FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
(X) Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended: December 31, 1995
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from: ______ to ______
XEROX CORPORATION
(Exact name of registrant as specified in its charter)
1-4471
(Commission file number)
New York 16-0468020
(State of incorporation) (I.R.S. Employer Identification No.)
P.O. Box 1600, Stamford, Connecticut 06904
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (203) 968-3000
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
Common Stock, $1 par value New York Stock Exchange
Chicago Stock Exchange
$3.6875 Ten-Year Sinking Fund Preferred Stock New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes: (X) No: ( )
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K.
( )
The aggregate market value of the voting stock of the registrant held by non-
affiliates as of February 29, 1996 was: $15,511,301,091.
(Cover Page Continued)
Indicate the number of shares outstanding of each of the registrant's classes
of common stock, as of the latest practicable date:
Class Outstanding at February 29, 1996
Common Stock, $1 Par Value 108,621,646 Shares
Class B Stock, $1 Par Value 1,000 Shares
Documents Incorporated By Reference
Portions of the following documents are incorporated herein by reference:
Part of 10-K in
Document Which Incorporated
Xerox Corporation 1995 Annual Report to Shareholders I & II
Xerox Corporation Notice of 1996 Annual Meeting of III
Shareholders and Proxy Statement (to be filed not
later than 120 days after the close of the fiscal
year covered by this report on Form 10-K).
PART I
Item 1. Business
Overview
Xerox Corporation (Xerox or the Company) is The Document Company and a leader
in the global document market, providing document services that enhance
productivity. References herein to "us" or "our" refer to Xerox and
consolidated subsidiaries unless the context specifically requires otherwise.
We distribute our products in the Western Hemisphere through divisions and
wholly-owned subsidiaries. In Europe, Africa, the Middle East and parts of
Asia including Hong Kong, India and China, we distribute through Rank Xerox
Limited and related companies (Rank Xerox) in which we have an 80 percent
financial interest and The Rank Organisation Plc (RO) has a 20 percent
financial interest. In Japan and other areas of the Pacific Rim, Australia and
New Zealand, document processing products are distributed by Fuji Xerox Co.
Ltd. (Fuji Xerox), an unconsolidated joint venture, which is equally owned by
Fuji Photo Film Company, Ltd. of Japan and Rank Xerox. On February 28, 1995,
we paid RO 620 million pounds sterling, or $972 million, to increase our
financial interest in Rank Xerox to 80 percent from 67 percent.
In January 1996, we announced agreements to sell our remaining property and
casualty insurance units to investor groups led by Kohlberg Kravis Roberts &
Co. (KKR) and existing management for consideration totaling $2.7 billion. We
expect the transactions will close in the middle of this year. As a result,
results from insurance operations are now accounted for as discontinued
operations and all prior periods have been restated. Therefore, the Document
Processing business is the only component of Continuing Operations.
Our Document Processing activities encompass developing, manufacturing,
marketing, servicing and financing a complete range of document processing
products and services designed to make offices around the world more
productive. We believe that documents will play a central role in business,
government, education and other organizations far into the future and that
efficient processing of documents offers significant opportunities for
productivity improvements. The financing of Xerox equipment is generally
carried out by Xerox Credit Corporation (XCC) in the United States and
internationally by foreign financing subsidiaries and divisions in most
countries that we operate. Document Processing operations employed 85,200
people worldwide at year-end 1995.
In 1993, we announced a worldwide Document Processing restructuring program to
significantly reduce the cost base and to improve productivity. Our
objectives were to reduce our worldwide work force by more than 10,000
employees and to close or consolidate a number of facilities. To date, the
activities associated with the 1993 restructuring program have reduced
employment by 12,000 and achieved pre-tax cost savings of approximately $650
million in 1995 and $350 million in 1994. However, we have reinvested a
portion of these savings to reengineer business processes, support the
expansion in growth markets, and mitigate anticipated continuing pricing
pressures.
Continuing Operations - Document Processing
The Document Processing Strategy
We believe that documents represent the knowledge base of an organization and
will play a dynamic and central role in business, government, education and
other organizations far into the future:
- - Increasingly, documents are being created and stored in digital electronic
form.
- - The use of electronically created paper documents will continue to
increase.
As The Document Company, we believe that by helping our customers navigate and
manage the world of documents, we can help them improve their productivity and
grow their businesses. We help customers make documents better, make better
documents, and work better with documents.
We create customer value by providing innovative document technologies,
products, systems, services and solutions that allow our customers to:
- - Move easily within and between the electronic and paper forms of documents.
- - Scan, store, retrieve, view, revise and distribute documents electronically
anywhere in an organization.
- - Print or publish documents on demand, at the point closest to the need,
including those locations of our customers' customers.
- - Integrate the currently separate modes of producing documents, such as the
data center, production publishing and office environments into a seamless,
user-friendly enterprise-wide document systems network - with technology
acting as an enabler.
We have formed alliances to bring together the diverse infrastructures that
currently exist and to nurture the development of an open document services
environment to support complementary products from our partners and customers.
We are working with more than 50 industry organizations to make office,
production and electronic printing an integrated, seamless part of today's
digital work place.
Market Overview
Our total document processing revenues were $16.6 billion in 1995, of which 49
percent were generated in the United States, 33 percent in Europe, and 18
percent in the remainder of the world (excluding the unconsolidated $8.5
billion of Fuji Xerox revenues in Japan and much of the Pacific Rim).
We have traditionally had a strong position in the black-and-white copying
market, which is expected to grow at a rate approximating real economic growth
in North America and Western Europe, and at a faster rate in the developing
countries. The remaining enterprise services market segments, which include
production publishing, electronic printing, color copying and printing and
digital office systems, are expected to grow at a substantially higher rate.
With our many new product introductions over the past five years, our
participation in the global document processing market has been considerably
broadened and is expected to increase. This growth will be driven by the
transfer of document production from offset printing to digital publishing,
the increase in customer requirements for network and distributed printing,
accelerating demand for color documents and the combination of many document
capabilities into digital office systems.
Xerox Focus
We believe that our success is due to our ability to continually improve the
features and performance of our products based on meeting demonstrated
customer needs, competitive pricing levels, our excellent reputation for
performance and service, expanding sales coverage through agents and retail
chains, extending our leadership position in the rapidly growing document
outsourcing business, maintaining our strong market position in emerging
markets and continuing to capitalize on the exploding home office market. As
a result, we believe we are well positioned to participate fully in the
anticipated growth in the market segments in which we compete.
Black-and-White Copying
We estimate that the black-and-white copying market was approximately $35
billion in 1995 and growing. With about $10 billion in copier revenues, we
expect our black-and-white copier business to grow faster than the industry.
We market the broadest line of black-and-white copiers and duplicators in the
industry, ranging from a three copies-per-minute personal copier to a 135
copies-per-minute fully-featured duplicator to special copiers designed for
large engineering and architectural drawings up to 3 feet by 4 feet in size.
Many of our state-of-the-art products have improved ease of use, reliability,
copy quality, job recovery and ergonomics as well as productivity-enhancing
features, including zoom enlargement and reduction, highlight color, copying
on both sides of the paper, and collating and stapling which allow the
preparation of completed document sets. The innovative copiers we introduced
in 1995 include a high-speed copier for space-conscious offices and one
specially designed to eliminate stress on bindings when books are copied.
We have a strong position with major accounts who demand a consistently high
level of service worldwide. Our competitive advantages include a focus on
customer call response times, diagnostic equipment that is state-of-the-art
and availability of twenty-four-hour-a-day, seven-day-a-week service.
We also are increasing our leadership position in small commercial accounts,
the most competitive copier market segment, through marketing programs such as
sales through independent agents, retail outlets and trade associations like
the American Medical Association, which represents more than two million
current and prospective customers.
The market for commercial copiers is expanding rapidly in emerging countries
in Latin America, Eastern Europe, the Commonwealth of Independent States,
Africa, China and India. 1995 revenues in all of these markets grew faster
than the growth in the developed markets.
Enterprise Services Products
Our enterprise services products fall into four digital product categories:
Production Publishing, Electronic Printing, Color Copying and Printing and
Digital Office Systems.
Production Publishing
The era of production publishing was launched in 1990 when we announced the
DocuTech family which was a major step beyond our traditional reprographics
market into the publishing industry, a $100 billion market with enormous
potential. With more than 10,000 systems installed all over the world, our
production publishing revenues in 1995 were $1.4 billion.
Production publishing technology is increasingly replacing older, traditional
offset printing as customers seek improved productivity and cost savings,
faster turnaround of document preparation, and the ability to print documents
"on demand." We offer the widest range of solutions available in the
marketplace - from dial-up lines through the Internet to state-of-the-art
networks - and we are committed to expanding these print-on-demand solutions
as new technology and applications are developed.
The DocuTech family of digital publishers scans hard copy and converts it into
digital documents, or accepts digital documents directly from networked
personal computers or workstations. A user-friendly electronic cut-and-paste
workstation allows the manipulation of images or the creation of new
documents. For example, in only a few minutes, a page of word-processed text,
received over a network, can be combined with a photograph which is scanned
from hard copy and enhanced electronically: cropped, positioned precisely,
rotated, brightened or sharpened. Digital masters can be prepared in a
fraction of the time necessary to prepare offset plates, thereby allowing fast
turnaround time. DocuTech prints high-resolution (600 dots per inch) pages at
up to 135 impressions per minute. The in-line finisher staples completed sets
or finishes booklets with covers and thermal-adhesive bindings. Because the
finished document can be stored as a digital document, hard copy documents can
be printed on demand, or only as required, thus avoiding the long production
runs and high storage and obsolescence costs associated with offset printing.
The concept of print-on-demand took another major step in 1995 when we
introduced the 6135 Production Publisher. It makes print-for-one publishing
practical; personalized publishing runs can now be as short as one or two
prints.
Electronic Printing
We estimate that the electronic printing market was over $20 billion in 1995
and is expected to grow to $25 billion in 1998.
This market has largely consisted of high-end host-connected printers and low-
end desktop printers. We expect significant future growth for robust, fully
featured printers serving multiple users on networks. This growth will be
driven by the increase in personal computers and workstations on networks,
client-server processing, accelerating growth in the demand for enterprise-
wide distributed printing, and declining electronics costs. These faster,
more reliable printers will print collated multiple sets on both sides of the
paper, insert covers and tabs, and staple or bind; but without the labor-
intensive steps of printing an original and manually preparing the documents
on copiers. In addition, documents can be printed on these printers from
remote data center computers, enabling the efficiencies of distributing
electronically and then printing, rather than printing paper documents and
then distributing them.
We have had a strong position in the high-end, high-volume electronic printing
market segment since 1977. Our high-end electronic printing revenues were
approximately $2 billion in 1995 and we expect this market to grow from almost
$7 billion in 1995 to more than $9 billion in 1998. We are well positioned to
capitalize on the growth in the electronic printing market because of both our
innovative technologies and our understanding of customer requirements for
distributed printing from desktop and host computers. Our goal is to
integrate office, production and data-center electronic printing into a
single, seamless, user-friendly network.
Xerox pioneered and continues to be a worldwide leader in electronic laser
printing, which combines computer, laser, communications and xerographic
technologies. We market a broad line of robust printers with speeds that
range from five pages per minute (ppm) to the industry's fastest cut-sheet
printer at 135 ppm, and continuous-feed production printers at speeds up to
420 ppm. Many of these printers have simultaneous interfaces that can be
connected to multiple host computers as well as local area networks.
Breakthrough technology allows printing, in a single pass through our
highlight color printers, black-and-white plus one customer-changeable color
(as well as shades, textures and mixtures of each) at production speeds up to
92 ppm. Other manufacturers' highlight color printers require additional
passes to add variable color, which increase cost, reduce speed and
reliability and introduce the possibility of color misalignment.
Productivity-enhancing features include printing collated multiple sets on
both sides of the paper, inserting covers and tabs, printing checks with
magnetic ink character recognition (MICR), and stapling; all on cut sheet
plain paper, with sizes up to 11 by 17 inches.
During 1995, we significantly expanded our opportunities with two major new
printer series that will redefine our role in the electronic production
printing industry. With the DocuPrint CF Series family, we entered the market
for very high-volume, continuous-feed printers at speeds up to 420 ppm. The
new DocuPrint IPS Series makes the IBM Advanced Function Presentation (AFP)
architecture directly available to our production printing customers.
Color Copying and Printing
We estimate that the color copying and printing market was $14 billion in 1995
and is expected to grow to $24 billion in 1998. Our revenues from color
products grew 45 percent in 1995 to $600 million.
The use of color originals in the office is accelerating. Independent studies
have concluded that color documents are more effective in communicating
information and that decision maker performance improves with the use of color
documents. The vast majority of industry shipments of workstations and
personal computers have color monitors, creating the need for economical,
convenient and reliable, high-quality color copying and printing.
Xerox entered the digital color market in 1991 with the introduction of the
Xerox 5775 digital copier which is targeted at the production market segment.
The 5775 copies high resolution full color at 7.5 ppm, black-and-white at 30
ppm, and allows the colorizing of black-and-white documents. The Xerox 4700
is a highly cost-efficient, full-color 7.5 ppm electronic printer that also
prints black-and-white at 30 ppm. The 4700 prints complete collated documents
incorporating both black-and-white and color pages in a single step and at
optimum speeds. It offers a broad array of connectivity options for both the
office network and host computer environments. The MajestiK color copier
series, introduced in 1993, offers benchmark copy quality and
price/performance, and prints full color at 6 ppm and black-and-white at 36
ppm. The MajestiK series is targeted at the expanding market for color in the
office. In 1994, we introduced the 4900 color laser printer for networked
office groups printing at up to 1200 by 300 dpi resolution and three ppm for
full color and 12 ppm for black-and-white. During 1995, we introduced the
XPrint family of networked desktop color laser printers using "Intelligent
Color" technology allowing work groups to integrate color and black-and-white
documents on a single printer at up to 600 x 600 dots per inch resolution. We
also introduced the Regal color copier/printer that provides MajestiK color
copy quality at a fast 9 ppm speed for full color copying and printing.
Digital Office Systems
Our digital office systems, known as Document Centre Systems, were introduced
in 1995 and bring the production publishing productivity to the office. This
new category of robust and extensible systems combines many capabilities -
printing, scanning, faxing and copying documents - into a single digital
resource that can be accessed from either a personal computer or on a walk-up
basis. With interactive software, a user can easily control the various steps
of the document cycle - document input, management and output - from the
desktop. The seamless integration of services and interoperability will bring
new levels of efficiency to the office. These new systems are a portal to the
network and allow office workers to navigate between digital and paper
documents, share information and knowledge, and collaborate with other members
of their work groups. The multitasking architecture allows Document Centre
Systems to perform multiple functions concurrently.
The two initial models in the Document Centre product family are equipped with
integrated scanners for digital copying and printing services, accessible
either from the PC desktop or from the user interface on the devices
themselves. The Document Centre System 35 is designed for work groups of up
to 50 people, and copies and prints at 35 ppm with resolutions of up to 600 by
2,400 dots per inch. It provides two-sided printing and several document
finishing options. The Document Centre System 20 is targeted for work groups
of up to 20 people, and copies and prints at 20 ppm with 400 dots per inch
resolution. Fax services, from the desktop or at the device, are standard.
Other Products
We also offer a wide range of other document processing products including
ink-jet and electrostatic printers, multifunction products, facsimile
products, scanners, personal computer and workstation software, and integrated
systems solutions.
We also sell cut-sheet paper to our customers for use in their Document
Processing products.
Summary of Revenues by Product Category
The following table summarizes our revenues by major product category. The
revenues for black-and-white copiers and enterprise services products include
equipment and supply sales, service and rental revenues, and finance income.
These revenues exclude the impact of foreign currency exchange rate
fluctuations which are shown combined with the revenues from paper and other
products.
Year ended December 31 (in billions) 1995 1994 1993
Black-and-white copiers $ 9.6 $ 9.5 $ 9.1
Enterprise services products 4.1 3.5 2.9
Paper, other products, currency 2.9 2.1 2.2
Total revenues $16.6 $15.1 $14.2
Xerox Competitive Advantages
Although the document processing industry is highly competitive, we believe
that we enjoy significant competitive advantages because of our dedication to
customer satisfaction, our total quality management processes, our substantial
on-going investment in research and development, and our large direct sales
and service forces.
Customer Satisfaction
Our highest priority is customer satisfaction. Our research shows that
satisfied customers are far more likely to repurchase products and that the
cost of selling a replacement product to a satisfied customer is far less than
selling to a "new" customer. We regularly survey customers on their
satisfaction, measure the results, analyze the root causes of dissatisfaction,
and take steps to correct any problems.
Because of our emphasis on customer satisfaction, we offer a Total
Satisfaction Guarantee, one of the simplest and most comprehensive offered in
any industry: "If you are not satisfied with our equipment, we will replace
it without charge with an identical model or a machine with comparable
features and capabilities." This guarantee applies for three years to
equipment acquired from and continuously maintained by Xerox or its authorized
agents.
Quality
We were an early pioneer in total quality management and are the only company
to have won all three of the following prestigious quality awards: the
Malcolm Baldrige National Quality Award in the United States in 1989, the
European Quality Award in 1992 and the Deming Prize in Japan, won by Fuji
Xerox in 1980. In addition, we have won top quality awards in Argentina,
Australia, Belgium, Brazil, Canada, Colombia, France, Germany, Hong Kong,
India, Ireland, Mexico, the Netherlands, Norway and the United Kingdom. Our
"Leadership Through Quality" program has enabled us to significantly reduce
our costs, accelerate the introduction of new products, improve customer
satisfaction and increase market share. Xerox products have been consistently
rated among the world's best by independent testing organizations.
Research and Development
The Xerox research and development (R&D) program is directed toward the
development of new products and capabilities in support of our document
processing strategy. Our research scientists are deeply involved in the
formulation of corporate strategy and key business decisions. They regularly
meet with customers and have dialogues with our business divisions to ensure
they understand customer requirements and are focused on products that can be
commercialized.
In 1995, R&D expense was $951 million compared with $895 million in 1994 and
$883 million in 1993. We expect to increase our investment in technological
development in 1996 and over the longer term to maintain our premier position
in the rapidly changing document processing market. Our R&D spending is
strategically coordinated with Fuji Xerox. The R&D investment by Fuji Xerox
was approximately $600 million in 1995, bringing the total to approximately
$1.5 billion.
Marketing
Xerox document processing products are principally sold directly to users by
our worldwide sales force of approximately 12,000 employees. We also market
through a network of independent agents, dealers, distributors and value-added
resellers and have arrangements with U.S. retail marketing channels, including
Sears, Office Depot, Office Max, Service Merchandise, Staples, Wal-Mart,
Costco, The Wiz, Price Club and MicroAge, to market low-end products not
generally suited for distribution through our direct sales force. These
products are now sold through approximately 3,000 retail stores.
In 1991, Xerox International Partners (XIP), a 51 percent-owned partnership,
was formed between Xerox and Fuji Xerox to supply printer engines to original
equipment manufacturers. XIP has also contracted to supply printer engines to
resellers.
Service
We have a worldwide service force of approximately 26,000 employees. In our
opinion, this direct service force is a significant competitive advantage:
the service force is continually trained on our new products and the
diagnostic equipment is state-of-the-art. Twenty-four-hour-a-day, seven-day-
a-week service is available in most metropolitan areas in the United States.
We are able to guarantee a consistent level of service nationwide and
worldwide because our service force is not focused exclusively on metropolitan
areas and it does not rely on independent local dealers for service.
Revenues
Revenues from supplies, paper, service, rentals, facilities management and
other revenues, and income from customer financing, which represented 67
percent of total revenues in 1995, are derived from the installed base of
equipment and are therefore less volatile than equipment sales revenues and
provide significant stability to overall revenues. Growth in these revenues
is primarily a function of the growth in our installed population of
equipment, usage and pricing. The balance of our revenues are derived from
equipment sales. These sales, which drive the non-equipment revenues, depend
on the flow of new products and are more affected by economic cycles.
Most of our customers have their equipment serviced by and use supplies sold
by us. The market for cut-sheet paper is highly competitive and revenue
growth is significantly affected by pricing. Our strategy is to charge a
spread over mill wholesale prices. After a number of years of decline, rental
revenues increased slightly in 1995.
Our document outsourcing business provides printing, publishing, duplicating
and related services at almost 4,000 customer locations in 36 countries,
including legal and accounting firms, financial institutions, insurance
agencies and manufacturing companies. Our revenues from these services, which
are largely in the U.S., increased 50 percent to $900 million in 1995.
We offer our document processing customers financing of their purchases of
Xerox equipment primarily through XCC in the United States, largely by wholly-
owned financing subsidiaries in Europe, and through divisions in Canada and
Latin America. Our financing operations have expanded over the past several
years in recognition of customer demand and the associated profit
opportunities.
While competition for this business from banks and other finance companies
remains extensive, we actively market our equipment financing services on the
basis of customer service, convenience and competitive rates. Approximately
80 percent of U.S. equipment sales and 70 percent of European equipment sales
are financed through Xerox. Over time, the growth rate of financing income is
expected to correspond to the growth rate of equipment sales and trends in
interest rates.
International Operations
Our international operations account for 51 percent of Document Processing
revenues. Xerox' largest interest outside the United States is the "Rank
Xerox Companies" in which we have an 80 percent financial interest and The
Rank Organisation Plc (RO) has a 20 percent financial interest. On February
28, 1995, Xerox paid RO 620 million pounds sterling, or $972 million, to
increase the Xerox financial interest in Rank Xerox to about 80 percent from
67 percent. Marketing and manufacturing operations are also conducted through
joint ventures in India and China. Marketing and manufacturing in the
Americas Customer Operations organization are conducted through subsidiaries
or distributors in 40 countries. Marketing and manufacturing in Japan and
other areas of the Pacific Rim, Australia and New Zealand are conducted by
Fuji Xerox.
Xerox' financial results by geographical area for 1995, 1994 and 1993, which
are presented on pages 35, 36, 58 and 59 of the Company's 1995 Annual Report
to Shareholders, is hereby incorporated by reference in this document in
partial answer to this item.
Discontinued Operations - Insurance and Other Financial Services and Third-
Party and Real-Estate
The discussion in the first ten paragraphs under the caption "Insurance and
Other Financial Services" on pages 48 and 49 and under the caption
"Discontinued Operations - Other Financial Services and Third-Party and Real-
Estate" on pages 52 and 53 set forth under the caption "Financial Review" in
the Company's 1995 Annual Report to Shareholders is hereby incorporated by
reference in this document in partial answer to this item.
Property and Casualty Reserves
Overview
Losses from claims and related claims handling and legal expense comprise the
majority of costs from providing insurance products. Therefore, unpaid losses
and loss expenses is generally the largest liability on a property and
casualty insurer's balance sheet. However, because insurance coverage is
provided for situations in which the certainty of loss cannot be predicted,
ultimate losses which will be incurred on policies issued are difficult to
estimate and are subject to constant reevaluation as new information becomes
available. Insurance companies utilize a variety of loss trending and
analysis techniques to estimate anticipated ultimate losses and the time
frames when claims are likely to be reported and paid. These patterns vary
significantly by type of insurance coverage and are affected by the economic,
social, judicial and weather-related/geological conditions in different
geographic areas.
In order to moderate the potential impact of unusually severe or frequent
losses, insurers often cede (i.e., transfer) through reinsurance mechanisms a
portion of their gross policy premiums to reinsurers in exchange for the
reinsurer's agreement to share a portion of the covered losses with the
insurer. Although the ceding of insurance does not discharge the original
insurer from its primary liability to its policyholder, the reinsurer that
accepts the risk assumes an obligation to the original insurer. The ceding
insurer retains a contingent liability with respect to reinsurance ceded to
the extent that the reinsurer might not be able to meet its obligations.
The net liability retained on individual risks varies by product and by the
nature of the risk. Insured liabilities are reinsured either by treaty,
wherein reinsurers agree in advance to provide coverage above retained limits
or for a specified percentage of losses attributable to specific products, or
by facultative arrangements, wherein reinsurance is provided for individual
risks based on individual negotiations.
Reserve provisions are established by the insurer to provide for the estimated
level of claim payments which will be made under the policies it writes. Over
the policy period, as premiums are earned, a portion of the premiums is set
aside as gross loss and loss expense reserves for incurred but not reported
("IBNR") losses in anticipation of claims which will be incurred, net of
anticipated salvage and subrogation. IBNR reserves also include amounts to
supplement case reserves, when established, to provide for potential further
loss development. In addition, gross reserves are established for internal
and external loss adjustment expenses ("LAE") associated with handling the
claims inventory. These expenses are characterized as "allocated LAE" when
they are attributable to a specific claim or series of claims and "unallocated
LAE" when not similarly attributable. When a claim is reported, case reserves
are established on the basis of all pertinent information available at the
time. Legal defense costs that can be assigned to a related claim file and
can be included as part of the loss under the contract are generally
established as part of the gross case reserve. Reinsurance recoverables on
gross reserves are recorded for amounts that are anticipated to be recovered
from reinsurers and are determined in a manner consistent with the liabilities
associated with the reinsured policies. Net reserves are gross reserves less
anticipated reinsurance recoverables (net of uncollectible reinsurance)and
salvage and subrogation on those reserves.
The effect of inflation on gross reserves is considered implicitly when
estimating the liability for unpaid losses and loss expenses. The effect of
inflation on individual case basis reserves reflects the direction of economic
price levels as they affect the individual claims being reserved.
Estimates of the ultimate value of unpaid claims are based in part on
historical data that reflect past inflation, as well as management's
assessment of severity and frequency, industry trends and related costs.
Ridge Re Coverage
Under the terms of the Ridge Re reinsurance coverage and subject to the limits
established for each insurance operating group, Ridge Re will reimburse the
Insurance Companies within their respective insurance operating group for 85%
of net increases, if any, to ultimate net unpaid loss and loss expenses and
uncollectible reinsurance reserves which may develop on its 1992 and prior
accident years as carried at December 31, 1992 (net of all salvage,
subrogation and other recoverables). At December 31, 1995, Ridge Re has
accrued approximately $750 million of the $1,245 million maximum excess of
loss reinsurance coverage estimated to be required based on actuarial
projections. The Ridge Re coverage is guaranteed by XFSI, and, subject to
certain commutation provisions, remains in effect until all 1992 and prior
accident year claims are paid. Cessions to Ridge Re, while beneficial to the
Remaining Talegen insurance operating groups and TRG, do not result in a
benefit to the Insurance segment or consolidated Xerox accounts. The Ridge Re
coverage will continue in effect after the consummation of the sale to the KKR
groups.
Monitoring of Insurance Reserves
Gross and net reserves for business written in both current and prior years is
continually monitored by the Remaining insurance companies, and Talegen senior
management reviews these reserves on a periodic basis. These reserves are
also reviewed and certified on an annual basis by an outside actuary appointed
by the Remaining insurance companies. Overall reserve levels are impacted
primarily by the types and amounts of insurance coverage currently being
written and the trends developing from newly reported claims and claims which
have been paid and closed. Adjustments are made to reserves in the period
they can be reasonably estimated to reflect evolving changes in loss
development patterns and various other factors. Such factors include
increased damage awards by the courts, known changes in judicial
interpretations of legal liability for asbestos-related, environmental and
other latent exposure claims, changes in judicial interpretation of the scope
of coverage provided by general liability and umbrella policies for
"advertising injury," particularly in the area of "unfair competition," and
other recently advanced new theories of liability. Many of these judicial
interpretations are still evolving. Generally, the greater the projected time
to settlement, the greater the complexity of estimating ultimate claim costs
and the more likely that such estimates will change as new information becomes
available.
Use of Reinsurance and Management of Reinsurance Collection
Most of the Remaining insurance companies made significant use of reinsurance
during the 1970's and early 1980's. Since that time, the Remaining insurance
companies have generally increased the portion of business they retain while
reducing the number of reinsurers used for their reinsurance contracts. During
1995 and 1994, excluding the insurance operating groups sold, 85% and 63%,
respectively, of total written premiums ceded to reinsurers were placed with
approximately 30 reinsurers.
Talegen has a reinsurance security committee composed of senior management who
approve those reinsurers with whom Talegen will do business. The criteria
under which such approvals are granted have become increasingly restrictive
over the past several years.
The potential uncollectibility of ceded reinsurance is an industry-wide issue.
With respect to the management of recoveries due from reinsurers, the
Remaining insurance companies operate under common guidelines for the early
identification of potential collection problems and assign these cases to a
specialized group under TRG staffed by "work-out" experts. This unit
aggressively pursues collection of reinsurance recoverables through mediation,
arbitration and, where necessary, litigation to enforce the Remaining
insurance companies contractual rights against reinsurers. Nevertheless,
periodically, it becomes necessary for management to adjust reserves for
potential losses to reflect their ongoing evaluation of developments which
affect recoverability, including the financial difficulties that some
reinsurers can experience. Based upon the review of financial condition and
assessment of other available information, the Remaining insurance companies
maintain a provision for uncollectible amounts due from reinsurers. The
balance of reinsurance recoverable is considered to be valid and collectible.
Statutory and GAAP Reporting of Net Unpaid Losses and Loss Expenses
The liability for unpaid losses and loss expenses required by generally
accepted accounting principles ("GAAP") includes various adjustments from the
liability reported in accordance with Statutory Accounting Practices ("SAP").
Because not all GAAP adjustments can be associated with subsequent
developments of the liabilities on other than an arbitrary basis, developments
on the loss and loss expense reserve development table are prepared in
accordance with SAP. The increase in 1995 in the difference between the GAAP
unpaid loss and loss expense reserve and the corresponding SAP liabilities was
principally caused by the application, by Xerox, of accounting principles
applicable to discontinued operations which did not result in increased
liabilities for SAP purposes at the Insurance operating subsidiary level.
Loss Development Data
In Note 9 on page 59 of the Company's 1995 Annual Report to Shareholders,
which is hereby incorporated by reference in this document in partial answer
to this item, the net liability for unpaid losses and loss expenses is
reconciled for each of the years in the three-year period ended December 31,
1995. Included therein are current year and prior year development data.
As a result of claim activity during 1995 and after reflection of prior
experience, it is management's judgment that the total liability for unpaid
losses and loss expenses at December 31, 1995 is reasonably stated.
The loss and loss expense reserve development table illustrates the
development of statutory balance sheet liabilities for 1985 through 1995 for
the Remaining insurance companies gross of Ridge Re cessions. Unpaid loss and
loss expense reserves and accident year development have been restated to
exclude the reserves of Constitution Reinsurance Corporation and Viking
Insurance Company of Wisconsin, which were sold during 1995. The first line
of the table is the estimated liability for unpaid losses and loss expenses,
net of reinsurance recoverable, recorded at the balance sheet date for each
year. The lower section of the table shows the updated amount of the
previously recorded liability based on experience as of the close of each
succeeding year. The estimate is increased or decreased as more information
becomes known about the claims until all claims are settled. Deficiencies or
redundancies represent aggregate changes in estimates as calculated on a
statutory basis for all prior calendar years. The effect as calculated under
GAAP on income for the latest three years is shown in Note 9 on page 59 of the
Company's 1995 Annual Report to Shareholders, which is hereby incorporated by
reference in this document in partial answer to this item. These changes in
estimates have been reflected in Talegen's calendar year operating results.
As the Remaining insurance companies recognize adjustments to reserves for
changes in loss development patterns and various other factors, such as social
and economic trends and known changes in judicial interpretation of legal
liability, in the period in which they become known, it is not appropriate to
extrapolate future redundancies or deficiencies based solely on this table.
Loss and Loss Expense Reserve Development
Year ended December 31 (in millions) 1985 1986 1987 1988 _
Liability for unpaid losses and loss
expenses - GAAP (net of reinsurance) $ 3,498 $ 4,127 $ 4,824 $ 5,200
Increase (decrease) for GAAP adj. (148) (256) (241) (208)
Liability for unpaid losses and loss
expense - SAP (net of reinsurance) 3,350 3,871 4,583 4,992
Paid (cumulative) as of:
End of year - - - -
One year later 1,169 1,187 1,323 1,246
Two years later 1,986 2,080 2,188 2,269
Three years later 2,596 2,701 2,933 3,043
Four years later 3,056 3,224 3,472 3,854
Five years later 3,450 3,611 4,150 4,053
Six years later 3,729 4,180 4,316 4,432
Seven years later 4,221 4,278 4,571 4,751
Eight years later 4,281 4,476 4,859
Nine years later 4,449 4,720
Ten years later 4,673
Liability estimated as of:
End of year 3,350 3,871 4,583 4,992
One year later 3,397 3,893 4,681 5,052
Two years later 3,826 4,314 4,870 5,247
Three years later 4,051 4,527 5,168 5,171
Four years later 4,311 4,928 5,073 5,953
Five years later 4,681 4,803 5,832 5,903
Six years later 4,644 5,495 5,854 6,029
Seven years later 5,260 5,546 5,959 6,381
Eight years later 5,353 5,673 6,314
Nine years later 5,506 6,045
Ten years later 5,880
(Deficiency) redundancy $(2,530) $(2,174) $(1,731) $(1,389)
End of Year:
Gross liability
Reinsurance recoverable
Net liability
One Year Later:
Gross re-estimated liability
Re-estimated recoverable
Net re-estimated liability
Two Years Later:
Gross re-estimated liability
Re-estimated recoverable
Net re-estimated liability
Three Years Later:
Gross re-estimated liability
Re-estimated recoverable
Net re-estimated liability
Gross cumulative deficiency
1989 1990 1991 1992 1993 1994 1995 _
$ 5,637 $ 5,848 $ 5,743 $ 6,109 $ 5,972 $ 5,618 $ 6,471
(215) (287) (299) (370) (254) (216) (827)
5,422 5,561 5,444 5,739 5,718 5,402 5,644
- - - - - - -
1,560 1,542 1,721 1,080 1,303 1,242
2,635 2,882 2,518 2,153 2,264
3,690 3,412 3,381 2,939
4,018 4,062 4,008
4,508 4,563
4,887
5,422 5,561 5,444 5,739 5,718 5,402 5,644
5,611 5,658 6,340 5,734 5,711 5,944
5,591 6,484 6,274 5,771 6,216
6,408 6,370 6,326 6,230
6,329 6,429 6,747
6,428 6,803
6,770
$(1,348) $(1,242) $(1,303) $ (491) $ (498) $ (542) $ -
$ 9,469 $ 8,526 $ 7,849 $ 8,143
3,730 2,808 2,447 2,499
5,739 5,718 5,402 5,644
9,444 8,590 8,616
3,710 2,879 2,672
5,734 5,711 5,944
9,482 9,316
3,711 3,100
5,771 6,216
10,188
3,958
6,230
$ (719) $ (790) $ (767) $ -
Asbestos-Related, Environmental and Other Latent Exposure Claims
The discussion under the captions "Latent Exposures," "Reserves for the
Remaining Insurance Companies" and "Latent Exposure Reserves" on pages 50
through 52 in the Company's 1995 Annual Report to Shareholders is hereby
incorporated by reference in this document in partial answer to this item.
Item 2. Properties
The Company owns a total of eleven principal manufacturing and engineering
facilities and leases an additional such facility. The domestic facilities
are located in California, New York and Oklahoma, while the international
facilities are located in Brazil, Canada, England, France, Holland and Mexico.
The Company also has four principal research facilities; two are owned
facilities in New York and Canada, and two are leased facilities in California
and France.
In addition, within the Company, there are numerous facilities which encompass
general offices, sales offices, service locations and distribution centers.
The principal owned facilities are located in the United States, England, and
Mexico. The principal leased facilities are located in the United States,
Brazil, Canada, England, Mexico, France, Germany and Italy.
The Company has closed and downsized numerous facilities as part of the
worldwide Document Processing restructuring program announced in December
1993. The facilities closed or downsized encompass general offices, sales
offices, and distribution centers. The principal closed or downsized domestic
facilities were located in California, Connecticut and Illinois.
The Company's Corporate Headquarters facility, located in Connecticut, is
leased; a training facility, located in Virginia, is owned by the Company. In
the opinion of Xerox management, its properties have been well maintained, are
in sound operating condition and contain all the necessary equipment and
facilities to perform the Company's functions.
Item 3. Legal Proceedings
The information set forth under Note 14 "Litigation" on page 73 of the
Company's 1995 Annual Report to Shareholders is incorporated by reference in
this document in answer to this item.
On July 21, 1993, the Company was notified that it had been named as a
respondent by the United States Environmental Protection Agency ("EPA") in a
unilateral Comprehensive Environmental Response, Compensation and Liability
Act ("CERCLA") section 106 (a) Administrative Order regarding the Metcoa
Radiation Site in Pulaski, PA. The Order directs the Company and 21 other
companies to perform remedial work at the Site. The order alleges that these
parties are jointly and severally liable to perform the work. Under CERCLA,
a respondent that does not comply with the Order could be subject to a civil
penalty of $25,000 for each day of noncompliance and be liable for punitive
damages at least equal to treble the EPA's cost of cleaning up the Site. The
Company denies that it is liable to perform the work described in the Order.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
The information set forth under the following captions on the indicated pages
of the Company's 1995 Annual Report to Shareholders is hereby incorporated by
reference in this document in answer to this Item:
Caption Page No.
Stock Listed and Traded 81
Dividends and Stock Prices 81
Ten Years in Review - Common Shareholders
of Record at Year-End 80 and 81
Item 6. Selected Financial Data
The following information, as of and for the five years ended December 31,
1995, as set forth and included under the caption "Ten Years in Review" on
pages 80 and 81 of the Company's 1995 Annual Report to Shareholders, is hereby
incorporated by reference in this document in answer to this Item:
Revenues
Income (loss) from continuing operations
Primary earnings (loss) per common share from continuing operations
Total assets
Long-term debt
Preferred stock
Dividends declared
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The information set forth under the caption "Financial Review" on pages 33-40,
42-45, and 47-53 of the Company's 1995 Annual Report to Shareholders other
than the pictures and captions to the pictures is hereby incorporated by
reference in this document in answer to this Item.
Item 8. Financial Statements and Supplementary Data
The consolidated financial statements of Xerox Corporation and subsidiaries
and the notes thereto and the report thereon of KPMG Peat Marwick LLP,
independent auditors, which appear on pages 32, 41, 46, 54-77, and 79 of the
Company's 1995 Annual Report to Shareholders, are hereby incorporated by
reference in this document in answer to this Item. In addition, also included
is the quarterly financial data included under the caption "Quarterly Results
of Operations (Unaudited)" on page 78 of the Company's 1995 Annual Report to
Shareholders.
The financial statement schedule required herein is filed as "Financial
Statement Schedules" pursuant to Item 14 of this Report on Form
10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
The information set forth in "Proposal 1--Election of Directors" in the
Company's Notice of the 1996 Annual Meeting of Shareholders and Proxy
Statement, to be filed pursuant to Regulation 14A not later than 120 days
after the close of the fiscal year covered by this report on Form 10-K, is
hereby incorporated by reference in this document in answer to this Part III.
Executive Officers of Xerox
The following is a list of the executive officers of Xerox, their current
ages, their present positions and the year appointed to their present
positions. There are no family relationships between any of the executive
officers named.
Each officer is elected to hold office until the meeting of the Board of
Directors held on the day of the next annual meeting of shareholders, subject
to the provisions of the By-Laws.
Year
Appointed
to Present Officer
Name Age Present Position Position Since_
Paul A. Allaire* 57 Chairman of the Board, Chief 1991 1983
Executive Officer and Chairman
of the Executive Committee
William F. Buehler 56 Executive Vice President and 1993 1991
Chief Staff Officer
A. Barry Rand 51 Executive Vice President, 1992 1986
Operations
Barry D. Romeril 52 Executive Vice President and 1993 1993
Chief Financial Officer
Stuart B. Ross 58 Executive Vice President; 1990 1979
Chairman and Chief Executive
Officer, Xerox Financial
Services, Inc.
Allan E. Dugan 55 Senior Vice President, 1992 1990
Corporate Strategic Services
John A. Lopiano 57 Senior Vice President; President, 1995 1993
Production Systems Group
Mark B. Myers 57 Senior Vice President, Corporate 1992 1989
Research and Technology
David R. Myerscough 55 Senior Vice President; 1996 1989
Corporate Business Strategy
* Member of Xerox Board of Directors.
Executive Officers of Xerox, Continued
Year
Appointed
to Present Officer
Name Age Present Position Position Since_
Richard S. Paul 54 Senior Vice President and 1992 1989
General Counsel
Brian E. Stern 48 Senior Vice President; President, 1996 1993
Office Document Products Group
Eunice M. Filter 55 Vice President, Treasurer 1990 1984
and Secretary
Philip D. Fishbach 54 Vice President and Controller 1995 1990
James H. Lesko 44 Vice President; President, 1996 1993
Desktop Products Group
Carlos Pascual 50 Vice President; President, 1995 1994
U.S. Customer Operations
Each officer named above, with the exceptions of William F. Buehler and Barry
D. Romeril, has been an officer or an executive of Xerox or its subsidiaries
for at least the past five years.
Prior to joining Xerox in 1991, Mr. Buehler was Vice President, Network
Systems Sales at the American Telephone & Telegraph Company (AT&T). Mr.
Buehler had been affiliated with AT&T since 1964.
Prior to joining Xerox in 1993, Mr. Romeril had been Group Finance Director at
British Telecommunications PLC since 1988. From 1987 to 1988 he was Finance
Director at BTR, Plc.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) (1) and (2) The financial statements, independent auditors' reports
and Item 8 financial statement schedules being filed herewith or
incorporated herein by reference are set forth in the Index to Financial
Statements and Schedule included herein.
(3) The exhibits filed herewith or incorporated herein by reference are
set forth in the Index of Exhibits included herein.
(b) No Current Reports on Form 8-K were filed during the last quarter of the
period covered by this Report.
(c) The management contracts or compensatory plans or arrangements listed
in the Index of Exhibits that are applicable to the executive officers
named in the Summary Compensation Table which appears in Registrant's
1996 Proxy Statement are preceded by an asterisk (*).
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
XEROX CORPORATION
By: /s/ Barry D. Romeril_________
Executive Vice President and
Chief Financial Officer
March 28, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
March 28, 1996
Signature Title
Principal Executive Officer:
Paul A. Allaire /s/ Paul A. Allaire______________
Chairman, Chief Executive Officer
and Director
Principal Financial Officer:
Barry D. Romeril /s/ Barry D. Romeril_____________
Executive Vice President and
Chief Financial Officer
Principal Accounting Officer:
Philip D. Fishbach /s/ Philip D. Fishbach___________
Vice President and Controller
Directors:
/s/ Robert A. Beck Director
/s/ B. R. Inman Director
/s/ Yotaro Kobayashi Director
/s/ Ralph S. Larsen Director
/s/ John D. Macomber Director
/s/ George J. Mitchell Director
/s/ N. J. Nicholas, Jr. Director
/s/ John E. Pepper Director
/s/ Martha R. Seger Director
/s/ Thomas C. Theobald Director
Report of Independent Auditors
To the Board of Directors and Shareholders of Xerox Corporation
Under date of January 24, 1996, we reported on the consolidated balance sheets
of Xerox Corporation and consolidated subsidiaries as of December 31, 1995 and
1994 and the related consolidated statements of income and cash flows for each
of the years in the three-year period ended December 31, 1995, as contained in
the Xerox Corporation 1995 Annual Report to Shareholders on pages 32, 41, 46,
and 54-77. These consolidated financial statements and our report thereon are
incorporated by reference in the 1995 Annual Report on Form 10-K. In
connection with our audits of the aforementioned consolidated financial
statements, we also have audited the related financial statement schedule
listed in the accompanying index. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express
an opinion on this financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
KPMG PEAT MARWICK LLP
Stamford, Connecticut
January 24, 1996
Index to Financial Statements and Schedule
Financial Statements:
Consolidated statements of income of Xerox Corporation and subsidiaries for
each of the years in the three-year period ended December 31, 1995
Consolidated balance sheets of Xerox Corporation and subsidiaries as of
December 31, 1995 and 1994
Consolidated statements of cash flows of Xerox Corporation and subsidiaries
for each of the years in the three-year period ended December 31, 1995
Notes to consolidated financial statements
Report of Independent Auditors
Quarterly Results of Operations (unaudited)
The above consolidated financial statements, related notes, report
thereon and the quarterly results of operations which appear on pages
32, 41, 46, 54-77, 78, and 79 of the Company's 1995 Annual Report to
Shareholders are hereby incorporated by reference in this document.
Commercial and Industrial (Article 5) Schedule:
II - Valuation and qualifying accounts
All other schedules are omitted as they are not applicable, or the information
required is included in the financial statements or notes thereto.
SCHEDULE II
Valuation and Qualifying Accounts
Year ended December 31, 1995, 1994 and 1993
Additions
Balance at charged to Deductions, Balance
beginning costs and net of at end
(in millions) of period expenses recoveries of period
1995
Allowance for Losses on:
Accounts Receivable $ 79 $ 81 $ 71 $ 89
Finance Receivables 319 227 224 322
Deferred Tax Valuation
Allowance 34 - 14 20
$432 $308 $309 $431
1994
Allowance for Losses on:
Accounts Receivable $ 62 $ 70 $ 53 $ 79
Finance Receivables 300 182 163 319
Deferred Tax Valuation
Allowance 34 - - 34
$396 $252 $216 $432
1993
Allowance for Losses on:
Accounts Receivable $ 68 $ 51 $ 57 $ 62
Finance Receivables 275 199 174 300
Deferred Tax Valuation
Allowance - 34 - 34
$343 $284 $231 $396
Index of Exhibits
Document and Location
(3) (a) (1) Restated Certificate of Incorporation of Registrant filed by the
Department of State of New York on June 10, 1988.
Incorporated by reference to Exhibit 3(a) to Registrant's
Quarterly Report on Form 10-Q for the Quarter Ended June 30, 1988.
(2) Certificate of Amendment dated July 7, 1989 to the Restated
Certificate of Incorporation.
Incorporated by reference to Exhibit 3(a) to Registrant's
Quarterly Report on Form 10-Q for the Quarter Ended June 30, 1989.
(3) Certificate of Amendment dated October 10, 1994 to the Restated
Certificate of Incorporation.
Incorporated by reference to Exhibit 3(a)(3) to Registrant's
Annual Report on Form 10-K for the Year Ended December 31, 1994.
(4) Certificate of Amendment dated October 19, 1995 to the Restated
Certificate of Incorporation.
(b) By-Laws of Registrant, as amended through May 29, 1991.
Incorporated by reference to Exhibit 3(b)(2) to Registrant's
Quarterly Report on Form 10-Q for the Quarter Ended June 30, 1991.
(4) (a) Indenture dated as of January 15, 1990 between Registrant and
BankAmerica National Trust Company (as successor in interest to
Security Pacific National Trust Company (New York)) relating
to unlimited amounts of debt securities which may be issued
from time to time by Registrant when and as authorized by or
pursuant to a resolution of Registrant's Board of Directors.
Incorporated by reference to Exhibit 4(a) to Registration No.
33-33150.
(b) Indenture dated as of December 1, 1991 between Registrant and
Citibank, N.A. relating to unlimited amounts of debt securities
which may be issued from time to time by Registrant when and
as authorized by or pursuant to a resolution of Registrant's
Board of Directors.
Incorporated by reference to Exhibit 4(a) to Registration No.
33-44597.
(c) Indenture dated as of March 1, 1988, as supplemented by the First
Supplemental Indenture dated as of July 1, 1988, between Xerox
Credit Corporation (XCC) and The First National Bank of Chicago
relating to unlimited amounts of debt securities which may be
issued from time to time by XCC when and as authorized by XCC's
Board of Directors or the Executive Committee of the Board of
Directors.
Incorporated by reference to Exhibit 4(a) to XCC's Registration
Statement No. 33-20640 and to Exhibit 4(a)(2) to XCC's Current
Report on Form 8-K dated July 13, 1988.
(d) Indenture dated as of March 1, 1989, as supplemented by the First
Supplemental Indenture dated as of October 1, 1989, between XCC
and Citibank, N.A. relating to unlimited amounts of debt
securities which may be issued from time to time by XCC when and
as authorized by XCC's Board of Directors or Executive Committee
of the Board of Directors.
Incorporated by reference to Exhibit 4(a) to XCC's Registration
Statement No. 33-27525 and to Exhibit 4(a)(2) to XCC's
Registration Statement No. 33-31367.
(e) Indenture dated as of October 1, 1991, as supplemented by the
First Supplemental Indenture dated as of May 1, 1992, between XCC
and Citibank, N.A. relating to unlimited amounts of debt
securities which may be issued from time to time by XCC when and
as authorized by XCC's Board of Directors or Executive Committee
of the Board of Directors.
Incorporated by reference to Exhibit 4(a) to XCC's Registration
Statement No. 33-43470.
(f) Indenture dated as of May 1, 1994, between XCC and State Street
Bank and Trust Company (formerly, The First National Bank of
Boston) relating to unlimited amounts of debt securities which may
be issued from time to time by XCC when and as authorized by XCC's
Board of Directors or Executive Committee of the Board of
Directors.
Incorporated by reference to Exhibit 4(a) to XCC's Registration
Statement No. 33-53533 and to Exhibits 4(a)(1) and 4(a)(2) to
XCC's Registration Statement No. 33-43470.
(g) Indenture dated as of October 2, 1995, between XCC and State
Street Bank and Trust Company relating to unlimited amounts of
debt securities which may be issued from time to time by XCC when
and as authorized by XCC's Board of Directors or Executive
Committee of the Board of Directors.
Incorporated by reference to Exhibit 4(a) to XCC's Registration
Statement No. 33-61481.
(h) Instruments with respect to long-term debt where the total amount
of securities authorized thereunder does not exceed 10% of the
total assets of the Registrant and its subsidiaries on a
consolidated basis have not been filed. The Registrant agrees to
furnish to the Commission a copy of each such instrument upon
request.
(10) The management contracts or compensatory plans or arrangements
listed below that are applicable to the executive officers named
in the Summary Compensation Table which appears in Registrant's
1996 Proxy Statement are preceded by an asterisk (*).
*(a) Registrant's 1976 Executive Long-Term Incentive Plan, as amended
through February 4, 1991.
Incorporated by reference to Exhibit (10)(a) to the Registrant's
Annual Report on Form 10-K for the Year Ended December 31, 1991.
*(b) Registrant's 1991 Long-Term Incentive Plan, as amended through
July 15, 1991.
Incorporated by reference to Exhibit 10(b) to Registrant's
Quarterly Report on Form 10-Q for the Quarter Ended June 30,
1991.
(c) Registrant's Retirement Income Plan for Directors, as amended
through October 2, 1989.
Incorporated by reference to Exhibit 10(n) to Registrant's
Quarterly Report on Form 10-Q for the Quarter Ended September
30, 1989.
*(d) Description of Registrant's Annual Performance Incentive Plan.
*(e) Registrant's 1993 Restatement of Unfunded Retirement Income
Guarantee Plan.
Incorporated by reference to Exhibit 10(e) to Registrant's Annual
Report on Form 10-K for the year ended December 31, 1993.
(f) Consent Order To Cease and Desist. In the Matter of Xerox
Corporation, Before the Federal Trade Commission, Docket No.
8909 dated 3/29/75.
Incorporated by reference to Exhibit I to Registrant's Report on
Form 8-K for July 1975.
*(g) 1993 Restatement of Registrant's Unfunded Supplemental Retirement
Plan.
Incorporated by reference to Exhibit 10(g) to Registrant's Annual
Report on Form 10-K for the year ended December 31, 1993.
(h) Registrant's 1981 Deferred Compensation Plan, 1985
Restatement, as amended through April 2, 1990.
Incorporated by reference to Exhibit 10(h) to Registrant's
Quarterly Report on Form 10-Q for the Quarter Ended March 31,
1990.
(i) Registrant's Restricted Stock Plan for Directors, as amended
through February 7, 1994.
Incorporated by reference to Exhibit 10(i) to Registrant's Annual
Report on Form 10-K for the Year Ended December 31, 1993.
*(j) Form of severance agreement entered into and to be entered into
with various executive officers.
Incorporated by reference to Exhibit 10(j) to Registrant's
Quarterly Report on Form 10-Q for the Quarter ended June 30,
1989.
*(k) Registrant's Contributory Life Insurance Plan.
Incorporated by reference to Exhibit 10(s) to Registrant's
Quarterly Report on Form 10-Q for the Quarter Ended June 30,
1989.
(l) 1996 Amendment and Restatement of Registrant's 1989 Deferred
Compensation Plan for Directors.
*(m) 1993 Amendment and Restatement of Registrant's 1989 Deferred
Compensation Plan for Executives.
Incorporated by reference to Exhibit 10(m) to Registrant's Annual
Report on Form 10-K for the year ended December 31, 1993.
*(n) Executive Performance Incentive Plan.
Incorporated by reference to Registrant's Notice of the 1995
Annual Meeting of Shareholders and Proxy Statement pursuant to
Regulation 14A.
(o) Stock Purchase Agreement dated as of January 17, 1996 among
Registrant, Xerox Financial Services, Inc. (XFSI) and New Talegen
Holdings Corporation and Talegen Acquisition Corporation. This
Agreement is for the sale of Talegen Holdings, Inc. and its
subsidiaries. Copies of the exhibits to the Agreement will be
furnished upon request. Copies of the schedules to the Agreement
will be furnished to the Commission upon request.
(p) Stock Purchase Agreement dated as of January 17, 1996 among
Registrant, XFSI and TRG Acquisition Corporation. This Agreement
is for the sale of The Resolution Group, Inc. Copies of the
exhibits to the Agreement will be furnished upon request. Copies
of the schedules to the Agreement will be furnished to the
Commission upon request.
(11) Statement re computation of per share earnings.
(12) Computation of Ratio of Earnings to Fixed charges.
(13) Pages 32 through 81 of Registrant's 1995 Annual Report
to Shareholders.
(21) Subsidiaries of the Registrant.
(23) Consent of KPMG Peat Marwick LLP.
(28) P Schedule P of Annual Statements to State Regulatory Authorities.
Incorporated by reference to Exhibit (28) on the Form SE of
Registrant dated March 26, 1996.
EXHIBIT 3(a)(4)
Certificate of Amendment
of the
Certificate of Incorporation
of
Xerox Corporation
Under Section 805 of the Business Corporation Law
We, the undersigned, Eunice M. Filter, Vice President and Martin S.
Wagner, Assistant Secretary of Xerox Corporation (the "Corporation") hereby
certify that:
1. The name of the Corporation is "XEROX CORPORATION". The name
under which the Corporation was formed is "THE HALOID COMPANY".
2. The Certificate of Incorporation was filed by the Department of
State on April 18, 1906 under the name The Haloid Company.
3. The Certificate of Incorporation of the Corporation is hereby
being amended pursuant to Section 805 of the BCL to (a) reduce the number
of authorized shares of Cumulative Preferred Stock, par value $1.00 per
share, of the Corporation ("Cumulative Preferred Stock") and (b) reduce the
stated capital of the Corporation resulting from the elimination, pursuant
to Section 515(e) of the BCL and subdivision 4 of Article FOURTH of the
Certificate of Incorporation of the Corporation, of 1,000,000 shares of
Cumulative Preferred Stock (consisting of 1,000,000 shares of the
Corporation's $3.6875 Ten-Year Sinking Fund Preferred Stock, a series of
Cumulative Preferred Stock) heretofore acquired by the Corporation by
sinking fund redemptions. Subdivision 4 of Article FOURTH of the
Certificate of Incorporation of the Corporation prohibits the reissue of
any shares of Cumulative Preferred Stock of any series redeemed or retired
pursuant to a sinking fund and requires that such shares be eliminated in
the manner provided by law from the authorized capital stock of the
Corporation.
4. The lead-in paragraph of Article FOURTH of the Certificate of
Incorporation of the Corporation reads as follows:
"FOURTH: The aggregate number of shares which the Corporation
shall have the authority to issue is 350,000,000 shares of Common Stock,
of the par value of $1.00 each (hereinafter referred to as "Common Stock"),
600,000 shares of Class B Stock of the par value of $1.00 each (hereinafter
referred to as "Class B Stock"), and 23,543,067 shares of Cumulative
Preferred Stock, of the par value of $1.00 each (hereinafter referred to as
"Cumulative Preferred Stock")."
5. The lead-in paragraph of Article FOURTH of the Certificate of
Incorporation of the Corporation is hereby amended to read as follows:
"FOURTH: The aggregate number of shares which the Corporation
shall have the authority to issue is 350,000,000 shares of Common Stock, of
the par value of $1.00 each (hereinafter referred to as "Common Stock"),
600,000 shares of Class B Stock of the par value of $1.00 each (hereinafter
referred to as "Class B Stock"), and 22,543,067 shares of Cumulative
Preferred Stock, of the par value of $1.00 each (hereinafter referred to as
"Cumulative Preferred Stock")."
6. The stated capital of the Corporation is hereby reduced by
$1,000,000, the amount represented by the shares of Cumulative Preferred
Stock heretofore acquired by the Corporation by optional and sinking fund
redemptions and thereafter cancelled or eliminated.
7. The foregoing amendment of the Certificate of Incorporation of
the Corporation was authorized by the Board of Directors of the Corporation
at a meeting duly called and held on February 6, 1995.
IN WITNESS WHEREOF, we have subscribed this document on the date set
forth below and do hereby affirm, under the penalties of perjury, that the
statements contained therein have been examined by us and are true and
correct.
Date: October 19, 1995 /s/ Eunice M. Filter
----------------------------
Name: Eunice M. Filter
Title: Vice President
/s/ Martin S. Wagner
----------------------------
Name: Martin S. Wagner
Title: Assistant Secretary
EXHIBIT 10(d)
Annual Performance Incentive Plan
Under the Annual Performance Incentive Plan, executive officers of the
Company may be entitled to receive performance related cash payments
provided that annual, Committee-established performance objectives are
met. At the beginning of the year, the Executive Compensation and
Benefits Committee approves for each officer not participating in the
Executive Performance Incentive Plan, an annual incentive target and
maximum opportunity expressed as a percentage of annual base salary.
The Committee also establishes overall Document Processing threshold,
target and maximum measures of performance and associated payment
schedules. For 1995, the performance measures are profit before tax
(30%), return on assets (20%), cash generation (20%) and customer and
employee satisfaction (30%). Additional goals are also established for
each officer that includes business unit specific and/or individual
performance goals and objectives. The weights associated with each
business unit specific or individual performance goal and objective used
vary and range from 10 percent to 55 percent of the total. Actual
performance payments are subject to approval by the Committee following
the end of the year.
Exhibit 10(l)
As amended through
February 5, 1996
XEROX CORPORATION
1989 DEFERRED COMPENSATION PLAN FOR DIRECTORS
1996 AMENDMENT AND RESTATEMENT
Preamble. This Plan is a private unfunded nonqualified deferred
compensation arrangement for Directors and all rights shall be governed by and
construed in accordance with the laws of New York, except where preempted by
federal law. It is intended to provide a vehicle for setting aside funds for
retirement.
Section 1. Effective Date. The original effective date of the Plan
is January 1, 1989. The effective date of this amendment and restatement is
May 16, 1996.
Section 2. Eligibility. Any Director of Xerox Corporation (the
"Company") who is not an officer or employee of the Company or a subsidiary of
the Company is eligible to participate in the Plan. A participant who
terminates an election to defer receipt of compensation is not eligible to
participate again in the Plan until twelve months after the effective date of
such termination.
Section 3. Deferred Compensation Account. There shall be established
for each participant a deferred compensation account.
Section 4. Amount of Deferral.
(a) A participant may elect to defer receipt of all or a specified part,
expressed either in terms of a fixed dollar amount or a percentage, of the
cash compensation otherwise payable to the participant for serving on the
Company's Board of Directors or committees of the Board of Directors. Any
amount deferred is credited to the participant's deferred compensation account
on the date such amount is otherwise payable.
(b) In addition to the foregoing, there shall be credited to the
deferred compensation accounts of each person who is serving as a Director on
May 15, 1996 a sum computed by the Company as the present value of his or her
accrued benefit under the Company's Retirement Income Plan For Directors, if
any, as of such date and each such Director shall be given notice of such
amount. The amount so computed shall be final and binding on the Company and
each such Director. Within 30 days of giving such notice, each such Director
shall make an election on a form provided by the Company as to the
hypothetical investment of such amount and the payment methods as permitted
under Sections 6 and 8 hereof as in effect on such date under the
administrative rules adopted by the Administrator.
Section 5. Time of Election to Defer. The election to defer will be
made prior to the individual's commencement of services as a Director for
amounts to be earned for the remainder of the calendar year. In the case of
an individual currently serving as a Director, the election to defer must be
made prior to December 31, of any year for amounts to be earned in a
subsequent calendar year or years. An election to totally terminate deferrals
may be made at any time prior to the relevant payment date.
Section 6. Hypothetical Investment. Deferred compensation is assumed
to be invested, without charge, in the Balanced Fund, Income Fund, U.S. Stock
Fund, International Stock Fund, Small Company Stock Fund or Xerox Stock Fund
(the "Funds") established under the Xerox Corporation Profit Sharing and
Savings Plan (the "Profit Sharing Plan") as elected by the participant;
provided, however, that the Administrator, as hereinafter defined, shall have
the right from time to time, without adversely affecting participants'
accruals in deferred compensation accounts, to substitute for the Income Fund
other hypothetical fixed return investments for the deferred compensation.
Elections to make hypothetical investments in any one or more of the
Funds shall be subject to administrative rules adopted by the Administrator
from time to time.
No shares of Xerox stock will ever actually be issued to a participant
under the Plan.
Section 7. Value of Deferred Compensation Accounts and Installment
Payments. The value of each participant's deferred compensation account shall
reflect all amounts deferred, and gains and losses from the hypothetical
investments, and shall be determined on the last day of each month (the
"Valuation Dates"). Hypothetical investments in the Profit Sharing Plan shall
be valued as of the valuation date under such Plan coincident with or last
preceding the Valuation Date under this Plan. The value of hypothetical
investments not made under the Profit Sharing Plan shall be determined as of
each Valuation Date by the best information available to the Administrator.
Section 8. Manner of Electing Deferral. A participant may elect to
defer compensation by giving written notice to the Administrator on a form
provided by the Company, which notice shall include (1) the amount and/or
percentage to be deferred; (2) if more than one is offered under the Plan, the
hypothetical investment applicable to the amount deferred; (3) the number of
installments for the payment of the deferred compensation; and (4) the date of
the first installment payment. A participant may elect a single method of
payment for (A) termination of service as a Director, (B) death, (C)
disability or (D) while still in service as a Director, or separate methods of
payment for each of these events, provided, however, that the amount credited
to deferred compensation accounts under Section 4(b) shall not be payable
while in service as a Director. The Administrator may adopt rules of general
applicability regarding commencement and duration of payments under the Plan
which may be elected by participants.
Section 9. Payment of Deferred Compensation. No withdrawal may be
made from the participant's deferred compensation account, except as provided
under this Section and Sections 10 and 11.
The value of a participant's deferred compensation account is payable in
cash in annual installments on February 15 or August 15 following the first
occurrence of one of the events elected under Section 8 or following a fixed
period after one of such events based on the value of the participant's
deferred compensation account as of the second preceding Valuation Date.
Unless otherwise elected by a participant with the written approval of
the Administrator, payments of deferred compensation shall be made pursuant to
the following formula: the amount of the first payment shall be a fraction of
the value of the participant's deferred compensation account on the second
preceding Valuation Date, the numerator of which is one and the denominator of
which is the total number of installments elected, and the amount of each
subsequent payment shall be a fraction of the value on the second Valuation
Date preceding each subsequent payment date, the numerator of which is one and
the denominator of which is the total number of installments elected minus the
number of installments previously paid. There shall be added to each payment
determined in accordance with the foregoing, imputed interest for a period of
one month at the same annual rate credited to accounts invested in the Income
Fund under the Profit Sharing Plan for the month of December or June, as the
case may be. Any other payment method selected with the written approval of
the Administrator must in all events provide for payments in substantially
equal installments.
Section 10. Acceleration of Payment for Hardship.
(a) For Hardship. Upon written approval from the Board of Directors,
a participant may be permitted to receive all or part of his accumulated
benefits if, in the discretion of the Board of Directors, it is determined
that an emergency event beyond the participant's control exists and which
would cause such participant severe financial hardship if the payment of his
benefits were not approved. Any such distribution for hardship shall be
limited to the amount needed to meet such emergency. A participant who makes
a hardship withdrawal cannot reenter the Plan for twelve months after the date
of withdrawal.
(b) Upon a Change in Control. Within 5 days following the occurrence
of a change in control of the Company (as hereinafter defined), each
participant shall be entitled to receive a lump sum payment equal to the value
of his deferred compensation account. For purposes hereof, a "change in
control of the Company" shall be deemed to have occurred if (A) any "person",
as such term is used in Sections 13(d) and 14(d) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act") other than the Company, any
trustee or other fiduciary holding securities under an employee benefit plan
of the Company, or any company owned, directly or indirectly, by the
shareholders of the Company in substantially the same proportions as their
ownership of stock of the Company, is or becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities of the Company representing 20 percent or more of the combined
voting power of the Company's then outstanding securities; or (B) during any
period of two consecutive years, individuals who at the beginning of such
period constitute the Board, including for this purpose any new director
(other than a director designated by a person who has entered into an
agreement with the Company to effect a transaction described in this Section)
whose election or nomination for election by the Company's shareholders was
approved by a vote of at least two-thirds of the directors then still in
office who were directors at the beginning of the period or whose election or
nomination for election was previously so approved, cease for any reason to
constitute a majority thereof.
Section 11. Other Penalized Withdrawals. Notwithstanding the
provisions of Sections 9 and 10, a participant may be permitted to receive all
or part of his accumulated benefits at any time provided that (A) the
Administrator approves such distribution in his or her sole discretion, and
(B) the participant forfeits a portion of his account balance equal to a
percentage of the amount distributed. The percentage reduction shall be the
greater of (A) six percent, or (B) a percentage equal to one-half of the prime
interest rate, as determined by the Administrator.
Section 12. Time Of Hypothetical Investment. The amount in the
participant's deferred compensation account as of each Valuation Date which
has not been previously deemed invested shall be deemed invested in a
hypothetical investment on such date, based on the value of the hypothetical
investment on such date.
Section 13. Participant's Rights Unsecured. The benefits payable
under this Plan shall be unfunded. Consequently, no assets shall be
segregated for purposes of this Plan and placed beyond the reach of the
Company's general creditors. The right of any participant to receive future
installments under the provisions of the Plan shall be an unsecured claim
against the general assets of the Company.
Section 14. Statement of Account. Statements will be sent to each
participant during February and August and more frequently if the
Administrator so determines as to the value of their deferred compensation
accounts as of the end of December and June, respectively.
Section 15. Assignability. No right to receive payments hereunder
shall be transferable or assignable by a participant, except by will or by the
laws of descent and distribution.
In the event of a participant's death without having an election under
Section 8 (B) in effect regarding payment of his account after death, the
value of the participant's deferred compensation account shall be determined
as of the Valuation Date coincident with or immediately following death and
such amount shall be paid in a single payment to the participant's estate (a)
the first January 15 or July 15 following such Valuation Date, or (b) if such
payment cannot be made at the time specified in (a), it shall be made within
30 days after the participant's death. There shall be added to such payment,
interest for the full calendar months elapsed following such Valuation Date to
the payment date at the same annual rate credited to accounts invested in the
Income Fund under the Profit Sharing Plan for the month of such Valuation
Date.
In the event of a participant's death after installment payments have
commenced to be paid, the balance of the deferred compensation account shall
be paid to the participant's estate.
Section 16. Business Days. In the event any date specified herein
falls on a Saturday, Sunday or legal holiday, such date shall be deemed to
refer to the next business day thereafter.
Section 17. Administration. The Plan shall be administered by the
Vice President of the Company having responsibility for human resources (the
"Administrator"). The Administrator shall have the authority to adopt rules
and regulations for carrying out the plan, and interpret, construe and
implement the provisions of the Plan.
Section 18. Amendment. The Plan may at any time or from time to time
be amended, modified or terminated by the Board of Directors or the Executive
Committee of the Board of Directors of the Company. Upon termination the
Administrator in his or her sole discretion may pay out account balances to
participants. No amendment, modification or termination shall, without the
consent of a participant, adversely affect such participant's accruals in
his/her deferred compensation account.
Exhibit 10(o)
STOCK PURCHASE AGREEMENT
dated as of January 17, 1996
among
XEROX CORPORATION
XEROX FINANCIAL SERVICES, INC.
and
NEW TALEGEN HOLDINGS CORPORATION
and
TALEGEN ACQUISITION CORPORATION
TABLE OF CONTENTS
Page
ARTICLE I
DEFINITIONS
1.1 Defined Terms 1
1.2 Other Defined Terms 10
1.3 Other Definitional Provisions 10
ARTICLE II
PURCHASE AND SALE OF STOCK AND PREFERRED SECURITIES
2.1 Transfer of Stock 11
2.2 Consideration for Stock 11
2.3 Transfer of Debentures 11
2.4 Consideration for Debentures 11
2.5 Transfer of Preferred Securities. 11
2.6 Consideration for Preferred Securities 11
2.7 Adjustments 12
ARTICLE III
CLOSING
3.1 Closing 12
3.2 Documents to be Delivered 13
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PARENT AND SELLER
4.1 Organization of Seller and Parent 14
4.2 Organization of the Company 14
4.3 Capital Stock 14
4.4 Authorization 15
4.5 Subsidiaries 15
4.6 Ridge Re 17
4.7 Absence of Certain Changes or Events 18
4.8 Title to Assets, Etc. 21
4.9 Contracts and Commitments 22
4.10 No Conflict or Violation 23
4.11 Consents and Approvals 24
4.12 Financial Statements 25
4.13 Litigation 26
4.14 Liabilities 26
4.15 Investments 27
4.16 Reserves 28
4.17 Compliance with Law; Permits; Regulatory Matters 28
4.18 No Brokers 29
4.19 No Other Agreements to Sell the Assets or the Company 29
4.20 Proprietary Rights 30
4.21 Employee Benefit Plans 30
4.22 Employment-Related Matters 34
4.23 Transactions with Certain Persons 34
4.24 Taxes 34
4.25 Reinsurance and Retrocessions 36
4.26 1992/93 Restructuring 36
4.27 Capital Commitments 36
4.28 Environmental Laws 36
4.29 Acquisition for Investment 37
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF BUYER AND HOLDINGS
5.1 Organization of Buyer and Holdings 37
5.2 Authorization 37
5.3 No Conflict or Violation 38
5.4 No Brokers 39
5.5 Acquisition for Investment 39
5.6 Organizational Documents 39
5.7 Capitalization of Buyer 39
5.8 Consents and Approvals 40
5.9 Financial Obligations 40
5.10 Solvency 40
5.11 Trust 40
ARTICLE VI
ACTIONS BY PARENT, SELLER, HOLDINGS AND BUYER
PRIOR TO THE CLOSING
6.1 Maintenance of Business and Preservation of Permits
and Services 42
6.2 Additional Financial Statements 42
6.3 Certain Prohibited Transactions 43
6.4 Investigation by Buyer 43
6.5 Consents 44
6.6 Notification of Certain Matters 45
6.7 No Solicitations 45
6.8 Cooperation; Accounting and Other Matters 46
6.9 Investment Portfolio 46
6.10 Reinsurance Agreements 47
6.11 Dividends 47
6.12 Seller Notes 48
6.13 Leesburg Training Facility 48
6.14 Reserves and Book-Up 49
6.15 Rating Agency Presentations 49
6.16 Certain Admitted Assets 49
6.17 Intercompany Accounts 49
6.18 Certain Required Transfer 50
6.19 Financing 50
6.20 Dividends Received by TRG 50
6.21 Capital Contribution by Seller 51
6.22 TOPrS 51
6.23 Subsidiary Credit Agreements 51
ARTICLE VII
CONDITIONS TO OBLIGATIONS OF PARENT AND SELLER
7.1 Representations, Warranties and Covenants 51
7.2 HSR Act 52
7.3 No Governmental or Other Proceeding; Illegality 52
7.4 Consents 52
7.5 Opinion of Counsel 52
7.6 Certificates 52
7.7 Corporate Documents 52
7.8 TRG Closing 53
7.9 Registration Rights Agreement 53
7.10 Solvency Matters 53
7.11 Capitalization 53
7.12 Company Certificates 53
7.13 Subsidiary Releases 53
ARTICLE VIII
CONDITIONS TO OBLIGATIONS OF HOLDINGS AND BUYER
8.1 Representations, Warranties and Covenants 53
8.2 Consents 54
8.3 HSR Act 55
8.4 No Governmental or Other Proceeding; Illegality 55
8.5 Opinion of Counsel 55
8.6 Certificates 55
8.7 Corporate Documents 56
8.8 TRG Closing 56
8.9 Financing 56
8.10 No Material Adverse Effect. 56
8.11 No Change in Rating 56
8.12 Resignation of Officers and Directors 56
8.13 Transfer Taxes 56
8.14 Seller Notes 56
8.15 Leesburg Training Facility Amount 56
8.16 Reserves and Book-Up 57
8.17 Ridge Re Endorsements. 57
8.18 Guarantees 57
ARTICLE IX
ACTIONS BY PARENT, SELLER, AND BUYER AFTER THE CLOSING
9.1 Books and Records 57
9.2 First Quadrant Final Sale, Viking Sale and
Constitution Re Sale 57
9.3 Covenants Regarding the Securities 58
9.4 Crostex/Camfex Purchase Money Notes 58
9.5 Certain Employee Benefit Matters 58
9.6 Transfer Taxes 59
9.7 Dividends Received by TRG 59
9.8 Ridge Re 59
9.9 Further Assurances 59
ARTICLE X
INDEMNIFICATION
10.1 Survival of Representations and Warranties 59
10.2 Indemnification 60
10.3 Indemnification Procedures 63
10.4 Insurance Proceeds and Tax Limitations 64
10.5 Tax Indemnification 65
ARTICLE XI
MISCELLANEOUS
11.1 Termination 65
11.2 Confidentiality 67
11.3 Parent Option 67
11.4 Assignment 68
11.5 Notices 68
11.6 Choice of Law 69
11.7 Entire Agreement; Amendments and Waivers 69
11.8 Counterparts 70
11.9 Invalidity 70
11.10 Headings 70
11.11 Expenses 70
11.12 [Intentionally Omitted] 70
11.13 Joint and Several 70
11.14 No Third Party Beneficiaries. 70
Exhibits
Exhibit A Form of Indenture
Exhibit B Investment Policy
Exhibit C Form of TOPrS Side Letter
Exhibit D Form of Trust Agreement
Exhibit E-1 Form of Opinion of Simpson Thacher & Bartlett
Exhibit E-2 Form of Opinion of King & Spalding
Exhibit E-3 Form of Opinion of Richards, Layton & Finger
Exhibit F Form of Registration Rights Agreement
Exhibit G Form of Company Certificates
Exhibit H Form of Insurance Subsidiary Releases
Exhibit I-1 Form of Opinion of Skadden, Arps, Slate, Meagher & Flom
Exhibit I-2 Form of Opinion of Richard S. Paul
Exhibit I-3 Form of Opinion of Richard N. Frasch
Exhibit I-4 Form of Opinion of Cox & Wilkinson
Exhibit I-5 Form of Opinion of LeBoeuf, Lamb, Greene & MacRae
Exhibit I-6 Form of Opinion of Indiana counsel
Exhibit I-7 Form of Opinion of New Jersey counsel
Exhibit J Form of Ridge Re Endorsements
Exhibit K Form of Parent Guarantees
Exhibit L Form of Parent and Seller Guarantees
Exhibit M Term Sheet for Holdings Common Stock
STOCK PURCHASE AGREEMENT
STOCK PURCHASE AGREEMENT dated as of January 17, 1996 among Xerox Corporation,
a New York corporation ("Parent"), Xerox Financial Services, Inc., a Delaware
corporation and a wholly-owned subsidiary of Parent ("Seller"), New Talegen
Holdings Corporation, a Delaware corporation ("Holdings"), and Talegen
Acquisition Corporation, a Delaware corporation and a wholly-owned subsidiary
of Holdings ("Buyer").
RECITALS
Seller is the beneficial and record owner of 1,000 shares of common stock, par
value $1.00 per share, of Talegen Holdings, Inc., a Delaware corporation (the
"Company"), constituting all of the issued and outstanding capital stock (the
"Stock") of the Company.
Buyer desires to purchase from Seller, and Seller desires to sell to Buyer,
all of the Stock subject to the terms and conditions of this Agreement.
Parent is the sole stockholder of Seller and desires that Seller sell to Buyer
all of the Stock, subject to the terms and conditions of this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein and for other good and valuable consideration the receipt and
adequacy of which are hereby acknowledged, the parties hereto agree as
follows:follows:
ARTICLE I
DEFINITIONS
1.1 Defined Terms. As used herein, the terms below shall have the following
meanings:
"Affiliate" shall mean a Person that directly or indirectly through one or
more intermediaries controls, is controlled by or is under common control with
the Person specified. For purposes of this definition and the definition of
"Subsidiary" set forth below, the term "control" (including the terms
"controlling," "controlled by" and "under common control with") of a Person
means the possession, direct or indirect, of the power to (i) vote 50% or more
of the voting securities of such Person or (ii) direct or cause the direction
of the management and policies of such Person, whether by contract or
otherwise.
"Agreement" shall mean this Stock Purchase Agreement (together with all
schedules and exhibits referenced herein), as amended, modified or
supplemented from time to time.
"Ancillary Agreements" shall mean, collectively, the Ridge Re Endorsements,
the Guarantees, the Tax Agreement and the TOPrS Side Letter.
"Apprise" shall mean Apprise Corp., a New Jersey corporation and a direct
wholly-owned subsidiary of the Company.
"Balance Sheet Date" shall mean June 30, 1995.
"Cash Equivalents" shall mean (a) securities with maturities of one year or
less from the date of acquisition issued or fully guaranteed or insured by the
United States Government or any agency thereof, (b) certificates of deposit
and eurodollar time deposits with maturities of one year or less from the date
of acquisition and overnight bank deposits of any commercial bank having
capital and surplus in excess of $500,000,000, (c) repurchase obligations of
any commercial bank satisfying the requirements of clause (b) of this
definition, having a term of not more than 30 days with respect to securities
issued or fully guaranteed or insured by the United States government, (d)
commercial paper of a domestic issuer rated at least A-2 by S&P or P-2 by
Moody's, (e) securities with maturities of one year or less from the date of
acquisition issued or fully guaranteed by any state, commonwealth or territory
of the United States, by any political subdivision or taxing authority of any
such state, commonwealth or territory or by any foreign government, the
securities of which state, commonwealth, territory, political subdivision,
taxing authority or foreign government (as the case may be) are rated at least
A by S&P or A by Moody's, (f) securities with maturities of one year or less
from the date of acquisition backed by standby letters of credit issued by any
commercial bank satisfying the requirements of clause (b) of this definition
or (g) shares of money market mutual or similar funds which invest exclusively
in assets satisfying the requirements of clauses (a) through (f) of this
definition.
"CFI" shall mean Crum & Forster Holdings, Inc., a Delaware corporation and a
direct wholly-owned subsidiary of the Company.
"CGI" shall mean Coregis Group, Inc., a Delaware corporation and a direct
wholly-owned subsidiary of the Company.
"Closing Date" shall mean the date on which the Closing occurs.
"Code" shall have the meaning ascribed in the Tax Agreement.
"Company GAAP Financial Statements" shall mean the audited Consolidated
Balance Sheets of the Company (or its predecessors) as of December 31, 1994
and 1993 and the Consolidated Statements of Operations, Consolidated
Statements of Shareholder's Equity and Consolidated Statements of Cash Flows
of the Company (or its predecessors) for each of the three fiscal years
included in the three-year period ended December 31, 1994, prepared in
accordance with GAAP, together with the notes thereon and the related reports
of KPMG Peat Marwick LLP.
"Company Interim Financial Statements" shall mean the unaudited Consolidated
Balance Sheets and the unaudited Consolidated Statements of Operations,
Consolidated Statements of Shareholder's Equity and Consolidated Statements of
Cash Flows of the Company for the nine-month periods ended September 30, 1994
and 1995, together with the notes thereon.
"Constitution Re" shall mean Constitution Re Corporation, a Delaware
corporation.
"Constitution Re Sale" shall mean the sale of the capital stock of
Constitution Re pursuant to the Stock Purchase Agreement dated December 16,
1994 between the Company and EXOR America Inc., as amended by an amendment
dated December 22, 1994.
"Contracts" shall mean all agreements, contracts, commitments and
undertakings (other than contracts of insurance or reinsurance or retrocession
agreements) to which the Company or any of the Subsidiaries is a party, an
obligor or a beneficiary and (i) the performance or non-performance of which
is individually or, with respect to any related series of agreements, in the
aggregate, material to the Company and the Subsidiaries, taken as a whole, or
(ii) which provide for an aggregate purchase price or payments of more than
$1,000,000 under any agreement during any two-year period (or $1,000,000 in
the aggregate, during any two-year period, in the case of any related series
of agreements).
"Convention Statements" shall mean (i) the annual convention statements and
the quarterly statement of each Insurance Subsidiary as filed with the
insurance regulatory authorities in its jurisdiction of domicile for the years
ended December 31, 1992, 1993 and 1994 and for the quarterly period ended
September 30, 1995, and (ii) the annual convention statements of Ridge Re as
filed with the insurance regulatory authorities in Bermuda for the period from
December 14, 1992 to December 31, 1993 and for the year ended December 31,
1994.
"Credit Corp." shall mean Xerox Credit Corporation, a Delaware corporation
and a wholly-owned subsidiary of Seller.
"Crostex/Camfex Contracts" shall mean all contracts, agreements or
arrangements of the Company or any Subsidiary relating to the real property
and improvements located at (i) 255 California Street, San Francisco,
California, (ii) 5724 W. Los Positos Blvd., Pleasonton, California, (iii) 299
Madison Avenue, Morris Township, New Jersey, (iv) 305 Madison Avenue, Morris
Township, New Jersey and (v) 4040 North Central Expressway, Dallas, Texas,
including, without limitation, any notes held by the Company or any Subsidiary
(the "Crostex/Camfex Purchase Money Notes").
"Debentures" shall mean the debentures to be issued pursuant to the
Indenture.
"Encumbrances" shall mean any claim, lien (statutory or other), pledge,
option, charge, easement, security interest, right-of-way, encroachment,
encumbrance, mortgage, or other rights of third parties.
"Environmental Laws" shall mean any and all applicable Federal, state or
local laws or regulations relating to the protection of the environment or of
human health as it may be affected by the environment.
"Environmental Permit" shall mean any license, permit, order, consent,
approval, registration, authorization, qualification or filing required under
any Environmental Law.
"Environmental Report" shall mean any report, study, assessment, audit, or
other similar document that addresses any issue of actual or potential
noncompliance with, or actual or potential liability under, any Environmental
Law that may in any way affect the Company or any Subsidiary other than to the
extent such document addresses any issue of actual or potential noncompliance
with, or actual or potential liability under, any Environmental Law by reason
of any policy of insurance, reinsurance, indemnity, guaranty or assumption of
liability of any party entered into by the Company or any Insurance
Subsidiary.
"Envision" shall mean Envision Claims Management Corporation, a New Jersey
corporation and a direct wholly-owned subsidiary of TRG.
"Excluded Activities" shall mean, with respect to the Company and the
Subsidiaries, activities relating to insurance reserves, claims under, related
to or in respect of insurance policies or any disputes related thereto, loss
adjustments and loss adjustment expenses and reinsurance receivables,
provided, however, that "Excluded Activities" shall not be deemed to include
any (i) of the matters covered by the representations contained in Section
4.6, 4.9(c), 4.12 (to the extent it applies to Ridge Re) or 4.26 or other
representations regarding Ridge Re or the Ridge Re Treaties or Ridge Re
Endorsements or (ii) actions, suits, proceedings or claims pending by any
governmental or regulatory authority to the extent based upon a violation of
any law, statute, ordinance, rule or regulation.
"Filoli" shall mean Filoli Information Systems Company, a Delaware
corporation.
"First Quadrant" shall mean First Quadrant Corp., a New Jersey corporation.
"First Quadrant Asset Sale" shall mean the sale of certain assets of First
Quadrant pursuant to an Asset Purchase Agreement dated as of August 11, 1995
between First Quadrant and American Re Asset Management, Inc.
"First Quadrant Final Sale" shall mean the sale of the capital stock of
First Quadrant by the Company.
"GAAP" shall mean generally accepted accounting principles in the United
States of America in effect from time to time.
"GAAP Subsidiaries" shall mean Apprise, CFI, CGI, Envision, II and WSG.
"Guarantees" shall mean the guarantees referred to in Section 8.18.
"Holdings Common Stock" shall mean common stock, par value $.01 per share,
of Holdings.
"HSR Act" shall mean the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended.
"II" shall mean Industrial Indemnity Holdings, Inc., a Delaware corporation
and a direct wholly-owned subsidiary of the Company.
"IIC" shall mean Industrial Indemnity Company, a California corporation and
direct wholly-owned subsidiary of II.
"Indenture" shall mean the Indenture to be dated as of the Closing Date
between Holdings and the trustee named therein, (i) with the terms of the
Debentures, the covenants and events of default set forth in Exhibit A and
(ii) otherwise substantially in the form of Exhibit A, except, in the case of
clause (ii), for such changes required by the trustee thereunder which do not
have an adverse effect on the holders of the Debentures or the Preferred
Securities.
"Information Returns" shall have the meaning ascribed in the Tax Agreement.
"Insurance Subsidiaries" shall mean the Subsidiaries listed on Schedule
1.1A.
"Investment Policy" shall mean, with respect to certain Subsidiaries, the
policy for each such Subsidiary set forth on Exhibit B.
"KKR" shall mean Kohlberg Kravis Roberts & Co.
"Knowledge of Seller" shall mean (i) with respect to matters relating to
Parent or Seller, actual knowledge of any officer of Parent, Seller or Ridge
Re set forth in Schedule 1.1B, and (ii) with respect to any matters relating
to the Company or any Subsidiary, actual knowledge of any such officer of
Parent or Seller, or the actual knowledge of the persons set forth in Schedule
1.1C.
"Material Adverse Effect" with respect to any Person shall mean a material
adverse effect on the business, financial condition, assets or operations of
such Person, but shall exclude any effect resulting from general economic
conditions.
"Materials of Environmental Concern" shall mean any waste, pollutant, or
contaminant or substance (including, without limitation, petroleum or
petroleum products, asbestos or asbestos-containing materials, urea-
formaldehyde insulation, polychlorinated biphenyls, odors, radioactivity, and
electro-magnetic fields) regulated by or under, or which may otherwise give
rise to liability under, any Environmental Law.
"Moody's" shall mean Moody's Investors Service, Inc.
"1992/93 Restructuring" shall mean the restructuring of the Company and its
subsidiaries pursuant to the Restructuring Agreement dated as of September 3,
1993 among Seller, Ridge Re, the Company and certain of the Subsidiaries.
"Permits" shall mean all licenses, permits, orders, consents, approvals,
registrations, authorizations, qualifications and filings with and under all
Federal, state, local or foreign laws and governmental or regulatory bodies
and all industry or other non-governmental self-regulatory organizations
(including, without limitation, Environmental Permits).
"Person" shall mean an individual, a partnership, a joint venture, a
corporation, a business trust, a limited liability company, a trust, an
unincorporated organization, a government or any department or agency thereof
or any other entity.
"Preferred Securities" shall mean the Trust Originated Preferred Securities
to be issued pursuant to the Trust Agreement.
"Qualified Transferee" shall mean a corporation (or the wholly-owned direct
or indirect subsidiary thereof) which, as of the date of the consummation of a
sale pursuant to Section 9.8, is an insurance company engaged in the business
of reinsurance and has at least $2 billion in assets and a rating of "A+" or
better by A.M. Best.
"Ridge Re" shall mean Ridge Reinsurance Limited, a Bermuda corporation and a
wholly-owned subsidiary of Seller.
"Ridge Re Endorsements" shall mean the endorsements to the Ridge Re Treaties
referred to in Section 8.17.
"Ridge Re GAAP Financial Statements" shall mean the audited Consolidated
Balance Sheets of Ridge Re as of December 31, 1994 and 1993 and the related
Statements of Operations and Retained Earnings and Cash Flows for the year
ended December 31, 1994 and the period from December 14, 1992 to December 31,
1993, prepared in accordance with GAAP, together with the notes thereon and
the related reports of KPMG Peat Marwick LLP.
"Ridge Re Interim Financial Statements" shall mean the unaudited
Consolidated Balance Sheet of Ridge Re as of September 30, 1995, and the
related Statements of Operations and Retained Earnings for the nine-month
periods ended September 30, 1994 and September 30, 1995.
"Ridge Re Treaties" shall mean the agreements, as amended by the applicable
Endorsement No. 1 thereto, contained in Schedule 1.1D.
"S&P" shall mean Standard and Poor's Rating Group.
"Securities" shall mean (a) the Preferred Securities and (b) any shares of
Holdings Common Stock purchased by Seller in accordance with Section 11.3.
"Statutory Accounting Principles" shall mean, as applied to any Subsidiary,
the statutory accounting practices prescribed or permitted by the jurisdiction
of domicile of such Subsidiary.
"Subsidiaries" shall mean all corporations, partnerships, joint ventures or
other entities which the Company controls, directly or indirectly through one
or more intermediaries. See definition of "Affiliate" in this Section 1.1 for
the meaning of "control."
"Subsidiary GAAP Financial Statements" shall mean the audited Consolidated
Balance Sheets of each of the GAAP Subsidiaries as of December 31, 1994 and
December 31, 1993 and the Consolidated Statements of Operations, Consolidated
Statements of Shareholder's Equity and Consolidated Statements of Cash Flows
of each such Subsidiary for each of the three fiscal years included in the
three-year period ended December 31, 1994 (except 1992 financial statements
for Apprise and Envision), prepared in accordance with GAAP together with the
notes thereon and the related reports of KPMG Peat Marwick LLP.
"Subsidiary Interim Financial Statements" shall mean the unaudited
Consolidated Balance Sheets of each of the GAAP Subsidiaries as of September
30, 1995, and the unaudited Consolidated Statements of Shareholder's Equity
and Consolidated Statements of Cash Flows of each such Subsidiary for the
nine-month periods ended September 30, 1994 and 1995, together with the notes
thereon.
"Tax Agreement" shall mean the Tax Allocation and Indemnification Agreement
dated as of the date hereof among Parent, Seller, the Company, Holdings and
Buyer.
"Tax Returns" shall have the meaning ascribed in the Tax Agreement.
"Taxes" shall have the meaning ascribed in the Tax Agreement.
"Third Party Amount" shall mean any amount paid by the transferee (which may
be Seller or any of its Affiliates (other than the Company or any Subsidiary))
to the Company or the Subsidiaries of all or a portion of the Seller Notes or
Leesburg Training Facility, as the case may be, pursuant to Sections 6.12 or
6.13.
"Third Party Expenses" shall mean all expenses paid or payable by Buyer or
Holdings to other Persons in connection with the transactions contemplated by
this Agreement, the Ancillary Agreements and the Financing Documents other
than expenses contingent upon a payment to Buyer or Holdings or which are not
payable unless there has been a breach of this Agreement by Parent, Seller,
the Company or any Subsidiary, but shall in no event include any amount
payable to KKR or its Affiliates (other than to Am-Re Consultants, Inc. in
connection with reserve analyses) or any officer, director or employee of the
Company or the Subsidiaries.
"TOPrS Side Letter" shall mean the letter among an investment partnership
affiliated with Holdings, Holdings and Seller to be dated the Closing Date,
substantially in the form of Exhibit C.
"TRG" shall mean The Resolution Group, Inc., a Delaware corporation and a
direct wholly-owned subsidiary of Seller.
"TRG Acquisition" shall mean TRG Acquisition Corporation, a Delaware
corporation.
"TRG Agreement" shall mean the Stock Purchase Agreement dated as of the date
hereof among Parent, Seller and TRG Acquisition, as amended, modified or
supplemented from time to time, which contemplates that TRG Acquisition will
purchase all of the outstanding capital stock of TRG from Seller, subject to
the terms and conditions thereof.
"TRG Dividend Replacement Amount" shall mean an amount equal to (i)
$15,000,000 plus (ii) $7,500,000 for each calendar quarter from July 1, 1996
to the Closing Date, provided that if the Closing Date is in the middle of a
calendar quarter the amount for such calendar quarter shall be pro rated from
the first day of such calendar quarter to the Closing Date based on actual
number of days elapsed.
"Trust" shall mean the Delaware business trust referred to in the Trust
Agreement.
"Trust Agreement" shall mean the Amended and Restated Trust Agreement to be
dated the Closing Date between Holdings and the trustees named therein (the
"Trustees"), (i) with the terms of Preferred Securities set forth in Exhibit D
and (ii) otherwise substantially in the form of Exhibit D, except, in the case
of clause (ii), for such changes required by the Property Trustee (as defined
in the Trust Agreement) which do not have an adverse effect on the holders of
the Debentures or the Preferred Securities.
"Underwriter Letter" shall mean that certain letter dated January 17, 1996
between a nationally recognized underwriter and Buyer stating that such
underwriter is highly confident that Buyer will be able to obtain funds
referenced therein, before underwriting discounts and commissions, from the
sale of subordinated debt of Buyer.
"Underwritten Notes" shall mean the subordinated debt securities of Buyer
issued by Buyer in an offering underwritten by a nationally recognized
underwriter pursuant to the Underwriter Letter.
"Viking" shall mean Viking Insurance Holdings, Inc., a Delaware
corporation.
"Viking Sale" shall mean the sale of the capital stock of Viking pursuant to
a Stock Purchase Agreement dated as of April 26, 1995 between the Company and
Guaranty National Corporation.
"WSG" shall mean Westchester Specialty Group, Inc., a Delaware corporation
and a direct wholly-owned subsidiary of the Company.
1.2 Other Defined Terms. The following terms shall have the meanings defined
for such terms in the Sections set forth below:
Term Section
"AARG" 4.7
"Actions" 4.13
"A.M. Best" 6.15
"Assets" 4.8
"Closing" 3.1
"Common Securities" 2.4
"Company Plans" 4.21
"Confidentiality Agreement" 6.4
"Crostex/Camfex Purchase Money Notes" 1.1
"Damages" 10.2
"ERISA" 4.21
"ESOP" 9.5
"Excluded Business" 10.2
"Exchange Act" 4.11
"Financing" 5.3
"Financing Documents" 5.3
"Indemnitee" 10.3
"Indemnitor" 10.3
"Indenture" 6.19
"Intellectual Property" 4.20
"Leesburg Training Facility Amount" 6.13
"Leesburg Training Facility" 6.13
"Liabilities" 4.14
"Long Term Incentive Program" 4.7
"Notice" 10.3
"Personnel" 4.13
"Section 4.5 Subsidiaries" 4.5
"Securities Act" 4.3
"Seller Notes" 4.23
"Subsidiary Credit Agreements" 4.14
"TRG Contributed Dividends" 6.20
"Trustees" 1.1
1.3 Other Definitional Provisions. (a) The words "hereof", "herein" and
"hereunder" and words of similar import when used in this Agreement shall
refer to this Agreement as a whole and not to any particular provision of this
Agreement, and Section, Schedule and Exhibit references are to this Agreement
unless otherwise specified.
(b) The meanings given to terms defined herein shall be equally applicable to
both the singular and plural forms of such terms.
ARTICLE II
PURCHASE AND SALE OF STOCK AND PREFERRED SECURITIES
2.1 Transfer of Stock. Upon the terms and subject to the conditions
contained herein, Seller will sell, convey, transfer, assign and deliver to
Buyer, and Buyer will acquire from Seller on the Closing Date, all of the
Stock for the consideration set forth in Section 2.2.
2.2 Consideration for Stock. Upon the terms and subject to the conditions
contained herein, as consideration for the purchase of the Stock, on the
Closing Date Buyer will pay to Seller cash in an amount equal to
$1,750,000,000, payable by wire transfer in immediately available funds to an
account which Seller will designate in writing to Buyer no less than two
business days prior to the Closing Date, subject to adjustment as described in
Section 2.7(a).
2.3 Transfer of Debentures. Simultaneously with Buyer making the payment
provided for in Section 2.2, (i) Holdings will issue Debentures to Trust in
the aggregate principal amount of $450,000,000, subject to adjustment as
described in Sections 2.7(a) and 2.7(b), and (ii) Holdings will issue
additional Debentures to Trust in an aggregate principal amount equal to the
aggregate liquidation amount of the common securities referred to in clause
(ii) of Section 2.4.
2.4 Consideration for Debentures. As consideration for the purchase of the
Debentures, on the Closing Date, Holdings and Buyer will cause Trust (i) to
pay to Holdings cash in an amount equal to $450,000,000, payable by intrabank
transfer (at a bank to be mutually agreed) in immediately available funds to
an account which Holdings will designate in writing to Trust no less than two
business days prior to the Closing Date, subject to adjustment as described in
Sections 2.7(a) and 2.7(b), and (ii) to issue and deliver to Holdings common
securities of Trust ("Common Securities") with a liquidation amount of 3% of
the aggregate liquidation amount of securities of Trust which will be
outstanding at Closing (after giving effect to the issuance of Preferred
Securities provided for in Section 2.5).
2.5 Transfer of Preferred Securities. Simultaneously with the payments
provided for in Sections 2.2 and 2.4, Holdings and Buyer will cause Trust to
issue and deliver to Seller, and Seller will acquire from Trust, Preferred
Securities with an aggregate liquidation amount of $450,000,000, subject to
adjustment as described in Sections 2.7(a) and 2.7(b).
2.6 Consideration for Preferred Securities. As consideration for the
purchase of the Preferred Securities, on the Closing Date Seller will pay to
Trust cash in an amount equal to $450,000,000, payable by intrabank transfer
(at a bank to be mutually agreed) in immediately available funds to an account
which Buyer will designate in writing to Seller no less than two business days
prior to the Closing Date, subject to adjustment as described in Sections
2.7(a) and 2.7(b).
2.7 Adjustments. (a) If the Closing shall not have occurred on or prior to
July 1, 1996, the amount of cash payable by Buyer to Seller pursuant to
Section 2.2, the principal amount of Debentures to be issued by Holdings
pursuant to Section 2.3, the amount of cash payable by Trust pursuant to
Section 2.4, the aggregate liquidation amount of Preferred Securities to be
issued by the Trust pursuant to Section 2.5 and the amount of cash payable by
Seller pursuant to Section 2.6 shall each be increased by $10,000,000 for each
full calendar month until the Closing Date, and with respect to any partial
calendar month commencing with July 1, 1996 until the Closing Date, by an
amount equal to the product obtained by multiplying $10,000,000 by a fraction
the numerator of which is equal to the number of days in such partial month
which have elapsed prior to the Closing Date and the denominator of which is
equal to the number of calendar days in such month.
(b) To the extent that IIC shall not have paid an extraordinary dividend to
II after the date hereof but prior to the Closing Date, the principal amount
of Debentures to be issued by Holdings pursuant to Section 2.3, the amount of
cash payable by Trust pursuant to Section 2.4, the aggregate liquidation
amount of Preferred Securities to be issued by Trust pursuant to Section 2.5
and the amount of cash payable by Seller pursuant to Section 2.6 shall each be
increased by $50,000,000, and to the extent that IIC shall have paid an
extraordinary cash dividend of less than $50,000,000 to II after the date
hereof but prior to the Closing Date, the principal amount of Debentures to be
issued by Holdings pursuant to Section 2.3, the amount of cash payable by
Trust pursuant to Section 2.4, the aggregate liquidation amount of Preferred
Securities to be issued by Trust pursuant to Section 2.5 and the amount of
cash payable by Seller pursuant to Section 2.6 shall each be increased to the
extent any such dividend is less than $50,000,000.
ARTICLE III
CLOSING
3.1 Closing. The closing of the transactions contemplated herein (the
"Closing") shall take place as soon as practicable but in no event later than
five business days after satisfaction or waiver of the conditions set forth in
Articles VII and VIII, and shall be held at 9:00 a.m. local time on the
Closing Date at the offices of Simpson Thacher & Bartlett, 425 Lexington
Avenue, New York, New York 10017, unless the parties hereto otherwise agree.
The parties agree that the effective time of the Closing for Federal income
tax purposes shall be at the close of business on the Closing Date.
3.2 Documents to be Delivered. To effect the transfers referred to in
Sections 2.1, 2.3 and 2.5 and the delivery of the consideration described in
Sections 2.2, 2.4 and 2.6 hereof, Seller and Buyer shall, and Holdings and
Buyer shall cause Trust to, on the Closing Date, deliver the following:
(a) Seller shall deliver to Buyer certificate(s) evidencing the Stock, free
and clear of any Encumbrances of any nature whatsoever (except Encumbrances
arising as a result of any action taken by Buyer or any of its Affiliates),
duly endorsed in blank for transfer or accompanied by stock powers duly
executed in blank.
(b) Buyer shall deliver to Seller immediately available funds as provided in
Section 2.2.
(c) Holdings shall issue Debentures to Trust as provided in Section 2.3.
(d) Trust shall deliver to Holdings immediately available funds as provided
in clause (i) of Section 2.4.
(e) Trust shall deliver to Holdings certificate(s) evidencing Common
Securities as provided in clause (ii) of Section 2.4.
(f) Trust shall deliver to Seller certificate(s) evidencing the Preferred
Securities as provided in Section 2.5, free and clear of any Encumbrances of
any nature whatsoever (except Encumbrances arising as a result of any action
taken by Seller or any of its Affiliates) in the form of one or more
certificates in the name of Seller.
(g) Seller shall deliver to Trust immediately available funds as provided in
Section 2.6.
(h) Seller and Buyer shall each deliver all documents required to be
delivered pursuant to Articles VII and VIII.
(i) All instruments and documents executed and delivered to Buyer pursuant
hereto shall be in form and substance, and shall be executed in a manner,
reasonably satisfactory to Buyer. All instruments and documents executed and
delivered to Seller pursuant hereto shall be in form and substance, and shall
be executed in a manner, reasonably satisfactory to Seller.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PARENT AND SELLER
Parent and Seller hereby represent and warrant to Buyer and Holdings as
follows:
4.1 Organization of Seller and Parent. Seller is duly organized, validly
existing and in good standing under the laws of the State of Delaware and has
full corporate power and authority to conduct its business as it is presently
being conducted and to own the Stock. Parent is duly organized, validly
existing and in good standing under the laws of the State of New York and has
full corporate power and authority to conduct its business as it is presently
being conducted.
4.2 Organization of the Company. The Company is duly organized, validly
existing and in good standing under the laws of the State of Delaware and has
full corporate power and authority to conduct its business as it is presently
being conducted and to own, lease and operate its properties and assets. The
Company is duly qualified or otherwise authorized as a foreign corporation to
conduct the business conducted by it and is in good standing in each
jurisdiction in which such qualification or authorization is necessary under
the applicable law and where the failure to be so qualified or otherwise
authorized, individually or in the aggregate, would have a Material Adverse
Effect on the Company and the Subsidiaries, taken as a whole. Seller has
provided to Buyer a complete and correct copy of the certificate of
incorporation, bylaws and other organizational documents of the Company and
the minute books of the Company. The Company's minute books include copies of
minutes of all meetings of the directors or shareholders of the Company held
on or after January 1, 1993 and complete and accurate copies of all
resolutions passed by the directors or actions by written consent of the
shareholders on or after January 1, 1993.
4.3 Capital Stock. The Company has authorized 1,000 shares of common stock,
$1.00 par value, 1,000 shares of which are issued and outstanding, and no
shares of any other class or series of capital stock are authorized, issued or
outstanding. All of the shares of the Stock have been duly and validly
authorized and issued, and are fully paid and nonassessable. Seller owns of
record and beneficially all of the Stock free and clear of all Encumbrances,
including without limitation, any agreement, understanding or restriction
affecting the voting rights or other incidents of record or beneficial
ownership pertaining to the Stock; provided that Parent and Seller make no
representation in this sentence regarding the ability of Seller to transfer or
otherwise dispose of such Stock without registration or qualification under,
or in compliance with, applicable Federal or state securities laws to a Person
who is not an "accredited investor" (as defined in Rule 501 of Regulation D
under the Securities Act of 1933, as amended (the "Securities Act")) or
without compliance with applicable insurance laws. There are no
subscriptions, options, warrants, calls, commitments, preemptive rights or
other rights of any kind outstanding for the purchase of, nor any securities
convertible or exchangeable for, any equity interests of the Company. There
are no restrictions upon the voting or transfer of any shares of the Stock
pursuant to the Company's Certificate of Incorporation or Bylaws or any
agreement or other instrument to which the Company or Seller is a party or by
which the Company or Seller is bound. Upon consummation of the transactions
contemplated by this Agreement, Buyer will acquire from Seller good and
marketable title to such Stock, free and clear of all Encumbrances, except
Encumbrances arising as a result of any action taken by Buyer or any of its
Affiliates; provided that Parent and Seller make no representation regarding
the ability of any Person other than Seller to transfer or otherwise dispose
of such Stock without registration or qualification under, or in compliance
with, applicable Federal securities or state securities or insurance laws.
4.4 Authorization. Each of Parent and Seller has all necessary corporate
power and authority to enter into this Agreement and the Ancillary Agreements
to which it is or will be a party, and has taken all corporate action
necessary to consummate the transactions contemplated hereby and thereby and
to perform its obligations hereunder and thereunder. This Agreement and the
Tax Agreement have each been duly executed and delivered by each of Seller and
Parent. Assuming the due execution of this Agreement and the Tax Agreement by
Holdings and Buyer, each of this Agreement and the Tax Agreement is a legal,
valid and binding obligation of each of Seller and Parent enforceable in
accordance with its terms, subject to the effects of bankruptcy, insolvency,
fraudulent conveyance, reorganization, moratorium and other similar laws
relating to or affecting creditors' rights generally, general equitable
principles (whether considered in a proceeding in equity or at law) and an
implied covenant of good faith and fair dealing. Subject to the occurrence of
the Closing, the Guarantees and the TOPrS Side Letter will be duly executed
and delivered by Parent and Seller, as applicable, on the Closing Date. Upon
execution and delivery by Parent or Seller, as the case may be, each Guarantee
and the TOPrS Side Letter will be a legal, valid and binding obligation of
such Person enforceable in accordance with its terms, subject to the effects
of bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium
and other similar laws relating to or affecting creditors' rights generally,
general equitable principles (whether considered in a proceeding in equity or
at law) and an implied covenant of good faith and fair dealing, assuming, in
the case of the TOPrS Side Letter, the due execution of such letter by
Holdings and the partnership party thereto.
4.5 Subsidiaries. Schedule 4.5 sets forth a complete and accurate list of
all of the Subsidiaries, other than Subsidiaries which are not Insurance
Subsidiaries and which do not hold any assets (including capital stock) with a
fair market value in excess of $1,000 or insurance licenses (the "Section 4.5
Subsidiaries"). Schedule 4.5 also contains the jurisdiction of incorporation
or formation of each of the Section 4.5 Subsidiaries, each jurisdiction in
which such Subsidiary is licensed, qualified or otherwise authorized to
conduct insurance business, the number of shares of capital stock of any
Section 4.5 Subsidiary which is a corporation issued and outstanding and the
percentage ownership interest of the Company in each such Subsidiary. All
outstanding shares of capital stock of such Subsidiaries have been duly and
validly authorized and are fully paid and nonassessable. Except as set forth
on Schedule 4.5, all such outstanding shares are owned by the Company and/or
one or more of its Subsidiaries free and clear of any Encumbrances, including,
without limitation, any agreement, understanding or restriction affecting the
voting rights or other incidents of record or beneficial ownership pertaining
to such shares; provided that Parent and Seller make no representation in this
sentence regarding the ability of Seller to transfer or otherwise dispose of
such shares without registration or qualification under, or in compliance
with, applicable Federal securities or state securities laws to a Person who
is not an "accredited investor" (as defined in Rule 501 under the Securities
Act) or without compliance with applicable insurance laws. Except as set
forth on Schedule 4.5, there are no subscriptions, options, warrants, calls,
commitments, preemptive rights or other rights of any kind outstanding for the
purchase of, nor any securities convertible or exchangeable for, any equity
interests of any of the Section 4.5 Subsidiaries. Schedule 4.5 contains true
and complete copies of all agreements and other instruments pursuant to which
the Company or any Section 4.5 Subsidiary is obligated or required, under any
circumstance, to make contributions to the capital of any Subsidiary. Each of
the Insurance Subsidiaries is a corporation duly licensed, organized, validly
existing and in good standing under the jurisdiction of its organization and
each of the other Subsidiaries is a corporation duly organized, validly
existing and in good standing under the jurisdiction of its organization, in
each case, with corporate power to own its properties and conduct its business
as now being conducted and is duly licensed (in the case of the Insurance
Subsidiaries), qualified and in good standing to transact business in each
jurisdiction (as listed in Schedule 4.5) where, by virtue of its business
carried on or properties owned, it is required to be so licensed (in the case
of the Insurance Subsidiaries) or qualified and where the failure to be so
licensed (in the case of the Insurance Subsidiaries) or qualified,
individually or in the aggregate, would have a Material Adverse Effect on the
Company and the Subsidiaries, taken as a whole. To the extent requested of
Seller by Buyer, Seller has made available to Buyer a complete and correct
copy of the certificates of incorporation, bylaws and other organizational
documents of each Section 4.5 Subsidiary and the minute books of each such
Subsidiary. The minute books include copies of minutes of all meetings of the
directors or shareholders of each such Subsidiary held on or after January 1,
1993 and complete and accurate copies of all resolutions passed by the
directors or actions by written consent of the shareholders on or after
January 1, 1993.
4.6 Ridge Re. (a) Ridge Re is duly organized, validly existing and in good
standing under the laws of Bermuda and has full corporate power and authority
to conduct its business as it is presently being conducted and to own, lease
and operate its properties and assets. Ridge Re is duly licensed, qualified
or otherwise authorized as an alien corporation to conduct the reinsurance
business conducted by it and is in good standing in each jurisdiction in which
such license, qualification or authorization is necessary under the applicable
law and where the failure to be so licensed, qualified or otherwise
authorized, individually or in the aggregate, would have a Material Adverse
Effect on the Company and the Subsidiaries, taken as a whole.
(b) Seller owns of record and beneficially all of the outstanding capital
stock of Ridge Re free and clear of all Encumbrances, including without
limitation, any agreement, understanding or restriction affecting the voting
rights or other incidents of record or beneficial ownership pertaining to such
shares; provided that Parent and Seller make no representation in this
sentence regarding the ability of Seller to transfer or otherwise dispose of
such shares without registration or qualification under, or in compliance
with, applicable Federal or state securities laws to a Person who is not an
"accredited investor" (as defined in Rule 501 of Regulation D under the
Securities Act) or without compliance with applicable insurance laws. There
are no subscriptions, options, warrants, calls, commitments, preemptive rights
or other rights of any kind outstanding to which Parent, Seller, Ridge Re or
any of their respective Affiliates is a party for the purchase of, nor any
securities convertible or exchangeable for, any equity interests of Ridge Re,
except as set forth in Schedule 4.6. Schedule 4.6 contains a true and
complete list of all agreements and other instruments pursuant to which
Parent, Seller or any Affiliate is obligated or required, under any
circumstance, to make contributions to the capital of Ridge Re.
(c) Each of Ridge Re and each Insurance Subsidiary has all necessary
corporate authority to enter into the Ridge Re Endorsements to which it will
be a party and has taken all necessary corporate authority to consummate the
transactions contemplated thereby and to perform its obligations thereunder.
Subject to the occurrence of the Closing, each of the Ridge Re Endorsements
will be duly executed and delivered by Ridge Re in Bermuda and by the
Insurance Subsidiaries parties thereto. Upon execution and delivery by the
parties thereto, each of the Ridge Re Treaties, as amended by the applicable
Ridge Re Endorsement, will be a legal, valid and binding obligation of Ridge
Re, enforceable in accordance with its terms, subject to the effects of
bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and
other similar laws relating to or affecting creditors' rights generally,
general equitable principles (whether considered in a proceeding in equity or
at law) and an implied covenant of good faith and fair dealing.
4.7 Absence of Certain Changes or Events. To the Knowledge of Seller, except
as expressly contemplated by this Agreement or as described on Schedule 4.7 or
reflected in the Company Interim Financial Statements, since June 30, 1995,
there has not been any:
(a) change in the business, condition (financial or otherwise), Permits,
assets, Liabilities, working capital, earnings or operations of the Company or
any Subsidiary, except for changes which have not, individually or in the
aggregate, had or are not reasonably likely to have a Material Adverse Effect
on the Company and the Subsidiaries, taken as a whole;
(b) acquisition of material assets or properties or of securities or business
of any other Person by the Company or any Subsidiary (in each case, other than
acquisitions in the ordinary course of business consistent with past practice)
or any merger, consolidation or amalgamation involving the Company or any
Subsidiary, except (i) the acquisition of Cash Equivalents as part of the
process of converting substantially all of the Company and the Subsidiaries'
investment portfolio into cash and Cash Equivalents prior to the date of this
Agreement and the reinvestment thereof in accordance with the Investment
Policy after the date of this Agreement and (ii) the purchase by the Company
of preferred stock of Filoli for a purchase price of $2,500,000;
(c) sale, assignment, lease or transfer of (i) the Crostex/Camfex Contracts,
the Seller Notes (except transfers in accordance with, and to the extent
Parent and Seller comply with, Section 6.12) or any interest in the Leesburg
Training Facility (except transfers in accordance with, and to the extent
Parent and Seller comply with, Section 6.13) or (ii) any other material assets
(including any portion of the investment portfolio) of the Company or any
Subsidiary, other than in the case of (ii) (W) in the ordinary course of
business consistent with past practices, (X) converting substantially all of
the Company and the Subsidiaries' investment portfolio into cash and Cash
Equivalents prior to the date of this Agreement and dispositions of securities
in accordance with the Investment Policy after the date of this Agreement, (Y)
the First Quadrant Asset Sale and (Z) the First Quadrant Final Sale;
(d) incurrence by the Company or any Subsidiary of any indebtedness for
borrowed money or incurrence, assumption or guarantee of, or any other act to
become responsible for, any obligations of any other Person, or making of
loans or advances by the Company or any Subsidiary to any Person (including,
without limitation, any broker or agent), except (i) advances to American All
Risk Group ("AARG") to the extent required under a credit agreement in effect
on the date hereof, a true and complete copy of which has been previously made
available to Buyer, (ii) loans by IIC to Filoli in an aggregate principal
amount of up to $17,500,000, (iii) loans to employees made in the ordinary
course of business consistent with past practice for relocation expenses and
(iv) the issuance of insurance policies in the ordinary course of business
consistent with past practice;
(e) cancellation of any indebtedness or waiver or compromise of any rights
(including agent balances) having a value to the Company or any Subsidiary of
$500,000 or more, including the Seller Notes and the Crostex/Camfex Purchase
Money Notes, whether or not in the ordinary course of business (other than
settlements in the ordinary course of business of claims and salvage and
subrogation rights arising under contracts of insurance underwritten, assumed
or ceded by the Company or any Subsidiary which settlements have not had nor
would be reasonably likely to have, individually or in the aggregate, a
Material Adverse Effect on the Company and the Subsidiaries, taken as a whole
and the terminations, modifications and commutations permitted by clause (j)
below), provided that for purposes of this paragraph the Company's elimination
of a deferred tax asset in an amount equal to $7,000,000 relating to the
Company's former participation in the ESOP shall not constitute a
cancellation;
(f) failure of the Company or any Subsidiary to pay any creditor any amount
owed to such creditor (in excess of $1,000,000 in the aggregate for all such
creditors) when due (after the expiration of any applicable grace periods)
except for failures to pay in the ordinary course of business or if the
Company or any Subsidiary is disputing the amount due in good faith;
(g) payment by the Company or any Subsidiary of any material Liability before
the same became due in accordance with its terms other than in the ordinary
course of business consistent with past practice;
(h) material change in the underwriting, reinsurance, marketing, claim
processing and payment, financial or accounting practices or policies of the
Company or any Subsidiary, except as required by law, generally accepted
accounting principles or Statutory Accounting Principles;
(i) except to the extent required under employee and director benefit plans
or policies, agreements or arrangements as in effect on the Balance Sheet Date
and except in connection with the Long Term Incentive Program attached as
Attachment A and the Stock Option Agreement attached as Exhibit A to the
Employment Agreement among Joseph W. Brown, Jr., Parent and the Company and
the five related agreements with management of the Company or TRG
(collectively, the "Long Term Incentive Program"), (1) increase in the
compensation or fringe benefits of any of the directors, officers or employees
of the Company or any Subsidiary (except for increases in salary or wages of
employees of the Company or any Subsidiary who are not officers of the Company
in the ordinary course of business in accordance with past practice), (2)
except for the letter agreement dated June 1, 1995 between II and Robert
Puccinelli, and the Employment Agreement (and related grants of stock options
and restricted stock) dated as of January 1, 1996 between Infocus Employee
Services, Inc. and Andrew Vadyak (on terms and conditions reasonably
satisfactory to Buyer), grant of any severance or termination pay or entrance
into any employment, consulting or severance agreement or arrangement with any
present or former director, officer or employee of the Company or any
Subsidiary or amendment of any such arrangement or agreement or (3)
establishment, adoption, entrance into, amendment of or termination of any (X)
collective bargaining agreement or (Y) plan or agreement to provide bonuses,
profit sharing, stock options, restricted stock, pensions, retirement
benefits, deferred compensation, employment or benefits upon termination for
the benefit of any directors, officers or any group of other employees of the
Company or any Subsidiary;
(j) (i) entry into or modification of any reinsurance or retrocession
agreement by the Company or any Subsidiary other than in the ordinary course
of business consistent with past practice, except for those which have not had
nor are reasonably likely to have, individually or in the aggregate, a
Material Adverse Effect on the Company and the Subsidiaries, taken as a whole
or (ii) termination or commutation of any reinsurance or retrocession
agreement legally carried on the books of the Subsidiaries at the time of such
termination or commutation at $5,000,000 or more;
(k) entry into, termination or modification by the Company or any Subsidiary
of any Contract, agreement, commitment, transaction, or instrument (including,
without limitation, relating to any borrowing, lending, capital expenditure,
capital contribution or capital financing), except entering into, terminating
or modifying contracts, agreements, commitments, transactions, or instruments
(i) in the ordinary course of business, (ii) as permitted by clauses (i) and
(j) above and (iii) for a contribution of an amount not to exceed $4,000,000
by CGI to Coregis Managers Corporation (Il.); provided that except as
disclosed on Schedule 4.7, no modifications shall have been made to the
Crostex/Camfex Contracts, the Subsidiary Credit Agreements or the Ridge Re
Treaties;
(l) entry into a material joint venture, partnership or similar arrangement
by the Company or any Subsidiary with any Person;
(m) any capital expenditure or execution of any lease or commitment for the
foregoing by the Company or any Subsidiary involving annual payments in excess
of $100,000;
(n) lapse or termination or failure to renew any Permit of the Company or any
Subsidiary, in each case other than with respect to Permits the failure of
which to be in effect would not have, individually or in the aggregate, a
Material Adverse Effect on the Company and the Subsidiaries, taken as a whole;
(o) (i) declaration, setting aside or payment of any dividends or
distributions (whether in cash, stock or property) in respect of any capital
stock of the Company or (ii) any redemption, purchase or other acquisition of
any of the capital stock of the Company or any Subsidiary (other than a wholly
owned Subsidiary), except for payments permitted under the Tax Agreement;
(p) issuance by the Company or any Subsidiary of, or commitment of the
Company or any Subsidiary to issue, any shares of capital stock or obligations
or securities convertible into or exchangeable for shares of capital stock
except for issuances or commitments by any Subsidiary to issue any such
securities to the Company or any wholly owned Subsidiary;
(q) amendment of the certificate of incorporation or bylaws of the Company or
any Subsidiary; or
(r) agreement by the Company or any Subsidiary to do any of the foregoing.
4.8 Title to Assets, Etc. The Company and the Subsidiaries have good title
to or valid and subsisting leasehold interests in all real and material
personal property and other material assets on their books and reflected on
the balance sheets included in the Company Interim Financial Statements and
the Subsidiary Interim Financial Statements, as applicable, or acquired in the
ordinary course of business since September 30, 1995 which would have been
required to be reflected on such balance sheets if acquired on or prior to
September 30, 1995, other than (i) assets which have been disposed of in the
ordinary course of business or pursuant to the First Quadrant Final Sale and
(ii) assets which were disposed in connection with the conversion of the
Company and the Subsidiaries' investment portfolio into cash and Cash
Equivalents (the "Assets"). None of the Assets is subject to any Encumbrance,
except for Encumbrances reflected in the financial statements contained in
Schedule 4.12, as applicable, or which in the aggregate are not substantial in
amount and do not materially detract from the value of the property or assets
subject thereto or interfere with the present use.
4.9 Contracts and Commitments. (a) None of the Company or any Subsidiary is
a party to any written or oral:
(i) Contracts not otherwise listed in Schedule 4.9;
(ii) except as listed on Schedule 4.9, treaties and agreements with, and
undertakings or commitments to, any governmental or regulatory authority
materially affecting the business of the Company and the Subsidiaries taken as
a whole and not made in the ordinary course of business;
(iii) except as described in Schedule 4.9, contracts or agreements
containing covenants limiting the freedom of the Company or any Subsidiary to
engage in any line of business in any geographic area or to compete with any
Person or to incur indebtedness for borrowed money;
(iv) except as described in Schedule 4.9 and for reinsurance and
retrocession agreements, contracts or agreements containing "change in
control" or similar provisions;
(v) except as listed on Schedule 4.9, employment contracts or agreements,
including without limitation contracts to employ executive officers and other
contracts with officers or directors of the Company or any Subsidiary which
cannot be terminated by the Company or the Subsidiary upon notice of sixty
days or less without penalty or premium and involve annual compensation in
excess of $100,000 individually; or
(vi) contracts or agreements providing for the indemnification by the
Company or any Subsidiary of any Person except for contracts entered into in
the ordinary course of business consistent with past practice.
(b) Except as set forth on Schedule 4.9, none of the Company or any
Subsidiary is (and, to the Knowledge of the Seller, no other party is) (i) in
material breach of or materially in default under, any of the Contracts (or
with or without notice or lapse of time or both, would be in material breach
of or materially in default under any of the Contracts) or (ii) in breach or
default under any of the Contracts (with or without notice or lapse of time or
both) if such breach or default would permit a party other than the Company or
a Subsidiary to terminate such Contract. None of Parent, Seller, the Company
or any Subsidiary has delivered or received notice of termination or written
notice of an intention to terminate to or from any other party to any Contract
except as described on Schedule 4.9.
(c) Other than the Ridge Re Treaties and treaties between Ridge Re and
subsidiaries of TRG, Viking and Constitution Re, respectively (copies of which
have been provided to Buyer), Ridge Re is not a party to any reinsurance or
retrocession agreement or treaty, and, except in connection with such
treaties, does not engage in any business. Set forth in Schedule 4.9 is the
amount of cover as of the date of this Agreement available under each of the
Ridge Re Treaties. True and complete copies of the Ridge Re Treaties are
contained in Schedule 1.1D. Each of the Ridge Re Treaties is in full force
and effect and constitutes a legal, valid and binding obligation of the
parties thereto, enforceable in accordance with its terms, subject to the
effects of bankruptcy, insolvency, fraudulent conveyance, reorganization,
moratorium and other similar laws relating to or affecting creditors' rights
generally, general equitable principles (whether considered in a proceeding in
equity or at law) and an implied covenant of good faith and fair dealing.
None of Parent, Seller, the Company or any Subsidiary has received any notice
from Ridge Re or any governmental or regulatory authority (i) that any Ridge
Re Treaty is not enforceable against any party thereto or (ii) regarding the
availability or enforceability of the cover under any Ridge Re Treaty. No
party to a Ridge Re Treaty has received notice of termination of, or written
notice of an intention to terminate, any Ridge Re Treaty. No party to a Ridge
Re Treaty is in breach of or violation of or default under any Ridge Re Treaty
(or with or without notice or lapse of time or both, would be in breach of or
violation of or default under any Ridge Re Treaty), except for breaches,
violations or defaults by an Insurance Subsidiary which would not permit Ridge
Re to terminate the applicable Ridge Re Treaty or which would not provide
Ridge Re with a defense to any payment obligation of Ridge Re thereunder.
4.10 No Conflict or Violation. Except as set forth in Schedule 4.10, neither
the execution, delivery and performance of this Agreement or any of the
Ancillary Agreements nor the consummation of the transactions contemplated
hereby or thereby will result in (a) a violation of or a conflict with any
provision of the certificate of incorporation or bylaws of Parent, Seller,
Ridge Re, the Company or any Section 4.5 Subsidiary, (b) a breach of, or a
default under, any term or provision of any contract, agreement, indebtedness,
lease, Encumbrance, commitment, license, franchise, Permit, authorization or
concession to which (i) Parent, Seller or Ridge Re is a party or is subject or
by which any assets (including investments) of any of them are bound or (ii)
the Company or any Subsidiary is a party or is subject or by which any assets
(including investments) of any of them are bound, which breach or default in
the case of clause (ii) would have, individually or in the aggregate, a
Material Adverse Effect on the Company and the Subsidiaries, taken as a whole,
or in the case of clauses (i) and (ii) would interfere in any material way
with the ability of Parent or Seller to consummate the transactions
contemplated by this Agreement or any of the Ancillary Agreements or the Ridge
Re Treaties, as amended by the applicable Ridge Re Endorsements, (c) subject
to obtaining the approvals referred to in Section 4.11, a violation by Parent,
Seller, Ridge Re, the Company or any Subsidiary of any statute, rule,
regulation, ordinance, code, order, judgment, writ, injunction, decree or
award, which violation would have, individually or in the aggregate, a
Material Adverse Effect on the Company and the Subsidiaries, taken as a whole,
or interfere in any material way with the ability of Parent, Seller or Ridge
Re to consummate the transactions contemplated by this Agreement or any of the
Ancillary Agreements, (d) the imposition of any Encumbrance, restriction or
charge on the business of the Company or any Subsidiary or on any material
assets of the Company or the Subsidiaries, (e) the creation or exercisability
of any right of termination, cancellation or acceleration under any Contract
or (f) result in the breach of any of the terms or conditions of, constitute a
default under, or otherwise cause any impairment of, any Permit, which breach,
default or impairment would result, individually or in the aggregate, in a
Material Adverse Effect on the Company and the Subsidiaries, taken as a whole.
4.11 Consents and Approvals. Except for (i) the approval of this Agreement,
the Ancillary Agreements and the transactions contemplated hereby and thereby
(including, without limitation, the Financing), and the new intercompany tax
agreements among the Company and the Subsidiaries which shall be effective as
of the Closing, by each of the governmental and regulatory authorities listed
on Schedule 4.11, (ii) the approval of this Agreement, the Ancillary
Agreements and the transactions contemplated hereby and thereby (including,
without limitation, the Financing), and the new intercompany tax agreements
among the Company and the Subsidiaries which shall be effective as of the
Closing, by any other governmental or regulatory authorities, the failure of
which to obtain would not, individually or in the aggregate, have a Material
Adverse Effect on the Company and the Subsidiaries, taken as a whole, (iii)
filings in respect of the transactions contemplated hereby required to be made
for compliance with the applicable provisions of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), and the rules and regulations
promulgated thereunder, (iv) filings under the Securities Act and the rules
promulgated thereunder in connection with the sale of the Underwritten Notes,
(v) the filing of premerger notification reports under the HSR Act and (vi)
consents, approvals, authorizations, declarations, filings and registrations
required (x) by the nature of the business or ownership of Holdings and Buyer
or (y) solely by reason of the Financing (excluding any consents, approvals,
authorizations, declarations, filings or registrations otherwise required in
connection with this Agreement, the Ancillary Agreements or the transactions
contemplated hereby or thereby), no consent, approval or authorization of, or
declaration, filing or registration with, any governmental or regulatory
authority, or any other Person, is required to be made or obtained by Parent,
Seller, Ridge Re, the Company, any Subsidiary, Buyer or Holdings on or prior
to the Closing Date in connection with the execution or delivery of this
Agreement or any of the Ancillary Agreements, the performance of this
Agreement, the Guarantees, the Tax Agreement, or the Ridge Re Treaties, as
amended by the applicable Ridge Re Endorsements, or the consummation of the
transactions contemplated hereby and thereby.
4.12 Financial Statements. (a) Seller has heretofore delivered to Buyer the
Company GAAP Financial Statements, the Subsidiary GAAP Financial Statements,
the Ridge Re GAAP Financial Statements, the Company Interim Financial
Statements, the Subsidiary Interim Financial Statements, the Ridge Re Interim
Financial Statements and the Convention Statements. A copy of each of the
foregoing financial statements is included in Schedule 4.12.
(b) Except as otherwise set forth therein, (i) the Company GAAP Financial
Statements are based on the books and records of the Company and its
Subsidiaries, fairly present in all material respects the financial condition
and consolidated results of operations of the Company and its Subsidiaries, as
of the dates and for the periods indicated therein, have been prepared in
accordance with GAAP (as in effect at the time of the respective financial
statements) consistently applied, and have been audited by KPMG Peat Marwick
LLP, (ii) each of the Subsidiary GAAP Financial Statements are based on the
books and records of the GAAP Subsidiaries to which such statements relate,
fairly present in all material respects the financial condition and
consolidated results of operations of such Subsidiaries, as of the dates and
for the periods indicated therein, have been prepared in accordance with GAAP
(as in effect at the time of the respective financial statements) consistently
applied, and have been audited by KPMG Peat Marwick LLP and (iii) the Ridge Re
GAAP Financial Statements are based on the books and records of Ridge Re,
fairly present in all material respects the financial condition and results of
operation of Ridge Re, as of the dates and for the periods indicated therein,
have been prepared in accordance with GAAP (as in effect at the time of the
respective financial statements) consistently applied, and have been audited
by KPMG Peat Marwick LLP.
(c) The Company Interim Financial Statements, the Subsidiary Interim
Financial Statements and the Ridge Re Interim Financial Statements were
prepared in the ordinary course of business and have been prepared on a
consistent basis through the periods indicated and in a manner consistent with
that employed in the Company GAAP Financial Statements, the Subsidiary GAAP
Financial Statements and the Ridge Re GAAP Financial Statements, as the case
may be. The Company Interim Financial Statements, the Subsidiary Interim
Financial Statements and the Ridge Re Interim Financial Statements do not
contain full footnote disclosures in accordance with United States generally
accepted accounting principles and are subject to normal recurring year-end
adjustments, but otherwise fairly present in all material respects the
financial condition and results of operations of the Company, the GAAP
Subsidiaries and Ridge Re, as the case may be, as of the dates and for the
periods indicated therein except as otherwise set forth therein.
(d) Except as otherwise set forth therein, the Convention Statements and the
statutory balance sheets and income statements included in such Convention
Statements fairly present in all material respects the statutory financial
condition and results of operations of the respective Insurance Subsidiaries
and Ridge Re, as the case may be, as of the dates and for the periods
indicated therein and have been prepared in accordance with Statutory
Accounting Principles (as in effect at the time of the respective financial
statements) consistently applied throughout the periods indicated, except as
expressly set forth therein. The statutory balance sheets and income
statements included in the Convention Statements for the years ended December
31, 1993 and 1994 have been audited by KPMG Peat Marwick LLP.
4.13 Litigation. To the Knowledge of Seller, except as set forth on Schedule
4.13, there is no action, order, writ, injunction, judgment, fine or decree
outstanding or suit, litigation, proceeding, labor dispute (other than routine
grievance procedures or routine, uncontested claims for benefits under any
benefit plans for any officers, employees or agents of the Company or any
Subsidiary (collectively, "Personnel")), arbitral action, investigation or
reported claim, in each case including, without limitation, those involving
any governmental or regulatory authority and excluding those relating to
insurance and reinsurance policies (collectively, "Actions") pending or
threatened by or against or relating to (i) the Company or any Subsidiary,
(ii) any benefit plan for Personnel or any fiduciary or administrator thereof
or (iii) the transactions contemplated by this Agreement and the Ancillary
Agreements. None of the Company or any Subsidiary is in default with respect
to any order, writ, injunction, judgment, fine or decree of any court or
governmental or regulatory agency, and there are no unsatisfied judgments
against the Company or any Subsidiary which would have, individually or in the
aggregate, a Material Adverse Effect on the Company and the Subsidiaries,
taken as a whole.
4.14 Liabilities. (a) Except as set forth in Schedule 4.14, the Company and
the Subsidiaries do not have any direct or indirect indebtedness, liability,
claim, loss, damage, deficiency, obligation or responsibility, fixed or
unfixed, choate or inchoate, liquidated or unliquidated, secured or unsecured,
accrued, absolute, contingent or otherwise ("Liabilities"), other than (i)
Liabilities fully and adequately reflected (including by reducing any
numerical amount set forth) in one or more line items on, reserved on, or
disclosed in the footnotes to, the balance sheets included in the Company
Interim Financial Statements or the Subsidiary Interim Financial Statements,
or disclosed in the footnotes to the Company GAAP Financial Statements or the
Subsidiary GAAP Financial Statements, (ii) Liabilities incurred in the
ordinary course of business, consistent with past practice and the provisions
of this Agreement and the Ancillary Agreements, (iii) Liabilities relating to
future benefits, losses, claims and expenses arising under insurance and
reinsurance policies of the Insurance Subsidiaries, (iv) Liabilities disclosed
in response to any other representation, (v) Liabilities of a type that are
subject to any other representation (without regard to any specific exclusions
from such representation, including any specific exclusions from the
definitions used therein) and (vi) Liabilities which have, or are reasonably
likely to have a net ultimate cost of $25,000 or less, on an individual basis
or in the aggregate to the extent such Liabilities arise out of a related
series of events.
(b) As of the date of this Agreement, no more than $358,500,000 aggregate
principal amount of indebtedness is outstanding under the credit agreements
contained in Schedule 4.14 (the "Subsidiary Credit Agreements").
(c) The Company and the Subsidiaries have no Liabilities for rate roll-backs
or refunds under California Proposition 103 and all proceedings thereunder
relating to the Company and the Subsidiaries have ceased.
(d) Each of the Company and each Subsidiary has paid in full all guaranty
fund assessments required by any regulatory authority to be paid by it prior
to the date of this Agreement. As of the date of this Agreement, except as
set forth in Schedule 4.14 and except as and to the extent paid prior to June
30, 1995 or reserved against in the Convention Statements or disclosed in the
notes thereto, the Company and the Subsidiaries have not received any
guarantee fund assessments.
4.15 Investments. (a) As of the date of this Agreement, at least 85% of the
investment portfolio for the Company and the Subsidiaries consists of cash and
Cash Equivalents and at least 61% of the investment portfolio (excluding cash
and Cash Equivalents) for the Company and the Subsidiaries consists of fixed
income securities rated at least AA by Moody's or by S&P. As of the date
hereof, at least 57% of the fixed income portfolio (excluding cash and Cash
Equivalents) has a maturity of one year or less.
(b) To the Knowledge of Seller, as of the Closing Date, the Company and the
Subsidiaries have good and marketable title to the investments in their
investment portfolios, provided that no representation is made as to the
transferability thereof.
4.16 Reserves. Seller has delivered to Buyer true and complete copies of all
actuarial reports or actuarial certificates in the possession or control of
Parent, Seller, the Company or any of the Subsidiaries relating to the
adequacy of the claims reserves of any of the Subsidiaries for any period
ended on or after December 31, 1993. Notwithstanding the foregoing
representations contained in this Section or anything contained in Section
4.12, 4.14 or 6.2, Holdings and Buyer acknowledge that Parent and Seller are
not making any representations, express or implied in or pursuant to this
Agreement, concerning the loss reserves or loss adjustment expense reserves of
the Company or any of the Subsidiaries including, without limitation, (i)
whether such reserves are adequate or sufficient, or (ii) whether such
reserves were determined in accordance with any actuarial, statutory or other
standard, or concerning any other "line item" or asset, liability or equity
amount which would be affected thereby.
4.17 Compliance with Law; Permits; Regulatory Matters. (a) Except as set
forth on Schedule 4.17, the Company and the Subsidiaries are in compliance
with all applicable laws, statutes, ordinances and regulations, whether
Federal, foreign, state or local, except where the failure to comply would
not, individually or in the aggregate, have a Material Adverse Effect on the
Company and the Subsidiaries, taken as a whole. Since January 1, 1993, none
of the Company or any Subsidiary has received any written notice to the effect
that, or otherwise been advised that, it is not in compliance with any such
statute, regulation, order, ordinance or other law where the failure to comply
would, prior to June 30, 1998, individually or in the aggregate, have a
Material Adverse Effect on the Company and the Subsidiaries, taken as a whole.
(b) Except as set forth on Schedule 4.17, the Company and the Subsidiaries
hold all Permits necessary for the ownership and conduct of the respective
businesses of the Company and the Subsidiaries in each of the jurisdictions in
which the Company and the Subsidiaries conduct or operate their respective
businesses in the manner now conducted, and such Permits are in full force and
effect except where the failure to hold any Permit or the failure of any
Permit to be in full force and effect would not, individually or in the
aggregate, have a Material Adverse Effect on the Company and the Subsidiaries,
taken as a whole. The consummation of the transactions contemplated by this
Agreement will not result in any revocation, cancellation or suspension of any
such Permit except as a result of the status of Buyer and its Affiliates, and,
there are no pending or threatened suits, proceedings or investigations with
respect to revocation, cancellation, suspension or nonrenewal thereof, and,
there has occurred no event which (whether with notice or lapse of time or
both) will result in such a revocation, cancellation, suspension or nonrenewal
thereof, in any such case except where such a revocation, cancellation,
suspension or non-renewal would not, individually or in the aggregate, have a
Material Adverse Effect on the Company and the Subsidiaries, taken as a whole.
(c) All insurance policies issued by the Insurance Subsidiaries, as now in
force are, to the extent required under applicable law, are in a form
acceptable to applicable regulatory authorities or have been filed and not
objected to (or such objection has been withdrawn or resolved) by such
authorities within the period provided for objection, except where such
failure or objection would not, individually or in the aggregate, have a
Material Adverse Effect on the Company and the Subsidiaries, taken as a whole.
Neither the Company nor any Subsidiary which is not an Insurance Subsidiary
has issued any insurance policies. Except as set forth on Schedule 4.17, (i)
all material reports, statements, documents, registrations, filings and
submissions to state insurance regulatory authorities complied in all material
respects with applicable law in effect when filed and (ii) no material
deficiencies have been asserted by any such regulatory authority with respect
to such reports, statements, documents, registrations, filings or submissions
that have not been satisfied or that would, individually or in the aggregate,
have a Material Adverse Effect on the Company and the Subsidiaries, taken as a
whole. Except as set forth on Schedule 4.17, all premium rates established by
the Insurance Subsidiaries that are required to be filed with or approved by
insurance regulatory authorities have been so filed or approved, the premiums
charged conform to the premiums so filed or approved and comply (or complied
at the relevant time) with the insurance laws applicable thereto except where
such failures to comply, individually or in the aggregate, would not have a
Material Adverse Effect on the Company and the Subsidiaries, taken as a whole.
4.18 No Brokers. Except as previously disclosed in writing to Buyer, neither
Parent, Seller nor the Company has employed, or is subject to any valid claim
of, any broker, finder, consultant or other intermediary in connection with
the transactions contemplated by this Agreement who will be entitled to a fee
or commission in connection with such transactions. Parent is solely
responsible for any such payment, fee or commission that may be due to any
Person so previously disclosed to Buyer in connection with the transactions
contemplated hereby.
4.19 No Other Agreements to Sell the Assets or the Company. Except as set
forth in Schedule 4.19, none of Parent, Seller, the Company or any Subsidiary
has any agreement, absolute or contingent, with any other Person to sell the
capital stock, assets (other than sales of assets that would not be prohibited
under Section 4.7(c)) or business of the Company or any Subsidiary or to
effect any merger, consolidation or other reorganization of the Company or any
Subsidiary or to enter into any agreement with respect thereto, except for any
agreements regarding the First Quadrant Final Sale.
4.20 Proprietary Rights. (a) Except as set forth in Schedule 4.20, Parent,
Seller and their Affiliates (other than the Company and the Subsidiaries) have
no right or title to or interest in the trademarks, service marks, copyrights,
trade names and the applications and registrations therefor and the trade
secrets, software and other proprietary rights used in and material to the
business of the Company or any of its Subsidiaries (collectively,
"Intellectual Property").
(b) Schedule 4.20 sets forth a complete and correct list and brief
description of all Intellectual Property that is material to the Company or
any Subsidiary. With respect to intellectual property owned by the Company or
a Subsidiary, such entity has the sole and exclusive right to use and is the
sole and exclusive registered owner of all right, title and interest in and to
the Intellectual Property. The Intellectual Property which is not owned by
the Company or a Subsidiary is being used by the Company or a Subsidiary only
with the consent of or license from the rightful owner thereof, and all such
licenses are in full force and effect.
(c) To the Knowledge of Seller no activity in which the Company or a
Subsidiary is engaged or any product which the Company or a Subsidiary sells,
or any advertising that they employ, or the use of any of the Intellectual
Property, breaches, violates, infringes or interferes with any rights of any
third party or, except for the payment of computer software licensing fees,
requires payment for the use of any patent, trade-name, trade secret, trade-
mark, copyright or other intellectual property right or technology of another.
4.21 Employee Benefit Plans. (a) Schedule 4.21 contains a true and complete
list of each "employee benefit plan" (within the meaning of section 3(3) of
the Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
including, without limitation, multiemployer plans within the meaning of ERISA
section 3(37)), stock purchase, stock option, severance, employment, change-
in-control, fringe benefit, collective bargaining, bonus, incentive, deferred
compensation and all other employee benefit plans, agreements, programs,
policies or other arrangements, whether or not subject to ERISA (including any
funding mechanism therefor now in effect or required in the future as a result
of the transactions contemplated by this Agreement or otherwise), whether
formal or informal, oral or written, legally binding or not, under which any
employee or former employee of the Company or any Subsidiary has any present
or future right to benefits or under which the Company or any Subsidiary has
any present or future liability. All such plans, agreements, programs,
policies and arrangements shall be collectively referred to as the "Company
Plans".
(b) With respect to each Company Plan, the Company has delivered to the Buyer
a current, accurate and complete copy (or, to the extent no such copy exists,
an accurate description) thereof and, to the extent applicable, (i) any
related trust agreement, annuity contract or other funding instrument;
(ii) the most recent determination letter; (iii) any summary plan description
and other written communications (or a description of any oral communications)
by the Company or any Subsidiary to their employees concerning the extent of
the benefits provided under a Company Plan; and (iv) for the three most recent
years (A) the Form 5500 and attached schedules; (B) audited financial
statements; (C) actuarial valuation reports; and (D) attorney's response to an
auditor's request for information.
(c) (i) Each Company Plan, in all material respects, has been established
and administered in accordance with its terms and in compliance with the
applicable provisions of ERISA, the Code and other applicable laws, rules and
regulations; (ii) each Company Plan which is intended to be qualified within
the meaning of Code section 401(a) is so qualified and has received a
favorable determination letter as to its qualification and nothing has
occurred, whether by action or failure to act, which would cause the loss of
such qualification; (iii) except as listed on Schedule 4.21, with respect to
any Company Plan, no actions, suits or claims (other than routine claims for
benefits in the ordinary course) are pending or threatened, no facts or
circumstances exist which could give rise to any such actions, suits or
claims, and the Company will promptly notify Buyer in writing of any pending
or threatened claims arising between the date hereof and the Closing Date;
(iv) neither the Company, any Subsidiary nor any other party has engaged in a
prohibited transaction, as such term is defined under Code section 4975 or
ERISA section 406, which would subject the Company, any Subsidiary or the
Buyer to any material taxes, penalties or other liabilities under Code section
4975 or ERISA sections 409 or 502(i); (v) no event has occurred and no
condition exists that would subject the Company, either directly or by reason
of its affiliation with any member of its "Controlled Group" (defined as any
organization which is a member of a controlled group of organizations within
the meaning of Code sections 414(b), (c), (m) or (o)), or any Subsidiary to
any material tax, fine or penalty imposed by ERISA, the Code or other
applicable laws, rules and regulations including, but not limited to the taxes
imposed by Code sections 4971, 4972, 4977, 4979, 4980B, 4976(a) or the fine
imposed by ERISA section 502(c); (vi) all insurance premiums required to be
paid with respect to Company Plans as of the Closing Date have been or will be
paid prior thereto and adequate reserves have been provided for on the
Company's Interim Financial Statements as of September 30, 1995, to the extent
required by GAAP, for any premiums (or portions thereof) attributable to
service on or prior to the Closing Date; (vii) for each Company Plan with
respect to which a Form 5500 has been filed, no material change has occurred
with respect to the matters covered by the most recent Form since the date
thereof; (viii) all contributions required to be made prior to the Closing
Date under the terms of any Company Plan, the Code, ERISA or other applicable
laws, rules and regulations have been or will be timely made and adequate
reserves have been provided for on the Company's Interim Financial Statements
as of September 30, 1995, to the extent required by GAAP, for all benefits
attributable to service on or prior to the Closing Date; (ix) no Company Plan
provides for an increase in benefits on or after the Closing Date; and (x) no
Company Plan (excluding any agreement between the Company and individual
employees) contains any contractual language which limits the Company's
ability to amend or terminate such Company Plan without obligation or
liability (other than those obligations and liabilities for which specific
assets have been set aside in a trust or other funding vehicle or reserved for
on the Company's Interim Financial Statements as of September 30, 1995).
(d) (i) No Company Plan has incurred any "accumulated funding deficiency" as
such term is defined in ERISA section 302 and Code section 412 (whether or not
waived); (ii) no event or condition exists which would be deemed a reportable
event within the meaning of ERISA section 4043 which could result in a
material liability to the Company, any member of its Controlled Group or any
Subsidiary, and no condition exists which could subject the Company, any
member of its Controlled Group or any Subsidiary to a material fine under
ERISA section 4071; (iii) as of the Closing Date, the Company, each member of
its Controlled Group and each Subsidiary will have made all premium payments
required to be made prior to the Closing Date to the PBGC; (iv) neither the
Company, any member of its Controlled Group nor any Subsidiary is subject to
any liability to the PBGC for any plan termination occurring on or prior to
the Closing Date; (v) no amendment has occurred which has required or would
require the Company, any member of its Controlled Group or any Subsidiary to
provide security pursuant to Code section 401(a)(29); and (vi) neither the
Company, any member of its Controlled Group nor any Subsidiary has engaged in
a transaction which could subject it to material liability under ERISA section
4069.
(e) With respect to each of the Company Plans which is not a multiemployer
plan within the meaning of section 4001(a)(3) of ERISA but is subject to
Title IV of ERISA, the funded status of each such Company Plan, as of January
1, 1995, is as reported in the actuarial valuation reports dated as of January
1, 1995. To the Knowledge of Seller, no material adverse change in the funded
status of such Company Plans has occurred since January 1, 1995, and no
material defects or omissions existed in the data provided to the preparers of
the actuarial valuation reports discussed in the preceding sentence.
(f) There are no multiemployer plans (within the meaning of section
4001(a)(3) of ERISA) to which the Company, any member of its Controlled Group
or any Subsidiary has or had any liability or contributes (or has at any time
contributed or had an obligation to contribute).
(g) (i) Each Company Plan which is intended to meet the requirements for tax-
favored treatment under Subchapter B of Chapter 1 of Subtitle A of the Code
meets such requirements; and (ii) the Company and the Subsidiaries have no
trusts intended to be qualified within the meaning of Code section 501(c)(9),
and, except as listed on Schedule 4.21, had no such trusts in the past.
(h) Schedule 4.21 sets forth, on a plan-by-plan basis, the present value of
any benefits payable presently or in the future to present or former employees
of the Company or any Subsidiary under any Company Plan (excluding any
agreements between the Company and individual employees which were not entered
into as part of any plan or program) that is not fully funded and not subject
to the reporting requirements of ERISA (if such amounts are not reflected in
the financial statements included in Schedule 4.12) which present value is as
reported in the most recent actuarial valuation or other reports done with
respect to each such plan. To the Knowledge of Seller, no material adverse
increase in the amount of such present values has occurred since the date of
the most recent report, and no material defects or omissions existed in the
reports, or, if applicable, in the data provided to the preparers of the
reports.
(i) Except as set forth on Schedule 4.21 or referenced in Section 9.5, no
Company Plan exists which could result in the payment to any Company employee
or Subsidiary employee of any money or other property or accelerate or provide
any other rights or benefits to any Company employee or Subsidiary employee as
a result of the transactions contemplated by this Agreement, whether or not
such payment would constitute a parachute payment within the meaning of Code
section 280G. The aggregate cost to the Company and its Subsidiaries, in the
event that all Company Plans set forth in Schedule 4.21 are triggered, shall
not exceed $1,050,000.
(j) Neither the Company nor any Subsidiary is obligated or otherwise required
to pay any bonuses (annual or otherwise) to Joseph W. Brown, Jr., or to any
managing director of the Company on or after the date of the Closing.
(k) No Company Plan operates within or is subject to the jurisdiction of any
foreign country, other than as described on Schedule 4.21.
(l) None of the amounts payable to any Company employee or any Subsidiary
employee as a result of the transactions contemplated by this Agreement will
be non-deductible under Section 280G of the Code.
4.22 Employment-Related Matters. Except as set forth in Schedule 4.22, (a)
none of the Company or the Subsidiaries is a party to, or otherwise bound by,
any consent decree with, or citation by, any government agency relating to
employees or employment practices, (b) none of the Company or any of the
Subsidiaries has closed any plant or facility, or effectuated any layoffs of
employees within the past six months, nor have the Company or the Subsidiaries
planned or announced any such action or programs for the future, and (c) the
Company and the Subsidiaries are in compliance with their respective
obligations pursuant to the Worker Adjustment and Retraining Notification Act
of 1988 and any similar state notification law.
4.23 Transactions with Certain Persons. (a) To the Knowledge of Seller,
neither any officer, director or employee of Parent, Seller, the Company or
any Subsidiary nor any member of any such Person's immediate family is
presently a party to any material transaction with the Company or any
Subsidiary, including, without limitation, any Contract, or other binding
arrangement (i) providing for the furnishing of material services (except in
such Person's capacity as an officer, director, employee or consultant) by,
(ii) providing for the rental of material real or personal property from, or
(iii) otherwise requiring material payments to (other than for services as
officers, directors or employees of Parent, Seller, the Company or any
Subsidiary) any such Person.
(b) Schedule 4.23 sets forth all contracts, agreements and arrangements in
effect on or after January 1, 1995, and all transactions (including, without
limitation, the provision of any services or the sale of any goods) since
January 1, 1994 between the Company or any Subsidiary, on the one hand, and
Parent or any Affiliate of Parent (excluding the Company and the Subsidiaries,
but including TRG and any of its subsidiaries), on the other, excluding
contracts, agreements and arrangements (i) relating to the use or purchase of
products leased or sold by Parent in the ordinary course of Parent's document
processing business, (ii) involving payments by or to the Company or any
Subsidiary that do not exceed $100,000 in the aggregate or (iii) specifically
referred to in the financial statements contained in Schedule 4.12. Certain
Subsidiaries hold $275,000,000 aggregate principal amount of promissory notes
issued by Seller and unconditionally guaranteed by Parent and $75,000,000
aggregate principal amount of notes issued by Credit Corp. (such notes,
collectively, the "Seller Notes"). Schedule 4.23 identifies the current
holders of each of the Seller Notes.
(c) Except in the ordinary course of business consistent with past practice,
since the Balance Sheet Date, Seller and the Company and/or any Subsidiary
have not settled any intercompany trade receivables and payables.
4.24 Taxes. (a) Filing of Tax Returns. Seller and the Company (and any
affiliated group of which the Company is now or has been a member) have timely
filed with the appropriate taxing authorities all Federal, and to the
Knowledge of Seller, state and local Tax Returns and Information Returns
required to be filed through the date hereof. All such Federal, and to the
Knowledge of Seller, state and local Tax Returns and Information Returns are
complete and accurate in all material respects. The Company is a member of an
affiliated group of corporations, within the meaning of Section 1504 of the
Code, that includes Seller and Parent, and Parent is the common parent of the
affiliated group.
(b) Payment of Taxes. All Taxes shown in the Tax Returns referred to in
Section 4.24(a) above that are due and payable by the Company and its
Subsidiaries before the date hereof have been paid.
(c) Liens for Taxes. There are no liens or other Encumbrances on any of the
assets of the Company or any Subsidiary that arose in connection with any
failure (or alleged failure) to pay any Tax.
(d) Audit History. Except as set forth in Schedule 4.24, there is no action,
suit, proceeding, investigation, audit or claim now pending or, to the
Knowledge of Seller, proposed against or with respect to the Company or any of
its Subsidiaries or any affiliated group of which the Company and its
Subsidiaries is or has been a member that relates to Tax liabilities
attributable to items of income, gain, deduction, loss or credits of the
Company or any of its Subsidiaries.
(e) Prior Affiliated Groups. Except as set forth in Schedule 4.24 and except
for the affiliated group of corporations of which the Company and the
Subsidiaries is currently a member and of which Parent is the common parent,
the Company and the Subsidiaries have never been members of an affiliated
group of corporations, within the meaning of Section 1504 of the Code.
(f) Withholding. The Company and the Subsidiaries have withheld and paid all
Federal, and to the Knowledge of Seller, state and local Taxes required to
have been withheld and paid in connection with amounts paid or owing to any
employee, independent contractor, creditor, stockholder or other third party.
(g) FIRPTA. Neither the Company nor any of the Subsidiaries have been a
United States real property holding corporation within the meaning of Section
897(c)(2) of the Code during the five-year period ending on the date hereof.
(h) Material Adverse Effect. A representation with respect to Taxes
contained in this Section 4.24 shall be deemed to be accurate unless an
inaccuracy contained therein has a Material Adverse Effect on the Company and
the Subsidiaries.
4.25 Reinsurance and Retrocessions. Schedule 4.25 contains a list as of the
date of this Agreement of all treaty reinsurance or retrocession treaties and
agreements in force to which any Subsidiary is a party (including any
terminated or expired treaty or agreement under which there remains any
outstanding liability with respect to paid or unpaid case reserves in excess
of $500,000), any terminated or expired treaty or agreement under which there
remains any outstanding liability from one reinsurer with respect to paid or
unpaid case reserves in excess of $100,000 and any treaty or agreement with
any Affiliate of such Subsidiary, the effective date of each such treaty or
agreement, and the termination date of any treaty or agreement which has a
definite termination date. To the Knowledge of Seller, no Subsidiary is in
default in any respect as to any provision of any reinsurance or retrocession
treaty or agreement or has failed to meet the underwriting standards required
for any business reinsured thereunder except for defaults which, individually
or in the aggregate, would not have a Material Adverse Effect on the Company
and the Subsidiaries, taken as a whole.
4.26 1992/93 Restructuring. All novations made pursuant to the 1992/93
Restructuring and any amendments to the Ridge Re Treaties made prior to the
date hereof, were made in accordance with all applicable laws, rules and
regulations at the time such novations or amendments were completed except
where the failure to do so (i) would not, individually or in the aggregate,
have a Material Adverse Effect on the Company and the Subsidiaries, taken as a
whole, or (ii) was a result of the failure by the Company or any Subsidiary to
obtain the consent of any insured or policyholder to the novation or
assumption of the relevant insurance policy. Notwithstanding the foregoing,
Buyer and Holdings acknowledges that Seller and Parent shall have no liability
to Buyer or Holdings for breach of this representation with respect to any
novation or assumption, or any amendment to the Ridge Re Treaties, which
results in any liability for the Company or any of its Subsidiaries, if there
is a corresponding benefit realized (or any liability avoided) by the Company
or any other Subsidiary or TRG or any of its subsidiaries.
4.27 Capital Commitments. Schedule 4.27 contains a list of all capital
commitments as of the date of this Agreement of the Company or any Subsidiary
in excess of $100,000.
4.28 Environmental Laws. (a) Except as set forth on Schedule 4.28, each of
the Company and each Subsidiary complies and has complied with all applicable
Environmental Laws, and possesses and complies with and has possessed and
complied with all Environmental Permits required under such laws except where
the failure to be in possession of or to comply with such Environmental
Permits, or where the failure to be in compliance with any Environmental Law,
would not have, individually or in the aggregate, a Material Adverse Effect on
the Company and the Subsidiaries, taken as a whole. There are no past,
present, or anticipated future events, conditions, circumstances, practices,
plans or legal requirements that could reasonably be expected to prevent, or
materially increase the burden on the Company or any Subsidiary of their
complying with applicable Environmental Laws or of their obtaining, renewing,
or complying with all Environmental Permits required under such laws. There
are and have been no Materials of Environmental Concern or other conditions at
any property owned, operated or otherwise used by the Company or any
Subsidiary now or in the past, or at any other location, that could reasonably
be expected to give rise to liability of the Company or any Subsidiary under
any Environmental Law. Parent, Seller and the Company have provided to Buyer
true and complete copies of all Environmental Reports prepared within the last
five years in their possession or control.
(b) Notwithstanding the representations contained in this Section, Buyer
acknowledges that Parent and Seller are not making any representations
(express or implied in or pursuant to this Agreement) with respect to any
violation of or noncompliance with Environmental Law or Environmental Permits,
or failure to obtain Environmental Permits, in each case by reason of any
policy of insurance, reinsurance, indemnity, guaranty or assumption of
liability of any party, entered into by the Company or any Insurance
Subsidiary.
4.29 Acquisition for Investment. Each of Seller and Parent acknowledges that
the Securities have not been registered under the Securities Act, or under any
state securities laws. Each of Seller and Parent (to the extent Parent
acquires Securities pursuant to Section 11.3) is acquiring the Securities
solely for its own account and not with a view to any distribution or other
disposition of such Securities or any part thereof, or interest therein,
except in accordance with the Securities Act. Each of Seller and Parent is an
"accredited investor" (as defined in Rule 501 of Regulation D under the
Securities Act).
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF BUYER AND HOLDINGS
Buyer and Holdings hereby represent and warrant to Seller and Parent as
follows:
5.1 Organization of Buyer and Holdings. Each of Buyer and Holdings is duly
organized, validly existing and in good standing under the laws of the State
of Delaware and has full corporate power and authority to conduct its business
and to own and lease its properties.
5.2 Authorization. Each of Buyer and Holdings has all necessary corporate
authority to enter into this Agreement and the Tax Agreement and has taken all
necessary corporate action to consummate the transactions contemplated hereby
and thereby and to perform its obligations hereunder and thereunder. This
Agreement and the Tax Agreement have been duly executed and delivered by each
of Buyer and Holdings. Assuming the due execution of this Agreement by Parent
and Seller, this Agreement is a legal, valid and binding obligation of each of
Buyer and Holdings enforceable against each of them in accordance with its
terms, and assuming the due execution of the Tax Agreement by Parent, Seller
and the Company, the Tax Agreement is a legal, valid and binding obligation of
Buyer enforceable against Buyer in accordance with its terms, in each case,
subject to the effects of bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium and other similar laws relating to or affecting
creditors' rights generally, general equitable principles (whether considered
in a proceeding in equity or at law) and an implied covenant of good faith and
fair dealing. Subject to the occurrence of the Closing, the TOPrS Side Letter
will be duly executed and delivered by Holdings and the partnership party
thereto. Upon execution and delivery by Holdings and such partnership of the
TOPrS Side Letter and assuming the due execution of the TOPrS Side Letter by
Seller, the TOPrS Side Letter will be a legal, valid and binding obligation of
Holdings and such partnership, enforceable in accordance with its terms,
subject to the effects of bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium and other similar laws relating to or affecting
creditors' rights generally, general equitable principles (whether considered
in a proceeding in equity or at law) and an implied covenant of good faith and
fair dealing.
5.3 No Conflict or Violation. Neither the execution, delivery and
performance of this Agreement or the Tax Agreement by Holdings and Buyer, nor
the execution, delivery and performance of the Indenture or the TOPrS Side
Letter or the issuance of Debentures by Holdings, nor the execution, delivery
and performance of the Trust Agreement by Holdings, as depositor, nor the
issuance of the Preferred Securities by Trust, nor the issuance, if issued, of
Holdings Common Stock by Holdings pursuant to the provisions of Section 11.3
nor the consummation by Buyer, Holdings or Trust of the transactions
contemplated hereby or thereby will result in (a) a violation of or a conflict
with any provision of the certificate of incorporation or bylaws, in the case
of Holdings or Buyer, or any provisions of the Trust Agreement, in the case of
Trust, (b) a breach of, or a default under, any term or provision of any
contract, agreement, indebtedness, lease, Encumbrance, commitment, license,
franchise, Permit, authorization or concession (including any agreements,
documents or instruments (the "Financing Documents") constituting part of the
financing required to consummate the transactions contemplated by this
Agreement (the "Financing")) to which Buyer, Holdings or Trust is a party or
is subject or by which any assets of Buyer, Holdings or Trust are bound, which
breach or default is in a Financing Document or would, individually or in the
aggregate, have a Material Adverse Effect on Buyer or Holdings or interfere in
any material way with the ability of Buyer or Holdings to consummate the
transactions contemplated by this Agreement, the TOPrS Side Letter and the Tax
Agreement, to the extent a party thereto, or (c) subject to obtaining the
approvals referred to in Section 4.11, a violation by Buyer, Holdings or Trust
of any statute, rule, regulation, ordinance, code, order, judgment, writ,
injunction, decree or award, which violation would, individually or in the
aggregate, have a Material Adverse Effect on Buyer or Holdings or their
respective ability to consummate the transactions contemplated by this
Agreement and the Tax Agreement, to the extent a party thereto.
5.4 No Brokers. Except for the services of Merrill Lynch & Co., neither
Buyer nor Holdings has employed, or is subject to the valid claim of, any
broker, finder, consultant or other intermediary in connection with the
transactions contemplated by this Agreement who will be entitled to a fee or
commission in connection with such transactions. Buyer is solely responsible
for any such payment, fee or commission that may be due to Merrill Lynch & Co.
in connection with the transactions contemplated by this Agreement.
5.5 Acquisition for Investment. Buyer acknowledges that the Stock has not
been registered under the Securities Act or under any state securities laws.
Buyer is acquiring the Stock solely for its own account and not with a view to
any distribution or other disposition of the Stock or any part thereof, or
interest therein, except in accordance with the Securities Act. Buyer is an
"accredited investor" (as defined in Rule 501 of Regulation D under the
Securities Act).
5.6 Organizational Documents. Copies of the certificate of incorporation and
bylaws of Buyer and Holdings have heretofore been delivered to Seller and such
copies are true, accurate and complete, without any amendment, modification or
supplement, as of the date of this Agreement and the Closing Date (except such
amendments, modifications or supplements which would not have a Material
Adverse Effect on Seller or which change the amount of authorized capital
stock).
5.7 Capitalization of Buyer. (a) All the outstanding shares of capital
stock of Buyer are owned, directly or indirectly, by Holdings. As of the
Closing Date, investment partnerships affiliated with KKR shall own, directly
or indirectly, no less than 70% of the common stock of Holdings, which
percentage shall be reduced to reflect any investment made by Parent and/or
Seller pursuant to Section 11.3.
(b) In the event that Parent and/or Seller acquires any of the Holdings
Common Stock as provided in Section 11.3 hereof, such shares will be duly
authorized, validly issued, fully paid and nonassessable, and free of
preemptive rights.
5.8 Consents and Approvals. Except for (i) consents, approvals,
authorizations, declarations, filings and registrations required by the nature
of the business or ownership of Parent, Seller, the Company and the
Subsidiaries, (ii) filings in respect of the transactions contemplated hereby
required to be made for compliance with the applicable provisions of the
Exchange Act and the rules and regulations promulgated thereunder, (iii)
filings under the Securities Act and the rules promulgated thereunder in
connection with the sale of the Underwritten Notes and (iv) the filing of
premerger notification reports under the HSR Act, no consents, approval or
authorization of, or declaration, filing or registration with, any
governmental or regulatory authority, or any other Person, is required to be
made or obtained by Buyer, Holdings or any of their respective Affiliates in
connection with the execution, delivery and performance of this Agreement, the
Ancillary Agreements and the consummation of the transactions contemplated
hereby and thereby.
5.9 Financial Obligations. Buyer has received and delivered copies to Seller
of (i) a commitment letter from senior lenders regarding the transactions
contemplated by this Agreement, (ii) the Underwriter Letter, (iii) a letter
with respect to equity Financing (other than that to be provided by management
of the Company), which letter is addressed to Seller and (iv) an agreement in
principal between Buyer and management of the Company with respect to the
investment by management referred to in Section 8.19.
5.10 Solvency. At the Closing (after and giving effect to the acquisition of
the Stock and the Financing), neither Buyer, Holdings, Trust nor the Company
will (i) be insolvent (either because its financial condition is such that the
sum of its debts is greater than the fair value of its assets or because the
present fair saleable value of its assets will be less than the amount
required to pay its probable liability on its debts as they become absolute
and matured), (ii) has unreasonably small capital with which to engage in its
business or (iii) has incurred or plan to incur debts beyond its ability to
pay as they become absolute and matured.
5.11 Trust. (a) As of the Closing, (i) Trust shall have been duly created
and be validly existing in good standing as a business trust under the
Business Trust Act of the State of Delaware with full business trust power and
authority to (A) own property and to conduct its business, (B) issue and
perform its obligations under the Preferred Securities and the Common
Securities and (C) consummate the transactions contemplated by the Trust
Agreement; (ii) Trust shall be duly qualified to transact business as a
foreign company and shall be in good standing in any other jurisdiction in
which such qualification is necessary, except to the extent that the failure
to so qualify or be in good standing would not have a Material Adverse Effect
on Trust; (iii) Trust shall not be a party to or otherwise bound by any
material agreement other than those listed in Schedule 5.11; (iv) Trust shall
be treated for United States federal income tax purposes as a grantor trust
and not as an association taxable as a corporation; and (v) Trust shall be
reported as a consolidated subsidiary of Holdings pursuant to GAAP.
(b) At the Closing, the Common Securities shall be duly authorized by the
Trust Agreement and, when issued and delivered by Trust to Holdings against
payment therefor, will be validly issued and (subject to the terms of the
Trust Agreement) fully paid and non-assessable undivided beneficial interests
in the assets of Trust; the issuance of the Common Securities shall not be
subject to preemptive or other similar rights; and at the Closing all of the
issued and outstanding Common Securities will be directly owned by Holdings
free and clear of any Encumbrances.
(c) Prior to the Closing, the Trust Agreement shall have been duly authorized
by Holdings and, at the Closing, will have been duly executed and delivered by
Holdings and the Trustees, and will be a legal, valid and binding obligation
of Holdings (as depositor) and the Trustees enforceable in accordance with its
terms, subject to the effects of bankruptcy, insolvency, fraudulent
conveyance, reorganization, moratorium and other similar laws relating to or
affecting creditors' rights generally, general equitable principles (whether
considered in a proceeding in equity or at law) and an implied covenant of
good faith and fair dealing.
(d) Prior to the Closing, the guarantee agreements relating to Trust shall
have been duly authorized by Holdings and, when validly executed and delivered
by Holdings, will be a legal, valid and binding obligation of Holdings
enforceable in accordance with its terms, subject to the effects of
bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and
other similar laws relating to or affecting creditors' rights generally,
general equitable principles (whether considered in a proceeding in equity or
at law) and an implied covenant of good faith and fair dealing.
(e) Prior to the Closing, the Preferred Securities shall have been duly
authorized by the Trust Agreement and, when issued and delivered against
payment of the consideration therefor, will be validly issued and (subject to
the terms of the Declaration) fully paid and nonassessable undivided
beneficial interests in Trust, and will be entitled to the benefits of the
Trust Agreement; the issuance of the Preferred Securities shall not be subject
to preemptive or other similar rights; and (subject to the terms of the Trust
Agreement) holders of Preferred Securities will be entitled to the same
limitation of personal liability under Delaware law as extended to stock-
holders of private corporations for profit.
(f) Prior to the Closing, the Indenture shall have been duly authorized by
Holdings and, assuming due authorization by the trustee thereunder, when
validly executed and delivered by Holdings and such trustee, will be a legal,
valid and binding obligation of Holdings enforceable in accordance with its
terms, subject to the effects of bankruptcy, insolvency, fraudulent
conveyance, reorganization, moratorium and other similar laws relating to or
affecting creditors' rights generally, general equitable principles (whether
considered in a proceeding in equity or at law) and an implied covenant of
good faith and fair dealing.
(g) Prior to the Closing, the Debentures shall have been duly authorized by
Holdings and, at the Closing, will have been duly executed by Holdings and,
when authenticated in the manner provided for in the Indenture and delivered
against payment therefor, will be a legal, valid and binding obligation of
Holdings enforceable in accordance with its terms, subject to the effects of
bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and
other similar laws relating to or affecting creditors' rights generally,
general equitable principles (whether considered in a proceeding in equity or
at law) and an implied covenant of good faith and fair dealing, and will be in
the form contemplated by the Indenture.
ARTICLE VI
ACTIONS BY PARENT, SELLER, HOLDINGS AND BUYER PRIOR TO THE CLOSING
Parent, Seller, Holdings and Buyer covenant as follows for the period from the
date hereof to the Closing Date (except, in the case of Section 6.16, for the
period specified in such Section):
6.1 Maintenance of Business and Preservation of Permits and Services. Except
as expressly contemplated by this Agreement, Seller shall cause the Company
and each Subsidiary to carry on its business, in the ordinary course
consistent with past practice. Neither Parent nor Seller shall cause the
Company or any Subsidiary to terminate an officer thereof or to diminish the
duties or responsibilities of such officer.
6.2 Additional Financial. As soon as reasonably practicable after the end of
the applicable period, Seller shall furnish to Buyer (a) the quarterly
convention statements of the Subsidiaries for all interim quarterly periods
subsequent to September 30, 1995, which shall have been prepared on a basis
consistent with the Convention Statements and, with respect to the financial
statements included therein, in accordance with Statutory Accounting
Principles, (b) the quarterly financial statements of the Company, the GAAP
Subsidiaries and Ridge Re for all quarterly periods subsequent to September
30, 1995, which shall have been prepared in accordance with generally accepted
accounting principles and on a basis consistent with the Company GAAP
Financial Statements, the Subsidiary GAAP Financial Statements and the Ridge
Re GAAP Financial Statements, as the case may be, subject to normal year-end
adjustments and the absence of footnote disclosure, (c) the consolidated
financial statements for the Company, each of the GAAP Subsidiaries and Ridge
Re for the year ended December 31, 1995, which shall have been prepared in
accordance with generally accepted accounting principles and on a basis
consistent with the Company GAAP Financial Statements, the Subsidiary GAAP
Financial Statements and the Ridge Re GAAP Financial Statements, as the case
may be, and (d) (to the extent ordinarily prepared) all monthly financial
statements of the Company, the Subsidiaries and Ridge Re (for months
subsequent to June 1995), which shall have been prepared in a manner
consistent with past practice.
6.3 Certain Prohibited Transactions. Parent and Seller agree to cause the
Company and each Subsidiary not to, without the prior written approval of
Buyer or except as expressly contemplated by this Agreement:
(a) terminate, cancel or amend any insurance coverage maintained by the
Company or any of its Subsidiaries with respect to any material assets of the
Company or any Subsidiary which is not replaced by an adequate amount of
insurance coverage or is not deemed unnecessary in the reasonable judgment of
the Company;
(b) settle any pending or threatened Action relating to an insurance claim in
an amount in excess of $5,000,000 above the policy limit relating to such
claim or settle any other pending or threatened Action in an amount in excess
of $1,000,000; or
(c) take any action which causes any representation or warranty (other than
Section 4.7(a)) of Parent or Seller in this Agreement to be or become untrue
at Closing or results in a material breach of any covenant made by Parent or
Seller in this Agreement.
6.4 Investigation by Buyer. Parent and Seller shall, and shall use their
reasonable efforts to cause the Company and the Subsidiaries to, allow Buyer
during regular business hours through Buyer's employees, agents and
representatives, to make such investigation of the business, properties, books
and records of the Company and the Subsidiaries, and to conduct such
examination of the condition of the Company and the Subsidiaries, as Buyer
reasonably deems necessary or advisable to familiarize itself with such
business, properties, books, records, condition and other matters, and to
verify the representations and warranties of Seller hereunder; provided,
however, that any information obtained from Seller or the Company shall be
deemed to be Evaluation Material for purposes of the Confidentiality Agreement
dated August 3, 1995, between Seller and Kohlberg Kravis Roberts Co., L.P.
(the "Confidentiality Agreement") and shall be subject to the Confidentiality
Agreement.
6.5 Consents. (a) As soon as practicable after execution and delivery of
this Agreement, Buyer and Seller shall make all filings required under the HSR
Act. Buyer and Seller will each furnish all information as may be required by
any other state regulatory agency properly asserting jurisdiction or by the
Federal Trade Commission and the United States Department of Justice under the
HSR Act in order that the requisite approvals for the purchase and sale of the
Stock pursuant hereto, and the transactions contemplated hereby, be obtained
or to cause any applicable waiting periods to expire.
(b) Buyer shall use its best efforts to file Form A change of control
applications with the applicable state insurance regulators referred to in
Schedule 4.11 within 45 days from the date hereof. Buyer will use its
reasonable efforts to obtain insurance regulatory approvals as soon as
possible following the Form A change of control filings. Parent and Seller
shall cooperate with Buyer to obtain such approvals.
(c) Seller and Buyer will, as soon as practicable, commence to take all other
action required to obtain as promptly as practicable all necessary consents,
approvals, authorizations and agreements of, and to give all notices and make
all other filings with, any third parties, including governmental authorities,
necessary to authorize, approve or permit the consummation of the transactions
contemplated hereby and by the Ancillary Agreements, including all consents,
approvals and waivers referred to in Sections 7.4 and 8.2 hereof, and Buyer,
Parent and Seller shall cooperate with each other with respect thereto.
(d) Buyer and Seller will cooperate in seeking applicable regulatory approval
so as to permit the Subsidiaries to continue to pay management fees to the
Company following the Closing at the same level as are currently being paid.
(e) Buyer and Seller will cooperate in seeking applicable regulatory approval
so as to permit IIC to pay to II prior to Closing an extraordinary dividend of
at least $50,000,000. To the extent such approval is obtained, Seller shall
cause IIC to pay to II prior to Closing an extraordinary dividend of at least
$50,000,000.
(f) Notwithstanding the foregoing, however, none of Parent, Seller, Holdings,
Buyer, the Company or the Subsidiaries shall be required to agree to any
limitations, requirements or conditions of, any third party including, but not
limited to, any insurance regulatory body, or make any payment to any party
including the Company or any Subsidiary in order to obtain consents referred
to in Sections 7.4 and 8.2. Parent and Seller shall be entitled to have a
representative or representatives present at all meetings that may be held by
Buyer, Holdings or Trust with insurance regulators.
6.6 Notification of Certain Matters. Parent and Seller, to the extent within
the actual knowledge of an officer of Parent or Seller listed on Schedule
1.1B, shall give prompt notice to Buyer, and Buyer, to the extent within the
knowledge of Buyer, shall give prompt notice to Seller, of (i) the occurrence,
or failure to occur, of any event which occurrence or failure would be likely
to cause any representation or warranty contained in this Agreement to be
untrue or inaccurate in any material respect any time from the date hereof to
the Closing Date, (ii) any material failure of Parent, Seller, Holdings or
Buyer, as the case may be, to comply with or satisfy any covenant, condition
or agreement to be complied with or satisfied by it hereunder (and each party
shall use all reasonable efforts to remedy such failure), (iii) any notice or
other communication from any Person alleging that the consent of such Person
is or may be required in connection with the transactions contemplated by this
Agreement and the Ancillary Agreements, (iv) any notice or other communication
from any governmental or regulatory agency or authority in connection with the
transactions contemplated by this Agreement and the Ancillary Agreements, (v)
any Actions that, if pending or threatened on the date hereof, would have been
required to have been disclosed pursuant to Section 4.13 and (vi) any Actions
that relate to the consummation of the transactions contemplated by this
Agreement and the Ancillary Agreements.
6.7 No Solicitations. (a) Parent, Seller and each of their respective
Affiliates, including the Company and the Subsidiaries, will not, directly or
indirectly, solicit any inquiries or proposals or enter into or continue any
discussions, negotiations, understandings, arrangements or agreements relating
to the sale or exchange of any Stock, the merger or amalgamation of the
Company or any of its Subsidiaries with, or the direct or indirect disposition
of a significant amount of the Company's assets or any Subsidiary's assets or
business to any Person other than Buyer and Holdings or their Affiliates or
provide any assistance or any information to or otherwise cooperate with any
Person in connection with any such inquiry, proposal or transaction (except
that the Company may direct inquiries to Buyer, which shall not disclose
confidential information about the Company or any of its Subsidiaries in
connection with responding to such inquiries). In the event that Parent,
Seller or any of their Affiliates, including the Company and the Subsidiaries
receives a solicited or unsolicited inquiry, proposal or offer for such a
transaction or obtains information that such an offer is likely to be made,
Parent and Seller will provide Buyer with notice thereof as soon as practical
after receipt thereof, including the identity of the prospective purchaser or
soliciting party. Buyer and Holdings agree that to the extent they engage in
any discussions regarding the Company or the Subsidiaries with potential
purchasers of the capital stock or businesses thereof, Buyer and Holdings
shall not include officers or employees of the Company or the Subsidiaries in
such discussions.
(b) The parties acknowledge that there may be no adequate remedy at law for a
breach of Section 6.7(a) and that money damages may not be an adequate remedy
for breach of such Section. Therefore, the parties agree that Buyer shall
have the right, in addition to any other rights it may have, to injunctive
relief and specific performance of Section 6.7(a) in the event of any breach
of such Section. The remedy set forth in the preceding two sentences is
cumulative and shall in no way limit any other remedy any party hereto has at
law, in equity or pursuant hereto.
6.8 Cooperation; Accounting and Other. (a) Seller shall, and Seller shall
use its reasonable efforts to cause the Company to, cooperate with Buyer in
respect of any proposed public offering or private placement of securities,
and arrangements of other financing by Buyer, the proceeds of which are to be
used to finance a portion of the purchase of the Stock by Buyer (provided,
however, that Seller shall not be obligated to participate in such financing
or the marketing thereof and shall not be obligated to be a party to any
underwriting, private placement or other agreement with respect thereto), and
shall, without limitation of the foregoing, cause such Company financial
statements to be prepared as may be required by the rules and regulations of
the Securities and Exchange Commission promulgated under the Securities Act.
(b) Buyer shall give Seller and Parent a reasonable opportunity to review any
references to Seller, Parent, this Agreement or the transactions contemplated
hereby in any registration statement or private placement memorandum relating
to the sale of securities the proceeds of which are to be used to finance a
portion of the purchase of the Stock by Buyer and any amendments or
supplements thereto by providing to Seller and Parent drafts of such
registration statement or private placement memorandum or any amendments or
supplements thereto prior to filing such documents with the Securities and
Exchange Commission or distributing such documents to potential purchasers of
privately placed securities and allow Seller and Parent a reasonable
opportunity (as determined under the circumstances and consistent with the
overall timing constraints applicable to preparation of such registration
statement, private placement memorandum, amendment or supplement) to review
and comment thereon.
6.9 Investment Portfolio. (a) Parent and Seller shall cause the Company and
the Subsidiaries to manage the investment portfolio for the Company and the
Subsidiaries in accordance with the Investment Policy.
(b) Five days prior to the Closing Date, Parent and Seller shall cause the
Company to deliver to Buyer a list of all Investments in the investment
portfolio for the Company and the Subsidiaries as of such date.
6.10 Reinsurance Agreements. Seller shall cause the Company and each
Subsidiary not to, without the prior written approval of Buyer (which approval
shall not be unreasonably withheld), except in the ordinary course of business
consistent with past practice (i) except for the Ridge Re Endorsements, amend
any reinsurance or retrocession agreement, (ii) enter into or commit to enter
into any loss portfolio transfer or other similar transaction, agreement or
arrangement or series of related transactions, agreements or arrangements
involving any ceded reinsurance of the Company or any Subsidiary, (iii) enter
into or commit to enter into any reinsurance or retrocession contract or
treaty except to replace, renew or extend existing reinsurance and
retrocession agreements and treaties on terms which are not different in any
material respect from the terms of the agreement or treaty being replaced,
renewed or extended, as the case may be, or (iv) commute or terminate any
contract of reinsurance, provided that Seller shall cause the Company and each
Subsidiary not to commute or terminate any such contract which at the time of
commutation or termination is legally carried on the books of the Company and
the Subsidiaries in an amount of $5,000,000 or more. All reinsurance or
retrocession agreements or treaties permitted by this Section shall not have a
change of control or similar provision which would require the Company or any
Subsidiary to obtain a consent to consummate the transactions contemplated
hereby (unless such provisions shall have been waived prior to Closing).
6.11 Dividends. Seller and Parent shall cause the Company not to (i)
declare, set aside or pay any dividends or distributions (whether in cash,
stock or property) in respect of any capital stock of the Company, (ii) make
any other payment or distribution to Parent, Seller or any Affiliate of Parent
(excluding the Company and the Subsidiaries, but including TRG and its
subsidiaries), or (iii) redeem, purchase or otherwise acquire any of the
capital stock of the Company or any Subsidiary, except for (A) payments
permitted under the Tax Agreement, (B) payments under the contracts,
agreements or arrangements referred to in Schedule 4.23 or described in
clauses (i), (ii) or (iii) of Section 4.23(b), (C) the dividends contemplated
by Sections 6.18(i) and 9.7 and (D) distributions to Seller of any proceeds
received by the Company (gross of any income tax obligations) from the First
Quadrant Final Sale or of any amounts received by the Company (gross of any
income tax obligations) as proceeds or purchase price adjustments from the
Viking Sale or Constitution Re Sale. For purposes of the exception set forth
in (D) in the preceding sentence, proceeds shall include any amounts (net of
any state tax obligations for which the Company is liable under the stock
purchase agreement for the company whose sale generated such proceeds)
subsequently received after the date of this Agreement with respect to tax
payments from such companies but shall not include any tax payments previously
received. In addition, as soon as practicable after the date of this
Agreement, the Company shall distribute $100,000 to Seller in respect of the
Constitution Re 1994 tax shortfall.
6.12 Seller Notes. The Company and the Subsidiaries shall not dispose of the
Seller Notes to a Person other than a Subsidiary, except that the Company and
the Subsidiaries may dispose of all or a portion of the Seller Notes prior to
Closing to a Person other than a Subsidiary if upon such disposition Seller
shall pay to the Company the excess of (i) the aggregate principal amount of
the Seller Notes so disposed plus accrued but unpaid interest through the date
of such disposition over (ii) the Third Party Amount. To the extent not
already disposed of, immediately prior to Closing, (i) Seller shall repay the
outstanding principal amounts and any accrued but unpaid interest thereon
under the Seller Notes issued by it and held at that time by the Company or
any Subsidiary and (ii) Parent shall cause Credit Corp. to repay the
outstanding principal amounts and any accrued but unpaid interest thereon
under the Seller Notes issued by Credit Corp. and held at that time by the
Company or any Subsidiary.
6.13 Leesburg Training Facility. The Company and the Subsidiaries shall not
dispose of any of their interests in the ground lease agreement among Parent
and certain of the Subsidiaries or the lease agreement among Seller and such
Subsidiaries, each dated as of December 1, 1985 and each relating to
approximately six acres of land in Loudon County, Virginia and a training
facility located thereon or their fee interests in such facility (the
"Leesburg Training Facility"), to a Person other than a Subsidiary, except
that the Company and the Subsidiaries may dispose of their interests (in whole
or in part) in the Leesburg Training Facility prior to Closing to a Person
other than a Subsidiary if upon such disposition Seller pays to the Company
the excess of (i) the greater of $118,000,000 and the statutory carrying value
of the Leesburg Training Facility as of December 31, 1995 over (ii) the Third
Party Amount. If no Third Party Amount has been received by the Company or
any Subsidiary prior to the Closing, immediately prior to Closing, Parent and
Seller agree to cause an amount equal to the greater of (i) the statutory
carrying value of the Leesburg Training Facility as of December 31, 1995 and
(ii) $118,000,000, to be contributed to such Subsidiaries, allocated to such
Subsidiaries in accordance with Schedule 6.13 (such contributed amount, the
"Leesburg Training Facility Amount"). At Closing, the Company shall cause to
be transferred to Seller or an Affiliate of Seller any remaining interests the
Company or any of the Subsidiaries has in the Leesburg Training Facility.
Upon any transfer of the Leesburg Training Facility in accordance with this
Section 6.13, the Company and the Subsidiaries shall have no further rights or
obligations relating to the Leesburg Training Facility.
6.14 Reserves and Book-Up. (a) Effective as of December 31, 1995, Parent
and Seller shall cause the reserves of CFI and its subsidiaries and WSG and
its subsidiaries for periods prior to December 31, 1992 to be increased for
statutory accounting and GAAP purposes in an amount so that after 85% of such
increase is ceded to Ridge Re pursuant to the applicable Ridge Re Treaties,
CFI and its subsidiaries and WSG and its subsidiaries shall have ceded to
Ridge Re the maximum amount of losses and loss adjustment expenses permitted
under the applicable Ridge Re Treaties. Immediately following such increases
and effective as of December 31, 1995, Parent and Seller shall cause CFI and
its subsidiaries and WSG and its subsidiaries to make the cession referred to
in the immediately preceding sentence.
(b) Effective as of December 31, 1995 Parent and Seller shall cause II and
its subsidiaries to increase their reserves for statutory accounting and GAAP
purposes by an additional $50,000,000 and cede 85% of such increase to Ridge
Re pursuant to the applicable Ridge Re Treaty.
(c) During 1996 and at least one day prior to the Closing Date, Parent and
Seller shall cause the reserves of CFI and its subsidiaries and WSG and its
subsidiaries to be increased for statutory accounting and GAAP purposes in the
amounts specified by Buyer and/or Seller, but not to exceed an additional
$115,000,000 and $100,000,000, respectively (beyond the increases required by
paragraph (a) above).
6.15 Rating Agency Presentations. Buyer shall give Seller reasonable notice
of any meetings prior to the Closing Date with A.M. Best & Co. ("A.M. Best")
to discuss the insurance claims paying ratings of the Insurance Subsidiaries,
and Seller at its option may have a representative at such meetings.
6.16 Certain Admitted Assets. Parent and Seller shall indemnify, guaranty or
otherwise post credit support to the extent that as of the Closing Date the
Insurance Subsidiaries shall not have received credit for statutory purposes
for the Crostex/Camfex Purchase Money Notes in an amount equal to at least $35
million. Such indemnity, guaranty or credit support shall continue until
final maturity of such notes but only in the amount provided in the preceding
sentence.
6.17 Intercompany Accounts. (a) Except as provided in Sections 6.12 and
6.13, all intercompany accounts (other than those relating to Taxes and those
under or relating to reinsurance contracts and arrangements) between the
Company and any Subsidiary, on the one hand, and Parent and any of its
Affiliates (other than the Company and its Subsidiaries), on the other hand,
as of the Closing shall be settled at fair value (irrespective of the terms of
payment of such intercompany accounts) in the manner provided in this Section.
At least five business days prior to the Closing, Seller shall prepare and
deliver to Buyer a statement setting out in reasonable detail the calculation
of all such intercompany account balances based upon the latest available
financial information as of such date and, to the extent reasonably requested
by Buyer, provide Buyer with supporting documentation to verify the underlying
intercompany charges and transactions. All such intercompany account balances
shall be paid in full in cash prior to the Closing. All intercompany
reinsurance agreements shall remain in effect and shall be settled in the
ordinary course of business. All intercompany accounts relating to Taxes will
be governed by the Tax Agreement.
(b) As promptly as practicable, but no later than 60 days after the Closing
Date, Seller shall cause to be prepared and delivered to Buyer a statement
setting out in reasonable detail the calculation of such intercompany account
balances as of the Closing Date (giving effect to any settlement under
subsection (a) and any other payments). Buyer and Seller shall cooperate in
the preparation of any such calculation including the provision of supporting
documentation to verify the underlying intercompany charges, transactions and
payments. If Buyer disagrees with Seller's calculation of such intercompany
balances Buyer may, within 30 days after delivery of such statement, deliver a
notice to Seller disagreeing with such calculation and setting forth Buyer's
calculation of such amount. If Buyer and Seller are unable to resolve such
disagreement within 30 days thereafter, such disagreement shall be resolved by
independent accountants of nationally recognized standing reasonably
satisfactory to Buyer and Seller. The net amount of any such intercompany
balance shall be paid in cash promptly thereafter, together with interest
thereon from and including the Closing Date to but excluding the date of
payment at a rate equal to 5% per annum. Such interest shall be payable at
the same time as the payable to which it relates and shall be calculated daily
on the basis of a year of 365 days and the actual number of days elapsed.
6.18 Certain Required Transfers. Prior to the Closing Date, Parent and
Seller shall cause TRG to transfer all of the outstanding capital stock of
Envision to the Company.
6.19 Financing. Buyer shall use its reasonable efforts to obtain financing
that will satisfy the condition in Section 8.9 hereof.
6.20 Dividends Received by TRG. In the event that Seller receives cash
dividends from TRG between January 1, 1996 and the Closing, immediately prior
to Closing Seller shall make a capital contribution to the Company in an
amount (the "TRG Contributed Dividends") equal to the lesser of the dividends
so received and the TRG Dividend Replacement Amount. Seller shall use
reasonable efforts to have TRG's subsidiaries distribute the fullest amount
permitted by insurance regulators and applicable law (not to exceed the TRG
Dividend Replacement Amount) to it prior to Closing.
6.21 Capital Contribution by Seller. Immediately prior to Closing, Seller
shall make a capital contribution to the Company in an amount equal to
$1,700,000.
6.22 TOPrS. Seller and Buyer shall, and Holdings shall cause an affiliated
investment partnership to, execute and deliver the TOPrS Side Letter at the
Closing.
6.23 Subsidiary Credit Agreements. In the event any indebtedness under any
Subsidiary Credit Agreement is prepaid, including by reason of any
acceleration thereof, with funds contributed by Seller for the purpose of such
prepayment, the cash payable pursuant to Section 2.2 shall be increased by an
amount equal to such indebtedness. No such prepayment shall constitute a
breach of this Agreement.
ARTICLE VII
CONDITIONS TO OBLIGATIONS OF PARENT AND SELLER
The obligations of Parent and Seller to consummate the transactions
contemplated hereby on the Closing Date are subject, in the discretion of
Parent and Seller, to the satisfaction or waiver, on or prior to the Closing
Date, of each of the following conditions:
7.1 Representations, Warranties and Covenants. All representations and
warranties of Buyer and Holdings contained in this Agreement and the Ancillary
Documents to which Buyer or Holdings is a party shall be true and correct in
all material respects (except that such representations and warranties
specifically qualified by materiality shall be read for purposes of this
Section so as not to require an additional degree of materiality) as of the
date of this Agreement and (except to the extent such representations and
warranties speak as of an earlier date) as of the Closing Date as if such
representations and warranties were made on and as of the Closing Date, any
breaches of such representations and warranties as of the Closing Date
(determined for purposes of this clause without regard to any materiality
qualifications in such representations and warranties) taken together shall
not have a Material Adverse Effect on Holdings, Buyer, the Company and the
Subsidiaries, taken as a whole (assuming that the Closing shall have
occurred), or on Parent or Seller, and Buyer and Holdings shall have performed
in all material respects all agreements and covenants required hereby to be
performed by them prior to or at the Closing Date. There shall be delivered
to Seller a certificate (signed by the President of Buyer and the President of
Holdings) to the foregoing effect.
7.2 HSR Act. The applicable waiting period, including any extension thereof,
under the HSR Act shall have expired.
7.3 No Governmental or Other Proceeding; Illegality. (a) No Action shall be
pending or threatened which seeks to enjoin, restrain or prohibit the
consummation of the transactions contemplated by this Agreement (including,
without limitation, the execution, delivery and performance of any Ancillary
Agreement by the parties thereto) which either Parent or Seller reasonably
believes presents a material risk that it or its Affiliates would suffer
substantial monetary damage (whether or not indemnified under this Agreement).
(b) There shall not be in effect any statute, rule, regulation or order of
any court, governmental or regulatory body which prohibits or makes illegal
the transactions contemplated hereby, including, without limitation, the
execution or delivery of any of the Ancillary Agreements or the performance of
any of the Guarantees, the Tax Agreement or the Ridge Re Treaties, as amended
by the applicable Ridge Re Endorsements.
7.4 Consents. All consents, approvals and waivers from governmental
authorities and other parties necessary to permit Seller and Parent to
consummate the transactions contemplated hereby shall have been obtained,
unless the failure to obtain any such consent, approval or waiver would not
have a Material Adverse Effect on Seller or Parent, as the case may be,
provided, however, that no such consent, approval or waiver shall contain any
limitations, requirements or conditions on Parent or Seller or require Parent
or Seller to make any payment to any party including the Company or any
Subsidiary.
7.5 Opinion of Counsel. Buyer shall have delivered to Seller an opinion of
Simpson Thacher & Bartlett, substantially in the form of Exhibit E-1, an
opinion of King & Spalding, special tax counsel to Holdings and Buyer,
substantially in the form of Exhibit E-2, and an opinion of Richards, Layton &
Finger, special Delaware counsel to Holdings and Buyer, substantially in the
form of Exhibit E-3.
7.6 Certificates. Buyer and Holdings will furnish Seller with such
certificates of their respective officers, directors and others to evidence
compliance with the conditions set forth in this Article VII as may be
reasonably requested by Seller.
7.7 Corporate Documents. Seller shall have received from Buyer and Holdings
resolutions adopted by the Board of Directors of Buyer and Holdings approving
this Agreement, the Tax Agreement, the TOPrS Side Letter and the Debentures,
as applicable, and the transactions contemplated hereby and thereby, certified
by the corporate secretary or assistant secretary of Holdings and Buyer, as
applicable.
7.8 TRG Closing. TRG Acquisition shall have simultaneously purchased all of
the outstanding shares of TRG capital stock pursuant to the TRG Agreement.
7.9 Registration Rights Agreement. Trust and Holdings shall have executed
and delivered to Seller a Registration Rights Agreement substantially in the
form of Exhibit F.
7.10 Solvency Matters. Buyer shall have provided to Seller, any solvency
letters or similar opinions or certificates relating to the solvency and
adequate capitalization of Buyer, Holdings or the Company and/or the ability
of Buyer, Holdings or the Company to pay its debts that are given to any banks
or other lenders in connection with the acquisition of the Stock at the same
time as such letters, opinions or certificates are provided to such banks or
other lenders.
7.11 Capitalization. Holdings shall have received no less than $500,000,000
in equity and the amount of indebtedness for borrowed money of Holdings and
Buyer shall be no more than $1,325,000,000 (excluding the Debentures).
7.12 Company Certificates. Seller shall have received (i) a certificate
signed by each of the persons listed on Schedule 1.1C dated as of the date of
this Agreement, and (ii) a certificate signed by each of such persons dated as
of the Closing Date, in each case substantially in the form of Exhibit G.
7.13 Subsidiary Releases. All of the domestic U.S. Subsidiaries included in
the consolidated federal income tax return of Parent which are Subsidiaries as
of Closing shall have executed and delivered to Parent and Seller the releases
of any and all obligations under existing tax sharing agreements substantially
in the form of Exhibit H.
ARTICLE VIII
CONDITIONS TO OBLIGATIONS OF HOLDINGS AND BUYER
The obligations of Holdings and Buyer to consummate the transactions
contemplated hereby are subject, in the discretion of Buyer, to the
satisfaction or waiver, on or prior to the Closing Date, of each of the
following conditions:
8.1 Representations, Warranties and Covenants. All representations and
warranties of Parent and Seller contained in this Agreement and the Ancillary
Agreements to which Parent or Seller is a party shall be true and correct in
all material respects (except that such representations and warranties
specifically qualified by materiality shall be read for purposes of this
Section so as not to require an additional degree of materiality) as of the
date of this Agreement and (except to the extent such representations and
warranties speak as of an earlier date) as of the Closing Date as if such
representations and warranties were made on and as of the Closing Date, any
breaches of such representations and warranties as of the Closing Date
(determined for purposes of this clause without regard to any materiality
qualifications in such representations and warranties) taken together shall
not have a Material Adverse Effect on the Company and the Subsidiaries, taken
as a whole, and Parent and Seller shall have performed in all material
respects all agreements and covenants (other than those contained in Section
6.3(c) and clauses (i), (ii) and (v) of Section 6.6) required hereby to be
performed by them, respectively, prior to or at the Closing Date. There shall
be delivered to Buyer a certificate of each of Parent and Seller (signed by an
Executive Vice President of Parent and the President of Seller) to the
foregoing effect.
8.2 Consents. All consents, approvals and waivers (a) referred to in clauses
(i) and (ii) of Section 4.11, (b) referred to on Schedule 4.10, (c) under
reinsurance and retrocession agreements for the accident year in which the
Closing occurs that would be terminable as a result of consummation of the
transactions contemplated by this Agreement and the Ancillary Agreements, (d)
under all other reinsurance and retrocession agreements that would be
terminable as a result of consummation of the transactions contemplated by
this Agreement and the Ancillary Agreements and (e) under the reinsurance
treaties described in Ex. 1 (part A) of Schedule 4.25 shall have been obtained
in form and substance satisfactory to Buyer, acting reasonably, and shall be
in full force and effect, except, in the case of consents, approvals and
waivers referred to in clauses (b), (c) and (d), consents, approvals or
waivers the failure of which to obtain would not, individually or in the
aggregate, result in a Material Adverse Effect on the Company and the
Subsidiaries, taken as a whole, provided, however, that in the case of clauses
(a), (b), (c), (d) and (e), no such consent, approval or waiver shall contain
any limitations, requirements or conditions on Holdings, Buyer, the Company or
a Subsidiary or require Holdings, Buyer, the Company or a Subsidiary to make
any payment to any party including in the case of Holdings or Buyer, to the
Company or, in the case of Holdings, Buyer or the Company, to any Subsidiary,
provided further, that the approval of any intercompany tax agreements
referred to in either Section 4.11(i) or (ii) for a period after Closing shall
not be a condition to the obligations of Buyer and Holdings hereunder, and
provided still further, that with respect to any intercompany tax agreement
among the Company and the Subsidiaries for the period January 1, 1995 through
Closing, the obligations of Buyer and Holdings hereunder shall be conditioned
only on the approval of an agreement that is reasonably consistent with those
provisions of the Tax Agreement that provide for the amount and time for
payments attributable to Taxes.
8.3 HSR Act. The applicable waiting period, including any extension thereof,
under the HSR Act shall have expired.
8.4 No Governmental or Other Proceeding; Illegality. (a) No Action shall be
pending or threatened which seeks to enjoin, restrain or prohibit the
consummation of the transactions contemplated by this Agreement (including,
without limitation, the execution, delivery and performance of any Ancillary
Agreement by the parties thereto) or to impose limitations on the ability of
Buyer to exercise full rights of ownership of the Stock or to require the
divestiture by Buyer of the Stock or by the Company, Buyer, Holdings or any of
their Affiliates of any assets or businesses, which either Holdings or Buyer
reasonably believes presents a material risk that it or its Affiliates
(including the Company and the Subsidiaries after the Closing Date) would not
realize substantially all of the benefits of the transactions contemplated by
this Agreement or would suffer substantial monetary damages (whether or not
indemnified under this Agreement).
(b) There shall not be in effect any statute, rule, regulation or order of
any court, governmental or regulatory body which prohibits or makes illegal
the transactions contemplated hereby, including, without limitation, the
execution or delivery of any of the Ancillary Agreements or the performance of
any of the Guarantees, the Tax Agreement or the Ridge Re Treaties, as amended
by the applicable Ridge Re Endorsements.
8.5 Opinion of Counsel. Seller shall have delivered to Buyer an opinion of
Skadden, Arps, Slate, Meagher & Flom, substantially in the form of Exhibit I-
l, an opinion of Richard S. Paul, Senior Vice President and General Counsel of
Seller, substantially in the form of Exhibit I-2, an opinion of Richard N.
Frasch, general counsel of the Company, substantially in the form of Exhibit
I-3, an opinion of Cox & Wilkinson, special Bermuda counsel to Parent and
Seller, substantially in the form of Exhibit I-4, an opinion of LeBoeuf, Lamb,
Greene & MacRae, special tax counsel to Parent and Seller, as to the matters
set forth in Exhibit I-5, which opinion shall otherwise be in form and
substance reasonably satisfactory to Buyer, an opinion of counsel (who shall
be reasonably acceptable to Buyer) as to matters of Indiana law set forth in
Exhibit I-6, which opinion shall otherwise be in form and substance reasonably
satisfactory to Buyer, and an opinion of counsel (who shall be reasonably
acceptable to Buyer) as to matters of New Jersey law set forth in Exhibit I-7,
which opinion shall otherwise be in form and substance reasonably satisfactory
to Buyer.
8.6 Certificates. Parent and Seller shall furnish Buyer with such
certificates of the respective officers of Parent and Seller and others to
evidence compliance with the conditions set forth in this Article VIII as may
be reasonably requested by Buyer.
8.7 Corporate Documents. Buyer shall have received from Parent and Seller
resolutions adopted by the respective boards of directors of Parent and Seller
approving this Agreement and the other Ancillary Agreements to which Parent or
Seller is or will be a party and the transactions contemplated hereby and
thereby, certified by the corporate secretary or assistant secretary of Parent
and Seller, as applicable.
8.8 Closing. TRG Acquisition shall have simultaneously purchased all of the
outstanding shares of TRG's capital stock pursuant to the TRG Agreement.
8.9 Financing. Buyer shall have obtained proceeds from financing sources on
terms and conditions consistent with the Underwriter Letter and with the
senior bank commitment letter provided by Buyer to Seller prior to the date
hereof, and otherwise reasonably satisfactory to Buyer.
8.10 No Material Adverse Effect. Since June 30, 1995, there shall not have
occurred any event, change or development (including, without limitation, the
suspension, revocation or other termination of any Permit) which individually
or in the aggregate, has had or is reasonably likely to have a Material
Adverse Effect on the Company and the Subsidiaries, taken as a whole.
8.11 No Change in Rating. Buyer shall have received confirmation from A.M.
Best that upon Closing the A.M. Best's policyholder's rating for each
Insurance Subsidiary will be "A-" (without negative implications) or better,
and after giving effect to the transactions contemplated by this Agreement,
the Ancillary Agreements and the Financing Documents.
8.12 Resignation of Officers and Directors. All Persons who are directors
and/or officers of the Company and/or any of the Subsidiaries whose principal
employment is as an officer and/or employee of Seller and/or Parent, shall
have resigned such directorships and/or such offices.
8.13 Transfer Taxes. Seller shall have caused all appropriate stock transfer
tax stamps to be affixed to the certificate or certificates representing the
Stock.
8.14 Seller Notes. Seller and Credit Corp. shall have made the payments
contemplated by Section 6.12 and repaid all amounts outstanding under any
Seller Notes that are still held by the Company and any Subsidiary together
with any accrued but unpaid interest thereon.
8.15 Leesburg Training Facility Amount. The Leesburg Training Facility
Amount shall have been paid, as provided in Section 6.13.
8.16 Reserves and Book-Up. All of the transactions described in Section 6.14
shall have been consummated.
8.17 Ridge Re Endorsements. Ridge Re, Seller and each Subsidiary listed on
Schedule 8.17 shall have executed and delivered to Buyer endorsements to the
Ridge Re Treaties substantially in the form of Exhibit J.
8.18 Guarantees. Parent shall have executed and delivered to Buyer
guarantees for the benefit of each Subsidiary listed on Schedule 8.18
substantially in the form of Exhibit K and Parent and Seller shall have
executed and delivered to Buyer guarantees for the benefit of each Subsidiary
listed on Schedule 8.18 substantially in the form of Exhibit L.
8.19 Management Investment. Members of the management of the Company and the
Subsidiaries designated by Holdings shall have invested in the capital stock
of Holdings on terms substantially consistent with the agreements in principle
delivered to Seller prior to the date hereof or otherwise satisfactory to
Holdings.
ARTICLE IX
ACTIONS BY PARENT, SELLER,AND BUYER AFTER THE CLOSING
9.1 Books and Records. Parent, Seller and Buyer agree that so long as any
books, records and files relating to the business, properties, assets or
operations of the Company or the Subsidiaries, to the extent that they pertain
to the operations of the Company or the Subsidiaries prior to the Closing
Date, remain in existence and available, each party (at its expense) shall
have the right to inspect and to make copies of the same at any time during
normal business hours for any proper purpose. Parent and Seller further agree
that, to the extent such records have not otherwise been delivered to the
Company or Buyer, Parent and Seller will not destroy or dispose of any
material books, records or files relating to the investment portfolio existing
as of the Closing Date without first offering to provide such books, records
or files to Buyer and that, in any event, Buyer shall have the right to
inspect and to make copies of the same at any time during normal business
hours for any proper purpose, to the extent reasonably requested by Buyer.
9.2 First Quadrant Final Sale, Viking Sale and Constitution Re Sale. If the
Company shall, after the Closing Date, receive any proceeds from the First
Quadrant Final Sale, or any amount as purchase price adjustments from the
Viking Sale or Constitution Re Sale, Buyer shall cause the Company to remit
such amounts (net of any tax obligation of Buyer, the Company or any
Subsidiary) to Seller as promptly as practicable.
9.3 Covenants Regarding the Securities. In connection with any sale,
transfer or other disposition of all or any part of the Securities under an
exemption from registration under the Securities Act, if requested by Buyer,
Seller (or Parent, if such Securities are held by Parent) will deliver to
Holdings an opinion of counsel (which may be the General Counsel of Parent or,
if such Securities are held by Seller, of Seller), reasonably satisfactory in
form and substance to Holdings, that such exemption is available; provided,
however, that in case of any sale or other transfer of Securities to any
Person who is a qualified institutional buyer as defined in Rule 144A under
the Securities Act, no opinion of counsel shall be required if Seller (or
Parent, if such Securities are held by Parent) provides to Holdings an
officer's certificate to the effect that such Person is a qualified
institutional buyer as defined in Rule 144A under the Securities Act. Parent
and Seller hereby agree and acknowledge that upon original issuance thereof,
and until such time as the same is no longer required under the applicable
requirements of the Securities Act, the Securities (and all securities issued
in exchange therefor or substitution thereof) shall bear, until such
restrictions are no longer applicable, the following legend:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "1933 ACT"). THEY MAY NOT BE SOLD
OR TRANSFERRED EXCEPT IN COMPLIANCE WITH THE REGISTRATION PROVISIONS OF THE
1933 ACT AND ANY APPLICABLE STATE BLUE SKY LAWS OR SECURITY LAWS OR PURSUANT
TO AN AVAILABLE EXEMPTION FROM SUCH PROVISIONS."
Parent and Seller further agree and acknowledge that any Holdings Common Stock
acquired in accordance with Section 11.3 shall also bear (until such time as
such restrictions are no longer applicable) the following legend:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A RIGHT OF
FIRST REFUSAL AND CERTAIN OTHER RESTRICTIONS ON TRANSFER AS SET FORTH IN THAT
CERTAIN STOCKHOLDERS AGREEMENT, BETWEEN NEW TALEGEN HOLDINGS CORPORATION AND
XEROX FINANCIAL SERVICES, INC., A COPY OF WHICH MAY BE OBTAINED FROM THE
SECRETARY OF NEW TALEGEN HOLDINGS CORPORATION."
9.4 Crostex/Camfex Purchase Money Notes. Seller and Parent shall indemnify,
guaranty or otherwise post credit support pursuant to the covenant set forth
in Section 6.16 from and after the Closing.
9.5 Certain Employee Benefit Matters. (a) Parent and its Affiliates (other
than the Company, the Subsidiaries, TRG and its subsidiaries) shall retain all
liabilities and obligations under the employee stock ownership plan ("ESOP")
in which employees of the Company and the Subsidiaries participated prior to
January 1, 1993. All awards made to such participants under the ESOP shall
fully vest as of the Closing Date.
(b) Parent and its Affiliates (other than the Company, the Subsidiaries, TRG
and its subsidiaries) shall retain all liabilities and obligations under the
Long Term Incentive Program for the benefit of the participants listed on
Schedule 9.5. All payments due to such participants under the Long Term
Incentive Program shall be made at Closing.
9.6 Transfer Taxes. Seller shall pay, or cause to be paid, all stock
transfer and other transfer taxes required to be paid in connection with the
sale and delivery to Buyer of the Stock.
9.7 Dividends Received by TRG. To the extent that the TRG Dividend
Replacement Amount exceeds the TRG Contributed Dividends as of Closing, Seller
shall cause TRG to declare and pay at Closing a dividend to Seller in the form
of a promissory note issued by TRG and in a principal amount equal to such
excess, and immediately thereafter Seller shall contribute such note to the
Company and assign to the Company all its rights thereunder. Such note shall
be payable at such times as TRG shall have cash available (after the payment
of its indebtedness and other corporate expenses). Interest shall accrue
thereon at a rate per annum equal to the Overdue Rate (as defined in the Tax
Agreement).
9.8 Ridge Re. On and after the Closing Date, Parent and Seller shall cause
Ridge Re to refrain from (i) entering into any reinsurance or retrocession
agreement or treaty and (ii) engaging in any business other than in connection
with the Ridge Re Treaties, as amended by the applicable Ridge Re
Endorsements, and the other treaties referenced in the first sentence of
Section 4.9(c) as in effect on the date hereof, provided that the obligations
contained in this Section 9.8 shall terminate upon consummation of the sale of
Ridge Re to a Qualified Transferee.
9.9 Further Assurances. On and after the Closing Date, Parent, Seller, the
Company, Holdings and Buyer will take all appropriate action and execute all
documents, instruments or conveyances of any kind which may be reasonably
necessary or advisable to carry out any of the provisions hereof, including
without limitation, putting Buyer in possession and operating control of the
business of the Company.
ARTICLE X
INDEMNIFICATION
10.1 Survival of Representations and Warranties. Holdings and Buyer have the
right to rely fully upon the representations, warranties, covenants and
agreements of Parent and Seller contained in this Agreement and the Ancillary
Agreements. Parent and Seller have the right to rely fully upon the
representations, warranties, covenants and agreements of Holdings and Buyer
contained in this Agreement and the Ancillary Agreements. All such
representations and warranties (including the Schedules hereto and the
certificates delivered in accordance with Sections 7.1 and 8.1 hereof, insofar
as the Schedules and such certificates relate to such representations and
warranties) shall be deemed to be repeated at Closing for purposes of this
Article X and, except as set forth in the last sentence of this Section, shall
survive the execution and delivery hereof and the Closing, and thereafter (i)
in the case of the representations and warranties contained in Sections 4.1,
4.2, 4.3, 4.4, 4.5, 4.6, 4.18, 5.1, 5.2, 5.4, 5.7 and 5.11 (other than clauses
(iii), (iv) and (v) of Section 5.11(a)) hereof, such representations and
warranties shall survive without limitation as to time, (ii) in the case of
the representations and warranties contained in Sections 4.21, 4.24 and 4.28
hereof, such representations and warranties shall survive until 90 days after
the expiration of the applicable statute of limitations with respect to the
subject matter thereof and (iii) in the case of all other representations and
warranties, such representations and warranties shall expire on the date two
years following the Closing Date; provided, however, that any representation
or warranty shall survive the time it would otherwise terminate pursuant to
this Section to the extent that notice of a breach thereof giving rise to a
right of indemnification shall have been given by a party hereto in accordance
with Section 10.3 hereof prior to such time. All of the covenants and
agreements of the parties contained in this Agreement and the Ancillary
Agreements to be performed on or after the date of this Agreement shall
survive the Closing without limitation as to time. Notwithstanding the
foregoing, none of the following representations and warranties (including the
Schedules hereto and the certificates delivered in accordance with Sections
7.1 and 8.1 hereof, insofar as the Schedules and such certificates relate to
such representations and warranties) shall survive the Closing: (i)
representations and warranties contained in Sections 4.16, 4.21(e), 4.21(h)
and 5.10 and in clauses (iii), (iv) and (v) of Section 5.11(a); and (ii)
representations and warranties contained in any Section of Article IV and
which relate to Excluded Activities.
10.2 Indemnification. (a) Parent and Seller shall jointly and severally
defend, indemnify and hold harmless Buyer, the Company and their Affiliates
and each director and officer of such Persons against any loss, damage, claim,
liability, judgment or settlement of any nature or kind, including all costs
and expenses relating thereto, including without limitation, interest,
penalties and reasonable attorneys' fees (collectively "Damages"), arising out
of, resulting from or relating to:
(i) subject to Section 10.1, the breach of any representation or warranty
of Parent or Seller contained in this Agreement (other than in Section 4.18),
any Ancillary Agreement or any certificate delivered pursuant hereto or
thereto; provided, however, that such Persons shall be entitled to
indemnification hereunder only when and to the extent that the aggregate of
all such Damages exceeds $10,000,000;
(ii) the breach of any covenant or agreement (whether to be performed prior
to or after Closing) of Parent or Seller contained in this Agreement, any
Ancillary Agreement or any certificate delivered pursuant hereto or thereto;
(iii) any facts, circumstances, conditions, events or actions existing or
occurring at any time with respect to Constitution Re, First Quadrant and
Viking and any subsidiary of any of the foregoing (other than liabilities
related to the business represented by the First Quadrant Asset Sale)
(collectively, the "Excluded Business");
(iv) any Action brought by a security holder or creditor of Seller or
Parent in their capacity as such;
(v) long term incentive payments (including payments arising out of the
sale of the Company or the Excluded Business) payable to the Persons listed on
Schedule 10.2 including payments under the Long Term Incentive Program;
(vi) the breach of the representations and warranties contained in Section
4.18;
(vii) any facts, circumstances, conditions, events or actions existing or
occurring after the Closing Date with respect to the Leesburg Training
Facility; and
(viii) the breach, if any, by CFI or WSG of the respective Subsidiary
Credit Agreement to which it is a party in connection with any of the
reserving actions described in Section 6.14(a).
The foregoing provisions of this Section 10.2(a) shall not apply with respect
to any Damages arising out of (and no indemnification hereunder shall be
available with respect to) any (i) breach of any representation or warranty of
Parent or Seller that is terminated as provided in Section 10.1 (subject,
however, to the proviso contained in Section 10.1), (ii) breaches of the
representations and warranties of Parent and Seller contained in this
Agreement and the Ancillary Agreements which would result in the failure of
any of the conditions in Section 8.1 to be satisfied if Holdings or Buyer had
actual knowledge of such breaches (or received notice thereof pursuant to
Section 6.6) prior to the Closing Date, (iii) breach of any representation or
warranty contained in Section 4.21(h), (iv) breach of any representation or
warranty to the extent it relates to Excluded Activities, (v) action that
breaches Section 6.3(c) to the extent such action relates to Excluded
Activities (except if such action is directed by Parent or Seller or, prior to
or at the time taken, an officer listed on Schedule 1.1B knew that such action
was to be taken), (vi) breach of any covenant to be performed prior to Closing
to the extent it relates to Excluded Activities, other than a breach of
Section 6.1, 6.3(a), 6.3(b), 6.10 or 6.14, (vii) action that breaches Section
6.2 or Section 6.9 (except in each case if such action is directed by Parent
or Seller or, prior to or at the time taken, an officer listed on Schedule
1.1B knew that such action was to be taken) or (viii) underfunding of Company
Plans (including fines and penalties assessed by governmental authorities
relating thereto).
(b) Buyer shall defend, indemnify and hold harmless Seller, Parent and their
Affiliates and each director or officer of such Persons against any Damages
arising out of, resulting from or relating to:
(i) subject to Section 10.1, the breach of any representation or warranty
of Holdings or Buyer contained in this Agreement (other than in Section 5.4),
any Ancillary Agreement or any certificate delivered pursuant hereto or
thereto; provided, however, that such Persons shall be entitled to
indemnification hereunder only when and to the extent that the aggregate of
all such Damages exceeds $10,000,000;
(ii) the breach of any covenant or agreement (whether to be performed prior
to or after Closing) of Holdings or Buyer contained in this Agreement, any
Ancillary Agreement or any certificate delivered pursuant hereto or thereto;
(iii) third party claims in connection with the sale of the Underwritten
Notes, provided that (x) such Damages did not result from any act or omission
by Parent, Seller or any Affiliate (other than the Company or any Subsidiary)
or any director, officer, employee or agent thereof and (y) any Notice (as
defined in Section 10.3 below) related to an indemnification claim under this
clause (iii) must be delivered prior to the third anniversary following the
Closing Date and no Notice may be delivered thereafter; and
(iv) the breach of the representations and warranties contained in Section
5.4.
The foregoing provisions of this Section 10.2(b) shall not apply with respect
to any Damages arising out of (and no indemnification hereunder shall be
available with respect to) any (i) breach of any representation or warranty of
Holdings or Buyer that is terminated (subject, however, to the proviso
contained in Section 10.1), (ii) breaches of the representations and
warranties of Holdings and Buyer contained in this Agreement and the Ancillary
Agreements which would result in the failure of any of the conditions in
Section 7.1 to be satisfied if Parent or Seller had actual knowledge of such
breaches (or received notice thereof pursuant to Section 6.6) prior to the
Closing Date or (iii) any breach of any representation or warranty contained
in Section 5.10 or in clauses (iii), (iv) or (v) or Section 5.11(a).
(c) For purposes of clause (i) of Section 10.2(a), (X) a "Material Adverse
Effect" (as such term is used in any representation or warranty contained in
Article IV other than the representations and warranties contained in Section
4.7(a)) shall be deemed to have occurred if the aggregate of all Damages
related to any such representation or warranty shall exceed $100,000 and (Y)
the representations and warranties contained in Sections 4.7, 4.13 and 4.15(b)
shall be read as if such representations and warranties do not include the
words "Knowledge of Seller".
(d) The term "Damages" as used in this Article X is not limited to matters
asserted by third parties against any Person entitled to be indemnified under
this Article X, but includes Damages incurred or sustained by any such Person
in the absence of third party claims.
(e) No claim for Damages under this Article X may be asserted or pursued by
any former Subsidiary against Parent or Seller, unless, prior to the date that
such former Subsidiary shall have ceased to be a "Subsidiary", such former
Subsidiary shall have delivered a Notice to Parent or Seller relating to such
claim.
10.3 Indemnification Procedures. (a) In the event that any Person shall
incur or suffer any Damages in respect of which indemnification may be sought
hereunder, such Person (the "Indemnitee") may assert a claim for
indemnification by written notice (the "Notice") to the party from whom
indemnification is being sought (the "Indemnitor"), stating the amount of
Damages, if known, and the nature and basis of such claim. In the case of
Damages arising or which may arise by reason of any third-party claim,
promptly after receipt by an Indemnitee of written notice of the assertion or
the commencement of any Action with respect to any matter in respect of which
indemnification may be sought hereunder, the Indemnitee shall give Notice to
the Indemnitor and shall thereafter keep the Indemnitor reasonably informed
with respect thereto, provided that failure of the Indemnitee to give the
Indemnitor prompt notice as provided herein shall not relieve the Indemnitor
of any of its obligations hereunder, except to the extent that the Indemnitor
is materially prejudiced by such failure. In case any such Action is brought
against any Indemnitee, the Indemnitor shall be entitled to assume the defense
thereof, by written notice of its intention to do so to the Indemnitee within
30 days after receipt of the Notice. If the Indemnitor shall assume the
defense of such Action, it shall not settle such Action without the prior
written consent of the Indemnitee, which consent shall not be unreasonably
withheld, provided that an Indemnitee shall not be required to consent to any
settlement that (i) does not include as an unconditional term thereof the
giving by the claimant or the plaintiff of a release of the Indemnitee from
all liability with respect to such Action or (ii) involves the imposition of
equitable remedies or the imposition of any material obligations on such
Indemnitee other than financial obligations for which such Indemnitee will be
indemnified hereunder. As long as the Indemnitor is contesting any such
Action in good faith and on a timely basis, the Indemnitee shall not pay or
settle any claims brought under such Action. Notwithstanding the assumption
by the Indemnitor of the defense of any Action as provided in this Section,
the Indemnitee shall be permitted to participate in the defense of such Action
and to employ counsel at its own expense; provided, however, that if the
defendants in any Action shall include both an Indemnitor and any Indemnitee
and such Indemnitee shall have reasonably concluded that counsel selected by
Indemnitor has a conflict of interest because of the availability of different
or additional defenses to such Indemnitee, such Indemnitee shall have the
right to select separate counsel to participate in the defense of such Action
on its behalf, at the expense of the Indemnitor; provided that the Indemnitor
shall not be obligated to pay the expenses of more than one separate counsel
for all Indemnitees, taken together.
(b) If the Indemnitor shall fail to notify the Indemnitee of its desire to
assume the defense of any such Action within the prescribed period of time, or
shall notify the Indemnitee that it will not assume the defense of any such
Action, then the Indemnitee may assume the defense of any such Action, in
which event it may do so acting in good faith in such manner as it may deem
appropriate, and the Indemnitor shall be bound by any determination made in
such Action, provided, however, that the Indemnitee shall not be permitted to
settle such action without the consent of the Indemnitor. No such
determination or settlement shall affect the right of the Indemnitor to
dispute the Indemnitee's claim for indemnification. The Indemnitor shall be
permitted to join in the defense of such Action and to employ counsel at its
own expense.
(c) Amounts payable by the Indemnitor to the Indemnitee in respect of any
Damages for which such party is entitled to indemnification hereunder shall be
payable by the Indemnitor as incurred by the Indemnitee.
(d) In the event of any dispute between the parties regarding the
applicability of the indemnification provisions of this Agreement, the
prevailing party shall be entitled to recover all Damages incurred by such
party arising out of, resulting from or relating to such dispute.
10.4 Insurance Proceeds and Tax Limitations. The amount of any Damages or
other liability for which indemnification is provided under this Agreement
shall be net of any amounts recovered or recoverable by the Indemnitee under
insurance policies with respect to such Damages or other liability and shall
be (i) increased to take account of any Tax cost incurred (grossed up for such
increase) by the Indemnitee arising from the receipt of indemnity payments
hereunder (unless such indemnity payment is treated as an adjustment to the
purchase price hereunder for tax purposes) and (ii) reduced to take account of
any Tax benefit realized by the Indemnitee arising from the incurrence or
payment of any such Damages or other liability. Such Tax cost or Tax benefit,
as the case may be, shall be computed for any year using the Indemnitee's
actual tax liability with and without (i) the incurrence or payment of any
Damages or other liability for which indemnification is provided under this
Agreement or (ii) the payment of any indemnification payments made pursuant to
this Agreement in such year. In the event that the Indemnitee will actually
realize a Tax cost or Tax benefit for a year(s) subsequent to the year in
which the indemnity payment is made, a payment in respect of such Tax cost or
Tax benefit shall be made in such subsequent year(s). Any indemnity payment
made pursuant to this Agreement will be treated as an adjustment to the
purchase price hereunder for Tax purposes, unless a determination (as defined
in Section 1313 of the Code) with respect to the Indemnitee causes any such
payment not to constitute an adjustment to the purchase price for United
States Federal income tax purposes.
10.5 Tax Indemnification. Notwithstanding anything to the contrary in this
Agreement, the rights and obligations of the parties with respect to
indemnification for any and all Tax matters (other than with respect to any
representations and warranties contained herein relating to Tax matters,
except to the extent Buyer or Holdings is indemnified under the provisions of
the Tax Agreement) shall be governed by the Tax Agreement and shall not be
subject to this Article X, including any calculation pursuant to clause (i) of
Section 10.2(a).
EXHIBIT XI
MISCELLANEOUS
11.1 Termination. This Agreement may be terminated and the transactions
contemplated hereby abandoned:
(a) by mutual consent of the parties; or
(b) by Parent and Seller, on the one hand, or Holdings and Buyer, on the
other hand, on June 17, 1996 if it can be reasonably anticipated that the
approvals referred to in Section 4.11(i) cannot be obtained without the
applicable regulatory authorities imposing an additional material economic
burden on Parent or Seller, on the one hand, or Holdings, Buyer, the Company
and the Subsidiaries, taken as a whole, on the other hand; or
(c) by Parent and Seller, on the one hand, or Holdings and Buyer, on the
other hand, if the conditions to such parties' obligations set forth in
Articles VII and VIII, as the case may be, have not been satisfied (or waived
by the party entitled to the benefit thereof) on or before August 17, 1996;
provided that if the approvals referred to in Section 4.11(i) have not been
obtained by August 17, 1996, this Agreement shall not be terminated prior to
October 17, 1996 if it can be reasonably anticipated that such approvals can
be obtained by October 17, 1996; or
(d) by Parent and Seller, on the one hand, or Holdings and Buyer, on the
other hand, if the TRG Agreement is terminated in accordance with its terms.
Upon termination of this Agreement pursuant to this Section 11.1, this
Agreement shall be void and of no further force and effect (except as provided
in the last sentence of this paragraph) and no party shall have any liability
to any other party under this Agreement unless such party has (a) willfully
failed to have performed its obligations hereunder or (b) knowingly made a
misrepresentation of any matter set forth herein. For purposes of the
immediately preceding sentence, with respect to obligations of the Company or
any Subsidiary to take or refrain from taking any action under this Agreement
or obligations of Parent or Seller to cause the Company or any Subsidiary to
take or refrain from taking any action under this Agreement, neither Parent
nor Seller shall be deemed to have "willfully failed" unless, in each case,
such action or failure to act is directed by Parent or Seller or occurs with
knowledge of an officer listed on Schedule 1.1B or 1.1C; provided that if such
action or failure is (X) not directed by Parent or Seller, (Y) occurs with the
knowledge of an officer listed on Schedule 1.1C and (Z) occurs without the
knowledge of an officer listed on Schedule 1.1B, Buyer shall recover only its
Third Party Expenses and Seller and Parent shall have no further liability
under this Agreement. For purposes of the second preceding sentence, neither
Parent nor Seller shall be deemed to have "knowingly" made a misrepresentation
unless an officer listed on Schedule 1.1B or 1.1C knows such representation is
untrue when made; provided that if a representation is known to be untrue when
this Agreement is executed by the parties hereto by an officer listed on
Schedule 1.1C but not by an officer listed on Schedule 1.1B, Buyer shall
recover only its Third Party Expenses and Seller and Parent shall have no
further liability under this Agreement. Notwithstanding a termination of this
Agreement, the provisions of Sections 11.2(b) and 11.11, the last sentences of
Sections 4.18 and 5.4 and the confidentiality provision of the proviso to
Section 6.4 hereof shall continue in full force and effect.
11.2 Confidentiality. (a) Parent and Seller shall assign to the Company at
or prior to, and with effect from and after the Closing, all of their
respective rights under the Confidentiality Agreement and under any other
confidentiality agreements with third Persons relating to the business of the
Company or any of the Subsidiaries.
(b) Except as otherwise required by law (including if required by any stock
exchange on which any of the securities of any party or their respective
Affiliates are listed or by any securities commission or similar regulatory
authority having jurisdiction over any such party or any of its Affiliates),
Buyer, Holdings, Seller and Parent shall keep confidential all aspects of the
transactions contemplated hereby, including the fact that this Agreement has
been executed. Notwithstanding the foregoing or the terms of the
Confidentiality Agreement, Buyer, Holdings and their respective Affiliates and
Seller, Parent and their respective Affiliates may disclose information
concerning the transactions contemplated hereby in connection with the
financing of such transactions by Holdings and Buyer, to potential equity
investors in Holdings or any of its Affiliates, as necessary to obtain any
consents referenced in Section 8.2 and, in the case of Parent, as it, in its
sole discretion, deems appropriate in light of its status as a Person with
public stockholders. The parties will use their reasonable efforts to make
the release to be issued announcing the Closing a mutually acceptable joint
release. Before issuing any other press release with respect to the
transactions contemplated by this Agreement, the parties will use reasonable
efforts to provide each other with a reasonable opportunity to review and
comment on any such announcement.
11.3 Parent Option. (a) Parent and/or Seller shall have the right to
purchase up to an aggregate of 19.9% of the Holdings Common Stock immediately
prior to the Closing for a per share purchase price equal to the per share
purchase price paid or payable by other stockholders of Holdings on or prior
to the Closing Date, provided that if investment partnerships affiliated with
KKR shall have invested, as of the Closing Date, in a corporation which
wholly-owns Holdings (rather than investing directly in Holdings), references
to "Holdings Common Stock" in this Section 11.3, Sections 5.3, 5.7(b) and 9.3
and clause (b) of the definition of "Securities" contained in Section 1.1
shall be deemed to be references to the common stock of such corporation and
references to "Holdings" and "New Talegen Holdings Corporation" in Section 9.3
shall be deemed to be references to such corporation. Parent and/or Seller
shall pay the aggregate purchase price for any shares to be purchased pursuant
to this Section in cash, payable by wire transfer in immediately available
funds to an account which Buyer shall designate in writing to Parent no less
than two business days prior to the Closing Date. To exercise such right,
Parent and/or Seller must deliver irrevocable written notice to Buyer within
45 days from the date hereof which indicates the percentage interest (after
giving effect to its purchase) of Holdings Common Stock that Parent and/or
Seller desire to purchase hereunder, but not to exceed an aggregate of 19.9%
(which irrevocable notice shall bind Parent, subject to the last sentence of
this Section, to make such purchase on the Closing Date). No such notice
shall be effective unless Parent and/or Seller concurrently delivers a notice
under Section 11.3 of the TRG Agreement which indicates Parent's and/or
Seller's election to purchase the same aggregate percentage interest in the
securities covered by the election thereunder that Parent and/or Seller elect
to purchase hereunder. Notwithstanding the foregoing, if this Agreement is
terminated pursuant to Section 11.1, Parent and Seller shall cease to have the
right to purchase Holdings Common Stock hereunder, whether or not their rights
had been previously exercised, and any notice which shall have been delivered
pursuant to this Section shall be void and of no effect.
(b) Any Holdings Common Stock purchased by Parent and/or Seller pursuant to
paragraph (a) above shall be subject to the terms and conditions set forth in
Exhibit M.
11.4 Assignment. Neither this Agreement nor any of the rights or obligations
hereunder may be assigned by Parent or Seller without the prior written
consent of Holdings or Buyer, or by Holdings or Buyer without the prior
written consent of Parent or Seller. Subject to the foregoing, this Agreement
shall be binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns, and no other Person shall have any right,
benefit or obligation hereunder.
11.5 Notices. Unless otherwise provided herein, any notice, request,
instruction or other document to be given hereunder by any party to the others
shall be in writing and delivered in Person or by courier or facsimile
transmission or mailed by certified mail, postage prepaid, return receipt
requested (such mailed notice to be effective on the date such receipt is
acknowledged), as follows:
If to Parent or Seller:
Xerox Financial Services, Inc.
100 First Stamford Place
Stamford, Connecticut 06904-2347
Attn: Stuart B. Ross
Chairman & Chief Executive
Officer
Fax: (203) 325-6822
and
Xerox Corporation
800 Long Ridge Road
Stamford, Connecticut 06904
Attn: Richard Paul, Esq.
General Counsel
Fax: (203) 968-3446
With a copy to:
Skadden, Arps, Slate, Meagher & Flom
919 Third Avenue
New York, New York 10022
Attn: Lou R. Kling, Esq. and
Peter Allan Atkins, Esq.
Fax: (212) 735-2000
If to Holdings or Buyer:
New Talegen Holdings Corporation
c/o Kohlberg Kravis Roberts & Co.
2800 Sand Hill Road, Suite 200
Menlo Park, California 94025
Attn: Saul A. Fox
Fax: (415) 233-6594
With copies to:
Joseph W. Brown
Talegen Holdings, Inc.
Waterfront Center One
1011 Western Avenue, Suite 1000
Seattle, Washington 98101
Fax: (206) 654-2633
Gary I. Horowitz, Esq.
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, New York 10017
Fax: (212) 455-2502
or to such other place and with such other copies as either party may
designate as to itself by written notice to the others.
11.6 Choice of Law. This Agreement shall be construed, interpreted and the
rights of the parties determined in accordance with the internal laws of the
State of New York, without regard to the conflict of law principles thereof.
11.7 Entire Agreement; Amendments and Waivers. This Agreement, together with
the Ancillary Agreements and the Confidentiality Agreement (except to the
extent superseded hereby), constitutes the entire agreement among the parties
pertaining to the subject matter hereof and supersedes all prior agreements,
understandings, negotiations and discussions, whether oral or written, of the
parties. No supplement, modification or waiver of this Agreement (including,
without limitation, any Schedule hereto) shall be binding unless executed in
writing by all parties. No waiver of any of the provisions of this Agreement
shall be deemed or shall constitute a waiver of any other provision hereof
(whether or not similar), nor shall such waiver constitute a continuing waiver
unless otherwise expressly provided. With respect to breaches of any
representation, warranty or covenant contained herein, unless this Agreement
shall have been terminated pursuant to Section 11.1, the sole remedy of the
parties against each other shall be the indemnification rights set forth in
Section 10.2.
11.8 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
11.9 Invalidity. In the event that any one or more of the provisions
contained in this Agreement or in any other instrument referred to herein,
shall, for any reason, be held to be invalid, illegal or unenforceable in any
respect, such invalidity, illegality or unenforceability shall not affect any
other provision of this Agreement or any other such instrument.
11.10 Headings. The headings of the Articles and
Sections herein are inserted for convenience of reference only and are not
intended to be a part of or to affect the meaning or interpretation of this
Agreement.
11.11 Expenses. Subject to Section 11.1, Seller and Buyer will each be
liable for its own costs and expenses incurred in connection with the
negotiation, preparation, execution or performance of this Agreement.
11.12 [Intentionally Omitted].
11.13 Joint and Several. (a) All covenants, representations and warranties
made by Parent or Seller in this Agreement shall be deemed to be joint and
several covenants, representations and warranties of Parent and Seller.
(b) All covenants, representations and warranties made by Holdings or Buyer
in this Agreement shall be deemed to be joint and several covenants,
representations and warranties of Holdings and Buyer.
11.14 No Third Party Beneficiaries. This Agreement shall inure exclusively to
the benefit of and be binding upon the parties hereto and their respective
successors, assigns, executors and legal representatives. Except as expressly
provided in Section 10.2, nothing in this Agreement, express or implied, is
intended to confer on any Person other than the parties hereto or their
respective successors and assigns, any rights, remedies, obligations or
liabilities under or by reason of this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement, or have
caused this Agreement to be duly executed on their respective behalf by their
respective officers thereunto duly authorized, as of the day and year first
above written.
XEROX CORPORATION
/s/ Stuart B. Ross
Name: Stuart B. Ross
Title: Executive Vice President
XEROX FINANCIAL SERVICES, INC.
/s/ Stuart B. Ross
Name: Stuart B. Ross
Title: Chairman, President and Chief Executive Officer
NEW TALEGEN HOLDINGS CORPORATION
/s/ Saul A. Fox
Name: Saul A. Fox
Title: President and Chief Executive Officer
TALEGEN ACQUISITION CORPORATION
/s/ Saul A. Fox
Name: Saul A. Fox
Title: President and Chief Executive Officer
Exhibit 10(p)
STOCK PURCHASE AGREEMENT
dated as of January 17, 1996
among
XEROX CORPORATION
XEROX FINANCIAL SERVICES, INC.
and
TRG ACQUISITION CORPORATION
TABLE OF CONTENTS
Page
ARTICLE I
DEFINITIONS
1.1 Defined Terms 1
1.2 Other Defined Terms 7
1.3 Other Definitional Provisions 8
ARTICLE II
PURCHASE AND SALE OF STOCK AND CLASS 2 STOCK
2.1 Transfer of Stock 8
2.2 Consideration for Stock 8
2.3 Adjustments 8
ARTICLE III
CLOSING
3.1 Closing 9
3.2 Documents to be Delivered 9
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PARENT AND SELLER
4.1 Organization of Seller and Parent 10
4.2 Organization of the Company 10
4.3 Capital Stock 10
4.4 Authorization 11
4.5 Subsidiaries 11
4.6 Ridge Re 13
4.7 Absence of Certain Changes or Events 13
4.8 Title to Assets, Etc. 17
4.9 Contracts and Commitments 17
4.10 No Conflict or Violation 18
4.11 Consents and Approvals 19
4.12 Financial Statements 20
4.13 Litigation 21
4.14 Liabilities 21
4.15 Investments 22
4.16 Reserves 22
4.17 Compliance with Law; Permits; Regulatory Matters 22
4.18 No Brokers 24
4.19 No Other Agreements to Sell the Assets or the Company 24
4.20 Proprietary Rights 24
4.21 Employee Benefit Plans 25
4.22 Employment-Related Matters 28
4.23 Transactions with Certain Persons 28
4.24 Taxes 29
4.25 Reinsurance and Retrocessions 30
4.26 1992/93 Restructuring 30
4.27 Capital Commitments 31
4.28 Environmental Laws 31
4.29 Acquisition for Investment 31
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF BUYER
5.1 Organization of Buyer 32
5.2 Authorization 32
5.3 No Conflict or Violation 32
5.4 No Brokers 33
5.5 Acquisition for Investment 33
5.6 Organizational Documents 33
5.7 Capitalization of Buyer 33
5.8 Consents and Approvals 34
5.9 Financial Obligations 34
5.10 Solvency 34
ARTICLE VI
ACTIONS BY PARENT, SELLER AND BUYER PRIOR TO THE CLOSING
6.1 Maintenance of Business and Preservation of Permits
and Services 34
6.2 Additional Financial Statements 35
6.3 Certain Prohibited Transactions 35
6.4 Investigation by Buyer 36
6.5 Consents 36
6.6 Notification of Certain Matters 37
6.7 No Solicitations 37
6. Cooperation; Accounting and Other Matters 38
6.9 Investment Portfolio 38
6.10 Reinsurance Agreements 38
6.11 Dividends 39
6.12 Seller Notes 39
6.13 Leesburg Training Facility 39
6.14 Cessions to Ridge Re 40
6.15 Restated Certificate of Incorporation 40
6.16 Certain Admitted Assets 40
6.17 Intercompany Accounts 40
6.18 Financing 41
6.19 Letter Agreement 41
ARTICLE VII
CONDITIONS TO OBLIGATIONS OF PARENT AND SELLER
7.1 Representations, Warranties and Covenants 41
7.2 HSR Act 42
7.3 No Governmental or Other Proceeding; Illegality 42
7.4 Consents 42
7.5 Opinion of Counsel 42
7.6 Certificates 43
7.7 Corporate Documents 43
7.8 Talegen Closing 43
7.9 Restated Certificate of Incorporation 43
7.10 Solvency Matters 43
7.11 Capitalization 43
7.12 Company Certificates 43
7.13Subsidiary Releases 43
ARTICLE VIII
CONDITIONS TO OBLIGATIONS OF BUYER
8.1 Representations, Warranties and Covenants 44
8.2 Consents 44
8.3 HSR Act 45
8.4 No Governmental or Other Proceeding; Illegality 45
8.5 Opinion of Counsel 45
8.6 Certificates 45
8.7 Corporate Documents 45
8.8 Talegen Closing 46
8.9 Financing 46
8.10 No Material Adverse Effect 46
8.11 Resignation of Officers and Directors 46
8.12 Transfer Taxes 46
8.13 Seller Notes 46
8.14 Leesburg Training Facility Amount 46
8.15 Guarantees 46
8.16 Management Investment 46
ARTICLE IX
ACTIONS BY PARENT, SELLER, AND BUYER AFTER THE CLOSING
9.1 Books and Records 47
9.2 Covenants Regarding the Securities 47
9.3 Crostex/Camfex Purchase Money Notes 48
9.4 Certain Employee Benefit Matters 48
9.5 Transfer Taxes 49
9.6 Ridge Re 49
9.7 Further Assurances 49
ARTICLE X
INDEMNIFICATION
10.1 Survival of Representations and Warranties 49
10.2 Indemnification 50
10.3 Indemnification Procedures 52
10.4 Insurance Proceeds and Tax Limitations 53
10.5 Tax Indemnification 54
ARTICLE XI
MISCELLANEOUS
11.1 Termination 54
11.2 Confidentiality 55
11.3 Parent Option 56
11.4 Assignment 56
11.5 Notices 57
11.6 Choice of Law 58
11.7 Entire Agreement; Amendments and Waivers 58
11.8 Counterparts 58
11.9 Invalidity 58
11.10 Headings 58
11.11 Expenses 58
11.12 [Intentionally Omitted]. 59
11.13 Joint and Several 59
11.14 No Third Party Beneficiaries 59
Exhibits
Exhibit A Investment Policy
Exhibit B Form of Restated Certificate of Incorporation of Buyer
Exhibit C Form of Letter Agreement
Exhibit D-1 Form of Opinion of Simpson Thacher & Bartlett
Exhibit D-2 Form of Opinion of King & Spalding
Exhibit E Form of Company Certificates
Exhibit F Form of Insurance Subsidiary Releases
Exhibit G-1 Form of Opinion of Skadden, Arps, Slate, Meagher & Flom
Exhibit G-2 Form of Opinion of Richard S. Paul
Exhibit G-3 Form of Opinion of Bruce Shulin
Exhibit G-4 Form of Opinion of Richard N. Frasch
Exhibit G-5 Form of Opinion of LeBoeuf, Lamb, Greene & MacRae
Exhibit H Form of Parent Guarantee
Exhibit I Form of Parent and Seller Guarantee
Exhibit J Term Sheet for Class 1 Stock
STOCK PURCHASE AGREEMENT
STOCK PURCHASE AGREEMENT dated as of January 17, 1996 among Xerox Corporation,
a New York corporation ("Parent"), Xerox Financial Services, Inc., a Delaware
corporation and a wholly-owned subsidiary of Parent ("Seller"), and TRG
Acquisition Corporation, a Delaware corporation ("Buyer").
RECITALS
Seller is the beneficial and record owner of 1,000 shares of common stock, par
value $1.00 per share, of The Resolution Group, Inc., a Delaware corporation
(the "Company"), constituting all of the issued and outstanding capital stock
(the "Stock") of the Company.
Buyer desires to purchase from Seller, and Seller desires to sell to Buyer,
all of the Stock subject to the terms and conditions of this Agreement.
Parent is the sole stockholder of Seller and desires that Seller sell to Buyer
all of the Stock, subject to the terms and conditions of this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein and for other good and valuable consideration the receipt and
adequacy of which are hereby acknowledged, the parties hereto agree as
follows:
ARTICLE I
DEFINITIONS
1.1 Defined Terms. As used herein, the terms below shall have the following
meanings:
"Affiliate" shall mean a Person that directly or indirectly through one or
more intermediaries controls, is controlled by or is under common control with
the Person specified. For purposes of this definition and the definition of
"Subsidiary" set forth below, the term "control" (including the terms
"controlling," "controlled by" and "under common control with") of a Person
means the possession, direct or indirect, of the power to (i) vote 50% or more
of the voting securities of such Person or (ii) direct or cause the direction
of the management and policies of such Person, whether by contract or
otherwise.
"Agreement" shall mean this Stock Purchase Agreement (together with all
schedules and exhibits referenced herein), as amended, modified or
supplemented from time to time.
"Ancillary Agreements" shall mean, collectively, the Guarantees and the Tax
Agreement.
"Balance Sheet Date" shall mean June 30, 1995.
"Cash Equivalents" shall mean (a) securities with maturities of one year or
less from the date of acquisition issued or fully guaranteed or insured by the
United States Government or any agency thereof, (b) certificates of deposit
and eurodollar time deposits with maturities of one year or less from the date
of acquisition and overnight bank deposits of any commercial bank having
capital and surplus in excess of $500,000,000, (c) repurchase obligations of
any commercial bank satisfying the requirements of clause (b) of this
definition, having a term of not more than 30 days with respect to securities
issued or fully guaranteed or insured by the United States government, (d)
commercial paper of a domestic issuer rated at least A-2 by S&P or P-2 by
Moody's, (e) securities with maturities of one year or less from the date of
acquisition issued or fully guaranteed by any state, commonwealth or territory
of the United States, by any political subdivision or taxing authority of any
such state, commonwealth or territory or by any foreign government, the
securities of which state, commonwealth, territory, political subdivision,
taxing authority or foreign government (as the case may be) are rated at least
A by S&P or A by Moody's, (f) securities with maturities of one year or less
from the date of acquisition backed by standby letters of credit issued by any
commercial bank satisfying the requirements of clause (b) of this definition
or (g) shares of money market mutual or similar funds which invest exclusively
in assets satisfying the requirements of clauses (a) through (f) of this
definition.
"Class 1 Stock" shall mean the Class 1 Stock having the terms set forth in the
Restated Certificate of Incorporation.
"Class 2 Stock" shall mean the Class 2 Stock having the terms set forth in the
Restated Certificate of Incorporation.
"Closing Date" shall mean the date on which the Closing occurs.
"Code" shall have the meaning ascribed in the Tax Agreement.
"Company GAAP Financial Statements" shall mean the audited Consolidated
Balance Sheets of the Company (or its predecessors) as of December 31, 1994
and 1993 and the Consolidated Statements of Operations, Consolidated
Statements of Shareholder's Equity and Consolidated Statements of Cash Flows
of the Company (or its predecessors) for each of the three fiscal years
included in the three-year period ended December 31, 1994, prepared in
accordance with GAAP, together with the notes thereon and the related reports
of KPMG Peat Marwick LLP.
"Company Interim Financial Statements" shall mean the unaudited Consolidated
Balance Sheets and the unaudited Consolidated Statements of Operations,
Consolidated Statements of Shareholder's Equity and Consolidated Statements of
Cash Flows of the Company for the nine-month periods ended September 30, 1994
and 1995, together with the notes thereon.
"Contracts" shall mean all agreements, contracts, commitments and undertakings
(other than contracts of insurance or reinsurance or retrocession agreements)
to which the Company or any of the Subsidiaries is a party, an obligor or a
beneficiary and (i) the performance or non-performance of which is
individually or, with respect to any related series of agreements, in the
aggregate, material to the Company and the Subsidiaries, taken as a whole, or
(ii) which provide for an aggregate purchase price or payments of more than
$1,000,000 under any agreement during any two-year period (or $1,000,000 in
the aggregate, during any two-year period, in the case of any related series
of agreements).
"Convention Statements" shall mean (i) the annual convention statements and
the quarterly statement of each Insurance Subsidiary as filed with the
insurance regulatory authorities in its jurisdiction of domicile for the years
ended December 31, 1992, 1993 and 1994 and for the quarterly period ended
September 30, 1995, and (ii) the annual convention statements of Ridge Re as
filed with the insurance regulatory authorities in Bermuda for the period from
December 14, 1992 to December 31, 1993 and for the year ended December 31,
1994.
"Crostex/Camfex Contracts" shall mean all contracts, agreements or
arrangements of the Company or any Subsidiary relating to the real property
and improvements located at (i) 255 California Street, San Francisco,
California, (ii) 5724 W. Los Positos Blvd., Pleasonton, California, (iii) 299
Madison Avenue, Morris Township, New Jersey, (iv) 305 Madison Avenue, Morris
Township, New Jersey and (v) 4040 North Central Expressway, Dallas, Texas,
including, without limitation, any notes held by the Company or any Subsidiary
(the "Crostex/Camfex Purchase Money Notes").
"Encumbrances" shall mean any claim, lien (statutory or other), pledge,
option, charge, easement, security interest, right-of-way, encroachment,
encumbrance, mortgage, or other rights of third parties.
"Environmental Laws" shall mean any and all applicable Federal, state or local
laws or regulations relating to the protection of the environment or of human
health as it may be affected by the environment.
"Environmental Permit" shall mean any license, permit, order, consent,
approval, registration, authorization, qualification or filing required under
any Environmental Law.
"Environmental Report" shall mean any report, study, assessment, audit, or
other similar document that addresses any issue of actual or potential
noncompliance with, or actual or potential liability under, any Environmental
Law that may in any way affect the Company or any Subsidiary other than to the
extent such document addresses any issue of actual or potential noncompliance
with, or actual or potential liability under, any Environmental Law by reason
of any policy of insurance, reinsurance, indemnity, guaranty or assumption of
liability of any party entered into by the Company or any Insurance
Subsidiary.
"Excluded Activities" shall mean, with respect to the Company and the
Subsidiaries, activities relating to insurance reserves, claims under, related
to or in respect of insurance policies or any disputes related thereto, loss
adjustments and loss adjustment expenses and reinsurance receivables,
provided, however, that "Excluded Activities" shall not be deemed to include
any (i) of the matters covered by the representations contained in Section
4.6, 4.9(c), 4.12 (to the extent it applies to Ridge Re) or 4.26 or other
representations regarding Ridge Re or the Ridge Re Treaty or (ii) actions,
suits, proceedings or claims pending by any governmental or regulatory
authority to the extent based upon a violation of any law, statute, ordinance,
rule or regulation.
"GAAP" shall mean generally accepted accounting principles in the United
States of America in effect from time to time.
"Guarantees" shall mean the guarantees referred to in Section 8.15.
"HSR Act" shall mean the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended.
shall mean International Insurance Company, an Illinois corporation.
"Information Returns" shall have the meaning ascribed in the Tax Agreement.
"Insurance Subsidiaries" shall mean the Subsidiaries listed on Schedule 1.1A.
"Investment Policy" shall mean, with respect to certain Subsidiaries, the
policy for each such Subsidiary set forth on Exhibit A.
"KKR" shall mean Kohlberg Kravis Roberts & Co.
"Knowledge of Seller" shall mean (i) with respect to matters relating to
Parent or Seller, actual knowledge of any officer of Parent, Seller or Ridge
Re set forth in Schedule 1.1B, and (ii) with respect to any matters relating
to the Company or any Subsidiary, actual knowledge of any such officer of
Parent or Seller, or the actual knowledge of the persons set forth in Schedule
1.1C.
"Material Adverse Effect" with respect to any Person shall mean a material
adverse effect on the business, financial condition, assets or operations of
such Person, but shall exclude any effect resulting from general economic
conditions.
"Materials of Environmental Concern" shall mean any waste, pollutant, or
contaminant or substance (including, without limitation, petroleum or
petroleum products, asbestos or asbestos-containing materials, urea-
formaldehyde insulation, polychlorinated biphenyls, odors, radioactivity, and
electro-magnetic fields) regulated by or under, or which may otherwise give
rise to liability under, any Environmental Law.
"Moody's" shall mean Moody's Investors Service, Inc.
Restructuring" shall mean the restructuring of Talegen and its subsidiaries
(including, without limitation, the Company and IIC) pursuant to the
Restructuring Agreement dated as of September 3, 1993 among Seller, Ridge Re,
Talegen and certain of its subsidiaries.
"Permits" shall mean all licenses, permits, orders, consents, approvals,
registrations, authorizations, qualifications and filings with and under all
Federal, state, local or foreign laws and governmental or regulatory bodies
and all industry or other non-governmental self-regulatory organizations
(including, without limitation, Environmental Permits).
"Person" shall mean an individual, a partnership, a joint venture, a
corporation, a business trust, a limited liability company, a trust, an
unincorporated organization, a government or any department or agency thereof
or any other entity.
"Qualified Transferee" shall mean a corporation (or the wholly-owned direct or
indirect subsidiary thereof) which, as of the date of the consummation of a
sale pursuant to Section 9.6, is an insurance company engaged in the business
of reinsurance and has at least $2 billion in assets and a rating of "A+" or
better by A.M. Best & Co.
"Restated Certificate of Incorporation" shall mean the restated certificate of
incorporation of Buyer in the form of Exhibit B, with such additional
ministerial changes as do not adversely affect the holders of Class 2 Stock.
"Ridge Re" shall mean Ridge Reinsurance Limited, a Bermuda corporation and a
wholly-owned subsidiary of Seller.
"Ridge Re GAAP Financial Statements" shall mean the audited Consolidated
Balance Sheets of Ridge Re as of December 31, 1994 and 1993 and the related
Statements of Operations and Retained Earnings and Cash Flows for the year
ended December 31, 1994 and the period from December 14, 1992 to December 31,
1993, prepared in accordance with GAAP, together with the notes thereon and
the related reports of KPMG Peat Marwick LLP.
"Ridge Re Interim Financial Statements" shall mean the unaudited Consolidated
Balance Sheet of Ridge Re as of September 30, 1995, and the related Statements
of Operations and Retained Earnings for the nine-month periods ended September
30, 1994 and September 30, 1995.
"Ridge Re Treaty" shall mean the agreement, as amended by Endorsement No. 1
thereto, contained in Schedule 1.1D.
shall mean Standard and Poor's Rating Group.
"Securities" shall mean (a) the Class 2 Stock and (b) any shares of Class 1
Stock purchased by Seller in accordance with Section 11.3.
"Statutory Accounting Principles" shall mean, as applied to any Subsidiary,
the statutory accounting practices prescribed or permitted by the jurisdiction
of domicile of such Subsidiary.
"Subsidiaries" shall mean all corporations, partnerships, joint ventures or
other entities which the Company controls, directly or indirectly through one
or more intermediaries. See definition of "Affiliate" in this Section 1.1 for
the meaning of "control."
"Talegen" shall mean Talegen Holdings, Inc., a Delaware corporation.
"Talegen Acquisition" shall mean Talegen Acquisition Corporation, a Delaware
corporation.
"Talegen Agreement" shall mean the Stock Purchase Agreement dated as of the
date hereof among Parent, Seller, New Talegen Holdings Corporation, a Delaware
corporation, and Talegen Acquisition as amended, modified or supplemented from
time to time, which contemplates that Talegen Acquisition will purchase all of
the outstanding capital stock of Talegen from Seller, subject to the terms and
conditions thereof.
"Tax Agreement" shall mean the Tax Allocation and Indemnification Agreement
dated as of the date hereof among Parent, Seller, the Company and Buyer.
"Tax Returns" shall have the meaning ascribed in the Tax Agreement.
"Taxes" shall have the meaning ascribed in the Tax Agreement.
"Third Party Amount" shall mean any amount paid by the transferee (which may
be Seller or any of its Affiliates (other than the Company or any Subsidiary))
to the Company or the Subsidiaries of all or a portion of the Seller Notes or
Leesburg Training Facility, as the case may be, pursuant to Sections 6.12 or
6.13.
"Third Party Expenses" shall mean all expenses paid or payable by Buyer to
other Persons in connection with the transactions contemplated by this
Agreement, the Ancillary Agreements and the Financing Documents other than
expenses contingent upon a payment to Buyer or which are not payable unless
there has been a breach of this Agreement by Parent, Seller, the Company or
any Subsidiary, but shall in no event include any amount payable to KKR or its
Affiliates (other than to Am-Re Consultants, Inc. in connection with reserve
analyses) or any officer, director or employee of the Company or the
Subsidiaries.
"Transaction Expenses" shall mean (i) a $5 million transaction fee payable by
Buyer to an Affiliate of KKR, (ii) all fees and expenses of third party
advisors to Buyer and of Buyer's financing sources in connection with the
transactions contemplated by this Agreement, the Ancillary Agreements and the
Financing Documents and (iii) all fees and expenses incurred by Buyer in
connection with satisfying the conditions precedent in Article VIII, certified
in good faith by Buyer to Seller.
1.2 Other Defined Terms. The following terms shall have the meanings defined
for such terms in the Sections set forth below:
Term Section
"Actions" 4.13
"Assets" 4.18
"Closing" 3.1
"Company Plans" 4.21
"Confidentiality Agreement" 6.4
"Crostex/Camfex Purchase Money Notes" 1.1
"Damages" 10.2
"ERISA" 4.21
"ESOP" 9.4
"Exchange Act" 4.11
"Financing" 5.3
"Financing Documents" 5.3
"Indemnitor" 10.3
"Intellectual Property" 4.20
"Leesburg Training Facility Amount" 6.13
"Leesburg Training Facility" 6.13
"Liabilities" 4.14
"Long Term Incentive Program" 9.4
"Notice" 10.3
"Personnel" 4.13
"Section 4.5 Subsidiaries" 4.5
"Securities Act" 4.3
"Seller Notes" 4.23
"TRG Incentive Plans" 9.4
1.3 Other Definitional Provisions. (a) The words "hereof", "herein" and
"hereunder" and words of similar import when used in this Agreement shall
refer to this Agreement as a whole and not to any particular provision of this
Agreement, and Section, Schedule and Exhibit references are to this Agreement
unless otherwise specified.
(b) The meanings given to terms defined herein shall be equally applicable to
both the singular and plural forms of such terms.
ARTICLE II
PURCHASE AND SALE OF STOCK AND CLASS 2 STOCK
2.1 Transfer of Stock. Upon the terms and subject to the conditions
contained herein, Seller will sell, convey, transfer, assign and deliver to
Buyer, and Buyer will acquire from Seller on the Closing Date, all of the
Stock for the consideration set forth in Section 2.2.
2.2 Consideration for Stock. Upon the terms and subject to the conditions
contained herein, as consideration for the purchase of the Stock, on the
Closing Date Buyer will (i) pay to Seller cash in an amount equal to
$150,000,000, payable by wire transfer in immediately available funds to an
account which Seller will designate in writing to Buyer no less than two
business days prior to the Closing Date, subject to adjustment as described in
Section 2.3, and (ii) issue and deliver to Seller Class 2 Stock with an
aggregate liquidation value of $462,000,000.
2.3 Adjustments. The amount of cash payable by Buyer pursuant to Section 2.2
will be reduced by an amount equal to the Transaction Expenses.
ARTICLE III
CLOSING
3.1 Closing. The closing of the transactions contemplated herein (the
"Closing") shall take place as soon as practicable but in no event later than
five business days after satisfaction or waiver of the conditions set forth in
Articles VII and VIII, and shall be held at 9:00 a.m. local time on the
Closing Date at the offices of Simpson Thacher & Bartlett, 425 Lexington
Avenue, New York, New York 10017, unless the parties hereto otherwise agree.
The parties agree that the effective time of the Closing for Federal income
tax purposes shall be at the close of business on the Closing Date.
3.2 Documents to be Delivered. To effect the transfer referred to in Section
2.1 and the delivery of the consideration described in Section 2.2 hereof,
Seller and Buyer shall, on the Closing Date, deliver the following:
(a) Seller shall deliver to Buyer certificate(s) evidencing the Stock, free
and clear of any Encumbrances of any nature whatsoever (except Encumbrances
arising as a result of any action taken by Buyer or any of its Affiliates),
duly endorsed in blank for transfer or accompanied by stock powers duly
executed in blank.
(b) Buyer shall deliver to Seller immediately available funds as provided in
Section 2.2.
(c) Buyer shall deliver to Seller certificate(s) evidencing Class 2 Stock as
provided in Section 2.2, free and clear of any Encumbrances of any nature
whatsoever (except Encumbrances arising as a result of any action taken by
Seller or any of its Affiliates) in the form of one or more certificates in
the name of Seller or its designee as Seller may require.
(d) Seller and Buyer shall each deliver all documents required to be
delivered pursuant to Articles VII and VIII.
(e) All instruments and documents executed and delivered to Buyer pursuant
hereto shall be in form and substance, and shall be executed in a manner,
reasonably satisfactory to Buyer. All instruments and documents executed and
delivered to Seller pursuant hereto shall be in form and substance, and shall
be executed in a manner, reasonably satisfactory to Seller.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PARENT AND SELLER
Parent and Seller hereby represent and warrant to Buyer as follows:
4.1 Organization of Seller and Parent. Seller is duly organized, validly
existing and in good standing under the laws of the State of Delaware and has
full corporate power and authority to conduct its business as it is presently
being conducted and to own the Stock. Parent is duly organized, validly
existing and in good standing under the laws of the State of New York and has
full corporate power and authority to conduct its business as it is presently
being conducted.
4.2 Organization of the Company. The Company is duly organized, validly
existing and in good standing under the laws of the State of Delaware and has
full corporate power and authority to conduct its business as it is presently
being conducted and to own, lease and operate its properties and assets. The
Company is duly qualified or otherwise authorized as a foreign corporation to
conduct the business conducted by it and is in good standing in each
jurisdiction in which such qualification or authorization is necessary under
the applicable law and where the failure to be so qualified or otherwise
authorized, individually or in the aggregate, would have a Material Adverse
Effect on the Company and the Subsidiaries, taken as a whole. Seller has
provided to Buyer a complete and correct copy of the certificate of
incorporation, bylaws and other organizational documents of the Company and
the minute books of the Company. The Company's minute books include copies of
minutes of all meetings of the directors or shareholders of the Company held
on or after January 1, 1993 and complete and accurate copies of all
resolutions passed by the directors or actions by written consent of the
shareholders on or after January 1, 1993.
4.3 Capital Stock. The Company has authorized 1,000 shares of common stock,
$1.00 par value, 1,000 shares of which are issued and outstanding, and no
shares of any other class or series of capital stock are authorized, issued or
outstanding. All of the shares of the Stock have been duly and validly
authorized and issued, and are fully paid and nonassessable. Seller owns of
record and beneficially all of the Stock free and clear of all Encumbrances,
including without limitation, any agreement, understanding or restriction
affecting the voting rights or other incidents of record or beneficial
ownership pertaining to the Stock; provided that Parent and Seller make no
representation in this sentence regarding the ability of Seller to transfer or
otherwise dispose of such Stock without registration or qualification under,
or in compliance with, applicable Federal or state securities laws to a Person
who is not an "accredited investor" (as defined in Rule 501 of Regulation D
under the Securities Act of 1933, as amended (the "Securities Act")) or
without compliance with applicable insurance laws. There are no
subscriptions, options, warrants, calls, commitments, preemptive rights or
other rights of any kind outstanding for the purchase of, nor any securities
convertible or exchangeable for, any equity interests of the Company. There
are no restrictions upon the voting or transfer of any shares of the Stock
pursuant to the Company's Certificate of Incorporation or Bylaws or any
agreement or other instrument to which the Company, Talegen or Seller is a
party or by which the Company, Talegen or Seller is bound. Upon consummation
of the transactions contemplated by this Agreement, Buyer will acquire from
Seller good and marketable title to such Stock, free and clear of all
Encumbrances, except Encumbrances arising as a result of any action taken by
Buyer or any of its Affiliates; provided that Parent and Seller make no
representation regarding the ability of any Person other than Seller to
transfer or otherwise dispose of such Stock without registration or
qualification under, or in compliance with, applicable Federal securities or
state securities or insurance laws.
4.4 Authorization. Each of Parent and Seller has all necessary corporate
power and authority to enter into this Agreement and the Ancillary Agreements
to which it is or will be a party, and has taken all corporate action
necessary to consummate the transactions contemplated hereby and thereby and
to perform its obligations hereunder and thereunder. This Agreement and the
Tax Agreement have each been duly executed and delivered by each of Seller and
Parent. Assuming the due execution of this Agreement and the Tax Agreement by
Buyer, each of this Agreement and the Tax Agreement is a legal, valid and
binding obligation of each of Seller and Parent enforceable in accordance with
its terms, subject to the effects of bankruptcy, insolvency, fraudulent
conveyance, reorganization, moratorium and other similar laws relating to or
affecting creditors' rights generally, general equitable principles (whether
considered in a proceeding in equity or at law) and an implied covenant of
good faith and fair dealing. Subject to the occurrence of the Closing, the
Guarantees will be duly executed and delivered by Parent and Seller, as
applicable, on the Closing Date. Upon execution and delivery by Parent or
Seller, as the case may be, each Guarantee will be a legal, valid and binding
obligation of such Person enforceable in accordance with its terms, subject to
the effects of bankruptcy, insolvency, fraudulent conveyance, reorganization,
moratorium and other similar laws relating to or affecting creditors' rights
generally, general equitable principles (whether considered in a proceeding in
equity or at law) and an implied covenant of good faith and fair dealing.
4.5 Subsidiaries. Schedule 4.5 sets forth a complete and accurate list of
all of the Subsidiaries, other than Subsidiaries which are not Insurance
Subsidiaries and which do not hold any assets (including capital stock) with a
fair market value in excess of $1,000 or insurance licenses (the "Section 4.5
Subsidiaries"). Schedule 4.5 also contains the jurisdiction of incorporation
or formation of each of the Section 4.5 Subsidiaries, each jurisdiction in
which such Subsidiary is licensed, qualified or otherwise authorized to
conduct insurance business, the number of shares of capital stock of any
Section 4.5 Subsidiary which is a corporation issued and outstanding and the
percentage ownership interest of the Company in each such Subsidiary. All
outstanding shares of capital stock of such Subsidiaries have been duly and
validly authorized and are fully paid and nonassessable. All such outstanding
shares are owned by the Company and/or one or more of its Subsidiaries free
and clear of any Encumbrances, including, without limitation, any agreement,
understanding or restriction affecting the voting rights or other incidents of
record or beneficial ownership pertaining to such shares; provided that Parent
and Seller make no representation in this sentence regarding the ability of
Seller to transfer or otherwise dispose of such shares without registration or
qualification under, or in compliance with, applicable Federal securities or
state securities laws to a Person who is not an "accredited investor" (as
defined in Rule 501 under the Securities Act) or without compliance with
applicable insurance laws. There are no subscriptions, options, warrants,
calls, commitments, preemptive rights or other rights of any kind outstanding
for the purchase of, nor any securities convertible or exchangeable for, any
equity interests of any of the Section 4.5 Subsidiaries. Schedule 4.5
contains true and complete copies of all agreements and other instruments
pursuant to which the Company or any Section 4.5 Subsidiary is obligated or
required, under any circumstance, to make contributions to the capital of any
Subsidiary. Each of the Insurance Subsidiaries is a corporation duly
licensed, organized, validly existing and in good standing under the
jurisdiction of its organization and each of the other Subsidiaries is a
corporation duly organized, validly existing and in good standing under the
jurisdiction of its organization, in each case, with corporate power to own
its properties and conduct its business as now being conducted and is duly
licensed (in the case of the Insurance Subsidiaries), qualified and in good
standing to transact business in each jurisdiction (as listed in Schedule 4.5)
where, by virtue of its business carried on or properties owned, it is
required to be so licensed (in the case of the Insurance Subsidiaries) or
qualified and where the failure to be so licensed (in the case of the
Insurance Subsidiaries) or qualified, individually or in the aggregate, would
have a Material Adverse Effect on the Company and the Subsidiaries, taken as a
whole. To the extent requested of Seller by Buyer, Seller has made available
to Buyer a complete and correct copy of the certificates of incorporation,
bylaws and other organizational documents of each Section 4.5 Subsidiary and
the minute books of each such Subsidiary. The minute books include copies of
minutes of all meetings of the directors or shareholders of each such
Subsidiary held on or after January 1, 1993 and complete and accurate copies
of all resolutions passed by the directors or actions by written consent of
the shareholders on or after January 1, 1993.
4.6 Ridge Re. (a) Ridge Re is duly organized, validly existing and in good
standing under the laws of Bermuda and has full corporate power and authority
to conduct its business as it is presently being conducted and to own, lease
and operate its properties and assets. Ridge Re is duly licensed, qualified
or otherwise authorized as an alien corporation to conduct the reinsurance
business conducted by it and is in good standing in each jurisdiction in which
such license, qualification or authorization is necessary under the applicable
law and where the failure to be so licensed, qualified or otherwise
authorized, individually or in the aggregate, would have a Material Adverse
Effect on the Company and the Subsidiaries, taken as a whole.
(b) Seller owns of record and beneficially all of the outstanding capital
stock of Ridge Re free and clear of all Encumbrances, including without
limitation, any agreement, understanding or restriction affecting the voting
rights or other incidents of record or beneficial ownership pertaining to such
shares; provided that Parent and Seller make no representation in this
sentence regarding the ability of Seller to transfer or otherwise dispose of
such shares without registration or qualification under, or in compliance
with, applicable Federal or state securities laws to a Person who is not an
"accredited investor" (as defined in Rule 501 of Regulation D under the
Securities Act) or without compliance with applicable insurance laws. There
are no subscriptions, options, warrants, calls, commitments, preemptive rights
or other rights of any kind outstanding to which Parent, Seller, Ridge Re or
any of their respective Affiliates is a party for the purchase of, nor any
securities convertible or exchangeable for, any equity interests of Ridge Re,
except as set forth in Schedule 4.6. Schedule 4.6 contains a true and
complete list of all agreements and other instruments pursuant to which
Parent, Seller or any Affiliate is obligated or required, under any
circumstance, to make contributions to the capital of Ridge Re.
(c) The Ridge Re Treaty is a legal, valid and binding obligation of Ridge Re,
enforceable in accordance with its terms, subject to the effects of
bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and
other similar laws relating to or affecting creditors' rights generally,
general equitable principles (whether considered in a proceeding in equity or
at law) and an implied covenant of good faith and fair dealing.
4.7 Absence of Certain Changes or Events. To the Knowledge of Seller, except
as expressly contemplated by this Agreement or as described on Schedule 4.7 or
reflected in the Company Interim Financial Statements, since June 30, 1995,
there has not been any:
(a) change in the business, condition (financial or otherwise), Permits,
assets, Liabilities, working capital, earnings or operations of the Company or
any Subsidiary, except for changes which have not, individually or in the
aggregate, had or are not reasonably likely to have a Material Adverse Effect
on the Company and the Subsidiaries, taken as a whole;
(b) acquisition of material assets or properties or of securities or business
of any other Person by the Company or any Subsidiary (in each case, other than
acquisitions in the ordinary course of business consistent with past practice)
or any merger, consolidation or amalgamation involving the Company or any
Subsidiary, except the acquisition of Cash Equivalents as part of the process
of converting substantially all of the Company and the Subsidiaries'
investment portfolio into cash and Cash Equivalents prior to the date of this
Agreement and the reinvestment thereof in accordance with the Investment
Policy after the date of this Agreement;
(c) sale, assignment, lease or transfer of (i) the Crostex/Camfex Contracts,
the Seller Notes (except transfers in accordance with, and to the extent
Parent and Seller comply with, Section 6.12) or any interest in the Leesburg
Training Facility (except transfers in accordance with, and to the extent
Parent and Seller comply with, Section 6.13) or (ii) any other material assets
(including any portion of the investment portfolio) of the Company or any
Subsidiary, other than in the case of (ii) (W) in the ordinary course of
business consistent with past practices and (X) converting substantially all
of the Company and the Subsidiaries' investment portfolio into cash and Cash
Equivalents prior to the date of this Agreement and dispositions of securities
in accordance with the Investment Policy after the date of this Agreement;
(d) incurrence by the Company or any Subsidiary of any indebtedness for
borrowed money or incurrence, assumption or guarantee of, or any other act to
become responsible for, any obligations of any other Person, or making of
loans or advances by the Company or any Subsidiary to any Person (including,
without limitation, any broker or agent), except (i) loans to employees made
in the ordinary course of business consistent with past practice for
relocation expenses and (ii) the issuance of insurance policies in the
ordinary course of business consistent with past practice;
(e) cancellation of any indebtedness or waiver or compromise of any rights
(including agent balances) having a value to the Company or any Subsidiary of
$500,000 or more, including the Seller Notes and the Crostex/Camfex Purchase
Money Notes, whether or not in the ordinary course of business (other than
settlements in the ordinary course of business of claims and salvage and
subrogation arising under contracts of insurance underwritten, assumed or
ceded by the Company or any Subsidiary which settlements have not had nor
would be reasonably likely to have, individually or in the aggregate, a
Material Adverse Effect on the Company and the Subsidiaries, taken as a whole
and the terminations, modifications and commutations permitted by clause (j)
below);
(f) failure of the Company or any Subsidiary to pay any creditor any amount
owed to such creditor (in excess of $1,000,000 in the aggregate for all such
creditors) when due (after the expiration of any applicable grace periods)
except for failures to pay in the ordinary course of business or if the
Company or any Subsidiary is disputing the amount due in good faith;
(g) payment by the Company or any Subsidiary of any material Liability before
the same became due in accordance with its terms other than in the ordinary
course of business consistent with past practice;
(h) material change in the reinsurance, claim processing and payment,
financial or accounting practices or policies of the Company or any
Subsidiary, except as required by law, generally accepted accounting
principles or Statutory Accounting Principles;
(i) except to the extent required under employee and director benefit plans
or policies, agreements or arrangements as in effect on the Balance Sheet
Date, (1) increase in the compensation or fringe benefits of any of the
directors, officers or employees of the Company or any Subsidiary (except for
increases in salary or wages of employees of the Company or any Subsidiary who
are not officers of the Company in the ordinary course of business in
accordance with past practice), (2) grant of any severance or termination pay
or entrance into any employment, consulting or severance agreement or
arrangement with any present or former director, officer or employee of the
Company or any Subsidiary or amendment of any such arrangement or agreement or
(3) establishment, adoption, entrance into, amendment of or termination of any
(X) collective bargaining agreement or (Y) plan or agreement to provide
bonuses, profit sharing, stock options, restricted stock, pensions, retirement
benefits, deferred compensation, employment or benefits upon termination for
the benefit of any directors, officers or any group of other employees of the
Company or any Subsidiary;
(j) (i) entry into or modification of any reinsurance or retrocession
agreement by the Company or any Subsidiary other than in the ordinary course
of business consistent with past practice, except for those which have not had
nor are reasonably likely to have, individually or in the aggregate, a
Material Adverse Effect on the Company and the Subsidiaries, taken as a whole
or (ii) termination or commutation of any reinsurance or retrocession
agreement legally carried on the books of the Subsidiaries at the time of such
termination or commutation at $5,000,000 or more;
(k) entry into, termination or modification by the Company or any Subsidiary
of any Contract, agreement, commitment, transaction, or instrument (including,
without limitation, relating to any borrowing, lending, capital expenditure,
capital contribution or capital financing), except entering into, terminating
or modifying contracts, agreements, commitments, transactions, or instruments
(i) in the ordinary course of business and (ii) as permitted by clauses (i)
and (j) above; provided that except as disclosed on Schedule 4.7, no
modifications shall have been made to the Crostex/Camfex Contracts or the
Ridge Re Treaty;
(l) entry into a material joint venture, partnership or similar arrangement
by the Company or any Subsidiary with any Person;
(m) any capital expenditure or execution of any lease or commitment for the
foregoing by the Company or any Subsidiary involving annual payments in excess
of $100,000;
(n) lapse or termination or failure to renew any Permit of the Company or any
Subsidiary, in each case other than with respect to Permits the failure of
which to be in effect would not have, individually or in the aggregate, a
Material Adverse Effect on the Company and the Subsidiaries, taken as a whole;
(o) (i) declaration, setting aside or payment of any dividends or
distributions (whether in cash, stock or property) in respect of any capital
stock of the Company or (ii) any redemption, purchase or other acquisition of
any of the capital stock of the Company or any Subsidiary (other than a wholly
owned Subsidiary), except for payments permitted under the Tax Agreement;
(p) issuance by the Company or any Subsidiary of, or commitment of the
Company or any Subsidiary to issue, any shares of capital stock or obligations
or securities convertible into or exchangeable for shares of capital stock
except for issuances or commitments by any Subsidiary to issue any such
securities to the Company or any wholly owned Subsidiary;
(q) amendment of the certificate of incorporation or bylaws of the Company or
any Subsidiary; or
(r) agreement by the Company or any Subsidiary to do any of the foregoing.
4.8 Title to Assets, Etc. The Company and the Subsidiaries have good title to
or valid and subsisting leasehold interests in all real and material personal
property and other material assets on their books and reflected on the balance
sheets included in the Company Interim Financial Statements or acquired in the
ordinary course of business since September 30, 1995 which would have been
required to be reflected on such balance sheets if acquired on or prior to
September 30, 1995, other than (i) assets which have been disposed of in the
ordinary course of business and (ii) assets which were disposed in connection
with the conversion of the Company and the Subsidiaries' investment portfolio
into cash and Cash Equivalents (the "Assets"). None of the Assets is subject
to any Encumbrance, except for Encumbrances reflected in the financial
statements contained in Schedule 4.12, as applicable, or which in the
aggregate are not substantial in amount and do not materially detract from the
value of the property or assets subject thereto or interfere with the present
use.
4.9 Contracts and Commitments. (a) None of the Company or any Subsidiary is
a party to any written or oral:
(i) Contracts not otherwise listed in Schedule 4.9;
(ii) except as listed on Schedule 4.9, treaties and agreements with, and
undertakings or commitments to, any governmental or regulatory authority
materially affecting the business of the Company and the Subsidiaries taken as
a whole and not made in the ordinary course of business;
(iii) except as described in Schedule 4.9, contracts or agreements
containing covenants limiting the freedom of the Company or any Subsidiary to
engage in any line of business in any geographic area or to compete with any
Person or to incur indebtedness for borrowed money;
(iv) except as described in Schedule 4.9 and for reinsurance and
retrocession agreements, contracts or agreements containing "change in
control" or similar provisions;
(v) except as listed on Schedule 4.9, employment contracts or agreements,
including without limitation contracts to employ executive officers and other
contracts with officers or directors of the Company or any Subsidiary which
cannot be terminated by the Company or the Subsidiary upon notice of sixty
days or less without penalty or premium and involve annual compensation in
excess of $100,000 individually; or
(vi) contracts or agreements providing for the indemnification by the
Company or any Subsidiary of any Person except for contracts entered into in
the ordinary course of business consistent with past practice.
(b) None of the Company or any Subsidiary is (and, to the Knowledge of the
Seller, no other party is) (i) in material breach of or materially in default
under, any of the Contracts (or with or without notice or lapse of time or
both, would be in material breach of or materially in default under any of the
Contracts) or (ii) in breach or default under any of the Contracts (with or
without notice or lapse of time or both) if such breach or default would
permit a party other than the Company or a Subsidiary to terminate such
Contract. None of Parent, Seller, the Company or any Subsidiary has delivered
or received notice of termination or written notice of an intention to
terminate to or from any other party to any Contract except as described on
Schedule 4.9.
(c) Other than the Ridge Re Treaty and the other treaties referenced in the
first sentence of Section 4.9(c) of the Talegen Agreement, Ridge Re is not a
party to any reinsurance or retrocession agreement or treaty, and, except in
connection with such treaties, does not engage in any business. Set forth in
Schedule 4.9 is the amount of cover as of the date of this Agreement available
under the Ridge Re Treaty. A true and complete copy of the Ridge Re Treaty is
contained in Schedule 1.1D. The Ridge Re Treaty is in full force and effect
and constitutes a legal, valid and binding obligation of the parties thereto,
enforceable in accordance with its terms, subject to the effects of
bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and
other similar laws relating to or affecting creditors' rights generally,
general equitable principles (whether considered in a proceeding in equity or
at law) and an implied covenant of good faith and fair dealing. None of
Parent, Seller, Talegen, the Company or any Subsidiary has received any notice
from Ridge Re or any governmental or regulatory authority (i) that the Ridge
Re Treaty is not enforceable against any party thereto or (ii) regarding the
availability or enforceability of the cover under the Ridge Re Treaty. No
party to the Ridge Re Treaty has received notice of termination of, or written
notice of an intention to terminate, the Ridge Re Treaty. No party to the
Ridge Re Treaty is in breach of or violation of or default under the Ridge Re
Treaty (or with or without notice or lapse of time or both, would be in breach
of or violation of or default under the Ridge Re Treaty), except for breaches,
violations or defaults by IIC which would not permit Ridge Re to terminate the
Ridge Re Treaty or which would not provide Ridge Re with a defense to any
payment obligation of Ridge Re thereunder.
4.10 No Conflict or Violation. Except as set forth in Schedule 4.10, neither
the execution, delivery and performance of this Agreement or any of the
Ancillary Agreements nor the consummation of the transactions contemplated
hereby or thereby will result in (a) a violation of or a conflict with any
provision of the certificate of incorporation or bylaws of Parent, Seller,
Talegen, Ridge Re, the Company or any Section 4.5 Subsidiary, (b) a breach of,
or a default under, any term or provision of any contract, agreement,
indebtedness, lease, Encumbrance, commitment, license, franchise, Permit,
authorization or concession to which (i) Parent, Seller, Talegen or Ridge Re
is a party or is subject or by which any assets (including investments) of any
of them are bound or (ii) the Company or any Subsidiary is a party or is
subject or by which any assets (including investments) of any of them are
bound, which breach or default in the case of clause (ii) would have,
individually or in the aggregate, a Material Adverse Effect on the Company and
the Subsidiaries, taken as a whole, or in the case of clauses (i) and (ii)
would interfere in any material way with the ability of Parent or Seller to
consummate the transactions contemplated by this Agreement or any of the
Ancillary Agreements or the Ridge Re Treaty, (c) subject to obtaining the
approvals referred to in Section 4.11, a violation by Parent, Seller, Talegen,
Ridge Re, the Company or any Subsidiary of any statute, rule, regulation,
ordinance, code, order, judgment, writ, injunction, decree or award, which
violation would have, individually or in the aggregate, a Material Adverse
Effect on the Company and the Subsidiaries, taken as a whole, or interfere in
any material way with the ability of Parent, Seller or Ridge Re to consummate
the transactions contemplated by this Agreement or any of the Ancillary
Agreements, (d) the imposition of any Encumbrance, restriction or charge on
the business of the Company or any Subsidiary or on any material assets of the
Company or the Subsidiaries, (e) the creation or exercisability of any right
of termination, cancellation or acceleration under any Contract or (f) result
in the breach of any of the terms or conditions of, constitute a default
under, or otherwise cause any impairment of, any Permit, which breach, default
or impairment would result, individually or in the aggregate, in a Material
Adverse Effect on the Company and the Subsidiaries, taken as a whole.
4.11 Consents and Approvals. Except for (i) the approval of this Agreement,
the Ancillary Agreements and the transactions contemplated hereby and thereby
(including, without limitation, the Financing), and the new intercompany tax
agreements among the Company and the Subsidiaries which shall be effective as
of the Closing, by each of the governmental and regulatory authorities listed
on Schedule 4.11, (ii) the approval of this Agreement, the Ancillary
Agreements and the transactions contemplated hereby and thereby (including,
without limitation, the Financing), and the new intercompany tax agreements
among the Company and the Subsidiaries which shall be effective as of the
Closing, by any other governmental or regulatory authorities, the failure of
which to obtain would not, individually or in the aggregate, have a Material
Adverse Effect on the Company and the Subsidiaries, taken as a whole, (iii)
filings in respect of the transactions contemplated hereby required to be made
for compliance with the applicable provisions of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), and the rules and regulations
promulgated thereunder, (iv) the filing of premerger notification reports
under the HSR Act and (v) consents, approvals, authorizations, declarations,
filings and registrations required (x) by the nature of the business or
ownership of Buyer or (y) solely by reason of the Financing (excluding any
consents, approvals, authorizations, declarations, filings or registrations
otherwise required in connection with this Agreement, the Ancillary Agreements
or the transactions contemplated hereby or thereby), no consent, approval or
authorization of, or declaration, filing or registration with, any
governmental or regulatory authority, or any other Person, is required to be
made or obtained by Parent, Seller, Talegen, Ridge Re, the Company, any
Subsidiary or Buyer on or prior to the Closing Date in connection with the
execution or delivery of this Agreement or any of the Ancillary Agreements,
the performance of this Agreement, the Guarantees, the Tax Agreement, or the
Ridge Re Treaty or the consummation of the transactions contemplated hereby
and thereby.
4.12 Financial Statements. (a) Seller has heretofore delivered to Buyer the
Company GAAP Financial Statements, the Ridge Re GAAP Financial Statements, the
Company Interim Financial Statements, the Ridge Re Interim Financial
Statements and the Convention Statements. A copy of each of the foregoing
financial statements is included in Schedule 4.12.
(b) Except as otherwise set forth therein, (i) the Company GAAP Financial
Statements are based on the books and records of the Company and its
Subsidiaries, fairly present in all material respects the financial condition
and consolidated results of operations of the Company and its Subsidiaries, as
of the dates and for the periods indicated therein, have been prepared in
accordance with GAAP (as in effect at the time of the respective financial
statements) consistently applied, and have been audited by KPMG Peat Marwick
LLP and (ii) the Ridge Re GAAP Financial Statements are based on the books and
records of Ridge Re, fairly present in all material respects the financial
condition and results of operation of Ridge Re, as of the dates and for the
periods indicated therein, have been prepared in accordance with GAAP (as in
effect at the time of the respective financial statements) consistently
applied, and have been audited by KPMG Peat Marwick LLP.
(c) The Company Interim Financial Statements and the Ridge Re Interim
Financial Statements were prepared in the ordinary course of business and have
been prepared on a consistent basis through the periods indicated and in a
manner consistent with that employed in the Company GAAP Financial Statements
and the Ridge Re GAAP Financial Statements, as the case may be. The Company
Interim Financial Statements and the Ridge Re Interim Financial Statements do
not contain full footnote disclosures in accordance with United States
generally accepted accounting principles and are subject to normal recurring
year-end adjustments, but otherwise fairly present in all material respects
the financial condition and results of operations of the Company and Ridge Re,
as the case may be, as of the dates and for the periods indicated therein
except as otherwise set forth therein.
(d) Except as otherwise set forth therein, the Convention Statements and the
statutory balance sheets and income statements included in such Convention
Statements fairly present in all material respects the statutory financial
condition and results of operations of the respective Insurance Subsidiaries
and Ridge Re, as the case may be, as of the dates and for the periods
indicated therein and have been prepared in accordance with Statutory
Accounting Principles (as in effect at the time of the respective financial
statements) consistently applied throughout the periods indicated, except as
expressly set forth therein. The statutory balance sheets and income
statements included in the Convention Statements for the years ended December
31, 1993 and 1994 have been audited by KPMG Peat Marwick LLP.
4.13 Litigation. To the Knowledge of Seller, except as set forth on
Schedule 4.13, there is no action, order, writ, injunction, judgment, fine or
decree outstanding or suit, litigation, proceeding, labor dispute (other than
routine grievance procedures or routine, uncontested claims for benefits under
any benefit plans for any officers, employees or agents of the Company or any
Subsidiary (collectively, "Personnel")), arbitral action, investigation or
reported claim, in each case including, without limitation, those involving
any governmental or regulatory authority and excluding those relating to
insurance and reinsurance policies (collectively, "Actions") pending or
threatened by or against or relating to (i) the Company or any Subsidiary,
(ii) any benefit plan for Personnel or any fiduciary or administrator thereof
or (iii) the transactions contemplated by this Agreement and the Ancillary
Agreements. None of the Company or any Subsidiary is in default with respect
to any order, writ, injunction, judgment, fine or decree of any court or
governmental or regulatory agency, and there are no unsatisfied judgments
against the Company or any Subsidiary which would have, individually or in the
aggregate, a Material Adverse Effect on the Company and the Subsidiaries,
taken as a whole.
4.14 Liabilities. Except as set forth in Schedule 4.14, the Company and the
Subsidiaries do not have any direct or indirect indebtedness, liability,
claim, loss, damage, deficiency, obligation or responsibility, fixed or
unfixed, choate or inchoate, liquidated or unliquidated, secured or unsecured,
accrued, absolute, contingent or otherwise ("Liabilities"), other than (i)
Liabilities fully and adequately reflected (including by reducing any
numerical amount set forth) in one or more line items on, reserved on, or
disclosed in the footnotes to, the balance sheets included in the Company
Interim Financial Statements, or disclosed in the footnotes to the Company
GAAP Financial Statements, (ii) Liabilities incurred in the ordinary course of
business, consistent with past practice and the provisions of this Agreement
and the Ancillary Agreements, (iii) Liabilities relating to future benefits,
losses, claims and expenses arising under insurance and reinsurance policies
of the Insurance Subsidiaries, (iv) Liabilities disclosed in response to any
other representation, (v) Liabilities of a type that are subject to any other
representation (without regard to any specific exclusions from such
representation, including any specific exclusions from the definitions used
therein) and (vi) Liabilities which have, or are reasonably likely to have a
net ultimate cost of $25,000 or less, on an individual basis or in the
aggregate to the extent such Liabilities arise out of a related series of
events.
4.15 Investments. (a) As of the date of this Agreement, at least 83% of the
investment portfolio for the Company and the Subsidiaries consists of cash and
Cash Equivalents and at least 87% of the investment portfolio (excluding cash
and Cash Equivalents) for the Company and the Subsidiaries consists of fixed
income securities rated at least AA by Moody's or by S&P. As of the date
hereof, at least 87% of the fixed income portfolio (excluding cash and Cash
Equivalents) has a maturity of one year or less.
(b) To the Knowledge of Seller, as of the Closing Date, the Company and the
Subsidiaries have good and marketable title to the investments in their
investment portfolios, provided that no representation is made as to the
transferability thereof.
4.16 Reserves. Seller has delivered to Buyer true and complete copies of all
actuarial reports or actuarial certificates in the possession or control of
Parent, Seller, Talegen, the Company or any of the Subsidiaries relating to
the adequacy of the claims reserves of any of the Subsidiaries for any period
ended on or after December 31, 1993. Notwithstanding the foregoing
representations contained in this Section or anything contained in Section
4.12, 4.14 or 6.2, Buyer acknowledges that Parent and Seller are not making
any representations, express or implied in or pursuant to this Agreement,
concerning the loss reserves or loss adjustment expense reserves of the
Company or any of the Subsidiaries including, without limitation, (i) whether
such reserves are adequate or sufficient, or (ii) whether such reserves were
determined in accordance with any actuarial, statutory or other standard, or
concerning any other "line item" or asset, liability or equity amount which
would be affected thereby.
4.17 Compliance with Law; Permits; Regulatory. (a) Except as set forth on
Schedule 4.17, the Company and the Subsidiaries are in compliance with all
applicable laws, statutes, ordinances and regulations, whether Federal,
foreign, state or local, except where the failure to comply would not,
individually or in the aggregate, have a Material Adverse Effect on the
Company and the Subsidiaries, taken as a whole. Since January 1, 1993, none
of the Company or any Subsidiary has received any written notice to the effect
that, or otherwise been advised that, it is not in compliance with any such
statute, regulation, order, ordinance or other law where the failure to comply
would, prior to June 30, 1998, individually or in the aggregate, have a
Material Adverse Effect on the Company and the Subsidiaries, taken as a whole.
(b) Except as set forth on Schedule 4.17, the Company and the Subsidiaries
hold all Permits necessary for the ownership and conduct of the respective
businesses of the Company and the Subsidiaries in each of the jurisdictions in
which the Company and the Subsidiaries conduct or operate their respective
businesses in the manner now conducted, and such Permits are in full force and
effect except where the failure to hold any Permit or the failure of any
Permit to be in full force and effect would not, individually or in the
aggregate, have a Material Adverse Effect on the Company and the Subsidiaries,
taken as a whole. The consummation of the transactions contemplated by this
Agreement will not result in any revocation, cancellation or suspension of any
such Permit except as a result of the status of Buyer and its Affiliates, and,
there are no pending or threatened suits, proceedings or investigations with
respect to revocation, cancellation, suspension or nonrenewal thereof, and,
there has occurred no event which (whether with notice or lapse of time or
both) will result in such a revocation, cancellation, suspension or nonrenewal
thereof, in any such case except where such a revocation, cancellation,
suspension or non-renewal would not, individually or in the aggregate, have a
Material Adverse Effect on the Company and the Subsidiaries, taken as a whole.
(c) All insurance policies issued by the Insurance Subsidiaries, as now in
force are, to the extent required under applicable law, are in a form
acceptable to applicable regulatory authorities or have been filed and not
objected to (or such objection has been withdrawn or resolved) by such
authorities within the period provided for objection, except where such
failure or objection would not, individually or in the aggregate, have a
Material Adverse Effect on the Company and the Subsidiaries, taken as a whole.
Neither the Company nor any Subsidiary which is not an Insurance Subsidiary
has issued any insurance policies. Except as set forth on Schedule 4.17, (i)
all material reports, statements, documents, registrations, filings and
submissions to state insurance regulatory authorities complied in all material
respects with applicable law in effect when filed and (ii) no material
deficiencies have been asserted by any such regulatory authority with respect
to such reports, statements, documents, registrations, filings or submissions
that have not been satisfied or that would, individually or in the aggregate,
have a Material Adverse Effect on the Company and the Subsidiaries, taken as a
whole. Except as set forth on Schedule 4.17, all premium rates established by
the Insurance Subsidiaries that are required to be filed with or approved by
insurance regulatory authorities have been so filed or approved, the premiums
charged conform to the premiums so filed or approved and comply (or complied
at the relevant time) with the insurance laws applicable thereto except where
such failures to comply, individually or in the aggregate, would not have a
Material Adverse Effect on the Company and the Subsidiaries, taken as a whole.
4.18 No Brokers. Except as previously disclosed in writing to Buyer, neither
Parent, Seller, Talegen nor the Company has employed, or is subject to any
valid claim of, any broker, finder, consultant or other intermediary in
connection with the transactions contemplated by this Agreement who will be
entitled to a fee or commission in connection with such transactions. Parent
is solely responsible for any such payment, fee or commission that may be due
to any Person so previously disclosed to Buyer in connection with the
transactions contemplated hereby.
4.19 No Other Agreements to Sell the Assets or the. Except as set forth in
Schedule 4.19, none of Parent, Seller, Talegen, the Company or any Subsidiary
has any agreement, absolute or contingent, with any other Person to sell the
capital stock, assets (other than sales of assets that would not be prohibited
under Section 4.7(c)) or business of the Company or any Subsidiary or to
effect any merger, consolidation or other reorganization of the Company or any
Subsidiary or to enter into any agreement with respect thereto.
4.20 Proprietary Rights. (a) Except as set forth in Schedule 4.20, Parent,
Seller and their Affiliates (other than the Company and the Subsidiaries) have
no right or title to or interest in the trademarks, service marks, copyrights,
trade names and the applications and registrations therefor and the trade
secrets, software and other proprietary rights used in and material to the
business of the Company or any of its Subsidiaries (collectively,
"Intellectual Property").
(b) Schedule 4.20 sets forth a complete and correct list and brief
description of all Intellectual Property that is material to the Company or
any Subsidiary. With respect to intellectual property owned by the Company or
a Subsidiary, such entity has the sole and exclusive right to use and is the
sole and exclusive registered owner of all right, title and interest in and to
the Intellectual Property. The Intellectual Property which is not owned by
the Company or a Subsidiary is being used by the Company or a Subsidiary only
with the consent of or license from the rightful owner thereof, and all such
licenses are in full force and effect.
(c) To the Knowledge of Seller no activity in which the Company or a
Subsidiary is engaged or any product which the Company or a Subsidiary sells,
or any advertising that they employ, or the use of any of the Intellectual
Property, breaches, violates, infringes or interferes with any rights of any
third party or, except for the payment of computer software licensing fees,
requires payment for the use of any patent, trade-name, trade secret, trade-
mark, copyright or other intellectual property right or technology of another.
4.21 Employee Benefit Plans. (a) Schedule 4.21 contains a true and complete
list of each "employee benefit plan" (within the meaning of section 3(3) of
the Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
including, without limitation, multiemployer plans within the meaning of ERISA
section 3(37)), stock purchase, stock option, severance, employment, change-
in-control, fringe benefit, collective bargaining, bonus, incentive, deferred
compensation and all other employee benefit plans, agreements, programs,
policies or other arrangements, whether or not subject to ERISA (including any
funding mechanism therefor now in effect or required in the future as a result
of the transactions contemplated by this Agreement or otherwise), whether
formal or informal, oral or written, legally binding or not, under which any
employee or former employee of the Company or any Subsidiary has any present
or future right to benefits or under which the Company or any Subsidiary has
any present or future liability. All such plans, agreements, programs,
policies and arrangements shall be collectively referred to as the "Company
Plans".
(b) With respect to each Company Plan, the Company has delivered to the Buyer
a current, accurate and complete copy (or, to the extent no such copy exists,
an accurate description) thereof and, to the extent applicable, (i) any
related trust agreement, annuity contract or other funding instrument; (ii)
the most recent determination letter; (iii) any summary plan description and
other written communications (or a description of any oral communications) by
the Company or any Subsidiary to their employees concerning the extent of the
benefits provided under a Company Plan; and (iv) for the three most recent
years (A) the Form 5500 and attached schedules; (B) audited financial
statements; (C) actuarial valuation reports; and (D) attorney's response to an
auditor's request for information.
(c) (i) Each Company Plan, in all material respects, has been established and
administered in accordance with its terms and in compliance with the
applicable provisions of ERISA, the Code and other applicable laws, rules and
regulations; (ii) each Company Plan which is intended to be qualified within
the meaning of Code section 401(a) is so qualified and has received a
favorable determination letter as to its qualification and nothing has
occurred, whether by action or failure to act, which would cause the loss of
such qualification; (iii) except as listed on Schedule 4.21, with respect to
any Company Plan, no actions, suits or claims (other than routine claims for
benefits in the ordinary course) are pending or threatened, no facts or
circumstances exist which could give rise to any such actions, suits or
claims, and the Company will promptly notify Buyer in writing of any pending
or threatened claims arising between the date hereof and the Closing Date;
(iv) neither the Company, any Subsidiary nor any other party has engaged in a
prohibited transaction, as such term is defined under Code section 4975 or
ERISA section 406, which would subject the Company, any Subsidiary or the
Buyer to any material taxes, penalties or other liabilities under Code section
4975 or ERISA sections 409 or 502(i); (v) no event has occurred and no
condition exists that would subject the Company, either directly or by reason
of its affiliation with any member of its "Controlled Group" (defined as any
organization which is a member of a controlled group of organizations within
the meaning of Code sections 414(b), (c), (m) or (o)), or any Subsidiary to
any material tax, fine or penalty imposed by ERISA, the Code or other
applicable laws, rules and regulations including, but not limited to the taxes
imposed by Code sections 4971, 4972, 4977, 4979, 4980B, 4976(a) or the fine
imposed by ERISA section 502(c); (vi) all insurance premiums required to be
paid with respect to Company Plans as of the Closing Date have been or will be
paid prior thereto and adequate reserves have been provided for on the
Company's Interim Financial Statements as of September 30, 1995, to the extent
required by GAAP, for any premiums (or portions thereof) attributable to
service on or prior to the Closing Date; (vii) for each Company Plan with
respect to which a Form 5500 has been filed, no material change has occurred
with respect to the matters covered by the most recent Form since the date
thereof; (viii) all contributions required to be made prior to the Closing
Date under the terms of any Company Plan, the Code, ERISA or other applicable
laws, rules and regulations have been or will be timely made and adequate
reserves have been provided for on the Company's Interim Financial Statements
as of September 30, 1995, to the extent required by GAAP, for all benefits
attributable to service on or prior to the Closing Date; (ix) no Company Plan
provides for an increase in benefits on or after the Closing Date; and (x) no
Company Plan (excluding any agreement between the Company and individual
employees) contains any contractual language which limits the Company's
ability to amend or terminate such Company Plan without obligation or
liability (other than those obligations and liabilities for which specific
assets have been set aside in a trust or other funding vehicle or reserved for
on the Company's Interim Financial Statements as of September 30, 1995).
(d) (i) No Company Plan has incurred any "accumulated funding deficiency" as
such term is defined in ERISA section 302 and Code section 412 (whether or not
waived); (ii) no event or condition exists which would be deemed a reportable
event within the meaning of ERISA section 4043 which could result in a
material liability to the Company, any member of its Controlled Group or any
Subsidiary, and no condition exists which could subject the Company, any
member of its Controlled Group or any Subsidiary to a material fine under
ERISA section 4071; (iii) as of the Closing Date, the Company, each member of
its Controlled Group and each Subsidiary will have made all premium payments
required to be made prior to the Closing Date to the PBGC; (iv) neither the
Company, any member of its Controlled Group nor any Subsidiary is subject to
any liability to the PBGC for any plan termination occurring on or prior to
the Closing Date; (v) no amendment has occurred which has required or would
require the Company, any member of its Controlled Group or any Subsidiary to
provide security pursuant to Code section 401(a)(29); and (vi) neither the
Company, any member of its Controlled Group nor any Subsidiary has engaged in
a transaction which could subject it to material liability under ERISA section
4069
(e) With respect to each of the Company Plans which is not a multiemployer
plan within the meaning of section 4001(a)(3) of ERISA but is subject to
Title IV of ERISA, the funded status of each such Company Plan, as of January
1, 1995, is as reported in the actuarial valuation reports dated as of January
1, 1995. To the Knowledge of Seller, no material adverse change in the funded
status of such Company Plans has occurred since January 1, 1995, and no
material defects or omissions existed in the data provided to the preparers of
the actuarial valuation reports discussed in the preceding sentence.
(f) There are no multiemployer plans (within the meaning of section 4001(a)(3)
of ERISA) to which the Company, any member of its Controlled Group or any
Subsidiary has or had any liability or contributes (or has at any time
contributed or had an obligation to contribute).
(g) (i) Each Company Plan which is intended to meet the requirements for tax-
favored treatment under Subchapter B of Chapter 1 of Subtitle A of the Code
meets such requirements; and (ii) the Company and the Subsidiaries have no
trusts intended to be qualified within the meaning of Code section 501(c)(9),
and, except as listed on Schedule 4.21, had no such trusts in the past.
(h) Schedule 4.21 sets forth, on a plan-by-plan basis, the present value of
any benefits payable presently or in the future to present or former employees
of the Company or any Subsidiary under any Company Plan (excluding any
agreements between the Company and individual employees which were not entered
into as part of any plan or program) that is not fully funded and not subject
to the reporting requirements of ERISA (if such amounts are not reflected in
the financial statements included in Schedule 4.12) which present value is as
reported in the most recent actuarial valuation or other reports done with
respect to each such plan. To the Knowledge of Seller, no material adverse
increase in the amount of such present values has occurred since the date of
the most recent report, and no material defects or omissions existed in the
reports, or, if applicable, in the data provided to the preparers of the
reports.
(i) Except as set forth on Schedule 4.21 or referenced in Section 9.4, no
Company Plan exists which could result in the payment to any Company employee
or Subsidiary employee of any money or other property or accelerate or provide
any other rights or benefits to any Company employee or Subsidiary employee as
a result of the transactions contemplated by this Agreement, whether or not
such payment would constitute a parachute payment within the meaning of Code
section 280G. There is no cost to the Company and its Subsidiaries in the
event that all Company Plans set forth in Schedule 4.21 are triggered.
(j) Neither the Company nor any Subsidiary is obligated or otherwise required
to pay any bonuses (annual or otherwise) to Joseph W. Brown, Jr., or to any
managing director of the Company on or after the date of the Closing.
(k) No Company Plan operates within or is subject to the jurisdiction of any
foreign country, other than as described on Schedule 4.21.
(l) None of the amounts payable to any Company employee or any Subsidiary
employee as a result of the transactions contemplated by this Agreement will
be non-deductible under Section 280G of the Code.
4.22 Employment-Related Matters. Except as set forth in Schedule 4.22, (a)
none of the Company or the Subsidiaries is a party to, or otherwise bound by,
any consent decree with, or citation by, any government agency relating to
employees or employment practices, (b) none of the Company or any of the
Subsidiaries has closed any plant or facility, or effectuated any layoffs of
employees within the past six months, nor have the Company or the Subsidiaries
planned or announced any such action or programs for the future, and (c) the
Company and the Subsidiaries are in compliance with their respective
obligations pursuant to the Worker Adjustment and Retraining Notification Act
of 1988 and any similar state notification law.
4.23 Transactions with Certain Persons. (a) To the Knowledge of Seller,
neither any officer, director or employee of Parent, Seller, the Company or
any Subsidiary nor any member of any such Person's immediate family is
presently a party to any material transaction with the Company or any
Subsidiary, including, without limitation, any Contract, or other binding
arrangement (i) providing for the furnishing of material services (except in
such Person's capacity as an officer, director, employee or consultant) by,
(ii) providing for the rental of material real or personal property from, or
(iii) otherwise requiring material payments to (other than for services as
officers, directors or employees of Parent, Seller, the Company or any
Subsidiary) any such Person.
(b) Schedule 4.23 sets forth all contracts, agreements and arrangements in
effect on or after January 1, 1995, and all transactions (including, without
limitation, the provision of any services or the sale of any goods) since
January 1, 1994 between the Company or any Subsidiary, on the one hand, and
Parent or any Affiliate of Parent (excluding the Company and the Subsidiaries,
but including Talegen and its subsidiaries), on the other, excluding
contracts, agreements and arrangements (i) relating to the use or purchase of
products leased or sold by Parent in the ordinary course of Parent's document
processing business, (ii) involving payments by or to the Company or any
Subsidiary that do not exceed $100,000 in the aggregate or (iii) specifically
referred to in the financial statements contained in Schedule 4.12. Certain
Subsidiaries hold $25,000,000 aggregate principal amount of promissory notes
issued by Seller and unconditionally guaranteed by Parent (such notes,
collectively, the "Seller Notes"). Schedule 4.23 identifies the current
holders of each of the Seller Notes.
(c) Except in the ordinary course of business consistent with past practice,
since the Balance Sheet Date, Seller and the Company and/or any Subsidiary
have not settled any intercompany trade receivables and payables.
4.24 Taxes. (a) Filing of Tax Returns. Seller and the Company (and any
affiliated group of which the Company is now or has been a member) have timely
filed with the appropriate taxing authorities all Federal, and to the
Knowledge of Seller, state and local Tax Returns and Information Returns
required to be filed through the date hereof. All such Federal, and to the
Knowledge of Seller, state and local Tax Returns and Information Returns are
complete and accurate in all material respects. The Company is a member of an
affiliated group of corporations, within the meaning of Section 1504 of the
Code, that includes Seller and Parent, and Parent is the common parent of the
affiliated group.
(b) Payment of Taxes. All Taxes shown in the Tax Returns referred to in
Section 4.24(a) above that are due and payable by the Company and its
Subsidiaries before the date hereof have been paid.
(c) Liens for Taxes. There are no liens or other Encumbrances on any of the
assets of the Company or any Subsidiary that arose in connection with any
failure (or alleged failure) to pay any Tax.
(d) Audit History. Except as set forth in Schedule 4.24, there is no action,
suit, proceeding, investigation, audit or claim now pending or, to the
Knowledge of Seller, proposed against or with respect to the Company or any of
its Subsidiaries or any affiliated group of which the Company and its
Subsidiaries is or has been a member that relates to Tax liabilities
attributable to items of income, gain, deduction, loss or credits of the
Company or any of its Subsidiaries.
(e) Prior Affiliated Groups. Except as set forth in Schedule 4.24 and except
for the affiliated group of corporations of which the Company and the
Subsidiaries is currently a member and of which Parent is the common parent,
the Company and the Subsidiaries have never been members of an affiliated
group of corporations, within the meaning of Section 1504 of the Code.
(f) Withholding. The Company and the Subsidiaries have withheld and paid all
Federal, and to the Knowledge of Seller, state and local Taxes required to
have been withheld and paid in connection with amounts paid or owing to any
employee, independent contractor, creditor, stockholder or other third party.
(g) FIRPTA. Neither the Company nor any of the Subsidiaries have been a
United States real property holding corporation within the meaning of Section
897(c)(2) of the Code during the five-year period ending on the date hereof.
(h) Material Adverse Effect. A representation with respect to Taxes
contained in this Section 4.24 shall be deemed to be accurate unless an
inaccuracy contained therein has a Material Adverse Effect on the Company and
the Subsidiaries.
4.25 Reinsurance and Retrocessions. Schedule 4.25 contains a list as of the
date of this Agreement of all treaty reinsurance or retrocession treaties and
agreements in force to which any Subsidiary is a party (including any
terminated or expired treaty or agreement under which there remains any
outstanding liability with respect to paid or unpaid case reserves in excess
of $500,000), any terminated or expired treaty or agreement under which there
remains any outstanding liability from one reinsurer with respect to paid or
unpaid case reserves in excess of $100,000 and any treaty or agreement with
any Affiliate of such Subsidiary, the effective date of each such treaty or
agreement, and the termination date of any treaty or agreement which has a
definite termination date. To the Knowledge of Seller, no Subsidiary is in
default in any respect as to any provision of any reinsurance or retrocession
treaty or agreement or has failed to meet the underwriting standards required
for any business reinsured thereunder except for defaults which, individually
or in the aggregate, would not have a Material Adverse Effect on the Company
and the Subsidiaries, taken as a whole.
4.26 1992/93 Restructuring. All novations made pursuant to the 1992/93
Restructuring and any amendments to the Ridge Re Treaty made prior to the date
hereof, were made in accordance with all applicable laws, rules and
regulations at the time such novations or amendments were completed except
where the failure to do so (i) would not, individually or in the aggregate,
have a Material Adverse Effect on the Company and the Subsidiaries, taken as a
whole, or (ii) was a result of the failure by the Company or any Subsidiary to
obtain the consent of any insured or policyholder to the novation or
assumption of the relevant insurance policy. Notwithstanding the foregoing,
Buyer acknowledges that Seller and Parent shall have no liability to Buyer for
breach of this representation with respect to any novation or assumption, or
any amendment to the Ridge Re Treaty, which results in any liability for the
Company or any of its Subsidiaries, if there is a corresponding benefit
realized (or any liability avoided) by the Company or any other Subsidiary or
Talegen or any of its subsidiaries.
4.27 Capital Commitments. Schedule 4.27 contains a list of all capital
commitments as of the date of this Agreement of the Company or any Subsidiary
in excess of $100,000.
4.28 Environmental Laws. (a) Each of the Company and each Subsidiary
complies and has complied with all applicable Environmental Laws, and
possesses and complies with and has possessed and complied with all
Environmental Permits required under such laws except where the failure to be
in possession of or to comply with such Environmental Permits, or where the
failure to be in compliance with any Environmental Law, would not have,
individually or in the aggregate, a Material Adverse Effect on the Company and
the Subsidiaries, taken as a whole. There are no past, present, or
anticipated future events, conditions, circumstances, practices, plans or
legal requirements that could reasonably be expected to prevent, or materially
increase the burden on the Company or any Subsidiary of their complying with
applicable Environmental Laws or of their obtaining, renewing, or complying
with all Environmental Permits required under such laws. There are and have
been no Materials of Environmental Concern or other conditions at any property
owned, operated or otherwise used by the Company or any Subsidiary now or in
the past, or at any other location, that could reasonably be expected to give
rise to liability of the Company or any Subsidiary under any Environmental
Law. Parent, Seller and the Company have provided to Buyer true and complete
copies of all Environmental Reports prepared within the last five years in
their possession or control.
(b) Notwithstanding the representations contained in this Section, Buyer
acknowledges that Parent and Seller are not making any representations
(express or implied in or pursuant to this Agreement) with respect to any
violation of or noncompliance with Environmental Law or Environmental Permits,
or failure to obtain Environmental Permits, in each case by reason of any
policy of insurance, reinsurance, indemnity, guaranty or assumption of
liability of any party, entered into by the Company or any Insurance
Subsidiary.
4.29 Acquisition for Investment. Each of Seller and Parent acknowledges that
the Securities have not been registered under the Securities Act, or under any
state securities laws. Each of Seller and Parent (to the extent Parent
acquires Securities pursuant to Section 11.3) is acquiring the Securities
solely for its own account and not with a view to any distribution or other
disposition of such Securities or any part thereof, or interest therein,
except in accordance with the Securities Act. Each of Seller and Parent is an
"accredited investor" (as defined in Rule 501 of Regulation D under the
Securities Act).
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer hereby represents and warrants to Seller and Parent as follows:
5.1 Organization of Buyer. Buyer is duly organized, validly existing and in
good standing under the laws of the State of Delaware and has full corporate
power and authority to conduct its business and to own and lease its
properties.
5.2 Authorization. Buyer has all necessary corporate authority to enter into
this Agreement the Tax Agreement and has taken all necessary corporate action
to consummate the transactions contemplated hereby and to perform its
obligations hereunder. This Agreement and the Tax Agreement have been duly
executed and delivered by Buyer. Assuming the due execution of this Agreement
by Parent and Seller, this Agreement is a legal, valid and binding obligation
of Buyer enforceable against it in accordance with its terms, subject to the
effects of bankruptcy, insolvency, fraudulent conveyance, reorganization,
moratorium and other similar laws relating to or affecting creditors' rights
generally, general equitable principles (whether considered in a proceeding in
equity or at law) and an implied covenant of good faith and fair dealing.
5.3 No Conflict or Violation. Neither the execution, delivery and
performance of this Agreement or the Tax Agreement by Buyer nor the issuance
of the Class 2 Stock by Buyer, nor the issuance, if issued, of Class 1 Stock
by Buyer pursuant to the provisions of Section 11.3, nor the consummation by
Buyer of the transactions contemplated hereby or thereby will result in (a) a
violation of or a conflict with any provision of the certificate of
incorporation or bylaws of Buyer, (b) a breach of, or a default under, any
term or provision of any contract, agreement, indebtedness, lease,
Encumbrance, commitment, license, franchise, Permit, authorization or
concession (including any agreements, documents or instruments (the "Financing
Documents") constituting part of the financing required to consummate the
transactions contemplated by this Agreement (the "Financing")) to which Buyer
is a party or is subject or by which any assets of Buyer are bound, which
breach or default is in a Financing Document or would, individually or in the
aggregate, have a Material Adverse Effect on Buyer or interfere in any
material way with the ability of Buyer to consummate the transactions
contemplated by this Agreement and the Tax Agreement, or (c) subject to
obtaining the approvals referred to in Section 4.11, a violation by Buyer of
any statute, rule, regulation, ordinance, code, order, judgment, writ,
injunction, decree or award, which violation would, individually or in the
aggregate, have a Material Adverse Effect on Buyer or its ability to
consummate the transactions contemplated by this Agreement and the Tax
Agreement.
5.4 No Brokers. Except for the services of Merrill Lynch & Co., Buyer has
not employed, and is not subject to the valid claim of, any broker, finder,
consultant or other intermediary in connection with the transactions
contemplated by this Agreement who will be entitled to a fee or commission in
connection with such transactions. Buyer is solely responsible for any such
payment, fee or commission that may be due to Merrill Lynch & Co. in
connection with the transactions contemplated by this Agreement.
5.5 Acquisition for Investment. Buyer acknowledges that the Stock has not
been registered under the Securities Act or under any state securities laws.
Buyer is acquiring the Stock solely for its own account and not with a view to
any distribution or other disposition of the Stock or any part thereof, or
interest therein, except in accordance with the Securities Act. Buyer is an
"accredited investor" (as defined in Rule 501 of Regulation D under the
Securities Act).
5.6 Organizational Documents. Copies of the certificate of incorporation and
bylaws of Buyer have heretofore been delivered to Seller and such copies are
true, accurate and complete, without any amendment, modification or
supplement, as of the date of this Agreement and, after giving effect to the
filing of the Restated Certificate of Incorporation prior to Closing, the
Closing Date (except such amendments, modifications or supplements which would
not have a Material Adverse Effect on Seller or which change the amount of
authorized capital stock).
5.7 Capitalization of Buyer. (a) As of the Closing Date, investment
partnerships affiliated with KKR shall own, directly or indirectly, no less
than 70% of the Class 1 Stock, which percentage shall be reduced to reflect
any investment made by Parent and/or Seller pursuant to Section 11.3.
(b) In the event that Seller acquires any of the Class 1 Stock as provided in
Section 11.3 hereof, such shares will be duly authorized, validly issued,
fully paid and nonassessable, and free of preemptive rights.
(c) Upon consummation of the transactions contemplated by this Agreement, the
Class 2 Stock to be issued by Buyer pursuant hereto, when delivered by Buyer
for the consideration specified herein, will be duly and validly authorized
and issued by Buyer, fully paid, nonassessable and free of preemptive rights
and Seller will acquire good and marketable title thereto, free and clear of
all Encumbrances, except Encumbrances arising as a result of any action taken
by Seller or any of its Affiliates; provided that Buyer makes no
representations regarding the ability of any Person other than Buyer to
transfer or otherwise dispose of such Class 2 Stock without registration or
qualification under, or in compliance with, applicable Federal securities or
state securities or insurance laws.
5.8 Consents and Approvals. Except for (i) consents, approvals,
authorizations, declarations, filings and registrations required by the nature
of the business or ownership of Parent, Seller, the Company and the
Subsidiaries, (ii) filings in respect of the transactions contemplated hereby
required to be made for compliance with the applicable provisions of the
Exchange Act and the rules and regulations promulgated thereunder and (iii)
the filing of premerger notification reports under the HSR Act, no consents,
approval or authorization of, or declaration, filing or registration with, any
governmental or regulatory authority, or any other Person, is required to be
made or obtained by Buyer or any of its Affiliates in connection with the
execution, delivery and performance of this Agreement, the Ancillary
Agreements and the consummation of the transactions contemplated hereby and
thereby.
5.9 Financial Obligations. Buyer has received and delivered copies to Seller
of (i) a commitment letter from senior lenders regarding the transactions
contemplated by this Agreement, (ii) a letter with respect to equity Financing
(other than that to be provided by management of the Company), which letter is
addressed to Seller and (iii) an agreement in principal between Buyer and
management of the Company with respect to the investment by management
referred to in Section 8.16.
5.10 Solvency. At the Closing (after and giving effect to the acquisition of
the Stock and the Financing), neither Buyer nor the Company will (i) be
insolvent (either because its financial condition is such that the sum of its
debts is greater than the fair value of its assets or because the present fair
saleable value of its assets will be less than the amount required to pay its
probable liability on its debts as they become absolute and matured), (ii) has
unreasonably small capital with which to engage in its business or (iii) has
incurred or plan to incur debts beyond its ability to pay as they become
absolute and matured.
ARTICLE VI
ACTIONS BY PARENT, SELLER AND BUYER PRIOR TO THE CLOSING
Parent, Seller and Buyer covenant as follows for the period from the date
hereof to the Closing Date (except, in the case of Section 6.16, for the
period specified in such Section):
6.1 Maintenance of Business and Preservation of Permits and Services. Except
as expressly contemplated by this Agreement, Seller shall cause the Company
and each Subsidiary to carry on its business, in the ordinary course
consistent with past practice. Neither Parent nor Seller shall cause the
Company or any Subsidiary to terminate an officer thereof or to diminish the
duties or responsibilities of such officer.
6.2 Additional Financial Statements. As soon as reasonably practicable after
the end of the applicable period, Seller shall furnish to Buyer (a) the
quarterly convention statements of the Subsidiaries for all interim quarterly
periods subsequent to September 30, 1995, which shall have been prepared on a
basis consistent with the Convention Statements and, with respect to the
financial statements included therein, in accordance with Statutory Accounting
Principles, (b) the quarterly financial statements of the Company and Ridge Re
for all quarterly periods subsequent to September 30, 1995, which shall have
been prepared in accordance with generally accepted accounting principles and
on a basis consistent with the Company GAAP Financial Statements and the Ridge
Re GAAP Financial Statements, as the case may be, subject to normal year-end
adjustments and the absence of footnote disclosure, (c) the consolidated
financial statements for the Company and Ridge Re for the year ended December
31, 1995, which shall have been prepared in accordance with generally accepted
accounting principles and on a basis consistent with the Company GAAP
Financial Statements and the Ridge Re GAAP Financial Statements, as the case
may be, and (d) (to the extent ordinarily prepared) all monthly financial
statements of the Company, the Subsidiaries and Ridge Re (for months
subsequent to June 1995), which shall have been prepared in a manner
consistent with past practice.
6.3 Certain Prohibited Transactions. Parent and Seller agree to cause the
Company and each Subsidiary not to, without the prior written approval of
Buyer or except as expressly contemplated by this Agreement:
(a) terminate, cancel or amend any insurance coverage maintained by the
Company or any of its Subsidiaries with respect to any material assets of the
Company or any Subsidiary which is not replaced by an adequate amount of
insurance coverage or is not deemed unnecessary in the reasonable judgment of
the Company;
(b) settle any pending or threatened Action relating to an insurance claim in
an amount in excess of $5,000,000 above the policy limit relating to such
claim or settle any other pending or threatened Action in an amount in excess
of $1,000,000; or
(c) take any action which causes any representation or warranty (other than
Section 4.7(a)) of Parent or Seller in this Agreement to be or become untrue
at Closing or results in a material breach of any covenant made by Parent or
Seller in this Agreement.
6.4 Investigation by Buyer. Parent and Seller shall, and shall use their
reasonable efforts to cause the Company and the Subsidiaries to, allow Buyer
during regular business hours through Buyer's employees, agents and
representatives, to make such investigation of the business, properties, books
and records of the Company and the Subsidiaries, and to conduct such
examination of the condition of the Company and the Subsidiaries, as Buyer
reasonably deems necessary or advisable to familiarize itself with such
business, properties, books, records, condition and other matters, and to
verify the representations and warranties of Seller hereunder; provided,
however, that any information obtained from Seller or the Company shall be
deemed to be Evaluation Material for purposes of the Confidentiality Agreement
dated August 3, 1995, between Seller and Kohlberg Kravis Roberts Co., L.P.
(the "Confidentiality Agreement") and shall be subject to the Confidentiality
Agreement.
6.5 Consents. (a) As soon as practicable after execution and delivery of
this Agreement, Buyer and Seller shall make all filings required under the HSR
Act. Buyer and Seller will each furnish all information as may be required by
any other state regulatory agency properly asserting jurisdiction or by the
Federal Trade Commission and the United States Department of Justice under the
HSR Act in order that the requisite approvals for the purchase and sale of the
Stock pursuant hereto, and the transactions contemplated hereby, be obtained
or to cause any applicable waiting periods to expire.
(b) Buyer shall use its best efforts to file Form A change of control
applications with the applicable state insurance regulators referred to in
Schedule 4.11 within 45 days from the date hereof. Buyer will use its
reasonable efforts to obtain insurance regulatory approvals as soon as
possible following the Form A change of control filings. Parent and Seller
shall cooperate with Buyer to obtain such approvals.
(c) Seller and Buyer will, as soon as practicable, commence to take all other
action required to obtain as promptly as practicable all necessary consents,
approvals, authorizations and agreements of, and to give all notices and make
all other filings with, any third parties, including governmental authorities,
necessary to authorize, approve or permit the consummation of the transactions
contemplated hereby and by the Ancillary Agreements, including all consents,
approvals and waivers referred to in Sections 7.4 and 8.2 hereof, and Buyer,
Parent and Seller shall cooperate with each other with respect thereto.
(d) Notwithstanding the foregoing, however, none of Parent, Seller, Buyer,
the Company or the Subsidiaries shall be required to agree to any limitations,
requirements or conditions of, any third party including, but not limited to,
any insurance regulatory body, or make any payment to any party including the
Company or any Subsidiary in order to obtain consents referred to in Sections
7.4 and 8.2. Parent and Seller shall be entitled to have a representative or
representatives present at all meetings that may be held by Buyer with
insurance regulators.
6.6 Notification of Certain Matters. Parent and Seller, to the extent within
the actual knowledge of an officer of Parent or Seller listed on Schedule
1.1B, shall give prompt notice to Buyer, and Buyer, to the extent within the
knowledge of Buyer, shall give prompt notice to Seller, of (i) the occurrence,
or failure to occur, of any event which occurrence or failure would be likely
to cause any representation or warranty contained in this Agreement to be
untrue or inaccurate in any material respect any time from the date hereof to
the Closing Date, (ii) any material failure of Parent, Seller or Buyer, as the
case may be, to comply with or satisfy any covenant, condition or agreement to
be complied with or satisfied by it hereunder (and each party shall use all
reasonable efforts to remedy such failure), (iii) any notice or other
communication from any Person alleging that the consent of such Person is or
may be required in connection with the transactions contemplated by this
Agreement and the Ancillary Agreements, (iv) any notice or other communication
from any governmental or regulatory agency or authority in connection with the
transactions contemplated by this Agreement and the Ancillary Agreements, (v)
any Actions that, if pending or threatened on the date hereof, would have been
required to have been disclosed pursuant to Section 4.13 and (vi) any Actions
that relate to the consummation of the transactions contemplated by this
Agreement and the Ancillary Agreements.
6.7 No Solicitations. (a) Parent, Seller and each of their respective
Affiliates, including the Company and the Subsidiaries, will not, directly or
indirectly, solicit any inquiries or proposals or enter into or continue any
discussions, negotiations, understandings, arrangements or agreements relating
to the sale or exchange of any Stock, the merger or amalgamation of the
Company or any of its Subsidiaries with, or the direct or indirect disposition
of a significant amount of the Company's assets or any Subsidiary's assets or
business to any Person other than Buyer or its Affiliates or provide any
assistance or any information to or otherwise cooperate with any Person in
connection with any such inquiry, proposal or transaction (except that the
Company may direct inquiries to Buyer, which shall not disclose confidential
information about the Company or any of its Subsidiaries in connection with
responding to such inquiries). In the event that Parent, Seller or any of
their Affiliates, including the Company and the Subsidiaries receives a
solicited or unsolicited inquiry, proposal or offer for such a transaction or
obtains information that such an offer is likely to be made, Parent and Seller
will provide Buyer with notice thereof as soon as practical after receipt
thereof, including the identity of the prospective purchaser or soliciting
party. Buyer agrees that to the extent it engages in any discussions
regarding the Company or the Subsidiaries with potential purchasers of the
capital stock or businesses thereof, Buyer shall not include officers or
employees of the Company or the Subsidiaries in such discussions.
(b) The parties acknowledge that there may be no adequate remedy at law for a
breach of Section 6.7(a) and that money damages may not be an adequate remedy
for breach of such Section. Therefore, the parties agree that Buyer shall
have the right, in addition to any other rights it may have, to injunctive
relief and specific performance of Section 6.7(a) in the event of any breach
of such Section. The remedy set forth in the preceding two sentences is
cumulative and shall in no way limit any other remedy any party hereto has at
law, in equity or pursuant hereto.
6.8 Cooperation; Accounting and Other Matters. Seller shall, and Seller
shall use its reasonable efforts to cause the Company to, cooperate with Buyer
in respect of any proposed public offering or private placement of securities,
and arrangements of other financing by Buyer, the proceeds of which are to be
used to finance a portion of the purchase of the Stock by Buyer (provided,
however, that Seller shall not be obligated to participate in such financing
or the marketing thereof and shall not be obligated to be a party to any
underwriting, private placement or other agreement with respect thereto), and
shall, without limitation of the foregoing, cause such Company financial
statements to be prepared as may be required by the rules and regulations of
the Securities and Exchange Commission promulgated under the Securities Act.
6.9 Investment Portfolio. (a) Parent and Seller shall cause the Company and
the Subsidiaries to manage the investment portfolio for the Company and the
Subsidiaries in accordance with the Investment Policy.
(b) Five days prior to the Closing Date, Parent and Seller shall cause the
Company to deliver to Buyer a list of all Investments in the investment
portfolio for the Company and the Subsidiaries as of such date.
6.10 Reinsurance Agreements. Seller shall cause the Company and each
Subsidiary not to, without the prior written approval of Buyer (which approval
shall not be unreasonably withheld), except in the ordinary course of business
consistent with past practice (i) amend any reinsurance or retrocession
agreement, (ii) enter into or commit to enter into any loss portfolio transfer
or other similar transaction, agreement or arrangement or series of related
transactions, agreements or arrangements involving any ceded reinsurance of
the Company or any Subsidiary, (iii) enter into or commit to enter into any
reinsurance or retrocession contract or treaty except to replace, renew or
extend existing reinsurance and retrocession agreements and treaties on terms
which are not different in any material respect from the terms of the
agreement or treaty being replaced, renewed or extended, as the case may be,
or (iv) commute or terminate any contract of reinsurance, provided that Seller
shall cause the Company and each Subsidiary not to commute or terminate any
such contract which at the time of commutation or termination is legally
carried on the books of the Company and the Subsidiaries in an amount of
$5,000,000 or more. All reinsurance or retrocession agreements or treaties
permitted by this Section shall not have a change of control or similar
provision which would require the Company or any Subsidiary to obtain a
consent to consummate the transactions contemplated hereby (unless such
provisions shall have been waived prior to Closing).
6.11 Dividends. Seller and Parent shall cause the Company not to (i)
declare, set aside or pay any dividends or distributions (whether in cash,
stock or property) in respect of any capital stock of the Company, (ii) make
any other payment or distribution to Parent, Seller or any Affiliate of Parent
(excluding the Company and the Subsidiaries, but including Talegen and its
subsidiaries), or (iii) redeem, purchase or otherwise acquire any of the
capital stock of the Company or any Subsidiary, except for (A) payments
permitted under the Tax Agreement, (B) payments under the contracts,
agreements or arrangements referred to in Schedule 4.23 or described in
clauses (i), (ii) or (iii) of Section 4.23(b) and (C) dividends from TRG in an
amount not to exceed the TRG Dividend Replacement Amount (as defined in the
Talegen Agreement).
6.12 Seller Notes. The Company and the Subsidiaries shall not dispose of the
Seller Notes to a Person other than a Subsidiary, except that the Company and
the Subsidiaries may dispose of all or a portion of the Seller Notes prior to
Closing to a Person other than a Subsidiary if upon such disposition Seller
shall pay to the Company the excess of (i) the aggregate principal amount of
the Seller Notes so disposed plus accrued but unpaid interest through the date
of such disposition over (ii) the Third Party Amount. To the extent not
already disposed of, immediately prior to Closing, Seller shall repay the
outstanding principal amounts and any accrued but unpaid interest thereon
under the Seller Notes issued by it and held at that time by the Company or
any Subsidiary.
6.13 Leesburg Training Facility. The Company and the Subsidiaries shall not
dispose of any of their interests in the ground lease agreement among Parent
and certain of the Subsidiaries or the lease agreement among Seller and such
Subsidiaries, each dated as of December 1, 1985 and each relating to
approximately six acres of land in Loudon County, Virginia and a training
facility located thereon or their fee interests in such facility (the
"Leesburg Training Facility"), to a Person other than a Subsidiary, except
that the Company and the Subsidiaries may dispose of their interests (in whole
or in part) in the Leesburg Training Facility prior to Closing to a Person
other than a Subsidiary if upon such disposition Seller pays to the Company
the excess of (i) the greater of $6,200,000 and the statutory carrying value
of the Leesburg Training Facility as of December 31, 1995 over (ii) the Third
Party Amount. If no Third Party Amount has been received by the Company or
any Subsidiary prior to the Closing, immediately prior to Closing, Parent and
Seller agree to cause an amount equal to the greater of (i) the statutory
carrying value of the Leesburg Training Facility as of December 31, 1995 and
(ii) $6,200,000, to be contributed to such Subsidiaries, allocated to such
Subsidiaries in accordance with Schedule 6.13 (such contributed amount, the
"Leesburg Training Facility Amount"). At Closing, the Company shall cause to
be transferred to Seller or an Affiliate of Seller any remaining interests the
Company or any of the Subsidiaries has in the Leesburg Training Facility.
Upon any transfer of the Leesburg Training Facility in accordance with this
Section 6.13, the Company and the Subsidiaries shall have no further rights or
obligations relating to the Leesburg Training Facility.
6.14 Cessions to Ridge Re. The Insurance Subsidiaries shall make cessions to
Ridge Re under the Ridge Re Treaty in the ordinary course of business, which
cessions shall be actuarially supported.
6.15 Restated Certificate of Incorporation. Prior to the Closing Date, Buyer
shall file the Restated Certificate of Incorporation with the Secretary of
State of the State of Delaware.
6.16 Certain Admitted Assets. Parent and Seller shall indemnify, guaranty or
otherwise post credit support to the extent that as of the Closing Date the
Insurance Subsidiaries shall not have received credit for statutory purposes
for the Crostex/Camfex Purchase Money Notes in an amount equal to at least $35
million. Such indemnity, guaranty or credit support shall continue until
final maturity of such notes but only in the amount provided in the preceding
sentence.
6.17 Intercompany Accounts. (a) Except as provided in Sections 6.12 and
6.13, all intercompany accounts (other than those relating to Taxes and those
under or relating to reinsurance contracts and arrangements) between the
Company and any Subsidiary, on the one hand, and Parent and any of its
Affiliates (other than the Company and its Subsidiaries), on the other hand,
as of the Closing shall be settled at fair value (irrespective of the terms of
payment of such intercompany accounts) in the manner provided in this Section.
At least five business days prior to the Closing, Seller shall prepare and
deliver to Buyer a statement setting out in reasonable detail the calculation
of all such intercompany account balances based upon the latest available
financial information as of such date and, to the extent reasonably requested
by Buyer, provide Buyer with supporting documentation to verify the underlying
intercompany charges and transactions. All such intercompany account balances
shall be paid in full in cash prior to the Closing. All intercompany
reinsurance agreements shall remain in effect and shall be settled in the
ordinary course of business. All intercompany accounts relating to Taxes will
be governed by the Tax Agreement.
(b) As promptly as practicable, but no later than 60 days after the Closing
Date, Seller shall cause to be prepared and delivered to Buyer a statement
setting out in reasonable detail the calculation of such intercompany account
balances as of the Closing Date (giving effect to any settlement under
subsection (a) and any other payments). Buyer and Seller shall cooperate in
the preparation of any such calculation including the provision of supporting
documentation to verify the underlying intercompany charges, transactions and
payments. If Buyer disagrees with Seller's calculation of such intercompany
balances Buyer may, within 30 days after delivery of such statement, deliver a
notice to Seller disagreeing with such calculation and setting forth Buyer's
calculation of such amount. If Buyer and Seller are unable to resolve such
disagreement within 30 days thereafter, such disagreement shall be resolved by
independent accountants of nationally recognized standing reasonably
satisfactory to Buyer and Seller. The net amount of any such intercompany
balance shall be paid in cash promptly thereafter, together with interest
thereon from and including the Closing Date to but excluding the date of
payment at a rate equal to 5% per annum. Such interest shall be payable at
the same time as the payable to which it relates and shall be calculated daily
on the basis of a year of 365 days and the actual number of days elapsed. All
amounts owing to Buyer under this Section 6.17 shall be paid directly to the
Company.
6.18 Financing. Buyer shall use its reasonable efforts to obtain financing
that will satisfy the condition in Section 8.9 hereof.
6.19 Letter Agreement. The Letter Agreement substantially in the form of
Exhibit C shall be executed and delivered at the Closing.
ARTICLE VII
CONDITIONS TO OBLIGATIONS OF PARENT AND SELLER
The obligations of Parent and Seller to consummate the transactions
contemplated hereby on the Closing Date are subject, in the discretion of
Parent and Seller, to the satisfaction or waiver, on or prior to the Closing
Date, of each of the following conditions:
7.1 Representations, Warranties and Covenants. All representations and
warranties of Buyer contained in this Agreement and the Ancillary Documents to
which Buyer is a party shall be true and correct in all material respects
(except that such representations and warranties specifically qualified by
materiality shall be read for purposes of this Section so as not to require an
additional degree of materiality) as of the date of this Agreement and (except
to the extent such representations and warranties speak as of an earlier date)
as of the Closing Date as if such representations and warranties were made on
and as of the Closing Date, any breaches of such representations and
warranties as of the Closing Date (determined for purposes of this clause
without regard to any materiality qualifications in such representations and
warranties) taken together shall not have a Material Adverse Effect on Buyer,
the Company and the Subsidiaries, taken as a whole (assuming that the Closing
shall have occurred), or on Parent or Seller, and Buyer shall have performed
in all material respects all agreements and covenants required hereby to be
performed by it prior to or at the Closing Date. There shall be delivered to
Seller a certificate (signed by the President of Buyer) to the foregoing
effect.
7.2 HSR Act. The applicable waiting period, including any extension thereof,
under the HSR Act shall have expired.
7.3 No Governmental or Other Proceeding; Illegality. (a) No Action shall be
pending or threatened which seeks to enjoin, restrain or prohibit the
consummation of the transactions contemplated by this Agreement (including,
without limitation, the execution, delivery and performance of any Ancillary
Agreement by the parties thereto) which either Parent or Seller reasonably
believes presents a material risk that it or its Affiliates would suffer
substantial monetary damage (whether or not indemnified under this Agreement).
(b) There shall not be in effect any statute, rule, regulation or order of
any court, governmental or regulatory body which prohibits or makes illegal
the transactions contemplated hereby, including, without limitation, the
execution or delivery of any of the Ancillary Agreements or the performance of
any of the Guarantees, the Tax Agreement or the Ridge Re Treaty.
7.4 Consents. All consents, approvals and waivers from governmental
authorities and other parties necessary to permit Seller and Parent to
consummate the transactions contemplated hereby shall have been obtained,
unless the failure to obtain any such consent, approval or waiver would not
have a Material Adverse Effect on Seller or Parent, as the case may be,
provided, however, that no such consent, approval or waiver shall contain any
limitations, requirements or conditions on Parent or Seller or require Parent
or Seller to make any payment to any party including the Company or any
Subsidiary.
7.5 Opinion of Counsel. Buyer shall have delivered to Seller an opinion of
Simpson Thacher & Bartlett, substantially in the form of Exhibit D-1, and an
opinion of King & Spalding, special tax counsel to Buyer, substantially in the
form of Exhibit D-2.
7.6 Certificates. Buyer will furnish Seller with such certificates of its
officers, directors and others to evidence compliance with the conditions set
forth in this Article VII as may be reasonably requested by Seller.
7.7 Corporate Documents. Seller shall have received from Buyer resolutions
adopted by the Board of Directors of Buyer approving this Agreement and the
Tax Agreement and the transactions contemplated hereby and thereby, certified
by the corporate secretary or assistant secretary of Buyer.
7.8 Talegen Closing. Talegen Acquisition shall have simultaneously purchased
all of the outstanding shares of Talegen's capital stock pursuant to the
Talegen Agreement.
7.9 Reated Certificate of Incorporation. The Restated Certificate of
Incorporation shall have been duly filed with the Secretary of State of the
State of Delaware.
7.10 Solvency Matters. Buyer shall have provided to Seller, any solvency
letters or similar opinions or certificates relating to the solvency and
adequate capitalization of Buyer or the Company and/or the ability of Buyer or
the Company to pay its debts that are given to any banks or other lenders in
connection with the acquisition of the Stock at the same time as such letters,
opinions or certificates are provided to such banks or other lenders.
7.11 Capitalization. Buyer shall have received no less than $50,000,000 in
equity and the amount of indebtedness for borrowed money of Buyer shall be no
more than $110,000,000.
7.12 Company Certificates. Seller shall have received (i) a certificate
signed by each of the persons listed on Schedule 1.1C dated as of the date of
this Agreement, and (ii) a certificate signed by each of such persons dated as
of the Closing Date, in each case substantially in the form of Exhibit E.
7.13 Subsidiary Releases. All of the domestic U.S. Subsidiaries included in
the consolidated federal income tax return of Parent which are Subsidiaries as
of Closing shall have executed and delivered to Parent and Seller the releases
of any and all obligations under existing tax sharing agreements substantially
in the form of Exhibit F.
ARTICLE VIII
CONDITIONS TO OBLIGATIONS OF BUYER
The obligations of Buyer to consummate the transactions contemplated hereby
are subject, in the discretion of Buyer, to the satisfaction or waiver, on or
prior to the Closing Date, of each of the following conditions:
8.1 Representations, Warranties and Covenants. All representations and
warranties of Parent and Seller contained in this Agreement and the Ancillary
Agreements to which Parent or Seller is a party shall be true and correct in
all material respects (except that such representations and warranties
specifically qualified by materiality shall be read for purposes of this
Section so as not to require an additional degree of materiality) as of the
date of this Agreement and (except to the extent such representations and
warranties speak as of an earlier date) as of the Closing Date as if such
representations and warranties were made on and as of the Closing Date, any
breaches of such representations and warranties as of the Closing Date
(determined for purposes of this clause without regard to any materiality
qualifications in such representations and warranties) taken together shall
not have a Material Adverse Effect on the Company and the Subsidiaries, taken
as a whole, and Parent and Seller shall have performed in all material
respects all agreements and covenants (other than those contained in Section
6.3(c) and clauses (i), (ii) and (v) of Section 6.6) required hereby to be
performed by them, respectively, prior to or at the Closing Date. There shall
be delivered to Buyer a certificate of each of Parent and Seller (signed by an
Executive Vice President of Parent and the President of Seller) to the
foregoing effect.
8.2 Consents. All consents, approvals and waivers (a) referred to in clauses
(i) and (ii) of Section 4.11 or on Schedule 5.8, (b) referred to on Schedule
4.10, (c) under reinsurance and retrocession agreements for the accident year
in which the Closing occurs that would be terminable as a result of
consummation of the transactions contemplated by this Agreement and the
Ancillary Agreements, (d) under all other reinsurance and retrocession
agreements that would be terminable as a result of consummation of the
transactions contemplated by this Agreement and the Ancillary Agreements and
(e) under the reinsurance agreement described in clause (e) of Section 8.2 of
the Talegen Agreement shall have been obtained in form and substance
satisfactory to Buyer, acting reasonably, and shall be in full force and
effect, except, in the case of consents, approvals and waivers referred to in
clauses (b), (c) and (d), consents, approvals or waivers the failure of which
to obtain would not, individually or in the aggregate, result in a Material
Adverse Effect on the Company and the Subsidiaries, taken as a whole,
provided, however, that in the case of clauses (a), (b), (c), (d) and (e) no
such consent, approval or waiver shall contain any limitations, requirements
or conditions on Buyer, the Company or a Subsidiary or require Buyer, the
Company or a Subsidiary to make any payment to any party including in the case
of Buyer, to the Company or, in the case of Buyer or the Company, to any
Subsidiary, provided further, that the approval of any intercompany tax
agreements referred to in either Section 4.11(i) or (ii) for a period after
Closing shall not be a condition to the obligations of Buyer hereunder, and
provided still further, that with respect to any intercompany tax agreement
among the Company and the Subsidiaries for the period January 1, 1995 through
Closing, the obligations of Buyer hereunder shall be conditioned only on the
approval of an agreement that is reasonably consistent with those provisions
of the Tax Agreement that provide for the amount and time for payments
attributable to Taxes.
8.3 HSR Act. The applicable waiting period, including any extension thereof,
under the HSR Act shall have expired.
8.4 No Governmental or Other Proceeding; Illegality. (a) No Action shall be
pending or threatened which seeks to enjoin, restrain or prohibit the
consummation of the transactions contemplated by this Agreement (including,
without limitation, the execution, delivery and performance of any Ancillary
Agreement by the parties thereto) or to impose limitations on the ability of
Buyer to exercise full rights of ownership of the Stock or to require the
divestiture by Buyer of the Stock or by the Company, Buyer or any of their
Affiliates of any assets or businesses, which Buyer reasonably believes
presents a material risk that it or its Affiliates (including the Company and
the Subsidiaries after the Closing Date) would not realize substantially all
of the benefits of the transactions contemplated by this Agreement or would
suffer substantial monetary damages (whether or not indemnified under this
Agreement).
(b) There shall not be in effect any statute, rule, regulation or order of
any court, governmental or regulatory body which prohibits or makes illegal
the transactions contemplated hereby, including, without limitation, the
execution or delivery of any of the Ancillary Agreements or the performance of
any of the Guarantees, the Tax Agreement or the Ridge Re Treaty.
8.5 Opinion of Counsel. Seller shall have delivered to Buyer an opinion of
Skadden, Arps, Slate, Meagher & Flom, substantially in the form of Exhibit G-
1, an opinion of Richard S. Paul, Senior Vice President and General Counsel of
Seller, substantially in the form of Exhibit G-2, an opinion of Bruce Shulin,
General Counsel of IIC, substantially in the form of Exhibit G-3, an opinion
of Richard N. Frasch, General Counsel of the Company, substantially in the
form of Exhibit G-4, and an opinion of LeBoeuf, Lamb, Greene & MacRae, special
tax counsel to Parent and Seller, substantially in the form of Exhibit G-5.
8.6 Certificates. Parent and Seller shall furnish Buyer with such
certificates of the respective officers of Parent and Seller and others to
evidence compliance with the conditions set forth in this Article VIII as may
be reasonably requested by Buyer.
8.7 Corporate Documents. Buyer shall have received from Parent and Seller
resolutions adopted by the respective boards of directors of Parent and Seller
approving this Agreement and the other Ancillary Agreements to which Parent or
Seller is or will be a party and the transactions contemplated hereby and
thereby, certified by the corporate secretary or assistant secretary of Parent
and Seller, as applicable.
8.8 Talegen Closing. Talegen Acquisition shall have simultaneously purchased
all of the outstanding shares of Talegen's capital stock pursuant to the
Talegen Agreement.
8.9 Financing. Buyer shall have obtained proceeds from financing sources on
terms and conditions consistent with the senior bank commitment letter
provided by Buyer to Seller prior to the date hereof, and otherwise reasonably
satisfactory to Buyer.
8.10 No Material Adverse Effect. Since June 30, 1995, there shall not have
occurred any event, change or development (including, without limitation, the
suspension, revocation or other termination of any Permit) which individually
or in the aggregate, has had or is reasonably likely to have a Material
Adverse Effect on the Company and the Subsidiaries, taken as a whole.
8.11 Resignation of Officers and Directors. All Persons who are directors
and/or officers of the Company and/or any of the Subsidiaries whose principal
employment is as an officer and/or employee of Seller and/or Parent, shall
have resigned such directorships and/or such offices.
8.12 Transfer Taxes. Seller shall have caused all appropriate stock transfer
tax stamps to be affixed to the certificate or certificates representing the
Stock.
8.13 Seller Notes. Seller shall have made the payments contemplated by
Section 6.12 and repaid all amounts outstanding under any Seller Notes that
are still held by the Company and any Subsidiary together with any accrued but
unpaid interest thereon.
8.14 Leesburg Training Facility Amount. The Leesburg Training Facility
Amount shall have been paid, as provided in Section 6.13.
8.15 Guarantees. Parent shall have executed and delivered to Buyer a
guarantee for the benefit of IIC substantially in the form of Exhibit H and
Parent and Seller shall have executed and delivered to Buyer a guarantee for
the benefit of IIC substantially in the form of Exhibit I.
8.16 Management Investment. Members of the management of the Company and the
Subsidiaries designated by Buyer shall have invested in the capital stock of
Buyer on terms substantially consistent with the agreements in principle
delivered to Seller prior to the date hereof or otherwise satisfactory to
Buyer.
ARTICLE IX
ACTIONS BY PARENT, SELLER, AND BUYER AFTER THE CLOSING
9.1 Books and Records. Parent, Seller and Buyer agree that so long as any
books, records and files relating to the business, properties, assets or
operations of the Company or the Subsidiaries, to the extent that they pertain
to the operations of the Company or the Subsidiaries prior to the Closing
Date, remain in existence and available, each party (at its expense) shall
have the right to inspect and to make copies of the same at any time during
normal business hours for any proper purpose. Parent and Seller further agree
that, to the extent such records have not otherwise been delivered to the
Company or Buyer, Parent and Seller will not destroy or dispose of any
material books, records or files relating to the investment portfolio existing
as of the Closing Date without first offering to provide such books, records
or files to Buyer and that, in any event, Buyer shall have the right to
inspect and to make copies of the same at any time during normal business
hours for any proper purpose, to the extent reasonably requested by Buyer.
9.2 Covenants Regarding the Securities. In connection with any sale,
transfer or other disposition of all or any part of the Securities under an
exemption from registration under the Securities Act, if requested by Buyer,
Seller (or Parent, if such Securities are held by Parent) will deliver to
Buyer an opinion of counsel (which may be the General Counsel of Parent or, if
such Securities are held by Seller, of Seller), reasonably satisfactory in
form and substance to Buyer, that such exemption is available; provided,
however, that in case of any sale or other transfer of Securities to any
Person who is a qualified institutional buyer as defined in Rule 144A under
the Securities Act, no opinion of counsel shall be required if Seller (or
Parent, if such Securities are held by Parent) provides to Buyer an officer's
certificate to the effect that such Person is a qualified institutional buyer
as defined in Rule 144A under the Securities Act. Parent and Seller hereby
agree and acknowledge that upon original issuance thereof, and until such time
as the same is no longer required under the applicable requirements of the
Securities Act, the Securities (and all securities issued in exchange therefor
or substitution thereof) shall bear, until such restrictions are no longer
applicable, the following legend:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "1933 ACT"). THEY MAY NOT BE SOLD
OR TRANSFERRED EXCEPT IN COMPLIANCE WITH THE REGISTRATION PROVISIONS OF THE
1933 ACT AND ANY APPLICABLE STATE BLUE SKY LAWS OR SECURITY LAWS OR PURSUANT
TO AN AVAILABLE EXEMPTION FROM SUCH PROVISIONS."
Parent and Seller further agree and acknowledge that any Class 1 Stock
acquired in accordance with Section 11.3 shall also bear (until such time as
such restrictions are no longer applicable) the following legend:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A RIGHT OF
FIRST REFUSAL AND CERTAIN OTHER RESTRICTIONS ON TRANSFER AS SET FORTH IN THAT
CERTAIN STOCKHOLDERS AGREEMENT, BETWEEN TRG ACQUISITION CORPORATION AND XEROX
FINANCIAL SERVICES, INC., A COPY OF WHICH MAY BE OBTAINED FROM THE SECRETARY
OF TRG ACQUISITION CORPORATION."
9.3 Crostex/Camfex Purchase Money Notes. Seller and Parent shall indemnify,
guaranty or otherwise post credit support pursuant to the covenant set forth
in Section 6.16 from and after the Closing.
9.4 Certain Employee Benefit Matters. (a) Parent and its Affiliates (other
than the Company, the Subsidiaries, Talegen and its subsidiaries) shall retain
all liabilities and obligations under the employee stock ownership plan
("ESOP") in which employees of the Company and the Subsidiaries participated
prior to January 1, 1993. All awards made to such participants under the ESOP
shall fully vest as of the Closing Date.
(b) Parent and its Affiliates (other than the Company, the Subsidiaries,
Talegen and its subsidiaries) shall retain all liabilities and obligations
under the Long Term Incentive Program attached as Attachment A and the Stock
Option Agreement attached as Exhibit A to the Employment Agreement among
Joseph W. Brown, Jr., Parent and the Company and the five related agreements
with management of the Company or TRG (collectively, the "Long Term Incentive
Program") for the benefit of the participants listed on Schedule 9.4. All
payments due to such participants under the Long Term Incentive Program shall
be made at Closing.
(c) All payments due, at or before the Closing, under the Senior Management
Group Compensation Plan of the Company and IIC, any related agreements
thereto, the Plan Termination Agreement and General Release for the Senior
Management Group, the Plan Termination Agreement and General Release for
Banded Associates, the TRG Senior Management Long Term Incentive Compensation
Plan, the IIC Annual Compensation Plan for Banded Associates, the IIC Annual
Compensation Plan for the Senior Management Group and any related termination
agreements (collectively, the "TRG Incentive Plans") shall be made at or prior
to the Closing. After the Closing, Parent and its Affiliates shall retain all
remaining liabilities and obligations arising under the TRG Incentive Plans.
9.5 Transfer Taxes. Seller shall pay, or cause to be paid, all stock
transfer and other transfer taxes required to be paid in connection with the
sale and delivery to Buyer of the Stock.
9.6 Ridge Re. On and after the Closing Date, Parent and Seller shall cause
Ridge Re to refrain from (i) entering into any reinsurance or retrocession
agreement or treaty and (ii) engaging in any business other than in connection
with the Ridge Re Treaty and the other treaties referenced in the first
sentence of Section 4.9(c) of the Talegen Agreement as in effect on the date
hereof, provided that the obligations contained in this Section 9.6 shall
terminate upon consummation of the sale of Ridge Re to a Qualified Transferee.
9.7 Further Assurances. On and after the Closing Date, Parent, Seller, the
Company and Buyer will take all appropriate action and execute all documents,
instruments or conveyances of any kind which may be reasonably necessary or
advisable to carry out any of the provisions hereof, including without
limitation, putting Buyer in possession and operating control of the business
of the Company.
ARTICLE X
INDEMNIFICATION
10.1 Survival of Representations and Warranties. Buyer has the right to rely
fully upon the representations, warranties, covenants and agreements of Parent
and Seller contained in this Agreement and the Ancillary Agreements. Parent
and Seller have the right to rely fully upon the representations, warranties,
covenants and agreements of Buyer contained in this Agreement and the
Ancillary Agreements. All such representations and warranties (including the
Schedules hereto and the certificates delivered in accordance with Sections
7.1 and 8.1 hereof, insofar as the Schedules and such certificates relate to
such representations and warranties) shall be deemed to be repeated at Closing
for purposes of this Article X and, except as set forth in the last sentence
of this Section, shall survive the execution and delivery hereof and the
Closing, and thereafter (i) in the case of the representations and warranties
contained in Sections 4.1, 4.2, 4.3, 4.4, 4.5, 4.6 and 4.18 hereof, such
representations and warranties shall survive without limitation as to time,
(ii) in the case of the representations and warranties contained in Sections
4.21, 4.24 and 4.28 hereof, such representations and warranties shall survive
until 90 days after the expiration of the applicable statute of limitations
with respect to the subject matter thereof and (iii) in the case of all other
representations and warranties, such representations and warranties shall
expire on the date two years following the Closing Date; provided, however,
that any representation or warranty shall survive the time it would otherwise
terminate pursuant to this Section to the extent that notice of a breach
thereof giving rise to a right of indemnification shall have been given by a
party hereto in accordance with Section 10.3 hereof prior to such time. All
of the covenants and agreements of the parties contained in this Agreement and
the Ancillary Agreements to be performed on or after the date of this
Agreement shall survive the Closing without limitation as to time.
Notwithstanding the foregoing, none of the following representations and
warranties (including the Schedules hereto and the certificates delivered in
accordance with Sections 7.1 and 8.1 hereof, insofar as the Schedules and such
certificates relate to such representations and warranties) shall survive the
Closing: (i) representations and warranties contained in Sections 4.16,
4.21(e), 4.21(h) and Article V; and (ii) representations and warranties
contained in any Section of Article IV and which relate to Excluded
Activities.
10.2 Indemnification. (a) Parent and Seller shall jointly and severally
defend, indemnify and hold harmless Buyer, the Company and their Affiliates
and each director and officer of such Persons against any loss, damage, claim,
liability, judgment or settlement of any nature or kind, including all costs
and expenses relating thereto, including without limitation, interest,
penalties and reasonable attorneys' fees (collectively "Damages"), arising out
of, resulting from or relating to:
(i) subject to Section 10.1, the breach of any representation or warranty
of Parent or Seller contained in this Agreement (other than in Section 4.18),
any Ancillary Agreement or any certificate delivered pursuant hereto or
thereto; provided, however, that such Persons shall be entitled to
indemnification hereunder only when the aggregate of all such Damages exceeds
$10,000,000 (in which event such Persons shall be entitled to indemnification
for all such Damages); provided, further, that Seller shall not be liable
under this clause (i) for an amount of Damages in excess of (x) $150,000,000
less an amount equal to Transaction Expenses plus (y) amounts received in cash
dividends on, and in respect of cash redemptions of, the Class 2 Stock;
(ii) the breach of any covenant or agreement (whether to be performed prior
to or after Closing) of Parent or Seller contained in this Agreement, any
Ancillary Agreement or any certificate delivered pursuant hereto or thereto;
(iii) any facts, circumstances, conditions, events or actions existing or
occurring at any time with respect to Constitution Re, First Quadrant and
Viking (as such terms are defined in the Talegen Agreement) and any subsidiary
of any of the foregoing (other than liabilities related to the business
represented by the First Quadrant Asset Sale (as defined in the Talegen
Agreement));
(iv) any Action brought by a security holder or creditor of Seller or
Parent in their capacity as such;
(v) long term incentive payments (including payments arising out of the
sale of the Company or the Excluded Business) payable to the Persons listed on
Schedule 10.2;
(vi) the breach of the representations and warranties contained in Section
4.18; and
(vii) any facts, circumstances, conditions, events or actions existing or
occurring after the Closing Date with respect to the Leesburg Training
Facility.
The foregoing provisions of this Section 10.2(a) shall not apply with respect
to any Damages arising out of (and no indemnification hereunder shall be
available with respect to) any (i) breach of any representation or warranty of
Parent or Seller that is terminated as provided in Section 10.1 (subject,
however, to the proviso contained in Section 10.1), (ii) breaches of the
representations and warranties of Parent and Seller contained in this
Agreement and the Ancillary Agreements which would result in the failure of
any of the conditions in Section 8.1 to be satisfied if Buyer had actual
knowledge of such breaches (or received notice thereof pursuant to Section
6.6) prior to the Closing Date, (iii) breach of any representation or warranty
contained in Section 4.21(h), (iv) breach of any representation or warranty to
the extent it relates to Excluded Activities, (v) action that breaches Section
6.3(c) to the extent such action relates to Excluded Activities (except if
such action is directed by Parent or Seller or, prior to or at the time taken,
an officer listed on Schedule 1.1B knew that such action was to be taken),
(vi) breach of any covenant to be performed prior to Closing to the extent it
relates to Excluded Activities, other than a breach of Section 6.1, 6.3(a),
6.3(b), 6.10 or 6.14, (vii) action that breaches Section 6.2 or Section 6.9
(except in each case if such action is directed by Parent or Seller or, prior
to or at the time taken, an officer listed on Schedule 1.1B knew that such
action was to be taken) or (viii) underfunding of Company Plans (including
fines and penalties assessed by governmental authorities relating thereto).
(b) For purposes of clause (i) of Section 10.2(a), (X) a "Material Adverse
Effect" (as such term is used in any representation or warranty contained in
Article IV other than the representations and warranties contained in Section
4.7(a)) shall be deemed to have occurred if the aggregate of all Damages
related to any such representation or warranty shall exceed $1 and (Y) the
representations and warranties contained in Sections 4.7, 4.13 and 4.15(b)
shall be read as if such representations and warranties do not include the
words "Knowledge of Seller".
(c) The term "Damages" as used in this Article X is not limited to matters
asserted by third parties against any Person entitled to be indemnified under
this Article X, but includes Damages incurred or sustained by any such Person
in the absence of third party claims.
(d) No claim for Damages under this Article X may be asserted or pursued by
any former Subsidiary against Parent or Seller, unless, prior to the date that
such former Subsidiary shall have ceased to be a "Subsidiary", such former
Subsidiary shall have delivered a Notice to Parent or Seller relating to such
claim.
10.3 Indemnification Procedures. (a) In the event that any Person shall
incur or suffer any Damages in respect of which indemnification may be sought
hereunder, such Person (the "Indemnitee") may assert a claim for
indemnification by written notice (the "Notice") to the party from whom
indemnification is being sought (the "Indemnitor"), stating the amount of
Damages, if known, and the nature and basis of such claim. In the case of
Damages arising or which may arise by reason of any third-party claim,
promptly after receipt by an Indemnitee of written notice of the assertion or
the commencement of any Action with respect to any matter in respect of which
indemnification may be sought hereunder, the Indemnitee shall give Notice to
the Indemnitor and shall thereafter keep the Indemnitor reasonably informed
with respect thereto, provided that failure of the Indemnitee to give the
Indemnitor prompt notice as provided herein shall not relieve the Indemnitor
of any of its obligations hereunder, except to the extent that the Indemnitor
is materially prejudiced by such failure. In case any such Action is brought
against any Indemnitee, the Indemnitor shall be entitled to assume the defense
thereof, by written notice of its intention to do so to the Indemnitee within
30 days after receipt of the Notice. If the Indemnitor shall assume the
defense of such Action, it shall not settle such Action without the prior
written consent of the Indemnitee, which consent shall not be unreasonably
withheld, provided that an Indemnitee shall not be required to consent to any
settlement that (i) does not include as an unconditional term thereof the
giving by the claimant or the plaintiff of a release of the Indemnitee from
all liability with respect to such Action or (ii) involves the imposition of
equitable remedies or the imposition of any material obligations on such
Indemnitee other than financial obligations for which such Indemnitee will be
indemnified hereunder. As long as the Indemnitor is contesting any such
Action in good faith and on a timely basis, the Indemnitee shall not pay or
settle any claims brought under such Action. Notwithstanding the assumption
by the Indemnitor of the defense of any Action as provided in this Section,
the Indemnitee shall be permitted to participate in the defense of such Action
and to employ counsel at its own expense; provided, however, that if the
defendants in any Action shall include both an Indemnitor and any Indemnitee
and such Indemnitee shall have reasonably concluded that counsel selected by
Indemnitor has a conflict of interest because of the availability of different
or additional defenses to such Indemnitee, such Indemnitee shall have the
right to select separate counsel to participate in the defense of such Action
on its behalf, at the expense of the Indemnitor; provided that the Indemnitor
shall not be obligated to pay the expenses of more than one separate counsel
for all Indemnitees, taken together.
(b) If the Indemnitor shall fail to notify the Indemnitee of its desire to
assume the defense of any such Action within the prescribed period of time, or
shall notify the Indemnitee that it will not assume the defense of any such
Action, then the Indemnitee may assume the defense of any such Action, in
which event it may do so acting in good faith in such manner as it may deem
appropriate, and the Indemnitor shall be bound by any determination made in
such Action, provided, however, that the Indemnitee shall not be permitted to
settle such action without the consent of the Indemnitor. No such
determination or settlement shall affect the right of the Indemnitor to
dispute the Indemnitee's claim for indemnification. The Indemnitor shall be
permitted to join in the defense of such Action and to employ counsel at its
own expense.
(c) Amounts payable by the Indemnitor to the Indemnitee in respect of any
Damages for which such party is entitled to indemnification hereunder shall be
payable by the Indemnitor as incurred by the Indemnitee.
(d) In the event of any dispute between the parties regarding the
applicability of the indemnification provisions of this Agreement, the
prevailing party shall be entitled to recover all Damages incurred by such
party arising out of, resulting from or relating to such dispute.
10.4 Insurance Proceeds and Tax Limitations. The amount of any Damages or
other liability for which indemnification is provided under this Agreement
shall be net of any amounts recovered or recoverable by the Indemnitee under
insurance policies with respect to such Damages or other liability and shall
be (i) increased to take account of any Tax cost incurred (grossed up for such
increase) by the Indemnitee arising from the receipt of indemnity payments
hereunder (unless such indemnity payment is treated as an adjustment to the
purchase price hereunder for tax purposes) and (ii) reduced to take account of
any Tax benefit realized by the Indemnitee arising from the incurrence or
payment of any such Damages or other liability. Such Tax cost or Tax benefit,
as the case may be, shall be computed for any year using the Indemnitee's
actual tax liability with and without (i) the incurrence or payment of any
Damages or other liability for which indemnification is provided under this
Agreement or (ii) the payment of any indemnification payments made pursuant to
this Agreement in such year. In the event that the Indemnitee will actually
realize a Tax cost or Tax benefit for a year(s) subsequent to the year in
which the indemnity payment is made, a payment in respect of such Tax cost or
Tax benefit shall be made in such subsequent year(s). Any indemnity payment
made pursuant to this Agreement will be treated as an adjustment to the
purchase price hereunder for Tax purposes, unless a determination (as defined
in Section 1313 of the Code) with respect to the Indemnitee causes any such
payment not to constitute an adjustment to the purchase price for United
States Federal income tax purposes.
10.5 Tax Indemnification. Notwithstanding anything to the contrary in this
Agreement, the rights and obligations of the parties with respect to
indemnification for any and all Tax matters (other than with respect to any
representations and warranties contained herein relating to Tax matters,
except to the extent Buyer is indemnified under the provisions of the Tax
Agreement) shall be governed by the Tax Agreement and shall not be subject to
this Article X, including any calculation pursuant to clause (i) of Section
10.2(a).
ARTICLE XI
MISCELLANEOUS
11.1 Termination. This Agreement may be terminated and the transactions
contemplated hereby abandoned:
(a) by mutual consent of the parties; or
(b) by Parent and Seller, on the one hand, or Buyer, on the other hand, on
June 17, 1996 if it can be reasonably anticipated that the approvals referred
to in Section 4.11(i) cannot be obtained without the applicable regulatory
authorities imposing an additional material economic burden on Parent or
Seller, on the one hand, or Buyer, the Company and the Subsidiaries, taken as
a whole, on the other hand; or
(c) by Parent and Seller, on the one hand, or Buyer, on the other hand, if
the conditions to such parties' obligations set forth in Articles VII and
VIII, as the case may be, have not been satisfied (or waived by the party
entitled to the benefit thereof) on or before August 17, 1996; provided that
if the approvals referred to in Section 4.11(i) have not been obtained by
August 17, 1996, this Agreement shall not be terminated prior to October 17,
1996 if it can be reasonably anticipated that such approvals can be obtained
by October 17, 1996; or
(d) by Parent and Seller, on the one hand, or Buyer, on the other hand, if
the Talegen Agreement is terminated in accordance with its terms.
Upon termination of this Agreement pursuant to this Section 11.1, this
Agreement shall be void and of no further force and effect (except as provided
in the last sentence of this paragraph) and no party shall have any liability
to any other party under this Agreement unless such party has (a) willfully
failed to have performed its obligations hereunder or (b) knowingly made a
misrepresentation of any matter set forth herein. For purposes of the
immediately preceding sentence, with respect to obligations of the Company or
any Subsidiary to take or refrain from taking any action under this Agreement
or obligations of Parent or Seller to cause the Company or any Subsidiary to
take or refrain from taking any action under this Agreement, neither Parent
nor Seller shall be deemed to have "willfully failed" unless, in each case,
such action or failure to act is directed by Parent or Seller or occurs with
knowledge of an officer listed on Schedule 1.1B or 1.1C; provided that if such
action or failure is (X) not directed by Parent or Seller, (Y) occurs with the
knowledge of an officer listed on Schedule 1.1C and (Z) occurs without the
knowledge of an officer listed on Schedule 1.1B, Buyer shall recover only its
Third Party Expenses and Seller and Parent shall have no further liability
under this Agreement. For purposes of the second preceding sentence, neither
Parent nor Seller shall be deemed to have "knowingly" made a misrepresentation
unless an officer listed on Schedule 1.1B or 1.1C knows such representation is
untrue when made; provided that if a representation is known to be untrue when
this Agreement is executed by the parties hereto by an officer listed on
Schedule 1.1C but not by an officer listed on Schedule 1.1B, Buyer shall
recover only its Third Party Expenses and Seller and Parent shall have no
further liability under this Agreement. Notwithstanding a termination of this
Agreement, the provisions of Sections 11.2(b) and 11.11, the last sentences of
Sections 4.18 and 5.4 and the confidentiality provision of the proviso to
Section 6.4 hereof shall continue in full force and effect.
11.2 Confidentiality. (a) Parent and Seller shall assign to the Company at
or prior to, and with effect from and after the Closing, all of their
respective rights under the Confidentiality Agreement and under any other
confidentiality agreements with third Persons relating to the business of the
Company or any of the Subsidiaries.
(b) Except as otherwise required by law (including if required by any stock
exchange on which any of the securities of any party or their respective
Affiliates are listed or by any securities commission or similar regulatory
authority having jurisdiction over any such party or any of its Affiliates),
Buyer, Seller and Parent shall keep confidential all aspects of the
transactions contemplated hereby, including the fact that this Agreement has
been executed. Notwithstanding the foregoing or the terms of the
Confidentiality Agreement, Buyer and its Affiliates and Seller, Parent and
their respective Affiliates may disclose information concerning the
transactions contemplated hereby in connection with the financing of such
transactions by Buyer, to potential equity investors in Buyer or any of its
Affiliates, as necessary to obtain any consents referenced in Section 8.2 and,
in the case of Parent, as it, in its sole discretion, deems appropriate in
light of its status as a Person with public stockholders. The parties will
use their reasonable efforts to make the release to be issued announcing the
Closing a mutually acceptable joint release. Before issuing any other press
release with respect to the transactions contemplated by this Agreement, the
parties will use reasonable efforts to provide each other with a reasonable
opportunity to review and comment on any such announcement.
11.3 Parent Option. (a) Parent and/or Seller shall have the right to
purchase up to an aggregate of 19.9% of the Class 1 Stock immediately prior to
the Closing for a per share purchase price equal to the per share purchase
price paid or payable by other stockholders of Buyer on or prior to the
Closing Date. Parent and/or Seller shall pay the aggregate purchase price for
any shares to be purchased pursuant to this Section in cash, payable by wire
transfer in immediately available funds to an account which Buyer shall
designate in writing to Parent no less than two business days prior to the
Closing Date. To exercise such right, Parent and/or Seller must deliver
irrevocable written notice to Buyer within 45 days from the date hereof which
indicates the percentage interest (after giving effect to its purchase) of
Class 1 Stock that Parent and/or Seller desire to purchase hereunder, but not
to exceed an aggregate of 19.9% (which irrevocable notice shall bind Parent,
subject to the last sentence of this Section, to make such purchase on the
Closing Date). No such notice shall be effective unless Parent and/or Seller
concurrently delivers a notice under Section 11.3 of the Talegen Agreement
which indicates Parent's and/or Seller's election to purchase the same
aggregate percentage interest in the securities covered by the election
thereunder that Parent and/or Seller elect to purchase hereunder.
Notwithstanding the foregoing, if this Agreement is terminated pursuant to
Section 11.1, Parent and Seller shall cease to have the right to purchase
Class 1 Stock hereunder, whether or not their rights had been previously
exercised, and any notice which shall have been delivered pursuant to this
Section shall be void and of no effect.
(b) Any Class 1 Stock purchased by Parent and/or Seller pursuant to paragraph
(a) above shall be subject to the terms and conditions set forth in Exhibit J.
11.4 Assignment. Neither this Agreement nor any of the rights or obligations
hereunder may be assigned by Parent or Seller without the prior written
consent of Buyer, or by Buyer without the prior written consent of Parent or
Seller. Subject to the foregoing, this Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and
assigns, and no other Person shall have any right, benefit or obligation
hereunder.
11.5 Notices. Unless otherwise provided herein, any notice, request,
instruction or other document to be given hereunder by any party to the others
shall be in writing and delivered in Person or by courier or facsimile
transmission or mailed by certified mail, postage prepaid, return receipt
requested (such mailed notice to be effective on the date such receipt is
acknowledged), as follows:
If to Parent or Seller:
Xerox Financial Services, Inc.
First Stamford Place
Stamford, Connecticut 06904-2347
Attn: Stuart B. Ross
Chairman & Chief Executive Officer
Fax: (203) 325-6822
and
Xerox Corporation
Long Ridge Road
Stamford, Connecticut 06904
Attn: Richard Paul, Esq.
General Counsel
Fax: (203) 968-3446
With a copy to:
Skadden, Arps, Slate, Meagher & Flom
Third Avenue
New York, New York 10022
Attn: Lou R. Kling, Esq. and
Peter Allan Atkins, Esq.
Fax: (212) 735-2000
If to Buyer:
TRG Acquisition Corporation
c/o Kohlberg Kravis Roberts & Co.
Sand Hill Road, Suite 200
Menlo Park, California 94025
Attn: Saul A. Fox
Fax: (415) 233-6594
With copies to:
Joseph W. Brown
Talegen Holdings, Inc.
Waterfront Center One
Western Avenue, Suite 1000
Seattle, Washington 98101
Fax: (206) 654-2633
Gary I. Horowitz, Esq.
Simpson Thacher & Bartlett
Lexington Avenue
New York, New York 10017
Fax: (212) 455-2502
or to such other place and with such other copies as either party may
designate as to itself by written notice to the others.
11.6 Choice of Law. This Agreement shall be construed, interpreted and the
rights of the parties determined in accordance with the internal laws of the
State of New York, without regard to the conflict of law principles thereof.
11.7 Entire Agreement; Amendments and Waivers. This
Agreement, together with the Ancillary Agreements and the Confidentiality
Agreement (except to the extent superseded hereby), constitutes the entire
agreement among the parties pertaining to the subject matter hereof and
supersedes all prior agreements, understandings, negotiations and discussions,
whether oral or written, of the parties. No supplement, modification or
waiver of this Agreement (including, without limitation, any Schedule hereto)
shall be binding unless executed in writing by all parties. No waiver of any
of the provisions of this Agreement shall be deemed or shall constitute a
waiver of any other provision hereof (whether or not similar), nor shall such
waiver constitute a continuing waiver unless otherwise expressly provided.
With respect to breaches of any representation, warranty or covenant contained
herein, unless this Agreement shall have been terminated pursuant to Section
11.1, the sole remedy of the parties against each other shall be the
indemnification rights set forth in Section 10.2.
11.8 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
11.9 Invalidity. In the event that any one or more of the provisions
contained in this Agreement or in any other instrument referred to herein,
shall, for any reason, be held to be invalid, illegal or unenforceable in any
respect, such invalidity, illegality or unenforceability shall not affect any
other provision of this Agreement or any other such instrument.
11.10 Headings. The headings of the Articles and
Sections herein are inserted for convenience of reference only and are not
intended to be a part of or to affect the meaning or interpretation of this
Agreement.
11.11 Expenses. Subject to Section 11.1, Seller and Buyer will each be
liable for its own costs and expenses incurred in connection with the
negotiation, preparation, execution or performance of this Agreement.
11.12 [Intentionally Omitted].
11.13 Joint and Several. All covenants, representations and warranties made
by Parent or Seller in this Agreement shall be deemed to be joint and several
covenants, representations and warranties of Parent and Seller.
11.14 No Third Party Beneficiaries. This Agreement shall inure exclusively
to the benefit of and be binding upon the parties hereto and their respective
successors, assigns, executors and legal representatives. Except as expressly
provided in Section 10.2, nothing in this Agreement, express or implied, is
intended to confer on any Person other than the parties hereto or their
respective successors and assigns, any rights, remedies, obligations or
liabilities under or by reason of this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement, or have
caused this Agreement to be duly executed on their respective behalf by their
respective officers thereunto duly authorized, as of the day and year first
above written.
XEROX CORPORATION
Stuart B. Ross
Name: Stuart B. Ross
Title: Executive Vice President
XEROX FINANCIAL SERVICES, INC.
Stuart B. Ross
Name: Stuart B. Ross
Title: Chairman, President and Chief Executive Officer
TRG ACQUISITION CORPORATION
Saul A. Fox
Name: Saul A. Fox
Title: President and Chief Executive Officer
Computation of Net Income Per Common Share
(Dollars in millions, except per-share data; shares in thousands)_____________
I. Primary Net Income (Loss) Per Common Share
Income (loss) from continuing operations
Accrued dividends on ESOP preferred stock, net
Accrued dividends on redeemable preferred stock
Call premium on redeemable preferred stock
Adjusted income (loss) from continuing operations
Discontinued operations
Change in accounting principles
Adjusted net income (loss)
Average common shares outstanding during the period
Common shares issuable with respect to common
stock equivalents for stock options, incentive and
exchangeable shares
Adjusted average shares outstanding for the period
Primary earnings (loss) per share:
Continuing operations
Discontinued operations
Change in accounting principles
Primary earnings (loss) per share
II.Fully Diluted Net Income (Loss) Per Common Share
Income (loss) from continuing operations
Accrued dividends on ESOP preferred stock, net
Accrued dividends on redeemable preferred stock
Call premium on redeemable preferred stock
ESOP expense adjustment, net of tax
Interest on convertible debt, net of tax
Adjusted income (loss) from continuing operations
Discontinued operations
Change in accounting principles
Adjusted net income (loss)
Average common shares outstanding during the period
Common shares issuable with respect to:
Stock options, incentive and exchangeable shares
Convertible debt
ESOP preferred stock
Adjusted average shares outstanding for the period
Fully diluted earnings (loss) per share:
Continuing operations
Discontinued operations
Change in accounting principles
Fully diluted earnings (loss) per share *
* Fully diluted discontinued operations net loss per share for the year
ended December 31, 1995 is computed by dividing adjusted net loss of
$(1,646) by the adjusted average shares outstanding for the period of
110,563 used in the computation of primary net income per common share.
This computation is necessitated by the anti-dilutive nature of convertible
debt and ESOP preferred stock which would otherwise decrease fully diluted
net loss per share for this period.
EXHIBIT 11
1995 1994 1993 1992 1991
$ 1,174 $ 794 $ (193) $ 562 $ 436
(42) (41) (38) (39) (60)
(3) (12) (23) (23) (23)
- (11) - - -
1,129 730 (254) 500 353
(1,646) - 67 (818) 18
- - - (764) -
$ (517) $ 730 $ (187) $ (1,082) $ 371
107,362 105,425 100,047 94,424 92,447
3,201 3,001 1,354 1,484 2,479
110,563 108,426 101,401 95,908 94,926
$ 10.20 $ 6.73 $ (2.50) $ 5.21 $ 3.72
(14.89) - .66 (8.53) .19
- - - (7.97) -
$ (4.69) $ 6.73 $ (1.84) $ (11.29) $ 3.91
$ 1,174 $ 794 $ (193) $ 562 $ 436
- - (38) (39) -
(3) (12) (23) (23) (23)
- (11) - - -
(9) (7) - - (25)
4 3 - - 1
1,166 767 (254) 500 389
(1,646) - 67 (818) 18
- - - (764) -
$ (480) $ 767 $ (187) $ (1,082) $ 407
107,362 105,425 100,047 94,424 92,447
3,229 3,001 1,354 1,484 2,791
881 881 - - 217
9,554 9,770 - - 10,007
121,026 119,077 101,401 95,908 105,462
$ 9.63 $ 6.44 $ (2.50) $ 5.21 $ 3.69
(14.89) - .66 (8.53) .17
- - - (7.97) -
$ (5.26) $ 6.44 $ (1.84) $ (11.29) $ 3.86
EXHIBIT 12
Computation of Ratio of Earnings to Fixed Charges
Year ended December 31 (in millions) 1995 1994 1993* 1992 1991
Fixed Charges:
Interest expense $ 591 $ 520 $ 540 $ 627 $ 596
Rental expense 142 170 180 187 178
Total fixed charges before
capitalized interest 733 690 720 814 774
Capitalized interest - 2 5 17 3
Total fixed charges $ 733 $ 692 $ 725 $ 831 $ 777
Earnings available for fixed
charges:
Earnings** $1,979 $1,602 $ (193) $1,183 $1,035
Less undistributed income in
minority owned companies (90) (54) (51) (52) (70)
Add fixed charges before
capitalized interest 733 690 720 814 774
Total earnings available for
fixed charges $2,622 $2,238 $ 476 $1,945 $1,739
Ratio of earnings to
fixed charges (1)(2) 3.58 3.23 0.66 2.34 2.24
(1) The ratio of earnings to fixed charges has been computed based on the
Company's continuing operations by dividing total earnings available for
fixed charges, excluding capitalized interest, by total fixed charges.
Fixed charges consist of interest, including capitalized interest, and
one-third of rent expense as representative of the interest portion of
rentals. Debt has been assigned to discontinued operations based on
historical levels assigned to the businesses when they were continuing
operations adjusted for subsequent paydowns. The discontinued operations
consist of the Company's Insurance and Other Financial Services businesses
and its real-estate development and third-party financing businesses.
(2) The Company's ratio of earnings to fixed charges includes the effect of
the Company's finance subsidiaries, which primarily finance Xerox
equipment. Financing businesses are more highly leveraged and, therefore,
tend to operate at lower earnings to fixed charges ratio levels than do
non-financial businesses.
* 1993 earnings were inadequate to cover fixed charges. The coverage
deficiency was $249 million.
** Sum of "Income (Loss) before Income Taxes, Equity Income and Minorities'
Interests" and "Equity in Net Income of Unconsolidated Affiliates."
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Income
Year ended December 31 (in millions, except per-share data) 1995 1994 1993
------ ------- ------
<S> <C> <C> <C>
REVENUES
Sales $ 8,799 $ 7,853 $ 7,211
Service and rentals 6,804 6,229 5,954
Finance income 1,008 1,006 1,064
------- ------- ------
Total Revenues 16,611 15,088 14,229
------- ------- ------
COSTS AND EXPENSES
Cost of sales 4,962 4,653 4,098
Cost of service and rentals 3,437 3,016 2,986
Equipment financing interest 509 502 537
Research and development expenses 951 895 883
Selling, administrative and general expenses 4,770 4,394 4,477
Special charges, net - - 1,373
Other, net 135 114 155
------- ------- ------
Total Costs and Expenses 14,764 13,574 14,509
------- ------- ------
INCOME (LOSS) BEFORE INCOME TAXES, EQUITY INCOME AND
MINORITIES' INTERESTS 1,847 1,514 (280)
Income Taxes (Benefits) 615 595 (78)
Equity in Net Income of Unconsolidated Affiliates 132 88 87
Minorities' Interests in Earnings of Subsidiaries 190 213 78
------- ------- ------
INCOME (LOSS) FROM CONTINUING OPERATIONS 1,174 794 (193)
Discontinued Operations (1,646) - 67
------- ------- ------
NET INCOME (LOSS) $ (472) $ 794 $ (126)
======= ======= ======
PRIMARY EARNINGS (LOSS) PER SHARE
Continuing Operations $ 10.20 $ 6.73 $ (2.50)
Discontinued Operations (14.89) - .66
------- ------- ------
PRIMARY EARNINGS PER SHARE $ (4.69) $ 6.73 $ (1.84)
======= ======= ======
FULLY DILUTED EARNINGS (LOSS) PER SHARE
Continuing Operations $ 9.63 $ 6.44 $ (2.50)
Discontinued Operations (14.89) - .66
------- ------- ------
FULLY DILUTED EARNINGS PER SHARE $ (5.26) $ 6.44 $ (1.84)
======= ======= ======
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
[PHOTO]
Chuck Wessendorf
Clark Robson
Investor Relations
32
<PAGE>
FINANCIAL REVIEW
Our Results of Operations and Financial Condition
SUMMARY OF TOTAL COMPANY RESULTS
In January 1996, we announced agreements to sell our remaining property and
casualty insurance units to investor groups led by Kohlberg Kravis Roberts
& Co. and existing management for consideration totaling $2.7 billion. We
expect the transactions will close in the middle of this year. As a result,
results from insurance operations are now accounted for as discontinued
operations and all prior periods have been restated. Therefore the Document
Processing business is the only component of Continuing Operations.
Document Processing revenues increased 10 percent to $16.6 billion in
1995, following an increase in revenues to $15.1 billion in 1994 from $14.2
billion in 1993.
The following table summarizes net income:
<TABLE>
<CAPTION>
(In millions) 1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Document Processing before
Special Items $ 1,076 $ 794 $ 580
Tax Benefits 98 - 40
Special Charges - - (813)
------- ----- -----
Continuing Operations 1,174 794 (193)
------- ----- -----
Discontinued Operations (1,646) - 67
------- ----- -----
Net Income (Loss) $ (472) $ 794 $(126)
======= ===== =====
</TABLE>
Document Processing income in 1995 increased 36 percent to $1,076 million before
a $98 million gain from a reduction in the Brazilian tax rate, from $794 million
in 1994. Income increased 37 percent in 1994 from $580 million in 1993 before
special items. The 1993 special items included charges of $813 million after
taxes to provide for the costs of restructuring the Document Processing business
and lawsuit settlements, and $40 million in one-time tax benefits. After special
items, Document Processing reported a $193 million loss in 1993.
Fully diluted earnings per share for Continuing Operations, which now include
only the Document Processing business, increased 37 percent to $8.83 in 1995,
before the Brazilian tax gain, from $6.44 in 1994 which was a 33 percent
increase from $4.86 in
[PHOTO]
Pictured here is Charlene Stephens, Public Relations, and a graphic depicting
Continuing Operations Fully Diluted Earnings per Share before special items of
$8.83 for 1995, $6.44 for 1994 and $4.86 for 1993.
1993, before special items. The 1993 Continuing Operations earnings per share
reflect the impact of the additional 8.1 million shares issued through an equity
offering in June 1993.
Discontinued Operations had a loss of $1.646 billion in 1995 compared with
break-even results in 1994 and income of $67 million in 1993. The 1995 results
reflect fourth quarter after-tax charges of $1.546 billion as a result of the
insurance disengagement. These charges consist of a non-cash loss on the sales
of $978 million and $568 million primarily to cover additional insurance loss
reserves and all estimated future expenses associated with excess of loss
reinsurance coverage. Prior to the fourth quarter charges, insurance operations
had a $100 million loss in the 1995 full year. The 1993 results included a $62
million after-tax gain on the sale of The Van Kampen Merritt Companies, Inc.
(VKM).
33
<PAGE>
The fully diluted loss per share for Discontinued Operations was $14.89,
compared with break-even in 1994, and income of $.66 in 1993.
The net loss in 1995 of $472 million compares with net income of $794 million
in 1994, and a net loss of $126 million in 1993. The fully diluted loss per
share of $5.26 in 1995 compares with earnings of $6.44 in 1994 and a net loss
of $1.84 per share in 1993.
DOCUMENT PROCESSING
UNDERLYING GROWTH
To understand the trends in the business, we believe that it is helpful to
adjust revenue and expense growth (except for ratios) to exclude the impact of
the changes in the translation of foreign currencies into U.S. dollars and
special items that distort the trends. We refer to this adjusted growth as
"underlying growth." The items that have been excluded from the discussion of
underlying growth are the 1993 charges for the Document Processing restructuring
program and the lawsuit settlements.
When compared with the major European currencies, the U.S. dollar was
approximately 10 percent weaker in 1995, 2 percent stronger in 1994 and 11
percent stronger in 1993. As a result, foreign currency translation had a
favorable impact of 3 percentage points on revenues in 1995, and
unfavorable impacts of 1 percentage point in 1994 and 4 percentage points
in 1993. We do not hedge foreign-currency denominated revenues to the
extent they do not represent cross-border cash flows.
REVENUES
The estimated components of underlying growth were as follows:
<TABLE>
<CAPTION>
Underlying Growth
-------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Total Revenues 7% 7% 3%
== == ==
Equipment Sales* 6 10 (1)
Non-equipment revenues 7 5 6
Supplies 9 11 11
Paper 39 4 (4)
Service 2 4 6
Rentals 1 (1) (6)
Document Outsourcing/Other 32 20 5
Finance Income (4) (4) 4
== == ==
* Only includes equipment sales to end-users
</TABLE>
The decline in the growth in equipment sales, across most major product lines,
in 1995 principally reflects disruption in the U.S. sales force primarily caused
by the realignment of the field sales organization and
[PHOTO]
Pictured here is a graphic depicting Equipment Sales Growth of 6% in 1995, 10%
in 1994 and -1% in 1993; Non-Equipment Revenue Growth of 7% in 1995, 5% in 1994
and 6% in 1993; and Total Revenue Growth of 7% in 1995, 7% in 1994 and 3% in
1993.
34
<PAGE>
changes in sales compensation plans. Modifications have been made to these
plans, sales force turnover has declined and we believe that the disruption will
have a declining impact going forward.
The growth in 1994 reflected good growth in black-and-white copiers,
excellent growth in the DocuTech family of digital publishers and a near
doubling of color copier and printer equipment sales.
Non-equipment revenues from supplies, paper, service, rentals, document
outsourcing and other revenues, and income from customer financing represented
67 percent of total revenues in 1995, 65 percent of total revenues in 1994 and
63 percent in 1993. These revenues are less volatile than equipment sales
revenues, and therefore provide significant stability to overall revenues.
Growth in these revenues is primarily a function of the growth in our
installed population of equipment, usage and pricing.
- - Supplies sales: The strong growth over the last several years is principally
due to cartridge sales for personal and convenience copiers and to new OEM
customers.
- - Paper sales: The significant improvement in the growth rate in 1995
is primarily due to higher prices, commencing in late 1994, after several years
of declining wholesale prices. Our strategy is to charge a spread over mill
wholesale prices.
- - Service revenues: The declining growth reflects the diversionary trend to
document outsourcing, rental plans and competitive pricing pressures.
- - Rental revenues: After a number of years of decline, reflecting a customer
preference for outright purchase of equipment, the rate of decline was arrested
by an increasing, but still relatively small, trend principally in the U.S.
toward cost-per-copy rental plans.
- - Document outsourcing, copy centers and other revenues: The growth in 1995 and
1994 reflected the trend of customers to focus on their core businesses and
outsource their document processing require-ments to Xerox. This trend, which
diverts revenue from equipment sales, service and finance income, can reduce
current period total revenues but increase revenues in future periods.
- - Finance income: The continuing decline in 1995 reflects lower interest rates
on financing contracts, the increasing customer preference for document out-
sourcing rather than purchase and finance and a stabilization in the percent of
customers who finance purchases through Xerox at approximately 80 percent of
equipment sales in the U.S. and 70 percent in Western Europe. Our strategy is to
charge a spread over our cost of borrowing.
Geographically, the underlying revenue growth rates were estimated as follows:
<TABLE>
<CAPTION>
UNDERLYING GROWTH
-------------------
1995 1994 1993
- -------------------------------------------------------------
<S> <C> <C> <C>
Total Revenues 7% 7% 3%
== == ==
United States 3 7 4
Rank Xerox 8 7 2
Other Areas 16 7 4
- -------------------------------------------------------------
</TABLE>
United States revenues were 49 percent of total revenues. Revenues of Rank
Xerox Limited and related companies (Rank Xerox), which manufacture and market
our products in eastern hemisphere countries, were 33 percent of total revenues.
Revenues of Other Areas, which includes operations principally in Latin America
and Canada, were 18 percent of total revenues.
[PHOTO AND CAPTION]
Pictured here are Vicente Jose Felice, Adelia Maria Branco Cerqueira, Jorge
Pereira da Silva, and Sergio Nicola, Xerox of Brazil, with the caption
"Itau Bank, Sao Paulo, found a more productive way to produce checkbooks when
it adopted a Xerox solution based on a 4635MX printer connected in-line to a
checkbook maker. The automatic process saved the bank the costs of manual
production."
35
<PAGE>
[PHOTO]
VIMAL GADHIA
Rank Xerox
Corporate Communications
The decline in U.S. revenue growth in 1995 principally reflects the disruption
in the sales force. The improving revenue growth in Rank Xerox and the Other
Areas in 1995 reflected good growth in black-and-white copiers and excellent
growth in enterprise printing products, attributable, in part, to improving
sales productivity and a strong economic environment in Brazil. In Mexico,
revenues declined significantly in 1995 due to currency and the continuing
economic disruption following devaluation of the Mexican peso in December 1994.
In 1995, revenues were approximately $1.4 billion in Brazil and $200 million in
Mexico compared with 1994 revenues of approximately $1 billion and $300 million,
respectively. The improved revenue growth in all areas in 1994 reflected good
growth in black-and-white copiers, excellent growth in the DocuTech family of
digital publishers and a near doubling of color copier and printer revenues,
attributable, in part, to improved sales productivity and economic environments.
For the major product categories, the underlying revenue growth rates were
estimated as follows:
<TABLE>
<CAPTION>
Underlying Growth
-------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Total Revenue 7% 7% 3%
== == ==
Enterprise Printing 17 20 18
Black and White Copiers 2 4 -
Paper and Other Products 14 3 (5)
== == ==
</TABLE>
Revenues from enterprise printing, comprised of production publishing, color
copying and printing, data center printing and network printing, represented 25
percent of total document processing revenues in 1995, 22 percent in 1994 and 19
percent in 1993. Revenues from black-and-white copying represented 59 percent of
total document processing revenues in 1995, 63 percent in 1994 and 65 percent in
1993. The revenues from paper and other products were 16 percent of total
document processing revenues in 1995, 15 percent in 1994 and 16 percent in 1993.
Total revenues from the DocuTech family of production publishing products
reflected excellent growth to $1.4 billion in 1995 and $1.1 billion in 1994.
Revenues from color products grew 45 percent to approximately $600 million in
1995 from approximately $400 million in 1994, which in turn had almost doubled
over 1993 levels. Revenues from network and data center printing products had
good growth in both 1995 and 1994. We believe that the declining growth in
enterprise printing revenues during 1995 was the result of the U.S. sales force
disruption and weak economic environments in Canada and some European countries.
During the fourth quarter of 1995, we introduced the first two products in
the Document Centre Systems family, a new enterprise printing category. These
networked office products print, scan, fax and copy documents for work groups,
with all operations managed over the network from each user's personal computer
or on a walk-up basis.
The decline in black-and-white copying revenue growth in 1995 reflects the
slowdown in revenue growth in the U.S. Black-and-white copying revenues had good
growth in international markets. The other revenue growth in 1995 and 1994 and
the decline in 1993 were principally due to paper pricing.
PRODUCTIVITY INITIATIVES
In 1993, we announced a restructuring program to significantly reduce the cost
base and to improve productivity. Our objectives were to reduce our
36
<PAGE>
worldwide work force by more than 10,000 employees and to close or consolidate a
number of facilities.
To date, the activities associated with the 1993 restructuring program have
reduced employment by 12,000 and achieved pre-tax cost savings of approxi-
mately $650 million in 1995 and $350 million in 1994. However, we have
reinvested a portion of these savings to re-engineer business processes, support
the expansion in growth markets, and mitigate anticipated continued pricing
pressures.
Employment declined by 2,400 from year-end 1994 to 85,200 employees at the end
of 1995; 4,400 reductions were due to restructuring program initiatives,
partially offset by the addition of 2,000 employees, principally to support the
document outsourcing business.
We are on track towards achieving our restructuring program objectives.
During 1994, we awarded a 10-year, $3.2 billion contract to Electronic Data
Systems Corp. (EDS) to operate our worldwide computer and telecommunications
network. Information management strategy and architecture and the development of
systems for re-engineered business processes were not outsourced.
Also in 1994, we signed a labor agreement with the principal union that
represents U.S. manufacturing employees. We believe that the contract has
enabled productivity, competitive advantages and progress towards achieving
benchmark unit manufacturing costs.
COSTS AND EXPENSES
The gross margins by revenue stream were as follows:
<TABLE>
<CAPTION>
Gross Margins
------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Total 46.4% 45.8% 46.4%
==== ==== ====
Sales 43.6 40.7 43.2
Service and Rentals 49.5 51.6 49.9
Finance Income 49.5 50.1 49.5
==== ==== ====
</TABLE>
The 1995 improvement in sales gross margins was principally due to cost
reductions, favorable product and geographic mix, principally Brazil, partially
offset by pricing pressures. The declines in sales gross margins during 1994
were principally due to adverse currency, competitive pricing, unfavorable
product and channel mix and inventory adjustments partially offset by improved
productivity. In 1995, the
[PHOTO]
Pictured here is a graphic depicting Selling, Administrative and General
Expenses (Percent of Revenues) of 28.7% in 1995, 29.1% in 1994 and 31.5%
in 1993.
erosion in service and rentals gross margins was largely due to pricing
pressures and economics, partially offset by productivity improvements. The
service and rentals gross margin improvement during 1994 was principally due to
improved productivity and price increases partially offset by economic cost
increases and adverse currency.
Research and development (R&D) expense increased 6 percent in 1995 and 1
percent in 1994. We expect to increase our investment in technological
development in 1996 and over the longer term to maintain our premier position in
the rapidly changing document processing market. We strategically coordinate R&D
with Fuji Xerox. The R&D investment by Fuji Xerox was approximately $600 million
in 1995, bringing the total to approximately $1.5 billion.
37
<PAGE>
Selling, administrative and general expenses (SAG) increased 6 percent in 1995
on an underlying basis, declined 1 percent in 1994, and were essentially
unchanged in 1993. SAG as a percent of revenues was 28.7 percent in 1995
compared with 29.1 percent in 1994 and 31.5 percent in 1993. The improvement in
the ratios is primarily due to improved productivity, partially offset by
investments in systems and in support of high-growth markets, principally
document outsourcing and our operations in Brazil, where the rate of inflation
exceeded pricing.
Other expenses, net, were $135 million in 1995, $114 million in 1994, and $155
million in 1993. The increase in Other expenses, net of $21 million in 1995
reflects higher interest expense and goodwill amortization, principally
resulting from our increased financial interest in Rank Xerox, and the non-
recurrence of one-time gains in 1994, partially offset by lower foreign currency
losses from balance sheet translation in our Brazilian operations. The decrease
in Other expenses, net of $41 million in 1994 primarily reflects lower foreign
currency losses in Brazil.
Our South American operations in general, and Brazil in particular, are
subject to hyperinflation, government-imposed price controls and currency
devaluation. By historical standards Brazilian exchange rates have been
relatively stable since the implementation of a new economic plan in mid-1994.
There can be no assurance this relative stability will continue.
INCOME TAXES, EQUITY IN NET INCOME OF UNCONSOLIDATED AFFILIATES, AND MINORITIES'
INTERESTS IN EARNINGS OF SUBSIDIARIES BEFORE SPECIAL ITEMS
Income before special items and income taxes was $1,847 million in 1995 compared
with $1,514 million in 1994 and $1,093 million in 1993.
Excluding a $98 million gain from a reduction in the Brazilian statutory tax
rate in 1995, gains from statutory rate changes in 1993 and $813 million of
special charges in 1993, the effective tax rate was 39 percent in 1995 and 1994,
and 41 percent in 1993. The higher tax rate in 1993 was due to mix of oper-
Pictured here is a graphic depicting Document Processing Return on Assets of
18.5% in 1995, 16.1% in 1994 and 12.6% in 1993 before special items.
ations. We estimate that the impact of the lower Brazilian statutory tax rate
will result in a two percentage point decline in the effective tax rate in the
future.
Equity in Net Income of Unconsolidated Affiliates increased 50 percent to
$132 million in 1995 after remaining essentially unchanged at $88 million in
1994. The equity in the income of Fuji Xerox, the principal unconsolidated
affiliate, increased 41 percent in 1995 due to revenue growth in the Japanese
domestic market and the strengthening of the Japanese yen against the U.S.
dollar. The equity in the income of Fuji Xerox in 1994 reflected improved
operating results offset by a provision for an early retirement program.
Minorities' Interests in Earnings of Subsidiaries were $190 million in 1995
compared with $213 million in 1994 and $152 million, before the effect of
special items, in 1993. The 1995 decrease was due to our increased financial
interest in Rank Xerox, partially offset by excellent growth in Rank Xerox
income, reflecting good revenue growth and benefits from productivity. The 1994
increase was due to excellent growth in Rank Xerox income, reflecting strong
revenue growth as well as benefits from productivity.
INCOME
In 1995, Document Processing income of $1,076 million, before the Brazilian tax
gain, grew 36 percent compared with $794 million in 1994. 1994 income of $794
million grew 37 percent from $580 million before 1993 special items.
38
<PAGE>
RETURN ON ASSETS
Improving Return on Assets (ROA) is an important focus throughout all levels of
the Document Processing organization, combining a focus on both asset turnover
and margin improvement. Excluding special items, the 1995 ROA was 18.5 percent
compared with 16.1 percent in 1994 and 12.6 percent in 1993.
The internal measurement for ROA is defined as Document Processing before-
tax profits plus equity in the net income of unconsolidated affiliates divided
by average ROA assets. These assets are Document Processing assets less
investments in affiliates and Xerox equipment financing debt.
SPECIAL ITEMS
In the fourth quarter of 1993, $813 million after income taxes and minorities'
interests in earnings of subsidiaries was provided for the costs of a restruc-
turing program and lawsuit settlements.
In January 1994, we reached agreement to settle a 1992 antitrust class
action lawsuit involving selling spare parts for high-volume copiers and
printers to independent service organizations, and a lawsuit involving the
termination of a contract to purchase laptop computers. Under the antitrust
settlement, $225 million of discount certificates were provided to members of
the plaintiff class for use as partial payment on future purchases of Xerox
products, and we agreed to sell service parts to independent service
organizations in the U.S., similar to the existing policy in Europe.
The discount certificates are available for use over a three-year period
that commenced in September 1994 and may be applied against the payment of
future purchases, excluding service, by our customers. Through 1995, $119
million of discount certificates were applied against purchases.
In 1995, we recognized a $98 million benefit from the favorable revaluation
of the deferred tax liability due to a change in the Brazilian statutory income
tax rate from 45 percent to 30 percent. In 1993, we benefited from a total of
$40 million of favorable revaluations of deferred tax provisions due to changes
in the U.S. and Brazilian statutory income tax rates.
Quarterly Analytical Earnings Per Share
We believe that the 1995 Continuing Operations results, before the gain from a
reduction in the Brazilian tax rate, are an appropriate basis for comparison
with future financial results. The following schedule summarizes the 1995
Continuing Operations revenues, income and Earnings Per Share computations,
before the gain from a reduction in the Brazilian tax rate, on a quarterly
basis.
<TABLE>
<CAPTION>
First Second Third Fourth Full
(In millions, except per-share data, unaudited) Quarter Quarter Quarter Quarter Year
<S> <C> <C> <C> <C> <C>
Revenues $3,770 $4,054 $4,027 $4,760 $16,611
Income $ 187 $ 254 $ 256 $ 477 $ 1,174
Gain from Brazilian tax rate reduction - - - 98 98
------ ------ ------ ------ -------
Income before gain from tax rate reduction $ 187 $ 254 $ 256 $ 379 $ 1,076
Primary Earnings per Share
Preferred dividends net of tax benefit $ (12) $ (11) $ (11) $ (11) $ (45)
Income available for common shareholders 175 243 245 368 1,031
Adjusted average shares outstanding 109.2 110.2 110.8 111.4 110.6
Primary Earnings per Share $ 1.60 $ 2.21 $ 2.21 $ 3.30 $ 9.32
Fully Diluted Earnings per Share
Preferred dividends net of tax benefit $ (3) $ (2) $ (1) $ (2) $ (8)
Income available for common shareholders 184 252 255 377 1,068
Adjusted average shares outstanding 119.9 120.7 121.5 121.8 121.0
Fully Diluted Earnings per Share $ 1.54 $ 2.09 $ 2.09 $ 3.11 $ 8.83
------ ------ ------ ------ -------
</TABLE>
39
<PAGE>
ADDITIONAL FINANCIAL INTEREST IN RANK XEROX
On February 28, 1995, we paid The Rank Organisation Plc (RO) (Pounds)620
million, or $972 million, for a 40 percent share of RO's financial interest in
Rank Xerox. The transaction increased our financial interest in Rank Xerox to
about 80 percent from 67 percent. The transaction resulted in goodwill of $574
million and a decline in minorities' interests in equity of subsidiaries of
approximately $400 million.
The transaction increased earnings per share and cash flow in 1995, and we
estimate that it will have a positive impact on earnings per share and cash flow
going forward. Minorities' interests in earnings of subsidiaries declined by
approximately 40 percent as a result of the transaction, which was partially
offset by an increase in interest expense related to the funding of the
transaction. The goodwill is amortized over 40 years, resulting in an annual
impact of $14 million, before and after taxes.
RANK XEROX AND LATIN AMERICAN FISCAL-YEAR CHANGE IN 1995
Effective January 1, 1995, we changed Rank Xerox and Latin American
operations to calendar-year financial reporting. The 1994 fiscal year ended on
October 31 for Rank Xerox and on November 30 for Latin American operations. The
results of these non-U.S. operations that occurred between the 1994 and 1995
fiscal years (the stub period) were accounted for as a direct charge to equity.
A loss of $21 million was charged to equity in the stub period, primarily due to
the currency devaluation and related economic dislocations in Mexico.
Excluding the Mexican devaluation and related economic dislocations, income
during the stub period was $4 million.
[PHOTO]
Pictured here are Josue Freitas and Miguel Brandtner, Xerox of Brazil, with
the caption "Pelotas University, Rio Grande do Sul, Brazil, dramatically
increased its production with the DocuTech Production Publisher, going from
4 to 40 books a year."
40
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31 (in millions) 1995 1994
<S> <C> <C>
ASSETS
Cash $ 130 $ 35
Accounts Receivable, net 1,894 1,811
Finance Receivables, net 4,069 3,910
Inventories 2,646 2,294
Deferred Taxes and Other Current Assets 1,094 1,199
------- -------
Total Current Assets 9,833 9,249
Finance Receivables Due after One Year, net 6,406 6,038
Land, Buildings and Equipment, net 2,092 2,108
Investments in Affiliates, at Equity 1,328 1,278
Goodwill 627 66
Other Assets 873 635
Investment in Discontinued Operations 4,810 7,904
------- -------
TOTAL ASSETS $25,969 $27,278
======= =======
LIABILITIES AND EQUITY
Short-Term Debt and Current Portion of Long-Term Debt $ 3,265 $ 3,159
Accounts Payable 563 562
Accrued Compensation and Benefit Costs 731 709
Unearned Income 228 298
Other Current Liabilities 2,212 2,110
------- -------
Total Current Liabilities 6,999 6,838
Long-Term Debt 7,867 7,074
Postretirement Medical Benefits 1,018 1,006
Deferred Taxes and Other Liabilities 2,436 2,732
Discontinued Operations Liabilities - Policyholders' Deposits and Other 2,810 4,194
Deferred ESOP Benefits (547) (596)
Minorities' Interests in Equity of Subsidiaries 745 1,021
Preferred Stock 763 832
Common Shareholders' Equity 3,878 4,177
------- -------
TOTAL LIABILITIES AND EQUITY $25,969 $27,278
======= =======
Shares of common stock issued and outstanding at December 31, 1995 and 1994
were (in thousands) 108,343 and 105,993, respectively.
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
[PHOTO]
SUE ANDERSON
Investor Services
41
<PAGE>
CAPITAL RESOURCES AND LIQUIDITY
CAPITAL RESOURCES
Total debt, including ESOP and Discontinued Operations debt not shown
separately in our consolidated balance sheets, increased to $11,785 million at
December 31, 1995, from $10,939 million in 1994 and $10,084 million in 1993.
On a consolidated basis, the debt-to-capital ratio at December 31, 1995 was
71 percent compared with 67 percent in 1994 and 66 percent in 1993. The increase
over 1994 was primarily due to the $972 million paid for our increased financial
interest in Rank Xerox and growth in the financing of equipment sales.
For purposes of capital ratio analysis, total equity includes common
equity, preferred stock and minorities' interests in the equity of subsidiaries.
The following table summarizes the changes in total equity during 1995 and
1994:
<TABLE>
<CAPTION>
Total Equity
----------------
(In millions) 1995 1994
------- ------
<S> <C> <C>
Balance as of January 1 $ 6,030 $5,882
Income from Continuing Operations 1,174 794
Loss from Discontinued Operations (1,646) -
Change in Unrealized Gains (Losses)
on Investment Securities 432 (439)
Shareholder Dividends Paid (389) (395)
Change in Minorities' Interests (276) 177
Exercise of Stock Options 137 92
All Other, net (76) (81)
------- ------
Balance as of December 31 $ 5,386 $6,030
======= ======
</TABLE>
We manage the capital structure of our non-financing operations separately
from that of our more highly leveraged activities. The following table
summarizes the ratios of earnings to fixed charges and interest expense; and
debt, equity and total capital for our non-financing and financing activities
for the three-year period ended December 31, 1995:
<TABLE>
<CAPTION>
(Dollars in millions) 1995 1994 1993
-------- ------- -------
<S> <C> <C> <C>
NON-FINANCING:
Ratio of Earnings to
Fixed Charges 3.87x 3.59x 2.58x
======== ======= =======
Ratio of Earnings to
Interest Expense 5.35x 5.75x 4.10x
======== ======= =======
Debt $ 3,003 $2,651 $2,446
Equity 4,035 4,730 4,679
-------- ------- -------
Total Capital $ 7,038 $7,381 $7,125
========= ======= =======
Debt-to-Capital Ratio 42.7%* 35.9% 34.3%
========= ======= =======
FINANCING:
Debt $ 8,782 $8,288 $7,638
Equity 1,351 1,300 1,203
-------- -------- -------
Total Capital $10,133 $9,588 $8,841
======== ======== =======
Debt-to-Equity Ratio 6.5x 6.4x 6.4x
======== ======== =======
Ratio of Earnings to
Fixed Charges 1.71x 1.81x 1.78x
======== ======== =======
Ratio of Earnings to
Interest Expense 1.71x 1.81x 1.78x
======== ======== =======
/*/ 31.2 percent, on a pro forma basis, adjusted for anticipated receipt of
net proceeds from the announced sale of Talegen's remaining operating groups.
</TABLE>
The 1995 debt-to-capital ratio for non-financing operations, including ESOP
debt and Discontinued Operations debt, increased as Document Processing cash
generation, net of shareholder dividends, and the proceeds from the sales of
Constitution Re Corporation, Viking Insurance Holdings, Inc. and the Xerox
Financial Services Life Insurance Company and related companies were more than
offset by the
[PHOTO]
Pictured here is David Cloyd, XSoft, with the caption "The new publishing
system incorporating XSoft's InConcert enables TV Guide to produce several dozen
editions simultaneously, managing the production process for the magazine's
features, program listings and advertisements. TV Guide needed a workflow
solution that could automate the processing of editorial tasks, as well as
provide quality control capabilities. InConcert's centralized management and
monitoring features prevent errors and allow system operators to track the
editorial assembly and compilation process - a cycle that encompasses more
than 10,000 tasks per week - across the company network. TV Guide has the
nation's largest magazine readership with a circulation of more than 13 million
readers."
42
<PAGE>
[PHOTO]
JANAE TUCKER-TAYLOR (IN-FRONT)
ANGELA TUCKER-TAYLOR
Investor Relations
purchase of the increased financial interest in Rank Xerox and non-cash
charges in connection with the sales of the remaining Talegen units. The 1994
ratio of 35.9 percent increased from 34.3 percent at year-end 1993 as strong net
cash flow from Document Processing was more than offset by the impact of Talegen
business unit borrowings, unrealized insurance investment portfolio losses and
the redemption of preferred stock.
With respect to our financing activities, we match fund by arranging fixed-
rate liabilities with maturities similar to the underlying customer financing
assets. Our guideline debt-to-equity ratio for the financing activities is 6.5
to 1.
The following table summarizes the principal causes for changes in
consolidated indebtedness for the three-year period ended December 31, 1995:
<TABLE>
<CAPTION>
(In millions) 1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Total Debt/*/ as of January 1 $10,939 $10,084 $10,638
------- ------- -------
NON-FINANCING BUSINESSES:
Document Processing Operations (543) (989) (496)
Increased financial interest in
Rank Xerox 972 - -
Yen/$ Financing repayment - 116 -
ESOP (49) (45) (40)
Discontinued businesses (399) 605 (15)
------- ------- -------
Non-Financing (19) (313) (551)
FINANCING BUSINESSES, NET 494 650 210
------- ------- -------
Total Operations 475 337 (341)
------- ------- -------
Shareholder dividends 389 395 389
------- ------- -------
Equity issuance (redemption)
and other changes (18) 123 (602)
------- ------- -------
Total Debt* as of December 31 $11,785 $10,939 $10,084
======= ======= =======
/*/ Including Discontinued Operations
</TABLE>
NON-FINANCING OPERATIONS
The following table summarizes 1995 and 1994, Document Processing non-
financing operations cash generation and borrowing:
Cash Generated/(Borrowed)
------------------------
(In millions) 1995 1994
-------------
DOCUMENT PROCESSING
NON-FINANCING:
Income $ 970 $ 565
Depreciation and Amortization 660 649
Restructuring Payments (331) (423)
Capital Expenditures (438) (389)
Assets Sold 90 220
Working Capital/Other (408) 367
-------------
$ 543 $ 989
=============
1995 cash generation of $543 million was $446 million below the 1994 level
as higher income and lower restructuring payments were more than offset by lower
sales of fixed assets (primarily related to the information management
outsourcing), higher capital spending, inventory growth including equipment on
operating lease, and 1994 profit sharing paid in 1995.
Discontinued businesses generated $399 million of cash in 1995 resulting
from proceeds from the sales of Constitution Re Corporation, Viking Insurance
Holdings, Inc. and the Xerox Financial Services Life Insurance Company and
related companies, partially offset by premium and interest payments to Ridge Re
and debt service requirements. This contrasts with $605 million of net borrowing
in 1994 resulting from higher debt service requirements and borrowing by Talegen
business units to retire intercompany debt and fund investment activities. Net
cash generation of $15 million in 1993 was mainly due to cash proceeds from the
1993 sales of VKM and Furman Selz Holding Corporation, partially offset by
Talegen restructuring requirements.
43
<PAGE>
FINANCING BUSINESSES
Financing business debt grew by $494 million in 1995 or $156 million less
than in 1994 due to lower growth in equipment sales revenue and the effects of
translating foreign currencies into U.S. dollars. Financing debt growth of $650
million in 1994 was $440 million more than in 1993 due to accelerated growth in
equipment sales revenue and currency translation effects.
Debt related to discontinued third-party financing activities, which is
included in Financing Business debt, totaled $231 million in 1995 and 1994, and
$424 million in 1993. Portfolio run-off in 1995 was offset by timing differences
related to tax payments while the 1994 debt reduction reflects both asset sales
and run-off.
FUNDING PLANS FOR 1996
Non-financing debt levels will be significantly affected by proceeds from
the expected sales in 1996 of the remaining Talegen Holdings, Inc. (Talegen)
insurance operating groups for a total of $2.7 billion, including $1.4 billion
in cash partially offset by $0.6 billion of cash usage related to the funding of
intercompany accounts and transaction costs, and borrowing activity resulting
from the recently announced plan to repurchase up to $1 billion of our common
stock. Customer financing-related debt is planned to increase in line with 1996
sales activity.
We believe that we have adequate short-term credit facilities available to
fund day-to-day operations and have readily available access to the capital
markets to meet any longer-term financing requirements. Our domestic operations
have a $5.0 billion revolving credit agreement with a group of banks, which
expires in 2000. This facility is unused and available to provide back-up to our
commercial paper borrowings, which amounted to $2.8 billion and $2.4 billion at
December 31, 1995 and 1994, respectively. In addition, our foreign subsidiaries
have unused committed long-term lines of credit aggregating $1.7 billion, in
various currencies at prevailing interest rates, that are used to provide back-
up to short-term indebtedness.
At December 31, 1995, Xerox and XCC had domestic shelf capacity of $865
million and $1 billion, respectively. A $1 billion Euro-debt facility is
available to both Xerox and XCC of which $547 million remained unused at
December 31, 1995. In 1996, we intend to increase the size of the Euro facility
by $1 billion to further enhance our capital markets flexibility.
Decisions in 1996 regarding the size and timing of any new term debt
financing will be made based on cash flows, match funding needs, refinancing
requirements and capital market conditions.
[PHOTO]
Pictured here is a Xerox 5614 convenience copier with the caption
"The Xerox 5614 convenience copier is a "green machine" that lets the user
exercise environmental responsibility without paying a cost penalty. It features
customer-settable Power Saver, low noise, reduced ozone emissions, returnable
copy and toner cartridges, recyclable packaging and design suitable for
remanufacturing. Customers can return both their used copy and toner cartridges,
which will then recycle, reuse or remanufacture to new-product standards.
This Xerox cartridge remanufacturing and reuse initiative reduced the amount
of material entering the waste stream in 1995 by more than 1,100 tons. Customers
have shown their strong acceptance of the program, returning nearly 60 percent
of all cartridges in 1995."
44
<PAGE>
HEDGING INSTRUMENTS
We have entered into certain financial instruments to manage interest rate
and foreign currency exposures. These instruments are held solely for hedging
purposes and include interest rate swap agreements, forward foreign exchange
contracts and foreign currency swap agreements. We have long-standing policies
prescribing that derivative instruments are only to be used to achieve a set of
very limited objectives: to lock in the value of cross-border cash flows and to
reduce the impact of currency and interest rate volatility on costs, assets and
liabilities. We do not enter into derivative instrument transactions for trading
purposes.
Currency derivatives are primarily arranged in conjunction with
underlying transactions that give rise to foreign currency-denominated payables
and receivables: for example, an option to buy foreign currency to settle the
importation of goods from suppliers, or a forward foreign-exchange contract to
fix the rate at which a dividend will be paid by a foreign subsidiary. In
addition, when cost-effective, currency derivatives are also used to hedge
balance sheet exposures in hyperinflationary economies.
We do not hedge foreign currency-denominated revenues of our foreign
subsidiaries since these do not represent cross-border cash flows.
With regard to interest rate hedging, virtually all customer financing
assets earn fixed rates of interest and, therefore, we "lock in" an interest
rate spread by arranging fixed-rate liabilities with similar maturities as the
underlying assets. Additionally, customer financing assets in one currency are
consistently funded with liabilities in the same currency. We refer to the
effect of these conservative practices as "match funding" customer financing
assets. This practice effectively eliminates the risk of a major decline in
interest margins resulting from adverse changes in the interest rate
environment. Conversely, this practice does effectively eliminate the
opportunity to materially increase margins when interest rates are declining.
More specifically, pay fixed-rate and receive variable-rate swaps are
typically used in place of more expensive fixed-rate debt. Pay variable-rate and
receive variable-rate swaps are used to transform variable-rate medium-term debt
into commercial paper or local currency LIBOR obligations. Additionally, pay
variable-rate and receive fixed-rate swaps are used from time to time to
transform longer-term fixed-rate debt into commercial paper-based rate
obligations. The transactions performed within each of these three categories
enable the cost effective management of interest rate exposures. The potential
[PHOTO]
Pictured here is Mel Peel, Xerox
Business Services, UK, with the caption "A Dun & Bradstreet unit in the U.S.
develops market intelligence reports for European customers on Monday and
Tuesday and transmits them electronically on Thursday to the Document Technology
Centre at Rank Xerox Mitcheldean. Personalized reports are printed on Friday and
mailed to 16 countries. Documents Direct, our network document service,
eliminates shipping costs and gets the reports on customers' desks at least
three days earlier than previously."
45
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31 (in millions) 1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Income (Loss) from Continuing Operations $1,174 $ 794 $ (193)
Adjustments required to reconcile income (loss) to cash flows
from operating activities:
Depreciation and amortization 660 649 629
Provision for special charges - - 1,373
Provisions for doubtful accounts 308 252 250
Provision for postretirement medical benefits 40 54 70
Charges against 1993 restructuring reserve (331) (423) -
Minorities' interests in earnings of subsidiaries 190 213 78
Undistributed equity in income of affiliated companies (90) (54) (51)
Increase in inventory (604) (472) (228)
Increase in finance receivables (774) (937) (993)
(Increase) decrease in accounts receivable (173) (266) 134
Increase (decrease) in accounts payable and accrued
compensation and benefit costs 179 205 (65)
Net change in current and deferred income taxes 263 258 (359)
Other, net (243) 204 (32)
------ ----- ------
Total 599 477 613
------ ----- ------
CASH FLOWS FROM INVESTING ACTIVITIES
Cost of additions to land, buildings and equipment (438) (389) (470)
Proceeds from sales of land, buildings and equipment 90 220 41
Proceeds from sale of Constitution Re and Viking 526 - -
Purchase of additional interest in Rank Xerox (972) - -
------ ----- ------
Total (794) (169) (429)
------ ----- ------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in debt 766 550 215
Yen financing repayment - (116) -
Dividends on common and preferred stock (389) (395) (389)
Proceeds from sale of common stock 139 90 665
Redemption of preferred stock (69) (245) (6)
Dividends to minority shareholders (86) (97) (105)
Proceeds received from (returned to) minority shareholders 20 (32) 12
------ ----- ------
Total 381 (245) 392
------ ----- ------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (5) (78) (34)
------ ----- ------
CASH PROVIDED (USED) BY CONTINUING OPERATIONS 181 (15) 542
CASH USED BY DISCONTINUED OPERATIONS (86) (18) (476)
------ ----- ------
INCREASE (DECREASE) IN CASH 95 (33) 66
CASH AT BEGINNING OF YEAR 35 68 2
------ ----- ------
CASH AT END OF YEAR $ 130 $ 35 $ 68
====== ===== ======
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
46
<PAGE>
risk attendant to this strategy is the performance of the swap counterparty. We
address this risk by arranging swaps exclusively with a diverse group of strong-
credit counterparties, regularly monitoring their credit ratings, and
determining the replacement cost, if any, of existing transactions.
On an overall worldwide basis, and including the impact of our hedging
activities, weighted average interest rates for 1995, 1994 and 1993 approximated
6.5 percent, 7.2 percent and 8.3 percent, respectively.
Our currency and interest rate hedging are typically unaffected by changes
in market conditions as forward contracts, options and swaps are normally held
to maturity consistent with our objective to lock in currency rates and interest
rate spreads on the underlying transactions.
[PHOTO]
Pictured here is Gabor Gagyor, Rank Xerox, Hungary, with the caption
"Hungarian mobile telephone customers get their bills much faster since Westel
900 switched to the Xerox DocuPrint to print its high volume of personalized
invoices. The payoff for Westel? A very measurable impact on cash flow."
LIQUIDITY
Our primary sources of liquidity are cash generated from operations and
borrowings. The consolidated statements of cash flows detailing changes in our
cash balances are on Page 46.
Operating activities, including growth in finance receivables, and after
$331 million of restructuring payments in 1995 and $423 in 1994, generated
positive cash flows of $599 million, $477 million and $613 million in 1995, 1994
and 1993, respectively.
Investing activities, including proceeds from the sales of Constitution Re
Corporation and Viking Insurance Holdings, Inc. and a $972 million payment to
The Rank Organisation Plc, which increased our financial interest in Rank Xerox
from 67 percent to 80 percent, resulted in net cash usage of $794 million in
1995 compared with $169 million and $429 million in 1994 and 1993, respectively.
The lower level of investing usage in 1994 versus the prior year was primarily
due to higher fixed asset sales in 1994 resulting from the information
management outsourcing initiative.
Financing activities generated $381 million of pos- itive cash flow in 1995
compared with $245 million of cash usage in 1994 and $392 million of generation
in 1993. Financing cash flows include $766 million, $550 million and $215
million of net borrowing in 1995, 1994 and 1993, respectively, excluding foreign
currency translation effects and other adjustments. Financing usage in 1994
included repayment of a 1984 yen-denominated financing for $116 million and $184
million used to redeem 8.25 percent preferred stock. Financing generation in
1993 included net proceeds of $580 million from a public offering of common
stock.
Overall, Continuing Operations generated net cash of $181 million in 1995,
used $15 million in 1994, and generated $542 million in 1993.
Discontinued Operations used $86 million in 1995, $18 million in 1994, and
$476 million in 1993.
The combined cash flows of Continuing and Discontinued Operations resulted
in a $95 million increase in cash balances in 1995, a $33 million decrease in
1994, and a $66 million increase in 1993.
47
<PAGE>
Insurance and Other Financial Services
In January 1993, we announced our decision to concentrate on the core
Document Processing business and our intent to sell or otherwise disengage from
the Insurance and Other Financial Services (IOFS) businesses, which is
consistent with the strategy that began in 1990. In 1993, we discontinued our
Other Financial Services (OFS) business, which included the sale of The Van
Kampen Merritt Companies, Inc. and Furman Selz Holding Corporation. During 1995,
we sold Xerox Financial Services Life Insurance Company and related companies,
which was part of OFS. Also in 1995, we sold two Talegen Holdings, Inc.
(Talegen) insurance operating groups, Constitution Re Corporation (CRC) and
Viking Insurance Holdings, Inc. (Viking), which are included in the
"Dispositioned" insurance line of the Insurance operating results. At year-end
1995, our "Remaining" insurance operating companies consisted of Coregis Group,
Inc. (Coregis), Crum & Forster Holdings, Inc. (CFI), Industrial Indemnity
Holdings, Inc. (II), Westchester Specialty Group, Inc. (Westchester), The
Resolution Group, Inc. (TRG), and three insurance-related service companies. In
January 1996, we announced that we had discontinued the Insurance business as a
result of the agreements to sell the Remaining insurance companies to investor
groups led by Kohlberg Kravis Roberts & Co. (KKR) and existing management.
Status of Insurance
In 1993, Talegen completed a restructuring that established and capitalized
seven insurance operating groups as independent legal entities: CRC, Coregis,
CFI, II, Viking, Westchester and TRG. The insurance segment now includes
Talegen, a holding company of four property-casualty insurance operating groups
and three insurance-related service companies; TRG, a former Talegen company,
primarily involved in run-off activities and collection of reinsurance; Ridge
Reinsurance Limited (Ridge Re) and that portion of the Xerox Financial Services,
Inc. (XFSI) headquarters costs and interest expense associated with the
insurance business activities.
In connection with the restructuring of Talegen completed in 1993, XFSI
agreed that support would be provided in the form of aggregate excess of loss
reinsurance. This reinsurance protection is provided through XFSI's single
purpose, wholly-owned reinsurance company Ridge Re, established in 1992. XFSI is
obligated to pay annual premium installments of $49 million, plus finance
charges, for 10 years, for coverage totaling $1,245 million, net of 15 percent
coinsurance. A total of seven annual premium installments remain to be paid as
of December 31, 1995. Xerox has guaranteed the payment by XFSI of all such
premiums. Xerox has also guaranteed Ridge Re's performance under a $400 million
letter of credit facility required to provide security with respect to aggregate
excess of loss reinsurance obligations under contracts with the Remaining
Talegen insurance companies, TRG and Dispositioned companies.
XFSI may also be required, under certain circumstances, to purchase over
time additional redeemable preferred shares up to a maximum of $301 million. In
addition, XFSI has guaranteed to the Talegen insurance companies that Ridge Re
will meet all of its financial obligations under the foregoing excess of loss
reinsurance issued to them.
Sale of Talegen Insurance Companies
In April 1995, CRC, one of the seven insurance operating groups of Talegen,
was sold to EXOR America Inc. for a purchase price of $421 million in cash. In
July 1995, Viking, another of the seven insurance operating groups of Talegen,
was sold to Guaranty National Corporation for approximately $103 million in cash
plus future upward price adjustments based on loss reserve development. Both
transactions approximated book value. The proceeds of both transactions were
primarily used to retire debt.
48
<PAGE>
In January 1996, we announced agreements to sell all of our Remaining
insurance units to investor groups led by KKR and senior management of the
Remaining companies. The sales, expected to close in the middle of this year,
will consist of two concurrent transactions with proceeds totaling $2.7 billion,
including the assumption of Talegen debt.
For the four Talegen insurance operating units (Coregis, CFI, II and
Westchester) and insurance-related service companies, Xerox will receive
approximately $1.25-$1.3 billion in cash, $450-$500 million in preferred stock
in a new company formed by the KKR group and the assumption of debt (which
amounted to $372 million at December 31, 1995).
For TRG, the unit that manages Talegen's run-off business, Xerox will
receive approximately $150 million in cash and $462 million in performance-based
instruments issued by another company formed by the KKR group.
The transactions are subject to customary closing conditions, including
buyer financing and regulatory approvals. In connection with the announced
sales, we recorded a fourth quarter $1,546 million after-tax charge. As a result
of the sales of the Talegen units, the insurance segment has been classified as
a discontinued operation for all periods presented.
XFSI will continue to provide support in the form of aggregate excess of
loss reinsurance agreements issued by Ridge Re and the guarantee of Ridge Re's
performance under such agreements. In addition to our guarantee of payment of
premiums under such agreements and the $400 million letter of credit facility,
Xerox will guaranty Ridge Re's payment and performance obligations under such
agreements.
<TABLE>
<CAPTION>
Operating Results
Full year results are summarized below:
Insurance Income Summary
-------------------------
(In millions) 1995 1994 1993
-------------------------
<S> <C> <C> <C>
Talegen Remaining Companies
and TRG $ 146 $ 138 $126
Talegen Dispositioned Companies (3) 48 44
Cessions to Ridge Re (85) (35) -
Interest/Other (158) (151) (166)
------- ----- ----
Total before Fourth
Quarter Charges (100) - 4
Fourth Quarter Charges:
Increased Talegen and
TRG Reserves (176) - -
Ridge Re Related and
Other Accruals (392) - -
------- ----- ----
Net Loss from Operations (668) - 4
Fourth Quarter Charge -
Loss on Sale (978) - -
------- ----- ----
Total Insurance $(1,646) $ - $ 4
======= ===== ====
</TABLE>
Insurance Results Before Fourth Quarter Charges
Talegen Remaining companies and TRG after-tax income totaled $146 million
in 1995, compared with $138 million in 1994 and $126 million in 1993. The
improving trend of the Remaining companies and TRG results reflects improved
underwriting, higher investment income and higher capital gains (1995 compared
with 1994), partially offset by higher interest expense related to the $425
million in debt issued in the fourth quarter of 1994. The decline in Talegen
Dispositioned companies income primarily reflects the absence of income in 1995
due to the sales of CRC and Viking. Cessions to Ridge Re totaled $85 million
after-tax in 1995, compared with $35 million in 1994. Interest and other charges
on an after-tax basis were $158 million in 1995, compared with $151 million in
1994 and $166 million in 1993. These charges primarily include net interest
expense.
Fourth Quarter Charges - Talegen and TRG Sales to KKR
In connection with the Talegen and TRG sales, we recorded fourth quarter
after-tax charges of $1,546 million in 1995 consisting of a non-cash loss on the
sales
49
<PAGE>
of $978 million, including a goodwill write-off of $245 million, reserve
strengthening at the Talegen insurance groups and TRG of $176 million and Ridge
Re related and other accruals of $392 million to cover all estimated future
expenses associated with the excess of loss reinsurance coverage to Talegen and
TRG.
Talegen and TRG Reserves
Losses from claims and related loss adjustment expenses (LAE) comprise the
majority of costs from providing insurance products. Therefore, unpaid losses
and loss expenses are generally the largest liability on a property and casualty
insurer's balance sheet. In order to moderate the potential financial impact of
unusually severe or frequent losses, insurers often cede (i.e., transfer)
through reinsurance mechanisms a portion of their gross policy premiums to
reinsurers in exchange for the reinsurer's agreement to share a portion of the
covered losses with the insurer. Although the ceding of insurance does not
discharge the original insurer from its primary liability to its policyholder,
the reinsurance company that accepts the risk assumes an obligation to the
original insurer. The ceding insurer retains a contingent liability with respect
to reinsurance ceded to the extent that any reinsuring company might not be able
to meet its obligations.
Reserve provisions are established by the insurer to provide for the
estimated level of claim payments that will be made under the policies it
writes. Over the policy period, as premiums are earned, a portion of the
premiums are set aside as gross loss reserves for incurred but not reported
(IBNR) losses. IBNR reserves also include amounts to supplement case reserves,
when established, to provide for further loss development. In addition, gross
reserves are established for internal and external (i.e., allocated) LAE
associated with handling the claims inventory. When a claim is reported, case
reserves are established on the basis of all pertinent information available at
the time. Reinsurance recoverables on gross reserves are recorded for amounts
anticipated to be recovered from reinsurers and are determined in a manner
consistent with the liabilities associated with the reinsured policies. Net
reserves are gross reserves less anticipated reinsurance recoverables on those
reserves.
Reinsurance
Talegen has a reinsurance security committee composed of senior management
who approve those reinsurers to whom the Remaining insurance companies cede
business, and the criteria under which such approvals are granted have become
increasingly restrictive over the past several years.
The potential uncollectibility of ceded reinsurance is an industry-wide
issue. With respect to the management of recoveries due from reinsurers, the
Remaining insurance companies operate within common guidelines for the early
identification of potential collection problems and assign these cases to a
specialized unit within TRG staffed by "work-out" experts. This unit
aggressively pursues collection of reinsurance recoverables through mediation,
arbitration and, where necessary, litigation to enforce the Remaining insurance
companies contractual right against reinsurers. Nevertheless, periodically, it
becomes necessary for management to adjust estimates of potential losses to
reflect their ongoing evaluation of developments that affect recoverability,
including the financial difficulties that some reinsurers can experience. Based
upon the review of financial condition and assessment of other available
information, the Remaining insurance companies maintain an allowance for
uncollectible amounts due from reinsurers. The remaining balance of reinsurance
recoverable is considered to be valid and collectible.
Latent Exposures
Claims resulting from asbestos-related, environmental and other latent
exposures have provided unique challenges to the insurance industry. The
possibility that these claims would emerge was often not contemplated at the
time the policies were written, and traditional actuarial reserving
methodologies have not
50
<PAGE>
been useful in accurately estimating ultimate losses. Beginning in 1994 and
continuing in 1995, Talegen and certain other companies within the insurance
industry developed analytical methods to provide estimates of ultimate losses
for such exposures.
Asbestos-related claims, which began to emerge in the 1970s, were the first
type of latent exposure to cause significant losses to the insurance industry.
In addition to bodily injury claims, asbestos-in-buildings claims have been
tendered to certain of the Remaining insurance companies seeking reimbursement
for the expense of replacing insulation material and other building components
containing asbestos. At this point, sufficient time has elapsed for case law to
become reasonably well developed in the asbestos bodily injury claims area. Case
law is not as well developed in the asbestos-in-buildings claim area.
Environmental claims were the second major type of such claims to emerge
and significantly impact the insurance industry. Environmental claims have
generally been defined by the insurance industry as loss or potential loss
related to the alleged contamination of a site from operations on the sites,
from waste disposal or from other causes. Inconsistent federal and state case
law and uncertainty with respect to Superfund reform have compounded the
industry's difficulties in adequately assessing these complex exposures.
Other latent exposures include claims such as repetitive stress, chemical
exposure and surgical breast implants, as well as other exposures where the
possibility of such claims arising was not contemplated when the policies were
written.
As judicial patterns emerge through the appellate process and remove
uncertainties surrounding asbestos-related, environmental and other latent
exposures, additional liabilities and reinsurance recoverables could arise. Due
to the unique complexities and uncertanties related to latent exposure claims,
additional information regarding these exposures is provided, although it is the
policy of Talegen not to disclose established case reserves on specific claims.
Reserves For The Remaining Insurance Companies
Gross and net unpaid losses and loss expenses for the Remaining insurance
companies as of December 31, 1995 and 1994, in total and for each latent
exposure area are summarized in the following table:
<TABLE>
<CAPTION>
Unpaid Losses and Loss Expenses For The Remaining Insurance Companies
Gross Net
(In millions) Reserves Reserves
-------- --------
<S> <C> <C>
DECEMBER 31, 1995
In Total $8,478 $5,648
====== ======
Latent exposure areas/1/:
Asbestos bodily injury $ 493 $ 224
Asbestos-in-buildings 63 2
Environmental 530 253
Other latent exposures 155 46
------ ------
Total $1,241 $ 525
====== ======
DECEMBER 31, 1994
In Total $7,835 $5,591
====== ======
Latent exposure areas/1/:
Asbestos bodily injury $ 266 $ 68
Asbestos-in-buildings 66 3
Environmental 391 127
Other latent exposures 178 60
------ ------
Total $ 901 $ 258
====== ======
</TABLE>
/1/ Included are case, IBNR and allocated LAE reserves. Ridge Re recoverable
balances are not included in net reserves because the Ridge Re contract is an
aggregate excess of loss contract covering all lines of business for the
Insurance Companies.
In the fourth quarter of 1995, gross unpaid loss and loss expense reserves
for the Remaining insurance companies and XFSI were strengthened by $690
million. After consideration of $349 million ceded to Ridge Re and $70 million
ceded to other reinsurers, net unpaid losses and loss expenses were strengthened
by a total of $271 million on a pre-tax basis. While cessions to Ridge Re are
beneficial to Talegen, they do not result in a benefit to the consolidated Xerox
accounts. Before consideration of Ridge Re, the net strengthening was comprised
of an addition of $310 million to latent exposure reserves, $255 million to
non-latent exposure reserves and $55 million to uncollectible reinsurance
reserves.
In 1995, prior to the strengthening discussed above and exclusive of a
settlement between Monsanto Company and Talegen, the Remaining insurance
51
<PAGE>
companies strengthened 1994 and prior accident year net reserves by $151
million, including a $64 million strengthening of uncollectible reinsurance
reserves. Those strengthening actions resulted in a cession to Ridge Re of $120
million.
Latent Exposure Reserves
Prior to 1995, the Remaining insurance companies established case and IBNR
reserves for asbestos bodily injury and environmental exposures for claims that
had been reported. Under that reserving methodology, the IBNR reserves were
established primarily to cover adverse development on known claims. Case
reserves have been, and continue to be, determined by a specialized claim and
legal staff. Beginning in the summer of 1994 and continuing through 1995,
Talegen developed methods of analysis and gathered additional data to support
IBNR reserves estimates for asbestos bodily injury and environmental claims.
During 1995, the methods of analysis were evaluated by internal and external
actuarial and claims professionals knowledgeable in the latent exposure field.
The following table identifies low and high estimates of the range of potential
unpaid costs of asbestos bodily injury and environmental exposures at December
31, 1995:
<TABLE>
<CAPTION>
Low and High Estimates of Gross and Net Unpaid Loss and Allocated LAE
Compared To Carried Reserves of The Remaining Insurance Companies
As of December 31, 1995
------------------------------------------------------------------
Estimated Values
------------------------------------------------------
Asbestos Bodily Injury Environmental/2/ Total
---------------------- ---------------- ------------ Carried
(In millions) Low High Low High Low High Reserves/2/
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Gross Reserves $424 $846 $251 $1,072 $675 $1,918 $875
Reinsurance/1/ 272 576 71 599 343 1,175 406
---- ---- ---- ------ ---- ------ ----
Net Reserves $152 $270 $180 $ 473 $332 $ 743 $469
==== ==== ==== ====== ==== ====== ====
/1/ The values presented do not include provisions for uncollectible
reinsurance.
/2/ Estimated values and carried reserve information exclude amounts associated
with policies expressly written for environmental exposures. As of December
31, 1995, gross and net reserves associated with these exposures are $148
million and $8 million, respectively.
</TABLE>
At December 31, 1995, Talegen and the Remaining insurance companies do not
expect that liabilities associated with incurred asbestos bodily injury and
environmental claims will have a material adverse effect on their future
liquidity or financial position. With respect to asbestos-in-buildings and other
latent exposures, because of the relatively low amount of cumulative net loss
and allocated LAE payments, the reserves established for identified claims and
the relatively low number of open claims, Talegen and the Remaining insurance
companies also do not expect that liabilities associated with incurred claims in
these latent exposure areas will have a material adverse affect on their future
liquidity or financial position. However, given the complexity of coverage and
other legal issues, and the significant assumptions used in estimating such
exposures, actual results could significantly differ from our current estimates.
Discontinued Operations - Other Financial Services and Third-Party and
Real-Estate
Other Financial Services (OFS), which were discontinued in the fourth
quarter of 1993, had no after-tax income in the full year 1995 and 1994. The net
investment in OFS was $169 million and $232 million at December 31, 1995 and
1994, respectively.
52
<PAGE>
We currently believe that the liquidation of the remaining OFS units will not
result in a net loss.
The sale of the business and assets of Shields, a former Furman Selz
subsidiary, and Regent, a subsidiary of Shields, to Alliance Capital
Management L.P. was completed in March 1994. Under the terms of the Furman Selz
sales agreement, the sales proceeds yielded cash of approximately $60 million
before settlement of related liabilities.
On June 1, 1995, XFSI completed the sale of Xerox Financial Services Life
Insurance Company and related companies (Xerox Life Companies) to a subsidiary
of General American Life Insurance Company. After the sale, the Xerox Life
Companies names were changed to replace the name "Xerox" in the corporate titles
with the name "Cova" (Cova Companies). OakRe Life Insurance Company (OakRe), an
XFSI subsidiary formed in 1994, has assumed responsibility for existing Single
Premium Deferred Annuity (SPDA) policies issued by Xerox Life's Missouri and
California companies via coinsurance agreements (Coinsurance Agreements). The
Coinsurance Agreements include a provision for the assumption (at their
election) by the Cova Companies, of all of the SPDA policies at the end of their
current rate reset periods. A Novation Agreement with an affiliate of the new
owner provides for the assumption of the liability under the Coinsurance
Agreements for any SPDA policies not so assumed by the Cova Companies. Other
policyholders (of Immediate, Whole Life, and Variable annuities as well as a
minor amount of SPDAs issued by Xerox Life New York) will continue to be the
responsibility of the Cova Companies.
As a result of the Coinsurance Agreements, at December 31, 1995, OakRe
retained approximately $2.5 billion of investment portfolio assets (transferred
from the Xerox Life Companies) and liabilities related to the reinsured SPDA
policies. Interest rates on these policies are fixed and were established upon
issuance of the respective policies. Substantially all of these policies will
reach their rate reset periods within the next five years and will be assumed
under the Agreements as described above. At December 31, 1995, the "maturities"
of OakRe's assets and liabilities were not fully matched as the Xerox Life
Companies' portfolio was designed to recognize that policy renewals extended
liability "maturities," thereby permitting investments of somewhat longer
average duration. OakRe's practice is to selectively improve this match over
time as market conditions allow. As of December 31, 1995, we estimate that
"maturities" are effectively matched for approximately 60% of ultimate policy
liabilities.
In connection with the aforementioned sale, XFSI established a $500 million
letter of credit and line of credit with a group of banks to support OakRe's
coinsurance obligations. The term of this letter of credit is five years and it
is unused and available at December 31, 1995. Upon a drawing under the letter of
credit, XFSI has the option to cover the drawing in cash or to draw upon the
credit line.
In January 1996, we announced an agreement to sell the remaining portion of
First Quadrant Corp., an asset management subsidiary of Talegen, to Affiliated
Managers Group, Inc. This transaction is expected to close in the first quarter,
1996 and is subject to regulatory approvals and customary closing conditions.
During 1995, sales of real-estate and third-party assets and run-off
activity reduced assets associated with these businesses by $58 million to a
total of $489 million. Assigned debt totaled $231 million at year-end 1995
unchanged from the year-end 1994 level. The 1995 debt activity primarily
includes an increase related to a tax payment made in 1995 as a result of the
1994 sale of a portion of the direct financing lease portfolio, fully offset by
debt reductions from the run-off of assets. We believe that the combination of
existing reserves together with run-off profits should adequately provide for
any credit losses or losses on disposition.
53
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In Millions, Except Per-Share Data and Unless Otherwise Indicated)
1 Summary Of Significant
Accounting Policies
Basis Of Consolidation. The consolidated financial statements include the
accounts of Xerox Corporation and all majority-owned subsidiaries (the Company).
All significant intercompany accounts and transactions have been eliminated.
Rank Xerox Limited, Rank Xerox Holding BV, Rank Xerox Investment Limited, R-X
Holdings Limited and their respective subsidiaries, and the other subsidiaries
owned by the Company and The Rank Organisation Plc are referred to as the Rank
Xerox Companies.
Investments in which the Company has a 20 to 50 percent ownership interest
are accounted for on the equity method.
Effective January 1, 1995, the Company changed the reporting periods of the
Rank Xerox Companies and Latin American operations from fiscal years ending
October 31 and November 30, respectively, to a calendar year ending December 31.
The results of these operations during the period between the end of the 1994
fiscal year and the beginning of the new calendar year (the stub period)
amounted to a loss of $21. The loss was charged to retained earnings to avoid
reporting more than 12 months results of operations in one year. Accordingly,
1995 worldwide operations include the results for all consolidated subsidiaries
beginning January 1, 1995. The cash activity for the stub period is included in
Other, net in the consolidated statement of cash flows.
Discontinued Operations. In January 1993, the Company announced its intent
to sell or otherwise disengage from its Insurance and Other Financial Services
businesses, which is consistent with the strategy that began in 1990. A formal
plan for the disposal of Other Financial Services was adopted in 1993, at which
time the Other Financial Services businesses were accounted for as discontinued
operations. The Insurance business, which now consists of Talegen Holdings, Inc.
(Talegen), The Resolution Group, Inc. (TRG), Ridge Reinsurance Limited and
headquarters costs and interest expense associated with the insurance activities
of Xerox Financial Services, Inc., remained a continuing operation of the
Company at that time.
During 1995, two of the seven operating groups of Talegen were sold. In
January 1996, the Company announced separate agreements to sell all of the
remaining insurance units of Talegen and TRG to investor groups led by Kohlberg
Kravis Roberts & Co. and existing management. The sales are subject to customary
closing conditions, including buyer financing and regulatory approvals. As a
result, the Insurance businesses have been accounted for as a discontinued
operation and all prior periods have been restated. See Note 9 on Page 60 for
additional information.
The announced sale agreements, on closing, effectively complete the Company's
strategy to exit financial services.
Business Segment Information. As a result of the decision to sell its
Insurance operations, the Company now operates in a single industry segment that
consists of the worldwide development, manufacturing, marketing, financing and
servicing of document processing products and services. This business is unitary
from both a company and a customer perspective in that the marketing, financing
and servicing of the Company's products represent an integrated document
services solution.
Earnings Per Share. Primary earnings per share are based on net income less
preferred stock dividend requirements divided by the average common shares
outstanding during the period and common equivalent shares related to dilutive
stock options and Xerox Canada Inc. exchangeable Class B stock. Fully diluted
earnings per share assume full conversion of convertible debt and convertible
preferred stock into common stock at the beginning of the year or date of
issuance, unless they are antidilutive.
Use Of Estimates. The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
54
<PAGE>
Goodwill. Goodwill represents the cost of acquired businesses in excess of the
net assets purchased and is amortized on a straight-line basis, generally over
40 years. Goodwill is reported net of accumulated amortization and the
recoverability of the carrying value is evaluated on a periodic basis.
Accumulated amortization at December 31, 1995 and 1994 was $25 and $22,
respectively.
[PHOTO]
GARY KABURECK
Corporate Accounting Services
Accounting Changes. In March 1995, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards (SFAS) No. 121 -
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." Commencing in 1996, SFAS No. 121 requires companies to review
assets for possible impairment and provides guidelines for recognition of
impairment losses related to long-lived assets, certain intangibles and assets
to be disposed of. The impact of the adoption of SFAS No. 121 will be
immaterial.
In October 1995, the FASB issued SFAS No. 123 - "Accounting for Stock-Based
Compensation." As allowable by SFAS No. 123, the Company will not recognize
compensation cost for stock-based employee compensation arrangements, but
rather, commencing in 1996, will disclose in the notes to the consolidated
financial statements the impact on net income and earnings per share as if the
fair value based compensation cost had been recognized.
Revenue Recognition. Revenues from the sale of equipment under installment
contracts and from sales-type leases are recognized at the time of sale or at
the inception of the lease, respectively. Associated finance income is earned on
an accrual basis under an effective annual yield method. Revenues from equipment
under other leases are accounted for by the operating lease method and are
recognized over the lease term. Service revenues are derived primarily from
maintenance contracts on the Company's equipment sold to customers and are
recognized over the term of the contracts. Sales of equipment subject to the
Company's operating leases to third-party lease finance companies are recorded
as sales at the time the equipment is accepted by the third-party.
Provisions For Losses On Uncollectible Receivables. The provisions for
losses on uncollectible trade and finance receivables are determined principally
on the basis of past collection experience.
Inventories. Inventories are carried at the lower of average cost or market.
Buildings And Equipment. Buildings and equipment are depreciated over their
estimated useful lives. Depreciation is computed using principally the straight-
line method. Significant improvements are capitalized; maintenance and repairs
are expensed.
Classification Of Commercial Paper And Bank Notes Payable. It is the
Company's policy to classify as long-term debt that portion of commercial paper
and bank notes payable that is intended to match fund finance receivables due
after one year to the extent that it has the ability under its revolving credit
agreement to refinance such commercial paper and notes payable on a long-term
basis. See Note 10 on Page 64.
55
<PAGE>
Foreign Currency Translation. The functional currency for most foreign
operations is the local currency. Net assets are translated at current rates of
exchange and income and expense items are translated at the average exchange
rate for the year. The resulting translation adjustments are recorded as a
separate component of shareholders' equity. The U.S. dollar is used as the
functional currency for the Company's subsidiaries, primarily those in Latin
America, which conduct their business in U.S. dollars or operate in
hyperinflationary economies. A combination of current and historical exchange
rates are used in remeasuring the local currency transactions of these
subsidiaries and the resulting exchange adjustments are included in income.
Aggregate foreign currency losses were $18, $136 and $174 in 1995, 1994 and
1993, respectively, and are included in Other, net in the consolidated
statements of income. As more fully discussed in the accompanying Financial
Review on Page 38 within the discussion of Other expenses, net, the decline in
currency losses in 1995 from prior years is primarily due to the relative
stabilization of exchange rates in Brazil commencing after July 1, 1994.
2 Acquisition
On February 28, 1995, the Company paid The Rank Organisation Plc (RO)
(Pounds)620 million, or approximately $972, for 40 percent of RO's financial
interest in the Rank Xerox Companies. The transaction increased the Company's
financial interest in the Rank Xerox Companies to 80 percent from 67 percent.
The Company's additional interest in the operating results of the Rank Xerox
Companies is included in the consolidated statement of income from the date of
acquisition. Based on the allocation of the purchase price, this transaction
resulted in goodwill of $574 (including transaction costs), a decline in
minorities' interests in equity of subsidiaries of approximately $400 and an
increase in long-term debt of $972.
3 1993 Special Charges, Net
In 1993, the Company recorded special charges which aggregated $1,373 and
included the following pre-tax amounts: $1,195 related to a restructuring of
operations and $278 related to litigation settlements, partially offset by $100
in reduced performance-based employee profit sharing. These special charges
resulted in an after-tax charge of $813 or $7.96 per share.
The restructuring program announced in December 1993 is a worldwide action
aimed at significantly reducing the Company's cost base and at improving
productivity.
The $1,195 pre-tax provision consisted of the following: $843 related to
severance pay and other employee separation benefits; $258 related to lease
cancellation and other facilities rationalization and site consolidation costs;
and $94 for the write-off or write-down of various assets in certain non-
strategic businesses the Company will exit and other costs directly related to
the restructuring program. Approximately 70 percent of this provision related to
the Company's domestic operations.
The Company's objectives were to reduce its worldwide work force by more than
10,000 employees and to close or consolidate a number of facilities.
[PHOTO]
ALLEN VASAN
Executive
Assistant
Operations
56
<PAGE>
A summary of the original reserve and charges through December 31, 1995
follows:
1995 1994 1993
---- ---- ----
Net charges to
restructuring reserve $370* $430 $ -
==== ==== ======
Reserve balance:
Current $298 $429 $ 395
Non-current 97 336 800
---- ---- ------
Total reserve balance $395 $765 $1,195
==== ==== ======
* Includes $30 charged to the reserve during the stub period.
Management believes that the aggregate reserve balance of $395 at December 31,
1995 is adequate for completion of the restructuring program.
4 Finance Receivables, Net
Finance receivables represent installment sales and sales-type leases
resulting from the marketing of the Company's business equipment products. These
receivables generally mature over two to five years and are typically
collateralized by a security interest in the underlying assets. The components
of finance receivables, net at December 31, 1995, 1994 and 1993 follow:
1995 1994 1993
---- ---- -----
Gross receivables $12,721 $12,135 $11,119
Unearned income (2,207) (2,074) (2,032)
Unguaranteed residual values 283 206 165
Allowance for doubtful accounts (322) (319) (300)
------- ------- -------
Finance receivables, net 10,475 9,948 8,952
Less current portion 4,069 3,910 3,358
------- ------- -------
Amounts due after one year, net $ 6,406 $ 6,038 $ 5,594
======= ======= =======
Contractual maturities of the Company's gross finance receivables subsequent to
December 31, 1995 follow:
1996 1997 1998 1999 2000 Thereafter
---- ---- ---- ---- ---- ----------
$5,138 $ 3,427 $ 2,338 $ 1,284 $ 459 $ 75
====== ======= ======= ======= ===== =====
Experience has shown that a portion of these finance receivables will be
prepaid prior to maturity. Accordingly, the preceding schedule of contractual
maturities should not be considered a forecast of future cash collections.
[PHOTO]
Rita Overal
Rank Xerox, UK
5 Inventories
The components of inventories at December 31, 1995, 1994 and 1993 follow:
1995 1994 1993
---- ---- ----
Finished goods $1,642 $1,458 $1,421
Work in process 88 88 80
Raw materials 289 268 297
Equipment on operating leases, net 627 480 364
------ ------ ------
Inventories $2,646 $2,294 $2,162
====== ====== ======
Equipment on operating leases consists of the Company's business equipment
products which are rented to customers and are depreciated to estimated residual
value. Depreciable lives vary from two to four years. The Company's business
equipment operating lease terms vary, generally from 12 to 36 months.
Accumulated depreciation on equipment on operating leases for the years ended
December 31, 1995, 1994 and 1993 amounted to $1,065, $824 and $790,
respectively. Minimum future rental revenues on the remaining non-cancelable
operating leases with original terms of one year or longer are:
1996 1997 1998 Thereafter
---- ---- ---- ----------
$439 $206 $107 $43
==== ==== ==== ===
Total contingent rentals, principally usage charges in excess of minimum
allowances relating to operating leases, for the years ended December 31, 1995,
1994 and 1993 amounted to $190, $197 and $217, respectively.
57
<PAGE>
6 Land, Buildings And Equipment, Net
The components of land, buildings and equipment at December 31, 1995, 1994
and 1993 follow:
Estimated
Useful Lives
(Years) 1995 1994 1993
------------ ---- ---- ----
Land $ 85 $ 87 $ 83
Buildings and building
equipment 20 to 40 941 876 824
Leasehold improvements Lease term 344 339 322
Plant machinery 4 to 12 1,892 1,843 1,732
Office furniture and
equipment 3 to 10 1,157 1,245 1,576
Other 3 to 20 199 139 171
Construction in progress 231 227 277
------ ------ ------
Subtotal 4,849 4,756 4,985
Less accumulated depreciation 2,757 2,648 2,766
------ ------ ------
Land, buildings and equipment, net $2,092 $2,108 $2,219
====== ====== ======
The Company leases certain land, buildings and equipment, substantially all of
which are accounted for as operating leases. Total rent expense under operating
leases for the years ended December 31, 1995, 1994 and 1993 amounted to $425,
$502 and $538, respectively. Future minimum operating lease commitments that
have remaining non-cancelable lease terms in excess of one year at December 31,
1995 follow:
1996 1997 1998 1999 2000 Thereafter
---- ---- ---- ---- ---- ----------
$344 $230 $179 $140 $111 $475
==== ==== ==== ==== ==== ====
In certain circumstances, the Company subleases space not currently required
in operations. Future minimum sublease income under leases with non-cancelable
terms in excess of one year amounted to $56 at December 31, 1995.
In 1994, the Company awarded a contract to Electronic Data Systems Corp. (EDS)
to operate the Company's worldwide data processing and telecommunications
network. Minimum payments due EDS under the contract for each of the next five
years follow:
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
$349 $325 $289 $250 $222
==== ==== ==== ==== ====
These minimum payments will be amended over time to reflect the transfer to
EDS of responsibility for the management of any new data processing
applications.
7 Investments In Affiliates, At Equity
Investments in corporate joint ventures and other companies in which the
Company has a 20 to 50 percent ownership interest at December 31, 1995, 1994 and
1993 follow:
1995 1994 1993
---- ---- ----
Fuji Xerox $1,223 $1,183 $1,004
Other investments 105 95 90
------ ------ ------
Investments in affiliates, at equity $1,328 $1,278 $1,094
====== ====== ======
Rank Xerox Limited, a consolidated subsidiary of the Company, owns 50 percent
of the outstanding stock of Fuji Xerox, a corporate joint venture with Fuji
Photo Film Co., Ltd. Fuji Xerox is headquartered in Tokyo and operates
throughout the Far East (except China). Condensed financial data of Fuji Xerox
for its last three fiscal years follow:
1995 1994 1993
---- ---- ----
SUMMARY OF OPERATIONS
Revenues $8,500 $7,235 $6,259
Costs and expenses 7,989 6,829 5,915
------ ------ ------
Income before income taxes 511 406 344
Income taxes 287 235 195
------ ------ ------
Net income $ 224 $ 171 $ 149
====== ====== ======
Rank Xerox' equity in net income $ 112 $ 86 $ 75
====== ====== ======
Xerox' equity in net income $ 88 $ 57 $ 50
====== ====== ======
BALANCE SHEET DATA
ASSETS
Current assets $3,518 $3,428 $3,175
Non-current assets 3,085 3,038 2,573
------ ------ ------
Total assets $6,603 $6,466 $5,748
====== ====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities $2,675 $2,567 $2,276
Long-term debt 594 658 794
Other non-current liabilities 884 871 668
Shareholders' equity 2,450 2,370 2,010
------ ------ ------
Total liabilities and
shareholders' equity $6,603 $6,466 $5,748
====== ====== ======
8 Geographic Area Data
Revenues and assets of the Rank Xerox Companies are substantially
attributable to European operations; their consolidated operations in Africa,
Asia and the Middle East together comprise less than two percent of the
Company's consolidated amounts. The Other Areas classification includes
operations principally in Latin America and Canada.
58
<PAGE>
Intercompany revenues are generally based on manufacturing cost plus a markup
to recover other operating costs and to provide a profit margin to the selling
company.
Geographic area data for the Company's continuing operations follow:
<TABLE>
<CAPTION>
Year ended December 31,
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Revenues from unrelated entities:
United States $ 8,068 $ 7,822 $ 7,238
Rank Xerox Companies 5,496 4,633 4,479
Other Areas 3,047 2,633 2,512
------- ------- -------
Total $16,611 $15,088 $14,229
======= ======= =======
Intercompany revenues:
United States $ 1,376 $ 1,291 $ 1,104
Rank Xerox Companies 226 262 216
Other Areas 463 362 353
------- ------- -------
Total $ 2,065 $ 1,915 $ 1,673
======= ======= =======
Total revenues:
United States $ 9,444 $ 9,113 $ 8,342
Rank Xerox Companies 5,722 4,895 4,695
Other Areas 3,510 2,995 2,865
Less intercompany revenues (2,065) (1,915) (1,673)
------- ------- -------
Total $16,611 $15,088 $14,229
======= ======= =======
Net income (loss) (before
intercompany eliminations):
United States $ 288 $ 379 $ (371)
Rank Xerox Companies 409 218 (43)
Other Areas 446 250 190
------- ------- -------
Total* $ 1,143 $ 847 $ (224)
======= ======= =======
Net income (loss) (after
intercompany eliminations):
United States $ 418 $ 386 $ (334)
Rank Xerox Companies 408 215 (47)
Other Areas 348 193 188
------- ------- -------
Total* $ 1,174 $ 794 $ (193)
======= ======= =======
Assets:
United States $ 9,876 $ 9,133 $ 8,966
Rank Xerox Companies 7,566 7,171 6,349
Other Areas 3,717 3,070 2,843
------- ------- -------
Subtotal 21,159 19,374 18,158
Investment in
discontinued operations 4,810 7,904 8,841
------- ------- -------
Total $25,969 $27,278 $26,999
======= ======= =======
* The 1993 special charges reduced net income by $813. On a geographic basis,
this charge was incurred as follows: $605-United States; $147-Rank Xerox
Companies; and $61-Other Areas.
</TABLE>
[PHOTO]
DAVID LEANING
Rank Xerox
Accounting
9 Discontinued Operations
In January 1993, the Company announced its intent to sell or otherwise
disengage from its Insurance and Other Financial Services (IOFS) businesses,
which is consistent with the strategy that began in 1990. As more fully
discussed below and in the accompanying Financial Review on Page 48 within the
section entitled Sale of Talegen Insurance Companies, the Company has
discontinued its Insurance business as a result of the announced sales of the
remaining Talegen insurance operating groups and The Resolution Group, Inc.
(TRG). In 1993, the Company discontinued its Other Financial Services businesses
and in 1990 discontinued its Real-Estate and Third-Party Financing businesses.
Insurance. The Insurance segment includes Talegen Holdings, Inc. (Talegen), a
holding company with originally seven property-casualty insurance operating
groups; TRG; Ridge Reinsurance Limited (Ridge Re); and headquarters costs and
interest expense associated with the insurance activities of Xerox Financial
Services, Inc. (XFSI). In 1993, Talegen completed a restructuring which
established and capitalized seven insurance operating groups as independent
legal entities: Constitution Re Corporation (CRC), Coregis, Crum & Forster
Insurance, Industrial Indemnity, TRG, Viking Insurance Holdings, Inc. (Viking)
and Westchester Specialty Group. TRG is the unit that manages Talegen's run-off
businesses.
59
<PAGE>
In connection with the restructuring of Talegen, XFSI agreed that support
would be provided in the form of aggregate excess of loss reinsurance. This
reinsurance protection is provided through XFSI's single purpose, wholly-owned
reinsurance company Ridge Re, which was established in 1992. Commencing in 1993,
XFSI is obligated to pay annual premium installments of $49, plus finance
charges, for 10 years, for coverage totaling $1,245, net of 15 percent
coinsurance. The XFSI premium payments have been guaranteed by the Company. The
Company has also guaranteed Ridge Re's performance under a $400 letter of credit
facility required to provide security with respect to aggregate excess of loss
reinsurance obligations.
XFSI may also be required, under certain circumstances, to purchase up to $301
in redeemable preferred stock of Ridge Re. In addition, XFSI has guaranteed to
the Talegen insurance companies that Ridge Re will meet all of its financial
obligations under all of the foregoing excess of loss reinsurance issued to
them.
[PHOTO]
MARTIN DURRIG
Rank Xerox
Sale of Talegen Insurance Operating Groups. In April 1995, CRC, one of the seven
insurance operating groups of Talegen, was sold to EXOR America Inc. for a
purchase price of $421 in cash, which approximated book value.
In July 1995, Viking, another of the seven insurance operating groups of
Talegen, was sold to Guaranty National Corporation for approximately $103 in
cash plus future upward price adjustments based on loss reserve development. The
transaction approximated book value.
The proceeds of both transactions were used to retire debt. Collectively, CRC
and Viking had $680 of revenue in 1994, the last full year of ownership by the
Company.
In January 1996, the Company announced separate agreements to sell all of the
remaining insurance operating groups of Talegen and TRG, for approximately $2.7
billion to investor groups (the Buyer) led by Kohlberg Kravis Roberts & Co. and
existing management. The transactions will consist of $1,400-$1,450 in cash,
$450-$500 in preferred stock, $462 in a performance-based instrument and the
assumption of debt, which amounted to $372 at December 31, 1995. The agreements,
which are expected to close mid-1996, are subject to customary closing
conditions, including buyer financing and regulatory approvals.
The Company will receive $450-$500 in face value of twenty-year Trust
Originated Preferred Securities (TOPrS) in connection with the sale of the
remaining Talegen units other than TRG. TOPrS are a tax-deductible preferred
stock issued by a trust established by the Buyer's holding company. Dividends on
the TOPrS may be deferred with a concurrent increase in the value of the TOPrS
for the first seven years. Subsequently, dividends must be paid in cash. The
TOPrS may be redeemed from the Company at face value, plus accrued dividends,
before maturity and the Company can sell the TOPrS after one year. The TOPrS
mature in 20 years and will pay a dividend rate equal to 499 basis points over
the published long-term Applicable Federal Rate at the date of closing. At
December 31, 1995, the TOPrS dividend rate would have been 11.20 percent.
The Company will participate in the future cash flows of TRG via a
performance-based instrument carried at $462. The recovery of this instrument is
dependent upon the sufficiency of TRG's available cash flows, as defined. Based
on current forecasts at December 31, 1995, the Company expects to realize $462
for this instrument. However, ultimate realization may be greater or less than
this amount.
60
<PAGE>
The Company will continue to provide support in the form of aggregate excess
of loss reinsurance to the Talegen units through Ridge Re. In addition, XFSI is
obligated to pay the seven remaining premium installments of $49 plus finance
charges. In addition to its guarantee of payment of premiums under such
agreements and the $400 letter of credit facility, the Company will guarantee,
upon closing, that Ridge Re will meet all of its payment and performance
obligations under the foregoing excess of loss reinsurance agreements. At
December 31, 1995, Ridge Re has accrued approximately $750 of the $1,245 excess
of loss reinsurance coverage estimated to be required based on actuarial
projections.
In connection with the announced sale, the Company recorded a $1,546 loss on
disposal of the remaining Talegen insurance operating groups and TRG. The loss
on disposal, recorded in the fourth quarter of 1995, is composed of the
following:
<TABLE>
<S> <C>
Loss on sale $ 978
Increased Talegen and TRG reserves, net of
income tax benefit of $95 176
Ridge Re related and other accruals,
net of tax benefit of $195 392
------
Total after-tax loss $1,546
======
</TABLE>
As a result of these sales, the Insurance businesses have been classified as
discontinued operations for all periods presented.
Insurance Financial Information. Summarized operating results of Insurance
for the three years ended December 31, 1995 follow:
<TABLE>
<CAPTION>
1995 1994 1993
------- ------ ------
<S> <C> <C> <C>
Revenues $ 2,352 $2,749 $2,809
======= ====== ======
Net income (loss) from
operations* $ (668) $ -- $ 4
Loss on disposal (978)
------- ------ ------
Income (loss) from Insurance $(1,646) $ -- $ 4
======= ====== ======
* The 1995 amount includes $568 of after-tax reserves recorded during the fourth
quarter.
</TABLE>
The net assets at December 31, 1995, 1994 and 1993 of the Insurance businesses
included in the Company's consolidated balance sheets as discontinued operations
are summarized as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Insurance Assets
Investments $ 7,871 $ 8,384 $ 8,344
Reinsurance recoverable 2,616 3,063 3,835
Premiums and other receivables 1,191 1,276 1,443
Deferred taxes and other assets 1,450 1,743 1,796
------- ------- -------
Total Insurance assets $13,128 $14,466 $15,418
------- ------- -------
Insurance Liabilities
Unpaid losses and loss expenses $ 8,761 $ 8,809 $ 9,684
Unearned income 859 1,066 1,077
Notes payable 372 425 --
Other liabilities 1,513 954 990
------- ------- -------
Total Insurance liabilities 11,505 11,254 11,751
------- ------- -------
Investment in Insurance, net $ 1,623 $ 3,212 $ 3,667
======= ======= =======
</TABLE>
At December 31, 1995 and 1994, intercompany transactions aggregating
approximately $465 and $522, respectively, have been included as assets in
Investment in Discontinued Operations in the consolidated balance sheets. The
corresponding obligations are included in Deferred Taxes and Other Liabilities
in the consolidated balance sheets and represent funding commitments by XFSI
guaranteed by the Company. Substantially all of these funding commitments will
be paid at the time the Talegen sale is completed.
[PHOTO]
TAMMY POWER
Olympic Document Printing Specialist
61
<PAGE>
The Investments caption consists mainly of short-term investments as shown
below. At December 31, 1995, approximately 97 percent of the fixed maturity
investments are investment grade securities. The amortized cost and fair value
of the investment portfolio at December 31, 1995 follow:
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
------ ------
<S> <C> <C>
Fixed maturities $1,035 $1,035
Equity securities 8 7
Short-term investments 6,829 6,829
------ ------
Total investments $7,872 $7,871
====== ======
</TABLE>
Activity related to unpaid losses and loss expenses for the three years ended
December 31, 1995 follows:
<TABLE>
<CAPTION>
1995 1994 1993
------ ------ -------
<S> <C> <C> <C>
UNPAID LOSSES AND LOSS EXPENSES
Gross unpaid losses and loss
expenses, January 1 $8,809 $9,684 $10,657
Reinsurance recoverable 2,391 2,935 3,788
------ ------ -------
Net unpaid losses and loss
expenses, January 1 6,418 6,749 6,869
------ ------ -------
Incurred related to:
Current year accident losses 1,461 1,748 1,795
Prior year accident losses 570 21 41
------ ------ -------
Total incurred 2,031 1,769 1,836
------ ------ -------
Paid related to:
Current year accident losses 427 486 495
Prior year accident losses 1,203 1,577 1,317
------ ------ -------
Total paid 1,630 2,063 1,812
------ ------ -------
Sale of CRC and Viking (769) -- --
------ ------ -------
Other adjustments 421 (37) (144)
------ ------ -------
Net unpaid losses and loss
expenses, December 31 6,471 6,418 6,749
Reinsurance recoverable 2,290 2,391 2,935
------ ------ -------
Gross unpaid losses and loss
expenses, December 31 $8,761 $8,809 $ 9,684
====== ====== =======
</TABLE>
The increase in 1995 incurred prior year accident losses compared to prior
years relates to reserve strengthening which was either identified by the
Company or negotiated in conjunction with the sale of Talegen. This includes the
recording of future Ridge Re loss development.
Other Financial Services. In 1993, the Company discontinued its Other
Financial Services (OFS) segment, which was composed of The Van Kampen Merritt
Companies, Inc. (VKM), Furman Selz Holding Corporation (Furman Selz), Xerox
Financial Services Life Insurance Company (Xerox Life) and First Quadrant Corp.
In 1993, the Company sold VKM for approximately $360, which resulted in pre-
and after-tax gains of approximately $101 and $62, respectively. The proceeds
were used to retire debt.
Also in 1993, the Company sold Furman Selz for $99 and the proceeds were used
to retire debt. The gain on the sale was immaterial.
On June 1, 1995, the Company completed the sale of Xerox Life for
approximately $104 before settlement costs and capital funding of OakRe Life
Insurance Company (OakRe), a single-purpose XFSI subsidiary formed in 1994.
OakRe assumed responsibility for the Single Premium Deferred Annuity (SPDA)
policies issued by Xerox Life's Missouri and California companies via
coinsurance agreements. As a result of these coinsurance agreements, at December
31, 1995, the Company has retained on its consolidated balance sheet
approximately $2.5 billion of investment portfolio assets and reinsurance
reserves related to its former SPDA policies. These amounts will decrease
through the year 2000 as the SPDA policies are either terminated by the
policyholder or renewed and transferred to the buyer.
In connection with the aforementioned sale, XFSI established a $500 letter of
credit and line of credit with a group of banks to support OakRe's coinsurance
obligations. The term of this letter of credit is five years and it is unused
and available at December 31, 1995. Upon a drawing under the letter of credit,
XFSI has the option to cover the drawing in cash or to draw upon the credit
line.
In January 1996, the Company announced an agreement to sell the remaining
portion of First Quadrant Corp. This transaction is expected to close in the
first quarter of 1996 and is subject to regulatory approvals and customary
closing conditions.
62
<PAGE>
[PHOTO]
LINDA YOSHINO
Business Strategy & Planning
Real-Estate And Third-Party Financing. During the last five years, the
Company made substantial progress in disengaging from the Real-Estate and Third-
Party Financing businesses that were discontinued in 1990. During the three
years ended December 31, 1995, the Company received net cash proceeds of $614
($64 in 1995, $259 in 1994 and $291 in 1993) from the sale of individual assets
and from run-off collection activities. The amounts received were consistent
with the Company's estimates in the disposal plan and were used primarily to
retire debt.
The remaining assets primarily represent direct financing leases, many with
long-duration contractual maturities and unique tax attributes. Accordingly, the
Company expects that the wind-down of the portfolio will be slower during 1996
and in future years, as it was in 1995, compared with prior years.
Total Discontinued Operations. The consolidated financial statements have
been restated, as appropriate, to segregate the effect of the discontinued
operations. Debt has been assigned to discontinued operations based on
historical levels assigned to the businesses when they were continuing
operations adjusted for subsequent paydowns. Interest expense thereon is
primarily determined based on annual average domestic borrowing costs of the
Company. Assigned interest expense for the discontinued businesses for the years
ended December 31, 1995, 1994 and 1993 was $255, $246 and $291, respectively.
Summarized information of discontinued operations for the three years ended
December 31, 1995 follows:
<TABLE>
<CAPTION>
1995 1994 1993
------- ------ ------
<S> <C> <C> <C>
SUMMARY OF OPERATIONS
Income (loss) before income taxes $(1,025) $ (44) $ (29)
Income tax benefits 357 44 34
Gain (loss) on disposal (978) -- 62
------- ------ ------
Net income (loss) $(1,646) $ -- $ 67
======= ====== ======
BALANCE SHEET DATA
ASSETS
- ------
INSURANCE
Investment, net $ 1,623 $3,212 $3,667
------- ------ ------
OTHER FINANCIAL SERVICES
Investments 2,508 3,604 3,832
Other assets, net 190 541 523
------- ------ ------
OFS assets 2,698 4,145 4,355
------- ------ ------
REAL-ESTATE AND THIRD-
PARTY FINANCING
Gross finance receivables 472 538 841
Unearned income and other 17 9 (22)
------- ------ ------
Investment, net 489 547 819
------- ------ ------
Investment in
Discontinued Operations $ 4,810 $7,904 $8,841
======= ======= ======
LIABILITIES
- -----------
OFS policyholders' deposits $ 2,528 $3,576 $3,716
Other OFS liabilities 1 337 395
Assigned debt 281 281 474
------- ------ ------
Discontinued Operations Liabilities $ 2,810 $4,194 $4,585
======= ====== ======
</TABLE>
At December 31, 1995 and 1994, approximately $2.3 billion and $2.6 billion,
respectively, of third-party indebtedness assigned to the Company's Insurance
operations is included in the consolidated balance sheet caption Long-Term Debt.
The Company's net investment in discontinued operations is approximately
$2,000 and $3,710 at December 31, 1995 and 1994, respectively. The Company
believes that the liquidation of the remaining net discontinued assets will not
result in a net loss.
63
<PAGE>
10 Debt
Short-Term Debt. Short-term borrowings data of the Company at December 31,
1995 and 1994 follow:
<TABLE>
<CAPTION>
Weighted average
interest rates at
December 31, 1995 1995 1994
----------------- ------ ------
<S> <C> <C> <C>
Bank notes payable 7.72% $ 884 $ 235
Foreign commercial paper -- -- 1,024
------ -------
Total short-term debt 884 1,259
Current maturities of
long-term debt 2,381 1,900
------ ------
Total $3,265 $3,159
====== ======
</TABLE>
Bank notes payable generally represent foreign currency denominated borrowings
of non-U.S. subsidiaries.
Long-Term Debt. A summary of long-term debt, by final maturity date, at December
31, 1995 and 1994 follows:
<TABLE>
<CAPTION>
Weighted average
interest rates at
December 31, 1995 1995 1994
----- ------ ------
<S> <C> <C> <C>
U.S. OPERATIONS:
XEROX CORPORATION (PARENT COMPANY)
Guaranteed ESOP notes due 1999-2004 7.62% $ 547 $ 596
Notes due 1995 -- -- 350
Notes due 1996 8.77 420 100
Notes due 1997 9.63 200 200
Notes due 1999 5.21 484 738
Notes due 2000 7.33 600 300
Notes due 2001 7.39 62 62
Notes due 2002 8.13 200 200
Notes due 2004 7.15 200 225
Notes due 2005 7.15 50 --
Notes due 2006 -- -- 45
Notes due 2007 7.38 25 --
Other debt due 1995-2014 8.24 97 97
Capital lease obligations 5.60 5 7
------ ------
Subtotal 2,890 2,920
------ ------
XEROX FINANCIAL SERVICES, INC. (XFSI)
XEROX CREDIT CORPORATION
Notes due 1995 -- -- 400
Notes due 1996 8.39 850 670
Notes due 1997 5.75 677 347
Notes due 1998 6.50 220 --
Notes due 1999 10.00 150 150
Notes due 2000 7.13 303 --
Floating rate notes due 2048 5.80 61 61
Other debt due 1996 10.00 18 19
----- -----
Subtotal 2,279 1,647
OTHER XFSI DEBT
XFSI Notes due 1995-1996 9.05 135 310
----- -----
Subtotal 2,414 1,957
----- -----
TOTAL U.S. OPERATIONS $5,304 $ 4,877
----- -----
Weighted average
interest rates at
December 31, 1995 1995 1994
----- ----- -----
INTERNATIONAL OPERATIONS:
INTERNATIONAL MARKETING AND
FINANCE SUBSIDIARIES
Various obligations, payable in:
Canadian dollars due 1995-2007 10.68% $ 263 $ 265
Dutch guilders due 1995-1999 6.48 216 187
French francs due 1995-1998 7.79 76 76
German marks due 1995-1999 6.60 280 297
Pounds sterling due 1995-1997 7.69 283 353
Swiss francs due 1995-1999 5.50 81 96
Italian lira due 1995-1997 11.08 99 81
U.S. dollars due 1995-1999 6.56 268 220
Other currencies due 1995-1999 8.22 363 314
Capital lease obligations 8.94 9 14
----- -----
TOTAL INTERNATIONAL OPERATIONS 1,938 1,903
----- -----
OTHER BORROWINGS DEEMED
LONG-TERM 3,287 2,475
----- -----
Subtotal 10,529 9,255
Less current maturities 2,381 1,900
----- -----
TOTAL LONG-TERM DEBT $8,148 $7,355
===== =====
</TABLE>
Consolidated Long-Term Debt Maturities. Payments due on long-term
debt for the next five years follow:
1996 1997 1998 1999 2000 Thereafter
---- ---- ---- ---- ---- ----------
$2,381 $1,431 $ 543 $1,076 $ 704 $1,107
====== ====== ====== ====== ====== ======
These payments do not include amounts relating to domestic commercial paper
and foreign bank notes payable which have been classified as long-term debt
under the caption Other borrowings deemed long-term. These borrowings are
classified as long-term because the Company has the intent to refinance them on
a long-term basis, and the ability to do so under its revolving credit
agreement.
Certain of the Company's debt agreements allow the Company to redeem
outstanding debt prior to scheduled maturity. Outstanding debt issues with these
call features are classified in the preceding five-year maturity table in
accordance with management's current expectations. The actual decision as to
early redemption will be made at the time the early redemption option becomes
exercisable and will be based on prevailing economic and business conditions.
64
<PAGE>
Lines Of Credit. The Company's domestic operations have a revolving credit
agreement totaling $5.0 billion with a group of banks, which expires in 2000.
This agreement is unused and is available to back the Company's domestic
commercial paper borrowings, which amounted to $2.8 billion and $2.4 billion at
December 31, 1995 and 1994, respectively. In addition, the Company's foreign
subsidiaries had unused committed long-term lines of credit aggregating $1.7
billion in various currencies at prevailing interest rates that are used to back
short-term indebtedness.
[PHOTO]
NAVIN CHHEDA
North American
Capital Markets
Match Funding Of Finance Receivables And Indebtedness. The Company employs a
match funding policy for customer financing assets and related liabilities.
Under this policy, which is more fully discussed in the accompanying Financial
Review on Page 45, the interest and currency characteristics of the indebtedness
are, in most cases, matched to the interest and currency characteristics of the
finance receivables. At December 31, 1995, these operations had approximately
$10.7 billion of net finance receivables, which will service approximately $8.8
billion of assigned short- and long-term debt, including $0.3 billion of debt
assigned to discontinued third-party financing businesses.
Guarantees. At December 31, 1995, the Company has guaranteed $506 of
indebtedness of its Latin American subsidiaries and the borrowings of its ESOP.
Interest. Including amounts relating to debt assigned to discontinued
operations, interest paid by the Company on its short- and long-term debt
amounted to $705, $751 and $860, respectively, for the years ended December 31,
1995, 1994 and 1993.
Total Short-And Long-Term Debt. The Company's total indebtedness, excluding
the direct indebtedness of Talegen, at December 31, 1995 and 1994 is reflected
in the consolidated balance sheet captions as follows:
1995 1994
------- -------
Short-term debt and current portion
of long-term debt 3,265 $ 3,159
Long-term debt 7,867 7,074
Discontinued operations liabilities --
policyholders' deposits and other 281 281
------- -------
Total debt $11,413 $10,514
======= =======
A summary of changes in consolidated indebtedness for the three years ended
December 31, 1995 follows:
1995 1994 1993
------- ------- -------
Increase (decrease) in short-term
debt, net $ 94 $ (146) $ (451)
Proceeds from long-term debt 3,169 2,058 1,866
Principal payments on
long-term debt (2,497) (1,555) (1,784)
------- ------- -------
Subtotal 766 357 (369)
Less discontinued operations -- (193) (584)
------- ------- -------
Total change in debt of
continuing operations $ 766 $ 550 $ 215
======= ======= =======
11 Financial Instruments
Derivative Financial Instruments. Certain financial instruments with off-
balance-sheet risk have been entered into by the Company to manage its interest
rate and foreign currency exposures. These instruments are held solely for
hedging purposes and include interest rate swap agreements, forward-foreign
exchange contracts and foreign currency swap agreements. The Company does not
enter into derivative instrument transactions for trading or other speculative
purposes.
65
<PAGE>
The Company typically enters into simple, unleveraged derivative transactions
which, by their nature, have low credit and market risk. The Company's policies
on the use of derivative instruments prescribe an investment grade counterparty
credit floor and at least quarterly monitoring of market risk on a counterparty-
by-counterparty basis. The Company utilizes numerous counterparties to ensure
that there are no significant concentrations of credit risk with any individual
counterparty or groups of counterparties. Based upon its ongoing evaluation of
the replacement cost of its derivative transactions and counterparty
creditworthiness, the Company considers the risk of credit default significantly
affecting its financial position or results of operations to be remote.
The Company employs the use of hedges to reduce the risks that rapidly
changing market conditions may have on the underlying transactions. Typically,
the Company's currency and interest rate hedging activities are not affected by
changes in market conditions as forward contracts and swaps are arranged and
normally held to maturity in order to lock in currency rates and interest
spreads related to underlying transactions.
None of the Company's hedging activities involve exchange traded instruments.
Interest Rate Swaps. The Company enters into interest rate swap agreements to
manage interest rate exposure. An interest rate swap is an agreement to exchange
interest rate payment streams based on a notional principal amount. The Company
follows settlement accounting principles for interest rate swaps whereby the net
interest rate differentials to be paid or received are recorded currently as
adjustments to interest expense.
Virtually all customer financing assets earn fixed rates of interest.
Accordingly, through the use of interest rate swaps in conjunction with the
contractual maturity terms of outstanding debt, the Company "locks in" an
interest spread by arranging fixed-rate interest obligations with maturities
similar to the underlying assets. Additionally, customer financing assets are
consistently funded with liabilities denominated in the same currency. The
Company refers to the effect of these conservative practices as "match funding"
its customer financing assets. This practice effectively eliminates the risk of
a major decline in interest margins resulting from adverse changes in the
interest rate environment. Conversely, this practice does effectively eliminate
the opportunity to materially increase margins when interest rates are
declining.
The aggregate notional amounts of interest rate swaps by maturity date and
type at December 31, 1995 and 1994 follow:
<TABLE>
1995 1996 1997-1999 2000-2007 Total
------ ------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
1995 Pay fixed/receive variable $ -- $ 1,466 $3,244 $ 291 $5,001
Pay variable/receive variable -- 150 625 273 1,048
Pay variable/receive fixed -- 168 37 830 1,035
------ ------- ------- ------- ------
Total $ -- $ 1,784 $3,906 $1,394 $7,084
====== ======= ======= ======= ======
Memo:
Interest rate paid -- 6.61% 6.83% 6.71% 6.75%
Interest rate received -- 6.69% 5.94% 7.08% 6.35%
====== ======= ======= ======= ======
1994 Pay fixed/receive variable $1,071 $ 1,137 $1,390 $ 200 $3,798
Pay variable/receive variable 100 150 175 274 699
Pay variable/receive fixed -- 31 35 416 482
------ ------- ------- ------- ------
Total $1,171 $ 1,318 $1,600 $ 890 $4,979
====== ======= ======= ======= ======
Memo:
Interest rate paid 6.41% 6.78% 7.41% 7.28% 6.72%
Interest rate received 5.44% 5.60% 6.07% 7.06% 6.02%
====== ====== ======= ======= ======
</TABLE>
66
<PAGE>
More specifically, pay fixed/receive variable interest rate swaps are often
used in place of more expensive fixed rate debt for the purpose of match funding
fixed rate customer contracts. Pay variable/receive variable interest rate swaps
("basis swaps") are used to transform variable rate, medium-term debt into
commercial paper or local currency LIBOR rate obligations. Occasionally, pay
variable/receive fixed interest rate swaps are used to transform term fixed rate
debt into variable rate obligations. The transactions performed within each of
these three categories enable the cost-effective management of interest rate
exposures. During 1995, the average notional amount of an interest rate swap
agreement was $23.
At December 31, 1995 and 1994, the total notional amounts of these
transactions, based on contract maturity, follow:
1995 1994
------ ------
Commercial paper/bank borrowings $1,784 $1,171
Medium-term debt 3,906 2,193
Long-term debt 1,394 1,615
------ ------
Total $7,084 $4,979
====== ======
For the three years ended December 31, 1995, no interest rate swap agreements
were terminated prior to maturity.
Forward-Foreign Exchange Contracts. The Company utilizes forward-foreign
exchange contracts to hedge against the potentially adverse impacts of foreign
currency fluctuations on foreign currency denominated receivables and payables
and firm foreign currency commitments. Firm foreign currency commitments
generally represent committed purchase orders for foreign sourced inventory.
These contracts generally mature in six months or less. At December 31, 1995 and
1994, the Company had outstanding forward-foreign exchange contracts of $1,474
and $1,476, respectively. Of the outstanding contracts at December 31, 1995, the
largest single currency represented was the Japanese yen. Contracts denominated
in Japanese yen, Pounds sterling, French francs, Italian lira, German
deutschmarks and Swiss francs accounted for over 75 percent of the Company's
forward-foreign exchange contracts. Gains and losses on contracts that hedge
foreign currency denominated receivables and payables are reported currently in
income and are included in Other, net in the consolidated statements of income.
Gains and losses on contracts that hedge firm commitments are deferred and
subsequently recognized as part of the cost of the underlying transaction,
such as inventory. At December 31, 1995, deferred losses amounted to $32. During
1995, the average notional amount of a forward-foreign exchange contract
amounted to $6.
[PHOTO]
RUTH BOSCO
Corporate
Accounting
Services
Foreign Currency Swap Agreements. During 1995, the Company entered into a
foreign currency and related interest rate swap agreement, whereby the Company
issued foreign currency denominated debt and swapped the proceeds with a
counterparty. In return, the Company received and effectively denominated the
debt in U.S. dollars. Currency swaps are utilized as hedges of the underlying
foreign currency borrowings, and exchange gains or losses are recognized
currently in Other, net in the consolidated statements of income. At December
31, 1995, a $53 foreign currency and related interest rate swap agreement was
outstanding.
67
<PAGE>
Fair Value Of Financial Instruments. The estimated fair values of the Company's
financial instruments at December 31, 1995 and 1994 follow:
1995 1994
---------------- -----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ------ -------- ------
Cash $ 130 $ 130 $ 35 $ 35
Accounts receivable, net 1,894 1,894 1,811 1,811
Short-term debt 884 884 1,259 1,259
Long-term debt 10,529 10,864 9,255 9,458
Interest rate and currency
swap agreements -- (73) -- (10)
Forward-foreign exchange
contracts -- (29) -- (7)
The fair value amounts for Cash, Accounts receivable, net and Short-term debt
approximate carrying amounts due to the short maturities of these instruments.
The fair value of long-term debt was estimated based on quoted market prices
for these or similar issues or on the current rates offered to the Company for
debt of the same remaining maturities. The difference between the fair value and
the carrying value represents the theoretical net premium the Company would have
to pay to retire all debt at such date. The Company has no plans to retire
significant portions of its long-term debt prior to scheduled maturity. The
Company is not required to determine the fair value of its finance receivables,
the match funding of which is the source of much of the Company's interest rate
swap activity.
The fair values for interest rate swap agreements and forward-foreign exchange
contracts were calculated by the Company based on market conditions at year-end
and supplemented with quotes from brokers. They represent amounts the Company
would receive (pay) to terminate/ replace these contracts. The Company has no
present plans to terminate/replace significant portions of these contracts.
12 Employee Benefit Plans
Retirement Income Guarantee Plan (RIGP). Approximately 51,000 salaried and
union employees participate in the Company's RIGP plans. The RIGP plans are
defined benefit plans, which provide employees with the greater of (i) the
benefit calculated under a highest average pay and years of service formula,
(ii) the benefit calculated under a formula that provides for the accumulation
of salary and interest credits during an employee's work life, or (iii) the
individual account balance from the Company's prior defined contribution plan
(Transitional Retirement Accounts or TRA).
At December 31, 1995, these domestic plans accounted for approximately 65
percent of the Company's total pension assets and were invested as follows:
domestic and international equity securities -69 percent; fixed-income
investments -28 percent; and real estate -3 percent. No plan assets are
invested in the stock of the Company.
The RIGP plans are in compliance with the minimum funding standards of the
Employee Retirement Income Security Act of 1974 (ERISA).
The transition asset and prior service cost are amortized over 15 years.
Pension costs are determined using assumptions as of the beginning of the year
while the funded status is determined using assumptions as of the end of the
year. The assumptions used in the accounting for the U.S. defined benefit plans
follow:
1995 1994 1993
---- ---- ----
Assumed discount rates 7.25% 8.75% 7.75%
Assumed rates for compensation
increases 4.25 5.75 5.25
Expected return on plan assets 9.50 9.50 9.50
==== ==== ====
The Company's discount rate considers, among other items, the aggregate effects
of a relatively young work force and, because pension benefits are settled at
retirement, the absence of retirees receiving pension benefits from plan assets.
Accordingly, the duration of the Company's pension obligation tends to be
relatively longer in comparison to other companies. Changes in the assumed
discount rates and rates of compensation increases primarily reflect changes in
the underlying rates of long-term inflation.
Other Plans. The Company maintains various supplemental executive retirement
plans (SERPs) that are not tax-qualified and are unfunded.
The Company sponsors numerous pension plans for its international operating
units in Europe, Canada and Latin America, which generally provide pay- and
service-related
68
<PAGE>
benefits. Plan benefits are provided through a combination of funded trusteed
arrangements or through book reserves. The Rank Xerox pension plan in the United
Kingdom is the largest international plan and accounted for approximately 22
percent of the Company's total pension assets at December 31, 1995. It is
primarily invested in marketable equity securities.
[PHOTO]
LOLITA WHITE
Xerox United Way Campaign
Financial Information. The Company's disclosures about the funded status and
components of pension cost are in accordance with U.S. accounting principles.
Such principles recognize the long-term nature of pension plan obligations and
the need to make assumptions about events many years into the future. In any
year there may be significant differences between a plan's actual experience and
its actuarially assumed experience. Such differences are deferred and do not
generally affect current net pension cost. The objective of deferring such
differences is to allow actuarial gains and losses an opportunity to offset over
time. These deferrals are included in the captions Unrecognized net gain (loss)
and Net amortization and deferrals in the accompanying tables. Due to variations
in investment results, the effect of revising actuarial assumptions, and actual
plan experience which differs from assumed experience, certain of the Company's
plans may be classified as overfunded in one year and underfunded in another
year. Under ERISA and other laws, the excess assets of overfunded plans are not
available to fund deficits in other plans.
The non-funded plans are the SERPs and the Rank Xerox pension plans in Germany
and Austria. For tax reasons, these plans are most efficiently and customarily
funded on a pay-as-you-go basis.
A reconciliation of the funded status of the Company's retirement plans to the
amounts accrued in the Company's consolidated balance sheets at December 31,
1995 and 1994 follows:
<TABLE>
<CAPTION>
1995 1994
------------------------------------- -------------------------------------
Over- Under- Non- Over- Under- Non-
funded funded funded Total funded funded funded Total
------ ------ ------ ----- ------ ------ ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Accumulated benefit obligation $5,066 $ 41 $ 240 $5,347 $4,559 $ 17 $ 210 $4,786
Effect of projected compensation
increases 440 37 53 530 418 4 40 462
------ ------ ------ ----- ------ ------ ------ -----
Projected benefit obligation (PBO) 5,506 78 293 5,877 4,977 21 250 5,248
Plan assets at fair value 5,830 38 -- 5,868 5,263 12 -- 5,275
------ ------ ------ ----- ------ ------ ------ -----
Excess (deficit) of plan assets over PBO 324 (40) (293) (9) 286 (9) (250) 27
Items not yet reflected in the financial
statements:
Unamortized transition obligations
(assets) (137) 19 12 (106) (154) 3 14 (137)
Unrecognized prior service cost 48 -- (12) 36 54 -- (12) 42
Unrecognized net (gain) loss 49 (14) 31 66 55 6 18 79
------ ------ ------ ----- ------ ------ ------ -----
Prepaid (accrued) pension cost recognized
in the consolidated balance sheets at
December 31 $ 284 $(35) $(262) $ (13) $ 241 $ -- $ (230) $ 11
====== ====== ====== ===== ====== ====== ====== =====
</TABLE>
69
<PAGE>
The components of pension cost for the three years ended December 31, 1995
follow:
1995 1994 1993
----- ----- -----
DEFINED BENEFIT PLANS
Service cost $ 143 $ 150 $ 149
----- ----- -----
Interest cost--change in PBO
due to:
Passage of time 186 171 159
Net investment income (loss)
allocated to TRA accounts 624 (45) 538
----- ----- -----
Subtotal 810 126 697
----- ----- -----
Net investment (income) loss on:
TRA assets (624) 45 (538)
Other plan assets (372) (96) (412)
----- ----- -----
Subtotal (996) (51) (950)
----- ----- -----
Net amortization and deferrals 120 (144) 205
----- ----- -----
Settlement and curtailment gains (32) (12) (4)
----- ----- -----
DEFINED BENEFIT PLANS
--net pension cost 45 69 97
DEFINED CONTRIBUTION PLAN
--pension cost 13 13 22
----- ----- -----
Total pension cost $ 58 $ 82 $ 119
===== ===== =====
Pension cost in 1995 and 1994 was lower than in prior years because of the
reduction of the work force in connection with the restructuring actions
announced in December 1993. Plan assets consist of both defined benefit plan
assets and assets legally allocated to the TRA accounts. The combined investment
results of the assets are shown above in the net investment income caption. To
the extent investment results relate to TRA, such results are credited to these
accounts as a component of interest cost. The TRA account assets were $3.4
billion and $3.0 billion at December 31, 1995 and 1994, respectively. Because a
substantial portion of plan assets are TRA-related and are equal to TRA-related
liabilities, the Company's pension plans' funding surplus tends to be less than
that of comparable companies.
Other Postretirement Benefits. The primary plan for U.S. salaried employees
retiring on or after January 1, 1995 provides retirees an annual allowance that
can be used to purchase medical and other benefits. The allowance available to
each eligible employee is partially service related and, for financial
accounting purposes, is projected to increase at an annual rate of 7.5 percent
until it reaches the plan's annual maximum coverage of approximately 2.5 times
the 1992 level, the inception year of this plan.
The Company also has other postretirement benefit plans that cover employees
retiring prior to January 1, 1995 and certain grandfathered employees. These
other plans are generally indemnity arrangements that provide varying levels of
benefit coverage. The medical inflation assumption for these plans is 8.50
percent in 1995 and declines to 5.25 percent in 2002 and thereafter. A one
percentage point increase in the medical inflation assumptions would increase
the service and interest cost for these plans by $6 and the accumulated
postretirement benefit obligation by $57.
The discount rate used to determine the funded status was 7.25 percent at
December 31, 1995, 8.75 percent at December 31, 1994 and 7.50 percent at
December 31, 1993.
[PHOTO]
BILL MECK
Xerox Foundation
70
<PAGE>
A reconciliation of the financial status of the plans as of December 31 follows:
1995 1994 1993
------ ------ ------
Accumulated Postretirement
Benefit Obligation:
Retirees $ 506 $ 470 $ 471
Fully eligible employees 251 205 249
Other employees 219 247 339
------ ------ ------
Total 976 922 1,059
Unrecognized net gain (loss) 42 84 (62)
------ ------ ------
Accrued cost recognized in the
consolidated balance sheets $1,018 $1,006 $ 997
====== ====== ======
The components of postretirement benefit cost for the three years ended
December 31, 1995 follow:
1995 1994 1993
------ ------ ------
Service cost $ 19 $ 27 $ 28
Interest cost 70 66 73
Net amortization (4) -- --
Settlement gain (8) (25) --
------ ------ ------
Total $ 77 $ 68 $ 101
====== ====== ======
These plans are most efficiently and customarily funded on a pay-as-you-go
basis.
Employee Stock Ownership Plan (ESOP) Benefits. In 1989, the Company
established an ESOP and sold to it ten million shares of Series B Convertible
Preferred Stock (Convertible Preferred) of the Company for a purchase price of
$785. The Convertible Preferred has a $1 par value, a guaranteed minimum value
of $78.25 per share and accrues annual dividends of $6.25 per share. The ESOP
borrowed the purchase price from a group of lenders. Because the ESOP borrowings
are guaranteed by the Company, they are included in debt in the Company's
consolidated balance sheets. A corresponding amount classified as Deferred ESOP
Benefits represents the Company's commitment to future compensation expense
related to the ESOP benefits.
The ESOP will repay its borrowings from dividends on the Convertible Preferred
and from Company contributions. The ESOP's debt service is structured such that
the Company's annual contributions (in excess of dividends) essentially
correspond to a specified level percentage of participant compensation. As the
borrowings are repaid, the Convertible Preferred is allocated to ESOP
participants and Deferred ESOP Benefits are reduced by principal payments on the
borrowings. Most of the Company's employees are eligible to participate in the
ESOP.
Information relating to the ESOP and the Company for the three years ended
December 31, 1995 follows:
1995 1994 1993
------ ------ ------
Interest on ESOP borrowings $ 45 $ 49 $ 52
====== ====== ======
Dividends declared on Convertible
Preferred Stock $ 59 $ 61 $ 62
====== ====== ======
Cash contribution to the ESOP $ 34 $ 32 $ 30
====== ====== ======
Compensation expense $ 35 $ 32 $ 31
====== ====== ======
ESOP costs are recognized by the Company based on the amount committed to be
contributed to the ESOP plus related trustee, finance and other charges.
13 Income Taxes
The parent Company and its domestic subsidiaries file consolidated U.S. income
tax returns. Generally, pursuant to tax allocation arrangements, domestic
subsidiaries record their tax provisions and make payments to the parent Company
for taxes due or receive payments from the parent Company for tax benefits
utilized.
Income before income taxes from continuing operations for the three years
ended December 31, 1995 consists of the following:
1995 1994 1993
------ ------ ------
Domestic income (loss) $ 747 $ 713 $(499)
Foreign income 1,100 801 219
------ ------ -----
Income (loss) before income taxes $1,847 $1,514 $(280)
====== ====== =====
Provisions for income taxes (benefits) from continuing operations for the
three years ended December 31, 1995 consist of the following:
1995 1994 1993
------ ------ ------
Federal income taxes
Current $ 285 $ 160 $ 182
Deferred (21) 100 (337)
Foreign income taxes
Current 178 88 87
Deferred 110 182 (3)
State income taxes
Current 57 46 42
Deferred 6 19 (49)
----- ----- -----
Income taxes (benefits) $ 615 $ 595 $ (78)
===== ===== =====
71
<PAGE>
A reconciliation of the U.S. Federal statutory income tax rate to the
effective income tax rate for continuing operations for the three years ended
December 31, 1995 follows:
1995 1994 1993
------ ------ ------
U.S. Federal statutory income
tax rate 35.0% 35.0% (35.0)%
Foreign earnings and dividends
taxed at different rates 2.2 2.1 17.5
Goodwill amortization .3 -- --
Tax-exempt income (.6) (.7) (3.8)
Effect of tax rate changes on
deferred tax assets and
liabilities (5.3) -- (14.3)
State taxes 2.2 2.7 (1.6)
Change in valuation allowance
for deferred tax assets (.8) -- --
Other .3 .2 9.3
---- ---- ----
Effective income tax rate 33.3% 39.3% (27.9)%
==== ==== ====
The 1995 effective tax rate of 33.3 percent is 6 percentage points lower than
the 1994 rate. This lower 1995 rate is primarily caused by a decrease in
Brazilian corporate tax rates, which created a deferred tax benefit. This
benefit increased 1995 fourth quarter and full year net income by $98. Excluding
the Brazilian tax benefit, the 1995 effective tax rate was 38.6 percent.
The 1994 effective tax rate of 39.3 percent is 2 percentage points higher than
the 1993 tax rate before considering the effects of the 1993 restructuring
charge and litigation settlements. This higher 1994 rate is primarily caused by
deferred tax rate benefits, which only occurred in 1993, and is partially offset
by the increased tax benefits in 1994 associated with the mix of operations and
ESOP dividends.
On a consolidated basis, including the effects of dis-continued operations,
the Company paid a total of $182, $163 and $197 in income taxes to federal,
foreign and state income-taxing authorities in 1995, 1994 and 1993,
respectively.
Total income tax expense (benefit) for the three years ended December 31, 1995
was allocated as follows:
1995 1994 1993
------ ------ ------
Income from continuing operations $ 615 $ 595 $ (78)
Discontinued operations (374) (135) 5
Common shareholders' equity* (15) (19) (33)
----- ----- -----
Total $ 226 $ 441 $(106)
===== ===== =====
* For dividends paid on shares held by the ESOP; cumulative translation
adjustments; and unrealized gains and losses on investment securities.
Deferred income taxes have not been provided on the undistributed earnings of
foreign subsidiaries and other foreign investments carried at equity. The amount
of such earnings included in consolidated retained earnings at December 31, 1995
was approximately $3.4 billion. These earnings have been substantially
reinvested and the Company does not plan to initiate any action that would
precipitate the payment of income taxes thereon. It is not practicable to
estimate the amount of additional tax that might be payable on the foreign
earnings.
The tax effects of temporary differences that give rise to significant
portions of the deferred taxes at December 31, 1995 and 1994 follow:
1995 1994
------ ------
Tax effect of future tax deductions:
Depreciation $ 537 $ 469
Postretirement medical benefits 393 388
Restructuring reserves 194 342
Other operating reserves 337 290
Deferred intercompany profit 109 116
Allowance for doubtful accounts 73 83
Deferred compensation 132 134
Tax credit carryforwards 101 56
Research and development 87 --
Other 75 118
------ ------
Subtotal 2,038 1,996
Less valuation allowance 20 34
------ ------
Total $ 2,018 $ 1,962
====== ======
Tax effect of future taxable income:
Installment sales and leases $(1,309) $(1,262)
Leverage leases (35) (41)
Deferred income (146) (155)
Other (189) (117)
------ ------
Total $(1,679) $(1,575)
====== ======
The above amounts are classified as current or long-term in the consolidated
balance sheets in accordance with the asset or liability to which they relate.
Current deferred tax assets at December 31, 1995, 1994 and 1993 amounted to
$608, $709 and $711, respectively.
The $20 valuation allowance at December 31, 1995 applies to deferred tax
assets that may expire unused before the Company can utilize them. After
consideration of the valuation allowance, the Company concludes that it is more
likely than not that the deferred tax assets will be realized
72
<PAGE>
in the ordinary course of operations based on scheduling of deferred tax
liabilities and income from operating activities.
At December 31, 1995, the Company has tax credit carryforwards for federal
income tax purposes of $40 which are available to offset future federal income
taxes through 2000 and of $61 which are available to offset future federal
income taxes indefinitely.
14 Litigation
Continuing Operations. On March 10, 1994, a lawsuit was filed in the United
States District Court for the District of Kansas by two independent service
organizations (ISOs) in Kansas City and St. Louis and their parent company. On
April 15, 1994, another case was filed in the United States District Court for
the Northern District of California by 21 different ISOs from 12 states.
Plaintiffs in these actions claim damages (to be trebled) to their individual
businesses resulting from essentially the same alleged violations of law at
issue in the antitrust class action in Texas, which was settled by the Company
during 1994. Claims for individual lost profits of ISOs who were not named
parties were not included in that class action. In one of the pending cases
damages are unspecified and in the other damages in excess of $10 are sought. In
addition, injunctive relief is sought in both actions. The two actions have been
consolidated for pretrial proceedings in the District of Kansas. The Company has
asserted counter-claims against certain of the plaintiffs alleging patent and
copyright infringement, misappropriation of Xerox trade secrets, conversion and
unfair competition and/or false advertising. On December 11, 1995, the District
Court issued a preliminary injunction against the parent company of the Kansas
City and St. Louis ISOs for copyright infringement. The Company denies any
wrongdoing and intends to vigorously defend these actions and pursue its
counterclaims.
Discontinued Operations. Farm & Home Savings Association (Farm & Home) and
certain Talegen insurance companies (Insurance Companies) entered into an
agreement (Indemnification Agreement) under which the Insurance Companies are
required to defend and indemnify Farm & Home from certain actual and punitive
damage claims being made against Farm & Home relating to the Brio superfund site
(Brio). In a number of lawsuits pending against Farm & Home in the District
Courts of Harris County, Texas, several hundred plaintiffs seek both actual and
punitive damages allegedly relating to injuries arising out of the hazardous
substances at Brio. The Insurance Companies have been defending these cases
under a reservation of rights because it is unclear whether certain of the
claims fall under the coverage of either the policies or the Indemnification
Agreement. The Insurance Companies have been successful in having some claims
dismissed which were brought by plaintiffs who were unable to demonstrate a
pertinent nexus to the Southbend subdivision. However, there are numerous
plaintiffs who do have a nexus to the Southbend subdivision. The Insurance
Companies have been in settlement discussions with respect to claims brought by
plaintiffs who have or had a pertinent nexus to the Southbend subdivision. If
not settled, one or more of these cases can be expected to be tried in 1996.
- --------------------------------------------------------------------------------
[PHOTO]
Pictured here is a banner with the caption "Xerox ColorgrafX Systems produce
big, bold, beautiful color like these banners. Using front-end software to
produce final prints directly from a digital file, ColorgrafX printers eliminate
the intermediate steps associated with traditional methods, reducing turnaround
time and costs. Applications include point-of-sale displays, backlit signs,
trade show graphics, posters, billboards, backdrops for photography film and
video and window displays."
73
<PAGE>
15 Preferred Stock
The Company has 22.5 million authorized shares of cumulative preferred
stock, $1 par value. Two series of preferred stock are currently outstanding and
are described below.
Redeemable Preferred Stock. The Company's series of Ten-Year Preferred Stock
has an annual dividend rate of $3.6875 per share and is subject to redemption by
the Company through a sinking fund. The mandatory sinking fund for this series
is designed to retire 20 percent of the issue in each of the five years
beginning on April 1, 1994. Also, the Company has the non-cumulative option to
increase the annual sinking fund payments by an amount up to 100 percent of the
mandatory payment. During each of 1995 and 1994, 1 million shares were redeemed
at the sinking fund redemption price of $50 per share. A total of 0.5 million
shares of this series, with a recorded value of $25, is outstanding. Dividends
amounted to $3 in 1995; $7 in 1994; and $9 in 1993.
Shares issued under this series are non-voting, have cumulative dividends and
have a $50 per share liquidation preference over the Company's common stock.
The Company's former series of Twenty-Year Preferred Stock was redeemed in
1994 for $184, including a premium of $11. Dividends amounted to $5 in 1994 and
$14 in 1993.
Convertible Preferred Stock. As more fully described in Note 12 on Page 71,
the Company sold, for $785, 10 million shares of its new Series B Convertible
Preferred Stock (ESOP shares) in 1989 in connection with the establishment of
its ESOP. At December 31, 1995, 9.4 million of these shares remain outstanding.
As employees with vested ESOP shares leave the Company, these shares are
redeemed by the Company. The Company has the option to settle such redemptions
with either shares of common stock or cash.
Preferred Stock Purchase Rights. The Company has a shareholder rights plan
designed to deter coercive or unfair takeover tactics and to prevent a person or
persons from gaining control of the Company without offering a fair price to all
shareholders.
Under the terms of the plan, one preferred stock purchase right (Right)
accompanies each share of outstanding common stock. Each Right entitles the
holder to purchase from the Company one one-hundredth of a new series of
preferred stock at an exercise price of $225.
Within the time limits and under the circumstances specified in the plan, the
Rights entitle the holder to acquire common stock of the Company, the surviving
company in a business combination or the purchaser of the Company's assets,
having a value of two times the exercise price.
The Rights may be redeemed prior to becoming exercisable by action of the
Board of Directors at a redemption price of $.05 per Right. The Rights expire in
April 1997.
The Rights are non-voting and, until they become exercisable, have no dilutive
effect on the earnings per share or book value per share of the Company's common
stock.
[PHOTO]
JENNIFER POWELL
Rank Xerox
Corporate Communications
74
<PAGE>
16 Common Shareholders' Equity
The components of common shareholders' equity and the changes therein for
the three years ended December 31, 1995 follow:
<TABLE>
<CAPTION>
Net Unrealized
Common Stock Additional Gain (Loss) on
------------------- Paid-In Retained Investment Translation
(Shares in thousands) Shares Amount Capital Earnings Securities Adjustments Total
------- ------ ------- -------- ---------- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1992 95,066 $ 96 $ 650 $3,282 $ 6 $(159) $3,875
Issuance of common stock, net of
issuance costs 8,050 8 571 579
Stock option and incentive plans 861 1 57 58
Xerox Canada Inc. exchangeable stock 65 1 34 3 38
Convertible securities 80
Net loss (126) (126)
Cash dividends declared
Common stock ($3.00 per share) (304) (304)
Preferred stock (See Note 15 on
Page 74) (85) (85)
Tax benefits on ESOP dividends 23 23
Translation adjustments--net of
minority shareholders' interests
of $(24) (86) (86)
------- ------ ------- -------- ---------- ----------- -----
BALANCE AT DECEMBER 31, 1993 104,122 106 1,312 2,793 6 (245) 3,972
Stock option and incentive plans 1,056 1 94 (3) 92
Xerox Canada Inc. exchangeable stock 653
Convertible securities 162
Net income 794 794
Cash dividends declared
Common stock ($3.00 per share) (322) (322)
Preferred stock (See Note 15 on
Page 74) (73) (73)
Tax benefits on ESOP dividends 19 19
Call premium on preferred stock
(See Note 15 on Page 74) (11) (11)
Net unrealized loss on investment
securities (439) (439)
Translation adjustments--net of
minority shareholders' interests
of $93 145 145
------- ------ ------- -------- ---------- ----------- ------
BALANCE AT DECEMBER 31, 1994 105,993 107 1,406 3,197 (433) (100) 4,177
Stock option and incentive plans 1,654 2 146 (11) 137
Xerox Canada Inc. exchangeable stock 455
Convertible securities 241
Net loss (472) (472)
Net loss during stub period (21) (21)
Cash dividends declared
Common stock ($3.00 per share) (327) (327)
Preferred stock (See Note 15 on
Page 74) (62) (62)
Tax benefits on ESOP dividends 17 17
Net unrealized gain on investment
securities 432 432
Translation adjustments--net of
minority shareholders'
interests of $17 (3) (3)
------- ------ ------- -------- ---------- ----------- ------
BALANCE AT DECEMBER 31, 1995 108,343 $ 109 $1,552 $2,321 $ (1) $(103) $3,878
======= ====== ======= ======== ========== =========== ======
</TABLE>
75
<PAGE>
Common Stock. The Company has 350 million authorized shares of common stock,
$1 par value. At December 31, 1995 and 1994, 2.6 and 3.9 million shares,
respectively, were reserved for issuance under the Company's incentive
compensation plans. In addition, at December 31, 1995, 0.9 million common shares
were reserved for the conversion of $53 of convertible debt and 9.4 million
common shares were reserved for conversion of ESOP-related Convertible Preferred
Stock.
In January 1996, the Board of Directors approved a three-for-one stock split
of the Company's common stock, subject to shareholder approval of an increase in
the number of authorized shares from 350 million shares to 1,050 million shares.
Given shareholder approval, this action will become effective shortly after the
1996 annual shareholders' meeting.
In June 1993, the Company completed a public offering of 8.05 million shares
of its common stock in the U.S. and abroad, at a price of $74.25 per share. The
proceeds of the offering, after deducting underwriting commissions, were
approximately $580 or $72.10 per newly issued share, and were used to retire
commercial paper.
Stock Option And Long-Term Incentive Plans. The Company has a long-term
incentive plan whereby eligible employees may be granted incentive stock
options, nonqualified stock options, incentive stock rights, stock appreciation
rights (SARs) and performance unit rights. Subject to vesting and other
requirements, SARs and performance unit rights are typically paid in cash, and
stock options and incentive stock rights are settled with newly issued or
treasury shares of the Company's common stock. Substantially all long-term
incentive compensation plan awards in recent years have been in the form of non-
qualified stock options, performance units and incentive stock rights. Eligible
employees typically receive equal amounts of options and performance units.
Stock options granted prior to December 31, 1995, normally vest in two years and
normally expire five years from the date of grant. Stock options granted
subsequent to December 31, 1995, will vest in three years and will expire eight
years from the date of grant. Because the exercise price of the options is equal
to the market value of the Company's common stock on the date of grant, option
awards do not result in a charge to expense. The value of each performance unit
is typically
[PHOTO]
SAM LEE
Office of the General Counsel
76
<PAGE>
based upon the level of return on assets during the year in which
granted. Performance units ratably vest in the three years after the year
awarded.
At December 31, 1995 and 1994, 3.7 and 4.3 million shares, respectively, were
available for grant of options or rights. The following table provides
information relating to the status of, and changes in, options granted:
<TABLE>
<CAPTION>
1995 1994
--------------- ---------------
Average Average
Stock Option Stock Option
(Options in thousands) Options Price Options Price
------- ------ ------- ------
<S> <C> <C> <C> <C>
Outstanding at January 1 3,242 $ 84 3,210 $75
Granted 1,836 110 1,168 98
Canceled (76) 101 (51) 87
Exercised (1,364) 79 (1,032) 72
Surrendered for SARs (40) 47 (53) 51
------ -----
Outstanding at December 31 3,598 100 3,242 84
====== =====
Exercisable at
December 31, 1995 1,195
======
Becoming exercisable in 1996 1,275
======
</TABLE>
During 1995, Xerox Canada Inc. established an executive rights plan, which
grants participants at the executive level rights to acquire the Company's
common stock at the participants' option. The vesting, expiration, and exercise
price of each right are the same as stock options in the Company's long-term
incentive plans. No rights were granted or exercised under this plan during
1995.
Xerox Canada Inc. Exchangeable Class B Stock. In 1989, the shareholders of
Xerox Canada Inc. (XCI), a then 79 percent-owned subsidiary of the Company,
approved a restructuring plan which, among other provisions, amend- ed the
provisions of XCI's Common Shares. The XCI Common Shares had previously been
owned by public shareholders and represented the 21 percent of XCI not owned by
the Company. As a result of the approved restructuring plan, in 1989 a majority
of the XCI public shareholders became owners of XCI's new Non-Voting
Exchangeable Class B Shares (Exchangeable Shares) with a right to exchange three
Exchangeable Shares for one share of the common stock of the Company. In 1993,
the remaining XCI public shareholder entered into the restructuring plan. As a
result, the Company's shareholders' equity was increased by $38. At December 31,
1995, the Company has reserved 1.3 million shares of the Company's common stock
for purposes of this exchange.
- --------------------------------------------------------------------------------
[PHOTO]
Pictured here are three ribbons with the words "1995 Major Awards Honors."
THE SECRETARY OF THE U. S. DEPARTMENT OF LABOR'S OPPORTUNITY 2000 AWARD TO XEROX
FOR MULTIFACETED AFFIRMATIVE ACTION AND DIVERSITY PROGRAMS
THE DEPARTMENT OF LABOR'S FIRST PERKINS/DOLE GLASS CEILING AWARD TO XEROX FOR
SUCCESSFUL RECRUITMENT AND DEVELOPMENT OF MINORITIES AND WOMEN AND FOR EXPANDING
POLICIES AND PRACTICES IN ORDER TO REMOVE BARRIERS FACED BY MINORITIES AND WOMEN
MONEY MAGAZINE NAMED XEROX TOPS AMONG LARGE U.S. COMPANIES WITH THE BEST
BENEFITS
HISPANIC MAGAZINE, HONORED XEROX ON "HISPANIC 100" LIST OF COMPANIES THAT
PROVIDE THE MOST OPPORTUNITIES FOR HISPANICS
WORKING MOTHER MAGAZINE HONOR TO XEROX FOR COMMITMENT TO WORKING MOTHERS
ASAHI SHIMBUN FOUNDATION, CORPORATE CITIZENSHIP AWARD TO FUJI XEROX
JAPAN MINISTER FOR INTERNATIONAL TRADE AND INDUSTRY, AWARD TO FUJI XEROX FOR
WORKING ENVIRONMENT
NATIONAL QUALITY AWARD, XEROX URUGUAY
QUALITY SCOTLAND BUSINESS EXCELLENCE AWARD,
RANK XEROX (SCOTLAND)
NATIONAL QUALITY AWARD IN PORTUGAL TO RANK XEROX IN 1995. THIS 1994 EXCELLENCE
AWARD WAS THE FIRST TO BE PRESENTED IN PORTUGAL
NATIONAL WILDLIFE FEDERATION, CORPORATE CONSERVATION COUNCIL ENVIRONMENTAL
ACHIEVEMENT AWARD TO XEROX CORPORATION
GERMAN BLUE ANGEL ENVIRONMENTAL LABEL AWARD TO RANK XEROX FOR THE XEROX 5614
AND 5352 COPIERS
U.S. ENVIRONMENTAL PROTECTION AGENCY - STRATOSPHERIC OZONE PROTECTION AWARD TO
XEROX FOR EXEMPLARY EFFORTS TO PROTECT THE OZONE LAYER
FRENCH NATIONAL AGENCY OF ENVIRONMENT AND ENERGY MANAGEMENT, MARQUE RETOUR
AWARD TO RANK XEROX FRANCE
ALL-JAPAN INVITATIONAL QC CIRCLE CONVENTION GOLD AWARD TO FUJI XEROX
USA WEEKEND NATIONAL 'MAKE A DIFFERENCE DAY' AWARD TO A ROCHESTER-BASED GROUP
OF XEROX EMPLOYEE VOLUNTEERS WHO COLLECTED SEVERAL TRACTOR TRAILER-LOADS OF
NEARLY NEW ITEMS THAT WERE SOLD FOR NICKLES AND DIMES AT "THE FRIENDSHIP BARGAIN
BAZAAR" TO RESIDENTS OF ONE OF ROCHESTER'S NEEDIEST COMMUNITIES
77
<PAGE>
Quarterly Results of Operations
(Unaudited)
<TABLE>
<CAPTION>
First Second Third Fourth
(In millions, except per-share data) Quarter Quarter Quarter Quarter Full Year
------- ------- ------- ------- ---------
<S> <C> <C> <C> <C> <C>
1995
Revenues $3,770 $4,054 $4,027 $ 4,760 $16,611
Costs and expenses 3,403 3,642 3,612 4,107 14,764
------ ------ ------ ------- -------
Income before income taxes,
equity income and minorities' interests 367 412 415 653 1,847
Income taxes 142 160 160 153 615
Equity in net income of unconsolidated affiliates 13 51 38 30 132
Minorities' interests in earnings of subsidiaries 51 49 37 53 190
------ ------ ------ ------- -------
Income from continuing operations 187 254 256 477 1,174
Discontinued operations (40) (16) (20) (1,570) (1,646)
------ ------ ------ ------- -------
Net income (loss) $ 147 $ 238 $ 236 $(1,093) $ (472)
====== ====== ====== ======= =======
Primary earnings (loss) per share
Continuing operations $ 1.60 $ 2.21 $ 2.21 $ 4.18 $ 10.20
Discontinued operations (.37) (.14) (.18) (14.20) (14.89)
------ ------ ------ ------- -------
Primary earnings per share $ 1.23 $ 2.07 $ 2.03 $(10.02) $ (4.69)
====== ====== ====== ======= =======
Fully diluted earnings (loss) per share/1/
Continuing operations $ 1.54 $ 2.09 $ 2.09 $ 3.91 $ 9.63
Discontinued operations (.34) (.13) (.16) (14.20) (14.89)
------ ------ ------ ------- -------
Fully diluted earnings per share $ 1.20 $ 1.96 $ 1.93 $(10.29) $ (5.26)
====== ====== ====== ======= =======
1994
Revenues $3,271 $3,584 $3,636 $ 4,597 $15,088
Costs and expenses 3,009 3,274 3,290 4,001 13,574
------ ------ ------ ------- -------
Income before income taxes,
equity income and minorities' interests 262 310 346 596 1,514
Income taxes 104 121 136 234 595
Equity in net income of unconsolidated affiliates 5 33 25 25 88
Minorities' interests in earnings of subsidiaries 32 55 50 76 213
------ ------ ------ ------- -------
Income from continuing operations 131 167 185 311 794
Discontinued operations (2) 1 1 - -
------ ------ ------ ------- -------
Net income $ 129 $ 168 $ 186 $ 311 $ 794
====== ====== ====== ======= =======
Primary earnings (loss) per share
Continuing operations $ 1.07 $ 1.30 $ 1.60 $ 2.76 $ 6.73
Discontinued operations (.02) .01 .01 - -
------ ------ ------ ------- -------
Primary earnings per share $ 1.05 $ 1.31 $ 1.61 $ 2.76 $ 6.73
====== ====== ====== ======= =======
Fully diluted earnings (loss) per share
Continuing operations $ 1.04 $ 1.27 $ 1.53 $ 2.60 $ 6.44
Discontinued operations (.01) .01 - - -
------ ------ ------ ------- -------
Fully diluted earnings per share $ 1.03 $ 1.28 $ 1.53 $ 2.60 $ 6.44
====== ====== ====== ======= =======
/1/ Quarterly primary and fully diluted earnings per share may differ from full
year amounts because of changes in the number of shares outstanding during the
year.
</TABLE>
78
<PAGE>
Reports Of Management And Independent Auditors
Report Of Management
Xerox Corporation management is responsible for the integrity and objectivity
of the financial data presented in this annual report. The consolidated
financial statements were prepared in conformity with generally accepted
accounting principles and include amounts based on management's best estimates
and judgments.
The Company maintains an internal control structure designed to provide
reasonable assurance that assets are safeguarded against loss or unauthorized
use and that financial records are adequate and can be relied upon to produce
financial statements in accordance with generally accepted accounting
principles. This structure includes the hiring and training of qualified people,
written accounting and control policies and procedures, clearly drawn lines of
accountability and delegations of authority. In a business ethics policy that is
communicated annually to all employees, the Company has established its intent
to adhere to the highest standards of ethical conduct in all of its business
activities.
The Company monitors its internal control structure with direct management
reviews and a comprehensive program of internal audits. In addition, KPMG Peat
Marwick LLP, independent auditors, have audited the consolidated financial
statements and have reviewed the internal control structure to the extent they
considered necessary to support their report, which follows.
The Audit Committee of the Board of Directors, which is composed solely of
outside directors, meets regularly with the independent auditors, the internal
auditors and representatives of management to review audits, financial
reporting and internal control matters, as well as the nature and extent of the
audit effort. The Audit Committee also recommends the engagement of independent
auditors, subject to shareholder approval. The independent auditors and inter-
nal auditors have free access to the Audit Committee.
/s/ Paul A. Allaire
Paul A. Allaire
Chairman of the Board and
Chief Executive Officer
/s/ Barry D. Romeril
Barry D. Romeril
Executive Vice President and
Chief Financial Officer
Report Of Independent Auditors
To the Board of Directors and Shareholders
of Xerox Corporation
We have audited the consolidated balance sheets of Xerox Corporation and
consolidated subsidiaries as of December 31, 1995 and 1994, and the related
consolidated statements of income and cash flows for each of the years in the
three-year period ended December 31, 1995. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements appearing on Pages 32,
41, 46, and 54-77 present fairly, in all material respects, the financial
position of Xerox Corporation and consolidated subsidiaries as of December 31,
1995 and 1994, and the results of their operations and their cash flows for each
of the years in the three-year period ended December 31, 1995, in conformity
with generally accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
KPMG PEAT MARWICK LLP
Stamford, Connecticut
January 24, 1996
79
<PAGE>
Ten Years In Review
<TABLE>
<CAPTION>
(Dollars in millions, except
per-share data) 1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
Per-Share Data
Earnings (loss) from continuing
operations
Primary $ 10.20 $ 6.73 $ (2.50) $ 5.21 $ 3.72
Fully diluted 9.63 6.44 (2.50) 5.21 3.69
Dividends declared 3.00 3.00 3.00 3.00 3.00
Operations
Revenues $16,611 $15,088 $14,229 $14,298 $ 13,438
Research and development expenses 951 895 883 922 890
Income (loss) from continuing
operations 1,174 794 (193) 562 436
Net income (loss) (472) 794 (126) (1,020) 454
Financial Position
Accounts and finance
receivables, net $12,369 $11,759 $10,565 $10,250 $ 8,952
Inventories 2,646 2,294 2,162 2,257 2,091
Land, buildings and equipment,
net 2,092 2,108 2,219 2,150 1,950
Investment in discontinued
operations 4,810 7,904 8,841 8,652 9,164
Total assets 25,969 27,278 26,999 25,792 24,342
Consolidated capitalization
Short-term debt 3,265 3,159 2,698 2,533 2,038
Long-term debt 8,148 7,355 7,386 8,105 7,825
Total debt 11,413 10,514 10,084 10,638 9,863
Deferred ESOP benefits (547) (596) (641) (681) (720)
Minorities' interests in
equity of subsidiaries 745 1,021 844 885 818
Preferred stock 763 832 1,066 1,072 1,078
Common shareholders' equity 3,878 4,177 3,972 3,875 5,140
Total capitalization 16,252 15,948 15,325 15,789 16,179
Selected Data and Ratios
Common shareholders of record at
year-end 54,262 56,414 65,820 68,877 71,213
Book value per common share/1/ $ 35.48 $ 38.86 $ 37.69 $ 40.19 $ 54.43
Year-end common share market
price $137.00 $ 99.00 $ 88.13 $ 79.25 $ 68.50
Employees at year-end 85,200 87,600 97,000 99,300 100,900
Working capital $ 2,834 $ 2,411 $ 2,357 $ 2,578 $ 2,282
Current ratio 1.4 1.4 1.4 1.5 1.5
Additions to land, buildings and
equipment $ 438 $ 389 $ 470 $ 582 $ 467
Depreciation on land, buildings
and equipment $ 376 $ 446 $ 437 $ 418 $ 397
* Data that conforms with the 1995 basis of presentation were not available.
/1/ Book value per common share is computed by dividing common shareholders'
equity by outstanding common shares plus common shares reserved for the
conversion of the Xerox Canada Inc. Exchangeable Class B stock.
</TABLE>
80
<PAGE>
Ten Years In Review
<TABLE>
<CAPTION>
(Dollars in millions, except
per-share data) 1990 1989 1988 1987 1986
<S> <C> <C> <C> <C> <C>
Per-Share Data
Earnings (loss) from continuing
operations
Primary $ 5.44 $ 4.39 $ 1.13 $ 3.06 $ 2.73
Fully diluted 5.21 4.36 1.13 3.05 2.73
Dividends declared 3.00 3.00 3.00 3.00 3.00
Operations
Revenues $13,210 $12,095 $ 11,354 $10,537 $ 9,493
Research and development expenses 848 809 794 722 650
Income (loss) from continuing
operations 599 488 148 353 316
Net income (loss) 243 704 388 578 465
Financial Position
Accounts and finance
receivables, net $ 8,016 $ 7,272 $ 6,109 $ 4,948 $ 3,887
Inventories 2,148 2,413 2,558 2,286 2,459
Land, buildings and equipment,
net 1,851 1,781 1,803 1,639 1,491
Investment in discontinued
operations 9,695 * * * *
Total assets 24,116 * * * *
Consolidated capitalization
Short-term debt 1,828 1,482 1,174 * *
Long-term debt 8,726 9,247 6,675 * *
Total debt 10,554 10,729 7,849 5,771 4,343
Deferred ESOP benefits (756) (785) - - -
Minorities' interests in
equity of subsidiaries 832 715 806 655 565
Preferred stock 1,081 1,081 296 442 442
Common shareholders' equity 5,051 5,035 5,371 5,105 4,687
Total capitalization 16,762 16,775 14,322 11,973 10,037
Selected Data and Ratios
Common shareholders of record at
year-end 74,994 78,876 84,864 86,388 90,437
Book value per common share/1/ $ 53.73 $ 53.59 $ 52.22 $ 51.00 $ 48.00
Year-end common share market
price $ 35.50 $ 57.25 $ 58.38 $ 56.63 $ 60.00
Employees at year-end 99,000 99,000 100,000 99,200 100,400
Working capital $ 2,537 * * * *
Current ratio 1.6 * * * *
Additions to land, buildings and
equipment $ 405 $ 390 $ 418 $ 347 $ 328
Depreciation on land, buildings
and equipment $ 372 $ 370 $ 369 $ 320 $ 283
* Data that conforms with the 1995 basis of presentation were not available.
/1/ Book value per common share is computed by dividing common shareholders'
equity by outstanding common shares plus common shares reserved for the
conversion of the Xerox Canada Inc. Exchangeable Class B stock.
</TABLE>
Dividends And Stock Prices
Consecutive Dividends Paid To Shareholders
During 1995, dividends paid to the Company's common stock shareholders totaled
$3.00 per share, unchanged from 1994 and 1993. Xerox has declared dividends to
its shareholders for 66 consecutive years and has paid consecutive quarterly
dividends since 1948.
The Company's Board of Directors, at a special meeting held January 23, 1996,
declared dividends on Xerox common stock at an increased rate of $.87 per share,
a 16 percent increase from the prior quarterly rate of $.75 per share. At its
February 5, 1996 meeting, the Board declared dividends on the Company's two
issues of preferred stock, unchanged from previous quarterly payments. Payments
on the $3.6875 Ten-Year Sinking Fund Preferred are $0.921875 per share. Payments
on the Series B Convertible Preferred, which was issued in July 1989 in
connection with the formation of a Xerox Employee Stock Ownership Plan, are
$1.5625 per share. All of these dividends are payable April 1 to shareholders of
record March 1.
At its January 23 meeting, the Board of Directors also approved a three-for-
one stock split and an increase in the authorized number of common shares to
1.05 billion from 350 million, subject to shareholder approval at the May 16,
1996 Annual Meeting of Shareholders. If approved by the shareholders, the
effective date of the split will be shortly after the Annual Meeting and the
annualized dividend on each share of stock will then be $1.16.
On April 1, 1996, the Company will redeem all outstanding shares of the
$3.6875 Ten-Year Sinking Fund Preferred stock at a price of $50. Dividends on
the stock will cease to accrue on April 1. Notices of redemption were mailed to
holders of the stock on February 26, 1996.
<TABLE>
<CAPTION>
XEROX COMMON STOCK PRICES AND DIVIDENDS
New York Stock Exchange First Second Third Fourth
Composite Prices Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1995 High $120 1/2 $125 7/8 $134 3/4 $144 5/8
Low 96 1/2 109 3/4 109 3/4 126
Dividends Paid .75 .75 .75 .75
1994 High $103 1/4 $104 3/4 $109 3/8 $112 3/4
Low 87 3/4 93 7/8 97 91 1/2
Dividends Paid .75 .75 .75 .75
- --------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
XEROX $3.6875 TEN-YEAR SINKING FUND
PREFERRED STOCK PRICES AND DIVIDENDS
New York Stock Exchange First Second Third Fourth
Composite Prices Quarter Quarter Quarter Quarter
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1995 High $ 54 1/2 $ 54 $ 54 $ 56
Low 49 49 49 1/2 50
Dividends Paid .921875 .921875 .921875 .921875
1994 High $ 54 $ 55 1/2 $ 55 $ 54
Low 50 1/2 50 1/2 50 50
Dividends Paid .921875 .921875 .921875 .921875
- -------------------------------------------------------------------------
</TABLE>
Stock Listed And Traded
Xerox common stock (XRX) is listed on the New York Stock Exchange and the
Chicago Stock Exchange. It is also traded on the Boston, Cincinnati, Pacific
Coast and Philadelphia exchanges and in London, Basel, Berne, Geneva, Lausanne
and Zurich.
81
EXHIBIT 21
Subsidiaries of Xerox Corporation
A. Xerox Corporation
The following companies are subsidiaries of Xerox Corporation as of February
1, 1996. The names of a number of other subsidiaries have been omitted as
they would not, if considered in the aggregate as a single subsidiary,
constitute a significant subsidiary:
Name of Subsidiary Incorporated In Ownership %
Xerox Canada Inc. Ontario, Canada 90
Xerox Canada Finance Inc. Ontario, Canada 100
Xerox Canada Ltd. Ontario, Canada 65
Lyell Holdings Limited Delaware 100
Xerox Business Equipment Limited United Kingdom 100
Xerox Research (UK) Limited United Kingdom 100
Xerox Business Equipment, Inc. Delaware 100
Xerox Financial Services, Inc. Delaware 100
International Insurance Company Illinois 100
OakRe Life Insurance Company Missouri 100
Xerox Credit Corporation Delaware 100
XCC Investment Corporation Delaware 100
Talegen Holdings, Inc. Delaware 100
Xerox Life Management Company Delaware 100
Ridge Reinsurance Limited Bermuda 100
The Resolution Group, Inc. Delaware 100
Xerox Foreign Sales Corporation Barbados 100
Xerox Realty Corporation Delaware 100
Xerox do Brasil, Ltda. Brazil 100
Xerox Mexicana, S.A. de C.V. Mexico 100
Rank Xerox Investments Limited Bermuda 66.7
Rank Xerox Limited United Kingdom 51.2
Bessemer Trust Limited United Kingdom 100
Fuji Xerox Co., Ltd. Japan 50
Modi Xerox Limited India 35.9
Rank Xerox (U.K.) Limited United Kingdom 100
Rank Xerox (Ireland) Limited United Kingdom 100
Rank Xerox Espanola S.A. Spain 100
Rank Xerox de Financiacion S.A. Spain 100
Rank Xerox Finance (Nederland) BV Netherlands 100
Rank Xerox Greece S.A. Greece 100
NV Rank Xerox Credit S.A. Belgium 100
Rank Xerox Finance AG Switzerland 100
Rank Xerox Finance Limited United Kingdom 100
Rank Xerox Leasing GmbH Germany 100
Rank Xerox Leasing International
Finance BV Netherlands 100
Rank Xerox - The Document Company S.A. France 100
Burofinance S.A. France 66
Rank Xerox Exports Limited United Kingdom 100
N.V. Rank Xerox S.A. Belgium 100
Rank Xerox Austria GmbH Austria 100
Rank Xerox A/S Denmark 100
Rank Xerox Finans A/S Denmark 100
Rank Xerox Oy Finland 100
Name of Subsidiary Incorporated In Ownership %
Rank Xerox GmbH Germany 100
Rank Xerox S.p.A. Italy 100
Rank Xerox AG Switzerland 100
Rank Xerox AS Norway 100
Rank Xerox Management Services S.A. Belgium 100
Rank Xerox Pensions Limited United Kingdom 100
Rank Xerox A.B. Sweden 100
Rank Xerox (Nederland) B.V. Netherlands 100
Rank Xerox Holding B.V. Netherlands 51.2
Rank Xerox Manufacturing
(Nederland) B.V. Netherlands 100
R-X Holdings Limited Bermuda 66.7
Xerox Limited Bermuda 100
B. Talegen Holdings, Inc.
Insurance Holding Company System Organizational Chart
All controlled persons and controlled insurers of Talegen Holdings, Inc., a
Delaware corporation ("Talegen"), (under applicable state insurance laws), are
set forth in the following table, together with the jurisdiction of domicile
of each and the percentage of voting securities owned as of January 1, 1996.
Unless otherwise indicated, all of the persons included in the table are
corporations, the voting securities of which are directly owned by Talegen.
All of the outstanding capital stock of Talegen is owned by Xerox Financial
Services, Inc., a Delaware corporation ("XFSI"), which is a wholly-owned
subsidiary of Xerox Corporation. XFSI also owns, effective as of December 31,
1995, all of the outstanding capital stock of The Resolution Group, Inc., a
Delaware corporation which was formerly a wholly-owned subsidiary of Talegen.
Name of Subsidiary Incorporated In Ownership %
Coregis Group, Inc. Delaware 100
Coregis Insurance Company Indiana 100 (1)
Coregis Indemnity Company Illinois 100 (1)
California Insurance Company California 100 (1)
Coregis Managers Corporation (IL) Illinois 100 (1)
Crum & Forster Holdings, Inc. Delaware 100
United States Fire Insurance Company New York 100 (1)
Southbend Properties, Inc. Texas 100 (1)
The North River Insurance Company New Jersey 100 (1)
Crum and Forster Insurance Company New Jersey 100 (1)
Crum & Forster Underwriters Co. of Ohio Ohio 100 (1)
Crum & Forster Indemnity Company New York 100
Crum & Forster Custom Securities, Inc. California 100 (1)
Industrial Indemnity Holdings, Inc. Delaware 100
Industrial Indemnity Company California 100 (1)
Claremont Holdings Limited Bermuda 9.2
Claremont Insurance Limited Bermuda 100
Industrial/Las Flores, Inc. (5) California 100 (1)
Industrial/Canyon Creek, Inc. (5) California 100 (1)
Industrial/Shadowridge, Inc. (5) California 100 (1)
Industrial/Mountainback, Inc. (5) California 100 (1)
Industrial/Channing, Inc. (5) California 100 (1)
Industrial Indemnity Company of Alaska Alaska 100 (1)
Industrial Indemnity Company of Idaho Idaho 100 (1)(2)
Industrial Indemnity Company
of the Northwest Washington 100 (1)
Industrial Insurance Company California 100 (1)
Employers First Insurance Company California 100 (1)
255 California Corporation California 100 (1)
Industrial Indemnity Insurance
Services, Inc. California 100 (1)
American All Risk Loss Administrators California 40 (1)
Westchester Specialty Group, Inc. Delaware 100
Westchester Fire Insurance Company New York 100 (1)
Westchester Surplus Lines Insurance
Company Georgia 100 (1)
Industrial Underwriters Insurance
Company Texas 100 (1)
Westchester Specialty Insurance
Services, Inc. Nevada 100 (1)
Name of Subsidiary Incorporated In Ownership %
Industrial Excess & Surplus Insurance
Brokers California 100 (1)
Talegen Properties, Inc. Delaware 100
Infocus Employee Services, Inc. Delaware 92.5
Filoli Information Systems Company Delaware 40
Apprise Corp. New Jersey 100
Crum & Forster of Canada Ltd. Canada 100
First Quadrant Corp. New Jersey 100
First Quadrant Limited United Kingdom 100 (1)(4)
Herald Insurance Company Canada 100 (3)
(1) Directly or indirectly owned by a subsidiary of Talegen.
(2) Includes qualifying shares held by directors.
(3) Includes less than 1/5 of 1% shares beneficially owned by directors.
(4) Includes one share held by Talegen in trust and as nominee for
First Quadrant Corp.
(5) Subject to the receipt of a tax clearance from the California Franchise
Tax Board, the effective date of the dissolution of this corporation will
be December 18, 1995.
EXHIBIT 23
Consent of Independent Auditors
To the Board of Directors and Shareholders of Xerox Corporation
We consent to the incorporation by reference in the Registration Statements of
Xerox Corporation on Forms S-8 (Nos. 2-81528, 2-86274, 2-86275, 33-18126, 33-
44313, 33-44314 and 33-65269) and Forms S-3 (Nos. 2-82363, 33-9486, 33-32215,
33-49177 and 33-54629) of our reports dated January 24, 1996 relating to the
consolidated balance sheets of Xerox Corporation and consolidated subsidiaries
as of December 31, 1995 and 1994, and the related consolidated statements of
income and cash flows and related schedule for each of the years in the three-
year period ended December 31, 1995 which reports appear in or are
incorporated by reference in the 1995 Annual Report on Form 10-K.
KPMG PEAT MARWICK LLP
Stamford, Connecticut
March 28, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM XEROX
CORPORATION'S DECEMBER 31, 1995 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 130
<SECURITIES> 0
<RECEIVABLES> 12,780
<ALLOWANCES> 411
<INVENTORY> 2,646
<CURRENT-ASSETS> 9,833
<PP&E> 4,849
<DEPRECIATION> 2,757
<TOTAL-ASSETS> 25,969
<CURRENT-LIABILITIES> 6,999
<BONDS> 11,413
25
738
<COMMON> 109
<OTHER-SE> 3,769
<TOTAL-LIABILITY-AND-EQUITY> 25,969
<SALES> 8,799
<TOTAL-REVENUES> 16,611
<CGS> 4,962
<TOTAL-COSTS> 8,908
<OTHER-EXPENSES> 5,856
<LOSS-PROVISION> 277
<INTEREST-EXPENSE> 591
<INCOME-PRETAX> 1,847
<INCOME-TAX> 615
<INCOME-CONTINUING> 1,174
<DISCONTINUED> (1,646)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (472)
<EPS-PRIMARY> (4.69)
<EPS-DILUTED> (5.26)
</TABLE>
