such
purpose (or at any adjournment thereof) by holders of at least twenty percent
(20%) of the then outstanding shares of Series A Preferred Stock or at any
annual meeting of stockholders, or by written consent delivered to the Secretary
of the Corporation, with the holders of such Series A Preferred Stock voting as
a class and with each such share of Series A Preferred Stock having one (1)
vote, shall be entitled, as a class, to the exclusion of the holders of Common
Stock or any other classes or series of capital stock of the Corporation, to
elect one (1) director to the Board of Directors of the Corporation (such
director referred to herein as the "Preferred Director"). The term of any such
Preferred Director shall expire at such time when all of the shares of Series A
Preferred Stock have been redeemed (or otherwise surrendered or canceled).
(c) Default Director.
(i) In addition to the rights set forth in Section 3(b) hereof, upon
the occurrence of a Redemption Default, the size of the Board of Directors
of
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the Corporation shall be increased by two (2) and during the period
(hereinafter in this Section 3(c) called the "Class Voting Period")
commencing upon the occurrence of any such Redemption Default and ending at
such time upon which no Redemption Default shall continue, the holders of
more than fifty percent (50%) of the then outstanding shares of Series A
Preferred Stock, by the affirmative vote in person or by proxy at a special
meeting of stockholders called for such purpose (or at any adjournment
thereof) by holders of at least twenty percent (20%) of the then
outstanding shares of Series A Preferred Stock or at any annual meeting of
stockholders, or by written consent delivered to the Secretary of the
Corporation, with the holders of such Series A Preferred Stock voting as a
class and with each such share of Series A Preferred Stock having one vote,
shall be entitled, as a class, to the exclusion of the holders of all other
classes or series of capital stock of the Corporation, to elect such two
(2) directors to the Board of Directors of the Corporation (each such
director referred to herein as a "Default Director").
(ii) At the end of the Class Voting Period, the holders of Series A
Preferred Stock shall be automatically divested of all voting power vested
in them under this Section 3(c) except as herein or by law expressly
provided, subject always to the subsequent vesting hereunder of such voting
power in the holders of Series A Preferred Stock upon the occurrence of any
subsequent Redemption Default. The term of each Default Director shall
expire at the end of the Class Voting Period and the size of the Board of
Directors shall be reduced accordingly.
(d) Special Meetings. If necessary to call a special meeting of
stockholders for the purpose of electing or removing any Preferred Director or
Default Director, and if such right shall not already have been initially
exercised by the holders of Series A Preferred Stock, an officer of the
Corporation shall, upon the written request of at least twenty percent (20%) of
the holders of record of shares of the Series A Preferred Stock then
outstanding, addressed to the Secretary of the Corporation, call a special
meeting of holders of shares of the Series A Preferred Stock. Such meeting shall
be held at the earliest practicable date upon the notice required for annual
meetings of stockholders at the place for holding annual meetings of
stockholders of the Corporation, or if none, at a place designated in New
11
York, New York by the Secretary of the Corporation. If such meeting shall not be
called by the proper officers of the Corporation within thirty (30) days after
the personal service of such written request upon the Secretary of the
Corporation, or within thirty (30) days after mailing the same within the United
States, by registered mail, addressed to the Secretary of the Corporation at its
principal office (such mailing to be evidenced by the registry receipt issued by
the postal authorities), then the holders of record of at least twenty percent
(20%) of the shares of Series A Preferred Stock then outstanding may designate
in writing any person to call such meeting at the expense of the Corporation,
and such meeting may be called by such person so designated upon the notice
required for annual meetings of stockholders and shall be held at the place for
holding annual meetings of stockholders of the Corporation or, if none, at a
place in New York, New York designated by the person selected to call the
meeting. Any holder of shares of Series A Preferred Stock then outstanding that
would be entitled to vote at such meeting shall have access to the stock books
of the Corporation for the purpose of causing a meeting of stockholders to be
called pursuant to the provisions of this paragraph.
(e) Removal of Preferred Director and Default Director. Any Preferred
Director or Default Director may be removed at any time, by the vote of the
holders of more than fifty percent (50%) of all of the then outstanding shares
of Series A Preferred Stock, voting as a separate class in person or by proxy at
a special meeting of stockholders called for such purpose (or at any adjournment
thereof) by holders of at least twenty percent (20%) of the outstanding shares
of Series A Preferred Stock or at any annual meeting of stockholders, or by
written consent delivered to the Secretary of the Corporation, and no Preferred
Director or Default Director may be removed at any time without the affirmative
vote or consent of the holders of more than fifty percent (50%) of all of the
outstanding shares of Series A Preferred Stock. Any vacancy created by the
removal, death or resignation of a Preferred Director or a Default Director may
be filled by the holders of more than fifty percent (50%) of all of the
outstanding shares of Series A Preferred Stock by vote in person or by proxy at
a special meeting of stockholders of the Corporation called for such purpose by
holders of at least twenty percent (20%) of the outstanding shares of Series A
Preferred Stock, or at any annual meeting, or by written consent delivered to
the Secretary of the Corporation.
(f) Consent Required. So long as any shares of the Series A Preferred
Stock remain outstanding, unless the vote or consent of the holders of a greater
number of shares shall then be required by law, the affirmative vote or consent
of the holders of more than eighty-five percent (85%) of all of the shares of
Series A Preferred Stock at the time outstanding, voting separately as a class,
given in person or by proxy either in writing (as may be permitted by law and
the Certificate of Incorporation and By-laws of the Corporation) or at any
special or
12
annual meeting, shall be necessary to permit, effect or validate the taking of
any of the following actions by the Corporation:
(i) create, authorize, issue or sell (i) any class or series of
capital stock ranking prior to or on parity with the Series A Preferred
Stock as to dividends or upon liquidation, dissolution or winding up or
(ii) any rights, options or other securities convertible, exercisable or
exchangeable for or into, or having rights to purchase, any shares of
capital stock described in clause (i) hereof; or
(ii) amend the Certificate of Incorporation or By-laws of the
Corporation, or in any other manner alter or change the powers, rights,
privileges or preferences of the Series A Preferred Stock, if such
amendment or action would alter, change or affect adversely the powers,
rights, privileges or preferences of the holders of the Series A Preferred
Stock; or
(iii) increase the number of shares of Series A Preferred Stock
authorized for issuance; or
(iv) change the size of the Board of Directors, except as permitted
under the Stockholders' Agreement; or
(v) at any time after September 30, 1996, issue any shares of Series A
Preferred Stock, except (i) issuances specifically permitted by Section 11
or Section 9.13 of the Purchase Agreement, or (ii) issuances of share
certificates upon transfers or exchanges of shares by holders (other than
the Corporation) or in replacement of lost, stolen, damaged or mutilated
share certificates;
(each of the actions set forth in the preceding clauses (i)-(v) of this Section
3(g), a "Fundamental Change").
4. Dividend Rights.
(a) General Dividend Obligations. The Corporation shall pay, when and
as declared by the Board of Directors, to the holders of the Series A Preferred
Stock, out of the assets of the Corporation legally available therefor, cash
dividends at the times, in the amounts and with such priorities as are provided
for in this Section 4.
(b) Accrual of Dividends. Dividends on each share of Series A Preferred
Stock shall accrue cumulatively on a daily basis, at the rate and in the manner
prescribed herein, from and including the date of issuance of such share of
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Series A Preferred Stock to and including the date on which the redemption of
such share of Series A Preferred Stock shall have been effected or on which full
payment with respect to such share shall have been made pursuant to any
liquidation, dissolution or winding-up of the Corporation. The date on which the
Corporation shall initially issue any share of Series A Preferred Stock shall be
deemed to be its "date of issuance" regardless of the number of times transfer
of such share of Series A Preferred Stock shall be made on the stock records
maintained by or for the Corporation and regardless of the number of
certificates which may be issued to evidence such share of Series A Preferred
Stock (whether by reason of transfer of such share of Series A Preferred Stock
or for any other reason).
(c) Dividend Rates. Dividends shall accrue cumulatively on each share
of Series A Preferred Stock from and including the date of issuance at a rate
per annum equal to $75 per share calculated on the basis of a 360 day year
(i.e., $0.2084 per day) and be paid for the actual number of days elapsed in a
year; provided, however, that from and after the occurrence of a Non- Compliance
Event (for so long as a Non-Compliance Event shall be continuing), dividends
shall accrue cumulatively on each share at a rate per annum equal to $85 per
share calculated on the basis of a 360 day year (i.e., $0.2361 per day) and be
paid for the actual number of days elapsed in a year and; provided, however,
that if at any time there shall be more than one Non-Compliance Event which
shall have occurred, then for so long as at least two Non-Compliance Events
shall be concurrently continuing, then dividends shall accrue cumulatively on
each share at a rate per annum equal to $95 per share calculated on the basis of
a 360 day year (i.e., $0.2639 per day) and be paid for the actual number of days
elapsed in a year.
(d) Payment Dates. Full Cumulative Dividends on each share of Series A
Preferred Stock shall be payable quarterly on the last day of each March, June,
September and December or, if any such day is not a Business Day, the
immediately succeeding Business Day (each, a "Dividend Reference Date"),
commencing on December 31, 1996. The first Dividend Reference Date shall be
December 31, 1996 (on which date dividends accrued from and including the date
of issuance through and including such Dividend Reference Date shall be
payable). An amount equal to the Full Cumulative Dividends also shall be
payable, in satisfaction of such dividend obligation, upon liquidation as
provided under Section 5 hereof, and upon redemption as provided under Section 6
hereof. The record date for the payment of dividends on the Series A Preferred
Stock shall in no event be more than sixty (60) nor less then fifteen (15) days
prior to a Dividend Reference Date.
(e) Amounts Payable. The amount of dividends payable on each share of
Series A Preferred Stock on each Dividend Reference Date shall be the Full
Cumulative Dividends which are unpaid through and including such Dividend
Reference Date. Dividends which are not paid for any reason whatsoever on a
14
Dividend Reference Date shall cumulate until paid and shall be payable on the
next Dividend Reference Date on which payment can lawfully be made (or upon
liquidation or redemption as provided herein). Holders of shares of Series A
Preferred Stock called for redemption on a redemption date falling between the
close of business on a dividend payment record date and the opening of business
on the corresponding Dividend Reference Date shall, in lieu of receiving such
dividend payment on the Dividend Reference Date fixed therefor, receive an
amount equal to the Full Cumulative Dividends payable with respect to such
shares on the date fixed for redemption. If for whatever reason all payments
have not been made with respect to any share of Series A Preferred Stock as
required by Section 5 on a distribution date or all payments have not been made
with respect to any share of Series A Preferred Stock as required by Section 6
on a redemption date (other than because of a failure by the holder thereof to
tender such shares for payment on such date), then, notwithstanding any other
provision hereof, dividends shall continue to accumulate on such outstanding
shares (at the applicable rate set forth in Section 4(c) hereof) until paid.
Dividends paid on shares of Series A Preferred Stock in an amount less than the
Full Cumulative Dividends payable on such shares shall be allocated pro rata
among all such shares of Series A Preferred Stock then outstanding.
(f) Priority. So long as any shares of the Series A Preferred Stock are
outstanding, in the event (A) Full Cumulative Dividends shall not have been paid
in full, (B) any amount due with respect to the Series A Preferred Stock shall
not have been paid, (C) any holder of Series A Preferred Stock shall have
exercised such holder's rights under Section 6(b) and the date of redemption
established pursuant to Section 6(c) shall not yet have occurred, or (D) the
Corporation shall have called for redemption of any Series A Preferred Stock
pursuant to Section 6(a) or Section 7, as the case may be, and the date of
redemption established pursuant to Section 6(a) or Section 7(c), as the case may
be, shall not yet have occurred, then (i) no dividends shall be declared or paid
or set apart for payment and no other distribution shall be declared or made or
set apart for payment, in each case upon the Common Stock or upon any other
Junior Stock of the Corporation and (ii) no capital stock of the Corporation
(other than the Series A Preferred Stock or Common Stock or rights therein
issued pursuant to Section 6.3(d)(iii) of the Home State Holdings, Inc. 1993
Stock Option Plan as in effect on the date hereof shall be redeemed, purchased
or otherwise acquired for any consideration (or any moneys be paid to or made
available for a sinking fund or otherwise for the purchase or redemption of any
shares of any such stock) by the Corporation or any Subsidiary.
5. Liquidation Rights.
(a) Priority. In the event of any liquidation, dissolution or winding
up of the Corporation, whether voluntary or involuntary, before any payment or
15
distribution of the assets of the Corporation (whether from capital or surplus)
shall be made to or set apart for the holders of any Common Stock or any other
Junior Stock, and before any purchase, redemption or other acquisition for any
consideration by the Corporation shall be made in respect of any Common Stock or
any other Junior Stock, each holder of shares of Series A Preferred Stock shall
be entitled to receive from the assets of the Corporation, whether represented
by capital, surplus, reserves or earnings, an amount per share (payable in cash)
equal to the sum of (i) $1,000 plus (ii) the Full Cumulative Dividends payable
with respect to each such share through and including the date of such
liquidation, dissolution or winding-up of the Corporation or the date on which
such share of Series A Preferred Stock is fully redeemed pursuant to Section 6
below (the sum of (i) and (ii) being the "Preferred Liquidation Value"). If the
assets distributable upon such liquidation, dissolution or winding-up of the
Corporation, whether voluntary or involuntary, shall be insufficient to permit
payment to the holders of the shares of Series A Preferred Stock of the full
preferential amounts as set forth in this Section 5(a), then such assets shall
be distributed ratably among the shares of Series A Preferred Stock.
(b) Junior Stock. After payment shall have been made in full to the
holders of Series A Preferred Stock as provided in this Section 5 upon any
liquidation, dissolution or winding up of the Corporation, the holders of the
Common Stock and any other Junior Stock of the Corporation shall, subject to the
respective terms and provisions (if any) applying thereto, be entitled to
receive any and all assets remaining to be paid or distributed upon such
liquidation, dissolution or winding up.
(c) Notice of Liquidation. Written notice of any liquidation,
dissolution or winding-up of the Corporation, stating the payment date or dates
when and the place or places where the amounts distributable in such
circumstances shall be payable, shall be given (not less than thirty (30) days
prior to any payment date stated therein) to the holders of record of the Series
A Preferred Stock at their respective addresses as the same shall appear on the
stock register of the Corporation.
6. Redemption.
(a) Mandatory Redemption. The Corporation shall redeem on each of
September 30, 2006, September 30, 2007, September 30, 2008, September 30, 2009
and September 30, 2010 (each, a "Mandatory Redemption Date"), the number of
shares of Series A Preferred Stock that is equal to twenty percent (20%) of the
total shares of Series A Preferred Stock outstanding on September 30, 2006 (or
any such lesser number of shares which on any such Mandatory Redemption Date
shall constitute all of the remaining outstanding shares of Series A Preferred
Stock), in
16
each case at a price per share in cash (the "Mandatory Redemption Price") equal
to the Preferred Liquidation Value per share on the applicable Mandatory
Redemption Date; provided, however, that if the Corporation fails to fully
redeem shares of Series A Preferred Stock pursuant to this Section 6(a) on any
two (2) Mandatory Redemption Dates, or if a Redemption Event of the type
referred to in clause (i) of the definition thereof has occurred, the
Corporation shall thereafter be required to redeem any remaining outstanding
shares of Series A Preferred Stock at a price per share in cash equal to the sum
of (i) $1,025 plus (ii) the Full Cumulative Dividends payable with respect to
each such share through and including the date of redemption of such share (the
"Premium Redemption Price").
(b) Optional Redemption.
(i) Upon the occurrence of any Redemption Event, each holder of a
share of Series A Preferred Stock shall have the right, at such holder's
option, to require the Corporation to redeem such holder's shares of Series
A Preferred Stock in whole or in part at a price per share in cash (the
"Optional Redemption Price") equal to the Preferred Liquidation Value per
share of Series A Preferred Stock through and including the date of such
redemption; provided, however, that (A) if such Redemption Event occurred
on or prior to September 30, 1997, the Optional Redemption Price shall be
increased by $37.50 per share of Series A Preferred Stock, (B) if such
Redemption Event occurred during the period after September 30, 1997 to and
including September 30, 1998, the Optional Redemption Price shall be
increased by $18.75 per share of Series A Preferred Stock, and (C) if such
Redemption Event occurred during the period after September 30, 1998 to and
including September 30, 2010, the Optional Redemption Price shall be
increased by $9.3525 per share of Series A Preferred Stock; provided
further that, if a Redemption Event of the type referred to in clause (i)
of the definition thereof has occurred, the Optional Redemption Price shall
be an amount equal to the Premium Redemption Price.
(ii) Such holder's option to require redemption under this Section
6(b) may be exercised by written notice to the Corporation pursuant to
Section 6(d) hereof given at any time on or after the occurrence of any
Redemption Event, but in no event after the later of (i) the ninetieth
(90th) day after such holder receives written notice from the Corporation
of such Redemption Event or (ii) the ninetieth (90th) day after the holder
becomes aware of the occurrence of such Redemption Event. Promptly (and in
any event within ten (10) days) after the occurrence of any Redemption
Event, the Corporation shall give written notice to each holder of a share
of Series A Preferred Stock notifying each such holder of the occurrence of
such
17
Redemption Event and informing each such holder of its right to
exercise its option to require a redemption under this Section 6(b).
(c) Payment of Redemption Price. Each payment to be made under Section
6(a) or Section 6(b) hereof shall be made in accordance with Section 10 hereof
to the holder of each share of Series A Preferred Stock being redeemed upon
surrender by such holder to the Corporation or its agent of the certificate
representing such share of Series A Preferred Stock, duly endorsed in blank or
accompanied by an appropriate form of assignment.
(d) Notice of Redemption.
(i) Notice of the redemption of shares of Series A Preferred Stock
pursuant to Section 6(a) hereof, specifying the time and place of
redemption and the price at which such shares are to be redeemed, shall be
mailed by certified or registered mail, return receipt requested, to each
holder of record of shares to be redeemed, at the address for such holder
shown on the stock records of the Corporation not less than ten (10)
Business Days prior to the date on which such redemption is to be made;
provided, that neither failure to give such notice nor any defect therein
shall affect the validity of the proceeding for the redemption of any
shares of Series A Preferred Stock to be redeemed. Such notice shall also
specify the number of shares of Series A Preferred Stock of each holder
thereof and the certificate numbers thereof which are to be redeemed. In
case less than all the shares of Series A Preferred Stock represented by
any certificate are redeemed, a new certificate representing the unredeemed
shares of Series A Preferred Stock shall be issued to the holder thereof
without cost to such holder.
(ii) In order to exercise its right to require a redemption under
Section 6(b) hereof, a holder of any shares of Series A Preferred Stock
requesting such redemption shall send to the Corporation a written notice
demanding redemption under Section 6(b) hereof and specifying the date of
such redemption (which shall not be less than five (5) days after receipt
of such notice by the Corporation); provided that neither failure to give
such notice nor any defect therein shall affect the validity of the
proceeding for the redemption of any shares of Series A Preferred Stock to
be redeemed.
(e) Failure to Redeem. In the event that on any date for redemption
pursuant to Section 6(a) or Section 6(b) hereof, the Corporation, for whatever
reason, is unable to, or does not, pay in full the applicable redemption price
or other amounts due to any holder or holders of shares of Series A Preferred
Stock (the "Redemption Default"), the Corporation shall promptly notify all
holders of shares of Series A Preferred Stock of the Redemption Default (the
"Non-Payment Notice").
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In the event of any Redemption Default, and without releasing the Corporation
from its obligations under Section 6(a) or Section 6(b) hereof, the amount, if
any, paid by the Corporation shall be allocated as follows: (i) with respect to
any amounts payable under Section 6(a) hereof, to all holders of shares of
Series A Preferred Stock in proportion, as nearly as practicable, to the
respective number of shares of Series A Preferred Stock then held by each
holder, and (ii) with respect to any amounts payable under Section 6(b) hereof,
to all holders of shares of Series A Preferred Stock who have sent written
notices to the Corporation of their intent to exercise redemption rights under
Section 6(b) hereof within thirty (30) days following the delivery of the
Non-Payment Notice by the Corporation, which allocation shall be in proportion,
as nearly as practicable, to the respective number of shares of Series A
Preferred Stock then held by each such holder; provided that any holders of
Series A Preferred Stock which, not more than thirty (30) days prior to the
delivery of the Non-Payment Notice, have delivered notice to the Corporation of
their intent to exercise redemption rights under Section 6(b) hereof, shall be
included in the allocation described in clause (ii) hereof.
(f) Status of Redeemed Shares. Shares of the Series A Preferred Stock
which have been redeemed pursuant to Section 6(a) or 6(b) hereof shall, after
such redemption be retired, canceled and shall not thereafter be reissued as
Series A Preferred Stock. All such shares shall have the status of authorized
but unissued shares of Preferred Stock of the Corporation, without designation
as to series, until such shares are once more designated as part of a particular
series by or on behalf of the Board of Directors.
7. Call Redemption of Series A Preferred Stock.
(a) Call Redemption. So long as no Redemption Event or Non-Compliance
Event shall have occurred and be continuing, the Corporation may, at its option,
at any time on or after September 30, 2000, on one or more occasions, provided
that the Corporation may legally do so at such time, elect to redeem for a cash
amount per share equal to the Preferred Liquidation Value through and including
the date of such redemption (the "Call Redemption Price") (i) all of the then
outstanding shares of Series A Preferred Stock or (ii) a portion of the then
outstanding shares of Series A Preferred Stock (but in no event, a portion
representing less than twenty-five percent (25%) of the total number of Series A
Preferred Shares then issued and outstanding). Such option under this Section
7(a) shall be exercised by written notice under Section 7(b) hereof to each
holder of a share of Series A Preferred Stock.
(b) Notice of Call Redemption. In order to exercise its right to
require redemption under Section 7(a) hereof, the Corporation shall send to each
holder of a share of Series A Preferred Stock a written notice demanding
19
redemption under Section 7(a) hereof, which notice shall (i) specify the date of
such redemption (which shall not be less than five (5) Business Days after
receipt of such notice by each such holder), (ii) specify the total number of
shares of Series A Preferred Stock to be redeemed (and the number of each such
holder's shares to be redeemed if less than all of the shares are to be
redeemed) and (iii) specify the Call Redemption Price and the place of payment;
provided, that neither failure to give such notice nor any defect therein shall
affect the validity of the proceeding for the redemption of any shares of Series
A Preferred Stock to be redeemed. In case less than all the shares of Series A
Preferred Stock represented by any certificate are redeemed, a new certificate
representing the unredeemed shares of Series A Preferred Stock shall be issued
to the holder thereof without cost to such holder.
(c) No Selective Redemption. In any such redemption by the Corporation,
if all shares of Series A Preferred Stock are not being redeemed, then the
number of shares of Series A Preferred Stock to be redeemed shall be allocated
among all shares of Series A Preferred Stock, such that the shares of Series A
Preferred Stock are redeemed from the holders in proportion to the respective
number of shares of Series A Preferred Stock held by each such holder (or in
such other proportion as agreed by all such holders). Nothing in this Section
7(c) shall effect the obligation of the Corporation to redeem shares of Series A
Preferred Stock in accordance with the terms of (and this Section 7 shall not
apply to) Sections 6(a) through 6(d) hereof.
(d) Status of Redeemed Shares. Shares of the Series A Preferred Stock
which have been redeemed pursuant to Section 7(a) hereof shall, after such
redemption be retired, canceled and shall not thereafter be reissued as Series A
Preferred Stock. All such shares shall have the status of authorized but
unissued shares of Preferred Stock of the Corporation, without designation as to
series, until such shares are once more designated as part of a particular
series by or on behalf of the Board of Directors.
8. Exercise of Warrants.
(a) Application of Liquidation Value to Exercise Price. Notwithstanding
any other provision of this Certificate of Designations and to the extent
legally permitted, any holder of Series A Preferred Stock also holding Warrants
shall have the option, but not the obligation, upon any exercise of Warrants, to
surrender to the Corporation for cancellation in payment of the exercise price
therefor, in accordance with the terms and provisions of the Warrants, shares of
Series A Preferred Stock held by such holder. Each share of Series A Preferred
Stock so surrendered for cancellation shall be deemed to be the payment of
$1,000 of the aggregate exercise price for the Warrants being exercised;
provided, however, if at the time of such surrender, the respective shares are
subject to either
20
(or both) of the Premium Redemption Price or the Optional Redemption Price, each
share so surrendered for cancellation shall be deemed to be the payment of such
Premium Redemption Price or Optional Redemption Price, as the case may be (or,
the greater of the Premium Redemption Price and the Optional Redemption Price if
both are applicable), and in each such case such amounts shall be applied
towards payment of the aggregate exercise price for the Warrants being
exercised. The surrender of shares pursuant to this Section 8(a) shall in no way
extinguish or limit the obligation of the Corporation to pay (or effect the
right of any holder of Series A Preferred Stock to receive) Full Cumulative
Dividends through and including the date of such surrender.
(b) Application of Unpaid Dividends to Exercise Price. Notwithstanding
any other provision in this Certificate of Designations and to the extent
legally permitted, any holder of Series A Preferred Stock who also holds
Warrants shall have the option, but not the obligation, upon any exercise of
Warrants to apply to all or a portion of the exercise price therefor, in
accordance with the terms and provisions of the Warrants, all or any part of the
accrued and unpaid dividends on the shares of Series A Preferred Stock held by
such holder. Any such application to the exercise price of Warrants shall reduce
the amount of accrued and unpaid dividends with respect to such shares of Series
A Preferred Stock by the aggregate amount applied to such exercise price.
(c) Status of Surrendered Shares. Shares of the Series A Preferred
Stock which have been surrendered pursuant to Section 8(a) hereof shall, after
such surrender be retired, canceled and shall not thereafter be reissued as
Series A Preferred Stock. All such shares shall have the status of authorized
but unissued shares of Preferred Stock of the Corporation, without designation
as to series, until such shares are once more designated as part of a particular
series by or on behalf of the Board of Directors.
9. Prohibited Actions. So long as any shares of any Series A Preferred
Stock remain outstanding, the Corporation shall not:
(a) create, authorize, issue or sell (i) any class or series of capital
stock ranking prior to or on parity with the Series A Preferred Stock as to
dividends or upon liquidation, dissolution or winding up or (ii) any rights,
options or other securities convertible, exercisable or exchangeable for or
into, or having rights to purchase, any shares of capital stock described in
clause (i) hereof; or
(b) amend the Certificate of Incorporation or By-laws of the
Corporation, or in any other manner alter or change the powers, rights,
privileges or preferences of the Series A Preferred Stock, if such amendment or
action would
21
alter, change or affect adversely the powers, rights, privileges or preferences
of the holders of the Series A Preferred Stock; or
(c) increase the number of shares of Series A Preferred Stock
authorized for issuance; or
(d) change the size of the Board of Directors, except as permitted
under the Stockholders' Agreement; or
(e) at any time after the date hereof, issue any shares of Series A
Preferred Stock, except (i) issuances specifically permitted by Section 11 of
the Purchase Agreement, or (ii) issuances of share certificates upon transfers
or exchanges of shares by holders (other than the Corporation) or in replacement
of lost, stolen, damaged or mutilated share certificates;
(each of the actions set forth in the preceding clauses (a)-(e) of this Section
9, a "Fundamental Change").
10. Method of Payment. Any payments to be made by the Corporation with
respect to the Series A Preferred Stock shall be made, at the option of each
respective holder, by certified or official bank check or by wire transfer of
immediately available funds in money of the United States that at the time of
payment is legal tender for payment of public and private debts.
11. Notices. Except as otherwise expressly provided herein, all
notices, requests, demands, consents and other communications hereunder shall be
in writing and shall be delivered personally, sent by reputable express courier
services (charges prepaid) or sent by registered or certified mail, return
receipt requested, postage prepaid and shall be deemed to have been given when
so delivered, sent or deposited in the U.S. Mail (i) to the holder of a share of
Series A Preferred Stock, at the holder's address as it appears in the records
of the Corporation or at such other address as any such holder may otherwise
indicate in a written notice delivered to the Corporation or (ii) to the
Corporation, at Three South Revmont Drive, Shrewsbury, New Jersey 07702 or at
such other address as the Corporation may otherwise indicate in a written notice
delivered to each holder of shares of Series A Preferred Stock. All such
notices, requests, demands, consents and other communications shall be deemed to
have been received two (2) days after so delivered, sent or deposited.
Whenever any notice is required to be given hereunder, such notice shall be
deemed given and such requirement satisfied only when such notice is delivered
or, if sent by telex or telecopier, when received, unless otherwise expressly
specified or permitted by the terms hereof.
22
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IN WITNESS WHEREOF, HOME STATE HOLDINGS, INC. has caused this
Certificate of Designations to be signed by its duly authorized President
and its Assistant Secretary this ____ day of June, 1997.
HOME STATE HOLDINGS, INC.
By
--------------------------
Mark Vaughn
President
Attest
-------------------------------
Eric A. Reehl
Assistant Secretary
23
[Signature Page to the Certificate of Designations]
24
HOME STATE HOLDINGS, INC.
Proxy--Annual Meeting of Stockholders--June 11, 1997
(SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS)
The undersigned stockholder of Home State Holdings, Inc. hereby
constitutes and appoints Edward D. Herrick, Michael H. Monier and Mark S.
Vaughn, and each and any of them, the attorneys and proxies of the undersigned,
with full power of substitution and revocation, to vote for and in the name,
place and stead of the undersigned at the Annual Meeting of Stockholders of Home
State Holdings, Inc. to be held at Sheraton Eatontown Hotel and Conference
Center, Route 35 & Industrial Way East, Eatontown, New Jersey 07724 on
Wednesday, June 11, 1997 at 9:00 A.M., and at any adjournments thereof, the
number of votes the undersigned would be entitled to cast if present.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL
BE VOTED FOR THE ELECTION OF DIRECTORS AND FOR EACH OF THE FOLLOWING PROPOSALS.
1. Election of three Class I directors nominated by the Board of Directors.
/ / FOR all nominees listed below / / WITHHOLD AUTHORITY
(except as indicated to the to vote for all nominees
contrary below)
Perez C. Ehrich, Eric A. Reehl and [Third Class I Director Nominee]
(INSTRUCTION: To withhold authority to vote for any individual nominee,
write such nominee's name in the space provided below.)
- --------------------------------------------------------------------------------
(Continued and to be signed on reverse side)
2. Proposal to amend the Certificate of Incorporation as described in the
Proxy Statement accompanying the Notice of Annual Meeting of Stockholders.
/ / FOR / / AGAINST / / ABSTAIN
3. Proposal to ratify the selection of Coopers & Lybrand L.L.P. as the
independent auditors for the fiscal year ending December 31, 1997.
/ / FOR / / AGAINST / / ABSTAIN
4. In their discretion, upon such other matters as may come properly before
the meeting.
Said attorneys and proxies, or their substitutes (or if only one, that
one), at said meeting, or any adjournments thereof, may exercise all of the
powers hereby given. Any proxy heretofore given is hereby revoked.
Receipt is acknowledged of the Notice of Annual Meeting of Stockholders,
the Proxy Statement accompanying such Notice and the Annual Report to
stockholders for the fiscal year ended December 31, 1996.
Dated: , 1997
-----------------------------------------
Stockholder(s) signature(s)
-----------------------------------------
Stockholder(s) signature(s)
Note: Signature(s) of Stockholder(s)
should correspond exactly with the name(s)
shown hereon. If shares are held jointly,
both holders should sign. Attorneys,
executors, administrators, trustees,
guardians or others signing in a
representative capacity should give their
full titles. Proxies executed in the name
of a corporation should be signed on
behalf of the corporation by its president
or other authorized officer.