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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1993 COMMISSION FILE NUMBER 1-8282
ALEXANDER & ALEXANDER SERVICES INC.
(Exact name of registrant as specified in its charter)
MARYLAND 52-0969822
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1211 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10036 (212) 840-8500
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
<TABLE><CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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<S> <C>
Common Stock, $1 par value New York Stock Exchange, Inc.
Preferred Share Purchase Rights
Common Stock, $1 par value International Stock Exchange of the United Kingdom and
Republic of Ireland, Ltd.
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
<TABLE><CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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<S> <C>
Class A Common Stock, $.00001 par value None
Class C Common Stock, $1 par value International Stock Exchange of the United Kingdom and
11% Convertible Subordinated Debentures Republic of Ireland, Ltd.
due 2007
</TABLE>
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 the disclosure of delinquent filers pursuant to
Item 405 or 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 [X].
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of March 17, 1994 was $761,094,623.
The number of shares of Common Stock, $1 par value, outstanding as of March
17, 1994 was 40,765,833.
The number of shares of Class A Common Stock, $.00001 par value,
outstanding as of March 17, 1994 was 2,409,600.
The number of shares of Class C Common Stock, $1 par value, outstanding as
of March 17, 1994 was 385,691.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's 1993 Annual Report to Stockholders are
incorporated by reference into Parts I and II of this report.
Portions of the Registrant's Proxy Statement for the 1994 Annual Meeting of
Stockholders are incorporated by reference into Part III of this report.
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PART I
ITEM 1. BUSINESS
GENERAL
Alexander & Alexander Services Inc., a holding company incorporated under
the laws of Maryland in 1973, together with its subsidiaries (collectively, the
"Company"), is a global insurance brokerage, risk management, and human resource
management consulting company. It is one of the leading insurance brokerage and
risk management companies worldwide. Through predecessor entities the Company
has been in business since 1899.
The Company has extensive international operations representing 46 percent,
47 percent and 45 percent of the Company's consolidated operating revenues for
the years ended December 31, 1993, 1992 and 1991, respectively. It operates from
offices located in more than 80 countries and territories through wholly owned
subsidiaries, affiliates and other servicing capabilities. The Company believes
that it is the second largest insurance broker in the world, based upon 1992
revenues, and that it is one of very few companies capable of providing
insurance brokerage, risk management and human resource management consulting
services on a global basis to clients with multinational operations.
The Company's clients are primarily commercial enterprises, including a
broad range of industrial, transportation, service, financial and other
businesses. Clients also include government and governmental agencies,
not-for-profit organizations and individuals.
The Company's core businesses include risk management and insurance
services, specialist insurance broking, reinsurance broking and human resource
management consulting.
INDUSTRY SEGMENTS
Insurance Services
The Company's principal industry segment is insurance services. For the
years ended December 31, 1993, 1992 and 1991, total revenues contributed by the
Company's insurance services segment accounted for 84 percent, 82 percent and 84
percent, respectively, of its consolidated operating revenues. The Company's
operations in this segment include risk management and insurance services,
specialist insurance broking and reinsurance broking. The Company's extensive
services permit it to handle diverse lines of coverage.
Risk Management and Insurance Services. For the years ended December 31,
1993, 1992 and 1991, the Company's risk management and insurance services
operations accounted for approximately 65 percent, 64 percent and 67
percent, respectively, of the Company's consolidated operating revenues.
The Company develops risk management programs and places coverage on behalf
of its clients directly with insurance companies, or indirectly through
specialist insurance brokers. Since January 1991, the Company's worldwide
risk management and insurance services have operated under a single
coordinated management structure. In 1993, the Company reorganized its
retail operations based on a global business segmentation strategy
initiated in 1992. In implementing this strategy, the Company formed risk
management and insurance services divisions to align its resources more
closely with the servicing requirements of its customers. In 1993, the
Company introduced the common trading name of "Alexander & Alexander"
throughout its global insurance services network in the United States, the
United Kingdom, Canada and Japan and in most of its markets in continental
Europe, Asia-Pacific and the Middle East. The Company's risk analysis and
management capabilities include a broad range of services such as risk
surveys and analyses, loss control and cost studies, formulation of safety
procedures and insurance programs. Through Anistics, the Company offers
financial and actuarial, risk information and strategic risk management
consulting to clients worldwide. Alexander Insurance Managers Limited
manages captive insurance companies and Alexander Trade Services arranges
political risk/export credit risk insurance programs and trade finance
packages worldwide. In the United States, Alexsis offers risk management
services, including risk analysis, claims administration and claims
information reporting. Through Alexander Underwriting Services, the Company
offers administration of runoff of insurance and reinsurance companies and
intermediaries.
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Specialist Insurance Broking. For the years ended December 31, 1993, 1992
and 1991, the Company's wholesale operations accounted for approximately 8
percent, 7 percent and 6 percent, respectively, of the Company's
consolidated operating revenues. As a specialist insurance broker, the
Company acts as an intermediary between the retail broker and insurance
companies and Lloyd's of London syndicates. London-based Alexander Howden
Limited places large and complex risks that require access to the London
and world markets. U.S.-based Alexander Howden North America, Inc. offers
excess, surplus and specialty lines placements. From Australia and
Singapore, Alexander Howden Asia Pacific specializes in specialist
insurance broking and facultative reinsurance.
Reinsurance Broking. For each of the years ended December 31, 1993, 1992
and 1991, the Company's reinsurance operations accounted for approximately
11 percent of the Company's consolidated operating revenues. As a
reinsurance broker, the Company places coverage on behalf of its insurance
or reinsurance company clients to reinsure all or a portion of the risk
underwritten by that insurance or reinsurance company. The Company's
worldwide reinsurance brokerage services, led by its U.K. subsidiary,
Alexander Howden Reinsurance Brokers Limited, arrange reinsurance programs
for Lloyd's of London syndicates and other insurance and reinsurance
companies worldwide. Alexander Reinsurance Intermediaries, Inc. provides a
full range of reinsurance services in the United States.
The Company is compensated for its broking services by commissions, usually
as a percentage of insurance premiums paid by the client, or by negotiated fees.
The Company may also receive contingent commissions which are based on the
volume and/or profitability of business placed with an insurance company over a
given period of time. The Company is generally compensated on a fee basis when
providing consulting and advisory services with respect to its clients' risk and
underwriting management programs. Premiums received from insureds but not yet
remitted to the carriers and claims payments received from carriers but not yet
remitted to the insureds are held as cash or investments in a fiduciary
capacity.
Human Resource Management Consulting
The Company offers global human resource management consulting services and
benefits broking through the Alexander Consulting Group Inc. ("ACG"). For the
years ended December 31, 1993, 1992 and 1991, total revenues contributed by the
Company's human resource management consulting services segment accounted for 16
percent, 18 percent and 16 percent, respectively, of the Company's consolidated
operating revenues. ACG provides advisory and support services in human resource
management, organizational effectiveness, integrated information technologies,
strategic health care and flexible compensation, retirement planning and
actuarial services, benefit plan design and implementation, international
benefits/compensation, and benefit plan investment consulting through Alexander
& Alexander Consulting Group Inc. in the U.S., Alexander Clay & Partners in
Europe and Alexander Consulting Group Limited in Canada and the Asia-Pacific
region. ACG provides broking services for group health and welfare, special
risk, and association/mass marketing insurance coverage through Alexander &
Alexander Benefits Services Inc. in the U.S. and as a division of the Alexander
Consulting Group Limited in Canada. ACG operates in 18 countries.
The Company is compensated for human resource management consulting
services on a fee basis, except in instances where it receives commissions from
insurance companies for the placement of individual and group insurance
contracts.
Financial Information about Industry Segments
Financial information related to the Company's industry segments and
geographical concentrations for each of the three years in the period ended
December 31, 1993 is contained in Note 15 of the Notes to Financial Statements
to the Company's 1993 Annual Report to Stockholders (the "1993 Annual Report")
and is incorporated herein by reference.
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DISCONTINUED OPERATIONS
In March 1985, the Company discontinued the insurance underwriting
operations acquired in 1982 as part of the Alexander Howden acquisition. In
1987, the Company sold Sphere Drake Insurance Group (Sphere Drake) and is
currently running-off the Atlanta and Bermuda insurance companies.
The 1987 Sphere Drake sales agreement provides indemnities by the Company
for various potential liabilities including provisions covering future losses on
the insurance pooling arrangements from 1953 to 1967 between Sphere Drake and
Orion Insurance Company, a U.K.-based insurance company and future
losses pursuant to a stop loss reinsurance contract between Sphere Drake and
Lloyd's Syndicate 701.
As to operations in run-off, reinsurance agreements provide the Atlanta and
Bermuda insurance companies with insurance coverage for their reserves as of
December 31, 1988, and for up to $50 million of insurance coverage for potential
losses in excess of those reserves, subject to a deductible for one of the
Atlanta companies of $12.5 million. The agreements also provide for a
reinsurance premium adjustment, whereby at any time after January 1, 2001, the
reinsurance agreements can be terminated and any excess funds, net of any
reinsurance premium paid to a substitute reinsurance company, would be returned
to the Company.
The Sphere Drake indemnities and other liabilities arising out of the
discontinued operations are expected to be settled and paid over many years and
could extend over a 20 to 30 year period.
Further information concerning discontinued operations is contained in Note
6 of the Notes to Financial Statements to the Company's 1993 Annual Report and
is incorporated herein by reference.
ACQUISITIONS AND DISPOSITIONS
On November 30, 1993, the Company issued 2.3 million shares of its Common
Stock for all of the partnership interests of Clay & Partners, a U.K.-based
actuarial consulting operation. This acquisition has been accounted for as a
pooling of interests and, accordingly, the consolidated financial statements
have been restated for all periods prior to the acquisition.
Effective July 1, 1993, the Company acquired an 80 percent interest in a
Mexican insurance brokerage company which was accounted for as a purchase. The
purchase price was $16.9 million, including a $7.4 million cash payment and
notes payable of $9.5 million due in three installments from 1994 to 1996. The
excess of the purchase price over the fair value of net tangible assets acquired
was approximately $16 million. The effect of this acquisition was not
significant to the Company's consolidated financial statements.
During 1993, the Company sold three small operations for gross proceeds of
$9.6 million. Pre-tax gains of $3.9 million have been recognized on the sales
with resulting after-tax gains totaling $2.3 million or $0.05 per share.
During 1992, the Company sold three non-core businesses, including a
U.K.-based pension fund management operation, a Netherlands-based non-broking
operation and a U.S.-based administrator of workers compensation funds. Total
proceeds on these sales were $77.4 million with resulting pre-tax gains of $43.8
million ($28.5 million after-tax or $0.66 per share).
Further information concerning acquisitions and dispositions is contained
in Note 3 of the Notes to Financial Statements to the Company's 1993 Annual
Report and is incorporated herein by reference.
COMPETITION AND CUSTOMERS
Insurance broking and human resource management consulting are highly
competitive industries. The Company competes with other worldwide and national
companies, as well as regional and local firms. The principal methods of
competition in these businesses involve the nature, quality and cost of the
services the broker or consultant provides. As a service provider, the Company
also encounters
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competition with respect to attracting and retaining qualified employees. In
addition, insurance and reinsurance underwriters compete with the Company by
marketing and servicing their insurance products without the assistance of
insurance brokers. Also, certain insureds and groups of insureds have
initiated programs of self-insurance, thereby reducing or eliminating the
need for insurance brokers.
EMPLOYEES
The Company has approximately 14,500 employees. A small number of employees
in foreign countries are represented by labor unions. In addition, support
personnel in Australia are represented by an industrywide union. The Company
considers relations with its employees to be satisfactory.
REGULATIONS AND LICENSING
The activities of the Company related to insurance broking and human
resource management consulting services are subject to licensing requirements
and extensive regulation under the laws of the United States and each of its
various states, territories and possessions, as well as the laws of numerous
other countries in which the Company's subsidiaries conduct business. These laws
and regulations vary by jurisdiction. The appropriate regulatory authorities
generally have wide discretionary authority in adopting, amending and
implementing such regulations. In addition, certain of the Company's insurance
activities are governed by the rules of the Lloyd's of London insurance market
and other similar organizations.
In every state of the United States and most foreign jurisdictions, an
insurance broker or agent is required to have a license and such license may be
denied or revoked by the appropriate governmental agency for various reasons,
including the violation of its regulations and the conviction of crimes. In a
few jurisdictions, licenses are issued only to individual residents or locally
owned business entities. In certain of those jurisdictions, if the Company
itself has no subsidiary that is so licensed, the Company may from time to time
make arrangements with residents or business entities licensed to act on its
behalf in the jurisdiction.
The legality of the Company's operations depends on the continuing
retention and validity of the licenses under which it operates and on compliance
with a diverse and complex regulatory structure. The Company's licenses may not
be readily transferable in many jurisdictions. The Company expends significant
amounts of time and money to maintain its licenses and to ensure compliance with
applicable laws and regulations.
Because of its multistate and international operations, in some instances
the Company follows practices which are based upon its interpretation of laws or
regulations or upon the interpretation generally followed by the industry.
However, such interpretations may be in conflict with those of regulatory
authorities. Therefore, the possibility exists that the Company may be precluded
or temporarily suspended from continuing its business or otherwise penalized in
a given jurisdiction.
ITEM 2. PROPERTIES
Substantially all of the Company's worldwide facilities are leased. No
difficulty is anticipated in negotiating renewals as leases expire or in finding
other satisfactory space if the premises become unavailable.
Further information concerning the Company's obligations under capital
leases and noncancelable operating leases is contained in Notes 9 and 12 of the
Notes to Financial Statements to the 1993 Annual Report incorporated herein by
reference.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are subject to various claims and lawsuits
from both private and governmental parties, which include claims and lawsuits in
the ordinary course of business, consisting principally of alleged errors and
omissions in connection with the placement of insurance and in rendering
consulting services. In some of these cases, the remedies that may be sought or
damages
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claimed are substantial. Additionally, the Company and its subsidiaries are
subject to the risk of losses resulting from the potential uncollectibility of
insurance and reinsurance balances and claims advances made on behalf of
clients.
MUTUAL FIRE AND OTHER SHAND CONTINGENCIES
In December 1987, the Company sold Shand, Morahan & Company, Inc.
("Shand"), its domestic underwriting management subsidiary. The sales contract
between the Company and Shand's purchasers obligates the Company to certain
indemnities with respect to transactions involving Mutual Fire Marine and Inland
Insurance Company ("Mutual Fire"). The Company, Alexander & Alexander Inc., a
subsidiary of the Company, and Shand are defendants in a lawsuit brought in 1991
by the Pennsylvania Insurance Commissioner as rehabilitator of Mutual Fire. The
complaint alleges matters within the terms of such indemnification obligation.
The action, in the United States District Court for the Eastern District of
Pennsylvania and styled Constance B. Foster v. Alexander & Alexander Services
Inc. et al. (Civil Action No. 91-1179), arises out of Shand's relationship as
underwriting manager for Mutual Fire, now insolvent. The complaint alleges that
Shand, and in certain respects the Company, breached duties to, and agreements
with, Mutual Fire. In addition to claiming compensatory damages, the complaint
seeks punitive damages and recovery of certain commissions paid to Shand and the
Company. The complaint does not specify, to any meaningful degree, the amount of
alleged damages incurred or sought. In June 1993, however, the rehabilitator
through an expert's report has indicated to Shand and the Company that the
alleged damages are in the amount of $238.5 million. The Company and Shand
strongly disagree with the alleged damages in the rehabilitator's report and
have substantial arguments to sustain their position. The Company and Shand are
in the process of finalizing a series of expert reports that rebut the damage
number alleged in the rehabilitator's report. The case is likely to be placed on
the trial calendar in the summer of 1994. Management of the Company believes
that there are valid defenses to the allegations set forth in the complaint and
the Company is vigorously defending this action.
The sales contract between the Company and Shand's purchasers also
obligates the Company to certain other indemnities with respect to transactions
involving Mutual Fire. In November 1992, the purchaser, by written notice,
asserted indemnification claims related to reinsurance recoverables due from
Mutual Fire. In February 1993, the Company agreed to settle certain of these
claims. The Company has estimated its exposure under this settlement, net of
anticipated recoveries from certain trusteed assets held for Shand's benefit of
$10.8 million and net of $4.6 million of set-offs, and established a reserve as
part of the 1992 special charge described in Note 4 of the Notes to Financial
Statements to the Company's 1993 Annual Report. The Mutual Fire rehabilitator
has challenged Shand's right to recover these assets and the utilization of such
set-offs.
The purchaser of Shand has also notified the Company of claims relating to
reinsurance recoverables based on alleged errors and omissions of Shand in
placing reinsurance. The allegations have, so far, led to the institution of
four arbitration proceedings involving certain of these reinsurers. The amount
at issue aggregates $33 million. These claims are potentially subject to
indemnification by the Company under the terms of the sales agreement. Shand is
actively disputing these allegations. However, pursuant to the terms of the
indemnity, the Company may be responsible for the costs of these proceedings and
related expenses. Until there is a final determination that a reinsurer has a
right to withhold payment of a reinsurance recoverable, based on an actual error
or omission of Shand, the Company believes that its exposure under the indemnity
is limited to the above-mentioned costs and expenses. The Company intends to
vigorously dispute these claims.
SPHERE DRAKE
In November 1984, Sphere Drake Insurance Company plc ("Sphere Drake")
issued a writ against, and served points of claim upon, Mark Edmond Denby,
individually and as a representative of the Names on Lloyd's Syndicate 701,
pursuant to a stop-loss reinsurance contract between Sphere Drake and Syndicate
701 and for a determination of continuing stop-loss coverage protecting Sphere
Drake
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under the contract. A defense was entered in Sphere Drake Insurance Company plc
v. Mark Edmond Denby, 1984 S. No. 6548 (Q.B. Commercial Court). The Company has
indemnified the purchasers of Sphere Drake in connection with this litigation. A
trial was held in late 1991 and an adverse decision was issued in April 1992.
The Company's appeal of the decision was heard in October 1993 with the U.K.
Court of Appeals upholding the adverse decision of the lower courts. In the
Company's opinion this indemnity is limited in amount pursuant to the terms of
the stop-loss reinsurance contract.
GLICKMAN
On November 4, 1993, a class action suit was filed against the Company and
two of its directors and officers, Tinsley H. Irvin and Michael K. White, in the
United States District Court for the Southern District of New York under the
caption Harry Glickman v. Alexander & Alexander Services Inc., et al. (Civil
Action No. 93 Civ. 7594). In response to defendants' motion to dismiss an
amended complaint was filed on February 16, 1994 purportedly on behalf of a
class of persons who purchased the Company's Common Stock during the period May
1, 1991 to September 28, 1993, alleging that during said period the Company's
financial statements contained material misrepresentations as a result of
inadequate reserves established by the Company's subsidiary, Alexander
Consulting Group Inc., for unbillable work-in-progress. The amended complaint
seeks damages in an unspecified amount, as well as attorneys' fees and other
costs, for alleged violations of the federal securities laws. Management of the
Company believes there are valid defenses to the allegations set forth in the
complaint and the Company intends to vigorously dispute this claim. Management
presently believes that this claim will not be material to the Company's
financial condition.
PINE TOP AND RELATED CONTINGENCIES
Claims have been or may be asserted against the Company and certain of its
subsidiaries alleging, among other things, that certain Alexander Howden
subsidiaries accepted, on behalf of certain insurance companies, insurance or
reinsurance at premium levels not commensurate with the level of underwriting
risks assumed and retroceded or reinsured those risks with financially unsound
reinsurance companies. Claims asserting these allegations are pending in suits
filed in New York and Ohio. In New York, a suit was brought against the Company
in 1985 (Pine Top Insurance Company, Ltd. v. Alexander & Alexander Services
Inc., et al., 85 Civ. 9860 (RPP) (S.D.N.Y.)). Plaintiff in this case seeks
compensatory and punitive, as well as treble damages under RICO totaling
approximately $87 million, arising from alleged RICO violations, common law
fraud, breach of contract and negligence. Discovery in this case has been
substantially completed and the trial is scheduled to begin in June 1994. In a
similar New York action brought in 1988 (Certain Underwriters at Lloyd's of
London Subscribing to Insurance Agreement ML8055801, et al. v. Alexander &
Alexander Services Inc., et al., formerly captioned Dennis Edward Jennings v.
Alexander & Alexander Europe plc, et al., 88 CIV. 7060 (RO) (S.D.N.Y.)),
plaintiffs seek compensatory and punitive damages, as well as treble damages
under RICO totaling $36 million. Discovery in this case remains to be concluded
and no trial date has been set. In the Ohio action brought in 1985 (The Highway
Equipment Company, et al. v. Alexander Howden Limited, et al. (Case No.
1-85-01667, U.S. Bankruptcy Court, So. Dist. Ohio, Western Div.)), plaintiffs
seek compensatory and punitive damages, as well as treble damages under RICO
totaling $24 million. In April 1993, the bankruptcy court ordered a directed
verdict in the Company's favor. That verdict was affirmed on March 14, 1994 in a
decision by the U.S. District Court for the Southern District of Ohio and
plaintiffs have 30 days in which to appeal the decision to the U.S. Court of
Appeals for the Sixth Circuit. Management of the Company believes there are
valid defenses to the claims asserted and the Company is vigorously defending
the pending actions.
In a New York action, which was initially commenced in 1984, a subsidiary
of the Company asserted claims against two reinsurers and their parent company
for breach of certain reinsurance contracts and tortious interference with these
contracts (American Special Risk Insurance Co. v. Delta America Re Insurance
Co., et al., 84 Civ. 1329 (S.D.N.Y.)). One of the reinsurers counterclaimed,
alleging RICO violations, common law fraud and negligence and claiming
compensatory and punitive damages,
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as well as treble damages under RICO. The action was settled in December 1993 by
payment to the Company's subsidiaries of $8.1 million and the counterclaim
against the Company's subsidiaries was voluntarily dismissed in February 1994.
In a Florida action brought in 1986 (The Staff Fund, Inc. f/k/a the North
Broward Hospital District Active Medical Staff Self-Insurance Fund, Inc. v.
Alexander & Alexander, Inc., a Florida Corporation, et al., Case No. 86-05314 CN
(Cir. Ct., Broward Cty., Fl.)), the plaintiff sought compensatory and punitive
damages of over $1.7 million. This action was settled to the parties
satisfaction on March 16, 1994.
IN RE INSURANCE ANTITRUST LITIGATION
One of the Company's subsidiaries, Thomas A. Greene & Company Inc., now
operating as Alexander Reinsurance Intermediaries, Inc., is one of 31 defendants
named in a series of antitrust actions which were filed beginning in March 1988
by the attorneys general of 18 states and by 20 private parties. All actions
have been consolidated in the United States District Court for the Northern
District of California (In Re Insurance Antitrust Litigation, C-88-1688-WWS
(N.D. Cal.)). The defendants, which include various insurance and reinsurance
companies, reinsurance brokers and trade associations, are alleged to have
manipulated the market for commercial insurance by, among other things,
conspiring to restrict the terms of, and hence the availability of, general
liability insurance. Plaintiffs seek to enjoin further violations and to order a
restructuring of the insurance industry, in addition to recovering damages for
injuries to both public entities and the private party plaintiffs. In September
1989, the court granted defendants' Motion for Summary Judgment on various
grounds. The plaintiffs appealed the matter to the Ninth Circuit Court of
Appeals, which reversed the decision of the District Court. The United States
Supreme Court granted certiorari and in June 1993 affirmed in part and reversed
in part the decision of the Ninth Circuit Court of Appeals and remanded the case
for further proceedings. Management of the Company believes that there are valid
defenses to the allegations asserted and the Company is vigorously defending
this action.
Further information concerning the above-mentioned legal contingencies is
contained in Notes 6, 13, and 14 of the Notes to the Financial Statements to the
Company's 1993 Annual Report and is incorporated herein by reference. These
contingent liabilities involve significant amounts, and while it is not possible
to predict with certainty the outcome of such contingent liabilities, the
applicability of coverage for such matters under the Company's professional
liability insurance programs, or their financial impact on the Company,
management presently believes that such impact will not be material to the
Company's financial condition. However, it is possible that future developments
with respect to these matters could have a material effect on future interim or
annual results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the fiscal year covered by this report, no
matter was submitted to a vote of security holders, through the solicitation of
proxies or otherwise.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Incorporated herein by reference is information concerning the market price
and dividends per share of the Company's Common Stock contained in Note 16 of
the Notes to Financial Statements and information under the caption "Approximate
Number of Equity Security Holders," in the Company's 1993 Annual Report. Also
incorporated herein by reference is information concerning restrictions on the
payment of dividends on the Company's Common Stock contained in Note 11 of the
Notes to the Financial Statements to the Company's 1993 Annual Report.
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ITEM 6. SELECTED FINANCIAL DATA
Information under the caption "Selected Financial Data" in the 1993 Annual
Report is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Information under the caption "Management's Discussion and Analysis of
Financial Condition & Results of Operations" in the Company's 1993 Annual Report
is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following are incorporated herein by reference to the 1993 Annual
Report:
Independent Auditors' Report
Consolidated Statements of Operations for each of the three years in the
period ended December 31, 1993
Consolidated Balance Sheets, December 31, 1993 and 1992
Consolidated Statements of Cash Flows for each of the three years in the
period ended December 31, 1993
Consolidated Statements of Stockholders' Equity for each of the three
years in the period ended December 31, 1993
Notes to Financial Statements, including unaudited quarterly financial
data
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
During the fiscal years ended December 31, 1993 and 1992 and in the
subsequent interim period, there has been no change in, or disagreements on
accounting matters with, the Company's independent auditors.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this item as to directors is included under the
caption "Nominees for Election" in the Company's Proxy Statement for the 1994
Annual Meeting of Stockholders (The "1994 Proxy Statement") and is incorporated
herein by reference. Information required by this item is included under the
caption "Compliance with Section 16(a) of the Securities Exchange Act of 1934"
in the 1994 Proxy Statement and is incorporated herein by reference.
The following sets forth information with respect to executive officers of
the Company and a former executive officer:
LAWRENCE E. BURK, 52, has served as chairman and chief executive officer of
Alexander & Alexander Inc. ("A&A Inc."), the Company's U.S. retail broking
subsidiary since November 1993. Since joining the Company in 1970, he has held
various senior management positions for the Company's retail broking operations,
including global business development director, January 1991 to October 1993,
and U.S. eastern regional director, May 1989 to January 1991.
RONALD W. FORREST, 51, former executive officer of the Company who retired
January 1, 1994, and who served as a senior vice president of the Company and as
chairman and chief executive officer of A&A Inc., from February 1989 and
September 1991, respectively, until his retirement. From 1985 until his
retirement, he held various executive, management and operating positions with
the Company.
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RONALD L. HENDRICK, 48, has served as controller and vice president of the
Company since May 1993. From February 1988 to March 1993 he was vice president
and controller of the Adolph Coors Company and director of treasury management
from November 1987 to January 1989. From 1972 to 1987, he held various financial
and management positions with subsidiaries of Coors.
RONALD A. ILES, 58, has served as a senior vice president of the Company
since 1985 and is responsible for general management of the Company's
reinsurance operations. Since 1981, he has been chairman of Alexander Howden
Reinsurance Brokers Limited, a U.K.-based subsidiary acquired in 1982, which
manages the Company's worldwide reinsurance operations. In January 1993, he was
appointed chairman of Alexander & Alexander Services UK plc.
TINSLEY H. IRVIN, 60, announced his retirement from the Company effective
April 1, 1994, having served as chief executive officer of the Company from May
1987 through March 1994, as chairman of the board from May 1988 to January 1994,
and as president from March 1982 to May 1993. He has served in various executive
management and operating positions for the Company and its predecessor entities
since 1953. Mr. Irvin has been a director of the Company and its predecessor
entities since 1970.
DANIEL E. KESTENBAUM, 60, has served as a senior vice president of the
Company and director of quality and professional practice since May 1993. Mr.
Kestenbaum joined the Company in 1974 and has held various management positions
with the Company's U.S. broking operation, including senior vice president of
A&A Inc. from October 1992 to May 1993 and chief executive officer of Alexander
Howden North America, Inc., the Company's U.S. wholesale broker, from January
1986 to September 1992.
ROBERT H. MOORE, 53, has served as a senior vice president since November
1985 and is responsible for management of the Company's corporate relations,
including Alexander & Alexander Government and Industry Affairs Inc. in
Washington, D.C. He has served in various management and advisory capacities
since joining the Company in 1977.
DAN R. OSTERHOUT, 43, has served as a senior vice president of the Company
since January 1988, with responsibility for management of the Company's
underwriting exposures. In January 1994, he was appointed chairman and chief
executive officer of Alexander Underwriting Services, a new business unit
offering administration of run-off of insurance and reinsurance companies and
intermediaries. From September 1991 to December 1993, he also served in various
executive positions with A&A Inc., including president and chief operating
officer. He has held various other financial and management positions since
joining the Company in 1970.
RONALD J. ROESSLER, 54, has served as general counsel and senior vice
president of the Company since 1976 and 1988, respectively. He joined the
Company in 1972.
PAUL E. ROHNER, 57, has served as chief financial officer and senior vice
president of the Company since 1987. Prior to joining the Company, he was chief
financial officer with Tambrands Inc. and Dekalb Corporation.
DONALD L. SEELEY, 50, has served as a senior vice president of the Company
since May 1992 and as chief executive officer of the Alexander Consulting Group
Inc., the Company's human resource management subsidiary, since October 1993.
From September 1988 to September 1993 he was responsible for the management of
the Company's treasury, tax, strategic planning and corporate secretary
functions, having served as vice president from September 1988 to April 1992.
From 1982 until joining the Company, he held various executive financial
management positions, including treasurer, with United Airlines and G.D. Searle
& Company.
THOMAS SOPER III, 44, has served as senior vice president of corporate
human resources since May 1991 and as vice president from April 1986 to April
1991. From 1982 until joining the Company, Mr.
9
<PAGE>
Soper held various human resource management positions with General Electric
Financial Services and International Playtex Inc.
MICHAEL K. WHITE, 55, has served as president and chief operating officer
of the Company since May 1993. Since January 1993, he has had executive
management responsibility for the Company's global operations. From September
1990 to May 1993, he served as a deputy chairman of the Company and from May
1987 to May 1993 as an executive vice president. He has held various executive
and operating positions with the Company since 1983 and various managerial
positions with the Company and its predecessor entities since 1970. Mr. White
has been a director of the Company since 1983, and of RSC since January 1989.
ITEM 11. MANAGEMENT REMUNERATION AND TRANSACTIONS
Information included under the caption "Executive Compensation" in the
Company's 1994 Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information included under the caption "Security Ownership of Certain
Beneficial Owners" and "Security Ownership of Directors and Executive Officers"
in the 1994 Proxy Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information included under the caption "Certain Transactions" in the 1994
Proxy Statement is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) and (a)(2): The financial statements, supplemental schedules and
related information are listed in the accompanying table of contents on page 15
of this report.
(a)(3) Exhibits:
<TABLE>
<S> <C>
3.1 --Amended and Restated Articles of Incorporation of the Company (incorporated herein by reference
to the Company's Annual Report on Form 10-K for the year ended December 31, 1991).
3.2 --Articles Supplementary of the Company, dated March 18, 1993 (incorporated herein by reference to
the Company's Annual Report on Form 10-K for the year ended December 31, 1992).
3.3 --Articles Supplementary of the Company, dated December 3, 1993.
3.4 --Amended and Restated Bylaws of the Company, dated as of January 14, 1994.
4.1 --Indenture, dated as of February 1, 1982, between the Company and Morgan Guaranty Trust Company of
New York, as Trustee, establishing the Company's 11% Convertible Subordinated Debentures due 2007
(incorporated herein by reference to Amendment No. 1 to Registration Statement on Form S-7,
Registration No. 2-74794 filed with the Commission on November 10, 1981).
4.2 --Rights Agreement dated as of June 11, 1987, amended and restated as of March 27, 1990, between
the Company and First Chicago Trust Company of New York, formerly Morgan Shareholder Services
Trust Company, as Rights Agent (incorporated herein by reference to Registration Statement on
Form 8-A filed with the Commission on
</TABLE>
10
<PAGE>
<TABLE>
<S> <C>
June 19, 1987, as amended by Amendment No. 1 on Form 8 filed on March 28, 1990 and Amendment No.
2 on Form 8 filed on April 23, 1992).
4.3 --Form of Trust Agreement dated as of June 11, 1987, amended and restated as of March 28, 1990,
between the Company and Montreal Trust Company of Canada, as successor to The Canada Trust
Company (incorporated herein by reference to Registration Statement on Form 8-A filed with the
Commission on June 19, 1987 as amended by Amendment No. 1 on Form 8 filed on March 28, 1990).
The Company hereby agrees, pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K, to furnish to the
Commission upon request a copy of each instrument with respect to long-term debt of the Company
or its subsidiaries.
10.1* --Description of the Company's Incentive Compensation Program, amended and restated as of September
22, 1988 (incorporated herein by reference to the Company's Annual Report on Form 10-K for the
year ended December 31, 1989).
10.2* --The Company's 1988 Long Term Incentive Compensation Plan, as amended (the "1988 Plan") and U.K.
Executive Share Option Scheme under the 1988 Plan (incorporated herein by reference to the
Company's Registration Statement on Form S-8 Registration No. 33-60054 filed with the Commission
on March 26, 1993).
10.3* --1993 Optionplan of Alexander & Alexander B.V. under the 1988 Plan.
10.4* --Form of the Company's 1988 Plan Stock Option Award Agreement, as amended and restated
(incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended
December 31, 1990).
10.5* --Form of the Company's 1988 Plan Restricted Stock Award Agreement (incorporated herein by
reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1990).
10.6* --Form of the Company's 1988 Plan Other Stock Based Award Agreement (incorporated herein by
reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1990).
10.7* --Form of the Company's 1988 Plan Performance Share/Unit Award Agreement (incorporated herein by
reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1990).
10.8* --The Company's 1982 Key Employee Stock Option Plan, as amended (the "1982 Plan") (incorporated
herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31,
1987), as amended by resolutions of the Board of Directors of the Company, dated September 22,
1988 (incorporated herein by reference to the Company's Annual Report on Form 10-K for the year
ended December 31, 1988); and U.K. Executive Share Option Scheme within the 1982 Plan, as amended
(incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended
December 31, 1988).
10.9* --Form of the Company's 1982 Plan Stock Option Agreement (incorporated herein by reference to the
Company's Annual Report on Form 10-K for the year ended December 31, 1990).
10.10* --Form of the Company's 1982 Plan Limited Stock Appreciation Rights Agreement (incorporated herein
by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1990).
10.11* --Alexander & Alexander Services Inc. and Subsidiaries Supplemental Executive Retirement Plan for
Senior Management, amended and restated as of January 1, 1989 (the "SERP") (incorporated herein
by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1989).
10.12* --Resolution of the Compensation and Benefits Committee of the Company, dated December 8, 1988,
amending the benefits of Tinsley H. Irvin under the SERP
</TABLE>
11
<PAGE>
<TABLE>
<S> <C>
(incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended
December 31, 1992).
10.13* --Alexander & Alexander U.K. Pension Scheme (formerly, Alexander Stenhouse Pension Scheme) and
Alexander & Alexander U.K. Voluntary Equity Scheme (formerly Alexander Stenhouse Voluntary Equity
Scheme) (incorporated herein by reference to the Company's Annual Report on Form 10-K for the
year ended December 31, 1985).
10.14* --Amendment to Alexander & Alexander U.K. Pension Scheme, effective as of February 1, 1991
(incorporated by reference to the Company's Annual Report on Form 10-K for the year ended
December 31, 1991).
10.15* --The Company's Senior Executive Severance Plan, effective January 1, 1989 (incorporated herein by
reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1988), as
amended by resolutions of the Compensation and Benefits Committee of the Company, dated November
16, 1989, adopting Option C to the Company's Senior Executive Severance Plan (incorporated herein
by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1989).
10.16* --Form of Termination Protection Agreement, effective as of July 1, 1989, amending Exhibit D to
Exhibit 10.8 (incorporated herein by reference to the Company's Report on Form 10-K for the year
ended December 31, 1989).
10.17* --Non-Employee Director Retirement Plan, effective as of June 1, 1990 (incorporated by reference to
the Company's Annual Report on Form 10-K for the year ended December 31, 1989).
10.18* --Employment Agreement between Michael K. White and the Company effective as of June 1, 1990
together with amendment dated October 1, 1990 (incorporated herein by reference to the Company's
Annual Report on Form 10-K for the year ended December 31, 1990).
10.19* --Employment Agreement between Ronald W. Forrest and A.R. Stenhouse Reed Shaw & Partners Limited,
dated October 22, 1979, together with amendments dated March 11, 1992 and dated March 12, 1992
(incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended
December 31, 1991).
10.20* --Retirement Agreement between Ronald W. Forrest and the Company, dated November 18, 1993.
10.21* --Contingent Agreement between Ronald A. Iles and the Company, dated January 5, 1988 (incorporated
herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31,
1992).
10.22* --Consulting Agreement between William M. Wilson and Alexander & Alexander Services UK plc, dated
as of March 18, 1993 (incorporated herein by reference to the Company's Annual Report on Form
10-K for the year ended December 31, 1992).
10.23* --Transition Employment, Retirement and Consulting Agreement between Tinsley H. Irvin and the
Company, dated March 16, 1994.
10.24* --Employment Agreement among Lawrence E. Burk, Alexander & Alexander Inc. and the Company, dated
October 25, 1993.
10.25 --Agreement relating to the Company's indemnification in connection with the sale of Shand Morahan
& Co. by the Company: (i) Stock Purchase Agreement, dated as of October 7, 1987 by and between
F-M Acquisition Corporation and Alexander & Alexander Inc. (including certain exhibits thereto);
(ii) Amendment No. 1 to the Stock Purchase Agreement, dated as of February 15, 1989 between F-M
Acquisition Corporation and Alexander & Alexander Inc.; (iii) Waiver and Consent, dated December
18, 1990, by Alexander & Alexander Inc. to a merger of F-M Acquisition Corporation with
Shand/Evanston Group, Inc.; (iv) Confirmation and Assumption Agreement, dated as of December 18,
1990, by Shand/Evanston Group for the benefit
</TABLE>
12
<PAGE>
<TABLE>
<S> <C>
of Alexander & Alexander Inc.; and (v) Letter Agreement, dated December 18, 1990 among Alexander
& Alexander Inc., F-M Acquisition Corporation, Shand/Evanston Group, Inc. and Markel Corporation.
10.26 --Agreement relating to the Company's indemnification in connection with the sale of Sphere Drake
Insurance Group plc: Share Purchase Agreement between Sphere Drake Acquisitions (U.K.) Limited
and Alexander Stenhouse & Partners Ltd., dated as of October 9, 1987, including all exhibits and
schedules thereto.
13.0 --1993 Annual Report to Stockholders.
21.0 --Subsidiaries of the Registrant.
23.0 --Independent Auditors' Consent.
</TABLE>
(b) Reports on Form 8-K:
In a report filed on Form 8-K, dated December 15, 1993, the Company reported the
acquisition by the Company of all of the partnership interests of Clay &
Partners, a U.K.-based actuarial consulting operation in exchange for
2.27 million shares of the Company's Common Stock.
In a report filed on Form 8-K, dated January 17, 1994, the Company noticed
certain management and corporate governance changes, including the appointment
of Robert E. Boni as chairman of the Board of Directors of the Company
and the retirement of T.H. Irvin, chairman and chief executive officer.
In a report filed on Form 8-K, dated February 25, 1994, the Company reported
earnings for the year ended and the quarter ended December 31, 1993.
- ---------------
* The referenced exhibit is a management contract or compensation plan or
arrangement described in Item 601(b)(10)(iii) of Regulation S-K.
13
<PAGE>
SIGNATURES
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, on the 31st day of
March, 1994.
ALEXANDER & ALEXANDER SERVICES INC.
By: /s/ TINSLEY H. IRVIN March 31, 1994
_____________________________________________
TINSLEY H. IRVIN DATE
Chief Executive Office and Director
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 capacity and on the dates indicated.
<TABLE>
<S> <C> <C> <C>
/s/ TINSLEY H. IRVIN March 31, 1994 /s/ PETER C. GODSOE March 31, 1994
- ----------------------------------------- -------------------------------------------
TINSLEY H. IRVIN DATE PETER C. GODSOE DATE
Chief Executive Officer and Director Director
/s/ PAUL E. ROHNER March 31, 1994 /s/ ANGUS M.M. GROSSART March 31, 1994
- ----------------------------------------- --------------------------------------------
PAUL E. ROHNER DATE ANGUS M.M. GROSSART DATE
Senior Vice President and Chief Financial Officer Director
/s/ RONALD L. HENDRICK March 31, 1994 /s/ VINCENT R. MCLEAN March 31, 1994
- ----------------------------------------- --------------------------------------------
RONALD L. HENDRICK DATE VINCENT R. MCLEAN DATE
Vice President and Controller Director
/s/ ROBERT E. BONI March 31, 1994 /s/ MICHAEL K. WHITE March 31, 1994
- ----------------------------------------- --------------------------------------------
ROBERT E. BONI DATE MICHAEL K. WHITE DATE
Chairman of the Board of Directors and Director Director
/s/ KENNETH BLACK, JR. March 31, 1994 /s/ WILLIAM M. WILSON March 31, 1994
- ----------------------------------------- -------------------------------------------
KENNETH BLACK, JR. DATE WILLIAM M. WILSON DATE
Director Director
/s/ JOHN A. BOGARDUS, JR. March 31, 1994
- -----------------------------------------
JOHN A. BOGARDUS, JR. DATE
Director
</TABLE>
14
<PAGE>
ALEXANDER & ALEXANDER SERVICES INC. AND SUBSIDIARIES
TABLE OF CONTENTS
FINANCIAL STATEMENTS AND RELATED INFORMATION
The following consolidated financial statements and related information of
Alexander & Alexander Services Inc. and subsidiaries, included in the Company's
1993 Annual Report to Stockholders, are incorporated by reference to Item 8 of
this report:
Independent Auditors' Report
Consolidated Statements of Operations for each of the three years in
the period ended December 31, 1993
Consolidated Balance Sheets, December 31, 1993 and 1992
Consolidated Statements of Cash Flows for each of the three years in
the period ended December 31, 1993
Consolidated Statements of Stockholders' Equity for each of the three
years in the period ended December 31, 1993
Notes to Financial Statements, including unaudited quarterly financial
data
The following supplemental schedules and related information of Alexander &
Alexander Services Inc. and its consolidated subsidiaries are included in pages
16 through 20 of this report:
Independent Auditors' Report
Schedule II-- Amounts Receivable from Officers and Employees of the
Company and Its Affiliates
Schedule VIII--Valuation and Qualifying Accounts
15
<PAGE>
INDEPENDENT AUDITORS' REPORT
To ALEXANDER & ALEXANDER SERVICES INC.:
We have audited the consolidated financial statements of Alexander &
Alexander Services Inc. and Subsidiaries as of December 31, 1993 and 1992, and
for each of the three years in the period ended December 31, 1993, and have
issued our report thereon dated February 25, 1994; such consolidated financial
statements and report are included in your 1993 Annual Report to Stockholders
and are incorporated herein by reference. Our audits also included the
consolidated financial statement schedules of Alexander & Alexander Services
Inc. and Subsidiaries, listed in the accompanying table of contents referred to
under Item 14. These financial statement schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits. In our opinion, such consolidated financial statement schedules, when
considered in relation to the basic consolidated financial statements taken as a
whole, present fairly in all material respects the information set forth
therein.
DELOITTE & TOUCHE
Baltimore, Maryland
February 25, 1994
16
<PAGE>
SCHEDULE II
ALEXANDER & ALEXANDER SERVICES INC. AND SUBSIDIARIES
AMOUNTS RECEIVABLE FROM OFFICERS AND EMPLOYEES
OF THE COMPANY AND ITS AFFILIATES
FOR THE YEAR ENDED DECEMBER 31, 1993
(THOUSANDS OF DOLLARS)
<TABLE><CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- --------------------------------------------- ----------- ----------- ---------------------------- ----------------------
DEDUCTIONS BALANCE AT
---------------------------- END OF YEAR
BALANCE AT FOREIGN ----------------------
BEGINNING AMOUNTS CURRENCY NON-
NAME OF DEBTOR OF YEAR ADDITIONS COLLECTED TRANSLATION CURRENT CURRENT
- --------------------------------------------- ----------- ----------- ----------- --------------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Ball, G.(1).................................. $ 150 $ -- $ 9 $ -- $ 9 $ 132
Caputo, C.(1)................................ 150 -- -- -- -- 150
Clay, R.(1).................................. 200 -- 200 -- -- --
Gunnin, T.(1)................................ 274 -- 8 -- 8 258
Fotheringham, S.(1).......................... -- 366 -- 6 360 --
Hands, K.(1)................................. 111 -- 111 -- -- --
Horrick, J.S.(1)............................. 168 -- 10 8 9 141
Kiessling, E.(1)............................. 500 -- -- -- -- 500
Osterhout, D.R.(1)........................... 184 11 -- -- 195 --
Reece, J.(1)................................. 300 24 24 -- 300 --
Swartout, D.(1).............................. 234 -- 5 11 4 214
----------- ----------- ----------- ----- ----------- ---------
Total................................... $ 2,271 $ 401 $ 367 $ 25 $ 885 $ 1,395
----------- ----------- ----------- ----- ----------- ---------
----------- ----------- ----------- ----- ----------- ---------
</TABLE>
- ---------------
Notes:
(1) Represents housing loan due to employee relocation.
17
<PAGE>
SCHEDULE II
ALEXANDER & ALEXANDER SERVICES INC. AND SUBSIDIARIES
AMOUNTS RECEIVABLE FROM OFFICERS AND EMPLOYEES
OF THE COMPANY AND ITS AFFILIATES
FOR THE YEAR ENDED DECEMBER 31, 1992
(THOUSANDS OF DOLLARS)
<TABLE><CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ---------------------------------- ----------- ----------- ----------------------------------------- ----------------------
DEDUCTIONS BALANCE AT
----------------------------------------- END OF YEAR
BALANCE AT AMOUNTS FOREIGN ----------------------
BEGINNING AMOUNTS WRITTEN CURRENCY NON-
NAME OF DEBTOR OF YEAR ADDITIONS COLLECTED OFF(2) TRANSLATION CURRENT CURRENT
- ---------------------------------- ----------- ----------- ----------- ----------- --------------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Ball, G. (1)...................... $ 150 $ -- $ -- $ -- $ -- $ 4 $ 146
Caputo, C. (1).................... 150 -- -- -- -- -- 150
Clay, R.(1)....................... 210 -- -- 10 -- -- 200
Greig, W.D.(1).................... 187 -- 176 -- 11 -- --
Gunnin, T.(1)..................... 275 -- 1 -- -- -- 274
Hands, K.(1)...................... -- 111 -- -- -- -- 111
Horrick, J.S.(1).................. 194 -- 9 -- 17 9 159
Kiessling, E.(1).................. 500 -- -- -- -- -- 500
Osterhout, D.R.(1)................ 184 12 12 -- -- 4 180
Paulding, J.(1)................... 250 -- 250 -- -- -- --
Reece, J.(1)...................... 324 24 48 -- -- -- 300
Swartout, D.(1)................... -- 248 2 -- 12 4 230
----------- ----------- ----------- ----- ----- ----- ---------
Total........................ $ 2,424 $ 395 $ 498 $ 10 $ 40 $ 21 $ 2,250
----------- ----------- ----------- ----- ----- ----- ---------
----------- ----------- ----------- ----- ----- ----- ---------
</TABLE>
- ---------------
Notes:
(1) Represents housing loan due to employee relocation.
(2) Represents portion of debt forgiven.
18
<PAGE>
SCHEDULE II
ALEXANDER & ALEXANDER SERVICES INC. AND SUBSIDIARIES
AMOUNTS RECEIVABLE FROM OFFICERS AND EMPLOYEES
OF THE COMPANY AND ITS AFFILIATES
FOR THE YEAR ENDED DECEMBER 31, 1991
(THOUSANDS OF DOLLARS)
<TABLE><CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- --------------------------------------------- ----------- ----------- ---------------------------- ----------------------
DEDUCTIONS BALANCE AT
---------------------------- END OF YEAR
BALANCE AT FOREIGN ----------------------
BEGINNING AMOUNTS CURRENCY NON-
NAME OF DEBTOR OF YEAR ADDITIONS COLLECTED TRANSLATION CURRENT CURRENT
- --------------------------------------------- ----------- ----------- ----------- --------------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Ball, G.(1).................................. $ -- $ 150 $ -- $ -- $ -- $ 150
Berrio, A.D.(2).............................. 108 30 51 2 85 --
Broadbent, A.(1)............................. 231 -- 213 18 -- --
Buck, K.(1).................................. 100 7 25 -- 26 56
Caputo, C.(1)................................ 150 -- -- -- -- 150
Clay, R.(1).................................. 210 -- -- -- 10 200
Greig, W.D.(1)............................... 193 -- -- 6 187 --
Gunnin, T.(1)................................ 26 249 -- -- -- 275
Hester, A.(1)................................ 173 -- 149 24 -- --
Horrick, J.S.(1)............................. 201 -- 8 (1) 8 186
Kemp, J.(3).................................. 176 -- 176 -- -- --
Kiessling, E.(1)............................. -- 500 -- -- -- 500
Mills, M.F.(1)............................... 101 -- 10 -- 10 81
Murphy, J.(1)................................ 159 3 162 -- -- --
Osterhout, D.R.(1)........................... 184 12 12 -- 184 --
Paulding, J.(1).............................. -- 250 -- -- 250 --
Reece, J.(1)................................. 300 24 -- -- 24 300
----------- ----------- ----------- ----- ----------- ---------
Total................................... $ 2,312 $ 1,225 $ 806 $ 49 $ 784 $ 1,898
----------- ----------- ----------- ----- ----------- ---------
----------- ----------- ----------- ----- ----------- ---------
</TABLE>
- ---------------
Notes:
(1) Represents housing loan due to employee relocation.
(2) Represents personal assistance loan.
(3) Represents obligation for compensation advanced to employee.
19
<PAGE>
SCHEDULE VIII
ALEXANDER & ALEXANDER SERVICES INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1993
(THOUSANDS OF DOLLARS)
<TABLE><CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ------------------------------------------------ ----------- ------------------------ ------------- -----------
ADDITIONS
------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE
BEGINNING COSTS AND OTHER AT END
DESCRIPTION OF YEAR EXPENSES ACCOUNTS(1) DEDUCTIONS(2) OF YEAR
- ------------------------------------------------ ----------- ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts receivable:
Year Ended December 31, 1991(3)............... $ 24,350 $ 4,114 $ (2,160) $ 1,896 $ 24,408
----------- ----------- ----------- ------------- -----------
----------- ----------- ----------- ------------- -----------
Year Ended December 31, 1992(3)............... $ 24,408 $ 5,424 $ (5,081) $ 2,632 $ 22,119
----------- ----------- ----------- ------------- -----------
----------- ----------- ----------- ------------- -----------
Year Ended December 31, 1993.................. $ 22,119 $ 3,793 $ (2,019) $ 3,566 $ 20,327
----------- ----------- ----------- ------------- -----------
----------- ----------- ----------- ------------- -----------
</TABLE>
- ---------------
Notes:
(1) Recoveries and adjustments for foreign currency translation.
(2) Writeoffs of receivables which are not recoverable.
(3) Restated to reflect acquisition of Clay & Partners.
20
<PAGE>
ALEXANDER & ALEXANDER SERVICES INC.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1993
INDEX TO EXHIBITS
Certain exhibits to this Report on Form 10-K have been incorporated by
reference. For a list of these Exhibits see Item 14 hereof. The following
exhibits are being filed herewith:
<TABLE><CAPTION>
EXHIBIT PAGE NO.
- ----------- -------------
<S> <C> <C>
3.3 Articles Supplementary of Alexander & Alexander Services Inc., dated December 3, 1993........
3.4 Amended and Restated Bylaws of The Company, dated as of January 14, 1994.....................
10.3 1993 Optionplan of Alexander & Alexander B.V. under Alexander & Alexander's 1988 Long Term
Incentive Compensation Plan..................................................................
10.20 Retirement Agreement between Ronald W. Forrest and the Company, dated November 18, 1993......
10.23 Transition Employment, Retirement and Consulting Agreement between Tinsley H. Irvin and
Alexander & Alexander Services Inc., dated March 16, 1994....................................
10.24 Employment Agreement among Lawrence E. Burk, Alexander & Alexander Inc. and Alexander &
Alexander Services Inc., dated October 25, 1993..............................................
10.25 Agreement relating to the Company's indemnification in connection with the sale of Shand
Morahan & Co. by the Company: (i) Stock Purchase Agreement, dated as of October 7, 1987 by
and between F-M Acquisition Corporation and Alexander & Alexander Inc. (including certain
exhibits thereto); (ii) Amendment No. 1 to the Stock Purchase Agreement, dated as of
February 15, 1989 between F-M Acquisition Corporation and Alexander & Alexander Inc.; (iii)
Waiver and Consent, dated December 18, 1990, by Alexander & Alexander Inc. to a merger of
F-M Acquisition Corporation with Shand/Evanston Group, Inc.; (iv) Confirmation and
Assumption Agreement, dated as of December 18, 1990, by Shand/Evanston Group for the
benefit of Alexander & Alexander Inc.; and (v) Letter Agreement, dated December 18, 1990
among Alexander & Alexander Inc., F-M Acquisition Corporation, Shand/Evanston Group, Inc.
and Markel Corporation.....................................................................
10.26 Agreement relating to the Company's indemnification in connection with the sale of Sphere
Drake Insurance Group plc: Share Purchase Agreement between Sphere Drake Acquisitions
(U.K.) Limited and Alexander Stenhouse & Partners Ltd., dated as of October 8, 1987,
including all exhibits and schedules thereto...............................................
13.0 1993 Annual Report to Stockholders...........................................................
21.0 Subsidiaries of the Registrant...............................................................
23.0 Independent Auditors' Consent................................................................
</TABLE>
ALEXANDER & ALEXANDER SERVICES INC.
-----------------------------------
ARTICLES SUPPLEMENTARY
Alexander & Alexander Services Inc., a Maryland
corporation (the "Corporation"), hereby certifies to the State
Department of Assessments and Taxation of Maryland that:
FIRST: Pursuant to the authority granted to and
-----
vested in the Board of Directors of the Corporation (hereinafter
called the "Board of Directors" or the "Board") in accordance
with the provisions of Article SIXTH of the charter of the
Corporation, the Board of Directors, at a meeting duly convened
and held on November 18, 1993, adopted a resolution classifying
100,000 of the Corporation's authorized but unissued shares of
Preferred Stock, $1.00 par value per share (the "Preferred
Stock"), as "Series A Junior Participating Preferred Stock," and
fixing the preferences, conversion and other rights, voting
powers, restrictions, limitations as to dividends,
qualifications and terms and conditions of redemption thereof as
follows:
Series A Junior Participating Preferred Stock
I. Designation and Amount
----------------------
The shares classified hereby shall be designated
as "Series A Junior Participating Preferred Stock" (the
"Series A Preferred Stock"). The number of shares
classified hereby shall be 100,000 and, when aggregated
with the shares classified as Series A Preferred Stock
under Article SIXTH of the charter of the Corporation,
the total number of shares constituting the Series A
Preferred Stock shall be 600,000. Such total number of
shares may be increased or decreased by resolution of
the Board of Directors; provided, that no decrease
--------
shall reduce the number of shares of Series A Preferred
Stock to a number less than the number of shares then
outstanding plus the number of shares reserved for
issuance upon the exercise of outstanding options,
rights or warrants or upon the conversion of any
outstanding securities issued by the Corporation
convertible into Series A Preferred Stock.
II. Dividends and Distributions
---------------------------
<PAGE>
(A) Subject to the rights of the holders of any
shares of any series of Preferred Stock (or any similar
stock) ranking prior and superior to the Series A
Preferred Stock with respect to dividends, the holders
of shares of Series A Preferred Stock, in preference to
the holders of Common Stock, $1.00 par value per share
(the "Common Stock"), of the Corporation, and of any
other junior stock, shall be entitled to receive, when,
as and if declared by the Board of Directors out of
funds legally available for the purpose, quarterly
dividends payable in cash on the first day of March,
June, September and December in each year (each such
date being referred to herein as a "Quarterly Dividend
Payment Date"), commencing on the first Quarterly
Dividend Payment Date after the first issuance of a
share or fraction of a share of Series A
<PAGE>
Preferred Stock, in an amount per share (rounded to the
nearest cent) equal to the greater of (a) $10 or (b) subject
to the provision for adjustment hereinafter set forth, 100
times the aggregate per share amount of all cash dividends,
and 100 times the aggregate per share amount (payable in
kind) of all non-cash dividends or other distributions,
other than a dividend payable in shares of Common Stock or
a subdivision of the outstanding shares of Common Stock
(by reclassification or otherwise), declared on the
Common Stock
- 3 -
<PAGE>
since the immediately preceding Quarterly Dividend Payment
Date or, with respect to the first Quarterly Dividend
Payment Date, since the first issuance of any share or
fraction of a share of Series A Preferred Stock. In the
event the Corporation shall at any time declare or pay any
dividend on the Common Stock payable in shares of Common
Stock, or effect a subdivision or combination or consolidation
of the outstanding shares of Common Stock (by reclassification
or otherwise than by payment of a dividend in shares of
- 4 -
<PAGE>
Common Stock) into a greater or lesser number of shares of
Common Stock, then in each such case the amount to which
holders of shares of Series A Preferred Stock were entitled
immediately prior to such event under clause (b) of the
preceding sentence shall be adjusted by multiplying such
amount by a fraction, the numerator of which is the number
of shares of Common Stock outstanding immediately after such
event and the denominator of which is the number of shares of
Common Stock that were outstanding immediately prior to such
event.
- 5 -
<PAGE>
(B) The Corporation shall declare a dividend or
distribution on the Series A Preferred Stock as
provided in paragraph (A) of this Section immediately
after it declares a dividend or distribution on the
Common Stock (other than a dividend payable in shares
of Common Stock); provided that, in the event no
dividend or distribution shall have been declared on
the Common Stock during the period between any
Quarterly Dividend Payment Date and the next
subsequent Quarterly Dividend Payment Date, a dividend
of $10 per share on the Series A Preferred Stock shall
nevertheless be payable on such subsequent Quarterly
Dividend Payment Date.
(C) Dividends shall begin to accrue and be
cumulative on outstanding shares of Series A Preferred
Stock from the Quarterly Dividend Payment Date next
preceding the date of issue of such shares, unless the
date of issue of such shares is prior to the record
date for the first Quarterly Dividend Payment Date, in
which case dividends on such shares shall begin to
accrue from the date of issue of such shares, or unless
the date of issue is a Quarterly Dividend Payment Date
or is a date after the record date for the
determination of holders of shares of Series A
Preferred Stock entitled to receive a quarterly
dividend and before such Quarterly Dividend Payment
Date, in either of which events such dividends shall
begin to accrue and be cumulative from such Quarterly
Dividend Payment Date. Accrued but unpaid dividends
shall not bear interest. Dividends paid on the shares
of Series A Preferred Stock in an amount less than the
total amount of such dividends at the time accrued and
payable on such shares shall be allocated pro rata on a
share-by-share basis among all such shares at the time
outstanding. The Board of Directors may fix a record
date for the determination of holders of shares of
Series A Preferred Stock entitled to receive payment of
a dividend or distribution declared thereon, which
record date shall be not more than 60 days prior to the
date fixed for the payment thereof.
III. Voting Rights
-------------
- 6 -
<PAGE>
The holders of shares of Series A Preferred Stock
shall have the following voting rights:
(A) Subject to the provision for adjustment
hereinafter set forth, each share of Series A Preferred
Stock shall entitle the holder thereof to 100 votes on
all matters submitted to a vote of the shareholders of
the Corporation. In the event the Corporation shall at
any time declare or pay any dividend on the Common
Stock payable in shares of Common Stock, or effect a
subdivision or combination or consolidation of the
outstanding shares of Common Stock (by reclassification
or otherwise than by payment of a dividend in shares of
Common Stock) into a greater or lesser number of shares
of Common Stock, then in each such case the number of
votes per share to which holders of shares of Series A
Preferred Stock were entitled immediately prior to such
event shall be adjusted by multiplying such number by a
fraction, the numerator of which is the number of shares
of Common Stock outstanding immediately after such event
and the denominator of which is the number of shares of
Common Stock that were outstanding immediately prior to
such event.
(B) Except as otherwise provided herein, in any
other Articles Supplementary creating a series of
Preferred Stock or any similar stock, or by law, the
holders of shares of Series A Preferred Stock and the
holders of shares of Common Stock and any other capital
stock of the Corporation having general voting rights
shall vote together as one class on all matters
submitted to a vote of shareholders of the Corporation.
(C) Except as set forth herein, or as otherwise
provided by law, holders of Series A Preferred Stock
shall have no voting rights.
IV. Certain Restrictions
--------------------
(A) Whenever quarterly dividends or other
- 7 -
<PAGE>
dividends or distributions payable on the Series A
Preferred Stock as provided in Section II are in
arrears, thereafter and until all accrued and unpaid
dividends and distributions, whether or not declared,
on shares of Series A Preferred Stock outstanding shall
have been paid in full, the Corporation shall not:
(i) declare or pay dividends, or make any other
distributions, on any shares of stock ranking junior
(either as to dividends or upon liquidation,
dissolution or winding up) to the Series A Preferred
Stock;
(ii) declare or pay dividends, or make any other
distributions, on any shares of stock ranking on a
parity (either as to dividends or upon liquidation,
dissolution or winding up) with the Series A Preferred
Stock, except dividends paid ratably on the Series A
Preferred Stock and all such parity stock on which
dividends are payable or in arrears in proportion to
the total amounts to which the holders of all such
shares are then entitled;
(iii) redeem or purchase or otherwise acquire for
consideration shares of any stock ranking junior
(either as to dividends or upon liquidation,
dissolution or winding up) to the Series A Preferred
Stock, provided that the Corporation may at any time
redeem, purchase or otherwise acquire shares of any
such junior stock in exchange for shares of any stock
of the Corporation ranking junior (either as to
dividends or upon dissolution, liquidation or winding
up) to the Series A Preferred Stock; or
(iv) redeem or purchase or otherwise acquire for
consideration any shares of Series A Preferred Stock,
or any shares of stock ranking on a parity with the
Series A Preferred Stock, except in accordance with a
purchase offer made in writing or by publication (as
determined by the Board of Directors) to all holders of
such shares upon such terms as the Board of Directors,
after consideration of the respective annual dividend
rates and other relative rights and preferences of the
- 8 -
<PAGE>
respective series and classes, shall determine in good
faith will result in fair and equitable treatment among
the respective series or classes.
(B) The Corporation shall not permit any
subsidiary of the Corporation to purchase or otherwise
acquire for consideration any shares of stock of the
Corporation unless the Corporation could, under
paragraph (A) of this Section IV purchase or otherwise
acquire such shares at such time and in such manner.
V. Reacquired Shares
-----------------
Any shares of Series A Preferred Stock purchased
or otherwise acquired by the Corporation in any manner
whatsoever shall be retired and cancelled promptly
after the acquisition thereof. All such shares shall
upon their cancellation become authorized but unissued
shares of Preferred Stock and may be reissued as part
of a new series of Preferred Stock subject to the
conditions and restrictions on issuance set forth
herein, in the Restated Articles of Incorporation, as
amended, in any other Articles Supplementary
classifying a series of Preferred Stock or any similar
stock or as otherwise required by law.
VI. Liquidation, Dissolution or Winding Up
--------------------------------------
Upon any liquidation, dissolution or winding up of
the Corporation, no distribution shall be made (1) to
the holders of shares of stock ranking junior (either
as to dividends or upon liquidation, dissolution or
winding up) to the Series A Preferred Stock unless,
prior thereto, the holders of shares of Series A
Preferred Stock shall have received $100 per share,
plus an amount equal to accrued and unpaid dividends and
- 9 -
<PAGE>
distributions thereon, whether or not declared,
to the date of such payment, provided that the
holders of shares of Series A Preferred Stock
shall be entitled to receive an aggregate
amount per share, subject to the provision for
adjustment hereinafter set forth, equal to 100
times the aggregate amount to be distributed per
share to holders of shares of Common Stock,
or (2) to the holders of shares of stock
ranking on a parity (either as to dividends
or upon liquidation, dissolution or winding up)
with the Series A Preferred
- 10 -
<PAGE>
Stock, except distributions made ratably on
the Series A Preferred Stock and all such
parity stock in proportion to the total
amounts to which the holders of all such
shares are entitled upon such liquidation,
dissolution or winding up. In the event the
Corporation shall at any time declare or
pay any dividend on the Common Stock payable
in shares of Common Stock, or effect a
subdivision or combination or consolidation
of the outstanding shares of Common Stock (by
reclassification or otherwise than by payment
of a dividend in shares of Common Stock)
- 11 -
<PAGE>
into a greater or lesser number of shares of
Common Stock, then in each such case the
aggregate amount to which holders of shares of
Series A Preferred Stock were entitled
immediately prior to such event under the
proviso in clause (1) of the preceding
sentence shall be adjusted by multiplying
such amount by a fraction the numerator of
which is the number of shares of Common Stock
outstanding immediately after such event and the
denominator of which is the number of shares of
Common Stock that were outstanding immediately
prior to such
- 12 -
<PAGE>
event.
VII. Consolidation, Merger, etc.
---------------------------
In case the Corporation shall enter into any
consolidation, merger, combination or other transaction
in which the shares of Common Stock are exchanged for
or changed into other stock or securities, cash and/or
any other property, then in any such case each share of
Series A Preferred Stock shall at the same time be
similarly exchanged or changed into an amount per
share, subject to the provision for adjustment
hereinafter set forth, equal to 100 times the aggregate
amount of stock, securities, cash and/or any other
property (payable in kind), as the case may be, into
which or for which each share of Common Stock is
changed or exchanged. In the event the Corporation
shall at any time declare or pay any dividend on the
Common Stock payable in shares of Common Stock,
or effect a subdivision or combination or consolidation
of the outstanding shares of Common Stock (by
reclassification or otherwise than by payment of a
dividend in shares of Common Stock) into a greater or
lesser number of shares of Common Stock, then in each
such case the amount set forth in the preceding
sentence with respect to the exchange or change of
shares of Series A Preferred Stock shall be adjusted
by multiplying such amount by a fraction, the
numerator of which is the number of shares of Common
Stock outstanding immediately after such event
and the denominator of which is the number of shares
of Common Stock that were outstanding immediately
prior to such event.
VIII. Redemption
----------
The shares of Series A Preferred Stock shall not
be redeemable.
- 13 -
<PAGE>
IX. Rank
----
The Series A Preferred Stock shall rank, with
respect to the payment of dividends and the
distribution of assets, junior to all series of any
other class of the Corporation's Preferred Stock.
X. Amendment
---------
The charter of the Corporation shall not be
amended in any manner which would materially alter or
change the powers, preferences or special rights of the
Series A Preferred Stock so as to affect them adversely
without the affirmative vote of the holders of at least
two-thirds of the outstanding shares of Series A
Preferred Stock, voting together as a single series.
SECOND: The undersigned Vice President acknowledges
------
these Articles Supplementary to be the corporate act of the
Corporation and, as to all matters or facts required to be
verified under oath, the undersigned Vice President acknowledges
that, to the best of his knowledge, information and belief,
these matters and facts are true in all material respects and
that this statement is made under the penalties for perjury.
IN WITNESS WHEREOF, the Corporation has caused these
Articles Supplementary to be executed under seal in its name and
on its behalf by its Vice President and attested to by its
Secretary on this 3rd day of December, 1993.
ATTEST: ALEXANDER & ALEXANDER SERVICES
INC.
By: (SEAL)
------------------------- -------------------------
, Secretary , Vice President
- 14 -
ALEXANDER & ALEXANDER SERVICES INC.
BY-LAWS
<PAGE>
TABLE OF CONTENTS
-----------------
Page
----
ARTICLE I. STOCKHOLDERS
Section 1. Annual Meetings. . . . . . . . . . . .I-1
Section 2. Special Meetings Called by the
President or the Board of Directors .I-1
Section 3. Special Meetings Called by
Stockholders . . . . . . . . . . . .I-2
Section 4. Removal of Directors . . . . . . . . .I-2
Section 5. Voting, Proxies, Record Date . . . . .I-3
Section 6. Quorum . . . . . . . . . . . . . . . .I-3
Section 7. Filing Proxies . . . . . . . . . . . .I-3
Section 8. Place of Meetings. . . . . . . . . . .I-4
Section 9. Order of Business. . . . . . . . . . .I-4
Section 10. Informal Action by Stockholders. . . .I-5
Section 11. Director Nominations . . . . . . . . .I-5
Section 12. New Business . . . . . . . . . . . . .I-8
ARTICLE II. BOARD OF DIRECTORS
Section 1. Powers . . . . . . . . . . . . . . . .II-1
Section 2. Number, Term of Office, Removal. . . .II-1
Section 3. Organization Meetings,
Regular Meetings . . . . . . . . . .II-2
Section 4. Special Meetings . . . . . . . . . . .II-2
Section 5. Quorum . . . . . . . . . . . . . . . .II-2
Section 6. Notice of Meetings . . . . . . . . . .II-3
Section 7. Election . . . . . . . . . . . . . . .II-3
Section 8. Vacancies. . . . . . . . . . . . . . .II-3
Section 9. Executive and Other Committees . . . .II-4
Section 10. Rules and Regulations. . . . . . . . .II-5
Section 11. Compensation of Directors. . . . . . .II-5
Section 12. Informal Action by the Directors . . .II-5
ARTICLE III. OFFICERS
Section 1. Officers of the Corporation. . . . . .III-1
Section 2. Officers of the Board of Directors . .III-1
Section 3. Chief Executive Officer. . . . . . . .III-2
Section 4. Chairman, Deputy Chairman or Deputy
Chairmen and Vice Chairman or Vice
Chairmen of the Board . . . . . . . .III-2
Section 5. Chairman of the Executive Committee. .III-3
Section 6. President. . . . . . . . . . . . . . .III-3
Section 7. Chief Operating Officer. . . . . . . .III-4
Section 8. Executive Vice-President . . . . . . .III-4
Section 9. Senior Vice-President. . . . . . . . .III-4
-i-
<PAGE>
Page
----
ARTICLE III. OFFICERS (continued)
Section 10. Vice-Presidents and
Assistant Vice-Presidents. . . . . . . . . .III-5
Section 11. Chief Financial Officer. . . . . . . .III-5
Section 12. Treasurer. . . . . . . . . . . . . . .III-5
Section 13. Secretary. . . . . . . . . . . . . . .III-5
Section 14. Controller . . . . . . . . . . . . . .III-6
Section 15. Assistant Treasurer, Assistant
Secretary and Assistant Controller . . . . .III-6
Section 16. Removal and Term of Contracts. . . . .III-7
Section 17. Vacancies. . . . . . . . . . . . . . .III-7
Section 18. Substitutes. . . . . . . . . . . . . .III-7
ARTICLE IV. RESIGNATION. . . . . . . . . . . . . . . .IV-1
ARTICLE V. COMMERCIAL PAPER, ETC.. . . . . . . . . . .V-1
ARTICLE VI. STOCK
Section 1. Issue. . . . . . . . . . . . . . . . .VI-1
Section 2. Transfers. . . . . . . . . . . . . . .VI-1
Section 3. Form of Certificates, Procedures . . .VI-1
Section 4. Record Dates for Dividends
and Stockholders Meetings. . . . . . . . . .VI-1
Section 5. Lost Certificate . . . . . . . . . . .VI-2
ARTICLE VII. NOTICE
Section 1. Notice to Stockholders . . . . . . . .VII-1
Section 2. Notice to Directors and Officers . . .VII-1
Section 3. Waiver of Notice . . . . . . . . . . .VII-1
ARTICLE VIII. VOTING OF STOCK IN OTHER CORPORATIONS. .VIII-1
ARTICLE IX. MISCELLANEOUS PROVISIONS
Section 1. Distributions. . . . . . . . . . . . .IX-1
Section 2. Fiscal Year. . . . . . . . . . . . . .IX-1
Section 3. Seal . . . . . . . . . . . . . . . . .IX-1
Section 4. Non-Applicability of Maryland
Control Share Act . . . . . . . . . . . . . .IX-1
ARTICLE X. INDEMNIFICATION . . . . . . . . . . . . . .X-1
ARTICLE XI. AMENDMENTS . . . . . . . . . . . . . . . .XI-1
-ii-
<PAGE>
ARTICLE I. STOCKHOLDERS
------------------------
SECTION 1. Annual Meetings.
---------------
The Annual Meeting of the Stockholders of the Corporation
shall be held on the third Thursday of May of every year at 9:30
A.M., or on such other date or at such other time within the period
beginning on the Fifteenth (15th) day preceding, and ending on the
Fifteenth (15th) day following, such third Thursday in May, as may
be fixed from time to time by the Board of Directors. Not less
than ten (10) nor more than ninety (90) days written or printed
notice stating the place, day and hour of each annual meeting shall
be given in the manner provided in Section 1 of Article VII hereof.
The business to be transacted at the annual meeting shall include
the election of directors, and any other business within the power
of the Corporation. All annual meetings shall be general meetings.
SECTION 2. Special Meetings Called by the President or the
-----------------------------------------------
Board of Directors.
------------------
At any time in the interval between annual meetings, special
meetings of stockholders may be called by the President, or by a
majority of the Board of Directors. Not less than ten (10) nor
more than ninety (90) days written or printed notice stating the
place, day and hour of such meeting and the business proposed to be
transacted thereat shall be given in the manner provided in Section
1 of Article VII hereof. No business shall be transacted at any
special meeting except that named in the notice.
I-1
<PAGE>
SECTION 3. Special Meeting Called by Stockholders.
--------------------------------------
Upon the request in writing delivered to the President or
Secretary by the holders of twenty-five (25%) percent or more of
all shares outstanding and entitled to vote, it shall be the duty
of such President or Secretary to call forthwith a special meeting
of the stockholders. Such request shall state the purpose or
purposes of such meeting and the matters proposed to be acted on
thereat. The Secretary shall inform such stockholders of the
reasonably estimated costs of preparing and mailing the notice of
the meeting. If upon payment of such costs to the Corporation, the
person to whom such request in writing shall have been delivered
shall fail to issue a call for such meeting within ten (10) days
after the receipt of such request and payment of costs, then the
stockholders owning twenty-five (25%) percent or more of the voting
shares, may do so upon giving not more than thirty (30) days and
not less than fifteen (15) days notice of the time, place and
object of the meeting in the manner provided in Section 1 of
Article VII hereof.
SECTION 4. Removal of Directors.
--------------------
At any special meeting of the stockholders called in the
manner provided for by this Article, the stockholders, by the vote
of a majority of all shares of stock outstanding and entitled to
vote, may remove any director or directors from office and may
elect a successor or successors to fill any resulting vacancies for
the remainder of his or their term.
I-2
<PAGE>
SECTION 5. Voting, Proxies, Record Date.
----------------------------
At all meetings of stockholders any stockholder shall be
entitled to vote by proxy. Such proxy shall be in writing and
signed by the stockholder or by his duly authorized attorney in
fact. The proxy shall be dated but need not be sealed, witnessed
or acknowledged. The Board of Directors may fix the record date
for the determination of stockholders entitled to vote in the
manner provided in Article VI of Section 4 of these By-Laws.
SECTION 6. Quorum.
------
A quorum at any annual or special meeting of the stockholders
shall consist of a majority of the shares outstanding and entitled
to vote whether represented in person or by proxy. If at any
annual or special meeting of stockholders a quorum shall fail to
attend in person or by proxy, a majority in interest attending in
person or by proxy may, without further notice, adjourn the meeting
from time to time, not exceeding sixty (60) days in all, until a
quorum shall attend, and thereupon any business may be transacted
which might have been transacted at the meeting as originally
called had the same been held at the time so called.
SECTION 7. Filing Proxies.
--------------
At all meetings of stockholders, the proxies shall be filed
with and be verified by the Secretary of the Corporation, or if the
meeting shall so decide, by the Secretary of the meeting.
I-3
<PAGE>
SECTION 8. Place of Meetings.
-----------------
All meetings of stockholders shall be held in the state of
incorporation, or at such other place within the United States as
may be fixed from time to time by the Board of Directors or
Executive Committee of the Corporation and designated in the
notice.
SECTION 9. Order of Business.
-----------------
At all meetings of stockholders, any stockholder, present and
entitled to vote in person or by proxy shall be entitled to
require, by written request to the Chairman of the meeting, that
the order of business shall be as follows:
1. Organization of the meeting.
2. Submission by Secretary or by Inspectors, if any shall
have been elected or appointed, of a list of the stockholders
entitled to vote, present in person or by proxy.
3. Proof of notice of meeting or of waivers thereof. (The
certificate of the Secretary of the Corporation, or the affidavit
of any other person who mailed or published the notice or caused
the same to be mailed or published, being proof of service of
notice).
4. If an annual meeting, or a meeting called for that
purpose, reading of unapproved minutes of preceding meetings, and
action thereon.
5. Reports.
6. Appointment of tellers, or if stockholders so desire, the
election of inspectors.
I-4
<PAGE>
7. If an annual meeting, or a meeting called for that
purpose, the election of directors.
8. Unfinished business.
9. New business.
10. Adjournment.
SECTION 10. Informal Action by Stockholders.
-------------------------------
Any action required or permitted to be taken at any meeting of
stockholders may be taken without a meeting if a consent in writing
setting forth such action is signed by all the stockholders
entitled to vote thereon, and any of the stockholders entitled to
notice of a meeting but not to vote thereat have waived in writing
any rights which they may have to dissent from such action, and
such consent and waiver are filed with the records of the
Corporation.
SECTION 11. Director Nominations.
--------------------
Nominations of candidates for election as directors at any
meeting of stockholders may be made (a) by or at the recommendation
of a majority of the directors then in office or (b) by any
stockholder of the Corporation who is a stockholder of record at
the time of giving of notice provided for in this Section, who
shall be entitled to vote for the election of directors at the
meeting, and who complies with the notice procedures set forth in
this Section. Only persons nominated in accordance with the
procedures set forth in this Section shall be eligible for election
as directors by the stockholders.
I-5
<PAGE>
Nominations, other than those made by or at the recommendation
of the Board of Directors, shall be made pursuant to timely notice
in writing to the Secretary of the Corporation as set forth in this
Section. To be timely, a stockholder's notice shall be delivered
to, or mailed to and received at, the principal executive offices
of the Corporation, not less than sixty (60) days nor more than
ninety (90) days prior to the date of the meeting, as established
pursuant to Section 1 or Section 2 of Article I hereof (depending
on whether the meeting is an annual meeting or special meeting),
regardless of any postponement, deferral, or adjournment of that
meeting to a later date (provided, however, that if less than
seventy (70) days' notice or prior public disclosure of the date of
the scheduled meeting is given or made, notice by the stockholder
to be timely must be so delivered or received not later than the
close of business on the tenth (10th) day following the earlier of
the day on which such notice of the date of the scheduled meeting
was given or the day on which such public disclosure was made).
Such stockholder's notice shall set forth (a) as to each person
whom the stockholder proposes to nominate for election or
reelection as a director (i) the name, age, business address and
residence address of such person, (ii) the principal occupation or
employment of such person, (iii) the class and number of shares of
the Corporation's stock which are beneficially owned (as defined in
Rule 13d-3 under the Securities Exchange Act of 1934, as amended
(the "1934 Act")) by such person on the date
I-6
<PAGE>
of such stockholder's notice, (iv) such person's written consent to
being nominated and, if elected, to serving as a director, and (v)
any other information relating to such person that is required to
be disclosed in solicitations of proxies with respect to nominees
for election as directors, or is otherwise required, in each case
pursuant to Regulation 14A under the 1934 Act, and (b) as to the
stockholder giving the notice (i) the name and address, as they
appear on the Corporation's books, of such stockholder and (ii) the
class and number of shares of the Corporation's stock which are
beneficially owned (as defined in Rule 13d-3 under the 1934 Act) by
such stockholder. At the request of the Board of Directors, any
person nominated by or at the recommendation of the Board for
election as a director shall promptly furnish to the Secretary of
the Corporation the information required to be set forth in a
stockholder's notice of nomination which pertains to the nominee.
The presiding officer of the meeting shall determine and
declare at the meeting whether the nomination was made in
accordance with the terms of this Section. If the presiding
officer determines that a nomination was not made in accordance
with the terms of this Section, the defective nomination shall be
disregarded.
Ballots bearing the names of all the persons who have been
nominated for election as directors at a meeting in accordance with
the procedures set forth in this Section shall be provided
for use at the meeting.
I-7
<PAGE>
Notwithstanding the foregoing provisions of this Section, a
stockholder shall also comply with all applicable requirements of
the 1934 Act and the rules and regulations thereunder with respect
to the matters set forth in this Section.
SECTION 12. New Business.
------------
At an annual meeting of stockholders, only such new business
shall be conducted, and only such proposals shall be acted upon, as
shall have been brought before the annual meeting (a) by or at the
recommendation of a majority of the directors then in office or (b)
by any stockholder of record at the time of giving of notice
provided for in this Section who complies with the notice
procedures set forth in this Section. For a proposal to be
properly brought before an annual meeting by a stockholder, the
stockholder must have given timely notice thereof in writing to the
Secretary of the Corporation. To be timely, a stockholder's notice
must be delivered to, or mailed and received at, the principal
executive offices of the Corporation, not less than sixty (60) days
nor more than ninety (90) days prior to the date of the meeting, as
established pursuant to Section 1 of Article I hereof regardless of
any postponement, deferral, or adjournment of that meeting to a
later date (provided, however, that if less than seventy (70) days'
notice or prior public disclosure of the date of the scheduled
meeting is given or made, notice by the stockholder to be timely
must be so delivered or received not later than the close of
business on the tenth (10th) day following the earlier of the
I-8
<PAGE>
day on which such notice of the date of the scheduled meeting was
given or the day on which such public disclosure was made). Such
stockholder's notice shall set forth as to each matter the
stockholder proposes to bring before the annual meeting (a) a brief
description of the proposal desired to be brought before the annual
meeting and the reasons for conducting such business at the annual
meeting; (b) the name and address, as they appear on the
Corporation's books, of the stockholder proposing such business;
(c) the class and number of shares of the Corporation's stock which
are beneficially owned (as defined in Rule 13d-3 under the 1934
Act) by the stockholder; and (d) any material interest of the
stockholder in such proposal.
The presiding officer of the annual meeting shall determine
and declare at the annual meeting whether the stockholder proposal
was made in accordance with the terms of this Section. If the
presiding officer determines that a stockholder proposal was made
in accordance with the terms of this Section, ballots shall be
provided for use at the meeting with respect to any such proposal.
If the presiding officer determines that a stockholder proposal was
not made in accordance with the terms of this Section, such
proposal shall not be acted upon at the annual meeting.
Notwithstanding the foregoing provisions of this Section, a
stockholder shall also comply with all applicable requirements of
the 1934 Act and the rules and regulations thereunder with respect
to the matters set forth in this Section. This Section shall not
I-9
<PAGE>
prevent the consideration and approval or disapproval at the annual
meeting of reports of officers, directors and committees of the
Board of Directors, but, in connection with such reports, no new
business shall be acted upon at such annual meeting unless stated,
filed and received as herein provided.
I-10
<PAGE>
ARTICLE II. BOARD OF DIRECTORS
-------------------------------
SECTION 1. Powers.
------
The Board of Directors shall have the control and management
of the affairs, business and properties of the Corporation. They
shall have and exercise in the name of the Corporation and on
behalf of the Corporation all the rights and privileges legally
exercisable by the Corporation, except as otherwise provided by
law, by the Charter or by these By-Laws. A director need not be a
stockholder.
SECTION 2. Number, Term of Office, Removal.
-------------------------------
The number of directors of the Corporation shall be the number
named in the Charter; provided, however, that such number may be
increased or decreased from time to time by vote of a majority of
the whole Board of Directors to a number not exceeding twenty (20)
and not less than three (3), but the tenure of office of directors
shall not be affected by any decrease in the number of directors so
made by the Board. The first directors of the Corporation shall
hold their office until the first annual meeting of the Corporation
or until their successors are elected and qualify, and thereafter
the directors shall hold office for the term of one (1) year, or
until their successors are elected and qualify. The Board of
Directors shall keep minutes of its meetings and a full account of
its transactions. A director may be removed from office as
provided in Article I. Section 4, hereof.
II-1
<PAGE>
SECTION 3. Organization Meetings, Regular Meetings.
---------------------------------------
After each meeting of stockholders at which a Board of
Directors shall have been elected, the Board of Directors so
elected shall meet for the purpose of organization and the
transaction of other business, at such time and place as may be
designated by the stockholders at such meeting; or, in the absence
of such designation, shall meet as soon as practicable. No notice
of the organization meeting shall be required if it is held at the
same place and immediately following the annual meeting of
stockholders. The Board of Directors may provide by resolution the
time and place, either within or without the state of
incorporation, for the holding of regular meetings of the Board of
Directors without other notice than such resolution.
SECTION 4. Special Meetings.
----------------
Special meetings of the Board may be called by the President
or by any two (2) of the directors. At least forty-eight (48)
hours notice shall be given of all special meetings; with the
consent of the majority of the directors, a shorter notice may be
given. Special meetings may be held at such time and place,
without or within the State of Maryland, as may be fixed by the
party making the call.
SECTION 5. Quorum.
------
A majority of the Board of Directors shall constitute a quorum
for the transaction of business at every meeting of the Board of
Directors; but if at any meeting there be less than a quorum
II-2
<PAGE>
present, a majority of those present may adjourn the meeting from
time to time, but not for a period exceeding sixty (60) days in
all, without notice other than by announcement at the meeting until
a quorum shall attend. At any such adjourned meeting at which a
quorum shall be present, any business may be transacted which might
have been transacted at the meeting as originally notified.
SECTION 6. Notice of Meetings.
------------------
Notice of the place, day, hour, and agenda of every regular
and special meeting of the Board of Directors shall be given to
each Director, in the manner provided in Section 2 of Article VII
hereof. Subsequent to each Board meeting, and as soon as possible
thereafter, each Director shall be furnished with a copy of the
minutes of said meeting and a list of those actions to be
undertaken by the individual Directors before the next meeting of
the Board of Directors. Said Director shall then send his comments
on the minutes to the Secretary.
SECTION 7. Election.
--------
At each meeting of the stockholders for the election of
directors at which a quorum is present, the directors shall be
elected by a plurality of the votes validly cast in such election.
There shall be no cumulative voting for directors.
SECTION 8. Vacancies.
---------
If the office of a director becomes vacant, including the
removal of a director by the stockholders, pursuant to Article I,
Section 4 hereof, if the stockholders then fail to appoint another
II-3
<PAGE>
in his place, or if the number of directors is increased, such
vacancy may be filled by the Board by a vote of the majority of the
directors then in office, (although such majority is less than a
quorum). The stockholders may, however, at any time during the
term of such director, elect some other person to fill said
vacancy, and thereupon the election by the Board shall be
superseded, and such election by the stockholders shall be deemed a
filling of the vacancy and not a removal, and may be made at any
meeting called for that purpose. If the entire Board of Directors
shall become vacant, any stockholder may call a special meeting in
the same manner that the President may call such meeting, and
directors for the unexpired term may be elected at such special
meeting, in the manner provided for their election at annual
meetings.
SECTION 9. Executive and Other Committees.
------------------------------
The Board of Directors may appoint from among its members an
Executive Committee and other committees, composed of two or more
directors, to serve at the pleasure of the Board of Directors.
The Board of Directors may delegate to committees appointed
under this Section 9 of Article II any of the powers of the Board
of Directors, except the power to declare dividends or
distributions on stock, to issue stock except pursuant to a general
formula or method specified by the Board of Directors by resolution
or by adoption of a stock option or other plan, to recommend to the
stockholders any action which requires stockholder approval, to
II-4
<PAGE>
amend the By-Laws, or to approve any merger or share exchange which
does not require stockholder approval.
SECTION 10. Rules and Regulations.
---------------------
The Board of Directors may adopt such rules and regulations
for the conduct of their meetings and the management of the affairs
of the Corporation as they may deem proper and not inconsistent
with the laws of the State of Maryland or these By-Laws or the
Charter.
SECTION 11. Compensation of Directors.
-------------------------
The Board of Directors shall have power from time to time to
authorize the payment of compensation to the Board of Directors for
past or future services to the Corporation, including fees for
attendance at meetings of the Board of Directors and of committees.
SECTION 12. Informal Action by the Directors.
--------------------------------
Any action required or permitted to be taken at any meeting of
the Board may be taken without a meeting if a written consent to
such action is signed by all members of the Board and such consent
is filed with the minutes of the Board.
II-5
<PAGE>
ARTICLE III. OFFICERS
----------------------
SECTION 1. Officers of the Corporation.
---------------------------
The officers of the Corporation (hereinafter in this Article III
being referred to as "officers") may consist of a Chief Executive
Officer, a President, a Chief Financial Officer, one or more
Executive Vice Presidents, one or more Senior Vice Presidents, one or
more Vice Presidents, one or more Assistant Vice Presidents, a
Controller, one or more Assistant Controllers, a Treasurer, one or
more Assistant Treasurers, a Secretary, and one or more Assistant
Secretaries. All of said officers shall be elected by the Board of
Directors and, except officers holding contracts for fixed terms,
shall hold office only during the pleasure of the Board or until
their successors are chosen and qualify. Any two or more of the
above offices, except those of President and Vice President, may be
held by the same person, but no officer shall execute, acknowledge or
verify any instrument in more than one capacity, when such instrument
is required to be executed, acknowledged or verified by any two or
more officers. The Chief Executive Officer and the President may be
chosen from among the directors. The Board of Directors may from
time to time appoint such other agents and employees, with such
powers and duties as they may deem proper. In its discretion, the
Board of Directors may leave unfilled any offices except those of
President, Treasurer and Secretary.
Section 2. Officers of the Board of Directors.
----------------------------------
The officers of the Board of Directors (hereinafter in this
Article III being referred to as "Board officers") may consist of a
III-1
<PAGE>
Chairman of the Board, one or more Deputy Chairmen of the Board,
one or more Vice Chairmen of the Board and a Chairman of the
Executive Committee. All of said Board officers shall be elected
by the Board of Directors and shall hold office only during the
pleasure of the Board or until their successors are chosen and
qualify. The Chairman of the Executive Committee may also be the
Chairman or a Deputy Chairman or a Vice Chairman of the Board.
The Board officers shall be chosen from among the directors. In
its discretion, the Board of Directors may leave unfilled any Board
office except those of Chairman of the Board and Chairman of the
Executive Committee.
SECTION 3. Chief Executive Officer.
-----------------------
The Board of Directors may designate the Chief Executive
Officer from among the elected officers who are directors. Said
officer shall have responsibility for the implementation of the
policies of the Corporation, which are to be determined by the
Board of Directors, and for the administration of the business
affairs of the Corporation. He shall submit a report of the
operations of the Corporation for the year and the state of its
affairs as of the 31st day of December of the preceding year to the
stockholders and directors and shall from time to time report to
the directors on all matters within his knowledge which the
interests of the Corporation may require to be brought to their
notice.
SECTION 4. Chairman, Deputy Chairman or Deputy Chairmen and Vice
-----------------------------------------------------
Chairman or Vice Chairmen of the Board.
--------------------------------------
The Chairman of the Board shall preside over the meetings of
the Board and of the stockholders at which he shall be present. In
III-2
<PAGE>
the absence of the Chairman of the Board, any Deputy Chairman or
Vice Chairman, as designated by or on behalf of the Chairman, shall
preside at such meetings at which he shall be present. The
Chairman of the Board, the Deputy Chairman or Deputy Chairmen, and
the Vice Chairman or Vice Chairmen of the Board shall,
respectively, perform such other duties as may be assigned to him
or them by the Board of Directors, the Executive Committee, or with
respect to the Deputy Chairman or Deputy Chairmen and Vice Chairman
or Vice Chairmen, by the Chairman.
SECTION 5. Chairman of the Executive Committee.
-----------------------------------
The Chairman of the Executive Committee shall preside over the
meetings of the Executive Committee at which he shall be present
and perform such other duties as assigned to him by the Board of
Directors or Executive Committee.
SECTION 6. President.
---------
The President shall have responsibility for the active
management of the business and general supervision and direction of
all of the affairs of the Corporation. In the absence of the
Chairman, all Deputy Chairmen and Vice-Chairmen of the Board, the
President shall preside at all meetings of the Board of Directors
and of the stockholders at which he shall be present. Unless the
President is also a Director, the President shall not have a vote
at any meeting at which he shall preside under this section. The
President shall report to the Chief Executive Officer and in the
absence of the Chief Executive Officer to the Board of Directors,
the Executive Committee or the Chairman, as appropriate. In the
III-3
<PAGE>
absence of a designation of a Chief Executive Officer by the Board
of Directors, the President shall be the principal executive
officer of the Corporation. The President's duties shall be
construed to cover the authority to sign or endorse stock
certificates and to sign other documents (a) representing
investments of the Corporation and (b) necessary to sell or
otherwise dispose of the same. The President shall perform such
other duties as the Board of Directors, the Executive Committee,
the Chairman or the Chief Executive Officer may direct.
SECTION 7. Chief Operating Officer.
-----------------------
The Board of Directors may designate a Chief Operating Officer
from among the elected officers. Said officer shall have the
responsibility and duties as set forth by the Board of Directors,
Executive Committee, the Chairman, the Chief Executive Officer or
the President.
SECTION 8. Executive Vice-President.
------------------------
The Executive Vice-President or Executive Vice-Presidents
shall be vested with all the powers and perform all the duties of
the President in his absence. He or they may sign certificates of
stock, and shall perform such other duties as may be prescribed by
the Board of Directors, the Executive Committee, the Chairman, the
Chief Executive Officer or the President.
SECTION 9. Senior Vice-President.
---------------------
The Senior Vice-President or Senior Vice-Presidents shall be
vested with all the powers and shall perform the duties of the
Executive Vice-President or Executive Vice-Presidents in his or
III-4
<PAGE>
their absence, and shall perform such other duties as may be
prescribed by the Board of Directors, the Executive Committee, the
Chairman, the Chief Executive Officer, or the President.
SECTION 10. Vice-Presidents and Assistant Vice-Presidents.
---------------------------------------------
The Vice-Presidents and Assistant Vice-Presidents shall be
vested with all the powers and shall perform the duties of the
Senior Vice-President or Senior Vice-Presidents in his or their
absence, and shall perform such other duties as may be prescribed
by the Board of Directors, the Executive Committee, the Chairman,
the Chief Executive Officer or the President.
SECTION 11. Chief Financial Officer.
-----------------------
The Board may designate a Chief Financial Officer. Said
officer shall be responsible for the maintenance, supervision and
control of the accounting records of the Corporation and he shall
be directly responsible for all accounting and auditing activities
procedures and such other responsibilities and duties as prescribed
by the Board of Directors, Executive Committee, the Chairman, the
Chief Executive Officer, or the President.
SECTION 12. Treasurer.
---------
The Treasurer shall perform such duties as may be assigned to
him by the Chief Financial Officer, the Board of Directors, the
Executive Committee, the Chairman, the Chief Executive Officer or
the President.
SECTION 13. Secretary.
---------
The Secretary shall keep the minutes of the meetings of the
stockholders and of the Board of Directors, and shall attend to the
III-5
<PAGE>
giving and serving of all notices of the Corporation required by
law or these By-Laws. He shall maintain at all times in the
principal office of the Corporation at least one copy of the
By-Laws with all amendments to date, and shall make the same,
together with the minutes of the meetings of the stockholders, the
annual statement of the affairs of the Corporation and any voting
trust agreement on file at the office of the Corporation, available
for inspection by any officer, director or stockholder during
reasonable business hours. He shall perform such other duties as
may be assigned to him by the Board of Directors, the Executive
Committee, the Chairman, the Chief Executive Officer or the
President.
SECTION 14. Controller.
----------
The Controller shall perform such duties as assigned to him by
the Chief Financial Officer, the Board of Directors, the Executive
Committee, the Chairman, the Chief Executive Officer or the
President.
SECTION 15. Assistant Treasurer, Assistant Secretary and
--------------------------------------------
Assistant Controller
--------------------
The Assistant Treasurers, Assistant Secretaries, and Assistant
Controllers shall perform such duties as may from time to time be
assigned to them by the Treasurer, the Secretary, and the
Controller, respectively, the Board of Directors, the Executive
Committee, the Chairman, the Chief Executive Officer or the
President.
III-6
<PAGE>
SECTION 16. Removal and Term of Contracts.
-----------------------------
The Board of Directors shall have the power at any regular or
special meeting to remove any officer and Board Officer, with or
without cause, except an officer holding a contract for a fixed
term, and such action shall be conclusive on the officer and Board
Officer so removed. The Board may authorize any officer to remove
subordinate officers. The Board of Directors may authorize the
Corporation's employment of an officer or other employee for a
period in excess of the term of the Board.
SECTION 17. Vacancies.
---------
The Board of Directors, at any regular or special meetings,
shall have the power to fill a vacancy occurring in any office
(including an office held by a Board Officer) for the unexpired
portion of the term.
SECTION 18. Substitutes for Officers.
------------------------
The Board of Directors may from time to time in the absence of
any one of said officers, or, at any other time, designate any
other person or persons, on behalf of the Corporation, to sign any
contracts, deeds, notes or other instruments in the place or stead
of any of said officers, and may designate any person to fill any
one of said offices, temporarily or for any particular purpose; and
any instruments so signed in accordance with a resolution of the
Board shall be the valid act of this Corporation as fully as if
executed by any regular officer.
III-7
<PAGE>
ARTICLE IV. RESIGNATION
------------------------
Any director or officer may resign his office at any time.
Such resignation shall be made in writing and shall take effect
from the time of its receipt by the Corporation, unless some time
be fixed in the resignation, and then from that date. The
acceptance of a resignation shall not be required to make it
effective.
IV-1
<PAGE>
ARTICLE V. COMMERCIAL PAPER, ETC.
----------------------------------
All bills, notes, checks, drafts and commercial paper of all
kinds to be executed by the Corporation as maker, acceptor,
endorser or otherwise and all assignments and transfers of stock,
contracts, deeds, mortgages, bonds or other written obligations of
the Corporation, and all negotiable instruments, shall be made in
the name of the Corporation and shall be signed by two persons, or
such greater or lesser number of persons, as may be designated by
the Board of Directors or Executive Committee.
V-1
<PAGE>
ARTICLE VI. STOCK
------------------
SECTION 1. Issue.
-----
All certificates of stock shall be signed by the Chairman,
President or Executive Vice-President, and countersigned by the
Secretary or Assistant Secretary or Treasurer or Assistant
Treasurer, and sealed with the seal of the Corporation.
SECTION 2. Transfers.
---------
No transfers of stock shall be recognized or binding upon the
Corporation until recorded on the books of the Corporation upon
surrender and cancellation of certificates for a like number of
shares duly endorsed.
SECTION 3. Form of Certificates, Procedures.
--------------------------------
The Board of Directors shall have power and authority to
determine the form of stock certificates (except in so far as
prescribed by law), and to make all rules and regulations, as they
may deem expedient concerning the issue, transfer and registration
of said certificates, and to appoint one or more transfer agents
and/or registrars to countersign and register the same.
SECTION 4. Record Dates for Dividends and Stockholders
-------------------------------------------
Meetings
--------
The Board of Directors may fix the time, not exceeding twenty
(20) days preceding the date of any meeting of stockholders, or any
dividend payment date or any date for the allotment of rights,
during which the books of the Corporation shall be closed against
transfers of stock, or the Board of Directors may fix a date not
exceeding ninety (90) days preceding the date of any meeting of
VI-1
<PAGE>
stockholders, or not exceeding sixty (60) days preceding any
dividend payment date or any date for the allotment of rights, as a
record date for the determination of the stockholders entitled to
notice of and to vote at such meetings, or entitled to receive such
dividends or rights, as the case may be, and only stockholders of
record on such dates shall be entitled to notice of and to vote at
such meeting or to receive such dividends or rights, as the case
might be. In the case of a meeting of stockholders the record date
shall be fixed not less than ten (10) days prior to the date of the
meeting.
SECTION 5. Lost Certificate.
----------------
In case any certificate of stock is lost, mutilated, or
destroyed, the Board of directors may issue a new certificate in
place thereof, under such terms and conditions as the Board of
Directors may deem advisable.
VI-2
<PAGE>
ARTICLE VII. NOTICE
--------------------
SECTION 1. Notice to Stockholders.
----------------------
Whenever by law or these By-Laws, notice is required to be
given to any stockholder, such notice may be given to each
stockholder by leaving the same with him or at his residence or
usual place of business, or by mailing it, postage prepaid, and
addressed to him at this address as it appears on the books of the
Corporation. Such leaving or mailing of notice shall be deemed the
time of giving such notice.
SECTION 2. Notice to Directors and Officers.
--------------------------------
Whenever by law or these By-Laws, notice is required to be
given to any Director or Officer, such notice may be given in any
one of the following ways: by personal notice to such Director or
Officer, by telephone communication with such Director or Officer
personally, by wire, addressed to such Director or Officer at his
then address or at his address as it appears on the books of the
Corporation, or by depositing the same in writing in the post
office or in a letter box in a postpaid, sealed wrapper addressed
to such Director or Officer at his then address or at his address
as it appears on the books of the Corporation; and the time when
such notice shall be mailed or consigned to a telegraph company for
delivery shall be deemed to be the time of the giving of such
notice.
SECTION 3. Waiver of Notice.
----------------
Notice to any stockholder or director of the time, place
VII-1
<PAGE>
and/or purpose of any meeting of stockholders or directors required
by these By-Laws may be dispensed with if such stockholder shall
either attend in person or by proxy, or if such director shall,
attend in person, or if such absent stockholder or director shall,
in writing filed with the records of the meeting either before or
after the holding thereof, waive such notice.
VII-2
<PAGE>
ARTICLE VIII. VOTING OF STOCK IN OTHER CORPORATIONS
----------------------------------------------------
Any stock in other corporations, which may from time to time
be held by the Corporation, may be represented and voted at any
meeting of stockholders of such other corporations by the President
or a Vice-President or by proxy or proxies appointed by the
President or a Vice-President, or otherwise pursuant to
authorization thereunto given by a resolution of the Board of
Directors adopted by a vote of a majority of the Directors.
VIII-1
<PAGE>
ARTICLE IX. MISCELLANEOUS PROVISIONS
-------------------------------------
SECTION 1. Distributions.
-------------
Subject to any applicable provision of law and to any
restriction in the charter of the Corporation or in these By-Laws,
the Board of Directors may in its discretion authorize and declare
dividends, and authorize other distributions, by the Corporation to
the stockholders and may also fix the record date for determination
of stockholders entitled to receive any such dividend or other
distribution and the date of payment of such dividend or the making
of such other distribution.
SECTION 2. Fiscal Year.
-----------
The fiscal year shall be January 1st to December 31st unless
otherwise provided by the Board of Directors.
SECTION 3. Seal.
----
The seal of the Corporation shall be circular in form,
denoting the name of the Corporation along with the year
incorporated and state of incorporation. The seal impressed on the
margin hereof being hereby adopted as the corporate seal of the
Corporation.
SECTION 4. Non-Applicability of Maryland Control Share Act.
-----------------------------------------------
Any acquisition of shares of stock of the Corporation is,
pursuant to Section 3-702(b) of the Maryland General Corporation
Law (the "MGCL") (or any successor or replacement provision or
statute), hereby approved for purposes of, and exempted from the
provisions of, Subtitle 7 of Title 3 of the MGCL (or any successor
or replacement provision or statute).
IX-1
<PAGE>
ARTICLE X. INDEMNIFICATION
---------------------------
To the maximum extent permitted by the Maryland General
Corporation Law, as from time to time amended, the Corporation
shall indemnify its currently acting and its former directors and
any person who serves or has served, at the request of the
Corporation, as a trustee of any employee benefit plan, against any
and all liabilities and expenses incurred in connection with their
services in such capacities. The Corporation shall indemnify its
currently acting and its former officers to the same extent that it
indemnifies its currently acting and its former directors, and may
indemnify its currently acting and its former officers to such
further extent as is consistent with law. The Corporation may
indemnify its employees and agents and any person who serves or has
served as a director, officer, partner, trustee, employee or agent
of a subsidiary of the Corporation, or at the request of the
Corporation, of another corporation, partnership, joint venture,
trust or other enterprise to the extent determined by the Board of
Directors. The Corporation may also advance expenses, to the
extent permitted by the Maryland General Corporation Law, to
persons referred to in this Article. As used herein, the term
"subsidiary" shall mean any corporation of which a majority of the
issued and outstanding shares of voting stock was owned or
controlled by the Corporation at the time of the service to which
the proposed indemnification relates, and shall include all tiers
of such subsidiaries.
X-1
<PAGE>
ARTICLE XI. AMENDMENTS
-----------------------
These By-Laws may be added to, altered, amended, repealed or
suspended by a majority vote of the entire Board of Directors at
any regular meeting of the Board or at any special meeting called
for that purpose. Any action of the Board of Directors in adding
to, altering, amending, repealing or suspending these By-Laws may
be changed or rescinded at the annual meeting of stockholders next
following the date on which a report including such amendment has
been filed with the Securities and Exchange Commission by majority
vote of all of the stock outstanding and entitled to vote as of the
record date for determining stockholders entitled to vote at the
meeting. In no event shall the Board of Directors have any power
to amend this Article.
XI-1
ALEXANDER & ALEXANDER B.V.
1993 OPTIONPLAN
Section 1 Purpose
--------------------
The purpose of this 1993 Optionplan is to promote the success of
Alexander & Alexander Services Inc. (the "Company"), the parent
of Alexander & Alexander B.V., by providing incentives for
certain key employees which will link their personal interest to
both the long term financial success of the Company and of
Alexander & Alexander B.V. and to the growth of stockholder
value.
In this respect, as far as possible within the requirements of
the Netherlands Wage Tax Act and consistently with the rules of
the Company's 1988 Long Term Incentive Compensation Plan, this
1993 Optionplan of Alexander & Alexander B.V., a 100% subsidiary
of the Company, will provide incentives to select key employees
of Alexander & Alexander B.V.
Section 2 Definitions
------------------------
2.1 Definitions
-----------
In the 1993 Optionplan the following words and expressions
bear the following meanings, namely:
"Associated company": Has the same meaning as is formulated
---------------------
in Article 15, paragraph 3 of the Implementation Regulation
"the Board": The Board of Directors of the Company
------------
"the Committee": A committee appointed from time to time by
----------------
the Board to administer the 1993 Optionplan
"the Company": Alexander & Alexander Services Inc.
--------------
"Date of the grant": The date on which the Committee ap-
---------------------
proves the grant of an Option under the 1993 Optionplan
"Employee": Key employee of the Company or of any Subsid-
-----------
iary
"the Group": The Company and its Subsidiaries from time to
------------
time
"Implementation Regulation": The Netherlands Implementation
----------------------------
Regulation Wage Tax (in Dutch: "de Uitvoeringsregeling
loonbelasting 1990")
"1993 Optionplan": The Optionplan set out herein as amended
------------------
from time to time
<PAGE>
2
"Option": A right of an Employee in his employment relation
---------
with a Subsidiary, to subscribe for Shares granted in accor-
dance with the rules of the 1993 Optionplan
"Option letter": A letter to an Optionee from the Company
----------------
evidencing the specific terms and conditions of an Option
"Optionee": An Employee who has been granted an Option and,
-----------
where the context so admits, the personal representative of
the Optionee
"Option period": The period during which an Option may be
----------------
exercised as fixed by the Committee, which shall begin on
the Date of the grant of the Option and end no later than
five years after the Date of the grant of that Option
"Option price": The price at which each Share subject to an
---------------
Option may be acquired on the exercise of that Option, being
the fair market value of that Share on the Date of the grant
"the Plan": The 1988 Long Term Incentive Compensation Plan
-----------
of Alexander & Alexander Services Inc.
"Share": A share of the Company's Common Stock of $1.00 par
--------
value (or of such other nominal amount in which the Common
Stock of the Company may hereafter be constituted) fully
paid
"Subsisting Option": An Option which has not been exercised
--------------------
and which has not lapsed
"Subsidiary": A company incorporated in the Netherlands for
-------------
which company the Company is considered to be an Associated
company
"Wage Tax Act": The Netherlands Wage Tax Act 1964 (in
----------------
Dutch: "de Wet op de loonbelasting 1964")
2.2 Subject to the definitions contained in Section 2.1 above,
unless the context otherwise requires, words and phrases
defined in the Wage Tax Act shall have the same meaning in
the 1993 Optionplan.
2.3 Unless the context otherwise requires, any reference herein
to any enactment shall be construed as a reference to that
enactment as from time to time amended or re-enacted.
2.4 Headings are included for ease of reference only and shall
not affect the construction of the 1993 Optionplan.
<PAGE>
3
2.5 The rules of the 1993 Optionplan are to be construed within
the requirements of the Wage Tax Act and, so far as possi-
ble, consistently with the rules of the Plan.
<PAGE>
4
Section 3 Eligibility
------------------------
Employees of a Subsidiary or any Associated company who are
expected to contribute substantially to the growth and
profitability of the Company and its Subsidiaries and are eligi-
ble under the Plan are also eligible to receive Options under the
1993 Optionplan.
Section 4 Grant of Options/Date of the Grant
-----------------------------------------------
4.1 The Committee may from time to time, prior to the expiration
or termination of the 1993 Optionplan and for such number of
shares as the Committee in its discretion may determine, but
subject to the limitations contained in section 5 of this
1993 Optionplan, grant Options to an Employee.
4.2 An Option is granted pursuant to an application by an
Employee. The date of the grant is the date that this
application is approved by the Committee, and will be
evidenced in an Option letter, all in accordance with the
rules as set out in this 1993 Optionplan.
Section 5 Shares subject to the 1993 Optionplan/Limits
---------------------------------------------------------
5.1 The Shares required to satisfy Options shall be authorized
and unissued shares. Any Shares not purchased under an
Option may be used for future grants of Options under the
1993 Optionplan.
5.2 The aggregate number of Shares issued or capable of being
issued under the 1993 Optionplan shall not exceed 5,000,000.
Section 6 Terms and conditions of an Option
----------------------------------------------
All Options granted under the 1993 Optionplan shall be subject to
the following terms and conditions:
6.1 Option price
------------
The Option price per Share with respect to each grant of Options
shall be the fair market value (as hereafter defined) of a Share
on the Date of the grant. For purposes of the 1993 Optionplan,
the fair market value of a Share shall be the closing price of
the Company's common stock as reported in the New York Stock
Exchange Composite Transaction Report on the Date of the grant,
or in the event that there was no report for such day, the fair
market value shall be the closing price on the first preceding
day for which there is a closing price.
6.2 The Option Period
-----------------
The Option period shall be fixed by the Committee. The period
shall not exceed five years, commencing on the Date of the grant
<PAGE>
5
of the Option. No other provisions of this 1993 Optionplan shall
have the effect of extending the Option period.
6.3 Exercisability
--------------
Except as stated in Section 7 hereof, an Option may be exercised
as to the whole or any part at any time prior to the end of the
Option period.
6.4 Nontransferability
------------------
An Option may not be transferred other than by will or the laws
of descent and distribution, and during the lifetime of the
Optionee, may be exercised only by the Optionee.
6.5 Other terms and conditions
--------------------------
Each Option shall be subject to such additional terms and con-
ditions, not inconsistent with the provisions of the 1993 Op-
tionplan, as the Committee shall from time to time deem advis-
able.
Section 7 Lapse of an Option
-------------------------------
7.1 The right of an Optionee to exercise any Option held by him
shall lapse forthwith upon his ceasing to be an Employee for
whatever reason, except in those circumstances described in
subparagraphs 7.2, 7.3 or 7.4.
7.2 If an Optionee ceases to be an Employee by reason of:
a. retirement at or after attaining a pensionable age; or
b. retirement before that age with the consent in writing
of the Company or the Subsidiary by which the Optionee
is employed,
the Optionee may exercise the Option within 1 year of such
cessation of employment but no later than the end of the
Option period.
7.3 If an Optionee ceases to be an Employee by reason of injury
or disability, he may exercise his Option within 1 year from
the date of such a cessation of employment but no later than
the end of the Option period.
7.4 If an Optionee dies, his Option may be exercised by his
personal representatives within one year from the date of
his death but no later than the end of the Option period.
7.5 If an Optionee is adjudicated bankrupt, all his Subsisting
Options shall lapse forthwith.
7.6 Each and every Subsisting Option and each and every part
thereof which has not been exercised within the Option
period shall lapse.
<PAGE>
6
Section 8 Takeovers and Liquidations
---------------------------------------
In the event that the Board shall approve a plan in which a
company ("the acquiring company") shall, if that plan is execut-
ed, acquire at least 51% of the Shares of the Company, the Board
may in its sole discretion provide for the Company to give notice
to all holders of Subsisting Options setting forth such approval
and stating that all Subsisting Options will, to the extent not
exercised, expire on the effective date of consummation of the
transaction so approved (which shall not be less than 15 days
after the giving of such notice). On the effective date of
consummation of the transaction so approved by the Board, unless
the Subsisting Options have expired or lapsed sooner in accor-
dance with the other provisions of this 1993 Optionplan, all
Subsisting Options will lapse. Notice by the Company shall be
given in the manner prescribed in Section 13 hereof.
Section 9 Manner of Exercise of Options
------------------------------------------
9.1 An Option shall be exercised by notice in writing from the
Optionee to the Company specifying the number of Shares in
respect of which the Optionee wishes to exercise the Option
and accompanied by payment in full of the Option price for
the Shares subscribed.
9.2 Within 30 days after the receipt by the Company of the
notice exercising the Option and the remittance for the
Option price, the Company shall allot and issue to the
Optionee the Shares in respect of which the Option has been
exercised and deliver to him a definitive Share certificate.
9.3 Shares allotted to an Optionee upon the exercise of an
Option will be registered with the U.S. Securities & Ex-
change Commission and authorized for listing on the New York
Stock Exchange. The Shares so issued to an Optionee will
rank pari passu in all respects with the then existing
issued Shares of the Company and shall entitle the holder to
receive only such dividends as may be declared on such
Shares after the date on which the Shares have been issued.
Section 10 Issue or reorganization
-------------------------------------
If there is any change in the Shares as a result of a reor-
ganization, re-capitalization, stock split, stock dividend,
combination of Shares, merger, consolidation, rights offering or
any other change in the corporate structure or Shares, the
Committee may make such adjustments, if any, proportionate to
such change, in the number and kind of Shares authorized by the
1993 Optionplan and in the number and kind of Shares subject to
Subsisting Options as it shall deem appropriate to preserve the
relative value of Options to be granted, or may make such
<PAGE>
7
adjustments and changes in the price of Shares to preserve the
relative value of Subsisting Options, all within the provisions
of the Plan and the 1993 Optionplan.
Section 11 Administration
----------------------------
This 1993 Optionplan shall be administrated by the Committee.
The Committee shall have full power to construe and interpret the
1993 Optionplan and to establish and amend rules and regulations
for its administration. All actions taken and decisions made by
the Committee pursuant to the provisions of this 1993 Optionplan
shall be binding and conclusive on all Employees eligible to
participate in the 1993 Optionplan, on all Optionees and on the
legal representatives and beneficiaries of each.
Section 12 Compensation on Dismissal
---------------------------------------
It shall be a condition of participation in the 1993 Optionplan
that if an Optionee ceases to be an Employee by reason of his
dismissal for whatever reason in circumstances which could give
rise to a claim for wrongful or unfair dismissal, he shall not
become entitled to any damages or compensation or any additional
damages or compensation in respect of any alteration or loss of
his rights or expectations under the 1993 Optionplan caused
thereby.
Section 13 Notices
---------------------
All notices under this 1993 Optionplan shall be in writing and,
if to the Company, shall be delivered to the Secretary of the
Company or sent by first-class post to the Secretary at the
registered office of the Company, and if to an Employee or
Optionee, shall be delivered personally or sent by first-class
post to the Employee or Optionee at the address which he shall
notify to the Company as his last known address. If a notice is
sent by post, service thereof shall be deemed to be effected by
properly addressing, prepaying and posting an envelope containing
the same to such address and shall be deemed to have been deliv-
ered forty-eight hours after such posting.
Section 14 Tax amendment or termination of this Plan
-------------------------------------------------------
The Committee in its discretion may terminate this 1993 Option-
plan at any time with respect to any Shares for which Options
have not theretofore been granted. The Committee shall have the
right to alter or amend this 1993 Optionplan or any part thereof
from time to time; provided, however, that no change in any
Subsisting Options may be made which would impair the rights of
the Optionees thereof without the consent of such Optionees; and
provided further, that the Committee may not without the approval
of the Board and, if necessary for the 1993 Optionplan to contin-
ue to meet the requirements of article 13 Wage Tax Act (or any
<PAGE>
8
successor thereto) or if otherwise required by law, by the vote
of the holders of a majority of all outstanding Shares of the
Company entitled to vote thereon, make any alteration or amend-
ment which would increase the maximum number of Shares issuable
in the aggregate, change the class of Employees eligible to
receive Options, extend the term of this 1993 Optionplan or of
Options granted hereunder or otherwise materially increase the
benefits to Optionees under the 1993 Optionplan, or which would
result in the material increase in the cost of the 1993
Optionplan to the Company.
November 18, 1993
Mr. Ronald W. Forrest
Alexander & Alexander Inc.
1211 Avenue of the Americas
New York, New York 10036
Dear Ron:
This letter sets forth the terms of your retirement from A&A and
the consequent termination of your employment agreement with A.R.
Stenhouse Reed Shaw & Partners Limited:
- Your retirement will be effective as of the
close of business on January 1, 1994. (Given
the date of your retirement, you are likely
to be included in the Proxy Statement for
A&A's 1994 Annual Meeting of Stockholders.)
- You will receive a full pension from the
Alexander & Alexander U.K. Pension Scheme.
The amount of such pension shall be
calculated as follows:
37 x P
----
60
where P equals the average of your 1991, 1992
and 1993 actual and notional U.K. salaries.
You may elect to commute part of this pension
for a lump sum payment which, together with
the value of your own contributions, should
not exceed the Inland Revenue maximum.
- All restrictions on the 7,500 shares of
Restricted Stock awarded to you on January
30, 1990 lapse upon your retirement and
certificates for those shares will be
released to you.
<PAGE>
-2-
- As of December 31, 1993, you will be vested
in stock options covering 42,440 shares of
A&A stock, which options will remain
exercisable for 3 additional years (or their
expiration date, if earlier).
- The Company will continue to provide you with
Health Care coverage through your 55th
birthday.
- You may purchase your Company cars at their
residual value as at 1st January 1994; if any
such car is leased, you may assume the lease.
- You will resign from all offices and
directorships you hold in any A&A company or
other business entity; a resignation letter
is attached hereto for your approval and
signature.
- As stated in your letter to me dated October
28, 1993, you will honor your outstanding
agreements with A&A concerning the
solicitation of its clients and employees and
the protection of its confidential
information. A separate letter on this
subject is attached hereto and incorporated
herein.
You agree to accept the pension and other arrangements referred
to above in full and final settlement of any costs, claims,
expenses or rights of action of any kind whatsoever and howsoever
arising (whether under common law, statute, the law of England or
of Scotland, the laws of the United States or of any state
thereof or the laws of any other state or country in the world)
which you have or may have against Alexander & Alexander Inc.,
Alexander & Alexander Services Inc., Alexander Stenhouse &
Partners Limited or any other company in the group of companies
of which any such company is a member ("Group Company") or any of
its or their officers or employees and whether arising out of
your Minute of Agreement dated 22nd October 1979 with A.R.
Stenhouse Reed Shaw & Partners Limited (now known as Alexander
Stenhouse & Partners Limited), the terms of your employment or
secondment with Alexander & Alexander Inc. or any employment or
secondment with any other office of Alexander & Alexander
Services Inc. or any other Group Company or the termination of
any such contract, secondment or employment or your resignation
from any offices within any Group Company or otherwise.
As you know, certain conditions of your early retirement, in
particular, the calculation of your pension benefit, require the
approval of A&A's Compensation & Benefits Committee. The
Committee's approval was given on November 18, 1993.
<PAGE>
-3-
To indicate that the above terms correctly state our mutual
understanding, please sign this letter in the space provided
below.
Very truly yours,
db
Att.
Agreed:
----------------------------------------------------------
Ronald W. Forrest
<PAGE>
Alexander & Alexander Inc.
1211 Avenue of the Americas
New York, New York 10036
Telephone: 212 840-8500
Direct Dial 212 444-4505
Fax 212 444-4699
Ronald W. Forrest
Chairman and Chief Executive
Officer
PRIVATE AND CONFIDENTIAL
------------------------
October 28, 1993
Mr. Michael K. White
President and Chief Operating Officer
Alexander & Alexander Services Inc.
1211 Avenue of the Americas
New York, New York 10036
Dear Mike:
Thank you for your letter of October 21, 1993, and as I indicated
in our meeting on Tuesday, October 26, I elect to accept early
retirement on the terms you indicated. As we discussed, the
most appropriate date would appear to be 1st January 1994, and
I am checking that there are no adverse tax ramifications which
might affect that timing.
I reconfirmed that in consideration of the early retirement
terms that I would be prepared to honor the "noncompete"
agreement currently in force, although as I expect, at some
point, to resume work in the industry, I am unwilling to
accept any additional constraints on my activities.
You also raised the question of my signing a release from
my employment contract. Again, I am quite prepared to do so
when the pension provisions are fully confirmed and in place.
I think it appropriate to take legal advice when the "release"
is submitted to me and presume that A&A will meet the costs
involved.
Kind regards,
RWF:CW
<PAGE>
Alexander & Alexander Services Inc.
1211 Avenue of the Americas
New York, New York 10036
Telephone: 212 840-8500
Mr. Michael K. White
President and Chief Operating Officer
November 18, 1993
Mr. Ronald W. Forrest
Alexander & Alexander Inc.
1211 Avenue of the Americas
New York, New York 10036
Dear Ron:
Thank you for your commitment, stated in your letter to me of
October 28, 1993, to comply with your pre-existing post
termination restrictive covenants. Those are as follows:
- An agreement between you and Alexander &
Alexander Services Inc. dated July 31, 1989
covering confidentiality of information and
solicitation of clients and employees and
having a term of 2 years from the termination
of your employment; and
- Clause Seventh and Eighth of an agreement
between you and A.R. Stenhouse Reed Shaw &
Partners Limited (now Alexander Stenhouse &
Partners Ltd.) dated 22nd October 1979
covering confidentiality of information and
solicitation of clients and having a term of
3 years from the termination of your
employment.
Copies of both documents are attached hereto for your reference.
Very truly yours,
db
Att.
Alexander & Alexander Services Inc.
1211 Avenue of the Americas
New York, N.Y. 10036
Telephone 212 840-8500
Fax 212 869-7535
March 16, 1994
Mr. Tinsley H. Irvin
8 Deer Park Court
Greenwich, CT 06830
Transition Employment, Retirement and Consulting Agreement
----------------------------------------------------------
Dear Tinsley:
This letter sets forth the understandings and
agreements between you and Alexander & Alexander Services Inc.
(the "Company") with regard to your resignation from the
-------
positions of Chairman of the Board of Directors of the Company
(the "Board") and Chairman of the Executive Committee of the
-----
Board as of January 14, 1994 (the "Resignation Date"); your
----------------
continuing service during a transition period as a director of
the Company at least until the 1994 annual meeting of
shareholders (the "1994 Shareholders Meeting") and your
-------------------------
continuing employment as Chief Executive Officer of the Company
through the earlier of March 31, 1994 or the appointment of a
successor Chief Executive Officer (the "Transition Period");
-----------------
retirement from the Company at the end of the Transition Period
(the "Retirement Date"); and your services as a consultant to
---------------
the Company for a period of three months following the
Retirement Date (the "Consulting Period").
-----------------
1. Resignation. It is acknowledged and agreed that
------------
as of the Resignation Date you resigned from your positions as
Chairman of the Board and as Chairman of the Executive
<PAGE>
Committee.
2. Transition Employment. Following the Resignation
----------------------
Date, you shall continue to serve as a director of the Company
at least until the 1994 Shareholders Meeting, and as Chief
Executive Officer of the Company during the Transition Period.
During the Transition Period your compensation and benefits
shall continue as currently in effect.
3. Retirement. You and the Company agree that you
-----------
shall voluntarily retire from your position as Chief Executive
Officer of the Company, and as an officer or employee of the
Company and its affiliates, as of the Retirement Date.
4. Retirement Benefits.
--------------------
(a) Retirement Plans. Following the Retirement Date,
-----------------
you shall be eligible for full unreduced retirement benefits
under the Company's qualified pension plan and its Supplemental
Executive Retirement Plan for Senior Management as of the
Retirement Date. Those benefits shall be payable to you in
accordance with the terms and provisions of such pension plans
in effect on such date and in accordance with the resolution of
the Compensation and Benefits Committee of the Company's Board
of Directors dated December 18, 1988. The Company agrees to
waive any right it may have to reduce pension benefits by the
amount of income you may receive from future employment.
(b) Severance Plans. You shall be entitled to
----------------
severance benefits under the Company's Senior Executive
Severance Plan (the "Severance Plan"), with certain
--------------
modifications described below.
(i) If you should choose Option B under the
Severance Plan, the Company agrees that the lump sum
payment under Option B will be based on 30 months' salary
discounted at a rate of 7% to a present value.
(ii) The Company agrees to waive any right it
may have to cause you to repay the severance benefit
payments received under the Severance Plan on account of
future employment.
(c) Stock Options. The Company agrees that all of
--------------
your unvested options granted pursuant to the 1988 Long Term
Incentive Compensation Plan and the 1982 Key Employee Stock
Option Plan shall vest upon your retirement on the Retirement
Date and that you will be entitled to exercise each stock
option for a three-year period following the Retirement Date
or, if shorter, until the expiration of the original term of
the stock option.
(d) Membership Fees. The Company agrees to reimburse
----------------
<PAGE>
you for all membership fees and dues for your current country
club memberships through the first anniversary of the 1994
Shareholders Meeting.
(e) Company Car. The Company agrees to determine
------------
your rights to the Company car in accordance with current
Company policy.
(f) Other Benefits. In addition, you shall be
---------------
eligible to continue to participate in the Company's employee
benefit plans, including, without limitation, health, dental
and life insurance plans, during the Consulting Period and to
be entitled to retiree benefits in accordance with current
Company policy.
(g) Continuation of Indemnification. The Company
--------------------------------
agrees that you shall continue to be defended in those cases in
which you are currently a party, and shall otherwise continue
to be eligible for defense and indemnification to the maximum
extent permitted by and subject to the terms of, Maryland
General Corporation Law, and otherwise to the full extent
provided for in the Company's by-laws for current officers and
directors, against any and all liabilities and expenses
incurred by you in connection with your service as an employee,
officer or director.
(h) Use of Company Office. The Company shall provide
----------------------
you with an office with access to office services in a branch
office of the Company, as mutually agreed to by both parties.
5. Consulting Services. During the Consulting
--------------------
Period, you agree to remain available to provide consulting
services to the Board and to your successor as Chief Executive
Officer. The consulting services shall be performed at such
times as shall be reasonably agreed to by you and the Company.
The Company agrees that you will not be required to make an
onerous time commitment to such consulting duties and in no
event more than 40 hours per month. During the Consulting
Period, you shall not be an employee of the Company, but shall
act in the capacity of an independent contractor. The Company
may extend the Consulting Period by up to two additional
three-month periods (the "Renewal Periods") at the election of
---------------
the Company, but only with your consent in writing.
6. Consulting Payments.
--------------------
(a) Subject to the provisions of this paragraph 6, in
consideration of the consulting services rendered by you and
available to be rendered by you in accordance with paragraph 5
above and your agreements and undertakings in paragraphs 7
through 12 inclusive below, the Company will pay you a
consulting fee (the "Consulting Fee") for the Consulting Period
--------------
(and for each additional three-month Renewal Period, if any) of
$100,000, payable in equal monthly installments, plus
<PAGE>
reimbursement for all of your out-of-pocket expenses.
(b) If the Company determines that, following the
start of the Consulting Period, you have breached in any
material respect any of your covenants under paragraphs 7
through 13 inclusive below, then, as of the date of such
breach, the Company shall have no further obligation to pay you
any remaining unpaid installments of the Consulting Fee. Any
such determination shall be made by the Company in good faith
and subject to your having a reasonable period of time to cure
any such alleged breach.
7. Secrecy. You shall hold in secrecy for the
--------
Company all trade secrets and other confidential information
relating to the Company's business and affairs that may come to
your knowledge or have come to your knowledge while heretofore
employed by the Company, including but not limited to, research
projects, information about costs, profits, markets, sales,
lists of customers and suppliers, and other information of a
similar nature, and plans for future development, all to the
extent not now, or hereafter, publicly available or disclosed.
8. Reaffirmation of Covenants. You hereby reaffirm
---------------------------
the ongoing application, validity, and enforceability of the
various non-competition and non-solicitation agreements among
yourself, the Company and certain subsidiaries of the Company.
9. Return of Documents and Property. You represent
---------------------------------
that you shall deliver to the Company as of the Retirement Date
(a) any documents and materials containing trade secrets and
other confidential information relating to the Company's
business and affairs, and (b) any other documents, materials
and other property belonging to the Company or its affiliated
companies that were in your possession or control, except to
the extent that they relate to this Agreement or your rights or
obligations hereunder or referred to herein, or to any of your
employee benefits.
10. Announcements. You and the Company shall
--------------
mutually agree upon the content of any voluntary statements,
whether oral or written, made by you or the Company to any
third party or parties regarding your termination of
employment, except that this paragraph shall not apply to any
statements required to be made by reason of law, regulation, or
any judicial or other similar proceeding or order. As to the
latter statements, you and the Company shall mutually agree on
the content to the extent possible under the circumstances.
11. No Public Comment. You agree to refrain from
------------------
making now or at any time in the future any derogatory comment
concerning the Company or any current or former officers,
directors or shareholders of the Company; or any comment
inconsistent with the provisions of paragraph 10 hereof. The
Company agrees to refrain from making now or at any time in the
<PAGE>
future any derogatory comment about you, or any comment
inconsistent with the provisions of paragraph 10.
12. Continued Cooperation. You shall cooperate with
----------------------
the Company in connection with all pending or future
investigations or inquiries by any state, federal or local
entity, directly or indirectly relating to the Company, such
cooperation to include all reasonable assistance that the
Company determines is necessary, including but not limited to
meeting or consulting with the Company, and its counsel and
their designees, reviewing documents, analyzing facts and
appearing or testifying as a witness or interviewee or
otherwise. Except as required by law, judicial order or other
lawful process, you will not cooperate or communicate in any
other way with any party or witness or their counsel or
designees who are adverse to the Company regarding any matter
which is adverse to the Company without the express written
consent of the Company. You will advise the Company reasonably
promptly if you are contacted by any firm, corporation,
association or other entity in connection with the business of
the Company. The Company will reimburse you for the costs and
expenses you reasonably incur in cooperating pursuant to this
paragraph 12, including, but not limited to, the costs and
expenses of counsel of your choice.
13. Confidentiality. Except as required by law,
----------------
judicial order, or other lawful process, and except to the
extent that the Company discloses the same, you agree to keep
confidential and not disclose, directly or indirectly, to any
person, firm, corporation, association, or other entity, except
family and professional advisors, the terms of this Agreement.
14. Full Satisfaction; General Release. You agree
-----------------------------------
that the payments described in this Agreement shall be in full
satisfaction of any and all claims for payment that you may
have against the Company or its affiliates arising out of your
employment relationship, your status as a director and officer
of the Company and the termination of your employment
arrangement and the termination of your status as an officer
and director of the Company (excluding claims that arise out
of a claimed breach of this Agreement or obligations that
survive this Agreement). In addition, in consideration of the
agreements set forth herein, you release and waive all claims,
causes of action or the like (regardless of whether or not
known at present), excluding claims that arise out of a claimed
breach of the terms of this Agreement that you may have against
the Company, and in the case of the Company, its successors, or
its shareholders, directors, officers, agents, employees or
anyone connected with it, regarding all matters arising from
events occurring prior to the date hereof relating to your
service as an employee, director and officer of the Company and
severance of such relationships with the Company, including,
without limitation, all claims related to the payment of
compensation and benefits and all claims arising under any
<PAGE>
Federal or state statute or regulation.
In consideration for the release you are giving to the
Company under this paragraph 14, the Company releases and
waives all claims, causes of action or the like (regardless of
whether or not known at present), excluding claims that arise
out of a claimed breach of the terms of this Agreement, that
the Company may have against you, or your heirs, executors,
administrators or personal representatives, regarding all
matters relating to your service as an employee, director and
officer of the Company, and the termination of such
relationships with the Company and that arise from events
occurring prior to the date hereof, but excluding claims
arising from acts of fraud or dishonesty by you during the
course of your employment. Nothing contained in this paragraph
shall modify or affect those non-solicitation or
non-competition agreements referenced in paragraph 8 above.
15. Specific Release of ADEA Claims. In recognition
--------------------------------
of the consideration cited above, you hereby release and
forever discharge the Company and its affiliates from any and
all claims, actions and causes of action that you may have as
of the date you sign this Agreement arising under the federal
Age Discrimination in Employment Act of 1967, as amended, and
the applicable rules and regulations promulgated thereunder
("ADEA") which may be based in whole or in part on age
----
discrimination.
16. Representations. By signing this Agreement, you
----------------
acknowledge the following:
a. Consultation with Attorney. You were advised by
---------------------------
the Company in connection with this employment termination
that you have the right to consult with an attorney of your
choice prior to signing this Agreement, and you have, in
fact, consulted with an attorney in the negotiation and
execution of this Agreement.
b. Period to Consider. You were given a period of
-------------------
not less than twenty-one (21) days to consider the terms of
the Agreement.
c. Payments. The payments and other benefits
---------
provided to you under paragraph 4 hereof are in excess of
the aggregate amount of any payments or other benefits
which you have a legal right to receive in connection with
your termination from employment with the Company.
17. Governing Law. This Agreement shall be governed
--------------
by, and construed in accordance with, the laws of the State of
New York (excluding the conflict of laws rules which require
application of any other law).
18. Revocation. This Agreement may be revoked by you
-----------
<PAGE>
within the seven-day period commencing on the date you sign
this Agreement (the "Revocation Period") in accordance with the
-----------------
requirements of ADEA as amended by the Older Workers Benefit
Protection Act of 1990. In the event of any such revocation by
you, all obligations of the Company under this Agreement shall
terminate and be of no further force and effect as of the date
of such revocation. No such revocation by you shall be
effective unless it is in writing and signed by you and
received by the Company prior to the expiration of the
Revocation Period.
19. Counterparts. This Agreement may be executed in
-------------
counterparts, each of which shall be deemed an original but all
of which together shall constitute one and the same instrument.
20. Complete Agreement. This Agreement constitutes
-------------------
the entire agreement between the parties concerning the subject
matter hereof. This Agreement has been submitted to the
scrutiny of, and has been negotiated by, the parties hereto and
their counsel, and shall be given a fair and reasonable
interpretation in accordance with the words hereof, without
consideration or weight being given to its having been drafted
by any party hereto or its counsel.
21. Succession. This Agreement, and each provision
-----------
herein, shall be binding on and inure to the benefit of you and
the Company and our respective heirs, executors,
administrators, legal representatives, successors and assigns.
Your signature on the line below constitutes your
agreement with each provision contained herein and upon such
signature, this shall be a valid and binding agreement between
us.
ALEXANDER & ALEXANDER SERVICES INC.
BY:
--------------------------------------
Name:
Title:
Duly authorized
ACCEPTED AND AGREED:
--------------------
Tinsley H. Irvin
EMPLOYMENT AGREEMENT
--------------------
AGREEMENT, dated as of October 25, 1993, between Alexander
-----------
& Alexander Services Inc., a Maryland corporation (the
"Company"), and Mr. Lawrence E. Burk ("Executive").
W I T N E S S E T H
- - - - - - - - - -
WHEREAS, Executive has served the Company in several
capacities over a period of years, most recently as Global
Managing Director, Business Development;
WHEREAS, the Company believes that the services performed to
date by Executive have been of substantial value to the Company
and that Executive's continued service would be of great value to
the Company; and
WHEREAS, the Company desires to assure itself of Executive's
continued employment and Executive is willing to continue his
employment with the Company upon the terms and conditions
hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual covenants
herein contained and of the mutual benefits herein provided, the
Company and Executive hereby agree as follows:
1. Term of Employment.
------------------
Except as provided in Section 8, the Company shall employ
Executive for the period commencing on October 1, 1993 (the
"Effective Date") and ending on August 31, 1996 ("Retirement
Date").
2. Duties.
------
During Executive's employment hereunder, Executive agrees to
serve as (i) Global Managing Director of the Company and (ii) to
perform such duties as may be assigned to him from time to time
by the Company which are consistent with Executive's skill,
position, training and ability. During his employment hereunder,
Executive shall devote his entire time, energy and skill during
regular business hours (other than during periods of illness,
vacation and other approved absences) to the affairs of the
Company and to the promotion of its interests.
3. Base Compensation.
-----------------
During the term of this Agreement, the Company shall pay
Executive a base salary at an annual rate of not less than
$308,350 in approximately equal installments payable semi-
<PAGE>
monthly. The Company shall annually review Executive's base
salary and he shall be eligible for an increase in such then
existing base salary, contingent on his performance and the
Company's then existing merit increase guidelines applicable to
employees with responsibilities and skills similar to those of
Executive. During the term hereof, the Company shall not have
the ability to decrease the then existing base salary of
Executive without his consent.
4. Incentive Compensation.
----------------------
During the term of this Agreement, Executive will
participate in the Company's annual and long term incentive
compensation programs at a level commensurate with his position
at the Company and consistent with then current policies and
practices.
5. Restricted Stock.
----------------
In addition to any awards otherwise granted or to be granted
under the terms of the Company's 1988 Long Term Incentive Compen-
sation Plan or any successor plan thereto (the "Stock Plan"), but
subject to the execution of this Agreement, Executive has been
granted 15,000 shares of the Company's common stock which shall
be restricted as to transfer and subject to forfeiture (the
"Restricted Shares"). Such award of Restricted Shares shall be
subject to the general terms and conditions of the Stock Plan as
well as to those conditions contained in this Section 5. The
restrictions on the Restricted Shares shall lapse in accordance
with the following schedule, provided that Executive is still in
the Company's employ on the dates set forth below:
Anniversary of Number of
the Effective Date Shares Vested
------------------ -------------
Third 6,000
Fifth 9,000
Notwithstanding the foregoing, Executive's right to receive the
Restricted Shares shall automatically vest (i) if Executive is
-
still in the Company's employ on the date a Change of Control (as
defined in the Stock Plan) occurs or (ii) upon the termination of
--
Executive's employment (A) due to his death, Disability (as
-
defined in Section 9(c) hereof) or retirement with the Company's
consent, (B) by the Company other than for "Cause", as described
-
in Section 9(a) (ii) hereof, or (C) by Executive for "Good
-
Reason," as described in Section 9(a)(iv). If Executive's
employment terminates for any reason other than those stated in
subsection (ii) above at a time at which all or any portion of
--
the Restricted Shares are still subject to the restrictions
described hereunder, Executive shall forfeit all right, title and
interest to such Restricted Shares.
<PAGE>
6. Supplemental Retirement Benefits.
--------------------------------
(a) Pre-55 Age and Service Supplement. If, prior to the
-----------------------------------
Retirement Date, Executive's employment is terminated (i) by
-
reason of his death, (ii) by the Company other than for Cause,
--
(iii) by the Executive for Good Reason or (iv) on account of
--- --
Executive's becoming disabled within the meaning of Section 9(c),
then the Company shall pay Executive (or his beneficiary, if
applicable) an additional retirement benefit in an amount equal
to the excess, if any, of (x) the benefit that would have been
-
payable to Executive (or his beneficiary, if applicable) under
the terms of the Company's Supplemental Executive Retirement Plan
for Senior Management (the "SERP") if Executive had remained in
the Company's employ until the Retirement Date and earned
compensation during such period of deemed employment at a rate
equal to the amount of his actual compensation in effect
immediately prior to such termination over (y) the actual benefit
-
payable to Executive (or his beneficiary, if applicable) under
the SERP. The Company shall have no obligation to Executive (or
his beneficiary) under this Section 6(a) if (i) the Company
-
terminates Executive's employment for Cause (as described in
Section 9(a)(ii)), (ii) Executive terminates his employment
--
hereunder for any reason except on account of Good Reason (as
described in Section 9(a)(iv) or (iii) Executive materially
---
breaches any of the covenants contained in Sections 10 through 15
hereof and fails to cure such breach within 10 days of receiving
written notice from the Company of the actions constituting such
breach.
(b) Special Spouse's Benefit. If Executive dies prior to
-------------------------
the Retirement Date while an employee of the Company or while
receiving severance benefits under Section 9(b)(i) or the special
disability benefit payable under Section 9(c), the Company shall
pay Executive's spouse a special spouse's benefit, commencing as
of the first day of the calendar month immediately following the
date of Executive's death, and continuing until the first day of
the month next following the Retirement Date in an amount equal
to the sum of (x) the benefits that would be payable to
-
Executive's spouse under the SERP and (y) the benefits, if any,
-
that would be payable to Executive's spouse under Section 6(a),
in each case determined as though Executive had lived until age
55, commenced payment of his benefits in the form of a 50% joint
and survivor annuity and died immediately thereafter.
(c) Manner of Payment. Except as provided in Section 6(b)
-----------------
above as to the time of payment of the special spouse's benefit,
the additional retirement benefits payable in accordance with
this Section shall be paid at the same time, in the same manner
and subject to the same terms and conditions as, benefits payable
to Executive under the SERP, except that in no event shall the
benefits be less than the actuarial equivalent of the benefit
payable thereunder at the age at which Executive elects to
3
<PAGE>
commence receipt of his retirement benefits. Without limiting
the
generality of the foregoing, upon the occurrence of a Change of
Control of the Company, as defined in the SERP, the Company shall
contribute to a grantor trust an amount sufficient to fund, on a
present value basis, the Company's obligations, if any, to
Executive (or his spouse) under Sections 6(a) or 6(b).
(d) No Mitigation. Notwithstanding anything in this
--------------
Agreement or the SERP to the contrary, the benefits payable to
Executive under Section 6(a) shall not be reduced, offset or
otherwise altered by reason of Executive's employment with any
other employer during the period that such benefits are payable,
unless, in connection with such employment, Executive breaches
his covenants under this Agreement.
7. Benefits and Perquisites.
------------------------
Executive shall be entitled to participate in the employee
benefit plans, policies and programs which are available
generally to the Company's employees. Executive shall be
provided with perquisites in accordance with the Company's plans,
programs and policies generally applicable to senior officers.
8. Expenses.
--------
The Company agrees to reimburse Executive for expenses
properly incurred by him in the performance of his duties
hereunder in accordance with policies established from time to
time by the Company. Executive will provide the Company with
substantiation of such expenses in such manner as is reasonably
requested by the Company.
9. Termination of Employment and This Agreement.
--------------------------------------------
(a) Executive's employment hereunder shall cease and
terminate upon the earliest of the events specified below:
(i) The death of Executive.
(ii) Termination of Executive's employment for Cause,
limited to (A) a finding by the Board of Directors of the Company
-
that Executive has willfully and materially failed, refused or
neglected to perform and discharge his duties and
responsibilities hereunder for at least 10 business days after
written notice from the Company setting forth the actions or
omissions, as the case may be, which constitute such failure,
refusal or neglect, (B) a violation of any of the covenants set
-
forth in Sections 10 through 15 hereof, (C) a material breach of
-
Executive's fiduciary duties to the Company or any subsidiary or
affiliate which results in a material detriment to the Company,
(D) repeated material gross misconduct by Executive, (E)
- -
4
<PAGE>
commission by Executive of an intentional tort against the
business and operations of the Company or any member of the same
controlled group of corporations (the "A&A Group") which
results in a material detriment to the Company or any member of
the A&A Group or (F) Executive's commission of an act
-
constituting a criminal act which the Board of Directors of the
Company determines in good faith will have a material adverse
impact on the business or reputation of the Company or any member
of the A&A Group if Executive remains in the Company's employ.
(iii) Termination of Executive's employment by the Company
other than for Cause pursuant to 90 days' written notice to
Executive.
(iv) Termination of Executive's employment by Executive for
Good Reason, limited to a termination occurring (A) within 90
-
days following a reduction in Executive's base salary payable
under Section 3, (B) within 90 days following a material breach
-
of this Agreement by the Company, (C) within 90 days following
-
the relocation of Executive's principal place of employment to
any location other than a principal city in North America, the
United Kingdom, or Western Europe or (D) within 36 months
-
following a Change of Control (as defined in the Stock Plan, as
in effect on the date hereof and expressly incorporated herein by
reference) which is a termination for Good Reason under the A&A
Services Senior Executive Severance Plan (the "Severance Plan").
Notwithstanding the foregoing, no termination by Executive shall
be treated as having been for Good Reason unless Executive shall
have given the Company at least 30 days prior written notice of
his intention to terminate his employment.
(b) Post-Termination Matters.
------------------------
(i) Severance Benefits. If Executive's employment is
-------------------
terminated by the Company pursuant to Section 9(a)(iii) or by
Executive pursuant to Section 9(a)(iv), Executive shall be
entitled to receive from the Company the amount payable to
Executive in accordance with the Severance Plan as in effect on
the Effective Date; provided, however, that if the amount payable
under the Severance Plan is increased at any time after the
Effective Date, Executive shall be entitled to receive such
greater amount. In addition, if Executive's employment is
terminated pursuant to either Section 9(a)(iii) or 9(a)(iv) prior
to the Retirement Date and Executive's Salary Continuation Period
under the Severance Plan expires prior to such time, the Company
shall continue to pay Executive additional severance payments in
accordance with Option A of the Severance Plan from the end of
the Salary Continuation Period until the first day of the
calendar month next following the Retirement Date; provided,
however, that the Company's obligation to make such additional
severance payments shall lapse in the event that Executive (x)
-
begins other employment (including self-employment), (y) breaches
-
5
<PAGE>
any terms or conditions of the Severance Agreement (as defined in
the Severance Plan) or (z) breaches any of his obligations under
-
this Agreement. The amounts paid to Executive pursuant to this
Section shall be paid as liquidated
damages and shall be in lieu of all other amounts which may be
due to Executive as severance pay or otherwise as a result of the
termination of Executive's employment hereunder, except that
Executive's rights under Section 6 hereof and any benefit plan,
policy or arrangement providing benefits other than severance
shall be determined under the terms of such Section or such plan,
policy or arrangement.
(ii) Breach by Executive. Executive agrees that his failure
-------------------
to remain in the Company's employ in accordance with the terms of
this Agreement may result in disruption of the ongoing business
affairs of the Company. Executive therefore agrees that, in
addition to any other rights or remedies available to the
Company, if Executive terminates his employment hereunder other
than for Good Reason as described in 9(a)(iv) and obtains (or
intends to obtain) other employment, Executive shall not disclose
any information regarding such employment to any third party,
including, without limitation, any Client (as defined in Section
10 hereof), without the written consent of the Company for a
period of 90 days after giving the Company written notice of his
intent to terminate his employment with the Company.
Additionally, if the Company provides Executive with written
notice not later than two business days after the termination of
Executive's employment, Executive shall refrain from commencing
such other employment and shall refrain from publicizing his
obtaining of such other employment for the period of time
specified in such notice ("Notice Period"), which Notice Period
shall not exceed ninety (90) days from the date of such notice.
During the Notice Period, the Company shall continue
compensation, benefits and perquisites for Executive at the rate
and level in effect as of the termination of his employment and
shall not require Executive to perform any services on behalf of
the Company except to reasonably cooperate in any appropriate
announcement of Executive's termination of employment with the
Company.
(c) Disability. Except as otherwise provided in Section 6,
----------
in the event that Executive is unable to perform his duties
hereunder for a period of 180 consecutive days due to illness or
physical or mental disability, the Company shall be under no
further obligation to make payments to Executive under the terms
of this Agreement; provided, however, that Executive shall be
entitled to such benefits, if any, as are payable, and such
period of leave as is available, under the Company's general
employee benefit plans and policies. Notwithstanding the
foregoing, if Executive becomes disabled (as determined under the
preceding sentence) prior to the Retirement Date, the Company
shall pay Executive until the first day of the calendar month
6
<PAGE>
next following the Retirement Date a special disability benefit
in monthly installments equal to the excess of (i) the monthly
-
amount of severance benefits that would have been payable to
Executive under Option A of the Severance Plan, were benefits
payable under that plan, over (ii) the monthly amount of any
--
other disability benefits payable to Executive under
a plan, program or arrangement, whether public or private,
maintained by the Company or to which the Company contributes;
provided, however, that, the Company's obligation to make such
special disability payments shall lapse in the event that
Executive (x) recommences active employment with the Company or
-
begins other employment (including self-employment ) or (y)
-
breaches any of his obligations under this Agreement.
10. Confidentiality and Non-Disclosure.
----------------------------------
It is understood that in the course of Executive's
employment with the Company, Executive has become and will
continue to become acquainted with Confidential Information (as
defined below). Executive recognizes that Confidential
Information has been developed by the members of the A&A Group at
great expense, is confidential and proprietary to the members of
the A&A Group, and is and shall remain the exclusive property of
the members of the A&A Group. Executive agrees that Executive
will not without the express, written consent of the Company
during the term of employment and for two (2) years after the
Termination Date, disclose, copy, make any use of, or remove from
the Company's premises Confidential Information (as defined
below), except as may be required in the course of Executive's
employment. "Confidential Information" shall mean the
confidential and proprietary information of any member of the A&A
Group relating to: (a) internal business and management
-
practices and procedures; (b) sources with which insurance is
-
placed; (c) Clients' policy expiration dates, policy terms,
-
conditions, and rates; (d) Clients' risk characteristics and
-
confidential information; (e) insurance markets and marketing for
-
Clients; (f) salary, bonus and other personal information
-
relating to employees of any member of the A&A Group; (g)
-
corporate financial and business information, strategies and
plans of the Company, any member of the A&A Group, or the A&A
Group as a whole; (h) corporate human resource information,
-
strategies and plans of the Company, any member of the A&A Group,
or the A&A Group as a whole; (i) decisions and deliberations of
-
committees or boards of any member of the A&A Group in which
Executive participates; or (j) litigation affecting any member(s)
-
of the A&A Group. As used in this section and in Section
9(b)(ii) above, "Client" shall mean those actual clients and
customers, and those active prospective clients or customers of
any member of the A&A Group which Executive alone, or in
combination with others, handled, serviced or solicited at any
time during the two year period immediately preceding the
Termination Date.
7
<PAGE>
11. Recruitment of Employees.
------------------------
Executive recognizes that the employees of each member of
the A&A Group are a valuable resource of each such member.
Executive agrees that he shall not, for a period of two (2) years
following the Termination Date, either alone or in conjunction
with any other person or entity solicit, induce or recruit any
employee to leave the employ of any member of the A&A Group.
12. Right to New Ideas.
------------------
Any invention, improvement, innovation, new product,
process, or idea made or developed by Executive, alone or in
conjunction with others, during the course of Executive's
employment with the Company, relating to the business of any
member of the A&A Group, shall be deemed to have been made or
developed by Executive solely for the benefit of such member and
shall be the sole and exclusive property of such member.
Executive shall not, either during the course of Executive's
employment or after the Termination Date, use or disclose to any
third party such invention, improvement, innovation or new
product, process or idea, except as expressly authorized by the
Company in writing.
13. Return of Confidential Information.
----------------------------------
As of the Termination Date Executive shall promptly return
to the Company originals or copies of any and all materials,
documents, notes, manuals or lists containing or embodying
Confidential Information, or relating directly or indirectly to
the business of any member of the A&A Group, in the possession or
control of Executive.
14. Prior Covenants.
---------------
Executive agrees that the covenants contained in this
Agreement are in addition to and not in lieu of the covenants
previously entered into between Executive and members of the A&A
Group ("Prior Covenants"), which Prior Covenants are set forth in
Exhibit A attached hereto. Executive reaffirms the validity,
reasonableness and his willingness to be bound by the terms of
the Prior Covenants.
15. Disclosure of this Agreement.
----------------------------
As soon as reasonably possible prior to the commencement by
Executive of employment with any third party during the two (2)
year period following the Termination Date, Executive shall
promptly furnish such new employer with a copy of this Agreement.
16. Remedies with Respect to Covenants.
----------------------------------
8
<PAGE>
(a) The parties recognize that irreparable injury will
result to the A&A Group, its business and its property in the
event of a breach by Executive of the covenants contained in
Section 9(b)(ii), and Sections 10 through 15 of this Agreement (a
"Breach"). It is agreed that in the event of any Breach, or
threatened Breach, the Company shall be entitled, in addition to
any other remedies and damages available, to an injunction to
restrain such Breach or threatened Breach. Executive agrees that
any member of the A&A
Group for which Executive performs services may enforce this
Agreement. Executive and the Company agree that all reasonable
expenses, including attorneys' fees, that are incurred by the
party that is successful in any action involving any such
covenant shall be borne by the losing party.
(b) If Executive shall have committed a Breach under
Section 10 or 11, and if the Company shall bring legal action for
injunctive or other relief, such relief shall have the duration
specified in such Section, commencing from the date such relief
is granted, but reduced by the period of time elapsed between the
Termination Date and such Breach.
17. Nature and Reformation of Covenants.
-----------------------------------
(a) Executive agrees and acknowledges that nothing
contained in this Agreement or the enforcement of any covenant
herein alters or shall alter Executive's ability to obtain a
livelihood for Executive or his family. Executive recognizes
that the covenants contained in this Agreement are reasonably
necessary to protect the Company's legitimate interest in the
customers and accounts Executive develops as an employee and to
protect Confidential Information. Executive further acknowledges
that the business of the Company and the A&A Group is not
confined to a specific geographical area, and that the absence of
a geographical limitation in Sections 10 and 11 hereof is, in
view of the nature of the business, reasonable.
(b) Executive agrees that the covenants contained in
Section 9(b)(ii) and Sections 10 through 15 are a substantial
part of the consideration being received by the Company in
respect of this Agreement, and are being made by Executive
expressly to induce the Company to enter into this Agreement.
Executive and the Company agree that if any provision of any such
covenant cannot be enforced as written, due to the length or
scope of the prohibitions contained therein or for any other
reason, a court or arbitrator having jurisdiction over this
Agreement shall reform any such unenforceable provision so that
it shall be enforceable in the manner which provides the Company
and each member of the A&A Group with the greatest level of
protection permissible at law.
18. Assignment.
----------
9
<PAGE>
This Agreement shall not be assigned by either Executive or
the Company except that the Company shall have the right to
assign its rights hereunder to any direct or indirect parent or
subsidiary of the Company or to any successor in interest of the
Company whether by merger, consolidation, purchase of assets or
otherwise. The Company represents and warrants that it currently
has no intention to enter into any transaction which could result
in this Agreement being assigned.
19. Survival.
--------
The provisions of Section 6, Section 9(b), Section 9(c) and
Sections 10 through 17 shall survive the term of this Agreement
and shall continue in full force and effect in accordance with
their terms.
20. Notices.
-------
All notices, requests, demands and other communications
hereunder must be in writing and shall be deemed to have been
given if delivered by hand or mailed within the continental
United States by first-class, registered or certified mail,
return receipt requested, postage and registry fees prepaid and
addressed as follows:
(a) if to the Company:
Alexander & Alexander Services Inc.
1211 Avenue of the Americas
New York, NY 10036
Attn: General Counsel
(b) if to Executive:
Lawrence E. Burk
6 Seminole Way
Chatham, New Jersey 07928
Addresses may be changed by notice in writing signed by the
addressee.
21. Disputes.
--------
Any disputes arising under this Agreement (excepting
disputes relating to the covenants set forth in Sections 10, 11,
12, 13, 14 and/or 15) shall be resolved by binding arbitration
under the rules of the American Arbitration Association then in
effect in the State of New York, by an arbitrator acceptable to
both the Company and Executive. If the parties cannot agree on
an acceptable arbitrator, the dispute shall be heard by a panel
of three arbitrators, one appointed by each of the parties and
the third appointed by the other two arbitrators. Any such
10
<PAGE>
arbitration shall be held in New York, New York, and the costs of
such arbitration shall be borne by the party who loses such
arbitration.
22. Miscellaneous.
-------------
(a) Entire Agreement. Except as otherwise expressly
-----------------
provided, this Agreement embodies the entire understanding
between Executive and the Company, except that nothing in this
Agreement shall be deemed to limit, restrict, constrain,
supersede or
otherwise impair the Company's rights and benefits under the
terms of the Prior Covenants or of any other agreement(s) between
the Company and Executive in effect on the date hereof regarding
confidentially, non-competition by Executive, non-solicitation or
any other matter discussed and described in Sections 10 through
17 hereof.
(b) Amendments. No amendment, change, alteration or other
----------
modification of this Agreement shall be made except in writing
signed by both parties hereto.
(c) Headings. The headings in this Agreement are for
--------
convenience of reference only and shall not be considered as part
of this Agreement nor limit or otherwise affect the meaning
hereof.
(d) Severability. In case any one or more of the
------------
provisions contained in this Agreement should be invalid, illegal
or unenforceable in any respect, the validity, legality and
enforceability of the remaining provisions contained herein shall
not in any way be affected or impaired thereby.
(e) Governing Law. This Agreement shall in all respects be
-------------
governed and construed in accordance with the laws of the State
of Maryland.
(f) Withholding. Any payments provided for herein shall be
-----------
reduced by any amounts required to be withheld by the Company
from time to time under applicable Federal, State or local income
tax laws or similar statutes then in effect.
IN WITNESS WHEREOF, the parties hereto have executed and
delivered this Agreement as of the day and year first above
written.
ALEXANDER & ALEXANDER SERVICES INC.
By:
-------------------------------
LAWRENCE E. BURK
-----------------------------------
12
STOCK PURCHASE AGREEMENT
BY AND BETWEEN
F-M ACQUISITION CORPORATION
AND
ALEXANDER & ALEXANDER INC.
Shares of Capital Stock
of
Shand, Morahan & Company, Inc.
Dated as of October 7, 1987
<PAGE>
STOCK PURCHASE AGREEMENT
BY AND BETWEEN
F-M ACQUISITION CORPORATION
AND
ALEXANDER & ALEXANDER INC.
TABLE OF CONTENTS
ARTICLE I
SALE AND PURCHASE OF SHARES
1.1. Sale and Purchase of Shares . . . . . . . . . . 2
1.2. Purchase Price . . . . . . . . . . . . . . . . 2
1.3. Payment of Purchase Price . . . . . . . . . . . 2
1.4. Deferred Purchase Price . . . . . . . . . . . . 3
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF SELLER
2.1. Organization and Existence of Seller . . . . . 11
2.2. Existence, Corporate Power and
Qualifications of SMCO . . . . . . . . . . . 12
2.3. Existence, Corporate Power and
Qualifications of ESI . . . . . . . . . . . 12
2.4. Subsidiaries . . . . . . . . . . . . . . . . . 13
2.5. Existence, Corporate Power and
Qualifications of EIC and ICE . . . . . . . 14
2.6. Capitalization . . . . . . . . . . . . . . . . 15
2.7. Ownership of Capital Stock . . . . . . . . . . 15
2.8. Authorization and Validity . . . . . . . . . . 16
2.9. Affiliates and Ventures . . . . . . . . . . . . 16
2.10. Non-Contravention of Instruments . . . . . . . 17
2.11. Consents, Filings and Approvals . . . . . . . . 18
2.12. Financial Statements . . . . . . . . . . . . . 19
2.13. Absence of Certain Changes or Events . . . . . 22
2.14. Accounts Receivable . . . . . . . . . . . . . . 24
2.15. Undisclosed Liabilities . . . . . . . . . . . . 24
2.16. Convention Statements . . . . . . . . . . . . . 25
2.17. Disputes and Litigation . . . . . . . . . . . . 26
2.18. Title to Properties . . . . . . . . . . . . . . 27
2.19. Investments . . . . . . . . . . . . . . . . . . 27
2.20. Governmental Licenses and Permits;
Compliance with Laws . . . . . . . . . . . . 28
2.21. Leases . . . . . . . . . . . . . . . . . . . . 28
2.22. Condition of Tangible Assets . . . . . . . . . 29
i
<PAGE>
2.23. Taxes . . . . . . . . . . . . . . . . . . . . . 29
2.24. Labor Relations . . . . . . . . . . . . . . . . 32
2.25. Insurance Coverage . . . . . . . . . . . . . . 33
2.26. Certain Contracts . . . . . . . . . . . . . . . 33
2.27. Employee Benefit Plans . . . . . . . . . . . . 35
(a) ERISA . . . . . . . . . . . . . . . . . . 35
(b) Qualification of Pension Plans;
Compliance with Law . . . . . . . . . . 36
(c) Multiemployer Plans . . . . . . . . . . . 37
2.28. Environmental Protection . . . . . . . . . . . 37
2.29. Insurance Business . . . . . . . . . . . . . . 37
2.30. Regulatory Filings . . . . . . . . . . . . . . 38
2.31. Reinsurance, Coinsurance and
Underwriting Management . . . . . . . . . . 39
2.32. Agents . . . . . . . . . . . . . . . . . . . . 40
2.33. Intangible Property and Computer
Software . . . . . . . . . . . . . . . . . . 40
2.34. No Brokers . . . . . . . . . . . . . . . . . . 41
2.35. Tax Allocation Agreement . . . . . . . . . . . 41
2.36. A&A as Guarantor . . . . . . . . . . . . . . . 41
2.37. Safe Harbor Leases . . . . . . . . . . . . . . 42
2.38. Full Disclosure . . . . . . . . . . . . . . . . 42
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF BUYER
3.1. Organization and Existence of Buyer . . . . . . 43
3.2. Authorization and Validity . . . . . . . . . . 43
3.3. Non-Contravention of Instruments . . . . . . . 43
3.4. Consents, Filings and Approvals . . . . . . . . 44
3.5. No Brokers . . . . . . . . . . . . . . . . . . 45
3.6. Purchase for Investment . . . . . . . . . . . . 45
3.7. Qualification . . . . . . . . . . . . . . . . . 45
3.8. Subsidiaries . . . . . . . . . . . . . . . . . 46
3.9. Capitalization . . . . . . . . . . . . . . . . 46
3.10. Indebtedness, etc. . . . . . . . . . . . . . . 46
3.11. Disputes and Litigation . . . . . . . . . . . . 47
3.12. Governmental Licenses and Permits;
Compliance with Laws . . . . . . . . . . . . 47
3.13. Taxes . . . . . . . . . . . . . . . . . . . . . 48
3.14. Buyer Guarantors . . . . . . . . . . . . . . . 48
3.15. Full Disclosure . . . . . . . . . . . . . . . . 49
ii
<PAGE>
ARTICLE IV
ADDITIONAL AGREEMENTS
4.1. Conduct of Business . . . . . . . . . . . . . . 49
4.2. Forbearance . . . . . . . . . . . . . . . . . . 51
4.3. Investigation of Business and
Properties . . . . . . . . . . . . . . . . . 53
4.4. Investigation of Financial Statements . . . . . 54
4.5. Agreement to Consummate . . . . . . . . . . . . 55
4.6. Regulatory Matters . . . . . . . . . . . . . . 55
4.7. Use of Names . . . . . . . . . . . . . . . . . 56
4.8. Covenant Not to Compete . . . . . . . . . . . . 56
4.9. Cooperation of Parties . . . . . . . . . . . . 57
4.10. EPIC Program . . . . . . . . . . . . . . . . . 58
4.11. Safe-Harbor Leases . . . . . . . . . . . . . . 59
4.12. Tax Allocation Agreement . . . . . . . . . . . 60
4.13. Timing Differences . . . . . . . . . . . . . . 60
4.14. Buyer Guarantees . . . . . . . . . . . . . . . 61
4.15. Shand Morahan Plaza . . . . . . . . . . . . . . 61
4.16. Pledge Agreement . . . . . . . . . . . . . . . 62
ARTICLE V
CONDITIONS TO BUYER'S OBLIGATIONS
5.1. Representations and Warranties . . . . . . . . 62
5.2. Performance of this Agreement . . . . . . . . . 62
5.3. Shand Morahan Plaza . . . . . . . . . . . . . . 63
5.4. Proceedings . . . . . . . . . . . . . . . . . . 63
5.5. Consents, Filings and Approvals . . . . . . . . 63
5.6. Litigation . . . . . . . . . . . . . . . . . . 64
5.7. Opinion of Counsel for Seller . . . . . . . . . 64
5.8. Share Certificates . . . . . . . . . . . . . . 65
5.9. Transfer Taxes . . . . . . . . . . . . . . . . 65
5.10. Repayment of Indebtedness . . . . . . . . . . . 65
5.11. Agreements with Lenders . . . . . . . . . . . . 65
5.12. Tax Allocation Agreement . . . . . . . . . . . 66
5.13. Guarantee . . . . . . . . . . . . . . . . . . . 66
ARTICLE VI
CONDITIONS TO SELLER'S OBLIGATIONS
6.1. Representations and Warranties . . . . . . . . 66
6.2. Performance of this Agreement . . . . . . . . . 67
6.3. Proceedings . . . . . . . . . . . . . . . . . . 67
6.4. Consents, Filings and Approvals . . . . . . . . 67
6.5. Litigation . . . . . . . . . . . . . . . . . . 68
iii
<PAGE>
6.6. Opinions of Counsel . . . . . . . . . . . . . . 68
6.7. Shand Morahan Plaza . . . . . . . . . . . . . . 69
6.8. Transfer Taxes . . . . . . . . . . . . . . . . 69
6.9. Pledge Agreement . . . . . . . . . . . . . . . 69
6.10. Guarantee . . . . . . . . . . . . . . . . . . . 69
6.11. Certificates and Undertakings . . . . . . . . . 69
6.12. Payments by SMCO . . . . . . . . . . . . . . . 70
6.13. Tax Allocation Agreement . . . . . . . . . . . 70
ARTICLE VII
CLOSING
7.1. Time and Place of Closing . . . . . . . . . . . 70
7.2. Deliveries by Seller . . . . . . . . . . . . . 71
7.3. Deliveries by Buyer . . . . . . . . . . . . . . 71
ARTICLE VIII
INDEMNIFICATION
8.1. By Seller . . . . . . . . . . . . . . . . . . . 72
8.2. By Buyer . . . . . . . . . . . . . . . . . . . 75
8.3. Third Party Claims . . . . . . . . . . . . . . 75
8.4. Payments . . . . . . . . . . . . . . . . . . . 80
8.5. No Contribution . . . . . . . . . . . . . . . . 83
ARTICLE IX
TERMINATION, AMENDMENT AND WAIVER
9.1. Termination . . . . . . . . . . . . . . . . . . 83
9.2. Effect of Termination . . . . . . . . . . . . . 84
9.3. Amendment . . . . . . . . . . . . . . . . . . . 85
9.4. Extension; Waiver . . . . . . . . . . . . . . . 85
ARTICLE X
BUSINESS AND FINANCIAL COVENANTS
10.1. Debt . . . . . . . . . . . . . . . . . . . . . 87
10.2. Restricted Payments . . . . . . . . . . . . . . 88
10.3. Liens, etc. . . . . . . . . . . . . . . . . . . 89
10.4. Leases; Leasebacks . . . . . . . . . . . . . . 92
10.5. Transactions with Affiliates . . . . . . . . . 92
10.6. Subsidiary Stock and Indebtedness . . . . . . . 93
10.7. Consolidation, Merger, Sale of
Assets, etc. . . . . . . . . . . . . . . . . 95
iv
<PAGE>
10.8. Corporate Existence, etc.; Business . . . . . . 96
10.9. Payment of Taxes and Claims . . . . . . . . . . 97
10.10. Investments . . . . . . . . . . . . . . . . . . 98
10.11. Net Worth . . . . . . . . . . . . . . . . . . . 99
10.12. Compliance with ERISA . . . . . . . . . . . . . 99
10.13. Insurance . . . . . . . . . . . . . . . . . . . 101
10.14. Accounting, Financial Statements and
Other Information . . . . . . . . . . . . . . 101
10.15. Inspection . . . . . . . . . . . . . . . . . . 108
10.16. Definitions . . . . . . . . . . . . . . . . . . 108
ARTICLE XI
PURCHASE PRICE ADJUSTMENTS
11.1. Certain Definitions . . . . . . . . . . . . . . 117
11.2. Adjustment Amount . . . . . . . . . . . . . . . 119
11.3. Estimates and Finality of the Adjustment
Amount; Disputes . . . . . . . . . . . . . . 122
11.4. Assignment of Uncollectible Reinsurance . . . . 125
11.5. Indemnification Amount, etc. . . . . . . . . . 126
11.6. No Commutation of Uncollectible
Reinsurance, etc. . . . . . . . . . . . . . . 128
11.7. Right of Inspection . . . . . . . . . . . . . . 129
ARTICLE XII
EVENTS OF DEFAULT
12.1. Events of Default; Acceleration . . . . . . . . 130
12.2. Remedies on Default, etc. . . . . . . . . . . . 135
12.3. Cure of Defaults . . . . . . . . . . . . . . . 136
ARTICLE XIII
GENERAL PROVISIONS
13.1. Notices . . . . . . . . . . . . . . . . . . . . 137
13.2. Fees and Expenses . . . . . . . . . . . . . . . 138
13.3. Public Announcements . . . . . . . . . . . . . 139
13.4. Interpretation . . . . . . . . . . . . . . . . 139
13.5. Counterparts . . . . . . . . . . . . . . . . . 139
13.6. Miscellaneous . . . . . . . . . . . . . . . . . 139
13.7. Survival . . . . . . . . . . . . . . . . . . . 140
13.8. Knowledge . . . . . . . . . . . . . . . . . . . 141
13.9. Arbitration . . . . . . . . . . . . . . . . . . 141
13.10. Deemed Obligations of Buyer . . . . . . . . . . 142
v
<PAGE>
EXHIBITS
A - Form of Tax Allocation Agreement
B - Terms of Shand Morahan Plaza Agreement
C - Form of Legal Opinion of Debevoise & Plimpton
D - Form of Legal Opinion of Lord, Bissell & Brook
E - Form of A&A Guarantee
F - Form of Legal Opinion of McGuire, Woods, Battle & Boothe
G - Form of Legal Opinion of Burke, Griffin,
Chomicz & Wienke, P.C.
H - Form of Pledge Agreement
I - Form of Non-Contingent Buyer Guarantee
J - Form of Overall Buyer Guarantee
K - Form of Certificate and Undertaking
L - Form of Legal Opinion of Tory, Tory,
DesLauriers & Binnington
M - Form of Kansa Buyer Guarantee
SCHEDULES
2.2 - Jurisdictions in which SMCO is licensed or
qualified to do business.
2.3 - Jurisdictions in which ESI is licensed or qualified
to do business.
2.5 - Classes of insurance which EIC or ICE are qualified
to issue.
2.9 - Affiliations and ventures of SMCO, ESI, EIC and
ICE.
2.10 - Agreements, judgments, court orders having
termination or other provisions that may be
triggered by the transactions contemplated by this
agreement.
2.11 - Filings and approvals required of Seller.
2.12 - Financial Statements Not Delivered.
2.13 - Changes in business or assets of SMCO, ESI, EIC and
ICE since June 30, 1987.
2.15 - Liabilities of SMCO, ESI, EIC or ICE (otherwise
undisclosed).
2.17 - Disputes and litigation affecting SMCO, ESI, EIC or
ICE.
2.18 - Real property owned by SMCO, ESI, EIC or ICE and
encumbrances on material assets.
2.20 - Procedings involving licenses of SMCO, ESI, EIC or
ICE.
2.21 - Leases of personal property having annual payments
in excess of $25,000.
vi
<PAGE>
2.23 - Tax matters with respect to SMCO, ESI, EIC and ICE.
2.24 - Labor disputes with SMCO, ESI, EIC or ICE.
2.25 - Insurance coverage of and unpaid claims against
SMCO, ESI, EIC and ICE.
2.26 - Certain contracts.
2.27 - SMCO employee benefit plans subject to ERISA.
2.30 - Regulatory filings of SMCO, ESI, EIC or ICE not
provided to Buyer or having alleged deficiencies.
2.31 - Reinsurers of EIC and ICE and underwriting
management agreements to which SMCO, ESI, EIC or
ICE are a party.
2.32 - Agents and brokers of EIC and ICE.
2.33 - Intangible property of SMCO, ESI, EIC or ICE.
2.37 - Tax Benefit Leases.
3.4 - Filings and approvals required of Buyer.
3.9 - Capitalization of Buyer.
4.8 - Lines of insurance with respect to Seller's
covenant not to compete.
5.10 - Indebtedness to be repaid by Seller or an Affiliate
to SMCO.
6.12 - Indebtedness to be repaid by SMCO to Seller.
List of Defined Terms
---------------------
Item Section
----- -------
A&A 2.11
A&A Guarantee 2.36
Adjustment Amount 11.2
Adjustment Date 1.4(a)
Affiliate 10.16
Best 1.4(c)(i)(C)(II)(1)
Buyer Heading
Buyer Affiliates 8.1
Buyer Guarantors 3.14
Buyer's Actuaries 11.3
Buyer's Auditors 11.3
Closing 7.1
Closing Date 7.1
Code 10.16
Coleman Recital A
Consolidated Net Income 10.16
Consolidated Net Worth 10.16
Contingent Amount 1.4 (a)(i)
Control 10.16
Debt 10.16
vii
<PAGE>
Deferred Purchase Price 1.4 (a)
Determination Date 11.1
EIC 2.4
Employee Benefit Plans 2.27
EPIC 4.10
ERISA 10.16
ESI Recital A
ESI Common Stock 2.6
ESI Share Purchase Agreements Recital C
ESI Shares Recital A
Events of Default 12.1
Fairfax 1.4(c)(i)(C)(II)(2)(z)
Financial Guarantee 1.4(c)(i)(A)
General Accident 8.1(c)
Guarantee 10.16
Guarantee Effectiveness Event Art. X (Introductory
paragraph)
Hamblin Watsa 10.16
ICE 2.4
Indemnification Amount 11.1
Intellectual Property 2.33
Interest and Penalties 2.23(ii)
Kansa Recital A
Kansa Buyer Guarantee 3.14
Legal Action 8.3(b)
Legislation 2.23(i)
Lien 10.16
Litigation 2.23(i)
Loss Events 2.37
Markel 1.4(c)(i)(C)(II)(2)(z)
Multiemployer Plan 10.16
Mutual Fire 8.1(b)
Non-Contingent Amount 1.4(a)(ii)
Non-Contingent Buyer Guarantee 3.14
Officer's Certificate 10.16
Overall Buyer Guarantee 1.4(c)(i)(C)(II)(2)(z)(1)
Payment Date 1.4(a)
Pension Plans 2.27(a)
Person 10.16
Plan 10.16
Potential Event of Default 10.16
Purchase Price 1.2
Reassessments 2.23(ii)
Reserves for Losses and
Loss Adjustment Expenses 11.1
Reserves for Uncollectible
Reinsurance 11.1
Restricted Payment 10.16
viii
<PAGE>
Returns 2.23(i)
Seller Heading
Seller's Actuaries 11.3
Seller's Auditors 11.3
SMCO Recital A
SMCO Common Stock 2.6
SMCO Shares Recital A
Subsidiary 10.16
Tax Allocation Agreement 2.35
Tax Reserves 2.23(ii)
Taxes 2.23(i)
Total Adjustment 1.4(b)
Uncollectible Reinsurance 11.1
Voting Stock 10.16
Welfare Plans 2.27(a)
Wholly-Owned 10.16
ix
<PAGE>
STOCK PURCHASE AGREEMENT
This STOCK PURCHASE AGREEMENT is made as of Octo-
ber 7, 1987 by and between F-M Acquisition Corporation, an
Illinois corporation ("Buyer"), and Alexander & Alexander
Inc., a Maryland corporation ("Seller").
RECITALS OF THE PARTIES
A. Seller owns all of the issued and outstanding
shares of capital stock (the "SMCO Shares") of Shand,
Morahan & Company, Inc., an Illinois corporation ("SMCO").
SMCO, Kansa General Insurance Company, Ltd., a Finland cor-
poration ("Kansa"), and C.J. Coleman Holdings Ltd., a United
Kingdom corporation ("Coleman"), own all of the issued and
outstanding shares of capital stock (the "ESI Shares") of
Evanston Services, Inc., an Illinois insurance holding cor-
poration ("ESI").
B. Buyer desires to purchase the SMCO Shares from
Seller and Seller desires to sell the SMCO Shares to Buyer.
C. Buyer proposes to enter into one or more stock
purchase agreements with Kansa and Coleman for the purpose
of purchasing all of the ESI Shares not owned by SMCO (the
"ESI Share Purchase Agreements").
<PAGE>
NOW THEREFORE, in consideration of the foregoing
and the representations, warranties, agreements and condi-
tions contained herein, the parties hereto agree as follows:
ARTICLE I
SALE AND PURCHASE OF SHARES
1.1. Sale and Purchase of Shares. Subject to the
---------------------------
terms and conditions set forth in this Agreement, including
the approval of the Commissioner of Insurance of the State
of Illinois, Seller hereby agrees to sell to Buyer, and
Buyer hereby agrees to purchase from Seller, the SMCO
Shares, free and clear of all claims, liens, pledges, secu-
rity interests, restrictions or encumbrances and together
with all rights attaching thereto.
1.2. Purchase Price. The aggregate purchase
--------------
price for the SMCO Shares shall be equal to $62.8 million,
subject to the adjustments referred to in Section 1.4 hereof
(the "Purchase Price"), payable as provided in Sections 1.3
and 1.4.
1.3. Payment of Purchase Price. The Purchase
-------------------------
Price (except for the Deferred Purchase Price) shall be paid
to Seller at the Closing (as defined in Section 7.1) by wire
transfer of immediately available funds to such account as
Seller may designate in the amount of (a) $30.5 million, or
-
(b) $21 million, if at the Closing Buyer shall have assumed
-
2
<PAGE>
$9.5 million of the liability owing to SMCO by Seller in
respect of the safe harbor leases referred to in Sec-
tion 4.11 and if at the Closing SMCO shall have released
Seller, in a manner satisfactory to Seller, from all liabil-
ity in respect of such liability of $9.5 million.
1.4. Deferred Purchase Price. (a) On the fifth
-----------------------
anniversary of the Closing Date, or such earlier date as may
be provided pursuant to Sections 1.4(d) or 12.1 (the "Pay-
ment Date"), Buyer shall pay to Seller, by wire transfer of
immediately available funds to such account as Seller may
designate, an amount (the "Deferred Purchase Price") equal
to
(i) $29.3 million (the "Contingent Amount"),
plus
----
(ii) $3 million (the "Non-Contingent Amount"),
plus
----
(iii) an amount equivalent to interest (calculated
using the applicable assumed interest rate set forth in
Section 1.4(c)) accrued on the Contingent Amount from
the Closing Date until the date on which the Contingent
Amount is paid in full,
plus
----
(iv) an amount equivalent to interest (calculated
using the applicable assumed interest rate set forth in
3
<PAGE>
Section 1.4(c)) accrued on the Non-Contingent Amount
from the Closing Date until the Non-Contingent Amount
is paid in full,
minus
-----
(v) the Adjustment Amount (as defined in Sec-
tion 11.2) calculated as of the Determination Date (as
defined in Section 11.1) and,
minus
-----
(vi) an amount (if any) equivalent to interest
(calculated using the applicable assumed interest rate
set forth in Section 1.4(c)) accrued on the Adjustment
Amount from the Adjustment Date (as defined below)
until the Payment Date.
"Adjustment Date" shall mean the expiration date of the time
period (beginning on the Closing Date) specified in Column 4
of the table set forth in Section 1.4(c)(ii) which cor-
responds to the interest rate, as set forth in Column 2 of
such table, that is used in determining the Deferred Pur-
chase Price.
(b) Notwithstanding the provisions of Sec-
tion 1.4(a), the sum (the "Total Adjustment") of the amounts
specified in clauses (v) and (if applicable) (vi) thereof
(in respect of the Adjustment Amount and the amount equiva-
lent to interest accrued thereon) shall be subject to the
4
<PAGE>
limitations hereinafter provided in clauses (i), (ii) and
(iii) of this paragraph (b):
(i) In any event, the Total Adjustment shall not
exceed the Contingent Amount plus the amount equivalent
to interest accrued thereon pursuant to clause (iii) of
Section 1.4(a).
(ii) In the event that (A) the Deferred Purchase
-
Price is prepaid pursuant to Section 1.4(d) or (B) (1)
- -
the payment of the Deferred Purchase Price is acceler-
ated pursuant to Section 12.1 to become due and payable
prior to the Adjustment Date and (2) the amount speci-
-
fied in clause (v) of Section 1.4(a) does not exceed
$12.6 million, the Total Adjustment shall not exceed
the amount equivalent to interest accrued on the Con-
tingent Amount pursuant to clause (iii) of Sec-
tion 1.4(a).
(iii) In the event that the payment of the Deferred
Purchase Price is accelerated pursuant to Section 12.1
to become due and payable prior to the Adjustment Date
and the amount specified in clause (v) of Sec-
tion 1.4(a) exceeds $12.6 million, the Total Adjustment
shall equal the amount specified in clause (iii) of
Section 1.4(a), plus the amount by which the amount
----
specified in clause (v) exceeds $12.6 million.
5
<PAGE>
(c) The amount equivalent to interest referred to
in clauses (iii), (iv) and (vi) of Section 1.4(a) shall be
calculated on the basis of a 365- or 366-day year, as the
case may be, and the actual number of days elapsed and shall
be accrued on, and for the entire periods specified in Sec-
tion 1.4(a) with respect to, the Contingent Amount, the Non-
Contingent Amount and the Adjustment Amount, as the case may
be, at the rates set forth below:
(i) The assumed interest rate per annum shall be
17.67% in the case of the Contingent Amount and 16.17%
in the case of the Non-Contingent Amount unless one of
the following different rates shall apply to the Con-
tingent Amount (in which case the assumed interest rate
on the Non-Contingent Amount will be 150 basis points
less than the respective rates set forth below):
(A) An assumed interest rate per annum of
13.36% shall apply if Buyer shall have delivered
to Seller on or before the first anniversary of
the Closing Date an unconditional and irrevocable
guarantee or letter of credit (the "Financial
Guarantee"), in form and substance reasonably
satisfactory to Seller, that is in the maximum
amount of the Deferred Purchase Price (including
the amount equivalent to interest that has accrued
6
<PAGE>
prior to the date on which such guarantee or let-
ter of credit becomes effective and the amount
equivalent to interest which would accrue there-
after until the fifth anniversary of the Closing
Date, in both cases at the rates determined as
provided in this Section 1.4(c)(i), and assuming
that no amount would be deducted pursuant to
clauses (v) and (vi) of Section 1.4(a)), and that
will remain in effect for a term ending not earli-
er than the sixth anniversary of the Closing Date,
from a bank, other financial institution or Hees
International Corporation, if such bank, financial
institution or corporation is rated AA or better
by Standard & Poor's Corporation (or receives a
comparable rating from a comparable agency).
(B) An assumed interest rate per annum of
14.39% shall apply if Buyer shall have delivered
to Seller the Financial Guarantee after the first
anniversary of the Closing Date and on or before
the second anniversary of the Closing Date.
(C) An assumed interest rate per annum of
15.45% shall apply if either (I) Buyer shall have
-
delivered to Seller the Financial Guarantee after
the second anniversary of the Closing Date and on
7
<PAGE>
or before the third anniversary of the Closing
Date or (II) on or before such third anniversary a
--
condition set forth in the following subclauses
shall have occurred and such condition shall con-
tinue to be true to and including the Payment
Date:
(1) EIC shall have received written
notice that it has received, and shall main-
tain, a rating of B+ or better from A.M. Best
& Company ("Best"); or
(2) if, and only if, EIC is rated NA-5
(Significant Change) by Best and (x) EIC
-
shall have received written notice that it
has received, and shall maintain, a rating of
A or better by Standard & Poor's Corporation,
or (y) Buyer shall have, and shall maintain,
-
a Consolidated Net Worth (as defined in Sec-
tion 10.16) in excess of $50 million, or (z)
-
Fairfax Financial Holdings Limited ("Fair-
fax") and Markel Corporation ("Markel") (1)
-
shall have executed and delivered to Seller a
guarantee substantially in the form attached
hereto as Exhibit J (the "Overall Buyer Guar-
antee"), and (2) either individually or to-
-
8
<PAGE>
gether shall have, and shall maintain, a
Consolidated Net Worth in excess of $70 mil-
lion;
provided, that, if a condition set forth in clause
--------
(II)(1) or (2) above ceases to be true, the assumed
rate of interest brought about by fulfillment of such
condition shall continue to apply if Buyer, within 60
days following such cessation, delivers to Seller the
Financial Guarantee or fulfills one of the other condi-
tions set forth in clause (II)(1) or (2). For purposes
of this proviso, the term "cessation" shall mean:
(m) in the case of clause (II)(1) and (2),
the date notice is received from a rating agency
of a lowering of the rating; and
(n) in the case of clause (II)(2), the date
of issuance of the first quarterly balance sheet show-
ing the deficiency of Consolidated Net Worth below $50
million or $70 million, as the case may be.
(D) An assumed rate of 16.54% shall apply if
either (1) Buyer shall have delivered to Seller
-
the Financial Guarantee after the third anniver-
sary of the Closing Date and on or before the
fourth anniversary of the Closing Date or (2) on
-
or before such fourth anniversary a condition set
9
<PAGE>
forth in clauses (C)(II)(1) or (2) of this Sec-
tion 1.4(c)(i) shall have occurred and shall con-
tinue to be true to and including the Payment
Date, subject to the same proviso as is set forth
immediately following such clauses (C)(II)(1) and
(2).
(ii) In the case of the Adjustment Amount, the
assumed interest rate per annum shall be as set forth
in Column 3 of the table below, corresponding to the
assumed interest rate applicable to the Contingent
Amount as set forth in Column 2 of such table:
Column 1 Column 2 Column 3 Column 4
-------- -------- -------- --------
Applicable Rate Rate Adjustment
Clause Applicable to Applicable to Date
of Paragraph Contingent Adjustment Years After
------------ ---------- ---------- -----------
(c)(i) Amount Amount Closing*
------ ------ ------ -------
Introduction 17.67% 12.45% 2.43 years
(A) 13.36% 9.55 3.22
(B) 14.39 9.95 2.99
(C) 15.45 10.82 2.78
(D) 16.54 11.67 2.60
The application of such assumed interest rates
hereunder shall be on the basis of simple interest, without
compounding. All payments of the Deferred Purchase Price
--------------------
* The figures in Column 4 represent the time periods at
the end of which the amount equivalent to interest
accrued on the Contingent Amount pursuant to Sec-
tion 1.4(a)(iii) equals $12.6 million.
10
<PAGE>
shall be applied first to amounts due pursuant to Sec-
tion 1.4(a)(iii), then to amounts due pursuant to Sec-
tion 1.4(a)(i), then to amounts due pursuant to Sec-
tion 1.4(a)(iv) and finally to amounts due pursuant to Sec-
tion 1.4(a)(ii). An amount equivalent to interest shall
accrue on any portion of the Contingent Amount and the Non-
Contingent Amount not paid when due at the assumed interest
rate per annum then applicable thereto plus 4%, provided
---- --------
that such rate of interest shall not apply to any portion of
the Deferred Purchase Price that is subject to and withheld
during a good-faith dispute as to the Adjustment Amount,
which portion is ultimately determined to be payable to
Seller (and is so paid).
(d) Buyer, at its option, exercised by giving not
less than 45 days' irrevocable notice to Seller designating
the date of prepayment, at any time may prepay, by wire
transfer of immediately available funds to such account as
Seller may designate, all, but not part, of the Deferred
Purchase Price, calculated as of the date of prepayment.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF SELLER
Seller represents and warrants to Buyer the fol-
lowing:
11
<PAGE>
2.1. Organization and Existence of Seller. Sell-
------------------------------------
er is a corporation duly organized, validly existing and in
good standing under the laws of the State of Maryland.
2.2. Existence, Corporate Power and Qualifica-
-----------------------------------------
tions of SMCO. SMCO is a corporation duly and validly ex-
-------------
isting and in good standing under the laws of the State of
Illinois, and has the corporate power and authority to own
all of its properties and assets and to carry on its busi-
ness as it is presently being conducted. SMCO is duly qual-
ified or licensed to do business and is in good standing in
each jurisdiction where the character of the properties and
assets it owns, operates or holds under lease or the nature
of the business transacted by it in such jurisdiction so
requires, except where, in the good-faith belief of manage-
ment, the failure so to qualify or be licensed would not
have a material adverse effect on its business. Each such
jurisdiction on which SMCO is duly qualified or licensed is
listed in Schedule 2.2. SMCO is duly licensed as an insur-
ance brokerage company in each such jurisdiction where such
licensing is required, except where the failure to be li-
censed would not have a material adverse effect on its busi-
ness. The copies of the Articles of Incorporation and the
Bylaws of SMCO which have been delivered to Buyer are true
12
<PAGE>
and complete copies of such instruments as in effect on the
date hereof.
2.3. Existence, Corporate Power and Qualifica-
-----------------------------------------
tions of ESI. ESI is a corporation duly and validly exist-
------------
ing and in good standing under the laws of the State of
Illinois, and has the corporate power and authority to own
all of its properties and assets and to carry on its busi-
ness as an insurance holding company as it is presently
being conducted. ESI is duly qualified to do business and
is in good standing in each jurisdiction where the character
of the properties and assets it owns, operates or holds
under lease or the nature of the business transacted by it
in such jurisdiction so requires, except where the failure
so to qualify would not have a material adverse effect on
its business. Each such jurisdiction where ESI is qualified
to do business is listed on Schedule 2.3. The copies of the
Articles of Incorporation and the Bylaws of ESI which have
been delivered to Buyer are true and complete copies of such
instruments as in effect on the date hereof.
2.4. Subsidiaries. ESI owns all of the issued
------------
and outstanding shares of capital stock in Evanston Insur-
ance Company, an Illinois corporation ("EIC"), and EIC owns
all of the issued and outstanding shares of capital stock of
Insurance Company of Evanston, an Illinois corporation
13
<PAGE>
("ICE"), in each case free and clear of all liens, charges,
pledges, security interests or other encumbrances, except
for the pledge by ESI of shares of common stock of EIC to
Harris Trust and Savings Bank, and all such capital stock is
duly authorized, validly issued and outstanding, fully paid
and nonassessable. There are no Subsidiaries (as defined in
Section 10.16) of SMCO other than ESI, EIC and ICE.
2.5. Existence, Corporate Power and Qualifica-
-----------------------------------------
tions of EIC and ICE. EIC and ICE are corporations duly and
--------------------
validly existing and in good standing under the laws of the
State of Illinois, and have the corporate power and authori-
ty to own all of their respective properties and assets and
to carry on their businesses as property and casualty insur-
ance companies, operating on a non-admitted or admitted
basis, as appropriate, as they are presently being
conducted. Each of EIC and ICE is duly qualified or
licensed to do business and is in good standing in each
jurisdiction where the character of the properties and
assets it owns, operates or holds under lease or the nature
of the business transacted by it in such jurisdiction so
requires, except where the failure so to qualify would not
have a material adverse effect on its business. Each class
of property or casualty insurance qualified to be issued by
EIC or ICE is listed on Schedule 2.5. The copies of the
14
<PAGE>
Articles of Incorporation and the Bylaws of EIC and ICE
which have been delivered to Buyer are true and complete
copies of such instruments as in effect on the date hereof.
2.6. Capitalization. The authorized capital
--------------
stock of SMCO consists of 10,000 shares of common stock,
$1.00 par value (the "SMCO Common Stock"), of which 1,000
shares of SMCO Common Stock are duly authorized, validly
issued and oustanding, fully paid and nonassessable. The
authorized capital stock of ESI consists of 2,000,000 shares
of Common Stock, $5.00 par value (the "ESI Common Stock"),
of which 751,229 shares of ESI Common Stock are duly autho-
rized, validly issued, fully paid and nonassessable. There
are not outstanding any options, warrants or other commit-
ments to issue any shares of capital stock of SMCO, ESI, EIC
or ICE, or any securities or obligations convertible into or
exchangeable for, or giving any person any right to acquire
from any of them, any shares of capital stock of SMCO, ESI,
EIC or ICE, except as set forth in Section 6.2 of the Bylaws
of ESI. No shares of ESI Common Stock have any preemptive
rights. No person other than Seller presently has any pre-
emptive rights under the provisions of SMCO's Articles of
Incorporation, and Seller's preemptive rights shall cease to
exist upon the transfer of the SMCO Shares pursuant to this
Agreement.
15
<PAGE>
2.7. Ownership of Capital Stock. Seller is the
--------------------------
owner beneficially and of record of the SMCO Shares. SMCO
is the owner beneficially and of record of 391,925 ESI
Shares. Seller has good and marketable title to the SMCO
Shares, and SMCO has good and marketable title to the ESI
Shares owned by it, in each case with no contractual re-
strictions on voting rights and with the other incidents of
record and beneficial ownership incident thereto, except as
set forth in Section 6.2 of the Bylaws of ESI.
2.8. Authorization and Validity. Seller has the
--------------------------
corporate power and authority to execute and deliver this
Agreement and the other agreements contemplated on its part
hereby and to consummate the transactions contemplated on
its part hereby; the execution and delivery hereof and
thereof by Seller and the consummation by Seller of such
transactions have been duly authorized by its Board of Di-
rectors, no other corporate authorization being necessary;
and this Agreement has been, and on the Closing Date each of
such other agreements will be, duly executed and delivered
by and this Agreement constitutes and each of such other
agreements will constitute a valid and binding agreement of
Seller.
2.9. Affiliates and Ventures. Except as de-
-----------------------
scribed in Section 2.4 or as set forth on Schedule 2.9, none
16
<PAGE>
of SMCO, ESI, EIC or ICE is a general or limited partner of,
or any party to any joint venture with, any other entity,
nor does any of them, directly or indirectly, own any inter-
est in any other corporation, partnership, joint venture or
other business association or entity other than in the ordi-
nary course of business. Except as set forth on Sched-
ule 2.9, Seller has no direct or indirect interest in any
material property (other than any interests in any agree-
ments listed on any Schedule attached hereto or otherwise
disclosed herein) used by, or relating to, SMCO, ESI, EIC or
ICE, except through the ownership of the SMCO Shares.
2.10. Non-Contravention of Instruments. The
--------------------------------
execution and delivery of this Agreement and the other
agreements contemplated on its part hereby by Seller do not
and the consummation by Seller of the transactions contem-
plated hereby and thereby, will not violate any provision of
the Articles of Incorporation or Bylaws of Seller, SMCO,
ESI, EIC or ICE, except for Section 6.2 of the Bylaws of
ESI, and, except for transactions disclosed on Sched-
ule 2.10, will not (a) violate, or result, with the passage
-
of time or the giving of notice or both, in a violation of,
any provision of, or result in the acceleration of or enti-
tle any party to accelerate any obligation under, or result
in the creation or imposition of any claim, lien, pledge,
17
<PAGE>
security interest, restriction or other encumbrance upon any
of the property of SMCO, ESI, EIC, ICE or, to the extent
that such creation or imposition would prevent the consumma-
tion of the transactions contemplated hereby, Seller pur-
suant to any provision of, any material mortgage, lien,
lease, agreement (except as set forth in Section 6.2 of the
Bylaws of ESI), license or instrument to which SMCO, ESI,
EIC, ICE or Seller is a party or to which any of them is
subject, (b) constitute an event permitting termination of
-
any mortgage, lien, lease, agreement, license or instrument
to which SMCO, ESI, EIC or ICE is a party, and (c) violate
-
any judgment, order, writ, injunction, decree, regulation or
rule of any court or governmental authority applicable to
SMCO, ESI, EIC, ICE or, to the extent that such violation
would prevent the consummation of the transactions
contemplated hereby, Seller or the assets of any of SMCO,
ESI, EIC, ICE or, to the extent that such violation would
prevent the consummation of the transactions contemplated
hereby, Seller.
2.11. Consents, Filings and Approvals. Except
-------------------------------
for filings and approvals listed on Schedule 2.11 and as set
forth in Section 6.2 of the Bylaws of ESI, no consent, ap-
proval, notification, authorization or order of, or declara-
tion, filing or registration with, any governmental agency
18
<PAGE>
or third party of the character referred to in the second
sentence of this Section 2.11, is required to be obtained or
made by Alexander & Alexander Services Inc. ("A&A"), Seller,
SMCO, ESI, EIC or ICE prior to the Closing in connection
with the execution, delivery and performance of this Agree-
ment or any other agreement contemplated hereby. The pre-
ceding sentence shall apply only where the consequences of
failing to obtain or make any such consent, approval, noti-
fication, authorization, order, declaration, filing or reg-
istration would prevent consummation of any of the transac-
tions contemplated by this Agreement or materially adversely
affect SMCO, ESI, EIC or ICE.
2.12. Financial Statements. Each of (v) the
-------------------- -
audited financial statements for SMCO for the two years
ended December 31, 1986, (w) the audited consolidated finan-
-
cial statements for ESI and its Subsidiaries for the three
years ended December 31, 1986, (x) the audited consolidated
-
financial statements for EIC and its Subsidiary for the
three years ended December 31, 1986 and (y) the audited
-
financial statements for ICE for the three years ended De-
cember 31, 1986, all of which, except as set forth in Sched-
ule 2.12, have been delivered to Buyer, (i) were prepared in
-
accordance with generally accepted accounting principles
applied on a consistent basis (except as noted therein) and
19
<PAGE>
(ii) fairly present the assets, liabilities and financial
--
position of the entities or consolidated entities included
therein as at the respective dates thereof, and the results
of their operations and changes in their financial position
for the periods then ended, provided that this representa-
--------
tion shall not be deemed to be breached by reason of the
development (or the state of facts giving rise to such de-
velopment) of Reserves for Losses and Loss Adjustment Ex-
penses (as defined in Section 11.1) and Reserves for Uncol-
lectible Reinsurance (as defined in Section 11.1) after the
respective dates of such financial statements for periods
included therein. The unaudited financial statements for
SMCO for the six-month period ended June 30, 1987, which
have been delivered to Buyer, were prepared from the books
and records of SMCO and its Subsidiary accounted for on the
equity method in conformity with generally accepted account-
ing principles (except for any adjustments described therein
and for the absence of footnotes therefrom) applied on a
basis consistent with those applied in the audited financial
statements of SMCO for the fiscal year ended December 31,
1986 and fairly present the assets, liabilities and consoli-
dated financial position of SMCO and its Subsidiary at such
date and the results of operations for such period in accor-
dance with such principles, subject to the aforementioned
20
<PAGE>
adjustments and to normal year-end audit adjustments made in
accordance with generally accepted accounting principles and
consistent with prior years' practice, provided that this
--------
representation shall not be deemed to be breached by reason
of the development (or the state of facts giving rise to
such development) of Reserves for Losses and Loss Adjustment
Expenses and Reserves for Uncollectible Reinsurance after
June 30, 1987 for the periods included therein. The unau-
dited consolidated financial statements of ESI and the unau-
dited unconsolidated financial statements of EIC and the
unaudited financial statements of ICE, as of and for the
six-month periods ended June 30, 1986 and 1987, which have
been delivered to Buyer, were prepared in accordance with
the books and records of ESI, EIC and ICE, respectively, in
conformity with generally accepted accounting principles
(except for any adjustments described therein and for the
absence of footnotes therefrom) applied on a basis consis-
tent with those applied in the audited financial statements
for the year ended December 31, 1986, and fairly present the
consolidated assets, liabilities and financial position of
ESI and the assets, liabilities and financial position of
EIC and ICE at such dates and the results of their opera-
tions for such periods in accordance with such principles,
subject to the aforementioned adjustments and to normal
21
<PAGE>
year-end audit adjustments made in accordance with generally
accepted accounting principles and consistent with prior
years' practice, provided that this representation shall not
--------
be deemed to be breached by reason of the development (or
the state of facts giving rise to such development) of
Reserves for Losses and Loss Adjustment Expenses and
Reserves for Uncollectible Reinsurance after their respec-
tive dates for periods included therein.
2.13. Absence of Certain Changes or Events.
------------------------------------
Except as contemplated by Section 4.1, there has not been
since June 30, 1987:
(i) except as set forth on Schedule 2.13, any
material adverse change in the business or assets of
SMCO, ESI, EIC and ICE, taken as a whole;
(ii) any damage, destruction or other casualty
loss to the property of SMCO, ESI, EIC or ICE (whether
or not covered by insurance) materially adversely af-
fecting the business or assets of SMCO, ESI, EIC and
ICE, taken as a whole;
(iii) any change in the accounting methods followed
by SMCO, ESI, EIC or ICE, except as stated in the
financial statements referred to in Section 2.12;
(iv) any direct or indirect redemption, purchase
or other acquisition by SMCO, ESI, EIC or ICE of any
22
<PAGE>
shares of their capital stock or any acquisition or
proposed acquisition of real property by any of them;
(v) any split, combination or other similar
change in the outstanding shares of capital stock of
SMCO, ESI, EIC or ICE;
(vi) except as set forth on Schedule 2.13, any
declaration, setting aside or payment of any dividend
or other distribution (whether in cash, capital stock
or property) by SMCO, ESI, EIC or ICE;
(vii) any increase in any manner in the compensa-
tion of any of the employees of SMCO, ESI, EIC or ICE
except normal increases in accordance with established
prior practice; any payment or agreement to pay any
pension or retirement allowance not required by any
existing plan or agreement to any officer or employee;
or any amendment (except as required by law) to any
employee agreement or any incentive compensation, prof-
it sharing, stock purchase, stock option, stock appre-
ciation rights, savings, consulting, deferred compensa-
tion, retirement, pension or other "fringe benefit"
plan or arrangement with or for the benefit of any
officer, employee or other person;
23
<PAGE>
(viii) any sale or other transfer of the fixed or
capital assets of SMCO, ESI, EIC or ICE other than in
the ordinary course of business;
(ix) except as set forth in Schedule 2.13, any
capital expenditures or commitments for capital expen-
ditures by SMCO, ESI, EIC or ICE other than in the
ordinary course of business;
(x) except as set forth in Schedule 2.13, any
termination of any material agreement by, any waiver of
any rights or claims under material agreements by, or
any material gifts or material contracts or commitments
to make any gifts of the property of, SMCO, ESI, EIC or
ICE other than in the ordinary course of business; or
(xi) any payment of liabilities by SMCO, ESI, EIC
or ICE other than current liabilities or liabilities
reflected in the audited consolidated financial state-
ments of SMCO and ESI as of December 31, 1986 or the
unaudited consolidated financial statements of SMCO and
ESI as of June 30, 1987.
2.14. Accounts Receivable. The accounts receiv-
-------------------
able shown on the balance sheets of SMCO, ESI, EIC, and ICE
at June 30, 1987, delivered to Buyer pursuant to Sec-
tion 2.12 hereof, or acquired by them subsequent to June 30,
24
<PAGE>
1987, and prior to the date hereof, represent transactions
made in the ordinary course of business.
2.15. Undisclosed Liabilities. Except as set
-----------------------
forth on Schedule 2.15 or otherwise disclosed herein or in
any other schedule hereto, none of SMCO, ESI, EIC or ICE
(i) had, as of June 30, 1987, any debts, liabilities or
-
obligations, whether accrued, absolute, contingent or other-
wise, and whether due or to become due, material in the
aggregate to the financial condition of SMCO, ESI, EIC and
ICE, taken as a whole, except as reflected in or provided
for in their respective financial statements at June 30,
1987 referred to in Section 2.12 hereof, provided that this
--------
representation shall not be deemed to be breached by reason
of the development (or the state of facts giving rise to
such development) of Reserves for Losses and Loss Adjustment
Expenses and Reserves for Uncollectible Reinsurance after
such date for the periods prior thereto; (ii) has incurred
--
any material debts, liabilities or obligations since
June 30, 1987, other than in the normal course of business;
or (iii) has, since June 30, 1987, conducted business other-
---
wise than in the normal course.
2.16. Convention Statements. Seller has fur-
---------------------
nished to Buyer Annual Convention Statements for each of the
five years ended December 31, 1986 and the Quarterly Conven-
25
<PAGE>
tion Statements for the quarters ended March 31, 1987 and
June 30, 1987 for EIC and ICE as filed with the Illinois
Insurance Department. The Annual and Quarterly Convention
Statements present fairly the statutory financial condition
of EIC and ICE as of their respective dates and the statuto-
ry results of their operations for the periods then ended
and were prepared in conformity with statutory accounting
principles prescribed or permitted by the Illinois Insurance
Department, provided that this representation shall not be
--------
deemed to be breached by reason of the development (or the
state of facts giving rise to such development) of Reserves
for Losses and Loss Adjustment Expenses and Reserves for
Uncollectible Reinsurance after the respective dates of such
statements.
2.17. Disputes and Litigation. Except as de-
-----------------------
scribed on Schedule 2.17, (i) there is no pending or, to the
-
knowledge of Seller, threatened, action, suit, proceeding or
claim before any court, arbitrator or governmental authori-
ty, or, to the knowledge of Seller, pending or threatened
investigation or review by any governmental agency, against
or affecting SMCO, ESI, EIC or ICE or any of their proper-
ties or business, or any of their employee welfare benefit
plans or employee pension benefit plans, which would have a
material adverse effect on SMCO, ESI, EIC and ICE taken as a
26
<PAGE>
whole; (ii) there is no action, suit, proceeding or claim,
--
investigation or review by any governmental agency, pending
or, to the knowledge of Seller, threatened against Seller
which would have a material adverse effect on Seller's abil-
ity to perform its obligations hereunder; and (iii) there is
---
no outstanding order, judgment, writ, injunction or decree
of any court, government or governmental authority or arbi-
trator against SMCO, ESI, EIC or ICE or their assets or
business. This representation shall not be deemed to in-
clude (x) any actions, suits, proceedings, claims, investi-
-
gations or reviews or orders, judgments or writs against any
person insured by EIC or ICE which may involve insurance
provided by EIC or ICE, or (y) threatened actions, suits,
-
proceedings or claims against EIC or ICE in respect of in-
surance policies issued by them in the ordinary course of
business.
2.18. Title to Properties. Except as set forth
-------------------
on Schedule 2.18, SMCO, ESI, EIC and ICE do not own any real
property. SMCO, ESI, EIC and ICE have good and marketable
title to all material assets reflected on their respective
balance sheets as at June 30, 1987, delivered to Buyer pur-
suant to Section 2.12 hereof, or acquired after June 30,
1987, other than any assets that have been sold or disposed
of in the normal course of business, free and clear of all
27
<PAGE>
claims, liens, pledges, security interests, restrictions or
encumbrances, except for those arising by operation of law.
2.19. Investments. Each of ESI, EIC and ICE has
-----------
good and marketable title, free and clear of all liens,
claims, charges, options or encumbrances, except for those
arising by operation of law, to all of its investment assets
reflected in its Quarterly Convention Statement for the
quarter ended June 30, 1987 or acquired after June 30, 1987,
other than investment assets that have been sold or disposed
of in the normal course of business, except as set forth in
Schedules 2.18 and 2.10.
2.20. Governmental Licenses and Permits; Compli-
------------------------------------------
ance with Laws. SMCO, ESI, EIC and ICE have all necessary
--------------
governmental licenses, permits and approvals legally re-
quired and material to the conduct of their respective busi-
nesses in each of the jurisdictions listed on Schedules 2.2,
2.3 and 2.5. Other than as listed on Schedule 2.20, such
licenses, permits and approvals are in full force and effect
and no proceeding is pending or, to the knowledge of Seller,
threatened to suspend, revoke or limit any such license,
permit or approval; and SMCO, ESI, EIC and ICE have complied
in all material respects with all applicable material laws,
regulations and restrictions relating to each of their busi-
28
<PAGE>
nesses, including the terms and conditions of such govern-
mental licenses and permits.
2.21. Leases. None of SMCO, ESI, EIC and ICE
------
leases any real property, except for Shand Morahan Plaza.
Each lease pursuant to which SMCO, ESI, EIC or ICE is a
lessee of personal property having lease payments in excess
of $25,000 per year is listed on Schedule 2.21.
2.22. Condition of Tangible Assets. All tangible
----------------------------
personal property owned by SMCO, ESI, EIC or ICE and materi-
al to their businesses is in good repair and operating con-
dition, normal wear and tear excepted, and reasonably suffi-
cient for the operation of their respective businesses as
presently conducted.
2.23. Taxes. Except as set forth on
-----
Schedule 2.23:
(i) SMCO, ESI, EIC and ICE have filed with all
appropriate governmental agencies all returns, forms,
notices, information returns and reports, and elections
(hereinafter collectively referred to as "Returns")
that are required to be filed by them on or prior to
the date hereof pursuant to any legislation, domestic
or foreign, federal, provincial, state or municipal
(hereinafter collectively referred to as "Legisla-
tion"), which levies a tax (including, without limita-
29
<PAGE>
tion, all income, franchise, property, gross receipts,
sales, use, employment, stamp, and other taxes), with-
holding tax, duty, levy or other charge (hereinafter
collectively referred to as "Taxes");
(ii) Taking into account any carrybacks or carry-
forwards existing as of June 30, 1987, none of SMCO,
ESI, EIC or ICE will have any liability beyond current
and deferred Taxes reflected in the financial state-
ments as of June 30, 1987 referred to in Section 2.12
(hereinafter referred to as "Tax Reserves") for any
material Taxes (including withholding Taxes) with re-
spect to its income, assets or business prior to Ju-
ly 1, 1987 or any material assessments, reassessments,
orders or judgments in respect of any such Taxes (here-
inafter referred to as "Reassessments") or any material
interest or charges, penalties or fines imposed in
respect of any such Taxes (hereinafter referred to as
"Interest and Penalties");
(iii) Upon the payment by SMCO of $1,681,955 owed
with respect to SMCO's share of the Federal income tax
liability of the consolidated group of A&A for 1986,
the payment by SMCO of $44,527 owed with respect to
SMCO's share of state tax liabilities of combined
groups of Seller and A&A for 1986, the payment by SMCO
30
<PAGE>
of $174,518 in respect of IRS adjustments for the years
1980 through 1982, the payment by SMCO of $13,123 with
respect to state income taxes resulting from IRS ad-
justments for the years 1979 through 1982, the payment
by SMCO of $24,952 with respect to IRS adjustments for
the years 1977 through 1979 (the Tax Reserves, before
reduction for the benefit of an operating loss expected
for the first six months of 1987, being more than the
aggregate of the preceding amounts), and SMCO's ful-
fillment of its obligations with respect to Federal
income tax and Illinois income and replacement tax
under Section 4.12, SMCO will not have any liability
with respect to the Taxes of any consolidated or com-
bined group of Seller or A&A of which SMCO is or was a
member;
(iv) There are no actions, suits, proceedings,
investigations, claims or audits pending or, to Sell-
er's knowledge, threatened against, nor any discussions
by SMCO, ESI, EIC or ICE with the tax authorities of
any jurisdiction involving, SMCO, ESI, EIC or ICE which
may result in the imposition of additional Taxes, Reas-
sessments or Interest and Penalties, or the loss or
diminution of any benefit or advantage which may cause
additional Taxes, Reassessments or Interest and Penal-
31
<PAGE>
ties to become payable, which are not covered by the
Tax Reserves; and
(v) The Federal income tax returns of the consol-
idated group of which SMCO is a member, ESI, EIC and
ICE for all tax periods listed on Schedule 2.23 are
closed by reason of final audit by the Internal Revenue
Service or expiration of the applicable period of limi-
tations.
2.24. Labor Relations. Except as set forth on
---------------
Schedule 2.24, (i) SMCO, ESI, EIC and ICE are in compliance
-
with all Federal and state laws respecting employment and
employment practices, terms and conditions of employment,
wages and hours and non-discrimination in employment, and
are not engaged in any unfair employment practice, in any
case in which the violation thereof would have a material
adverse effect on the business or assets of SMCO, ESI, EIC
and ICE, taken as a whole; (ii) there is no charge pending
--
or, to Seller's knowledge, threatened before any court or
agency alleging unlawful discrimination in employment prac-
tices or any unfair labor practice by SMCO, ESI, EIC or ICE
which would have a material adverse effect on the business
or assets of SMCO, ESI, EIC and ICE, taken as a whole;
(iii) there are no collective bargaining agreements binding
---
on SMCO, ESI, EIC or ICE, and no collective bargaining
32
<PAGE>
agreement is currently being negotiated by any of them with
any employee representative or labor organization; and (iv)
--
none of SMCO, ESI, EIC or ICE has experienced any material
work stoppage or any other material labor difficulty during
the three years immediately preceding the date hereof.
2.25. Insurance Coverage. None of SMCO, ESI, EIC
------------------
or ICE is in default with respect to any material provision
of any material insurance policy issued for its benefit nor
has SMCO, ESI, EIC or ICE failed to give any notice or pres-
ent any material claim thereunder in due or timely fashion
or as required by any of such insurance policies which would
result in failure to recover any material amount in full
under such policies. Attached hereto as Schedule 2.25 is a
true and complete list, showing company and type and amount
of coverage, of, and all actual or potential claims for
which notice has been given to the insurer under, all insur-
ance policies for the benefit of SMCO, ESI, EIC and ICE or
their respective employees which are carried by them or on
their behalf by the Seller or any Affiliate of Seller. The
provisions of this Section 2.25 are not intended to cover
treaties and agreements referred to in Section 2.31.
2.26. Certain Contracts. Except as listed on
-----------------
Schedule 2.26 or on other Schedules attached hereto (includ-
ing the benefit plans listed therein), (i) none of SMCO,
-
33
<PAGE>
ESI, EIC or ICE has any written or oral employment agreement
providing either (x) a stated term of employment or (y) any
- -
material compensation in addition to salary which is in the
nature of incentive compensation, profit sharing, stock
option, stock appreciation rights, stock purchase, savings,
deferred compensation, retirement, pension or other plans or
other benefit arrangements or practices with or for the
benefit of any officer, employee or any other person, or any
consulting agreement or arrangement with any officer, em-
ployee, former officer, former employee or holder of options
to purchase capital stock of any of them, provided that this
--------
representation shall not be deemed to cover any implicit
undertaking or obligations with respect to persons that
SMCO, ESI, EIC or ICE deems to be terminable at will;
(ii) no officer or director of SMCO, ESI, EIC or ICE has any
--
other material agreement with any of them or any material
interest in any real, personal or intellectual property used
in or pertaining to their businesses; (iii) none of SMCO,
---
ESI, EIC or ICE is a party to any enforceable agreement
(whether or not in writing) providing for severance or ter-
mination payments or payments in connection with any change
in control of any of them; and (iv) none of SMCO, ESI, EIC
--
or ICE is subject to any agreement (other than insurance
producer agreements written pursuant to the Management
34
<PAGE>
Agreement, dated April 1, 1985, between EIC and Corrie
Bauckham Batts Strickland Ltd., insurance policies or rein-
surance treaties, in each case issued in the normal course
of business) which provides for or creates a contingent
obligation to make aggregate future payments in excess of
$500,000. All material mortgages, liens, leases, agree-
ments, licenses or instruments to which SMCO, ESI, EIC or
ICE is a party or by which any of its assets are bound or
affected are in full force and effect and are binding obli-
gations of SMCO, ESI, EIC and ICE, as the case may be, and
no event or condition exists, or is alleged by any of the
other parties thereto to exist, which constitutes, or with
the lapse of time or giving of notice or both would consti-
tute, on the part of SMCO, ESI, EIC or ICE, a default or a
basis for acceleration of any obligation thereunder or in
respect thereof. Schedule 2.26 contains a list of all
agreements presently in existence between A&A or any of
A&A's Subsidiaries, on the one hand, and any of SMCO, ESI,
EIC or ICE, on the other, not listed on any other Schedule
hereto.
2.27. Employee Benefit Plans.
----------------------
(a) ERISA. SMCO, ESI, EIC and ICE have complied
-----
with the provisions of ERISA (as defined in Section 10.16),
and each applicable regulation thereunder in administering
35
<PAGE>
the employee welfare benefit plans (the "Welfare Plans") and
employee pension benefit plans (the "Pension Plans"), as
defined in Sections 3(1) and 3(2) of ERISA, covering their
employees from time to time (together, the "Employee Benefit
Plans"). The Employee Benefit Plans listed on Schedule 2.27
are the only Employee Benefit Plans maintained by SMCO, ESI,
EIC or ICE or to which any of them is now contributing or
has contributed that are subject, or have been subject, to
any provision of ERISA or any such regulation.
(b) Qualification of Pension Plans; Compliance
------------------------------------------
with Law. The Pension Plans intended to qualify under Sec-
--------
tion 401 of the Code (as defined in Section 10.16) have been
determined to be qualified under such Section, and no action
or proceeding has been initiated or is threatened which
would affect the qualification of any such Pension Plan. No
prohibited transactions, as defined in Section 4975 of the
Code, have occurred in connection with any Pension Plan.
None of the Pension Plans which is a defined benefit pension
plan has incurred an accumulated funding deficiency, as
defined in Section 412 of the Code, whether or not waived,
since the effective date of Section 412. Since the effec-
tive date of ERISA, no Pension Plan, subject to Title IV of
ERISA, nor any pension plan subject to Title IV of ERISA
sponsored by any member of the controlled group of corpora-
36
<PAGE>
tions of which any of SMCO, ESI, EIC and ICE is a member
(within the meaning of Section 414(b) or (c) of the Code),
has been completely or partially terminated, nor has there
been any reportable event as to which the 30-day notice
requirement has not been waived, as defined in Sec-
tion 4043(b) of ERISA and the regulations thereunder, with
respect to any Pension Plan.
(c) Multiemployer Plans. None of SMCO, ESI, EIC
-------------------
and ICE is a party to any employee Multiemployer Plan (as
defined in Section 10.16).
2.28. Environmental Protection. SMCO, ESI, EIC
------------------------
and ICE have obtained all material permits, licenses and
other authorizations which are required under federal, state
and local laws relating to public health and safety, worker
health and safety and pollution or protection of the envi-
ronment, are in compliance with all material terms and con-
ditions of such required permits, licenses and authoriza-
tions, and are also in compliance with all other material
limitations, restrictions, conditions, standards, prohibi-
tions, requirements, obligations, schedules and timetables
contained in any federal, state or local law or any regula-
tion, code, plan, order, decree or judgment relating to
public health and safety, worker health and safety and pol-
lution or protection of the environment.
37
<PAGE>
2.29. Insurance Business. All material policies
------------------
of insurance issued by EIC or ICE and in force on the date
hereof are, to the extent required by applicable law, on
forms approved by applicable insurance regulatory authori-
ties or which have been filed with and not objected to by
such authorities within the period provided for such objec-
tion. Any premium rates required to be filed with or
approved by insurance regulatory authorities have been so
filed or approved and the premiums charged conform thereto.
2.30. Regulatory Filings. Except as set forth in
------------------
Schedule 2.30, Seller has made available to Buyer all mate-
rial registrations, filings or submissions (other than poli-
cy filings or rate filings) made by or on behalf of EIC or
ICE with or to any insurance regulatory authority and all
reports of examination issued by any insurance regulatory
authority. EIC and ICE have filed all reports, statements,
documents, registrations, filings or submissions required to
be filed with any governmental or regulatory body, except
those, if any, with respect to which the failure to file
individually or in the aggregate does not materially ad-
versely affect their respective licenses or authority as
property and casualty insurance companies operating on a
non-admitted or admitted basis, as appropriate, in any ju-
risdiction or does not otherwise have a material adverse
38
<PAGE>
effect on either of them. Except as shown on Schedule 2.30,
all such registrations, filings and submissions were in
material compliance with applicable law when filed, and no
material deficiencies have been asserted with respect there-
to.
2.31. Reinsurance, Coinsurance and Underwriting
-----------------------------------------
Management. (a) Schedule 2.31 contains a list of all mate-
----------
rial treaty reinsurers of EIC or ICE entering into treaties
during calendar year 1987 that are effective for such year.
All treaties with such reinsurers for calendar year 1987 are
in full force and effect (subject to any termination notices
that may have been given that would become effective as of
December 31, 1987). Except as shown on Schedule 2.31, nei-
ther EIC or ICE nor, to the knowledge of Seller, EIC or ICE,
any other party thereto, is in default as to any material
provision of any material reinsurance treaty.
(b) Schedule 2.31 contains a list of all material
agreements to which SMCO, ESI, EIC or ICE is a party pur-
suant to which SMCO, ESI, EIC or ICE serves as managing
general agent or underwriting manager and continues to be
authorized or obligated to provide any services. Except as
set forth on Schedule 2.31, all such agreements are in full
force and effect and Seller has not received notice from any
other party to any such agreement that such party intends to
39
<PAGE>
terminate or does not intend to renew such agreement. Nei-
ther SMCO nor, to the knowledge of Seller, any other party
thereto, is in default as to any material provision thereof,
and, except as set forth in Schedule 2.31, no such agreement
contains any provision to the effect that the other party
thereto may terminate the agreement by reason of the trans-
actions contemplated by this Agreement.
2.32. Agents. Each of the material contracts
------
between EIC or ICE and their respective agents and brokers
authorizing such agents or brokers to execute insurance
policies on behalf of EIC or ICE is listed on Schedule 2.32.
The termination provisions of such agreements are summarized
in Schedule 2.32.
2.33. Intangible Property and Computer Software.
-----------------------------------------
SMCO, ESI, EIC and ICE have and own, or have the right to
use, all trademarks, service marks, trade names, business
names, copyrights, formulas, inventions, trade secrets,
know-how and computer software material to and used in their
businesses including, but not limited to, the items listed
on Schedule 2.33 (the "Intellectual Property"). There are
no claims or proceedings pending or, to Seller's knowledge,
threatened against SMCO, ESI, EIC or ICE asserting that its
use of any Intellectual Property infringes the rights of any
other person. None of Seller, SMCO, ESI, EIC or ICE has
40
<PAGE>
licensed or otherwise assigned any material Intellectual
Property to any third party.
2.34. No Brokers. Neither Seller nor any of its
----------
Affiliates has employed any broker or finder or incurred any
liability for any brokerage fees, commissions or finders'
fees in connection with the transactions contemplated here-
by, except for Smith, Barney, Harris Upham & Co. Inc., and
Seller agrees to hold Buyer and SMCO and its Subsidiaries
harmless from any claim relating to any such fee or compen-
sation.
2.35. Tax Allocation Agreement. Set forth in Ex-
------------------------
hibit A hereto is the form of agreement (the "Tax Allocation
Agreement") which will define the manner in which tax lia-
bilities and related tax items of any consolidated or com-
bined group of Seller or A&A will be treated and allocated
for any period beginning after December 31, 1986 in which
SMCO is a member of any such group.
2.36. A&A as Guarantor. A&A is a corporation
----------------
duly organized, validly existing and in good standing under
the laws of the State of Maryland and has the corporate
power and authority to execute and deliver the guarantee in
the form attached hereto as Exhibit E (the "A&A Guarantee").
At the Closing Date, the execution and delivery of the A&A
Guarantee shall have been duly authorized by the Board of
41
<PAGE>
Directors of A&A, no other corporate authorization being
necessary on its part, and the A&A Guarantee shall have been
duly executed and delivered by and constitute a valid and
binding agreement of A&A. The execution and delivery of the
A&A Guarantee by A&A does not violate any provision of the
Articles of Incorporation or Bylaws of A&A.
2.37. Safe Harbor Leases. Except for possible
------------------
minor discrepancies that in the aggregate would result in no
more than $150,000 of net additional taxable income, Sched-
ule 2.37 reflects the Federal taxable income that will be
generated each year beginning after June 30, 1987 by the
safe harbor leases under which SMCO is the tax lessor, ex-
cept for any dispositions of assets or other termination
events under such leases (hereinafter referred to as "Loss
Events").
2.38. Full Disclosure. No statement contained in
---------------
this Article II, together with the documents, certificates
and other writings furnished or to be furnished by Seller to
Buyer pursuant to the provisions of this Agreement, contains
or shall contain any untrue statement of a material fact or
omits or shall omit to state any material fact necessary, in
the light of the circumstances under which it was made, to
make such statement not misleading.
42
<PAGE>
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer represents and warrants to Seller the
following:
3.1. Organization and Existence of Buyer. Buyer
-----------------------------------
is a corporation duly organized, validly existing and in
good standing under the laws of the State of Illinois.
3.2. Authorization and Validity. Buyer has the
--------------------------
corporate power and authority to execute and deliver this
Agreement and the other agreements contemplated on its part
hereby and to consummate the transactions contemplated on
its part hereby and thereby; the execution and delivery
hereof and thereof by Buyer and the consummation by Buyer of
such transactions have been duly authorized by its Board of
Directors, no other corporate authorization being necessary;
and this Agreement has been, and on the Closing Date each of
such other agreements will be, duly executed and delivered
by and this Agreement constitutes and each of such other
agreements will constitute a valid and binding agreement of
Buyer.
3.3. Non-Contravention of Instruments. The exe-
--------------------------------
cution and delivery of this Agreement and the other agree-
ments contemplated on its part hereby by Buyer and the con-
summation by Buyer of the transactions contemplated hereby
and thereby will not violate any provision of the Articles
43
<PAGE>
of Incorporation or Bylaws of Buyer, and will not violate or
result, with the passage of time or the giving of notice or
both, in a violation of, any provision of, or result in the
acceleration of or entitle any party to accelerate any obli-
gation under, or result in the creation or imposition of any
lien, charge, pledge, security interest, restriction or
other encumbrance (except as contemplated hereby or thereby)
upon any of the property of Buyer pursuant to any provision
of any material mortgage, lien, lease, agreement, license or
instrument to which Buyer is a party or to which it is sub-
ject, and will not constitute an event permitting termina-
tion of any mortgage, lien, lease, agreement, license or
instrument to which Buyer is a party and will not violate
any judgment, order, writ, injunction, decree, regulation or
rule of any court or governmental authority applicable to
Buyer or its assets.
3.4. Consents, Filings and Approvals. Except for
-------------------------------
filings and approvals listed on Schedule 2.11 or 3.4, no
consent, approval, notification, authorization or order of,
or declaration, filing or registration with, any governmen-
tal agency or third party of the character referred to in
the second sentence of this Section 3.4 is required to be
obtained or made by Buyer or any Affiliate of Buyer in con-
nection with the execution, delivery and performance of this
44
<PAGE>
Agreement or any other agreement contemplated hereby. The
preceding sentence shall apply only where the consequences
of failing to obtain or make any such consent, approval,
notification, authorization, order, declaration, filing or
registration would prevent consummation of any of the trans-
actions contemplated by this Agreement or materially ad-
versely affect Buyer.
3.5. No Brokers. Neither Buyer nor any of its
----------
Affiliates has employed any brokers or finders or incurred
any liability for any brokerage fees, commissions, finders'
fees or financial advisory fees in connection with the tran-
sactions contemplated hereby and Buyer agrees to hold Seller
harmless from any claim relating to any such fee or compen-
sation.
3.6. Purchase for Investment. Buyer is purchas-
-----------------------
ing the SMCO Shares hereunder, and the shares of stock ac-
quired under the ESI Share Purchase Agreements, for its own
account for investment and not with a view to the distribu-
tion thereof or with any present intention of distributing
or selling any thereof.
3.7. Qualification. Buyer is duly qualified to
-------------
do business and is in good standing in each jurisdiction
where the character of the properties and assets it owns,
operates or holds under lease or the nature of the business
45
<PAGE>
transacted by it in such jurisdiction so requires, except
where the failure so to qualify would not have a material
adverse effect on its business.
3.8. Subsidiaries. Buyer has no Subsidiaries.
------------
3.9. Capitalization. All shares of authorized
--------------
capital stock of Buyer now outstanding are, and all shares
of authorized capital stock of Buyer outstanding at the
Closing will be, duly authorized, validly issued and out-
standing, fully paid and nonassessable. The legal and bene-
ficial owners of the common stock of Buyer and the number of
shares of common stock that each such owner owns on the date
hereof are set forth on Schedule 3.9, and, at the Closing
Date, Buyer will deliver an updated Schedule 3.9 showing
such owners as of such date.
3.10. Indebtedness, etc. Buyer has no liabili-
-----------------
ties or indebtedness and has not entered into any transac-
tions other than transactions in connection with its forma-
tion and capitalization and other than transactions contem-
plated by or incidental to the performance of this Agreement
and the other instruments provided for herein to which it is
or is to be party. There has been no change in the finan-
cial condition of Buyer since the date of its incorporation,
other than changes in the ordinary course of business which
have not been, in any case or in the aggregate, materially
46
<PAGE>
adverse, and since such date neither the condition, business
or prospects of Buyer nor any of its properties or assets
have been materially adversely affected as a result of any
occurrence whatever, whether or not insured against except
for the transactions contemplated by this Agreement.
3.11. Disputes and Litigation. There is no pend-
-----------------------
ing or, to Buyer's knowledge, threatened action, suit, pro-
ceeding or claim before any court, arbitrator or governmen-
tal authority, or, to Buyer's knowledge, pending or threat-
ened investigation or review by any governmental agency,
against or affecting Buyer or properties or business which
would have a material adverse effect on it or on its ability
to perform its obligations hereunder or under the other
agreements to be entered into pursuant hereto, and there is
no outstanding order, judgment, writ, injunction or decree
of any court, government of governmental authority or arbi-
trator against it or its assets or business.
3.12. Governmental Licenses and Permits; Compli-
------------------------------------------
ance with Laws. Buyer has all necessary governmental li-
--------------
censes, permits and approvals legally required and material
to the conduct of its business. Such licenses, permits and
approvals are in full force and effect and no proceeding is
pending or, to the knowledge of Buyer, threatened to sus-
pend, revoke or limit any such license, permit or approval;
47
<PAGE>
and Buyer has complied in all material respects with all
applicable material laws, regulations and restrictions re-
lating to its business, including the terms and conditions
of such governmental licenses and permits.
3.13. Taxes. All tax returns and reports of
-----
Buyer required by law to be filed have been duly filed, and
all material taxes, assessments and other governmental
charges required to be paid in connection therewith have
been duly paid in full. No Federal, state or other income
tax has been assessed against Buyer up to the date hereof.
3.14. Buyer Guarantors. Each of Fairfax and
----------------
Markel (together, the "Buyer Guarantors") is a corporation
duly organized, validly existing and in good standing under
the laws of its jurisdiction of incorporation and has the
corporate power and authority to execute and deliver the
guarantee in the form attached hereto as Exhibit I (the
"Non-Contingent Buyer Guarantee"), the Overall Buyer Guar-
antee and the guarantee in the form attached hereto as Ex-
hibit M (the "Kansa Buyer Guarantee"). At the Closing Date,
the execution and delivery of the Non-Contingent Buyer Guar-
antee and the Kansa Buyer Guarantee, if required pursuant to
Section 4.14, shall have been duly authorized by the Board
of Directors of each of the Buyer Guarantors, no other cor-
porate authorization being necessary on the part of either,
48
<PAGE>
and such guarantee or guarantees shall have been duly exe-
cuted and delivered by and constitute a valid and binding
agreement or valid and binding agreements of each of the
Buyer Guarantors. The execution and delivery of the Non-
Contingent Buyer Guarantee, the Kansa Buyer Guarantee and
the Overall Buyer Guarantee by the Buyer Guarantors do not
violate any provision of the Articles of Incorporation or
Bylaws of either Buyer Guarantor.
3.15. Full Disclosure. No statement contained in
---------------
this Article III, together with the documents, certificates
and other writings furnished or to be furnished by Buyer to
Seller pursuant to the provisions of this Agreement, con-
tains or shall contain any untrue statement of a material
fact or omits or shall omit to state any material fact nec-
essary, in the light of the circumstances under which it was
made, to make such statement not misleading.
ARTICLE IV
ADDITIONAL AGREEMENTS
4.1. Conduct of Business. From the date hereof
-------------------
through the Closing Date, Seller shall cause SMCO, ESI, EIC
and ICE to conduct their operations according to the normal
course of business and shall use its best efforts (but with-
out material expense to Seller) to cause SMCO, ESI, EIC and
ICE to preserve intact in all material respects their re-
49
<PAGE>
spective business organizations and their licenses to carry
on their respective businesses in the jurisdictions listed
on Schedules 2.2, 2.3 and 2.5, keep available the services
of their respective officers and employees material to their
respective businesses and maintain satisfactory relation-
ships with brokers, insurance companies, reinsurers, custom-
ers and others having business relationships with them and
that are material to their business taken as a whole. Sell-
er and Buyer shall confer on a regular and frequent basis to
discuss operational matters of a material nature and to
discuss the general status of ongoing operations. Seller
shall promptly notify Buyer of any unexpected emergency or
other material adverse change in the normal course of busi-
ness or in the operations of the businesses of SMCO, ESI,
EIC or ICE, of any investigation or review of SMCO, ESI, EIC
or ICE, pending or threatened, of which it learns, by any
governmental entity that would have a material adverse ef-
fect on their business or assets taken as a whole, and of
any material budget revisions submitted to the Board of
Directors of Seller, SMCO, ESI, EIC or ICE involving any
business, asset or property of SMCO, ESI, ECI or ICE. Sell-
er shall keep Buyer fully informed of developments with
respect to such events and permit Buyer's representatives
access to all materials prepared in connection therewith.
50
<PAGE>
4.2. Forbearance. Except as contemplated by this
-----------
Agreement, Seller will not permit any of SMCO, ESI, EIC or
ICE, after the date hereof prior to the Closing Date, with-
out the prior written consent of Buyer to:
(i) issue additional capital stock;
(ii) declare or pay any dividend or distribution,
except for dividends declared by EIC and ICE in accor-
dance with customary practice;
(iii) issue stock options or any stock appreciation
rights;
(iv) sell any material assets other than in the
normal course of business;
(v) issue or incur additional funded debt;
(vi) assume, guarantee, endorse or otherwise be-
come responsible for the obligations of any other indi-
vidual, firm or corporation, or make any loans or ad-
vances to any individual, firm or corporation, except
in the normal course of business;
(vii) mortgage, pledge or otherwise encumber any of
its properties or assets, except in the ordinary course
of business;
(viii) make any investment in third parties or
assets of a capital nature either by purchasing stock,
securities or assets, contributing to capital, trans-
51
<PAGE>
ferring property or otherwise making an investment,
except in the normal course of business;
(ix) except with respect to matters set forth in
Schedule 2.13, make any commitments for capital expen-
ditures other than in the normal course of business;
(x) increase in any manner the compensation of
any of its officers or employees; pay or agree to pay
any pension or retirement allowance not required by any
existing plan or agreement to any officer or employee;
or enter into or amend any employment agreement or any
incentive compensation, profit sharing, stock purchase,
stock option, stock appreciation rights, savings, con-
sulting, deferred compensation, retirement, pension or
other "fringe benefit" plan or arrangment with or for
the benefit of any officer, employee or other person;
excepting, however, with respect to all of this para-
graph (x), increases in compensation, benefits or other
commitments, transactions or agreements in the ordinary
course of business consistent with past practices;
(xi) agree that any insurance policy naming it as
a beneficiary or a loss payee may be cancelled or ter-
minated or allow any of the coverage thereunder to
lapse unless simultaneously with such termination,
cancellation or lapse notice is given to Buyer and
52
<PAGE>
replacement policies providing substantially the same
coverage are obtained (it being understood, however,
that all insurance policies of which Seller or A&A and
any of SMCO, ESI, EIC or ICE are jointly named as bene-
ficiaries or loss payees shall be terminated on the
Closing Date);
(xii) amend its Articles of Incorporation or By-
laws;
(xiii) enter into any agreements other than those
made in the ordinary course of business; or
(xiv) enter into any agreement to do any of the
things described in clauses (i) through (xiii) above.
4.3. Investigation of Business and Properties.
----------------------------------------
Buyer may make or cause to be made such investigation of the
business and properties of SMCO, ESI EIC and ICE and of
their financial and legal condition as may be reasonable to
familiarize Buyer therewith, provided that such investiga-
--------
tion shall not unreasonably interfere with their normal
operations. Seller agrees to cause SMCO, ESI EIC and ICE to
permit Buyer and its accountants, counsel and other repre-
sentatives to have reasonable access to their premises,
books and records during normal business hours. Seller
shall make arrangements with SMCO, ESI, EIC and ICE and
their officers to furnish Buyer with such financial and
53
<PAGE>
operating data and other information with respect to their
business and properties as Buyer shall from time to time
reasonably request in accordance with this Section. If for
any reason the transactions contemplated by this Agreement
fail to close, Buyer shall maintain, and shall cause its
agents and representatives to maintain, in confidence all
non-public information received or learned by it (other than
any such information or documents properly obtained by Buyer
from a source other than SMCO, ESI, EIC or ICE or that is
readily ascertainable from public or published information)
and shall return to them all written materials in its and
its agents' and representatives' possession received from
them, and all copies thereof.
4.4. Investigation of Financial Statements.
-------------------------------------
Seller shall make arrangements with SMCO, ESI, EIC and ICE
to give, and shall instruct Deloitte Haskins & Sells and
Arthur Andersen & Co., its independent certified public
accountants, to give such reasonable assistance and coopera-
tion to Peat, Marwick, Main & Co., the independent certified
public accountants of Buyer, and to employees or representa-
tives of Buyer as they may reasonably request in connection
with their review of the financial statements of SMCO, ESI,
EIC and ICE. Such review shall include the right to examine
any notes and work papers related thereto.
54
<PAGE>
4.5. Agreement to Consummate. Subject to the
-----------------------
terms and conditions herein provided, each of the parties
agrees to use its reasonable efforts to do all things rea-
sonably necessary, proper or advisable under applicable laws
and regulations to consummate and make effective, as soon as
reasonably practicable, the transactions contemplated by
this Agreement, including, but not limited to, the obtaining
of all consents, authorizations, orders and approvals of any
governmental commission, board or other regulatory body
required in connection therewith. Notwithstanding the fore-
going, it is understood that neither Seller or Buyer, nor
any of their respective affiliates, shall be required to
incur any costs or to assume any obligations or liabilities
in connection with carrying out this Section 4.5 other than
immaterial costs, obligations and liabilities. At any time
after the Closing Date, if any further action is necessary,
proper or advisable to carry out the purposes of this Agree-
ment, then, as soon as is reasonably practicable, each party
to this Agreement shall take, or cause to be taken, such
action.
4.6. Regulatory Matters. Seller and Buyer will
------------------
cooperate in the preparation of documentation and filings
and the obtaining of permits, consents, approvals and autho-
rizations of third parties and governmental bodies (includ-
55
<PAGE>
ing, without limitation, applicable insurance regulatory
authorities) necessary to consummate the transactions con-
templated by this Agreement. Each party shall be primarily
responsible for accomplishing all such matters applicable to
it but shall take all such further action in regard to mat-
ters applicable to the other party as the other party shall
reasonably request.
4.7. Use of Names. After the Closing Date, A&A
------------
and its Subsidiaries will have no right to use the names or
trade names of SMCO, ESI, EIC and ICE, and the trade names
ALTIS and SLIM, in any form in the conduct of any business.
4.8. Covenant Not to Compete. Except as other-
-----------------------
wise provided in this Section 4.8, for a period of three
years from the date hereof, neither Seller nor any corpora-
tion or other entity affiliated with Seller, except for
Sphere Drake Insurance Group Public Limited Company and its
Subsidiaries operating substantially as they do today, shall
directly or indirectly, either individually or in partner-
ship or in conjunction with any other person or entity,
engage in business within the United States as an underwrit-
er accepting third party risks for its own account with
respect to the lines of insurance listed on Schedule 4.8.
In no event shall any of the prohibitions in this Sec-
tion 4.8 apply to rent-a-captive or limited risk insurance
56
<PAGE>
and reinsurance arrangements. Seller further acknowledges
and agrees that Buyer's remedy at law for any breach of the
covenants contained in this Section will be inadequate and
that Buyer, its successors and assigns, shall be entitled to
injunctive relief for any breach or any violation hereof.
The period, geographical area and scope of the restrictions
on Seller's activities under this Section 4.8 are divisible
so that if any of the provisions hereof is invalid, that
provision shall be automatically modified to the extent
necessary to make it valid. It is understood that the fore-
going covenants shall not prohibit Seller from carrying on
its business as and to the extent currently conducted by it
and its Subsidiaries (other than SMCO, ESI, EIC or ICE) with
respect to the brokering and underwriting of architects and
engineers professional liability and products liability
insurance.
4.9. Cooperation of Parties. Subject to the
----------------------
provisions of the Tax Allocation Agreement, Seller and Buyer
agree that in connection with any claims or proceedings
(including tax proceedings) arising out of events occurring
prior to the Closing Date which involve or affect both Sell-
er or any of its affiliates and any of SMCO or its Subsid-
iaries (regardless of whether such claim or proceeding is
covered by insurance or by the indemnity provided in Arti-
57
<PAGE>
cle VIII) each party will, to the extent reasonably
practicable, cooperate and work with the other in the
handling or resolution of such claims or proceedings so as
to avoid, to the extent reasonably feasible, any damage to
the relationship of such companies or their affiliates with
any brokers, customers or regulatory agencies or tax
authorities, provided that neither party shall be required
--------
to incur other than immaterial costs or expenses in
connection with such cooperation and work.
4.10. EPIC Program. Seller and SMCO are present-
------------
ly involved in attempting to establish a risk retention
group known as the Environmental Protection Insurance Compa-
ny ("EPIC"). In the event EPIC is formed but only one of
A&A or any of A&A's Subsidiaries, on the one hand, or SMCO
or any of SMCO's Subsidiaries, on the other hand, shall be
retained as manager and underwriting manager, respectively,
the party that is retained shall reimburse the party that is
not retained for all documented and otherwise unreimbursed
out-of-pocket expenses incurred in the formation of EPIC.
Such reimbursement shall be limited to the lesser of
$300,000 or one-third of the revenues earned from EPIC ex-
clusive of expense reimbursement and shall be paid, promptly
upon receipt thereof, from revenues received by the retained
58
<PAGE>
party from EPIC exclusive of expense reimbursement at the
rate of $1.00 out of each $3.00 so received.
4.11. Safe-Harbor Leases. If any payment is
------------------
received by SMCO from any tax lessee under any safe-harbor
lease referred to in Section 2.37 under which SMCO is the
tax lessor, SMCO will pay to Seller any portion thereof that
is paid with respect to any Loss Event (under such safe
harbor lease) which occurred before July 1, 1987. SMCO
shall be responsible for all Taxes attributable to Loss
Events occurring after June 30, 1987, and for loss of depre-
ciation deductions by Seller during the first half of 1987
as a result of any Loss Event occurring after June 30, 1987
and prior to the Closing Date. Seller shall be responsible
for all Taxes attributable to Loss Events occurring before
July 1, 1987. In the event SMCO as the result of any Loss
Event occurring prior to July 1, 1987 shall have less tax-
able income from such safe harbor leases after June 30, 1987
than was reflected in Schedule 2.37, SMCO shall pay to Sell-
er an amount equal to any resulting tax savings realized by
SMCO promptly after the realization thereof. In the event
any Loss Event occurs after June 30, 1987, Seller, subject
to the provisions of Section 8.4(c)(ii) hereof, shall indem-
nify and hold harmless SMCO against any failure of the tax
lessee under the applicable safe harbor lease to pay any
59
<PAGE>
amount due as a consequence of such Loss Event, provided
SMCO shall promptly (after SMCO has knowledge of such Loss
Event) notify Seller of any such failure and, if requested
by Seller, shall (subject to Seller's payment of reasonable
fees of counsel and reasonable out-of-pocket expenses) first
pursue such tax lessee and exhaust its remedies against such
tax lessee.
4.12. Tax Allocation Agreement. The parties to
------------------------
the Tax Allocation Agreement will promptly pay all amounts
determined to be due in accordance with the provisions of
the Tax Allocation Agreement, and after the Closing Date
Buyer will cause SMCO to comply with the terms of the Tax
Allocation Agreement.
4.13. Timing Differences. In the event SMCO or
------------------
A&A's affiliated group, as the case may be, in any taxable
year after SMCO ceases to be a member of Seller's or A&A's
affiliated group for the purpose of filing federal income
tax or Illinois combined income and replacement tax returns
shall realize any tax savings as a result of any audit ad-
justment relating to SMCO increasing or reducing deductions
or increasing or reducing income reported on a consolidated
or combined basis for the taxable years 1983 through 1986,
SMCO shall pay to A&A, or A&A shall pay to SMCO, as the case
may be, an amount equal to such tax savings promptly after
60
<PAGE>
the realization thereof. A&A shall notify SMCO of any tax
savings payable by A&A to SMCO pursuant to this Section
promptly after A&A's realization of such savings. All
payments shall be made promptly after notification by A&A to
SMCO. No payment shall be required under this Section 4.13
unless and until the aggregate net amount of such increased
or decreased deductions and/or increased or decreased income
exceeds $250,000.
4.14. Buyer Guarantees. Subject to the fulfill-
----------------
ment of the conditions set forth in Article V, Buyer shall
cause the Buyer Guarantors to execute and deliver to Seller,
on the Closing Date, the Non-Contingent Buyer Guarantee and
the Kansa Buyer Guarantee, unless Kansa, on or before the
Closing Date, shall have sold and delivered to Buyer the ESI
Shares owned by it, in which case Buyer shall cause the
Buyer Guarantors to execute and deliver only the Non-Contin-
gent Buyer Guarantee to Seller on the Closing Date.
4.15. Shand Morahan Plaza. Subject to the condi-
-------------------
tions set forth in Article VI, Seller shall, and shall cause
its affiliates which are parties thereto to, and, subject to
the conditions set forth in Article V, Buyer shall, and
shall cause its Affiliates which are parties thereto to,
execute and deliver the agreement referred to in Sec-
tions 5.3 and 6.7 hereof.
61
<PAGE>
4.16. Pledge Agreement. Subject to the fulfill-
----------------
ment of the conditions set forth in Article V, Buyer will
execute and deliver at the Closing the Pledge Agreement
referred to in Section 6.9 and will perform its obligations
thereunder required to be performed at the Closing.
ARTICLE V
CONDITIONS TO BUYER'S OBLIGATIONS
Buyer's obligation to purchase and pay for the
SMCO Shares shall be subject, to the extent not waived, to
the satisfaction of each of the following conditions at the
Closing.
5.1. Representations and Warranties. The repre-
------------------------------
sentations and warranties of Seller contained in this Agree-
ment shall be true and correct in all material respects as
of the date when made and, except for changes expressly
contemplated by this Agreement, on and as of the Closing
Date as though such representations and warranties had been
made on and as of the Closing Date, and Seller shall have
delivered to Buyer a certificate, signed by the President or
a Vice-President of Seller and dated the Closing Date, to
the foregoing effect.
5.2. Performance of this Agreement. Seller,
-----------------------------
SMCO, ESI, EIC and ICE shall have performed and complied in
all material respects with all covenants, conditions and
62
<PAGE>
agreements required by this Agreement to be performed or
complied with by any and all of them (including, without
limitation, the delivery of all SMCO Shares) prior to or on
the Closing Date and Seller shall have delivered to Buyer a
certificate, signed by the President or a Vice-President of
Seller and dated the Closing Date, to the foregoing effect.
5.3. Shand Morahan Plaza. Seller and any of its
-------------------
affiliates which are parties thereto shall have executed and
delivered to Buyer an agreement, in form and substance rea-
sonably satisfactory to Buyer, with respect to the matters
contained in Exhibit B.
5.4. Proceedings. All corporate and other pro-
-----------
ceedings to be taken by Seller in connection with the trans-
actions contemplated hereby shall have been completed and
all such proceedings and all documents incident thereto
shall be reasonably satisfactory in substance and form to
Buyer, and Buyer shall have received all such counterpart
originals or certified or other copies of such documents as
Buyer may reasonably request.
5.5. Consents, Filings and Approvals. All con-
-------------------------------
sents and authorizations by third parties and all govern-
mental consents, filings, approvals, licenses and permits,
the granting of which are necessary for the consummation of
the transactions contemplated hereby or for preventing the
63
<PAGE>
termination of any material right, privilege, license or
agreement of each of SMCO, ESI, EIC and ICE which is materi-
al to it (each of the licenses or approvals listed on Sched-
ules 2.2, 2.3 and 2.5 being deemed to be material) upon the
consummation of the transactions contemplated hereby, shall
have been obtained or made and shall be in full force and
effect, including any consents required of applicable insur-
ance regulatory authorities, and all waiting periods speci-
fied by law the passing of which are necessary for such
consummation shall have passed.
5.6. Litigation. No order of any court or admin-
----------
istrative agency shall be in effect which restrains or pro-
hibits the transactions contemplated hereby or which would
limit or affect Buyer's ownership or control of SMCO, ESI,
EIC or ICE, and there shall not have been threatened, nor
shall there be pending, any action or proceeding by or be-
fore any court or governmental agency or other regulatory or
administrative agency or commission challenging any of the
transactions contemplated by this Agreement or Buyer's par-
ticipation therein.
5.7. Opinion of Counsel for Seller. Buyer shall
-----------------------------
have received an opinion from Debevoise & Plimpton dated the
Closing Date, substantially in the form of Exhibit C hereto,
and an opinion from Lord, Bissell & Brook dated the Closing
64
<PAGE>
Date, substantially in the form of Exhibit D hereto, and, in
each case, concerning such other matters as Buyer may rea-
sonably request.
5.8. Share Certificates. The certificate(s)
------------------
representing all the SMCO Shares, duly endorsed in blank or
with stock powers attached thereto duly signed in blank,
shall have been tendered to Buyer.
5.9. Transfer Taxes. Seller shall have paid, or
--------------
caused to be paid, all stock transfer and other taxes re-
quired to be paid by it in connection with the sale and
delivery to Buyer of the SMCO Shares.
5.10. Repayment of Indebtedness. Seller or A&A
-------------------------
shall have paid all dollar amounts owed by them to SMCO due
through the Closing Date under the Tax Allocation Agreement,
all items of indebtedness on Schedule 5.10 and indebtedness
of $19.5 million owed by Seller or an affiliate thereof to
SMCO in respect of certain safe harbor leases (or of
$10 million if payment of the immediately payable portion of
the Purchase Price at the Closing is made pursuant to Sec-
tion 1.3(b) hereof).
5.11. Agreements with Lenders. Buyer shall have
-----------------------
obtained agreements in form and substance satisfactory to it
with all banks or other commercial lenders with whom ESI has
outstanding indebtedness, to the effect that they will not
65
<PAGE>
exercise their right to declare any of ESI's indebtedness
immediately payable or otherwise accelerate the agreed pay-
ment terms, by reason of the consummation of the transac-
tions contemplated by this Agreement.
5.12. Tax Allocation Agreement. Seller and A&A
------------------------
shall have executed, and Seller shall have delivered to
Buyer, the Tax Allocation Agreement.
5.13. Guarantee. A&A shall have executed and
---------
delivered to Buyer the A&A Guarantee.
ARTICLE VI
CONDITIONS TO SELLER'S OBLIGATIONS
Seller's obligations to sell and deliver the
Shares shall be subject, to the extent not waived, to the
satisfaction of each of the following conditions at the
Closing.
6.1. Representations and Warranties. The repre-
------------------------------
sentations and warranties of Buyer contained in this Agree-
ment shall be true and correct in all material respects as
of the date when made and, except for changes expressly
contemplated by this Agreement, on and as of the Closing
Date as though such representations and warranties had been
made on and as of the Closing Date, and Buyer shall have
delivered to Seller its certificate, signed by the President
66
<PAGE>
or a Vice-President of Buyer and dated the Closing Date, to
the foregoing effect.
6.2. Performance of this Agreement. Buyer shall
-----------------------------
have performed and complied in all material respects with
all covenants, conditions and agreements required by this
Agreement to be performed or complied with by it prior to or
on the Closing Date, and Buyer shall have delivered to Sell-
er a certificate, signed by the President or a Vice-Presi-
dent of Buyer and dated the Closing Date, to the foregoing
effect.
6.3. Proceedings. All corporate and other pro-
-----------
ceedings to be taken by Buyer in connection with the trans-
actions contemplated hereby shall have been completed and
all such proceedings and all documents incident thereto
shall be reasonably satisfactory in substance and form to
Seller and Seller shall have received all such counterpart
originals or certified or other copies of such documents as
Seller may reasonably request.
6.4. Consents, Filings and Approvals. All con-
-------------------------------
sents and authorizations by third parties and all governmen-
tal consents, filings, approvals, licenses and permits, the
granting of which are necessary for the consummation of the
transactions contemplated hereby, shall have been obtained
or made and shall be in full force and effect, including any
67
<PAGE>
consents required of applicable insurance regulatory author-
ities, and all waiting periods specified by law the passing
of which are necessary for such consummation shall have
passed.
6.5. Litigation. No order of any court or admin-
----------
istrative agency shall be in effect which restrains or pro-
hibits the transactions contemplated hereby or which would
limit or affect Buyer's ownership or control of SMCO, ESI,
EIC or ICE, and there shall not have been threatened, nor
shall there be pending, any action or proceeding by or be-
fore any court or governmental agency or other regulatory or
administrative agency or commission challenging or limiting
the effect of any of the transactions contemplated by this
Agreement or Seller's participation therein.
6.6. Opinions of Counsel. Seller shall have
-------------------
received an opinion from McGuire, Woods, Battle & Boothe,
dated the Closing Date, substantially in the form of
Exhibit F, from Burke, Griffin, Chomicz & Wienke, P.C.,
dated the Closing Date, substantially in the form of Exhibit
G from Tory, Tory, DesLauriers & Binnington, dated the
Closing Date, substantially in the form of Exhibit L, and in
each case, concerning such other matters as Seller may
reasonably request.
68
<PAGE>
6.7. Shand Morahan Plaza. Buyer and any of its
-------------------
Affiliates which are parties thereto shall have executed and
delivered to Seller an agreement, in form and substance
reasonably satisfactory to Seller, with respect to the mat-
ters contained in Exhibit B.
6.8. Transfer Taxes. Buyer shall have paid, or
--------------
caused to be paid, all stock transfer and other taxes re-
quired to be paid by it in connection with the sale and
delivery to Buyer of the SMCO Shares.
6.9. Pledge Agreement. Buyer shall have entered
----------------
into the Pledge Agreement in the form attached hereto as
Exhibit H and shall have performed and complied in all mate-
rial respects with all covenants, conditions and agreements
required to be performed or complied with by it thereunder
(including the delivery to Seller of the SMCO Shares pledged
thereby) prior to or on the Closing Date.
6.10. Guarantee. The guarantee or guarantees
---------
required pursuant to Section 4.14 shall have been executed
and delivered by the Buyer Guarantors to Seller.
6.11. Certificates and Undertakings. Each of
-----------------------------
Joseph Prochaska, Robert Libby, E.L. Calhoun, William Wall,
Richard Adler, Robert Liston and Robert Linn, as of the date
hereof and on the Closing Date, shall have entered into a
69
<PAGE>
Certificate and Undertaking in the form attached hereto as
Exhibit K.
6.12. Payments by SMCO. SMCO shall have paid to
----------------
Seller or Seller's parent (a) the dollar amounts owed by
-
SMCO that are set forth in Section 2.23(iii), (b) all
-
amounts due through the Closing Date under the Tax Alloca-
tion Agreement and (c) all amounts of indebtedness set forth
-
in Schedule 6.12.
6.13. Tax Allocation Agreement. SMCO shall have
------------------------
executed and delivered to Seller the Tax Allocation Agree-
ment.
ARTICLE VII
CLOSING
7.1. Time and Place of Closing. The closing of
-------------------------
the transactions provided for in this Agreement shall take
place at 10:00 a.m. local time within 15 days following the
satisfaction of the conditions specified in Sections 5.5 and
6.4 (provided that all other conditions of Articles V and VI
shall have been satisfied), at the offices of Debevoise &
Plimpton, 875 Third Avenue, New York, New York, or at such
other time, date and place as the parties shall agree (the
"Closing"). The date on which the Closing occurs is called
the "Closing Date."
70
<PAGE>
7.2. Deliveries by Seller. At the Closing, con-
--------------------
currently with the discharge of the other parties' respec-
tive closing obligations, Seller shall deliver, or with
respect to the items described in clause (v), arrange for
delivery, to Buyer the following:
(i) the certificates representing the SMCO
Shares, duly endorsed in blank or with stock powers
attached thereto, duly signed in blank;
(ii) the opinions of counsel, agreements, docu-
ments and certificates required by Article V of this
Agreement;
(iii) certificates of SMCO's, ESI's, EIC's and
ICE's good standing and authority to transact their
respective businesses as described in Sections 2.2, 2.3
and 2.5 in the jurisdictions listed on Schedules 2.2,
2.3 and 2.5 as of the most recent date obtainable;
(iv) evidence satisfactory to Buyer of compliance
with Section 5.10; and
(v) all minute books, seals and stock records of
SMCO, ESI, EIC and ICE.
7.3. Deliveries by Buyer. At the Closing, con-
-------------------
currently with the discharge of the other parties' respec-
tive closing obligations, Buyer shall deliver to Seller the
following:
71
<PAGE>
(i) the Purchase Price (except for the portion
thereof comprising the Deferred Purchase Price);
(ii) the opinions of counsel, agreements, docu-
ments and certificates required by Article VI of this
Agreement; and
(iii) certificates of Buyer's good standing and
authority to transact its business in those jurisdic-
tions where Buyer is qualified to do business as of the
most recent date obtainable.
ARTICLE VIII
INDEMNIFICATION
8.1. By Seller. Seller shall indemnify and hold
---------
harmless Buyer, its Affiliates (including Fairfax and
Markel) and their officers and directors and, after the
Closing Date, SMCO and its Subsidiaries and (except with
respect to any matter set forth in Section 8.1(a)) the offi-
cers and directors (including former officers and directors)
of SMCO and its Subsidiaries (collectively with Buyer and
its Affiliates and their officers and directors, the "Buyer
Affiliates") against:
(a) any damages, losses, liabilities, fees, costs
or expenses (including reasonable fees and expenses of
outside counsel, but excluding the time of employees of
Buyer and its Affiliates) sustained or suffered by any
72
<PAGE>
of the Buyer Affiliates and arising from a breach of
(i) this Agreement occurring on or before the Closing
-
Date, (ii) Section 4.7, 4.8, 4.10, 4.11, 4.12 or 4.13
--
of this Agreement or (iii) any representation or war-
---
ranty of Seller contained in Section 2.1 through 2.8
inclusive, 2.36 or 2.37 of this Agreement or the Sched-
ules pertaining to such Sections;
(b) any damages, losses, liabilities, fees,
costs, or expenses (including reasonable fees and ex-
penses of outside counsel and payments to the rehabili-
tator or liquidator of The Mutual Fire, Marine and
Inland Insurance Company ("Mutual Fire"), but excluding
the time of employees of Buyer and its Affiliates)
sustained or suffered by any of the Buyer Affiliates
(to the extent not reserved for on the balance sheets
of SMCO, ESI, EIC or ICE as of June 30, 1987 referred
to in Section 2.12) arising out of or related to any
transactions or arrangements, including without limita-
tion any insurance policies in which Mutual Fire was
the insurer or reinsurer and any matters relating to
Mutual Fire listed on any Schedule attached hereto,
occurring or existing prior to the Closing Date between
any of SMCO, ESI, EIC or ICE and Mutual Fire, provided
--------
that such transactions and arrangements shall not in-
73
<PAGE>
clude (i) claims made in the ordinary course of busi-
-
ness under insurance policies in which Mutual Fire was
the insured and EIC or ICE was the insurer and (ii) the
--
amount of Uncollectible Reinsurance (as defined in
Section 11.1) that is included in the Adjustment Amount
pursuant to Section 11.2(b);
(c) any damages, losses, liabilities, fees, costs
or expenses (including reasonable fees and expenses of
outside counsel, but excluding the time of employees of
Buyer and its Affiliates) sustained or suffered by any
of the Buyer Affiliates (to the extent not reserved for
on the balance sheets of SMCO, ESI, EIC or ICE as of
June 30, 1987 referred to in Section 2.12) arising out
of or relating to (i) the actual or alleged occurrence
-
or existence prior to the Closing Date of any breach by
SMCO, ESI, EIC or ICE of any agreements entered into on
or before the Closing Date between SMCO, ESI, EIC or
ICE and General Accident Insurance Company or affili-
ates thereof (collectively, "General Accident") (except
for insurance policies entered into in the ordinary
course of business in which General Accident is the
insured and EIC or ICE is the insurer) or any willful
or negligent act or omission or any misrepresentation
on the part of SMCO, ESI, EIC or ICE in respect of any
74
<PAGE>
of such agreements prior to the Closing Date or (ii)
--
the actual or alleged occurrence prior to the Closing
Date of any error or omission in connection with the
professional services provided by SMCO, ESI, EIC or
ICE.
8.2. By Buyer. Buyer shall indemnify and hold
--------
harmless A&A and its Subsidiaries (including Seller) and
their officers and directors against any damages, losses,
liabilities, fees, costs and expenses (including reasonable
fees and expenses of outside counsel, but excluding the time
of employees of A&A and its Subsidiaries) sustained or suf-
fered by A&A or any of such Subsidiaries or their officers
and directors and arising from a breach of this Agreement
(prior to, on or after the Closing Date) or any other agree-
ment or any representation or warranty of Buyer contained in
or made pursuant to this Agreement or any Exhibit or Sched-
ule attached hereto.
8.3. Third Party Claims. The obligations and
------------------
liabilities of the parties under this Article VIII with
respect to claims resulting from the assertion of liability
by third parties (including governmental penalties, fines
and assessments) and with respect to any requests, demands,
proposals or actions by any rehabilitator or liquidator of
75
<PAGE>
Mutual Fire shall be subject to the following terms and
conditions:
(a) The indemnified person shall give prompt
written notice to the indemnifying person of any claim
or assertion of liability by a third party or any re-
quest, demand, proposal, or action by any rehabilitator
or liquidator of Mutual Fire which might give rise to a
claim by the indemnified person against the indemnify-
ing person based on the indemnity agreements contained
in Section 8.1 or 8.2. Such notice shall comply with
the provisions of Section 13.1.
(b) (i) Except as provided in clause (ii) of
this paragraph (b) and paragraph (c) of this Sec-
tion 8.3, in the event any action, suit, proceeding or
claim (a "Legal Action") is brought or made against an
indemnified person with respect to which the indemnify-
ing person may have liability under an indemnity agree-
ment contained in Section 8.1 or 8.2, the indemnifying
person shall have the right (but not the obligation) to
defend, and to negotiate concerning the resolution or
settlement of, the Legal Action (in the name of the
indemnified person if necessary or appropriate). If
the indemnifying person does elect to defend or nego-
tiate such Legal Action, the indemnified person shall
76
<PAGE>
have the right to be represented by counsel and accoun-
tants, at its own expense, and shall be kept fully
informed as to such Legal Action at all stages thereof
whether or not it is represented by its own counsel.
Subject to clause (ii) of this paragraph (b) and para-
graph (c) of this Section 8.3, until the indemnifying
person shall have elected to defend or negotiate a
Legal Action, or if the indemnified person shall have
reasonably concluded that there are likely to be de-
fenses available to the indemnified person that are
different from or in addition to those available to the
indemnifying person (in which case, to the extent of
such differing defenses, the indemnifying person shall
not be entitled to assume the defense of such Legal
Action but shall have the right to be represented by
counsel and accountants, at its own expense, and shall
be kept fully informed as to such Legal Action at all
stages thereof, whether or not it is represented by its
own counsel), the indemnified person shall expeditious-
ly, on behalf of Buyer and Seller, undertake the de-
fense and negotiation of such Legal Action and, until
such time or in such event, all reasonable fees and
expenses of outside counsel and other expenses (but
excluding the time of the employees of the indemnified
77
<PAGE>
person and its affiliates) reasonably incurred by the
indemnified person shall be borne by the indemnifying
person. The parties hereto agree to render to each
other such assistance as they may reasonably require of
each other in order to facilitate the proper and ade-
quate defense or negotiation of the resolution or set-
tlement of any such Legal Action.
(ii) In the event that any rehabilitator or liqui-
dator of Mutual Fire makes any request, demand or pro-
posal or takes any action the effect of which might be
to give rise to an indemnity obligation of Seller,
Seller shall have the right to negotiate with such
rehabilitator or liquidator with respect thereto, and
Buyer shall not, without the prior consent of Seller,
conduct any negotiations with any such rehabilitator or
liquidator with respect thereto, to the extent that
such requests, demands, proposals or actions do give
rise to such an indemnity obligation, provided that
--------
Seller shall keep Buyer fully informed of the course of
such negotiations and that Buyer shall have the right,
at its own expense, to attend such negotiations.
(c) Neither the indemnifying person nor the in-
demnified person shall make any settlement or commuta-
tion of any claim or agree to any request or demand of,
78
<PAGE>
or enter into any agreement or arrangement with, any
Person (as defined in Section 10.16), including any
rehabilitator or liquidator of Mutual Fire, if the
result thereof might give rise to an amount subject to
indemnification hereunder, without the written consent
of the other person, which consent shall not be unrea-
sonably withheld or delayed. Without limiting the
generality of the foregoing, it shall not be deemed
unreasonable to withhold consent to a settlement in-
volving injunctive or other equitable relief against
the indemnified person or its assets, employees or
business.
(d) (i) Buyer will, and will cause the other
Buyer Affiliates to, use reasonable diligence in at-
tempting to obtain payment of any claim under any poli-
cy of insurance referred to in Section 8.4(d)(iv) and,
upon payment by Seller of any amount with respect to
any claim actually or allegedly covered by such insur-
ance, will assign such claim to Seller.
(ii) Seller will use reasonable diligence in at-
tempting to obtain payment of any claim under any poli-
cy of insurance referred to in Section 8.4(d)(iii).
(e) Buyer will cause SMCO, ESI, EIC and ICE to
use reasonable diligence in performing contractual
79
<PAGE>
obligations with respect to collecting receivables owed
to General Accident or Mutual Fire and in otherwise
performing all of their obligations (if any) set forth
in the agreements referred to in Section 8.1(c)(i) and
all obligations with respect to Mutual Fire.
8.4. Payments. (a) Any losses, liabilities or
--------
expenses for which the indemnifying party is responsible
under Section 8.1, 8.2 or 8.3 shall be paid directly by the
indemnifying party. If any such losses, liabilities or
expenses are sustained, suffered or paid by the indemnified
party, the indemnifying party shall reimburse the indemni-
fied party for the amount thereof within 20 days after no-
tice of such loss, liability or claim for reimbursement is
delivered to the indemnifying party. Any reimbursement
payments not paid within such 20-day period shall bear
interest at a rate equal to the assumed interest rate in
effect at the time with respect to the Contingent Amount.
(b) Seller shall incur no liability under Sec-
tion 8.1(a) with respect to the breach of any representation
or warranty contained in Sections 2.1 through 2.8, inclu-
sive, and Section 2.36 of this Agreement, and Buyer shall
incur no liability under Section 8.2 with respect to the
breach of any representation or warranty contained in
Article III of this Agreement, unless and until the
80
<PAGE>
aggregate amount of the damages, losses, liabilities, fees,
costs and expenses sustained or suffered by the Buyer
Affiliates or by A&A, its Subsidiaries and their officers
and directors, as the case may be, with respect to all
breaches of such representations and warranties, exceeds
$500,000, whereupon such liability, including liability for
the portion not exceeding $500,000, shall accrue.
(c) (i) Notwithstanding any other provision of
this Agreement, the aggregate amount for which Seller shall
be liable pursuant to Section 8.1(a) shall not exceed the
Purchase Price, and such amount shall be payable (A) in cash
-
to Buyer as provided in Section 8.4(a) only to the extent of
the portion of the Purchase Price paid by Buyer in cash at
the Closing and (B) with respect to any remaining portion of
-
such amount, at the Payment Date, but only as a reduction in
the Deferred Purchase Price then payable. Any amount set
off pursuant to clause (B) shall be increased by an amount
equivalent to interest, at the rate applicable to the Con-
tingent Amount from (and including) the date on which Buyer
incurred the damage, loss, liability, fee, cost or expense
with respect to which such amount arose to (but excluding)
the Payment Date.
(ii) Notwithstanding the provisions of Sec-
tions 4.11 and 8.1(a) hereof, the obligation of Seller to
81
<PAGE>
indemnify Buyer pursuant to Section 4.11, or in connection
with any breach of the representation set forth in Sec-
tion 2.37, of this Agreement shall not exceed, in the aggre-
gate, $8.5 million.
(d) Notwithstanding any other provision of this
Agreement, Seller shall not be liable under this Article
VIII (or, except for clause (i) below, under Article XI of
this Agreement) for an amount (i) to the extent such amount
-
is reflected in the Adjustment Amount on the Determination
Date, (ii) to the extent, if any, that any damage, loss or
--
liability giving rise to such amount results from a failure
on the part of any Buyer Affiliate to exercise good faith in
not jeopardizing or prejudicing the interests of Seller,
(iii) subject to Seller's compliance with the provisions of
---
Section 8.3(d)(ii), to the extent that Seller is rightfully
denied coverage with respect to any matter giving rise to
such amount under any policy of insurance maintained by
Seller or an affiliate thereof, if such denial is the result
of Buyer's failure to notify Seller of the claim with re-
spect to such matter promptly after receiving notice thereof
or Buyer's taking any other action which has the effect of
causing the rightful denial of such coverage, (iv) to the
--
extent a Buyer Affiliate receives any proceeds from any
policy of insurance maintained by it covering the damage,
82
<PAGE>
loss or liability with respect to such amount and (v) with
-
respect to which (and to the extent that) Seller is obligat-
ed to indemnify an officer or director (this clause (v)
applying only to the obligation, if any, to an officer or
director) of any Buyer Affiliate, to the extent that such
amount results from any action or failure to act by such
officer or director unless such action or failure to act is
in good faith and with a reasonable belief that his conduct
was in, or not opposed to, the interests of the company of
which such person is an officer or director.
8.5. No Contribution. After the Closing Date, if
---------------
Seller shall have any liability to any Buyer Affiliate under
any provision of this Agreement, Seller shall have no right
of contribution from, or any other right of recovery from or
remedy against, SMCO, ESI, EIC or ICE or (except, in the
case of individuals delivering certificates and undertakings
pursuant to Section 6.11 hereof with respect to matters
covered by such certificates and undertakings) their offi-
cers or directors, whether at law or in equity.
ARTICLE IX
TERMINATION, AMENDMENT AND WAIVER
9.1. Termination. This Agreement may be termi-
-----------
nated at any time prior to the Closing Date:
83
<PAGE>
(i) by mutual consent of the Boards of Directors
of Buyer and Seller;
(ii) by Buyer, if any representation or warranty
of Seller, or by Seller, if any representation or war-
ranty of Buyer, contained herein shall have been incor-
rect or breached in any material respect and shall not
have been cured or otherwise resolved to the reasonable
satisfaction of the other on or before the Closing
Date, or by either Buyer or Seller if any material
condition to the consummation of the transactions con-
templated hereby which must be fulfilled to its satis-
faction has become impossible to be fulfilled; or
(iii) by Buyer or Seller if the Closing has not
occurred by 11:59 p.m. E.S.T. on January 30, 1988.
9.2. Effect of Termination. In the event of the
---------------------
termination of this Agreement as provided in Section 9.1
above, this Agreement shall become wholly void and shall
have no further force and effect; and there shall be no
liability on the part of Buyer or Seller except if such
termination is caused by a willful breach or failure on the
part of Buyer or Seller. In the event of the termination of
this Agreement, each party shall return all papers and docu-
ments, including all copies, obtained from the other party,
and will maintain in confidence all nonpublic information
84
<PAGE>
received by it from the other party (other than information
or documents that are properly obtained or obtainable from a
source other than such other party or are readily ascertain-
able from public or published sources).
9.3. Amendment. This Agreement and the exhibits
---------
and schedules hereto may be amended by the parties hereto at
any time; provided that any amendment must be by an instru-
--------
ment or instruments in writing signed and delivered on be-
half of each of the parties hereto.
9.4. Extension; Waiver. At any time prior to the
-----------------
Closing Date, any party hereto which is entitled to the
benefits hereof may (i) extend the time for the performance
-
of any of the obligations or other acts of any of the other
parties hereto, (ii) in whole or in part, waive any inaccu-
--
racy in the representations and warranties of any of the
other parties hereto contained herein or in any schedule
hereto or in any document delivered pursuant hereto, and
(iii) in whole or in part, waive compliance with any of the
---
agreements of any of the other parties hereto or conditions
contained herein. Any agreement on the part of any party
hereto to any such extension or waiver shall be valid if set
forth in an instrument in writing signed and delivered on
behalf of such party.
85
<PAGE>
ARTICLE X
BUSINESS AND FINANCIAL COVENANTS
Buyer covenants that, from the Closing Date of
this Agreement, and so long as Seller is owed any amount
under Section 1.4 of this Agreement (and as to the inspec-
tion of tax records as provided in Section 10.15, until all
federal and state statutes of limitations, including any
extension thereof, have expired with respect to tax periods
prior to or including the Closing Date) it will observe the
covenants set forth in this Article X, provided that Buyer
--------
shall not be deemed to have failed to comply with, and no
Event of Default shall exist as to, any such covenant to the
extent, if any, that SMCO, ESI, EIC or ICE shall not be in
compliance therewith on the Closing Date. Seller will con-
sider in good faith in a timely fashion any request by Buyer
to waive any covenant or breach thereof contained in this
Article X and will provide such waiver if and to the extent
Seller determines in good faith that the effect of such
waiver of compliance would not materially diminish the like-
lihood of Buyer (or, if either (i) the Buyer Guarantors
-
shall have provided the Kansa Buyer Guarantee and the Con-
solidated Net Worth of Buyer shall have fallen below $10
million or (ii) the Buyer Guarantors shall have delivered
--
the Overall Buyer Guarantee (the events specified in the
foregoing clauses (i) and (ii) being hereinafter referred to
86
<PAGE>
as a "Guarantee Effectiveness Event"), the Buyer Guarantors)
being able to perform its (or their) obligations under this
Agreement below such likelihood at the date of this Agree-
ment. Seller will maintain, and will cause its agents and
representatives to maintain, in confidence all non-public
information received by it pursuant to this Article X (other
than any information or document that is properly obtained
or obtainable by Seller from a source other than Buyer or is
readily ascertainable from public or published information).
10.1. Debt. Buyer will not, and will not permit
----
any of its Subsidiaries to, directly or indirectly, create,
incur, assume, guarantee, or otherwise become or remain
directly or indirectly liable with respect to, any Debt,
except that:
(a) Buyer and its Subsidiaries may remain liable
with respect to their respective Debt outstanding on
the Closing Date, and any extensions, renewals or re-
fundings of any thereof;
(b) Buyer may become and remain liable with re-
spect to the Debt owed to Seller pursuant to this
Agreement and to Kansa and Coleman pursuant to the ESI
Share Purchase Agreements;
(c) any Wholly-Owned Subsidiary of Buyer may
become and remain liable with respect to Debt of such
87
<PAGE>
Subsidiary owing to Buyer or another Wholly-Owned Sub-
sidiary;
(d) Buyer and its Subsidiaries may become and
remain liable with respect to Debt in addition to that
otherwise permitted by the foregoing provisions of this
Section 10.1, provided that, immediately after Buyer or
--------
any such Subsidiary becomes liable for such Debt,
(i) to the best knowledge and belief of Buyer, as cer-
-
tified by an Officers' Certificate delivered to Seller,
no condition or event shall exist which constitutes an
Event of Default (as defined in Section 12.1) or a
Potential Event of Default and (ii) Consolidated Net
--
Worth shall at least equal 25% of the aggregate Debt of
Buyer and its Subsidiaries; and
(e) Buyer's Subsidiaries engaged in the insurance
business may make arrangements for the issuance of
letters of credit in the normal course of their busi-
ness.
10.2. Restricted Payments. Buyer will not, and
-------------------
will not permit any of its Subsidiaries to, directly or
indirectly declare, pay or make any Restricted Payment,
except for a Restricted Payment payable to Buyer or a
Wholly-Owned Subsidiary of Buyer, unless, immediately after
giving effect to such proposed action:
88
<PAGE>
(a) to the best knowledge and belief of Buyer, as
certified by an Officers' Certificate delivered to
Seller, no condition or event shall exist which consti-
tutes an Event of Default or a Potential Event of De-
fault; and
(b) the aggregate amount of all sums included in
all Restricted Payments directly or indirectly de-
clared, paid or made by Buyer during the period after
June 30, 1987, to and including the date of such pro-
posed action, shall not exceed 50% of the Consolidated
Net Income of Buyer for such period in excess of
$5 million.
Buyer will not, and will not permit any Subsidiary to, di-
rectly or indirectly declare, pay or make any Restricted
Payment except in cash.
10.3. Liens, etc. Buyer will not, and will not
----------
permit any of its Subsidiaries to, directly or indirectly,
create, incur, assume or permit to exist any material Lien
on or with respect to any material property or asset (in-
cluding any document or instrument in respect of goods or
accounts receivable) of Buyer or any of its Subsidiaries,
whether now owned or held or hereafter acquired, or any
material income or profits therefrom, except:
89
<PAGE>
(a) Liens for taxes, assessments or other govern-
mental charges the payment of which is not at the time
required by Section 10.9;
(b) statutory Liens of landlords and Liens of
carriers, warehousemen, mechanics and materialmen in-
curred in the ordinary course of business for sums not
yet due or the payment of which is not at the time
required by Section 10.9;
(c) Liens incurred or deposits made in the ordi-
nary course of business in connection with obtaining or
maintaining licenses, and workers' compensation, unem-
ployment insurance and other types of social security,
or to secure (or to obtain letters of credit or surety,
appeal or performance bonds which secure) the perfor-
mance of bids, tenders, statutory obligations, leases,
purchase, construction or sales contracts and other
similar obligations and payment of the deferred pur-
chase price of property purchased in the ordinary
course of business;
(d) any attachment or judgment Lien, unless the
judgment it secures shall not, within 60 days after the
entry thereof, have been discharged or execution
thereof stayed pending appeal, or shall not have been
90
<PAGE>
discharged within 60 days after the expiration of any
such stay;
(e) leases or subleases granted to others, ease-
ments, rights-of-way, restrictions and other similar
charges or encumbrances, in each case incidental to,
and not materially interfering with, the ordinary con-
duct of the business of Buyer or any of its Subsidiar-
ies;
(f) Liens on property or assets of any Wholly-
Owned Subsidiary securing Debt of such Subsidiary owing
to Buyer or a Wholly-Owned Subsidiary of Buyer;
(g) Liens existing as of the Closing Date, Liens
in favor of Harris Trust & Savings Bank to secure Debt
existing at the Closing Date and successor Liens asso-
ciated with extensions, renewals or refundings of Debt
as permitted under Section 10.1(a);
(h) any Lien securing the obligations of Buyer to
Seller under this Agreement or (to the extent of any
pledge of ESI Shares sold by Kansa or Coleman) to Kansa
and Coleman under the ESI Share Purchase Agreements;
and
(i) Liens securing Debt permitted under Sec-
tion 10.1(d), subject to the following sentence.
91
<PAGE>
If Buyer or any of its Subsidiaries shall create, incur,
assume or suffer to exist any Lien on any of its or their
properties, whether now owned or hereafter acquired, in
violation of the provisions of this Section 10.3 or that is
permitted under Section 10.3(i), it will make or cause to be
made effective provision whereby the obligations of Buyer
hereunder will be secured equally and ratably with any and
all other Debt or obligations thereby secured.
10.4. Leases; Leasebacks. Buyer will not, and
------------------
will not permit any of its Subsidiaries to, directly or
indirectly, become or remain liable as lessee or as guaran-
tor or other surety with respect to any leases except those
existing on the Closing Date and those entered into there-
after in the ordinary course of business.
10.5. Transactions with Affiliates. Buyer will
----------------------------
not, and will not permit any of its Subsidiaries to, direct-
ly or indirectly, engage in any transaction, including with-
out limitation the purchase, sale or exchange of assets or
the rendering of any service, with any Affiliate of Buyer,
except in the ordinary course of and pursuant to the reason-
able requirements of Buyer's or such Subsidiary's business
and upon fair and reasonable terms that are no less favor-
able to Buyer or such Subsidiary, as the case may be, than
those which are generally obtainable in an arm's-length
92
<PAGE>
transaction at the time from Persons which are not such an
Affiliate, provided that the foregoing restrictions shall
--------
not apply to (a) any transaction between Buyer and a Wholly-
-
Owned Subsidiary of Buyer or between one Wholly-Owned Sub-
sidiary of Buyer and another Wholly-Owned Subsidiary of
Buyer, (b) any transaction that, together with all other
-
transactions entered into pursuant to this clause (b) of
this proviso is not material to Buyer and its Subsidiaries
taken as a whole or (c) any investment consulting agreement
-
between Buyer or any of its Subsidiaries and Hamblin Watsa
or any brokerage, underwriting management or claims manage-
ment agreement between Buyer or any of its Subsidiaries and
Markel or any of its Subsidiaries, so long as any such
agreement is on terms (including compensation) substantially
at least as favorable as those generally entered into by
Hamblin Watsa or by Markel or its Subsidiaries, as the case
may be, with unaffiliated third parties for comparable ser-
vices.
10.6. Subsidiary Stock and Indebtedness. Buyer
---------------------------------
will not:
(a) directly or indirectly sell, assign, pledge
or otherwise dispose of any Debt of or any shares of
stock of (or warrants, rights or options to acquire
stock of) any of its Subsidiaries, except as security
93
<PAGE>
for Buyer's obligations under this Agreement or the ESI
Purchase Agreements with Kansa and Coleman or to a
Wholly-Owned Subsidiary of Buyer and except as direc-
tors' qualifying shares if required by applicable law;
(b) permit any of its Subsidiaries directly or
indirectly to sell, assign, pledge or otherwise dispose
of any Debt of Buyer or any other Subsidiary of Buyer,
or any shares of stock of (or warrants, rights or op-
tions to acquire stock of) any other Subsidiary of
Buyer, except to Buyer or a Wholly-Owned Subsidiary of
Buyer or as directors' qualifying shares if required by
applicable law and except for the pledge of shares of
common stock of ESI or its Subsidiaries permitted under
Section 10.3(g); or
(c) permit any of its Subsidiaries, directly or
indirectly, to issue or sell any shares of its stock
(or warrants, rights or options to acquire its stock)
except to Buyer or a Wholly-Owned Subsidiary of Buyer
or as directors' qualifying shares if required by ap-
plicable law;
provided that Buyer or any of its Subsidiaries may sell
--------
shares of stock of (or, warrants, rights or options to ac-
quire stock of) any Subsidiary of Buyer, and any Subsidiary
of Buyer may issue or sell shares of its stock (or warrants,
94
<PAGE>
rights or options to acquire its stock), not otherwise per-
mitted under this Section 10.6, so long as, at the time of
such issuance or sale:
(i) the price of each of the shares so issued or
sold (or the exercise price for any shares to be issued
or sold upon exercise of any warrants, rights or op-
tions to acquire such shares) is not less than the book
value per share of stock of such Subsidiary at the time
of such issue or sale;
(ii) after such issue or sale, such Subsidiary
would continue at all times to be a Subsidiary of Buy-
er, regardless of any exercise of any warrants, rights
or options so issued or sold; and
(iii) immediately prior to such issue or sale, the
Buyer would have been permitted pursuant to Sec-
tion 10.1(d) to issue at least $1.00 of Debt.
10.7. Consolidation, Merger, Sale of Assets, etc.
------------------------------------------
Buyer will not, and will not permit any Subsidiary to, di-
rectly or indirectly,
(a) consolidate with or merge into any other
Person or permit any other Person to consolidate with
or merge into it;
95
<PAGE>
(b) sell, transfer, lease, abandon or otherwise
dispose of all or substantially all its property,
assets and undertakings; or
(c) sell, transfer, lease, abandon or otherwise
dispose of any of its material property, assets and
undertakings (except in the ordinary course of business
or in connection with any action permitted under Sec-
tion 10.8);
provided that any Subsidiary of Buyer may consolidate with
--------
or merge into Buyer or a Wholly-Owned Subsidiary of Buyer if
Buyer or such Wholly-Owned Subsidiary, as the case may be,
shall be the surviving corporation and if, immediately after
giving effect to such transaction, to the best knowledge and
belief of Buyer, as certified by an Officers' Certificate
delivered to Seller, no condition or event shall exist which
constitutes an Event of Default or a Potential Event of
Default.
10.8. Corporate Existence, etc.; Business. Ex-
-----------------------------------
cept as permitted by the provisions of Section 10.7, Buyer
will at all times preserve and keep in full force and effect
its corporate existence, and rights and franchises deemed
material to its business and those of each of its Subsidi-
aries. Buyer will not, and will not permit any of its Sub-
sidiaries to, engage in any material business other than the
96
<PAGE>
businesses conducted by Buyer and its Subsidiaries on the
Closing Date of this Agreement and other businesses or ac-
tivities substantially similar or reasonably related there-
to; and Buyer will not discontinue any material line of
business or undertake a material new line of business, and
shall not permit any Subsidiary to discontinue any material
line of business or undertake any material new line of busi-
ness, except that Buyer or a Subsidiary of Buyer may discon-
tinue a line of insurance business or undertake a new line
of insurance business if, in the good-faith judgment of
management of Buyer or such Subsidiary, such discontinuance
or undertaking is in the best of interests of Buyer or such
Subsidiary, as the case may be.
10.9. Payment of Taxes and Claims. Buyer will,
---------------------------
and will cause each of its Subsidiaries to, pay all material
taxes, assessments and other governmental charges imposed
upon it or any of its material properties or assets or in
respect of any of its material franchises, business, income
or profits before any penalty or interest accrues thereon,
and all material claims (including, without limitation,
claims for labor, services, materials and supplies) for sums
which have become due and payable and which by law have or
might become a Lien upon any of its material properties or
assets, provided that no such charge or claim need be paid
--------
97
<PAGE>
if being contested in good faith by appropriate proceedings,
diligently conducted, and if such reserve or other appropri-
ate provision, if any, as shall be required by generally
accepted accounting principles shall have been made there-
for.
10.10. Investments. Buyer will not, and will not
-----------
permit any of its Subsidiaries to, make any material Invest-
ment in any Person or property, whether directly or indi-
rectly made, and whether by purchase or other acquisition of
shares or other securities, by loan, advance, extension of
credit or capital contribution, or otherwise, other than:
(a) accounts receivable arising in the ordinary
course of business;
(b) any such investment in property (other than
shares or other securities of any person) used in the
ordinary course of business;
(c) any such investment by Buyer in any of its
Subsidiaries existing on the Closing Date;
(d) any investment made in the ordinary course of
business by any Subsidiary of Buyer which, at the time
of making such investment, Buyer reasonably and in good
faith believed would not violate any applicable legal
investment laws; and
98
<PAGE>
(e) any investment by Buyer or a wholly-owned
Subsidiary of Buyer in a wholly-owned Subsidiary of
Buyer.
10.11. Net Worth. Buyer will not at any time
---------
permit its Consolidated Net Worth to be less than $10 mil-
lion.
10.12. Compliance with ERISA. Buyer will not,
---------------------
and will not permit any of its Subsidiaries to,
(a) engage in any transaction in connection with
which Buyer or any of its Subsidiaries could be subject
to either a civil penalty assessed pursuant to Sec-
tion 502(i) of ERISA or a tax imposed by Section 4975
of the Code, terminate any Plan (other than a Multiem-
ployer Plan) in a manner, or take any other action with
respect to any such Plan, which could result in any
liability of Buyer or any of its Subsidiaries to the
Pension Benefit Guaranty Corporation, fail to make full
payment when due of all amounts which, under the
provisions of any Plan, Buyer or any of its
Subsidiaries is required to pay as contributions
thereto, or permit to exist any accumulated funding
deficiency, whether or not waived, with respect to any
Plan (other than a Multiemployer Plan), if, in any such
case, such penalty or tax or such liability, or the
99
<PAGE>
failure to make such payment, or the existence of such
deficiency, as the case may be, could have a material
adverse effect on Buyer and its Subsidiaries as a
whole;
(b) permit the present value of all vested ac-
crued benefits under all Plans maintained at such time
by Buyer and any of its Subsidiaries (other than Multi-
employer Plans) guaranteed under Title IV of ERISA to
exceed the current value of the assets of such Plans
allocable to such vested accrued benefits by more than
$1 million plus the amount, if any, by which the
----
present value of all accrued benefits under all Pension
Plans listed on Schedule 2.27 on the Closing Date
exceeds the current value of the assets of such Plans
at the Closing Date; or
(c) withdraw from any Multiemployer Plan if such
withdrawal would result in a withdrawal liability under
Title IV of ERISA in excess of $1 million.
Buyer agrees (i) once in each calendar year, beginning in
-
the year following its initial participation in a Multiem-
ployer Plan, to request a current statement of withdrawal
liability from each Multiemployer Plan and (ii) promptly
--
upon receipt, to transmit to Seller a copy of any such
statement obtained from a Multiemployer Plan within 25 days
100
<PAGE>
after Buyer receives the same. As used in this Sec-
tion 10.12, the term "accumulated funding deficiency" has
the meaning specified in Section 302 of ERISA and Section
412 of the Code, the terms "accrued benefit" and "current
value" have the meanings specified in Section 3 of ERISA.
10.13. Insurance. Buyer will use all reasonable
---------
efforts to maintain or cause to be maintained, with insurers
believed in good faith by it to be financially sound and
reputable, insurance with respect to its material properties
and business and the material properties and business of its
Subsidiaries, including without limitation, errors and omis-
sions and directors' and officers' liability insurance,
against loss or damage of the kinds customarily insured
against by corporations of established reputation engaged in
the same or similar business and similarly situated and in
such amounts as Buyer determines in good faith to be ade-
quate in light of the circumstances and experience of Buyer
and its Subsidiaries.
10.14. Accounting, Financial Statements and Other
------------------------------------------
Information. Buyer will maintain and cause each of its
-----------
Subsidiaries to maintain, a system of accounting established
and administered in accordance with generally accepted ac-
counting principles and, to the extent required, accounting
practices prescribed by all regulatory authorities in all
101
<PAGE>
jurisdictions where violation thereof would have a material
adverse effect on Buyer and its Subsidiaries taken as a
whole, and will set aside on its books, and will cause each
of its Subsidiaries to set aside on its books, all such
proper reserves as shall be required by such principles and
practices. Buyer will deliver (in duplicate) to Seller:
(a) within 40 days after the end of each of the
first three quarterly fiscal periods in each fiscal
year of Buyer, consolidated balance sheets of Buyer and
its Subsidiaries as at the end of such period and the
related consolidated statements of income, of Buyer and
its Subsidiaries for such period and (in the case of
the second and third quarterly periods) for the period
from the beginning of the current fiscal year to the
end of such quarterly period, setting forth in each
case in comparative form the consolidated figures for
the corresponding periods of the previous fiscal year,
all in reasonable detail and certified as complete and
correct by a principal financial officer of Buyer,
provided that the comparative statements shall not be
--------
required in the initial year following the Closing
unless reasonably available;
(b) within 60 days after the end of each fiscal
year of Buyer, consolidated and consolidating balance
102
<PAGE>
sheets of Buyer and its Subsidiaries as at the end of
such year and the related consolidated and, as to
statements of income only, consolidating statements of
income, stockholders' equity and changes in financial
position of Buyer and its Subsidiaries for such fiscal
year, setting forth in each case in comparative form
the consolidated and consolidating figures for the
previous fiscal year, all in reasonable detail, pro-
----
vided that the comparative statements shall not be
-----
required in the initial year following the Closing
unless reasonably available; and (i) in the case of
-
such consolidated financial statements, accompanied by
a report thereof of Peat, Marwick, Main & Co. or other
independent certified public accountants of recognized
national standing selected by Buyer, which report shall
state that such consolidated financial statements pres-
ent fairly the financial position of Buyer and its
Subsidiaries as at the dates indicated and the results
of their operations and changes in their financial
position for the periods indicated in conformity with
generally accepted accounting principles applied on a
basis consistent with prior years (except as otherwise
specified in such report) and that the audit by such
accountants in connection with such consolidated finan-
103
<PAGE>
cial statements has been made in accordance with gener-
ally accepted auditing standards and (ii) in the case
--
of such consolidating financial statements, certified
by a principal financial officer of Buyer;
(c) together with each delivery of financial
statements of Buyer and its Subsidiaries pursuant to
subdivisions (a) and (b) of this Section 10.14, an
Officers' Certificate stating that the signers have
reviewed the terms of this Agreement and have made, or
caused to be made under their supervision, a review in
reasonable detail of the transactions and condition of
Buyer and its Subsidiaries during the accounting period
covered by such financial statements and that such
review has not disclosed the existence during or at the
end of such accounting period, and that the signers do
not have knowledge of the existence as at the date of
the Officers' Certificate, of any condition or event
which constitutes an Event of Default or Potential
Event of Default, or, if any such condition or event
existed or exists, specifying the nature and period of
existence thereof and what action Buyer has taken or is
taking or proposes to take with respect thereto;
(d) together with each delivery of consolidated
financial statements of Buyer and its Subsidiaries
104
<PAGE>
pursuant to subdivision (b) of this Section 10.14, a
written statement by the independent public accountants
giving the report thereon stating (i) that their audit
-
examination has included a review of the terms of this
Agreement as it relates to the financial covenants and
accounting matters and (ii) whether, in the course of
--
their audit examination, they obtained knowledge (and
whether, as of the date of such written statement, they
have knowledge) of the existence of any condition or
event which constitutes an Event of Default or Poten-
tial Event of Default, and, if so, specifying the na-
ture and period of existence thereof;
(e) promptly upon receipt thereof, copies of all
reports submitted to Buyer by independent public ac-
countants in connection with each annual, interim or
special audit of the books of Buyer or any Subsidiary
made by such accountants, including, without limita-
tion, the comment letter, if any, submitted by such
accountants to management in connection with their
annual audit;
(f) promptly upon their becoming available, cop-
ies of all financial statements, reports and notices as
to material matters and proxy statements filed or sub-
mitted by Buyer or any of its Subsidiaries to any regu-
105
<PAGE>
latory authority having jurisdiction over Buyer or any
such Subsidiary, of all regular and periodic reports
and all registration statements and prospectuses filed
by Buyer or any Subsidiary with any securities exchange
or with the Securities and Exchange Commission or any
governmental authority succeeding to any of its func-
tions, or to any such regulatory authority, and of all
press releases and other statements made available
generally by Buyer or any Subsidiary to the public
concerning material developments in the business of
Buyer or its Subsidiaries;
(g) immediately upon any principal officer of
Buyer or any other officer of Buyer or any of its Sub-
sidiaries involved in its financial administration
obtaining knowledge of any condition or event which he
understands constitutes an Event of Default or Poten-
tial Event of Default, or that the holder of any Debt
has given any notice or taken any other action with
respect to a claimed default with respect thereto, an
Officers' Certificate describing the same and the peri-
od of existence thereof and what action Buyer has
taken, is taking and proposes to take with respect
thereto or that might reasonably be expected to have a
material adverse effect on the business, affairs, con-
106
<PAGE>
dition (financial or otherwise), properties or assets
of Buyer and its Subsidiaries, taken as a whole;
(h) 75 days after the end of each year, a report
of a firm of independent consulting actuaries of recog-
nized national standing selected by Buyer and reason-
ably acceptable to Seller on the required loss reserves
of each Subsidiary which is an insurance carrier, re-
porting on the matters required to be estimated pur-
suant to Section 11.3 of this Agreement and additional-
ly stating such independent consulting actuaries' esti-
mate of the total reserves arising from business booked
by such Subsidiaries as of the end of such year, pre-
pared on the basis of assumptions methodology consis-
tent with those reflected in financial statements of
ESI at and for the periods ending December 31, 1986, or
on the basis of such different assumptions or methodol-
ogy as the actuaries determine to be appropriate, which
shall be specified in their report;
(i) promptly after any principal officer of Buyer
learns thereof, any condition or event materially ad-
versely affecting the amount of the Deferred Purchase
Price; and
(j) with reasonable promptness, such other infor-
mation and data with respect to Buyer or any of its
107
<PAGE>
Subsidiaries as from time to time may be reasonably
requested.
10.15. Inspection. Buyer will permit any autho-
----------
rized representatives designated by Seller to visit and
inspect any of the properties of Buyer or any of its Subsid-
iaries, including its and their books of account and tax
records, and to make copies and take extracts therefrom, and
to discuss its and their affairs, finances and accounts with
its and their officers and independent public accountants,
all at such reasonable times and as often as may be reason-
ably requested. Seller shall, and shall cause any other
person to whom Seller has given access to information dis-
closed pursuant to this Section 10.15, to keep confidential
any information or documents obtained pursuant to this Sec-
tion 10.15, unless such information or documents are readily
ascertainable from public or published information.
10.16. Definitions. As used herein the following
-----------
terms have the following respective meanings:
Affiliate: any Person directly or indirectly
---------
Controlling or Controlled by or under common Control with
Buyer.
Code: the Internal Revenue Code of 1986, as
----
amended from time to time.
108
<PAGE>
Consolidated Net Income: with reference to any
-----------------------
period, the net income (or deficit) of Buyer and its Subsid-
iaries for such period (taken as a cumulative whole), in-
cluding any aggregate net realized gain (net of any unreal-
ized net loss arising after June 30, 1987, determined as of
the end of the fiscal quarter terminating on or immediately
preceding the date on which Consolidated Net Income is to be
determined) during such period arising from the sale, ex-
change or other disposition of capital assets (such term to
include all fixed assets, whether tangible or intangible,
all inventory sold in conjunction with the disposition of
fixed assets, and all securities), after deducting all
operating expenses, provisions for all taxes and reserves
(including reserves for deferred income taxes) and all other
proper deductions, and after application of tax loss and
investment tax credit carryforwards all determined in
accordance with generally accepted accounting principles on
a consolidated basis applied on a consistent basis after
eliminating all intercompany transactions and after
deducting portions of income properly attributable to
minority interests, if any, in the stock and surplus of its
Subsidiaries, provided that there shall be excluded (a) the
-------- -
income (or deficit) of any Person accrued prior to the date
it becomes a Subsidiary of Buyer (or, in the case of SMCO,
109
<PAGE>
ESI, EIC and ICE, prior to July 1, 1987) or is merged into
or consolidated with Buyer or a Subsidiary of Buyer, (b) the
-
income (or deficit) of any Person (other than a Subsidiary
of Buyer) in which Buyer or any Subsidiary of Buyer has an
ownership interest, except to the extent that any such
income has been actually received by Buyer or such
Subsidiary in the form of dividends or similar
distributions, (c) the undistributed earnings of any
-
Subsidiary of Buyer to the extent that the declaration or
payment of dividends or similar distributions by such Sub-
sidiary is not at the time permitted by the terms of its
charter or any agreement, instrument, judgment, decree,
order, statute, rule or governmental regulation applicable
to such Subsidiary, (d) any restoration to income of any
-
contingency reserve, except to the extent that provision for
such reserve was made out of income accrued after June 30,
1987, (e) any write-up of any asset (except to the extent it
-
was written down after June 30, 1987), (f) any net gain from
-
the collection of the proceeds of life insurance policies,
(g) any gain arising from the acquisition of any securities
-
or Debt of Buyer or any of its Subsidiaries, and (h) any net
-
income or gain (but not any net loss) during such period
from any change in accounting, from the discontinuance of
110
<PAGE>
any operations or the disposition thereof, from any extra-
ordinary events or from any prior period adjustments.
Consolidated Net Worth: with respect to any Per-
----------------------
son, the sum of the capital stock (but excluding treasury
stock and capital stock subscribed and unissued), paid-in
capital, and surplus (including retained earnings, earned
surplus, capital surplus and the balance of the current
profit and loss account not transferred to surplus) accounts
of such Person and its Subsidiaries appearing on a consoli-
dated balance sheet of such Person and its Subsidiaries
prepared in accordance with generally accepted accounting
principles as of the date of determination, after eliminat-
ing all intercompany transactions and all amounts properly
attributable to minority interests, if any, in the stock and
surplus of Subsidiaries, all as reflected in the most recent
available quarterly financial statements of such Person;
provided that, in the case of any determination of the joint
--------
Consolidated Net Worth of Fairfax and Markel, there shall be
deducted from such joint Consolidated Net Worth any portion
thereof attributable to acquisitions after the date of this
Agreement by Fairfax of equity interests in Markel, or by
Markel of equity interests in Fairfax.
Control: (including, with correlative meanings,
-------
the terms "controlled by" and "under common control with"),
111
<PAGE>
as used with respect to any Person, shall mean the posses-
sion, directly or indirectly, of the power to direct or
cause the direction of the management and policies of such
Person, whether through the ownership of voting securities
or by contract or otherwise.
Debt: as applied to any Person (without duplica-
----
tion):
(a) any indebtedness for borrowed money which
such Person has directly or indirectly created, in-
curred or assumed; and
(b) any indebtedness for borrowed money secured
by any Lien in respect of property owned by such Per-
son, whether or not such Person has assumed or become
liable for the payment of such indebtedness; and
(c) any indebtedness for borrowed money with
respect to which such Person has become directly or
indirectly liable and which represents or has been
incurred to finance the purchase price (or a portion
thereof) of any property or services or business
acquired by such Person, whether by purchase,
consolidation, merger or otherwise; and
(d) any indebtedness of any other Person of the
character referred to in subdivision (a), (b), or (c)
of this definition with respect to which the Person
112
<PAGE>
whose Debt is being determined has become liable by way
of a Guarantee.
ERISA: the Employee Retirement Income Security
-----
Act of 1974, as amended from time to time.
Guarantee: as applied to any Person, any direct
---------
or indirect liability, contingent or otherwise, of such
Person with respect to any indebtedness, lease, dividend or
other obligation of another, including, without limitation,
any such obligation directly or indirectly guaranteed, en-
dorsed (otherwise than for collection or deposit in the
ordinary course of business) or discounted or sold with
recourse by such Person, or in respect of which such Person
is otherwise directly or indirectly liable, including, with-
out limitation, any such obligation in effect guaranteed by
such Person through any agreement (contingent or otherwise)
to purchase, repurchase or otherwise acquire such obligation
or any security therefor, or to provide funds for the pay-
ment or discharge of such obligation (whether in the form of
loans, advances, stock purchases, capital contributions or
otherwise), or to maintain the solvency or any balance sheet
or other financial condition of the obligor of such obliga-
tion, or to make payment for any products, materials or
supplies or for any transportation or services regardless of
the non-delivery or nonfurnishing thereof, in any such case
113
<PAGE>
if the purpose or intent of such agreement is to provide
assurance that such obligation will be paid or discharged,
or that any agreements relating thereto will be complied
with, or that the holders of such obligation will be pro-
tected against loss in respect thereof. The amount of any
Guarantee shall be equal to the amount of the obligation
guaranteed (or such lesser amount as to which the maximum
exposure of the guarantor shall have been specifically lim-
ited).
Hamblin Watsa: Hamblin Watsa Investment Counsel
-------------
Ltd.
Lien: as to any Person, any mortgage, lien,
----
pledge, security interest or other encumbrance in or on, or
any interest or title of any vendor, lessor, lender or other
secured party to or of such Person with respect to, any
property or asset owned or held by such Person, or the sign-
ing or filing of a financing statement which names such
Person as debtor, or the signing of any security agreement
authorizing any other party as the secured party thereunder
to file any financing statement.
Multiemployer Plan: any Plan which is a "multiem-
------------------
ployer plan" (as such term is defined in section 4001(a)(3)
of ERISA).
114
<PAGE>
Officers' Certificate: a certificate executed on
---------------------
behalf of Buyer by its President or one of its Vice Presi-
dents and its Chief Financial Officer.
Person: a corporation, an association, a partner-
------
ship, an organization, a business, an individual, a govern-
ment or political subdivision thereof or a governmental
agency.
Plan: an "employee pension benefit plan" (as
----
defined in section 3 of ERISA) which is or has been estab-
lished or maintained or to which contributions are or have
been made, by Buyer or any trade or business, whether or not
incorporated, which, together with Buyer, is under common
control, as defined in section 414(b) or (c) of the Code.
Potential Event of Default: any condition or
--------------------------
event which, with notice or lapse of time or both, would
become an Event of Default.
Restricted Payment: (a) any dividend or other
------------------ -
distribution, direct or indirect, on account of any shares
of any class of stock of Buyer or a Subsidiary of Buyer now
or hereafter outstanding, except a dividend payable solely
in shares of stock of Buyer; and (b) any redemption, retire-
-
ment, purchase or other acquisition, direct or indirect, of
any shares of any class of stock of Buyer or a Subsidiary of
Buyer now or hereafter outstanding, or of any warrants,
115
<PAGE>
rights or options to acquire any such shares, except to the
extent that the consideration therefor consists of shares of
stock of Buyer.
Subsidiary: with respect to any Person, a corpo-
----------
ration, association or other business entity in which such
Person or one or more Subsidiaries or such Person and one or
more Subsidiaries owns sufficient Voting Stock to enable it
or them (as a group) ordinarily, in the absence of contin-
gencies, to elect a majority of the directors (or persons
performing similar functions) of such business entity.
Voting Stock: stock of any class or classes (or
------------
equivalent interests), if the holders of the stock of such
class or classes (or equivalent interests) are ordinarily,
in the absence of contingencies, entitled to vote for the
election of the directors (or persons performing similar
functions) of such business entity, even though the right so
to vote has been suspended by the happening of such a con-
tingency.
Wholly-Owned: as applied to any Subsidiary, a
------------
Subsidiary all the outstanding shares (other than directors'
qualifying shares, if required by law) of every class of
stock of which are at the time owned by Buyer or by one or
more Wholly-Owned Subsidiaries or by Buyer and one or more
Wholly-Owned Subsidiaries.
116
<PAGE>
ARTICLE XI
PURCHASE PRICE ADJUSTMENTS
11.1. Certain Definitions. As used in this
-------------------
Agreement, the following terms have the following meanings:
Adjustment Amount: as defined in Section 11.2.
-----------------
Buyer's Accountants: as defined in Section 11.3.
-------------------
Buyer's Actuaries: as defined in Section 11.3.
-----------------
Determination Date: the earliest of (a) Decem-
------------------ -
ber 31, 1991, (b) the last day of the fiscal quarter of ESI
-
most recently ended prior to the date on which the Deferred
Purchase Price becomes due and payable following accelera-
tion pursuant to Section 12.1, and (c) the last day of the
-
fiscal quarter of ESI most recently ended prior to the date
on which Buyer delivers notice of prepayment to Seller pur-
suant to Section 1.4(d).
Indemnification Amount: the aggregate amount,
----------------------
calculated in accordance with Section 11.5 and subject to
the limitation specified in Section 11.5, of all damages,
losses, liabilities, fees, costs and expenses (including
reasonable fees and expenses of counsel) sustained or suf-
fered by any of the Buyer Affiliates (except for the indi-
viduals delivering certificates and undertakings pursuant to
Section 6.11) and arising from a breach after the Closing
Date of any agreement of Seller (except for a breach of the
provisions of Section 4.7, 4.8, 4.10, 4.11, 4.12 or 4.13 or
117
<PAGE>
Article VIII of this Agreement) or a breach of any represen-
tation or warranty of Seller (except for the representations
and warranties set forth in Sections 2.1 through 2.8 inclu-
sive, 2.36 and 2.37 and the Schedules attached hereto with
respect to such Sections) contained in or made pursuant to
this Agreement or any Exhibit or Schedule attached hereto.
Reserves for Losses and Loss Adjustment Expenses:
------------------------------------------------
an amount equal to the provision, determined in accordance
with generally accepted accounting principles (applied on a
basis consistent with that used at December 31, 1986), in
respect of the consolidated financial position of ESI and
its Subsidiaries, for (a) case reserve estimates for report-
-
ed losses, plus (b) incurred but not reported claims and
---- -
loss adjustment expenses, less (c) cash amounts that relate
---- -
to salvage and subrogation recoveries, and in the case of
clauses (a), (b) and (c), net of applicable reinsurance
recoverables.
Reserves for Uncollectible Reinsurance: an amount
--------------------------------------
equal to the provision, determined in accordance with gener-
ally accepted accounting principles (applied on a basis
consistent with that used at December 31, 1986), in respect
of the consolidated financial position of ESI and its Sub-
sidiaries for Uncollectible Reinsurance.
Seller's Accountants: as defined in Section 11.3.
--------------------
118
<PAGE>
Seller's Actuaries: as defined in Section 11.3.
------------------
Uncollectible Reinsurance: reinsurance recover-
-------------------------
ables owed to ESI and its Subsidiaries by reinsurers, that
have been determined to be uncollectible (including any
amount charged as an expense in connection with commutation,
in accordance with generally accepted accounting principles
(applied on a basis consistent with that used at Decem-
ber 31, 1986)).
11.2. Adjustment Amount. As used in this Agree-
-----------------
ment, the "Adjustment Amount" shall mean an amount equal to:
(a) 52%, if the Kansa Buyer Guarantee shall have
been delivered at the Closing, and 70%, if the Kansa
Buyer Guarantee shall not have been delivered at the
Closing, of an amount equal to 90% of the first $10
million and 100% of the remainder, of any difference
(positive or negative) which results when $160,823,000
is subtracted from the sum of:
(i) Reserves for Losses and Loss Adjustment
Expenses at the Determination Date, and
(ii) the aggregate amount of all losses and
loss adjustment expenses paid by ESI and its Sub-
sidiaries from January 1, 1987, to the Determina-
tion Date in each case, with respect only to
losses occurring on or before December 31, 1986,
119
<PAGE>
under contracts of insurance or reinsurance
entered into by ESI and its Subsidiaries;
plus
----
(b) 52%, if the Kansa Buyer Guarantee shall have
been delivered at the Closing, and 70%, if the Kansa
Buyer Guarantee shall not have been delivered at the
Closing, of an amount equal to 90% of the first $10
million, and 100% of the remainder, of any difference
(positive or negative) which results when $8 million is
subtracted from the following amount:
(i) Reserves for Uncollectible Reinsurance
at the Determination Date;
plus
----
(ii) the aggregate amount of Uncollectible
Reinsurance on paid claims written off, net of any
recoveries with respect thereto, from January 1,
1987 to the Determination Date;
minus
-----
(iii) the amount by which (x) the sum of such
-
Uncollectible Reinsurance owed by Mutual Fire that
is written off and such Reserves for Uncollectible
Reinsurance with respect to Mutual Fire exceeds
(y) $4.5 million;
-
minus
-----
120
<PAGE>
(iv) recoveries from January 1, 1987 to the
Determination Date with respect to reinsurance
recoverables written off by ESI and its Subsidi-
aries prior to January 1, 1987,
in each case, in respect of reinsurance agreements in effect
before January 1, 1987, with respect to insurance policies
(including optional extension periods) in effect before
January 1, 1987, under which a claim arises out of events
occurring prior to January 1, 1987;
plus
----
(c) the Indemnification Amount at the Determina-
tion Date;
minus
-----
(d) one-third of the amount of the net Federal,
state or local tax savings that are realized in respect
of tax periods prior to and including the Determination
Date by Buyer, SMCO, ESI, EIC or ICE, determined as set
out below, as a result of any items reflected in
amounts determined pursuant to paragraphs (a), (b) and
(c) of this Section 11.2. If the Adjustment Amount is
a negative number, it shall be deemed to be equal to
zero. No amount shall be included in the Adjustment
Amount to the extent that Seller is obligated to indem-
nify Buyer with respect to such amount pursuant to
121
<PAGE>
Section 8.1 prior to the Determination Date. The de-
termination of the tax savings realized shall be deter-
mined each year by consolidating or combining the cur-
rent year taxable income (loss) of Buyer, SMCO, ESI,
EIC and ICE (taking into account carryforwards and, to
the extent arising no later than the tax period that
includes the Determination Date, carrybacks) and ex-
cluding the income (loss) of any other company.
11.3. Estimates and Finality of the Adjustment
----------------------------------------
Amount; Disputes. (a) Buyer, at its expense, shall deliver
----------------
to Seller within 30 days following each quarter of each
fiscal year a non-binding estimate of the Adjustment Amount,
which shall assume that the last day of the quarter with
respect to which such report is being delivered is the De-
termination Date. Each such estimate shall be accompanied
by a reasonably detailed statement by Buyer of the basis
therefor.
(b) As soon after the Determination Date as is
practicable, Buyer, at its expense, shall deliver to Seller
its determination of the Adjustment Amount, accompanied by a
reasonably detailed statement of the basis therefor (to the
extent of actuarial matters involved therein) by nationally
recognized actuaries regularly used by Buyer in making actu-
arial determinations with respect to its own financial
122
<PAGE>
statements (the "Buyer's Actuaries") and (to the extent of
accounting matters involved therein) by nationally recog-
nized independent accountants regularly used by Buyer with
respect to its own financial statements (the "Buyer's Audi-
tors") stating that such determination has been made pur-
suant to this Agreement. Such determination shall be final
and binding upon the parties unless, within 20 days after
receipt thereof, Seller notifies Buyer that it disagrees
with the amount or the matters reflected therein, in which
case it shall, at its own expense, cause its own nationally
recognized actuaries (the "Seller's Actuaries"), if the
disagreement concerns an actuarial matter, or its own na-
tionally recognized independent accountants (the "Seller's
Auditors"), if the disagreement concerns an accounting mat-
ter, to perform an additional determination and shall deli-
ver such determination to Buyer within 45 days after the
delivery of its notice concerning such disagreement. If
Seller's disagreement concerns any matter other than an
actuarial or accounting matter, Seller shall notify Buyer
within 20 days after receipt of Buyer's determination and
shall submit such disagreement to arbitration pursuant to
Section 13.9. With respect to any disagreement concerning
an actuarial or accounting matter, if the Seller's Actuaries
and/or the Seller's Auditors and the Buyer's Actuaries
123
<PAGE>
and/or the Buyer's Auditors cannot agree on a single deter-
mination of the Adjustment Amount within 20 days after de-
livery to Buyer of the determination of the Seller's Actu-
aries and/or the Seller's Auditors, then the Seller's Actu-
aries and/or the Seller's Auditors and the Buyer's Actuaries
and/or the Buyer's Auditors shall, within 10 days there-
after, mutually select an independent third actuary and/or
auditor, whose determination of the Adjustment Amount, which
shall not be more than the determination of the Buyer's
Actuaries and the Buyer's Auditors nor less than the deter-
mination of the Seller's Actuaries and the Seller's Auditors
and which shall be made within 60 days after its or their
selection and shall be delivered to Buyer and Seller, shall
be final and binding.
(c) The determination of the Adjustment Amount
shall be deemed to be final upon the earliest to occur of
(i) Buyer's receipt of Seller's written concurrence with the
-
determination made by Buyer, (ii) Seller's failure to notify
--
Buyer of its objection to Buyer's determination within
20 days after Seller's receipt thereof, (iii) with respect
---
to disagreements concerning actuarial or accounting matters,
(A) Seller's failure to deliver the Seller's Actuaries'
-
and/or the Seller's Auditors' determination to Buyer within
45 days after delivery to Buyer of the notice referred to in
124
<PAGE>
clause (ii) above, (B) the receipt by Buyer and Seller of
-
the written agreement by the Buyer's Actuaries and/or the
Buyer's Auditors and the Seller's Actuaries and/or the Sell-
er's Auditors on a single determination, or (C) the receipt
-
by Buyer and Seller of the determination made by the inde-
pendent third actuaries and/or auditors selected by the
Buyer's Actuaries and/or the Buyer's Auditors and the Sell-
er's Actuaries and/or the Seller's Auditors and (iv) with
--
respect to disagreements concerning other matters, the re-
ceipt by Buyer and Seller of the determination of the arbi-
trators selected pursuant to Section 13.9. If any objection
or dispute exists at any time with respect only to a portion
of the Adjustment Amount, the portion of the Adjustment
Amount not objected to or disputed shall be deemed to be
final on receipt of notice by Buyer from Seller, or by Sell-
er from Buyer, that such portion is not objected to or in
dispute.
11.4. Assignment of Uncollectible Reinsurance.
---------------------------------------
On the date on which any reinsurance recoverable that would
be reflected in the Adjustment Amount is written off by ESI
or any of its Subsidiaries, Buyer shall assign, or cause ESI
or its Subsidiaries to assign, to Seller such reinsurance
recoverable. Buyer shall cause ESI and its Subsidiaries to
write off such reinsurance recoverables in accordance with
125
<PAGE>
generally accepted accounting principles (applied on a basis
consistent with that used at December 31, 1986). On or
prior to the Closing Date, Seller may cause ESI or its Sub-
sidiaries to assign to Seller all reinsurance recoverables
relating to reinsurance in effect prior to January 1, 1987
that were written off the books and records of such compa-
nies prior to January 1, 1987, and Seller will make avail-
able to Buyer records or lists identifying the reinsurance
recoverables so assigned. Seller may thereafter collect the
amount of any such recoverables in its own name and for its
own account, provided that, to the extent that it can rea-
--------
sonably do so, Seller will avoid unnecessary damage to the
relationship between ESI and its Subsidiaries and the person
owing such recoverable.
11.5. Indemnification Amount, etc. (a) With
---------------------------
respect to any warranty or representation of Seller con-
tained in or made pursuant to this Agreement or any Exhibit
or Schedule attached hereto which contains a reference to
materiality (other than the representations set forth in
Sections 2.1 through 2.8), the breach of which may give rise
to an amount included in the Indemnification Amount, any
damages, losses, liabilities, fees, costs or expenses sus-
tained or suffered by any of the Buyer Affiliates shall be
deemed material and (subject to the next following sentence)
126
<PAGE>
included in the Indemnification Amount only if the amount
thereof sustained or incurred with respect to such warranty
or representation exceeds $50,000, but if such amount ex-
ceeds $50,000, such entire amount (including the portion not
exceeding $50,000) shall be included in the Indemnification
Amount. No such damages, losses, liabilities, fees, costs
and expenses shall be included in the Indemnification Amount
unless the aggregate amount thereof with respect to all such
representations and warranties (less any amount excluded
pursuant to the final sentence of this Section 11.5(a))
exceeds $100,000, whereupon such entire amount (including
the portion thereof not exceeding $100,000) shall be includ-
ed in the Indemnification Amount. The Indemnification
Amount shall not include any amount included in the calcula-
tion of the Adjustment Amount pursuant to paragraph (a) or
(b) of Section 11.2.
(b) The obligations and liabilities of the par-
ties under this Article XI with respect to claims resulting
from the assertion of liability by third parties that might
give rise to an amount included in the Adjustment Amount
shall be subject to the provisions of Sections 8.3, 8.4(d)
(except for clause (i) thereof) and 8.5 hereof, as if such
claims would give rise to an indemnification obligation
pursuant to any provision of Article VIII hereof.
127
<PAGE>
(c) Buyer shall have no right, recourse or claim
whatsoever against Seller with respect to
(i) any representation or warranty contained in
this Agreement (except for those set forth in Sections
2.1 through 2.8 inclusive, 2.36 and 2.37 of this Agree-
ment and the Schedules attached hereto with respect
thereto),
(ii) any obligation created by this Agreement or
arising out of the transactions contemplated hereby,
the breach of which would give rise to an amount in-
cluded in the Indemnification Amount,
(iii) inadequacies of any Reserves for Losses and
Loss Adjustment Expenses or Reserves for Uncollectible
Reinsurance, or
(iv) the inability of any Buyer Affiliate to ob-
tain payment of any Uncollectible Reinsurance, except
as set forth in this Article XI and in Section 1.4
hereof, provided that nothing in this Section 11.5(c)
--------
shall in any way adversely affect Buyer's rights under
Article VIII.
11.6. No Commutation of Uncollectible Reinsur-
----------------------------------------
ance, etc. Buyer shall not permit ESI or its Subsidiaries
---------
to commute, reduce, settle or discount any reinsurance re-
coverable that is or might be reflected in the Adjustment
128
<PAGE>
Amount without the prior written consent of Seller, which
consent will not be unreasonably withheld or delayed. Buyer
will, and will cause ESI and its Subsidiaries to, proceed
with reasonable diligence to attempt to collect such rein-
surance recoverables. All payments by any debtor in respect
of any reinsurance recoverable shall, in the absence of any
requirement to the contrary, be allocated for purposes of
this Article XI to the oldest outstanding recoverable of the
payor that would be reflected in the Adjustment Amount.
11.7. Right of Inspection. Seller shall be enti-
-------------------
tled, through its employees and representatives, to inspect
and examine such of the books, records, tax records and
financial statements of Buyer, SMCO, ESI, EIC and ICE and
working files of the Buyer's Actuaries and the Buyer's Audi-
tors as may be relevant to a determination of the adjust-
ments required by this Article XI. Any such inspection and
examination shall be conducted at reasonable times and under
reasonable circumstances in such a manner as will avoid any
unreasonable disruption of the businesses of such corpora-
tions, and Buyer shall and shall cause SMCO, ESI, EIC and
ICE to cooperate fully with such inspection and examination.
Seller shall, and shall cause any other person to whom Sell-
er has given access to information disclosed pursuant to
this Section 11.7, to keep confidential any information or
129
<PAGE>
documents obtained pursuant to this Section 11.7, unless
such information or documents are readily ascertainable from
public or published information.
ARTICLE XII
EVENTS OF DEFAULT
12.1. Events of Default; Acceleration. If any of
-------------------------------
the following conditions or events ("Events of Default")
shall occur and be continuing:
(a) if Buyer shall default in the payment of any
amount owed under Section 1.4 of this Agreement when
the same becomes due and payable, whether on the date
when normally due, as set forth herein, or at a date
fixed for prepayment; or
(b) if Buyer shall materially default in the
performance of or compliance with any material covenant
contained in Article X of this Agreement or, if a Guar-
antee Effectiveness Event shall have occurred, a Buyer
Guarantor shall materially default in the performance
of or compliance with Section 10(a) or (b) of the Kansa
Buyer Guarantee or Overall Buyer Guarantee, and such
default shall not have been remedied within 45 days
after written notice thereof shall have been received
by Buyer from Seller; or
130
<PAGE>
(c) if any material representation or warranty
made in writing by or on behalf of Buyer in this Agree-
ment or the Pledge Agreement, together with the docu-
ments, certificates and other writings furnished or to
be furnished by Buyer to Seller pursuant to this Agree-
ment or by or on behalf of a Buyer Guarantor in the
Non-Contingent Buyer Guarantee, or, if a Guarantee
Effectiveness Event shall have occurred, any represen-
tation or warranty contained in the Kansa Buyer Guaran-
tee or Overall Buyer Guarantee, shall prove to have
been false or incorrect in any material respect on the
date as of which made; or
(d) if Buyer or any of its Subsidiaries or, if a
Guarantee Effectiveness Event shall have occurred, a
Buyer Guarantor, shall default (as principal or guaran-
tor or other surety) in the payment (at maturity, at
any time designated for prepayment or otherwise) of any
principal of or premium or interest on any Debt which
is outstanding in an aggregate amount of at least
$1 million ($2 million in the case of a Buyer Guaran-
tor) in the aggregate (other than the obligations of
Buyer under this Agreement) and such amount is not paid
or the payment of such amount is not waived, within any
grace period applicable thereto or, if longer, within
131
<PAGE>
ten days after the occurrence of such default, or if
any event shall occur or condition shall exist in re-
spect of any such Debt which is outstanding in a prin-
cipal amount of at least $1 million ($2 million in the
case of a Buyer Guarantor) in the aggregate or under
any evidence of any such Debt or of any mortgage, in-
denture or other agreement relating thereto the effect
of which is to accelerate the payment of such Debt so
as to cause it to become due before its stated maturity
or before its regularly scheduled dates of payment, and
such acceleration shall not have been waived or re-
scinded by the holder of such Debt prior to delivery of
a notice by Seller to Buyer pursuant to clause (y) of
this Section 12.1; or
(e) if Buyer or any of its Subsidiaries or, if a
Guarantee Effectiveness Event shall have occurred, a
Buyer Guarantor, shall (i) be generally not paying its
-
debts as they become due, (ii) file, or consent by
--
answer or otherwise to the filing against it of, a
petition for relief or reorganization or arrangement or
any other petition in bankruptcy, for liquidation or to
take advantage of any bankruptcy or insolvency law of
any jurisdiction, (iii) make an assignment for the
---
benefit of its creditors, (iv) consent to the appoint-
--
132
<PAGE>
ment of a custodian, receiver, trustee or other officer
with similar powers with respect to it or with respect
to any substantial part of its property, (v) be adjudi-
-
cated insolvent or (vi) take corporate action for the
--
purpose of any of the foregoing; or
(f) if a court or governmental authority of com-
petent jurisdiction shall enter an order appointing,
without consent by Buyer or any of its Subsidiaries or,
if a Guarantee Effectiveness Event shall have occurred,
without consent by a Buyer Guarantor, a custodian,
receiver, trustee or other officer with similar powers
with respect to it or with respect to any substantial
part of the property of Buyer and its Subsidiaries
taken as a whole or of such Buyer Guarantor, or if an
order for relief shall be entered in any case or pro-
ceeding for liquidation or reorganization or otherwise
to take advantage of any bankruptcy or insolvency law
of any jurisdiction, or ordering the dissolution, wind-
ing-up or liquidation of Buyer or any of its Subsidi-
aries or, if a Guarantee Effectiveness Event shall have
occurred, a Buyer Guarantor, if any petition for any
such relief shall be filed against Buyer or a Subsid-
iary of Buyer or, if a Guarantee Effectiveness Event
133
<PAGE>
shall have occurred, a Buyer Guarantor, and such peti-
tion shall not be dismissed within 90 days; or
(g) if a final judgment or judgments shall be
rendered against Buyer or any of its Subsidiaries or,
if a Guarantee Effectiveness Event shall have occurred,
a Buyer Guarantor, for the payment of money in excess
of $1 million ($2 million in the case of a Buyer
Guarantor) in the aggregate and any one of such
judgments shall not be discharged or execution thereon
stayed pending appeal, within 60 days after entry
thereof, or, in the event of such a stay, such judgment
shall not be discharged within 60 days after such stay
expires; or
(h) if a Guarantee Effectiveness Event shall have
occurred, at any time after delivery of the Kansa Buyer
Guarantee when the Consolidated Net Worth of Buyer is
less than $10 million or after the delivery of the
Overall Buyer Guarantee, neither Buyer Guarantor has,
or both together do not have, a Consolidated Net Worth
in excess of $50 million then, (x) upon the occurrence
-
of any Event of Default described in subdivision (e) or
(f) of this Section 12.1 the entire unpaid amount owed
to Seller pursuant to Section 1.4 hereof shall automat-
ically become due and payable or (y) upon the occur-
-
134
<PAGE>
rence of any other Event of Default, Seller may at any
time (unless all defaults shall theretofore have been
remedied) at its option, by written notice or notices
to Buyer, declare the entire unpaid amount owed to
Seller pursuant to Section 1.4 hereof to be due and
payable, whereupon the same shall forthwith mature and
become due and payable.
12.2. Remedies on Default, etc. In case any one
------------------------
or more Events of Default or Potential Events of Default
shall occur and be continuing, unless (in the case of a
Potential Event of Default) Buyer is diligently and in good
faith attempting to remedy such Potential Event of Default,
Seller may proceed to protect and enforce its rights by an
action at law, suit in equity or other appropriate proceed-
ing, whether for the specific performance of any agreement
contained herein, or for an injunction against a violation
of any of the terms hereof or thereof, or in aid of the
exercise of any power granted hereby or thereby or by law or
otherwise. In any case to which the preceding sentence is
applicable, Buyer will pay to Seller such further amount as
shall be sufficient to cover its costs and expenses, includ-
ing without limitation, reasonable attorneys' fees, expenses
and disbursements and costs and expenses of collection,
incurred in connection therewith. No course of dealing and
135
<PAGE>
no delay on the part of Seller in exercising any right,
power or remedy shall operate as a waiver thereof or other-
wise prejudice such holder's rights, powers or remedies. No
right, power or remedy conferred by this Agreement upon
Seller shall be exclusive of any other right, power or reme-
dy referred to herein or now or hereafter available at law,
in equity, by statute or otherwise.
12.3. Cure of Defaults. (a) If the Buyer Guar-
----------------
antors shall have delivered to Seller an Overall Buyer Guar-
antee, any breach of the covenants contained in Sec-
tions 10.4, 10.9, 10.10, 10.11, 10.12 and, to the extent
that the covenants in Section 10.14 require action by per-
sons other than Buyer and its Subsidiaries, 10.14, and any
breach of any covenant which does not result from action or
intentional inaction by Buyer or any Subsidiary, that is
then in existence or thereafter may occur shall, unless the
obligations of Buyer under Section 1.4 hereof shall have
been accelerated pursuant to Section 12.1 hereof prior to
delivery to Seller of an Overall Buyer Guarantee, be deemed
to have been cured. To the extent that a Buyer Guarantor
has a Consolidated Net Worth in excess of $50 million, any
event with respect to the other Buyer Guarantor that other-
wise would constitute an Event of Default under Sec-
tion 12.1(d) or (g) shall be deemed to have been cured.
136
<PAGE>
(b) If Buyer shall have delivered the Financial
Guarantee to Seller prior to the acceleration, pursuant to
Section 12.1, of the obligations of Buyer under Section 1.4
hereof, any Event of Default or Potential Event of Default
that is in existence at the time of such delivery or that
thereafter may occur (other than failure to pay the Deferred
Purchase Price on the fifth anniversary of the Closing Date)
shall be deemed for all purposes to have been cured.
ARTICLE XIII
GENERAL PROVISIONS
13.1. Notices. All notices and other communica-
-------
tions hereunder shall be in writing and shall be deemed
given if delivered personally or transmitted by telex, tele-
copy (if receipt is confirmed) or mailed by registered or
certified mail (return receipt requested) to the persons at
the following addresses (or at such other address for a
party as shall be specified by like notice):
(a) If to Buyer:
Fairfax Financial Holdings Limited
Suite 800
95 Wellington Street West
Toronto, Ontario, Canada M5J 2N7
Attention: Prem Watsa
Markel Corporation
5310 Markel Road
Richmond, Virginia 23230
Attention: Steven A. Markel
137
<PAGE>
with copies to:
Tory, Tory, DesLauriers & Binnington
Suite 3200
IBM Tower
Toronto Dominion Center
Toronto, Ontario M5K 1N2
Attention: Eric P. Salsberg
McGuire, Woods, Battl & Boothe
One James Center
Richmond, Virginia 23219
Attention: Leslie A. Grandis
(b) If to Seller:
Alexander & Alexander Inc.
300 East Joppa Road
Baltimore, Maryland 21204
Attention: Controller
with a copy to:
Alexander & Alexander Inc.
1211 Avenue of the Americas
New York, New York 10036
Attention: General Counsel
A notice shall be deemed to be delivered (a) in the case of
-
personal delivery, on the date of delivery, (b) in the case
-
of telex or telecopy, on the date of confirmation of receipt
and (c) in the case of registered or certified mail, on the
-
date shown on the receipt.
13.2. Fees and Expenses. Each of the parties
-----------------
hereto shall pay its own expenses incurred in connection
with the preparation, negotiation, execution, delivery and
consummation of this Agreement.
138
<PAGE>
13.3. Public Announcements. Buyer and Seller
--------------------
shall consult with each other before issuing any press re-
lease with respect to this Agreement or the transactions
contemplated hereby.
13.4. Interpretation. The headings contained in
--------------
this Agreement are for reference purposes only and shall not
affect the meaning or interpretation of this Agreement.
Terms such as "herein", "hereof" and "hereinafter" refer to
this Agreement as a whole and not to the particular sentence
or paragraph where they appear, unless the context otherwise
requires. Terms used in the plural include the singular,
and vice versa, unless the context otherwise requires.
13.5. 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.
13.6. Miscellaneous. This Agreement (i) consti-
------------- -
tutes the entire agreement and supersedes all other prior
agreements and understandings, both written and oral, among
the parties, or any of them, with respect to the subject
matter hereof; (ii) except as expressly stated herein, is
--
not intended to and shall not confer upon any other person
any rights or remedies hereunder or otherwise with respect
to the subject matter hereof; (iii) shall not be assigned by
---
139
<PAGE>
operation of law or otherwise; and (iv) shall be governed in
--
all respects, including validity, interpretation and effect
by the laws of the State of New York.
13.7. Survival. No investigation by the parties
--------
made heretofore or hereafter shall affect the representa-
tions and warranties of the parties contained herein. The
representations and warranties of Seller shall survive such
investigation and the Closing (a) in the case of the repre-
-
sentations and warranties contained in Sections 2.1 through
2.8 inclusive and 2.36, until the Payment Date, (b) in the
-
case of representations and warranties with respect to Taxes
paid or payable by SMCO, ESI, EIC and ICE and liabilities in
respect thereof, for the period during which an assessment
or reassessment may be made in respect thereof, (c) in the
-
case of the representation and warranty contained in Sec-
tion 2.37, until April 30, 2000, and (d) in the case of all
-
other representations and warranties, for a period of two
years following the Closing and, in each case, if notice of
a breach thereof shall have been received by Seller from
Buyer during the applicable survival period, until such
alleged breach has been resolved or settled. Each represen-
tation and warranty of Buyer shall survive such investiga-
tion and the Closing until the Deferred Purchase Price shall
have been paid in full, and, if notice of a breach of a
140
<PAGE>
representation or warranty shall have been received by Buyer
from Seller prior to payment in full of the Deferred Pur-
chase Price, such representation and warranty shall survive
until such alleged breach has been resolved or settled.
13.8. Knowledge. Any provision in Article II
---------
referring to the knowledge of Seller also shall be deemed to
refer to the knowledge of A&A. Any provision in Article III
referring to the knowledge of Buyer also shall be deemed to
refer to the knowledge of each of the Buyer Guarantors.
13.9. Arbitration. (a) Any dispute arising in
-----------
respect of the terms hereof or in any manner related hereto
(except as provided in Section 11.3) shall be settled by
arbitration in accordance with the rules of the American
Arbitration Association and judgment upon the award rendered
by the arbitrators may be rendered in any court having ju-
risdiction thereof.
(b) Arbitration hereunder shall be by a single
arbitrator appointed by agreement between the parties. If
the parties fail to agree to such appointment within 15 days
following the delivery by one party to the other of a writ-
ten notice requesting concurrence in a proposed appointment,
then either party may notify the other party that it is
requesting a panel of three arbitrators. In such event each
party shall select one arbitrator within 21 days of receipt
141
<PAGE>
of such notice requesting a panel. In default of such se-
lection by either party, the arbitrator (if any) appointed
by the other party shall be the sole arbitrator hereunder.
If both parties have made a selection, those arbitrators so
selected shall agree on the third arbitrator within 30 days
following the date on which the last of the two was selected
as an arbitrator. Should the two arbitrators fail within
this time limit to reach an agreement on the third arbitra-
tor, the third arbitrator shall be appointed by the Presi-
dent of the American Arbitration Association in accordance
with its rules. Such third arbitrator shall act as Chair-
man.
(c) Any arbitration proceeding shall take place
in New York City and any arbitration award shall be final
and binding on the parties.
(d) The arbitrators shall designate the party or
parties to bear the expense of the arbitration and the
amount to be borne by each.
(e) None of the parties shall cease or suspend or
otherwise hinder the continuing performance of its respec-
tive obligations hereunder pending any reference to arbitra-
tion but shall continue to perform the same fully.
13.10. Deemed Obligations of Buyer. To the ex-
---------------------------
tent that this Agreement imposes any obligations on SMCO,
142
<PAGE>
ESI, EIC or ICE after the Closing Date, such obligations
shall be deemed to be obligations of Buyer.
IN WITNESS WHEREOF, the parties hereto have caused
this Agreement to be executed by their duly authorized offi-
cers.
F-M ACQUISITION CORPORATION
By /s/ S. A. Markel
----------------------------
Title: President
ALEXANDER & ALEXANDER INC.
By /s/ J. B. Lockhart III
----------------------------
Title: Vice President and
Treasurer
143
<PAGE>
EXHIBIT A
TAX ALLOCATION AGREEMENT
------------------------
AGREEMENT between ALEXANDER & ALEXANDER SERVICES
INC., a Maryland corporation having its principal place of
business located at 1211 Avenue of the Americas, New York,
New York, and ALEXANDER & ALEXANDER INC., a Maryland corpo-
ration having its principal place of business located at 300
East Joppa Road, Baltimore, Maryland (hereinafter together
and individually referred to as the "Parent"), and SHAND,
MORAHAN & COMPANY, INC., an Illinois corporation having its
principal place of business located at Shand Morahan Plaza,
Evanston, Illinois (hereinafter referred to as the "Subsid-
iary").
WHEREAS, Subsidiary was a member of the Parent's
affiliated group as defined in section 1504 of the Internal
Revenue Code of 1986, as amended (the "Code") on January 1,
1987 and will consolidate with the Parent for purposes of
filing Federal consolidated income tax returns ("Consolidat-
ed Return") and is expected to be combined with the Parent
for purposes of filing Illinois combined income and replace-
ment tax returns ("Combined Return") for tax periods begin-
ning after December 31, 1986 and ending when Subsidiary
ceases to be a member of the Parent's affiliated group; and
A-1
<PAGE>
WHEREAS, Parent and Subsidiary desire to execute
this Agreement, effective for all tax returns for taxable
years beginning after December 31, 1986.
NOW, THEREFORE, in order to calculate Subsidiary's
allocable share of Parent's Federal consolidated income tax
liability and Illinois combined income and replacement tax
liability for tax periods beginning after December 31, 1986,
the parties hereto agree as follows:
SECTION 1. Definitions and Payment of Federal Consolidated
-----------------------------------------------
Income Tax Liability and Illinois Combined
------------------------------------------
Income and Replacement Tax Liability.
------------------------------------
(a) General Rule. On the filing of a Consolidated
------------
Return or a Combined Return by the Parent for any tax period
beginning after December 31, 1986, the tax liabilities shall
be allocated and borne by the parties hereto in accordance
with this Agreement. This Agreement shall not apply to the
extent Subsidiary is not included in a Consolidated Return
or a Combined Return of the Parent.
(b) Disbursing Agent. Upon receipt of the payments
----------------
provided for in Section 2 and subsection (c) of this Section
1, Parent, acting as disbursing agent for Subsidiary, shall
pay the amount due the Internal Revenue Service or Illinois
Department of Revenue on account of any Federal consolidated
income tax or Illinois combined income and replacement tax
A-2
<PAGE>
for such tax period and shall pay or credit any refunds to
Subsidiary as required by Section 4.
(c) Determination of Payment and Disbursement. The
-----------------------------------------
amount of payments and disbursements provided for in this
Agreement shall be made quarterly on the basis of estimates
of taxable income and Tax Credits and shall be adjusted as
provided in Section 4(b). Such quarterly installments shall
be on a basis consistent with that adopted by Parent for
payment of estimated Federal consolidated income tax to the
Internal Revenue Service and estimated Illinois combined
income and replacement tax to the Illinois Department of
Revenue, and all amounts due Parent shall be paid no later
than one day prior to the due date of Parent's estimated tax
payment. Parent shall be responsible for any failure to
remit the Subsidiary's payments on a timely basis.
(d) Definitions.
-----------
1. The term "Separate Return Tax Liability"
means the Subsidiary's aggregate Federal income tax liabili-
ty (including alternative minimum tax and any tax on the
deferred intercompany gain recognized with respect to the
sale of Shand Morahan Plaza in 1985) and Illinois income and
replacement tax liability (each after available Tax Credits)
computed in the manner that Subsidiary would use in filing
an Illinois income and replacement tax return reflecting the
A-3
<PAGE>
application of Subsidiary's Apportionment Factor to the
unitary group's Illinois taxable income and a separate Fed-
eral income tax return except that: (i) all Federal taxable
-
income with the exception of net capital gains (as defined
in section 1222(11) of the Code) of Subsidiary will be taxed
at the highest marginal corporate tax rate, as specified in
section 11 of the Code (taking into account section 15 of
the Code), and (ii) Illinois taxes shall be computed at the
--
Illinois flat income and replacement tax rates (provided a
Combined Return is filed including Subsidiary) and (iii) any
---
taxable income, gain, loss or deduction that prior to July
1, 1987 is generated by or related to the safe harbor leases
under which Subsidiary is the tax lessor (the "Safe Harbor
Leases") shall be omitted.
2. The term "Subsidiary's Apportionment Factor"
means the average of the ratios, as provided by Illinois tax
law, of the Subsidiary's gross receipts within Illinois to
the aggregate gross receipts of the unitary group, the Sub-
sidiary's property within Illinois to the aggregate property
of the unitary group and the Subsidiary's payroll within
Illinois to the aggregate payroll of the unitary group. Any
receipts and property related to the Safe Harbor Leases
shall be excluded in determining the Subsidiary's Apportion-
ment Factor for any period prior to July 1, 1987.
A-4
<PAGE>
3. The term "Tax Credits" means any credit
against tax liability permitted under the Code or the tax
statutes of Illinois.
SECTION 2. Determination of Liabilities.
----------------------------
(a) General Rule. The Parent shall compute Subsid-
------------
iary's Separate Return Tax Liability. The amount of tax so
computed shall be paid by Subsidiary to the Parent, less the
amount of any adjustment under Section 4.
(b) In computing Subsidiary's Separate Return Tax
Liability under subsection (a), any net operating loss car-
ryover, capital loss carryover, excess charitable contribu-
tion deduction carryover, or any similar carryover existing
at January 1, 1987 (other than a carryover generated by or
related to the Safe Harbor Leases and other than Tax Credits
and charitable contribution deductions generated by Subsid-
iary in tax years ending before January 1, 1987) shall, to
the extent utilized in Parent's Consolidated Return or Com-
bined Return, be given effect.
(c) Parent shall determine the Federal consolidated
and combined Illinois income and replacement tax liabilities
and submit all appropriate returns and tax payments in a
manner determined by the Parent.
A-5
<PAGE>
SECTION 3. Use of Tax Credits.
------------------
Subsidiary shall be entitled to the benefit of Tax
Credits generated by it after December 31, 1986 and during
the period Subsidiary is included in a Consolidated Return
or a Combined Return with Parent.
SECTION 4. Refund or Adjustment of Tax.
---------------------------
(a) Tax Previously Paid.
-------------------
1. Cash Refund. Except as provided in paragraph
-----------
(2), Subsidiary shall be entitled to a refund, computed as
provided in paragraph (3), of tax previously paid to the
Parent (pursuant to the terms of this Agreement or any
formal or informal tax sharing arrangement existing between
Parent and Subsidiary for taxable years ending prior to
January 1, 1987) if in any tax period subject to this Agree-
ment it sustains a net operating loss, has unused Tax Cred-
its, or has unused deductions, which may be carried back on
a Separate Return Tax Liability basis to a tax period ending
prior to January 1, 1987 under applicable provisions of the
Code or the Illinois tax statutes.
2. Deduction Against Current Tax. If Subsidiary
-----------------------------
has a current Separate Return Tax Liability payable to the
Parent, the amount of refund determined under paragraph (1)
shall be deducted from such tax liability and only the ex-
A-6
<PAGE>
cess of such tax liability over the amount of such deduction
shall be paid to the Parent.
3. Basis of Computation of Amount of Refund or
-------------------------------------------
Adjustment. Subsidiary's Separate Return Tax Liability for
----------
the year to which a net operating loss, Tax Credit or unused
deduction is carried back shall be recomputed both with and
without such carryback and excluding in computing
Subsidiary's Separate Return Tax Liability any items gener-
ated by or related to the Safe Harbor Leases. The excess of
such Separate Return Tax Liability recomputed without such
carryback over such Separate Return Liability computed with
such carryback will be refunded to Subsidiary.
(b) Adjustment of Separate Return Tax Liability. The
-------------------------------------------
amounts payable to the Parent or Subsidiary under the provi-
sions of this Agreement shall be adjusted:
(1) quarterly to reflect the then estimate of
Subsidiary's Separate Return Tax Liability subject to this
Agreement for the taxable period involved and all prior
payments by Subsidiary with respect to such period,
(2) upon the filing of Parent's Consolidated
Return or Combined Return for the taxable period involved,
(3) upon receipt of a statutory notice of defi-
ciency or other notice of or consent to audit adjustment
(favorable or unfavorable) if the Parent determines that
A-7
<PAGE>
such deficiency or adjustment shall be paid or accepted for
taxable periods ending after December 31, 1986,
(4) upon final determination of the Federal con-
solidated and Illinois combined income and replacement tax
liabilities of the Parent for such period, and
(5) to include any interest, penalties, or other
additions to tax related to such amounts.
Any adjustments required to be made shall be treated on a
basis consistent with the provisions of this Agreement.
SECTION 5. Effective Date.
--------------
The parties agree that the provisions of this
Agreement shall be effective for taxable years beginning
after December 31, 1986 (and for earlier years as provided
for example in Section 4(a)) and for each taxable year
A-8
<PAGE>
thereafter in which Subsidiary is included in a Consolidated
Return or a Combined Return of Parent.
IN WITNESS WHEREOF, the parties hereto have caused
this Agreement to be duly executed and attested all as of
the day of December, 1987.
----
ALEXANDER & ALEXANDER
---------------------
SERVICES INC.
------------
By
---------------------------
Title:
ALEXANDER & ALEXANDER INC.
--------------------------
By
---------------------------
Title:
SHAND, MORAHAN & COMPANY, INC.
-----------------------------
By
---------------------------
Title:
A-9
<PAGE>
EXHIBIT B
TERMS OF SHAND MORAHAN PLAZA AGREEMENT
Until December 31, 2010, on each date on which
rental payments are payable by SMCO under its lease of Shand
Morahan Plaza, if the difference between (a) the rent
-
payable under such lease and (b) the rent that would be
-
payable if such rent were computed at a rate per annum of
$13.00 per square foot (with an escalator of 4% per annum
and with such escalator taking effect beginning with the
computation with respect to the first rental payment due in
1989) is positive, Seller will pay or cause to be paid such
difference to the bank account of SMCO's lessor, and if such
difference is negative, Buyer will pay or cause to be paid
the absolute value of such difference to Seller. Buyer will
have the option, on each March 1 and September 1, to require
the Building's owner to sell, and Seller will have the
option, on each March 1 and September 1 beginning September
1, 1995, to require Buyer to buy, the owner's interest in
the Building, free and clear of all liens and encumbrances
except for the existing mortgage, liens and encumbrances in
respect of obligations or actions of SMCO or Buyer, and
other liens and encumbrances not materially adversely
affecting title to the property and the intended use
thereof, at an amount equal to the greater of (i) the then
-
outstanding amount of the existing mortgage on the Building
and (ii) the depreciated book value of such interest for
--
accounting purposes, determined in accordance with generally
accepted accounting principles, on the books of such owner,
provided that in connection with the sale or purchase of the
--------
owner's interest in the Building, (x) if the sale is
-
required by Buyer, either (1) A&A and its affiliates must be
-
released from any guarantees in respect of the lease or the
existing financing of the Building, or (2) if the sale is
-
required by Buyer on or after January 1, 1996 Fairfax and
Market will provide A&A and affiliates with a financial
guaranty in form and scope reasonably satisfactory to A&A
from a bank or financial institution rated AA or better by
Standard & Poor's Corporation (or receiving a comparable
rating from a comparable rating agency) and (y) if the
-
purchase is required by Seller, either A&A and its
affiliates will be released from any such guarantees or
Fairfax and Markel will provide A&A with a financial
guaranty, reasonably satisfactory to A&A as to the guarantor
and the scope and form of the guarantee, with respect to the
lease and the existing financing, provided that such
--------
guarantee, if it is to be provided by a third party, can be
obtained at reasonable cost. All subleases of space in the
Building by SMCO will be for SMCO's own account. SMCO shall
continue to enjoy all existing rights under the lease.
B-1
<PAGE>
EXHIBIT E
[A&A Guarantee]
ALEXANDER & ALEXANDER SERVICES INC.
=====================
GUARANTEE AGREEMENT
=====================
Dated as of October 1, 1987
<PAGE>
EXHIBIT E
GUARANTEE AGREEMENT
GUARANTEE AGREEMENT (the "Agreement"), dated as of
December , 1987, from ALEXANDER & ALEXANDER SERVICES INC.,
--
a Maryland corporation ("Guarantor"), to and in favor of F-M
ACQUISITION CORPORATION, an Illinois corporation ("F-M") and
the other BUYER AFFILIATES (as such term is hereinafter
defined).
R E C I T A L S:
- - - - - - - -
A. Pursuant to a Stock Purchase Agreement, dated
as of October 7, 1987 (the "Stock Purchase Agreement")
between F-M and Alexander & Alexander Inc., a Maryland
corporation ("A&A"), F-M has agreed to buy from A&A all of
the outstanding shares of capital stock (the "SMCO Shares")
of Shand, Morahan & Company, Inc., and A&A has agreed, among
other things, to indemnify F-M and the other Buyer
Affiliates (as such term is defined in Section 8.1 of the
Stock Purchase Agreement) with respect to certain matters.
Capitalized terms used and not otherwise defined herein have
the meanings specified in the Stock Purchase Agreement.
B. Guarantor will derive direct and substantial
benefit from the sale of the SMCO Shares by A&A under the
Stock Purchase Agreement.
C. F-M is not willing to purchase the SMCO Shares
unless Guarantor enters into this Agreement.
NOW, THEREFORE, to induce F-M to purchase the SMCO
Shares from A&A, Guarantor agrees as follows:
1. Guarantee. Guarantor irrevocably guarantees
---------
the timely payment and performance in full of the following
obligations (the "Obligations"): all amounts owed by A&A to
F-M or to any other Buyer Affiliate under the Stock Purchase
Agreement and any other agreements executed pursuant or
incidental to the Stock Purchase Agreement (collectively the
"Stock Purchase Documents") and the performance by A&A of
all of its obligations under the Stock Purchase Agreement
and the other Stock Purchase Documents.
2. Obligations Hereunder. This Guarantee shall
---------------------
be irrevocable and shall continue in full force and effect
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<PAGE>
as the separate and independent undertaking of Guarantor.
If, for any reason, the Obligations of A&A to be paid or
performed under the Stock Purchase Agreement or any other
Stock Purchase Document shall not be paid or performed
promptly at the time set forth in the Stock Purchase
Agreement or any other Stock Purchase Document for the
payment or performance thereof (including any applicable
grace or cure periods), Guarantor will immediately make such
payment or perform such obligation as provided in the Stock
Purchase Agreement or any other Stock Purchase Document,
subject to any defenses or rights of setoff or counterclaim
which A&A may have or assert but regardless of whether any
Buyer Affiliate shall have taken any steps to enforce any
rights against A&A or any other person to collect such sums
or any part thereof or with respect to any collateral.
Payments to any Buyer Affiliate under this Guarantee shall
be made in immediately available funds in lawful money of
the United States of America and shall be paid immediately
on the date on which such payments become due under the
Stock Purchase Agreement or any other Stock Purchase
Document (including any applicable grace period), at c/o
Markel Corporation, 5310 Markel Road, Richmond, Virginia
23230, or such other place in the United States as may be
designated by notice to Guarantor. The Obligations of
Guarantor under this Guarantee shall remain in full force
and effect without regard to, and shall not be released,
discharged or terminated by, any circumstance or condition
(whether or not Guarantor shall have notice or knowledge
thereof), including, without limitation:
(a) any amendment or modification of or addition
or supplement to the Stock Purchase Agreement or any
other Stock Purchase Document;
(b) any waiver, compromise, release, consent,
extension, indulgence or other action or inaction in
respect of the documents referred to in clause (a)
above;
(c) any failure, omission or delay on the part of
any Buyer Affiliate or any successor in interest
thereto to enforce, assert or exercise any right, power
or remedy conferred on or available to any Buyer
Affiliate or any successor in interest thereto;
(d) any default by A&A or Guarantor under the
documents referred to in clause (a) above;
E-2
<PAGE>
(e) any exercise or non-exercise of any right,
remedy, power or privilege under or in respect of this
Guarantee and the documents referred to in clause (a)
above;
(f) any furnishing or acceptance of additional
security, or any release, substitution or exchange of
any security for the Obligations;
(g) any failure to give notice to Guarantor of
the occurrence of a breach or default by A&A under the
Stock Purchase Agreement or any other Stock Purchase
Document;
(h) any assignment or transfer of any assets of
A&A to any other person or corporation or other entity,
or any disposition by Guarantor or any other
stockholder of A&A of any stock or other interest in
Buyer;
(i) any bankruptcy, insolvency, reorganization,
arrangement, adjustment, composition, liquidation,
dissolution or similar proceeding involving or
affecting A&A or any discharge of A&A therein;
(j) any partial prepayment, or any assignment or
transfer, of any portion of the Obligations; or
(k) any other circumstance or occurrence
whatsoever, whether similar or dissimilar to the
foregoing, which might otherwise constitute a legal or
equitable defense or discharge of the liabilities of
Guarantor hereunder or which might otherwise limit
recourse against Guarantor.
3. Waivers. Guarantor unconditionally waives:
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(a) notice of any of the matters referred to in
section 2;
(b) all notices which may be required by statute,
rule or law or otherwise to preserve any rights of any
Buyer Affiliate or any successor to any Buyer Affiliate
against A&A or Guarantor, including, without
limitation, notice of default, presentment and demand
for payment and protest for non-payment or dishonor;
E-3
<PAGE>
(c) any right to the enforcement, assertion or
exercise of any right, remedy, power or privilege by
any Buyer Affiliate under or in respect of the Stock
Purchase Agreement or any other Stock Purchase
Document;
(d) any right to require any Buyer Affiliate or
any successor to a Buyer Affiliate to proceed against
A&A or any other person, or to proceed against or
exhaust any security granted to secure the Obligations,
or to pursue any other remedy;
(e) any requirement of diligence; and
(f) any notice of the acceptance of this
Guarantee.
4. Right to Proceed Against Guarantor. Upon any
----------------------------------
default in the payment or performance of the Obligations by
A&A (after any applicable grace or cure period), the
obligation of Guarantor to make such payment or perform such
obligation hereunder shall be effective immediately without
notice. Any Buyer Affiliate, in its sole discretion, shall
have the right to proceed first and directly against
Guarantor under this Guarantee without proceeding against or
exhausting any other remedies which it may have and without
resorting to any other security held by any Buyer Affiliate.
5. Reinstatement. The obligations of the
-------------
Guarantor under this Guarantee shall continue to be
effective or be automatically reinstated, as the case may
be, if any payment made with respect to the Obligations when
due according to the terms of the Stock Purchase Agreement
or any other Stock Purchase Documents or this Guarantee is
rescinded or must otherwise be restored or returned by the
recipient upon the insolvency, bankruptcy, dissolution,
liquidation or reorganization of A&A or Guarantor, or upon
or as a result of the appointment of a custodian, receiver,
trustee or other officer with similar powers with respect to
A&A or Guarantor or any substantial part of the property of
either, or otherwise, all as though such payment had not
been made.
6. Subordination. Guarantor hereby absolutely
-------------
subordinates, both in right of payment and in time of
payment, any present and any future indebtedness of A&A to
Guarantor to the indebtedness of A&A to the Buyer Affiliates
and any successors in interest to the Buyer Affiliates.
E-4
<PAGE>
Notwithstanding any payment made by Guarantor hereunder,
Guarantor shall not be entitled to be subrogated to any
rights of the Buyer Affiliates or any successor to the Buyer
Affiliates until the payment in full of the principal and
interest of the Obligations and the performance of all of
A&A's other obligations under the Stock Purchase Agreement
and the other Stock Purchase Documents.
7. Enforcement. (a) The Buyer Affiliates and
-----------
the successors to the Buyer Affiliates may enforce this
Guarantee in their own names or otherwise, either by action
at law, suit in equity or other proceeding, and it shall not
be necessary to make A&A a party to any such action, suit or
proceeding. Guarantor stipulates that the remedies at law
in respect of any default or threatened default by Guarantor
in the performance of or compliance with any of the terms of
this Guarantee are not and will not be adequate, and that
any of such terms may be specifically enforced by a decree
for specific performance or by an injunction against
violation of any of such terms or otherwise.
(b) A separate action may be brought against
Guarantor whether or not an action is commenced against A&A.
(c) Guarantor will pay all fees (including,
without limitation, reasonable attorneys' fees), costs and
expenses of any nature whatsoever incurred by any Buyer
Affiliate or any successor to the Buyer Affiliates in
connection with enforcing this Guarantee.
8. Termination. Except as provided in section 5
-----------
hereof, the obligations of Guarantor under this Guarantee
shall terminate upon the payment and performance in full by
A&A of all of the Obligations.
9. Representations. Guarantor represents that
---------------
(a) it is a corporation duly organized, validly existing and
-
in good standing under the laws of its jurisdiction of
incorporation and has the corporate power and authority to
execute and deliver this Agreement, (b) the execution and
-
delivery of this Agreement has been duly authorized by its
Board of Directors, no other corporate authorization being
necessary on its part, (c) this Agreement has been duly
-
executed and delivered by it and constitutes its valid and
binding agreement and (d) the execution and delivery of this
-
Agreement will not violate any provisions of its Articles of
Incorporation or By-laws.
E-5
<PAGE>
10. Covenants. Guarantor agrees that it will
---------
comply with the following covenants:
(a) Guarantor will not directly or indirectly,
(i) consolidate with or merge into any other
Person or permit any other Person to consolidate
with or merge into it; or
(ii) sell, transfer, lease, abandon or
otherwise dispose of all or substantially all its
property, assets and undertakings;
provided that Guarantor may consolidate with or merge
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into another corporation, and another corporation may
be merged into it, if the surviving corporation,
immediately after giving effect to such transaction,
shall have a Consolidated Net Worth at least equal to
Guarantor's Consolidated Net Worth immediately prior to
giving effect to such transaction, and if such
surviving corporation shall assume, in a manner and in
form and substance reasonably satisfactory to F-M,
Guarantor's obligations hereunder.
(b) Guarantor will deliver (in duplicate) to you:
(i) within 45 days after the end of each of
the first three quarterly fiscal periods in each
of its fiscal years, consolidated balance sheets
of Guarantor and its Subsidiaries as at the end of
such period and the related consolidated
statements of income, stockholders' equity and
changes in financial position of Guarantor and its
Subsidiaries for such period and (in the case of
the second and third quarterly periods) for the
period from the beginning of the current fiscal
year to the end of such quarterly period, setting
forth in each case in comparative form the
consolidated figures for the corresponding periods
of the previous fiscal year, all in reasonable
detail and certified as complete and correct by a
principal financial officer of Guarantor;
(ii) within 90 days after the end of each of
its fiscal years, consolidated balance sheets of
Guarantor and its Subsidiaries as at the end of
such year and the related consolidated statements
of income, stockholders' equity and changes in
E-6
<PAGE>
financial position of Guarantor and its
Subsidiaries for such fiscal year, setting forth
in each case in comparative form the consolidated
figures for the previous fiscal year, all in
reasonable detail, accompanied by a report thereon
of independent certified public accountants of
recognized national standing selected by it, which
report shall state that such consolidated
financial statements present fairly the financial
position of Guarantor and its Subsidiaries as at
the dates indicated and the results of their
operations and changes in their financial position
for the periods indicated in conformity with
generally accepted accounting principles applied
on a basis consistent with prior years (except as
otherwise specified in such report) and that the
audit by such accountants in connection with such
consolidated financial statements has been made in
accordance with generally accepted auditing
standards.
11. Notices. All notices hereunder shall be
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personally delivered or sent by prepaid certified or
registered mail, return receipt requested, (i) if to
-
Guarantor, to Alexander & Alexander Services Inc., 1211
Avenue of the Americas, New York, New York 10036, to the
attention of general counsel, and (ii) if to any Buyer
--
Affiliate, to Fairfax Financial Holdings Limited, Suite 800,
900 Wellington Street West, Toronto, Ontario, Canada M5J
2N7, to the attention of V. Prem Watsa, and to Markel
Corporation, 4551 Cox Road, Richmond, Virginia 23260, to the
attention of Steven A. Markel, or at such other address as
may be specified by written notice to each other party.
12. Jurisdiction. Guarantor irrevocably and
------------
unconditionally (a) submits itself to the non-exclusive
-
jurisdiction of courts of the State of New York and the
federal courts of the Southern District of New York with
respect to any action, suit or proceeding arising out of or
relating to this Agreement or for the recognition or
enforcement of any judgment in respect thereof, (b) waives
-
any objection to the venue of any such action, suit or
proceeding in such court and (c) agrees that service upon it
-
in the manner provided for notice in Section 11 shall
constitute valid and effective service with respect to any
such action, suit or proceeding.
E-7
<PAGE>
13. Miscellaneous. If any term of this Guarantee
-------------
or any application thereof shall be invalid, illegal or
unenforceable, the remainder of this Guarantee and any other
application of such term shall not be affected thereby. No
delay or omission in exercising any right hereunder shall
operate as a waiver of such right or any other right. This
Guarantee shall be binding upon, inure to the benefit of and
be enforceable by Guarantor, F-M and the other Buyer
Affiliates, and their respective successors and assigns.
This Guarantee shall be governed and construed in accordance
with the laws of the State of New York.
IN WITNESS WHEREOF, Guarantor has caused this
Guarantee to be duly executed as of the day and year first
above written.
ALEXANDER & ALEXANDER SERVICES INC.
By:
--------------------------
James B. Lockhart III
Vice President and Treasurer
E-8
<PAGE>
EXHIBIT I
[Non-Contingent
Buyer Guarantee]
=========================================================
FAIRFAX FINANCIAL HOLDINGS LIMITED
MARKEL CORPORATION
====================
GUARANTEE AGREEMENT
====================
Dated as of __________________ __, 1987
=========================================================
<PAGE>
EXHIBIT I
GUARANTEE AGREEMENT
GUARANTEE AGREEMENT (the "Agreement"), dated as of
December , 1987, from FAIRFAX FINANCIAL HOLDINGS LIMITED,
--
a Canada corporation, and MARKEL CORPORATION, a Virginia
corporation (together, the "Guarantors"), to and in favor of
ALEXANDER & ALEXANDER, INC., a Maryland corporation ("A&A").
R E C I T A L S:
- - - - - - - -
A. Pursuant to a Stock Purchase Agreement, dated
as of October 7, 1987 (the "Stock Purchase Agreement")
between A&A and F-M Acquisition Corporation, an Illinois
corporation ("Buyer"), A&A has agreed to sell to Buyer all
of the outstanding shares of capital stock (the "SMCO
Shares") of Shand, Morahan & Company, Inc. Capitalized
terms used and not otherwise defined herein have the
meanings specified in the Stock Purchase Agreement.
B. Guarantors will derive direct and substantial
benefit from the purchase of the SMCO Shares by Buyer.
C. The purchase price for the SMCO Shares
consists of an immediately payable component and two
deferred components, the Deferred Purchase Price.
D. A&A is not willing to sell the SMCO Shares to
Buyer unless the Guarantors enter into this Agreement.
NOW, THEREFORE, to induce A&A to sell the SMCO
Shares to Buyer, Guarantors agree as follows:
1. Guarantee. Guarantors, jointly and severally,
---------
irrevocably guarantee the timely payment in full of the
following obligations (the "Obligations"): all amounts due
and payable by Buyer and Seller pursuant to clauses (ii) and
(iv) of Section 1.4(a) of the Stock Purchase Agreement.
2. Obligations Hereunder. This Guarantee shall
---------------------
be irrevocable and shall continue in full force and effect
as the separate and independent undertaking of each
Guarantor. If, for any reason, the Obligations of Buyer to
be paid under the Stock Purchase Agreement shall not be paid
promptly at the time set forth in the Stock Purchase
Agreement for the payment thereof (including any applicable
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<PAGE>
grace or cure periods), Guarantors will immediately make
such payment to A&A as provided in the Stock Purchase
Agreement, subject to any defenses or rights of setoff or
counterclaim which Buyer may have or assert but regardless
of whether A&A shall have taken any steps to enforce any
rights against Buyer or any other Guarantor or any other
person to collect such sums or any part thereof or with
respect to any collateral. Payments to A&A under this
Guarantee shall be made in immediately available funds in
lawful money of the United States of America and shall be
paid immediately on the date on which such payments become
due under the Stock Purchase Agreement (including any
applicable grace period), whether at maturity, by
declaration or by acceleration, following the occurrence of
a default or otherwise, at 1211 Avenue of the Americas, New
York, New York. The obligations of Guarantors under this
Guarantee shall remain in full force and effect without
regard to, and shall not be released, discharged or
terminated by, any circumstance or condition (whether or not
Guarantors shall have notice or knowledge thereof),
including, without limitation:
(a) any amendment or modification of or addition
or supplement to the Stock Purchase Agreement or any
other agreements executed pursuant or incidental to the
Stock Purchase Agreement (collectively, the "Stock
Purchase Documents");
(b) any waiver, compromise, release, consent,
extension, indulgence or other action or inaction in
respect of the documents referred to in clause (a)
above;
(c) any failure, omission or delay on the part of
A&A or any successor in interest to A&A to enforce,
assert or exercise any right, power or remedy conferred
on or available to A&A or any successor in interest to
A&A;
(d) any default by Buyer or Guarantors under the
documents referred to in clause (a) above;
(e) any exercise or non-exercise of any right,
remedy, power or privilege under or in respect of this
Guarantee and the documents referred to in clause (a)
above;
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<PAGE>
(f) any furnishing or acceptance of additional
security, or any release, substitution or exchange of
any security for the Obligations;
(g) any failure to give notice to Guarantors (in
their capacity as Guarantors) of the occurrence of a
Potential Event of Default or Event of Default under
the Stock Purchase Agreement or any other Stock
Purchase Document;
(h) any assignment or transfer of any assets of
Buyer to any other person or corporation or other
entity, or any disposition by any Guarantor or any of
the other stockholders of Buyer of any stock or other
interest in Buyer;
(i) any bankruptcy, insolvency, reorganization,
arrangement, adjustment, composition, liquidation,
dissolution or similar proceeding involving or
affecting Buyer or any discharge of Buyer therein;
(j) any partial prepayment, or any assignment or
transfer, of any portion of the Obligations; or
(k) any other circumstance or occurrence
whatsoever, whether similar or dissimilar to the
foregoing, which might otherwise constitute a legal or
equitable defense or discharge of the liabilities of
Guarantors hereunder or which might otherwise limit
recourse against Guarantors.
3. Waivers. Guarantors unconditionally waive:
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(a) notice of any of the matters referred to in
section 2;
(b) all notices which may be required by statute,
rule or law or otherwise to preserve any rights of A&A
or any successor to A&A against Buyer or Guarantors,
including, without limitation, notice of default,
presentment and demand for payment and protest for non-
payment or dishonor;
(c) any right to the enforcement, assertion or
exercise of any right, remedy, power or privilege by
A&A under or in respect of the Stock Purchase Agreement
or any other Stock Purchase Document;
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<PAGE>
(d) any right to require A&A or any successor to
A&A to proceed against Buyer or any other person, or to
proceed against or exhaust any security granted to
secure the Obligations, or to pursue any other remedy;
(e) any requirement of diligence; and
(f) any notice of the acceptance of this
Guarantee.
4. Right to Proceed Against Guarantors. Upon any
-----------------------------------
default in the payment of the Obligations by Buyer (after
any applicable grace or cure period), the obligation of
Guarantor to make such payment hereunder shall be effective
immediately without notice. A&A, in its sole discretion,
shall have the right to proceed first and directly against
Guarantors under this Guarantee without proceeding against
or exhausting any other remedies which it may have and
without resorting to any other security held by A&A.
5. Reinstatement. The obligations of each
-------------
Guarantor under this Guarantee shall continue to be
effective or be automatically reinstated, as the case may
be, if any payment made with respect to the Obligations when
due or pursuant to acceleration according to the terms of
the Stock Purchase Agreement is rescinded or must otherwise
be restored or returned by the recipient upon the
insolvency, bankruptcy, dissolution, liquidation or
reorganization of Buyer or any other Guarantor, or upon or
as a result of the appointment of a custodian, receiver,
trustee or other officer with similar powers with respect to
Buyer or any other Guarantor or any substantial part of the
property of either, or otherwise, all as though such payment
had not been made. If an event permitting the acceleration
of the Obligations shall at any time have occurred and be
continuing, and such acceleration shall at such time be
prevented by reason of the pendency against Buyer of a case
or proceeding under a bankruptcy or insolvency law, each
Guarantor agrees that, for purposes of this Guarantee and
its obligations hereunder, the Obligations shall be deemed
to have been accelerated with the same effect as if
accelerated in accordance with the terms of the Stock
Purchase Agreement.
6. Subordination. Guarantors hereby absolutely
-------------
subordinate, both in right of payment and in time of
payment, any present and any future indebtedness of Buyer to
Guarantors to the indebtedness of Buyer to A&A and any
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<PAGE>
successors in interest to A&A. Notwithstanding any payment
made by Guarantors hereunder, Guarantors shall not be
entitled to be subrogated to any rights of A&A or any
successor to A&A until the payment in full of the principal
and interest of the Obligations.
7. Enforcement. (a) A&A and the successors to
-----------
A&A may enforce this Guarantee in their own names or
otherwise, either by action at law, suit in equity or other
proceeding, and it shall not be necessary to make Buyer a
party to any such action, suit or proceeding. Guarantors
stipulate that the remedies at law in respect of any default
or threatened default by Guarantors in the performance of or
compliance with any of the terms of this Guarantee are not
and will not be adequate, and that any of such terms may be
specifically enforced by a decree for specific performance
or by an injunction against violation of any of such terms
or otherwise.
(b) A separate action may be brought against
Guarantors whether or not an action is commenced against
Buyer.
(c) Guarantors will pay all fees (including,
without limitation, reasonable attorneys' fees), costs and
expenses of any nature whatsoever incurred by A&A or any
successor to A&A in connection with enforcing this
Guarantee.
8. Termination. Except as provided in section 5
-----------
hereof, the obligations of Guarantors under this Guarantee
shall terminate upon the payment in full to A&A of all of
the Obligations.
9. Representations. Each of Guarantors
---------------
represents that (a) it is a corporation duly organized,
-
validly existing and in good standing under the laws of its
jurisdiction of incorporation and has the corporate power
and authority to execute and deliver this Agreement, (b) the
-
execution and delivery of this Agreement has been duly
authorized by its Board of Directors, no other corporate
authorization being necessary on its part, (c) this
-
Agreement has been duly executed and delivered by it and
constitutes its valid and binding agreement and (d) the
-
execution and delivery of this Agreement will not violate
any provisions of its Articles of Incorporation or By-laws.
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<PAGE>
10. Covenants. Each Guarantor agrees that it
---------
will deliver (in duplicate) to you:
(i) within 45 days after the end of each of the
first three quarterly fiscal periods in each of its
fiscal years, consolidated balance sheets of such
Guarantor and its Subsidiaries as at the end of such
period and the related consolidated statements of
income, stockholders' equity and changes in financial
position of such Guarantor and its Subsidiaries for
such period and (in the case of the second and third
quarterly periods) for the period from the beginning of
the current fiscal year to the end of such quarterly
period, setting forth in each case in comparative form
the consolidated figures for the corresponding periods
of the previous fiscal year, all in reasonable detail
and certified as complete and correct by a principal
financial officer of such Guarantor;
(ii) within 90 days after the end of each of its
fiscal years, consolidated balance sheets of such
Guarantor and its Subsidiaries as at the end of such
year and the related consolidated statements of income,
stockholders' equity and changes in financial position
of such Guarantor and its Subsidiaries for such fiscal
year, setting forth in each case in comparative form
the consolidated figures for the previous fiscal year,
all in reasonable detail, accompanied by a report
thereon of independent certified public or chartered
accountants of recognized national standing selected by
it, which report shall state that such consolidated
financial statements present fairly the financial
position of such Guarantor and its Subsidiaries as at
the dates indicated and the results of their operations
and changes in their financial position for the periods
indicated in conformity with generally accepted
accounting principles applied on a basis consistent
with prior years (except as otherwise specified in such
report) and that the audit by such accountants in
connection with such consolidated financial statements
has been made in accordance with generally accepted
auditing standards.
11. Notices. All notices hereunder shall be
-------
personally delivered or sent by prepaid certified or
registered mail, return receipt requested, (i) if the
-
Guarantors, to Fairfax Financial Holdings Limited, Suite
800, 900 Wellington Street West, Toronto, Ontario, Canada
I-6
<PAGE>
M5J 2N3, to the attention of V. Prem Watsa, and to Markel
Corporation, 5310 Markel Road, Richmond, Virginia 23230, to
the attention of Steven A. Markel, and (ii) if to A&A, at
--
its address set forth in paragraph 2 above, to the attention
of its general counsel, or at such other address as may be
specified by written notice to each other party.
12. Jurisdiction. Each Guarantor irrevocably and
------------
unconditionally (a) submits itself to the non-exclusive
-
jurisdiction of courts of the State of New York and the
federal courts of the Southern District of New York with
respect to any action, suit or proceeding arising out of or
relating to this Agreement or for the recognition or
enforcement of any judgment in respect thereof, (b) waives
-
any objection to the venue of any such action, suit or
proceeding in such court and (c) agrees that service upon it
-
in the manner provided for notice in Section 11 shall
constitute valid and effective service with respect to any
such action, suit or proceeding.
13. Miscellaneous. If any term of this Guarantee
-------------
or any application thereof shall be invalid, illegal or
unenforceable, the remainder of this Guarantee and any other
application of such term shall not be affected thereby. No
delay or omission in exercising any right hereunder shall
operate as a waiver of such right or any other right. This
Guarantee shall be binding upon, inure to the benefit of and
be enforceable by Guarantors, A&A, and their respective
successors and assigns. This Guarantee shall be governed
and construed in accordance with the laws of the State of
New York.
IN WITNESS WHEREOF, Guarantors have caused this
Guarantee to be duly executed as of the day and year first
above written.
FAIRFAX FINANCIAL HOLDINGS LIMITED
By:_______________________________
Title:____________________________
MARKEL CORPORATION
By:_______________________________
Title:____________________________
I-7
<PAGE>
EXHIBIT J
[Overall Buyer Guarantee]
=========================================================
FAIRFAX FINANCIAL HOLDINGS LIMITED
MARKEL CORPORATION
====================
GUARANTEE AGREEMENT
====================
Dated as of __________________ __, 1987
=========================================================
<PAGE>
EXHIBIT J
GUARANTEE AGREEMENT
GUARANTEE AGREEMENT (the "Agreement"), dated as of
________ __, 1987, from FAIRFAX FINANCIAL HOLDINGS LIMITED,
a Canada corporation, and MARKEL CORPORATION, a Virginia
corporation (together, "Guarantors"), to and in favor of
ALEXANDER & ALEXANDER, INC., a Maryland corporation ("A&A"),
Alexander & Alexander Services Inc., a Maryland corporation
("Services"), any direct or indirect Subsidiary (as defined
in the Stock Purchase Agreement referred to below) of
Services and their officers and directors (collectively, the
"A&A Affiliates").
R E C I T A L S:
---------------
A. Pursuant to a Stock Purchase Agreement, dated
as of October 7, l987 (the "Stock Purchase Agreement"
between A&A and F-M Acquisition Corporation, an Illinois
corporation ("Buyer"), A&A has sold to Buyer all of the
outstanding shares of capital stock (the "SMCO Shares") of
Shand, Morahan & Company, Inc. Capitalized terms used and
not otherwise defined herein have the meanings specified in
the Stock Purchase Agreement.
B. Under the Stock Purchase Agreement, Buyer is
required to pay Seller the Deferred Purchase Price.
C. Guarantors will derive direct and substantial
benefit from guaranteeing the obligations of Buyer under the
Stock Purchase Agreement.
NOW, THEREFORE, to induce A&A to sell the SMCO
Shares to Buyer, Guarantors agree as follows:
1. Guarantee. Guarantors, jointly and severally,
---------
irrevocably guarantee the timely payment and performance in
full of the following obligations (the "Obligations"): all
amounts comprising the Deferred Purchase Price, all other
amounts owed by Buyer or its Subsidiaries to A&A or any
other A&A Affiliate under the Stock Purchase Agreement and
any other agreements executed pursuant or incidental to the
Stock Purchase Agreement (collectively the "Stock Purchase
Documents") and the performance by Buyer of all of its
obligations under the Stock Purchase Agreement and the other
Stock Purchase Documents.
J-1
<PAGE>
2. Obligations Hereunder. This Guarantee shall
---------------------
be irrevocable and shall continue in full force and effect
as the separate and independent undertaking of each
Guarantor. If, for any reason, the Obligations to be paid
or- performed under the Stock Purchase Agreement or other
Stock Purchase Documents shall not be paid or performed
promptly at the time set forth in the Stock Purchase
Agreement or the other Stock Purchase Documents for the
payment or performance thereof (including any applicable
grace or cure periods), Guarantors will immediately make
such payment to or perform such obligation for A&A as
provided in the Stock Purchase Agreement and other Stock
Purchase Documents, subject to any defenses or rights of
setoff or counterclaim which Buyer or its Subsidiaries may
have or assert but regardless of whether A&A or any other
A&A Affiliate shall have taken any steps to enforce any
rights against Buyer or any other Guarantor or any other
person to collect such sums or any part thereof or with
respect to any collateral. Payments to A&A or any other A&A
Affiliate under this Guarantee shall be made in immediately
available funds in lawful money of the United States of
America and shall be paid immediately on the date on which
such payments become due under the Stock Purchase Agreement
or the other Stock Purchase Documents (including any
applicable grace period), whether at maturity, by
declaration or by acceleration, following the occurrence of
a default or otherwise, at 1211 Avenue of the Americas, New
York, New York. The obligations of Guarantors under this
Guarantee shall remain in full force and effect without
regard to, and shall not be released, discharged or
terminated by, any circumstance or condition (whether or not
Guarantors shall have notice or knowledge thereof),
including, without limitation:
(a) any amendment or modification of or addition
or supplement to the Stock Purchase Agreement or any
other Stock Purchase Document;
(b) any waiver, compromise, release, consent,
extension, indulgence or other action or inaction in
respect of the documents referred to in clause (a)
above;
(c) any failure, omission or delay on the part of
A&A or any other A&A Affiliate or any successor in
interest thereto to enforce, assert or exercise any
right, power or remedy conferred on or available to A&A
J-2
<PAGE>
or any other A&A Affiliate or any successor in interest
thereto;
(d) any default by Buyer, any Subsidiary of Buyer
or Guarantors under the documents referred to in clause
(a) above;
(e) any exercise or non-exercise of any right,
remedy, power or privilege under or in respect of this
Guarantee and the documents referred to in clause (a)
above;
(f) any furnishing or acceptance of additional
Security, or any release, substitution or exchange of
any security for the Obligations;
(g) any failure to give notice to Guarantors (in
their capacity as Guarantors) of the occurrence of a
Potential Event of Default or Event of Default under
the Stock Purchase Agreement or any breach or default
by Buyer or any Subsidiary of Buyer under any other
Stock Purchase Document;
(h) any assignment or transfer of any assets of
Buyer or any Subsidiary of Buyer to any other Person or
corporation or other entity, or any disposition by any
Guarantor or any of the other stockholders of Buyer of
any stock or other interest in Buyer;
(i) any bankruptcy, insolvency, reorganization,
arrangement, adjustment, composition, liquidation,
dissolution or similar proceeding involving or
affecting Buyer or any Subsidiary or Buyer or any
discharge of Buyer or any Subsidiary of Buyer therein;
(j) any partial prepayment, or any assignment or
transfer, of any portion of the Obligations; or
(k) any other circumstance or occurrence
whatsoever, whether similar or dissimilar to the
foregoing, which might otherwise constitute a legal or
equitable defense or discharge of the liabilities of
Guarantors hereunder or which might otherwise limit
recourse against Guarantors.
3. Waivers. Guarantors unconditionally waive:
-------
J-3
<PAGE>
(a) notice of any of the matters referred to
section 2;
(b) all notices which may be required by statute,
rule or law or otherwise to preserve any rights of A&A
or any other A&A Affiliate or any successor thereto
against Buyer or any Subsidiary of Buyer or Guarantors,
including, without limitation, notice of default,
presentment and demand for payment and protest for non-
payment or dishonor;
(c) any right to the enforcement, assertion or
exercise of any right, remedy, power or privilege by
A&A or any other A&A Affiliate under or in respect of
the Stock Purchase Agreement or any other Stock
Purchase Document;
(d) any right to require A&A or any other A&A
Affiliate or any successor thereto to proceed against
Buyer or any Subsidiary of Buyer or any other person,
or to proceed against or exhaust any security granted
to secure the Obligations, or to pursue any other
remedy;
(e) any requirement of diligence; and
(f) any notice of the acceptance of this
Guarantee.
4. Right to Proceed Against Guarantors. Upon any
-----------------------------------
default in the payment or performance of the Obligations by
Buyer (after any applicable grace or cure period), the
obligation of Guarantor to make such payment or perform such
obligation hereunder shall be effective immediately without
notice. A&A or any other A&A Affiliate, in its sole
discretion, shall have the right to proceed first and
directly against Guarantors under this Guarantee without
proceeding against or exhausting any other remedies which it
may have and without resorting to any other security held by
A&A or any other A&A Affiliate.
5. Reinstatement. The obligations of each
-------------
Guarantor under this Guarantee shall continue to be
effective or be automatically reinstated, as the case may
be, if any payment made with respect to the Obligations when
due or pursuant to acceleration according to the terms of
the Stock Purchase Agreement or the other Stock Purchase
Documents or this Guarantee is rescinded or must otherwise
J-4
<PAGE>
be restored or returned by the recipient upon the
insolvency, bankruptcy, dissolution, liquidation or
reorganization of Buyer, any Subsidiary of Buyer or any
other Guarantor, or upon or as a result of the appointment
of a custodian, receiver, trustee or other officer with
similar powers with respect to Buyer, any Subsidiary of
Buyer or any other Guarantor or any substantial part of the
property of either, or otherwise, all as though such payment
had not been made. If an event permitting the acceleration
of the Obligations shall at any time have occurred and be
continuing, and such acceleration shall at such time be
prevented by reason of the pendency against Buyer of a case
or proceeding under a bankruptcy or insolvency law, each
Guarantor agrees that, for purposes of this Guarantee and
its obligations hereunder, the Obligations shall be deemed
to have been accelerated with the same effect as if
accelerated in accordance with the terms of the Stock
Purchase Agreement.
6. Subordination. Guarantors hereby absolutely
-------------
subordinate, both in right of payment and in time of
payment, any present and any future indebtedness of Buyer or
any Subsidiary of Buyer to Guarantors to the indebtedness of
Buyer and any such Subsidiary to A&A or any other A&A
Affiliate and any successors in interest thereto.
Notwithstanding any payment made by Guarantors hereunder,
Guarantors shall not be entitled to be subrogated to any
rights of A&A or any other A&A Affiliate or any successor
thereto until the payment in full of the principal and
interest of the Obligations and the performance of all of
Buyer's and Buyer's Subsidiaries' other obligations under
the Stock Purchase Agreement and the other Stock Purchase
Documents.
7. Enforcement. (a) A&A and the other A&A
-----------
Affiliates and the successors thereto may enforce this
Guarantee in their own names or otherwise, either by action
at law, suit in equity or other proceeding, and it shall not
be necessary to make Buyer or any of its Subsidiaries a
party to any such action, suit or proceeding. Guarantors
stipulate that the remedies at law in respect of any default
or threatened default by Guarantors in the performance of or
compliance with any of the terms of this Guarantee are not
and will not be adequate, and that any of such terms may be
specifically enforced by a decree for specific performance
or by an injunction against violation of any of such terms
or otherwise.
J-5
<PAGE>
(b) A separate action may be brought against
Guarantors whether or not an action is commenced against
Buyer or any of its Subsidiaries.
(c) Guarantors will pay all fees (including,
without limitation, reasonable attorneys' fees), costs and
expenses of any nature whatsoever incurred by A&A or any
other A&A Affiliate or any successor thereto in connection
with enforcing this Guarantee.
8. Termination. Except as provided in section 5
-----------
hereof, the obligations of Guarantors under this Guarantee
shall terminate upon the payment and performance in full to
A&A and the other A&A Affiliates of all of the Obligations.
9. Representations. Each of Guarantors
---------------
represents that (a) it is a corporation duly organized,
-
validly existing and in good standing under the laws of its
jurisdiction of incorporation and has the corporate power
and authority to execute and deliver this Agreement, (b) the
-
execution and delivery of this Agreement has been duly
authorized by its Board of Directors, no other corporate
authorization being necessary on its part, (c) this
-
Agreement has been duly executed and delivered by it and
constitutes its valid and binding agreement and (d) the
-
execution and delivery of this Agreement will not violate
any provisions of its Articles of Incorporation or By-laws.
10. Covenants. Each Guarantor agrees that it
---------
will comply with the following covenants:
(a) Such Guarantor will not, directly or indi-
rectly, sell, assign, pledge or otherwise dispose of
any shares of stock, now or hereafter acquired, of (or
warrants, rights or options to acquire stock of) Buyer,
except to one of its Wholly-Owned Subsidiaries or the
other Guarantor and except for directors' qualifying
shares if required by applicable law.
(b) Such Guarantor will not directly or
indirectly,
(i) consolidate with or merge into any other
Person or permit any other Person to consolidate
with or merge into it; or
J-6
<PAGE>
(ii) sell, transfer, lease, abandon or
otherwise dispose of all or substantially all its
property, assets and undertakings;
provided that such Guarantor may consolidate with or merge
--------
into another corporation, and another corporation may be
merged into it, if the surviving corporation, immediately
after giving effect to such transaction, shall have a
Consolidated Net Worth at least equal to such Guarantor's
Consolidated Net Worth immediately prior to giving effect to
such transaction, and if such surviving corporation shall
assume, in a manner in form and substance reasonably
satisfactory to Seller, such Guarantor's obligations
hereunder.
(c) Such Guarantor will deliver (in duplicate) to
you:
(i) within 45 days after the end of each of
the first three quarterly fiscal periods in each
of its fiscal years, consolidated balance sheets
of such Guarantor and its Subsidiaries as at the
end of such period and the related consolidated
statements of income, stockholders' equity and
changes in financial position of such Guarantor
and its Subsidiaries for such period and (in the
case of the second and third quarterly periods)
for the period from the beginning of the current
fiscal year to the end of such quarterly period,
setting forth in each case in comparative form the
consolidated figures for the corresponding periods
of the previous fiscal year, all in reasonable
detail and certified as complete and correct by a
principal financial officer of such Guarantor;
(ii) within 90 days after the end of each of
its fiscal years, consolidated balance sheets of
such Guarantor and its Subsidiaries as at the end
of such year and the related consolidated
statements of income, stockholders' equity and
changes in financial position of such Guarantor
and its Subsidiaries for such fiscal year, setting
forth in each case in comparative form the
consolidated figures for the previous fiscal year,
all in reasonable detail, accompanied by a report
thereon of independent certified public or
chartered accountants of recognized national
standing selected by it, which report shall state
J-7
<PAGE>
that such consolidated financial statements
present fairly the financial position of such
Guarantor and its Subsidiaries as at the dates
indicated and the results of their operations and
changes in their financial position for the
periods indicated in conformity with generally
accepted accounting principles applied on a basis
consistent with prior years (except as otherwise
specified in such report) and that the audit by
such accountants in connection with such
consolidated financial statements has been made in
accordance with generally accepted auditing
standards.
11. Notices. All notices hereunder shall be
-------
personally delivered or sent by prepaid certified or
registered mail, return receipt requested, (i) if to
-
Guarantors, to Fairfax Financial Holdings Limited, Suite
800, 900 Wellington Street West, Toronto, Ontario, Canada
M5J 2N7, to the attention of V. Prem Watsa, and to Markel
Corporation, 5310 Markel Road, Richmond, Virginia 23230, to
the attention of Steven A. Markel, and (ii) if to A&A or any
--
other A&A Affiliate, at its address set forth in paragraph 2
above, to the attention of its general counsel, or at such
other address as may be specified by written notice to each
other party.
12. Jurisdiction. Each Guarantor irrevocably and
------------
unconditionally (a) submits itself to the nonexclusive
-
jurisdiction of courts of the State of New York and the
federal courts of the Southern District of New York with
respect to any action, suit or proceeding arising out of or
relating to this Agreement or for the recognition or
enforcement of any judgment in respect thereof, (b) waives
-
any objection to the venue of any such action, suit or
proceeding in such court and (c) agrees that service upon it
-
in the manner provided for notice in Section II shall
constitute valid and effective service with respect to any
such action, suit or proceeding.
13. Miscellaneous. If any term of this Guarantee
-------------
or any application thereof shall be invalid, illegal or
unenforceable, the remainder of this Guarantee and any other
application of such term shall not be affected thereby. No
delay or omission in exercising any right hereunder shall
operate as a waiver of such right or any other right. This
Guarantee shall be binding upon, inure to the benefit of and
be enforceable by Guarantors, A&A, the other A&A Affiliates
J-8
<PAGE>
and their respective successors and assigns. This Guarantee
shall be governed and construed in accordance with the laws
of the State of New York.
IN WITNESS WHEREOF, Guarantors have caused this
Guarantee to be duly executed as of the day and year first
above written.
FAIRFAX FINANCIAL HOLDINGS
LIMITED
By: _________________________
Title:_______________________
MARKEL CORPORATION
By:__________________________
Title:_______________________
J-9
<PAGE>
EXHIBIT K
October 7, 1987
Alexander & Alexander Inc.
1211 Avenue of the Americas
New York, New York 10036
Dear Sirs:
I understand that you are agreeing,
contemporaneously herewith, to sell all of the outstanding
stock of Shand, Morahan & Company, Inc. ("SMCO") to
---------
pursuant to that certain Stock Purchase Agreement (the
"Agreement"), dated as of October 7, 1987, between
----------
and you, a copy of which is attached hereto. I have
carefully reviewed the Agreement in connection with this
letter. Capitalized terms used and not otherwise defined
herein have the meanings specified in the Agreement.
I recognize that you are relying on my statement
in paragraph 1 below, in addition to information provided to
you by others, including, without limitation, independent
certified public accountants, attorneys, your employees who
have had supervisory responsibility for SMCO and its
subsidiaries (including those employees who have served from
time to time as members of the Boards of Directors of SMCO,
EIC, ESI or ICE) and other agents.
1. To my actual knowledge, information and
belief, the representations and warranties with respect to
SMCO, EIC, ESI and ICE contained in Article 2 of the
Agreement and in the Exhibits attached thereto, and the
information contained in the Schedules attached thereto with
respect to SMCO, EIC, ESI and ICE, did not as of the date of
such Agreement contain any untrue statement of a material
fact or omit to state a material fact necessary, in light of
the circumstances under which they were made, to make the
statements and information contained therein not misleading;
provided that I express no opinion with respect to the
--------
representations, warranties and information described in
Annex A to this Agreement. With respect to the reserves
shown on the unaudited financial statements of SMCO and its
subsidiaries as at June 30, 1987 in respect of business
booked prior to December 31, 1986, to my actual knowledge,
information and belief there were no events or circumstances
known to me at the time such reserves were established which
would have then required any material increase in the amount
of such reserves; provided that this representation shall
--------
K-1
<PAGE>
Alexander & Alexander Inc. -2- September 30, 1987
not be deemed to be breached in the event that additional
reserves are developed after the date hereof for any prior
period or year-end audit adjustments are made in accordance
with generally accepted accounting principles and consistent
with prior years' practice.
2. I will, within the purview of my assigned
responsibilities and the directions of the Board of
Directors of SMCO, ESI, EIC or ICE, as the case may be, use
my best efforts to ensure that SMCO, ESI, EIC and ICE
conduct their operations in compliance with Sections 4.1 and
4.2 of the Agreement, and will cooperate with you in
carrying out your obligations under, and in consummating the
transactions contemplated by, the Agreement.
3. I will, within the purview of my assigned
responsibilities and the directions of the Board of
Directors of SMCO, ESI, EIC or ICE, as the case may be, use
my best efforts to ensure that SMCO, ESI, EIC and ICE
conduct their businesses in such a manner so that the
representations and warranties contained in Article II of
the Agreement shall continue to be true and correct in all
material respects on and as of the Closing Date.
4. I will promptly inform you of any event,
condition or circumstance occurring following the date of
this letter until the Closing Date of which I have actual
knowledge that will constitute a violation or breach by
Seller of the Agreement, that does not comply with Sections
4.1 and 4.2 of the Agreement, or that would cause the
representations and warranties contained in Article II of
the Agreement not to be true and correct as of the Closing
Date.
Very truly yours,
[Name]
K-2
<PAGE>
Annex A
I express no opinion with respect to the representations, warranties
and information contained in the following paragraphs of Article II
of the Stock Purchase Agreement By and Between F-M Acuuisition Corporation
and Alexander & Alexander Inc. dated as of October 7, 1987:
1. 2.23 with respect to Federal and State income tax returns of SMCO only.
2. 2.25
3. 2.35
4. 2.37
<PAGE>
EXHIBIT M
[Alii Buyer Guarantee]
=========================================================
FAIRFAX FINANCIAL HOLDINGS LIMITED
MARKEL CORPORATION
====================
GUARANTEE AGREEMENT
====================
Dated as of __________________ __, 1987
=========================================================
<PAGE>
GUARANTEE AGREEMENT
GUARANTEE AGREEMENT (the "Agreement"), dated as of
December , 1987, from FAIRFAX FINANCIAL HOLDINGS LIMITED,
--
a Canada corporation, and MARKEL CORPORATION, a Virginia
corporation (together, "Guarantors"), to and in favor of
ALEXANDER & ALEXANDER, INC., a Maryland corporation ("A&A"),
Alexander & Alexander Services Inc., a Maryland corporation
("Services"), any direct or indirect Subsidiary (as such
term is defined in the Stock Purchase Agreement referred to
below) of Services and their officers and directors
(collectively, the "A&A Affiliates").
R E C I T A L S:
- - - - - - - -
A. Pursuant to a Stock Purchase Agreement, dated
as of October 7, 1987 (the "Stock Purchase Agreement")
between A&A and F-M Acquisition Corporation, an Illinois
corporation ("Buyer"), A&A has sold to Buyer all of the
outstanding shares of capital stock (the "SMCO Shares") of
Shand, Morahan & Company, Inc. Capitalized terms used and
not otherwise defined herein have the meanings specified in
the Stock Purchase Agreement.
B. Under the Stock Purchase Agreement, Buyer is
required to pay Seller the Deferred Purchase Price.
C. Guarantors will derive direct and substantial
benefit from guaranteeing the obligations of Buyer under the
Stock Purchase Agreement.
NOW, THEREFORE, to induce A&A to sell the SMCO
Shares to Buyer, Guarantors agree as follows:
1. Guarantee. Guarantors, jointly and severally,
---------
irrevocably guarantee the timely payment and performance in
full of the following obligations (the "Obligations"): all
amounts comprising the Deferred Purchase Price, all other
amounts owed by Buyer or its Subsidiaries to A&A or any
other A&A Affiliate under the Stock Purchase Agreement and
any other agreements executed pursuant or incidental to the
Stock Purchase Agreement (collectively the "Stock Purchase
Documents") and the performance by Buyer of all of its
obligations under the Stock Purchase Agreement and the other
M-1
<PAGE>
Stock Purchase Documents, provided that Guarantors'
--------
obligations hereunder with respect to the Obligations shall
exist only if, at the time when enforcement of Guarantors'
obligations is sought (or at any time thereafter prior to
the date on which the Obligations are paid and performed in
full), the Consolidated Net Worth of Buyer is less than $10
million.
2. Obligations Hereunder. This Guarantee shall
---------------------
be irrevocable and shall continue in full force and effect
as the separate and independent undertaking of each
Guarantor. If, for any reason, the Obligations of Buyer to
be paid or performed under the Stock Purchase Agreement or
the other Stock Purchase Documents shall not be paid or
performed promptly at the time set forth in the Stock
Purchase Agreement or the other Stock Purchase Documents for
the payment or performance thereof (including any applicable
grace or cure periods), Guarantors will immediately make
such payment to or perform such obligation for A&A or
another A&A Affiliate as provided in the Stock Purchase
Agreement and the other Stock Purchase Documents, subject to
any defenses or rights of setoff or counterclaim which Buyer
or its Subsidiaries may have or assert but regardless of
whether A&A or any other A&A Affiliate shall have taken any
steps to enforce any rights against Buyer or any other
Guarantor or any other person to collect such sums or any
part thereof or with respect to any collateral. Payments to
A&A or any other A&A Affiliate under this Guarantee shall be
made in immediately available funds in lawful money of the
United States of America and shall be paid immediately on
the date on which such payments become due under the Stock
Purchase Agreement or the other Stock Purchase Documents
(including any applicable grace period), whether at
maturity, by declaration or by acceleration, following the
occurrence of a default or otherwise, at 1211 Avenue of the
Americas, New York, New York. The obligations of Guarantors
under this Guarantee shall remain in full force and effect
without regard to, and shall not be released, discharged or
terminated by, any circumstance or condition (whether or not
Guarantors shall have notice or knowledge thereof),
including, without limitation:
(a) any amendment or modification of or addition
or supplement to the Stock Purchase Agreement or any
other Stock Purchase Document;
(b) any waiver, compromise, release, consent,
extension, indulgence or other action or inaction in
M-2
<PAGE>
respect of the documents referred to in clause (a)
above;
(c) any failure, omission or delay on the part of
A&A or any other A&A Affiliate or any successor in
interest thereto to enforce, assert or exercise any
right, power or remedy conferred on or available to A&A
or any other A&A Affiliate or any successor in interest
thereto;
(d) any default by Buyer, any Subsidiary of Buyer
or Guarantors under the documents referred to in clause
(a) above;
(e) any exercise or non-exercise of any right,
remedy, power or privilege under or in respect of this
Guarantee and the documents referred to in clause (a)
above;
(f) any furnishing or acceptance of additional
security, or any release, substitution or exchange of
any security for the Obligations;
(g) any failure to give notice to Guarantors (in
their capacity as Guarantors) of the occurrence of a
Potential Event of Default or Event of Default under
the Stock Purchase Agreement or any breach or default
by Buyer or any Subsidiary of Buyer under any other
Stock Purchase Document;
(h) any assignment or transfer of any assets of
Buyer or any Subsidiary of Buyer to any other person or
corporation or other entity, or any disposition by any
Guarantor or any of the other stockholders of Buyer of
any stock or other interest in Buyer;
(i) any bankruptcy, insolvency, reorganization,
arrangement, adjustment, composition, liquidation,
dissolution or similar proceeding involving or
affecting Buyer or any Subsidiary of Buyer or any
discharge of Buyer or any Subsidiary of Buyer therein;
(j) any partial prepayment, or any assignment or
transfer, of any portion of the Obligations; or
(k) any other circumstance or occurrence
whatsoever, whether similar or dissimilar to the
foregoing, which might otherwise constitute a legal or
M-3
<PAGE>
equitable defense or discharge of the liabilities of
Guarantors hereunder or which might otherwise limit
recourse against Guarantors.
3. Waivers. Guarantors unconditionally waive:
-------
(a) notice of any of the matters referred to in
section 2;
(b) all notices which may be required by statute,
rule or law or otherwise to preserve any rights of A&A
or any other A&A Affiliate or any successor thereto
against Buyer or any Subsidiary of Buyer or Guarantors,
including, without limitation, notice of default,
presentment and demand for payment and protest for non-
payment or dishonor;
(c) any right to the enforcement, assertion or
exercise of any right, remedy, power or privilege by
A&A or any other A&A Affiliate under or in respect of
the Stock Purchase Agreement or any other Stock
Purchase Document;
(d) any right to require A&A or any other A&A
Affiliate or any successor thereto to proceed against
Buyer or any Subsidiary of Buyer or any other person,
or to proceed against or exhaust any security granted
to secure the Obligations, or to pursue any other
remedy;
(e) any requirement of diligence; and
(f) any notice of the acceptance of this
Guarantee.
4. Right to Proceed Against Guarantors. Upon any
-----------------------------------
default in the payment or performance of the Obligations by
Buyer (after any applicable grace or cure period), the
obligation of Guarantor to make such payment or perform such
obligation hereunder shall be effective immediately without
notice. A&A or any other A&A Affiliate, in its sole
discretion, shall have the right to proceed first and
directly against Guarantors under this Guarantee without
proceeding against or exhausting any other remedies which it
may have and without resorting to any other security held by
A&A or any other A&A Affiliate.
M-4
<PAGE>
5. Reinstatement. The obligations of each
-------------
Guarantor under this Guarantee shall continue to be
effective or be automatically reinstated, as the case may
be, if any payment made with respect to the Obligations when
due or pursuant to acceleration according to the terms of
the Stock Purchase Agreement or other Stock Purchase
Documents is rescinded or must otherwise be restored or
returned by the recipient upon the insolvency, bankruptcy,
dissolution, liquidation or reorganization of Buyer or any
Subsidiary of Buyer or any other Guarantor, or upon or as a
result of the appointment of a custodian, receiver, trustee
or other officer with similar powers with respect to Buyer
or any Subsidiary of Buyer or any other Guarantor or any
substantial part of the property of either, or otherwise,
all as though such payment had not been made. If an event
permitting the acceleration of the Obligations shall at any
time have occurred and be continuing, and such acceleration
shall at such time be prevented by reason of the pendency
against Buyer of a case or proceeding under a bankruptcy or
insolvency law, each Guarantor agrees that, for purposes of
this Guarantee and its obligations hereunder, the
Obligations shall be deemed to have been accelerated with
the same effect as if accelerated in accordance with the
terms of the Stock Purchase Agreement.
6. Subordination. Guarantors hereby absolutely
-------------
subordinate, both in right of payment and in time of
payment, any present and any future indebtedness of Buyer or
any Subsidiary of Buyer to Guarantors to the indebtedness of
Buyer or any such Subsidiary to A&A or any other A&A
Affiliate and any successors in interest thereto.
Notwithstanding any payment made by Guarantors hereunder,
Guarantors shall not be entitled to be subrogated to any
rights of A&A, any other A&A Affiliate or any successor
thereto until the payment in full of the principal and
interest of the Obligations and the performance of all of
Buyer's and Buyer's Subsidiaries' other obligations under
the Stock Purchase Agreement and the other Stock Purchase
Documents.
7. Enforcement. (a) A&A and the other A&A
-----------
Affiliates and the successors thereto may enforce this
Guarantee in their own names or otherwise, either by action
at law, suit in equity or other proceeding, and it shall not
be necessary to make Buyer or any of its Subsidiaries a
party to any such action, suit or proceeding. Guarantors
stipulate that the remedies at law in respect of any default
or threatened default by Guarantors in the performance of or
M-5
<PAGE>
compliance with any of the terms of this Guarantee are not
and will not be adequate, and that any of such terms may be
specifically enforced by a decree for specific performance
or by an injunction against violation of any of such terms
or otherwise.
(b) A separate action may be brought against
Guarantors whether or not an action is commenced against
Buyer or any of its Subsidiaries.
(c) Guarantors will pay all fees (including,
without limitation, reasonable attorneys' fees), costs and
expenses of any nature whatsoever incurred by A&A or any
other A&A Affiliate or any successor thereto in connection
with enforcing this Guarantee.
8. Termination. Except as provided in section 5
-----------
hereof, the obligations of Guarantors under this Guarantee
shall terminate upon the payment and performance in full to
A&A and the other A&A Affiliates of all of the Obligations.
9. Representations. Each of Guarantors
---------------
represents that (a) it is a corporation duly organized,
-
validly existing and in good standing under the laws of its
jurisdiction of incorporation and has the corporate power
and authority to execute and deliver this Agreement, (b) the
-
execution and delivery of this Agreement has been duly
authorized by its Board of Directors, no other corporate
authorization being necessary on its part, (c) this
-
Agreement has been duly executed and delivered by it and
constitutes its valid and binding agreement and (d) the
-
execution and delivery of this Agreement will not violate
any provisions of its Articles of Incorporation or By-laws.
10. Covenants. Each Guarantor agrees that it
---------
will comply with the following covenants:
(a) Such Guarantor will not, directly or
indirectly, sell, assign, pledge or otherwise dispose of any
shares of stock, now or hereafter acquired, of (or warrants,
rights or options to acquire stock of) Buyer, except to one
of its Wholly-Owned Subsidiaries or the other Guarantor and
except for directors' qualifying shares if required by
applicable law.
(b) Such Guarantor will not directly or
indirectly,
M-6
<PAGE>
(i) consolidate with or merge into any other
Person or permit any other Person to consolidate
with or merge into it; or
(ii) sell, transfer, lease, abandon or
otherwise dispose of all or substantially all its
property, assets and undertakings;
provided that such Guarantor may consolidate with or
--------
merge into another corporation, and another corporation
may be merged into it, if the surviving corporation,
immediately after giving effect to such transaction,
shall have a Consolidated Net Worth at least equal to
such Guarantor's Consolidated Net Worth immediately
prior to giving effect to such transaction, and if such
surviving corporation shall assume, in a manner in form
and substance reasonably satisfactory to Seller, such
Guarantor's obligations hereunder.
(c) Such Guarantor will deliver (in duplicate) to
you:
(i) within 45 days after the end of each of
the first three quarterly fiscal periods in each
of its fiscal years, consolidated balance sheets
of such Guarantor and its Subsidiaries as at the
end of such period and the related consolidated
statements of income, stockholders' equity and
changes in financial position of such Guarantor
and its Subsidiaries for such period and (in the
case of the second and third quarterly periods)
for the period from the beginning of the current
fiscal year to the end of such quarterly period,
setting forth in each case in comparative form the
consolidated figures for the corresponding periods
of the previous fiscal year, all in reasonable
detail and certified as complete and correct by a
principal financial officer of such Guarantor;
(ii) within 90 days after the end of each of
its fiscal years, consolidated balance sheets of
such Guarantor and its Subsidiaries as at the end
of such year and the related consolidated
statements of income, stockholders' equity and
changes in financial position of such Guarantor
and its Subsidiaries for such fiscal year, setting
forth in each case in comparative form the
consolidated figures for the previous fiscal year,
M-7
<PAGE>
all in reasonable detail, accompanied by a report
thereon of independent certified public or
chartered accountants of recognized national
standing selected by it, which report shall state
that such consolidated financial statements
present fairly the financial position of such
Guarantor and its Subsidiaries as at the dates
indicated and the results of their operations and
changes in their financial position for the
periods indicated in conformity with generally
accepted accounting principles applied on a basis
consistent with prior years (except as otherwise
specified in such report) and that the audit by
such accountants in connection with such
consolidated financial statements has been made in
accordance with generally accepted auditing
standards.
11. Notices. All notices hereunder shall be
-------
personally delivered or sent by prepaid certified or
registered mail, return receipt requested, (i) if to
-
Guarantors, to Fairfax Financial Holdings Limited, Suite
800, 900 Wellington Street West, Toronto, Ontario, Canada
M5J 2N7, to the attention of V. Prem Watsa, and to Markel
Corporation, 4551 Cox Road, Richmond, Virginia 23260, to the
attention of Steven A. Markel, and (ii) if to A&A or any
--
other A&A Affiliate, at its address set forth in paragraph 2
above, to the attention of its general counsel, or at such
other address as may be specified by written notice to each
other party.
12. Jurisdiction. Each Guarantor irrevocably and
------------
unconditionally (a) submits itself to the non-exclusive
-
jurisdiction of courts of the State of New York and the
federal courts of the Southern District of New York with
respect to any action, suit or proceeding arising out of or
relating to this Agreement or for the recognition or
enforcement of any judgment in respect thereof, (b) waives
-
any objection to the venue of any such action, suit or
proceeding in such court and (c) agrees that service upon it
-
in the manner provided for notice in Section 11 shall
constitute valid and effective service with respect to any
such action, suit or proceeding.
13. Miscellaneous. If any term of this Guarantee
-------------
or any application thereof shall be invalid, illegal or
unenforceable, the remainder of this Guarantee and any other
application of such term shall not be affected thereby. No
M-8
<PAGE>
delay or omission in exercising any right hereunder shall
operate as a waiver of such right or any other right. This
Guarantee shall be binding upon, inure to the benefit of and
be enforceable by Guarantors, A&A, the other A&A Affiliates
and their respective successors and assigns. This Guarantee
shall be governed and construed in accordance with the laws
of the State of New York.
IN WITNESS WHEREOF, Guarantors have caused this
Guarantee to be duly executed as of the day and year first
above written.
FAIRFAX FINANCIAL HOLDINGS LIMITED
By:
V. Prem Watsa
Chairman
MARKEL CORPORATION
By:
Steven A. Markel
Executive Vice-President
M-9
<PAGE>
SCHEDULE 2.2
A. Jurisdictions in which SMCO is qualified to do
business:
Arizona
Montana
B. Jurisdictions in which SMCO is licensed:
Arizona
California
Montana
New Jersey
New York
Pennsylvania
<PAGE>
SCHEDULE 2.3
None
2
<PAGE>
SCHEDULE 2.5
A. Evanston Insurance Company is licensed as an admitted
carrier in the State of Illinois. It is authorized to
write the following classes of insurance:
Accident and Health; Vehicle; Liability; Workers'
Compensation; Burglary and Forgery; Glass; Fidelity and
Surety; Miscellaneous; Other Casualty Risks; Contingent
Losses; Livestock and Domestic Animals; Legal Expense
Insurance; Fire; Elements; War, Riot and Explosion;
Marine and Transportation; Vehicle; Property Damage,
Sprinkler Leakage and Crop; Other Fire and Marine Risks;
Contingent Losses; Legal Expense; Reinsurance.
Evanston Insurance Company is an eligible surplus lines
carrier in the following jurisdictions:
Alabama
Alaska
Arizona
Arkansas
California
Colorado
Connecticut
District of Columbia
Delaware
Florida
Georgia
Hawaii
Idaho
Indiana
Iowa
Kansas
Kentucky
Louisiana
Maine
Maryland
Massachusetts
Michigan
Minnesota
Mississippi
Missouri
Montana
Nebraska
Nevada
3
<PAGE>
New Hampshire*
New Jersey
New Mexico
New York
North Carolina
North Dakota
Ohio
Oklahoma
Oregon
Pennsylvania
Puerto Rico
Rhode Island
South Carolina
South Dakota
Tennessee
Texas
Utah
Vermont
Virginia
Washington
West Virginia
Wisconsin
Wyoming
B. Insurance Company of Evanston is licensed as an admitted
carrier in forty-one jurisdictions. It is licensed to
write the following classes of business:
Alabama - Property; Miscellaneous Casualty (including
-------
Official Surety Bonds).
Alaska - Property; Casualty; Surety; Marine, Wet Marine
------
and Transportation.
Arizona - Disability; Property; Casualty; Surety;
-------
Vehicle; Marine and Transportation (excluding Workers'
Compensation).
Arkansas - Property; Casualty; Surety; Marine;
--------
Disability.
Colorado - Accident and Health; Livestock; Plate Glass;
--------
Steam Boiler and Machinery; Burglary and Theft; Fidelity
--------------------
* See Schedule 2.20
4
<PAGE>
and Surety; Motor Vehicle - Full Coverage; Workmen's
Compensation; Liability; Professional Malpractice; Legal
Expense; Fire and Lightning; Extended Coverage; Hail on
Growing Crops; Earthquake; Motor Vehicle - Full
Coverage; Aircraft; Inland Marine; Ocean Marine;
Commercial Multiple Peril.
District of Columbia - Fire; Allied Lines; Farmowners
--------------------
Multiple Peril; Homeowners Multiple Peril; Commercial
Multiple Peril; Ocean Marine; Inland Marine; Medical
Malpractice; Earthquake; Workmen's Compensation; Other
Liability; Private Passenger Auto Liability; Commercial
Auto Liability; Private Passenger Auto Physical Damage;
Aircraft (all perils); Fidelity; Surety; Glass; Burglary
and Theft; Boiler and Machinery; Credit; Umbrella
Liability.
Georgia - Property; Marine and Transportation; Casualty
-------
(including Workers' Compensation); Surety.
Hawaii - Casualty.
------
Idaho - Property; Marine and Transportation; Casualty -
-----
Excluding Workmen's Compensation; Surety.
Illinois - Accident and Health; Vehicle; Liability;
--------
Workers' Compensation; Burglary and Forgery; Glass;
Fidelity and Surety; Miscellaneous; Other Casualty
Risks; Contingent Losses; Livestock and Domestic
Animals; Legal Expense Insurance; Fire; Elements; War,
Riot and Explosion; Marine and Transportation; Vehicle;
Property Damage; Sprinkler, Leakage and Crop; Other Fire
and Marine Risks; Contingent Losses; Legal Expense;
Reinsurance.
Indiana - Accident; Burglary and Theft; Glass; Steam
-------
Boilers, Elevators and Machinery; Motor Vehicles;
Sprinklers; Employers' Liability; Surety; Other
Casualty; Property; Crop; Water Damage; Transportation.
Iowa - Fire; Extended Coverage; Other Allied Lines;
----
Homeowners Multi-peril (including bodily injury);
Commercial Multi-peril; Earthquake; Growing Crops; Ocean
Marine; Inland Marine; Accident Only (Individual);
Accident and Health (Individual); Hospital and Medical
Expense (Individual); Group Accident and Health; Non-
cancellable Accident; Workers' Compensation; Liability
other than auto (bodily injury); Liability other than
5
<PAGE>
auto (property damage); Auto Liability (bodily injury);
Auto Liability (property damage); Auto Physical Damage;
Aircraft Physical Damage; Fidelity; Surety; Glass;
Burglary and Theft; Boiler and Machinery.
Kansas - Fire; Windstorm and Hail; Extended Coverage;
------
Additional Perils on Growing Crops; Hail on Growing
Crops; Optional Perils; Sprinkler Leakage; Business
Interruption; Earthquakes, Water Damage; Aircraft Hull;
Ocean Marine; Inland Marine; Rain; Automobile Physical
Damage; Flood; Homeowners Policies; Accident and Health;
Automobile Liability; General Liability; Workers'
Compensation; Fidelity, Surety and Forgery Bond; Glass;
Burglary, Theft and Robbery; Boiler and Machinery;
Credit Malpractice Liability; Livestock Mortality;
Aircraft Liability; Cargo Liability.
Kentucky - Multiple Line Insurance.
--------
Louisiana - Vehicle; Liability; Workmen's Compensation;
---------
Burglar and Forgery; Glass; Fidelity and Surety; Fire
and Extended Coverage; Steam Boiler and Sprinkler
Leakage; Crop and Livestock; Marine and Transportation
(Inland Marine); Miscellaneous.
Maryland - Workers' Compensation; Casualty (not
--------
including Vehicle Liability, Workers' Compensation and
Mortgage Guaranty); Health; Marine, Wet Marine and
Transportation; Surety; Property and Marine; Vehicle
Liability.
Massachusetts - Liability other than Auto; Reinsurance
-------------
Except Life.
Michigan - Disability; Property; Marine; Inland
--------
Navigation and Transportation; Automobile (except bodily
injury); Steam Boiler and Flywheel; Liability;
Automobile and Workmen's Compensation; Plate Glass;
Sprinkler; Credit; Burglary and Theft; Livestock;
Malpractice; Surety and Fidelity.
Minnesota - Property, Legal Expenses; Surety; Auto
---------
Casualty.
Mississippi - Fire and Allied Lines; Industrial Fire;
-----------
Miscellaneous Casualty; Fidelity; Surety; Guaranty;
General Liability; Auto Fire and Physical Damage; Auto
Liability; Workmen's Compensation; Boiler and Machinery;
6
<PAGE>
Livestock; Burglary and Theft; Plate Glass; Inland
Marine; Ocean Marine; Aircraft; Homeowners; Farmowners;
Accident and Health.
Missouri - Aircraft; Automobile Full Coverage; Boiler,
--------
Burglary and Theft; Employers Liability; Fidelity; Fire
and Allied Lines; Collision other than Auto; Liability
other than Auto, Bodily Injury; Liability other than
Auto; Property Damage; Livestock Full Coverage; Machine;
Marine, Inland Marine and Transportation; Non-recording
Insurance; Plate Glass; Rain; Surety; Workers'
Compensation; Miscellaneous Contractual Liability and
Indemnity.
Montana - Property; Casualty; Surety; Marine.
-------
Nebraska - Fire and Marine; Sickness and Accident;
--------
Fidelity Insurance; Liability Insurance; Plate Glass
Insurance; Boiler and Machinery Insurance; Burglary
Insurance; Credit Insurance; Automobile; Engine,
Elevator Insurance; Miscellaneous Insurance.
Nevada - Property; Casualty; Surety; Marine and
------
Transportation.
New Mexico - General Casualty; Surety; Property; Marine
----------
and Transportation; Vehicle.
New York - Accident and Health; Fire; Miscellaneous
--------
Property; Water Damage; Burglary and Theft; Glass;
Boiler and Machinery; Elevator; Animal; Collision;
Personal Injury Liability; Property Damage Liability;
Workers' Compensation and Employers' Liability; Fidelity
and Surety; Credit; Motor Vehicle and Aircraft Physical
Damage; Marine and Inland Marine; Marine Protection and
Indemnity Insurance.
New York - Free Trade Zone License (Regulation 63),
--------
License No. 88-300-36, Expiration Date 8/31/88 - Special
Risk.
North Carolina - Fire; Miscellaneous Property; Water
--------------
Damage; Burglary and Theft; Glass; Boiler and Machinery;
Elevator; Animal; Collision; Personal Injury; Property
Damage; Workmen's Compensation and Employers' Liability;
Fidelity and Surety; Credit; Motor Vehicle and Aircraft;
Marine.
7
<PAGE>
North Dakota - Fire; Ocean Marine; Liability (non-Auto);
------------
Aircraft; Burglary and Theft; Crop; Allied Lines; Inland
Marine; Auto Liability (BI and PD); Fidelity and Surety;
Boiler and Machinery; Mortgage Guaranty; Multiple Peril;
Earthquake; Auto Physical Damage; Glass; Credit.
Ohio - Property; Liability; Disability; Auto; Machinery;
----
Casualty; Miscellaneous; Fidelity and Surety.
Oklahoma - Accident and Health; Property; Casualty;
--------
Marine; Vehicle.
Oregon - Property; Casualty (including Workers'
------
Compensation); Marine and Transportation; Surety.
Pennsylvania - Property; Transportation; Marine;
------------
Fidelity; Accident and Health; Glass; Liability; Steam
Boilers; Burglary and Theft; Credit; Water; Elevator;
Livestock; Motor Vehicle; Machinery; Employers'
Liability.
South Carolina - Property; Casualty; Surety; Marine.
--------------
South Dakota - Fire and Allied Lines; Inland and Ocean
------------
Marine; Workers' Compensation; Bodily Injury; Property
Damage, Physical Damage; Fidelity and Surety Bond;
Glass; Burglary and Theft; Boiler and Machinery;
Aircraft; Credit (Mortgage Guaranty); Crop Hail;
Livestock.
Tennessee - Property; Vehicle; Casualty; Surety.
---------
Texas - Fire; Allied Coverages; Hail, growing crops
-----
only; Rain; Inland Marine; Ocean Marine; Aircraft -
Liability and Physical Damages; Workers' Compensation
and Employers' Liability; Employers' Liability;
Automobile - Liability and Physical Damage; Liability
other than Automobile; Fidelity and Surety; Glass;
Burglary and Theft; Forgery; Boiler and Machinery;
Credit; Livestock and Reinsurance.
Utah - Disability; Property; Professional Liability
----
(including Medical Malpractice); Surety (includes
Fidelity); Liability (includes Vehicle, excludes
Disability); Marine and Transport; Workers'
Compensation; Vehicle Liability.
8
<PAGE>
Virginia - Fire; Farmers Multi-peril; Commercial Multi-
--------
peril; Inland Marine; Liability other than Auto; Auto
Physical Damage; Aircraft Physical Damage; Surety;
Burglary and Theft; Credit; Water Damage; Miscellaneous
Property; Homeowners' Multi-peril; Ocean Marine;
Workers' Compensation - Employers' Liability; Auto
Liability; Aircraft Liability; Fidelity; Glass; Boiler
and Machinery; Animal; Legal Services.
Washington - Property; Marine and Transportation;
----------
General Casualty; Surety.
Wisconsin - Fire, Inland Marine and Other Property;
---------
Ocean Marine; Disability; Liability and Incidental
Medical Expense (other than Auto); Automobile and
Aircraft; Fidelity; Surety; Credit; Workers'
Compensation; Legal Expense; Credit Unemployment;
Miscellaneous.
Wyoming - Multiple Lines.
-------
9
<PAGE>
SCHEDULE 2.9
A. Additional affiliates, partnerships, and joint ventures
in which SMCO, ESI, EIC, or ICE may own any interests
other than in the ordinary course of business:
1. SMCO is assisting in the formation of Barristers
Insurance Company and EPIC.
B. Interests of Seller in property used by SMCO, ESI, ECI
or ICE:
Shand Morahan Plaza is owned by TIFCO Properties, Inc.,
an affiliate of Seller as beneficiary of a land trust at
American National Bank, Chicago.
10
<PAGE>
SCHEDULE 2.10
A. Agreements containing default provisions which could be
triggered by the transactions contemplated by this
agreement:
1. Term Credit Agreement between ESI and Harris Trust
and Savings Bank dated March 27, 1985 as amended
December 18, 1985.
2. Amended and Restricted Pledge and Security Agreement
from ESI to Harris Trust and Savings Bank dated
December 18, 1985.
3. Guaranty Agreements by SMCO to Harris Trust and
Savings Bank dated March 27, 1985 and December 18,
1985.
4. Term Credit Agreement dated December 31, 1985
between ESI and SMCO.
B. Contracts containing termination provisions or other
limitations that could be triggered by the transactions
contemplated by this agreement:
1. Management Agreement among SMCO, ESI, and EIC
effective January 1, 1982.
2. Management Agreement among SMCO and EIC effective
January 1, 1982.
3. Management Agreement among SMCO, ESI, and ICE
effective January 1, 1982.
4. Lloyds Errors and Omissions Contract #8791 effective
January 1, 1987 between SMCO and Underwriters at
Lloyds.
5. Maintenance Agreement between Management Science
America, Inc. and SMCO dated August 7, 1981.
6. Treaty with American Reinsurance Co., effective
January 1, 1987.
7. Denver Insurance Company Line Slip effective between
SMCO and other line slip participants.
11
<PAGE>
C. Court or other governmental orders that would be
violated by the transactions contemplated by this
agreement:
None
12
<PAGE>
SCHEDULE 2.11
Filings, Consents, Approvals, etc. required by Seller, SMCO,
ESI, EIC, or ICE in connection with the transactions
contemplated by this Agreement:
1. Hart-Scott-Rodino filings may be required on the
part of Buyer and/or Seller.
2. Lord, Bissell & Brook is conducting research as to
state "takeover" statutes, as well as state
insurance statutes. Such research may indicate the
need or desirability of further consents, approvals,
or notices.
13
<PAGE>
SCHEDULE 2.12
None
14
<PAGE>
SCHEDULE 2.13
A. The following events or continuing conditions have
existed which may have an adverse effect on the business
or assets of SMCO, ESI, EIC, or ICE:
1. Utica Mutual Insurance Company advised of its
intention to terminate its underwriting management
agreement with SMCO effective as of December 31,
1987.
2. The Mutual Fire, Marine & Inland Insurance Company
continues in rehabilitation.
3. General Accident Insurance Company indicated that it
may have claims against SMCO.
4. See also Schedules 2.17 and 2.20 which are
incorporated herein by reference.
B. Quarterly dividends have been paid, from ICE to EIC and
from EIC to ESI, according to customary practice.
C. Capital expenditures or commitments for capital
expenditures:
1. SMCO is replacing a significant portion of its
office equipment, including typewriters and copying
machines, involving an expenditure of less than
$100,000 to complete transaction.
2. SMCO is planning to purchase phone switch currently
leased from AT&T in November for approximately
$95,000.
15
<PAGE>
SCHEDULE 2.15
Undisclosed liabilities of SMCO, ESI, EIC, or ICE:
1. Approximately $12 million has been recognized as
commission income by SMCO but has been deferred as
expense by EIC and amortized over the policy period.
2. SMCO is obligated to render future claims handling
services valued at approximately $12-15 million to
its underwriting management clients and reinsurers.
3. Under an agreement dated October 4, 1985, SMCO is
obligated to hold Sphere Drake Insurance p.l.c.
harmless for any loss arising out of SMCO's acting
as a reinsurance broker on layers $8,000,000 excess
of $2,000,000 retrocession to Munich Reinsurance
Company.
16
<PAGE>
SCHEDULE 2.17
A. Threatened claims (no suit filed) against Shand, Morahan
& Company, Inc.:
1. International Association of Financial Planners.
-----------------------------------------------
Evanston Insurance Company has been named in
three actions (Burge, Oeberst and Hatch,
noted below) involving non-renewal of
individual policies with respect to a
financial planners insurance program. Other
participants in this program may have similar
claims.
2. General Accident Insurance Company of America.
---------------------------------------------
General Accident has advised it intends to
make a claim against SMCO for substantial
damages allegedly suffered with respect to
certain agreements with SMCO (see also item
A.10 below).
3. Lord, Bissell & Brook.
---------------------
Threatened claim by insured law firm
regarding final expiration date of optional
extension period of insurance policy.
4. Brobeck & Phlegler.
------------------
Threatened claim involving allegations of
insufficient limits of liability.
5. P.T. Umum.
---------
A reinsurer alleges SMCO may have
intentionally charged inadequate premiums to
receive commissions.
6. Rothstein & Associates (EIC).
----------------------------
Evanston Insurance Company has a potential
claim against SMCO for failure to deny
coverage.
7. Hassneh Insurance Company.
-------------------------
Threatened claim by a reinsurer concerned
about escalating defense costs on an insured
law firm case.
17
<PAGE>
8. Mutual Fire.
-----------
Threatened claim involving dispute over
proper notice of non-renewal.
The following parties have notified SMCO that
they may assert claims with respect to the
Mutual Fire situation:
a. Sun Coast Hospital
b. Krueger Engineering & Manufacturing
Company
c. Advanced Environmental Technology
d. Cook International Agency
e. Schidler, McBroom & Gates
f. Abramson
g. North Miami General Hospital
h. Egleseder & Levitt.
9. Murphy, Jahn.
------------
Potential claim by an excess carrier alleging
unspecified breach of fiduciary duties by
SMCO.
10. The Travelers v. General Accident.
---------------------------------
Potential claim arising from declaratory
relief action filed by The Travelers against
General Accident. General Accident might
cross-claim SMCO if matter proceeds to trial
(see also item A.2 above).
11. Linkow.
------
Potential claim by an oral surgeon whose
claim reserves were inadvertently revealed
during a presentation to American Association
of Oral and Maxillofacial Surgeons.
B. Claims (in suit) made against SMCO issuing companies
other than EIC, ICE, or Mutual Fire. These represent
potential claims against SMCO in its capacity as an
underwriting manager.
Name Court/County Docket #
---- ------------ --------
1. Costello v. Northbrook CA, Shasta 80939
Excess and Surplus Company
2. Bonaldi v. Utica Mutual NJ, Bergen L-092354-85
3. Schaffer v. Northbrook CA, Los Angeles C-576-773
Excess and Surplus Company
18
<PAGE>
Name Court/County Docket #
---- ------------ --------
4. Lakritz v. General Accident MI, Oakland 86-323829
Insurance Company of CK
America
5. Meyer, Rohrs v. General OH, Lucas 85-0583
Accident Insurance Company
of America
6. Davis & Davis v. General CA, San Diego 589377
Accident Insurance Company
of America
7. Hamond & Company v. Utica NY, Nassau 14186-87
Mutual
8. Sabella v. American Bankers CA, San 831949
Francisco
9. Joseph P. Hennessey v. MT, Yellowstone DV87-1186
General Accident Insurance
Company
C. The following is a list of lawsuits naming SMCO or SMCO
and EIC as a defendant or defendants.
1. Johnson v. Underwriters at Lloyds, Orion, SMCO et
---------------------------------------------- --
al. - Superior Court, Ventura County, California;
--
Case #83040
2. General Practice Associates v. SMCO - District
-----------------------------------
Court, Clark County, Nevada; Case #A-228821
3. Lee v. The Travelers, SMCO - Superior Court, Los
--------------------------
Angeles County, California; Case #C-608-174
4. David Potter Duff v. EIC, SMCO - Circuit
------------------------------
Court, Cook County, Illinois; Case #86L23758
5. Farm Bureau Town & Country v. SMCO - Circuit Court,
----------------------------------
Cole County, Missouri; Case #CVl86-845CC
6. Auerbach v. GAIC, SMCO - Circuit Court, Dade County,
----------------------
Florida; Case #86-52834
7. Duke Transportation v. SMCO - U.S. District Court,
---------------------------
Middle District of Louisiana; Case #86-186, Section
"B"
8. City of Harlingen v. EIC, SMCO - District Court,
------------------------------
Dallas County, Texas; Case #86-11483
9. Swanke, Hayden, Connell v. GAIC, SMCO - U.S.
-------------------------------------
District Court, Southern District, New York; Case
#87CIV3332
19
<PAGE>
10. Phanlobh Vichaikul v. SMCO - Circuit Court, Marion
--------------------------
County, West Virginia; Case #87C303
11. LaVine v. EIC, SMCO - Superior Court, Los Angeles
-------------------
County; Case #C-652-302
12. American Motorists Insurance Company v. GAIC, SMCO -
--------------------------------------------- ----
Court of Common Please, Philadelphia County,
Pennsylvania; Case #4796
13. Fidelity Bank & Trust Co. v. SMCO, Mutual Fire, et
----------------------------------------------- --
al. - 22nd District Court, St. Tammy Parish,
--
Louisiana; Case #86-11418
14. Encino Savings & Loan v. Mutual Fire, SMCO U.S.
------------------------------------------
District Court, Central District of California; Case
#CV86-6l55DT
15. Evander v. SMCO, et al. - Circuit Court, Baltimore
----------------------
City, Maryland; Case #87051030/CL61785
16. Harrington v. Commonwealth Insurance Company, v.
------------------------------------------------
SMCO, Mutual Fire - Superior Court, Essex County,
-----------------
Massachusetts; Case #83-546
17. American Savings & Loan v. SMCO - U.S. District
-------------------------------
Court, Central District of California; Case #CV86-
8024PAR
18. Houston Engineering v. NESCo, SMCO - District Court,
----------------------------------
Case County, North Dakota; Case #79-835
19. Ensearch v. SMCO, EIC - District Court, Dallas
---------------------
County, Texas; Case 85-9011
20. Pioneer Bank & Trust v. SMCO, EIC - Circuit Court,
---------------------------------
Cook County, Illinois; Case #85CH09964 and Case
#85CHl0506
21. Transamerica v. SMCO, GAIC - Court of Common Pleas,
--------------------------
Allegheny County, Pennsylvania; Case #GD86-5254
22. Strout Realty v. SMCO, Mutual Fire - District Court,
----------------------------------
Mesa County, Colorado; Case #87-CV-358
23. American Medical International Incorporated, et al
--------------------------------------------------
v. EIC, SMCO, and A&A - Superior Ct., Orange County,
---------------------
CA; Case #53-11-72
24. Diamond Claims and Investigation Services v. SMCO
-------------------------------------------------
and EIC, Circuit Ct., Mulnomar County, Oregon; Case
--------
#A8708-04938
25. Federal Insurance Co. v. SMCO and EIC, Circuit Ct.,
-------------------------------------
Cook County, Ill. Case #7CH08984
D. The following is a list of lawsuits naming the EIC (does
not include items listed in "C" above).
1. Diplarakos, First Home Realtors v. EIC, GAIC U.S.
--------------------------------------------
District Court, Central District of California;
Case #856450 WDK
20
<PAGE>
2. Esco Elevators v. EIC, Weir et al. - District
---------------------------------
Court, Tarrant County, Texas; Case #141-99515-86
3. Sigco Research v. EIC - U.S. District Court, North
---------------------
Dakota, Southeastern Division; Case #A3-86-114
4. Warren Oil v. EIC - Superior Court, Providence
-----------------
County, Rhode Island; Case #87-290
5. Nevada National Bank v. EIC et al. - lst District
---------------------------------
Court, Carson City, Nevada; Case #87-00l07A
6. Wilshire Group v. EIC - Superior Court, Los Angeles
---------------------
County, California; Case #WEC-109-549
7. Bob Speer v. EIC - U.S. District Court, Western
----------------
District of Oklahoma; Case #CIV-87-6l2B
* 8. Christopher Hatch et al. v. EIC - Superior Court,
-------------------------------
Suffolk County, Massachusetts, Case #81289
* 9. Burge v. EIC - Superior Court, Sacramento County,
------------
California; Case #336090
* 10. Oeberst v. EIC - Superior Court, Sacramento County,
--------------
California; Case #336090
11. Chemical Sales Co. v. EIC - District Court, Denver
-------------------------
County, Colorado; Case #PD02173
12. Harold F. LeClair Co. v. EIC et al. - Superior
----------------------------------
Court, Middlesex County, Massachusetts; Case #87-
2421
13. Erma Johnson v. EIC - Circuit Court, Floyd County,
-------------------
Kentucky; Case #85-CI-587
14. Wayne County National Bank v. EIC - Court of Common
---------------------------------
Pleas, Wayne County, Ohio; Case #87-CI107
15. Martin et al. v. EIC - Circuit Court, Ray County,
--------------------
Missouri; Case #CV387-l46CC
** 16. Vance Abstract Company v. EIC - U.S. District
-----------------------------
Court, Eastern District of Arkansas; Case #LR-C-84-
42
17. PPG Industries v. EIC - U.S. District Court,
---------------------
Western District of Pennsylvania; Case #85-1387
18. Furguson v. EIC - Circuit court, Broward County,
---------------
Florida; Case #85-03584
19. (Intentionally Deleted)
--------------------
* Involves International Association of Financial Planners
as noted in Section A.
** Item, 16 Vance Abstract Company v. EIC was recently
-----------------------------
settled although the settlement documents have not yet
been signed.
21
<PAGE>
20. Integrity v. EIC - Superior Court, Bergen County,
----------------
New Jersey; Case #L-10931-86E
21. Opatut v. EIC - Superior Court, Atkinson County,
-------------
Georgia; Case #85-C-7
22. McGraw Edison v. EIC - U.S. District Court, Western
--------------------
District of Michigan; Case #K86-48
23. Travelers Corporation v. Denver Johnson v. EIC 27th
----------------------------------------------
District Court, St. Landry Parish; Louisiana; Case
#87-0021-C
24. Argonaut Insurance Company v. EIC - Superior Court,
---------------------------------
Pima County, Arizona; Case #244520
25. IT Corporation v. EIC - Superior Court, Los Angeles
---------------------
County, California; Case #C578125
26. Aerojet General Corporation v. EIC - Superior
----------------------------------
Court, San Mateo County, California; Case #262425
27. St. Joseph's Regional Medical Center, Inc. v. EIC -
-------------------------------------------------
4th Judicial District, Ada County, Idaho; Case
#89415
28. Emmett & Chandler v. EIC - Superior Court, Los
------------------------
Angeles County, California; Case #C610601
29. Devan Pardue & Riverside v. EIC - 2lst Judicial
-------------------------------
District, Livingston Parish, Louisiana; Case
#50200, Div. E
30. Haas et al. v. V.W. Childress, EIC - Superior
----------------------------------
Court, King County, Washington; Case #86-2-21823-8
31. Karen Ballard v. EIC - 2lst Judicial District, St.
--------------------
Helena Parish, Louisiana; Case #11739, Div. A
32. Terry Turner v. EIC - District Court, Osage County,
-------------------
Oklahoma, Case #C-86-553
33. Allstate Insurance Co. v. EIC, Aetna - 4th Circuit
------------------------------------
Court; Duvall County, Florida; Case #86-16712-CA
34. Johnson Grant & Co. et al. v. EIC - U.S. District
---------------------------------
Court, District of Nebraska; Case #CV87-L-87
35. Mount Holly Retirement v. EIC - Superior Court,
-----------------------------
Burlington County, New Jersey; Case #W-003078-86
36. Arkwright-Boston v. EIC - Court of Common Pleas,
-----------------------
Cuyahoga County, Ohio; Case #71819
37. Carl Johns v. EIC - District Court, Gregg County,
-----------------
Texas; Case #83-3150-B
38. Cravens, Dargan & Co. v. EIC - U.S. District Court,
----------------------------
Middle District of Louisiana; Case #85-539
39. Central Illinois Public Service Company v. EIC, 7th
----------------------------------------------
Judicial Circuit, Morgan County, Illinois; Case
#87639
40. Northrup Corporation v. EIC, Superior Court, Los
---------------------------
Angeles County, California; Case #C566129
22
<PAGE>
E. The following is a list of lawsuits naming the Insurance
Company of Evanston.
1. Transamerica Insurance Co. v. ICE - Circuit Court,
---------------------------------
Cook County, Illinois; Case #86CHl2193
2. Clark Compton v. W. Knecht & R. Gheen (garnishment)
-------------------------------------
- Circuit Court, Lane County, Oregon; Case #16-86-
03420
F. Government Agency Review
1. The Illinois Insurance Department received a
complaint from an insured, Consolidated
Construction Safety Fund of Illinois. The policy
provided aggregate Excess Workers' Compensation
Reinsurance through General Accident Insurance
Company of America. The Illinois Insurance
Department has requested that SMCO contact the
Insured to work out an amicable resolution of the
matter.
2. The Illinois Insurance Department is in the process
of completing its regular triennial examination of
Evanston Insurance Company and Insurance Company of
Evanston for 1983-1985.
3. Illinois is conducting a tax audit of EIC, ESI and
ICE through 1985.
4. See also Schedule 2.20 incorporated herein by
reference.
G. See Schedule 2.23 which is incorporated herein by
reference.
23
<PAGE>
SCHEDULE 2.18
A. Real Property owned by SMCO:
1. A triangular lot adjacent to Shand Morahan Plaza
described as follows:
That part of Lots 1, 2, 3, 4, 5 and 6 (taken as a
single tract) in Block 3 of E.A. Pratt's Addition to
Evanston, being a Subdivision of that part of the
Southwest quarter of the Northwest quarter of
Section 18, Township 41 North, Range 14, East of the
Third Principal Meridian, lying East of Ridge Road
and West of the Chicago and Northwestern Railroad,
in the City of Evanston, Cook County, Illinois,
described as follows: Beginning at a point on the
West line of said Lot 6 and the East line of Oak
Avenue, 171.50 ft. North of the Southwest corner of
Lot 7 in said Block 3; thence East parallel to the
North line of Church Street, 148.0 ft.; thence North
parallel to the East line of Oak Avenue, 13.0 ft.;
then East parallel to the North line of Church
Street, 57.51 ft. to the East line of said Lot 6,
being also the Westerly line of the right of way of
the Chicago and Northwestern Railway Company; thence
Northwesterly along the Easterly line of said Lots
1, 2, 3, 4, 5 and 6, 362.62 ft. to the Northwest
corner of said Lot 1; thence West 8.26 ft. to the
Northwest corner of said Lot 1; thence South on the
East line of Oak Avenue, 317.22 ft. to the place of
beginning.
2. A parking lot adjacent to Shand Morahan Plaza
described as follows:
Lots 1 and 2 (except the Westerly 11 feet), Lot 3
(except the Westerly 11 feet of the Northerly 12
feet), 4, 5 and the North 2 feet of Lot 6 and all of
Lots 16, 17, 18, 19 and 20 and 21 (except that part
of Lot 21 which lies North and East of a straight
line drawn from the Southeast corner of said Lot 21
to a point on the North line of and 50 feet West of
the Northeast corner of said Lot 21), the vacated
North and South Public Alley lying between said Lots
1 to 6 inclusive and Lots 16 to 21 inclusive; that
part of the vacated South 8 feet of Clark Street
which lies East of the West line of said Lots 1 to 6
inclusive extended in a Northeasterly direction and
24
<PAGE>
West of the said line drawn from the Southeast
corner of said Lot 21 to a point on the North line
of and 50 feet West of the Northeast corner of said
Lot 21 extended in a Northwesterly direction; also
Lots A, B, C and D (except the West 25 feet of Lot
D) in Grover and Currey's Subdivision of Lots 6, 7
and 8 (except the North 2 feet of Lot 6 thereof);
all of the aforesaid property being located in Block
2 in E.A. Pratt's Addition to Evanston, a
subdivision of part of the Southwest 1/4 of the
Northwest 1/4 of Section 18, Township 41 North,
Range 14 East of the Third Principal Meridian, lying
East of Ridge Road and West of Milwaukee Division of
the Chicago and Northwestern Railway, in Cook
County, Illinois.
Properties 1 and 2 above are both owned beneficially by
SMCO. Title is held by American National Bank and Trust
Company under trust agreement #56801 dated February 1,
1983.
B. Real Property owned by ESI, EIC, or ICE:
None
C. Encumbrances on any Real Property owned by SMCO:
1. Grant of Easement dated September 19, 1956 and
recorded October 11, 1956 as Document No. 16723918
granted to the City of Evanston for sidewalk.
2. License granted August 1, 1985 allowing encroachment
by Shand Morahan Plaza patio onto triangular lot.
3. Easement Agreement, dated March 1, 1983 and amended
August 1, 1985, granting a parking easement to
property described in Sections A1 and A2 above.
D. Assets Deposited as security by EIC and ICE pursuant to
state regulations as of December 31, 1986:
STATE EIC ICE
----- --- ---
1. Arkansas $ 150,000 $ 100,000
2. Delaware -- 35,000
3. Illinois 8,575,000 5,400,000
4. Kentucky 175,000 --
5. Louisiana 150,000 70,000
6. Massachusetts 500,000 100,000
25
<PAGE>
7. Michigan 100,000 --
8. New Hampshire 1,500,000 --
9. New Jersey 150,000 --
10. New Mexico 150,000 100,000
11. North Carolina -- 100,000
12. Oklahoma 100,000 --
13. Oregon -- 230,000
14. Virginia -- 100,000
26
<PAGE>
SCHEDULE 2.20
The New Hampshire Insurance Department has notified Evanston
Insurance Company that it has been removed from the
authorized surplus lines company list effective October 1,
1987. The Department advised on October 1, 1987 that EIC
will be removed from this list until the Department has an
opportunity to review the financial statements of the new
investors in SMCO.
27
<PAGE>
SCHEDULE 2.21
A. Leases of personal property by SMCO, having annual
payments in excess of $25,000:
1. Master lease for computer equipment from NBI, Inc.
dated March 29, 1985;
2 Master lease for computer equipment from Comdisco,
Inc. dated August 6, 1981.
3. Master lease for computer equipment from ITT Courier
Terminal Systems, Inc. dated March 1, 1983.
4. Lease of phone switch from AT&T.
5. Lease of software from E.D.S. Corp. and software
maintenance agreement dated as of January 23, 1985
and extended to January 31, 1988.
B. Leases of personal property by ESI, EIC, or ICE having
annual payments in excess of $25,000:
None.
28
<PAGE>
SCHEDULE 2.23
A. Exceptions to clause (i) of Section 2.23:
SMCO's 1986 Illinois state income tax return has not yet
been filed. The return is extended until October 15,
1987. The Illinois Combined Income and Replacement tax
return for ESI, EIC and ICE, was not filed by the
extended due date of September 15, 1987 but was filed on
September 30, 1987. No penalties or interest should be
assessed since the return shows a current loss.
B. Exceptions to clause (iii) of Section 2.23:
SMCO owes to A&A $174,518 in respect to the IRS audit of
1980 through 1982 Federal Income Tax returns and SMCO
owes to A&A $24,952 in respect to the IRS audit of 1977
through 1979 Federal income tax returns. SMCO owes to
A&A $13,123 with respect to state income taxes, net of a
Federal tax benefit, resulting from the IRS audit of
1979 through 1982 Federal Income Tax returns. The
amounts due to A&A with respect to State income taxes
are based on IRS audit adjustments from preliminary
audit reports. These adjustments have not yet been
reported to the State tax authorities.
SMCO owes to A&A a balance of $1,681,955 in respect to
the 1986 Federal Income Tax return filed by A&A on
September 15, 1987. SMCO owes to A&A $44,527 in respect
to the Illinois Combined Income and Replacement tax
return that will be filed by A&A on or before October
15, 1987 (this amount is net of a Federal income tax
benefit).
C. Exceptions to clause (iv) of Section 2.23:
The 1979 through 1984 Federal Income Tax returns of the
consolidated group of which SMCO is included, are either
currently under audit or, the parent has received
notification that they will be audited. No state tax
returns of SMCO are currently under audit. The Illinois
state tax authorities have reviewed the Combined Income
and Replacement tax return for ESI, EIC and ICE, for the
years ended December 31, 1984 and 1985 and have verbally
stated that no adjustment is needed.
29
<PAGE>
D. Exceptions to clause (v) of Section 2.23:
SMCO's federal income tax returns are closed for tax
years ending on or prior to December 31, 1978. SMCO's
Illinois income tax returns are closed for tax years
ending on or before December 31, 1983 and the SMCO's
Minnesota income tax returns are closed for years ending
on or before December 31, 1981. ESI's Federal returns
are closed for tax years ending on or before December
31, 1984. The Illinois Combined Income and Replacement
tax returns for ESI, EIC and ICE for tax years ending on
or before December 31, 1983 are closed.
30
<PAGE>
SCHEDULE 2.24
EEOC charges have been filed by:
1. Melvin Smith (alleging race and age discrimination)
2. Maudette Watley
Antigone Cooper
Juanita Welch
Claudine Jordan
Lilieth McLachlin
(alleging race discrimination)
31
<PAGE>
SCHEDULE 2.25
A. A&A Insurance Policies Covering SMCO, ESI, EIC, and ICE up until the time
of SMCO's sale:
Company Type Amount of Coverage
------- ---- ------------------
1. Hartford Workers Statutory WC
Compensation & 100,000 EL accident
Employers 500,000 OD aggregate
Liability
2. Hartford Comprehensive 1,000,000 CSL occurrence
General and & aggregate where
Automobile applicable
Liability
3. Seaboard Surety Advertisers' 1,000,000
per
Liability advertisement
50,000forpunitive
4. Federal Aircraft Non- 20,000,000CSLoccurrence
Ownership
Liability
5.
(a) Hartford Umbrella Liability 5,000,000xsprimaries
(above)
(b) Pacific Empl Umbrella Liability 5,000,000xs5,000,000
(c) St. Paul Surplus Umbrella Liability 5MMp/o 10MMxs 10MM
(d) North River Umbrella Liability 5MMp/o 10MMxs 10MM
(e) Aetna C&S Umbrella Liability 10MMp/o 40MMxs 20MM
(f) Fireman's Fund Umbrella Liability 10MMp/o 40MMxs 20MM
(g) AIU Umbrella Liability 5MMp/o 40MMxs 20MM
(h) INA Umbrella Liability 5MMp/o 40MMxs 20MM
(i) Home Umbrella Liability 5MMp/o 40MMxs 20MM
(j) New England Umbrella Liability 5MMp/o 40MMxs 20MM
(k) Federal Umbrella Liability 10MMp/o 25MMxs 60MM
(l) Transamerica Umbrella Liability 10MMp/o 25MMxs 60MM
(m) Lexington Umbrella Liability 5MMp/o 25MMxs 60MM
(n) Fireman's Fund Umbrella Liability 15,000,000xs85,000,000
32
<PAGE>
6.
(a) Lloyd's & Cos. Fiduciary 5,000,000xs 10,000ded
Liability
(b) Federal Fiduciary 25,000,000xs5,000,000
Liability
7. National Union Lawyers 5,000,000xs 5,000ded.
Professional
Liability
(moonlighting
only)
8.
(a) Trust Property and Professional E&O SMCO to be reimbursedfor
Casualty covered indemnity and
expenses which exceed
40,000 each claim until
SMCO has paid out100,000
from 12-1-86 to 12-1-87.
SMCO is reimbursed for
100% of such costs
thereafter. (This
applies to SMCO, ESI,EIC
and ICE).
(b) Lloyds & Cos. Professional E&O 25%of 10,000,000xs TP&C
(c) Trust P&C Professional E&O 75% of 10,000,000 xsTP&C
(TP&C = 5,000,000 each
claim of which 40MM xs
1MM is limited to 40MM
aggregate)
(d) Lloyds & Cos. Professional E&O 11.25MMp/o 15MMxs 10MM
(e) Amer. Cas./Reading Professional E&O .50MMp/o 15MMxs 10MM
(f) Amer. Motorists Professional E&O .50MMp/o 15MMxs 10MM
(g) Continental Ins. Professional E&O .50MMp/o 15MMxs 10MM
(h) Hartford Professional E&O .50MMp/o 15MMxs 10MM
(i) National Union Professional E&O .50MMp/o 15MMxs 10MM
(j) National Cas Professional E&O .35MMp/o 15MMxs 10MM
(k) Centennial Professional E&O .25MMp/o 15MMxs 10MM
(l) Fireman's Fund Professional E&O .25MMp/o 15MMxs 10MM
(m) Hartford Professional E&O .50MMp/o 15MMxs 10MM
33
<PAGE>
(n) The Home Professional E&O .15MMp/o 15MMxs 10MM
(o) Lloyd's Cos. Professional E&O 12.40MMp/o 15MMxs 25MM
(p) Amer. Motorists Professional E&O .50MMp/o 15MMxs 25MM
(q) National Union Professional E&O .50MMp/o 15MMxs 25MM
(r) Travelers Professional E&O .50MMp/o 15MMxs 25MM
(s) The Home Professional E&O .35MMp/o 15MMxs 25MM
(t) Hartford Professional E&O .25MMp/o 15MMxs 25MM
(u) INA Professional E&O .25MMp/o 15MMxs 25MM
(v) North River Professional E&O .25MMp/o 15MMxs 25MM
(w) Aetna C&S Professional E&O 1.25MMp/o 5MMxs 40MM
(x) Fireman's Fund Professional E&O .75MMp/o 5MMxs 40MM
(y) INA Professional E&O .75MMp/o 5MMxs 40MM
(z) Federal Professional E&O .60MMp/o 5MMxs 40MM
(aa) Travelers Professional E&O .50MMp/o 5MMxs 40MM
(bb) Amer. Zurich Professional E&O .50MMp/o 5MMxs 40MM
(cc) Hartford Professional E&O .25MMp/o 5MMxs 40MM
(dd) Utica Mnt. Professional E&O .25MMp/o 5MMxs 40MM
(ee) The Home Professional E&O .15MMp/o 5MMxs 40MM
9.
(a) National Union Directors & 15,000,000*
xs
Officers deductible:
CORPORATE REIMBURSEMENT
-----------------------
2,500,000/Loss
-
regulatory
750,000/Loss-other
INDIVIDUAL COVERAGE
-------------------
10,000/director
or
officer
100,000aggregateper
loss
(b) Harbor Directors & 5,000,000xs15,000,000
Officers
34
<PAGE>
(c) North River Directors & 1,000,000xs20,000,000
Officers
(d) Federal Directors & 4,000,000xs21,000,000
Officers
(e) Great Amer. Directors & 10,000,000xs25,000,000
Officers
(f) INAPRO Directors & 2,000,000xs40,000,000
Officers
(g) Home Directors & 2,000,000xs42,000,000
Officers
(h) National Union Directors & 5,000,000xs35,000,000
Officers
*5% coinsurance applies to the first 1,000,000 of loss.
10. CNA Commercial (subject to a 1,000
----------
Property: deductible)
--------
real & personal
in transit 35,000,000eachoccurence
extra expense 1,000,000eachoccurrence
extra expense 2,000,000eachoccurrence
11. Travelers Boiler & Machinery 25,000,000 each accident
(subject to a 1,000
deductible)
12.
(a) Federal Comprehensive 10,000,000 per loss
-------------
Crime: (subject to a 2.5MMded.)
-----
Blanket Coverage
for employee
dishonesty,
property on
premises and in
transit, forgery,
etc.
35
<PAGE>
(b) National Union Comprehensive 10,000,000xs10,000,000
-------------
Crime:
-----
Blanket Coverage
for employee
dishonesty,
property on
premises and in
transit, forgery,
etc.
(c) INA Comprehensive 5,000,000xs20,000,000
-------------
Crime:
-----
Blanket Coverage
for employee
dishonesty,
property on
premises and in
transit, forgery,
etc.
(d) National Union Comprehensive 5,000,000xs25,000,000
-------------
Crime:
-----
Blanket Coverage
for employee
dishonesty,
property on
premises and in
transit, forgery,
etc.
(e) Reliance Comprehensive 7,500,000xs30,000,000
-------------
Crime:
-----
Blanket Coverage
for employee
dishonesty,
property on
premises and in
transit, forgery,
etc.
13.
(a) Federal Special 15,000,000perevent
Contingency
(b) American Ins. Group Special 20,000,000xs15,000,000
Contingency
(c) Lloyd's Special 15,000,000xs35,000,000
Contingency
36
<PAGE>
14. Federal First Class Mail 250eachpackage
1,100,000peraddress
per day
15. Federal Registered Mail 2,500,000each package
2,500,000per addressper
day
16. CNA Travel Accident Class I Employee 350,000
max.
ClassII Employee 100,000
max.
SPECIAL SELF-INSURED FUNDING ARRANGEMENTS OF A&A
------------------------------------------------
17. Automobile Physical ACV Comprehensive less 250 deductible
Damage Plan: ACV Collision less 250 deductible
18. Crime Deductible Fund : Formula for disbursements has not yet been
finalized
19. EEO Liability Fund : Formula for disbursements has not yet been
finalized
B. Independent SMCO Insurance Policies:
1. Lawyers Title Insurance Title Insurance 23,288,276 Leasehold
Co. Owners'
45,878,929 Mortgagee
2. First State Insurance Cos. E&O 1,000,000 xs 1,000,000
decl. (underlying to
Lloyd's Prof. E&O)
3. General Insurance Co. Directors & 1,000,000 xs Nat Union
of America Officers (below)
or xs deductible:
CORPORATE REIMBURSEMENT
-----------------------
50,000 for loss
INDIVIDUAL COVERAGE
-------------------
5,000 per director/
officer
20,000aggregate per loss
The following claim summary lists open case files for actual
and potential E&O claims against SMCO, ESI, EIC, or ICE.
All of these claims and potential claims have been reported
to A&A for protection under its professional indemnity
program.
37
<PAGE>
Additionally, all EIC cases with a DCM - date claim made -
of 12-4-86 or later have been reported to First State
Insurance Company.
At the present time, none of these claims exceed the
deductible amounts under any available E&O insurance policy.
In addition, approximately two or three unpaid workers
compensation claims are outstanding. These claims are fully
insured by the Hartford.
38
<PAGE>
Claim or
--------
DCM Potential
--- ---------
EIC SM
--- --
12/1/83 to 12-1-84
------------------
3-22-84 Johnson -- C
12-1-84 to 12-1-85
------------------
8-05-85 G.P.A. -- C
9-25-85 Int'l Finc Planners P P
11-13-85 Costello -- C
12-1-85 to 12-1-86
------------------
1-13-86 Burge Financial C P
1-22-86 Diplarakos P P
3-21-86 Lord Bissell & Brook P P
4-10-86 Mutual Fire (MF) -- P
5-09-86 Harrington -- C
7-23-86 Savitri Jain, M.D. C P
8-04-86 Sun Coast Hospital (MF) -- P
8-06-86 Lee v. The Travelers -- C
8-14-86 Advanced Environ (MF) -- P
8-14-86 N. Miami Gen Hosp (MF) -- P
8-19-86 Evander -- P
8-20-86 Krueger Engin (MF) -- C
9-04-86 Fidelity Bank (MF) -- C
9-30-86 Encino S&L (MF) -- C
10-01-86 Bonaldi Agency -- C
10-09-86 Esco Elevator C P
10-28-86 David Potter Duff C C
11-06-86 Schaffer -- P
11-10-86 American S&L (MF) -- C
11-14-86 Cook Int'l (Campb) (MF) -- P
39
<PAGE>
11-14-86 Shidler, McBroom (MF) -- P
11-14-86 Abrahamson (MF) -- P
11-14-86 Strout Realty (MF) -- P
11-24-86 Brobeck & Phlegler P P
11-26-86 Mutual Fire P P
12-1-86 to 12-1-87
------------------
12-02-86 Farm Bureau T&C P C
12-02-86 Murphy-Jahn P P
1-05-87 Duke Transportation P C
1-07-87 P.T. Umum -- P
1-14-87 Sigco Research C P
1-16-87 Auerbach -- C
1-20-87 Lakritz -- P
1-26-87 City of Harlingen C C
2-02-87 Wiltshire Group C P
2-05-87 Meyer, Rohrs -- P
2-10-87 Warren Oil Co. C P
3-02-87 Bob Speer C P
3-14-87 Christopher Hatch C P
3-16-87 Nevada National Bank C C
3-25-87 Rothstein (EIC) -- P
4-14-87 Chemical Sales Co. C P
4-21-87 Hassneh Ins. Co. P P
4-22-87 Eglseder & Levitt (MF) -- P
6-01-87 Phanlobh Vichaikul P C
6-05-87 Harold F. Leclair Co. C P
6-08-87 Swanke, Hayden -- C
6-09-87 Erma Johnson C P
6-24-87 Wayne Co. Nat. Bank C P
7-20-87 Martin et al. C P
40
<PAGE>
7-29-87 LaVine C C
8-03-87 Hammond & Company -- P
8-06-87 American Motorists -- C
8-24-87 Davis & Davis -- P
8-27-87 Diamond Claims C C
9-9-87 The Travellers (GA) -- P
7-24-87 Linkow -- P
9-14-87 American Medical International C C
9-9-87 Federal Ins. Co. C C
41
<PAGE>
SCHEDULE 2.26
A. SMCO Employment Agreements that might provide a stated
or implied term of employment:
1. Consulting Agreement with Joseph E. Morahan, Jr.
2. Employee Handbook.
3. Personnel Manual.
B. SMCO Employment Agreements providing compensation other
than salary (other than welfare, health or pension plans
listed on Schedule 2.27):
1. Officer Reimbursement Policy.
2. Short Term Bonus Plan and Covenant not to Compete.
3. Long Term Bonus Plan.
4. Excess Benefit Bonus Plan.
5. Severance Pay Policy.
6. Executive Committee Golf Club Membership Policy.
7. Deferred Compensation Agreement with Joseph J.
Prochaska, Jr.
8. Deferred Compensation Agreement with E.L. Calhoun.
9. Special Disability Income Protection Plan.
10. Retiree Life and Health Program.
11. Employee Handbook.
12. Personnel Manual.
13. Bonus plans for Donald Brayer and Robert Liston.
14. Company policy on Automobiles for Executive
Committee Members.
15. Deferred Compensation Agreement with M.W. Beam.
42
<PAGE>
C. ESI, EIC or ICE Employment Agreements providing a stated
term of employment or compensation other than salary.
None.
D. Agreements between Seller or Seller's affiliates and
subsidiaries and SMCO, ESI, EIC, or ICE not disclosed
elsewhere:
1. Agreement between A&A and SMCO providing for
reimbursement by A&A to SMCO of deferred amounts
payable to J.E. Morahan, Jr. in 1988.
2. Incentive Stock Option Plan
3. Two insurance policies issued by EIC in favor of A&A
and all owned entities providing brokers and agents
errors and omissions coverage for the period from
12:01 AM to 11:59 PM December 31, 1980.
4. Hemisphere Marine & General Assurance (Bermuda) Ltd.
aggregate excess of loss reinsurance covering EIC
effective December 31, 1982.
5. Two facultative reinsurance agreements between
Hemisphere Marine & General Assurance (Bermuda) Ltd.
as reinsurer and EIC as reinsured from 12:01 AM to
11:59 PM December 31, 1980.
43
<PAGE>
SCHEDULE 2.27
A. Employee Benefit Programs subject to ERISA:
Profit Sharing Plan
Money Purchase Pension Plan
Defined Benefit Pension Plan
Health and Dental Plan
Flexible Benefit Plan (including component plans)
44
<PAGE>
SCHEDULE 2.30
A. Insurance regulatory registrations, filings, or
submissions not made available to Buyer:
None
B. Registrations, filings, or submissions not in compliance
with applicable law:
See Schedule 2.20, incorporated herein by reference.
45
<PAGE>
SCHEDULE 2.31
A. 1987 Treaty Reinsurers of EIC or ICE:
A.M.P. Fire & General Insurance Company, Limited
American Hardware Mutual Insurance Co.
Austin Mutual Insurance Co.
Auto-Owners Insurance Co.
Baltica-Skandinavia Reinsurance Co. of America, Inc.
Celfor Insurance Company
Chiyoda Fire & Marine Insurance Company, Limited
Colonial Mutual General Insurance Company Limited
Columbia Mutual Insurance Company
The Copenhagen Reinsurance Co. of America
Dai Tokyo Fire & Marine Insurance Company Limited
Dai Tokyo U.K.
Dorinco Reinsurance Co.
Dowa Fire & Marine Insurance Company Limited
Druggists Mutual Insurance Co.
Eisen & Stahl Ruckversicherungs A.G.
Evanston Insurance Company
Excess Insurance Company
Farm Bureau Mutual Insurance Co. of Michigan
Farmers Home Mutual Insurance Co.
Folksam International Insurance Co., Ltd.
Fuji Fire & Marine Insurance Company Limited
John Hancock Reinsurance Management/Hanseco
Insurance Co.
Hannover Ruckversicherungs A.G.
Homestead Insurance Company
Insurance Company of Evanston
Insurance Corporation of Hannover
Israel Reinsurance Company Limited
Alii Reinsurance Company Limited
Kyoei Mutual Fire & Marine Insurance Company
Paul J. McGee Associates/RLS Insurance Co.
Michigan Mutual Insurance Co.
Midwest Family Mutual Insurance Co.
Nichido Fire & Marine Insurance Company Limited
North Star Mutual Insurance Co.
Royale Belge
Russell Reinsurance Service/Employers Mutual
Casualty Accounts A&B
Signet Reinsurance Company
Sphere Drake Insurance Co.
Stockholm Reinsurance Company, Ltd.
Travelers Indemnity Co.
Underwriters at Lloyds
46
<PAGE>
United Fire & Casualty Company
United States Fidelity and Guaranty Company
Utah Home Fire Insurance Company
West Bend Mutual Insurance Company
Western National Mutual Insurance Company
B. Management and Underwriting Agreements to which SMCO,
ESI, EIC or ICE is a party:
1. American Bankers Ins. Co. of Florida - SMCO.
Management Agreement, effective April 1, 1977 through
December 31, 1982.
2. General Accident Insurance Co. of America - SMCO.
------------------------------------------------
Underwriting Management Agreement, effective November
1, 1980 through June 30, 1986.
3. General Accident Insurance Co. of America - SMCO.
------------------------------------------------
Reinsurance Management Agreement, effective October
20, 1980 through December 31, 1986.
4. General Accident Insurance Co. of Puerto Rico Limited
-----------------------------------------------------
- SMCO. Underwriting Management Agreement, effective
------
January 1, 1983 through December 31, 1985.
5. EIC - ESI - SMCO. Tripartite Underwriting Management
----------------
Agreement, effective January 1, 1982.
6. ESI - SMCO. Underwriting Management Agreement, dated
----------
September 27, 1982.
7. ICE - ESI - SMCO. Tripartite Underwriting Management
----------------
Agreement, effective January 1, 1982 as amended.
8. Underwriters at Lloyd's, London - SMCO. Lawyers
--------------------------------------
Errors and Omissions Contract # 8791 effective January
1, 1987.
9. Northbrook Excess & Surplus Insurance Co. - SMCO.
------------------------------------------------
Underwriting Management Agreement, effective through
December 31, 1981.
10. Utica Mutual Insurance Co. - Professional Insurance
---------------------------------------------------
Agents Association - SMCO. Underwriting Management
-------------------------
Agreement, effective March 15, 1971 through December
31, 1987. Utica has given notice of termination
effective as of December 31, 1987.
47
<PAGE>
11. Mutual Fire, Marine & Inland Insurance Co. - SMCO.
-------------------------------------------------
Underwriting Management Agreement effective June 30,
1977 through December 31, 1984.
12. Barristers Insurance Co. - Risk Retention Group -
-------------------------------------------------
SMCO. Underwriting Consultation and Claims Service
----
Agreement, not yet finalized.
13. Managing Partners Council - SMCO. Service Agreement,
--------------------------------
presently in effect.
14. EIC - Corrie Bauckham Batts Strickland Ltd.
------------------------------------------
Management Agreement, effective April 1, 1985.
15. Environmental Protection Insurance Co. - Risk
---------------------------------------------
Retention Group - SMCO. Management Agreement, not yet
----------------------
finalized.
16. Denver Insurance Company - SMCO. Line slip effective
-------------------------------
between SMCO and other participants.
17. General Accident Insurance Co. of America - SMCO.
------------------------------------------------
Service Agreement for insurance policies effective
July 1, 1986.
18. Northbrook Excess & Surplus Insurance Co. - SMCO.
------------------------------------------------
Service Agreement for lawyers insurance policies
effective January 1, 1982.
19. Northbrook Excess & Surplus Insurance Co. - SMCO.
------------------------------------------------
Service Agreement for architects and engineers
insuance policies effective January 1, 1982.
20. First State Insurance Company - SMCO. Underwriting
------------------------------------
Management Agreement for hospital umbrella policies
including malpractice from January 1, 1977 to December
31, 1982.
E. Management and Underwriting Agreements having
termination provisions affected by the transactions of
this agreement:
1. See Schedule 2.10, which is incorporated herein by
reference.
2. Denver Insurance Co. Line Slip.
F. Reinsurers exhibiting account deficiencies:
48
<PAGE>
1. Approximately 100 reinsurers had account deficiencies
(excess of loss reserves over funds held in trust or
L.O.C.s) with SMCO and EIC as of August 31, 1987
ranging from $0 to approximately $2,800,000. The
following reinsurers had deficiencies greater than
$500,000:
A.A. Mutual Mutual Fire
Abeille Paix P.T. Umum
Gerling Global River Plate
Malayan Terra Nova
49
<PAGE>
SCHEDULE 2.32
A. Material contracts between EIC and ICE and brokers
authorizing such brokers to issue insurance policies on
their behalf:
1. Management Agreement between EIC and Corrie Bauckham
Batts Strickland Ltd. ("CBBS") dated April 1, 1985.
(Terminable by either party on 6-months' notice).
The following agents have been signed as producers
for EIC by CBBS under the above management
agreement:
ADCO General Corporation Denver, Colorado
All Risks, Ltd. Towson, Maryland
Arkansas General Agency Fort Smith, Arkansas
Bolton & Company Louisville, Kentucky
Casualty Underwriters, Inc. St. Paul, Minnesota
Cochrane Griffin Bellevue, Washington
& Co., Inc.
EBCO Commercial Lines Memphis, Tennessee
Underwriters
Erickson-Larsen, Inc. Brooklyn Park, MN
Franklin Excess & Columbus, Ohio
Surplus Agency, Inc.
Burns & Wilcox, Ltd. Southfield, Michigan
I-West Insurance Managers San Diego, California
K.W. Underwriters Metairie, Louisiana
Med James, Inc. Shawnee Mission, KS
Montgomery General Ardmore, Pennsylvania
Agency, Inc.
Preferred General Agency Anchorage, Alaska
of Alaska, Inc.
R.J. Saex Insurance Holyoke, MA
Agency, Inc.
Westward Insurance Phoenix, Arizona
Specialties Co., Inc.
(The Producer agreements signed by the above
producers are terminable by either party upon 30-
days' notice.)
2. Agreement between SMCO and I-West Insurance
Managers, Inc., effective July 23, 1987.
(Terminable upon 60-days' notice.)
3. Agreement between SMCO and Skanco International,
Ltd. effective July 14, 1987. (Terminable upon 60-
days' notice.)
4. Theodore Liftman one year exclusive contract.
50
<PAGE>
SCHEDULE 2.33
A. Registered trademarks or service marks owned by SMCO,
ESI, EIC, or ICE:
1. ALTIS - registered in Illinois.
2. SLIM
B. Third party software material to SMCO, ESI, EIC, or ICE:
1. "PCMF" Software by E.D.S. Corporation.
(Maintenance Agreement expires January 31, 1987)
2. Office management software by Management Science
America, Inc.
3. NBI software by N.B.I., Inc.
C. In-House material software systems developed and owned
by SMCO:
1. PRAIS
2. Invoicing
3. Broker
4. Reinsurance Assumed
5. LEAP
6. RGS
7. On-Line Risk Experience
8. Types of Business
51
<PAGE>
SCHEDULE 2.37
Total federal taxable income under SMCO Safe Harbor Lease
agreements with ITT and U.S. Air:
Federal
Year Taxable Income
---- -----------------
1987* $ 222,902
1988 $ 474,505
1989 $ 782,218
1990 $1,116,813
1991 $2,109,242
1992 $2,557,689
1993 $3,102,543
1994 $3,764,776
1995 $4,456,156
1996 $5,139,851
1997 $4,054,377
1998 $4,943,512
1999 $5,956,273
2000 $2,223,897
2001 $1,259,601
2002 $ 726,335
2003 $ 300,958
2004 $ 360,618
2005 $ 432,105
2006 $ 517,763
2007 $ 620,402
2008 $ 743,387
2009 $ 890,751
2010 $1,067,329
2011 $1,161,554
----------
Total $48,985,557
___________________
* Federal taxable income for the period July 1, 1987 to
December 31, 1987.
52
<PAGE>
SCHEDULE 3.4
Filings, Consents, Approvals, etc. required by Buyer or any
Affiliate of Buyer to consummate transaction:
1. A "Form A" must be filed by Buyer with the insurance
regulatory agencies of the following states:
Illinois
2. Lord, Bissell & Brook is conducting research as to
state "takeover" statutes, as well as state
insurance statutes. Such research may indicate the
need or desirability of further consents, approvals,
or notices.
3. The New Hamphsire Insurance Department has indicated
that it will not reinstate EIC's surplus lines
authorization before it has had an opportunity to
review the financial statements of Buyer and
Affiliates.
4. Hart-Scott-Rodino filings may be required on the
part of Buyer and/or Seller.
53
<PAGE>
SCHEDULE 3.9
Legal and beneficial owners of the common stock of Buyer:
Owner Number of Shares
----- ----------------
Fairfax 100
Markel 100
54
<PAGE>
SCHEDULE 4.8
Lines of insurance with respect to Seller's covenant not to
compete:
Architects and Engineers Professional Liability
Hospital Professional Liability
Insurance Agents and Brokers Errors and Omissions
Liability
Insurance Companies Errors and Omissions and Directors
and Officers Liability
Lawyers Professional Liability
Medical Malpractice Professional Liability
Mutual Fund and Investment Advisors Errors and Omissions
and Directors and Officers Liability
Products Liability
Environmental Impact and Liability
Errors and Omissions Coverages for any of the following:
Advertisers
Associations
Claims Adjusters
Communication Consultants
Electronic Data Processors
Executive Search Firms
Franchisors
Management Consultants
Manufacturers' Product Engineering or Design
Marketing Agencies/Consultants Printers
Property Managers
Tax Preparers
Testing Labs
Translators
Travel Agents
Trustees
Unauthorized Computer Access
55
<PAGE>
SCHEDULE 5.10
Amounts payable by A&A to SMCO, other than payments for the
Safe Harbor Leases listed on Schedule 2.37, which is
included herein by reference:
J. Morahan special payroll
adjustments $419,455.69(1)
Reimbursable travel expenses-
J. Morahan $883.53
P. West 39.40
B. Libby 640.13 1,563.06
E&O reimbursements 562,577.32
----------
Total $983,596.07
-----------
(1) This amount represents reimbursements of deferred
compensation payments payable by SMCO to J. Morahan in
1988. Payment for reimbursement is not due from A&A
until actual payments are made by SMCO. In addition,
certain amounts that comprise these payments accrue
interest at a rate that cannot be determined until the
actual date of payment by SMCO to J. Morahan.
56
<PAGE>
SCHEDULE 6.12
Amounts payable by SMCO to A&A:
1986 Management fees $ 770,000.00
1987 General insurance 1,661,000.00(1)
1987 Excess building charge 205,002.00
E&O reimbursement 133,379.14
----------
Total $2,769,381.14
-------------
(1) Represents ultimate amount due if coverage remains in
force through year end. $833,833 has been expensed
through 6/30/87. Per A&A's instructions, this amount
has been set up as a prepaid amount on SMCO's books,
thus bringing the net payable at 6/30/87 to $827,167
($1,661,000 - $833,833). If the effective date of the
Closing is prior or subsequent to 12/31/87, an
appropriate pro-rata adjustment will have to be made to
the $1,661,000.
57
<PAGE>
ALEXANDER & ALEXANDER INC.
1211 Avenue of the Americas
New York, New York 10036
As of February 15, 1989
F-M Acquisition Corporation
c/o Fairfax Financial Holdings Limited
Suite 800
95 Wellington Street West
Toronto, Ontario
Canada M5J2N7
Attention: Mr. Prem Watsa
AMENDMENT NO. 1 TO STOCK PURCHASE AGREEMENT,
dated as of October 7, 1987, between
F-M Acquisition Corporation and
Alexander & Alexander Inc.
--------------------------------------------
Dear Sirs:
We refer to the Stock Purchase Agreement (the
"Stock Purchase Agreement"), dated as of October 7, 1987,
between you and us providing for the sale by us to you of
all of the outstanding common stock of Shand Morahan &
Company, Inc. Terms used and not otherwise defined herein
have the meanings specified in the Stock Purchase Agreement.
As you are aware, you and we have differed as to
how certain issues relating to optional extension period
policies are addressed in the Stock Purchase Agreement.
This Agreement, and the amendments to the Stock Purchase
Agreement contained herein, are intended to resolve those
differences and to provide for other adjustments to the
<PAGE>
amounts payable, and credits against amounts payable, under
the Stock Purchase Agreement that you and we agreed were
appropriate in connection with such resolution.
You and we hereby agree as follows:
1. Amendments to Article I of the Stock Purchase
---------------------------------------------
Agreement.
---------
1.1. Deferred Purchase Price. Section 1.4(a) of
-----------------------
the Stock Purchase Agreement is amended by inserting the
following heading immediately after "(a)" at the beginning
of such section:
"Elements of Deferred Purchase Price."
-----------------------------------
and by amending the final sentence of Section 1.4(a) to read
in its entirety as follows:
"'Adjustment Date' shall mean March 19, 1991."
1.2. Limitations on Total Adjustment. Section
-------------------------------
1.4(b) of the Stock Purchase Agreement is amended by
inserting the following heading immediately following "(b)"
at the beginning thereof:
"Limitations on Total Adjustment."
-------------------------------
1.3. Amounts Equivalent to Interest. Section
------------------------------
1.4(c) of the Stock Purchase Agreement is amended in its
entirety to read as follows:
"(c) Assumed Interest Rates and Payments. The
-----------------------------------
amount equivalent to interest referred to in clauses
2
<PAGE>
(iii), (iv) and (vi) of Section 1.4(a) shall be
calculated on the basis of a 365- or 366-day year, as
the case may be, and the actual number of days elapsed
and shall be accrued on, and for the entire periods
specified in Section 1.4(a) with respect to, the
Contingent Amount, the Adjustment Amount and the Non-
Contingent Amount, as the case may be, at the rates set
forth in clauses (i) and (ii) below, and shall be
subject to the further provisions of this Section
1.4(c).
(i) Assumed Interest Rate for Contingent
------------------------------------
Amount and Adjustment Amount. The assumed
----------------------------
interest rate per annum shall be 13.36% in the
case of the Contingent Amount and 9.55% in the
case of the Adjustment Amount.
(ii) Assumed Interest Rate for Non-Contin-
-------------------------------------
gent Amount. The assumed interest rate per annum
-----------
on the Non-Contingent Amount shall be 16.17% or,
under the circumstances hereinafter specified, one
of the following respective amounts:
(A) An assumed interest rate per annum
of 11.86% shall apply if Buyer shall have
delivered to Seller on or before February 28,
1989 an unconditional and irrevocable
3
<PAGE>
guarantee or letter of credit (the "Financial
Guarantee"), in form and substance reasonably
satisfactory to Seller, that is in the amount
of the Non-Contingent Amount and the amount
equivalent to interest that has accrued
thereon prior to the date on which such
guarantee or letter of credit becomes
effective and the amount equivalent to
interest which would accrue thereon there-
after until the fifth anniversary of the
Closing Date, in both cases at the rates
determined as provided in this Section 1.4(c)
and that will remain in effect for a term
ending not earlier than the sixth anniversary
of the Closing Date, from a bank, other
financial institution or Hees International
Bancorp Inc., if such bank, financial
institution or corporation is rated AA or
better by Standard & Poor's Corporation (or
received a comparable rating from a
comparable agency).
(B) An assumed interest rate per annum
of 12.89% shall apply if Buyer shall have
delivered to Seller the Financial Guarantee
4
<PAGE>
after February 28, 1989 and on or before the
second anniversary of the Closing Date.
(C) An assumed interest rate per annum
of 13.95% shall apply if either (I) Buyer
-
shall have delivered to Seller the Financial
Guarantee after the second anniversary of the
Closing Date and on or before the third
anniversary of the Closing Date or (II) on or
--
before such third anniversary a condition set
forth in the following subclauses shall have
occurred and such condition shall continue to
be true to and including the Payment Date:
(1) EIC shall have received
written notice that it has received, and
shall maintain, a rating of B+ or better
from A.M. Best & Company ("Best"); or
(2) if, and only if, EIC is rated
NA-5 (Significant Change) by Best and
(x) EIC shall have received written
-
notice that it has received, and shall
maintain, a rating of A or better by
Standard & Poor's Corporation, or (y)
-
Buyer shall have, and shall maintain, a
Consolidated Net Worth (as defined in
5
<PAGE>
Section 10.16) in excess of $50 million,
or (z) Fairfax Financial Holdings
-
Limited ("Fairfax") and Markel
Corporation ("Markel") (1) shall have
-
executed and delivered to Seller a
guarantee substantially in the form
attached hereto as Exhibit J (the
"Overall Buyer Guarantee"), and (2)
-
either individually or together shall
have, and shall maintain, a Consolidated
Net Worth in excess of $70 million;
provided, that, if a condition set forth in
--------
clause (II)(1) or (2) above ceases to be
true, the assumed rate of interest brought
about by fulfillment of such condition shall
continue to apply if Buyer, within 60 days
following such cessation, delivers to Seller
the Financial Guarantee or fulfills one of
the other conditions set forth in clause
(II)(1) or (2). For purposes of this
proviso, the term "cessation" shall mean:
(m) in the case of clause (II)(1)
and (2), the date notice is received
6
<PAGE>
from a rating agency of a lowering of
the rating; and
(n) in the case of clause (II)(2),
the date of issuance of the first
quarterly balance sheet showing the
deficiency of Consolidated Net Worth
below $50 million.
(D) An assumed rate of 15.04% shall
apply if either (1) Buyer shall have
-
delivered to Seller the Financial Guarantee
after the third anniversary of the Closing
Date and on or before the fourth anniversary
of the Closing Date or (2) on or before such
-
fourth anniversary a condition set forth in
clauses (C)(II)(1) or (2) of this Section
1.4(c)(ii) shall have occurred and shall
continue to be true to and including the
Payment Date, subject to the same proviso as
is set forth immediately following such
clauses (C)(II)(1) and (2).
(iii) No Compounding. The application of
--------------
the assumed interest rates specified in paragraphs
(i) and (ii) of this Section 1.4(c) shall be on
the basis of simple interest, without compounding.
7
<PAGE>
(iv) Order of Payment. All payments of the
----------------
Deferred Purchase Price shall be applied first to
amounts due pursuant to Section 1.4(a)(iii), then
to amounts due pursuant to Section 1.4(a)(i), then
to amounts due pursuant to Section 1.4(a)(iv) and
finally to amounts due pursuant to Section
1.4(a)(ii), except that a prepayment pursuant to
Section 1.4(d)(ii) shall be applied first to
amounts due pursuant to Section 1.4(a)(iv) and
then to amounts due pursuant to Section
1.4(a)(ii).
(v) Overdue Amounts. An amount equivalent
---------------
to interest shall accrue on any portion of the
Contingent Amount and the Non-Contingent Amount
not paid when due at the assumed interest rate per
annum then applicable thereto plus 4%, provided
---- --------
that such rate of interest shall not apply to any
portion of the Deferred Purchase Price that is
subject to and withheld during a good-faith
dispute as to the Adjustment Amount, which portion
is ultimately determined to be payable to Seller
(and is so paid).
(vi) Guarantee by Fairfax and Markel of
----------------------------------
Contingent Amount. In consideration of Seller's
-----------------
8
<PAGE>
agreement to the assumed rates of interest
specified in paragraph (i) of this Section 1.4(c),
Fairfax and Markel have executed and delivered to
Seller a Guarantee, which shall become effective
as a guarantee only under the circumstances
specified in section 1 thereof."
1.4. Prepayment. Section 1.4(d) of the Stock
----------
Purchase Agreement is amended in its entirety to read as
follows:
"(d) Prepayment. Buyer, at its option, exercised
----------
by giving not less than 45 days' (or one day's, in the
case of a prepayment of the Non-Contingent Amount)
irrevocable notice to Seller designating the date of
prepayment, at any time may prepay, by wire transfer of
immediately available funds to such account as Seller
may designate, all, but not part, of (i) the Deferred
-
Purchase Price, or (ii) the Non-Contingent Amount and
--
the amount equivalent to interest accrued thereon, in
each case calculated as of the date of prepayment."
2. Amendment to Article X of the Stock Purchase
--------------------------------------------
Agreement. The introductory paragraph of Article X of the
---------
Stock Purchase Agreement is amended by deleting the second
sentence thereof and substituting therefor the following two
sentences:
9
<PAGE>
"Seller will consider in good faith in a timely
fashion any request by Buyer to waive any covenant or
breach thereof contained in this Article X and will
provide such waiver if and to the extent Seller
determines in good faith that the effect of such waiver
of compliance would not materially diminish the
likelihood of Buyer or (if a Guarantee Effectiveness
Event, as defined in the succeeding sentence, has
occurred) the Buyer Guarantors being able to perform
its or their obligations under this Agreement below
such likelihood at the date of this Agreement. The
term "Guarantee Effectiveness Event" shall mean the
execution and delivery by the Buyer Guarantors of the
Overall Buyer Guarantee."
3. Amendments to Article XI of the Stock
-------------------------------------
Purchase Agreement.
------------------
3.1. Additional Definitions. Section 11.1 of the
----------------------
Stock Purchase Agreement is hereby amended by inserting the
following definitions into such Section in the respective
appropriate places so that the definitions in such Section
are in alphabetical order:
"Auditable Premium and Auditable Refund: an
--------------------------------------
additional premium (herein called an "Auditable
Premium") above an initial, base or deposit premium
10
<PAGE>
which may be payable, or a partial refund (herein
called an "Auditable Refund") of an initial, base or
deposit premium which may be made, in accordance with a
calculation formula provided for in an insurance policy
(often called an auditable or adjustable, or a retro,
policy), which formula is based on the amount of
certain revenues received by the insured or on other
objective measures of the insured's exposure, or on the
amount of certain losses of the insured, during a
period related to the term of such policy."
"Commutation Amount: any amount of cash actually
------------------
received by ESI or any of its Subsidiaries from a
reinsurer in a commutation or other settlement in
respect of any reinsurance recoverable that would or
could be a factor in the calculation of the Adjustment
Amount, provided that such Commutation Amount is so
--------
received after December 31, 1987 and prior to the
delivery to Seller of Buyer's determination of the
Adjustment Amount pursuant to the first sentence of
Section 11.3(b)."
"Commutation Amount Earnings: the interest that
----------------------------
would be earned on all or any part of a Commutation
Amount, when calculated as follows:
11
<PAGE>
(a) Interest rate per annum: equal to 90% of the
-----------------------
yield of 90-day U.S. Treasury securities most recently
issued by the United States prior to the date on which
such Commutation Amount is received, as reported in
Federal Reserve Statistical Release H.15(519) (or if
such Statistical Release is no longer available, in any
publicly available source of similar market data).
(b) Interest period: the number of days elapsed
---------------
commencing with the day following the date of receipt
of the Commutation Amount and ending on (but including)
the earlier of (i) December 31, 1993, and (ii) the date
- --
on which such Commutation Amount (or part thereof) is
applied against losses that would have been paid to the
reinsured under the reinsurance policy in respect of
which such Commutation Amount was received; provided,
--------
however, that as to any part of a Commutation Amount
-------
not so applied on or prior to the Determination Date,
this clause (ii) shall cease to be applicable and
--
interest shall be calculated for a period ending on
(but including) December 31, 1993.
(c) Apportionment: for any interest period that
-------------
includes a period of less than one year, the
calculation for such partial year shall be based on a
12
<PAGE>
fraction of which the numerator is the number of days
within the interest period and the denominator is 365."
"Included Losses:
---------------
(a) all losses under Included Policies which
expired prior to January 1, 1987;
(b) all losses, resulting from events occurring
prior to January 1, 1987, under Included Policies A
which are occurrence policies (or are contracts of
reinsurance providing reinsurance for occurrence
policies);
(c) all losses, for which the date of loss (as
provided in the relevant insurance policy) was prior to
January 1, 1987, under Included Policies A which are
claims-made policies (or are contracts of reinsurance
providing reinsurance for claims-made policies); and
(d) all losses under Included Policies B."
"Included Policies:
-----------------
(a) insurance policies (except in respect of any
portion of the term thereof that is an Optional
Extension Period and except for project policies) or
contracts of reinsurance (except in respect of any
portion of the term thereof that provides for rein-
surance in respect of an Optional Extension Period and
except for those contracts that provide reinsurance in
13
<PAGE>
respect of project policies) entered into by ESI and
its Subsidiaries (as insurer or reinsurer, as the case
may be) that were in effect (and as in effect) prior to
January 1, 1987; and
(b) insurance policies or contracts of reinsur-
ance (except for those policies or contracts that pro-
vide insurance or reinsurance in respect of project
policies) entered into by ESI and its Subsidiaries (as
insurer or reinsurer, as the case may be) that were in
effect (and as in effect) prior to January 1, 1987 and
under the terms of which there could be, or could be
reinsurance provided for, an Optional Extension Period,
but only in respect of any portion of the term thereof
that is, or that provides reinsurance for, an Optional
Extension Period; and "Included Policies A" and
"Included Policies B" mean Included Policies described
in clauses (a) and (b) above, respectively."
"Included Premiums: the amount which is 75%
-----------------
of the sum (without duplication of any amounts) of:
(a) the full amount (without deduction for
deferred acquisition costs) of premiums earned by ESI
and its Subsidiaries after June 30, 1987 (determined in
accordance with generally accepted accounting
principles, applied on a basis consistent with that
14
<PAGE>
used at December 31, 1986) in respect of Included
Policies B; and
(b) the amount (which may be a negative number)
resulting when the following percentage of the full
amount (without credit for deferred acquisition costs)
of each Auditable Refund for which ESI and its
Subsidiaries become liable after June 30, 1987 is
subtracted from the following percentage of the full
amount (without deduction for deferred acquisition
costs) of each Auditable Premium earned by ESI and its
Subsidiaries after June 30, 1987 (all determined in
accordance with generally accepted accounting prin-
ciples, applied on a basis consistent with that used at
December 31, 1986):
- if the Auditable Refund or Auditable Premium
is in respect of an Included Policy B, 100%;
- otherwise, that percentage which is the
percentage of the entire term of the Included
Policy constituted by the portion of the
policy term which commenced at the policy's
effective date and which terminated on the
earlier of the policy's termination date and
December 31, 1986; and
15
<PAGE>
(c) with respect to premiums earned by ESI and
its Subsidiaries under any insurance policy written by
ESI or one of its Subsidiaries and in effect prior to
January 1, 1987, the aggregate net amount, if any, by
which such premiums, as recognized on the books of ESI
and its Subsidiaries as earned in respect of such
policies as at June 30, 1987 (and reflected in the
financial statements as at that date delivered to Buyer
pursuant to Section 2.12), are less than (in which case
such amount will be a positive number) or greater than
(in which case such amount will be a negative number)
the amount of premiums that would have been recognized
as earned at December 31, 1986 if such premiums were
treated as earned pro rata over the risk period covered
by such policy (or, if Buyer and Seller shall agree
that, in respect of any policy, it would not be
equitable to have the premiums under such policies be
treated as earned pro rata (Buyer and Seller hereby so
agreeing in respect of project policies generally)1,
as earned on such policy in a manner that Buyer and
Seller shall agree is equitable)."
--------------------
1. This clause does not derogate from the exclusion of
losses under project policies from Included Losses.
16
<PAGE>
"Optional Extension Period: that portion of
-------------------------
the term of a claims-made insurance policy listed
(subject (a) to changes as a result of an audit of such
-
policies by Seller, (b) to correction of typographic
-
errors and minor errors of identification and (c) to
-
the deletion of any project policies included therein)
in the Schedule identified by Buyer and Seller as the
"Schedule of Optional Extension Periods" at the time of
their entering into Amendment No. 1, dated as of
February 15, 1989, to this Agreement which is an
extension of the original term of the policy within
which claims must be first made against the insured to
be covered under the policy, if such extension has
occurred by the exercise of a right of the insured,
contained in the original policy, to obtain such
extension, with or without payment of an additional
premium."
3.2. Determination of Adjustment Amount. Section
----------------------------------
11.2 of the Stock Purchase Agreement is amended in its
entirety to read as follows:
"11.2 Adjustment Amount. As used in this
-----------------
Agreement, the "Adjustment Amount" shall mean an amount
equal to:
17
<PAGE>
(a) the amount (whether positive or
negative) which is equal to:
(i) 70% of an amount equal to the sum
of (x) 90% of the first $10 million, and
-
(y) 100% of the remainder, of any difference
-
(whether positive or negative) which results
when the sum of $160,823,000 and Included
Premiums is subtracted from the sum of:
(1) Reserves for Losses and Loss
Adjustment Expenses at the Determination
Date, and
(2) the aggregate amount of all losses
and loss adjustment expenses paid by ESI
and its Subsidiaries from January 1,
1987 to the Determination Date, in the
case of each of clauses (1) and (2),
with respect only to Included Losses,
minus
-----
(ii) $4.3 million,
plus
----
(iii) $0.49 million;
PLUS
----
(b) 70% of an amount equal to the sum of
(x) 90% of the first $10 million, and (y) 100% of
- -
18
<PAGE>
the remainder, of any difference (whether positive
or negative) which results when $8 million is
subtracted from the following amount:
(i) Reserves for Uncollectible
Reinsurance at the Determination Date,
plus
----
(ii) the aggregate amount of Uncol-
lectible Reinsurance on paid claims written
off, net of any recoveries with respect
thereto, from January 1, 1987 to the
Determination Date,
minus
-----
(iii) the amount by which (x) the sum
-
of such Uncollectible Reinsurance owed by
Mutual Fire that is written off and such
Reserves for Uncollectible Reinsurance with
respect to Mutual Fire exceeds (y) $4.5
-
million,
minus
-----
(iv) recoveries from January 1, 1987 to
the Determination Date with respect to
reinsurance recoverables written off by ESI
and its Subsidiaries prior to January 1,
1987,
19
<PAGE>
in the case of each of clauses (i), (ii), (iii)
and (iv), with respect only to Included Losses;
PLUS
----
(c) the Indemnification Amount at the
Determination Date;
MINUS
-----
(d) one-third of the amount of the net
Federal, state or local tax savings in excess of
$6 million of such savings2 that are realized in
respect of tax periods through and including the
period in which the Determination Date occurs by
Buyer, SMCO, ESI, EIC, or ICE, determined as set
out in the penultimate sentence of this Section
11.2, as a result of any items reflected in
amounts determined pursuant to paragraphs (a), (b)
and (c) of this Section 11.2;
MINUS
-----
(e) all Commutation Amount Earnings;
PLUS
----
(f) one third of the amount of additional
taxes (Federal, state or local), if any, in
respect of Commutation Amount Earnings that would
--------------------
2. I.e., one-third of such savings to the extent that such
- -
one-third exceeds $2 million.
20
<PAGE>
be payable in tax periods through and including
the period in which the Determination Date occurs
if (i) Commutation Amount Earnings allocable to
-
tax periods through and including the tax period
in which the Determination Date occurs were
actually earned by ESI and its Subsidiaries in
such tax periods and (ii) Commutation Amount
--
Earnings allocable to tax periods after the tax
period in which the Determination Date occurs were
actually earned by ESI and its Subsidiaries in the
tax period in which the Determination Date occurs,
all determined as set out in the penultimate
sentence of this Section 11.2, provided that
--------
notwithstanding the foregoing the amount to be
added pursuant to this subdivision (f) shall be as
follows: (x) if the amount of net tax savings
-
referred to in subdivision (d) of this Section
11.2 (that is, the actual amount, not only the
amount in excess of $6 million) (the "Subdivision
(d) Savings") does not exceed $6 million, the
amount to be added shall be one third of the
amount, if any, by which the amount of additional
taxes referred to in this subdivision (f) (the
"Subdivision (f) Taxes") exceeds the Subdivision
21
<PAGE>
(d) Savings; and (y) if the Subdivision (d)
-
Savings exceed $6 million, the amount to be added
shall be one third of the sum of (I) the amount,
-
if any, by which the Subdivision (f) Taxes exceed
the Subdivision (d) Savings, and (II) the lesser
--
of (1) the Subdivision (f) Taxes, and (2) the
- -
amount by which the Subdivision (d) Savings exceed
$6 million.
If the Adjustment Amount is a negative number, it shall
be deemed to be equal to zero. No amount shall be
included in the Adjustment Amount to the extent that
Seller is obligated to indemnify Buyer with respect to
such amount pursuant to Section 8.1 prior to the
Determination Date. The determinations pursuant to
paragraph (d) of the tax savings realized and pursuant
to paragraph (f) of the additional taxes that would be
payable shall be determined each year by consolidating
or combining the current year taxable income (loss) of
Buyer, SMCO, ESI, EIC and ICE (taking into account
carryforwards and, to the extent arising no later than
the tax period that includes the Determination Date,
carrybacks) and excluding the income (loss) of any
other company. For purposes of determining the
Adjustment Amount, all Commutation Amounts received
22
<PAGE>
after the Determination Date shall be deemed to have
been received immediately prior to the Determination
Date.
3.3. Commutation of Uncollectible Reinsurance.
----------------------------------------
Section 11.6 of the Stock Purchase Agreement is hereby
amended by inserting the following sentence immediately
after the first sentence thereof:
"Seller's determination that the provisions of the
definition of Commutation Amount Earnings, to the
extent that they limit the interest calculation to
periods ending December 31, 1993, do not provide a fair
basis for estimating Buyer's earnings in respect of any
amount received as a result of such commutation,
reduction, settlement or discount shall be deemed a
reasonable basis for withholding such consent."
3.4 Right of Inspection. Section 11.7 of the
-------------------
Stock Purchase Agreement is hereby amended by inserting the
following phrase immediately after "Article XI" and before
the period at the end of the first sentence thereof:
"or to an audit of the policies listed in the Schedule
referred to in the definition of Optional Extension
Period in Section 11.1".
4. Amendment to Section 13.9 of the Stock
--------------------------------------
Purchase Agreement. Section 13.9 of the Stock Purchase
------------------
23
<PAGE>
Agreement is hereby amended by substituting the following
for the language in parentheses in the third line thereof:
"(except as provided in Section 11.3, but including any
dispute as to modifications to the Schedule of
insurance policies referred to in the definition of
Optional Extension Period in Section 11.1 as a result
of an audit of such policies by Seller)".
* * * * *
Except as otherwise herein provided, the Stock
Purchase Agreement is hereby ratified and confirmed in all
respects.
This Agreement may be signed in counterparts, each
of which shall be an original but all of which together
shall constitute one instrument.
24
<PAGE>
If you are in agreement with the foregoing, please
sign the form of agreement on the accompanying counterparts
of this Amendment No. 1 and return one of the counterparts
to us, whereupon this Amendment No. 1 shall become a binding
agreement between you and us.
Very truly yours,
ALEXANDER & ALEXANDER INC.
By:
-----------------------
Title:
The foregoing Agreement
is hereby agreed to as
of the date thereof.
F-M ACQUISITION CORPORATION
By:
------------------------
Title:
25
<PAGE>
WAIVER AND CONSENT
------------------
F-M Acquisition Corporation
c/o Markel Corporation
5310 Markel Road
Richmond, Virginia 23230
Gentlemen:
We refer to the Stock Purchase Agreement, dated as
of October 7, 1987 (as amended, the "Stock Purchase
Agreement"), between F-M Acquisition Corporation ("F-M
Acquisition") and Alexander & Alexander Inc. ("A&A").
You have advised us that F-M Acquisition has
entered into a Merger Agreement, dated as of December 10,
1990 (the "Merger Agreement"), with Shand/Evanston Group,
Inc. ("S/E Group") pursuant to which F-M Acquisition will
merge with and into S/E Group (the "Merger"). You have also
advised us that in connection with the Merger, F-M
Acquisition intends to enter into (or cause certain of its
subsidiaries to enter into) various other transactions
which, together with the Merger, are described in the Form A
Statement of Evanston Insurance Company ("EIC") and
Insurance Company of Evanston ("ICE"), dated October 18,
1990, and the supplement thereto, dated November 1, 1990,
consisting of a letter from Messrs. Lord, Bissell & Brook to
the Director of Insurance of Illinois (such Form A
Statement, as so supplemented, being herein referred to as
the "Form A"). Capitalized terms used herein without
definition shall have the meaning assigned to such terms in
the Form A.
Merger. With respect to the Merger as described
------
in the Form A and to the extent such Merger would otherwise
breach the covenants contained in Sections 10.2, 10.5, 10.7
and 10.8 of the Stock Purchase Agreement, A&A hereby waives
compliance with such covenants.
Purchases of M&H Shares. With respect to the
-----------------------
purchases of the M&H Shares by EIC and ICE from Markel
Corporation ("Markel") as described in the Form A and to the
extent such purchases would otherwise breach the covenants
contained in Sections 10.2, 10.5 and 10.10 of the Stock
Purchase Agreement, A&A hereby waives compliance with such
covenants.
<PAGE>
Purchases of Markel Preferred Stock. With respect
-----------------------------------
to the purchases by EIC and ICE of the Markel Preferred
Stock from Markel as described in the Form A and to the
extent such purchases would otherwise breach the covenants
contained in Sections 10.2, 10.5 and 10.10 of the Stock
Purchase Agreement, A&A hereby waives compliance with such
covenants.
Purchases of F-M Preferred Stock. With respect to
--------------------------------
the purchases by EIC and ICE of the F-M Preferred Stock from
Markel as described in the Form A and to the extent such
purchases would otherwise breach the covenants contained in
Sections 10.2, 10.5, 10.6 and 10.10 of the Stock Purchase
Agreements, A&A hereby waives compliance with such
covenants.
Year-End Dividend on F-M Preferred Stock. F-M
----------------------------------------
(or, after the effectiveness of the Merger, S/EG,) proposes
to pay a regular annual dividend (in respect of the year
1990) of $10.00 per share or an aggregate of $972,000 on or
about December 31, 1990. To the extent the payment of such
dividend would otherwise breach the covenants contained in
Sections 10.2 and 10.5 of the Stock Purchase Agreement, A&A
hereby waives compliance with such covenants.
Delivery by Markel of Overall Buyer Guarantee.
---------------------------------------------
The delivery of the Guarantee Agreement by Markel referred
to in the following paragraph shall be deemed to constitute
delivery by Markel (but not Fairfax Financial Holdings
Limited) of a commitment equivalent to the "Overall Buyer
Guarantee", as it relates to Markel, for purposes of clause
(ii) of the introductory paragraph of Article X of the Stock
Purchase Agreement, provided, that nothing in this Waiver
--------
and Consent shall preclude F-M Acquisition from asserting
that a "Guarantee Effectiveness Event" (as defined in
Article X of the Stock Purchase Agreement) has occurred, and
provided further that nothing in this Waiver and Consent
----------------
shall preclude A&A from asserting that a "Guarantee
Effectiveness Event" has not occurred. In evaluating
requests for waivers pursuant to Article X, A&A will give
consideration, in its good faith judgment, to the financial
position of Markel in addition to that of Buyer.
Scope of this Waiver and Consent. This Waiver and
--------------------------------
Consent is strictly limited to the specific transactions
described herein and carries no implication as to the
granting of waivers and consents with respect to
transactions of a similar nature in the future. Without
2
<PAGE>
limiting the generality of the foregoing, the Purchases of
F-M Preferred Stock and the Year-End Dividend on F-M
Preferred Stock, as described in the paragraphs above so
designated, shall be included in the calculation of
Restricted Payments, as defined in Section 10.16 of the
Stock Purchase Agreement, in any calculation made hereafter
under Section 10.2 of the Stock Purchase Agreement.
Effectiveness. This Waiver shall become effective
-------------
simultaneously with the delivery to A&A of both (i) a
-
certain Confirmation and Assumption Agreement, of even date
herewith (but to take effect simultaneously with the
Merger), executed by S/E Group; and (ii) a certain Guarantee
--
Agreement, of even date herewith, executed by Markel
Corporation, a Virginia corporation, which shall be
effective on delivery.
ALEXANDER & ALEXANDER INC.
By_________________________
Title:
Dated: December 18, 1990
3
<PAGE>
CONFIRMATION AND ASSUMPTION AGREEMENT
-------------------------------------
CONFIRMATION AND ASSUMPTION AGREEMENT, dated as of
December 18, 1990 by SHAND/EVANSTON GROUP, INC., a Virginia
---
corporation ("S/E Group"), for the benefit of ALEXANDER &
ALEXANDER INC., a Maryland corporation ("A&A).
WHEREAS, A&A and F-M Acquisition Corporation, an
Illinois corporation ("F-M Acquisition"), entered into a
Stock Purchase Agreement, dated as of October 7, 1987 (as
amended from time to time, the "Stock Purchase Agreement"),
pursuant to which A&A sold to F-M Acquisition all of the
outstanding shares of capital stock of Shand, Morahan &
Company, Inc.
WHEREAS, F-M Acquisition and S/E Group have
entered into a Merger Agreement, dated as of December 10,
1990 (the "Merger Agreement"), pursuant to which F-M
Acquisition will merge with and into S/E Group (the "Merger
Agreement").
WHEREAS, pursuant to Section 10 of the Stock
Purchase Agreement, the Merger may not be consummated
without the prior written consent of A&A.
WHEREAS, A&A is not willing to consent to the
Merger unless S/E Group enters into this Agreement.
NOW, THEREFORE, to induce A&A to consent to the
Merger and for other good and valuable consideration, the
sufficiency of which is hereby acknowledged, S/E Group
agrees as follows:
1. Confirmation and Assumption. S/E Group
---------------------------
hereby confirms its liability for, as the surviving
corporation under the Merger Agreement, and in addition
hereby expressly assumes, all of the debts, liabilities,
duties, and obligations of F-M Acquisition, including but
not limited to the debts, liabilities, duties and
obligations of F-M Acquisition under the Stock Purchase
Agreement and the Pledge Agreement (as defined in the Stock
Purchase Agreement), and any other agreements executed by
F-M Acquisition pursuant or incidental to the Stock Purchase
Agreement as if in each case they had been originally
executed by S/E Group.
2. Further Assurances. From time to time, S/E
------------------
Group will execute and deliver such further instruments or
agreements and will take such other action as A&A may
reasonably request in order more fully to evidence the
<PAGE>
confirmation and assumption undertaken by S/E Group pursuant
to paragraph 1 of this Agreement.
3. Binding Effect. This Agreement shall be
--------------
binding upon S/E Group, its successors and assigns and inure
to the benefit of A&A and any A&A Affiliate (as defined in
the Stock Purchase Agreement), and their respective
successors and assigns.
4. Effective Date. This Agreement shall take
--------------
effect simultaneously with the effectiveness of the Merger,
without any further action on the part of S/E Group, A&A or
any other person.
5. Governing Law. This Agreement shall in all
-------------
respects be governed by, and construed in accordance with,
the laws of the State of New York.
6. Counterparts. This Agreement may be executed
------------
in any number of counterparts, each of which shall be an
original, but all of which together shall constitute one
instrument.
IN WITNESS WHEREOF, S/E Group has caused this
Agreement to be executed by its duly authorized officer as
of the date first above written.
SHAND/EVANSTON GROUP, INC.
By________________________
Title:
ACKNOWLEDGEMENT
ALEXANDER & ALEXANDER INC. hereby
accepts and agrees to the foregoing
Confirmation and Assumption Agreement,
and agrees that, upon the effectiveness
of the Merger, S/E Group will be the
entity defined as "Buyer" under the
Stock Purchase Agreement
ALEXANDER & ALEXANDER INC.
By________________________
Title:
2
<PAGE>
ALEXANDER & ALEXANDER INC.
December 18, 1990
F-M Acquisition Corporation
Shand/Evanston Group Inc.
c/o Markel Corporation
5310 Markel Road
Richmond, Virginia 23230
Gentlemen:
Reference is hereby made to the Stock Purchase
Agreement dated as of October 7, 1987, between F-M
Acquisition Corporation, an Illinois corporation ("F-M"),
and Alexander & Alexander Inc., a Maryland corporation
("A&A"), as amended by Amendment No. 1 dated as of February
15, 1989 (the "Stock Purchase Agreement").
For purposes of determining compliance with the
covenants and agreements under the Stock Purchase Agreement,
we have agreed that Consolidated Net Worth (as defined in
Section 10.16 of the Stock Purchase Agreement) shall be
calculated so as to eliminate the impact of the application
by F-M of purchase accounting methods (commonly referred to
as "push-down" accounting) to the acquisition by Markel
Corporation, a Virginia corporation ("Markel"), of any
shares of capital stock of F-M. Accordingly, we have agreed
that Consolidated Net Worth shall be adjusted in the manner
set forth below:
(a) If the Consolidated Net Worth of Buyer (as
defined in the Stock Purchase Agreement), calculated as at
December 31, 1990 and calculated taking into account the
fair value adjustments (the "Fair Value Adjustments")
resulting from application by F-M of purchase accounting
methods to the acquisition by Markel of any shares of
capital stock of F-M (the "Adjusted Net Worth"), is greater
than the Consolidated Net Worth of Buyer, calculated as at
December 31, 1990 without taking into account the Fair Value
Adjustments (the "Unadjusted Net Worth"), then the amount by
which the Adjusted Net Worth is greater than the Unadjusted
Net Worth as at December 31, 1990 shall be subtracted from
the Adjusted Net Worth of Buyer in determining Consolidated
Net Worth for purposes of Section 10.16 of the Stock
Purchase Agreement. A subtraction in the same dollar amount
as was subtracted at December 31, 1990 shall be made in all
<PAGE>
future calculations of Consolidated Net Worth for purposes
of such Section 10.16.
(b) If the Unadjusted Net Worth as at December
31, 1990 is greater than the Adjusted Net Worth as at
December 31, 1990, then the amount by which the Unadjusted
Net Worth exceeds the Adjusted Net Worth shall be added to
the Adjusted Net Worth of Buyer in determining Consolidated
Net Worth for purposes of Section 10.16 of the Stock
Purchase Agreement. An addition in the same dollar amount
as was added at December 31, 1990 shall be made in all
future calculations of Consolidated Net Worth for purposes
of such Section 10.16.
If you are in agreement with the foregoing, please
indicate by signing in the space indicated below.
Very truly yours,
ALEXANDER & ALEXANDER INC.
By_________________________
Title:
ACCEPTED AND AGREED TO:
F-M ACQUISITION CORPORATION
By______________________________
Title:
SHAND/EVANSTON GROUP INC.
By______________________________
Title:
MARKEL CORPORATION, as Guarantor
under the Guarantee Agreement,
dated even date herewith, between
Markel Corporation and
Alexander & Alexander Inc.
By______________________________
Title:
2
SHARE PURCHASE AGREEMENT
between
SPHERE DRAKE ACQUISITIONS (U.K.) LIMITED
and
ALEXANDER STENHOUSE & PARTNERS LTD.
_____________________
As of October 9, 1987
_____________________
<PAGE>
TABLE OF CONTENTS
-----------------
1. Sale and Purchase of Shares . . . . . . . . . . . . . 1
1.1 Sale of Shares . . . . . . . . . . . . . . . . 1
1.2 Purchase Price . . . . . . . . . . . . . . . . 1
1.3 Delivery of Shares . . . . . . . . . . . . . . 2
1.4 Closing; Closing Date . . . . . . . . . . . . 2
1.5 Purchase Price Adjustments . . . . . . . . . . 2
2. Representations and Warranties of the Seller . . . . . 2
2.1 Organization . . . . . . . . . . . . . . . . . 2
2.2 Authority to Execute and Perform Agreements . . 3
2.3 Outstanding Share Capital . . . . . . . . . . . 3
2.4 Title to Shares . . . . . . . . . . . . . . . . 3
2.5 Options or Other Rights . . . . . . . . . . . . 4
2.6 Subsidiaries and Other Affiliates . . . . . . . 4
2.7 Memorandum and Articles of Association . . . . 5
2.8 Company Financial Statements . . . . . . . . . 6
2.9 SDI Financial Statements . . . . . . . . . . . 6
2.10 Consolidating Statement of Net Worth . . . . . 7
2.11 No Material Adverse Change . . . . . . . . . . 7
2.12 Tax Matters . . . . . . . . . . . . . . . . . . 8
2.13 Compliance with Laws . . . . . . . . . . . . . 15
2.14 Consents and Approvals . . . . . . . . . . . . 16
2.15 No Breach . . . . . . . . . . . . . . . . . . . 17
2.16 Actions and Proceedings . . . . . . . . . . . . 18
2.17 Contracts and Other Agreements . . . . . . . . 19
2.18 Reinsurance . . . . . . . . . . . . . . . . . . 20
2.19 Real Estate . . . . . . . . . . . . . . . . . . 22
2.20 Tangible Property . . . . . . . . . . . . . . . 22
2.21 Intangible Property . . . . . . . . . . . . . . 23
2.22 Ownership of Securities . . . . . . . . . . . . 23
2.23 Employees . . . . . . . . . . . . . . . . . . . 23
2.24 Employee Benefit Plans . . . . . . . . . . . . 24
2.25 Operations of the Companies . . . . . . . . . . 27
2.26 Potential Conflicts of Interest . . . . . . . . 30
2.27 Deposits and Bonds . . . . . . . . . . . . . . 31
2.28 Regulatory Filings . . . . . . . . . . . . . . 31
2.29 Managing General Agents . . . . . . . . . . . . 32
2.30 Banks, Brokers and Powers of Attorney . . . . . 32
2.31 Full Disclosure . . . . . . . . . . . . . . . . 33
2.32 Qualification of Representations . . . . . . . 34
2.33 Representations and Warranties on the
Closing Date . . . . . . . . . . . . . . . . 34
<PAGE>
Page
----
3. Representations and Warranties of the Buyer . . . . . 34
3.1 Organization . . . . . . . . . . . . . . . . . 34
3.2 Authority to Execute and Perform Agreements . . 35
3.3 Memorandum and Articles of Association . . . . 35
3.4 Reinsurance Affiliates . . . . . . . . . . . . 35
3.5 Consents and Approvals . . . . . . . . . . . . 36
3.6 No Breach . . . . . . . . . . . . . . . . . . . 36
3.7 Full Disclosure . . . . . . . . . . . . . . . . 36
3.8 Representations and Warranties on the
Closing Date . . . . . . . . . . . . . . . . 37
4. Covenants and Agreements . . . . . . . . . . . . . . . 37
4.1 Conduct of Business . . . . . . . . . . . . . . 37
4.2 Continued Effectiveness of Representations
and Warranties of the Seller . . . . . . . . 37
4.3 Corporate Examinations and Investigations . . . 38
4.4 Payment of Debts . . . . . . . . . . . . . . . 39
4.5 Certain Approvals . . . . . . . . . . . . . . . 39
4.5.1 Actions by the Buyer . . . . . . . . . 39
4.5.2 Actions by the Seller . . . . . . . . . 40
4.6 Use of Certain Names by the Seller . . . . . . 40
4.7 Use of Certain Names by the Buyer . . . . . . . 41
4.8 Expenses . . . . . . . . . . . . . . . . . . . 41
4.9 Sale of Sphere Drake (Underwriting) Limited . . 42
4.10 Sale of Halford, Shead (Holdings) Limited . . . 42
4.11 Sale of Sphere Drake Underwriting
(Australia), Limited . . . . . . . . . . . . 42
4.12 Disposition of Certain Subsidiaries . . . . . . 43
4.13 Administration of Certain Underwriting Pools . 43
4.14 Properties . . . . . . . . . . . . . . . . . . 43
4.15 Data Processing Services . . . . . . . . . . . 43
4.16 Resignations of Directors . . . . . . . . . . . 44
4.17 Sentry Account . . . . . . . . . . . . . . . . 44
4.18 Imperio Account . . . . . . . . . . . . . . . . 44
4.19 Statements Concerning Relationship . . . . . . 45
4.20 FET Refunds . . . . . . . . . . . . . . . . . . 45
4.21 Tax Indemnity . . . . . . . . . . . . . . . . . 46
4.22 Guaranty . . . . . . . . . . . . . . . . . . . 46
4.23 Indemnification . . . . . . . . . . . . . . . . 47
4.24 Pension Trustee . . . . . . . . . . . . . . . . 47
4.25 Further Assurances . . . . . . . . . . . . . . 47
5. Conditions Precedent to the Obligation
of the Buyer to Close . . . . . . . . . . . . . . . 47
5.1 Representations and Covenants . . . . . . . . . 47
ii
<PAGE>
Page
----
5.2 Third Party Consents . . . . . . . . . . . . . 48
5.3 Buyer's Consents . . . . . . . . . . . . . . . 48
5.4 Opinions of Counsel to the Seller . . . . . . . 48
5.5 Litigation . . . . . . . . . . . . . . . . . . 49
5.6 Delivery of Share Certificates . . . . . . . . 49
6. Conditions Precedent to the Obligation of
the Seller to Close . . . . . . . . . . . . . . . . 49
6.1 Representations and Covenants . . . . . . . . . 49
6.2 Buyer's Consents . . . . . . . . . . . . . . . 50
6.3 Opinions of Counsel to the Buyer . . . . . . . 50
6.4 Litigation . . . . . . . . . . . . . . . . . . 50
7. Purchase Price Adjustments on Account of
Reinsurance Recoverables and Loss Reserves . . . . . 50
7.1 Purchase Price Adjustments . . . . . . . . . . 50
7.2 Adjustment Account . . . . . . . . . . . . . . 51
7.3 Determination of Reinsurance Recoverables
Increase Amount . . . . . . . . . . . . . . . 54
7.4 Cash Adjustments Following Certain Events . . . 54
7.5 Limitation on Liability . . . . . . . . . . . . 55
7.6 Current Status of Recoverables . . . . . . . . 55
7.7 Preparation of Adjustment Schedules . . . . . . 56
7.8 Settlements . . . . . . . . . . . . . . . . . . 58
7.9 Collection of Reinsurance Recoverables . . . . 59
7.10 No Commutation of Recoverables, Etc . . . . . . 61
7.11 Accounts of SDI, Etc . . . . . . . . . . . . . 61
7.12 Other Indemnities . . . . . . . . . . . . . . . 62
7.13 Right of Inspection . . . . . . . . . . . . . . 62
7.14 Certain Definitions . . . . . . . . . . . . . . 64
8. Net Tax Benefit Adjustment . . . . . . . . . . . . . . 74
8.1 Certain Memorandum Accounts . . . . . . . . . . 74
8.2 Notional Tax Computations . . . . . . . . . . . 77
8.2.1 Notional Account Adjustments . . . . . 77
8.2.2 Baseline Corporation Tax, Etc . . . . . 80
8.2.3 Determination of Benefits . . . . . . . 81
8.2.4 Dates for Adjustment . . . . . . . . . 83
8.2.5 Settlement of Tax Benefits . . . . . . 83
8.2.6 Principles Applied in Making
Computations . . . . . . . . . . . . 84
8.3 Claims Handling . . . . . . . . . . . . . . . . 85
8.4 Preparation of Tax Adjustment Schedules . . . . 86
8.5 Settlements . . . . . . . . . . . . . . . . . . 87
8.6 Certain Defined Terms . . . . . . . . . . . . . 88
iii
<PAGE>
Page
----
9. Survival of Representations and Warranties
of the Parties . . . . . . . . . . . . . . . . . . . 91
10. Indemnification and Reimbursement . . . . . . . . . . 92
10.1 Obligation of the Seller to Indemnify and
Reimburse for Undisclosed Liabilities,
Misrepresentations, Etc . . . . . . . . . . . 92
10.2 Obligation of the Buyer to Indemnify and
Reimburse for Misrepresentations, Etc . . . . 93
10.3 Indemnification and Reimbursement Arising
Out of the Fraud, Deception, Misconduct
and Irregular Practices of the Management
of Alexander Howden Underwriting Ltd., Etc . 94
10.4 Indemnification and Reimbursement Arising
Out of S.I.R. Substituted Stop Loss
Reinsurance . . . . . . . . . . . . . . . . . 99
10.5 Indemnification and Reimbursement Arising
Out of the Orion Litigation . . . . . . . . .100
10.6 Indemnification and Reimbursement Arising
out of Certain Matters . . . . . . . . . . .101
10.7 Indemnification of Brokerage . . . . . . . . .102
10.8 Atlanta Policies . . . . . . . . . . . . . . .103
10.9 Guaranty of Insurance and Reinsurance
Recoveries . . . . . . . . . . . . . . . . .106
10.10 Notice and Opportunity to Defend . . . . . . .107
10.10.1 Notice of Asserted Liability . . . . .107
10.10.2 Opportunity to Defend . . . . . . . .108
10.11 Indemnification to Cover Directors, Etc . . . .109
10.12 Cooperation . . . . . . . . . . . . . . . . . .111
10.13 Subrogation . . . . . . . . . . . . . . . . . .111
10.14 Insurance . . . . . . . . . . . . . . . . . . .111
10.15 No Indemnification or Reimbursement
for Management Time . . . . . . . . . . . . .112
10.16 Indemnification Payments . . . . . . . . . . .112
10.17 Settlement Prior to Closing Date . . . . . . .112
11. Termination of Agreement . . . . . . . . . . . . . . .113
11.1 Termination . . . . . . . . . . . . . . . . . .113
11.2 Survival . . . . . . . . . . . . . . . . . . .114
12. Miscellaneous . . . . . . . . . . . . . . . . . . . .115
12.1 Certain Definitions . . . . . . . . . . . . . .115
12.2 Overdue Amounts . . . . . . . . . . . . . . . .119
12.3 Consent to Jurisdiction and Service of
Process . . . . . . . . . . . . . . . . . . .119
iv
<PAGE>
Page
----
12.4 Publicity . . . . . . . . . . . . . . . . . . .120
12.5 Suspensory Clause . . . . . . . . . . . . . . .121
12.6 Notices . . . . . . . . . . . . . . . . . . . .121
12.7 Entire Agreement . . . . . . . . . . . . . . .123
12.8 Waivers and Amendments; Non-Contractual
Remedies; Preservation of Remedies . . . . .123
12.9 Governing Law . . . . . . . . . . . . . . . . .124
12.10 Payments and Currency . . . . . . . . . . . . .124
12.11 Binding Effect; Assignment . . . . . . . . . .125
12.12 Variations in Pronouns . . . . . . . . . . . .125
12.13 Counterparts . . . . . . . . . . . . . . . . .125
12.14 Exhibits and Schedules . . . . . . . . . . . .125
12.15 Headings . . . . . . . . . . . . . . . . . . .125
SCHEDULES:
2.6 - Subsidiaries and Other Affiliates
2.9 - SDF Financial Statements
2.11 - Material Adverse Changes
2.12 - Tax Matters
2.13 - Compliance with Laws
2.14 - Seller's Consents
2.15 - No Breach
2.16 - Actions and Proceedings
2.17 - Contracts and Other Agreements
2.18 - Reinsurance
2.19 - Real Estate
2.23 - Employees
2.24 - Employee Benefit Plans
2.25 - Operations of the Companies
2.26 - Potential Conflicts of Interest
2.27 - Deposits and Bonds
2.28 - Regulatory Filings
2.29 - Managing General Agents
2.30 - Banks, Brokers and Powers of Attorney
3.4 - Reinsurance Affiliates
3.5 - Buyer's Consents
4.16 - Resignations of Directors
7.6 - Current Status of Recoverables
7.10 - Reinsurance Recoverables
10.3-A - The Howden Affair
10.3-B - The Howden Affair (Background)
10.3-C - The Hart Affair
10.3-D - The PCW Affair
10.3-E - PCW Contracts List
10.3-F - PCW Corporations List
10.3-G - PCW Syndicates
10.3-H - Errors and Omissions Policies
v
<PAGE>
Page
----
EXHIBITS:
A - Form of Halford, Shead Agreement (4.10)
B-1 - Form of Agreement with respect to the disposition of
Alexander Agency Administration Limited (4.12)
B-2 - Form of Agreement with respect to the disposition of
Solar Underwriting Agencies Limited (4.12)
C - Form of Administration Agreement (4.13)
D-1 - Form of Agreement with respect to the Ringstead
House Property (4.14)
D-2 - Form of Agreement with respect to the Park Row Leeds
Property #31 and #32 (4.14)
E - Form of Data Processing Agreement (4.15)
F - Form of Tax Indemnity Deed (4.21)
G - Form of Guaranty Agreement (4.22)
H - Form of Indemnification Agreement (4.23)
I - [Deleted]
J - Form of Pension Deed (4.24)
K-1 - Form of Opinion of Debevoise & Plimpton (5.4)
K-2 - Form of Opinion of Slaughter and May (5.4)
K-3 - Form of Opinion of Maclay, Murray & Spens (5.4)
L - Form of Opinion of Clyde & Co. (6.3)
M - Form of Reinsurance Recoverable Schedule (7.7)
N - Form of Reserve Adjustment Schedule (7.7)
O - Form of Tax Adjustment Schedule (8.4)
P - Form of Insurance Guaranty Agreement (10.8)
Q - Form of Investor Letter (11.1)
R - Form of Stock Subscription Agreement (11.1)
vi
<PAGE>
SHARE PURCHASE AGREEMENT
------------------------
SHARE PURCHASE AGREEMENT dated as of October 9, 1987 (here-
in, as amended or supplemented from time to time as per-
mitted hereby, this "Agreement"), between SPHERE DRAKE
ACQUISITIONS (U.K.) LIMITED, an English company whose regis-
tered office is situate at 30 Mincing Lane, London EC3R 7BR
England, registered in England with number 2136565 (the
"Buyer"), and ALEXANDER STENHOUSE & PARTNERS LTD., a Scot-
tish company whose registered office is situate at 145 St.
Vincent Street, Glasgow, Scotland, registered in Scotland
with number SC23477 (the "Seller").
The Seller owns all of the issued share capital of SPHERE
DRAKE INSURANCE GROUP Public Limited Company, an English
company whose registered office is situate at 52/54
Leadenhall Street, London EC3A 2B9J England, registered in
England with number 1868708 (the "Company"). The Seller
wishes to sell to the Buyer all of the issued share capital
of the Company (collectively, the "Shares"), and the Buyer
wishes to purchase all of the Shares, upon the terms and
subject to the conditions of this Agreement.
Accordingly, the parties agree as follows:
1. Sale and Purchase of Shares
---------------------------
1.1 Sale of Shares
--------------
At the closing provided for in Section 1.4 (the
"Closing"), subject to the terms and conditions
of this Agreement, the Seller shall sell the
Shares to the Buyer, and the Buyer shall purchase
the Shares, for the purchase price provided in
Section 1.2.
1.2 Purchase Price
--------------
Subject to adjustment as provided in Section 1.5,
the aggregate purchase price for the Shares (the
"Purchase Price") shall be B.P.17,651,934, payable
at the Closing in same day funds to such account
at a bank in London, England as the Seller sets
forth in a notice to be delivered to the Buyer at
least one Business Day prior to the Closing.
<PAGE>
1.3 Delivery of Shares
------------------
At the Closing, the Seller shall deliver to the
Buyer share certificates representing all of the
Shares, accompanied by unstamped share transfer
forms in favour of the Buyer or its nominee.
1.4 Closing; Closing Date
---------------------
The Closing of the sale and purchase of the
Shares contemplated hereby shall take place at
the offices of Slaughter and May, 35 Basinghall
Street, London EC2V 5DB England at 10:00 a.m.
local time on the first Business Day following
receipt of the Seller's Consents and the Buyer's
Consents referred to in Sections 2.14 and 3.5,
respectively, or at such other place or such
other time or date as the Buyer and the Seller
shall agree in writing. The time and date upon
which the Closing occurs is herein called the
"Closing Date."
1.5 Purchase Price Adjustments
--------------------------
The Purchase Price set forth in Section 1.2 shall
be adjusted by amounts paid or credited to the
parties pursuant to Sections 7, 8, and 10.
2. Representations and Warranties of the Seller
--------------------------------------------
The Seller represents and warrants to the Buyer as
follows:
2.1 Organization
------------
The Company is a company duly incorporated under
the laws of England and has the power and author-
ity to own, lease and operate its assets and to
carry on its business as now and heretofore con-
ducted. Without limiting the generality of the
foregoing, the Company owns all of the issued
share capital of SPHERE DRAKE INSURANCE plc, an
English company whose registered office is situ-
ate at 52/54 Leadenhall Street, London EC3A 2B9J
England, registered in England with number 516540
("SDI"). SDI is authorized to carry on insurance
2
<PAGE>
business in the United Kingdom within the meaning
of the Insurance Companies Act 1982.
2.2 Authority to Execute and Perform Agreements
-------------------------------------------
The execution and delivery of the Seller's Docu-
ments by the Seller or its Affiliates, as the
case may be, and the performance by the Seller or
its Affiliates, as the case may be, of its and
their obligations thereunder have been duly
authorized by all necessary corporate action on
the part of the Seller and its Affiliates, as the
case may be. Each of the Seller's Documents has
been duly executed and delivered by the Seller or
its Affiliates, as the case may be, and is the
valid and binding obligation of the Seller or its
Affiliates, as the case may be, enforceable
against it in accordance with its terms.
2.3 Outstanding Share Capital
-------------------------
The authorized share capital of the Company is
B.P.50,000,0O0, represented by 50,000,000 ordinary
shares of B.P.1 each, of which shares 21,338,066 are
issued and fully paid. No other class of share
capital of the Company is authorized. All of the
Shares are duly authorized, validly issued and
fully paid.
2.4 Title to Shares
---------------
The Seller owns the Shares beneficially and of
record, free and clear of any Lien, and, upon
delivery of and payment for the Shares at the
Closing as herein provided, the Buyer will
acquire good and valid title thereto, free and
clear of any Lien.
2.5 Options or Other Rights
-----------------------
There is no existing option, warrant, subscrip-
tion, call, unsatisfied preemptive right (except
preemptive rights which may exist pursuant to
Section 89 of the Companies Act 1985 (the "Compa-
nies Act")) or other right or agreement obligat-
ing the Company to issue, transfer or sell any
share capital of the Company or securities or
rights convertible into or exchangeable therefor.
3
<PAGE>
2.6 Subsidiaries and Other Affiliates
---------------------------------
Schedule 2.6 sets forth (i) the name and juris-
diction of incorporation, and the percentage and
number of issued shares owned by the Company, of
each Person as to which the Company directly or
indirectly owns or has the power to vote, or to
exercise a controlling influence with respect to,
5O% or more of the securities of any class of
such Person the holders of which are entitled to
vote for the election of directors (or Persons
performing similar functions) of such Person;
(ii) the jurisdiction of incorporation, the num-
ber of ordinary shares outstanding, and the bene-
ficial owner of each of such shares of Sphere
Drake (Underwriting) Limited ("SDUL") and Sphere
Drake Underwriting (Australia), Limited ("SDUA")
(such Persons referred to in clause (i), SDUL and
SDUA being hereinafter referred to as the "Sub-
sidiaries," and the Company and the Subsidiaries
(other than those Subsidiaries listed in Sections
4.10 and 4.12) being hereinafter referred to as
the "Companies"); and (iii) the name of each
Person, other than the Subsidiaries, as to which
the Company directly or indirectly owns or has
the power to vote, or to exercise controlling
influence with respect to any securities of any
class of such Person the holders of which are
entitled to vote for the election of directors
(or Persons performing similar functions) of such
Persons, other than investment securities pur-
chased and held by the Companies in the ordinary
course of business. Each Subsidiary is a company
duly incorporated under the laws of its jurisdic-
tion of incorporation and has the power and
authority to own, lease and operate its assets
and to carry on its business as now and hereto-
fore conducted. Except with respect to those
Subsidiaries listed in Sections 4.10 and 4.12,
the Company directly or indirectly owns, or will
own at or prior to closing, all of the shares of
each Subsidiary as set forth in Schedule 2.6 free
and clear of any Lien. Except as set forth in
Schedule 2.6, all such shares are duly autho-
rized, validly issued and fully paid. There is
no existing option, warrant, subscription, call,
unsatisfied preemptive right (except preemptive
rights which may exist pursuant to Section 89 of
4
<PAGE>
the Companies Act) or other right or agreement
obligating any Subsidiary to issue, transfer or
sell any share capital of any Subsidiary or secu-
rities or rights convertible into or exchangeable
therefor. Except for the Company's interests set
forth in Schedule 2.6 and portfolio investment
securities purchased and held by the Company or
any of the Subsidiaries in the ordinary course of
business, the Company does not own directly or
indirectly any interest in any other Person.
2.7 Memorandum and Articles of Association
--------------------------------------
The Seller has heretofore delivered to the Buyer
true and complete copies of the Memorandum and
Articles of Association of each of the Companies,
having attached thereto all of the resolutions
required to be so attached, certified by the
Secretary or Assistant Secretary thereof, and has
delivered all of the returns and information
supplied to the Registrar of Companies under the
Companies Act since December 31, 1981, which are
all of the returns and information required to be
so supplied since such date. The minute books of
the Companies contain true and complete records
of all meetings and written resolutions in lieu
of meeting of their respective Boards of Direc-
tors (and any committees thereof) and of their
shareholders since December 31, 1981, and accu-
rately reflect all transactions referred to in
such minutes and written resolutions in lieu of
meeting.
2.8 Company Financial Statements
----------------------------
The Seller has delivered to the Buyer true, com-
plete and correct copies of the individual finan-
cial statements of each of the Companies, other
than SDI, as at December 31, 1985 and December
31, 1986, which include the balance sheets and
any related profit and loss accounts and state-
ments of source and application of funds for the
years then ended, including the footnotes there-
to, all accompanied by a report thereon of
Deloitte Haskins & Sells, independent chartered
accountants, which financial statements (i) have
been prepared in accordance with standard
accounting practice applicable in the United
5
<PAGE>
Kingdom, (ii) give a true and fair view of the
individual state of the affairs of the Companies,
as the case may be, as at such dates and of their
operations and source and application of funds
for the years then ended in accordance with
accounting principles consistently applied
throughout the periods covered thereby and
(iii) comply with the Companies Act. The forego-
ing individual financial statements of such Com-
panies as at December 31, 1986, and for the year
then ended are sometimes herein called the "Com-
pany Financials," and the individual balance
sheets included in the Company Financials are
sometimes herein called the "Company Balance
Sheets."
2.9 SDI Financial Statements
------------------------
The Seller has delivered to the Buyer true, com-
plete and correct copies of the financial state-
ments of SDI as at December 31, 1985 and December
31, 1986, which include the balance sheets and
the related revenue accounts, profit and loss
accounts and statements of source and application
of funds for the years then ended, including the
footnotes thereto, all accompanied by a report
thereon of Deloitte, Haskins & Sells, independent
chartered accountants, which financial statements
were prepared on a basis materially consistent
with that used in the preparation of the pub-
lished and audited annual accounts of SDI for the
accounting periods ending December 31 in each of
1985, 1984 and 1983 and in accordance with the
provisions of the Companies Act (or any statutory
predecessor thereof) as they apply to insurance
companies, the statements of standard accounting
practice issued by the Consultative Committee of
Accounting Bodies and generally accepted account-
ing principles applicable in the United Kingdom
consistently applied. The foregoing financial
statements of SDI as at December 31, 1986, and
for the year then ended are sometimes herein
called the "SDI Financials," and the balance
sheet included in the SDI Financials is sometimes
herein called the "SDI Balance Sheet."
6
<PAGE>
2.10 Consolidating Statement of Net Worth
------------------------------------
The Seller has delivered to the Buyer true, com-
plete and correct copies of a pro forma statement
of net worth of the Companies as at December 31,
1986 accompanied by a report thereon by Deloitte
Haskins & Sells, independent chartered accoun-
tants, setting out certain assumptions on the
basis of which such pro forma statement of net
worth has been prepared, which statement contains
information correctly extracted from the Company
Balance Sheets and the SDI Balance Sheet and has
been properly prepared as described and on the
basis of the assumptions set out in such report
of Deloitte Haskins & Sells.
2.11 No Material Adverse Change
--------------------------
Except as set forth in Schedule 2.11, since
December 31, 1986, (i) there has been no material
adverse change in the Condition of the Companies
taken as a whole or in the separate Condition of
SDI; (ii) no action has been taken by or on be-
half of any of the Companies that could result in
any such change; and (iii) the Seller does not
know of any such change that is threatened, nor
has there been any damage, destruction or loss of
the assets of any of the Companies materially
adversely affecting the Condition of the Compa-
nies taken as a whole or the separate Condition
of SDI whether or not covered by insurance.
2.12 Tax Matters
-----------
Except as set forth in Schedule 2.12 or as spe-
cifically contemplated by this Agreement:
(i) The Companies have paid all Taxation (as
defined below) which has become payable,
and Schedule 2.12 sets out all Taxation
assessments made on the Companies which
are not yet payable or on which payment
of tax has been postponed.
(ii) The Companies have claimed on a timely
basis all reliefs to which they are
entitled and all taxes recoverable shown
in the Company Financials or the SDI
7
<PAGE>
Financials (including repayment supple-
ment for which credit has been taken in
any of the individual financial state-
ments of the Companies to December 31,
1986), are recoverable.
(iii) All amounts paid or payable, received or
receivable and shown in the individual
financial statements of the Companies
for all years up to and including the
year ended December 31, 1986, in respect
of losses claimed or surrendered, provi-
sionally claimed or surrendered or pur-
ported to be claimed or surrendered by
way of group relief for accounting peri-
ods of the Companies ending on December
31, 1986, or earlier are not repayable.
(iv) The Companies have submitted to the
Inland Revenue, and all other Taxation
authorities in the United Kingdom and
elsewhere, all returns, accounts, compu-
tations and information required to be
submitted by them to the Inland Revenue
and such authorities (including, without
limitation, returns and notices which
the Companies ought of their own initia-
tive to make or give for compliance with
TMA, VATA, ICTA and CGTA (each as de-
fined below)), and the same are accurate
and up-to-date as of the date of this
Agreement and none of the Inland Revenue
nor any other such Taxation authority
has indicated that it disputes any mat-
ters for any accounting periods after
December 31, 1977.
(v) Except as disclosed and provided for or
reserved in the Company Balance Sheets
or the SDI Balance Sheet (a) the Compa-
nies have no (and have not since
December 31, 1986 had any) liability for
Taxation chargeable by reference to any
event, business transaction or activity
attributable to any period ending on or
before December 31, 1986; and (b) the
Company Balance Sheets or the SDI Bal-
ance Sheet makes full provision for
8
<PAGE>
deferred Taxation on all timing differ-
ences arising between the corporation
tax computations and the accounts taking
no account of any losses carried forward
at December 31, 1986.
(vi) All books and records required for com-
pliance with PAYE legislation are fully
maintained and written up, and each of
the Companies has deducted and accounted
to the Inland Revenue for all PAYE which
it should deduct and/or for which it
should account. All employee expenses
referred to in Chapter II Part III of
Finance Act 1976 which have not been
specifically disclosed to the Inland
Revenue are covered by a valid dispensa-
tion which has not been revoked. All
necessary PAYE returns have been made
and have been made on a correct basis.
(vii) All details of any issues under unap-
proved share incentive and share option
schemes have been given to the Inland
Revenue within the specified time (para-
graph 3 Part VII Schedule 12 Finance Act
("FA") 1972 and Section 186(11) Taxes
Act 1970).
(viii) Any share option or profit sharing
scheme operated by any of the Companies
has been duly approved by the Inland
Revenue and no event has occurred or
action been taken, to cause such
approval to be withdrawn.
(ix) The Inland Revenue has issued final
assessments against the Companies for
each accounting period ending on or
before December 31, 1977, and such
assessments have not been re-opened.
(x) Except as specifically provided for in
full in the Company Financials and the
SDI Financials, there are no circum-
stances or events arising since January
1, 1978 (including this Agreement and
the Closing), which give rise to any
9
<PAGE>
claim for Taxation against any of the
Companies (whether on their own account
or on account of Taxation chargeable
against another in the name of any of
the Companies or on account of Taxation
chargeable against another for which any
of the Companies might otherwise be
liable from January 1, 1978) under the
following provisions (a) Part VIII of
TMA (charges on non-residents); (b) Part
IX of TMA (interest on overdue tax);
(c) Sec.Sec. 53 or 54 of ICTA (deduction of
tax on annual payments, interest, etc.);
(d) Sec. 70 of ICTA (collection of Schedule
A tax from lessee and agents); (e) Sec.
268A ICTA as extended by Sec. 45 FA 1977
(postponement -- transfer of assets to
non-resident company); (f) Sec. 277 ICTA
(tax recoverable from other members of
group); (g) Sec.Sec. 278-279 ICTA (company
ceasing to be a member of group); (h)
Sec.Sec. 460-468 ICTA (cancellation of tax
advantage on certain transactions in
securities); (i) Sec. 085 ICTA (transac-
tions at under value/over value);
(j) Sec.Sec. 488-490 ICTA (artificial transac-
tions in land); and (k) Sec. 496 ICTA
(transactions associated with loans or
credit).
(xi) The liability to tax in respect of
chargeable gains which would be incurred
on the disposal by any of the Companies
of any asset at net book value will not
exceed the provisions made in the Com-
pany Financials or the SDI Financials,
and the records of the Companies accu-
rately record all information required
for computation of any tax liability or
relief which would arise on any disposal
or realization of any asset owned by any
of the Companies as at December 31,
1986.
(xii) A loss on disposal of any asset by any
of the Companies would not give rise to
any adjustment resulting from the appli-
10
<PAGE>
cation of Sections 280 and 281 ICTA
(depreciatory transactions).
(xiii) None of the Companies has acquired any
assets otherwise than under a bargain at
arm's length (Section 29A CGTA).
(xiv) No scheme has been effected or arrange-
ments made whereby the value of any of
the Companies' assets has been materi-
ally reduced to obtain a tax-free bene-
fit on disposal (Sections 25 and 26
CGTA).
(xv) Since January 1, 1978, none of the Com-
panies has made any disposal which has
required or may/will require any compu-
tation under Section 35 CGTA (part -
disposals).
(xvi) None of the Companies has sought relief
under the provisions of Sections 115
through 117 CGTA 1979 or Section 46 FA
1977.
(xvii) No charge to Taxation in respect of
chargeable gains will arise in respect
of any disposal by any of the Companies
at a price equal to the cost of acquisi-
tion of any asset acquired since
December 31, 1986.
(xviii) None of the Companies has since January
1, 1978, made any "distribution" as the
same is defined in Sections 233, 234 and
235 ICTA except for dividends shown in
the Company Financials or the SDI Finan-
cials.
(xix) The Company has not made any elections
for any purposes of the ICTA, TMA, VATA
or CGTA including (without limiting the
foregoing) elections under (a) Sec. 256
ICTA (group income, etc.), (b) Schedule
6 FA 1983 (pooling qualifying securi-
ties), and (c) Schedule 5 CGTA (pooling
of securities at market values as at
April 6, 1965).
11
<PAGE>
(xx) None of the Companies has received or
become entitled to receive any capital
distribution from a company within the
meaning of Section 266(5) ICTA (and
Section 72(5) CGTA).
(xxi) None of the Companies has been a party
to any scheme of reconstruction or amal-
gamation within the meaning of Section
267(4) ICTA.
(xxii) None of the Companies has carried on a
trade outside the United Kingdom through
a branch or agency and full provision
has been made in the Company Financials
or the SDI Financials for all overseas
Taxation on overseas branch or agency
activities.
(xxiii) None of the Companies has been a party
to any transaction to which Section 482
ICTA (migration etc. of companies) may
apply and for which Treasury consent has
not been obtained or which is not cov-
ered by the General Consents (as defined
in Section 482 ICTA).
(xxiv) None of the Companies has claimed any
relief under Sections 418 and 419 ICTA
(unremittable income and delayed remit-
tances).
(xxv) None of the Companies has paid nor has
any obligation to pay any interest which
is not eligible for relief by way of
deduction in the computation of profits
and gains for Taxation purposes.
(xxvi) None of the Companies has been involved
in or concerned with any transactions
falling within the terms of Sections 85
and 86 of CGTA or in respect of which it
is open to the Companies to apply for
clearance pursuant to Section 88 CGTA.
(xxvii) The Companies are taxable persons for
the Value Added Tax ("VAT") and have
been duly registered as such. The Com-
12
<PAGE>
panies issued correct tax invoices to
all appropriate persons requiring them
and have kept all necessary documents
required to be completed and used to
verify their quarterly VAT returns. The
Companies have in all other respects
complied with the VAT legislation.
(xxviii) All documents in the possession or under
the control of any of the Companies or
to which any of them is a party have
been properly stamped.
(xxix) None of the Companies has claimed or
been concerned with any claim for relief
from stamp duty or capital duty under
Section 55 FA 1927, Section 78 FA 1985,
Section 77 FA 1986, Section 42 FA 1930,
Schedule 19 FA 1973 or Parts III and IV
Chapter IV FA 1986.
(xxx) Where any taxes have been recovered or
are recoverable full provision has been
made for any tax due on that recovery or
recoverable, as the case may be, and
full provision has been made for amounts
due to third parties.
(xxxi) In this Section 2.12 "Taxation" means
any liability to any form of taxation,
duty, levy, impost, rate or charge
raised, levied or imposed by any govern-
mental, fiscal, municipal, local or
other authority whatsoever whether in
the United Kingdom or elsewhere whether
measured on income, receipts, value,
gains or otherwise, including without
prejudice to the generality of the fore-
going any amount chargeable (including
interest and penalties and additions)
under any provision of the Income &
Corporation Taxes Act 1970 ("ICTA"), the
Taxes Management Act 1970 ("TMA"), the
Capital Gains Tax Act 1979 ("CGTA"), the
Value Added Tax Act 1983 ("VATA") or
other statute or statutory instrument in
the United Kingdom or elsewhere (in each
case as amended and in force from time
13
<PAGE>
to time including any statute or statu-
tory instrument repealed, replaced or
reenacted thereby) relating to income
tax, corporation tax, advance corpora-
tion tax, capital gains tax, capital
transfer tax, inheritance tax, develop-
ment land tax, value added tax, with-
holding tax, sales tax, use tax, gross
receipts tax, franchise tax, employment
and payroll related tax, property tax,
premium tax, Australian fire brigade
charges, import duties, customs duties,
excise duties, capital duties, stamp
duties, national insurance, social secu-
rity and other like contributions and/or
costs, interests, penalties or fines
relating to any claim for Taxation.
2.13 Compliance with Laws
--------------------
Except as set forth in Schedule 2.13, none of the
Companies is in violation of any applicable law,
ordinance, regulation, order, judgment, injunc-
tion, award, decree, undertaking or other
requirement of any Governmental or Regulatory
Body applicable to its business the failure to
comply with which could materially affect the
Condition of the Companies taken as a whole or
the separate Condition of SDI, and none of the
Companies has received written notice that any
such violation is being alleged. Except as set
forth in Schedule 2.13, the Companies have all
licenses, permits, orders or approvals of each
Governmental or Regulatory Body that are neces-
sary for the conduct of any material portion of
their businesses as now conducted (collectively,
"Permits"). Without limiting the generality of
the foregoing, SDI is duly authorized or
licensed, or was duly authorized or licensed when
necessary, to write all of the lines of insurance
written by it in each jurisdiction set forth in
Schedule 2.13, which comprise all jurisdictions
in which it may have any outstanding liabilities
or obligations. Schedule 2.13 sets forth details
of all material written undertakings or assur-
ances issued by Alexander & Alexander Services,
Inc., a Maryland corporation ("A&A"), the Seller
or any of their Affiliates, on behalf or for the
14
<PAGE>
benefit of any of the Companies, including, with-
out limitation, any such undertaking or assurance
issued to the Department of Trade and Industry of
the United Kingdom (the "DTI") and the Institute
of London Underwriters (the "ILU") and to any
other Governmental or Regulatory Body. All Per-
mits, together with their dates of expiration, if
known, are listed on Schedule 2.13 (such listing
to be without prejudice to the Seller's position
that any particular permit is not a Permit) and
are in full force and effect. None of the Compa-
nies has received any written allegations of a
violation of any Permit from any Governmental or
Regulatory Body (including, without limitation,
any insurance authority), and no proceeding is
pending or, to the Knowledge of the Seller
threatened, to revoke or limit any Permit, which
violation or proceeding could have a material
adverse affect on the Condition of the Companies
taken as a whole or on the separate Condition of
SDI. Except as set forth in Schedule 2.13, since
December 31, 1981, none of the Companies (i) has
been denied authority by any Governmental or
Regulatory Body to conduct any type of insurance
business; (ii) has been notified that a Permit
has been revoked, suspended, restricted or
adversely modified (which modifications have not
been satisfied); (iii) has received and failed to
satisfy any request from any Governmental or
Regulatory Body to modify (by amendment, waiver
or otherwise) the terms of any reinsurance agree-
ment or treaty to which it is a party or by which
it is bound; (iv) that is an underwriting agency
has written insurance policies or settled claims
outside of the terms of the authority granted to
it by its principals; (v) has received an allega-
tion of a violation of any such authority from
any principal; (vi) has been a party to any con-
tract of insurance or reinsurance that is unlaw-
ful; or (vii) has purported to reinsure with
Persons not authorized to carry on business as
insurers in the relevant territories; in each
case where such event or circumstance described
in (i) through (vii) above could result in conse-
quences materially adverse to the Condition of
the Companies taken as a whole, or to the sepa-
rate Condition of SDI.
15
<PAGE>
2.14 Consents and Approvals
----------------------
Except as set forth in Schedule 2.14, the execu-
tion and delivery by the Seller or its Affili-
ates, as the case may be, of the Seller's Docu-
ments, the binding effect of the Seller's Docu-
ments on the Seller and its Affiliates and the
consummation of the transactions to be completed
on or prior to Closing pursuant to the Seller's
Documents do not require the Seller, any of the
Companies or any of their Affiliates to obtain
any consent, approval or action of, or make any
filing with or give any notice to, any Governmen-
tal or Regulatory Body or trade or industry orga-
nization or any other Person for which the conse-
quences of failing to obtain any such consent or
approval, or maintain any such action, filing or
notice (i) would prevent the Seller or its Affil-
iates, as the case may be, from consummating the
transactions to be completed on or prior to Clos-
ing pursuant to the Seller's Documents or
(ii) could be materially adverse to the Condition
of the Companies taken as a whole or to the sepa-
rate Condition of SDI (the "Seller's Consents").
Except as set forth on Schedule 2.14, the Seller
has no Knowledge of any fact or circumstance
concerning itself or its Affiliates which could
result in the Buyer not being able to obtain any
of the Buyer's Consents (as such term is defined
in Section 3.5) or the Seller or its Affiliates,
as the case may be, not being able to obtain any
of the Seller's Consents in due course.
2.15 No Breach
---------
Except as set forth in Schedule 2.15, the execu-
tion, delivery and performance of the Seller's
Documents and the consummation of the transac-
tions to be completed on or prior to Closing
pursuant to the Seller's Documents will not
(i) violate any provision of the Memorandum or
Articles of Association of the Seller or any of
the Companies or any of their Affiliates;
(ii) require any consent, approval or notice
under or result in a violation or breach of, or
conflict with, or constitute (with or without
notice or lapse of time or both) a default (or
give rise to any right of termination, cancella-
16
<PAGE>
tion or acceleration) under any of the terms,
conditions or provisions of any note, bond, mort-
gage, indenture, license, Contracts or Other
Agreements to which the Seller or any of the
Companies or any of their Affiliates is a party
or by which the Seller or any of the Companies or
any of their Affiliates or any of their proper-
ties may be bound, the consequences of failure to
obtain such consent, approval or notice, or of
such violation, breach, conflict or default could
be materially adverse to the Condition of the
Companies taken as a whole or to the separate
Condition of SDI; (iii) result in the creation or
attachment of any Lien on the Shares; (iv) result
in the creation or attachment of any Lien on any
property or right of any of the Companies the
consequences of which Lien could be materially
adverse to the Condition of the Companies taken
as a whole or to the separate Condition of SDI;
(v) violate any order, judgment, injunction,
award or decree of any Governmental or Regulatory
Body applicable to the Seller or any of the Com-
panies or any of their Affiliates or any of their
properties or any statute, law or regulation of
any jurisdiction, the consequences of which vio-
lation could be materially adverse to the Condi-
tion of the Companies taken as a whole or to the
separate Condition of SDI; or (vi) violate or
result in the revocation, restriction, suspension
or modification of any Permit (assuming in the
case of clause (v) that the Seller's Consents and
the Buyer's Consents have been obtained) the
consequences of which violation, revocation,
restriction, suspension or modification could be
materially adverse to the Condition of the Compa-
nies taken as a whole or to the separate Condi-
tion of SDI.
2.16 Actions and Proceedings
-----------------------
Except as set forth in Schedule 2.16 and other
than in the ordinary course of business, there
are no outstanding orders, judgments in excess of
B.P.5O,O00 alone or in the aggregate, injunctions,
awards or decrees of any Governmental or Regula-
tory Body involving any of the Companies as a
party. Except as set forth in Schedule 2.16,
there are no actions, suits or claims or legal,
17
<PAGE>
administrative or arbitral proceedings or to the
Knowledge of the Seller investigations (whether
or not the defense thereof or liabilities in
respect thereof are covered by insurance) pending
or, to the Knowledge of the Seller threatened,
involving any of the Companies as a party or any
of their properties that, individually or in the
aggregate, could have a material adverse effect
upon the transactions contemplated hereby or upon
the Condition of the Companies taken as a whole
or the separate Condition of SDI.
2.17 Contracts and Other Agreements
------------------------------
Schedule 2.17 sets forth all material Contracts
or Other Agreements to which any of the Companies
is a party or by or to which it or its properties
is bound or subject that are currently in effect
or may have outstanding obligations or liabili-
ties and which meet the following conditions:
(i) Contracts or Other Agreements with any cur-
rent or former directors; (ii) binding authori-
ties or contractual arrangements of a similar
nature (but not including line slips and perma-
nent open covers), whereby any of the Companies
has delegated the authority to underwrite on its
behalf to any managing general agent, broker,
agent or any other third Person, and any other
Contracts or Other Agreements with such Persons;
(iii) Contracts or Other Agreements under which
any of the Companies agrees to indemnify any
Person or to guarantee the obligation of any
Person other than in the ordinary course of busi-
ness or to be party to any VAT Grouping with any
other Person (or any Contracts or Other Agree-
ments having the same effect as any of the fore-
going); (iv) Contracts or Other Agreements (other
than insurance and reinsurance agreements) which
cannot be cancelled (a) without liability, pre-
mium or penalty less than B.P.100,000 or (b) which
involve the payment or receipt of B.P.100,000 or
more per year or are for a term in excess of 18
months and which cannot be cancelled without 60
days' or more notice; (v) Contracts or Other
Agreements containing covenants of any of the
Companies not to compete in any line of business
or with any Person in any geographical area or
covenants of any other Person not to compete with
18
<PAGE>
any of the Companies in any line of business or
in any geographical area; (vi) Contracts or Other
Agreements relating to the acquisition by any of
the Companies of any operating business or the
share capital of any other Person; and (vii) Con-
tracts or Other Agreements relating to the bor-
rowing of money by any of the Companies. Except
as set forth in Schedule 2.17 or 2.18, none of
the Companies is in material default under any of
the Contracts or Other Agreements listed in
Schedule 2.17 nor, to the Knowledge of the Seller
(i) is any other party to any such Contract or
Other Agreement in material default thereunder,
or (ii) does any condition exist that with notice
or lapse of time or both would constitute a mate-
rial default thereunder.
2.18 Reinsurance
-----------
Schedule 2.18 sets forth a list of all outward
reinsurances (other than facultative contracts)
including reinsurance treaties or agreements to
which SDI is a party covering underwriting years
commencing on January 1, 1978 pursuant to which
there may be any outstanding Obligations or lia-
bilities. Except as set forth in Schedule 2.18,
(i) all such reinsurances are in full force and
effect; (ii) neither SDI nor, to the Knowledge of
the Seller, any other party thereto is in mate-
rial default with respect to any provision there-
of and to the Knowledge of the Seller, no condi-
tion exists that with notice or lapse of time or
both would constitute a material default there-
under; and (iii) no approval or consent of any
Person is needed for such reinsurances to con-
tinue in full force and effect following the
Closing and the consummation of the transactions
to be completed on or prior to Closing pursuant
to this Agreement.
2.19 Real Estate
-----------
(i) Schedule 2.19 sets forth a list of all
leases, subleases or other agreements
under which any of the companies is
lessor, lessee or licensee of any real
property (all of such property being
19
<PAGE>
hereinafter referred to as the "Proper-
ties").
(ii) The Properties comprise all the rights
vested in the Companies relating to any
land at the date hereof and the descrip-
tions set out in Schedule 2.19 are cor-
rect in all respects and not misleading.
(iii) Except as set forth in Schedule 2.19,
the Companies have good and marketable
title to the Properties.
(iv) The Properties and deeds and documents
of title thereto are free and clear of
all Liens other than Permitted Liens and
all such deeds and documents are in the
possession or under the control of the
Companies and, if required, copies
thereof shall be supplied to the Buyer
prior to Closing.
(v) Except as set forth in Schedule 2.19,
the Companies have exclusive possession
of all the Properties and none of the
Properties is subject to any lease,
tenancy or license to occupy or
agreement to grant any of them.
(vi) Except as set forth in Schedule 2.19,
there are no outgoings affecting the
Properties which are of an unusual or
onerous nature and there are no rent
reviews in the course of being
determined or exercisable by the
landlord thereof from a date prior to
the date hereof.
(vii) To the Knowledge of the Seller, there
are no material disputes concerning
boundaries, easements, covenants or
other matters relating to the Properties
or their use.
(viii) To the Knowledge of the Seller, there
are no circumstances which would enable
the landlord or any other Person to re-
enter or take possession of any of the
20
<PAGE>
Properties or which would otherwise
restrict or terminate the continued
possession or occupation of any of the
Properties.
(ix) Except as set forth in Schedule 2.19,
none of the Companies has acquired or
disposed of or agreed to acquire or
dispose of or granted any option in
respect of any interest in any land or
premises other than the Properties.
(x) The terms under which the Companies
occupy the Properties provide that the
relevant landlord shall insure the buil-
dings and structures comprising the
Properties. To the Knowledge of the
Seller, the Companies have not done or
omitted to do anything which would make
any such insurance void or voidable or
might result in an increased rate of
premium.
2.20 Tangible Property
-----------------
All items of tangible property, other than the
Properties, reflected in the Company Financials
or the SDI Financials, which are material to the
Condition of the Companies taken as a whole or to
the separate Condition of SDI were owned by the
Companies on December 31, 1986 free and clear of
any Lien other than Permitted Liens, and none of
such tangible property has been sold or disposed
of other than in the ordinary course of business
since December 31, 1986. All of such items are
in good operating condition and repair, ordinary
wear and tear excepted, and are fit for the par-
ticular purpose for which they are currently
being used by the Companies.
2.21 Intangible Property
-------------------
The Companies own, have registered or have valid
right to use any service marks, trademarks, ser-
vice names, trade names and copyrights, and own,
or will have the use of as contemplated by the
Data Processing Agreement (as defined in Section
4.15), all data, records and computer software
21
<PAGE>
that is currently being used in the conduct of
their businesses now being conducted, and none of
the Companies is currently in receipt of any
notice of infringement by others of, or conflicts
by others with, the rights of any of the Compa-
nies in any such service marks, trademarks, ser-
vice names, trade names, copyrights, data,
records and computer software which infringement
or conflict would be material to the Condition of
the Companies taken as a whole or to the separate
Condition of SDI. To the Knowledge of the
Seller, none of the Companies has received notice
that any of the Companies is infringing any ser-
vice marks, trademark, service names, trade name
or registration, copyright or any application
therefor or any right of any other Person in any
computer software now used by it.
2.22 Ownership of Securities
-----------------------
SDI beneficially owns and has good and marketable
title to all of its portfolio securities, in each
case free and clear of any Lien other than those
Permitted Liens described in Sections 12.1(x)(c),
(g) and (i).
2.23 Employees
---------
(i) Schedule 2.23 sets forth the name and
total compensation of each director of
each of the Companies and of each other
employee of any of the Companies whose
current annual rate of compensation
(including bonuses and commissions)
exceeds B.P.50,000.
(ii) The Seller has given copies to the Buyer
of all current contracts of employment
to which any of the Companies is a party
involving any rate of compensation in
excess of B.P.50,000 and the current Sphere
------
Drake Staff Handbook (the "Staff Hand-
--------------------
book") presently furnished by each of
the Companies to its employees. Except
as set forth in the Staff Handbook, to
the Knowledge of the Seller, there are
no other contracts or arrangements
(a) entitling any employee to future
22
<PAGE>
increases in remuneration, level of
employment benefits or pension contribu-
tion; (b) entitling any employee to
receive sickness payments above and
beyond statutory sick pay; (c) entitling
any employee to receive notice in excess
of the notice period specified in Sec-
tion 49 of the Employment Protection
(Consolidation) Act 1978 (as amended);
or (d) with respect to employees who
have been employed by any of the Compa-
nies for 10 years or more or receive
compensation in excess of B.P.30,000,
requiring any of the Companies to recog-
nize the part of employment by any other
Person or previous employer as continu-
ous employment by any of the Companies;
which contracts or agreements are mate-
rial to the Condition of the Companies
taken as a whole or to the separate
Condition of SDI.
(iii) Except as set forth in Schedule 2.23,
there are no agreements or arrangements
by, or in relation to, any of the Compa-
nies whereunder any director or employee
is entitled to a commission or remunera-
tion of any other sort, calculated by
reference to the whole or part of the
turnover, profits or sales of any Per-
son. Except as set forth in Schedule
2.23, none of the Companies has made any
loans other than advances and loans for
travel and other out-of-pocket expenses
made in the ordinary course of business
to any employees or directors of any of
the Companies.
2.24 Employee Benefit Plans
----------------------
(i) In this Section 2.24 the following terms
shall have the meanings herein speci-
fied:
"Company Pension Scheme" means the
Sphere Drake Pension and Life Assurance
Plan (1986).
23
<PAGE>
"Pension Scheme" means all superannua-
tion and all other pension, retirement
benefit schemes or life assurance
arrangements in operation by or in rela-
tion to any of the Companies.
"Relevant Employee" means any employee
or director for the time being of or a
former employee or director of any of
the Companies or a former employee or
director of any other employer to whose
business (or any part thereof) any of
the Companies has succeeded.
(ii) Other than the Company Pension Scheme,
there is no Pension Scheme to which any
of the Companies contributes or has
contributed or may become liable to
contribute under which benefits of any
kind are payable to or in respect of any
of the Relevant Employees on retirement,
death, disability or sickness or in
other similar circumstances.
(iii) Except as set forth in Schedule 2.24,
the Company Pension Scheme (a) is an
exempt approved scheme (within the mean-
ing of the Finance Act 1970); and
(b) has at all times complied with in
all material respects and been duly
administered in all material respects in
accordance with all applicable laws,
regulations and requirements (including
Inland Revenue and trust requirements).
(iv) Except as set forth in Schedule 2.24,
each of the Companies (a) has been duly
admitted to participation in the Company
Pension Scheme; (b) has complied in all
material respects with all the provi-
sions of the Company Pension Scheme; and
(c) holds or is named in an appropriate
contracting-out certificate (within the
meaning of the Social Security Pensions
Act 1975).
(v) There are not in respect of the Company
Pension Scheme or the benefits there-
24
<PAGE>
under any actions, suits or claims pend-
ing or threatened (other than routine
claims for benefits) which are material
to the Condition of the Companies taken
as a whole or to the separate Condition
of SDI.
(vi) There has been delivered to the Buyer in
respect of the Company Pension Scheme
true, complete and correct copies of
(a) all trust deeds and other documents
constituting the Company Pension Scheme;
(b) all current booklets and announce-
ments; (c) the latest actuarial report
and valuation; (d) any contracting-out
certificates; and (e) lists of all
assets, funding arrangements and current
membership as of December 31, 1986.
(vii) To the Knowledge of the Seller, all
steps have been taken to ensure that the
Company Pension Scheme conforms with the
preservation requirements specified in
Sections 62 and 16 of the Social Secu-
rity Act 1973 and any regulations made
thereunder and the equal access require-
ments specified in Section 53 of the
Social Security Pensions Act 1975 and
any regulations made thereunder.
(viii) No claim has been made, nor to the
Knowledge of the Seller, threatened
against the trustees or administrator of
the Company Pension Scheme or any of
them or against any other Person whom
any of the Companies is or may be liable
to indemnify or compensate in respect of
any event, act or omission or other
matter arising out of or in connection
with the Company Pension Scheme.
(ix) Notwithstanding any other provision of
this Agreement, the Seller makes no
representations or warranties as to, and
assumes no liability with respect to
(whether under Section 7, Section 10 or
otherwise), the adequacy of the contri-
butions to the Company Pension Scheme
25
<PAGE>
made before the date hereof relative to
the liabilities for benefits under the
Company Pension Scheme or the financial
disclosure with respect thereto in the
Company Financials or the SDI Finan-
cials.
2.25 Operations of the Companies
---------------------------
Except as set forth in Schedule 2.25, in any
other Schedule hereto or as specifically contem-
plated by this Agreement, since December 31, 1986
none of the Companies has:
(i) amended its Memorandum or Articles of
Association or merged with or into or con-
solidated with any other Person or
changed or agreed to change in any man-
ner the rights of its outstanding share
capital or the character of its busi-
ness;
(ii) issued or sold or purchased, or issued
options or rights to subscribe for, or
entered into any contracts or commit-
ments to issue or sell or purchase, any
of its share capital;
(iii) except in the ordinary course of busi-
ness, entered into or amended any
employment agreement, or entered into or
amended any Contracts or Other Agree-
ments with any labor union or
association representing any employee;
(iv) except in the ordinary course of busi-
ness, incurred any indebtedness for
borrowed money or otherwise represented
by notes, bonds, debentures or similar
instruments;
(v) declared or paid any dividends or
declared or made any other distributions
of any kind to its shareholders, or made
any direct or indirect redemption,
reduction, purchase or other acquisition
of any of its share capital;
26
<PAGE>
(vi) except in the ordinary course of busi-
ness, to the Knowledge of the Seller,
waived any right under any Contracts or
Other Agreements of a type required to
be set forth in any Schedule hereto,
which waiver could have a material
adverse effect on the Condition of the
Companies taken as a whole or on the
separate Condition of SDI;
(vii) made any material change in its account-
ing methods or practices;
(viii) materially changed any of its investment
guidelines or business policies or stan-
dards with respect to underwriting,
principles of loss reserving or claims
adjustment policies and practices;
(ix) entered into any obligation or agreement
(whether legally binding or not) to
provide or procure the provision of
benefits of the nature of those
described in Section 2.24 in respect of
any of the Relevant Employees except in
accordance with the provisions of the
Company Pension Scheme;
(x) except in the ordinary course of busi-
ness, made any wage or salary increase
or bonus, or increase in any other di-
rect or indirect compensation, for or to
any of its officers or directors;
(xi) made any loan or advance to any of its
shareholders, officers, directors,
employees, consultants, agents or other
representatives (other than advances and
loans for travel and out-of-pocket
expenses made in the ordinary course of
business), or made any other loan or
advance otherwise than in the ordinary
course of business which individually or
in the aggregate exceed B.P.100,000;
(xii) except in the ordinary course of busi-
ness, entered into any material lease
(as lessor or lessee) or sold, abandoned
27
<PAGE>
or made any other disposition of a mate-
rial portion of its assets or proper-
ties;
(xiii) except in the ordinary course of busi-
ness, incurred or assumed any material
debt, obligation or liability (whether
absolute or contingent and whether or
not currently due and payable);
(xiv) except in the ordinary course of busi-
ness, made any acquisition in a material
amount of all or any part of the assets,
properties, share capital or business of
any other Person;
(xv) paid, directly or indirectly, any obli-
gation in any material amount otherwise
than in the ordinary course of business;
(xvi) except in the ordinary course of busi-
ness, entered into any Contracts or
Other Agreements with respect to under-
writing authorities or fronting arrange-
ments;
(xvii) except in the ordinary course of busi-
ness, created any Liens other than Per-
mitted Liens on any of its properties;
(xviii) except in the ordinary course of busi-
ness, made any expenditure or business
commitment in any amount in excess of
B.P.100,000;
(xix) except in the ordinary course of busi-
ness, introduced any new class of busi-
ness or withdrawn from any class of
business in any material respect;
(xx) extended its business in any material
respect into any geographical area in
which it was not previously doing busi-
ness or withdrawn any material portion
of its business from any geographical
area in which it was previously doing
business;
28
<PAGE>
(xxi) except in the ordinary course of busi-
ness, appointed or employed any new
agent, salesman or broker;
(xxii) except in the ordinary course of busi-
ness, terminated or cancelled any agent,
salesman or broker;
(xxiii) except in the ordinary course of busi-
ness, entered into any reinsurance or
coinsurance treaty or agreement, whether
assuming premium or ceding liabilities;
(xxiv) settled any claims, except in the ordi-
nary course of business;
(xxv) except in the ordinary course of busi-
ness, undertaken any litigation with
respect to which the liability is
expected to exceed B.P.500,000; or
(xxvi) done anything that might constitute a
default in respect of any provision of
any reinsurance treaty, and as a result
of such default the Companies as a
whole, or SDI individually, could suffer
material adverse consequences.
2.26 Potential Conflicts of Interest
-------------------------------
Except as set forth in Schedule 2.26, no director
of any of the Companies or the Seller, and to the
Knowledge of the Seller, no director of A&A or
any of its Affiliates other than the Companies
and the Seller, and no entity controlled by any
such director (to the Knowledge of the Seller in
the case of directors of A&A and its Affiliates
other than the Companies and the Seller) owns,
directly or indirectly, any interest in (except-
ing not more than 10% shareholdings for invest-
ment purposes in securities of publicly held and
traded companies), or is an officer, director,
employee or consultant of, any Person that is, or
is engaged in business as, a competitor, lessor,
lessee, customer or supplier of any of the Compa-
nies which relationship as such lessor, lessee,
customer or supplier, or the conflict of inter-
ests involved in such relationship as competitor,
29
<PAGE>
is material to the Condition of the Companies
taken as a whole or to the separate Condition of
SDI.
2.27 Deposits and Bonds
------------------
SDI has made or furnished or maintains in or for
the account of each jurisdiction in which it
writes or is admitted to write policies of insur-
ance or reinsurance all material deposits, bonds,
funds, letters of credit and other securities
("Security Deposits") required to be made, fur-
nished or maintained by the law of each jurisdic-
tion in which it carries on its business. SDI
has complied with all of its material contractual
obligations to make, furnish or maintain Security
Deposits. Schedule 2.27 sets forth a list of all
material Security Deposits furnished or main-
tained as of December 31, 1986, by any of the
Companies arising out of any obligations in any
jurisdiction under any Contracts or Other Agree-
ments in connection with any contracts of insur-
ance or reinsurance. Except as set forth in
Schedule 2.27, there has been no material change
in such Security Deposits since December 31,
1986.
2.28 Regulatory Filings
------------------
The Seller has made available for inspection by
the Buyer the following with respect to any of
the Companies (i) all material registrations,
filings or submissions made with any Governmental
or Regulatory Body since December 31, 1981;
(ii) every material financial statement filed
with or submitted to any Governmental or Regula-
tory Body since December 31, 1981; (iii) any
reports of examination issued by any Governmental
or Regulatory Body and any trade or industry
organization since December 31, 1981; and
(iv) any such filings or submissions Known to the
Seller to have been made from December 31, 1978
through December 31, 1981. To the Knowledge of
the Seller, except as indicated in Schedule 2.28
since December 31, 1981 (i) each of the Companies
has filed all reports, statements, documents,
registrations, filings or submissions required to
be filed by it with any Governmental or Regula-
30
<PAGE>
tory Body; (ii) all such registrations, filings
and submissions were in substantial compliance
with applicable law when filed and as of their
respective dates; and (iii) no material deficien-
cies have been asserted by any such Governmental
or Regulatory Body with respect to such registra-
tions, filings or submissions.
2.29 Managing General Agents
-----------------------
Schedule 2.29 lists all managing general agents
now engaged, or Known to the Seller to have been
engaged within the past five years, by SDI and
with respect to whom there may be any outstanding
obligations or liabilities. Except as set forth
in Schedule 2.29, neither the Seller nor, to the
Seller's Knowledge, SDI has received written
notice that any managing general agent so listed
and accounting for a material portion of SDI's
business has cancelled or intends to cancel or
otherwise materially modify its relationship with
SDI or to decrease or limit its services to SDI.
2.30 Banks, Brokers and Powers of Attorney
-------------------------------------
Schedule 2.30 sets forth (i) the name of each
bank, trust company, securities or other broker
or financial institution with which any of the
Companies has an active account, credit line or
safe deposit box or vault; (ii) the name of each
Person Known by the Seller to be authorized by
any of the Companies to draw thereon or to have
access to any safe deposit box or vault; and
(iii) the names of all Persons Known by the
Seller (other than managing general agents listed
in Schedule 2.29 or any Persons authorised pursu-
ant to any line slips or permanent open covers)
to be authorized by powers of attorney or other
instruments to act on behalf of any of the Compa-
nies in matters concerning its business or
affairs.
2.31 Full Disclosure
---------------
The Seller or its Affiliates, as the case may be,
has made available to the Buyer for inspection
true, complete and authentic copies of all of the
31
<PAGE>
Contracts or Other Agreements set forth in any
Schedule to any of the Seller's Documents. All
copies of any Document or Other Papers delivered
by or on behalf of the Seller or any of the Com-
panies or any of their Affiliates as required by
the Seller's Documents and the transactions to be
completed on or prior to Closing pursuant to the
Seller's Documents are true, complete and authen-
tic in all material respects. The representa-
tions and warranties of the Seller or any of its
Affiliates contained in the Seller's Documents,
and the Documents or Other Papers furnished by or
on behalf of the Seller or any of its Affiliates
to the Buyer as required by the Seller's Docu-
ments or in connection with the transactions to
be completed on or prior to the Closing pursuant
to the Seller's Documents, analyzed as a whole,
do not contain any untrue statement of a material
fact or omit to state a material fact necessary
in order to make the statements made, in the
light of the circumstances under which they are
made, not misleading; provided, however, that the
-------- -------
representations and warranties contained in this
Section 2.31 shall not apply to (i) Schedules
10.3A through 10_______ or (ii) the affidavit(s)
of Reynolds Johnson & Green attached to Sched-
ule 2.12.
2.32 Qualification of Representations
--------------------------------
The Buyer shall not have any claim or right of
action against the Seller based upon, arising out
of or otherwise in respect of any inaccuracy in
or any breach of the representations and warran-
ties set forth in the last sentence of Section
2.31 if and to the extent that on or prior to the
Closing Date the Buyer had Knowledge of the fact
upon which a claim that such representations and
warranties were inaccurate or breached is based;
provided, however, that the limitations on the
-------- -------
claims or rights of the Buyer contained in this
Section 2.32 shall only limit any claims or
rights that the Buyer might otherwise have or
assert under the last sentence of Section 2.31
and shall not limit or otherwise restrict any
claims or rights that the Buyer may have or
assert based upon, arising out of or otherwise in
32
<PAGE>
respect of any other provisions of this Agree-
ment.
2.33 Representations and Warranties on the Closing
---------------------------------------------
Date
----
The representations and warranties contained in
this Section 2 shall be true and complete in all
material respects on and as of the Closing Date
with the same force and effect as though such
representations and warranties had been made on
and as of the Closing Date.
3. Representations and Warranties of the Buyer
-------------------------------------------
The Buyer represents and warrants to the Seller as
follows:
3.1 Organization
------------
The Buyer is a company duly incorporated under
the laws of England and has the power and author-
ity to own, lease and operate its assets and to
carry on its business as now and heretofore con-
ducted.
3.2 Authority to Execute and Perform Agreements
-------------------------------------------
The execution and delivery of the Buyer's Docu-
ments and the performance by the Buyer or its
Affiliates of its or their obligations thereunder
have been duly authorized by all necessary corpo-
rate action on the part of the Buyer or its
Affiliates, as the case may be. Each of the
Buyer's Documents has been duly executed and
delivered by the Buyer or its Affiliates, as the
case may be, and is the valid and binding obliga-
tion of the Buyer or such Affiliate enforceable
against such Person in accordance with its terms.
3.3 Memorandum and Articles of Association
--------------------------------------
The Buyer has heretofore delivered to the Seller
true and complete copies of the Memorandum and
Articles of Association of the Buyer on the date
hereof, having attached thereto all of the reso-
lutions required to be so attached, certified by
33
<PAGE>
the Secretary or Assistant Secretary of the
Buyer.
3.4 Reinsurance Affiliates
----------------------
Schedule 3.4 identifies each Reinsurance Affili-
ate (as such term is defined in Section 7.14) of
the Buyer as of the date of this Agreement.
3.5 Consents and Approvals
----------------------
Except as set forth in Schedule 3.5, the execu-
tion and delivery by the Buyer or its Affiliates,
as the case may be, of the Buyer's Documents, the
binding effect of the Buyer's Documents on the
Buyer and its Affiliates and the consummation of
the transactions to be completed on or prior to
the Closing pursuant to the Buyer's Documents do
not require the Buyer or any of its Affiliates to
obtain any consent, approval or action of, or
make any filing with or give any notice to any
Governmental or Regulatory Body (the consents,
approvals, actions and filings indicated by
asterisks in Schedule 3.5 being hereinafter
referred to as the "Buyer's Consents"). Except
or as set forth on Schedule 3.5, the Buyer has no
Knowledge of any fact or circumstance concerning
itself or its Affiliates which could result in
the Seller not being able to obtain any of the
Seller's Consents or the Buyer or any of its
Affiliates not being able to obtain any of the
Buyer's Consents in due course.
3.6 No Breach
---------
The execution, delivery and performance of the
Buyer's Documents and the consummation of the
transactions to be completed on or prior to the
Closing pursuant to the Buyer's Documents will
not (i) violate any provision of the Memorandum
or Articles of Association of the Buyer or any of
its Affiliates; (ii) require any consent,
approval or notice under or result in a violation
or breach of, or conflict with, or constitute
(with or without notice or lapse of time or both)
a default (or give rise to any right of termina-
tion, cancellation or acceleration) under any of
the terms, conditions or provisions of any note,
34
<PAGE>
bond, mortgage, indenture, license, Contracts or
Other Agreements to which the Buyer or any of its
Affiliates is a party or by which the Buyer or
any of its Affiliates or any of their properties
may be bound; (iii) result in the creation or
attachment of any Lien on any property or right
of the Buyer or any of its Affiliates; or
(iv) violate any order, judgment, injunction,
award or decree of any Governmental or Regulatory
Body applicable to the Buyer or any of its Affil-
iates.
3.7 Full Disclosure
---------------
All copies of Documents or Other Papers delivered
by or on behalf of the Buyer or any of its Affil-
iates as required by the Buyer's Documents are
true, complete and authentic in all material
respects. The representations and warranties of
the Buyer or any of its Affiliates contained in
the Buyer's Documents, and the Documents or Other
Papers furnished by or on behalf of the Buyer or
any of its Affiliates to the Seller as required
by the Buyer's Documents or in connection with
the transactions to be completed on or prior to
the Closing pursuant to the Buyer's Documents,
analyzed as a whole, do not contain any untrue
statement of a material fact or omit to state a
material fact necessary in order to make the
statements made, in the light of the circum-
stances under which they are made, not mislead-
ing.
3.8 Representations and Warranties on the Closing
---------------------------------------------
Date
----
The representations and warranties contained in
this Section 3 shall be true and complete in all
material respects on and as of the Closing Date
with the same force and effect as though such
representations and warranties had been made on
and as of the Closing Date.
35
<PAGE>
4. Covenants and Agreements
------------------------
The parties covenant and agree as follows:
4.1 Conduct of Business
-------------------
From the date hereof through the Closing Date,
the Seller shall use reasonable efforts to cause
the Companies to conduct their business in the
ordinary course and, without the prior written
consent of the Buyer, not to undertake any of the
actions specified in Section 2.25, except as
disclosed in Schedule 2.25.
4.2 Continued Effectiveness of Representations and
----------------------------------------------
Warranties of the Seller
------------------------
From the date hereof through the Closing Date,
the Seller shall use reasonable efforts to cause
the Companies to conduct their businesses in such
a manner so that the representations and warran-
ties contained in Section 2 shall continue to be
true and correct in all material respects on and
as of the Closing Date as if made on and as of
the Closing Date. Each of the Buyer and the
Seller shall promptly give notice to the other of
any event, condition or circumstance occurring
from the date hereof through the Closing Date
that would constitute a violation or breach of
the Buyer's or the Seller's Documents.
4.3 Corporate Examinations and Investigations
-----------------------------------------
Prior to the Closing Date, the Buyer shall be
entitled, through its employees and representa-
tives, to make such investigation of the Condi-
tion of the Companies, and such examination of
the books, records and financial Condition of the
Companies as the Buyer wishes. Any such investi-
gation and examination shall be conducted at
reasonable times and under reasonable circum-
stances in such a manner to avoid any disruption
of the Companies' businesses, and the Seller, the
Companies and any of their Affiliates shall coop-
erate fully therein. Subject to Section 2.32, no
investigation by the Buyer shall diminish or
obviate any of the representations, warranties,
covenants or agreements of the Seller or any of
36
<PAGE>
its Affiliates under the Seller's Documents. In
order that the Buyer may have full opportunity to
make such business, accounting and legal review,
examination or investigation as it may wish of
the Condition of the Companies, the Seller shall
(i) furnish and shall cause the Companies to
furnish the representatives of the Buyer during
such period with all such information and copies
of such documents concerning the affairs of the
Companies as such representatives may reasonably
request with the exception of those documents the
disclosure of which might serve to waive any
attorney-client privilege attaching thereto; and
(ii) use its best efforts to cause the Companies'
directors and employees (including auditors in
whatever capacity employed) to cooperate fully
with such representatives in connection with such
review and examination and to cooperate with the
Buyer in furnishing all information requested by
the Buyer as to the Condition of the Companies.
If this Agreement terminates, the Buyer shall,
and shall cause its Affiliates and any other
Person to whom the Buyer has given access to
information disclosed hereunder to, (i) keep
confidential and not use in any manner any infor-
mation or documents obtained from any of the
Companies or any of their Affiliates concerning
the Condition of the Companies unless readily
ascertainable from public or published informa-
tion, or already known or subsequently developed
by the Buyer independent of any investigation of
the Companies, or received from a third party not
under an obligation to the Companies or any of
their Affiliates to keep such information confi-
dential and (ii) return any documents obtained
from the Companies or any of their Affiliates as
soon as possible without retaining any copies
thereof; provided, however, that such require-
-------- -------
ments shall not apply to any use by the Buyer or
any of its Affiliates of any such information or
documents in any action or proceeding brought by
it in good faith against the Seller or any of its
Affiliates for any breach of any of the Seller's
Documents.
37
<PAGE>
4.4 Payment of Debts
----------------
Except with respect to amounts owing in the ordi-
nary course of business, before the Closing Date,
the Seller shall, and shall use its reasonable
efforts to cause each Affiliate of the Seller,
other than the Companies, to pay to the Companies
any amounts owed by any of the Seller or such
Affiliate to any of the Companies, and the Compa-
nies shall pay to the Seller and each of its
Affiliates, other than the Companies, any amounts
owed by the Companies to any of such Persons.
4.5 Certain Approvals
-----------------
4.5.1 Actions by the Buyer
--------------------
The Buyer shall use its best efforts,
without any cost to the Seller, to
obtain as promptly as practicable the
Buyer's Consents. The Seller shall
cooperate with the Buyer in its efforts
to obtain all such Buyer's Consents.
The Seller shall provide such informa-
tion to Governmental and Regulatory
Bodies as such bodies or organizations
may require in order to assist the Buyer
in obtaining the Buyer's Consents.
Without limiting the generality of the
foregoing, the Buyer shall in good faith
use its best efforts to procure by
October 16, 1987 a preliminary indica-
tion in writing, reasonably satisfactory
to the Seller (the "ILU Indication"),
from the ILU or the Buyer to the effect
that the ILU has withdrawn or has been
satisfied as to each of the requests for
further action specified in its letter
to SDI dated September 16, 1987. If the
ILU Indication shall not have been
obtained prior to October 16, 1987, then
the Seller shall have the right, whether
or not it elects to terminate this
Agreement pursuant to Section 11.1, to
furnish material information to, and to
hold discussions with, other potential
purchasers of SDI or the Company to the
end of entering into an agreement with
38
<PAGE>
another purchaser to purchase the Com-
pany upon the termination of this Agree-
ment.
4.5.2 Actions by the Seller
---------------------
The Seller shall use its best efforts,
without any cost to the Buyer, to obtain
as promptly as practicable the Seller's
Consents. The Buyer shall cooperate
with the Seller in its efforts to obtain
all such Seller's Consents. The Buyer
shall provide such information to Gov-
ernmental and Regulatory Bodies as such
bodies or organizations may require in
order to assist the Seller in obtaining
the Seller's Consents.
4.6 Use of Certain Names by the Seller
----------------------------------
Immediately following the Closing, the Seller
shall, and shall cause all of its Affiliates to,
(i) cease using the name "Sphere," or "Drake" or
any variant thereof, whether alone or in combina-
tion, and shall promptly cause any Affiliate
whose corporate name contains any of such words
to change its name to a name that does not con-
tain any of such words; and (ii) cease using the
name "Sterling" in the United Kingdom and Ber-
muda, if used in conjunction with the word
"Insurance" or any variant thereof or if used
with respect to any risk bearing insurance busi-
ness, and shall promptly cause any Affiliate
whose corporate name contains such words and
which does business in the United Kingdom or
Bermuda to change its name to a name that does
not contain such words.
4.7 Use of Certain Names by the Buyer
---------------------------------
Immediately following the Closing, the Buyer
shall, and shall cause the Companies to, cease
using the names "Alexander," "Howden," "Reed,"
"Solar," "Sterling" and "Stenhouse" or any vari-
ant thereof, whether alone or in combination, and
shall promptly cause any Affiliate whose corpo-
rate name contains any of such words to change
its name to a name that does not contain any of
39
<PAGE>
such words; provided, however, that the Buyer
-------- -------
shall continue to have the right to use the name
"Sterling" without restriction in the United
Kingdom and Bermuda, but only if used in conjunc-
tion with at least one additional descriptive
word and an intervening descriptive word in the
case of the use of the word "Insurance" (e.g.,
Sterling and General Insurance Company); pro-
----
vided, however, that in no event shall the Buyer
----- -------
use the name Sterling in conjunction with the
word "Offices." For the purposes of this Section
4.7, "descriptive word" shall not include the
words "limited", "company", "public limited com-
pany" or any variation thereof or any equivalent
words in any jurisdiction.
4.8 Expenses
--------
The parties shall, except as otherwise specific-
ally provided herein, bear their respective
expenses incurred in connection with the prepara-
tion, execution and performance of the Seller's
Documents and the Buyer's Documents and the
transactions to be completed on or prior to the
Closing pursuant to this Agreement, including,
without limitation, all fees and expenses of
agents, representatives, counsel and accountants;
provided, however, that the Seller shall bear the
-------- -------
reasonable expenses of such character of the
Buyer if this Agreement is terminated pursuant to
either Section l1.1(iv) or (v), and the Buyer
shall bear the reasonable expenses of such char-
acter of the Seller if this Agreement is termi-
nated pursuant to either Section 11.1(iii) or
(vi). The fees and expenses of any arbitrator or
expert incurred in connection with the perfor-
mance of its duties pursuant to any provision of
the Seller's Documents or the Buyer's Documents
shall be borne one-half by the Buyer and one-half
by the Seller.
4.9 Sale of Sphere Drake (Underwriting) Limited
-------------------------------------------
Prior to the execution and delivery of this
Agreement, Howden Management & Data Services
Limited, an English company ("HMDS"), has
transferred to the Company for nominal
40
<PAGE>
consideration all of the issued and outstanding
share capital of SDUL.
4.10 Sale of Halford, Shead (Holdings) Limited
-----------------------------------------
Prior to the execution and delivery of this
Agreement, the Seller and SDI, have entered into
an agreement in the form of Exhibit A providing
for the sale to the Seller of all of the issued
and outstanding share capital of Halford, Shead
(Holdings) Limited, an English company (the
"Halford Shead Agreement").
4.11 Sale of Sphere Drake Underwriting (Australia),
----------------------------------------------
Limited
-------
Prior to the execution and delivery of this
Agreement, Alexander Howden Group (Australia)
Limited, an Australian company, has transferred
to the Company for nominal consideration all of
the issued and outstanding share capital of SDUA.
4.12 Disposition of Certain Subsidiaries
-----------------------------------
Prior to the execution and delivery of this
Agreement, Dormante Holdings Limited, an English
company ("Dormante") and the Company, and Sphere
Drake Underwriting Management Limited, an English
company ("SDUM") and Dormante have entered into
agreements in the form of Exhibits B-1 and B-2,
respectively, providing for the transfer to
Dormante of all of the issued and outstanding
share capital of the following corporations that
are currently Subsidiaries: Alexander Agency
Administration Limited, an English company and
Solar Underwriting Agencies Limited, an English
company (collectively, the "Subsidiary Agree-
ments").
4.13 Administration of Certain Underwriting Pools
--------------------------------------------
On or prior Closing, Alexander Howden Group
Agency Management Ltd., an English company
("AHGAM"), SDUM and Groves, John & Westrup
(Underwriting) Ltd., an English company, will
enter into an agreement in the form of Exhibit C
pursuant to which AHGAM, shall assume as of
December 31, 1987, responsibility for the admin-
41
<PAGE>
istration of certain underwriting pools (the
"Administration Agreement").
4.14 Properties
----------
On or prior Closing, HMDS and SDI and HMDS and
SDUM will enter into the agreements in the form
of Exhibits D-1 and D-2, respectively, providing
for the assignment of the Ringstead House Prop-
erty leasehold and the Park Row Leeds Property
#31 and #32 leaseholds (the "Property Agree-
ments").
4.15 Data Processing Services
------------------------
On or prior Closing, Alexander Howden Group Man-
agement Services Limited, an English company
("AHGM") and SDUM will enter into an agreement in
the form of Exhibit E pursuant to which AHGM
shall provide data processing services to the
Companies (the "Data Processing Agreement").
4.16 Resignations of Directors
-------------------------
On or prior to the Closing Date, all of the
directors of the Companies who are affiliated
with the Seller and listed in Schedule 4.16,
shall have submitted their resignations in the
form set out in Schedule 4.16, and all of the
directors of the Seller or Affiliates of the
Seller who are affiliated with the Buyer and
listed in Schedule 4.16, shall have submitted
their resignations in the form set out in Sched-
ule 4.16.
4.17 Sentry Account
--------------
Forthwith upon collection by any of the Companies
of any of the receivables due to SDUM from Sentry
Insurance Company (U.K.) Limited (an English
company) and Sentry Indemnity Company (a
Wisconsin corporation) ("SIC") amounting to
(B.P.537,585), US$2,863,717 and Can.$41,520 and a
receivable due to SDUA from SIC of B.P.114,937 the
Buyer will make a payment to the Seller in cash
of an amount equal to any amount so collected and
the Seller shall have and assume full authority
and responsibility for claims handling with
42
<PAGE>
respect to such receivables. The Buyer shall
procure that SDUM and SDUA shall furnish the
Seller or an Affiliate of the Seller with a suit-
able power of attorney in such form as the Seller
or such Affiliate shall reasonably request pro-
viding that the Seller or such Affiliate shall
have full authority and responsibility to assert
claims on behalf of SDUM and SDUA in respect of
such receivables.
4.18 Imperio Account
---------------
The Seller will pay to SDUM a sum equivalent to
balances paid by SDUM at 31st December 1986 on
the Solar Marine Quota Share Treaty 1976-81 of
B.P.923,315, US$1,518,960 and Can.$56,642 less the
reserve set up in the books of SDUM of B.P.550,000
relating to the related E&O Claim No. 84-005-04-
00. This payment will be subject to adjustment
30 days after the Buyer advises the Seller of the
actual balances at Closing paid by SDUM less any
recoveries received from the quota share reinsur-
ers on the said Treaty for the years in question.
4.19 Statements Concerning Relationship
----------------------------------
The Buyer and the Seller acknowledge that they
will have a continuing relationship under the
arrangements provided for in this Agreement
(including, without limitation, Section 7) and
that the insurance markets are sensitive to the
identity of the owner of the businesses conducted
by the Companies. Accordingly, each of the Buyer
and the Seller agrees that it will make no mis-
representation concerning the arrangements pro-
vided for in this Agreement, and the Buyer agrees
that it will not, and from and after the Closing
Date will not permit any of the Companies to,
hold itself out as being controlled by A&A or the
Seller or represent that, otherwise than as pro-
vided in the Seller's Documents, A&A or the
Seller indemnifies or guarantees any of the obli-
gations or liabilities of any of the Companies.
4.20 FET Refunds
-----------
SDUM has informed the Seller that it estimates
that as of September 30, 1987 the amount of
43
<PAGE>
refund of Federal Excise Tax (plus accumulated
interest) ("FFT") held by it for the account of
SDI is B.P.1,685,000. SDI, prior to the date here-
of, has declared and paid a dividend in such
amount to the Company, and the Company, prior to
the date hereof, has declared and paid a dividend
in such amount to the Seller. The Buyer agrees
that if and to the extent that there is a final
determination that the amount of any FET refund
held by SDUM for the account of SDI exceeds such
amount (either by a court of competent jurisdic-
tion or in the good faith judgment of the Board
of Directors of SDUM) then the Buyer shall cause
the prompt payment in cash of such amount equal
to such excess to the Seller. The Seller agrees
that if and to the extent that there is a final
determination that the amount of any FET refund
held by it for the account of SDI is less than
such amount (either by a court of competent
jurisdiction or in the good faith judgment of the
Board of Directors of SDUM) the Seller shall
cause the prompt payment in cash of an amount
equal to such deficiency to SDI. The final
determination of such amount shall become final
and binding upon the parties unless within 30
days of receipt thereof either the Seller or the
Buyer disagrees with the amount or the matters
reflected therein and has not resolved such dis-
agreement with the other party, in which case the
Seller or the Buyer, as the case may be, may give
the other party written notice of its disagree-
ment (a "Notice of Disagreement"). Any such
Notice of Disagreement shall specify in reason-
able detail the nature of any disagreement so
asserted and shall be submitted to and reviewed
by an arbitrator which shall act as an expert and
not as an arbitrator which shall be mutually
selected by the Buyer's and the Seller's audi-
tors, or if they cannot agree, by the President
of the Institute of Chartered Accountants of
England and Wales, whose decision shall be final
and binding upon the parties.
4.21 Tax Indemnity
-------------
At the Closing, the Buyer, the Seller and the
Company shall enter into a Tax Indemnity Deed in
the form of Exhibit F (the "Tax Indemnity Deed").
44
<PAGE>
4.22 Guaranty
--------
Simultaneously with the execution and delivery of
this Agreement, A&A, Alexander & Alexander Europe
plc, a Scottish corporation ("A&A Europe"), and
the Buyer are entering into a Guaranty Agreement
in the form of Exhibit G (the "Guaranty Agree-
ment").
4.23 Indemnification
---------------
At the Closing, SDI and Alexander Howden North
America, Inc., a Georgia corporation, shall enter
into an Indemnification Agreement in the Form of
Exhibit H (the "Indemnification Agreement").
4.24 Pension Trustee
---------------
At the Closing, Alexander Howden Holdings plc, an
English company, the Company and SDUM shall enter
into a Deed in the form of Exhibit J with respect
to the retirement and appointment of the trustee
of the Company Pension Scheme (the "Pension
Deed").
4.25 Further Assurances
------------------
Each of the parties shall execute such Documents
or Other Papers and take such further actions as
may be reasonably required or desirable to carry
out the transactions contemplated hereby. Each
such party shall use its best efforts to fulfill
or obtain the fulfillment of the conditions to
the Closing. Without limiting the generality of
the foregoing, the parties will use their best
efforts to obtain the Seller's Consents or the
Buyer's Consents, as the case may be.
5. Conditions Precedent to the Obligation of the Buyer to
------------------------------------------------------
Close
-----
The obligation of the Buyer to enter into and complete
the Closing is subject, at its option, to the fulfill-
ment on or prior to the Closing Date of the following
conditions, any one or more of which may be waived by
it:
45
<PAGE>
5.1 Representations and Covenants
-----------------------------
The representations and warranties of the Seller
or any of its Affiliates, as the case may be,
contained in the Seller's Documents shall be true
in all material respects on and as of the Closing
Date with the same force and effect as though
made on and as of the Closing Date. Each of the
Seller and its Affiliates, as the case may be,
shall have performed and complied with all cove-
nants and agreements required by the Seller's
Documents to be performed or complied with by it
in all material respects on or prior to the Clos-
ing Date. The Seller and any of its Affiliates,
as the case may be, shall have delivered to the
Buyer a certificate, dated the Closing Date and
signed by an officer of the Seller and such
Affiliates, respectively, to the foregoing effect
and stating that all conditions to the obliga-
tions of the Buyer hereunder have been satisfied
in all material respects and that the Seller and
its Affiliates have not relied upon any represen-
tation or warranty by the Buyer which is not a
term of the Buyer's Documents.
5.2 Third Party Consents
--------------------
All material consents, permits and approvals from
parties to Contracts or Other Agreements with the
Seller or any or the Companies or any of their
Affiliates that may be required in connection
with the performance by the Seller or its Affili-
ates of their obligations under the Seller's
Documents or the continuance of such Contracts or
Other Agreements with the Companies after the
Closing shall have been obtained.
5.3 Buyer's Consents
----------------
All Buyer's Consents as set forth in Section 3.5
shall have been received.
5.4 Opinions of Counsel to the Seller
---------------------------------
The Buyer shall have received the opinions dated
the Closing Date, addressed to the Buyer, of
(i) Debevoise & Plimpton, special United States
counsel to the Seller, in the form of Exhibit K-
46
<PAGE>
1, (ii) Slaughter and May, solicitors to the
Seller, in the form of Exhibit K-2 and
(iii) Maclay, Murray & Spens, solicitors to the
Seller, in the form of Exhibit K-3.
5.5 Litigation
----------
No action, suit or proceeding shall have been
instituted before any Governmental or Regulatory
Body, or instituted or threatened by any Govern-
mental or Regulatory Body, to restrain, modify or
prevent the carrying out of the transactions
contemplated hereby, or to seek damages or a
discovery order in connection with such transac-
tions.
5.6 Delivery of Share Certificates
------------------------------
At the Closing, the Seller shall deliver to the
Buyer share certificates representing all of the
Shares, accompanied by unstamped share transfer
forms in favor of the Buyer or its nominee.
6. Conditions Precedent to the Obligation of the Seller to
-------------------------------------------------------
Close
-----
The obligation of the Seller to enter into and complete
the Closing is subject, at its option, to the fulfill-
ment on or prior to the Closing Date of the following
conditions, any one or more of which may be waived by
it:
6.1 Representations and Covenants
-----------------------------
The representations and warranties of the Buyer
or any of its Affiliates, as the case may be,
contained in the Buyer's Documents shall be true
in all material respects on and as of the Closing
Date with the same force and effect as though
made on and as of the Closing Date. Each of the
Buyer and its Affiliates, as the case may be,
shall have performed and complied with all cove-
nants and agreements required by the Buyer's
Documents to be performed or complied with by it
in all material respects on or prior to the Clos-
ing Date. The Buyer and any of its Affiliates,
as the case may be, shall have delivered to the
47
<PAGE>
Seller a certificate, dated the Closing Date and
signed by an officer of the Buyer and such Affil-
iates, respectively, to the foregoing effect and
stating that all conditions to the obligations of
the Seller hereunder have been satisfied in all
material respects and that the Buyer and its
Affiliates have not relied upon any representa-
tion or warranty by the Seller which is not a
term of the Seller's Documents.
6.2 Buyer's Consents
----------------
All Buyer's Consents as set forth in Section 3.5
shall have been received.
6.3 Opinions of Counsel to the Buyer
--------------------------------
The Seller shall have received the opinions dated
the Closing Date, addressed to the Seller, of
Clyde & Co., solicitors to the Buyer, in the form
of Exhibit L.
6.4 Litigation
----------
No action, suit or proceeding shall have been
instituted before any Governmental or Regulatory
Body, or instituted or threatened by any Govern-
mental or Regulatory Body, to restrain, modify or
prevent the carrying out of the transactions
contemplated hereby, or to seek damages or a
discovery order in connection with such transac-
tions.
7. Purchase Price Adjustments on Account of Reinsurance
----------------------------------------------------
Recoverables and Loss Reserves
------------------------------
The Purchase Price set forth in Section 1.2 shall be
adjusted as provided in this Section 7, as follows:
7.1 Purchase Price Adjustments
--------------------------
Certain terms used in this Section 7 are defined
in Section 7.14. Subject to the further provi-
sions of this Section 7, the Seller shall pay to
the Buyer as an adjustment to the Purchase Price
the amounts determined from time to time in the
Adjustment Account provided for in Section 7.2.
48
<PAGE>
All amounts to be credited, paid or applied under
this Section 7 shall be credited, paid or applied
in accordance with the applicable provisions of
this Section 7. Except as provided in Section
7.4 it is understood and agreed that neither the
Buyer, SDI, their permitted assigns nor any other
Person shall have any right of recourse in
respect of the Adjustment Account provided for in
Section 7.2 against the Seller or any other
Person or any of their assets.
7.2 Adjustment Account
------------------
The Seller shall maintain pursuant to this Sec-
tion 7 an open account (the "Adjustment Account")
in favor of the Buyer, and amounts shall be cred-
ited and charged to the Adjustment Account on
each Adjustment Date as provided in this Sec-
tion 7. The balance in the Adjustment Account
shall be adjusted as follows:
(i) as of any Adjustment Date, the balance
of the Adjustment Account shall be
increased by the amount of any Net
Recoverables Adjustment;
(ii) as of any Adjustment Date that is a
Reserve Adjustment Date or an Accelera-
tion Date, the balance of the Adjustment
Account shall be increased (decreased)
by the positive (negative) amount of any
Net Reserves Adjustment;
(iii) as of any Adjustment Date that is a Tax
Adjustment Date, the balance of the
Adjustment Account shall be decreased by
the amount of any Net Tax Benefit
Adjustment;
(iv) as of any Adjustment Date that is an
Annual Adjustment Date or an Accelera-
tion Date occurring in either case on
December 31, 1988 or thereafter, the
balance of the Adjustment Account shall
be decreased by the amount of any Net
Pipeline Profits Adjustment;
49
<PAGE>
(v) as of any Adjustment Date, the balance
of the Adjustment Account shall be
decreased by the amount of any Net Write
Off Adjustment;
(vi) as of any Adjustment Date, the balance
of the Adjustment Account shall be
decreased by the amount of any Negative
Balance determined as of any prior
Adjustment Date not theretofore applied
to the Adjustment Account pursuant to
this clause (vi) of this Section 7.2;
(vii) as of any Adjustment Date, the balance
of the Adjustment Account shall be
increased in accordance with Section
7.12 by the amount specified in any
notice given pursuant to Section 7.12;
(viii) as of any Adjustment Date, the balance
of the Adjustment Account shall be
decreased by any amount paid by the
Seller to the Buyer pursuant to Sec-
tion 7.4 or 7.5 with respect to such
Adjustment Date;
(ix) as of any Adjustment Date, the balance
of the Adjustment Account shall be
increased by the amount of any Collec-
tion Costs incurred by the Buyer and not
included in Net Recoverables Adjustment
(90% of such amount in respect of Non-
Proportional Recoverables and Propor-
tional Recoverables);
(x) as of any Adjustment Date, the balance
of the Adjustment Account shall be
decreased by the amount of any Remaining
Balance paid to SDI pursuant to Section
7.9 during the period ending on such
Adjustment Date and commencing on the
immediately prior Adjustment Date;
(xi) as of any Acceleration Date, an amount
equal to the full balance of the Adjust-
ment Account (but not to exceed the then
Accreted Value of the Notes) as at
such Acceleration Date shall be paid as
50
<PAGE>
provided below in this Section 7.2 and
the Adjustment Account shall be reduced
by the amount so applied (but not below
zero);
(xii) as of any such Adjustment Date that
occurs subsequent to January 1, 1988,
the balance of the Adjustment Account
shall be increased by the Reinsurance
Recoverables Increase Amount with
respect to the period ending on such
Adjustment Date and commencing on the
immediately prior Adjustment Date;
(xiii) as of any Adjustment Date that is an
Equity Adjustment Date, the balance of
the Adjustment Account shall be
decreased by the Equity Put Adjustment;
and
(xiv) as of any Adjustment Date that occurs
subsequent to January 1, 1988, the bal-
ance of the Adjustment Account shall be
increased by an amount determined by
applying the Applicable Rate to an
amount equal to (a) the balance of the
Adjustment Account as of the immediately
prior Adjustment Date, less (b) the
----
amount of any Matured Eligible Recovera-
bles outstanding as of such immediately
prior Adjustment Date and included in
such balance at such prior Adjustment
Date.
Anything in this Agreement to the contrary not-
withstanding, if the adjustments to the Adjust-
ment Account otherwise required pursuant to this
Section 7 as of any Adjustment Date (including,
without limitation, the Final Adjustment Date)
would result in a negative balance in the Adjust-
ment Account (a "Negative Balance"), such balance
shall, subject to the last sentence of Sec-
tion 7.4, for all purposes of this Agreement be
deemed to have been adjusted on such Adjustment
Date to zero. As of the earlier to occur of the
Final Adjustment Date or the Acceleration Date,
any balance of the Adjustment Account shall be
paid by the Seller to the Buyer. Adjustments
51
<PAGE>
contemplated by this Section 7.2 shall be
calculated and determined in accordance with any
applicable Adjustment Schedule provided for in
Section 7.7, with any such adjustment to become
definitive on the date on which the applicable
Adjustment Schedule becomes final.
7.3 Determination of Reinsurance Recoverables
-----------------------------------------
Increase Amount
---------------
In connection with the adjustments to be made to
the Adjustment Account pursuant to Section 7.2,
there shall be computed with respect to each
Eligible Recoverable an amount determined by
applying the Applicable Rate to the Recoverable
Base Amount from time to time outstanding of such
Eligible Recoverable from and including the date
upon which each such Eligible Recoverable becomes
an Eligible Recoverable to but not including the
date upon which such Eligible Recoverable is
actually paid to the Buyer or any of the Compa-
nies in full. On each Adjustment Date, an amount
shall be computed pursuant to the provisions of
the preceding sentence with respect to each
Eligible Recoverable that was an Eligible Recov-
erable at any time during the period ending on
such Adjustment Date and commencing on the imme-
diately prior Adjustment Date, and the sum of the
amounts so determined with respect to each such
Eligible Recoverable shall be the "Reinsurance
Recoverables Increase Amount" as of such Adjust-
ment Date.
7.4 Cash Adjustments Following Certain Events
-----------------------------------------
Anything in this Section 7 to the contrary not-
withstanding (but subject to Section 7.5), fol-
lowing any payment pursuant to Section 7.2 of the
balance of the Adjustment Account as of any
Acceleration Date, the Adjustment Account shall
be continued and amounts shall be credited and
charged to the Adjustment Account on each Adjust-
ment Date as provided in this Section 7; provided
--------
that subject to the limitations set forth in
Section 7.5, any positive amount in the Adjust-
ment Account as at any such Adjustment Date sub-
sequent to an Acceleration Date shall be paid by
the Seller to the Buyer (or to its permitted
52
<PAGE>
assigns) in cash at the Adjustment Closing imme-
diately following such Adjustment Date. The
Buyer shall pay the Seller directly (notwith-
standing any assignment of the Buyer's rights in
respect of the Adjustment Account) an amount
equal to the lesser of the Negative Balance and
all amounts by which the Adjustment Account shall
theretofore have been decreased pursuant to Sec-
tion 7.2(x) as at any such Adjustment Date
(reduced by all amounts theretofore paid pursuant
to this sentence) in cash at the Adjustment Clos-
ing next following such Adjustment Date and the
Negative Balance shall be reduced by the amount
of any cash payments made pursuant to this sen-
tence.
7.5 Limitation on Liability
-----------------------
The total cumulative liability of the Seller to
the Buyer under this Section 7 shall not exceed
the sum of B.P.32,651,934 plus the amount of any
Warrant Proceeds, provided that such sum shall be
--------
reduced if any of the Notes shall have been pre-
paid in accordance with Section 9 of the Note
Purchase Agreement by an amount equal to the
excess, if any, of (i) the Prepaid Percentage of
-
Notes so prepaid times B.P.32,651,934, over (ii) the
----- ---- --
Accreted Value of the Notes so prepaid. For
these purposes the "Prepaid Percentage" shall be
a fraction, the numerator of which is the aggre-
gated stated principal amount of the Notes so
prepaid and the denominator of which is the
aggregate stated principal amount of the Notes
outstanding as of the Closing Date.
7.6 Current Status of Recoverables
------------------------------
Schedule 7.6 annexed hereto sets forth (i) a list
of all Proportional Recoverables that are Closed
Recoverables together with the reserves for bad
debts specifically applied against such Propor-
tional Recoverables and (ii) a list of all Pro-
portional Recoverables that are Open Recoverables
based solely on the latest best estimates of SDI
(as to which the Seller has no independent knowl-
edge), together with the reserves for bad debts
specifically applied against such Proportional
53
<PAGE>
Recoverables as reflected on the books and
records of SDI.
7.7 Preparation of Adjustment Schedules
-----------------------------------
The Buyer shall cause SDI to deliver to the
Seller as promptly as possible following each
Adjustment Date but in no event later than 90
days (180 days if such Adjustment Date is a
Reserve Adjustment Date) following each Adjust-
ment Date a schedule (a "Reinsurance Recoverable
Schedule") in the form of Exhibit M, accompanied,
in the case of the Adjustment Date at the end of
the fourth calendar quarter, by a report of the
auditors of SDI stating that such auditors have
reviewed (I) such Reinsurance Recoverable Sched-
ule and each other Reinsurance Recoverable Sched-
ule delivered subsequent to the last such report
(or the date of the Closing if there was no such
report), (II) the provisions of this Agreement
(including Exhibit M) and (III) the appropriate
accounting records of SDI, and that such Reinsur-
ance Recoverable Schedules have been prepared in
accordance with such provisions and properly
reflect the information in such books and
records; and if such Adjustment Date is a Reserve
Adjustment Date, a schedule (a "Reserve Sched-
ule") in the form of Exhibit N accompanied by a
report of the auditors of SDI stating that such
auditors have reviewed (w) such Reserve Schedule,
(x) the provisions of this Agreement (including
Exhibit N), (y) the report referred to in the
last sentence of this Section 7.7, and (z) the
appropriate accounting books and records of SDI
and that such Reserve Schedule has been prepared
in accordance with such provisions and properly
reflects the information in such report and books
and records. In any event the Buyer shall cause
SDI to deliver to the Seller no later than 75
days following each Reserve Adjustment Date a
draft statement of SDI's Net Reserves Adjustment
as at such Reserve Adjustment Date. In addition,
within 180 days following each Annual Adjustment
Date commencing with December 31, 1988, the Buyer
shall cause SDI to deliver to the Seller a sched-
ule (a "Pipeline Profits Schedule") showing the
calculation of the Net Pipeline Profits Adjust-
ment with respect to the preceding accounting
54
<PAGE>
year (the Pipeline Profits Schedule, together
with the Reinsurance Recoverable Schedule and the
Reserve Schedule being hereinafter collectively
called the "Adjustment Schedules"). In determin-
ing the amount of all Net Recoverables Adjust-
ments, Net Reserve Adjustments and Pipeline Prof-
its, all adjustments and calculations are to be
made in their original currency (i.e., Sterling,
United States or Canadian dollars) and then
translated into Sterling (i) if at the end of an
accounting year of SDI, at the exchange rates in
effect in preparing SDI's annual accounts and
(ii) if at the last day of the first three quar-
ters of SDI's accounting year, at the exchange
rates published in the Financial Times as at such
---------------
day (or if such day is not a Business Day, as at
the immediately preceding Business Day). The
Adjustment Schedules shall become final and bind-
ing upon the parties (except that any Net Recov-
erables Adjustment made on an Adjustment Date
that is not an Annual Adjustment Date, shall be
subject to year-end audit adjustment) unless
within 30 days of receipt thereof either the
Seller or the Buyer disagrees with the amount or
the matters reflected therein and has not
resolved such disagreement with the other party,
in which case the Seller or the Buyer, as the
case may be, may give the other party written
notice of its disagreement (a "Notice of Dis-
agreement"). Any such Notice of Disagreement
shall specify in reasonable detail the nature of
any disagreement so asserted and shall be submit-
ted to and reviewed by an arbitrator (who shall
act as an expert and not as an arbitrator) which
shall be mutually selected by the Buyer's and the
Seller's auditors, or if they cannot agree, by
the President of the Institute of Chartered
Accountants of England and Wales, whose decision
shall be final and binding upon the parties. Net
Reserve Adjustments shall be based upon a report
on the required loss reserves of SDI prepared
(a) with respect to the first Reserve Adjustment
Date, by Milliman & Robertson, Inc. and (b) with
respect to subsequent Reserve Adjustment Dates,
by any firm of independent consulting actuaries
of recognized standing selected by SDI and rea-
sonably acceptable to the Seller (it being agreed
that Tillinghast Nelson & Warren shall be accept-
55
<PAGE>
able to the Seller). Within 180 days after the
end of each year, the Buyer shall furnish the
Seller with a report of Milliman & Robertson,
Inc. (for each year through December 31, 1988)
and such other independent consulting actuaries
(for each subsequent year) on the required loss
reserves of SDI.
7.8 Settlements
-----------
The settlement of any amounts owing by the Seller
to the Buyer pursuant to this Section 7 and the
settlement of any amounts owing by the Buyer to
the Seller pursuant to this Section 7 shall take
place at a closing (an "Adjustment Closing") to
be held on the tenth Business Day following the
date upon which the Adjustment Schedules relating
to such Adjustment Closing become final and bind-
ing on the parties pursuant to Section 7.7. Any
such Adjustment Closing shall take place at the
offices of Slaughter and May, 35 Basinghall
Street, London EC2V 5DB, at 10:00 a.m. local
time, or such other place or such other time or
date as the Buyer and the Seller agree in writ-
ing. Any amounts owing by the Buyer or the
Seller at any Adjustment Closing shall be payable
in cash in same-day funds, together with interest
on the amount so due computed from but not
including the Adjustment Date as to which the
settlement to be made at such Adjustment Closing
relates to and including the date of payment, at
the base lending rate from time to time of
National Westminster Bank plc based on a year of
365 days and the actual number of days elapsed
(each change in such rate of interest to be
effective as at the opening of business on the
date the change in such rate is determined by
such bank to be effective).
7.9 Collection of Reinsurance Recoverables
--------------------------------------
At such time as any amount has been included in a
Net Recoverables Adjustment with respect to any
particular Reinsurance Recoverable, the Seller or
such Affiliate of the Seller as the Seller may
designate shall thereupon have and assume full
authority and responsibility for claims handling
with respect to such Reinsurance Recoverable. In
56
<PAGE>
this connection, the Buyer shall furnish the
Seller or such Affiliate with a suitable power of
attorney in such form as the Seller or such
Affiliate shall reasonably request providing that
the Seller or such Affiliate shall have full
authority and responsibility to assert claims on
behalf of the Buyer or the Companies with respect
to such Reinsurance Recoverables. In discharging
its claims handling responsibility with respect
to such Reinsurance Recoverables, the Seller or
such Affiliate shall attempt to collect the
amount thereof and shall act in the ordinary
manner applicable in the industry to collections
of Reinsurance Recoverables, and the Seller or
such Affiliate will consult from time to time
with the Buyer at the Buyer's reasonable request
with respect to the collection status of any such
Reinsurance Recoverable but in the absence of
such request shall not be required to consult
with the Buyer in advance of taking any action
with respect to the collection thereof. The
Seller or such Affiliate shall deliver to the
Buyer as promptly as possible following each
Adjustment Date (but in no event later than 90
days following each Adjustment Date) a schedule
showing the collection status of each outstanding
Eligible Recoverable. The Seller may hold itself
out as the agent and attorney-in-fact of SDI in
connection with attempts to collect any such
Reinsurance Recoverable but all costs and ex-
penses of collection incurred in connection with
such attempts following the assumption pursuant
to this Section 7.9 of its claims handling
responsibility shall be borne by the Seller or
such Affiliate. The Seller or any of its Affili-
ates shall indemnify, defend and hold harmless,
promptly (and within any period specified for
payment under or pursuant to any court order,
arbitration award or other settlement, compromise
or agreement of any kind) and fully in cash and
without limitation as to time or amount, the
Buyer and the Companies from and against, and
reimburse, make whole and pay the Buyer and the
Companies for, all losses, claims, liabilities,
damages, deficiencies, costs or expenses (includ-
ing interest and penalties) based upon, arising
out of or otherwise in respect of, or alleged to
be based upon, arising out of or otherwise in
57
<PAGE>
respect of any attempt by the Seller or any of
its Affiliates to collect any such Eligible
Recoverable pursuant to this Section 7.9 and
shall reimburse the Buyer and the Companies for
any legal or other expenses (including any value
added or similar tax payable thereon) reasonably
incurred, as such expenses are incurred, by them
in connection therewith. Any amounts collected
by the Seller with respect to any such Eligible
Recoverable shall be applied as follows:
(i) first, to reimburse the Seller or any of its
Affiliates, as the case may be, for Collection
Costs with respect to such Reinsurance Recover-
able; and (ii) any balance of such collection
then remaining (the "Remaining Balance") shall
thereupon be promptly paid to SDI. Any Reinsur-
ance Recoverable shall to the extent of any pay-
ment made pursuant to the immediately preceding
sentence thereupon cease to be an Eligible Recov-
erable for purposes of this Agreement (including,
without limitation, Section 7.3). At the Adjust-
ment Date following the reimbursement of the
Seller or any of its Affiliates, as the case may
be, Collection Costs and the payment of any
Remaining Balance to the Buyer pursuant to this
Section 7.9, the Adjustment Account shall be
decreased by the amount of such Remaining Bal-
ance. The Seller and the Buyer shall, and the
Buyer shall cause SDI and SDUM to, take reason-
able measures to cooperate with respect to any
interests that any third party insured may have
with respect to policies under which any such
Eligible Recoverable arise.
7.10 No Commutation of Recoverables, Etc.
------------------------------------
The Buyer shall not permit SDI to (i) commute,
reduce, settle or discount Reinsurance Recover-
able balances for amounts applicable to 1986 and
prior underwriting years without the prior writ-
ten consent of the Seller or (ii) pledge or
otherwise subject to any Lien its Reinsurance
Recoverables (except for any Liens which may
arise in the ordinary operation of its business).
The Buyer will cause SDI to proceed with dili-
gence to collect amounts which are or may become
Reinsurance Recoverables in a manner that will
not prejudice the collectibility thereof. Except
58
<PAGE>
with respect to those Reinsurance Recoverables
set forth on Schedule 7.10, the Seller shall not
make any direct or indirect solicitation of the
debtor in respect of any Reinsurance Recoverable
for collection purposes. The Buyer shall not
attempt to cause any debtor in respect of any
Reinsurance Recoverable to allocate payments
other than to the oldest outstanding balance due
from such debtor. If SDI receives any payment
from a debtor on any Reinsurance Recoverable, the
Buyer shall cause SDI to credit such payment to
the oldest outstanding balance due from such
debtor; provided that (x) if and to the extent
--------
that such debtor has specifically allocated any
payment other than to such oldest outstanding
balance, SDI may credit such payment accordingly
and the Buyer will cause SDI promptly to notify
the Seller of such allocation and (y) if such
payment is on a commuted Reinsurance Recoverable,
such payment shall be credited as agreed by the
Seller in connection with the consent contem-
plated by the first sentence of, this Sec-
tion 7.10.
7.11 Accounts of SDI, Etc.
---------------------
The principles used in determining the amount of
any item for purposes of any calculation to be
made pursuant to this Section 7 (including, with-
out limitation, Reserve Items, Reinsurance Recov-
erables and Pipeline Profits) shall be in accor-
dance with standard accounting practices applica-
ble in the United Kingdom consistently applied
with those used in preparing the accounts of SDI
included in the SDI Balance Sheet but without
regard to any changes subsequent to December 31,
1986, in standard accounting practices applicable
in the United Kingdom or in legal or other regu-
latory provisions applicable to SDI, and all
books and records of SDI applicable to such com-
putations shall also be kept in accordance with
such provisions. It is understood and agreed
that certain reinsurance recoverables of SDI are
booked as reinsurance recoverables on the books
and records of SDUM and on the books and records
of SDI as a receivable from SDUM, and references
in this Section 7 to recoverables of SDI shall
mean and include such items as reflected on the
59
<PAGE>
books and records of SDUM. For purposes of this
Agreement, Pipeline Profits will be determined
for the first time as of December 31, 1988, and
annually thereafter.
7.12 Other Indemnities
-----------------
In the event of any Act of Insolvency applicable
to the Seller, the Buyer shall have the option,
exercisable by written notice to the Seller, to
apply to the Adjustment Account any amounts pay-
able to the Buyer by the Seller pursuant to this
Agreement that would otherwise be payable by the
Seller to the Buyer in cash.
7.13 Right of Inspection
-------------------
For so long as the Purchase Price is subject to
adjustment pursuant to this Section 7, the Seller
shall be entitled, through its employees and
representatives, to inspect, examine and to make
copies of such of the books, records and finan-
cial statements of the Companies as may be rele-
vant to a determination of the adjustments
required by this Section 7. Any such inspection
and examination shall be conducted at reasonable
times and under reasonable circumstances and in
such a manner that the Companies' businesses will
not be unreasonably disrupted, and the Buyer, the
Companies and any of their Affiliates shall coop-
erate fully therein. The Seller shall, and shall
cause its Affiliates and any other Person to whom
the Buyer has given access to information dis-
closed pursuant to this Section 7.13 to, keep
confidential and not use in any manner any infor-
mation or documents obtained from any of the
Companies or any of their Affiliates unless read-
ily ascertainable from public or published infor-
mation, provided that the foregoing shall not
prohibit the disclosure of such information
(a) as may become generally available to the
public, (b) as may be required or appropriate in
any report, statement or testimony to any regula-
tory body with appropriate jurisdiction or (c) as
may be required or appropriate in response to any
summons, subpoena or legal proceedings. For so
long as the Seller shall have any claims handling
responsibility with respect to any Eligible
60
<PAGE>
Recoverable pursuant to Section 7.9, the Buyer
shall be entitled, through its employees and
representatives, to inspect, examine and to make
copies of such of the books, records and finan-
cial statements of the Seller as may be relevant
to any determination with respect to the collec-
tion status of any such Eligible Recoverable.
Any such inspection and examination shall be
conducted at reasonable times and under reason-
able circumstances and in such a manner that the
Seller's business will not be unreasonably dis-
rupted, and the Seller and any of its Affiliates
shall operate fully therein. The Buyer shall,
and shall cause its Affiliates and any other
Person to whom the Seller has given access to
information disclosed pursuant to this Section
7.13 to, keep confidential and not use in any
manner any information or documents obtained from
the Seller or any of its Affiliates unless read-
ily ascertainable from public or published infor-
mation, provided that the foregoing shall not
prohibit the disclosure of such information
(a) as may become generally available to the
public, (b) as may be required or appropriate in
any report, statement or testimony to any regula-
tory body with appropriate jurisdiction or (c) as
may be required or appropriate in response to any
summons subpoena or legal proceedings. Each of
the Seller and the Buyer shall promptly notify
the other of any event or circumstance that it
believes may have a material impact on the
adjustments contemplated by this Section 7 (such
as the insolvency of a major reinsurer), but the
rights of such party shall not be diminished or
otherwise prejudiced in any way whatsoever as a
result of any failure to give such notice. The
Seller shall at all times have designated a per-
son in London, England, reasonably satisfactory
to the Buyer for the purpose of coordinating with
the Buyer concerning matters arising under this
Section 7.
7.14 Certain Definitions
-------------------
As used in this Section 7 and in Section 8, as
applicable, the following terms have the follow-
ing meanings:
61
<PAGE>
"Acceleration Date" means any date upon which the
-----------------
Notes are prepaid in full pursuant to Section 9.1
of the Note Purchase Agreement or the Notes are
declared to be due and payable in accordance with
the provisions of the Note Purchase Agreement
prior to their maturity following any Event of
Default (as such term is defined in the Note
Purchase Agreement).
"Accreted Value" has the meaning specified in the
--------------
Note Purchase Agreement.
"Act of Insolvency," with respect to the Seller,
-----------------
means that one of the following conditions or
events shall occur and be continuing:
(i) an administration order is made in
respect of the Seller or an order is
made or a resolution passed for the
winding up of the Seller; or
(ii) the Seller stops or threatens to stop
payment or ceases or threatens to cease
to carry on all or substantially all of
its business (other than for the pur-
poses of reorganization or amalgamation
while solvent and as previously approved
by the Buyer), or is unable to pay its
debts within the meaning of Section 123
of the Insolvency Act 1986 or an order
is made by any competent court, or any
resolution is passed by the Seller, to
apply for judicial composition proceed-
ings with its creditors or any voluntary
arrangement is proposed under Section 1
of the Insolvency Act 1986, or makes any
assignment for the benefit of creditors,
or a liquidator, provisional liquidator,
administrator or other similar official
is validly appointed in relation to the
Seller or all or a substantial part of
any of its assets; or
(iii) any encumbrancer takes possession of or
a receiver or administrative receiver is
appointed of or over any of the assets
of the Seller; or
62
<PAGE>
(iv) any distress or other process is levied
or enforced or served upon or against
any asset of the Seller and is not dis-
charged within 90 days; or
(v) if there shall exist final judgments
against the Seller aggregating in excess
of B.P.100,000 and if any one of such judg-
ments shall have been outstanding for
any period of 60 days or more from the
date of its entry and shall not have
been discharged in full or stayed pend-
ing appeal.
"Adjustment Account" has the meaning set
------------------
forth in Section 7.2.
"Adjustment Closing" has the meaning set
------------------
forth in Section 7.8.
"Adjustment Date" means the last day of
---------------
each quarter of SDI's accounting year,
commencing December 31, 1987, and ending
December 31, 1994.
"Adjustment Schedules" has the meaning
--------------------
set forth in Section 7.7.
"Allocated Loss Adjustment Expenses"
----------------------------------
means all expenses that SDI, under its
accounting practices, directly allocates
to a particular claim. Salaries, office
and travelling expenses of all employees
of the Companies and the Companies'
overhead shall be excluded from Allo-
cated Loss Adjustment Expenses.
"Annual Adjustment Date" means the last
----------------------
day of each fiscal year of SDI, from
December 31, 1987, through December 31,
1994.
"Applicable Rate" means 11% per annum
---------------
(compounded on June 30 and December 31
in each year).
"Billing Date" means in the case of
------------
(i) any Reinsurance Recoverables in
63
<PAGE>
respect of accounting periods ending
prior to January 1, 1987, the later of
the date such recoverable is billed to
the broker, and December 31, 1986;
(ii) any Reinsurance Recoverables with
respect to proportional reinsurance, for
accounting periods ending after December
31, 1986, the date such recoverable is
billed to the broker; and (iii) any
other Reinsurance Recoverables, the date
on which a collecting note has been
submitted to the applicable intermedi-
ary.
"Closed Recoverable" means any amount
------------------
receivable of SDI from a reinsurer,
other than a Reinsurance Affiliate of
the Buyer, in respect of accounting
periods ended prior to January 1, 1987.
"Collection Costs," with respect to any
----------------
Eligible Recoverable, means all reason-
able out-of-pocket expenses incurred in
connection with collecting such Eligible
Recoverable (including reasonable legal
fees and disbursements) but shall not
include any costs or expenses of collec-
tion agents, management time or over-
head; provided that the Collection Costs
--------
of the Buyer or SDI shall not include
any expenses incurred by either of them
in connection with any litigation insti-
tuted without the prior written consent
of the Seller.
"Combined Reserves Adjustment" means, as
----------------------------
at each Reserve Adjustment Date, the
algebraic sum of (i) the Motor Reserves
Adjustment as at such Reserve Adjustment
Date; plus (ii) the Other Reserves
Adjustment as at such Reserve Adjustment
Date; and less (iii) the algebraic sum
----
of all Combined Reserves Adjustments
theretofore applied to the Adjustment
Account pursuant to Section 7.2.
"Eligible Recoverable" means, as at each
--------------------
Adjustment Date, any amount receivable
64
<PAGE>
by SDI from a reinsurer, other than a
Reinsurance Affiliate of the Buyer, as
to which the first anniversary of the
Billing Date thereof has occurred on or
prior to such Adjustment Date.
"Equity Adjustment Date" has the meaning
----------------------
set forth in the Warrant Agreement.
"Equity Put Adjustment" means an
---------------------
"Adjustment" within the meaning of the
Warrant Agreement under Section
3.2(ii)(b) of the Warrant Agreement.
"Final Adjustment Date" means December
---------------------
31, 1994.
"Matured Eligible Recoverables" means,
-----------------------------
as at each Adjustment Date, any Eligible
Recoverable as to which the second anni-
versary of the Billing Date thereof has
occurred on or prior to such Adjustment
Date.
"Motor Reserves" means, as at December
--------------
31, 1986 or any Reserve Adjustment Date,
SDI's loss reserves (including, without
limitation, IBNR), plus Allocated Loss
Adjustment Expenses, minus reinsurance
recoverables whether or not collectable,
in each case with respect to SDI's motor
insurance lines (excluding business
accounted for on a three year funded
basis), for all accident years 1986 and
prior as reflected on the books and
accounts of SDI for its accounting year
ended on such date.
"Motor Reserves (Adjusted)" means, as at
-------------------------
each Reserve Adjustment Date, the alge-
braic sum of (i) SDI's Motor Reserves as
at such Adjustment Date, plus (ii) all
----
cash disbursements on account of losses
(including all Allocated Loss Adjustment
Expenses) paid after December 31, 1986,
through such Reserve Adjustment Date
with respect to the motor insurance
lines for all accident years 1986 and
65
<PAGE>
prior, minus (iii) cash amounts that
-----
relate to reinsurance recovered and
salvage and subrogation recoveries with
respect to such motor insurance lines,
for all accident years 1986 and prior,
during the period commencing January 1,
1987 through such Adjustment Date, all
as reflected on the books and records of
SDI.
"Motor Reserves Adjustment" means, as at
-------------------------
each Reserve Adjustment Date, (i) if
SDI's Motor Reserves (Adjusted) as at
such Reserve Adjustment Date exceed
SDI's Motor Reserves at December 31,
1986, the amount of such excess
expressed as a positive number; and
(ii) if SDI's Motor Reserves (Adjusted)
as at such Reserve Adjustment Date are
less than SDI's Motor Reserves at
December 31, 1986, the amount of such
difference expressed as a negative num-
ber.
"Negative Balance" has the meaning set
----------------
forth in Section 7.2.
"Net Closed Recoverables Adjustment
----------------------------------
Amount" means, as at each Adjustment
------
Date, the algebraic sum of (i) the
aggregate of all Matured Eligible Recov-
erables that are Closed Recoverables, to
the extent not actually paid to SDI
during the period since the immediately
prior Adjustment Date (December 31,
1986, if there is no such previous
Adjustment Date), and not previously
included in the Net Recoverables Adjust-
ment; less (ii) the aggregate amount of
----
all reserves specifically applicable to
all of such Closed Recoverables as
reflected on the books and records of
SDI as at December 31, 1986, not previ-
ously applied to reduce the Net Closed
Recoverables Adjustment Amount; plus
(iii) Collection Costs incurred by SDI
in attempting to collect such Closed
Recoverables.
66
<PAGE>
"Net Non-Proportional Recoverables
---------------------------------
Adjustment Amount" means as at each
-----------------
Adjustment Date, the algebraic sum of
(i) the aggregate of all Matured Eligi-
ble Recoverables that are Non-Propor-
tional Recoverables incepted on or prior
to December 31, 1986, that are recorded
on the books and records of SDI as col-
lectible after December 31, 1986, that
are not actually paid to SDI during the
period since the immediately prior
Adjustment Date (December 31, 1986, if
there is no such prior Adjustment Date),
and not previously included in the Net
Recoverables Adjustment; less (ii) the
----
aggregate amount of all reserves specif-
ically applicable to all of such Non-
Proportional Recoverables as reflected
on the books and records of SDI as at
December 31, 1986, not previously
applied to reduce the Net Non-Propor-
tional Recoverables Adjustment Amount;
plus (iii) Collection Costs incurred by
SDI in attempting to collect such Non-
Proportional Recoverables.
"Net Pipeline Profits Adjustment" means,
-------------------------------
as at each Annual Adjustment Date, the
algebraic sum of (i) 50% of the amount
by which (a) the aggregate of Pipeline
Profits with respect to each accounting
year of SDI commencing January 1, 1987,
and ending on any such date, exceeds (b)
B.P.3,750,000, less (ii) any amount previ-
----
ously included in Net Pipeline Profits
Adjustment.
"Net Proportional Recoverables Adjust-
-------------------------------------
ment Amount" means, as at each Adjust-
-----------
ment Date, the algebraic sum of (i) the
aggregate of all Matured Eligible Recov-
erables that are Proportional Recovera-
bles in respect of all accounting peri-
ods ended after December 31, 1986, with
respect to underwriting years 1986 and
prior, as reflected on the books and
records of SDI, that are not actually
paid to SDI during the period since the
67
<PAGE>
immediately prior Adjustment Date
(December 31, 1986, if there was no such
prior Adjustment Date) and not previ-
ously included in the Net Recoverables
Adjustment; less (ii) the aggregate
----
amount of all reserves specifically
applicable to all of such Proportional
Recoverables as reflected on the books
and records of SDI as at December 31,
1986, not previously applied to reduce
the Net Proportional Recoverables
Adjustment Amount; plus (iii) Collection
----
Costs incurred by SDI in attempting to
collect such Proportional Recoverables.
"Net Recoverables Adjustment" means, as
---------------------------
at each Adjustment Date, the algebraic
sum of 100% of any Net Closed Recovera-
bles Adjustment Amount, 90% of any Net
Proportional Recoverables Adjustment
Amount and 90% of any Net Non-Propor-
tional Recoverables Adjustment Amount,
determined in each case as of such date.
"Net Reserves Adjustment" means as at
-----------------------
each Reserve Adjustment Date, (i) if the
Combined Reserves Adjustment as at such
Reserve Adjustment Date is a positive
number, 80%, of such amount; and (ii) if
the Combined Reserves Adjustment as at
such Reserve Adjustment Date is a nega-
tive number, 50% of such amount.
"Net Tax Benefit Adjustment" has the
--------------------------
meaning specified in Section 8.6.
"Net Write Off Adjustment" means, as at
------------------------
each Adjustment Date, the algebraic sum
of (i) 50% of the amount by which
(a) the aggregate of all amounts col-
lected by or on behalf of SDI since
January 1, 1987 for its account (net of
any Collection Costs incurred by SDI or
the Buyer) with respect to any reinsur-
ance recoverable written off on the
books and records of SDI prior to
December 31, 1986, exceeds (b) B.P.200,000,
68
<PAGE>
less (ii) any amount previously included
----
in Net Write Off Adjustment.
"Non-Proportional Recoverable" means any
----------------------------
amount receivable of SDI from a rein-
surer, other than a Reinsurance Affili-
ate of the Buyer, with respect to non-
proportional and facultative reinsurance
policies.
"Note Purchase Agreement" means that
-----------------------
certain Note Purchase Agreement of even
date herewith between Sphere Drake Hold-
ing Public Limited Company, an English
company, the Buyer and the Seller.
"Notes" has the meaning specified in the
-----
Note Purchase Agreement.
"Open Recoverables" means reinsurance
-----------------
amounts collectable for underwriting
years 1986 and prior billed to reinsur-
ers on January 1, 1987 or later.
"Other Reserves" means, as at December
--------------
31, 1986 or any Reserve Adjustment Date,
the loss reserves of SDI at December 31,
1986, with respect to all insurance
business other than its motor insurance
lines (but Other Reserves shall include
loss reserves in respect of motor insur-
ance lines accounted for on a three-year
funded basis), including, without limi-
tation, its marine, non-marine and avia-
tion lines.
"Other Reserves (Adjusted)" means, as at
-------------------------
each Reserve Adjustment Date, SDI's
Other Reserves as at December 31, 1986,
recomputed as at such Reserve Adjustment
Date using the actual ultimate loss
ratio determined as at such date of SDI
with respect to such business (it being
the intent of the parties that in such
recomputation no adjustment be made with
respect to uncollectible reinsurance
recoverables), on a basis consistent
with the principles used in determining
69
<PAGE>
SDI's Other Reserves at December 31,
1986).
"Other Reserves Adjustment" means, as at
-------------------------
each Reserve Adjustment Date, (i) if
SDI's Other Reserves (Adjusted) as at
such Reserve Adjustment Date exceed
SDI's Other Reserves at December 31,
1986, the amount of such excess
expressed as a positive number; and
(ii) if SDI's Other Reserves (Adjusted)
as at such Reserve Adjustment Date are
less than SDI's Other Reserves at
December 31, 1986, the amount of such
difference expressed as a negative num-
ber.
"Pipeline Profits" means, as at each
----------------
Annual Adjustment Date, the aggregate
(or net amount) for all classes of busi-
ness of (i) the amount of premium,
received by SDI commencing on January 1,
1987, as to each class of business in
respect of business incepted on or prior
to December 31, 1986, and not recorded
on the books and records of SDI at
December 31, 1986, multiplied by
(ii) the amount by which the ultimate
loss ratio for each class of business as
at such Annual Adjustment Date is below
or in excess of 100% (if the amount
determined in accordance with the fore-
going provision shall be less than zero,
Pipeline Profits at such Annual Adjust-
ment Date shall be zero).
"Proportional Recoverable" means any
------------------------
amount receivable of SDI from a rein-
surer, other than a Reinsurance Affili-
ate of the Buyer, with respect to pro-
portional reinsurance.
"Recoverable Base Amount" means (i) with
-----------------------
respect to any Closed Recoverable, 100%
of the Net Closed Recoverables Adjust-
ment Amount and (ii) with respect to any
Non-Proportional Recoverable or Propor-
tional Recoverable, 90% of the Net Non-
70
<PAGE>
Proportional Recoverables Adjustment
Amount or the Net Proportional Recovera-
bles Adjustment Amount, respectively.
"Reinsurance Affiliate" means any Affil-
---------------------
iate of the Buyer and any partner from
time to time of SD Partners, a Bermuda
partnership; provided, that The Dai-
--------
Tokyo Fire and Marine Insurance Company,
Limited ("Dai-Tokyo") (and its Affili-
ates) shall be deemed to be Reinsurance
Affiliates for purposes of this Agree-
ment for so long as Dai-Tokyo shall
beneficially own, directly or indi-
rectly, at least a 5% equity interest in
the Buyer; provided, further that not-
--------
withstanding the foregoing, if Dai-Tokyo
shall no longer beneficially own such 5%
equity interest, it and its Affiliates
shall be deemed to be Reinsurance Affil-
iates with respect to any Reinsurance
Recoverable as to which it or any such
Affiliate shall claim as a matter of
defense, or counterclaim with respect
thereto, any matter bearing on it or its
or their relationship as a direct or
indirect investor in the Buyer.
"Reinsurance Recoverables" means Closed
------------------------
Recoverables, Non-Proportional Recovera-
bles and Proportional Recoverables.
"Reinsurance Recoverables Increase
---------------------------------
Amount" has the meaning specified in
------
Section 7.3.
"Remaining Balance" has the meaning
-----------------
specified in Section 7.9.
"Reserve Adjustment Date" means December
-----------------------
31, 1988, December 31, 1990, and
December 31, 1994.
"Reserve Items" means Motor Reserves
-------------
(Adjusted) and Other Reserves
(Adjusted).
71
<PAGE>
"Tax Adjustment Date" has the meaning
-------------------
specified in Section 8.6.
"Warrant Agreement" means the Warrant
-----------------
Agreement dated the date hereof among
Sphere Drake Holding Public Limited
Company, the Buyer and the Seller.
"Warrant Proceeds" means the aggregate
----------------
Value of the Underlying Shares (as such
terms are defined in the Warrant Agree-
ment) actually paid to the Seller as
contemplated by Section 3.2(ii) of the
Warrant Agreement, and shall not include
any Adjustment (as such term is defined
in the Warrant Agreement).
8. Net Tax Benefit Adjustment
--------------------------
Certain capitalized terms used in this Section 8 have
the meanings specified in Section 8.6.
8.1 Certain Memorandum Accounts
---------------------------
The Buyer shall cause the following memorandum
accounts to be established on the accounting
records of the Company:
(a) The "Indemnity Tracing Account", the
opening balance of which shall be zero.
(b) As to SDI only an "NOL Tracing Account",
the opening balance of which shall be
the amount of the aggregate trading
losses of SDI carried forward for corpo-
ration tax purposes at December 31,
1986, as reflected in the tax computa-
tions of SDI as heretofore submitted to
the Inland Revenue for accounting peri-
ods ending prior to and on December 31,
1986, provided that the opening balance
--------
of the NOL Tracing Account shall be
adjusted as follows:
(aa) by decreasing the balance thereof
by all amounts of accrued interest
and investment income recognised
72
<PAGE>
in the SDI Financials which are
chargeable to taxation in Future
Accounting Periods (for purposes
of identification this amount
corresponds to the figure of
B.P.2,068,996 referred to in Sched-
ule 2.12 item (v) of this
Agreement);
(bb) by decreasing the balance thereof
by an amount equivalent to any SDI
trading losses utilised to extin-
guish or mitigate liabilities to
taxation which would otherwise be
within the indemnity of the Seller
under the Tax Indemnity Deed;
(cc) by increasing the balance thereof
to reflect any amounts allowed to
SDI as a deduction resulting from
a Final Determination for any
Future Accounting Period in
respect of loss reserves appearing
in the SDI 1986 Financials to the
extent that such loss reserves are
not admitted as deductible for
corporation tax purposes at
December 31, 1986 provided that
this paragraph (cc) does not apply
to items within Section 8.2.1(b).
(dd) to reflect the actual amount of
trading losses giving effect to
all Final Determinations in
respect of any Open Tax Years;
(ee) by deducting any such trading
losses which, as a result of a
Final Determination in respect of
an accounting period ending after
December 31, 1986, are not avail-
able to SDI with respect to such
accounting period by virtue of
section 483 of ICTA;
(ff) to reflect any surrender of the
trading losses for group relief
purposes of SDI for accounting
73
<PAGE>
periods ending on or prior to
December 31, 1986 as a result of
group relief claimed by other
Affiliates of the Seller; and
(gg) as to any Determination Accounting
Period, to the extent that any
amount of Discount Increase in
respect to such period shall not
have resulted in payment of a
Discounting Tax Amount as defined
in Clause 4(5) of the Tax Indem-
nity Deed, the amount of such
Discount Increase shall decrease
the balance of the NOL Tracing
Account, provided that the balance
on the NOL Tracing Account shall
not be reduced below zero.
(c) The "Indemnity Cash Tracing Account",
the opening balance of which shall be
zero.
(d) The "Discounting Cash Tracing Account",
the opening balance of which shall be
zero.
(e) The "Discounting Unwind Tracing
Account", the opening balance of which
shall be zero.
The Indemnity Tracing Account, the NOL Tracing
Account, the Indemnity Cash Tracing Account, the
Discounting Cash Tracing Account and the Dis-
counting Unwind Tracing Account are referred to
herein as the "Notional Accounts".
8.2 Notional Tax Computations
-------------------------
Certain principles applicable in making notional
tax computations under this Section 8.2 are set
forth in Section 8.2.6.
8.2.1 Notional Account Adjustments
----------------------------
On each Tax Adjustment Date with respect
to each accounting period (the "Determi-
nation Accounting Period") the Buyer
74
<PAGE>
shall cause the Company to adjust the
Notional Accounts as follows:
(a) Indemnity Tracing Account: Indem-
---------------------------------
nity Cash Tracing Account
-------------------------
The Company shall determine an
amount equal to the sum of the
following items: (i) the amounts
of any Net Recoverables Adjust-
ments and any Net Reserves Adjust-
ments, less the amount of any Net
----
Pipeline Profits Adjustments and
less any amount in respect of any
----
Net Pipeline Profits Adjustment
for any prior period reflected in
any adjustment to the Adjustment
Account made under Section
7.2(vi), in each case which have
been reflected in the Adjustment
Account, and (ii) any purchase
price adjustment resulting from
indemnity payments to the Buyer
made in respect of events indemni-
fied against under Section 10; in
the case of each of the foregoing
clauses (i) and (ii) to the extent
that such amounts or adjustments
were reflected, paid or made on or
before such Tax Adjustment Date
and not previously included in a
Determination Accounting Period of
the relevant company hereunder,
provided that the amounts or
--------
adjustments referred to in clauses
(i) and (ii) shall be reflected
only to the extent that individual
items of expense or loss in
respect of which such amounts or
adjustments are made actually
reduce (increase) the taxable
profits (losses) of the company in
question for such accounting pe-
riod for purposes of corporation
tax. The sum of the adjustments
referred to in the preceding sen-
tence is referred to as the
"Indemnities Income Adjustment"
75
<PAGE>
for the Determination Accounting
Period. The balance of the Indem-
nity Tracing Account shall be
increased by the amount of each
Indemnities Income Adjustment.
The balance of the Indemnity Cash
Tracing Account shall be increased
if any Indemnities Income Adjust-
ment reflects any payment by the
Seller by an amount equal to the
product of (x) the aggregate of
such cash payments or such
amounts, times (y) 0.5, and times
----- -----
(z) the Effective Tax Rate for
such accounting period.
(b) Discounting Unwind Tracing Account
----------------------------------
Discounting Cash Tracing Account
--------------------------------
The provisions of this paragraph
(b) shall apply in respect of any
Future Accounting Period of SDI in
which a calculation is required to
be made under the provisions of
Clause 4 of the Tax Indemnity
Deed.
(i) If the calculation made
under Clause 4(4) of the
Tax Indemnity Deed results
in a Discount Increase for
any Determination Account-
ing Period, the balance of
the Discounting Cash Trac-
ing Account shall be
increased by an amount
equal to 0.8 times the
-----
"Discounting Tax Amount"
referred to in Clause 4(5)
if any.
(ii) If for any Determination
Accounting Period the cal-
culation under the said
Clause 4(4) results in a
Discount Unwind, the bal-
ance of the Discounting
Unwind Tracing Account
76
<PAGE>
shall be increased by the
amount of such Discount
Unwind, except that
------
(iii) If in any Determination
Accounting Period for which
the calculation under the
said Clause 4(4) results in
a Discount Unwind and the
---
opening balance on the
Discounting Cash Tracing
Account is zero, any Dis-
count Unwind shall be added
to the balance of the NOL
Tracing Account with effect
from that Determination
Accounting Period
(iv) For the purposes of subdi-
visions (ii) and (iii)
above Discount Unwind shall
be limited to the amount
which, when added to Dis-
count Unwind for all pre-
ceding Determination
Accounting Periods is equal
to the sum of Discount
Increases for all preceding
Determination Accounting
Periods in respect of which
a Discounting Tax Amount
has been paid, plus any
----
amount by which the NOL
Tracing Account has been
reduced pursuant to Sec-
tion 8.1(b)(gg) above, plus
----
in the case of subdivision
(iii) the Opening Discount
for the Determination
Accounting Period ended
December 31 1987.
8.2.2 Baseline Corporation Tax, Etc.
------------------------------
On each Tax Adjustment Date with respect
to each Determination Accounting Period,
the Buyer shall cause the Company to
determine the aggregate pro forma corpo-
77
<PAGE>
ration tax that would be payable by all
of the Group Companies for the Determi-
nation Accounting Period at the actual
rate or rates applicable to such
accounting periods, assuming (v) the
surrender of any losses of one or more
of the Group Companies that would be
available if group relief were available
with respect to the Group Companies (on
the assumption that there were no trad-
ing losses for any of the Group Compa-
nies in prior accounting periods) but
without giving effect to any group
relief that may be available in respect
of any company that is not one of the
Group Companies, (w) that there were no
trading losses or other amounts eligible
for carry forward for tax purposes of
the Group Companies in prior accounting
periods, (x) that the taxable profits
(losses) of SDI are increased
(decreased) by an amount equal to the
Indemnities Income Adjustment for the
Determination Accounting Period, and
(y) that the taxable profits (losses) of
SDI are increased (decreased) by an
amount equal to the Discount Unwind
(within the limits of Sec-
tion 8.2.1(b)(iv)) for the Determination
Accounting Period. The amount of the
aggregate taxable profits, if any, for
all Group Companies during the Determi-
nation Accounting Period reflecting the
assumptions referred to the foregoing
clauses (v) through (y) is referred to
as the "Baseline Profit" for such com-
pany, provided that if the Group Compa-
--------
nies, after taking into account such
assumptions have an aggregate trading
loss, Baseline Profit shall be zero.
The aggregate amount of corporation tax
for the Group Companies determined in
accordance with the first sentence of
this Section 8.2.2 is referred to as the
"Baseline Corporate Tax" for the Deter-
mination Accounting Period.
78
<PAGE>
8.2.3 Determination of Benefits
-------------------------
On each Tax Adjustment Date for each
Determination Accounting Period as to
which Baseline Profits are greater than
zero, Baseline Profits for such Applica-
ble Accounting Period shall be deemed to
be decreased, but not below zero, and
the amount of certain tax benefits shall
be determined, as follows:
(a) First, by the positive balance, if
-----
any, of the Indemnity Tracing
Account (such balance to be deter-
mined after giving effect to the
adjustments required to be made on
such Tax Adjustment Date pursuant
to Section 8.2.1). If any adjust-
ment is made pursuant to this
subdivision (a), the Company shall
determine the aggregate amount of
the corporation tax that would be
payable by all Group Companies for
the Determination Accounting
Period on Baseline Profits, as
adjusted in this subdivision (a).
The excess of the Baseline Corpo-
ration Tax over such aggregate
amount is referred to as the
"Indemnity Tax Benefit" for the
Determination Accounting Period.
(b) Second, by the positive balance on
------
the Discounting Unwind Tracing
Account (if any) for the Determi-
nation Accounting Period. If any
adjustment is made pursuant to
this subdivision (b), the Company
shall determine the aggregate
amount of the corporation tax that
would be payable by all Group
Companies for the Determination
Accounting Period on the Baseline
Profits, as adjusted in the fore-
going subdivision (a) and in this
subdivision (b). The excess of
the aggregate corporation tax
payable by all Group Companies
79
<PAGE>
determined in accordance with the
foregoing subdivision (a) over
such aggregate amount is referred
to as the "Discounting Unwind Tax
Benefit".
(c) Third, by the positive balance, if
-----
any, of the NOL Tracing Account
(such balance to be determined
after giving effect to the adjust-
ments required to be made on such
Tax Adjustment Date pursuant to
Section 8.2.1). If any adjustment
is made pursuant to this subdivi-
sion (c), the Company shall deter-
mine the aggregate amount of the
corporation tax payable by all
Group Companies for the Determina-
tion Accounting Period on the
basis of the Baseline Profits, as
adjusted in the foregoing subdivi-
sions (a) and (b) and in this
subdivision (c). The excess of
the aggregate corporation tax of
all Group Companies determined in
accordance with the foregoing
subdivision (b) over such aggre-
gate amount times 0.5 is referred
-----
to as the "NOL Tax Benefit" for
the Determination Accounting
Period.
Subject to the proviso to Section 8.2.6,
if and to the extent that such Baseline
Profits are decreased as provided in the
foregoing subdivisions (a), (b) and (c),
the balance of the Indemnity Tracing
Account, the Discounting Unwind Tracing
Account or the NOL Tracing Account, as
the case may be, shall be decreased by
an equal amount.
8.2.4 Dates for Adjustment
--------------------
The adjustments contemplated by this
Section 8 shall be made in respect of
the following accounting periods:
80
<PAGE>
(a) the provisions of Section 8.2.1(b)
shall apply for all accounting
periods up to and including that
ending on 31st December 1997;
(b) all other provision or other
adjustments referred to in this
Section 8 shall be made for the
accounting periods commencing 1st
January 1987 and ending 31st
December 1994.
8.2.5 Settlement of Tax Benefits
--------------------------
On each Tax Adjustment Date the Buyer
shall pay the Seller an amount in cash,
on the date of the Tax Adjustment Clos-
ing, equal to the sum of
(i) the lesser of (x) 0.5 times the
-----
Indemnity Tax Benefit, and (y) the
balance of the Indemnity Cash
Tracing Account;
(ii) the lesser of (x) 0.8 times the
-----
Discount Unwind Tax Benefit or
(y) the balance in the Discounting
Cash Tracing Account, and
(iii) interest on the foregoing amounts
at a rate of 11% per year, com-
pounded on each June 30 and
December 31, from a date 12 months
after the last day of the Determi-
nation Accounting Period to which
such Tax Adjustment Date relates
to the Tax Adjustment Date;
and the balance of the Indemnity Cash
Tracing Account or Discounting Cash
Tracing Account, as the case may be,
shall be reduced by the amount of any
such payment. If (x) exceeds (y) in (i)
above the amount of such excess when
added to the NOL Tax Benefit referred to
in Section 8.2.3(c) above shall be the
"Net Tax Benefit Adjustment" with
respect to such Tax Adjustment Date. If
81
<PAGE>
(x) exceeds (y) in (ii) above the amount
of such excess times 0.625 shall also be
included in the Net Tax Benefit Adjust-
ment.
8.2.6 Principles Applied in Making Computa-
-------------------------------------
tions
-----
As to each accounting period, each
adjustment to a Notional Account, each
adjustment reflected in a computation of
Baseline Profit and Baseline Corporation
Tax and each determination under Sec-
tions 8.2.2, 8.2.3 and 8.2.5 shall be
made without duplication of any amounts
of adjustments previously made. In
making each determination called for in
Sections 8.2.3 and 8.2.5, (x) if the Tax
Adjustment Date for a Determination
Accounting Period is an Interim Tax
Adjustment Date for such Determination
Accounting Period, such determination
shall be made in the manner consistent
with the accounts and computations of
the Group Companies submitted to the
Inland Revenue for such Determination
Accounting Period; otherwise such deter-
mination shall be made in a manner con-
sistent with the position reflected in
the Final Determination in respect of
such Determination Accounting Period;
and (y) in determining the deemed reduc-
tions in profits of the Companies con-
templated by Section 8.2.3 and in deter-
mining Baseline Profits and the amounts
of the Indemnity Tax Benefit; the Dis-
counting Unwind Tax Benefit and the NOL
Tax Benefit, the balance on the NOL
Tracing Account shall only be applied to
SDI and losses of Group Companies shall
be deemed to be surrendered in a manner
that results in the lowest aggregate
corporation tax liability of all such
companies, provided that for all such
--------
purposes losses of Group Companies other
than SDI shall be deemed to be surren-
dered to Group Companies in a manner
that results in the lowest possible
82
<PAGE>
surrender of losses to SDI. Each compu-
tation made under this Section 8 on an
Interim Tax Adjustment Date relating to
a Determination Accounting Period shall
be made on an interim basis as set forth
in the previous sentence subject to
final settlement as of the Tax Adjust-
ment Date following the Final Determina-
tion with respect to such Determination
Account Period, and each such computa-
tion shall be adjusted as of such Tax
Adjustment Date to give effect to such
final settlement. All calculations
under this Section 8 shall be made with-
out carrying any losses back from a
subsequent taxable year to the taxable
year in question.
8.3 Claims Handling
---------------
Subject to the Tax Indemnity Deed, the Buyer and
the Group Companies shall be entitled and obliged
to act at their own risk and expense in all deal-
ings with the Inland Revenue for the purpose of
finalizing the corporation tax liability of the
Group Companies for all Future Taxable Years.
Subject to the provisions of the Tax Indemnity
Deed, upon the Buyer becoming aware of a Claim
for corporation tax for any year ending after
December 31, 1986 and before January 1, 1998 (the
"Future Taxable Years") it shall forthwith give
written notice of the same to the Seller specify-
ing the details thereof and shall thereafter
(i) give such information to the Seller on the
affairs of the Company, SDI or the other Group
Companies as the Seller may reasonably request on
the status and course of the discussions with the
Inland Revenue and on such company's efforts to
resist, appeal or compromise such Claim;
(ii) conduct such discussions and efforts only
upon consultation with the Seller; and (iii) con-
duct such efforts and discussions in good faith
and not with a view to reducing or otherwise
impairing the Seller's present or future rights
to receive payments or credits in the Adjustment
Account in respect of Tax Benefits. The Buyer
will cause each Group Company to furnish to the
Seller true and complete copies of all accounts,
83
<PAGE>
computations and assessments in respect of corpo-
ration tax payable by such companies in respect
of the Future Taxable Years promptly upon the
same being produced or received by such compa-
nies.
8.4 Preparation of Tax Adjustment Schedules
---------------------------------------
The Buyer shall cause the Company to deliver to
the Seller on or before a date 30 days following
each Tax Adjustment Date a schedule (a "Tax
Adjustment Schedule") in the form of Exhibit O,
together with a report thereon of the Company's
auditors stating that such accountants have
reviewed (w) such Tax Adjustment Schedule,
(x) the provisions of this Agreement (including
Exhibit O), (y) the appropriate accounting
records of the Group Companies (z) the tax compu-
tations of the Group Companies and any applicable
Final Determination, and that such Tax Adjustment
Schedule has been prepared in accordance with
such provisions and properly reflect the informa-
tion in such books and records and the positions
in such tax computations and Final Determina-
tions. Each Tax Adjustment Schedule shall become
final and binding upon the parties unless within
30 days of receipt thereof the Seller gives a
notice (a "Notice of Tax Disagreement") in writ-
ing to the Buyer prior to the expiration of such
30-day period that it disagrees with any amount
or other matter reflected therein. Any such
Notice of Tax Disagreement shall specify in rea-
sonable detail the nature of any disagreement so
asserted. If the matters referred to therein
cannot be resolved by the agreement of the par-
ties within 30 days of the date on which the
notice of Tax Disagreement is given, any unre-
solved issues shall be submitted to and reviewed
by an arbitrator which shall be mutually selected
by the Buyer's and the Seller's auditors, or if
they cannot agree, by the President of the Insti-
tute of Chartered Accountants of England and
Wales, whose decision shall be final and binding
among the parties.
84
<PAGE>
8.5 Settlements
-----------
The Settlement of each amount owing to the Seller
under Section 8.2.5 or to the Buyer under the
penultimate sentence of Section 8.2.6 shall take
place at a closing (a "Tax Adjustment Closing")
to be held on the tenth Business Day following
the date upon which the Tax Adjustment Schedules
relating to such Tax Adjustment Closing become
final and binding on the parties pursuant to
Section 8.5. Any such Tax Adjustment Closing
shall take place at the offices of Slaughter and
May, 35 Basinghall Street, London EC2V 5DB
England, at 10:00 a.m. local time, or such other
place or such other time or date as the Buyer and
the Seller agree in writing. Any amounts owing
to the Buyer or the Seller at any Tax Adjustment
Closing shall be payable in cash in same-day
funds, together with interest on the amount so
due computed from but not including the Tax
Adjustment Date as to which the settlement to be
made at such Tax Adjustment Closing relates to
and including the date of payment at 11% per
year, compounded on each June 30 and December 31.
8.6 Certain Defined Terms
---------------------
As used in this Section 8, as the context
requires terms defined in the Taxes Act 1970 have
the meanings specified therein, and the following
terms shall have the following meanings:
"Baseline Corporation Tax" has the meaning set
------------------------
forth in Section 8.2.2.
"Baseline Profit" has the meaning set forth in
---------------
Section 8.2.2.
"Claim" has the meaning set forth in the Tax
-----
Indemnity Deed.
"Determination Accounting Period" has the meaning
-------------------------------
set forth in Section 8.2.1.
"Discount Increase and Discount Unwind" have the
-------------------------------------
meanings set forth in Clause 4 of the deed of Tax
Indemnity.
85
<PAGE>
"Discounting Cash Tracing Account" has the mean-
--------------------------------
ing set forth in Section 8.1.
"Discounting Unwind Tax Benefit" has the meaning
------------------------------
set forth in Section 8.2.3.
"Discounting Unwind Tracing Account" has the
----------------------------------
meaning set forth in Section 8.1.
"Effective Tax Rate" means as to any Determina-
------------------
tion Accounting Period the highest rate of corpo-
ration tax (expressed as a decimal) applicable to
companies engaged in the property and casualty
insurance business.
"Final Determination" means a binding agreement
-------------------
between the relevant taxpayer and the Inland
Revenue or an applicable administrative or judi-
cial decision with respect to the taxpayer that
is not (or is no longer) appealable.
"Future Accounting Periods" has the meaning set
-------------------------
forth in the Tax Indemnity Deed.
"Future Taxable Years" has the meaning set forth
--------------------
in Section 8.3.
"Group Companies" means if there shall not have
---------------
occurred any Triggering Event (as such term is
defined in the Note Purchase Agreement), the
Buyer and its UK resident Subsidiaries (as such
term is defined in the Note Purchase Agreement),
or if there shall have occurred a Triggering
Event, the Guarantor and its UK resident Subsid-
iaries (as so defined) as of the end of the
accounting period in question provided that a
--------
company shall be a Group Company only if any of
its trading losses could be surrendered to the
Company (assuming that the Company had trading
profits) under the group relief provisions of TA
1970, Section 258 and FA 1973, Section 28 and
Schedule 12 applicable in the period in question.
"Indemnities Income Adjustment" has the meaning
-----------------------------
set forth in Section 8.2.1.
"Indemnity Cash Tracing Account" has the meaning
------------------------------
set forth in Section 8.1.
86
<PAGE>
"Indemnity Tracing Account" has the meaning set
-------------------------
forth in Section 8.
"Indemnity Tax Benefit" has the meaning set forth
---------------------
in Section 8.2.3.
"Interim Tax Adjustment Date" means any Accelera-
---------------------------
tion Date and the Final Adjustment Date.
"Net Tax Benefit Adjustment" has the meaning set
--------------------------
forth in Section 8.2.5.
"NOL Tax Benefit" has the meaning set forth in
---------------
Section 8.2.3.
"NOL Tracing Account" has the meaning set forth
-------------------
in Section 8.1.
"Notice of Tax Disagreement" has the meaning set
--------------------------
forth in Section 8.4.
"Notional Accounts" has the meaning set forth in
-----------------
Section 8.1.
"Open Tax Years" has the meaning set forth in the
--------------
Tax Indemnity Deed.
"Opening Discount" has the meaning set forth in
----------------
the Tax Indemnity Deed.
"Tax Adjustment Closing" has the meaning set
----------------------
forth in Section 8.5.
"Tax Adjustment Date" means, (x) as to each
-------------------
accounting period of each of the Company and the
subsidiaries ending after January 1, 1987 and
before January 1, 1998, the last Business Day of
the calendar quarter ending on or after the date
on which there is a Final Determination of the
corporation tax liability of each company for
such period and (y) any Interim Tax Adjustment
Date.
"Tax Adjustment Schedule" has the meaning set
-----------------------
forth in Section 8.4.
87
<PAGE>
9. Survival of Representations and Warranties of the Par-
------------------------------------------------------
ties
----
Subject to Section 2.32, notwithstanding any right of
the Buyer fully to investigate the affairs of the Com-
panies and notwithstanding any knowledge of facts
determined or determinable by the Buyer pursuant to
such investigation or right of investigation, the Buyer
has the right to rely fully upon the representations,
warranties, covenants and agreements of the Seller
contained in this Agreement. All representations,
warranties, covenants and agreements of the parties to
this Agreement shall survive the execution and delivery
hereof and the Closing hereunder, and, except as other-
wise specifically provided in this Agreement, any claim
with respect to any such representations and warranties
of the Seller contained in this Agreement shall there-
after terminate and expire (i) on the 60th day follow-
ing the first Reserve Adjustment Date, with respect to
any General Claim (as herein defined) based upon, aris-
ing out of or otherwise in respect of any fact, circum-
stance, action or proceeding of which the party assert-
ing such claim shall have given no written notice on or
prior to such date to the party against which such
General Claim is asserted and (ii) with respect to any
Tax Claim (as herein defined), within the time provided
in the Tax Indemnity Deed. As used in this Agreement,
the following terms have the following meanings:
(i) "General Claim" means any claim (other than a Tax
-------------
Claim) based upon, arising out of or otherwise in
respect of any inaccuracy in or any breach of any
representation or warranty of the Seller or the
Buyer contained in this Agreement.
(ii) "Tax Claim" means any claim based upon, arising
---------
out of or otherwise in respect of any inaccuracy
in or any breach of any representation or war-
ranty of the Seller contained in Section 2.12 and
in the Tax Indemnity Deed.
88
<PAGE>
10. Indemnification and Reimbursement
---------------------------------
10.1 Obligation of the Seller to Indemnify and Reim-
-----------------------------------------------
burse for Undisclosed Liabilities, Misrepresenta-
-------------------------------------------------
tions, Etc.
-----------
Without duplication of any other provision of
this Section 10, the Seller shall indemnify,
defend and hold harmless the Buyer promptly (and
within any period specified for payment under or
pursuant to any court order, arbitration award or
other settlement, compromise or agreement of any
kind) and fully in cash, from and against, and
reimburse, make whole and pay the Buyer for, all
losses, claims, liabilities, damages, deficien-
cies, costs or expenses (including interest and
penalties) of the Buyer or any of the Companies
(collectively "Losses") based upon, arising out
of or otherwise in respect of, or alleged to be
based upon, arising out of or otherwise in
respect of, (i) any direct or indirect indebted-
ness, liability, claim, loss, damage, deficiency,
obligation or responsibility known or unknown,
fixed or unfixed, choate or inchoate, liquidated
or unliquidated, secured or unsecured, accrued,
absolute, contingent or otherwise, of any of the
Companies, whether or not of a kind required by
generally accepted accounting principles to be
set forth on a financial statement or in the
notes thereto ("Liabilities"), incurred on or
prior to December 31, 1986; (ii) subject to Sec-
tion 2.32, any inaccuracy in or any breach of any
representation or warranty of the Seller con-
tained in this Agreement; or (iii) any breach by
the Seller of Section 4.19; provided that the
--------
Seller shall not be liable to make any payment
pursuant to this Section 10.1: (a) concerning
Losses that would be reflected in a Net Recovera-
bles Adjustment, Net Reserves Adjustment or Col-
lection Costs for purposes of Section 7; (b) con-
cerning Liabilities fully and adequately
reflected or reserved against on the Company
Balance Sheets (or, in the case of SDI, on the
SDI Balance Sheet); (c) concerning any Liabili-
ties arising as a result of any action taken or
omitted to be taken at the written request,
direction or with the written consent of the
Buyer or in response to any condition or other
89
<PAGE>
requirement contained in any written consent of
the Buyer in respect of the matters referred to
in Section 2.25; (d) unless and until the aggre-
gate amount payable by the Seller pursuant to
this Section 10.1 exceeds B.P.100,000; or (e) to the
extent that the aggregate amount payable by the
Seller pursuant to this Section 10.1 exceeds
B.P.32,651,934 as adjusted pursuant to the provi-
sions of Section 1.5 through the date any such
payment is due. The Seller shall reimburse the
Buyer and the Companies for any legal fees or
other expenses (including any value added or
similar tax payable thereon) reasonably incurred
by them in connection with investigating or
defending any such Losses as and when such
expenses are incurred. Anything in this Sec-
tion 10.1 to the contrary notwithstanding, no
indemnification or reimbursement shall be
provided pursuant to this Section 10.1 for any
Losses arising from loss of future business or
future profit to the Buyer or the Companies or
any of their Affiliates. The Buyer agrees that
any claim which it may have with respect to a
breach of any representation or warranty of the
Seller contained in this Agreement (other than a
claim grounded in fraud) shall be brought
pursuant to this Section 10.1, which shall
provide its exclusive and complete remedy
therefor.
10.2 Obligation of the Buyer to Indemnify and Reim-
----------------------------------------------
burse for Misrepresentations, Etc.
----------------------------------
The Buyer shall indemnify, defend and hold harm-
less the Seller, promptly (and within any period
specified for payment under or pursuant to any
court order, arbitration award or other settle-
ment, compromise or agreement of any kind) and
fully in cash, from and against, and reimburse,
make whole and pay the Seller for, all Losses
based upon, arising out of or otherwise in
respect of, or alleged to be based upon, arising
out of or otherwise in respect of, any inaccuracy
in or any breach of any representation or war-
ranty of the Buyer contained in this Agreement or
any breach by the Buyer of Section 4.19, and
shall reimburse the Seller for any legal or other
expenses (including any value added or similar
90
<PAGE>
tax payable thereon) reasonably incurred by it in
connection with defending any such Losses as and
when such expenses are incurred, provided that no
--------
indemnification or reimbursement shall be pro-
vided pursuant to this Section 10.2 for any
Losses arising from loss of future business or
future profit to the Seller or any of its Affili-
ates. The Seller agrees that any claim which it
may have with respect to a breach of any repre-
sentation or warranty of the Buyer contained in
this Agreement (other than a claim grounded in
fraud) shall be brought pursuant to this Section
10.2, which shall provide its exclusive and com-
plete remedy therefor.
10.3 Indemnification and Reimbursement Arising Out of
------------------------------------------------
the Fraud, Deceit, Misconduct and Irregular Prac-
-------------------------------------------------
tices of the Management of Alexander Howden
-------------------------------------------
Underwriting Ltd., Etc.
-----------------------
(1) The Seller shall indemnify, defend and hold
harmless the Buyer and the Companies, promptly
(and within any period specified for payment
under or pursuant to any court order, arbitration
award or other settlement, compromise or agree-
ment of any kind) and fully in cash and without
limitation as to time or amount, from and
against, and reimburse, make whole and pay the
Buyer and the Companies for, all third party
claims or counterclaims against the Buyer, the
Companies or their Affiliates, being claims or
counterclaims by any Person (other than the
Buyer, the Companies or any of their Affiliates)
(together with all costs, charges and expenses
(including interest and penalties) incurred in
connection therewith or otherwise relating there-
to) in connection with, based upon, arising out
of or otherwise relating to, or alleged to be in
connection with, based upon, arising out of or
otherwise relating to, (i) the "Howden Affair",
"Hart Affair" or "PCW Affair" (as defined below),
provided that such claim or counterclaim involves
--------
or relates to, or is reasonably proximately asso-
ciated with any fraud, secret profit, deceit,
misappropriation or diversion of funds, breach of
trust and/or fiduciary duty, wrongful act or
omission, irregularity and/or misconduct; or
(ii) any other fraud, secret profit, deceit,
91
<PAGE>
misappropriation or diversion of funds, breach of
trust and/or fiduciary duty, wrongful act or
omission, irregularity and/or misconduct by any
of K.V. Grob, A.J. Page, J.H. Carpenter, the late
R.C. Comery, I.R. Posgate, C. Hart, the late
Leonard Hart, P.S. Dixon, P.E.J. Cameron - Webb,
J. Wallrock, J.A.W.I. Hardman, D.B. Hill, B.C.
Newman, A.G.F. Oldworth, and M. Benbassat (to the
extent of Benbassat's dealings with any of the
preceding named individuals or in relation to his
involvement in the Howden Affair, Hart Affair, or
PCW Affair).
Provided however that the indemnity provided in
this Section 10.3 does not extend:-
(a) to claims or counterclaims payable under
valid contracts of insurance or reinsur-
ance or in respect of damages for breach
thereof; or
(b) to costs, charges and expenses incurred
by SDI in relation to any claim for
liability, or any defence thereof, aris-
ing in connection with various marine
excess of loss reinsurances for the
benefit of certain PCW Syndicates, and
with various errors and omission poli-
cies, details of which are set out in
Schedule 10.3H hereto; or
(c) to SDI's liabilities to Syndicate 126
arising under quota share numbers
ST8010580, ST8110727, ST8110762(26),
ST8210727 and ST8210762 referred to in
Schedule 10.3A hereto; or
(d) to any Losses to the Buyer or the Compa-
nies resulting from the refusal of any
third party to engage in any future
business transaction with any of the
Companies if the Seller can demonstrate
that such refusal is based solely upon
information concerning the matters set
forth in Schedule 10.3A through H that
was publicly available on the date of
this Agreement.
92
<PAGE>
(2) Definitions
-----------
"The Howden Affair" means the facts,
-----------------
matters, and events referred to, recited
in, or described in Schedule 10.3A
annexed hereto. Schedule 10.3B does not
form part of the Howden Affair or of the
Indemnity under Section 10.3 of this
Agreement and is provided herein to the
Buyer for background and information
purposes only. (It is agreed that no
representations or warranties are given
by Deloitte Haskins & Sells as to the
accuracy of the information contained in
Schedules 10.3A & B.)
"The Hart Affair" means the facts, mat-
---------------
ters and events referred to, recited in
or described in Schedule 10.3C annexed
hereto.
"The PCW Affair" means:-
--------------
(a) The facts, matters and events
referred to, recited in, or
described in the Report of Lloyd's
Disciplinary Committee (case No.
8401/5) in January 1985 in pro-
ceedings against J.A.W.I. Hardman
and others (the "Report") in para-
graphs A.5-A.11, B5, B9(b)-B16,
C.3-C.23,D5-D27, D31-D33, D36 and
F4-F16, F20-F24 as set out in
Schedule 10.3D hereto, or any of
the contracts of reinsurance or
retrocession or purported reinsur-
ance or retrocession (including
the contracts listed in Schedule
10.3E of this section) or other
transactions forming part thereof
referred to or described in the
Report, or any reinsurance of the
Schemes described in paragraphs
A.6-A10 of the Report, or funds
transferred thereunder or in con-
nection therewith and any improper
benefits paid thereunder;
93
<PAGE>
(b) any contracts or purported con-
tracts of insurance or reinsurance
commonly known as "Tonners" made
between the PCW Syndicates and
Regent Excess Limited or any other
company participating in "the
Guernsey Scheme", "the Isle of Man
Scheme", "the Gibraltar Scheme",
"the Geneva Scheme" and "The
Europa Scheme" (as described in
the Report) or any reinsurance or
purported reinsurance thereof and
funds transferred thereunder or in
connection therewith and improper
benefits paid thereunder; or
(c) any act or omission of the corpo-
rations or other entities listed
in Schedule 10.3F to this section
or any improper benefits paid
thereto or therefrom; or
(d) the contracts of reinsurance or
purported reinsurance made between
the PCW Syndicates and Chiltern
Reinsurance Company Limited,
and/or Regent Excess Limited and
retrocessions to Marine Excess
(Gibraltar) Limited and/or Marine
Excess Limited and funds trans-
ferred thereunder or in connection
therewith and improper benefits
paid thereunder; or
(e) a quota share contract of reinsur-
ance placed in 1978 and subsequent
years through Seascope Insurance
Services Limited under which part
of the overriding commission was
placed with Unimar SA and any
improper benefits paid thereunder.
"The PCW Syndicates" means the Syndi-
------------------
cates specified in Schedule 10.3G to
this sectIon for the years of account
therein mentioned.
94
<PAGE>
Nothing in the Schedules to Section 10.3 shall
constitute or contain any representation or war-
ranty as to the accuracy of the information con-
tained therein nor any admission of any fact or
liability by the Buyer or the Seller or any
waiver of any applicable legal privilege that
arises under the laws of England and Wales or
under any other jurisdiction.
10.4 Indemnification and Reimbursement Arising Out of
------------------------------------------------
S.I.R. Substituted Stop Loss Reinsurance
----------------------------------------
Without duplication of any other provision of
this Section 10, the Seller shall indemnify,
defend and hold harmless the Buyer, promptly (and
within any period specified for payment under or
pursuant to any court order, arbitration award,
or other settlement, compromise or agreement of
any kind) and fully in cash and without limita-
tion as to time or amount, from and against, and
reimburse, make whole and pay the Buyer for, all
Losses of the Buyer or any of the Companies based
upon, arising out of or otherwise in respect of,
or alleged to be based upon, arising out of or
otherwise in respect of, and shall reimburse the
Buyer and the Companies for any legal or other
expenses (including any value added or similar
tax payable thereon) reasonably incurred by them
in connection with investigating or defending any
such Losses as and when such expenses are
incurred, in connection with the reinsurances
placed with Lloyds Syndicate 701 concerning the
quota share reinsurances written by Sphere, Drake
and/or SDI for the benefit of Lloyds Syndicate
126 (the contractual details of which are more
particularly described in Alexander Howden Insur-
ance Brokers Ltd. Cover Notes ST 8010580, ST 80
10727, ST 81 10727, ST 82 10727) or being the
subject matter of proceedings in the English High
Court of Justice in Action No. 1984 C. No. 6548;
provided that no indemnification or reimbursement
--------
shall be provided pursuant to this Section 10.4
for any Losses to the Buyer or the Companies
resulting from the refusal of any third party to
engage in any future business transaction with
any of the Companies if the Seller can demon-
strate that such refusal was based solely upon
95
<PAGE>
information concerning such matters that were
publicly available on the date of this Agreement.
10.5 Indemnification and Reimbursement Arising out of
------------------------------------------------
the Orion Litigation
--------------------
Without duplication of any other provision of
this Section 10, the Seller shall indemnify,
defend and hold harmless the Buyer, promptly (and
within any period specified for payment under or
pursuant to any court order, arbitration award or
other settlement, compromise or agreement of any
kind) and fully in cash and without limitation as
to time or amount, from and against, and reim-
burse, make whole and pay the Buyer for, all
Losses of the Buyer or any of the Companies based
upon, arising out of or otherwise in respect of,
or alleged to be based upon, arising out of or
otherwise in respect of, and shall reimburse the
Buyer and the Companies for any legal or other
expanses (including any value added or similar
tax payable thereon) reasonably incurred by them
in connection with investigating or defending any
such Losses as and when such expenses are
incurred, in connection with (i) Action No. 1986.
O. No. 1802 in the English High Court of Justice
or (ii) the contracts of insurance or reinsurance
which form the business written by the Orion
Insurance Company PLC on behalf of SDI and its
predecessors in title under the various pool
agreements and other contracts of insurance or
reinsurance for the period 1953 to 1967, and
which form the subject matter of the Action in
(i) above.
10.6 Indemnification and Reimbursement Arising out of
------------------------------------------------
Certain Matters
---------------
Without duplication of any other provision of
this Section 10, the Seller shall indemnify,
defend and hold harmless the Buyer, promptly (and
within any period specified for payment under or
pursuant to any court order, arbitration award or
other settlement, compromise or agreement of any
kind) and fully in cash and without limitation as
to time or amount, from and against, and reim-
burse, make whole and pay the Buyer for, all
Losses of the Buyer or any of the Companies based
96
<PAGE>
upon, arising out of or otherwise in respect of,
or alleged to be based upon, arising out of or
otherwise in respect of, and shall reimburse the
Buyer and the Companies for any legal or other
expenses (including any value added tax or simi-
lar tax payable thereon) reasonably incurred by
them after the Closing Date in connection with
investigating or defending any such losses as and
when such expenses are incurred:-
(a) in connection with E & O Claim No. 84-
005-04-00 being a notification reported
to SDUM's underwriters under its Prior
Acts Professional Indemnity Policy
expiring 4th January 1984 concerning,
inter alia, potential allegations by
Iron Trades Mutual Ins. Co. Ltd, a for-
mer principal of SDUM and its predeces-
sors, and other principals of negligence
in arranging reinsurance in 1978-81 in
respect of the Marine Quota Share Treaty
placed during those years with Companhia
de Seguros Imperio of Portugal
("Imperio") and other reinsurers and
Imperio's attempt to avoid such reinsur-
ance;
(b) in connection with E & O Claim No. 84-
005-3-00 being a notification reported
to SDUM's underwriters under its Prior
Acts Professional Indemnity Policy
expiring 4th January 1984 concerning,
inter alia, allegations that SDUM's
predecessor Swan & Everett Underwriting
Ltd may have exceeded its authority
under the underwriting agency agreement
between it and Eagle Star Ins. Co. Ltd.
("Eagle Star") in the years 1963 - 69
and may have been negligent in relation
to the said account and Eagle Star's
attempt to avoid liability and to seek
an indemnity in respect thereof; and
(c) in connection with allegations made by
Sentry Ins. Co. (U.K.) Ltd and Sentry
Indemnity Company (collectively, "Sen-
try") concerning, inter alia, allega-
tions relating to certain business writ-
97
<PAGE>
ten for Sentry by SDUM or its predeces-
sors up to 1982 and Sentry's attempt to
avoid liability in respect thereof by
way of a contribution from SDUM or a
counterclaim against SDUM.
10.7 Indemnification of Brokerage
----------------------------
The Buyer and the Seller shall each indemnify,
defend and hold harmless the other, promptly (and
within any period specified for payment under or
pursuant to any court order, arbitration award or
other settlement, compromise or agreement of any
kind) from and against any claim or demand for
any commission, fee or other compensation by any
broker, finder, agent or similar intermediary
claiming to have been employed by or on behalf of
the other, and shall reimburse the other for any
legal fees or other expenses (including any value
added or similar tax payable thereon) reasonably
incurred by the other in connection with defend-
ing any such claim or demand, it being specific-
ally understood and agreed that the fees and
expenses of Salomon Brothers Inc in connection
with the transactions contemplated by this Agree-
ment shall be the sole responsibility of the
Seller.
10.8 Atlanta Policies
----------------
10.8.1 Without duplication of any provision of
the Indemnification Agreement attached
hereto as Exhibit H4 or any other provi-
sion of this Section 10, the Seller
shall indemnify, defend and hold harm-
less the Buyer, promptly (and within any
period specified for payment under or
pursuant to any court order, arbitration
award or other settlement, compromise or
agreement of any kind), and fully in
cash and without limitation as to time
or amount, from and against, and reim-
burse, make whole and pay the Buyer for,
all Losses of the Buyer or any of the
Companies based upon, arising out of or
otherwise in respect of, or alleged to
be based upon, arising out of, in con-
nection with or otherwise in respect of
98
<PAGE>
the Atlanta Policies (as defined below)
if and only if (i) such Policies were
underwritten or issued by Howden Agen-
cies Ltd, Howden Swann Ltd, or Country-
wide Managers in the name of the Sphere
Insurance Company Ltd ("Sphere") or the
Drake Insurance Company Ltd ("Drake"),
and (ii) neither Sphere nor Drake had
any Knowledge of or involvement in the
evaluation or underwriting of the risks
covered by such Policies, and (iii) such
Policies were insured or reinsured with
other insurers as an accommodation to
one or more of those other insurers or
as an accommodation for the Howden Agen-
cies Ltd., Howden Swann Ltd, or Country-
wide Managers, and (iv) Sphere's or
Drake's gross retention on such Policies
was less than fifty per cent (50%) of
the risk covered by the Policies, and
(v) Sphere and Drake received no Premium
in respect of their gross retained risk
on such Policies. The Seller shall
reimburse the Buyer and the Companies
for any legal fees or other expenses
(including any value added or other
similar tax payable thereon) reasonably
incurred by them in connection with
investigating or defending any such
Losses as and when any such Losses are
incurred. No indemnification or reim-
bursement shall be provided under this
Section 10.8 for any Losses arising from
any failure to pay or other action on
the part of one or more of any Affiliate
of the Buyer or the Companies or from
loss of future business or future profit
to the Buyer or the Companies or any of
their Affiliates.
10.8.2 The rights of the Buyer and the Compa-
nies to be indemnified under this Sec-
tion 10.8 as to any event (the "Indemni-
fied Event") shall be in excess of the
amount of any claim that SDI as succes-
sor in interest to Sphere and Drake, as
the case may be, may have under any
reinsurance or insurance contract issued
99
<PAGE>
by any Person (an "Insurer") covering
the Indemnified Event (each amount which
SDI may be entitled to claim under any
such policy is referred to herein as the
"Insurance Recovery Amount" with respect
to the Indemnified Event). As to each
and every Indemnified Event, the Seller
hereby unconditionally and irrevocably
guarantees to the Buyer and the Compa-
nies the payment in full of all Insur-
ance Recovery Amounts in respect of the
Atlanta Policies covered by the Indem-
nity in sub-section 10.8.1, notwith-
standing any other provision of this
sub-section 10.8.2, such guaranty to be
further evidenced by the Guaranty Agree-
ment attached hereto as Exhibit P (the
"Insurance Guaranty Agreement").
10.8.3 The Seller shall indemnify, defend and
hold harmless the Buyer and any of the
Companies promptly (and within any
period specified for payment under or
pursuant to any court order arbitration
award or other settlement, compromise or
agreement of any kind) and fully in cash
and without limitation as to time or
amount from and against all Losses of
the Buyer or any of the Companies, based
upon, arising out of or in connection
with the indemnity and guarantee given
in Section 10.8.2.
10.8.4 Upon issuance of an Exercise Notice
under Section 10.10.2, the Seller shall
be authorised to take all steps neces-
sary to recover any claims the Buyer or
any of the Companies may have against
any Insurer in connection with any
Insurance Recovery Amount including the
use of the appropriate insured's name as
and when required, and, if requested,
the insured (being one of the Companies)
shall provide the Seller with a power of
attorney, in such form as the Seller
shall reasonably request but no litiga-
tion or proceedings shall be commenced
in an insured's name without the prior
100
<PAGE>
written consent of the insured, such
consent not to be unreasonably withheld.
10.8.5 (a) The term "Atlanta Policies" as
used herein shall mean any con-
tract of insurance or reinsurance
written or issued in the name of
Sphere or Drake by Howden Agencies
Ltd, Howden Swann Ltd, and
Countrywide Managers.
(b) The term "Premium" as used herein
shall mean amounts actually
received by Sphere or Drake as
premium under Atlanta Policies but
shall exclude any amounts paid to
or received in Bermuda on behalf
of Sphere or Drake which were not
subsequently transmitted to Sphere
and Drake.
(c) The term "Knowledge" as used here-
in shall mean the actual knowledge
of any of the executive officers,
directors or key employees of
Sphere or Drake but shall exclude
any knowledge of or involvement by
Mr.Jack Carpenter with respect to
the Atlanta Policies.
10.9 Guaranty of Insurance and Reinsurance Recoveries
------------------------------------------------
10.9.1 The Buyer's right to be indemnified
under Section 10.4 of this Agreement as
to any event (an "Indemnified Event")
shall be in excess of the amount of any
claim that the Buyer or any of the Com-
panies may have under any reinsurance
contract covering the Indemnified Event,
and the Buyer's right to be indemnified
under Sections 10.1, 10.5 and 10.6 of
this Agreement as to any event (also an
"Indemnified Event") shall be in excess
of any amount of any claim that any of
the Companies may have under any errors
and omission insurance contract in
respect of the errors and omissions
claims listed in Schedule 2.13 of this
101
<PAGE>
Agreement. (Each Person issuing such a
reinsurance or errors and omission
insurance contract is hereafter referred
to as an "Insurer", and each amount
which the Buyer or the Companies may be
entitled to claim under such a reinsur-
ance or errors and omission insurance
contract is hereafter referred to as the
"Insurance Recovery Amount" with respect
to the Indemnified Event.)
10.9.2 As to each and every Indemnified Event,
the Seller hereby unconditionally and
irrevocably guarantees to the Buyer the
payment in full of all Insurance Recov-
ery Amounts in respect of such reinsur-
ance or errors and omissions insurance
contracts notwithstanding any other
provision of Section 10.9.1, such guar-
anty to be further evidenced by the
Insurance Guaranty Agreement.
10.9.3 Upon issuance of an Exercise Notice
under Section 10.10.2 the Seller shall
be authorized to take all steps neces-
sary to recover any claims the Buyer or
any of the Companies may have against
any Insurer in connection with any
Insurance Recovery Amount including the
use of the appropriate insured's name as
and when required, and, if requested,
the insured (being one of the Companies)
shall provide the Seller with a power of
attorney, but no litigation or proceed-
ings shall be commenced in an insured's
name without the prior written consent
of the insured, such consent not to be
unreasonably withheld.
10.10 Notice and Opportunity to Defend
--------------------------------
10.10.1 Notice of Asserted Liability
----------------------------
Promptly after receipt by any party
hereto (the "Indemnitee") of written
notice of any demand, claim or circum-
stance that, with the lapse of time,
would give rise to a claim or the com-
102
<PAGE>
mencement (or threatened commencement)
of any action, proceeding or investiga-
tion (an "Asserted Liability") that may
result in a Loss or claim under any of
the indemnities in Section 10, the
Indemnitee shall give written notice
thereof (the "Claims Notice") to any
other party which may be obligated to
provide indemnification pursuant to this
Section 10 (the "Indemnitor"). The
Claims Notice shall describe the
Asserted Liability in reasonable detail,
shall indicate the amount (estimated, if
necessary) of the Loss or claim that has
been or may be suffered by the Indemni-
tee and shall describe any insurance
cover in force known to the Indemnitee
relating to such demand, claim or cir-
cumstance. For purposes of this Section
10.10.1, the parties acknowledge that a
Claims Notice is hereby deemed provided
pursuant to this Section 10.10.1 with
respect to the actions and proceedings
set forth in Schedule 2.16, such notice
to be effective as of the Closing Date,
and such actions and proceedings shall
be subject to the provisions of this
Section 10.10.
10.10.2 Opportunity to Defend
---------------------
The Indemnitor shall have the right to
compromise or defend, at its own expense
and by its own counsel, any Asserted
Liability, which right may be exercised
by it by giving written notice (the
"Exercise Notice") of the exercise
thereof within 30 days following the
Claims Notice (or sooner if the nature
of the Asserted Liability so requires).
Failure by the Indemnitor to give any
Exercise Notice shall be deemed an elec-
tion by it not to exercise its right to
defend or compromise the Asserted Lia-
bility that is the subject of the
related Claims Notice. If the Indemni-
tor so elects to compromise or defend
such Asserted Liability, the Indemnitee
103
<PAGE>
shall cooperate, at the expense of the
Indemnitor, in the compromise of, or
defense against, such Asserted Liability
and shall provide the Indemnitor with a
suitable power of attorney in such form
as the Indemnitor shall reasonably
request. If the Indemnitor elects not
to compromise or defend the Asserted
Liability, fails to notify the Indemni-
tee of its election as herein provided
or contests its obligation to indemnify
under this Agreement, the Indemnitee may
compromise or defend such Asserted Lia-
bility. Anything in this Section
10.10.2 to the contrary notwithstanding,
however, the Indemnitor and the Indemni-
tee shall give the other at least 10
days' prior written notice of any
compromise proposed to be made by it of
any claim and neither the Indemnitor nor
the Indemnitee may compromise any such
claim over the objection of the other;
provided, however, that if the
-------- -------
Indemnitee withholds its consent to any
compromise proposed by the Indemnitor of
any claim, the Indemnitee shall
thereafter be responsible for its own
defense and shall not be entitled to (i)
any indemnity or reimbursement for
additional defense costs incurred by it
subsequent to the withholding of its
consent or (ii) any amount by which the
ultimate compromise or other disposition
of such claim exceeds the compromise to
which consent was withheld. In any
event, the Indemnitee and the Indemnitor
shall consult, at their own expense, as
to the defense of such Asserted
Liability. If the Indemnitor chooses to
defend any claim, the Indemnitee shall
make available to the Indemnitor any
Documents or Other Papers and any
employees within its control that are
necessary or appropriate for such
defense; similarly if the Indemnitee has
need to defend or compromise any claim,
the Indemnitor shall make available to
the Indemnitee any Documents or Other
104
<PAGE>
Papers and any employees within its
control (including documents in the
control of the Indemnitor's agents) that
are necessary or appropriate for such
defense.
10.11 Indemnification to Cover Directors, Etc.
----------------------------------------
Any obligation pursuant to this Section 10 on the
part of the Seller to indemnify, defend and hold
harmless the Buyer and the Companies from and
against any Losses or claims under any of the
other provisions of this Section 10, and to reim-
burse them for any legal or other expenses
(including any value added or similar tax payable
thereon) reasonably incurred in connection with
defending any such Losses or claims under any of
the other provisions of this Section 10 as and
when such expenses are incurred, and any obliga-
tion pursuant to this Section 10 on the part of
the Buyer to indemnify, defend and hold harmless
the Seller from and against any Losses or claims
under any of the other provisions of this Sec-
tion 10, and to reimburse it for any legal or
other expenses (including any value added or
similar tax payable thereon) reasonably incurred
in connection with defending any such Losses or
claims as and when such expenses are incurred,
shall equally extend to their respective
directors, officers, employees, Affiliates and
permitted assigns; provided, that under no
--------
circumstance shall the Seller have any obligation
pursuant to this Section 10 to indemnify, defend
and hold harmless, or to make any reimbursement
of legal or other expenses, to any individual
named in Schedules 10.3A through 10.3G; further
-------
provided, that no Indemnitor shall be required
--------
pursuant to this Section 10 to indemnify any
director, officer or employee of any Indemnitee
who is determined to be guilty of Disqualifying
Conduct with respect to the matter as to which
indemnification is sought. For purposes of this
Section 10.11, "Disqualifying Conduct" with re-
spect to any matter means willful misfeasance,
bad faith, gross negligence or reckless disregard
with respect to such matter. A Person shall be
deemed to have been found guilty of Disqualifying
Conduct within the meaning of this Section 10.11
105
<PAGE>
(i) if a court of competent jurisdiction makes a
final determination, which is no longer subject
to appeal, that such Person is guilty of Dis-
qualifying Conduct with respect to the matter as
to which indemnification is claimed in a pro-
ceeding in which the burden of proof with respect
to such issue is on the party claiming that such
Person is guilty of Disqualifying Conduct or (ii)
the Board of Directors of the entity of which
such Person is a director, officer or employee is
unable to make a determination that such Person
was not guilty of Disqualifying Conduct with
respect to such matter. Notwithstanding any
other provision of this Section 10, no indemnifi-
cation shall be made under this Section 10 in
respect of any Loss or claim under any of the
other provisions of this Section 10 that relates
to a Reinsurance Recoverable or a Reserve Item of
SDI that is subject to the provisions of Section
7 or any Loss subject to the provisions of the
Indemnification Agreement. Any Indemnitee here-
under shall refund to its Indemnitor hereunder
such amount of any claim paid by the Indemnitor
to the Indemnitee pursuant to this Section 10
that the Indemnitee subsequently receives for its
own account from any third party in respect of
such claim by way of cash payment, discount,
credit or otherwise.
10.12 Cooperation
-----------
If any loss is incurred by the Buyer or the Com-
panies, on the one hand, or the Seller, on the
other hand, that may give rise to a claim for
indemnification pursuant to this Section 10, the
Indemnitor hereunder may request in writing that
the Indemnitee hereunder take certain actions
that the Indemnitor reasonably believes will
mitigate, at no cost to the Indemnitee, such
loss, and the Indemnitee agrees reasonably to
consider such request but shall be under no obli-
gation to comply with such request if it in its
sole judgment believes that it is not in its best
interests to do so.
106
<PAGE>
10.13 Subrogation
-----------
Any Indemnitor hereunder shall be subrogated to
the rights of any Indemnitee hereunder with
respect to any claim against any other Person to
the extent of any indemnification payment made by
such Indemnitor to such Indemnitee pursuant to
this Section 10.
10.14 Insurance
---------
Each of the Buyer and the Seller agrees that it
will, and in the case of the Buyer that it will
cause the Companies to, claim against any insur-
ance coverage maintained by it or any of them if
payment of such claim could result in receipt of
insurance proceeds that would reduce any amount
with respect to which the other party is required
to provide indemnification pursuant to Sec-
tion 10.1 or 10.2.
10.15 No Indemnification or Reimbursement for Manage-
-----------------------------------------------
ment Time
---------
Neither the Buyer nor the Seller shall be
required to indemnify or reimburse any Person
pursuant to any provision of this Section 10 with
respect to the time devoted by the management or
employees of such Person to matters related to
any claim for indemnification or reimbursement
pursuant to this Section 10.
10.16 Indemnification Payments
------------------------
Any payments to be made pursuant to this Section
10 to the Buyer or any of the Companies shall be
made by the Seller (i) to the Buyer or (ii) at
the election of the Buyer, to the Buyer as agent
for any of the Companies which suffered the rele-
vant loss in which event the Buyer shall thereaf-
ter remit such payment to such company which
suffered the relevant Loss.
10.17 Settlement Prior to Closing Date
--------------------------------
The Seller shall not be required to indemnify or
reimburse any Person pursuant to any provision of
this Section 10 to the extent that
107
<PAGE>
(i) any losses, claims, liabilities, dam-
ages, deficiencies and expenses shall
have been settled or compromised on or
before the Closing Date, and are
reflected in the accounts of the Buyer,
the Companies and their Affiliates for
the years up to December 31, 1986, or
(ii) any costs, charges and expenses shall
have been paid by the Companies during
the period from January 1, 1987 to the
Closing Date in relation to matters
referred to in this Section 10 up to an
aggregate amount of B.P.125,000.
11. Termination of Agreement
------------------------
11.1 Termination
-----------
This Agreement may be terminated prior to the
Closing as follows:
(i) at the election of the Seller, if any
one or more of the conditions to the
obligation of the Seller to close (other
than the conditions set forth in the
first two sentences of Section 6.1) has
not been fulfilled as of the Closing
Date;
(ii) at the election of the Buyer, if any one
or more of the conditions to the obliga-
tion of the Buyer to close (other than
the conditions set forth in the first
two sentences of Section 5.1) has not
been fulfilled as of the Closing Date;
(iii) at the election of the Seller, if the
Buyer has breached any representation,
warranty, covenant or agreement con-
tained in this Agreement;
(iv) at the election of the Buyer, if the
Seller has breached any representation,
warranty, covenant or agreement con-
tained in this Agreement;
108
<PAGE>
(v) at the election of the Seller, if any
representation or warranty of the Seller
contained in this Agreement that was
true on the date hereof shall through no
act or omission of the Seller, the Com-
panies or any of their Affiliates become
untrue in any material respect on and as
of the Closing Date as a result of any
event occurring subsequent to the date
hereof;
(vi) at the election of the Buyer, if any
representation or warranty of the Buyer
contained in this Agreement that was
true on the date hereof shall through no
act or omission of the Buyer or any of
its Affiliates become untrue in any
material respect on and as of the Clos-
ing Date as a result of any event occur-
ring subsequent to the date hereof;
(vii) at the election of the Buyer or the
Seller, if the Closing has not occurred
on or before December 31, 1987;
(viii) at the election of the Buyer or the
Seller, if the ILU or the DTI has stated
in writing that it will not consent to
the consummation of the transactions
contemplated by this Agreement and has
not withdrawn such statement within 10
days following the date that both the
Buyer and the Seller have received such
written statement;
(ix) at the election of the Buyer if an ILU
Indication shall not have been obtained
prior to November 16, 1987;
(x) at the election of the Seller if it
shall not have received a letter and a
stock subscription agreement, respec-
tively in the form and substantially in
the form of Exhibits Q and R prior to
October 21, 1987; or
(xi) at any time on or prior to the Closing
Date, by mutual written consent of the parties.
109
<PAGE>
11.2 Survival
--------
If this Agreement is terminated and the transac-
tions contemplated hereby are not consummated as
described above, this Agreement shall become void
and of no further force and effect, except for
the provisions of Section 4.3 relating to the
obligation of the Buyer to keep confidential and
not to use certain information and data obtained
by it from the Companies and except for the pro-
visions of Sections 4.8, 10.7 and 12.4; provided,
--------
however, that except as otherwise provided in
-------
Section 4.8 none of the parties hereto shall have
any liability in respect of a termination of this
Agreement except to the extent that failure to
satisfy the conditions of Section 5 or 6 results
from the intentional or willful violation of the
representations, warranties, covenants or agree-
ments of such party under this Agreement.
12. Miscellaneous
-------------
12.1 Certain Definitions
-------------------
As used in this Agreement, the following terms
have the following meanings unless the context
otherwise requires:
(i) "Affiliate" with respect to any Person,
---------
means any other Person controlling,
controlled by or under common control
with such Person, and, in the case of
the Buyer includes any partner of any
Affiliate of the Buyer.
(ii) "Business Day" means any day other than
------------
a Saturday, a Sunday or a day on which
banks are authorized or required to be
closed in New York, New York or London,
England.
(iii) "Buyer's Documents" means this Agree-
-----------------
ment, the Tax Indemnity Deed, the Guar-
anty Agreement, the Warrant Agreement,
the Insurance Guaranty Agreement, the
Note Purchase Agreement, the Guaranty
Agreement under the Note Purchase Agree-
110
<PAGE>
ment and the Guaranty of SD Investors,
Inc. pursuant hereto.
(iv) "Condition" of any Person means the
---------
assets, liabilities, properties, busi-
ness, operations and financial condition
of such Person taken as a whole.
(v) "Contracts or Other Agreements" means
-----------------------------
all contracts, agreements, understand-
ings, indentures, notes, bonds, loans,
instruments, leases, mortgages, fran-
chises, licenses, commitments or other
binding arrangements.
(vi) "Documents or Other Papers" means any
-------------------------
Contracts or Other Agreements or any
document, instrument, certificate, no-
tice, consent, affidavit, letter, tele-
gram, telex, statement, schedule
(including any Schedule to this Agree-
ment), or exhibit (including any Exhibit
to this Agreement).
(vii) "Governmental or Regulatory Body" means
-------------------------------
any government or political subdivision
thereof, whether federal, state, local
or foreign, or any agency or instrumen-
tality of any such government or politi-
cal subdivision and any court or arbi-
trator and the ILU.
(viii) "Knowledge" of or to be "Known" by a
--------- -----
Person that is a corporation means the
actual knowledge of any of the executive
officers, directors or key employees of
such Person. Knowledge of the Seller
for purposes of this Agreement shall
include the Knowledge of A&A and A&A
Europe.
(ix) "Lien" means any lien, pledge, mortgage,
----
security interest, right in equity,
claim, lease, charge, option, right of
first refusal, easement, servitude,
transfer restriction under any share-
holder or similar agreement or encum-
brance.
111
<PAGE>
(x) "Permitted Lien" means:
--------------
(a) Liens for taxes, assessments or
other governmental charges the
payment of which is not at the
time required or which are being
challenged in good faith;
(b) statutory Liens of landlords and
Liens of carriers, warehousemen,
mechanics and materialmen incurred
in the ordinary course of business
for sums not yet due or the pay-
ment of which is not at the time
required or which are being chal-
lenged in good faith;
(c) Security Deposit or deposits made
in the ordinary course of business
in connection with workers' com-
pensation, unemployment insurance
and other types of social security
or social welfare, or to secure
(or to obtain letters of credit or
surety, appeal or performance
bonds which secure) the perfor-
mance of bids, tenders, statutory
obligations, leases, purchase,
construction, sales or reinsurance
contracts and other similar obli-
gations, in each case not incurred
in connection with the borrowing
of money, the obtaining of
advances or the payment of the
deferred purchase price of prop-
erty;
(d) any Lien incurred in the ordinary
course of business in connection
with workers' compensation, unem-
ployment insurance and other types
of social security or social wel-
fare, or to secure (or to obtain
letters of credit or surety,
appeal or performance bonds which
secure) the performance of bids,
tenders, statutory obligations,
leases, purchase, construction or
112
<PAGE>
sales contracts and other similar
obligations, in each case not
incurred in connection with the
borrowing of money, the obtaining
of advances or the payment of the
deferred purchase price of prop-
erty;
(e) any attachment or judgment Lien,
unless in the case of the Compa-
nies if such judgment is or is
required to be set forth in Sched-
ule 2.16 the judgment it secures
shall not, within 60 days after
the entry thereof, have been dis-
charged or execution thereof
stayed pending appeal, or shall
not have been discharged within 60
days after the expiration of any
such stay;
(f) leases or subleases granted to
others, easements, rights-of-way,
restrictions and other similar
charges or encumbrances, in each
case incidental to, and not inter-
fering with, the ordinary conduct
of the business of any of the
Companies;
(g) in the case of investment securi-
ties, Liens of depositories for
fees payable, repurchase agree-
ments, securities lending arrange-
ments, options, futures, Liens of
issuing banks with respect to
letters of credit, and other simi-
lar arrangements entered into in
the ordinary course of business;
(h) all other Liens incurred in the
ordinary course of business and
not material to the Condition of
the Companies taken as a whole or
to the separate Condition of SDI;
and
113
<PAGE>
(i) all Liens reflected on the Company
Balance Sheets or the SDI Balance
Sheet.
(xi) "Person" means any individual, corpora-
------
tion, partnership, firm, joint venture,
association, joint-stock company, trust,
unincorporated organization or other
entity and any Governmental or Regula-
tory Body.
(xii) "Property" means real or personal prop-
--------
erty or assets, tangible or intangible.
(xiii) "Seller's Documents" means this Agree-
------------------
ment, the Guaranty Agreement, the
Halford Shead Agreement, the Subsidiary
Agreements, the Property Agreements, the
Administration Agreement, the Data Pro-
cessing Agreement, the Tax Indemnity
Deed, the Indemnification Agreement, the
Pension Deed, the Insurance Guaranty
Agreement, the Note Purchase Agreement,
the Guaranty Agreement under the Note
Purchase Agreement, the Warrant Agree-
ment.
12.2 Overdue Amounts
---------------
Any amount that becomes due and payable hereunder
and that is not paid at such time shall bear
interest from the date it first becomes due and
payable until the date of payment in full at a
fluctuating rate of interest equal to (i) with
respect to the first 15 days such amount is over-
due, the base lending rate from time to time of
National Westminster Bank plc (the "Bank") based
on a year of 365 days and the actual number of
days elapsed (the "Base Rate") and (ii) thereaf-
ter, the Base Rate plus four percentage points.
Each change in the foregoing rate of interest
shall be effective as at the opening of business
on the date a change in the Base Rate is deter-
mined by the Bank to be effective.
114
<PAGE>
12.3 Consent to Jurisdiction and Service of Process
----------------------------------------------
Any legal action, suit or proceeding arising out
of or relating to this Agreement or the transac-
tions contemplated hereby may be instituted in
any federal court located in New York County,
State of New York or in any English court and
each party agrees not to assert as a defense in
any such action, suit or proceeding, any claim
that it is not subject personally to the juris-
diction of such court, that its property is
exempt or immune from attachment or execution,
that the action, suit or proceeding is brought in
an inconvenient forum, that the venue of the
action, suit or proceeding is improper or that
this Agreement or the subject matter hereof may
not be enforced in or by such court. Each party
further irrevocably submits to the jurisdiction
of any such court in any such action, suit or
proceeding. The Seller hereby appoints the Gen-
eral Counsel, Alexander & Alexander Services
Inc., at its offices at 1211 Avenue of the Ameri-
cas, New York, New York, or if the suit is
brought in England, the Group Legal Adviser,
Alexander & Alexander Europe plc at its offices
at 5-10 Bury Street, London, England or their
respective offices in New York, New York or
London, England, as they hereafter furnish to the
parties to this Agreement, as the authorized
agent of the Seller to accept and acknowledge on
such party's behalf service of any and all pro-
cess that may be served in any such action, suit
or proceeding. The Buyer hereby appoints Paul,
Weiss, Rifkind, Wharton & Garrison, at its
offices at 1285 Avenue of the Americas, New York,
New York 10019, or if the suit is brought in
England, the Chairman, Sphere Drake Insurance
plc, at its offices at 52/54 Leadenhall Street,
London, England, or their respective offices in
New York, New York, or London, England as they
hereafter furnish to the parties to this Agree-
ment, as the Buyer's authorized agent to accept
and acknowledge on such party's behalf service of
any and all process that may be served in any
such action, suit or proceeding. Any and all
service of process and any other notice in any
such action, suit or proceeding shall be effec-
tive against any party if given personally or by
115
<PAGE>
registered or certified mail, return receipt
requested, or by any other means of mail that
requires a signed receipt, postage prepaid.
Nothing herein contained shall be deemed to
affect the right of any party to serve process in
any manner permitted by law or to commence legal
proceedings or otherwise proceed against any
other party in any jurisdiction other than New
York or England.
12.4 Publicity
---------
No publicity release or announcement concerning
this Agreement or the transactions contemplated
hereby shall be made without written advance
approval thereof by the Seller and the Buyer
until three months after the Closing.
12.5 Suspensory Clause
-----------------
No provisions of this Agreement or of any agree-
ment or arrangement of which it forms part, by
virtue of which the agreement constituted by all
of the foregoing is subject to registration (if
such be the case) under the Restrictive Trade
Practices Act 1976 shall take effect until the
day after particulars of such agreement have been
furnished to the Director General of Fair Trading
pursuant to the terms of Section 24 of that Act.
12.6 Notices
-------
Any notice or other communication required or
permitted hereunder shall be in writing and shall
be delivered personally, telegraphed, telexed or
sent by facsimile transmission. Any such notice
shall be deemed given when so delivered person-
ally, telegraphed, telexed or sent by facsimile
transmission, as the case may be, or when
received in any manner as follows:
116
<PAGE>
(i) if to the Buyer, to:
Sphere Drake Acquisitions (U.K.) Limited
c/o Centre Capital Investors L.P.
Suite 1025
One Rockefeller Plaza
New York, New York 10020
United States of America
Attention: Lester Pollack
Telex: RCA 222301
Fax: (212) 974-2825 or
(212) 489-9655
and
Sphere Drake Acquisitions (U.K.) Limited
c/o Sphere Drake Insurance plc
52/54 Leadenhall Street
London EC3A 2BJ
England
Attention: Ian H. Dean
Telex: 935015 Sphere G
Fax: 01-481-3828
and
c/o John Head & Partners
John C Head III
545 Madison Avenue
New York, New York 10022
Telex: 971861
Fax: (212) 421-9049
with copies to:
Paul, Weiss, Rifkind, Wharton & Garrison
1285 Avenue of the Americas
New York, New York 10019
United States of America
Attention: Albert P. Hand, Esq.
Telex: WUI 666-843
Fax: (212) 757-3990
117
<PAGE>
and
Clyde & Co.
51 Eastcheap
London EC3M 1JP
England
Attention: Francis Mackie and
V.G. Southey
Telex: 884886 Clyde G
Fax: 01-623-5427
(ii) if to the Seller, to:
Alexander & Alexander Services Inc.
1211 Avenue of the Americas
New York, New York 10036
Attention: General Counsel
Telex: 620303
Fax: (212) 302-1921
and
Alexander Stenhouse & Partners Ltd.
Two South Place
London EC2P 2DX
England
Attention: The Company Secretary
Telex: 8813371
Fax: 01-588-1680
and
Alexander & Alexander Europe plc
5-10 Bury Street
London EC3A 5HL
England
Attention: Group Legal Adviser
Telex: 882171
Fax: 01-623-5022
Any party may by notice given in accordance with
this Section 12.6 to the other parties designate
another address or person for receipt of notices
hereunder.
118
<PAGE>
12.7 Entire Agreement
----------------
This Agreement (including the Schedules and
Exhibits) and the collateral agreements executed
in connection with the consummation of the trans-
actions contemplated herein contain the entire
agreement among the parties with respect to the
purchase of the Shares and related transactions,
and supersede all prior agreements, written or
oral, with respect thereto.
12.8 Waivers and Amendments; Non-Contractual Remedies;
-------------------------------------------------
Preservation of Remedies
------------------------
This Agreement may be amended, superseded, can-
celled, renewed or extended, and the terms hereof
may be waived, only by a written instrument
signed by the parties affected thereby or, in the
case of a waiver, by the party waiving compli-
ance. No delay on the part of any party in exer-
cising any right, power or privilege hereunder
shall operate as a waiver thereof. Nor shall any
waiver on the part of any party of any such
right, power or privilege, nor any single or
partial exercise of any such right, power or
privilege, preclude any further exercise thereof
or the exercise of any other such right, power or
privilege with the exception of the waiver of any
condition precedent to the obligation to close in
which case the rights of the parties shall be as
set forth herein. The rights and remedies herein
provided are cumulative and are not exclusive of
any rights or remedies that any party may other-
wise have at law or in equity. The rights and
remedies of any party based upon, arising out of
or otherwise in respect of any inaccuracy in or
breach of any representation, warranty, covenant
or agreement contained in this Agreement shall in
no way be limited by the fact that the act, omis-
sion, occurrence or other state of facts upon
which any claim of any such inaccuracy or breach
is based may also be the subject matter of any
other representation, warranty, covenant or
agreement contained in this Agreement (or in any
other agreement between the parties) whether or
not there is any inaccuracy or breach with
respect to such other representation, warranty,
covenant or agreement.
119
<PAGE>
12.9 Governing Law
-------------
This Agreement shall be governed and construed in
accordance with the laws of England.
12.10 Payments and Currency
---------------------
Any and all amounts payable hereunder, whether at
the Closing or otherwise, shall be paid to the
appropriate party in London, England in sterling,
and the specification of payment in London,
England in sterling is of the essence of this
Agreement. No payment obligation hereunder shall
be discharged by amounts paid in another currency
or in another place, whether pursuant to a judg-
ment or otherwise, to the extent that the amount
so paid on prompt conversion to sterling and
transfer to London, England under normal banking
procedures does not yield the amount of sterling
due hereunder.
12.11 Binding Effect: Assignment
--------------------------
This Agreement shall be binding upon and inure to
the benefit of the parties and their respective
successors and legal representatives. This
Agreement is not assignable other than by the
written consent of the parties.
12.12 Variations in Pronouns
----------------------
All pronouns and any variations thereof refer to
the masculine, feminine or neuter, singular or
plural, as the context may require.
12.13 Counterparts
------------
This Agreement may be executed by the parties
hereto in separate counterparts, each of which
when so executed and delivered shall be an origi-
nal, but all such counterparts shall together
constitute one and the same instrument. Each
counterpart may consist of a number of copies
hereof each signed by less than all, but together
signed by all of the parties hereto.
120
<PAGE>
12.14 Exhibits and Schedules
----------------------
The Exhibits and Schedules are a part of this
Agreement as if fully set forth herein. All
references herein to Sections, clauses and Exhib-
its shall be deemed references to such parts of
this Agreement, unless the context otherwise
requires. All references herein to Schedules
shall be deemed references to such Schedules as
delivered to the Buyer by the Seller on the date
hereof.
12.15 Headings
--------
The headings in this Agreement are for reference
only, and shall not affect the interpretation of
this Agreement.
IN WITNESS WHEREOF the parties have executed this Agreement
as of the date first above written.
Signed by
------------------------
for and on behalf of
SPHERE DRAKE ACQUISITIONS (U.K.) LIMITED
in the presence of:
Signed by
------------------------
for and on behalf of
ALEXANDER STENHOUSE & PARTNERS, LTD.
in the presence of:
121
<PAGE>
GUARANTY
The undersigned (the "Guarantor") (a) is a corpo-
ration whose capital stock has been subscribed for by the
proposed partners of SD Partners, a proposed Bermuda part-
nership that will indirectly be the sole shareholder of
Sphere Drake Acquisitions (U.K.) Limited; (b) acknowledges
receipt of copies of the foregoing Share Purchase Agreement
(the "Agreement") and the Schedules and Exhibits referred to
therein; (c) agrees that such copies constitute adequate
notice of all matters contained therein and consent thereto
in all respects; (d) represents and warrants that the Guar-
antor has full right and power and all authority and
approval required to enter into, execute and deliver this
Guaranty and to consummate the transactions contemplated
hereby, and that this Guaranty has been duly executed and
delivered by the Guarantor and is the valid and binding
obligation of the Guarantor enforceable against it in accor-
dance with its terms; and (e) unconditionally and irrevoca-
bly guarantees the due and faithful performance by the Buyer
of all of the Buyer's obligations as to Closing under the
Agreement.
This Guaranty shall be binding upon the successors
and assigns of the Guarantor and shall inure to the benefit
of and be enforceable by the Seller and its successors and
assigns. This Guaranty shall be governed by New York law.
This Guaranty may be amended, changed, waived, discharged or
terminated only by an instrument in writing signed by the
Seller.
SPHERE DRAKE ACQUISITIONS HOLDINGS COMPANY
(U.K.) LIMITED COMPANY
------
By:
-------------------------
Name:
Title:
<PAGE>
============================================================
GUARANTY AGREEMENT
Dated as of
October 9, 1987
by
ALEXANDER & ALEXANDER SERVICES INC.
and
ALEXANDER & ALEXANDER EUROPE plc
with
SPHERE DRAKE ACQUISITIONS (U.K.) LIMITED
============================================================
<PAGE>
TABLE OF CONTENTS
-----------------
Section Page
------- ----
1. Share Purchase Agreement . . . . . . . . . . . 1
2. Guaranty . . . . . . . . . . . . . . . . . . . 2
3. Subrogation, etc. . . . . . . . . . . . . . . 2
4. Obligations Unconditional . . . . . . . . . . 2
5. Waiver . . . . . . . . . . . . . . . . . . . 5
6. Reservation of Rights of the Seller or any
of its Affiliates . . . . . . . . . . . . . . 6
7. Representations and Warranties of the
Guarantors . . . . . . . . . . . . . . . . . . 6
7.1 Organization . . . . . . . . . . . . . 6
7.2 Authority to Execute and Perform
Agreements . . . . . . . . . . . . . . 7
7.3 Certificate of Incorporation, By-Laws,
Memorandum and Articles of
Association . . . . . . . . . . . . . . 7
7.4 Consents and Approvals . . . . . . . . 7
7.5 No Breach . . . . . . . . . . . . . . . 7
8. Miscellaneous . . . . . . . . . . . . . . . . 8
8.1 Survival . . . . . . . . . . . . . . . 8
8.2 Consent to Jurisdiction and Service of
Process . . . . . . . . . . . . . . . . 8
8.3 Notices . . . . . . . . . . . . . . . . 9
8.4 Entire Agreement . . . . . . . . . . . 12
8.5 Waivers and Amendments; Non-Contractual
Remedies; Preservation of Remedies . . 12
8.6 Governing Law . . . . . . . . . . . . . 12
8.7 Binding Effect; No Assignment . . . . . 13
8.8 Variations in Pronouns . . . . . . . . 13
8.9 Headings . . . . . . . . . . . . . . . 13
8.10 Counterparts . . . . . . . . . . . . . 13
<PAGE>
GUARANTY AGREEMENT
GUARANTY AGREEMENT, dated as of October 9, 1987
(herein as amended or supplemented from time to time as
permitted hereby, this "Guaranty Agreement"), by Alexander &
Alexander Services Inc., a Maryland corporation ("A&A") and
Alexander & Alexander Europe plc, a Scottish corporation
whose registered office is situate at 145 St. Vincents
Street, Glasgow G2 5NX Scotland registered in Scotland with
number 32111 ("A&A Europe," A&A and A&A Europe are herein
collectively referred to as the "Guarantors"), with Sphere
Drake Acquisitions (U.K.) Limited, an English corporation
whose registered office is situate at 3O Mincing Lane,
London EC3R 7BR England, registered in England with number
2136565 (the "Buyer").
1. Share Purchase Agreement.
------------------------
This Guaranty Agreement is made pursuant to the Share
Purchase Agreement, dated as of the date hereof (the "Share
Purchase Agreement"), between the Buyer and Alexander
Stenhouse & Partners Ltd., a Scottish corporation whose
registered office is situate at 145 St. Vincents Street,
Glasgow, Scotland, registered in England with number SC23477
(the "Seller"), providing for the purchase by the Buyer from
the Seller of all of the issued share capital of Sphere
Drake Insurance Group Public Limited Company, an English
corporation whose registered office is situate at 52/54
Leadenhall Street, London EC3A 2BJ England, registered in
England with number 1868708 (the "Company"). Certain
capitalized terms used herein without definition have the
meanings specified in the Share Purchase Agreement. This
Guaranty Agreement is made for the benefit of the Buyer and
its Affiliates to guarantee the performance by the Seller
and its Affiliates of its obligations under the Seller's
Documents.
2. Guaranty.
--------
The Guarantors hereby jointly and severally unconditionally
and irrevocably guarantee to the Buyer and its Affiliates,
for the benefit of the Buyer and its Affiliates, the due and
punctual performance by the Seller of the obligations of the
Seller under the Share Purchase Agreement, the Note Purchase
Agreement, the Warrant Agreement, and the Tax Indemnity Deed
<PAGE>
when and as the same shall be performed. A&A hereby also
unconditionally and irrevocably guarantees to the Buyer and
its Affiliates, for the benefit of the Buyer and its
Affiliates, the due and punctual performance by the Seller's
Affiliates of the obligations of the Seller's Affiliates
under the Halford Shead Agreement, the Subsidiary
Agreements, the Property Agreements, the Administration
Agreement, the Data Processing Agreement, the
Indemnification Agreement, and the Pension Deed when and as
the same shall be performed. Such guaranties are absolute,
unconditional, present, and continuing guaranties of
performance.
3. Subrogation, etc.
----------------
In the event (and only in the event) that the Guarantors
shall have made full and complete performance of any of
their obligations under Section 2 hereof, the Guarantors
shall be subrogated to the rights of the Buyer or its
Affiliates, as the case may be to the extent of such
performance.
4. Obligations Unconditional.
-------------------------
Subject to Section 6, the obligations and liabilities of the
Guarantors under this Guaranty Agreement (i) are absolute,
irrevocable and unconditional, (ii) shall not be subject to
any counterclaim, set-off, deduction or defense (other than
full and strict compliance with, or satisfaction of, such
obligations and liabilities) based upon any claim that the
Guarantors may have against the Buyer, any of its Affiliates
or any other Person and (iii) shall remain in full force and
effect without regard to, and shall not be released,
discharged or in any way affected by, any of the following
circumstances and conditions:
(a) any amendment or modification of or supplement to
the Seller's Documents or any Contracts or Other Agreements
entered into in connection therewith (collectively, the
"Instruments");
(b) any invalidity, irregularity or unenforceability
of any term or provision of any Instrument;
2
<PAGE>
(c) any assignment or transfer of any Instrument or of
any interest thereunder in compliance with the terms of the
applicable Instrument;
(d) any furnishing or acceptance of any security, or
any release of any security, for any obligation of the
Seller or any of its Affiliates under any Instrument;
(e) any waiver, consent, extension or indulgence under
or with respect to any Instrument;
(f) any exercise or nonexercise of any right, remedy,
power or privilege under or in respect of any Instrument or
any lack of diligence or failure to mitigate damages or
failure to proceed against or to take any action or pursue
any remedy with respect to, any Person or any security
afforded by or under any Instrument;
(g) the voluntary or involuntary liquidation,
dissolution, sale or other disposition of all or
substantially all of the assets of, or marshalling of assets
and liabilities, receivership, insolvency, bankruptcy,
assignment for the benefit of creditors, reorganization,
arrangement, composition or readjustment of, or other
similar proceeding, affecting the Seller or any of its
Affiliates or any of their assets, or any action taken by
any trustee, receiver or court in any such proceeding, or
the disaffirmance, rejection or postponement in any such
proceeding of any of the undertakings of the Seller or any
of its Affiliates set forth in any Instrument (it being
understood that the obligations guaranteed hereunder shall
be those of the Seller or any of its Affiliates without
giving effect to any reduction, disaffirmance, rejection,
postponement or other change in or by reason of any such
proceeding);
(h) any release by operation of law or discharge by
operation of law of the Seller, any of its Affiliates, or
any other Person from the performance or observance of any
obligation, undertaking or condition to be performed by the
Seller any of its Affiliates, or such other Person, as the
case may be, under or in respect of any Instrument;
(i) any limitation on the liabilities or obligations
of the Seller, any of its Affiliates or any other Person
under any Instrument or any termination or cancellation
(other than any such termination or cancellation expressly
consented to in writing by the Buyer, or any of its
3
<PAGE>
Affiliates which materially impairs or materially diminishes
the value of the rights of subrogation of the Seller or any
of its Affiliates), or any frustration, invalidity or
unenforceability, in whole or in part, of any such
instrument or agreement or any limitation on the method or
terms of payment thereunder which may now or hereafter be
caused or imposed in any manner whatsoever;
(j) any failure on the part of the Seller any of its
Affiliates, or any other Person for any reason to perform or
comply with any term of any Instrument;
(k) any direct or indirect transfer or other
disposition by either of the Guarantors of their indirect
interest in the shares of the capital stock of the Seller or
any of its Affiliates;
(l) any occurrence of a default or an event of default
under any Instrument; or
(m) any other circumstance or condition, whether
similar or dissimilar to any of the foregoing, that might
constitute a legal or equitable discharge or defense of a
guarantor (whether or not the Guarantors shall have any
knowledge or notice thereof).
5. Waiver.
------
Subject to Section 6, the Guarantors hereby waive, insofar
as their obligations hereunder are concerned:
(a) notice of acceptance hereof and notice of the
execution and delivery of any Instrument;
(b) notice of any of the matters referred to in
Section 4 hereof;
(c) to the fullest extent permitted by applicable law,
all notices required by statute, rule of law or otherwise to
preserve or enforce any rights against the Guarantors
hereunder, including without limitation any presentment,
demand, proof or notice of nonpayment of any indemnity of
the Seller or any of its Affiliates, as the case may be and
notice of any failure on the part of the Seller or any of
its Affiliates, as the case may be to perform or comply with
any term of any instrument or agreement applicable to the
Seller or any of its Affiliates;
4
<PAGE>
(d) any right to the enforcement, assertion or
exercise of any right, remedy, power or privilege under or
in respect of any Instrument;
(e) to the fullest extent permitted by applicable law,
any requirement that the Seller, any of its Affiliates or
any other Person be joined as a party to any proceeding for
the enforcement of any term of any Instrument;
(f) any right to require a proceeding first against
the Seller, or any of its Affiliates or any other Person or
the security provided by or under any Instrument or
agreement;
(g) the filing of claims by the Buyer or any of its
Affiliates in the event of the receivership or bankruptcy of
the Seller, any of its Affiliates; provided that the Buyer
--------
or any of its Affiliates, at the Guarantors' expense, comply
with any reasonable request of the Guarantors to file claims
on behalf of the Buyer or any of its Affiliates in the event
of any such receivership or bankruptcy; provided, further,
-------- -------
however, that compliance with any such request shall not be
a condition of any obligation of the Guarantors hereunder;
and
(h) any requirement of diligence on the part of the
Buyer or any of its Affiliates and any requirement on the
part of the Buyer or any of its Affiliates to mitigate any
damages resulting from any nonperformance by the Seller or
any of the Affiliates hereunder or the occurrence of any
default or event of default under any Instrument.
6. Reservation of Rights of the Seller or any of its
-------------------------------------------------
Affiliates.
----------
Notwithstanding the provisions of Sections 4 and 5, the
Guarantors shall be entitled to assert as a defense
hereunder any defense that is or would be available to the
Seller or any of its Affiliates under the Instruments (other
than any defense arising as a result of proceedings of the
character referred to in Section 4(g)) and shall be entitled
to set off any claim that the Seller or any of its
Affiliates has against the Buyer or any of its Affiliates
under the Instruments against its obligations hereunder.
The Guarantors shall be entitled to receive all notices that
the Seller or any of its Affiliates is entitled to receive
5
<PAGE>
from the Buyer or any of its Affiliates pursuant to the
Seller's Documents.
7. Representations and Warranties of the Guarantors.
------------------------------------------------
The Guarantors represent and warrant jointly and severally
as follows:
7.1 Organization. A&A is a corporation duly organized,
------------
validly existing and in good standing under the laws of the
State of Maryland, and A&A Europe is a corporation duly
incorporated under the laws of Scotland. Each Guarantor has
the power and authority to own, lease and operate its assets
and to carry on its business as now and heretofore
conducted.
7.2 Authority to Execute and Perform Agreements. The
-------------------------------------------
execution and delivery of this Guaranty Agreement and the
performance by the Guarantors of their obligations hereunder
have been duly authorized by all necessary corporate action
on the part of each of the Guarantors. This Guaranty
Agreement has been duly executed and delivered by each of
the Guarantors and is the valid and binding obligation of
each of the Guarantors enforceable against each of them in
accordance with its terms.
7.3 Certificate of Incorporation, By-Laws, Memorandum and
-----------------------------------------------------
Articles of Association. A&A has heretofore delivered to
-----------------------
the Buyer true and complete copies of its Certificate of
Incorporation and By-Laws, certified by the Secretary or
Assistant Secretary thereof. A&A Europe has heretofore
delivered to the Buyer true and complete copies of its
Memorandum and Articles of Association, having attached
thereto all of the resolutions required to be so attached,
certified by the Secretary or Assistant Secretary thereof.
7.4 Consents and Approvals. The execution and delivery by
----------------------
the Guarantors of this Guaranty Agreement and the
performance by the Guarantors of their obligations hereunder
do not require either of the Guarantors to obtain any
consent, approval or action of, or make any filing with or
give any notice to, any Governmental or Regulatory Body or
trade or industry organization.
7.5 No Breach. The execution, delivery and performance of
---------
this Guaranty Agreement and the consummation of the
transactions contemplated hereby will not (i) violate any
6
<PAGE>
provision of the Certificate of Incorporation or By-Laws of
A&A or the Memorandum or Articles of Association of A&A
Europe; (ii) require any consent, approval or notice under
or result in a violation or breach of, or conflict with, or
constitute (with or without notice or lapse of time or both)
a default (or give rise to any right of termination,
cancellation or acceleration) under any of the terms,
conditions or provisions of any note, bond, mortgage,
indenture, license, Contracts or Other Agreements to which
either of the Guarantors is a party or by which either of
the Guarantors or any of their respective properties may be
bound; (iii) violate any order, judgment, injunction, award
or decree of any Governmental or Regulatory Body applicable
to either of the Guarantors or any of their respective
properties or any statute, law or regulation of any
jurisdiction applicable to either of the Guarantors.
8. Miscellaneous.
-------------
8.1 Survival. If the Share Purchase Agreement is
--------
terminated and the transactions contemplated thereby are not
consummated for reasons other than as set forth in Section
11.1(iv) or (v) of the Share Purchase Agreement, this
Guaranty Agreement shall become void and of no further force
and effect except for any obligation of the Guarantors with
respect to Sections 4.8, 10.7 and 12.4 of the Share Purchase
Agreement.
8.2 Consent to Jurisdiction and Service of Process. Any
----------------------------------------------
legal action, suit or proceeding arising out of or relating
to this Guaranty Agreement or the transactions contemplated
hereby may be instituted in any federal court located in New
York County, State of New York or in any English court, and
each party agrees not to assert as a defense in any such
action, suit or proceeding, any claim that it is not subject
personally to the jurisdiction of such court, that its
property is exempt or immune from attachment or execution,
that the action, suit or proceeding is brought in an
inconvenient forum, that the venue of the action, suit or
proceeding is improper or that this Guaranty Agreement or
the subject matter hereof may not be enforced in or by such
court, and hereby waives any offsets or counterclaims in any
such action, suit or proceeding. Each party further
irrevocably submits to the jurisdiction of any such court in
any such action, suit or proceeding. The Guarantors hereby
appoint the General Counsel, Alexander & Alexander Services
Inc., at its offices at 1211 Avenue of the Americas, New
York, New York, or if the suit is brought in England, the
7
<PAGE>
Group Legal Adviser, Alexander & Alexander Europe plc at its
offices at 5-10 Bury Street, London, England or their
respective offices in New York, New York or London, England,
respectively as they hereafter furnish to the parties to
this Agreement, as the authorized agent of the Guarantors to
accept and acknowledge on their behalf service of any and
all process that may be served in any such action, suit or
proceeding. The Buyer hereby appoints Paul, Weiss, Rifkind,
Wharton & Garrison, at its offices at 1285 Avenue of the
Americas, New York, New York 10019, or if the suit is
brought in England the Chairman, Sphere Drake Insurance plc,
at its offices at 52/54 Leadenhall Street, London, England,
or their respective offices in New York, New York or London,
England, as they hereafter furnish to the parties to this
Agreement, as the Buyer's authorized agent to accept and
acknowledge on such party's behalf service of any and all
process that may be served in any such action, suit or
proceeding. Any and all service of process and any other
notice in any such action, suit or proceeding shall be
effective against any party if given personally or by
registered or certified mail, return receipt requested, or
by any other means of mail that requires a signed receipt,
postage prepaid. Nothing herein contained shall be deemed
to affect the right of any party to serve process in any
manner permitted by law or to commence legal proceedings or
otherwise proceed against any other party in any
jurisdiction other than New York or England.
8.3 Notices. Any notice or other communication required or
-------
permitted hereunder shall be in writing and shall be
delivered personally, telegraphed, telexed or sent by
facsimile transmission. Any such notice shall be deemed
given when so delivered personally, telegraphed, telexed or
sent by facsimile transmission, as the case may be or when
received in any manner, as follows:
(i) if to the Buyer, to:
Sphere Drake Acquisitions (U.K.) Limited
c/o Centre Capital Investors L.P.
Suite 1025
One Rockefeller Plaza
New York, New York 10020
United States of America
Attention: Lester Pollack
Telex: RCA 222301
Fax: (212) 974-2825 or (212) 489-9655
8
<PAGE>
and
Sphere Drake Acquisitions (U.K.) Limited
c/o Sphere Drake Insurance plc
52/54 Leadenhall Street
London EC3A 2BJ,
England
Attention: Ian H. Dean
Telex: 935015 Sphere G
Fax: 01-481-3828
and
John C Head III
c/o John Head & Partners
545 Madison Avenue
New York, New York 10022
Telex: 971861
Fax: (212) 421-9049
with copies to:
Paul, Weiss, Rifkind, Wharton & Garrison
1285 Avenue of the Americas
New York, New York 10019
United States of America
Attention: Albert P. Hand, Esq.
Telex: WUI 666-843
Fax: (212) 757-3990
and
Clyde & Co.
51 Eastcheap
London EC3M lJP
England
Attention: Francis Mackie and
V.G. Southey
Telex: 884886 Clyde G
Fax: 01-623-5427
(ii) if to the Guarantors, to:
Alexander & Alexander Services Inc.
1211 Avenue of the Americas
New York, New York 10036
Attention: General Counsel
Telex: 620303
9
<PAGE>
Fax: (212) 302-1921
and
Alexander & Alexander Europe plc
5-10 Bury Street
London EC3A 5HL
England
Attention: Group Legal Adviser
Telex: 882171
Fax: 01-623-5022
Any party may by notice given in accordance with this
Section 8.3 to the other parties designate another address
or person for receipt of notices hereunder.
8.4 Entire Agreement. This Guaranty Agreement, the Share
----------------
Purchase Agreement (including the Schedules and Exhibits)
and the collateral agreements executed in connection with
the consummation of the transactions contemplated by the
Share Purchase Agreement contain the entire agreement among
the parties with respect to the purchase of the Shares and
related transactions, and supersede all prior agreements,
written or oral, with respect thereto.
8.5 Waivers and Amendments; Non-Contractual Remedies;
-------------------------------------------------
Preservation of Remedies. This Guaranty Agreement may be
------------------------
amended, superseded, cancelled, renewed or extended, and the
terms hereof may be waived, only by a written instrument
signed by the Guarantors and the Buyer. No delay on the
part of any party in exercising any right, power or
privilege hereunder shall operate as a waiver thereof. Nor
shall any waiver on the part of any party of any such right,
power or privilege, nor any single or partial exercise of
any such right, power or privilege, preclude any further
exercise thereof or the exercise of any other such right,
power or privilege.
8.6 Governing Law. This Guaranty Agreement shall be
-------------
governed and construed in accordance with the laws of the
State of New York.
8.7 Binding Effect; No Assignment. This Guaranty Agreement
-----------------------------
shall be binding upon and inure to the benefit of the Buyer
and its successors and legal representatives. This Guaranty
Agreement is not assignable.
10
<PAGE>
8.8 Variations in Pronouns. All pronouns and any
----------------------
variations thereof refer to the masculine, feminine or
neuter, singular or plural, as the context may require.
8.9 Headings. The headings in this Guaranty Agreement are
--------
for reference only, and shall not affect the interpretation
of this Agreement.
8.10 Counterparts. This Agreement may be executed by the
------------
parties hereto in separate counterparts, each of which when
so executed and delivered shall be an original, but all such
counterparts shall together constitute one and the same
instrument. Each counterpart may consist of a number of
copies hereof each signed by less than all, but together
signed by all of the parties hereto.
IN WITNESS WHEREOF, the parties have executed or,
as the case may be, caused their common seals to be affixed
to this Guaranty Agreement as of the date first above
written.
ALEXANDER & ALEXANDER SERVICES INC.
By:
------------------------------
THE COMMON SEAL of
ALEXANDER & ALEXANDER EUROPE plc
was affixed hereto in the presence
of:
11
<PAGE>
The foregoing provisions
of this Guaranty Agreement
are hereby consented to:
Signed by
--------------------
for and on behalf of
SPHERE DRAKE ACQUISITIONS (U.K.) LIMITED
in the presence of:
12
<PAGE>
AMENDMENT AGREEMENT
-------------------
THIS AMENDMENT AGREEMENT is made as of August 30,
1988 by and among SPHERE DRAKE ACQUISITIONS (U.K.) LIMITED,
whose registered office is at 52-54 Leadenhall Street,
London, EC3 2BJ (the "Buyer"), SPHERE DRAKE INSURANCE GROUP
PUBLIC LIMITED COMPANY, whose registered office is at 52-54
Leadenhall Street, London, EC3 2BJ (the "Company"), and
ALEXANDER STENHOUSE & PARTNERS LIMITED, whose registered
office is at 145 St. Vincents Street, Glasgow, Scotland (the
"Seller").
WHEREAS, the Buyer and the Seller have entered
into a Share Purchase Agreement dated as of October 9, 1987
("the Share Purchase Agreement") under which the parties
agreed, among other things, that the Seller would sell and
the Buyer would buy all of the issued share capital of the
Company;
WHEREAS, the Buyer, the Seller and the Company
have entered into a Tax Indemnity Deed dated December 30,
1987 (the "Tax Indemnity Deed"); and
WHEREAS the rights of the Buyer under Section 7 of
the Share Purchase Agreement are held subject to the trust
declared pursuant to a Deed made on 30th December 1987
between the Buyer and SD Securities Limited as Trustee ("The
Deed of Trust").
NOW, THEREFORE, in consideration of the terms and
conditions set forth herein and of other good and valuable
consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereby agree as follows:
1. Share Purchase Agreement. The Share Purchase
------------------------
Agreement shall be and is hereby amended in the following
respects:
(a) By the insertion in the last sentence of
Section 7.1 of the words "Section 7.4 and except as
contemplated by the Deed made on 30th December 1987,
between Sphere Drake Acquisitions (U.K.) Limited and SD
Securities Limited, as Trustee (the "Deed of Trust"),"
in place of the words "Section 7.4";
<PAGE>
(b) By the deletion of the final sentence of
Section 7.4 and the substitution therefor of the
following:
"On each Adjustment Date subsequent to an
Acceleration Date and on the Final Adjustment
Date, the Buyer shall pay the Seller directly
(notwithstanding any assignment of the Buyer's
rights in respect of the Adjustment Account), in
cash at the Adjustment Closing next following such
Adjustment Date, an amount equal to the lesser of
the Negative Balance and the sum of:
(x) if such Adjustment Date is not the Final
Adjustment Date, all amounts by which the
Adjustment Account shall thereto fore have
been decreased pursuant to Section 7.2(x) as
of any such Adjustment Date, and
(y) to the extent that any adjustment shall
have been made pursuant to Section 7.2 (iii)
as of such Adjustment Date, and such
adjustment reflects any NOL Tax Benefit, the
amount of such NOL Tax Benefit,
(in the case of each of the foregoing clauses (x)
and (y), such payment to be reduced by all amounts
theretofore paid pursuant to this sentence), and
the Negative Balance shall be reduced by the
amount of any cash payments made pursuant to this
sentence."
(c) By the deletion of Section 7.5 and the
substitution therefor of the following:
"7.5 Certain Limitations. The total cumulative
--------------------
liability of the Seller to the Buyer under this
Section 7 shall not exceed the greater of (i) the
-
sum of B.P.32,651,934 plus the amount of any Warrant
Proceeds, or (ii) the Accreted Value of the Notes
--
plus the amount of any Warrant Proceeds, provided
--------
that such sum shall be reduced if any of the Notes
shall have been prepaid in accordance with Section
9 of the Note Purchase Agreement by an amount
equal to the excess, if any, of (i) the Prepaid
-
Percentage of Notes so prepaid times B.P.32,651,934
-----
over (ii) the Accreted Value of the Notes so
---- --
prepaid. For these purposes the "Prepaid
2
<PAGE>
Percentage" shall be a fraction, the numerator of
which is the aggregated stated principal amount of
the Notes so prepaid and the denominator of which
is the aggregate stated principal amount of the
Notes outstanding as of the Closing Date."
(d) By the deletion of the third sentence of
Section 7.7 and the substitution therefor of the
following:
"In addition, within 1180 days following each
Annual Adjustment Date commencing with December
31, 1988, the Buyer shall cause SDI to deliver to
the Seller a schedule (a "Pipeline Profits
Schedule") showing the calculation of the Net
Pipeline Profits Adjustment with respect to the
preceding accounting year. As promptly as
possible following each Adjustment Date but in no
event later than 90 days (180 days if such
Adjustment Date is a Reserve Adjustment Date)
following each Adjustment Date, the Buyer shall
cause SDI to deliver to the Seller a statement of
the balance of the Adjustment Account (a
"Statement of the Balance of the Adjustment
Account") showing each adjustment made in the
Adjustment Account since the previous Adjustment
Date and the current balance in the Adjustment
Account. (The statement of the Balance of the
Adjustment Account together with the Reinsurance
Recoverable Schedules, the Reserve Schedules and
the Pipeline Profits Schedules, being hereinafter
collectively called the "Adjustment Schedules".)"
(e) By the insertion in section 7.9 following the
last sentence thereof, of the following:
"At the Final Adjustment Date the Buyer shall
cause the Company to assign or otherwise transfer
to the Seller or such Affiliate of the Seller as
the Seller may designate, all Reinsurance
Recoverables which have been included in the Net
Recoverables Adjustment in the Adjustment Account
pursuant to Section 7.2 to the extent that such
Reinsurance Recoverables do not exceed the final
balance of the Adjustment Account."
3
<PAGE>
(f) By the deletion of the final two sentences of
Section 8.2.5 and the substitution therefor of the
following:
"The 'Net Tax Benefit Adjustment' shall equal
the NOL Tax Benefit, provided that there shall be
--------
included in Net Tax Benefit Adjustment, if (x)
exceeds (y) in (i) above, the amount of such
excess, and if (x) exceeds (y) in (ii) above, the
amount of such excess times 0.625."
(g) By the insertion in Note 1 to Annex A to
Exhibit M of the Share Purchase Agreement of "7.7" in
place of "7.6."
(h) By insertion in the Note to Annex 2 to
Exhibit N of the Share Purchase Agreement of "7.7" in
place of "7.6."
2. Effect of Deed of Trust. The provisions of
------------------------
the Deed of Trust for discharge of the liabilities of the
Seller under the Adjustment Account referred to in Section 7
of the Share Purchase Agreement shall govern the settlement
of the Adjustment Account so that (having regard to and in
furtherance of the limitations on liability in Section 7.5
of the Share Purchase Agreement) if at any Adjustment Date
on which the Seller has an obligation to pay cash to the
Buyer pursuant to Section 7.4 of the Share Purchase
Agreement the balance in the Adjustment Account is in excess
of the Accreted Value of the Notes as at such Adjustment
Date, such obligation of the Seller to pay cash to the Buyer
(or to the Trustee as assignee of the Buyer's rights) shall
be equal to the lesser of (i) the amount of such excess and
-
(ii) an amount determined as follows:
--
(a) If at the time of such Adjustment Date none
of the Notes has been prepaid in accordance with
Section 9 of the Note Purchase Agreement, an amount
equal to the sum of (1) the excess of B.P.32,651,934 over
-
the Accreted Value of the Notes as at such Adjustment
Date; and (2) any Warrant Proceeds;
-
(b) If at the time of such Adjustment Date the
Notes have been paid in full, an amount equal to the
sum of (1) any amount actually received by the Seller
-
(or any assignee of the Seller) from the Trustee in the
discharge or purported discharge of the trusts of the
Deed of Trust (but excluding, however, any amount paid
4
<PAGE>
by the Trustee to the Seller in respect of costs for
which the Seller is entitled to indemnity under the
Deed of Trust) and (2) any Warrant Proceeds; and
-
(c) If at the time of such Adjustment Date the
Notes have been prepaid in part in accordance with
Section 9 of the Note Purchase Agreement, an amount
equal to the sum of (1) the sum of (x) all amounts
- -
actually received by the Seller (or any assignee of the
Seller) from the Trustee in the discharge or purported
discharge of the trusts of the Deed of Trust (but
excluding however any amount paid by the Trustee to the
Seller in respect of costs for which the Seller is
entitled to indemnity under the Deed of Trust) and (y)
-
any excess of (i) B.P.32,651,934 times a fraction, the
-
numerator of which is the aggregate stated principal
amount of the Notes outstanding at such Adjustment Date
and the denominator of which is the aggregate stated
principal amount of the Notes outstanding as of the
Closing Date, over (ii) the Accreted Value of the Notes
--
outstanding as at such Adjustment Date and (2) any
-
Warrant Proceeds;
less, in the cases of each of the foregoing clauses (A), (B)
----
and (C), the aggregate of all amounts theretofore paid in
cash by the Seller pursuant to Section 7.4.
3. Accounting Periods. The parties agree that
-------------------
the indemnifications due to the Buyer and the tax benefits
due to the Seller under the Tax Indemnity Deed and the Share
Purchase Agreement shall be calculated using a 31 December
tax accounting period currently in use by the Companies (as
defined in Section 2.6 of the Share Purchase Agreement),
notwithstanding that one or more of the Companies may
subsequently change their tax accounting period to a date
other than 31 December.
4. Tax Indemnity Deed. The Tax Indemnity Deed
-------------------
shall be and is hereby amended by the insertion in the
second sentence of subsection (1) of Section 8 thereof of
the word "not" so that the sentence reads as follows:
"Notwithstanding any provision of this Clause 8,
settlement of such liability for open tax years
that would materially affect the liability of the
Company, SDI or any Subsidiary for tax years
subsequent to that ended on 31st December 1986,
may not be made with the Inland Revenue without
5
<PAGE>
the Company's consent, which shall not be
unreasonably withheld or delayed."
5. Consent of Trustee and Guarantors. By
----------------------------------
signature hereof each of Alexander and Alexander Services,
Inc. as guarantor of the obligations of the Seller under the
Share Purchase Agreement, Sphere Drake Holdings, Public
Limited Company, as guarantor of the obligations of the
Buyer under the Share Purchase Agreement and the Trustee as
assignee of the rights of the Buyer under Section 7 of the
Share Purchase Agreement consent to and ratify the foregoing
amendments.
6. Share Purchase Agreement and Tax Indemnity
------------------------------------------
Deed. Except as amended hereby, the Share Purchase
-----
Agreement and the Tax Indemnity Deed shall remain in full
force and effect.
7. Counterparts. This Amendment Agreement may
-------------
be executed in any number of counterparts, each of which
shall be deemed an original, and the counterparts shall
constitute but one and the same instrument, which shall be
sufficiently evidenced by any one counterpart.
IN WITNESS WHEREOF the parties have executed this
Amendment Agreement as of the date above written:
Signed by
-------------------------
for and on behalf of
SPHERE DRAKE INSURANCE GROUP PLC
in the presence of:
Signed by
-------------------------
for and on behalf of
SPHERE DRAKE ACQUISITIONS (U.K.) LIMITED
in the presence of:
Signed by
-------------------------
for and on behalf of
ALEXANDER STENHOUSE & PARTNERS LIMITED
in the presence of:
6
<PAGE>
THE UNDERSIGNED hereby consent to and ratify the
foregoing amendments.
SPHERE DRAKE HOLDINGS PLC
By:
------------------------------
ALEXANDER & ALEXANDER
SERVICES, INC.
By:
------------------------------
SD SECURITIES LIMITED, AS TRUSTEE
By:
------------------------------
7
<PAGE>
SPHERE DRAKE ACQUISITIONS (U.K.) LIMITED
SPHERE DRAKE HOLDING PUBLIC LIMITED COMPANY
Zero Coupon Senior Notes due 1995
Zero Coupon Subordinated Notes due 1995
Credit Facility Notes due 1995
SPHERE DRAKE HOLDING PUBLIC LIMITED COMPANY
As of October 9, 1987
Alexander Stenhouse & Partners Ltd.
145 St. Vincents Street
Glasgow
Scotland
Dear Sirs:
SPHERE DRAKE ACQUISITIONS (U.K.) LIMITED, an Eng-
lish corporation whose registered office is situate at 30
Mincing Lane, London EC3R 7BR England, registered in England
with number 2136565 (the "Company"), and SPHERE DRAKE HOLD-
ING PUBLIC LIMITED COMPANY, an English company whose regis-
tered office is situate at 30 Mincing Lane, London EC3R 7BR
England, registered in England with number 2168083 (the
"Guarantor"), agree with you as follows:
1. Authorization of Notes. The Company has au-
----------------------
thorized the issue and sale of (a) an aggregate principal
amount determined as set forth below of its Zero Coupon
Senior Notes due 1995 (the "Senior Notes") and an aggregate
principal amount determined as set forth below of its Zero
Coupon Subordinated Notes due 1995 (the "Subordinated
Notes," and together with the Senior Notes, the "Notes,"
such terms to include any such Notes issued in substitution
thereof pursuant to section 15.2) to be substantially in the
form of the Senior Notes and the Subordinated Notes as re-
spectively set out in Exhibits A-1 and A-2, and (b) up to
the amount from time to time of the Credit Facility Cap an
aggregate principal amount of its Credit Facility Notes due
1995 (the "Credit Facility Notes", such term to include any
such notes issued in substitution therefor pursuant to sec-
tion 15.2), to be substantially in the form of the Credit
Facility Notes set out in Exhibit A-3; in each case with
such changes therefrom, if any, as may be approved by you,
the Company and the Guarantor. The stated principal amount
of the Senior Notes shall be B.P.13,000,000 with interest pay-
able thereon at a rate of 10% per annum, compounded on each
<PAGE>
June 30 and December 31 from the Closing to the stated final
maturity date of such Senior Notes. The stated principal
amount of the Subordinated Notes shall be B.P.12,700,000 with
interest payable thereon at a rate of 12% per annum, com-
pounded on each June 30 and December 31 from the Closing to
the stated final maturity date of such Subordinated Notes.
The Notes and the Credit Facility Notes shall be uncondi-
tionally guaranteed by the Guarantor pursuant to a Guaranty
Agreement (the "Guaranty Agreement") in the form of Exhi-
bit B. Certain capitalized terms used in this Agreement are
defined in section 14; references to an "Exhibit" are, un-
less otherwise specified, to an Exhibit attached to this
Agreement.
2. Sale and Purchase of Notes. Subject to the
--------------------------
terms and conditions of this Agreement, we may call upon you
by notice given pursuant to section 3 by December 31, 1987
to purchase from the Company, (a) at the Closing provided
for in section 3, the Notes at the purchase price of
B.P.l3,000,000 in the case of the Senior Notes and B.P.12,700,000
in the case of the Subordinated Notes, and (b) as provided
in section 10, up to B.P.32,651,934 in principal amount of
Credit Facility Notes at a purchase price equal to the prin-
cipal amount thereof.
3. Closing. The sale of the Notes to be pur-
-------
chased by you shall take place at the offices of Slaughter
and May, 35 Basinghall Street, London, EC2V 5DB, at 10:00
a.m., local time, at a closing (the "Closing") on December
31, 1987 or on such other Business Day prior to December 31,
1987 as may be advised by the Company on at least one day's
advance written notice to you. If at the Closing the Com-
pany shall fail to tender the Notes or the Guarantor shall
fail to tender the Guaranty Agreement to you, or any of the
conditions specified in section 4 shall not have been ful-
filled to your satisfaction, you shall, at your election, be
relieved of all further obligations under this Agreement.
4. Conditions to Closing. Your obligation to
---------------------
purchase and pay for the Notes at the Closing is subject to
the fulfillment to your satisfaction, prior to or at the
Closing, of the following conditions:
4.1. Delivery, Etc. The Company shall have
-------------
delivered to you the Senior Notes and the Subordinated Notes
to be purchased by you, each in the form of a single note
dated as of the date of the Closing and payable to you (or
your nominee) or order, against delivery by you to the Com-
2
<PAGE>
pany or its order of immediately available funds in the
amount of the purchase price therefor. The Guarantor shall
have delivered to you the Guaranty Agreement.
4.2. Representations and Warranties. The repre-
------------------------------
sentations and warranties of the Guarantor and the Company
contained in this Agreement and those otherwise made in
writing by or on behalf of the Guarantor or the Company in
connection with the transactions contemplated by this Agree-
ment and the Guaranty Agreement shall be correct in all
material respects when made and at the time of the Closing,
except as affected by the consummation of such transactions.
4.3. Performance; No Default. Each of the Gua-
-----------------------
rantor and the Company shall have performed and complied
with all agreements and conditions contained in this Agree-
ment and the Guaranty Agreement required to be performed or
complied with by it prior to or at the Closing and at the
time of the Closing no Event of Default or Potential Event
of Default shall have occurred and be continuing.
4.4. Share Purchase Agreement. Prior to the
------------------------
subscription hereunder for the Notes, the closing of the
transactions contemplated by the Share Purchase Agreement,
dated as of the date hereof, between you and the Company
(the "Share Purchase Agreement") shall have been completed.
4.5. The Warrants. The Warrants shall be duly
------------
issued pursuant to the Warrant Agreement simultaneously with
the Notes.
4.6. Compliance Certificate. The Company shall
----------------------
have delivered to you an Officers' Certificate, dated the
date of the Closing, certifying that the conditions speci-
fied in sections 4.2 and 4.3 have been fulfilled.
4.7. Opinion of Counsel. You shall have re-
------------------
ceived from Clyde & Co., solicitors for the Guarantor and
the Company in connection with the transactions contemplated
by this Agreement, a favourable opinion substantially in the
form set forth in Exhibit C, dated the date of the Closing
and otherwise satisfactory in substance and form to you.
5. Representations and Warranties, etc. Each
-----------------------------------
of the Guarantor and the Company jointly and severally re-
presents and warrants as follows:
3
<PAGE>
5.1. Organization. Each of the Guarantor and
------------
the Company is a company duly incorporated under English law
and has the power and authority to own, lease and operate
its assets and to carry on its business as now and hereto-
fore conducted.
5.2. Authority to Execute and Perform Agree-
---------------------------------------
ments. The execution and delivery of this Agreement, the
-----
Warrant Agreement and the Guaranty Agreement and the perfor-
mance by the Guarantor and the Company of their respective
obligations hereunder and thereunder have been duly author-
ized by all necessary corporate action on the part of the
Guarantor and the Company, as the case may be. This Agree-
ment, the Warrant Agreement and the Guaranty Agreement have
been duly executed and delivered by the Guarantor and the
Company and are the valid and binding obligations of the
Guarantor and the Company, as the case may be, enforceable
against the Guarantor and the Company, as the case may be,
in accordance with their respective terms.
5.3. Memorandum and Articles of Association. The
--------------------------------------
Guarantor and the Company have heretofore delivered to you
true and complete copies of their respective Memoranda and
Articles of Association, having attached thereto all of the
resolutions required to be so attached.
5.4. Capitalization. The Guarantor and the
--------------
Company have delivered to you complete and correct copies of
(a) a schedule (the "Capitalization Table") setting forth
accurately as of the date set forth therein the pro forma
capitalization of the Guarantor and the Company giving
effect, among other things, to the transactions contemplated
by the Share Purchase Agreement and hereby, and (b) the
agreements, instruments and other documents (the
"Constituent Documents") relating to the securities and
other obligations issued and to be issued by the Guarantor
and the Company reflected on the Capitalization Table. The
Guarantor and the Company were incorporated in September and
June, 1987, respectively, and, prior to the date hereof,
have had no business or operations other than the
negotiations leading up to the execution and delivery of the
Constituent Documents, the Share Purchase Agreement and this
Agreement.
5.5. Compliance with Other Instruments, etc.
--------------------------------------
Neither the Guarantor nor the Company is in violation of any
term of its Memorandum and Articles of Association, and
neither the Guarantor nor the Company is in violation of any
4
<PAGE>
term of any agreement or instrument to which it is a party
or by which it is bound (including without limitation the
Constituent Documents) or any term of any applicable law,
ordinance, rule or regulation of any governmental authority
or any term of any applicable order, judgment or decree of
any court, arbitrator or governmental authority. The execu-
tion, delivery and performance of this Agreement, the War-
rant Agreement, the Guaranty Agreement, the Notes, the War-
rant and the Credit Facility Notes will not result in any
violation of or be in conflict with or constitute a default
under any such term or result in the creation of any Lien
upon any of the properties or assets of the Guarantor or the
Company.
5.6. Governmental Consent. No consent, approval
--------------------
or authorization of, or declaration or filing with, any
governmental authority on the part of the Guarantor, the
Company or any of their Affiliates is required for the valid
execution and delivery of this Agreement, the Warrant Agree-
ment or the Guaranty Agreement, the valid offer, issue, sale
and delivery of the Notes or the Credit Facility Notes pur-
suant to this Agreement or the valid issue or (except for
such as are contemplated by the Warrant Agreement) exercise
of the Warrant, or the entering into the Constituent Docu-
ments except for (x) a filing which may be required under
the Restrictive Trade Practices Legislation, and (y) consent
under the Control of Borrowing Order 1958 (as amended),
which (in the case of (y)) shall at the time of the Closing,
have theretofore been duly filed and obtained.
5.7. Offer of Notes. Neither the Guarantor, the
--------------
Company nor anyone acting on behalf of either of them in
connection with the offering or sale of the Notes or the
Credit Facility Notes or any similar securities of the Com-
pany has directly or indirectly offered the Notes or the
Credit Facility Notes or any part thereof or any similar
securities (other than in the case of the Credit Facility
Notes as contemplated by section 10) for sale to, or soli-
cited any offer to buy any of the same from, or otherwise
approached or negotiated in respect thereof with, anyone
other than you. Neither the Guarantor, the Company nor
anyone acting on behalf of either of them has taken or will
take any action which would (a) subject the issuance and
sale of the Notes or the Credit Facility Notes or the War-
rants to the registration and prospectus delivery provisions
of the Securities Act of 1933, as amended, or (b) contravene
any of the provisions of the Companies Act 1985 or the Fi-
nancial Services Act 1986.
5
<PAGE>
5.8. Disclosure. Neither this Agreement nor any
----------
other document, certificate or instrument delivered to you
by or on behalf of the Guarantor or the Company in connec-
tion with the transactions contemplated by this Agreement or
the Warrant Agreement contains (in each case, as of its
date) any untrue statement of a material fact or omits to
state a material fact necessary in order to make the state-
ments contained in this Agreement and in such other docu-
ments, certificates or instruments not misleading in light
of the circumstances in which they were made.
6. Purchase for Investment. You represent
-----------------------
that you are purchasing the Notes and the Credit Facility
Notes for your own account for investment and not with a
view to the distribution thereof or with any present inten-
tion of distributing or selling any of the Notes or the
Credit Facility Notes, provided that the disposition of your
--------
property shall at all times be within your control.
7. Accounting; Financial Statements and Other
------------------------------------------
Information. The Guarantor and the Company will maintain,
-----------
and will cause each of the Subsidiaries to maintain, a sys-
tem of accounting established and administered in accordance
with standard accounting practice applicable in the United
Kingdom, and will set aside on their respective books, and
will cause each Subsidiary to set aside on its books, all
such proper reserves as shall be required by standard ac-
counting practice applicable in the United Kingdom. The
Guarantor will deliver to you, so long as you, an Affiliated
Lender or a Credit Enhancement Party, as the case may be,
shall be required to purchase Notes or be entitled to Credit
Facility Notes under this Agreement or you, your nominee or
any permitted transferee shall be the holder of any of the
Notes or of the Credit Facility Notes:
(a) As promptly as possible (typically within 21 days
after the end of each of the first three calendar
quarters) and in any event within 30 days after
the end of each of the first three calendar quar-
ters, the consolidated balance sheets of (i) the
Guarantor and its Subsidiaries and (ii) the Com-
pany and its Subsidiaries, and the separate ba-
lance sheet of Sphere Drake Insurance plc, a Sub-
sidiary of the Company and the Guarantor ("SDI"),
as at the end of such quarters and the related
profit and loss accounts of the Guarantor and its
Subsidiaries, of the Company and its Subsidiaries,
and of SDI, for such quarters and (in the case of
6
<PAGE>
the second and third quarters) for the period from
the beginning of the current fiscal year to the
end of such quarterly period, setting forth in
each case in comparative form the consolidated
figures for the corresponding periods of the pre-
vious year, all in reasonable detail. In the case
of any Subsidiary (including SDI) that is a pro-
perty and casualty insurance company that is sub-
ject to the Insurance Companies Act 1985 (such
subsidiaries are referred to as "UK Insurance
Subsidiaries"), each such balance sheet and profit
and loss accounts will be prepared on the follow-
ing bases: (A) all balance sheet items will be as
recorded in the books and records of the applic-
able UK Insurance Subsidiary as at each reported
date, it being recognized that certain items will
in accordance with the present practices of SDI be
one quarter in arrears; (B) changes in the Adjust-
ment Account shall be reflected one quarter in
arrears; and (C) all profit and loss account items
will be reported on an accrual basis, except that
estimated underwriting transfers (comprising pre-
miums, net of commissions, less claims incurred,
all figures net of reinsurance ceded) will be
included on the basis of the estimated transfer
for the full year multiplied by the number of
months elapsed from the beginning of the financial
year to the end of the reported quarter, the re-
sultant being divided by 12; and the underwriting
transfer for the full year will be based on a
review of premiums and claims data at the end of
the quarter previous to the one reported. In the
case of the Company and, subject to the final
sentence in this section 7(a), the Guarantor, each
such consolidated balance sheet and profit and
loss account will reflect the accounts of each UK
Insurance Subsidiary prepared on the bases set
forth in the foregoing sentence and the accounts
of their other respective Subsidiaries prepared in
accordance with standard accounting practice ap-
plicable in the United Kingdom (except for the
absence of notes) presenting a true and fair view
of the state of affairs of such Subsidiaries as of
the applicable date, and of their operations for
the periods then ending. Each of the foregoing
financial statements shall be prepared in accor-
dance with accounting principles consistently
applied throughout the period covered thereby, and
7
<PAGE>
in compliance with the Companies Act 1985, subject
to changes resulting from normal year-end audit
adjustments. The foregoing financial statements
shall be certified by the Finance Director of the
Guarantor, the Company or SDI, as the case may be,
as having been prepared in accordance with the
foregoing provisions of this section 7(a). In the
case of Subsidiaries of the Guarantor organized in
jurisdictions other than the United Kingdom, the
foregoing financial statements of the Guarantor
may be based on the financial statements of such
Subsidiaries in accordance with generally accepted
or standard accounting practices applicable in
such jurisdiction.
(b) (i) Within 30 days after the end of each year,
a preliminary indication of the earnings of
the Guarantor and its Subsidiaries, the
Company and its Subsidiaries and SDI.
(ii) Within 60 days after the end of each year,
preliminary forms of the consolidated bal-
ance sheets of the Guarantor and its Sub-
sidiaries and of the Company and its Sub-
sidiaries, and the separate balance sheet
of SDI, as at the end of such year and the
related consolidated profit and loss ac-
counts of the Guarantor and its Subsidiar-
ies, and of SDI, for such fiscal year,
setting forth in each case (other than in
the cases of consolidated financial state-
ments required to be delivered before De-
cember 31, 1988) in comparative form the
consolidated figures for the previous year,
all in reasonable detail accompanied by a
report as to the issues at the time open in
connection with the audit of such financial
statements (which report shall indicate a
range of amounts affected by each such open
issue), certified in the case of such fi-
nancial statements by the Finance Director
of the Guarantor, the Company and SDI, as
the case may be.
(iii) Within 135 days of the end of such year
such financial statements in definitive
form and statements of sources and applica-
tion of funds of the Guarantor and its
8
<PAGE>
subsidiaries and of SDI for such fiscal
year accompanied by reports thereon of
independent chartered accountants of recog-
nised standing selected by the Guarantor,
which reports shall state that such finan-
cial statements (x) have been prepared in
accordance with standard accounting prac-
tice applicable in the United Kingdom, and
(y) comply with the Companies Act 1985 and,
in the case of SDI, the Companies Act 1985
as it applies to insurance companies. As
to any year that ends on a Reserve Adjust-
ment Date, the date for delivery of the
financial statement and of the report re-
ferred to in this clause (iii) shall be
deferred until a date 30 days after the
delivery of the applicable Reserve Adjust-
ment Schedule.
(c) Together with each delivery of financial state-
ments pursuant to subdivisions (a) and (b) of this
section 7, an Officers' Certificate of the Guaran-
tor (i) stating that the signers have reviewed the
terms of this Agreement, of the Notes and the
Credit Facility Note and have made, or caused to
be made under their supervision, a review in rea-
sonable detail of the transactions and condition
of the Guarantor, the Company and their Subsidiar-
ies during the accounting periods covered by such
financial statements and that such review has not
disclosed the existence during or at the end of
such accounting period, and that the signers do
not have knowledge of the existence as at the date
of the Officers' Certificate, of any condition or
event which constitutes an Event of Default or
Potential Event of Default, or, if any such condi-
tion or event existed or exists, specifying the
nature and period of existence thereof and what
action the Company has taken or is taking or pro-
poses to take with respect thereto, (ii) specify-
ing the amount available at the end of such ac-
counting period for Restricted Payments in compli-
ance with section 11.2 and showing in reasonable
detail all calculations required in arriving at
such amount, and (iii) demonstrating in reasonable
detail compliance during and at the end of such
accounting period with the restrictions contained
9
<PAGE>
in sections 11.1(d), 11.2, 11.4 and the proviso to
section 11.9.
(d) Promptly upon the resignation, dismissal or fail-
ure to reappoint any chartered accountants which
had been engaged to report upon financial state-
ments of the Guarantor or of any of its Subsidiar-
ies, an Officers' Certificate stating whether in
connection with the audits of the two most recent
years and any subsequent interim periods preceding
such resignation, dismissal or failure to reap-
point, there were any material disagreements with
such chartered accountants on matters of account-
ing principles or practice, financial statement
disclosure, or on audit procedures; provided, that
---------
the foregoing shall not apply to any resignation,
dismissal or failure to reappoint the firm of
chartered accountants currently engaged to report
upon the financial statements of any of the Gua-
rantor or its Subsidiaries for periods ending on
or prior to June 30, 1988. Disagreements required
to be reported in response to this subdivision (d)
shall include both those resolved to such char-
tered accountants' satisfaction and those not so
resolved. The Guarantor shall request such char-
tered accountants to furnish the Guarantor with a
letter addressed to you stating whether such char-
tered accountants agree with the statements made
by the Guarantor in response to this subdivision
(d), and if not, stating the respects in which
such chartered accountants do not agree. The Gua-
rantor shall promptly furnish to you a copy of any
such letter obtained by it.
(e) Promptly upon receipt thereof, copies of all re-
ports submitted to the Company by chartered ac-
countants in connection with each annual, interim
or special audit of the books of the Guarantor or
any of its Subsidiaries made by such accountants,
including, without limitation, any comment letters
submitted by such accountants to management in
connection with their annual audit.
(f) Promptly upon their becoming available, copies of
all financial statements, reports, notices and
proxy statements sent or made available generally
by the Guarantor to any public security holders or
by any of its Subsidiaries to its security holders
10
<PAGE>
other than the Guarantor or another Subsidiary, of
any regular and periodic reports and all final
registration statements, prospectuses, listing
particulars, circulars and agreements filed by the
Guarantor or any such Subsidiary with any securi-
ties exchange or with the United States Securities
and Exchange Commission, the Companies Registry,
The International Stock Exchange of the United
Kingdom and the Republic of Ireland Limited or of
any governmental or self-regulatory body having
jurisdiction over SDI or any of its operations
(including the Department of Trade and Industry),
and of all press releases and other statements
made available generally by the Guarantor or any
Subsidiary to the public concerning material de-
velopments in the business of the Guarantor or its
Subsidiaries.
(g) Immediately upon any director of the Guarantor,
the Company or SDI, or any other employee of the
Guarantor, the Company or SDI involved in finan-
cial administration obtaining knowledge of any
condition or event which constitutes an Event of
Default or Potential Event of Default, or that the
holder of any Note has given any notice or taken
any other action with respect to a claimed default
or Event of Default under this Agreement or that
any Person has given any notice to the Guarantor
or any of its Subsidiaries or taken any other
action with respect to a claimed default or event
or condition of the type referred to in section
12(f), an Officers' Certificate describing the
same and the period of existence thereof and what
action the Guarantor has taken, is taking and
proposes to take with respect thereto.
(h) 180 days after the end of each year, a report of
Milliman & Robertson, Inc. (or as to years ending
on December 31, 1989 and later, of Milliman &
Robertson, Inc. or such other firm of independent
consulting actuaries of recognised standing se-
lected by the Guarantor and reasonably acceptable
to you, it being agreed that Tillinghast Nelson &
Warren shall be acceptable to you) on the required
loss reserves of SDI and each other Subsidiary of
the Guarantor which is an insurance carrier, re-
porting on the matters required to be reported on
by it pursuant to section 7.7 of the Share Pur-
11
<PAGE>
chase Agreement and additionally stating such
independent consulting actuaries' estimate of the
total undiscounted reserves necessary to discharge
liabilities estimated to arise from premiums
booked by SDI and such other Subsidiaries as of
the end of such year, prepared on the basis of
assumptions and methodology appropriate in light
of all of the circumstances, including the assump-
tions and methodology reflected in financial
statements of SDI at and for the periods ending
December 31, 1986. The Guarantor shall promptly
deliver such report received by it, SDI or the
Company and shall use reasonable efforts to deliv-
er such report within 75 days of the end of such
year. A preliminary report is expected to be
received within 60 days of the end of such year.
(i) With reasonable promptness, such other information
and data with respect to the Guarantor or any of
its Subsidiaries as from time to time may be rea-
sonably requested, including, without limitation
any of the same as shall be useful to you in car-
rying out your obligations under section 10.
(j) Notwithstanding any contrary provision in this
Agreement, if any Notice of Disagreement shall
have been delivered as to any year pursuant to
section 7.7 of the Share Purchase Agreement the
date for delivery of financial statements under
section 7.(b)(iii) shall be extended to a date 10
days after the final determination of the issues
involved in the Notice of Disagreement.
8. Inspection, etc.; Confidentiality. The
---------------------------------
Guarantor will permit any authorised representatives desig-
nated by you, so long as you, an Affiliated Lender or a
Credit Enhancement Party, as the case may be, shall be re-
quired to purchase Notes or be entitled to Credit Facility
Notes under this Agreement, or you, your nominee or your
permitted transferee shall be the holder of any Notes or
Credit Facility Notes, without expense to the Guarantor or
any of its Subsidiaries, to visit and inspect any of the
properties of the Guarantor or any of its Subsidiaries,
including its and their books of account and statutory
books, and to make copies and take extracts therefrom, and
to discuss its and their affairs, finances and accounts with
its and their officers, chartered accountants and indepen-
dent consulting actuary (and by this provision the Guarantor
12
<PAGE>
authorises such accountants and actuaries to discuss with
such representatives the affairs, finances and accounts of
the Guarantor and its Subsidiaries, whether or not the Gua-
rantor or any such Subsidiary is present). You agree that
you will use your best efforts not to disclose without the
prior consent of the Guarantor (other than to your employ-
ees, auditors, actuaries or counsel) any information with
respect to the Guarantor or any of its Subsidiaries which is
furnished pursuant to section 7 or this section 8, provided
--------
that you may disclose any such information (a) as has become
generally available to the public, (b) as may be required or
appropriate in any report, statement or testimony submitted
to any regulatory body having or claiming to have jurisdic-
tion over you or any of your Affiliates, (c) as may be re-
quired or appropriate in response to any summons or subpoena
or in connection with any litigation, (d) to the extent that
you reasonably believe it appropriate in order to protect
your investment in the Notes or the Credit Facility Notes or
in order to comply with any law, order, regulation or ruling
applicable to you, (e) to the prospective transferee in
connection with any contemplated transfer of any of the
Notes by you and (f) to any prospective lender in connection
with section 10.
9. Prepayment of Notes.
-------------------
9.1. Optional Prepayments. The Company may, at
--------------------
its option, upon notice as provided in section 9.2, prepay
at any time all, or from time to time any part of, the Notes
upon the earlier to occur of (i) June 30, 1991 in the case
of the Senior Notes and June 30, 1990 in the case of the
Subordinated Notes and (ii) the date on which the Warrants
first become exercisable as provided in Section 2.1 of the
Warrant Agreement, in each case at a price equal to the
Accreted Value of the applicable Note as of the date fixed
for prepayment pursuant to Section 9.2 provided that prepay-
--------
ments from time to time of less than all of the Notes shall
be applied first to prepay the Subordinated Notes.
9.2. Notice of Prepayments; Officers' Certifi-
-----------------------------------------
cate. The Company will give to the payee or payees named in
----
any Notes written notice of each prepayment under section
9.1 not less than 30 days and not more than 60 days prior to
the date fixed for such prepayment, in each case specifying
such date, the aggregate principal amount of the Notes to be
prepaid on such date, the principal amount of each Note held
by such holder to be prepaid on such date, the premium, if
13
<PAGE>
any, applicable to such prepayment and the section of this
Agreement under which such prepayment is to be made.
9.3. Surrender, Etc. Any Note paid or prepaid
--------------
in full shall be surrendered to the Company and cancelled
and shall not be reissued.
10. The Credit Facility.
-------------------
10.1. Loans; Credit Support. Subject to the
---------------------
terms and conditions of this Agreement and commencing on the
first Adjustment Date, you agree on each Credit Call Date,
to procure Third Party Unsupported Loans or furnish Support,
in each case as contemplated by this section 10, provided
--------
that the amount of Support at any time outstanding shall not
exceed the amount of the Credit Facility Cap as from time to
time in effect and provided further that all such Third
-------- -------
Party Unsupported Loans and Support shall be denominated
only in pounds sterling.
10.2. Credit Facility Cap. On any date the maxi-
-------------------
mum amount of Support available hereunder (the "Credit Fa-
cility Cap") shall be equal to the sum of A minus B where:
A is the lesser of:
(i) the positive balance, if any, of the Ad-
justment Account on such date, reduced by all amounts
by which the Adjustment Account has been increased
pursuant to clauses (xii) and (xiv) of section 7.2 of
the Share Purchase Agreement (such balance as so re-
duced is referred to herein as the "Non-Cash Indemnity
Balance") plus the aggregate amount of interest paid
and accrued through such date on the Credit Facility
Notes;
(ii) B.P.32,651,934 minus the amount of any Senior
-----
Debt actually outstanding on such date as to which you
and the Company agree that the Senior Notes shall be
subordinate to on any terms; and
(iii) an amount determined from the following
table with respect to such date and adjusted as set
forth following such table:
14
<PAGE>
If the Date of
Determination Falls
in the 12-Month Period
Ending on December 31, Such Amount Shall Be
------------------------ --------------------
1987 B.P.40 million
1988 B.P.43 million
1989 B.P.46 million
1990 B.P.49 million
1991 B.P.52 million
1992 B.P.52 million
1993 B.P.52 million
1994 B.P.52 million
1995 B.P.52 million
minus the net assets of SDI as reflected on the balance
-----
sheet most recently delivered to you pursuant to clause
(ii) of section 7(b) (or B.P.38,382,438 if the date of
determination is before the delivery to you of the
first such balance sheet);
minus any unpaid portion of the capital of SDI as of
-----
the later of the date of the Closing or the date of
such balance sheet, but only to the extent that such
unpaid portion is considered capital of SDI for pur-
poses of applicable regulations pursuant to the Insur-
ance Companies Act 1982; and
if such date falls on January 1, 1988 or later, minus
-----
50% of the aggregate amount of any loss reserve redun-
dancies for underwriting and accident years ending
before January l, 1987 as reflected in the report most
recently delivered pursuant to section 7(h), to the
extent that such loss reserve redundancies are not
reflected in such balance sheet of SDI; and
B is the aggregate amount of all Restricted Payments made by
SDI from the date of the Closing through the date of deter-
mination.
10.3. Notices; Cooperation. Each Third Party
--------------------
Unsupported Loan shall be made and all Support shall be
given on at least 120 days' advance written notice by the
Guarantor to you, which notice shall specify:
15
<PAGE>
(a) a preliminary indication of the date, which
shall be a Business Day between June 15 and September
30 of the year in question, on which such Third Party
Unsupported Loan or Support is proposed to be drawn
upon (the "Credit Call Date");
(b) a preliminary indication of the proposed
amount of such Third Party Unsupported Loan or such
Support;
(c) sufficient information to permit you to
ascertain on a preliminary basis the amount, as of the
Credit Call Date, of the Credit Facility Cap; and
(d) the identity of any proposed Third Party
Lender with which the Guarantor or the Company has had
discussions, and any proposed terms and conditions of
any thereof, including drafts of the principal proposed
documents governing any such Third Party Loan.
From and after the date that such notice is given to you,
each of the Company and the Guarantor will, and will cause
their Subsidiaries, any Financial Adviser and their respec-
tive accountants, attorneys and their agents to, furnish
such documents and information as shall be necessary or
appropriate, and otherwise to cooperate with you in all
respects in procuring and arranging any Third Party Loan
proposed by you. At least 30 days prior to each Credit Call
Date the Guarantor shall give a notice (the "Credit Call
Notice") specifying the definitive Credit Call Date, the
actual amount of the Third Party Unsupported Loan or Sup-
port, and sufficient information to permit you to ascertain
the amount, as of the Credit Call Date, of the Credit Facil-
ity Cap.
10.4. Furnishing Support, etc. Your obligation
-----------------------
to procure a Third Party Unsupported Loan or to furnish
Support in the amount called for pursuant to section 10.3 on
any Credit Call Date shall be satisfied if and to the extent
that on the Credit Call Date:
(a) the Company shall have received the pro-
ceeds of a loan (a "Third Party Unsupported Loan") from
a third party lender (a "Third Party Lender") which is
not an Affiliate of yours, selected by you and reason-
ably satisfactory to the Company as contemplated by
section 10.5;
16
<PAGE>
(b) The Company shall have received the pro-
ceeds of a loan (a "Loan") from you or one of your
Affiliates designated by you (you or such Affiliate
being referred to as an "Affiliated Lender") as contem-
plated by section 10.6; or
(c) the Company shall have received a loan (a
"Third Party Supported Loan") from a Third Party Lender
selected by you and reasonably satisfactory to the
Company, as to which you or one of your Affiliates
designated by you provides Credit Support as contem-
plated by section 10.7.
"Support" means a Loan or Third Party Supported Loan. For
all purposes of this Agreement the amount of Support from
time to time shall include the principal amount of all Loans
made as contemplated by the foregoing subdivision (b) and
the principal amount of all loans from Third Party Lenders
supported by Credit Support as contemplated by the foregoing
subdivision (c), but shall not include any amount with re-
spect to any Third Party Unsupported Loan.
10.5. Third Party Unsupported Loans. If you
-----------------------------
propose to satisfy your obligation under Section 10.1 by
means of a Third Party Unsupported Loan, you shall give
notice to the Guarantor at least 20 days in advance of the
applicable Credit Call Date stating as follows:
(a) the identity of the proposed Third Party
Lender;
(b) the proposed terms and conditions of the
Third Party Unsupported Loan, including available
drafts of the principal proposed documents governing
the Third Party Unsupported Loan; and
(c) a statement that such terms are, in the
good faith judgment of your Board, Relatively Favour-
able.
Subject to the following provisions of this section 10.5,
the terms and conditions of such Third Party Unsupported
Loan shall be as determined by you in your sole discretion
but such terms must be Relatively Favourable. Such proposed
terms shall be "Relatively Favourable" if taken as a whole
they are at least as favourable as those reflected in sec-
tions 10.6, 10.9 and ll and the Credit Facility Notes, taken
as a whole, provided that for these purposes the Credit
--------
17
<PAGE>
Facility Notes shall be deemed to bear interest at a rate
from time to time equivalent to four percentage points above
the base lending rate used in England by National Westmin-
ster Bank plc, and there shall be deemed to have occurred a
Triggering Event. The determination by your Board reflected
in such notice that such terms are Relatively Favourable
shall become final and binding upon the parties unless with-
in seven days of the receipt of such notice the Company
delivers to you an opinion (a "Financial Adviser's Opinion")
of an investment banking or merchant banking firm of recog-
nised standing in the United States or England reasonably
satisfactory to you (the "Financial Adviser"), and such
opinion is to the effect that based on such firm's review of
such proposed terms it is of the opinion that such terms are
not Relatively Favourable, and stating in reasonable detail
the respects in which such terms fail to meet the definition
of Relatively Favourable terms. If the Company shall have
caused the delivery of a Financial Adviser's Opinion within
the period as above said, each of you, the Guarantor, the
Company and its Subsidiaries shall cooperate in further
discussions with the applicable Third Party Lender in an
effort to procure a Third Party Unsupported Loan on terms
which would meet the objections raised in such opinion; if
the parties and such firm are not able to agree upon the
terms of such proposed Third Party Unsupported Loan within
fifteen Business Days before the proposed Credit Call Date,
the issue of whether the terms of such proposed loan, as
proposed as of such date, are Relatively Favourable shall be
submitted to and reviewed by a third party (which shall act
as an expert and not an arbitrator) which shall be mutually
selected by you and the Company or, if such parties cannot
agree on such third party, by Salomon Brothers, Inc (which
shall act as an expert and not as an arbitrator), whose
decision on such matter shall be final and binding on the
parties, and the Credit Call Date shall be deemed to be the
fifth Business Day after notice of such decision is received
by you.
10.6. Loans. Subject to the following provisions
-----
of this section 10.6, your obligation to furnish Support
hereunder on any Credit Call Date shall be satisfied if and
to the extent that any Affiliated Lender makes a Loan to the
Company as contemplated by this section 10.6. Each Loan
under this section 10.6 shall be in an aggregate amount of
B.P.10,000 or an integral multiple thereof. Within the limits
of the Credit Facility Cap, the Company may reborrow and
repay under this section 10.6.
18
<PAGE>
(a) Each Loan made by an Affiliated Lender
shall be evidenced by and repaid with interest in ac-
cordance with the terms of, a Credit Facility Note,
dated the date of the initial borrowing from such Af-
filiated Lender, payable to the order of such Affili-
ated Lender. The Affiliated Lender shall endorse on
the Credit Facility Note held by it an appropriate
notation indicating the amount of each Loan made by it
hereunder.
(b) Not later than 11:00 a.m. (London time) on
the applicable Credit Call Date, the Affiliated Lender
shall make available to the Company immediately avail-
able funds in the amount of such Loan.
(c) The Company (i) may, upon two Business
Days' notice to an Affiliated Lender, prepay all or any
portion of the principal amount of the Loan as speci-
fied in such notice; (ii) shall prepay the Loan to the
extent that the amount of Support shall at any time be
greater than the Credit Facility Cap, within two Busi-
ness Days of receipt by the Company of notice from an
Affiliated Lender of such excess; and (iii) shall pre-
pay all of the Loans if at any time it pays or prepays
all or any portion, or is required (whether at matur-
ity, as a result of acceleration or otherwise) under
any other provision of this Agreement or the Notes to
pay all or any portion of the Notes, any such prepay-
ment to be accompanied by payment of interest accrued
on the principal amount so prepaid through the date of
prepayment. Upon receipt from the Company of payments
on account of principal, each Affiliated Lender shall
endorse on the Credit Facility Note held by it an ap-
propriate notation indicating the amount paid on ac-
count of principal.
Each Loan shall be prepayable at your request, upon two
days' notice to the Company, out of the proceeds of a Third
Party Supported Loan or a Third Party Unsupported Loan ar-
ranged by you pursuant to Section 10.5 or 10.7, as the case
may be.
10.7. Credit Support. Subject to the following
--------------
provisions of this section 10.7 your obligation to furnish
Support hereunder on any Credit Call Date shall be satisfied
if and to the extent that the Company shall have received
the proceeds from a loan from a Third Party Lender (a "Third
Party Supported Loan") as to which you or one of your Affi-
19
<PAGE>
liates designated by you provides credit support ("Credit
Support") pursuant to one of the following (a "Credit En-
hancement Agreement"):
(a) a Guaranty with respect to such Third
Party Loan of you or any of your Affiliates;
(b) an irrevocable letter of credit, nam-
ing the Third Party Lender as the beneficiary, as to
which you or any of your Affiliates is the applicant;
(c) a credit insurance policy;
(d) any agreement pursuant to which you or
any of your Affiliates agrees to delay or otherwise
subordinate their right to receive any payment from the
Company; or
(e) such other security, intercreditor
arrangement or credit support as may be mutually agreed
upon by you, the Company and the Third Party Lender.
Each Credit Enhancement Agreement shall be subject to provi-
sions, satisfactory to you, providing that you, or your
Affiliate or Affiliates providing Credit Support with re-
spect to the Credit Enhancement Agreement (the "Credit En-
hancement Party"), shall be subrogated to the rights of such
Third Party Lender. The terms of each Third Party Supported
Loan shall be furnished in a notice to the Guarantor from
you and shall be on Relatively Favourable terms, such notice
to be given and whether such terms are Relatively Favourable
to be determined in accordance with section 10.5 as if such
Third Party Supported Loan were a Third Party Unsupported
Loan thereunder. The Company shall deliver a Credit Facil-
ity Note to each Credit Enhancement Party, and any payment
by any such party in respect of any Credit Enhancement A-
greement shall be deemed to be a borrowing by the Company
thereunder, with interest payable as provided therein.
Forthwith upon making any such payment the Credit Enhance-
ment Party shall endorse on the Credit Facility Note an
appropriate notation indicating the amount of such payment.
Each Third Party Supported Loan shall be under terms and
conditions such that, and the Company agrees that, the Com-
pany shall (i) promptly prepay the Third Party Supported
Loans if and to the extent that the amount of Support shall
at any time be greater than the Credit Facility Cap and
there shall be no Loan outstanding; and (ii) promptly prepay
all of the Loans and the Third Party Supported Loans if at
20
<PAGE>
any time it pays or prepays all or any portion, or is re-
quired (whether at maturity, as a result of acceleration or
otherwise) under any other provision of this Agreement or
the Notes to prepay all or any portion of the Notes. Forth-
with upon the Company prepaying all or any part of any Third
Party Supported Loan each Credit Enhancement Party shall
endorse on the relevant Credit Facility Note an appropriate
notation indicating the amount of such prepayment which
shall be deemed to be a prepayment (in an equivalent amount)
of the amount outstanding under such Credit Facility Note.
For all purposes of this section 10, the amount of Credit
Support outstanding on any date shall include all amounts of
principal, premium, interest and fees otherwise payable on
such date in respect of each Third Party Supported Loan to
the extent that the same are guaranteed, secured, insured or
otherwise supported as contemplated by this section 10.7.
To the extent that your liability under any Credit Enhance-
ment Agreement shall be terminated without creating a de-
fault in respect of the Third Party Supported Loan, such
loan shall be deemed for all purposes of this section 10 to
be a Third Party Unsupported Loan. You shall not take or
omit to take any action and you shall not permit any Affili-
ate to take or omit to take any action if as a result there-
of there would be any default or event of default under any
Credit Enhancement Agreement which would result in a default
in respect of the applicable Third Party Supported Loan.
10.8. Conditions Precedent. (a) Your obligation
--------------------
to provide Support on the initial Credit Call Date shall be
subject to the fulfillment to your reasonable satisfaction,
prior to or at the time such Support is provided, of the
following conditions:
(i) The Affiliated Lender or the Credit En-
hancement Party, as the case may be, shall have re-
ceived a Credit Facility Note in substantially the form
of Exhibit A-3.
(ii) You shall have received from Clyde & Co.,
solicitors for the Guarantor and the Company in connec-
tion with the transactions contemplated by this Agree-
ment, a favourable opinion substantially in the form
set forth in Exhibit C2.
(b) Your obligation to provide Support and
procure any Third Party Unsupported Loan on each Credit Call
Date shall be subject to the fulfillment to your reasonable
21
<PAGE>
satisfaction, prior to the time that such Support is provid-
ed, of the following conditions:
(i) The representations and warranties in sec-
tion 5 shall be true and correct on and as of the Cred-
it Call Date as though made on and as of such date.
(ii) Each of the Guarantor and the Company shall
have performed and complied with all agreements and
conditions contained in this Agreement and the Guaranty
Agreement required to be performed or complied with by
it prior to or at the Closing.
(iii) No event shall have occurred and be contin-
uing, or would result from such Support or Third Party
Unsupported Loan, which constitutes an Event of Default
or Potential Event of Default or a default in respect
of any Third Party Unsupported Loan.
(iv) Neither the Company, nor if there shall
have occurred any Triggering Event, the Guarantor shall
have theretofore made Restricted Payments aggregating
in excess of B.P.5,000,000, provided that if there shall
--------
have occurred a Triggering Event the foregoing
restriction on Restricted Payments by the Company shall
not apply.
(v) The Company shall not have paid or prepaid
an aggregate amount in excess of B.P.5,000,000 in princi-
pal amount of the Notes pursuant to the terms and con-
ditions of the Notes and the terms and conditions of
this Agreement.
(vi) There shall not have been a Change in Con-
trol of the Guarantor or the Company.
(vii) The Guarantor shall have delivered to you
an Officers' Certificate, dated the Credit Call Date,
certifying that the conditions specified in the forego-
ing clauses of this Section 10.8 have been fulfilled.
10.9. Additional Covenants. So long as any Sup-
--------------------
port is outstanding:
(a) Certain Information, etc. The Guarantor
------------------------
shall immediately notify you of any event of default or
potential event of default in respect of any Third Party
Loan. The Guarantor, the Company and SDI will permit any
22
<PAGE>
authorised representative designated by you to attend as an
observer meetings of the Board of the Guarantor and the
Company (but such representative shall not be a member of
either of such Boards and shall not be entitled to take part
in their deliberations), and to consult with the management
of the Guarantor and the Company on matters relating to the
business and affairs of the Company such as: significant
changes in management personnel and compensation or employee
benefits, introduction of new lines of business, important
acquisitions of assets, significant changes in investment
policies, and the proposed compromise of any significant
litigation, all at such reasonable times and as often as may
be reasonably requested.
(b) Senior Debt. Neither the Company nor if
-----------
there shall have occurred any Triggering Event the Guarantor
will, nor will they permit any Subsidiary to, directly or
indirectly, create, incur, assume, guarantee, or otherwise
become directly or indirectly liable with respect to, any
Senior Debt other than in respect of Loans and Third Party
Loans unless the proceeds of such Senior Debt shall be ap-
plied to pay Loans or Third Party Loans except for Senior
Debt outstanding on the earliest Credit Call Date in respect
of such Support.
(c) Restricted Payments. Neither the Company
-------------------
nor if there shall have occurred any Triggering Event the
Guarantor will directly or indirectly declare, order, pay,
make or set apart any sum or property for any Restricted
Payment.
(d) Liens, etc. Neither the Company nor if
----------
there shall have occurred any Triggering Event the Guarantor
will, nor will they permit any Subsidiary to, directly or
indirectly create, incur or assume any Lien on or with re-
spect to any property or asset (including any document or
instrument in respect of goods or accounts receivable),
whether now owned or held or hereafter acquired, or any
income or profits therefrom, of the character referred to in
clause (h) or (j) of section 11.3.
(e) Subsidiary Stock and Indebtedness. Neither
---------------------------------
the Company nor if there shall have occurred any Triggering
Event the Guarantor will engage, or will permit any Subsidi-
ary to engage, in any transaction of the character referred
to in clauses (a) through (d) of section 11.6 whether or not
such transactions are otherwise permitted pursuant to the
23
<PAGE>
proviso to such section, other than as permitted pursuant to
the proviso to section 11.9.
(f) Consolidation, Sale of Assets, etc. The
----------------------------------
Company and if there shall have occurred any Triggering
Event the Guarantor will not, and will not permit any
Subsidiary to, directly or indirectly,
(i) participate in any scheme of arrange-
ment; or
(ii) sell, transfer, lease, abandon or
otherwise dispose of all, substantially all or a
substantial part of its property, assets or under-
taking.
(g) Business. The Company and, if there shall
--------
have occurred any Triggering Event, the Guarantor will not,
and will not permit any Subsidiary to, engage in any busi-
ness other than the businesses conducted by it and its Sub-
sidiaries (that being the property and casualty insurance
business in the case of SDI) on the Credit Call Date relat-
ing to such Support and other businesses or activities sub-
stantially similar or reasonably related thereto.
10.10. Additional Events of Default. So long as
----------------------------
any Support is outstanding, any of the following conditions
or events shall constitute Events of Default, in addition to
such events specified in section 12:
(a) if the Guarantor or the Company shall de-
fault in the performance of or compliance with any term
contained in section 10.9; or
(b) if the Guarantor or the Company or any
Subsidiary shall default (as principal or guarantor or
other surety) in the payment of any principal of or
premium or interest on any Third Party Loan, or if any
event shall occur or condition shall exist in respect
of any Third Party Loan or under any evidence of any
Third Party Loan or of any mortgage, indenture or other
agreement relating thereto which would permit or shall
have caused the acceleration of the payment of such
Third Party Loan; or
(c) if there shall exist final judgments
against the Guarantor or the Company and its Subsidiar-
ies aggregating in excess of B.P.50,000, (other than any
24
<PAGE>
judgment arising out of or resulting from any fact or
circumstance in respect of which there shall be a pur-
chase price adjustment or you are required to indemnify
the Company under the Share Purchase Agreement) and if
any one of such judgments shall have been outstanding
for any period of fifteen days or more from the date of
its entry and shall not have been discharged in full or
stayed pending appeal.
10.11. Fees and Expenses, Cooperation.
------------------------------
(a) Credit Support Fee. On the last day of
------------------
each calendar month after the initial Credit Call Date
on which any Credit Enhancement Party shall have given
any Credit Support and for so long as any such Credit
Support shall remain outstanding, the Company shall pay
such Credit Enhancement Party a fee in an amount (not
less than zero) equal to (i) the amount that would have
been payable on such date as interest on the Credit
Facility Note had the full amount for such Credit Sup-
port been a Loan thereunder, less (ii) the amount of
----
interest and discount which accrued or amortised in
respect of the applicable Third Party Supported Loan
during the period as to which such interest would have
been payable on the Credit Facility Note.
(b) Expenses. The Company will pay all reason-
--------
able expenses in connection with any Third Party Unsup-
ported Loan or Support and in connection with any
amendments or waivers (whether or not the same become
effective) under or in respect of any agreements with
respect to any Support, including without limitation
all costs and expenses (including fees and premiums)
charged or incurred by the issuer of any Credit En-
hancement Agreement or any Third Party Lender, and the
reasonable fees, expenses and disbursements of counsel
employed by you, any issuer of any Credit Enhancement
Agreement and any Third Party Lender in connection with
such transactions and any such amendments nor waivers.
(c) Cooperation. Each of the Guarantor, the
-----------
Company, SDI and each other Subsidiary of the Guarantor
shall cooperate fully and in good faith with you and
shall otherwise take such commercially reasonable ac-
tions as you may from time to time request, including
without limitation attending meetings with Third Party
Lenders and taking corporate actions.
25
<PAGE>
11. Business and Financial Covenants. The
--------------------------------
Guarantor and the Company covenant that from the date of
this Agreement through the Closing and thereafter so long as
any of the Notes or the Credit Facility Notes are outstand-
ing:
11.1. Senior Debt. Neither the Company nor if
-----------
there shall have occurred any Triggering Event the Guarantor
will, nor will the Company or if there shall have occurred
any Triggering Event the Guarantor permit any of its Subsi-
diaries to, directly or indirectly, create, incur, assume,
guarantee, or otherwise become or remain directly or indi-
rectly liable with respect to, any Senior Debt, except that:
(a) the Company or the Guarantor, as the case
may be, and their Subsidiaries may remain liable with
respect to their respective Senior Debt outstanding on
the date of this Agreement and referred to in the Capi-
talisation Table, and any extensions, renewals or re-
fundings of any thereof;
(b) the Company may become and remain liable
with respect to the Senior Debt evidenced by the Senior
Notes and the Credit Facility Notes and the Third Party
Loan and the Guarantor may enter into the Guaranty
Agreement;
(c) any Wholly-Owned Subsidiary of the Company
or the Guarantor, as the case may be, may become and
remain liable with respect to Senior Debt of such Sub-
sidiary owing to the Company or the Guarantor, as the
case may be, or another Wholly-Owned Subsidiary of the
Company or the Guarantor, as the case may be; and
(d) the Company or the Guarantor, as the case
may be, may become and remain liable (other than to a
Subsidiary of the Company or the Guarantor, as the case
may be) with respect to Senior Debt in addition to that
otherwise permitted by the foregoing provisions of this
section 11.1, provided that, on the date the Company or
--------
the Guarantor, as the case may be, becomes liable with
respect to any such additional Senior Debt and immedi-
ately after giving effect thereto and to the concurrent
repayment of any other Debt the aggregate amount of all
Senior Debt of the Company and the Guarantor, as the
case may be, and the Subsidiaries of the Company or the
Guarantor, as the case may be (excluding the Senior
26
<PAGE>
Debt permitted by subdivision (b) and (c)) shall not
exceed B.P.15,000,000.
11.2. Restricted Payments. Neither the Company
-------------------
nor, if there shall have occurred any Triggering Event, the
Guarantor shall directly or indirectly declare, order, pay,
make or set apart any sum for any Restricted Payment unless:
(a) there shall at the time be no amount pay-
able by the Company in respect of any principal of or
interest on any Loan or Third Party Loan;
(b) such proposed action is taken and becomes
effective after September 30, 1989; and
(c) immediately after giving effect to such
proposed action:
(i) no condition or event shall exist which
constitutes an Event of Default or Potential Event of
Default;
(ii) the aggregate amount of all sums included
in all Restricted Payments directly or indirectly de-
clared, ordered, paid, made or set apart by the Company
or the Guarantor, as the case may be, after the date of
the Closing and including the date of such proposed
action shall not exceed the sum of:
(A) 50% (but, in the case of a deficit,
100%) of Consolidated Adjusted Net Income of the
Company or the Guarantor, as the case may be, for
such period; plus
----
(B) the aggregate amount of the net cash
proceeds received by the Company or the Guarantor,
as the case may be, during such period from the
issue of its shares during such period, and as
consideration for the issuance during such period
of Debt of the Company or the Guarantor, as the
case may be, convertible into shares of the Com-
pany or the Guarantor, as the case may be, but
only to the extent that any such Debt has been
converted into shares during such period, provided
--------
that the aggregate amount of such net cash pro-
ceeds to be taken into account for such period
(excluding any shares reflected on the Capitali-
sation Table) shall not exceed the aggregate of
27
<PAGE>
the amounts expended by the Company or the Guaran-
tor, as the case may be, during such period for
Restricted Payments of the character described in
clause (b) of the definition of "Restricted Pay-
ment" in section 14; and
(iii) the aggregate amount of all sums included
in all Restricted Payments directly or indirectly de-
clared, ordered, paid, made or set apart by the Company
or the Guarantor, as the case may be, during the period
beginning one year prior to such proposed action to and
including the date of such proposed action shall not
exceed 50% of the Consolidated Adjusted Net Income of
the Company or the Guarantor, as the case may be, for
the calendar year covered by the financial statements
most recently delivered pursuant to section 7(b);
provided, that the Company and its Subsidiaries may from
---------
time to time make Restricted Payments which are Triggering
Events solely to the Guarantor and its Wholly-Owned Subsidi-
aries. The Company and the Guarantor will not, and will not
permit SDI to directly or indirectly declare, order, pay or
make any Restricted Payment (other than a Restricted Payment
that is a Triggering Event) except in cash. Upon the occur-
rence of a Triggering Event, the amount of Restricted Pay-
ments made as dividends from the Company to the Guarantor
shall be deemed to be zero. The Company and the Guarantor
will not declare any dividend (other than a dividend payable
in its own shares) on any shares of any class which is pay-
able more than 60 days after the date of declaration there-
of.
Notwithstanding the foregoing provisions of this
section 11.2, on or after the first date on which SDI would
be permitted to discontinue its motor lines of business
pursuant to section 11.9, SDI may transfer to a direct or
indirect Subsidiary of the Guarantor (the "New Motor Subsid-
iary") the personnel and goodwill (including the non-exclu-
sive right to use the name "Sphere Drake") of SDI relating
to the motor business of SDI, if immediately after giving
effect to the proposed transfer (I) no condition or event
shall exist or have occurred which constitutes an Event of
Default or Potential Event of Default, (II) no assets other
than such personnel and goodwill shall have been so trans-
ferred by SDI and (III) the New Motor Subsidiary shall have
executed and delivered a guaranty on substantially identical
terms to the Guaranty Agreement (any transfer of assets made
28
<PAGE>
in accordance with this sentence is retermed as a "New Motor
Transfer").
11.3. Liens, etc. Neither the Company nor if
----------
there shall have occurred any Triggering Event the Guarantor
will, nor will the Company or if there shall have occurred
any Triggering Event the Guarantor permit any of its Subsi-
diaries, directly or indirectly, create, incur, assume or
permit to exist any Lien on or with respect to any property
or asset (including any document or instrument in respect of
goods or accounts receivable) of the Company or the Guaran-
tor, as the case may be, and their Subsidiaries, whether now
owned or held or hereafter acquired, or any income or prof-
its therefrom, except:
(a) Liens for taxes, assessments or other gov-
ernmental charges the payment of which is not at the
time required by section 11.10;
(b) statutory Liens of landlords and Liens of
carriers, warehousemen, mechanics and materialmen in-
curred in the ordinary course of business for sums not
yet due or the payment of which is not at the time
required by section 11.9;
(c) Liens incurred or deposits (deposits,
bonds, letters of credit and other securities) made in
the ordinary course of business in connection with
obtaining licenses and in connection with workers'
compensation, unemployment insurance and other types of
social security, or social welfare or to secure (or to
obtain letters of credit or surety, appeal or perfor-
mance bonds which secure) the performance of bids,
tenders, statutory obligations, leases, purchase, con-
struction, sales or reinsurance contracts and other
similar obligations or as provided by law in respect of
bank deposits, in each case not incurred in connection
with the borrowing of money, the obtaining of advances
or the payment of the deferred purchase price of pro-
perty;
(d) any attachment or judgment Lien, unless the
judgment it secures shall not, within 60 days after the
entry thereof, have been discharged or execution there-
of stayed pending appeal, or shall not have been dis-
charged within 60 days after the expiration of any such
stay;
29
<PAGE>
(e) leases or subleases granted to others,
easements, rights-of-way, restrictions and other simi-
lar charges or encumbrances, in each case incidental
to, and not interfering with, the ordinary conduct of
the business of the Company or the Guarantor, as the
case may be, or any Subsidiary;
(f) Liens on property or assets of any Wholly-
Owned Subsidiary securing Debt of such Subsidiary owing
to the Company or the Guarantor, as the case may be;
(g) Liens securing the Debt of the Company or
the Guarantor, as the case may be, and their Subsidiar-
ies referred to in the Capitalization Table;
(h) any Lien created to secure all or any part
of the purchase price, or to secure Debt incurred or
assumed to pay all or any part of the purchase price,
of property acquired by the Company or the Guarantor,
as the case may be, or a Subsidiary after the date
hereof, provided that (i) any such Lien shall be con-
--------
fined solely to the item or items of property so ac-
quired and, if required by the terms of the instrument
originally creating such Lien other property which is
an improvement to or is acquired property, (ii) the
principal amount of the Debt secured by any such Lien
shall at no time exceed an amount equal to 100% of the
lesser of (A) the cost to the Company or the Guarantor,
as the case may be, or such Subsidiary of the property
so acquired and (B) the fair market value of such pro-
perty (as determined in good faith by the Board) at the
time of such acquisition, and (iii) any such Lien shall
be created within six months after, in the case of
property, its acquisition, or, in the case of improve-
ments, their completion;
(i) with respect to portfolio investments of
SDI, repurchase agreements, securities lending arrange-
ments options, futures, liens of issuing banks with
respect to letters of credit, Liens of brokers and
custodians securing payments of fees and expenses in-
curred in the ordinary course of business and other
similar arrangements entered into in the ordinary
course of business;
(j) any Lien existing on property of a Person
immediately prior to its being consolidated with or
merged into the Company or the Guarantor, as the case
30
<PAGE>
may be, or a Subsidiary thereof or its becoming a Sub-
sidiary of the Company or the Guarantor, as the case
may be, or any Lien existing on any property acquired
by the Company or the Guarantor, as the case may be, or
any Subsidiary thereof at the time such property is so
acquired (whether or not the Debt secured thereby shall
have been assumed), provided that no such Lien shall
--------
have been created or assumed in contemplation of such
consolidation or merger or such Person's becoming a
Subsidiary or such acquisition of property, and pro-
----
vided further that each such Lien shall at all times be
-------------
confined solely to the item or items of property so
acquired and, if required by the terms of the instru-
ment originally creating such Lien, other property
which is an improvement to or is acquired for specific
use in connection with such acquired property;
(k) any Lien renewing, extending or refunding
any Lien permitted by subdivision (c), (g), (h) or (j)
of this section 11.3, provided that the principal
--------
amount of Debt secured by such Lien immediately prior
thereto is not increased or the maturity thereof re-
duced and such Lien is not extended to other property;
(l) any Lien securing Senior Debt which, as of
the date such Debt is created, incurred, assumed or
guaranteed is permitted so to be created, incurred,
assumed or guaranteed pursuant to the proviso to sec-
tion ll.1(d); and
(m) any Lien arising out of or resulting from
any fact or circumstance in respect of which there
shall be a purchase price adjustment or you are re-
quired to indemnify the Company under the Share Pur-
chase Agreement.
11.4. Leases; Leasebacks. Neither the Company
------------------
nor if there shall have occurred any Triggering Event the
Guarantor will, nor will the Company or if there shall have
occurred any Triggering Event the Guarantor permit any of
its Subsidiaries to, directly or indirectly, become or re-
main liable as lessee or as guarantor or other surety with
respect to:
(a) any lease of any property (whether real,
personal or mixed) other than a Capital Lease unless,
immediately after giving effect to the incurrence of
liability with respect to such lease, the aggregate
31
<PAGE>
amount of all minimum or guaranteed net rental payments
under such lease and all other leases (other than Capi-
tal Leases) at the time in effect during the then cur-
rent or any future period of 12 consecutive calendar
months prior to the stated final maturity date of the
Notes shall not exceed B.P.l,500,000; or
(b) any lease of any property (whether real,
personal or mixed), other than a Capital Lease, whether
now owned or hereafter acquired by the Company or the
Guarantor, as the case may be, or any Subsidiary of the
Company or the Guarantor, as the case may be, which has
been or is to be sold or transferred by the Company or
the Guarantor, as the case may be, or any Subsidiary
thereof to any other Person other than any such lease
by the Company or the Guarantor, as the case may be, to
a Wholly-Owned Subsidiary thereof or by a Wholly-Owned
Subsidiary thereof to another Wholly-Owned Subsidiary
thereof.
For the purposes of subdivision (a) of this section 11.4,
any Person becoming a Subsidiary after the date of this
Agreement shall be deemed, at the time it becomes such a
Subsidiary, to have become liable with respect to all of its
then existing obligations under leases.
11.5. Transactions with Affiliates. The Guaran-
----------------------------
tor will not, and will not permit the Company or any Subsid-
iary to, directly or indirectly, engage in any transaction,
including without limitation the purchase, sale or exchange
of assets or the rendering of any service, with any Affili-
ate of the Guarantor, except in the ordinary course of and
pursuant to the reasonable requirements of the Company's or
such Subsidiary's business and upon fair and reasonable
terms that are no less favorable to the Company or such
Subsidiary, as the case may be, than those which might be
obtained in an arm's length transaction at the time from
Persons which are not such an Affiliate, provided that the
--------
foregoing restrictions shall not apply to any transaction
between the Company and the Guarantor and a Wholly-Owned
Subsidiary or between one Wholly-Owned Subsidiary and anoth-
er Wholly-Owned Subsidiary provided further that the Guaran-
----------------
tor and its Subsidiaries may enter into consulting arrange-
ments with Affiliates of the Guarantor without regard to the
foregoing restrictions if and so long as the aggregate pay-
ments during any period of twelve consecutive months in
respect of all of such arrangements shall not exceed
B.P.150,000.
32
<PAGE>
11.6. Subsidiary Stock and Indebtedness. Neither
---------------------------------
the Company nor, if there shall have occurred any Triggering
Event, the Guarantor shall:
(a) directly or indirectly sell, charge, as-
sign, pledge or otherwise dispose of any Debt of or any
shares of (or warrants, rights or options to acquire or
subscribe for shares of) any Subsidiary except to a
Wholly-Owned Subsidiary and except as directors' quali-
fying shares if required by applicable law;
(b) permit any Subsidiary directly or indirect-
ly to sell, charge, assign, pledge or otherwise dispose
of any Debt of the Company or the Guarantor, as the
case may be, or any other Subsidiary, or any shares of
(or warrants, rights or options to acquire or subscribe
for shares of) any other Subsidiary, except to the
Guarantor or a Wholly-Owned Subsidiary or as directors'
qualifying shares if required by applicable law;
(c) permit any Subsidiary to have outstanding
any Preferred Shares other than shares of Preferred
Stock which are owned by the Company or a Wholly-Owned
Subsidiary or which are outstanding on the date of the
Closing and are reflected in the Capitalisation Table;
or
(d) permit any Subsidiary, directly or indi-
rectly, to issue or sell (including, without limita-
tion, in connection with a scheme of arrangement, mer-
ger or consolidation of a Subsidiary otherwise permit-
ted by section 11.7(a)) any shares (or warrants, rights
or options to acquire or subscribe for its shares)
except to the Company or the Guarantor, as the case may
be, or a Wholly-Owned Subsidiary or as directors' qua-
lifying shares if required by applicable law;
provided that all Debt and shares of any Subsidiary, other
--------
than SDI, owned by the Company or the Guarantor, as the case
may be, and its other Subsidiaries may be simultaneously
sold as an entirety for a consideration having a fair value
at least equal to the fair value thereof (in each case as
determined in good faith by the Board) at the time of such
sale if such Subsidiary does not at the time own (i) any
Debt of the Company or the Guarantor, as the case may be, or
(ii) any Debt or shares of any other Subsidiary which is not
also being simultaneously sold as an entirety in compliance
with this proviso or section 11.7(b)(ii).
33
<PAGE>
11.7. Sale of Assets, etc. Neither the Company
-------------------
nor if there shall have occurred any Triggering Event the
Guarantor will, nor will the Company or if there shall have
occurred any Triggering Event the Guarantor permit any of
its Subsidiaries to, directly or indirectly,
(a) enter into a scheme of arrangement with any
other Person, or consolidate with or merge into any other
Person or permit any other Person to consolidate with or
merge into it, except that:
(i) any Subsidiary may enter into a scheme of
arrangement with the Company or the Guarantor, as the
case may be, or a Wholly-Owned Subsidiary if immediate-
ly after giving effect to such transaction, no condi-
tion or event shall exist which constitutes an Event of
Default or Potential Event of Default;
(ii) any corporation may enter into a scheme of
arrangement with the Company or the Guarantor, as the
case may be, or a Wholly-Owned Subsidiary if, immedi-
ately after giving effect to such transaction, no con-
dition or event shall exist which constitutes an Event
of Default or Potential Event of Default; and
(iii) the Company or the Guarantor, as the case
may be, may enter into a scheme of arrangement with any
other corporation if (A) such corporation expressly
assumes, by an agreement satisfactory in substance and
form to the holders of 66 2/3% or more in principal
amount of each of the Senior Notes, the Subordinated
Notes and the Credit Facility Notes at the time out-
standing (which agreement may require the delivery in
connection with such assumption of such opinions of
counsel as such holders may reasonably require), the
obligations of the Guarantor and the Company under this
Agreement and under the Notes and the Credit Facility
Notes, (B) immediately after giving effect to such
transaction, such corporation shall not be liable with
respect to any Debt which it could not become liable
with respect under this Agreement on the date of such
transaction, and (C) immediately after giving effect to
such transaction (and such assumption), such corpora-
tion could incur at least B.P.1 of additional Senior Debt
in compliance with section 11.1(d) and no condition or
event shall exist which constitutes an Event of Default
or a Potential Event of Default; or
34
<PAGE>
(b) sell, transfer, lease, abandon or otherwise
dispose of all, substantially all or a substantial part of
its property, assets and undertaking, except that:
(i) any Subsidiary of the Company or the Guar-
antor may sell, transfer, lease or otherwise dispose of
all or substantially all its property, assets and un-
dertaking to the Company or the Guarantor, as the case
may be, or a Wholly-Owned Subsidiary of the Company or
the Guarantor, as the case may be;
(ii) any Subsidiary of the Company or the Guar-
antor other than SDI may sell, transfer, lease or oth-
erwise dispose of all or substantially all its proper-
ty, assets and undertaking as an entirety for a cash
consideration at least equal to the fair value thereof
(as determined in good faith by the Board) at the time
of such disposition if such Subsidiary does not at the
time hold (A) any Debt of the Company or the Guarantor,
as the case may be, or (B) any Debt or shares of any
other Subsidiary of the Company or the Guarantor, as
the case may be, which is not also being simultaneously
sold as an entirety in compliance with this subdivision
(b) (ii) or the proviso to section ll.6;
(iii) the Company or the Guarantor, as the case
may be, may sell, transfer, lease or otherwise dispose
of all or substantially all its property, assets and
undertaking to any corporation into which the Company
or the Guarantor, as the case may be, could be the
subject of a scheme of arrangement in compliance with
subdivisions (a) (ii) or (iii) of this section ll.7,
provided that (A) each of the conditions set forth in
--------
such subdivisions (a) (ii) or (iii) shall have been
fulfilled, and (B) no such disposition shall relieve
the Guarantor or the Company from their obligations
under this Agreement, the Guaranty Agreement, the Notes
or the Credit Facility Notes; and
(iv) SDI may make a New Motor Transfer.
11.8. Use of Proceeds. The proceeds of all Third
---------------
Party Unsupported Loans, Loans and Third Party Supported
Loans shall immediately be applied to subscribe for equity
share capital (as defined in section 744 of the Companies
Act 1985) of SDI.
35
<PAGE>
11.9. Corporate Existence, etc.; Business. The
-----------------------------------
Company and if there shall have occurred a Triggering Event
the Guarantor will at all times preserve and keep in full
force and effect its corporate existence, and rights and
franchises deemed material to its business, and those of
each of its Subsidiaries, except as otherwise specifically
permitted by section 11.7, and (subject to the remaining
provisions of this section 11.9) the Company, the Guarantor
and their respective Subsidiaries may discontinue any line
of business and except that the corporate existence of any
Subsidiary (other than SDI) may be terminated if, in the
good faith judgment of the Board, such termination is in the
best interest of the Company or the Guarantor, as the case
may be, and is not disadvantageous to the holders of the
Notes. Prior to September 30, 1988:
(a) the Company or the Guarantor, as the case
may be, will not, and will not permit any Subsidiary
to, engage in any business other than the businesses
conducted by the Company or the Guarantor, as the case
may be, and its Subsidiaries on the date of this Agree-
ment and other businesses or activities substantially
similar or reasonably related thereto (it being under-
stood that SDI is engaged in the business of property
and casualty insurance underwriting); and
(b) the Company or the Guarantor, as the case
may be, shall not discontinue any line of business or
undertake a new line of business, and shall not permit
any Subsidiary to discontinue any line of business or
undertake any new line of business,
provided that if at any time the Motor Net Deficit is great-
--------
er than B.P.8 million, SDI may (x) discontinue its motor lines
of business, or (y) make a New Motor Transfer.
11.10. Payment of Taxes and Claims. The Company
---------------------------
and if there shall have occurred a Triggering Event the
Guarantor will, and will cause each of its Subsidiaries to,
pay all taxes, assessments and other governmental charges
imposed upon it or any of its properties or assets or in
respect of any of its franchises, businesses, income or
profits before any penalty or interest accrues thereon, and
all claims (including, without limitation, claims for labor,
services, materials and supplies) for sums which have become
due and payable and which by law have or might become a Lien
upon any of its properties or assets, provided that no such
--------
charge or claim need be paid if being contested in good
36
<PAGE>
faith by appropriate proceedings promptly initiated and
diligently conducted and if such reserve or other appropri-
ate provision, if any, as shall be required by generally
accepted accounting principles applicable in the United
Kingdom shall have been made therefor.
12. Events of Default; Acceleration. If any of
-------------------------------
the following conditions or events (each an "Event of De-
fault") shall occur and be continuing:
(a) the Company shall default in the payment of
any principal of or premium, if any, on any Note or
Credit Facility Note when the same becomes due and
payable, whether at maturity or at a date fixed for
prepayment or by declaration or otherwise; or
(b) the Company shall default for a period of
seven days in the payment of any interest on any Note
or Credit Facility Note when the same becomes due and
payable or in material respect with any term contained
in section 11.3, ll.5, ll .9 or ll .10; or
(c) the Company or the Guarantor shall default
in the performance of or compliance with any term con-
tained in section 11.1, 11.2, 11.4, 11.6, 11.7 or 11.8;
or
(d) the Company or the Guarantor shall default
in the performance of or compliance with any term con-
tained in this Agreement other than those referred to
above in this section 12 and such default shall not
have been remedied within 30 days after the date on
which the Company or the Guarantor is required to give
notice of such default to you; or
(e) any representation or warranty made in
writing by or on behalf of the Company or the Guarantor
in this Agreement or in any instrument other than the
Share Purchase Agreement furnished in compliance with
or in reference to this Agreement or otherwise in con-
nection with the transactions contemplated by this
Agreement shall prove to have been false or incorrect
in any material respect on the date as of which made;
or
(f) any Debt (other than the Notes or the Cred-
it Facility Notes) of the Guarantor or any of its Sub-
sidiaries in excess of B.P.25,000 becomes or is declared
37
<PAGE>
repayable prior to the date for payment thereof by
reason of default or is not repaid on the due date for
payment thereof as extended by any period of grace; or
(g) an administration order is made in respect
of the Guarantor or any of its Subsidiaries or an order
is made or a resolution passed for the winding up of
the Guarantor or any of its Subsidiaries, other than as
permitted under section 11.7; or
(h) the Guarantor or any of its Subsidiaries
stops or threatens to stop payment or ceases or threat-
ens to cease to carry on all or substantially all of
its business (other than in a transaction permitted
under section ll.7 or for the purposes of reorganiza-
tion or amalgamation while solvent and as previously
approved by you), or is unable to pay its debts within
the meaning of section 123 of the Insolvency Act 1986
or an order is made by any competent court, or any
resolution is passed by the Guarantor or any Subsid-
iary, to apply for judicial composition proceedings
with its creditors or any voluntary arrangement is
proposed under Section l of the Insolvency Act 1986, or
makes any assignment for the benefit of creditors, or a
liquidator, provisional liquidator, administrator or
other similar official is validly appointed in relation
to the Guarantor, any of its Subsidiaries or all or a
substantial part of any of their assets; or
(i) any encumbrancer takes possession of or a
receiver or administrative receiver is appointed of or
over any of the assets of the Guarantor or any of its
Subsidiaries; or
(j) any distress or other process is levied or
enforced or served upon or against any asset of the
Guarantor or any Subsidiary and is not discharged with-
in 90 days; or
(k) if there shall exist final judgments
against the Guarantor and its Subsidiaries aggregating
in excess of B.P.100,000 (other than any judgment arising
out of or resulting from any fact or circumstance in
respect of which there shall be a purchase price ad-
justment or you are required to indemnify the Company
under the Share Purchase Agreement) and if any one of
such judgments shall have been outstanding for any
period of 60 days or more from the date of its entry
38
<PAGE>
and shall not have been discharged in full or stayed
pending appeal;
then, upon the occurrence of any Event of Default, any hold-
er or holders of 25% or more in principal amount of the
Senior Notes, the Subordinated Notes or the Credit Facility
Notes at the time outstanding may at any time (unless all
defaults shall theretofore have been remedied) at its or
their option, by written notice or notices to the Company,
declare all such Senior Notes, Subordinated Notes or Credit
Facility Notes, as the case may be, to be due and payable,
whereupon the same shall forthwith mature and become due and
payable, in the amount of such Senior Notes' or Subordinated
Notes' (as the case may be) Accreted Value as of the date of
such declaration (or principal amount in the case of the
Credit Facility Notes), together with interest accrued
thereon at a rate of 10% per annum in the case of the Senior
Notes, 12% per annum in the case of the Subordinated Notes
and in accordance with the terms of the Credit Facility
Notes in the case of such notes, all without presentment,
demand, protest or notice, which are hereby waived.
At any time after the principal of, and interest
accrued on, all the Senior Notes, Subordinated Notes or
Credit Facility Notes or any of them is declared due and
payable, the holders of not less than 75% in aggregate prin-
cipal amount of the Senior Notes, Subordinated Notes or
Credit Facility Notes, as the case may be, then outstanding
(excluding any Notes or Credit Facility Notes directly or
indirectly owned by the Company or any of its Subsidiaries
or Affiliates), by written notice to the Company may rescind
and annul any such declaration and its consequences.
13. Remedies on Default, etc. In case any one
------------------------
or more Events of Default or Potential Events of Default
shall occur and be continuing, the holder of any Note or
Credit Facility Note at the time outstanding may proceed to
protect and enforce the rights of such holder by an action
at law, suit in equity or other appropriate proceeding,
whether for the specific performance of any agreement con-
tained herein or in such Note or Credit Facility Note, or
for an injunction against a violation of any of the terms
hereof or thereof, or in aid of the exercise of any power
granted hereby or thereby or by law or otherwise. In case of
a default in the payment of any principal of or premium, if
any, or interest on any Note or Credit Facility Note, the
Company will pay to the holder thereof such further amount
as shall be sufficient to cover the cost and expenses of
39
<PAGE>
collection, including, without limitation, reasonable attor-
neys' fees, expenses and disbursements. No course of deal-
ing and no delay on the part of any holder of any Note or
Credit Facility Note in exercising any right, power or reme-
dy shall operate as a waiver thereof or otherwise prejudice
such holder's rights, powers or remedies. No right, power
or remedy conferred by this Agreement or by any Note or
Credit Facility Note upon any holder thereof shall be exclu-
sive of any other right, power or remedy referred to herein
or therein or now or hereafter available at law, in equity,
by statute or otherwise.
14. Definitions. As used herein the following
-----------
terms have the following respective meanings:
Accreted Value: the meaning specified in the
--------------
Notes.
Adjustment Account: the meaning specified in the
------------------
Share Purchase Agreement.
Affiliate: any Person directly or indirectly
---------
Controlling or Controlled by or under common Control with
the Guarantor or any Subsidiary and any partner (whether
general or limited) of any such Person.
Affiliated Lender: the meaning specified in Sec-
-----------------
tion 10.4.
Board: the Board of Directors of the Guarantor,
-----
the Company, SDI or you, as the context requires.
Business Day: any day except a Saturday, a Sunday
------------
or other day on which commercial banks in the City of London
are required or authorized by law to be closed.
Capital Lease: as applied to any Person, any
-------------
lease of any property (whether real, personal or mixed) by
such Person as lessee which would, in accordance with stan-
dard accounting practices applicable in the United Kingdom,
be required to be classified and accounted for as a capital
lease on a balance sheet of such Person.
Capital Lease Obligation: with respect to any
------------------------
Capital Lease, the amount of the obligation of the lessee
thereunder which would, in accordance with standard account-
ing practices applicable in the United Kingdom, appear on a
40
<PAGE>
balance sheet of such lessee in respect of such Capital
Lease.
Capitalization Table: the meaning specified in
--------------------
section 5.4.
Change in Control: any of the following events:
-----------------
(i) The Dai-Tokyo Fire and Marine Insurance
Company Limited, a Japanese Company, and any of
its Affiliates shall not own, directly or indi-
rectly, more than 10% of the equity capital of the
Company, or
(ii) the partners on the Closing Date of SD
Partners, a.Bermuda partnership, shall not own, direct-
ly or indirectly, in the aggregate more than 50% of the
equity capital of the Company.
Closing: the meaning specified in section 3.
-------
Consolidated Adjusted Net Income: with reference
--------------------------------
to any period, the Consolidated Net Income of the Guarantor
(or the Company, as the case may be) excluding (a) the in-
come (or deficit) of any Person accrued prior to the date it
becomes a Subsidiary or is merged into or consolidated with
the Guarantor (or the Company, as the case may be) or a
Subsidiary, (b) the income (or deficit) of any Person (other
than a Subsidiary) in which the Guarantor (or the Company,
as the case may be) or any Subsidiary has an ownership in-
terest, except to the extent that any such income has been
actually received by the Guarantor (or the Company, as the
case may be) or such Subsidiary in the form of dividends or
similar distributions, (c) the undistributed earnings of any
Subsidiary (including in the case of the Guarantor and the
Company, SDI) to the extent that the declaration or payment
of dividends or similar distributions by such Subsidiary is
not at the time permitted by the terms of its Memorandum and
Articles of Association or any agreement, instrument, judg-
ment, decree, order, statute, rule or governmental regula-
tion applicable to such Subsidiary, (d) any restoration to
income of any contingency reserve, except to the extent that
provision for such reserve was made out of income accrued
during such period, (e) any aggregate net gain (but not any
aggregate net loss) during such period arising from the
sale, exchange or other disposition of capital assets (such
term to include all fixed assets, whether tangible or intan-
gible, all inventory sold in conjunction with the disposi-
41
<PAGE>
tion of fixed assets, and all securities), (f) any write-up
of any assets, (g) any net gain from the collection of the
proceeds of life insurance policies, (h) any gain arising
from the acquisition of any securities, or the extinguish-
ment of any Debt of the Guarantor (or the Company, as the
case may be) or any Subsidiary, and (i) any deferred credit
representing the excess of equity in any Subsidiary at the
date of acquisition over the cost of the investment in such
Subsidiary.
Consolidated Net Income: with reference to any
-----------------------
period, the net income (or deficit) of the Guarantor (or the
Company, as the case may be) and its Subsidiaries for such
period (taken as a cumulative whole), after deducting all
operating expenses, provisions for all taxes and reserves
and all other proper deductions, all determined in accor-
dance with standard accounting practices applicable in the
United Kingdom on a consolidated basis, after eliminating
all intercompany transactions and after deducting portions
of income properly attributable to minority interests, if
any, in the stock and surplus of Subsidiaries.
Constituent Documents: the meaning specified in
---------------------
section 5.4.
Control: (including, with correlative meanings,
-------
the terms "Controlled by" and "under common Control with"),
as used with respect to any Person, shall mean the posses-
sion, directly or indirectly, of the power to direct or
cause the direction of the management and policies of such
Person, whether through the ownership of voting securities
or by contract or otherwise.
Credit Enhancement Agreement: the meaning speci-
----------------------------
fied in section 10.7.
Credit Enhancement Party: the meaning specified
------------------------
in Section 10.7.
Credit Call Date: the meaning specified. in sec-
----------------
tion 10.3.
Credit Call Notice: the meaning specified in
------------------
section 10.3.
Credit Facility Cap: the meaning specified in
-------------------
section 10.2.
42
<PAGE>
Credit Support: the meaning specified in section
--------------
10.7.
Debt: as applied to any Person (without duplica-
----
tion):
(a) any indebtedness for borrowed money which
such Person has directly or indirectly created, in-
curred or assumed;
(b) any indebtedness, whether or not for bor-
rowed money, secured by any Lien in respect of property
owned by such Person, whether or not such Person has
assumed or become liable for the payment of such in-
debtedness;
(c) any indebtedness, whether or not for bor-
rowed money, with respect to which such Person has
become directly or indirectly liable and which repre-
sents or has been incurred to finance the purchase
price (or a portion thereof) of any property or ser-
vices or business acquired by such Person, whether by
purchase, consolidation, merger or otherwise;
(d) any Capital Lease Obligation; and
(e) any indebtedness or Capital Lease Obliga-
tion of any other Person of the character referred to
in subdivision (a), (b), (c) or (d) of this definition
with respect to which the Person whose Debt is being
determined has become liable by way of a Guaranty.
Event of Default: the meaning specified in sec-
----------------
tion 12.
Financial Adviser: the meaning specified in sec-
-----------------
tion 10.5.
Financial Adviser's Opinion: the meaning speci-
---------------------------
fied in Section 10.5.
Guaranty: as applied to any Person, any direct or
--------
indirect liability, contingent or otherwise of such Person with
respect to any indebtedness, lease, dividend or other obligation
of another, including, without limitation, any such obligation
directly or indirectly guaranteed, endorsed (otherwise than
for collection or deposit in the ordinary course of busi-
ness) or discounted or sold with recourse by such Person, or
43
<PAGE>
in respect of which such Person is otherwise directly or
indirectly liable, including, without limitation, any such
obligation in effect guaranteed by such Person through any
agreement (contingent or otherwise) to purchase, repurchase
or otherwise acquire such obligation or any security there-
for, or to private funds for the payment or discharge of
such obligation (whether in the form of loans, advances,
stock purchases, capital contributions or otherwise), or to
maintain the solvency of any balance sheet or other finan-
cial condition of the obligor of such obligation, or to make
payment for any products, materials or supplies or for any
transportation or services regardless of the non-delivery or
nonfurnishing thereof, in any such case if the purpose or
intent of such agreement is to provide assurance that such
obligation will be paid or discharged, or that any agree-
ments relating thereto will be complied with, or that the
holders of such obligation will be protected against loss in
respect thereof. The amount of any Guaranty shall be equal
to the amount of the obligation guaranteed (or such lesser
amount as to which the maximum exposure of the guarantor
shall have been specifically limited).
Guaranty Agreement: the meaning specified in
------------------
section 1.
Lien: as to any Person, any mortgage, lien,
----
pledge, adverse claim, charge, security interest or other
encumbrance in or on, or any interest or title of any ven-
dor, lessor, lender or other secured party to or of such
Person under any conditional sale or other title retention
agreement or lease with respect to, any property or asset
owned or held by such Person, or the signing or filing of a
financing statement which names such Person.
Loan: the meaning specified in section 10.4.
----
Motor Net Income (or Deficit): on any date, the
-----------------------------
net income (or deficit) of SDI in respect of its motor lines
of business, determined as if such business were conducted
by a separate Wholly-Owned Subsidiary of SDI, for the four
(or if a lesser number, the number of full calendar quarters
ending after December 31, 1986 through the date of determi-
nation) most recently-ended calendar quarters, determined on
the basis of the revenues allocable to such business and
after deducting the allocable portion of operating expenses,
reserves (determined in accordance with practices used in
determining reserves on the financial statements of SDI as
of and for the periods ending December 31, 1986), and other
44
<PAGE>
proper deductions, all determined in accordance with stan-
dard accounting practices in the United Kingdom.
New Motor Subsidiary: the meaning specified in
--------------------
section 11.2.
New Motor Transfer: the meaning specified in
------------------
section 11.2.
Non-Cash Indemnity Balance: the meaning specified
--------------------------
in section 10.2.
Officers' Certificate: a certificate executed on
---------------------
behalf of the Guarantor, the Company, SDI or you, as the
context requires, by its Chairman and its Finance Director,
and, in respect of financial statements delivered pursuant
to section 7(b)(iii) and the related certificate under sec-
tion 7(c), approved by its Board.
Person: a company, a corporation, an association,
------
a partnership, an organization, a business, an individual, a
government or political subdivision thereof or a governmen-
tal agency.
Potential Event of Default: any condition or
--------------------------
event which, with notice or lapse of time or both, would
become an Event of Default.
Preferred Shares: as applied to any company or
----------------
corporation, shares of such company or corporation which
shall be entitled to preference or priority over any other
shares of such company or corporation in respect of either
the payment of dividends or the distribution of assets upon
liquidation.
Relatively Favourable: the meaning specified in
---------------------
section 10.5.
Reserve Adjustment Date: the meaning specified in
-----------------------
the Share Purchase Agreement.
Reserve Adjustment Schedule: the meaning speci-
---------------------------
fied in the Share Purchase Agreement.
Restricted Payment: (a) any dividend or other
------------------
distribution, direct or indirect, on account of any shares
of any class of the Company, the New Motor Subsidiary, or
the Guarantor, as the case may be now or hereafter outstand-
45
<PAGE>
ing, except a dividend payable solely in shares of the Com-
pany, the New Motor Subsidiary, or the Guarantor, as the
case may be, which are not Preferred Shares; (b) any redemp-
tion, purchase or other acquisition, direct or indirect, of
any shares of any class of the Company, the New Motor
Subsidiary, or the Guarantor, as the case may be now or
hereafter outstanding, or of any warrants, rights or options
to acquire any such shares, except (i) to the extent that
the consideration therefor consists of an issue of shares of
the Company or the Guarantor, as the case may be or (ii) out
of the net cash proceeds received by the Company after Octo-
ber 9, 1987 from an issue of shares of the Company occurring
within 60 days of the making of such redemption, purchase or
other acquisition; and (c) any discharge by the Company or
the Guarantor, as the case may be, or any Subsidiary there-
of, of any obligation of any Person Controlling the Company
or the Guarantor as the case may be, provided that the fol-
--------
lowing shall not be Restricted Payments: (x) cash dividends
of the Company not exceeding B.P.430,000 during any period of
twelve consecutive months, (y) dividends on B.P.3,000,000 of
the Guarantor's Cumulative Redeemable Preference Shares, and
other dividends of the Guarantor not exceeding B.P.100,000
during any period of twelve consecutive months and (z) with-
out prejudice to (x), dividends aggregating not more than
B.P.14,750,000 by the Company to the Guarantor or by the Guar-
antor to its parent to the extent that, simultaneously with
the receipt of the dividend, the party receiving the divi-
dend subscribes and pays for preferred shares of the party
making the dividend in an amount equal to the amount of the
dividend.
SDI: the meaning specified in section 7(a).
---
Senior Debt: Debt other than Subordinated Debt.
-----------
Share Purchase Agreement: the meaning specified
------------------------
in section 4.4.
Shares: the meaning specified in the Share Pur-
------
chase Agreement.
Subordinated Debt: any unsecured Debt of the
-----------------
Company or the Guarantor which (a) has a final maturity
subsequent to June 30, 1995; (b) at the date of its creation
has a Weighted Average Life to Maturity which is greater
than the remaining Weighted Average Life to Maturity of the
Notes; (c) does not permit any holder of such Debt to de-
clare all or any part of such Debt to be due and payable, or
46
<PAGE>
to require (upon the occurrence of any contingency or other-
wise) all or any part of such Debt to be paid, before its
expressed maturity by reason of the occurrence of a default
in respect of the Notes or the Credit Facility Notes; and
(d) is created under is evidenced by or is subject to any
instrument containing provisions for the subordination of
such Debt to the Notes and (if desired by the Company and so
provided) to other Debt of the Company substantially the
same as those provided in the Trust Deed.
Subsidiary: a corporation, association or other
----------
business entity in which the Guarantor (or, as the case may
be, the Company) or one or more Subsidiaries of the Guaran-
tor (or, as the case may be, the Company) owns sufficient
voting stock to enable it or them (as a group) ordinarily,
in the absence of contingencies, to elect a majority of the
directors (or persons performing similar functions) of such
business entity, provided that for the purposes of sections
--------
10.9, ll.l, ll.3, ll.4, ll.6, ll.7 and the definitions of
"Consolidated Adjusted Net Income" and "Consolidated Net
Income" any New Motor Subsidiary shall be deemed to be a
Subsidiary of the Company, but that for all purposes of this
Agreement, any New Motor Subsidiary shall be deemed not to
be a Wholly-Owned Subsidiary of the Company or SDI.
Support: the meaning specified in section 10.4.
-------
Third Party Lender: the meaning specified in
------------------
section 10.4.
Third Party Loan: a Third Party Supported Loan or
----------------
a Third Party Unsupported Loan.
Third Party Supported Loan: the meaning specified
--------------------------
in section 10.4.
Third Party Unsupported Loan: the meaning speci-
----------------------------
fied in section 10.4.
Triggering Event: (i) any sale, distribution or
----------------
other transfer of any property, assets or undertaking of the
Company or any of its Subsidiaries to any of the Guarantor
or its Subsidiaries (other than the Company and its Subsi-
diaries), which sale, distribution or transfer would not be
permitted under sections ll.2 (without reference to the
proviso thereof) and ll.5 and (ii) any Restricted Payment by
a New Motor Subsidiary.
47
<PAGE>
Trust Deed: the Deed of Trust substantially in
----------
the form attached hereto as Exhibit D.
UK Insurance Subsidiaries: the meaning specified
-------------------------
in section 7(a).
Warrants: the meaning specified in the Warrant
--------
Agreement.
Warrant Agreement: the Warrant Agreement dated as
-----------------
of October 9, 1987, between you and the Guarantor.
Weighted Average Life to Maturity: as applied to
---------------------------------
any Debt at any date, the number of years obtained by divid-
ing (a) the then outstanding principal amount of such Debt
into (b) the total of the products obtained by multiplying
(i) the amount of each then remaining installment, sinking
fund, serial maturity or other required payment, including
payment at final maturity, in respect thereof, by (ii) the
number of years (calculated to the nearest one-twelfth)
which will elapse between such date and the date on which
such payment is to be made.
Wholly-Owned: as applied to any Subsidiary, a
------------
Subsidiary all the outstanding shares (other than directors'
qualifying shares, if required by law) of every class which
are at the time owned by the Company or by one or more Whol-
ly-Owned Subsidiaries or by the Company and one or more
Wholly-Owned Subsidiaries.
15. Exchange and Substitution of Notes.
----------------------------------
15.1. Exchange. Upon surrender of any Note to
--------
the Company at its principal office for exchange for Notes
of smaller denominations as a result of prepayment or other-
wise, the Company at its expense will execute and deliver in
exchange therefor a new Note or Notes in denominations of at
least B.P.1,000,000 (except one Note may be issued in a lesser
principal amount if the unpaid principal amount of the sur-
rendered Note is not evenly divisible by, or is less than
B.P.l,000,000), as requested by the holder or transferee, which
aggregate the unpaid remaining principal amount of such
surrendered Note. Each such new Note shall be payable to
the order of such Person as such holder or transferee may
request and shall be dated so that there will be no loss of
interest on such surrendered Note and otherwise of like
tenor.
48
<PAGE>
15.2. Replacement. Upon receipt of evidence
-----------
reasonably satisfactory to the Company of the loss, theft,
destruction or mutilation of any Note or Credit Facility
Note and, in the case of any such loss, theft or destruction
of any Note or Credit Facility Note, upon delivery of an
indemnity bond in such reasonable amount as the Company may
determine (or, in the case of any Note or Credit Facility
Note held by you or another institutional holder or your or
its nominee, of an indemnity agreement from you or such
other holder), or, in the case of any such mutilation, upon
the surrender of such Note or Credit Facility Note for can-
cellation to the Company at its principal office, the Com-
pany at its expense will execute and deliver, in lieu there-
of, a new Note or Credit Facility Note in the unpaid princi-
pal amount of such lost, stolen, destroyed or mutilated Note
or Credit Facility Note, dated so that there will be no loss
of interest on such Note and otherwise of like tenor. Any
Note or Credit Facility Note in lieu of which any such new
Note or Credit Facility Note has been so executed and deli-
vered by the Company shall not be deemed to be an outstand-
ing Note or Credit Facility Note, as the case may be, for
all purposes of this Agreement.
16. Payments on Notes. Payments of principal,
-----------------
premium, if any, and interest becoming due and payable on
the Notes or Credit Facility Notes shall be made at the
principal office of the Company in London.
17. Survival of Representations and Warranties.
------------------------------------------
All representations and warranties contained in this Agree-
ment or made in writing by or on behalf of the Company and
the Guarantor in connection with the transactions contem-
plated by this Agreement shall survive the execution and
delivery of this Agreement, any investigation at any time
made by you or on your behalf, the purchase of the Notes or
Credit Facility Notes by you, an Affiliated Lender or a
Credit Enhancement Party, as the case may be, under this
Agreement and any disposition or payment of the Notes or
Credit Facility Notes. All statements contained in any
certificate or other instrument delivered by or on behalf of
the Company or the Guarantor pursuant to this Agreement or
in connection with the transactions contemplated by this
Agreement other than such as are made in or in connection
with the Share Purchase Agreement shall be deemed represen-
tations and warranties of the Company or the Guarantor, as
the case may be, under this Agreement.
49
<PAGE>
18. Amendments and Waivers. Any term of this
----------------------
Agreement or of the Senior Notes or of the Subordinated
Notes or of the Credit Facility Notes may be amended and the
observance of any term of this Agreement or of the Senior
Notes or of the Subordinated Notes or of the Credit Facility
Notes may be waived (either generally or in a particular
instance and either retroactively or prospectively) only
with the written consent of the Company, the Guarantor and
the holders of at least 66 2/3% in principal amount of each
of the Senior Notes, Subordinated Notes and Credit Facility
Notes at the time outstanding, provided that, without the
--------
prior written consent of the holders of all the Notes and
Credit Facility Notes at the time outstanding, no such a-
mendment or waiver shall (a) change the maturity or the
principal amount of, or reduce the rate or change the time
of payment of interest on, or change the amount or the time
of payment of any principal or premium payable on any pre-
payment of, any Note or Credit Facility Note, (b) reduce the
aforesaid percentages of the principal amount of the Notes
or Credit Facility Notes the holders of which are required
to consent to any such amendment or waiver or (c) change the
percentage of the principal amount outstanding from time to
time of the Senior Notes, the Subordinated Notes or the
Credit Facility Notes the holders of which may declare the
Senior Notes, the Subordinated Notes or the Credit Facility
Notes to be due and payable as provided in section 12. Any
amendment or waiver effected in accordance with this section
18 shall be binding upon each holder of any Note or Credit
Facility Note at the time outstanding, each future holder of
any Note or Credit Facility Note and the Company.
19. Suspensory Clause: No provisions of this
-----------------
Agreement or of any agreement or arrangement of which it
forms part, by virtue of which the agreement constituted by
all of the foregoing is subject to registration (if such be
the case) under the Restrictive Trade Practices Act 1976
shall take effect until the day after particulars of such
agreement have been furnished to the Director General of
Fair Trading pursuant to the terms of Section 24 of that
Act.
20. Notices, etc. Except as otherwise provided
------------
in this Agreement, notices and other communications under
this Agreement shall be in writing and shall be delivered,
or mailed by first-class mail, postage pre-paid, addressed,
(a) if to you, at
50
<PAGE>
Alexander Stenhouse & Partners Ltd.
Two South Place
London EC2P 2DX
England
Attention: The Company Secretary
Telex: 8813371
Fax: 01-588-1680
With copies to:
Alexander & Alexander Services, Inc.
1211 Avenue of the Americas
New York, New York 10036
Attention: General Counsel
Telex: 620303
Fax: (212) 302-1921
Alexander & Alexander Europe plc
5-10 Bury Street
London EC3A 5HL
England
Attention: Group Legal Adviser
Telex: 882171
Fax: 01-623-5022
or at such other address as you shall have furnished to the
Company in writing, or (b) if to any other holder of any
Note or Credit Facility Note, at such address as such other
holder shall have furnished to the Company in writing, or,
until any such other holder so furnishes to the Company an
address, then to and at the address of the last holder of such
Note or Credit Facility Note who has furnished an address to
the Company, or (c) if to the Company or the Guarantor, to:
Sphere Drake Acquisitions (U.K.) Limited
c/o Sphere Drake Insurance plc
52/54 Leadenhall Street
London EC3A 2BJ
England
Attention: Ian H. Dean
Telex: 935015 Sphere G
Fax: 01-481-3828
with copies to
51
<PAGE>
Sphere Drake Acquisitions (U.K.) Limited
c/o Centre Capital Investors L.P.
Suite 1025
One Rockefeller Plaza
New York, New York 10020
United States of America
Attention: Lester Pollack
Telex: RCA222301
Fax: (212) 974-2825 or
(212) 489-9655
and
John C Head III
c/o John Head & Partners
545 Madison Avenue
New York, New York 10022
Telex: 971861
Fax: (212) 421-9049
and
Paul, Weiss, Rifkind, Wharton & Garrison
1285 Avenue of the Americas
New York, New York 10019
United States of America
Attention: Albert P. Hand, Esq.
Telex: WUI 66-843
Fax: (212) 757-3990
and
Clyde & Co.
51 Eastcheap
London EC3M lJP
England
Attention: Francis Mackie and V.G. Southey
Telex: 884886 Clyde G
Fax: 01-623-5427
or at such other address, or to the attention of such other
officer, as the Company shall have furnished to you and each
such other holder in writing.
21. Miscellaneous. This Agreement shall be
-------------
binding upon and inure to the benefit of and be enforceable
by the respective successors and assigns of the parties
hereto, whether so expressed or not, and, in particular,
52
<PAGE>
shall inure to the benefit of and be enforceable by any
holder or holders from time to time of the Notes and the
Credit Facility Notes or any part thereof. Except as stated
in section 17, this Agreement embodies the entire agreement
and understanding between you, the Company and the Guarantor
and supersedes all prior agreements and understandings re-
lating to the subject matter hereof. This Agreement, the
Notes and the Credit Facility Notes shall be construed and
enforced in accordance with and governed by the laws of
England. The headings in this Agreement are for purposes of
reference only and shall not limit or otherwise affect the
meaning hereof. This Agreement may be executed in any num-
ber of counterparts, each of which shall be an original, but
all of which together shall constitute one instrument.
If you are in agreement with the foregoing, please
sign the form of agreement and the accompanying counterparts
of this letter and return one of the same to the Company,
whereupon this letter shall become a binding agreement be-
tween you, the Company and the Guarantor.
SPHERE DRAKE ACQUISITIONS (U.K.) LIMITED
By: _________________________
Director
SPHERE DRAKE HOLDING PUBLIC LIMITED COMPANY
By: _________________________
Director
The foregoing Agreement is hereby agreed as of the date
hereof.
ALEXANDER STENHOUSE
& PARTNERS LTD.
By: _________________________
Director
53
<PAGE>
EXHIBIT A-1
FORM OF
ZERO COUPON SENIOR NOTE
-----------------------
SPHERE DRAKE ACQUISITIONS (U.K.) LIMITED
ZERO COUPON SENIOR NOTE DUE 1995
Guaranteed by Sphere Drake Holding Public Limited Company
B.P.__________ London
December, 1987
SPHERE DRAKE ACQUISITIONS (U.K.) LIMITED, an Eng-
lish company having its registered office at 30 Mincing
Lane, London EC3R 7BR, company registration number 2136565
(the "Company"), for value received, hereby promises to pay
to ALEXANDER STENHOUSE & PARTNERS LTD., a Scottish company
having its registered office at 145 St. Vincents Street,
Glasgow, Scotland, company registration number SC23477 ("AS
& P"), or order, on June 30, 1995 (the "Maturity Date"), or
such earlier date as the principal hereof and interest
thereon may become due in accordance with the provisions
hereof upon surrender hereof, the principal sum of ____
Pounds Sterling (B.P. ) (the "Face Amount"), or such lesser sum
as shall become due upon acceleration of the maturity or
redemption hereof to a date prior to the Maturity Date.
This Note shall not otherwise bear interest unless
the Company shall fail to pay or duly provide for payment of
any amount due hereunder, whether upon acceleration, redemp-
tion, at stated maturity or otherwise, provided, that if the
--------
Company shall fail to pay any amount due hereunder on the
date when due, the overdue amounts shall bear interest from
and including such due date to but not including the date
upon which all overdue amounts have been paid at a rate
equal to the greater of (i) 10% per annum, compounded as of
June 30 and December 31 in each year, and (ii) a fluctuating
rate of interest equal to four percentage points above the
base lending rate from time to time of National Westminster
Bank plc (each change in such fluctuating rate of interest
<PAGE>
to be effective as at the opening of business on the date a
change in such base rate is determined by such Bank to be
effective), so compounded.
Payments of principal and interest on this Note
shall be made in lawful money of the United Kingdom at the
principal office of the Company in London.
This Note is one of the Company's Zero Coupon
Senior Notes due 1995 (the "Notes"), originally issued in
the aggregate principal amount of B.P. pursuant to a
-----------
Note Purchase Agreement (the "Note Purchase Agreement"),
dated as of October 9, 1987, among the Company, Sphere Drake
Holding Public Limited Company ("the "Guarantor") and Alex-
ander Stenhouse & Partners Ltd. The holder of this Note is
entitled to the benefits of the Note Purchase Agreement and
may enforce the agreements of the Company and the Guarantor
contained therein and exercise the remedies provided for
thereby or otherwise available in respect thereof.
Timely payment of all amounts of interest and
principal payable in respect of this Note are guaranteed by
the Guarantor pursuant to the Guaranty Agreement dated De-
cember , 1987.
The Notes are subject to required and optional
prepayment, in whole or in part, as specified in the Note
Purchase Agreement. All such prepayments shall be at this
Note's Accreted Value (as hereinafter defined) on the date
of prepayment. This Note was originally issued on December
, 1987 for an aggregate purchase price of B.P.13,000,000. For
any period from its date of issue to its final maturity the
income element in respect of this Note shall be the differ-
ence between such Accreted Value (as hereinafter defined) as
of the last and the first days of such period.
Anything in this Note to the contrary notwith-
standing, if the Final Adjustment Date (as defined in that
certain Share Purchase Agreement dated as of October 9, 1987
between the Company and AS & P) shall occur after the Matur-
ity Date, the maturity of this Note shall be extended to the
Final Adjustment Date at which time this Note shall become
due together with interest as provided in the second para-
graph hereof.
The term "Accreted Value" with respect to this
Note means, as of any date (a "Determination Date"), an
amount equal to the original purchase price of this Note
2
<PAGE>
(B.P.13,000,000) plus Accrued Amortization of Original Issue
Discount to the Determination Date. "Accrued Amortization
of Original Issue Discount" shall be (i) the aggregate of
the amount of original issue discount of this Note at the
June 30 or December 31 falling on or immediately prior to
the Determination Date (a "Reference Date"), determined by
applying the percentage applicable to this Note on such date
as set forth in the Schedule attached hereto to the Face
Amount of this Note, plus (ii) if the Determination Date is
a date other than a Reference Date, Accrued Amortization of
Original Issue Discount from the immediately preceding Ref-
erence Date (or [the Closing date] if there is no preceding
Reference Date) to the Determination Date, computed by mul-
tiplying (a) the excess of the Accrued Amortization of the
Original Issue Discount as of the next succeeding Reference
Date determined by applying the percentage applicable to
this Note on such Reference Date as set forth in the Sche-
dule attached hereto to the Face Amount of this Note over
the Accrued Amortization of the Original Issue Discount as
of the immediately preceding Reference Date (or [the Closing
date] if there is no preceding Reference Date), by (b) a
fraction, (A) the numerator of which is the number of days
(based on a 360-day year comprised of 12 30-day months) from
but not including such immediately preceding Reference Date
(or [the Closing date] if there is no preceding Reference
Date) to and including the Determination Date and (B) the
denominator of which is 180.
In case an Event of Default, as defined in the
Note Purchase Agreement, shall occur and be continuing, the
unpaid balance of the principal of this Note may become due
and payable in the manner and with the effect provided in
the Note Purchase Agreement.
This Note is made and delivered in London, and
shall be governed by the laws of England.
The Company waives diligence, presentment, demand,
protest and notice of dishonour or other notice of any kind.
The non-exercise by the holder of this Note of any of its
rights hereunder in any particular instance shall not con-
stitute a waiver thereof in that or any subsequent instance.
3
<PAGE>
IN WITNESS WHEREOF this Note has been executed on
behalf of the Company by its duly authorised director the
day and year first above written.
SPHERE DRAKE ACQUISITIONS (U.K.) LIMITED
By:____________________________
Director
4
<PAGE>
SCHEDULE TO SENIOR NOTE
-----------------------
<PAGE>
EXHIBIT A-2
FORM OF
ZERO COUPON SUBORDINATED NOTE
-----------------------------
SPHERE DRAKE ACQUISITIONS (U.K.) LIMITED
ZERO COUPON SUBORDINATED NOTE DUE 1995
Guaranteed by Sphere Drake Holding Public Limited Com-
pany
B.P. London
--------------
December, 1987
SPHERE DRAKE ACQUISITIONS (U.K.) LIMITED, an Eng-
lish company having its registered office at 30 Mincing
Lane, London EC3R 7BR, company registration number 2136565
(the "Company"), for value received, hereby promises to pay
to ALEXANDER STENHOUSE & PARTNERS LTD., a Scottish company
having its registered office at 145 St. Vincents Street,
Glasgow, Scotland, company registration number SC23477, ("AS
& P") or order, on June 30, 1995, (the "Maturity Date"), or
such earlier date as the principal hereof and interest
thereof may become due in accordance with the provisions
hereof upon surrender hereof, the principal sum of ____
Pounds Sterling (B.P. ) (the "Face Amount"), or such
lesser sum as shall become due upon acceleration of the
maturity or redemption hereof to a date prior to the Matur-
ity Date.
This Note shall not otherwise bear interest unless
the Company shall fail to pay or duly provide for payment of
any amount due hereunder, whether upon acceleration, redemp-
tion, at stated maturity or otherwise, provided, that if the
--------
Company shall fail to pay any amount due hereunder on the
date when due, the overdue amounts shall bear interest from
and including such due date to but not including the date
upon which all overdue amounts have been paid at a rate
equal to the greater of (i) 12% per annum, compounded as of
June 30 and December 31 in each year, and (ii) a fluctuating
rate of interest equal to four percentage points above the
base lending rate from time to time of National Westminster
Bank plc (each change in such fluctuating rate of interest
to be effective as at the opening of business on the date a
.
<PAGE>
change in such base rate is determined by such Bank to be
effective), so compounded.
Payments of principal and interest on this Note
shall be made in lawful money of the United Kingdom at the
principal office of the Company in London.
This Note is one of the Company's Zero Coupon
Subordinated Notes due 1995 (the "Notes"), originally issued
in the aggregate principal amount of B.P. pursuant to a
--------
Note Purchase Agreement (the "Note Purchase Agreement"),
dated as of October 9, 1987, among the Company, Sphere Drake
Holding Public Limited Company (the "Guarantor") and Alex-
ander Stenhouse & Partners Ltd. The holder of this Note is
entitled to the benefits of the Note Purchase Agreement and
may enforce the agreements of the Company and the Guarantor
contained therein and exercise the remedies provided for
thereby or otherwise available in respect thereof.
Timely payment of all amounts of interest and
principal payable in respect of this Note are guaranteed by
the Guarantor pursuant to the Guaranty Agreement dated De-
cember , 1987.
The Notes are subject to required and optional
prepayment, in whole or in part as specified in the Note
Purchase Agreement. All such prepayments shall be at this
Note's Accreted Value (as hereinafter defined) on the date
of prepayment. This Note was originally issued on December ,
1987 for an aggregate purchase price of B.P.12,700,000. For
any period from its date of issue to its final maturity the
income element in respect of this Note shall be the differ-
ence between such Accreted Value (as hereinafter defined) as
of the last and the first days of such period.
Anything in this Note to the contrary notwith-
standing, if the Final Adjustment Date (as defined in that
certain Share Purchase Agreement dated as of October 9, 1987
between the Company and AS & P) shall occur after the Matur-
ity Date, the maturity of this Note shall be extended to the
Final Adjustment Date at which time this Note shall become
due together with interest as provided in the second para-
graph hereof.
The term "Accreted Value" with respect to this
Note means, as of any date (a "Determination Date"), an
amount equal to the original purchase price of this Note
(B.P.12,700,000) plus Accrued Amortization of Original Issue
2
<PAGE>
Discount to the Determination Date. "Accrued Amortization
of Original Issue Discount" shall be (i) the aggregate of
the amount of original issue discount of this Note at the
June 30 or December 31 falling on or immediately prior to
the Determination Date (a "Reference Date"), determined by
applying the percentage applicable to this Note on such date
as set forth in the Schedule attached hereto to the Face
Amount of this Note, plus (ii) if the Determination Date is
a date other than a Reference Date, Accrued Amortization of
Original Issue Discount from the immediately preceding Ref-
erence Date (or [the Closing date] if there is no preceding
Reference Date) to the Determination Date, computed by mul-
tiplying (a) the excess of Accrued Amortization of the Ori-
ginal Issue Discount as of the next succeeding Reference
Date determined by applying the percentage applicable to
this Note on such Reference Date as set forth in the Sche-
dule attached hereto to the Face Amount of this Note over
Accrued Amortization of the Original Issue Discount as of
the immediately preceding Reference Date (or [the Closing
date] if there is no preceding Reference Date), by (b) a
fraction, (A) the numerator of which is the number of days
(based on a 360-day year comprised of 12 30-day months) from
but not including such immediately preceding Reference Date
(or [the Closing date] if there is no preceding Reference
Date) to and including the Determination Date and (B) the
denominator of which is 180.
In case an Event of Default, as defined in the
Note Purchase Agreement, shall occur and be continuing, the
unpaid balance of the principal of this Note may become due
and payable in the manner and with the effect provided in
the Note Purchase Agreement.
This Note is made and delivered in London, and
shall be governed by the laws of England.
3
<PAGE>
The Company waives diligence, presentment, demand,
protest and notice of dishonour or other notice of any kind.
The non-exercise by the holder of this Note of any of its
rights hereunder in any particular instance shall not con-
stitute a waiver thereof in that or any subsequent instance.
IN WITNESS WHEREOF this Note has been executed on
behalf of the Company by its duly authorised director the
day and year first above written.
SPHERE DRAKE ACQUISITIONS (U.K.) LIMITED
By:______________________
Director
4
<PAGE>
SCHEDULE TO SUBORDINATED NOTE
-----------------------------
.
<PAGE>
EXHIBIT A-3
FORM OF CREDIT FACILITY NOTE
----------------------------
SPHERE DRAKE ACQUISITIONS (U.K.) LIMITED
CREDIT FACILITY NOTE DUE 1995
Guaranteed by Sphere Drake Holding Public Limited
Company
London
, 19__
SPHERE DRAKE ACQUISITIONS (U.K.) Limited, an En-
glish company having its registered office at 30 Mincing
Lane, London EC3R 7BR, England, company registration number
2136565 (the "Company"), for value received, hereby promises
to pay to [ALEXANDER STENHOUSE & PARTNERS LTD., a Scottish
company having its registered office at 145 St. Vincents
Street, Glasgow, Scotland, company registration number
SC23477] [or name of Affiliated Lender] [or name of Credit
Enhancement Party] or order, (the "Holder") on June 30, 1995
as extended, or such earlier date as the principal hereof
and interest hereon may become due in accordance with the
provisions hereof, upon surrender hereof, the outstanding
principal sum of Pounds Sterling shown for the time being
and from time to time in the fifth column of the schedule
hereto following notations made from time to time by the
holder hereof in accordance with section 10 of the Note
Purchase Agreement hereinafter referred to; together with
interest on any and all principal amounts remaining unpaid
hereunder from time to time outstanding from the date hereof
until payment in full hereof, payable monthly on the last
day of each calendar month during the term hereof and at
final maturity at a fluctuating interest rate equal at all
times to two percentage points above the base lending rate
used in England by National Westminster Bank plc (each
change in such fluctuating rate of interest to be effective
as at the opening of business on the date a change in such
base rate is determined by such Bank to be effective).
.
<PAGE>
Payments of principal and interest on this Note
shall be made in lawful money of the United Kingdom at the
principal office of the Company in London.
This Note is one of the Company's Credit Facility
Notes due 1995 (the "Notes"), originally issued in the ag-
gregate principal amount of up to B.P.32,651,939 pursuant to a
Note Purchase Agreement, dated as of October 9, 1987, ("the
Note Purchase Agreement") among the Company, Sphere Drake
Holding Public Limited, Company (the "Guarantor") and Alex-
ander Stenhouse & Partners Ltd. The holder of this Note is
entitled to the benefits of the Note Purchase Agreement and
may enforce the agreements of the Company and the Guarantor
contained therein and exercise the remedies provided for
thereby or otherwise available in respect thereof.
Timely payment of all amounts of interest and
principal payable in respect of this Note are guaranteed by
the Guarantor pursuant to the Guaranty Agreement dated De-
cember , 1987.
The Notes are subject to required and optional
prepayment, in whole or in part, all as specified in the
Note Purchase Agreement.
Anything in this Note to the contrary notwithstan-
ding, if the Final Adjustment Date (as defined in that cer-
tain Share Purchase Agreement dated as of October 9, 1987
between the Company and AS & P) shall occur after the Matur-
ity Date, the maturity of this Note shall be extended to the
Final Adjustment Date at which time this Note shall become
due together with interest as provided in the second para-
graph hereof.
In case an Event of Default, as defined in the
Note Purchase Agreement, shall occur and be continuing, the
unpaid balance of the principal of this Note may become due
and payable in the manner and with the effect provided in
the Note Purchase Agreement.
This Note is made and delivered in London, and
shall be governed by the laws of England.
The Company waives diligence, presentment, demand,
protest and notice of dishonour or other notice of any kind.
The non-exercise by the holder of this Note of any of its
rights hereunder in any particular instance shall not con-
stitute a waiver thereof in that or any subsequent instance.
2
<PAGE>
IN WITNESS WHEREOF this Note has been executed on
behalf of the Company by its duly authorised director the
day and year first above written.
SPHERE DRAKE ACQUISITIONS (U.K.) LIMITED
By:______________________
Director
3
<PAGE>
SCHEDULE
--------
OUTSTANDING PRINCIPAL AMOUNT
----------------------------
OF CREDIT FACILITY NOTE
-----------------------
<TABLE><CAPTION>
Payment Type: Loan/
Third Party
Supported Loan/ Outstanding/ Notation
Payment under Credit Repayment/ Remaining made on behalf
Date made Enhancement Agreement Principal Amount Prepayment Principal Amount of the holder
--------- --------------------- ---------------- ---------- ---------------- -------------
<S> <C> <C> <C> <C> <C>
.
</TABLE>
<PAGE>
Exhibit B
GUARANTY AGREEMENT
December , 1987
by
SPHERE DRAKE HOLDING PUBLIC LIMITED COMPANY
10931908.
<PAGE>
TABLE OF CONTENTS
-----------------
Section Page
------- ----
1. Definitions . . . . . . . . . . . . . . . . . . . 1
2. Guarantee . . . . . . . . . . . . . . . . . . . . 2
3. Obligations Unconditional . . . . . . . . . . . . 3
4. Waiver . . . . . . . . . . . . . . . . . . . . . 9
5. Corporate Existence . . . . . . . . . . . . . . . 10
6. Notices . . . . . . . . . . . . . . . . . . . . . 10
7. Governing Law and Jurisdiction . . . . . . . . . 12
.
<PAGE>
EXHIBIT B
SPHERE DRAKE HOLDING PUBLIC LIMITED COMPANY
-------------------------------------------
GUARANTY AGREEMENT
------------------
THIS GUARANTEE is made the day of 1987 by
SPHERE DRAKE HOLDING PUBLIC LIMITED COMPANY, a company in-
corporated in England (registered number 2168083) whose
registered office is at 30 Mincing Lane, London EC3R 7BR,
England ("the Guarantor") for the benefit of each of (1)
Alexander Stenhouse & Partners Ltd., its permitted succes-
sors and assigns pursuant to the provisions of the Note
Purchase Agreement referred to in Recital (A) ("AS&P") and
(2) the holders from time to time of the Guaranteed Notes
(as hereinafter defined) ("the Noteholders").
WHEREAS:
--------
(A) This Guarantee is made pursuant to a Note Purchase
Agreement dated as of October 9, 1987 made between
Sphere Drake Acquisitions (U.K.) Limited (the "Com-
pany"), the Guarantor and AS&P (the "Note Purchase
Agreement").
(B) Pursuant to the Note Purchase Agreement, the Company
may from time to time issue and require AS&P to pur-
chase the Senior Notes and the Subordinated Notes and
may from time to time issue and Affiliated Lenders and
Credit Enhancement Parties may purchase Credit Facility
Notes (such Senior Notes, Subordinated Notes and Credit
Facility Notes being hereinafter collectively called
"the Guaranteed Notes").
NOW THIS DEED WITNESSES AND IT IS HEREBY DECLARED as
follows:-
1. Definitions
-----------
(A) Subject as herein provided, all words and expressions
defined in the Note Purchase Agreement shall where the
context so requires or permits have the same meanings
in this Guarantee.
(B) Unless the context indicates otherwise, references to a
Clause shall be construed as a reference to a Clause of
this Guarantee.
(C) Headings have been inserted for ease of reference only
and do not and shall be deemed not to form part of this
<PAGE>
Guarantee and shall not affect the construction of this
Guarantee.
(D) References to the singular shall include the plural and
vice versa and references to persons include references
to companies.
2. Guarantee
---------
(A) The Guarantor hereby unconditionally and irrevocably
guarantees to AS&P, each of the Noteholders, each Af-
filiated Lender, and each Third Party Lender if and
when there is a Triggering Event the due and punctual
payment by the Company of the following amounts (the
"Guaranteed Payments") as and when the same shall be-
come due and payable:-
(i) any and all amounts of principal (including the
Accreted Value) becoming due and payable on the
Guaranteed Notes in accordance with the terms
thereof and of the Note Purchase Agreement, whe-
ther at the stated maturity of the Guaranteed
Notes, as installments, as required prepayments,
by notice of optional prepayment, by declaration
of acceleration or otherwise;
(ii) any and all amounts of interest becoming due and
payable on the unpaid principal balance of the
Guaranteed Notes to and including the date of
payment of such balance in accordance with the
terms of the Guaranteed Notes and of the Note
Purchase Agreement, including interest on any
overdue principal and, to the extent permitted by
applicable law, on any overdue interest;
(iii) any and all amounts payable under any provision of
the Note Purchase Agreement.
(iv) any and all amounts of principal (including the
Accreted Value) becoming due and payable on the
Support in accordance with the terms thereof and
of the Note Purchase Agreement, whether at the
stated maturity of the Support, as installments,
as required prepayments, by notice of optional
prepayment, by declaration of acceleration or
otherwise;
2
<PAGE>
(v) any and all amounts of interest becoming due and
payable on the unpaid principal balance of the
Support to and including the date of payment of
such balance in accordance with the terms of the
Support and of the Note Purchase Agreement, in-
cluding interest on any overdue principal and, to
the extent permitted by applicable law, on any
overdue interest; and
(vi) any and all amounts payable under any provision of
any Support agreement.
(B) This Guarantee shall be a continuing guarantee and
shall remain in force until all the Guaranteed Payments
shall have been finally paid in full to the satisfac-
tion of AS&P and each of the Noteholders and shall not
be satisfied, discharged or affected by any intermedi-
ate payment or settlement of account.
(C) If and whenever the Company shall default in the pay-
ment of any Guaranteed Payment on the due date for
payment thereof, the Guarantor shall immediately on
demand made by AS&P or any Noteholder make the Guaran-
teed Payment to AS&P or such Noteholder, as the case
may be, strictly in accordance with the terms and pro-
visions of the Guaranteed Notes and/or the Note Pur-
chase Agreement, as the case may be, regardless of any
law, regulation or decree, now or hereafter in effect,
which affects or might in any manner affect any of such
terms and provisions or AS&P's or such Noteholder's, as
the case may be, rights as against the Company.
3. Obligations Unconditional
-------------------------
(A) The liability of the Guarantor hereunder shall remain
in full force and effect without regard to, and shall
not be released, diminished or discharged or in any way
affected by:
(i) any amendment or modification of or supplement to
the Note Purchase Agreement, the Guaranteed Notes
or any contracts or other agreements entered into
in connection therewith including, without limita-
tion, the Share Purchase Agreement dated as of
October 9, 1987 made between the Company and AS&P
(all of such agreements, notes and contracts being
3
<PAGE>
hereinafter collectively called "the Instru-
ments");
(ii) any assignment or transfer of any Instrument or of
any interest thereunder in compliance with the
terms of the applicable Instrument;
(iii) any exercise or non-exercise of any right, remedy,
power or privilege under or in respect of any
Instrument or any lack of diligence or failure to
mitigate damages or failure to proceed against, or
to take any action or pursue any remedy with re-
spect to, the Company or any other person or any
security afforded by or under any Instrument;
(iv) any release by operation of law or discharge by
operation of law of the Company or any other per-
son from the performance or observance of any
obligation, undertaking or condition to be per-
formed by the Company or such other person, as the
case may be, under or in respect of any Instru-
ment;
(v) any limitation on the liabilities or obligations
of the Company, or any other person under any
Instrument or any termination or cancellation, or
any frustration, invalidity, irregularity it, or
unenforceability, in whole or in part, of any such
Instrument or any limitation on the method or
terms of payment thereunder which may now or here-
after be caused or imposed in any manner whatso-
ever;
(vi) any failure on the part of AS&P or any Noteholder
or any other person for any reason to perform or
comply with any tern or provision of any Instru-
ment.
(B) The bankruptcy, liquidation or insolvency of the Com-
pany shall not affect or determine the liability of the
Guarantor under this Guarantee. All dividends, composi-
tions and moneys received by AS&P or any Noteholder
from the Company or from any other company, person or
estate capable of being applied by AS&P or any Note-
holder, as the case may be, in reduction of the Guaran-
teed Payments shall be regarded for all purposes as
payments in gross and AS&P or any Noteholder, as the
case may be, shall be entitled to prove in the bank-
4
<PAGE>
ruptcy, liquidation or insolvency of the Company in
respect of all outstanding Guaranteed Payments due to
AS&P or any Noteholder, as the case may be, and without
any right on the part of the Guarantor to be subrogated
to AS&P or any Noteholder, as the case may be, in re-
spect of any such proof to the intent that this Guaran-
tee shall apply to and secure the whole of any ultimate
balance which shall remain due to AS&P or any Note-
holder.
(C) This Guarantee and the rights of AS&P and the Noteh-
olders hereunder shall be in addition to and shall not
be in any way prejudiced or affected by any one or more
other securities or guarantees for the Company which
AS&P or any Noteholder may now or hereafter hold wheth-
er from the Guarantor or from any other person.
(D) The liability of the Guarantor hereunder shall be unaf-
fected by any arrangement which AS&P or any Noteholder
may make with the Company or with any other person
which (but for this provision) might operate to dimi-
nish or discharge the liability of or otherwise provide
a defence to a surety. Without prejudice to the gener-
ality of the foregoing, AS&P and the Noteholders are to
be at liberty at any time and without reference to the
Guarantor to give time for payment or grant any other
indulgence and to give up, deal with, vary, exchange or
abstain from perfecting or enforcing any other securi-
ties or guarantees held by AS&P and the Noteholders at
any time and to discharge any party thereto, and to
realise such securities or guarantees or any of them,
as AS&P and the Noteholders may think fit and to com-
pound with, accept compositions from and make any other
arrangements with the Company or any person or persons
liable on bills, notes or other securities or guaran-
tees held or to be held by AS&P and the Noteholders
without affecting the Guarantor's liability hereunder.
(E) This Guarantee shall take effect as a guarantee of the
whole and every part of the Guaranteed payments due or
owing or payable and accordingly the Guarantor shall
not be entitled as against AS&P and the Noteholders to
any right of proof in the bankruptcy, liquidation or in-
solvency of the Company or any other surety or other
right of a surety (including any right of contribution
from any other surety) discharging, in whole or in
part, its liability in respect of the Guaranteed Pay-
ments or to share in any security held or money re-
5
<PAGE>
ceived by AS&P or any Noteholder on account of the
obligations of the Company or any other surety or to
have or exercise any rights as surety (including any
such right of contribution as aforesaid) in competition
with AS&P or any Noteholder unless and until all the
Guaranteed Payments shall have first been completely
discharged and satisfied. Furthermore, until all the
Guaranteed Payments shall have been discharged and
satisfied in full the Guarantor shall not, if the Guar-
anteed Payments shall have become payable or shall have
been paid by the Guarantor under this Guarantee, take
any step to enforce repayment or to exercise any other
rights, claims or remedies of any kind which may accrue
howsoever to the Guarantor in respect either of the
amount so payable or so paid (including any such right
of contribution as aforesaid) or of any other moneys
for the time being due to the Guarantor from the Com-
pany or any other surety provided that in the event of
the bankruptcy, liquidation or insolvency of the Com-
pany or any other surety the Guarantor shall, if so
directed by AS&P or any Noteholder but not otherwise,
prove for the whole or any part of the moneys due to
the Guarantor from the Company or any other surety as
aforesaid on terms that the benefit of such proof and
of all moneys to be received by the Guarantor in re-
spect thereof shall be held in trust for AS&P and the
Noteholders and applied in discharging the obligations
of the Guarantor to AS&P and the Noteholders. For the
purpose of enabling AS&P and the Noteholders to sue the
Company or any other surety or prove in the bankruptcy,
liquidation or insolvency of the Company or any other
surety for any Guaranteed Payments remaining due or
owing or payable, or to preserve intact the liability
of any other party, AS&P and the Noteholders may at any
time and place keep, for such time as AS&P and the
Noteholders may think prudent, any moneys received, or
realised hereunder or under any other guarantee or
security to the credit, either of the Guarantor, or
such other person or transaction (if any) as AS&P and
the Noteholders shall think fit, without any intermedi-
ate obligation on the part of AS&P and the Noteholders
to apply the same or any part thereof in or towards the
discharge of any Guaranteed Payments remaining due or
owing or payable or any intermediate right on the part
of the Guarantor to sue the Company or any other surety
or prove in the bankruptcy, liquidation or insolvency
of the Company or any other surety in competition with
or so as to diminish any dividend or other advantage
6
<PAGE>
that would or might come to AS&P and the Noteholders or
treat the liability of the Company or any other surety
as diminished. As used in this Clause 3(E) the expres-
sion "any other surety" includes any party or person
referred to in Clause 3(D).
(F) For all purposes including any legal proceedings a copy
of any Guaranteed Note signed by another Director of
the relevant Noteholder shall be accepted by the Guar-
antor as conclusive evidence of the outstanding princi-
pal amount of such Guaranteed Note.
(G) It is hereby declared by the Guarantor that no security
has been received by the Guarantor from the Company or
any other surety for the giving of this Guarantee and
it is declared and agreed by the Guarantor that the
Guarantor will not, so long as this Guarantee remains
in force, take any security in respect of the Guaran-
tor's liability hereunder without first obtaining the
written consent of AS&P.
(H) As a separate and independent stipulation it is de-
clared and agreed by the Guarantor that any Guaranteed
Payment which may not be recoverable from the Guarantor
on the footing of a guarantee, whether by reason of any
legal limitation, disability or incapacity on or of the
Company or any other fact or circumstance, and whether
known to AS&P, any Noteholder or the Guarantor or not,
shall nevertheless be recoverable from the Guarantor as
sole or principal debtor in respect thereof and shall
be paid by the Guarantor immediately on demand.
(I) This Guarantee shall continue to bind the Guarantor
notwithstanding any amalgamation or merger that may be
effected by AS&P or any Noteholder with any other com-
pany or companies and notwithstanding any reconstruc-
tion by AS&P or any Noteholder involving the formation
of and transfer of the whole or any part of the under-
taking and assets of AS&P or any Noteholder to a new
company and notwithstanding the sale or transfer of the
whole or any part of the undertaking and assets of AS&P
or any Noteholder to another company, whether the com-
pany or companies with which AS&P or any Noteholder
amalgamates or merges or the company to which AS&P or
any Noteholder transfers the whole or any part of its
undertaking and assets either on a reconstruction or
sale or transfer as aforesaid shall or shall not differ
from AS&P or any Noteholder in their or its objects,
7
<PAGE>
character or constitution, it being the intent of the
Guarantor that this Guarantee shall remain valid and
effectual in all respects in favour of, against and
with reference to, and that the benefit of this Guaran-
tee and all rights conferred upon AS&P and the Note-
holders hereby may be assigned to and enforced by, any
such company or companies and proceeded on in the same
manner to all intents and purposes as if such company
or companies had been named herein instead of and/or in
addition to AS&P and the Noteholders.
(J) Any settlement or discharge between AS&P or any Note-
holder and the Guarantor shall be subject to the condi-
tion that no security or payment to AS&P or any Note-
holder, as the case may be, by the Company or any other
person shall be avoided or reduced by virtue of any
provisions or enactments relating to bankruptcy, liqui-
dation or insolvency for the time being in force and if
any such security or payment shall be so avoided or
reduced AS&P or any Noteholder, as the case may be,
shall be entitled to recover the value or amount there-
of from the Guarantor subsequently just as if such
settlement or discharge had not occurred.
(K) Each payment to be made by the Guarantor hereunder
shall be made to AS&P and the Noteholders in pounds
sterling, to the credit of the accounts of AS&P and the
Noteholders with whichever bank or banks located in the
United Kingdom, as shall be designated by AS&P and the
Noteholders. All such payments shall be made in full
without set-off or counterclaim and free and clear of
and without deduction of or withholding for or on ac-
count of any tax of any nature now or hereafter imposed
by the United Kingdom or any subdivision or taxing
authority thereof or therein or any federation or or-
ganisation of which such country is a member. If any
such payment shall be subject to any such tax or if the
Guarantor shall be required to make any such deduction
or withholding, the Guarantor shall pay such tax, shall
ensure that such payment, deduction or withholding will
not exceed the minimum legal liability therefor and
shall simultaneously pay to AS&P and/or the Noteholders
such additional amounts as may be necessary to enable
AS&P and/or the Noteholders to receive, after all such
payments, deductions and withholdings, a net amount
equal to the full amount payable hereunder. If the
Guarantor shall make any such payment deduction or
withholding the Guarantor shall within 30 days there-
8
<PAGE>
after forward to AS&P and/or the Noteholders an of-
ficial receipt or other official documentation evidenc-
ing such payment or the payment of such deduction or
withholding. As used in this Clause the term "tax"
includes all levies, imposts, duties, charges, fees,
deductions, withholdings, turnover tax, transaction
tax, stamp tax, and any restrictions or conditions
resulting in a charge.
(L) No delay or omission on the part of AS&P or any Note-
holder in exercising any right, power, privilege or
remedy in respect of this Guarantee shall impair such
right, power, privilege or remedy or be construed as a
waiver thereof nor shall any single or partial exercise
of any such right, power, privilege or remedy preclude
any further, exercise thereof or the exercise of any
other right, power, privilege or remedy. The rights,
powers, privileges and remedies heron provided are
cumulative and not exclusive of any rights, powers,
privileges, or remedies provided by law.
(M) The liability of the Guarantor shall not be released,
diminished or discharged or in any way affected by any
other circumstance or condition, whether similar or
dissimilar to any of the foregoing, that might consti-
tute a legal or equitable discharge or defence of a
guarantor (whether or not the Guarantor shall have any
knowledge or notice thereof).
4. Waiver
------
The Guarantor hereby waives, insofar as its obligations
hereunder are concerned:
(i) notice from any person that such person is or has
become a person entitled to the benefit of this
Guarantee;
(ii) notice of the execution and delivery of any In-
strument;
(iii) notice of any of the matters referred to in Clause 3;
(iv) to the fullest extent permitted by applicable law,
all notices required by statute, rule of law or
otherwise to preserve or enforce any rights
against the Guarantor hereunder, including without
limitation any presentment, demand, proof or no-
9
<PAGE>
tice of non-payment of any indemnity of the Com-
pany and notice of any failure on the part of the
Company to perform or comply with any term of any
instrument or agreement (including without limita-
tion any Instrument) applicable to the Company;
(v) any right to the enforcement, assertion or exer-
cise of any right, remedy, power or privilege
under or in respect of any Instrument;
(vi) to the fullest extent permitted by applicable law,
any requirement that AS&P, any Noteholder or any
other person be joined as a party to any proceed-
ing for the enforcement of any term of any Instru-
ment;
(vii) any right to require a proceeding first against
the Company or any other person or the security
provided by or under any Instrument or agreement;
(viii) any requirement on the part of AS&P or any Note-
holder to mitigate any damages resulting from any
non-performance by the Company or AS&P or any
Noteholder under any Instrument or the occurrence
of any default or event or default under any In-
strument.
5. Corporate Existence
-------------------
The Guarantor hereby undertakes at all times to pre-
serve and keep in full force and effect its corporate
existence.
6. Notices
-------
Any demand or notice required or permitted hereunder
shall be in writing and shall be delivered personally,
telegraphed, telexed or sent by facsimile transmission.
Any such demand or notice shall be deemed given when so
10
<PAGE>
delivered personally, telegraphed, telexed or sent by
facsimile transmission, as the case may be, as follows:
(i) if to the Guarantor, to:
Sphere Drake Holding Public Limited Company
c/o Sphere Drake Insurance plc
52/54 Leadenhall Street
London EC3A 2BJ
England
Attention: The Managing Director
Telex: 935015 Sphere G
Fax: 01-481-3828
with copies to:-
Sphere Drake Holding Public Limited Company
c/o Centre Capital Investors L.P.
Suite 1025
One Rockefeller Plaza
New York, New York 10020
United States of America
Attention: Lester Pollack
Telex: RCA 222331
Fax: (212) 971-2825 or
(212) 489-9655
and
John C Head III
c/o John Head & Partners
545 Madison Avenue
New York, New York 10022
Telex: 971861
Fax: (212) 421-9049
and
Paul, Weiss, Rifkind, Wharton & Garrison
1285 Avenue of the Americas
New York, New York 10019
United States of America
Attention: Albert P. Hand, Esq.
Telex: WUI 666-843
Fax: (212) 757-3990
and
11
<PAGE>
Clyde & Co.
51 Eastcheap
London EC3M 1JP
England
Attention: Francis Mackie and V.G. Southey
Telex: 884886 CLYDE G
Fax: 01-623-5427
(ii) if to AS&P or any Noteholder, to:
Alexander Stenhouse & Partners Ltd.
Two South Place
London EC2P 2DX
Attention: The Company Secretary
Telex: 8813371
Fax: 01-588-1680
with copies to:
Alexander & Alexander Services Inc.
1211 Avenue of the Americas
New York, New York 10036
Attention: General Counsel
Telex: 620303
Fax: (212) 302-1921
Alexander & Alexander Europe plc
5-10 Bury Street
London EC3A 5HL
England
Attention: Group Legal Adviser
Telex: 882171
Fax: 01-623-5022
7. Governing Law and Jurisdiction
------------------------------
(A) This Guarantee shall be governed by and construed in
accordance with the laws of England and the Guarantor
hereby irrevocably declares and agrees for the exclu-
sive benefit of AS&P and the Noteholders that the
courts of England are to have jurisdiction to settle
any disputes which may arise out of or in connection
with this Guarantee and that accordingly any suit,
action or proceeding arising out of or in connection
with this Guarantee (in this Clause referred to as
"Proceedings") may be brought in such courts.
12
<PAGE>
(B) Without prejudice to Clause 7(A), the Guarantor further
irrevocably declares and agrees that any Proceedings
may be brought in the courts of the United States of
America located in New York County in the State of New
York and submits to the non-exclusive jurisdiction of
such courts.
(C) Nothing contained in this Clause shall limit the right
of AS&P or any Noteholder to take Proceedings against
the Guarantor in any other court of competent jurisdic-
tion, nor shall the taking of Proceedings in one or
more jurisdictions preclude the taking of Proceedings
in any other jurisdiction, whether concurrently or not.
(D) The Guarantor hereby irrevocably waives (and irrevoc-
ably declares and agrees that it will not raise) any
objection which it may have now or hereafter to the
laying of the venue of any Proceedings in any such
court as is referred to in this Clause and any claim
that any such Proceedings have been brought in an in-
convenient forum and further irrevocably declares and
agrees that a judgment in any Proceedings brought in
any court as is referred to in this Clause shall be
conclusive and binding upon the Guarantor and may be
enforced in the courts of any other jurisdiction.
(E) The Guarantor declares and agrees that any writ, judg-
ment or other notice of process shall be sufficiently
and effectively served on it (a) in connection with
Proceedings in New York, if addressed to Paul, Weiss,
Rifkind, Wharton & Garrison and delivered to such firm
at its offices at 1285 Avenue of the Americas, New
York, New York 10019 or such other address for the time
being as the Guarantor may have notified to AS&P, (b)
if a copy thereof is mailed by registered or certified
mail (airmail if overseas), postage pre-paid, return
receipt requested, to the address for the time being
for the service of notices on the Guarantor under
Clause 6, or (c) if served in any other manner permit-
ted by law.
13
<PAGE>
IN WITNESS WHEREOF this Guarantee has been execut-
ed by the Guarantor as of the day and year first above writ-
ten.
THE COMMON SEAL OF SPHERE )
DRAKE HOLDING PUBLIC LIMITED )
COMPANY was hereunto affixed )
in the presence of:- )
Director:
Secretary:
14
<PAGE>
EXHIBIT "C"
-----------
OPINION OF CLYDE & CO
---------------------
Dear Sirs,
We have acted as Legal Advisors in England and
Wales to Sphere Drake Acquisitions (U.K.) Limited (the "Com-
pany") and Sphere Drake Holding Public Limited Company (the
"Guarantor") with respect to the Note Purchase Agreement
(the "Note Purchase Agreement") dated as of October 9, 1987
made between the Company, the Guarantor and yourselves, the
Guaranty Agreement dated December 30, 1987 (the "Guaranty
Agreement") and the Warrant Agreement (the "Warrant Agree-
ment") dated as of October 9, 1987 made between the Company,
the Guarantor and yourselves and as such have been entered
into in connection with a transaction in which the Company
acquired all of the issued share capital of Sphere Drake
Insurance Group Public Limited Company. Certain capitalized
terms used in this Opinion have the meanings specified in
the Note Purchase Agreement.
We have participated in the preparation of and
have examined the documents listed in Schedule 1 hereof (the
"Documents") for the purposes of this Opinion. The opinion
given is rendered solely in relation to the Laws of England
and Wales and no opinion is expressed as to the laws of any
other jurisdiction.
On the basis of the Guaranty Agreement, the Note
Purchase Agreement, the Notes, the Warrant Agreement and the
Warrant and the assumptions listed in Schedule 2 hereof we
are of the opinion that, so far as the laws of England and
Wales are concerned:
1. Each of the Company and the Guarantor is duly incorpor-
ated in England and Wales and no winding up order or
appointment of a Liquidator, Receiver or Administrative
Receiver has been filed on the Companies file at the
Companies Registration Office or the Central Registry
of Winding-up Petitions with respect to either company.
2. Each of the Company and the Guarantor has the corporate
power to enter into the Guaranty Agreement, the Note
.
<PAGE>
Purchase Agreement, the Notes, the Warrant Agreement
and the Warrant, as the case may be.
3. Each of the Company and the Guarantor has taken the
necessary corporate action to authorise it to enter
into the Guaranty Agreement, the Note Purchase Agree-
ment, the Notes, the Warrant Agreement and the Warrant,
as the case may be, and to perform its obligations as
therein provided for.
4. The obligations which each of the Company and the Guar-
antor will undertake under the Guaranty Agreement, the
Note Purchase Agreement, the Notes, the Warrant Agree-
ment and the Warrant, as the case may be, constitute
valid and legally binding obligations of the Company
and the Guarantor, as the case may be, under the laws
of England and Wales.
5. Save for the approvals and consents specified in clause
5.6 of the Note Purchase Agreement there are no other
consents or approvals of any United Kingdom governmen-
tal authority applicable to the Company or the Guaran-
tor generally which are required in connection with
their respective entry into the Guaranty Agreement, the
Note Purchase Agreement, the Notes, the Warrant Agree-
ment or the Warrants, or the performance by them of
their obligations thereunder.
6. No United Kingdom stamp duty (other than nominal duty)
is payable in connection with the execution and deliv-
ery of the Guaranty Agreement, the Note Purchase Agree-
ment, the Notes, the Warrant Agreement or the Warrant.
7. Save as otherwise provided it is not necessary to reg-
ister the Guaranty Agreement, the Note Purchase Agree-
ment, the Notes, the Warrant Agreement or the Warrant
in any Public Office in the United Kingdom.
2
<PAGE>
The above Opinion is subject to the assumptions
referred to in Schedule 2 and the following reservations:-
A. Nothing in this opinion is to be taken as indicating
that an order for specific performance or an injunction
would be available in respect of any of the obligations
of the Company or the Guarantor, as the case may be
under the Guaranty Agreement, the Note Purchase Agree-
ment, the Notes, the Warrant Agreement or the Warrants.
B. The obligations of the Company or the Guarantor, as the
case may be, under the Guaranty Agreement, the Note
Purchase Agreement, the Notes, the Warrant Agreement or
the Warrant are subject to all laws relating to liqui-
dation or insolvency and all other laws affecting cred-
itors rights generally.
This Opinion is given for the benefit of Alexander
Stenhouse & Partners Limited as an original party to the
Note Purchase Agreement pursuant to clause 4.7 thereof and
may not be relied upon by any other person.
Yours faithfully,
Clyde & Co.
-----------
3
<PAGE>
SCHEDULE 1
----------
Documents
---------
1) A conformed copy of the Guaranty Agreement.
2) A conformed copy of the Note Purchase Agreement.
3) A conformed copy of the Warrant Agreement.
4) The Memorandum and Articles of Association of the Com-
pany.
5) The Memorandum and Articles of Association of the Guar-
antor.
6) A certificate by the Company Secretary of the Company.
7) A certificate by the Company Secretary of the Guaran-
tor.
8) (i) Copy of the Register of Members of the Com-
pany.
(ii) Minutes of a Meeting of the Board of Direc-
tors of the Company held on 9th October 1987.
(iii) Minutes of a Meeting of the Shareholders of
the Company.
(iv) Written Resolution of the Board of Directors
of the Company dated 9th October 1987.
9) (i) Copy of the Register of Members of the Guar-
antor.
(ii) Minutes of a Meeting of the Board of Direc-
tors of the Guarantor held on 9th October
1987.
(iv) Minutes of a Meeting of the Shareholders of
the Guarantor.
(v) Written Resolution of the Board of Directors
of the Guarantor dated 9th October 1987.
.
<PAGE>
SCHEDULE 2
----------
Assumptions
-----------
1) That the opinion we have expressed is not overridden or
modified by the laws of any other jurisdiction.
2) That the Documents we have examined have been duly
executed and delivered by the parties of record who had
appropriate capacity power and authority to enter into
such Documents and which are either original or com-
plete copies thereof.
3) That the Governmental or public records or certificates
have searched or examined are complete and accurate and
do not fail to disclose any material information which
had been properly presented for registration.
2
<PAGE>
EXHIBIT "C2"
------------
OPINION OF CLYDE & CO
---------------------
Alexander Stenhouse & Partners Limited,
145 St. Vincent Street,
Glasgow,
Scotland [First Credit Call Date]
Dear Sirs,
We have acted as Legal Advisers in England and
Wales to Sphere Drake Acquisitions (U.K.) Limited (the "Com-
pany") and Sphere Drake Holding Public Limited Company (the
"Guarantor") with respect to the Note Purchase Agreement
(the "Note Purchase Agreement") dated as of October 9, 1987
made between the Company, the Guarantor and yourselves and
the Guaranty Agreement dated December , 1987 (the "Guaranty
Agreement") made between the Guarantor and yourselves.
Certain capitalized terms used in this Opinion have the
meanings specified in the Note Purchase Agreement.
We have participated in the preparation of and
have examined the documents listed on Schedule 1 hereof (the
"Documents") for the purposes of this Opinion. The opinion
given is rendered solely in relation to the Laws of England
and Wales and no opinion is expressed as to the laws of any
other jurisdiction.
On the basis of the Guaranty Agreement, the Note
Purchase Agreement and the Credit Facility Note and the
assumptions listed in Schedule 2 hereof we are of the opin-
ion that, so far as the laws of England and Wales are con-
cerned:
1. Each of the Company and the Guarantor is duly incorpor-
ated in England and Wales and no winding-up order or
appointment of a Liquidator, Receiver, Administrative
Receiver or Administrator has been filed on the Com-
panies file at the Companies Registration Office or the
Central Registry of Winding-up Petitions with respect
to either company.
.
<PAGE>
2. Each of the Company and the Guarantor has the corporate
power to enter into the Guaranty Agreement, the Note
Purchase Agreement and the Credit Facility Note, as the
case may be.
3. Each of the Company and the Guarantor has taken the
necessary corporate action to authorise it to enter
into the Guaranty Agreement, the Note Purchase Agree-
ment and the Credit Facility Note, as the case may be,
and to perform its obligations as provided therein for.
4. The obligations which each of the Company and the Guar-
antor will undertake under the Guaranty Agreement, the
Note Purchase Agreement and the Credit Facility Note,
as the case may be, constitute valid and legally bind-
ing obligations of the Company and the Guarantor, as
the case may be, under the laws of England and Wales.
5. Save for the approvals and consents specified in
clause 5.6 of the Note Purchase Agreement there are no
other consents or approvals of any United Kingdom gov-
ernmental authority applicable to the Company or the
Guarantor generally which are required in connection
with their respective entry into the Guaranty Agree-
ment, the Note Purchase Agreement or the Credit Facil-
ity Note, or the performance by them of their obliga-
tions thereunder.
6. No United Kingdom stamp duty (other than nominal duty)
is payable in connection with the execution and deli-
very of the Agreement, the Note Purchase Agreement or
the Credit Facility Note.
7. Save as otherwise provided it is not necessary to reg-
ister the Guaranty Agreement, the Note Purchase Agree-
ment or the Credit Facility Note in any Public Office
in the United Kingdom.
2
<PAGE>
The above Opinion is subject to the assumptions
referred to in Schedule 2 and the following reservations:
A. Nothing in this Opinion is to be taken as indicating
that an order for specific performance or an injunction
would be available in respect of any other obligations
of the Company or the Guarantor, as the case may be,
under the Guaranty Agreement, the Note Purchase Agree-
ment or the Credit Facility Note.
B. The obligations of the Company or the Guarantor, as the
case may be, under the Guaranty Agreement, the Note
Purchase Agreement or the Credit Facility Note are
subject to all laws relating to liquidation or insol-
vency and all other laws affecting creditors rights
generally.
This Opinion is given for the benefit of Alexander
Stenhouse & Partners Limited as an original party to the
Note Purchase Agreement pursuant to clause 10.8(a)(ii)
thereof and may not be relied upon by any other person.
Yours faithfully,
Clyde & Co.
-----------
3
<PAGE>
SCHEDULE 1
----------
Documents
---------
1) A conformed copy of the Guaranty Agreement.
2) A conformed copy of the Note Purchase Agreement.
3) The Memorandum and Articles of Association of the Com-
pany.
4) The Memorandum and Articles of Association of the Guar-
antor.
5) A certificate by the Company Secretary of the Company.
6) A certificate by the Company Secretary of the Guaran-
tor.
7) (i) Copy of the Register of Members of the Com-
pany.
(ii) Copy of Minutes of a meeting of the Board of
Directors of the Company dated 9th October,
1987.
(iii) Copy of Minutes of a meeting of the Board of
Directors of the Company dated 24th December,
1987.
(iv) Copy of Minutes of a meeting of the Share-
holders of the Company dated 29th December,
1987.
(v) Copy of Minutes of a meeting of the Board of
Directors of the Company dated 29th December,
1987.
8) (i) Copy of the Register of the Shareholders of
the Guarantor.
(ii) Copy of Minutes of a meeting of the Board of
Directors of the Guarantor dated 9th October,
1987.
4
<PAGE>
(iii) Copy of Minutes of a meeting of the Board of
Directors of the Guarantor dated 21st Decem-
ber, 1987.
(iv) Copy of Minutes of a meeting of the Members
of the Guarantor dated 24th December, 1987.
(v) Copy of Minutes of a meeting of the Board of
Directors of the Guarantor dated 24th Decem-
ber, 1987.
(vi) Copy of Minutes of a meeting of the Board of
Directors of the Guarantor dated 29th Decem-
ber, 1987.
SCHEDULE 2
----------
Assumptions
-----------
1) That the opinion we have expressed is not overridden or
modified by the laws of any other jurisdiction.
2) That the Documents we have examined have been duly
executed and delivered by the parties of record who had
appropriate capacity, power and authority to enter into
such Documents and which are either original or com-
plete copies thereof.
3) That the Governmental or public records or certificates
we have searched or examined are complete and accurate
and do not fail to disclose any material information
which had been properly presented for registration.
5
<PAGE>
EXHIBIT D
THIS DEED is made the 1987
B E T W E E N :
--------------
(1) SPHERE DRAKE ACQUISITIONS (U.K.) LIMITED incorporated
----------------------------------------
in England and Wales (No. 2136565) whose registered
office is at 30 Mincing Lane, London EC3R 7BR ("SDA").
(2) S.D SECURITIES LIMITED incorporated in Guernsey whose
----------------------
registered office is at 7, New Street, St. Peter's
Port, Guernsey ("S.D Securities").
RECITALS
--------
A. Words and expressions defined in Clause 1 of this Deed
("Definitions") bear the same meaning when used in
those Recitals.
B. S.D Securities Limited has been promoted by SD Inves-
tors, Inc., a New York corporation and A&A to acquire
and hold upon certain trusts:-
(a) the Adjustment Rights of SDA under the Share Pur-
chase Agreement;
(b) the Senior Note and the Junior Note.
C. SDA has agreed to grant to S.D. Securities by this Deed
rights of option in respect of the Adjustment Rights.
D. Schedule 1 of this Deed records the trusts upon which
S.D Securities will hold, inter alia, the Adjustment
Rights upon exercise of the Option.
.
<PAGE>
NOW IT IS AGREED AND DECLARED as follows:-
-----------------------------
1. DEFINITIONS
-----------
(1) In this Deed the following words and expressions shall
bear the following meanings unless the context other-
wise requires:
"A&A" Alexander & Alexander
Services Inc, a Maryland
corporation
"A&A (Europe)" Alexander & Alexander
(Europe) plc incorporated
in Scotland (No. 32111)
"the Adjustment Account" the Adjustment Account
referred to in Section 7
of the Share Purchase
Agreement
"the Adjustment Debt" at any time, the balance
owing by AS&P under the
Adjustment Account
"the Adjustment Rights" all right and interest of
SDA under Section 7 and
the Adjustment Account
including the right to
enforce the provisions of
Section 7 against A&A and A&A
(Europe) as guarantors
"the Assigned Rights" following exercise of the
Option, the rights of the
Trustee as holder of the
Notes and as assignee of
the Adjustment Rights
"AS&P" Alexander Stenhouse &
Partners Limited incor-
porated in Scotland (No.
SC 23477)
2
<PAGE>
"the Beneficiaries" SDA and AS&P and any
person who is at the
material time a Priority
Creditor (and Beneficiary
shall be construed ac-
cordingly)
"the Countersigned Notice" the duplicate Notice of
Exercise countersigned in
accordance with clause
4(2)
"this Deed" this deed including the
Recitals and Schedules as
from time to time modi-
fied in accordance with
the provisions hereof
including any deed or
document supplemental to
or executed pursuant to
this deed
"Disputed Debt" the amount treated as
such pursuant to
clause 2(5) of Schedule 1
"Final Adjustment Date" 31st December, 1994
"Final Adjustment Debt" the cumulative Adjustment
Debt as finally deter-
mined after the Final
Adjustment Date (without
deduction for payments
made on account other
than payments to SDA
pursuant to sub-section
7.9 of Section 7)
"Junior Note" the Zero Coupon Subordi-
nated Note due 1995 is-
sued by SDA and purchased
by AS&P pursuant to the
Note Purchase Agreement
"Loan Note Debt" at any time the balance
outstanding under the
Notes
3
<PAGE>
"the Greater Debt" whichever is the greater
of the Adjustment Debt
and the Loan Note Debt
"the Lower Debt" whichever is the lesser
of the Adjustment Debt
and the Loan Note Debt
"the Net Amount" the difference between
the Greater Debt and the
Lower Debt
"the Notes" the Senior Note and the
Junior Note
"the Note Purchase Agreement" an Agreement dated as of
9th October 1987 between
SDA (1) and AS&P (2)
relating to the issue of
the Notes by SDA to AS&P
"Notice of Disagreement" shall have the meaning
ascribed in Section 7
"Notice of Exercise" a written notice given by
S.D Securities to SDA in
accordance with Clause
4(1) of this Deed
"the Option" the rights of option
granted by SDA to S.D
Securities under Clause 2
of this Deed
"Priority Creditor" any person nominated by
SDA as a Priority Credi-
tor under clause 6 of
Schedule 1
"Priority Debt" all monies from time to
time owing (account being
taken, inter alia, of
monies received by way of
dividend in a winding-up
of SDA) by SDA to the
Priority Creditor whether
on account of capital
interest costs or other-
4
<PAGE>
wise in respect of monies
borrowed or other credit
facilities obtained by
SDA to the extent re-
ferred to in clause 6 of
Schedule 1
"Provisional Adjustment the amount treated as
Debt" such pursuant to clause 2
(4) of Schedule 1 and
references to the cumula-
tive Provision Adjustment
Debt shall be to such
debt as adjusted from
time to time under Sec-
tion 7 (but without de-
duction for any part
thereof which is paid or
is to be treated as paid
other than payment to SDA
pursuant to sub-section
7.9 of Section 7)
"SD (Holding)" Sphere Drake Holding
Public Limited Company
"Section 7" Section 7 of the Share
Purchase Agreement
"Senior Creditors" creditors of SDA who are
trade or other unsubordi-
nated creditors of SDA
(other than Priority
Creditors to the extended
Priority Debt)
"Senior Note" the Zero Coupon Senior
Note due 1995 issued by
SDA and purchased by AS&P
pursuant to the Note
Purchase Agreement
"solvent" shall have the meaning
ascribed in clause 7 of
Schedule 1
5
<PAGE>
"the Share Purchase The Agreement dated as of
Agreement" 9th October 1987 between
AS&P as Seller (1) and
SDA as Buyer (2) for,
inter alia, the sale and
purchase of all the is-
sued shares of Sphere
Drake Insurance Group
Public Limited Company
"the Specified Address" 7 New Street, St. Peter's
Port, Guernsey
"Trustee" S.D Securities and any
other trustee or trustees
of the Assigned Rights
from time to time
"the Trusts" the Trusts upon which the
Trustee shall hold the
Assigned Rights as a
Schedule 1 of this Deed
as modified or varied
from time to time in
accordance therewith
(2) Words and expressions defined in the Share Purchase
Agreement where the contract admits bear the same mean-
ing when used in this Deed.
(3) In this Deed where the context admits:-
(a) the sign "B.P." shall be construed as references to
the currency of the United Kingdom
(b) references to any action, remedy or method of
judicial proceedings for the enforcement of rights
of creditors shall be deemed to include, in re-
spect of any jurisdiction other than England,
references to such action, remedy or method of
judicial or other proceedings for the enforcement
of rights of creditors available or appropriate in
such jurisdiction as shall most nearly approximate
to such action, remedy or proceedings described or
referred to in this Deed and references to the
6
<PAGE>
liquidator of SDA shall include any comparable
officer in any jurisdiction
(c) references to any document in the "agreed terms"
shall be to a document agreed and initialled by
the Trustee and the Beneficiaries
(d) references to any statute or statutory provisions
shall include any statute or statutory provision
which amends, extends, consolidates, or replaces
the same or which has been amended, extended,
consolidated or replaced by the same
(e) words importing the singular only shall include
the plural and vice versa, words importing a gen-
der include every gender and references to persons
include bodies corporate or unincorporate
(f) words and expressions defined in the Companies Act
1985 shall bear the same meaning when used in this
Deed
(g) references to any clauses, sub-clauses or para-
graphs are to the clauses, sub-clauses and para-
graphs of this Deed, references to sub-clauses
without other qualification are to sub-clauses of
the clause in which the reference appears, refer-
ences to paragraphs without other qualification
are to paragraphs of the clause (or sub-clause) in
which the reference appears
(h) references to the claims of Senior Creditors shall
in the case of an insolvent winding-up be to such
claims as at the date of commencement of the wind-
ing-up
(i) any headings in this Deed are for convenience only
and are not to be used as aids in interpretation.
7
<PAGE>
2. GRANT OF OPTION
---------------
In consideration of the sum of B.P.1 (receipt of which is
hereby acknowledged) SDA hereby grants to the Trustee
an option to acquire by assignment the Adjustment
Rights upon the terms and conditions of this Deed.
3. CONDITION PRECEDENT
-------------------
Exercise of the Option shall be conditional upon the
prior or simultaneous acquisition by the Trustee of all
right, title and interest of AS&P as holder of the
Senior Note and the Junior Note including the rights of
AS&P under the Guarantee Agreement dated as of 9th
October 1987 between SD (Holding) (1) and AS&P (2).
4. EXERCISE OF OPTION
------------------
(1) The Option shall be exercisable only by Notice of Exer-
cise under the Common Seal of S.D Securities and deli-
vered to SDA at the Specified Address.
(2) SDA shall at the Specified Address acknowledge service
of the Notice of Exercise by countersigning a duplicate
thereof and delivering the Countersigned Notice to S.D
Securities.
(3) Delivery of the Notice of Exercise in accordance with
sub-clause (1) and of the Countersigned Notice in ac-
cordance with sub-clause (2) shall operate as an as-
signment so as to transfer to the Trustee absolutely
all the Adjustment Rights.
(4) A copy certified by any two directors of S.D Securities
as a true copy of the Countersigned Notice shall be
conclusive evidence of delivery in accordance with
clause 4 (3).
8
<PAGE>
(5) Notwithstanding such assignment SDA shall remain
obliged to perform (and covenants with the Trustee that
it will perform) all the obligations of the Buyer under
the Share Purchase Agreement in relation to the keeping
of accounts records and the Adjustment Schedules and
SDA shall deliver copies to the Trustee as the Trustee
may require.
(6) The Trustee shall retain the Countersigned Notice in
safe custody at the Specified Address unless and until
required to be produced for the protection proof or
enforcement of its claim to the Adjustment Debt.
5. THE TRUSTS
----------
Upon exercise of the Option, the Trustee shall hold
(and the Notice of Exercise shall constitute a declara-
tion on the part of S.D Securities that it does hold)
the Adjustment Rights and all rights under the Senior
Note and the Junior Note upon the Trusts.
6. STAMP DUTIES
------------
(1) SDA undertakes to pay United Kingdom stamp duty (if
any) payable on this Deed, the Notice of Exercise or
the Countersigned Notice.
(2) The Trustee undertakes with SDA not to bring this Deed,
the Notice of Exercise or the Countersigned Notice into
the United Kingdom except if advised by English Counsel
that the original is required in the United Kingdom to
prove the terms of the Deed, the Notice of Exercise or
the Countersigned Notice in proceedings then current in
the English Courts and that failure to produce the
original would jeopardize the Trustee's rights here-
under.
9
<PAGE>
7. LAW AND JURISDICTION
--------------------
This Deed shall be construed in accordance with and be
governed by English law and the parties hereby submit
to the non-exclusive jurisdiction of the English
Courts.
IN WITNESS WHEREOF this document has been executed as a
deed on the above date.
10
<PAGE>
SCHEDULE 1
----------
1. THE TRUSTS
----------
The Trustee shall hold the Assigned Rights upon trust
to enforce the same and to apply all monies derived there-
from in accordance with this Schedule 1.
2. THE ADJUSTMENT SCHEDULES: FINAL AND PROVISIONAL AD-
----------------------------------------------------
JUSTMENT DEBT: DISPUTED DEBT
-----------------------------
(1) The Trustee shall require SDA (or failure which AS&P)
to deliver the Trustee copies of the Adjustment Sche-
dules prepared in accordance with Section 7 from time
to time. The Trustee shall itself be entitled to pre-
pare and deliver such Schedules or any of them if SDA
fails to deliver them to AS&P as required by Section 7.
(2) The Final Adjustment Debt shall be calculated by the
Trustee on the basis of the Adjustment Schedules (a-
mended as appropriate by any arbitrator's determination
under sub-section 7 of Section 7) when:-
(a) all Adjustment Schedules have been delivered to
the Trustee for all Adjustment Dates up to and
including the Final Adjustment Date;
(b) all disputes concerning items within the Adjust-
ment Schedules which are the subject of a Notice
of Disagreement have been finally resolved pursu-
ant to subsection 7 of Section 7.
(3) The Trustee shall notify SDA and AS&P in writing of the
Trustee's calculation of the Final Adjustment Debt and
if neither SDA nor AS&P serves counternotice in writing
upon the Trustee within 30 days following service of
such notice that it disputes the same the Trustee's
calculation shall be final and binding provided that if
a manifest error is discovered in the calculation
before the Trustee makes any payment on the basis
thereof, the Trustee shall on application correct the
11
<PAGE>
error. If a counternotice is served and the matter is
not resolved within the said 30 day period the matter
shall be submitted to and reviewed by an Chartered
Accountant (who shall act as an expert and not an
arbitrator who shall be selected by the auditors of
SDA and AS&P or, if they cannot agree, by the President
of the Institute of Chartered Accountants in England
and Wales, whose decision shall be final and binding on
the parties.
(4) If after the final determination of each Adjustment
Schedule pursuant to sub-section 7 of Section 7 it is
demonstrated there to the Trustee that there is a bal-
ance in the Adjustment Account in favour of the Buyer
under Section 7, the Trustee may notify SDA and AS&P in
writing that such balance is to be treated as Provi-
sional Adjustment Debt and unless AS&P serves counter-
notice in writing upon the Trustee within 30 days fol-
lowing service of such notice that it disputes the same
the amount so notified shall be treated as Provisional
Adjustment Debt for the purposes of the Trusts.
(5) If it is demonstrated to the Trustee that there are
items in an Adjustment Schedule which are either dis-
puted by Notice of Disagreement or are not yet capable
of final quantification pursuant to Section 7 they
shall be treated as Disputed Debt and the Trustees
shall notify SDA and AS&P accordingly.
(6) The Final Adjustment Debt and the Provisional Adjust-
ment Debt shall be determined in accordance with the
procedure in Section 7 for determining issues raised in
a Notice of Disagreement and the Trustee as assignee
shall at the request of any Beneficiary (subject to
provision of security to the satisfaction of the Trus-
tee for all costs occasioned thereby) take reasonable
steps to procure such determination.
(7) For the avoidance of doubt it is hereby declared that
the Adjustment Rights are subject to the limitations
set out in sub-section 5 of Section 7.
12
<PAGE>
3. THE NET AMOUNT (FINAL)
----------------------
(1) This clause 3 shall apply only:-
(a) when the Final Adjustment Debt has been notified
under clause 2(3); and
(b) if the Loan Note Debt has not become due and pay-
able before the Final Adjustment Date; and
(c) if SDA is solvent at the time of such notification
(2) The Lower Debt shall be treated for all purposes as if
it had been paid to the Trustee in full and the Greater
Debt shall be treated for all purposes as if it had
been paid to the Trustee to the extent of the amount of
the Lower Debt so that:
(a) the Trustee shall release and discharge the debtor
of the Lower Debt;
(b) the Trustee shall release and discharge the debtor
of the Greater Debt to the extent of the Lower
Debt; and
(c) the debtor of the Greater Debt shall remain liable
for the Net Amount.
(3) The Trustee shall (subject to provision of security to
the satisfaction of the Trustee for all expenses in-
curred in connection therewith) take at the request of
any of the Beneficiaries all reasonable steps to collect
the Net Amount from the person liable to pay the same.
(4) The Trustee shall hold the Net Amount or so much there-
of as it shall collect (together with recovered costs,
charges and interest) to apply the same in the follow-
ing order:-
(a) to pay thereout any costs and expenses not other-
wise reserved, including stamp duties, incurred in
the protection, proof and enforcement of the Trus-
13
<PAGE>
tee's claim for any part of the Greater Debt
and/or the Lower Debt,
(b) If the Final Adjustment Debt is the Greater Debt,
to pay the Net Amount to SDA absolutely,
(c) if the Loan Note Debt is the Greater Debt to pay
the Net Amount to AS&P absolutely.
(5) If after delivery of the Final Adjustment Schedule it
appears that the Loan Note Debt will be the Greater
Debt but that one or more items in the Final Adjustment
Schedule or any preceding Adjustment Schedule is Dis-
puted Debt the Trustee may pending resolution of such
dispute:
(a) require SDA to pay all or any part of the Loan
Note Debt which exceeds the undisputed amount of
the Adjustment Debt,
(b) retain funds in respect of Disputed Debts, and
(c) make payments on account from time to time to AS&P
as it may in its absolute discretion think fit.
4. ACCELERATION OF NOTES
---------------------
(1) If for any reason the Notes shall become due and pay-
able before the Final Adjustment Date the Trustee shall
at the written request (but not otherwise) of either
SDA or AS&P or, if SDA is not solvent, at the written
request of any of the Beneficiaries (and subject to the
provision of security to the satisfaction of the Trus-
tee for all expenses in connection therewith) take all
reasonable steps to collect the Loan Note Debt includ-
ing but not limited to proof in the liquidation for the
full amount of the Loan Note Debt and enforcement of
any guarantee of SD (Holding) provided that if SDA is
--------
then solvent and an amount of Provisional Adjustment
Debt has been established pursuant to Section 7:
(a) the Trustee shall only collect the amount by which
the Loan Note Debt exceeds the Provisional Adjust-
ment Debt at that time and the Trustee shall treat
the Loan Note Debt as paid by SDA to the extent of
the Provisional Adjustment Debt and the Trustee
shall treat the Provisional Adjustment Debt as
paid by AS&P,
14
<PAGE>
(b) if the Provisional Adjustment Debt exceeds the
Loan Note Debt the Trustee shall treat the Loan
Note Debt as paid in full and the Provisional
Adjustment Debt paid by AS&P to the extent of the
Loan Note Debt and the Trustee shall take all
reasonable steps to collect the balance of the
Provisional Adjustment Debt from time to time.
(2) All monies collected by the Trustee in respect of the
Loan Note Debt under this clause 4 (together with re-
covered costs, charges and interest) shall be held upon
the following trusts:
(a) to pay thereout any costs and expenses including
stamp duties incurred in the protection proof and
enforcement of the Trustee's claims for the Loan
Note Debt;
(b) to apply the balance collected on the Loan Note
Debt in the following order of priority:-
(i) in payment of the amount of the Priority Debt
(if any) to the extent then due and payable
but only against the valid and effective
assignment by the Priority Creditor as bene-
ficial owner to the Trustee of the rights of
the Priority Creditor against SDA in respect
of the Priority Debt free from any charge,
encumbrance, equity or right of deduction
whatsoever,
(ii) if the amount of Provisional Adjustment Debt
then exceeds the aggregate of (aa) any uncol-
lected balance of the Loan Note Debt and (bb)
any amount paid to the Priority Creditor
under paragraph (i), in payment to SDA of the
amount of such excess, in which case the
Trustee shall treat the Provisional Adjust-
ment Debt as paid by AS&P to the extent of
such payment,
(iii) if SDA was solvent when notice was served on
the Trustee under sub-clause (1) and if the
Loan Note Debt then exceeded the Provisional
Adjustment Debt, the Trustee shall pay the
balance of the monies collected under sub-
clause (1)(a) and sub-clause (3) in respect
of the Loan Note Debt to AS&P absolutely
15
<PAGE>
provided that if there shall be or shall have
--------
been an increase in the Provisional Adjust-
ment Debt at a time when the Trustee still
holds any such monies, the Trustee shall
first pay the amount of such increase to SDA
absolutely and shall only pay to AS&P the
balance remaining thereafter and in such
event the increase in the Provisional Adjust-
ment Debt shall be treated by the Trustee as
paid by AS&P to the extent of the payment to
SDA.
(c) Following application of all monies collected on
account of the Loan Note Debt under sub-clause
(2), if there shall be a subsequent increase in
the cumulative Provisional Adjustment Debt (in-
cluding any amount by which the Final Adjustment
Debt exceeds the amount last notified by the Trus-
tee as Provisional Adjustment Debt) then AS&P
shall remain liable to pay such increase in accor-
dance with Section 7 and the Trustee shall at the
request of SDA (and subject to the provision of
security to the satisfaction of the Trustee for
all expenses in connection therewith) take all
reasonable steps to collect the same until such
time as the whole of the Final Adjustment Debt has
been collected and/or discharged and/or treated as
paid and the Trustee shall hold the same upon
trust to pay such balance to SDA absolutely.
(3) The Trustee shall (subject to the provisions of sub-
clause (1)) take all reasonable steps to collect from
SDA the amount of the Priority Debt assigned to the
Trustee in accordance with sub-paragraph (b) (i) of
sub-clause (2) and the monies so collected shall be
held upon the trusts set out in paragraphs (b) (ii) and
(iii) and paragraph (c) of sub-clause (2) as if all
references to monies collected on the Loan Note Debt
were to monies collected under this sub-clause (3).
(4) If SDA was not solvent at the time of service of the
written request on the Trustee under clause 4 (1)
clause 5 shall apply.
(5) All monies collected by the Trustee in respect of the
Provisional Adjustment Debt shall be held upon trust to
16
<PAGE>
pay thereout any costs and expenses not otherwise re-
covered including stamp duties incurred in the protec-
tion, proof and enforcement of the Trustee's claim for
the Provisional Adjustment Debt and thereof for SDA
absolutely.
5. INSOLVENCY OF SDA: LIQUIDATION OF AS&P
---------------------------------------
(1) If SDA shall not be solvent when the Loan Note Debt
becomes due and payable or if later when a written
request is served on the Trustee under clause 4(1) the
provisions of sub-clause (2) to (5) shall apply.
(2) The Trustee shall at the request of any of the Benefi-
ciaries (and subject to the provision of security to
the satisfaction of the Trustee for all expenses in
connection therewith) take all reasonable steps to
collect the full amount of the Loan Note Debt from SDA
including but not limited to proof in the liquidation
of SDA for the full amount of such Loan Note Debt and
the enforcement of any guarantee of SD (Holding).
(3) All monies collected by the Trustee on account of the
Loan Note Debt shall be applied in the following order
of priority to the extent not previously done:-
(a) in the payment of any costs and expenses including
stamp duties incurred in the protection proof and
enforcement of the Trustee's claims for the Loan
Note Debt;
(b) to the Priority Creditor (if any) absolutely the
amount of the Priority Debt to the extent then due
and payable against the assignment to the Trustee
of all rights of the Priority Creditor against SDA
in respect of the Priority Debt;
(c) if (and only if) the Loan Note Debt exceeds the
cumulative Provisional Adjustment Debt (or the
Final Adjustment Debt if then established) in the
payment to AS&P of :-
(i) the amount of such excess, or
(ii) the balance of all monies owing under the
Senior Note after deducting the amount paid
17
<PAGE>
in respect of the Priority Debt under para-
graph (b)
whichever shall be the lesser;
(d) in the payment to the Senior Creditors by way of
distribution amongst them in proportion to their
claims against SDA up to the full amount of such
claims;
(e) if following determination of the Final Adjustment
Debt (and only if) the Loan Note Debt is the
Greater Debt, in the payment to AS&P absolutely of
any amount by which the total payments to AS&P
under paragraph (c) and sub-clause (4) fall short
of the Net Amount;
(f) finally, in the payment of the balance to SDA
absolutely.
(4) Out of any monies received by the Trustee in respect of
claims assigned to the Trustee by a Priority Creditor
there shall be paid to AS&P (but only if the Loan Note
Debt is the Greater Debt) an amount equal to the lesser
of:
(i) the amount paid by the Trustee in respect of the
relevant Priority Debt;
(ii) the amount by which the payments to AS&P under
sub-clause (3) fall short of the Net Amount.
and any balance of such monies shall be paid to those
persons specified in and in the order of priority set
out in paragraphs (d) and (f) of sub-clause (3).
(5) If the Final Adjustment Debt is established to be the
Lower Debt then the Final Adjustment Debt shall be
treated by the Trustee as satisfied in full and AS&P
shall have no further liability in respect thereof. If
the Final Adjustment Debt is established to be the
Greater Debt then AS&P shall be treated by the Trustee
as having paid the same to the extent of the Lower Debt
plus any amount paid by the Trustee under paragraph
(3)(a) but AS&P shall remain liable for the balance of
the Net Amount (less monies paid on account), in which
case the Trustee shall at the request of any Benefici-
ary (and subject to provision of security to the satis-
18
<PAGE>
faction of the Trustee for all expenses occasioned
thereby) take all reasonable steps to collect the same
and any monies collected by the Trustee thereon shall
first be applied, in accordance with paragraphs (a) and
(b) of sub-clause (3) according to their respective
priorities and thereafter any balance shall be paid to
SDA absolutely.
(6) If AS&P shall be wound up the Trustee shall at the
request of SDA (and subject to provision of secu-
rity to the satisfaction of the Trustee for all
expenses occasioned thereby) prove in the liquida-
tion for the full amount of the Adjustment Debt
from time to time. All monies received by the
Trustee on such proof shall be retained upon trust
pending establishment of the Final Adjustment
Debt. When such Final Adjustment Debt is estab-
lished under the provisions of clause 2 all monies
received by the Trustee shall be deemed payments
on account of the Final Adjustment Debt and shall:-
(a) first be applied in accordance with paragraph
(a) and (b) of sub-clause (3) according to
their respective priorities:
(b) thereafter be paid to SDA if and to the ex-
tent the Final Adjustment Debt (less any
amounts paid on account) exceeds the aggre-
gate of the total Loan Note Debt and the
amounts paid under paragraph (a);
(c) otherwise and as to the balance, be paid to
AS&P absolutely.
In such case
(i) the Loan Note Debt shall be treated by the
Trustee as discharged to the extent of the
Lower Debt;
(ii) if the Final Adjustment Debt is the Greater
Debt it shall be treated by the Trustee as
discharged to the extent of the Lower Debt
and if it is the Lower Debt it shall be trea-
ted by the Trustee as discharged in its en-
tirety.
19
<PAGE>
6. PRIORITY CREDITORS
------------------
(1) Subject to sub-clause (2) SDA may from time to time
notify the Trustee and AS&P in writing of the names and
addresses of banks or other financial institutions from
which SDA has borrowed money or otherwise obtained
credit and the persons specified in that notice shall
be Priority Creditors in the order of priority as be-
tween themselves as notified by SDA or failing notifi-
cation of priority ranking pari passu and the monies
due to them from time to time in respect of such bor-
rowing or other credit shall be Priority Debt for the
purposes of this Deed up to but not exceeding
B.P.15,000,000.
(2) No notice under sub-clause (1) shall be effective un-
less all persons specified in earlier notices as Prior-
ity Creditors give their written consent thereto nor
shall any such notice be given after service upon the
Trustee of a written request under clause 4(1) or the
date when the Notes become due and payable or after the
Final Adjustment Date whichever shall be the earliest.
(3) A Priority Creditor shall cease to be such if he serves
notice to that effect upon the Trustee.
(4) By signature of this Deed SDA hereby notifies the Trus-
tee Manufacturers Hanover Trust Company as a Priority
Creditor for all purposes of this Deed.
7. INSOLVENCY
----------
(1) SDA shall be deemed solvent for the purpose of this
Deed if (and only if) (i) it is able to pay its debts
as they fall due and (ii) its assets exceed its liabi-
lities (other than its liabilities to persons whose
claims are subordinated to the Loan Note Debt).
(2) SDA may at any time and shall whenever requested by the
Trustee (upon the written instruction of AS&P) procure
that two directors of SDA or (if SDA is in liquidation)
the liquidator of SDA shall give an Officers' Certifi-
cate (as defined in the Note Purchase Agreement) as to
whether or not SDA is or would in any specified circum-
stances be solvent or insolvent within the definition
in sub-clause (a) above and in the absence of proven
error any such report shall be treated and accepted by
the Trustee as correct and sufficient evidence of such
20
<PAGE>
fact. In the absence of any such report to the con-
trary, it shall be assumed (unless the contrary is
proven prior to the date of payment) that SDA is and
will immediately after any payment to AS&P be solvent.
If a report of two directors of SDA states that SDA is
not solvent SDA shall procure that the Auditors (as
defined in the Note Purchase Agreement) shall provide,
within 30 days of the date of delivery of such report,
a report of the Auditors as to whether or not SDA is
solvent for the purposes of sub-clause (a) above and
such report of the Auditors shall supersede the report
of the directors of SDA for all purposes of this Deed.
8. PAYMENTS TO SENIOR CREDITORS
----------------------------
The trust for distribution amongst the Senior Creditors
may be performed by the Trustee by repaying to SDA (or
the liquidator thereof) the amount so to be distributed
on terms that SDA (or the liquidator thereof) shall
distribute the same accordingly and in that event the
Trustee shall not be bound to supervise such distribu-
tion and (subject as in this Deed otherwise provided)
shall receive for distribution to AS&P only such
amounts (if any) as shall be available after the claims
of all the Senior Creditors shall have been satisfied
or provided for in full.
9. THE GUARANTOR
-------------
(1) Whenever any part of the Loan Note Debt is for the
purposes of the Trusts to be treated as paid by SDA,
the Trustee shall treat the Loan Note Debt as dis-
charged to that extent for all purposes in connection
with the liability of SD (Holding) as guarantor.
(2) Whenever any part of the Adjustment Debt is for the
purposes of the Trusts to be treated by the Trustee as
paid by AS&P, the Adjustment Debt shall be treated as
discharged to that extent for all purposes in connec-
tion with the liability of A&A and A&A (Europe) as
guarantors.
(3) If A&A or A&A (Europe) or SD (Holding) shall be called
upon by the Trustee to make any payment as guarantor of
the Adjustment Debt or the Loan Note Debt respectively,
then to the extent of the respective payments so made
(excluding costs) A&A or A&A (Europe) shall be subro-
gated to the rights of AS&P under the Trusts and SD
21
<PAGE>
(Holding) shall be subrogated to the rights of SDA
under the Trusts (as the case may be) but neither A&A
nor A&A (Europe) nor SD (Holding) shall thereby become
a Beneficiary for the purposes of the Trusts.
10. PERPETUITY PERIOD
-----------------
The period of the Trusts declared by this Deed shall be
21 years following the death of the last surviving
child or other descendant now living of Her Majesty
Queen Elizabeth the Second.
11. DEPOSIT OF MONIES AND INCOME RECEIVED BY TRUSTEE
------------------------------------------------
(1) Any amounts received by the Trustee in respect of the
Assigned Rights and not required to be paid out immedi-
ately under this Deed may be placed on current account
with any bank. The Trustee need not invest, or invest
at interest, such amounts but if any interest or other
income is earned on such amounts the Trustee shall hold
that interest or income (after paying any taxation in
respect of that interest or other income) as monies
collected on account of the Loan Note Debt or the Ad-
justment Debt according to the source of the monies
from which such income is derived.
(2) Any bank account maintained by the Trustee in connec-
tion with these Trusts may be operated by the Trustee
or by such two or more persons as the Trustee shall in
its discretion determine.
12. INVESTMENT AND MANAGEMENT OF AMOUNTS RECEIVED BY THE
----------------------------------------------------
TRUSTEE
-------
In addition to all the powers vested in it by this Deed
or by law or otherwise the Trustee shall have the fol-
lowing powers:-
(a) General
-------
to exercise all powers of investment, sale, alienation,
exchange, partition, mortgage, charging, pledging,
leasing, insurance, protection, improvement, disposi-
tion and management (and all other powers) of an abso-
lute beneficial owner of all monies received by the
Trustee pursuant to this Deed and such powers shall not
be restricted by any principle of construction but
shall operate according to the widest generality of
22
<PAGE>
which the foregoing words are capable notwithstanding
that certain powers are hereinafter more particularly
set forth;
(b) Investment
----------
to invest or lay out the whole or any part or parts of
such monies in the purchase of or at interest upon the
security of such stock, funds, shares, securities,
foreign currencies, commodities, financial futures or
other investments or property or interests or particip-
ations therein of whatever nature and situate anywhere
in the world and whether involving liability or not and
whether producing income or not and whether in posses-
sion or reversion or upon such personal or other credit
with or without security as the Trustee shall in its
absolute discretion think fit and the Trustee shall not
be bound to have regard to any requirement for the
diversification of investments and it shall not be
liable for the consequences of investing or keeping
such monies invested in the shares or obligations of a
single company;
(c) Borrowing
---------
to borrow money on such terms and conditions as to
interest, repayment and otherwise as it may think fit
and whether upon the security of the whole or any part
or parts of the Assigned Rights or monies deriving
therefrom or upon personal security only and to use
such moneys for the purposes of investment or otherwise
for any purpose for which money deriving from the As-
signed Rights may be used.
13. DELEGATION
----------
The Trustee shall have power to delegate to any other
person or persons at any time for any period and in any
manner upon any terms whatever (including provision for
reasonable remuneration) all or any of the powers (in-
cluding power to delegate) and discretions imposed on
or given to the Trustee by this Deed or by law or
otherwise without being liable for the acts or defaults
of any such delegate or sub-delegate.
23
<PAGE>
14. PROFESSIONAL ASSISTANCE
-----------------------
The Trustee shall have power to employ and pay for such
professional or other assistance as it may consider
advisable in the discharge of its duties as trustee of
the Trusts.
15. PAYMENTS AND RECEIPTS
---------------------
The Trustee may from time to time in writing authorise
such person or persons as the Trustee shall think fit
to make any payments and to give receipts and dis-
charges for any money or other property payable, trans-
ferable or deliverable to the Trustee. Every such
receipt or discharge shall be as valid and effective as
if such receipt or discharge were given by the Trustee.
16. ENFORCEMENT AND TRUSTEE'S INDEMNITY
-----------------------------------
(1) The Trustee shall not be bound to take any steps to
enforce any of the Assigned Rights unless it shall have
been secured and indemnified to its satisfaction
against all liabilities, proceedings, claims and de-
mands to which it may be or become liable and all
costs, charges and expenses which may be incurred by it
in connection therewith but this shall not limit in any
way the right of the Trustee to claim costs, damages,
expenses and/or interest from any defaulting debtor.
(2) Subject to sub-clause (1) above, SDA covenants with the
Trustee that it will at all times hereafter keep the
Trustee fully indemnified and saved harmless against
all claims, losses, demands, actions, proceedings,
charges, expenses, costs, damages, taxes, duties and
other liabilities that may be suffered or incurred by
it in connection with the execution of the trusts and
powers of this Deed other than liabilities arising as a
consequence of fraud or wilful default or negligence on
the part of the Trustee.
17. MODIFICATION
------------
(1) The Trustee may from time to time and at any time with-
out any consent or sanction of any Beneficiary here-
under make any modification to this Deed which in the
opinion of the Trustee it may be expedient to make
provided that the Trustee is of the opinion that such
24
<PAGE>
modification will not be materially prejudicial to the
interests of any Beneficiary or to correct a manifest
error or where such modification is of a formal, minor
or technical nature. Any such modification shall be
binding on any Beneficiary.
(2) The Trusts may be varied or terminated by a deed exe-
cuted by all persons who are then Beneficiaries as they
shall think fit (including any variation so as to ex-
clude Senior Creditors from benefit hereunder).
18. PROTECTION OF THIRD PARTIES
---------------------------
The production of a written authority of the Trustee
given pursuant to clause 15 shall be sufficient protec-
tion to any person taking any such receipt or discharge
as is mentioned in clause 13 and (unless that person
shall have received express notice in writing of the
revocation of the authority) he shall be entitled to
assume and to act upon the assumption that the author-
ity remains unrevoked.
19. APPOINTMENT AND REMOVAL OF TRUSTEES
-----------------------------------
The power of appointment of additional Trustees shall
be exercised by the Trustee but:-
(a) if SDA shall be placed in liquidation, AS&P shall
have the power to appoint and remove Trustees;
(b) If AS&P shall be placed in liquidation, SDA shall
have the power to appoint and remove Trustees.
20. NOTICES
-------
Any notice or other communication required or permitted
hereunder shall be in writing and shall be delivered
personally, telegraphed, telexed or sent by facsimile
transmission. Any such notice shall be deemed given
when so delivered personally, telegraphed, telexed or
sent by facsimile transmission, as the case may be, or
when received in any manner as follows:
25
<PAGE>
(i) If to SDA to:
Sphere Drake Acquisitions (U.K.) Limited
c/o Centre Capital Investors L.P.
Suite 1025
One Rockefeller Plaza
New York, New York 10020
United States of America
Attention: Lester Pollack
Telex: RCA 222301
Fax: (212) 974-2825 or
(212) 489-9655
and
Sphere Drake Acquisitions (U.K.) Limited
c/o Sphere Drake Insurance plc
52/54 Leadenhall Street
London EC3A 2BJ
England
Attention: Ian N. Dean
Telex: 935015 Sphere G
Fax: 01-481-3828
and
John C Head III
c/o John Head & Partners
545 Madison Avenue
New York, New York 10022
United States of America
Telex: 971861
Fax: (212) 715-8641
with copies to:
Paul, Weiss, Rifkind, Wharton & Garrison
1285 Avenue of the Americas
New York, New York 10019
United States of America
Attention: Albert P. Hand, Esq.
Telex: WUI 666-843
Fax: (212) 757-3990
and
26
<PAGE>
Clyde & Co.
51 Eastcheap
London EC3M 1JP
England
Attention: Francis Mackie and
V.C. Southey
Telex: 884886 Clyde G
Fax: 01-623-5427
(ii) if to AS&P, to:
Alexander & Alexander Services Inc.
1211 Avenue of the Americas
New York, New York 10036
United States of America
Attention: General Counsel
Telex: 620303
Fax: (212) 302-1921
and
Alexander Stenhouse & Partners Ltd.
Two South Place
London EC2P 2DX
England
Attention: The Company Secretary
Telex: 8813371
Fax: 01-588-1680
and
Alexander & Alexander Europe plc
5-10 Bury Street
London EC3A 5HL
England
Attention: Group Legal Adviser
Telex: 882171
Fax: 01-623-5022
Any party may by notice given in accordance with
this clause 20 to the other parties designate another ad-
dress or person for receipt of notices hereunder.
27
<PAGE>
(iii) if to the Trustee to:-
7 New Street,
St. Peter's Port,
Guernsey,
(Attention: Mr Langlois/Mr Beattie)
21. GOVERNING LAW
-------------
The Trusts shall be governed by and construed in accor-
dance with English law and the English Courts shall
have non-exclusive jurisdiction.
THE COMMON SEAL of SPHERE )
DRAKE ACQUISITIONS (U.K.) LTD )
is hereunto affixed in the )
presence of:- )
THE COMMON SEAL of S.D )
SECURITIES LIMITED is hereunto)
affixed in the presence of:- )
28
<PAGE>
SPHERE DRAKE ACQUISITIONS (U.K.) LIMITED
Zero Coupon Senior Notes due 1995
Zero Coupon Subordinated Notes due 1995
Credit Facility Notes due 1995
Guaranteed by
SPHERE DRAKE HOLDING PUBLIC LIMITED COMPANY
_______________________
NOTE PURCHASE AGREEMENT
_______________________
Dated As of October 9, 1987
<PAGE>
TABLE OF CONTENTS
Section Page
------- ----
1. Authorization of Notes . . . . . . . . . . . . .
2. Sale and Purchase of Notes . . . . . . . . . . .
3. Closing . . . . . . . . . . . . . . . . . . . . .
4. Conditions to Closing . . . . . . . . . . . . . .
4.1 Delivery etc. . . . . . . . . . . . . . .
4.2. Representations and Warranties . . . . . .
4.3. Performance; No Default . . . . . . . . .
4.4. Share Purchase Agreement . . . . . . . . .
4.5. The Warrants . . . . . . . . . . . . . . .
4.6. Compliance Certificate . . . . . . . . . .
4.7. Opinion of Counsel . . . . . . . . . . . .
5. Representations and Warranties, etc. . . . . . .
5.1. Organization . . . . . . . . . . . . . . .
5.2. Authority to Execute and Perform
Agreements . . . . . . . . . . . . . . .
5.3. Memorandum and Articles of Association . .
5.4. Capitalization . . . . . . . . . . . . . .
5.5. Compliance with Other Instruments, etc . .
5.6. Governmental Consent . . . . . . . . . . .
5.7. Offer of Notes . . . . . . . . . . . . . .
5.8. Disclosure . . . . . . . . . . . . . . . .
6. Purchase for Investment . . . . . . . . . . . . .
7. Accounting; Financial Statements and Other
Information . . . . . . . . . . . . . . . . . .
8. Inspection, etc.; Confidentiality . . . . . . . .
9. Prepayment of Notes . . . . . . . . . . . . . . .
9.1. Optional Prepayments . . . . . . . . . . .
9.2. Notice of Prepayments; Officers'
Certificate . . . . . . . . . . . . . .
9.3. Surrender, etc. . . . . . . . . . . . . .
<PAGE>
Page
----
10. The Credit Facility . . . . . . . . . . . . . . .
10.1. Loans; Credit Support . . . . . . . . . .
10.2. Credit Facility Cap . . . . . . . . . . .
10.3. Notices; Cooperation . . . . . . . . . . .
10.4. Furnishing Support, etc. . . . . . . . . .
10.5. Third Party Unsupported Loans . . . . . .
10.6. Loans . . . . . . . . . . . . . . . . . .
10.7. Credit Support . . . . . . . . . . . . . .
10.8. Conditions Precedent . . . . . . . . . . .
10.9. Additional Covenants . . . . . . . . . . .
10.10. Additional Events of Default . . . . . . .
10.11. Fees and Expenses, Cooperation . . . . . .
11. Business and Financial Covenants . . . . . . . .
11.1. Senior Debt . . . . . . . . . . . . . . .
11.2. Restricted Payments . . . . . . . . . . .
11.3. Liens, etc. . . . . . . . . . . . . . . .
11.4. Leases; Leasebacks . . . . . . . . . . . .
11.5. Transactions with Affiliates . . . . . . .
11.6. Subsidiary Stock and Indebtedness . . . .
11.7. Sale of Assets, etc. . . . . . . . . . . .
11.8. Use of Proceeds . . . . . . . . . . . . .
11.9. Corporate Existence, etc.; Business . . .
11.10. Payment of Taxes and Claims . . . . . . .
12. Events of Default; Acceleration . . . . . . . . .
13. Remedies on Default, etc. . . . . . . . . . . . .
14. Definitions . . . . . . . . . . . . . . . . . . .
15. Exchange and Substitution of Notes . . . . . . .
15.1. Exchange . . . . . . . . . . . . . . . . .
15.2. Replacement . . . . . . . . . . . . . . .
16. Payments on Notes . . . . . . . . . . . . . . . .
17. Survival of Representations and Warranties . . .
18. Amendments and Waivers . . . . . . . . . . . . .
19. Suspensory Clause . . . . . . . . . . . . . . . .
20. Notices, etc. . . . . . . . . . . . . . . . . . .
21. Miscellaneous . . . . . . . . . . . . . . . . . .
ii
<PAGE>
EXHIBIT A1 -- Form of Zero Coupon Senior Note due 1995
EXHIBIT A2 -- Form of Zero Coupon Subordinated Note
due 1995
EXHIBIT A3 -- Form of Credit Facility Note
EXHIBIT B -- Form of Guaranty Agreement
EXHIBIT C1 -- Form of Opinion of Solicitors for the
Company under Section 4.7
EXHIBIT C2 -- Form of Opinion of Solicitors for the
Company under Section 10.8 (ii)
EXHIBIT D -- Form of Deed of Trust
iii
<PAGE>
AMENDMENT AGREEMENT
-------------------
THIS AMENDMENT AGREEMENT is made August 30, 1988,
by and among SPHERE DRAKE ACQUISITIONS (U.K.) LIMITED, an
English company, SPHERE DRAKE HOLDING PUBLIC LIMITED COM-
PANY, an English company, and ALEXANDER STENHOUSE & PARTNERS
LTD., a Scottish company.
WHEREAS, the parties have entered into a Note
Purchase Agreement dated as of October 9, 1987 (the "Note
Purchase Agreement").
NOW THEREFORE, in consideration of the terms and
conditions set forth herein and of other good and valuable
consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereby agree as follows:
1. Amendment to Note Purchase Agreement. The
------------------------------------
Note Purchase Agreement shall be and hereby is amended in
the following respects:
(a) By the deletion of Subsection (ii) and Sub-
section (iii) of Section 7(b) and the substitution therefor
of the following:
"(ii) Within 60 days after the end of each year,
preliminary forms of the consolidated balance sheets of
the Guarantor and its Subsidiaries and of the Company
and its Subsidiaries, and the separate balance sheet of
SDI, as at the end of such year and the related consol-
idated profit and loss accounts of the Guarantor and
its Subsidiaries, the Company and its Subsidiaries and
SDI for such fiscal year, setting forth in each case
(other than in the cases of consolidated financial
statements required to be delivered before December 31,
1988) in comparative form the consolidated figures for
the previous year, all in reasonable detail accompanied
by a report as to the issues at the time open in con-
nection with the audit of such financial statements
(which report shall indicate a range of amounts af-
fected by each such open issue), certified in the case
of such financial statements by the Finance Director of
the Guarantor, the Company and SDI, as the case may be.
"(iii) Within 135 days of the end of the year
such financial statements referred to in clause (ii)
<PAGE>
above in definitive form and statements of sources and
application of funds of the Guarantor and its subsid-
iaries, the Company and its Subsidiaries and SDI for
such fiscal year accompanied by reports thereon of
independent chartered accountants of recognized stand-
ing selected by the Guarantor, which reports shall
state that such financial statements (x) have been
-
prepared in accordance with standard accounting prac-
tice applicable in the United Kingdom, and (y) comply
-
with the Companies Act 1985 and, in the case of SDI,
the Companies Act 1985 as it applies to insurance com-
panies. As to any year that ends on a Reserve Adjust-
ment Date, the date for delivery of the financial
statement and of the report referred to in this clause
(iii) shall be deferred until a date 30 days after the
delivery of the applicable Reserve Adjustment
Schedule."
(b) By the deletion of Subsection (i) of Section
10.2 and the substitution therefor of the following:
"the positive balance, if any, of the Adjustment
Account on such date, reduced by all amounts by which
the Adjustment Account has been increased pursuant to
clauses (xii) and (xiv) of section 7.2 of the Share
Purchase Agreement (such balance as so reduced is re-
ferred to herein as the "Non-Cash Indemnity Balance")
to the extent and only to the extent that such balance
does not exceed the limits contained in section 7.5 of
the Share Purchase Agreement plus the aggregate amount
of interest paid and accrued through such date on the
Credit Facility Notes;"
2. Note Purchase Agreement. Except as amended
-----------------------
hereby, the Note Purchase Agreement shall remain in full
force and effect.
3. Counterparts. This Amendment Agreement may be
------------
executed in any number of counterparts, each of which shall
be deemed an original, and the counterparts shall constitute
but one and the same instrument, which shall be sufficiently
evidenced by any one counterpart.
2
10931655
<PAGE>
IN WITNESS WHEREOF, the parties have executed this
Agreement as of the date first above written.
SPHERE DRAKE ACQUISITIONS (U.K.) LIMITED
By:_____________________________________
SPHERE DRAKE HOLDING PUBLIC LIMITED COMPANY,
By:_____________________________________
ALEXANDER STENHOUSE & PARTNERS, LTD.
By:_____________________________________
3
<PAGE>
THIS (NOTE PURCHASE AMENDMENT) AGREEMENT AND DEED
-------------------------------------------------
OF CONSENT is made the 14th October 1992
----------
BETWEEN:-
-------
(1) ALEXANDER STENHOUSE & PARTNERS LIMITED No. S.C.23477
--------------------------------------
whose registered office is at 145 St. Vincents Street,
Glasgow, Scotland ("ASPL")
(2) SPHERE DRAKE ACQUISITIONS (U.K.) LIMITED No. 2136565
----------------------------------------
whose registered office is at 52-54 Leadenhall Street,
London EC3 ("SDA")
(3) SPHERE DRAKE HOLDING PUBLIC LIMITED COMPANY No. 2168083
-------------------------------------------
whose registered office is at 52-54 Leadenhall Street,
London EC3 ("SD Holding")
(4) SPHERE DRAKE LIMITED No. 2709527 whose registered of-
--------------------
fice is at 52-54 Leadenhall Street, London EC3
("SDLTD")
(5) S.D. SECURITIES LIMITED incorporated in Guernsey whose
-----------------------
registered office is at 7 New Street, St Peter's Port,
Guernsey ("S.D. Securities")
RECITALS
--------
A. Words and expressions defined in or by clause 1 ("Defi-
nitions") bear that meaning when used in these Re-
citals.
B. ASPL is the beneficial owner of certain Notes due 1995
issued by SDA upon and subject to the term and condi-
tions of the Note Purchase Agreement.
C. S.D. Securities is the legal owner of the Notes re-
ferred to in Recital B and holds the same upon the
trusts constituted by the Trust Deed.
D. The obligations of SDA under the Notes are guaranteed
by SD Holding under and subject to the terms and condi-
tions of the Guaranty Agreement.
E. SD Holding is the ultimate U.K. holding company of
(i) SDI, which is itself the direct subsidiary of
4
<PAGE>
(ii) SDIG, which is itself the direct subsidiary of
(iii) SDA, which is itself the direct subsidiary of SD
Holding.
F. SDLTD wishes, as part of a scheme of reorganisation, to
acquire all the issued shares of SD Holding and after-
wards to issue new shares to raise monies which will
(after deduction of related costs) be lent to SD Hold-
ing and onwards within the Group for the purpose of
increasing the paid up share capital of SDI.
G. This Deed supplements and varies the Note Purchase
Agreement having regard to the proposed Reorganisation
and New Capitalisation.
H. SD Securities is a party to this Agreement for the sole
purpose of providing its consent to the Reorganisation
and New Capitalisation.
5
<PAGE>
NOW THIS DEED WITNESSES as follows:
-----------------------
1. DEFINITIONS
-----------
1.1 Subject to sub-clause 1.2 and to the opera-
tive terms of this Deed, words and expressions defined in
the Note Purchase Agreement bear that Meaning when used in
this Deed, including without limitation
"Affiliate"
"Event of Default"
"Guaranty Agreement"
"Potential Event of Default"
"Restricted Payments"
"Triggering Event"
and words used in the Schedule and not otherwise defined
herein or in the Note Purchase Agreement have the meaning
given to them in the A&A Warrant Amendment Agreement.
1.2 In this Agreement:-
"the A&A Warrant Agreement" means the Warrant Agreement
made as of October 9, 1987
between SD Holding (1) SDA
(2) and ASPL (3)
"the A&A Warrant Amendment" means the Agreement made or
to be made at the same time
as this Agreement between
ASPL (1) SD Holding (2) SDA
(3) and SDLTD (4) amending
the A&A Warrant Agreement
"Dai-Tokyo (Bermuda)" means Dai-Tokyo Inter-
national Company Limited, a
Bermudian corporation
"the draft Articles" means the draft Articles of
Association of SDLTD deliv-
ered with the A&A Warrant
Amendment marked "WA1"
6
<PAGE>
"the Group" means SD Holding and its
subsidiaries
"Net Subscription Monies" means the amount raised by
SDLTD the issue of Con-
vertible Preference Shares
upon New Capitalisation
less all costs attendant on
the Reorganisation and on
such issue
"the New B Shares" means the "B" Shares of
SDLTD as defined in the
draft Articles
"New Capitalisation" shall have the meaning as-
cribed in Schedule 2
"Notes" means the Senior Notes and
the Subordinated Notes as
defined in the Note Pur-
chase Agreement and issued
by SDA
"Note Purchase Agreement" means an Agreement made as
of October 9, 1987 between
ASPL (1) SDA (2) and SD
Holding (3) for the sale of
the Notes by SDA to ASPL as
amended by an Amendment
Agreement made August 30,
1988 between the same par-
ties
"the Reorganisation" shall have the meaning as-
cribed in Schedule 1
"SD Associates" means S.D. Associates
Limited, a Bermudian cor-
poration
"SDI" means Sphere Drake Insur-
ance plc
"SDIG" means Sphere Drake Insur-
ance Group plc
"SD Partners" means SD Partners, a
7
<PAGE>
Bermudian partnership which
proposes to register as a
limited partnership with
the name SD Partners L.P.
2. INTERPRETATION
--------------
2.1 In this Deed unless the context (which in-
cludes the context of the Note Purchase Agreement) otherwise
requires:-
(a) words and expressions defined in the Com-
panies Act 1985 as amended bear those meanings;
(b) reference to the singular includes the plural
and vice versa and reference to a gender includes all
other genders;
(c) reference to a person includes a body cor-
porate and an unincorporated association of persons;
(d) references to the Note Purchase Agreement
include the Notes.
2.2 Headings in this Deed are for convenience
only and do not affect its interpretation.
3. CONSENT TO REORGANIZATION
-------------------------
3.1 Subject to sub-clause 3.2, ASPL hereby con-
sents in so far as such consent may be required under the
Note Purchase Agreement to each step in the Reorganisation
and in particular agrees that the Reorganisation will not in
any respect constitute, and in any event shall be deemed not
to constitute, a Triggering Event or an Event of Default or
Potential Event of Default or to breach any of the represen-
tations covenants or obligations of SDA or SD Holding under
the Note Purchase Agreement or the Guaranty Agreement and
such consent and agreement shall as from the date hereof
constitute an amendment to and become a term of the Note
Purchase Agreement.
3.2 SDLTD, SDA and SD Holding undertakes with
ASPL that no member of the Group shall give any financial
assistance in connection with the acquisition by SDLTD of
shares under the Reorganisation or with the acquisition of
shares in SDLTD under the New Capitalisation.
8
<PAGE>
4. CONSENT TO NEW CAPITALISATION
-----------------------------
4.1 Subject to sub-clause 4.2 and clause 5, ASPL
hereby consents in so far as such consent may be required
under the Note Purchase Agreement to each step in the New
Capitalisation and in particular agrees that the New
Capitalisation will not in any respect constitute, and in
any event shall be deemed not to constitute, a Triggering
Event or an Event of Default or Potential Event of Default
or to breach any of the representations covenants or
obligations of SDA or SD Holding under the Note Purchase
agreement and such consent and agreement shall as from the
date hereof constitute an amendment to and become a term of
the Note Purchase Agreement.
4.2 SDLTD, SD Holding and SDA each undertake with
ASPL that the loan and security and other documentation
actually used in the Reorganisation and New Capitalisation
will not without the prior consent of ASPL differ from the
drafts referred to in Schedules 1 and 2 in any respect which
affects the interests of ASPL as beneficial owner of the
Notes acquired under the Note Purchase Agreement.
4.3 Nothing in the Note Purchase Agreement shall
operate to prohibit or limit the exercise or enforcement by
SDLTD or any member of the Group of its rights under any of
the agreements referred to in Schedule 2 even if such exer-
cise or enforcement shall result in an Event of Default or
Potential Event of Default. In turn, ASPL shall not by this
Agreement waive its rights in respect of any such Event of
Default or Potential Event of Default or otherwise.
5. A&A WARRANT AMENDMENT
---------------------
This Agreement is conditional upon execution of
the A&A Warrant Amendment.
6. AMENDMENT OF THE NOTE PURCHASE AGREEMENT
----------------------------------------
6.1 The definition of Debt in Section 14 of the
Note Purchase Agreement shall be amended with effect from
the completion of the New Capitalisation so that there shall
be excluded from the definition of Debt:
(i) indebtedness for the purchase of goods or
services unless and to the extent that payment therefor
is not due under the purchase agreement until a date
9
<PAGE>
which is more than 90 days after whichever is the later
of the date of invoice or the date of supply;
(ii) indebtedness under office equipment or motor
vehicle leases having an aggregate capital value of
less than B.P.300,000;
(iii) interest payable accruing under the loan
agreement referred to in Schedule 2;
6.2 The definition of Lien in Section 14 of the
Note Purchase Agreement shall be amended with effect from
the New Capitalisation so that there shall be excluded
therefrom any interest which would otherwise constitute a
Lien if and to the extent it is a security interest for any
obligation which is by the express terms of sub-clause 6.1
above excluded from the definition of Debt.
6.3 For avoidance of doubt it is agreed that:
(i) payments or repayments on account of princi-
pal, interest or any other sums under the loan and
other agreements referred to in Schedule 2 will not
constitute Restricted Payments or a Triggering Event;
(ii) with reference to clause 11.1 of the Note
Purchase Agreement, that clause is construed so that
the New Capitalisation is excluded as being permitted
by sub-clause 11.1 (c) for the purposes of the proviso
to sub-clause 11.1 (d) whether before or after any
Triggering Event and accordingly does not operate to
reduce the sum of B.P.15,O00,000 specified therein.
7. APPLICATION OF NOTE PURCHASE AGREEMENT
--------------------------------------
Except as amended hereby, the Note Purchase Agree-
ment shall remain in full force and effect.
8. GENERAL
-------
8.1 All applicable provisions of the Note Pur-
chase Agreement as amended shall apply including in particu-
lar Sections 10 ("Notices") and 21 ("Miscellaneous"). No-
tices to SDLTD shall be addressed to SDLTD and served at the
same address and in the same manner as notices addressed to
SD Holding.
10
<PAGE>
8.2 SDLTD undertakes with ASPL to procure that
the Net Subscription Monies are applied in accordance with
paragraphs (b) (c) and (f) of Schedule 2.
IN WITNESS WHEREOF the parties have executed this document
----------------------------------------------------------
as a Deed on the above date.
---------------------------
11
<PAGE>
SCHEDULE 1
----------
"the Reorganization" means
(a) the adoption by SDLTD of the draft Articles
and establishment by SDLTD of the share capital struc-
ture set out therein;
(b) the exercise by John Head & Partners L.P.
(or its designate) of rights under an agreement made on
December 30 1987 between John Head & Partners L.P. and
SDH and in consequence the issue by SD Holding
(credited as fully paid through capitalisation of the
share premium account referred to in (f)) of 612,245
Ordinary Shares;
(c) the acquisition by SDLTD
(i) from SD Partners of all the issued
shares of SD Associates in exchange for (aa)
24,134,704 SDLTD 25 pence Ordinary Shares and (bb)
2,713,737 New "B" Shares;
(ii) from SD Associates of all the issued B
Preference Shares of SD Holding for the sum of
B.P.14,000,000 payable in cash;
(iii) from Dai-Tokyo (Bermuda) of all the
issued A Preference Shares of SD Holding in ex-
change for 3,000,000 A Preference Shares (as de-
fined in the draft Articles) of SDLTD;
(iv) from SD Partners and others including
John Head & Partners L.P. of each of the issued
Ordinary Shares of SD Holding in exchange for one
SDLTD 25 pence Ordinary Share;
(d) the adoption by SDLTD, subject to Revenue
approval, of an approved share option scheme (the New
Share Option Scheme) which will provide on certain
conditions for the grant of options over SDLTD [10/25]
pence Ordinary Shares in replacement for (and so as to
extinguish) the rights of holders of existing options
over Ordinary Shares in SD Holding;
12
<PAGE>
(e) the grant to executives of SDI of options to
subscribe at par for 555,826 New "B" Shares;
(f) the conversion of the 14,000,000 B Preference
Shares in SD Holding then held by SDLTD into 24,134,704
Ordinary Shares in SD Holding of 10 pence each credited
as fully paid and ranking pari passu in all respects
with the Ordinary Shares of SD Holding currently in
issue and the consequent creation of a share premium
account of B.P.11,586,529.60;
(g) the adoption by SD Holding of Articles of
Association in the terms of the draft delivered with
this agreement and marked as Appendix "WAA2".
13
<PAGE>
SCHEDULE 2
----------
"New Capitalisation" means
(a) the issue by SDLTD to affiliates or others of
9,300,000 Convertible Preference Shares of B.P.1 each at
par and of 5,800,000 Convertible Preference Shares of
US $1 each at $1 plus the Equalisation Premium, such
shares having, inter alia, rights of conversion into
ordinary shares of SDLTD in the terms of the draft
Articles;
(b) the loan in Sterling and United States dol-
lars by SDLTD to SD Holding of the Net Subscription
Monies upon the terms and conditions of the draft Loan
Agreement delivered with the Note Purchase Amendment
and marked as Appendix "NPA1" and the creation by SD
Holding of security for such loan as contemplated by
Appendix NPA1 in the form of the draft security docu-
mentation delivered with the Note Purchase Amendment
and marked as Appendix "NPA2";
(c) the loan in Sterling and United States dol-
lars by SD Holding to SDIG of all monies borrowed from
SDLTD as described in paragraph (b) upon the terms and
conditions of the draft Loan Agreement delivered with
the Note Purchase Amendment and marked as Appendix
"NPA4" and the creation by SDIG of security for such
loan as contemplated by Appendix NPA4 in the form of
the draft security documentation delivered with the
Note Purchase Amendment and marked as Appendix "NPA5";
(d) the giving by SDA of a guarantee in respect
of the loan obligations of SDIG to SD Holding in the
form of the draft Deed of Guarantee delivered with the
Note Purchase Amendment and marked as Appendix "NPA6";
(e) the giving by SDA of a guarantee in respect
of the loan obligations of SD Holding to SDLTD in the
form of the draft Deed of Guarantee delivered with the
Note Purchase Amendment;
(f) the application by SDIG of the monies bor-
rowed from SD Holding as described in paragraph (c)
first to meet all attendant costs and charges as con-
templated by Appendix NPA4 and secondly by way of sub-
14
<PAGE>
scription at par for fully paid ordinary shares in SDI
of B.P.1 each;
(g) the subordination and regulation of priori-
ties of B.P.32,000,000 Unsecured Loan Notes 1995 issued by
SDIG to SDA pursuant to a Deed of Priorities between
SDLTD, SD Holding, SDA and SDIG in the form of the
draft Deed of Priorities delivered with the Note Pur-
chase Amendment and named as Appendix "NPA7"
and for the purposes of paragraph (a) above "Equalisation
Premium" means the amount produced by the formula
(X - US $1) in which X is that amount which will on
conversion by SDIG into Sterling on the date of New
Capitalisation realise the sum of B.P.1.
THE COMMON SEAL OF
ALEXANDER STENHOUSE &
PARTNERS LIMITED
in the presence of:
THE COMMON SEAL OF
SPHERE DRAKE ACQUISITIONS
[U.K.] LIMITED in the
presence of:
THE COMMON SEAL OF
SPHERE DRAKE HOLDING
PUBLIC LIMITED COMPANY
in the presence of:
THE COMMON SEAL OF
SPHERE DRAKE LIMITED
in the presence of:
THE COMMON SEAL OF
S.D. SECURITIES LIMITED
in the presence of:
15
<PAGE>
THIS (NOTE PURCHASE AMENDMENT) AGREEMENT AND DEED OF CONSENT is
made the 14 October 1992
BETWEEN:-
(1) ALEXANDER STENHOUSE & PARTNERS LIMITED No. S.C.23477 whose
registered office is at 145 St Vincents Street, Glasgow,
Scotland ("ASPL")
(2) SPHERE DRAKE ACQUISITIONS (U.K.) LIMITED No. 2136565 whose
registered office is at 52-54 Leadenhall Street, London EC3
("SDA")
(3) SPHERE DRAKE HOLDING PUBLIC LIMITED COMPANY No. 2168083
whose registered office is at 52-54 Leadenhall Street,
London EC3 ("SD Holding")
(4) SPHERE DRAKE LIMITED No. 2709527 whose registered office is
at 52-54 Leadenhall Street, London EC3 ("SDLTD")
(5) S.D. SECURITIES LIMITED incorporated in Guernsey whose
registered office is at 7 New Street, St Peter's Port,
Guernsey ("S.D. Securities")
RECITALS
A. Words and expressions defined in or by clause 1
("Definitions") bear that meaning when used in these
Recitals.
B. ASPL is the beneficial owner of certain Notes due 1995
issued by SDA upon and subject to the terms and conditions
of the Note Purchase Agreement.
C. S.D. Securities is the legal owner of the Notes referred to
in Recital B and holds the same upon the trusts constituted
by the Trust Deed.
<PAGE>
2
D. The obligations of SDA under the Notes are guaranteed by SD
Holding under and subject to the terms and conditions of
the Guaranty Agreement.
E. SD Holding is the ultimate U.K. holding company of
(i) SDI, which is itself the direct subsidiary of
(ii) SDIG, which is itself the direct subsidiary of
(iii) SDA, which is itself the direct subsidiary of SD
Holding.
F. SDLTD wishes, as part of a scheme of reorganisation, to
acquire all the issued shares of SD Holding and afterwards
to issue new shares to raise monies which will (after
deduction of related costs) be lent to SD Holding and
onwards within the Group for the purpose of increasing the
paid up share capital of SDI.
G. This Deed supplements and varies the Note Purchase
Agreement having regard to the proposed Reorganisation and
New Capitalisation.
H. SD Securities is a party to this Agreement for the sole
purpose of providing its consent to the Reorganisation and
New Capitalisation.
<PAGE>
3
NOW THIS DEED WITNESSES as follows:
1. DEFINITIONS
1.1 Subject to the sub-clause 1.2 and to the operative terms of
this Deed, words and expressions defined in the Note
Purchase Agreement bear that meaning when used in this
Deed, including without limitation
"Affiliate"
"Event of Default"
"Guaranty Agreement"
"Potential Event of Default"
"Restricted Payments"
"Triggering Event"
and words used in the Schedule and not otherwise defined
herein or in the Note Purchase Agreement have the meaning
given to them in the A&A Warrant Amendment Agreement.
1.2 In this Agreement:-
"the A&A Warrant means the Warrant Agreement
Agreement" made as of October 9, 1987
between SD Holding (1) SDA (2)
and ASPL (3)
"the A&A Warrant means the Agreement made or to
Amendment" be made at the same time as this
Agreement between ASPL (1) SD
Holding (2) SDA (3) and SDLTD (4)
amending the A&A Warrant
Agreement
"Dai-Tokyo (Bermuda)" means Dai-Tokyo International
Company Limited, a Bermudian
corporation
"the draft Articles" means the draft Articles of
Association of SDLTD delivered
with the A&A Warrant Amendment
marked "WA1"
"the Group" means SD Holding and its
subsidiaries
<PAGE>
4
"Net Subscription means the amount raised by SDLTD
Monies" the issue of Convertible
Preference Shares upon New
Capitalisation less all costs
attendant on the Reorganisation
and on such issue
"the New B Shares" means the "B" Shares of SDLTD as
defined in the draft Articles
"New Capitalisation" shall have the meaning ascribed
in Schedule 3
"Notes" means the Senior Notes and the
Subordinated Notes as defined in
the Note Purchase Agreement and
issued by SDA
"Note Purchase means an Agreement made as of
agreement" October 9, 1987 between ASPL (1)
SDA (2) and SD Holding (3) for
the sale of the Notes by SDA to
ASPL as amended by on Amendment
Agreement made August 30, 1988
between the same parties
"the Reorganisation" shall have the meaning ascribed
in Schedule 1
"SD Associates" means S.D. Associates Limited, a
Bermudian corporation
"SDI" means Sphere Drake Insurance
plc
"SDIG" means Sphere Drake Insurance
Group plc
"SD Partners" means SD Partners, a Bermudian
partnership which proposes to
register as a limited partnership
with the name SD Partners L.P.
"SD Securities" means S.D. Securities Limited, a
Guernsey corporation
<PAGE>
5
2. INTERPRETATION
2.1 In this Deed unless the context (which includes the context
of the Note Purchase Agreement) otherwise requires:-
(a) words and expressions defined in the Companies Act
1985 as amended bear those meanings;
(b) reference to the singular includes the plural and vice
versa and reference to a gender includes all other
genders;
(c) reference to a person includes a body corporate and an
unincorporated association of persons;
(d) references to the Note Purchase Agreement include the
Notes.
2.2 Headings in this Deed are for convenience only and do not
affect its interpretation.
3. CONSENT TO REORGANISATION
3.1 Subject to sub-clause 3.2, ASPL hereby consents in so far
as such consent may be required under the Note Purchase
Agreement to each step in the Reorganisation and in
particular agrees that the Reorganisation will not in any
respect constitute, and in any event shall be deemed not to
constitute, a Triggering Event or an Event of Default or
Potential Event of Default or to breach any of the
representations covenants or obligations of SDA or SD
Holding under the Note Purchase Agreement or the Guaranty
Agreement and such consent and agreement shall as from the
date hereof constitute an amendment to and become a term of
the Note Purchase Agreement.
3.2 SDLTD, SDA and SD Holding undertakes with ASPL that no
<PAGE>
6
member of the Group shall give any financial assistance in
connection with the acquisition of SDLTD of shares under
the Reorganisation or with the acquisition of shares in
SDLTD under the New Capitalisation.
4. CONSENT TO NEW CAPITALISATION
4.1 Subject to sub-clause 4.2 and clause 5, ASPL hereby
consents in so far as such consent may be required under
the Note Purchase Agreement to each step in the New
Capitalisation and in particular agrees that the New
Capitalisation will not in any respect constitute, and in
any event shall be deemed not to constitute, a Triggering
Event or an Event of Default or Potential Event of Default
or to breach any of the representations covenants or
obligations of SDA or SD Holding under the Note Purchase
Agreement and such consent and agreement shall as from the
date hereof constitute an amendment to and become a term of
the Note Purchase Agreement.
4.2 SDLTD, SD Holding and SDA each undertake with ASPL that the
loan and security and other documentation actually used in
the Reorganisation and New Capitalisation will not without
the prior consent of ASPL differ from the drafts referred
to in Schedules 1 and 2 in any respect which affects the
interests of ASPL as beneficial owner of the Notes acquired
under the Note Purchase Agreement.
4.3 Nothing in the Note Purchase Agreement shall operate to
prohibit or limit the exercise or endorcement by SDLTD or
any member of the Group of its rights under any of the
agreements referred to in Schedule 2 even if such exercise
or enforcement shall result in an Event of Default or
Potential Event of Default. In turn, ASPL shall not by
this Agreement waive its rights in respect of any such
Event of Default or Potential Event of Default or
otherwise.
<PAGE>
7
5. A&A WARRANT AMENDMENT
This Agreement is conditional upon execution of the A&A
Warrant Amendment.
6. AMENDMENT OF THE NOTE PURCHASE AGREEMENT
6.1 The definition of Debt in Section 14 of the Note Purchase
Agreement shall be amended with effect from the completion
of the New Capitalisation so that there shall be excluded
from the definition of Debt:
(i) indebtedness for the purchase of goods or services
unless and to the extent that payment therefor is not
due under the purchase agreement until a date which is
more than 90 days after whichever is the later of the
date of invoice or the date of supply;
(ii) indebtedness under office equipment or motor vehicle
leases having an aggregate capital value of less than
300,000 pounds;
(iii) interest payable accruing under the loan agreement
referred to in Schedule 2;
6.2 The definition of Lien in Section 14 of the Note Purchase
Agreement shall be amended with effect from the New
Capitalisation so that there shall be excluded therefrom
any interest which would otherwise constitute a Lien if and
to the extent it is a security interest for any obligation
which is by the express terms of sub-clause 6.1 above
excluded from the definition of Debt.
6.3 For avoidance of doubt it is agreed that:
(i) payments or repayments on account of principal,
interest or any other sums under the loan and other
<PAGE>
8
agreements referred to in Schedule 2 will not
constitute Restricted Payments or a Triggering Event;
(ii) with reference to clause 11.1 of the Note Purchase
Agreement, that clause is construed so that the New
Capitalisation is excluded as being permitted by sub-
clause 11.1 (c) for the purposes of the proviso to
sub-clause 11.1 (d) whether before or after any
Triggering Event and accordingly does not operate to
reduce the sum of 15,000,000 pounds specified therein.
7. APPLICABILITY OF NOTE PURCHASE AGREEMENT
Except as amended hereby, the Note Purchase Agreement shall
remain in full force and effect.
8. GENERAL
8.1 All applicable provisions of the Note Purchase Agreement as
amended shall apply including in particular Sections 10
("Notices") and 21 ("Miscellaneous"). Notices to SDLTD
shall be addressed to SDLTD and served at the same address
and in the same manner as notices addressed to SD Holding.
8.2 SDLTD undertakes with ASPL to procure that the Net
Subscription Monies are applied in accordance with
paragraphs (b) (c) and (f) of Schedule 2.
IN WITNESS WHEREOF the parties have executed this document as a
Deed on the above date.
<PAGE>
9
SCHEDULE 1
"the Reorganisation" means
(a) the adoption by SDLTD of the Draft Articles and
establishment by SDLTD of the share capital structure set
out therein;
(b) the exercise by John Head & Partners L.P. (or its
designate) of rights under an agreement made on December 30
1987 between John Head & Partners L.P. and SDH and in
consequence the issue by SD Holding (credited as fully paid
through capitalisation of the share premium account
referred to in (f)) of 612,245 Ordinary Shares;
(c) the acquisition by SDLTD
(i) from SD Partners of all the issued shares of SD
Associates in exchange for (aa) 24,134,704 SDLTD 25
pence Ordinary Shares and (bb) 2,713,737 New "B"
Shares;
(ii) from SD Associates of all the issued B Preference
Shares of SD Holding for the sum of 14,000,000 pounds
payable in cash;
(iii) from Dai-Tokyo (Bermuda) of all the issued A
Preference Shares of SD Holding in exchange for
3,000,000 A Preference Shares (as defined in the draft
Articles) of SDLTD;
(iv) from SD Partners and others including John Head &
Partners L.P. of each of the issued Ordinary Shares of
SD Holding in exchange for one SDLTD 25 pence Ordinary
Share;
<PAGE>
10
(d) the adoption by SDLTD, subject to Revenue approval, of an
approved share option scheme (the New Share Option Scheme)
which will provide on certain conditions for the grant of
options over SDLTD [10/25] pence Ordinary Shares in
replacement for (and so as to extinguish) the rights of
holders of existing options over Ordinary Shares in SD
Holding;
(e) the grant to executives of SDI of options to subscribe at
par for 555,826 New "B" Shares;
(f) the conversion of the 14,000,000 B Preference Shares in SD
Holding then held by SDLTD into 24,134,704 Ordinary Shares
in SD Holding of 10 pence each credited as fully paid and
ranking pari passu in all respects with the Ordinary Shares
of SD Holding currently in issue and the consequent
creation of a share premium account of 11,586,529.60 pounds;
(g) the adoption by SD Holding of Articles of Association in
the terms of the draft delivered with this Agreement and
marked as Appendix "WAA2"
<PAGE>
11
SCHEDULE 2
"New Capitalisation" means
(a) the issue by SDLTD to Affiliates or others of 9,300,000
Convertible Preference Shares of 1 pound each at par and of
5,800,000 Convertible Preference Shares of US $1 each at $1
plus the Equalisation Premium, such shares having, inter
alia, rights of conversion into ordinary shares of SDLTD in
the terms of the draft Articles;
(b) the loan in Sterling and United States dollars by SDLTD to
SD Holding of the Net Subscription Monies upon the terms
and conditions of the draft Loan Agreement delivered with
the Note Purchase Amendment and marked as Appendix "NPA1"
and the creation by SD Holding of security for such loan as
contemplated by Appendix NPA1 in the form of the draft
security documentation delivered with the Note Purchase
Amendment and marked as Appendix "NPA2";
(c) the loan in Sterling and United States dollars by SD
Holding to SDIG of all monies borrowed from SDLTD as
described in paragraph (b) upon the terms and conditions of
the draft Loan Agreement delivered with the Note Purchase
Amendment and marked as Appendix "NPA4" and the creation by
SDIG of security for such loan as comtemplated by Appendix
NPA4 in the form of the draft security documentation
delivered with the Note Purchase Amendment and marked as
Appendix "NPA5";
(d) the giving by SDA of a guarantee in respect of the loan
obligations of SDIG to SD Holding in the form of the draft
Deed of Guarantee delivered with the Note Purchase
Amendment and marked as Appendix "NPA6";
(e) the giving by SDA of a guarantee in respect of the loan
obligations of SD Holding to SDLTD in the form of the draft
<PAGE>
12
Deed of Guarantee delivered with the Note Purchase
Amendment;
(f) the application by SDIG of the monies borrowed from SD
Holding as described in paragraph (c) first to meet all
attendant costs and charges as contemplated by Appendix
NPA4 and secondly by way of subscription at par for fully
paid ordinary shares in SD1 of 1 pound each;
(g) the subordination and regulation of priorities of
32,000,000 pounds Unsecured Loan Notes 1995 issued by SDIG to SDA
pursuant to a Deed of Priorities between SDLTD, SD Holding,
SDA and SDIG in the form of the draft Deed of Priorities
delivered with the Note Purchase Amendment and named as
Appendix "NPA7"
and for the purposes of paragraph (a) above "Equalisation
Premium" means the amount produced by the formula (X - US $1) in
which X is that amount which will on conversion by SDIG into
Sterling on the date of New Capitalisation realise the sum of 1 pound.
THE COMMON SEAL OF )
ALEXANDER STENHOUSE & ) /s/
PARTNERS LIMITED )
in the presence of:- ) /s/
THE COMMON SEAL OF )
SPHERE DRAKE ACQUISITIONS ) /s/
(U.K.) LIMITED in the )
presence of:- ) /s/
/s/
51 Eastcheap
London EC3 Director
THE COMMON SEAL OF )
SPHERE DRAKE HOLDING ) /s/
PUBLIC LIMITED COMPANY )
in the presence of: ) /s/
/s/
<PAGE>
13
THE COMMON SEAL OF ) /s/
SHPERE DRAKE LIMITED )
in the presence of:- ) /s/
/s/
THE COMMON SEAL OF )
S.D. SECURITIES LIMITED )
in the presence of:- )
/s/
Director
for C.L. SECRETARIES LIMITED
/s/
Authorised Signatory
Alexander & Alexander 1993 Annual Report
[Graphic design of the words "Alignment", "Partnering", "Information and
Technology", "Productivity" and "Globalization"]
["Alexander & Alexander" logo]
<PAGE>
Alexander & Alexander Services Inc. at a Glance
Alexander & Alexander Services Inc. is a global organization of professional
advisers providing risk management, insurance brokerage and human resource
management consulting services from more than 300 offices in over 80 countries.
[Sources of Revenue Pie Chart: shows sources of revenue by core business. Does
not include percentages. Risk Management & Insurance Services is approximately
two-thirds, with Human Resource Management Consulting Services, Reinsurance
Broking and Specialist Insurance Broking approximately dividing the remaining
one-third.]
Risk Management & Insurance Services
Alexander & Alexander works on behalf of clients to design and implement
integrated insurance and risk management programs. We have access to world
insurance markets and the resources to help clients address their risk
assessment, risk control and risk financing requirements.
Specialist Insurance Broking
Alexander Howden Intermediaries places large and complex risks that require
access to wholesale and specialist insurance markets in London, Europe and
internationally. Excess and surplus, specialty lines and facultative
reinsurance placements are also handled by AHI.
Reinsurance Broking
Alexander Howden Reinsurance Brokers Limited is one of the leading reinsurance
broking companies operating in the London and international markets. Through a
network of offices worldwide, AHRB provides a range of broking and associated
services to insurance and reinsurance companies and Lloyd's syndicates.
Human Resource Management Consulting Services
The Alexander Consulting Group Inc. provides advisory and support services in
human resource management, including organizational effectiveness, integrated
information technologies, strategic health care and flexible compensation,
retirement planning and actuarial services. ACG also offers brokerage services
for group health and welfare, special risk and association/mass marketing
insurance coverage.
<PAGE>
Financial Highlights
Alexander & Alexander Services Inc. & Subsidiaries
(in millions, except per share amounts)
1993 1992 1991
- ------------------------------------------------------------------------------
Operating Results:
Operating Revenues $1,341.6 $1,369.5 $1,385.1
Operating Income 52.3 85.5 16.4
Income (Loss) from Continuing Operations (a) 23.6 57.1 (9.5)
Loss from Discontinued Operations (b) -- (145.0) --
Cumulative Effect of Change in Accounting 3.3 -- (2.2)
Net Income (Loss) 26.9 (87.9) (11.7)
- ------------------------------------------------------------------------------
Per Common Share:
Income (Loss) from Continuing Operations $ .40 $ 1.32 $ (.22)
Loss from Discontinued Operations -- (3.35) --
Cumulative Effect of Change in Accounting .08 -- (.05)
Net Income (Loss) .48 (2.03) (.27)
Dividends Paid 1.00 1.00 1.00
- ------------------------------------------------------------------------------
Financial Position:
Total Assets $2,793.8 $2,609.6 $2,737.8
Stockholders' Equity 276.2 185.5 370.1
Long-Term Debt 111.8 125.1 169.9
- ------------------------------------------------------------------------------
Other Data:
Average Common Shares Outstanding 43.4 43.2 43.1
Number of Employees (thousands) 14.5 14.9 15.8
- ------------------------------------------------------------------------------
(a) Income (loss) from continuing operations includes restructuring and other
special charges of $13.9 million in 1992 and $48.2 million in 1991.
(b) The 1992 loss from discontinued operations primarily reflects an increase
in the Company's estimated liabilities under indemnities provided to the
purchasers of discontinued businesses.
Contents
2. Message from the Chairman
7. Operational Highlights
14. Financial Contents
43. Board of Directors & Officers,
Major Subsidiaries and Operating Units
44. Investor Information
45. A&A Around the World
<PAGE>
[Head shot of Dr. Robert E. Boni, Chairman of the board]
[Caption: "Robert E. Boni, Chairman of the Board"]
In January 1994, Dr. Robert E. Boni was elected non-executive chairman of
the Board of Directors of Alexander & Alexander Services Inc. He succeeded T.H.
Irvin, who announced plans to retire as A&A's chairman and chief executive
officer.
Dr. Boni, 66, joined A&A's Board of Directors in 1988. He is chairman of
its Executive Committee and a member of the Audit, Nominating and Compensation
& Benefits committees.
From 1985 to 1990, Dr. Boni was chairman and CEO of Armco Inc., where he
restructured insurance, aerospace, steel and oilfield equipment manufacturing
operations. He joined Armco in 1956 as a research engineer after earning a
Ph.D. in metallurgical engineering from Carnegie-Mellon University.
To our Shareholders:
After my first few months as chairman of Alexander & Alexander Services
Inc., I want to give you a frank assessment of the company's current condition
and future prospects. I also want you to know what the Board of Directors is
doing to deal with some of the issues facing A&A.
Since my election in January, I have talked with employees and clients as
well as with the financial community and journalists. I have met individually
with the company's entire senior management. There is a remarkable consensus:
A&A requires dramatic change to improve financial performance, to fix certain
operations, and to regain its position of industry leadership.
I am a firm advocate of change--not for its own sake, but rather for change
that leads to substantive progress in the pursuit of our corporate purpose.
A&A's strengths in insurance and reinsurance broking and in risk and human
resource management consulting are well-established. We have thousands of
capable and dedicated employees serving clients around the world.
On this foundation, the company will address its future with renewed
vigor. I cannot promise an immediate transformation. As 1993's financial
results show, we have our work cut out
<PAGE>
for us. With net income of only $26.9 million, or $0.48 per share, it is not
surprising that A&A faced blunt questions about corporate direction as the year
ended.
Some of A&A's difficulties are due to external factors--such as unusually
competitive business conditions. But other problems have been self-inflicted.
For example, crucial areas of our global risk management and insurance services
group have not always performed as well as they should have.
On a corporate level, discontinued operations and litigation have sapped
excessive amounts of management's attention. Core businesses have occasionally
operated without the requisite balance of freedom and accountability.
In January 1994, the Board of Directors took steps to deal more
aggressively with the challenges facing the company. Subsequently, T.H.
Irvin, chairman and chief executive officer, announced plans to retire after
more than 40 years of dedicated service with the company. He agreed to continue
as CEO through March 1994 and to complete his term on the Board of Directors.
At the same time, the board voted to separate the functions of chairman
and CEO, a step many companies have taken to strengthen their corporate
governance structure. The board's Executive Committee is taking on additional
responsibility for oversight of company policy and management controls. As part
of the change, I was elected to succeed Mr. Irvin as chairman, effective
January 14.
One of my first acts was to convene a committee of outside directors to
begin an international search for a new CEO. As I write this, the process is
well underway.
We are focused on finding a leader who can maximize the substantial
potential of our global franchise. This is likely to be someone who has had a
successful track record of running a global financial services operation under
difficult business conditions. While placing a premium on fresh ideas and
openness to change, A&A does not require a "slash and burn" chief executive.
To be sure, the CEO must focus on our problems, control costs and make A&A
a more efficient and productive company. The new leadership must do whatever is
necessary for
<PAGE>
A&A to be the first choice of clients, employees and shareholders. This means
developing innovative services and identifying new areas of business
opportunity. It means emphasizing consultative relationships and providing a
level of service that is second to none.
To achieve this, it is essential to accelerate changes in how we manage
our business and our employees. We are determined to foster a more open,
people-oriented culture that will free our employees to devote themselves even
more creatively and energetically to their clients. My own business background,
including five years as CEO and chairman of Armco Inc., leaves me no doubt
about the wisdom--and practicality--of this vision.
Our determination to transform A&A reflects industry conditions that could
not have been imagined just a few years ago. It would make no sense for us to
simply concentrate on running A&A more efficiently. The times demand--and the
company needs--leadership which understands that future success will depend on
our ability to provide tangible value to clients in a rapidly changing
environment.
At the same time, we must run a tighter ship. In my opinion, the most
disturbing development in 1993 was the discovery of improper revenue
recognition practices within our Alexander Consulting Group subsidiary. To fix
the problem, several top management changes were made at ACG, and its operating
procedures and financial controls were strengthened.
It is important to be candid about this situation. But it must be kept in
perspective. Despite improper revenue recognition and disappointing fourth
quarter results, ACG has the leadership and professional talent necessary to
resume growth and to improve profitability. Our confidence in this business was
evident in A&A's recent acquisition of Clay & Partners, a major U.K. actuarial
consulting firm that significantly expands ACG's service capabilities in
Europe. (See "Operational Highlights," beginning Page 7.) ACG also extended its
professional practices in such growth areas as integrated information
technologies and health care.
Meanwhile, important parts of our risk management and insurance services
operations
<PAGE>
are being transformed to align services more closely to client needs while
enhancing profitability. The changes are most far-reaching in the United
States, where our A&A Inc. subsidiary still constitutes about a third of A&A's
global revenues.
Our U.S. strategy is focused on those industry segments that enable us to
best apply our resources to add value and profitability. We have a growing list
of specialties--from agriculture, trucking and construction to aviation, energy,
financial services and health care and others--where we have a strong industry
position and outstanding expertise.
I recognize that changes in the structure and management of the U.S.
organization have been difficult for many employees. The new U.S. management
has the board's support in addressing this issue as we create a more
innovative, responsive and profitable operation.
Other parts of the risk management and insurance services group are
performing well. For instance, having taken a first-hand look at Alexander &
Alexander U.K., I conclude that the operation is proactively adjusting to
evolving business needs. Client retention is high, and margins are quite
satisfactory.
It is clear from our U.K. experience that organizational changes must be
applied in a thoughtful, strategic manner that recognizes geographic and
cultural differences.
Our global risk management and insurance services group also is continuing
to grow in Asia, Eastern Europe and Latin America. In the latter region, we
acquired an 80 percent equity interest in Asesores Kennedy Agente de Seguros,
S.A., a leading Mexican broker. This puts us in a very strong position as the
North American Free Trade Agreement takes effect. A&A has also established a
global business unit in Mexico City to better coordinate our global resources
on behalf of clients operating in Mexico. Earlier this year, we acquired
majority equity in Bogota insurance broker Marmorek Y Asociados Ltda., La
Correduria de Seguros.
Throughout 1993, Alexander Howden Reinsurance Brokers Limited and
Alexander Howden Intermediaries produced strong
<PAGE>
financial results while gaining market share and extending their global reach.
The Alexander Howden Group continued to report excellent revenue and operating
income growth and is now the third largest firm of brokers in the London market
and the third largest reinsurance broker in the world.
On a corporate level, A&A completed a private placement of 2.3 million
shares of convertible preferred stock for net proceeds of approximately $111
million. This restored A&A's debt-to-total capitalization ratio to the
comfortable level that existed before the 1992 fourth quarter special charge
for discontinued underwriting operations. A&A also continued an effective,
tax-efficient cash management program.
Despite these achievements, we fell short of our goals--particularly by
failing to deliver an acceptable level of financial performance and shareholder
return. Nevertheless, I am confident that we are making the tough decisions
necessary to improve operations and financial results.
During this difficult period, the board's Executive Committee and I are
working closely with management. All of us are focused on servicing and
expanding our client base as well as the retention of A&A's best employees. We
have a tough road ahead, but I am personally excited by the challenge of
helping A&A achieve its full potential.
My fellow board members and I--as well as the employees of Alexander &
Alexander--appreciate your continued support.
Sincerely,
Robert E. Boni
Chairman of the Board
March 31, 1994
<PAGE>
Operational Highlights
This review of A&A's activities in 1993 takes a broad look at areas of
critical focus, significant investment and notable accomplishment within our
operations.
Aligning to Meet Client Needs
Historically, Alexander & Alexander served clients through a traditional
hierarchical, geography-based structure, common to many organizations.
Over time, such a management structure can limit flexibility in meeting
client needs by creating artificial internal borders and hindering a company's
ability to respond promptly to marketplace developments. In recent years, A&A
has taken steps to form a flexible organization that addresses converging
market forces--evolving client needs, insurance pricing and availability,
liability and environmental hazards, to name a few.
A key focus in 1993 was to accelerate the company's process of aligning
its service structure with client needs. A&A's global Risk Management and
Insurance Services division reorganized staff and resources to structurally
recognize that clients of different sizes,
- --------------------------------------------------------------------------------
Focus On Forestry
[Photograph of construction worker assembling wooden beams for a house.]
[Caption: "Trus Joist MacMillan's engineered lumber is increasingly used in
residential construction."]
Technology and environmental awareness are changing Canada's forestry
industry.A&A in Canada has been a leader in this segment for more than 50
years, thanks to industry-focused resources in exposure analysis, loss
prevention and risk transfer.
A&A is assisting MacMillan Bloedel in Vancouver explore alternative
technologies to provide affordable construction lumber.
A MacMillan Bloedel joint venture, Trus Joist MacMillan in Boise, Idaho,
is a pioneer in the development of engineered lumber, which requires the
harvest of substantially fewer trees.
<PAGE>
industries and attributes require fundamentally different types of service and
advice.
As part of this alignment strategy, A&A organized its resources to support
additional industry segments and product niches for companies with common needs
and characteristics. This new structure--based on client needs rather than
internal convenience--is designed to deliver more tailored services, streamline
lines of authority and put A&A's professionals closer to clients.
The segmentation process is being applied globally by A&A's Risk
Management and Insurance Services division as appropriate for local market
conditions and client characteristics. In the United States, change has been
particularly dramatic and rapid. In less than three months, 86,000 client
service records were changed to match them more closely to the most appropriate
resources, and more than 3,000 employees had new assignments and reporting
relationships.
Industry segments are now being led by practice leaders. These
professionals were recruited from within and outside A&A based on specific
management skills, consulting aptitude and industry knowledge to act as "change
agents" in a new environment.
- --------------------------------------------------------------------------------
Space-age Partnership
[Photograph of unidentified man in front of space rocket in Russia.]
[Caption: "Rocket at Star City, north of Moscow."]
Russia wants to export its rocket launch technology but requires
assistance with insurance and risk management programs.
In 1993, the Russian Space Agency and Ministry of Defense asked A&A to
serve on an advisory committee reviewing risk management issues affecting space
commercialization. A&A is the only risk management firm--and the only foreign
firm--represented.
A&A is partnering its aviation, risk management consulting and reinsurance
expertise to design a consolidated insurance program that accesses aviation
markets in London and around the world.
<PAGE>
Partnering Core Businesses to Strategic Advantage
For companies with hard-to-place or geographically dispersed risks, a
cross-disciplinary approach is essential to an effective risk management
program. In 1993, A&A continued to look for opportunities to integrate its
resources in innovative ways.
In response to a growing privatization trend in Europe, Latin America and
Asia, A&A created a Privatization Consulting Group consisting of in-house
specialists in risk management consulting, human resource management,
reinsurance broking, specialty broking and financial risk management. The new
group provides broad risk-related services to governments, state-owned
enterprises, purchasers of companies and other third parties navigating the
crosscurrents of economic, financial and regulatory issues involved in the
privatization process.
Another resource introduced in 1993 was the U.S. Captive Council. Based on
A&A's successful European model, the council assists companies in exploring and
using captives effectively. The council consists of specialists from A&A's
global risk management, captive management and reinsurance operations.
Other cross-disciplinary groups include AlexComp Consulting Plus, which
specializes in workers compensation, and the company's Global Risk Control
Committee, which monitors and responds to the increasing number of safety and
environmental issues of common concern around the world.
Partnering has significant benefits for efficiency and financial controls.
In California, for example, five discrete functions that previously operated in
separate locations now share one facility and support services. A&A continues
to identify and implement similar resource-sharing arrangements.
Creating Client-Centered Information and Technology Opportunities
Strengthening information and technology capabilities supports A&A's move
towards a more consultative relationship with our clients.
A&A's global information strategy aims to unite communications and
information systems to create a "universal work station." This will enable our
staff to "talk" in one computer language for basic transactions and information
sharing worldwide.
<PAGE>
In 1993, A&A linked the existing electronic mail systems of its major
business units, allowing employees to exchange information electronically among
themselves and with clients and third parties. It also set a foundation for
implementation of a companywide desktop computer program that will be completed
in 1995--Microsoft Office.
Videoconferencing standards were established, and facilities are up and
running in A&A's London, New York and Pasadena, Calif., offices as well as
corporate offices in Owings Mills, Md. In addition to reducing employee travel
time and expense, the technology can improve client access to A&A's global
network and expertise.
For example, videoconferencing enabled A&A clients in Southern California
to obtain first-hand information on Lloyd's of London. Those interested in
unfolding developments at Lloyd's gathered in Pasadena to pose questions to
Lloyd's CEO Peter Middleton, who responded from A&A's videoconferencing center
in London.
The technology is also being used effectively in business development
efforts, allowing companies in various locations the convenience
- --------------------------------------------------------------------------------
Trading Technology
[Photograph of two employees at a computer terminal; the screen reads "RINET."]
[Caption: "Networks offer rapid and reliable access to responsive markets."]
Alexander Howden's commitment to information networks is helping to
eliminate paper processes--and change the nature of commercial insurance
transactions around the world.
Alexander Howden was the first London broker to join RINET, the
Reinsurance and Insurance Network, and took the initiative in promoting
electronic data exchange for wide-ranging reinsurance transactions
internationally.
Together with its extensive participation in LIMNET, the London Insurance
Market Network, Alexander Howden has emerged as a leading exponent of advanced
electronic trading.
<PAGE>
of "meeting" and talking directly to our professionals.
The Alexander Consulting Group is helping its clients apply new and
emerging technology. ACG's Integrated Information Technologies professionals
are advising clients in the establishment of Human Resource Information
Centers, which integrate all human resource-related databases within a client
organization. Management at all levels can access centralized information as
needed.
This initiative will be a major focus of ACG's "walk through" Technology
Center. In 1994, the center will be open to clients who want hands-on
involvement with software and systems that are being designed and tested for
use in their organizations.
Enhancing Productivity
A&A has undertaken a multiyear reengineering effort in the United States
aimed at improving quality and productivity.
Known internally as "The A&A Way," the effort involves isolating work
processes--such as policy renewals--and redesigning them from scratch. Combined
with a significant investment in information technology, reengineering offers
- --------------------------------------------------------------------------------
Higher Productivity Through Quality
[Illustration of the official seal of the Bueau Veritas Quality International.]
[Caption: "The seal of the Bureau Veritas Quality International."]
Alexander & Alexander (UK) Ltd. has received independent endorsement as the
risk management operation of quality.
In 1993, all 25 offices were awarded the British Standard Institute's BS
5750, a system of practices and procedures that targets client satisfaction as
the ultimate measure of quality.
BS 5750 compliance typically takes two years. A&A (UK) Ltd. was certified
after just nine months, testament to its internal quality systems. Its strong
financial performance demonstrates the link between quality and efficiency.
<PAGE>
an excellent opportunity for dramatic productivity improvements. The completion
of several pilot programs in our Pasadena office in 1993 has set the stage for
formal "roll out" in 1994.
Companywide, A&A continues to reduce overhead and other expenses. Careful
facilities management has resulted in significant savings in premises
costs.Staffing levels have been kept in line with changing business
requirements. From a high of 18,000 employees seven years ago, A&A now
employs 14,500. Revenue per capita has risen 56 percent since 1986--the largest
increase in an outside analyst's examination of three publicly traded
U.S.-based brokers.
Reengineering and other initiatives will continue to close the productivity
"gap" that exists between A&A and some major competitors.
Expanding Geographic Presence
A&A's development of a worldwide service structure is one of the company's
great success stories. For multinational clients, A&A's owned and/or controlled
network can provide a standard of consistent, quality service that is second to
none.
Since the late 1980s, A&A has viewed expansion opportunities not for the
purpose of gaining size but to fill regional gaps or seize business
opportunities in developing areas.
Thanks to increased privatization activities and ratification of the North
American Free Trade Agreement, Latin America has become one of the world's most
dynamic regions. In 1993 A&A acquired an 80 percent stake in Asesores Kennedy
Agente de Seguros, S.A., one of Mexico's leading insurance brokers. Asesores
Kennedy has 270 employees in eight offices, located in the country's major
commercial and industrial centers.
The former Communist bloc nations have a critical need for sophisticated
insurance counsel and represent a promising area of growth. Alexander Howden
was the first broker to open an office in Kazakhstan and received full local
<PAGE>
registration in October, giving us formal accreditation as an insurance and
reinsurance broker. This follows more than five years of research and
consultancy in the region.
A&A's presence in Kazakhstan along with other recently opened offices in
Hungary, Poland and the Czech Republic reflect our commitment to establish a
controlled operation to ensure a consistent standard of service.
[Two pie charts illustrating Global Diversification: one labeled 1988 shows
A&A's U.S. revenues at 63 percent and non-U.S. revenues at 37 percent; the
other, labeled 1993, shows U.S. revenues at 54 percent and non-U.S. revenues at
46 percent.]
[Caption: Changes in A&A's revenue base over the last five years reflect the
stronger growth of revenues outside the U.S.]
- --------------------------------------------------------------------------------
Globalization in Action
[Photograph of Alan Fishman, managing director, and Brian Kennedy, chairman &
CEO, of Alexander Clay & Partners Consulting.]
Alan Fishman, managing director, and Brian Kennedy, chairman & CEO, of
Alexander Clay & Partners Consulting.
The 1993 acquisition of London-based Clay & Partners advances A&A's
globalization strategy on several fronts.
In Europe, where the private sector is shouldering greater pension and
benefits responsibilities, the actuarial resources of Clay & Partners are a
natural fit with the Alexander Consulting Group's European network.
In the U.K., pension reform is likely to trigger significant consulting
activity. Alexander Clay & Partners Consulting, 650 strong, is prepared to
respond to local and multinational companies operating there.
<PAGE>
Financial Contents
15. Selected Financial Data
16. Management's Discussion and Analysis of
Financial Condition and Results of Operations
22. Report of Management
23. Independent Auditors' Report
24. Consolidated Statements of Operations
25. Consolidated Balance Sheets
26. Consolidated Statements of Cash Flows
27. Consolidated Statements of Stockholders' Equity
28. Notes to Financial Statements
<PAGE>
Selected Financial Data
Alexander & Alexander Services Inc. & Subsidiaries
(in millions, except per share amounts)
1993 1992 1991 1990 1989
Operating Results:
Operating revenues $1,341.6 $1,369.5 $1,385.1 $1,361.4 $1,265.6
Operating income 52.3 85.5 16.4 123.8 112.8
Income (loss) from
continuing operations (a) 23.6 57.1 (9.5) 55.9 64.2
Loss from discontinued
operations (b) -- (145.0) -- -- --
Extraordinary credits -- -- -- -- 1.1
Cumulative effect of change
in accounting 3.3 -- (2.2) -- --
Net income (loss) 26.9 (87.9) (11.7) 55.9 65.3
Per share of common stock:
Income (loss) from
continuing operations $ .40 $ 1.32 $ (.22) $ 1.30 $ 1.49
Loss from discontinued
operations -- (3.35) -- -- --
Extraordinary credits -- -- -- -- .03
Cumulative effect of change
in accounting .08 -- (.05) -- --
Net income (loss) $ .48 $ (2.03) $ (.27) $ 1.30 $ 1.52
Dividends paid $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Weighted Average Shares
Outstanding 43.4 43.2 43.1 43.0 42.9
Financial Position:
Total assets $2,793.8 $2,609.6 $2,737.8 $2,812.9 $2,581.7
Current assets 2,201.6 2,054.2 2,085.1 2,056.9 1,899.3
Working capital 116.1 119.1 131.8 97.3 152.4
Long-term debt 111.8 125.1 169.9 182.6 215.5
Stockholders' equity 276.2 185.5 370.1 430.6 379.9
(a) Income (loss) from continuing operations includes restructuring and other
special charges of $13.9 million in 1992, $48.2 million in 1991, and $7.2
million in 1990.
(b) The 1992 loss from discontinued operations primarily reflects an increase
in the Company's estimated liabilities under indemnities provided
to the purchasers of discontinued businesses.
<PAGE>
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
General
The Company's core business activities are concentrated in two principal
segments, insurance services and human resource management consulting.
Insurance services revenues account for approximately 84 percent of the
Company's total revenues and are derived primarily from risk management and
insurance services, specialist and reinsurance broking operations. Human
resource management consulting operations, which represent approximately 16
percent of total revenues, include services for employee benefit programs,
communications and management consulting, health care consulting,
organizational analysis and planning and benefits broking.
The Company's risk management and insurance service revenues are generally
related to the levels of premiums for coverage placed on behalf of clients.
Throughout the last several years, these revenues have been negatively
influenced by the steady decline in premium rates, particularly in North
America. This decline has been due to the intense competition among insurance
underwriters for business and excess overall market capacity. In addition to
the insurance market forces, revenue growth has been curtailed by the generally
poor worldwide economic conditions and a significant drop in interest rates
which reduced the interest income earned on fiduciary funds. During this
period, revenue growth has largely stemmed from new business initiatives and
the development of new products and services.
The Company cannot predict the timing or extent of any changes in premium
rates or overall economic conditions in 1994; however, property premium rates
are anticipated to stabilize with casualty and liability rates remaining very
competitive. Reinsurance pricing will remain mixed; however, market capacity
has expanded in certain lines. Economic variables are anticipated to remain
somewhat static with the possibility of a slight increase in short-term
interest rates and moderate economic expansion in the United States.
During the last three years, consulting revenue growth has been
constrained by the downturn in worldwide economic conditions and, particularly
in the last two years, by the uncertainty over health care reform in the United
States. Consulting clients have reduced discretionary spending and the lack of
new legislation has resulted in severe price competition, particularly for
actuarial services relating to employee benefit plans. These conditions are
expected to continue into 1994, although revenue growth could be stimulated if
new health care reform proposals in the United States are enacted.
The following discussion and analysis of significant factors affecting the
Company's results of operations and liquidity and capital resources should be
read in conjunction with the accompanying financial statements and related
notes. The Company's financial statements for all periods prior to December 31,
1993, have been restated from those previously reported to reflect a correction
of certain revenue recognition practices of the Alexander Consulting Group Inc.
subsidiary and to reflect the pooling of interests acquisition of Clay &
Partners, a U.K.-based actuarial consulting operation. See Notes 2 and 3 of
Notes to Financial Statements for further information.
Operating Revenues
Consolidated operating revenues decreased in 1993 by $27.9 million or 2
percent compared to a decrease of $15.6 million or 1.1 percent in 1992.
Revenue comparisons were impacted by both foreign currency fluctuations as
well as dispositions of non-core businesses. In 1993 versus 1992, the U.S.
dollar strengthened significantly against most of the major currencies in
countries where the Company operates, including a 17 percent appreciation
against the U.K. pound sterling. This negatively impacted consolidated
operating revenues by approximately $57.7 million or 4.2 percent in 1993.
Foreign exchange rates had minimal impact on the comparability of revenues in
1992 versus 1991. In addition, the Company disposed of three non-core
businesses in 1992, two of which occurred in the first quarter. The impact on
revenues in 1992 from the sold operations was a reduction of $47.8 million when
compared to 1991.
<PAGE>
Commissions and Fees
Commissions and fees are derived from the following sources:
- --------------------------------------------------------------------
For the years ended December 31, 1993 1992 1991
Risk management and
insurance services $ 845.9 $ 838.6 $ 885.7
Specialist insurance broking 93.8 86.5 74.1
Reinsurance broking 135.3 131.6 117.3
Human resource management
consulting 212.7 240.3 226.3
- --------------------------------------------------------------------
$1,287.7 $1,297.0 $1,303.4
- --------------------------------------------------------------------
Total commissions and fees decreased by $9.3 million or 0.7 percent in
1993 compared to a $6.4 million or 0.5 percent decrease in 1992 versus 1991.
Broking commissions and fees in the risk management and insurance services
operations increased by $7.3 million or 0.9 percent in 1993 compared to a $47.1
million or 5.3 percent decline in 1992 versus 1991. The comparison of 1992
versus 1991 was negatively impacted by $47.1 million due to the 1992 sales of
non-core businesses.
The continuation of reduced property and casualty premium rates in North
America, coupled with the impact of unfavorable economic conditions, limited
revenue growth in the comparable periods. These effects were partially offset
by new business production and moderate firming of premium rates in certain
international markets.
Specialist insurance broking commissions and fees increased by $7.3
million or 8.4 percent and $12.4 million or 16.7 percent in 1993 and 1992,
respectively. The growth in commissions and fees for both comparable periods
reflects strong new business production and rate increases, particularly in the
United Kingdom and Asia-Pacific markets, partially offset by slightly lower
foreign exchange rates.
Reinsurance broking commissions and fees increased by $3.7 million or 2.8
percent in 1993 over 1992 and $14.3 million or 12.2 percent in 1992 versus
1991. Revenue growth resulted from premium rate increases in most non-U.S.
markets and new business efforts, partially offset by a decline in foreign
exchange rates in 1993 which negatively impacted revenues by approximately 8
percent. Revenue growth has been restricted during 1993 and 1992, particularly
in the marine and non-marine markets, because significant elements of
previously available capacity have been withdrawn from the market and certain
risks have ceased to be underwritten.
Human resource management consulting commissions and fees decreased by
$27.6 million or 11.5 percent in 1993 compared to a $14 million or 6.2 percent
increase in 1992 over 1991. Revenue production was negatively influenced in
1993 by the uncertainty surrounding health care reform in the United States,
lower foreign exchange rates, and revenues of an operation sold in 1992.
Consulting clients have continued to reduce the number and scope of
discretionary projects stemming from economic conditions, particularly in the
United States. Revenue growth was achieved in 1992 compared to 1991 primarily
from new business as well as increased employee benefit activities in the
United Kingdom.
Fiduciary Investment Income
Investment income earned on fiduciary funds decreased by 25.7 percent in
1993 primarily due to lower average interest rates worldwide, particularly in
the United States and United Kingdom. Fiduciary investment income declined by
11.3 percent in 1992 versus 1991 also due to lower interest rates, partially
offset by higher average investment levels.
The Company believes that short-term interest rates in 1994 are likely to
increase slightly in the United States; however, further declines are expected
in the European markets.
Operating Expenses
Consolidated operating expenses, excluding the applicable special charges
described below, increased by $5.3 million or 0.4 percent in 1993 compared to a
$22.1 million or 1.7 percent decrease in 1992 versus 1991.
In 1993, as a result of lower foreign exchange rates and hedging contract
gains, expense comparisons with 1992 were favorably impacted by $66.3 million
or 5.2 percent. In addition, the impact on total expenses in 1992 from the sold
operations was a reduction of $40.2 million compared to 1991.
<PAGE>
Salaries and benefits
Total salaries and related benefits decreased by $19.2 million or 2.4
percent in 1993 compared to a $3.3 million or 0.4 percent increase in 1992. The
1993 decline was primarily attributable to lower foreign exchange rates, offset
by slightly higher staff costs in local currency terms. Staff costs for the
comparable periods include normal salary progressions and higher benefit costs
partially offset by lower headcounts. Incentive-related costs, which are
primarily based upon performance of the individual operating companies,
declined in 1993 compared to an increase in 1992 over 1991. In 1992, the
Company realized staff cost savings of approximately $14 million due to the
restructuring program as well as a $22.3 million reduction resulting from the
sold operations.
Other Operating Expenses
Other operating expenses increased by $24.5 million or 5.1 percent in 1993
compared to a decrease of $25.4 million or 5 percent in 1992. In 1993, the
increase reflects higher insurance costs, travel and entertainment expenses and
systems development costs, offset by lower foreign exchange rates. In 1992,
such expenses, including premises costs and amortization of intangible assets,
were favorably impacted by the restructuring and other special charges recorded
in 1991 as well as a $17.9 million reduction from the sold operations.
Insurance costs reflect higher third-party insurance premiums and self-
insurance reserves for the Company's professional indemnity programs. The
Company believes its insurance-related reserves are sufficient to cover all
potential claims and liabilities; however, there is no assurance that
escalating litigation costs and awards, as well as insurance company
insolvencies, will not adversely impact the future overall costs of insurance
coverages.
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions," for its U.S. plans. In 1991, the Company adopted
the provisions of SFAS No. 106 relating to deferred compensation plans. This
statement requires the Company to accrue the estimated cost of future retiree
benefit payments during the years the employee provides services. The Company
previously expensed the cost of these benefits, which are principally health
care and life insurance, as premiums or claims were paid. The Company has
elected to recognize the initial postretirement benefit obligation of $14
million over a period of twenty years. The Company's cash flows are not
affected by implementation of this statement and the impact to the results of
operations for 1993 was not significant.
In November 1992, the Financial Accounting Standards Board issued SFAS No.
112, "Employers' Accounting for Postemployment Benefits," which will be adopted
by the Company in the first quarter of 1994. This statement requires that
certain benefits provided to former or inactive employees after employment but
prior to retirement, including disability benefits and health care continuation
coverage, be accrued based upon the employees' service already rendered. The
cumulative effect of this accounting change is estimated to approximate $2.7
million after-tax and the increase to the annual cost of providing such
benefits will not be significant.
Special Charges
In 1992, the Company recorded a $16.5 million pre-tax charge ($13.9
million after-tax or $0.32 per share) associated with the 1987 sale of Shand,
Morahan & Company, Inc. (Shand). The provision reflects the estimated cost of
indemnities provided to the purchasers of Shand.
In 1991, the Company recorded a $75.6 million pre-tax charge ($48.2
million after-tax or $1.12 per share) associated with the restructuring of its
insurance broking operations and other expenses. The restructuring portion of
the charge amounted to $45.5 million and included the anticipated costs of
closing or consolidating certain offices as well as the restructuring of
others. In addition to the restructuring costs, the special charge included
$17.1 million relating primarily to the write-off of certain intangible assets
and $13 million relating primarily to the estimated costs of indemnities given
to the purchasers of Shand.
Other Income and Expenses
Investment income earned on operating funds decreased by $2.4 million or
20 percent in 1993 compared to a decrease of $1 million or 7.7 percent in 1992.
The decreases in these comparable periods
<PAGE>
reflect the significantly lower short-term interest rates throughout most of
the major world markets.
Interest expense decreased by $3.6 million or 20 percent in 1993 compared
to a decrease of $4.2 million or 18.9 percent in 1992. This reflects
significantly lower worldwide interest rates and a decrease in average debt
levels.
Other non-operating income (expenses) is comprised of the following:
Years ended December 31, 1993 1992 1991
- ------------------------------------------------------------------
Gains on sales of businesses $ 3.9 $43.8 $ --
Litigation costs (20.2) (5.8) (2.1)
Other 0.7 1.9 1.5
- ------------------------------------------------------------------
$(15.6) $39.9 $(0.6)
- ------------------------------------------------------------------
Litigation costs increased substantially in 1993 due primarily to
pre-trial discovery preparations associated with the Mutual Fire lawsuit
described in Note 13 of Notes to Financial Statements as well as the settlement
of certain other litigation matters.
Income Taxes
Effective January 1, 1993, the Company adopted SFAS No. 109, "Accounting
for Income Taxes." The cumulative effect of adopting this standard increased
net income by $3.3 million or $0.08 per share. There were no significant
changes in the components of income tax expense or the Company's effective tax
rate as a result of implementing this standard.
At December 31, 1993, the Company has a net deferred tax asset of $57.6
million, which is net of a $23.1 million valuation allowance primarily relating
to net operating loss, tax credit, and capital loss carryforwards. The
valuation allowance represents approximately 70 percent of the carryforwards.
The Company believes that it is more likely than not that this portion of these
deferred tax assets will not be realized.
A substantial portion of the net deferred tax asset relates to various
financial statement expenses and accruals, primarily in the U.S., that will not
be tax deductible until paid. These costs, which will be paid over many years,
include principally deferred compensation expenses, professional indemnity
costs, and pension and other employee benefit expenses. The Company believes a
valuation allowance is not necessary for these temporary differences since it
is expected that taxable income will be generated in future years to assure
realization.
The Company's effective tax rates, excluding the 1992 and 1991 special
charges described above, were 20.1 percent, 39 percent and 40.6 percent in
1993, 1992 and 1991, respectively. These rates compare to the U.S. statutory
rate of 35 percent in 1993 and 34 percent in 1992 and 1991. The effective tax
rates prior to 1993 were higher than the U.S. statutory rate due primarily to
amortization of goodwill and certain expenses which are not deductible for tax
purposes in the jurisdictions in which the Company conducts business.
As a result of capital gains generated in 1993, the Company recognized a
tax benefit of $3.5 million associated with a prior year capital loss, which
decreased the effective tax rate in 1993. In addition, Clay & Partners operated
as a partnership prior to the merger, and accordingly, their results do not
reflect corporate income taxes of approximately $1.9 million in 1993 and $2.1
million in each of 1992 and 1991.
As discussed in Note 5 of Notes to Financial Statements, the Company has
reached an agreement with the Appeals Office of the Internal Revenue Service on
the settlement of tax issues for the years 1980 through 1986. The settlement
agreement is subject to final review by the staff of the Joint Committee on
Taxation which should be completed during the first half of 1994. The
settlement is within previously established reserves.
The Company is also under examination by the Internal Revenue Service for
years 1987 through 1991. The Company believes that adequate provision has been
made to cover liabilities which may arise on final settlement of these
examinations.
Discontinued Operations
Indemnities provided by the Company to the purchasers of Sphere Drake
include a provision covering future losses on the insurance pooling
arrangements from 1953 to 1967, between Sphere Drake and Orion Insurance
Company (Orion), a U.K.-based insurance company, and future losses pursuant to
a stop-loss reinsurance contract between Sphere Drake and Lloyd's Syndicate
701.
The types of claims being reported on the Orion insurance pooling
arrangement are primarily asbestosis, environmental pollution and latent
disease claims in the United States and are coupled with substantial litigation
expenses. Liabilities for these claims cannot be estimated by conventional
actuarial reserving techniques because the available historical experience is
not sufficient to apply such techniques for these types
<PAGE>
of claims and case law, which will ultimately determine the extent of these
liabilities, is still evolving. To date, U.S. case law has already altered the
intent and scope of these policies to some extent.
The Company has obtained advice from an independent actuarial firm who
used available exposure information and various projection techniques in
estimating the Company's ultimate exposure. The Company has provided as its
ultimate exposure, the actuarial firm's point estimate, which approximates
the mid-point within their range of expected loss and a provision for Sphere
Drake's share of uncollectible reinsurance recoverables. The $70 million
difference between the low and high estimates of their range is quite wide due
to the expansion of coverage and liability by certain state courts and
legislatures for environmental pollution and other losses in the past and the
possibility of similar interpretations in the future, as well as the
uncertainty in determining what scientific standards will be acceptable for
measuring site cleanup.
The major portion of the $145 million loss from discontinued operations
recorded by the Company in 1992 was due to recording additional reserves
associated with the Orion indemnity.
Sphere Drake's appeal of the decision regarding the lawsuit against the
Names on Lloyd's Syndicate 701 was heard in October 1993 with the U.K. Court of
Appeal upholding the adverse decision of the lower court. As a result, the
deferred litigation settlement balance of $22.3 million described in Note 14 of
Notes to Financial Statements has been included in the Company's net
liabilities of discontinued operations. The Company has provided $45.8 million,
which includes the above $22.3 million, as its ultimate exposure under this
indemnity based on an estimate by an independent actuarial firm.
The Sphere Drake indemnities and other liabilities arising out of the
discontinued operations are expected to be settled over many years and could
extend over a 20 to 30 year period.
The Company believes that, based on current estimates of exposures, the
reserves relating to discontinued operations are adequate. However, there can
be no assurance that further adverse developments may not occur due to
variables inherent in the estimation process, including estimating insurance
reserves for environmental pollution, latent disease and other exposures, the
collectibility of reinsurance recoverable balances and other matters.
Cumulative Effect Adjustments
Effective January 1, 1993, the Company adopted SFAS No. 109, "Accounting
for Income Taxes." The cumulative effect of adopting this standard increased
net income by $3.3 million or $0.08 per share.
Effective January 1, 1991, the Company adopted the provisions of SFAS No.
106 "Employers' Accounting for Postretirement Benefits Other Than Pensions,"
relating to deferred compensation plans. The cumulative effect of adopting this
standard decreased net income by $2.2 million, net of a related income tax
benefit of $1.8 million, or $0.05 per share.
Liquidity and Capital Resources
In 1993, cash flow generated from operations, supplemented by the $110.9
million of net proceeds upon the issuance of 2.3 million shares of $3.625
Series A Convertible Preferred Stock discussed below, was sufficient to fund
the Company's operating and capital expenditure requirements as well as
dividend payments.
Net cash provided from operations declined by $120.2 million in 1993. A
substantial portion of this decrease represents the net change in fiduciary
receivables and payables, which are dependent upon the timing of the receipt of
premiums from clients and the subsequent payment of such premiums to the
insurance carriers.
The increase in cash and cash equivalents and short-term investments
primarily represents fiduciary funds which are generally not available for the
operating needs of the Company. Such funds are invested in high-quality
instruments, including bank time deposits and governmental securities. At
December 31, 1993, more than 80 percent of the Company's cash and cash
equivalents and short-term investments are represented by such fiduciary
balances.
On March 18, 1993, the Company issued 2.3 million shares of $3.625 Series
A Convertible Preferred Stock through a private placement offering of $115
million of such shares. Such shares are convertible into Common Stock at a
conversion price of $31.875 per share of Common Stock and are redeemable, in
whole or in part, by the Company beginning in March 1997. The net proceeds to
the Company were $110.9 million and are available for general corporate
purposes.
<PAGE>
The Company's net capital expenditures for property and equipment and
acquisitions were $47 million in 1993, an increase of $24.6 million over 1992.
This increase primarily consisted of expenditures for systems-related software
and equipment as well as $16.4 million for an acquisition in Mexico. Capital
expenditures are expected to moderate somewhat in 1994.
The Company has a $150 million long-term credit agreement with various
banks which expires in July 1995. No borrowings were outstanding as of December
31, 1993 and none are contemplated during the first quarter of 1994. Based upon
current financial projections for 1994, it is probable that the Company will
not be in compliance with certain covenants contained in the credit agreement,
and that this may be reportable to the banks during April 1994. While there can
be no assurances in this regard, the Company believes that it will be able to
obtain any necessary waivers or amendments to such agreement. Supplementing the
credit agreement, the Company has uncommitted cancelable lines of credit
totaling $162.8 million.
In 1993, certain rating agencies downgraded the Company's commercial paper
to below investment grade. The Company had no commercial paper outstanding
during 1993, and does not expect to issue such short-term financing until the
Company's credit rating has improved.
In 1993, the Accumulated Translation Adjustments, which represent the
cumulative effect of translating the Company's international operations to U.S.
dollars, negatively impacted total Stockholders' Equity by $12.6 million. The
decrease resulted from strengthening of the U.S. dollar against most of the
major currencies of the Company's overseas operations.
As described in Notes 6 and 13 of Notes to Financial Statements, the
Company has significant litigation and other exposures which may require cash
resources. In addition, as described in Note 5 of Notes to Financial
Statements, a settlement has been reached with the Appeals Office of the IRS on
the significant tax issues which, subject to review, is within the Company's
previously established reserves and which is expected to require cash resources
of approximately $38 million during 1994. The Company has substantial arguments
and legal defenses against its litigation exposures; however, the timing and
ultimate outcome of these issues cannot be predicted with certainty. When funds
are required on the settlement with the IRS and in the event additional funds
are required to meet litigation exposures, the Company believes it has
sufficient resources, including credit capacity, to cover those tax liabilities
and other potential liabilities which are likely to arise on settlement of
other issues.
The Company has an accumulated deficit of $119 million at December 31,
1993. Under Maryland law, dividends may be paid as long as, after giving effect
to the dividend, a corporation is able to pay its debts as they become due in
the usual course of business and total assets of the corporation exceed total
liabilities plus any preferential rights of stockholders upon dissolution of
the corporation. The Company's current financial position satisfies these
requirements and the Board of Directors declared the regular quarterly dividend
of $0.25 per share payable in March 1994. The Board of Directors will continue
to monitor the Company's financial performance in connection with future
dividend decisions.
The Company believes that cash flow from operations, along with current
cash balances, will be sufficient to satisfy working capital and other
operating requirements in 1994. In the event additional funds are required, the
Company believes it will have sufficient resources, including borrowing
capacity, to meet such requirements.
<PAGE>
Report of Management
The Company's management is responsible for the preparation and contents
of the information and representations contained in the consolidated financial
statements and other sections of this annual report. Management believes that
the consolidated financial statements and related information have been
prepared in accordance with generally accepted accounting principles
appropriate in the circumstances, including amounts that are based on
management's judgment and best estimates.
The Company maintains a system of internal accounting controls to provide
reasonable assurance that assets are safeguarded against loss from unauthorized
use or disposition and that accounting records provide a reliable basis for the
preparation of financial statements. The internal accounting control system is
augmented by an internal auditing program, written policies and guidelines, and
careful selection and training of qualified personnel.
Deloitte & Touche has been engaged, with the ratification of the Company's
stockholders, as the independent auditors to audit the financial statements
of the Company and to express an opinion thereon. Their opinion is based on
procedures believed by them to be sufficient to provide reasonable assurance
that the financial statements present fairly, in all material respects, the
Company's financial position, cash flows and results of operations. Their
report is set forth on Page 23.
The Audit Committee of the Board of Directors is composed of five
directors, none of whom is an employee of the Company. It assists the board in
exercising its fiduciary responsibilities for oversight of audit and related
matters, including corporate accounting, reporting and control practices. It is
responsible for recommending to the Board of Directors the independent auditors
to be employed for the coming year, subject to stockholder approval. The Audit
Committee meets periodically with management, internal auditors and the
independent auditors to review internal accounting controls, auditing and
financial reporting matters. The independent auditors and the internal auditors
have unrestricted access to the Audit Committee.
Tinsley H. Irvin
Chief Executive Officer
Paul E. Rohner
Senior Vice President &
Chief Financial Officer
<PAGE>
Independent Auditors' Report
To The Stockholders of Alexander & Alexander Services Inc.
We have audited the accompanying consolidated balance sheets of Alexander
& Alexander Services Inc. and Subsidiaries as of December 31, 1993 and 1992,
and the related consolidated statements of operations, cash flows and
stockholders' equity for each of the three years in the period ended December
31, 1993. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these 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 financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the companies at December 31,
1993 and 1992, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1993 in conformity
with generally accepted accounting principles.
As discussed in Notes 5 and 7 to the consolidated financial statements, in
1993 the Company changed its method of accounting for income taxes and
postretirement benefits, and, in 1991, deferred compensation.
DELOITTE & TOUCHE
Baltimore, Maryland
February 25, 1994
<PAGE>
Consolidated Statements of Operations
Alexander & Alexander Services Inc. & Subsidiaries
For the years ended December 31, (in millions, except per share amounts)
1993 1992 1991
- --------------------------------------------------------------------
Operating revenues:
Commissions and fees $1,287.7 $1,297.0 $1,303.4
Fiduciary investment income 53.9 72.5 81.7
- --------------------------------------------------------------------
1,341.6 1,369.5 1,385.1
- --------------------------------------------------------------------
Operating expenses:
Salaries and benefits 785.3 804.5 801.2
Other 504.0 479.5 504.9
Special charges:
Restructuring -- -- 45.5
Other -- -- 17.1
- --------------------------------------------------------------------
1,289.3 1,284.0 1,368.7
- --------------------------------------------------------------------
Operating income 52.3 85.5 16.4
Other income (expenses):
Investment income 9.6 12.0 13.0
Interest expense (14.4) (18.0) (22.2)
Other (15.6) 39.9 (0.6)
Special charges -- (16.5) (13.0)
- --------------------------------------------------------------------
(20.4) 17.4 (22.8)
- --------------------------------------------------------------------
Income (loss) before income taxes and
minority interest 31.9 102.9 (6.4)
Income taxes 6.4 44.0 0.7
- --------------------------------------------------------------------
Income (loss) before minority interest 25.5 58.9 (7.1)
Minority interest (1.9) (1.8) (2.4)
- --------------------------------------------------------------------
Income (loss) from continuing operations 23.6 57.1 (9.5)
Loss from discontinued operations -- (145.0) --
- --------------------------------------------------------------------
Income (loss) before cumulative effect
of change in accounting 23.6 (87.9) (9.5)
Cumulative effect of change in accounting 3.3 -- (2.2)
- --------------------------------------------------------------------
Net income (loss) 26.9 (87.9) (11.7)
- --------------------------------------------------------------------
Preferred stock dividends (6.2) -- --
- --------------------------------------------------------------------
Earnings (Loss) Available for Common
Shareholders $ 20.7 $ (87.9) $(11.7)
- --------------------------------------------------------------------
Per share of common stock:
Income (loss) from continuing
operations $ .40 $ 1.32 $ (.22)
Loss from discontinued operations -- (3.35) --
- --------------------------------------------------------------------
Income (loss) before cumulative effect
of change in accounting .40 (2.03) (.22)
Cumulative effect of change
in accounting .08 -- (.05)
- --------------------------------------------------------------------
Net income (loss) $ .48 $ (2.03) $(.27)
- --------------------------------------------------------------------
Cash dividends $ 1.00 $ 1.00 $1.00
- --------------------------------------------------------------------
Weighted average number of shares 43.4 43.2 43.1
- --------------------------------------------------------------------
See Notes to Financial Statements.
<PAGE>
Consolidated Balance Sheets
Alexander & Alexander Services Inc. & Subsidiaries
December 31, (in millions)
1993 1992
- -----------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 642.2 $ 582.5
Short-term investments 246.5 239.1
Premiums and fees receivable (net of allowance for
doubtful accounts of $20.3 in 1993 and $22.1 in
1992) 1,172.3 1,134.2
Prepaid expenses and other current assets 140.6 98.4
- -----------------------------------------------------------------------------
Total current assets 2,201.6 2,054.2
- -----------------------------------------------------------------------------
Property and equipment:
Land and buildings 38.2 35.6
Furniture and equipment 305.4 313.2
Leasehold improvements 101.1 104.4
- -----------------------------------------------------------------------------
444.7 453.2
Less accumulated depreciation and amortization (292.3) (284.0)
- -----------------------------------------------------------------------------
Property and equipment (net) 152.4 169.2
- -----------------------------------------------------------------------------
Other assets:
Intangible assets (net of accumulated amortization
of $112.1 in 1993 and $107.7 in 1992) 188.8 187.1
Other 251.0 199.1
- -----------------------------------------------------------------------------
$2,793.8 $2,609.6
- -----------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current liabilities:
Premiums payable to insurance companies $1,744.0 $1,692.6
Short-term debt and current portion of long-term debt 29.2 6.7
Accounts payable and accrued expenses 312.3 235.8
- -----------------------------------------------------------------------------
Total current liabilities 2,085.5 1,935.1
- -----------------------------------------------------------------------------
Long-term liabilities:
Long-term debt 111.8 125.1
Deferred income taxes 17.9 71.7
Net liabilities of discontinued operations 106.5 95.4
Other 195.9 196.8
- -----------------------------------------------------------------------------
Total long-term liabilities 432.1 489.0
- -----------------------------------------------------------------------------
Commitments and contingent liabilities
Stockholders' equity:
Preferred stock, authorized 10 shares, $1 par value:
Series A junior participating preferred stock,
authorized 0.6 shares; issued and outstanding,
none -- --
$3.625 Series A convertible preferred stock,
authorized 2.3 shares; issued and outstanding
2.3 shares and none, respectively 2.3 --
Common stock, authorized 60 shares, $1 par value;
issued and outstanding 40.7and 40.1
shares, respectively 40.7 40.1
Class A common stock, authorized 13 shares, $.00001
par value; issued and outstanding 2.4 and 2.8
shares, respectively -- --
Class C common stock, authorized 5.5 shares, $1 par
value; issued and outstanding 0.4 and 0.4 shares,
respectively 0.4 0.4
Paid-in capital 423.4 296.5
Accumulated deficit (119.0) (92.5)
Accumulated translation adjustments (71.6) (59.0)
- -----------------------------------------------------------------------------
Total stockholders' equity 276.2 185.5
- -----------------------------------------------------------------------------
$2,793.8 $2,609.6
See Notes to Financial Statements.
<PAGE>
Consolidated Statements of Cash Flows
Alexander & Alexander Services Inc. & Subsidiaries
For the years ended December 31, (in millions)
1993 1992 1991
- ----------------------------------------------------------------------------
Cash provided (used) by:
Operating Activities:
Income (loss) from continuing operations $ 23.6 $ 57.1 $ (9.5)
Adjustments to reconcile to net cash provided by
operating activities:
Depreciation and amortization 54.5 60.5 72.2
Deferred income taxes (27.5) (2.9) (17.3)
Gains on disposition of subsidiaries
and other assets (3.9) (43.8) 0.3
Gain on pension plan settlement -- -- (5.1)
Special charges (net of tax) -- 13.9 48.2
Other 13.4 10.1 5.8
Changes in assets and liabilities (net of
effects from acquisitions and dispositions):
Premiums and fees receivable (67.9) (150.6) 105.3
Prepaid expenses and other current assets (15.8) 22.2 3.6
Other assets (11.9) 26.4 (16.6)
Premiums payable to insurance companies 85.9 226.5 (3.3)
Accounts payable and accrued expenses (4.7) (29.9) (17.8)
Other liabilities 12.8 (6.3) 30.9
Discontinued operations (net) (11.9) (13.1) (5.8)
Cumulative effect of change in accounting 3.3 -- (2.2)
- ----------------------------------------------------------------------------
Net cash provided by operating activities 49.9 170.1 188.7
- ----------------------------------------------------------------------------
Investing activities:
Purchases of property and equipment (net) (26.0) (16.7) (22.7)
Purchases of businesses (net of
cash acquired) (21.0) (5.7) (2.6)
Proceeds from sales of subsidiaries and other
assets (net of cash sold) 9.6 61.1 2.8
Purchases of investments (1,039.6) (1,133.8) (952.7)
Sales or maturities of investments 1,035.8 1,087.8 1,006.8
- ----------------------------------------------------------------------------
Net cash provided (used) by
investing activities (41.2) (7.3) 31.6
- ----------------------------------------------------------------------------
Financing activities:
Cash dividends (47.9) (40.9) (40.6)
Net change in short-term debt 17.2 (41.5) (7.8)
Additions to long-term debt 19.4 29.6 2.5
Repayments of long-term debt (26.0) (31.4) (10.3)
Issuance of preferred and common stock 112.1 2.0 0.9
Distribution of earnings of pooled entity (5.5) (5.2) (5.0)
- ----------------------------------------------------------------------------
Net cash provided (used) by
financing activities 69.3 (87.4) (60.3)
- ----------------------------------------------------------------------------
Effect of exchange rate changes on cash and
cash equivalents (18.3) (69.3) 2.2
Cash and cash equivalents at beginning of year 582.5 576.4 414.2
- ----------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 642.2 $ 582.5 $ 576.4
- ----------------------------------------------------------------------------
Supplemental cash flow information:
Cash paid during the year for:
Interest $ 14.6 $ 15.9 $ 17.2
Income taxes 56.0 47.6 38.4
- ----------------------------------------------------------------------------
Non-cash investing and financing activities:
Common stock issued for business acquisitions
and employee benefit plans 2.3 1.4 1.7
Notes received on dispositions
of subsidiaries 2.0 -- --
- ----------------------------------------------------------------------------
See Notes to Financial Statements.
<PAGE>
Consolidated Statements of Stockholders' Equity
Alexander & Alexander Services Inc. & Subsidiaries
For the years ended December 31, (in millions)
1993 1992 1991
- -------------------------------------------------------------------------------
$3.625 Series A Convertible Preferred Stock:
Balance, beginning of year $ -- $ -- $ --
Shares issued in private placement 2.3 -- --
- -------------------------------------------------------------------------------
Balance, end of year $2.3 $ -- $ --
- -------------------------------------------------------------------------------
Common stock:
Balance, beginning of year as previously reported $-- $ -- $ 37.0
Acquisition of pooled entity -- -- 2.3
- -------------------------------------------------------------------------------
Balance, beginning of year as restated 40.1 39.7 39.3
Issued for acquisitions, none, 0.1 and 0.1 shares,
respectively -- 0.1 0.1
Conversions of Class A and Class C shares into
common stock, 0.4, 0.2 and 0.2
shares, respectively 0.4 0.2 0.2
Other, principally stock option transactions 0.2 0.1 0.1
- -------------------------------------------------------------------------------
Balance, end of year $ 40.7 $ 40.1 $ 39.7
- -------------------------------------------------------------------------------
Class A common stock:
Balance, beginning of year $ 0.0 $ 0.0 $ 0.0
Conversions into common stock, 0.4, 0.1
and 0.1 shares, respectively -- -- --
- -------------------------------------------------------------------------------
Balance, end of year $ 0.0 $ 0.0 $ 0.0
- -------------------------------------------------------------------------------
Class C common stock:
Balance, beginning of year $ 0.4 $ 0.5 $ 0.6
Conversions into common stock, none, 0.1 and 0.1
shares, respectively -- (0.1) (0.1)
- -------------------------------------------------------------------------------
Balance, end of year $ 0.4 $ 0.4 $ 0.5
- -------------------------------------------------------------------------------
Paid-in capital:
Balance, beginning of year as previously
reported $ -- $ -- $289.0
Acquisition of pooled entity -- -- (2.2)
- -------------------------------------------------------------------------------
Balance, beginning of year as restated 296.5 291.4 286.8
Issued for acquisitions -- 1.3 1.6
Conversions into common stock (0.4) (0.1) (0.1)
Preferred stock issuance 108.6 -- --
Other, principally stock option transactions 3.1 2.9 1.9
Transactions of pooled entity prior
to acquisition (2.0) 1.0 1.2
Tax benefit from acquisitions accounted for as
pooling of interests 17.6 -- --
- -------------------------------------------------------------------------------
Balance, end of year $423.4 $296.5 $ 291.4
- -------------------------------------------------------------------------------
Retained earnings (deficit):
Balance, beginning of year $ (92.5) $ 42.5 $ 101.0
Net income (loss) 26.9 (87.9) (11.7)
Dividends:
Common stock (41.7) (40.9) (40.6)
Preferred stock (6.2) -- --
Distribution of earnings of pooled entity (5.5) (6.2) (6.2)
- -------------------------------------------------------------------------------
Balance, end of year $(119.0) $ (92.5) $ 42.5
- -------------------------------------------------------------------------------
Accumulated translation adjustments:
Balance, beginning of year $ (59.0) $ (4.0) $ 3.0
Foreign currency translation adjustments (12.6) (55.0) (7.0)
- -------------------------------------------------------------------------------
Balance, end of year $ (71.6) $ (59.0) $ (4.0)
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
<PAGE>
Notes to Financial Statements
(in millions, except per share amounts)
1. Significant Accounting Policies
Consolidation
The accompanying consolidated financial statements include the accounts of
Alexander & Alexander Services Inc. and its majority-owned subsidiaries. All
significant intercompany transactions and balances have been eliminated.
Cash Equivalents and Investments
Cash equivalents are highly liquid investments, including certificates of
deposit, government securities and time deposits, with maturities of three
months or less at the time of purchase. Short-term investments are similar
investments with maturities of more than three months but less than one year
from the date of purchase. Cash equivalents and short-term investments are
stated at cost which approximates market value.
Included in Other Assets in the Consolidated Balance Sheets at December
31, 1993 and 1992, are $74.8 million and $83.6 million, respectively, of
investments with maturities of greater than one year. Such long-term
investments are carried at the lower of aggregate cost or market, which
approximated $80 million and $89.3 million at December 31, 1993 and 1992,
respectively.
In May 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS)No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," which will be adopted in the first
quarter of 1994. This statement requires that certain investments in debt and
equity securities be classified into one of three categories:held-to-maturity,
available for sale, or trading. The accounting and reporting of such
investments is dependent upon such classification. The Company believes that
its investments in such securities will be classified as either
held-to-maturity, which are reported at amortized cost, or available for sale,
which are carried at fair value with unrealized gains and losses reported as a
separate component of Stockholders' Equity.
The Company's investment policies include placing its temporary cash
investments with financial institutions with strong credit ratings and limiting
the amount of exposure to any one institution in order to reduce credit risk.
Foreign Currency Translation
The financial statements of the Company's foreign operations, where the
local currency is the functional currency, are translated into U.S. dollars at
the exchange rates in effect at each year end for assets and liabilities and
average exchange rates during the year for the results of operations. The
related unrealized gains or losses resulting from translation are reported as a
separate component of Stockholders' Equity.
The Company enters into foreign exchange forward contracts to hedge the
impact of currency fluctuations, primarily relating to U.S. dollar revenues
generated by certain foreign subsidiaries. Gains and losses on these contracts
are recognized in the period in which the exchange rates change. At December
31, 1993, the Company has approximately $94.8 million of forward exchange
contracts outstanding. The fair value of such contracts was $0.5 million at
December 31, 1993. These contracts are generally purchased from large financial
institutions with strong credit ratings and management does not anticipate
incurring losses due to nonperformance by these institutions.
Net foreign currency transaction gains, included in operating income,
amounted to $9 million, $5.6 million and $3.2 million for the years ended
December 31, 1993, 1992, and 1991, respectively.
Property and Depreciation
The cost of property and equipment is depreciated generally on the
straight-line method over the estimated useful lives of the related assets
which range up to 40 years for buildings and 10 years for equipment. Leasehold
improvements are capitalized and amortized over the shorter of the life of the
asset or the lease term.
Intangible Assets
Intangible assets resulting from acquisitions, principally expiration
lists and goodwill, are amortized on the straight-line method over periods not
exceeding 17 and 40 years, respectively. The costs of non-compete agreements
are amortized on the straight-line method over the terms of the agreements. The
Company annually evaluates the carrying value of its intangible assets by
considering current and future operating results and cash flows related to the
specific intangible asset. Amortization of intangible assets included in
operating expenses amounted to $13 million, $14 million and $19.1 million for
the years ended December 31, 1993, 1992 and 1991, respectively.
Income Taxes
Effective January 1, 1993, the Company adopted SFAS No. 109, "Accounting
for Income Taxes." The adoption of SFAS No. 109 changes the Company's method of
accounting for income taxes from the
<PAGE>
deferred method to an asset and liability method whereby deferred income taxes
reflect the net tax effects of temporary differences between the tax bases and
financial reporting bases of assets and liabilities.
Income taxes are generally not provided on undistributed earnings of
foreign subsidiaries because they are considered to be permanently invested or
will not be repatriated unless any additional federal income taxes would be
substantially offset by foreign tax credits.
Fiduciary Funds
Premiums which are due from insureds are reported as assets of the Company
and as corresponding liabilities, net of commissions, to the insurance
carriers. Premiums received from insureds but not yet remitted to the carriers
are held as cash or investments in a fiduciary capacity.
Revenue Recognition
Commissions and fees for insurance services are generally recognized on
the effective date of the policies or the billing date, whichever is later. Any
subsequent commission adjustments, including policy cancellations, are
generally recognized upon notification from the insurance carriers. Contingent
commissions and commissions on policies billed and collected directly by
insurance carriers are recognized when received.
Fees and commissions for human resource management consulting services are
generally recognized when the services are provided.
Per Share Data
Primary earnings per share are computed by dividing earnings available to
common shareholders by the weighted average number of shares of Common Stock
and their equivalents (Class A and Class C Common Stock) outstanding during the
period and, if dilutive, shares issuable upon the exercise of stock options and
upon conversion of the convertible subordinate debentures. The $3.625 Series A
Convertible Preferred Stock issued in March 1993 is not a common stock
equivalent. The computation of fully diluted earnings per share for the periods
presented was antidilutive; therefore, the amounts for primary and fully
diluted earnings are the same.
Presentation
Unless otherwise indicated, all amounts are stated in millions of U.S.
dollars. Certain prior period amounts have been reclassified to conform with
the current year presentation.
2. Restatement of Financial Statements
During the third quarter of 1993, the Company became aware of certain
information regarding billed and unbilled accounts receivable balances and
related revenue recognition practices at its U.S. human resources management
consulting subsidiary, Alexander Consulting Group Inc. (ACG). In response to
this information, the Company commenced a comprehensive review of those
matters.
As a result of that review, the Company concluded that ACG's billed and
unbilled receivable balances and corresponding revenues had been overstated.
Accordingly, the Company's financial statements for the years ended December
31, 1992 and 1991 have been revised from those previously issued. The
restatement increased the Company's net loss by $4 million in 1992 and $5.3
million in 1991.
3. Acquisitions and Dispositions
On November 30, 1993, the Company issued 2.3 million shares of its Common
Stock for all of the partnership interests of Clay & Partners (Clay), a
U.K.-based actuarial consulting operation. This acquisition has been accounted
for as a pooling of interests and, accordingly, the consolidated financial
statements have been restated for all periods prior to the acquisition.
The following summarizes the separate results of the Company and Clay
prior to the restatement:
Company Clay Combined
Nine Months Ended
September 30, 1993:
Operating Revenues $ 976.1 $17.7 $ 993.8
Net Income 19.2 4.5 23.7
Year Ended
December 31, 1992:
Operating Revenues $1,342.8 $26.7 $1,369.5
Net Income (Loss) (94.1) 6.2 (87.9)
Year Ended
December 31, 1991:
Operating Revenues $1,359.9 $25.2 $1,385.1
Net Income (Loss) (17.9) 6.2 (11.7)
Prior to the merger, Clay operated as a partnership. Accordingly, their
results do not reflect partner draws or corporate income taxes. Pro-forma net
income for Clay, assuming partner salaries and income taxes were charged to
operations, would be $1.6 million for the nine months ended September 30, 1993
and $2 million and $2.1 million for the years ended December 31, 1992 and 1991,
respectively. In connection with the merger, the Company recorded $14.4 million
as additional paid-in capital representing deferred tax benefits associated
with the taxable business combination of Clay.
<PAGE>
Effective July 1, 1993, the Company acquired an 80 percent interest in a
Mexican insurance brokerage company which was accounted for as a purchase. The
purchase price was $16.9 million, including a $7.4 million cash payment and
notes payable of $9.5 million due in three installments from 1994 to 1996. The
excess of the purchase price over the fair value of net tangible assets
acquired was approximately $16 million. The effect of this acquisition was not
significant to the Company's consolidated financial statements.
During 1993, the Company sold three small operations for gross proceeds of
$9.6 million. Pre-tax gains of $3.9 million have been recognized on the sales
with resulting after-tax gains totaling $2.3 million or $0.05 per share.
During 1992, the Company sold three non-core businesses, including a
U.K.-based pension fund management operation, a Netherlands-based non-broking
operation and a U.S.-based administrator of workers compensation funds. Total
proceeds on these sales were $77.4 million with resulting pre-tax gains of
$43.8 million ($28.5 million after-tax or $0.66 per share). These gains are
included in Other Income (Expenses) in the Consolidated Statements of
Operations.
4. Special Charges
In 1992, the Company recorded a $16.5 million pre-tax charge ($13.9
million after-tax or $0.32 per share) for the estimated cost of indemnities
provided to the purchasers of Shand, Morahan & Company (Shand).
In the fourth quarter of 1991, the Company recorded a pre-tax charge of
$75.6 million ($48.2 million after-tax or $1.12 per share) that includes
expenses associated with the restructuring of its insurance broking operations
and other costs. The restructuring portion of this charge, amounting to $45.5
million, represented the anticipated costs of closing or consolidating certain
broking offices and restructuring others. Severance payments, leasehold
write-offs and employee relocation expenses were included in the charge. The
special charge included in operating expenses of $17.1 million represented
primarily the write-down of goodwill and other intangible assets related to
certain acquired businesses. The $13 million included in non-operating expenses
represented increases to reserves previously established for reported
contingencies, primarily indemnities for certain sold operations.
5. Income Taxes
Effective January 1, 1993, the Company adopted SFAS No. 109, "Accounting
for Income Taxes." The cumulative effect of adopting this standard increased
net income by $3.3 million or $0.08 per share. Tax benefits of $3.2 million
were also allocated to paid-in capital representing the difference in the tax
bases over the book bases of the net assets of taxable business combinations
accounted for as pooling of interests. These benefits would have been
recognized at the respective dates of combination if SFAS No. 109 had been
applied at that time. There were no significant changes in the components of
income tax expense or the Company's effective tax rate as a result of
implementing SFAS No. 109 in 1993.
The components of income (loss) from continuing operations before income
taxes are as follows:
For the years ended December 31, 1993 1992 1991
United States $(74.2) $(39.2) $(102.7)
International 106.1 142.1 96.3
$ 31.9 $102.9 $ (6.4)
The components of the provision for income taxes on continuing operations
are as follows:
For the years ended December 31, 1993 1992 1991
Current:
Federal $ (0.2) $ (4.1) $ 1.4
State and local (0.8) (1.0) 4.1
International 34.9 54.6 39.9
33.9 49.5 45.4
Deferred:
Federal (28.7) (3.5) (31.6)
State and local (2.0) 1.2 (8.4)
International 3.2 (3.2) (4.7)
(27.5) (5.5) (44.7)
$ 6.4 $44.0 $ 0.7
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying value of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes as well as operating and
capital loss carryforwards.
<PAGE>
The following is a summary of the significant components of the Company's
gross deferred tax assets and liabilities as of December 31, 1993:
Deferred tax assets:
Capital loss carryforwards $ 12.6
Deferred compensation 13.3
Other accruals not currently deductible 87.3
Net operating loss and tax credit carryforwards 21.1
Business combinations 17.1
Subtotal 151.4
Less: Valuation allowance (23.1)
Total deferred tax assets 128.3
Deferred tax liabilities:
Deferred commissions $ 11.4
Depreciation 8.0
Other accruals 15.4
Gains on settlement of pension
liabilities, net of accruals 18.3
Tax leases 17.6
Total deferred tax liabilities 70.7
Net deferred tax asset $ 57.6
The valuation allowance, which relates primarily to net operating loss and
capital loss carryforwards, decreased in 1993 by a net amount of $6.7 million.
Of this amount, $3.5 million relates to the tax benefit recognized on a
prior year capital loss as a result of capital gains generated in 1993. The
remaining $3.2 million is due to decreases in foreign capital loss
carryforwards, partially offset by increases in U.S. state and foreign net
operating losses.
As of December 31, 1993, the Company has foreign net operating loss and
capital loss carryforwards for tax purposes of $9.4 million and $19.3 million,
respectively, which can be carried forward indefinitely and approximately $3.1
million of foreign net operating losses which expire in various years between
1994 and 2000. The Company also has U.S. state tax net operating loss
carryforwards totaling $121 million which expire in various years through 2008
and U.S. federal alternative minimum tax credits of $5.3 million which can be
carried forward indefinitely.
At December 31, 1993, the net deferred tax balances are included in the
Company's consolidated balance sheet as follows:
Other current assets $35.4
Other assets 53.3
Accounts payable and accrued expenses 13.2
Long-term deferred income taxes 17.9
Prior to the change in accounting for income taxes, the components of the
provision for deferred income taxes for 1992 and 1991 were as follows:
For the years ended December 31, 1992 1991
Depreciation $ (2.5) $ (3.1)
Tax leases (3.2) (5.0)
Financial accounting accruals, net (17.5) (8.7)
Net deferred losses on subsidiary
dispositions 3.6 (0.3)
Special charges 14.3 (27.4)
Other (0.2) (0.2)
$ (5.5) $(44.7)
A reconciliation of the tax provision and the amount computed by applying
the U.S. federal income tax rate of 35 percent in 1993 and 34 percent in 1992
and 1991 to income (loss) from continuing operations before income taxes is as
follows:
For the years ended December 31, 1993 1992 1991
Computed "expected" tax expense
(benefit) $11.2 $35.0 $(2.2)
State and local income taxes-net of
federal income tax (1.9) (0.4) (3.2)
Foreign statutory rates over (under)
U.S. federal statutory rate (2.9) 1.7 0.4
Foreign partnership income
not taxed (1.9) (2.1) (2.1)
Tax benefit of capital losses (3.5) -- --
Tax rate changes (1.2) -- --
Adjustment to prior year tax
provisions (2.9) -- --
Amortization of intangible
assets 2.5 2.6 2.5
Repatriation of foreign earnings,
net of tax credits 3.3 0.5 1.5
Other non-deductible expenses 4.1 3.9 3.9
Other, net (0.4) 2.8 (0.1)
$ 6.4 $44.0 $0.7
During 1993, the Company reached an agreement with the Appeals Office of
the Internal Revenue Service on settlement of tax issues arising out of the
years 1980 through 1986, most of which related to issues arising out of the
acquisition of Alexander Howden. The settlement agreement is subject to final
review by the staff of the Joint Committee onTaxation (Joint Committee). Based
on the Company's discussion with the Appeals Office, it is expected that the
Joint Committee review should be completed during the first half of 1994.
Subject to this final review, the Company believes the settlement is within its
previously established reserves.
The Company is also under examination by the Internal Revenue Service for
years 1987 through 1991.Payment on agreed issues for 1987 through 1989 was made
in 1993 and charged against previously established reserves. The Company
believes that adequate provision has been made to cover liabilities which may
arise on final settlement of these examinations.
Federal income taxes have not been provided on undistributed earnings of
foreign subsidiaries which
<PAGE>
aggregated approximately $349.6 million at December 31, 1993, because such
earnings are permanently invested or will not be repatriated unless any
additional income taxes would be substantially offset by foreign tax credits.
It is not practicable to determine the amount of unrecognized deferred income
tax liabilities on these undistributed earnings.
6. Discontinued Operations
In March 1985, the Company discontinued the insurance underwriting
operations acquired in 1982 as part of the Alexander Howden acquisition. In
1987, the Company sold Sphere Drake Insurance Group (Sphere Drake) and is
currently running-off the Atlanta and Bermuda insurance companies.
The 1987 Sphere Drake sales agreement provides indemnities by the Company
for various potential liabilities including provisions covering future losses
on the insurance pooling arrangements from 1953 to 1967 between Sphere Drake
and Orion Insurance Company (Orion), a U.K.-based insurance company and future
losses pursuant to a stop loss reinsurance contract between Sphere Drake and
Lloyd's Syndicate 701.
The types of claims being reported on the Orion insurance pooling
arrangement are primarily asbestosis, environmental pollution and latent
disease claims in the U.S. and are coupled with substantial litigation
expenses. Liabilities for these claims cannot be estimated by conventional
actuarial reserving techniques because the available historical experience is
not sufficient to apply such techniques for these types of claims and case law,
which will ultimately determine the extent of these liabilities, is still
evolving. To date, U.S. case law has already altered the intent and scope of
these policies to some extent. Therefore, the Company has obtained advice from
an independent actuarial firm who used available exposure information and
various projection techniques in estimating the Company's ultimate exposure.
The Company has provided as its ultimate exposure the actuarial firm's point
estimate, which approximates the mid-point within their range of expected loss,
and a provision for Sphere Drake's share of uncollectible reinsurance
recoverables. The $70 million difference between the low and high estimates of
their range is quite wide due to the expansion of coverage and liability by
certain state courts and legislatures for environmental pollution and other
losses in the past and the possibility of similar interpretations in the
future, as well as the uncertainty in determining what scientific standards
will be acceptable for measuring site cleanup.
The major portion of the $145 million loss from discontinued operations
recorded by the Company in 1992 was due to recording additional reserves
associated with the Orion indemnity. No tax benefit has been recognized by the
Company on this provision due to the uncertainties surrounding its
deductibility.
Sphere Drake's appeal of a lawsuit against the Names on Lloyd's Syndicate
701 seeking payment of funds due Sphere Drake pursuant to a stop-loss
reinsurance contract with Syndicate 701 and a determination of continuing
stop-loss coverage protecting Sphere Drake under that contract was heard in
October 1993 with the U.K. Court of Appeal upholding the adverse decision of
the lower court. As a result, the deferred litigation settlement balance of
$22.3 million described in Note 14 hereof has been included in the Company's
net liabilities of discontinued operations. The Company has provided $45.8
million, which includes the above $22.3 million, as its ultimate exposure under
this indemnity based on an estimate by an independent actuarial firm. However,
unlike the Orion indemnity, the Company's opinion is this indemnity is limited
in amount pursuant to the terms of the stop-loss reinsurance contract. The
maximum remaining exposure beyond what the Company has currently provided is
$18.3 million.
Zero coupon notes with interest at 10 percent to 12 percent and warrants
to purchase five percent of Sphere Drake stock, which were acquired in
connection with the sale of Sphere Drake, are subject to offset for indemnities
regarding the adequacy of loss reserves and recoverability of reinsurance
receivables on the books of Sphere Drake at December 31, 1986. Based on
estimates of an independent actuarial firm, there has been deterioration in
loss reserves and uncollectible reinsurance balances that will offset
substantially all of the interest income of the zero coupon notes. The
remaining exposure for this indemnity is limited to the discounted carrying
amount of the notes which is 19.3 million pounds sterling ($28.5 million and
$29.2 million at December 31, 1993 and December 31, 1992) plus the realized
proceeds of $6.5 million from the 1993 exercise of the warrants.
The Sphere Drake indemnities and other liabilities arising out of the
discontinued operations are expected to be settled and paid over many years and
could extend over a 20 to 30 year period.
Reinsurance agreements provide the Atlanta and Bermuda insurance companies
with insurance coverage for their reserves as of December 31, 1988, and for up
to $50 million of insurance coverage for potential losses in excess of those
reserves, subject to a deductible for one of the Atlanta companies of $12.5
million. At December 31, 1993, based on an estimate by an independent
actuarial firm, the Company has recorded $4.6 million of the deductible, which
approximates the midpoint of the actuarial firm's range of expected loss, and
has utilized $21 million out of the $50 million of insurance coverage. The
remaining unrecognized deductible of $7.9 million is within the actuarial
firm's range of expected loss. The agreements also provide for a reinsurance
<PAGE>
premium adjustment whereby at any time after January 1, 2001, the reinsurance
agreements can be terminated and any excess funds, net of any reinsurance
premium paid to a substitute reinsurance company, would be returned to the
Company. The reinsurance premium adjustment is currently estimated to be $10.4
million.
In addition, the Company is exposed to a number of other indemnities,
exposures and contingencies primarily related to the sale of Sphere Drake.
A summary of the net liabilities of the Company's discontinued operations
is as follows:
As of December 31, 1993 1992
Assets
Cash and investments $ 18.8 $ 19.0
Other assets 22.1 15.0
Zero coupon notes 28.5 29.2
69.4 63.2
Claim and other liabilities 182.9 165.6
Net liabilities of discontinued
operations $113.5 $102.4
The net liabilities of the Company's discontinued operations are presented
in the Consolidated Balance Sheets as follows:
As of December 31, 1993 1992
Other payables and accrued expenses $ 7.0 $ 7.0
Net liabilities of discontinued operations 106.5 95.4
Total net liabilities of
discontinued operations $113.5 $102.4
Change in the net liabilities (assets) of the Company's discontinued
operations are as follows:
For the years ended December 31, 1993 1992 1991
Beginning balance $102.4 $(36.4) $(31.7)
Provision for loss -- 145.0 --
Deferred litigation
settlement 22.3 -- --
Translation adjustment 0.7 6.9 1.1
Payment of claims and expenses (11.9) (13.1) (5.8)
Ending balance $113.5 $102.4 $(36.4)
The Company believes that, based on current estimates of exposures, the
established claim and other liabilities, the estimated reinsurance premium
adjustment and the interest income on the zero coupon notes, will be sufficient
to cover any future indemnifications and offsets related to the Sphere Drake
agreement, the future run-off expenses net of any investment income of the
Atlanta and Bermuda operations, and any other expenses associated with its
discontinued operations. However, there is no assurance that further adverse
developments may not occur due to variables inherent in the estimation process,
including estimating insurance reserves for environmental pollution, latent
disease and other exposures, the collectibility of reinsurance recoverable
balances, the effect of future legislation and other matters described above.
It is possible that future developments with respect to these matters could
have a material effect on future interim or annual results of operations.
However, the Company presently believes that such impact will not be material
to the Company's financial condition.
7. Employees' Retirement Plans and Benefits
Pension Plans
The Company has contributory and non-contributory defined benefit pension
plans covering substantially all employees. The plans generally provide pension
benefits that are based on the employee's years of service and compensation
prior to retirement. In general, it is the Company's policy to fund these plans
consistent with laws and regulations of the respective jurisdictions in which
the Company operates.
During 1991, the Company's Canadian pension plans settled the accumulated
benefit obligation to certain retirees by purchasing annuity contracts for
$25.7 million. The resulting pre-tax gain of $5.1 million was recognized as a
reduction of pension expense and was included in salaries and benefits in the
Consolidated Statements of Operations.
Total pension costs are summarized as follows:
For the years ended December 31, 1993 1992 1991
Service cost $ 29.5 $ 29.4 $ 27.7
Interest cost 38.4 36.9 33.8
Actual return on plan assets (73.4) (68.9) (98.0)
Net amortization and deferral 7.4 3.7 40.7
Net pension costs $ 1.9 $ 1.1 $ 4.2
<PAGE>
The following table sets forth the funded status and amounts recognized in
the Company's Consolidated Balance Sheets:
As of December 31, 1993 1992
Inter- Inter-
U.S. national U.S. national
Vested benefit obligation $ 221.5 $ 246.4 $ 179.1 $ 165.9
Accumulated benefit
obligation $ 235.3 $ 252.4 $ 191.2 $ 177.1
Projected benefit
obligation $(308.1) $(284.7) $(247.6) $(214.5)
Plan assets at fair
market value 298.5 387.2 265.9 303.3
Excess (shortfall) of plan assets
over projected benefit
obligation (9.6) 102.5 18.3 88.8
Unrecognized net
loss (gain) 33.4 (39.0) 10.5 (24.0)
Unrecognized prior
service cost (1.4) 13.4 (1.5) 9.4
Unrecognized net assets
being amortized over
the plans' average
remaining service lives (16.3) (30.8) (18.7) (33.0)
Prepaid pension cost $ 6.1 $ 46.1 $ 8.6 $ 41.2
Assumed discount rate 7.0% 5.0-8.25% 8.0% 5.5-9.5%
Assumed rate of
compensation increase 5.0% 4.0-6.5% 5.0% 4.5-7.0%
Expected rate of return
on plan assets 9.75% 7.0-11.0% 10.75% 7.5-11.0%
At December 31, 1993 and 1992, approximately 85 percent and 81 percent,
respectively, of all plan assets are invested in equity securities and 15
percent and 19 percent, respectively, in cash equivalents and/or fixed income
securities.
Thrift Plans
The Company maintains thrift plans for most U.S. and Canadian employees.
Under the thrift plans, eligible employees may contribute amounts through
payroll deduction, supplemented by Company contributions, for investments in
various funds established by the plans. The cost of these plans was $11.3
million in 1993, $10.8 million in 1992 and $11.4 million in 1991.
Postretirement Benefits
Effective January 1, 1993, the Company adopted SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions," for its U.S.
plans. This statement requires the Company to accrue the estimated cost of
future retiree benefit payments during the years the employee provides
services. The Company previously expensed the cost of these benefits, which are
principally health care and life insurance, as premiums or claims were paid.
The Company has elected to recognize the initial postretirement benefit
obligation of $14 million over a period of 20 years. The Company's cash flows
are not affected by implementation of this statement and the impact to the
results of operations for 1993 was not significant.
Total postretirement benefit costs are summarized as follows:
For the year ended December 31, 1993
Health Life
Care Insurance Total
Service cost $ 0.8 $ -- $ 0.8
Interest cost 1.2 0.2 1.4
Actual return on plan assets -- (0.2) (0.2)
Net amortization and deferral 0.8 (0.2) 0.6
Net postretirement
costs (credit) $ 2.8 $(0.2) $ 2.6
The following table sets forth the funded status and amounts recognized in
the Company's consolidated financial statements:
For the year ended December 31, 1993
Health Life
Care Insurance Total
Accumulated postretirement
benefit obligation:
Retirees $ (7.0) $(3.2) $(10.2)
Fully eligible active
participants (1.7) (0.3) (2.0)
Other active participants (10.4) -- (10.4)
(19.1) (3.5) (22.6)
Plan assets at fair
market value -- 5.7 5.7
Accumulated benefit
obligation in excess (short-
fall) of plan assets (19.1) 2.2 (16.9)
Unrecognized net obligation 15.5 (2.3) 13.2
Unrecognized net loss 3.0 0.3 3.3
(Accrued) prepaid post-
retirement benefit liability $ (0.6) $ 0.2 $ (0.4)
The discount rate used in determining the accumulated postretirement
benefit obligation was 7 percent and the compensation rate increase was 5
percent. The assumed medical trend rate is 11 percent in 1994 and gradually
declines to 5.5 percent in 2000 and thereafter. Increasing the trend rate by 1
percent and holding all other assumptions constant, the impact on the cost
component and the accumulated benefit obligation is an increase of $0.2 million
and $1.6 million, respectively.
Certain of the Company's international subsidiaries have similar plans for
their employees; however, most retirees are covered primarily by government
sponsored programs. As a result, the cost to the Company for retired employees
is not significant for these programs.
<PAGE>
Postemployment Benefits
In November 1992, the Financial Accounting Standards Board issued SFASNo.
112, "Employers' Accounting for Postemployment Benefits," which will be adopted
by the Company in the first quarter of 1994. This statement requires that
certain benefits provided to former or inactive employees after employment but
prior to retirement, including disability benefits and health care continuation
coverage, be accrued based upon the employees' service already rendered. The
cumulative effect of this accounting change is estimated to be a charge of
approximately $2.7 million after-tax and the increase to the annual cost of
providing such benefits will not be significant.
Deferred Compensation Plan
The Company has a deferred compensation plan which permitted certain of
its key officers and employees to defer a portion of their incentive
compensation during 1986 to 1989. The Company has purchased whole life
insurance policies on each participant's life to assist in the funding of the
deferred compensation liability. At December 31, 1993, the cash surrender value
of these policies was $0.5 million, which is net of $32.6 million of policy
loans. The Company's obligation under the plan, including accumulated interest,
was $15.6 million and $18.6 million at December 31, 1993 and 1992,
respectively, and is included in Other Long-Term Liabilities in the
Consolidated Balance Sheets.
Prior to January 1, 1991, the deferred compensation expense was being
accrued on a present value basis over the period of active employment to normal
retirement at age 65. Effective January 1, 1991, the Company adopted the
provisions of SFAS No. 106, "Employers' Accounting for Postretirement Benefits
Other Than Pensions," relating to deferred compensation plans. This statement
requires the accrual of deferred compensation expense over the period of active
employment to the full eligibility date, which is generally age 55 under the
Company's plan. The cumulative effect of this accounting change for years prior
to 1991 was an increase to the net loss in 1991 of $2.2 million, net of related
income tax benefit of $1.8 million, or $0.05 per share. The effect of applying
this new accounting method was not material to the results of operations in
1991.
8. Short-Term Debt
Consolidated short-term debt consists of the following:
As of December 31, 1993 1992
Notes payable $ 17.5 $ 0.4
Current portion of
long-term debt 11.7 6.7
29.2 7.1
Less short-term debt
reclassified as long-term -- 0.4
$ 29.2 $ 6.7
Information with respect to short-term borrowing activity is as follows:
As of December 31, 1993 1992 1991
Commercial paper:
Balance at year end $ -- $ -- $41.4
Weighted average interest rate --% --% 5.0%
Maximum outstanding $ -- $52.8 $75.9
Average outstanding $ -- $38.7 $49.4
Weighted average interest rate
during the year --% 4.2% 6.0%
Notes payable:
Balance at year end $17.5 $ 0.4 $ 0.5
Weighted average interest rate 5.2% 12.4% 11.7%
Maximum outstanding $18.7 $37.2 $43.2
Average outstanding $ 6.6 $20.6 $14.5
Weighted average interest rate
during the year 7.7% 8.6% 10.3%
The average outstanding balances and weighted average interest rates
during each year are based on average daily balances outstanding.
The maximum outstanding balance above reflects the maximum amount of each
category outstanding at any month end. The maximum aggregate short-term debt
outstanding at any month end was $18.7 million, $78.9 million and $119.1
million in 1993, 1992 and 1991, respectively.
Supplementing the $150 million credit facility described in Note 9(B), the
Company has uncommitted cancelable lines of credit available for general
corporate purposes totaling $162.8 million. These lines consist of facilities
in the U.S. and certain other countries. If drawn, the lines bear interest at
market rates and carry an annual commitment fee of no greater than 0.5 percent
of the line.
<PAGE>
9. Long-Term Debt
Consolidated long-term debt outstanding is as follows:
As of December 31, 1993 1992
11% Convertible subordinated debentures (A) $ 60.2 $ 60.2
Long-term credit agreement (B) -- --
Obligation under capital lease (C) 20.8 23.1
Non-recourse mortgage notes (D) 19.6 19.4
Term loans (E) 10.0 25.0
Other, primarily for acquisitions 12.9 4.1
123.5 131.8
Less current portion 11.7 6.7
$111.8 $125.1
The principal payments required during the next five years are $11.7
million in 1994, $17.8 million in 1995, $6.8 million in 1996, $6.2 million in
1997 and $6.4 million in 1998.
The estimated fair value of the Company's long-term debt at December 31,
1993 is $113.6 million based upon the market prices for similar issues or
current interest rates offered to the Company for debt with the same remaining
maturities.
A. 11% Convertible Subordinated Debentures
The debentures are unsecured subordinated obligations maturing April 15,
2007. The debentures were issued in connection with the acquisition of
Alexander Howden under an Indenture agreement dated February 1, 1982, and are
convertible into common stock at $39 per share, subject to adjustment under
certain conditions. The remaining debentures are redeemable any time, at 102.93
percent of par value prior to April 15, 1994, and at declining prices
thereafter until April 15, 1997. Commencing April 15, 1992, and annually
thereafter, 5 percent of the aggregate principal amount outstanding as of
October 15, 1991, must be redeemed at par value through the operation of a
mandatory sinking fund. However, at its option the Company may reduce or
satisfy this obligation by applying previously retired debentures. The Company
may make an optional sinking fund payment in each year not exceeding the amount
of the mandatory sinking fund payment.
B. Long-Term Credit Agreement
The Company has a $150 million long-term credit agreement with various
banks which expires in July 1995. The agreement contains various financial
covenants including limits on minimum net worth, maximum consolidated debt,
minimum interest coverage and minimum consolidated cash flow.
Based upon current financial projections for 1994, it is probable that the
Company will not be in compliance with certain covenants contained in the
credit agreement, and that this may be reportable to the banks during April
1994. While there can be no assurances in this regard, the Company believes
that it will be able to obtain any necessary waivers or amendments to such
agreement. In addition, the Company believes it has sufficient cash resources
to fund its operations during 1994.
C. Obligation Under Capital Lease
A French subsidiary has a lease agreement for office facilities which is
classified as a capital lease. Future minimum lease payment obligations are
approximately $2.3 million for each of the next five years and an aggregate of
$24.8 million thereafter.
D. Non-Recourse Mortgage Notes
Two subsidiaries of the Company have an investment in a direct financing
lease of an office building and related non-recourse mortgage notes. The
mortgage notes bear interest at rates between 12.1 percent and 13 percent and
are payable in semiannual installments of $1.4 million (including principal and
interest) through September 2010.
The components of the net investment in the direct financing lease,
included in Other Assets in the Consolidated Balance Sheets, are as follows:
As of December 31, 1993 1992
Future minimum lease
payments to be received $66.5 $69.2
Unguaranteed residual value accruing
to the benefit of the Company 7.9 7.9
Less unearned income (54.8) (57.0)
Net investment in lease $19.6 $20.1
Future minimum lease payments to be received are approximately $3 million
for each of the next five years and an aggregate of $51.5 million thereafter.
E. Term Loans
In February 1992, a U.S. subsidiary of the Company entered into an
unsecured $15 million three-year loan agreement with a bank. This loan was
repaid in September 1993.
In August 1992, a U.S. subsidiary entered into an unsecured $10 million
three-year term loan agreement with a bank. The interest rate (4.5 percent at
December 31, 1993) floats with the LIBOR rate. The agreement, guaranteed by the
Company, contains financial covenants on minimum consolidated net worth and
maximum consolidated indebtedness.
10. Stock Option and Incentive Plans
In 1992, the stockholders approved amendments to the 1988 Long-Term
Incentive Compensation Plan (1988 Plan) which provides for the granting of up
to 5 million shares of the Company's Common Stock to officers and key employees
as stock options. The 1988 Plan includes grants in the form of incentive stock
options and non-qualified options, stock appreciation rights, restricted stock
awards, performance share/unit awards and other stock based awards.
<PAGE>
Stock options may be granted under the 1988 Plan at a price not less than the
fair market value of the Common Stock on the date the option is granted and,
with respect to incentive stock options, must be exercised not later than 10
years from date of grant and, with respect to non-qualified options, must be
exercised not later than 10 years and one day from date of grant.
Stock appreciation rights may be granted alone or in conjunction with a
stock option at a price not less than the fair market value of the Common Stock
at date of grant. Upon exercise of a stock appreciation right, the participant
will receive cash, Common Stock or a combination thereof equal to the excess of
the market value over the exercise price of the stock appreciation right.
Exercise of either the right or the stock option will result in the surrender
of the other.
Restricted stock awards may be granted which limit the sale or transfer of
the shares until the expiration of a specified time period. Such awards are
subject to forfeiture if the participant does not remain in the employ of the
Company throughout the restricted time period. A maximum of 1,250,000 shares
may be issued under the 1988 Plan. There were 60,000, 92,810 and 22,880 shares
issued in 1993, 1992 and 1991, respectively.
Performance share/unit awards may be granted based upon certain
performance criteria as determined by the Company and Benefits Committee of the
Board of Directors. Upon achievement of the performance share/unit criteria,
the participant will receive cash, Common Stock or a combination thereof equal
to the award. No performance share/unit awards were made in 1993, 1992 and
1991.
Stock option transactions were as follows:
Number Option Price
of Per Share
Shares Range
Outstanding, January 1, 1991 2,886,159 $17.75-38.63
Granted 95,500 23.13-23.25
Exercised (38,204) 17.75-25.38
Canceled (186,371)
Outstanding, December 31, 1991 2,757,084 $17.75-38.63
Granted 485,000 21.63-23.69
Exercised (106,439) 21.56-27.38
Canceled (210,590)
Outstanding, December 31, 1992 2,925,055 $17.75-38.63
Granted 488,500 26.00-27.63
Exercised (93,948) 17.75-25.38
Canceled (188,307)
Outstanding, December 31, 1993 3,131,300 $17.75-38.63
The number of options exercisable at December 31 were as follows:
1993 2,231,301
1992 1,976,017
1991 1,724,060
11. Common and Preferred Stock
Common Stock
In addition to its Common Stock, $1.00 par value (Common Stock), the
Company had issued two classes of voting equity securities, Class A and Class C
Common Stock, with voting rights equal to the Company's Common Stock.
Associated with each such share is a dividend paying share issued by a Canadian
(RSC Class 1 share) or a United Kingdom (AASUK Dividend share) subsidiary which
pays dividends in Canadian dollars and pounds sterling respectively, equivalent
to the dividends paid on shares of Common Stock. Holders of these securities,
therefore, hold the economic equivalent of shares of Common Stock. Each Class A
share (together with an RSC Class 1 share) and Class C share (together with an
AASUK Dividend share) may be exchanged at any time for a share of Common Stock.
At December 31, 1993, the Company had 5.4 million shares of Common Stock
reserved for issuance under employee stock option plans, 1.5 million shares
reserved for issuance in the event of conversion of the 11 percent convertible
subordinated debentures and 2.8 million shares reserved for issuance upon
redemption or conversion of the Class A and Class C shares.
The Board of Directors has authorized, subject to certain business and
market conditions, the purchase of up to 5 million shares of the Company's
Common Stock. As of December 31, 1993, the total number of shares purchased was
3.7 million at an average price of $21.77 per share. No shares were repurchased
in 1993 or 1992. Shares of its own stock acquired by the Company constitute
authorized but unissued shares.
Dividend Restrictions
No dividends may be declared or paid on the Company's Common Stock unless
an equivalent amount per share is declared and paid on the RSC Class 1 and
AASUK Dividend shares. Accordingly, the Company's ability to pay dividends is
limited by the amounts available to the Canadian and U.K. subsidiaries for such
purposes. These amounts approximate Canadian $75.8 million or $56.8 million,
assuming certain solvency tests are met under Canadian law, and 155 million
pounds sterling or $228.7 million, respectively, at December 31, 1993. In the
event sufficient earnings are not available in the Canadian or the United
Kingdom subsidiary to declare dividends, the Company's legal structure allows
it to make earnings or capital available in those subsidiaries to pay
dividends. In addition, the Series A Convertible Preferred Stock described
below has priority as to dividends over the Common Stock.
<PAGE>
Preferred Stock and Related Rights
The Company's Preferred Stock, $1.00 par value (Preferred Stock), can be
issued in one or more series with full or limited voting rights, with the
rights of each series to be determined by the Board of Directors before each
issuance.
Series A Convertible Preferred Stock
In March 1993, the Company completed a private placement of 2.3 million
shares of $3.625 Series A Convertible Preferred Stock (Convertible Preferred
Shares). Gross proceeds of the offering were $115 million with net proceeds to
the Company of $110.9 million. Holders of the Convertible Preferred Shares will
be entitled to receive cumulative cash dividends at an annual rate of $3.625
per share, payable quarterly in arrears. The Convertible Preferred Shares have
priority as to dividends over the Common Stock. The shares are convertible into
Common Stock at a conversion price of $31.875 per share of Common Stock,
subject to adjustments. Common Stock issued upon conversion will include
Rights, as described below, provided the conversion occurs prior to the
distribution, redemption or expiration of such Rights. The Convertible
Preferred Shares may be redeemed by the Company on and after March 22, 1997, in
whole or in part, at $52.18 per share until March 14, 1998, and declining
ratably annually to $50 per share on or after March 15, 2003, plus accrued and
unpaid dividends. The Convertible Preferred Shares are non-voting, except as
provided by law and except that, among other things, holders will be entitled
to vote as a separate class with any other series of outstanding Preferred
Stock to elect a maximum of two directors if the equivalent of six or more
quarterly dividends on the Convertible Preferred Shares are in arrears. The
Convertible Preferred Shares have a liquidation preference of $50 per share.
Series A Junior Participating Preferred Stock
In 1987, a series of Preferred Stock, Series A Junior Participating
Preferred Stock (Participating Preferred Shares), $1.00 par value per share was
authorized and a dividend of one preferred share purchase right (a Right) for
each outstanding share of Common Stock, each Common Stock equivalent and each
subsequently issued share was declared. Each Right, as amended, entitles the
holder thereof to buy one one-hundredth of a Participating Preferred Share at a
price of $85 (subject to adjustment). The Rights become exercisable only
following the announcement by the Company that a person or a group has acquired
beneficial ownership of 10 percent or more of the Company's voting shares or
has commenced a tender or exchange offer that if consummated would result in
the ownership of 10 percent or more of such voting shares. If the Rights become
exercisable, each holder will be entitled to purchase at the then-current
exercise price that number of Participating Preferred Shares having a value
equal to twice the then-current exercise price.
If the Company is subsequently acquired, each Right will entitle the
holder to purchase at the then-current exercise price, stock of the surviving
company having a market value of twice the exercise price of each Right. In
addition, if a person or group acquires more than 10 percent, but less than 50
percent, of the Company's voting shares, the Board of Directors may exchange
each Right for one one-hundredth of a Participating Preferred Share. The Rights
are redeemable by the Board until the time of announcement that any person or
group has beneficially acquired 10 percent or more of the Company's voting
shares. All rights beneficially owned by a holder of 10 percent or more of the
voting shares become void once such holder passes the 10 percent threshold. The
Rights are redeemable by action of the Board of Directors prior to becoming
exercisable at a redemption price of $.01 per Right. The Rights will expire on
July 6, 1997.
On April 21, 1992, the Board of Directors of the Company approved an
Amendment to the Rights Agreement (the "Amendment") between the Company and
First Chicago Trust Company of New York. The Amendment provides for certain
technical revisions in the Rights Agreement including definition of Shares
Acquisition Date to mean the first date of public announcement by the Company
that an Acquiring Person has become such. The Amendment also provides that if
the Rights become exercisable, the Company, acting by resolution of the Board
of Directors, may (and if a sufficient number of Participating Preferred Shares
is not available for issuance upon exercise of the Right, shall) issue equity
securities, debt securities, cash and/or other property in lieu of
Participating Preferred Shares.
12. Commitments
Lease Commitments
The Company leases property and equipment under noncancelable operating
lease agreements which expire at various dates.
Future minimum annual rentals under noncancelable operating leases, which
have been translated at December 31, 1993 closing foreign exchange rates, are
as follows:
<PAGE>
Operating
Leases
1994 $ 91.5
1995 82.1
1996 67.6
1997 51.2
1998 42.0
Thereafter 262.7
Total minimum lease payments $597.1
<PAGE>
Rent expense for office space, which includes property taxes and certain
other costs, amounted to $92 million, $99.3 million and $100 million for the
years ended December 31, 1993, 1992, and 1991, respectively.
Other Commitments
At December 31, 1993, the Company has $32.1 million of letters of credit
outstanding which are required under certain agreements in the ordinary course
of business.
The Company has entered into asset-based interest rate swap and forward
rate agreements with large financial institutions to hedge a portion of its
investment portfolio against short-term interest rate fluctuations. Any
differences in interest income between the fixed and floating interest rates
are recorded monthly. At December 31, 1993, the principal amounts of such
agreements outstanding were $290.7 million. The fair value of these agreements
is an unrealized gain of $3.8 million, representing the amount at which they
could be settled based upon current interest rates. The Company is exposed to
credit losses on only the interest element in the event of nonperformance by
these financial institutions; however, management does not anticipate incurring
losses due to such nonperformance.
13. Contingencies
The Company and its subsidiaries are subject to various claims and
lawsuits from both private and governmental parties, which includes claims and
lawsuits in the ordinary course of business, consisting principally of alleged
errors and omissions in connection with the placement of insurance and in
rendering consulting services. In some of these cases, the remedies that may be
sought or damages claimed are substantial. Additionally, the Company and its
subsidiaries are subject to the risk of losses resulting from the potential
uncollectibility of insurance and reinsurance balances and claims advances made
on behalf of clients and indemnifications connected with the sales of certain
businesses.
Following the acquisition of Alexander Howden in January 1982, certain
claims, relating primarily to the placement of reinsurance by Alexander Howden
subsidiaries and questionable broking and underwriting practices of former
Alexander Howden officials and others, were asserted. In particular, claims
have been asserted against the Company and certain of its subsidiaries
alleging, among other things, that certain of the Company's subsidiaries
accepted, on behalf of certain insurance companies, insurance or reinsurance at
premium levels not commensurate with the level of underwriting risks assumed
and retroceded or reinsured those risks with financially unsound reinsurance
companies. In three pending actions, plaintiffs seek compensatory and punitive
damages totaling $147 million based on treble damage claims under the Racketeer
Influenced and Corrupt Organizations Act (RICO). Management of the Company
believes that there are valid defenses to all the claims that have been made
with respect to these activities and the Company is vigorously defending the
pending actions.
In 1987, the Company sold Shand Morahan & Company, Inc. (Shand), its
domestic underwriting management subsidiary. The Company has agreed to
indemnify the purchasers of Shand against certain contingencies, including the
Mutual Fire, Marine and Inland Insurance Company contingency described below.
Prior to its sale in 1987, Shand and its subsidiaries provided
underwriting management services for and placed insurance and reinsurance with
and on behalf of Mutual Fire. Mutual Fire was placed in rehabilitation by the
Courts of the Commonwealth of Pennsylvania in December 1986. In January 1990,
the Supervisory Court approved a plan of rehabilitation for Mutual Fire. The
rehabilitator, in February 1991, filed a complaint in the commonwealth court
against Shand and the Company. The case was subsequently removed to the U.S.
District Court for the Eastern District of Pennsylvania. The complaint alleges
that Shand, and in certain respects the Company, breached duties to, and
agreements with, Mutual Fire. In addition to claiming compensatory damages, the
complaint seeks punitive damages and recovery of certain commissions paid to
Shand and the Company. The complaint does not specify, to any meaningful
degree, the amount of alleged damages incurred or sought. In June 1993,
however, the rehabilitator, through an expert's report, has indicated to Shand
and the Company that the damages alleged are in the amount of $238.5 million.
The Company and Shand strongly disagree with the alleged damages in the
rehabilitator's report and have substantial arguments to sustain their
position. The Company and Shand are in the process of finalizing a series of
expert reports that rebut the damage amount alleged in the rehabilitator's
report.
The case is likely to be placed on the trial calendar in the summer of
1994. Management believes that there are valid defenses to the allegations set
forth in the complaint and the Company intends to vigorously defend against
this action.
Also, the sales contract between the Company and Shand's purchasers
obligates the Company to certain indemnities with respect to transactions
involving Mutual Fire. In November 1992, the purchaser asserted indemnification
claims related to reinsurance recoverables due from Mutual Fire. In February
1993, the Company agreed to settle certain of these claims. The Company has
estimated its exposure under this settlement, net of anticipated recoveries
from certain trusteed assets held for Shand's benefit of $10.8 million and net
of $4.6 million of set-offs, and established a reserve as part of the 1992
special charge described in Note 4. The Mutual Fire rehabilitator has
challenged Shand's right to recover these assets and utilization of such
set-offs.
<PAGE>
The purchaser of Shand has also notified the Company of claims relating
to reinsurance recoverables based on alleged errors and omissions of Shand in
placing reinsurance. To date, these claims have led to the institution of four
arbitration proceedings involving certain reinsurers in an amount presently
estimated to be $33 million. These claims are potentially subject to
indemnification by the Company under the terms of the sales agreement. Shand is
actively disputing these allegations. However, pursuant to the terms of the
indemnity, the Company may be responsible for the costs of these proceedings
and related expenses. Until there is a final determination that a reinsurer
has a right to withhold payment of a reinsurance recoverable, based on an
actual error or omission of Shand, the Company believes that its exposure
under the indemnity is limited to the above-mentioned costs and expenses. The
Company intends to vigorously dispute these claims.
On November 4, 1993, a class action suit was filed against the Company and
two of its directors and officers in the United States District Court for the
Southern District of New York. In response to the defendant's motion to
dismiss, an amended complaint was filed on February 16, 1994, purportedly on
behalf of a class of persons who purchased the Company's Common Stock during
the period May 1, 1991 to September 28, 1993, alleging that during said period
the Company's financial statements contained material misrepresentations as a
result of inadequate reserves established by the Company's subsidiary,
Alexander Consulting Group Inc., for unbillable work in progress. The amended
complaint seeks damages in an unspecified amount, as well as attorneys' fees
and other costs, for alleged violations of the federal securities law. The
Company intends to vigorously dispute this claim.
These contingent liabilities involve significant amounts. While it is not
possible to predict with certainty the outcome of such contingent liabilities,
the applicability of coverage for such matters under the Company's professional
liability insurance policies, or their financial impact on the Company,
management presently believes that such impact will not be material to the
Company's financial condition. However, it is possible that future developments
with respect to these matters could have a material effect on future interim or
annual results of operations.
14. Litigation Settlement
In November 1986, the Company settled its lawsuit, which commenced in
1983, against certain former auditors of Alexander Howden. The terms of the
settlement included the payment of $24 million to the Company. Recognition of
this recovery in the Consolidated Statements of Operations had been deferred
pending final resolution of specific loss contingencies arising out of the
Alexander Howden acquisition which were known at the date of the settlement.
As discussed in Note 6, the remaining balance of $22.3 million was
transferred to the Company's net liabilities of discontinued operations as a
result of a 1993 adverse court decision relating to one of these specific loss
contingencies.
15. Business Segments
Segment information is provided for the Company's two reportable segments,
Insurance Services and Human Resource Management Consulting.
Insurance Services operations include risk management and insurance
services, specialist and reinsurance broking. The Company's extensive services
permit it to handle diverse lines of coverage.
Human Resource Management Consulting includes a variety of human resource
management consulting services, including actuarial and benefit plan consulting
services, flexible compensation consulting, communications and management
consulting services and executive planning services, as well as human resource
organizational analysis and planning.
<PAGE>
The following tables present information about the Company's operations by
business segment and geographical areas for each of the three years in the
period ended December 31, 1993:
<TABLE> <CAPTION>
Operating Operating Identifiable Depreciation & Capital
Revenues Income Assets Amortization Expenditures
<S> <C> <C> <C> <C> <C>
Business Segments:
1993
Insurance services $1,128.6 $ 92.9 $2,544.1 $48.3 $21.0
Human resource management consulting 213.0 (7.5) 121.4 5.6 4.0
General corporate -- (33.1) 128.3 0.6 1.0
$1,341.6 $ 52.3 $2,793.8 $54.5 $26.0
1992
Insurance services $1,129.0 $ 86.1 $2,422.5 $52.9 $16.2
Human resource management consulting 240.5 30.8 130.2 7.0 0.5
General corporate -- (31.4) 56.9 0.6 --
$ 1,369.5 $ 85.5 $2,609.6 $60.5 $16.7
1991
Insurance services $ 1,158.0 $ 24.5 $2,546.2 $63.6 $16.9
Human resource management consulting 227.1 23.1 136.6 7.8 5.5
General corporate -- (31.2) 55.0 0.8 0.3
$ 1,385.1 $ 16.4 $2,737.8 $72.2 $22.7
Operating Operating Identifiable
Revenue Income Assets
<S> <C> <C> <C>
Geographical areas:
1993
United States $ 727.1 $(11.8) $1,029.2
United Kingdom 315.5 64.1 987.8
Canada, principally Reed Stenhouse Cos. Ltd. 120.9 13.0 208.1
Other countries 178.1 20.1 440.4
General corporate -- (33.1) 128.3
$1,341.6 $ 52.3 $2,793.8
1992
United States $ 731.1 $ 17.4 $ 960.8
United Kingdom 338.4 63.9 980.8
Canada, principally Reed Stenhouse Cos. Ltd. 130.0 16.1 213.6
Other countries 170.0 19.5 397.5
General corporate -- (31.4) 56.9
$1,369.5 $ 85.5 $2,609.6
1991
United States $ 762.6 $(42.3) $1,045.1
United Kingdom 314.9 54.5 979.7
Canada, principally Reed Stenhouse Cos. Ltd. 136.5 21.4 222.3
Other countries 171.1 14.0 435.7
General corporate -- (31.2) 55.0
$1,385.1 $ 16.4 $2,737.8
</TABLE>
<PAGE>
16. Quarterly Financial Data (Unaudited)
Quarterly operating results for 1993 and 1992 are summarized below (in
millions, except per share data).
Income
(Loss) from Net
Operating Operating Continuing Income
Revenue Income Operations (Loss)
1993
1st $ 324.8 $ 18.9 $ 9.9 $ 13.2
2nd 341.9 25.6 13.1 13.1
3rd 327.1 0.2 (2.6) (2.6)
4th 347.8 7.6 3.2 3.2
Year $ 1,341.6 $ 52.3 $ 23.6 $ 26.9
1992
1st $ 326.9 $ 14.4 $ 21.7 $ 21.7
2nd 352.1 32.7 17.6 17.6
3rd 345.4 20.1 10.2 10.2
4th 345.1 18.3 7.6 (137.4)(a)
Year $ 1,369.5 $ 85.5 $ 57.1 $ (87.9)
Income
(Loss) from Net
Continuing Income
Operations (Loss) Dividends High Low
Per Share of Common Stock:
1993
1st $ .22 $ .30 $ .25 $28 7/8 $24
2nd .26 .26 .25 $28 $24 3/8
3rd (.11) (.11) .25 $27 3/4 $21 3/8
4th .03 .03 .25 $21 3/4 $17 5/8
Year $ .40 $ .48 $1.00
1992
1st $ .50 $ .50 $ 25 $23 3/8 $19 3/4
2nd .41 .41 .25 $22 3/8 $18
3rd .24 .24 .25 $27 3/8 $21 1/4
4th .17 (3.18)(a) .25 $27 5/8 $25 1/8
Year $1.32 $(2.03) $ 1.00
(a) Includes a provision of $145 million or $3.35 per share associated with
the discontinued and sold underwriting operations (see Note 6).
<PAGE>
Board of Directors & Officers,
Major Subsidiaries and Operating Units
Alexander & Alexander Services Inc.
Board of Directors
Dr. Robert E. Boni(1)(2)(3)(5)
Chairman of the Board
Tinsley H. Irvin(1)
Chief Executive Officer
Dr. Kenneth Black, Jr.(1)(2)(3)(5)
Regents' Professor Emeritus of Insurance,
Georgia State University
John A. Bogardus, Jr.(2)(4)
Former Chairman of the Board
Peter C. Godsoe (3)(4)(5)
President & Chief Executive Officer,
The Bank of Nova Scotia
Angus M.M. Grossart(2)(4)
Managing Director,
Noble Grossart Limited (A U.K. merchant bank.)
Vincent R. McLean(1)(2)(3)(4)(5)
Michael K. White(1)
President & Chief Operating Officer
William M. Wilson(1)
Former Deputy Chairman & Executive Vice President
Executive & Other Corporate Officers
Tinsley H. Irvin
Chief Executive Officer
Michael K. White
President & Chief Operating Officer
Lawrence E. Burk
Chairman & Chief Executive Officer,
Alexander & Alexander Inc.
Kenneth J. Davis
Chief Executive Officer,
Alexander & Alexander Europe
Timothy P.S. Gibson
Chief Executive Officer,
Alexander & Alexander Limited, Asia Pacific Region
Ronald L. Hendrick
Vice President & Controller
<PAGE>
James S. Horrick
President & Chief Executive Officer,
Alexander & Alexander/Reed Stenhouse Companies Limited
Ronald A. Iles
Senior Vice President,
Alexander & Alexander Services Inc.
Chairman,Alexander Howden Reinsurance Brokers Limited
R. Alan Kershaw
Vice President & Treasurer
Daniel E. Kestenbaum
Senior Vice President, Director of Quality & Professional Practice
Jayne D. Maas
Vice President & Director of Taxes
Dennis L. Mahoney
Chairman,
Alexander Howden Limited
Dr. Robert H. Moore
Senior Vice President,
Corporate Relations
Dan R. Osterhout
Senior Vice President,
Alexander & Alexander Services Inc.
Chairman & Chief Executive Officer,
Alexander Underwriting Services
Charles M. Patrick, Jr.
President,
Alexander & Alexander of Japan
John C. Reece
Vice President & Chief Information Officer
Ronald J. Roessler
Senior Vice President & General Counsel
Paul E. Rohner
Senior Vice President & Chief Financial Officer
Donald L. Seeley
Senior Vice President,
Alexander & Alexander Services Inc.
President & Chief Executive Officer,
The Alexander Consulting Group Inc.
Kevin J. Smith
Chairman & Chief Executive Officer,
Alexsis Inc.
Thomas Soper III
Senior Vice President,
Human Resources
Kenneth J. Tesi
Vice President, Director of Corporate Auditing Operations
Frank R. Wieczynski
Secretary
Alexander & Alexander Services Inc.
Principal Worldwide Operations
Risk Management & Insurance Services
Alexander & Alexander
Alexander Insurance Managers Limited
Alexander Underwriting Services
Alexsis Inc.
Anistics
Specialist Insurance Broking
Alexander Howden Intermediaries
Reinsurance Broking
Alexander Howden
Reinsurance Brokers Limited
Alexander Reinsurance Intermediaries, Inc.
Human Resource Management Consulting Services
The Alexander Consulting Group Inc.
(1) Member, Executive Committee
(2) Member, Audit Committee
(3) Member, Compensation and Benefits Committee
(4) Member, Finance-Investment Committee
(5) Member, Nominating Committee
<PAGE>
Investor Information
Corporate Headquarters
Alexander & Alexander Services Inc.
1211 Avenue of the Americas
New York, N.Y. 10036
(212) 840-8500
Annual Meeting of Stockholders
Date: Thursday, May 19, 1994
Time: 9:30 a.m.
Place: The Equitable Center Auditorium
787 Seventh Avenue
(between West 51st and West 52nd St.)
New York, N.Y. 10019
Approximate Number of Equity Security Holders
As of March 1, 1994, there were approximately 2,262 record holders of the
Company's Common Stock, 578 beneficial holders of Class A Common Stock and
1,301 record holders of Class C Common Stock.
Exchange Listings
Alexander & Alexander's Common Stock is listed on the New York Stock Exchange
(symbol: AAL) and the International Stock Exchange of the United Kingdom and
the Republic of Ireland. Its Class C Common Stock is listed on the
International Stock Exchange of the United Kingdom and the Republic of Ireland.
Reed Stenhouse's RSC Class 1 Special Shares, associated with the shares of
Alexander & Alexander's Class A Common Stock, are listed on the Toronto Stock
Exchange and Montreal Stock Exchange.
Annual Report on Form 10-K
A copy of the Company's Annual Report on Form 10-K may be
obtained by writing to:
Alexander & Alexander Services Inc.
Secretary
10461 Mill Run Circle
Owings Mills, Md. 21117
Investors, security analysts and others desiring additional information should
contact:
Frank R. Wieczynski
Secretary
(410) 363-5802
Facsimile (410) 363-5900
Transfer Agents and Registrars
First Chicago Trust Company of New York
P.O. Box 2500
Jersey City, N.J. 07303-2500
The R-M Trust Company
Balfour House
390 High Road
Ilford, Essex IG1 1NQ
England
Montreal Trust Company of Canada
151 Front Street West
Toronto, Ontario M5J 2N1
Canada
Auditors
Deloitte & Touche
Printed on recycled paper.
Printed in the U.S.A.
<PAGE>
A&A Around the World
Alexander & Alexander Services Inc. serves clients worldwide. This listing
includes those countries in which we have offices, affiliates or other
established servicing capabilities.
[Color illustration of an antique world map.]
Anguilla
Antigua & Barbuda
Argentina
Aruba
Australia
Austria
Bahamas
Bahrain
Barbados
Belgium
Belize
Bermuda
Bolivia
Brazil
British Virgin Islands
Canada
Cayman Islands
Channel Islands
Chile
China
Colombia
Costa Rica
Curacao
Cyprus
Czech Republic
Denmark
Djibouti
Dominica
Dominican Republic
Ecuador
Egypt
El Salvador
Fiji
Finland
France
Germany
Greece
Grenada
Guadeloupe
Guatemala
Guyana
Haiti
Hong Kong
Hungary
India
Indonesia
Ireland
Isle of Man
Israel
Italy
Jamaica
Japan
Kazakhstan
Kenya
Kuwait
Luxembourg
Malaysia
Mexico
Montserrat
Morocco
Netherlands
New Zealand
Nicaragua
Nigeria
Norway
Oman
Pakistan
Panama
Papua New Guinea
Paraguay
Peru
Philippines
Poland
Portugal
Puerto Rico
Qatar
Republic of Korea
St. Kitts & Nevis
St. Lucia
St. Vincent & the Grenadines
Saudi Arabia
Singapore
Spain
Suriname
Swaziland
Sweden
Switzerland
Taiwan
Thailand
Trinidad & Tobago
Turkey
Turks & Caicos Islands
United Arab Emirates
United Kingdom
United States
Uruguay
U.S. Virgin Islands
Venezuela
Zaire
<PAGE>
["Alexander & Alexander" logo]
Corporate Headquarters
Alexander & Alexander Services Inc.
1211 Avenue of the Americas
New York, N.Y. 10036
The attached lists all subsidiaries of the registrant. No subsidiaries have
been excluded as permitted by Item 601(21)(II) of Regulation S-K, even
though particular subsidiaries If taken together would not constitute
a significant subsidiary under Rule 1-02(v) of Regulation S-X.
<PAGE>
<TABLE>
ALEXANDER & ALEXANDER SERVICES INC. and SUBSIDIARIES
<CAPTION>
State or Percent of
Other Voting
Jurisdiction of Securities
Incorporation Owned
------------- ----------
<S> <C> <C>
Alexander & Alexander Services Inc........................... Maryland
Alexander & Alexander U.S. Inc.......................... Maryland 88%
Alexander & Alexander Inc.(Maryland Corp.)......... Maryland 100%
Alexander & Alexander, Inc.(Florida Corp.).... Florida 100%
Alexander & Alexander, Inc.(Louisiana Corp.).. Louisiana 100%
Transport Insurance Inc.................. Louisiana 100%
Alexander & Alexander, Inc.(Massachusetts
Corp.)...................................... Massachusetts 100%
Alexander & Alexander, Inc.(Oklahoma Corp.)... Oklahoma 100%
Alexander & Alexander, Inc.(Tennessee Corp.).. Tennessee 100%
Alexander & Alexander, Inc.(West Virginia
Corp.)...................................... West Virginia 100%
Alexander & Alexander & Paul Mayer GMBH....... Austria 75%
Alexander & Alexander of Arizona Inc.......... Arizona 100%
Futuro 3000 S.R.L............................. Italy 5%
Alexander & Alexander of the Carolinas, Inc... North Carolina 100%
Alexander & Alexander of Connecticut Inc...... Connecticut 100%
Alexander & Alexander of Kentucky Inc......... Kentucky 100%
Alexander & Alexander of Mississippi Inc...... Mississippi 100%
Alexander & Alexander of New York, Inc........ New York 100%
AARE Corporation......................... New York 100%
A & A Real Estate Services Inc........... New York 100%
Alexander & Alexander Securities Corp......... Delaware 100%
Alexander & Alexander of Virginia, Inc........ Virginia 100%
Alexander & Alexander of Wyoming, Inc......... Wyoming 100%
Alexander & Associates Inc.................... Texas 100%
DA&A Insurance Agency, Inc............... Texas 100%
Alexander Risk Management & Consulting
Services............................... Texas 100%
Alexander & Alexander Health Services
Inc.................................... Texas 100%
Alexander Managing General Agency........ Texas 100%
Ecco General Agency Inc.................. Texas 100%
Ecco Services, Inc.................. Texas 100%
Ecco Insurance Services Inc.
(Calif.)..................... California 100%
Gilliland & McReynolds, Inc.............. Texas 100%
Insurance Administrators Inc............. Texas 100%
SRA, Inc................................. Texas 100%
Alexander Hellas Ltd.......................... Greece 100%
Alexander Howden Reinsurance Intermediaries
Inc......................................... New York 100%
Alexander Underwriting Agencies Limited....... Bermuda 50%
Alexsis Inc................................... Maryland 100%
Alexsis Risk Management Services Inc.......... New York 100%
Barros & Carrion, Inc......................... Puerto Rico 100%
Asesores y Corredores De Seguros S.A..... Puerto Rico 100%
Inter-American Underwriters, Inc......... Puerto Rico 100%
Claimaco Corporation.......................... New York 100%
Corporate Group Systems, Inc.................. Michigan 100%
Corporate Service Inc......................... Michigan 100%
Employers Underwriters, Inc................... Michigan 100%
Figurecheck, Inc.............................. United Kingdom 100%
Insurance Planning Inc........................ Nevada 80%
Hemisphere Marine & General Assurance Ltd..... Bermuda 100%
Alexander & Alexander Middle East Ltd.... Bermuda 100%
Alexander Insurance Ltd.................. Bermuda 100%
<PAGE>
<CAPTION>
State or Percent of
Other Voting
Jurisdiction of Securities
Incorporation Owned
------------- ----------
<S> <C> <C>
Security Offshore Insurance Ltd.......... Bermuda 3%
R. B. Jones Corporation....................... Delaware 100%
Alexander & Alexander of Kansas Inc...... Kansas 100%
Alexander & Alexander of Missouri Inc.... Missouri 100%
SHL Pacific Regional Holdings Inc.
(California Corp)........................... California 100%
Alexander & Alexander of California Inc.. California 100%
AGR Disposition Company Inc ........ California 100%
AGR (NY) Disposition Company
Inc.......................... New York 100%
BIS Disposition Company........ California 100%
Alexander & Alexander of Japan, Inc. Nevada 100%
Alexander & Alexander of Idaho Inc....... Idaho 100%
Campbell & Co., Inc................. Idaho 100%
Alexander & Alexander of Indiana, Inc.... Indiana 100%
Alexander & Alexander of Michigan, Inc... Michigan 100%
Alexander & Alexander of Ohio, Inc....... Ohio 100%
Ohio Cap Insurance Company, Inc..... Bermuda 7%
Alexander & Alexander of Washington, Inc. Washington 100%
Alexander of Hawaii Inc.................. Hawaii 100%
Kadowaki Associates International Corp.
Ins. Broker............................ California 100%
S. Hammond Story Agency Inc................... Georgia 100%
Alexander Reinsurance Intermediaries Inc...... New York 100%
Tifco Properties, Inc......................... Illinois 100%
A&A Realty Finance Inc........................ Minnesota 100%
United Commercial Agencies, Ltd............... Cayman Islands 50%
Alexander International Insurance Services
Ltd......................................... Bermuda 100%
Inter-American Group Inc........................... Delaware 100%
Alexander Insurance Managers Ltd................... Bermuda 85%
Alexander Insurance Managers (Dublin) Ltd..... Ireland 100%
Alexander Insurance Managers (Isle of Man)
Ltd......................................... Isle of Man 100%
Alexander Insurance Managers (Barbados) Ltd... Barbados 100%
Alexander Insurance Managers(Cayman) Ltd...... Cayman Islands 100%
Alexander Insurance Managers (Holdings) Ltd... Guernsey 90%
Alexander Insurance Managers (Guernsey)
Ltd.................................... Guernsey 100%
Bailiwick Consultancy & Management
Co. Ltd........................... Guernsey 100%
Alexander & Alexander Mexico S.A. de C.V........... Mexico 100%
Asesores Kennedy Agente De Seguros, S.A....... Mexico 80%
Promotora Zircon S.A. de C.V.................. Mexico 80%
Seguridad y Prevencion S.A. de C.V............ Mexico 80%
Servicios Administrativos Kennedy S.A. de C.V. Mexico 80%
Inmuebles Niagara S.A. de C.V................. Mexico 80%
Minet S.A. de C.V............................. Mexico 80%
Grupo Ken S.A. de C.V......................... Mexico 80%
Asesores de Reaseguros Internacionales
Mexicanos.............................. Mexico 99%
Consejuros Actuariales y Administrativos, S.C. Mexico 80%
Servisios Immobilarios Guadalajara, S.C....... Mexico 80%
Wilken Asesores, S.C.......................... Mexico 80%
Alexander & Alexander Services U.K. Plc................. United Kingdom 100%
Alexander & Alexander Finance Limited.............. United Kingdom 100%
Alexander & Alexander Mediadores De Seguros Ltda... Portugal 73%
Alexander Howden Underwriting Limited.............. United Kingdom 100%
Couparey Nominees Limited.......................... United Kingdom 100%
<PAGE>
<CAPTION>
State or Percent of
Other Voting
Jurisdiction of Securities
Incorporation Owned
------------- ----------
<S> <C> <C>
Alexander Howden Holdings Plc...................... United Kingdom 100%
Howden Chile Consultores Ltda................. Chile 51%
Alexander Howden Group Agency Management Ltd.. United Kingdom 100%
Alexander Howden Group (Bermuda) Limited...... Bermuda 100%
A.H.G. Far East Ltd...................... Hong Kong 100%
Asian Reinsurance Underwriters Ltd.. Hong Kong 100%
Howden Sterling Asia Limited........ Hong Kong 100%
Sphere Drake Far East Limited....... Hong Kong 100%
Sterling Offices Far East........... Hong Kong 100%
Alexander Underwriting Agencies Limited.. Bermuda 50%
Howden Cover Hispanoamericana (Bermuda)
Ltd.................................... Bermuda 100%
Alexander Howden de Espana.......... Spain 50%
Trent Insurance Company Ltd.............. Bermuda 100%
Alexander Howden Group Ltd. .................. United Kingdom 100%
Howden Dastur Reinsurance Brokers
(Private) Ltd.......................... India 40%
Alexander y Alexander Chile Ltda......... Chile 51%
Sten-Re S.A.............................. Spain 50%
Alexander Howden Group Financial
Services Ltd........................... United Kingdom 100%
Howden Chile Reaseguros Ltda............. Chile 51%
Alexander Howden Group Management
Services Ltd........................... United Kingdom 100%
Alexander Howden Limited................. United Kingdom 100%
Alexander Howden Reinsurance Brokers Ltd. United Kingdom 100%
Cisema.............................. Brazil 33%
Keith Rayment & Associates Ltd...... United Kingdom 51%
Alexander Howden Ossa de Colombia
S.A............................... Colombia 51%
Anistics Ltd............................. United Kingdom 100%
Energy Insurance Brokers and Risk
Management Co.......................... United Kingdom 100%
Independent Engineering Services Ltd..... United Kingdom 100%
Alexander Howden Asia Pacific Ltd........ United Kingdom 100%
Keyaction Ltd............................ United Kingdom 100%
Rydata Limited........................... United Kingdom 100%
Alexander Howden Financial Services Limited... United Kingdom 100%
Alexander Howden International Limited........ United Kingdom 100%
A.H.O.H. (Bermuda) Limited............... Bermuda 100%
SPICAFAB Limited.................... United Kingdom 100%
Alexander Howden Group
(Australia) Ltd.............. Australia 100%
Sterling Offices
(Australia) Ltd......... Australia 100%
Sterling Universal Holdings
Ltd.......................... Canada 30%
Sterling Universal Ltd.... Canada 100%
Alexander Howden Canada
Ltd..................... Canada 100%
IRM France SA....................... France 45%
Alexander Howden Y Associados S.A. de C.V..... Mexico 35%
Dormante Holdings Limited..................... United Kingdom 100%
Solar Underwriting Agencies Ltd.......... United Kingdom 100%
Howden Management & Data Services Limited..... United Kingdom 100%
Alexander Howden Leasing Limited......... United Kingdom 100%
Morice Tozer S.A.............................. Spain 100%
Sten-Re S.A.............................. Spain 50%
Alexander Stenhouse and Partners Ltd............... United Kingdom 100%
Scottish & Commonwealth Insurance Co. Ltd.
(Bermuda)................................... Bermuda 100%
Alexander Stenhouse Europe Ltd................ United Kingdom 100%
<PAGE>
<CAPTION>
State or Percent of
Other Voting
Jurisdiction of Securities
Incorporation Owned
------------- ----------
<S> <C> <C>
Alexander & Alexander Sigorta Musavirlk
Anonim S............................... Turkey 51%
Cagdas Sigorta A.S.................. Turkey 94%
Ralph S. Harris (Insurance) Pty. Ltd..... Zimbabwe 100%
Reed Stenhouse Europe Holdings B.V....... Holland 100%
Alexander Stenhouse A.G............. Switzerland 100%
Reinsurance Underwriting Agency Ltd. Switzerland 100%
Reed Stenhouse GMBH...................... Germany 100%
Societe Generale de Courtage d'Assurances France 14%
A.M.P.R.E........................... France 90%
Alexander & Alexander Consultants
S.A............................... France 100%
France Cote D'Afrique............... France 99%
Groupement Europeen d'Assurances
General........................... France 100%
SASE France......................... France 100%
Alexander & Alexander France S.A......... France 100%
Societe Generale de Courtage
d'Assurances ..................... France 37%
A.M.P.R.E...................... France 90%
Alexander & Alexander
Consultants S.A.............. France 100%
France Cote D'Afrique.......... France 99%
Groupement Europeen
d'Assurances General......... France 100%
SASE France.................... France 100%
Stenhouse Reed Shaw Africa (Pty) Ltd..... South Africa 100%
Alexander & Alexander Ltd..................... United Kingdom 100%
Alexander Stenhouse Management Services
Limited................................ United Kingdom 100%
Alexander & Alexander U.K. Ltd........... United Kingdom 100%
Alexander Stenhouse Limited.............. United Kingdom 100%
Alexander & Alexander (Isle of Man)
Limited................................ Isle of Man 100%
Alexander Stenhouse Magee Limited........ Ireland 100%
Alexander & Alexander (C.I.) Limited..... Guernsey 100%
Alexander & Alexander (Ireland) Limited.. Ireland 100%
Alexander & Alexander U.K. Pension Trustees
Ltd......................................... United Kingdom 100%
Noble Grossart Holdings Ltd................... United Kingdom 20%
Noble Grossart Ltd....................... Scotland 100%
Noble Grossart Investments Ltd...... Scotland 60%
NGI SOQ Ltd.................... Scotland 100%
NGI Securities Ltd............. Scotland 100%
NGI Inc........................ Delaware 100%
Howe Securities Ltd................. Scotland 100%
Noble Grossart Investments Ltd........... Scotland 40%
NGI SOQ Ltd......................... Scotland 100%
NGI Securities Ltd.................. Scotland 100%
NGI Inc............................. Delaware 100%
Stenhouse Marketing Services London Ltd....... United Kingdom 100%
Stenhouse Marketing Services Inc......... Delaware 100%
Halford, Shead & Co. Limited.................. United Kingdom 100%
IRM France SA............................ France 55%
Reed Stenhouse Underwriting Mgmt Ltd..... United Kingdom 100%
The Alexander Consulting Group Ltd............ United Kingdom 100%
Alexander Stenhouse Fund Managers Ltd.... United Kingdom 100%
Alexander & Alexander International Inc................. Maryland 100%
Alexander & Alexander of Thailand Ltd.............. Thailand 25%
Alexander & Alexander Ltd - Thailand............... Thailand 25%
<PAGE>
<CAPTION>
State or Percent of
Other Voting
Jurisdiction of Securities
Incorporation Owned
------------- ----------
<S> <C> <C>
Alexander & Alexander Europe B.V................... Netherlands 100%
Alexander & Alexander Belgium NV.............. Belgium 100%
NV Alexander Stenhouse Belgium
International S.A...................... Belgium 25%
Reed Stenhouse Netherlands B.V................ Holland 100%
Alexander & Alexander Italia S.P.A....... Italy 50%
Brokeraggio Assicurativo SRL........ Italy 30%
Alexander & Alexander Insurance Brokers -
Hungary..................................... Hungary 100%
Alexander & Alexander Insurance Brokers -
Czech Republic.............................. Czech. Republic 100%
Alexander & Alexander Insurance Brokers -
Poland...................................... Poland 100%
Alexander & Alexander Spain S.A............... Spain 90%
Prevencion y Control..................... Spain 100%
Alexander Stenhouse SRL.................. Spain 100%
Reed Stenhouse (Espana) S.A......... Spain 95%
Alexander Stenhouse Risk Management S.A.. Spain 100%
Alexander & Alexander Holdings B.V............ Netherlands 100%
Brons Orobio Groep B.V................... Netherlands 100%
Brons Van Lennep B.V................ Netherlands 100%
Orobio Mees Herman B.V.............. Netherlands 100%
Brons Orobio Groep
(Partnership)................ Netherlands 100%
Brons Hartley Cooper B.V............ Netherlands 50%
Bekouw Mendes B.V........................ Netherlands 100%
Bekouw Mendes Reinsurance B.V............ Netherlands 100%
Brons Van Lennep Den Haug B.V............ Netherlands 100%
Bekouw Mendes Risk Management B.V........ Netherlands 100%
Alexander Insurance Managers N.V.... Nether/Antilles 100%
N.V. Verzekering Maatschappij
"Diligentia van 1890".................. Netherlands 100%
Bekouw Mendes C.V........................ Netherlands 76%
Firma A.J. Driessen C.V............. Netherlands 100%
Firma H.J. Reens C.V................ Netherlands 100%
Alexander & Alexander Scandinavia A.B......... Sweden 100%
Futuro 3000 S.R.L............................. Italy 95%
Alexander Coyle Hamilton Ltd.................. Ireland 75%
Alexander Insurance Managers Ltd S.A.R.L...... Luxembourg 100%
NV Alexander Stenhouse Belgium International
S.A......................................... Belgium 75%
Fides Alexander A.G. (Switzerland)............ Switzerland 45%
Alexander & Alexander LTDA......................... Brazil 99%
MacFarlane Participacoes LTDA................. Brazil 59%
Alexander & Alexander Servicios LTDA.......... Brazil 59%
MacFarlane E. Associados Participacoes LTDA... Brazil 59%
Alexander & Alexander Brazil Ltda............. Brazil 50%
Alexander & Davidson de Columbia LTDA.............. Columbia 49%
Alexander, Ayling, Barrios & Cia, S.A.............. Argentina 98%
Alexander Insurance Managers (Singapore) Pte. Ltd.. Singapore 100%
Pensions Berattings Gmbh........................... Germany 20%
Jaspers Industrie Assekuranz Gmbh & Co. KG......... Germany 20%
Pensions Berattings Gmbh...................... Germany 25%
Industrie Assekuranz Gmbh.......................... Germany 20%
Servicios A.B.S., S.A.............................. Mexico 75%
Alexander Clay & Partners Consulting.................... United Kingdom 100%
Alexander & Alexander Australia Holdings Ltd............ Australia 100%
Alexander Stenhouse Accumulation Fund Nominees..... Australia 100%
<PAGE>
<CAPTION>
State or Percent of
Other Voting
Jurisdiction of Securities
Incorporation Owned
------------- ----------
<S> <C> <C>
Alexander & Alexander Ltd.......................... Australia 100%
Anistics Pty. Ltd.................................. Australia 100%
John C. Lloyd Reinsurance Brokers Ltd.............. Australia 88%
Alexander Stenhouse Financial Services Ltd......... Australia 100%
Alexander Stenhouse Nominees Ltd................... Australia 100%
Burnie Enterprises P/L............................. New Guinea 100%
Alexander & Alexander (PNG) Pty. Limited...... New Guinea 63%
The Alexander Consulting Group Ltd................. Australia 100%
Southern Cross Underwriting Pty. Limited........... Australia 56%
Reed Stenhouse Asia Pacific Ltd (U.K.)............. Scotland 100%
Alexander & Alexander (Hong Kong) Holding Ltd........... Hong Kong 100%
Alexander Lippo (Hong Kong) Ltd.................... Hong Kong 50%
Alexander & Alexander Holdings N.Z. Limited............. New Zealand 100%
The Alexander Consulting Group Limited............. New Zealand 100%
Alexander & Alexander Ltd.......................... New Zealand 100%
Southern Insurance Brokers Limited............ New Zealand 100%
Southern Insurance Brokers (Miles) Limited.... New Zealand 100%
Alexander Benefits Services Ltd............... New Zealand 100%
B.A. Nelson Ltd............................... New Zealand 40%
Alexander & Alexander Services NZ Ltd......... New Zealand 100%
Alexander & Alexander (NZ) Ltd........... New Zealand 100%
Alexander Anistics Services Ltd.......... New Zealand 100%
Alexander Portfolio Management Ltd....... New Zealand 100%
Adam and Adam Limited......................... New Zealand 100%
Superannuation Management Ltd............ New Zealand 100%
British Underwriting Agencies Ltd... New Zealand 100%
Alexander & Alexander Limited (Fiji).......... Fiji 100%
Alexander Sterling Reinsurance Limited........ New Zealand 100%
Knight Alexander Stenhouse Ltd................ New Zealand 100%
Marsden & Associates(Fire & General) Ltd...... New Zealand 100%
Russell Brown & Co. Ltd....................... New Zealand 100%
Atlanta Group Inc....................................... Delaware 100%
Alexander Howden North America Inc. (Georgia)...... Georgia 100%
AAMET Inc..................................... Maryland 100%
Alexander Howden North America Inc. (Ohio).... Ohio 100%
Alexander Howden North America Inc.
(Massachusetts)............................. Massachusetts 100%
Alexander Howden North America Inc (N.Y.)..... New York 100%
Alexander Howden North America Inc. (Texas)... Texas 100%
Alexander Howden Insurance Services, Inc.
(Texas)................................ Texas 100%
Illinois R.B. Jones Inc. ..................... Illinois 100%
American Special Risk Insurance Company............ Delaware 100%
Atlanta International Insurance Company............ New York 100%
Jufcrest Limited........................................ United Kingdom 50%
Manzitti Howden Beck s.p.a.............................. Italy 41%
L.& F. Longobardi SRL.............................. Italy 24%
Pandi Italia s.p.a................................. Italy 5%
CSA................................................ Italy 13%
Reed Stenhouse Companies Ltd............................ Canada 100%
Duggan Insurances Ltd.............................. Ireland 100%
National Computer Services Ltd..................... Canada 100%
Y & D Properties Ltd............................... Canada 50%
<PAGE>
<CAPTION>
State or Percent of
Other Voting
Jurisdiction of Securities
Incorporation Owned
------------- ----------
<S> <C> <C>
Reed Stenhouse Ltd................................. Canada 100%
Reinsurance Managers Ltd........................... Canada 100%
Risk Management Consultants of Canada Ltd.......... Canada 100%
Societe de Courtage Meloche Alexander Ltd.......... Canada 100%
Sterling Universal Holdings Ltd.................... Canada 70%
Sterling Universal Ltd........................ Canada 100%
Alexander Howden Canada Ltd................... Canada 100%
The Alexander Consulting Group Ltd................. Canada 100%
Alexander & Alexander Canada Inc................... Canada 100%
514239 Ontario Ltd................................. Canada 100%
164113 Canada Inc.................................. Canada 100%
164226 Canada Inc............................. Canada 50%
164226 Canada Inc.................................. Canada 50%
Stenhouse (S.E. Asia) Pte. Ltd.......................... Singapore 100%
Alexander & Alexander (Asia) Holding Pte. Ltd
(formerly AS (Asia))............................. Singapore 100%
Alexander Howden Far East Pte Ltd............. Singapore 100%
Alexander & Alexander Risk Management Services
Inc......................................... Taiwan 50%
Alexander & Alexander Insurance Agency Ltd.... Taiwan 50%
Alexander & Alexander (Malaysia) Sdn Bhd...... Malaysia 49%
Alexander & Alexander Pte. Ltd................ Singapore 100%
Alexander Stenhouse Taiwan Ltd................ Taiwan 50%
Alexander Howden Reinsurance Brokers (Asia)
Pte. Ltd.................................... Singapore 100%
Alexander & Alexander Government & Industry Affairs Inc. Dist. Of Columbia 100%
PTS Liquidation Co...................................... Pennsylvania 100%
The Alexander Consulting Group Inc...................... Maryland 100%
Alexander & Alexander Benefits Services Inc........ New Jersey 100%
Alexander & Alexander Benefits Services
(Arizona) Inc............................... Arizona 100%
Alexander & Alexander Benefits Services Of
Louisiana Inc............................... Louisiana 100%
Alexander & Alexander Benefits Services Inc... Ohio 100%
Alexander & Alexander Insurance Benefits
Services Inc................................ Massachusetts 100%
Alexander & Alexander Life Agency of Ohio..... Ohio 100%
A&A Managing General Agency, Inc.............. Texas 100%
Paul Burke & Associates, Inc.................. Minnesota 100%
Pilots International Association.............. North Dakota 100%
Alexander & Alexander Consulting Group Inc......... New Jersey 100%
Alexander & Alexander Benefit Services Inc.... Virginia 100%
Alexander & Alexander Consulting Group Inc.... Texas 100%
Alexander Consulting Investment Services Inc....... Maryland 100%
TP & C International Inc................................ Vermont 100%
Trust Life Insurance Co. of America..................... Arizona 100%
Trust Property & Casualty Insurance Co............. Vermont 100%
</TABLE>
Updated 12/31/93
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Alexander & Alexander
Services Inc. Registration Statement Nos. 2-98915 and 33-10440 on Form
S-4; Registration Statement No. 33-5316 on Form S-3; Registration Statement
Nos. 2-68206, 2-94427, 33-16608, 2-86820, 33-16609,33-8152, 33-25580 and
33-60054 on Form S-8; and Registration Statement Nos. 2-97056, 2-97057 and
2-97734 on Form S-14 of our reports dated February 25, 1994 appearing in
and incorporated by reference in the Annual Report on Form 10-K of
Alexander & Alexander Services Inc. for the year ended December 31, 1993.
Deloitte & Touche
Baltimore, Maryland
March 31, 1994
