CATASTROPHE EQUITY SECURITIES ISSUANCE OPTION AGREEMENT
This Catastrophe Equity Securities Issuance Option Agreement (this
"Agreement") is entered into as of February 15, 1997 between Horace Mann
Educators Corporation, a Delaware corporation ("HM"), and Centre Reinsurance
(U.S.) Limited, a Bermuda corporation ("Option Writer").
RECITALS
WHEREAS, HM is an insurance holding company with certain subsidiaries which
insure life and property/casualty risks;
WHEREAS, Option Writer is a reinsurance company in the business of
reinsuring certain property/casualty insurance risks;
WHEREAS, HM and Option Writer wish to enter into a financial accommodation
under which, during a specified time period, HM has the option (the "Securities
Issuance Option", as defined in Section 1.31) to require Option Writer to
purchase shares of HM preferred stock (the "Preferred Shares", as defined in
Section 1.22), in the event that HM incurs a Qualifying Catastrophic Event (as
defined in Section 1.24); and
WHEREAS, Option Writer requires that, as a condition to any Securities
Issuance Option exercise, it not become a holder of more than 50% of the HM
Common Stock (on an as-converted basis) upon such exercise.
WHEREAS, HM and Option Writer desire to memorialize their agreement with
respect to the Securities Issuance Option on the terms and conditions set forth
below;
NOW, THEREFORE, for good and valuable consideration, receipt of which is
hereby acknowledged, HM and Option Writer agree as follows:
AGREEMENT
1. Definitions. Terms used in this Agreement shall have the respective
meanings ascribed to them below.
1.1 "Agreement Year" means the period beginning at 12:00 A.M. Central
Time on March 1, 1997 and ending at 12:00 A.M. Central Time on January 1, 1998,
and each subsequent one (1) year period, during the Exposure Period, beginning
at 12:00 A.M. Central Time on January 1 and ending at 12:00 A.M. Central Time on
the next following January 1.
1.2 "Attachment Point" means (a) with respect to the initial Exposure
Period ending at 12:00 A.M. on January 1, 2000, the greater of (i)US$65,000,000,
or (ii) the amount
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of the total property catastrophe reinsurance excess of loss coverage actually
maintained by HM and HM Insurance Subsidiaries which is then in effect less up
to US$15,000,000 of uncollectible reinsurance, and (b) with respect to the two
(2) year extension of the Exposure Period, if any, the greater of (i)
US$75,000,000, or (ii) the amount of the total property catastrophe reinsurance
excess of loss coverage actually maintained by HM and HM Insurance Subsidiaries
which is then in effect less up to US$15,000,000 of uncollectible reinsurance.
1.3 "Certificate of Designations" means the Certificate of
Designations for the Preferred Shares, substantially in the form attached as
Exhibit 1.3, to be adopted by the Board of Directors of HM and filed with the
Secretary of State of Delaware in accordance with Section 151 of the Delaware
General Corporation Law of 1953, as amended.
1.4 "Effective Date" means March 1, 1997.
1.5 "Event" means a "loss occurrence" as defined in the Company's
excess of loss property catastrophe reinsurance agreements, a copy of which
definition is attached as Exhibit 1.5, provided, however, that such definition
shall not be materially changed or amended without the prior written consent of
Option Writer, which consent shall not be unreasonably withheld.
1.6 "Exchange Act" means the Securities Exchange Act of 1934, as
amended, and all rules and regulations promulgated thereunder.
1.7 "Exercise Date" means the date of purchase and sale of Preferred
Shares pursuant to an exercise of the Securities Issuance Option which date
shall be specified in the Notice of Exercise and shall be the later of forty-
five (45) days following delivery of a Notice of Exercise or ten (10) business
days following receipt of all necessary insurance regulatory approvals
(including without limitation, any Form A approvals required for the issuance
and sale of the Preferred Shares), provided that the Exercise Date shall not be
later than the one hundred eightieth (180th) day after the date of delivery of
the Notice of Exercise, or such later date, if any, resulting from alternative
dispute resolution under Section 8, which date shall be ten (10) business days
after the rendering of a final decision pursuant to Section 8.
1.8 "Exercise Term" means (a) with respect to a single Event, the one
(1) year period commencing upon the occurrence of a Qualifying Catastrophic
Event and ending at 12:00 A.M. Central Time on the first anniversary of such
occurrence (as the same may be extended under Section 2.4) during which HM has
the right to exercise the Securities Issuance Option, or (b) with respect to
multiple Events, the period commencing upon the occurrence of a Qualifying
Catastrophic Event and ending six (6) months following the Agreement Year during
which such multiple Events occur, which six (6) month period ends at 12:00 A.M.
Central Time on the July 1 next following the end of such Agreement Year (as the
same may be extended under Section 2.4), during which HM has the right to
exercise the Securities Issuance Option.
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1.9 "Exposure Period" means the period beginning at 12:00 A.M.
Central Time on March 1, 1997 and ending at 12:00 A.M. Central Time on January
1, 2000, which period may be extended by HM for an additional two (2) year
period ending at 12:00 A.M. Central Time on January 1, 2002, provided that HM
gives Option Writer notice of such proposed extension at least thirty (30) days
prior to January 1, 2000, and provided further that, at 12:00 A.M. Central Time
on January 1, 2000, (a) HM has not previously exercised the Securities Issuance
Option, (b) neither the S&P Ratings of, nor the A. M. Best claims payment
ability ratings of, the HM property/casualty insurance subsidiaries which in the
aggregate write more than fifty percent (50%) of HM's net property/casualty
insurance premiums written have been downgraded below the level of A- and (c) HM
is not in material breach of any provision of the Transaction Agreements.
1.10 "GAAP" means United States generally accepted accounting
principles, consistently applied.
1.11 "HM" means Horace Mann Educators Corporation, a Delaware
corporation.
1.12 "HM Common Stock" means the common stock of HM.
1.13 "HM Financial Statements" means the HM financial statements
specified in Section 3.9.
1.14 "HM Insurance Subsidiaries" means Horace Mann Insurance Company,
an insurance company formed under the laws of Illinois; Allegiance Insurance
Company, an insurance company formed under the laws of California; Teachers
Insurance Company, an insurance company formed under the laws of Illinois;
Horace Mann Life Insurance Company, an insurance company formed under the laws
of Illinois; Allegiance Life Insurance Company, an insurance company formed
under the laws of Illinois; and such other insurance company subsidiaries of HM
as may be agreed in writing between HM and Option Writer.
1.15 "Notice of Exercise" means the written notice of HM's intent to
exercise the Securities Issuance Option as described in Section 2.3.
1.16 "Notice of Objection" means Option Writer's written notice of
objection to a Notice of Exercise, as described in Section 2.3.
1.17 "Option Exercise Fee" means the amount paid by HM to Option
Writer at the time of each separate exercise of the Securities Issuance Option,
as set forth in Section 2.2(f).
1.18 "Option Fee" means the amounts paid by HM to Option Writer as
consideration for the Securities Issuance Option, as set forth in Section 2.1.
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1.19 "Original Value" means the Preferred Share Purchase Price for
each Preferred Share, as proportionally adjusted for all stock splits, stock
dividends, and any other subdivisions, combinations, reclassifications, or
recapitalizations affecting the Preferred Shares.
1.20 "Option Writer" means Centre Reinsurance (U.S.) Limited, a
Bermuda corporation.
1.21 "Preferred Share Purchase Price" means US$1,000 per Preferred
Share payable by Option Writer to HM as set forth in Section 2.3.
1.22 "Preferred Shares" means the Cumulative Nonvoting Convertible
Preferred Shares of HM described in the Certificate of Designations.
1.23 "Property Catastrophe Reinsurance" means the property
catastrophe reinsurance maintained by HM as described in Section 5.6.
1.24 "Qualifying Catastrophic Event" means (a) with respect to a
single Event, any single Event taking place during an Agreement Year from which
HM incurs an Ultimate Loss in an amount greater than the Attachment Point, or
(b) with respect to multiple Events taking place during an Agreement Year,
multiple Events from which HM incurs an Ultimate Loss in the aggregate from such
Events in an amount greater than the Attachment Point. A single Event that
takes place during the Exposure Period but which has not developed into a
Qualifying Catastrophic Event prior to the first anniversary of such Event shall
not constitute a Qualifying Catastrophic Event for purposes of this Agreement.
A single Event that takes place during the Exposure Period and which develops
into a Qualifying Catastrophic Event prior to the first anniversary of such
Event, but after expiration of the Exposure Period, shall constitute a
Qualifying Catastrophic Event for purposes of this Agreement. Multiple Events
that have taken place during any Agreement Year within the Exposure Period but
which have not developed into a Qualifying Catastrophic Event prior to the end
of six (6) months after the end of such Agreement Year shall not constitute a
Qualifying Catastrophic Event for purposes of this Agreement. Multiple Events
that have taken place during any Agreement Year within the Exposure Period and
which develop into a Qualifying Catastrophic Event prior to the end of six (6)
months after the end of such Agreement Year shall constitute a Qualifying
Catastrophic Event for purposes of this Agreement.
1.25 "Registration Rights Agreement" means the Registration Rights
Agreement described in Section 6.2.
1.26 "S&P Rating" means a claims payment ability rating, as published
from time to time, by the Standard & Poor's Division of the McGraw-Hill
Companies.
1.27 "SAP" means statutory accounting principles, consistently
applied.
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1.28 "SAP Consolidated Surplus" means the consolidated surplus of the
HM Insurance Subsidiaries determined based on the following: with respect to
(a) any Insurance Subsidiary engaged principally in life insurance, the sum of
(i) the amount reported on page 3, line 38, column 1 of its Annual Statement
required under the laws of its state of domicile, plus (ii) the asset valuation
reserve/interest maintenance reserve of such Insurance Subsidiary; or (b) any
Insurance Subsidiary engaged principally in property/casualty insurance, the
amount reported on page 3, line 25, column 1 of its Annual Statement required
under the laws of its state of domicile; or an amount determined in a consistent
manner for any date other than one as of which an Annual Statement is prepared;
provided, however, that if at any time SAP shall be modified to decrease the
amount calculated under clause (b) of this Section 1.28 by a reserve similar to
the asset valuation reserve/interest maintenance reserve, then the amount under
such clause (b) shall be deemed to be the sum of such reduced amount plus such
reserve.
1.29 "SEC" means the United States Securities and Exchange
Commission.
1.30 "Securities Act" means the Securities Act of 1933, as amended,
and all rules and regulations promulgated thereunder.
1.31 "Securities Issuance Option" means HM's option to obligate
Option Writer to purchase Preferred Shares with an Original Value of up to
US$100,000,000, subject to the terms and conditions set forth in this Agreement
(provided, however, that up to an additional US$50,000,000 of Preferred Shares,
valued at Original Value, which are issued but subsequently redeemed by HM shall
be reincluded in the Preferred Shares subject to the Securities Issuance Option
as provided in Section 6.1, and provided, further, that in no event shall Option
Writer be required to (a) purchase, in the aggregate, more than US$150,000,000
of Preferred Shares valued at Original Value, or (b) hold at any one time more
than US$100,000,000, in the aggregate, of Preferred Shares valued at Original
Value and HM Common Stock into which the Preferred Shares may have been
converted, valued at the conversion rate).
1.32 "Single Investor" means, with respect to holders of the
Preferred Shares, any group of one or more separate legal persons or entities
which are owned or managed by, or under common ownership or management with, one
another.
1.33 "Transaction Agreements" means this Agreement, its schedules and
exhibits, the Registration Rights Agreement and the Certificate of Designations.
1.34 "Ultimate Loss" means the actual direct losses (including the
paid loss, all reserves for unpaid losses, and coinsurance paid by the HM
Insurance Subsidiaries) incurred by the HM Insurance Subsidiaries from an Event
or multiple Events during the applicable Agreement Year (a) with respect to a
single Event, prior to accounting for the Property Catastrophe Reinsurance in
place at the time such Event took place, but after accounting for all other
reinsurance, and (b) with respect to multiple Events, after accounting for the
Property Catastrophe Reinsurance (to be calculated as if HM were in compliance
with
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Section 5.6 hereof, if in fact HM is not in compliance with such Section) and
all other reinsurance then in effect. A loss shall not be included in the
calculation of Ultimate Loss for more than one Qualifying Catastrophic Event.
2. Securities Issuance Option.
2.1 Option Fee. To acquire the right to exercise the Securities
Issuance Option during the Exercise Term with respect to a Qualifying
Catastrophic Event, HM shall pay to Option Writer an Option Fee (the "Option
Fee") for each Agreement Year as follows: (a) for the first Agreement Year,
US$1,250,000, and (b) for all subsequent Agreement Years, 1.475% of the Original
Value of that portion of the Preferred Shares subject to the Securities Issuance
Option which are not then issued and outstanding pursuant to an exercise of the
Securities Issuance Option (including up to US$50,000,000 of Preferred Shares,
valued at Original Value, to the extent that such Preferred Shares have been
issued but subsequently redeemed by HM as provided in Section 6.1). The first
Option Fee payment of US$1,250,000 shall be delivered upon execution of this
Agreement, and subsequent Option Fee payments shall be delivered on January 1
(or the next following business day) of 1998 and each subsequent year within the
Exposure Period (as it may be extended). In consideration of the payment of the
Option Fee, Option Writer hereby grants to HM the right to exercise the
Securities Issuance Option on the terms set forth in this Agreement.
2.2 Exercise Rights. HM shall have the right to exercise the
Securities Issuance Option subject to the following limitations:
a. The first exercise of the Securities Issuance Option must be
made with respect to a number of Preferred Shares having a minimum aggregate
Original Value of US$15,000,000, and may only be made in integral multiples of
US$1,000,000 above such minimum amount.
b. The second or any subsequent exercise of the Securities
Issuance Option must be made with respect to a number of Preferred Shares having
a minimum aggregate Original Value of US$5,000,000, and may only be made in
integral multiples of US$1,000,000 above such minimum amount.
c. In no event shall the Preferred Shares issued pursuant to any
one exercise of the Securities Issuance Option have an aggregate Original Value
in excess of the amount of the decline in SAP Consolidated Surplus resulting
from the Qualifying Catastrophic Event (to be calculated as if HM were in
compliance with Section 5.6 hereof, if in fact HM is not in compliance with such
Section) with respect to which such Securities Issuance Option exercise is
effected, which amount shall be limited, if the circumstances require, such that
no more than US$15,000,000 of such amount is attributable to uncollectible
reinsurance.
d. In no event shall the Preferred Shares issued pursuant to any
one exercise of the Securities Issuance Option have an aggregate Original Value
in excess of US$100,000,000.
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e. In no event shall the Preferred Shares issued pursuant to all
exercises of the Securities Issuance Option, considered in the aggregate, have
an Original Value of greater than US$150,000,000 (provided, however, that
included in such amount is up to US$50,000,000 of Preferred Shares, valued at
Original Value, which are issued but subsequently redeemed by HM and reincluded
in the Preferred Shares subject to the Securities Issuance Option as provided in
Section 6.1), provided, however, that in no event shall Option Writer be
required to (a) purchase, in the aggregate, more than US$150,000,000 of
Preferred Shares valued at Original Value, or (b) hold at any one time more than
US$100,000,000, in the aggregate, of Preferred Shares valued at Original Value
and HM Common Stock into which Preferred Shares may have been converted, valued
at the conversion rate.
f. Upon each separate exercise of the Securities Issuance
Option, HM shall pay to Option Writer an Option Exercise Fee which shall equal
US$25,000 for the first exercise and US$15,000 for each subsequent exercise.
g. In no case shall HM exercise the Securities Issuance Option
more than one time (i) per Qualifying Catastrophic Event resulting from any
single Event, (ii) per Qualifying Catastrophic Event resulting from multiple
Events occurring during any one (1) Agreement Year, or (iii) with respect to any
one Agreement Year (regardless of the number of Qualifying Catastrophic Events
occurring during such Agreement Year).
2.3 Method of Exercise. In the event that HM desires to exercise the
Securities Issuance Option with respect to a Qualifying Catastrophic Event, HM
shall provide written notice to Option Writer during the Exercise Term of its
intent to exercise the Securities Issuance Option (a "Notice of Exercise"). The
Notice of Exercise shall specify the number of Preferred Shares to be issued
pursuant to the exercise of the Securities Issuance Option, the aggregate
Preferred Share Purchase Price payable for such Preferred Shares based on
Original Value and the proposed Exercise Date. Following delivery of a Notice
of Exercise in accordance with Section 9.2, Option Writer shall have until the
end of the forty-five (45) day period following delivery of the Notice of
Exercise to investigate whether the conditions to exercise of the Securities
Issuance Option have been satisfied and shall, by the end of such 45 day period,
either issue a Notice of Objection (hereinafter defined) or state its intent not
to issue a Notice of Objection based on its investigation theretofore conducted,
provided, however, that if the Exercise Date is extended for more than an
additional forty-five (45) days (beyond the initial forty-five (45) day notice
period) for any reason, Option Writer shall have a period of ten (10) business
days to update its investigation, which ten (10) business day period shall
commence on the date that is the later of (a) the date that HM certifies to
Option Writer that all conditions to exercise of the Securities Issuance Option
set forth in Article 5 hereof shall have been satisfied, or (b) the 45th day
immediately preceding the actual Exercise Date. In connection with such
investigation, HM shall provide Option Writer, or its designated agent,
reasonable access to its loss records relating to the Qualifying Catastrophic
Event in question (including, without limitation, policy files, claim files, and
loss and loss reserve files or information), during normal business hours, in
order to allow Option Writer to undertake such investigation. In the event that
Option Writer determines that the conditions to exercise
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of the Securities Issuance Option set forth in Article 5 have been satisfied,
Option Writer shall deliver, on the Exercise Date (or the next following
business day if the Exercise Date falls on a Saturday, Sunday or nationally
recognized holiday), by wire transfer of immediately available funds, in U.S.
dollars, the aggregate Preferred Share Purchase Price specified in the Notice of
Exercise, against the delivery by HM of the corresponding number of Preferred
Shares. In the event that Option Writer determines that the conditions for
exercise of Securities Issuance Option have not been met, Option Writer shall
deliver a written notice of objection to exercise of the Securities Issuance
Option (the "Notice of Objection") to HM within such forty-five (45) day period
or the ten (10) business day update period described above, as applicable. Such
Notice of Objection shall specify in reasonable detail the reason(s) for Option
Writer's objection to the exercise of the Securities Issuance Option. If, within
twenty (20) days following delivery of the Notice of Objection to HM, HM and
Option Writer cannot reach an agreement regarding the exercise of the Securities
Issuance Option, their dispute shall be submitted to dispute resolution in
accordance with Section 8 below. If Option Writer has not delivered a Notice of
Objection to HM, Option Writer and HM shall cooperate and shall use their
commercially reasonable efforts to cause the conditions listed in Section 5.3
which involve obligations of Option Writer or HM, as applicable, to be satisfied
as soon as reasonably practicable, including without limitation making any Form
A filings required under applicable state insurance laws, rules and regulations.
2.4 Extension of Exercise Term. Notwithstanding anything in this
Agreement to the contrary, in the event that HM files, prior to the end of any
Exercise Term, preliminary proxy materials with the SEC relating to a submission
to holders of HM Common Stock for approval of the issuance of the Preferred
Shares (or the issuance of shares of HM Common Stock upon conversion of the
Preferred Shares), as required by any exchange listing or other regulatory
requirements, the Exercise Term shall be extended by a period of ninety (90)
days plus, if any such materials are not reviewed by the staff at the SEC within
thirty (30) days, an additional number of days (not to exceed fifteen (15) days
in any event) equal to the number of days in excess of thirty between the filing
of such preliminary materials with the SEC and the initial receipt by HM of
written comments thereon from the SEC staff.
3. Representations and Warranties of HM. HM represents and warrants to
Option Writer (which representations and warranties shall be deemed to be
repeated by HM on each Exercise Date and which representations and warranties
shall be deemed to include any certification made by any officer of HM pursuant
to the terms of this Agreement) as follows:
3.1 Existence and Qualifications of HM. HM is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware, and HM has the full corporate power and authority to execute and
deliver the Transaction Agreements to which it is a party, and to perform its
obligations under, and to consummate the transactions contemplated by, the
Transaction Agreements to which it is a party, including, without limitation,
the delivery of the Preferred Shares pursuant to the exercise of the Securities
Issuance Option.
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3.2 No Violation or Conflict. The execution and delivery of the
Transaction Agreements to which it is a party by HM, and the performance of HM
under such Transaction Agreements, do not violate or conflict with any
applicable law, any provision of HM's organizational documents or any order or
judgment of any court or other government agency applicable to HM or any of its
assets or subsidiary or affiliated companies, or any contractual restriction
binding upon or affecting HM or any of its subsidiary or affiliated companies or
its assets. HM and the HM Subsidiaries, as applicable, have complied, in all
material respects, with all representations, warranties, covenants and
agreements contained in any Transaction Agreements.
3.3 Consents. All governmental and other consents that are required
to have been obtained by HM with respect to the execution and delivery of this
Agreement have been obtained and are in full force and effect and all conditions
of any such consents have been complied with.
3.4 Binding Obligations. The execution of the Transaction Agreements
to which it is a party has been duly authorized by all necessary corporate
action of HM, and such Transaction Agreements (a) have been duly executed and
delivered by HM, (b) constitute legal, valid and binding obligations of HM, and
(c) are enforceable against HM in accordance with their terms (subject to
applicable bankruptcy, reorganization, insolvency, moratorium or similar laws
affecting creditors' rights generally and subject, as to enforceability, to
equitable principles of general application).
3.5 Absence of Litigation. There is not pending or, to its
knowledge, threatened against HM or any of its subsidiaries or affiliates, any
action, suit or proceeding before any court, tribunal, governmental body, agency
or official or any arbitrator or mediator that is likely to affect the legality,
validity and enforceability of this Agreement against HM.
3.6 Preferred Shares. HM has, or will have as of the applicable
Exercise Date, 100,000 authorized Preferred Shares, and such Preferred Shares,
when issued pursuant to the exercise of the Securities Issuance Option, shall,
upon delivery of payment therefor, be validly issued, fully paid and non-
assessable. Upon issuance pursuant to this Agreement, the Preferred Shares
shall be free and clear of any lien, encumbrance or other restriction (other
than as set forth in the Transaction Agreements), and upon delivery of and
payment for the Preferred Shares as provided in this Agreement, Option Writer
will acquire good title to the Preferred Shares purchased under this Agreement,
free and clear of any lien, encumbrance or other restriction (other than as set
forth in the Transaction Agreements).
3.7 HM Common Stock. The shares of HM Common Stock into which the
Preferred Shares may be converted, as set forth in the Certificate of
Designations, shall, upon issuance pursuant to such conversion, be validly
issued, fully paid and non-assessable. Such shares of HM Common Stock shall be
free and clear of any lien, encumbrance or other restriction (other than as set
forth in the Transaction Agreements), and upon conversion as provided in the
Certificate of Designations, Option Writer will acquire good title to the
requisite number of shares of HM Common Stock, free and clear of any lien,
encumbrance or
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other restriction (other than as set forth in the Transaction Agreements). Such
shares of HM Common Stock shall be subject to the Registration Rights Agreement
described in Section 6.2.
3.8 Options or Other Rights. Except for this Agreement, there is no
outstanding right, subscription, warrant, call, unsatisfied preemptive right,
option or other agreement of any kind to purchase or otherwise to receive from
HM any authorized but unissued, unauthorized or treasury shares of the Preferred
Shares.
3.9 Financial Statements. HM has furnished Option Writer with true
and complete copies of (a) the statutory annual statements of the HM Insurance
Subsidiaries containing balance sheets as of December 31, 1994 and 1995 and
statements of earnings for the years ended December 31, 1994 and 1995
(collectively, the "Subsidiary Statements"), and (b) the Form 10-K and Annual
Report of HM for the year ended December 31, 1995 (collectively, the "Annual
Reports"). The Subsidiary Statements have been prepared in accordance with SAP
and the Annual Reports have been prepared in accordance with GAAP, and both the
Subsidiary Statements and the Annual Reports present fairly in all material
respects the financial position of HM and/or the HM Insurance Subsidiaries, and
the results of their respective operations, as of the dates indicated and for
the periods then ended.
3.10 Licenses and Permits. The HM Insurance Subsidiaries have all
requisite licenses, permits and authority (collectively, "Licenses") that are
necessary for the conduct of their respective insurance and other businesses, if
any, such Licenses are in full force and effect, and no proceeding is pending or
threatened to suspend, revoke or limit any License which is material to the
operations of any such insurance company.
3.11 Regulatory Filings. All previous regulatory filings by HM with
the SEC and applicable insurance regulatory authorities, at the time of filing,
(a) in the case of filings with the SEC, did not contain any material
misstatements or omissions, and (b) in the case of filings with applicable
insurance regulatory authorities, were appropriately responsive to, and in
compliance with, the insurance regulatory requirements in all material respects.
All previous regulatory filings by the HM Insurance Subsidiaries with applicable
insurance regulatory authorities were, at the time of filing, appropriately
responsive to, and in compliance with, the insurance regulatory requirements in
all material respects.
4. Representations and Warranties of Option Writer. Option Writer
represents and warrants to HM (which representations and warranties shall be
deemed repeated by Option Writer on each Exercise Date) as follows:
4.1 Existence and Qualifications of Option Writer. Option Writer is
a corporation duly organized, validly existing and in good standing under the
laws of Bermuda, and Option Writer has the full corporate power and authority to
execute and deliver the Transaction Agreements to which it is a party, and to
perform its obligations under, and consummate the transactions contemplated by
the Transaction Agreements to which it is a
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party, including, without limitation, the purchase of the Preferred Shares
pursuant to the exercise of the Securities Issuance Option.
4.2 No Violation or Conflict. The execution and delivery of the
Transaction Agreements to which it is a party by Option Writer, and the
performance of Option Writer under such Transaction Agreements, do not violate
or conflict with any applicable law, any provision of Option Writer's
organizational documents or any order or judgment of any court or other
government agency applicable to Option Writer or any of its assets or subsidiary
or affiliated companies, or any contractual restriction binding upon or
affecting Option Writer or any of its subsidiary or affiliated companies or its
assets. Option Writer has complied, in all material respects, with all
representations, warranties, covenants and agreements contained in any
Transaction Agreements.
4.3 Consents. All governmental and other consents that are required
to have been obtained by Option Writer with respect to the execution and
delivery of this Agreement have been obtained and are in full force and effect
and all conditions of any such consents have been complied with.
4.4 Binding Obligations. The execution of the Transaction Agreements
to which it is a party has been duly authorized by all necessary corporate
action of Option Writer, and such Transaction Agreements (a) have been duly
executed and delivered by Option Writer, (b) constitute legal, valid and binding
obligations of Option Writer, and (c) are enforceable against Option Writer in
accordance with their terms (subject to applicable bankruptcy, reorganization,
insolvency, moratorium or similar laws affecting creditors' rights generally and
subject, as to enforceability, to equitable principles of general application).
4.5 Absence of Litigation. There is not pending or to its knowledge,
threatened against Option Writer or any of its subsidiaries or affiliates, any
action, suit or proceeding before any court, tribunal, governmental body, agency
or official or any arbitrator or mediator that is likely to affect the legality,
validity and enforceability of this Agreement against Option Writer.
4.6 Investment Representation. Option Writer understands that the
issuance of Preferred Shares under this Agreement and the issuance of HM Common
Stock upon conversion of Preferred Shares have not been and will not (except as
contemplated pursuant to the Registration Rights Agreement) be registered under
the Securities Act and such Preferred Shares and HM Common Stock will be issued
in reliance upon the exemption afforded by Section 4(2) of the Securities Act
for transactions by an issuer not involving any public offering. Option Writer
represents that (a) it is acquiring the Preferred Shares and such HM Common
Stock solely for its own account, for investment purposes only, and not with a
view to distribution, fractionalization or resale thereof, (b) it will not sell
or otherwise dispose of the Preferred Shares and such HM Common Stock except in
compliance with the registration requirements or exemption provisions of
applicable securities laws including the Securities Act, (c) it has not relied
on HM for any explanation of the application of the various state and federal
securities laws with regard to the acquisition of the Preferred Shares and such
HM
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Common Stock, (d) it has access to complete information regarding the business
and finances of HM, and has received, read and understood the contents of the
Annual Report to Shareholders and Notice of Meeting and Proxy Statements for HM
as of and for each of the years ended December 31, 1993, 1994 and 1995, (e) it
has such knowledge and experience in business and financial matters that it has
been able to fully understand and completely evaluate the risks and merits of
holding the Preferred Shares and such HM Common Stock as provided in this
Agreement, and (f) it is able to bear the economic risk and limitation in
liquidity of an investment in the Preferred Shares and such HM Common Stock.
5. Conditions to Exercise of Securities Issuance Option. With respect to
each exercise of the Securities Issuance Option, the right of HM to effect such
exercise of the Securities Issuance Option shall be subject to the satisfaction
by HM at, or waiver by Option Writer at or prior to, the Exercise Date, of the
following conditions:
5.1 Occurrence of Event. A Qualifying Catastrophic Event shall have
occurred with respect to the HM Insurance Subsidiaries collectively.
5.2 HM Net Worth. With respect to the first exercise of the
Securities Issuance Option, after accounting for the Qualifying Catastrophic
Event, but prior to payment for any Preferred Shares to be purchased upon such
first exercise of the Securities Issuance Option, the consolidated stockholders'
equity of HM and its consolidated subsidiaries, as determined in accordance with
GAAP (the "HM Net Worth") shall not be less than US$175,000,000. With respect
to any subsequent exercise of the Securities Issuance Option, after accounting
for the Qualifying Catastrophic Event and any payment for Preferred Shares
previously issued pursuant to an exercise of the Securities Issuance Option, the
HM Net Worth shall not be less than US$175,000,000.
5.3 Compliance with Laws and Consents. HM shall have complied with
all laws and regulations applicable to the authorization and issuance of the
Preferred Shares, and subject to the following sentence, the conversion of the
Preferred Shares into HM Common Stock, including the adoption by the Board of
Directors of HM of the Certificate of Designations, and the filing of such
Certificate of Designations with the Secretary of State of Delaware. HM and
Option Writer shall have obtained all consents and approvals (whether
shareholder, regulatory, contractual or otherwise) necessary for the
authorization and issuance of the Preferred Shares, the conversion of the
Preferred Shares into HM Common Stock, and the authorization and issuance of
such HM Common Stock, including without limitation the filing and approval of
any Form A application with the applicable insurance departments (but excluding
any filings required under the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended) provided that, if any insurance regulator shall for any reason
decline to approve the conversion of the Preferred Shares and/or the issuance of
HM Common Stock pursuant to such conversion, but shall approve the authorization
and issuance of the Preferred Shares then such approval of the conversion of the
Preferred Shares and/or the issuance of HM Common Stock pursuant to such
conversion, as applicable, shall not be a condition to exercise
- 12 -
of the Securities Issuance Option, provided further, however, that HM has
reasonably cooperated with Option Writer to obtain such approvals.
5.4 Review of Financial Statements by Auditor. HM's regular outside
auditor or accounting firm shall have reviewed HM's consolidated balance sheet
and statement of earnings for the most recent quarter ending prior to the date
of the applicable Notice of Exercise, and shall have issued its review report on
such quarterly financial statements, and HM shall provide an adjusted
consolidated balance sheet for HM for the period up to the Exercise Date, and HM
shall represent and warrant, as of the Exercise Date, that such adjusted
consolidated balance sheet presents fairly in all material respects the
financial position of HM as of the date indicated. In addition, HM shall supply
Option Writer with such information as Option Writer may reasonably request to
permit Option Writer to determine satisfaction by HM of the conditions to
exercise set forth in Sections 5.1, 5.2, 5.4, 5.6 and 5.7 of this Agreement.
5.5 No Insolvency or Bankruptcy. None of HM or the HM Insurance
Subsidiaries shall (a) be a debtor under any bankruptcy, insolvency or similar
law affecting creditors generally, (b) be the subject of any liquidation,
transformation or rehabilitation proceeding, (c) be under the supervision of any
governmental regulatory body, or (d) have had a receiver or similar person or
entity appointed for any of its property.
5.6 Maintenance of Current HM Reinsurance Program. HM shall have in
effect a reinsurance program, of reasonably consistent quality with its
reinsurance program in effect on the Effective Date, with an excess of loss
cover with an original limit and a single reinstatement limit per year in effect
of not less than sixty-six percent (66%) of the 250 year return period loss for
the HM Insurance Subsidiaries as determined by the Applied Insurance Research
model in use by HM and the HM Insurance Subsidiaries on the Effective Date, and
consistent with the "base case" analysis computed under such model, a copy of
which is attached as Exhibit 5.6.
5.7 HM Common Stock Ownership Threshold. The purchase of Preferred
Shares pursuant to an exercise of the Securities Issuance Option shall not (when
taking into account all shares of HM Common Stock in which Option Writer then
holds direct, indirect or beneficial ownership) result in Option Writer having
direct, indirect or beneficial ownership of more than fifty percent (50%) of the
issued and outstanding shares of HM Common Stock, assuming that such Preferred
Shares, together with any other Preferred Shares already then held directly,
indirectly or beneficially by Option Writer, were converted into shares of HM
Common Stock on the Exercise Date.
5.8 Accuracy of Representations, Warranties and Covenants. Each of
the representations and warranties of HM made in Article 3 of this Agreement
shall be true in all material respects on and as of the Exercise Date and with
the same effect as though such representations and warranties had been made on
and as of such date except as otherwise contemplated or permitted by this
Agreement, and HM shall not be in breach of any of the covenants of HM made in
Article 6 of this Agreement; and Option Writer shall have received
- 13 -
a certificate to that effect, in the form attached as Exhibit 5.8, dated the
Exercise Date and executed on behalf of HM by a duly authorized officer.
5.9 Payment of Fees. All Option Fee payments then due and the
applicable Option Exercise Fee shall have been paid in full.
5.10 Legal Opinion. Option Writer shall have received, from counsel
for HM, an opinion of counsel dated as of the Exercise Date which is
substantially in the form attached as Exhibit 5.10.
6. Covenants and Agreements. Option Writer and HM make the following
covenants and agreements:
6.1 Redemption Rights. The Preferred Shares shall be subject to
redemption as provided in the Certificate of Designations. Up to US$50,000,000
of Preferred Shares (valued at Original Value) which are redeemed by HM pursuant
to such redemption right shall upon redemption be reincluded in the Preferred
Shares subject to subsequent exercises of the Securities Issuance Option under
this Agreement, provided, however, that this reinclusion right shall be
nonrecurring so that the amount of the Preferred Shares which are so redeemed
and reincluded would not, if subsequently reissued and then redeemed again, be
so reincluded another time.
6.2 Registration Rights. Holders of Registrable Securities (as
defined in the Registration Rights Agreement) shall have registration rights in
accordance with the terms of the Registration Rights Agreement in the form
attached as Exhibit 6.2, which Registration Rights Agreement shall be executed
by HM and Option Writer concurrently with this Agreement.
6.3 Resale Rights.
a. The Preferred Shares will be freely transferable subject only to
restrictions imposed by Federal and state securities laws, except that (i) any
transfer of the Preferred Shares having an Original Value of more than
US$25,000,000 to any Single Investor shall require the prior written consent of
HM, and (ii) any transfer of any amount of Preferred Shares to any "Prohibited
Transferee" (as defined below) that acquires such Preferred Shares other than
solely for investment purposes (as evidenced by a written representation to HM
to such effect by such transferee), shall require the prior written consent of
HM. Subject to the foregoing restrictions, Option Writer shall have the right
to sell or transfer any Preferred Shares to other investors that qualify as
"qualified institutional buyers" as defined in Rule 144A of the General
Regulations of the Securities Act, provided that (a) Option Writer shall first
deliver an opinion of counsel acceptable to HM indicating that any such proposed
investors meet the definition of "qualified institutional buyers", and (b) in no
case shall Option Writer have the right to sell or transfer any Preferred Shares
to any proposed transferee which includes any of the leveraged buy-out firms or
competitors of HM listed on the attached
- 14 -
Schedule 6.3 or their affiliates or subsidiaries, which Schedule 6.3 may be
reasonably updated and modified from time to time, by notice given by HM to
Option Writer, provided that such update or modification shall be based upon
industry changes reasonably determined by HM to change the identity of leveraged
buy-out firms or competitors of HM or their affiliates or subsidiaries (each of
the entities listed on Schedule 6.3, as so updated or modified from time to
time, is herein referred to as a "Prohibited Transferee"). In connection with
any proposed Rule 144A sales by Option Writer, HM shall provide Option Writer
with (i) copies of all SEC filings made by HM within the previous one (1) year
period and any press releases issued by HM since the date of the last such
filing, and (ii) only in the event that HM securities cease to be listed on a
national securities exchange or traded on NASDAQ or any other similar national
over-the-counter market, copies of all Rule 144A information with respect to HM.
Notwithstanding the foregoing, Option Writer shall be able to sell or transfer
Preferred Shares to its affiliates and affiliated investment funds within the
Zurich Group of companies without the prior consent of HM; provided, however,
that any such sale or transfer shall not subject HM to suffer any material cost
or expense, and provided further, that if such affiliate is foreign, there would
be no material adverse effect on HM due to the fact that such affiliate is a
foreign entity.
Prior to the registration of the Preferred Shares, pursuant to
the Registration Rights Agreement or otherwise, the certificates evidencing the
Preferred Shares shall bear a legend which evidences restrictions upon
transferability of the Preferred Shares. The legend shall read as follows:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER ANY
STATE OR FOREIGN SECURITIES LAWS, AND MAY NOT BE SOLD OR TRANSFERRED
IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT OR AN EXEMPTION
FROM REGISTRATION THEREUNDER. THE SECURITIES REPRESENTED BY THIS
CERTIFICATE ARE ALSO SUBJECT TO ADDITIONAL RESTRICTIONS ON TRANSFER
SET FORTH IN A CATASTROPHE EQUITY SECURITIES ISSUANCE OPTION AGREEMENT
BETWEEN THE COMPANY AND CENTRE REINSURANCE (U.S.) LIMITED, A BERMUDA
CORPORATION, DATED AS OF FEBRUARY 15, 1997, AS AMENDED AND MODIFIED
FROM TIME TO TIME. A COPY OF SUCH AGREEMENT MAY BE OBTAINED BY THE
HOLDER HEREOF AT THE COMPANY'S PRINCIPAL PLACE OF BUSINESS WITHOUT
CHARGE.
The first sentence of the legend (and the eighth and eleventh words of the
second sentence) shall be removed from any certificate representing Preferred
Shares (a) sold under an effective registration statement under the Securities
Act, or (b) as to which, in an opinion of counsel reasonably satisfactory to HM
(which opinion shall be paid for solely by the holder of such
- 15 -
Preferred Shares), such registration is not necessary or required, and that the
transfer will not otherwise violate the Securities Act, the Exchange Act, or
applicable state or foreign securities laws; and any stop transfer instructions
previously given to HM's transfer agent shall be revoked as to such Preferred
Shares upon the occurrence of (a) or (b) above.
b. The shares of HM Common Stock into which the Preferred
Shares may be convertible shall not be subject to any restrictions on sale or
transfer by Option Writer pursuant to this Agreement.
Prior to the registration of any shares of HM Common Stock into
which the Preferred Shares are converted, pursuant to the Registration Rights
Agreement or otherwise, the certificates representing such shares of HM Common
Stock shall bear a legend which evidences restrictions upon transferability of
such shares of HM Common Stock. Such legend shall read as follows:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER ANY
STATE OR FOREIGN SECURITIES LAWS, AND MAY NOT BE SOLD OR TRANSFERRED
IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT OR AN EXEMPTION
FROM REGISTRATION THEREUNDER.
The legend shall be removed from any certificate representing either (a) shares
of HM Common Stock sold under an effective registration statement under the
Securities Act, or (b) shares of HM Common Stock as to which, in an opinion of
counsel reasonably satisfactory to HM (which opinion shall be paid for solely by
the holder of such shares of HM Common Stock), such registration is not
necessary or required, and that the transfer will not otherwise violate the
Securities Act, the Exchange Act, or applicable state or foreign securities
laws; and stop transfer instructions previously given to HM's transfer agent
shall be revoked as to such shares of HM Common Stock upon the occurrence of (a)
or (b) above.
6.4 Preferred Share Preference. The liquidation preference of the
Preferred Shares shall be at least equal to the highest liquidation preference
of any other class of preferred shares of HM issued and outstanding at the time
of liquidation. During the term of this Agreement and during the period when
any Preferred Shares remain issued and outstanding, HM shall not issue any
preferred or other capital stock which ranks equal or senior to Preferred Shares
with respect to dividend or distribution rights or rights to distributions on
liquidation without the prior written approval, which approval shall not be
unreasonably withheld, of (i) Option Writer if no Preferred Shares are then
outstanding, or (ii) the holders of more than fifty percent (50%) of the
outstanding Preferred Shares if Preferred Shares are then outstanding.
6.5 Restrictions on HM and Option Writer. During the period when any
Preferred Shares remain issued and outstanding, without the prior written
consent of the holders of more than fifty percent (50%) of such Preferred
Shares, which consent shall not be
- 16 -
unreasonably withheld, (a) HM and the HM Insurance Subsidiaries shall not (i)
pay dividends on, make redemptions of, or make other distributions with respect
to, any capital stock of HM other than the Preferred Shares except that
subsidiaries of HM may pay dividends to HM and HM may pay dividends on the HM
Common Stock at any time if all dividends theretofore accrued on the Preferred
Shares shall be paid in full in cash to the holders of Preferred Shares before
the declaration or payment of any such dividends on the HM Common Stock; (ii)
enter into related party transactions at other than arm's length, or (iii)
except in the ordinary course of business, make any loan or advance to, or
investment in, any person or entity, and (b) HM shall not dispose of its
interest in any material subsidiary (i.e., any subsidiary which contains more
than ten percent (10%) of the consolidated assets or produces more than ten
percent (10%) of the consolidated annual revenue of HM); provided, however, that
the restrictions set forth in clauses (a)(iii) and (b) above shall only apply in
the event that HM has not then paid all dividends then accrued and payable with
respect to such Preferred Shares.
6.6 Option Writer Filings. Notwithstanding anything in this Agreement
to the contrary, Option Writer shall be responsible for making any filing
required under Section 13(d) or Section 16 of the Exchange Act, but the making
of such filings shall not be a condition to the exercise of the Securities
Issuance Option.
6.7 Regulatory Filings for Conversion. HM, Option Writer and their
respective affiliates shall make all regulatory filings, including without
limitation all filings under the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended, which are necessary or desirable to permit Option Writer to
convert any Preferred Shares into shares of HM Common Stock in accordance with
its terms as promptly as possible following any request by Option Writer. Option
Writer and HM shall cooperate and use commercially reasonable efforts to obtain
any insurance regulatory approvals not theretofore obtained, including without
limitation any Form A filings required under applicable insurance laws, rules
and regulations.
6.8 Change of Control. In the event of a change of control of HM (as
defined in the Certificate of Designations), HM shall be obligated to redeem any
issued and outstanding Preferred Shares on the terms and conditions set forth in
the Certificate of Designations, and this Agreement shall be automatically
canceled upon receipt of the Redemption Price (as defined in the Certificate of
Designations) by Option Writer, provided, however, that the cancellation of this
Agreement shall not affect any rights or obligations arising out of or relating
to events occurring or circumstances existing prior to such cancellation, and
provided further, however, that this Agreement shall be reinstated in the event
the Redemption Price must be refunded or returned by Option Writer due to any
preferential transfer or fraudulent conveyance claim.
6.9 Option Writer Credit Support. Option Writer shall, promptly upon
request by HM, in the event that the S&P Ratings of both Option Writer and
Centre Reinsurance Limited, a Bermuda corporation, fall below AA- during any
period during which HM has the ability to exercise the Securities Issuance
Option, purchase at Option Writer's sole expense an irrevocable standby letter
of credit drawable in New York, from a financial institution reasonably
acceptable to HM, which letter of credit secures the performance of
17
Option Writer under this Agreement and effectively raises the claims payment
ability of the Option Writer under this Agreement to an S&P Rating of AAA. Such
letter of credit shall remain in effect until the earlier of (a) five (5) days
following the end of the period during which HM has the ability to exercise the
Securities Issuance Option, and (b) the date that the S&P Ratings of either
Option Writer or Centre Reinsurance Limited shall be at least AA-. Such letter
of credit shall initially be in a principal amount equal to the Original Value
of the Preferred Shares subject to the Securities Issuance Option which are not
then issued and outstanding, and such principal amount shall subsequently be
adjusted from time to time based on adjustments to the total Original Value of
the Preferred Shares subject to the Securities Issuance Option, whether due to
exercises of the Securities Issuance Option, redemption of Preferred Shares
which are reincluded in the Preferred Shares subject to the Securities Issuance
Option in accordance with Section 6.1, or otherwise.
6.10 Option Writer Common Stock Ownership. Option Writer shall not
acquire or own HM Common Stock (other than through the acquisition of Preferred
Shares by exercise of the Securities Issuance Option and the subsequent
conversion of such Preferred Shares into HM Common Stock) if such acquisition or
ownership could result in the inability to satisfy the condition contained in
Section 5.7.
6.11 Maintenance of Reinsurance. During the Exposure Period and
Exercise Term, if any, and during any period in which any Preferred Shares
remain outstanding, HM shall maintain the reinsurance program described in
Section 5.6.
6.12 Plans and Reports. HM shall promptly deliver, or cause the
delivery, to Option Writer of copies of (a) HM's most recent two (2) year future
business plan, which plan will generally be available on or about March 1 of
each calendar year, (b) HM's most recent Form 10-K and Annual Report, and (c)
the most recent statutory annual statements for the HM Insurance Subsidiaries.
The failure of HM to deliver any such items shall not be deemed a breach of this
Agreement unless such item is actually available, has been requested in writing
by Option Writer, and has not been delivered by HM within thirty (30) days after
HM's receipt of such request. Option Writer shall keep all documents or
information delivered to Option Writer pursuant to this Section 6.12 (except for
the Form 10-K and Annual Report and statements described in clauses (b) and (c)
above) in strictest confidence and shall use them solely in connection with the
Transaction Agreements, except as otherwise required by law.
6.13 Stock Dividends or Distributions. In the event that Option
Writer, whether as a holder of Common Stock or as a holder of Preferred Shares,
receives (or is entitled to receive upon conversion of such Preferred Shares, as
the case may be) a distribution (by stock dividend or otherwise) of any
securities, the sale of which is registered, not required to be registered or
exempt from such registration under the Securities Act in the hands of public
holders of the HM Common Stock, but the sale of which is not registered, but is
required to be registered or exempt from registration under the Securities Act
in the hands of Option Writer, HM shall at its option, within a reasonable time
period following a request by Option Writer, either (a) notify Option Writer
that it will be permitted to include such securities as "Registrable Securities"
as defined in the Registration Rights Agreement, or (b)
18
repurchase such securities from Option Writer at market value as determined in
the public market. In the event that there is no public market for such
securities, HM and Option Writer shall appoint a mutually agreeable third-party
appraiser to establish the value of such securities, provided that if the
parties fail to agree on such third-party appraiser, the value will be
determined pursuant to Section 8(a).
6.14 Press Releases and Confidentiality. Neither HM nor Option Writer
shall issue any press release or other announcements to the public relating to
the execution of the Transaction Agreements or the transactions contemplated
thereunder without the prior written consent of the other party. Each of Option
Writer and HM shall hold confidential all financial and other information
supplied by the other party in respect of the Transaction Agreements or the
transactions contemplated therein, and Option Writer and HM agree to keep
confidential the specific economics of the Securities Issuance Option, including
but not limited to, the Option Fee and the Option Exercise Fee; provided that
such confidentiality obligation shall apply only to non-public information, and
information which was not available to the other party on a non-confidential
basis from a third party. Notwithstanding any provision of this Section to the
contrary, either Option Writer or HM may make any disclosure required to be made
by it under applicable law (including federal securities law) if it determines
in good faith that it is necessary to do so, and gives prior notice to the other
party and discusses such disclosure with such other party. In addition, either
Option Writer or HM may make any disclosure to which the other party gives its
prior written consent.
7. Termination. This Agreement and the transactions contemplated by this
Agreement may be terminated by mutual written consent signed by HM and Option
Writer at any time prior to the end of the Exposure Period, in which case Option
Writer shall refund to HM a portion of the annual Option Fee previously paid for
the then current year as agreed between HM and Option Writer.
8. Alternative Dispute Resolution.
(a) In the event of a dispute regarding the satisfaction of any of
the conditions set forth in Sections 5.1, 5.2, 5.4 or 5.6 of this Agreement,
such dispute shall be referred to a "Big Six" public accounting firm except for
any such accounting firm which serves as a then current accountant or outside
auditor for either HM or Option Writer (the "Accountant"). Either party may
submit a dispute to the Accountant by making a written submission to the
Accountant and the other party, which written submission shall include the
submitting party's documentation of such dispute, and the submitting party's
position on the issue(s). The other party shall then have ten (10) business days
to submit to the Accountant and the first party its documentation of the dispute
and its position on the issue(s); provided, however, that if such other party
fails to make a timely and complete submission to the Accountant, such other
party shall be deemed to have conceded the dispute. Upon receipt of submissions
from both parties with respect to a given dispute, the Accountant shall then
have ten (10) business days in which to resolve the dispute by selecting one
party's position or the
19
other's. The decision of the Accountant in the event of alternative dispute
resolution under this Section 8 shall be final and binding upon the parties, and
each party shall bear its own costs plus one-half (1/2) of the costs of the
Accountant.
(b) In the event of a dispute regarding the satisfaction of any of
the conditions set forth in Article 5 of this Agreement, except for conditions
set forth in Sections 5.1, 5.2, 5.4 or 5.6, such dispute shall be referred to a
panel of three arbitrators. Notice requesting arbitration must be in writing in
accordance with Section 9.2 of this Agreement.
One arbitrator shall be chosen by each party within twenty (20)
business days of delivery of a written notice of request for arbitration by a
party. The two arbitrators shall, before instituting the hearing, choose a third
arbitrator who shall preside at the hearing. If either party fails to appoint
its arbitrator within twenty (20) business days of the notice of request for
arbitration, the other party, after ten (10) business days notice of its
intention to do so, may appoint the second arbitrator.
If the two arbitrators are unable to agree upon the third arbitrator
within fifteen (15) business days of their appointment, the two arbitrators
shall request the American Arbitration Association to appoint the third
arbitrator with the qualifications identified herein.
All arbitrators shall be impartial, and unless the parties otherwise
agree, all arbitrators shall be attorneys with at least fifteen (15) years of
corporate law experience.
The procedure to be followed in the arbitration hereunder shall be as
prescribed herein and in such directives as shall be issued by the arbitrators.
Either party may submit a dispute to the arbitration panel by making a
written submission to the panel and the other party, which written submission
shall include the submitting party's documentation of such dispute, and the
submitting party's position on the issue(s). The other party shall then have ten
(10) business days to submit to the panel and the other party its documentation
of the dispute and its position on the issue(s); provided, however, that if such
party fails to make a timely and complete submission to the panel, such other
party shall be deemed to have conceded the dispute.
Upon receipt of submissions from both parties with respect to a given
dispute, the panel shall then have ten (10) business days in which to resolve
the dispute by determining whether the condition has been satisfied. The
decision of any two arbitrators when rendered in writing shall be final and
binding. The arbitration award shall be based on and accompanied by a written
opinion containing findings of fact and conclusions of law. Each party shall
bear the expense of its own arbitrator and shall jointly and equally bear with
the other party the cost of the third arbitrator.
20
9. Miscellaneous.
9.1 Amendments. The provisions of this Agreement may not be waived,
altered, amended or repealed, in whole or in part, except by the written consent
of both parties to this agreement.
9.2 Notices. Any notice or other communication required or permitted
under this Agreement shall be in writing and shall be deemed to have been given
(a) on the date of delivery if delivered personally or sent by facsimile
transmission (which transmission shall be confirmed by telephone), (b) twenty-
four (24) hours after sending if sent by overnight delivery service, or (c) five
(5) days after mailing if sent by certified, registered or express mail, postage
prepaid, if properly addressed or directed to such party at the appropriate
address or facsimile number set forth below, or such address or facsimile number
as such party may designate by written notice to the other parties:
(i) if to HM to:
Horace Mann Educators Corporation
Mail No. G 016
One Horace Mann Plaza
Springfield, Illinois 62715-0001
Attention: George Zock
Fax No.: (217) 788-5798
with a copy to:
Gibson, Dunn & Crutcher LLP
200 Park Avenue
New York, NY 10166-0193
Attention: Conor Reilly
Fax No.: (212) 351-5247
and a copy to:
Aon Securities Corporation
123 N. Wacker Drive
Chicago, Illinois 60606
Attention: Bryon Ehrhart
Lawrence Harb
Fax No.: (312) 701-2174
(ii) if to Option Writer to:
Centre Reinsurance (U.S.) Limited
Cumberland House
21
One Victoria Street
P.O. Box HM 1788
Hamilton HM HX
Bermuda
Attention: President
Fax No.: (441) 295-3705
with a copy to:
ZC ReSource Limited
One Chase Manhattan Plaza, 44th Floor
New York, New York 10005
Attention: General Counsel
Fax No.: (212) 898-5444
9.3 Entire Agreement. This Agreement (including the Exhibits and the
Schedules) contains the entire agreement between the parties, and supersedes all
prior agreements, written or oral, with respect to the Securities Issuance
Option.
9.4 Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of New York (without regard to any
choice of law or conflict of law rules that would cause the application of any
laws or rules of any jurisdiction other than the State of New York).
9.5 Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the parties and their respective successors and assigns,
and any references to a specific party in this Agreement shall include such
party's permitted successors or assigns. Neither party shall have the right to
assign or otherwise transfer its rights or obligations under this Agreement
without the prior written consent of the other party, provided, however, that
any holder or holders of Preferred Shares, or Common Stock into which such
Preferred Shares are convertible, shall be a third-party beneficiary under this
Agreement having all the rights of Option Writer, subject to the obligations of,
and limitations on, Option Writer contained in this Agreement, and provided,
further, that Option Writer may assign this Agreement to any affiliate of Option
Writer provided that such affiliate agrees to and complies with the terms and
conditions applicable to Option Writer under this Agreement, including without
limitation the terms set forth in Section 6.9.
9.6 Severability. Each term, covenant, condition or provision of this
Agreement shall be viewed as separate and distinct, and in the event that any
such term, covenant, condition or provision shall be deemed by a court of
competent jurisdiction to be invalid, the remaining provisions shall continue in
full force and effect.
9.7 Necessary Acts. Each party to this Agreement shall perform any
further acts and execute and deliver any additional agreements, assignments,
documents or
22
instruments that may be reasonably necessary or desirable to carry out the
provisions or effectuate the purposes of this Agreement.
9.8 Legal Expenses. If any legal action or any arbitration or other
proceeding is brought to enforce the provisions of this Agreement, or because of
an alleged dispute, breach, default or misrepresentation in connection with any
of the provisions of this Agreement, the successful or prevailing party or
parties, whether or not such party or parties have instituted the action, shall
be entitled to recover all attorneys' fees and other costs incurred in such
action or proceeding, in addition to any other relief to which it or they may be
entitled. Notwithstanding the forgoing, in the event of alternative dispute
resolution under Section 8, each party shall bear its own costs as set forth in
Section 8.
9.9 Counterparts. This Agreement may be executed in separate
counterparts, each of which when so executed and delivered shall be an original,
but all of which shall together constitute one and the same instrument.
9.10 Headings. The headings in this Agreement are for reference only,
and shall not affect the interpretation of this Agreement.
23
IN WITNESS WHEREOF, the parties to this Agreement have caused it to be duly
executed as of the date first written above.
HORACE MANN EDUCATORS CORPORATION
By: /s/ George J. Zock
---------------------------------
Title: Senior Vice President & Treasurer
-----------------------------------
By: /s/ Paul J. Kardos
---------------------------------
Title: President and Chief Executive Officer
---------------------------------------
CENTRE REINSURANCE (U.S.) LIMITED
By: /s/ Rolf Staub
--------------------------------------
Title: Assistant Secretary
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EXHIBIT 1.3
HORACE MANN EDUCATORS CORPORATION
CERTIFICATE OF DESIGNATIONS
PURSUANT TO SECTION 151 OF THE GENERAL CORPORATION
LAW OF THE STATE OF DELAWARE
SERIES A CUMULATIVE CONVERTIBLE
PREFERRED STOCK
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RESOLVED, that, pursuant to the authority vested in the Board of Directors of
the Corporation in accordance with the provisions of its Certificate of
Incorporation, a series of Preferred Stock of the Corporation be, and hereby is,
created and that the designation and amount thereof and the voting powers,
preferences and relative, participating, optional or other special rights of the
shares of such series, and the qualifications, limitations or restrictions
thereon, are as follows:
SECTION 1. DESIGNATION. The series of Preferred Stock established hereby shall
be designated the "Series A Cumulative Convertible Preferred Stock" (the "Series
A Preferred Shares") and the authorized number of Series A Preferred Shares
shall be 100,000 shares.
SECTION 2. DIVIDENDS.
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(a) Holders of outstanding Series A Preferred Shares will be entitled
to receive, when and as declared by the Board of Directors out of funds legally
available therefore, cash dividend payments in the amount of the Dividend Yield
on each Series A Preferred Share, payable quarterly for each of the quarters
ending March, June, September and December of each year, payable in arrears on
the first business day of each succeeding April, July, October and January,
respectively (each such date being hereinafter referred to as a "Preferred
Dividend Payment Date"). The first dividend shall be payable on the Preferred
Dividend Payment Date corresponding to the quarter in which the Issuance Date
falls. Each such dividend will be payable to holders of record as they appear on
the stock books of the Corporation on such record dates, not less than 10 nor
more than 50 days preceding the related Preferred Dividend Payment Date, as
shall be fixed by the Board of Directors. Dividends on each Series A Preferred
Share shall accrue on a daily basis and compound quarterly commencing on the
Issuance Date for such share and continuing to, but not including, the
Redemption Date, Special Redemption Date or Conversion Date for such share (or
other date on which such Series A Preferred Share is no
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longer outstanding) and accrued dividends for each quarterly dividend period
shall accumulate as Unpaid Dividend Yield, to the extent not paid, on the
Preferred Dividend Payment Date for the quarter in which they accrued. Dividend
payments under this paragraph (a) shall accrue whether or not the Corporation
shall have earnings, whether or not there shall be funds legally available for
the payment of such dividends and whether or not such dividends are declared.
(b) So long as any Series A Preferred Shares shall remain outstanding,
no dividend (other than a dividend payable in shares of Common Stock or rights
to obtain Common Stock or any class of capital stock of the Corporation which is
junior to the Series A Preferred Shares) shall be declared, nor shall the
Corporation make any other distribution or payment or set aside anything of
value for distribution or payment on, or redeem, repurchase or otherwise acquire
any shares of, the Common Stock of the Corporation or any other class of stock
or series thereof ranking junior to the Series A Preferred Shares in the payment
of dividends (other than a redemption or purchase of shares of Common Stock of
the Corporation made for purposes of an employee incentive or benefit plan of
the Corporation or any of its subsidiaries) unless the full amount of Unpaid
Dividend Yield, if any, accumulated on all outstanding Series A Preferred Shares
through all past Preferred Dividend Payment Dates shall have been paid and not
refunded. No dividend shall be declared on any share or shares on any class of
stock of the Corporation or series thereof ranking on a parity with the Series A
Preferred Shares in respect of payment of dividends for any prior dividend
payment period of said parity stock unless there shall have been declared on all
shares then outstanding of the Series A Preferred Shares terminating with or
before such prior dividend payment period of such parity stock, like
proportional dividends determined ratably in proportion to the respective Unpaid
Dividend Yield accumulated to date for all previous quarterly dividend periods
on all outstanding Series A Preferred Shares and the dividends accumulated on
all outstanding shares of said parity stock.
(c) CHANGE IN TAX LAWS.
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(i) If because of an increase or decrease (up to and including
full elimination), effective on or after March 1, 1997, of the dividends
received deduction ("DRD") with respect to dividend payments on the Series A
Preferred Shares presently permitted by any Tax Law (a "change in the DRD Tax
Law"), corporate holders of Series A Preferred Shares ("Corporate Holders")
would realize a greater or lesser after-tax yield from dividend payments on a
Series A Preferred Shares than would have been the case had such change in the
DRD Tax Law not occurred (a positive or negative "Tax Effect," respectively),
then a dividend adjustment shall be calculated on the Series A Preferred Shares
(whether or not held by Corporate Holders) so that a Corporate Holder's net
after-tax yield would be the same as if there has been no change in the DRD Tax
Law. Calculation of the dividend adjustment pursuant to this paragraph (c) of
Section 2 shall be made (1) without regard to any other changes in Tax laws
except those affecting the deductibility of dividends received by Corporate
Holders (including changes in the characterization of Series A Preferred Shares
dividends which impact their deductibility under any DRD related Tax Law); and
(2) assuming that Corporate Holders pay federal income tax at the highest
marginal corporate income tax rate effective at March 1, 1997.
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(ii) For purposes of calculating the Preferred Dividend Yield
Rate as set forth in Section 8 herein, any adjustment in dividends required
pursuant to paragraph (c) (1) of this Section 2 shall be expressed as (1) the
dividend payment required, after considering the change in DRD Tax law, to
equalize a Corporate Holder's net after tax yield, expressed as a percentage (in
decimals) of (2) dividends which would have accrued to such Corporate Holder had
the change in DRD Tax law not occurred (such percentage referred to as the
"Preferred Dividend Tax Adjustment Factor"). Therefore, if in equalization of
any negative Tax Effect, the Corporation were required to pay $15.00 in extra
dividends for each $100.00 of dividends that would have accrued and been payable
without regard to any changes in the DRD Tax Law, the Preferred Dividend Tax
Adjustment Factor would be 1.15 ($115.00 / $100.00). Conversely, if in
equalization of any positive Tax Effect, the Corporation were entitled to pay
$8.00 less in dividends for each $100.00 of dividends that would have accrued
and been payable without regard to any changes in the DRD Tax Law, the Preferred
Dividend Tax Adjustment Factor would be 0.92 ($92.00 / $100.00).
(iii) Upon the occurrence of any changes in the DRD Tax Law
resulting in a positive or negative Tax Effect, dividends accruing on each
Series A Preferred Share shall be calculated using the Preferred Dividend Tax
Adjustment Factor, effective as of the first day of the quarterly dividend
period in which such change in the DRD Tax Laws become effective, or from the
Issuance Date, if such Issuance Date occurred for such Series A Preferred Share
during the quarterly dividend period in which the change in the DRD Tax Law
occurred. Dividends calculated using the adjusted Preferred Dividend Yield Rate
shall continue to be payable on the Preferred Dividend Payment Date immediately
following the end of such quarterly dividend period. To the extent not paid on
any Series A Preferred Share outstanding on the record date corresponding to the
Preferred Dividend Payment Date for such quarterly dividend period, any
additional dividend shall accumulate as Unpaid Dividend Yield of such share and
shall remain a part thereof until (but only until) such dividend is paid.
SECTION 3. CASH REDEMPTION BY THE CORPORATION.
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(a) REDEMPTION AT OPTION OF CORPORATION. The Corporation may not
redeem the Series A Preferred Shares at any time prior to the first anniversary
of the Issuance Date of such Series A Preferred Shares. At any time and from
time to time on or after such anniversary date, the Corporation may, at its
option, with proper notice as set forth in paragraph (b) of this Section 3,
redeem any or all of the outstanding Series A Preferred Shares, as of a Proposed
Redemption Date specified in the notice to holders, for cash in an amount equal
to the Redemption Price per share, subject to a minimum aggregate Redemption
Price for all Series A Preferred Shares redeemed of $15,000,000 plus integral
multiples of $1,000,000 above such minimum amount. Notwithstanding anything to
the contrary in this paragraph (a), the Corporation may provide notice of its
intention to redeem any Series A Preferred Shares prior to the first anniversary
of their Issuance Date, so long as the Proposed Redemption Date specified in
such notice is a date on or after the date of such first anniversary.
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(b) NOTICE OF REDEMPTION. In order to properly effect the redemption
of Series A Preferred Shares, the Corporation will provide notice, to holders of
record of the Series A Preferred Shares to be redeemed, not less than (i) thirty
(30) days prior to the Proposed Redemption Date if the Proposed Redemption Date
is three (3) years, eight (8) months and fifteen (15) days or less from the
Issuance Date of such Series A Preferred Shares, and (ii) forty-five (45) days
prior to the Proposed Redemption Date if the Proposed Redemption Date is more
than three (3) years, eight (8) months and fifteen (15) days after the Issuance
Date of such Series A Preferred Shares. Such notice may be provided by mail,
first class postage prepaid, to the holders of record of the Series A Preferred
Shares at their respective addresses as the same shall appear on the books of
the Corporation or any transfer agent for the Series A Preferred Shares, or by
facsimile or telecopy, as set forth in paragraph (a) of Section 9 herein. Each
such notice shall state, as appropriate: (1) the Proposed Redemption Date; (2)
the total number of Series A Preferred Shares to be redeemed and, if fewer than
all Series A Preferred Shares are to be redeemed, the number of such shares held
by such holder to be redeemed; (3) the Redemption Price; (4) the place or places
where certificates for such shares are to be surrendered for redemption; and (5)
that dividends on the Series A Preferred Shares to be redeemed will cease to
accrue on the Proposed Redemption Date.
Each holder of Series A Preferred Shares called for redemption shall
surrender the certificates evidencing such shares to the Corporation at the
place designated in such notice and shall thereupon be entitled to receive the
cash payable upon such redemption. In case less than all of the shares
represented by any such surrendered certificate are redeemed, a new certificate
shall be issued promptly at the expense of the Corporation representing the
balance of the shares. If proper notice of redemption shall have been duly
provided to holders of the Series A Preferred Shares in accordance with this
paragraph (b), and payment therefor has been made or duly provided for, then,
notwithstanding that the certificates evidencing any of such shares so called
for redemption shall not have been surrendered, as of the close of business on
the Redemption Date the shares represented thereby shall be deemed no longer
outstanding, dividends with respect to such Series A Preferred Shares shall
cease to accrue and all rights of the holder with respect to such Series A
Preferred Shares shall forthwith cease and terminate, except for the right of
the holders to receive the cash payable upon such redemption, without interest,
upon surrender of the certificates therefor.
(c) REVOCATION OF NOTICE TO REDEEM. The Corporation's election to
redeem the Series A Preferred Shares pursuant to paragraph (a) of this Section 3
shall be fully or partially revocable, and any notice to holders of Series A
Preferred Shares provided in accordance with paragraph (b) of this Section 3
shall be subject to revocation or amendment by the Corporation. In order to
properly effect the revocation or amendment of such notice, the Corporation will
provide notice of its revocation or amendment, not less than one business day
prior to the Proposed Redemption Date, to holders of record of the Series A
Preferred Shares previously notified of the proposed redemption. Such notice may
be provided in any of the manners permissible for providing notice of redemption
under paragraph (b) of this Section 3. Such notice of revocation or amendment
shall clearly state that: (1) on the Proposed Redemption Date, the Corporation
will not redeem any of the Series A Preferred Shares, or if
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notice of partial revocation, the amended number of Series A Preferred Shares
held by such holder to be redeemed, and the balance of Series A Preferred Shares
held by such holder not being redeemed; and (2) dividends on the Series A
Preferred Shares not being redeemed will continue to accrue on and after the
Proposed Redemption Date without interruption. Notwithstanding the foregoing, in
the event that a notice of conversion has been delivered in accordance with
paragraph (e) of Section 4 below (which notice of conversion then remains
unrevoked), the Corporation shall not issue a notice of redemption under
paragraph (b) of this Section 3, or revoke a previously issued notice of
redemption, within thirty (30) days prior to the Proposed Conversion Date set
forth in such notice of conversion.
(d) RATABLE REDEMPTION. If fewer than all outstanding Series A
Preferred Shares are to be redeemed on any Redemption Date, the shares to be
redeemed (which shall be a whole number) shall be selected by the Corporation
from outstanding Series A Preferred Shares not previously called for redemption
by lot or pro rata (to the extent possible without redeeming fractional shares)
or by any other method determined by the Corporation in its sole discretion to
be equitable.
(e) SPECIAL REDEMPTION EVENT. Notwithstanding anything to the
contrary in this Section 3, at any time after the occurrence of a Special
Redemption Event, any holder of Series A Preferred Shares shall be entitled, at
the option of such holder, to cause any or all of such shares to be redeemed by
the Corporation for cash in the amount of the Redemption Price per share as of a
Special Redemption Date. To properly effect the redemption of any Series A
Preferred Shares pursuant to this paragraph (e) of Section 3, the holder of
Series A Preferred Shares shall provide notice to the Corporation not less than
ten (10) business days prior to the proposed Special Redemption Date. Such
notice must be provided by first class, registered mail, postage prepaid, to the
Corporation at its principal executive offices, or by facsimile or telecopy, at
the address or number set forth in paragraph (a) of Section 9 herein. Each such
notice shall state, as appropriate: (1) the proposed Special Redemption Date;
(2) the number of Series A Preferred Shares (which must be a whole number of
shares) to be redeemed; (3) the name or names in which such holder wishes any
Series A Preferred Shares not to be so redeemed to be issued and the address to
which such holder wishes delivery to be made of such balance certificate or
certificates; and (4) a statement setting forth the facts and circumstances
under which the holder believes a Special Redemption Event has occurred. The
Corporation shall give notice of the occurrence of a Special Redemption Event to
all holders of Series A Preferred Shares promptly upon the occurrence of such
event.
(f) CANCELLATION OF SHARES. All Series A Preferred Shares redeemed by
the Corporation as provided in this Section 3 (or otherwise acquired by the
Corporation) shall be retired and thereupon restored to the status of authorized
but unissued Series A Preferred Shares.
SECTION 4. CONVERSION BY HOLDERS INTO COMMON STOCK.
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(a) RIGHT OF CONVERSION. Except as provided in paragraph (b) of this
Section 4, no holder of Series A Preferred Shares may convert such shares into
shares of
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Common Stock at any time prior to the close of business of the fourth
anniversary of the Issuance Date of such Series A Preferred Shares. At any time
and from time to time after such anniversary date, on the terms and subject to
the conditions set forth in this Section 4, any holder of Series A Preferred
Shares shall be entitled, at the option of such holder, to cause any or all of
such shares to be converted into shares of Common Stock of the Corporation at
the conversion rate set forth in paragraph (d) of this Section 4, as of the
Proposed Conversion Date specified in such holder's notice to the Corporation
delivered pursuant to paragraph (e) of this Section 4. The minimum number of
Series A Preferred Shares for which conversion may be elected shall be 1,000, or
such lesser number which constitutes all of the outstanding Series A Preferred
Shares held by such holder.
Notwithstanding anything to the contrary in this paragraph (a), the
holder of Series A Preferred Shares may provide notice of its intention to
convert any or all of such shares prior to the fourth anniversary of the
Issuance Date of such Series A Preferred Shares, so long as the Proposed
Conversion Date specified in such notice is a date after the date of such fourth
anniversary.
(b) SPECIAL CONVERSION EVENTS. Notwithstanding anything to the
contrary in paragraph (a) of this Section 4, at any time after the occurrence of
a Special Conversion Event, any holder of Series A Preferred Shares shall be
entitled, at the option of such holder, to cause any or all of such shares to be
converted into shares of Common Stock of the Corporation at the Special
Conversion Rate as of the Proposed Conversion Date specified in such holder's
notice to the Corporation delivered pursuant to paragraph (e) of this Section 4.
Such notice shall be effective only to the extent that the condition resulting
in a Special Conversion Event has not been cured prior to the delivery of such
notice.
(c) PRIORITY OF CORPORATION'S RIGHT OF REDEMPTION. Notwithstanding
paragraphs (a) and (b) of this Section 4, no Series A Preferred Shares shall be
converted on or after the close of business on any Redemption Date for which
notice has been properly delivered in accordance with Section 3 hereof. The
Corporation's right to redeem any or all shares of Series A Preferred Stock on
or prior to any Proposed Conversion Date shall supersede any holder's right of
conversion under this Section 4, whether or not such holder's notice of
conversion was properly delivered prior to the Corporation's notice to redeem,
so long as the Corporation's notice to redeem was properly delivered in
accordance with Section 3 hereof at least (i) thirty (30) days prior to the
Proposed Conversion Date if such notice to redeem is delivered three (3) years,
eight (8) months and fifteen (15) days or less from the applicable Issuance
Date, or (ii) forty-five (45) days prior to the Proposed Conversion Date if such
notice to redeem is delivered more than (3) years, eight (8) months and fifteen
(15) days from the applicable Issuance Date.
(d) CONVERSION RATE. For purposes of conversion of Series A Preferred
Shares to shares of Common Stock pursuant to this Section 4 other than a Special
Conversion Event under paragraph (b) of this Section 4, each Series A Preferred
Share shall be converted into the number of Common Stock shares resulting from
dividing (i) the Original Value of such Series A Preferred Share, plus Unpaid
Dividend Yield to and including the Conversion Date,
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by (ii) the greater of (A) the Market Price at Conversion, or (B) the Minimum
Book Value Price (such greater value to be referred to as the "Conversion
Price")
(e) NOTICE OF CONVERSION. In order to properly effect the conversion
of Series A Preferred Shares, the holder of such shares will provide notice to
the Corporation not less than one hundred five (105) days prior to the Proposed
Conversion Date. Such notice must be provided by first class, registered mail,
postage prepaid, to the Corporation at its principal executive offices, at the
address or number set forth in paragraph (a) of Section 9 herein. Each such
notice shall state, as appropriate: (1) the Proposed Conversion Date; (2) the
number of Series A Preferred Shares (which must be a whole number of shares) to
be converted; (3) the name or names in which such holder wishes the certificate
or certificates for Common Stock and for any Series A Preferred Shares not to be
so converted to be issued and the address to which such holder wishes delivery
to be made of the new certificates to be issued upon conversion; and (4) an
acknowledgment that the shares to be converted remain subject to the
Corporation's right of redemption in accordance with Section 3.
Notwithstanding the preceding paragraph, for any conversion pursuant
to paragraph (b) of Section 4, the holder of Series A Preferred Shares may
properly convert such shares into shares of Common Stock upon providing notice
to the Corporation, not less than five (5) business days prior to the Proposed
Conversion Date, in the manner set forth in the preceding paragraph. Such notice
shall contain the information described above for conversion pursuant to
paragraph (a) of Section 4, as well as a statement setting forth the facts and
circumstances under which the holder believes a Special Conversion Event has
occurred.
(f) REVOCATION OF NOTICE TO CONVERT. The right of any holder of Series
A Preferred Shares electing to convert the Series A Preferred Shares pursuant to
paragraphs (a) or (b) of this Section 4 shall be fully or partially revocable,
and any notice to the Corporation provided in accordance with paragraph (e) of
this Section 4 shall be subject to revocation or amendment by the holder of the
shares to which such notice relates. In order to properly effect the revocation
or amendment of such notice, the holder shall provide notice to the Corporation
of its revocation or amendment not less than three (3) business days prior to
the Proposed Conversion Date. Such notice shall be provided in the same manner
specified as permissible for providing notice of conversion under paragraph (e)
of this Section 4, and shall clearly state that: (1) the holder of such Series A
Preferred Shares will not convert any of such shares, or if notice of partial
revocation, the amended number of Series A Preferred Shares held by such holder
that are to be converted, and (2) if true, that the Market Price at Conversion
is less than the Minimum Book Value Price such that dividends on the Series A
Preferred Shares not being converted will accrue on such shares at the higher
Preferred Dividend Yield Rate for such period of time as is set forth in Section
8.
(g) SURRENDER OF SERIES A PREFERRED SHARES. Any holder of Series A
Preferred Shares desiring to convert any such shares into shares of Common Stock
shall surrender the certificate or certificates representing the Series A
Preferred Shares being converted, duly assigned or endorsed for transfer to the
Corporation (or accompanied by duly executed stock powers relating thereto), at
the principal executive office of the Corporation or
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the offices of the transfer agent for the Series A Preferred Shares or such
office or offices in the continental United States of an agent for conversion as
may from time to time be designated by notice to the holders of the Series A
Preferred Shares by the Corporation or the transfer agent for the Series A
Preferred Shares, accompanied by a copy of the written notice of conversion
previously provided to the Corporation in accordance with paragraph (e) of this
Section 4.
(h) DELIVERY OF COMMON STOCK. Upon the effectiveness of a conversion
of Series A Preferred Shares on the Conversion Date for such shares, the
Corporation, subject to the provisions of paragraph (k) of this Section 4
regarding fractional shares and paragraph (m) of this Section 4 regarding
payment of taxes, shall issue and send by first-class mail, postage prepaid, to
the holder thereof, or to such holder's designee, at the address designated by
such holder a certificate or certificates for the number of whole shares of
Common Stock to which such holder shall be entitled upon conversion. In case
there shall have been surrendered a certificate or certificates representing
Series A Preferred Shares only part of which are to be converted, the
Corporation, subject to the provisions of paragraph (m) of this Section 4
regarding payment of taxes, shall issue and deliver to such holder or such
holder's designee a new certificate or certificates for the number of Series A
Preferred Shares which shall not have been converted.
(i) EFFECTIVENESS OF CONVERSION. Any conversion of Series A Preferred
Shares into shares of Common Stock made at the option of the holder thereof
shall be effective immediately following the close of business on the Conversion
Date. At and after the effective time on the Conversion Date, the person or
persons entitled to receive the Common Stock issuable upon such conversion shall
be treated for all purposes as the record holder or holders of such shares of
Common Stock.
(j) CONVERSION PRICE ADJUSTMENTS. The conversion rate of any Series A
Preferred Shares shall be subject to the following adjustments:
(A) If any capital reorganization or reclassification of the
capital stock of the Corporation, or any consolidation or merger of the
Corporation with another corporation, or the sale of all or substantially all of
its assets to another corporation, or any other transaction, shall be effected
in such a way that holders of Common Stock shall be entitled to receive stock,
securities or assets with respect to or in exchange for Common Stock, then, as a
condition of such reorganization, reclassification, consolidation, merger, sale,
or other transactions, lawful and adequate provisions (in form authorized and
approved by the Board of Directors of the Corporation) shall be made whereby
each holder of any Series A Preferred Shares shall thereafter have the right to
receive, upon the basis and upon the terms and conditions specified herein and
in lieu of the shares of Common Stock of the Corporation immediately theretofore
receivable upon the conversion of such Series A Preferred Shares, such shares of
stock, securities or assets as may be issued or payable with respect to or in
exchange for a number of outstanding shares of such Common Stock equal to the
number of shares of Common Stock immediately theretofore so receivable had such
reorganization, reclassification, consolidation, merger, sale, or other
transactions, not taken place, and in any
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such case appropriate provision shall be made with respect to the rights and
interests of such holder to the end that the provisions hereof (including,
without limitation, provisions for adjustments of the conversion rate) shall
thereafter be applicable, as nearly as may be, in relation to any shares of
stock, securities or assets thereafter deliverable upon the exercise of such
conversion rights. If applicable, the Corporation shall reserve as provided by
paragraph (l) of this Section 4 such shares of common stock, other capital stock
or other securities of the Corporation as may be issuable upon conversion of
Series A Preferred Shares as provided by this Section 4 and shall comply with
the other requirements of paragraph (l) of this Section 4 in respect of such
shares or other securities so as to permit their issuance to holders of Series A
Preferred Shares upon conversion thereof.
The Corporation will not effect any such consolidation or merger,
or any sale of all or substantially all of its assets or properties, unless (i)
prior to the consummation thereof the successor corporation (if other than the
Corporation) resulting from such consolidation or merger or the corporation
purchasing such assets shall assume, by written instrument (in form authorized
and approved by the Board of Directors), executed and mailed or delivered to
each holder of shares of Series A Preferred Stock at the last address of such
holder appearing on the books of the Corporation, the obligation to deliver to
such holder such shares of stock, securities or assets as, in accordance with
the foregoing provisions, such holder may be entitled to receive or (ii) the
Series A Preferred Stock shall have been redeemed by the Corporation pursuant to
paragraph (a) or (e) of Section 3 hereof.
(B) In any case in which (i) this Section 4 shall require that an
adjustment as a result of any event become effective after the opening of
business on a specified business day following a record date, and (ii) the date
fixed for conversion pursuant to paragraph (e) of this Section 4 occurs after
such record date but before the occurrence of the event on such date, then (iii)
the Corporation may elect to defer until after the occurrence of such event (1)
issuing to the holder of any Series A Preferred Shares surrendered for
conversion certificates representing the shares or securities issuable upon such
conversion, and (2) paying to such holder any amount in cash in lieu of a
fractional share of Common Stock in accordance with paragraph (k) of this
Section 4, provided, however, that such deferral is not for an unreasonable
period of time.
(k) FRACTIONAL SHARES. No fractional shares of Common Stock shall be
issued upon conversion of any Series A Preferred Shares but, in lieu of any
fraction of a share of Common Stock which would otherwise be issuable in respect
of the aggregate number of Series A Preferred Shares surrendered for conversion
at one time by the same holder, the Corporation shall pay an amount in cash
equal to the same fraction of the Conversion Price (based on the Market Price at
Conversion).
(l) RESERVATION OF SHARES. The Corporation shall at all times reserve
and keep available out of the authorized but unissued shares of Common Stock the
maximum number of shares of Common Stock into which all Series A Preferred
Shares from time to time outstanding are convertible, but shares of Common Stock
held in the treasury of the
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Corporation may in its discretion be delivered upon any conversion of Series A
Preferred Shares.
(m) TAXES. The Corporation shall pay any and all stock transfer and
documentary stamp taxes that may be payable in respect of any issuance or
delivery of shares of Common Stock or any other securities issued upon
conversion of the Series A Preferred Shares pursuant hereto. The Corporation
shall not, however, be required to pay any such tax which may be payable in
respect of any transfer involved in the issuance and delivery of shares of
Common Stock or other securities in a name other than that in which the Series A
Preferred Shares with respect to which such shares are issued were registered,
or any payment to any person other than the registered holder thereof, and shall
not be required to make any such issuance or delivery unless and until the
person otherwise entitled to such issuance or payment has paid to the
Corporation the amount of any such tax or has established, to the satisfaction
of the Corporation, that such tax has been paid or is not payable.
(n) CANCELLATION OF SHARES. All Series A Preferred Shares converted
into shares of Common Stock, other capital stock or other securities of the
Corporation as provided in this Section 4 (or otherwise acquired by the
Corporation) shall be retired and thereupon restored to the status of authorized
but unissued shares of preferred stock, par value $0.001 per share, undesignated
as to series.
SECTION 5. LIQUIDATION RIGHTS.
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(a) In the event of any Liquidation, after payment or provision for
payment has been made of the debts and other liabilities of the Corporation, the
holders of Series A Preferred Shares shall be entitled to receive, out of the
net assets of the Corporation, for each share its Original Value plus an amount
equal to the sum of Unpaid Dividend Yield (whether or not declared) accrued and
unpaid thereon for all previous periods and the current period, whether or not
accumulated, and no more. After such amount is paid in full, no further
distributions or payments shall be made in respect of Series A Preferred Shares,
such Series A Preferred Shares shall no longer be deemed to be outstanding or be
entitled to any other powers, preferences, rights or privileges, including
voting rights, and such Series A Preferred Shares shall be surrendered for
cancellation to the Corporation.
(b) The full amount payable to the holders of Series A Preferred
Shares shall be paid before any distribution shall be made to the holders of any
class of common stock of the Corporation or any other class of stock or series
thereof ranking junior to the Series A Preferred Shares with respect to the
distribution of assets upon a Liquidation. No payment on account of any
Liquidation shall be made to the holders of any class or series of stock ranking
on a parity with the Series A Preferred Shares in respect of the distribution of
assets upon Liquidation unless there shall likewise be paid at the same time to
the holders of the Series A Preferred Shares like proportionate amounts
determined ratably in proportion to the full amounts to which the holders of all
outstanding Series A Preferred Shares and the holders of all outstanding shares
of such parity stock are respectively entitled with respect to such
distribution.
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(c) If the assets distributed to the holders of Series A Preferred
Shares upon any Liquidation shall be insufficient to permit the payment to such
holders of the full amount to which they are entitled in such circumstances,
then such assets or the proceeds thereof shall be distributed among such holders
ratably in proportion to the sums which would be payable to such holders if all
sums were paid in full.
(d) Once any payment required upon any Liquidation is made to any
holder of Series A Preferred Shares, there shall not be any conversion rights in
respect of such shares pursuant to Section 4 hereof unless the full amount of
all such distributions and payment made in respect of such shares being
converted is remitted to the Corporation prior to or concurrently with the
conversion of such shares.
(e) Neither the merger nor consolidation of the Corporation into or
with any other corporation, nor the merger or consolidation of any other
corporation into or with the Corporation, nor a sale, transfer or lease of all
or any part of the assets of the Corporation, shall be deemed to be a
Liquidation for purposes of this Section 5.
(f) Written notice of any Liquidation, 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 by first class mail, postage
prepaid, not less than thirty (30) days prior to any payment date stated
therein, to the holders of record of the Series A Preferred Shares at their
respective addresses as the same shall appear on the books of the Corporation or
any transfer agent for the Series A Preferred Shares.
SECTION 6. VOTING RIGHTS.
- ---------- --------------
(a) Except as otherwise provided by paragraph (b) of this Section 6 or
required by law, the holders of Series A Preferred Shares shall not be entitled
to vote on any matter on which the holders of any voting securities of the
Corporation shall be entitled to vote.
(b) So long as any Series A Preferred Shares remain outstanding, the
Corporation shall not without first obtaining the approval (by vote or written
consent, as provided by applicable law) of the holders of more than fifty
percent (50%) of the then outstanding Series A Preferred Shares, voting together
as a single class:
(A) alter or change the rights, preferences or privileges of the
Series A Preferred Shares so as to affect adversely such Series A Preferred
Shares;
(B) sell, convey or otherwise dispose of or encumber all or
substantially all of its property or business or merge into or consolidate with
any other corporation (other than a corporation owned by or under common
ownership with the Corporation), provided, however, that the holders of Series A
Preferred Shares shall have no
-11-
voting rights under this subparagraph (B) of paragraph (b) of this Section 6
with respect to an event or occurrence which constitutes a Special Redemption
Event;
(C) increase the authorized number of Series A Preferred Shares;
or
(D) create any new class or series of stock, or any other
securities convertible into equity securities of the Corporation having rights
or preferences over, or on a parity with, the Series A Preferred Shares.
SECTION 7. SINKING FUND. No sinking fund or other mechanism for the segregation
of funds shall be established for the purpose of redemption or repurchase of the
Series A Preferred Shares or payment of dividends thereon.
SECTION 8. CERTAIN DEFINITIONS. For purposes of this Certificate of
Designations, the following terms shall have the meanings as set forth below.
"AVERAGE MARKET PRICE" means, with respect to a share of Common Stock
on any date of determination, the lesser of (a) the average of the daily Closing
Prices for the thirty (30) consecutive Trading Days ending on the date of
determination, or (b) the average of the daily Closing Prices for the fifteen
(15) consecutive Trading Days ending on the date of determination; provided,
however, that in averaging the daily Closing Prices for such Trading Days, all
adjustments shall be made as are necessary to reflect any subdivision,
reclassification, recapitalization or combination of, or dividend paid or
distribution made on, shares of Common Stock during such period of Trading Days.
"CHANGE OF CONTROL" means, with respect to the Corporation, (i) the
acquisition of ownership (by any Person or "group" within the meaning of
Sections 13(d) and 13(g) of the Securities Exchange Act of 1934, as amended) of
greater than 50% of the voting power of the capital stock of the Corporation
(whether by sale or other transfer of capital stock, merger, consolidation or
other reorganization or means, including a reorganization under bankruptcy or
insolvency laws); or (ii) the consummation of a sale, transfer or other
disposition of greater than 50% of the assets of the Corporation (determined on
a combined and consolidated fair market value basis) in one or a series of
related transactions to any Person that is not an affiliate of the Corporation.
"CLOSING PRICE" on any Trading Day shall mean the closing sales price
regular way on such day for one share of Common Stock or, in case no such sale
takes place on such day, the average of the reported closing bid and asked
prices regular way, in each case on the New York Stock Exchange, or, if the
Common Stock is not listed or admitted to trading on such Exchange, on the
principal national securities exchange on which the Common Stock is listed or
admitted to trading, or, if not listed or admitted to trading on any national
securities exchange, the average of the closing bid and asked prices of the
Common Stock on the over-the-counter market on the day in question as reported
by the National Quotation Bureau Incorporated, or a similarly generally accepted
reporting service, or if not so available in such
-12-
manner as furnished by any New York Stock Exchange member-firm selected from
time to time by the Board of Directors of the Corporation for that purpose.
"COMMON STOCK" means common stock of the Corporation, par value $0.001
per share.
"CONSOLIDATED SURPLUS" means the consolidated surplus of the
Corporation's life and property/casualty insurance subsidiaries determined based
on the following: with respect to (a) any insurance subsidiary of the
Corporation engaged principally in life insurance, the sum of (i) the amount
reported on page 3, line 38, column 1 of its Annual Statement required under the
laws of its state of domicile, plus (ii) the asset valuation reserve/interest
maintenance reserve of such subsidiary; or (b) any insurance subsidiary of the
Corporation engaged principally in property/casualty insurance, the amount
reported on page 3, line 25, column 1 of its Annual Statement required under the
laws of its state of domicile; or an amount determined in a consistent manner
for any date other than one as of which an Annual Statement is prepared;
provided, however, that if at any time SAP shall be modified to decrease the
amount calculated under clause (b) of this paragraph by a reserve similar to the
asset valuation reserve/interest maintenance reserve, then the amount under such
clause (b) shall be deemed to be the sum of such reduced amount plus such
reserve.
"CONVERSION DATE" shall be the same day as the Proposed Conversion
Date, provided that (i) the holder of Series A Preferred Shares has not
delivered a notice of revocation in accordance with paragraph (f) of Section 4;
and (ii) the Corporation has not properly delivered a notice of redemption
pursuant to paragraph (c) of Section 3 naming any date on or prior to the
Proposed Conversion Date as the Proposed Redemption Date, and such notice to
redeem has not been revoked prior to such date. Notwithstanding the foregoing,
in the event that the holders of more than fifty percent (50%) of the
outstanding Series A Preferred Shares hold registration rights with respect to
Common Stock into which such Series A Preferred Shares can be converted, and
such holders have delivered to the Corporation, concurrently with any notice of
conversion under paragraph (e) of Section 4, a notice requesting registration of
such Common Stock upon conversion in an underwritten securities offering, then
the Conversion Date shall be delayed so that it occurs (i) on or after the
effective date of such registration, and (ii) immediately prior to the purchase
of such Common Stock by the underwriter(s) undertaking such offering.
"CONVERSION PRICE" has the meaning set forth in paragraph (d) of
Section 4.
"DIVIDEND YIELD" means, with respect to each Series A Preferred Share
for each quarter, or such lesser period as may arise in connection with the
issuance, redemption or conversion of such share, or with any Liquidation, the
amount accruing on such share during the quarter, or such lesser period, at an
annual rate equal to the Preferred Dividend Yield Rate, applied to the sum of
(A) such share's Original Value, plus (B) Unpaid Dividend Yield thereon for all
prior periods. Dividend Yield for any period shorter than a full quarterly
dividend period shall be computed on the basis of a 360 day year of twelve 30-
day months. Dividend Yield will begin accruing on each Series A Preferred Share
on the Issuance Date of
-13-
such share and shall accrue to, but not including, the Redemption Date, Special
Redemption Date or Conversion Date for such share (or other date on which such
Series A Preferred Share is no longer outstanding).
"GAAP" means United States generally accepted accounting principles,
consistently applied.
"ISSUANCE DATE" means, for each Series A Preferred Share, the date on
which such share was originally issued by the Corporation.
"LIBOR" means the ninety (90) day London Interbank Offered Rate, as
reported in The Wall Street Journal or any other similar financial publication
selected by the Corporation. For purposes of calculating the Preferred Dividend
Yield Rate for any particular Series A Preferred Shares, LIBOR shall be such
rate as reported on the applicable Issuance Date; provided, such rate shall be
adjusted up or down, effective on the first day of each subsequent calendar
quarter (i.e., January 1, April 1, July 1 and October 1), to reflect the current
published rate on the last Trading Day of the prior calendar quarter, until such
time that no Series A Preferred Shares remain outstanding.
"LIQUIDATION" means any dissolution, liquidation or winding up of the
affairs of the Corporation, whether voluntary or involuntary.
"MARKET PRICE AT CONVERSION" means the Average Market Price of one
share of Common Stock determined as of the Proposed Conversion Date.
"MINIMUM BOOK VALUE PRICE" means one hundred percent (100%) of the
book value per share of the Common Stock, on a fully diluted basis, as of the
end of the most recent calendar quarter preceding the date of determination (or
on the date of determination, if such date falls at quarter-end), computed in
accordance with GAAP.
"ORIGINAL ISSUANCE DATE" means the first date on which any Series A
Preferred Shares were originally issued by the Corporation.
"ORIGINAL VALUE" of each Series A Preferred Share shall be equal to
$1,000, as proportionally adjusted for all stock splits, stock dividends, and
any other subdivisions, combinations, reclassifications, or recapitalization
affecting the Series A Preferred Shares.
"PERSON" means any individual, partnership, joint venture,
corporation, limited liability company, association, joint stock company, trust,
or unincorporated organization or association, or a government or any department
or agency or political subdivision thereof.
"PREFERRED DIVIDEND PAYMENT DATE" has the meaning set forth in
paragraph (a) of Section 2.
-14-
"PREFERRED DIVIDEND TAX ADJUSTMENT FACTOR" has the meaning set forth
in paragraph (c) of Section 2.
"PREFERRED DIVIDEND YIELD RATE" means (A) the sum of (i) LIBOR,
expressed as an annual percentage, and (ii) an additional percentage amount
based on the S&P Rating of the Series A Preferred Shares (adjusted annually) as
set forth in the table below (provided that such additional percentage shall be
two percent (2%) during any interim period where such S&P Rating is not
available), multiplied by (B) the Preferred Dividend Tax Adjustment Factor, if
any.
S&P RATING ADDITIONAL PERCENTAGE AMOUNT
---------- ----------------------------
AA 1.44%
AA- 1.49%
A+ 1.54%
A 1.59%
A- 1.69%
BBB+ 1.79%
BBB 1.99%
BBB- 2.24%
BB+ 2.65%
BB 2.85%
BB- 3.13%
Less than BB- 3.50%
Upon the occurrence of a Special Conversion Event, the Preferred
Dividend Yield Rate shall be adjusted effective as of the Preferred Dividend
Payment Date next succeeding the date of such Special Conversion Event based on
the S&P Rating as adjusted pursuant to such Special Conversion Event.
With respect to any Series A Preferred Shares that have been issued
and outstanding for four (4) years or more, the additional percentage amounts
listed in the right hand column of the above table shall be modified on each
anniversary of the Issuance Date for such Series A Preferred Shares, beginning
on the fourth (4th) anniversary of such Issuance Date, by adding to such
percentage amount an amount equal to: 12.5 basis points times the number of such
anniversaries of the Issuance Date that have passed after the third (3rd)
anniversary (i.e., the fourth (4th) anniversary shall be counted as the first
(1st) anniversary that has so passed, the fifth (5th) anniversary shall be
counted as the second (2nd) anniversary that has so passed, etc.) for all
rating classes from AA through A-; 25 basis points times the number of such
anniversaries of the Issuance Date that have passed after the third (3rd)
anniversary (i.e., the fourth (4th) anniversary shall be counted as the first
(1st) anniversary that has so passed, the fifth (5th) anniversary shall be
counted as the second (2nd) anniversary that has so passed, etc.) for rating
classes BBB+ and BBB; and 50 basis points times the number of such anniversaries
of the Issuance Date that have passed after the third (3rd) anniversary (i.e.,
the fourth (4th) anniversary shall be counted as the first (1st) anniversary
-15-
that has so passed, the fifth (5th) anniversary shall be counted as the second
(2nd) anniversary that has so passed, etc.) for all rating classes of BBB- or
lower.
"PROPOSED CONVERSION DATE" shall mean the date on which a holder of
Series A Preferred Shares proposes to convert any or all of the Series A
Preferred Shares, as set forth in its notice to the Corporation properly
delivered in accordance with paragraph (e) of Section 4.
"PROPOSED REDEMPTION DATE" shall mean the date on which the
Corporation proposes to redeem any or all of the Series A Preferred Shares, as
set forth in its notice to holders of Series A Preferred Shares properly
delivered in accordance with paragraph (b) of Section 3.
"REDEMPTION DATE" shall be the same day as the Proposed Redemption
Date, provided that (i) the Corporation has not withdrawn its intention to
redeem the Series A Preferred Shares pursuant to paragraph (c) of Section 3; and
(ii) proper provision for the payment of the Redemption Price to holders of
Series A Preferred Shares being redeemed has been made in accordance with
paragraph (b) of Section 3 by the close of business on the Proposed Redemption
Date.
"REDEMPTION PRICE" for each Series A Preferred Share shall be equal to
the sum of (A) the Original Value, plus (B) Unpaid Dividend Yield to and
including the Redemption Date on such share, provided, however, that the
Redemption Price for any redemption occurring (a) after the first anniversary
but on or before the second anniversary of the Issuance Date of such Preferred
Share shall be equal to 102% of such sum, (b) after the second anniversary but
on or before the third anniversary of the Issuance Date of such Preferred Share
shall be equal to 101% of such sum, and (c) after the third anniversary of the
Issuance Date of such Preferred Share shall be equal to 100% of such sum.
"S&P RATING" means the risk rating of the Series A Preferred Shares as
determined annually as of each anniversary of the Original Issuance Date (and in
addition as soon as practicable after the occurrence of a Special Conversion
Event) by the Standard & Poor's Division of the McGraw-Hill Companies. The
Corporation shall use its reasonable best efforts to obtain an S&P Rating with
respect to the Series A Preferred Shares as soon as practicable after the
applicable Issuance Date or Special Conversion Event, if any.
"SAP" means statutory accounting principles, consistently applied,
applicable to the Subsidiaries.
"SPECIAL CONVERSION EVENT" means the occurrence of the following
event: the consolidated stockholders' equity of HM and its consolidated
subsidiaries, as determined in accordance with GAAP, is less than
US$175,000,000, including the invested capital relating to any issued and
outstanding Series A Preferred Shares, and such condition remains uncured for
over sixty (60) days.
-16-
"SPECIAL CONVERSION RATE" means, with respect to the conversion of
Series A Preferred Stock to shares of Common Stock in the event of a Special
Conversion Event, the conversion of each Series A Preferred Share into the
number of Common Stock shares resulting from dividing (i) the Original Value of
such Series A Preferred Share, plus Unpaid Dividend Yield to and including the
Conversion Date, by (ii) the greater of (A) the Market Price at Conversion, or
(B) ninety percent (90%) of the Minimum Book Value Price.
"SPECIAL REDEMPTION DATE" shall be the day designated by any holder of
Series A Preferred Shares for redemption by the Corporation of any or all Series
A Preferred Shares held by such holder, as set forth in the notice of such
election, properly delivered in accordance with paragraph (e) of Section 3,
following a Special Redemption Event.
SPECIAL REDEMPTION EVENT" means the occurrence of a Change of Control
without the written consent of the holders of a majority of the Series A
Preferred Shares then outstanding.
"SUBSIDIARIES" means Horace Mann Insurance Company, an insurance
company formed under the laws of Illinois; Allegiance Insurance Company, an
insurance company formed under the laws of California; Teachers Insurance
Company, an insurance company formed under the laws of Illinois; Horace Mann
Life Insurance Company, an insurance company formed under the laws of Illinois;
and Allegiance Life Insurance Company, an insurance company formed under the
laws of Illinois.
"TAX LAWS" means the Internal Revenue Code of 1986, as amended, or any
other revenue statute of the United States or in any United States regulation,
ruling, administrative interpretation or judicial or other official
interpretation (including a change in the characterization of dividends on the
Series A Preferred Shares) applicable to the Corporation and/or corporate
holders. For purposes of paragraph (c) of Section 2, "Tax Laws" does not
include the tax laws of any state, municipality or foreign jurisdiction, or any
tax law relating to the computation of taxes or treatment of income, expenses or
deductions, or characterization of the dividends on the Series A Preferred
Shares under the Alternative Minimum Tax rules.
"TRADING DAY" shall mean a date on which the New York Stock Exchange
(or if different, the principal national securities exchange on which the Common
Stock is listed or admitted to trading) is open for the transaction of business.
"UNPAID DIVIDEND YIELD" of any Series A Preferred Share means, for any
particular quarterly period (or lesser period, as may arise in connection with
the issuance, redemption or conversion of such shares, or payments on such
shares in connection with any Liquidation), an amount equal to the excess, if
any, of (A) the aggregate Dividend Yield accrued on such share in such period,
over (B) the aggregate amount of cash dividends or distributions paid by the
Corporation in satisfaction of Dividend Yield on such shares for such period.
-17-
SECTION 9. MISCELLANEOUS.
-------------
(a) Any notice or other communication required or permitted hereunder
shall be in writing and shall be deemed to have been given on the earlier of (a)
the receipt thereof, or (b) five (5) days after mailing if sent by first class,
registered mail, postage prepaid, if properly addressed or directed to such
party at the appropriate address set forth below, or such address such party may
designate by written notice to the other parties:
(i) if to the Corporation to:
Horace Mann Educators Corporation
Mail No. G 016
One Horace Mann Plaza
Springfield, Illinois 62715-0001
Attention: George Zock
Senior Vice President & Treasurer
with a copy to:
Gibson, Dunn & Crutcher LLP
200 Park Avenue
New York, NY 10166-0193
Attention: Conor Reilly
(ii) if to a holder of the Series A Preferred Shares: to such
holder at the address for such holder as listed in the stock record books of the
Corporation (which may include the records of any transfer agent for the Series
A Preferred Shares if appropriate).
(b) In the event a holder of Series A Preferred Shares shall not by
written notice designate the name to whom payment upon redemption of Series A
Preferred Shares should be made or the address to which the certificate or
certificates representing such shares, or such payment, should be sent, the
Corporation shall be entitled to register such shares, and make such payment, in
the name of the holder of such Series A Preferred Shares as shown on the records
of the Corporation and to send the certificate or certificates representing such
shares, or such payment, to the address of such holder shown on the records of
the Corporation.
(c) All payments in the form of dividends and distributions and
distributions upon any Liquidation or otherwise made upon the Series A Preferred
Shares and any other shares of stock ranking on a parity with the Series A
Preferred Shares with respect to such dividend or distribution shall be made pro
rata, so that amounts paid per share on the Series A Preferred Shares and such
other shares of stock shall in all cases bear to each other the same ratio that
the required dividends, distributions or payments, as the case may be, payable
per share on the Series A Preferred Shares and such other shares of stock bear
to each other.
-18-
(d) The Corporation may appoint, and from time to time discharge and
change, a transfer agent for the Series A Preferred Shares.
-19-
ANNEX A
EXAMPLES OF TAX ADJUSTMENT MECHANISM
CERTIFICATE OF DESIGNATIONS
HORACE MANN EDUCATOR'S CORPORATION
SERIES A CUMULATIVE CONVERTIBLE PREFERRED STOCK
EXAMPLE 1: If a change in the DRD Tax Law was to eliminate the 70% dividends
received deduction (the "70% DRD"), the following additional
dividend would be calculated by the Corporation on the Series A
Preferred Shares pursuant to paragraph (c) of Section 2 of the
Statement of Resolution Establishing Series (the "Statement"):
PRE-CHANGE YIELD TO CORPORATE HOLDER PER $100 OF DIVIDENDS:
Dividend...............................$100.00
Less: 70% DRD.......................... 70.00
-------
Taxable Dividend.......................$ 30.00
Highest Marginal Tax Rate.............. 35%
-------
Federal Income Tax.....................$ 10.50
After-Tax Yield........................$ 89.50
=======
AFTER-CHANGE YIELD TO CORPORATE HOLDER PER $100 OF DIVIDENDS:
Dividend...............................$100.00
Highest Marginal Tax Rate.............. 35%
-------
Federal Income Tax.....................$ 35.00
-------
After-Tax Yield........................$ 65.00
=======
ADDITIONAL PAYMENT BY THE CORPORATION PER $100 OF DIVIDENDS
REQUIRED TO EQUALIZE AFTER-TAX YIELD:
Pre-Change Yield.......................$ 89.50
After-Change Yield..................... 65.00
-------
..........................$ 24.50
+ (1 minus Tax Rate)................... 0.65
-------
Additional Payment to Equalize
After-Tax Yield.......................$ 37.69
=======
In this example, the Corporation would be required to pay an
additional $37.69 per $100.00 of dividends to each holder of any
Series A Preferred Shares. Therefore, if the Preferred Dividend
Yield Rate were 7.5% (representing ninety days (90) year LIBOR plus
2%) prior to the change in the DRD Tax Law, the Preferred Dividend
Tax Adjustment Factor would be 1.3769 ($137.69 / $100.00), and the
Preferred Dividend Yield Rate would be increased (by 37.69%) to
10.32675% (7.5% X 1.3769).
EXAMPLE 2: If a change in the DRD Tax Law was to reduce the 70% dividends
received deduction received deduction to 50% (the "50% DRD"), the
following additional dividend would be calculated by the Corporation
on the Series A Preferred Shares pursuant to paragraph (c) of
Section 2 of the Statement.
PRE-CHANGE YIELD TO CORPORATE HOLDER PER $100 OF DIVIDENDS:
Dividend...................................$100.00
Less: 70% DRD.............................. 70.00
-------
Taxable Dividend...........................$ 30.00
Highest Marginal Tax Rate.................. 35%
-------
Federal Income Tax.........................$ 10.50
-------
After-Tax Yield............................$ 89.50
=======
AFTER-CHANGE YIELD TO CORPORATE HOLDER PER $100 OF DIVIDENDS
Dividend...................................$100.00
Less: 50% DRD.............................. 50.00
-------
Taxable Dividend...........................$ 50.00
Highest Marginal Tax Rate, as effective.... 35%
-------
Federal Income Tax.........................$ 17.50
-------
After-Tax Yield............................$ 82.50
=======
ADDITIONAL PAYMENT BY THE CORPORATION PER $100 OF DIVIDENDS
REQUIRED TO EQUALIZE AFTER-TAX YIELD:
Pre-Change Yield...........................$ 89.50
After-Change Yield......................... 82.50
-------
$ 7.00
+ (1 - (Tax Rate* (1-new DRD))=
+ (1 - (.35)(.50))=........................$ 0.825
-------
Additional Payment to Equalize
After-Tax Yield..........................$ 8.48
=======
In this example, the Corporation would be required to pay an
additional $8.48 per $100 of dividends to each holder of any Series A
Preferred Shares. Therefore, if the Preferred Dividend Yield Rate
were 7.5%, the Preferred Dividend Tax Adjustment Factor would be
1.0848 ($108.48 / $100.00), and the Preferred Dividend Yield Rate
would be increased (by 8.48%) to 8.136% (7.5% x 1.0848).
EXAMPLE 3: If a change in the Tax Laws increased the 70% dividends received
deduction to 80% (the "80% DRD"), and increased the highest marginal
tax rate (at October 1, 1996) from 35% to 55%, the following
additional dividend would be calculated by the Corporation on the
Series A Preferred Shares pursuant to this paragraph (c) of Section 2
of the Statement:
PRE-CHANGE YIELD TO CORPORATE HOLDER PER $100 OF DIVIDENDS:
Dividend................... $100.00
Less: 70% DRD............. 70.00
-------
Taxable Dividend........... $ 30.00
Highest Marginal Tax Rate.. 35%
-------
Federal Income Tax......... $ 10.50
-------
After-Tax Yield.......... $ 89.50
=======
AFTER-CHANGE YIELD TO CORPORATE HOLDER PER $100 OF DIVIDENDS
Dividend................................. $100.00
Less: 80% DRD........................... 80.00
-------
Taxable Dividend......................... $ 20.00
Highest Marginal Tax Rate, as effective.. 55%
-------
Federal Income Tax....................... $ 11.00
-------
After-Tax Yield........................ $ 89.00
=======
AFTER-CHANGE YIELD TO CORPORATE HOLDER PER $100 OF
DIVIDENDS CONSIDERED FOR PURPOSES OF ADJUSTMENT:
Dividend........................... $100.00
Less: 80% DRD..................... 80.00
-------
Taxable Dividend................... $ 20.00
Highest Marginal Tax Rate,
as effective at January 1, 1997.. 35%
-------
Federal Income Tax................. $ 7.00
-------
After-Tax Yield.................. $ 93.00
=======
REDUCTION IN FUTURE DIVIDENDS PAID BY THE CORPORATION PER $100 OF DIVIDENDS
REQUIRED TO EQUALIZE AFTER-TAX YIELD:
Pre-Change Yield..................... $89.50
After Change Yield................... 93.00
------
$ 3.50
------
+ (1-(Tax Rate*(1-new DRD))=
+ (1-(.35)(.20))=................ 0.93
------
Additional Payment to Equalize
After-Tax Yield.................. $ 3.75
======
EXHIBIT 6.2
REGISTRATION RIGHTS AGREEMENT
-----------------------------
This REGISTRATION RIGHTS AGREEMENT (this "Agreement") is made as of
February 15, 1997, between Horace Mann Educators Corporation, a Delaware
corporation (the "Company") and Centre Reinsurance (U.S.) Limited, a Bermuda
corporation ("Option Writer").
1. Background. Pursuant to a Catastrophe Equity Securities Issuance
Option Agreement, dated as of February 15, 1997, between the Company and Option
Writer (the "Option Agreement"), Option Writer may acquire shares of the
Company's Series A Cumulative Nonvoting Cumulative Convertible Preferred Stock,
par value US$0.001 per share (the "Preferred Stock"). The number of shares of
Preferred Stock to be acquired by Option Writer, if any, will be determined in
accordance with applicable provisions of the Option Agreement. The shares of
Preferred Stock outstanding from time to time are referred to in this Agreement
as the "Preferred Shares." The Preferred Stock will, when issued, be
convertible, subject to certain conditions, into shares of the Company's common
stock, par value $0.001 per share ("Common Stock"), all as set forth in the
Certificate of Designations for the Preferred Stock (the "Certificate of
Designations"). Pursuant to the Option Agreement, the Company has agreed to
enter into this Agreement granting to the holders of the Preferred Shares the
right to register the Registrable Securities (hereinafter defined) upon the
terms and subject to the conditions set forth in this Agreement.
2. Definitions. As used in this Agreement, the following terms have the
following respective meanings:
"Affiliate" of a Person means any other Person that is controlled by,
controls, or is under common control with such Person.
"Certificate of Designations" is defined in Section 1.
"Commission" means the Securities and Exchange Commission or any other
Federal agency at the time administering the Securities Act.
"Common Stock" is defined in Section 1.
"Company" means Horace Mann Educators Corporation, a Delaware corporation.
"Conversion Shares" means the shares of Common Stock issued or issuable
upon conversion of the Preferred Stock.
1
"Exchange Act" means the Securities Exchange Act of 1934, as amended, and
the rules and regulations of the Commission thereunder, all as the same shall be
in effect from time to time.
"Initiating Holder" is defined in Section 3.1(a).
"Minimum Period" is defined in Section 3.3(b).
"Option Agreement" is defined in Section 1.
"Option Writer" means Centre Reinsurance (U.S.) Limited, a Bermuda
corporation.
"Person" means a corporation, association, partnership, limited liability
company, organization, business, individual, governmental or political agency,
or other entity.
"Preferred Shares" is defined in Section 1.
"Preferred Stock" is defined in Section 1.
"Registrable Securities" means (i) any Conversion Shares, (ii) any
Preferred Shares which a holder is unable to convert into Conversion Shares due
to a lack of approval, from the appropriate state insurance commissioner, of any
applicable insurance regulatory filing necessary for such conversion, and (iii)
any other securities which may be included as Registrable Securities as set
forth in Section 6.13 of the Option Agreement. As to any particular Registrable
Securities, once issued such securities shall cease to be Registrable Securities
when (a) a registration statement with respect to the sale of such securities
shall have become effective under the Securities Act and such securities have
been disposed of in accordance with such registration statement (b) they shall
have been sold as permitted by Rule 144 under the Securities Act, (c) they shall
have been otherwise transferred, new certificates for them not bearing a legend
restricting further transfer shall have been properly delivered by the Company
and subsequent public distribution of them shall not, in the reasonable opinion
of counsel to the Company, require registration of them under the Securities
Act, or (d) they shall have ceased to be outstanding.
"Registration Expenses" means all expenses incident to the Company's
performance of or compliance with Section 3, including, without limitation, all
registration, filing and NASD fees, all fees and expenses of complying with
securities or blue sky laws (including related counsel fees), all word
processing, duplicating and printing expenses, messenger and delivery expenses,
the fees and disbursements of counsel for the Company and of its independent
public accountants, including the expenses of "cold comfort" letter required by
or incident to such performance and compliance, fees of transfer agents any fees
and disbursements of underwriters customarily paid by issuers or sellers of
securities (excluding any underwriting discounts or commissions with respect to
the Registrable Securities), but excluding any fees or expenses of counsel to
any holders. Notwithstanding the foregoing, in the event the Company shall
2
determine, in accordance with Section 3.2, not to register any securities with
respect to which it had given written notice of its intention to so register to
holders of Registrable Securities, all of the costs of the type (and subject to
any limitation to the extent) set forth in this definition and incurred by
Requesting Holders in connection with such registration on or prior to the date
the Company notifies the Requesting Holders of such determination shall be
deemed Registration Expenses.
"Requesting Holder" is defined in Section 3.2(a).
"Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations of the Commission thereunder, all as the same shall be in
effect from time to time.
"Selling Expenses" means all underwriting discounts and selling commissions
applicable to the sale of Registrable Securities and all fees and expenses of
counsel to Selling Holders.
"Selling Holder" is defined in Section 3.1(a)(ii).
"Significant Subsidiary" is defined under Rule 1-02(v) of Regulation S-X
promulgated under the Securities Act and the Exchange Act.
"Value" is defined in Section 3.1(a).
3. Registration Under the Securities Act.
-------------------------------------
3.1 Registration on Request.
-----------------------
(a) Request. Subject to Section 3.9, upon the written request of one
or more holders (the "Initiating Holders") of Registrable Securities,
representing not less than US$25,000,000 of the Registrable Securities (or such
lesser amount of Registrable Securities as set forth in Section 3.1(g)(ii)
below) based on the market value of such Registrable Securities at the time of
the request (with Preferred Shares valued on an as converted basis) (the
"Value"), that the Company effect the registration under the Securities Act of
all or part of such Initiating Holders' Registrable Securities, the Company will
promptly give written notice of such requested registration to all registered
holders of Registrable Securities, and the Company will use its commercially
reasonable efforts to effect, as early as practicable, the registration under
the Securities Act of
(i) the Registrable Securities which the Company has been so
requested to register by such Initiating Holders, and
(ii) all other Registrable Securities which the Company has been
requested to register by holders of Registrable Securities (such holders
together with the Initiating Holders are referred to in this Agreement as the
"Selling Holders") by written notice to the Company, within thirty (30) days
after the receipt of such written notice by the Company,
3
all to the extent requisite to permit the disposition of the
Registrable Securities to be registered in such manner, subject to Section
3.1(d) below.
(b) Registration of Other Securities. Whenever the Company shall
effect a registration pursuant to this Section 3.1 in connection with an
offering and sale of Registrable Securities by one or more Selling Holders of
Registrable Securities, subject to the following sentence and Section 3.1(f)
below, (i) any person other than a Selling Holder who holds registration rights
with respect to securities of the Company (each, a "Registration Rights
Holder"), shall have the right to include, to the extent provided in the
relevant agreement between the Company and the Registration Rights Holder, in
the registration made pursuant to this Section 3.1 the securities held by the
Registration Rights Holders to which such registration rights relate, and (ii)
the Company shall have the right to include in the registration made pursuant to
this Section 3.1 securities to be issued by the Company (the securities for
which Registration Rights Holders and the Company can so require registration
are referred to in this Agreement as "Additional Securities"). No Additional
Securities, however, shall be included among the securities covered by the
registration made pursuant to this Section 3.1 if, in case of an underwritten
offering, the managing underwriter of such offering shall have advised the
Company and any Registration Rights Holder seeking to have Additional Securities
covered by such registration in writing that the inclusion of such Additional
Securities would adversely affect such offering, in which case the number of
Additional Securities included in such registration shall be limited to the
number that will not, in the judgment of the managing underwriter, adversely
affect the offering (such limited number to be allocated promptly (so as not to
interfere with the timing of the offering) between the Company and the affected
Registration Rights Holders as the Company shall determine).
(c) Registration Statement Form. Registrations under this Section
3.1 shall be on an appropriate registration form of the Commission, as
reasonably determined by the Company.
(d) Effective Registration Statement. A registration requested
pursuant to this Section 3.1 shall not be deemed to have been effected (i)
unless a registration statement with respect thereto has become effective and
remained effective in compliance with the provisions of the Securities Act until
the Minimum Period has been completed, (ii) if, after it has become effective,
such registration is interfered with by any stop order, injunction or other
order or requirement of the Commission or other governmental agency or court for
any reason not attributable to the Selling Holders and has not subsequently
become effective, or (iii) if the conditions to closing specified in the
underwriting agreement, if any, entered into in connection with such
registration are not satisfied or waived, other than by reason of a failure on
the part of Selling Holders.
(e) Selection of Underwriters. All registrations pursuant to this
Section 3.1 shall involve underwritten securities offerings. The underwriter or
underwriters of each underwritten offering of the Registrable Securities so to
be registered shall be selected by the Company from a list of four (4) reputable
securities underwriters submitted to the Company by the Selling Holders of more
than 50% of the Registrable Securities so to be registered.
4
(f) Priority in Requested Registration. If the managing underwriter
of any underwritten offering shall advise the Company in writing (with a copy to
each Selling Holder of Registrable Securities requesting registration) that, in
its opinion, the number or type of securities requested to be included in such
registration (including any Additional Securities requested to be included
pursuant to Section 3.1(b)) is a number or type which would adversely affect
such offering (including, but not limited to, the price offered), then the
Company shall include in such registration, to the extent of the number which
the Company is so advised can be sold in such offering, Registrable Securities
requested to be included in such registration, pro rata among the Selling
Holders requesting such registration on the basis of the percentage of the
Registrable Securities of such Selling Holders requested so to be registered. In
connection with any such registration to which this Section 3.1(f) is
applicable, no securities other than Registrable Securities shall be covered by
such registration unless all Registrable Securities requested to be included in
such registration are so included. If all of the Registrable Securities
requested by the Initiating Holder to be included in such registration cannot be
included as provided in the first sentence of this Section 3.1(f), the Company
shall so notify the Initiating Holder and the Initiating Holder shall have the
right to withdraw the request for registration by giving written notice to the
Company within 20 days after receipt of notice thereof by the Company and, in
the event of such withdrawal, such request shall not be counted for purposes of
the requests for registration to which holders are entitled pursuant to Section
3.1 hereof (thereby allowing such holders to make a demand for registration
pursuant to Section 3.1 at another time).
(g) Limitations on Registration on Request. Notwithstanding anything
in this Section 3.1 to the contrary, in no event will the Company be required to
(i) effect more than three registrations pursuant to this Section 3.1, (subject
to the last sentence of Section 3.1(f) and 3.6(b)), it being understood that
Initiating Holders are entitled to one registration and up to two additional
conditional registrations as set forth below in this Section 3.1(g), (ii) effect
a registration in which the aggregate amount of Registrable Securities has a
Value less than US$25,000,000, unless the Value of Registrable Securities
outstanding is less than US$25,000,000 in which case the Company shall be
obligated to effect one and only one registration of no less than US$5,000,000
in Value of Registrable Securities pursuant to this Section 3.1, subject to the
other provisions hereof, unless less than US$5,000,000 in Value of Registrable
Securities remain outstanding due to a prior partial redemption of Registrable
Securities by HM, in which case such $5,000,000 minimum shall not apply, or
(iii) file a registration statement pursuant to this Section 3.1 within the
twelve-month period occurring immediately subsequent to the effectiveness
(within the meaning of Section 3.1(d)) of a registration statement filed
pursuant to this Section 3.1 or pursuant to Section 3.2. The conditions to any
second and third registrations under this Section 3.1 are as follows:
(A) Selling Holders shall be entitled to a second registration
if, at the time immediately preceding a sale in the first registration, such
Selling Holders either (i) hold Preferred Shares which on an as converted basis
would cause them, without giving effect to any other holdings of Common Stock
acquired other than upon conversion of Preferred Shares, to hold an ownership
interest in HM of greater than 33 1/3% based on market
5
capitalization, or (ii) stand to receive, in a sale of Registrable Securities
pursuant to such registration, gross proceeds of less than 95% of the Option
Writer's cost basis in such Registrable Securities (which cost basis shall
include the amount paid by Option Writer for the relevant Preferred Shares, plus
accrued but unpaid dividends thereon). Notwithstanding the foregoing, in the
first registration (unless clause (A)(ii) above applies, in which case the
holders can withdraw from such first registration), the Selling Holders shall be
obligated to sell Registrable Securities with an aggregate value of at least 1/3
of the aggregate value of the outstanding Preferred Shares (valued on an as
converted basis) and Common Stock issued upon conversion of Preferred Shares.
(B) Selling Holders shall be entitled to a third registration if,
at the time immediately preceding a sale in the second registration, such
Selling Holders either (i) hold Preferred Shares which on an as converted basis
would cause them, without giving effect to any other holdings of Common Stock
acquired other than upon conversion of Preferred Shares, to hold an ownership
interest in HM of greater than 33 1/3% based on market capitalization, or (ii)
stand to receive, in a sale of Registrable Securities pursuant to such
registration, gross proceeds of less than 90% of the Option Writer's cost basis
in such Registrable Securities (which cost basis shall include the amount paid
by Option Writer for the relevant Preferred Shares, plus accrued but unpaid
dividends thereon). Notwithstanding the foregoing, in the second registration
(unless clause (B)(ii) above applies, in which case the Selling Holders can
withdraw from such second registration), the Selling Holders shall be obligated
to sell Registrable Securities with an aggregate value of at least 1/2 of the
aggregate value of the outstanding Preferred Shares (valued on an as converted
basis) and Common Stock issued upon conversion of Preferred Shares.
(C) In any third registration, the Selling Holders shall be
obligated to (i) sell all of the Common Stock that they then hold, (ii) convert
all of the Preferred Shares that they then hold into Common Stock and sell such
Common Stock (unless such Preferred Shares cannot be converted as set forth in
the definition of Registrable Securities above, in which case clause (C)(iii)
below applies), (iii) sell all of the Preferred Shares that they then hold which
cannot be converted and must therefore be registered in accordance with the
definition of Registrable Securities above, and (iv) sell all other securities
that they then hold pursuant to Section 6.13 of the Option Agreement.
3.2 Incidental Registration.
-----------------------
(a) Right to Include Registrable Securities. Subject to Section 3.9,
if the Company at any time proposes to register any of its securities under the
Securities Act by registration on any form other than Forms S-4 or S-8 (or any
successor forms), whether or not for sale for its own account, it will, each
such time give prompt written notice to all registered holders of Registrable
Securities of its intention to do so and of such holders' rights under this
Section 3.2. Upon the written request of any such holder (a "Requesting
Holder") made as promptly as practicable and in any event within twenty (20)
days after the receipt of any such notice (ten (10) days if the Company states
in such written notice or gives telephonic notice to all
6
registered holders of Registrable Securities, with written confirmation to
follow promptly thereafter, stating that (i) such registration will be on Form
S-3 and (ii) such shorter period of time is required because of a planned filing
date), which request shall specify the Registrable Securities intended to be
disposed of by such Requesting Holder, the Company will, subject to Section 3.9,
use its commercially reasonable efforts to effect the registration under the
Securities Act of all Registrable Securities which the Company has been so
requested to register by the Requesting Holders thereof, provided, however, that
if, at any time after giving written notice of its intention to register any
securities and prior to the effective date of registration statement filed in
connection with such registration, the Company shall determine for any reason
not to register or to delay registration of such securities the Company may, at
its election, give written notice of such determination to each Requesting
Holder of Registrable Securities and (i) in the case of a determination not to
register, shall be relieved of its obligation to register any Registrable
Securities in connection with such registration (but not from any obligation of
the Company to pay the Registration Expenses in connection therewith), without
prejudice, however, to the rights of any holder or holders of Registrable
Securities entitled to do so to request that such registration be effected as a
registration under Section 3.1, and (ii) in the case of a determination to delay
registering, shall be permitted to delay registering any Registrable Securities,
for the same period as the delay in registering such securities. Other than as
provided in Section 3.1, no registration effected under this Section 3.2 shall
relieve the Company of its obligation to effect any registration upon request
under Section 3.1.
(b) Priority in Incidental Registrations. If the managing
underwriter of any underwritten offering shall advise the Company in writing
(with a copy to each Requesting Holder) that, in its opinion, the number or type
of Registrable Securities requested to be included in such registration would
adversely affect such offering, then the Company will, subject to any relevant
agreements between the Company and Registration Rights Holders, include in such
registration, to the extent of the number and type which the Company is so
advised can be sold in (or during the time of) such offering, first, all
securities proposed by the Company to be sold for its own account, second, such
Registrable Securities and other securities of the Company with respect to which
the holders thereof have the right to require the Company to register such
securities in connection with any registration of securities to be offered by
the Company ("Other Securities") requested to be included in such registration,
such Registrable Securities and Other Securities to be included in such
registration pro rata on the basis of the estimated gross proceeds from the sale
thereof, and third, any other securities of the Company requested to be included
in such registration. There shall be no limit on the number or registrations
that may be requested pursuant to this Section 3.2.
(c) Limitations on Incidental Registrations. Notwithstanding
anything in this Section 3.2 to the contrary, in no event will the Company be
required to (i) grant a request to include Registrable Securities in any "shelf"
registration filed pursuant to Rule 415 under the Securities Act, or any
successor rule, relating to the offering of debt securities by the Company, or
(ii) grant a request to include Registrable Securities in any registration
unless the amount of all Registrable Securities which the Company has been so
requested to register by the Requesting
7
Holders thereof (without giving effect to the application of the foregoing
subsection (b)) is at least US$25,000,000 (or such lesser amount as described in
Section 3.1(g)(ii)).
3.3 Registration Procedures. If and whenever the Company is required to
use its commercially reasonable efforts to effect the registration of any
Registrable Securities under the Securities Act as provided in Sections 3.1 and
3.2, the Company will as expeditiously as possible:
(a) prepare and file with the Commission the requisite registration
statement (within ninety (90) days after receipt of a request for registration
from the requisite Initiating Holders under Section 3.1(a) above) to effect such
registration and then use its commercially reasonable efforts to cause such
registration statement to become and remain effective for the Minimum Period,
provided, however, that the Company may discontinue any registration of its
securities which are not Registrable Securities (and, under the circumstances
specified in Section 3.2(a), its securities which are Registrable Securities) at
any time prior to the effective date of the applicable registration statement
relating thereto;
(b) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in connection
with such registration statement as may be necessary to keep such registration
statement effective and to comply with the provisions of the Securities Act with
respect to the disposition of all Registrable Securities covered by such
registration statement for such period as shall be required for the disposition
of all such Registrable Securities, provided that such period shall not exceed
ninety (90) days (such period being referred to in this Agreement as the
"Minimum Period");
(c) furnish to each seller of Registrable Securities covered by such
registration statement such number of conformed copies of such registration
statement and the prospectus included in such registration statement (including
each preliminary prospectus and any summary prospectus) and of each such
amendment and supplement thereto (in each case including all exhibits and
documents incorporated by reference therein), such number of copies of the
prospectus contained in such registration statement and any other prospectus
filed under Rule 424 under the Securities Act, in conformity with the
requirements of the Securities Act, and such other documents, as such seller may
reasonably request;
(d) use its commercially reasonable efforts (i) to register or
qualify all Registrable Securities and other securities covered by such
registration statement under such other securities or blue sky laws of such
States when an exemption is not available and as the sellers of Registrable
Securities covered by such registration statement shall reasonably request in
writing, (ii) to keep such registration or qualification in effect for the
Minimum Period, and (iii) to take any other action which may be reasonably
necessary or advisable to enable such sellers to consummate the disposition in
such jurisdictions of the securities to be sold by such sellers, except that the
Company shall not for any such purpose be required to qualify generally to do
business as a foreign corporation in any jurisdiction in which it would not, but
for the
8
requirements of this Section 3.3(d), be obligated to be so qualified or to
consent to general service of process in any such jurisdiction;
(e) use its commercially reasonable efforts to cause all Registrable
Securities covered by such registration statement to be registered with or
approved by such other Federal or state governmental agencies or authorities as
may be necessary to enable the seller or sellers of such Registrable Securities
to consummate the disposition of such Registrable Securities;
(f) in the case of an underwritten or "best efforts" offering,
furnish at the effective date of such registration statement to each Selling
Holder, and such Person's underwriters, if any, a signed counterpart of:
(i) an opinion of counsel for the Company, dated the effective
date of such registration statement and, if applicable, the date
of the closing under the underwriting agreement, and
(ii) a "comfort" letter signed by the independent public
accountants who have certified the Company's financial statements
included or incorporated by reference in such registration
statement,
covering substantially the same matters with respect to such registration
statement (and the prospectus included therein) and, in the case of the
accountants' comfort letter, with respect to events subsequent to the date of
such financial statements, as are customarily covered in opinions of issuer's
counsel and in accountants' comfort letters delivered to the underwriters in
underwritten public offerings of securities and, in the case of the accountants'
comfort letter, such other financial matters, and, in the case of the legal
opinion, such other legal matters, as the underwriters may reasonably request;
(g) cause representatives of the Company to participate in any "road
show" or "road shows" reasonably requested by any underwriter of an underwritten
or "best efforts" offering of any Registrable Securities;
(h) notify each seller of Registrable Securities covered by such
registration statement, at any time when a prospectus relating thereto is
required to be delivered under the Securities Act, upon discovery that, or upon
the happening of any event as a result of which, the prospectus included in such
registration statement, as then in effect, includes an untrue statement of a
material fact or omits to state any material fact required to be stated therein
or necessary to make the statements therein not misleading, in the light of the
circumstances under which they were made, and at the request of any such seller
promptly prepare and furnish (subject to the proviso below) to it a reasonable
number of copies of a supplement to or an amendment of such prospectus as may be
necessary so that, as thereafter delivered to the purchasers of such securities,
such prospectus shall not include an untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances under which
they were made; provided, however,
9
that the prompt delivery of such a supplement to or amendment of such prospectus
may be delayed by the Company pursuant to Section 3.6 below.
(i) use its commercially reasonable efforts to list the Registrable
Securities covered by such registration statement with any national securities
exchange on which securities of the same class as those requested to be included
in such registration statement are then listed (or, if such securities are not
listed on a national securities exchange but are quoted on The Nasdaq Stock
Market, to include such shares for quotation therein);
(j) provide a transfer agent and registrar for all Registrable Securities
to be registered under this Agreement, and a CUSIP number for all such
Registrable Securities, in each case not later than the effective date of such
registration;
(k) enter into such agreements (including an underwriting agreement as
provided below, if applicable) and take all such other actions reasonably
requested in order to expedite and facilitate the disposition of the Registrable
Securities to be registered; and
(l) otherwise use its commercially reasonable efforts to comply with all
applicable rules and regulations of the Commission, including without limitation
Section 11(a) of the Securities Act, and promptly furnish to each Selling Holder
of Registrable Securities a copy of any amendment or supplement to the
applicable registration statement or prospectus;
(m) notify each seller of Registrable Securities and the managing
underwriter or agent, and confirm the notice in writing (a) when the
registration statement, or any post-effective amendment to the registration
statement, shall have become effective, or any supplement to the prospectus or
any amendment to the prospectus shall have been filed, (b) of the receipt of any
comments from the Commission, (c) of any request of the Commission to amend the
registration statement or amend or supplement the prospectus or for additional
information, and (d) of the issuance by the Commission of any stop order
suspending the effectiveness of the registration statement or of any order
preventing or suspending the use of any preliminary prospectus, or of the
suspension of the qualification of the Registrable Securities for sale in any
jurisdiction, or of the institution or threatening of any proceedings for any
such purposes;
(n) use its commercially reasonable efforts to obtain the withdrawal of
any order suspending the effectiveness of the registration statement at the
earliest possible time;
(o) cooperate with the sellers of Registrable Securities and the managing
underwriter or agent, if any, to facilitate the timely preparation and delivery
of certificates (not bearing any restrictive legends) representing Registrable
Securities to be sold, and enable such Registrable Securities to be in such
denominations and registered in such names as such sellers or the managing
underwriter or agent, if any, may reasonably request;
10
(p) cause its subsidiaries and affiliates to take all action necessary or
advisable to effect the registration of the Registrable Securities contemplated
hereby, including preparing the filing any required financial information; and
(q) use its commercially reasonable efforts to take all other steps
necessary or advisable to effect the registration of the Registrable Securities
contemplated hereby.
The Company may require each seller of Registrable Securities as to
which any registration is being effected to furnish the Company such information
regarding such seller and the distribution of such securities as the Company may
from time to time reasonably request in writing in order to comply with Federal
and applicable state securities laws.
Each seller of Registrable Securities agrees, by requesting
registration thereof, that upon receipt of any notice from the Company of the
happening of any event of the kind described in Section 3.3(h), such holder will
immediately discontinue such holder's disposition of Registrable Securities
pursuant to the registration statement relating to such Registrable Securities
until such holder's receipt of the copies of the supplemented or amended
prospectus contemplated by Section 3.3(h) and, if so directed by the Company,
will deliver to the Company (at the Company's expense) all copies, other than
permanent file copies, then in such holder's possession of the prospectus
relating to such Registrable Securities current at the time of receipt of such
notice.
3.4 Underwritten Offerings.
----------------------
(a) Requested Underwritten Offerings. If requested by the
underwriters for any underwritten offering by holders of Registrable Securities
pursuant to registrations requested under Section 3.1, the Company will use
commercially reasonable efforts to enter into an underwriting agreement with
such underwriters for such offering, such agreement to be reasonably
satisfactory in substance and form to the Company, each such holder and the
underwriters and to contain such representations and warranties by the Company
and such other terms as are generally prevailing in agreements of that type,
including, without limitation, indemnities and the furnishing of an opinion of
counsel and "cold comfort" letters from the Company's independent certified
public accountants. The holders of the Registrable Securities proposed to be
distributed by such underwriters shall cooperate with the Company in the
negotiation of, and shall be parties to, the underwriting agreement between the
Company and such underwriters.
(b) Incidental Underwritten Offerings. If the Company proposes
to register any of its securities under the Securities Act as contemplated by
Section 3.2 and such securities are to distributed by or through one or more
underwriters, the Company will, subject to Section 3.9, if requested by any
Requesting Holder of Registrable Securities, use its commercially reasonable
efforts to arrange for such underwriters to include all the Registrable
Securities to be offered and sold by such Requesting Holder among the securities
of the Company to be distributed by such underwriters. The holders of
Registrable Securities to be distributed by such underwriters shall be parties
to the underwriting agreement between the Company and such underwriters.
11
Notwithstanding the foregoing provisions of this Section 3.4(b), the Company
need not include any Registrable Securities of any such Requesting Holder in an
underwritten offering of the Company's securities under the circumstances
contemplated by Section 3.2(b) above.
3.5 Preparation: Reasonable Investigation. In connection with the
preparation and filing of each registration statement under the Securities Act
pursuant to this Agreement, the Company will give the holders of Registrable
Securities registered under such registration statement, their underwriters, if
any, and their respective counsel the opportunity to participate in the
preparation of such registration statement, and, to the extent practicable, each
amendment or supplement to such registration statement, and give each of them
such access to its books and records, pertinent corporate documents and
properties (to the extent customarily given to the underwriters of the Company's
securities), such opportunities to discuss the business of the Company with its
officers and the independent public accountants who have certified its financial
statements as shall be necessary to conduct a reasonable investigation within
the meaning of the Securities Act.
3.6 Limitations, Conditions and Qualifications to Obligations under
Registration Covenants. The obligations of the Company to use its commercially
reasonable efforts to cause the Registrable Securities to be registered under
the Securities Act are subject to each of the following limitations, conditions
and qualifications:
(a) The Company shall not be obligated to file any registration
statement pursuant to Section 3.1 at any time if the Company would be required
to include financial statements audited as of any date other than the end of its
fiscal year.
(b) The Company shall be entitled to postpone for a reasonable
period of time (but not exceeding 120 days) the filing, supplementing or
amending or any registration statement otherwise required to be prepared and
filed by it pursuant to Section 3.1 if the Company determines, in its reasonable
judgment, that such registration and offering would interfere with, or require
public disclosure of, any financing, acquisition, disposition, corporate
reorganization or other transaction involving the Company or any of its
Significant Subsidiaries, and promptly gives the holders of Registrable
Securities requesting registration pursuant to Section 3.1 written notice of
such determination and an approximation of the anticipated delay; provided,
however, that after any exercise of its right to postpone the filing of a
registration statement under this Section 3.6(b), the Company shall not, within
120 days of the expiration of any such postponement, exercise again its right of
postponement under this Section 3.6(b). The Company shall notify the Selling
Holders of the expiration of the period of delay. If the Company shall so
postpone the filing of a registration statement, such holders of Registrable
Securities requesting registration pursuant to Section 3.1 shall have the right
to withdraw the request for registration by giving written notice to the Company
within 15 days after receipt of the notice from the Company of the end of such
delay and, in the event of such withdrawal, such request for registration to
which holders of Registrable Securities are entitled pursuant to Section 3.1
shall not be considered a request for registration pursuant to Section 3.1
(thereby allowing such holders to make a demand for registration pursuant to
Section 3.1 at another time).
12
3.7 Indemnification and Contribution.
--------------------------------
(a) In the event of a registration of any Registrable Securities
under the Securities Act pursuant to Section 3, the Company will, and hereby
does, indemnify and hold harmless, to the full extent permitted by law, each
seller of Registrable Securities covered by such registration statement and each
other Person who participates as an underwriter in the offering or sale of such
securities and each other Person, if any, who controls such seller or any such
underwriter within the meaning of the Securities Act, and their respective
directors, officers, partners, members and agents, against any losses, claims,
damages, liabilities and expenses, joint or several, to which such seller or
underwriter or any such director, officer, partner, member, agent or controlling
person may become subject under the Securities Act or otherwise including,
without limitation, the reasonable fees and expenses of legal counsel (including
those incurred in connection with any claim for indemnity hereunder), insofar as
such losses, claims, damages or liabilities (or actions or proceedings, whether
commenced or threatened, in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
any registration statement under which such Registrable Securities were
registered under the Securities Act pursuant to Section 3, any preliminary
prospectus, summary prospectus or final prospectus contained therein, or any
amendment or supplement thereof, or arise out of or are based upon the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein in light of the
circumstances in which they were made not misleading, and will pay or reimburse
each such seller or underwriter and each such director, officer, partner, member
and controlling Person for any legal or other expenses reasonably incurred by
them in connection with investigating or defending any such loss, claim, damage,
liability or action; provided, however, that the Company shall not be liable in
any such case if and to the extent that any such loss, claim, damage, liability
(or action or proceeding in respect thereof) or expense arises out of or is
based upon an untrue statement or alleged untrue statement or omission or
alleged omission made in such registration statement, any such preliminary
prospectus, final prospectus, summary prospectus, amendment or supplement in
reliance upon and in conformity with information furnished by any such seller or
underwriter and each such director, officer, partner, member and controlling
Person as the case may be, in writing specifically for use in such registration
statement, prospectus, amendment or supplement, and provided further that the
Company shall not be liable to any Person who participates as an underwriter in
the offering or sale of Registrable Securities or any other Person, if any, who
controls such underwriter within the meaning of the Securities Act, in any such
case to the extent that any such loss, claim, damage, liability (or action or
proceeding in respect thereof) or expense arises out of such Person's failure to
send or give a copy of the final prospectus, as the same may be then
supplemented or amended, to the Person asserting an untrue statement or alleged
untrue statement or omission or alleged omission at or prior to the written
confirmation of the sale of Registrable Securities to such Person if such
statement or omission was corrected in such final prospectus. Such indemnity
shall remain in
13
full force and effect regardless of any investigation made by or on behalf of
such seller or any such director, officer, partner, member, agent or controlling
person and shall survive the transfer of such securities by such seller.
(b) In the event of a registration of any Registrable Securities
under the Securities Act pursuant to Section 3, each seller of Registrable
Securities under such registration, severally and not jointly, will, and hereby
does, indemnify and hold harmless the Company, each person, if any, who controls
the Company within the meaning of the Securities Act, each officer of the
Company who signs the registration statement, each director of the Company, each
underwriter and each person who controls any underwriter within the meaning of
the Securities Act, against all losses, claims damages or liabilities, joint or
several, to which the Company or such officer, director, underwriter or
controlling person may become subject under the Securities Act or otherwise, but
only insofar as such losses, claims, damages or liabilities (or actions in
respect thereof), arise out of or are based upon an untrue statement or alleged
untrue statement or omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements therein
not misleading, made in reliance upon and in conformity with information
pertaining to such seller of Registrable Securities furnished in writing to the
Company by such seller of Registrable Securities specifically for use in such
registration statement under which such Registrable Securities were registered
under the Securities Act pursuant to Section 3, any preliminary prospectus or
final prospectus contained therein, or any amendment or supplement thereof, and
will pay or reimburse the Company and each such officer, director, underwriter
and controlling person for any legal or other expenses reasonably incurred by
them in connection with investigating or defending any such loss, claim, damage,
liability or actions; provided, however, that (i) the liability of each seller
of Registrable Securities under this Section 3.7 shall be limited to the
proportion of any such loss, claim, damage, liability or expense which is equal
to the proportion that the public offering price of the Registrable Securities
sold by such seller of Registrable Securities under such registration statement
bears to the total public offering price of all securities sold under such
registration statement, but not in any event to exceed the net proceeds received
by such seller of Registrable Securities for the sale of Registrable Securities
covered by such registration statement, and (ii) no seller of Registrable
Securities shall be liable for amounts paid in settlement of any such loss,
claim, damage, liability or action if such settlement is effected without the
consent of such seller of Registrable Securities, such consent not to be
unreasonably withheld or delayed. Such indemnity shall remain in full force and
effect, regardless of any investigation made by or on behalf of the Company or
any such director, officer or controlling person and shall survive the transfer
of such securities by such seller.
(c) Promptly after receipt by an indemnified party of notice of the
commencement of any action or proceeding involving a claim referred to in
Section 3.7(a) or (b), such indemnified party shall, if a claim is to be made
against the indemnifying party, notify the indemnifying party in writing of such
claim, but the failure to so notify the indemnifying party shall not relieve the
indemnifying party from any liability which it may have to such indemnified
party other than under this Section 3.7 and shall only relieve it from any
liability which it may have to such indemnified party under this Section 3.7 if
and to the extent the
14
indemnifying party is actually prejudiced by such failure. In case any such
action shall be brought against any indemnified party and the indemnified party
shall notify the indemnifying party of the commencement of that action, the
indemnifying party shall be entitled to participate in and, to the extent it
shall wish, to assume and undertake the defense of that action with counsel
reasonably satisfactory to such indemnified party, and, after notice from the
indemnifying party to such indemnified party of its election so to assume and
undertake the defense of that action, the indemnifying party shall not be liable
to such indemnified party under this Section 3.7 for legal and other
professional expenses subsequently incurred by such indemnified party in
connection with the defense of that action other than reasonable costs of
investigation and of liaison with counsel so selected; provided, however, that
if the defendants in any such action include both the indemnified party and the
indemnifying party, and the indemnified party shall have reasonably concluded
that there may be legal defenses or rights available to the indemnified party
(which have not been waived) which are in actual or potential conflict with
those available to the indemnifying party, the indemnified party shall have the
right to select one law firm to act as separate counsel and to assume such legal
defenses and otherwise to participate in the defense of such action, with the
reasonable fees and expenses of such separate counsel and other expenses related
to such participation to be reimbursed by the indemnifying party as incurred.
Upon the election by the indemnifying party to assume the defense of, or
otherwise contest, such litigation, proceeding or other action, the indemnifying
party shall not be liable for any legal or other expenses subsequently incurred
by the indemnified party in connection with the defense of such litigation,
proceeding or action unless (x) the indemnified party shall have employed such
counsel in connection with the assumption of legal defense or assertion of
rights in accordance with the provision of the preceding sentence or (y) the
indemnifying party fails to take reasonable steps necessary to diligently defend
such claim within twenty (20) days after receiving notice from the indemnified
party stating that the indemnified party believes the indemnifying party has
failed to take such steps, in which case the indemnified party may assume its
own defense and the indemnifying party shall be liable for reimbursement of all
legal and other expenses of the indemnified party as incurred by the indemnified
party. The parties shall cooperate in any such defense and give each other full
access to all information relevant to such defense. The indemnifying party shall
not be obligated to indemnify any party for any settlement entered into without
the indemnifying party's prior written consent, which consent shall not be
unreasonably withheld or delayed. No indemnifying party, in the defense of any
such claim or litigation against an indemnified party, shall consent to entry of
any judgment or enter into any settlement which does not include an
unconditional release by the claimant or plaintiff of such indemnified party
from all liability in respect of such claim or litigation, unless such
indemnified party shall otherwise consent in writing.
(d) If the indemnification provided for in this Section 3.7 shall for
any reason be held by a court to be unavailable to an indemnified party under
Section 3.7(a) or (b) hereof in respect of any loss, claim, damage or liability,
or any action in respect thereof, then, in lieu of the amount paid or payable
under Section 3.7(a) or (b), the indemnified party and the indemnifying party
under Section 3.7(a) or (b) shall contribute to the aggregate losses, claims,
damages and liabilities (including legal or other expenses reasonably incurred
in connection with investigating the same, including those incurred in
connection with any claim for indemnity hereunder), (i) in such proportion as is
appropriate to reflect the relative fault of the
15
Company and the prospective sellers of Registrable Securities covered by the
registration statement which resulted in such loss, claim, damage or liability,
or action or proceeding in respect thereof, with respect to the statements or
omissions which resulted in such loss, claim, damage or liability, or action or
proceeding in respect thereof, as well as any other relevant equitable
considerations or (ii) if the allocation provided by clause (i) above is not
permitted by applicable law, in such portion as shall be appropriate to reflect
the relative benefits received by the Company and such prospective sellers from
the offering of the securities covered by such registration statement; provided,
however, that for purposes of this clause (ii), the relative benefits received
by the prospective sellers shall be deemed not to exceed the amount of proceeds
received by such prospective sellers. No Person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any Person who was not guilty of such
fraudulent misrepresentation. Such prospective sellers' obligations to
contribute as provided in this Section 3.7(d) are several in proportion to the
relative value of their respective Registrable Securities covered by such
registration statement and not joint. In addition, no Person shall be obligated
to contribute hereunder any amounts in payment for any settlement of any action
or claim effected without such Person's consent, which consent shall not be
unreasonably withheld.
(e) Indemnification and contribution similar to that specified in the
preceding subdivisions of this Section 3.7 (with appropriate modifications)
shall be given by the Company and each seller of Registrable Securities with
respect to any required registration or other qualification of securities under
any federal or state law or regulation of any governmental authority other than
the Securities Act.
(f) The indemnification and contribution required by this Section 3.7
shall be made by periodic payments of the amount thereof during the course of
the investigation or defense, as and when bills are received or expense, loss,
damage or liability is incurred.
3.8 Removal of Legends on Certificates. Following the registration of
any Registrable Securities under the Securities Act and sales pursuant to such
registration, the Company shall (a) furnish to each holder of Registrable
Securities so registered and sold unlegended certificates representing ownership
of the registered Registrable Securities, in such denominations as shall be
requested, and (b) instruct the transfer agent to release any stop transfer
orders with respect to such registered Registrable Securities.
3.9 Conditions and Limitations on Registrations of Registrable
Securities.
(a) The Company shall not be required to effect any registration
of Registrable Securities pursuant to Section 3.2 if (i) it shall deliver to the
holder or holders requesting such registration an opinion of reputable counsel
to the effect that the Registrable Securities requested to be registered may be
sold by such holder without restriction or limitation and without registration
under the Securities Act, and (ii) the Company provides or has provided to the
holders of such Registrable Securities certificates therefor which do not
contain restrictive legends, as contemplated in Section 3.8.
16
(b) The Company shall not be required to effect any registration of
Registrable Securities pursuant to this Agreement, if (i) the holder can resell
such Registrable Securities without restriction or limitation and without
registration under the Securities Act, and (ii) the Company provides or has
provided to the holders of such Registrable Securities certificates therefor
which do not contain restrictive legends, as contemplated in Section 3.8.
3.10 Expenses. All Registration Expenses, but not Selling Expenses,
shall be borne by the Company.
3.11 Rule 144 and 144A Reporting. With a view to making available the
benefits of certain rules and regulations of the Commission which may at times
permit the sale of the Registrable Securities to the public or other Persons
without registration, the Company, so long as it is required to file information
with the Commission pursuant to the requirements of the Exchange Act (or any
successor provision), shall:
(a) make and keep public information available, as contemplated by
Rule 144 under the Securities;
(b) file with the Commission in a timely manner all reports and other
documents required of the Company under the Securities Act and the Exchange Act;
and
(c) furnish to each holder of Registrable Securities promptly upon
request (i)a written statement by the Company as to its compliance with the
reporting requirements of such Rule 144 of the Securities Act and the Exchange
Act, (ii) copies of all SEC filings made by the Company within the previous one
(1) year period and any press releases issued by the Company since the date of
the last such filing, and (iii) only in the event that Company securities cease
to be listed on a national securities exchange, copies of all Rule 144A
information with respect to the Company.
3.12 Market Stand-Off Agreement. If requested by the Company, each
holder of Registrable Securities included in a registration statement hereunder
shall not sell or otherwise transfer or dispose of any Conversion Shares or
Preferred Shares or other securities of the Company held by it (other than those
included in the registration) during the period specified by the managing
underwriter or underwriters of the underwritten offer being made pursuant to
such registration statement (which period shall not exceed seven days prior to
and 180 days following the effective date of such registration statement),
except as part of such registration, if and to the extent reasonably requested
by such managing underwriter or underwriters, provided that all officers and
directors of the Company, enter into similar agreements.
The obligations described in this Section 3.12 shall not apply to a
registration relating solely to employee benefit plans on S-8 or similar forms
which may be promulgated in the future, or a registration relating solely to a
Commission Rule 145 transaction on Form S-14 or Form S-15 or similar forms which
may be promulgated in the future. The Company may impose
17
stop-transfer instructions with respect to securities subject to the
restrictions in this Section 3.12 until the end of such 180 day period.
4. Voting Percentages. In determining whether a required percentage or
amount of Registrable Securities has been met under this Agreement, the amount
required shall be calculated on the basis of the aggregate value of outstanding
Registrable Securities. For purposes of this Agreement, the value of each
Conversion Share shall be the average closing market price per share of the
Common Stock on the New York Stock Exchange on the thirty (30) most recent
trading days prior to the valuation date.
5. Amendments and Waivers. This Agreement may be amended with the consent
of the Company and holders of at least fifty percent (50%) of the Registrable
Securities and the Company may take any action prohibited by this Agreement, or
omit to perform any act required to be performed by it under this Agreement,
only if the Company shall have obtained the written consent to such amendment,
action or omission to act, of the holder or holders of at least fifty percent
(50%) of the Registrable Securities. Each holder of any Registrable Securities
at the time or subsequently outstanding shall be bound by any consent authorized
by this Section 5, whether or not such Registrable Securities shall have been
marked to indicate such consent.
6. Nominees for Beneficial Owners. In the event that any Registrable
Securities are held by a nominee or trustee for the beneficial owner, the
beneficial owner may, at its election in writing delivered to the Company, be
treated as the holder of such Registrable Securities for purposes of any request
or other action by any holder or holders of Registrable Securities pursuant to
this Agreement or any determination of any number or percentage of Registrable
Securities held by any holder or holders of Registrable Securities contemplated
by this Agreement. If the beneficial owner of any Registrable Securities so
elects, the Company may require assurances reasonably satisfactory to it of such
owner's beneficial ownership of such Registrable Securities.
7. Notices. All notices or other communications required or permitted
hereunder shall be given only in writing and only by personal delivery,
registered or certified mail, return receipt requested, or overnight courier
service, and shall be deemed given on the fifth day following the date when
deposited in the mail, on the day following the date of delivery to a courier
service (postage or charges prepaid) or when personally delivered, and addressed
to the particular party to whom the notice is to be sent as follows:
7.1 if to Option Writer, addressed in the manner set forth in the
Option Agreement, or at such other address as Option Writer shall have furnished
to the Company in writing;
7.2 if to any other holder of Registrable Securities, at the address
that such holder shall have furnished to the Company in writing, or, until any
such other holder so furnishes to the Company an address, then to and at the
address of the last holder of such Registrable Securities who has furnished an
address to the Company; or
18
7.3 if to the Company, addressed to it in the manner set forth in the
Option Agreement or at such other address as the Company shall have furnished to
each holder of Registrable Securities at the time outstanding.
8. Transfer of Registration Rights. Any holder of Registrable Securities
may exercise the rights described in this Agreement subject to the terms and
conditions of this Agreement.
9. Successors and Assigns; Amendments. This Agreement shall be binding
upon and inure to the benefit of and be enforceable by transferees of the
Registrable Securities (and, with respect to the holders of Registrable
Securities, subject to the provisions respecting the minimum percentage of
Registrable Securities required in order to be entitled to certain rights, or
take certain actions, contained herein) the parties to this Agreement and their
respective successors and assigns. The parties to this Agreement may amend this
Agreement as provided in Section 5 without the consent of any other Person.
10. Descriptive Headings. The descriptive headings of the several sections
and paragraphs of this Agreement are inserted for reference only and shall not
limit or otherwise affect the meaning of the respective sections or paragraphs
to which they apply.
11. Governing Law. This Agreement shall be construed and enforced in
accordance with, and the rights of the parties shall be governed by, the laws of
the State of New York.
12. Counterparts. This Agreement may be executed in counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same document.
13. Certain Agreements and Grants.
13.1 The Company is not now a party to or otherwise bound by, any
agreement or contract (whether written or oral) with respect to any of its
securities which is inconsistent in any adverse respect with the registration
rights granted by the Company pursuant to this Agreement.
13.2 The Company will not at any time during the effectiveness of
this Agreement grant to any other person(s) any rights with respect to the
registration of any securities of the Company which have priority or are
inconsistent in any adverse respect with the registration rights granted by the
Company pursuant to this Agreement.
14. Severability. In the event that any one or more of the provisions
contained herein, or the application thereof in any circumstances, is held
invalid, illegal or unenforceable in any respect for any reason, the validity,
legality and enforceability of any such provision in every other respect and of
the remaining provisions contained herein shall not be in any way impaired
thereby, it being intended that all of the rights and privileges of the holders
of Registrable Securities shall be enforceable to the fullest extent permitted
by law.
19
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed and
delivered by their respective duly authorized officers as of the date first
written above.
Horace Mann Educators Corporation
By /s/ George J. Zock
------------------------------
Name: George J. Zock
Title: Senior Vice President & Treasurer
By /s/ Paul J. Kardos
------------------------------
Name: Paul J. Kardos
Title: President and Chief Executive Officer
Centre Reinsurance (U.S.) Limited
By /s/ Rolf Staub
------------------------------
Name: Rolf Staub
Title: Assistant Secretary
20
March 14, 1997
Mr. George Zock
Horace Mann Educators Corporation
Mail No. G016
One Horace Mann Plaza
Springfield, Illinois 62715-0001
Re: Securities Issuance Option Agreement
Dear George:
Reference is made to the Securities Issuance Option Agreement dated February 15,
1997 between Horace Mann Educators Corporation and Centre Reinsurance (U.S.)
Limited relating to the issuance by Horace Mann Educators Corporation of
Preferred Stock upon the happening of certain events (such agreement including
annexes thereto, the "Agreement").
Centre Reinsurance Limited indirectly owns 100% of the stock of Centre
Reinsurance (U.S.) Limited. Should Centre Reinsurance (U.S.) Limited be unable
to meet its payment or performance obligations to Horace Mann Educators
Corporation under the Agreement, Centre Reinsurance Limited will cause such
payment or performance.
By your acceptance, as evidenced by your signature below, you hereby agree,
except as otherwise may be required by law, to keep confidential and not
disclose to any person or entity the contents of this letter or the fact that
this letter was issued to you, provided, however; you may use this letter in
connection with any enforcement of your rights hereunder; and provided further,
however, that you may use this letter in discussions with AM Bests, Standard and
Poor's and other rating agencies. This letter is only for your benefit and
cannot be used or relied upon by any other person or enity.
If you have any questions please do not hesitate to contact us.
Very truly yours,
Centre Reinsurance Limited
By /s/ Andrea Hodson
--------------------------
Name: Andrea Hodson
Title: Vice President & Assistant Secretary
Accepted and Agreed to as of March 14, 1997
---------
Horace Mann Educators Corporation
By /s/ George J. Zock
--------------------------
Name: George J. Zock
Title: Senior Vice President & Treasurer